11
Corporations: Organization,
Stock Transactions, and
Dividends
11-1
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.
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1
Public Corporations
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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1
Private Corporations
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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1
Board of Directors
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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1
Exhibit 1
Organizational Structure of a Corporation
Stockholders
Board of Directors
Officers
Employees
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1
Characteristics of a Corporation
• A corporation has separate legal
•
•
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existence from its owners.
A corporation has transferable units
of ownership.
A corporation has limited
stockholders’ liability.
1
Exhibit 2
Advantages and Disadvantages
of the Corporate Form
(continued)
11-8
1
Exhibit 2
Advantages and Disadvantages of
the Corporate Form (continued)
Explanation
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1
Forming a Corporation
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).
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1
Exhibit 3
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Examples of Corporations and
Their States of Incorporation
1
Forming a Corporation
• After the application is approved, the state
•
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grants a charter or articles of
incorporation which formally create the
corporation.
Management and the board of directors
prepare bylaws which are operating rules
and procedures.
1
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:
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2
Stockholders’ Equity
The owner’s equity in a corporation is
called stockholders’ equity,
shareholders’ equity, shareholders’
investment, or capital.
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2
The two sources of capital are:
1. Capital contributed
to the corporation
by the stockholders,
called paid-in
capital or
contributed capital.
2. Net income retained
in the business, called
retained earnings.
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2
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.
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3
Number of Shares Authorized,
Issued, and Outstanding
Outstanding
Authorized
Issued
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3
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.
These stock rights normally
vary with the class of stock.
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3
Classes of Stock
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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3
Cumulative Preferred 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.
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3
Example Exercise 11-1
Dividends per Share
Sandpiper Company has 20,000 shares of 1%
cumulative 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:
45,000
Year 3:
80,000
Determine the dividends per share for preferred and
common stock for each year.
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Example Exercise 11-1 (continued)
3
Follow My Example 11-1
Amount distributed
Preferred dividend (20,000
shares)
Common dividend (100,000
shares)
Year 1
Year 2
Year 3
$10,000
$45,000
$80,000
.
,
*(10,000 + $20,000)
Dividends per share:
Preferred
Common stock
$
$
$
$
$
For Practice: PE 11-1A, PE 11-1B
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11-22
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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3
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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3
Premium on Stock
Caldwell Company issues 2,000 shares of
$50 par preferred stock for cash at $55.
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3
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.
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3
No-Par Stock
On January 9, a corporation issues 10,000 shares of nopar common stock at $40 a share. On June 27, the
corporation issues an additional 1,000 shares at $36.
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3
Example Exercise 11-2
Entries for Issuing Stock
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.
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Example Exercise 11-2 (continued)
3
Follow My Example 11-2
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For Practice: PE 11-2A, PE 11-2B
4
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
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4
Date of Declaration
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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4
Date of Record
The date of record is the date the
corporation used to determine
which stockholders will receive the
dividend.
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4
Date of Payment
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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4
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.
Dividend
Total
per Share Dividends
Preferred stock, $100 par,
5,000 shares outstanding… $2.50
Common stock, $10 par,
100,000 shares outstanding $0.30
Total……………………………...
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$12,500
30,000
$42,500
4
On October 1, the declaration date, Hiber
Corporation records the following entry:
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4
On December 10, the date of
record, no entry is required
since this date merely
determines which stockholders
will receive the dividend.
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4
On December 2, the date of payment, Hiber
Corporation records the payment of the
dividend as follows:
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4
Stock Dividends
A distribution of dividends
to stockholders in the form
of the firm’s own shares is
called a stock dividend.
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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:
1. To provide shares for resale to employees
2. To reissue as bonuses to employees, or
3. To support the market price of the stock.
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5
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.
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7
Stock Split
A stock split is a process by which
a corporation reduces the par or
stated value of the common stock
and issues a proportionate number
of additional shares.
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7
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7
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. A stock split does not
require a journal entry.
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