ACC 100 Chapter 11: Corporate Form of Organization

11.1 Corporate Form of Organization

Definition of a Corporation

• An entity separate and distinct from its owners.
• Created by law, with existence dependent on state statutes.
• Has rights and privileges similar to a person but cannot vote.
• Must abide by laws and pay taxes.

Classification of Corporations

• By Purpose: Profit or not-for-profit.
• By Ownership:
  • Publicly held: Thousands of stockholders.
  • Privately held: Few stockholders, no public stock sale.

Characteristics of a Corporation

• Separate Legal Existence: Acts under its own name.
  • Can own property, borrow money, enter contracts.
• Limited Liability of Stockholders: Limited to investment.
  • Creditors can't claim personal assets unless fraud occurs.
• Transferable Ownership Rights: Shares of stock are transferable.
  • Stock transfer doesn’t affect corporation’s operations.
• Ability to Acquire Capital: Attractive due to limited liability and transferability.
• Continuous Life: Perpetual or limited life extendable by charter renewal.
• Corporate Management: Managed by a board of directors and officers.
  • CEO handles overall responsibility, controller manages accounting.

Government Regulations

• State laws dictate stock issuance and earnings distribution.
• Federal laws regulate public sale of stock.
• SEC requires disclosure from publicly held corporations.

Additional Taxes

• Corporations pay taxes as separate entities.
• Double taxation on corporate income and stockholders’ dividends.

Forming a Corporation

• Formed by state charter.
• Establishes by-laws for internal governance.
• Organization Costs: Expenses incurred during formation.
  • Expensed immediately due to difficulty in determining future benefits.

Stockholder Rights

• Common stock is the basic stock class.
• Stock Certificate: Proof of stock ownership.

Authorized Stock

• Charter indicates maximum shares a corporation can sell.
• Authorization doesn’t affect corporate assets or stockholders’ equity immediately.

Issuance of Stock

• Can issue directly to investors or indirectly via investment banks.
• Indirect Issuance: Investment banks underwrite and resell stock.
• Stock price set by future earnings, dividend rate, market conditions.

Par and No-Par Value Stocks

• Par Value Stock: Assigned value per share.
• No-Par Value Stock: No assigned value, often given a stated value.

Corporate Capital

• Stockholders’ Equity: Includes paid-in capital and retained earnings.
• Paid-In Capital: Total contributed by stockholders.
• Retained Earnings: Net income retained for future use.

11.2 Accounting for Common, Preferred, and Treasury Stock

Accounting for Common Stock

• Distinguish between paid-in capital and retained earnings.
• Issuance affects only paid-in capital accounts.
• Journal Entries:
  • Par value issuance and excess of par issuance recorded with distinct accounts.

Accounting for Preferred Stock

• Preferred stock has priority over common stock in dividends.
• Journal Entry for issuance includes preferred stock and excess paid-in capital.

Accounting for Treasury Stock

• Treasury Stock: Reacquired shares held for future use.
• Reasons for acquisition include reissuing, increasing trading, and reducing shares.
• Journal Entry for purchase uses the cost method.

11.3 Accounting for Dividends and Stock Splits

Dividends

• Types: Cash, property, scrip, stock.
• Cash Dividends: Require retained earnings, adequate cash, and declared dividends.
• Important Dates: Declaration, record, and payment dates.
  • Entries made on declaration and payment dates.

Dividend Preferences

• Preferred stockholders have precedence.
• Cumulative Dividend: Includes unpaid prior-year dividends before common stockholders.
• Dividends in Arrears: Unpaid dividends not considered a liability.

Stock Dividends and Splits

• Stock Dividends: Transfer funds from retained earnings to paid-in capital.
• Stock Splits: Increase shares, reduce share price, no effect on total equity.

11.4 Presentation and Analysis

• [Further details not provided in transcript.]