CENTURY 21 ACCOUNTING © Thomson/South-Western 1 LESSON 11-1 PART 4: CORPORATION ACCOUNTING Overview: PART 4  covers complete accounting cycle for a corporation Chapter 11: Organizing a Corporation and Paying Dividends Chapter 12: Acquisition of Additional capital for corp: treasury stock and corporate bonds Chapter 13: Financial Analysis and Reporting: End-of- fiscal period work for corporation; worksheet and financial stmts, calculating federal income tax

CENTURY 21 ACCOUNTING © Thomson/South-Western 2 LESSON 11-1 LampLight, Inc, Chart of Accounts, pg 311 Merchandising business organized as corporation Sells lighting fixtures Similarities: Typical divisions Differences: Classifications within Assets and Liabilities Large number of accounts within Stockholder’s Equity Organization Expense  new account Other Expenses

CENTURY 21 ACCOUNTING © Thomson/South-Western 3 LESSON 11-1 Ch.11-1: Starting a Corporation Corporation: organization with legal rights of a person and that may be owned by many persons Organized by law to exist separately and apart from its owners Limited liability Ownership: divided into units Unit = share of stock Capital stock – total shares of ownership in a corporation Stockholder – owner of one or more shares of stock Dividends - earnings distributed to stockholders Retained earnings - earnings retained to finance future business expansion and improvement

CENTURY 21 ACCOUNTING © Thomson/South-Western 4 LESSON 11-1 Articles of Incorporation Elected Board of Directors: small group to represent combined interests and to be responsible for management Determines corporate policies and selects officers to supervise daily management Legal Requirements for forming a Corporation: Articles of Incorporation: written application requesting permission to form a corporation (submit to state or federal government) Charter  approved articles of incorporation AKA: certificate of incorporation

CENTURY 21 ACCOUNTING © Thomson/South-Western 5 LESSON Nature of business. 2.Types of stock authorized. 3.Initial directors. ARTICLES OF INCORPORATION – pg 315 page

CENTURY 21 ACCOUNTING © Thomson/South-Western 6 LESSON Names of incorporators. 2.Signatures of incorporators. ARTICLES OF INCORPORATION page

CENTURY 21 ACCOUNTING © Thomson/South-Western 7 LESSON 11-1 Rights of Stockholders 1.To vote at stockholders’ meetings (unless an exception is made for holders of a particular kind of stock) 2.To share in a corporation’s earnings 3.To share in the distribution of the assets of the corporation if it ceases operations and sells all of its assets Capital Stock of a Corporation: Common stock: stock that does not give stockholders any special privileges Preferred stock: stock that gives stockholders special privileges

CENTURY 21 ACCOUNTING © Thomson/South-Western 8 LESSON 11-1 Stock Certificates: Written evidence of the number of shares that each stockholder owns Usually states issue date, certificate number, number of shares, name of stockholder Corporation keeps record of all stock issued to each stockholder Stock transfer  changing ownership of stock Value of Stock: Par value: value assigned to stock and printed on certificate Par value stock: stock that has an authorized value printed on the certificate No-par-value Stock: share of stock that has no authorized value printed Some states require no par value stock be assigned a stated or specific value Stated-value stock: No-par-value stock that has a value assigned by a corporation Similar to par value stock, but value is not printed on certificate

CENTURY 21 ACCOUNTING © Thomson/South-Western 9 LESSON 11-1 STOCK CERTIFICATES page 317

CENTURY 21 ACCOUNTING © Thomson/South-Western 10 LESSON 11-1 Common Stock If corporation issues only one type of stock  it is common stock If corporation issues only common stock  stockholders are entitled to all dividends In most corporations  only owners of common stock have right to vote on matters brought before stockholders Lamplight, Inc is authorized to issue no-par-value common stock w/stated value of $10.00 Article III Most stock sold today is common stock

CENTURY 21 ACCOUNTING © Thomson/South-Western 11 LESSON 11-1 Preferred Stock To attract more investors  might offer preferred stock with preferences as to some of basic stockholder’s rights Usually does not have voting rights and cannot influence how much and when dividends are paid out Preference is to receive dividends before common stockholders

CENTURY 21 ACCOUNTING © Thomson/South-Western 12 LESSON 11-1 Preferred Stock: Others preferences: 1.Unpaid dividends may accumulate from one year to another. Accumulated preferred dividends must be paid before common. 2. Dividends may be shared with common stockholders above a certain percentage or amount. Once dividend to common stockholders equals stated percentage of preferred stock, additional dividends may be shared between preferred and common stockholders Every preference granted comes at expense to common stockholders Preferred stock dividends may be stated as percentage of par value or as amount per share Ex) Lamplight has authorized the issuance of 8%, $ par-value stock

CENTURY 21 ACCOUNTING © Thomson/South-Western 13 LESSON 11-1 TRANSACTIONS INCURRED WHEN STARTING A CORPORATION Charter is legal authorization to begin business BUT still needs assets to operate Obtains initial capital by selling stock to incorporators Capital Accounts of a Corporation Maintains single general ledger account for each KIND of stock issued When issuing ONLY common stock  value of all stock issued is recorded in single capital stock account When issuing BOTH  separate capital stock accounts Retained Earnings  used to record net income Keeps net income separate from recorded values of issued capital stock Net income  CR Net Loss  DR (DEFICIT)

CENTURY 21 ACCOUNTING © Thomson/South-Western 14 LESSON Write the date. 2.Enter the account title. 3.Record the receipt numbers. 4.Write the credit amount. 5.Write the debit amount. TRANSACTIONS INCURRED WHEN STARTING A CORPORATION page When formed, each of Lamplights 6 incorporators agrees to buy 5000 shares of common stock at stated value Total = 30,000 $10.00 = $300,000.00

CENTURY 21 ACCOUNTING © Thomson/South-Western 15 LESSON 11-1 ORGANIZATION COSTS OF A CORPORATION 1.Incorporation fee paid to the state when the articles of incorporation are submitted 2.Attorney fees for legal services during the process of incorporation 3.Other incidental expenses incurred prior to receiving the charter Cannot be formed without these costs Until it receives a charter  does not exist as corporation to pay costs One of incorporators may agree to pay costs until charter is granted After receiving charter  reimbursed for costs by corp If substantial costs were recorded as expense  could reduce net income during first year Record as Asset account  benefits derived from costs extend over many years page 320

CENTURY 21 ACCOUNTING © Thomson/South-Western 16 LESSON 11-1 TERMS REVIEW corporation board of directors articles of incorporation charter common stock preferred stock stock certificate par value par-value stock no-par-value stock stated-value stock organization costs page 322 ***TO DO*** 1.Work Together, pg On your own, pg 322

CENTURY 21 ACCOUNTING © Thomson/South-Western 17 LESSON 11-1 LESSON 11-2: Stock Subscriptions and the Balance Sheet Subscribing for capital stock: entering into an agreement with a corporation to buy capital stock and pay at a later date. Future payments may be made all at once or in installment plan No voting rights Example: Jan. 5 – Daniel Herring subscribed to 2000 shares of common stock at $10.00/share Agreed to pay $10,000 on March 1 and $10,000 by July 1

CENTURY 21 ACCOUNTING © Thomson/South-Western 18 LESSON Write the date. 3.Record memorandum number. 4.Enter debit amount. 5.Enter the account credited. 6.Enter credit amount. 2.Enter the account debited. JOURNALIZING A STOCK SUBSCRIPTION *Stock certificates are issued only when paid in full *Amounts will be recorded in Capital Stock – Common when paid in full and stock certificate is issued. page 324

CENTURY 21 ACCOUNTING © Thomson/South-Western 19 LESSON 11-1 JOURNALIZING CASH RECEIVED FOR A STOCK SUBSCRIPTION page 325 March 1, received cash from Herring in payment of half of stock subscription Similar entry will be made on July 1 when he makes second, final payment

CENTURY 21 ACCOUNTING © Thomson/South-Western 20 LESSON 11-1 JOURNALIZING ISSUANCE OF STOCK PREVIOUSLY SUBSCRIBED When subscription is fully paid  certificate is issued If stockholder decides to sell stock at later date  no journal entry  does not generate additional capital Name of new stockholder must be entered in stock ownership records for future dividend pymts page 325

CENTURY 21 ACCOUNTING © Thomson/South-Western 21 LESSON List intangible assets as the last category of assets. 2.List sources of paid-in capital. BALANCE SHEET OF A NEWLY FORMED CORPORATION Cash = $300, Intangible assets – non- physical, but hold value page

CENTURY 21 ACCOUNTING © Thomson/South-Western 22 LESSON 11-1 TERMS REVIEW subscribing for capital stock intangible assets TO DO: 1.Work Together, pg On your own, pg App 11-1, 11-2 page 327

CENTURY 21 ACCOUNTING © Thomson/South-Western 23 LESSON 11-1 Ch11-3: Calculating and Journalizing Dividends for a Corporation Declaring a dividend: action by board of directors to distribute corporate earnings to stockholders Three important dates in distributing a dividend: Date of declaration: date on which BOD votes to distribute Date of record: date that determines which stockholders are to receive dividends May buy and sell stocks at any time but person listed on stockholder on date of record will receive dividends Date of payment: date on which dividends are actually to be paid Several weeks after date of record  corporation has time to determine who is entitled to receive dividends and prepare checks to be mailed Transactions are recorded on date of declaration and date of payment

CENTURY 21 ACCOUNTING © Thomson/South-Western 24 LESSON 11-1 Declaring Dividends: On date of declarations  incurs liability that must be recorded BOD has decided to declare annual dividend of $24,000. On date of record: 1000 shares of 8%, $100 par-value preferred stock 16,000 shares of $20.00 stated-value common stock

CENTURY 21 ACCOUNTING © Thomson/South-Western 25 LESSON 11-1 Calculating Value of Preferred Stock DIVIDENDS page 328 Number of Preferred Shares Par Value= Value of Preferred Stock × 1,000$100.00=$100, ×

CENTURY 21 ACCOUNTING © Thomson/South-Western 26 LESSON 11-1 DIVIDENDS page 328 Calculating Value of Common Stock Number of Common Shares Stated Value= Value of Common Stock × 16,000$20.00=$320, ×

CENTURY 21 ACCOUNTING © Thomson/South-Western 27 LESSON 11-1 DIVIDENDS page 329 Calculating Dividend of Preferred Stock = × Value of Preferred Stock Preferred Dividend Rate Preferred Dividend Amount $100, %=$8, ×

CENTURY 21 ACCOUNTING © Thomson/South-Western 28 LESSON 11-1 DIVIDENDS page 329 Calculating Amount Available for Common Dividends Total Amount Available for Dividends Preferred Dividend Amount = Amount Available for Common Dividends – $24,000.00$8,000.00=$16, –

CENTURY 21 ACCOUNTING © Thomson/South-Western 29 LESSON 11-1 DIVIDENDS If company decides to increase its annual dividend  preferred stock will never exceed 8% Additional dividends may go to Common stock, increasing the dividend rate page 329 Calculating Dividend Rate for Common Stock Common Dividend Amount Value of Common Stock = Common Dividend Rate ÷ $16,000.00$320,000.00=5% ÷

CENTURY 21 ACCOUNTING © Thomson/South-Western 30 LESSON 11-1 JOURNALIZING DECLARATION OF DIVIDEND page 330

CENTURY 21 ACCOUNTING © Thomson/South-Western 31 LESSON 11-1 JOURNALIZING PAYMENT OF A DIVIDEND Business issues single check for dividend  deposited in special dividend checking account Separate check to each eligible stockholder is written against special account Avoids large number of entries in journals Reserves cash specifically for paying dividends Dividend check is given to agent (bank) who handles details of preparing and mailing individual checks page 330

CENTURY 21 ACCOUNTING © Thomson/South-Western 32 LESSON 11-1 TERMS REVIEW declaring a dividend date of declaration date of record date of payment TO DO: 1.Work Together, pg On your own, pg App Prob 11-3, 11-4 page 332