ACG2021 Chapter 11 Notes

ACG2021 Chapter 11 Notes - Chapter 11 Notes Corporations,...

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Chapter 11 Notes Corporations, upon formation, are a legal entity registered with the state they incorporate in. The Articles of Incorporation is a legal document that is issued by the state after approval and gives basic information about the corporation (i.e., who the officers are, what the purpose of the business is, etc.) Benefits of being a stockholder/shareholder of common stock as opposed to being a creditor: 1. A voice in management – shareholders are “owners” of the company, and therefore, are entitled to vote on company policies at annual (and special) shareholder meetings 2. Dividends – if the company declares dividends, the shareholders are entitled to these distributions 3. Residual claim – in the event that a corporation is liquidated (goes bankrupt and sells all of its assets to cover its debts), the shareholders are entitled to any share of distributions after the creditors are paid Authorized, Issued, and Outstanding Shares (know these terms) 1. Authorized – the maximum number of shares of a corporation’s capital stock that can be issued as specified in the charter 2. Issued – represent the total number of shares of stock that have been sold 3. Outstanding – the total number of shares of stock that are owned by stockholders on any particular date Treasury Stock is stock that is REPURCHASED by the company from stockholders. Once the shares are repurchased, they are no longer outstanding (since the shareholders do not own the stock anymore). Treasury stock is a “contra-equity” account and works AGAINST the contributed capital account. Note also that a company can RESELL its treasury stock to shareholders as well. Common Stock Transactions © Scott Friend, 2008
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Common stock is the basic voting stock issued by a corporation. It often has two components – 1) a stated par value (if applicable) and 2) additional paid in capital (the price paid by shareholders in EXCESS of par value) The par value of the stock is stated in the articles of incorporation, and some companies opt not to have a par value, but often times, it is a legal requirement by the state When a company first goes public, it does this by selling a specified number of shares on a national exchange, and this is known as an initial public offering (IPO) Example: On 1/1/x1 Company X undergoes an IPO by selling 100,000 shares of its common stock to shareholders for a total of $10,000,000. The stock had a par value of $1 per share. Record the journal entry for this IPO sale. First off, let’s calculate the total par value of the stock. If it’s $1 per share and Company X sold 100,000 shares, the total par value of the stock issued is $100,000. Therefore, $9,900,000 was paid IN EXCESS OF PAR by the shareholders. To record this transaction: Cash 10,000,000 Common Stock – Par 100,000 APIC (Capital in excess of par) 9,900,000
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ACG2021 Chapter 11 Notes - Chapter 11 Notes Corporations,...

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