1 1. describe the nature of the corporate form of organization. 2. describe the two main sources of...
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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.
After studying this chapter, you should be able to:
Chapter 13 - Corporations: Organization, Stock Chapter 13 - Corporations: Organization, Stock Transactions, and DividendsTransactions, and Dividends
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.
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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.
Objective 1Objective 1Objective 1Objective 1Describe the nature of the
corporate form of organization.
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.
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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.
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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.
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EmployeesEmployees
StockholdersStockholders
OfficersOfficers
Board of DirectorsBoard of Directors
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Exhibit 1 Organizational Structure of a Corporation
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Advantages of the Corporate Form
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.
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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.
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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.
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The owner’s equity in a corporation is called stockholders’ equity, shareholders’ equity, shareholders’
investment, or capital.
Objective 2Objective 2Objective 2Objective 2Describe the two main sources of
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).
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Stockholders’ Equity Section of a Corporate Balance Sheet
Stockholders’ EquityPaid-in capital: Common stock $330,000Retained 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 Earnings is called a deficit. Such a balance results from
accumulated net losses.
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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.
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.
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.
Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock.
Objective 3Objective 3Objective 3Objective 3
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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.
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Major Rights That Accompany Ownership of a Share of Stock
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.
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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 $62,000Amount retained 10,000 6,000 40,000Amount distributed $10,000 $3,000 $22,000
2006 2007 2008
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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.
Issuing Stock
Cash 1,500 000 00
Issued preferred stock and
common stock at par for cash.
Preferred Stock 500 000 00
Common Stock 1,000 000 00
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Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55.
Cash 110 000 00
Issued $50 par preferred stock at $55.
Preferred Stock100 000 00
Paid-in Capital in Excess of
Par—Preferred Stock10 000 00
Premium on Stock
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.
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13-3A 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
Issued $10 par common stock
valued at $12 per share, for
land.
Common Stock100 000 00
Paid-in Capital in Excess of Par20 000 00
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A corporation issues 10,000 shares of no-par common stock at $40 a share.
Cash 400 000 00
Issued 10,000 shares of no-
par common stock at $40.
Common Stock400 000 00
No-Par Stock
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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.
1. Sufficient retained earnings
2. Sufficient cash
3. Formal action by the board of directors
Objective 4Objective 4Objective 4Objective 4 Journalize the entries for cash dividends and
stock dividends.
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Dec. 1 Cash Dividends 42 500 00
Declared cash dividend.
Cash Dividends Payable42 500 00
Heber Corporation records the $42,500 liability on the declaration date.
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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.
Three Important Dividend Dates
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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.
Three Important Dividend Dates 13-4
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The third important date is the date of payment. On January 2, Hiber issues dividend
checks.
Three Important Dividend Dates
Jan. 2 Cash Dividends Payable 42 500 00
Paid cash dividend.
Cash 42 500 00
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A distribution of dividends to stockholders in the form of the firm’s own shares is called a
stock dividend.
Stock Dividends 13-4
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.
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Dec. 15 Stock Dividend (100,000 x $31 market) 3,100 000 00
Declared 5% (100,000 share)
stock dividend on $20 par
common stock with a market
value of $31 per share.
Stock Dividend Distributable
2,000 000 00 Paid-in Capital in Excess of
Par—Common Stock 1,100 000 00
The entry to record the declaration of the 5 percent stock dividend is as follows:
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Jan. 10 Stock Dividends Distributable 2,000 000 00
Issued stock for the stock
dividend.
Common Stock2,000 000 00
On January 10, the number of shares out-standing is increased by 100,000. The following entry records the issue of the stock:
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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.
Treasury Stock Transactions
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Objective 5Objective 5Objective 5Objective 5 Journalize the entries for treasury stock transactions.
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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
Purchased 1,000 shares of
treasury stock at $45.
Cash45 000 00
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Later, 200 shares of treasury stock were sold for $60 per share.
Cash 12 000 00
Sold 200 of treasury stock
at $60.
Treasury Stock*9 000 00
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Paid-in Capital from Sale of
Treasury Stock
3 000 00
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Sold 200 shares of treasury stock at $40 per share.
Cash 8 000 00
Sold 200 of treasury stock
at $40.
Treasury Stock9 000 00
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Paid-in Capital from Sale of
Treasury Stock 1 000 00
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Objective 6Objective 6Objective 6Objective 6 Describe and illustrate the reporting of stockholders’ equity.
Stockholders’ Equity Section of a Balance Sheet
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Example Exercise 13-6
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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 $1,500,000Paid-in Capital in Excess of Par 160,000Paid-in Capital from Sale of Treasury Stock 44,000Retained Earnings 4,395,000Treasury Stock 120,000
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Follow My Example 13-6
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Stockholders’ EquityPaid-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 $1,660,000From sale of treasury stock 44,000 Total paid-in capital $1,704,000
Retained earnings 4,395,000Total $6,099,000
Deduct treasury stock (5,000 shares at cost) 120,000Total stockholders’ equity $5,979,000
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Retained Earnings Statement
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Statement of Stockholders’ Equity77
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Example Exercise 13-7
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Dry Creek Camera Inc. reported the following results for the year ending March 31, 2008:
Retained earnings, April 1, 2007 $3,338,500Net income 461,500Cash dividends declared 80,000Stock dividends declared 120,000
Prepare a retained earnings statement for the fiscal year ended March 31, 2008.
34For Practice: PE 13-6A, PE 13-6B
Follow My Example 13-7
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DRY CREEK CAMERAS INC.RETAINED EARNINGS STATEMENT
For the Year Ended March 31, 2008
Retained earnings, April 1, 2007 $3,338,500Net income $461,500Less dividends declared 200,000Increase in retained earnings 261,500Retained earnings, March 31, 2008 $3,600,000
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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.
Stock Splits
13-7Objective 7Objective 7Objective 7Objective 7
Describe the effect of stock splits on corporate financial statements.
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BEFORE BEFORE STOCK SPLITSTOCK SPLIT
4 shares, $100 par
$400 total par value
20 shares, $20 par
AFTER 5:1 AFTER 5:1 STOCK SPLITSTOCK SPLIT
$400 total par value
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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.
It is not recorded by a journal entry