Preview of Chapter 1: Financial Accounting

Preview of Chapter 1
Financial Accounting
Ninth Edition
Weygandt Kimmel Kieso
11-1
Preview of Chapter 11
Financial Accounting
Ninth Edition
Weygandt Kimmel Kieso
11-2
11
Corporations: Organization,
Stock Transactions, Dividends,
and Retained Earnings
Learning Objectives
After studying this chapter, you should be able to:
[1] Identify the major characteristics of a corporation.
[2] Record the issuance of common stock.
[3] Explain the accounting for treasury stock.
[4] Differentiate preferred stock from common stock.
[5] Prepare the entries for cash dividends and stock dividends.
[6] Identify the items reported in a retained earnings statement.
[7] Prepare and analyze a comprehensive stockholders equity section.
11-3
The Corporate Form of Organization

An entity separate and distinct from its owners.
Classified by Purpose
Classified by Ownership
Not-for-Profit
Publicly held
For Profit
Privately held
Salvation Army
McDonalds
American Cancer
Society
Nike
PepsiCo
Google
11-4
Cargill Inc.
Alternative
Alternative Terminology
Terminology
Privately
Privately held
held corporations
corporations
are
are also
also referred
referred to
to as
as
closely
closely held
held corporations.
corporations.
LO 1
Characteristics of an Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-5
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Advantages
Disadvantages
LO 1
Corporation acts
under its own name
rather than in the
name of its
stockholders.
11-6
Continuous Life
Additional Taxes
LO 1
11-7
Continuous Life
Additional Taxes
Limited to their
investment.
LO 1
11-8
Continuous Life
Additional Taxes
Shareholders may
sell their stock.
LO 1
11-9
Continuous Life
Additional Taxes
Corporation can
obtain capital
through the issuance
of stock.
LO 1
11-10
Continuous Life
Additional Taxes
Continuance as a
going concern is not
affected by the
withdrawal, death, or
incapacity of a
stockholder,
employee, or officer.
LO 1
Characteristics that distinguish corporations
from proprietorships and partnerships.
11-11
Continuous Life
Additional Taxes
Separation of
ownership and
management often
reduces an owners
ability to actively
manage the
company.
LO 1
11-12
Continuous Life
Additional Taxes
LO 1
11-13
Continuous Life
Additional Taxes
Corporations pay
income taxes as a
separate legal entity
and in addition,
stockholders pay
taxes on cash
dividends.
LO 1
Stockholders
Illustration 11-1
Corporation
organization chart
Chairman and
Board of
Directors
President and
Chief Executive
Officer
General
Counsel/
Secretary
Vice President
Marketing
Treasurer
11-14
Vice President
Finance/Chief
Financial Officer
Vice President
Operations
Vice President
Human
Resources
Controller
LO 1

Forming a Corporation
Initial Steps:
Alternative
Terminology
The
The charter
charter is
is often
often
referred
referred to
to as
as the
the articles
articles
of
of incorporation.
incorporation.
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 engaged in interstate commerce must obtain a license
from each state in which they do business.
11-15
LO 1
11-16
LO 1

Stockholders Rights
Illustration 11-3
Ownership rights of
stockholders
1. Vote in election of board of

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

through receipt of dividends.
11-17
LO 1

Stockholders Rights
Illustration 11-3
Ownership rights of
stockholders
3. Keep the same percentage ownership when new shares

of stock are issued (preemptive right).
* A number of companies have eliminated the preemptive right.

11-18
LO 1

Stockholders Rights
Illustration 11-3
Ownership rights of
stockholders
4. Share in assets upon liquidation in proportion to their

holdings. This is called a residual claim.
11-19
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?
11-20
LO 1

Authorized Stock
11-21
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.
No formal accounting entry.
LO 1

Prenumbered
Shares
Illustration 11-4
Name of corporation
Stockholders
name
Signature of
corporate official
11-22
LO 1

Issuance of Stock
Companies 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.
11-23
LO 1

Market Price of Stock
11-24
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 companys earnings

and dividends.
Factors beyond a companys control may cause day-today fluctuations in market prices.
LO 1
11-25
LO 1

Par and No-Par Value Stock
11-26
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 fairly common today.
In many states, the board of directors assigns a stated

value to no-par shares.
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.
11-27
LO 1
Indicate whether each of the following statements is true or false.

False 1. Similar to partners in a partnership, stockholders of a
______
corporation have unlimited liability.
True 2. It is relatively easy for a corporation to obtain capital
______
through the issuance of stock.
False 3. The separation of ownership and management is an
______
advantage of the corporate form of business.
False 4. The journal entry to record the authorization of capital stock
______
includes a credit to the appropriate capital stock account.
False 5. All states require a par value per share for capital stock.
______
11-28
LO 1
Corporate Capital
Common
CommonStock
Stock
Paid-in
Paid-inCapital
Capital
Account
Account
Preferred
PreferredStock
Stock
Paid-in
Paid-inCapital
Capitalinin
Excess
Excessof
ofPar
Par
Account
Account
Account
Account
Two Primary
Sources of
Equity
Retained
RetainedEarnings
Earnings
Account
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.
11-29
LO 1
Corporate Capital
Common
CommonStock
Stock
Paid-in
Paid-inCapital
Capital
Account
Account
Preferred
PreferredStock
Stock
Paid-in
Paid-inCapital
Capitalinin
Excess
Excessof
ofPar
Par
Account
Account
Account
Account
Two Primary
Sources of
Equity
Retained
RetainedEarnings
Earnings
Account
Account
Retained earnings is net income that a corporation retains for

future use.
11-30
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 11-5
Stockholders equity section
11-31
LO 1
Corporate Capital
Comparison of the owners equity (stockholders equity)
accounts reported on a balance sheet for a proprietorship and
a corporation.
Illustration 11-6
Comparison of owners
equity accounts
11-32
LO 1
11-33
LO 1
11
Learning Objectives
11-34
Accounting for Stock Transactions

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.
11-35
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-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.
a.
Cash
1,000
Common Stock (1,000 x $1)
b.
11-36
1,000
Cash
5,000
1,000
Paid-in Capital in Excess of Par Value
4,000
LO 2

Illustration 11-7
Alternative
Terminology
Paid-in
Paid-in Capital
Capital in
in Excess
Excess of
of Par
Par is
is
also
also called
called Premium
Premium on
on Stock.
Stock.
11-37
LO 2

Issuing No-Par Common Stock for Cash
Illustration: Assume that instead of $1 par value stock, HydroSlide, Inc. has $5 stated value no-par stock and the company
issues 5,000 shares at $8 per share for cash.
Cash
11-38
40,000
Common Stock
25,000
Paid-in Capital in Excess of Stated Value
15,000
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
11-39
LO 2

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.
11-40
LO 2

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

4,000
Paid-in Capital in Excess of Par
1,000
11-41
LO 2

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

50,000
30,000
11-42
LO 2
ANATOMY OF A FRAUD
The president, chief operating officer, and chief financial officer of SafeNet, a software
encryption company, were each awarded employee stock options by the companys board of
directors as part of their compensation package. Stock options enable an employee to buy a
companys stock sometime in the future at the price that existed when the stock option was
awarded. For example, suppose that you received stock options today, when the stock price of
your company was $30. Three years later, if the stock price rose to $100, you could exercise
your options and buy the stock for $30 per share, thereby making $70 per share. After being
awarded their stock options, the three employees changed the award dates in the companys
records to dates in the past, when the companys stock was trading at historical lows. For
example, using the previous example, they would choose a past date when the stock was
selling for $10 per share, rather than the $30 price on the actual award date. In our example,
this would increase the profit from exercising the options to $90 per share.
Total take: $1.7 million

THE MISSING CONTROL
Independent internal verification. The companys board of directors should have
ensured that the awards were properly administered. For example, the date on the
minutes from the board meeting could be compared to the dates that were recorded
for the awards. In addition, the dates should again be confirmed upon exercise.
11-43
Advance slide in presentation mode to reveal the missing control.
LO 2
11
Learning Objectives
11-44
Accounting for Treasury Stock

Common
CommonStock
Stock
Paid-in
Paid-inCapital
Capital
Account
Account
Preferred
PreferredStock
Stock
Paid-in
Paid-inCapital
Capitalinin
Excess
Excessof
ofPar
Par
Account
Account
Account
Account
Two Primary
Sources of
Equity
Retained
RetainedEarnings
Earnings
Account
Account
Less:
Less:
Treasury
TreasuryStock
Stock
Account
Account
11-45
LO 3

Treasury stock is a corporations 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 stocks market value.
3. To have additional shares available for use in the acquisition
of other companies.
4. To increase earnings per share.
11-46
LO 3

Purchase of Treasury Stock
Companies generally use the cost method.
Debit Treasury Stock for the price paid to reacquire

the shares.
Treasury stock is a contra stockholders equity

account. Reduces stockholders equity.
Helpful
Helpful Hint
Hint
Treasury
Treasury shares
shares do
do not
not have
have
dividend
dividend rights
rights or
or voting
voting rights.
rights.
11-47
LO 3

Illustration 11-8
Stockholders equity
with no treasury stock
Illustration: On February 1, 2015, Mead acquires 4,000 shares of

its stock at $8 per share.
Treasury Stock (4,000 x $8)
32,000
Cash
11-48
32,000
LO 3

Illustration 11-9
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.
11-49
LO 3
11-50
LO 3

Disposal of Treasury Stock
Sale of Treasury Stock
Above Cost
Below Cost
Helpful
Helpful Hint
Hint
Treasury
Treasury stock
stock transactions
transactions are
are
classified
classified as
as capital
capital stock
stock
transactions.
transactions. As
As in
in the
the case
case when
when
stock
stock is
is issued,
issued, the
the income
income
statement
statement is
is not
not involved.
involved.
Both increase total assets and stockholders equity.
11-51
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.
11-52
LO 3
Sale of Treasury Stock 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
Treasury Stock
5,600
800
6,400
Illustration 11-10
Treasury stock accounts
11-53
LO 3
Sale of Treasury Stock 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
1,200
Retained Earnings
1,000
Treasury Stock
11-54
15,400
Limited to
balance
on hand
17,600
LO 3
11
Learning Objectives
11-55
Accounting for Stock Transactions

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.
11-56
LO 4

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
20,000
Preferred stock may have a par value or no-par value.
11-57
LO 4

Dividend Preferences
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.
11-58
Cumulative Dividend
Preferred stockholders must be
paid both current-year
dividends and any unpaid prioryear dividends before common
stockholders receive dividends.
LO 4

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.
Illustration 11-11
Computation of total dividends to preferred stock
11-59
Advance slide in presentation mode to reveal dividend amounts.
LO 4

Liquidation Preferences
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.
11-60
LO 4
11
Learning Objectives
11-61
Dividends
Distribution of cash or stock to stockholders on a pro rata
(proportional to ownership) basis.
Types of Dividends:
1. Cash dividends.
3. Stock dividends.
2. Property dividends.
4. Scrip (promissory note).
Dividends are generally reported quarterly as a dollar amount

per share.
11-62
LO 5
Dividends
Cash Dividends
For a corporation to pay a cash dividend, it must have:
1.
Retained earnings - Payment of cash dividends from

retained earnings is legal in all states.
11-63
2.
Adequate cash.
3.
A declaration of dividends by the Board of Directors.
LO 5
Dividends
Three dates are important:
11-64
Illustration 11-12
Key dividend dates
LO 5
Dividends
Illustration: On Dec. 1, the directors of Media General declare a 50
cents per share cash dividend on 100,000 shares of $10 par value
common stock. The dividend is payable on Jan. 20 to shareholders of
record on Dec. 22.
Dec. 1 (Declaration Date)
Cash Dividends
50,000
Dividends Payable
Dec. 22 (Date of Record)
50,000
No entry
Jan. 20 (Payment Date)

Dividends Payable
Cash
11-65
50,000
50,000
LO 5
Dividends
Allocating Cash Dividends Between Preferred
and Common Stock
Holders of cumulative preferred stock must be paid any unpaid
prior-year dividends and their current years dividend before
common stockholders receive dividends.
11-66
LO 5
Dividends
Illustration: On December 31, 2015, IBR Inc. has 1,000 shares
of 8%, $100 par value cumulative preferred stock. It also has
50,000 shares of $10 par value common stock outstanding. At
December 31, 2015, the directors declare a $6,000 cash dividend.
Prepare the entry to record the declaration of the dividend.
Cash Dividends
6,000
Dividends Payable
6,000
Preferred Dividends: 1,000 shares x $100 par x 8% = $8,000
11-67
LO 5
Dividends
Illustration: At December 31, 2016, IBR declares a $50,000
cash dividend. Show the allocation of dividends to each class of
stock.
$ 50,000
2,000
8,000
**
*
$ 40,000
1,000 shares x $100 par x 8% = $8,000
** 2015 Pfd. dividends $8,000 declared $6,000 = $2,000

11-68
LO 5
Dividends
Illustration: At December 31, 2016, IBR declares a $50,000 cash
dividend. Prepare the entry to record the declaration of the
dividend.
Cash Dividends
Dividends Payable
11-69
50,000
50,000
LO 5
Dividends
Stock Dividends
A pro rata (proportional to ownership) distribution of the
corporations own stock to stockholders.
Reasons why corporations issue stock dividends:
1.
Satisfy stockholders dividend expectations without

spending cash.
2.
Increase marketability of the corporations stock.
3.
Emphasize a portion of stockholders equity has been

permanently reinvested in the business.
11-70
LO 5
Dividends
Stock Dividends
Small stock dividend (less than 2025% of the

corporations issued stock, recorded at fair market value)*
Large stock dividend (greater than 2025% of issued

stock, recorded at par value)
* Accounting based on the assumption that a small stock dividend will

have little effect on the market price of the outstanding shares.
11-71
LO 5
Dividends
Illustration: Medland Corporation declares a 10% stock dividend on
its 50,000 shares of $10 par value common stock. The current fair
market value of its stock is $15 per share. Record the entry on the
declaration date:
Stock Dividends (50,000 x 10% x $15)
Common Stock Dividends Distributable
50,000
25,000
Statement Presentation
11-72
75,000
Illustration 11-14
LO 5
Dividends
Illustration: Medland Corporation declares a 10% stock dividend on
its 50,000 shares of $10 par value common stock. The current fair
market value of its stock is $15 per share. Record the entry on the
declaration date:
Stock Dividends (50,000 x 10% x $15)
75,000
50,000
25,000
Record the journal entry when Medland issues the dividend shares.
Common Stock
11-73
50,000
50,000
LO 5
Dividends
Effects of Stock Dividends
11-74
Illustration 11-15
LO 5
Dividends
Question
Which of the following statements about small stock dividends
is true?
a. A debit to Stock Dividends for the par value of the shares
issued should be made.
b. A small stock dividend decreases total stockholders
equity.
c. Market value per share should be assigned to the
dividend shares.
d. A small stock dividend ordinarily will have an effect on par
value per share of stock.
11-75
LO 5
Dividends
Question
In the stockholders equity section, Common Stock Dividends
Distributable is reported as a(n):
a. deduction from total paid-in capital and retained earnings.
b. current liability.
c. deduction from retained earnings.
d. addition to capital stock.
11-76
LO 5
Dividends
Stock Splits
11-77
Issuance of additional shares to stockholders according to

their percentage ownership.
Reduction in the par or stated value per share.
Increase in number of shares outstanding.
Reduces the market value of shares.
No journal entry recorded.
Helpful
Helpful Hint
Hint
A
A stock
stock split
split changes
changes the
the
par
par value
value per
per share
share but
but
does
does not
not affect
affect any
any
balances
balances in
in stockholders
stockholders
equity.
equity.
LO 5
Dividends
Stock Splits
Effect of 4-for-1 stock split for stockholders
Illustration 11-16
11-78
LO 5
Dividends
Effects for Medland Corporation, assuming that it splits its
50,000 shares of common stock on a 2-for-1 basis.
Illustration 11-17
11-79
LO 5
11-80
LO 5
11
Learning Objectives
11-81
Retained Earnings
Retained earnings is net income that a company retains in
the business.
Part
of the stockholders claim on the total assets of the
corporation.
Debit
balance in Retained Earnings is identified as a deficit.

Illustration 11-20
11-82
LO 6
Retained Earnings
Retained Earnings Restrictions
Restrictions can result from:
11-83
1.
Legal restrictions.
2.
Contractual restrictions.
3.
Voluntary restrictions.
Illustration 11-22
Disclosure of restriction
LO 6
Retained Earnings
Prior Period Adjustments
Correction of an error in previously issued financial

statements.
Result from:
11-84
mathematical mistakes.
mistakes in application of accounting principles.
oversight or misuse of facts.
Adjustment made to the beginning balance of retained

earnings.
LO 6
Retained Earnings Statement
Before issuing the report for the year ended December 31, 2015, you discover a
$50,000 error (net of tax) that caused the 2014 inventory to be overstated
(overstated inventory caused COGS to be lower and thus net income to be higher in
2014. Would this discovery have any impact on the reporting of the Statement of
Retained Earnings for 2015?
11-85
LO 6
11-86
Advance slide in presentation mode to reveal answer.
LO 6

Debits and Credits to Retained Earnings
Illustration 11-24
11-87
LO 6

Illustration 11-25
Retained earnings statement
11-88
LO 6

Question
All but one of the following is reported in a retained earnings
statement. The exception is:
a. cash and stock dividends.
b. net income and net loss.
c. some disposals of treasury stock below cost.
d. sales of treasury stock above cost.
11-89
LO 6
11
Learning Objectives
11-90
Statement Presentation and Analysis

Illustration 11-26
Illustration 11-15
11-91
LO 7
Statement Presentation and Analysis

Analysis
To illustrate, Walt Disney Companys beginning-of-the-year and endof-the-year common stockholders equity were $31,820 and $30,753
million, respectively. Its net income was $4,687 million, and no
preferred stock was outstanding.
Illustration 11-28
Ratio shows how many dollars of net income the company earned
for each dollar invested by the common stockholders.
11-92
LO 7
APPENDIX 11A
Stockholders Equity Statement

Illustration 11A-1
When a stockholders equity statement is presented, a retained earnings

statement is not necessary.
11-93
LO 8 Describe the use and content of the stockholders equity statement.
APPENDIX 11B
Book ValueAnother per Share Amount
Book Value per Share

The equity a common stockholder has in the net assets of the
corporation.
Illustration 11B-1
11-94
LO 9 Compute book value per share.
APPENDIX 11B
Book Value per Share

The computation of book value per share involves the following
steps.
1. Compute the preferred stock equity. This equity is equal to
the sum of the call price of preferred stock plus any cumulative
dividends in arrears. If the preferred stock does not have a call
price, the par value of the stock is used.
2. Determine the common stock equity. Subtract the preferred
stock equity from total stockholders equity.
3. Determine book value per share. Divide common stock equity
by shares of common stock outstanding.
11-95
LO 9
APPENDIX 11B
Illustration: Using the stockholders equity section of Graber Inc.

shown in Illustration 11-26. Grabers preferred stock is callable at
$120 per share and is cumulative. Assume that dividends on
Grabers preferred stock were in arrears for one year, $54,000
(6,000 x $9). The computation of preferred stock equity (Step 1 in
the preceding list) is:
Illustration 11B-2
11-96
LO 9
APPENDIX 11B

Illustration 11B-2
Computation of book value:
11-97
Illustration 11B-3
LO 9
APPENDIX 11B
Book Value versus Market Value

The correlation between book value and the annual range of a
companys market value per share is often remote.
Illustration 11B-4
11-98
LO 9
Key Points
11-99
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.
LO 10 Compare the accounting procedures for

stockholders equity under GAAP and IFRS.
Key Points
11-100
There are often terminology differences for equity accounts. The

following summarizes some of the common differences in terminology.
LO 10
Key Points
11-101
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.
LO 10
Key Points
11-102
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.
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.
LO 10
Key Points
11-103
The accounting related to prior period adjustment is essentially the same

under IFRS and GAAP. IFRS addresses the accounting for errors in IAS
8 (Accounting Policies, Changes in Accounting Estimates, and Errors).
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.
LO 10
Key Points
11-104
The income statement using IFRS is called the statement of

comprehensive income. A statement of comprehensive income is
presented in a one- or two-statement format. The single-statement
approach includes all items of income and expense, as well as each
component of other comprehensive income or loss by its individual
characteristic. In the two-statement approach, a traditional income
statement is prepared. It is then followed by a statement of
comprehensive income, which starts with net income or loss and then
adds other comprehensive income or loss items. Regardless of which
approach is reported, income tax expense is required to be reported.
The computations related to earnings per share are essentially the same
under IFRS and GAAP.
LO 10
Looking to the Future

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.
Both the IASB and FASB are working toward convergence of any remaining
differences related to earnings per share computations.
11-105
LO 10
IFRS Self-Test Questions

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
11-106
LO 10

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.
11-107
LO 10
A Look at IFRS
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.
11-108
LO 10
Copyright
Copyright 2014 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
11-109

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The Corporate Form of Organization

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

The Corporate Form of Organization

File application with the Secretary of State.

State grants charter.

Corporation develops by-laws.

Companies generally incorporate in a state whose laws are

The Corporate Form of Organization

1. Vote in election of board of

2. Share the corporate earnings

The Corporate Form of Organization

3. Keep the same percentage ownership when new shares

* A number of companies have eliminated the preemptive right.

The Corporate Form of Organization

4. Share in assets upon liquidation in proportion to their

The Corporate Form of Organization

Stock Issue Considerations

Charter indicates the amount of stock that a corporation

Number of authorized shares is often reported in the

No formal accounting entry.

Stock Issue Considerations

Stock Issue Considerations

Companies issue common stock directly to investors or

Factors in setting price for a new issue of stock:

Stock Issue Considerations

Stock of publicly held companies is traded on organized

Interaction between buyers and sellers determines the