Describe the nature of the corporate form of organization.

1. Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 0 After studying this chapter, you should be able to: • Describe the nature of the corporate form of organization. • Describe the two main sources of stockholders’ equity. • Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock. Journalize the entries for cash dividends and stock dividends. • Journalize the entries for treasury stock transactions. • Describe and illustrate the reporting of stockholders’ equity. • Describe the effect of stock splits on corporate financial statements.

2. Objective 1 0 Describe the nature of the corporate form of organization. 13-1 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. The stockholders or shareholderswho own the stock own the corporation. Corporations whose shares of stock are traded in public markets are called public corporations.

3. 0 Corporations whose shares are not traded publicly are usually owned by a small group of investors and are called nonpublicorprivate corporations. The stockholders of all corporation have limited liability. 13-1 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.

4. 0 13-1 Exhibit 1 Organizational Structure of a Corporation Stockholders Board of Directors Officers Employees

5. Advantages of the Corporate Form 0 13-1 • 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. • 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.

6. 0 13-1 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.

7. 0 13-1 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.

8. Objective 2 0 13-2 Describe the two main sources of stockholders’ equity. The owner’s equity in a corporation is called stockholders’ equity, shareholders’ equity, shareholders’ investment, orcapital. The two sources of capital found in the Stockholders’ Equity section of a balance sheet are paid-incapital or contributed capital (capital contributed to the corporation by stockholders and others) and retained earnings (net income retained in the business).

9. 0 13-2 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. A debit balance in Retained Earningsis called a deficit. Such a balance results from accumulated net losses.

10. Objective 3 0 13-3 Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing 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. Shares of stock are often assigned a monetary amount, called par. Corporations may issue stockcertificatesto stockholders to document their ownership. Some corporations have stopped issuing stock certificates except on special request. Stock issued without a par is called no-par stock. Some states require the board of directors to assign a statedvalue to no-par stock.

11. 0 Major Rights That Accompany Ownership of a Share of Stock 13-3 • 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. Two Primary Classes of Paid-In Capital 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.

12. 0 13-3 E.g. 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 $62,000 Amount retained 10,000 6,000 40,000 Amount distributed $10,000 $3,000 $22,000 200620072008

13. 0 13-3 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. Cash 1,500 000 00 Preferred Stock 500 000 00 Common Stock 1,000 000 00 Issued preferred stock and common stock at par for cash.

14. 13-3 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. 0 Premium on Stock Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55. Cash 110 000 00 Preferred Stock 100 000 00 Paid-in Capital in Excess of Par—Preferred Stock 10 000 00 Issued $50 par preferred stock at $55.

15. 0 13-3 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. Land 120 000 00 Common Stock 100 000 00 Paid-in Capital in Excess of Par 20 000 00 Issued $10 par common stock valued at $12 per share, for land.

16. 0 13-3 No-Par Stock A corporation issues 10,000 shares of no-par common stock at $40 a share. Cash 400 000 00 Common Stock 400 000 00 Issued 10,000 shares of no-par common stock at $40.

17. Journalize the entries for cash dividends and stock dividends. Objective 4 0 13-4 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

18. Three Important Dividend Dates 13-4 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. 0 Heber Corporation records the $42,500 liability on the declaration date. Dec. 1 Cash Dividends 42 500 00 Cash Dividends Payable 42 500 00 Declared cash dividend.

19. 0 13-4 Three Important Dividend Dates 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.

20. 0 13-4 Three Important Dividend Dates The third important date is the date of payment. On January 2, Hiber issues dividend checks. Jan. 2 Cash Dividends Payable 42 500 00 Cash 42 500 00 Paid cash dividend.

21. 0 13-4 Stock Dividends A distribution of dividends to stockholders in the form of the firm’s own shares is called a stock dividend. 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.

22. 0 13-4 The entry to record the declaration of the 5 percent stock dividend is as follows: Dec. 15 Stock Dividend (100,000 x $31 market) 3,100 000 00 Stock Dividend Distributable 2,000 000 00 Paid-in Capital in Excess of Par—Common Stock 1,100 000 00 Declared 5% (100,000 share) stock dividend on $20 par common stock with a market value of $31 per share.

23. 0 13-4 On January 10, the number of shares out-standing is increased by 100,000. The following entry records the issue of the stock: Jan. 10 Stock Dividends Distributable 2,000 000 00 Common Stock 2,000 000 00 Issued stock for the stock dividend.

24. 13-5 Objective 5 Journalize the entries for treasury stock transactions. 0 Treasury Stock Transactions Occasionally, a corporation buys back its own stock to provide shares for resale to employees, for reissuing as a bonus to employees, or for supporting the market price of the stock. This stock is referred to as treasury stock.

25. 0 13-5 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. Treasury Stock 45 000 00 Cash 45 000 00 Purchased 1,000 shares of treasury stock at $45.

26. 0 13-5 Later, 200 shares of treasury stock were sold for $60 per share. Cash 12 000 00 Treasury Stock* 9 000 00 Paid-in Capital from Sale of Treasury Stock 3 000 00 Sold 200 of treasury stock at $60.

27. Paid-in Capital from Sale of Treasury Stock 1 000 00 0 13-5 Sold 200 shares of treasury stock at $40 per share. Cash 8 000 00 Treasury Stock 9 000 00 Sold 200 of treasury stock at $40.

28. Describe and illustrate the reporting of stockholders’ equity. Objective 6 0 13-6 Stockholders’ Equity Section of a Balance Sheet

29. Example Exercise 13-6 0 13-6 Using the following accounts and balances, prepare the Stockholders’ Equity section of the balance sheet. Forty thousand shares of common stock are authorized and 5,000 shares have been reacquired. Common Stock, $50 par $1,500,000 Paid-in Capital in Excess of Par 160,000 Paid-in Capital from Sale of Treasury Stock 44,000 Retained Earnings 4,395,000 Treasury Stock 120,000

30. Follow My Example 13-6 0 13-6 Stockholders’ Equity Paid-in capital: Common stock, $50 par (40,000 shares authorized, 30,000 shares issued) $1,500,000 Excess of issue price over par 160,000 $1,660,000 From sale of treasury stock 44,000 Total paid-in capital $1,704,000 Retained earnings 4,395,000 Total $6,099,000 Deduct treasury stock (5,000 shares at cost) 120,000 Total stockholders’ equity $5,979,000

31. 0 13-6 Retained Earnings Statement

32. 0 13-6 Statement of Stockholders’ Equity 7

33. Example Exercise 13-7 0 13-6 Dry Creek Camera Inc. reported the following results for the year ending March 31, 2008: Retained earnings, April 1, 2007 $3,338,500 Net income 461,500 Cash dividends declared 80,000 Stock dividends declared 120,000 Prepare a retained earnings statement for the fiscal year ended March 31, 2008.

34. Follow My Example 13-7 0 13-6 DRY CREEK CAMERAS INC. RETAINED EARNINGS STATEMENT For the Year Ended March 31, 2008 Retained earnings, April 1, 2007 $3,338,500 Net income $461,500 Less dividends declared 200,000 Increase in retained earnings 261,500 Retained earnings, March 31, 2008 $3,600,000 For Practice: PE 13-6A, PE 13-6B

35. Objective 7 13-7 Describe the effect of stock splits on corporate financial statements. 0 Stock Splits 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.

36. AFTER 5:1 STOCK SPLIT 20 shares, $20 par $400 total par value 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. 13-7 0 BEFORE STOCK SPLIT 4 shares, $100 par $400 total par value It is not recorded by a journal entry