1 AC116 Accounting II Seminar 6 Jim Eads, CPA, MST, MSF Corporations: Organizations, Stock Transactions, and Dividends Part I

2 Corporations Corporation: A legal entity, distinct and separate from the individuals who create and operate it. As a legal entity, a corporation may acquire, own, and dispose of property in its own name.

3 Corporations Stockholders or shareholders: The owners of the shares of a corporation.

4 Corporations Public corporations: Corporations whose shares of stock are traded in public markets.

5 Corporations Nonpublic or private corporations: Corporations whose shares are not traded publicly are usually owned by a small group of investors.

6 Corporations Limited liability: The stockholders of a corporation have limited liability. Stockholders risk only their investment in the corporation’s shares. They are not personally liable for the corporation’s debts.

7 Corporations Board of Directors: Establishes company policy and selects the chief executive officer (CEO) and other major officers of the corporation. The board of directors is elected by the corporation’s shareholders.

8 Corporations Advantages of the corporate form: A corporation is a separate entity. A corporation’s life is indefinite. The corporation can raise large amounts of capital by selling stock. Stockholders can freely sell their shares. Stockholders are not usually liable for the corporation’s debts.

9 Corporations Disadvantages of the corporation form: Owners (stockholders) do not directly control the company. Corporations are subject to income tax. Dividends distributed to owners are taxed at both the corporate and individual levels. Corporations must satisfy many regulatory requirements.

10 Corporations The owner’s equity in a corporation is called stockholders’ equity, shareholders’ equity, shareholders’ investment, or capital. Commonly just called the equity section of the balance sheet.

11 Corporations Equity comes from two sources: Paid-in or Contributed capital: Capital contributed to the corporation by stockholders. Retained earnings: Net income retained by the business (income earned but not distributed to owners as dividends).

12 Corporations Remember that equity accounts increase with credits and decrease with debits. Therefore A debit balance in Retained Earnings is called a deficit. Such a balance results from accumulated net losses.

13 Corporations Authorized Shares: The number of shares of stock that a corporation may issue, as stated in the corporate charter.

14 Corporations Issued Shares: The number of shares of stock that have been sold by a corporation.

15 Corporations Outstanding Shares: The number of shares currently owned by shareholders (shares issued but not repurchased by the corporation). Note: A corporation may own its own shares, called treasury stock, but they are not considered as outstanding. Treasury stock does not vote and does not earn dividends.

16 Corporations Par value: A value assigned to stock by the corporation in the corporate charter. Par value actually means very little today and has no relation to the actual value of the stock. Stock issued without a par is called no-par stock. Some states require the board of directors to assign a stated value to no- par stock.

17 Corporations The two primary classes of paid-in capital (stock): Common Stock Preferred Stock

18 Corporations Common Stock: Basic owners of the corporation with: – –The right to vote in matters concerning the corporation. – –The right to share in distributions of earnings. – –The right to share in assets on liquidation.

19 Corporations Preferred Stock: Secondary owners of the corporation with: – –No right to vote in matters concerning the corporation. – –No right to share in distributions of earnings in excess of the stated dividend for the stock. – –No right to share in assets on liquidation. However, preferred stock holders receive priority when dividends are distributed. Common stock shareholders do not receive dividends until the preferred shareholders receive their dividends.

Preferred Stock Dividends Preferred stock dividends are stated in one of two ways: 1. 10,000 shares, 5%, $100 par: Dividend per share = $100 x 5% = $5.00 Total dividend = $5.00 x 10,000 = $50, ,000 shares, $4.00, $100 par: Dividend per share = $4.00 Total dividend = $4.00 x 10,000 = $40,000 20

21 Example Exercise 13-1 (page 581) Sandpiper Company has 20,000 shares of 1% cumulative preferred stock of $100 par and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1:$10,000 Year 2:$45,000 Year 3:$80,000 Determine the dividends per share for preferred and common stock for each year.

22 Example Exercise 13-1 (page 581) Preferred stock dividend are computed as follows: Par (or stated) value x dividend rate. Therefore, the annual dividend per share of preferred = $100 x 1% = $1. With 20,000 shares of preferred stock, preferred stock dividends should be $20,000 each year.

23 Example Exercise 13-1 (page 574) In year 1, the total dividends paid were $10,000. Since preferred dividends should be $20,000; it is clear the company only paid 50% of the preferred dividends, or $0.50 per share. Since preferred shareholders must receive their dividends before common shareholders, common shareholders received no dividends. And, since these are cumulative preferred shares, the remaining $10,000 must be paid in addition to preferred dividends before common shareholders can receive future dividends.

24 Example Exercise 13-1 (page 574) In year 2, the total dividends paid were $45,000. Since preferred dividends are $20,000 and there are $10,000 in preferred dividends in arrears, the first $30,000 must be paid to preferred shareholders. The preferred shareholders will receive $1.50 per share. The remaining dividends of $15,000 must have been paid to common shareholders. $15,000 / 100,000 shares = $0.15 per share.

25 Example Exercise 13-1 (page 581) In year 3, the total dividends paid were $80,000. Since preferred dividends are $20,000 and there are no preferred dividends in arrears, the first $20,000 will be paid to preferred shareholders. They will receive $1 per share. The remaining dividends of $60,000 must have been paid to common shareholders. $60,000 / 100,000 shares = $0.60 per share.

26 Corporations When stock is issued that has a par or stated value: Debit cash Debit cash Credit Common (or preferred) Stock up to the amount of the par value Credit Common (or preferred) Stock up to the amount of the par value Credit Capital in Excess of Par for the amount in excess of par value Credit Capital in Excess of Par for the amount in excess of par value

27 Corporations Example: XYZ issues 100,000 shares of $5 par common stock in exchange for $750,000. Cash750,000 Common Stock500,000 Paid-in Capital in Excess of Par250,000

28 Corporations When stock is issued that has no par or stated value: Debit cash Debit cash Credit Common (or preferred) Stock Credit Common (or preferred) Stock

29 Corporations Example: XYZ issues 100,000 shares of no par common stock in exchange for $750,000. Cash750,000 Common Stock750,000

30 Questions?

31 One last thought…. Make sure you read through the remainder of Chapter 13 before next week’s seminar.