13-1 CHAPTER13 Corporations: Organization and Capital Stock Transactions 13-2 PreviewofCHAPTER13 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 ► McDonald’s ► American Cancer Society ► Nike ► PepsiCo ► Google 13-4 ► Cargill Inc Characteristics of a Organization Characteristics that distinguish corporations from proprietorships and partnerships 13-5 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Advantages Disadvantages SO Identify the major characteristics of a corporation Characteristics of a Organization Characteristics that distinguish corporations from proprietorships and partnerships 13-6 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Corporation acts under its own name rather than in the name of its stockholders SO Identify the major characteristics of a corporation Characteristics of a Organization Characteristics that distinguish corporations from proprietorships and partnerships 13-7 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Limited to their investment SO Identify the major characteristics of a corporation Characteristics of a Organization Characteristics that distinguish corporations from proprietorships and partnerships 13-8 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Shareholders may sell their stock SO Identify the major characteristics of a corporation Characteristics of a Organization Characteristics that distinguish corporations from proprietorships and partnerships 13-9 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Corporation can obtain capital through the issuance of stock SO Identify the major characteristics of a corporation Characteristics of a Organization Characteristics that distinguish corporations from proprietorships and partnerships 13-10 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer SO Identify the major characteristics of a corporation 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) Paid-in capital in excess of par – Preferred stock 100,000 20,000 Preferred stock may have a par value or no-par value 13-46 SO Differentiate preferred stock from common stock Preferred 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 13-47 SO Differentiate preferred stock from common stock 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 13-48 SO Differentiate preferred stock from common stock Preferred Stock Liquidation Preferences Most preferred stocks have a preference on corporate assets if the corporation fails 13-49 Provides security for the preferred stockholder Preference to assets may be for the par value of the shares or for a specified liquidating value SO Differentiate preferred stock from common stock Statement Presentation Illustration 13-12 13-50 SO Prepare a stockholders’ equity section Key Points 13-51 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 Key Points 13-52 There are often terminology differences for equity accounts The following summarizes some of the common differences in terminology Key Points 13-53 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 IFRS requires that the number of treasury shares held be disclosed Key Points 13-54 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 As indicated earlier, the term reserves is used in IFRS to indicate all non-contributed (non–paid-in) capital Reserves include retained earnings and other comprehensive income items, such as revaluation surplus and unrealized gains or losses on available-for-sale securities Key Points 13-55 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 The accounting related to prior period adjustments is essentially the same under IFRS and GAAP One area where IFRS and GAAP differ in reporting relates to error corrections in previously issued financial statements While IFRS requires restatement with some exceptions, GAAP does not permit any exceptions Equity is given various descriptions under IFRS, such as shareholders’ equity, owners’ equity, capital and reserves, and shareholders’ funds 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 For example, it is likely that the statement of stockholders’ equity and its presentation will be examined closely In addition, the options of how to present other comprehensive income under GAAP will change in any converged standard 13-56 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 13-57 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 13-58 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 13-59 Copyright “Copyright © 2011 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.” 13-60 .. .CHAPTER1 3 Corporations: Organization and Capital Stock Transactions 13- 2 PreviewofCHAPTER13 13- 3 The Corporate Form of Organization An entity... Classified by Purpose Classified by Ownership Not-for-Profit Publicly held For Profit Privately held ► Salvation Army ► McDonald’s ► American Cancer Society ► Nike ► PepsiCo ► Google 13- 4 ►... proprietorship, a partnership, and a corporation Illustration 13- 6 13- 27 SO Differentiate between paid-in capital and retained earnings Accounting for Common Stock Issues Primary objectives: 1)