Corporations-Organization and Capital Stock Transactions

13 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
► Salvation Army ► McDonald’s ► Cargill Inc.

► American Cancer ► Nike
Alternative
Alternative Terminology
Terminology
Society ► PepsiCo Privately
Privately held
held corporations
corporations
are
are also
also referred
referred to
to as
as
► Google
closely
closely held
held corporations.
corporations.
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
 Government Regulations stockholder,
employee, or officer.
13-8 LO 1
Characteristics that distinguish corporations

from proprietorships and partnerships.
 Ability to Acquire Capital Separation of
 Continuous Life ownership and
management often
 Corporate Management reduces an owner’s
 Government Regulations 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,
 Government Regulations 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
The charter
charter is
is often
often
referred
referred to
to as
as the
the articles
articles
 File application with the Secretary of
of incorporation.
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
Accounting Across the Organization
A Thousand Millionaires!
Traveling to space or embarking on an expedition to excavate lost Mayan ruins
are normally the stuff of adventure novels. But for employees of Facebook, these
and other lavish dreams moved closer to reality when the world’s No. 1 online
social network went public through an initial public offering (IPO) that may have
created at least a thousand millionaires. The IPO was the largest in Internet
history, valuing Facebook at over $104 billion. With all these riches to be had, why
did Mark Zuckerberg, the founder of Facebook, delay taking his company public?
Consider that the main motivation for issuing shares to the public is to raise
money so you can grow your business. However, unlike a manufacturer or even
an online retailer, Facebook doesn’t need major physical resources, it doesn’t
have inventory, and it doesn’t really need much money for marketing. So in the
past, the company hasn’t had much need for additional cash beyond what it was
already generating on its own. Finally, as head of a closely held, nonpublic
company, Zuckerberg was subject to far fewer regulations than a public company.
Source: “Status Update: I’m Rich! Facebook Flotation to Create 1,000 Millionaires Among
Company’s Rank and File,” Daily Mail Reporter (February 1, 2012). LO 1
13-14
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
13-15 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
13-16 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
13-17 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?
13-18 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.
13-19 LO 1
Illustration 13-4
Prenumbered Shares A Stock certificate
Name of corporation
Stockholder’s
name
Signature of
corporate official
13-20 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.
13-21 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.
13-22 LO 1
Investor Insight Nike
13-23 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.
13-24 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.
13-25 LO 1
DO IT! 1a Corporate Organization
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.
13-26 LO 1
Corporate Capital
Common
CommonStock
Stock
Account
Account Paid-in
Paid-inCapital
Capital
Paid-in
Paid-inCapital
Capital in
inExcess
ExcessofofPar
Par
Account
Account
Preferred
PreferredStock
Stock
Account
Account
Two Primary
Sources of Retained
RetainedEarnings
Earnings
Account
Account
Equity
Paid-in capital is the total amount of cash and other assets paid in
to the corporation by stockholders in exchange for capital stock.
13-27 LO 1
Corporate Capital
Common
CommonStock
Stock
Account
Account Paid-in
Paid-inCapital
Capital
Paid-in
Paid-inCapital
Capital in
inExcess
ExcessofofPar
Par
Account
Account
Preferred
PreferredStock
Stock
Account
Account
Two Primary
Sources of Retained
RetainedEarnings
Earnings
Account
Account
Equity
Retained earnings is net income that a corporation retains for

future use.
13-28 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
13-29 LO 1
Corporate Capital
Comparison of the owners’ equity (stockholders’ equity)

accounts reported on a balance sheet for a proprietorship, a
partnership, and a corporation.
Illustration 13-6
Comparison of owners’
equity accounts
13-30 LO 1
DO IT! 1b Corporate Capital
At the end of its first year of operation, Doral Corporation has

$750,000 of common stock and net income of $122,000. Prepare
(a) the closing entry for net income and (b) the stockholders’ equity
section at year-end.
Solution
(a) Income Summary 122,000
Retained Earnings 122,000
(b) Stockholders’ equity
Common Stock $750,000
Retained earnings 122,000
Total stockholders’ equity $872,000
13-31 Advance slide in slide show to reveal solution. 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.
13-32 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
13-33 LO 2
Accounting for Common Stock
Illustration 13-7
Stockholders’ equity—paid-in Alternative
Terminology
capital in excess of par
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.
13-34 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
13-35 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
13-36 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.
13-37 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
13-38 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
13-39 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.
13-40 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.
13-41 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
13-42 LO 2

traded.
Mar. 15
Organization Expense 50,000
Common Stock (5,000 x $1) 5,000
Common Stock 45,000
13-43 LO 2

traded.
Mar. 28
Cash 45,000
Preferred Stock (1,500 x $10) 15,000
Preferred Stock 30,000
13-44 LO 2
LEARNING Explain how to account for treasury
3
OBJECTIVE stock.
Common
CommonStock
Stock
Account
Account Paid-in
Paid-inCapital
Capital
Paid-in
Paid-inCapital
Capital in
inExcess
ExcessofofPar
Par
Account
Account
Preferred
PreferredStock
Stock
Account
Account
Two Primary
Sources of Retained
RetainedEarnings
Earnings
Account
Account
Equity
Less:
Less:
Treasury
TreasuryStock
Stock
Account
Account
13-45 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.
13-46 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.
13-47 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
13-48 LO 3
Purchase of Treasury Stock Illustration 13-9
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.
13-49 LO 3
Disposal of Treasury Stock
Sale of Treasury Stock

 Above Cost
 Below Cost
Both increase total assets and stockholders’ equity.
Helpful
Helpful Hint
Hint
Treasury
Treasury stock
stock transactions
transactions are
are
classified
classified asas 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.
13-50 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.
13-51 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
13-52 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
13-53 LO 3
Accounting Across the Organization
Why Did Reebok Buy Its Own Stock?
In a bold (and some would say risky) move, Reebok at one time bought back
nearly a third of its shares. This repurchase of shares dramatically reduced
Reebok’s available cash. In fact, the company borrowed significant funds to
accomplish the repurchase. In a press release, management stated that it
was repurchasing the shares because it believed its stock was severely
underpriced. The repurchase of so many shares was meant to signal
management’s belief in good future earnings. Skeptics, however, suggested
that Reebok’s management was repurchasing shares to make it less likely
that another company would acquire Reebok (in which case Reebok’s top
managers would likely lose their jobs). By depleting its cash, Reebok became
a less attractive acquisition target. Acquiring companies like to purchase
companies with large cash balances so they can pay off debt used in the
acquisition.
13-54 LO 3
DO IT! 3 Treasury Stock
Santa Anita Inc. purchases 3,000 shares of its $50 par value
common stock for $180,000 cash on July 1. It will hold the shares in
the treasury until resold. On November 1, the corporation sells
1,000 shares of treasury stock for cash at $70 per share. Journalize
the treasury stock transactions.
Solution
July 1 Treasury Stock 180,000

Cash 180,000
Nov. 1 Cash 70,000
Paid-in Capital from Treasury Stock 10,000
13-55 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.
13-56 LO 4
Illustration 13-11
13-57 LO 4
Stockholders’ equity section
DO IT! 4 Stockholders’ Equity Section
Jennifer Corporation has issued 300,000 shares of $3 par value

common stock. It authorized 600,000 shares. The paid-in capital in
excess of par on the common stock is $380,000. The corporation
has reacquired 15,000 shares at a cost of $50,000 and is currently
holding those shares. Treasury stock was reissued in prior years for
$72,000 more than its cost.
The corporation also has 4,000 shares issued and outstanding of

8%, $100 par value preferred stock. It authorized 10,000 shares.
The paid-in capital in excess of par on the preferred stock is
$25,000. Retained earnings is $610,000.
Prepare the stockholders’ equity section of the balance sheet.
13-58 LO 4
13-59 LO 4
A Look at IFRS
LEARNING Compare the accounting for stockholders’

5
OBJECTIVE equity under GAAP and IFRS.
Key Points
Similarities
 Aside from the terminology used, the accounting transactions for the
issuance of shares and the purchase of treasury stock are similar.
 Like GAAP, IFRS does not allow a company to record gains or
losses on purchases of its own shares.
13-60 LO 5
A Look at IFRS
Key Points
Differences
 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.
13-61 LO 5
A Look at IFRS
Key Points
 There are often terminology differences for equity accounts. The
following summarizes some of the common differences in
terminology.
13-62 LO 5
A Look at IFRS
Key Points
 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.
 Equity is given various descriptions under IFRS, such as
shareholders’ equity, owners’ equity, capital and reserves, and share
holders’ funds.
13-63 LO 5
A Look at IFRS
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.
13-64 LO 5
A Look at IFRS
IFRS Self-Test Questions
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.
13-65 LO 5
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.
13-66 LO 5
A Look at IFRS
Which of the following does not represent a pair of GAAP/IFRS-

comparable terms?
a) Additional paid-in capital/Share premium.
b) Treasury stock/Repurchase reserve.
c) Common stock/Share capital.
d) Preferred stock/Preference shares.
13-67 LO 5
Copyright
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Reproduction or translation of this work beyond that permitted in
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13 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

► Salvation Army ► McDonald’s ► Cargill Inc.

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

Characteristics that distinguish corporations

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

Illustration 13-1 Stockholders

General Vice President Vice President

Companies generally incorporate in a state whose laws are

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

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

PAR AND NO-PAR VALUE STOCK

Indicate whether each of the following statements is true or false.

True 2. It is relatively easy for a corporation to obtain capital through

False 3. The separation of ownership and management is an advantage

Retained earnings is net income that a corporation retains for

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

Comparison of the owners’ equity (stockholders’ equity)

At the end of its first year of operation, Doral Corporation has

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:

Cost is either the fair market value of the consideration given

Illustration: Attorneys have helped Jordan Company incorporate.

Organizational Expense 5,000

Illustration: Athletic Research Inc. is an existing publicly held

Typically, preferred stockholders have a priority as to:

2. Assets in event of liquidation.

Generally do not have voting rights.

Accounting for preferred stock at issuance is similar to that for

Illustration: Stine Corporation issues 10,000 shares of $10

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

Cayman Corporation begins operations on March 1 by issuing 100,000

Cayman Corporation begins operations on March 1 by issuing 100,000

Cayman Corporation begins operations on March 1 by issuing 100,000

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