Accounting Principles, 12th Edition Ch13

13-1
Corporations: Organization and
Capital Stock Transactions13
Learning Objectives
Discuss the major characteristics of a corporation.
Explain how to account for the issuance of common and
preferred stock.
Explain how to account for treasury stock.3
2
1
Prepare a stockholders’ equity section.4

13-2
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.
Alternative Terminology
Privately held corporations
are also referred to as
closely held corporations.
LO 1
LEARNING
OBJECTIVE
Discuss the major characteristics of a
corporation.
1

13-3
Characteristics that distinguish corporations from
proprietorships and partnerships.
Advantages
Disadvantages
Characteristics of a Corporation
 Separate Legal Existence
 Limited Liability of Stockholders
 Transferable Ownership Rights
 Ability to Acquire Capital
 Continuous Life
 Corporate Management
 Government Regulations
 Additional Taxes
LO 1

13-4
Corporation acts
under its own name
rather than in the
name of its
stockholders.
 Continuous Life
LO 1

13-5
Limited to their
investment.
 Continuous Life
LO 1

13-6
Shareholders may
sell their stock.
 Continuous Life
LO 1

13-7
Corporation can
obtain capital
through the issuance
of stock.
 Continuous Life
LO 1

13-8
Continuance as a
going concern is not
affected by the
withdrawal, death, or
incapacity of a
stockholder,
employee, or officer.
 Continuous Life
LO 1

13-9
Separation of
ownership and
management often
reduces an owner’s
ability to actively
manage the
company.
Characteristics that distinguish corporations
from proprietorships and partnerships.
 Continuous Life
LO 1

13-10
 Continuous Life
LO 1

13-11
 Continuous Life
Corporations pay
income taxes as a
separate legal entity
and in addition,
stockholders pay
taxes on cash
dividends.
LO 1

13-12
Stockholders
Chairman and
Board of
Directors
President and
Chief Executive
Officer
General
Counsel/
Secretary
Vice President
Marketing
Vice President
Finance/Chief
Financial Officer
Vice President
Operations
Vice President
Human
Resources
Treasurer Controller
Illustration 13-1
Corporation organization chart
LO 1

13-13
 File application with the Secretary
of State.
 State grants 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 engaged in interstate commerce must obtain a
license from each state in which they do business.
Forming a Corporation
The charter is often
referred to as the articles
of incorporation.
LO 1

13-14
A Thousand Millionaires!
Traveling to space or embarking on an expedition to excavate lost Mayan ruins
are normally the stuff of adventure novels. But for employees of Facebook, these
and other lavish dreams moved closer to reality when the world’s No. 1 online
social network went public through an initial public offering (IPO) that may have
created at least a thousand millionaires. The IPO was the largest in Internet
history, valuing Facebook at over $104 billion. With all these riches to be had, why
did Mark Zuckerberg, the founder of Facebook, delay taking his company public?
Consider that the main motivation for issuing shares to the public is to raise
money so you can grow your business. However, unlike a manufacturer or even
an online retailer, Facebook doesn’t need major physical resources, it doesn’t
have inventory, and it doesn’t really need much money for marketing. So in the
past, the company hasn’t had much need for additional cash beyond what it was
already generating on its own. Finally, as head of a closely held, nonpublic
company, Zuckerberg was subject to far fewer regulations than a public company.
Source: “Status Update: I’m Rich! Facebook Flotation to Create 1,000 Millionaires Among
Company’s Rank and File,” Daily Mail Reporter (February 1, 2012).
Accounting Across the Organization
LO 1

13-15
1. Vote in election of board of
directors and on actions that
require stockholder approval.
2. Share the corporate earnings
through receipt of dividends.
Stockholder Rights
LO 1
Illustration 13-3
Ownership rights of
stockholders

13-16
3. Keep the same percentage ownership when new shares
of stock are issued (preemptive right).
* A number of companies have eliminated the preemptive right.
LO 1
Stockholder Rights
Illustration 13-3
Ownership rights of
stockholders

13-17
4. Share in assets upon liquidation in proportion to their
holdings. This is called a residual claim.
LO 1
Stockholder Rights
Illustration 13-3
Ownership rights of
stockholders

13-18
When a corporation decides to issue stock, it must resolve
a number of basic questions:
1. How many shares should it authorize for sale?
2. How should it issue the stock?
3. What value should the corporation assign to the
stock?
Stock Issue Considerations
LO 1

13-19
 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.
 No formal accounting entry.
AUTHORIZED STOCK
LO 1

13-20
Name of corporation
Stockholder’s name
Shares
Signature of
corporate official
Prenumbered
Illustration 13-4
A Stock certificate
LO 1

13-21
 Companies 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
LO 1

13-22
 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 PRICE OF STOCK
LO 1

13-23 LO 1
Investor Insight Nike

13-24
 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 fairly common today.
 In many states, the board of directors assigns a stated
value to no-par shares.
PAR AND NO-PAR VALUE STOCK
LO 1

13-25
Question
Which of these statements is false?
a. Ownership of common stock gives the owner a
voting right.
b. The stockholders’ equity section begins with paid-in
capital.
c. The authorization of capital stock does not result in a
formal accounting entry.
d. Legal capital is intended to protect stockholders.
LO 1

13-26
Indicate whether each of the following statements is true or false.
______ 1. Similar to partners in a partnership, stockholders of a
corporation have unlimited liability.
______ 2. It is relatively easy for a corporation to obtain capital
through the issuance of stock.
______ 3. The separation of ownership and management is an
advantage of the corporate form of business.
______ 4. The journal entry to record the authorization of capital stock
includes a credit to the appropriate capital stock account.
______ 5. All states require a par value per share for capital stock.
False
True
False
False
False
LO 1
DO IT! Corporate Organization1a

13-27
Paid-in Capital
Retained Earnings
Account
Paid-in Capital in
Excess of Par
Account
Two Primary
Sources of
Equity
Common Stock
Account
Preferred Stock
Account
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
LO 1

13-28
Paid-in Capital
Retained Earnings
Account
Two Primary
Sources of
Equity
Common Stock
Account
Preferred Stock
Account
Retained earnings is net income that a corporation retains for future
use.
Corporate Capital
Paid-in Capital in
Excess of Par
Account
LO 1

13-29
If Delta Robotics has a balance of $800,000 in common stock
and $130,000 in retained earnings at the end of its first year,
its stockholders’ equity section is as follows.
Corporate Capital
Illustration 13-5
Stockholders’ equity section
LO 1

13-30
Comparison of the owners’ equity (stockholders’ equity)
accounts reported on a balance sheet for a proprietorship, a
partnership, and a corporation.
Corporate Capital
LO 1
Illustration 13-6
Comparison of owners’
equity accounts

13-31
(a) Income Summary 122,000
Retained Earnings 122,000
(b) Stockholders’ equity
Common Stock $750,000
Retained earnings 122,000
Total stockholders’ equity $872,000
LO 1
DO IT! Corporate Capital1b
At the end of its first year of operation, Doral Corporation has
$750,000 of common stock and net income of $122,000. Prepare (a)
the closing entry for net income and (b) the stockholders’ equity
section at year-end.
Solution
Advance slide in slide show to reveal solution.

13-32 LO 2
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.
Accounting for Common Stock
LEARNING
OBJECTIVE
Explain how to account for the issuance of
common and preferred stock.
2

13-33
b.
Cash 1,000
Common Stock (1,000 x $1) 1,000
Cash 5,000
Common Stock (1,000 x $1) 1,000
Paid-in Capital in Excess of Par —
Common Stock 4,000
Issuing Par Value Common Stock for Cash
Illustration: Assume that Hydro-Slide, Inc. issues 1,000 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.
LO 2

13-34
Accounting for Common Stock
Paid-in Capital in Excess of Par is
also called Premium on Stock.
LO 2
Illustration 13-7
Stockholders’ equity—paid-in
capital in excess of par

13-35
Illustration: Assume that instead of $1 par value stock, Hydro-
Slide, Inc. has $5 stated value no-par stock and the company
issues 5,000 shares at $8 per share for cash.
Cash 40,000
Common Stock 25,000
Paid-in Capital in Excess of Stated Value— Common
Stock 15,000
Issuing No-par Common Stock For Cash
LO 2

13-36
Illustration: What happens when no-par stock does not have a
stated value?
Cash 40,000
Common Stock 40,000
LO 2
Issuing No-par Common Stock For Cash

13-37
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.
Issuing Common Stock for Services or
Noncash Assets
LO 2

13-38
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—
Common Stock 1,000
Common Stock for Services
LO 2

13-39
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 80,000
Common Stock (10,000 x $5) 50,000
Common Stock 30,000
LO 2
Common Stock for Noncash Asset

13-40
Typically, preferred stockholders have a priority as to:
1. Distributions of earnings (dividends).
2. Assets in event of liquidation.
Generally do not have voting rights.
Accounting for preferred stock at issuance is similar to that for
common stock.
Accounting for Preferred Stock
LO 2

13-41
Illustration: Stine Corporation issues 10,000 shares of $10 par
value preferred stock for $12 cash per share. The journal entry
to record the issuance is:
Preferred stock may have a par value or no-par value.
Accounting for Preferred Stock
Cash 120,000
Preferred Stock (10,000 x $10) 100,000
Paid-in Capital in Excess of Par— Preferred
Stock 20,000
LO 2

13-42 LO 2
DO IT! Issuance of Stock2
Cayman Corporation begins operations on March 1 by issuing 100,000
shares of $1 par value common stock for cash at $12 per share. On
March 15, it issues 5,000 shares of common stock to attorneys in
settlement of their bill of $50,000 for organization costs. On March 28,
Cayman Corporation issues 1,500 shares of $10 par value preferred
stock for cash at $30 per share. Journalize the issuance of the common
and preferred shares, assuming the shares are not publicly traded.
Mar. 1
Cash 1,200,000
Common Stock (100,000 x $1) 100,000
Common Stock 1,100,000

13-43 LO 2
Mar. 15
Organization Expense 50,000
Common Stock (5,000 x $1) 5,000
Common Stock 45,000

13-44 LO 2
Mar. 28
Cash 45,000
Preferred Stock (1,500 x $10) 15,000
Preferred Stock 30,000

13-45
Paid-in Capital
Retained Earnings
Account
Paid-in Capital in
Excess of Par
Account
Less:
Treasury Stock
Account
Two Primary
Sources of
Equity
Common Stock
Account
Preferred Stock
Account
LO 3
LEARNING
OBJECTIVE
Explain how to account for treasury stock.3

13-46
Treasury stock is a corporation’s own stock that it has
reacquired from shareholders but not retired.
Corporations acquire treasury stock for various reasons:
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.
Accounting for Treasury Stock
LO 3

13-47
 Companies generally use the cost method.
 Debit Treasury Stock for the price paid to reacquire
the shares.
 Treasury stock is a contra stockholders’ equity
account. Reduces stockholders’ equity.
Purchase of Treasury Stock
Helpful Hint
Treasury shares do not have
dividend rights or voting rights.
LO 3

13-48
Treasury Stock (4,000 x $8) 32,000
Cash 32,000
Illustration: On February 1, 2017, Mead acquires 4,000 shares of its
stock at $8 per share.
Purchase of Treasury Stock Illustration 13-8
Stockholders’ equity
with no treasury stock
LO 3

13-49
Both the number of shares issued (100,000) and the number
of shares held as treasury (4,000) are disclosed.
Illustration 13-9
Stockholders’ equity
with treasury stock
LO 3
Purchase of Treasury Stock

13-50
Sale of Treasury Stock
 Above Cost
 Below Cost
Both increase total assets and stockholders’ equity.
Disposal of Treasury Stock
Helpful Hint
Treasury stock transactions are
classified as capital stock
transactions. As in the case when
stock is issued, the income
statement is not involved.
LO 3

13-51
Illustration: On July 1, Mead sells for $10 per share 1,000 shares
of its treasury stock previously acquired at $8 per share and
makes the following entry.
Cash 10,000
Treasury Stock 8,000
Paid-in Capital from Treasury Stock 2,000
A corporation does not realize a gain or suffer a loss from
stock transactions with its own stockholders.
SALE OF TREASURY STOCK
“ABOVE” COST
LO 3

13-52
Illustration: On Oct. 1, Mead sells an additional 800 shares of
treasury stock at $7 per share and makes the following entry.
Illustration 13-10
Treasury stock accounts
SALE OF TREASURY STOCK “BELOW”
COST
Cash 5,600
Paid-in Capital from Treasury Stock 800
LO 3

13-53
Cash 15,400
Retained Earnings 1,000
Illustration: On Dec. 1, assume that Mead, Inc. sells its
remaining 2,200 shares at $7 per share and makes the following
entry.
Limited to
balance
on hand
LO 3
SALE OF TREASURY STOCK “BELOW”
COST

13-54
Why Did Reebok Buy Its Own Stock?
In a bold (and some would say risky) move, Reebok at one time bought back
nearly a third of its shares. This repurchase of shares dramatically reduced
Reebok’s available cash. In fact, the company borrowed significant funds to
accomplish the repurchase. In a press release, management stated that it
was repurchasing the shares because it believed its stock was severely
underpriced. The repurchase of so many shares was meant to signal
management’s belief in good future earnings. Skeptics, however, suggested
that Reebok’s management was repurchasing shares to make it less likely
that another company would acquire Reebok (in which case Reebok’s top
managers would likely lose their jobs). By depleting its cash, Reebok became
a less attractive acquisition target. Acquiring companies like to purchase
companies with large cash balances so they can pay off debt used in the
acquisition.
Accounting Across the Organization
LO 3

13-55
July 1 Treasury Stock 180,000
Cash 180,000
Nov. 1 Cash 70,000
LO 3
DO IT! Treasury Stock3
Santa Anita Inc. purchases 3,000 shares of its $50 par value
common stock for $180,000 cash on July 1. It will hold the shares in
the treasury until resold. On November 1, the corporation sells 1,000
shares of treasury stock for cash at $70 per share. Journalize the
treasury stock transactions.
Solution

13-56
Companies report paid-in capital and retained earnings in the
stockholders’ equity section of the balance sheet. Paid-in
capital includes:
1. Capital stock. Preferred stock appears before common stock
because of its preferential rights. Companies report par value,
shares authorized, shares issued, and shares outstanding for
each class of stock.
2. Additional paid-in capital. Excess amounts paid in over par or
stated value and paid-in capital from treasury stock.
LO 4
LEARNING
OBJECTIVE
Prepare a stockholder’s equity section4

13-57 LO 4Illustration 13-11
Stockholders’ equity section

13-58
Jennifer Corporation has issued 300,000 shares of $3 par value
common stock. It authorized 600,000 shares. The paid-in capital in
excess of par on the common stock is $380,000. The corporation
has reacquired 15,000 shares at a cost of $50,000 and is currently
holding those shares. Treasury stock was reissued in prior years for
$72,000 more than its cost.
The corporation also has 4,000 shares issued and outstanding of
8%, $100 par value preferred stock. It authorized 10,000 shares.
The paid-in capital in excess of par on the preferred stock is
$25,000. Retained earnings is $610,000.
Prepare the stockholders’ equity section of the balance sheet.
LO 4
DO IT! Stockholders’ Equity Section4

13-60
Key Points
Similarities
 Aside from the terminology used, the accounting transactions for the
issuance of shares and the purchase of treasury stock are similar.
 Like GAAP, IFRS does not allow a company to record gains or
losses on purchases of its own shares.
LEARNING
OBJECTIVE
Compare the accounting for stockholders’ equity
under GAAP and IFRS.
5
LO 5
A Look at IFRS

13-61
Key Points
Differences
 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.
LO 5
A Look at IFRS

13-62
Key Points
 There are often terminology differences for equity accounts. The
following summarizes some of the common differences in
terminology.
LO 5
A Look at IFRS

13-63
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.
 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.
 Equity is given various descriptions under IFRS, such as
shareholders’ equity, owners’ equity, capital and reserves, and share
holders’ funds.
LO 5
A Look at IFRS

13-64
Looking to the Future
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.
LO 5
A Look at IFRS

13-65
IFRS Self-Test Questions
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.
LO 5
A Look at IFRS

13-66
A Look at IFRS
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.
LO 5
A Look at IFRS

13-67
Which of the following does not represent a pair of GAAP/IFRS-
comparable terms?
a) Additional paid-in capital/Share premium.
b) Treasury stock/Repurchase reserve.
c) Common stock/Share capital.
d) Preferred stock/Preference shares.
LO 5
A Look at IFRS

13-68
“Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
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
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these programs
or from the use of the information contained herein.”
Copyright

Accounting Principles, 12th Edition Ch13

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Accounting Principles, 12th Edition Ch13

Similar to Accounting Principles, 12th Edition Ch13 (20)

More from AbdelmonsifFadl

More from AbdelmonsifFadl (7)

Recently uploaded

Recently uploaded (20)

Accounting Principles, 12th Edition Ch13