Accounting principles 12th willey kieso chapter 13

Explain how to account for the issuance of common and preferred stock.. Paid-in capital is the total amount of cash and other assets paid in to the corporation by stockholders in exchang

Corporations: Organization and Capital Stock Transactions

13

Learning Objectives

Discuss the major characteristics of a corporation.

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

Explain how to account for treasury stock.

An entity separate and distinct from its owners.

Characteristics that distinguish corporations from

proprietorships and partnerships

Advantages

Disadvantages

Characteristics of a Corporation

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

stockholders

Characteristics that distinguish corporations from

proprietorships and partnerships

Characteristics of a Corporation

Limited to their investment.

Characteristics that distinguish corporations from

proprietorships and partnerships

Characteristics of a Corporation

Shareholders may sell their stock.

Characteristics that distinguish corporations from

proprietorships and partnerships

Characteristics of a Corporation

Corporation can obtain capital through the issuance

of stock

Characteristics that distinguish corporations from

proprietorships and partnerships

Characteristics of a Corporation

Continuance as a going concern is not affected by the

withdrawal, death, or incapacity of a

stockholder, employee, or officer

Characteristics that distinguish corporations from

proprietorships and partnerships

Characteristics of a Corporation

Separation of ownership and management often reduces an owner’s ability to actively manage the

company

Characteristics that distinguish corporations

from proprietorships and partnerships

Characteristics of a Corporation

Separate Legal Existence

Characteristics that distinguish corporations from

proprietorships and partnerships

Characteristics of a Corporation

Characteristics that distinguish corporations from

proprietorships and partnerships

Characteristics of a Corporation

stockholders pay taxes on cash dividends

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

File application with the Secretary of

State

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

Alternative Terminology

The charter is often

referred to as the articles

of incorporation.

A Thousand Millionaires!

Traveling to space or embarking on an expedition to excavate lost Mayan ruins are normally the stuff of adventure novels But for employees of Facebook, these and other lavish dreams moved closer to reality when the world’s No 1 online social network went public through an initial public offering (IPO) that may have created at least a thousand millionaires The IPO was the largest in Internet history, valuing Facebook at over $104 billion With all these riches to be had, why did Mark Zuckerberg, the founder of Facebook, delay taking his company public? Consider that the main motivation for issuing shares to the public is to raise money so you can grow your business However, unlike a manufacturer or even

an online retailer, Facebook doesn’t need major physical resources, it doesn’t have inventory, and it doesn’t really need much money for marketing So in the past, the company hasn’t had much need for additional cash beyond what it was already generating on its own Finally, as head of a closely held, nonpublic company, Zuckerberg was subject to far fewer regulations than a public company.

Accounting Across the Organization

1 Vote in election of board of

directors and on actions that require stockholder approval

2 Share the corporate earnings

through receipt of dividends

Stockholder Rights

Illustration 13-3

Ownership rights of

stockholders

3 Keep the same percentage ownership when new

shares of stock are issued (preemptive right)

* A number of companies have eliminated the preemptive right.

Stockholder Rights

Illustration 13-3

Ownership rights of

stockholders

4 Share in assets upon liquidation in proportion to their

holdings This is called a residual claim.

Stockholder Rights

Illustration 13-3

Ownership rights of

stockholders

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?

Stock Issue Considerations

Charter indicates the amount of stock that a corporation is

authorized to sell.

stockholders’ equity section

AUTHORIZED STOCK

Stock Issue Considerations

Prenumbered Illustration 13-4A Stock certificate

Stock Issue Considerations

Companies issue common stock directly to investors or

indirectly through an investment banking firm.

1.Company’s 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.

ISSUANCE OF STOCK

Stock Issue Considerations

Stock of publicly held companies is traded on organized

exchanges

prices per share

dividends

fluctuations in market prices

MARKET PRICE OF STOCK

Stock Issue Considerations

Investor Insight Nike

 Years ago, par value determined the legal capital per

share that a company must retain in the business for the protection of corporate creditors

 No-par value stock is fairly common today

value to no-par shares

PAR AND NO-PAR VALUE STOCK

Stock Issue Considerations

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

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.

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

to the corporation by stockholders in exchange for capital stock.

Corporate Capital

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

Corporate Capital

Illustration 13-5

Stockholders’ equity section

Comparison of the owners’ equity (stockholders’ equity)

accounts reported on a balance sheet for a proprietorship, a

partnership, and a corporation

Corporate Capital

Illustration 13-6

Comparison of owners’

equity accounts

(a) Income Summary 122,000

Retained Earnings 122,000

(b) Stockholders’ equity

DO IT! 1b Corporate Capital

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.

Solution

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

LEARNING

OBJECTIVE

Explain how to account for the issuance

of common and preferred stock.

2

Common Stock (1,000 x $1)

1,000

Common Stock (1,000 x $1)

1,000

Paid-in Capital in Excess of Par —

Issuing Par Value 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.

Accounting for Common Stock

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.

Common Stock

25,000 Paid-in Capital in Excess of Stated Value—

Common Stock 15,000

Issuing No-par Common Stock For Cash

Illustration: What happens when no-par stock does not have a

stated value?

Cash

40,000 Common Stock 40,000

Issuing No-par Common Stock For Cash

Corporations also may issue stock for:

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

Issuing Common Stock for Services

or Noncash Assets

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.

Common Stock (4,000 x $1)

4,000 Paid-in Capital in Excess of Par—

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.

Common Stock (10,000 x $5)

50,000 Paid-in Capital in Excess of Par—

Common Stock

Common Stock for Noncash Asset

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

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:

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

Accounting for Preferred Stock

120,000

Preferred Stock (10,000 x $10)

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

Preferred Stock 20,000

13-42 LO 2

DO IT! 2 Issuance of Stock

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 15, it issues 5,000 shares of common stock to attorneys in

settlement of their bill of $50,000 for organization costs On March 28, Cayman Corporation 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, assuming the shares are not publicly

traded.

1,200,000

Common Stock (100,000 x $1)

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

13-43 LO 2

DO IT! 2 Issuance of Stock

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 15, it issues 5,000 shares of common stock to attorneys in

settlement of their bill of $50,000 for organization costs On March 28, Cayman Corporation 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, assuming the shares are not publicly

traded.

Mar 15Organization Expense 50,000

Common Stock (5,000 x $1)

5,000 Paid-in Capital in Excess of Par—

13-44 LO 2

DO IT! 2 Issuance of Stock

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 15, it issues 5,000 shares of common stock to attorneys in

settlement of their bill of $50,000 for organization costs On March 28, Cayman Corporation 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, assuming the shares are not publicly

traded.

Preferred Stock (1,500 x $10)

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

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

Accounting for Treasury Stock

Companies generally use the cost method.

the shares.

account Reduces stockholders’ equity.

Purchase of Treasury Stock

Helpful Hint

Treasury shares do not have dividend rights or voting rights.

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.

Purchase of Treasury Stock Illustration 13-8

Stockholders’ equity with no treasury stock

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

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

Illustration 13-9

Stockholders’ equity with treasury stock

Purchase of Treasury Stock

Sale of Treasury Stock

Both increase total assets and stockholders’ equity

Disposal of Treasury Stock

Illustration: On July 1, Mead sells for $10 per share 1,000

shares of its treasury stock previously acquired at $8 per share and makes the following entry

Treasury Stock

8,000 Paid-in Capital from Treasury Stock

A corporation does not realize a gain or suffer a loss from

stock transactions with its own stockholders

SALE OF TREASURY STOCK

“ABOVE” COST

Illustration: On Oct 1, Mead sells an additional 800 shares of

treasury stock at $7 per share and makes the following entry

SALE OF TREASURY STOCK

“BELOW” COST

Paid-in Capital from Treasury Stock 800

Treasury Stock

6,400

Cash 15,400 Paid-in Capital from Treasury Stock 1,200

Treasury Stock

17,600

Illustration: On Dec 1, assume that Mead, Inc sells its

remaining 2,200 shares at $7 per share and makes the following entry

Limited to balance

on hand

SALE OF TREASURY STOCK

“BELOW” COST

Why Did Reebok Buy Its Own Stock?

In a bold (and some would say risky) move, Reebok at one time bought back nearly a third of its shares This repurchase of shares dramatically reduced Reebok’s available cash In fact, the company borrowed significant funds to accomplish the repurchase In a press release, management stated that it was repurchasing the shares because it believed its stock was severely underpriced The repurchase of so many shares was meant to signal management’s belief in good future earnings Skeptics, however, suggested that Reebok’s management was repurchasing shares to make it less likely that another company would acquire Reebok (in which case Reebok’s top managers would likely lose their jobs) By depleting its cash, Reebok became

a less attractive acquisition target Acquiring companies like to purchase companies with large cash balances so they can pay off debt used in the acquisition.

Accounting Across the Organization