Corporation

A corporation is an organization—usually a group of people or a

company—authorized by the state to act as a single entity and
recognized as such in law for certain purposes. Early incorporated
entities were established by charter. Most jurisdictions now allow
the creation of new corporations through registration.

A corporation is created by law, and its continued existence

depends upon the statutes of the state in which it is incorporated.
As a legal entity, a corporation has most of the rights and
privileges of a person. The major exceptions
relate to privileges that only a living person can exercise, such as
the right to vote or to hold public offi ce. A corporation is subject to
the same duties and responsibilities as a person. For example, it
must abide by the laws, and it must pay taxes.
Two common ways to classify corporations are by purpose and by
ownership. A corporation may be organized for the purpose of
making a profit, or it may be not for- profi t. For-profi t corporations
include such well-known companies as McDonald’s,
Nike, PepsiCo, and Google. Not-for-profi t corporations are
organized for charitable,medical, or educational purposes.
Examples are the Salvation Army and the American
Cancer Society.
Classifi cation by ownership differentiates publicly held and
privately held corporations.
A publicly held corporation may have thousands of stockholders.
Its
stock is regularly traded on a national securities exchange such
as the New York
Stock Exchange. Examples are IBM, Caterpillar, and General
Electric.
In contrast, a privately held corporation usually has only a few
stockholders,
and does not offer its stock for sale to the general public. Privately
held
companies are generally much smaller than publicly held
companies

Definition of Paid-in Capital

Paid-in capital is one of the major categories of stockholders'
equity. Generally, paid-in capital reports the amount that a
corporation received from its stockholders (or shareholders) in
exchange for the newly issued shares of its capital stock.

Paid-in capital is also referred to as contributed capital and as

permanent capital.

Definition of Retained Earnings

Generally, retained earnings is the cumulative amount of after-tax
net income earned by the corporation since its inception minus
the dividends that have been distributed to its stockholders since
the corporation began.

The major characteristics of a corporation are separate

legal existence, limited liability of stockholders, transferable
ownership rights, ability to acquire capital, continuous life,
corporation management, government regulations, and additional
Taxes.

Treasury stock is a corporation’s own stock that it has issued and

subsequently reacquired from shareholders, but not retired.​A
treasury stock or reacquired stock is stock which is bought back by the issuing
company, reducing the amount of outstanding stock on the open market.​ A
corporation may acquire treasury stock for various reasons:
Accounting for Issues of Common Stock

i) Issuing Par Value Common Stock for Cash

Cash ac DR
To common stock ac

Rs 100 (1000) Rs 500 500-100

ii) Issuing above Par Value Common Stock for Cash
Cash ac DR
To common stock
To paid in capital

iii) Issuing Common Stock for Services

or Noncash Assets
Corporations also may issue stock for services
(compensation to attorneys or consultants)
or for noncash assets (land, buildings, and equipment). In
such cases, what cost should be recognized in the exchange
transaction? To comply with the cost principle, in a non
cash transaction cost is the cash equivalent price. Thus, cost
is either the fair value of the consideration given up, or the
fair value of the consideration
received, whichever is more clearly determinable.
To illustrate, assume that Attorneys​ ( ABC) ​have helped
Jordan Company​(XYZ)​ 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. In this case, the
fair value of the consideration received, $5,000, is more
clearly evident. Accordingly,
Jordan Company makes the following entry.

Expenses ac DR 5000
To common stock ac (4000*1) 4000
To paid in capital ac (1000*1) 1000
( Being issuance of 4000 shares to recover the expenses
of 5000)

90000
10000*8=80000
In contrast, assume that Athletic Research Inc. is an existing
publicly held corporation. Its Rs5 par value stock is actively
traded at Rs 8 per share. The company issues 10,000 shares
of stock to acquire land recently advertised for sale at
Rs90,000. The most clearly evident value in this non cash
transaction is the market price of the consideration given,
Rs80,000
Land ac DR 80000
To common stock (5*10000) 50000
To paid in capital (3*10000) 30000
( Being issuance of 10000 shares for the purchase of land)

On March 15, it issues 5,000 shares Par value of Rs 10

of common stock to attorneys in settlement of their bill of
50,000 for organization costs. Journalize the transaction
Organization expense ac 50000
To common stock (10*5000) 50000
Corporation begins operations on March 1 by issuing
100,000 shares of 10 par value common stock for cash at 12
per share.

Cash ac DR ( 12*100000) 1200000

To common stock (10*100000) 1000000
To paid in capital ( 2*1000000) 200000

Disposal of Treasury Stock

Treasury stock is usually sold or retired. The accounting for
its sale differs when treasury stock is sold above cost than
when it is sold below cost.
SALE OF TREASURY STOCK ABOVE COST
If the selling price of the treasury shares is equal to their
cost, the company records the sale of the shares by a debit
to Cash and a credit to Treasury Stock. When the
selling price of the shares is greater than their cost, the
company credits the difference to Paid-in Capital from
Treasury Stock.
ABC company sells for Rs10 per share the 1,000 shares
of its treasury stock, previously acquired at Rs8 per share.
Cash ac Dr (10*1000) 10000
To Treasury stock (8*1000) 8000
To paid in capital (2*1000 2000
( Being sale of treasury stock above cost)
SALE OF TREASURY STOCK BELOW COST
When a company sells treasury stock below its cost, it
usually debits to Paid-in Capital from Treasury Stock the
excess of cost over selling price.
If ABC Inc. sells an additional 800 shares of treasury
stock on at Rs 7 per share Previously acquired at Rs 8 per
share
Cash ac Dr (7*800) 5600
Paid in capital from Treasury stock (1*800) 800
To Treasury stock (8*800) 6400
( Being sold of Treasury stock below the cost)

Preferred Stock
● Preferred stockholders have a higher claim on distributions (e.g.
dividends) than common stockholders.
● Preferred stockholders usually have no or limited, voting rights in
corporate governance.
● In the event of a liquidation, preferred stockholders claim on assets is
greater than common stockholders but less than bondholders.
● Preferred stock has characteristics of both bonds and common stock
which enhances its appeal to certain investors.
● The main difference between preferred and common stock is that
preferred stock gives no voting rights to shareholders while common
stock does.
● Preferred shareholders have priority over a company's income,
meaning they are paid dividends before common shareholders.
● Common stockholders are last in line when it comes to company
assets, which means they will be paid out after creditors,
bondholders, and preferred shareholder