13 Corporations: Organization and Capital Stock Transactions Learning Objectives 13-1 Discuss the major characteristics of a corporation Explain how to account for the issuance of common and preferred stock Explain how to account for treasury stock Prepare a stockholders’ equity section LEARNING OBJECTIVE Discuss the major characteristics of a corporation An entity separate and distinct from its owners Classified by Purpose Classified by Ownership Not-for-Profit Publicly For Privately Profit ►Salvation Army ►McDonald’s ►American ►Nike Cancer Society ►PepsiCo ►Google 13-2 held held ►Cargill Inc Alternative Terminology Privately held corporations are also referred to as closely held corporations LO Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships Separate Limited Legal Existence Liability of Stockholders Transferable Ability to Acquire Capital Continuous Corporate Additional Advantages Life Management Government 13-3 Ownership Rights Regulations Disadvantages Taxes LO Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships Corporation acts Separate Legal Existence under its own name rather than in the Limited Liability of Stockholders name of its Transferable Ownership Rights stockholders Ability to Acquire Capital Continuous Corporate Life Management Government Additional 13-4 Regulations Taxes LO Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships Separate Limited Legal Existence Liability of Stockholders Transferable Ability to Acquire Capital Continuous Corporate Life Management Government Additional 13-5 Ownership Rights Limited to their investment Regulations Taxes LO Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships Separate Limited Legal Existence Liability of Stockholders Transferable Ability Shareholders may sell their stock to Acquire Capital Continuous Corporate Life Management Government Additional 13-6 Ownership Rights Regulations Taxes LO Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships Separate Limited Legal Existence Liability of Stockholders Transferable Ability to Acquire Capital Continuous Corporate Life Additional Corporation can obtain capital through the issuance of stock Management Government 13-7 Ownership Rights Regulations Taxes LO Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships Separate Limited Legal Existence Liability of Stockholders Transferable Ability to Acquire Capital Continuous Corporate Life Management Government Additional 13-8 Ownership Rights Regulations Taxes Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer LO Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships Separate Limited Legal Existence Liability of Stockholders Transferable Ability to Acquire Capital Continuous Corporate Life Management Government Additional 13-9 Ownership Rights Regulations Taxes Separation of ownership and management often reduces an owner’s ability to actively manage the company LO Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships Separate Limited Legal Existence Liability of Stockholders Transferable Ability to Acquire Capital Continuous Corporate Life Management Government Additional 13-10 Ownership Rights Regulations Taxes LO Accounting Across the Organization Why Did Reebok Buy Its Own Stock? In a bold (and some would say risky) move, Reebok at one time bought back nearly a third of its shares This repurchase of shares dramatically reduced Reebok’s available cash In fact, the company borrowed significant funds to accomplish the repurchase In a press release, management stated that it was repurchasing the shares because it believed its stock was severely underpriced The repurchase of so many shares was meant to signal management’s belief in good future earnings Skeptics, however, suggested that Reebok’s management was repurchasing shares to make it less likely that another company would acquire Reebok (in which case Reebok’s top managers would likely lose their jobs) By depleting its cash, Reebok became a less attractive acquisition target Acquiring companies like to purchase companies with large cash balances so they can pay off debt used in the acquisition 13-54 LO DO IT! Treasury Stock Santa Anita Inc purchases 3,000 shares of its $50 par value common stock for $180,000 cash on July It will hold the shares in the treasury until resold On November 1, the corporation sells 1,000 shares of treasury stock for cash at $70 per share Journalize the treasury stock transactions Solution July Treasury Stock 180,000 Cash 180,000 Nov Cash 70,000 Treasury Stock 13-55 60,000 LO LEARNING OBJECTIVE Prepare a stockholder’s equity section Companies report paid-in capital and retained earnings in the stockholders’ equity section of the balance sheet Paid-in capital includes: Capital stock Preferred stock appears before common stock because of its preferential rights Companies report par value, shares authorized, shares issued, and shares outstanding for each class of stock Additional paid-in capital Excess amounts paid in over par or stated value and paid-in capital from treasury stock 13-56 LO 13-57 Illustration 13-11 Stockholders’ equity section LO DO IT! Stockholders’ Equity Section Jennifer Corporation has issued 300,000 shares of $3 par value common stock It authorized 600,000 shares The paid-in capital in excess of par on the common stock is $380,000 The corporation has reacquired 15,000 shares at a cost of $50,000 and is currently holding those shares Treasury stock was reissued in prior years for $72,000 more than its cost The corporation also has 4,000 shares issued and outstanding of 8%, $100 par value preferred stock It authorized 10,000 shares The paid-in capital in excess of par on the preferred stock is $25,000 Retained earnings is $610,000 Prepare the stockholders’ equity section of the balance sheet 13-58 LO 13-59 LO A Look at IFRS LEARNING OBJECTIVE Compare the accounting for stockholders’ equity under GAAP and IFRS Key Points Similarities 13-60 Aside from the terminology used, the accounting transactions for the issuance of shares and the purchase of treasury stock are similar Like GAAP, IFRS does not allow a company to record gains or losses on purchases of its own shares LO A Look at IFRS Key Points Differences 13-61 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 A Look at IFRS Key Points 13-62 There are often terminology differences for equity accounts The following summarizes some of the common differences in terminology LO A Look at IFRS Key Points 13-63 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 share holders’ funds LO A Look at IFRS Looking to the Future 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 13-64 LO A Look at IFRS 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 d)The amount to treasury stock is very different between U.S GAAP and IFRS 13-65 LO A Look at IFRS IFRS Self-Test Questions 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 13-66 LO A Look at IFRS IFRS Self-Test Questions Which of the following does not represent a pair of GAAP/IFRScomparable terms? a)Additional paid-in capital/Share premium b)Treasury stock/Repurchase reserve c)Common stock/Share capital d)Preferred stock/Preference shares 13-67 LO Copyright “Copyright © 2015 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.” 13-68 ... No 13- 19 formal accounting entry LO Stock Issue Considerations Prenumbered Shares Illustration 13- 4 A Stock certificate Name of corporation Stockholder’s name Signature of corporate official 13- 20... Illustration 13- 3 Ownership rights of stockholders 13- 16 LO Stockholder Rights Share in assets upon liquidation in proportion to their holdings This is called a residual claim Illustration 13- 3 Ownership... engaged in interstate commerce must obtain a license from each state in which they business 13- 13 LO Accounting Across the Organization A Thousand Millionaires! Traveling to space or embarking