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Accounting – Chapter 11 Corporations: Organization, Stock Transactions, and Dividends

1. Describe the nature of the corporate form of organization. Characteristics of a Corporation

A _______________ 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.

The __________________ or shareholders who own the stock own the corporation. Corporations whose shares of

stock are traded in public markets are called __________________ corporations.

Corporations whose shares are not traded publicly are usually owned by a small group of investors and are called

________________ or ________________ corporations. The stockholders of all corporations have limited liability.

The stockholders control a corporation by electing a ______________________. The board meets periodically to

establish corporate policy. It also selects the chief executive officer (CEO) and other major officers.

• A corporation has __________________________________ from its owners.

• A corporation has __________________ units of ownership.

• A corporation has limited stockholders’ _____________________.

Forming a Corporation

First step in forming a corporation is to file an _________________________________ 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.

• After the application is approved, the state grants a _________________ or articles of incorporation which

formally create the corporation.

• Management and the board of directors prepare _______________ which are operating rules and procedures.

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:

DATE ACCOUNT TITLE NO. REF. DEBIT CREDIT

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

Stockholders’ Equity

The owner’s equity in a corporation is called stockholders’ equity, shareholders’ equity, shareholders’ investment,

or __________________.

The two sources of capital are:

1. Capital contributed to the corporation by the stockholders, called ____________________ or

_____________________________.

2. Net income retained in the business, called _____________________________.

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 ______________ Stock or ________________ Stock.

A debit balance in Retained Earnings is called a _____________. 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.

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

Characteristics of Stock

The number of shares of stock that a corporation is _________________ 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 ________________- stock.

Shares of stock are often assigned a monetary amount, called __________. Corporations may issue stock

_________________ to stockholders to document their ownership. Some corporations have stopped issuing stock

certificates except on special request.

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 distributions of earnings.

3. The right to share in assets on liquidation.

These stock rights normally vary with the class of stock.

Classes of Stock

• Stock issued without a par is called __________ stock. Some states require the board of directors to assign a

_____________________ to no-par stock.

• Some state laws require that corporations maintain a minimum stockholder contribution, called

___________________, to protect creditors.

Label the diagram below:

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.

Cumulative preferred stock has a right to receive regular dividends that were not declared (paid) in prior years.

Noncumulative preferred stock does not have this right.

Example 11-1: Dividends per Share

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. One-half of each class of authorized shares is issued at par for cash.


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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 ______________. If the

stock is issued (sold) for a price that is less than its par, the stock has been sold at a ________________.

Premium on Stock

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


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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.


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No-Par Stock 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.


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


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Example 11-2: Entries for Issuing Stock


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4. Describe and illustrate the accounting for cash dividends and stock dividends.

Cash Dividends

A cash distribution of earnings by a corporation to its stockholders is called a _______________________. 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 Date of Declaration

The date of _________________ is the date the board of directors formally authorized the payment of the dividend.

On this date, the corporation incurs the liability to pay the amount of the dividend.

Date of Record

The date of __________________ is the date the corporation used to determine which stockholders will receive the

dividend.

Date of Payment

The date of _______________ is the date the corporation will pay the dividends to the stockholders who owned the stock on the date of record. On October 1, Hiber Corporation declares the cash dividends shown below with a date of record of November 10 and a date of payment of December 2. Div/Share Total Divs

Preferred stock, $100 par,

5,000 shares outstanding… $2.50 $_______

Common stock, $10 par,

100,000 shares outstanding $0.30 _________

Total……………………………... $_________

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. On December 2, the date of payment, Hiber Corporation records the payment of the dividend as follows:


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Example 11-3: Entries for Cash Dividends


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Stock Dividends A distribution of dividends to stockholders in the form of the firm’s own shares is called a _____________________. On December 15, the board of directors of Hendrix Corporation declares a 5% stock dividend of 100,000 shares

(2,000,000 shares × 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. The entry to record the declaration of the 5 percent stock dividend is as follows:


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On January 10, the number of shares outstanding is increased by 100,000. The following entry records the issue of the stock:


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Before Stock

Dividend

After Stock

Dividend

Total Shares Issued

Number of shares owned

Proportionate ownership

Example 11-4: Entries for Issuing Stock


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5. Describe and illustrate the accounting for treasury stock transactions.

Treasury Stock Transactions

________________ 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. On January 5, a firm purchased 1,000 shares of treasury stock (common stock, $25 par) at $45 per share. The ___ ________________for accounting for treasury stock is used.


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Later, 600 shares of treasury stock were sold for $60 per share.


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On October 4, the corporation sells the remaining 400 shares of treasury stock for $40 per share.


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Example 11-5: Entries for Treasury Stock


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6. Describe and illustrate the reporting of stockholders’ equity.

Example 11-6: Reporting Stockholders’ Equity

Reporting Retained Earnings Changes to retained earnings may be reported using one of the following:

1. Separate retained earnings statement 2. Combined income and retained earnings statement 3. Statement of stockholders’ equity

The retained earnings available for use as dividends may be limited by the actions of a corporation’s board of directors. These amounts, called _________________ or ______________________, remain part of the retained earnings. However, they must be disclosed, usually in the notes to the financial statements. Restrictions of retained earnings are classified as follows:

1. _____________. State laws may require a restriction of retained earnings.

2. __________________. A corporation may enter into contracts that require restrictions of retained earnings.

3. ____________________. A corporation’s board of directors may restrict retained earnings voluntarily.

Example 11-7: Retained Earnings Statement

____________________________

____________________________

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Retained Earnings, April ___, 2009 $_____________

Net Income $___________

______ Dividends Declared ____________

______________ in Retained Earnings _______________

Retained Earnings, ___________________ _______________

7. Describe the effect of stock splits on corporate financial statements.

A stock split is a process by which a corporation reduces the par or stated value of the common stock and issues a

proportionate number of additional shares.

Before Stock Split: ____ shares, $_____ par, $_____ total par value

After Stock Split: ____ shares, $_____ par, $_____ total par value

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. A stock split does not require a journal entry.

Financial Analysis

Earnings per share

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