Accounting principles 9e willey kieso chapter 13

Issuing par value stock Issuing no- par stock Issuing stock for services or noncash assets Dividend preferences Liquidation preference Accounting for Common Stock Issues Accounting for C

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Chapter 13

Corporations:

Organization and

Capital Stock Transactions

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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.

Study Objectives

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Issuing par value stock Issuing no- par stock Issuing stock for services

or noncash assets

Dividend preferences Liquidation preference

Accounting for Common Stock Issues

Accounting for Treasury Stock

Preferred Stock

Statement Presentation

Corporations: Organization and Capital

Stock Transactions

Corporations: Organization and Capital

Stock Transactions

Capital stock Additional paid-in capital Retained earnings

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An entity separate and distinct from its owners.

The Corporate Form of Organization

Classified by Purpose

Not-for-Profit For Profit

Classified by Ownership

Publicly held Privately held

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Separate Legal ExistenceLimited Liability of StockholdersTransferable Ownership RightsAbility to Acquire Capital

Continuous LifeGovernment RegulationsAdditional Taxes

Corporate Management

Characteristics that distinguish corporations from

proprietorships and partnerships.

Characteristics of a Corporation

Advantages

Disadvantages

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

stockholders

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Limited to their investment

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Shareholders may sell their stock

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Corporation can obtain capital through the issuance of stock

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Continuance as a going concern is not affected by the

withdrawal, death,

or incapacity of a stockholder,

employee, or officer

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Corporations pay income taxes as a separate legal entity and in addition,

stockholders pay taxes on cash dividends

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Separation of ownership and management prevents owners from having

an active role in managing the company

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Stockholders

Chairman and Board of Directors

President and Chief Executive Officer

General

Counsel and

Secretary

Vice President Marketing

Vice President Finance/Chief Financial Officer

Vice President Operations

Vice President Human Resources Treasurer Controller

Illustration 13-1

Corporation

organization chart

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File application with the Secretary of State.

State grants charter.

Corporation develops by-laws.

Initial Steps:

Forming a Corporation

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.

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1 Vote in election of board of

directors and on actions that require stockholder approval.

Stockholders have the right to:

Ownership Rights of Stockholders

through receipt of dividends.

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3 Keep the same percentage ownership when new

shares of stock are issued (preemptive right*).

* A number of companies have eliminated the 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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Class A COMMON STOCK

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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

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Corporation can issue common stock directly to investors or indirectly through an investment banking firm.

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

5 the current state of the securities market

Issuance of Stock

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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 to-day fluctuations in market prices.

day-Market Value of Stock

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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.

In many states the board of directors assigns a

Par and No-Par Value Stock

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Paid-in Capital in Excess of Par

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for future use.

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Corporate Capital

Comparison of the owners’ equity (stockholders’

equity) accounts reported on a balance sheet for a

proprietorship, a partnership, and a corporation.

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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.

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Illustration: : Assume that Hydro-Slide, Inc issues 1,000

shares of $1 par value common stock at par for Prepare the journal entry

Common stock (1,000 x $1)

1,000

Issuing Par Value Common Stock for Cash

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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

a

b

Issuing Par Value Common Stock for Cash

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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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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

Common stock (4,000 x $1) 4,000

Paid-in capital in excess of par1,000

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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

Common stock (10,000 x $5) 50,000

Paid-in capital in excess of par30,000

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Paid-in Capital in Excess of Par

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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 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

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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

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

Cash 32,000

Illustration: On February 1, 2008, Mead acquires 4,000

shares of its stock at $8 per share

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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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Sale of Treasury Stock

Above Cost Below Cost

Both increase total assets and stockholders’

equity

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Treasury stock 8,000

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

Accounting for Treasury Stock Above Cost

July 1

Paid-in capital 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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Paid-in capital treasury stock 800

On Oct 1, Mead sells an additional 800 shares of treasury

stock at $7 per share

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Paid-in capital treasury stock 1,200

On Dec 1, assume that Mead, Inc sells its remaining 2,200

shares at $7 per share

Limited

to balance

on hand

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Features often associated with preferred stock.

Accounting for preferred stock at issuance is similar to

that for 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

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.

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stock must be paid their annual dividend plus any dividends in arrears before common

stockholders receive dividends.

Preferred Stock

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Statement Presentation

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