ACCT 1005_ Corporations

Corporation
Separate legal entity
Capital divided into stocks/shares
 Owners of a corporation are called stockholders or
shareholders
Authorization must be received to issue shares
 Issuing of shares is usually done by an underwriter
Continuous life & transferrable ownership right
No mutual agency
Limited liability of stockholders
Separation of ownership & management (BOD)
Corporate tax (Double taxation)

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ACCT 1005_ Corporations

Capital Stock
 Authorized Share Capital
Total number of shares the corporation’s Articles of
Incorporation authorises the corporation to issue
 Issued Stock
Portion of authorized share capital sold & issued
 Outstanding Stock
Number of issued shares in the hands of shareholders.
Excludes treasury stock
 Treasury Stock (TS)
 Issued stock reacquired by company
 Cash dividend not paid on TS
 Can be resold at a later date

Paid-in /Contributed Par Value

Capital Additional Paid-in Capital
Externally Generated
Sources
Of
Capital Accum. from Profitable Operations
Retained Negative Balance - Deficit
Earnings Increased by Net Income
Decreased by Net Loss & Dividends
Internally Generated

Statement of Retained Earnings

Retained Earnings, 1/1/- $xxxxxxx
Add: Net Income/(Net Loss) xxxxxxx
xxxxxxx
Less: Dividends (xxxxxxx)
Retained Earnings, 31/12/- xxxxxxx

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ACCT 1005_ Corporations

Paid –In Capital

Owners
Pre-emptive Right
Common
Stock

Classes Cumulative
Accum. Dividend from year to year
Of Arrears not a liability on BS
Stocks Preferred Carried in Notes to FS
Stock
Preference over C/SH Non-Cumulative
Do not accumulate dividend

Stockholders Equity Section of BS

Paid-in Capital:
Preferred Stock (Par) xxxxx
Common Stock (Par) xxxxx
Additional Paid-in Capital-CS xxxxx
Total Paid-in Capital xxxxx
Retained Earnings xxxxx
Total Stockholders’ Equity xxxxx

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ACCT 1005_ Corporations

Issuance of Stock
Issued 20,000 shares @ $4 par

At Par Dr Cash $80,000

Cr Common Stock $80,000

Issued 20,000 shares ,$4 par @ $10 each

Dr Cash $200,000
At Premium Cr Common Stock (20,000@$4) $80,000
Cr APC: Common Stock $120,000

Issued 20,000 shares @ $4 par for Computer Equipment

valued at $180,000

For Dr Computer Equipment $180,000

Cr Common Stock (20,000 @$4) $80,000
Assets
Cr APC : Common Stock $100,000

Dividends
§ Distribution of earnings by a corporation to its
stockholders
§ A corporation must declare a dividend before paying it.
§ The board of directors alone has the authority to
declare a dividend.
1. Cash Dividends
2. Stock Dividends

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ACCT 1005_ Corporations

Three conditions must exist:

1) Unrestricted Retained Earnings
2) Adequate cash balance (Cash Dividend)
3) Declaration of dividend
Three dates:
1) Declaration Date Dr Retained Earnings
Cr Dividends Payable
2) Date of Record - No journal entry required
- Verify # of shares O/S
3) Payment Date Dr Dividends Payable
Cr Cash

Stock Dividends
Distribution of shares of a corporation to shareholders
Do not give any assets to shareholders
Issued to continue dividends but conserve on cash
Not subject to income taxes
Affect only stockholders equity
Small Stock Dividend
Dr Retained Earnings (With MV of shares)
Cr Common Stock (Par value)
Cr Additional Paid-In Capital
Note that a stock dividend merely rearranges the
Shareholders Equity Section of the BS

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ACCT 1005_ Corporations

Stock Split
 Increases # of authorised, issued and outstanding shares
 Proportionate reduction in par value
 2:1 split – Double # of shares; ½ par
 4:1 split – 4 times # of shares; ¼ par
 Makes shares of corporation more affordable
 No change in shareholders equity
 No accounts affected
 Recorded in a memorandum entry in the financial
statements

Stockholders Equity Section of BS

Paid-in Capital:
Preferred Stock (Par) xxxxx
Common Stock (Par) xxxxx
Additional Paid-in Capital-CS xxxxx
Total Paid-in Capital xxxxx
Retained Earnings xxxxx
Total Shareholders’ Equity xxxxx

Event Effect on Total Shareholders Equity

1. Declaration of Cash Dividend Decrease total Shareholders Equity
2. Payment of Cash Dividend No effect on Shareholders Equity
3. No effect on Shareholders Equity
Distribution of Stock Dividend
4. Stock Split No effect on Shareholders Equity

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