Accounting principles, 13th edition ch13

Accounting Principles Thirteenth Edition Weygandt Kimmel Kieso Chapter 13 Corporations: Organization and Capital Stock Transactions Prepared by Coby Harmon University of California, Santa Barbara Westmont College Chapter Outline Learning Objectives LO Discuss and major characteristics of a corporation LO Explain how to account for common, preferred, and treasury stock LO Prepare a stockholders’ equity section Copyright ©2018 John Wiley & Son, Inc Corporate Form of Organization An entity separate and distinct from its owners Classified by Purpose LO Classified by Ownership  Not-for-Profit  Publicly held  For Profit  Privately held ► Salvation Army ► McDonald’s ► American Cancer Society ► Nike ► PepsiCo ► Google Copyright ©2018 John Wiley & Son, Inc ► Cargill Inc Characteristics of 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 Corporate Management Government Regulations Disadvantages Additional Taxes LO Copyright ©2018 John Wiley & Son, Inc Characteristics of Corporation Characteristics that distinguish corporations from proprietorships and partnerships Separate Legal Existence Corporation acts under its own Limited Liability of Stockholders name rather than in the name of Transferable Ownership Rights its stockholders Ability to Acquire Capital Continuous Life Corporate Management Government Regulations Additional Taxes LO Copyright ©2018 John Wiley & Son, Inc Characteristics of Corporation Characteristics that distinguish corporations from proprietorships and partnerships Separate Legal Existence Limited Liability of Stockholders Limited to their investment Transferable Ownership Rights Ability to Acquire Capital Continuous Life Corporate Management Government Regulations Additional Taxes LO Copyright ©2018 John Wiley & Son, Inc Characteristics of Corporation Characteristics that distinguish corporations from proprietorships and partnerships Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Shareholders may sell their stock Ability to Acquire Capital Continuous Life Corporate Management Government Regulations Additional Taxes LO Copyright ©2018 John Wiley & Son, Inc Characteristics of Corporation Characteristics that distinguish corporations from proprietorships and partnerships Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Corporation can obtain capital through the issuance of stock Continuous Life Corporate Management Government Regulations Additional Taxes LO Copyright ©2018 John Wiley & Son, Inc Characteristics of Corporation Characteristics that distinguish corporations from proprietorships and partnerships Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuance as a going concern Continuous Life is not affected by the withdrawal, death, or incapacity of a Corporate Management stockholder, employee, or officer Government Regulations Additional Taxes LO Copyright ©2018 John Wiley & Son, Inc Characteristics of 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 Separation of ownership and management often reduces an Corporate Management owner’s ability to actively Government Regulations manage the company Additional Taxes LO Copyright ©2018 John Wiley & Son, Inc 10 Mead, Inc ILLUSTRATION 13.9 Stockholders’ equity section Balance Sheet (partial) Stockholders' equity Paid-in capital Common stock, $5 par value, 400,000 shares authorized, 100,000 shares issued and 96,000 shares outstanding Retained earnings $500,000 200,000 Total paid-in capital and retained earnings 700,000 Less: Treasury stock (4,000 shares) 32,000 Total stockholders' equity $668,000 Both the number of shares issued (100,000) and the number of shares held as treasury (4,000) are disclosed LO Copyright ©2018 John Wiley & Son, Inc 44 Sale of Treasury Stock Above Cost Illustration: On July 1, Mead, Inc sells for $10 per share 1,000 of the 4,000 shares of its treasury stock previously acquired at $8 per share The entry is as follows Cash 10,000 Treasury Stock (1,000 x $8) 8,000 Paid-in Capital from Treasury Stock 2,000 A corporation does not realize a gain or suffer a loss from stock transactions with its own stockholders LO Copyright ©2018 John Wiley & Son, Inc 45 Sale of Treasury Stock Below Cost If Mead, Inc sells an additional 800 shares of treasury stock on October at $7 per share, it makes the following entry Cash 5,600 Paid-in Capital from Treasury Stock Treasury Stock (800 x $8) 800 6,400 Treasury Stock Feb Oct Bal Paid-in Capital from Treasury Stock 32,000 July 8,000 Oct 6,400 Oct 800 July Oct Bal 2,000 1,200 17,600 ILLUSTRATION 13.10 Treasury stock accounts LO Copyright ©2018 John Wiley & Son, Inc 46 Sale of Treasury Stock Below Cost On December 1, assume that Mead, Inc sells its remaining 2,200 shares at $7 per share and makes the following entry Cash 15,400 Limited to balance Paid-in Capital from Treasury Stock Retained Earnings on hand 1,000 Treasury Stock (2,200 x $8) LO 1,200 17,600 Copyright ©2018 John Wiley & Son, Inc 47 DO IT! 2b Issuance of 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 July Treasury Stock Cash Nov 180,000 180,000 Cash 70,000 Treasury Stock 60,000 Paid-in Capital from Treasury Stock LO 10,000 Copyright ©2018 John Wiley & Son, Inc 48 Statement Presentation of Stockholders’ Equity 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 LO Copyright ©2018 John Wiley & Son, Inc 49 Graber Inc Balance Sheet (partial) ILLUSTRATION 13.11 Stockholders’ equity section Stockholders’ equity Paid-in capital Capital stock 9% preferred stock, $100 par value, cumulative, 10,000 shares authorized, 6,000 shares issued and outstanding $ 600,000 Common stock, no par, $5 stated value, 500,000 shares authorized, 400,000 shares issued, and 390,000 outstanding 2,000,000 Total capital stock $2,600,000 Additional paid-in capital In excess of par—preferred stock 30,000 In excess of stated value—common stock 1,050,000 Total additional paid-in capital 1,080,000 Total paid-in capital 3,680,000 Retained earnings 1,050,000 Total paid-in capital and retained earnings 4,730,000 LO Accumulated other comprehensive income Copyright ©2018 John Wiley & Son, Inc 50 110,000 DO IT! Stockholders’ Equity Jennifer Corporation has issued 300,000 shares of $3 par value common stock It is authorized to issue 600,000 shares The paid-in capital in excess of par value 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 It also had a cumulative other comprehensive loss of $82,000 The corporation also has 4,000 shares issued and outstanding of 8%, $100 par value preferred stock It is authorized to issue 10,000 shares The paid-in capital in excess of par value on the preferred stock is $97,000 Retained earnings is $610,000 Prepare the stockholders’ equity section of the balance sheet LO Copyright ©2018 John Wiley & Son, Inc 51 Jennifer Corporation Balance Sheet (partial) Stockholders’ equity Paid-in capital Capital stock 8% preferred stock, $100 par value, cumulative, 10,000 shares authorized, 4,000 shares issued and outstanding $ 400,000 Common stock, $3 par value, 600,000 shares authorized, 300,000 shares issued, and 285,000 outstanding 900,000 Total capital stock $1,300,000 Additional paid-in capital In excess of par—preferred stock 97,000 In excess of stated value—common stock 380,000 Total additional paid-in capital 477,000 Total paid-in capital 1,777,000 Retained earnings 610,000 Total paid-in capital and retained earnings 2,387,000 Accumulated other comprehensive loss 82,000 Less: Treasury stock (15,000 common shares) 50,000 Total LO stockholders’ equity Copyright ©2018 John Wiley & Son, Inc $2,255,000 52 A Look at IFRS Key Points Similarities 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 Copyright ©2018 John Wiley & Son, Inc 53 A Look at IFRS Key Points Differences 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 Copyright ©2018 John Wiley & Son, Inc 54 A Look at IFRS Key Points Differences There are often terminology differences for equity accounts GAAP IFRS Common stock Share capital—ordinary Stockholders Shareholders Par value Nominal or face value Authorized stock Authorized share capital Preferred stock Share capital—preference Paid-in capital Issued/allocated share capital Paid-in capital in excess of par—common stock Share premium—ordinary Paid-in capital in excess of par—preferred stock Share premium—preference Retained earnings Retained earnings or Retained profits Retained earnings deficit Accumulated losses Accumulated other comprehensive income LO General reserve and other reserve Copyright ©2018 John Wiley & Son, Inc accounts 55 A Look at IFRS Key Points Differences 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 Copyright ©2018 John Wiley & Son, Inc 56 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 LO Copyright ©2018 John Wiley & Son, Inc 57 Copyright Copyright © 2018 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States 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 Copyright ©2018 John Wiley & Son, Inc 58 ... Total stockholders’ equity LO $872,000 Copyright ©2018 John Wiley & Son, Inc 26 Accounting for Stock Transactions Accounting for Common Stock Primary Objectives: Identify the specific sources of... section begins with paid-in capital c The authorization of capital stock does not result in a formal accounting entry d Legal capital per share applies to par value stock but not to no-par value stock... to sell Number of authorized shares is often reported in stockholders’ equity section No formal accounting entry LO Copyright ©2018 John Wiley & Son, Inc 17 Stock Issue Considerations Issuance