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Learning Objective

1. Explain the features of a corporation

10-1

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FEATURES OF A CORPORATION
Advantages
1. Can raise more capital
than a proprietorship or
partnership can

1. Separation of
ownership and
management

2. Continuous life

2. Double taxation of
distributed profits

3. Ease of transferring
ownership
4. Limited liability of
stockholders
10-2

Disadvantages

3. Government regulation
Exhibit 10-1 | Advantages
and Disadvantages of a
Corporation

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LO 1

Organizing a Corporation

Corporate organizers (incorporators) obtain a charter


from the state

10-3

Charter includes authorization to issue shares of


stock

Incorporators:

Pay fees

Sign the charter

File documents with the state

Agree to set of bylaws

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LO 1

Exhibit 10-2 |
Authority
Structure of a
Corporation

10-4
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Stockholders Rights
Right to voting on matters that come
before the stockholders

Vote
Dividends

Right to receive a proportionate part of


any dividend

Liquidation

Right to receive a proportionate share of


any assets remaining after corporation
pays its liabilities in liquidation

Preemption

Right to maintain ones proportionate


ownership in the corporation

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LO 1

Stockholders Equity
Paid-in Capital

Also called contributed


capital

Amount of equity
stockholders have
contributed

10-6

Retained Earnings

Increased by earnings
through profitable
operations

Reduced by dividends
declared

Includes stock accounts


and any additional paidin capital

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LO 1

Stockholders Equity

10-7

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Exhibit 10-3 | The Home


Depot, Inc. Stock Certificate

LO 1

Classes of Stock
Common

Basic form of stock

Has four basic rights

Receive dividends first

Shareholders benefit
most if corporation
succeeds

Receive assets first in


liquidation

10-8

Preferred

Advantages

Shareholders earn a
fixed dividend

Few corporations issue

Take more risk

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LO 1

Exhibit 10-4 |
Percentage of
Corporations Issuing
Preferred Stock

Classes
of Stock

Exhibit 10-5 | Comparison of


Common Stock, Preferred
Stock, and Long-Term Debt

10-9

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LO 1

Par Value and No-Par

Arbitrary amount assigned to share of stock

Usually set low to avoid legal issues

No-par stock

10-10

Most states do not allow companies to issue stock


below par

May have a stated value

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LO 1

Learning Objective
2. Account for the issuance of stock

10-11

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ACCOUNT FOR THE ISSUANCE OF STOCK


Common Stock
Illustration: Home Depot needs to raise $100 million through
issuance of stock. Suppose Home Depots common stock had
carried a par value equal to its issuance price of $10 per share. The
entry for issuance of 10 million shares of stock at par would be
Account
Jan 8

Cash (10,000,000 x $10)

Debit

Credit

100,000,000

Common Stock

100,000,000

To issue common stock

10-12

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LO 2

Common Stock Above Par


Illustration: Home Depot needs to raise $100 million through
issuance of stock. Suppose Home Depots common stock had a
par value of $0.05. The entry for issuance of 10 million shares of
stock at $10 per share would be:
Account
Jan 8

Cash (10,000,000 x $10)

Debit

Credit

100,000,000

Common Stock
Paid-in Capital

500,000
99,500,000

To issue common stock

Common stock = 10,000,000 $0.05 = $500,000


10-13

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LO 2

Common Stock Above Par


Illustration: Stockholders Equity section of The Home Depot,
Inc.s Balance Sheet might appear as follows (figures assumed):
Stockholders Equity
Common stock, $.05 par, 10 billion shares
authorized, 10 million shares issued and outstanding

500,000
99,500,000

Paid-in Capital
Total paid-in capital
Retained earnings
Total stockholders equity

10-14

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100,000,000
500,000,000
$600,000,000

LO 2

No-Par Common Stock


Illustration: Apple, Inc., issues 939 million shares of no-par
common stock for $16,422 million. Apples stock issuance entry is
(in millions):
Account
Aug 14 Cash

Debit

Credit

16,422

Common Stock

16,422

To issue no-par common stock

10-15

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LO 2

No-Par Common Stock


Illustration: Apple, Inc., reports stockholders equity on its balance
sheet as follows (in millions):
Stockholders Equity
(in millions)
Common stock, no par, 1,800 shares
authorized, 939 shares issued and outstanding
Retained earnings
Accumulated other comprehensive income
Total stockholders equity

10-16
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$ 16,422
101,289
499
$ 118,210

LO 2

Common Stock Issued for Assets Other


Than Cash
Illustration: On November 12, Kahn Corporation issued 15,000
shares of its $1 par common stock for equipment with a market
value of $4,000 and a building with a market value of $120,000.
Account
Nov 12 Equipment
Building
Common Stock (15,000 x $1)
Paid-in Capital in Excess of Par-Common

Debit

Credit

4,000
120,000
15,000
109,000

($124,000 - $15,000)
10-17

To issue common stock


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LO 2

Common Stock Issued for Services


Illustration: Kahn Corporation engages an attorney. The attorney
bills the corporation $25,000 for services and agrees to accept
2,500 shares of $1 par common stock, rather than cash, in
settlement of the fee. The fair market value of the stock is $10 per
share. The journal entry to record the transaction is
Account
Legal Expense
Common Stock (2,500 x $1)
Paid-in Capital in Excess of Par-Common

Debit

Credit

25,000
2,500
22,500

($25,000 - $2,500)
To issue common stock
10-18

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LO 2

Preferred Stock

Follows same pattern as accounting for common


stock

May have separate accounts for paid-in capital in


excess of par for preferred and common

Can be issued with conversion feature

10-19

Allows preferred shareholders to exchange preferred


shares for common

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LO 2

Preferred Stock
Illustration: Convertible preferred stock $1 par, 50,000 shares
issued at par value
Account
2014

Cash

Debit

Credit

50,000

Convertible Preferred Stock

50,000

Issue convertible preferred stock

10-20

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LO 2

Preferred Stock
Illustration: Converted preferred stock to common stock at the
rate of 6.25 to 1 (8,000 shares of $1 par-value common stock
issued in exchange for 50,000 shares of preferred stock).
Account
2014

Convertible Preferred Stock


Common Stock
Paid-in Capital in Excess of Par-Common

Debit

Credit

50,000
8,000
42,000

Convert convertible preferred stock into


common stock

10-21

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LO 2

Authorized, Issued, and Outstanding Stock


Authorized

Maximum number of shares the


company can issue under its charter

Issued

Number of shares the company has


issued to its stockholders

Outstanding

10-22

Number of shares that stockholders


own (number of shares in the hands of
stockholders)

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LO 2

Learning Objective
3. Show how treasury stock affects a company

10-23

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SHOW HOW TREASURY STOCK AFFECTS A


COMPANY

10-24

Issued shares reacquired by the company

Reasons:

Make shares available for employee stock purchase


plans

Plan to buy low and sell high

Avoid takeover

Increase earnings per share

Use in share repurchase program

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LO 3

How Is Treasury Stock Recorded?

Recorded at cost

Not par value

Classified as a contra-stockholders equity account

Debit balance

Illustration: The following entry records the repurchase of 74


million shares for $4 billion.
Account
2012

Treasury Stock

Debit
4,000,000,000

Cash
10-25

Credit

4,000,000,000
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LO 3

How Is Treasury Stock Recorded?


The Home Depot, Inc.
Stockholders Equity
January 29, 2012
(in millions)
Common stock

87

Paid-in Capital

6,966

Retained earnings
Accumulated other comprehensive income
Treasury stock (196,000,000 shares)
Total stockholders equity

10-26

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17,246
293
(6,694)
$ 17,898

LO 3

Retirement of Treasury Stock

10-27

Cancel stock certificates

Stock cannot be reissued

Once shares are repurchased, neither total assets


nor total liabilities are affected

Memorandum entry made decreasing number of


shares issued in stockholders equity

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LO 3

Resale of Treasury Stock

10-28

Increases assets and equity

No gain or loss on transactions involving treasury


stock

Amounts received on resale in excess of amounts


originally paid for treasury stock are recorded as
Paid-in Capital from Treasury Stock Transaction

Amounts received from resale of treasury stock less


than amounts originally paid are debited to Paid-in
Capital from Treasury Stock Transactions to extent of
that balance, and after that, to Retained Earnings
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LO 3

Resale of Treasury Stock


Illustration: On July 22, 2014, Home Depot resold a million shares
of treasury stock for $55 per share. Assuming that the average cost
of treasury shares is $54.05, the journal entry to record the resale
of treasury shares would have been as follows:
2014

Account

Jul 22 Cash

Debit

Credit

55,000,000

Treasury Stock
Paid-in Capital from Treasury Stock
Transactions

54,050,000
950,000

Sold treasury stock

Cost of shares sold = 1,000,000 shares $54.05 = $54,050,000


10-29

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LO 3

Illustration
Illustration: At December 31, 2014, Hartnett Corporation reported the
stockholders equity as follows (in millions):
Common stock $1.50 par value per share,
2,400 million shares issued

$ 3,600

Paid-in capital in excess of par value--Common

7,200

Retained earnings

1,490

Treasury stock, at cost


Total stockholders equity

(85)
$12,205

Hartnetts 2015 transactions included


a. Issuance of 16 million shares of common stock for $10.00 per share
b. Purchase of 6 million shares of treasury stock for $100 million
c. Sold 3 million of the treasury shares purchased in part b for $70
million
10-30

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LO 3

Illustration
Illustration: Journalize the transaction to record the issuance of 16
million shares of common stock for $10.00 per share.
Account
Cash (16 million x $10)

10-31

Debit

Credit

160,000,000

Common stock (16 million x $1.50)

24,000,000

Paid-in Capital in Excess of Par


Common

136,000,000

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LO 3

Illustration
Illustration: Journalize the transactions to record the purchase of 6
million shares of treasury stock for $100 million and the sale of 3 million
of the treasury shares purchased in part b for $70 million.
Account
Treasury stock

Debit

Credit

100,000,000

Cash

100,000,000

Cash

70,000,000

Treasury stock (3 million x $16.67)

50,000,000

Paid-in Capital from Treasury Stock

20,000,000

Treasury stock cost per share = $100 million 6 million shares = $16.67
10-32

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LO 3

Issuing Stock for Employee Compensation


Illustration: Home Depot issued 21 million new (not treasury)
shares in conjunction with an employee stock compensation plan.
The entry the company made was
Account
Compensation Expense
Common Stock
Paid-in Capital

Debit

Credit

679,000,000
1,000,000
678,000,000

Record stock-based compensation

10-33

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LO 3

Stockholders Equity on Balance Sheet


The Home Depot, Inc.
Stockholders Equity
February 3, 2013
(in millions)
Common stock

88

Paid-in Capital

7,948

Retained earnings
Accumulated other comprehensive income
Treasury stock (at cost) 270 million shares
Total stockholders equity

10-34

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20,038
397
(10,694)
$ 17,777

LO 3

Learning Objective
4. Account for retained earnings, dividends, and
splits

10-35

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ACCOUNT FOR RETAINED EARNINGS,


DIVIDENDS, AND SPLITS
Retained Earnings

10-36

Net income

Less net losses

Less declared dividends

Accumulated over
corporations lifetime

Credit
balance

Lifetime
earnings

Debit
balance

Lifetime
earnings
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>

Lifetime losses
& dividends

<

Lifetime losses
& dividends
LO 4

Should the Company Declare and Pay


Cash Dividends?
Dividends

10-37

Distribution by a corporation to its stockholders

Usually based on earnings

Usually take one of three forms:

Cash

Stock

Noncash assets

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LO 4

Cash Dividends

10-38

Company must have both:

Enough Retained Earnings to declare the dividend

Enough Cash to pay the dividend

Board of directors has authority to declare a dividend

Company not obligated to pay dividend until declared

Three relevant dates:

Declaration date

Date of record (no entry)

Payment date
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LO 4

Cash Dividends

Declaration Date

Illustration: On June 19, the board of directors declares a $50,000


cash dividend. The company records the dividend as follows:

Account
Jun 19 Retained Earnings
Dividends Payable

Debit

Credit

50,000
50,000

Declared a cash dividend

10-39

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LO 4

Cash Dividends

Payment Date

Illustration: On July 10, the company paid the dividend declared


on June 19. The entry to record the payment is as follows:

Account
Jul 10

Dividends Payable
Cash

Debit

Credit

50,000
50,000

Paid cash dividend

10-40

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LO 4

Analyzing the Stockholders Equity


Accounts
Retained Earnings

Dividends

1,743

17,246

Beg balance

4,535

Net income

20,038

10-41

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End. balance

LO 4

Illustration
Illustration: Hartnett Corporation reported stockholders equity as
follows (in millions):
Common stock $1.50 par value per share,
2,416 million shares issued

$ 3,624

Paid-in capital in excess of par value--Common

7,336

Retained earnings

1,490

Treasury stock, at cost


Paid-in capital from treasury stock
Total stockholders equity

(135)
80
$12,315

Journalize the transactions to record the declaration and payment of


cash dividends of $32 million.

10-42

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LO 4

Illustration
Illustration: Journalize the transactions to record the declaration and
payment of cash dividends of $32 million.
Account
Retained Earnings

Debit
32,000,000

Dividends Payable

Dividends Payable

32,000,000

32,000,000

Cash

10-43

Credit

32,000,000

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LO 4

Dividends on Preferred Stock

Paid dividends before common stockholders

Stated as a percent of par value or a dollar amount per


share

May be cumulative

Passed dividends are owed to preferred shareholders

10-44

In arrears

Almost debt

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LO 4

Dividends on Preferred Stock


Illustration: Assume that the preferred stock of Avant Garde, Inc., is
cumulative. Avant Garde passed the preferred dividend of $150,000 in
2013. Before paying dividends to common in 2014, Avant Garde must
first pay preferred dividends of $150,000 for both 2013 and 2014a
total of $300,000. On September 6, 2014, Avant Garde declares a
$500,000 dividend. The entry to record the declaration is as follows:

Account
Sep 6

Retained Earnings

Debit

Credit

500,000

Dividends Payable, Preferred

300,000

Dividends Payable, Common

200,000

* $150,000 x 2 = $300,000
10-45

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LO 4

Illustration
Illustration: Arizona Manufacturing, Inc., reported the following at
December 31, 2014 and December 31, 2015:
Stockholders Equity
Preferred stock, cumulative, $1.00 par, 6%, 90,000 shares
issued
Common stock, $0.30 par, 9,130,000 shares issued

$ 90,000
1,490

Arizona Manufacturing has paid all preferred dividends through 2011.


Requirements
1. Compute the total amounts of dividends to both preferred and
common for 2014 and 2015 if total dividends are $90,000 in 2014
and $270,000 in 2015.
10-46

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LO 4

Illustration
Illustration: Total dividends are $90,000 in 2014 and $270,000 in 2015.
Preferred dividend = $1.00 x 6% x 90,000 shares = $5,400
Preferred

Common

2014 Dividends = $90,000


Dividends in arrears (2 years x $5,400)
Current year

$10,800
5,400
16,200

Remainder to common

$73,800

2015 Dividends = $270,000


Current year
10-47

5,400

Advance
slide in presentation mode to reveal answers 264,600
Remainder
to common
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LO 4

Stock Dividends

Proportional distribution of stock to shareholders

Increase stock account and decrease Retained


Earnings

10-48

Total equity is unchanged

Reasons stock dividends are distributed

Continue dividends, but conserve cash

Reduce market price of shares

Size of stock dividend

25% or less, recorded at market value

Greater than 25%, recorded at par value


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LO 4

Stock Splits

10-49

Increase in shares with a proportionate reduction in par


value

Decreases market price of shares

No accounts affected

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LO 4

Summary of the Effects of Stock


Transactions on Assets, Liabilities, and
Stockholders Equity
Exhibit 10-7 | Effects of Stock Transactions

10-50

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LO 4

Learning Objective
5. Use stock values in decision making

10-51

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USE STOCK VALUES IN DECISION MAKING

Market, Redemption, Liquidation, and


Book Value

Stocks market value, or market capitalization

10-52

Market price multiplied by number of shares


outstanding

Overall market assessment of the worth of a share of


common stock is reflected in the price-earnings ratio

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LO 5

Market, Redemption, Liquidation, and


Book Value

10-53

Redeemable preferred stock requires company to


redeem stock at a set price

Liquidation value is amount that a company must pay


a preferred stockholder in the event the company goes
out of business

Book value per share is amount of common


stockholders equity on companys books for each share
of its stock

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LO 5

ROE: Relating Profitability to


Stockholder Investment
DuPont Analysis provides a way to analyze various elements
of profitability, as shown in the following diagram:

* minus preferred dividends

10-54

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LO 5

Learning Objective
6. Report stockholders equity transactions in the
financial statements

10-55

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REPORT STOCKHOLDERS EQUITY


TRANSACTIONS

Statement of Cash Flows


Financing transactions that affect both cash and equity fall
into three main categories:
Issuance of stock
Treasury stock
Dividends

10-56

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LO 6

Exhibit
10-9

10-57
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A Detailed Stockholders Equity Section


Real-World Format
Stockholders Equity
Preferred stock, 8%, $10 par, 30,000 shares authorized,
issued, and outstanding

$ 330,000

Common stock, $1 par, 100,000 shares authorized,


60,000 shares issued, 58,600 shares outstanding
Additional paid-in capital

2,150,000

Retained earnings

1,500,000

Less treasury stock, common (1,400 shares at cost)

(40,000)

Accumulated other comprehensive income

200,000

Total stockholders equity

10-58

60,000

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$4,200,000

LO 6

Copyright
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