1. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Corporations: Organization and Capital Stock Chapter 18

2. Learning Objective 1 Defining a corporation; establishing a corporation; listing the advantages and disadvantages of a corporation © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

3. Corporation Business organization that is both a legal and accounting entity Incorporators - those wishing to form the corporation ◦ Submit articles of incorporation to the state when applying for charter © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

4. Articles of Incorporation Name of corporation/incorporation date Purpose of business Organizational structure Expected life (usually forever) Primary business location Types of stocks to be offered © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

5. Forming a Corporation Four steps: 1.Apply to a state for a charter. 2.Office of the Secretary of State reviews and issues charter to incorporators. 3.Stock is issued by corporation to owners (stockholders). 4.Stockholders meet to elect board of directors and adopt bylaws. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

6. Advantages of Corporate Structure 1.Limited liability/Separate legal entity - not personally liable for corporate obligations 2.Unlimited life - goes on forever 3.Ease of transferring ownership interest - ownership is transferred through shares of stock 4.No mutual agency - actions of one stockholder are not binding to the corporation 5.Ease of raising capital - can raise large amounts of capital by assembling investment groups of stockholders © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

7. Disadvantages of Corporate Structure 1.Difficulties in forming a corporation: -More difficult to form than sole proprietorship/partnership -Government regulations - file many governmental reports -Have to hire lawyer due to legal aspects 2.Corporate Taxation: -May be t axed at state and local levels -Double taxation - earnings of the corporation are taxed at the corporate level as well as the personal level © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

8. Learning Objective 2 Journalizing entries for issuing par-value stock, no-par stock, and no-par with stated value stock © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

9. Stockholders’ Equity Two sections: Paid-in capital – represents what stockholders have invested into the corporation Retained earnings – accumulated profits of corporation that have been kept in the business © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

10. Capital Stock Classes of stock that represent the fractional elements of ownership of a corporation 2 Classes: ◦ Common ◦ Preferred © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

11. Capital Stock Authorized capital stock – number of shares listed in charter Issued capital stock – shares sold to stockholders Outstanding capital stock – shares sold and in stockholders’ possession © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

12. Characteristics of Common Stock Basic ownership equity – rights 1. Right to vote at stockholders’ meetings 2. Right to share in profits by receiving dividends 3. Right to dispose of or sell their stock 4. Right to maintain their proportionate ownership interest (preemptive right) 5. Right, upon liquidation of company, to share in assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

13. Characteristics of Preferred Stock Has preference to corporation’s profits and assets over Common Stock holders Often give up some of the rights in return for more stable earnings - voting, preemptive, earnings potential Less risky investment than Common Stock © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

14. Dividends on Common and Preferred Stock Cash or other assets or shares of stock that a corporation issues to the stockholders Must be voted by the board of directors ◦ Bad years may not allow a dividend ◦ May vote against a dividend even in good year © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

15. Features of Preferred Stock Cumulative - holders have a right to certain dividends each year; dividend will accumulate if not paid Noncumulative - holders have a right to current year’s dividend; does not accumulate Nonparticipating - holders receive a certain percentage as dividend; remainder goes to Common Stock Participating - holders get yearly dividend and can get a percentage of what’s left over. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

16. Stock Value Par value ◦ Arbitrary value placed on each share of stock ◦ Represents minimum legal capital – amount a corporation must retain in the business for protection of creditors ◦ Stated on stock certificate No-par stock ◦ Stock with no par value ◦ Entire proceeds from selling represents the legal capital © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

17. Stock Value Stated value ◦ Most states permit or require that directors set a stated value ◦ Arbitrary; can be changed by board of directors ◦ Value is not printed on stock certificates ◦ Directors can change without state approval ◦ Does not mean market value © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

18. Recording Capital Stock Transactions New stockholders’ equity accounts ◦ Common Stock ◦ Preferred Stock ◦ Paid-in Capital in Excess of Par Value - difference between what stockholders invest and par value. ◦ Paid-in Capital in Excess of Stated Value - difference between what stockholders invest and stated value placed on stock by board of directors ◦ Retained Earnings © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

19. Recording Capital Stock Transactions Selling Common Stock at par: Martin Co. sells 100 shares of $5 par value Common Stock at $5 per share. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2 Mar. 7

20. Recording Capital Stock Transactions Selling preferred stock at par: Martin Co. sells 50 shares of $100 par value preferred stock at $100 per share. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2 Mar. 8

21. Recording Capital Stock Transactions Selling Common Stock at a premium: Martin Co. sells 100 shares of $5 par value Common Stock at $8 per share. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2 Mar. 10 Paid-in Capital in Excess of Par, Common

22. Recording Capital Stock Transactions Selling Common Stock at a Discount: Martin Co. sells 100 shares of $5 par- value Common Stock at $4 per share. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2 Mar. 15

23. Recording Capital Stock Transactions Selling no-par Common Stock with no stated value: Martin Co. sells 100 shares of no-par value Common Stock at $6 per share. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2 Apr. 7

24. Recording Capital Stock Transactions Selling no-par Common Stock above stated value: Martin Co. sells 100 shares of no- par, $5 stated value Common Stock at $6 per share. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2 Apr. 21 Paid-in Capital in Excess of Stated Value, Common

25. Recording Capital Stock Transactions Exchanging stock for noncash assets: Martin Co. exchanges 1,000 shares of $5 par- value Common Stock for equipment with a fair value of $8,000. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2 May 7 Paid-in Capital in Excess of Par, Common

26. Learning Objective 3 Calculating dividends on preferred and Common Stock © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

27. Calculating Dividends Step 1: Calculate preferred dividend. Step 2: Calculate common dividend. Step 3: If preferred is fully participating, find total par value. Step 4: Allocate remainder of the dividend to preferred and common based on percentage of total par. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

28. Problem 18B-2 Calculate preferred dividend 10,000 x $20 x 10% = $20,000 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

29. Problem 18B-2 (a) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater YearDividend Declared Preferred Dividend Common Dividend 20X1$ 0 20X216,000 0 20X380,00020,00060,000 20X484,00020,00064,000 20X5120,00020,000100,000 Preferred is noncumulative & nonparticipating LO-3

30. Problem 18B-2 (b) YearDividend Declared Preferred Dividend Common Dividend 20X1$ 0 20X216,000 0 20X380,00044,00036,000 20X484,00020,00064,000 20X5120,00020,000100,000 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Preferred is cumulative & nonparticipating $20,000 in arrears after 20X1 $24,000 in arrears after 20X2 LO-3

31. Problem 18B-2 (c) YearDividend Declared Preferred Dividend Common Dividend 20X1$ 0 20X216,000 0 20X380,00044,00036,000 20X484,000CalculatedOn 20X5120,000UpcomingSlides © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Preferred is cumulative & fully participating LO-3 $20,000 in arrears after 20X1 $24,000 in arrears after 20X2

32. Calculating Dividends for 20X4 Step 1: Calculate preferred dividend. 10,000 x $20 x 10% = $20,000 Step 2: Calculate common dividend. 120,000 shares x $5 x 10% = $60,000 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

33. Calculating Dividends for 20X4 YearDividend Declared Preferred Dividend Common Dividend 20X4$84,000 (80,000)$20,000$60,000 $4,000 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Preferred is cumulative & fully participating LO-3

34. Calculating Dividends for 20X4 Step 3: If preferred is fully participating, find total par value. Preferred: 10,000 x $20$200,000 Common: 120,000 x $5600,000 Total par value$800,000 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

35. Calculating Dividends for 20X4 Step 4: Allocate remainder of the dividend to preferred and common based on percentage of total par. Preferred: $200,000/$800,000 = 25% Common: $600,000/$800,000 = 75% © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

36. Calculating Dividends for 20X4 YearDividend Declared Preferred Dividend Common Dividend 20X4$84,000 (80,000)$20,000$60,000 $4,0001,0003,000 Totals $21,000$63,000 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Preferred is cumulative & fully participating LO-3

37. Calculating Dividends for 20X5 YearDividend Declared Preferred Dividend Common Dividend 20X5$120,000 (80,000)$20,000$60,000 $40,00010,00030,000 Totals$30,000$90,000 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Preferred is cumulative & fully participating LO-3

38. Learning Objective 4 Recording capital stock transactions under a stock subscription plan © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

39. Stock Subscriptions Contractual agreement to buy a certain number of shares of stock from a corporation at a specific price New accounts ◦ Subscriptions Receivable – current asset on balance sheet; represents the amount due on subscriptions ◦ Common Stock Subscribed – temporary stockholders’ equity account © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

40. Problem 18B-4(1) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

41. Problem 18B-4(1) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

42. Problem 18B-4(1) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

43. Stockholders’ Equity-Problem 18B-3 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

44. End of Chapter 18