CORPORATIONS: ORGANIZATION AND CAPITAL STOCK TRANSACTIONS CHAPTER 13 CORPORATIONS: ORGANIZATION AND CAPITAL STOCK TRANSACTIONS Accounting Principles, Eighth Edition

Study 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. Compute book value per share. 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

Corporations: Organization and Capital Stock Transactions The Corporate Form of Organization Accounting for Common Stock Issues Accounting for Treasury Stock Preferred Stock Statement Presentation and Analysis Characteristics Formation Stockholder rights Stock issue considerations Corporate capital Issuing par value stock Issuing no-par stock Issuing stock for services or noncash assets Purchase of treasury stock Disposal of treasury stock Dividend preferences Liquidation preference Presentation Analysis—Book value per share Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods

The Corporate Form of Organization An entity separate and distinct from its owners. Classified by Purpose Not-for-Profit For Profit Classified by Ownership Publicly held Privately held Salvation Army American Cancer Society Gates Foundation McDonald’s Ford Motor Company PepsiCo Google Cargill Inc.

Characteristics of a 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 Government Regulations Additional Taxes Corporate Management Advantages Disadvantages LO 1 Identify the major characteristics of a corporation.

Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. Corporation acts under its own name rather than in the name of its stockholders. Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management LO 1 Identify the major characteristics of a corporation.

Characteristics of a 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 Government Regulations Additional Taxes Corporate Management Limited to their investment. LO 1 Identify the major characteristics of a corporation.

Characteristics of a 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 Government Regulations Additional Taxes Corporate Management Shareholders may sell their stock. LO 1 Identify the major characteristics of a corporation.

Characteristics of a 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 Government Regulations Additional Taxes Corporate Management Corporation can obtain capital through the issuance of stock. LO 1 Identify the major characteristics of a corporation.

Characteristics of a 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 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. LO 1 Identify the major characteristics of a corporation.

Characteristics of a 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 Government Regulations Additional Taxes Corporate Management LO 1 Identify the major characteristics of a corporation.

Characteristics of a 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 Government Regulations Additional Taxes Corporate Management Corporations pay income taxes as a separate legal entity and in addition, stockholders pay taxes on cash dividends. LO 1 Identify the major characteristics of a corporation.

Characteristics of a 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 Government Regulations Additional Taxes Corporate Management Separation of ownership and management prevents owners from having an active role in managing the company. LO 1 Identify the major characteristics of a corporation.

Characteristics of a Corporation Stockholders Illustration 13-1 Corporation organization chart Chairman and Board of Directors President and Chief Executive Officer General Counsel and Secretary Vice President Marketing Vice President Finance/Chief Financial Officer Vice President Operations Vice President Human Resources Treasurer Controller LO 1 Identify the major characteristics of a corporation.

Forming a Corporation Initial Steps: File application with the Secretary of State. State grants charter. Corporation develops by-laws. Company’s generally incorporate in a state whose laws are favorable to the corporate form of business (Delaware, New Jersey). Corporations expense organization costs as incurred. LO 1 Identify the major characteristics of a corporation.

Ownership Rights of Stockholders Illustration 13-3 Stockholders have the right to: 1. Vote in election of board of directors and on actions that require stockholder approval. 2. Share the corporate earnings through receipt of dividends. LO 1 Identify the major characteristics of a corporation.

Ownership Rights of Stockholders Illustration 13-3 Stockholders have the right to: 3. Keep the same percentage ownership when new shares of stock are issued (preemptive right*). * A number of companies have eliminated the preemptive right. LO 1 Identify the major characteristics of a corporation.

Ownership Rights of Stockholders Illustration 13-3 Stockholders have the right to: 4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim. LO 1 Identify the major characteristics of a corporation.

Ownership Rights of Stockholders Illustration 13-4 Prenumbered Class Class A COMMON STOCK Class A COMMON STOCK PAR VALUE $1 PER SHARE PAR VALUE $1 PER SHARE Name of corporation Stockholder’s name Shares Stock Certificate Signature of corporate official LO 1 Identify the major characteristics of a corporation.

Stock Issue Considerations Authorized Stock Charter indicates the amount of stock that a corporation is authorized to sell. Number of authorized shares is often reported in the stockholders’ equity section. LO 1 Identify the major characteristics of a corporation.

Stock Issue Considerations Issuance of Stock 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: the company’s anticipated future earnings its expected dividend rate per share its current financial position the current state of the economy the current state of the securities market LO 1 Identify the major characteristics of a corporation.

Stock Issue Considerations Market Value of Stock Stock of publicly held companies is traded on organized exchanges. Interaction between buyers and sellers determines the prices per share. Prices set by the marketplace tend to follow the trend of a company’s earnings and dividends. Factors beyond a company’s control, may cause day-to-day fluctuations in market prices. LO 1 Identify the major characteristics of a corporation.

Stock Issue Considerations Par and No-Par Value Stock 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 stated value to no-par shares. LO 1 Identify the major characteristics of a corporation.

Corporate Capital Common Stock Account Paid-in Capital Paid-in Capital in Excess of Par Account Preferred Stock Account Two Primary Sources of Equity Retained Earnings Account Paid-in capital is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock. LO 2 Differentiate between paid-in capital and retained earnings.

Corporate Capital Common Stock Account Paid-in Capital Additional Paid-in Capital Account Preferred Stock Account Two Primary Sources of Equity Retained Earnings Account Retained earnings is net income that a corporation retains for future use. LO 2 Differentiate between paid-in capital and retained earnings.

Corporate Capital Comparison of the owners’ equity (stockholders’ equity) accounts reported on a balance sheet for a proprietorship, a partnership, and a corporation. Illustration 13-6 LO 2 Differentiate between paid-in capital and retained earnings.

Accounting for Common Stock Issues Issuing Par Value Common Stock for Cash Primary objectives: Identify the specific sources of paid-in capital. Maintain the distinction between paid-in capital and retained earnings. Issuing No-Par Common Stock for Cash Avoids contingent liability for stockholders. LO 3 Record the issuance of common stock.

Accounting for Common Stock Issues Illustration: Viking Corporation issued 300 shares of $10 par value common stock for $4,100. Prepare Vikings’ journal entry. Cash 4,100 Common stock (300 x $10) 3,000 Paid-in capital in excess of par 1,100 LO 3 Record the issuance of common stock.

Accounting for Common Stock Issues Illustration: Knopfle Corporation issued 600 shares of no-par common stock for $10,200. Prepare Knopfle’s journal entry if (a) the stock has no stated value, and (b) the stock has a stated value of $2 per share. a. Cash 10,200 Common stock 10,200 b. Cash 10,200 Common stock (600 x $2) 1,200 Paid-in capital in excess of stated value 9,000 LO 3 Record the issuance of common stock.

Accounting for Common Stock Issues Issuing Common Stock for Services or Noncash Assets Corporations also may issue stock for: Services (attorneys or consultants). Noncash assets (land, buildings, and equipment). Cost is either the fair market value of the consideration given up, or the fair market value of the consideration received, whichever is more clearly determinable. LO 3 Record the issuance of common stock.

Accounting for Common Stock Issues E13-5 On March 2nd, Leone Co. issued 5,000 shares of $5 par value common stock to attorneys in payment of a bill for $30,000 for services provided in helping the company to incorporate. Organizational expense 30,000 Common stock (5,000 x $5) 25,000 Paid-in capital in excess of par 5,000 LO 3 Record the issuance of common stock.

Accounting for Common Stock Issues BE13-5 Kane Inc.’s $10 par value common stock is actively traded at a market value of $15 per share. Kane issues 5,000 shares to purchase land advertised for sale at $85,000. Journalize the issuance of the stock in acquiring the land. Land (5,000 x $15) 75,000 Common stock (5,000 x $10) 50,000 Paid-in capital in excess of par 25,000 LO 3 Record the issuance of common stock.

Accounting for Treasury Stock Common Stock Account Paid-in Capital Paid-in Capital in Excess of Par Account Preferred Stock Account Two Primary Sources of Equity Retained Earnings Account Less: Treasury Stock Account LO 4 Explain the accounting for treasury stock.

Accounting for Treasury 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 stocks 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. LO 4 Explain the accounting for treasury stock.

Accounting for Treasury Stock Purchase of Treasury Stock Two acceptable methods: Cost method (more widely used). Par or Stated value method. Treasury stock, reduces stockholders’ equity. LO 4 Explain the accounting for treasury stock.

Accounting for Treasury Stock Illustration: UC Company originally issued 15,000 shares of $1 par, common stock for $25 per share. Record the journal entry for the following transaction: April 1st the company re-acquired 1,000 shares for $28 per share. Treasury stock (1,000 x $28) 28,000 Cash 28,000 LO 4 Explain the accounting for treasury stock.

Accounting for Treasury Stock Stockholders’ Equity with Treasury stock Both the number of shares issued (15,000) and the number in the treasury (4,000) are disclosed. LO 4 Explain the accounting for treasury stock.

Accounting for Treasury Stock Sale of Treasury Stock Above Cost Below Cost Both increase total assets and stockholders’ equity. LO 4 Explain the accounting for treasury stock.

Accounting for Treasury Stock Above Cost Accounting for Treasury Stock Illustration: UC Company originally issued 15,000 shares of $1 par, common stock for $25 per share. Record the journal entry for the following transaction: June 1st Sold 500 shares of its Treasury Stock for $30 per share. Cash (500 x $30) 15,000 Treasury stock (500 x $28) 14,000 Paid-in capital treasury stock 1,000 LO 4 Explain the accounting for treasury stock.

Accounting for Treasury Stock Below Cost Accounting for Treasury Stock Illustration: UC Company originally issued 15,000 shares of $1 par, common stock for $25 per share. Record the journal entry for the following transaction: Oct. 15th Sold 300 shares of its Treasury Stock for $9 per share. Cash (300 x $9) 2,700 Treasury stock (300 x $28) 8,400 Paid-in capital treasury stock 1,000 Limited to balance on hand Retained earnings 4,700 LO 4 Explain the accounting for treasury stock.

Accounting for Treasury Stock Below Cost Accounting for Treasury Stock Illustration: UC Company originally issued 15,000 shares of $1 par, common stock for $25 per share. Record the journal entry for the following transaction: Oct. 30th Sold 100 shares of its Treasury Stock for $11 per share. Cash (100 x $11) 1,100 Treasury stock (100 x $28) 2,800 Retained earnings 1,700 LO 4 Explain the accounting for treasury stock.

Accounting for Treasury Stock Stockholders’ Equity with Treasury stock Both the number of shares issued (15,000) and the number in the treasury (100) are disclosed. LO 4 Explain the accounting for treasury stock.

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. LO 5 Differentiate preferred stock from common stock.

Preferred Stock BE13-7 Acker Inc. issues 5,000 shares of $100 par value preferred stock for cash at $130 per share. Journalize the issuance of the preferred stock. Cash (5,000 x $130) 650,000 Preferred stock (5,000 x $100) 500,000 Paid-in capital in excess of par – Preferred stock 150,000 Preferred stock may have a par value or no-par value. LO 5 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 – preferred stockholders must be paid both current-year dividends and any unpaid prior-year (arrears) dividends before common stockholders receive dividends. LO 5 Differentiate preferred stock from common stock.

Statement Analysis and Presentation Illustration 13-12 LO 6 Prepare a stockholders’ equity section.

Statement Analysis and Presentation Total Stockholders’ Equity * Book Value Per Share = Number of Common Shares Outstanding Book value per share generally does not equal market value per share. * When a company has preferred stock, the preferred stockholders claim on net assets must be deducted from total stockholders’ equity. LO 7 Compute book value per share.

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