Corporations: Organization, Stock Transactions, and Dividends

1. 11 Corporations: Organization, Stock Transactions, and Dividends

2. 1 Characteristics of a Corporation A corporationis 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.

3. 1 Public Corporations 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.

4. 1 Private Corporations 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 corporations have limited liability.

5. 1 Board of Directors 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.

6. Exhibit 1 1 Organizational Structure of a Corporation Stockholders Board of Directors Officers Employees

7. 1 Characteristics of a Corporation • A corporation has separate legal existence from its owners. • A corporation has transferable units of ownership. • A corporation has limited stockholders’ liability.

8. Exhibit 2 1 Advantages and Disadvantages of the Corporate Form (continued)

9. Exhibit 2 1 Advantages and Disadvantages of the Corporate Form (continued) Explanation

10. 1 Forming a Corporation First step in forming a corporation is to file an application of incorporationwith 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 (see Exhibit 3 in Slide 14).

11. Exhibit 3 1 Examples of Corporations and Their States of Incorporation

12. 1 Forming a Corporation • After the application is approved, the state grants a charter or articles of incorporationwhich formally create the corporation. • Managementand the board of directorspreparebylaws which are operating rules and procedures.

13. 1 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:

14. 2 Stockholders’ Equity The owner’s equity in a corporation is called stockholders’ equity, shareholders’ equity, shareholders’ investment, or capital.

15. 2 The two sources of capital are: • Capital contributed to the corporation by the stockholders, called paid-in capital or contributed capital. • Net income retained in the business, called retained earnings.

16. 2 Stockholders’ Equity Section of a Corporate Balance Sheet Stockholders’ Equity Paid-in capital: Common stock $330,000 Retained 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.

17. 3 Number of Shares Authorized, Issued, and Outstanding Outstanding Authorized Issued

18. 3 Major Rights That Accompany Ownership of a Share of Stock • The right to vote in matters concerning the corporation. • The right to share in distributions of earnings. • The right to share in assets on liquidation. These stock rights normally vary with the class of stock.

19. 3 Classes of Stock 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.

20. 3 Cumulative Preferred Stock Cumulative preferred stock has a right to receive regular dividends that were not declared (paid) in prior years. Noncumulative preferred stock does not have this right.

21. 3 Example Exercise 11-1 Dividends per Share Sandpiper Company has 20,000 shares of 1% cumulative preferred stock of $100 par and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1: $10,000 Year 2: 45,000 Year 3: 80,000 Determine the dividends per share for preferred and common stock for each year. 11-32

22. Year 1Year 2Year 3 Amount distributed $10,000 $45,000 $80,000 Preferred dividend (20,000 shares) . , Common dividend (100,000 shares) *(10,000 + $20,000) Follow My Example 11-1 For Practice: PE 11-1A, PE 11-1B 3 Example Exercise 11-1 (continued) Dividends per share: Preferred $ $ $ Common stock $ $ 11-33

23. 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.

24. 3 If the stock is issued (sold) for a price that is more than its par, the stock has been sold at a premium. If the stock is issued (sold) for a price that is less than its par, the stock has been sold at a discount.

25. 3 Premium on Stock Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55.

26. 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.

27. 3 No-Par Stock On January 9, a corporation issues 10,000 shares of no-par common stock at $40 a share. On June 27, the corporation issues an additional 1,000 shares at $36.

28. 3 Example Exercise 11-2 Entries for Issuing Stock On March 6, Limerick Corporation issued for cash 15,000 shares of no-par common stock at $30. On April 13, Limerick issued at par 1,000 shares of 4%, $40 par preferred stock for cash. On May 19, Limerick issued for cash 15,000 shares of 4%, $40 par preferred stock at $42. Journalize the entries to record the March 6, April 13, and May 19 transactions. 11-41

29. Follow My Example 11-2 3 Example Exercise 11-2 (continued) For Practice: PE 11-2A, PE 11-2B 11-42

30. 4 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. • Sufficient retained earnings • Sufficient cash • Formal action by the board of directors

31. 4 Date of Declaration The date of declaration is the date the board of directors formally authorized the payment of the dividend. On this date, the corporation incurs the liability to pay the amount of the dividend.

32. 4 Date of Record The date of record is the date the corporation used to determine which stockholders will receive the dividend.

33. 4 Date of Payment The date of payment is the date the corporation will pay the dividends to the stockholders who owned the stock on the date of record.

34. 4 On October 1, Hiber Corporation declares the cash dividends shown below with a date of record of November 10 and a date of payment of December 2. Dividend per Share Total Dividends Preferred stock, $100 par, 5,000 shares outstanding… $2.50 $12,500 Common stock, $10 par, 100,000 shares outstanding $0.30 30,000 Total……………………………... $42,500

35. 4 On October 1, the declaration date, Hiber Corporation records the following entry:

36. 4 On December 10, the date of record, no entry is required since this date merely determines which stockholders will receive the dividend.

37. 4 On December 2, the date of payment, Hiber Corporation records the payment of the dividend as follows:

38. 4 Stock Dividends A distribution of dividends to stockholders in the form of the firm’s own shares is called a stock dividend.

39. 5 Treasury Stock Transactions Treasury stock is stock that a corporation has issued and then reacquired. A corporation may purchase its own stock for a variety of reasons including the following: • To provide shares for resale to employees • To reissue as bonuses to employees, or • To support the market price of the stock.

40. 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.

41. 7 Stock Split A stock split is a process by which a corporation reduces the par or stated value of the common stock and issues a proportionate number of additional shares.

42. 7

43. 7 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. A stock split does not require a journal entry.