Accounting Principles
Thirteenth Edition
Weygandt ● Kimmel ● Kieso
Chapter 13
Corporations: Organization and Capital
Stock Transactions
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Chapter Outline
Learning Objectives
LO 1 Discuss and major characteristics of a corporation.
LO 2 Explain how to account for common, preferred, and
treasury stock.
LO 3 Prepare a stockholders’ equity section.
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Corporate Form of Organization
An entity separate and distinct from its owners.
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Characteristics of Corporation (1 of 4)
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Characteristics of Corporation (2 of 4)
Characteristics that distinguish corporations from proprietorships
and partnerships.
Advantages Disadvantages
• Separate Legal Existence • Corporate Management
• Limited Liability of • Government Regulations
Stockholders • Additional Taxes
• Transferable Ownership Rights
• Ability to Acquire Capital
• Continuous Life
• Corporate Management
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Characteristics of Corporation (3 of 4)
Characteristics that distinguish corporations from proprietorships
and partnerships.
• Separate Legal Existence → Corporation acts under its own name
rather than in the name of its stockholders.
• Limited Liability of Stockholders → Limited to their investment.
• Transferable Ownership → Stockholders may sell their stock.
• Ability to Acquire Capital → Corporation can obtain capital
through the issuance of stock.
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Characteristics of Corporation (4 of 4)
Characteristics that distinguish corporations from proprietorships
and partnerships.
• Continuous Life → Continuance as a going concern is not affected by the
withdrawal, death, or incapacity of a stockholder, employee, or officer.
• Corporate Management → Separation of ownership and management
often reduces an owner’s ability to actively manage the company.
• Government Regulations → A corporation is subject to numerous state
and federal regulations.
• Additional Taxes → Corporations pay income taxes as a separate legal
entity and in addition, stockholders pay taxes on cash dividends.
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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.
Corporations engaged in interstate commerce must
obtain a license from each state in which they do
business.
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Stockholder Rights
1. Vote in election of board of directors at annual meeting
and vote on actions that require stockholder approval.
2. Share the corporate earnings through receipt of dividends.
3. Keep the same percentage ownership when new shares of
stock are issued (preemptive right).
4. Share in assets upon liquidation in proportion to their
holdings. This is called a residual claim.
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Stock Issue Considerations (1 of 6)
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?
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Stock Issue Considerations (2 of 6)
Authorized Stock
• Charter indicates amount of stock that a corporation is
authorized to sell
• Number of authorized shares is often reported in
stockholders’ equity section
• No formal accounting entry
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Stock Issue Considerations (3 of 6)
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 economy
5. Current state of securities market
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Stock Issue Considerations (4 of 6)
Par and No-Par Value Stocks
• Years ago, par value determined legal capital per share that
a company must retain in business for 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
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Stock Issue Considerations (5 of 6)
Which of the following 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 per share applies to par value stock but
not to no-par value stock.
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Stock Issue Considerations (6 of 6)
Which of the following 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. Answer: Legal capital per share applies to par value
stock but not to no-par value stock.
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Do It! 1a: Corporate Organization (1 of 3)
Indicate whether each of the following statements is true or false. If false,
indicate how to correct the statement.
______ 1. Similar to partners in a partnership, stockholders of a
corporation have unlimited liability.
______ 2. It is relatively easy for a corporation to obtain capital through
the issuance of stock.
______ 3. The separation of ownership and management is an advantage
of the corporate form of business.
______ 4. The journal entry to record the authorization of capital stock
includes a credit to the appropriate capital stock account.
______ 5. All states require a par value per share for capital stock.
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Do It! 1a: Corporate Organization (2 of 3)
Indicate whether each of the following statements is true or false. If false,
indicate how to correct the statement.
1. Similar to partners in a partnership, stockholders of a corporation have
unlimited liability.
False. The liability of stockholders is normally limited to their
investment in the corporation.
2. It is relatively easy for a corporation to obtain capital through the
issuance of stock. True
3. The separation of ownership and management is an advantage of the
corporate form of business.
False. The separation of ownership and management is a disadvantage
of the corporate form of business.
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Do It! 1a: Corporate Organization (3 of 3)
Indicate whether each of the following statements is true or false. If false,
indicate how to correct the statement.
4. The journal entry to record the authorization of capital stock includes a
credit to the appropriate capital stock account.
False. The authorization of capital stock does not result in a formal
accounting entry.
5. All states require a par value per share for capital stock.
False. Many states do not require a par value.
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Corporate Capital (1 of 3)
Paid-in capital is the total amount of cash and other assets paid in
to the corporation by stockholders in exchange for capital stock.
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Corporate Capital (2 of 3)
Retained earnings is net income that a corporation retains for
future use.
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Retained Earnings
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.
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Corporate Capital (3 of 3)
Comparison of the owners’ equity (stockholders’ equity) accounts
reported on a balance sheet.
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Do It! 1b: Corporate Capital
Illustration: 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.
(a) Income Summary 122,000
Retained Earnings 122,000
(To close Income Summary and transfer
net income to Retained Earnings)
(b) Stockholders’ equity
Paid-in capital
Common stock $750,000
Retained earnings 122,000
Total stockholders’ equity $872,000
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Accounting for Stock Transactions (1 of 2)
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.
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Issuing Common Stock for Cash (1 of 4)
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
(To record issuance of 1,000 shares of
$1 par common stock at par)
(b) Cash 5,000
Common Stock (1,000 × $1) 1,000
Paid-in Capital in Excess of Par—Common
Stock 4,000
(To record issuance of 1,000 shares of
$1 par common stock)
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Accounting for Stock Transactions (2 of 4)
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Issuing No-Par Common Stock for Cash
(3 of 4)
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 (5,000 × $5) 25,000
Paid-in Capital in Excess of Stated 15,000
Value—Common Stock
(To record issue of 5,000 shares of
$5 stated value no-par stock)
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Issuing No-Par Common Stock for Cash
(4 of 4)
Illustration: Assume further that the no-part stock does not have a
stated value and the company issues 5,000 shares at $8 per share
for cash.
Cash 40,000
Common Stock 40,000
(To record issue of 5,000 shares of
no-par stock)
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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.
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Common Stock for Services (1 of 2)
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 × $1) 4,000
Paid-in Capital in Excess of Par Value 1,000
—Common Stock
(To record issuance of 4,000
shares of $1 par value stock to
attorneys)
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Common Stock for Services (2 of 2)
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
Paid-in Capital in Excess of Par Value 30,000
—Common Stock
(To record issuance of 10,000
shares of $5 par value stock for
land)
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Accounting for Preferred Stock (1 of 2)
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.
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Accounting for Preferred Stock (2 of 2)
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
Common Stock (10,000 × $10) 100,000
Paid-in Capital in Excess of Par 20,000
Value—Preferred Stock
(To record the issuance of
10,000 shares of $10 par
value preferred stock)
Preferred stock may have a par value or no-par value.
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Do It! 2a: Issuance of Stock (1 of 3)
Illustration: Cayman Corporation begins operations on March 1 by
issuing 100,000 shares of $1 par value common stock for cash at
$12 per share. Journalize the issuance of the common shares on
March 1 assuming the shares are not publicly traded.
Cash 1,200,000
Common Stock (100,000 × $1) 100,000
Paid-in Capital in Excess of Par Value 1,100,000
—Common Stock
(To record issuance of 100,000
shares at $12 per share)
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Do It! 2a: Issuance of Stock (2 of 3)
Illustration: On March 15, Cayman issues 5,000 shares of common
stock to attorneys in settlement of their bill of $50,000 for
organization costs. Journalize the issuance of these shares.
Organization Expense 50,000
Common Stock (5,000 × $1) 5,000
Paid-in Capital in Excess of Par 45,000
Value—Common Stock
(To record issuance of 5,000
shares for attorneys’ fees)
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Do It! 2a: Issuance of Stock (3 of 3)
Illustration: On March 28, Cayman issues 1,500 shares of $10 par
value preferred stock for cash at $30 per share. Journalize the
issuance of preferred shares.
Cash 45,000
Preferred Stock (1,500 × $10) 15,000
Paid-in Capital in Excess of Par 30,000
Value—Preferred Stock
(To record issuance of 1,500
shares at $30 per share)
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Accounting for Treasury Stock (1 of 5)
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Accounting for Treasury Stock (2 of 5)
Treasury stock is a corporation’s own stock that it has
issued and subsequently 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.
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Accounting for Treasury Stock (3 of 5)
• Companies generally use cost method
• Debit Treasury Stock for price paid to reacquire shares
• Treasury stock is a contra stockholders’ equity account
• Reduces stockholders’ equity
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Accounting for Treasury Stock (4 of 5)
Illustration: On February 1, 2020, Mead acquires 4,000 shares of its stock
at $8 per share. The entry is as follows.
Feb. 1 Treasury Stock (4,000 × $8) 32,000
Cash 32,000
(To record purchase of 4,000 shares
of treasury stock at $8 per share)
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Accounting for Treasury Stock (5 of 5)
Both the number of shares issued (100,000) and the number of
shares held as treasury (4,000) are disclosed.
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Sale of Treasury Stock Above Cost
Illustration: On July 1, Mead, Inc. sells for $10 per share 1,000 of
the 4,000 shares of its treasury stock previously acquired at $8 per
share. The entry is as follows.
Jul. 1 Cash 10,000
Treasury Stock (1,000 × $8) 8,000
Paid-in Capital from Treasury Stock 2,000
(To record sale of 1,000 shares of
treasury stock above cost)
A corporation does not realize a gain or suffer a loss from stock
transactions with its own stockholders.
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Sale of Treasury Stock Below Cost (1 of 2)
If Mead, Inc. sells an additional 800 shares of treasury stock on
October 1 at $7 per share, it makes the following entry.
Cash (800 × $7) 5,600
Paid-in Capital from Treasury Stock 800
Treasury Stock (800 × $8) 6,400
(To record sale of 800 shares of
treasury stock below cost)
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Sale of Treasury Stock Below Cost (2 of 2)
On December 1, assume that Mead, Inc. sells its remaining 2,200
shares at $7 per share and makes the following entry.
Cash (2,200 × $7) 15,400 Limited to
Paid-in Capital from Treasury Stock 1,200 balance on
hand
Retained Earnings 1,000
Treasury Stock (2,200 × $8) 17,600
(To record sale of 2,200
shares of treasury stock
at $7 per share)
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Do It! 2b: 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.
July 1 Treasury Stock 180,000
Cash 180,000
(To record the purchase of
3,000 shares at $60 per share)
Nov. 1 Cash 70,000
Treasury Stock 60,000
Paid-in Capital from Treasury Stock 10,000
(To record the sale of 1,000
shares at $70 per share)
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Statement Presentation of Stockholders’ Equity
(1 of 2)
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.
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Statement Presentation of Stockholders’ Equity
(2 of 2)
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Do It! 3: Stockholders’ Equity (1 of 2)
Jennifer Corporation has issued 300,000 shares of $3 par value
common stock. It is authorized to issue 600,000 shares. The paid-in
capital in excess of par value 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. It also had a cumulative other
comprehensive loss of $82,000. The corporation also has 4,000
shares issued and outstanding of 8%, $100 par value preferred
stock. It is authorized to issue 10,000 shares. The paid-in capital in
excess of par value on the preferred stock is $97,000. Retained
earnings is $610,000.
Prepare the stockholders’ equity section of the balance sheet.
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Do It! 3: Stockholders’ Equity (2 of 2)
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A Look at IFRS (1 of 5)
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.
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A Look at IFRS (2 of 5)
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.
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A Look at IFRS (3 of 5)
Key Points
Differences
• There are often terminology differences for equity accounts.
G AA P IFRS
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
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A Look at IFRS (4 of 5)
Key Points
Differences
• 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.
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A Look at IFRS (5 of 5)
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.
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Copyright
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