1. Chapter 11
Corporations: Organization, Capital Stock Transactions, and Dividends
Financial and Managerial Accounting
8th Edition
Warren Reeve Fess
© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.
Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.
PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

2. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

3. After studying this chapter, you should be able to:
Objectives
1. Describe the nature of the corporate form of organization.
2. List the major sources of paid-in capital, including the various classes of stock.
3. Journalize the entries for issuing stock.
4. Journalize the entries for treasury stock transactions.
5. State the effect of stock splits on corporate financial statements.
After studying this chapter, you should be able to:

4. Objectives
6. Journalize the entries for cash dividends and stock dividends.
7. Describe and illustrate the reporting of stockholders’ equity.
8. Compute and interpret the dividend yield on common stock.

5. A corporation is a legal entity, distinct and separate from the individuals who create and operate it.

6. Stakeholders include those who have an economic interest in an organization and those who are affected by its activities.

7. Organizational Structure of a Corporation
Stockholders
(owners of corporation stock)
Board of Directors
(elected by stockholders)
Officers
(selected by board of directors)
Employees

8. Forming a Corporation
First step is to file an application of incorporation with the state.
Because state laws differ, corporations often organize in states with more favorable laws.
More than half of the largest companies are incorporated in Delaware.
State grants a charter or articles of incorporation which formally create the corporation.
Management and board of directors prepare bylaws which are operation rules and procedures.

9. Forming a Corporation
On January 5, the firm paid the organization costs of $8,500. This amount includes legal fees, taxes and licenses, promotion costs, etc.
Jan. 5 Organization Costs
Cash
Paid cost of organizing the corporation.

10. Sources of Paid-In Capital
Authorized
Issued
Outstanding
Number of Shares

11. Major Rights that Accompany Ownership of a Share of Stock
Sources of Paid-In Capital
Major Rights that Accompany Ownership of a Share of Stock
1. The right to vote in matters concerning the corporation.
2. The right to share in distribution of earnings.
3. The right to share in assets on liquidation.

12. Classes of Stockholders
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.
Money available for dividends
Common Stockholders
Preferred Stockholders

13. Classes of Stockholders
Common Stock—the basic ownership of stock with rights to vote in election of directors, share in distribution of earnings, and purchase additional shares.
Preferred Stock—A class of stock with preferential rights over common stock in payment of dividends and company liquidation.

14. Nonparticipating Preferred Stock
A nonparticipating preferred stock is limited to a certain amount. Assume 1,000 shares of $4 nonparticipating preferred stock and 4,000 shares of common stock and the following:
Net income $20,000 $55,000 $62,000
Amount retained 10, , ,000
Amount distributed $10,000 $35,000 $22,000

15. Nonparticipating Preferred Stock
Amount distributed $10,000 $35,000 $22,000
Preferred dividend
(1,000 shares) 4,000 4,000 4,000
Common dividend
(4,000 shares) $6,000 $31,000 $18,000
Dividends per share:
Preferred $ 4.00 $ 4.00 $ 4.00
Common $ 1.50 $ 7.75 $ 4.50

16. Cumulative Preferred Stock
So, preferred dividends are two years in arrears.
Assume 1,000 shares of $4 cumulative preferred stock and 4,000 shares of common stock. No dividends were paid in 2005 and 2006.

17. Cumulative Preferred Stock
On March 7, 2007, the board of directors declares dividends of $22,000.

18. Cumulative Preferred Stock
Preferred Stock Dividends
Dividends Paid in 2007
Total dividends paid, $22,000
$4,000
2005
(In arrears)
$4,000
$10,000
$4,000
2006
(In arrears)
$4,000
$4,000
2007
(Current dividend)
$4,000
Preferred Stock
Common Stock

19. Issuing Stock
A corporation is authorized to issue 10,000 shares of preferred stock, $100 par, and 100,000 shares of common stock, $20 par.

20. Issuing Stock
On April 1, one-half of each class of authorized stock is issued at par for cash.
Apr. 1 Cash 1,
Preferred Stock
Common Stock 1,
Issued preferred stock and common stock at par.

21. Issuing Stock
Common Stock and Preferred Stock accounts are controlling accounts. A record of each stockholders’ name, address, and number of shares is kept in a stockholders’ subsidiary ledger.

22. Issuing Stock at a Premium
On March 15, Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55.
Mar. 15 Cash
Preferred Stock
Paid-in Capital in Excess of Par--
Preferred Stock
Issued 2,000 shares of $50 par preferred stock at $55.

23. Issuing Stock at a Premium
When stock is issued for more than its par, the stock has sold at a premium. It has sold at a discount if issued for less than its par.
The $10,000 excess is recorded in a separate account because some states do not consider this to be part of legal capital and may be used for dividends.

24. Issuing Stock at a Premium
On Nov. 12, 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.
Nov. 12 Land
Common Stock
Paid-in Capital in Excess of Par
Issued $10 par common stock valued at $12 per share, for land.

25. Issuing Stock at a Premium
Stock issued for assets other than cash should be recorded at the fair market value of the asset or fair market value of the stock, whichever can be more clearly determined.

26. Issuing Stock at No-Par
On February 23, a corporation issues 10,000 shares of no-par common stock at $40 a share.
Feb. 23 Cash
Common Stock
Issued 10,000 shares of no-par common stock at $40.

27. Issuing Stock at No-Par
Later, on March 9, the corporation issues 1,000 additional shares at $36.
Mar. 9 Cash
Common Stock
Issued 1,000 shares of no-par common stock at $36.

28. Issuing Stock at No-Par
Some states require that the entire proceeds from the sale of no-par stock be treated as legal capital.

29. Issuing Stock at No-Par
Also, no-par stock may be assigned a stated value per share. The stated value is recorded similar to a par value.

30. Issuing Stock with a Stated Value
On March 30, issued 1,000 shares of no-par common stock at $40; stated value, $25.
Mar. 30 Cash
Common Stock
Paid-in Capital in Excess of
Stated Value
Issued 1,000 shares of no-par common stock at $36; stated value, $25.

31. Treasury Stock Transactions
Occasionally, a corporation buys back its own stock for the purpose of later reissuing it. This stock is referred to as treasury stock.

32. Treasury Stock Transactions
Treasury stock is stock that:
1. has been issued as fully paid.
2. has been reacquired by the corporation.
3. has not been canceled or reissued.
A commonly used method of accounting for treasury stock is the cost method.

33. Treasury Stock Transactions
Cost Method
On January 5, a firm purchased 1,000 shares of treasury stock (common stock, $25 par) at $45 per share.
Jan. 5 Treasury Stock
Cash
Purchased 1,000 shares of treasury stock at $45.

34. Treasury Stock Transactions
Cost Method
On June 2, sold 200 shares of treasury stock at $60 per share.
June 2 Cash
Treasury Stock
Paid-in Capital from sale of
Treasury Stock
Sold 200 shares of treasury stock at $60.

35. Treasury Stock Transactions
Cost Method
On September 3, sold 200 shares of treasury stock at $40 per share.
Sep. 3 Cash
Paid-in Capital from Sale of
Treasury Stock
Treasury Stock
Sold 200 shares of treasury stock at $60.

36. Stock Splits
A corporation sometimes reduces the par or stated value of their common stock and issues a proportionate number of additional shares. This is called a stock split.

37. Stock Splits 20 shares, $20 par AFTER 5-1 STOCK SPLIT
$400 total par value
BEFORE STOCK SPLIT
4 shares, $100 par
$400 total par value

38. Stock Splits
A stock split does not change the balance of any corporation accounts. However, it can make the stock more attractive to investors by reducing the price of a share,

39. Accounting for Cash Dividends
Dividends are distributions of retained earnings to stockholders.
Dividends may be paid in cash, stock, or property.
Dividends, even on cumulative preferred stock, are never required, but once declared become a legal liability of the corporation.

40. Accounting for Cash Dividends
Corporations generally declare and pay cash dividends on shares outstanding when three conditions exist:
1. Sufficient retained earnings
2. Sufficient cash
3. Formal action by the board of directors
Retained Earnings
50,000

41. Accounting for Cash Dividends
There are three important dates relating the dividends.

42. Accounting for Cash Dividends
First is the date of declaration. Assume that on December 1, Hiber Corporation declares a $42,500 dividend.

43. Accounting for Cash Dividends
Date of Declaration
Dec. 1 Cash Dividends
Cash Dividend Payable
Declared cash dividend.

44. Accounting for Cash Dividends
The second important date is the date of record. For Hiber Corporation this would be December 11.

45. Accounting for Cash Dividends
On this date, ownership of shares determines who receives the dividend. No entry is required.

46. Accounting for Cash Dividends
The third important date is the date of payment. On January 2, Hiber issues dividend checks. 2

47. Accounting for Cash Dividends
Date of Payment
Jan. 2 Cash Dividends Payable
Cash
Paid cash dividends.

48. Accounting for Stock Dividends
A distribution of dividends to stockholders in the form of the firm’s own shares is called a stock dividend.

49. Accounting for Stock Dividends
Stock dividends transfer pro rata shares of stock to stockholders. Assume Hendrix Corporation issues a 5% stock dividend on common stock, $20 par, 2,000,000 shares issued.

50. Hendrix Corporation, December 15 (before dividend)
Accounting for Stock Dividends
Hendrix Corporation, December 15 (before dividend)
Common Stock, $20 par $40,000,000
Paid-in Capital in Excess of Par--Common Stock 9,000,000
Retained Earnings 26,600,000
Dec. 15 Stock Dividends 3,
Stock Dividends Distributable 2,
Paid-in Capital in Excess of
Par—Common Stock 1,
Declared stock dividend.

51. Accounting for Stock Dividends
On January 10, Hendix Corporation issues the stock. This action increases the number of shares outstanding by 100,000.
Jan. 10 Stock Dividends Distributable 2,
Common Stock 2,
Issued stocks for the stock dividend.

52. Accounting for Stock Dividends
Hendrix Corporation, December 15 (before dividend)
Common Stock, $20 par $40,000,000
Paid-in Capital in Excess of Par--Common Stock 9,000,000
Retained Earnings 26,600,000
$75,600,000
Hendrix Corporation, January 10 (after dividend)
Common Stock, $20 par $42,000,000
Paid-in Capital in Excess of Par--Common Stock 10,100,000
Retained Earnings 23,500,000
$75,600,000

53. Reporting Stockholders’ Equity
There are two ways to report stockholders’ equity in the balance sheet. In Slide 57, each class of stock is listed first, followed by its related paid-in capital accounts.

54. Stockholders’ Equity Paid-in capital: Preferred 10% stock, $50 par,
cumulative (2,000 shares
authorized and issued) $100,000
Excess of issue price over par 10,000 $ 110,000
Common stock, $20 par
(50,000 shares authorized, 45,000
issued) $900,000
Excess of issue price over par 190,000 1,090,000
From sale of treasury stock ,000
Total paid-in capital $1,202,000
Retained earnings ,000
Total $1,552,000
Deduct treasury stock (600 shares at cost) ,000
Total stockholders’ equity $1,525,000

55. Slide 59 shows the second method
Slide 59 shows the second method. Note that the stock accounts are listed first. The other paid-in capital accounts are listed as a single item described as Additional paid-in capital.

56. Stockholders’ Equity Contributed capital:
Preferred 10% stock, cumulative
$50 par (2,000 shares authorized
and issued) $100,000
Common stock, $20 par
(50,000 shares authorized, 45,000
issued) 900,000
Additional paid-in capital ,000
Total contributed capital $1,202,000
Retained earnings ,000
Total $1,552,000
Deduct treasury stock (600 shares at cost) ,000
Total stockholders’ equity $1,525,000

57. Financial Analysis and Interpretation
Use: To indicate the rate of return to common stockholders in terms of dividends
Dividend Yield
Dividends per share of common $ $ 0.60
Market price per share of common $20.50 $13.50
Dividends per Share of Common Stock
Market Price per Share of Common Stock
Dividend Yield
$.60
$13.50
Dividend Yield, 2006
= 4.4%
Dividend Yield, 2007
$.80
$20.50
= 3.9%

58. Chapter 11
The End