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1 1 Adeng Pustikaningsih, M.Si. Dosen Jurusan Pendidikan Akuntansi Fakultas Ekonomi Universitas Negeri Yogyakarta CP: adengpustikaningsih@uny.ac.id 1

2 2 Corporations: 13 Organization, Stock Transactions, and Dividends 2

3 3 After studying this chapter, you should be able to: 1. Describe the nature of the corporate form of organization. 2. Describe the two main sources of stockholders equity. 3. Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock. 3

4 4 After studying this chapter, you should be able to: 4. Journalize the entries for cash dividends and stock dividends. 5. Journalize the entries for treasury stock transactions. 6. Describe and illustrate the reporting of stockholders equity. 7. Describe the effect of stock splits on corporate financial statements. 4

5 Objective 1 Describe the nature of the corporate form of organization. 5

6 6 Characteristics of a Corporation 13-1 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. 6

7 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. 7

8 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. 8

9 The stockholders control a corporation by electing a board of directors and board of Commissioners. The board meets periodically to establish corporate policy. It also selects the chief executive officer (CEO) and other major officers. 9

10 10 Organizational Structure of a Corporation in Indonesia 13-1 Stockholders Board of Directors Board of Commissioners Officers Employees 10

11 11 Advantages of the Corporate Form 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. (Continued) 11

12 12 Advantages of the Corporate Form 13-1 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) 12

13 13 Disadvantages of the Corporate Form Stockholders control management through a board of directors (in Indonesia, troughs a board of commissioners). 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

14 14 Forming a Corporation In Indonesia First step, the founders need to check if their proposed name of the company has not been used by other. Second step, All founders need to sign the Deed of Establishment before a public notary. Third step, the public notary then will file application of establishment with the Minister of Law and Human Rights. This process can be done on-line, but only public notary have access to the web site. Fourth step, such establishment and ratification will then be published in the Supplement to State Gazette of the Republic of Indonesia

15 15 Click to Examples edit of Master Corporations title style and Their States of Incorporation

16 16 Organization Structure of a Corporation 13-1 Costs may be incurred in organizing a corporation. The recording of a corporation s organizing costs of Rp8,500,000 on January 5 is shown below: Jan. 5 Organizational Expense Cash Paid costs of organizing the corporation

17 Objective 2 Describe the two main sources of stockholders equity. 17

18 The owner s equity in a corporation is called stockholders equity, shareholders equity, shareholders investment, or capital. 18

19 19 Stockholders Equity 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)

20 20 Stockholders Equity Section of a Corporate Balance Sheet 13-2 Stockholders Equity Paid-in capital: Common stock Rp330,000,000 Retained earnings 80,000,000 Total stockholders equity Rp410,000,000 If there is only one class of stock, the account is entitled Common Stock or Capital Stock

21 A debit balance in Retained Earnings is called a deficit. Such a balance results from accumulated net losses. 21

22 Objective 3 Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock. 22

23 23 Characteristics of Stock 13-3 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. 23

24 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. 24

25 Stock issued without a par is called no-par stock. Some states require the board of directors to assign a stated value to no-par stock. Some state laws require that corporations maintain a minimum stockholder contribution, called legal capital, to protect creditors. 25

26 26 Number of Shares Authorized, Issued, and Outstanding 13-3 Outstanding Issued Outstanding Authorized Issued 26 25

27 27 Major Rights That Accompany Ownership of a Share of Stock 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. 27

28 28 Two Primary Classes of Paid-In Capital 13-3 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. 28

29 29 A corporation has 1,000 shares of Rp4,000 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 Rp20,000,000 Rp9,000,000 Rp62,000,000 Amount retained 10,000,000 6,000,000 40,000,000 Amount distributed Rp10,000,000 Rp3,000,000 Rp22,000,

30 30 Dividends to Common and Preferred Stock Amount distributed Rp10,000,000 Rp3,000,000 Rp22,000,000 Preferred dividen (1,000 shares) 4,000,000 3,000,000 4,000,000 Common dividend (4,000 shares) 6,000, ,000,000 Dividends per share: Preferred stock Rp4,000 Rp3,000 Rp4,000 Common stock Rp1,500 none Rp

31 Example Exercise 13-1 PT Cahaya Sakti has stock 20,000 shares of 1% preferred stock of Rp100,000 par and 100,000 shares of Rp50,000 par common stock. The following amounts were distributed as dividends: Year 1: Rp10,000,000 Year 2: 25,000,000 Year 3: 80,000,000 Determine the dividends per share for preferred and common stock for each year

32 Follow My Example 13-1 Year 1 Year 2 Year 3 Amount distributed Rp10,000,000 Rp25,000,000 Rp80,000,000 Preferred dividend (20,000 shares) 10,000,000 20,000,000 20,000,000 Common dividend (100,000 shares) Rp 0 Rp 5,000,000 Rp60,000,000 Dividends per share: Preferred Rp500 Rp1,000 Rp1,000 Common stock None Rp500 Rp600 For Practice: PE 13-1A, PE 13-1B 32 31

33 33 Issuing Stock 13-3 A corporation is authorized to issue 10,000 shares of preferred stock, Rp100,000 par, and 100,000 shares of common stock, Rp20,000 par. One-half of each class of authorized shares is issued at par for cash. Cash Preferred Stock Common Stock Issued preferred stock and common stock at par for cash

34 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. 34

35 35 Premium on Stock PT Cahaya Cemerlang issues 2,000 shares of Rp50,000 par preferred stock for cash at Rp55, Cash Preferred Stock Paid-in Capital in Excess of Par Preferred Stock Issued Rp50,000 par preferred stock at Rp55,

36 36 A corporation acquired land for which the fair market value cannot be determined. The corporation issued 10,000 shares of Rp10,000 par common that has a current market value of Rp12,000 in exchange for the land Land Common Stock Paid-in Capital in Excess of Par Issued Rp10,000 par common stock valued at Rp12,000 per share, for land

37 37 No-Par Stock 13-3 A corporation issues 10,000 shares of nopar common stock at Rp40,000 a share. Cash Common Stock Issued 10,000 shares of nopar common stock at Rp40,

38 At a later date, the corporation issues 1,000 additional shares at Rp36,000. Cash Common Stock Issued 1,000 shares of no-par common stock at Rp36,

39 39 Stated Value 13-3 Some states require that the entire proceeds from the issue of no-par stock be recorded as legal capital. In other states, no-par stock may be assigned a stated value per share. 39

40 40 Stated Value 13-3 Using the same data as we used for par the transaction is recorded as follows: Cash Common Stock Paid-in Capital in Excess of Stated Value Issued 10,000 shares of nopar common at Rp40,000. Stated value, Rp25,

41 41 The corporation issued 1,000 shares of no-par common stock at Rp36,000 (stated value, Rp25,000) Cash Common Stock Paid-in Capital in Excess of Stated Value Issued 1,000 shares of nopar common at $36. Stated value, $

42 Example Exercise 13-2 On March 6, Limerick Corporation issued for cash 15,000 shares of no-par common stock at Rp30,000. On April 13, Limerick issued at par 1,000 shares of 4%, Rp40,000 par preferred stock for cash. On May 19, Limerick issued for cash 15,000 shares of 4%, Rp40,000 par preferred stock at Rp42,000. Journalize the entries to record the March 6, April 13, and May 19 transactions

43 Follow My Example 13-2 Mar. 6 Cash 450,000,000 Common Stock 450,000,000 (15,000 shares x Rp30,000) Apr. 13 Cash 40,000,000 Preferred Stock 40,000,000 (1,000 shares x Rp40,000) May 19 Cash 630,000,000 Preferred Stock 600,000,000 Paid-in Capital in Excess of Par 30,000,000 (15,000 shares x Rp42,000) For Practice: PE 13-2A, PE 13-2B

44 Objective 4 Journalize the entries for cash dividends and stock dividends. 44

45 45 Cash Dividends 13-4 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 45

46 46 Three Important Dividend Dates 13-4 First is the date of declaration. Assume that on December 1, PT Herlambang declares a Rp42,500,000 dividend (Rp12,500,000 to the 5,000 preferred stockholders and Rp30,000,000 to the 100,000 common stockholders). 46

47 PT Herlambang records the Rp42,500,000 liability on the declaration date. Dec. 1 Cash Dividends Cash Dividends Payable Declared cash dividend

48 48 Three Important Dividend Dates 13-4 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. 48

49 49 Three Important Dividend Dates The third important date is the date of payment. On January 2, PT Herlambang issues dividend checks Jan. 2 Cash Dividends Payable Cash Paid cash dividend

50 50 Example Exercise 13-3 The important dates in connection with a cash dividend of Rp75,000,000 on a corporation s common stock are February 26, March 30, and April 2. Journalize the entries required on each date. Follow My Example Feb. 26 Cash Dividends 75,000,000 Cash Dividends Payable 75,000,000 Mar. 30 No entry required. Apr. 2 Cash Dividends Payable 75,000,000 Cash 75,000,000 For Practice: PE 13-3A, PE 13-3B 50 49

51 51 Stock Dividends 13-4 A distribution of dividends to stockholders in the form of the firm s own shares is called a stock dividend. 51

52 On December 15, the board of directors of PT Herlambang 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 Rp31,000 a share. 52

53 53 The entry to record the declaration of the 5 percent stock dividend is as follows: 13-4 Dec. 15 Stock Dividend (100,000 x Rp31,000 market) 3, Stock Dividend Distributable 2, Paid-in Capital in Excess of Par Common Stock 1, Declared 5% (100,000 share) stock dividend on Rp20,000 par common stock with a market value of Rp31,000 per share

54 On January 10, the number of shares outstanding is increased by 100,000. The following entry records the issue of the stock: Jan. 10 Stock Dividends Distributable 2, Common Stock 2, Issued stock for the stock dividend

55 Example Exercise 13-4 Vienna Highlights Corporation has 150,000 shares of Rp100,000 par common stock outstanding. On June 14, Vienna Highlights declared a 4% stock dividend to be issued August 15 to stockholders of record on July 1. The market price of the stock was Rp110,000 a share on June 14. Journalize the entries required on June 14, July 1, and August

56 Follow My Example 13-4 June 14 Stock Dividends (150,000 x 4% x Rp110,000) 660,000,000 Stock Dividends Distributable (6,000 x Rp100,000) 600,000,000 Paid-in Capital in Excess of Par Common Stock (Rp660,000,000 Rp600,000,000) 60,000,000 July 1 No entry required. Aug. 15 Stock Dividend Distributable 600,000,000 Common Stock 600,000,000 For Practice: PE 13-4A, PE 13-4B 56 55

57 Objective 5 Journalize the entries for treasury stock transactions. 57

58 58 Treasury Stock Transactions 13-5 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. 58

59 59 On January 5, a firm purchased 1,000 shares of treasury stock (common stock, Rp25,000 par) at Rp45,000 per share. The cost method for accounting for treasury stock is used Treasury Stock Cash Purchased 1,000 shares of treasury stock at Rp45,

60 Later, 200 shares of treasury stock were sold for Rp60,000 per share. Cash Treasury Stock* Paid-in Capital from Sale of Treasury Stock Sold 200 of treasury stock at Rp60,000. *The amount debited to Treasury Stock per share when purchased is the amount per share that must be credited to that account when sold

61 Sold 200 shares of treasury stock at Rp40,000 per share. Cash Paid-in Capital from Sale of Treasury Stock Treasury Stock Sold 200 of treasury stock at Rp40,

62 Example Exercise 13-5 On May 3, PT Budiraharja reacquired 3,200 shares of its common stock at Rp42,000 per share. On July 22, PT Budiraharja sold 2,000 of the reacquired shares at Rp47,000 per share. On August 30, PT Budiraharja sold the remaining shares at Rp40,000 per share. Journalize the transactions of May 3, July 22, and August

63 Follow My Example 13-5 May 3 Treasury Stock (3,200 x Rp42,000) 134,400,000 Cash 134,400,000 July 22 Cash (2,000 x Rp47,000) 94,000,000 Treasury Stock (2,000 x Rp42,000) 84,000,000 Paid-in Capital from Sale of Treasury Stock [2,000 x (Rp47,000 Rp42,000)] 10,000,000 Aug. 30 Cash (1,200 x Rp40,000) 48,000,000 Paid-in Capital from Sale of Treasury Stock [1,200 x (Rp42,000 Rp40,000)] 2,400,000 Treasury Stock (1,200 x Rp42,000) 50,400,000 For Practice: PE 13-5A, PE 13-5B 63 62

64 Objective 6 Describe and illustrate the reporting of stockholders equity. 64

65 65 Click to Stockholders edit Master Equity title style Section of a Balance Sheet 13-6 PT Tarumanegara Balance Sheet December 31, 2008 Stockholder's Equity Paid-in Capital Preferred 10% stock, Rp50,000 par (2,000 shares authorized and issued) Rp100,000,000 Excess of issue price over par 10,000,000 Rp110,000,000 Common stock, Rp20,000 par (50,000 shares authorized, 45,000 shares issued) Rp900,000,000 Excess of issue price over par 190,000,000 1,090,000,000 From sale of treasury stock 2,000,000 Total Paid-in capital Rp1,202,000,000 Retained earnings 350,000,000 Total Rp1,552,000,000 Deduct treasury stock (600 shares at cost) 27,000,000 Total stockholders equity Rp1,525,000,000 65

66 Example Exercise 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, Rp50,000 par Rp1,500,000,000 Paid-in Capital in Excess of Par 160,000,000 Paid-in Capital from Sale of Treasury Stock 44,000,000 Retained Earnings 4,395,000,000 Treasury Stock 120,000,

67 Follow My Example 13-6 Stockholders Equity Paid-in capital: Common stock, Rp50,000 par (40,000 shares authorized, 30,000 shares issued) Rp1,500,000,000 Excess of issue price over par 160,000,000 Rp1,660,000,000 From sale of treasury stock 44,000,000 Total paid-in capital Rp1,704,000,000 Retained earnings 4,395,000,000 Total Rp6,099,000,000 Deduct treasury stock (5,000 shares at cost) 120,000,000 Total stockholders equity Rp5,979,000,000 For Practice: PE 13-6A, PE 13-6B 67 66

68 68 Retained Earnings Statement 13-6 PT Tarumanegara Retained Earnings Statement For the Year Ended December 31, 2008 Retained earnings, January 1, 2008 Rp245,000,000 Net Income Rp180,000,000 Less dividens: Preferred stock Rp10,000,000 Common stock 65,000,000 75,000,000 Increase in retained earnings 105,000,000 Retained earnings, December 31, 2008 Rp350,000,000 68

69 69 Restrictions 13-6 The retained earnings available for use as dividends may be limited by the actions of a corporation s board of directors. These amounts, called restrictions or appropriations, remain part of the retained earnings. However, they must be disclosed, usually in the notes to the financial statements. 69

70 70 Statement of Stockholders Equity 13-6 PT Tarumanegara Statement of Stockholder's Equity For the Year Ended December 31, 2008 Additional Preferred Common Paid-in Retained Treasury Stock Stock Capital Earnings Stock Total Balance, January 1, 2008 Rp100,000,000 Rp850,000,000 Rp177,000,000 Rp245,000,000 Rp(17,000,000) Rp1,355,000,000 Net Income 180,000, ,000,000 Dividens on preferred stock (10,000,000) (10,000,000) Dividens on common stock (65,000,000) (65,000,000) Issuance of additional common stock 50,000,000 25,000,000 75,000,000 Purchase of treasury stock (10,000,000) (10,000,000) Balance, December 31, 2008 Rp100,000,000 Rp900,000,000 Rp202,000,000 Rp350,000,000 Rp(27,000,000) Rp1,525,000,000 70

71 Example Exercise 13-7 PT Kamera Jakarta. reported the following results for the year ending March 31, 2008: Retained earnings, April 1, 2007 Rp3,338,500,000 Net income 461,500,000 Cash dividends declared 80,000,000 Stock dividends declared 120,000,000 Prepare a retained earnings statement for the fiscal year ended March 31,

72 Follow My Example 13-7 PT KAMERA JAKARTA RETAINED EARNINGS STATEMENT For the Year Ended March 31, 2008 Retained earnings, April 1, 2007 Rp3,338,500,000 Net income Rp461,500,000 Less dividends declared 200,000,000 Increase in retained earnings 261,500,000 Retained earnings, March 31, 2008 Rp3,600,000,000 For Practice: PE 13-6A, PE 13-6B 72 71

73 Objective 7 Describe the effect of stock splits on corporate financial statements. 73

74 74 Stock Splits 13-7 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. 74

75 PT Rojali has 10,000 shares of Rp100,000 par common stock outstanding with a current market price of Rp150,000 per share. The board of directors declares a 5-for-1 stock split. 75

76 BEFORE STOCK SPLIT 4 shares, Rp100,000 par AFTER 5:1 STOCK SPLIT 20 shares, Rp20,000 par $400 total par value $400 total par value 76 75

77 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. 77