Sheet (5)

Tegara English
First year
‫ازهر‬

Financial Chapter
Accounting
5

The king of Accounting

Edited by Dr/ Magdy Kamel
Tel/ 01273949660

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 Complete chapter (5)
The corporation form of organization:

 The legal interpretation of a corporation is an entity separate and distinct

from its owners
 A corporation may be organized for the purpose of making profit or it may be
nonprofit seeking

Classification by ownership distinguishes between publicly held and privately

held corporations

A publicly held corporation may have A privately held corporations often

thouthands of stockholders, and its stock is referred to as a closely retated held
regularly traded on a national securities corporation, usually has only a few
exchanges. stockholders and doesn’t offer its stock for
sale to the general public.

Characteristics of a corporation :
1- separate legal existence ‫كيان قانونى منفصل‬
 As an entity separate and distinct from its owners, the corporation acts under
its own name rather than in the name of its stockholders .

2) limited liability of stockholders: ‫التزام محدود لحاملى االسهم‬

 Since a corporation is a separate legal entity , creditors have resources only to
compare assets to satisfy their claims.

3) transferable ownership rights ‫حقوق ملكية متنقلة من شخص الخر‬

 Ownership of a corporation is held in shares of capital stock, which are
transferable units.

4) ability to acquire capital ‫سهوله تجميع راس المال‬

 It is relatively easy for a corporation to obtain capital through the issuance of

stock
 Stockholder has limited liability and shares of stock are readily transferable

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5) continuous life ‫عمر الشركة مستمر‬
 The life of a corporation is stated in its charter.
 The life may be perpetual or it may be limited to a specific number of years

6) corporation management ‫اداره الشركة‬

 Stockholders legally own the corporation. But they manage the
corporation indirectly through a board of directors they elect.
‫يمتلك اصحاب االسهم قانونا الشركه ولكنهم يديرون الشركه بصوره غير مباشره من خالل مجلس اداره ينتحبونه‬
 The board, in turn, formulates the operating policities for the company.
 board also selects officiers to execute policy and perform daily management
functions
‫ االداره اليوميه‬,‫يقوم مجلس االداره باختيار الموظفين وتنفيز الوظائف‬

7) government regulations ‫القيود والتنظيمات الحكومية‬

 A corporation is subject to numerous state and federal regulations
 Governmental regulations are designed to protect the owners of the corporation

8) additional taxes ‫الضرائب المضاعفة‬

 Corporation must pay federal and state income taxes as a separate legal entity
 These taxes are substantial : they can amount to more than 40% of taxable income

Forming a Corporation

 A corporation is formed by grant of a state charter

which describes the name and purpose of the corporation ,
the types and number of shares of stock that are authorized to be issues,
the name of the individuals that formed the company 

 it is to a company’s advantage to incorporate in a state whose laws are

favorable to the corporation form of business organization.

 Corporations engaged in interstate commerce must also obtain a license

from each state in which they do business

Costs incurred in the formation of a corporation are called organization costs.

 These costs include legal and state fees, and promotional expenditures

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Ownership rights of stockholders ‫حقوق الملكيه لحاملى االسهم‬
Stockholders have the right to:

1) Vote in election of board of directors at annual meeting and vote on actions

that require stockholder approval.

2) Share the corporate earnings through receipt of dividends.

3) Keep the same percentage ownership when new shares of stock are issued
(preemptive right) ‫حق الشفعه‬

4) Share in assets upon liquidation in proportion to their holdings. This is called

a residual claim:

Stock issue Considerations

 Authorized Stock
The charter indicates the amount of stock that a corporation is authorized to sell
‫ تم تحديد كميه االسهم التى الشركه صرحت ببيعها‬: ‫ بمعنى وفقا لقرار تاسيس الشركه‬:‫اسهم جاهزه للبيع‬

 Issuance Of Stock ‫اسهم تم بيعها‬

A corporation can issue common stock directly to investors. /Or it can issue
the stock indirectly through an investment banking firm that specializes in
bringing securities to market.
‫ شركه مصرفيه استثماريه‬,‫يمكن للشركه ان تبيع االسهم مباشرا للمستثمرين او بطريقه غير مباشره عن طريق‬

 Market value per stocks

The stock of publicly held companies is traded on organized exchanges.
The dollars price per share are established by the interaction between buyers
and sellers.

Par and no par value stocks

 Par value stock is capital stock to which the charter has assigned a value
per share most states required the corporation to sell its shares at par
 No-par value stock is capital stock to which the charter has not assigned a
value .In many states the board of directors assigns a stated value to no-
par shares

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Corporate capital
Owners’ equity is identified by various names:
stockholders’ equity, shareholders’ equity, or corporate capital.
The stockholders’ equity section of a corporation’s balance sheet consists of two parts: (1)
paid-in (contributed) capital and (2) retained earnings (earned capital).

1) Paid-In Capital
Paid-in capital is the total amount of cash and other assets paid in to the corporation by
stockholders in exchange for capital stock. As noted earlier, when a corporation has only
one class of stock, it is common stock.

2) Retained Earnings
Retained earnings is net income that a corporation retains for future use. It is often referred
to as earned capital

First: accounting for common stock issues

1) The primary objectives in accounting for the issuance of common stock are :
a) to identify the specific sources of paid in capital
b) to maintain the distinction between paid in capital and retained earnings

2) when the issuance of common stock for cash is recorded, the par value of the shares is
credited to common stock, The portion of the proceeds that is above or below par
value is recorded in a separate paid in capital account.

3) when no par common stock has a stated value, the entires are similar to those for par
value common stock.

4) when no par common stock doesn’t have a stated value, the entire proceeds from the
issue become legal capital and credited to common stock.

Example (1)
Boomer corporation issues, 2,000 shares of common stock at $ 10 per shares.
Stock has $ 4 par value Stock has no par value
 Cash 20,000  Cash 20,000
 Common stock (4 × 2,000) 8,000  Common stock 20,000
 Paid in capital in excess of (2,000 × 10)
par value (6 × 2,000) 12,000
Stock has $ 4 stated value Stock has no stated value
 Cash 20,000  Cash 20,000
 Common stock (4 × 2,000) 8,000  Common stock 20,000
 Paid in capital in excess of (2,000 × 10)
stated value (6 × 2,000) 12,000

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Second : treasury stock
1) treasury stock is a corporation’s own stock that has been issued fully paid for , &
reacquired by the corporation but not retired.
‫هى اسهم تمتلكها الشركه ومصدره فعال وثمنها ادفع بالكامل والشركة هتعيد امتالكها مره اخرى‬
2) treasury stock is generally accounted for by the cost method , under this method ,
treasury stock is debited for the price paid to require the shares & the same amount is
credited to treasury stock when the share are disposal of

3) when the selling price of treasury stock is greater than its cost, the difference is credited
to paid in capital from treasury stock, when treasury stock is sold below its cost, paid in
capital from treasury stock is debited for its remaining balances and retained earnings is
debited for any additional excess of cost over selling price

Example :
On January 1, 2010, the stockholders' equity section of Nunez Corporation shows:
Common stock ($5 par value) $1,500,000
paid-in capital in excess of par value $1,000,000
and retained earnings  $1,200,000
During the year, the following treasury stock transactions occurred. 
a) Mar. 1 Purchased 50,000 shares for cash at $15 per share. 
July. 1 Sold 10,000 treasury shares for cash at $17 per share. 
Sept. 1 Sold 8,000 treasury shares for cash at $14 per share. 
b) Restate the entry for September 1, assuming the treasury shares were sold at $12 per
share. 
Solution
a) Journal entries
Mar.1 Treasury stock (50,000 x $15)  750,000
Cash 750,000
July 1 Cash 170,000
Treasury stock (10,000 × $15)  150,000
Paid-in cap. from treasury stock 20,000
Sept. 1 Cash (8,000 x $14)  112,000
Paid-in cap. from treasury stock 8,000
Treasury stock (8,000 × $15) 120,000

b)
Sept. 1 Cash (8,000 x $12)  96,000
Paid-in cap. from treasury stock 20,000
Retained earnings 4,000 120,000
Treasury stock (8,000 × $15)

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Third : accounting for preferred stock

1) a corporation may issue an additional class of stock (called preferred stock ) to appeal to
more potential investors.

2) preferred stock has contractual provision that give it priority over common stock in
certain areas.

Typically, preferred stock has a priority as to

a) distribution of earnings (dividends)
b) assets in the event of liquidation

3) preferred stock dividends preferences may be classified as:

 Cumulative – both current year dividends and any unpaid prior year dividends must
be paid to preferred stockholders before common stockholders received any
dividends.
 Preferred dividends not declared in a given period are called dividends in arrears.
 Dividends in arrears are not considered a liability but they should be disclosed in the
notes to financial statements.

True or false
1. The cost method derives its name from the fact that the treasury stock
account is maintained at the cost of shares purchased
 True false

2. When treasury stock is sold for an amount greater than its cost, the
difference should be credited to Gain on Sale of Treasury Stock and reported
as other income on the income statement.
 True false

3. Stockholders' liability is generally unlimited; therefore, creditors have

recourse to stockholders' personal assets as well as corporate assets.
 True false

4. Retained earnings is net income retained in a corporation and is often

referred to as earned capital
 True false

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5. A corporation is bound to a contract entered into by one of its stockholders.
 True false

6. Issued shares of stock less outstanding shares equals treasury stock

 True false

7. The cumulative feature of stock applies to preferred stock .

 True false

8. Dividends in arrears are not considered a liability because no obligation exists

until the dividend is declared by the board of directors.

 True false

9. Preferred stockholders have a priority as to dividends but not to assets in the

event of liquidation
 True false

10. Treasury stock should be listed as an asset in the balance sheet.

 True false

Muti choose question

1. Par value
a. represent what a share of stock is worth.
b. represent the original selling price for a share of stock.
c. is the legal capital established for a share of stock
d. is established for a share of stock after it is issued

2. If a company has 900,000 shares of common stock authorized, and has

750,000 shares issued, and holds 30,000 shares of common stock as treasury
stock, the general ledger account for common stock, $1 par value would have a
balance of.
a. $870,000.
b. $750,000.
c. $720,000.
d. $150,000.
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3. All of the following balances are normally found in a corporation's
stockholders' equity section except
a. common stock
b. paid in capital in excess of par.
c. retained earnings
d. dividends in arrears

4. Preferred stock would least likely have which characteristic?

a. The right of the holder to vote at stockholders' meetings
b. the right of the corporation to redeem or retire the stock
c. preference as to assets upon liquidation of the corporation
d. preference as to dividends

5. A company purchases 1,500 shares of its $25 par value stock at $35 per share.
It then reissues 500 shares at $40 per share. The entry upon reissue of the stock
would include a credit to
a. cash for $2,500.
b. treasury stock for $2,500.
c. retained earnings for $2,500.
d. paid in capital from treasury stock for $2,500.

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