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C11 - 1 Learning Objectives Power Notes 1. Nature of a Corporation 2. Stockholders’ Equity 3. Sources of Paid-in Capital 4. Issuing Stock 5. Treasury Stock.

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Presentation on theme: "C11 - 1 Learning Objectives Power Notes 1. Nature of a Corporation 2. Stockholders’ Equity 3. Sources of Paid-in Capital 4. Issuing Stock 5. Treasury Stock."— Presentation transcript:

1 C Learning Objectives Power Notes 1. Nature of a Corporation 2. Stockholders’ Equity 3. Sources of Paid-in Capital 4. Issuing Stock 5. Treasury Stock Transactions 6. Stock Splits 7. Accounting for Dividends 8. Financial Analysis and Interpretation Chapter F11 C11 Corporations: Organization, Capital Stock, Dividends Corporations: Organization, Capital Stock, Dividends

2 C Characteristics of Corporations Stockholders’ Equity Issuing Stock Treasury Stock Transactions Stock Splits and Dividends Dividend Yield on Common Stock Slide #Power Note Topics Note: To select a topic, type the slide # and press Enter. Power Notes Chapter F11 Corporations: Organization, Capital Stock, Dividends Corporations: Organization, Capital Stock, Dividends

3 C Characteristics of Corporations  As a separate legal entity, a corporation may own and dispose of property in its own name.  The corporation ownership is divided into units called shares of stock. 4 The owners of the shares are called shareholders or stockholders. 4 Stockholders of a corporation have a limited liability.

4 C Characteristics of Corporations Stockholders (owners of corporation stock) Common Stock Common Stock – the basic ownership of stock with rights to vote in election of directors, share in distribution of earnings, and purchase additional shares. Preferred Stock Preferred Stock – A class of stock with preferential rights over common stock in payment of dividends and company liquidation. Classes of Stock

5 C Characteristics of Corporations Board of Directors (elected by stockholders) Stockholders (owners of corporation stock)

6 C Characteristics of Corporations Officers (selected by board of directors) Board of Directors (elected by stockholders) Stockholders (owners of corporation stock)

7 C Characteristics of Corporations Employees (hired by officers) Officers (selected by board of directors) Board of Directors (elected by stockholders) Stockholders (owners of corporation stock)

8 C Forming a Corporation uFirst step is to file an application of incorporation with the state. uBecause state laws differ, corporations often organize in states with more favorable laws. uMore than half of the largest companies are incorporated in Delaware. uState grants a charter or articles of incorporation which formally create the corporation. uManagement and board of directors prepare bylaws which are operation rules and procedures.

9 C DateDescription Debit Credit DateDescription Debit Credit Forming a Corporation Organization Costs8,500 Cash8,500 Jan. 5 Paid organization costs of $8,500. Cost of organizing includes legal fees, taxes and licenses, promotion costs, etc. These costs are recorded as an expense.

10 C Stockholders’ Equity Stockholders’ Equity Assets Liabilities Stockholders’ Equity Stockholders’ Equity = Assets – Liabilities Represents the stockholders’ share of the total assets.

11 C Stockholders’ Equity Stockholders’ Equity Assets Liabilities Stockholders’ Equity Stockholders’ Equity: Paid-in capital: Common stock$330,000 Retained earnings80,000 Total$410,000

12 C Stockholders’ Equity Stockholders’ Equity Assets Liabilities Stockholders’ Equity There are two sources of stockholders’ equity Stockholders’ Equity: Paid-in capital: Common stock$330,000 Retained earnings80,000 Total$410,000

13 C Stockholders’ Equity Stockholders’ Equity Assets Liabilities Stockholders’ Equity fromstockholders Stockholders’ Equity: Paid-in capital: Common stock$330,000 Retained earnings80,000 Total$410,000 There are two sources of stockholders’ equity 1

14 C Stockholders’ Equity Stockholders’ Equity Assets Liabilities Stockholders’ Equity Stockholders’ Equity: Paid-in capital: Common stock$330,000 Retained earnings80,000 Total$410,000 from earnings There are two sources of stockholders’ equity 2

15 C Stockholders’ Equity Stockholders’ Equity Assets Liabilities Stockholders’ Equity There are two sources of stockholders’ equity from stockholders Stockholders’ Equity: Paid-in capital: Common stock$330,000 Retained earnings80,000 Total$410,000 from earnings 1 2

16 C Two Classes of Stockholders Common Stock Common Stock – The basic ownership of stock includes: 1. Right to vote in election of directors and other important matters. 2.Right to share in distribution of earnings. 3.Preemptive right to purchase sufficient shares of new common stock offerings to maintain an existing ownership percentage. Preferred Stock Preferred Stock – A class of stock with preferential rights over common stock with respect to payment of dividends and assets of the corporation in liquidation.

17 C Nonparticipating Preferred Stock Preferred dividend4,0004,0004,000 Common dividend$6,000$31,000$18,000 Dividends per share: Preferred$ 4.00$ 4.00$ 4.00 Common$ 1.50$ 7.75$ 4.50 A nonparticipating preferred stock is limited to a certain amount. Assume 1,000 shares of $4 nonparticipating preferred stock and 4,000 shares of common stock and the following: Net income$20,000$55,000$62,000 Amount retained10,00020,00040,000 Amount distributed$10,000$35,000$22,000

18 C Cumulative Preferred Stock Preferred Dividend: First year in arrears$4,000 Second year in arrears4,000 Third year current4,00012,000 Common dividend$10,000 Dividends per share: Preferred $ Common $ 2.50 Assume 1,000 shares of $4 cumulative preferred stock and 4,000 shares of common stock. No dividends have been paid in the preceding two years. Amount distributed in 3rd year $22,000

19 C DateDescriptionDebitCredit DateDescriptionDebitCredit Issuing Stock Cash1,500,000 Preferred Stock500,000 Common Stock1,000,000 The stock accounts are controlling accounts. A record of each stockholder’s name, address, and number of shares is kept in a stockholders subsidiary ledger. Jan. 5 One-half of each class is issued at par for cash. A corporation is authorized to issue 10,000 shares of preferred stock, $100 par, and 100,000 shares of common stock, $20 par.

20 C DateDescriptionDebitCredit DateDescriptionDebitCredit Premium on Issuing Stock Cash110,000 Preferred Stock100,000 Paid-In Capital in Excess10,000 The $10,000 excess is recorded in a separate account because some states do not consider this to be part of legal capital and may be used for dividends. Many states do not permit issuance at a discount. Jan. 5 Issued 2,000 shares of $50 par preferred stock for $55. When stock is issued for more than its par, the stock has sold at a premium. It has sold at a discount if issued for less than its par.

21 C DateDescriptionDebitCredit DateDescriptionDebitCredit Issuing Stock for Non-Cash Assets Land120,000 Common Stock100,000 Paid-In Capital in Excess20,000 Jan. 5 Acquired land (fair market value cannot be determined) for 10,000 shares of $10 par common. The current market price of the stock is $12 per share. Stock issued for assets other than cash should be recorded at the fair market value of the asset or fair market value of the stock, whichever can be more clearly determined.

22 C DateDescriptionDebitCredit DateDescriptionDebitCredit Issuing No-Par Stock Cash400,000 Common Stock400,000 Cash36,000 Common Stock36,000 Jan. 5 Issuance of 10,000 shares of no-par common at $40. In most states, both preferred and common stock may be issued without a par value. Preferred stock, however, is normally assigned a par value. Jun. 15 Issuance of 1,000 shares of no-par common at $36.

23 C Treasury Stock Transactions A recent survey indicated that over 64% of companies reported treasury stock. Treasury stock Treasury stock is stock that: 1. Has been issued as fully paid. 2.Has been reacquired by the corporation. 3.Has not been canceled or reissued. A commonly used method of accounting for treasury stock is the cost method. Treasury Stock The account Treasury Stock is debited for a purchase. Paid-In Capital from Sale of Treasury Stock When sold, Treasury Stock is credited and any difference is debited or credited to an account titled Paid-In Capital from Sale of Treasury Stock.

24 C DateDescriptionDebitCredit DateDescriptionDebitCredit Treasury Stock Transactions Treasury Stock45,000 Cash45,000 Cash12,000 Treasury Stock9,000 Paid-In Capital–Treasury Stock3,000 Cash8,000 Paid-In Capital–Treasury Stock1,000 Treasury Stock9,000 Jan. 5 Purchased 1,000 shares of treasury stock at $45. Jun. 2 Sold 200 shares of treasury stock at $60. Sold 200 shares of treasury stock at $40. Sep. 3

25 C General Ledger Balance DateItemDebitCredit DebitCredit Account: Treasury Stock Account No /51,000 $4545,00045,000 6/2200 $609,00036,000 9/3200 $409,00027,000 Treasury Stock Transactions – General Ledger Treasury stock is booked at cost upon acquisition and sale.

26 C Balance DateItemDebitCredit DebitCredit Account: Paid-In Capital Treasury Stock Account No /2200 $603,0003,000 9/3200 $401,0002,000 General Ledger Balance DateItemDebitCredit DebitCredit Account: Treasury Stock Account No /51,000 $4545,00045,000 6/2200 $609,00036,000 9/3200 $409,00027,000 Treasury Stock Transactions – General Ledger If treasury stock is sold for more than its cost, the difference is credited to Paid-In Capital Treasury Stock.

27 C Paid-in capital: Common stock, $25 par (20,000 shares authorized and issued) $500,000 Excess of issue price over par150,000 From sale of treasury stock2,000 Total paid-in capital$652,000 Retained earnings130,000 Total$782,000 Deduct treasury stock (600 shares at cost)27,000 Total stockholders’ equity$755,000 Stockholders’ Equity Debit balance of Treasury Stock account.

28 C Corporations sometimes reduce the par or stated value of their common stock by issuing a proportionate number of additional shares. This is called a stock split. An example: A corporation has 10,000 shares of $100 par common stock outstanding when a 5-for-1 stock split is declared. Before: 100,000 $100 par = $10,000,000 After: 500,000 $20 par = $10,000,000 The total legal capital is the same. Only the number of shares and the par per share are changed. No journal entry is required. Accounting for Stock Splits

29 C Dividends 4Dividends are distributions of retained earnings to stockholders. 4Dividends may be paid in cash, stock, or property. 4Dividends, even on cumulative preferred stock, are never required, but once declared become a legal liability of the corporation. 4Cash dividends are declared and paid on shares outstanding with three conditions: 1. Sufficient retained earnings 2. Sufficient cash 3. Formal action by the board of directors

30 C DateDescriptionDebitCredit DateDescriptionDebitCredit Accounting for Cash Dividends Cash Dividends42,500 Cash Dividends Payable42,500 Cash42,500 Dec. 1 Declared cash dividends on preferred and common. Preferred: $2.50 x 5,000 shares = $12,500 Common: $0.30 x 100,000 shares = $30,000 A quarterly cash dividend is declared on 5,000 shares of $100 par 10% preferred stock and $0.30 on the 100,000 shares of $10 par common stock. Jan. 2 Paid cash dividend declared on December 1.

31 C DateDescriptionDebitCredit DateDescriptionDebitCredit Accounting for Stock Dividends Stock Dividends3,100,000 Stock Dividends Distributable2,000,000 Paid-In Capital in Excess of Par1,100,000 Stock Dividends Distributable2,000,000 Common Stock2,000,000 Dec. 15 Declared a 100,000 (5%) stock dividend on common. Market price is $31 a share at declaration date. Stock dividends transfer pro rata shares of stock to stockholders. Assume a 5% stock dividend on common stock, $20 par, 2,000,000 shares issued. Jan. 10 Issued the stock dividend declared on December 15.

32 C Stock Dividends and Stockholders’ Equity Equity per share$37.80$36.00 A Stockholder: Shares owned1,0001,050 Total equity$37,800$37,800 Portion of corporation owned.05%.05% Before After Common stock$40,000,000$42,000,000 Excess of issue price over par9,000,00010,100,000 Retained earnings26,600,00023,500,000 Total stockholders’ equity$75,600,000$75,600,000 Number of shares outstanding2,000,0002,100,000

33 C Stock Dividends and Stockholders’ Equity Equity per share$37.80$36.00 A Stockholder: Shares owned1,0001,050 Total equity$37,800$37,800 Portion of corporation owned.05%.05% Note: The total stockholders’ equity is exactly the same before and after the stock dividend. Before After Common stock$40,000,000$42,000,000 Excess of issue price over par9,000,00010,100,000 Retained earnings26,600,00023,500,000 $75,600,000$75,600,000 Total stockholders’ equity$75,600,000$75,600,000 Number of shares outstanding2,000,0002,100,000

34 C Stock Dividends and Stockholders’ Equity Before After Common stock$40,000,000$42,000,000 Excess of issue price over par9,000,00010,100,000 Retained earnings26,600,00023,500,000 Total stockholders’ equity$75,600,000$75,600,000 Number of shares outstanding2,000,0002,100,000 Note: The individual stockholder’s equity is the same before and after the stock dividend, although the total number of shares have increased by 5%. Equity per share$37.80$36.00 A Stockholder: 1,0001,050 Shares owned1,0001,050 $37,800$37,800 Total equity$37,800$37,800.05%.05% Portion of corporation owned.05%.05%

35 C Profitability Measures — The Common Stockholder Dividend Yield Dividends per share of common$ 0.80$ 0.60 Market price per share of common$20.50$13.50

36 C Profitability Measures — The Common Stockholder Dividend Yield Use:To indicate the rate of return to common stockholders in terms of dividends Dividends per share of common$ 0.80$ 0.60 Market price per share of common$20.50$13.50 Dividend yield on common stock3.9%4.4%

37 C Note: To see the topic slide, type 2 and press Enter. This is the last slide in Chapter F11. Power Notes Chapter F11 Corporations: Organization and Equity Rights Corporations: Organization and Equity Rights


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