review the characteristics of a corporation

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.1

Review the characteristics of a corporation

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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

ADVANTAGES1.Corporations can raise more money2.Corporations have continuous life3.Ownership transfer is easy4.No mutual agency5.Stockholders have limited liability

DISADVANTAGES1.Ownership and management separated.2.Double taxation3.Government regulation is expensive4.Start-up costs are higher

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Authorization–State’s permission to operateAuthorized stock–How many shares of a class of stock a corporation may issueCapital stock–Represents ownership of the corporation's capitalStock certificate–Paper evidencing ownership in a corporation

Company nameStockholder nameNumber of shares owned

Outstanding stock–Stock held by stockholders3


Due to the recent beef recalls, Southern Steakhouse is considering incorporating. Bill, the owner, wants to protect his personal assets in the event the restaurant is sued.

Which advantage of incorporating is most applicable?

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Stockholders have limited liability.


Describe the two sources of stockholders’ equity and the classes of stock

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Paid-in capital(Contributed capital)

Amounts received from stockholdersCommon stock is main sourceExternally generatedResulting from transactions with outsiders

Retained earningsEarned by profitable operationsInternally generated Results from internal corporate decisions to retain net income for use in the company

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Common stockFour basic rights

Vote—voting on corporate mattersDividends—receive a proportionate part of dividend declared Liquidation—receive a proportionate part of assets remainingPreemption—maintain their proportionate ownership

Preferred stockCertain advantages over common stock

Receive dividends before commonFixed dividend amountUpon liquidation, receive assets before commonAlso have basic rights of common stockholders unless withheld

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Par valueArbitrary amount assigned to a share of stockSet when the corporate charter is filedUsually set low as to avoid legal difficulties

No-parNo arbitrary amount assignedCould have a stated valueStated value treated as par

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Journalize the issuance of stock and prepare the stockholders’ equity section of a

corporation balance sheet

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Sell directly to stockholdersUse an underwriter/brokerage firm

Buys unsold stock

Issue price–price received for issuing stockUsually exceeds par value

Stock exchange– here public company stock is traded

NYSE–New York Stock Exchange

Wall Street JournalTombstone—an advertisement for initial sale of a stock

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Issuing common stock at par

Issuing common stock above parAmount received above par is called a premiumNot a gain; called additional paid-in capitalAnother account is created for the premium amount

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The balance of the Common stock account is calculated

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Total Paid-in capital is the sum of Common stock plus Paid-in capital in excess of par


No-par stockNo Paid-in capital in excess of par account neededFull amount received is credited to Common stock

Balance sheet shows only the Common stock account

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Stated value stockSimilar to accounting for par value stockAmount above stated value is credited to Paid-in capital in excess of stated value

Issuing stock for assets other than cashAsset is debited for its fair value

Building is debited instead of cash

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Issuing preferred stockSimilar to issuing common stock, except Preferred stock is credited at par value

Preferred stock usually is not issued above par

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Equity accounts are listed in the following order on the balance sheet: Preferred stock , Common stock, Retained earnings

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Scifilink.com issued stock beginning in 2012 and reported the following on its balance sheet at December 31, 2012:

Common stock, $ 2.00 par valueAuthorized: 6,000 shares

Issued: 4,000 shares $ 8,000Paid-in capital in excess of par 4,000Retained earnings 26,500

Requirement: Journalize the company’s issuance of the stock for cash.

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Journal Entry

DATE ACCOUNTS DEBIT CREDIT

Dec 31 Cash 12,000

Common stock 8,000

Paid in capital in excess of par 4,000

Common stock, $ 2.00 par valueAuthorized: 6,000 sharesIssued: 4,000 shares $ 8,000 Paid-in capital in excess of par 4,000Retained earnings 26,500


Susie Systems completed the following stock issuance transactions:May 19 Issued 2,000 shares of $1 par common stock for cash of $9.50 per share.June 3 Sold 300 shares of $3, no-par preferred stock for $15,000 cash.June 11 Received equipment with market value of $78,000. Issued 3,000 shares of the $1 par common stock in exchange.

Requirements:

1. Journalize the transactions. Explanations are not required.2. How much paid-in capital did these transactions generate for Susie Systems?

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Susie Systems completed the following stock issuance transactions:

May 19 Issued 2,000 shares of $1 par common stock for cash of $9.50 per share.

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Journal Entry


May 19 Cash 19,000

Common stock 2,000




June 3 Sold 300 shares of $3, no-par preferred stock for $15,000 cash.

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Journal Entry


Jun 3 Cash 15,000

Preferred stock 15,000



June 11 Received equipment with market value of $78,000. Issued 3,000 shares of the $1 par common stock in exchange.

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Journal Entry


Jun 11 Equipment 78,000

Common stock 3,000



2. How much paid-in capital did these transactions generate for Susie Systems?

$112,000


Illustrate Retained earnings transactions

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Closing entriesStep 1 – Close RevenuesStep 2 – Close Expenses

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Closing entriesStep 3 – Close Income summary

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A loss causes Retained earnings to decrease

A debit balance in Retained earnings is a deficit

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A deficit is reported as a negative amount

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The data for Amanda’s Tax Service, Inc., for the year ended August 31, 2012, follow:

Journalize the required closing entries for the year.Step 1

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Cost of goods sold $ 62,000 Sales revenue $ 125,000

Dividends 14,000 Operating expenses 44,000

Interest revenue 1,800 Retained earnings 24,000

Journal Entry


Aug 31 Sales revenue 125,000

Interest revenue 1,800

Income summary 126,800




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Journal EntryDATE ACCOUNTS DEBIT CREDIT

Aug 31 Income summary 106,000

Cost of goods sold 62,000

Operating expenses 44,000




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Journal Entry


Aug 31 Income summary 20,800

Retained earnings 20,800




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Journal Entry


Aug 31 Retained earnings 14,000

Dividends 14,000



2. What is the balance in Retained earnings after the closing entries are posted?

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Beginning Retained Earnings, Sep 1, 2011 $24,000

Plus: Net income 20,800

44,800

Minus: Dividends 14,000

Ending Retained Earnings, Sep 1, 2011 $30,800


Account for cash dividends

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Sometimes a state prohibits using Paid-in capital for dividendsLegal capital is the portion of equity unavailable for dividendsDividends are declared before payingThree dates:

Declaration date–Board declares a dividend and creates a liabilityDate of record–determines which stockholders receives dividendsPayment date–pay dividends and remove liability

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Preferred dividends expressed as either:A percent of par value

Or a flat dollar amount per share

Common dividends are expressed as a dollar amount per share

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2,000 shares of $100 par 8% preferred = $16,000 dividend

2,000 shares of no-par $3 preferred = $6,000 dividend


Declaration date

Date of Record (no entry)Payment date

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Preferred stockholders receive dividends before commonCommon stockholders receive dividends if total declared is large enough to cover preferred

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Cumulative preferred stock Accumulates dividends each year until the dividends are paidDividends in arrears—dividends passed or not paid

Noncumulative preferred stock Dividends not paid do not accumulated from one year to the next

Dividend in arrears are paid first, then current dividends paid

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A company declares $50,000 for dividendsIn arrears, 1 year at $6,000

Preferred gets $6,000 in arrears + $6,000 currentCommon receives the remainder

Journal entry

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Frenchvanilla Company earned Net income of $75,000 during the year ended December 31, 2012. On December 15, Frenchvanilla declared the annual cash dividend on its 5% preferred stock (par value, $115,000) and a $0.50 per share cash dividend on its common stock (55,000 shares). Frenchvanilla then paid the dividends on January 4, 2013.

Journalize for Frenchvanilla:a. Declaring the cash dividends on December 15, 2012.

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Journal Entry


Dec 31 Retained earnings 33,250

Dividends Payable 33,250


(Continued)

Journalize for Frenchvanilla:b. Paying the cash dividends on January 4, 2013.

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Journal Entry


Jan 4 Dividends payable 33,250

Cash 33,250


Use different stock values in decision making

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Book value attributed to preferred stock + any preferred dividends that are in arrears

Book value attributed to preferred stock is eitherthe number of outstanding preferred shares times liquidation value per share, ORthe book value of preferred equity (the Preferred stock account balance)

Plus any dividends that are in arrears, if the preferred stock is cumulative.

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Book value of preferred stock:

Liquidation price or Preferred stock account A

Dividends in arrears on any outstanding preferred shares B

Total book value attributed to preferred stock A+B

Number of outstanding preferred shares C

Book value per share of preferred stock (A+B)/C

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Book value of common stock:

Total stockholders’ equity D

Less: book value attributed to preferred A+B

Total book value attributed to common stock D-(A+B)

Number of outstanding common shares E

Book value per share of common stock D-(A+B)/E


Bronze Tint Trust has the following stockholders’ equity:

Bronze Tint has not declared preferred dividends for five years (including the current year).

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Paid-in capital:

Preferred stock, 5%, $10 par, 6,000 shares authorized, 4,500 shares issued

$ 45,000

Common stock, $0.20 par, 1,200,000 shares authorized and issued

240,000

Paid-in capital in excess of par—common 400,000

Total paid-in capital $685,000

Retained earnings 255,000

Total stockholders’ equity $ 940,000


Compute the book value per share of Bronze Tint’s preferred and common stock.

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Preferred stock

Par value of Preferred stock $45,000

Cumulative dividends 11,250

Total book value attributed to preferred stock 56,250

Number of outstanding preferred shares 4,500

Book value per share of preferred stock $12.50


Compute the book value per share of Bronze Tint’s preferred and common stock.

(*$ 0.73645833 rounded)

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Common stock

Total stockholders’ Equity $940,000

Less: Preferred equity (56,250)

Common equity $883,750

Number of outstanding preferred shares 1,200,000

Book value per share of preferred stock * $0.74

review the characteristics of a corporation

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