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Corporations:
Organization, Stock
Transactions, and
Dividends
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Characteristics of a Corporation
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13-1
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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13-1
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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13-1
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.
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13-1
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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Exhibit 1 Organizational Structure of a
Corporation
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13-1
Stockholders
Board of Directors
Officers
Employees
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Advantages of the Corporate Form
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 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)
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Advantages of the Corporate Form
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13-1
 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)
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Disadvantages of the
Corporate Form
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 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.
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Organization Structure of a Corporation
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13-1
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:
Jan. 5 Organizational Expense
Cash
8 500 00
8 500 00
Paid costs of organizing
the corporation.
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Objective 2
13-2
Describe the two main
sources of
stockholders’ equity.
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13-2
The owner’s equity in a corporation
is called stockholders’ equity,
shareholders’ equity, shareholders’
investment, or capital.
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Stockholders’ Equity
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13-2
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).
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Stockholders’ Equity Section of a
Corporate Balance Sheet
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Stockholders’ Equity
Paid-in capital:
Common stock
Retained earnings
Total stockholders’ equity
13-2
$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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13-2
A debit balance in Retained
Earnings is called a deficit.
Such a balance results from
accumulated net losses.
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Objective 3
13-3
Describe and illustrate the
characteristics of stock,
classes of stock, and
entries for issuing stock.
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Characteristics of Stock
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13-3
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.
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13-3
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.
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13-3
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.
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Number of Shares Authorized,
Issued, and Outstanding
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13-3
Outstanding
Authorized
Issued
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Major Rights That Accompany
Ownership of a Share of Stock
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13-3
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.
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Two Primary Classes of Paid-In Capital
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13-3
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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13-3
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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
Net income
Amount retained
Amount distributed
2007
2008
$20,000 $9,000 $62,000
10,000 6,000 40,000
$10,000 $3,000 $22,000
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Dividends to Common
and Preferred Stock
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13-3
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Issuing Stock
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13-3
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
1,500 000 00
500 000 00
1,000 000 00
common stock at par for cash.
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13-3
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.
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Premium on Stock
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13-3
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
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13-3
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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.
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No-Par Stock
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13-3
A corporation issues 10,000 shares of nopar common stock at $40 a share.
Cash
Common Stock
Issued 10,000 shares of nopar common stock at $40.
400 000 00
400 000 00
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13-3
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-par
36 000 00
common stock at $36.
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Stated Value
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13-3
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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Stated Value
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13-3
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 nopar common at $40. Stated
value, $25.
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13-3
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 nopar common at $36. Stated
value, $25.
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Objective 4
13-4
Journalize the entries
for cash dividends and
stock dividends.
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Knives are up sharply
Dairy cows were steered into a bull market
Pencils lost a point
Hiking gear is trailing
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Cash Dividends
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13-4
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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Three Important Dividend Dates
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13-4
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.
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13-4
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.
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Three Important Dividend Dates
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13-4
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.
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Three Important Dividend Dates
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13-4
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.
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Stock Dividends
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13-4
A distribution of dividends
to stockholders in the form
of the firm’s own shares is
called a stock dividend.
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13-4
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.
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13-4
The entry to record the declaration of the 5
percent stock dividend is as follows:
Dec. 15 Stock Dividend (100,000 x $31 market)
Stock Dividend Distributable
3,100 000 00
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.
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13-4
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.
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Objective 5
13-5
Journalize the entries
for treasury stock
transactions.
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• Analysts reported the cereal market popped
after a cold snap causing Kellogg stock to
crackle
• Kimberly-Clark reported that while
Huggies dropped, Cottonelle cleaned up
the market and Scott tissue touched a new
bottom
• Meanwhile, Coca-Cola fizzled
• While Pepsi went flat
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Treasury Stock Transactions
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13-5
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.
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13-5
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.
Treasury Stock
Cash
45 000 00
45 000 00
Purchased 1,000 shares of
treasury stock at $45.
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13-5
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.
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13-5
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.
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Objective 6
13-6
Describe and illustrate
the reporting of
stockholders’ equity.
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The price of Helium is up
Feathers are down
The paper industry is stationary
Fluorescent tubing was dimmed today with
light trading
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Stockholders’ Equity
Section of a Balance Sheet
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13-6
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Retained Earnings
Statement
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13-6
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Restrictions
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13-6
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.
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Statement of
Stockholders’ Equity
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13-6
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Objective 7
13-7
Describe the effect of
stock splits on
corporate financial
statements.
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• Elevators rose while escalators continued their
slow decline
• Weights were up in heavy trading
• Light switches were off
• Mining industry hit rock bottom
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Stock Splits
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13-7
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.
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13-7
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.
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BEFORE
STOCK SPLIT
13-7
AFTER 5:1
STOCK SPLIT
4 shares, $100 par
20 shares, $20 par
$400 total par value
$400 total par value
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13-7
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.
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After studying this chapter, you should
be able to:
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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After studying this chapter, you should
be able to:
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.
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Objective 1
13-1
Describe the nature of
the corporate form of
organization.
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13-1
Forming a Corporation
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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)
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Examples of Corporations
and Their States of
Incorporation
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13-1
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14
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Forming a Corporation
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13-1
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)
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