1 ac116 accounting ii seminar 6 jim eads, cpa, mst, msf corporations: organizations, stock...

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AC116 Accounting IIAC116 Accounting II

Seminar 6Seminar 6Jim Eads, CPA, MST, MSFJim Eads, CPA, MST, MSF

Corporations:Corporations:Organizations, Stock Transactions,Organizations, Stock Transactions,

and Dividendsand DividendsPart IPart I

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CorporationsCorporations

Corporation:

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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Stockholders or shareholders:

The owners of the shares of a corporation.

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Public corporations:

Corporations whose shares of stock are traded in public markets.

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Nonpublic or private corporations:

Corporations whose shares are not traded publicly are usually owned by a small group of investors.

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Limited liability:

The stockholders of a corporation have limited liability.

Stockholders risk only their investment in the corporation’s shares. They are not personally liable for the corporation’s debts.

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Board of Directors:

Establishes company policy and selects the chief executive officer (CEO) and other major officers of the corporation.

The board of directors is elected by the corporation’s shareholders.

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Advantages of the corporate form:Advantages of the corporate form:

A corporation is a separate entity. A corporation’s life is indefinite. The corporation can raise large

amounts of capital by selling stock. Stockholders can freely sell their

shares. Stockholders are not usually liable for

the corporation’s debts.

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Disadvantages of the corporation form:Disadvantages of the corporation form:

Owners (stockholders) do not directly control the company.

Corporations are subject to income tax. Dividends distributed to owners are taxed at both the corporate and individual levels.

Corporations must satisfy many regulatory requirements.

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The owner’s equity in a corporation is called stockholders’ equity, shareholders’ equity, shareholders’ investment, or capital.

Commonly just called the equity section of the balance sheet.

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Equity comes from two sources:

Paid-in or Contributed capital:

Capital contributed to the corporation by stockholders.

Retained earnings:

Net income retained by the business (income earned but not distributed to owners as dividends).

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Remember that equity accounts increase with credits and decrease with debits.

Therefore A debit balance in Retained Earnings is called a deficit. Such a balance results from accumulated net losses.

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Authorized Shares:

The number of shares of stock that a corporation may issue, as stated in the corporate charter.

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Issued Shares:

The number of shares of stock that have been sold by a corporation.

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Outstanding Shares:

The number of shares currently owned by shareholders (shares issued but not repurchased by the corporation).

Note: A corporation may own its own shares, called treasury stock, but they are not considered as outstanding. Treasury stock does not vote and does not earn dividends.

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Par value:

A value assigned to stock by the corporation in the corporate charter. Par value actually means very little today and has no relation to the actual value of the 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.

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The two primary classes of paid-in capital (stock):

• Common Stock

• Preferred Stock

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Common Stock:Common Stock:

Basic owners of the corporation with:Basic owners of the corporation with:

– The right to vote in matters concerning the corporation.

– The right to share in distributions of earnings.

– The right to share in assets on liquidation.

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Preferred Stock:Preferred Stock:

Secondary owners of the corporation with:Secondary owners of the corporation with:

– No right to vote in matters concerning the corporation.

– No right to share in distributions of earnings in excess of the stated dividend for the stock.

– No right to share in assets on liquidation.

However, preferred stock holders receive priority when dividends are distributed. Common stock shareholders do not receive dividends until the preferred shareholders receive their dividends.

Preferred Stock Preferred Stock DividendsDividends

Preferred stock dividends are stated in one Preferred stock dividends are stated in one of two ways:of two ways:

1.1. 10,000 shares, 5%, $100 par:10,000 shares, 5%, $100 par:

Dividend per share = $100 x 5% = $5.00Dividend per share = $100 x 5% = $5.00Total dividend = $5.00 x 10,000 = $50,000Total dividend = $5.00 x 10,000 = $50,000

2.2. 10,000 shares, $4.00, $100 par:10,000 shares, $4.00, $100 par:

Dividend per share = $4.00Dividend per share = $4.00Total dividend = $4.00 x 10,000 = $40,000Total dividend = $4.00 x 10,000 = $40,000

2020

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Example Exercise 13-1Example Exercise 13-1 (page 581)(page 581)

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: $10,000Year 2: $45,000Year 3: $80,000

Determine the dividends per share for preferred and common stock for each year.

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Preferred stock dividend are computed Preferred stock dividend are computed as follows:as follows:

Par (or stated) value x dividend rate.Par (or stated) value x dividend rate.

Therefore, the annual dividend per share Therefore, the annual dividend per share of preferred = $100 x 1% = $1.of preferred = $100 x 1% = $1.

With 20,000 shares of preferred stock, With 20,000 shares of preferred stock, preferred stock dividends should be preferred stock dividends should be $20,000 each year.$20,000 each year.

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In year 1, the total dividends paid were $10,000.In year 1, the total dividends paid were $10,000.

Since preferred dividends should be $20,000; it is Since preferred dividends should be $20,000; it is clear the company only paid 50% of the clear the company only paid 50% of the preferred dividends, or $0.50 per share. preferred dividends, or $0.50 per share.

Since preferred shareholders must receive their Since preferred shareholders must receive their dividends before common shareholders, dividends before common shareholders, common shareholders received no dividends. common shareholders received no dividends. And, since these are cumulative preferred And, since these are cumulative preferred shares, the remaining $10,000 must be paid in shares, the remaining $10,000 must be paid in addition to preferred dividends before common addition to preferred dividends before common shareholders can receive future dividends.shareholders can receive future dividends.

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In year 2, the total dividends paid were In year 2, the total dividends paid were $45,000.$45,000.

Since preferred dividends are $20,000 and Since preferred dividends are $20,000 and there are $10,000 in preferred dividends in there are $10,000 in preferred dividends in arrears, the first $30,000 must be paid to arrears, the first $30,000 must be paid to preferred shareholders. The preferred preferred shareholders. The preferred shareholders will receive $1.50 per share.shareholders will receive $1.50 per share.

The remaining dividends of $15,000 must have The remaining dividends of $15,000 must have been paid to common shareholders. been paid to common shareholders. $15,000 / 100,000 shares = $0.15 per share.$15,000 / 100,000 shares = $0.15 per share.

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Example Exercise 13-1Example Exercise 13-1(page 581)(page 581)

In year 3, the total dividends paid were In year 3, the total dividends paid were $80,000.$80,000.

Since preferred dividends are $20,000 and Since preferred dividends are $20,000 and there are no preferred dividends in arrears, there are no preferred dividends in arrears, the first $20,000 will be paid to preferred the first $20,000 will be paid to preferred shareholders. They will receive $1 per share.shareholders. They will receive $1 per share.

The remaining dividends of $60,000 must have The remaining dividends of $60,000 must have been paid to common shareholders. been paid to common shareholders. $60,000 / 100,000 shares = $0.60 per share.$60,000 / 100,000 shares = $0.60 per share.

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When stock is issued that has a par When stock is issued that has a par or stated value:or stated value:

Debit cashDebit cash Credit Common (or preferred) Credit Common (or preferred)

Stock up to the amount of the par Stock up to the amount of the par valuevalue

Credit Capital in Excess of Par for Credit Capital in Excess of Par for the amount in excess of par valuethe amount in excess of par value

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Example: XYZ issues 100,000 shares Example: XYZ issues 100,000 shares of $5 par common stock in exchange of $5 par common stock in exchange for $750,000.for $750,000.

CashCash 750,000750,000Common StockCommon Stock

500,000500,000Paid-in Capital in Paid-in Capital in

Excess of ParExcess of Par 250,000250,000

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When stock is issued that has no When stock is issued that has no par or stated value:par or stated value:

Debit cashDebit cash Credit Common (or preferred) Credit Common (or preferred)

StockStock

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Example: XYZ issues 100,000 Example: XYZ issues 100,000 shares of no par common stock in shares of no par common stock in exchange for $750,000.exchange for $750,000.

CashCash 750,000750,000

Common StockCommon Stock 750,000750,000

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Questions?Questions?

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One last thought….One last thought….

Make sure you read through the Make sure you read through the remainder of Chapter 13 remainder of Chapter 13 beforebefore next week’s seminar.next week’s seminar.

1 ac116 accounting ii seminar 6 jim eads, cpa, mst, msf corporations: organizations, stock...

Documents

shares of stock

corporations shares

shareholders shares

corporations shareholders

number of shares

corporation form

corporationsauthorized

corporationsoutstanding