Financial accounting 10th by harmin ch11

ISSUING PAR VALUE COMMON STOCK FOR CASH Accounting for Common Stock Illustration: Assume that Hydro-Slide, Inc... Cash 40,000 Common Stock 25,000Paid-in Capital in Excess of Stated Value

Trang 1

Prepared by

Coby Harmon

Trang 2

Corporations: Organization, Stock Transactions, and

Stockholders’ Equity

11

Learning Objectives

Discuss the major characteristics of a corporation.

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

Explain how to account for cash dividends, stock dividends, and stock splits.

Trang 3

An entity separate and distinct from its owners.

Trang 4

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

 Continuous Life

 Corporate Management

 Government Regulations

 Additional Taxes

Trang 5

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

stockholders.

 Continuous Life

Trang 6

Limited to their investment.

 Continuous Life

Trang 7

Shareholders may sell their stock.

 Continuous Life

Trang 8

Corporation can obtain capital through the issuance

of stock.

 Continuous Life

Trang 9

Continuance as a going concern is not affected by the

withdrawal, death, or incapacity of a

stockholder, employee, or officer.

 Continuous Life

Trang 10

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

company.

Characteristics that distinguish corporations

from proprietorships and partnerships.

 Continuous Life

Trang 11

 Continuous Life

Trang 12

stockholders pay taxes on cash dividends.

Trang 13

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

Illustration 11-1

Corporation organization chart

Trang 14

 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

Trang 15

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

Ownership rights of

stockholders

Trang 16

3 Keep the same percentage ownership when new shares

of stock are issued (preemptive right).

* A number of companies have eliminated the preemptive right

Ownership rights of

stockholders

Trang 17

4 Share in assets upon liquidation in proportion to their

holdings This is called a residual claim.

Ownership rights of

stockholders

Trang 18

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

Trang 19

 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.

 No formal accounting entry.

AUTHORIZED STOCK

Trang 21

 Companies 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

Trang 22

 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

 Factors beyond a company’s control may cause

day-to-day fluctuations in market prices.

MARKET PRICE OF STOCK

Trang 23

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.

Trang 24

 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 fairly common today.

 In many states, the board of directors assigns a stated

value to no-par shares.

PAR AND NO-PAR VALUE STOCK

Trang 25

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.

Trang 26

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.

Trang 27

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

Trang 29

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

Stockholders’ equity section

Trang 30

Comparison of the owners’ equity (stockholders’ equity)

accounts reported on a balance sheet for a proprietorship and

Trang 31

(a) Income Summary 122,000

(b) Stockholders’ equity

Paid-in capital common Stock $750,000

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

Trang 32

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, preferred, and treasury stock.

2

Trang 33

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

Trang 34

Trang 35

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

Cash 40,000

Common Stock 25,000Paid-in Capital in Excess of Stated Value 15,000

ISSUING NO-PAR COMMON STOCK FOR CASH

Trang 36

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

Trang 37

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.

ISSUING COMMON STOCK FOR SERVICES

OR NONCASH ASSETS

Trang 38

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

Organization Expense 5,000

Common Stock (4,000 x $1) 4,000Paid-in Capital in Excess of Par 1,000

COMMON STOCK FOR SERVICES

Trang 39

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 80,000

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

COMMON STOCK FOR NONCASH ASSET

Trang 40

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 Stock Transactions

Accounting for Preferred Stock

Trang 41

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

Cash 120,000

Preferred Stock (10,000 x $10) 100,000Paid-in Capital in Excess of Par 20,000

Trang 42

Investor Insight Facebook

Trang 43

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

Cash 1,200,000Common Stock (100,000 × $1) 100,000Paid-in Capital in Excess of Par Value—

Common Stock 1,100,000Mar 1

Trang 44

Organizational Expense 50,000Common Stock (5,000 × $1) 5,000Paid-in Capital in Excess of Par Value—

Common Stock 45,000Mar 15

Trang 45

Cash 45,000Preferred Stock (1,500 × $10) 15,000Paid-in Capital in Excess of Par Value—

Preferred Stock 30,000Mar 28

Trang 47

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

Định dạng
Số trang	107
Dung lượng	7,18 MB