1. Corporations: Organization, Stock Transactions, and Dividends Chapter 13 1

2. Describe the nature of the corporate form of organization. Objective 1 2

3. Characteristics of a Corporation A corporation is 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

4. The stockholders or shareholders who own the stock own the corporation. Corporations whose shares of stock are traded in public markets are called public corporations. Public Corporations 4

5. Corporations whose shares are not traded publicly are usually owned by a small group of investors and are called nonpublic or private corporations. The stockholders of all corporations have limited liability. Private Corporations 5

6. The stockholders control a corporation by electing a board of directors. The board meets periodically to establish corporate policy. It also selects the chief executive officer (CEO) and other major officers. Board of Directors 6

7. Employees Officers Board of Directors Organizational Structure of a Corporation Exhibit 1 Stockholders 7

8. A corporation has separate legal existence from its owners. A corporation has transferable units of ownership. A corporation has limited stockholders’ liability. Characteristics of a Corporation 8

9. Advantages and Disadvantages of the Corporate Form (continued) Exhibit 2 9

10. Advantages and Disadvantages of the Corporate Form (continued) Exhibit 2 10

11. First step in forming a corporation is to file an application of incorporation with the state. Forming a Corporation Because state laws differ, corporations often organize in states with more favorable laws. More than half of the largest companies are incorporated in Delaware 11

12. After the application is approved, the state grants a charter or articles of incorporation which formally create the corporation. Forming a Corporation Management and the board of directors prepare bylaws which are operating rules and procedures. 12

13. Costs may be incurred in organizing a corporation. The recording of a corporation’s organizing costs of $8,500 on January 5 is shown below: 13

14. Describe the two main sources of stockholders’ equity. Objective 2 14

15. The owner’s equity in a corporation is called stockholders’ equity, shareholders’ equity, shareholders’ investment, or capital. Stockholders’ Equity 15

16. The two sources of capital are: 1.Capital contributed to the corporation by the stockholders, called paid-in capital or contributed capital. 2.Net income retained in the business, called retained earnings. 16

17. Stockholders’ Equity Section of a Corporate Balance Sheet Stockholders’ Equity Paid-in capital: Common stock$330,000 Retained earnings 80,000 Total stockholders’ equity$410,000 If there is only one class of stock, the account is entitled Common Stock or Capital Stock. 17

18. A debit balance in Retained Earnings is called a deficit. Such a balance results from accumulated net losses. A credit balance in Retained Earnings does not represent surplus cash or cash left over from dividends. 18

19. Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock. Objective 3 19

20. Characteristics of Stock The number of shares of stock that a corporation is authorized to issue is stated in the charter. A corporation may reacquire some of the stock that has been issued. The stock remaining in the hands of stockholders is then called outstanding stock. 20

21. Shares of stock are often assigned a monetary amount, called par. Corporations may issue stock certificates to stockholders to document their ownership. Some corporations have stopped issuing stock certificates except on special request. Characteristics of Stock 21

22. 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. Some state laws require that corporations maintain a minimum stockholder contribution, called legal capital, to protect creditors. Classes of Stock 22

23. 1.The right to vote in matters concerning the corporation. Major Rights That Accompany Ownership of a Share of Stock 2.The right to share in distributions of earnings. 3.The right to share in assets on liquidation. These stock rights normally vary with the class of stock. 23

24. The two primary classes of paid-in capital are common stock and preferred stock. The primary attractiveness of preferred stocks is that they are preferred over common as to dividends. Classes of Stock 24

25. Example Exercise 13-1 Dividends per Share 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. 25

26. Example Exercise 13-1 (continued) Dividends per share: Preferred$0.50$1.50$1.00 Common stockNone$0.15$0.60 Year 1 Year 2 Year 3 Amount distributed$10,000$45,000$80,000 Preferred dividend (20,000 shares) 10,000 30,000* 20,000 Common dividend (100,000 shares)$ 0$15,000$60,000 *(10,000 + $20,000) 26

27. 27 TotalPreferred Dividends Common Dividends YearDividendsTotalPer ShareTotalPer Share 2005$7,500 $7,500 $0.75$0$0 20069,000 9,000 0.9000 200730,00013,500* 1.3516,5000.33 200830,00010,000 1.0020,0000.40 200940,00010,000 1.0030,0000.60 201048,50010,000 1.0038,5000.77 $6.00$2.10

28. A corporation is authorized to issue 10,000 shares of preferred stock, $100 par, and 100,000 shares of common stock, $20 par. One-half of each class of authorized shares is issued at par for cash. Issuing Stock 28

29. If the stock is issued (sold) for a price that is more than its par, the stock has been sold at a premium. If the stock is issued (sold) for a price that is less than its par, the stock has been sold at a discount. 29

30. Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55. Premium on Stock 30

31. A corporation acquired land for which the fair market value cannot be determined. The corporation issued 10,000 shares of $10 par common that has a current market value of $12 in exchange for the land. 31

32. On January 9, a corporation issues 10,000 shares of no- par common stock at $40 a share. On June 27, the corporation issues an additional 1,000 shares at $36. No-Par Stock 32

33. Stated Value Some states require that the entire proceeds from the issue of no-par stock be recorded as legal capital. In other states, no-par stock may be assigned a stated value per share. 33

34. Using the same data as we used for par the transaction at stated value is recorded as follows: 34

35. Example Exercise 13-2 Entries for Issuing Stock On March 6, Limerick Corporation issued for cash 15,000 shares of no-par common stock at $30. On April 13, Limerick issued at par 1,000 shares of 4%, $40 par preferred stock for cash. On May 19, Limerick issued for cash 15,000 shares of 4%, $40 par preferred stock at $42. Journalize the entries to record the March 6, April 13, and May 19 transactions. 35

36. Example Exercise 13-2 (continued) Mar.6Cash………………………………..450,000 Common Stock……………..450,000 (15,000 shares × $30) Apr.13Cash………………………………..40,000 Preferred Stock…………….40,000 (1,000 shares × $40) May 19Cash………………………………..630,000 Preferred Stock…………….600,000 Paid-in Capital in Excess of Par………………………..30,000 (15,000 shares × $42) 36

37. THE END 37