UMD BMGT 220 - Chapter 11: Reporting and Analyzing Equity

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Chapter 11: Reporting and Analyzing EquityCorporate Form of Organization- Corporation: is an entity created by law that is separate from its owners; hasmost of the rights/privileges granted to individuals o Owners of corporations are called stockholders/shareholderso Privately held/closely held: does not offer its stock for public sale and usually has few stockholderso Publicly held: offers its stock for public sale and can have thousands ofstockholders o Advantages Separate legal entity Limited liability of stockholders Transferable ownership rights Continuous life Lack of mutual agency for stockholders Ease of capital accumulationo Disadvantages Government regulation Corporate taxationo Incorporation A corporation is created by obtaining a charter from the state, charter must be signed by the prospective stockholders called incorporators/promoters and then filed with the state; once the application process is done, the charter is issued & the corporation is formed; investors then purchase stock, the stockholders meet and elect a board of directors who oversee the corporation’s affairs o Organization expenses: organization costs; are the costs to organize a corporation (legal fees, promoters’ fees, amounts paid to obtain a charter)  Debit to organization expenses  Expensed as incurred bc it is difficult to determine the amount and timing of their future benefits o Management of a corporation Stockholders >> board of directors >> president/VP/other officers >> employees  Proxy: a document that gives a designated agent the right to vote the stock (if one stockholder can’t make the meeting) o Rights of stockholders  Specific rights: identified by the corporation’s charter  General rights: identified by the state  Common stock: when a corporation has only one class of stock; all authorized shares have the same rights and characteristics; rights include…- Vote at stockholder’s meetings - Sell or otherwise dispose of their stock- Purchase their proportional share of any common stock later issued by the corporation; this preemptive right protects stockholders’ proportionate interest in the corporation- Receive the same dividend on each common share - Share in any assets remaining after creditors and preferred stockholders are paid if the company is liquidated o Stock certificate: prove ownership; not common o If a corporation’s stock is traded on a major stock exchange, the corporation must have a registrar and a transfer agent; usually large banks or trust companies  Registrar: keeps stockholder records and prepares official lists of stockholders for stockholder meetings and dividend payments Transfer agent: assists with purchase and sales of shares by receiving and issuing certificates as necessary o Capital stock: is a general term that refers to any shares issued to obtain capitalo Authorized stock: is the number of shares that a corporation’s charter allows it to sell; no formal journal entry required for stock authorization Discloses the number of shares authorized in the equity sectionof its balance sheet o Outstanding stock: issued stock held by stockholders o Sell stock directly: advertises its stock issuance to potential buyers (privately held corporations)o Sell stock indirectly: a corporation pays a brokerage house (investment banker) to issue its stock Investment bankers can underwrite an indirect issuance of stock (they buy the stock from the corporation and take all gains/losses from its resale) o Market value per share: is the price at which a stock is bought and sold o Per value stock: is a stock that is assigned a par value which is an amount assigned per share by the corporation in its charter  Minimum legal capital: the least amount that the buyers of stock must contribute to the corporation at a future date o No par value stock: is stock not assigned a value per share by the corporate charter  Advantage: can be issued at any price without the possibility ofa minimum legal capital deficiencyo Stated value stock: is no par stock to which the directors assign a state value per share o Stockholder’s equity: paid in or contributed capital and retained earnings  Paid in capital: is the total amount of cash and other assets the corporation receives from its stockholders in exchange for its stock Retained earnings: is the cumulative net income not distributed as dividends Common Stock- Accounting for the issuance of common stock affects only paid in capital accounts, NOT retained earnings - Issuing par value stock at par o Issued 30,000 shares of 10 par value stock o Debit cash 300,000o Credit common stock, 10 par value 300,000- Issuing par value stock at a premium o Premium on stock: occurs when a corporation sells its stock for more than par value o Paid in capital in excess of par value: the premium, reported as partof equity, not revenue, not listed on the income statemento Issued 30,000 shares of 10 dollars par value for 12 dollars per share o Debit cash 360,000o Credit common stock 10 par value 300,000o Credit paid in capital in excess of par value, common stock 60,000 (12-10 times 30,000) - Issuing par value stock at a discount o Discount on stock: occurs when a corporation sells its stock for less than par value o The amount by which issue price is less than par is debited to discount on common stock- Issuing no par value stocko Issued 1,000 shares of no par stock for 40 cash per shareo Debit cash 40,000o Credit common stock, no par value 40,000- Issuing stated value stocko Issued 1,000 shares of no par common stock having a stated value of 40 per share in return for 50 cash per shareo Debit cash 50,000o Credit common stock, 40 stated value 40,000o Credit paid in capital in excess of stated value, common stock 10,000- Issuing stock for noncash assetso Record receipt of land valued at 105,000 in return for issuance of 4,000 shares of 20 par value common stock Debit land 105,000 Credit common stock, 20 par value 80,000 Paid in capital in excess of par value, common stock 25,000o Record receipt of services at 12,000 in organizing the corporation in return for 600 shares of 15 par value common stock Debit organization expenses 12,000 Credit common stock, 15 par value 9,000 Credit paid in capital in excess of par value, common stock 3,000Dividends- Cash dividendso Date of declaration: is the date the directors vote to declare and pay a dividend (creates a


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UMD BMGT 220 - Chapter 11: Reporting and Analyzing Equity

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