Chapter 12
Corporations: Organization,
Capital Stock Transactions,
and Dividends
Accounting, 21st Edition
Warren Reeve Fess

PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University

© Copyright 2004 South-Western, a division
of Thomson Learning. All rights reserved.
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Objectives
Objectives

1. Describe the nature of the corporate form of
After
After studying
studying this
this
organization.
you
chapter,
you should
should
2. List the twochapter,
main sources
of stockholders’
be
be able
able to:
to:
equity.
3. List the major sources of paid-in capital,
including the various classes of stock.
4. Journalize the entries for issuing stock.
5. Journalize the entries for treasury stock
transactions.


Objectives
Objectives
6. State the effect of stock splits on
corporate financial statements.
7. Journalize the entries for cash

dividends and stock dividends.
8. Describe and illustrate the reporting of
stockholders’ equity.
9. Compute and interpret the dividend
yield on common stock.


Organizational
Organizational Structure
Structure of
of aa Corporation
Corporation
Stockholders
(owners of corporation stock)
Board of Directors
(elected by stockholders)
Officers
(selected by board of directors)
Employees


Forming
Forming aa Corporation
Corporation
 First step 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.
 State grants a charter or articles of incorporation which formally
create the corporation.

 Management and board of directors prepare bylaws which are
operation rules and procedures.


Forming
Forming aa Corporation
Corporation
On
On January
January 5,
5, the
the firm
firm paid
paid the
the organization
organization
costs
costs of
of $8,500.
$8,500. This
This amount
amount includes
includes legal
legal
fees,
fees, taxes
taxes and
and licenses,
licenses, promotion
promotion costs,

costs, etc.
etc.
Jan. 5 Organization Costs
Cash
Paid cost of organizing the
corporation.

8 500 00
8 500 00


Stockholders’
Stockholders’ Equity
Equity
Assets

Liabilities
Stockholders’
Stockholders’
Equity
Equity
Stockholders’ Equity = Assets – Liabilities
Represents the stockholders’ share of the total assets.


Stockholders’
Stockholders’ Equity
Equity
Liabilities


There
are
There Assets
are two
two sources
sources
Stockholders’
Stockholders’
of
stockholders’
of stockholders’ Equity
Equity
equity.
equity.


Stockholders’
Stockholders’ Equity
Equity
Assets

Liabilities
Stockholders’
Stockholders’
Equity
Equity
1

Stockholders’ Equity:
Paid-in capital:

Common stock

$xxxxx

Retained earnings

xxxx

Total

$xxxxx

Stockholder
investments


Stockholders’
Stockholders’ Equity
Equity
Assets

Liabilities
Stockholders’
Stockholders’
Equity
Equity

Stockholders’ Equity:
Paid-in capital:
Common stock


$xxxxx

Retained earnings

xxxx

Total

$xxxxx

2
Reinvested
earnings


Sources
Sources of
of Paid-In
Paid-In Capital
Capital
Authorized
Issued
Outstanding

Number of Shares


Sources
Sources of

of Paid-In
Paid-In Capital
Capital
Major
Major Rights
Rights that
that
Accompany
Accompany Ownership
Ownership
of
of aa Share
Share of
of Stock
Stock
1. The right to vote in matters
concerning the corporation.
2. The right to share in
distribution of earnings.
3. The right to share in assets on
liquidation.


Classes
Classes of
of Stockholders
Stockholders
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.

Money
available
for
dividends

Preferred
Stockholders

Common
Stockholders


Classes
Classes of
of Stockholders
Stockholders
Common Stock—the basic ownership of stock with
rights to vote in election of directors, share in
distribution of earnings, and purchase additional
shares.
Preferred Stock—A class of stock with preferential
rights over common stock in payment of dividends
and company liquidation.


Nonparticipating
Nonparticipating Preferred
Preferred Stock

Stock
A nonparticipating preferred stock is limited to a
certain amount. Assume 1,000 shares of $4
nonparticipating preferred stock and 4,000 shares
of common stock and the following:
2005

Net income
Amount retained
Amount distributed

2006

2007

$20,000 $55,000 $62,000
10,000 20,000 40,000
$10,000 $35,000 $22,000


Nonparticipating
Nonparticipating Preferred
Preferred Stock
Stock
Amount distributed
Preferred dividend
(1,000 shares)
Common dividend
(4,000 shares)


$10,000 $35,000 $22,000
4,000

4,000

4,000

$6,000 $31,000 $18,000

Dividends per share:
Preferred
$ 4.00$ 4.00$ 4.00
Common
$ 1.50$ 7.75$ 4.50


Cumulative
Cumulative Preferred
Preferred Stock
Stock
So,
So, preferred
preferred
dividends
dividends are
are two
two
years
years in
in arrears.

arrears.
Assume 1,000 shares of $4
cumulative preferred stock
and 4,000 shares of common
stock. No dividends were
paid in 2005 and 2006.


Cumulative
Cumulative Preferred
Preferred Stock
Stock
On March 7, 2007, the board of directors
declares dividends of $22,000.


Cumulative
Cumulative Preferred
Preferred Stock
Stock
Preferred
Preferred Stock
Stock Dividends
Dividends

Dividends
DividendsPaid
Paid in
in 2007
2007

Total dividends paid,
$22,000

$4,000
2005

(In arrears)

$4,000
$4,000
2006

(In arrears)

$4,000
$4,000

$4,000

2007

Preferred
Stock

(Current dividend)

$10,000

Common
Stock



Other
Other Sources
Sources of
of Paid-in
Paid-in Capital
Capital
On April 20 the city of Moraine donated
land to Merrick Corporation as an
incentive to relocate its headquarters to
Moraine. The land was valued at
$500,000.

Apr. 20 Land

500 000 00

Donated Capital
Recorded land donated by the
city of Moraine.

500 000 00


Issuing
Issuing Stock
Stock
A corporation is authorized to issue 10,000
shares of preferred stock, $100 par, and

100,000 shares of common stock, $20 par.


Issuing
Issuing Stock
Stock
On
On April
April 1,
1, one-half
one-half of
of each
each class
class of
of
authorized
authorized stock
stock isis issued
issued at
at par
par for
for cash.
cash.
Apr. 1 Cash

1,500000 00

Preferred Stock

500 000 00


Common Stock

1,000000 00

Issued preferred stock and
common stock at par.


Issuing
Issuing Stock
Stock
Common
Common Stock
Stock and
and Preferred
Preferred Stock
Stock accounts
accounts are
are
controlling
controlling accounts.
accounts. A
A record
record of
of each
each
stockholders’
stockholders’ name,
name, address,

address, and
and number
number of
of shares
shares
isis kept
kept in
in aa stockholders’
stockholders’ subsidiary
subsidiary ledger.
ledger.


Issuing
Issuing Stock
Stock at
at aa Premium
Premium
On
On March
March 15,
15, Caldwell
Caldwell Company
Company issues
issues 2,000
2,000
shares
shares of
of $50
$50 par

par preferred
preferred stock
stock for
for cash
cash at
at $55.
$55.
Mar. 15 Cash

110 000 00

Preferred Stock

100 000 00

Paid-in Capital in Excess of Par-Preferred Stock
Issued 2,000 shares of $50 par
preferred stock at $55.

10 000 00