Chapter 13 Corporations Organization and Capital Stock Transactions

Chapter 13 Corporations: Organization and Capital Stock Transactions Chapter 13 -1 Accounting Principles, Ninth Edition

Study Objectives 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. Chapter 13 -2

Corporations: Organization and Capital Transactions The Corporate Form of Organization Characteristics Formation Stockholder rights Stock issue considerations Corporate capital Chapter 13 -3 Accounting for Common Stock Issues Issuing par value stock Issuing nopar stock Issuing stock for services or noncash assets Accounting for Treasury Stock Purchase of treasury stock Disposal of treasury stock Preferred Stock Dividend preferences Liquidation preference Stock Statement Presentation Capital stock Additional paid -in capital Retained earnings

The Corporate Form of Organization An entity separate and distinct from its owners. Classified by Purpose Not-for-Profit Publicly held For Profit Privately held Ø Salvation Army Ø American Cancer Society Ø Gates Foundation Chapter 13 -4 Classified by Ownership Ø Ø Mc. Donald’s Ford Motor Company Pepsi. Co Google Ø Cargill Inc.

Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Advantages Continuous Life Government Regulations Additional Taxes Disadvantages Corporate Management Chapter 13 -5 SO 1 Identify the major characteristics of a corporation.

Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Corporation acts under its own name rather than in the name of its stockholders. Continuous Life Government Regulations Additional Taxes Corporate Management Chapter 13 -6 SO 1 Identify the major characteristics of a corporation.

Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Limited to their investment. Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Chapter 13 -7 SO 1 Identify the major characteristics of a corporation.

Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Shareholders may sell their stock. Continuous Life Government Regulations Additional Taxes Corporate Management Chapter 13 -8 SO 1 Identify the major characteristics of a corporation.

Characteristics of a 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 Corporation can obtain capital through the issuance of stock. Government Regulations Additional Taxes Corporate Management Chapter 13 -9 SO 1 Identify the major characteristics of a corporation.

Characteristics of a 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 Government Regulations Additional Taxes Corporate Management Chapter 13 -10 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.

Characteristics of a 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 Government Regulations Additional Taxes Corporate Management Chapter 13 -11 SO 1 Identify the major characteristics of a corporation.

Characteristics of a 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 Government Regulations Additional Taxes Corporate Management Chapter 13 -12 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.

Characteristics of a 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 Government Regulations Additional Taxes Corporate Management Chapter 13 -13 Separation of ownership and management prevents owners from having an active role in managing the company. SO 1 Identify the major characteristics of a corporation.

Characteristics of a Corporation Stockholders Illustration 13 -1 Corporation organization chart Chairman and Board of Directors President and Chief Executive Officer General Counsel and Secretary Vice President Marketing Treasurer Chapter 13 -14 Vice President Finance/Chief Financial Officer Vice President Operations Vice President Human Resources Controller SO 1 Identify the major characteristics of a corporation.

Forming a Corporation Initial Steps: File application with the Secretary of State grants 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. Chapter 13 -15 SO 1 Identify the major characteristics of a corporation.

Ownership Rights of Stockholders have the right to: Illustration 13 -3 1. Vote in election of board of directors and on actions that require stockholder approval. 2. Share the corporate earnings through receipt of dividends. Chapter 13 -16 SO 1 Identify the major characteristics of a corporation.

Ownership Rights of Stockholders have the right to: Illustration 13 -3 3. Keep the same percentage ownership when new shares of stock are issued (preemptive right*). * A number of companies have eliminated the preemptive right. Chapter 13 -17 SO 1 Identify the major characteristics of a corporation.

Ownership Rights of Stockholders have the right to: Illustration 13 -3 4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim. Chapter 13 -18 SO 1 Identify the major characteristics of a corporation.

Ownership Rights of Stockholders Prenumbered Illustration 13 -4 Class A COMMON STOCK PAR VALUE $1 PER SHARE Name of corporation Stockholder’s name Stock Certificate Shares Signature of corporate official Chapter 13 -19 SO 1 Identify the major characteristics of a corporation.

Stock Issue Considerations Authorized Stock 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. Chapter 13 -20 SO 1 Identify the major characteristics of a corporation.

Stock Issue Considerations Issuance of Stock Corporation can issue common stock directly to investors (closely held companies) or indirectly through an investment banking firm (publicly held companies). 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 Chapter 13 -21 5. the current state of the securities market SO 1 Identify the major characteristics of a corporation.

Stock Issue Considerations Market Value of 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 dayto-day fluctuations in market prices. Chapter 13 -22 SO 1 Identify the major characteristics of a corporation.

Chapter 13 -23

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. Chapter 13 -24 SO 1 Identify the major characteristics of a corporation.

Corporate Capital Common Stock Paid-in Capital Account Preferred Stock Paid-in Capital in Excess 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. Chapter 13 -25 SO 2 Differentiate between paid-in capital and retained earnings.

Corporate Capital Common Stock Paid-in Capital Account Preferred Stock Additional Paidin Capital Account Two Primary Sources of Equity Retained Earnings Account Retained earnings is net income that a corporation retains for future use. Chapter 13 -26 SO 2 Differentiate between paid-in capital and retained earnings.

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

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. Other than consideration received, the issuance of common stock affects only paid -in capital accounts. Chapter 13 -28 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 1, 000 shares of $1 par value common stock at par for cash. Prepare the journal entry. Cash 1, 000 Common stock (1, 000 x $1) Chapter 13 -29 1, 000 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-Slide’s journal entry if (a) 1, 000 share 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) b. Chapter 13 -30 Cash 1, 000 5, 000 Common stock (1, 000 x $1) 1, 000 Paid-in capital in excess of par value 4, 000 SO 3 Record the issuance of common stock.

Accounting for Common Stock Issues Illustration 13 -7 Chapter 13 -31 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). 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 -32 SO 3 Record the issuance of common stock.

Accounting for Common Stock Issues 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 Chapter 13 -33 5, 000 Common stock (4, 000 x $1) 4, 000 Paid-in capital in excess of par 1, 000 SO 3 Record the issuance of common stock.

Accounting for Common Stock Issues 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) Chapter 13 -34 80, 000 Common stock (10, 000 x $5) 50, 000 Paid-in capital in excess of par 30, 000 SO 3 Record the issuance of common stock.

Accounting for Treasury Stock Common Stock Paid-in Capital Account Preferred Stock Paid-in Capital in Excess of Par Account Two Primary Sources of Equity Retained Earnings Account Less: Treasury Stock Account Chapter 13 -35 SO 4 Explain the accounting for treasury stock.

Accounting for Treasury Stock 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. Chapter 13 -36 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. Chapter 13 -37 SO 4 Explain the accounting for treasury stock.

Accounting for Treasury Stock Illustration 13 -8 Illustration: On February 1, 2008, Mead acquires 4, 000 shares of its stock at $8 per share. Treasury stock (4, 000 x $8) Cash Chapter 13 -38 32, 000 SO 4 Explain the accounting for treasury stock.

Accounting for Treasury Stockholders’ Equity with Treasury stock Illustration 13 -9 Both the number of shares issued (100, 000), outstanding (96, 000), and the number of shares held as treasury (4, 000) are disclosed. Chapter 13 -39 SO 4 Explain the accounting for treasury stock.

Accounting for Treasury Stock Sale of Treasury Stock Above Cost Below Cost Both increase total assets and stockholders’ equity. Chapter 13 -40 SO 4 Explain the accounting for treasury stock.

Above Cost Accounting for Treasury Stock 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. July 1 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. Chapter 13 -41 SO 4 Explain the accounting for treasury stock.

Below Cost Accounting for Treasury Stock 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. Oct. 1 Cash 5, 600 Paid-in capital from treasury stock Treasury stock 800 6, 400 Mead uses Paid-in Capital from Treasury Stock, if available, for the difference between cost and resale price of the shares. Chapter 13 -42 SO 4 Explain the accounting for treasury stock.

Below Cost Accounting for Treasury Stock 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. Dec. 1 Cash 15, 400 Paid-in capital from treasury stock 1, 200 Retained earnings Treasury stock Chapter 13 -43 1, 000 Limited to balance on hand 17, 600 SO 4 Explain the accounting for treasury stock.

Chapter 13 -44

Preferred Stock Features often associated with preferred stock. 1. Preference as to dividends. 2. Preference as to assets in liquidation. 3. Nonvoting. Accounting for preferred stock at issuance is similar to that for common stock. Chapter 13 -45 SO 5 Differentiate preferred stock from common stock.

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 Preferred stock (10, 000 x $10) 100, 000 Paid-in capital in excess of par – Preferred stock 20, 000 Preferred stock may have a par value or no-par value. Chapter 13 -46 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 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. Chapter 13 -47 SO 5 Differentiate preferred stock from common stock.

Statement Presentation Stockholders’ Equity consists of : (1) Paid – in capital (2) Retained earning l Paid – in capital consists of: (1) Capital stock: which consists of: preferred and common stocks. (2) Additional paid – in capital: which includes: the excess of amounts paid in over par or stated value and paid – in capital from treasury stock. l Chapter 13 -48

Statement Presentation Illustration 13 -12 Chapter 13 -49 SO 6 Prepare a stockholders’ equity section.

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