I.          Corporate Form of Organization—An entity created by law that is separate from its owners. Owners are called stockholders. A publicly held corporation offers its stock for public sale (organized stock market) whereas a privately held corporation does not.

A.  Characteristics of Corporations

Advantages:

1.   Separate legal entity—a corporation, through its agents (officers and managers), may conduct business affairs with the same rights, duties, and responsibilities of a person.

2.   Limited liability of stockholders—generally limited to investment.

3.   Transferable ownership rights—through stock sale.

4.   Continuous life¾perpetual life as long as it continues to be successful.

5.   Lack of mutual agency for stockholders—they do not have the power to bind the corporation to contracts.

6.   Ease of capital accumulation—the corporate form enables a corporation to accumulate large amounts of capital from the combined investments of many stockholders.

Disadvantages:

7.   Governmental regulation—must meet requirements of a state’s incorporation laws.

8.   Corporate taxation—corporate income is taxed; and when income is distributed to shareholders as dividends, it is taxed a second time as personal income (double taxation).

B.   Corporate Organization and Management

1.   Incorporation—a charter application must be filed with the state. Upon payment of fees and issuance of the charter the corporation is formed.

2.   Organizational expenses are the costs to organize a corporation (such as legal fees, promoters’ fees, and amounts paid to obtain a charter); these costs are expensed as incurred because it is difficult to determine the amount and timing of future benefits.

3.   Management of a corporation

a.   Stockholders have ultimate control through vote to elect board of directors.

b.   Board of directors has final managing authority, but it usually limits its actions to establishing broad policy.

c.   Day-to-day direction of corporate business is delegated to executive officers appointed by the board.

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C.     Stockholders of Corporations

1.   Rights of stockholders
Specific rights are granted by the charter and general rights by state laws. Common stockholders rights include right to:

a.   Vote at stockholders’ meeting.

b.       Sell or otherwise dispose of their stock.

c.       Purchase their proportional shares of any common stock later issued; this preemptive right protects stockholders’ proportionate interest in the corporation.

d.       Share in other common stockholders in any dividends.

e.       Share equally in any assets remaining after creditors are paid when, and if, the corporation is liquidated.

f.        Receive timely financial reports.

2.       Stock certificates and transfer—a stock certificate is sometimes received as proof of share ownership.

3.       Registrar and transfer agents—if stock is traded on a major exchange, the corporation must have:

a.   Registrar who keeps stockholder records and prepares official lists of stockholders for stockholders’ meetings and dividend payments.

b.   Transfer agent who assists purchases and sales of shares by receiving and issuing certificates as necessary.

D.  Basics of Capital Stock
Capital stock refers to any shares issued to obtain capital (owner financing).

1.       Authorized stock—the total amount of stock that charter authorizes for sale.

a.       Outstanding stock refers to issued stock held by stockholders.

b.       No formal journal entry is required for stock authorization; the number of shares authorized is disclosed in the financial statements..

2.   Selling (issuing) stock—can be sold directly or indirectly to stockholders

a.   To sell directly, the corporation advertises its stock issuance to potential buyers.

b.   To sell indirectly, a corporation pays a brokerage house (investment banker) to issue its stock.

c.   A brokerage house may underwrite issuance (buy the stock from the corporation and take all gains or losses from its resale).

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3.   Market value per share—the price at which a stock is bought or sold.

a.   Influenced by expected future earnings, dividends, growth, and other company and economic events.

b.   Current market value of previously issued shares does not impact that corporation's stockholders' equity accounts.

4.   Classes of stock

a.   Common—stock is called common stock when all classes have same rights and privileges.

b.   Additional classes—corporation is sometimes authorized to issue more than one class of stock.

5.   Par value stock—assigned a value per share by the corporation in its charter.

a.   Printed on the stock certificate.

b.   Establishes the minimum legal capital.

6.   No-par value stock—not assigned a value per share by the corporate charter.

7.   Stated value stock—no-par stock that is assigned a “stated” value per share by the directors; becomes the minimum legal capital per share.

8.   Stockholder’s Equity—has two parts

a.   Contributed (or paid-in) capital—the total amount of cash and other assets received by the corporation from its stockholders in exchange for stock.

b.   Retained earnings—the cumulative net income (and loss) retained by a corporation.

II.        Common Stock—Issuance of stock affects only contributed capital accounts, not retained earnings accounts.

Note: When the corporation issues par value stock, it can only credit the stock account for the par value of shares issued.

A.     Issuing Par Value Stock

1.   Entry to record issuance at par for cash—debit Cash, credit Common Stock (both for the amount received which is the total par value of the shares issued).

2.   Issuing par value stock at a premium

a.   A premium is an amount paid in excess of par by the purchasers of newly issued stock.

b.   Entry to record issuance of par value stock at a premium: debit Cash (for amount received or issue price), credit Common Stock (for par value), credit Contributed Capital in Excess of Par Value, Common Stock (for the amount of the premium).

3.   Issuing par value stock at a discount

a.   A discount occurs when stock corporation sells its stock for less than its par value.

b.   Entry to record issuance of par value stock at a discount: debit Cash (for amount received or issue price), debit Discount on Common Stock, a contra to the common stock account (for the amount of the discount), credit Common Stock (for par value).

B.   Issuing No-Par Value Stock

1.   When no-par stock is issued and is not assigned a stated value, the entire amount received becomes legal capital and is recorded as Common Stock.

2.   Entry to record issuance of no-par value stock: debit Cash, credit Common Stock (for the entire proceeds).

C.  Issuing Stock for Noncash Assets

1.       Issuing par value stock for other assets
Entry to record: debit the accounts relating to the asset(s) received (at market value(s) as of the date of the transaction), credit Common Stock, credit Contributed Capital in Excess of Par Value, Common Stock (for the amount of the premium, if any).

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III.       Preferred Stock—Has special rights that give it priority over common stock in one or more areas such as preference for receiving dividends and for the distribution of assets if the corporation is liquidated.  Usually does not have right to vote.

A.  Issuance of Preferred Stock
Usually has a par value; can be sold at a price different from par.

1.   Separate contributed capital accounts are used to record preferred stock.

2.   Preferred Stock account is used to record the par value of shares issued; Contributed Capital in Excess of Par Value, Preferred Stock is used to record any value received above the par value.

3.   Entry to record issuance of preferred stock: debit Cash, credit Preferred Stock account (for the par value of shares issued), credit Contributed Capital in Excess of Par Value, Preferred Stock (for the value received above the par value).

B.   Dividend Preference of Preferred Stock
Preferred stockholders are allocated their dividends before any dividends are allocated to common stockholders.

1.   Cumulative or noncumulative preferred stock

a.   Cumulative preferred stock has a right to be paid both current and all prior periods' unpaid dividends before any dividend is paid to common stockholders. These unpaid dividends are referred to as “dividends in arrears.”

b.   Noncumulative preferred stock has no right to prior periods' unpaid dividends if they were not declared.

c.   Full‑disclosure principle requires that the amount of preferred dividends in arrears be reported as of the balance sheet date, normally in a note to the financial statements.

C.   Convertible Preferred Stock

1.   Convertible preferred stock gives holders the option of exchanging their preferred shares into common shares at a specified rate.

2.   If a company’s common stock increases in value, the convertible preferred stockholders can share in this success by converting their stock into more valuable common stock.

IV.       Dividends

A.  Cash Dividends
Reduce in equal amounts both cash and the retained earnings component of stockholders' equity.

1.       Generally a cash dividend requires:

a.   Retained earnings (requirement of many states).

b.   Sufficient cash.

c.   Decision by the board of directors.

2.   Dividend dates—date of

a.   Declaration—date the directors vote to pay a dividend (legal liability created).

b.   Record—date specified for identifying stockholders (owners on this date will receive dividend).

c.   Distribution—date stockholders receive payment.

3.   Cash Dividend Entries

a.   Entry at declaration date: debit Retained Earnings, credit Dividends Payable.

b.   Entry at distribution date: debit Dividends Payable, credit Cash

V.         Treasury Stock—A corporation acquires their own shares for several reasons such as to acquire another company, or to avoid a hostile takeover, or to use for employee compensation.

A.  Purchasing Treasury Stock—reduces the corporation's assets and stockholders' equity by equal amounts.

1.   Debit Treasury Stock (contra-equity) and credit Cash for full cost. (reduces total assets and total equity).

2.   Treasury Stock is a contra equity account; the equity reduction is reported by deducting the cost of treasury stock in the equity section of the balance sheet.

3.   The resulting restriction on retained earnings must be disclosed.

B.   Reissuing treasury stock

1.   Entry to record sale of treasury stock at cost: debit Cash, credit Treasury Stock, Common.

2.   Entry to record sale of treasury stock above cost: debit Cash, credit Treasury Stock, common, credit Contributed Capital, Treasury Stock (for the amount received in excess of cost).

3.   When sold below cost, entry depends on whether the Contributed Capital, Treasury Stock account has a balance.

i.    If the Contributed Capital, Treasury Stock account has no balance, the excess of cost over sales price is debited to Retained Earnings.

ii.    If the Contributed Capital, Treasury Stock account has a balance, then it is debited for the excess of the cost over the sales price, not to exceed the balance in the account.