Accounting For Corporation: Learning Objectives

6 Accounting for Corporation
Learning Objectives
1. Discuss the major characteristics of a corporation.
2. Explain how to account for the issuance of common,
preferred, and treasury stock.
3. Explain how to account for cash dividends, stock
dividends, and stock splits.
Copyright ©2017 John Wiley & Sons, Inc. 1

Discuss the Major Characteristics of a
Corporation
An entity separate and distinct from its owners.
Alternative Terminology
Privately held corporations
are also referred to as closely
held corporations.

LO 1
Characteristics of a Corporation
Advantages and Disadvantages
Characteristics that distinguish corporations from proprietorships
and partnerships.

LO 1
Separate Legal Existence
and partnerships.
• Separate Legal Existence Corporation acts under its
own name rather than in the
• Limited Liability of Stockholders name of its stockholders.
• Transferable Ownership Rights
• Ability to Acquire Capital
• Continuous Life
• Corporate Management
• Government Regulations
• Additional Taxes

LO 1
Limited Liability of Stockholders
and partnerships.
• Separate Legal Existence
• Limited Liability of Stockholders Limited to their investment.
• Continuous Life

LO 1
Transferable Ownership Rights
Characteristics that distinguish corporations from proprietorships and
partnerships.
• Limited Liability of Stockholders
• Transferable Ownership Rights Shareholders may sell
their stock.
• Continuous Life

LO 1
Ability to Acquire Capital
partnerships.
• Ability to Acquire Capital Corporation can obtain
capital through the
• Continuous Life issuance of stock.

LO 1
Continuous Life
partnerships.
• Continuous Life Continuance as a going
concern is not affected
• Corporate Management by the withdrawal,
• Government Regulations death, or incapacity of a
stockholder, employee,
• Additional Taxes or officer.

LO 1
Corporate Management
partnerships.
Ethics Note
• Separate Legal Existence Managers who are not owners
• Limited Liability of Stockholders are often compensated based
on the performance of the firm.
• Transferable Ownership Rights They thus may be tempted to
exaggerate firm performance by
• Ability to Acquire Capital inflating income figures.
• Continuous Life
Separation of ownership and
• Corporate Management management often reduces
• Government Regulations an owner’s ability to actively
manage the company.

LO 1
Government Regulations
partnerships.
• Continuous Life

LO 1
Additional Taxes
partnerships.
• Continuous Life
Corporations pay income taxes as a
• Government Regulations separate legal entity and in
• Additional Taxes addition, stockholders pay taxes on
cash dividends.
LO 1
Organizational Chart

LO 1
Forming a Corporation
• Initial Steps:
• File application with the Secretary 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.
• Alternative Terminology
• The charter is often referred to as the articles of incorporation.
LO 1
Stockholder Rights
Vote and Share in Earnings
1. Vote in election of board of

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

through receipt of dividends.

LO 1
Stockholder Rights
Preemptive Right
3. Keep the same percentage ownership when new shares of
stock are issued (preemptive right).
* A number of companies have eliminated the preemptive right.

LO 1
Stockholder Rights
Residual Claim on Assets
4. Share in assets upon liquidation in proportion to their holdings.
This is called a residual claim.

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?

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.

LO 1
Share of Stock

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.

LO 1
Market Price of Stock
• Stock of publicly held companies is traded on organized

exchanges.
• Interaction between buyers and sellers determines the
price 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.

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.

LO 1
Corporate Capital
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.

LO 1
Corporate Capital
Retained Earnings
Retained earnings is net income that a corporation retains for future use.

LO 1
Corporate Capital
Example
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.

LO 1
Corporate Capital
Proprietorship Versus Corporation
Comparison of the owners’ equity (stockholders’ equity)
accounts reported on a balance sheet for a proprietorship
and a corporation.

LO 1
Explain How to Account for the Issuance of
Common, Preferred, and Treasury 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.

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 × $1) 1,000
b. Cash 5,000
Common Stock (1,000 × $1) 1,000
Paid-in Capital in Excess of Par Value 4,000
LO 2
Issuing Stated Value 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 15,000

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.

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.
Organization Expense 5,000
Common Stock (4,000 × $1) 4,000
Paid-in Capital in Excess of Par 1,000

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 × $5) 50,000

LO 2
Accounting for Stock Transactions
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.

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 × $10) 100,000

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

LO 2
Accounting for Treasury Stock
Contra Equity Account

LO 2
Reasons to Acquire 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.
LO 2
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.

LO 2
Purchase Of Treasury Stock
Journal Entry to Acquire Treasury Stock
Illustration: On February 1, 2019, Mead acquires 4,000 shares of

its stock at $8 per share.
Treasury Stock (4,000 × $8) 32,000
Cash 32,000

LO 2
Purchase Of Treasury Stock
Presentation on Balance Sheet
Both the number of shares issued (100,000) and the number of

shares held as treasury (4,000) are disclosed.

LO 2
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.

LO 2
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.

LO 2
Sale of Treasury Stock “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

LO 2
Sale of Treasury Stock “Below” Cost
May Need to Debit Retained Earnings
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

LO 2
Explain How to Account for Cash Dividends,
Stock Dividends, and Stock Splits
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.

LO 3
Cash Dividends
Three Items Needed
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.

LO 3
Cash Dividends
Three Important Dates

LO 3
Cash Dividends
Journal Entries
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.
begin underline Dec. 1 (Declaration Date) end underline
50,000
Cash Dividends
Dividends Payable 50,000
begin underline Dec. 22 (Date of Record) end underline
No entry
begin underline Jan. 20 (Payment Date) end underline

Cash 50,000

LO 3
Dividend Preferences
Cumulative Dividend on Preferred Stock
• Right to receive dividends before common stockholders.
• Per share dividend amount is stated as a percentage of the
preferred stock’s par value or as a specified amount.
Preferred stockholders must

be paid both current-year
dividends and any unpaid
prior-year dividends before
common stockholders
receive dividends.

LO 3
Calculation of Cumulative Preferred Dividends
Illustration: Scientific Leasing has 5,000 shares of 7%, $100 par value,
cumulative preferred stock outstanding. Each $100 share pays a $7
dividend (.07 × $100). The annual dividend is $35,000 (5,000 × $7 per
share). If dividends are two years in arrears, preferred stockholders are
entitled to receive the following dividends in the current year.

LO 3
Allocating Cash Dividends Between Preferred and Common Stock
Holders of cumulative preferred stock must be paid any unpaid

prior-year dividends and their current year’s dividend before
common stockholders receive dividends.

LO 3
Allocating Cash Dividends
Declaration of $6,000 Dividend on Dec. 31, 2019
Illustration: On December 31, 2019, 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, 2019, the
directors declare a $6,000 cash dividend. Prepare the entry to record
the declaration of the dividend.
Cash Dividends 6,000

6,000
Dividends Payable
Preferred Dividends: 1,000 shares × $100 par × 8% = $8,000

LO 3
Declaration of $50,000 Dividend on Dec. 31, 2020
Illustration: On December 31, 2020, IBR declares a $50,000 cash dividend.
Show the allocation of dividends to each class of stock.
* 1,000 shares × $100 par × 8% = $8,000

** 2019 Pfd. dividends $8,000 – declared $6,000 = $2,000
LO 3
Journal Entry to Record Declaration of Dividends
Illustration: At December 31, 2020, IBR declares a $50,000 cash
dividend. Prepare the entry to record the declaration of the dividend.
Cash Dividends 50,000


LO 3
Stock Dividends
Reasons to Issue Stock Dividends
A pro rata (proportional to ownership) distribution of the
corporation’s own stock to stockholders.
Reasons why corporations issue stock dividends:
1. Satisfy stockholders’ dividend expectations without spending cash.
2. Increase marketability of the corporation’s stock.
3. Emphasize a portion of stockholders’ equity has been permanently
reinvested in the business.

LO 3
Stock Dividends
Small Stock Dividends and Large Stock Dividends
• Small stock dividend (less than 20–25% of the corporation’s issued
stock, recorded at fair market value)
• Large stock dividend (greater than 20–25% of issued stock, recorded at
par value)
* Accounting based on the assumption that a small stock dividend will

have little effect on the market price of the outstanding shares.

LO 3
Entry to Declare a Stock Dividend
Illustration: Medland Corporation declares a 10% stock dividend on its 50,000
shares of $10 par value common stock. The current fair market value of its
stock is $15 per share. Record the entry on the declaration date:
Stock Dividends (50,000 x 10% x $15) 75,000
Common Stock Dividends Distributable 50,000
Paid-in Capital in Excess of Par—Common 25,000

LO 3
Stock Splits
• Issuance of additional shares to stockholders according
to their percentage ownership.
• Reduction in the par or stated value per share.
• Increase in number of shares outstanding.
• Reduces the market value of shares.
• No journal entry recorded.
Helpful Hint
A stock split changes the par value per share but does not affect
any balances in stockholders’ equity.
LO 3
Stock Splits
Effect of 4-for-1 Stock Split for Stockholders

LO 3
Stock Splits
Stockholders’ Equity Before and After Stock Split
Effects for Medland Corporation, assuming that it splits its 50,000
shares of common stock on a 2-for-1 basis.

LO 3
Compute Book Value per Share
Book Value per Share
The equity a common stockholder has in the net assets of the

corporation.
Total Stockholders’ Equity ÷ Number of Common Shares

Outstanding = Book Value per Share

LO 6
Steps Involved
The computation of book value per share involves the following
steps.
1. Compute the preferred stock equity. This equity is equal to
the sum of the call price of preferred stock plus any
cumulative dividends in arrears. If the preferred stock does
not have a call price, the par value of the stock is used.
2. Determine the common stock equity. Subtract the preferred
stock equity from total stockholders’ equity.
3. Determine book value per share. Divide common stock equity
by shares of common stock outstanding.

LO 6
Compute Preferred Stock Equity
Illustration: Using the stockholders’ equity section of Graber Inc.
shown in Illustration 11-22. Graber’s preferred stock is callable at
$120 per share and is cumulative. Assume that dividends on
Graber’s preferred stock were in arrears for one year, $54,000
(6,000 × $9). The computation of preferred stock equity is:

LO 6
Compute Common Stock Equity and Book Value per Share
Computation of book value:

LO 6
Book Value versus Market Value
The correlation between book value and the annual range
of a company’s market value per share is often remote.

LO 6
A Look at IFRS
Similarities
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.
• The accounting related to prior period adjustment is
essentially the same under IFRS and GAAP.

LO 6
A Look at IFRS
Income Statement
Key Points
• The income statement using IFRS is called the statement of
comprehensive income. A statement of comprehensive income is
presented in a one- or two-statement format. The single-statement
approach includes all items of income and expense, as well as each
component of other comprehensive income or loss by its individual
characteristic. In the two-statement approach, a traditional income
statement is prepared. It is then followed by a statement of
comprehensive income, which starts with net income or loss and then
adds other comprehensive income or loss items. Regardless of which
approach is reported, income tax expense is required to be reported.
• The computations related to earnings per share are essentially the
same under IFRS and GAAP.

LO 6
A Look at IFRS
Differences
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.

LO 6
A Look at IFRS
Terminology Differences
Key Points
• There are often terminology differences for equity accounts. The
following summarizes some of the common differences in terminology.
GA AP I F RS
Common stock Share capital—ordinary
Stockholders Shareholders
Par value Nominal or face value
Authorized stock Authorized share capital
Preferred stock Share capital—preference
Paid-in capital Issued/allocated share capital
Paid-in capital in excess of par—common stock Share premium—ordinary
Paid-in capital in excess of par—preferred stock Share premium—preference
Retained earnings Retained earnings or Retained profits
Retained earnings deficit Accumulated losses
Accumulated other comprehensive income General reserve and other reserve accounts

LO 6
A Look at IFRS
Key Points
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 shareholders’ funds.

LO 6
A Look at IFRS
Looking to the Future
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. For example, it is likely that the statement of stockholders’
equity and its presentation will be examined closely.
• Both the IASB and FASB are working toward convergence of any
remaining differences related to earnings per share computations.

LO 6

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6 Accounting for Corporation

Copyright ©2017 John Wiley & Sons, Inc. 1

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1. Vote in election of board of

2. Share the corporate earnings

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* A number of companies have eliminated the preemptive right.

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• Charter indicates the amount of stock that a

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1. Company’s anticipated future earnings.

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• Stock of publicly held companies is traded on organized

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• Years ago, par value determined the legal capital per

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Accounting for Common Stock

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

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

Common Stock 25,000

Copyright ©2017 John Wiley & Sons, Inc. 29

Corporations also may issue stock for:

Cost is either the fair market value of the consideration

Copyright ©2017 John Wiley & Sons, Inc. 30

Organization Expense 5,000

Common Stock (4,000 × $1) 4,000

Paid-in Capital in Excess of Par 1,000

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Common Stock (10,000 × $5) 50,000

Paid-in Capital in Excess of Par 30,000

Copyright ©2017 John Wiley & Sons, Inc. 32

Generally do not have voting rights.

Accounting for preferred stock at issuance is similar to

Copyright ©2017 John Wiley & Sons, Inc. 33

Preferred Stock (10,000 × $10) 100,000

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

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• Companies generally use the cost method.

Copyright ©2017 John Wiley & Sons, Inc. 37

Illustration: On February 1, 2019, Mead acquires 4,000 shares of

Treasury Stock (4,000 × $8) 32,000

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Both the number of shares issued (100,000) and the number of

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Both increase total assets and stockholders’ equity.