1 C H A P T E R 11 Corporations: Organization, Stock Transactions, and Dividends Corporate Financial Accounting 13e Warren Reeve Duchac human/istock/360/getty Images
2 Characteristics of a Corporation (slide 1 of 2) A corporation is a legal entity, distinct and separate from the individuals who create and operate it. o As a legal entity, a corporation may acquire, own, and dispose of property in its own name. o It may also incur liabilities and enter into contracts. o Most importantly, it can sell shares of ownership, called stock. The stockholders or shareholders who own the stock own the corporation. Corporations whose shares of stock are traded in public markets are called public corporations.
3 Characteristics of a Corporation (slide 2 of 2) The stockholders of all corporations have limited liability. The stockholders control a corporation by electing a board of directors. As a separate entity, a corporation is subject to taxes. o Corporations must pay federal income taxes on their income. o Stockholders must pay income taxes on the dividends they receive.
4 Forming a Corporation The first step in forming a corporation is to file an application of incorporation with the state. After the application has been approved, the state grants a charter or articles of incorporation. o The articles of incorporation formally create the corporation. The corporate management and board of directors then prepare a set of bylaws, which are the rules and procedures for conducting the corporation s affairs. Costs may be incurred in organizing a corporation. These costs are debited to an expense account entitled Organizational Expenses.
5 Characteristics of Stock (slide 1 of 2) The number of shares of stock that a corporation is authorized to issue is stated in its charter. The term issued refers to the shares issued to the stockholders. The stock remaining in the hands of stockholders is then called outstanding stock. Shares of stock are often assigned a dollar amount, called par value. Stock issued without par is called no-par stock.
6 Characteristics of Stock (slide 2 of 2) Some state laws require corporations to maintain a minimum amount of paid-in capital to protect creditors. This minimum amount, called legal capital, usually includes the par or stated value of the shares issued. The major rights that accompany ownership of a share of stock are as follows: o The right to vote in matters concerning the corporation. o The right to share in distributions of earnings. o The right to share in assets upon liquidation.
7 Classes of Stock (slide 1 of 2) The two primary classes of paid-in capital are common stock and preferred stock. o When only one class of stock is issued, it is called common stock. Each share of common stock has equal rights. o When a corporation issues classes of stock with various preference rights, such a stock is called preferred stock. Preferred stockholders have first rights (preference) to any dividends. However, a corporation cannot guarantee dividends even to preferred stockholders The Cengage payment Learning. All Rights Reserved. of May not dividends be scanned, copied or duplicated, is or authorized posted to a publicly accessible website, by in whole the or in part.
8 Classes of Stock (slide 2 of 2) Cumulative preferred stock has a right to receive regular dividends that were not declared (paid) in prior years. o Noncumulative preferred stock does not have this right. o Cumulative preferred stock dividends that have not been paid in prior years are said to be in arrears. In addition to dividend preference, preferred stock may be given preferences to assets if the corporation goes out of business and is liquidated. However, claims of creditors must be satisfied first.
9 Issuing Stock (slide 1 of 2) Assume that a corporation is authorized to issue 10,000 shares of $100 preferred stock and 100,000 shares of $20 par common stock. The corporation issued 5,000 shares of preferred stock and 50,000 shares of common stock at par for cash. The corporation s entry to record the stock issue is as follows:
10 Issuing Stock (slide 2 of 2) If the stock is issued (sold) for a price that is more than its par, the stock has been sold at a premium. o When stock is issued at a premium, Cash is debited for the amount received. Common Stock or Preferred Stock is credited for the par amount. An account entitled Paid-In Capital in Excess of Par is credited for the excess of the amount paid over par. If the stock is issued (sold) for a price that is less than its par, the stock has been sold at a discount.
11 Premium on Stock When stock is issued in exchange for assets other than cash, such as land, buildings, and equipment, the assets acquired are recorded at their fair market value. o If this value cannot be determined, the fair market value of the stock issued is used.
12 No-Par Stock When no-par stock is issued, Cash is debited and Common Stock is credited for the proceeds. As no-par stock is issued over time, this entry is the same even if the issuing price varies. In some states, no-par stock may be assigned a stated value per share. o The stated value is recorded like a par value.
13 Cash Dividends (slide 1 of 3) A cash distribution of earnings by a corporation to its stockholders is a cash dividend. Although dividends may be paid in other assets, cash dividends are most common. Three conditions for a cash dividend are as follows: o Sufficient retained earnings o Sufficient cash o Formal action by the board of directors
14 Cash Dividends (slide 2 of 3) Three dates included in a dividend announcement are as follows: 1. Date of declaration The date of declaration is the date the board of directors formally authorizes the payment of the dividend. 2. Date of record The date of record is the date the corporation uses to determine which stockholders will receive the dividend. 3. Date of payment The date of payment is the date the corporation will pay the dividend to the stockholders who owned the stock on the date of record.
15 Cash Dividends (slide 3 of 3) On October 1, the declaration date, Hiber Corporation records the following entry: On November 10, the date of record, no entry is necessary as this date merely determines which stockholders will receive the dividends. On December 2, the date of payment, Hiber Corporation records the payment of the dividends as follows:
16 Stock Dividends (slide 1 of 3) A stock dividend is a distribution of shares of stock to stockholders. Stock dividends normally are declared only on common stock and issued to common stockholders. A stock dividend affects only stockholders equity. A stock dividend does not change the assets, liabilities, or total stockholders equity of a corporation. Likewise, a stock dividend does not change an individual stockholder s proportionate interest
17 Stock Dividends (slide 2 of 3) The entry to record the stock dividend is as follows: At the end of the accounting period, the stock dividends account is closed to Retained Earnings, and the stock dividends distributable and paid-in capital in excess of par common stock accounts are reported in the Paid-In Capital section of the balance sheet. o Thus, the effect of the preceding stock dividend is to transfer $3,100,000 of retained earnings to paid-in capital.
18 Stock Dividends (slide 3 of 3) On January 10, the stock dividend is distributed to stockholders by issuing 100,000 shares of common stock. The issuance of the stock is recorded by the following entry:
19 Treasury Stock Transactions Treasury stock is stock that a corporation has issued and then reacquired. Using the cost method, Treasury Stock is debited for the cost (purchase price) of the stock. When the stock is resold, Treasury Stock is credited for its cost. Any difference between the cost and the selling price is debited or credited to Paid-In Capital from Sale of Treasury Stock. No dividends (cash or stock) are paid on the shares of treasury stock.
20 Stockholders Equity on the Balance Sheet Two methods can be used for reporting stockholders equity on the balance sheet: o Method 1. Each class of stock is reported, followed by its related paid-in capital accounts. Retained earnings is then reported, followed by a deduction for treasury stock. o Method 2. The stock accounts are reported, followed by the paid-in capital reported as a single item, Additional paid-in capital. Retained earnings is then reported, followed by a deduction for treasury stock.
21 Reporting Retained Earnings Changes to retained earnings may be reported using one of the following: o Separate retained earnings statement o Combined income and retained earnings statement o Statement of stockholders equity
22 Restrictions The use of retained earnings for payment of dividends may be restricted by action of a corporation s board of directors. Such restrictions, sometimes called appropriations, remain part of the retained earnings. Restrictions of retained earnings are classified as: o o o Legal. State laws may require a restriction of retained earnings. Contractual. A corporation may enter into contracts that require restrictions of retained earnings. Discretionary. A corporation s board of directors may restrict retained earnings voluntarily.
23 Prior Period Adjustments The effect of errors that may arise from a mathematical mistake or from a mistake in applying accounting principles that are not discovered within the same period in which they occur should not affect the current period s net income. Instead, the correction of the error, called a prior period adjustment, is reported in the retained earnings statement as an adjustment to the beginning balance of retained earnings.
24 Statement of Stockholders Equity When the only change to stockholders equity is due to net income or net loss and dividends, a retained earnings statement is sufficient. However, when a corporation also has changes in stock and paid-in capital accounts, a statement of stockholders equity is normally prepared.
25 Stock Splits A stock split is a process by which a corporation reduces the par or stated value of its common stock and issues a proportionate number of additional shares. A major objective of a stock split is to reduce the market price per share of the stock. Only the number of shares and the par value per share have changed.
26 Financial Analysis and Interpretation: Earnings per Share Earnings per common share (EPS), sometimes called basic earnings per share, is the net income per share of common stock outstanding during a period. Earnings per share is computed as follows: Earnings per Share = Net Income Preferred Dividends Average Number of Common Shares Outstanding
C H A P T E R 13 Corporations: Organization, Stock Transactions, and Dividends Financial Accounting 14e Warren Reeve Duchac human/istock/360/getty Images Advantages and Disadvantages of the Corporate Form
4. Common stock the usual or normal stock of the corporation. It is the voting stock and generally ranks after the preferred stock for dividends and assets distributed upon dissolution. Often it is called
PAID-IN CAPITAL Fundamental Share Rights One of the most important features of the corporate form of business is the issuance of capital stock in exchange for capital contributions. Each share of capital
Practice Review Stockholders Equity Chapter Use the following information to answer questions 1-3. When Sample Corporation was formed on January 1, the corporate charter provided for 50,000 shares of $20
CHAPTER 11 Reporting and Analyzing Stockholders Equity Major Characteristics of a Corporation Ownership A publicly held corporation is regularly traded on a national securities market and may have thousands
ILLUSTRATION 15-1 COMPONENTS OF CAPITAL COMPONENTS OF CAPITAL Stockholders' Equity (Total) LESS Treasury Stock (Cost Method) Contributed Capital Retained Earnings Preferred Stock Common Stock LESS Unappropriated
RETAINED EARNINGS The balance in retained earnings represents an accumulation of the following common items from the inception date of the business: Add: net income Subtract: net losses Subtract: dividends.
Summer 2002 Accounting 2110 Practice Exam 4 Student IDNO PLEASE ENTER YOUR NAME AND IDNO ON THE SCAN TRON SHEET! 1. Which of the following most likely would be classified as a current liability? a. Dividends
Chapter 16 Stockholders Equity: Retained Earnings LECTURE OUTLINE The material in this chapter is straight-forward and can be covered in two class periods. Students are often not familiar with dividend
1. A company purchased land for $72,000 cash. Real estate brokers' commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start.
Authorization and Issuance Of capital stock Authorized Shares The maximum number of shares Of capital stock that can be sold to the public Authorized Shares Issued Shares are authorized shares of stock
Problems 2-8. Identify whether each of the following items increases or decreases cash flow: Increase in accounts receivable Increase in notes payable Depreciation expense Increase in investments Decrease
Larry M. Walther; Christopher J. Skousen Download free books at Larry M. Walther & Christopher J. Skousen Liabilities and Equity Exercises III 2 2011 Larry M. Walther, Christopher J. Skousen & Ventus Publishing
CHAPTER 11 Solutions STOCKHOLDERS EQUITY Chapter 11, SE 1. 1. c 4. 2. a 5. 3. b 6. d e a Chapter 11, SE 2. 1. Advantage 4. 2. Disadvantage 5. 3. Advantage 6. Advantage Disadvantage Advantage Chapter 11,
Issuance of Common Stock example Let's assume that a company wants to raise $10,000 through the issuance of common stock. At the time the stock is sold the market price is $50 per share. the company will,
13 Equity Financing Overview After discussing debt financing in Chapter 12, we now turn to the other kind of financing available to businesses equity financing. Like debt financing, equity financing, once
Illinois Corporate Franchise Tax Department of Revenue 3-21-2014 House Joint Committee of Revenue and Finance and State Government Objectives Provide committee members with some basic accounting framework
Stock Dividends and Stock Splits Created in 2006 By Michael Worthington Elizabeth City State University Stock Dividends Stock Dividends consist of additional shares of issued to current stockholders (instead
Chapter 18 Dilutive Securities and EPS Learning Objectives Understand and account for dilutive securities Understand how to account for stock options Understand the difference between a simple and complex
PREPARING THE STATEMENT OF CASH FLOWS: THE INDIRECT METHOD OF REPORTING CASH FLOWS FROM OPERATING ACTIVITIES The work sheet method described in the text book is not the recommended approach. We will provide
23 The Statement of Cash Flows Direct Method DEMONSTRATION PROBLEM The financial statements of Bolero Corporation follow. Copyright Houghton Mifflin Company. All rights reserved. 1 Bolero Corporation Income
ILLUSTRATION 24-1 OPERATING, INVESTING, AND FINANCING ACTIVITIES COMPONENTS OF THE STATEMENT OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES + Sales and Service Revenue Received Cost of Sales Paid Selling
ACCOUNTING TERM: Corporation THEME: C CORPORATIONS By John W. Day A corporation is a person or persons granted a charter from a state that legally recognizes it as a separate entity having its own rights,
E15-1. Understanding Shareholders Equity Preferred stock is a class of capital stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the
THE CONTENT AND VALUE OF THE STATEMENT OF CASH FLOWS The cash flow statement reconciles beginning and ending cash by presenting the cash receipts and cash disbursements of an enterprise for an accounting
BRIEF EXERCISES Cite advantages and disadvantages of a corporation (LO1) Understand an S corporation ( LO1 ) Record issuance of common stock ( LO2 ) Record issuance of common stock ( LO2 ) Record issuance
Principles of Financial Accounting ACC-101-TE TECEP Test Description This TECEP is an introduction to the field of financial accounting. It covers the accounting cycle, merchandising concerns, and financial
Study Guide - Final Exam Accounting I True/False Indicate whether the sentence or statement is true or false. 1. Entries in a sales journal affect account balances in both the accounts receivable ledger
PROFITABILITY ANALYSIS The following financial statements for Spencer Company will be used to demonstrate the calculation of the various ratios in profitability analysis. Spencer Company Comparative Balance
Page 1 ACC 255 FINAL EXAM REVIEW PACKET (NEW MATERIAL) Complete these sample exam problems/objective questions and check your answers with the solutions at the end of the review file and identify where
Deutsche Bank Capital Finance Trust I (a statutory trust formed under the Delaware Statutory Trust Act with its principle place of business in New York/New York/U.S.A.) Half - Year Financial Report January
ILLUSTRATION 17-1 CONVERTIBLE SECURITIES CONVERTIBLE BONDS Issued ten, 8%, $1,000 par value bonds at 110. Each bond is convertible into 100 shares of $5 par value common. Entry at date of issue: Cash 11,000
Chapter 5 Consolidation Following Acquisition The procedures used to prepare a consolidated balance sheet as of the date of acquisition were introduced in the preceding chapter, that is, Chapter 4. More
Quiz Questions for Chapter 9 1. A truck was purchased for $25,000. It has a six-year life and a $4,000 salvage value. Using straight-line depreciation, what is the asset s carrying value (book value) after
JOBNAME: No Job Name PAGE: 1 SESS: 378 OUTPUT: Mon Nov 21 10:08:25 2011 /frb/bsr/instructs/fr2320/4_dec11_2320-gen_v3 INSTRUCTIONS FOR PREPARATION OF Quarterly Savings and Loan Holding Company Report General
ACCOUNTING STANDARDS BOARD OCTOBER 1998 FRS 14 14 EARNINGS FINANCIAL REPORTING STANDARD PER SHARE ACCOUNTING STANDARDS BOARD Financial Reporting Standard 14 Earnings per Share is issued by the Accounting
Reeve Warren Duchac 10e James M. Reeve Professor Emeritus of Accounting University of Tennessee, Knoxville Carl S. Warren Professor Emeritus of Accounting University of Georgia, Athens Jonathan E. Duchac
C H 2 3, P a g e 1 CH 23 STATEMENT OF CASH FLOWS SELF-STUDY QUESTIONS (note from Dr. N: I have deleted questions for you to omit, but did not renumber the remaining questions) 1. The primary purpose of
Chapter 2 Financial Statement and Cash Flow Analysis Answers to Concept Review Questions 1. What role do the FASB and SEC play with regard to GAAP? The FASB is a nongovernmental, professional standards
By Jessica Huff The standard accounting equation is Assets=Liabilities + Stockholders Equity. Depending on which item someone is looking at will determine what the normal balance is. The normal balance
RESTATED CERTIFICATE OF INCORPORATION OF BECTON, DICKINSON AND COMPANY AS OF JANUARY 29, 2013 Becton, Dickinson and Company, a corporation organized and existing under the laws of the State of New Jersey,
Topic Mapping 1 Transaction Analysis Understand the effect of various types of transactions on the accounting equation, accounting journal and accounting ledger. Concepts and Skills Accounting Equation
AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment. Although schools, departments, and faculty may approach assessment and its documentation
U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November
Financial Statements SEIKAGAKU CORPORATION AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets March 31, 2001 and 2000 Assets Current assets: Cash and cash equivalents... Short-term investments (Note
Chapter 11 Stockholders' Equity Key Concepts What is included in stockholders' equity? What is the result of a sale of stock? What are the differences between the classes of capital stock? How does treasury
B Exercises E4-1B (Balance Sheet Classifications) Presented below are a number of balance sheet accounts of Castillo Inc. (a) Trading Securities. (h) Warehouse in Process of Construction. (b) Work in Process.
13 Corporations: Effects on Retained Earnings and the Income Statement Assets Current assets: Cash Accounts receivable Inventory Supplies Prepaid rent Total current assets Plant assets: Furniture Less:
REFERENCE AND RESEARCH BUREAU LEGISLATIVE RESEARCH SERVICE THE PROCEDURE ON THE CONVERSION OF PREFERRED SHARES TO COMMON SHARES OF THE PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT) AND COMMENTARIES
1. No. Common stock with a higher par is not necessarily a better investment than common stock with a lower par because par is an amount assigned to the shares. 2. The broker is not correct. Corporations
140 SU 3: Profitability Analysis and Analytical Issues QUESTIONS 3.1 Profitability Ratios Questions 1 and 2 are based on the following information. The financial statements for Dividendosaurus, Inc., for
Chapter 18 Shareholders Equity AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment. Although schools, departments, and faculty may approach
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-A FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSACTIONS ANALYSIS EXAMPLE Maxwell Partners Medical Diagnostic Services report the following information for 2011, their first year of operations: 1. Billings to clients for services provided: $350,000
NEW EQUITYMOBILICITY COMMUNICATIONS INC. - SHARE TERMS That the classes and any maximum number of shares that the Corporation is authorized to issue shall be: (b) (d) an unlimited number of shares of a
MANITOBA TELECOM SERVICES INC. DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN MAY 12, 2010 SUMMARY Manitoba Telecom Services Inc. Dividend Reinvestment and Share Purchase Plan This is a summary of the features
Accounting Principles STUDENT STUDY PACK PRBA001 Accounting Principles All rights reserved Revision 1 Contents Week 8: Companies: Share Capital and the Balance Sheet...3 Learning outcomes for this week...3
GBA 521 Midterm Review Dr. Markelevich Multiple Choice (3 points for each question) Identify the letter of the choice that best completes the statement or answers the question. Wynn Corp. Wynn Corp. reported
CHAPTER 20 LONG TERM FINANCE: SHARES, DEBENTURES AND TERM LOANS Q.1 What is an ordinary share? How does it differ from a preference share and debenture? Explain its most important features. A.1 Ordinary
9 Shareholders Equity Learning Objectives 1 Explain the advantages and disadvantages of a corporation 2 Measure the effect of issuing shares on a company s financial position 3 Describe how share repurchase
Advanced Accounting Exam 1AA Page 1 of 9 MARK THE LETTER OF THE BEST ANSWER ON YOUR SCANTRON FORM. 1. A business combination is accounted for appropriately as a pooling of interests. Costs of furnishing
Chapter 8 Accounting for Receivables Accounts Receivable Accounts Receivables are current assets. They are usually expected to be collected within 30 days. Allowance Method and Bad Debt Expense 2 methods:
Sample Test for entrance into Acct 3110 and Acct 3310 1. Which of the following financial statements could properly have the following in the date line: For the Year Ended December 31, 2010"? a. Balance
NAU ACCOUNTING SKILLS ASSESSMENT PRACTICE EXAM & KEY 1. A company received cash and issued common stock. What was the effect on the accounting equation? Assets Liabilities Stockholders Equity A. + NE +
Financial Statement Analysis: An Introduction 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Scope of Financial Statement Analysis... 3 3. Major
FACULTEIT DER ECONOMISCHE WETENSCHAPPEN EN BEDRIJFSKUNDE Afdeling ACCOUNTING (FAB) DECEMBER 23, 2005 Read this first before you start the exam. The exam contains 9 pages and 5 assignments. The duration
Reading 27: Understanding Cash Flow Statements Relevance of Cash Flow The primary purpose of the statement of cash flows (SCF) is to provide: Info about a firm s cash receipts & cash payments during an