Chapter 13-1. Chapter 13-2 Chapter 13 Accounting Principles, Ninth Edition Corporations: Organization and Capital Stock Transactions

Chapter 13-1

Chapter 13-2

Chapter 13

Accounting Principles, Ninth Edition

Corporations: Organization and

Capital Stock Transactions

Chapter 13-3

1. Identify the major characteristics of a corporation.

2. Differentiate between paid-in capital and retained earnings.

3. Record the issuance of common stock.

4. Explain the accounting for treasury stock.

5. Differentiate preferred stock from common stock.

6. Prepare a stockholders’ equity section.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 13-4

Issuing par Issuing par value stockvalue stock

Issuing no-Issuing no-par stockpar stock

Issuing stock Issuing stock for services for services or noncash or noncash assetsassets

The Corporate The Corporate Form of Form of

OrganizationOrganization

The Corporate The Corporate Form of Form of

OrganizationOrganization

CharacteristicCharacteristicss

FormationFormation

Stockholder Stockholder rightsrights

Stock issue Stock issue considerationsconsiderations

Corporate Corporate capitalcapital

Purchase of Purchase of treasury stocktreasury stock

Disposal of Disposal of treasury stocktreasury stock

Dividend Dividend preferencespreferences

Liquidation Liquidation preferencepreference

Accounting Accounting for Common for Common Stock IssuesStock Issues

Accounting Accounting for Common for Common Stock IssuesStock Issues

Accounting Accounting for Treasury for Treasury

StockStock

Accounting Accounting for Treasury for Treasury

StockStock

Preferred Preferred StockStock

Preferred Preferred StockStock

Statement Statement PresentationPresentation

Statement Statement PresentationPresentation

Corporations: Organization and Capital Corporations: Organization and Capital Stock TransactionsStock Transactions

Corporations: Organization and Capital Corporations: Organization and Capital Stock TransactionsStock Transactions

Capital stockCapital stock

Additional Additional paid-in capitalpaid-in capital

Retained Retained earningsearnings

Chapter 13-5

An entity separate and distinct from its owners.

The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization

Classified by Purpose

Not-for-Profit

For Profit

Classified by Ownership

Publicly held

Privately held

McDonald’s Ford Motor Company PepsiCo Google

Salvation Army American Cancer

Society Gates

Foundation

Cargill Inc.

Chapter 13-6

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Continuous Life

Government Regulations

Additional Taxes

Corporate Management

Characteristics that distinguish corporations from proprietorships and partnerships.

Characteristics of a CorporationCharacteristics of a CorporationCharacteristics of a CorporationCharacteristics of a Corporation

SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.

Advantages

Disadvantages

Chapter 13-7





Continuous Life


Additional Taxes





Corporation acts under its own name rather than in the name of its stockholders.

Chapter 13-8





Continuous Life


Additional Taxes





Limited to their investment.

Chapter 13-9





Continuous Life


Additional Taxes





Shareholders may sell their stock.

Chapter 13-10





Continuous Life


Additional Taxes





Corporation can obtain capital through the issuance of stock.

Chapter 13-11





Continuous Life


Additional Taxes





Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer.

Chapter 13-12





Continuous Life


Additional Taxes





Chapter 13-13





Continuous Life


Additional Taxes





Corporations pay income taxes as a separate legal entity and in addition, stockholders pay taxes on cash dividends.

Chapter 13-14





Continuous Life


Additional Taxes





Separation of ownership and management prevents owners from having an active role in managing the company.

Chapter 13-15



Stockholders

Chairman and Board of Directors

President andChief Executive

Officer

General Counsel and

Secretary

Vice PresidentMarketing

Vice PresidentFinance/Chief

Financial Officer

Vice PresidentOperations

Vice PresidentHuman

Resources

Treasurer Controller

Illustration 13-1 Corporation organization chart

Chapter 13-16

File application with the Secretary of State.

State grants charter.

Corporation develops by-laws.

Initial Steps:

Forming a CorporationForming a CorporationForming a CorporationForming a Corporation


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.

Chapter 13-17

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

Stockholders have the right to:

Ownership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of Stockholders


2. Share the corporate earnings through receipt of dividends.

Illustration 13-3

Chapter 13-18

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




* A number of companies have eliminated the preemptive right.

Illustration 13-3

Chapter 13-19

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




Illustration 13-3

Chapter 13-20



Class A COMMON STOCK

Class A COMMON STOCK

PAR VALUE $1 PER SHARE

PAR VALUE $1 PER SHARE

Stock Certificate

Stock Certificate

Name of corporation

Stockholder’s name

Class

Shares

Signature of corporate official

PrenumberedIllustration 13-4

Chapter 13-21

Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations


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.

Authorized Stock

Chapter 13-22



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. the company’s anticipated future earnings

2. its expected dividend rate per share

3. its current financial position

4. the current state of the economy

5. the current state of the securities market

Issuance of Stock

Chapter 13-23



Stock of publicly held companies is traded on organized exchanges.

Interaction between buyers and sellers determines the prices per share.

Prices set by the marketplace 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.

Market Value of Stock

Chapter 13-24

Chapter 13-25



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.

Par and No-Par Value Stock

Chapter 13-26

Paid-in CapitalPaid-in CapitalPaid-in CapitalPaid-in Capital

Retained Retained EarningsEarningsAccountAccount


Paid-in Capital Paid-in Capital in Excess of Parin Excess of Par

AccountAccount


AccountAccount

Two Primary Sources of

Equity

Common StockCommon StockAccountAccount


Preferred StockPreferred StockAccountAccount


Corporate CapitalCorporate CapitalCorporate CapitalCorporate Capital

SO 2 Differentiate between paid-in capital and retained SO 2 Differentiate between paid-in capital and retained earnings.earnings.

Paid-in capital is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock.

Chapter 13-27




Additional Paid-Additional Paid-in Capitalin CapitalAccountAccount

Additional Paid-Additional Paid-in Capitalin CapitalAccountAccount


Equity







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

Chapter 13-28



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

Illustration 13-6

Chapter 13-29

Primary objectives:

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

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

Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues

SO 3 Record the issuance of common stock.SO 3 Record the issuance of common stock.

Other than consideration received, the issuance of common stock

affects only paid-in capital accounts.

Chapter 13-30

IllustrationIllustration: : 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

Chapter 13-31

IllustrationIllustration: : 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.

Cash 1,000

Common stock (1,000 x $1)

1,000Cash 5,000


1,000Paid-in capital in excess of par value

4,000

a.

b.



Issuing Par Value Common Stock for Cash

Chapter 13-32



Illustration 13-7

Chapter 13-33

Issuing Common Stock for Services orNoncash Assets

Corporations also may issue stock for:

Services (attorneys or consultants).

Noncash assets (land, buildings, and equipment).



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.

Chapter 13-34

Illustration: Assume that 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


4,000Paid-in capital in excess of par

1,000



Chapter 13-35

Illustration: Assume that 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


50,000Paid-in capital in excess of par

30,000



Chapter 13-36





AccountAccount


AccountAccount

Less:Less:Treasury StockTreasury Stock

Account

Less:Less:Treasury StockTreasury Stock

Account


Equity





Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock

SO 4 Explain the accounting for treasury stock.SO 4 Explain the accounting for treasury stock.

Chapter 13-37

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.

5. To rid the company of disgruntled investors, perhaps to avoid a takeover.



Chapter 13-38

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.



Chapter 13-39

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

Cash

32,000

Illustration: On February 1, 2008, Mead acquires 4,000 shares of its stock at $8 per share.



Illustration 13-8

Chapter 13-40



Stockholders’ Equity with Treasury stock

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

Illustration 13-9

Chapter 13-41

Sale of Treasury Stock

Above Cost

Below Cost

Both increase total assets and stockholders’ equity.



Chapter 13-42

Treasury stock

8,000

Illustration: On February 1, 2008, Mead acquires 4,000 shares of its stock at $8 per share. Record the journal entry for the following transaction:

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



Above Cost

July 1

Paid-in capital treasury stock

2,000

Cash 10,000

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

Chapter 13-43

Paid-in capital treasury stock 800


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



Oct. 1

Treasury stock

6,400

Cash 5,600

Mead uses Paid-in Capital from Treasury Stock, if available, for the difference between cost and resale price of the shares.

Below Cost

Chapter 13-44

Paid-in capital treasury stock 1,200


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



Dec. 1

Retained earnings 1,000

Cash 15,400

Treasury stock

17,600

Below Cost

Limited to

balance on hand

Chapter 13-45

Chapter 13-46

Features often associated with preferred stock.

1. Preference as to dividends.

2. Preference as to assets in liquidation.

3. Nonvoting.

SO 5 Differentiate preferred stock from common stock.

Preferred StockPreferred StockPreferred StockPreferred Stock

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

Chapter 13-47

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)

100,000Paid-in capital in excess of par – Preferred stock

20,000Preferred stock may have a par value or no-par value.

Chapter 13-48

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.



Chapter 13-49 SO 6 Prepare a stockholders’ equity section.

Statement PresentationStatement PresentationStatement PresentationStatement Presentation

Illustration 13-12

Chapter 13-50

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Chapter 13-1. Chapter 13-2 Chapter 13 Accounting Principles, Ninth Edition Corporations: Organization and Capital Stock Transactions