Chapter Eight Proprietorships, Partnerships, and Corporations © 2015 McGraw-Hill Education.

Corporate Advantages  Separate legal Entity  Limited liability of stockholders  Continuous life  Management Structure  Easily transferable ownership rights  Ability to raise capital Corporate Disadvantages  Governmental regulation  Corporate double taxation Corporate Advantages  Separate legal Entity  Limited liability of stockholders  Continuous life  Management Structure  Easily transferable ownership rights  Ability to raise capital Corporate Disadvantages  Governmental regulation  Corporate double taxation Comparing Corporations with Proprietorships and Partnerships 8-2

Appearance of Capital Structure in Financial Statements The ownership interest (equity) in a business is composed of:  Owner/investor contributions.  Retained earnings. The ownership interest (equity) in a business is composed of:  Owner/investor contributions.  Retained earnings. 8-3

Legal capital is the amount of capital, required by the state of incorporation, that must remain invested in the business. Par Value Nominal Amount Legal capital Characteristics of Capital stock 8-4

Some states do not require a par value to be stated in the charter. No-par Stock Characteristics of Capital stock 8-5

Par value is an arbitrary amount assigned to each share of stock when it is authorized. Market price is the amount that each share of stock will sell for in the market.  Characteristics of Capital stock 8-6

Authorized, Issued, and Outstanding Capital Stock The maximum number of shares of capital stock that can be sold to the public. Authorized Shares 8-7

Authorized, Issued, and Outstanding Capital Stock Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold. Authorized Shares 8-8

Authorized, Issued, and Outstanding Capital Stock Unissued Shares Treasury Shares Outstanding Shares Issued Shares Treasury shares are issued shares that have been reacquired by the corporation. Outstanding shares are issued shares that are owned by stockholders. Authorized Shares 8-9

Common stockholders have the rights to: Buy and sell stock. Share in the distribution of profits. Share in the distribution of assets in the case of liquidation. Vote on significant matters that affect the corporate charter. Participate in the election of directors. Common stockholders have the rights to: Buy and sell stock. Share in the distribution of profits. Share in the distribution of assets in the case of liquidation. Vote on significant matters that affect the corporate charter. Participate in the election of directors. Classes of Stock – Common Stock 8-10

A separate class of stock, typically having priority over common shares in... – Dividend distributions. – Distribution of assets in case of liquidation. A separate class of stock, typically having priority over common shares in... – Dividend distributions. – Distribution of assets in case of liquidation. Classes of Stock – Preferred Stock Usually has a stated dividend rate. Normally has no voting rights. 8-11

NoncumulativeCumulative Dividends in arrears must be paid before dividends may be paid on common stock. Undeclared dividends from current and prior years do not have to be paid in future years. Most preferred stock is cumulative. Preferred Stock Dividends 8-12

Issuing Stock, $10 Par Value Nelson, Incorporated issued 100 shares of $10 par value stock for $22 per share. The effects on the financial statements would be: Nelson, Incorporated issued 100 shares of $10 par value stock for $22 per share. The effects on the financial statements would be: 100 shares × $22 per share = $2, shares × $10 par value = $1,

Issuing Stock, $20 Par Value Assume that Nelson has another class of common stock, $20 par value Class B. The company issues 150 shares of Class B common stock at $25 per share. The effects on the financial statements would be as follows: Assume that Nelson has another class of common stock, $20 par value Class B. The company issues 150 shares of Class B common stock at $25 per share. The effects on the financial statements would be as follows: 150 shares × $25 per share = $3, shares × $20 par value = $3,

Assume that Nelson issues 100 shares of 7 percent cumulative preferred stock with a stated value of $10 per share at a price of $22 per share. The effects on the financial statements would be as follows: Assume that Nelson issues 100 shares of 7 percent cumulative preferred stock with a stated value of $10 per share at a price of $22 per share. The effects on the financial statements would be as follows: Issuing Stock, $10 Stated Value 100 shares × $22 per share = $2, shares × $10 par value = $1,

Issuing Stock with No Par Value Assume that Nelson issues 100 shares of no par common stock at a price of $22 per share. The effects on the financial statements would be as follows: Assume that Nelson issues 100 shares of no par common stock at a price of $22 per share. The effects on the financial statements would be as follows: 100 shares × $22 per share = $2,

Financial Statement Presentation 8-17

No voting or dividend rights Contra equity account When stock is reacquired, the corporation records the treasury stock at cost. Treasury shares are issued shares that have been reacquired by the corporation. Treasury Stock 8-18

Three important dates Cash Dividends Date of Record No entry required. Payment Date Record payment of cash to stockholders. Declaration Date Record liability for dividend. Dividends 8-19

Stock Dividends Distribution of additional shares of stock to stockholders. No change in total stockholders’ equity. No change in par values. All stockholders retain same percentage ownership. 8-20

Stock Splits  Stock splits replace existing shares with a greater number of new shares.  Companies use stock splits to reduce market price per share of their outstanding stock.  The number of outstanding shares increase and par value is decreased proportionately.  Retained earnings is not affected.  Stock splits replace existing shares with a greater number of new shares.  Companies use stock splits to reduce market price per share of their outstanding stock.  The number of outstanding shares increase and par value is decreased proportionately.  Retained earnings is not affected. 8-21

End of Chapter Eight 8-22