Corporations: Formation and Capital Stock Transactions

2. Chapter 20 Corporations: Formation and CapitalStock Transactions Section 1: Forming a Corporation Section Objectives • Explain the characteristics of a corporation. • Describe special “hybrid” organizations that have some characteristics of partnerships and some characteristics of corporations. McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

3. Explain the characteristics ofa corporation Objective 1 • Created by corporate charter issued by state government. • Can enter into contracts and own property. • Can have few or many owners. • Can be privately held or publicly held.

4. Advantages Disadvantages Corporations • Limited liability • Corporate income tax • Restricted agency • Governmental regulation • Continuous existence • Transferability of ownership rights • Ease of raising capital

5. Objective 2 Describe special “hybrid” organizations “Hybrid” Business Entities • Subchapter S corporation. • Limited liability partnership (LLP). • Limited liability company (LLC). Hybrid entities have characteristics of partnerships and corporations.

6. Subchapter S Corporation • Known as Scorporation. • Meets Subchapter S requirements of Internal Revenue Code to be treated as a partnership. The S corporation does not pay income taxes. Shareholders include their share of corporate profits on their individual tax returns.

7. Limited Liability Partnership (LLP) • Partners are responsible and have liability for their own actions and actions of those they control or supervise. • Partners are not liable for the actions or malfeasance of another partner.

8. Limited Liability Company (LLC) • Owners have limited liability. • Owners choose to have profits taxed at the company level or on their individual income tax return. • Profits and losses can be allocated other than in proportion to ownership interest. • Transfers of ownership must be approved by owners.

9. Organizers elect an acting board of directors. Shares are issued to individuals who have paid full purchase price of the stock. Shareholders elect permanent directors. Directors or shareholders approve bylaws. Board selects corporate officers. After a Corporate Charter Is Issued Officers hire employees and begin operations.

10. Chapter 20 Corporations: Formation and CapitalStock Transactions Section 2: Types of Capital Stock Section Objectives • Describe the different types of stock. • Compute the number of shares of common stock to be issued on the conversion of convertible preferred stock. • 5. Compute dividends payable on stock. McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

11. Capital Stock • Authorizedshares: The number of shares that can be sold. • Issued shares: The number of shares that have been sold. • Outstanding shares:The number of shares still in circulation. Outstanding stock = Issuedstock – Treasury stock

12. Capital Stock Values • Par Value Specified in the corporate charter and assigned to each share of stock for accounting purposes. • Stated Value A value assigned to no-par stock by the board of directors for accounting and legal purposes. • Market Value The price per share at which stock is bought and sold.

13. Common Preferred Describe the different types of stock Objective 3 Stock Classes Preferred stock has special claims on a corporation’s profits or, in case of liquidation, corporate assets. If there is only one class of stock, common stock is issued. Each share carries the same rights and privileges as every other share.

14. Compute the number of shares of common stock to be issued on the conversion of convertible preferred stock. Objective 4

15. Convertible Preferred Stock Owners have the right to convert their shares into common stock after a specified date. Conversion Ratio The number of shares of common stock into which a preferred stock can be converted. Example: 400 shares of preferred, with a 1:2 conversion ratio equals 2 shares of common for each share of preferred. 400 X 2 = 800 shares of common stock

16. Compute dividends payable on stock QUESTION: What are dividends? ANSWER: Dividends are distributions of the profits of a corporation to its shareholders. Objective 5 The board of directors declares dividends.

17. Dividend Rights on Preferred Stock • Cumulative preferred stock • Noncumulative preferred stock • Nonparticipating preferred stock • Participating preferred stock

18. Cumulative Preferred Stock • Has right to receive preference dividend each year before any dividend can be paid on common stock. • If dividend is passed (not paid) in one year, the amount not paid carries over and must be fully paid in a subsequent year before any dividend can be paid on common stock.

19. Noncumulative Preferred Stock • Has right to receive preference dividend each year before any dividend can be paid on common stock. • Stockholders have no rights to dividend for years in which none were declared.

20. Nonparticipating Preferred Stock • Has right to receive preference dividend each year before any dividend can be paid on common stock. • Does not have the right to any dividend in excess of the preference dividend.

21. Participating Preferred Stock • Has right to receive preference dividend each year before any dividend can be paid on common stock. • After common shareholders have received specified amount, preferred and common stock share in further dividends.

22. Common Stock Common stockholders receive remaining dividends only after dividends have been paid on preferred stock in accordance with contractual obligations.

23. Dividend Calculations The following slides show three scenarios: Only common stock issued and 5 percent dividend declared. Common stock and noncumulative, nonparticipating preferred stock issued and $20,000 dividend declared. Common stock and noncumulative, nonparticipating preferred stock issued and $9,000 dividend declared.

24. QUESTION: 15,000shares X$ 50par value What is the dividend calculation? $ 750,000 X 0.05dividend declared ANSWER: $ 37,500total dividends Only Common Stock Issued Scenario A: • 15,000 shares issued, authorized, and outstanding • $50 par value • 5% dividend declared

25. Remaining dividend to common stockholders $15,000 Common and Noncumulative, Nonparticipating Preferred Stock Issued Preferred Stock, noncumulative, nonparticipating (10%, $50 Par Value, 1,000 Shares) $50,000 Common Stock ($20 Par Value, 10,000 Shares) 200,000 Total Capital Stock $250,000 Scenario B: Dividend declared $ 20,000 Dividend due to preferred stockholders (1,000 Shares x $50 x 10%) $ 5,000 Dividend per share for common stock = $15,000 ÷ 10,000 shares = $1.50

26. Remaining dividend to common stockholders$2,000 Common and Cumulative, Nonparticipating Preferred Stock Issued when $2,000 ofpreferred dividends are in arrears. Scenario C: Preferred Stock, noncumulative, nonparticipating (10%, $50 Par Value, 1,000 Shares) $50,000 Common Stock ($20 Par Value, 10,000 Shares) 200,000 Total Capital Stock $250,000 Dividend declared $ 9,000 Dividend due to preferred stockholders: Dividends in arrears $ 2,000 (1,000 Shares x $50 x 10%) $ 5,000 Dividend per share of common stock is $2,000 ÷ 10,000 shares = $0.20

27. Capital Stock on the Balance Sheet • Capital stock represents the equity in a corporation. • Common stock and preferred stock are reported separately. • Since the owners of a corporation are stockholders, the equity section of the balance sheet is titled “Stockholders’ Equity.”

28. Chapter 20 Corporations: Formation and CapitalStock Transactions Section 3: Recording Capital Stock Transactions Section Objectives • Record the issuance of capital stock at par value. • Prepare a balance sheet for a corporation. • Record organization costs. • 9. Record stock issued at a premium, and stock with no par value. • 10. Record transactions for stock subscriptions. • 11. Describe the capital stock records for a corporation. McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

29. Objective 6 Record the issuance of capital stock at par value Recording the Issuance of Stock Stock is issued after the purchaser has paid for it in full with one of the following: • Cash • Noncash assets • Services rendered

30. 20-- Dec. 31 Cash ($15,000 + $40,000) 55,000.00 Common Stock (600 X $25) 15,000.00 Preferred Stock (400 X $100) 40,000.00 Issuance of stock to Karen Wilcox: 600 shares of common at par ($25 per share) and 400 shares of preferred at par ($100 per share). Stock Issued at Par Value for Cash When stock is issued for cash equal to the par value of the shares, cash proceeds are credited to the capital stock account.

31. Stock Issued at Par Value for Noncash Assets Noncash assets include: • Merchandise Inventory • Land • Building • Equipment and Fixtures • Accounts Receivable The Allowance for Doubtful Accounts is recorded separately. The net value of assets transferred is the sum of all noncash assets less liabilities (such as Accounts Payable).

32. Camping Supply Center, Inc. Balance Sheet (Partial) December 31, 20-- Liabilities and Stockholders’ Equity: Current Liabilities Accounts Payable $19,200.00 Stockholders’ Equity Preferred Stock (10%, $100 par value, 8,000 shares authorized) At Par Value (1,600 shares issued) $160,000.00 Common Stock ($25 par value, 40,000 shares authorized) At Par Value (5,300 shares issued) 132,500.00 Total Stockholders’ Equity 292,500.00 Total Liabilities and Stockholders’ Equity $311,700.00 Objective 7 Preparing a Balance Sheet for a Corporation

33. 20-- Dec. 31 Organization Expenses 2,000.00 Cash 2,000.00 Payment of legal fees, charter fee, and cost of printing stock certificates. Record organization costs Objective 8 Organization costs are charged to an intangible asset account and then amortized over a period of time.

34. 20-- Mar. 2 Cash 42,000.00 Preferred Stock 40,000.00 Paid-in Capital in Excess of Par Value—Preferred Stock 2,000.00 Issuance of 400 shares for $105 per share Record stock issued at a premium and stock with no par value Objective 9 When stock is issued for more than its par value, it is issued at a premium. Premiums on stock are usually credited to an account titled Paid-in Capital in Excess of Par Value. Separate accounts are set up for different classes of stock.

35. Recording Rules for Par and No-Par Stock

36. Recording Rules for Par and No-Par Stock (cont.)

37. First issue: Cash 20,000.00 Common Stock 20,000.00 Issue of 1,000 shares of no-par-value common stock at $20 per share. Second issue: Cash 13,200.00 Common Stock 13,200.00 Issue of 600 shares of no-par-value common stock at $22 per share. Recording No-Par-Value Stock Without a Stated Value • Stated value has not been assigned the shares. • First issue was for 1,000 shares for $20 per share. • Second issue was for 600 shares for $22 per share. All proceeds go into the stock accounts!!

38. Cash 62,400.00 Common Stock 60,000.00 Paid-in Capital in Excess of Stated Value 2,400.00 Issued 2,400 shares of common stock at $26 per share. Recording No-Par-Value Stock With a Stated Value • Sold 2,400 shares of stated value $25 per share stock for $26 per share. Stated value is credited to the capital stock account—just like par. 2,400 X $25 = $60,000

39. Stockholder signs a subscription contract. (It details stock price and payment plan.) Stockholder pays for stock at a later date. Record transactions for stock subscriptions Objective 10 Subscriptions for Capital Stock Stockholder receives stock when payment is made.

40. 20-- May 1 Subscriptions Receivable—Common 20,000.00 Common Stock Subscribed 20,000.00 Subscription from Tyrone Coles to buy 400 shares of common stock at par value of $50 per share. A stock subscription gives the corporation a receivable from the subscriber and an obligation to hold enough stock for issue when the subscription is paid in full. The Common Stock Subscribed account appears in the Stockholder’s Equity section of the Balance Sheet. It will remain there until the stock is actually issued.

41. 20-- June 1 Cash 20,000.00 Subscriptions Receivable—Common 20,000.00 Received Tyrone Coles’ subscription in full. 1 Common Stock Subscribed(400 shares) 20,000.00 Common Stock (400 shares) 20,000.00 Issued 400 shares of common stock to Tyrone Cole. The stock is issued when full payment has been received for the subscription.

42. Describe the capital stock records for a corporation Objective 11 Special Corporation Records and Agents Corporations keep detailed records of stockholders’ equity and special corporate records such as: • Meeting minutes • Corporate bylaws • Stock certificate books • Stock ledgers • Stock transfer records

43. Thank You for using College Accounting, 12th Edition Price • Haddock • Farina