ch13, Accounting Principles

Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
13-1
13
Corporations: Organization
and Capital Stock
Transactions
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.
13-2
Preview of Chapter 13
Accounting Principles
Eleventh Edition
Weygandt Kimmel Kieso
13-3
The Corporate Form of Organization
An entity separate and distinct from its owners.
Classified by Purpose Classified by Ownership

Not-for-Profit Publicly held
For Profit Privately held
Salvation Army McDonalds Cargill Inc.

American Cancer Nike
Alternative
Alternative Terminology
Terminology
Society PepsiCo Privately
Privately held
held corporations
corporations
are
are also
also referred
referred to
to as
as
Google closely
closely held
held corporations.
corporations.
13-4 LO 1 Identify the major characteristics of a corporation.

Characteristics of an Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence

Limited Liability of Stockholders
Transferable Ownership Rights
Advantages
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations Disadvantages
Additional Taxes

Corporation acts
under its own name
Limited Liability of Stockholders rather than in the
name of its
stockholders.
Continuous Life
Government Regulations
Additional Taxes


Limited Liability of Stockholders Limited to their
investment.
Continuous Life
Additional Taxes


Shareholders may
sell their stock.
Continuous Life
Additional Taxes


Transferable Ownership Rights Corporation can
Ability to Acquire Capital obtain capital
through the issuance
Continuous Life of stock.
Additional Taxes


Transferable Ownership Rights Continuance as a
Ability to Acquire Capital going concern is not
affected by the
Continuous Life withdrawal, death, or
Corporate Management incapacity of a
stockholder,
Government Regulations employee, or officer.
Additional Taxes

Characteristics that distinguish corporations
from proprietorships and partnerships.

Transferable Ownership Rights Separation of
Ability to Acquire Capital ownership and
management
Continuous Life prevents owners
Corporate Management from having an
active role in
Government Regulations managing the
Additional Taxes company.


Continuous Life
Additional Taxes


Ability to Acquire Capital Corporations pay
income taxes as a
Continuous Life separate legal entity
Corporate Management and in addition,
stockholders pay
taxes on cash
Additional Taxes dividends.

Stockholders
Illustration 13-1
Corporation
organization chart
Chairman and
Board of
Directors
President and
Chief Executive
Officer
General Vice President Vice President

Vice President Vice President
Counsel/ Finance/Chief Human
Marketing Operations
Secretary Financial Officer Resources
Treasurer Controller

Alternative
Forming a Corporation The
The charter
Terminology
charter is
is often
often
referred
referred to
to as
as the
the articles
articles
Initial Steps: of
of incorporation.
incorporation.
File application with the Secretary of State.

State grants charter.
Corporation develops by-laws.
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.

Stockholders Rights Illustration 11-3
1. Vote in election of board of

directors and on actions that
require stockholder approval.
2. Share the corporate earnings

through receipt of dividends.

3. Keep the same percentage ownership when new shares

of stock are issued (preemptive right).
* A number of companies have eliminated the preemptive right.

4. Share in assets upon liquidation in proportion to their

holdings. This is called a residual claim.

13-19
Stock Issue Considerations
Authorized Stock
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.

Prenumbered Shares Illustration 13-4
Name of corporation
Stockholders
name
Signature of
corporate official
13-21 LO 1
Issuance of Stock
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. Companys 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.

Market Price of Stock

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 companys earnings and
dividends.
Factors beyond a companys control, may cause day-to-day
fluctuations in market prices.

13-24
Par and No-Par Value Stock

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.

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.

> DO IT!
Indicate whether each of the following statements is true or false.
False 1. Similar to partners in a partnership, stockholders of a

______
corporation have unlimited liability.
True 2. It is relatively easy for a corporation to obtain capital

______
through the issuance of stock.
False 3. The separation of ownership and management is an

______
advantage of the corporate form of business.
False 4. The journal entry to record the authorization of capital stock

______
includes a credit to the appropriate capital stock account.
False 5. All states require a par value per share for capital stock.
______

Corporate Capital
Common
CommonStock
Stock
Account
Account Paid-in
Paid-inCapital
Capitalinin
Paid-in
Paid-inCapital
Capital Excess
Excessof
ofPar
Par
Account
Account
Preferred
PreferredStock
Stock
Account
Account
Two Primary
Sources of Retained
RetainedEarnings
Earnings
Account
Account
Equity
Paid-in capital is the total amount of cash and other assets paid in
to the corporation by stockholders in exchange for capital stock.
13-28 LO 2 Differentiate between paid-in capital and retained earnings.

Corporate Capital
Common
CommonStock
Stock
Account
Account Paid-in
Paid-inCapital
Capitalinin
Paid-in
Paid-inCapital
Capital Excess
Excessof
ofPar
Par
Account
Account
Preferred
PreferredStock
Stock
Account
Account
Two Primary
Sources of Retained
RetainedEarnings
Earnings
Account
Account
Equity
Retained earnings is net income that a corporation retains for

future use.

Corporate Capital
Comparison of the owners equity (stockholders equity)

accounts reported on a balance sheet for a proprietorship, a
partnership, and a corporation.
Illustration 13-6

13-31
Accounting for Common Stock Issues
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.
13-32 LO 3 Record the issuance of common stock.

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-Slides 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. Cash 1,000
Common Stock (1,000 x $1) 1,000
b. Cash 5,000
Common Stock (1,000 x $1) 1,000
Paid-in Capital in Excess of Par Value 4,000

Illustration 13-7
Alternative
Terminology
Paid-in
Paid-in Capital
Capital in
in Excess
Excess of
of
Par
Par is
is also
also called
called Premium
Premium
on
on Stock.
Stock. LO 3 Record the issuance of common stock.
13-34
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.

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.
Organizational Expense 5,000
Common Stock (4,000 x $1) 4,000
Paid-in Capital in Excess of par 1,000

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

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 companys board of
directors as part of their compensation package. Stock options enable an employee to buy a
companys 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 companys
records to dates in the past, when the companys 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.
Total take: $7 billion

THE MISSING CONTROLS
Independent internal verification. The companys 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.
13-38 Advance slide in presentation mode to reveal answer.

Accounting for Treasury Stock
Common
CommonStock
Stock
Account
Account Paid-in
Paid-inCapital
Capitalinin
Paid-in
Paid-inCapital
Capital Excess
Excessof
ofPar
Par
Account
Account
Preferred
PreferredStock
Stock
Account
Account
Two Primary
Sources of Retained
RetainedEarnings
Earnings
Account
Account
Equity
Less:
Less:
Treasury
TreasuryStock
Stock
Account
Account
13-39 LO 4 Explain the accounting for treasury stock.

Treasury stock - corporations 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 stocks market value.
3. To have additional shares available for use in the acquisition of

other companies.
4. To increase earnings per share.

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

Illustration 13-8
Illustration: On February 1, 2014, Mead acquires 4,000 shares of

its stock at $8 per share.
Treasury Stock (4,000 x $8) 32,000
Cash 32,000

Illustration 13-9
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.

13-44
Disposal of Treasury Stock

Helpful
Helpful Hint
Hint Treasury
Treasury stock
stock
Sale of Treasury Stock transactions
transactions are are classified
classified as
as
capital
capital stock
stock transactions.
transactions.
Above Cost As
As inin the
the case
case when
when stock
stock
is
is issued,
issued, the
the income
income
Below Cost statement
statement is is not
not involved.
involved.
Both increase total assets and stockholders equity.

Accounting for Treasury Stock Above
Cost
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 Cash 10,000

Treasury Stock 8,000
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.

Accounting for Treasury Stock Below
Cost
Illustration: On Oct. 1, Mead sells an additional 800 shares of
treasury stock at $7 per share.
Oct. 1 Cash 5,600

Paid-in Capital Treasury Stock 800
Illustration 13-10

Accounting for Treasury Stock Below
Cost
Illustration: On Dec. 1, assume that Mead, Inc. sells its
remaining 2,200 shares at $7 per share.
Dec. 1 Cash 15,400 Limited

to
Paid-in Capital Treasury Stock 1,200 balance
on
Retained Earnings 1,000 hand

Preferred Stock
Features often associated with preferred stock.

1. Preference as to dividends.
2. Preference as to assets in liquidation.
3. Nonvoting.
Accounting for preferred stock at issuance is similar to that for

common stock.
13-49 LO 5 Differentiate preferred stock from 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.
Cash 120,000
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.

Preferred Stock
Dividend Preferences
Right to receive dividends before common stockholders.
Per share dividend amount is stated as a percentage of the

preferred stocks 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
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.
Illustration 13-11

Preferred Stock
Liquidation Preferences
Most preferred stocks have a preference on corporate
assets if the corporation fails.
Provides security for the preferred stockholder.
Preference to assets may be for the par value of the

shares or for a specified liquidating value.

Statement Presentation
Illustration 13-12
13-54 LO 6 Prepare a stockholders equity section.

A Look at IFRS
Key Points
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.
LO 7 Compare the accounting procedures for

13-55 stockholders equity under GAAP and IFRS.
A Look at IFRS
Key Points
There are often terminology differences for equity accounts. The
following summarizes some of the common differences in terminology.

A Look at IFRS
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.

A Look at IFRS
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.
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.
Equity is given various descriptions under IFRS, such as shareholders
equity, owners equity, capital and reserves, and shareholders funds.

A Look at IFRS
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.

A Look at IFRS
IFRS Self-Test Questions

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

A Look at IFRS

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.
d) The amount to treasury stock is very different between U.S.

GAAP and IFRS.

A Look at IFRS

Under IFRS, the amount of capital received in excess of par value
would be credited to:
a) Retained Earnings.
b) Contributed Capital.
c) Share Premium.
d) Par value is not used under IFRS.

Copyright
Copyright 2013 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
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may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
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programs or from the use of the information contained herein.
13-63

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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.

An entity separate and distinct from its owners.

Classified by Purpose Classified by Ownership

Salvation Army McDonalds Cargill Inc.

13-4 LO 1 Identify the major characteristics of a corporation.

Separate Legal Existence

13-5 LO 1 Identify the major characteristics of a corporation.

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

Separate Legal Existence

13-7 LO 1 Identify the major characteristics of a corporation.

Separate Legal Existence

13-8 LO 1 Identify the major characteristics of a corporation.

Separate Legal Existence

13-9 LO 1 Identify the major characteristics of a corporation.

Separate Legal Existence

13-10 LO 1 Identify the major characteristics of a corporation.

Separate Legal Existence

13-11 LO 1 Identify the major characteristics of a corporation.

Separate Legal Existence

13-12 LO 1 Identify the major characteristics of a corporation.

Separate Legal Existence

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

General Vice President Vice President

13-14 LO 1 Identify the major characteristics of a corporation.

File application with the Secretary of State.

Companies generally incorporate in a state whose laws are

Corporations engaged in interstate commerce must obtain a license

13-15 LO 1 Identify the major characteristics of a corporation.

Stockholders Rights Illustration 11-3

1. Vote in election of board of

2. Share the corporate earnings

13-16 LO 1 Identify the major characteristics of a corporation.

Stockholders Rights Illustration 11-3

3. Keep the same percentage ownership when new shares

* A number of companies have eliminated the preemptive right.

13-17 LO 1 Identify the major characteristics of a corporation.

Stockholders Rights Illustration 11-3

4. Share in assets upon liquidation in proportion to their

13-18 LO 1 Identify the major characteristics of a corporation.

13-20 LO 1 Identify the major characteristics of a corporation.

2. Expected dividend rate per share.

3. Current financial position.

4. Current state of the economy.

5. Current state of the securities market.

13-22 LO 1 Identify the major characteristics of a corporation.

Market Price of Stock

13-23 LO 1 Identify the major characteristics of a corporation.

Par and No-Par Value Stock

13-25 LO 1 Identify the major characteristics of a corporation.

13-26 LO 1 Identify the major characteristics of a corporation.

Indicate whether each of the following statements is true or false.

False 1. Similar to partners in a partnership, stockholders of a

True 2. It is relatively easy for a corporation to obtain capital

False 3. The separation of ownership and management is an

False 4. The journal entry to record the authorization of capital stock

13-27 LO 1 Identify the major characteristics of a corporation.

13-28 LO 2 Differentiate between paid-in capital and retained earnings.

Retained earnings is net income that a corporation retains for