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					Chapter 19




    Corporate Accounting:
    Formation and Paid-In
    Capital
Corporation

 Definition:
 A form of business that is owned by investors
 (called stockholders or shareholders).

 Their investments are referred to as the stock or
 capital stock of the corporation.




                     Chapter 19                  2
Corporations

Some are publicly held. Their stock is owned by
 many investors and usually traded on an
 organized stock exchange.
Others are closely held. They may have as few
 as three stockholders. Often, these corporations
 are controlled by a family.
Most of the very large businesses in the U.S.,
 such as General Motors, IBM, Coca-Cola, are
 publicly held corporations.

                      Chapter 19                    3
Legal Status of
Corporations

Unlike a sole proprietorship or a partnership, a
 corporation is created by law as an entity
 separate from its owners.
A corporation can make binding contracts, sue
 and be sued, own property, hire and fire
 employees, and incur debts.
Because of its separate legal existence it has
 most of the legal rights and responsibilities of an
 individual.

                       Chapter 19                  4
Advantages of Corporations


Have limited liability. The stockholders are not
 personally responsible for the debts of the
 business.

Have a greater ability to raise capital. By selling
 stock, corporations can obtain large amounts of
 money to fund growth.


                       Chapter 19                      5
Advantages of Corporations


Have a continuous life. The life of a corporation
 is not affected by the death, incapacity, or
 withdrawal of individual stockholders.

Ownership can easily be transferred. Ownership
 is represented by shares of stock, which can be
 sold by one stockholder to another.


                      Chapter 19                     6
Advantages of Corporations

There is no mutual agency. Unless stockholders
 are officers of the corporation, they cannot
 enter into contracts for the firm.

More likely to have professional management.
 Publicly held corporations have the resources to
 hire managers who may have skills and
 experience that stockholders lack.


                      Chapter 19                    7
Disadvantages of
Corporations

More heavily taxed. They are required to pay
 federal and state income taxes. Also, when they
 distribute part of their earnings to stockholders,
 the stockholders must pay personal income
 taxes on these amounts.
More heavily regulated. They are subject to
 many state and federal laws and must file many
 reports with government agencies, especially if
 they are publicly held.

                       Chapter 19                 8
Forming a Corporation

The formation of corporations is regulated by
 the states.

Any group that wishes to form a corporation
 must submit an application to the proper agency
 in its state.

If the state approves the application, it issues a
 corporate charter or certificate of incorporation.
                       Chapter 19                     9
Forming a Corporation


After the incorporators receive the corporate
 charter, they agree on a set of bylaws to govern
 the firm.

The incorporators then hold a meeting of
 stockholders and elect a board of directors.



                      Chapter 19                10
Forming a Corporation


The board of directors appoints officers to
 manage the corporation.

The officers hire employees, rent facilities, and
 take any other actions necessary to start the
 business.



                       Chapter 19                    11
Organization Costs

 The costs of forming a corporation include:

 lawyers’ fees
 fee paid for the state charter
 cost of printing stock certificates
 cost of promoting the stock



                     Chapter 19                12
Organization Costs


These costs are debited to an intangible asset
 account called Organization Costs.

The balance of Organization Costs is amortized
 (written off) over a period of time, which must
 not exceed 40 years.



                      Chapter 19                   13
Corporate Capital

The owner’s equity of a corporation is called
 stockholders’ equity.

Stockholders’ equity is divided into paid-in
 capital and earned capital.

Paid-in capital comes from the shares of stock
 the corporation sells to investors.

                       Chapter 19                 14
Corporate Capital

Earned capital comes from the earnings of the
 corporation. Earnings that have accumulated
 and not been paid out to stockholders are called
 retained earnings.

The Capital Stock account is used to record the
 amounts received from selling stock to
 investors.


                      Chapter 19                   15
Corporate Capital


The Retained Earnings account is used to record
 the earnings of the corporation in past periods
 that have not been distributed to stockholders.

Both of these accounts are stockholders’ equity
 accounts that increase on the credit side and
 decrease on the debit side.


                      Chapter 19                   16
Capital Stock

  Definition:
  General term used to describe the shares of
  ownership in a corporation.

Corporations issue stock certificates to investors
 as evidence of their shares of ownership.




                       Chapter 19                 17
Capital Stock


The charter of a corporation specifies the
 maximum number of shares it can issue. This
 number of shares is the authorized stock.

The shares that have been sold to investors are
 known as the issued stock.



                     Chapter 19                18
Capital Stock


A corporation may buy back some of the stock it
 previously issued. These shares are called
 treasury stock.

Outstanding stock is the difference between the
 number of shares issued and the number of
 treasury shares held by the corporation.


                     Chapter 19                19
Capital Stock

 There are two basic types of stock.
  Common Stock
  Preferred Stock



 If a corporation issues only one type of capital
 stock, it is common stock.


                      Chapter 19                    20
Common Stock

 Owners of common stock usually have the
 following rights.

 Right to receive dividends when they are
  declared by the board of directors.

 Right to vote for the board of directors and
  on certain important corporate issues.

                    Chapter 19                   21
Common Stock


 Right to maintain their proportionate share of
  the corporation if additional stock is issued.

 Right to share in the final distribution of
  assets if the corporation is liquidated.




                     Chapter 19                 22
Preferred Stock

 Owners of preferred stock have special rights
 not available to owners of common stock.

 Have a prior claim to any dividends declared
  by the board of directors.
 Have a prior claim to the assets of the
  corporation in case of a liquidation.



                     Chapter 19                  23
Preferred Stock

Usually has a stated dividend rate and a stated
 liquidation value.

May be cumulative or noncumulative.

With cumulative preferred stock, unpaid
 dividends accumulate and must be paid before
 the owners of the common stock receive any
 dividends.
                      Chapter 19                   24
Preferred Stock


May be participating or nonparticipating.



Owners of participating preferred stock are
 entitled to their stated dividend if the board of
 directors makes funds available.


                       Chapter 19                    25
Issuing Capital Stock with
a Par Value


For legal purposes, some shares of stock are
 issued with a par value, such as $1 or $10 per
 share.

Par value has nothing to do with the market
 value.



                      Chapter 19                  26
Issuing Capital Stock with
a Par Value


The par value of all shares outstanding is the
 legal capital of the corporation.

In most states, a corporation must have
 resources equal to its legal capital before it pays
 dividends.



                       Chapter 19                  27
Issuing Capital with No Par
Value


Some states allow corporations to issue stock
 without a par value.

If there is no par value, the legal capital of the
 corporation is the amount received from all
 shares issued.



                       Chapter 19                     28
Issuing Capital with No Par
Value


Some states that permit the sale of no-par value
 stock require corporations assign a stated value.

Market value of a share of stock is the actual
 price at which it can be sold.




                      Chapter 19                  29
Recording Stock Issued at
Par Value for Cash



 On January 2, 20X1, the Hill Corporation issued
 1,000 shares of $100 par value preferred stock
 at par and 40,000 shares of $10 par value
 common stock at par.




                     Chapter 19                    30
Recording Stock Issued at
Par Value for Cash

 20X1
 Jan. 2   Cash                   500,000
           Preferred Stock               100,000
           Common Stock                  400,000
             Issued 1,000 shares of
             preferred stock and
             40,000 shares of common
             stock at par for cash.


                     Chapter 19                31
Recording Stock Issued at Par
Value for Noncash Assets

The Hill Corporation issued 900 shares of $10
 par value common stock at par to a lawyer who
 helped to organize the firm.

The total par value of the shares issued
 ($9,000) is debited to the intangible asset
 account Organization Costs and credited to the
 Common Stock account.


                     Chapter 19                   32
Recording Stock Issued at Par
Value for Noncash Assets

 20X1
 Jan. 5   Organization Costs         9,000
           Common Stock                    9,000
            Issued 900 shares of
            common stock at par
            for legal services received
            during incorporation.



                     Chapter 19                33
Issuing Stock Above Par
Value


After a corporation has operated successfully for
 a while, it may be able to sell its stock above
 par value.

When the market value of stock exceeds the par
 value, the stock sells at a premium.



                      Chapter 19                 34
Issuing Stock Above Par
Value


 Example:

 On March 1, 20X2, the Hill Corporation issued
 500 shares of $100 par value preferred stock at
 $104 and 20,000 shares of $10 par value
 common stock at $14.



                     Chapter 19                35
Recording Stock Issued at
a Premium

When preferred stock is issued at a premium,
 the par value is credited to the Preferred Stock
 account.
The premium is credited to a separate
 stockholders’ equity account called Paid-In
 Capital in Excess of Par—Preferred.
The same procedure is followed for the common
 stock. Separate accounts are used to record the
 par value and the premium.

                      Chapter 19               36
Recording Stock Issued at
a Premium
 20X2
 Mar. 1   Cash                         332,000
           Preferred Stock                     50,000
           Paid-In Capital in Excess
           of Par—Preferred                     2,000
           Common Stock                       200,000
           Paid-In Capital in Excess
           of Par—Common                       80,000
             Issued 500 shares of $100
             par value preferred stock at
             $104 and 20,000 shares of
             $10 par value common stock at $14.

                        Chapter 19                      37
Issuing Stock Below Par
Value

When a stock sells below its par value, it is said
 to sell at a discount.

In most states, it is illegal to issue stock at a
 discount.

Assume the state where the Briggs Corporation
 is located allows the issuance of stock at a
 discount.
                        Chapter 19                   38
Issuing Stock Below Par
Value

 20X1
 Aug. 10 Cash                  70,000
         Discount on Common 30,000
         Stock
          Common Stock                100,000
            Issued 10,000 shares
            of $10 par value common
            stock at $7.


                    Chapter 19              39
Issuing No-par Value Stock
for Cash


On August 1, 20X1, the Davis Corporation
 issued 25,000 shares of its no-par value
 common stock for $20 a share.

The total amount received ($500,000) is
 credited to the Common Stock account.



                     Chapter 19             40
Issuing No-par Value Stock
for Cash

 20X1
 Aug. 1   Cash                 500,000
           Common Stock                500,000
            Issued 25,000 shares
            of no-par value stock
            at $20.




                    Chapter 19               41
Issuing Stated Value Stock
for Cash

 When stock with a stated value is issued, the
 journal entry is similar to that for a par value
 stock.

 Example:
 The Lang Corporation issued 5,000 shares of its
 $10 stated value stock at $12.



                      Chapter 19                    42
Issuing Stated Value Stock
for Cash

 20X3
 Feb. 15 Cash                  60,000
          Common Stock                50,000
          Paid-In Cap. in Excess
          of Stated Val.—Com.         10,000
            Issued 5,000 shares of
            $10 stated value common
            stock at $12.


                   Chapter 19              43
Stock Subscriptions


Sometimes corporations issue stock on a
 subscription basis—on the installment plan.

The subscribers make several payments and
 then receive their stock certificates.




                      Chapter 19               44
Stock Subscriptions


 Example:

 On August 1, 20X2, the Hill Corporation
 accepted subscriptions for 10,000 shares of its
 $10 par value common stock at $15. The
 subscribers will make three equal payments.



                     Chapter 19                    45
Recording a Stock
Subscription

The total amount to be received from a stock
 subscription is debited to an asset account
 called Subscriptions Receivable.

When a subscription involves common stock,
 the par value is credited to a stockholders’
 equity account called Common Stock
 Subscribed.


                     Chapter 19                 46
Recording a Stock
Subscription


If there is a premium, it is credited to Paid-In
 Capital in Excess of Par—Common.

The following entry is made at the Hill
 Corporation when it accepts subscriptions for
 common stock.



                       Chapter 19                   47
Recording a Stock
Subscription

 20X2
 Aug. 1 Subscriptions Receivable    150,000
         Common Stock Subscribed            100,000
         Paid-In Cap. in Excess of
         Par—Common                          50,000
           Accepted subscriptions for
           10,000 shares of $10 par
           value common stock at $15.




                      Chapter 19                  48
Recording the Collection of
Stock Subscriptions



 On October 1, 20X2, the Hill Corporation
 received the third installment for the stock
 subscriptions and issued the stock certificates to
 the subscribers.




                      Chapter 19                  49
Recording the Collection of
Stock Subscriptions
 20X2
 Oct. 1   Cash                              50,000
           Subscriptions Receivable                   50,000
             Collected final installment
             of subscriptions of
             August 1.

     1    Common Stock Subscribed          100,000
           Common Stock                              100,000
            Issued certificates to
            subscribers of August 1.


                         Chapter 19                       50
Treasury Stock

A corporation may buy some of its own
 outstanding stock from stockholders and keep
 the stock in its treasury.

This type of stock is called treasury stock.

The corporation may later reissue the stock, or
 it may distribute the stock to employees as part
 of a stock option plan or bonus plan.
                       Chapter 19               51
Recording Treasury Stock

Assume the Hill Corporation reacquires 2,000
 shares of its $10 par value common stock for
 $16 from a large stockholder.

Hill records this transaction on the cost basis. It
 debits a contra stockholders’ equity account
 called Treasury Stock for $32,000
 (2,000 shares  $16). It credits Cash.


                       Chapter 19                  52
Recording Treasury Stock

 20X2
 Nov. 6 Treasury Stock         32,000
         Cash                         32,000
          Reacquired 2,000 shares
          of $10 par value common
          stock at $16.




                   Chapter 19              53
Recording Treasury Stock

On May 5, 20X3, the Hill Corporation sells 1,000
 shares of the treasury stock it reacquired at
 $16. It receives $20 per share (a total of
 $20,000).
The amount above the cost of $16 per share is
 credited to a stockholders’ equity account called
 Paid-In Capital from the Sale of Treasury Stock
 (1,000 shares  $4 = $4,000).


                      Chapter 19                 54
Recording Treasury Stock

 20X3
 May 5 Cash                    20,000
        Treasury Stock                16,000
        Paid-In Cap. from Sale
        of Treas. Stock                4,000
         Sold 1,000 shares of
         treasury stock
         reacquired at $16 for $20.


                   Chapter 19              55
Subsidiary Ledgers for
Stockholders

A corporation keeps a common stockholders’
 ledger, a preferred stockholders’ ledger, and a
 subscribers’ ledger.
The following controlling accounts in the general
 ledger provide a link to the subsidiary ledgers:
  Common Stock
  Preferred Stock
  Subscriptions Receivable

                      Chapter 19                56

				
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