Corporations Organization and Capital Stock Chapter 19 19

Corporations: Organization and Capital Stock Chapter 19 19 - 1

Learning Objective 1 Defining a corporation; establishing a corporation; listing the advantages and disadvantages of a corporation. 19 - 2

Learning Unit 19 -1 n 1 2 3 4 What are the steps in forming a corporation? Incorporators write up and submit articles of incorporation to the state. The Secretary of State issues a charter. Stockholders are the owners. A board of directors is elected by stockholders at the first meeting. 19 - 3

Learning Unit 19 -1 n – – – What are some advantages of the corporate form of organization? limited liability/separate legal entity unlimited life ease of transferring ownership no mutual agency ease of raising capital 19 - 4

Learning Unit 19 -1 What are some disadvantages? – difficulties in forming a corporation – corporate taxation (double taxation) 19 - 5

Learning Objective 2 Journalizing entries for issuing par-value stock, no-par stock, and no-par with stated value stock. 19 - 6

Learning Unit 19 -2 n Stockholders’ equity must be separated into two categories. Paid-in Capital Retained Earnings 19 - 7

Learning Unit 19 -2 Capital stock is the amount paid to the business. n Par value is the legal capital assigned to each share. n Usually it is the amount paid to the corporation for the initial issuances of stock. n Retained earnings is net income less net loss less dividends. n 19 - 8

Learning Unit 19 -2 n – – What are some characteristics of common stock? voting rights profit sharing selling the stock preemptive right (right to maintain ownership ratio) 19 - 9

Learning Unit 19 -2 n – – What are some characteristics of preferred stock? first claim to dividend distribution usually have no voting rights 19 - 10

Learning Unit 19 -2 n – – Dividends are paid to stockholders as their share of the corporation’s profit. common dividends preferred dividends 19 - 11

Learning Unit 19 -2 Cumulative preferred stockholders have a right to receive a dividend each year. n Amounts not declared and paid accumulate each year. n These are paid before any current year dividends (dividends in arrears). n 19 - 12

Learning Unit 19 -3 R. C. sells 200 shares of a $10 par value common stock at par. Accounts Affected Category Cash Asset Dr. 2, 000 SE Cr. 2, 000 Common Stock Rules 19 - 13

Learning Unit 19 -3 Assume R. C. sells 100 shares of $5 par value common stock at $20. n 100 shares × $5. 00 par value = $500 n 100 shares × $20. 00 market value = $2, 000 n What is the journal entry? n 19 - 14

Learning Unit 19 -3 Cash 2, 000 Common Stock Paid-in-Cap in Excess of Par Value – Common Issued par value common stock 500 1, 500 19 - 15

Learning Unit 19 -3 R. C. sells 300 shares of a no-par, common stock for $20 per share. Accounts Affected Category Cash Asset Dr. 6, 000 SE Cr. 6, 000 Common Stock Rules 19 - 16

Learning Objective 3 Calculating dividends on preferred and common stock. 19 - 17

Learning Unit 19 -3 n A $150, 000 dividend was declared. preferred stock 6%, 1, 000 shares, $200 par, and fully participative common stock, 6, 000 shares, $100 par 19 - 18

Learning Unit 19 -3 Preferred dividend: n 6% × $200 × 1, 000 = $12, 000 Common dividend: n 6% × $100 × 6, 000 = $36, 000 n How do we allocate the remaining $102, 000? 19 - 19

Learning Unit 19 -3 Preferred stock $200, 000 ÷ $800, 000 × $102. 000 = $25, 500 Common stock $600, 000 ÷ $800, 000 × $102. 000 = $76, 500 19 - 20

Learning Objective 4 Recording capital stock transactions under a stock subscription plan. 19 - 21

Learning Unit 19 -4 n n n Subscriptions Receivable—Common Stock is an asset account. It is debited when the contract is signed. A temporary stockholder equity account, called Common Stock Subscribed, is credited for the par value of the stock. Paid-in Capital in Excess of Par Value—Common is credited for any amounts above par value. 19 - 22

Learning Unit 19 -4 n When stock is fully paid it is issued, and then the par value is transferred to common stock. n Assume that R. C. received subscriptions for 1, 000 shares of $100 par value common stock at $160 per share. What is the entry? 19 - 23

Learning Unit 19 -4 Subscription Receivable 160, 000 Common Stock Paid-in Capital in Excess of Par Value Received stock subscriptions 100, 000 60, 000 19 - 24

Learning Unit 19 -4 n 1 – – – 2 The balance sheet must show stockholders’ equity with two divisions. Paid-in capital common stock (par value) common stock subscribed (if any not fully paid) paid-in capital in excess of par Retained earnings 19 - 25

End of Chapter 19 19 - 26