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Chapter Chapter 1212Corporations: Organization, Corporations: Organization, Capital Stock Transactions, Capital Stock Transactions,
and Dividendsand DividendsAccounting, 21st Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University
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1. Describe the nature of the corporate form of organization.
2. List the two main sources of stockholders’ equity.
3. List the major sources of paid-in capital, including the various classes of stock.
4. Journalize the entries for issuing stock.5. Journalize the entries for treasury stock
transactions.
ObjectivesObjectivesObjectivesObjectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
6. State the effect of stock splits on corporate financial statements.
7. Journalize the entries for cash dividends and stock dividends.
8. Describe and illustrate the reporting of stockholders’ equity.
9. Compute and interpret the dividend yield on common stock.
ObjectivesObjectivesObjectivesObjectives
Employees
Officers(selected by board of directors)
Board of Directors(elected by stockholders)
Organizational Structure of a CorporationOrganizational Structure of a CorporationOrganizational Structure of a CorporationOrganizational Structure of a Corporation
Stockholders(owners of corporation stock)
Forming a CorporationForming a CorporationForming a CorporationForming a Corporation First step is to file an application of incorporation with the state.
Because state laws differ, corporations often organize in states with more favorable laws.
More than half of the largest companies are incorporated in Delaware.
State grants a charter or articles of incorporation which formally create the corporation.
Management and board of directors prepare bylaws which are operation rules and procedures.
Forming a CorporationForming a CorporationForming a CorporationForming a Corporation
On January 5, the firm paid the organization costs of $8,500. This amount includes legal
fees, taxes and licenses, promotion costs, etc.
On January 5, the firm paid the organization costs of $8,500. This amount includes legal
Sources of Paid-In CapitalSources of Paid-In CapitalSources of Paid-In CapitalSources of Paid-In Capital
Major Rights that Accompany Ownership
of a Share of Stock
Major Rights that Accompany Ownership
of a Share of Stock1. The right to vote in matters
concerning the corporation.
2. The right to share in distribution of earnings.
3. The right to share in assets on liquidation.
Sources of Paid-In CapitalSources of Paid-In CapitalSources of Paid-In CapitalSources of Paid-In Capital
The two primary classes of paid-in capital are common stock and preferred stock. The
primary attractiveness of preferred stocks is that they are preferred over common as to dividends.
Money available
for dividends
Common Common StockholdersStockholders
Preferred Preferred StockholdersStockholders
Classes of StockholdersClasses of StockholdersClasses of StockholdersClasses of Stockholders
Common Stock—the basic ownership of stock with rights to vote in election of directors, share in distribution of earnings, and purchase additional shares.
Preferred Stock—A class of stock with preferential rights over common stock in payment of dividends and company liquidation.
Classes of StockholdersClasses of StockholdersClasses of StockholdersClasses of Stockholders
A nonparticipating preferred stock is limited to a certain amount. Assume 1,000 shares of $4 nonparticipating preferred stock and 4,000 shares of common stock and the following:
Net income $20,000 $55,000 $62,000Amount retained 10,000 20,000 40,000Amount distributed $10,000 $35,000 $22,000
A corporation sometimes reduces the par or stated value of their common stock and
issues a proportionate number of additional shares. This is called a stock split.
A corporation sometimes reduces the par or stated value of their common stock and
issues a proportionate number of additional shares. This is called a stock split.
Stock SplitsStock SplitsStock SplitsStock Splits
BEFORE BEFORE STOCK SPLITSTOCK SPLIT
4 shares, $100 par
$400 total par value
20 shares, $20 par
AFTER 5-1 AFTER 5-1 STOCK SPLITSTOCK SPLIT
$400 total par value
Stock SplitsStock SplitsStock SplitsStock Splits
A stock split does not change the balance of any corporation accounts. However, it
can make the stock more attractive to investors by reducing the price of a
share,
A stock split does not change the balance of any corporation accounts. However, it
can make the stock more attractive to investors by reducing the price of a
share,
Accounting for Cash DividendsAccounting for Cash Dividends Dividends are distributions of retained
earnings to stockholders.
Dividends may be paid in cash, stock, or property.
Dividends, even on cumulative preferred stock, are never required, but once declared become a legal liability of the corporation.
Corporations generally declare and pay cash dividends on shares outstanding when three conditions exist:
1. Sufficient retained earnings
Accounting for Cash DividendsAccounting for Cash Dividends
2. Sufficient cash
3. Formal action by the board of directors
Retained Earnings
50,000
Accounting for Cash DividendsAccounting for Cash Dividends
There are three important dates relating
the dividends.
There are three important dates relating
the dividends.
Accounting for Cash DividendsAccounting for Cash Dividends
First is the date of declaration. Assume that on December 1, Hiber Corporation declares a
$42,500 dividend.
First is the date of declaration. Assume that on December 1, Hiber Corporation declares a
$42,500 dividend.
Dec. 1 Cash Dividends 42 500 00
Declared cash dividend.
Cash Dividend Payable42 500 00
Date of DeclarationDate of Declaration
Accounting for Cash DividendsAccounting for Cash Dividends
The second important date is the date of record. For Hiber
Corporation this would be December 11.
The second important date is the date of record. For Hiber
Corporation this would be December 11.
Accounting for Cash DividendsAccounting for Cash Dividends
Accounting for Cash DividendsAccounting for Cash Dividends
On this date, ownership of shares determines who receives the
dividend. No entry is required.
On this date, ownership of shares determines who receives the
dividend. No entry is required.
The third important date is the date of payment. On January 2, Hiber
issues dividend checks.
The third important date is the date of payment. On January 2, Hiber
issues dividend checks.
Accounting for Cash DividendsAccounting for Cash Dividends
2
Accounting for Cash DividendsAccounting for Cash Dividends
Jan. 2 Cash Dividends Payable 42 500 00
Paid cash dividends.
Cash 42 500 00
Date of PaymentDate of Payment
Accounting for Stock DividendsAccounting for Stock Dividends
A distribution of dividends to stockholders in the form of the firm’s own shares is called a
stock dividend.
A distribution of dividends to stockholders in the form of the firm’s own shares is called a
stock dividend.
Accounting for Stock DividendsAccounting for Stock Dividends
Stock dividends transfer pro rata shares of stock to stockholders. Assume
Hendrix Corporation issues a 5% stock dividend on common stock, $20 par,
2,000,000 shares issued.
Stock dividends transfer pro rata shares of stock to stockholders. Assume
Hendrix Corporation issues a 5% stock dividend on common stock, $20 par,
2,000,000 shares issued.
Accounting for Stock DividendsAccounting for Stock Dividends
Dec. 15 Stock Dividends 3,100 000 00
Declared stock dividend.
Hendrix Corporation, December 15 (before dividend)Common Stock, $20 par $40,000,000Paid-in Capital in Excess of Par--Common Stock 9,000,000Retained Earnings 26,600,000
Stock Dividends Distributable2,000000 00
Paid-in Capital in Excess of
Par—Common Stock1,100000 00
Accounting for Stock DividendsAccounting for Stock Dividends