Chapter 11 Corporation Organization Stock Transactions and Dividends Characteristics of a corporation Advantage Continuous life 1 Separate legal existence 2 3 Ability to raise large amounts of capital 4 Ownership rights are easily transferable 5 Limited Liability of stock holders Disadvantages 1 Ownership is separate from management 2 Cost of government regulations 3 Double taxation of dividends Characteristics of stock The number of stock a company is authorized to issue is stated in its chapter The term issued refers to the shares issued to stockholders Outstanding stock is the stock remaining in the hands of the stockholders Classes of Stock Common stock Preferred stock rights Cumulative Preferred stock declared paid in prior years Only one class of stock is issued and each share has equal rights one or more classes of stock are issued with various preference has a right to receive regular dividends that were not Issuing Stock Factors in setting price for a new issue of stock 1 The company s anticipated future earnings 2 The expected dividend rate per share 3 4 Current state of economy 5 Current state of the securities market Its current financial position Premium stock is issued for a price that is more than it par Discount stock is issued for a price less than its par Ex A Journal entry for issuing stock Assume that a corporation is authorized to issue 10 000 shares of 100 par preferred stock and 100 000 share of 20 par common stock The corporation issued 5 000 shares of preferred stock and 50 000 shares of common stock at par for cash Cash 1 500 000 Preferred stock Common Stock 500 000 1 000 000 Premium on Stock Cash is debited for the amount received common stock or preferred stock s credited for the par amount and paid in capital in excess of par is credited for the difference Ex A journal entry for when stock is issued at premium Assume that Caldwell Company issues 2 000 shares of 50 par preferred stock for cash at 55 Cash 110 000 Preferred stock Paid in Capital in excess of par 100 000 10 000 Stock in exchange for an asset other than cash When stock is issued in exchange for assets other than cash such as land building and equipment the assets are recorded as their fair market value If this value is cannot be determined the fair market price of the stock issued is used Ex Assume a corporation acquired land with a fair market value that cannot be determined In exchange the corporation issued 10 000shares of its 10 par common stock If the stock has a market price of 12 per share the transaction is recorded as Land 120 000 Common Stock Paid In Capital in Excess of Par 100 000 20 000 No Par Stock When no par stock is issued cash is debited and common stock is credited for the proceeds As no par stock is issued over time this entry is the same even if the issuing price varies Ex Assume that on January 9 a corporation issues 10 000 shares of no par common stock at 40 a share On June 27 the corporation issues an additional 1 000 shares at 36 Jan 9th Cash June 27th Cash Common Stock 400 000 Common Stock 36 000 400 000 36 000 In some states no par stock may be assigned a stated value per share The stated value is recorded like a par value Any excess of the proceeds over the stated value is credited to Paid In Capital in excess of state value Ex Assume that in the preceding example the no par common stock is assigned a stated value of 25 Jan 9th Cash June 27th Cash 400 000 36 000 Common Stock Paid In Capital in Excess of State Value 250000 150 000 Common Stock Paid In Capital in Excess of State Value 25 000 11 000 Accounting For Dividends Cash Dividends A cash distribution of earnings to its shareholders is cash dividend Three conditions for a cash dividend 1 Sufficient retained earnings 2 Sufficient Cash 3 Formal action by the board of directors The Date of Declaration is the date the board of directors formally authorizes the payment of the dividends The Date of Record is the date the corporation uses to determine which stockholders will receive the dividend The Date of Payment is the date the corporation will pay the dividends to the stockholders who owned the stock on the date of record Ex Assume that on October 1 Hiber Corporation declares the cash dividends shown below with the date of record of Nov 10 and a date of payment of Dec 2 Preferred Stock 100 par 5 000 shares outstanding Common Stock 10 par 100 000 shares outstanding Total Total Dividend 12 500 30 000 42 500 Dividends per share 2 50 0 30 Declaration Date On Oct 1 Hiber Corporation records the following entry 42 500 Cash Dividends Cash Dividends Payable 42 500 Date of Record NO ENTRY Date of Payment Cash Dividends Payable 42 500 Cash Stock Dividends 42 500 Stock Dividend is a distribution of shares of stock to stockholders Normally only for common stock Ex Assume that the stockholder s equity accounts of Hendrix Corporation as of Dec 15 are as follows Common Stock 20 par 2 000 000 shares issued 40 000 000 Paid In Capital in Excess of Par Common Stock Retained Earnings 9 000 000 26 600 000 On December 15 Hendrix Co declares a stock dividend of 5 or 100 000 shares 2 000 000 x 5 to be issued on Jan 10 to stockholders of record on Dec 31 The market price of the stock on Dec 15 the date of declaration is 31 per share The entry to record the stock dividends Stock Dividends 3 100 000 2 000 000 Stock Dividends Distributable Paid In Capital in Excess of Par Common Stock 1 100 000 On January 10 the stock dividend is distributed to stockholders by issuing 100 000 shares of common stock The issuance of the stock is recorded by the following entry Stock Dividends Distributable 2 000 000 Common Stock Treasury Stock Transactions Treasury Stock is stock that a corporation has issued and then reacquired A corporation may reacquire purchase its own stocks for a variety of reasons including provide share 2 000 000 for resale to employees reissue as bonuses for employees support the market price of the stock The cost method is usually used for recording the purchase and resale of treasury stock Using the cost method treasury stock is debited for the cost purchase price of the stock When the stock is resold treasury stock is credited for its cost Any difference between the cost and the selling price is debited or credited in paid in capital from sale of treasury stock Ex Assume that a corporation has the following paid in capital on January 1 500 000 150 000 Common Stock 25 par 20 000 shares authorized and issued Excess of issue
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