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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 ► McDonald’s ► American Cancer Society ► Nike ► PepsiCo ► Google 13-4 ► Cargill Inc Alternative Alternative Terminology Terminology Privately Privately held held corporations corporations are are also also referred referred to to as as closely closely held held corporations corporations LO Identify the major characteristics of a corporation Characteristics of an 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 Corporate Management Government Regulations Additional Taxes Advantages Disadvantages LO Identify the major characteristics of a corporation Characteristics of an Organization 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 13-6 Continuous Life Corporate Management Government Regulations Additional Taxes LO Identify the major characteristics of a corporation Characteristics of an 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 Corporate Management Government Regulations Additional Taxes Limited to their investment LO Identify the major characteristics of a corporation Characteristics of an 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 Corporate Management Government Regulations Additional Taxes Shareholders may sell their stock LO Identify the major characteristics of a corporation Characteristics of an 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 Corporate Management Government Regulations Additional Taxes Corporation can obtain capital through the issuance of stock LO Identify the major characteristics of a corporation Characteristics of an 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 Corporate Management Government Regulations Additional Taxes Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer LO Identify the major characteristics of a corporation Preferred 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 13-49 LO 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) Paid-in Capital in Excess of Par – Preferred Stock 100,000 20,000 Preferred stock may have a par value or no-par value 13-50 LO 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 13-51 LO 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 Illustration 13-11 13-52 LO Differentiate preferred stock from common stock 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 13-53 LO Differentiate preferred stock from common stock Statement Presentation Illustration 13-12 13-54 LO Prepare a stockholders’ equity section A Look at IFRS Key Points 13-55 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 Compare the accounting procedures for stockholders’ equity under GAAP and IFRS A Look at IFRS Key Points 13-56 There are often terminology differences for equity accounts The following summarizes some of the common differences in terminology LO Compare the accounting procedures for stockholders’ equity under GAAP and IFRS A Look at IFRS Key Points 13-57 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 LO Compare the accounting procedures for stockholders’ equity under GAAP and IFRS A Look at IFRS Key Points 13-58 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 LO Compare the accounting procedures for stockholders’ equity under GAAP and IFRS 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 13-59 LO Compare the accounting procedures for stockholders’ equity under GAAP and IFRS 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 13-60 LO Compare the accounting procedures for stockholders’ equity under GAAP and IFRS 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 13-61 LO Compare the accounting procedures for stockholders’ equity under GAAP and IFRS 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 13-62 LO Compare the accounting procedures for stockholders’ equity under GAAP and 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 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.” 13-63 ... [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... 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... 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
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