Weygandt AP 10e PowerPoint Ch13

7/28/2019 Weygandt AP 10e PowerPoint Ch13

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CHAPTER13Corporations:Organization and

Capital Stock

Transactions


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PreviewofCHAPTER13


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An entity separate and distinct from its owners.

Classified by Purpose

Not-for-Profit

For Profit

Classified by Ownership

Publicly held

Privately held

McDonalds

Nike

PepsiCo

Google

Salvation Army

American CancerSociety

Cargill Inc.

The Corporate Form of Organization


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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 fromproprietorships and partnerships.

SO 1 Ident i fy the major character is t ics of a corporat ion.

Advantages

Disadvantages

Characteristics of a Organization


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Continuous Life


Additional Taxes



Corporation actsunder its own namerather than in the

name of itsstockholders.




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Continuous Life


Additional Taxes



Limited to their

investment.




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Continuous Life


Additional Taxes



Shareholders maysell their stock.




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Continuous Life


Additional Taxes



Corporation canobtain capitalthrough the issuanceof stock.




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Continuous Life


Additional Taxes



Continuance as agoing concern is notaffected by thewithdrawal, death, or

incapacity of astockholder,employee, or officer.




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Continuous Life


Additional Taxes






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Continuous Life


Additional Taxes



Corporations payincome taxes as aseparate legal entity

and in addition,stockholders paytaxes on cashdividends.




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Continuous Life


Additional Taxes



Separation ofownership andmanagementprevents owners

from having anactive role inmanaging thecompany.




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13-14 SO 1 Ident i fy the major character is t ics of a corporat ion.

Stockholders

Chairman andBoard ofDirectors

President andChief Executive

Officer

General

Counsel andSecretary

Vice PresidentMarketing

Vice President

Finance/ChiefFinancial Officer

Vice PresidentOperations

Vice President

HumanResources

Treasurer Controller

Illustration 13-1

Corporation

organization chart



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Formed by grant of a state charter.

Corporation develops by-laws.

Initial Steps:


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


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1. Vote in election of board of

directors and on actions that

require stockholder approval.

Stockholders have the right to:


2. Share the corporate earnings

through receipt of dividends.

Illustration 13-3

Ownership Rights of Stockholders


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3. Keep the same percentage ownership when new

shares of stock are issued (preemptive right*).


* A number of companies have eliminated the preemptive right.

Illustration 13-3




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4. Share in assets upon liquidation in proportion to

their holdings. This is called a residual claim.


Illustration 13-3




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13-19 SO 1

Class ACOMMON STOCK

Class ACOMMON STOCK

PAR VALUE$1 PER SHARE

PAR VALUE$1 PER SHARE

Stock Certificate

Name of corporation

Stockholders name

Class

Shares

Signature of corporateofficial

PrenumberedIllustration 13-4



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Charter indicates the amount of stock that a

corporation is authorized to sell.

Number of authorized shares is often reported in thestockholders equity section.

Authorized Stock

Stock Issue Considerations


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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. 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.

Issuance of Stock



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Stock of publicly held companies is traded on organized

exchanges.

Interaction between buyers and sellers determines theprices per share.

Prices tend to follow the trend of a companys earnings and

dividends.

Factors beyond a companys control, may cause day-to-

day fluctuations in market prices.

Market Value of Stock



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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 statedvalue to no-par shares.

Par and No-Par Value Stock



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Paid-in Capital

Retained EarningsAccount

Paid-in Capital inExcess of Par

Account

Two PrimarySources of

Equity

Common StockAccount

Preferred Stock

Account

SO 2 Differentiate between paid-in capital and retained earnin gs .

Paid-in capitalis the total amount of cash and other assets paid

in to the corporation by stockholders in exchange for capital

stock.

Corporate Capital


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Paid-in Capital


Additional Paid-inCapitalAccount


Equity

Common StockAccount

Preferred Stock

Account

SO 2 Differentiate between paid-in capital and retained earnin gs .

Retained earningsis net income that a corporation retains forfuture use.

Corporate Capital


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

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


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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-incapital accounts.

Accounting for Common Stock Issues


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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


Issuing Par Value Common Stock fo r Cash



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Illustration: Assume that Hydro-Slide, Inc. issues 2,000

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.

Cash 1,000

Common stock (1,000 x $1) 1,000

Cash 5,000

Common stock (1,000 x $1) 1,000

Paid-in capital in excess of par value 4,000

a.

b.


Issuing Par Value Common Stock for Cash



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13-31 SO 3 Record the issuance of common stock .

Illustration 13-7



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Issu ing Common Stock fo r Services orNoncash As sets

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 givenup, or the fair market value of the consideration received,

whichever is more clearly determinable.



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Illustration: Attorneys have helped Jordan Companyincorporate. 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




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Illustration: Athletic Research Inc. is an existing publicly heldcorporation. 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




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Paid-in Capital


Paid-in Capital inExcess of Par

Account

Less:Treasury Stock

Account


Equity

Common StockAccount

Preferred Stock

Account

SO 4 Expla in the accoun t ing for treasury stock.

Accounting for Treasury Stock


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Treasury stock - corporations own stock that it hasreacquired from shareholders, but not retired.

Corporations purchase their outstanding stock:

1. To reissue the shares to officers and employees underbonus 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.




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Purchase of Treasu ry 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.




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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.


Illustration 13-8



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13-39 SO 4 Expla in the accoun t ing 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



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Sale of Treasury Stock

Above Cost

Below Cost

Both increase total assets and stockholders equity.



Disposal of Treasu ry Stock


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Treasury stock 8,000

Illustration: On July 1, Mead sells for $10 per share 1,000shares of its treasury stock, previously acquired at $8 per share.


July 1

Paid-in capital treasury stock 2,000

Cash 10,000

A corporation does not realize a gain or suffer a loss from stocktransactions with its own stockholders.

Accounting for Treasury Stock AboveCost


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Paid-in capital treasury stock 800

Illustration: On Oct. 1, Mead sells an additional 800 shares oftreasury stock at $7 per share.


Oct. 1


Cash 5,600

Accounting for Treasury Stock BelowCost

Illustration 13-10


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Paid-in capital treasury stock 1,200

Illustration: On Dec. 1, assume that Mead, Inc. sells itsremaining 2,200 shares at $7 per share.


Dec. 1

Retained earnings 1,000

Cash 15,400


Limitedto

balanceonhand

Accounting for Treasury Stock BelowCost


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Features often associated with preferred stock.1. Preference as to dividends.

2. Preference as to assets in liquidation.

3. Nonvoting.

SO 5 Dif ferent iate preferred stock from commo n stock.

Accounting for preferred stock at issuance is similar to that forcommon stock.

Preferred Stock


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Illustration: Stine Corporation issues 10,000 shares of $10par value preferred stock for $12 cash per share. Journalize

the issuance of the preferred stock.

SO 5 Dif ferent iate preferred stock from commo n stock.

Cash 120,000

Preferred stock (10,000 x $10) 100,000

Paid-in capital in excess of par

Preferred stock 20,000

Preferred stock may have a par value or no-par value.

Preferred Stock


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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.

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


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13-48 SO 5 Dif ferent iate preferred stock from commo n stock.

Preferred Stock

Cumulative DividendIllustration: 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 inarrears, preferred stockholders are entitled to receive the

following dividends in the current year.


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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

Liquidat ion Preferences


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13-50 SO 6 Prepare a stockholders equity section.

Illustration 13-12

Statement Presentation


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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 valuedifferences.

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


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There are often terminology differences for equity accounts.

The following summarizes some of the common differences in

terminology.

Key Points


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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 ownshares. 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


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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 certaincircumstances. 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 (nonpaid-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


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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 isessentially 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


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Looking to the FutureAs 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 underGAAP will change in any converged standard.


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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


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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.



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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.



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Weygandt AP 10e PowerPoint Ch13