Name: - Accounting Chapter 11 Corporations: Organization, Stock Transactions, and Dividends 1. Describe the nature of the corporate form of organization. Characteristics of a Corporation A 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. The or shareholders who own the stock own the corporation. Corporations whose shares of stock are traded in public markets are called corporations. Corporations whose shares are not traded publicly are usually owned by a small group of investors and are called or corporations. The stockholders of all corporations have limited liability. The stockholders control a corporation by electing a. The board meets periodically to establish corporate policy. It also selects the chief executive officer (CEO) and other major officers. A corporation has from its owners. A corporation has units of ownership. A corporation has limited stockholders. Forming a Corporation First step in forming a corporation is to file an with 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. After the application is approved, the state grants a or articles of incorporation which formally create the corporation. Management and the board of directors prepare which are operating rules and procedures. 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: 2. Describe the two main sources of stockholders equity. Stockholders Equity The owner s equity in a corporation is called stockholders equity, shareholders equity, shareholders investment, or. The two sources of capital are: 1. Capital contributed to the corporation by the stockholders, called or. 2. Net income retained in the business, called.
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 Stock or Stock. A debit balance in Retained Earnings is called a. Such a balance results from accumulated net losses. A credit balance in Retained Earnings does not represent surplus cash or cash left over from dividends. 3. Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock. Characteristics of Stock The number of shares of stock that a corporation is 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 - stock. Shares of stock are often assigned a monetary amount, called. Corporations may issue stock to stockholders to document their ownership. Some corporations have stopped issuing stock certificates except on special request. Major Rights That Accompany Ownership of a Share of Stock 1. 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. These stock rights normally vary with the class of stock. Classes of Stock Stock issued without a par is called stock. Some states require the board of directors to assign a to no-par stock. Some state laws require that corporations maintain a minimum stockholder contribution, called, to protect creditors. Label the diagram below:
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. 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. Example 11-1: Dividends per Share 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. If the stock is issued (sold) for a price that is more than its par, the stock has been sold at a. If the stock is issued (sold) for a price that is less than its par, the stock has been sold at a.
Premium on Stock Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55. 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. 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. Stated Value 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 value per share. Using the same data as we used for par the transaction at stated value is recorded as follows: 5 5 6 6 Example 11-2: Entries for Issuing Stock 5 5 6 6 7 7
4. Describe and illustrate the accounting for cash dividends and stock dividends. Cash Dividends A cash distribution of earnings by a corporation to its stockholders is called a. 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 Date of Declaration The date of 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. Date of Record The date of is the date the corporation used to determine which stockholders will receive the dividend. Date of Payment The date of is the date the corporation will pay the dividends to the stockholders who owned the stock on the date of record. 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. Div/Share Total Divs Preferred stock, $100 par, 5,000 shares outstanding $2.50 $ Common stock, $10 par, 100,000 shares outstanding $0.30 Total... $ On October 1, the declaration date, Hiber Corporation records the following entry: On December 10, the date of record, no entry is required since this date merely determines which stockholders will receive the dividend. On December 2, the date of payment, Hiber Corporation records the payment of the dividend as follows:
Example 11-3: Entries for Cash Dividends Stock Dividends A distribution of dividends to stockholders in the form of the firm s own shares is called a. On December 15, the board of directors of Hendrix Corporation declares a 5% stock dividend of 100,000 shares (2,000,000 shares 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. The entry to record the declaration of the 5 percent stock dividend is as follows: On January 10, the number of shares outstanding is increased by 100,000. The following entry records the issue of the stock: Before Stock Dividend After Stock Dividend Total Shares Issued Number of shares owned Proportionate ownership Example 11-4: Entries for Issuing Stock 5 5
5. Describe and illustrate the accounting for treasury stock transactions. Treasury Stock Transactions 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: 1. To provide shares for resale to employees 2. To reissue as bonuses to employees, or 3. To support the market price of the stock. On January 5, a firm purchased 1,000 shares of treasury stock (common stock, $25 par) at $45 per share. The for accounting for treasury stock is used. Later, 600 shares of treasury stock were sold for $60 per share. On October 4, the corporation sells the remaining 400 shares of treasury stock for $40 per share. Example 11-5: Entries for Treasury Stock 5 5 6 6 7 7 8 8 6. Describe and illustrate the reporting of stockholders equity. Example 11-6: Reporting Stockholders Equity
Reporting Retained Earnings Changes to retained earnings may be reported using one of the following: 1. Separate retained earnings statement 2. Combined income and retained earnings statement 3. Statement of stockholders equity The retained earnings available for use as dividends may be limited by the actions of a corporation s board of directors. These amounts, called or, remain part of the retained earnings. However, they must be disclosed, usually in the notes to the financial statements. Restrictions of retained earnings are classified as follows: 1.. State laws may require a restriction of retained earnings. 2.. A corporation may enter into contracts that require restrictions of retained earnings. 3.. A corporation s board of directors may restrict retained earnings voluntarily. Example 11-7: Retained Earnings Statement Retained Earnings, April, 2009 Net Income Dividends Declared in Retained Earnings Retained Earnings, $ $ 7. Describe the effect of stock splits on corporate financial statements. 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. Before Stock Split: shares, $ par, $ total par value After Stock Split: shares, $ par, $ 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. A stock split does not require a journal entry. Financial Analysis Earnings per share Blockbuster: Netflix: