Chapter_13-students - Chapter 13 Chapter 13 Corporations...

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Unformatted text preview: Chapter 13 Chapter 13 Corporations Intro Intro Up until this point, we have mainly discussed companies as owned and operated as a sole proprietorship Other forms of ownership are available. These include partnerships, limited liability companies, and corporations Partnerships and limited liability companies are discussed in a different class Corporations is our focus today The impact of corporation verses sole proprietorships will be reflected in how we record things in the owner’s equity portion of the balance sheet Corporations Corporations Nature Formed under state law in the US Limited liability for the owners of the corporation (owners are not personally liable) Continuous life Ease of raising capital Corporations are owned by a series of shareholders Shareholders have the ability to sell shares easily Management­ A corporation is run by a board of directors (BOD). The members of the BOD are elected by the shareholders of a corporation This is not the case for the other forms of business This particularly true if it is a public company Disadvantages Allows for the separation of ownership and management Can be seen as an advantage and a major disadvantage Double taxation Cost of compliance is extremely high Particularly for publicly traded companies Stockholder’s Equity Stockholder’s Equity As background, I want to highlight that companies have various ways to refer to the components of Stockholder’s Equity Owner’s Equity in a corporation is called Stockholder’s Equity. It has two main sources Capital contributed to the corporation by the stockholders. This is called Paid­in Capital. Net Income retained in the business. This is called Retained Earnings (RE) RE are increased by net income. It is decreased by net losses and dividends. Normal balance of a credit. IF there is a debit balance, this is referred to as a deficit Income Summary will be closed into RE for corporations (we previously closed into Owner, capital) Paid in Capital Paid in Capital Characteristics of stock Authorized, issued, and outstanding The number of shares of stock that a corporation is authorized to issue is stated in its charter (or articles of incorporation) Issued­the number of shares issued to shareholders The stock remaining in the hands of the stockholders is the number of outstanding shares Charter is granted by the state and officially creates the corporation (must apply for this) A difference might occur between issued and outstanding because a corporation reacquires some shares that it has issued Paid­In Capital, cont. Paid­In Capital, cont. Rights of a Shareholder Par verses no­par Right to vote in matters concerning the corporation Right to share in distributions of earnings Right to share in assets on liquidation We learn both, but the concept of par is rather antiquated Classes of Stock Classes of Stock Common and Preferred If only one class of shares are issued, it is called common stock. Each share of common stock has equal rights. A corporation may also issue one or more classes of stock with various preference rights. This is preferred stock. Cumulative versus noncumulative Participating versus nonparticipating Potential preferences for preferred stock include preference to dividends or rights in liquidation Issuing Stock Issuing Stock On your quiz for next week You must know the JE for the issuance of both par and no­par stock Ex.13­8 There is an additional account for par value stock when the stock is issued at a higher price than its par value Paid­In Capital in Excess of Par (or Additional Paid in Capital – APIC) Accounting for Dividends Accounting for Dividends Dividends in the form of cash are the most common Three important dates for dividends We will learn the treatment of cash dividends and stock dividends The journal entries for cash dividends will be on your quiz next week Date of Declaration Date of Record Date of Payment Cash dividends Cash dividends Declaration Date will result in the following JE: Cash Dividends (dr.) Cash Dividends Payable (cr.) There is no JE on the Date of Record On the Date of Payment, the following journal entry will occur: Cash Dividends Payable (dr.) Cash (cr.) The account ‘Cash Dividends’ is a temporary account that will be closed into retained earnings Please know that it does NOT show up on the income statement Stock Dividends Stock Dividends These JE only impacts stockholder’s equity There is a movement from Retained Earnings to Paid­in Capital This is the JE on the date of declaration Stock Dividends (dr.) Stock Dividends Distributable (cr.) PIC in Excess of Par­CS (cr.) The last entry to PIC in Excess of Par­CS is only necessary if there is par value stock at issue Stock Dividends Distributable shows up in the Paid­In Capital section of the balance sheet Stock Dividends, cont. Stock Dividends, cont. There is no JE on the Date of Record The JE on the date of distribution (date of payment) Stock Dividends Distributable (dr.) Common Stock (cr.) A stock dividend does not impact total assets, liabilities, or stockholder’s equity Stock Split Stock Split Stock Split is the process by which a corporation reduces the par value of its common stock and issues a proportionate number of shares The purpose is to reduce the market value of each share of stock outstanding No JE is recorded. You do need to change the par value of the shares on the balance sheet. In addition, you must change the shares issued and outstanding. Treasury Stock Treasury Stock Treasury Stock is stock that a corporation has issued and then required. We will use the cost method to account for these (there is another method) Ex.13­13 6 Exhibit 5 Stockholders’ Equity Section of a Balance Sheet Method 1 (continued) 6 Exhibit 7 Statement of Stockholders’ Equity ...
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This note was uploaded on 02/07/2011 for the course BUS 209 taught by Professor Z.gougoumanova during the Spring '11 term at American University in Bulgaria.

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