Chapter 12: Organization, Stock Transaction, & Dividends

Corporation

Legal entity, distinct, and separate from individuals who create and operate it

• may acquire and dispose of property in its own name

• sell share of ownership (stocks)

Stockholders

Own stock of firm and can buy/sell stock without affecting firms operation or continued existance

Public Firms vs Private Fims

one’s shares are traded in a public market while the other is owned by small group of investors

Board of directors

Stockholders who are in control of the corporation

What are the two steps in forming an organization?

1. File application of in corporation to the state

   • state laws are different and firms in file in favorable states

2. State grants a charter pr articles of incorporation (formally created)

   • after preparing bylaws (rules/procedures for corporate affairs)

What is the journal entry for organization costs?

Organizational expense (Debit) to Cash (Credit)

What are the two main sources of Equity?

Paid-in capital and Retained Earnings

• main source of paid-in capital is from issuing stock

Outstanding stock

Stock remaining at hand of stock

• Authorized → number of shares issued stated in charter

• Issued → shares issued to the stockholder

Do firms have limited liability?

Yes, they do thus they have no claim against stockholders personal assets, BUT to protect creditors, state requires firms to maintain minimum amount to be paid in capital

• The minimum amount is called legal capital

What are the stockholders major rights?

• The right to vote in matters concerning the corporation

• The right to share in distributions of earnings.

• The right to share in assets upon liquidation.

What is the difference between common stock and premium stock?

When 1 class of stock is issued → Common stock (they all have equal rights)

Issued 1 or more stocks with preference rights are preference to dividend → Preferred stock

What is cumulative preferred stock?

Rights to receive regular dividends not paid in previous years

• Not paid are set to be in arrears (behind)

• Dividends — Preferred

Entry for Issuing stock

Cash (Debit) to Preferred stock (Credit); Common stock (Credit)

What does the price of stock depend on?

• Financial Conditions

• earnings record

• dividend record

• investor expectations

• general business

• economic conditions

Premium vs Discount

• stock is sold > than par = Premium

• Stock sold < than par = Discount

Journal entry for Premium issued in common stock?

Cash (Debit) to common stock (credit); Paid in Capital excess (credit)

Journal entry for Premium issued in Preferred stock?

Cash (Debit) to Preferred Stock (credit); Paid in Capital excess (credit)

Issuance of NO-par

Cash (Debit) to Common stock (Credit)

Preceding of NO-par

Cash (Debit) to Common stock (credit); Paid in Capital excess stated value (credit)

Cash dividend

Cash distribution of earnings to shareholders

What are the three conditions for cash dividend?

1. Sufficient retained earnings

2. cash

3. formal action by the board of directors

What are the three dates in a cash dividend?

1. Date of declaration

2. Date of record → NO JOURNAL ENTRY

3. Date of payment

Journal entry for date of declaration

Cash dividend (debit) to cash dividend payable (credit)

Journal entry for date of payment

Cash dividend payable (debit) to cash (credit)

Stock Dividend

distribution of shares of stock to shareholders

• stock dividend does NOT change in assets, liabilities, or equity of a firm

Stock Dividend Journal Entry

Stock dividend (debit) to Stock dividend distributable (credit); paid in capital excess of par (credit)

Stock distributed Journal entry

Stock dividend distributed (debit) to Common Stock (credit)

Stock Split

Process by which corporation reduces the par or stated value of its common stock and issues a proportionate number of additional stocks

• Major objective is to reduce market price per share of stock

• NO JOURNAL ENTRY

Treasury Stock

Stock that corporation has issued then reacquired:

• provides shares for resale to employees, reissue as bonuses to employees or to support market price of the stock

• cost method is issued for recording the purchase and resale of treasury stock

Journal Entry for Treasury Purchase

Treasury Stock (Debit) to Cash (Credit)

Journal Entry for Selling Treasury

Cash (Debit) to Treasury stock (Credit)

Journal Entry for Selling remaining Treasury

Cash (Debit) to Paid-in capital from Treasury (Credit); Treasury Stock (Credit)

What are the TWO methods to disclose Stockholders Equity

1. Each class reported is followed by related paid in capital retained earnings is then reported followed by deduction for treasury

2. Stock account reported followed by paid-in capital reported as single item PLUS paid in capital. Retained Earnings is then reported as deduction changes in retained earnings statement, combined income, retained earnings and stateholders equity

Restructions

Restrictions by firms' boards of directors:

• Legal → State laws

• Contractural → contracts

• Discretionary → restrictions

Earnings Per Share

(Net Income — Preferred Dividends) / Avg # of common shares outstanding