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13-2 CHAPTER13 Corporations: Organization and Capital Stock Transactions

13-3 PreviewofCHAPTER13

13-4 An entity separate and distinct from its owners. Classified by Purpose  Not-for-Profit  For Profit Classified by Ownership  Publicly held  Privately held ► McDonald’s ► Nike ► PepsiCo ► Google ► Salvation Army ► American Cancer Society ► Cargill Inc. The Corporate Form of Organization

13-5  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 from proprietorships and partnerships. SO 1 Identify the major characteristics of a corporation. Advantages Disadvantages Characteristics of a Organization

13-6  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Government Regulations  Additional Taxes  Corporate Management SO 1 Identify the major characteristics of a corporation. Corporation acts under its own name rather than in the name of its stockholders. Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of a Organization

13-7  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Government Regulations  Additional Taxes  Corporate Management SO 1 Identify the major characteristics of a corporation. Limited to their investment. Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of a Organization

13-8  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Government Regulations  Additional Taxes  Corporate Management SO 1 Identify the major characteristics of a corporation. Shareholders may sell their stock. Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of a Organization

13-9  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Government Regulations  Additional Taxes  Corporate Management SO 1 Identify the major characteristics of a corporation. Corporation can obtain capital through the issuance of stock. Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of a Organization

13-10  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Government Regulations  Additional Taxes  Corporate Management SO 1 Identify the major characteristics of a corporation. Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer. Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of a Organization

13-11  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Government Regulations  Additional Taxes  Corporate Management SO 1 Identify the major characteristics of a corporation. Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of a Organization

13-12  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Government Regulations  Additional Taxes  Corporate Management SO 1 Identify the major characteristics of a corporation. Corporations pay income taxes as a separate legal entity and in addition, stockholders pay taxes on cash dividends. Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of a Organization

13-13  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Government Regulations  Additional Taxes  Corporate Management SO 1 Identify the major characteristics of a corporation. Separation of ownership and management prevents owners from having an active role in managing the company. Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of a Organization

13-14 SO 1 Identify the major characteristics of a corporation. Stockholders 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 TreasurerController Illustration 13-1 Corporation organization chart Characteristics of a Organization

13-15  Formed by grant of a state charter.  Corporation develops by-laws. Initial Steps: SO 1 Identify the major characteristics of a corporation. 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

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

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

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

13-19 SO 1 Class A COMMON STOCK PAR VALUE $1 PER SHARE Stock Certificate Name of corporation Stockholder’s name Class Shares Signature of corporate official Prenumbered Illustration 13-4 Ownership Rights of Stockholders

13-20 SO 1 Identify the major characteristics of a corporation.  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. Authorized Stock Stock Issue Considerations

13-21 SO 1 Identify the major characteristics of a corporation.  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.Company’s 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

13-22 SO 1 Identify the major characteristics of a corporation.  Stock of publicly held companies is traded on organized exchanges.  Interaction between buyers and sellers determines the prices per share.  Prices 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. Market Value of Stock Stock Issue Considerations

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13-24 SO 1 Identify the major characteristics of a corporation.  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. Par and No-Par Value Stock Stock Issue Considerations

13-25 Paid-in Capital Retained Earnings Account Account Paid-in Capital in Excess of Par Account Account Two Primary Sources of Equity Common Stock Account Account Preferred Stock Account Account SO 2 Differentiate between paid-in capital and retained earnings. Paid-in capital is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock. Corporate Capital

13-26 Paid-in Capital Retained Earnings Account Account Additional Paid-in Capital Account Account Two Primary Sources of Equity Common Stock Account Account Preferred Stock Account Account SO 2 Differentiate between paid-in capital and retained earnings. Retained earnings is net income that a corporation retains for future use. Corporate Capital

13-27 SO 2 Differentiate between paid-in capital and retained earnings. 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

13-28 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-in capital accounts. Accounting for Common Stock Issues

13-29 Illustration: Assume that Hydro-Slide, Inc. issues 1,000 shares of $1 par value common stock at par for. Prepare the journal entry. Cash1,000 Common stock (1,000 x $1) 1,000 SO 3 Record the issuance of common stock. Issuing Par Value Common Stock for Cash Accounting for Common Stock Issues

13-30 Illustration: Assume that Hydro-Slide, Inc. issues 2,000 shares of $1 par value common stock. Prepare Hydro-Slide’s journal entry if (a) 1,000 share are issued for $1 per share, and (b) 1,000 shares are issued for $5 per share. Cash1,000 Common stock (1,000 x $1) 1,000 Cash5,000 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

13-31 SO 3 Record the issuance of common stock. Illustration 13-7 Accounting for Common Stock Issues

13-32 Issuing Common Stock for Services or Noncash Assets 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 given up, or the fair market value of the consideration received, whichever is more clearly determinable. Accounting for Common Stock Issues

13-33 Illustration: Attorneys have helped Jordan Company incorporate. 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 expense5,000 Common stock (4,000 x $1) 4,000 Paid-in capital in excess of par1,000 SO 3 Record the issuance of common stock. Accounting for Common Stock Issues

13-34 Illustration: Athletic Research Inc. is an existing publicly held corporation. 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 par30,000 SO 3 Record the issuance of common stock. Accounting for Common Stock Issues

13-35 Paid-in Capital Retained Earnings Account Account Paid-in Capital in Excess of Par Account Account Less: Treasury Stock AccountLess: Treasury Stock Account Two Primary Sources of Equity Common Stock Account Account Preferred Stock Account Account SO 4 Explain the accounting for treasury stock. Accounting for Treasury Stock

13-36 Treasury stock - corporation’s own stock that it has reacquired from shareholders, but not retired. Corporations purchase their outstanding stock: 1.To reissue the shares to officers and employees under bonus and stock compensation plans. 2.To enhance the stock’s market value. 3.To have additional shares available for use in the acquisition of other companies. 4.To increase earnings per share. SO 4 Explain the accounting for treasury stock. Accounting for Treasury Stock

13-37 Purchase of Treasury 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 Explain the accounting for treasury stock. Accounting for Treasury Stock

13-38 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 Explain the accounting for treasury stock. Illustration 13-8 Accounting for Treasury Stock

13-39 SO 4 Explain the accounting 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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13-41 Sale of Treasury Stock  Above Cost  Below Cost Both increase total assets and stockholders’ equity. SO 4 Explain the accounting for treasury stock. Accounting for Treasury Stock Disposal of Treasury Stock

13-42 Treasury stock 8,000 Illustration: On July 1, Mead sells for $10 per share 1,000 shares of its treasury stock, previously acquired at $8 per share. SO 4 Explain the accounting 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 stock transactions with its own stockholders. Accounting for Treasury Stock Above Cost

13-43 Paid-in capital treasury stock 800 Illustration: On Oct. 1, Mead sells an additional 800 shares of treasury stock at $7 per share. SO 4 Explain the accounting for treasury stock. Oct. 1 Treasury stock 6,400 Cash 5,600 Accounting for Treasury Stock Below Cost Illustration 13-10

13-44 Paid-in capital treasury stock 1,200 Illustration: On Dec. 1, assume that Mead, Inc. sells its remaining 2,200 shares at $7 per share. SO 4 Explain the accounting for treasury stock. Dec. 1 Retained earnings 1,000 Cash 15,400 Treasury stock 17,600 Limited to balance on hand Accounting for Treasury Stock Below Cost

13-45 Features often associated with preferred stock. 1. Preference as to dividends. 2. Preference as to assets in liquidation. 3. Nonvoting. SO 5 Differentiate preferred stock from common stock. Accounting for preferred stock at issuance is similar to that for common stock. Preferred Stock

13-46 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. SO 5 Differentiate preferred stock from common stock. Cash120,000 Preferred stock (10,000 x $10) 100,000 Paid-in capital in excess of par – Preferred stock20,000 Preferred stock may have a par value or no-par value. Preferred Stock

13-47   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. SO 5 Differentiate preferred stock from common stock. Preferred Stock Dividend Preferences

13-48 SO 5 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.

13-49   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 Liquidation Preferences

13-50 SO 6 Prepare a stockholders’ equity section. Illustration Statement Presentation

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. Key Points

13-56 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.

13-57 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

13-58 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

13-59 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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