Transcript Document

Chapter 11
Corporations: Organization,
Capital Stock Transactions,
and Dividends
Objectives
1. Describe the nature of the corporate
form of organization.
2. List the major sources of paid-in capital,
including the various classes of stock.
3. Journalize the entries for issuing stock.
4. Journalize the entries for treasury stock
transactions.
5. State the effect of stock splits on
corporate financial statements.
Objectives
6. Journalize the entries for cash
dividends and stock dividends.
7. Describe and illustrate the reporting of
stockholders’ equity.
8. Compute and interpret the dividend
yield on common stock.
A corporation is a legal
entity, distinct and separate
from the individuals who
create and operate it.
Stakeholders include those
who have an economic
interest in an organization
and those who are affected
by its activities.
Organizational Structure of a Corporation
Stockholders
(owners of corporation stock)
Board of Directors
(elected by stockholders)
Officers
(selected by board of directors)
Employees
Forming a Corporation - US
 First step 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.
 State grants a charter or articles of incorporation
which formally create the corporation.
 Management and board of directors prepare bylaws
which are operation rules and procedures.
Forming a Corporation
On January 5, the firm paid the organization
costs of $8,500. This amount includes legal
fees, taxes and licenses, promotion costs, etc.
Jan. 5 Organization Costs
Cash
Paid cost of organizing the
corporation.
8 500 00
8 500 00
Sources of Paid-In Capital
Authorized
Issued
Outstanding
Number of Shares
Sources of Paid-In Capital
Major Rights that
Accompany Ownership
of a Share of Stock
1. The right to vote in matters
concerning the corporation.
2. The right to share in
distribution of earnings.
3. The right to share in assets on
liquidation.
Classes of Stockholders
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.
Money
available
for
dividends
Preferred
Stockholders
Common
Stockholders
Classes of Stockholders
Common Stock—the basic ownership of stock
with rights to vote in election of directors,
share in distribution of earnings, and purchase
additional shares.
Preferred Stock—A class of stock with
preferential rights over common stock in
payment of dividends and company liquidation.
Nonparticipating Preferred Stock
A nonparticipating preferred stock is limited to a
certain amount. Assume 1,000 shares of $4
nonparticipating preferred stock (or 4% with a par
value of $100) and 4,000 shares of common stock
and the following:
2005
2006
2007
Net income
Amount retained
Amount distributed
$20,000 $55,000 $62,000
10,000 20,000 40,000
$10,000 $35,000 $22,000
Nonparticipating Preferred Stock
Amount distributed $10,000 $35,000 $22,000
Preferred dividend
(1,000 shares)
4,000
4,000
4,000
Common dividend
(4,000 shares)
$6,000 $31,000 $18,000
Dividends per share:
Preferred
$ 4.00 $ 4.00 $ 4.00
Common
$ 1.50 $ 7.75 $ 4.50
Cumulative Preferred Stock
So, preferred
dividends are
two years in
arrears.
Assume 1,000 shares of $4
cumulative preferred stock
and 4,000 shares of common
stock. No dividends were
paid in 2005 and 2006.
On March 7, 2007, the board of
directors declares dividends of $22,000.
Cumulative Preferred Stock
Preferred Stock Dividends
Dividends Paid in 2007
Total dividends paid,
$22,000
$4,000
2005
(In arrears)
$4,000
$4,000
2006
(In arrears)
$4,000
$4,000
$4,000
2007
Preferred
Stock
(Current dividend)
$10,000
Common
Stock
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.
Issuing Stock
On April 1, one-half of each class of
authorized stock is issued at par for cash.
Apr. 1 Cash
1,500000 00
Preferred Stock
500 000 00
Common Stock
1,000000 00
Issued preferred stock and
common stock at par.
Issuing Stock
Common Stock and Preferred Stock accounts are
controlling accounts. A record of each
stockholders’ name, address, and number of shares
is kept in a stockholders’ subsidiary ledger.
Issuing Stock at a Premium
On March 15, Caldwell Company issues 2,000
shares of $50 par preferred stock for cash at $55.
Mar. 15 Cash
110 000 00
Preferred Stock
100 000 00
Paid-in Capital in Excess of Par-Preferred Stock
Issued 2,000 shares of $50 par
preferred stock at $55.
10 000 00
Issuing Stock at a Premium
When stock is issued for more than
its par, the stock has sold at a
premium. It has sold at a discount if
issued for less than its par.
The $10,000 excess is recorded in a
separate account because some states do
not consider this to be part of legal capital
and may be used for dividends.
Issuing Stock at a Premium
On Nov. 12, 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.
Nov. 12 Land
120 000 00
Common Stock
Paid-in Capital in Excess of Par
Issued $10 par common stock
valued at $12 per share, for
land.
100 000 00
20 000 00
Issuing Stock at a Premium
Stock issued for assets other than cash should be
recorded at the fair market value of the asset or
fair market value of the stock, whichever can be
more clearly determined.
Issuing Stock at No-Par
On February 23, a corporation issues 10,000
shares of no-par common stock at $40 a share.
Feb. 23 Cash
400 000 00
Common Stock
Issued 10,000 shares of no-par
common stock at $40.
400 000 00
Issuing Stock at No-Par
Later, on March 9, the corporation
issues 1,000 additional shares at $36.
Mar. 9 Cash
36 000 00
Common Stock
Issued 1,000 shares of no-par
common stock at $36.
36 000 00
Issuing Stock at No-Par
Some states require that the entire
proceeds from the sale of no-par
stock be treated as legal capital.
Also, no-par stock may be
assigned a stated value per share.
The stated value is recorded
similar to a par value.
Issuing Stock with a Stated Value
On March 30, issued 1,000 shares of no-par
common stock at $40; stated value, $25.
Mar. 30 Cash
40 000 00
Common Stock
25 000 00
Paid-in Capital in Excess of
Stated Value
Issued 1,000 shares of no-par
common stock at $40; stated
value, $25.
15 000 00
Treasury Stock Transactions
Treasury Stock Transactions
Occasionally, a corporation buys back its own
stock for the purpose of later reissuing it. This
stock is referred to as treasury stock.
Treasury stock is stock that:
1. has been issued as fully paid.
2. has been reacquired by the
corporation.
3. has not been canceled or reissued.
A commonly used method of
accounting for treasury stock is the cost
method.
Treasury Stock Transactions
Cost Method
On January 5, a firm purchased 1,000
shares of treasury stock (common stock,
$25 par) at $45 per share.
Jan. 5 Treasury Stock
Cash
Purchased 1,000 shares of
treasury stock at $45.
45 000 00
45 000 00
Treasury Stock Transactions
Cost Method
On June 2, sold 200 shares of
treasury stock at $60 per share.
June 2 Cash
12 000 00
Treasury Stock
9 000 00
Paid-in Capital from sale of
Treasury Stock
Sold 200 shares of treasury
stock at $60.
3 000 00
Treasury Stock Transactions
Cost Method
On September 3, sold 200 shares
of treasury stock at $40 per share.
Sep. 3 Cash
8 000 00
Paid-in Capital from Sale of
Treasury Stock
Treasury Stock
Sold 200 shares of treasury
stock at $40.
1 000 00
9 000 00
Stock Splits
A corporation sometimes reduces the par or
stated value of their common stock and issues
a proportionate number of additional shares.
This is called a stock split.
A stock split does not change the balance
of any corporation accounts. However, it
can make the stock more attractive to
investors by reducing the price of a share,
Stock Splits
BEFORE
STOCK SPLIT
AFTER 5-1
STOCK SPLIT
4 shares, $100 par
20 shares, $20 par
$400 total par value
$400 total par value
Accounting for Cash Dividends
 Dividends are distributions of
retained earnings to
stockholders.
 Dividends may be paid in cash,
stock, or property.
 Dividends, even on cumulative
preferred stock, are never
required, but once declared
become a legal liability of the
corporation.
Accounting for Cash Dividends
Corporations generally declare and pay
cash dividends on shares outstanding when
three conditions exist:
1. Sufficient retained earnings
2. Sufficient cash
3. Formal action by the board of directors
Retained Earnings
50,000
Accounting for Cash Dividends
There are three important dates relating
the dividends.
First is the date of declaration.
Assume that on December 1,
Hiber Corporation declares a
$42,500 dividend.
Accounting for Cash Dividends
Date of Declaration
Dec. 1 Cash Dividends
Cash Dividend Payable
Declared cash dividend.
42 500 00
42 500 00
Accounting for Cash Dividends
The second important date is
the date of record. For Hiber
Corporation this would be
December 11.
On this date, ownership of shares
determines who receives the
dividend. No entry is required.
Accounting for Cash Dividends
The third important date is the date of
payment. On January 2, Hiber issues
dividend checks.
Accounting for Cash Dividends
Date of Payment
Jan. 2 Cash Dividends Payable
Cash
Paid cash dividends.
42 500 00
42 500 00
Accounting for Stock Dividends
A distribution of dividends to
stockholders in the form of the
firm’s own shares is called a
stock dividend.
Stock dividends transfer pro rata shares of
stock to stockholders. Assume Hendrix
Corporation declares a 5% stock dividend on
common stock, $20 par, 2,000,000 shares
issued. (Market price $31)
Accounting for Stock Dividends
Hendrix Corporation, December 15 (before dividend)
Common Stock, $20 par
$40,000,000
Paid-in Capital in Excess of Par--Common Stock
9,000,000
Retained Earnings
26,600,000
Dec. 15 Stock Dividends
Stock Dividends Distributable
3,100 000 00
2,000000 00
Paid-in Capital in Excess of
Par—Common Stock
Declared stock dividend.
1,100000 00
Accounting for Stock Dividends
On January 10, Hendix Corporation issues
the stock. This action increases the number
of shares outstanding by 100,000.
Jan. 10 Stock Dividends Distributable
Common Stock
Issued stocks for the stock
dividend.
2,000 000 00
2,000000 00
Accounting for Stock Dividends
Hendrix Corporation, December 15 (before dividend)
Common Stock, $20 par
$40,000,000
Paid-in Capital in Excess of Par--Common Stock
9,000,000
Retained Earnings
26,600,000
$75,600,000
Hendrix Corporation, January 10 (after dividend)
Common Stock, $20 par
Paid-in Capital in Excess of Par--Common Stock
Retained Earnings
$42,000,000
10,100,000
23,500,000
$75,600,000
Reporting Stockholders’ Equity
There are two ways to report
stockholders’ equity in the balance sheet.
In the following slide, each class of stock
is listed first, followed by its related paidin capital accounts.
The other slide shows the second method.
Note that the stock accounts are listed
first. The other paid-in capital accounts
are listed as a single item described as
Additional paid-in capital.
Stockholders’ Equity
Paid-in capital:
Preferred 10% stock, $50 par,
cumulative (2,000 shares
authorized and issued)
Excess of issue price over par
Common stock, $20 par
(50,000 shares authorized, 45,000
issued)
Excess of issue price over par
From sale of treasury stock
Total paid-in capital
Retained earnings
Total
Deduct treasury stock (600 shares at cost)
Total stockholders’ equity
$100,000
10,000
$900,000
190,000
$ 110,000
1,090,000
2,000
$1,202,000
350,000
$1,552,000
27,000
$1,525,000
Stockholders’ Equity
Contributed capital:
Preferred 10% stock, cumulative
$50 par (2,000 shares authorized
and issued)
Common stock, $20 par
(50,000 shares authorized, 45,000
issued)
Additional paid-in capital
Total contributed capital
Retained earnings
Total
Deduct treasury stock (600 shares at cost)
Total stockholders’ equity
$100,000
900,000
202,000
$1,202,000
350,000
$1,552,000
27,000
$1,525,000
Financial Analysis and
Interpretation
Dividend
Use: To Yield
indicate the rate of return to common
stockholders in terms of dividends
2007
Dividends per share of common
Market price per share of common
Dividend Yield
$ 0.80
$20.50
2006
$ 0.60
$13.50
Dividends per Share of Common Stock
Market Price per Share of Common Stock
$.60
Dividend Yield, 2006
$13.50 = 4.4%
Dividend Yield, 2007
$.80
= 3.9%
$20.50