Corporations: Organization, Stock Transactions, and Dividends

1. Corporations: Organization, Stock Transactions, and Dividends Chapter 13

2. Learning Objectives • Describe the nature of the corporate form of organization. • Describe the two main sources of stockholders’ equity. • Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock. • Describe and illustrate the accounting for cash dividends and stock dividends. • Describe and illustrate the accounting for treasury stock transactions.

3. Learning Objectives • Describe and illustrate the reporting of stockholders’ equity. • Describe the effect of stock splits on corporate financial statements. • Describe and illustrate the use of earnings per share in evaluating a company’s profitability.

4. Learning Objective 1 Describe the nature of the corporate form of organization

5. Characteristics of a Corporation • A corporation is a legal entity, distinct and separate from the individuals who create and operate it. As a legal entity, a corporation may acquire, own, and dispose of property in its own name. • A corporation sells shares of ownership, called stock.

6. Characteristics of a Corporation • The stockholders or shareholders who own the stock own the corporation. They can buy and sell stock without affecting the corporation’s operations or continued existence.

7. Characteristics of a Corporation • Corporations whose shares of stock are traded in public markets are called publiccorporations.

8. Characteristics of a Corporation • Corporations whose shares are not traded publicly are usually owned by a small group of investors and are called nonpublic or privatecorporations. The stockholders of all corporations have limitedliability.

9. Characteristics of a Corporation • The stockholders control a corporation by electing a board of directors. This board meets periodically to establish corporate policy. It also selects the chief executive officer (CEO) and other major officers.

10. Characteristics of a Corporation

11. Characteristics of a Corporation • A corporation has separate legal existence from its owners. • A corporation has transferable units of ownership. • A corporation has limited stockholders’ liability. • A corporation is subject to taxes. Thus, the corporate form has the disadvantage of double taxation.

12. Characteristics of a Corporation (continued)

13. Characteristics of a Corporation

14. Forming a Corporation • The first step in forming a corporation is to file an application of incorporation with the state. • Because state laws differ, corporations often organize in states with more favorable laws. • More than half of the largest companies are incorporated in Delaware (see Exhibit 3, next slide).

15. Forming a Corporation

16. Forming a Corporation • After the application is approved, the state grants a charter or articles of incorporation, which formally create the corporation. • Management and the board of directors then prepare bylaws which are operating rules and procedures for conducting the corporation’s affairs.

17. Forming a Corporation • Costs may be incurred in organizing a corporation, such as legal fees, taxes, license fees, and promotional costs. The recording of a corporation’s organizing costs of $8,500 on January 5 is shown below:

18. Learning Objective 2 Describe the two main sources of stockholders’ equity

19. Stockholders’ Equity • The owner’s equity in a corporation is called stockholders’ equity, shareholders’ equity, shareholders’ investment, or capital.

20. Stockholders’ Equity Stockholders’ equity is reported by its two main sources. • Capital contributed to the corporation by the stockholders, called paid-in capital or contributed capital. • Net income retained in the business, called retained earnings.

21. If there is only one class of stock, the account is entitled Common Stockor Capital Stock. Stockholders’ Equity

22. Stockholders’ Equity • Retained earnings is a corporation’s cumulative net income that has not been distributed as dividends. • Dividends are distributions of a corporation’s earnings to stockholders.

23. Stockholders’ Equity • A debit balance in Retained Earnings is called a deficit. Such a balance often results from accumulated net losses. • A credit balance in Retained Earnings does not represent surplus cash or cash left over for dividends.

24. Learning Objective 3 Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock

25. Characteristics of Stock • The number of shares of stock that a corporation is authorized to issue is stated in the charter. • The term issued refers to the shares issued to the stockholders. • A corporation may reacquire some of the stock that has been issued. The stock remaining in the hands of stockholders is then called outstandingstock.

26. Characteristics of Stock Authorized Issued Outstanding

27. Characteristics of Stock • Corporations may issue stock certificates to stockholders to document their ownership. • Shares of stock are often assigned a dollar amount, called par value. • Some corporations have stopped issuing stock certificates except on special request.

28. Characteristics of Stock • Stock issued without par is called no-par stock. Some states require the board of directors to assign a stated value to no-par stock. • Some state laws require that corporations maintain a minimum stockholder contribution, called legal capital, to protect creditors.

29. Characteristics of Stock • The major rights that accompany ownership of a share of stock are as follows: • The right to vote in matters concerning the corporation. • The right to share in distributions of earnings. • The right to share in assets upon liquidation.

30. Classes of Stock • The two primary classes of paid-in capital are common stock and preferred stock. • The primary attractiveness of preferredstock is that it is given a preference to dividends over common stock.

31. Classes of Stock • The payment of dividends is authorized by the corporation’s board of directors. • When authorized, the directors are said to have declared a dividend.

32. Classes of Stock • Cumulative preferred stock has a right to receive regular dividends that were not declared (paid) in prior years. • Noncumulative preferred stock does not have this right. • Cumulative preferred stock dividends that have not been paid in prior years are said to be in arrears.

33. Classes of Stock • A corporation has issued the following preferred and common stock: 1,000 shares of $4 cumulative preferred stock, $50 par 4,000 shares of common stock, $15 par • The corporation was organized on January 1, 2012, and paid no dividends in 2012 and 2013. In 2014, the corporation paid $22,000 in dividends, of which $12,000 was paid to preferred stockholders and $10,000 was paid to common stockholders. (continued)

34. Classes of Stock The 2012 dividends in arrears are paid first. There are 1,000 shares, and each share receives $4 for a total of $4,000. (continued)

35. Classes of Stock The 2013 dividends in arrears are paid next. Again, the preferred stockholders receive $4 for each share held. (continued)

36. Classes of Stock The current dividends for 2014 must be paid to preferred stockholders before common stockholders can participate in the dividends. (continued)

37. Classes of Stock Of the $22,000 in dividends declared, preferred must receive $12,000 before common can receive any dividends. (continued)

38. Classes of Stock Dividends available to common stockholders

39. Issuing Stock • A corporation is authorized to issue 10,000 shares of preferred stock, $100 par, and 100,000 shares of common stock, $20 par. One-half of each class of authorized shares is issued at par for cash.

40. Issuing Stock • If the stock is issued (sold) for a price that is more than its par, the stock has been sold at a premium. • If the stock is issued (sold) for a price that is less than its par, the stock has been sold at a discount.

41. Premium on Stock • Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55.

42. Premium on Stock • A corporation acquired land for which the fair market value cannot be determined. In exchange for the land, the corporation issued 10,000 shares of $10 par common that had a current market value of $12.

43. No-Par Stock • On January 9, a corporation issues 10,000 shares of no-par common stock at $40 a share. On June 27, the corporation issues an additional 1,000 shares at $36.

44. No-Par Stock • Some states require that the entire proceeds from the issue of no-par stock be recorded as legal capital. In other states, no-par stock may be assigned a stated value per share.

45. No-Par Stock • Using the same data as in the previous transaction, assume that the stock is assigned a stated value of $25.

46. Learning Objective 4 Describe and illustrate the accounting for cash dividends and stock dividends

47. Cash Dividends • A cash distribution of earnings by a corporation to its stockholders is called a cash dividend. The three conditions a corporation must meet to pay a cash dividend are as follows: • Sufficient retained earnings • Sufficient cash • Formal action by the board of directors

48. Cash Dividends • The date of declaration is the date the board of directors formally authorizes the payment of the dividend. On this date, the corporation incurs the liability to pay the amount of the dividend.

49. Cash Dividends • The date of record is the date the corporation uses to determine which stockholders will receive the dividend.

50. Cash Dividends • The date of payment is the date the corporation will pay the dividends to the stockholders who owned the stock on the date of record.