MGMT 102 - Chapter 20 Corporations - Organization and Capital Stock

Assume: Takach Company has the following shares outstanding: 2,000 shares of $50 par, $4 preferred stock 2,000 shares of $10 par common stock $0 is the amount available for dividends for the first year $22,000 is the amount available for dividends for the second year If the company has cumulative preferred stock how will the dividends be split between common and preferred stocks at the end of the second year?

$16,000 to preferred stock (i.e., 2,000 * $4 * 2 years) = $8/share over 2 years A: $6,000 to common stock (i.e., remaining $6,000 / 2,000 shares) = $3/share over 2 years

Assume: Takach Company has the following shares outstanding: 2,000 shares of $50 par, $4 preferred stock 2,000 shares of $10 par common stock $14,000 is the amount available for dividends for the year How would the $14,000 be allocated between the preferred and common shares?

$8,000 to preferred stock (i.e., 2,000 * $4) = $4 per share A: $6,000 to common stock (i.e., remaining $6,000 / 2,000 shares) = $3 per share

Assume: Takach Company has the following shares outstanding: 2,000 shares of $50 par, $4 preferred stock 2,000 shares of $10 par common stock $0 is the amount available for dividends for the first year $22,000 is the amount available for dividends for the second year If the company has noncumulative stock how will the dividends be split between common and preferred stocks at the end of the second year?

$8,000 to preferred stock (i.e., 2,000 * $4) = $4/share over 2 years $14,000 to common stock (i.e., remaining $14,000 / 2,000 shares) = $7/share over 2 years

What are the two (2) disadvantages of corporations?

1) Double taxation of earnings (i.e., corporations must pay income tax and owners must pay income tax on dividends, distributions of corporate income to owners) 2) Government regulation (i.e., activities may be regulated by federal, state, and local laws which may restrict the corporation's ownership of real property, the purchase of its own stock, and the retention of its earnings)

What three events affect Owner's Equity and Partner's Equity accounts in sole proprietorships and partnerships respectively?

1) Initial and subsequent investments in the business 2) Net income or net losses during the life of the business 3) Withdrawals by the owners

What are some different variations at which stock can be issued?

1) Issuing par value stock at par (i.e., use Common (Preferred) Stock account) 2) Issuing par value stock at a premium (i.e. use Paid-in Capital in Excess of Par -- Common (Preferred) Stock 3) Issuing par value stock at a discount (i.e., use Discount on Common (Preferred) Stock contra-stockholders' equity account) 4) Issuing stock with a stated value (i.e. use Paid-in Capital in Excess of Stated Value - Common (Preferred) Stock 5) Issuing no-par stock (i.e., use Common (Preferred) stock account) 6) Issuing stock for non-cash assets (i.e., use Common (Preferred) Stock account) 7) Issuing stock through capital stock subscription (i.e., use Common (Preferred) Stock Subscriptions Receivable contra-stockholders' equity account) 8) "Un-issuing" stock through repurchase of treasury stock (i.e., use Treasury Stock - Common (Preferred) contra-stockholders' equity account)

What are the five (5) advantages of a corporation?

1) Limited liability of owners (i.e., owners have no personal liability) 2) Transferable ownership units (i.e., capital stock which is divided into shares of stock) 3) Ease of raising capital (i.e., obtain capital by selling additional shares of stock) 4) No mutual agency (i.e., owners do not have power to engage in contracts) 5) Unlimited life (i.e., changes in ownership or death of owners have no effect)

How is the stockholders' equity section presented on a corporation's balance sheet?

1) stockholders' equity is separated by source 2) Paid-in capital is separated by source 3) Stock characteristics indicated 4) Number of shares authorized, subscribed, issued, and held as treasury stock indicated 5) Preferred stock is listed first 6) Retained earnings listed after all paid-in capital 7) Preferred (common) stock subscriptions receivable and treasury stock are subtracted from the total of paid-in capital and retained earnings

What will be covered in the next four chapters?

Accounting for corporations including the types of ownership in a corporation, capital stock, dividends, taxes, earnings, distributions, bonds and the statement of retained earnings and the statement of cash flows

Corporation (Stockholders' Equity)

Capital Stock Normal Balance (Credit) Additional Paid-In Capital Normal Balance (Credit) Retained Earnings Normal Balance (Credit) Dividends Normal Balance (Debit)

What is issued stock?

Capital stock that has been sold and issued

What is stock that grants stockholders voting rights, a share in earnings, preemptive right (i.e., purchase additional shares in proportion to the owner's present holding), and share in the assets if the corporation liquidates?

Common stock

What is the key difference between corporations, sole proprietorships, and partnerships?

Corporation is a legal entity that exists separate and distinct from its owners

What is the difference between cumulative and noncumulative preferred stock?

Cumulative stock is stock on which unpaid dividends accumulate from year to year (i.e., the accumulated amounts and the current year preferred dividends must be paid to the preferred stockholders before the common stockholders can receive any dividends) [note: cumulative feature of preferred stock is important preference most preferred stock is cumulative] [note: participating preferred stock gives its owners the right to share with common stock owners in dividends in excess of a stated dividend rate, if preferred dividends are limited to the stated dividend rate, the stock is called nonparticipating] [note: convertible preferred stock gives its owner the right to convert that stock to common stock and the number of shares of common stock that will be issued for each share of preferred stock is indicated on the preferred stock certificate]

AB Company incurred the following costs in organizing the corporation: Attorneys' fees $6,200 State incorporation fees $900 Prepare the general journal entry to record payment of these costs on March 1.

D-> Organization Expenses $7,100 C-> Cash $7,100

If Takach Company was billed $8,000 for incorporation and attorneys' fees what would the correct journal entry be?

D-> Organization expenses, C-> Accounts Payable, description "Corporate organization costs"

How are the stock characteristics indicated on the balance sheet?

Dividend rate for preferred stocks, par or no-par value

Concerning corporations, what is equivalent to withdrawals in a sole proprietorship or partnership?

Dividends are equivalent to withdrawals as dividends are debited to the Dividends account in the same way that withdrawals are debited to the Drawing account in the sole proprietorship and partnership, and the Dividends account is closed to Retained Earnings in the same way that Drawing is closed to the capital accounts respectively [Note: retained earnings represents accumulated earnings not paid out to stockholders as dividends]

What does each stockholder receive upon purchase of a corporations share of stock?

Each stockholder receives a form called a stock certificate that shows the name of the stockholder and the number of shares owned

T/F Dividends are not taxable because these earning have already been taxed to the corporation

False (Dividends are taxable to the recipients)

T/F Organization costs are recorded as an intangible asset and are generally amortized over a period of five years

False (They are expensed when incurred)

How is the dividend amount stated?

In dollar amount per share (i.e., "$50 par, $4 preferred stock) or as a percentage of par value (i.e., $50 par, 8% preferred stock)

When forming a corporation, what do the contents of the corporation's charter typically include?

Name of corporation, location of principal office, purpose of the business, description of the capital stock, names and addresses of the incorporators

What are some of the costs of organization of a business as a corporation?

Organization costs (i.e., incorporation fees, attorneys' fees, promotion expenses) may be viewed as benefiting the entire life of a corporation, but accepted practice is to record them as expenses when they are incurred

Where are organization expenses reported?

Organization expenses are reported under Other Expenses on the income statement

Sole Proprietorship (Owner's Equity) accounts

Owner, Capital Normal Balance (Credit) Owner, Drawing Normal Balance (Debit)

What "groups" do what within an organization?

Owners (i.e., stockholders) elect the Board of Directors (BOD) who appoint the officers (i.e., CEO, CFO, COO, CIO) who manage the employees (i.e., all others)

How is the stockholders' equity separated by source on the balance sheet?

Paid-in Capital (i.e., amounts contributed by owners) and Retained Earnings (i.e., accumulated, undistributed earnings)

Prepare the stockholders' equity section of the balance sheet based on the following account balances: Common stock, $2 par, 60,000 shares $120,000 Preferred stock, $10 par, 5%, 4,000 shares $40,000 Common stock subscribed, $2 par, 3,000 shares $6,000 Retained earnings $17,000

Paid-in capital: Preferred stock $10 par, 5%, 4,000 shares $40,000 Common stock, $2 par, 60,000 shares $120,000 Common stock subscribed (3,000 shares) $6,000 $40,000 + $126,000 = $166,000 Total paid-in capital + retained earning $17,000 = $183,000 total stockholders' equity

Partnership (Partners' Equity) accounts

Partner A, Capital Normal Balance (Credit) Partner A, Drawing Normal Balance (Debit) Partner B, Capital Normal Balance (Credit) Partner B, Drawing Normal Balance (Debit)

What is the difference between common stock and preferred stock?

Preferred stock gives its owner certain preferences (i.e., pertain to dividends or distribution of assets at liquidation), but certain lack of rights (i.e., no voting rights)

Why is preferred stock listed first on the balance sheet?

Preferred stock has a preferred claim on dividends and assets

How is the paid-in capital separated by source on the balance sheet?

Preferred stock, common stock, stock subscriptions, paid-in capital in excess of par, paid-in capital from sale of treasury stock

How are ownership rights represented in a corporation?

Shares of capital stock issued by the corporation to the owners

What has been covered in the class so far?

Sole proprietorships and partnerships

What is treasury stock?

Stock that may be bought back by the corporation

What is the big distinction in a corporation between the capital invested by the owners and earnings retained in the business?

The amount paid by the stockholders for their shares of stock is called paid-in capital (i.e., recorded in Capital Stock and Additional Paid-In Capital accounts) and the corporations net income (net loss) is credited (debited) to the Retained Earnings account

Who owns the assets and liabilities in a corporation?

The business, not the owners (i.e., a corporation can own property, enter into contracts, and incur debt in its own name, it can sue and be sued)

What determines the total number of shares the corporation can issue?

The corporate charter authorizes the number of shares a corporation can issue which is known as authorized stock

When forming a corporation, after the corporate bylaws are established what happens?

The corporation issues capital stock which is the owner's equity in a corporation which is divided into shares representing ownership rights in the corporation with those who purchase the stock becoming owners and are known as stockholders

What is the dollar amount per share for which the stock can be bought and sold?

The dollar amount is known as the market value of the stock

What is the dollar amount per share printed on the stock known as?

The dollar amount is known as the par value of the stock [note: par value is strictly a legal matter and has not direct relationship with the market value per share]

When forming a corporation, after the state approves the corporate charter, what happens?

The incorporators meet to elect a temporary board of directors and to prepare the corporation bylaws which provide the general guidelines for conducting the business

What is outstanding stock?

The issued stock less the treasury stock (i.e., the number of shares in the hands of stockholders)

Who is legally liable in sole proprietorships and partnerships?

The liabilities are legal liabilities of the owners

When organizing a corporation, what titles are included amongst the corporate officers?

The officers usually consist of the president, one or more vice presidents, a secretary, and a treasurer [note: major officers in large corporations typically include the Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Operating Officer (COO), and Chief Information Officer (CIO)]

What is the big difference in what the accounting elements for sole proprietorships, partnerships and corporations?

The owner's equity account is different (i.e., not Owner's Equity nor Partner's Equity, but instead Stockholders' Equity)

What is an advantage of preferred stock if dividends are preferred by investors?

The owners of preferred stock usually have the right to dividends of a certain amount before owners of common stock can receive any dividends

What do par value and market value of shares of stock have to do with accounting?

The par value has accounting importance as it is the amount that must be recorded in the capital stock account when stock is issued and if the market value of a share of stock is greater than the par value then this excess is accounted for in the Paid-in Capital Account

When organizing a corporation, what is the board of directors?

The stockholders elect a board of directors who determines corporate policies and selects the corporate officers who generally manage the corporation and are responsible to the board of directors

What is different on the balance sheet for corporations?

The stockholders' equity section of the balance sheet

What is a stock that has no dollar amount printed on the it?

This is known as no-par stock and is sometimes assigned a value per share by the Board of Directors (BOD) which will be known as the stated value of the stock [note: from an accounting standpoint the par value and the stated value are virtually the same]

What form of business can be used to generate money, raise capital from the market, that allows individuals to begin and operate a business?

Through incorporation, an individual can generate money and begin operating a business (i.e., one of the advantages of the corporate form of organization is that it makes it "easier" to raise capital)

How is a corporation formed?

To form a corporation, the incorporators file an application with the state in which the company is to be incorporated and after the application is approved, a legal document called a charter, or articles of incorporation is prepared

Genous Company has 20,000 shares of common stock and 2,000 shares of cumulative, $20 par, $1 dividend, preferred stock outstanding. No dividends were declared in year 1 of operation. In year 2, $9,000 is available for dividends. Compute the dividends per share for common stock and preferred stock in year 2.

Total available for dividends $9,000 Cumulative preferred dividend for year 1 (2,000 shares x $1) = $2,000 plus Preferred dividend for year 2 (2,000 shares x $1 = $2,000) = $4,000 Available for common stock ($9,000 - $4,000) = $5,000 Dividends per share: Preferred $2,00 Common ($5,000/20,000 shares) $0.25

T/F Convertible preferred stock is a type of preferred stock that gives its owners the right to convert the stock to common stock of the corporation

True

T/F Corporations do more dollar volume of business than sole proprietorships and partnerships combined

True

T/F Owners of corporations have no personal liability for debts of the corporation

True

Prepare general journal entries for the following transactions of GOTE Company: a) Received subscriptions for 10,000 shares of $2 par common stock for $80,000 b) Received payment of $30,000 on the stock subscription in transaction (a). c) Received the balance in full for the stock subscription in transaction (a) and issued the stock d) Purchased 1,000 shares of its own $2 par common stock for $7.50 a share e) Sold 500 shares of the stock on transaction (d) for $8.50 a share

a) D -> Common Stock Subscriptions Receivable $80,000 C -> Common Stock Subscribed $20,000 C -> Paid-In Capital in Excess of Par-- Common Stock $60,000 b) D -> Cash $30,000 C -> Common Stock Subscriptions Receivable $30,000 c) D -> Cash $50,000 C -> Common STock Subscriptions Receivable $50,000 D -> Common Stock Subscribed $20,000 C -> Common Stock $20,000 d) D -> Common Treasury Stock $7,500 C -> Cash $7,500 e) D -> Cash $4,250 C -> Common Treasury Stock $3,750 C -> Paid-In Capital from Sale of Treasury Stock $500

The total number of shares the corporate charter authorizes a corporation to issue

authorized stock

A group elected by the stockholders to determine corporate policies and to select corporate officers

board of directors

Together with the charter, the bylaws provide the general guidelines for conducting the business

bylaws

Represents ownership rights in a corporation. Generally broken down into common and preferred stock

capital stock

An agreement in which a buyer contracts to buy shares of a corporation at a specific price

capital stock subscription

A legal document that includes the name of the corporation, the location of the principal office, the purpose of the business, the description of the capital stock, and the names and addresses of the incorporators.

charter

Stock that gives its owner the right to vote at stockholders' meetings, share in earnings distributions, purchase additional shares if more shares are issued by the corporation, and share in the assets if the corporation liquidates

common stock

Stock subscriptions receivable are listed as ______ on the balance sheet

contra-stockholders' equity

A type of preferred stock that gives its owners the right to convert the stock to common stock of the corporation

convertible preferred stock

Preferred stock on which unpaid dividends accumulate from year to year

cumulative preferred stock

Treasury stock is listed as a(n) ________ on the balance sheet

deduction from stockholders' equity

The difference between the par amount and the amount received when the par value stock is issued at a price below par

discount

When par value stock is issued at a price below par, the amount below par is called a

discount

The distributions of corporate income to the owners

dividends

The process of taxing corporate income both to the company that earns it and to the owners who receive it

double taxation

Those who form a corporation by filing an application with the state in which the company is to be incroporated

incorporators

Capital stock that has been sold and issued

issued stock

The amount for which the stock can be sold on the open market

market value

The power of each owner to act as an agent and engage in contracts for a business

mutual agency

Stock that has no dollar amount printed on it

no-par stock

Preferred stock on which dividend claims do not accumulate from year to year

noncumulative preferred stock

Preferred stock on which the dividends are limited to the stated dividend rate

nonparticipating

The costs of organizing a corporation, such as incorporation fees, attorneys' fees, and promotion expenses

organization costs

The amount paid by stockholders for their shares of stock

paid-in capital

The dollar amount printed on the share of stock

par value

Preferred stock that has a right to share with common stock in dividends in excess of a stated dividend rate

participating

The right to purchase additional shares in proportion to the owner's present holding, if more shares are issued by the corporation

preemptive right

Stock that has certain preferences or rights superior to common stock

preferred stock

The difference between the par value and the price of a stock when the stock is issued at a price above par

premium

When par value stock is issued at a price above par, the amount above par is called a

premium

The accumulated earnings of the corporation that have not been paid out to stockholders as dividends

retained earnings

Capital stock is divided into shares that represent ownership rights in the corporation

shares

Value per share assigned to no-par stock by the board of directors

stated value

A form received by each stockholder that shows the name of the stockholder and the number of shares owned

stock certificate

Owner of corporations

stockholders

Owners' equity within a corporation

stockholders' equity

A buyer who contracts to purchase shares of stock from a corporation at a specific price

subscriber

Who owns the assets of sole proprietorships and partnerships?

the assets of sole proprietorships and partnerships legally belong to the owners

Shares of stock reacquired by the issuing company are called

treasury stock

Shares of stock that have been bought back by the issuing company

treasury stock