CHAPTERFI VE

CORPORATI ON, ORGANI ZATI ON&OPERATI ON

Corpor at i
on- isal egalent ity,di st i
nctandsepar at ef rom i tsowner s.Asanar ti
ficial
l
egalbei ng, acor por at i
onmayacqui re, own, anddi sposeofpr oper tyi nitsownname.
I
tmayal sobor r
owmoney ,ent eri ntocont ract,sueandbesued.
Char acter i
st icsofacor por ation
A numberofchar act erist i
cs di st ingui sh a cor por ation f rom pr opr i
et or ship and
partnershi p.
1.Separ at eLegalEnt ity:
-Acor por ationact sasanar tifi
ci alper sonsepar ateand
distinctf rom i tsowner s, whoar ecal edst
l ockhol der sorshar ehol der s.
2.Li mi tedLi abi li
ty :-
Thel iabi l
ityofst ockhol der si sl i
mi t
edt ot hei rinv est menti n
thecor por ation,andcr edi tor shav enol egalcl aim ont heper sonalasset sof
theowner s.
3.Tr ansf erabi lit
yofOwner shi p: -Theowner shi pofacor por ati
oni sdi videdi nto
shar esofst ock,whi char et ransf erabl euni ts.Thi smakescor por at i
ont ohav e
acont inuousl ifer egar dl essofchangesi nt heowner shi poft hei rst ock.
4.Unl imi ted Li fe:-t he t ransf erofowner shi pi nter estdoes notaf fectt he
cor por ation’ sexi st enceandoper at i
ons.
5.Cor por ateTaxat ion: -Cor por at ionsar esepar atet axabl eent i
ties.
6.Separ at i
onofOwner shi pandManagement :
-St ockhol der sownt hebusi ness,
butaboar dofdi rect ors- elect edbyt hest ockhol der s-appoi ntcor por ateof f
icers
tomanaget hebusi ness.
Advant agesoft heCor por atef orm ofOr gani zat i
on
Sever alchar act er i
sticsofcor por at ionmaymaket hisf orm ofor gani zationmor e
desirablet hanei t
herapar tner shi porapr opr ietorshi p.
1.Gr eateramountofcapi talcanber aised
2.Li mi tedl iabi l
ity:-Owner s’l iabi l
ityi sl i
mi tedt ot heamounti nvest edi nt he
cor por ation
3.Tr ansf erabi lit
yofOwner shi p: -Af tert hei nitialsal eofst ock,shar esmaybe
transf er r
edi npr ivat esal et ransact i
ons;t raded( sold)i nwi thoutaski ngf or
appr ov al from t hecor por ationsmanagement .
4.Unl imi tedl ife:-Thet r
ansf erofshar esdoesnotaf fectt hecor porat ion’ sability
tooper ater out inelyov erdecades.
5.Pr ofessi onalmanagement -theexcel lentr ecor dofgr owthandear ningsi n
mostl argecor por at i
onsi ndi cat et hatt hesepar at i
onofowner shipandcont r
ol
hasbenef i
tedr at hert hani njur edst ockhol der s.
Disadv ant agesoft heCor por at eFor m ofOr gani zat ion
1.Doubl et axat i
onexi sts- thei ncomeofacor por ati
oni st axedt wi ce.
2.Gov ernmentr egul at ionexi st s-Cor porationsar esubj ectt omor egov ernment
regul at i
onst hanei therpr opr iet orshi psorpar tner ships.
3.Noteasyt of orm
4.Lar geset tingupcost
Format i
onofaCor por at i
on
Creationofacor por at i
onbegi nswheni tsor ganizer s, calledt hei ncor porat or s,obtain
achar t
erf rom t hest ate.Thechar teri ncl udest heaut hor i
zat ionf orthecor por ati
ont o
i
ssueacer tainnumberofshar esofst ock,whi char eshar esofowner shipi nt he
corpor ation.To obt ai n acor por at echar ter,an appl i
cati
on cal led the arti
clesof
i
ncor por ati
oni ssubmi t
tedt othest ateoffici al.
Theappl icati
on( arti
cl esofi ncor poration)cont ai
nst hef oll
owi ngt ypesofinformation:
 Thename, pur pose, anddur ationoft hepr oposedcor porat i
on
 Amount s,kinds, andnumberofshar esofcapi talstockt obeaut horized
 Theaddr essoft hecor por ation’spr i
nci pal office
 Thenameandaddr essoft hei ncorpor ators
Aftert hechar terisobt ained, thest ockhol der si nthenewcor por ati
onhol dameet i
ng
toel ectboar dofdi rect orsandt oest ablishbyl awsasagui det ot hecompany ’s
affair
s.Thedi rectorsi nt urnhol dameet ingatwhi chof fi
cersoft hecorpor at
ionar e
appoi nted.
Thef or mat i
onandor gani zat i
onofacor por at ionr equi r
essigni f
icantcosts.Suchcost
i
scal ledor ganizationcost .
Organi zat i
onCost s-ar ecost sincur redint hef ormat ionofacor porat
ion.Suchcost s
i
ncl ude:l egalf ees,t axes,st at ei ncorpor ationf ees,andpr omot ionalcost s.These
cost sar edebi tedt oani nt angibl eassetaccountent i
tedor
l gani zati
oncost sandar e
normal yamor
l ti
zedoveraf ive-yearper i
od.
RightsofSt ockhol der s
Theowner shipofst ocki nacor porationusual l
ycar riesthef oll
owi ngbasicr i
ghts:
1.Ther ighttor eceiveacer t
ifi
cat easevi denceofowner shipinterest,andt otransfer
suchshar
es ast heychoose( thr
ougheithersal
eorgift)
.
2.Theri
ghttovotef orBoardofDirect
orsandbusinessmat ter
s
3.Theri
ghttosharei nprof
itsbyrecei
vingdivi
dends
4.Toshareinassetsuponl i
quidat
ion
5.Theri
ghttopur chaseapor ti
onofanynewshar esissuedinor
dert
omai
ntai
nthe
same per centageofowner ship(cal
l
edpr eempti
veri
ght )
.
Char act eri
sticsofSt ockI ssuance
Capi talSt ock-acor por ationi ssuesst ockcer tifi
catest oitsowner si nexchangef or
theirinv estmenti nt hebusi ness.Thebasi cunitofcapi talstocki scalledashar e.
StockCer tif
icate-pr oofofst ockowner shi pisev idencedbyapr intedorengr aved
form knownasast ockcer t
ificat e.
Aut hor i
zedCapi t alSt ocks-ar et henumberofst ocksthatacor porationisaut hor i
zed
tosel l;whichar ei ndicat edi ni tschar ter.
Issued Capi talSt ocks- ar est ocks,whi ch aresol dt oinv est
or sei therdi rectl
yor
i
ndi rectlyt hroughabr oker agehouse( thatspeci ali
zesi nbr ingi
ngst ockst ot he
attentionofpr ospect ivei nv est or s).
Out standi ngCapi t alSt ocks- areshar esofcapi talstockissuedbyt heco.andst i
l
lare
beinghel dbyst ockhol der s.
Parval ueoft hest ock- isanar bitrarymonet ar
yamountassi gnedt oasi ngl eshar eof
stockatt het imeofaut hor izat ion.Parv aluer epresentsthel egalcapi t
alpershar e
thatmustber etai nedi nt hebusi nessf orthepr otectionofcor poratecr editors.
No- parval uest ock-i scapi talst ockt hathasnotbeenassi gnedav aluei nt he
corpor atechar ter .St ocksar ei ssued wi thno- parv aluet o pr eventconf usionby
i
nv est orsbet weenparv alueandmar ketv alue.
No- parwi thast at edval ue- ast atedv alueser vest hesamepur poseasparv alue.But
sincest at
ed v al uei snotpr int ed on t hest ockcer t
ifi
cate,t herei sl essr i
skof
confusi
nginvestors.
Inaccounti
ngfort heissuanceofstock,theparorst
atedval
ue,ifany,i
srecor
dedin
thecommonst ockaccount.
Marketvalueofstock-isthesel
li
ngpriceormarketpr
iceofstock.
Corporat
eCapi tal
Theowner ’
scapi t
alinacor por
ati
oni stermedasstockhol
ders’equi
ty,orcor
por
ate
capi
tal
.
Sour cesofst ockhol der s’equi ty :
1.Pai d- i
ncapi tal( orcont r i
but edcapi tal)-i
st hei nvest mentbyt hest ockhol ders
inexchangef orcapi tal stock.
2.Ret ai nedear ni ngs- isneti ncomer et ainedi nt hecor por ationt hr oughpr of i
table
oper ationoft hebusi ness.
CLASSESOFSTOCK
Inor dert oappealt oasmanyi nv est orsaspossi ble,acor por ationmayi ssuemor e
thanoneki ndofcapi talst ock.Thet wot y pesofst ocksofacor por at ionar ecommon
andpr eferred.St ockhol der snor mal lyacqui r
eoneoft wobasi ct y pesofst ockas
evidenceoft heirowner shi pi nt erest .
1.Common St ock- ist he mostbasi c/ primar y/capi talst ock i ssue by t he
corpor at i
ont ost ockhol der s.
 Commonst ockhol der s’ possesal lt her i
ghtsl i
stedear l
ier.
 Commonst ockhol der sar et hepr imar yowner sofacor por ation.
 I fonlyonecl assofst ocki si ssued, itiscommonst ock.
2.Pr efer redSt ock- isast ocki ssuedbycor porationst oappeali nv est orswhoar e
unwi ll
ingt ot akeal l ther isksi nv olv edi ncommonst ockowner shi p
 Ther ightsofcommonst ockhol der sar emodi fiedt opr ovidet hepr eferred
st
ockhol der swi thcer tai nadv ant agesnotav ailablet ocommonst ockhol ders.
Mostpr efer redst ockshav et hef ollowi ngdi sti
nct i
vef eat ures;
 Pr efer redast odi vidends
The pr efer r
ed st ockhol der s ar e ent it
led t or ecei ve a di vi
dend ofspeci fi
c
amountbef or eany di videndi spai dont hecommonst ock.
Thedi v i
dendi susual lyst at edasadol l
aramountpershar eorasaper cent ageofpar
values.
 Cumul ati
vedi videndr ight s
Thedi v i
dendpr eferencecar ri
edbymostpr ef erredst ocki sacumul at i
v eone.I fallor
onepar toft her egul ardi v i
dendont hepr ef erredst ocki somi t t
edi nagi veny ear ,the
amountomi ttedi ssai dt obei nar rear sandmustbepai di nasubsequenty earbef ore
anydi videndcanbepai dont hecommonst ock.
 Pr efer redast oasset si nev entoft hel iquidationoft hecor por at i
on
Mostpr eferredst ockcar ryapr ef erenceast oasset sintheev entofl iqui dat i
onoft he
corpor ati
on.I fthebusi nessi st er minat ed,t hepr eferredst ocki sent itl
edt opay ment
i
nf ullofitsparv alueorahi gherst atedl iqui dat ionv aluebef or eanypay menti smade
ont hecommonst ock.
 Par tici patingdi videndr ight
The owner s ofpar ticipat i
ng pr eferred st ock may r ecei ve-thatpar ticipating in-
divi
dendsbey ondt hest at edamountorper cent age.
 Cal labl eatt heopt ionoft hecor por at i
on.
Mostpr efer r
edst ocksi ncl udeacal lpr ov i
sion.Thi spr ov i
siongr ant st heissui ng
cor por ationt her i
ghtt opur chaset hest ockf rom t hest ockhol der satast i
pulatedcall
price.
 Conv ersi onpr ivilege
Inor dert oaddt ot heat tract i
venessofpr ef erredst ockasani nv estment ,corporation
somet i
mesof f eraconv ersionpr ivilegewhi chent i
tlest hepr eferredst ockholderst o
exchanget heirshar esf orcommonst ocki nast i
pul atedr atio.
 Nov ot i
ngr ight
Pref erred st ockhol ders gi ve up some oft he pr i
vil
eges accor ded t o common
stockhol der s.Eg; Ther ightt ov otef ormember soft heBoar dofDi rect or s.
Pr eferredst ocksv arywi del ywi thr espectt ot hespeci alr ight sandpr i
v i
l
eges
grant ed.
ISSUANCEOFCAPI TALSTOCK
Stocksi ssuedmayhav e
 Parv alue
 Noparv aluebutst atedv alue
 Noparv alueandnost at edv alue
Stockmayal sobei ssued:
 Atpar -whenast ocki si ssuedatt hesameamtofpar
 Atpr emi um or
 Atdi scount
1.I ssui ngCommonSt ockatpar
Thisi swhenast ocki si ssuedatt hesameamountofpar
Eg:SupposeWOW cor por ationi ssues500shar esofi tsBr .10parcommonst ockf or
cashequal toi ts parv al
ue.Thest ocki ssuanceent ryis:
Jan.10 Cash( 500xBr .10) ……………………5000
Commonst ock……………………………. .5000
(Tor ecordt hei ssuanceofcommonst ockatpar )
2.I ssui ngCommonSt ockataPr emi um
Acor por ati
onusual l
yi ssuesi tscommonst ockf orapr i
ceabov eparv al
ue. The
excessamount .abov epari scal edapr
l emi um.
Eg; AssumeWOW cor por ationi ssues4, 000shar esofi t
satBr .10parcommonst ock
forapr i
ceofBr .25pershar e.Theent rytor ecor dt hei ssuanceoft hest ockis:
Jan.15 Cash( 4000xBr .25)……………………………………. .100,000
Commonst ock( 4000xBr .10) …………………………. 40, 000
Paidi ncapi tal i
nexcessofpar -common( 4000xBr .15) …. 60, 000
(Tor ecor di ssueofcommonst ockatpr emi um)
Apr emi um ont hesal eofst ocki snotgai n
STOCKKHOLDERS’ EQUI TY
Thest ockhol der ssect ionofacor por ation’sbal ancesheethast hef ol lowi ngfeature:
Commonst ock, Br.10par , 20,000shar esaut hor ized, 4500shar ei ssued- ---
-$
45,000
Pai d-incapi talinexcessofpar- ------
---
---
-----
----
---
-----
--
----
---
---
---
---
- 60, 000
Tot al pai di ncapi tal ----
---
--
-----
------
---
---
-------
---
----
---
----
---
---
---
--
-- 105, 000
Ret ainedear nings- -
--
----
------
---
-----
----
------
---
--
------
---
----
-----
--
----
--
----
-- 85, 000
Tot al stockhol der s’equi ty---
----
----
------
----
---
-------
--
-----
--
-----
--
----
---
-- $ 190. 000
 3.I ssui ngCommonSt ockataDi scount
Stocki ssuedatapr icebel owpari ssai dt obei ssuedatadi scount .
Eg:Assumeacor por ationi ssued1000shar esofBr .5parcommonst ockf orBr .3
pershar e.Theent ryt or ecor dt hei ssuance:
Feb.15 Cash( 1000xBr .3)……………………………… .3000
Di scountoncommonst ock( 1000x2)……………. .
2000
Commonst ock( 1000x5)……………………………. 5000
(Toi ssuecommonst ockatadi scount .)
ISSUI NGNOPARCOMMONSTOCK
Thecont i
ngentl iabilityoncommonst ocki ssuedatadi scountmayexpl ainwhysome
statelawsal lowcompani est oissuenoparst ock.I fthest ockhasnoparv alue,there
canbenodi scountandt husnocont ingentl iability.
Eg;Assumeacor p.i ssues300shar esofnoparcommonst ockf orBr .20pershar e.
Thest ocki ssuanceent ryi s
May10.Cash( 300x20)………………………6000
Commonst ock…………………………. 6000
(Toi ssuenoparcommonst ock.)
IssuingNo- ParCommonSt ockwi thaSt atedVal ue
Account ingf orno- parst ockwi thast at edv aluei si denticalt oaccount ingf orpar
valuest ock. Thepr emi um accountf orno- parcommonst ocki sent itl
ed“ paid-i
n
capital i
nexcessofst atedv alue-common. ”
Cash……………………………………………………xxx
Commonst ock……………………………………………. xxx
Commonst ocki nexcessofst atedv aluecommon………. .
xxx
Capital stockmaybei ssuedorsol d:
 Forcash:
 Fornoncashasset s
 Thr oughsubscr i
ption.
IssuingCommonSt ockf orAsset sOt hert hanCash
Stocksmaybei ssued:
 Forser vices( compensat iont oat tor ney s,consul tant s, andot her),or
 Fornon-cashasset s(land, bui l
dingandequi pment )
Toi l
lust rate,assumet hatt heat torneyf orCompactI ncorpor ation,agr eet oaccept
4,000shar esofBr1parv aluecommonst ocki npay mentoft hei rbi l
lofBr5, 000f or
serviceper for medi nhel pingt hecor por ationt oi ncor porate.Att het imeoft he
exchange, ther eisnoest abl ishedmar ketpr icef ort hest ock.
Jan.5. Or gani zationCost s 5,000
Commonst ock( par ) 4,000
Pai di ncapi t
al inexcessofparv alue 1, 000
Tor
( ecor dissuanceof4000shar esofBr1perval uest ockt oat tor ney)
Assumet hatRai nbowI ncor porat i
oni sapubl ichel dcor porationwhoseBr5parv alue
stocki sact iv el
yt radedatBr8pershar e.TheCo.i ssues10, 000shar esofst ockt o
acqui r
el andr ecentlyadv er t
isedf orsal e atBr90, 000.Thet r
ansact ionisr ecor dedas
foll
ows:
Apr i
l18. Land 80, 000
 Commonst ock 50,000
Paid-incapi talinexcessofperv alue 30,000
(Tor ecor dissuanceof10, 000shar eofBr5perv al
uest ockf orland)
Whenacor por at i
oni ssuescapi talstocki nexchangef orser v i
cesorf orasset sother
thancash,t het ransact i
onshoul dber ecor dedatt hecur rentmar ketv alueoft he
goodsorser vi
cesr eceived,oratt hemar ketv alueoft heshar e,whi chev erismor e
clearl
ydet ermi nabl e.
Issui
ngCommonSt ockt hr oughsubscr i
ptions
A st ock subscr i
ption is a cont ractin whi ch t he i
nv estoragr eed t o pay t he
subscr i
pti
onpr iceataf ut ur
edat eori naser iesofi nstallment .Thesubscr i
ber
receivesnoshar esunt ilhe/ shepayt hecont r actpr i
cei
nf ull
.Thesubscr ibernor mall
y
makesadownpay mentwhenhe/ shesignst hesubscr i
ptioncont ract;thebal anceis
paidininst allment .
Assumeacor porationr ecei vesasubscr iptiononJan.30f or5, 000shar esofBr10
parcommonst ock.Thesubscr ipti
onpr i
cei sBr18pershar e.A20%downpay ment
i
sr eceivedatt het imet hesubscr ipti
oncont racti ssi
gned.Ther emai nderi sduei n
twoequal installment sonMar .1andApr .1, 2003.
Jan.30. Cash 18,000 0.
St ocksubscr iptionr eceivable-common 72,000 0
Common stock subscr ibed (
5000 x Br 10)
50,000
Paid i n capi tali n excess of per - common ( 5000 x Br 8)
40,000
(
To recordt he sal
e ofsubscr
ipt
ion t
o 5,
000 shar
es ofBr10 per
capi
talatBr8andt her
ecei
ptof20%downpayment)
Theent
ri
est
orecordrecei
ptofthetwoinst
all
mentsandi
ssuanceoft
hestockare:
May1. Cash 36,
000 .
00
Stocksubscri
pti
onsrecei
vabl
e-common 36,000
(
Tor
ecor
drecei
ptoff
ir
sti
nst
almentoncommonst
ocksubscr
ipt
ion)
Apr
il1. Cash 36,000 0
Stocksubscr
ipt
ionsr
ecei
vable-common 36,
000
(
Tocol
l
ectsecondi
nst
almentoncommonst
ocksubscr
ipt
ion)
Whent hesubscr
ipt
ionpr
iceispai
dinf
ull
,thest
ocki
sissuedbyt
hefol
lowi
ngent
ry:
Apr
il1.Commonst ocksubscri
bed 50,
000 0
Commonst ock 50,
000
(Tor
ecor
dthei
ssuanceof5000shar
esofBr
.10parcommonsst
ockunder
subs.
)
Thel astentryisneededt otransf
ertheparvalueofthestockf r
om thesubscr
ibed
accountt ocommonst ock.
Issui
ngPr eferr
edSt ock
Account i
ngf orprefer
redstockfoll
owsthesamepat ternasil
lustr
atedforcommon
stock.
Assumet heWowCor porat
ion’schart
eraut
hori
zesissuanceofsharesof5%,Br.100
parpr ef
erredstock.OnFeb.1t hecorpor
ati
onissues400sharesatapr i
ceofBr110.
Theissuanceent ryis:
Feb.1Cash( 400xBr110) 44,000
 Pr efer redst ock( 400xBr100) 40,000
Pai di ncapi tal inex cessofpar-pr ef err
ed( 400xbr 10) 4,000
(Toi ssuepr ef erredst ockatapr emi um)
Div idendsonPr ef er redandcommonSt ock
Def i
ni ti
on:di v i
dendi sadi stribut ionofear ningsofacor por at i
ont oi tsshar ehol ders
i
nr et urnf ort hei ri nv est ment .Theamountofdi videndt obedi stributedmaybe
expr essedei theri naper cent ageorspeci fi
edamount .
AssumeMoonLi ghtCor por ationhast hef ollowingcl assesofst ocki ni tsbal ance
sheetonDec.31,2001.8% pr ef erredst ock,Br50par10, 000shar esaut hor i
zed,
2,000
Shar esi ssuedandout standi ng.I ft heboar doft hecor por ati
ondecl aresannual
cashdi v i
dendofBr150, 000, whati st heamountofdi videndt obeal locat ed( paid)t o
each cl ass ofst ockassumi ng t he pr eferr
ed st ocki s non- cumul ativ
e and non-
par ticipat ive?
Pr efer red( 8%xBr50x2, 000shar es) Br.
8,000
Toani nv estor , thepr efer redst ocki ssaf erbecausei tr eceiv esdi videndf i
rst.Thati s,
thecommonst ockhol der swi llr ecei veonl yt her emai ni
ngamountaf t
erpr eferred
stockhol der sobt ai nf irst.Howev er ,theear ning pot entialf rom an i nvestmenti n
commonst ocki smuchgr eat ert hanf rom ani nv estmenti npr ef erredst ock.Pr eferred
div i
dendsar eusual lyl imi tedt ot hespeci fi
edamount ,butt her ei snoupperl i
mi ton
theamountofcommondi vidends.
Classi ficat i
onofPr ef err edShar es
1.Cumul at ivebutNon-Par t
icipat i
ve
Cumul at i
v edi v idendf eat ureof fer spr eferredst ockhol der st her ightt or eceivebot h
cur rent– y eardi vidends and unpai d pr i
or-year (
s)di v idends ( cal led di vidends
i
nar rear s)bef or ecommonst ockhol der sr eceiveanydi v i
dends.I fthepr eferredst ock
i
snoncumul at i
v e, thecor por at i
oni snotobl i
gat edt opaydi videndsi nar rear s
2. Cumul at i
v e&Par ti
cipat i
ng
Par ticipat ing di v i
dend f eat ure gi ves pr eferred st ockhol der st he r ightt or eceive
div i
dendbey ondt hespeci fiedr ate( amount )byshar i
ngpr opor ti
onal lywi thcommon
stockhol der sf oranyr emai ningamount .If,howev er,thepr efer reddi videdi sli
mi tedt o
thespeci f i
edr ate( amount )t hest ocki sr eferr
edt oasnon- par ticipat ing.
Par ticipat ingpr ef err edst ocki sr are. I nf act ,prefer redst ocki snon- participating
unl essi ti sspeci fical l
ydescr i
bedaspar ti
cipatingont hest ockcer t i
ficateandi nt he
fi
nanci al st atement s.
Tr easur yst ock
Def inition- Tr easur yst ocki sacor por at i
on’sownst ockt hathasbeeni ssued,f ull
y
pai df or ,andacqui redbyt hei ssui ngcor poration,butnotr e-issued.Thepur chaseof
treasur yst ockdecr easest hecooper ation’sassetandi t
sst ockhol der ’
sequi ty.The
pur chaseoft reasur yst ocki susual lyrecor dedatcosti nat reasur yst ockaccount .
Reasonsf orr eacqui sition
 Tomakest ocksav ai l
abl et oi ssuet oof ficersandempl oy eesunderbonuspl an
 Tosuppor tt hest ock’ scur rentmar ketpr icebydecr easi ngt hesuppl yofst ock
av ai l
abl et ot hepubl i
c.
  Toi ncr easeear ningspershar ebyr educingt henumberofshar esout standing.
 Toav oidat akeov erbyanout sidepar ty.
\OnSep. 10t hecor por ationpur chases1, 000shar esofi tsBr .1parcommonas
treasur yst ock, pay ingcashofBr .7.50pershar e.
Thecor por ationr ecor dst hepur chaseasf oll
ows:
Sept .10. Tr easur yst ock- common( 1,000xBr .
7. 50) 7500 0
Cash 7,500
Tor
( ecor dpur chaseof1, 000shar eoft reasur y-stockatBr .7.5pershar e)
Tr easur est ocki sr ecor dedatcost ,wi thoutr ef er encet otheparv alueoft hest ock.
Thet reasur yst ockaccounti sr epor tedbel owr etai nedear ningsont hebal ancesheet ,
andi tsbal ancei ssubt ract edf rom t hesum oft ot alpaid-incapi talandRet ai
ned
Ear ni ng,
Re- issuanceorsal eofTr easur yst ock
Tr easur yst ocki susual lyr eissuedorsol dati tspur chasedcost ,abov eitscostor
bel owi t scost .
A)Sal eofTr easur yst ockatcost–t reasur yst ockmaybesol datanypr ice
agr eeabl et ot hecor por ationandt hepur chaser .I fthest ocki ssol dfort he
samepr icet hatt hecooper ationpai dt or eacqui r
ei t
,theent ryi sadebi ttocash
andacr edi tt oTr easur yst ockf ort hesameamount .
Cash xxx
Treasur yst ock xxx
B)Sal eofTr easur est ockabov ecost–I ft hesal ei sgr eat ert hanr eacqui si
tion
cost ,t
hed/ ci scr edi tedt ot heaccountpai d- i
ncapi t
al from t reasur yst ock.
Supposei nt hepr ev iouse. g.t heco.r esol d200ofi tstreasur yshar esf orBr .9per
shar e, theent r yis
Dec. 10. Cash( 200sh.xBr .9) 1800
0
Treasur yst ock, common( 200shxBr .
7.50) 1500
Paid- incapi tal from t reasur yst ock 300
(Tosel l200shar eoft reasur yst ockatBr .9pershar e)
TheBr .300cr editi nt heent ryisnotmadet oGai nonsal eofTr easur yst ock.
Sal eofTr easur yst ockbel owcost -Att imest her esalepr icei sl esst hancost .The
differ encebet weent heset woamount sisdebi tedt opai d-i
ncapi talf rom Tr easury .If
thedi ff erencebet weenr esal epr i
ceandcosti sgr eat erthant hecr edi tbalancei npai d
-i
n capi talf rom Tr easur y st ock account ,t hen t he cor por at ion debi ts Ret ai
ned
Ear ni ngsf ort her emai ningamount s.
Fore. g assumet hecor por ati
onsol d400shar eoft reasurest ockatBr .7pershar e.
Theent ryi s:
Dec15. Cash( 400shxBr7) 2800 0
Paid- incapi tal from t reasur yst ock( 400shxBr0. 5)200 0
Tr easur yst ock( 400shxBr7. 5cost ) 3,000
(Tor ecor dsal esof400sh.oft reasur yst ockatBr7)
Thesal esoft reasur yst ocki ncreasebot ht otal asset sandt ot al stockhol derequi t
y .
Repor tingofEar ningandDi v i
dends
Div idends:
Di
vi
dendsar
edi
str
ibut
ionofr
etai
nedear
ningsofacor
por
ati
oni
nthef
orm ofcash,
stocks, orot herasset s.Threedat esar ei mpor tanti
nconnect i
onwi thdivi
dends:
Decl ar
at i
on dat e-ist he dayt hatt he BOD announces di str
ibuti
on di v
idend.The
declarationcr eat esal iabili
tyforthecor por ati
on.
Toi ll
ustrate,assumet hatonDe.1, 2007, theBoar dofABCCor porationdeclaredaBr .
0.80pershar ecashdi videndon100, 000shar esofBr .10parv al
uecommonst ock.
Theent rytor ecor dthedecl ar
ationis:
Dec. 1 Ret ai nedEar nings( Br0.8x100, 000sh. ) 80,000 0
Di videndpay able 80,000
(Tor ecor ddecl arati
onofcashdi vidend)
Recor ddat e- i
st hedayt hatthel i
stoft henamesandaddr essoft hestockhol dersis
compi led.Thepur poseoft her ecorddat ei st oidenti
fyt heper sonsorent iti
est hat
willreceivet hedi vidends,nott odet er
mi net heamountoft hedi vi
dendl i
abilit
y.No
account ing ent ryi s necessar yon t he r ecor d dat
e because no f ur
therf i
nancial
tr
ansact i
onorcommi tmenthast akenpl ace.
Pay mentdat e-i st hedayonwhi cht hedi vi
dendsar esentt otheshar eholders.The
pay mentoft hecashdi videndisr ecordedatt histi
me.
Dividendpay abl e 80,000
Cash 80,
000
(Tor ecor dpay mentofdi vidend)