13-1. 13-2 chapter13 corporations: organization and capital stock transactions

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CHAPTER13Corporations:

Organization and

Capital Stock

Transactions

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PreviewofCHAPTER13

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An entity separate and distinct from its owners.

Classified by Purpose

Not-for-Profit

For Profit

Classified by Ownership

Publicly held

Privately held

► McDonald’s► Nike► PepsiCo► Google

► Salvation Army► American Cancer

Society

► Cargill Inc.

The Corporate Form of Organization

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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.

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

Advantages

Disadvantages

Characteristics of a Organization

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Continuous Life


Additional Taxes



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




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Continuous Life


Additional Taxes



Limited to their investment.




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Continuous Life


Additional Taxes



Shareholders may sell their stock.




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Continuous Life


Additional Taxes



Corporation can obtain capital through the issuance of stock.




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Continuous Life


Additional Taxes



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




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Continuous Life


Additional Taxes






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Continuous Life


Additional Taxes



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




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Continuous Life


Additional Taxes



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




13-14 SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.

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


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Formed by grant of a state charter.

Corporation develops by-laws.

Initial Steps:


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.

Forming a Corporation

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

Stockholders have the right to:


2. Share the corporate earnings through receipt of dividends.

Illustration 13-3

Ownership Rights of Stockholders

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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



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


Illustration 13-3



13-19 SO 1SO 1

Class A COMMON STOCK

Class A COMMON STOCK

PAR VALUE $1 PER SHARE

PAR VALUE $1 PER SHARE

Stock CertificateStock Certificate

Name of corporation

Stockholder’s name

Class

Shares

Signature of corporate official

PrenumberedIllustration 13-4



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

Stock Issue Considerations


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.

Issuance 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.

Market Value of 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.

Par and No-Par Value Stock


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

Retained EarningsRetained EarningsAccountAccount


Paid-in Capital in Paid-in Capital in Excess of ParExcess of Par

AccountAccount


AccountAccount

Two Primary Sources of

Equity

Common StockCommon StockAccountAccount


Preferred StockPreferred StockAccountAccount


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

Corporate Capital

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Additional Paid-in Additional Paid-in CapitalCapitalAccountAccount

Additional Paid-in Additional Paid-in CapitalCapitalAccountAccount


Equity





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

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

Corporate Capital

13-27 SO 2 Differentiate between paid-in capital and retained earnings.SO 2 Differentiate between paid-in capital and retained earnings.

Comparison of the owners’ equity (stockholders’ equity)

accounts reported on a balance sheet for a proprietorship, a

partnership, and a corporation.

Illustration 13-6

Corporate Capital

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Primary objectives:

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

2) Maintain the distinction between paid-in capital

and retained earnings.

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.

Accounting for Common Stock Issues

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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


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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.

Cash 1,000

Common stock (1,000 x $1)

1,000Cash 5,000

Common stock (1,000 x $1)

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

4,000

a.

b.


Issuing Par Value Common Stock for Cash


13-31 SO 3 Record the issuance of common stock.SO 3 Record the issuance of common stock.

Illustration 13-7


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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.


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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



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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



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AccountAccount


AccountAccount

Less:Less:Treasury StockTreasury Stock

Account

Less:Less:Treasury StockTreasury Stock

Account


Equity





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

Accounting for Treasury Stock

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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.



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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.



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

Cash 32,000

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


Illustration 13-8


13-39 SO 4 Explain the accounting for treasury stock.SO 4 Explain the accounting for treasury stock.

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


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Sale of Treasury Stock

Above Cost

Below Cost

Both increase total assets and stockholders’ equity.



Disposal of Treasury Stock

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Treasury stock

8,000

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

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.

Accounting for Treasury Stock Above Cost

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Paid-in capital treasury stock 800

Illustration: 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

Accounting for Treasury Stock Below Cost

Illustration 13-10

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Paid-in capital treasury stock 1,200

Illustration: 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

Limited to

balance on

hand

Accounting for Treasury Stock Below Cost

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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.

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

Preferred Stock

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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

20,000

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

Preferred Stock

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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

Dividend Preferences

13-48 SO 5 Differentiate preferred stock from common stock.

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.

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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.


Preferred Stock

Liquidation Preferences

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

Illustration 13-12

Statement Presentation

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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.

Key Points

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

Key Points

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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.

Key Points

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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.

Key Points

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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.

Key Points

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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.

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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

IFRS Self-Test Questions

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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.


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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.


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