chapter 12 corporations: organization, capital stock transactions, and dividends accounting, 21 st...
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Chapter Chapter 1212Corporations: Organization, Corporations: Organization, Capital Stock Transactions, Capital Stock Transactions,
and Dividendsand DividendsAccounting, 21st Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University
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1. Describe the nature of the corporate form of organization.
2. List the two main sources of stockholders’ equity.
3. List the major sources of paid-in capital, including the various classes of stock.
4. Journalize the entries for issuing stock.5. Journalize the entries for treasury stock
transactions.
ObjectivesObjectivesObjectivesObjectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
6. State the effect of stock splits on corporate financial statements.
7. Journalize the entries for cash dividends and stock dividends.
8. Describe and illustrate the reporting of stockholders’ equity.
9. Compute and interpret the dividend yield on common stock.
ObjectivesObjectivesObjectivesObjectives
Employees
Officers(selected by board of directors)
Board of Directors(elected by stockholders)
Organizational Structure of a CorporationOrganizational Structure of a CorporationOrganizational Structure of a CorporationOrganizational Structure of a Corporation
Stockholders(owners of corporation stock)
Forming a CorporationForming a CorporationForming a CorporationForming a Corporation First step is to file an application of incorporation with the state.
Because state laws differ, corporations often organize in states with more favorable laws.
More than half of the largest companies are incorporated in Delaware.
State grants a charter or articles of incorporation which formally create the corporation.
Management and board of directors prepare bylaws which are operation rules and procedures.
Forming a CorporationForming a CorporationForming a CorporationForming a Corporation
On January 5, the firm paid the organization costs of $8,500. This amount includes legal
fees, taxes and licenses, promotion costs, etc.
On January 5, the firm paid the organization costs of $8,500. This amount includes legal
fees, taxes and licenses, promotion costs, etc.
Jan. 5 Organization Costs 8 500 00
Paid cost of organizing the
corporation.
Cash 8 500 00
Stockholders’ EquityStockholders’ Equity Stockholders’ EquityStockholders’ Equity
AssetsLiabilities
Stockholders’Equity
Stockholders’ Equity = Assets – Liabilities
Represents the stockholders’ share of the total assets.
Stockholders’ Equity
Assets
Stockholders’ EquityStockholders’ Equity Stockholders’ EquityStockholders’ Equity
Liabilities
Stockholders’Equity
Stockholders’ Equity
There are two sources of
stockholders’ equity.
There are two sources of
stockholders’ equity.
Stockholders’ Equity:
Paid-in capital:Paid-in capital:
Common stockCommon stock $xxxxx$xxxxx
Retained earnings xxxx
Total $xxxxx
1
StockholderStockholderinvestmentsinvestments
Stockholders’ EquityStockholders’ Equity Stockholders’ EquityStockholders’ Equity
AssetsLiabilities
Stockholders’Equity
Stockholders’ Equity
Stockholders’ Equity:
Paid-in capital:
Common stock $xxxxx
Retained earningsRetained earnings xxxx xxxx
Total $xxxxx
Reinvested Reinvested earningsearnings
2
Stockholders’ EquityStockholders’ Equity Stockholders’ EquityStockholders’ Equity
AssetsLiabilities
Stockholders’Equity
Stockholders’ Equity
Authorized
IssuedIssued
Outstanding
Number of Shares
Sources of Paid-In CapitalSources of Paid-In CapitalSources of Paid-In CapitalSources of Paid-In Capital
Major Rights that Accompany Ownership
of a Share of Stock
Major Rights that Accompany Ownership
of a Share of Stock1. The right to vote in matters
concerning the corporation.
2. The right to share in distribution of earnings.
3. The right to share in assets on liquidation.
Sources of Paid-In CapitalSources of Paid-In CapitalSources of Paid-In CapitalSources of Paid-In Capital
The two primary classes of paid-in capital are common stock and preferred stock. The
primary attractiveness of preferred stocks is that they are preferred over common as to dividends.
Money available
for dividends
Common Common StockholdersStockholders
Preferred Preferred StockholdersStockholders
Classes of StockholdersClasses of StockholdersClasses of StockholdersClasses of Stockholders
Common Stock—the basic ownership of stock with rights to vote in election of directors, share in distribution of earnings, and purchase additional shares.
Preferred Stock—A class of stock with preferential rights over common stock in payment of dividends and company liquidation.
Classes of StockholdersClasses of StockholdersClasses of StockholdersClasses of Stockholders
Nonparticipating Preferred StockNonparticipating Preferred StockNonparticipating Preferred StockNonparticipating Preferred Stock
A nonparticipating preferred stock is limited to a certain amount. Assume 1,000 shares of $4 nonparticipating preferred stock and 4,000 shares of common stock and the following:
Net income $20,000 $55,000 $62,000Amount retained 10,000 20,000 40,000Amount distributed $10,000 $35,000 $22,000
2005 2006 2007
Nonparticipating Preferred StockNonparticipating Preferred StockNonparticipating Preferred StockNonparticipating Preferred Stock
Dividends per share: Preferred $ 4.00 $ 4.00 $ 4.00 Common $ 1.50 $ 7.75 $ 4.50
Amount distributed $10,000 $35,000 $22,000Preferred dividend (1,000 shares) 4,000 4,000 4,000Common dividend (4,000 shares) $6,000 $31,000 $18,000
Assume 1,000 shares of $4 cumulative preferred stock
and 4,000 shares of common stock. No dividends were
paid in 2005 and 2006.
Cumulative Preferred StockCumulative Preferred StockCumulative Preferred StockCumulative Preferred Stock
So, preferred dividends are two years in arrears.
So, preferred dividends are two years in arrears.
On March 7, 2007, the board of directors declares dividends of $22,000.
Cumulative Preferred StockCumulative Preferred StockCumulative Preferred StockCumulative Preferred Stock
$4,000
$4,000
$4,000
Cumulative Preferred StockCumulative Preferred StockCumulative Preferred StockCumulative Preferred Stock
Preferred Stock DividendsPreferred Stock Dividends Dividends Paid in 2007Dividends Paid in 2007
Total dividends paid, $22,000
$4,000
2005(In arrears) $4,000
2006(In arrears) $4,000
2007(Current dividend)
Preferred Stock
Common Stock
$10,000$10,000
Other Sources of Paid-in CapitalOther Sources of Paid-in CapitalOther Sources of Paid-in CapitalOther Sources of Paid-in Capital
On April 20 the city of Moraine donated land to Merrick Corporation as an incentive
to relocate its headquarters to Moraine. The land was valued at $500,000.
Apr. 20 Land 500 000 00
Recorded land donated by the
city of Moraine.
Donated Capital500 000 00
A corporation is authorized to issue 10,000 shares of preferred stock, $100 par, and
100,000 shares of common stock, $20 par.
Issuing StockIssuing StockIssuing StockIssuing Stock
Issuing StockIssuing StockIssuing StockIssuing Stock
On April 1, one-half of each class of authorized stock is issued at par for cash.
On April 1, one-half of each class of authorized stock is issued at par for cash.
Apr. 1 Cash 1,500000 00
Issued preferred stock and
common stock at par.
Preferred Stock500 000 00
Common Stock1,000000 00
Issuing StockIssuing StockIssuing StockIssuing Stock
Common Stock and Preferred Stock accounts are controlling accounts. A record of each
stockholders’ name, address, and number of shares is kept in a stockholders’ subsidiary ledger.
Common Stock and Preferred Stock accounts are controlling accounts. A record of each
stockholders’ name, address, and number of shares is kept in a stockholders’ subsidiary ledger.
Issuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a Premium
On March 15, Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55.
On March 15, Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55.
Mar. 15 Cash 110 000 00
Issued 2,000 shares of $50 par
preferred stock at $55.
Preferred Stock100 000 00
Paid-in Capital in Excess of Par--
Preferred Stock10 000 00
When stock is issued for more than its par, the stock has sold at a
premium. It has sold at a discount if issued for less than its par.
When stock is issued for more than its par, the stock has sold at a
premium. It has sold at a discount if issued for less than its par.
The $10,000 excess is recorded in a separate account because some states do
not consider this to be part of legal capital and may be used for dividends.
The $10,000 excess is recorded in a separate account because some states do
not consider this to be part of legal capital and may be used for dividends.
Issuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a Premium
On Nov. 12, a corporation acquired land for which the fair market value cannot be determined. The corporation
issued 10,000 shares of $10 par common that has a current market value of $12 in exchange for the land.
On Nov. 12, a corporation acquired land for which the fair market value cannot be determined. The corporation
issued 10,000 shares of $10 par common that has a current market value of $12 in exchange for the land.
Nov.12 Land 120 000 00
Issued $10 par common stock
valued at $12 per share, for
land.
Common Stock100 000 00
Paid-in Capital in Excess of Par20 000 00
Issuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a Premium
Stock issued for assets other than cash should be recorded at the fair market value of the asset or fair market value of the stock, whichever can be
more clearly determined.
Issuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a Premium
Issuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-Par
On February 23, a corporation issues 10,000 shares of no-par common stock at $40 a share.
On February 23, a corporation issues 10,000 shares of no-par common stock at $40 a share.
Feb. 23 Cash 400 000 00
Issued 10,000 shares of no-par
common stock at $40.
Common Stock400 000 00
Issuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-Par
Later, on March 9, the corporation issues 1,000 additional shares at $36.
Later, on March 9, the corporation issues 1,000 additional shares at $36.
Mar. 9 Cash 36 000 00
Issued 1,000 shares of no-par
common stock at $36.
Common Stock36 000 00
Issuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-Par
Some states require that the entire proceeds from the sale of no-par stock be treated as legal capital.
Some states require that the entire proceeds from the sale of no-par stock be treated as legal capital.
Issuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-Par
Also, no-par stock may be assigned a stated value per share. The stated value is
recorded similar to a par value.
Also, no-par stock may be assigned a stated value per share. The stated value is
recorded similar to a par value.
Issuing Stock with a Stated ValueIssuing Stock with a Stated ValueIssuing Stock with a Stated ValueIssuing Stock with a Stated Value
On March 30, issued 1,000 shares of no-par common stock at $40; stated value, $25.
On March 30, issued 1,000 shares of no-par common stock at $40; stated value, $25.
Mar. 30 Cash 40 000 00
Issued 1,000 shares of no-par common stock at $36; stated value, $25.
Common Stock25 000 00
Paid-in Capital in Excess of
Stated Value15 000 00
Treasury Stock TransactionsTreasury Stock TransactionsTreasury Stock TransactionsTreasury Stock Transactions
Occasionally, a corporation buys back its own stock for the purpose of later reissuing it. This stock is
referred to as treasury stock.
Occasionally, a corporation buys back its own stock for the purpose of later reissuing it. This stock is
referred to as treasury stock.
Treasury stock is stock that:1. has been issued as fully paid.2. has been reacquired by the corporation.3. has not been canceled or reissued.
Treasury Stock TransactionsTreasury Stock TransactionsTreasury Stock TransactionsTreasury Stock Transactions
A commonly used method of accounting for treasury stock is the cost method.
Treasury Stock TransactionsTreasury Stock TransactionsTreasury Stock TransactionsTreasury Stock Transactions
Cost Method
On January 5, a firm purchased 1,000 shares of treasury stock (common stock,
$25 par) at $45 per share.
On January 5, a firm purchased 1,000 shares of treasury stock (common stock,
$25 par) at $45 per share.
Jan. 5 Treasury Stock 45 000 00
Purchased 1,000 shares of
treasury stock at $45.
Cash 45 000 00
On June 2, sold 200 shares of treasury stock at $60 per share.
On June 2, sold 200 shares of treasury stock at $60 per share.
June 2 Cash 12 000 00
Sold 200 shares of treasury
stock at $60.
Treasury Stock9 000 00
Paid-in Capital from sale of
Treasury Stock3 000 00
Treasury Stock TransactionsTreasury Stock TransactionsTreasury Stock TransactionsTreasury Stock Transactions
Cost Method
On September 3, sold 200 shares of treasury stock at $40 per share.
On September 3, sold 200 shares of treasury stock at $40 per share.
Sep. 3 Cash 8 000 00
Paid-in Capital from Sale of
Treasury Stock 1 000 00
Sold 200 shares of treasury
stock at $60.
Treasury Stock9 000 00
Treasury Stock TransactionsTreasury Stock TransactionsTreasury Stock TransactionsTreasury Stock Transactions
Cost Method
Stock SplitsStock SplitsStock SplitsStock Splits
A corporation sometimes reduces the par or stated value of their common stock and
issues a proportionate number of additional shares. This is called a stock split.
A corporation sometimes reduces the par or stated value of their common stock and
issues a proportionate number of additional shares. This is called a stock split.
Stock SplitsStock SplitsStock SplitsStock Splits
BEFORE BEFORE STOCK SPLITSTOCK SPLIT
4 shares, $100 par
$400 total par value
20 shares, $20 par
AFTER 5-1 AFTER 5-1 STOCK SPLITSTOCK SPLIT
$400 total par value
Stock SplitsStock SplitsStock SplitsStock Splits
A stock split does not change the balance of any corporation accounts. However, it
can make the stock more attractive to investors by reducing the price of a
share,
A stock split does not change the balance of any corporation accounts. However, it
can make the stock more attractive to investors by reducing the price of a
share,
Accounting for Cash DividendsAccounting for Cash Dividends Dividends are distributions of retained
earnings to stockholders.
Dividends may be paid in cash, stock, or property.
Dividends, even on cumulative preferred stock, are never required, but once declared become a legal liability of the corporation.
Corporations generally declare and pay cash dividends on shares outstanding when three conditions exist:
1. Sufficient retained earnings
Accounting for Cash DividendsAccounting for Cash Dividends
2. Sufficient cash
3. Formal action by the board of directors
Retained Earnings
50,000
Accounting for Cash DividendsAccounting for Cash Dividends
There are three important dates relating
the dividends.
There are three important dates relating
the dividends.
Accounting for Cash DividendsAccounting for Cash Dividends
First is the date of declaration. Assume that on December 1, Hiber Corporation declares a
$42,500 dividend.
First is the date of declaration. Assume that on December 1, Hiber Corporation declares a
$42,500 dividend.
Dec. 1 Cash Dividends 42 500 00
Declared cash dividend.
Cash Dividend Payable42 500 00
Date of DeclarationDate of Declaration
Accounting for Cash DividendsAccounting for Cash Dividends
The second important date is the date of record. For Hiber
Corporation this would be December 11.
The second important date is the date of record. For Hiber
Corporation this would be December 11.
Accounting for Cash DividendsAccounting for Cash Dividends
Accounting for Cash DividendsAccounting for Cash Dividends
On this date, ownership of shares determines who receives the
dividend. No entry is required.
On this date, ownership of shares determines who receives the
dividend. No entry is required.
The third important date is the date of payment. On January 2, Hiber
issues dividend checks.
The third important date is the date of payment. On January 2, Hiber
issues dividend checks.
Accounting for Cash DividendsAccounting for Cash Dividends
2
Accounting for Cash DividendsAccounting for Cash Dividends
Jan. 2 Cash Dividends Payable 42 500 00
Paid cash dividends.
Cash 42 500 00
Date of PaymentDate of Payment
Accounting for Stock DividendsAccounting for Stock Dividends
A distribution of dividends to stockholders in the form of the firm’s own shares is called a
stock dividend.
A distribution of dividends to stockholders in the form of the firm’s own shares is called a
stock dividend.
Accounting for Stock DividendsAccounting for Stock Dividends
Stock dividends transfer pro rata shares of stock to stockholders. Assume
Hendrix Corporation issues a 5% stock dividend on common stock, $20 par,
2,000,000 shares issued.
Stock dividends transfer pro rata shares of stock to stockholders. Assume
Hendrix Corporation issues a 5% stock dividend on common stock, $20 par,
2,000,000 shares issued.
Accounting for Stock DividendsAccounting for Stock Dividends
Dec. 15 Stock Dividends 3,100 000 00
Declared stock dividend.
Hendrix Corporation, December 15 (before dividend)Common Stock, $20 par $40,000,000Paid-in Capital in Excess of Par--Common Stock 9,000,000Retained Earnings 26,600,000
Stock Dividends Distributable2,000000 00
Paid-in Capital in Excess of
Par—Common Stock1,100000 00
Accounting for Stock DividendsAccounting for Stock Dividends
Jan. 10 Stock Dividends Distributable 2,000 000 00
Issued stocks for the stock
dividend.
Common Stock2,000000 00
On January 10, Hendix Corporation issues the stock. This action increases the number
of shares outstanding by 100,000.
Accounting for Stock DividendsAccounting for Stock DividendsHendrix Corporation, December 15 (before dividend)
Common Stock, $20 par $40,000,000Paid-in Capital in Excess of Par--Common Stock 9,000,000Retained Earnings 26,600,000
$75,600,000
Hendrix Corporation, January 10 (after dividend)
Common Stock, $20 par $42,000,000Paid-in Capital in Excess of Par--Common Stock 10,100,000Retained Earnings 23,500,000
$75,600,000
Financial Analysis and Financial Analysis and InterpretationInterpretation
Financial Analysis and Financial Analysis and InterpretationInterpretation
Dividend YieldDividend YieldDividend YieldDividend Yield
2004 2003Dividends per share of common $ 0.80 $ 0.60Market price per share of common $20.50 $13.50
Dividends per Share of Common Stock
Market Price per Share of Common StockDividend YieldDividend YieldDividend YieldDividend Yield
$.60
$13.50Dividend Yield, 2006Dividend Yield, 2006Dividend Yield, 2006Dividend Yield, 2006 = 4.4%
Dividend Yield, 2007Dividend Yield, 2007Dividend Yield, 2007Dividend Yield, 2007$.80
$20.50= 3.9%
Use: To indicate the rate of return to common stockholders in terms of dividends
Use: To indicate the rate of return to common stockholders in terms of dividends
There are two ways to report stockholders’ equity in the balance
sheet. In Slide 58, each class of stock is listed first, followed by its
related paid-in capital accounts.
There are two ways to report stockholders’ equity in the balance
sheet. In Slide 58, each class of stock is listed first, followed by its
related paid-in capital accounts.
Paid-in capital:
Preferred 10% stock, $50 par,
cumulative (2,000 shares
authorized and issued) $100,000
Excess of issue price over par 10,000 $ 110,000
Common stock, $20 par
(50,000 shares authorized, 45,000
issued) $900,000
Excess of issue price over par 190,000 1,090,000
From sale of treasury stock 2,000
Total paid-in capital $1,202,000
Retained earnings 350,000
Total $1,552,000
Deduct treasury stock (600 shares at cost) 27,000
Total stockholders’ equity $1,525,000
Stockholders’ Equity61
Slide 60 shows the second method. Note that the stock accounts are listed first. The other paid-in capital accounts are
listed as a single item described as Additional paid-in capital.
Slide 60 shows the second method. Note that the stock accounts are listed first. The other paid-in capital accounts are
listed as a single item described as Additional paid-in capital.
Contributed capital:
Preferred 10% stock, cumulative
$50 par (2,000 shares authorized
and issued) $100,000
Common stock, $20 par
(50,000 shares authorized, 45,000
issued) 900,000
Additional paid-in capital 202,000
Total contributed capital $1,202,000
Retained earnings 350,000
Total $1,552,000
Deduct treasury stock (600 shares at cost) 27,000
Total stockholders’ equity $1,525,000
Stockholders’ Equity
The EndThe End
Chapter 12Chapter 12