Accounting Quiz #1 (Chapter 13)

Is it more common for a company to issue common stock with a par value of $10 or $.001? Explain why

Companies desire to minimize the amount of legal capital. It is more likely the par value of common stock will be $.001 per share than $10.

Registrar and Transfer Agents

If a corporation's stock is traded on a major stock exchange, the corporation must have a registrar and a transfer agent. A registrar keeps stockholder records and prepares official lists of stockholders for stockholder meetings and dividend payments. A transfer agent assists with purchases and sales of shares by receiving and issuing certificates as necessary. Registrars and transfer agents are usually large banks or trust companies with computer facilities and staff to do this work.

Stock Certificates and Transfer

Investors who buy a corporation's stock, sometimes receive a stock certificate as proof of share ownership. Many corporations issue only one certificate for each block of stock purchased . A certificate can be for any number or shares. A certificate shows the company name, stockholder name, number of shares and other crucial info. Issuance of certificates is becoming less common. Instead, many stockholders have accounts with the corporation or their stockbrokers and never receive actual certificates.

Issuing Par Value Stock

Par value stock can be issued (provided, distributed) at a par premium (above par), or at a discount (below par). In each case, stock can be exchanged for either cash or noncash assets. The par value stock can be issued in three ways - at par, above par and below par.

The business entity assumption requires a corporation to be...

accounted for separately from its owners.

Organization Expense

also called organization costs, are the costs to organize a corporation. They include legal fees, promoter's fees and amounts paid to obtain a charter. The corporation records(debits) these costs to an EXPENSE ACCOUNT called Organization Expenses. Organization costs are expensed as incurred because it is hard to determine the amount and timing of their future benefits.

This section describes the incorporation, costs, and management of corporate organizations.

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Double taxation

corporate income is taxed and then its later distribution through dividends is normally taxed again for shareholders.

Stated Value Stock

is a no-par value stock to which the directors assign a "stated" value per share. Stated value per share becomes the minimum legal capital per share in this case.

Corporation

is an entity created by law that is separate from its owners. It has most rights and privileges granted to individuals.

No-Par Value Stock

is stock not assigned a value per share by the charter. Its advantages is that it can be issued at any price without the possibility of a minimum legal capacity deficiency.

Par Value Stock

is stock that is assigned a par value (which is an amount assigned per share by the corporation in its charter). There is no restriction on the assigned par value. In many states, the par value of a stock establishes a minimum legal capital, which refers to the least amount that the buyers of stock must contribute to the corporation or be subject to paying at a future date. Minimum legal capital was intended to protect creditors by requiring a minimum level of net assets.

Market Value of Stock (or per share)

is the price at which a stock is bought and sold. Expected future earnings, dividends, growth, and other company and economic factors influence market value. Traded stocks market value are available daily in newspapers such as the wall street journal and online.

Public sale usually refers to...

issuance (act of making something available) and trading on an organized stock market.

Basics of Capital Stock: What is Capital Stock?

it's a general term that refers to any shares issued to obtain capital (owner financing).

Classes of Stock

when all authorized shares have the same rights and characteristics, the stock is called common stock. A corporation is sometimes authorized to issue more than one class of stock, including preferred stock and different classes of common stock.

Rights of Stockholders

when investors buy stock, they acquire all specific rights the corporation's charter grants to stockholders. They also acquire general rights given by the laws of the state where it is at. When a corporation has only one class of stock, it is identified as COMMON STOCK.

Issuing Stated Value Stock

when no-par stock is issued and assigned a stated value, its stated value becomes legal capital and is credited to a stated value stock account.

Issuing No-par value stock

when no-par stock is issued and is not assigned a stated value, the amount the corporation receives becomes legal capital and is recorded as Common Stock. This means that the entire poceeds are credited to a no-par stock account.

Mention the 6 advantages of Corporate Characteristics

(1)Continuous life= it's life continues indefinitely because it is not tied to the physical lives of its owners. (2)Ease of capital accumulation= buying stock is attractive to investors 'cause.. (a)stockholders are not liable for the corporations acts and debts. (b)stocks are transferred easily. (c)life of corporation is unlimited. (d)stockholders are not corporate agents. This enables corporations to accumulate big amounts of capital from the combined investments of many stockholders. (3)Lack of mutual agency for stockholders= corporation acts through its agents, who are its officers and managers. Stockholders do not have the power to bind the corporation to contracts-referred to as lack of mutual agency. (4)Limited liability of stockholders= they're not liable for corporate acts nor debt. (5)Separate legal entity=corporation conducts its affairs with the same rights, duties, and responsibilities of a person. It takes actions through its agents, who are its officers and managers. (6)Transferable ownership rights= transfer of shares from one stockholder to another usually has no effect on the corporation or its operations except when this causes a change in the directors who control or manage the corporation.

Mention the two disadvantages of Corporate Characteristics

(1)Corporate taxation= corporations are subject to the same property and payroll taxes as proprietorships and partnership PLUS additional taxes. The worst are federal and state income taxes that can take 40% or more if corporate pretax income. (2)Government regulation= corporation must meet requirements of a state's incorporation laws, which subject the corporation to state regulation and control. Proprietorships and partnerships avoid many of these regulations and governmental reports.

The four basic sources of Corporate capital are..

(1)Long term debt (2)Preffered stock (3)Common stock (4)Retained Earnings

Mention the Corporate Structure

(1)Stockholders (2)Board of Directors (3)President, V. President and other officers. (4)Employees of Corporation

Common Stockholders usually have the general right to... (5)

(1)Vote at stockholder's meetings (or register proxy votes electronically) (2)Sell or dispose of their stock. (3)Buy their proportional share of any common stock later issued by the corporation. The preemptive right protects stockholder's proportionate interest in the corporation. Ex: stockholder who owns 25% of a corporation's common stock has the first opportunity to buy 25% of any new common stock issued. (4)Receive the same dividend, if any, on each common share. (5)Share in any assets remaining after creditors and preferred stockholders are paid when the corporation is liquidated. Each common share gets the same amount. (6) They also have the right to receive timely financial reports.

Corporations can be separated into two types...

(a)Privately held (or closely held) corporation= does not offer its stock for public sale and usually has few stockholders. (b)Publicly held corporation= offers its stock for public sale and can have thousands id stockholders.

Owners of corporations are called... (2)

(a)stockholders or shareholders

Issuing stock for noncash assets

A corporation can receive assets other than cash in exchange for its stock. (It can also assume liabilities on the assets received such as a mortgage on property received). The corporation records the assets received a their market values as of the date of the transaction. A corporation sometimes gives shares of its stock to promoters in exchange for their services in organizing the corporation, which the corporation records as Organization Expenses.

Selling (issuing) stock

A corporation can sell stock directly or indirectly. To sell directly= it advertises its stock issuance to potential buyers. It's most common with privately held corporations. To sell indirectly= a corporation pays a brokerage house (investment banker) to issue its stock. Some brokerage houses underwrite an indirect issuance of stock, that is, they buy the stock from the corporation and that all gains or loses from its resale.

Incorporation

A corporation is created by obtaining a charter (formal document that creates a legal entity, exemption, immunity, privilege, or right.) from a state government. A charter application must be signed by the prospective stockholders call incorporators or promoters and then filed with the proper state official. When the application process is done and fees are paid, the charter is issued and the corporation is formed. Investors then purchase the corporation's stock, meet as stockholders, and elects a board of directors. Directors oversee (supervise) a corporations affairs.

Recording the issuance of corporate stock

Accounting for the issuance of common stock affects only paid-in (contributed) capital accounts; no retained earnings accounts are affected.

Stockholders or Shareholders

An individual, group, or organization that holds one or more shares in a company, and in whose name the share certificate is issued.

Management of a Corporation

The ultimate control of the corporation rests with stockholders who control a corporation by electing its board of directors. Each stockholder has one vote for each share of stock owned. Directors are responsible for and have financial authority for managing corporate activities. A board can act only as a collective body and usually limits its actions to setting general policy. A corporation usually has a stockholder meeting at least once a year to elect directors and transact business as its bylaws require. Group of stockholders owning or controlling votes of more than a 50% share of a corporation's stock can elect the board and control the corporation.

Why is a corporations income said to be taxed twice?

a corporation pays taxes on its income, and its stockholders normally pay personal income taxes (at the 15% rate or lower) on any cash dividends received from the corporation.

Stockholders Equity

a corporations equity is known as stockholders equity. It consists of: (1)paid-in capital=total amount of cash and other assets the corporation receives from its stockholders in exchange for stock. (2)Retained earnings=cumulative net income (and loss) not distributed as dividends to its stockholders.

Authorized Stock

it's the number of shares that a corporation's charter allows it to sell. The number of authorized shares usually exceeds the number of shares issued(and outstanding), often by a large amount. (Outstanding stock refers to issued stock held by stockholders). No formal journal entry is required for stock authorization. A corporation must apply to the state for a change in its charter if it wishes to issue more shares than previously authorized. It discloses the number of shares authorized in the equity section of its balance sheet or notes.

Discount on stock

occurs when a corporation sells its stock for less than par value. Most states prohibit the issuance of stock at a discount. In states that allow stock to be issued at a discount, its buyers usually become contingently liable to creditors for the discount. If stock is issued at a discount, the amount by which issue price is less than par is debited to a Discount on Common Stock account, a contra to the common stock account, and its balances is subtracted from the par value of stock in the equity section of the balance sheet. Is it NOT an expense and does not appear on the income statement.

Premium on stock

occurs when a corporation sells its stock for more than par value.