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Corporat ions: Organizat ion ,
Stock Transact ions, andDividends
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Characteristics of a Corporation
A corporationis a legal entity, distinct
and separate from the individuals whocreate and operate it. As a legal entity, a
corporation may acquire, own, and
dispose of property in its own name.
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The stockholdersorshareholders
who own the stock own the
corporation. Corporations whoseshares of stock are traded in public
markets are called public
corporations.
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Public Corporations
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Corporations whose shares are not traded
publicly are usually owned by a small
group of investors and are callednonpublicorprivate corporations. The
stockholders of all corporations have
l imited l iabi l i ty.
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Private Corporations
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The stockholders control a corporation
by electing a board of directors. The
board meets periodically to establishcorporate policy. It also selects the chief
executive officer (CEO) and other major
officers.
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Board of Directors
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Employees
Officers
Board of Directors
Organizational Structure of a Corporation
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Exhibit 1
Stockholders
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A corporation has separate legalexistence from its owners.
A corporation has transferable unitsof ownership.
A corporation has limited
stockholders liability.
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Characteristics of a Corporation
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Advantages and Disadvantagesof the Corporate Form
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(continued)
Exhibit 2
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Advantages and Disadvantages ofthe Corporate Form(cont inued)
Exhibit 2
Explanation
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First step in forming a corporation is to file an
application of incorporationwith the state.
Forming a Corporation
Because state laws differ, corporations often
organize in states with more favorable laws. More than half of the largest companies are
incorporated in Delaware (see Exhibit 3 in
Slide 14).
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Examples of Corporations andTheir States of Incorporation
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Exhibit 3
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After the application is approved, the stategrants a charteror articles of
incorporationwhich formally create thecorporation.
Managementand the board of directorspreparebylawswhich are operating rules
and procedures.
Forming a Corporation
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Costs may be incurred in organizing a corporation.
The recording of a corporations organizing costs
of $8,500 on January 5 is shown below:
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The owners equity in a corporation is
called stockholders equity,shareholders equity, shareholders
investment, orcapital.
Stockholders Equity
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The two sources of capital are:
1. Capital contributedto the corporation
by the stockholders,
called paid-incapitalor
contr ibuted capital.2. Net income retained
in the business, called
retained earnings.
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Stockholders Equity Section of
a Corporate Balance Sheet
Stockholders EquityPaid-in capital:
Common stock $330,000Retained earnings 80,000
Total stockholders equity $410,000
If there is only one class of stock, the account is
entitled Common Stockor Capital Stoc k.
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Authorized
Number of Shares Authorized,
Issued, and Outstanding
IssuedOutstanding
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Major Rights That AccompanyOwnership of a Share of Stock
These stock rights normallyvary with the class of stock.
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1. The right to vote in matters concerning
the corporation.
2. The right to share in distributions ofearnings.
3. The right to share in assets on liquidation.
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The two primary classes of paid-in
capital are common stockand
preferred stock. The primary
attractiveness of preferred stocks is
that they are preferred over
common as to dividends.
Classes of Stock
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Cumulative preferred stockhas a right
to receive regular dividends that were
not declared (paid) in prior years.
Noncumulative preferred stock does
not have this right.
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Cumulative Preferred Stock
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Example Exercise 11-1
Dividends per Share
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Sandpiper Company has 20,000 shares of 1%cumulative preferred stock of $100 par and 100,000shares of $50 par common stock. The following
amounts were distributed as dividends:Year 1: $10,000Year 2: 45,000Year 3: 80,000
Determine the dividends per share for preferred and
common stock for each year.
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Example Exercise 11-1 (cont inued) 3
Dividends per share:Preferred $ $ $Common stock $ $
Year 1 Year 2 Year 3
Amount distributed $10,000 $45,000 $80,000Preferred dividend (20,000
shares) . ,Common dividend (100,000
shares)*(10,000 + $20,000)
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For Practice: PE 11-1A, PE 11-1B
Follow My Example 11-1
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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.
Issuing Stock
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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 premium.
If the stock is issued (sold) for aprice that is less than its par, the
stock has been sold at a discount.
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Caldwell Company issues 2,000 shares of
$50 par preferred stock for cash at $55.
Premium on Stock
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A corporation acquired land for which the fairmarket 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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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.
No-Par Stock
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Example Exercise 11-2
Entries for Issuing Stock
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On March 6, Limerick Corporation issued for cash15,000 shares of no-par common stock at $30. On April13, Limerick issued at par 1,000 shares of 4%, $40 par
preferred stock for cash. On May 19, Limerick issuedfor cash 15,000 shares of 4%, $40 par preferred stockat $42.
Journalize the entries to record the March 6, April 13,and May 19 transactions.
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Example Exercise 11-2 (cont inued) 3
11-42 For Practice: PE 11-2A, PE 11-2B
Follow My Example 11-2
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Cash Dividends
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A cash distribution of earnings by a corporation
to its stockholders is called a cash dividend.
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
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The date of declarationis the date
the board of directors formally
authorized the payment of thedividend. On this date, the
corporation incurs the liability to
pay the amount of the dividend.
Date of Declaration
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The date of recordis the date the
corporation used to determinewhich stockholders will receive the
dividend.
Date of Record
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The date of paymentis the date
the corporation will pay thedividends to the stockholders who
owned the stock on the date of
record.
Date of Payment
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Dividendper Share
TotalDividends
Preferred stock, $100 par,5,000 shares outstanding $2.50 $12,500
Common stock, $10 par,100,000 shares outstanding $0.30 30,000
Total... $42,500
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On October 1, Hiber Corporation declaresthe cash dividends shown below with a date
of record of November 10 and a date of
payment of December 2.
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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.
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On December 2, the date of payment, Hiber
Corporation records the payment of the
dividend as follows:
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Stock Dividends
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A distribution of dividends
to stockholders in the formof the firms own shares is
called a stock dividend.
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Treasury Stock Transactions
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Treasury 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.
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On January 5, a firm purchased 1,000 sharesof treasury stock (common stock, $25 par)
at $45 per share. The cost methodfor
accounting for treasury stock is used.
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Stock Split
A stock spli tis a process by which
a corporation reduces the par or
stated value of the common stock
and issues a proportionate number
of additional shares.
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Rojek Corporation has 10,000
shares of $100 par common stock
outstanding with a current market
price of $150 per share. The boardof directors declares a 5-for-1
stock split. A stock spli t does not
requi re a journal entry.