CH 13

13
Corporations: Organization and

Capital Stock Transactions
Learning Objectives
13-1
Discuss the major characteristics of a corporation.
Explain how to account for the issuance of common

and preferred stock.
Explain how to account for treasury stock.
Prepare a stockholders equity section.
LEARNING
OBJECTIVE
Discuss the major characteristics of a

corporation.
An entity separate and distinct from its owners.

Classified by Purpose
Not-for-Profit
Publicly held
For Profit
Privately held
Salvation Army
American Cancer
Society
13-2
Classified by Ownership
McDonalds
Nike
PepsiCo
Google
Cargill Inc.
Alternative
Alternative Terminology
Terminology
Privately
Privately held
held corporations
corporations
are
are also
also referred
referred to
to as
as
closely
closely held
held corporations.
corporations.
LO 1
Characteristics of a Corporation
Characteristics that distinguish corporations from
proprietorships and partnerships.
13-3
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Advantages
Disadvantages
LO 1
Corporation acts
under its own name
rather than in the
name of its
stockholders.
13-4
Continuous Life
Additional Taxes
LO 1
13-5
Continuous Life
Additional Taxes
Limited to their
investment.
LO 1
13-6
Continuous Life
Additional Taxes
Shareholders may
sell their stock.
LO 1
13-7
Continuous Life
Additional Taxes
Corporation can
obtain capital
through the issuance
of stock.
LO 1
13-8
Continuous Life
Additional Taxes
Continuance as a
going concern is not
affected by the
withdrawal, death, or
incapacity of a
stockholder,
employee, or officer.
LO 1
Characteristics that distinguish corporations
from proprietorships and partnerships.
13-9
Continuous Life
Additional Taxes
Separation of
ownership and
management often
reduces an owners
ability to actively
manage the
company.
LO 1
13-10
Continuous Life
Additional Taxes
LO 1
13-11
Continuous Life
Additional Taxes
Corporations pay
income taxes as a
separate legal entity
and in addition,
stockholders pay
taxes on cash
dividends.
LO 1
Illustration 13-1
Corporation organization chart
Stockholders
Chairman and
Board of
Directors
President and
Chief Executive
Officer
General
Counsel/
Secretary
Vice President
Marketing
Treasurer
13-12
Vice President
Finance/Chief
Financial Officer
Vice President
Operations
Vice President
Human
Resources
Controller
LO 1
Forming a Corporation
Initial Steps:
File application with the Secretary

of State.
State grants charter.
Corporation develops by-laws.
Alternative
Terminology
The
The charter
charter is
is often
often
referred
referred to
to as
as the
the articles
articles
of
of incorporation.
incorporation.
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.
13-13
LO 1
Accounting Across the Organization

A Thousand Millionaires!
Traveling to space or embarking on an expedition to excavate lost Mayan ruins
are normally the stuff of adventure novels. But for employees of Facebook, these
and other lavish dreams moved closer to reality when the worlds No. 1 online
social network went public through an initial public offering (IPO) that may have
created at least a thousand millionaires. The IPO was the largest in Internet
history, valuing Facebook at over $104 billion. With all these riches to be had, why
did Mark Zuckerberg, the founder of Facebook, delay taking his company public?
Consider that the main motivation for issuing shares to the public is to raise
money so you can grow your business. However, unlike a manufacturer or even
an online retailer, Facebook doesnt need major physical resources, it doesnt
have inventory, and it doesnt really need much money for marketing. So in the
past, the company hasnt had much need for additional cash beyond what it was
already generating on its own. Finally, as head of a closely held, nonpublic
company, Zuckerberg was subject to far fewer regulations than a public company.
Source: Status Update: Im Rich! Facebook Flotation to Create 1,000 Millionaires Among
Companys Rank and File, Daily Mail Reporter (February 1, 2012).
LO 1
13-14
Stockholder Rights
1. Vote in election of board of
directors and on actions that
require stockholder approval.
2. Share the corporate earnings

through receipt of dividends.
Illustration 13-3
Ownership rights of
stockholders
13-15
LO 1
Stockholder Rights
3. Keep the same percentage ownership when new shares
of stock are issued (preemptive right).
* A number of companies have eliminated the preemptive right.

Illustration 13-3
Ownership rights of
stockholders
13-16
LO 1
Stockholder Rights
4. Share in assets upon liquidation in proportion to their
holdings. This is called a residual claim.
Illustration 13-3
Ownership rights of
stockholders
13-17
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?
13-18
LO 1

AUTHORIZED STOCK
13-19
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

Prenumbered
Shares
Illustration 13-4
A Stock certificate
Name of corporation
Stockholders
name
Signature of
corporate official
13-20
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. Companys 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
LO 1

MARKET PRICE OF STOCK
13-22
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 companys earnings

and dividends.
Factors beyond a companys control may cause day-today fluctuations in market prices.
LO 1
Investor Insight
13-23
Nike
LO 1

PAR AND NO-PAR VALUE STOCK
13-24
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

Question
Which of these 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 is intended to protect stockholders.
13-25
LO 1
DO IT!
1a
Corporate Organization
Indicate whether each of the following statements is true or false.

______ 1. Similar to partners in a partnership, stockholders of a
False
corporation have unlimited liability.
______ 2. It is relatively easy for a corporation to obtain capital through
True
the issuance of stock.
______ 3. The separation of ownership and management is an advantage
False
of the corporate form of business.
______ 4. The journal entry to record the authorization of capital stock
False
includes a credit to the appropriate capital stock account.
______ 5. All states require a par value per share for capital stock.
False
13-26
LO 1
Corporate Capital
Common
CommonStock
Stock
Paid-in
Paid-inCapital
Capital
Account
Account
Preferred
PreferredStock
Stock
Paid-in
Paid-inCapital
Capital
in
inExcess
Excessof
ofPar
Par
Account
Account
Account
Account
Two Primary
Sources of
Equity
Retained
RetainedEarnings
Earnings
Account
Account
Paid-in capital is the total amount of cash and other assets paid in
to the corporation by stockholders in exchange for capital stock.
13-27
LO 1
Corporate Capital
Common
CommonStock
Stock
Paid-in
Paid-inCapital
Capital
Account
Account
Preferred
PreferredStock
Stock
Paid-in
Paid-inCapital
Capital
in
inExcess
Excessof
ofPar
Par
Account
Account
Account
Account
Two Primary
Sources of
Equity
Retained
RetainedEarnings
Earnings
Account
Account
Retained earnings is net income that a corporation retains for

future use.
13-28
LO 1
Corporate Capital
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.
Illustration 13-5
Stockholders equity section
13-29
LO 1
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
Comparison of owners
equity accounts
13-30
LO 1
DO IT!
1b
Corporate Capital
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.
Solution
(a)
Income Summary
122,000
Retained Earnings
(b)
Stockholders equity
Common Stock
$750,000
Retained earnings
122,000
Total stockholders equity

13-31
122,000
Advance slide in slide show to reveal solution.
$872,000
LO 1
LEARNING
OBJECTIVE
Explain how to account for the issuance

of common and preferred 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.
13-32
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-Slides 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)

b.
Cash
1,000
5,000
1,000
Paid-in Capital in Excess of Par

Common Stock
4,000
13-33
LO 2
Accounting for Common Stock
Illustration 13-7
Stockholders equitypaid-in
capital in excess of par
13-34
Alternative
Terminology
Paid-in
Paid-in Capital
Capital in
in Excess
Excess of
of Par
Par is
is
also
also called
called Premium
Premium on
on Stock.
Stock.
LO 2
Issuing No-par Common Stock For Cash

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

Common Stock
15,000
13-35
LO 2
Issuing No-par Common Stock For Cash

Illustration: What happens when no-par stock does not have a
stated value?
Cash
40,000
Common Stock
13-36
40,000
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.
13-37
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.
Organizational Expense
5,000
4,000

Common Stock
1,000
13-38
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
50,000

Common Stock
30,000
13-39
LO 2
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.
13-40
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 x $10)
100,000

Preferred Stock
20,000
Preferred stock may have a par value or no-par value.
13-41
LO 2
DO IT!
Issuance of Stock
Cayman Corporation begins operations on March 1 by issuing 100,000

shares of $1 par value common stock for cash at $12 per share. On
March 15, it issues 5,000 shares of common stock to attorneys in
settlement of their bill of $50,000 for organization costs. On March 28,
Cayman Corporation issues 1,500 shares of $10 par value preferred
stock for cash at $30 per share. Journalize the issuance of the
common and preferred shares, assuming the shares are not publicly
traded.
Mar.
1
Cash
1,200,000
100,000

Common Stock
1,100,000
13-42
LO 2
DO IT!
Issuance of Stock

traded.
Mar.
15
Organization
Expense 50,000
5,000

Common Stock
45,000
13-43
LO 2
DO IT!
Issuance of Stock

traded.
Mar.
28
Cash
45,000
Preferred Stock (1,500 x $10)
15,000

Preferred Stock
30,000
13-44
LO 2
LEARNING
OBJECTIVE
Explain how to account for treasury

stock.
Common
CommonStock
Stock
Paid-in
Paid-inCapital
Capital
Account
Account
Preferred
PreferredStock
Stock
Paid-in
Paid-inCapital
Capital
in
inExcess
Excessof
ofPar
Par
Account
Account
Account
Account
Two Primary
Sources of
Equity
Retained
RetainedEarnings
Earnings
Account
Account
Less:
Less:
Treasury
TreasuryStock
Stock
Account
Account
13-45
LO 3
Accounting for Treasury Stock

Treasury stock is a corporations 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 stocks market value.
3. To have additional shares available for use in the acquisition
of other companies.
4. To increase earnings per share.
13-46
LO 3
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
Helpful Hint
Hint
Treasury
Treasury shares
shares do
do not
not have
have
dividend
dividend rights
rights or
or voting
voting rights.
rights.
13-47
LO 3
Illustration 13-8
Stockholders equity
with no treasury stock
Illustration: On February 1, 2017, Mead acquires 4,000 shares of

its stock at $8 per share.
Treasury Stock (4,000 x $8) 32,000
Cash
13-48
32,000
LO 3
Illustration 13-9
Stockholders equity
with treasury stock
Both the number of shares issued (100,000) and the number

of shares held as treasury (4,000) are disclosed.
13-49
LO 3
Disposal of Treasury Stock

Sale of Treasury Stock
Above Cost
Below Cost
Both increase total assets and stockholders equity.

Helpful
Helpful Hint
Hint
Treasury
Treasury stock
stock transactions
transactions are
are
classified
classified as
as capital
capital stock
stock
transactions.
transactions. As
As in
in the
the case
case when
when
stock
stock is
is issued,
issued, the
the income
income
statement
statement is
is not
not involved.
involved.
13-50
LO 3
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.
13-51
LO 3

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

Treasury Stock
Illustration 13-10
Treasury stock accounts
13-52
800
6,400
LO 3

BELOW COST
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

Retained Earnings 1,000
Treasury Stock
13-53
1,200
Limited to
balance
on hand
17,600
LO 3
Accounting Across the Organization

Why Did Reebok Buy Its Own Stock?
In a bold (and some would say risky) move, Reebok at one time bought back
nearly a third of its shares. This repurchase of shares dramatically reduced
Reeboks available cash. In fact, the company borrowed significant funds to
accomplish the repurchase. In a press release, management stated that it
was repurchasing the shares because it believed its stock was severely
underpriced. The repurchase of so many shares was meant to signal
managements belief in good future earnings. Skeptics, however, suggested
that Reeboks management was repurchasing shares to make it less likely
that another company would acquire Reebok (in which case Reeboks top
managers would likely lose their jobs). By depleting its cash, Reebok became
a less attractive acquisition target. Acquiring companies like to purchase
companies with large cash balances so they can pay off debt used in the
acquisition.
13-54
LO 3
DO IT! 3
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.
Solution
July 1
Treasury Stock
180,000
Cash
Nov. 1
13-55
Cash
180,000
70,000
Treasury Stock
60,000
10,000
LO 3
LEARNING
OBJECTIVE
Prepare a stockholders equity section
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.
13-56
LO 4
13-57
Illustration 13-11
Stockholders equity section
LO 4
DO IT! 4
Stockholders Equity Section
Jennifer Corporation has issued 300,000 shares of $3 par value

common stock. It authorized 600,000 shares. The paid-in capital in
excess of par 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. Treasury stock was reissued in prior years for
$72,000 more than its cost.
The corporation also has 4,000 shares issued and outstanding of
8%, $100 par value preferred stock. It authorized 10,000 shares.
The paid-in capital in excess of par on the preferred stock is
$25,000. Retained earnings is $610,000.
Prepare the stockholders equity section of the balance sheet.
13-58
LO 4
13-59
LO 4
A Look at IFRS
LEARNING
OBJECTIVE
Compare the accounting for stockholders

equity under GAAP and IFRS.
Key Points
Similarities
13-60
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.
LO 5
A Look at IFRS
Key Points
Differences
13-61
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 5
A Look at IFRS
Key Points
13-62
There are often terminology differences for equity accounts. The

following summarizes some of the common differences in
terminology.
LO 5
A Look at IFRS
Key Points
13-63
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 share
holders funds.
LO 5
A Look at IFRS
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.
13-64
LO 5
A Look at IFRS
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.
13-65
LO 5
A Look at IFRS
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.
13-66
LO 5
A Look at IFRS
Which of the following does not represent a pair of GAAP/IFRScomparable terms?
a) Additional paid-in capital/Share premium.
b) Treasury stock/Repurchase reserve.
c) Common stock/Share capital.
d) Preferred stock/Preference shares.
13-67
LO 5
Copyright
Copyright 2015 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.
13-68

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13

Corporations: Organization and

Discuss the major characteristics of a corporation.

Explain how to account for the issuance of common

Explain how to account for treasury stock.

Prepare a stockholders equity section.

Discuss the major characteristics of a

An entity separate and distinct from its owners.

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

File application with the Secretary

State grants charter.

Corporation develops by-laws.

Companies generally incorporate in a state whose laws are

Accounting Across the Organization

2. Share the corporate earnings

* A number of companies have eliminated the preemptive right.

Stock Issue Considerations

Stock Issue Considerations

Charter indicates the amount of stock that a corporation

Number of authorized shares is often reported in the

No formal accounting entry.

Stock Issue Considerations

Stock Issue Considerations

Companies issue common stock directly to investors or

Factors in setting price for a new issue of stock:

Stock Issue Considerations

Stock of publicly held companies is traded on organized

Interaction between buyers and sellers determines the

Prices tend to follow the trend of a companys earnings

Stock Issue Considerations

Years ago, par value determined the legal capital per

Today many states do not require a par value.