Corporations: Organization, Stock Transactions & Dividends Chapter 11 Corporations: Organization, Stock Transactions & Dividends

Corporation a legal entity, distinct and separate from the individuals who create and operate it can acquire, own, and dispose of property in its own name Sells shares of ownership called _________ The stock of the corporation is owned by _____________________.

What are Public Corporations? 1 What are Public Corporations? .

What are Private Corporations? 1 What are Private Corporations?

What is the Board of Directors? 1 What is the Board of Directors?

1 Exhibit 1 Organizational Structure of a Corporation Stockholders Board of Directors Officers Employees

Advantages of Corporations Separate legal entity Limited liability Easy capital generation Easy to transfer ownership Continuous existence

Disadvantages of Corporations Government regulation (SOX) Double taxation Owner is separate from management; management’s interests may conflict with shareholders’ interests

Formation of corporation File application of incorporation with the state Organize in the state with the most favorable laws (Delaware)

Formation of corporation File articles of incorporation with the state Formally creates the corporation States authorized shares: maximum # of shares the corporation is allowed to issue States par value: arbitrary amount used to record common stock

Initial public offering Selling shares of stock to investors to raise capital for the business Underwriter helps corporation with this

Shares of stock Issued shares: shares that have been transferred to shareholders = Outstanding shares: shares that are still being held by shareholders + Treasury shares: shares that the corporation has bought back from shareholders

Classes of stock Common stock: carry voting rights Rank behind creditors and preferred stockholders Preferred stock: have a preference for dividends – receive a certain amount of dividends before common stockholders can receive any dividends

Organizational Expenses Costs of forming the corporation Are incurred prior to the start of operations Include: State incorporation fees Costs or printing stock certificates Accounting fees Attorney fees Record as Dr. Cr. Organizational Expense 1,000 Cash 1,000

Issuance of stock In order to record stock issuance, you need the par value Selling price of shares = market value

Issuance of stock Premium: stock is issued at a price higher than par Discount: stock is issued at a price lower than par rarely happens not allowed in some states

Issuance of stock Dr. Cr. Cash (# of shares X selling price) Common Stock (# of shares X par value) Paid in capital in excess of par, Common (Difference)

Issuance of stock Dr. Cr. Cash (# of shares X selling price) Preferred Stock (# of shares X par value) Paid in capital in excess of par, Preferred (Difference)

Issuance of stock Some states have no-par stock Sometimes, no-par stock will have a stated value Stated value is treated the same as par value when recording issuance of stock

Issuance of stock Record issuance of no-par stock with a stated value: Dr. Cr. Cash (# of shares X selling price) Common Stock (# of shares X stated value) Paid in capital in excess of stated value, Common (Difference)

Issuance of stock In some states, no-par stock doesn’t have a stated value Dr. Cr. Cash (# of shares X selling price) Common Stock (# of shares X selling price)

Issuance of stock for noncash asset Record assets received at their fair market value if assets’ fair market value is not known, record the assets at the stock market value

Issuance of stock for noncash asset Ex. Issued 10,000 shares of $10 par common stock for Land with a fair market value of $200,000. Stock market price = $17 per share Dr. Cr. What would the journal entry be if the Land’s fair market value cannot be determined?

Stockholders’ equity section of Balance Sheet Paid in Capital Preferred Stock, %, par, # of sh auth., issued Excess of issue price over par Common Stock, par, # of sh auth., issued From sale of treasury stock Total Paid in Capital Retained Earnings Total Deduct Treasury Stock (# of shares at cost) Total Stockholders’ Equity

Stockholders’ equity section of Balance Sheet Contributed Capital Preferred Stock, %, par, # of sh auth., issued Common Stock, par, # of sh auth., issued Additional paid in capital From sale of treasury stock Total Contributed Capital Retained Earnings Total Deduct Treasury Stock (# of shares at cost) Total Stockholders’ Equity

Declaration of dividend Distribution to shareholders Declared by the Board of Directors Once declared, become a legal obligation upon declaration Only paid on outstanding shares (not on treasury shares)

Cash dividends Corporation must have sufficient Retained Earnings and Cash Usually paid quarterly

Declaration of cash dividend Date of declaration Dr. Cr. Cash dividends * Cash dividends payable * * Amount = # of shares X amount set by Board

Declaration of dividend Date of record Date on which ownership of stock is determined for purposes of receiving dividend; No journal entry made

Declaration of dividend Date of payment Dr. Cr. Cash dividends payable * Cash * *amount from Declaration entry

Cash Dividend Example Espinoza Corporation is authorized to issue $ par value common stock. It has 160,000 shares issued and 140,000 shares outstanding. On June 5, the Board of Directors declared a cash dividend of $ .50 per share to be paid on June 25 to stockholders of record on June 15.

Stock Dividend Distributes shares to stockholders Done to reward stockholders Transfers amount from retained earnings to contributed capital Does not change total stockholders’ equity Usually accounted for at market price Will affect market price, because now there are more shares outstanding

Stock Dividend Example: Declare a 5% stock dividend 10,000 shares outstanding market price = $10, par = $1 # of shares in stock dividend = # of shares outstanding X %

Stock Dividend Example: Declare a 5% stock dividend 10,000 shares outstanding market price = $10, par = $1 Date of declaration Journal entry: Dr. Cr. Stock dividends # of shares in dividend X market price

Stock Dividend Example: Declare a 5% stock dividend 10,000 shares outstanding market price = $10, par = $1 Date of declaration Journal entry: Dr. Cr. Stock dividends Stock Dividend Distributable # of shares in dividend x par

Stock Dividend Example: Declare a 5% stock dividend 10,000 shares outstanding market price = $10, par = $1 Date of declaration Journal entry: Dr. Cr. Stock dividends Stock Dividend Distributable Paid in capital in excess of par, Common difference

Stock Dividend Date of record Ownership on this day determines recipient of stock dividend No journal entry

Stock Dividend Date of Distribution Journal Entry Dr. Cr. Stock Dividend Distributable Common Stock

Stock Dividend Stock Dividend Distributable is part of contributed capital (paid in capital) Stock Dividends is closed into Retained Earnings the same way Cash Dividends is

Before and after stock dividend Before After # of total shares 10,000 Individual stockholder 1,000

Stock Split Usually done by a corporation to lower market price and make stock easier to trade Increases # of issued shares Par value is reduced in the same proportion

Stock Split Stockholders’ Equity Accounts remain the same Since no accounts change, no journal entry is required

Stock Split New number of shares: Number of shares before the split X amount of split = Number of shares after the split

Stock Split New Par value Par value before the split Divided by the amount of the split = the par value after the split

Stock Split Example: Corporation has 10,000 shares with a $4 par value 2 for 1 stock split is declared # of shares Par Before the split After the split

Preferred Stock Dividends rights may be stated in monetary terms or as a % Monetary terms: $2 preferred stock means that each share will receive a $2 per share annual dividend Percentage: Annual Dividends calculated as par value X %

Preferred Stock Cumulative preferred stock If dividends aren’t paid in the current year, they carry forward to the next year Dividends in arrears: dividends that have carried forward from the previous year Preferred stockholders must be paid the current dividends + dividends in arrears before common stockholders receive any dividends After Preferred stock dividends are paid in full, the common stockholders receive the rest of the dividends

Preferred Stock Noncumulative preferred stock If dividends aren’t paid in the current year, they are lost

Preferred Stock Dividend Example Cormer Corporation has 20,000 shares of $100 par, 6% cumulative preferred stock and 60,000 shares of $10 par value common stock. Calculate the total dividends and dividends per share on preferred stock and common stock, if dividends paid in 2006 – 2009 are $80,000, $60,000, $180,000 and $300,000.

Preferred Stock Dividend Example Jackson Corporation has 10,000 shares of $50 par, $2 cumulative preferred stock and 20,000 shares of $10 par value common stock. Calculate the total dividends and dividends per share on preferred stock and common stock, if dividends paid in 2007 – 2010 are $10,000, $15,000, $40,000 and $300,000.

Treasury stock Stock that has been issued to shareholders and then reacquired by the corporation Reasons why company buys treasury stock:

Treasury stock Stock that has been issued to shareholders and then reacquired by the corporation Reasons why company buys treasury stock:

Treasury stock Has no voting rights Receives no dividends

Treasury stock Has no voting rights Receives no dividends Purchase is recorded at cost Dr. Cr. Treasury stock (# of shares X purchase price) Cash

Treasury stock Ex.: Corporation purchased 1,000 shares of $10 par value stock for the treasury for $15 on Feb.1 Dr. Cr. Treasury stock (# of shares X purchase price) Cash

Sale of Treasury stock After the company has held treasury stock, it may decide to sell the stock again Treasury stock can be sold for the same price it was purchased for Dr. Cr. Cash # of sh X selling price Treasury stock # of sh X cost

Sale of Treasury stock After the company has held treasury stock, it may decide to sell the stock again Treasury stock can be sold for more than it was purchased for Cash # of sh X selling price Treasury stock # of sh X cost Paid in capital, treasury difference

Sale of Treasury stock After the company has held treasury stock, it may decide to sell the stock again Treasury stock can be sold for less than it was purchased for Cash # of sh x selling price Paid in capital, treasury difference Treasury stock # of sh X cost

Sale of Treasury stock Ex.: On Mar. 1, sold 500 of the treasury shares that were purchased for $15 on Feb. 1. The selling price on Mar. 1 was $17. Dr. Cr.

Sale of Treasury stock Ex.: On Mar. 15, sold the remaining 500 treasury shares that were purchased for $15 on Feb. 1. The selling price on Mar. 15 was $12. Dr. Cr.

Stockholders’ equity section of Balance Sheet Paid in Capital Preferred Stock, %, par, # of sh auth., issued, outst. Common Stock, par, # of sh auth., issued, outst. Excess of issue price over par From sale of treasury stock Total Paid in Capital Retained Earnings Total Deduct Treasury Stock Total Stockholders’ Equity

Stockholders’ equity section of Balance Sheet Paid in Capital Preferred Stock, %, par, # of sh auth., issued Excess of issue price over par Common Stock, par, # of sh auth., issued From sale of treasury stock Total Paid in Capital Retained Earnings Total Deduct Treasury Stock (# of shares at cost) Total Stockholders’ Equity 62

Restriction on Retained Earnings Also called Appropriations Makes a portion of retained earnings unavailable for distributing dividend Usually reported in the Notes to the Financial Statements

Prior period adjustment Correction of error from math mistake or wrong application of accounting principle that isn’t discovered in the period it occurred Reported as an adjustment to the beginning balance of Retained Earnings

6 Retained Earnings Statement

Statement of Stockholders’ Equity Usually prepared when corporation has changes to stock and paid-in capital accounts in addition to net income and dividends

6 Statement of Stockholders’ Equity