Chapter 10

Organizing a Corp.

- Corporation organizers (incorporators) obtain a charter from the state - Incorporators... > pay fees > File documents with state > Sign Charter > Agree to set of bylaws

Statement of Cash flows

- Financing activities because the company is dealing with its owners - 3 Main Categories > issuance of stock > Treasury Stock > Dividends

Cash Dividends

- Most common type of dividend - Must have enough retained earnings to declare dividend and money to pay the dividend. - Board of directors has authority to declare > Corporation has no obligation until declared - 3 Relevant Dates: 1. Deceleration Date 2. Date of Record 3. Payment Date

Reasons to buy BACK treasury stock

- Need stock for distributions to employees - Buying its stock low and selling high - Avoid takeover - Increase earnings per share (EPS) - Repurchase program to return excess money to shareholders

Classes of Stock

- Par Value and no-Par > Par-arbitrary amount assigned by a company upon issuing stock > Usually set low to avoid legal issues > No-Par Stock: does not have a par value * May have a stated value * Rare in practice

Retained Earnings

- amt. of stockholders equity the corp. has earned through profitable operations - Reduced by dividends - Net income less net losses dividends declared - *Credit Balance* = Lifetime earnings exceed lifetime losses and dividends - *Debit Balance* = Lifetime losses and dividends exceed earnings

Advantages of a Corporation

1. Can raise more capital than a proprietorship or partnership can 2. Continous life 3. Ease of transferring ownership 4. Limited liability of stockholders

Treasury Stock

A company's own stock that it had issued and later reacquired

Book Value per share of common stock =

(Total Stockholder's Equity - Preferred Equity)/# of shares of common stock outstanding

Resale Treasury Stock

*DEBIT* Cash *CREDIT* Treasury Stock *CREDIT* Paid-in Capital

Issue Stock for *CASH* at *PAR*

*DEBIT* Cash XX (# of shares * Par Value) *CREDIT* Common Stock XX

Issue Stock for *CASH* at *NO PAR* Value

*DEBIT* Cash XX (# of shares * issue price) *CREDIT* Common Stock (# of shares * Issue price)

Issue Stock for *CASH* at *above Par*

*DEBIT* Cash XX (# of shares * issue price) *CREDIT* Common Stock (# of shares * par value) *CREDIT* Paid in capital (# of shares * [issue-par])

Compensation Treasury Stock

*DEBIT* Compensation Expense (#of shares * Market Value) *CREDIT* Common Stock (Par value * #ofshares) *CREDIT* Paid in Capital

Journalized Payment Date

*DEBIT* Dividend Payable XX *CREDIT* Cash XX

Gloria Company has 100,000 shares of common stock authorized, 33,000 shares issued and outstanding. On September 1, 2016, the company declared a $3.30 per share dividend for those of record on October 1, 2016, to be paid on November 1, 2016. Based on this information, which of the following journal entries would Gloria Company make?

*DEBIT* Dividends Payable 108,900 *CREDIT* Cash 108,900

Issue Stock in Exchange for *Services* at *no par*

*DEBIT* Expense eg Legal XX *CREDIT* Common Stock XX

Issue Stock in Exchange for *Services* at *par*

*DEBIT* Expense eg Legal XX *CREDIT* Common Stock XX

Issue Stock in Exchange for *Services* at *above par*

*DEBIT* Expense eg Legal XX *CREDIT* Common Stock XX (Shares # * Par) *CREDIT* Paid-in capital XX (Shares# * [market-par])

Issue Stock for *Other Assets* at *no Par*

*DEBIT* Other Asset XX *CREDIT* Common Stock XX

Issue Stock for *Other assets* at *PAR*

*DEBIT* Other Asset XX *CREDIT* Common Stock XX

Issue Stock for *Other Assets* at *above par*

*DEBIT* Other Asset XX *CREDIT* Common Stock XX *CREDIT* Paid-in Capital XX

Journalized deceleration Date

*DEBIT* Retained Earnings XX *CREDIT* Dividend Payable XX

Buy Treasury Stock

*DEBIT* Treasury Stock (# of shares * Price per share) *CREDIT* Cash

Treasury Stock Transactions

- *Buying Treasury Stock*: assets and equity DECREASE by the cost of treasury stock purchased - *Reselling Treasury Stock*: Assets/Equity INCREASE by the cost of treasury stock sold - *Retiring Treasury Stock*: Remove it from common stock and treasury; assets/equity DONT CHANGE - *Issuing stock for employee Compensation*: Expenses, capital stock, and additional paid-in capital all INCREASE

Stockholders Rights

- *Vote*: right to vote on matters that come before the stockholders - *Dividends*: right to receive a proportionate part of any dividend - *Liquidation*: right to receive proportionate share of any assets remaining upon liquidation - *Preemption*: right to maintain one's proportionate ownership in the corporation

Common Stock

- Basic form of stock - The owners of the corporation - 4 basic rights - Stand to benefit most if corporation suceeds

Preferred Stock

- Certain advantages over common stock > Receive dividends 1st > Receive assets 1st in liquidation - 4 basic rights - Rare in practice

Dividends on Preferred Stock

- Receive dividends before common stockholders - Stated as either > % of Par Value > $ amount per share - May be cumulative > If a corporation fails to pay a cumulative preferred stock dividends in any year, the dividend is said to be in arrears. > Receive all dividends in arrears before common stockholders get any dividend > Preferred stock is cumulative unless it is specifically labeled as noncumulative

Paid in Capital (Contributed capital)

- amt. of stockholders equity the stockholders have contributed to the corp. - Includes stock accounts and additional paid-in capital

Disadvantages of a Corporation

1. Seperation of ownership and management 2. Double taxation of distributed profits 3. Gov't regulation

Preferred shareholders of Shelby International decided to convert some of these preferred shares into shares of Common Stock. The journal entry for this conversion will include all of the following except? A. A credit to Retained Earnings B. A debit to Convertible Preferred Stock C. A credit to Paid-in Capital in Excess of Par - Common D. A credit to Common Stock

A In order to record the conversion of preferred stock to common stock, the following accounts would be affected: Debit to Convertible Preferred Stock Credit to Common Stock Credit to Paid-in Capital in Excess of Par - Common Retained Earnings is not debited or credited when preferred stock is converted to common stock. next

Which of the following statements describing a corporation is true? A. A corporation is subject to greater government regulation than a proprietorship or a partnership. B. Stockholders are the creditors of a corporation. C. Stockholders own the business and manage its day-to-day operations. D. When ownership of a corporation changes, the corporation terminates.

A Because investors rely on financial data of corporations for investment purposes, corporations are highly regulated by government, specifically the SEC. Stockholders are owners of a corporation. A corporation's ownership is transferable and is not terminated with the death of an owner (there are usually many owners of a corporation). Stockholders are owners of the business but rely on managers to manage the day-to-day operations of the business.

Stockup, Inc. issued 1,000 shares of $1 par value common stock for $3,000. The Common Stock account will increase by __________. A. $1,000 B. $2,000 C. $3,000 D. $4,000

A Common stock is always recorded at par value regardless of how much each share is sold for. The additional amount above par is recorded as Paid-in Capital in Excess of Par - Common and increases the stockholders' equity section of the balance sheet.

A corporation issues 1,800 shares of $10 par value common stock in exchange for land with a current market value of $23,000. How would this be recorded in the Land account? A. Debited for $23,000 B. Credited for $18,000 C. Credited for $20,000 D. Debited for $18,000

A Land 23,000 Common Stock 18,000 Paid-in Capital in Excess of Par - Common 5,000 When an asset, other than cash, is exchanged for stock, the asset is recorded on the books at fair market value. This is due to the volatility of stock prices, and the fair market value of the asset is the most reliable information available.

Charter

Authorizes corp. to issue a certain number of shares of stock

Which of the following best describes paid-in capital? A. Fixed assets donated by the board of directors B. Investments by the stockholders of a corporation C. Capital that the corporation has earned through profitable operations D. Investments by the creditors of a corporation

B Paid-in capital represents the common stock, preferred stock, and additional paid-in capital accounts. Creditors are not investors; the business owes creditors money, and this is represented in the liabilities section of the balance sheet. Capital earned by a corporation through the normal operations of the business affect retained earnings which is not part of paid-in capital. Stockholders may donate fixed assets in exchange for ownership represented by stock.

A company had the following treasury-stock related account balances: Treasury Stock - $150,000 Paid-in Capital from Treasury Stock Transactions - $15,000 If the company resells Treasury Stock that originally cost $50,000 for $40,000, then __________. A. shareholders' equity is increased by $50,000 B. paid-in capital from treasury stock transactions is reduced $10,000 C. treasury stock is increased by $40,000 D. additional paid-in capital is reduced by $50,000

B The reissuance of treasury stock at an amount below cost causes cash to increase by $40,000 and treasury stock to decrease by $50,000. Paid-in capital from treasury stock transactions is decreased by $10,000 to balance the entry, which would be: Cash 40,000 Paid-in Capital from Treasury Stock Transactions 10,000 Treasury Stock 50,000

Mr. Cello bought 4,000 shares of Ventures, Inc. $1 par value common stock directly from Ventures, Inc. for $80,000. Mr. Cello later sold 1,000 of these purchased shares to Mr. Bill for $30,000. Which of the following is true of the sale of these shares by Mr. Cello? A. Shareholders' equity of Ventures Inc. will increase by $80,000. B. Shareholders' equity of Ventures, Inc. will be unaffected by the sale. C. Net income of Ventures Inc. will increase by $10,000 from the gain on the sale of common stock. D. Shareholders' equity of Ventures Inc. will decrease by $80,000.

B When Ventures, Inc. initially issued 4,000 shares to Mr. Cello, there was an increase to Ventures, Inc.'s stockholders' equity of $80,000. However, when Mr. Cello sold 1,000 shares to another party, this did not affect the stockholders' equity of Ventures, Inc., as this was a personal transaction of an individual investor to another, not a transaction of the corporation.

Ending Retained Earnings =

Beginning Balance + Net income - Dividends declared

Which of the following is not something that must be completed by the incorporators in order to bring a corporation into existence? A. Agree to a set of corporate bylaws. B. File corporate documents with the state. C. Issues shares of stock. D. Sign the charter of the corporation.

C The creation of a corporation begins when its organizers, called the incorporators, obtain a charter from the state. The charter includes the authorization for the corporation to issue a certain number of shares of stock. A share of stock is the basic unit of ownership for a corporation. The incorporators: pay fees, sign the charter, file documents with the state, and agree to a set of bylaws , which act as the constitution for governing the company. The corporation then comes into existence. Issuing shares of stock is something that will be done after the corporation is created.

Which of the following equity-related transactions would not be included in the financing activities section of the statement of cash flows? A. Matty Manufacturing purchased 1,000 shares of its own stock for the treasury. B. Matty Manufacturing issued 1,000 shares of $1 par value common stock in exchange for cash. C. Matty Manufacturing declared and distributed a 10% stock dividend on common shares outstanding during the year. D. Matty Manufacturing declared and paid the required annual cash dividend on preferred stock.

C The declaration and distribution of a stock dividend do not involve a debit or credit to cash; therefore they are not reported on the statement of cash flows in the financing activities section. All other listed transactions involve increases or decreases in cash, which would require them to be reported on the statement of cash flows. Because the transactions affect equity accounts, they will all be listed in the financing activities section of the statement of cash flows.

Aria's, Inc. has 1,000 shares of 5%, $100 par value cumulative preferred stock and 10,000 shares of $1 par value common stock outstanding. The company has not paid dividends in two years. In its third year, it paid the common shareholders a $2 per-share dividend, plus the amount owed to preferred shareholders. What is the total amount of dividends paid? A. $30,000 B. $20,000 C. $35,000 D. $20,150

C To calculate the total dividend, first determine the amount of dividends paid to preferred shareholder. The annual preferred dividend is $5,000, calculated as $100 par x 5% x 1,000 shares. Because the preferred stock is cumulative, preferred shareholders are owed dividends from the previous 2 years plus the current year, resulting in total preferred dividends of $15,000. Next, calculate the dividend to common stockholders. This is calculated as $2 x 10,000 shares, resulting in total common dividends of $20,000. The total dividend is then calculated as the Preferred Dividend, $15,000, plus the Common Dividend, $20,000, which results in total dividends of $35,000.

Par Value per Share =

Common Stock Account Balance/# of shares issued

Which of the following would be included in the journal entry to record the issuance of new shares of common stock to employees as part of a stock-based compensation plan? A. Debit to Treasury Stock B. Credit to Retained Earnings C. Debit to Common Stock D. Debit to Compensation Expense

D

Aria's, Inc. has 1,000 shares of 5%, $100 par value cumulative preferred stock and 10,000 shares of $1 par value common stock outstanding. The company has not paid dividends in two years. In its third year, it paid the common shareholders a $2 per-share dividend. How much must each preferred shareholders have received? A. $6 per share B. $5 per share C. $100 per share D. $15 per share

D Because the preferred stock is cumulative, whatever is owed to preferred shareholders must be paid before common shareholders can receive any dividends. Preferred shareholders are owed dividends for the prior 2 years plus the current year. The annual preferred dividend is $5 per share ($100 x 5%). Because preferred shareholders are owed 2 prior years plus the current year, each preferred shareholder must have received $15 ($5 dividend per year x 3 years).

Kaldon, Inc. had the following account balances related to treasury shares: Treasury Stock (2,500 shares @ $30 per share) - $75,000 Paid-in Capital from Treasury Stock Transactions - $2,000 If Kaldon, Inc. were to resell all its treasury stock at $28 per share, the journal would include which of the following? A. Debit Cash $75,000 B. Debit Paid-in Capital from Treasury Stock Transactions $5,000 C. Credit Treasury Stock $70,000 D. Debit Retained Earnings $3,000

D Cash is debited for the proceeds of the sale, $70,000, calculated as 2,500 treasury shares x $28 per share. Treasury Stock is credited for the cost of the treasury shares sold, $75,000, calculated as 2,500 treasury shares x $30 cost per share. Because Kaldon received $5,000 less than the cost of the treasury shares, Paid-in Capital from Treasury Stock Transactions is debited, but it can only be debited for the credit balance of the account, $2,000. The remaining $3,000 is debited to Retained Earnings.

At the beginning of the year, the balance in retained earnings was $400,000. During the year, the following Retained Earnings related transactions occurred: Sales were $1,000,000 of which $480,000 was collected. Expenses were $750,000 of which $400,000 was paid. The company has outstanding 10,000 shares of 6%, $100 par value preferred stock and 100,000 shares of $.10 par value common stock. The annual preferred dividend was paid, as well as a common dividend of $1 per share. Calculate the ending balance of retained earnings reported on the balance sheet. A. $240,000 B. $410,000 C. $90,000 D. $490,000

D The retained earnings balance is increased over the course of the year by Net Income and decreased by dividends declared. From the specific transactions listed: Net Income: $1,000,000 Sales - $750,000 Expenses = $250,000 Net Income Preferred Dividends = $100 x 6% x 10,000 shares = $60,000 Common Dividends = $1 x 100,000 shares = $100,000 Total Dividends = $60,000 Preferred + $100,000 Common = $160,000 total dividends The resulting Retained Earnings balance is calculated as: Beginning Balance $ 400,000 + Net Income 250,000 - Dividends Declared (160,000) Ending Balance $490,000

Authorized Stock

Max number of shares the company can issue under its charter

Retire Treasury Stock

Memorandum Entry

Journalized Date of record

NO ENTRY

Outstanding

Number of shares that the stockholders own

Issued Stock

Number of shares the company has issued to its stockholders i.e. Treasury Stock

Payment Date

Payment of Dividend

Deceleration Date

The date the board of directors announces the intention to pay the dividend. The deceleration of a cash dividend creates an obligation (liability) for the corporation.

Date of Record

Those stockholders holding the stock at the end of business on the date of record (as announced by the board)