Accounting principles 11e kieso kimmel chapter 013

Advantages Disadvantages Characteristics of an Organization  Limited Liability of Stockholders  Ability to Acquire Capital... Characteristics of an Organization  Limited Liability of

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Prepared by Coby Harmon University of California, Santa Barbara

Westmont College

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Learning Objectives

After studying this chapter, you should be able to:

[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.

13 Corporations: Organization

and Capital Stock Transactions

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Preview of Chapter 13

Accounting Principles Eleventh Edition Weygandt Kimmel Kieso

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The Corporate Form of Organization

LO 1 Identify the major characteristics of a corporation.

Alternative Terminology

Privately held corporations are also referred to as closely held corporations.

Alternative Terminology

Privately held corporations are also referred to as closely held corporations.

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Characteristics that distinguish corporations from

proprietorships and partnerships

Advantages

Disadvantages

Characteristics of an Organization

 Limited Liability of Stockholders

 Ability to Acquire Capital

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13-6 LO 1 Identify the major characteristics of a corporation.

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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Separation of ownership and management prevents owners from having an active role in managing the company

Characteristics that distinguish corporations

from proprietorships and partnerships

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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

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Forming a Corporation

 File application with the Secretary of State

 State grants charter

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

Illustration 11-3

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3 Keep the same percentage ownership when new shares

of stock are issued (preemptive right)

Stockholders Rights Illustration 11-3

* 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.

Stockholders Rights Illustration 11-3

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13-19

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 Charter indicates the amount of stock that a

corporation is authorized to sell

stockholders’ equity section

Authorized Stock

Stock Issue Considerations

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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

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 Stock of publicly held companies is traded on organized

 Factors beyond a company’s control, may cause day-to-day

fluctuations in market prices.

Market Price of Stock

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13-24

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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.

 No-par value stock is quite common today.

 In many states the board of directors assigns a stated value to

no-par shares.

Par and No-Par Value Stock

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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

LO 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

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

Retained earnings is net income that a corporation retains for

future use.

Account

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13-30 LO 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

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13-31

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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

LO 3 Record the issuance of common stock.

Other than consideration received, the issuance

of common stock affects only paid-in capital

accounts.

Accounting for Common Stock Issues

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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.

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.

Issuing Par Value Common Stock for Cash

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13-34 LO 3 Record the issuance of common stock.

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Issuing Common Stock for Services or

Noncash Assets

Corporations also may issue stock for:

 Services (attorneys or consultants)

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: 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.

Land (10,000 x $8) 80,000

Common Stock (10,000 x $5) 50,000 Paid-in Capital in Excess of Par 30,000

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THE MISSING CONTROLS

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 could be compared to the dates that were recorded

for the awards In addition, the dates should again be confirmed upon exercise.

Total take: $7 billion

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.

Advance slide in presentation mode to reveal answer.

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LO 4 Explain the accounting for treasury stock.

Accounting for 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 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

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Purchase of Treasury Stock

 Debit Treasury Stock for the price paid to reacquire the

Helpful Hint Treasury

shares do not have dividend rights or voting rights.

Helpful Hint Treasury shares do not have dividend rights or voting rights.

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

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

its stock at $8 per share.

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13-43 LO 4 Explain the accounting for 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.

Stockholders’ equity with treasury stock

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13-44

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Sale of Treasury Stock

Both increase total assets and stockholders’ equity

Disposal of Treasury Stock

Helpful Hint Treasury stock

transactions are classified as capital stock transactions.

As in the case when stock

is issued, the income statement is not involved.

Helpful Hint Treasury stock transactions are classified as capital stock transactions.

As in the case when stock

is issued, the income statement is not involved.

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

July 1

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

transactions with its own stockholders.

Accounting for Treasury Stock Above

Cost

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treasury stock at $7 per share

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remaining 2,200 shares at $7 per share

on hand

Accounting for Treasury Stock Below

Cost

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LO 5 Differentiate preferred stock from common stock.

Accounting for preferred stock at issuance is similar to that for

common stock.

Preferred Stock

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par value preferred stock for $12 cash per share Journalize

the issuance of the preferred stock

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 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.

Preferred Stock

Dividend Preferences

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13-52 LO 5 Differentiate preferred stock from common stock.

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.

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