ACCOUNTING FOR

CORPORATIONS
Chapter 13

© 2009 The McGraw-Hill Companies, Inc.,

All Rights Reserved
C1
CORPORATE FORM OF
ORGANIZATION

An entity
created by law

Existence is Privately Held

Ownership
separate from
can be
owners

Has rights and

privileges
Publicly Held

McGraw-Hill/Irwin Slide 2
C1
CHARACTERISTICS OF
CORPORATIONS
Advantages
 Separate legal entity
 Limited liability of stockholders
 Transferable ownership rights
 Continuous life
 Lack of mutual agency for stockholders
 Ease of capital accumulation
Disadvantages
 Governmental regulation
 Corporate taxation

McGraw-Hill/Irwin Slide 3
C1
CORPORATE ORGANIZATION AND
MANAGEMENT

Stockholders

Board of Directors

President, Vice-President,
and Other Officers

Employees of the Corporation

McGraw-Hill/Irwin Slide 4
C1
CORPORATE ORGANIZATION AND
MANAGEMENT

C orporate O rganiza tion C hart

Stockholders
Ultimate
S tockholders usually meet
control.
once a year.
Selected by a
B oard of D irectors Overall
vote of the
responsibility
stockholders.
for managing
P resident the company.

Secretary Vice P resident Vice P resident V ice President

Finance Production M arketing
McGraw-Hill/Irwin Slide 5
C1 RIGHTS OF STOCKHOLDERS

 Vote at stockholders’ meetings

 Sell stock

 Purchase additional shares of stock

 Receive dividends, if any

 Share equally in any assets remaining

after creditors are paid in a liquidation

McGraw-Hill/Irwin Slide 6
 STOCK CERTIFICATES AND
C1
TRANSFER

Each unit of
ownership is
called a share of
stock.
A stock certificate
serves as proof
that a stockholder
has purchased
shares.

When the stock is sold, the stockholder signs a transfer

endorsement on the back of the stock certificate.
McGraw-Hill/Irwin Slide 7
C2 BASICS OF CAPITAL STOCK

Total amount of stock that a

corporation’s charter authorizes it to sell.

Total amount of stock that has been

issued or sold to stockholders.
McGraw-Hill/Irwin Slide 8
C2 BASICS OF CAPITAL STOCK


Par value is an
Market price is the
arbitrary amount
amount that each
assigned to each
share of stock will
share of stock when
sell for in the market.
it is authorized.

Classes of Stock
 Par Value
 No-Par Value
 Stated Value
McGraw-Hill/Irwin Slide 9
P1 ISSUING PAR VALUE STOCK
Par Value Stock
On September 1, Matrix, Inc. issued 100,000
shares of $2 par value stock for $25 per share.
Let’s record this transaction.

Dr Cr
Sept. 1 Cash 2,500,000
Common Stock, $2 par value 200,000
Paid-in Capital in Excess
of Par Value, Common 2,300,000
Issued 100,000 shares of common stock.
McGraw-Hill/Irwin Slide 10
P1 ISSUING PAR VALUE STOCK

McGraw-Hill/Irwin Slide 11
 ISSUING STOCK FOR NONCASH
P1
ASSETS
Par Value Stock
On September 1, Matrix, Inc. issued 100,000
shares of $2 par value stock for land valued at
$2,500,000. Let’s record this transaction.

Dr Cr
Sept. 1 Land 2,500,000
Common Stock, $2 par value 200,000
Paid-in Capital in Excess 2,300,000
of Par Value, Common
Exchanged 100,000 common shares for land
McGraw-Hill/Irwin Slide 12
P2 CASH DIVIDENDS
Regular cash dividends provide a return to investors
and almost always affect the stock’s market value.

Corporation Dividends Stockholders

To pay a cash dividend the %o f Co rpo ra tio ns Pa ying Dive nds

corporation must have: 100%
75%
80%
1. A sufficient balance in 60%
retained earnings and 40%
22%
2. The cash necessary to 20%
0%
pay the dividend. Co mm o n Pre fe rre d

McGraw-Hill/Irwin Slide 13
 ACCOUNTING FOR CASH
P2
DIVIDENDS

Three important dates

e nds
id
Div

Date of Declaration Date of Record Date of Payment

Record liability No entry Record payment of
for dividend. required. cash to stockholders.

McGraw-Hill/Irwin Slide 14
 ACCOUNTING FOR CASH
P2
DIVIDENDS
On January 19, a $1 per share cash dividend is declared
on Dana, Inc.’s 10,000 common shares outstanding. The
dividend will be paid on March 19 to stockholders of
record on February 19.

e nds
id
Div
Date of Declaration
Record liability
for dividend.
Dr Cr
Jan. 19 Retained Earnings 10,000
Common Dividend Payable 10,000
Declared $1 per share cash dividend
McGraw-Hill/Irwin Slide 15
 ACCOUNTING FOR CASH
P2
DIVIDENDS
On January 19, a $1 per share cash dividend is declared
on Dana, Inc.’s 10,000 common shares outstanding. The
dividend will be paid on March 19 to stockholders of
record on February 19.
No entry required on February 19, the date of record.

Date of Payment
Record payment of
cash to stockholders.
Dr Cr
Mar. 19 Common Dividends Payable 10,000
Cash 10,000
Paid $1 per share cash dividend
McGraw-Hill/Irwin Slide 16
 DEFICITS AND CASH
P2
DIVIDENDS
A deficit is created when a company incurs
cumulative losses or pays dividends greater
than total profits earned in other years.

McGraw-Hill/Irwin Slide 17
P3 STOCK DIVIDENDS
A distribution of a corporation’s own shares to its stockholders
without receiving any payment in return.
Why a stock dividend?
 Can be used to keep the market price on the stock affordable.
 Can provide evidence of management’s confidence that
the company is doing well.
Small Stock Dividend
Distribution is  25% of the previously outstanding shares.
Large Stock Dividend
Distribution is > 25% of the previously outstanding shares.
100 shares
HotAir, Inc.
Common Stock
$1 par

McGraw-Hill/Irwin Slide 18
P3
RECORDING A SMALL STOCK
DIVIDEND
Quest has 100,000 shares of $1 par value stock outstanding. On
December 31, 2009, Quest declared a 2% stock dividend, when the stock
was selling for $10 per share. The stock will be distributed to stockholders
on January 20, 2010. Let’s make the December 31 entry.

Capitalize retained earnings for the market

value of the shares to be distributed.
(100,000 × 2% = 2,000 × $10 = $20,000)
2,000 × $1 par

Dr Cr
Dec. 31 Retained Earnings 20,000
Common Stock Dividend Distributable 2,000
Paid-In capital in excess
of Par Value 18,000
Declared a 2,000 share (2%) stock dividend
McGraw-Hill/Irwin Slide 19
P3

Before the
stock
dividend.

After the
stock
dividend.

McGraw-Hill/Irwin Slide 20
P3
RECORDING A LARGE STOCK
DIVIDEND
Router, Inc., has 50,000 shares of $1 par value stock
outstanding. On December 31, 2009, Router declared a 40%
stock dividend, when the stock was selling for $8 per share.
The stock will be distributed to stockholders on January 20,
2010. Let’s make the December 31 entry.

Capitalize retained earnings for the minimum amount required

by state law, usually par or stated value of the shares.
(50,000 × 40% = 20,000 shares × $1 par value = $20,000)

Dr Cr
Dec. 31 Retained Earnings 20,000
Common Stock Dividend Distributable 20,000
Declared a 20,000 share (40%) stock dividend
McGraw-Hill/Irwin Slide 21
P3 STOCK SPLITS
A distribution of additional shares of stock to
stockholders according to their percent ownership.

$10 par value

Common Stock Old

Shares
100 shares

$5 par value
New
Shares Common Stock
200 shares
McGraw-Hill/Irwin Slide 22
C3 PREFERRED STOCK
A separate class of stock, typically having
priority over common shares in . . .
 Dividend distributions
 Distribution of assets in case of liquidation

Usually has a stated Normally has no

dividend rate voting rights

McGraw-Hill/Irwin Slide 23
P4 PREFERRED STOCK
Cumulative vs. Noncumulative
Dividends in arrears must Undeclared dividends from
be paid before dividends current and prior years do
may be paid on common not have to be paid in
stock. (Normal case) future years.
Consider the following Stockholders’ Equity Section of
the Balance Sheet. The Board of Directors did not
declare or pay dividends in 2009. In 2010, the Board
declared and paid cash dividends of $42,000.

McGraw-Hill/Irwin Slide 24
 P4 PREFERRED STOCK

If Preferred Stock is Noncumulative: Preferred Common

Year 2009: No dividends paid. $ - $ -
Year 2010:
1. Pay 2010 preferred dividend. $ 9,000
2. Remainder goes to common. $ 33,000

If Preferred Stock is Cumulative: Preferred Common

Year 2009: No dividends paid. $ - $ -
Year 2010:
1. Pay 2009 preferred dividend in arrears. $ 9,000
2. Pay 2010 preferred dividend. 9,000
3. Remainder goes to common. $ 24,000
Totals $ 18,000 $ 24,000

McGraw-Hill/Irwin Slide 25
P4 PREFERRED STOCK
Participating vs. Nonparticipating
Dividends may exceed a Dividends are limited to a
stated amount once maximum amount each year.
common stockholders The maximum is usually the
receive a dividend equal to stated dividend rate.
the preferred stated rate. (Normal case)

Reasons for Issuing Preferred Stock

 To raise capital without sacrificing control
 To boost the return earned by common stockholders
through financial leverage
 To appeal to investors who may believe the common
stock is too risky or that the expected return on
common stock is too low
McGraw-Hill/Irwin Slide 26
P5 TREASURY STOCK
Treasury stock represents shares of a company’s own
stock that has been acquired. Corporations might acquire
its own stock to:
1.Use their shares to buy other companies.
2.Avoid a hostile takeover.
3.Reissue to employees as compensation.
4.Support the market price.

McGraw-Hill/Irwin Slide 27
P5 PURCHASING TREASURY STOCK

On May 8, Whitt, Inc. purchased 2,000 of its own

shares of stock in the open market for $4 per share.
Dr Cr
May 8 Treasury stock, common 8,000
Cash 8,000
Purchase 2,000 treasury shares
at $4 per share

Treasury stock is shown as a reduction in total

stockholders’ equity on the balance sheet.

McGraw-Hill/Irwin Slide 28
P5
SELLING TREASURY STOCK AT
COST
On June 30, Whitt sold 100 shares of
its treasury stock for $4 per share.

Dr Cr
June 30 Cash 400
Treasury stock, common 400
Sold 100 shares of treasury
for $4 per share

McGraw-Hill/Irwin Slide 29
P5
SELLING TREASURY STOCK
ABOVE COST
On July 19, Whitt, Inc. sold an additional 500
shares of its treasury stock for $8 per share.

Dr Cr
July 19 Cash 4,000
Treasury Stock, common 2,000
Paid-In Capital, Treasury Stock 2,000
Sold 500 treasury shares for $8 per share

McGraw-Hill/Irwin Slide 30
P5
SELLING TREASURY STOCK
BELOW COST

On August 27, Whitt sold an additional 400

shares of its treasury stock for $1.50 per share.

Dr Cr
Aug. 27 Cash 600
Paid-in Captial, Treasury Stock 1,000
Treasury Stock, Common 1,600
Sold 500 treasury shares for $1.50 per share

McGraw-Hill/Irwin Slide 31
C4
STATEMENT OF RETAINED
EARNINGS
Retained earnings is the total cumulative amount of
reported net income less any net losses and dividends
declared since the company started operating.

Restricted Retained Earnings

Legal Restriction
Most states restrict
the amount of
treasury stock
purchases to the
amount of retained
earnings.
Contractual Restriction
Loan agreements
can include
restrictions on paying
dividends below a
certain amount of
retained earnings.

McGraw-Hill/Irwin Slide 32
 APPROPRIATED RETAINED
C4
EARNINGS
A corporation’s directors can voluntarily limit
dividends because of a special need for cash
such as the purchase of new facilities.

McGraw-Hill/Irwin Slide 33
C4 PRIOR PERIOD ADJUSTMENTS
Prior period adjustments are correction of material
errors in past years’ financial statements that result in a
change in the beginning balance of retained earnings.

McGraw-Hill/Irwin Slide 34
 STATEMENT OF STOCKHOLDERS’
C4
EQUITY
Matrix, Inc.
Statement of Stockholders' Equity
For the Year Ended December 31, 2010

Common stock and

(In millions) capital in excess of par Retained
Shares Amount Earnings Total
Balance at January 1, 2010 821 $ 2,500 $ 9,500 $ 12,000
Stock sales 17 500 500
Stock repurchases and retirement (17) (260) (925) (1,185)
Cash dividends declared (150) (150)
Other, net 70 70
Net income 5,100 5,100
Balance at December 31, 2010 821 $ 2,740 $ 13,595 $ 16,335

This is a more inclusive statement than the statement of

retained earnings.
McGraw-Hill/Irwin Slide 35
C4 STOCK OPTIONS
The right to purchase common stock at a fixed price over a
specified period of time. As the stock’s price rises above
the fixed option price, the value of the option increases.

Market
Option price of
purchase stock $75
price $30 per share.
per share.

Options are given to key employees to motivate them to:

 focus on company performance,
 take a long-run perspective, and
 remain with the company.
McGraw-Hill/Irwin Slide 36
 END OF CHAPTER 13

McGraw-Hill/Irwin Slide 37