Slide Chương 10

10 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

 Not-for-Profit  Publicly held
 For Profit  Privately held
13-2 LO 1
Characteristics of a Corporation
Characteristics that distinguish corporations from

proprietorships and partnerships.
 Separate Legal Existence

 Limited Liability of Stockholders
 Transferable Ownership Rights
Advantages
 Ability to Acquire Capital
 Continuous Life
 Corporate Management
 Government Regulations Disadvantages
 Additional Taxes
13-3 LO 1

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


Limited to their
investment.
 Continuous Life
13-5 LO 1


Shareholders may
sell their stock.
 Continuous Life
13-6 LO 1


 Transferable Ownership Rights Corporation can
 Ability to Acquire Capital obtain capital
through the issuance
 Continuous Life of stock.
13-7 LO 1


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

from proprietorships and partnerships.

 Ability to Acquire Capital Separation of
ownership and
 Continuous Life
management often
 Corporate Management reduces an owner’s
ability to actively
manage the
 Additional Taxes company.
13-9 LO 1


 Continuous Life
13-10 LO 1


 Ability to Acquire Capital Corporations pay
income taxes as a
 Continuous Life
separate legal entity
 Corporate Management and in addition,
stockholders pay
taxes on cash
 Additional Taxes dividends.
13-11 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
13-12 LO 1
Forming a Corporation
Alternative Terminology
Initial Steps: The charter is often
referred to as the articles
 File application with the Secretary of incorporation.
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.
13-13 LO 1
Stockholder Rights
1. Vote in election of board of

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

through receipt of dividends.
Illustration 13-3
Ownership rights of
stockholders
13-14 LO 1
Stockholder Rights
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
Ownership rights of
stockholders
13-15 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
13-16 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?
13-17 LO 1
AUTHORIZED STOCK
 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.
13-18 LO 1
Illustration 13-4
Prenumbered Shares A Stock certificate
Name of corporation
Stockholder’s
name
Signature of
corporate official
13-19 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. 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.
13-20 LO 1
MARKET PRICE OF STOCK

 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 company’s earnings

and dividends.
 Factors beyond a company’s control may cause day-to-

day fluctuations in market prices.
13-21 LO 1
PAR AND NO-PAR VALUE STOCK

 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.
13-22 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.
13-23 LO 1
Corporate Capital
Common Stock
Account
Paid-in Capital
Paid-in Capital
in Excess of Par
Account
Preferred Stock
Account
Two Primary
Sources of Retained Earnings
Account
Equity
Paid-in capital is the total amount of cash and other assets paid
into the corporation by stockholders in exchange for capital stock.
13-24 LO 1
Corporate Capital
Common Stock
Account
Paid-in Capital
Paid-in Capital
in Excess of Par
Account
Preferred Stock
Account
Two Primary
Account
Equity
Retained earnings is net income that a corporation retains for

future use.
13-25 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
13-26 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.
13-27 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
13-28 LO 2
Accounting for Common Stock
Illustration 13-7
Stockholders’ equity—paid-in Alternative Terminology
capital in excess of par
Paid-in Capital in Excess of Par is
also called Premium on Stock.
13-29 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
13-30 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
13-31 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.
13-32 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
13-33 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
13-34 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.
13-35 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
Preferred stock may have a par value or no-par value.
13-36 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
13-37 LO 2
Mar. 15
Organization Expense 50,000
Common Stock (5,000 x $1) 5,000
Common Stock 45,000
13-38 LO 2
Mar. 28
Cash 45,000
Preferred Stock (1,500 x $10) 15,000
Preferred Stock 30,000
13-39 LO 2
LEARNING Explain how to account for treasury
3
OBJECTIVE stock.
Common Stock
Account
Paid-in Capital
Paid-in Capital
in Excess of Par
Account
Preferred Stock
Account
Two Primary
Account
Equity
Less:
Treasury Stock
Account
13-40 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.
13-41 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 Hint
Treasury shares do not have
dividend rights or voting rights.
13-42 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
13-43 LO 3
Purchase of Treasury Stock Illustration 13-9
with treasury stock
Both the number of shares issued (100,000) and the number

of shares held as treasury (4,000) are disclosed.
13-44 LO 3
Disposal of Treasury Stock
Sale of Treasury Stock

 Above Cost
 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.
13-45 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.
13-46 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
13-47 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
Paid-in Capital from Treasury Stock 1,200 balance
on hand
Retained Earnings 1,000
13-48 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.
13-49 LO 4
Illustration 13-11
13-50 LO 4
Stockholders’ equity section
14 Corporations: Dividends, Retained
Earnings, and Income Reporting
Learning Objectives
1 Explain how to account for cash dividends.
2 Explain how to account for stock dividends and splits.
Prepare and analyze a comprehensive stockholders’

3 equity section.
Describe the form and content of corporation income

4 statements.
14-51
LEARNING Explain how to account for cash
1
OBJECTIVE 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.
14-52 LO 1
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.
2. Adequate cash.
3. A declaration of dividends by the Board of Directors.
14-53 LO 1
Cash Dividends
Three dates are important: Illustration 14-1

Key dividend dates
14-54 LO 1
Cash 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 50,000
Dec. 22 (Date of Record) No entry
Jan. 20 (Payment Date)

Cash 50,000
14-55 LO 1
ALLOCATING CASH DIVIDENDS
Illustration: On December 31, 2017, 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, 2017, the directors declare a $6,000 cash dividend.
Prepare the entry to record the declaration of the dividend.

Preferred Dividends: 1,000 shares x $100 par x 8% = $8,000
14-56 LO 1
Illustration: At December 31, 2018, IBR declares a $50,000

cash dividend. Show the allocation of dividends to each class of
stock.
2017 2018
Dividends declared $ 6,000 $ 50,000
Dividends in arrears 2,000 **
Allocation to preferred 6,000 8,000 *
Remainder to common $ - $ 40,000
* 1,000 shares x $100 par x 8% = $8,000

** 2017 Pfd. dividends $8,000 – declared $6,000 = $2,000
14-57 LO 1
Illustration: At December 31, 2018, IBR declares a $50,000 cash

dividend. Prepare the entry to record the declaration of the
dividend.

14-58 LO 1
LEARNING Prepare and analyze a comprehensive
3
OBJECTIVE stockholders’ equity section.
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 14-10
with deficit
14-59 LO 3
RETAINED EARNINGS STATEMENT
Illustration 14-14
Retained earnings statement
14-60 LO 3
Statement Presentation and Analysis
Illustration 14-15
Comprehensive stockholders’
equity section
14-61 LO 3
Statement Presentation and Analysis
ANALYSIS
To illustrate, Walt Disney Company’s beginning-of-the-year and end-
of-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 14-16
Ratio shows how many dollars of net income the company earned
for each dollar invested by the common stockholders.
14-62 LO 3
LEARNING Describe the form and content of
4
OBJECTIVE corporation income statements.
Income
Statement
Presentation
Illustration 14-17
Income statement
with income taxes
14-63 LO 4
Income Statement Analysis
EPS AND PREFERRED DIVIDENDS

Net Income minus
Earnings Preferred Dividends
=
Per Share
Weighted-Average Common
Shares Outstanding
Ratio indicates the net income

earned by each share of
outstanding common stock.
14-64 LO 4
Income Statement Analysis
Question
The income statement for Nadeen, Inc. shows income before
income taxes $700,000, income tax expense $210,000, and
net income $490,000. If Nadeen has 100,000 shares of
common stock outstanding throughout the year, earnings per
share is:
a. $7.00.
b. $4.90. ($490,000 / 100,000 = $4.90)
c. $2.10.
d. No correct answer is given.
14-65 LO 4
DO IT! 4 Stockholders’ Equity and EPS
(a) Compute return on common stockholders’ equity for each year.
14-66 LO 4
DO IT! 4 Stockholders’ Equity and EPS
(b) Compute earnings per share for each year.
14-67 LO 4

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10 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

Characteristics that distinguish corporations from

 Separate Legal Existence

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

 Separate Legal Existence

Characteristics that distinguish corporations from

 Separate Legal Existence

Characteristics that distinguish corporations from

 Separate Legal Existence

Characteristics that distinguish corporations from

 Separate Legal Existence

Characteristics that distinguish corporations

 Separate Legal Existence

Characteristics that distinguish corporations from

 Separate Legal Existence

Characteristics that distinguish corporations from

 Separate Legal Existence

Illustration 13-1 Stockholders

General Vice President Vice President

Companies generally incorporate in a state whose laws are

Corporations engaged in interstate commerce must obtain a

1. Vote in election of board of

2. Share the corporate earnings

3. Keep the same percentage ownership when new shares

* A number of companies have eliminated the preemptive right.

4. Share in assets upon liquidation in proportion to their

When a corporation decides to issue stock, it must

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

 Number of authorized shares is often reported in the

 No formal accounting entry.

 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

 Interaction between buyers and sellers determines the

 Prices tend to follow the trend of a company’s earnings

 Factors beyond a company’s control may cause day-to-

PAR AND NO-PAR VALUE STOCK

 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

Retained earnings is net income that a corporation retains for

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

Accounting for Common Stock

2) Maintain the distinction between paid-in capital and

Other than consideration received, the issuance of common

Illustration: Assume that Hydro-Slide, Inc. issues 1,000 shares

Illustration: Assume that instead of $1 par value stock, Hydro-

Illustration: What happens when no-par stock does not have a

Corporations also may issue stock for:

 Noncash assets (land, buildings, and equipment).

Cost is either the fair market value of the consideration given

Illustration: Attorneys have helped Jordan Company incorporate.