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13
Corporations:
Organization, Stock
Transactions, and
Dividends
Principles of Financial Accounting, 11e
Reeve • Warren • Duchac
13-1
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1
Describe the nature of the
corporate form of
organization.
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1
Characteristics of a Corporation
A corporation is a legal entity, distinct
and separate from the individuals who
create and operate it. As a legal entity, a
corporation may acquire, own, and
dispose of property in its own name.
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1
Public Corporations
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.
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Private Corporations
Corporations whose shares are not
traded publicly are usually owned by a
small group of investors and are called
nonpublic or private corporations. The
stockholders of all corporations have
limited liability.
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Board of Directors
The stockholders control a corporation
by electing a board of directors. The
board meets periodically to establish
corporate policy. It also selects the
chief executive officer (CEO) and
other major officers.
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Exhibit 1 Organizational Structure of a Corporation
Stockholders
Board of Directors
Officers
Employees
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Characteristics of a Corporation
• A corporation has separate legal
existence from its owners.
• A corporation has transferable
units of ownership.
• A corporation has limited
stockholders’ liability.
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Costs may be incurred in organizing a corporation.
The recording of a corporation’s organizing costs
of $8,500 on January 5 is shown below:
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2
Describe the two main
sources of
stockholders’ equity.
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Stockholders’ Equity
The owner’s equity in a corporation
is called stockholders’ equity,
shareholders’ equity, shareholders’
investment, or capital.
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The two sources of capital are:
1. Capital contributed
to the corporation
by the stockholders,
called paid-in
capital or
contributed capital.
2. Net income retained
in the business, called
retained earnings.
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Stockholders’ Equity Section of
a Corporate Balance Sheet
Stockholders’ Equity
Paid-in capital:
Common stock $330,000
Retained earnings 80,000
Total stockholders’ equity $410,000
If there is only one class of stock, the account is
entitled Common Stock or Capital Stock.
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A debit balance in Retained Earnings
is called a deficit. Such a balance
results from accumulated net losses. A
credit balance in Retained Earnings
does not represent surplus cash or cash
left over from dividends.
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3
Describe and illustrate the
characteristics of stock,
classes of stock, and
entries for issuing stock.
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3
Characteristics of Stock
The number of shares of stock that a
corporation is authorized to issue is
stated in the charter. A corporation
may reacquire some of the stock that
has been issued. The stock remaining
in the hands of stockholders is then
called outstanding stock.
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3
Characteristics of Stock
Shares of stock are often assigned a
monetary amount, called par.
Corporations may issue stock certificates
to stockholders to document their
ownership. Some corporations have
stopped issuing stock certificates except
on special request.
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Classes of Stock
• Stock issued without a par is called no-
par stock. Some states require the board
of directors to assign a stated value to
no-par stock.
• Some state laws require that corporations
maintain a minimum stockholder
contribution, called legal capital, to
protect creditors.
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Number of Shares Authorized,
Issued, and Outstanding
Authorized
Issued
Outstanding
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Major Rights That Accompany
Ownership of a Share of Stock
1. The right to vote in matters concerning
the corporation.
2. The right to share in distributions of
earnings.
3. The right to share in assets on liquidation.
These stock rights normally
vary with the class of stock.
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Classes of Stock
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.
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Cumulative Preferred Stock
Cumulative preferred stock has 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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Exhibit 4 Dividends to Cumulative Preferred Stock
(continued)
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Dividends to Cumulative
Exhibit 4
Preferred Stock (continued)
Amount distributed $22,000
Preferred dividend (1,000 shares):
2008 dividend in arrears $4,000
2009 dividend in arrears 4,000
2010 dividend 4,000 12,000
Common dividend (4,000 shares) $10,000
Dividends per share:
Preferred $ 12.00
Common $ 2.50
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3
Example Exercise 13-1
Dividends per Share
Sandpiper Company has 20,000 shares of 1%
cumulative preferred stock of $100 par and 100,000
shares of $50 par common stock. The following
amounts were distributed as dividends:
Year 1: $10,000
Year 2: 45,000
Year 3: 80,000
Determine the dividends per share for preferred and
common stock for each year.
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Example Exercise 13-1 (continued)
3
Follow My Example 13-1
Year 1 Year 2 Year 3
Amount distributed $10,000 $45,000 $80,000
Preferred dividend (20,000
shares) 10,000 30,000* 20,000
Common dividend (100,000
shares) $ 0 $15,000 $60,000
*(10,000 + $20,000)
Dividends per share:
Preferred $0.50 $1.50 $1.00
Common stock None $0.15 $0.60
For Practice: PE 13-1A, PE 13-1B
13-33
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3
Issuing Stock
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.
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3
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 a
price that is less than its par, the
stock has been sold at a discount.
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Premium on Stock
Caldwell Company issues 2,000 shares of
$50 par preferred stock for cash at $55.
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A corporation acquired land for which the
fair market 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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3
Using the same data as we used for par the
transaction at stated value is recorded as follows:
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Example Exercise 13-2
Entries for Issuing Stock
On March 6, Limerick Corporation issued for cash
15,000 shares of no-par common stock at $30. On April
13, Limerick issued at par 1,000 shares of 4%, $40 par
preferred stock for cash. On May 19, Limerick issued
for cash 15,000 shares of 4%, $40 par preferred stock
at $42.
Journalize the entries to record the March 6, April 13,
and May 19 transactions.
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Example Exercise 13-2 (continued)
3
Follow My Example 13-2
Mar. 6 Cash……………………………….. 450,000
Common Stock…………….. 450,000
(15,000 shares × $30)
Apr. 13 Cash……………………………….. 40,000
Preferred Stock……………. 40,000
(1,000 shares × $40)
May 19 Cash……………………………….. 630,000
Preferred Stock……………. 600,000
Paid-in Capital in Excess
of Par……………………….. 30,000
(15,000 shares × $42)
13-42 For Practice: PE 13-2A, PE 13-2B
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4
Describe and illustrate
the accounting for
cash dividends and
stock dividends.
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4
Cash Dividends
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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4
Date of Declaration
The date of declaration is the date
the board of directors formally
authorized the payment of the
dividend. On this date, the
corporation incurs the liability to
pay the amount of the dividend.
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Date of Record
The date of record is the date the
corporation used to determine
which stockholders will receive
the dividend.
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Date of Payment
The date of payment is the date
the corporation will pay the
dividends to the stockholders
who owned the stock on the
date of record.
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4
On October 1, Hiber Corporation declares
the cash dividends shown below with a date
of record of November 10 and a date of
payment of December 2.
Dividend Total
per Share Dividends
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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4
On October 1, the declaration date, Hiber
Corporation records the following entry:
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4
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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4
On December 2, the date of payment, Hiber
Corporation records the payment of the
dividend as follows:
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Example Exercise 13-3 4
Entries for Cash Dividends
The important dates in connection with a cash dividend of
$75,000 on a corporation’s common stock are February 26,
March 30, and April 2. Journalize the entries required on
each date.
Follow My Example 13-3
Feb. 26 Cash Dividends………………………………………. 75,000
Cash Dividends Payable…………....................
Follow My Example 6-1 75,000
Mar. 30 No entry required.
Apr. 2 Cash Dividends Payable……………………………. 75,000
Cash………………………………..................... 75,000
13-52 For Practice: PE 13-3A, PE 13-3B
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4
Stock Dividends
A distribution of dividends
to stockholders in the form
of the firm’s own shares is
called a stock dividend.
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4
On December 15, the board of directors of
Hendrix Corporation declares a 5% stock
dividend of 100,000 shares (2,000,000
shares × 5%) to be issued on January 10
to stockholders of record on December 31.
The market price on the declaration date is
$31 a share.
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4
The entry to record the declaration of the
5 percent stock dividend is as follows:
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On January 10, the number of shares outstanding
is increased by 100,000. The following entry
records the issue of the stock:
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Before and After Stock Dividends
Before After
Stock Dividend Stock Dividend
Total shares issued 10,000 10,600
10,000 + (10,000 × 6%)
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4
Before and After Stock Dividends
Before After
Stock Dividend Stock Dividend
Total shares issued 10,000 10,600
Number of shares owned 1,000 1,060
1,000 + (1,000 × 6%)
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4
Before and After Stock Dividends
Before After
Stock Dividend Stock Dividend
Total shares issued 10,000 10,600
Number of shares owned 1,000 1,060
Proportionate ownership 10% 10%
1,000 ÷ 10,000 1,060 ÷ 10,600
13-50
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4
Example Exercise 13-4
Entries for Issuing Stock
Vienna Highlights Corporation has 150,000 shares
of $100 par common stock outstanding. On June
14, Vienna Highlights declared a 4% stock
dividend to be issued August 15 to stockholders
of record on July 1. The market price of the stock
was $110 a share on June 14.
Journalize the entries required on June 14, July 1,
and August 15.
13-60
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Example Exercise 13-4 (continued)
4
Follow My Example 13-4
June 14 Stock Dividends (150,000 × 4% × $110)………… 660,000
Stock Dividends Distributable
(6,000 × $100)………………………………….. 600,000
Paid-in Capital in Excess of Par—
Common Stock ($660,000 – $600,000)…… 60,000
July 1 No entry required.
Aug. 15 Stock Dividend Distributable…………………….. 600,000
Common Stock………………………………. 600,000
For Practice: PE 13-4A, PE 13-4B
13-61
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5
Describe and illustrate
the accounting for
treasury stock
transactions.
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5
Treasury Stock Transactions
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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5
On January 5, a firm purchased 1,000 shares
of treasury stock (common stock, $25 par)
at $45 per share. The cost method for
accounting for treasury stock is used.
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5
Later, 600 shares of treasury stock were sold for
$60 per share.
*
*The amount debited to Treasury Stock per share when purchased is
the amount per share that must be credited to that account when sold.
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5
On October 4, the corporation sells the
remaining 400 shares of treasury stock for $40
per share.
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5
Example Exercise 13-5
Entries for Treasury Stock
On May 3, Buzz Off Corporation reacquired 3,200
shares of its common stock at $42 per share. On
July 22, Buzz Off sold 2,000 of the reacquired
shares at $47 per share. On August 30, Buzz Off
sold the remaining shares at $40 per share.
Journalize the transactions of May 3, July 22, and
August 30.
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Example Exercise 13-5 (continued)
5
Follow My Example 13-5
May 3 Treasury Stock (3,200 × $42)…………………….. 134,400
Cash……………………………………………... 134,400
July 22 Cash (2,000 × $47)…………………………………. 94,000
Treasury Stock (2,000 × $42)……………….. 84,000
Paid-in Capital from Sale of Treasury
Stock [2,000 × ($47 – $42)]………………… 10,000
Aug. 30 Cash (1,200 × $40)…………………………………. 48,000
Paid-in Capital from Sale of Treasury
Stock [1,200 × ($42 – $40)]……………………... 2,400
Treasury Stock (1,200 × $42)……………….. 50,400
For Practice: PE 13-5A, PE 13-5B
13-68
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6
Describe and illustrate
the reporting of
stockholders’ equity.
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6
Exhibit 5 Stockholders’ Equity Section of a Balance Sheet
Method 1
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6
Stockholders’ Equity Section of a
Exhibit 5
Balance Sheet (continued)
Method 2
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Example Exercise 13-6
Reporting Stockholders’ Equity
Using the following accounts and balances, prepare
the Stockholders’ Equity section of the balance sheet.
Forty thousand shares of common stock are
authorized and 5,000 shares have been reacquired.
Common Stock, $50 par $1,500,000
Paid-in Capital in Excess of Par 160,000
Paid-in Capital from Sale of
Treasury Stock 44,000
Retained Earnings 4,395,000
Treasury Stock 120,000
13-72
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Example Exercise 13-6 (continued)
6
Follow My Example 13-6
Stockholders’ Equity
Paid-in capital:
Common stock, $50 par
(40,000 shares authorized,
30,000 shares issued)……………….. $1,500,000
Excess of issue price over par………….. 160,000 $1,660,000
From sale of treasury stock 44,000
Total paid-in capital………………….. $1,704,000
Retained earnings……………………………… 4,395,000
Total………………………………………….. $6,099,000
Deduct treasury stock (5,000 shares
at cost)……………………………………….. 120,000
Total stockholders’ equity……………………. $5,979,000
13-73 For Practice: PE 13-6A, PE 13-6B
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Reporting Retained Earnings
Changes to retained earnings may be
reported using one of the following:
1. Separate retained earnings
statement
2. Combined income and retained
earnings statement
3. Statement of stockholders’ equity
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Exhibit 6 Retained Earnings Statement
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Restrictions
The retained earnings available for use as
dividends may be limited by the actions
of a corporation’s board of directors.
These amounts, called restrictions or
appropriations, remain part of the
retained earnings. However, they must be
disclosed, usually in the notes to the
financial statements.
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Restrictions of retained earnings are
classified as follows:
1. Legal. State laws may require a
restriction of retained earnings.
2. Contractual. A corporation may
enter into contracts that require
restrictions of retained earnings.
3. Discretionary. A corporation’s
board of directors may restrict
retained earnings voluntarily.
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Example Exercise 13-7
Retained Earnings Statement
Dry Creek Camera Inc. reported the following results
for the year ending March 31, 2010:
Retained earnings, April 1, 2009 $3,338,500
Net income 461,500
Cash dividends declared 80,000
Stock dividends declared 120,000
Prepare a retained earnings statement for the fiscal
year ended March 31, 2010.
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7
Describe the effect of
stock splits on
corporate financial
statements.
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Stock Split
A stock split is 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 board
of directors declares a 5-for-1
stock split. A stock split does not
require a journal entry.
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7
Financial Analysis
Blockbuster Inc.:
Net Income – Preferred Dividends
Earnings per Share =
Number of Common Shares
Outstanding
$54.7 – $11.3
Earnings per Share =
187.1 common shares outstanding
Earnings per Share = $0.23 per common
share
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Financial Analysis
Netflix, Inc.:
Net Income – Preferred Dividends
Earnings per Share =
Number of Common Shares
Outstanding
$49.1
Earnings per Share =
62.6 common shares outstanding
Earnings per Share = $0.78 per common
share
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