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