chapter 11 corporations: organization, capital stock transactions, and dividends

Chapter Chapter 1111Corporations: Organization, Corporations: Organization, Capital Stock Transactions, Capital Stock Transactions,

and Dividendsand Dividends

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.

ObjectivesObjectivesObjectivesObjectives

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.

ObjectivesObjectivesObjectivesObjectives

A corporation is a legal entity, distinct and separate from the individuals who

create and operate it.

A corporation is a legal entity, distinct and separate from the individuals who

create and operate it.

Stakeholders include those who have an economic

interest in an organization and those who are affected

by its activities.

Stakeholders include those who have an economic

interest in an organization and those who are affected

by its activities.

Employees

Officers(selected by board of directors)

Board of Directors(elected by stockholders)

Organizational Structure of a CorporationOrganizational Structure of a CorporationOrganizational Structure of a CorporationOrganizational Structure of a Corporation

Stockholders(owners of corporation stock)

Forming a Corporation - USForming a Corporation - USForming a Corporation - USForming a Corporation - US 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.

Forming a CorporationForming a CorporationForming a CorporationForming 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.

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 8 500 00

Paid cost of organizing the

corporation.

Cash 8 500 00

Authorized

IssuedIssued

Outstanding

Number of Shares

Sources of Paid-In CapitalSources of Paid-In CapitalSources of Paid-In CapitalSources of Paid-In Capital

Major Rights that Accompany Ownership

of a Share of Stock

Major Rights that Accompany Ownership

of a Share of Stock1. 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.

Sources of Paid-In CapitalSources of Paid-In CapitalSources of Paid-In CapitalSources of Paid-In Capital

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 Common StockholdersStockholders

Preferred Preferred StockholdersStockholders

Classes of StockholdersClasses of StockholdersClasses of StockholdersClasses 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.

Classes of StockholdersClasses of StockholdersClasses of StockholdersClasses of Stockholders

Nonparticipating Preferred StockNonparticipating Preferred StockNonparticipating Preferred StockNonparticipating Preferred Stock

A nonparticipating preferred stock is limited to a certain amount. Assume 1,000 shares of $4 nonparticipating preferred stock (or 4% with a par value of $100) and 4,000 shares of common stock and the following:

Net income $20,000 $55,000 $62,000Amount retained 10,000 20,000 40,000Amount distributed $10,000 $35,000 $22,000

2005 2006 2007

Nonparticipating Preferred StockNonparticipating Preferred StockNonparticipating Preferred StockNonparticipating Preferred Stock

Dividends per share: Preferred $ 4.00 $ 4.00 $ 4.00 Common $ 1.50 $ 7.75 $ 4.50

Amount distributed $10,000 $35,000 $22,000Preferred dividend (1,000 shares) 4,000 4,000 4,000Common dividend (4,000 shares) $6,000 $31,000 $18,000

Assume 1,000 shares of $4 cumulative preferred stock

and 4,000 shares of common stock. No dividends were

paid in 2005 and 2006.

Cumulative Preferred StockCumulative Preferred StockCumulative Preferred StockCumulative Preferred Stock

So, preferred dividends are two years in

arrears.

So, preferred dividends are two years in

arrears.

On March 7, 2007, the board of directors declares dividends of $22,000.

$4,000

$4,000

$4,000

Cumulative Preferred StockCumulative Preferred StockCumulative Preferred StockCumulative Preferred Stock

Preferred Stock DividendsPreferred Stock Dividends Dividends Paid in 2007Dividends Paid in 2007

Total dividends paid, $22,000

$4,000

2005(In arrears) $4,000

2006(In arrears) $4,000

2007(Current dividend)

Preferred Stock

Common Stock

$10,000$10,000

A corporation is authorized to issue 10,000 shares of preferred stock, $100 par, and

100,000 shares of common stock, $20 par.

Issuing StockIssuing StockIssuing StockIssuing Stock


On April 1, one-half of each class of authorized stock is issued at par for cash.

On April 1, one-half of each class of authorized stock is issued at par for cash.

Apr. 1 Cash 1,500000 00

Issued preferred stock and

common stock at par.

Preferred Stock500 000 00

Common Stock1,000000 00


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.

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.

Issuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a Premium

On March 15, Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55.

On March 15, Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55.

Mar. 15 Cash 110 000 00

Issued 2,000 shares of $50 par

preferred stock at $55.


Paid-in Capital in Excess of Par--


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.

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.

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.


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.

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 120 000 00

Issued $10 par common stock

valued at $12 per share, for

land.

Common Stock100 000 00

Paid-in Capital in Excess of Par20 000 00


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.


Issuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-Par

On February 23, a corporation issues 10,000 shares of no-par common stock at $40 a share.

On February 23, a corporation issues 10,000 shares of no-par common stock at $40 a share.

Feb. 23 Cash 400 000 00

Issued 10,000 shares of no-par

common stock at $40.



Later, on March 9, the corporation issues 1,000 additional shares at $36.

Later, on March 9, the corporation issues 1,000 additional shares at $36.

Mar. 9 Cash 36 000 00

Issued 1,000 shares of no-par

common stock at $36.



Some states require that the entire proceeds from the sale of no-par stock be treated as legal capital.

Some states require that the entire proceeds from the sale of no-par stock be treated as legal capital.

Also, no-par stock may be assigned a stated value per share. The stated value is

recorded similar to a par value.

Also, no-par stock may be assigned a stated value per share. The stated value is

recorded similar to a par value.

Issuing Stock with a Stated ValueIssuing Stock with a Stated ValueIssuing Stock with a Stated ValueIssuing Stock with a Stated Value

On March 30, issued 1,000 shares of no-par common stock at $40; stated value, $25.

On March 30, issued 1,000 shares of no-par common stock at $40; stated value, $25.

Mar. 30 Cash 40 000 00

Issued 1,000 shares of no-par common stock at $40; stated value, $25.


Paid-in Capital in Excess of

Stated Value15 000 00

Treasury Stock TransactionsTreasury Stock TransactionsTreasury Stock TransactionsTreasury 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.

Occasionally, a corporation buys back its own stock for the purpose of later reissuing it. This

stock is referred to as treasury stock.

Occasionally, a corporation buys back its own stock for the purpose of later reissuing it. This

stock is referred to as treasury stock.


Cost Method

On January 5, a firm purchased 1,000 shares of treasury stock (common stock,

$25 par) at $45 per share.

On January 5, a firm purchased 1,000 shares of treasury stock (common stock,

$25 par) at $45 per share.

Jan. 5 Treasury Stock 45 000 00

Purchased 1,000 shares of

treasury stock at $45.

Cash 45 000 00

On June 2, sold 200 shares of treasury stock at $60 per share.

On June 2, sold 200 shares of treasury stock at $60 per share.

June 2 Cash 12 000 00

Sold 200 shares of treasury

stock at $60.

Treasury Stock9 000 00

Paid-in Capital from sale of



Cost Method

On September 3, sold 200 shares of treasury stock at $40 per share.

On September 3, sold 200 shares of treasury stock at $40 per share.

Sep. 3 Cash 8 000 00

Paid-in Capital from Sale of

Treasury Stock 1 000 00

Sold 200 shares of treasury

stock at $40.



Cost Method

Stock SplitsStock SplitsStock SplitsStock 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.

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.

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,

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,

Stock SplitsStock SplitsStock SplitsStock Splits

BEFORE BEFORE STOCK SPLITSTOCK SPLIT

4 shares, $100 par

$400 total par value

20 shares, $20 par

AFTER 5-1 AFTER 5-1 STOCK SPLITSTOCK SPLIT

$400 total par value

Accounting for Cash DividendsAccounting 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.

Corporations generally declare and pay cash dividends on shares outstanding when three conditions exist:

1. Sufficient retained earnings

Accounting for Cash DividendsAccounting for Cash Dividends

2. Sufficient cash

3. Formal action by the board of directors

Retained Earnings

50,000


There are three important dates relating the dividends.

There are three important dates relating the dividends.

First is the date of declaration. Assume that on December 1, Hiber Corporation declares a

$42,500 dividend.

First is the date of declaration. Assume that on December 1, Hiber Corporation declares a

$42,500 dividend.

Dec. 1 Cash Dividends 42 500 00

Declared cash dividend.

Cash Dividend Payable42 500 00

Date of DeclarationDate of Declaration


The second important date is the date of record. For Hiber

Corporation this would be December 11.

The second important date is the date of record. For Hiber

Corporation this would be December 11.


On this date, ownership of shares determines who receives the

dividend. No entry is required.

On this date, ownership of shares determines who receives the

dividend. No entry is required.

The third important date is the date of payment. On January 2, Hiber

issues dividend checks.

The third important date is the date of payment. On January 2, Hiber

issues dividend checks.


2


Jan. 2 Cash Dividends Payable 42 500 00

Paid cash dividends.

Cash 42 500 00

Date of PaymentDate of Payment

Accounting for Stock DividendsAccounting for Stock Dividends

A distribution of dividends to stockholders in the form of the firm’s own shares is called a

stock dividend.

A distribution of dividends to stockholders in the form of the firm’s own shares is called a

stock dividend.

Stock dividends transfer pro rata shares of stock to stockholders. Assume Hendrix

Corporation declares a 5% stock dividend on common stock, $20 par, 2,000,000

shares issued. (Market price $31)

Stock dividends transfer pro rata shares of stock to stockholders. Assume Hendrix

Corporation declares a 5% stock dividend on common stock, $20 par, 2,000,000

shares issued. (Market price $31)


Dec. 15 Stock Dividends 3,100 000 00

Declared stock dividend.

Hendrix Corporation, December 15 (before dividend)Common Stock, $20 par $40,000,000Paid-in Capital in Excess of Par--Common Stock 9,000,000Retained Earnings 26,600,000

Stock Dividends Distributable2,000000 00

Paid-in Capital in Excess of

Par—Common Stock1,100000 00


Jan. 10 Stock Dividends Distributable 2,000 000 00

Issued stocks for the stock

dividend.

Common Stock2,000000 00

On January 10, Hendix Corporation issues the stock. This action increases the number

of shares outstanding by 100,000.

Accounting for Stock DividendsAccounting for Stock DividendsHendrix Corporation, December 15 (before dividend)

Common Stock, $20 par $40,000,000Paid-in Capital in Excess of Par--Common Stock 9,000,000Retained Earnings 26,600,000

$75,600,000

Hendrix Corporation, January 10 (after dividend)

Common Stock, $20 par $42,000,000Paid-in Capital in Excess of Par--Common Stock 10,100,000Retained Earnings 23,500,000

$75,600,000

There are two ways to report stockholders’ equity in the balance

sheet. In the following slide, each class of stock is listed first, followed by its

related paid-in capital accounts.

There are two ways to report stockholders’ equity in the balance

sheet. In the following slide, each class of stock is listed first, followed by its

related paid-in capital accounts.

Reporting Stockholders’ EquityReporting Stockholders’ EquityReporting Stockholders’ EquityReporting Stockholders’ Equity

The other slide 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.

The other slide 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.

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 2,000

Total paid-in capital $1,202,000

Retained earnings 350,000

Total $1,552,000

Deduct treasury stock (600 shares at cost) 27,000

Total stockholders’ equity $1,525,000

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 202,000

Total contributed capital $1,202,000

Retained earnings 350,000

Total $1,552,000

Deduct treasury stock (600 shares at cost) 27,000

Total stockholders’ equity $1,525,000

Stockholders’ Equity

Financial Analysis and Financial Analysis and InterpretationInterpretation

Financial Analysis and Financial Analysis and InterpretationInterpretation

Dividend YieldDividend YieldDividend YieldDividend Yield

2007 2006Dividends per share of common $ 0.80 $ 0.60Market price per share of common $20.50 $13.50

Dividends per Share of Common Stock

Market Price per Share of Common StockDividend YieldDividend YieldDividend YieldDividend Yield

$.60

$13.50Dividend Yield, 2006Dividend Yield, 2006Dividend Yield, 2006Dividend Yield, 2006 = 4.4%

Dividend Yield, 2007Dividend Yield, 2007Dividend Yield, 2007Dividend Yield, 2007$.80

$20.50= 3.9%

Use: To indicate the rate of return to common stockholders in terms of dividends

Use: To indicate the rate of return to common stockholders in terms of dividends

chapter 11 corporations: organization, capital stock transactions, and dividends

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