Corporations: Organization, Stock Transactions,
and Dividends
12e
PRINCIPLES OF FINANCIAL ACCOUNTING
24e
PRINCIPLES OF ACCOUNTING
2e
Chapter 13
ACCOUNTING PRINCIPLES
Using excel for Success
Prepared by: C. Douglas Cloud
Prepared
Professorby:
Emeritus
C. Douglas
of Accounting
Cloud
Professor
Pepperdine
Emeritus
University
of Accounting
Pepperdine University
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© 2012 Cengage
Learning.
All Rights
May not
copied,
scanned, or
in whole or website
in part, for
except
for use use.
as
permitted
in a license
distributed
with aReserved.
certain product
or be
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or otherwise
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Reeve Warren Duchac
Learning Objectives
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.
4. Describe and illustrate the accounting for
cash dividends and stock dividends.
5. Describe and illustrate the accounting for
treasury stock transactions.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives
6. Describe and illustrate the reporting of
stockholders’ equity.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives
6. Describe and illustrate the reporting of
stockholders’ equity.
7. Describe the effect of stock splits on
corporate financial statements.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives
6. Describe and illustrate the reporting of
stockholders’ equity.
7. Describe the effect of stock splits on
corporate financial statements.
8. Describe and illustrate the use of earnings
per share in evaluating a company’s
profitability.
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Learning Objective 1
1. Describe the nature of the corporate form of
organization.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Characteristics of a Corporation
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.
A corporation sells shares of ownership,
called stock.
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LO 1
Characteristics of a Corporation
The stockholders or shareholders who own
the stock own the corporation. They can buy
and sell stock without affecting the
corporation’s operations or continued
existence.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Characteristics of a Corporation
Corporations whose shares of stock are
traded in public markets are called public
corporations.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Characteristics of a Corporation
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
corporations have limited liability.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Characteristics of a Corporation
The stockholders control a corporation by
electing a board of directors. This board
meets periodically to establish corporate
policy. It also selects the chief executive
officer (CEO) and other major officers.
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LO 1
Characteristics of a Corporation
Stockholders
Board of Directors
Officers
Employees
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LO 1
Characteristics of a Corporation
A corporation has separate legal existence
from its owners.
A corporation has transferable units of
ownership.
A corporation has limited stockholders’
liability.
A corporation is subject to taxes. Thus, the
corporate form has the disadvantage of
double taxation.
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LO 1
Characteristics of a Corporation
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)
LO 1
Characteristics of a Corporation
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Forming a Corporation
The first step in forming a corporation is to
file an application of incorporation 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 (see Exhibit
3, next slide).
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LO 1
Forming a Corporation
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Forming a Corporation
After the application is approved, the state
grants a charter or articles of incorporation,
which formally create the corporation.
Management and the board of directors
then prepare bylaws which are operating
rules and procedures for conducting the
corporation’s affairs.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Forming a Corporation
Costs may be incurred in organizing a
corporation, such as legal fees, taxes,
license fees, and promotional costs. The
recording of a corporation’s organizing costs
of $8,500 on January 5 is shown below:
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Learning Objective 2
1. Describe the nature of the corporate form of
organization.
2. Describe the two main sources of
stockholders’ equity.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Stockholders’ Equity
The owner’s equity in a corporation is called
stockholders’ equity, shareholders’ equity,
shareholders’ investment, or capital.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Stockholders’ Equity
Stockholders’ equity is
reported by its two main
sources.
 Capital contributed to
the corporation by the
stockholders, called
paid-in capital or
contributed capital.
 Net income retained in
the business, called
retained earnings.
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LO 2
Stockholders’ Equity
If there is only one class
of stock, the account is
entitled Common Stock
or Capital Stock.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Stockholders’ Equity
Retained earnings is a corporation’s
cumulative net income that has not been
distributed as dividends.
Dividends are distributions of a corporation’s
earnings to stockholders.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Stockholders’ Equity
 A debit balance in Retained Earnings is
called a deficit. Such a balance often
results from accumulated net losses.
 A credit balance in Retained Earnings does
not represent surplus cash or cash left over
for dividends.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 3
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.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Characteristics of Stock
The number of shares of stock that a
corporation is authorized to issue is stated in
the charter.
The term issued refers to the shares issued to
the stockholders.
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.
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LO 3
Characteristics of Stock
Outstanding
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LO 3
Characteristics of Stock
Corporations may issue stock certificates to
stockholders to document their ownership.
Shares of stock are often assigned a dollar
amount, called par value.
Some corporations have stopped issuing
stock certificates except on special request.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Characteristics of Stock
Stock issued without 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.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Characteristics of Stock
The major rights that accompany ownership
of a share of stock are as follows:
 The right to vote in matters concerning
the corporation.
 The right to share in distributions of
earnings.
 The right to share in assets upon
liquidation.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Classes of Stock
The two primary classes of paid-in capital
are common stock and preferred stock.
The primary attractiveness of preferred stock
is that it is given a preference to dividends
over common stock.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Classes of Stock
The payment of dividends is authorized by
the corporation’s board of directors.
When authorized, the directors are said to
have declared a dividend.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Classes of Stock
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.
 Cumulative preferred stock dividends that
have not been paid in prior years are said
to be in arrears.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Classes of Stock
A corporation has issued the following preferred
and common stock:
1,000 shares of $4 cumulative preferred stock, $50 par
4,000 shares of common stock, $15 par
The corporation was organized on January 1, 2010,
and paid no dividends in 2010 and 2011. In 2012,
the corporation paid $22,000 in dividends, of which
$12,000 was paid to preferred stockholders and
$10,000 was paid to common stockholders.
(continued)
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LO 3
Classes of Stock
Total dividends paid
Preferred stockholders:
2010 dividends in arrears
$22,000
$4,000
The 2010 dividends in arrears are paid
first. There are 1,000 shares, and each
share receives $4 for a total of $4,000.
(continued)
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Classes of Stock
Total dividends paid
Preferred stockholders:
2010 dividends in arrears
2011 dividends in arrears
$22,000
$4,000
4,000
The 2011 dividends in arrears are paid
next. Again, the preferred stockholders
receive $4 for each share held.
(continued)
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Classes of Stock
Total dividends paid
Preferred stockholders:
2010 dividends in arrears
2011 dividends in arrears
2012 dividends
$22,000
$4,000
4,000
4,000
The current dividends for 2012 must
be paid to preferred stockholders
before common stockholders can
participate in the dividends.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(continued)
LO 3
Classes of Stock
Total dividends paid
Preferred stockholders:
2010 dividends in arrears
2011 dividends in arrears
2012 dividends
Total preferred dividends
$22,000
$4,000
4,000
4,000
Of the $22,000 in dividends declared,
preferred must receive $12,000 before
common can receive any dividends.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(12,000)
(continued)
LO 3
Classes of Stock
Total dividends paid
Preferred stockholders:
2010 dividends in arrears
2011 dividends in arrears
2012 dividends
Total preferred dividends
Dividends available to common
stockholders
$22,000
$4,000
4,000
4,000
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
(12,000)
$10,000
EE 13-1
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
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.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Issuing Stock
If the stock is issued (sold) for a price that is
more than its par, the stock has been sold at
a premium.
If the stock is issued (sold) for a price that is
less than its par, the stock has been sold at a
discount.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Premium on Stock
Caldwell Company issues 2,000 shares of $50 par
preferred stock for cash at $55.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Premium on Stock
A corporation acquired land for which the fair
market value cannot be determined. In exchange for
the land, the corporation issued 10,000 shares of $10
par common that had a current market value of $12.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
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.
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LO 3
No-Par Stock
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.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
No-Par Stock
Using the same data as in the previous transaction,
assume that the stock is assigned a stated value of $25.
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EE 13-2
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Learning Objective 4
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.
4. Describe and illustrate the accounting for
cash dividends and stock dividends.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Cash Dividends
A cash distribution of earnings by a
corporation to its stockholders is called a
cash dividend. The three conditions a
corporation must meet to pay a cash
dividend are as follows:
 Sufficient retained earnings
 Sufficient cash
 Formal action by the board of directors
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Cash Dividends
The date of declaration 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.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Cash Dividends
The date of record is the date the
corporation uses to determine which
stockholders will receive the dividend.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Cash Dividends
The date of payment is the date the
corporation will pay the dividends to the
stockholders who owned the stock on the
date of record.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Cash Dividends
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.
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LO 4
Cash Dividends
On October 1, the declaration date, Hiber Corporation
records the following entry:
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Cash Dividends
On November 10, the date of record, no entry is
required, since this date merely determines which
stockholders will receive the dividends.
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LO 4
Cash Dividends
On December 2, the date of payment, Hiber
Corporation records the payment of the dividends as
follows:
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EE 13-3
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LO 4
Stock Dividends
A distribution of dividends to stockholders in
the form of the firm’s own shares is called a
stock dividend. Stock dividends normally
are declared only on common stock and
issued to common stockholders.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Stock Dividends
On December 15, the board of directors of Hendrix
Corporation declares a 5 percent 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 per
share.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Stock Dividends
The entry to record the declaration of the 5 percent
stock dividend is as follows:
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Stock Dividends
At the end of the period, the stock dividends
distributable and paid-in capital in excess of par—
common stock accounts are reported in the Paid-In
Capital section of the balance sheet. Thus, the effect
of the preceding stock dividend is to transfer
$3,100,000 of retained earnings to paid-in capital.
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LO 4
Stock Dividends
On January 10, the stock dividend is distributed to
stockholders by issuing 100,000 shares of common
stock. The following entry records the issue of the
stock:
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Stock Dividends
Before and After Stock Dividend Distribution
Total shares issued
After 6%
Before
Stock Dividend Stock Dividend
10,000
10,600
10,000 + (10,000 x 6%)
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LO 4
Stock Dividends
Before and After Stock Dividend Distribution
Total shares issued
Number of shares owned
by one stockholder
After 6%
Before
Stock Dividend Stock Dividend
10,000
10,600
1,000
1,060
1,000 + (1,000 x 6%)
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LO 4
Stock Dividends
Before and After Stock Dividend Distribution
Total shares issued
Number of shares owned
by one stockholder
Proportionate ownership
After 6%
Before
Stock Dividend Stock Dividend
10,000
10,600
1,000
10%
1,060
10%
1,000 ÷ 10,000
1,060 ÷ 10,600
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EE 13-4
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Learning Objective 5
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.
4. Describe and illustrate the accounting for
cash dividends and stock dividends.
5. Describe and illustrate the accounting for
treasury stock transactions.
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LO 5
Treasury Stock Transactions
Treasury 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:
 To provide shares for resale to employees
 To reissue as bonuses to employees, or
 To support the market price of the stock
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LO 5
Treasury Stock Transactions
On February 13, 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. The entry to record the purchase of
the treasury stock is as follows:
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LO 5
Treasury Stock Transactions
On April 29, the corporation sells 600 shares of the
treasury stock for $60. The entry to record the sale
is as follows:
*
The amount (per share) debited to Treasury Stock
when purchased is the amount per share that must
be credited to that account when sold (600 x $45).
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LO 5
Treasury Stock Transactions
On October 4, the corporation sells the remaining
400 shares of treasury stock for $40 per share. The
entry to record the sale is as follows:
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EE 13-5
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Learning Objective 6
6. Describe and illustrate the reporting of
stockholders’ equity.
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LO 6
Reporting Stockholders’ Equity
 Exhibit 4 shows two methods for reporting
stockholders’ equity for the December 31, 2012,
balance sheet of Telex Inc.
 In the first method, shown in the next slide,
each class of stock is reported, followed by its
related paid-in capital accounts. Retained
earnings is then reported, followed by a
deduction for treasury stock.
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LO 6
Reporting Stockholders’ Equity
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(continued)
LO 6
Reporting Stockholders’ Equity
In the second method, the stock accounts are
reported, followed by the paid-in capital reported
as a single item, Additional paid-in capital.
Retained earnings is then reported, followed by a
deduction for treasury stock. Method 2 is shown
on the next slide.
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LO 6
Reporting Stockholders’ Equity
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(concluded)
EE 13-6
(continued)
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EE 13-6
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LO 6
Reporting Retained Earnings
Changes to retained earnings may be
reported using one of the following:
 Separate retained earnings statement
 Combined income and retained earnings
statement
 Statement of stockholders’ equity
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LO 6
Reporting Retaining Earnings
 When a separate retained earnings
statement is prepared, the beginning
balance of retained earnings is reported.
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EE 13-7
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LO 6
Restrictions
The retained earnings available for use as
dividends may be restricted by action 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.
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LO 6
Restrictions
Restrictions of retained earnings are
classified as follows:
 Legal. State laws may require a restriction
of retained earnings.
 Contractual. A corporation may enter into
contracts that require restrictions of
retained earnings.
 Discretionary. A corporation’s board of
directors may restrict retained earnings
voluntarily.
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LO 6
Prior Period Adjustments
Errors may not be discovered within the
same period in which they occur. The
correction of this type of error, called a prior
period adjustment, is reported in the
retained earnings statement as an
adjustment to the beginning balance of
retained earnings.
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LO 6
Statement of Stockholders’ Equity
When the only to change to stockholders’
equity is due to net income or net loss and
dividends, a retained earnings statement is
sufficient.
When a corporation also has changes in
stock and paid-in capital accounts, a
statement of stockholders’ equity is normally
prepared.
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LO 6
Statement of Stockholders’ Equity
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LO 6
Mornin’ Joe’s Statements
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LO 6
Mornin’ Joe’s Statements
Mornin’ Joe’s retained earnings statement
for the year ended December 31, 2012, is as
follows:
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LO 6
Mornin’ Joe’s Statements
The statement of stockholders’ equity for
Mornin’ Joe is shown below:
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Learning Objective 7
6. Describe and illustrate the reporting of
stockholders’ equity.
7. Describe the effect of stock splits on
corporate financial statements.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 7
Stock Splits
A stock split is a process by which a
corporation reduces the par or stated value
of its common stock and issues a
proportionate number of additional shares.
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LO 7
Stock Splits
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 the following stock split:
1. Each common shareholder will receive 5
shares for each share held.
2. The par of each share of common stock will be
reduced to $20 ($100/5).
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LO 7
Stock Splits
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Learning Objective 8
6. Describe and illustrate the reporting of
stockholders’ equity.
7. Describe the effect of stock splits on
corporate financial statements.
8. Describe and illustrate the use of earnings
per share in evaluating a company’s
profitability.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 8
Earnings per Share
Earnings per common share (EPS),
sometimes called basic earnings per share,
is the net income per share of common
stock outstanding during a period.
Earnings per share is computed as follows:
Net Income – Preferred Dividends
Earnings per Share =
Average Number of Common
Shares Outstanding
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LO 8
Earnings per Share
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EE 13-8
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Corporations: Organization, Stock Transactions,
and Dividends
The End
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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