Corporations Organization Stock Transactions and Dividends LO 3

Corporations: Organization, Stock Transactions, and Dividends LO 3 a – Understanding the Characteristics and Classes of Stock

LO 3 Characteristics of Stock è The number of shares of stock that a corporation is authorized to issue is stated in the charter. è The term issued refers to the shares issued to the stockholders. è A corporation may reacquire some of the stock that has been issued. The stock remaining in the hands of stockholders is then called outstanding stock.

LO 3 Characteristics of Stock Outstanding

LO 3 Characteristics of Stock è Corporations may issue stock certificates to stockholders to document their ownership. è Shares of stock are often assigned a dollar amount, called par value. è Some corporations have stopped issuing stock certificates except on special request.

LO 3 Characteristics of Stock è Stock issued without par is called no-par stock. Some states require the board of directors to assign a stated value to no-par stock. è Some state laws require that corporations maintain a minimum stockholder contribution, called legal capital, to protect creditors.

LO 3 Characteristics of Stock è The major rights that accompany ownership of a share of stock are as follows: § 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.

LO 3 Classes of Stock è The two primary classes of paid-in capital are common stock and preferred stock. è The primary attractiveness of preferred stock is that it is given a preference to dividends over common stock.

LO 3 Classes of Stock è Cumulative preferred stock has a right to receive regular dividends that were not declared (paid) in prior years. § Noncumulative preferred stock does not have this right. § Cumulative preferred stock dividends that have not been paid in prior years are said to be in arrears.

LO 3 Classes of Stock A corporation has issued the following preferred and common stock: 1, 000 shares of $4 cumulative preferred stock, $50 par 4, 000 shares of common stock, $15 par The corporation was organized on January 1, 2010, and paid no dividends in 2010 and 2011. In 2012, the corporation paid $22, 000 in dividends, of which $12, 000 was paid to preferred stockholders and $10, 000 was paid to common stockholders. (continued)

LO 3 Classes of Stock Total dividends paid Preferred stockholders: 2010 dividends in arrears $22, 000 $4, 000 The 2010 dividends in arrears are paid first. There are 1, 000 shares, and each share receives $4 for a total of $4, 000. (continued)

LO 3 Classes of Stock Total dividends paid Preferred stockholders: 2010 dividends in arrears 2011 dividends in arrears $22, 000 $4, 000 The 2011 dividends in arrears are paid next. Again, the preferred stockholders receive $4 for each share held. (continued)

LO 3 Classes of Stock Total dividends paid Preferred stockholders: 2010 dividends in arrears 2011 dividends in arrears 2012 dividends $22, 000 $4, 000 The current dividends for 2012 must be paid to preferred stockholders before common stockholders can participate in the dividends. (continued)

LO 3 Classes of Stock Total dividends paid Preferred stockholders: 2010 dividends in arrears 2011 dividends in arrears 2012 dividends Total preferred dividends $22, 000 $4, 000 (12, 000) Of the $22, 000 in dividends declared, preferred must receive $12, 000 before common can receive any dividends. (continued)

LO 3 Classes of Stock Total dividends paid Preferred stockholders: 2010 dividends in arrears 2011 dividends in arrears 2012 dividends Total preferred dividends Dividends available to common stockholders $22, 000 $4, 000 (12, 000) $10, 000