Chapter 13-1 CHAPTER CHAPTER 13 13 CORPORATIONS: ORGANIZATION AND CAPITAL STOCK TRANSACTIONS Accounting Principles, Eighth Edition Chapter 13-2 Study Study Objectives Objectives Identify the major characteristics of a corporation Differentiate between paid-in capital and retained earnings Record the issuance of common stock Explain the accounting for treasury stock Differentiate preferred stock from common stock Prepare a stockholders’ equity section Compute book value per share Chapter 13-3 Corporations: Corporations: Organization Organization and and Capital Capital Stock Stock Transactions Transactions The Corporate Form of Organization Characteristics Formation Stockholder rights Stock issue considerations Corporate capital Chapter 13-4 Accounting for Common Stock Issues Issuing par value stock Issuing nopar stock Issuing stock for services or noncash assets Accounting for Treasury Stock Purchase of treasury stock Disposal of treasury stock Preferred Stock Dividend preferences Liquidation preference Statement Presentation and Analysis Presentation Analysis—Book value per share The The Corporate Corporate Form Form of of Organization Organization An entity separate and distinct from its owners Classified by Purpose Not-for-Profit Publicly held For Profit Privately held Salvation Army American Cancer Society Gates Foundation Chapter 13-5 Classified by Ownership McDonald’s Ford Motor Company PepsiCo Google Cargill Inc Characteristics Characteristics of of aa Corporation Corporation 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 Government Regulations Additional Taxes Disadvantages Corporate Management Chapter 13-6 LO Identify the major characteristics of a corporation Characteristics Characteristics of of aa Corporation Corporation Characteristics that distinguish corporations from proprietorships and partnerships Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Corporation acts under its own name rather than in the name of its stockholders Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Chapter 13-7 LO Identify the major characteristics of a corporation Characteristics Characteristics of of aa Corporation Corporation Characteristics that distinguish corporations from proprietorships and partnerships Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Limited to their investment Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Chapter 13-8 LO Identify the major characteristics of a corporation Characteristics Characteristics of of aa Corporation Corporation Characteristics that distinguish corporations from proprietorships and partnerships Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Shareholders may sell their stock Continuous Life Government Regulations Additional Taxes Corporate Management Chapter 13-9 LO Identify the major characteristics of a corporation Characteristics Characteristics of of aa Corporation Corporation Characteristics that distinguish corporations from proprietorships and partnerships Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Corporation can obtain capital through the issuance of stock Government Regulations Additional Taxes Corporate Management Chapter 13-10 LO Identify the major characteristics of a corporation Accounting Accounting for for Common Common Stock Stock Issues Issues BE13-5 Kane Inc.’s $10 par value common stock is actively traded at a market value of $15 per share Kane issues 5,000 shares to purchase land advertised for sale at $85,000 Journalize the issuance of the stock in acquiring the land Land (5,000 x $15) Chapter 13-33 75,000 Common stock (5,000 x $10) 50,000 Paid-in capital in excess of par 25,000 LO Record the issuance of common stock Accounting Accounting for for Treasury Treasury Stock Stock Common CommonStock Stock Paid-in Paid-inCapital Capital Account Account Preferred PreferredStock Stock Paid-in Paid-inCapital Capitalin in Excess Excessof ofPar Par Account Account Account Account Two Primary Sources of Equity Retained RetainedEarnings Earnings Account Account Less: Less: Treasury TreasuryStock Stock Account Account Chapter 13-34 LO Explain the accounting for treasury stock Accounting Accounting for for Treasury Treasury Stock Stock Treasury stock - corporation’s own stock that it has reacquired from shareholders, but not retired Corporations purchase their outstanding stock: To reissue the shares to officers and employees under bonus and stock compensation plans To enhance the stocks market value To have additional shares available for use in the acquisition of other companies To increase earnings per share To rid the company of disgruntled investors, perhaps to avoid a takeover Chapter 13-35 LO Explain the accounting for treasury stock Accounting Accounting for for Treasury Treasury Stock Stock 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 Chapter 13-36 LO Explain the accounting for treasury stock Accounting Accounting for for Treasury Treasury Stock Stock Illustration: UC Company originally issued 15,000 shares of $1 par, common stock for $25 per share Record the journal entry for the following transaction: On April 1st the company reacquired 1,000 shares for $28 per share Treasury stock (1,000 x $28) Cash Chapter 13-37 28,000 28,000 LO Explain the accounting for treasury stock Accounting Accounting for for Treasury Treasury Stock Stock Stockholders’ Equity with Treasury stock UC Company Balance Sheet (partial) Stockholders' equity Paid-in capital Common stock, $1 par, 15,000 issued and 14,000 outstanding Paid-in capital in excess of par Retained earnings Total paid-in capital and retained earnings Less: Treasury stock (1,000 shares) Total stockholders' equity $ 15,000 360,000 200,000 575,000 28,000 $ 547,000 Both the number of shares issued (15,000), outstanding (14,000), and the number of shares held as treasury (1,000) are disclosed Chapter 13-38 LO Explain the accounting for treasury stock Accounting Accounting for for Treasury Treasury Stock Stock Sale of Treasury Stock Above Cost Below Cost Both increase total assets and stockholders’ equity Chapter 13-39 LO Explain the accounting for treasury stock Accounting Accounting for for Treasury Treasury Stock Stock Above Cost Illustration: UC Company originally issued 15,000 shares of $1 par, common stock for $25 per share On February 10, UC acquired 500 shares of its stock at $28 per share Record the journal entry for the following transaction: On June 1, UC sold 500 shares of its treasury stock for $30 per share Cash (500 x $30) Treasury stock (500 x $28) Paid-in capital treasury stock Chapter 13-40 15,000 14,000 1,000 LO Explain the accounting for treasury stock Accounting Accounting for for Treasury Treasury Stock Stock Below Cost Illustration: UC Company originally issued 15,000 shares of $1 par, common stock for $25 per share On February 10, UC acquires 500 shares of its stock for $28 per share and on May 15 sold 200 shares of treasury for $29 per share Record the journal entry for the following transaction: On October 15, UC sold the remaining 300 shares of its treasury stock for $24 per share Limited Cash (300 x $24) 7,200 to balance Paid-in capital treasury stock 200 on hand Retained earnings 1,000 Treasury stock (300 x $28) 8,400 Chapter 13-41 LO Explain the accounting for treasury stock Preferred Preferred Stock Stock Features often associated with preferred stock Preference as to dividends Preference as to assets in liquidation Nonvoting Accounting for preferred stock at issuance is similar to that for common stock Chapter 13-42 LO Differentiate preferred stock from common stock Preferred Preferred Stock Stock BE13-7 Acker Inc issues 5,000 shares of $100 par value preferred stock for cash at $130 per share Journalize the issuance of the preferred stock Cash (5,000 x $130) 650,000 Preferred stock (5,000 x $100) 500,000 Paid-in capital in excess of par – Preferred stock 150,000 Preferred stock may have a par value or no-par value Chapter 13-43 LO Differentiate preferred stock from common stock Preferred Preferred Stock Stock Dividend Preferences 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 Chapter 13-44 LO Differentiate preferred stock from common stock Statement Statement Analysis Analysis and and Presentation Presentation Illustration 13-12 Chapter 13-45 LO Prepare a stockholders’ equity section Statement Statement Analysis Analysis and and Presentation Presentation Analysis Book Value Per Share = Total Stockholders’ Equity * Number of Common Shares Outstanding Book value per share generally does not equal market value per share * When a company has preferred stock, the preferred stockholders claim on net assets must be deducted from total stockholders’ equity Chapter 13-46 LO Compute book value per share Copyright Copyright “Copyright © 2008 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 Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” Chapter 13-47 .. .CHAPTER CHAPTER 13 13 CORPORATIONS: ORGANIZATION AND CAPITAL STOCK TRANSACTIONS Accounting Principles, Eighth Edition Chapter 13- 2 Study Study Objectives Objectives... proprietorship, a partnership, and a corporation Illustration 13- 6 Chapter 13- 27 LO Differentiate between paid-in capital and retained earnings Accounting Accounting for for Common Common Stock Stock Issues... considerations Corporate capital Chapter 13- 4 Accounting for Common Stock Issues Issuing par value stock Issuing nopar stock Issuing stock for services or noncash assets Accounting for Treasury Stock