Topic 11 - Accounting For Corporations

12-1
Accounting for
Chapter
Corporations
11 100 Shares
Corporations?
$1 par value
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
12-2
Corporate
Corporate Form
Form of
of Organization
Organization
An
An entity
entity
created
created by
by law.
law.
Existence Privately Held

Existence is
is Ownership
separate
separate from
from can be
owners.
owners.
Has
Has rights
rights and
and
privileges.
privileges.
Publicly Held
12-3
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
12-4
Organizing
Organizing and
and Managing
Managing aa Corporation
Corporation
Shareholders
Board of Directors
President, Vice-President,
and Other Officers
Employees of the Corporation
12-5
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.
12-6
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.
12-7
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.
12-8
Selling
Selling (Issuing)
(Issuing) share
share
≠
Par
Par value
value is
is an
an
arbitrary
arbitrary amount
amount Market
Market priceprice is
is the
the
assigned
assigned to to each
each amount
amount that that each
each
share
share of of share
share when
when share
share of of share
share will
will
itit is
is authorized.
authorized. sell
sell for
for in
in the
the market.
market.
12-9
Classes
Classes of
of share
share
• Par Value
• No-Par Value
• Stated Value
12-10
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.
12-11
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 200,0
Share premium 2,300,0
Sold and issued 100,000 shares of common shares
12-12
Issuing
Issuing Par
Par Value
Value share
share
12-13
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 shareshare account.
account.
3.
3. The
The remainder
remainder is is assigned
assigned to to Share
Share
Premium.
Premium.
12-14
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 200,0
Share premium 2,300,0
Exchanges 100,000 common shares for land
12-15
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 Normally
Normally has
has no
no
dividend
dividend rate.
rate. voting
voting rights.
rights.
12-16
Cumulative
Cumulative or
or Noncumulative
Noncumulative Dividend
Dividend
Cumulative Vs. Noncumulative
Dividends
Dividends in
in arrears
arrears Undeclared
Undeclared dividends
dividends
must
must be
be paid
paid before
before from
from current
current and
and
dividends
dividends may
may bebe prior
prior years
years do
do not
not have
have
paid
paid on
on common
common to
to be
be paid
paid in
in future
future
share.
share. years.
years.
Most preferred share

is cumulative.
12-17
Cumulative
Cumulative or
or Noncumulative
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.
12-18
Cumulative
Cumulative or
or Noncumulative
Dividend
If Preferred Share is Noncumulative: Preferred Commo
Year 2004: No dividends paid. $ - $ -
Year 2005:
1. Pay 2005 preferred dividend. $ 9,000
2. Remainder goes to common. $ 33,0
If Preferred Share is Cumulative: Preferred Commo

Year 2004: No dividends paid. $ - $ -
Year 2005:
1. Pay 2004 preferred dividend in arrears. $ 9,000
2. Pay 2005 preferred dividend. 9,000
3. Remainder goes to common. $ 24,0
Totals $ 18,000 $ 24,0
12-19
Participating
Participating or
or Nonparticipating
Nonparticipating
Dividend
Dividend
Participating Vs. Nonparticipating
Dividends
Dividends may
may Dividends
Dividends are
are limited
limited
exceed
exceed aa stated
stated to
to aa maximum
maximum amount
amount
amount
amount once
once each
each year.
year. The
The
common
common maximum
maximum is is usually
usually
shareholders
shareholders receive
receive the
the stated
stated dividend
dividend
aa dividend
dividend equal
equal to
to rate.
rate.
the
the preferred
preferred stated
stated
rate.
rate. Most preferred
share is
nonparticipating.
12-20
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 toto investors
investors whowho may
may believe
believe
the
the common
common shareshare 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.
12-21
Cash
Cash Dividends
Dividends
To pay a cash dividend

the corporation must Cash Dividend Types and Frequency
have: 100%
1. A sufficient balance in 80% 73%
retained earnings and
60%
2. The cash necessary to
pay the dividend. 40%
23%
20%
0%
Common Preferred
12-22
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
Dividends
12-23
Entries
Entries for
for Cash
Cash Dividends
Dividends
Three important dates
e nds
D ivid
Date of Declaration Date of Record Date of Payment

Record liability No entry Record payment of
for dividend. required. cash to shareholders.
12-24
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
i vi d
e nds shareholders of record on 19 February.
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.
12-25
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.
No entry required on
Date of Record
19 February.
No entry
required.
12-26
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 10,000

Cash 10,000
Paid $1 per share cash dividend
Date of Payment
Record payment of
cash to shareholders.
12-27
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.
12-28
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. ••Can
Can be
be used
used to
to keep
keep the
the market
market
Common share price
price on
on the
the share
share affordable.
affordable.
$1 par
$1 par value
••Can
Can provide
provide evidence
evidence of
of
management’s
management’s confidence
confidence that
that
shareholders
the
the company
company isis doing
doing well.
well.
12-29
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
12-30
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.
12-31
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.
12-32
Treasury
Treasury share
share
Corporations acquire shares of their own share.
Use
 Use the
the shares
shares to
to acquire
acquire
Why would a control
control of
of another
another corporation.
corporation.
company do
that? 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 inin the
the current
current price.
price.
12-33
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.
Market
price of
Option share $75
purchase per share.
price $30
per share.
12-34
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.
12-35
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.
12-36
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.
12-37
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 Retained
Shares Amount Earnings Total
Balance at 1 January 2005 821 $ 2,500 $ 9,500 $ 12,000
Stock sales 17 500 500
Stock repurchases and retirement (17) (260) (925) (1,185)
Cash dividends declared (150) (150)
Other, net 70 70
Net income 5,100 5,100
Balance at 31 December 2005 821 $ 2,740 $ 13,595 $ 16,335
This is a more inclusive statement than the statement of

retained earnings.
12-38
End of Chapter 11

Topic 11 - Accounting For Corporations

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12-1

Existence Privately Held

Employees of the Corporation

Most preferred share

The Board of Directors did not declare or pay

If Preferred Share is Cumulative: Preferred Commo

To pay a cash dividend

Date of Declaration Date of Record Date of Payment

Jan. 19 Retained earnings 10,000

Mar. 19 Common dividend payable 10,000

Common share Old

Common stock and

This is a more inclusive statement than the statement of

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