Financial accounting 8e tool for busniess decision making chapter 11

Separate Legal ExistenceLimited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Corporation Management Government Regulations A

Reporting and Analyzing Stockholders’ Equity

Kimmel ● Weygandt ● Kieso

11

Explain how to account for the issuance of common and preferred stock, and the purchase of treasury stock.

An entity separate and distinct from its owners.

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Continuous Life

Corporation Management

Government Regulations

Additional Taxes

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

stockholders

Characteristics that distinguish corporations from

proprietorships and partnerships

CHARACTERISTICS OF A CORPORATION

 Separate Legal Existence

 Limited Liability of Stockholders

 Transferable Ownership Rights

 Ability to Acquire Capital

Characteristics that distinguish corporations from

proprietorships and partnerships

CHARACTERISTICS OF A CORPORATION

Shareholders may sell their stock.

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Continuous Life

Corporation Management

Government Regulations

Additional Taxes

Characteristics that distinguish corporations from

proprietorships and partnerships

CHARACTERISTICS OF A CORPORATION

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

of stock

Characteristics that distinguish corporations from

proprietorships and partnerships

CHARACTERISTICS OF A CORPORATION

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

withdrawal, death, or incapacity of a

stockholder, employee,

or officer

Characteristics that distinguish corporations from

proprietorships and partnerships

CHARACTERISTICS OF A CORPORATION

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

in managing the company

Characteristics that distinguish corporations from

proprietorships and partnerships

CHARACTERISTICS OF A CORPORATION

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Continuous Life

Corporation Management

Government Regulations

Additional Taxes

Characteristics that distinguish corporations from

proprietorships and partnerships

CHARACTERISTICS OF A CORPORATION

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

stockholders pay taxes on cash dividends

Characteristics that distinguish corporations from

proprietorships and partnerships

CHARACTERISTICS OF A CORPORATION

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

The Impact of Corporate Social Responsibility

A survey conducted by Institutional Shareholder Services, a proxy advisory firm, shows that 83% of investors now believe environmental and social factors can significantly impact shareholder value over the long term This belief is clearly visible in the rising level of support for shareholder proposals requesting action related to social and environmental issues The following table shows that the number of corporate social responsibility (CSR) related shareholder proposals rose from 150 in 2000 to 191 in 2010 Moreover, those proposals received average voting support of 18.4% of votes cast versus just 7.5% a decade earlier

Trends in Shareholder Proposals on Corporate Responsibility

Other Forms of Business Organization

Limited partnerships

Limited liability partnerships (LLPs)

Limited liability companies (LLCs)

S Corporation

► No double taxation.

► Cannot have more than 100 shareholders.

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

1 Vote in election of board of

directors and on actions that require stockholder approval

2 Share the corporate

earnings through receipt of

3 Keep the same percentage ownership when new

shares of stock are issued (preemptive right).

STOCKHOLDER RIGHTS

ILLUSTRATION 11-3

Ownership rights of stockholders

4 Share in assets upon liquidation in proportion to

their holdings This is called a residual claim.

ILLUSTRATION 11-3

Ownership rights of stockholders

STOCKHOLDER RIGHTS

Name of

corporation

Stockholder’s name

STOCKHOLDER RIGHTS

Shares Prenumbered

ILLUSTRATION 11-4

A stock certificate

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

STOCK ISSUE CONSIDERATIONS

 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

STOCK ISSUE CONSIDERATIONS

Total take: $1.7 million

ANATOMY OF A FRAUD

The president, chief operating officer, and chief financial officer of SafeNet, a software encryption company, were each awarded employee stock options by the company’s board of directors as part of their compensation package Stock options enable an employee to buy a company’s stock sometime in the future at the price that existed when the stock option was awarded For example, suppose that you received stock options today, when the stock price of your company was $30 Three years later, if the stock price rose to $100, you could “exercise” your options and buy the stock for $30 per share, thereby making $70 per share After being awarded their stock options, the three employees changed the award dates in the company’s records to dates in the past, when the company’s stock was trading at historical lows For example, using the previous example, they would choose a past date when the stock was selling for $10 per share, rather than the $30 price on the actual award date In our example, this would increase the profit from exercising the options to $90 per share.

THE MISSING CONTROL

Independent internal verification The company’s board of directors should have

ensured that the awards were properly administered For example, the date on the minutes from the board meeting should be compared to the dates that were recorded for the awards The dates should again be confirmed upon exercise.

Par value stock is 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

Many states do not require a par value

No-par value stock is fairly common

In many states the board of directors assigns a stated

value to no-par shares

Par and No-Par Value Stocks

STOCK ISSUE CONSIDERATIONS

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

STOCK ISSUE CONSIDERATIONS

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 shares of

ownership.

CORPORATE CAPITAL

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

Retained earnings is net income that a corporation retains for

future use in the business.

CORPORATE CAPITAL

Indicate whether each of the following statements is true or false

Corporate Organization

DO IT! 1

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

False

True

False

False False

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

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

(a)

(b)

Issuing Par Value Common Stock for Cash

Stockholders’ equity section assuming Hydro-Slide, Inc has

Review Question

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

stock at $12 per share When the transaction is recorded,

credits are made to:

a Common Stock $10,000 and Paid-in Capital in Excess

of Stated Value $2,000

b Common Stock $12,000

c Common Stock $10,000 and Paid-in Capital in Excess

of Par Value $2,000

d Common Stock $10,000 and Retained Earnings

STOCK ISSUE CONSIDERATIONS

Typically, preferred stockholders have a priority in relation to

1.dividends and2.assets in the event of liquidation

However, they sometimes do not have voting rights.

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

ACCOUNTING FOR 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.

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

ACCOUNTING FOR PREFERRED STOCK

INVESTOR INSIGHT

Organized exchanges trade the stock of publicly held companies at dollar prices per share established by the interaction between buyers and sellers For each listed security, the financial press reports the high and low prices

of the stock during the year, the total volume of stock traded on a given day, the high and low prices for the day, and the closing market price, with the net change for the day Facebook is listed on the Nasdaq exchange Here is a recent listing for Facebook:

How to Read Stock Quotes

These numbers indicate the following The high and low market prices for the last 52 weeks have been $86.07 and $54.66 The trading volume for the day was 54,156,600 shares The high, low, and closing prices for that date were $85.59, $83.11, and $84.63, respectively The net change for the day was a decrease of $0.629 per share.

11-37 LO 2

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 28, Cayman 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.

Issuance of Stock

DO IT! 2

Cash 1,200,000

Common Stock (100,000 × $1)

100,000 Paid-in Capital in Excess of Par Value—

Common Stock

1,100,000

Mar 1

Preferred Stock (1,500 × $10)

15,000 Paid-in Capital in Excess of Par Value—

Preferred Stock

Mar 28

Paid-in Capital

Retained Earnings Account

Paid-in Capital

in Excess of Par Account

Preferred Stock Account

TREASURY STOCK

Treasury stock is a corporation’s own stock that has been

reacquired by the corporation and is being held for future use

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.

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

TREASURY STOCK

Purchase of Treasury Stock

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

Cash

Illustration: On February 1, 2017, Mead acquires 4,000 shares of

its stock at $8 per share Prepare the entry.

Purchase of Treasury Stock ILLUSTRATION 11-6

Stockholders’ equity with

no treasury stock

LO 2

Both the number of shares issued (100,000), outstanding (96,000),

and the number of shares held as treasury (4,000) are disclosed.

Purchase of Treasury Stock ILLUSTRATION 11-7

Stockholders’ equity with treasury stock

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

Purchase of Treasury Stock

Santa Anita Inc purchases 3,000 shares of its $50 par value

common stock for $180,000 cash on July 1 It expects to hold the shares in the treasury until resold Journalize the treasury stock

A dividend is a distribution to stockholders on a pro rata

(proportional to ownership) basis

Types of Dividends:

1.Cash dividends

2.Property dividends

Dividends expressed: (1) as a percentage of the par or stated

value, or (2) as a dollar amount per share

3

For a corporation to pay a cash dividend, it must have:

1 Retained earnings - Payment of dividends from retained

earnings is legal in all states

2 Adequate cash.

3 Declaration by the Board of Directors.

CASH DIVIDENDS

Dividends require information concerning three dates:

Entries for Cash Dividends

Illustration: On December 1, the directors of Media General declare a

$0.50 per share cash dividend on 100,000 shares of $10 par value

common stock The dividend is payable on January 20 to shareholders

of record on December 22:

December 1 (Declaration Date)

Cash Dividends 50,000Dividends Payable 50,000

December 22 (Record Date)

January 20 (Payment Date)

Dividends Payable 50,000Cash

No entry

Entries for Cash Dividends