Corporations: Organization, Capital Stock Transactions, and Dividends Instructor’s Lecture P.H.
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Transcript of Corporations: Organization, Capital Stock Transactions, and Dividends Instructor’s Lecture P.H.
Corporations: Organization, Capital Stock Transactions, and Dividends
Instructor’s Lecture
P.H.
Characteristics of a Corporation
a legal entity, separate from its owners (stockholders)
limited liability– a stockholder’s loss is limited to his/her
investment subject to double taxation
– the corporation pays taxes on earnings– the stockholder pays taxes on dividends
received
Organizational Structure of a Corporation
Stockholders
Board of Directors
Officers
Employees
elect
selects
hire
Owner’s Equity in a Corporation
is called Stockholders’ Equity, Shareholders’ Equity, Shareholders’ Investment, or Capital
consists of two main sources:1. paid-in capital (also called contributed
capital)
2. retained earnings
Stockholders’ Equity:
1. Paid-in capital is capital contributed to the corporation by the stockholders
2. Retained earnings is net income earned by the corporation and retained (kept) in the business (not distributed to the stockholders in the form of dividends)
Stockholders’ Equity: Paid-in Capital Paid-in capital is recorded in separate
accounts for each class of stock, for example, common stock and preferred stock
If there is only one class of stock, it is called Common Stock, or Capital Stock
Stockholders’ Equity: Retained Earnings
Net income or net loss is closed to the Retained Earnings account at the end of the period
The Dividends account (similar to the Drawing account) is also closed the Retained Earnings account
Stockholders’ Equity: Retained Earnings
Retained earnings is accumulated net income
– net income increases retained earnings– dividends decrease retained earnings
Stockholders’ Equity: Retained Earnings
Retained earnings may also be called earnings retained for use in the business, or earnings reinvested in the business
The normal balance of the Retained Earnings account is credit (remember, it is an owners’ equity account)
A debit balance in the Retained Earnings account is called a deficit, and is the result of accumulated net losses
Stockholders’ Equity: Retained Earnings
A deficit is deducted from paid-in capital to determine total stockholders’ equity
Just as net income does not represent cash available, retained earnings does not represent surplus cash
Stockholders’ Equity: Sources of Paid-In Capital
Stock Donations of real estate or other assets
Stockholders’ Equity: Sources of Paid-In Capital
Stock Authorized
– stated in the charter of the corporation Issued
– shares issued (sold) to the stockholders Outstanding
– stock remaining in the hands of the stockholders
– shares that receive dividends
Stockholders’ Equity: Sources of Paid-In Capital
Classes of Stock Common Stock
– when there is only one class of stock it is “common stock”
Preferred Stock– nonparticipating vs. participating
• most preferred stock is nonparticipating
– cumulative vs. non-cumulative• cumulative preferred stock has the right to receive regular
dividends that have been passed (are in arrears) before any common stock dividends are paid
Stockholders’ Equity: Sources of Paid-In Capital
Preferred Stock
Has preference over common stockholders in receiving dividends
Has preference over common stockholders in receiving assets on liquidation
Stockholders’ Equity: Sources of Paid-In Capital
Rights of Stockholders
1. The right to vote
2. The right to share in distributions of earnings (dividends)
3. The right to share in assets on liquidation (the winding up of a corporation when it goes out of business)
Stockholders’ Equity: Sources of Paid-In Capital
Terms Par Value
– a monetary amount that may be assigned to a share of stock
– related to legal capital (a minimum amount of stockholder contribution that a corporation may be required to retain for the protection of its creditors)
Stated Value– some states may require a corporation to assign a stated
value to no-par stock
Stockholders’ Equity: Sources of Paid-In Capital
Issuing (Selling) Stock at Par
Cash 1,500,000
Preferred Stock 500,000
Common Stock 1,000,000
Stockholders’ Equity: Sources of Paid-In Capital
Issuing (Selling) Stock at a Premium
Cash 110,000
Preferred Stock 100,000
Paid-In Capital in Excess of Par-Preferred Stock*
10,000
*When stock is issued at a price that is above par, a separate account is credited for the amount above par
Stockholders’ Equity: Sources of Paid-In Capital
Issuing (Selling) Stock With a Stated Value at a Premium
Cash 400,000
Common Stock 250,000
Paid-In Capital in Excess of Stated Value*
150,000
*When no-par stock that has been assigned a stated value is issued at a price that is above par, a separate account is credited for the amount above par
Stockholders’ Equity Treasury Stock
Treasury stock is shares of its own stock that a corporation has once issued and then reacquires
The number of shares issued and the number of shares outstanding will be different if the corporation holds treasury stock
Shares held in the treasury do not receive dividends
Treasury stock reduces total stockholder’s equity
Stockholders’ EquityReasons for Purchasing Treasury
Stock
1. For resale to employees
2. To reissue as a bonus to employees
3. To support (boost) the market price of the stock
Stockholders’ EquityTreasury Stock
Follow the transactions and corresponding journal entries for treasury stock in your text
Use T-accounts to post to the Treasury Stock and Paid-In Capital from Sale of Treasury Stock accounts, and keep track of the number of shares of treasury stock as you do your homework
Stock Splits
A reduction in the par or stated value of a share of common stock, and the issuance of a proportionate number of additional shares
Applies to all shares, including unissued, issued, and treasury shares
Stock Splits
A stock split does not change the total dollar amount of common stock outstanding; only the par value per share and the number of shares is changed
A stock split does not require a journal entry—the details are disclosed in the notes to the financial statements
A stock split does not change the proportional ownership in the corporation for an individual stockholder
Stock SplitsIllustrated
Assume that a corporation has 10,000 shares of $100 par value common stock outstanding with a market price of $120 per share. The board of directors declares a 4-for-1 stock split. What is the new par value per share, the new total number of shares outstanding, and the the total dollar amount of common stock outstanding after the split?
Stock SplitsIllustrated
before the split after the split
par value per share
$100 $25
($100/4)
# of shares outstanding
10,000 40,000 (10,000 shares x 4)
total dollar amount of common stock outstanding
$1,000,000 ($100/share x 10,000 shares)
$1,000,000 ($25/share x
40,000 shares)
Stock SplitsIllustrated
The proportional ownership in the corporation does not change for an individual stockholder. Let’s say a stockholder has 100 shares before the split:
% ownership before the split:
% ownership after the split:
100 shares/10,000 shares = 10%
400 shares/ 40,000 shares = 10%
Stock SplitsIllustrated
What would you expect the market price per share to change to?
Stock SplitsIllustrated
Did you get $30?*
*$120/4
Accounting for DividendsConditions for a Cash Dividend
1. Sufficient retained earnings declaration of a dividend reduces retained
earnings
2. Sufficient cash
3. Formal action by the board of directors
Accounting for DividendsImportant Dates
1. Date of declaration2. Date of record
determines who gets the dividend
3. Date of payment
Journal entries are required for the date of declaration and the date of payment
Accounting for DividendsCash Dividends
Dec. 1 Cash Dividends 42,500
Cash Dividends Payable 42,500
Declared cash dividend
Jan. 2 Cash Dividends Payable 42,500
Cash 42,500
Paid cash dividend
Accounting for DividendsStock Dividends
Assume the following information for a corporation:
Common Stock, $10 par (200,000 shares issued)
On Dec. 15, the board of directors declares a stock dividend of 2% (4,000 shares) to be issued on Jan. 10 to stockholders of record on Dec. 31. The market price of the stock on Dec. 15 is $15 a share.
Accounting for DividendsStock Dividends
Dec. 15 Stock Dividends* 60,000
Stock Dividends Distributable** 40,000
Paid-in Cap. in Excess of Par 20,000
Declared stock dividend
Jan. 10 Stock Dividends Distributable 40,000
Common Stock 40,000
Issued stock
*4,000 shares x $15/share (market price per share on Dec. 15)
**4,000 shares x 10 share (par value)
Accounting for DividendsStock Dividends
A stock dividend does not change the assets, liabilities, or total stockholders’ equity of the corporation. It also does not change the proportional ownership in the corporation for an individual stockholder.
Financial Analysis and InterpretationDividend Yield
Indicates the rate of return to stockholders in terms of cash dividend distributions:
Dividends per share of Common Stock
Market Price per share of Common StockDividend Yield
The dividend yield is of special interest to stockholders whose main objective is to receive a current cash return on their investment
Chapter 12: New Accounts
Account Category Normal
Balance
Common Stock S/E Credit
Preferred Stock S/E Credit
Paid-in Capital in Excess of Par/Stated Value S/E Credit
Retained Earnings S/E Credit
Donated Capital S/E Credit
Treasury Stock S/E Debit
Paid-in Capital from Sale of Treasury Stock S/E Credit
Cash Dividends (temporary account) S/E Debit
Cash Dividends Payable Liability Credit
Stock Dividends (temporary account) S/E Debit
Stock Dividends Distributable S/E Credit