Chapter 13

• Corporation


  A business organized under state law that is a separate legal entity
• Unique characteristics of corporations


  • Separate legal entity
  • Number of owners
  • No personal liability of the owner(s)
  • Lack of mutual agency
  • Indefinite life
  • Taxation
  • Capital accumulation
• Advantages of Corporations


  • Can raise more money than a proprietorship or partnership
  • No mutual agency among the stockholders and the corporation
  • Continuous life
  • Transfer of corporate ownership is easy
  • Stockholders have limited liability
• Disadvantages of Corporations


  • Ownership and management are often separated
  • Government regulation is expensive
  • Start-up costs are higher than other business forms
  • Earnings of a corporation may be subject to double taxation
• Authorized stock


  The maximum number of shares of stock a corporation may issue
• Issued stock


  Stock that has been issued by the corporation
• Outstanding stock


  Stock held by the stockholders
• Stock certificates

  Documents issued to stockholders
• Capital stock


  Represents a stockholder’s ownership
• Stockholder's have 4 basic rights

  • Vote
  • Dividends
  • Liquidation
  • Preemptive right
• Common stock


  Represents basic ownership
• Preferred stock


  Gives owners certain advantages over common stock
• Stockholders’ equity

  A corporation’s equity
• Basic sources of stockholders’ equity

  • Paid-in capital
  • Retained earnings
• Paid-in capital


  Amounts received from stockholders for stock
• Retained earnings

  Equity earned by profitable operations that is not distributed to stockholders
• A company can sell its stock directly to stockholders, or it can use the services of an underwriter
• Stocks of public companies are bought and sold on a stock exchange, such as the New York Stock Exchange (NYSE) or NASDAQ Stock Market
• Issue price


  The amount a corporation receives from issuing stock
• Premium


  The difference between the issue price and the par value
• Treasury stock


  A company’s stock that it has previously issued and later reacquired
• Reasons companies purchase treasury stock

  • Increase net assets by buying low and selling high
  • Support the company’s stock price
  • Avoid a takeover
  • Reward valued employees with stock
• The Treasury Stock account has a normal debit balance
• Treasury Stock is a contra equity account
• Treasury stock is recorded at cost, without reference to par value
• The Treasury Stock account is reported beneath Retained Earnings on the balance sheet as a reduction to equity
• A corporation may retire its stock by canceling the stock certificates
• Retired stock cannot be reissued
• To repurchase previously issued stock for retirement, we debit the stock accounts and credit Cash
• Types of dividends

  • Cash dividends
  • Stock dividends
  • Other property dividends
• Relevant dividend dates

  • Declaration date
  • Date of record
  • Payment date
• Declaration date

  The date the board of directors announces the intention to pay the dividend, and a liability is created
• Date of record

  The date the corporation records the stockholders that will receive dividend checks
• Payment date


  The date the dividend is paid to the stockholders
• Cash dividend

  A distribution of cash to stockholders
• Stock dividend


  A distribution of a corporation’s own stock to its shareholders
• Dividend in arrears

  A dividend that has not been paid for the year
• Types of preferred stock

  • Cumulative preferred stock
  • Noncumulative preferred stock
• Cumulative preferred stock

  • Owners must receive all dividends in arrears plus the current year dividends before the corporation pays dividends to the common stockholders
• Noncumulative preferred stock

  • Owners do not receive passed dividends