Professional Documents
Culture Documents
Corporations: Organization,
Capital Stock Transactions,
and Dividends
Accounting, 21st Edition
Warren Reeve Fess
Board of Directors
(elected by stockholders)
Officers
(selected by board of directors)
Employees
Forming
Forming aa Corporation
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
Forming aa Corporation
Corporation
On
On January
January 5, 5, the
the firm
firm paid
paid the
the organization
organization
costs
costs ofof $8,500.
$8,500. This
This amount
amount includes
includes legal
legal
fees,
fees, taxes
taxes and
and licenses,
licenses, promotion
promotion costs,
costs, etc.
etc.
Jan. 5 Organization Costs 8 500 00
Cash 8 500 00
Paid cost of organizing the
corporation.
Stockholders’
Stockholders’ Equity
Equity
Liabilities
Assets
Stockholders’
Stockholders’
Equity
Equity
Stockholders’ Equity: 1
Paid-in capital: Stockholder
Common stock $xxxxx investments
Stockholders’ Equity:
Paid-in capital:
Common stock $xxxxx 2
Retained earnings xxxx Reinvested
Total $xxxxx earnings
Sources
Sources of
of Paid-In
Paid-In Capital
Capital
Authorized
Issued
Outstanding
Number of Shares
Sources
Sources of
of Paid-In
Paid-In Capital
Capital
Major
Major Rights
Rights that
that
Accompany
Accompany Ownership
Ownership
of
of aa Share
Share of
of Stock
Stock
1. 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.
Classes
Classes of
of Stockholders
Stockholders
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.
Preferred Common
Money Stockholders Stockholders
available
for
dividends
Classes
Classes of
of Stockholders
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.
Nonparticipating
Nonparticipating Preferred
Preferred Stock
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:
2005 2006 2007
Net income $20,000 $55,000 $62,000
Amount retained 10,000 20,000 40,000
Amount distributed $10,000 $35,000 $22,000
Nonparticipating
Nonparticipating Preferred
Preferred Stock
Stock
Amount distributed $10,000 $35,000 $22,000
Preferred dividend
(1,000 shares) 4,000 4,000 4,000
Common dividend
(4,000 shares) $6,000 $31,000 $18,000
Dividends per share:
Preferred $ 4.00$ 4.00$ 4.00
Common $ 1.50$ 7.75$ 4.50
Cumulative
Cumulative Preferred
Preferred Stock
Stock
So,
So, preferred
preferred
dividends
dividends are
are two
two
years
years in
in arrears.
arrears.
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
Cumulative Preferred
Preferred Stock
Stock
$4,000 $4,000
2005
(In arrears) $4,000 $4,000 $10,000
2006
(In arrears) $4,000 $4,000
Some
Some states
states require
require that
that the
the entire
entire
proceeds
proceeds from
from the
the sale
sale of
of no-par
no-par
stock
stock be
be treated
treated as
as legal
legal capital.
capital.
Issuing
Issuing Stock
Stock at
at No-Par
No-Par
Also,
Also, no-par
no-par stock
stock may may be
be
assigned
assigned aa stated
stated value
value per
per
share.
share. The
The stated
stated value
value isis
recorded
recorded similar
similar to
to aa par
par value.
value.
Issuing
Issuing Stock
Stock with
with aa Stated
Stated Value
Value
On
On March
March 30,
30, issued
issued 1,000
1,000 shares
shares of
of no-par
no-par
common
common stock
stock at
at $40;
$40; stated
stated value,
value, $25.
$25.
Mar. 30 Cash 40 000 00
Common Stock 25 000 00
Paid-in Capital in Excess of
Stated Value 15 000 00
Issued 1,000 shares of no-par
common stock at $36; stated
value, $25.
Treasury
Treasury Stock
Stock Transactions
Transactions
Occasionally,
Occasionally, aa corporation
corporation buysbuys
back
back its
its own
own stock
stock forfor the
the purpose
purpose
of
of later
later reissuing
reissuing it.
it. This
This stock
stock isis
referred
referred toto as
as treasury
treasury stock.
stock.
Treasury
Treasury Stock
Stock Transactions
Transactions
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.
2. Sufficient cash
Date
Date of
of Declaration
Declaration
Date
Date of
of Payment
Payment
$.80
Dividend
DividendYield,
Yield,2007
2007 = 3.9%
$20.50
There
There are are two
two ways
ways to to report
report
stockholders’
stockholders’ equity equity inin the
the balance
balance
sheet.
sheet. In In Slide
Slide 58,
58, each
each class
class of
of
stock
stock isis listed
listed first,
first, followed
followed byby its
its
related
related paid-in
paid-in capital
capital accounts.
accounts.
61
Stockholders’ Equity
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
Slide
Slide 6060 shows
shows the the second
second method.
method. Note Note
that
that the
the stock
stock accounts
accounts are
are listed
listed first.
first.
The
The other
other paid-in
paid-in capital
capital accounts
accounts are are
listed
listed as
as aa single
single item
item described
described as as
Additional
Additional paid-in
paid-in capital.
capital.
Stockholders’ Equity
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
Chapter 12
The
The End
End