an entity created by law that is separate from it's owners.
2 types-public and private.
advantages of corporate characteristics
-separate legal entity
-limited liability of stockholders
-transferable ownership rights
-lack of mutual agency for stockholders (stockholders do not have power to bind contracts)
-ease of capital accumulation
advantages of buying stock
(1) stockholders are not liable for the corporation's acts and debts
(2) stocks usually are transferred easily
(3) the life of the corporation is unlimited
(4) stockholders are not corporate agents. These advantages enable corporations to accumulate large amounts of capital from the combined investments of many stockholders.
disadvantages of corporate characteristics
-corporate taxation (double taxation- property and payroll taxes + corporate income is usually taxed a second time as part of stockholders' personal income when they receive cash distributed as dividends)
how a corporation is made
by obtaining a charter from a state government.
-amounts paid to obtain a charter
The corporation records (debits) these costs to an expense account called Organization Expenses.
board of directors
president, vice president, other officers
employees of the corporation
a document that gives a designated agent the right to vote the stock
when a stockholder cannot attend meetings they delegate their voting rights to an agent.
Rights of common stockholders
-Vote at stockholders' meetings.
-Sell or otherwise dispose of their stock.
-Purchase their proportional share of any common stock later issued by the corporation.
-Receive the same dividend, if any, on each common share of the corporation.
-Share in any assets remaining after creditors and preferred stockholders are paid when, and if, the corporation is liquidated. Each common share receives the same amount.
-Stockholders also have the right to receive timely financial reports.
When all authorized shares have the same rights and characteristics
-affects only paid-in (contributed) capital accounts
Stockholders' right to maintain their proportionate interest in a corporation with any additional shares issued.
(First come first serve)
For example, a stockholder who owns 25% of a corporation's common stock has the first opportunity to buy 25% of any new common stock issued.
Investors who buy a corporation's stock, sometimes receive a stock certificate as proof of share ownership. Many corporations issue only one certificate for each block of stock purchased.
A registrar keeps stockholder records and prepares official lists of stockholders for stockholder meetings and dividend payments.
A transfer agent assists with purchases and sales of shares by receiving and issuing certificates as necessary.
what you must have If a corporation's stock is traded on a major stock exchange
general term that refers to any shares issued to obtain capital (owner financing).
number of shares that a corporation's charter allows it to sell. The number of authorized shares usually exceeds the number of shares issued (and outstanding), often by a large amount.
Outstanding stock refers to issued stock held by stockholders.
number of shares authorized is recorded where?
equity section of the balance sheet
issuing stock directly and indirectly
-advertises its stock issuance to potential buyers. This type of issuance is most common with privately held corporations.
-pays a brokerage house (investment banker) to issue its stock. Some brokerage houses underwrite an indirect issuance of stock; that is, they buy the stock from the-corporation and take all gains or losses from its resale.
price at which stock is bought and sold.
influences on market value
Expected future earnings
other company and economic factors
Par Value Stock
stock that is assigned an amount assigned per share
-no restriction on the assigned par value
minimum legal capital
the least amount that the buyers of stock must contribute to the corporation or be subject to paying at a future date
(((((amount of shares x par value))))
For example, if a corporation issues 1,000 shares of $10 par value stock, the corporation's minimum legal capital in these states would be $10,000.
why are managers motivated to set a low par value?
bc minimum legal capital or state issuance taxes are based on par value
No-Par Value Stock
not assigned a value per share by the corporate charter.
advantage- it can be issued at any price without the possibility of a minimum legal capital deficiency.***
stated value stock
no-par stock to which the directors assign a "stated" value per share
stated value per share becomes the minimum legal capital per share
-paid-in (or contributed) capital
paid in capital
total amount of cash and other assets the corporation receives from its stockholders in exchange for its stock.
AKA contributed capital
cumulative net income (and loss) not distributed as dividends to its stockholders.
when acct is negative, reflects accumulated losses
((((cumulative income- cumulative losses and dividends))))
Issuing Par Value Stock at Par
When common stock is issued at par value, we record amounts for both the assets received and the par value stock issued.
premium on stock
orporation sells its stock for more than par (or stated) value
-the amount by which issue price exceeds par (or stated) value.
-recorded in the "Paid-In Capital in Excess of Par Value, Common Stock" account; AKA "Additional Paid-In Capital, Common Stock."
discount on stock
corporation sells its stock for less than par value
-amount by which issue price is less than par is debited to a Discount on Common Stock account, a contra to the common stock account
-balance is subtracted from the par value of stock in the equity section of the balance sheet
-not an expense and does not appear on the income statement
No-Par Value Stock
-not assigned a stated value
-amount the corporation receives becomes legal capital and is recorded as Common Stock.
-entire proceeds are credited to a no-par stock account.
stated value stock
-no-par stock is issued and assigned a stated value, its stated value becomes legal capital and is credited to a stated value stock account
-stated value stock is issued at an amount in excess of stated value=excess is credited to Paid-In Capital in Excess of Stated Value, Common Stock
Stock for Noncash Assets
-any type of stock can be issued for noncash assets
-should be recorded at the market value of either the stock or the noncash asset
sometimes gives shares of its stock to promoters in exchange for their services in organizing the corporation
three important dates for dividend payment
-date of declaration
(creates legal liability of corporation to its stockholders)
-date of record
(identify those stockholders listed in the corporation's records to receive dividends. if on list on this date, will receive dividends)
-date of payment
(corporation makes payment)