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Corporations: Formation and Capital Stock Transactions Section 1: Forming a Corporation Chapter 20 Section Objectives 20-1 Explain the characteristics of a corporation Describe special “hybrid” organizations that have some characteristics of partnerships and some characteristics of corporations.

Created by corporate charter issued by a state government. Can enter into contracts and own property. Can have few or many owners. Can be privately held or publicly held. Has shareholders who own the shares of stock. They are the owners of the corporation. Explain the characteristics of a corporation. Objective

AdvantagesDisadvantages Ease of raising capital. Limited liability. Restricted agency. Continuous existence. Transferability of ownership rights. Corporate income tax. Governmental regulation. Corporations 20-4

Subchapter S corporation. Limited liability partnerships (LLP). Limited liability companies (LLCs). “Hybrid” Business Entities: Hybrid entities have characteristics of partnerships and corporations. Describe special “hybrid” organizations. Objective

After a Corporate Charter Is Issued Shareholders elect permanent directors.Directors or shareholders approve bylaws.Board selects corporate officers.Shares are issued to individuals who have paid full purchase price of the stock. Organizers elect an acting board of directors. Officers hire employees and begin operations. 20-6

Corporations: Formation and Capital Stock Transactions Section 2: Types of Capital Stock Chapter 20 Section Objectives 20-3 Describe the different types of stock Compute the number of shares of common stock to be issued on the conversion of convertible preferred stock Compute dividends payable on stock. 20-7

Capital Stock Authorized shares: The number of shares that can be sold. Issued shares: The number of shares that have been sold. Outstanding shares: The number of shares still in circulation. Outstanding stock = Issued stock – Treasury stock 20-8

The price per share at which stock is bought and sold. Specified in the corporate charter and assigned to each share of stock for accounting purposes. A value assigned to no-par stock by the board of directors for accounting and legal purposes. Par Value Stated Value Market Value Capital Stock Values 20-9

CommonPreferred Stock Classes If there is only one class of stock, common stock is issued. Each share carries the same rights and privileges as every other share. Preferred stock has special claims on a corporation’s profits or, in case of liquidation, corporate assets. Describe the different types of stock. Objective

Compute the number of shares of common stock to be issued on the conversion of convertible preferred stock. Objective

Dividends are distributions of the profits of a corporation to its shareholders. ANSWER: QUESTION: What are dividends? The board of directors declares dividends. Compute dividends payable on stock. Objective

Dividend Rights on Preferred Stock: Cumulative preferred stock. Noncumulative preferred stock. Nonparticipating preferred stock. Participating preferred stock

Capital Stock on the Balance Sheet  Capital stock represents the equity in a corporation.  Common stock and preferred stock are reported separately.  Since the owners of a corporation are stockholders, the equity section of the balance sheet is titled “Stockholders’ Equity.” 20-14

Corporations: Formation and Capital Stock Transactions Section 3: Recording Capital Stock Transactions Chapter 20 Section Objectives 20-6 Record the issuance of capital stock at par value Prepare a balance sheet for a corporation Record organization costs Record stock issued at a premium, and stock with no par value Record transactions for stock subscriptions Describe the capital stock records for a corporation

Cash Noncash assets Services rendered Recording the Issuance of Stock Stock is issued after the purchaser has paid for it in full with one of the following: Record the issuance of capital stock at par value. Objective

Preparing a Balance Sheet for a Corporation: Objective

Subscriptions for Capital Stock Stockholder signs a subscription contract. (It details stock price and payment plan.) Stockholder pays for stock at a later date. Stockholder receives stock when payment is made. Record transactions for stock subscriptions. Objective

Special Corporation Records and Agents Corporations keep detailed records of stockholders’ equity and special corporate records such as: Meeting minutes Corporate bylaws Stock certificate books Stock ledgers Stock transfer records Describe the capital stock records for a corporation. Objective

Thank You for using College Accounting, 14th Edition Price Haddock Farina 20-20