Accounting principles 10e by kieso chapter 13

 Limited Liability of Stockholders  Ability to Acquire Capital Characteristics that distinguish corporations from proprietorships and partnerships..  Limited Liability of Stockholder

13-1

CHAPTER 13

Corporations:

Organization and Capital Stock

Transactions

13-3

An entity separate and distinct from its owners.

 Limited Liability of Stockholders

 Ability to Acquire Capital

Characteristics that distinguish corporations from

proprietorships and partnerships.

SO 1 Identify the major characteristics of a corporation.

Advantages

Disadvantages

Characteristics of a Organization

 Separate Legal Existence

 Limited Liability of Stockholders

 Ability to Acquire Capital

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 Organization

 Limited Liability of Stockholders

 Ability to Acquire Capital

Characteristics that distinguish corporations from

proprietorships and partnerships.

Characteristics of a Organization

 Separate Legal Existence

 Limited Liability of Stockholders

 Ability to Acquire Capital

Shareholders may sell their stock

Characteristics that distinguish corporations from

proprietorships and partnerships.

Characteristics of a Organization

 Limited Liability of Stockholders

 Ability to Acquire Capital

of stock

Characteristics that distinguish corporations from

proprietorships and partnerships.

Characteristics of a Organization

 Separate Legal Existence

 Limited Liability of Stockholders

 Ability to Acquire Capital

Continuance as a going concern is not affected by the

withdrawal, death, or incapacity of a

Characteristics that distinguish corporations from

proprietorships and partnerships.

Characteristics of a Organization

 Limited Liability of Stockholders

 Ability to Acquire Capital

SO 1 Identify the major characteristics of a corporation.

Characteristics that distinguish corporations from

proprietorships and partnerships.

Characteristics of a Organization

 Separate Legal Existence

 Limited Liability of Stockholders

 Ability to Acquire Capital

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

Characteristics that distinguish corporations from

proprietorships and partnerships.

Characteristics of a Organization

 Limited Liability of Stockholders

 Ability to Acquire Capital

Characteristics that distinguish corporations from

proprietorships and partnerships.

Characteristics of a Organization

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

Illustration 13-1

Corporation

organization chart

Characteristics of a Organization

 Formed by grant of a state charter

Initial Steps:

SO 1 Identify the major characteristics of 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

Forming a Corporation

1 Vote in election of board of

directors and on actions that require stockholder approval.

Stockholders have the right to:

2 Share the corporate earnings

through receipt of dividends.

Illustration 13-3

Ownership Rights of Stockholders

3 Keep the same percentage ownership when new

shares of stock are issued (preemptive right*).

SO 1 Identify the major characteristics of a corporation.

* A number of companies have eliminated the preemptive right.

Illustration 13-3

Ownership Rights of Stockholders

Stockholders have the right to:

4 Share in assets upon liquidation in proportion to

their holdings This is called a residual claim

Illustration 13-3

Ownership Rights of Stockholders

Stockholders have the right to:

 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

13-21 SO 1 Identify the major characteristics of a corporation.

 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 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

 Interaction between buyers and sellers determines the

prices per share

 Prices tend to follow the trend of a company’s earnings and

dividends

day-to-Market Value of Stock

Stock Issue Considerations

13-23

 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 stated

Par and No-Par Value Stock

Stock Issue Considerations

Paid-in Capital in Excess of Par

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

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

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

Comparison of the owners’ equity (stockholders’ equity)

accounts reported on a balance sheet for a proprietorship, a partnership, and a corporation

Illustration 13-6

Corporate Capital

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

Accounting for Common Stock Issues

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

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

journal entry

SO 3 Record the issuance of common stock.

Issuing Par Value Common Stock for Cash

Accounting for Common Stock Issues

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

Issuing Par Value Common Stock for Cash

Accounting for Common Stock Issues

13-31 SO 3 Record the issuance of common stock.

Illustration 13-7

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

Accounting for Common Stock Issues

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

SO 3 Record the issuance of common stock.

Accounting for Common Stock Issues

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

Accounting for Common Stock Issues

Paid-in Capital in Excess of Par

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.

Accounting for Treasury Stock

Purchase of Treasury Stock

 Debit Treasury Stock for the price paid to reacquire the

SO 4 Explain the accounting for treasury stock.

Accounting for Treasury Stock

Illustration: On February 1, 2012, Mead acquires 4,000 shares

of its stock at $8 per share

Illustration 13-8

Accounting for Treasury Stock

13-39 SO 4 Explain the accounting for treasury stock.

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.

Illustration 13-9

Accounting for Treasury Stock

Sale of Treasury Stock

 Above Cost

 Below Cost

Both increase total assets and stockholders’ equity

SO 4 Explain the accounting for treasury stock.

Accounting for Treasury Stock

Disposal of Treasury Stock

Treasury stock 8,000

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

shares of its treasury stock, previously acquired at $8 per share.July 1

Cost

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

treasury stock at $7 per share

SO 4 Explain the accounting for treasury stock.

Paid-in capital treasury stock 1,200

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

remaining 2,200 shares at $7 per share

on hand

Cost

SO 5 Differentiate preferred stock from common stock.

Accounting for preferred stock at issuance is similar to that for

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

the preferred stock’s par value or as a specified amount

be paid their annual dividend plus any dividends in arrears before common stockholders receive dividends

SO 5 Differentiate preferred stock from common stock.

Preferred Stock

Dividend Preferences

Preferred 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

assets if the corporation fails

shares or for a specified liquidating value

SO 5 Differentiate preferred stock from common stock.

Preferred Stock

Liquidation Preferences

Illustration 13-12

Statement Presentation

 Under IFRS, the term reserves is used to describe all equity

accounts other than those arising from contributed (paid-in) capital This would include, for example, reserves related to retained earnings, asset revaluations, and fair value

differences.

 Many countries have a different mix of investor groups than in

the United States For example, in Germany, financial institutions like banks are not only major creditors of corporations but often are the largest corporate stockholders

as well In the United States, Asia, and the United Kingdom, many companies rely on substantial investment from private investors.

Key Points

 There are often terminology differences for equity accounts

The following summarizes some of the common differences in terminology.

Key Points

 The accounting for treasury stock differs somewhat between

IFRS and GAAP (However, many of the differences are beyond the scope of this course.) Like GAAP, IFRS does not allow a company to record gains or losses on purchases of its own shares One difference worth noting is that, when a company purchases its own shares, IFRS treats it as a reduction of stockholders’ equity, but it does not specify which particular stockholders’ equity accounts are to be affected Therefore, it could be shown as an increase to a contra equity account (Treasury Stock) or a decrease to retained earnings or share capital IFRS requires that the number of treasury shares held

be disclosed

Key Points

 A major difference between IFRS and GAAP relates to the

account Revaluation Surplus Revaluation surplus arises under IFRS because companies are permitted to revalue their

property, plant, and equipment to fair value under certain circumstances This account is part of general reserves under IFRS and is not considered contributed capital.

 As indicated earlier, the term reserves is used in IFRS to

indicate all non-contributed (non–paid-in) capital Reserves include retained earnings and other comprehensive income

Key Points

 IFRS often uses terms such as retained profits or accumulated

profit or loss to describe retained earnings The term retained earnings is also often used.

 The accounting related to prior period adjustments is

essentially the same under IFRS and GAAP One area where IFRS and GAAP differ in reporting relates to error corrections in previously issued financial statements While IFRS requires

restatement with some exceptions, GAAP does not permit any exceptions.

 Equity is given various descriptions under IFRS, such as

shareholders’ equity, owners’ equity, capital and reserves, and shareholders’ funds.

Key Points

Looking to the Future

As indicated in earlier discussions, the IASB and the FASB are currently working on a project related to financial statement

presentation An important part of this study is to determine

whether certain line items, subtotals, and totals should be clearly defined and required to be displayed in the financial statements For example, it is likely that the statement of stockholders’ equity and its presentation will be examined closely In addition, the

options of how to present other comprehensive income under

Under IFRS, a purchase by a company of its own shares is recorded by:

a) an increase in Treasury Stock.

b) a decrease in contributed capital.

c) a decrease in share capital.

d) All of these are acceptable treatments

IFRS Self-Test Questions

Which of the following is true?

a) In the United States, the primary corporate stockholders

are financial institutions.

b) Share capital means total assets under IFRS.

c) The IASB and FASB are presently studying how financial

statement information should be presented.

IFRS Self-Test Questions

d) Par value is not used under IFRS.

IFRS Self-Test Questions

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