2. Accounting Principles, Ninth Edition
Chapter 13
Corporations:
Organization and
Capital Stock
Transactions
Accounting Principles, Ninth Edition

3. 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.
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)

4. Corporations: Organization and Capital Stock Transactions
The Corporate Form of Organization
Accounting for Common Stock Issues
Accounting for Treasury Stock
Preferred Stock
Statement Presentation
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
Capital stock
Additional paid-in capital
Retained earnings
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

5. 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.

6. 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
SO 1 Identify the major characteristics of a corporation.

7. 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
SO 1 Identify the major characteristics of a corporation.

8. 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.
SO 1 Identify the major characteristics of a corporation.

9. 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.
SO 1 Identify the major characteristics of a corporation.

10. 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.
SO 1 Identify the major characteristics of a corporation.

11. 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.
SO 1 Identify the major characteristics of a corporation.

12. 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
SO 1 Identify the major characteristics of a corporation.

13. 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.
SO 1 Identify the major characteristics of a corporation.

14. 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.
SO 1 Identify the major characteristics of a corporation.

15. 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
SO 1 Identify the major characteristics of a corporation.

16. Forming a Corporation Initial Steps:
File application with the Secretary of State.
State grants charter.
Corporation develops by-laws.
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.
SO 1 Identify the major characteristics of a corporation.

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

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

19. Ownership Rights of Stockholders
Stockholders have the right to:
Illustration 13-3
4. 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.

20. 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
SO 1 Identify the major characteristics of a corporation.

21. 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.
SO 1 Identify the major characteristics of a corporation.

22. 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
SO 1 Identify the major characteristics of a corporation.

23. 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.
SO 1 Identify the major characteristics of a corporation.

25. 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.
SO 1 Identify the major characteristics of a corporation.

26. 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.
SO 2 Differentiate between paid-in capital and retained earnings.

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

28. 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
SO 2 Differentiate between paid-in capital and retained earnings.

29. Accounting for Common Stock Issues
Primary objectives:
Identify the specific sources of paid-in capital.
Maintain the distinction between paid-in capital and retained earnings.
Other than consideration received, the issuance of common stock affects only paid-in capital accounts.
SO 3 Record the issuance of common stock.

30. Accounting for Common Stock Issues
Issuing Par Value Common Stock for Cash
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.

31. Accounting for Common Stock Issues
Issuing Par Value Common Stock for Cash
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. a.
Cash 1,000
Common stock (1,000 x $1) 1,000 b.
Cash 5,000
Common stock (1,000 x $1) 1,000
Paid-in capital in excess of par value 4,000
SO 3 Record the issuance of common stock.

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

33. 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.
SO 3 Record the issuance of common stock.

34. Accounting for Common Stock Issues
Illustration: Assume that 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 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.

35. Accounting for Common Stock Issues
Illustration: Assume that 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 par 30,000
SO 3 Record the issuance of common stock.

36. 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
SO 4 Explain the accounting for treasury stock.

37. 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 stock’s 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.
SO 4 Explain the accounting for treasury stock.

38. Accounting for Treasury Stock
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.

39. Accounting for Treasury Stock
Illustration 13-8
Illustration: On February 1, 2008, Mead acquires 4,000 shares of its stock at $8 per share.
Treasury stock (4,000 x $8) 32,000
Cash 32,000
SO 4 Explain the accounting for treasury stock.

40. Accounting for Treasury Stock
Stockholders’ Equity with Treasury stock
Illustration 13-9
Both the number of shares issued (100,000), outstanding (96,000), and the number of shares held as treasury (4,000) are disclosed.
SO 4 Explain the accounting for treasury stock.

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

42. Accounting for Treasury Stock
Above Cost
Accounting for Treasury Stock
Illustration: On February 1, 2008, Mead acquires 4,000 shares of its stock at $8 per share. Record the journal entry for the following transaction:
On July 1, Mead sells for $10 per share 1,000 shares of its treasury stock, previously acquired at $8 per share.
July 1
Cash 10,000
Treasury stock 8,000
Paid-in capital treasury stock 2,000
A corporation does not realize a gain or suffer a loss from stock transactions with its own stockholders.
SO 4 Explain the accounting for treasury stock.

43. Accounting for Treasury Stock
Below Cost
Accounting for Treasury Stock
Illustration: On February 1, 2008, Mead acquires 4,000 shares of its stock at $8 per share. Record the journal entry for the following transaction:
On Oct. 1, Mead sells an additional 800 shares of treasury stock at $7 per share.
Oct. 1
Cash 5,600
Paid-in capital treasury stock 800
Treasury stock 6,400
Mead uses Paid-in Capital from Treasury Stock, if available, for the difference between cost and resale price of the shares.
SO 4 Explain the accounting for treasury stock.

44. Accounting for Treasury Stock
Below Cost
Accounting for Treasury Stock
Illustration: On February 1, 2008, Mead acquires 4,000 shares of its stock at $8 per share. Record the journal entry for the following transaction:
On Dec. 1, assume that Mead, Inc. sells its remaining 2,200 shares at $7 per share.
Dec. 1
Cash 15,400
Limited to balance on hand
Paid-in capital treasury stock 1,200
Retained earnings 1,000
Treasury stock ,600
SO 4 Explain the accounting for treasury stock.

46. 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.
SO 5 Differentiate preferred stock from common stock.

47. 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) ,000
Paid-in capital in excess of par –
Preferred stock 20,000
Preferred stock may have a par value or no-par value.
SO 5 Differentiate preferred stock from common stock.

48. 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.
SO 5 Differentiate preferred stock from common stock.

49. Statement Presentation
Illustration 13-12
SO 6 Prepare a stockholders’ equity section.

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