Chapter 13

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

1. Identify the major characteristics of a corporation.

2. Differentiate between paid-in capital and retained
earnings.
3. Record the issuance of common stock.
4. Explain the accounting for treasury stock.
5. Differentiate preferred stock from common stock.
6. Prepare a stockholders’ equity section.

Chapter
13-2
 The
The Corporate
Corporate Form
Form of
of Organization
Organization

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  Ford Motor Company
Society  PepsiCo
 Gates Foundation  Google

Chapter
13-3
 Characteristics
Characteristics of
of aa Corporation
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
Government Regulations
Additional Taxes Disadvantages

Corporate Management
Chapter
13-4 SO 1 Identify the major characteristics of a corporation.
 Ownership
Ownership Rights
Rights of
of Stockholders
Stockholders

Stockholders have the right to: Illustration 13-3

1. Vote in election of board of

directors and on actions that
require stockholder approval.

2. Share the corporate earnings

through receipt of dividends.

Chapter
13-5 SO 1 Identify the major characteristics of a corporation.
 Ownership
Ownership Rights
Rights of
of Stockholders
Stockholders

Stockholders have the right to: Illustration 13-3

3. Keep the same percentage ownership when new

shares of stock are issued (preemptive right*).

* A number of companies have eliminated the preemptive right.

Chapter
13-6 SO 1 Identify the major characteristics of a corporation.
 Ownership
Ownership Rights
Rights of
of Stockholders
Stockholders

Stockholders have the right to: Illustration 13-3

4. Share in assets upon liquidation in proportion to

their holdings. This is called a residual claim.

Chapter
13-7 SO 1 Identify the major characteristics of a corporation.
 Stock
Stock Issue
Issue Considerations
Considerations

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.

Chapter
13-8 SO 1 Identify the major characteristics of a corporation.
 Stock
Stock Issue
Issue Considerations
Considerations

Issuance of Stock
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
Chapter
13-9 SO 1 Identify the major characteristics of a corporation.
 Stock
Stock Issue
Issue Considerations
Considerations

Market Value of Stock

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.

Chapter
13-10 SO 1 Identify the major characteristics of a corporation.
 Stock
Stock Issue
Issue Considerations
Considerations

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 quite common today.
In many states the board of directors assigns a
stated value to no-par shares.

Chapter
13-11 SO 1 Identify the major characteristics of a corporation.
 Corporate
Corporate Capital
Capital

Common
CommonStock
Stock
Account
Account Paid-in
Paid-inCapital
Capitalin
in
Paid-in
Paid-inCapital
Capital Excess
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.
Chapter
13-12 SO 2 Differentiate between paid-in capital and retained earnings.
 Corporate
Corporate Capital
Capital

Common
CommonStock
Stock
Account
Account Additional
AdditionalPaid-
Paid-
Paid-in
Paid-inCapital
Capital in
inCapital
Capital
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.

Chapter
13-13 SO 2 Differentiate between paid-in capital and retained earnings.
 Corporate
Corporate Capital
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

Chapter
13-14 SO 2 Differentiate between paid-in capital and retained earnings.
 Accounting
Accounting for
for Common
Common Stock
Stock Issues
Issues

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.

Chapter
13-15 SO 3 Record the issuance of common stock.
 Accounting
Accounting for
for Common
Common Stock
Stock Issues
Issues

Issuing Par Value Common Stock for Cash

Illustration: Assume that Hydro-Slide, Inc. issues 1,000
shares of $1 par value common stock at par for. Prepare the
journal entry.

Cash 1,000
Common stock (1,000 x $1) 1,000

Chapter
13-16 SO 3 Record the issuance of common stock.
 Accounting
Accounting for
for Common
Common Stock
Stock Issues
Issues
Issuing Par Value Common Stock for Cash
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.
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 value 4,000
Chapter
13-17 SO 3 Record the issuance of common stock.
 Accounting
Accounting for
for Common
Common Stock
Stock Issues
Issues
Illustration 13-7

Chapter
13-18 SO 3 Record the issuance of common stock.
 Accounting
Accounting for
for Common
Common Stock
Stock Issues
Issues

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.

Chapter
13-19 SO 3 Record the issuance of common stock.
 Accounting
Accounting for
for Common
Common Stock
Stock Issues
Issues

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 expense 5,000

Common stock (4,000 x $1) 4,000
Paid-in capital in excess of par 1,000

Chapter
13-20 SO 3 Record the issuance of common stock.
 Accounting
Accounting for
for Common
Common Stock
Stock Issues
Issues

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 par 30,000

Chapter
13-21 SO 3 Record the issuance of common stock.
 Accounting
Accounting for
for Treasury
Treasury Stock
Stock

Common
CommonStock
Stock
Account
Account Paid-in
Paid-inCapital
Capitalin
in
Paid-in
Paid-inCapital
Capital Excess
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

Chapter
13-22 SO 4 Explain the accounting for treasury stock.
 Accounting
Accounting for
for Treasury
Treasury Stock
Stock
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.
Chapter
13-23 SO 4 Explain the accounting for treasury stock.
 Accounting
Accounting for
for Treasury
Treasury Stock
Stock

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.

Chapter
13-24 SO 4 Explain the accounting for treasury stock.
 Accounting
Accounting for
for Treasury
Treasury Stock
Stock
Illustration 13-8

Illustration: On February 1, 2008, Mead acquires 4,000

shares of its stock at $8 per share.
Treasury stock (4,000 x $8) 32,000
Cash 32,000
Chapter
13-25 SO 4 Explain the accounting for treasury stock.
 Accounting
Accounting for
for Treasury
Treasury Stock
Stock

Stockholders’ Equity with Treasury stock

Illustration 13-9

Both the number of shares issued (100,000), outstanding (96,000),

and the number of shares held as treasury (4,000) are disclosed.
Chapter
13-26 SO 4 Explain the accounting for treasury stock.
 Accounting
Accounting for
for Treasury
Treasury Stock
Stock

Sale of Treasury Stock

Above Cost
Below Cost

Both increase total assets and stockholders’

equity.

Chapter
13-27 SO 4 Explain the accounting for treasury stock.
 Above
Accounting
Accounting for
for Treasury
Treasury Stock
Stock Cost

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.

July 1 Cash 10,000

Treasury stock 8,000
Paid-in capital treasury stock 2,000

A corporation does not realize a gain or suffer a loss from stock

transactions with its own stockholders.
Chapter
13-28 SO 4 Explain the accounting for treasury stock.
 Below
Accounting
Accounting for
for Treasury
Treasury Stock
Stock Cost

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.

Oct. 1 Cash 5,600

Paid-in capital treasury stock 800
Treasury stock 6,400

Mead uses Paid-in Capital from Treasury Stock, if available, for the
difference between cost and resale price of the shares.
Chapter
13-29 SO 4 Explain the accounting for treasury stock.
 Below
Accounting
Accounting for
for Treasury
Treasury Stock
Stock Cost

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.

Dec. 1 Cash 15,400 Limited

to
Paid-in capital treasury stock 1,200 balance
on hand
Retained earnings 1,000
Treasury stock 17,600

Chapter
13-30 SO 4 Explain the accounting for treasury stock.
 Preferred
Preferred Stock
Stock

Features often associated with preferred stock.

1. Preference as to dividends.
2. Preference as to assets in liquidation.
3. Nonvoting.

Accounting for preferred stock at issuance is similar to

that for common stock.

Chapter
13-31 SO 5 Differentiate preferred stock from common stock.
 Preferred
Preferred Stock
Stock

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.

Cash 120,000
Preferred stock (10,000 x $10) 100,000
Paid-in capital in excess of par –
Preferred stock 20,000

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

Chapter
13-32 SO 5 Differentiate preferred stock from common stock.
 Preferred
Preferred Stock
Stock

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.
Chapter
13-33 SO 5 Differentiate preferred stock from common stock.