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Corporat ions: Organizat ion ,

Stock Transact ions, andDividends

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Characteristics of a Corporation

A corporationis a legal entity, distinct

and separate from the individuals whocreate and operate it. As a legal entity, a

corporation may acquire, own, and

dispose of property in its own name.

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The stockholdersorshareholders

who own the stock own the

corporation. Corporations whoseshares of stock are traded in public

markets are called public

corporations.

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Public Corporations

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Corporations whose shares are not traded

publicly are usually owned by a small

group of investors and are callednonpublicorprivate corporations. The

stockholders of all corporations have

l imited l iabi l i ty.

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Private Corporations

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The stockholders control a corporation

by electing a board of directors. The

board meets periodically to establishcorporate policy. It also selects the chief

executive officer (CEO) and other major

officers.

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Board of Directors

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Employees

Officers

Board of Directors

Organizational Structure of a Corporation

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Exhibit 1

Stockholders

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A corporation has separate legalexistence from its owners.

A corporation has transferable unitsof ownership.

A corporation has limited

stockholders liability.

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Characteristics of a Corporation

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Advantages and Disadvantagesof the Corporate Form

1

(continued)

Exhibit 2

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1

Advantages and Disadvantages ofthe Corporate Form(cont inued)

Exhibit 2

Explanation

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First step in forming a corporation is to file an

application of incorporationwith 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 (see Exhibit 3 in

Slide 14).

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Examples of Corporations andTheir States of Incorporation

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Exhibit 3

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After the application is approved, the stategrants a charteror articles of

incorporationwhich formally create thecorporation.

Managementand the board of directorspreparebylawswhich are operating rules

and procedures.

Forming a Corporation

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Costs may be incurred in organizing a corporation.

The recording of a corporations organizing costs

of $8,500 on January 5 is shown below:

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The owners equity in a corporation is

called stockholders equity,shareholders equity, shareholders

investment, orcapital.

Stockholders Equity

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The two sources of capital are:

1. Capital contributedto the corporation

by the stockholders,

called paid-incapitalor

contr ibuted capital.2. Net income retained

in the business, called

retained earnings.

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Stockholders Equity Section of

a Corporate Balance Sheet

Stockholders EquityPaid-in capital:

Common stock $330,000Retained earnings 80,000

Total stockholders equity $410,000

If there is only one class of stock, the account is

entitled Common Stockor Capital Stoc k.

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Authorized

Number of Shares Authorized,

Issued, and Outstanding

IssuedOutstanding

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Major Rights That AccompanyOwnership of a Share of Stock

These stock rights normallyvary with the class of stock.

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1. The right to vote in matters concerning

the corporation.

2. The right to share in distributions ofearnings.

3. The right to share in assets on liquidation.

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The two primary classes of paid-in

capital are common stockand

preferred stock. The primary

attractiveness of preferred stocks is

that they are preferred over

common as to dividends.

Classes of Stock

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Cumulative preferred stockhas a right

to receive regular dividends that were

not declared (paid) in prior years.

Noncumulative preferred stock does

not have this right.

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Cumulative Preferred Stock

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Example Exercise 11-1

Dividends per Share

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Sandpiper Company has 20,000 shares of 1%cumulative preferred stock of $100 par and 100,000shares of $50 par common stock. The following

amounts were distributed as dividends:Year 1: $10,000Year 2: 45,000Year 3: 80,000

Determine the dividends per share for preferred and

common stock for each year.

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Example Exercise 11-1 (cont inued) 3

Dividends per share:Preferred $ $ $Common stock $ $

Year 1 Year 2 Year 3

Amount distributed $10,000 $45,000 $80,000Preferred dividend (20,000

shares) . ,Common dividend (100,000

shares)*(10,000 + $20,000)

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For Practice: PE 11-1A, PE 11-1B

Follow My Example 11-1

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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

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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 aprice that is less than its par, the

stock has been sold at a discount.

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Caldwell Company issues 2,000 shares of

$50 par preferred stock for cash at $55.

Premium on Stock

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A corporation acquired land for which the fairmarket 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.

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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

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Example Exercise 11-2

Entries for Issuing Stock

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On March 6, Limerick Corporation issued for cash15,000 shares of no-par common stock at $30. On April13, Limerick issued at par 1,000 shares of 4%, $40 par

preferred stock for cash. On May 19, Limerick issuedfor cash 15,000 shares of 4%, $40 par preferred stockat $42.

Journalize the entries to record the March 6, April 13,and May 19 transactions.

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Example Exercise 11-2 (cont inued) 3

11-42 For Practice: PE 11-2A, PE 11-2B

Follow My Example 11-2

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Cash Dividends

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A 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.1. Sufficient retained earnings

2. Sufficient cash

3. Formal action by the board of directors

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The date of declarationis the date

the board of directors formally

authorized the payment of thedividend. On this date, the

corporation incurs the liability to

pay the amount of the dividend.

Date of Declaration

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The date of recordis the date the

corporation used to determinewhich stockholders will receive the

dividend.

Date of Record

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The date of paymentis the date

the corporation will pay thedividends to the stockholders who

owned the stock on the date of

record.

Date of Payment

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Dividendper Share

TotalDividends

Preferred stock, $100 par,5,000 shares outstanding $2.50 $12,500

Common stock, $10 par,100,000 shares outstanding $0.30 30,000

Total... $42,500

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On October 1, Hiber Corporation declaresthe cash dividends shown below with a date

of record of November 10 and a date of

payment of December 2.

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On October 1, the declaration date, Hiber

Corporation records the following entry:

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On December 10, the date of

record, no entry is required

since this date merely

determines which stockholders

will receive the dividend.

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On December 2, the date of payment, Hiber

Corporation records the payment of the

dividend as follows:

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Stock Dividends

4

A distribution of dividends

to stockholders in the formof the firms own shares is

called a stock dividend.

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Treasury Stock Transactions

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Treasury stock is stock that a corporation has

issued and then reacquired. A corporation may

purchase its own stock for a variety of reasons

including the following:

1. To provide shares for resale to employees

2. To reissue as bonuses to employees, or

3. To support the market price of the stock.

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On January 5, a firm purchased 1,000 sharesof treasury stock (common stock, $25 par)

at $45 per share. The cost methodfor

accounting for treasury stock is used.

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Stock Split

A stock spli tis a process by which

a corporation reduces the par or

stated value of the common stock

and issues a proportionate number

of additional shares.

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Rojek Corporation has 10,000

shares of $100 par common stock

outstanding with a current market

price of $150 per share. The boardof directors declares a 5-for-1

stock split. A stock spli t does not

requi re a journal entry.