Financial accounting 7e harmon chapter 11 reporting analyzing stockholders equyti

11-10 LO 1 Identify the major characteristics of a corporation.Corporation can obtain capital through the issuance of stock.. Stockholders Chairman and Board of Directors President and

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11-1

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After studying this chapter, you should be able to:

1. Identify and discuss the major characteristics of a corporation.

2. Record the issuance of common stock.

3. Explain the accounting for the purchase of treasury stock.

4. Differentiate preferred stock from common stock.

5. Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

6. Identify the items that affect retained earnings.

7. Prepare a comprehensive stockholders’ equity section.

8. Evaluate a corporation’s dividend and earnings performance from a stockholder’s perspective.

Learning Objectives

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Preview of Chapter 11

Financial Accounting Seventh Edition Kimmel Weygandt Kieso

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The Corporate Form of Organization

An entity separate and distinct from its owners.

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 Separate Legal Existence

 Limited Liability of Stockholders

 Transferable Ownership Rights

 Ability to Acquire Capital

 Continuous Life

 Corporate Management

 Government Regulations

 Additional Taxes

Characteristics that distinguish corporations from

proprietorships and partnerships.

LO 1 Identify the major characteristics of a corporation.

Characteristics of a Corporation

Advantages

Disadvantages

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11-7 LO 1 Identify the major characteristics of a corporation.

Corporation acts under its own name rather than in the name of its

stockholders.

 Continuous Life

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Limited to their investment.

 Continuous Life

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Shareholders may sell their stock.

 Continuous Life

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Corporation can obtain capital through the issuance

of stock.

 Continuous Life

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Continuance as a going concern is not affected by the

withdrawal, death, or incapacity of a

stockholder, employee, or officer.

 Continuous Life

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 Continuous Life

LO 1 Identify the major characteristics of a corporation.

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and in addition,

stockholders pay taxes on cash dividends.

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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 11-1

Corporation

organization chart

LO 1 Identify and discuss the major characteristics of a corporation.

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11-16

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Other Forms of Business Organization

 Limited partnerships

 Limited liability partnerships (LLPs)

 Limited liability companies (LLCs)

 S Corporation

► No double taxation.

► Cannot have more than 75 shareholders.

Other Forms of Business Organization

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Forming a Corporation

 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.

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1 Vote in election of board of

directors and on actions that require stockholder approval.

Stockholders Rights

2 Share the corporate earnings

through receipt of dividends.

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3 Keep the same percentage ownership when new shares

of stock are issued (preemptive right).

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4 Share in assets upon liquidation in proportion to their

holdings This is called a residual claim.

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Stock Issue Considerations

 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

LO 2 Record the issuance of common stock.

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 Corporation can issue common stock

► directly to investors or

► indirectly through an investment banking firm.

 Top five exchanges by value of shares traded:

1 New York Stock Exchange

2 Nasdaq stock market

3 London Stock Exchange

4 Tokyo Stock Exchange

5 Euronext

Issuance of Stock

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11-25

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 Capital stock that has been assigned a value per share.

 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 Stocks

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Review 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.

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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.

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Paid-in Capital in Excess of Par

Paid-in capital is the total amount of cash and other assets paid in to

the corporation by stockholders in exchange for shares of ownership.

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Retained earnings is net income (earned capital) that a corporation

retains for future use in the business.

Account

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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 Issues of Common Stock

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11-32 LO 2 Record the issuance of common stock.

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 are issued for $1 per share, and (b) 1,000 shares are issued for $5 per share.

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

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

a)

b)

Accounting for Issues of Common Stock

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11-33 LO 2 Record the issuance of common stock.

Stockholders’ equity section assuming Hydro-Slide, Inc has

retained earnings of $27,000.

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ABC Corp issues 1,000 shares of $10 par value common stock

at $12 per share When the transaction is recorded, credits are

d Common Stock $10,000 and Retained Earnings $2,000.

Review Question

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11-35

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Accounting for Treasury Stock

LO 3 Explain the accounting for the purchase of treasury stock.

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Treasury stock - corporation’s own stock that it has reacquired

from shareholders, but not retired.

Corporations purchase their outstanding stock:

1 To reissue shares to officers and employees under bonus

and stock compensation plans.

2 To increase trading of the company’s stock in the securities

market

3 To have additional shares available for use in acquiring

other companies.

4 To increase earnings per share

Another infrequent reason is to eliminate hostile shareholders.

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Purchase of Treasury Stock

 Generally accounted for by the cost method.

 Debit Treasury Stock for the price paid.

 Treasury stock is a contra stockholders’ equity account,

not an asset.

 Treasury Stock decreases by the same amount when the

company later sells the shares.

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Treasury stock (4,000 x $8) 32,000

Cash 32,000

Illustration: On February 1, 2014, Mead acquires 4,000 shares of

its stock at $8 per share Prepare the entry.

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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.

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Review Question

Treasury stock may be repurchased:

a to reissue the shares to officers and employees under

bonus and stock compensation plans.

b to signal to the stock market that management believes

the stock is underpriced.

c to have additional shares available for use in the

acquisition of other companies.

d more than one of the above.

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Typically, preferred stockholders have a priority in relation to

1 dividends and

2 assets in the event of liquidation

However, they sometimes do not have voting rights.

LO 4 Differentiate preferred stock from common stock.

Preferred Stock

Each paid-in capital account title should identify the stock to which it relates:

 Paid-in Capital in Excess of Par Value—Preferred Stock

 Paid-in Capital in Excess of Par Value—Common Stock

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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.

LO 4 Differentiate preferred stock from common stock.

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.

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11-44 LO 4 Differentiate preferred stock from common stock.

Preferred Stock

 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.

Dividend Preferences

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11-45 LO 4 Differentiate preferred stock from common 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.

Preferred Stock

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