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Accounting Principles

Thirteenth Edition
Weygandt Kimmel Kieso

Chapter 13
Corporations: Organization and
Capital Stock Transactions
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
Chapter Outline
Learning Objectives
LO 1 Discuss and major characteristics of a corporation.
LO 2 Explain how to account for common, preferred,
and treasury stock.
LO 3 Prepare a stockholders’ equity section.

Copyright ©2018 John Wiley & Son, Inc. 2


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

► Salvation Army ► McDonald’s ► Cargill Inc.


► American Cancer ► Nike
Society ► PepsiCo
► Google

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Characteristics of Corporation
Characteristics that distinguish corporations from
proprietorships and partnerships.
• Separate Legal Existence
• Limited Liability of Stockholders
• Transferable Ownership Rights
Advantages
• Ability to Acquire Capital
• Continuous Life
• Corporate Management
• Government Regulations Disadvantages
• Additional Taxes
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Characteristics of Corporation
Characteristics that distinguish corporations from
proprietorships and partnerships.
Corporation acts
• Separate Legal Existence under its own
• Limited Liability of Stockholders name rather than
in the name of its
• Transferable Ownership Rights stockholders
• Ability to Acquire Capital
• Continuous Life
• Corporate Management
• Government Regulations
• Additional Taxes
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Characteristics of Corporation
Characteristics that distinguish corporations from
proprietorships and partnerships.
• Separate Legal Existence
Limited to their
• Limited Liability of Stockholders investment
• Transferable Ownership Rights
• Ability to Acquire Capital
• Continuous Life
• Corporate Management
• Government Regulations
• Additional Taxes
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Characteristics of Corporation
Characteristics that distinguish corporations from
proprietorships and partnerships.
• Separate Legal Existence
• Limited Liability of Stockholders
Shareholders may
• Transferable Ownership Rights sell their stock
• Ability to Acquire Capital
• Continuous Life
• Corporate Management
• Government Regulations
• Additional Taxes
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Characteristics of Corporation
Characteristics that distinguish corporations from
proprietorships and partnerships.
• Separate Legal Existence
• Limited Liability of Stockholders
• Transferable Ownership Rights Corporation can
obtain capital
• Ability to Acquire Capital through the
• Continuous Life issuance of stock
• Corporate Management
• Government Regulations
• Additional Taxes
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Characteristics of Corporation
Characteristics that distinguish corporations from
proprietorships and partnerships.
• Separate Legal Existence
• Limited Liability of Stockholders
Continuance as a
• Transferable Ownership Rights going concern is
• Ability to Acquire Capital not affected by the
withdrawal, death,
• Continuous Life or incapacity of a
• Corporate Management stockholder,
• Government Regulations employee, or
officer
• Additional Taxes
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Characteristics of Corporation
Characteristics that distinguish corporations from
proprietorships and partnerships.
• Separate Legal Existence
• Limited Liability of Stockholders
• Transferable Ownership Rights
• Ability to Acquire Capital Separation of
ownership and
• Continuous Life management often
• Corporate Management reduces an owner’s
ability to actively
• Government Regulations manage the
• Additional Taxes company

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ILLUSTRATION 13.1 Stockholders
Corporation organization
chart
Chairman and
Board of
Directors

President and
Chief Executive
Officer

General Vice President Vice President


Vice President Vice President
Counsel/ Finance/Chief Human
Marketing Operations
Secretary Financial Officer Resources

Treasurer Controller

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

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Forming a Corporation
Initial Steps:
• File application with the Secretary of State
• State grants charter
• Corporation develops by-laws
Companies generally incorporate in a state whose laws
are favorable to the corporate form of business.
Corporations engaged in interstate commerce must
obtain a license from each state in which they do
business.
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Stockholder Rights
1. Vote in election of board of directors at annual
meeting and vote on actions that require
stockholder approval.
2. Share the corporate earnings through receipt of
dividends.
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.

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Stock Issue Considerations
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?

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Stock Issue Considerations
Authorized Stock
• Charter indicates amount of stock that a corporation
is authorized to sell
• Number of authorized shares is often reported in
stockholders’ equity section
• No formal accounting entry

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Stock Issue Considerations
Issuance of Stock
• 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 economy
5. Current state of securities market
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Stock Issue Considerations
Par and No-Par Value Stocks
• Years ago, par value determined legal capital per
share that a company must retain in business for
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

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Stock Issue Considerations
Which of the following 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 per share applies to par value stock
but not to no-par value stock.

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

Two Primary Retained Earnings


Sources of Equity 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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Corporate Capital
Common Stock
Account Paid-in Capital in
Paid-in Capital Excess of Par
Account
Preferred Stock
Account

Two Primary Retained Earnings


Sources of Equity Account

Retained earnings is net income that a corporation retains for


future use.

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Retained Earnings
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.
Delta Robotics ILLUSTRATION 13.5
Stockholders’ equity section

Balance Sheet (partial)


Stockholders' equity
Paid-in capital
Common stock $800,000
Retained earnings 130,000
Total stockholders' equity $930,000

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Corporate Capital
Comparison of the owners’ equity (stockholders’ equity)
accounts reported on a balance sheet.

Proprietorship Partnership Corporation


Owner's Capital Able, Capital Common Stock
Normal Normal Normal
balance balance balance

Baker, Capital Retained Earnings


ILLUSTRATION 13.6
Normal Normal
Comparison of owners’
equity accounts
balance balance

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DO IT! 1b Corporate Capital
Illustration: 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.
(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
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Accounting for Stock Transactions
Accounting for Common Stock
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.

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Issuing 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) Cash 1,000
Common Stock (1,000 x $1) 1,000
(b) Cash 5,000
Common Stock (1,000 x $1) 1,000
Paid-in Capital in Excess of Par—
Common Stock 4,000
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Accounting for Stock Transactions
Hydro-Slide, Inc.
Balance Sheet (partial)
Stockholders' equity
Paid-in capital
Common stock $ 2,000
In excess of par—common stock 4,000
Total paid-in capital 6,000
Retained earnings 27,000
Total stockholders' equity $33,000
ILLUSTRATION 13.7
Stockholders’ equity section

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Issuing Common Stock for Cash
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 (5,000 x $5) 25,000
Paid-in Capital in Excess of Stated
Value—Common Stock 15,000

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Issuing Common Stock for Cash
Illustration: Assume further that the no-part stock does not
have a stated value and the company issues 5,000 shares at $8
per share for cash.
Cash 40,000
Common Stock 40,000

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Issuing Common Stock for Services or
Noncash 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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Common Stock for Services
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
Value—Common Stock 1,000

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Common Stock for Services
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
Paid-in Capital in Excess of Par
Value—Common Stock 30,000

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Accounting for Preferred Stock
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.

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Accounting for Preferred Stock
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:
Cash 120,000
Common Stock (10,000 x $10) 100,000
Paid-in Capital in Excess of Par
Value—Preferred Stock 20,000

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

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DO IT! 2a Issuance of Stock
Illustration: Cayman Corporation begins operations on March
1 by issuing 100,000 shares of $1 par value common stock for
cash at $12 per share. Journalize the issuance of the common
shares on March 1 assuming the shares are not publicly
traded.
Cash 1,200,000
Common Stock (100,000 x $1) 100,000
Paid-in Capital in Excess of Par
Value—Common Stock 1,100,000

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DO IT! 2a Issuance of Stock
Illustration: On March 15, Cayman issues 5,000 shares of
common stock to attorneys in settlement of their bill of
$50,000 for organization costs. Journalize the issuance of
these shares.
Organization Expense 50,000
Common Stock (5,000 x $1) 5,000
Paid-in Capital in Excess of Par
Value—Common Stock 45,000

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DO IT! 2a Issuance of Stock
Illustration: On March 28, Cayman issues 1,500 shares of $10
par value preferred stock for cash at $30 per share. Journalize
the issuance of preferred shares.
Cash 45,000
Preferred Stock (1,500 x $10) 15,000
Paid-in Capital in Excess of Par
Value—Preferred Stock 30,000

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Accounting for Treasury Stock
Common Stock
Account Paid-in Capital in
Paid-in Capital Excess of Par
Account
Preferred Stock
Account

Two Primary Retained Earnings


Sources of Equity Account

Less:
Treasury Stock
Account

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Accounting for Treasury Stock
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.

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Accounting for Treasury Stock
• Companies generally use cost method
• Debit Treasury Stock for price paid to reacquire
shares
• Treasury stock is a contra stockholders’ equity
account
• Reduces stockholders’ equity

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Mead, Inc. ILLUSTRATION 13.8
Stockholders’ equity section
Balance Sheet (partial)
Stockholders' equity
Paid-in capital
Common stock, $5 par value, 400,000 shares
authorized, 100,000 shares issued and outstanding $500,000
Retained earnings 200,000
Total stockholders' equity $700,000

Illustration: On February 1, 2020, Mead acquires 4,000 shares of its


stock at $8 per share. The entry is as follows.
Treasury Stock (4,000 x $8) 32,000
Cash 32,000

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Mead, Inc. ILLUSTRATION 13.9
Stockholders’ equity section
Balance Sheet (partial)
Stockholders' equity
Paid-in capital
Common stock, $5 par value, 400,000 shares
authorized, 100,000 shares issued and 96,000
shares outstanding $500,000
Retained earnings 200,000
Total paid-in capital and retained earnings 700,000
Less: Treasury stock (4,000 shares) 32,000
Total stockholders' equity $668,000

Both the number of shares issued (100,000) and the number of


shares held as treasury (4,000) are disclosed.

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Sale of Treasury Stock Above Cost
Illustration: On July 1, Mead, Inc. sells for $10 per share 1,000
of the 4,000 shares of its treasury stock previously acquired at
$8 per share. The entry is as follows.
Cash 10,000
Treasury Stock (1,000 x $8) 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.

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Sale of Treasury Stock Below Cost
If Mead, Inc. sells an additional 800 shares of treasury stock
on October 1 at $7 per share, it makes the following entry.
Cash 5,600
Paid-in Capital from Treasury Stock 800
Treasury Stock (800 x $8) 6,400

Treasury Stock Paid-in Capital from Treasury Stock


Feb. 1 32,000 July 1 8,000 Oct. 1 800 July 1 2,000
Oct. 1 6,400 Oct. 1 Bal. 1,200
Oct. 1 Bal. 17,600

ILLUSTRATION 13.10
Treasury stock accounts
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Sale of Treasury Stock Below Cost
On December 1, assume that Mead, Inc. sells its remaining
2,200 shares at $7 per share and makes the following entry.
Cash 15,400 Limited to
Paid-in Capital from Treasury Stock 1,200 balance on
hand
Retained Earnings 1,000
Treasury Stock (2,200 x $8) 17,600

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DO IT! 2b Issuance of Stock
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.
July 1 Treasury Stock 180,000
Cash 180,000
Nov. 1 Cash 70,000
Treasury Stock 60,000
Paid-in Capital from Treasury Stock 10,000
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Statement Presentation of
Stockholders’ Equity
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.

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Graber Inc. ILLUSTRATION 13.11
Stockholders’ equity section
Balance Sheet (partial)
Stockholders’ equity
Paid-in capital
Capital stock
9% preferred stock, $100 par value, cumulative, 10,000 shares
authorized, 6,000 shares issued and outstanding $ 600,000
Common stock, no par, $5 stated value, 500,000 shares
authorized, 400,000 shares issued, and 390,000 outstanding 2,000,000
Total capital stock $2,600,000
Additional paid-in capital
In excess of par—preferred stock 30,000
In excess of stated value—common stock 1,050,000
Total additional paid-in capital 1,080,000
Total paid-in capital 3,680,000
Retained earnings 1,050,000
Total paid-in capital and retained earnings 4,730,000
Accumulated other comprehensive income 110,000
Less: Treasury stock (10,000 common shares) 80,000
Total stockholders’ equity $4,760,000

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DO IT! 3 Stockholders’ Equity
Jennifer Corporation has issued 300,000 shares of $3 par
value common stock. It is authorized to issue 600,000 shares.
The paid-in capital in excess of par value 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. It also had a cumulative other comprehensive loss of
$82,000. The corporation also has 4,000 shares issued and
outstanding of 8%, $100 par value preferred stock. It is
authorized to issue 10,000 shares. The paid-in capital in excess
of par value on the preferred stock is $97,000. Retained
earnings is $610,000.
Prepare the stockholders’ equity section of the balance sheet.

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Jennifer Corporation
Balance Sheet (partial)
Stockholders’ equity
Paid-in capital
Capital stock
8% preferred stock, $100 par value, cumulative, 10,000 shares
authorized, 4,000 shares issued and outstanding $ 400,000
Common stock, $3 par value, 600,000 shares authorized,
300,000 shares issued, and 285,000 outstanding 900,000
Total capital stock $1,300,000
Additional paid-in capital
In excess of par—preferred stock 97,000
In excess of stated value—common stock 380,000
Total additional paid-in capital 477,000
Total paid-in capital 1,777,000
Retained earnings 610,000
Total paid-in capital and retained earnings 2,387,000
Accumulated other comprehensive loss 82,000
Less: Treasury stock (15,000 common shares) 50,000
Total stockholders’ equity $2,255,000

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A Look at IFRS
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.

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A Look at IFRS
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.

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A Look at IFRS
Key Points
Differences
• There are often terminology differences for equity accounts.
GAAP IFRS
Common stock Share capital—ordinary
Stockholders Shareholders
Par value Nominal or face value
Authorized stock Authorized share capital
Preferred stock Share capital—preference
Paid-in capital Issued/allocated share capital
Paid-in capital in excess of par—common stock Share premium—ordinary
Paid-in capital in excess of par—preferred stock Share premium—preference
Retained earnings Retained earnings or Retained profits
Retained earnings deficit Accumulated losses
Accumulated other comprehensive income General reserve and other reserve
accounts
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A Look at IFRS
Key Points
Differences
• 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 shareholders’ funds.

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A Look at IFRS
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.

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Copyright
Copyright © 2018 John Wiley & Sons, Inc.
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or from the use of the information contained herein.

Copyright ©2018 John Wiley & Son, Inc. 58