Corporations and

Stockholders’ Equity
Course IX

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 Objective 1

The comparison of the three

forms of business
organization

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 Forms of Business Organization
• Proprietorship
• Partnership
• Corporation

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 Characteristics – Organizational

Proprietorship Partnership Corporation

One owner Two or more Many

partners stockholders

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 Characteristics – Ability to Raise
Capital
Proprietorship Partnership Corporation

Limited Greater than Much greater

proprietorship than other
forms

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 Characteristics – Liability for
Business Debts
Proprietorship Partnership Corporation

Personally Personally Not personally

liable liable liable

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 Characteristics – Owner
Involvement
Proprietorship Partnership Corporation

Owner is Some partners Managers are

manager are managers selected by
board of
directors

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 Characteristics – Income Taxes

Proprietorship Partnership Corporation

Owner pays Partners pay Corporation

personal personal pays income
income tax on income tax on taxes on
company company company
earnings earnings earnings

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 Characteristics – Regulation

Proprietorship Partnership Corporation

No regulation No regulation Regulated by

by GAAP by GAAP GAAP if
publicly held

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 Organizing a Corporation
• Charter (article of incorporation,
corporate charter)– obtained from
state; gives a business the state's
permission to form a corporation and
thereby allows the corporation to issue,
or sell, a certain number of shares of
stock
• Authorized shares – number of
shares of stock that can be sold
• Bylaws – act as the constitution of the
newly formed business
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 Organizing a Corporation
• Stockholders vote to elect board of
directors
• Board of directors sets policy and
appoints officers
• Further, the board appoints the
president, who is in charge of day-
to-day operations.

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 Stockholders’ Rights
• Four basic rights
– Vote - Each share of stock carries one vote.
– Dividends - Each share of stock receives an
equal dividend with every other share of the
same class.
– Liquidation - Stockholders receive their
proportionate share of any assets remaining
after the corporation pays its liabilities in
liquidation
– Preemption - Stockholders can maintain their
proportionate ownership in the corporation in
the event that additional shares of stock are
offered for sale
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 Objective 2

The description of
stockholders’ equity.
Classes of stock

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 Stockholders’ Equity
• Two components:
– Paid-in capital (contributed capital) -
amounts received from, or paid in by,
the stockholders.
– Retained earnings - capital earned by
the profitable operations of the
corporation. Net income of the business
increased owner's equity while net loss
decreased it.

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 Stockholders’ Equity
Sole-proprietor Corporation
Owner, Capital Paid in Capital
Investments Investments
Withdrawals Net Income

Separate investments by
owners (stockholders) and Retained Earnings
the earnings of the company Dividends Net Income
into 2 sections of
stockholders’ equity

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 Classes of Stock
• Common stock - most basic form of
capital stock issued by every
corporation
• Preferred stock - owners have
certain advantages over common
stockholders
– Receive dividends before common
– Upon liquidation, receive assets before
common

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 Classes of Stock
• Stock that is held by the stockholders is
said to be outstanding stock because it is
out in the hands of the shareholders.
• Stock may or may not be assigned a value
at incorporation named par value
• Par value is used to compute dividends on
preferred stock.
• The par value is set low, because the
stock cannot be issued for less than par
value.

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 Classes of Stock
• When a company first becomes incorporated, the
state of incorporation must approve the number
of shares of stock that the corporation is
authorized to sell—authorized stock, or capital
stock.
• Many states require that the stocks also have a
par value, or nominal value, to provide a
minimum amount of legal capital to pay
creditors.
• So, the legal capital is equal to the par value
multiplied by the number of shares of
outstanding stock, which is the number of shares
currently held by investors.
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 Classes of Stock
• No-par stocks have no par value printed on
its certificates.
• Instead of par value, some states allow no-
par stocks to have a stated value.
• This is set by the board of directors of the
corporation, which serves the same purpose
as par value in setting the minimum legal
capital that the corporation must have, in
order to calculate prefferential dividends or
buying back its stock.

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 Stockholders’ Equity
Transactions
• Issue shares of stock
• Pay cash dividends
• Distribute stock dividends

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 Objective 3

The recording of the issuance

of stock

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 Issuing Stock
Paid-in Capital
Cash Common Stock
Amount
Amount
Par
received
received
over par

Paid-in Capital in Excess of Par

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 Issuing Stock
On April 1, Stanley Systems issued 1,000
shares of $1 par common stock for cash of
$1 per share
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Apr 1 Amount receivable 1,000

Not Paid-in Capital -
Common Stock 1,000
(1,000 shares x $1)

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 GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Apr 19 Amount receivable 10,500

Not Paid-in Capital-Common Stock 1,000
Paid-in Capital in Excess of
Par-common 9,500

Just the par value goes to the

Common Stock account
Premium
Everything else goes to the Paid
in Capital in Excess

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 GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

May 11 Inventory 23,000

Equipment 11,000
Amount receivable 3,000
Paid-in Capital in Excess of
Par – Common 31,000
When you issue stock for a
noncash asset, debit the
asset for its fair market
value

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 Notice how the stock is
described in each line…..par
value, number of shares
authorized and then number
Stockholders’ Equity
of shares issued
Paid-in capital:
Preferred stock, $3 par, 100,000
authorized, 3000 issued $9,000
Common stock, $1 par, 500,000
authorized, 1,500 issued 1,500
Paid-in capital in excess of par common 39,500
Total paid-in capital $40,000
Retained earnings 25,000
Total stockholders’ equity $86,000

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 Objective 4

The accounting for cash

dividends

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 Dividend Dates
• Declaration date - creates a
liability for the corporation equal to
the amount of the dividend declared.
• Date of record - usually a week or
two after declaration
• Payment date

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 Declaring and Paying Dividends
The declaration of a cash
dividend decreases retained
Preferred stock: 6% x $100,000 $6,000
earnings and creates a
Common: $0.50 x 50,000current liability 25,000
Total dividends $31,000

GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

2010
Jan 15 Retained earnings 31,000
Dividends payable 31,000

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 Declaring and Paying Dividends

GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

2010
Feb 4 Dividends payable 31,000
Cash 26,040
Other taxes and similar 4960
liabilities

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Preferred: Per Share Dividend
• Stated as percentage of par value or
as specified amount
• How much does one share of 3%
preferred stock with a $50 par value
receive when dividends are declared
and paid? $1.50

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Preferred: Per Share Dividend
• Stated as percentage of par value or
as specified amount
• How much does one share of $4
preferred stock with a $50 par value
receives when dividends are declared
and paid? $4

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 Cumulative & Noncumulative
Preferred Stock
• Cumulative - accumulates dividends
each year until the dividends are
paid Assume that preferred stock
– Dividends in arrearsis -cumulative
dividends passed
if it is not
or not paid specifically designated as
– Dividends in arrearsnoncumulative
- not a liability
• Noncumulative – dividends not paid
do not accumulate from one year to
the next

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A company decides to pay dividends of 9000$:
1. Preferred:
2 years in arrears $4,000
Current year 2,000
Total to preferred $6,000

Common stockholders get the

rest $3,000

What if the preferred stock was Preferred, $2,000

noncumulative? How would the and Common,
$15,000 be divided? $7,000

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