Bus 106
ODonnell
CHAPTER 13 - CORPORATIONS A corporation differs from sole proprietorships and partnerships in that the owner(s) personal assets are protected from claims by the creditors of the corporation, and that ownership interest is e idenced by shares of stoc!" #he same four transactions that chan$ed the net worth of a sole proprietorship or partnership will be responsible for the chan$e in the net worth of a corporation" #hese are% 1" (" *" ," &n estments by the owner(s) (&ssuance of new 'hares) )ithdrawal by the owner(s) (&ssuance of di idends) +et &ncome +et -oss
#hese four transactions, formerly held in the capital account(s) will now be included in the stoc!holder.s e/uity section of the balance sheet" Our accountin$ e/uation is now% Assets 0 -iabilities 1 'toc!holder.s 2/uity 3aid4in 5apital (&n estments by 'toc!holders) 6etained 2arnin$s (+et &ncome 7 +et -osses 7 Di idends) Paid-in Capital Transactions - Investments by O ners! " " 8 8 5ontributed assets come on the boo!s at #air $ar%et &al'e #he common 'toc! account is always credited for an amount e/ual to% #he number of new shares issued multiplied by the par (or stated) alue per share" 3aid in 5apital in e9cess of par is credited for an amount e/ual to the difference between the fair mar!et alue of the assets recei ed and the par alue of the shares issued" A()A*S SE+RE+ATE PAR #RO$ THE A$O,NT IN E-CESS O# PAR
.o'rnal Entries/ Assets : ;air <ar!et =alue 5ommon 'toc! 3aid in 5apital in e9cess of par : 3ar =alue of 'hares &ssued : Difference
Retained Earnin0s Transactions 6etained 2arnin$s represents the cumulati e profitability of the corporation that has not yet been paid out in the form of di idends" 6etained 2arnin$s +et -osses Di idends +et &ncome +ormal 2ndin$
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Bus 106
ODonnell
#62A'>6? '#O5@ 'hares of stoc! which ha e been purchased bac! from the open mar!et are referred to as treasury shares" #his reduction in the number of shares accomplishes some of the followin$ $oals% 8 Bolsters the mar!et price by reducin$ the supply 8 'atisfies obli$ations under stoc! option plans without chan$in$ the total number of shares in the open mar!et 8 6educes the shares a ailable in the e ent of a hostile ta!eo er bid 8 'imply an opportunity to ta!e ad anta$e of an under alued stoc! price" #he effect of the purchase of these shares on the accountin$ e/uation is% A''2#' 0 D2562A'2 1) -&AB&-&#&2' 1 '#O5@AO-D26'. 2B>&#? +O 2;;25# D2562A'2
#he Cournal entry to record the purchase of these shares is%
D2B&# #62A'>6? '#O5@ for the D of shares E the purchase price per share 562D&# 5A'A for the same amount #he #62A'>6? '#O5@ account has a normal debit balance, as its purpose is to reduce stoc!holders. e/uity" &ts balance always represents the number of shares still held in treasury at the purchase price per share" () As the shares are reissued to the mar!et, the effect on the accountin$ e/uation is% A''2#' 0 &+562A'2 -&AB&-&#&2' 1 '#O5@AO-D26'. 2B>&#? +O 2;;25# &+562A'2
#he Cournal entry to record the re4issuance is% D2B&# 5A'A for the D of shares reissued E the sellin$ price per4 share 562D&# #62A'>6? '#O5@ for the D of shares reissued 9 the cost per share 562D&# 3A&D &+ 5A3&#A- ;6O< #62A'>6? '#O5@ #6A+'A5#&O+' for the FprofitF on the reissuance ?ou may not affect the income statement by wheelin$ and dealin$ in your own shares" (#he '25 $ets ery crabby") #herefore, the entire transaction remains within stoc!holders. e/uity" ?ou and & will thin! of this as a FprofitF or FlossF on the treasury shares, but don.t let the '25 hear you say it" 3A&D &+ 5A3&#A- ;6O< #62A'>6? '#O5@ #6A+'A5#&O+' is a stoc!holder.s e/uity account" &t is credited whene er there is a FprofitF on the reissuance" &t can be debited when there is a FlossF on the reissuance, but it can ne er ha e an endin$ debit balance"4 Once the balance in 3aid in 5apital from #reasury 'toc! #ransactions has been e9hausted, any further FlossesF are debited to 6etained 2arnin$s,
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Bus 106 E1ample o2 Treas'ry Stoc% Transactions/
ODonnell
Common Stock $10 par $ 00!000
PIC-excess Common Stock $ "00!000
PIC from Treas Stk $"!000
Retained Earnings $ #$0!000
Treasury Stock $30 Cost
Ass'me t3at t3e Corporation 3as t3e 2ollo in0 E4'ity 5alances/ T3e Corporation p'rc3ases 6!777 s3ares o2 its o n 817 par common stoc% 2or 837 per s3are/ Treas'ry Stoc% 837 Cost 8197!777
Common Stock $10 par $ 00!000
PIC-excess Common Stock $ "00!000
PIC from Treas Stk $"!000
Retained Earnings $ #$0!000
Treasury Stock $30 Cost $1$0!000
Cas3
8197!777
T3e Corporation reiss'es 9!:77 treas'ry s3ares 2or 89; per s3are/ Cas3 8<9!:77 Paid-in Capital 2rom Treas 8 9!:77 Treas'ry Stoc% 837 Cost 8<:!777 T3e Corporation reiss'es remainin0 1!:77 treas'ry s3ares 2or 897 per s3are/ Cas3 837!777 Paid-in Capital 2rom Treas 8 1!:77
Common Stock $10 par $ 00!000 PIC-excess Common Stock $ "00!000 $$!%00 $1!%00 $"%!000 PIC from Treas Stk $"!000 Retained Earnings $ #$0!000 Treasury Stock $30 Cost $1$0!000 $&%!000
Retained Earnin0s 813!:77 Treas'ry Stoc% 837 Cost
86:!777
Common Stock $10 par $ 00!000
PIC-excess Common Stock $ "00!000
PIC from Treas Stk $1!%00 $1!%00 $0
Retained Earnings $ #$0!000 $13!%00 $#0'!%00
Treasury Stock $30 Cost $"%!000 $"%!000 $0
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Bus 106
ODonnell
RETAINE= EARNIN+S
#he 62#A&+2D 2A6+&+G' section of stoc!holders e/uity holds the followin$ e/uity transactions% 8 +et &ncome 8 +et -osses 8 Di idends Net Income #he Cournal entry to record net income is% D6 &+5O<2 '><<A6? 56 62#A&+2D 2A6+&+G' Net Loss #he Cournal entry to record net loss is% D6 62#A&+2D 2A6+&+G' 56 &+5O<2 '><<A6? Dividends #here are two maCor types of di idends% 1" 5ash Di idends 4 end result is a 56 to 5ash (" 'toc! Di idends 4 end result is a 56 to 5ommon 'toc! Cash Dividends - Order of Distribution of dividends 1> (" *" 5umulati e 3referred 'hareholders recei e any di idends in arrears 3referred 'hareholders recei e their current di idend (e9pressed as a H of par) 5ommon 'hareholders recei e the remainder (assumin$ the preferred stoc! is non4 participatin$)
.O,RNA( ENTRIES #OR Cas3 =ividends ? ,ltimately credit CASH@ DA#2 O;% D25-A6A#&O+ 625O6D &''>A+52 D6 6etained 2arnin$s 56 D&=&D2+D' 3A?AB-2 +O 2+#6? D6 D&=&D2+D' 3A?AB-2 56 CASH
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Bus 106
ODonnell
STOCA =I&I=EN= Stoc% =ividends )hen the Board of Directors declares a stoc! di idend, no liability is created, as it will not re/uire the sacrifice of assets" 'toc! Di idends are e9pressed as a percenta$e" A 10H stoc! di idend means that the board will increase the number of shares outstandin$ by 10H" A small stoc! di idend will not affect the supply of shares on the open mar!et dramatically, and the mar!et price per share will remain fairly constant" #he small stoc! di idend will be alued at mar!et" &f the board declares a lar$e stoc! di idend (I(04(JH), the mar!et price of the stoc! will not hold" #herefore, the di idend is alued at par" TO CALCULATE THE $ VALUE OF A STOCK DIVIDEND: 1" (" *" ," 5A-5>-A#2 #A2 +><B26 O; 'AA62' 5>662+#-? O>#'#A+D&+G" Di ide the balance in the common stoc! account by the par alue per share" 5A-5>-A#2 #A2 +><B26 O; +2) 'AA62' #O B2 &''>2D" <ultiply the number of shares outstandin$ (from 1 abo e) by the percenta$e of the stoc! di idend" D2#26<&+2 #A2 36O326 =A->2 326 'AA62" 'mall stoc! di idends are alued at mar!et" -ar$e stoc! di idends are alued at par" D2B&# #A2 D&=&D2+D' A55O>+# for the number of new shares (D( abo e) multiplied by the proper alue per share (D* abo e)" 562D&# #A2 '#O5@ D&=&D2+D' D&'#6&B>#AB-2 A55O>+# for the par alue of the number of new shares and 562D&# #A2 3A&D &+ 5A3&#A&+ 2K52'' O; 3A6 O+ 5O<<O+ '#O5@ A55O>+# for the difference"
.o'rnal Entries 2or Stoc% =ividends ? ,ltimately credit common stoc%@ Dr 6etained 2arnin$s : D +ew 'hares K (<!t Or 3ar) 5r 'toc! Di idends Distributable : D +ew 'hares K 3ar 5r 5ontributed 5apital &n 29cess Of 3ar : 29cess ('mall 't! Di idend Only) +o 2ntry Dr 'toc! Di idends Distributable 5r Common Stoc% : 3ar Of +ew 'hares : 3ar Of +ew 'hares
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