4. The Corporate Form of 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 ► Nike
Society ► PepsiCo
► Google
13-4
5. Characteristics of a Organization
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
13-5 SO 1 Identify the major characteristics of a corporation.
6. Characteristics of a Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
Corporation acts
Separate Legal Existence under its own name
Limited Liability of Stockholders rather than in the
name of its
Transferable Ownership Rights stockholders.
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
13-6 SO 1 Identify the major characteristics of a corporation.
7. Characteristics of a Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited to their
Limited Liability of Stockholders
investment.
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
13-7 SO 1 Identify the major characteristics of a corporation.
8. Characteristics of a Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Stockholders
Shareholders may
Transferable Ownership Rights sell their stock.
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
13-8 SO 1 Identify the major characteristics of a corporation.
9. Characteristics of a Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights Corporation can
Ability to Acquire Capital obtain capital
through the issuance
Continuous Life of stock.
Government Regulations
Additional Taxes
Corporate Management
13-9 SO 1 Identify the major characteristics of a corporation.
10. Characteristics of a Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights Continuance as a
Ability to Acquire Capital going concern is not
affected by the
Continuous Life withdrawal, death, or
Government Regulations incapacity of a
stockholder,
Additional Taxes employee, or officer.
Corporate Management
13-10 SO 1 Identify the major characteristics of a corporation.
11. Characteristics of a Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
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13-11 SO 1 Identify the major characteristics of a corporation.
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12. Characteristics of a Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital Corporations pay
income taxes as a
Continuous Life separate legal entity
Government Regulations and in addition,
stockholders pay
Additional Taxes taxes on cash
Corporate Management dividends.
13-12 SO 1 Identify the major characteristics of a corporation.
13. Characteristics of a Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights Separation of
Ability to Acquire Capital ownership and
management
Continuous Life prevents owners
Government Regulations from having an
active role in
Additional Taxes managing the
Corporate Management company.
13-13 SO 1 Identify the major characteristics of a corporation.
14. Characteristics of a Organization
Stockholders
Illustration 13-1
Corporation
organization chart Chairman and
Board of
Directors
President and
Chief Executive
Officer
General Vice President Vice President
Vice President Vice President
Counsel and Finance/Chief Human
Marketing Operations
Secretary Financial Officer Resources
Treasurer Controller
13-14 SO 1 Identify the major characteristics of a corporation.
15. Forming a Corporation
Initial Steps:
Formed by grant of a state 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 expense organization costs as incurred.
13-15 SO 1 Identify the major characteristics of a corporation.
16. Ownership Rights of 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.
13-16 SO 1 Identify the major characteristics of a corporation.
17. Ownership Rights of 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.
13-17 SO 1 Identify the major characteristics of a corporation.
18. Ownership Rights of 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.
13-18 SO 1 Identify the major characteristics of a corporation.
19. Ownership Rights of Stockholders
Illustration 13-4 Prenumbered
Class A Class A
Class COMMON STOCK COMMON STOCK
PAR VALUE PAR VALUE
$1 PER SHARE $1 PER SHARE
Name of corporation
Stockholder’s name
Shares
Stock Certificate
Signature of corporate
official
13-19 SO 1
20. Stock Issue 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.
13-20 SO 1 Identify the major characteristics of a corporation.
21. Stock Issue 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. 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 SO 1 Identify the major characteristics of a corporation.
22. Stock Issue 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 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 SO 1 Identify the major characteristics of a corporation.
24. Stock Issue 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.
13-24 SO 1 Identify the major characteristics of a corporation.
25. Corporate Capital
Common Stock
Common Stock
Account
Account Paid-in Capital in
Paid-in Capital in
Paid-in Capital
Paid-in Capital Excess of Par
Excess of Par
Account
Account
Preferred Stock
Preferred Stock
Account
Account
Two Primary
Sources of Retained Earnings
Retained 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.
13-25 SO 2 Differentiate between paid-in capital and retained earnings.
26. Corporate Capital
Common Stock
Common Stock
Account
Account Additional Paid-in
Additional Paid-in
Paid-in Capital
Paid-in Capital Capital
Capital
Account
Account
Preferred Stock
Preferred Stock
Account
Account
Two Primary
Sources of Retained Earnings
Retained Earnings
Account
Account
Equity
Retained earnings is net income that a corporation retains for
future use.
13-26 SO 2 Differentiate between paid-in capital and retained earnings.
27. 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
13-27 SO 2 Differentiate between paid-in capital and retained earnings.
28. Accounting for Common Stock 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.
13-28 SO 3 Record the issuance of common stock.
29. Accounting for Common Stock 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
13-29 SO 3 Record the issuance of common stock.
30. Accounting for Common Stock 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
13-30 SO 3 Record the issuance of common stock.
31. Accounting for Common Stock Issues
Illustration 13-7
13-31 SO 3 Record the issuance of common stock.
32. Accounting for Common Stock Issues
Issuing Common Stock for Services or
Noncash Assets
C
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 SO 3 Record the issuance of common stock.
33. Accounting for Common Stock Issues
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 1,000
13-33 SO 3 Record the issuance of common stock.
34. Accounting for Common Stock Issues
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 (10,000 x $8) 80,000
Common stock (10,000 x $5) 50,000
Paid-in capital in excess of par 30,000
13-34 SO 3 Record the issuance of common stock.
35. Accounting for Treasury Stock
Common Stock
Common Stock
Account
Account Paid-in Capital in
Paid-in Capital in
Paid-in Capital
Paid-in Capital Excess of Par
Excess of Par
Account
Account
Preferred Stock
Preferred Stock
Account
Account
Two Primary
Sources of Retained Earnings
Retained Earnings
Account
Account
Equity
Less:
Less:
Treasury Stock
Treasury Stock
Account
Account
13-35 SO 4 Explain the accounting for treasury stock.
36. Accounting for Treasury 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.
13-36 SO 4 Explain the accounting for treasury stock.
37. Accounting for Treasury 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.
13-37 SO 4 Explain the accounting for treasury stock.
38. Accounting for Treasury Stock
Illustration 13-8
Illustration: On February 1, 2012, Mead acquires 4,000 shares
of its stock at $8 per share.
Treasury stock (4,000 x $8) 32,000
Cash 32,000
13-38 SO 4 Explain the accounting for treasury stock.
39. Accounting for Treasury 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.
13-39 SO 4 Explain the accounting for treasury stock.
41. Accounting for Treasury Stock
Disposal of Treasury Stock
Sale of Treasury Stock
Above Cost
Below Cost
Both increase total assets and stockholders’ equity.
13-41 SO 4 Explain the accounting for treasury stock.
42. Accounting for 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.
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.
13-42 SO 4 Explain the accounting for treasury stock.
43. Accounting for Treasury Stock Below
Cost
Illustration: 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
Illustration 13-10
13-43 SO 4 Explain the accounting for treasury stock.
44. Accounting for Treasury Stock Below
Cost
Illustration: 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
Retained earnings 1,000 hand
Treasury stock 17,600
13-44 SO 4 Explain the accounting for treasury stock.
45. Preferred 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.
13-45 SO 5 Differentiate preferred stock from common stock.
46. Preferred 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.
13-46 SO 5 Differentiate preferred stock from common stock.
47. Preferred 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.
13-47 SO 5 Differentiate preferred stock from common stock.
48. Preferred Stock
Cumulative Dividend
Illustration: Scientific Leasing has 5,000 shares of 7%, $100
par value, cumulative preferred stock outstanding. Each $100
share pays a $7 dividend (.07 x $100). The annual dividend is
$35,000 (5,000 x $7 per share). If dividends are two years in
arrears, preferred stockholders are entitled to receive the
following dividends in the current year.
13-48 SO 5 Differentiate preferred stock from common stock.
49. Preferred Stock
Liquidation Preferences
Most preferred stocks have a preference on corporate
assets if the corporation fails.
Provides security for the preferred stockholder.
Preference to assets may be for the par value of the
shares or for a specified liquidating value.
13-49 SO 5 Differentiate preferred stock from common stock.
50. Statement Presentation
Illustration 13-12
13-50 SO 6 Prepare a stockholders’ equity section.
51. Key Points
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.
13-51
52. Key Points
There are often terminology differences for equity accounts.
The following summarizes some of the common differences in
terminology.
13-52
53. Key Points
The accounting for treasury stock differs somewhat between
IFRS and GAAP. (However, many of the differences are beyond
the scope of this course.) Like GAAP, IFRS does not allow a
company to record gains or losses on purchases of its own
shares. One difference worth noting is that, when a company
purchases its own shares, IFRS treats it as a reduction of
stockholders’ equity, but it does not specify which particular
stockholders’ equity accounts are to be affected. Therefore, it
could be shown as an increase to a contra equity account
(Treasury Stock) or a decrease to retained earnings or share
capital. IFRS requires that the number of treasury shares held
be disclosed.
13-53
54. 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.
As indicated earlier, the term reserves is used in IFRS to
indicate all non-contributed (non–paid-in) capital. Reserves
include retained earnings and other comprehensive income
items, such as revaluation surplus and unrealized gains or
losses on available-for-sale securities.
13-54
55. Key Points
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.
The accounting related to prior period adjustments is
essentially the same under IFRS and GAAP. One area where
IFRS and GAAP differ in reporting relates to error corrections in
previously issued financial statements. While IFRS requires
restatement with some exceptions, GAAP does not permit any
exceptions.
Equity is given various descriptions under IFRS, such as
shareholders’ equity, owners’ equity, capital and reserves, and
shareholders’ funds.
13-55
56. Looking to the Future
As indicated in earlier discussions, 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. In addition, the
options of how to present other comprehensive income under
GAAP will change in any converged standard.
13-56
57. IFRS Self-Test Questions
Under IFRS, a purchase by a company of its own shares is
recorded by:
a) an increase in Treasury Stock.
b) a decrease in contributed capital.
c) a decrease in share capital.
d) All of these are acceptable treatments
13-57
58. 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.
13-58
59. IFRS Self-Test Questions
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.
13-59