Presentation on theme: "Chapter 14 Sole Proprietorships, Partnerships, and Corporations."— Presentation transcript:
Chapter 14 Sole Proprietorships, Partnerships, and Corporations
14-1 Partnership Characteristics – Advantages and Disadvantages Partnership Characteristics The partnership is a voluntary association of individuals based on a legally binding contract. A partnership has mutual agency where each partner acts on behalf of the partnership when engaging in partner business. The partnership is a limited life dependent upon the partnership contract. The partners have unlimited liability making each partner individually liable for all partnership liabilities. Partner assets are co-owned by the partners. AdvantagesDisadvantages The combination of the skills and resources of two or more individuals. Mutual agency. Partnerships are easily formed and relatively free from governmental regulations and restrictions. Unlimited liability. Decisions can be made quickly on substantive matters affecting the firm. Limited life.
14-2 Partnership Agreement or Articles of Co-Partnership Name and principal location of the firm Purpose of the business Date of inception Names and capital contributions of partners Rights and duties of partners Basis for sharing net income or net loss Provision for withdrawals of income Procedures for submitting disputes to arbitration Procedures for the withdrawal or addition of a partner Rights and duties of surviving partners in the event of a partner’s death
14-3 Entries Required when Forming a Partnership Book ValueMarket Value A. RolfeT. SheaA. RolfeT. Shea Cash$8,000$9,000$8,000$9,000 Equipment5,0004,000 Accumulated depreciation(2,000) Accounts receivable4,000 Allowance for doubtful accounts(700)(1,000) $11,000$12,300$12,000 Entries to record the investment are: Investment of A. Rolfe Cash8,000 Equipment4,000 A. Rolfe, Capital (To record investment by A. Rolfe) 12,000 Investment of T. Shea Cash9,000 Accounts Receivable4,000 Allowance for Doubtful Accounts1,000 T. Shea, Capital (To record investment by T. Shea) 12,000
14-4 Corporate Characteristics – Advantages and Disadvantages ADVANTAGESDISADVANTAGES Separate legal existence Corporation management – separation of ownership and management Limited liability of stockholders Transferable ownership rights Ability to acquire capitalGovernment regulations Continuous life Additional taxes Corporation management – professional managers CORPORATE FORM OF BUSINESS ORGANIZATION
14-5 Stock Issue Terms Shares Authorized Anticipated number of shares to meet the needs of the company and included in the corporate charter. Par Value The legal amount assigned to each share of stock in the corporate charter. Market Value Actual market price paid for the stock in an arm’s length transaction. Shares Issued Actual number of shares that are sold to investors or underwriters. RELATIONSHIP OF PAR AND NO-PAR VALUE STOCK TO LEGAL CAPITAL StockLegal Capital per Share Par value No-par value with stated valueStated value No-par value without stated valueEntire proceeds
14-6 Issue of Stock Boomer Corporation issues 2,000 shares of common stock at $10 per share. Stock has $4 par value.Stock has no par value. Cash20,000Cash20,000 Common Stock8,000 Common Stock20,000 Paid-in Capital in Excess of Par Value 12,000 Stock has $4 stated value.Stock has no stated value. Cash20,000Cash20,000 Common Stock8,000 Common Stock8,000 Paid-in Capital in Excess of Stated Value 12,000 Note: The amount credited to the Common Stock account becomes legal capital.
14-7 Treasury Stock Transactions Boomer Corporation acquires 100 shares of its $4 par value common stock at $15 per share and holds them as treasury stock. Treasury Stock1,500 Cash1,500 Boomer Corporation sells 25 shares of its treasury stock for $18 per share. Cash450 Treasury Stock375 Paid-in Capital from Treasury Stock75 Boomer Corporation sells 25 shares of its treasury stock for $14 per share. Cash350 Paid-in Capital from Treasury Stock25 Treasury Stock375
14-8 Requirements for Cash Dividends 1.Retained earnings. 2.Adequate cash. 3.A declaration of dividends (by board of directors). BOARD OF DIRECTORS RELEVANT DIVDEND DATES AND ENTRIES FOR CASH DIVIDENDS Declaration DateRetained EarningsXXX Dividends PayableXXX Record DateNo entry Payment DateDividends PayableXXX CashXXX STOCKHOLDERS
14-9 Stock Dividends REASONS FOR STOCK DIVIDENDS 1. Satisfy dividend expectations of stockholders without spending cash. 2. Increase marketability of stock by increasing the number of shares outstanding and thereby decreasing the market price per share. 3. Emphasize the permanent reinvestment of stockholders’ equity that is unavailable for cash dividends. BOARD OF DIRECTORS SUMMARY OF STOCK DIVIDEND ENTRIES Declaration DateRetained EarningsXXX Common Stock Dividends DistributableXXX Paid-in Capital in Excess of ParXXX Issuance DateCommon Stock Dividends DistributableXXX Common StockXXX Small stock dividendsRetained earnings reduced by fair market value of stock. Large stock dividendsRetained earnings reduced by par value of stock. STOCKHOLDERS
14-10 Effects of a Stock Dividend on Stockholders’ Equity Stockholders’ Equity Before a 10% Stock Dividend Stockholders’ Equity Paid-in capital Common Stock, $10 par value, 100,000 shares issued and outstanding$1,000,000 Additional paid-in capital in excess of par value200,000 Total paid-in capital1,200,000 Retained earnings300,000 Total stockholders’ equity$1,500,000 (Market Value = $15) Board of Directors Declares and Distributes a 10% Stock Dividend Entries: Retained Earnings (100,000 X.10 X $15)150,000 Common Stock Dividends Distributable100,000 Paid-in Capital in Excess of Par Value50,000 Common Stock Dividends Distributable100,000 Common Stock100,000
14-10 Effects of a Stock Dividend on Stockholders’ Equity (continued) Stockholders’ Equity After a 10% Stock Dividend Stockholders’ Equity Paid-in capital Common Stock, $10 par value, 110,000 shares issued and outstanding$1,100,000 Additional paid-in capital in excess of par value250,000 Total paid-in capital1,350,000 Retained earnings150,000 Total stockholders’ equity$1,500,000
14-11 Effect of a Stock Split on Stockholders’ Equity Stockholders’ Equity Before a 2 for 1 Stock Split Stockholders’ Equity Paid-in capital Common Stock, $10 par value, 100,000 shares issued and outstanding$1,000,000 Additional paid-in capital in excess of par value200,000 Total paid-in capital1,200,000 Retained earnings300,000 Total stockholders’ equity$1,500,000 Stockholders’ Equity After a 2 for 1 Stock Split Stockholders’ Equity Paid-in capital Common Stock, $5 par value, 200,000 shares issued and outstanding$1,000,000 Additional paid-in capital in excess of par value200,000 Total paid-in capital1,200,000 Retained earnings300,000 Total stockholders’ equity$1,500,000 Comparative Effects ItemStock SplitStock Dividend Total paid-in capitalNo changeIncrease Total retained earningsNo changeDecrease Total par value (common stock)No changeIncrease Par value per shareDecreaseNo change
14-12 Retained Earnings Statement KAYTEL, INC. Retained Earnings Statement For the Year Ended December 31, 2008 Balance, January 1, as reported $900,000 Correction for Understatement of Net Income in Prior Period (Inventory error) 75,000 Balance, January 1, as adjusted 975,000 Add:Net income 400,000 1,375,000 Less : Cash dividends$75,000 Stock dividends50, ,000 Balance December 31 $1,250,000