Corporations Organization Stock Transactions and Dividends

Corporations: Organization, Stock
Transactions, and Dividends
Learning Objective 1
Describe the
nature of the
corporate form of
organization.
Chapter 11
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Prepared by: C. Douglas Cloud

Professor Emeritus of Accounting
Pepperdine University
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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LO 1
LO 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.
A corporation sells shares of ownership,
called stock.
The stockholders or shareholders who own

the stock own the corporation. They can
buy and sell stock without affecting the
corporations operations or continued
existence.
LO 1
LO 1
Corporations whose shares of stock are

traded in public markets are called public
corporations.
A corporation has separate legal existence

from its owners.
A corporation has transferable units of
ownership.
A corporation has limited stockholders
liability.
A corporation is subject to taxes. Thus, the
corporate form has the disadvantage of
double taxation.
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.
LO 1
Forming a Corporation
After the application is approved, the state

grants a charter or articles of incorporation,
which formally create the corporation.
Management and the board of directors
then prepare bylaws, which are operating
rules and procedures for conducting the
corporations affairs.
Describe and illustrate

the characteristics of
stock, classes of stock,
and entries for issuing
stock.
LO 2
LO 2
Characteristics of Stock
The number of shares of stock that a

corporation is authorized to issue is stated in
the charter.
The term issued refers to the shares issued to
the stockholders.
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.
Corporations may issue stock certificates to

stockholders to document their ownership.
Shares of stock are often assigned a dollar
amount, called par value.
Some corporations have stopped issuing
stock certificates except on special
request.
LO 2
LO 2
Stock issued without 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.
The major rights that accompany ownership

of a share of stock are:
The right to vote in matters concerning the

corporation.
The right to share in distributions of earnings.
The right to share in assets upon liquidation.
LO 2
LO 2
Classes of Stock
Classes of Stock
The two primary classes of paid-in capital

are common stock and preferred stock.
The primary attractiveness of preferred
stock is that it is given a preference to
dividends over common 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.
Cumulative preferred stock dividends that
have not been paid in prior years are said to
be in arrears.
LO 2
LO 2
Issuing Stock
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.
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.
LO 2
LO 2
Premium on Stock
Premium on Stock
Caldwell Company issues 2,000 shares of $50 par

preferred stock for cash at $55.
A corporation acquired land for which the fair

market value cannot be determined. In exchange
for the land, the corporation issued 10,000 shares
of $10 par common that had a current market value
of $12.
LO 2
LO 2
No-Par Stock
No-Par Stock
On January 9, a corporation issues 10,000 shares of nopar common stock at $40 a share. On June 27, the
corporation issues an additional 1,000 shares at $36.
Using the same data as in the previous transaction,

assume that the stock is assigned a stated value of $25.
LO 3
Cash Dividends
A cash distribution of earnings by a
corporation to its stockholders is called a
cash dividend. The three conditions a
corporation must meet to pay a cash
dividend are:

the accounting for
cash dividends and
stock dividends.
Sufficient retained earnings

Sufficient cash
Formal action by the board of directors
LO 3
LO 3
Cash Dividends
Cash Dividends
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.
The date of record is the date the
corporation uses to determine which
stockholders will receive the dividend.
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.
LO 3
LO 3
Cash Dividends
Cash Dividends
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.
On October 1, the declaration date, Hiber

Corporation records the following entry:
On November 10, the date of record, no entry is

required, since this date merely determines which
stockholders will receive the dividends.
LO 3
LO 3
Cash Dividends
Stock Dividends
On December 2, the date of payment, Hiber

Corporation records the payment of the dividends
as follows:
A distribution of dividends to stockholders in

the form of the firms own shares is called a
stock dividend. Stock dividends normally
are declared only on common stock and
issued to common stockholders.
LO 3
Stock Dividends
On December 15, the board of directors of Hendrix
Corporation declares a 5 percent 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 per share.
LO 3
Stock Dividends
The entry to record the declaration of the 5
percent stock dividend is as follows:
LO 3
Stock Dividends
On January 10, the stock dividend is distributed to

stockholders by issuing 100,000 shares of
common stock. The following entry records the
issue of the stock:

the accounting for
treasury stock
transactions.
LO 4
Treasury Stock Transactions
LO 4
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:
To provide shares for resale to employees,
To reissue as bonuses to employees, or
To support the market price of the stock
On February 13, 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. The entry to record the
purchase of the treasury stock is as follows:
LO 4

On April 29, the corporation sells 600 shares of
the treasury stock for $60. The entry to record the
sale is as follows:
LO 4

On October 4, the corporation sells the remaining
400 shares of treasury stock for $40 per share.
The entry to record the sale is as follows:
The amount (per share) debited to Treasury Stock

when purchased is the amount per share that must
be credited to that account when sold (600 x $45).
LO 5
Reporting Retained Earnings
Changes to retained earnings may be

reported using one of the following:
Separate retained earnings statement
Combined income and retained earnings
statement
Statement of stockholders equity

the reporting of
stockholders equity.
LO 5
LO 5
Restrictions
Prior Period Adjustments
Restrictions of retained earnings are

classified as follows:
Errors may not be discovered within the

same period in which they occur. The
correction of this type of error, called a
prior period adjustment, is reported in the
retained earnings statement as an
adjustment to the beginning balance of
retained earnings.
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 corporations board of
directors may restrict retained earnings
voluntarily.
LO 5
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.
When a corporation also has changes in
stock and paid-in capital accounts, a
statement of stockholders equity is
normally prepared.
Describe the effect of

stock splits on
corporate financial
statements.
LO 6
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.

the use of earnings per
share in evaluating a
companys profitability.
LO 7
Earnings per Share
Corporations: Organization, Stock

Transactions, and Dividends
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
The End
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University

Corporations Organization Stock Transactions and Dividends

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Corporations Organization Stock Transactions and Dividends

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Formate disponibile

Corporations: Organization, Stock

Transactions, and Dividends

Prepared by: C. Douglas Cloud

A corporation is a legal entity, distinct and

The stockholders or shareholders who own

Corporations whose shares of stock are

A corporation has separate legal existence

Corporations whose shares are not traded

After the application is approved, the state

Describe and illustrate

The number of shares of stock that a

Corporations may issue stock certificates to

Stock issued without par is called no-par

The major rights that accompany ownership

The right to vote in matters concerning the

The two primary classes of paid-in capital

Cumulative preferred stock has a right to

A corporation is authorized to issue 10,000

If the stock is issued (sold) for a price that is

Caldwell Company issues 2,000 shares of $50 par

A corporation acquired land for which the fair

Using the same data as in the previous transaction,

Describe and illustrate

Sufficient retained earnings

The date of declaration is the date the

The date of payment is the date the

On October 1, Hiber Corporation declares the cash

On October 1, the declaration date, Hiber

On November 10, the date of record, no entry is

On December 2, the date of payment, Hiber

A distribution of dividends to stockholders in

On January 10, the stock dividend is distributed to

Describe and illustrate

Treasury Stock Transactions

Treasury Stock Transactions

Treasury stock is stock that a corporation

On February 13, a firm purchased 1,000 shares

Treasury Stock Transactions

Treasury Stock Transactions

The amount (per share) debited to Treasury Stock

Reporting Retained Earnings

Changes to retained earnings may be

Describe and illustrate

Prior Period Adjustments

Restrictions of retained earnings are

Errors may not be discovered within the

Legal. State laws may require a restriction of

Statement of Stockholders Equity

Describe the effect of

A stock split is a process by which a

Describe and illustrate

Earnings per Share

Corporations: Organization, Stock

Earnings per common share (EPS),

Net Income Preferred Dividends

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