Corporations: Formation and CapitalStock Transactions
Corporations: Formation and CapitalStock Transactions
Section 1: Forming a Corporation
Chapter
20
Section Objectives
1. Explain the characteristics of a corporation.
2. Describe special “hybrid” organizations that have some characteristics of partnerships and some characteristics of corporations.
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20-3
Created by corporate charter issued by state government.
Can enter into contracts and own property.
Can have few or many owners.
Can be privately held or publicly held.
Explain the characteristics ofa corporation
Objective 1
20-4
Advantages Disadvantages
Ease of raising capital
Limited liability
Restricted agency
Continuous existence
Transferability of ownership rights
Corporate income tax
Governmental regulation
Corporations
20-5
Subchapter S corporation.
Limited liability partnership (LLP).
Limited liability company (LLC).
“Hybrid” Business Entities
Hybrid entities have characteristics of partnerships and corporations.
Describe special “hybrid” organizations
Objective 2
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Known as S corporation.
Meets Subchapter S requirements of Internal Revenue Code to be treated as a partnership.
Subchapter S Corporation
Shareholders include their share of corporate profits on their individual tax returns.
The S corporation does not pay income taxes.
20-7
Partners are responsible and have liability for their own actions and actions of those they control or supervise.
Partners are not liable for the actions or malfeasance of another partner.
Limited Liability Partnership (LLP)
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Limited Liability Company (LLC)
Owners have limited liability.
Owners choose to have profits taxed at the company level or on their individual income tax return.
Profits and losses can be allocated other than in proportion to ownership interest.
Transfers of ownership must be approved by owners.
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After a Corporate Charter Is Issued
Shareholders elect permanent directors.
Directors or shareholders approve bylaws.
Board selects corporate officers.
Shares are issued to individuals who have paid full purchase price of the stock.
Organizers elect an acting board of directors.
Officers hire employees and begin operations.
Corporations: Formation and CapitalStock Transactions
Corporations: Formation and CapitalStock Transactions
Section 2: Types of
Capital Stock
Chapter
20
Section Objectives
3. Describe the different types of stock.
4. Compute the number of shares of common stock to be issued on the conversion of convertible preferred stock.
5. Compute dividends payable on stock.
McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
20-11
Capital Stock
Authorized shares: The number of shares that can be sold.
Issued shares: The number of shares that have been sold.
Outstanding shares: The number of shares still in circulation.
Outstanding stock = Issued stock – Treasury stock
20-12
The price per share at which stock is bought and sold.
Specified in the corporate charter and assigned to each share of stock for accounting purposes.
A value assigned to no-par stock by the board of directors for accounting and legal purposes.
Par Value
Stated Value
Market Value
Capital Stock Values
20-13
Common Preferred
Stock Classes
If there is only one class of stock, common stock is issued. Each share carries the same rights and privileges as every other share.
Preferred stock has special claims on a corporation’s profits or, in case of liquidation, corporate assets.
Describe the different types of stock
Objective 3
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Compute the number of shares of common stock to be issued on the conversion of convertible preferred stock.
Objective 4
20-15
Owners have the right to convert their shares into common stock after a specified date.
Convertible Preferred Stock
400 shares of preferred, with a 1:2 conversion ratio equals 2 shares of common for each share of preferred.
The number of shares of common stock into which a preferred stock can be converted.
ConversionRatio
Example:
400 X 2 = 800 shares of common stock
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Dividends are distributions of the profits of a corporation to its shareholders.
ANSWER:
QUESTION:
What are dividends?
The board of directors declares dividends.
Compute dividends payable on stock
Objective 5
20-17
Dividend Rights on Preferred Stock
Cumulative preferred stock
Noncumulative preferred stock
Nonparticipating preferred stock
Participating preferred stock
20-18
Cumulative Preferred Stock
Has right to receive preference dividend each year before any dividend can be paid on common stock.
If dividend is passed (not paid) in one year, the amount not paid carries over and must be fully paid in a subsequent year before any dividend can be paid on common stock.
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Noncumulative Preferred Stock
Has right to receive preference dividend each year before any dividend can be paid on common stock.
Stockholders have no rights to dividend for years in which none were declared.
20-20
Nonparticipating Preferred Stock
Has right to receive preference dividend each year before any dividend can be paid on common stock.
Does not have the right to any dividend in excess of the preference dividend.
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Participating Preferred Stock
Has right to receive preference dividend each year before any dividend can be paid on common stock.
After common shareholders have received specified amount, preferred and common stock share in further dividends.
20-22
Common Stock
Common stockholders receive remaining dividends only after dividends have been paid on preferred stock in accordance with contractual obligations.
20-23
Dividend Calculations
The following slides show three scenarios:
A. Only common stock issued and 5 percent dividend declared.
B. Common stock and noncumulative, nonparticipating preferred stock issued and $20,000 dividend declared.
C. Common stock and noncumulative, nonparticipating preferred stock issued and $9,000 dividend declared.
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Scenario A: 15,000 shares issued, authorized, and outstanding $50 par value 5% dividend declared
QUESTION:
What is the dividend calculation?
ANSWER:
15,000 shares
X $ 50 par value
$ 750,000
X 0.05 dividend declared $ 37,500 total dividends
Only Common Stock Issued
20-25
Preferred Stock, noncumulative, nonparticipating
(10%, $50 Par Value, 1,000 Shares) $ 50,000
Common Stock ($20 Par Value, 10,000 Shares) 200,000
Total Capital Stock $250,000
Dividend declared $ 20,000
Scenario B:
Common and Noncumulative, Nonparticipating Preferred Stock Issued
Dividend per share for common stock = $15,000 ÷ 10,000 shares = $1.50
Remaining dividend to common stockholders $ 15,000
Dividend due to preferred stockholders
(1,000 Shares x $50 x 10%) $ 5,000
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Dividend declared $ 9,000
Scenario C:
Dividend due to preferred stockholders:
Dividends in arrears $ 2,000
(1,000 Shares x $50 x 10%) $ 5,000
Common and Cumulative, Nonparticipating Preferred Stock Issued when $2,000 of preferred dividends are in arrears.
Dividend per share of common stock is $2,000 ÷ 10,000 shares = $0.20
Remaining dividend to common stockholders $ 2,000
Preferred Stock, noncumulative, nonparticipating
(10%, $50 Par Value, 1,000 Shares) $ 50,000
Common Stock ($20 Par Value, 10,000 Shares) 200,000
Total Capital Stock $250,000
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Capital Stock on the Balance Sheet Capital Stock on the Balance Sheet
Capital stock represents the equity in a corporation.
Common stock and preferred stock are reported separately.
Since the owners of a corporation are stockholders, the equity section of the balance sheet is titled “Stockholders’ Equity.”
Corporations: Formation and Capital
Stock Transactions
Corporations: Formation and Capital
Stock Transactions Section 3: Recording
Capital Stock Transactions
Chapter
20
Section Objectives6. Record the issuance of capital stock at par value.7. Prepare a balance sheet for a corporation. 8. Record organization costs.9. Record stock issued at a premium, and stock with
no par value. 10. Record transactions for stock subscriptions.11. Describe the capital stock records for a corporation.
McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
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Cash
Noncash assets
Services rendered
Recording the Issuance of Stock
Stock is issued after the purchaser has paid for it in full with one of the following:
Record the issuance of capital stock at par value
Objective 6
20-30
Stock Issued at Par Value for Cash
When stock is issued for cash equal to the par value of the shares, cash proceeds are credited to the capital stock account.
20--
Dec. 31 Cash ($15,000 + $40,000) 55,000.00
Common Stock (600 X $25) 15,000.00Preferred Stock (400 X $100) 40,000.00
Issuance of stock to Karen Wilcox: 600 shares of common at par ($25 per share) and 400 shares ofpreferred at par ($100 per share).
20-31
The net value of assets transferred is the sum of all noncash assets less liabilities (such as Accounts Payable).
Noncash assets include:
Merchandise Inventory Land Building Equipment and Fixtures Accounts Receivable
Stock Issued at Par Value for Noncash Assets
The Allowance for Doubtful Accounts is recorded separately.
20-32
Preparing a Balance Sheet for a Corporation
Camping Supply Center, Inc.Balance Sheet (Partial)
December 31, 20--
Liabilities and Stockholders’ Equity:
Current Liabilities Accounts Payable $19,200.00
Stockholders’ Equity Preferred Stock (10%, $100 par value, 8,000 shares authorized) At Par Value (1,600 shares issued) $160,000.00 Common Stock ($25 par value, 40,000 shares authorized) At Par Value (5,300 shares issued) 132,500.00 Total Stockholders’ Equity 292,500.00 Total Liabilities and Stockholders’ Equity $311,700.00
Objective 7
20-33
Organization costs are charged to an intangible asset account and then amortized over a period of time.
20--
Dec. 31 Organization Expenses 2,000.00
Cash 2,000.00Payment of legal fees, charter fee, and cost of printing stock certificates.
Record organization costsObjective 8
20-34
When stock is issued for more than its par value, it is issued at a premium.
Premiums on stock are usually credited to an account titled Paid-in Capital in Excess of Par Value.
Separate accounts are set up for different classes of stock.
20--
Mar. 2 Cash 42,000.00Preferred Stock 40,000.00Paid-in Capital in Excess of Par Value—Preferred Stock 2,000.00
Issuance of 400 sharesfor $105 per share
Record stock issued at a premium and stock with no par value
Objective 9
20-35
Recording Rules for Par and No-Par Stock
Par-Value Stock No-Par-Value Stock
Stated Value No Stated Value
Par value is specified in corporate charter.
Stock certificate indicates par value.
Stated value is assigned by directors. Corporate charter indicates that stock is no-par-value stock.
Stock certificate does not generally show stated value.
Corporate charter indicates that stock is no-par-value stock.
Stock certificate shows that stock is no-par-value stock.
20-36
Recording Rules for Par and No-Par Stock (cont.)
Par-Value Stock No-Par-Value Stock
Stated Value No Stated Value
Change in par value requires revision of charter.
On issue of stock, par value is credited to capital stock account.
Stated value can be changed by directors.
On issue of stock, stated value is credited to capital stock account.
On issue of stock, entire proceeds are credited to capital stock account.
20-37
Stated value has not been assigned the shares.
First issue was for 1,000 shares for $20 per share.
Second issue was for 600 shares for $22 per share.
Recording No-Par-Value Stock Without a Stated Value
First issue: Cash 20,000.00 Common Stock 20,000.00 Issue of 1,000 shares of no-par-value common stock at $20 per share.Second issue: Cash 13,200.00 Common Stock 13,200.00 Issue of 600 shares of no-par-value common stock at $22 per share.
All proceeds go into the stock accounts!!
20-38
2,400 X $25 = $60,000
Cash 62,400.00 Common Stock 60,000.00 Paid-in Capital in Excess
of Stated Value 2,400.00 Issued 2,400 shares of
common stock at $26 per share.
Sold 2,400 shares of stated value $25 per share stock for $26 per share.
Stated value is credited to the capital stock account—just like par.
Recording No-Par-Value Stock With a Stated Value
20-39
Subscriptions for Capital Stock
Stockholder signs a subscription contract. (It details stock price and payment plan.)
Stockholder pays for stock at a later date.
Stockholder receives stock when payment is made.
Record transactions for stock subscriptions
Objective 10
20-40
A stock subscription gives the corporation a receivable from the subscriber and an obligation to hold enough stock for issue when the subscription is paid in full.
20--
May 1 Subscriptions Receivable—Common 20,000.00Common Stock Subscribed 20,000.00
Subscription from Tyrone Coles to buy 400 shares of common stock at par value of $50 per share.
The Common Stock Subscribed account appears in the Stockholder’s Equity section of the Balance Sheet. It will remain there until the stock is actually issued.
20-41
The stock is issued when full payment has been received for the subscription.
20--
June 1 Cash 20,000.00Subscriptions Receivable—Common 20,000.00
Received Tyrone Coles’ subscription in full.
Common Stock Subscribed (400 shares) 20,000.00Common Stock (400 shares) 20,000.00
Issued 400 shares ofcommon stock to Tyrone Cole.
1
20-42
Special Corporation Records and Agents
Corporations keep detailed records of stockholders’ equity and special corporate records such as:
Meeting minutes
Corporate bylaws
Stock certificate books
Stock ledgers
Stock transfer records
Describe the capital stock records for a corporation
Objective 11
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