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CHAPTER13Corporations:Organization and
Capital Stock
Transactions
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PreviewofCHAPTER13
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An entity separate and distinct from its owners.
Classified by Purpose
Not-for-Profit
For Profit
Classified by Ownership
Publicly held
Privately held
McDonalds
Nike
PepsiCo
Salvation Army
American CancerSociety
Cargill Inc.
The Corporate Form of Organization
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Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
Characteristics that distinguish corporations fromproprietorships and partnerships.
SO 1 Ident i fy the major character is t ics of a corporat ion.
Advantages
Disadvantages
Characteristics of a Organization
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Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
SO 1 Ident i fy the major character is t ics of a corporat ion.
Corporation actsunder its own namerather than in the
name of itsstockholders.
Characteristics that distinguish corporations fromproprietorships and partnerships.
Characteristics of a Organization
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Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
SO 1 Ident i fy the major character is t ics of a corporat ion.
Limited to their
investment.
Characteristics that distinguish corporations fromproprietorships and partnerships.
Characteristics of a Organization
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Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
SO 1 Ident i fy the major character is t ics of a corporat ion.
Shareholders maysell their stock.
Characteristics that distinguish corporations fromproprietorships and partnerships.
Characteristics of a Organization
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Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
SO 1 Ident i fy the major character is t ics of a corporat ion.
Corporation canobtain capitalthrough the issuanceof stock.
Characteristics that distinguish corporations fromproprietorships and partnerships.
Characteristics of a Organization
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Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
SO 1 Ident i fy the major character is t ics of a corporat ion.
Continuance as agoing concern is notaffected by thewithdrawal, death, or
incapacity of astockholder,employee, or officer.
Characteristics that distinguish corporations fromproprietorships and partnerships.
Characteristics of a Organization
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Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
SO 1 Ident i fy the major character is t ics of a corporat ion.
Characteristics that distinguish corporations fromproprietorships and partnerships.
Characteristics of a Organization
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Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
SO 1 Ident i fy the major character is t ics of a corporat ion.
Corporations payincome taxes as aseparate legal entity
and in addition,stockholders paytaxes on cashdividends.
Characteristics that distinguish corporations fromproprietorships and partnerships.
Characteristics of a Organization
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Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
SO 1 Ident i fy the major character is t ics of a corporat ion.
Separation ofownership andmanagementprevents owners
from having anactive role inmanaging thecompany.
Characteristics that distinguish corporations fromproprietorships and partnerships.
Characteristics of a Organization
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13-14 SO 1 Ident i fy the major character is t ics of a corporat ion.
Stockholders
Chairman andBoard ofDirectors
President andChief Executive
Officer
General
Counsel andSecretary
Vice PresidentMarketing
Vice President
Finance/ChiefFinancial Officer
Vice PresidentOperations
Vice President
HumanResources
Treasurer Controller
Illustration 13-1
Corporation
organization chart
Characteristics of a Organization
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Formed by grant of a state charter.
Corporation develops by-laws.
Initial Steps:
SO 1 Ident i fy the major character is t ics of a corporat ion.
Companies generally incorporate in a state whose laws are
favorable to the corporate form of business (Delaware, New
Jersey).
Corporations expense organization costs as incurred.
Forming a Corporation
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1. Vote in election of board of
directors and on actions that
require stockholder approval.
Stockholders have the right to:
SO 1 Ident i fy the major character is t ics of a corporat ion.
2. Share the corporate earnings
through receipt of dividends.
Illustration 13-3
Ownership Rights of Stockholders
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3. Keep the same percentage ownership when new
shares of stock are issued (preemptive right*).
SO 1 Ident i fy the major character is t ics of a corporat ion.
* A number of companies have eliminated the preemptive right.
Illustration 13-3
Ownership Rights of Stockholders
Stockholders have the right to:
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4. Share in assets upon liquidation in proportion to
their holdings. This is called a residual claim.
SO 1 Ident i fy the major character is t ics of a corporat ion.
Illustration 13-3
Ownership Rights of Stockholders
Stockholders have the right to:
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13-19 SO 1
Class ACOMMON STOCK
Class ACOMMON STOCK
PAR VALUE$1 PER SHARE
PAR VALUE$1 PER SHARE
Stock Certificate
Name of corporation
Stockholders name
Class
Shares
Signature of corporateofficial
PrenumberedIllustration 13-4
Ownership Rights of Stockholders
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13-20 SO 1 Ident i fy the major character is t ics of a corporat ion.
Charter indicates the amount of stock that a
corporation is authorized to sell.
Number of authorized shares is often reported in thestockholders equity section.
Authorized Stock
Stock Issue Considerations
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13-21 SO 1 Ident i fy the major character is t ics of a corporat ion.
Corporation can issue common stock directly to investors
or indirectly through an investment banking firm.
Factors in setting price for a new issue of stock:1. Companys anticipated future earnings.
2. Expected dividend rate per share.
3. Current financial position.
4. Current state of the economy.
5. Current state of the securities market.
Issuance of Stock
Stock Issue Considerations
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13-22 SO 1 Ident i fy the major character is t ics of a corporat ion.
Stock of publicly held companies is traded on organized
exchanges.
Interaction between buyers and sellers determines theprices per share.
Prices tend to follow the trend of a companys earnings and
dividends.
Factors beyond a companys control, may cause day-to-
day fluctuations in market prices.
Market Value of Stock
Stock Issue Considerations
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13-24 SO 1 Ident i fy the major character is t ics of a corporat ion.
Years ago, par value determined the legal capital per share
that a company must retain in the business for the
protection of corporate creditors.
Today many states do not require a par value.
No-par value stock is quite common today.
In many states the board of directors assigns a statedvalue to no-par shares.
Par and No-Par Value Stock
Stock Issue Considerations
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Paid-in Capital
Retained EarningsAccount
Paid-in Capital inExcess of Par
Account
Two PrimarySources of
Equity
Common StockAccount
Preferred Stock
Account
SO 2 Differentiate between paid-in capital and retained earnin gs .
Paid-in capitalis the total amount of cash and other assets paid
in to the corporation by stockholders in exchange for capital
stock.
Corporate Capital
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Paid-in Capital
Retained EarningsAccount
Additional Paid-inCapitalAccount
Two PrimarySources of
Equity
Common StockAccount
Preferred Stock
Account
SO 2 Differentiate between paid-in capital and retained earnin gs .
Retained earningsis net income that a corporation retains forfuture use.
Corporate Capital
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13-27 SO 2 Differentiate between paid-in capital and retained earnin gs .
Comparison of the owners equity (stockholders equity)
accounts reported on a balance sheet for a proprietorship, a
partnership, and a corporation.
Illustration 13-6
Corporate Capital
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Primary objectives:
1) Identify the specific sources of paid-in capital.
2) Maintain the distinction between paid-in capital
and retained earnings.
SO 3 Record the issuance of common stock .
Other than consideration received, the
issuance of common stock affects only paid-incapital accounts.
Accounting for Common Stock Issues
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Illustration: Assume that Hydro-Slide, Inc. issues 1,000
shares of $1 par value common stock at par for. Prepare the
journal entry.
Cash 1,000
Common stock (1,000 x $1) 1,000
SO 3 Record the issuance of common stock .
Issuing Par Value Common Stock fo r Cash
Accounting for Common Stock Issues
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Illustration: Assume that Hydro-Slide, Inc. issues 2,000
shares of $1 par value common stock. Prepare Hydro-Slides
journal entry if (a) 1,000 share are issued for $1 per share, and
(b) 1,000 shares are issued for $5 per share.
Cash 1,000
Common stock (1,000 x $1) 1,000
Cash 5,000
Common stock (1,000 x $1) 1,000
Paid-in capital in excess of par value 4,000
a.
b.
SO 3 Record the issuance of common stock .
Issuing Par Value Common Stock for Cash
Accounting for Common Stock Issues
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13-31 SO 3 Record the issuance of common stock .
Illustration 13-7
Accounting for Common Stock Issues
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Issu ing Common Stock fo r Services orNoncash As sets
Corporations also may issue stock for:
Services (attorneys or consultants). Noncash assets (land, buildings, and equipment).
SO 3 Record the issuance of common stock .
Cost is either the fair market value of the consideration givenup, or the fair market value of the consideration received,
whichever is more clearly determinable.
Accounting for Common Stock Issues
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Illustration: Attorneys have helped Jordan Companyincorporate. They have billed the company $5,000 for their
services. They agree to accept 4,000 shares of $1 par value
common stock in payment of their bill. At the time of the
exchange, there is no established market price for the stock.
Prepare the journal entry for this transaction.
Organizational expense 5,000
Common stock (4,000 x $1) 4,000
Paid-in capital in excess of par 1,000
SO 3 Record the issuance of common stock .
Accounting for Common Stock Issues
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Illustration: Athletic Research Inc. is an existing publicly heldcorporation. Its $5 par value stock is actively traded at $8 per
share. The company issues 10,000 shares of stock to acquire
land recently advertised for sale at $90,000. Prepare the journal
entry for this transaction.
Land (10,000 x $8) 80,000
Common stock (10,000 x $5) 50,000
Paid-in capital in excess of par 30,000
SO 3 Record the issuance of common stock .
Accounting for Common Stock Issues
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Paid-in Capital
Retained EarningsAccount
Paid-in Capital inExcess of Par
Account
Less:Treasury Stock
Account
Two PrimarySources of
Equity
Common StockAccount
Preferred Stock
Account
SO 4 Expla in the accoun t ing for treasury stock.
Accounting for Treasury Stock
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Treasury stock - corporations own stock that it hasreacquired from shareholders, but not retired.
Corporations purchase their outstanding stock:
1. To reissue the shares to officers and employees underbonus and stock compensation plans.
2. To enhance the stocks market value.
3. To have additional shares available for use in the acquisition
of other companies.
4. To increase earnings per share.
SO 4 Expla in the accoun t ing for treasury stock.
Accounting for Treasury Stock
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Purchase of Treasu ry 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.
SO 4 Expla in the accoun t ing for treasury stock.
Accounting for Treasury Stock
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Treasury stock (4,000 x $8) 32,000
Cash 32,000
Illustration: On February 1, 2012, Mead acquires 4,000 shares
of its stock at $8 per share.
SO 4 Expla in the accoun t ing for treasury stock.
Illustration 13-8
Accounting for Treasury Stock
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13-39 SO 4 Expla in the accoun t ing for treasury stock.
Stockholders Equity with Treasury stock
Both the number of shares issued (100,000), outstanding (96,000), and the
number of shares held as treasury (4,000) are disclosed.
Illustration 13-9
Accounting for Treasury Stock
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Sale of Treasury Stock
Above Cost
Below Cost
Both increase total assets and stockholders equity.
SO 4 Expla in the accoun t ing for treasury stock.
Accounting for Treasury Stock
Disposal of Treasu ry Stock
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Treasury stock 8,000
Illustration: On July 1, Mead sells for $10 per share 1,000shares of its treasury stock, previously acquired at $8 per share.
SO 4 Expla in the accoun t ing for treasury stock.
July 1
Paid-in capital treasury stock 2,000
Cash 10,000
A corporation does not realize a gain or suffer a loss from stocktransactions with its own stockholders.
Accounting for Treasury Stock AboveCost
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Paid-in capital treasury stock 800
Illustration: On Oct. 1, Mead sells an additional 800 shares oftreasury stock at $7 per share.
SO 4 Expla in the accoun t ing for treasury stock.
Oct. 1
Treasury stock 6,400
Cash 5,600
Accounting for Treasury Stock BelowCost
Illustration 13-10
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Paid-in capital treasury stock 1,200
Illustration: On Dec. 1, assume that Mead, Inc. sells itsremaining 2,200 shares at $7 per share.
SO 4 Expla in the accoun t ing for treasury stock.
Dec. 1
Retained earnings 1,000
Cash 15,400
Treasury stock 17,600
Limitedto
balanceonhand
Accounting for Treasury Stock BelowCost
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Features often associated with preferred stock.1. Preference as to dividends.
2. Preference as to assets in liquidation.
3. Nonvoting.
SO 5 Dif ferent iate preferred stock from commo n stock.
Accounting for preferred stock at issuance is similar to that forcommon stock.
Preferred Stock
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Illustration: Stine Corporation issues 10,000 shares of $10par value preferred stock for $12 cash per share. Journalize
the issuance of the preferred stock.
SO 5 Dif ferent iate preferred stock from commo n 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.
Preferred Stock
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Right to receive dividends before common stockholders.
Per share dividend amount is stated as a percentage of
the preferred stocks 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.
SO 5 Differentiate preferred stock from common stock.
Preferred Stock
Dividend Preferences
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13-48 SO 5 Dif ferent iate preferred stock from commo n stock.
Preferred Stock
Cumulative DividendIllustration: 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 inarrears, preferred stockholders are entitled to receive the
following dividends in the current year.
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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.
SO 5 Differentiate preferred stock from common stock.
Preferred Stock
Liquidat ion Preferences
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13-50 SO 6 Prepare a stockholders equity section.
Illustration 13-12
Statement Presentation
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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 valuedifferences.
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
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There are often terminology differences for equity accounts.
The following summarizes some of the common differences in
terminology.
Key Points
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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 ownshares. 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
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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 certaincircumstances. 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 (nonpaid-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
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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 isessentially 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.
Key Points
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Looking to the FutureAs 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 underGAAP will change in any converged standard.
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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
IFRS Self-Test Questions
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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.
IFRS Self-Test Questions
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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.
IFRS Self-Test Questions
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