Corporations
Chapter 12
Corporation Characteristics
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Is a legal entity, distinct and separate from the
individuals who create and operate it.
It may acquire, own and dispose of property in its
own name.
It may also incur liabilities and enter into contracts
It can sell shares of ownership

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Stock – shares of ownership
It gives the corporations the ability to raise large
amounts of capital.
Corporations
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Stock – shares of ownership
Stockholder – owners of stock
Dividends – distribution of income to
shareholders
Types of Corporations
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Public Corporations
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those with shares of stock are traded in public
markets
such as the NASDAQ or NYSE
regulated by the Securities and Exchange
Commission.
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http://www.sec.gov/
Private or Nonpublic Corporations

Shares are not traded publicly are usually owned
by a small group of investors.
Additional Characteristics

Additional Characteristics of Corporations
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Limited liability
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Board of Directors
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Elected by the shareholders
Meets periodically to establish corporate policies
Selects the Chief Executive Officers
Dividends
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A corporation’s creditors usually may not go beyond the assets
of the corporation to satisfy their claims.
Distribution of income to shareholders
Liable for Taxes
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on the income of the corporation
before the distribution of dividends to shareholders
may cause double taxation of income
Forming a Corporation

Application of incorporation
Filed with the state authority
 http://www.sunbiz.org/
 Once approved the state grants a Charter or
Articles of Incorporation
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Articles of incorporation
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Formally create the corporation
Organizational Costs
Costs may be incurred in organizing a
corporation
 Costs include legal fees, taxes, state
incorporation fees, license fees, and
promotional costs

Example 1

Suppose that
$15,000 is spent in
the forming of the
corporation.
Account
Organizational costs
Cash
Debit
Credit
$15,000
$15,000
Paid-In Capital from Issuing
Stock

Two main sources of stockholders’
equity

Paid in capital
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Paid in capital comes from the issuance of
stock
Retained earnings
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From the earnings of the business not
distributed as dividends
Stock
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Authorized – number of shares of stock that a
corporation can issue
Issued – number sold
Outstanding – number in hands of
stockholders
Stock
Authorizing > Issued ≥ Outstanding
Stock
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Par value or stated value – assigned
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Rights
monetary value
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Right to vote in matters concerning the
corporation
Right to share in distribution of earnings
Right to share in assets at liquidation
Rights vary with the class of stock
Classes of Stock
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Common stock
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Has all the rights listed above
Preferred stock
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The dividend rights of preferred stock are usually stated
in monetary terms or as a percent of par
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$2 preferred stock
 Has a right to an annual $2 per share dividend
5% preferred stock with par of $100
 Has a right to an annual dividend of $5 per share
They have the first right to dividends when any dividends
are declared.

Have greater chance of receiving their dividends
Dividends
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Dividends
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First paid to
preferred
stockholders
Remainder to
common
stockholders
Dividend Distributions
by class

Corporation has 4,000 shares of common stock and
1,000 shares outstanding of 8% preferred stock with a
par value of $50. The Board declares the following
dividends.
2006
$20,000
2007
$50,000
2008
$62,000
Example 2
What are dividends distributed to preferred stock and
common stock?
Preferred stock gets 8% times par value
8% x $50 = $4 per share
There are 1,000 shares outstanding of preferred stock so dividend
is:
$4 per share x 1,000 shares outstanding = $4,000
Example 2
2006
2007
2008
Dividends
$20,000
$55,000
$62,000
Preferred
stock
$4,000
$4,000
$4,000
Common
Stock
$16,000
$51,000
$58,000
Note

Even though the dividends declared
increased each year, preferred stock
only received the $4,000 and common
stock always receives the remainder
which increases as dividends increase.
Example 3
Corporation has 5,000 shares of common stock
and 2,000 shares outstanding of $10
preferred stock with a par value of $50. The
Board declares the following dividends.
2005: $30,000
2006: $55,000
2007: $20,000
What are dividends distributed to preferred
stock and common stock?
Issuing Stock
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An account is created for each type of
stock.
These accounts are classified as equity.
They increase with a credit.
Stock can be issued at par or above par
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Issued at par:
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Amount received is the same amount credited to the
stock account.
Journal Entry
Account
Cash
Debit
Credit
Amount
received
Preferred stock
Par value
Common stock
Par value
Example 4

The Corporation issues 10,000 shares of
$5 par value common stock and 4,000
shares of $10 par value preferred stock
at par. Record the entry.
Preferred stock: 4,000 shares x $10 per share = $40,000
Common stock: 10,000 shares x $ 5 per share = $50,000
Total cash received
$90,000
Example 4
Account
Cash
Debit
Credit
$90,000
Preferred stock
$40,000
Common stock
$50,000
Premium on sale of stock
When stock is issued for a price that is
more than its par.
 Caused by
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Financial conditions, earnings record, and
dividend record of the corporation
Investor expectations of the corporation’s
potential earning power
Premium on sale of stock
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When stock is issued for a price above its par
value, it has sold at a PREMIUM.
When stock is issued for a price above its par
value, it has sold at a DISCOUNT.
Difference between par value and selling
price is placed in an equity account called
Paid in Capital in Excess of Par.
Journal Entry
Account
Cash
Debit
Credit
Total cash
received
Preferred stock
Par value
Paid in capital in
excess of par
Cash - par
Example 5
The Corporation issues 4,000 shares of $10 par value
preferred stock for $15 per share. Record the entry.
Preferred stock:
Selling price:
$15 per share x 4,000 shares =
Par value:
$10 per share x 4,000 shares =
Paid in capital
EXCESS
$60,000
$40,000
$20,000
Journal Entry
Account
Cash
Debit
Credit
$60,000
Preferred stock
$40,000
Paid in capital in
excess of par
$20,000
Example 6

The Corporation issues 7,000 shares of
$4 par value common stock and 3,000
shares of $20 par value preferred stock.
The common stock is issued at $7 per
share and the preferred stock at $24
per share. Record the entry.
Rule
Companies will never declare a
gain or loss on transactions with
its own stock.
 Always the difference will go to
paid in capital in excess of par.
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No Par Stock
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Stock may be issued without par value
Entire proceeds from the sale are credited
to the stock account
No paid in capital in excess of par account
will exist
Accounting for Dividends
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Cash dividends
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A cash distribution of earnings by a corporation to
its shareholders.
These are the most common though other assets
may be distributed.
Three conditions for dividends to be paid:
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Sufficient retained earnings
Sufficient cash
Formal action by the board of directors. Though they
are not legally required to do so.
Three important dates with
dividends:
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Example 6:
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On May 10, 2007, the ABC Corporation’s
Board of Directors declared a cash dividend
of $.25 per common stock share to
stockholder’s of record on May 31, 2007
payable on June 10th. There are 10,000
shares outstanding.
Date 1: Declaration Date
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Declaration date
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The date that Board of Directors
approves the dividend.
A liability is incurred by the corporation.
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Entry:
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Cash dividends DR
Dividends payable CR
Example 6
Date
May 10,
2007
Account
Cash dividends
Dividends Payable
DR
CR
$2500.00
$2500.00
Date 2: Date of Record
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This date determines which shareholders
will get the dividend.
No entry
Shares sold after May 31 are called exdividend stock. The sales price includes a
share of the dividend
Example 6
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May 31 is the date of record.
Shareholders at the close of business
on this day will receive the dividend
check.
Date 3: Payment Date
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This is the date that the dividend checks
are mailed out
Entry:
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Dividends payable DR
Cash CR
Example 6
Date
Account
June 10, Dividends payable
2007
Cash
DR
CR
$2500.00
$2500.00
Stock Dividends
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A distribution of shares of stock to stockholders.
These distributions are in common stock
Issued to holders of common stock only
The effect of the stock dividend on the stockholders’
equity of the issuing corporation is to transfer
retained earnings to paid in capital.
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Therefore no assets are affective
The amount transferred from retained earnings to
paid in capital is normally the fair market value of the
shares issued in the stock dividend.
Example 7

Suppose that on June 10, 2007, Morton
Company declares a 2% stock dividend
on shares outstanding on June 30,
2007. The stock dividend is payable on
July15, 2007. The stockholder’s equity
account looks like this:
Example 7
Common stock,
($15 par value with 100,000 shares issued)
$1,500,000
Paid in Capital
Retained Earnings
$ 700,000
$7,000,000
Fair market value of stock on declaration date is $20 per share.
Example 7: Declaration Date
Date
Account
June
Stock Dividends
10,
2007
Stock Dividends
Distributable
Paid in capital in
excess of par
DR
CR
$40,000
$30,000
$10,000
Example 7: Payment Date
Date
Account
June 10, Stock Dividends
2007
DR
CR
$40,000
Stock Dividends
Distributable
$30,000
Paid in capital in excess
of par
$10,000
Note
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It does not change the assets, liabilities
or total stockholder’s equity of a
company
Treasury Stock
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Companies may buy its own stock to provide
shares:
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for resale to employees
for reissuing as a bonus to employees
for supporting the market price of the stock
Cost method

A commonly used method of accounting for the
purchase and resale of treasury stock.
Treasury Stock
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Transactions for Treasury Stock

Repurchase –
when a company buys back its stock
 create a new equity account called: Treasury
Stock
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it is a contra equity account
increases with a debit
recorded at the purchase price called COST
Treasury Stock
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Sale
Recorded at original buy back cost
 Difference between SELLING PRICE and cost

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Recorded in PAID IN CAPITAL
Example 9:
A corporation has common stock with a par
value of $25. The company repurchases 2,000
shares at $45 per share. Record the buy back.
Date
Account
Cash
Treasury Stock
DR
CR
$90,000
$90,000
Example 9

The company sells 700 shares at $60
per share. Record the entry.
Selling price: 700 x $60 =
Cost:
700 x$45 =
Excess paid in capital
$42,000
$31,500
10,500
Example 9
Account
Cash
Debit
Credit
$42,000
Treasury Stock
$31,500
Paid in capital in excess of par
$10,500
Example 9
The company sells 200 shares at $40 per share. Record the
entry.
Selling price: 200 x $40 =
Cost:
200 x$45 =
Excess paid in capital
$8,000
$9,000
(1,000)
Example 9
Account
Debit
Cash
$8,000
Paid in capital in excess of
par
$1,000
Treasury Stock
Credit
$9,000
Example 10
A corporation has common stock with a
par value of $10.
 The company repurchases 1,000 shares
at $20 per share. Record the buy back.
 The company sells 500 shares at $30
per share. Record the entry.
 The company sells 200 shares at $15
per share. Record the entry.

Why Paid in Capital and not a
gain or loss?

Companies will never declare a
gain or loss on transactions with
its own stock. Always the
difference will go to paid in capital
in excess of par.