Presentation on theme: "Corporations & Stock Transactions"— Presentation transcript:
1 Corporations & Stock Transactions By Rachelle Agatha, CPA, MBASlides by Rachelle Agatha, CPA,with excerpts from Warren, Reeve, Duchac
2 Objectives: Describe the nature of the corporate form of organization. Objectives:Describe the nature of the corporate form of organization.Describe the two main sources of stockholders’ equity.Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock.
3 Objectives:Journalize the entries for cash dividends and stock dividends.Journalize the entries for treasury stock transactions.Describe and illustrate the reporting of stockholders’ equity.Describe the effect of stock splits on corporate financial statements.
4 Describe the nature of the corporate form of organization. Objective 1Describe the nature of the corporate form of organization.
5 Characteristics of a CorporationA 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.
6 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.
7 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 corporation have limited liability.
8 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.
9 Exhibit 1 Organizational Structure of a Corporation Exhibit 1 Organizational Structure of a CorporationStockholdersBoard of DirectorsOfficersEmployees
10 A corporation exists separately from its owners. Advantages of the Corporate FormA corporation exists separately from its owners.A corporation’s life is separate from its owners; therefore, it exists indefinitely.The corporate form is suited for raising large amounts of money from stockholders.(Continued)
11 Advantages of the Corporate FormA corporation sells shares of ownership, called stock. Stockholders can transfer their shares of stock to other stockholders.A corporation’s creditors usually may not go beyond the assets of the corporation to satisfy their claims.(Concluded)
12 Stockholders control management through a board of directors. Disadvantages of the Corporate FormStockholders control management through a board of directors.As a separate legal entity, the corporation is subject to taxation. Thus, net income distributed as dividends will be taxed at both the corporate and individual levels.Corporations must satisfy many regulatory requirements.
13 Forming a CorporationFirst step in forming a corporation 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 (see Exhibit 3 in Slide 14).(Continued)
15 Forming a CorporationAfter the application is approved, the state grants a charter or articles of incorporation which formally create the corporation.Management and the board of directors prepare bylaws which are operation rules and procedures.(Concluded)
16 Organization Structure of a CorporationCosts may be incurred in organizing a corporation. The recording of a corporation’s organizing costs of $8,500 on January 5 is shown below:Jan. 5 Organizational ExpenseCashPaid costs of organizing the corporation.
17 Describe the two main sources of stockholders’ equity. Objective 2Describe the two main sources of stockholders’ equity.
18 The owner’s equity in a corporation is called stockholders’ equity, shareholders’ equity, shareholders’ investment, or capital.
19 Stockholders’ EquityThe two sources of capital found in the Stockholders’ Equity section of a balance sheet are paid-in capital or contributed capital (capital contributed to the corporation by stockholders and others) and retained earnings (net income retained in the business).
20 Stockholders’ Equity Section of a Corporate Balance SheetStockholders’ EquityPaid-in capital:Common stock $330,000Retained earnings 80,000Total stockholders’ equity $410,000If there is only one class of stock, the account is entitled Common Stock or Capital Stock.
21 A debit balance in Retained Earnings is called a deficit. Such a balance results from accumulated net losses.
22 Objective 3Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock.
23 Characteristics of StockThe 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.
24 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.
25 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.
26 Number of Shares Authorized, Issued, and Outstanding Number of Shares Authorized, Issued, and OutstandingOutstandingAuthorizedIssued
27 The right to vote in matters concerning the corporation. Major Rights That Accompany Ownership of a Share of StockThe right to vote in matters concerning the corporation.The right to share in distributions of earnings.The right to share in assets on liquidation.
28 Two Primary Classes of Paid-In CapitalThe 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.
29 A corporation has 1,000 shares of $4 preferred stock and 4,000 shares of common stock outstanding. The net income, amount of earnings retained, and the amount of earnings distributed are as follows:Net income $20, $9,000 $62,000Amount retained , , ,000Amount distributed $10, $3,000 $22,000
31 Sandpiper Company has stock 20,000 shares of 1% preferred stock of $100 par and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends:Year 1: $10,000Year 2: 25,000Year 3: 80,000Determine the dividends per share for preferred and common stock for each year.
32 Year Year Year 3Amount distributed $10,000 $25,000 $80,000Preferred dividend (20, shares) 10, , ,000Common dividend (100,000shares) $ $ 5,000 $60,000Dividends per share:Preferred $0.50 $1.00 $1.00Common stock None $0.05 $0.60
33 Issuing StockA 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.Cash 1,Preferred StockCommon Stock 1,Issued preferred stock and common stock at par for cash.
34 When a stock is issued for a price that is more than its par, the stock has sold at a premium. When stock is issued for a price that is less than its par, the stock has sold at a discount.
35 Premium on StockCaldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55.CashPreferred StockPaid-in Capital in Excess ofPar—Preferred StockIssued $50 par preferred stock at $55.
36 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.LandCommon StockPaid-in Capital in Excess of ParIssued $10 par common stock valued at $12 per share, for land.
37 No-Par StockA corporation issues 10,000 shares of no-par common stock at $40 a share.CashCommon StockIssued 10,000 shares of no-par common stock at $40.
38 At a later date, the corporation issues 1,000 additional shares at $36.CashCommon StockIssued 1,000 shares of no- par common stock at $36.
39 Stated ValueSome 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.
40 Stated ValueUsing the same data as we used for par the transaction is recorded as follows:CashCommon StockPaid-in Capital in Excess of Stated ValueIssued 10,000 shares of no-par common at $40. Stated value, $25.
41 The corporation issued 1,000 shares of no-par common stock at $36 (stated value, $25).CashCommon StockPaid-in Capital in Excess of Stated ValueIssued 1,000 shares of no-par common at $36. Stated value, $25.
42 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.
43 Mar. 6 Cash 450,000Common Stock 450,000(15,000 shares x $30)Apr. 13 Cash 40,000Preferred Stock 40,000(1,000 shares x $40)May 19 Cash ,000Preferred Stock 600,000Paid-in Capital in Excess of Par 30,000(15,000 shares x $42)
44 Journalize the entries for cash dividends and stock dividends. Objective 4Journalize the entries for cash dividends and stock dividends.
45 Sufficient retained earnings Sufficient cash Cash DividendsA cash distribution of earnings by a corporation to its stockholders is called a cash dividend. There are usually three conditions that a corporation must meet to pay a cash dividend.Sufficient retained earningsSufficient cashFormal action by the board of directors
46 Three Important Dividend DatesFirst is the date of declaration. Assume that on December 1, Hiber Corporation declares a $42,500 dividend ($12,500 to the 5,000 preferred stockholders and $30,000 to the 100,000 common stockholders.
47 Heber Corporation records the $42,500 liability on the declaration date.Dec. 1 Cash DividendsCash Dividends PayableDeclared cash dividend.
48 Three Important Dividend DatesThe second important date is the date of record. For Hiber Corporation this would be December 10. No entry is required since this date merely determines which stockholders will receive the dividend.
49 Three Important Dividend DatesThe third important date is the date of payment. On January 2, Hiber issues dividend checks.Jan Cash Dividends PayableCashPaid cash dividend.
50 The important dates in connection with a cash dividend of $75,000 on a corporation’s common stock are February 26, March 30, and April 2. Journalize the entries required on each date.Feb. 26 Cash Dividends 75,000Cash Dividends Payable 75,000Mar. 30 No entry required.Apr. 2 Cash Dividends Payable 75,000Cash 75,000
51 Stock DividendsA distribution of dividends to stockholders in the form of the firm’s own shares is called a stock dividend.
52 On December 15, the board of directors of Hendrix Corporation declares a 5% stock dividend of 100,000 shares (2,000,000 shares x 5%) to be issued on January 10 to stockholders of record on December 31. The market price on the declaration date is $31 a share.
53 The entry to record the declaration of the 5 percent stock dividend is as follows:Dec. 15 Stock Dividend (100,000 x $31 market) 3,Stock Dividend Distributable 2,Paid-in Capital in Excess of Par—Common Stock 1,Declared 5% (100,000 share) stock dividend on $20 par common stock with a market value of $31 per share.
54 On January 10, the number of shares out-standing is increased by 100,000. The following entry records the issue of the stock:Jan. 10 Stock Dividends Distributable 2,Common Stock 2,Issued stock for the stock dividend.
55 Journalize the entries required on June 14, July 1, and August 15. Vienna Highlights Corporation has 150,000 shares of $100 par common stock outstanding. On June 14, Vienna Highlights declared a 4% stock dividend to be issued August 15 to stockholders of record on July 1. The market price of the stock was $110 a share on June 14.Journalize the entries required on June 14, July 1, and August 15.
56 June 14 Stock Dividends (150,000 x 4% x $110) ,000Stock Dividends Distributable(6,000 x $100) ,000Paid-in Capital in Excess of Par—Common Stock ($660,000 – $600,000) ,000July 1 No entry required.Aug. 15 Stock Dividend Distributable 600,000Common Stock ,000
57 Journalize the entries for treasury stock transactions. Objective 5Journalize the entries for treasury stock transactions.
58 Treasury Stock TransactionsOccasionally, a corporation buys back its own stock to provide shares for resale to employees, for reissuing as a bonus to employees, or for supporting the market price of the stock. This stock is referred to as treasury stock.
59 Purchased 1,000 shares of treasury stock at $45. On January 5, a firm purchased 1,000 shares of treasury stock (common stock, $25 par) at $45 per share. The cost method for accounting for treasury stock is used.Treasury StockCashPurchased 1,000 shares of treasury stock at $45.
60 Later, 200 shares of treasury stock were sold for $60 per share. Later, 200 shares of treasury stock were sold for $60 per share.CashTreasury Stock*Paid-in Capital from Sale of Treasury StockSold 200 of treasury stock at $60.*The amount debited to Treasury Stock per share when purchased is the amount per share that must be credited to that account when sold.
61 Sold 200 shares of treasury stock at $40 per share. Sold 200 shares of treasury stock at $40 per share.CashPaid-in Capital from Sale of Treasury StockTreasury StockSold 200 of treasury stock at $40.
62 On May 3, Buzz Off Corporation reacquired 3,200 shares of its common stock at $42 per share. On July 22, Buzz Off sold 2,000 of the reacquired shares at $47 per share. On August 30, Buzz Off sold the remaining shares at $40 per share.Journalize the transactions of May 3, July 22, and August 30.
63 May 3 Treasury Stock (3,200 x $42) 134,400Cash 134,400July 22 Cash (2,000 x $47) 94,000Treasury Stock (2,000 x $42) 84,000Paid-in Capital from Sale of TreasuryStock [2,000 x ($47 – $42)] 10,000Aug. 30 Cash (1,200 x $40) 48,000Paid-in Capital from Sale of TreasuryStock [1,200 x ($42 – $40)] 2,400Treasury Stock (1,200 x $42) 50,400
64 Describe and illustrate the reporting of stockholders’ equity. Objective 6Describe and illustrate the reporting of stockholders’ equity.
65 Stockholders’ Equity Section of a Balance Sheet
66 Using the following accounts and balances, prepare the Stockholders’ Equity section of the balance sheet. Forty thousand shares of common stock are authorized and 5,000 shares have been reacquired.Common Stock, $50 par $1,500,000Paid-in Capital in Excess of Par 160,000Paid-in Capital from Sale ofTreasury Stock 44,000Retained Earnings 4,395,000Treasury Stock 120,00066
67 Stockholders’ EquityPaid-in capital:Common stock, $50 par(40,000 shares authorized,30,000 shares issued) $1,500,000Excess of issue price over par ,000 $1,660,000From sale of treasury stock ,000Total paid-in capital $1,704,000Retained earnings 4,395,000Total $6,099,000Deduct treasury stock (5,000 shares at cost) ,000Total stockholders’ equity $5,979,000
69 RestrictionsThe retained earnings available for use as dividends may be limited by the actions of a corporation’s board of directors. These amounts, called restrictions or appropriations, remain part of the retained earnings. However, they must be disclosed, usually in the notes to the financial statements.
71 Dry Creek Camera Inc. reported the following results for the year ending March 31, 2008:Retained earnings, April 1, 2007 $3,338,500Net income 461,500Cash dividends declared 80,000Stock dividends declared 120,000Prepare a retained earnings statement for the fiscal year ended March 31, 2008.
72 RETAINED EARNINGS STATEMENT For the Year Ended March 31, 2008 DRY CREEK CAMERAS INC.RETAINED EARNINGS STATEMENTFor the Year Ended March 31, 2008Retained earnings, April 1, $3,338,500Net income $461,500Less dividends declared 200,000Increase in retained earnings ,500Retained earnings, March 31, $3,600,000
73 Describe the effect of stock splits on corporate financial statements. Objective 7Describe the effect of stock splits on corporate financial statements.
74 13-7Stock SplitsA corporation sometimes reduces the par or stated value of their common stock and issues a proportionate number of additional shares. This process is called a stock split.
75 Rojek Corporation has 10,000 shares of $100 par common stock outstanding with a current market price of $150 per share. The board of directors declares a 5-for-1 stock split.
76 20 shares, $20 parAFTER 5:1 STOCK SPLIT$400 total par valueBEFORE STOCK SPLIT4 shares, $100 par$400 total par value
77 Since a stock split changes only the par or stated value and the number of shares outstanding, it is not recorded by a journal entry. The details of the stock split are normally disclosed in the notes to the financial statements.
78 Summary Nature of Corporations Main sources of stockholders equity Characteristics of stockJournalize transactionsReporting of Stockholders Equity