Transcript Document
Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends After studying this chapter, you should be able to: 1. Describe the nature of the corporate form of organization. 2. Describe the two main sources of stockholders’ equity. 3. Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock. 4. Journalize the entries for cash dividends and stock dividends. 5. 6. 7. Journalize the entries for treasury stock transactions. Describe and illustrate the reporting of stockholders’ equity. Describe the effect of stock splits on corporate financial statements. 1 Objective 1 Describe the nature of the corporate form of organization. 13-1 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. The stockholders or shareholders who own the stock own the corporation. Corporations whose shares of stock are traded in public markets are called public corporations. 2 Corporations whose shares are not traded publicly are usually owned by a small group of investors and are called nonpublic or private corporations. The stockholders of all corporation have limited liability. 13-1 The stockholders control a corporation by electing a board of directors. The board meets periodically to establish corporate policy. It also selects the chief executive officer (CEO) and other major officers. 3 Exhibit 1 Organizational Structure of a Corporation 13-1 Stockholders Board of Directors Officers Employees 4 Advantages of the Corporate Form A corporation exists separately from its owners. 13-1 A corporation’s life is separate from its owners; therefore, it exists indefinitely. The corporate form is suited for raising large amounts of money from stockholders. A corporation sells shares of ownership, called stock. Stockholders can transfer their shares of stock to other stockholders. A corporation’s creditors usually may not go beyond the assets of the corporation to satisfy their claims. 5 Disadvantages of the Corporate Form 13-1 Stockholders control management through a board of directors. As a separate legal entity, the corporation is subject to taxation. Thus, net income distributed as dividends will be taxed at both the corporate and individual levels. Corporations must satisfy many regulatory requirements. 6 13-1 Organization Structure of a Corporation Costs may be incurred in organizing a corporation. The recording of a corporation’s organizing costs of $8,500 on January 5 is shown below: Jan. 5 Organizational Expense Cash 8 500 00 8 500 00 Paid costs of organizing the corporation. 7 Objective 2 Describe the two main sources of stockholders’ equity. 13-2 The owner’s equity in a corporation is called stockholders’ equity, shareholders’ equity, shareholders’ investment, or capital. The two sources of capital found in the Stockholders’ Equity section of a balance sheet are paid-in capital or contributed capital (capital contributed to the corporation by stockholders and others) and retained earnings (net income retained in the business). 8 Stockholders’ Equity Section of a Corporate Balance Sheet Stockholders’ Equity Paid-in capital: Common stock Retained earnings Total stockholders’ equity 13-2 $330,000 80,000 $410,000 If there is only one class of stock, the account is entitled Common Stock or Capital Stock. A debit balance in Retained Earnings is called a deficit. Such a balance results from accumulated net losses. 9 Objective 3 13-3 Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock. The number of shares of stock that a corporation is authorized to issue is stated in the charter. A corporation may reacquire some of the stock that has been issued. The stock remaining in the hands of stockholders is then called outstanding stock. Shares of stock are often assigned a monetary amount, called par. Corporations may issue stock certificates to stockholders to document their ownership. Some corporations have stopped issuing stock certificates except on special request. Stock issued without a par is called no-par stock. Some states require the board of directors to assign a stated value to no-par stock. 10 Major Rights That Accompany Ownership of a Share of Stock 13-3 1. The right to vote in matters concerning the corporation. 2. The right to share in distributions of earnings. 3. The right to share in assets on liquidation. Two Primary Classes of Paid-In Capital The two primary classes of paid-in capital are common stock and preferred stock. The primary attractiveness of preferred stocks is that they are preferred over common as to dividends. 11 13-3 E.g. A corporation has 1,000 shares of $4 preferred stock and 4,000 shares of common stock outstanding. The net income, amount of earnings retained, and the amount of earnings distributed are as follows: 2006 2007 2008 Net income $20,000 $9,000 $62,000 Amount retained 10,000 6,000 40,000 Amount distributed $10,000 $3,000 $22,000 12 13-3 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. Cash Preferred Stock Common Stock Issued preferred stock and 1,500 000 00 500 000 00 1,000 000 00 common stock at par for cash. 13 13-3 When a stock is issued for a price that is more than its par, the stock has sold at a premium. When stock is issued for a price that is less than its par, the stock has sold at a discount. Premium on Stock Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55. Cash Preferred Stock 110 000 00 100 000 00 Paid-in Capital in Excess of Par—Preferred Stock Issued $50 par preferred stock at $55. 10 000 00 14 13-3 A corporation acquired land for which the fair market value cannot be determined. The corporation issued 10,000 shares of $10 par common that has a current market value of $12 in exchange for the land. Land 120 000 00 Common Stock Paid-in Capital in Excess of Par 100 000 00 20 000 00 Issued $10 par common stock valued at $12 per share, for land. 15 13-3 No-Par Stock A corporation issues 10,000 shares of nopar common stock at $40 a share. Cash Common Stock Issued 10,000 shares of nopar common stock at $40. 400 000 00 400 000 00 16 Objective 4 Journalize the entries for cash dividends and stock dividends. Cash Dividends 13-4 A cash distribution of earnings by a corporation to its stockholders is called a cash dividend. There are usually three conditions that a corporation must meet to pay a cash dividend. 1. Sufficient retained earnings 2. Sufficient cash 3. Formal action by the board of directors 17 Three Important Dividend Dates 13-4 First is the date of declaration. Assume that on December 1, Hiber Corporation declares a $42,500 dividend ($12,500 to the 5,000 preferred stockholders and $30,000 to the 100,000 common stockholders. Heber Corporation records the $42,500 liability on the declaration date. Dec. 1 Cash Dividends Cash Dividends Payable 42 500 00 42 500 00 Declared cash dividend. 18 Three Important Dividend Dates 13-4 The second important date is the date of record. For Hiber Corporation this would be December 10. No entry is required since this date merely determines which stockholders will receive the dividend. 19 13-4 Three Important Dividend Dates The third important date is the date of payment. On January 2, Hiber issues dividend checks. Jan. 2 Cash Dividends Payable Cash 42 500 00 42 500 00 Paid cash dividend. 20 Stock Dividends 13-4 A distribution of dividends to stockholders in the form of the firm’s own shares is called a stock dividend. On December 15, the board of directors of Hendrix Corporation declares a 5% stock dividend of 100,000 shares (2,000,000 shares x 5%) to be issued on January 10 to stockholders of record on December 31. The market price on the declaration date is $31 a share. 21 13-4 The entry to record the declaration of the 5 percent stock dividend is as follows: Dec. 15 Stock Dividend (100,000 x $31 market) Stock Dividend Distributable 3,100 000 00 2,000 000 00 Paid-in Capital in Excess of Par—Common Stock 1,100 000 00 Declared 5% (100,000 share) stock dividend on $20 par common stock with a market value of $31 per share. 22 13-4 On January 10, the number of shares outstanding is increased by 100,000. The following entry records the issue of the stock: Jan. 10 Stock Dividends Distributable Common Stock 2,000 000 00 2,000 000 00 Issued stock for the stock dividend. 23 13-5 Objective 5 Journalize the entries for treasury stock transactions. Treasury Stock Transactions Occasionally, a corporation buys back its own stock to provide shares for resale to employees, for reissuing as a bonus to employees, or for supporting the market price of the stock. This stock is referred to as treasury stock. 24 13-5 On January 5, a firm purchased 1,000 shares of treasury stock (common stock, $25 par) at $45 per share. The cost method for accounting for treasury stock is used. Treasury Stock Cash 45 000 00 45 000 00 Purchased 1,000 shares of treasury stock at $45. 25 13-5 Later, 200 shares of treasury stock were sold for $60 per share. Cash 12 000 00 Treasury Stock* 9 000 00 Paid-in Capital from Sale of Treasury Stock 3 000 00 Sold 200 of treasury stock at $60. 26 13-5 Sold 200 shares of treasury stock at $40 per share. Cash 8 000 00 Paid-in Capital from Sale of Treasury Stock Treasury Stock 1 000 00 9 000 00 Sold 200 of treasury stock at $40. 27 Objective 6 Describe and illustrate the reporting of stockholders’ equity. 13-6 Stockholders’ Equity Section of a Balance Sheet 28 13-6 Example Exercise 13-6 Using the following accounts and balances, prepare the Stockholders’ Equity section of the balance sheet. Forty thousand shares of common stock are authorized and 5,000 shares have been reacquired. Common Stock, $50 par Paid-in Capital in Excess of Par Paid-in Capital from Sale of Treasury Stock Retained Earnings Treasury Stock $1,500,000 160,000 44,000 4,395,000 120,000 29 13-6 Follow My Example 13-6 Stockholders’ Equity Paid-in capital: Common stock, $50 par (40,000 shares authorized, 30,000 shares issued) $1,500,000 Excess of issue price over par 160,000 From sale of treasury stock Total paid-in capital Retained earnings Total Deduct treasury stock (5,000 shares at cost) Total stockholders’ equity $1,660,000 44,000 $1,704,000 4,395,000 $6,099,000 120,000 $5,979,000 30 Retained Earnings Statement 13-6 31 7 Statement of Stockholders’ Equity 13-6 32 13-6 Example Exercise 13-7 Dry Creek Camera Inc. reported the following results for the year ending March 31, 2008: Retained earnings, April 1, 2007 $3,338,500 Net income 461,500 Cash dividends declared 80,000 Stock dividends declared 120,000 Prepare a retained earnings statement for the fiscal year ended March 31, 2008. 33 13-6 Follow My Example 13-7 DRY CREEK CAMERAS INC. RETAINED EARNINGS STATEMENT For the Year Ended March 31, 2008 Retained earnings, April 1, 2007 Net income Less dividends declared Increase in retained earnings Retained earnings, March 31, 2008 For Practice: PE 13-6A, PE 13-6B $3,338,500 $461,500 200,000 261,500 $3,600,000 34 Objective 7 13-7 Describe the effect of stock splits on corporate financial statements. Stock Splits A corporation sometimes reduces the par or stated value of their common stock and issues a proportionate number of additional shares. This process is called a stock split. 35 Rojek Corporation has 10,000 shares of $100 par common 13-7 stock outstanding with a current market price of $150 per share. The board of directors declares a 5-for-1 stock split. BEFORE STOCK SPLIT AFTER 5:1 STOCK SPLIT 4 shares, $100 par 20 shares, $20 par $400 total par value $400 total par value It is not recorded by a journal entry 36