organization and operation of corporations module 9

Organization and Operation of Corporations

Module 9

SAP 2007 / SAP University Alliances Introductory Accounting

Learning Objectives


Characteristics of Corporations


Organizing a Corporation


Organization Costs


Shareholders

Board of Directors

President, Vice-President, and Other Officers

Employees of the Corporation

Corporate Authority Structure


Rights of Shareholders

Revenues $116Operating expenses 40Income from operations $76Other revenues and expenses Gain on sale of capital assets $7 Interest revenue 3 Loss on sale of capital assets (12)Interest expense (14) (16)Income before tax $60Income tax expense 12Net income $48

ABC CorporationIncome Statement

For Year Ended December 31, 2005

Revenues $116Operating expenses 40Income from operations $76Other revenues and expenses Gain on sale of capital assets $7 Interest revenue 3 Loss on sale of capital assets (12)Interest expense (14) (16)Net Income $60

Joe's Income Statement

For Year Ended December 31, 2005

The statements are identical except for the $12 of income tax expense.

Corporation Single Proprietorship


ABC CorporationStatement of Retained Earnings

For Year Ended December 31, 2005Retained Earnings, January 1 $0Add: Net Income 48Total $48Less: Dividends 40Retained Earnings, December 31 $8

Joe’sJoe’sStatementStatement of Owner’s Equity of Owner’s Equity

For Year Ended December 31, 2005For Year Ended December 31, 2005I. Dell, Capital, January 1I. Dell, Capital, January 1 $0 $0Add: Owner InvestmentAdd: Owner Investment 500 500 Net IncomeNet Income 60 60TotalTotal $560 $560Less: WithdrawalsLess: Withdrawals 4040Joe’s, Capital, December 31 $Joe’s, Capital, December 31 $520520

Retained earnings represents the earnings that have been kept (retained) by the corporation for the purpose of reinvestment.


ABC CorporationPartial Balance SheetDecember 31, 2005

Shareholders’ Equity

Share Capital $500 Retained Earnings 8Total Shareholders’ Equity $508

Joe’sJoe’sPartial Balance SheetPartial Balance SheetDecember 31, 2005December 31, 2005

Owner’s EquityOwner’s EquityJoe’s, Capital $520Joe’s, Capital $520

The balance sheets for the corporation and single proprietorships are identical except for the equity section.

ABC CorporationPartial Balance SheetDecember 31, 2005

Shareholders’ Equity

Share Capital $500 Retained Earnings 8Total Shareholders’ Equity $508

Joe’sJoe’sPartial Balance SheetPartial Balance SheetDecember 31, 2005December 31, 2005

Owner’s EquityOwner’s EquityJoe’s, Capital $520Joe’s, Capital $520

Shareholders’ equity and Owner’s equity include the same transactions in total: net income (losses), distributions of income, and owner investments.SAP 2007 / SAP University Alliances Introductory Accounting


Reporting Income Information

Continuing operations

Discontinued operations

Extraordinary items

Earnings per share

Continuing operations

Shows the revenues, expenses, and income generated by the company’s day-to-day operating activities.

Discontinued operations

Shows:

1.The income from operating the discontinued segment prior to its disposal, and

2.The gain or loss from selling or closing down a segment.

Extraordinary items

Shows items that meet the following criteria:

1.They are not expected to occur frequently over several years,

2.They do not typify the normal activities of the entity, and

3.They do not depend primarily on the decisions or determinations by management or owners.

Earnings per share

Shows the amount of income earned by a company’s outstanding common shares.


Issuing Share Capital

Example: Shareholders’ equity of ABC Ltd. after the first year of operating. Assume net income of $65,000 and no dividend payments.

Shareholders’ EquityShareholders’ Equity

Common Shares, unlimited shares Common Shares, unlimited shares authorized, 30,000 shares issued and authorized, 30,000 shares issued and outstandingoutstanding $300,000$300,000

Retained earningsRetained earnings 65,00065,000

Total shareholders’ equityTotal shareholders’ equity $365,000$365,000

Shareholder’s Equity



Common Shares, Common Shares, unlimited shares unlimited shares authorizedauthorized, 30,000 shares issued and , 30,000 shares issued and outstandingoutstanding $300,000$300,000



Identifies how many shares the corporation is allowed to sell.




Common Shares, unlimited shares Common Shares, unlimited shares authorized, authorized, 30,000 shares issued30,000 shares issued and and outstandingoutstanding $300,000$300,000



Identifies how many shares have been sold or given out.







Defines how many shares are held by shareholders.







Discloses dollars invested by shareholders in exchange for shares.







This reflects accumulated profits/losses less dividends.




Preferred Shares


Issuing Preferred Shares for Cash

Shareholders’ Equity —After Issue of Preferred Shares


Contributed Capital:Contributed Capital:

Preferred shares, $3, unlimited shares Preferred shares, $3, unlimited shares authorized, 5,000 shares issued and authorized, 5,000 shares issued and outstandingoutstanding $125,000$125,000


Total contributed capitalTotal contributed capital $530,000$530,000



Represents the dividend preference. Preferred shareholders are entitled to dividends at the rate of $3 per preferred share when declared.



Preferred Shares


Dividends


Important dates:

1. Date of declaration

2. Date of record

3. Date of payment

Dividends


Example: On October 5, the board of directors of a company with 5,000 common shares outstanding declared a $1 per share dividend payable December 1 to the shareholders of record on November 1.

On October 5, the date of declaration, the entry would be either:

Cash Dividends 5,000 Common Dividends Payable 5,000

or Retained Earnings 5,000 Common Dividends Payable 5,000

Cash Dividends


Cash Dividends


On December 1, the date of payment, the entry would be:

Common Dividends Payable 5,000

Cash 5,000

Cash Dividends


On December 31, the corporation’s year end, the closing entry would be:

Retained Earnings 5,000

Cash Dividends 5,000

No closing entry would be necessary if the retained earnings account was debited on the date of declaration.

Cash Dividends


Deficits and Cash Dividends


Preferred Shares


Financial Disclosure of Dividends


Preferred Shares


Closing Entries


Book Value


Book Value Per Common Share

Shareholders’ Equity Applicable to Common Shares

Number of Common Shares Outstanding=

When only common shares are outstanding:

Book Value per Share


=

When both common and preferred shares are outstanding:

Number of Common Shares Outstanding

Total Shareholders’ Equity

Equity Applicable to Preferred Shares*

*Preferred share’s call price plus any cumulative dividends in arrears

_

Book Value Per Common Share

Book Value per Share

organization and operation of corporations module 9

Documents

sale of capital assets12loss

income tax expense12net

distributions of income

retained earnings

net income losses

total shareholders equity

expensesother revenues

earningsfor year