TABLECONTENT

5.ACCOUNTI
NGFORCORPORATI
ON.
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5.
1NATUREOFACORPORATI
ON.
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1

5.
2BASI
CCHARACTERSOFCORPORATION
/
SHARECOMPANI
ESANDPLC...
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2

5.
2.1ADVANTAGEOFCORPORATE
FORM ORGANI
ZATI
ON.
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5.
2.1DI
SADVANTAGEOFCORPORATE
FORM ORGANI
ZATI
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2

5.
3SHAERCOMPANYETHI
OPI
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.3

5.
4PAI
DINCAPI
TALFROM SHARE.
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.4

5.
4.1CHARACTEROFSHARE/
STOCKS.
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4

5.
4.2CLASSOFSTOCKS.
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.4

5.
4.3I
SSUI
NGSTOCKS.
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4

5.
5ACCOUNTI
NGFORDI
VIDI
NG.
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.5

5.
5.1CASHDI
VIDES.
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.5

5.
5.2STOCKDI
VIDES.
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.5

5.
6STOCKSSPLI
T..
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6

5.
7TREASURESTOCKTRANSACTI
ON.
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7

5.
8REPORTI
NGSTOCKHOLDEREQUI
TYONTHEBALANCESHEET.
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8

5.
9SUMMARY.
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.9

5.
9.1REFERENCE.
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.10
 ACCOUNTI
NGFORCORPORATI
ON

OVERVI
WE
Cor
por
ati
on i
scl
assi
fi
edasnonpr
ofi
tor pr
ofi
tseeki
ng or
gani
zat
ion.
Nonpr
ofi
tcor
por
ati
onsi
ncl
udet
hoseor
gani
zedf
orr
ecr
eat
ional
,educat
ional
,
char
it
abl
e,r
eli
giousi
nst
it
uti
onsandot
herphi
lant
hropi
cpur
poseswher
eas
Pr
ofi
tcor
por
ati
onsar
eengagedi
nbusi
nessact
ivi
tyt
heydependupon
pr
ofi
tabl
eoper
ati
onf
ort
hei
rcont
inuousexi
stence.Acor
por
ati
oni
saf
orm
ofbusi
nesst
hati
s ownedbysever
ali
nvest
ors.The owner
shi
pina
cor
por
ati
oni
sdi
vi
dedi
ntoshar
esandowner
sofacor
por
ati
onar
ecal
led
st
ockhol
der
s(or shar
ehol
der
s).Thei
nvest
ment
s of st
ockhol
der
sar
e
r
efer
redt
oast
hecapi
talst
ock(
orst
ock)oft
hecor
por
ati
on.Thecor
por
ate
f
orm ofbusi
nessi
swel
lsui
tedt
orai
si
ngl
argeamount
sofcapi
talbecause
cor
por
ati
onscansel
lst
ockt
o manyt
housands of i
nvest
ors.Thus,
cor
por
ati
ons,gener
all
yspeaki
ng,ar
elar
ger–i
nter
msofear
nings,asset
s
owned,andpeopl
eempl
oyed–t
hansol
epr
opr
iet
orshi
psandpar
tner
shi
ps.
Account
ingf
orcor
por
ati
onsdi
ff
ersf
rom account
ingf
orot
herf
ormsof
busi
nessi
nthet
reat
mentoft
ransact
ionst
hataf
fectst
ockhol
der
s’equi
ty.

5.
1NATUREOFCORPORATI
ON
A) Acor
por
ati
oni
sal
egalent
it
yhav
inganexi
stencesepar
ateanddi
sti
nctf
rom t
hat
ofi
tsowner
s.I
ntheey
esoft
hel
aw t
her
ear
etwoper
sonsandacor
por
ati
oni
san
‘
art
if
ici
alper
son’
hav
ingmanyofi
tsownr
ight
sandr
esponsi
bil
i
ties.
B)A cor
por
ati
ondi
ff
ersf
rom sol
epr
opr
iet
orshi
psandpar
tner
shi
psi
nthatmany
shar
ehol
der
sown i
t.Tr
ansf
erabl
est
ocksr
epr
esentowner
shi
pin a cor
por
ati
on.A
cor
por
atef
orm ofbusi
nessi
spr
efer
abl
etoot
herf
ormsofbusi
nessi
nsomer
espect
s.
5.
2CHARACTERI
STI
CSOFCORPORATI
ON
Amongt
hechar
act
eri
sti
csofacor
por
ati
onar
e:
a)Acor
por
ati
oni
sasepar
atel
egalent
it
y.Accor
dingt
othel
awacor
por
ateent
it
y
mayownpr
oper
tyi
nit
sownname,mayent
eri
ntocont
ractandr
esponsi
blef
ori
ts
owndebt
s.
b)Acor
por
ati
onhasal
egalst
atusi
ncour
t.Accor
dingt
othel
awacor
por
ati
onmay
sueandbesuedasi
fitwer
ear
eal
per
son.
c)Acor
por
ati
onhasi
tsownchar
ter
.Acor
por
ati
oni
scr
eat
edbyobt
aini
ngchar
ter
f
rom t
hest
atei
nwhi
cht
hecompanyi
stobei
ncor
por
ated.
d)
Acor
por
ati
onpay
sincomet
axesoni
tsear
nings.Thei
ncomeofacor
por
ati
oni
s
subj
ectt
oincomet
axes,
whi
chmustbepai
dbyt
hecor
por
ati
on.

5.
2.1ADVANTAGEsOFTHECORPORATEFORM OFORGANI
ZATI
O

Acor
por
ateent
it
yhasmanyadv
ant
agesnotav
ail
abl
einot
herf
ormsofor
gani
zat
ion.
Amongt
headv
ant
agesar
ethef
oll
owi
ng
A)CONTI
UOUS EXI
STENCEC:A cor
por
ati
on hasper
pet
ualexi
stencei
nthati
ts
cont
inuous exi
stence i
s notdi
ssol
ved byt
he deat
h on r
eti
rement
s ofanyofi
ts
member
s.

B)NOPERSONALLI
ABI
LITYFOROWNERS:Si
nceacor
por
ati
oni
ssepar
atel
egal
ent
it
y,t
he cr
edi
tor
s ofa cor
por
ati
on hav
e a cl
aim agai
nstt
he asset
s oft
he
cor
por
ati
on,
nott
heper
sonal
proper
tyoft
heowner
s.

C)
SEPARATI
ONOFMANAGEMENTFROM OWNERSHI
P:t
heowner
sofacor
por
ati
on
(
cal
l
edst
ockhol
der
sorshar
ehol
der
s)ownt
hecor
por
ati
onbutt
heydonotmanagei
t
onadai
l
ybasi
s.Toadmi
nist
ert
heaf
fai
rsoft
hecor
por
ati
on,pr
esi
dentandot
her
of
fi
cer
sar
ehi
redf
ori
t.Thus,i
ndi
vi
dualst
ockhol
derhasnor
ight
stopar
ti
cipat
ein
t
hemanagement
'sact
ivi
tyoft
hecor
por
ati
onunl
esst
hest
ockhol
derhasbeenhi
red
asacor
por
ateof
fi
cer
.
D)
EASI
LY TRANSFERABLE OWNERSHI
P SHARES:owner
shi
p ofa cor
por
ati
on i
s
evi
dencedby
tr
ansfer
ableshar
esofstocks.Thesesharesofstocksmaybesoldbyonei
nvest
ort
o
anotherwi
thoutdi
ssol
vi
ngordisrupti
ngthebusi
nessorgani
zat
ion.

5.
2.1DI
SADVANTAGEOFCORPORATEFORM OFORGANI
ZATI
ON

Someoft
hedi
sadv
ant
agesoft
hecor
por
ati
onar
e:
A)DOUBLETAXATI
ON:cor
por
ateear
ningsar
etaxedt
wot
imes.Theear
ningsar
etaxed
f
ir
stasacor
por
atei
ncomet
axesandagai
nasper
sonal
incomet
axesi
fthecor
por
ati
on.
Di
str
ibut
esi
tsear
ningst
ost
ockhol
der
s.

B)
DIFFI
CULTI
ES TO CONTROL: si
nce owner
shi
p i
s usual
l
y separ
ated f
rom
management
s,owner
sar
eunabl
etoexer
ciseact
ivecont
rol
overmanagementact
ions.

C)GREATERREGULATI ON:si
nceacorpor
ati
oncomesint
oexi st
enceaccordi
ngtothe
l
awoft hestat
e,thel
awmaypr ov
idef
orconsi
der
abl
eregulat
ionofthecorpor
ati
on’s
act
ivi
ti
es.Forexampl
e,thewi
thdr
awaloff
undsfr
om acorporati
onissubj
ectstocert
ain
l
imit
ssetsbylaw.

5.
3SHARECOMPANYI
NETHI
OPI
AN

Thesharecompanyi
sf undamental
lydi
fferentfr
om theotherfor
msofbusi nessor
gani
zat
ions.Al
lofi
tsmembersenjoyli
mit
ed
l
iabi
li
ty.I
tmayconsi
stofmanymember s.Member shi
pisfreel
ytransf
erabl
e.ShareCompanyist
hefor
m ofbusi
nessorgani
zat
ion
usual
lychosent
ooperateenter
pri
seswhi chrequir
ehugeamountofmoney .
Forashar ecompany, t
hecapit
alshal
lnotbel essthan50,000Birrasthelawstandsnow.Ashar ecompanymaynotbeest abl
ished
bylesst hanfiv
emember s.Personswhosi gnthememor andum ofassoci
ati
onandsubscribethewholeofthecapit
alshall
havethe
l
egal statusoffounders.Thefounder
smayr eservepersonall
ytothemselvesatleastonef
ift
hofthenetprofi
ts.Thi
sisinadditi
on
totheirright
sasshar ehol
ders.However,suchr i
ghttogetone-fi
fthofthenetprofi
tsmustbementionedi
nt hememor andum of
association.

Ashar
ecompanyshal
lnotr
emai
ninbusi
nessf
ormor
ethansi
xmont
hsaf
tert
henumberofmember
sisr
educedt
olesst
hanf
ive.

5.
4PAI
DINCAPI
TALFROM SHARE

Paid-
incapit
alisthetotalamountrecei
vedfr
om thei
ssuanceofcommonor
pr
eferr
edst ock.I
tiscalcul
atedbyaddingtheparval
ueoftheissuedshar
eswi
tht
he
amountsreceivedinexcessoft heshar
es'parval
ue.

5.
4.1CHARACTERSOFSHARE/
STOCKS

Whennumberofsharesofstockthatacor
porat
ioni
sauthor
izedtoissueisst
ated
i
nit
schar
ter
.Theter
mi ssuedrefer
stotheshar
esissuedtothestockhol
der
s.A
corporati
onmayr eacqui r
esomeoft he
stockthatithasi ssued.Thest ockremai ningi nt hehandsofst ockhol dersi sthen
call
edout standi ngst ock.Ther elati
onshipbet weenaut hori
zed, issued, andout standing
stockisshowni nt hegr aphicatt heleft.
Uponr equest ,cor por ati
onsmayi ssuest ockcer ti
ficatestost ockhol derst odocument
thei
rowner ship.Pr i
ntedonast ockcer ti
ficateist henameoft hecompany ,thenameof
thestockhol der, andt he
numberofshar esowned.Thest ockcer ti
f i
catemayal soindicat eadol laramount
assignedt oeachshar eofst ock,call
edparv alue.St ockmaybei ssuedwi t
houtpar ,i
n
whichcasei ti
scal l
edno- parstock.Insomest ates,theboar dofdi r
ect orsofa
corporati
oni sr equi redt oassi gnast atedv aluet ono- parst ock.
Corporationshav el imi t
edl iabil
it
yand, thus, creditorshav enocl aim agai nst
stockholders’per sonal asset s.Topr otectcr editors,howev er,somest atesr equire
corporati
onst omai nt ai
nami ni
mum
amountofpai d- i
ncapi t
al.Thi smi ni
mum amount ,call
edl egal capi tal,usuallyincl
udes
theparorst atedv alueoft heshar esissued.
Themaj orr i
ght st hataccompanyowner shi pofashar eofst ockar easf oll
ows:

1.Ther
ightt
ovot
einmat
ter
sconcer
ningt
hecor
por
ati
on.

2.Ther
ightt
oshar
eindi
str
ibut
ionsofear
nings.

3.Ther
ightt
oshar
einasset
sonl
i
qui
dat
ion.

Thesest
ockr
ight
snor
mal
l
yvar
ywi
tht
hecl
assofst
ock.

5.
4.2CLASSESOFSTOCKS

Whenonl yonecl assofst ocki sissued, i

tiscal ledy nst ock.Eachshar eofcommon
stockhasequal ri
ght s.Acor porati
onmayal soi ssueoneormor eclassesofst ockwi th
vari
ouspr eferencer ightssuchasapr eferencet odi vidends.Suchast ocki scalleda
preferredst ock.Thedi vi dendr i
ghtsofpr eferredst ockar est atedei therasdol larsper
shareorasaper centofpar .Forexampl e,a$50parv al uepr eferredst ockwi tha$4per
sharedi vi
dendmaybedescr ibedasei ther:5$4pr efer redst ock, $50paror8%pr eferr
ed
stock, $50parBecauset heyhav ef i
rstrights(pr eference)t oanydi vidends, pref erred
stockhol dershav eagr eaterchanceofr eceiv i
ngdi videndst hancommonst ockhol ders.
Howev er,sincedi videndsar enor mallybasedonear nings, acorpor ationcannot
guar anteedi videndsev ent opr eferr
edst ockhol der s.
Thepay mentofdi videndsi saut hori
zedbyt hecor por at i
on’sboar dofdi r
ect or
s.When
author i
zed, thedi r
ect orsar esai dtohav edecl aredadi v idend.Cumul ativepr ef
erred
stockhasar ighttor ecei ver egulardivi
dendst hatwer enotdecl ared( paid)inpr i
ory ears.
Noncumul at i
vepr efer r
edst ockdoesnothav et hisr ight .Cumul ati
vepr eferredstock
divi
dendst hathav enotbeenpai di nprioryearsar esai dt obei nar rear s.Anypr ef erred
divi
dendsi nar rearsmustbepai dbef oreanycommonst ockdi v i
dendsar epaid.In
addition,anydi vi
dendsi nar rearsarenor mal l
ydi scl osedi nnot est ot hef inancial
statement s.
Toil
l
ust
rat
e,assumet
hatacor
por
ati
onhasi
ssuedt
hef
oll
owi
ngpr
efer
redand
com monstock:

1,
000shar
esof$4cumul
ati
vepr
efer
redst
ock,
$50par

4,
000shar
esofcommonst
ock,
$15par

Thecor porati
onwasor ganizedonJanuar y1, 2008,andpai dnodi videndsin2008and
2009.I n2010, thecorporati
onpaiddividendsof$22, 000.Exhi bit4showshowt he
$22,000ofdi vi
dendspaidi n2010isdistributedbetweent hepr eferredandcommon
stockhol ders.I
nadditi
ont odivi
dendpr eference,preferredst ockmaybegi v
en
preferencest oasset sifthecorporat
iongoesoutofbusi nessandi sli
quidated.
Howev er,clai
msofcr edit
orsmustbesat isfi
edf i
rst
.Pr eferredst ockholder
sar enexti
n
l
inet orecei veanyremainingassets,f
ollowedbyt hecommonst ock.

5.
4.3I
SSUI
NGSTOCK

Aseparat
eaccountisusedforrecordi
ngt heamountofeachcl assofstockissuedt
o
i
nvestor
sinacorporati
on.Forexample,assumet hatacorporati
onisauthor
izedto
i
ssue10,000sharesof$100parpr ef
err
edst ockand100,000shar esof$20par
commonst ock.
Thecorporat
ionissued5,000sharesofpreferredstockand50,000
shar
esofcommonst ockatparforcash.Thecorporati
on’sentrytorecor
dthestock
i
ssueisasfoll
ows:

Cash.
..
..
..
..
..
..
..
..
..
..
..
..
.1,
500,
000

Pr
efer
redSt
ock.
..
..
..
..
..
..
..
.500,
000

CommonSt
ock.
..
..
..
..
..
..
..
.1,
000,
000

I
ssuedpr
efer
redst
ockandommon

stockatparf
orCass
St
ocki
soft
eni
ssuedbyacor porat
ionatapri
ceothert
hanit
spar.Thepr
iceatwhi
ch
st
ocki
ssol
ddependsonav ari
etyoffact
ors,
suchasthefol
l
owing:

1.Thef
inanci
alcondi
ti
on,
ear
ningsr
ecor
d,anddi
vi
dendr
ecor
doft
hecor
por
ati
on.

2.I
nvest
orexpect
ati
onsoft
hecor
por
ati
on’
spot
ent
ial
ear
ningpower
.

3.Gener
albusi
nessandeconomi
ccondi
ti
onsandexpect
ati
ons.

Ifstockisi
ssued(sol
d)forapri
cethatismor ethanit
spar,thestockhasbeensoldata
premium.Forexample,i
fcommonst ockwi t
haparof$50i ssoldfor$60pershare,
the
stockhassoldatapremium of$10.Ifst
ockisissued(sold)forapri
cethatisl
essthan
i
tspar ,t
hestockhasbeensoldatadiscount.Forexample,i
fcommonst ockwit
hapar
of$50issol
dfor$45pershar
e,thestockhassoldatadiscountof$5.Manystat
esdo
notpermi
tst
ocktobesoldatadiscount.I
notherstat
es,st
ockmaybesol data
di
scounti
nonlyunusual
cases.Sincest
ockisrar
elysoldatadiscount
,iti
snot
i
ll
ustr
ated

5.
5ACCOUNTI
NGFORDI
VIDENDS

Whenaboar dofdirect
orsdeclaresacashdivi
dend,itauthori
zesthedistr
ibut
ion
ofcasht ost
ockholders.Whenaboar dofdi
rect
orsdeclar
esast ockdi
vidend,i
t
authorizesthedist
ri
butionofitsstock.I
nbothcases,decl
aringadi vi
dendreducesthe
retai
nedearningsofthecorporati
on.
5.5.1CASHDI VIDENDs

Acashdistr
ibut
ionofear
ningsbyacorporat
iontoitsshareholder
sisacash
di
vi
dend.Al
thoughdiv
idendsmaybepaidinotherassets,cashdivi
dendsaret
hemost
common.Threecondi
tionsf
oracashdiv
idendareasf oll
ows:

1.Suf
fi
cientr
etai
nedear
nings

2.Suf
fi
cientcash

3.For
mal
act
ionbyt
heboar
dofdi
rect
ors

Theremustbeasuf ficient(largeenough)bal ancei nRet ai

nedEar ningst odeclarea
cashdi vi
dend.Thati s, t
hebal anceofRet ainedEar ningsmustbel ar geenoughsot hat
thedividenddoesnotcr eateadebi tbalancei nther et
ainedearningsaccount .Howev er
alargeRet ainedEarningsbal ancedoesnotmeant hattherei
scashav ail
abletopay
divi
dends.Thi sisbecauset hebal ancesofCashandRet ai
nedEar ningsar eoften
unrelat
ed.Ev eniftherear esuf fi
cientretainedear ningsandcash, acor porati
on’sboar d
ofdirectorsisnotrequi redtopaydi vi
dends.Nev ertheless,manycorpor ati
onspay
quarterl
ycashdi vi
dendst omaket hei
rstockmor eat t
racti
vetoinv estors.Specialor
extr
adi videndsmayal sobepai dwhenacor porationexper i
enceshi gherthannormal
profi
ts.
Threedatesi ncludedi nadi v
idendannouncementar easf oll
ows:

1.Dat
eofdecl
arat
ion

2.Dat
eofr
ecor
d

3.Dateofpay
ment
TheDATEOFDECLARTI ONisthedatetheboardofdir
ector
sformall
yauthorizest
he
paymentofthedivi
dend.Onthi
sdate,t
hecorporat
ionincur
stheliabi
li
tytopaythe
amountofthedivi
dend

TheDATEOFRECORDist
hedat
ethecorporat
ionusestodet
ermi
newhich
st
ockhol
der
swi
llr
ecei
vet
hedi
vi
dend.Duri
ngtheperiodoft
imebet
weenthedat
eof
declarat
ionandt hedat
eofrecord,t
hestockpri
ceisquotedassel
l
ingwit
h-div
idends.
Thismeanst hatanyinvest
orspurchasi
ngthestockbef
orethedat
eofrecordwill
receiv
ethedividend

TheDATEOFPAYMENTi sthedat et
hecorporat
ionwil
lpaythedivi
dendtothe
stockhol
der swhoownedt hestockonthedateofrecor
d.Duri
ngt heper
iodofti
me
betweentherecor
ddateandt hepaymentdate,t
hestockpri
ceisquotedassell
ingex-
di
v i
dends.Thismeansthatsi
ncethedateofrecordhaspassed,anynewinvest
orswil
l
notrecei
vethedivi
dend

Toi
ll
ust
rat
e,assumet
hatonOctober1HiberCorpor
ati
ondecl
arest
hecash
di
videndsshownbelowwi
thadateofrecor
dofNov ember10andadateofpaymentof
December2.

Di
vi
dendTot
al

perShar
eDi
vi
dends

Pr
efer
redst
ock,
$100par
,5,
000shar
esout
standi
ng......$2.
5. $12,
500

Commonst
ock,
$10par
,100,
000shar
esout
standi
ng.....$0.
30 30,
000

Tot
al..........................................
..
..
..
..
..
.. $42,
500

OnOct
ober1,
thedecl
arat
iondat
e,Hi
berCor
por
ati
onr
ecor
dst
hef
oll
owi
ngent
ry

oct1 CashDi
vi
dends.
..
..
..
..
..
..
..
..
..
..
..
..
..
42,
500

CashDi
vi
dendsPay
abl
e..
..
..
..
..
..
..
..
..
42,
500

Decl
aredcashdivi
dends
OnNovember10, thedat
eofrecord,noentr
yisnecessar
y.Thisdatemerel
y
deter
mineswhichstockhol
derswil
lrecei
vethediv
idends.
OnDecember2, t
hedateofpayment ,Hi
berCorporat
ionr
ecordsthepay
mentoft
he
di
vi
dendsasfol
l
ows:

CashDi
vi
dendsPay
abl
e..
..
..
..
..
..
.42,
500

Cash.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
42,
500

Pai
dcashdi
vi
dends

Attheendoftheaccounti
ngperiod,t
hebal anceinCashDi vi
dendswill
bet r
ansfer
red
toRetai
nedEarni
ngsaspartoftheclosingpr ocess.Thiscl
osingent
rydebit
sRetai
ned
Earni
ngsandcredi
tsCashDividendsforthebal anceofthecashdivi
dendsaccount
.If
thecashdi
vi
dendshav enotbeenpaidbyt heendoft heper
iod,CashDivi
dendsPayabl
e
wi
l
lber
epor
tedont
hebal
ancesheetasacur
rentl
i
abi
l
ity

5.
5.2STOKEDI
VIDENDs

Astockdividendisadist
ri
buti
onofshar esofst ocktostockholders.Stockdiv
idends
arenormallydeclaredonl
yoncommonst ockandi ssuedt ocommonst ockhol
der
s.The
recor
dingofast ockdivi
dendaff
ectsonlystockholders’equi
ty.Specifi
cal l
y,t
heamount
ofthestockdividendistr
ansf
err
edfrom Ret ai
nedEar ni
ngst oPaid-i
nCapi tal
.The
amountt r
ansferredisnor
mallyt
hefairv
alue( marketprice)oftheshar esissuedi
nt he
stockdivi
dend.9

Toil
lust
rat
e,assumet
hatthest
ockhol
der
s’equi
tyaccount
sofHendr
ixCor
por
ati
onas
ofDecember15areasfol
l
ows:

CommonSt
ock,
$20par(
2,000,
000shar
esi
ssue.
..
..
.$40,
000,
000

Pai
d-I
nCapit
al i
nExcessofPar —CommonStock.
..
..
..
..
..
..
9,000,
000
Ret
ainedEar
nings..
..
..
..
..
..
..
..
..
..
.26,
600,
000

OnDecember15,Hendr
ixCorpor
ati
ondeclar
esastockdi
videndof5%or100, 000shar
es
(2,
000,
000shares5%)tobeissuedonJanuary10tost
ockholdersofrecor
don
December31.Themarketpr
iceofthest
ockonDecember15( thedateofdeclar
ati
on)is
$31pershar
e.Theentr
ytorecordthest
ockdivi
dendi
sasf ol
lows:

St
ockDi
vi
dends.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
3,100,
000

St
ockDi
vi
dendsDi
str
ibut
abl
e..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.2,
000,
000

Pai
d-I
nCapi
tal
inExcessofPar
––CommonSt
ock.
..
.1,
100,
000

Decstocke5%(100,000shar
e)st
ock
di
vi
dendon$20parcommonst ock
withamar ketpr
iceof$31pershar
e.

Aft
ertheprecedingent
ryi
srecorded,StockDividendswill
hav
eadebitbal
anceof
$3,
100,000.Li
kecashdivi
dends,thestockdivi
dendsaccountiscl
osedtoRetai
ned
Ear
ningsattheendoftheaccount i
ngperiod.Thisclosi
ngent
rydebi
tsRet
ained
Ear
ningsandcr edi
tsSt
ockDivi
dends.

Attheendoftheperi
od,thestockdiv
idendsdi st
ri
butableandpaid-
incapi
tali
nexcess
ofpar—commonst ockaccountsarereportedinthePaid-i
nCapit
alsecti
onofthe
bal
ancesheet.Thus,t
heef f
ectoft
hepr ecedingstockdivi
dendistotr
ansfer$3,
100,
000
ofret
ainedearni
ngstopaid-i
ncapi
tal
.

OnJanuar
y10,t
hest
ockdivi
dendisdist
ri
butedt
ostockholdersbyi
ssui
ng100,
000
shar
esofcommonst
ock.Theissuanceofthest
ockisrecordedbyt
hefoll
owi
ngentr
y:
 Di
vi
dendsDi
str
ibut
abl
e..
..
..
..
..
..
..
..
..
2,000,
000

CommonSt
ock.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.2,
000,
000

I
ssuedstockasstockdiv
idend
Astockdiv
idenddoesnotchanget heasset
s,l
iabi
li
ti
es,
ortot
alst
ockhol
ders’
equi
tyof
acorpor
ati
on.Likewise,astockdiv
idenddoesnotchangeanindi
vi
dualst
ockhol
der’
s
pr
oporti
onateint
erest(equi
ty)i
nthe

5.
6STOCKSPLI
Ts

Ast ocksplitisapr
ocessbywhi chacorporati
onreducestheparorst atedvalueof
i
tscommonst ockandissuesapr oport i
onatenumberofaddi t
ionalshares.Astockspl
it
appliestoallcommonshar esi ncl
udingtheunissued,i
ssued,andtreasur
yshar es.A
maj orobjecti
veofastocksplitistoreducethemar ketpri
cepershareoft hestock.Thi
s,
i
nt urn,attr
actsmor ei
nvestorstothestockandbr oadensthetypesandnumber sof
stockholders
Stoc ks plitsoc curwhe nma nag eme ntwish estor educet hema r ketpriceof
stoc ks ot hatmor einves t
or sca naffordit.Wh ens tockiss pli
t,thep aror
stat edva lueoft hestocki sr educeda swe l
last hema rketv alue.Howe ver,
thea mou n t
si nthepa i
d-inc apitalaccoun t
sa ren otaffected.Con seque nt
ly,
noj ou rnale ntr
y–ot hert haname mor andu me ntry–i sn eededt or ecordthe
sp l
it.

5.
7TREASURESTOCKTRANSACTI
ON

Ca p i
tals t
oc kth atisreac qu iredb yac orporat
ioni sterme dt r
ea su r
y
stoc k.Tre asurys tockh a snov ot i
n g,dividend,oroth erstoc k holderrigh t
s.
Stoc kc anb er e acquiredforv a riou srea sons,sucha stoh a ves hares
availablef ord ist
ributiontoe mp l
oy eesu nderbonu sp l
ans , andt os up port
thema rke tpriceoft h estockb ys ti
mu latingtradi
ngi nit.Ift r
ea surys tocki s
resold ,
n og a i
norl os sisr ecog n i
z edont hee xchang ebec a uset he
corp oration’
sp ri
ma ryob jectivei sn ott oma keprofitbytra d i
ngi nitsown
stoc k.Ina dd i
tion,thet r
e asurys tock sa renota ssets;rat
h e rtheya re
dedu c t
ion sfrom s toc kholderse qu i
ty.
Toill
ustratethecostmet hod, assumet hatHarambeCor porationhad50, 000
sharesofBr .10parcommonst ockout standingatthebeginni
ngoft hecurrentyear.
Thecompanypur chased500shar esf orcashandr ecei
ved500shar esinset t
lementof
adebtf rom stockholders.Themar ketspriceofstockswasBr .30/ share.Thef ol
lowing
entr
yi srequir
edi nvolv
ingthetransact ions

Tr
easur
yst
ock 30,
000
Cash 15,
000
Not
esRecei
vabl
e 15,
000
I
fthecompanysel
l
s600shar
esoft
het
reasur
yst
ockf
orBr
.31each,
theent
rywoul
dbe:
st
ock

Cash 18,
600
Tr
easur
yst
ock 18,
000
Pai
dincapi
tal
from sal
eof 600
Tr
easurystock
Pai
dincapi
talf
rom sal
eoftreasur
yst
ocki
srepor
tedi
nthepai
dincapi
tal
sect
ionoft
he
bal
ancesheet
.Tr
easur
yst
ocki
sdeduct
edf
rom t
het
otaloft
hepai
dincapi
taland
Ret
ainedear
nings.
5.
8REPORTI
NGSTOCKHOLDEREQUI
TYONTHEBALANCESHEET
Aswi
thot
hersect
ionsoft
hebal
ancesheet
,al
ter
nat
ivet
ermsandf
ormat
smaybe
usedi
nrepor
ti
ngst
ockhol
der
s’equi
ty.Al
so,changesi
nret
ainedear
ningsandpai
d-i
n
capi
tal
mayber
epor
tedi
nsepar
atest
atement
sornot
est
othef
inanci
alst
atement
s.
Ther
ear
etwomet
hodsf
orr
epor
ti
ngst
ockhol
der
s’equi
ty.
MTHODE1.Eachcl
assofst
ocki
srepor
ted,f
oll
owedbyi
tsr
elat
edpai
d-i
ncapi
tal
account
s.Ret
ainedear
ningsi
sthenr
epor
tedf
oll
owedbyadeduct
ionf
ort
reasur
y
MTHEOD2.Thest
ockaccount
sar
erepor
ted,f
oll
owedbyt
hepai
d-i
ncapi
talr
epor
ted
asasi
ngl
eit
em,Addi
ti
onalpai
d-i
ncapi
tal
.Ret
ainedear
ningsi
sthenr
epor
tedf
oll
owed
cor
por
ati
onf
ort
reasur
yst
ock.
5.
9SUMMARY
ACor
por
ati
onhast
hef
oll
owi
ngmosti
mpor
tantchar
act
eri
sti
cs:
Separ
atel
egal
exi
stence,
li
mit
edl
i
abi
l
ity
,andt
ransf
erabl
euni
tsofst
ocks.
Thepr
imar
yadv
ant
agesofacor
por
ati
onar
enoper
sonall
i
abi
l
ityofst
ockhol
der
s
f
ort
hedebt
soft
hebusi
ness,t
het
ransf
erabi
l
ityofowner
shi
pshar
es,cont
inui
tyof
exi
stenceandabi
l
ityt
ohi
repr
ofessi
onal
management
s.
St
ockhol
der
sinacor
por
ati
onnor
mal
l
yhav
ether
ight
stoel
ectt
heboar
dof
di
rect
ors,t
oshar
eindi
vi
dendsdecl
aredbyt
hedi
rect
ors,t
oshar
eist
hedi
str
ibut
ion
ofasset
sift
hecor
por
ati
oni
sli
qui
dat
ed,
andt
osubscr
ibet
oaddi
ti
onalshar
esi
fthe
cor
por
ati
ondeci
dest
oincr
easest
henumberofshar
esout
standi
ng.
Commonst
ockr
epr
esent
sthet
ruer
esi
dualowner
shi
pofacor
por
ati
on.These
shar
ehav
evot
ingr
ight
sandcannotbecal
l
ed.Pr
efer
redst
ockhaspr
efer
enceov
er
 commonst
ockwi
thr
espect
stodi
vi
dendsandt
odi
str
ibut
ionsi
ntheev
ent
sof
l
i
qui
dat
ion.
Anyt
reasur
yst
ockhel
datt
heendofanaccount
ingper
iodi
sdeduct
edf
rom t
he
t
otal
oft
hepai
d-i
n-capi
tal
andr
etai
nedear
ningsoft
hecor
por
ati
on.
Todet
ermi
net
heequi
typershar
e,t
heequi
tyal
l
ocat
edt
oeachcl
assi
sdi
vi
dedby
t
henumberofshar
esout
standi
ngoft
her
espect
ivecl
ass.
5.
9.1REFERENCS
PRI
NCI
PLEOFACCOUNTI
NG 2MODULE
WARREN,
ACCOUNTI
NG_
__23r
d__
EDI
TION.
ETHI
OPI
ANBUSI
NESSLAW