Hello! Please check the two documents attached. One document has the content for the unit and examples (so you can look at examples of work if you need to) and the other is the outline for a test I have tomorrow at 8:45 AM EST. The time limit is 2 hours long. Basically at the time I mentioned I would need you to be online since the test has to be done during a given time period and I would make a copy of the spreadsheet where we are doing the test and I will paste the link so you can get on the spreadsheet and edit it directly. Thank you so much!
Chapter 13 - Introduction to Corporations CHAPTER 13 OBJECTIVES 1. What are corporations? 2. Account for the issuance of common and preferred shares 3. Prepare a corporate income statement 4. Account for cash dividends 5. Prepare a statement of retained earnings and closing entries for a corporation 6. Prepare the shareholder’s section of the balance sheet CORPORATE FORM OF ORGANIZATION ● A corporation is a legal entity that is separate from its owners (known as shareholders) ● Classified by purpose (profit or not-for profit) & ownership: ● Public corporation - shares are available for purchase on an organized securities exchange ● Private corporation - shares are held by a few individuals and are not traded CHARACTERISTICS OF A CORPORATION 1. Separate legal existence from its owners 2. Limited liability of shareholders 3. Transferable ownership rights 4. Ability to acquire capital 5. Continuous and unlimited life 6. Government regulations 7. Income Tax FORMING A CORPORATION ● Can incorporate federally or provincially ● Done by filing articles of incorporation ● By-laws must be set - these are internal rules & policies ● Organization costs - forming a corporation; must be expensed when incurred OWNERSHIP RIGHTS OF SHAREHOLDERS ● Ownership rights are in the form of shares (which can be divided into classes: ➔ Common ➔ Preferred ● Shareholder have rights: ➔ To vote on certain matters ➔ To receive dividends - the distribution of profit ➔ To remaining assets in a liquidation MANAGEMENT OF A CORPORATION ● Shareholders legally own and manage the corporation through the Board of Directors that they elect The Board of Directors: ➔ Decides on the corporation’s operating policies ➔ Selects officers (such as the CEO) to perform daily management functions CHAPTER 13 OBJECTIVES 1. What are corporations? 2. Account for the issuance of common and preferred shares 3. Prepare a corporate income statement 4. Account for cash dividends 5. Prepare a statement of retained earnings and closing entries for a corporation 6. Prepare the shareholder’s section of the balance sheet SHARE ISSUE CONSIDERATIONS ● IMPORTANT: shares = stocks ● A corporation’s authorized shares is the number of shares a company is allowed to sell ● This is indicated in the articles of incorporation (many companies have unlimited shares) ● ISSUED SHARES are the authorized shares that have been sold ● The first public sale of a share is called an INITIAL PUBLIC OFFERING (IPO) SHARE ISSUE CONSIDERATIONS ● Market value of shares - Once issued, shares are traded on a secondary market (or a stock exchange such as the TSX or NASDAQ) ● Prices are determined by buyers and sellers and other external factors ● This has little effect on the day to day operations but does change the value of the corporation’s equity SHARE ISSUE CONSIDERATIONS ● Legal Capital - this refers to the amount of equity that can’t legally be distributed ● Legal capital exists because it is used to protect corporate creditors ● It is the par value of a share that can’t be sold ● i.e. assume a company has 1 million shares and each share has a par value of $0.01. Therefore, there is legal capital of $10,000 ($1,000,000 x $0.01) If a company sells stock/shares for cash, what accounts would be affected?? Assets = Liabilities + Shareholders/stock holders equity ● Cash increases ● Shares/stocks increases Shareholders/shareholders equity is increasing because there are people investing in the company COMMON SHARES - ISSUING SHARES ● When there is no par value, the proceeds from issuing shares are credited to the “common shares” account (this is an equity account, not an asset!) ● Shares are typically issued for cash ● i.e. 20,000 shares are issued for $1 cash for each share on Jan. 2 COMMON SHARES - ISSUING SHARES ● Shares can sometimes be issued in exchange for services or non-cash assets ● Recorded at fair value of goods/services received ● This is an alternative to cash (if limited cash is available, then shares may be offered instead of cash) 3,900 PREFERRED SHARES ● Preferred shares are very similar to common shares but have priority over common shares for: 1. Dividends and 2. Assets in the event of liquidation of the company ● These shares may also be issued for cash, non-cash assets or services ● Transactions for each class of shares is recorded in a separate account (i.e. “common shares” and “preferred shares”) DIVIDEND PREFERENCE ● Preferred shareholders have a right to dividends before common shareholders ● Cumulative preferred shares have a right to current year’s dividends and any prior years’ dividends owing before dividends are paid on common shares ● When preferred shares are cumulative, preferred dividends that are not declared in a period are called dividends in arrears ● Noncumulative shares are only entitled to the current year’s dividends EXAMPLE OF DIVIDEND IN ARREARS Assume that Hydroslide Inc.’s $5 preferred shares are cumulative. Hydroslide’s annual preferred dividend is $2,500 (500 shares x $5 per share). If dividends are two years in arrears, Hydroslide’s preferred shareholders are entitled to receive the following dividends: CONVERTIBLE PREFERRED SHARES ● Provide option to exchange preferred shares to common shares at a specified ratio ● These are purchased by investors who want the greater security of preferred shares but also want the option of converting them to common shares if the fair market value of the shares increase in value CONVERTIBLE PREFERRED SHARES ● Conversion is recorded by transferring cost from Preferred shares to Common shares account ● i.e. assume that 1,000 preferred shares with a cost of $100 are converted into 10,000 common shares REDEEMABLE & RETRACTABLE PREFERRED SHARES ● Redeemable (or callable) preferred shares give the issuing corporation the right to purchase the shares from shareholders at specified future dates and prices ● Retractable preferred shares are similar to redeemable preferred shares except the shareholders can redeem shares at their option PRACTICE! BE13-2, BE13-3, BE13-5, BE13-7, E13-3, E13-6 https://docs.google.com/spreadsheets/d/1MzCRr-u9UVEUMXLhzJVysMRpoQGxESxW3385_vhmGgA/edit?usp=sharing https://docs.google.com/spreadsheets/d/1MzCRr-u9UVEUMXLhzJVysMRpoQGxESxW3385_vhmGgA/edit?usp=sharing CHAPTER 13 OBJECTIVES 1. What are corporations? 2. Account for the issuance of common and preferred shares 3. Prepare a corporate income statement 4. Account for cash dividends 5. Prepare a statement of retained earnings and closing entries for a corporation 6. Prepare the shareholder’s section of the balance sheet CORPORATE INCOME STATEMENTS ● Income Tax expense - paid by the corporation ● Deducted from their Profit which is referred to as “Profit before income tax” ● Affects income statement (income tax expense account) and balance sheet (through a liability account called income tax payable) CORPORATE INCOME STATEMENTS PRACTICE! BE13-8, E13-7, P13-5A https://docs.google.com/spreadsheets/d/1l58gpIM8HjSjqcl2Wj1KPGy0vZ6HNo86HCSJqbpo31E/edit?usp=sharing CHAPTER 13 OBJECTIVES 1. What are corporations? 2. Account for the issuance of common and preferred shares 3. Prepare a corporate income statement 4. Account for cash dividends 5. Prepare a statement of retained earnings and closing entries for a corporation 6. Prepare the shareholder’s section of the balance sheet CASH DIVIDENDS ● Cash Dividend - most common type of dividend distributed to shareholders ● Distributed on a pro-rata (per share) of the corporation’s retained earnings to shareholders ● Pro-rata - based on the proportion of shares owned ● To pay dividends, a corporation must: 1. Have enough retained earnings and cash 2. Declare a dividend payable (board of directors decide when dividends become payable) ENTRIES FOR CASH DIVIDENDS ● There are 3 important dates for dividends: 1. The declaration date 2. The record date 3. The payment date ● Normally, there are several weeks between each date ● Journal entries are only required on two of the dates (seen on the next couple of slides) ENTRIES FOR CASH DIVIDENDS 1. Declaration date A. Board of directors formally declares dividend B. Commits company to legal obligation C. Declaration is recorded ● An entry is required to recognize the increase in the “Cash Dividends” account (which results in a decrease in “Retained Earnings”) and the increase in the current liability account, “Dividends Payable” (or preferred) CASH DIVIDENDS 2. Record date ➔ Ownership of shares is determined so that the corporation knows who to pay the dividends to ➔ No journal entry required 3. Payment date - dividend is paid to shareholders and recorded CASH DIVIDENDS EXAMPLE CLICK THE IMAGE TO GO TO THE WALKTHROUGH https://docs.google.com/spreadsheets/d/1Sl4VMDNDUHv79zG2PzcJrprwLuJ1nXwTZl8ZYPJhC2o/edit?usp=sharing https://docs.google.com/spreadsheets/d/1Sl4VMDNDUHv79zG2PzcJrprwLuJ1nXwTZl8ZYPJhC2o/edit?usp=sharing PRACTICE! BE13-9, E13-8, P13-5A https://docs.google.com/spreadsheets/d/1DaR-YcTg6FtKmC9rc-wPv91-q7O1riGruvxk8oBBAeQ/edit?usp=sharing CHAPTER 13 OBJECTIVES 1. What are corporations? 2. Account for the issuance of common and preferred shares 3. Prepare a corporate income statement 4. Account for cash dividends 5. Prepare a statement of retained earnings and closing entries for a corporation 6. Prepare the shareholder’s section of the balance sheet RETAINED EARNINGS ● Retained earnings - is the cumulative profit or loss that has been retained in the company for future use and NOT distributed to shareholders ● There are two major components of retained earnings: 1. Profit - how is it reported on a corporation’s income statement? 2. Dividends - cash distributions to owners that reduce retained earnings STATEMENT OF RETAINED EARNINGS ● All corporations are required to provide information on each of the transactions that change retained earnings during the period and show how ending retained earnings has been calculated ● This information is reported in the statement of retained earnings ● Similar to the statement of owner’s equity - the income statement must be prepared before this ● Cash dividends reduce retained earnings (just like how drawings reduces capital) ● IMPORTANT: the amount of dividends declared is reported NOT the amount of dividends paid STATEMENT OF RETAINED EARNINGS (Common and preferred) CLOSING ENTRIES FOR A CORPORATION ● Closing entries for a corporation is the same as for other forms of ownership, except that the accounts (revenue, expense & dividends) are closed into Retained Earnings (instead of Capital) CLOSING ENTRIES - JOURNAL ENTRIES PRACTICE! E13-9 https://docs.google.com/spreadsheets/d/1xcb_ZZiJRp950exrPQ0czOdldedoxRyq3Nw1SAxzj64/edit?usp=sharing CHAPTER 13 OBJECTIVES 1. What are corporations? 2. Account for the issuance of common and preferred shares 3. Prepare a corporate income statement 4. Account for cash dividends 5. Prepare a statement of retained earnings and closing entries for a corporation 6. Prepare the shareholder’s section of the balance sheet SHAREHOLDERS’ EQUITY ON THE BALANCE SHEET ● The shareholder’s equity section always includes two parts: 1. Share capital - can also be referred to as contributed capital 2. Retained earnings (ENDING retained earnings, not BEGINNING retained earnings) SHAREHOLDERS’ EQUITY ON THE BALANCE SHEET 1. Contributed capital - is the total amount of assets that shareholders have given to a corporation in exchange for shares 2. Retained earnings- Cumulative profit (or loss) since incorporation SAMPLE SHAREHOLDERS’ EQUITY SECTION PRACTICE! BE13-12, E13-11,