ACCOUNTING FOR CORPORATIONS
I. Introduction
What is the Corporation?
A corporation is a separate legal entity chartered under law.
Basically, upon the creation of a corporation, a 'new person'
is created in the eyes of the law. This 'person' has similar
rights and obligations that a real person would have and is
expected to abide by the same laws and regulations that
govern all business activity.
Advantage and Disadvantage of Corporation:
Advantage :
1. A Corporation is a separate legal entity.
2. The shareholders are not liable for the company's debts.
3. It is very easy to raise capital.
4. In the event the corporation fails, stockholders are only
accountable for the amount they have invested.
5. Ownership may easily be transferred by selling the
share held.
6. The corporation continue to exist even with the death of
a stockholder.
7. Contacts can be entered into in the corporate name
8. Significant funds can be raised through the sale of stock
to the public.
Advantage and Disadvantage of Corporation:
Disadvantage :
1. High taxes
2. Annual fees paid to the state in which the company
corporate.
3. Double taxation in that the source of dividends,
corporate income, is subject to corporate income
taxes and the dividends received by stockholders are
themselves subject to personal income taxes.
4. The cost of printing stock certificates.
5. Governmental regulation over affairs.
6. The filing of financial reports, as required by the
Securities and Exchange Commission, that may
disclose vital information to creditors.
Study objective of Accounting for Corporation:
1. Analyze financial statement to identify the different types of
business organizations.
2. Explain the characteristics of major types of stock issued by
corporation.
3. Explain how to account for different types of stock issued by
corporation.
4. Show how treasury stock transactions affect a company’s
financial statements.
5. Explain the effects of declaring and paying cash dividends on
a company’s financial statements.
6. Explain the effects of stock dividends and stock splits on a
company’s financial statement.
Who is a stockholder ?
A stockholder is an owner of the company and as is entitle to
vote , share in earning through the receipt of dividends, share in
disposition of assets after creditors if the company becomes
bankrupt, sell his or her ownership interest , and invest in
additional shares on a proportionate basis if the company
increases the amount of shares outstanding.
Who is the board of director?
Board of director is the person who was voted by the
stockholder
and overall responsibility for managing the company. Some of
board of directors is the stockholders who was selected by the
other stockholders.
Right of stockholders :
1. Vote at stockholders’ meeting.
2. Sell stock.
3. Purchase additional shares of stock.
4. Receive dividends, if any.
5. Share equally in any assets remaining after creditors are paid
in a liquidation.
II. Share
Stock certificate:
Stock certificate is a legal document that certifies ownership of
a specific number of stock shares in a corporation and typically
has a par value printed on it.
Stock certificates are divided into two forms :
- registered stock certificates.
- bearer stock.
A registered stock certificate is normally only evidence of title, and
record of the true holders of the shares will appear in the
stockholder’s register of the corporation.
A bearer stock certificates , as its name implies is a bearer
instrument, and physical possession of the certificate entitles
the holders to exercise all legal rights associated with the stock.
Par value:
Par value is a nominal value of a security which is determined
by an issuing company as a minimum price .
Shares are divided into five groups :
-Authorized shares.
-Issued shares.
-Treasury stock.
-Outstanding shares.
-Subscribed shares.
Authorized shares:
Authorized shares are the maximum amount that can be issued
according to the articles of incorporation.
Issued shares:
Issued shares are the amount of authorized shares that have been
sold to the public.
Treasury stock:
Treasury stock represents the issued shares that have been
reacquired by the company.
Outstanding shares:
Outstanding shares equal issued share less treasury stock.
Subscribed shares:
Subscribed shares are those shares under contact at a specified
price for which a down payment has been given .
The subscribed shares will not be issued until full payment is
Received from the subscriber.
Example of shares:
Chan vatana company has an authorization (authorized shares)
200,000 shares. During 2008, 90,000 shares were issued.
During
the year, the company bought back 10,000 shares. The
outstanding shares at year’s end are determined as follow:
Issued shares
90,000
Less: Treasury stock
10,000
Outstanding shares
80,000
III. Stock
Stock are divided into two types :
-Common stock.
-Preferred stock.
Common
stock:
Common stock are the shares in a corporation with no
preference
or priorities over other classes of stock. The rights in these
shares
Include: voting rights, distribution rights, liquidation rights, and
Other rights.
Preferred stock:
Preferred stock are the shares in a corporation that are entitled
to a preference above shares of common stock.
The shareholders of preferred stock have the following rights:
-Special voting or veto rights.
-A priority on distribution of dividends.
-A priority on the corporation’s assets upon liquidation or
merger.
-A right to convert to common stock based on a formula.
-A right to force the corporation to buy back shares at
some
time in the future .
-A possible separate right to elect a designated number of
Example of Stock:
On January1, Korn chantha company has authorized shares
55,000 shares of common stock and 44,000 shares of preferred
stock. On January 1 , it issued 6,600 shares of common of $10
par value common stock for cash. On Jane 20. the company
issued an additional 5000, shares of common stock and also
2,000
Shares of preferred stock. All shares were issued at par value.
Jan 1.
Cash
$66,000
Common stock
Jan 20.
Cash
$66,000
$70,000
Common stock
$50,000
Preferred stock
$20,000
IV. Stockholders’ equity
Stockholder’s equity section of the balance sheet consists of capital
stock, paid-in capital, retained earnings and total stockholder’s
equity.
Capital stock shows the par value of the stock issued. Preferred
Stock is listed before common stock because of its preference in
liquidation.
Paid-in capital shows the amount received over the par value
of stock issued.
Retained earning presentations the accumulated earning of
the company since inception less the dividends declared.
Total stockholders’ equity sums of the above.
V. Issuance of stock
When stock is sold at an issuance price that is different than
par
value, cash is debited for the amount received and the
particular security (common or preferred stock) is credited at
par value.
When is sold above par value, the excess is called a premium.
The premium account is shown under the paid-in capital section
of stockholders’ equity because it relates to the issuance of
stock’s company.
In the case where the issuance price is less than par value, the
excess is called discount. Discount is shown under paid-in
capital as a reduction.
Example of premium stock:
Kuy Rotha corporation issued 6,000 shares of $10 par value
of preferred stock for $16 a share.
Cash
$96,000
Preferred stock
$6,0000
Premium on Preferred stock
$3,6000
Example of discount
stock:
Pen Ret Co.,Ltd issued 30,000 shares of $15 par value common
stock for $14 a share.
Cash
$420,000
Discount on common stock
$30,000
Common stock
$450,000
VI. Subscribed stock
Stock may be acquired under an installment plan. The journal
entry for the down payment is :
Cash ( down payment)
Subscription Receivable ( balance due)
Common Stock Subscribed (par value)
Premium on Common Stock ( subscription price over
par value
When full payment has been received , the subscribed stock will
be
issued. The journal entry are:
Cash
$$$
Subscription Receivable
Common stock subscribed
Common Stock
$$$
$$$
$$$
On July 10, Lay Soklun Corporation received subscription for
10,000 shares of $15 par value common stock. The subscription
price is $18 per share. A down payment of 40 percent was made.
On August 5, the balance due from the subscribers was received.
July 10
Cash
$72,000
Subscriptions Receivable
$108,000
Common stock subscribed
$150,000
Premium on Common Stock
August 5
Cash
$108,000
Subscriptions Receivable
$108,000
$30,000
VII. Treasury Stock
Treasury stock or reacquired stock is the stock is bought back
by the issuing company, reducing the amount of outstanding
stock.
The journal entry is :
Treasury stock
Cash
$$$
$$$
When the treasury stock is resold, the difference the
selling price and the cost is reflected in an account called
Paid-in Capital-treasury stock.
Cash
$$$
Treasury Stock
$$$
Paid-in Capital- treasury stock
$$$
Example of Treasury Stock:
ADB Corporation had the following transactions during 2009
January 7 Purchased 1,000 shares of outstanding common
stock at $18 per share
February 8 Sold 400 shares of treasury stock at $20 per
share
March 10 Sold 250 shares of treasury stock at $16 per
share
Journal entry of example of treasury stock:
January 7
Treasury stock
$18,000
Cash
February 8
March 10
Cash
$18,000
$8,000
Treasury stock
$7,200
Paid-in capital- treasury stock
$800
Cash
$4,000
Paid-in capital-treasury stock
$500
Treasury stock
$4,500
When a company experience financial problems, stockholders
may
DonateCash
shares back to the company so that$$$
they may be resold.
Paid-in Capital-donation
$$$
On April 1 , animal corporation received 1,500 shares of $10 on
par value of donation common stock from its stockholders. And
then on April 10 the corporation sold 500 share at $15 per
share.
April 1
Memorandum: received 1,500 shares of donated
common stock having a par value of $10
April 10
Cash
$7,500
Paid-in Capital-donation
$7,500
VIII. Dividends
A dividend is a distribution of the assets of a corporation to its
shareholders.
Three important dates associated with dividends are:
- Declaration date: the date upon which a divided is
declared by the board of directors.
- Date of record: the date upon which a stockholder
must hold the stock in order to entitled to receive
the dividend.
- Payment date : the date the stockholder receives the
dividend.
Journal entries are made on the declaration date and payment date.
No entry is made on the date on record.
Dividends are divided into two forms:
- Cash dividends
- Stock dividends.
Cash dividends:
A cash dividend is a payment made by a company out of its
earning to investor in the form of cash.
Example of Cash dividends:
On October 2 ,2008, a cash dividend of $2 per share on 5,000 shares
of $10 par value common stock. The record date is October
20,2008.
Payment is to be made on December 5 , 2008.
October 2
Retained Earnings
$10,000
Cash dividends payable
$10,000
October 20
No entry
December 5 Cash dividends payable
Cash
$10,000
$10,000
Stock dividends:
A stock dividend : is an increase in the amount of shares of a
company with a new shares being given to the shareholders
Stock dividends are divided into two kinds :
- Small stock dividends
- Large stock dividends.
A small stock dividend : when amount to be distributed are less
than 20-25 percent of the outstanding stock.
Retained Earnings ( based on the market value of the shares)
Stock dividend distributable( based on the par value of
shares)
Premium on Common Stock
A large stock dividend : when amounts to be distributed are more
than 20-25 percent of the outstanding stock.(
Retained Earnings ( based on the par value of the shares)
Stock dividend distributable
The entry for the actual stock issuance is the same whether there
is a small or large stock dividend.
Stock dividend distributable
Common Stock
$$$
$$$
Example of Stock dividends:
Chan Vatana Corporation has 40,000 shares of $10 par value
common stock outstanding. On August 5,2007, it declared a 5
percent stock divided to the shareholders to record on August 25.
On August 5, the market price of the stock was $25 per share.
The issuance date is September 10,2007.
Aug. 5 Retained Earning
$50,000
Common stock dividend distributable
$20,000
Premium on Common Stock
$30,000
Aug.25
No entry
Sep.10 Common stock dividend distributable
$20,000
IX. Retained Earnings
Retained earnings is the accumulated earnings of the business
that have not been distributed to stockholders.
Retained earnings may be either un appropriated and
appropriated .
Un appropriated retained earnings is free for dividend distribution.
Appropriated retained earnings is reserved and unavailable for
dividend distribution.
Retained Earning
Appropriation of Retained Earning
$$$
$$$$
When the appropriation is no longer needed, the above entry is
reversed:
Appropriation of Retained Earning
$$$$
Retained Earning
$$$
ABC Corporation has a balance in retained earnings of
$70,000.
The company decides to establish a reserve for plant expansion
of $20,000.
Retained Earnings
$20,000
Appropriation for Plant Expansion
$20,000
The company acquires $6,000 of treasury stock. The entry for the
appropriation is :
Retained Earnings
Appropriation for Treasury Stock
5,000
5,000
The Treasury stock costing $3,000 is sold:
Appropriation for Treasury Stock
Retained Earning
$3,000
$3,000
Under the stockholder’s equity section, retained earning would
be broken down as follows:
Un appropriated retained earnings
$48,000
Appropriated retained earnings:
For Plant Expansion
$20,000
For Treasury Stock
$2,000
Total Retained Earnings
$60,000
Stockholders’ Equity
Capital Stock:
Preferred stock
Common stock
Common stock subscribed
Common stock dividend distributable
Paid-in Capital:
Premium on Preferred stock
Premium on Common stock
Paid-in Capital-donation
Paid-in Capital-Treasury stock
Retained :
Un appropriated retained earnings
Appropriated Retained Earnings
Subtotal:
Less: Treasury Stock
Total Stockholders’ Equity
Exercise of Accounting for Corporation:
Pen Ret Corp. completed the following transaction in 2009 :
1. Issued 20,000 shares of $10 par common stock at par
2. Issued 2,000 shares of $30 started value preferred stock at 32
per share.
3. Purchased 500 shares of common stock as treasury stock for
$15 per share.
4. Declared a 5 percent dividend on preferred stock.
5. Sold 300 shares of treasury for $18 per share.
6. Paid the cash dividend on preferred stock that was declared in
event 4.
7. Appropriated $6,000 of retained earnings.
Prepare journal entry and stockholders’ equity of December 31,2009