Corporations: Organization and Capital Stock Transactions: Learning Objectives

13 Corporations: Organization and
Capital Stock Transactions
Learning Objectives
1 Discuss the major characteristics of a corporation.
Explain how to account for the issuance of common

2 and preferred stock.
3 Explain how to account for treasury stock.
4 Prepare a stockholders’ equity section.
13-1
LEARNING Discuss the major characteristics of a
1
OBJECTIVE corporation.
An entity separate and distinct from its owners.
Classified by Purpose Classified by Ownership

u Not-for-Profit u Publicly held
u For Profit u Privately held
► Salvation Army ► McDonald’s ► Cargill Inc.

► American ► Nike
Alternative
Cancer Society ► PepsiCo Terminology
Privately held
► Google corporations are also
referred to as closely held
corporations..
13-2 LO 1
Characteristics of a Corporation
Characteristics that distinguish corporations from

proprietorships and partnerships.
u Separate Legal Existence

u Limited Liability of
Stockholders
u Transferable Ownership Rights Advantages
u Ability to Acquire Capital

u Continuous Life
u Corporate Management
u Government Regulations Disadvantages
u Additional Taxes
13-3 LO 1

Corporation acts
u Separate Legal Existence under its own
u Limited Liability of name rather than
Stockholders in the name of its
stockholders.
u Transferable Ownership Rights
u Continuous Life
u Government Regulations
u Additional Taxes
13-4 LO 1


u Limited Liability of Limited to their
investment.
Stockholders
u Continuous Life
u Additional Taxes
13-5 LO 1


u Limited Liability of
Stockholders
Shareholders may
Transferable Ownership Rights
sell their stock.
u

u Continuous Life
u Additional Taxes
13-6 LO 1

u Limited Liability of Stockholders
u Transferable Ownership Rights Corporation can
u Ability to Acquire Capital obtain capital
u Continuous Life through the
issuance of stock.
u Additional Taxes
13-7 LO 1

u Transferable Ownership Rights Continuance as a
going concern is not
u Ability to Acquire Capital affected by the
u Continuous Life withdrawal, death,
or incapacity of a
u Corporate Management stockholder,
u Government Regulations employee, or officer.
u Additional Taxes
13-8 LO 1
Characteristics that distinguish corporations

from proprietorships and partnerships.

Separation of
ownership and
u Continuous Life management
u Corporate Management often reduces an
u Government Regulations owner’s ability to
actively manage
u Additional Taxes the company.
13-9 LO 1
Illustration 13-1
Stockholders
Corporation organization
chart
Chairman and
Board of
Directors
President and
Chief Executive
Officer
General Vice President Vice President

Vice President Vice President
Counsel/ Finance/Chief Human
Marketing Operations
Secretary Financial Officer Resources
Treasurer Controller
13-10 LO 1

u Continuous Life
u Additional Taxes
13-11 LO 1

u Continuous Life Corporations pay
income taxes as a
u Corporate Management separate legal entity
u Government Regulations and in addition,
stockholders pay
Additional Taxes
taxes on cash
u
dividends.
13-12 LO 1
Forming a Corporation
Initial Steps:
Alternative Terminology
The charter is often
referred to as the articles
u File application with the SEC. of incorporation.
u SEC grants charter.

u Corporation develops by-laws.
Companies generally incorporate in a state whose laws

are favorable to the corporate form of business
(Delaware, New Jersey).
Corporations engaged in interstate commerce must

obtain a license from each state in which they do
business.
13-13 LO 1
13-14
A Thousand Millionaires!
Traveling to space or embarking on an expedition to excavate lost Mayan ruins
are normally the stuff of adventure novels. But for employees of Facebook,
these and other lavish dreams moved closer to reality when the world’s No. 1
online social network went public through an initial public offering (IPO) that
may have created at least a thousand millionaires. The IPO was the largest in
Internet history, valuing Facebook at over $104 billion. With all these riches to
be had, why did Mark Zuckerberg, the founder of Facebook, delay taking his
company public? Consider that the main motivation for issuing shares to the
public is to raise money so you can grow your business. However, unlike a
manufacturer or even an online retailer, Facebook doesn’t need major physical
resources, it doesn’t have inventory, and it doesn’t really need much money for
marketing. So in the past, the company hasn’t had much need for additional
cash beyond what it was already generating on its own. Finally, as head of a
closely held, nonpublic company, Zuckerberg was subject to far fewer
regulations than a public company.
Source: “Status Update: I’m Rich! Facebook Flotation to Create 1,000 Millionaires Among
Company’s Rank and File,” Daily Mail Reporter (February 1, 2012).
13-15 LO 1
Stockholder Rights
1. Vote in election of board of

directors and on actions that
require stockholder approval.
2. Share in the corporate

earnings through receipt of
dividends.
Illustration 13-3
Ownership rights of
stockholders
13-16 LO 1
Stockholder Rights
3. Keep the same percentage ownership when new

shares of stock are issued (preemptive right).
Illustration 13-3
Ownership rights of
stockholders
13-17 LO 1
Stockholder Rights
4. Share in assets upon liquidation in proportion to

their holdings. This is called a residual claim.
Illustration 13-3
Ownership rights of
stockholders
13-18 LO 1
Stock Issue Considerations
When a corporation decides to issue stock, it must

resolve a number of basic questions:
1. How many shares should it authorize for

sale?
2. How should it issue the stock?
3. What value should the corporation assign to

the stock?
13-19 LO 1
AUTHORIZED STOCK
u Charter indicates the amount of stock that a
corporation is authorized to sell.
u Number of authorized shares is often reported in

the stockholders’ equity section.
u No formal accounting entry.
13-20 LO 1
Illustration 13-
Prenumbered Shares 4
A Stock
certificate
Name of corporation
Stockholder’s
name
Signature of
corporate official
13-21 LO 1
ISSUANCE OF STOCK
u Companies issue common stock directly to
investors or indirectly through an investment
banking firm.
u 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.

13-22 LO 1
MARKET PRICE OF STOCK

u Stock of publicly held companies is traded on
organized exchanges.
u Interaction between buyers and sellers determines

the prices per share.
u Prices tend to follow the trend of a company’s

earnings and dividends.
u Factors beyond a company’s control may cause

day-to-day fluctuations in market prices.
13-23 LO 1
Nike
13-24 LO 1
PAR AND NO-PAR VALUE STOCK

u Years ago, par value determined the legal capital
per share that a company must retain in the
business for the protection of corporate creditors.
u Today many states do not require a par value.
u No-par value stock is fairly common today.
u In many states, the board of directors assigns a

stated value to no-par shares.
13-25 LO 1
Question
Which of these statements is false?
a. Ownership of common stock gives the owner
a voting right.
b. The stockholders’ equity section begins with
paid-in capital.
c. The authorization of capital stock does not
result in a formal accounting entry.
d. Legal capital is intended to protect
stockholders.
13-26 LO 1
DO IT! 1a Corporate Organization
Indicate whether each of the following statements is true or false.

False1.
______ Similar to partners in a partnership, stockholders of a
corporation have unlimited liability.
True2.
______ It is relatively easy for a corporation to obtain capital
through the issuance of stock.
False3.
______ The separation of ownership and management is an
advantage of the corporate form of business.
False4. The journal entry to record the authorization of capital
______
stock includes a credit to the appropriate capital stock account.
False5.
______ All states require a par value per share for capital stock.
13-27 LO 1
Corporate Capital
Two Primary
Sources of
Equity
Paid-in capital is the total amount of cash and other

assets paid in to the corporation by stockholders in
exchange for capital stock.
13-28 LO 1
Corporate Capital
Two Primary
Sources of
Equity
Retained earnings is net income that a corporation retains

for future use.
13-29 LO 1
Corporate Capital
If Delta Robotics has a balance of $800,000 in common

stock and $130,000 in retained earnings at the end of its
first year, its stockholders’ equity section is as follows.
Illustration 13-5
Stockholders’ equity section
13-30 LO 1
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
Comparison of owners’
equity accounts
13-31 LO 1
DO IT! 1b Corporate Capital
At the end of its first year of operation, Doral Corporation

has $750,000 of common stock and net income of
$122,000. Prepare (a) the closing entry for net income
and (b) the stockholders’ equity section at year-end.
Solution
(a) Income Summary 122,000
Retained Earnings 122,000
(b) Stockholders’ equity
Common Stock $750,000
Retained earnings 122,000
Total stockholders’ equity $872,000
13-32 Advance slide in slide show to reveal solution. LO 1

LEARNING Explain how to account for the issuance
2
OBJECTIVE of common and preferred stock.
Accounting for Common Stock

Primary Objectives:
1) Identify the specific sources of paid-in capital.
2) 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.
13-33 LO 2
Issuing Par Value Common Stock for Cash
Illustration: Assume that Hydro-Slide, Inc. issues 1,000

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 —
Common Stock 4,000
13-34 LO 2
Accounting for Common Stock
Illustration 13-7
Stockholders’ equity—paid-in
capital in excess of par
Alternative Terminology
Paid-in Capital in Excess of Par is
also called Premium on Stock.
13-35 LO 2
Issuing No-par Common Stock For Cash
Illustration: Assume that instead of $1 par value stock,

Hydro-Slide, Inc. has $5 stated value no-par stock and
the company issues 5,000 shares at $8 per share for cash.
Cash 40,000
Common Stock 25,000
Paid-in Capital in Excess of Stated Value—
Common Stock 15,000
13-36 LO 2
Issuing No-par Common Stock For Cash
Illustration: What happens when no-par stock does not

have a stated value?
Cash 40,000
Common Stock 40,000
13-37 LO 2
Issuing Common Stock for Services
or Noncash Assets
Corporations also may issue stock for:

u Services (attorneys or consultants).
u Noncash assets (land, buildings, and equipment).
13-38 LO 2
Common Stock for Services
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 Expense 5,000

Common Stock (4,000 x $1) 4,000
Paid-in Capital in Excess of Par—
Common Stock 1,000
13-39 LO 2
Common Stock for Noncash Asset
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 80,000
Common Stock (10,000 x $5) 50,000
Common Stock 30,000
13-40 LO 2
Accounting for Preferred Stock
Typically, preferred stockholders have a priority as to:

1. Distributions of earnings (dividends).
2. Assets in event of liquidation.
Generally do not have voting rights.
Accounting for preferred stock at issuance is similar to

that for common stock.
13-41 LO 2
Accounting for Preferred Stock
Illustration: Stine Corporation issues 10,000 shares of

$10 par value preferred stock for $12 cash per share.
The journal entry to record the issuance is:
Cash 120,000
Preferred Stock (10,000 x $10) 100,000
Preferred Stock 20,000
13-42 LO 2
DO IT! 2 Issuance of Stock
Cayman Corporation begins operations on March 1 by issuing

100,000 shares of $1 par value common stock for cash at $12
per share. On March 15, it issues 5,000 shares of common stock
to attorneys in settlement of their bill of $50,000 for
organization costs. On March 28, Cayman Corporation issues
1,500 shares of $10 par value preferred stock for cash at $30
per share. Journalize the issuance of the common and preferred
shares, assuming the shares are not publicly traded.
Mar. 1
Cash 1,200,000
Common Stock (100,000 x $1) 100,000
Common Stock 1,100,000
13-43 LO 2

Mar. 15
Organization Expense 50,000
Common Stock (5,000 x $1) 5,000
Common Stock 45,000
13-44 LO 2

Mar. 28
Cash 45,000
Preferred Stock (1,500 x $10) 15,000
Preferred Stock 30,000
13-45 LO 2
LEARNING Explain how to account for treasury
3
OBJECTIVE stock.
Two Primary
Sources of
Equity
Account
13-46 LO 3
Accounting for Treasury Stock
Treasury stock is a corporation’s own stock that it

has reacquired from shareholders but not retired.
Corporations acquire treasury stock for various

reasons:
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.

13-47 LO 3
Purchase of Treasury Stock
u Companies generally use the cost method.
u Debit Treasury Stock for the price paid to

reacquire the shares.
u Treasury stock is a contra stockholders’ equity

account. Reduces stockholders’ equity.
Helpful Hint
Treasury shares do not have
dividend rights or voting rights.
13-48 LO 3
Purchase of Treasury Stock Illustration 13-8
Stockholders’ equity
with no treasury
stock
Illustration: On February 1, 2017, Mead acquires 4,000

shares of its stock at $8 per share.
Treasury Stock (4,000 x $8) 32,000

Cash 32,000
13-49 LO 3
Purchase of Treasury Stock Illustration 13-9
Stockholders’
equity with
treasury stock
Both the number of shares issued (100,000) and the

number of shares held as treasury (4,000) are disclosed.
13-50 LO 3
Disposal of Treasury Stock
Sale of Treasury Stock

u Above Cost
u Below Cost
Both increase total assets and stockholders’ equity.
Helpful Hint
Treasury stock transactions are
classified as capital stock
transactions. As in the case when
stock is issued, the income
statement is not involved.
13-51 LO 3
SALE OF TREASURY STOCK
“ABOVE” COST
Illustration: On July 1, Mead sells for $10 per share

1,000 shares of its treasury stock previously acquired at
$8 per share and makes the following entry.
Cash 10,000
Treasury Stock 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.
13-52 LO 3
“BELOW” COST
Illustration: On Oct. 1, Mead sells an additional 800

shares of treasury stock at $7 per share and makes the
following entry.
Cash 5,600
Paid-in Capital from Treasury Stock 800
Illustration 13-10
Treasury stock accounts
13-53 LO 3
“BELOW” COST
Illustration: On Dec. 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 on
hand
Retained Earnings 1,000
13-54 LO 3
Why Did Reebok Buy Its Own Stock?
In a bold (and some would say risky) move, Reebok at one time
bought back nearly a third of its shares. This repurchase of shares
dramatically reduced Reebok’s available cash. In fact, the company
borrowed significant funds to accomplish the repurchase. In a press
release, management stated that it was repurchasing the shares
because it believed its stock was severely underpriced. The
repurchase of so many shares was meant to signal management’s
belief in good future earnings. Skeptics, however, suggested that
Reebok’s management was repurchasing shares to make it less
likely that another company would acquire Reebok (in which case
Reebok’s top managers would likely lose their jobs). By depleting its
cash, Reebok became a less attractive acquisition target. Acquiring
companies like to purchase companies with large cash balances so
they can pay off debt used in the acquisition.
13-55 LO 3
DO IT! 3 Treasury Stock
Santa Anita Inc. purchases 3,000 shares of its $50 par value
common stock for $180,000 cash on July 1. 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.
Solution
July 1 Treasury Stock 180,000

Cash 180,000
Nov. 1 Cash 70,000
13-56 LO 3
LEARNING
OBJECTIVE
4 Prepare a stockholder’s equity section
Companies report paid-in capital and retained

earnings in the stockholders’ equity section of the
balance sheet. Paid-in capital includes:
1. 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.
2. Additional paid-in capital. Excess amounts paid in

over par or stated value and paid-in capital from
treasury stock.
13-57 LO 4
Illustration 13-11
13-58 Stockholders’ equity section
LO 4
DO IT! 4 Stockholders’ Equity Section
Jennifer Corporation has issued 300,000 shares of $3 par

value common stock. It authorized 600,000 shares. The
paid-in capital in excess of par 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.
Treasury stock was reissued in prior years for $72,000 more
than its cost.
The corporation also has 4,000 shares issued and outstanding

of 8%, $100 par value preferred stock. It authorized 10,000
shares. The paid-in capital in excess of par on the preferred
stock is $25,000. Retained earnings is $610,000.
Prepare the stockholders’ equity section of the balance sheet.

13-59 LO 4
13-60 LO 4
13-61

Corporations: Organization and Capital Stock Transactions: Learning Objectives

Uploaded by

Copyright:

Available Formats

Corporations: Organization and Capital Stock Transactions: Learning Objectives

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Corporations: Organization and Capital Stock Transactions: Learning Objectives

Uploaded by

Copyright:

Available Formats

13 Corporations: Organization and

Capital Stock Transactions

Explain how to account for the issuance of common

3 Explain how to account for treasury stock.

4 Prepare a stockholders’ equity section.

An entity separate and distinct from its owners.

Classified by Purpose Classified by Ownership

► Salvation Army ► McDonald’s ► Cargill Inc.

Characteristics that distinguish corporations from

u Separate Legal Existence

u Ability to Acquire Capital

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

u Separate Legal Existence

Characteristics that distinguish corporations from

u Separate Legal Existence

u Ability to Acquire Capital

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

Characteristics that distinguish corporations

u Separate Legal Existence

General Vice President Vice President

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

u SEC grants charter.

Companies generally incorporate in a state whose laws

Corporations engaged in interstate commerce must

1. Vote in election of board of

2. Share in the corporate

3. Keep the same percentage ownership when new

4. Share in assets upon liquidation in proportion to

When a corporation decides to issue stock, it must

1. How many shares should it authorize for

2. How should it issue the stock?

3. What value should the corporation assign to

u Number of authorized shares is often reported in

u No formal accounting entry.

u Factors in setting price for a new issue of stock:

2. Expected dividend rate per share.

3. Current financial position.

4. Current state of the economy.

5. Current state of the securities market.

MARKET PRICE OF STOCK

u Interaction between buyers and sellers determines

u Prices tend to follow the trend of a company’s

u Factors beyond a company’s control may cause

PAR AND NO-PAR VALUE STOCK

u Today many states do not require a par value.

u No-par value stock is fairly common today.

u In many states, the board of directors assigns a

Indicate whether each of the following statements is true or false.

Paid-in capital is the total amount of cash and other

Retained earnings is net income that a corporation retains

If Delta Robotics has a balance of $800,000 in common

Comparison of the owners’ equity (stockholders’

At the end of its first year of operation, Doral Corporation

13-32 Advance slide in slide show to reveal solution. LO 1

Accounting for Common Stock