Chapter 11

Teacher Version

1. separate legal existence

2. ownership evidenced by shares of stock

3. ownership easily transferred through sale of stock

4. limited liability

5. owners elect Board of Directors to set policies and

select officers

6. separate taxable entity (double taxation)

7. earnings distributed in form of dividends

File an application of incorporation with the state

States grants charter (Articles of Incorporation) to create corporation

More than half of largest corporations incorporate in the state of Delaware

Examples: Caterpillar incorporated in Delaware; headquarters in Illinois

General Electric incorporated in NY; headquarters in Connecticut

Home Depot incorporated in Delaware; headquarters in Atlanta

Starbucks incorporated in Washington; headquarters in Seattle

Legal fees

taxes

State incorporation fees

License fees

Promotional costs

Recorded as organization expense as incurred

Borrow money= liability

Make a profit from business

shareholders investment= sale of stock to shareholders

2 sources: Paid-in capital which is funds invested by stockholders

Retained Earnings which is the net income and dividends to stockholders

Number issued to issue (sold to stockholders) is stated in charter

Stock in hands of stockholders is referred to as outstanding

Stock certificate samples

Right to vote in business matters

Right to share in distributions of earnings

Right to share in assets upon liquidation

Creditors have no claim against stockholders’ personal assets

Corporations are required to maintain an amount of paid-in capital or legal capital (stated value of the shares issued)

Dividends are not a liability of a corporation until declared by the board of directors

Corporations are not required to pay dividends

COMMON

Equal rights

Most common form of stock

PREFERRED First in line for dividends but not

guaranteed

Stated as $ or %:

$4 preferred, $50 par or 8% preferred, $50 par

Greater chance of receiving dividends than common

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.

Caldwell Company issues 2,000 shares of $50 par preferred stock

for cash at $55.

The three conditions a corporation must meet to pay a cash dividend are:

Sufficient retained earnings

Sufficient cash

Formal action by the board of directors

Announcement of dividend

Date of declaration

Date of record

Date of payment

On October 1, the declaration date, Hiber Corporation records the

following entry:

On November 10, the date of record, no entry is required since this

date merely determines which stockholders will receive the dividends.

On December 2, the date of payment, Hiber Corporation records

the payment of the dividends as follows:

On December 15, the board of directors of Hendrix Corporation declares a 5 percent stock dividend of 100,000 shares (2,000,000 shares × 5%) to be issued on January 10 to stockholders of record on December 31. The market price on the declaration date is $31 per share.

Record

declaration

of stock

On January 10, the stock dividend is distributed to stockholders by issuing 100,000 shares of common stock. The following entry records the issue of the stock:

Corporation issues and than reacquires To provide shares for resale to employees

To reissue as bonuses to employees

To support the market price of the stock

Corporation does not Pay dividends on treasury stock

Vote treasury stock

Recognize gains or losses if the treasury stock is reissued

Does not purchase its own stock as an investment

Earnings per common share (EPS), sometimes called basic earnings per share, is the net income per share of common stock outstanding during a period.

Earnings per share is computed as follows: