Topic 11 - Accounting For Corporations

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Chapter

11

Accounting for Corporations 100 Shares

Corporations? $1 par value

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Corporate Corporate Form Form of of Organization Organization An An entity entity created created by by law. law. Existence Existence is is separate separate from from owners. owners.

Ownership can be

Has Has rights rights and and privileges. privileges.

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Privately Held

Publicly Held © The McGraw-Hill Companies, Inc., 2007

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Characteristics Characteristics of of Corporations Corporations Advantages Advantages  Separate Separate Legal Legal Entity Entity

 Limited Limited Liability Liability of of Shareholders Shareholders  Transferable Transferable Ownership Ownership Rights Rights  Continuous Continuous Life Life  Shareholders Shareholders Are Are Not Not Corporate Corporate Agents Agents  Ease Ease of of Capital Capital Accumulation Accumulation

Disadvantages Disadvantages  Governmental Governmental Regulation Regulation  Corporate Corporate Taxation Taxation Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Organizing Organizing and and Managing Managing aa Corporation Corporation Shareholders

Board of Directors

President, Vice-President, and Other Officers

Employees of the Corporation Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Rights Rights of of shareholders shareholders  Vote Vote at at shareholders’ shareholders’ meetings. meetings.  Sell Sell shares. shares.  Purchase Purchase additional additional share share of of shares. shares.  Receive Receive dividends, dividends, ifif any. any.  Share Share equally equally in in any any assets assets remaining remaining after after creditors creditors are are paid paid in in aa liquidation. liquidation.

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Basics Basics of of Capital Capital share share Total Total amount amount of of share share that that aa corporation’s corporation’s M M& &A A authorizes authorizes itit to to sell. sell.

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Basics Basics of of Capital Capital share share Total Total amount amount of of share share that that has has been been issued issued to to shareholders. shareholders.

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Selling Selling (Issuing) (Issuing) share share

Par Par value value is is an an arbitrary arbitrary amount amount assigned assigned to to each each share share of of share share when when itit is is authorized. authorized.

≠

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Market Market price price is is the the amount amount that that each each share share of of share share will will sell sell for for in in the the market. market. © The McGraw-Hill Companies, Inc., 2007

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Classes Classes of of share share

• Par Value • No-Par Value • Stated Value

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Issuing Issuing Par Par Value Value share share Par Par Value Value share share On On 11 September, September, Matrix, Matrix, Inc. Inc. issued issued 100,000 100,000 shares shares of of $2 $2 par par value value share share for for $25 $25 per per share. share. Let’s Let’s record record this this transaction. transaction. Record: Record: 1. 1. The The cash cash received. received. 2. 2. The The number number of of shares shares issued issued ×× the the par par value value per per share share in in the the Common Common share share account. account. 3. 3. The The remainder remainder is is assigned assigned to to Contributed Contributed Capital Capital in in Excess Excess of of Par. Par. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Issuing Issuing Par Par Value Value share share Par Par Value Value share share On On 11 September, September, Matrix, Matrix, Inc. Inc. issued issued 100,000 100,000 shares shares of of $2 $2 par par value value share share for for $25 $25 per per share. share. Let’s Let’s record record this this transaction. transaction. Sept. 1 Cash

2,500,000 Common shares, $2 par value Share premium

200,0 2,300,0

Sold and issued 100,000 shares of common shares

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Issuing Issuing Par Par Value Value share share

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Issuing Issuing share share for for Noncash Noncash Assets Assets Par Par Value Value share share On On 11 September, September, Matrix, Matrix, Inc. Inc. issued issued 100,000 100,000 shares shares of of $2 $2 par par value value share share for for land land valued valued at at $2,500,000. $2,500,000. Let’s Let’s record record this this transaction. transaction. Record: Record: 1. 1. The The asset asset received received at at its its market market value. value. 2. 2. The The number number of of shares shares issued issued ×× the the par par value value per per share share in in the the Common Common share share account. account. 3. 3. The The remainder remainder is is assigned assigned to to Share Share Premium. Premium. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Issuing Issuing share share for for Noncash Noncash Assets Assets Par Par Value Value share share On On 11 September, September, Matrix, Matrix, Inc. Inc. issued issued 100,000 100,000 shares shares of of $2 $2 par par value value share share for for land land valued valued at at $2,500,000. $2,500,000. Let’s Let’s record record this this transaction. transaction. Sept. 1 Land

2,500,000 Common shares, $2 par value Share premium

200,0 2,300,0

Exchanges 100,000 common shares for land

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Preferred Preferred share share A A separate separate class class of of share, share, typically typically having having priority priority over over common common shares shares in in .. .. ..  Dividend Dividend distributions. distributions.  Distribution Distribution of of assets assets in in case case of of liquidation. liquidation.

Usually Usually has has aa stated stated dividend dividend rate. rate.

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Normally Normally has has no no voting voting rights. rights.

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Cumulative Cumulative or or Noncumulative Noncumulative Dividend Dividend Cumulative Dividends Dividends in in arrears arrears must must be be paid paid before before dividends dividends may may be be paid paid on on common common share. share.

Vs.

Noncumulative

Undeclared Undeclared dividends dividends from from current current and and prior prior years years do do not not have have to to be be paid paid in in future future years. years.

Most preferred share is cumulative.

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Cumulative Cumulative or or Noncumulative Noncumulative Dividend Dividend Example: Consider the following partial Statement of shareholders’ Equity

The Board of Directors did not declare or pay dividends in 2004. In 2005, the Board of Directors declare and pay cash dividends of $42,000. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Cumulative Cumulative or or Noncumulative Noncumulative Dividend Dividend If Preferred Share is Noncumulative: Year 2004: No dividends paid. Year 2005: 1. Pay 2005 preferred dividend. 2. Remainder goes to common.

Preferred Commo $ $ -

If Preferred Share is Cumulative: Year 2004: No dividends paid. Year 2005: 1. Pay 2004 preferred dividend in arrears. 2. Pay 2005 preferred dividend. 3. Remainder goes to common. Totals

Preferred Commo $ $ -

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$

9,000 $

$

33,0

9,000 9,000

$ $ 18,000 $

24,0 24,0

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Participating Participating or or Nonparticipating Nonparticipating Dividend Dividend Participating Dividends Dividends may may exceed exceed aa stated stated amount amount once once common common shareholders shareholders receive receive aa dividend dividend equal equal to to the the preferred preferred stated stated rate. rate.

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Vs. Nonparticipating Dividends Dividends are are limited limited to to aa maximum maximum amount amount each each year. year. The The maximum maximum is is usually usually the the stated stated dividend dividend rate. rate.

Most preferred share is nonparticipating. © The McGraw-Hill Companies, Inc., 2007

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Reasons Reasons for for Issuing Issuing Preferred Preferred share share  To To raise raise capital capital without without sacrificing sacrificing control. control.  To To boost boost the the return return earned earned by by common common shareholders shareholders through through financial financial leverage. leverage.  To To appeal appeal to to investors investors who who may may believe believe the the common common share share is is too too risky risky or or that that the the expected expected return return on on common common share share is is too too low. low.

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Cash Cash Dividends Dividends To pay a cash dividend the corporation must have: 1. A sufficient balance in retained earnings and 2. The cash necessary to pay the dividend.

Cash Dividend Types and Frequency 100% 80%

73%

60% 40%

23%

20% 0% Common

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Preferred

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Cash Cash Dividends Dividends Regular cash dividends provide a return to investors and almost always affect the share’s market value. June 30

shareholders Corporation

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Dividends

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Entries Entries for for Cash Cash Dividends Dividends

Three important dates D

ds n e ivid

Date of Declaration

Date of Record

Date of Payment

Record liability for dividend.

No entry required.

Record payment of cash to shareholders.

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Entries Entries for for Cash Cash Dividends Dividends

D

On 19 January, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding. The dividend will be paid on 19 March to shareholders of record on 19 February.

ds n e i vi d

Jan. 19 Retained earnings 10,000 Common dividend payable

10,000

Declared $1 per share cash dividend

Date of Declaration

Record liability for dividend. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Entries Entries for for Cash Cash Dividends Dividends On 19 January, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding. The dividend will be paid on 19 March to shareholders of record on 19 February.

Date of Record

No entry required on 19 February.

No entry required. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Entries Entries for for Cash Cash Dividends Dividends On 19 January, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding. The dividend will be paid on 19 March to shareholders of record on 19 February. Mar. 19

Common dividend payable Cash

10,000 10,000

Paid $1 per share cash dividend

Date of Payment

Record payment of cash to shareholders. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Deficits Deficits and and Cash Cash Dividends Dividends Created when a company incurs cumulative losses or pays dividends greater than total profits earned in other years.

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Share Share Dividends Dividends The The corporation corporation distributes distributes additional additional shares shares of of its its own own share share to to its its shareholders shareholders without without receiving receiving any any payment payment in in return. return.

Why Why aa share share dividend? dividend? 100 Shares 100 shares

HotAir, Inc. Common share $1 par

••Can Can be be used used to to keep keep the the market market price price on on the the share share affordable. affordable.

$1 par value

••Can Can provide provide evidence evidence of of management’s that management’s confidence confidence that shareholders the the company company is is doing doing well. well. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Share Share Splits Splits A distribution of additional shares of share to shareholders according to their percent ownership. $10 par value

Common share

Old Shares

100 shares

$5 par value

New Shares

Common share 200 shares

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Share Share Splits Splits Thomas, Thomas, Inc. Inc. has has the the following following shareholders’ shareholders’ equity equity section section just just prior prior to to aa 2-for-1 2-for-1 share share split. split.

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Share Share Splits Splits After After the the 2-for-1 2-for-1 split split the the shareholders’ shareholders’ equity equity section section of of the the balance balance sheet sheet looks looks like like this this .. .. .. No accounting entry is made.

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Treasury Treasury share share Corporations acquire shares of their own share.

Why would a company do that?

 Use Use the the shares shares to to acquire acquire control control of of another another corporation. corporation.  To To avoid avoid aa hostile hostile takeover. takeover.  Use Use the the shares shares for for employee employee share share options. options.  To To maintain maintain aa strong strong market market for for its its share share or or show show management management confidence confidence in in the the current current price. price.

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Share Share Options Options The right to purchase common share at a fixed price over a specified period of time. As the share’s price rises above the fixed option price, the value of the option increases.

Option purchase price $30 per share. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

Market price of share $75 per share.

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Share Share Options Options Options are given to key employees to motivate them to: focus on company performance, take a long-run perspective, and remain with the company.

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Statement Statement of of Retained Retained Earnings Earnings Total cumulative amount of reported net income less any net losses and dividends declared since the company started operating.

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Appropriated Appropriated Retained Retained Earnings Earnings A corporation’s directors can voluntarily limit dividends because of a special need for cash such as the purchase of new facilities.

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Statement Statement of of shareholders’ shareholders’ Equity Equity Matrix, Inc. Statement of Stockholders' Equity For the Year Ended 31 December 2005 Common stock and (In millions) capital in excess of par Shares Amount Balance at 1 January 2005 821 $ 2,500 Stock sales 17 500 Stock repurchases and retirement (17) (260) Cash dividends declared Other, net Net income Balance at 31 December 2005 821 $ 2,740

Retained Earnings $ 9,500 (925) (150) 70 5,100 $ 13,595

Total $ 12,000 500 (1,185) (150) 70 5,100 $ 16,335

This is a more inclusive statement than the statement of retained earnings. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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End of Chapter 11

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