Chapter 13: Corporations: Organization and Capital Stock Transactions

Slide 1: Chapter 13: Corporations: Organization and Capital Stock Transactions

Slide 2: Learning Objectives

• LO 1: Discuss and identify major characteristics of a corporation.

• LO 2: Explain how to account for the issuance of common, preferred, and treasury stock.

• LO 3: Prepare a stockholders’ equity section.

Slide 3: Corporate Form of Organization

• A corporation is an entity that is separate and distinct from its owners, meaning it has its own legal identity apart from that of its owners.

• Unlike sole proprietorships or partnerships, a corporation can own property, enter contracts, and be sued or sue in its own name.

• Corporations are considered "legal persons" and can live on independently of their owners.

Slide 4: Characteristics of a Corporation

1. Separate Legal Existence

   • Corporations operate under their own name, independent of the owners, having perpetual existence.

2. Limited Liability of Stockholders

   • Stockholders’ liability is restricted to their investment, meaning they can only lose their investment, not personal assets.

3. Transferable Ownership Rights

   • Shareholders can sell their shares freely unless stated otherwise.

4. Ability to Acquire Capital

   • Corporations can raise funds easily through stock issuance.

5. Continuous Life

   • The corporation continues to exist regardless of ownership changes.

6. Corporate Management

   • Separation between ownership and management exists, often leading to more efficient decision-making.

7. Government Regulations

   • Corporations must comply with various regulations and legal requirements.

8. Additional Taxes

   • Corporations face double taxation—corporate taxes and taxes on dividends.

Slide 5: Advantages and Disadvantages of Corporations

Advantages

• Separate legal existence provides continuity and stability.

• Limited liability protection encourages investment.

• Transferable ownership enhances marketability of shares.

• Easier access to capital through stock offerings.

• Continuous life ensures ongoing operations despite ownership changes.

Disadvantages

• Complexity of establishment (government regulations) may increase initial costs.

• Separation of ownership and management may lead to inefficiency.

• Double taxation may deter some investors.

Slide 6: Forming a Corporation

1. File an application with the Secretary of State including necessary documents and fees.

2. Obtain a charter from the state detailing the company's purpose and structure.

3. Develop bylaws for corporate governance, establishing rules for operations.

4. Corporations doing business across state lines must obtain necessary licenses.

Slide 7: Ownership Rights of Stockholders

• Voting Rights: In electing the board of directors and major decisions.

• Right to Dividends: Share in corporate earnings as dividends if declared.

• Preemptive Rights: Maintain ownership percentage with new stock issues.

• Residual Claim: Right to share in assets upon liquidation after satisfying other claims.

Slide 8: Example Scenario: Dividends and Stock Issuance

• Before and after issuance of new shares affects stockholders’ ownership percentage, influencing decision-making and returns.

Slide 9: Stock Issuance Considerations

1. Number of Shares: Authorized shares indicated in the charter.

2. Issuance Method: Directly to investors or through investment banks.

3. Valuation of Stock: Influenced by expected earnings and market conditions.

Slide 10: Par Value and No-Par Value Stocks

• Par Value: Some shares must have a stated minimum value affecting legal responsibilities.

• No-Par Value: Many states allow issuance without a par value, simplifying accounting.

Slide 11: Accounting for Stock Transactions

Common Stock

• Distinction between paid-in capital and retained earnings is crucial.

• Example Journal Entries:

  • Issuing 1,000 shares at par:

    • Cash 1,000

    • Common Stock 1,000

  • Selling at a premium:

    • Cash 5,000

    • Common Stock 1,000

    • Paid-in Capital in Excess of Par 4,000

Preferred Stock

• Priority over common stock in dividends and liquidation claims, typically without voting rights.

Treasury Stock

• Shares repurchased by the company, reducing total equity.

• Example Journal Entry for Purchase:

  • Treasury Stock 32,000

  • Cash 32,000

Slide 12: Disposal of Treasury Stock

• If sold above cost, reductions in paid-in capital are recognized as necessary.

Slide 13: Preparing a Stockholders’ Equity Section

1. Report capital stock, including par value and shares authorized.

2. Present additional paid-in capital, detailing excess amounts over par.

3. Include retained earnings and deductions for treasury stock for a comprehensive view.

Slide 14: Example of Stockholders' Equity Section

• Preferred stock with par value listed first, then common stock and respective values.

Slide 15: IFRS vs. GAAP in Stockholders’ Equity

• Similarities and differences in terminology and presentation for international financial reporting.

Slide 16: Conclusion

• These notes outline the major concepts and transactional details required in understanding the structure, formation, and accounting practices of corporations, emphasizing characteristics, capital structure, and reporting standards. They serve as an essential review for students preparing for exams in accounting or business studies involving corporate finance.