ACC212_Weygandt_Chapter13

CHAPTER13
Corporations:
Organization and
Capital Stock
Transactions

13-2

The Corporate Form of Organization

An entity separate and distinct from its owners.

Classified by Purpose Classified by Ownership
 Not-for-Profit  Publicly held
 For Profit  Privately held

► Salvation Army ► McDonald’s ► Cargill Inc.
► American Cancer ► Nike
Society ► PepsiCo
► Google

13-4

Characteristics of a Organization

Characteristics that distinguish corporations from
proprietorships and partnerships.
 Separate Legal Existence
 Limited Liability of Stockholders
 Transferable Ownership Rights
Advantages
 Ability to Acquire Capital
 Continuous Life
 Government Regulations
 Additional Taxes Disadvantages
 Corporate Management

13-5 SO 1 Identify the major characteristics of a corporation.


Corporation acts
 Separate Legal Existence under its own name
 Limited Liability of Stockholders rather than in the
name of its
 Transferable Ownership Rights stockholders.
 Continuous Life
 Additional Taxes



Limited to their
investment.
 Continuous Life



Shareholders may
 Transferable Ownership Rights sell their stock.
 Continuous Life



 Transferable Ownership Rights Corporation can
 Ability to Acquire Capital obtain capital
through the issuance
 Continuous Life of stock.



 Transferable Ownership Rights Continuance as a
 Ability to Acquire Capital going concern is not
affected by the
 Continuous Life withdrawal, death, or
 Government Regulations incapacity of a
stockholder,
 Additional Taxes employee, or officer.



 Se
pa
rat
e
Le
ga
l
Ex
ist
en
ce
 Li


 Ability to Acquire Capital Corporations pay
income taxes as a
 Continuous Life separate legal entity
 Government Regulations and in addition,
stockholders pay
 Additional Taxes taxes on cash
 Corporate Management dividends.



 Transferable Ownership Rights Separation of
 Ability to Acquire Capital ownership and
management
 Continuous Life prevents owners
 Government Regulations from having an
active role in
 Additional Taxes managing the
 Corporate Management company.



Stockholders
Illustration 13-1
Corporation
organization chart Chairman and
Board of
Directors

President and
Chief Executive
Officer

General Vice President Vice President
Vice President Vice President
Counsel and Finance/Chief Human
Marketing Operations
Secretary Financial Officer Resources

Treasurer Controller


Forming a Corporation

Initial Steps:
 Formed by grant of a state charter.
 Corporation develops by-laws.

Companies generally incorporate in a state whose laws are
favorable to the corporate form of business (Delaware, New
Jersey).

Corporations expense organization costs as incurred.


Ownership Rights of Stockholders

Stockholders have the right to: Illustration 13-3

1. Vote in election of board of
directors and on actions that
require stockholder approval.

2. Share the corporate earnings
through receipt of dividends.




3. Keep the same percentage ownership when new
shares of stock are issued (preemptive right*).

* A number of companies have eliminated the preemptive right.




4. Share in assets upon liquidation in proportion to
their holdings. This is called a residual claim.


Illustration 13-4 Prenumbered
Class A Class A
Class COMMON STOCK COMMON STOCK

PAR VALUE PAR VALUE
$1 PER SHARE $1 PER SHARE

Name of corporation
Stockholder’s name
Shares
Stock Certificate

Signature of corporate
official

13-19 SO 1

Stock Issue Considerations

Authorized Stock
 Charter indicates the amount of stock that a
corporation is authorized to sell.
 Number of authorized shares is often reported in the
stockholders’ equity section.



Issuance of Stock
 Corporation can issue common stock directly to investors
or indirectly through an investment banking firm.
 Factors in setting price for a new issue of stock:
1. Company’s anticipated future earnings.
2. Expected dividend rate per share.
3. Current financial position.
4. Current state of the economy.
5. Current state of the securities market.



Market Value of Stock
 Stock of publicly held companies is traded on organized
exchanges.
 Interaction between buyers and sellers determines the
prices per share.
 Prices tend to follow the trend of a company’s earnings and
dividends.
 Factors beyond a company’s control, may cause day-to-
day fluctuations in market prices.



Par and No-Par Value Stock
 Years ago, par value determined the legal capital per share
that a company must retain in the business for the
protection of corporate creditors.
 Today many states do not require a par value.
 No-par value stock is quite common today.
 In many states the board of directors assigns a stated
value to no-par shares.


Corporate Capital

Common Stock
Common Stock
Account
Account Paid-in Capital in
Paid-in Capital in
Paid-in Capital
Paid-in Capital Excess of Par
Excess of Par
Account
Account
Preferred Stock
Preferred Stock
Account
Account

Two Primary
Sources of Retained Earnings
Retained Earnings
Account
Account
Equity

Paid-in capital is the total amount of cash and other assets paid
in to the corporation by stockholders in exchange for capital
stock.
13-25 SO 2 Differentiate between paid-in capital and retained earnings.

Corporate Capital

Common Stock
Common Stock
Account
Account Additional Paid-in
Additional Paid-in
Paid-in Capital
Paid-in Capital Capital
Capital
Account
Account
Preferred Stock
Preferred Stock
Account
Account

Two Primary
Retained Earnings
Account
Account
Equity

Retained earnings is net income that a corporation retains for
future use.


Corporate Capital

Comparison of the owners’ equity (stockholders’ equity)
accounts reported on a balance sheet for a proprietorship, a
partnership, and a corporation.
Illustration 13-6


Accounting for Common Stock Issues

Primary objectives:

1) Identify the specific sources of paid-in capital.

2) Maintain the distinction between paid-in capital
and retained earnings.

Other than consideration received, the
issuance of common stock affects only paid-in
capital accounts.

13-28 SO 3 Record the issuance of common stock.


Issuing Par Value Common Stock for Cash
Illustration: Assume that Hydro-Slide, Inc. issues 1,000
shares of $1 par value common stock at par for. Prepare the
journal entry.

Cash 1,000
Common stock (1,000 x $1) 1,000



Issuing Par Value Common Stock for Cash
Illustration: Assume that Hydro-Slide, Inc. issues 2,000
shares of $1 par value common stock. Prepare Hydro-Slide’s
journal entry if (a) 1,000 share are issued for $1 per share, and
(b) 1,000 shares are issued for $5 per share.
a. Cash 1,000
Common stock (1,000 x $1) 1,000

b. Cash 5,000
Common stock (1,000 x $1) 1,000
Paid-in capital in excess of par value 4,000



Illustration 13-7



Issuing Common Stock for Services or
Noncash Assets
C

Cost is either the fair market value of the consideration given
up, or the fair market value of the consideration received,
whichever is more clearly determinable.



Illustration: Attorneys have helped Jordan Company
incorporate. They have billed the company $5,000 for their
services. They agree to accept 4,000 shares of $1 par value
common stock in payment of their bill. At the time of the
exchange, there is no established market price for the stock.
Prepare the journal entry for this transaction.

Organizational expense 5,000
Common stock (4,000 x $1) 4,000
Paid-in capital in excess of par 1,000



Illustration: Athletic Research Inc. is an existing publicly held
corporation. Its $5 par value stock is actively traded at $8 per
share. The company issues 10,000 shares of stock to acquire
land recently advertised for sale at $90,000. Prepare the journal
entry for this transaction.

Land (10,000 x $8) 80,000
Common stock (10,000 x $5) 50,000
Paid-in capital in excess of par 30,000


Accounting for Treasury Stock

Common Stock
Common Stock
Account
Account Paid-in Capital in
Paid-in Capital in
Paid-in Capital
Paid-in Capital Excess of Par
Excess of Par
Account
Account
Preferred Stock
Preferred Stock
Account
Account

Two Primary
Retained Earnings
Account
Account
Equity

Less:
Less:
Treasury Stock
Treasury Stock
Account
Account

13-35 SO 4 Explain the accounting for treasury stock.


Treasury stock - corporation’s own stock that it has
reacquired from shareholders, but not retired.

Corporations purchase their outstanding stock:
1. To reissue the shares to officers and employees under
bonus and stock compensation plans.

2. To enhance the stock’s market value.

3. To have additional shares available for use in the acquisition
of other companies.

4. To increase earnings per share.



Purchase of Treasury Stock
 Debit Treasury Stock for the price paid to reacquire the
shares.
 Treasury stock is a contra stockholders’ equity account,
not an asset.
 Purchase of treasury stock reduces stockholders’
equity.


Illustration 13-8

Illustration: On February 1, 2012, Mead acquires 4,000 shares
of its stock at $8 per share.

Treasury stock (4,000 x $8) 32,000
Cash 32,000



Stockholders’ Equity with Treasury stock
Illustration 13-9

Both the number of shares issued (100,000), outstanding (96,000), and the
number of shares held as treasury (4,000) are disclosed.



Disposal of Treasury Stock
Sale of Treasury Stock
 Above Cost
 Below Cost

Both increase total assets and stockholders’ equity.


Accounting for Treasury Stock Above
Cost

Illustration: On July 1, Mead sells for $10 per share 1,000
shares of its treasury stock, previously acquired at $8 per share.

July 1 Cash 10,000
Treasury stock 8,000
Paid-in capital treasury stock 2,000

A corporation does not realize a gain or suffer a loss from stock
transactions with its own stockholders.


Accounting for Treasury Stock Below
Cost

Illustration: On Oct. 1, Mead sells an additional 800 shares of
treasury stock at $7 per share.

Oct. 1 Cash 5,600
Paid-in capital treasury stock 800

Illustration 13-10


Accounting for Treasury Stock Below
Cost

Illustration: On Dec. 1, assume that Mead, Inc. sells its
remaining 2,200 shares at $7 per share.

Dec. 1 Cash 15,400 Limited
to
Paid-in capital treasury stock 1,200 balance
on
Retained earnings 1,000 hand



Preferred Stock

Features often associated with preferred stock.

1. Preference as to dividends.

2. Preference as to assets in liquidation.

3. Nonvoting.

Accounting for preferred stock at issuance is similar to that for
common stock.

13-45 SO 5 Differentiate preferred stock from common stock.

Preferred Stock

Illustration: Stine Corporation issues 10,000 shares of $10
par value preferred stock for $12 cash per share. Journalize
the issuance of the preferred stock.

Cash 120,000
Preferred stock (10,000 x $10) 100,000
Paid-in capital in excess of par –
Preferred stock 20,000

Preferred stock may have a par value or no-par value.


Preferred Stock

Dividend Preferences
 Right to receive dividends before common stockholders.

 Per share dividend amount is stated as a percentage of
the preferred stock’s par value or as a specified amount.

 Cumulative dividend – holders of preferred stock must
be paid their annual dividend plus any dividends in
arrears before common stockholders receive dividends.


Preferred Stock

Cumulative Dividend
Illustration: Scientific Leasing has 5,000 shares of 7%, $100
par value, cumulative preferred stock outstanding. Each $100
share pays a $7 dividend (.07 x $100). The annual dividend is
$35,000 (5,000 x $7 per share). If dividends are two years in
arrears, preferred stockholders are entitled to receive the
following dividends in the current year.


Preferred Stock

Liquidation Preferences
 Most preferred stocks have a preference on corporate
assets if the corporation fails.

 Provides security for the preferred stockholder.

 Preference to assets may be for the par value of the
shares or for a specified liquidating value.


Statement Presentation

Illustration 13-12

13-50 SO 6 Prepare a stockholders’ equity section.

Key Points
 Under IFRS, the term reserves is used to describe all equity
accounts other than those arising from contributed (paid-in)
capital. This would include, for example, reserves related to
retained earnings, asset revaluations, and fair value differences.
 Many countries have a different mix of investor groups than in
the United States. For example, in Germany, financial
institutions like banks are not only major creditors of
corporations but often are the largest corporate stockholders
as well. In the United States, Asia, and the United Kingdom,
many companies rely on substantial investment from private
investors.

13-51

Key Points
 There are often terminology differences for equity accounts.
The following summarizes some of the common differences in
terminology.

13-52

Key Points
 The accounting for treasury stock differs somewhat between
IFRS and GAAP. (However, many of the differences are beyond
the scope of this course.) Like GAAP, IFRS does not allow a
company to record gains or losses on purchases of its own
shares. One difference worth noting is that, when a company
purchases its own shares, IFRS treats it as a reduction of
stockholders’ equity, but it does not specify which particular
stockholders’ equity accounts are to be affected. Therefore, it
could be shown as an increase to a contra equity account
(Treasury Stock) or a decrease to retained earnings or share
capital. IFRS requires that the number of treasury shares held
be disclosed.

13-53

Key Points
 A major difference between IFRS and GAAP relates to the
account Revaluation Surplus. Revaluation surplus arises under
IFRS because companies are permitted to revalue their
property, plant, and equipment to fair value under certain
circumstances. This account is part of general reserves under
IFRS and is not considered contributed capital.
 As indicated earlier, the term reserves is used in IFRS to
indicate all non-contributed (non–paid-in) capital. Reserves
include retained earnings and other comprehensive income
items, such as revaluation surplus and unrealized gains or
losses on available-for-sale securities.

13-54

Key Points
 IFRS often uses terms such as retained profits or accumulated
profit or loss to describe retained earnings. The term retained
earnings is also often used.
 The accounting related to prior period adjustments is
essentially the same under IFRS and GAAP. One area where
IFRS and GAAP differ in reporting relates to error corrections in
previously issued financial statements. While IFRS requires
restatement with some exceptions, GAAP does not permit any
exceptions.
 Equity is given various descriptions under IFRS, such as
shareholders’ equity, owners’ equity, capital and reserves, and
shareholders’ funds.
13-55

Looking to the Future
As indicated in earlier discussions, the IASB and the FASB are
currently working on a project related to financial statement
presentation. An important part of this study is to determine
whether certain line items, subtotals, and totals should be clearly
defined and required to be displayed in the financial statements.
For example, it is likely that the statement of stockholders’ equity
and its presentation will be examined closely. In addition, the
options of how to present other comprehensive income under
GAAP will change in any converged standard.

13-56

IFRS Self-Test Questions
Under IFRS, a purchase by a company of its own shares is
recorded by:

a) an increase in Treasury Stock.

b) a decrease in contributed capital.

c) a decrease in share capital.

d) All of these are acceptable treatments

13-57

Which of the following is true?

a) In the United States, the primary corporate stockholders
are financial institutions.

b) Share capital means total assets under IFRS.

c) The IASB and FASB are presently studying how financial
statement information should be presented.

d) The amount to treasury stock is very different between
U.S. GAAP and IFRS.

13-58

Under IFRS, the amount of capital received in excess of par
value would be credited to:

a) Retained Earnings.

b) Contributed Capital.

c) Share Premium.

d) Par value is not used under IFRS.

13-59

Copyright

“Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
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express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
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errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.”

13-60

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