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CHAPTER 13

CORPORATIONS: ORGANIZATION AND CAPITAL STOCK TRANSACTIONS. CHAPTER 13. Accounting Principles, Eighth Edition. The Corporate Form of Organization. An entity separate and distinct from its owners. Classified by Ownership Publicly held Privately held. Classified by Purpose Not-for-Profit

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CHAPTER 13

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  1. CORPORATIONS: ORGANIZATION AND CAPITAL STOCK TRANSACTIONS CHAPTER 13 Accounting Principles, Eighth Edition

  2. The Corporate Form of Organization An entity separate and distinct from its owners. • Classified by Ownership • Publicly held • Privately held • Classified by Purpose • Not-for-Profit • For Profit • Salvation Army • American Cancer Society • Gates Foundation • Cargill Inc. • Riverside Bank

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

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

  5. Characteristics of a Corporation Stockholders Illustration 13-1 Corporation organization chart 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 Treasurer Controller LO 1 Identify the major characteristics of a corporation.

  6. Forming a Corporation Initial Steps: • File application with the Secretary of State. • State grants charter. (creation) • Corporation develops by-laws. (rules & procedures) LO 1 Identify the major characteristics of a corporation.

  7. Ownership Rights of Stockholders Illustration 13-3 Stockholders have the right to: • Vote in election of board of directors and on actions that require stockholder approval. • www.Riversidebankhv.com • Share the corporate earnings through receipt of dividends. • CHG , GE , JNJ LO 1 Identify the major characteristics of a corporation.

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

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

  10. Stock Issue Considerations Authorized Stock • Charter indicates the • Number of authorized shares is often reported in the stockholders’ equity section. LO 1 Identify the major characteristics of a corporation.

  11. 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: LO 1 Identify the major characteristics of a corporation.

  12. Stock Issue Considerations Market Value of Stock • Stock of publicly held companies is traded on organized exchanges. • Interaction • Prices set by • Factors beyond a company’s control, LO 1 Identify the major characteristics of a corporation.

  13. 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. (But we still have to learn it!) • No-par value stock is quite common today. • FYI… stated valueis synonymous withpar value. LO 1 Identify the major characteristics of a corporation.

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

  15. Differences in 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 LO 2 Differentiate between paid-in capital and retained earnings.

  16. Accounting for Common Stock Issues Illustration: Viking Corporation issued 300 shares of $1 par value common stock for $4,100. Prepare Vikings’ journal entry. LO 3 Record the issuance of common stock.

  17. Accounting for Common Stock Issues“no-par stock” versus “par/stated stock” Illustration: Carp Corporation issued 600 shares of no-par common stock for $10,200. Prepare Carp’s journal entry if: the stock has a par/stated value of $2 per share, the stock has no par/stated value, and a. b. LO 3 Record the issuance of common stock.

  18. Accounting for Common Stock Issues • Corporations also may issue stock for: • Services (attorneys or consultants). • Noncash assets (land, buildings, and equipment). Why? 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. LO 3 Record the issuance of common stock.

  19. Accounting for Common Stock Issues E13-5 On March 2nd, Leone Co. issued 5,000 shares of $5 par value common stock to attorneys in payment of a bill for $30,000 for services provided in helping the company to incorporate. Organizational expense 30,000 Common stock (5,000 x $5) 25,000 Paid-in capital in excess of par 5,000 LO 3 Record the issuance of common stock.

  20. Accounting for Common Stock Issues BE13-5 Kane Inc.’s $10 par value common stock is actively traded at a market value of $15 per share. Kane issues 5,000 shares to purchase land advertised for sale at $85,000. Journalize the issuance of the stock in acquiring the land. LO 3 Record the issuance of common stock.

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

  22. Accounting for Treasury Stock Treasury stock - corporation’s own stock that it has reacquired from shareholders, but not retired. • Corporations purchase their outstanding stock: • To reissue the shares to officers and employees under bonus and stock compensation plans. • To enhance the stocks market value and earnings per share. • To have available for use in the acquisition of other companies. • To avoid a takeover. LO 4 Explain the accounting for treasury stock.

  23. Accounting for Treasury Stock Purchase of Treasury Stock • Treasury stock is a contra stockholders’ equity account, not an asset. • Debit Treasury Stock for the price paid to reacquire the shares. (example to follow) • Purchase of treasury stock from the open market reduces stockholders’ equity. LO 4 Explain the accounting for treasury stock.

  24. Accounting for Treasury Stock Illustration: UC Company originally issued 15,000 shares of $1 par, common stock for $25 per share. Record the journal entry for the following transaction: OnApril 1st the company reacquired 1,000 shares for $28 per share. Treasury stock (1,000 x $28) 28,000 Cash 28,000 LO 4 Explain the accounting for treasury stock.

  25. Accounting for Treasury Stock Stockholders’ Equity with Treasury stock Both the number of shares issued (15,000), outstanding (14,000), and the number of shares held as treasury (1,000) are disclosed. LO 4 Explain the accounting for treasury stock.

  26. Preferred Stock • Features often associated with preferred stock. • Preference as to dividends. • Preference as to assets in liquidation. • Nonvoting. Accounting for preferred stock at issuance is similar to that for common stock. LO 5 Differentiate preferred stock from common stock.

  27. Preferred Stock BE13-7Acker Inc. issues 5,000 shares of $100 par value preferred stock for cash at $130 per share. Journalize the issuance of the preferred stock. Preferred stock may have a par value or no-par value. LO 5 Differentiate preferred stock from common stock.

  28. 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. Preferred Stock LO 5 Differentiate preferred stock from common stock.

  29. Statement Analysis and Presentation Illustration 13-12 LO 6 Prepare a stockholders’ equity section.

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