Corporations & Stock
Transactions
BY RACHELLE AGATHA, CPA, MBA
Slides by Rachelle Agatha, CPA,
with excerpts from Warren, Reeve, Duchac
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.
2
Objectives:
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.
3
Objective 1
Describe the
nature of the
corporate form of
organization.
4
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.
5
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.
6
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.
7
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.
8
Exhibit 1 Organizational Structure of a
Corporation
Stockholders
Board of Directors
Officers
Employees
9
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.
(Continued)
10
Advantages of the Corporate Form
 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.
(Concluded)
11
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.
12
Forming a Corporation
1. 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 in Slide 14).
(Continued)
13
Corporations and Their States of Incorporation
14
Forming a Corporation
2. After the application is approved, the
state grants a charter or articles of
incorporation which formally
create the corporation.
3. Management and the board of directors
prepare bylaws which are operation
rules and procedures.
(Concluded)
15
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
Cash
8 500 00
8 500 00
Paid costs of
organizing the
corporation.
16
Objective 2
Describe the two
main sources of
stockholders’
equity.
17
The owner’s equity in a
corporation is called
stockholders’ equity,
shareholders’ equity,
shareholders’ investment, or
capital.
18
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).
19
Stockholders’ Equity Section of a
Corporate Balance Sheet
Stockholders’ Equity
Paid-in capital:
Common stock
Retained earnings
Total stockholders’ equity
$330,000
80,000
$410,000
If there is only one class of stock, the
account is entitled Common Stock or
Capital Stock.
20
A debit balance in
Retained Earnings is
called a deficit. Such a
balance results from
accumulated net losses.
21
Objective 3
Describe and
illustrate the
characteristics of
stock, classes of
stock, and entries for
issuing stock.
22
Characteristics of 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.
23
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.
24
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.
Some state laws require that
corporations maintain a minimum
stockholder contribution, called
legal capital, to protect
creditors.
25
Number of Shares Authorized,
Issued, and Outstanding
Outstanding
Authorized
Issued
26
Major Rights That Accompany
Ownership of a Share of Stock
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.
27
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.
28
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:
2006
2007
2008
Net income
$20,000 $9,000 $62,000
Amount retained
10,000 6,000 40,000
Amount distributed $10,000 $3,000 $22,000
29
Dividends to Common
and Preferred Stock
30
Sandpiper Company has stock 20,000 shares of 1%
preferred stock of $100 par and 100,000 shares of
$50 par common stock. The following amounts were
distributed as dividends:
Year 1:
$10,000
Year 2:
25,000
Year 3:
80,000
Determine the dividends per share for preferred and
common stock for each year.
31
Year 1
Amount distributed
Preferred dividend (20,000
shares)
Common dividend (100,000
shares)
Dividends per share:
Preferred
Common stock
Year 2
Year 3
$10,000
$25,000
$80,000
10,000
20,000
20,000
$ 5,000
$60,000
$1.00
$0.05
$1.00
$0.60
$
0
$0.50
None
32
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.
Cash
Preferred Stock
Common Stock
Issued preferred stock and
common stock at par for
cash.
33
1,500 000 00
500 000 00
1,000 000 00
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.
34
Premium on Stock
Caldwell Company issues 2,000 shares of
$50 par preferred stock for cash at $55.
Cash
Preferred Stock
110 000 00
100 000 00
Paid-in Capital in Excess of
Par—Preferred Stock
Issued $50 par preferred
stock at $55.
10 000 00
35
A 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
Common Stock
Paid-in Capital in Excess of Par
100 000 00
20 000 00
Issued $10 par common
stock valued at $12 per
share, for land.
36
No-Par Stock
A corporation issues 10,000 shares of
no-par common stock at $40 a share.
Cash
Common Stock
Issued 10,000 shares of
no-par common stock at
$40.
400 000 00
400 000 00
37
At a later date, the corporation
issues 1,000 additional shares at
$36.
Cash
36 000 00
Common Stock
Issued 1,000 shares of no-
36 000 00
par common stock at $36.
38
Stated Value
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.
39
Stated Value
Using the same data as we used for par the
transaction is recorded as follows:
Cash
400 000 00
Common Stock
Paid-in Capital in Excess of
Stated Value
250 000 00
150 000 00
Issued 10,000 shares of
no-par common at $40.
Stated value, $25.
40
The corporation issued 1,000 shares of no-par
common stock at $36 (stated value, $25).
Cash
36 000 00
Common Stock
Paid-in Capital in Excess of
Stated Value
25 000 00
11 000 00
Issued 1,000 shares of
no-par common at $36.
Stated value, $25.
41
On March 6, Limerick Corporation issued for cash
15,000 shares of no-par common stock at $30. On
April 13, Limerick issued at par 1,000 shares of 4%,
$40 par preferred stock for cash. On May 19, Limerick
issued for cash 15,000 shares of 4%, $40 par preferred
stock at $42.
Journalize the entries to record the March 6, April 13,
and May 19 transactions.
42
Mar. 6 Cash
Common Stock
(15,000 shares x $30)
450,000
450,000
Apr. 13 Cash
40,000
Preferred Stock
(1,000 shares x $40)
May 19 Cash
40,000
630,000
Preferred Stock
Paid-in Capital in Excess of Par
(15,000 shares x $42)
600,000
30,000
43
Objective 4
Journalize the
entries for cash
dividends and
stock dividends.
44
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
45
Three Important Dividend Dates
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.
46
Heber Corporation records the $42,500
liability on the declaration date.
Dec. 1 Cash Dividends
Cash Dividends Payable
42 500 00
42 500 00
Declared cash dividend.
47
Three Important Dividend Dates
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.
48
Three Important Dividend Dates
The third important date is the date of
payment. On January 2, Hiber issues
dividend checks.
Jan. 2 Cash Dividends Payable
Cash
42 500 00
42 500 00
Paid cash dividend.
49
The important dates in connection with a cash
dividend of $75,000 on a corporation’s common stock
are February 26, March 30, and April 2. Journalize
the entries required on each date.
Feb. 26 Cash Dividends
Cash Dividends Payable
75,000
75,000
Mar.30 No entry required.
Apr. 2 Cash Dividends Payable
Cash
75,000
75,000
50
Stock Dividends
A distribution of
dividends to
stockholders in the form
of the firm’s own shares
is called a stock
dividend.
51
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.
52
The entry to record the declaration of the 5
percent stock dividend is as follows:
Dec. 15 Stock Dividend (100,000 x $31 market) 3,100 000 00
Stock Dividend Distributable
2,000 000 00
Paid-in Capital in Excess of
Par—Common Stock
1,100 000 00
Declared 5% (100,000
share) stock dividend on
$20 par common stock
with a market value of $31
per share.
53
On January 10, the number of shares outstanding is increased by 100,000. The
following entry records the issue of the
stock:
Jan. 10 Stock Dividends Distributable
Common Stock
2,000 000 00
2,000 000 00
Issued stock for the stock
dividend.
54
Vienna Highlights Corporation has 150,000 shares of
$100 par common stock outstanding. On June 14,
Vienna Highlights declared a 4% stock dividend to be
issued August 15 to stockholders of record on July 1.
The market price of the stock was $110 a share on
June 14.
Journalize the entries required on June 14, July 1, and
August 15.
55
June 14 Stock Dividends (150,000 x 4% x $110) 660,000
Stock Dividends Distributable
(6,000 x $100)
Paid-in Capital in Excess of Par—
Common Stock ($660,000 – $600,000)
600,000
60,000
July 1 No entry required.
Aug. 15 Stock Dividend Distributable
Common Stock
600,000
600,000
56
Objective 5
Journalize the
entries for
treasury stock
transactions.
57
Treasury Stock Transactions
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.
58
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
Cash
45 000 00
45 000 00
Purchased 1,000 shares of
treasury stock at $45.
59
Later, 200 shares of treasury stock were
sold for $60 per share.
Cash
12 000 00
Treasury Stock*
9 000 00
Paid-in Capital from Sale of
Treasury Stock
3 000 00
Sold 200 of treasury
stock at $60.
*The amount debited to Treasury Stock per share when purchased is
the amount per share that must be credited to that account when sold.
60
Sold 200 shares of treasury stock at $40
per share.
Cash
8 000 00
Paid-in Capital from Sale of
Treasury Stock
Treasury Stock
1 000 00
9 000 00
Sold 200 of treasury
stock at $40.
61
On May 3, Buzz Off Corporation reacquired
3,200 shares of its common stock at $42 per
share. On July 22, Buzz Off sold 2,000 of the
reacquired shares at $47 per share. On August
30, Buzz Off sold the remaining shares at $40
per share.
Journalize the transactions of May 3, July 22,
and August 30.
62
May 3 Treasury Stock (3,200 x $42)
Cash
134,400
134,400
July 22 Cash (2,000 x $47)
94,000
Treasury Stock (2,000 x $42)
84,000
Paid-in Capital from Sale of Treasury
Stock [2,000 x ($47 – $42)]
10,000
Aug.30 Cash (1,200 x $40)
Paid-in Capital from Sale of Treasury
Stock [1,200 x ($42 – $40)]
Treasury Stock (1,200 x $42)
48,000
2,400
50,400
63
Objective 6
Describe and
illustrate the
reporting of
stockholders’
equity.
64
Stockholders’ Equity
Section of a Balance Sheet
65
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
Paid-in Capital in Excess of Par
Paid-in Capital from Sale of
Treasury Stock
Retained Earnings
Treasury Stock
$1,500,000
160,000
44,000
4,395,000
120,000
66
66
Stockholders’ Equity
Paid-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 $1,660,000
From sale of treasury stock
44,000
Total paid-in capital
$1,704,000
Retained earnings
4,395,000
Total
$6,099,000
Deduct treasury stock (5,000 shares at cost)
120,000
Total stockholders’ equity
$5,979,000
67
Retained Earnings
Statement
68
Restrictions
The retained earnings available for
use as dividends may be limited by
the actions 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.
69
Statement of
Stockholders’ Equity
70
Dry Creek Camera Inc. reported the following results for the year
ending March 31, 2008:
Retained earnings, April 1, 2007
Net income
Cash dividends declared
Stock dividends declared
$3,338,500
461,500
80,000
120,000
Prepare a retained earnings statement for the fiscal year ended
March 31, 2008.
71
DRY CREEK CAMERAS INC.
RETAINED EARNINGS STATEMENT
For the Year Ended March 31, 2008
Retained earnings, April 1, 2007
Net income
Less dividends declared
Increase in retained earnings
Retained earnings, March 31, 2008
$3,338,500
$461,500
200,000
261,500
$3,600,000
72
Objective 7
Describe the
effect of stock
splits on
corporate
financial
statements.
73
13-7
Stock Splits
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.
74
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.
75
BEFORE STOCK
SPLIT
AFTER 5:1
STOCK SPLIT
4 shares, $100 par
20 shares, $20 par
$400 total par value
$400 total par value
76
Since a stock split changes only
the par or stated value and the
number of shares outstanding, it
is not recorded by a journal
entry. The details of the stock
split are normally disclosed in the
notes to the financial statements.
77
Summary
 Nature of Corporations
 Main sources of stockholders equity
 Characteristics of stock
 Journalize transactions
 Reporting of Stockholders Equity