I. Characteristics of a Corporation (Publicly held (closely held))
* Separate legal existence;
* Limited liability of stockholders; limited to investment
* Transferable ownership rights;
* Ability to acquire capital;
* Continuous life;
* Corporation management:
* Voting rights
* Profit sharing
* Preemptive right
* Residual claim
Board of Directors
Board of Directors
. other vps
. other vps
* Government regulations; file application with state government-> corportate charter by-law
* Additional taxes. Double taxation
II. Stock Issue
1. Basics of Stock Issue:
(1) Authorized Stock: The maximum amount of stock that a corporation is authorized to sell by corporate charter.
(2) Outstanding Stock: Capital stock that has been issued and is being held by stockholders. Legal capital= # of issued shares x par value per share
(3) Par Value Stock: Capital stock that has been assigned an arbitrary value per share in the corporate charter.
(4) No-par value Stock: Capital stock that has not been assigned a value in the corporate charter.
(5) Stated Value of No-par value Stock: Value per share assigned by the board of directors to no-par value stock.
(6) Paid-in Capital: Amount paid to corporation by stockholders for shares of ownership.
(7) Retained Earnings: Earned capital held for future use in the business.
2. Accounting for Common Stock Issues:
(1) Issuing Stock at Par
On March 1, 2002, XYZ Company issued 10,000 shares of $10 par value common stock at par.
(2) Issuing Stock above Par
On June 10, XYZ Company issued 5,000 shares of $10 par value common stock at $12 per share. Cash 60,000(=5,000x12)
Additional paid in capital14,000
(Paid in capital in excess of par)
What if the common stock issued on June 10 is no par stock with a stated value of $10? Cash60,000
Additional Paid in capital10,000
3. Treasury Stock:
* A corporation’s own stock that has been issued, fully paid for, and reacquired by the corporation but not retired. * Issued but not outstanding
(1) Corporations acquire treasury stock to …
* reissue shares to employees under bonus and stock compensation plans; * increase trading of company’s stock in securities market to enhance market value; * reduce number of shares outstanding , and therefore increase earnings per share (EPS); * prevent a hostile takeover.
(2) Purchasing Treasury Stock:
* Cost method: Treasury stock is increased by the amount paid to reacquire the shares, and is decreased by the same amount when the shares are later sold.
On October 15, 2002, XYZ Company acquired 2,000 shares of the stock issued on June 10 in Example 2 at $9 per share.
On the balance sheet:
Paid in capital
Common stock (par)
Additional paid in capital
Less: Treasury stock (a contra equity account)
* Effect of purchasing treasury stock on common stock:
* Effect of purchasing treasury stock on stockholders’ equity:
III. Preferred Stock
* Preferred stock has contractual provisions that give it preferences over common stock in dividends and assets in the event of liquidation.
* Preferred stockholders do not have voting rights.
On November 5, 2002, XYZ Company issued 5,000 shares of $10 par value preferred stock for $13 per share. Cash65,000
Additional Paid in capital15,000
1. Dividend Preference
* Preferred stockholders have the right to share in the distribution of corporate...