Corporations:
Organization and Capital Stock
Chapter 19
19- 1
Learning Objective 1
Defining a corporation;
establishing a corporation;
listing the advantages and
disadvantages of a corporation.
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Learning Unit 19-1
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What are the steps in forming a corporation?
Incorporators write up and submit articles
of incorporation to the state.
The Secretary of State issues a charter.
Stockholders are the owners.
A board of directors is elected by stockholders
at the first meeting.
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Learning Unit 19-1
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What are some advantages of the corporate
form of organization?
limited liability/separate legal entity
unlimited life
ease of transferring ownership
no mutual agency
ease of raising capital
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Learning Unit 19-1
What are some disadvantages?
– difficulties in forming a corporation
– corporate taxation (double taxation)
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Learning Objective 2
Journalizing entries for issuing
par-value stock, no-par stock,
and no-par with stated value stock.
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Learning Unit 19-2
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Stockholders’ equity must be separated into
two categories.
Paid-in Capital
Retained Earnings
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Learning Unit 19-2
Capital stock is the amount paid to the
business.
 Par value is the legal capital assigned to
each share.
 Usually it is the amount paid to the
corporation for the initial issuances of stock.
 Retained earnings is net income less net loss
less dividends.
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19- 8
Learning Unit 19-2
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What are some characteristics of common
stock?
voting rights
profit sharing
selling the stock
preemptive right (right to maintain
ownership ratio)
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Learning Unit 19-2
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What are some characteristics of preferred
stock?
first claim to dividend distribution
usually have no voting rights
19- 10
Learning Unit 19-2
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Dividends are paid to stockholders as their
share of the corporation’s profit.
common dividends
preferred dividends
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Learning Unit 19-2
Cumulative preferred stockholders have a
right to receive a dividend each year.
 Amounts not declared and paid accumulate
each year.
 These are paid before any current year
dividends (dividends in arrears).
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19- 12
Learning Unit 19-3
R.C. sells 200 shares of a
$10 par value common stock at par.
Accounts Affected
Category
Cash
Asset
Dr. 2,000
SE
Cr. 2,000
Common Stock
Rules
19- 13
Learning Unit 19-3
Assume R.C. sells 100 shares of $5 par
value common stock at $20.
 100 shares × $5.00 par value = $500
 100 shares × $20.00 market value = $2,000
 What is the journal entry?
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19- 14
Learning Unit 19-3
Cash
2,000
Common Stock
Paid-in-Cap in Excess of
Par Value – Common
Issued par value common stock
500
1,500
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Learning Unit 19-3
R.C. sells 300 shares of a no-par,
common stock for $20 per share.
Accounts Affected
Category
Cash
Asset
Dr. 6,000
SE
Cr. 6,000
Common Stock
Rules
19- 16
Learning Objective 3
Calculating dividends on
preferred and common stock.
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Learning Unit 19-3
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A $150,000 dividend was declared.
preferred stock 6%,
1,000 shares,
$200 par,
and fully
participative
common stock,
6,000 shares,
$100 par
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Learning Unit 19-3
Preferred dividend:
 6% × $200 × 1,000 = $12,000
Common dividend:
 6% × $100 × 6,000 = $36,000
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How do we allocate the remaining $102,000?
19- 19
Learning Unit 19-3
Preferred stock
$200,000 ÷ $800,000 × $102.000 = $25,500
Common stock
$600,000 ÷ $800,000 × $102.000 = $76,500
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Learning Objective 4
Recording capital stock transactions
under a stock subscription plan.
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Learning Unit 19-4
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Subscriptions Receivable—Common Stock is an
asset account. It is debited when the contract is
signed.
A temporary stockholder equity account, called
Common Stock Subscribed, is credited for the the
par value of the stock.
Paid-in Capital in Excess of Par Value—Common
is credited for any amounts above par value.
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Learning Unit 19-4
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When stock is fully paid it is issued, and
then the par value is transferred to common
stock.
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Assume that R.C. received subscriptions
for 1,000 shares of $100 par value common
stock at $160 per share. What is the entry?
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Learning Unit 19-4
Subscription Receivable
160,000
Common Stock
Paid-in Capital
in Excess of Par Value
Received stock subscriptions
100,000
60,000
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Learning Unit 19-4
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The balance sheet must show
stockholders’ equity with two divisions.
Paid-in capital
common stock (par value)
common stock subscribed (if any not fully
paid)
paid-in capital in excess of par
Retained earnings
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End of Chapter 19
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