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Chapter 11

Chapter 11. Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings. Financial Accounting, Seventh Edition. CHAPTER 11 - Part 1. Major Characteristics of a corporation Forming a corporation Stockholders’ Rights.

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Chapter 11

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  1. Chapter11 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings Financial Accounting, Seventh Edition

  2. CHAPTER 11 - Part 1 Major Characteristics of a corporation Forming a corporation Stockholders’ Rights SO 1 Identify the major characteristics of a corporation.

  3. Identify the major characteristics of a corporation. Record the issuance of common stock. Explain the accounting for treasury stock. Differentiate preferred stock from common stock. Prepare the entries for cash dividends and stock dividends. Identify the items that are reported in a retained earnings statement. Prepare and analyze a comprehensive stockholders’ equity section. Learning Objectives

  4. The Corporate Form of Organization An entity separate and distinct from its owners. • Classified by Ownership • Publicly held • Privately held • Classified by Purpose and • Not-for-Profit • For Profit • Hopelink • Susan B Komen • Bill & Melinda Gates Foundation • Wendy’s • Ford Motor Company • Coke • Amazon • Mars (the Snickers Co.

  5. The Corporate Form of Organization Characteristics that distinguish corporations from proprietorships and partnerships. • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Corporate Management • Government Regulations • Additional Taxes Advantages Disadvantages SO 1 Identify the major characteristics of a corporation.

  6. ______________________________________________ The Stockholders Separate Legal Existence - Adv Stockholders are separate from the company. The word “corporation” comes from the root work “corpus” or body. A corporation is a separate legal entity.

  7. The Corporation ______________________________________________ The Stockholders –$$$$$$$$$$$$$$$$$$$ BUT: The stockholders’ personal assets are NOT at risk. LimitedLiability of Stockholders - Adv Stockholder are at risk ONLY to the extent of their investment. In other words, a stockholder can either make money on his/her stock (if the price rises) or….worst case scenario, LOSE IT ALL. But no more.

  8. Easy to buy/sell stock – the transactions are public, not personal, and do not require the consensus of other owners. Transferable Ownership Rights - Adv Stockholder are can sell their stock without consent of other owners. And…changing owners does NOT affect the company’s day-to day operations.

  9. It is easy to obtain capital through the stock market and investors can be BIGor small…. Ability to Acquire Capital - Adv It is easy to obtain capital through the stock market and investors can be BIGor small…. Investors can buy stock… a lot or a little with ease.

  10. A corporation’s life is not limited by the lifetime of its owners Continuous Life–ADV The corporate charter (read ahead for forming a corporation and writing a charter) can limit its life, but most corporations live on indefinitely, not limited by its owner’s lives.

  11. Having professional managers is an advantage. Having professional managers who are not owners….might be a disadvantage. Corporate Management - Adv Stockholders elect the Board of Directors, who elect the CEO, who hires the managers. Question: Should the managers own stock? Would owning stock make them more invested in the company?

  12. Characteristics of a Corporation Stockholders Illustration 11-1Corporation organization chart Chairman and Board of Directors President and Chief Executive Officer General Counsel and Secretary Vice President Marketing Vice President Finance/Chief Financial Officer Vice President Operations Vice President Human Resources Treasurer Controller SO 1 Identify the major characteristics of a corporation.

  13. Many requirements: reports, federal laws, state laws, SEC rules, stock exchange requirements (NYSE, NASDAC, ASE…) Government Regulations – DIS ADV

  14. Double Taxation. The stockholders are taxed on their dividend earnings AND the corporation is taxed on its earnings. AND, the corporation CANNOT deduct dividend payments! Additional Taxes– DIS ADV

  15. Forming a Corporation Initial Steps: • File application with the Secretary of State. • State grants charter. • Corporation develops by-laws. Companies generally incorporate in a state whose laws are favorable to the corporate form of business (Delaware, New Jersey). Corporations expense organization costs as incurred. SO 1 Identify the major characteristics of a corporation.

  16. Stockholders’ Rights Stockholders have the right to: Illustration 11-3 1. Vote in election of board of directors and on actions that require stockholder approval. 2. Share the corporate earnings through receipt of dividends. SO 1 Identify the major characteristics of a corporation.

  17. Stockholders’ Rights Stockholders have the right to: Illustration 11-3 3. Keep the same percentage ownership when new shares of stock are issued (preemptive right*). * A number of companies have eliminated the preemptive right. SO 1 Identify the major characteristics of a corporation.

  18. Ownership Rights of Stockholders Stockholders have the right to: Illustration 11-3 4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim. SO 1 Identify the major characteristics of a corporation.

  19. Ownership Rights of Stockholders Illustration 11-4 Prenumbered Class Class A COMMON STOCK Class A COMMON STOCK PAR VALUE $1 PER SHARE PAR VALUE $1 PER SHARE Name of corporation Stockholder’s name Shares Stock Certificate Signature of corporate official

  20. Practice Practice: Do Self Study Questions: 1,2,3 See solution at the end of the chapter SO 1 Identify the major characteristics of a corporation.

  21. CHAPTER 11 - Part 2 Common Stock Treasury Stock Preferred Stock SO 1 Identify the major characteristics of a corporation.

  22. Stock Issue Considerations Authorized Stock • Charter indicates the amount of stock that a corporation is authorized to sell. • Number of authorized shares is often reported in the stockholders’ equity section. • Note: the number of authorized shares does NOT mean there are the SAME number of investors in the company. These are just the number of shares the company would EVER be authorized to sell.

  23. Stock Issue Considerations Issuance of Stock • Corporation can issue common stock directly to investors or indirectly through an investment banking firm. • How does a company set the price for a new issue of stock? • the company’s anticipated future earnings • its expected dividend rate per share • its current financial position • the current state of the economy • the current state of the securities market Note: Ultimately, it is the market demand that will set the current selling price.

  24. Stock Issue Considerations Market Value of Stock • Stock of publicly held companies is traded on organized exchanges. • Interaction between buyers and sellers determines the prices per share. • Prices set by the marketplace tend to follow the trend of a company’s earnings and dividends. • Factors beyond a company’s control, may cause day-to-day fluctuations in market prices. After the Company has sold a share of stock, any subsequent sale (at profit or loss), does NOT impact the company.

  25. Stock Issue Considerations For example… • The Chocolate Company sells 1 • share of stock at $30 to Joseph Blow. • One year later, Joseph sells it for $40. • There is a $10 profit. • Who receives it? The company or Joseph? Chocolate! First, answer this on YOUR OWN and then go to next slide

  26. Stock Issue Considerations For example… • Joseph earns the $10 profit. • However… The Chocolate Company gets the prestige of its rising prices.

  27. Stock Issue Considerations Par and No-Par Value Stock • Years ago, par value determined the legal capital per share that a company must retain in the business for the protection of corporate creditors. • Today many states do not require a par value. • No-par value stock is quite common today. • In many states the board of directors assigns a stated valueto no-par shares.

  28. Capital Remember the Accounting Equation? • Assets = Liabilities + Stockholders’ Equity • Assets = The Company’s Resources • Liabilities & Stockholders’ Equity = How the Company financed these resources. The Choices are: • DEBT • EQUITY (owners)

  29. Capital (EQUITY) HAS TWO SOURCES: • PAID IN CAPITAL Paid in Capital is the total amount of cash and other assets paid into the corporation by stockholders in exchange for capital stock. Common Stock Preferred Stock PIC, in Excess of Par Value, Common Stock PIC, in Excess of Par Value, Preferred Stock • EARNED CAPITAL Retained Earnings – the net income (less dividends paid out) that a corporation retains for future use. Retained Earnings

  30. Accounting for Common Stock Issues • Primary objectives: • Identify the specific sources of paid-in capital. • Maintain the distinction between paid-in capital and retained earnings. Other than consideration received, the issuance of common stock affects only paid-in capital accounts. SO 2 Record the issuance of common stock.

  31. Accounting for Common Stock Issues Issuing Par Value Common Stock for Cash Illustration: Assume that Hydro-Slide, Inc. issues 2,000 shares of $1 par value common stock. Prepare Hydro-Slide’s journal entry if (a) 1,000 share are issued for $1 per share, and (b) 1,000 shares are issued for $5 per share. a. Stop: Try these Journal Entries in your Course Pack b. SO 2 Record the issuance of common stock.

  32. Accounting for Common Stock Issues Issuing Par Value Common Stock for Cash Illustration: Assume that Hydro-Slide, Inc. issues 2,000 shares of $1 par value common stock. Prepare Hydro-Slide’s journal entry if (a) 1,000 share are issued for $1 per share, and (b) 1,000 shares are issued for $5 per share. Note these Journal Entries in your Course Pack a. Cash 1,000 Common stock (1,000 x $1) 1,000 b. Cash 5,000 Common stock (1,000 x $1) 1,000 Paid-in capital in excess of par value 4,000 SO 2 Record the issuance of common stock.

  33. Accounting for Common Stock Issues Illustration 11-7 SO 2 Record the issuance of common stock.

  34. Accounting for Common Stock Issues Issuing No-Par Common Stock for Cash Illustration: Assume that Hydro-Slide, Inc. issues 5,000 shares of $5 stated value no-par common stock for $8 per share. The entry is: Stop: Try these Journal Entries in your Course Pack Prepare the entry assuming there is no stated value? SO 2 Record the issuance of common stock.

  35. Accounting for Common Stock Issues Issuing No-Par Common Stock for Cash Illustration: Assume that Hydro-Slide, Inc. issues 5,000 shares of $5 stated value no-par common stock for $8 per share. The entry is: Note these Journal Entries in your Course Pack Cash 40,000 Common stock (5,000 x $5) 25,000 Paid-in capital in excess of stated value 15,000 Prepare the entry assuming there is no stated value? Cash 40,000 Common stock 40,000 SO 2 Record the issuance of common stock.

  36. Accounting for Common Stock Issues Issuing Common Stock for Services or Noncash Assets • Corporations also may issue stock for: • Services (attorneys or consultants). • Noncash assets (land, buildings, and equipment). Cost is either the fair market value of the consideration given up, or the fair market value of the consideration received, whichever is more clearly determinable. SO 2 Record the issuance of common stock.

  37. Accounting for Common Stock Issues Illustration: Assume that attorneys have helped Jordan Company incorporate. They have billed the company $5,000 for their services. They agree to accept 4,000 shares of $1 par value common stock in payment of their bill. At the time of the exchange, there is no established market price for the stock. Prepare the journal entry for this transaction. Stop: Try these Journal Entries in your Course Pack SO 2 Record the issuance of common stock.

  38. Accounting for Common Stock Issues Illustration: Assume that attorneys have helped Jordan Company incorporate. They have billed the company $5,000 for their services. They agree to accept 4,000 shares of $1 par value common stock in payment of their bill. At the time of the exchange, there is no established market price for the stock. Prepare the journal entry for this transaction. Organizational expense 5,000 Common stock (4,000 x $1) 4,000 Paid-in capital in excess of par 1,000 SO 2 Record the issuance of common stock.

  39. Accounting for Common Stock Issues Illustration: Assume that Athletic Research Inc. is an existing publicly held corporation. Its $5 par value stock is actively traded at $8 per share. The company issues 10,000 shares of stock to acquire land recently advertised for sale at $90,000. Prepare the journal entry for this transaction. Stop: Try these Journal Entries in your Course Pack SO 2 Record the issuance of common stock.

  40. Accounting for Common Stock Issues Illustration: Assume that Athletic Research Inc. is an existing publicly held corporation. Its $5 par value stock is actively traded at $8 per share. The company issues 10,000 shares of stock to acquire land recently advertised for sale at $90,000. Prepare the journal entry for this transaction. Land (10,000 x $8) 80,000 Common stock (10,000 x $5) 50,000 Paid-in capital in excess of par 30,000 SO 2 Record the issuance of common stock.

  41. Accounting for Common Stock Issues Practice: Do Problem 11-1B See solution at the end of the Powerpoint slides SO 2 Record the issuance of common stock.

  42. TREASURY STOCK • PAID IN CAPITAL Paid in Capital is the total amount of cash and other assets paid into the corporation by stockholders in exchange for capital stock. Common Stock Preferred Stock PIC, in Excess of Par Value, Preferred Stock PIC, in Excess of Par Value, Common Stock • EARNED CAPITAL Retained Earnings Retained Earnings – the net income (less dividends paid out) that a corporation retains for future use. LESS: Treasury Stock

  43. Accounting for Treasury Stock Treasury stock - corporation’s own stock that it has reacquired from shareholders, but not retired. • Corporations purchase their outstanding stock: • To reissue the shares to officers and employees under bonus and stock compensation plans. • To enhance the stock’s market value. • To have additional shares available for use in the acquisition of other companies. • To increase earnings per share. • To rid the company of disgruntled investors, perhaps to avoid a takeover. SO 3 Explain the accounting for treasury stock.

  44. Accounting for Treasury Stock Purchase of Treasury Stock Debit Treasury Stock for the price paid to reacquire the shares.* Treasury stock is a contra stockholders’ equity account, not an asset. Purchase of treasury stock reduces stockholders’ equity. * Debit T-Stock at Cost (note-there are alternative ways to record T-Stock, but not learned until more advanced courses)

  45. Accounting for Treasury Stock Illustration 11-8 Illustration:On February 1, 2011, Mead acquires 4,000 shares of its stock at $8 per share. Treasury stock (4,000 x $8) 32,000 Cash 32,000 SO 3 Explain the accounting for treasury stock.

  46. Accounting for Treasury Stock Stockholders’ Equity with Treasury stock Illustration 11-9 Both the number of shares issued (100,000), outstanding (96,000), and the number of shares held as treasury (4,000) are disclosed. SO 3 Explain the accounting for treasury stock.

  47. What is the relationship between… • Authorized • Issued • Outstanding • Treasury Stock Assume: 1,000,000 shares are authorized. 400,000 shared issued and 15,000 shares in treasury stock. How many are outstanding?

  48. What is the relationship between… • Authorized = 1,000,000 • Issued = 400,000 • Outstanding = 385,000 • Treasury Stock = 15,000 --Total Issued Shares = 400,000 -- -------------Total Authorized Shares = 1,000,000 ----------- Assume: 1,000,000 shares are authorized. 400,000 shared issued and 15,000 shares in treasury stock. How many are outstanding? 15,000 385,000

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