CHAPTER13

Corporations: Organization and Capital Stock Transactions

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PreviewofCHAPTER13

The Corporate Form of Organization

An entity separate and distinct from its owners.
Classified by Purpose Not-for-Profit For Profit Classified by Ownership Publicly held Privately held

Salvation Army American Cancer Society

McDonalds

Cargill Inc.

Nike PepsiCo

Google

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Characteristics of an Organization
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management
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Characteristics of a Organization
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence Limited Liability of Stockholders Advantages Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Corporation acts under its own name rather than in the name of its stockholders.

Disadvantages

Additional Taxes Corporate Management

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SO 1 Identify the major characteristics of a corporation.

SO 1 Identify the major characteristics of a corporation.

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

Limited to their investment.

Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management
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Shareholders may sell their stock.

SO 1 Identify the major characteristics of a corporation.

SO 1 Identify the major characteristics of a corporation.

Characteristics of a Organization
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management
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Characteristics of a Organization
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management
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Corporation can obtain capital through the issuance of stock.

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

SO 1 Identify the major characteristics of a corporation.

SO 1 Identify the major characteristics of a corporation.

Characteristics of a Organization
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management
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Characteristics of a Organization
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management
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Corporations pay income taxes as a separate legal entity and in addition, stockholders pay taxes on cash dividends.

SO 1 Identify the major characteristics of a corporation.

SO 1 Identify the major characteristics of a corporation.

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

Chairman and Board of Directors President and Chief Executive Officer

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

General Counsel and Secretary

Vice President Marketing

Vice President Finance/Chief Financial Officer

Vice President Operations

Vice President Human Resources

Treasurer

Controller

SO 1 Identify the major characteristics of a corporation.

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SO 1 Identify the major characteristics of a corporation.

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:
1. Vote in election of board of directors and on actions that require stockholder approval.
Illustration 13-3

2. Share the corporate earnings through receipt of dividends.

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SO 1 Identify the major characteristics of a corporation.

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SO 1 Identify the major characteristics of a corporation.

Ownership Rights of Stockholders

Stockholders have the right to:
Illustration 13-3

Ownership Rights of Stockholders

Stockholders have the right to:
Illustration 13-3

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

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

* A number of companies have eliminated the preemptive right.

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SO 1 Identify the major characteristics of a corporation.

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SO 1 Identify the major characteristics of a corporation.

Ownership Rights of Stockholders

Illustration 13-4

Stock Issue Considerations

Prenumbered

Class

Class A
COMMON STOCK PAR VALUE $1 PER SHARE

Class A
COMMON STOCK PAR VALUE $1 PER SHARE

Authorized Stock
Charter indicates the amount of stock that a corporation is authorized to sell.

Name of corporation Stockholders name

Stock Certificate

Shares

Number of authorized shares is often reported in the stockholders equity section.

Signature of corporate official

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SO 1

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SO 1 Identify the major characteristics of a corporation.

Stock Issue Considerations

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

Stock Issue Considerations

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 companys earnings and dividends. Factors beyond a companys control, may cause day-today fluctuations in market prices.

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SO 1 Identify the major characteristics of a corporation.

Stock Issue Considerations

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
Account

Paid-in Capital PaidPreferred Stock

Account

Paid-in Capital in PaidExcess of Par

Account

Two Primary Sources of Equity

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

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

Corporate Capital
Common Stock
Account

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

Paid-in Capital PaidPreferred Stock

Account

Additional Paid-in PaidCapital

Account

Two Primary Sources of Equity

Retained Earnings
Account

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

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

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

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.

Accounting for Common Stock Issues

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

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

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SO 3 Record the issuance of common stock.

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SO 3 Record the issuance of common stock.

Accounting for Common Stock Issues

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-Slides 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 Common stock (1,000 x $1) b. Cash Common stock (1,000 x $1) Paid-in capital in excess of par value
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Accounting for Common Stock Issues

Illustration 13-7

1,000 1,000 5,000 1,000 4,000

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SO 3 Record the issuance of common stock.

SO 3 Record the issuance of common stock.

Accounting for Common Stock Issues

Issuing Common Stock for Services or Noncash Assets
Corporations also may issue stock for: Services (attorneys or consultants). Noncash assets (land, buildings, and equipment).

Accounting for Common Stock Issues

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 4,000 1,000

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.

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

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SO 3 Record the issuance of common stock.

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SO 3 Record the issuance of common stock.

Accounting for Common Stock Issues

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

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During its first year of operation. Benji Corp. had the following transactions pertaining to its common stock.
Jan 10 Issued 70,000 shares for cash at $5 per share. July 1 Issued 40,000 shares for cash at $7 per share.
Instructions: a) Journalize the transactions, assuming that the common stock has a par value of $5 per share. b) Journalize the transactions, assuming that the common stock is no-par with a stated value of $1 per share.

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SO 3 Record the issuance of common stock.

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SO 4 Explain the accounting for treasury stock.

Accounting for Treasury Stock

Common Stock
Account

Accounting for Treasury Stock

Treasury stock - corporations 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 stocks market value. 3. To have additional shares available for use in the acquisition of other companies. 4. To increase earnings per share.

Paid-in Capital PaidPreferred Stock

Account

Paid-in Capital in PaidExcess of Par

Account

Two Primary Sources of Equity

Retained Earnings
Account

Less: Treasury Stock

Account

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SO 4 Explain the accounting for treasury stock.

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SO 4 Explain the accounting for treasury stock.

Accounting for Treasury Stock

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 Stock

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Illustration: On February 1, 2012, Mead acquires 4,000 shares of its stock at $8 per share. Treasury stock (4,000 x $8) Cash 32,000 32,000
SO 4 Explain the accounting for treasury stock.

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SO 4 Explain the accounting for treasury stock.

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Accounting for Treasury Stock

Stockholders Equity with Treasury stock
Illustration 13-9

Accounting for Treasury Stock

Disposal of Treasury Stock
Sale of Treasury Stock
Above Cost Below Cost Both increase total assets and stockholders equity.

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

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SO 4 Explain the accounting for treasury stock.

Accounting for Treasury Stock

Above Cost

Accounting for Treasury Stock

Below 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 Treasury stock Paid-in capital treasury stock 10,000 8,000 2,000

Illustration: On Oct. 1, Mead sells an additional 800 shares of treasury stock at $7 per share. Oct. 1 Cash Paid-in capital treasury stock Treasury stock 5,600 800 6,400
Illustration 13-10

A corporation does not realize a gain or suffer a loss from stock transactions with its own stockholders.
SO 4 Explain the accounting for treasury stock. SO 4 Explain the accounting for treasury stock.

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Accounting for Treasury Stock

Below Cost

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On January 1, 2012, the stockholders equity section of Joshua Corp. shows: Common stock ($5 par value) $1,500,000; paid-in capital in excess of par $1,000,000; and retained earnings $1,200,000. During the year, the following treasury stock transactions occurred.

Illustration: On Dec. 1, assume that Mead, Inc. sells its remaining 2,200 shares at $7 per share. Dec. 1 Cash Paid-in capital treasury stock Retained earnings Treasury stock 15,400 1,200 1,000
Limited to balance on hand

Mar. 1 Purchased 50,000 shares for cash at $15 per share. July 1 Sold 10,000 treasury shares for cash at $17 per share. Sept.1 Sold 8,000 treasury shares for cash at $14 per share. Instructions
a) b)

17,600

Journalize the treasury stock transactions. Restate the entry for September 1, assuming the treasury shares were sold at $12 per share.
.

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SO 4 Explain the accounting for treasury stock.

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Preferred Stock
Features often associated with preferred stock.
1. Preference as to dividends. 2. Preference as to assets in liquidation.

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 120,000 100,000 20,000

3. Nonvoting.

Preferred stock (10,000 x $10) Paid-in capital in excess of par Preferred stock

Accounting for preferred stock at issuance is similar to that for common stock. Preferred stock may have a par value or no-par value.

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SO 5 Differentiate preferred stock from common stock.

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SO 5 Differentiate preferred stock from common stock.

Preferred Stock
Dividend Preferences
Right to receive dividends before common stockholders. Per share dividend amount is stated as a percentage of the preferred stocks 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.

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SO 5 Differentiate preferred stock from common stock.

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SO 5 Differentiate preferred stock from common stock.

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

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SO 5 Differentiate preferred stock from common stock.

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SO 6 Prepare a stockholders equity section.

End of Chapter 13

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