century 21 accounting © thomson/south-western 1 lesson 11-1 part 4: corporation accounting...
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
PART 4: PART 4: CORPORATION ACCOUNTINGCORPORATION ACCOUNTING
Overview: PART 4 covers complete accounting cycle for a
corporation Chapter 11: Organizing a Corporation and Paying
Dividends Chapter 12: Acquisition of Additional capital for corp:
treasury stock and corporate bonds Chapter 13: Financial Analysis and Reporting: End-of-
fiscal period work for corporation; worksheet and financial stmts, calculating federal income tax
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
LampLight, Inc, Chart of Accounts, pg 311LampLight, Inc, Chart of Accounts, pg 311
Merchandising business organized as corporation Sells lighting fixtures
Similarities: Typical divisions
Differences: Classifications within Assets and Liabilities Large number of accounts within Stockholder’s Equity Organization Expense new account
Other Expenses
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
Ch.11-1: Starting a CorporationCh.11-1: Starting a Corporation
Corporation: organization with legal rights of a person and that may be owned by many persons Organized by law to exist separately and apart from its owners Limited liability
Ownership: divided into units Unit = share of stock Capital stock – total shares of ownership in a corporation Stockholder – owner of one or more shares of stock Dividends - earnings distributed to stockholders Retained earnings - earnings retained to finance future business
expansion and improvement
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
Articles of IncorporationArticles of Incorporation
Elected Board of Directors: small group to represent combined interests and to be responsible for management Determines corporate policies and selects officers to supervise daily
management
Legal Requirements for forming a Corporation: Articles of Incorporation: written application requesting permission
to form a corporation (submit to state or federal government) Charter approved articles of incorporation
AKA: certificate of incorporation
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
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1. Nature of business.
2. Types of stock authorized.
3. Initial directors.
ARTICLES OF INCORPORATION – pg 315ARTICLES OF INCORPORATION – pg 315 page 315
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
1. Names of incorporators.
2. Signatures of incorporators.
ARTICLES OF INCORPORATIONARTICLES OF INCORPORATION page 316
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
Rights of StockholdersRights of Stockholders
1. To vote at stockholders’ meetings (unless an exception is made for holders of a particular kind of stock)
2. To share in a corporation’s earnings
3. To share in the distribution of the assets of the corporation if it ceases operations and sells all of its assets
Capital Stock of a Corporation: Common stock: stock that does not give stockholders
any special privileges Preferred stock: stock that gives stockholders special
privileges
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
Stock Certificates:Stock Certificates:
Written evidence of the number of shares that each stockholder owns Usually states issue date, certificate number, number of shares, name of
stockholder Corporation keeps record of all stock issued to each stockholder
Stock transfer changing ownership of stock
Value of Stock: Par value: value assigned to stock and printed on certificate Par value stock: stock that has an authorized value printed on the
certificate No-par-value Stock: share of stock that has no authorized value printed
Some states require no par value stock be assigned a stated or specific value Stated-value stock: No-par-value stock that has a value assigned by a
corporation Similar to par value stock, but value is not printed on certificate
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
STOCK CERTIFICATESSTOCK CERTIFICATES page 317
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
Common StockCommon Stock
If corporation issues only one type of stock it is common stock
If corporation issues only common stock stockholders are entitled to all dividends
In most corporations only owners of common stock have right to vote on matters brought before stockholders
Lamplight, Inc is authorized to issue no-par-value common stock w/stated value of $10.00 Article III
Most stock sold today is common stock
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
Preferred StockPreferred Stock
To attract more investors might offer preferred stock with preferences as to some of basic stockholder’s rights
Usually does not have voting rights and cannot influence how much and when dividends are paid out
Preference is to receive dividends before common stockholders
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
Preferred Stock: Preferred Stock:
Others preferences: 1. Unpaid dividends may accumulate from one year to another. Accumulated
preferred dividends must be paid before common.
2. Dividends may be shared with common stockholders above a certain percentage or amount. Once dividend to common stockholders equals stated percentage of preferred stock, additional dividends may be shared between preferred and common stockholders
Every preference granted comes at expense to common stockholders
Preferred stock dividends may be stated as percentage of par value or as amount per share Ex) Lamplight has authorized the issuance of 8%, $100.00 par-value stock
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
TRANSACTIONS INCURRED WHEN TRANSACTIONS INCURRED WHEN STARTING A CORPORATIONSTARTING A CORPORATION
Charter is legal authorization to begin business BUT still needs assets to operate Obtains initial capital by selling stock to incorporators
Capital Accounts of a Corporation Maintains single general ledger account for each KIND of stock issued When issuing ONLY common stock value of all stock issued is
recorded in single capital stock account When issuing BOTH separate capital stock accounts Retained Earnings used to record net income
Keeps net income separate from recorded values of issued capital stock Net income CR
Net Loss DR (DEFICIT)
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
1. Write the date.
2. Enter the account title.
3. Record the receipt numbers.
4. Write the credit amount.
5. Write the debit amount.
TRANSACTIONS INCURRED WHEN TRANSACTIONS INCURRED WHEN STARTING A CORPORATIONSTARTING A CORPORATION page 319
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When formed, each of Lamplights 6 incorporators agrees to buy 5000 shares of common stock at stated value
Total = 30,000 shares @ $10.00 = $300,000.00
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
ORGANIZATION COSTS OF A ORGANIZATION COSTS OF A CORPORATIONCORPORATION
1. Incorporation fee paid to the state when the articles of incorporation are submitted
2. Attorney fees for legal services during the process of incorporation3. Other incidental expenses incurred prior to receiving the charter
Cannot be formed without these costs Until it receives a charter does not exist as corporation to pay costs One of incorporators may agree to pay costs until charter is granted
After receiving charter reimbursed for costs by corp If substantial costs were recorded as expense could reduce net income
during first year Record as Asset account benefits derived from costs extend over many years
page 320
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
TERMS REVIEWTERMS REVIEW
corporation board of directors articles of incorporation charter common stock preferred stock
stock certificate par value par-value stock no-par-value stock stated-value stock organization costs
page 322
***TO DO***
1. Work Together, pg 322
2. On your own, pg 322
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
LESSON 11-2: Stock Subscriptions and the LESSON 11-2: Stock Subscriptions and the Balance SheetBalance Sheet
Subscribing for capital stock: entering into an agreement with a corporation to buy capital stock and pay at a later date. Future payments may be made all at once or in installment plan No voting rights
Example: Jan. 5 – Daniel Herring subscribed to 2000 shares of
common stock at $10.00/share Agreed to pay $10,000 on March 1 and $10,000 by July 1
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
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1. Write the date.
3. Record memorandum number.
4. Enter debit amount.
5. Enter the account credited.
6. Enter credit amount.
2. Enter the account debited.
JOURNALIZING A STOCK SUBSCRIPTIONJOURNALIZING A STOCK SUBSCRIPTION
*Stock certificates are issued only when paid in full
*Amounts will be recorded in Capital Stock – Common when paid in full and stock certificate is issued.
page 324
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
JOURNALIZING CASH RECEIVED JOURNALIZING CASH RECEIVED FOR A STOCK SUBSCRIPTIONFOR A STOCK SUBSCRIPTION page 325
March 1, received cash from Herring in payment of half of stock subscription
Similar entry will be made on July 1 when he makes second, final payment
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
JOURNALIZING ISSUANCE OF STOCK JOURNALIZING ISSUANCE OF STOCK PREVIOUSLY SUBSCRIBEDPREVIOUSLY SUBSCRIBED
When subscription is fully paid certificate is issued If stockholder decides to sell stock at later date no
journal entry does not generate additional capital Name of new stockholder must be entered in stock
ownership records for future dividend pymts
page 325
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
1. List intangible assets as the last category of assets.
2. List sources of paid-in capital.
BALANCE SHEET OF A NEWLY FORMED BALANCE SHEET OF A NEWLY FORMED CORPORATIONCORPORATION
Cash = $300,000-2400
Intangible assets – non-physical, but hold value
page 326
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
TERMS REVIEWTERMS REVIEW
subscribing for capital stock intangible assets
TO DO:
1. Work Together, pg 327
2. On your own, pg 327
3. App 11-1, 11-2
page 327
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
Ch11-3: Calculating and Journalizing Ch11-3: Calculating and Journalizing Dividends for a CorporationDividends for a Corporation
Declaring a dividend: action by board of directors to distribute corporate earnings to stockholders
Three important dates in distributing a dividend: Date of declaration: date on which BOD votes to distribute Date of record: date that determines which stockholders are to
receive dividends May buy and sell stocks at any time but person listed on stockholder on
date of record will receive dividends
Date of payment: date on which dividends are actually to be paid Several weeks after date of record corporation has time to determine
who is entitled to receive dividends and prepare checks to be mailed
Transactions are recorded on date of declaration and date of payment
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
Declaring Dividends: Declaring Dividends:
On date of declarations incurs liability that must be recorded
BOD has decided to declare annual dividend of $24,000.
On date of record: 1000 shares of 8%, $100 par-value preferred stock 16,000 shares of $20.00 stated-value common stock
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
Calculating Value of Preferred Stock
DIVIDENDSDIVIDENDS page 328
Number of Preferred Shares
Par Value =Value of
Preferred Stock×
1,000 $100.00 = $100,000.00×
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
DIVIDENDSDIVIDENDS page 328
Calculating Value of Common Stock
Number of Common Shares
Stated Value =Value of
Common Stock×
16,000 $20.00 = $320,000.00×
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
DIVIDENDSDIVIDENDS page 329
Calculating Dividend of Preferred Stock
=×Value of
Preferred StockPreferred
Dividend RatePreferred
Dividend Amount
$100,000.00 8% = $8,000.00×
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
DIVIDENDSDIVIDENDS page 329
Calculating Amount Available for Common Dividends
Total Amount Available for Dividends
Preferred Dividend Amount
=Amount Available
for Common Dividends
–
$24,000.00 $8,000.00 = $16,000.00–
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
DIVIDENDSDIVIDENDS
If company decides to increase its annual dividend preferred stock will never exceed 8%
Additional dividends may go to Common stock, increasing the dividend rate
page 329
Calculating Dividend Rate for Common Stock
Common Dividend Amount
Value of Common Stock
=Common Dividend
Rate÷
$16,000.00 $320,000.00 = 5%÷
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
JOURNALIZING JOURNALIZING DECLARATION OF DIVIDENDDECLARATION OF DIVIDEND page 330
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
JOURNALIZING PAYMENT OF A DIVIDENDJOURNALIZING PAYMENT OF A DIVIDEND
Business issues single check for dividend deposited in special dividend checking account
Separate check to each eligible stockholder is written against special account Avoids large number of entries in journals Reserves cash specifically for paying dividends
Dividend check is given to agent (bank) who handles details of preparing and mailing individual checks
page 330
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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1
TERMS REVIEWTERMS REVIEW
declaring a dividend date of declaration date of record date of payment
TO DO:
1. Work Together, pg 322
2. On your own, pg 322
3. App Prob 11-3, 11-4
page 332