Chapter 13

declare cash dividends record date payment date

declare: Dr. Dividends Cr. CS Div Payable record: no JE payment: Dr. CS Div Payable Cr. Cash

Capital Stock

Corporations issue different classes of stock: Common stock represents basic ownership. Preferred stock gives owners certain advantages over common stock. Stock may carry a par value or may be no-par stock. Stated value stock is no-par stock that has been assigned an amount similar to par value.

Journalize the issuance of stock

Dr. Cash/other assets/expenses Cr. Common Stock Cr. APIC-CS (if necessary)

Prior-Period Adjustments

Occasionally a company may make an accounting error as a result of mathematical mistakes or other errors not discovered until the following period. Corrections to Retained Earnings for errors of an earlier period are called prior-period adjustments.

What is a corporation?

A corporation is a business organized under state law that is a separate legal entity. Corporations dominate business activity in the United States. Most well-known companies are corporations.

Stockholders' Equity

A corporation's equity is called stockholders' equity. The two basic sources of stockholders' equity are: Paid-in capital represents amounts received from stockholders for stock. Retained earnings is equity earned by profitable operations that is not distributed to stockholders.

HOW ARE DIVIDENDS AND STOCK SPLITS ACCOUNTED FOR?

A profitable corporation may make distributions to stockholders in the form of dividends. Dividends can be paid in the form of cash, stock, or other property. Legal capital refers to the portion of stockholders' equity that cannot be used for dividends most states prohibit using paid-in capital for dividends

Stock Dividends

A stock dividend is a distribution of a corporation's own stock to its shareholders. Stock dividends have the following characteristics: They affect only stockholders' equity accounts. They have no effect on total stockholders' equity. They have no effect on assets or liabilities. A company issues stock dividends in order to: Continue dividends but conserve cash Reduce the market price per share of its stock Reward investors

Stock Splits

A stock split is fundamentally different from a stock dividend. A stock split increases the number of issued and outstanding shares of stock. A stock split decreases the par value and the market value per share, whereas stock dividends do not affect par value per share. No formal journal entry is needed for stock splits. Instead, the split is recorded in a memorandum entry, an entry in the journal that notes a significant event but has no debit or credit amount.

Stockholders' Rights

A stockholder has four basic rights: Vote―Each share of basic ownership in the corporation carries one vote. Dividends―Stockholders receive a proportionate part of any dividend declared and paid. Liquidation―Stockholders receive their proportionate share of any assets remaining after liquidation. Preemptive right―Stockholders have a right to maintain their proportional ownership.

How is the complete corporation income statement prepared?

Continuing operations: These operations should continue from period to period. Income from continuing operations helps investors make predictions about future earnings. Discontinued operations: These gains and losses occur when a company sells or disposes of an identifiable division. They are reported separately from continuing operations because this type of disposal does not occur frequently.

Earnings per Share

Earnings per share (EPS) is the most widely used of all business statistics. EPS reports the amount of net income (loss) for each share of the company's outstanding common stock. Earnings per share is calculated as net income minus preferred dividends divided by the weighted average number of common shares outstanding.

Restrictions of Retained Earnings vs. Appropriations of retained earnings

Restrictions of retained earnings Cash dividends and treasury stock purchases require a cash payment. Banks often require a company to maintain a minimum level of stockholders' equity. These restrictions are disclosed in the notes to the financial statements. Do not require journal entries. Appropriations of retained earnings Retained earnings that are voluntarily segregated in a separate account by the board of directors of a corporation. Recorded by journal entries. Communicate to investors that the company intends to use a portion of retained earnings for a specific purpose (e.g., future expansion or a potential liability associated with a lawsuit).

Declaring and Paying Dividends―Preferred Stock

The cash dividend rate on preferred stock is often expressed as a percentage of the preferred stock par value, such as 6%. Sometimes, cash dividends on preferred stock are expressed as a flat dollar amount per share, such as $3 per share. A preferred stock dividend in arrears is a dividend that has not been paid for the year. Preferred stock can be: Cumulative preferred stock―Preferred stock whose owners must receive all dividends in arrears plus the current year dividends before the corporation pays dividends to the common stockholders Noncumulative preferred stock―Preferred stock whose owners do not receive passed dividends declare: Dr. Dividends Cr. PS Div Payable Cr. CS Div Payable record: no JE payment: Dr. CS Div Payable Dr. PS Div Payable Cr. Cash refer to handout and solution for cumulative vs. non-cumulative

Stockholders' Equity Basics

The maximum number of shares of stock a corporation may issue is called authorized stock. Issued stock has been issued by the corporation. Stock held by the stockholders is called outstanding stock. Stockholders are issued stock certificates. Capital stock represents a stockholder's ownership. EPS is calcuated based on weighted average of commons shares OUTSTANDING.

How is equity reported for a corporation?

The statement of retained earnings reports how the company's retained earnings balance changed from the beginning of the period to the end of the period. Companies can report a negative amount in retained earnings. This is called a deficit.

Statement of Stockholders' Equity

The statement of stockholders' equity is another option for reporting the changes in stockholders' equity of a corporation. It reports the changes in all stockholders' equity accounts.

Characteristics of Corporations

Unique characteristics of corporations: Separate legal entity Number of owners No personal liability of the owner(s) Lack of mutual agency Indefinite life Taxation Capital accumulation