chapter 13-1. chapter 13-2 chapter 13 accounting principles, ninth edition corporations:...
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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
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.
Corporation acts under its own name rather than in the name of its stockholders.
Chapter 13-8
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.
Limited to their investment.
Chapter 13-9
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.
Shareholders may sell their stock.
Chapter 13-10
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.
Corporation can obtain capital through the issuance of stock.
Chapter 13-11
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.
Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer.
Chapter 13-12
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.
Chapter 13-13
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.
Corporations pay income taxes as a separate legal entity and in addition, stockholders pay taxes on cash dividends.
Chapter 13-14
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.
Separation of ownership and management prevents owners from having an active role in managing the company.
Chapter 13-15
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.
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
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.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
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
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*).
Stockholders have the right to:
Ownership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of Stockholders
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
* 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.
Stockholders have the right to:
Ownership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of Stockholders
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Illustration 13-3
Chapter 13-20
Ownership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of Stockholders
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
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
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
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
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
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 Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
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
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
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
Retained Retained EarningsEarningsAccountAccount
Paid-in Capital Paid-in Capital in Excess of Parin Excess of Par
AccountAccount
Paid-in Capital Paid-in Capital in Excess of Parin Excess of Par
AccountAccount
Two Primary Sources of
Equity
Common StockCommon StockAccountAccount
Common StockCommon StockAccountAccount
Preferred StockPreferred 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
Paid-in CapitalPaid-in CapitalPaid-in CapitalPaid-in Capital
Retained Retained EarningsEarningsAccountAccount
Retained Retained EarningsEarningsAccountAccount
Additional Paid-Additional Paid-in Capitalin CapitalAccountAccount
Additional Paid-Additional Paid-in Capitalin CapitalAccountAccount
Two Primary Sources of
Equity
Common StockCommon StockAccountAccount
Common StockCommon StockAccountAccount
Preferred StockPreferred 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.
Retained earnings is net income that a corporation retains for future use.
Chapter 13-28
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.
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
SO 3 Record the issuance of common stock.SO 3 Record the issuance of common stock.
Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues
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
Common stock (1,000 x $1)
1,000Paid-in capital in excess of par value
4,000
a.
b.
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.
Issuing Par Value Common Stock for Cash
Chapter 13-32
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.
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).
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.
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
Common stock (4,000 x $1)
4,000Paid-in capital in excess of par
1,000
SO 3 Record the issuance of common stock.SO 3 Record the issuance of common stock.
Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues
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
Common stock (10,000 x $5)
50,000Paid-in capital in excess of par
30,000
SO 3 Record the issuance of common stock.SO 3 Record the issuance of common stock.
Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues
Chapter 13-36
Paid-in CapitalPaid-in CapitalPaid-in CapitalPaid-in Capital
Retained Retained EarningsEarningsAccountAccount
Retained Retained EarningsEarningsAccountAccount
Paid-in Capital Paid-in Capital in Excess of Parin Excess of Par
AccountAccount
Paid-in Capital Paid-in Capital in Excess of Parin Excess of Par
AccountAccount
Less:Less:Treasury StockTreasury Stock
Account
Less:Less:Treasury StockTreasury Stock
Account
Two Primary Sources of
Equity
Common StockCommon StockAccountAccount
Common StockCommon StockAccountAccount
Preferred StockPreferred StockAccountAccount
Preferred StockPreferred StockAccountAccount
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.
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 13-38
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.
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 13-39
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.
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.
Illustration 13-8
Chapter 13-40
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.
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.
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 13-42
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.
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.
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
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 Oct. 1, Mead sells an additional 800 shares of treasury stock at $7 per share.
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.
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
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 Dec. 1, assume that Mead, Inc. sells its remaining 2,200 shares at $7 per share.
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.
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.
SO 5 Differentiate preferred stock from common stock.
Preferred StockPreferred StockPreferred StockPreferred 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.
SO 5 Differentiate preferred stock from common stock.
Preferred StockPreferred StockPreferred StockPreferred Stock
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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