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Chapter 13-1. Chapter 13-2 Chapter 13 Accounting Principles, Ninth Edition Corporations: Organization and Capital Stock Transactions.

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Presentation on theme: "Chapter 13-1. Chapter 13-2 Chapter 13 Accounting Principles, Ninth Edition Corporations: Organization and Capital Stock Transactions."— Presentation transcript:

1 Chapter 13-1

2 Chapter 13-2 Chapter 13 Accounting Principles, Ninth Edition Corporations: Organization and Capital Stock Transactions

3 Chapter 13-3 1. 1.Identify the major characteristics of a corporation. 2. 2.Differentiate between paid-in capital and retained earnings. 3. 3.Record the issuance of common stock. 4. 4.Explain the accounting for treasury stock. 5. 5.Differentiate preferred stock from common stock. 6. 6.Prepare a stockholders’ equity section. Study Objectives

4 Chapter 13-4 Issuing par value stock Issuing no- par stock Issuing stock for services or noncash assets The Corporate Form of Organization Characteristic s Formation Stockholder rights Stock issue considerations Corporate capital Purchase of treasury stock Disposal of treasury stock Dividend preferences Liquidation preference Accounting for Common Stock Issues Accounting for Treasury Stock Preferred Stock Statement Presentation Corporations: Organization and Capital Stock Transactions Capital stock Additional paid-in capital Retained earnings

5 Chapter 13-5 An entity separate and distinct from its owners. The Corporate Form of Organization Classified by Purpose Not-for-Profit For Profit Classified by Ownership Publicly held Privately held  McDonald’s  Ford Motor Company  PepsiCo  Google  Salvation Army  American Cancer Society  Gates Foundation  Cargill Inc.

6 Chapter 13-6 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of a Corporation SO 1 Identify the major characteristics of a corporation. Advantages Disadvantages

7 Chapter 13-7 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of a Corporation SO 1 Identify the major characteristics of a corporation. Corporation acts under its own name rather than in the name of its stockholders.

8 Chapter 13-8 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of a Corporation SO 1 Identify the major characteristics of a corporation. Limited to their investment.

9 Chapter 13-9 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of a Corporation SO 1 Identify the major characteristics of a corporation. Shareholders may sell their stock.

10 Chapter 13-10 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of a Corporation SO 1 Identify the major characteristics of a corporation. Corporation can obtain capital through the issuance of stock.

11 Chapter 13-11 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of a Corporation SO 1 Identify the major characteristics of a corporation. Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer.

12 Chapter 13-12 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of a Corporation SO 1 Identify the major characteristics of a corporation.

13 Chapter 13-13 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of a Corporation SO 1 Identify the major characteristics of a corporation. Corporations pay income taxes as a separate legal entity and in addition, stockholders pay taxes on cash dividends.

14 Chapter 13-14 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of a Corporation SO 1 Identify the major characteristics of a corporation. Separation of ownership and management prevents owners from having an active role in managing the company.

15 Chapter 13-15 Characteristics of a Corporation SO 1 Identify the major characteristics of a corporation. Stockholders Chairman and Board of Directors President and Chief Executive Officer General Counsel and Secretary Vice President Marketing Vice President Finance/Chief Financial Officer Vice President Operations Vice President Human Resources TreasurerController Illustration 13-1 Corporation organization chart

16 Chapter 13-16 File application with the Secretary of State. State grants charter. Corporation develops by-laws. Initial Steps: Forming a Corporation SO 1 Identify the major characteristics of a corporation. Companies generally incorporate in a state whose laws are favorable to the corporate form of business (Delaware, New Jersey). Corporations expense organization costs as incurred.

17 Chapter 13-17 1.Vote in election of board of directors and on actions that require stockholder approval. Stockholders have the right to: Ownership Rights of Stockholders SO 1 Identify the major characteristics of a corporation. 2.Share the corporate earnings through receipt of dividends. Illustration 13-3

18 Chapter 13-18 3.Keep the same percentage ownership when new shares of stock are issued (preemptive right * ). Stockholders have the right to: Ownership Rights of Stockholders SO 1 Identify the major characteristics of a corporation. * A number of companies have eliminated the preemptive right. Illustration 13-3

19 Chapter 13-19 4.Share in assets upon liquidation in proportion to their holdings. This is called a residual claim. Stockholders have the right to: Ownership Rights of Stockholders SO 1 Identify the major characteristics of a corporation. Illustration 13-3

20 Chapter 13-20 Ownership Rights of Stockholders SO 1 Identify the major characteristics of a corporation. Class A COMMON STOCK PAR VALUE $1 PER SHARE Stock Certificate Name of corporation Stockholder’s name Class Shares Signature of corporate official Prenumbered Illustration 13-4

21 Chapter 13-21 Stock Issue Considerations SO 1 Identify the major characteristics of a corporation. 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. Authorized Stock

22 Chapter 13-22 Stock Issue Considerations SO 1 Identify the major characteristics of a corporation. Corporation can issue common stock directly to investors or indirectly through an investment banking firm. Factors in setting price for a new issue of stock: 1.the company’s anticipated future earnings 2.its expected dividend rate per share 3.its current financial position 4.the current state of the economy 5.the current state of the securities market Issuance of Stock

23 Chapter 13-23 Stock Issue Considerations SO 1 Identify the major characteristics of a corporation. Stock of publicly held companies is traded on organized exchanges. Interaction between buyers and sellers determines the prices per share. Prices set by the marketplace 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. Market Value of Stock

24 Chapter 13-24

25 Chapter 13-25 Stock Issue Considerations SO 1 Identify the major characteristics of a corporation. 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 quite common today. In many states the board of directors assigns a stated value to no-par shares. Par and No-Par Value Stock

26 Chapter 13-26 Paid-in Capital Retained Earnings Account Account Paid-in Capital in Excess of Par Account Account Two Primary Sources of Equity Common Stock Account Account Preferred Stock Account Account Corporate Capital SO 2 Differentiate between paid-in capital and retained earnings. Paid-in capital is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock.

27 Chapter 13-27 Paid-in Capital Retained Earnings Account Account Additional Paid- in Capital Account Account Two Primary Sources of Equity Common Stock Account Account Preferred Stock Account Account Corporate Capital SO 2 Differentiate between paid-in capital and retained earnings. Retained earnings is net income that a corporation retains for future use.

28 Chapter 13-28 Corporate Capital SO 2 Differentiate between paid-in capital and retained earnings. Comparison of the owners’ equity (stockholders’ equity) accounts reported on a balance sheet for a proprietorship, a partnership, and a corporation. Illustration 13-6

29 Chapter 13-29 Primary objectives: 1)Identify the specific sources of paid-in capital. 2)Maintain the distinction between paid-in capital and retained earnings. Accounting for Common Stock Issues SO 3 Record the issuance of common stock. Other than consideration received, the issuance of common stock affects only paid-in capital accounts.

30 Chapter 13-30 Illustration: Illustration: Assume that Hydro-Slide, Inc. issues 1,000 shares of $1 par value common stock at par for. Prepare the journal entry. Cash1,000 Common stock (1,000 x $1) 1,000 SO 3 Record the issuance of common stock. Accounting for Common Stock Issues Issuing Par Value Common Stock for Cash

31 Chapter 13-31 Illustration: Illustration: Assume that Hydro-Slide, Inc. issues 2,000 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. Cash1,000 Common stock (1,000 x $1) 1,000 Cash5,000 Common stock (1,000 x $1) 1,000 Paid-in capital in excess of par value 4,000 a. b. Accounting for Common Stock Issues SO 3 Record the issuance of common stock. Issuing Par Value Common Stock for Cash

32 Chapter 13-32 Accounting for Common Stock Issues SO 3 Record the issuance of common stock. Illustration 13-7

33 Chapter 13-33 Issuing Common Stock for Services or Noncash Assets Corporations also may issue stock for: Services (attorneys or consultants). Noncash assets (land, buildings, and equipment). Accounting for Common Stock Issues SO 3 Record the issuance of common stock. 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.

34 Chapter 13-34 Illustration: Assume that 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 expense5,000 Common stock (4,000 x $1) 4,000 Paid-in capital in excess of par1,000 SO 3 Record the issuance of common stock. Accounting for Common Stock Issues

35 Chapter 13-35 Illustration: Assume that 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 (10,000 x $8) 80,000 Common stock (10,000 x $5) 50,000 Paid-in capital in excess of par30,000 SO 3 Record the issuance of common stock. Accounting for Common Stock Issues

36 Chapter 13-36 Paid-in Capital Retained Earnings Account Account Paid-in Capital in Excess of Par Account Account Less: Treasury Stock AccountLess: Treasury Stock Account Two Primary Sources of Equity Common Stock Account Account Preferred Stock Account Account Accounting for Treasury Stock SO 4 Explain the accounting for treasury stock.

37 Chapter 13-37 Treasury stock - corporation’s own stock that it has reacquired from shareholders, but not retired. Corporations purchase their outstanding stock: 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. 5.To rid the company of disgruntled investors, perhaps to avoid a takeover. Accounting for Treasury Stock SO 4 Explain the accounting for treasury stock.

38 Chapter 13-38 Purchase of Treasury Stock Debit Treasury Stock for the price paid to reacquire the shares. Treasury stock is a contra stockholders’ equity account, not an asset. Purchase of treasury stock reduces stockholders’ equity. Accounting for Treasury Stock SO 4 Explain the accounting for treasury stock.

39 Chapter 13-39 Treasury stock (4,000 x $8) 32,000 Cash 32,000 Illustration: On February 1, 2008, Mead acquires 4,000 shares of its stock at $8 per share. Accounting for Treasury Stock SO 4 Explain the accounting for treasury stock. Illustration 13-8

40 Chapter 13-40 Accounting for Treasury Stock SO 4 Explain the accounting for treasury stock. Stockholders’ Equity with Treasury stock Both the number of shares issued (100,000), outstanding (96,000), and the number of shares held as treasury (4,000) are disclosed. Illustration 13-9

41 Chapter 13-41 Sale of Treasury Stock Above Cost Below Cost Both increase total assets and stockholders’ equity. Accounting for Treasury Stock SO 4 Explain the accounting for treasury stock.

42 Chapter 13-42 Treasury stock 8,000 Illustration: On February 1, 2008, Mead acquires 4,000 shares of its stock at $8 per share. Record the journal entry for the following transaction: On July 1, Mead sells for $10 per share 1,000 shares of its treasury stock, previously acquired at $8 per share. Accounting for Treasury Stock SO 4 Explain the accounting for treasury stock. Above Cost July 1 Paid-in capital treasury stock 2,000 Cash 10,000 A corporation does not realize a gain or suffer a loss from stock transactions with its own stockholders.

43 Chapter 13-43 Paid-in capital treasury stock 800 Illustration: On February 1, 2008, Mead acquires 4,000 shares of its stock at $8 per share. Record the journal entry for the following transaction: On Oct. 1, Mead sells an additional 800 shares of treasury stock at $7 per share. Accounting for Treasury Stock SO 4 Explain the accounting for treasury stock. Oct. 1 Treasury stock 6,400 Cash 5,600 Mead uses Paid-in Capital from Treasury Stock, if available, for the difference between cost and resale price of the shares. Below Cost

44 Chapter 13-44 Paid-in capital treasury stock 1,200 Illustration: On February 1, 2008, Mead acquires 4,000 shares of its stock at $8 per share. Record the journal entry for the following transaction: On Dec. 1, assume that Mead, Inc. sells its remaining 2,200 shares at $7 per share. Accounting for Treasury Stock SO 4 Explain the accounting for treasury stock. Dec. 1 Retained earnings 1,000 Cash 15,400 Treasury stock 17,600 Below Cost Limited to balance on hand

45 Chapter 13-45

46 Chapter 13-46 Features often associated with preferred stock. 1. Preference as to dividends. 2. Preference as to assets in liquidation. 3. Nonvoting. SO 5 Differentiate preferred stock from common stock. Preferred Stock Accounting for preferred stock at issuance is similar to that for common stock.

47 Chapter 13-47 Illustration: Stine Corporation issues 10,000 shares of $10 par value preferred stock for $12 cash per share. Journalize the issuance of the preferred stock. SO 5 Differentiate preferred stock from common stock. Preferred Stock Cash120,000 Preferred stock (10,000 x $10) 100,000 Paid-in capital in excess of par – Preferred stock20,000 Preferred stock may have a par value or no-par value.

48 Chapter 13-48 Dividend Preferences 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. Cumulative dividend – holders of preferred stock must be paid their annual dividend plus any dividends in arrears before common stockholders receive dividends. SO 5 Differentiate preferred stock from common stock. Preferred Stock

49 Chapter 13-49 SO 6 Prepare a stockholders’ equity section. Statement Presentation Illustration 13-12

50 Chapter 13-50 “Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” CopyrightCopyright


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