Click to edit Master title style 1 1 1 Corporations: Organization, Stock Transactions, and Dividends...

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Corporations: Corporations: Organization, Stock Organization, Stock Transactions, and Transactions, and

DividendsDividends

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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.


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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.


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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.

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EmployeesEmployees

StockholdersStockholders

OfficersOfficers

Board of DirectorsBoard of Directors

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Exhibit 1 Organizational Structure of a Corporation


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Advantages of the Corporate Form

A corporation exists separately from its owners.

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.

(Continued)


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Advantages of the Corporate Form

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.

(Concluded)


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Disadvantages of the Corporate Form

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.


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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 8 500 00

Cash 8 500 00

Paid costs of organizing

the corporation.


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The owner’s equity in a corporation is called stockholders’ equity,

shareholders’ equity, shareholders’ investment, or capital.


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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).

Stockholders’ Equity


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Stockholders’ Equity Section of a Corporate Balance Sheet

Stockholders’ EquityPaid-in capital: Common stock $330,000Retained earnings 80,000 Total stockholders’ equity $410,000

If there is only one class of stock, the account is entitled Common Stock or Capital Stock.


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Characteristics of 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.


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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.


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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.

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Major Rights That Accompany Ownership of a Share of Stock


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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.

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Two Primary Classes of Paid-In Capital


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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:

Net income $20,000 $9,000 $62,000Amount retained 10,000 6,000 40,000Amount distributed $10,000 $3,000 $22,000

2006 2007 2008


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Dividends to Common and Preferred Stock


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Example Exercise 13-1

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Sandpiper Company has stock 20,000 shares of 1% preferred stock of $100 par and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends:

Year 1: $10,000Year 2: 25,000Year 3: 80,000

Determine the dividends per share for preferred and common stock for each year.


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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.

Issuing Stock

Cash 1,500 000 00

Issued preferred stock and

common stock at par for cash.

Preferred Stock 500 000 00

Common Stock 1,000 000 00


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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.


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Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55.

Cash 110 000 00

Issued $50 par preferred stock at $55.

Preferred Stock100 000 00

Paid-in Capital in Excess of

Par—Preferred Stock10 000 00

Premium on Stock


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13-3A 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

Issued $10 par common stock

valued at $12 per share, for

land.

Common Stock100 000 00

Paid-in Capital in Excess of Par20 000 00


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Cash Dividends

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


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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.

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Three Important Dividend Dates


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Dec. 1 Cash Dividends 42 500 00

Declared cash dividend.

Cash Dividends Payable42 500 00

Heber Corporation records the $42,500 liability on the declaration date.

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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.

Three Important Dividend Dates 13-4


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The third important date is the date of payment. On January 2, Hiber issues dividend checks.

Three Important Dividend Dates

Jan. 2 Cash Dividends Payable 42 500 00

Paid cash dividend.

Cash 42 500 00

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A distribution of dividends to stockholders in the form of the firm’s own shares is

called a stock dividend.

Stock Dividends 13-4


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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.

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Dec. 15 Stock Dividend (100,000 x $31 market) 3,100 000 00

Declared 5% (100,000 share)

stock dividend on $20 par

common stock with a market

value of $31 per share.

Stock Dividend Distributable

2,000 000 00 Paid-in Capital in Excess of

Par—Common Stock 1,100 000 00

The entry to record the declaration of the 5 percent stock dividend is as follows:


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Jan. 10 Stock Dividends Distributable 2,000 000 00

Issued stock for the stock

dividend.

Common Stock2,000 000 00

On January 10, the number of shares out-standing is increased by 100,000. The following entry records the issue of the stock:


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Stockholders’ Equity Section of a Balance Sheet


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Statement of Stockholders’ Equity77


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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.

Stock Splits 13-7


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Rojek Corporation has 10,000 shares of $100 par common stock outstanding with a current market price

of $150 per share. The board of directors declares a

5-for-1 stock split.


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BEFORE BEFORE STOCK SPLITSTOCK SPLIT

4 shares, $100 par

$400 total par value

20 shares, $20 par

AFTER 5:1 AFTER 5:1 STOCK SPLITSTOCK SPLIT

$400 total par value

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Since a stock split changes only the par or stated value and the number of shares outstanding, it is not recorded by a journal entry. The details of the stock split are normally disclosed in the notes to the financial statements.

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