CORPORATIONS handout

chap 12

Chapter

12-1

Corporations:

Organization, Stock Transactions,

Dividends, and Retained Earnings

Corporations:

Organization, Stock Transactions,

Dividends, and Retained Earnings

Financial Accounting, Sixth Edition

Chapter

12-2

1. Identify the major characteristics of a corporation

2. Record the issuance of common stock

3. Explain the accounting for treasury stock

4. Differentiate preferred stock from common stock

5. Prepare the entries for cash dividends and stock

Chapter

12-3

Cash dividends Stock dividends Stock splits

Statement Presentation and Analysis

Statement Presentation and Analysis

Prior period adjustments Retained earnings statement

Presentation Analysis

Corporations: Organization, Stock Transactions, Dividends and Retained Earnings

Corporations: Organization, Stock Transactions, Dividends and Retained Earnings

Chapter

12-4

An entity separate and distinct from its owners.

The Corporate Form of Organization

The Corporate Form of Organization

Classified by Purpose

Not-for-ProfitFor Profit

Classified by Ownership

Publicly heldPrivately held

Chapter

12-5

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Continuous Life

Government Regulations

Additional Taxes

Corporate Management

Characteristics that distinguish corporations from

proprietorships and partnerships.

President and Chief Executive Officer

General

Counsel and

Secretary

Vice President Marketing

Vice President Finance/Chief Financial Officer

Vice President Operations

Vice President Human Resources

Treasurer Controller

Illustration 12-1

Corporation organization chart

Chapter

12-7

File application with the Secretary of State

State grants charter

Corporation develops by-laws

Initial Steps:

Forming a Corporation

Forming a Corporation

SO 1 Identify the major characteristics of a corporation.

Companies generally incorporate in a state whose laws

are favorable to the corporate form of business

(Delaware, New Jersey)

Corporations expense organization costs as incurred

Chapter

12-8

1 Vote in election of board of

directors and on actions that require stockholder approval

Stockholders have the right to:

Ownership Rights of Stockholders

Ownership Rights of Stockholders

SO 1 Identify the major characteristics of a corporation.

2 Share the corporate earnings

through receipt of dividends

Illustration 12-3

Chapter

12-9

3 Keep the same percentage ownership when new

shares of stock are issued (preemptive right*)

Stockholders have the right to:

Ownership Rights of Stockholders

Ownership Rights of Stockholders

SO 1 Identify the major characteristics of a corporation.

* A number of companies have eliminated the preemptive right.

Illustration 12-3

Chapter

12-10

4 Share in assets upon liquidation in proportion to

their holdings This is called a residual claim

Stockholders have the right to:

Ownership Rights of Stockholders

Ownership Rights of Stockholders

SO 1 Identify the major characteristics of a corporation.

Illustration 12-3

Chapter

12-11

Ownership Rights of Stockholders

Ownership Rights of Stockholders

SO 1 Identify the major characteristics of a corporation.

Chapter

12-12

Stock Issue Considerations

Stock Issue Considerations

SO 1 Identify the major characteristics of a corporation.

Charter indicates the amount of stock that a corporation is authorized to sell

Number of authorized shares is often reported

in the stockholders’ equity section

Authorized Stock

Chapter

12-13

Stock Issue Considerations

Stock Issue Considerations

SO 1 Identify the major characteristics of a corporation.

Corporation can issue common stock

 directly to investors or

 indirectly through an investment banking firm.

Factors in setting price for a new issue of stock:

1 the company’s anticipated future earnings

2 its expected dividend rate per share

3 its current financial position

4 the current state of the economy

5 the current state of the securities market

Issuance of Stock

Chapter

12-14

Stock Issue Considerations

Stock Issue Considerations

SO 1 Identify the major characteristics of a corporation.

Stock of publicly held companies is traded on organized exchanges

Interaction between buyers and sellers determines the prices per share

Prices set by the marketplace tend to follow the trend of a company’s earnings and dividends

Factors beyond a company’s control, may cause to-day fluctuations in market prices

day-Market Value of Stock

Chapter

12-15

Stock Issue Considerations

Stock Issue Considerations

SO 1 Identify the major characteristics of a corporation.

Years ago, par value determined the legal capital

per share that a company must retain in the business for the protection of corporate creditors.Today many states do not require a par value

No-par value stock is quite common today

In many states the board of directors assigns a

stated value to no-par shares

Par and No-Par Value Stock

Paid-in Capital in Excess of Par

Paid-in Capital in Excess of Par

Retained earnings is net income that a corporation retains

for future use.

SO 1 Identify the major characteristics of a corporation.

Chapter

12-18

Corporate Capital

Corporate Capital

Comparison of the owners’ equity (stockholders’

equity) accounts reported on a balance sheet for a

proprietorship and a corporation

Illustration 12-6

SO 1 Identify the major characteristics of a corporation.

Chapter

12-19

Issuing Par Value Common Stock for Cash

Primary objectives:

1) Identify specific sources of paid-in capital

2) Maintain distinction between paid-in capital and

retained earnings

Accounting for Common Stock Issues

Accounting for Common Stock Issues

SO 2 Record the issuance of common stock.

Issuing No-Par Common Stock for Cash

Avoids contingent liability for stockholders.

Chapter

12-20

Illustration: Viking Corporation issued 300 shares of

$10 par value common stock for $4,100 Prepare

Vikings’ journal entry

Common stock (300 x $10) 3,000Paid-in capital in excess of par 1,100

Accounting for Common Stock Issues

Accounting for Common Stock Issues

SO 2 Record the issuance of common stock.

Chapter

12-21

Illustration: Knopfle Corporation issued 600 shares of

no-par common stock for $10,200 Prepare Knopfle’s

journal entry if (a) the stock has no stated value, and

(b) the stock has a stated value of $2 per share

Common stock (600 x $2) 1,200Paid-in capital in excess of stated value 9,000

a

b

Accounting for Common Stock Issues

Accounting for Common Stock Issues

SO 2 Record the issuance of common stock.

Chapter

12-22

Issuing Common Stock for Services or

Noncash Assets

Corporations also may issue stock for:

Services (attorneys or consultants)

Noncash assets (land, buildings, and equipment)

Accounting for Common Stock Issues

Accounting for Common Stock Issues

Cost is either the fair market value of the consideration

given up, or the fair market value of the consideration

received, whichever is more clearly determinable.

SO 2 Record the issuance of common stock.

Chapter

12-23

Illustration: On March 2nd, Leone Co issued 5,000

shares of $5 par value common stock to attorneys in

payment of a bill for $30,000 for services provided in

helping the company to incorporate

Organizational expense 30,000

Common stock (5,000 x $5) 25,000Paid-in capital in excess of par 5,000

Accounting for Common Stock Issues

Accounting for Common Stock Issues

SO 2 Record the issuance of common stock.

Chapter

12-24

Illustration: Kane Inc.’s $10 par value common stock is actively traded at a market value of $15 per share

Kane issues 5,000 shares to purchase land advertised

for sale at $85,000 Journalize the issuance of the

stock in acquiring the land

Common stock (5,000 x $10) 50,000Paid-in capital in excess of par 25,000

Accounting for Common Stock Issues

Accounting for Common Stock Issues

SO 2 Record the issuance of common stock.

Paid-in Capital in Excess of Par

Accounting for Treasury Stock

Accounting for Treasury Stock

SO 3 Explain the accounting for treasury stock.

Chapter

12-26

Treasury stock - corporation’s own stock that it

has reacquired from shareholders, but not retired.

Corporations purchase their outstanding stock:

1 To reissue shares to officers and employees under bonus

and stock compensation plans.

2 To enhance the stock’s market value

3 To have additional shares available for use in acquisition

of other companies.

4 To increase earnings per share

5 To rid company of disgruntled investors, perhaps to

avoid a takeover.

Accounting for Treasury Stock

Accounting for Treasury Stock

SO 3 Explain the accounting for treasury stock.

Chapter

12-27

Purchase of Treasury Stock

Two acceptable methods:

Cost method (more widely used)

Par or Stated value method

Treasury stock, reduces stockholders’ equity.

Accounting for Treasury Stock

Accounting for Treasury Stock

SO 3 Explain the accounting for treasury stock.

Chapter

12-28

Treasury stock (1,000 x $28) 28,000

Illustration: UC Company originally issued 15,000

shares of $1 par, common stock for $25 per share

Record the journal entry for the following transaction:

April 1 st the company re-acquired 1,000 shares for $28 per share

Accounting for Treasury Stock

Accounting for Treasury Stock

SO 3 Explain the accounting for treasury stock.

Chapter

12-29

Accounting for Treasury Stock

Accounting for Treasury Stock

Stockholders' equity

Paid-in capital Common stock, $1 par, 15,000 issued and 14,000 outstanding $ 15,000 Paid-in capital in excess of par 360,000

Total paid-in capital and retained earnings 575,000

Less: Treasury stock (1,000 shares) 28,000

UC Company

Balance Sheet (partial)

Stockholders’ Equity with Treasury stock

The number of shares issued (15,000), outstanding (14,000) and

in the treasury (1,000) are disclosed .

SO 3 Explain the accounting for treasury stock.

Chapter

12-30

Sale of Treasury Stock

Above Cost Below Cost

Both increase total assets and stockholders’

equity

Accounting for Treasury Stock

Accounting for Treasury Stock

SO 3 Explain the accounting for treasury stock.

Paid-in capital treasury stock 1,000

Accounting for Treasury Stock

Accounting for Treasury Stock Above Cost

SO 3 Explain the accounting for treasury stock.

on hand

Accounting for Treasury Stock

Accounting for Treasury Stock Below Cost

SO 3 Explain the accounting for treasury stock.

Accounting for Treasury Stock

Accounting for Treasury Stock Below Cost

SO 3 Explain the accounting for treasury stock.

Chapter

12-34

Accounting for Treasury Stock

Accounting for Treasury Stock

Stockholders' equity

Paid-in capital Common stock, $1 par, 15,000 issued and 14,900 outstanding $ 15,000 Paid-in capital in excess of par 360,000

Total paid-in capital and retained earnings 568,600

Less: Treasury stock (100 shares) 2,800

UC Company

Balance Sheet (partial)

Stockholders’ Equity with Treasury stock

The number of shares issued (15,000), outstanding (14,900) and

in the treasury (100) are disclosed

SO 3 Explain the accounting for treasury stock.

Accounting for preferred stock at issuance is

similar to that for common stock

Chapter

12-36

Illustration: Acker Inc issues 5,000 shares of $100

par value preferred stock for cash at $130 per share

Journalize the issuance of the preferred stock

Preferred Stock

Preferred Stock

Cash (5,000 x $130) 650,000

Preferred stock (5,000 x $100) 500,000Paid-in capital in excess of par –

Preferred stock may have a par value or no-par value.

SO 4 Differentiate preferred stock from common stock.

Preferred Stock

Preferred Stock

SO 4 Differentiate preferred stock from common stock.

Chapter

12-38

A distribution of cash or stock to stockholders

on a pro rata (proportional) basis

Chapter

12-40

Cash Dividends

For a corporation to pay a cash dividend, it must have:

1. Retained earnings - Payment of cash dividends

from retained earnings is legal in all states

Chapter

12-41

Illustration: What would be the journal entries made

by a corporation that declared a $50,000 cash

dividend on March 10, payable on April 6 to

shareholders of record on March 25?

March 10 (Declaration Date)

April 6 (Payment Date)

Chapter

12-42

Allocating Cash Dividends Between

Preferred and Common Stock

Dividends

Dividends

Holders of cumulative preferred stock must be

paid any unpaid prior-year dividends before

common stockholders receive dividends.

SO 5 Prepare the entries for cash dividends and stock dividends.

Chapter

12-43

Exercise: Arnez Corporation was organized on January

1, 2007 During its first year, the corporation issued

2,000 shares of $50 par value preferred stock and

100,000 shares of $10 par value common stock At

December 31, the company declared the following cash dividends: 2007, $6,000, 2008, $12,000, and 2009,

$28,000

Instructions: (a) Show the allocation of dividends to

each class of stock, assuming the preferred stock

dividend is 8% and not cumulative

Dividends

Dividends

SO 5 Prepare the entries for cash dividends and stock dividends.

Chapter

12-44

Exercise: (a) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 8% and not cumulative

Dividends

Dividends

Dividends declared $ 6,000 $ 12,000 $ 28,000 Allocation to preferred 6,000 8,000 8,000 Remainder to common $ - $ 4,000 $ 20,000

* 2,000 shares x $50 par x 8% = $8,000

*

SO 5 Prepare the entries for cash dividends and stock dividends.

Chapter

12-45

Exercise: (b) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 9% and cumulative

Dividends

Dividends

Dividends declared $ 6,000 $ 12,000 $ 28,000 Dividends in arrears 3,000

Allocation to preferred 6,000 9,000 9,000 Remainder to common $ - $ - $ 19,000

Chapter

12-46

Exercise: (c) Journalize the declaration of the cash

dividend at December 31, 2009, under part (b)

Allocation to preferred 6,000 9,000 9,000 Remainder to common $ - $ - $ 19,000

Journal entry:

SO 5 Prepare the entries for cash dividends and stock dividends.

Chapter

12-48

Stock Dividends

Reasons why corporations issue stock dividends:

1. Satisfy stockholders’ dividend expectations without

spending cash

2. Increase marketability of corporation’s stock

3. Emphasize that a portion of stockholders’ equity has

been permanently reinvested in the business

Stock Dividends

Stock Dividends

SO 5 Prepare the entries for cash dividends and stock dividends.

Chapter

12-49

Size of Stock Dividends

Small stock dividend (less than 20–25% of the

corporation’s issued stock, recorded at fair market value)

Large stock dividend (greater than 20–25% of

issued stock, recorded at par value)

* Assumption that a small stock dividend will have little

effect on market price of outstanding shares

*

SO 5 Prepare the entries for cash dividends and stock dividends.

Stock Dividends

Stock Dividends

Chapter

12-50

10% stock dividend is declared

Stock issued

Illustration: HH Inc has 5,000 shares issued and

outstanding The per share par value is $1, book value

$32 and market value is $40

SO 5 Prepare the entries for cash dividends and stock dividends.

Stock Dividends

Stock Dividends