Page 488 - Accounting Principles (A Business Perspective)

12. Stockholders' equity: Classes of capital stock

After supplying the information requested in the incorporation application form, incorporators file the articles
with the proper office in the state of incorporation. Each state requires different information in the articles of
incorporation, but most states ask for the following:

• Name of corporation.
• Location of principal offices.
• Purposes of business.
• Number of shares of stock authorized, class or classes of shares, and voting and dividend rights of each
class of shares.
• Value of assets paid in by the incorporators (the stockholders who organize the corporation).

• Limitations on authority of the management and owners of the corporation.
On approving the articles, the state office (frequently the secretary of state's office) grants the charter and
creates the corporation.
As soon as the corporation obtains the charter, it is authorized to operate its business. The incorporators call the
first meeting of the stockholders. Two of the purposes of this meeting are to elect a board of directors and to adopt
the bylaws of the corporation.
The bylaws are a set of rules or regulations adopted by the board of directors of a corporation to govern the
conduct of corporate affairs. The bylaws must be in agreement with the laws of the state and the policies and
purposes in the corporate charter. The bylaws contain, along with other information, provisions for: (1) the place,

date, and manner of calling the annual stockholders' meeting; (2) the number of directors and the method for
electing them; (3) the duties and powers of the directors; and (4) the method for selecting officers of the
corporation.
Organization costs are the costs of organizing a corporation, such as state incorporation fees and legal fees
applicable to incorporation. The firm debits these costs to an account called Organization Costs. The Organization
Costs account is an asset because the costs yield benefits over the life of the corporation; if the fees had not been
paid, no corporate entity would exist. Since the account is classified on the balance sheet as an intangible asset, it is

amortized over its finite useful life. Most organizations write off these costs fairly rapidly because they are small in
amount.
As an illustration, assume that De-Leed Corporation pays state incorporation fees of USD 10,000 and attorney's
fees of USD 5,000 for services rendered related to the acquisition of a charter with the state. The entry to record
these costs is:
Organization Costs (+A) 15,000
Cash (-A) 15,000
To record costs incurred in organizing
corporation.
Assuming the corporation amortizes the organization costs over a 10-year period, this entry records
amortization at the end of the year:
Amortization Expense—Organization Costs (-SE) 1,500
Organization Costs (-A) 1,500
To record organization costs amortization
expense.
(15,000/10 years = $1,500).
Management of the corporation is through the delegation of authority from the stockholders to the directors to
the officers, as shown in the organization chart in Exhibit 95. The stockholders elect the board of directors. The

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