Chapter 13-1 Chapter 13 Corporations: Organization and Capital Stock Transactions Chapter 13-2 Accounting Principles, Ninth Edition 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 Chapter 13-3 Corporations: Corporations: Organization Organization and and Capital Capital Stock Stock Transactions Transactions The TheCorporate Corporate Form Formof of Organization Organization Characteristics Formation Stockholder rights Stock issue considerations Corporate capital Chapter 13-4 Accounting Accounting for for Common Common Stock StockIssues Issues Issuing par value stock Issuing nopar stock Issuing stock for services or noncash assets Accounting Accounting for for Treasury Treasury Stock Stock Preferred Preferred Stock Stock Statement Statement Presentation Presentation Purchase of treasury stock Disposal of treasury stock Dividend preferences Liquidation preference Capital stock Additional paid-in capital Retained earnings 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 Ability to Acquire Capital Advantages Continuous Life Government Regulations Additional Taxes Disadvantages Corporate Management Chapter 13-6 SO 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 SO 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 SO 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 SO 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 SO Identify the major characteristics of a corporation 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 Capitalinin 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 13-36 SO 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 stock’s 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 13-37 SO 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 13-38 SO Explain the accounting for treasury stock Accounting Accounting for for Treasury Treasury Stock Stock Illustration 13-8 Illustration: On February 1, 2008, Mead acquires 4,000 shares of its stock at $8 per share Treasury stock (4,000 x $8) Chapter 13-39 32,000 Cash 32,000 SO Explain the accounting for treasury stock Accounting Accounting for for Treasury Treasury Stock Stock Stockholders’ Equity with Treasury stock Illustration 13-9 Both the number of shares issued (100,000), outstanding (96,000), and the number of shares held as treasury (4,000) are disclosed Chapter 13-40 SO 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 13-41 SO Explain the accounting for treasury stock Accounting Accounting for for Treasury Treasury Stock Stock Above Cost Illustration: On February 1, 2008, Mead acquires 4,000 shares of its stock at $8 per share Record the journal entry for the following transaction: On July 1, Mead sells for $10 per share 1,000 shares of its treasury stock, previously acquired at $8 per share July 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 Chapter 13-42 SO Explain the accounting for treasury stock Accounting Accounting for for Treasury Treasury Stock Stock Below Cost Illustration: On February 1, 2008, Mead acquires 4,000 shares of its stock at $8 per share Record the journal entry for the following transaction: On Oct 1, Mead sells an additional 800 shares of treasury stock at $7 per share Oct Cash 5,600 Paid-in capital treasury stock 800 Treasury stock 6,400 Mead uses Paid-in Capital from Treasury Stock, if available, for the difference between cost and resale price of the shares Chapter 13-43 SO Explain the accounting for treasury stock Accounting Accounting for for Treasury Treasury Stock Stock Below Cost Illustration: On February 1, 2008, Mead acquires 4,000 shares of its stock at $8 per share Record the journal entry for the following transaction: On Dec 1, assume that Mead, Inc sells its remaining 2,200 shares at $7 per share Dec Cash 15,400 Limited Paid-in capital treasury stock Retained earnings to 1,200 balance 1,000 on hand Treasury stock 17,600 Chapter 13-44 SO Explain the accounting for treasury stock Chapter 13-45 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 13-46 SO Differentiate preferred stock from common stock Preferred Preferred Stock 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 Chapter 13-47 SO 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 13-48 SO Differentiate preferred stock from common stock Statement Statement Presentation Presentation Illustration 13-12 Chapter 13-49 SO Prepare a stockholders’ equity section Copyright Copyright “Copyright © 2009 John Wiley & Sons, Inc All rights reserved Reproduction or 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Differentiate between paid-in capital and retained earnings Accounting Accounting for for Common Common Stock Stock Issues