Chapter 13
Corporations:
Organization, Stock
Transactions, and
Dividends
1
Objective 1
Describe the nature of the
corporate form of organization.
Characteristics of a Corporation
A corporation is a legal entity, distinct
and separate from the individuals who
create and operate it. As a legal entity, a
corporation may acquire, own, and
dispose of property in its own name.
Public Corporations
The stockholders or shareholders who
own the stock own the corporation.
Corporations whose shares of stock are
traded in public markets are called
public corporations.
Private Corporations
Corporations whose shares are not
traded publicly are usually owned by a
small group of investors and are called
nonpublic or private corporations. The
stockholders of all corporations have
limited liability.
Board of Directors
The stockholders control a corporation
by electing a board of directors. The
board meets periodically to establish
corporate policy. It also selects the
chief executive officer (CEO) and
other major officers.
Exhibit 1 Organizational Structure of a Corporation
Stockholders
Board of Directors
Officers
Employees
Characteristics of a Corporation
• A corporation has separate
legal existence from its owners.
• A corporation has
transferable units of
ownership.
• A corporation has
limited stockholders’
liability.
Exhibit 2 Advantages and Disadvantages of the
Corporate Form
(continued)
Exhibit 2 Advantages and Disadvantages of the
Corporate Form (continued)
Forming a Corporation
First step in forming a corporation is to file an
application of incorporation with the state.
• Because state laws differ, corporations
often organize in states with more favorable
laws.
• More than half of the largest companies
are incorporated in Delaware
Forming a Corporation
• After the application is approved, the state
grants a charter or articles of
incorporation which formally create the
corporation.
• Management and the board of directors
prepare bylaws which are operating rules
and procedures.
Costs may be incurred in organizing a corporation.
The recording of a corporation’s organizing costs
of $8,500 on January 5 is shown below:
Objective 2
Describe the two main
sources of stockholders’
equity.
Stockholders’ Equity
The owner’s equity in a corporation
is called stockholders’ equity,
shareholders’ equity,
shareholders’ investment, or
capital.
The two sources of capital are:
1. Capital contributed
to the corporation
by the stockholders,
called paid-in
capital or
contributed capital.
2. Net income retained
in the business, called
retained earnings.
Stockholders’ Equity Section of a
Corporate Balance Sheet
Stockholders’ Equity
Paid-in capital:
Common stock $330,000
Retained earnings 80,000
Total stockholders’ equity $410,000
If there is only one class of stock, the account is entitled
Common Stock or Capital Stock.
A debit balance in Retained Earnings
is called a deficit. Such a balance
results from accumulated net losses. A
credit balance in Retained Earnings
does not represent surplus cash or cash
left over from dividends.
Objective 3
Describe and illustrate the
characteristics of stock, classes
of stock, and entries for issuing
stock.
Characteristics of Stock
The number of shares of stock that a
corporation is authorized to issue is
stated in the charter. A corporation
may reacquire some of the stock that
has been issued. The stock remaining
in the hands of stockholders is then
called outstanding stock.
Characteristics of Stock
Shares of stock are often assigned a
monetary amount, called par.
Corporations may issue stock
certificates to stockholders to document
their ownership. Some corporations have
stopped issuing stock certificates except
on special request.
Classes of Stock
• Stock issued without a par is called no-
par stock. Some states require the board
of directors to assign a stated value to
no-par stock.
• Some state laws require that corporations
maintain a minimum stockholder
contribution, called legal capital, to
protect creditors.
Major Rights That Accompany
Ownership of a Share of Stock
1. The right to vote in matters concerning
the corporation.
2. The right to share in distributions of
earnings.
3. The right to share in assets on liquidation.
These stock rights normally vary
with the class of stock.
Classes of Stock
The two primary classes of paid-in
capital are common stock and
preferred stock. The primary
attractiveness of preferred stocks is
that they are preferred over
common as to dividends.
Example Exercise 13-1
Dividends per Share
Sandpiper Company has 20,000 shares of 1% cumulative
preferred stock of $100 par and 100,000 shares of $50 par
common stock. The following amounts were distributed as
dividends:
Year 1: $10,000
Year 2: 45,000
Year 3: 80,000
Determine the dividends per share for preferred and common
stock for each year.
Example Exercise 13-1 (continued)
Year 1 Year 2 Year 3
Amount distributed $10,000 $45,000 $80,000
Preferred dividend (20,000
shares) 10,000 30,000* 20,000
Common dividend (100,000
shares) $ 0 $15,000 $60,000
*(10,000 + $20,000)
Dividends per share:
Preferred $0.50 $1.50 $1.00
Common stock None $0.15 $0.60
Total Preferred Dividends Common Dividends
Year Dividends Total Per Share Total Per Share
2005 $ 7,500 $7,500 $0.75 $0 $0
2006 9,000 9,000 0.90 0 0
2007 30,000 13,500* 1.35 16,500 0.33
2008 30,000 10,000 1.00 20,000 0.40
2009 40,000 10,000 1.00 30,000 0.60
2010 48,500 10,000 1.00 38,500 0.77
$6.00 $2.10
Issuing Stock
A corporation is authorized to issue 10,000 shares
of preferred stock, $100 par, and 100,000 shares of
common stock, $20 par. One-half of each class of
authorized shares is issued at par for cash.
If the stock is issued (sold) for a
price that is more than its par, the
stock has been sold at a premium.
If the stock is issued (sold) for a
price that is less than its par, the
stock has been sold at a discount.
Premium on Stock
Caldwell Company issues 2,000 shares of
$50 par preferred stock for cash at $55.
A corporation acquired land for which the
fair market value cannot be determined. The
corporation issued 10,000 shares of $10 par
common that has a current market value of
$12 in exchange for the land.
No-Par Stock
On January 9, a corporation issues 10,000 shares of no-
par common stock at $40 a share. On June 27, the
corporation issues an additional 1,000 shares at $36.
Stated Value
Some states require that the
entire proceeds from the issue
of no-par stock be recorded as
legal capital. In other states,
no-par stock may be assigned
a stated value per share.
Using the same data as we used for par the
transaction at stated value is recorded as follows:
Example Exercise 13-2
Entries for Issuing Stock
On March 6, Limerick Corporation issued for cash 15,000 shares
of no-par common stock at $30. On April 13, Limerick issued at
par 1,000 shares of 4%, $40 par preferred stock for cash. On May
19, Limerick issued for cash 15,000 shares of 4%, $40 par
preferred stock at $42.
Journalize the entries to record the March 6, April 13, and May
19 transactions.
Example Exercise 13-2 (continued)
Mar. 6 Cash……………………………….. 450,000
Common Stock…………….. 450,000
(15,000 shares × $30)
Apr. 13 Cash……………………………….. 40,000
Preferred Stock……………. 40,000
(1,000 shares × $40)
May 19 Cash……………………………….. 630,000
Preferred Stock……………. 600,000
Paid-in Capital in Excess
of Par……………………….. 30,000
(15,000 shares × $42)
THE END
