Accounting principles, 13th edition ch13

Accounting Principles
Thirteenth Edition
Weygandt Kimmel Kieso

Chapter 13

Corporations: Organization and
Capital Stock Transactions
Prepared by

Coby Harmon
University of California, Santa Barbara
Westmont College


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.
Classified by Purpose

LO 1

Classified by Ownership



Not-for-Profit



Publicly held



For Profit



Privately held

►

Salvation Army

►

McDonald’s

►

American Cancer Society

►

Nike

►

PepsiCo

►

Google

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►

Cargill Inc.

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Characteristics of Corporation
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital

Advantages

Continuous Life
Corporate Management
Government Regulations

Disadvantages

Additional Taxes
LO 1

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Characteristics of Corporation
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence
Corporation acts under its own

Limited Liability of Stockholders

name rather than in the name of

Transferable Ownership Rights

its stockholders

Ability to Acquire Capital

Continuous Life
Corporate Management
Government Regulations
Additional Taxes
LO 1

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Characteristics of Corporation
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Stockholders
Limited to their investment

Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
LO 1

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Characteristics of Corporation
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Shareholders may sell their stock

Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
LO 1

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Characteristics of Corporation
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital

Corporation can obtain capital
through the issuance of stock

Continuous Life

Corporate Management
Government Regulations
Additional Taxes
LO 1

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Characteristics of Corporation
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuance as a going concern

Continuous Life

is not affected by the withdrawal,
death, or incapacity of a

Corporate Management

stockholder, employee, or officer

Government Regulations
Additional Taxes
LO 1

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Characteristics of 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

Separation of ownership and
management often reduces an

Corporate Management

owner’s ability to actively

Government Regulations

manage the company

Additional Taxes
LO 1

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Stockholders

ILLUSTRATION 13.1
Corporation organization chart

Chairman and
Board of
Directors

President and
Chief Executive
Officer

General
Counsel/
Secretary

Vice President
Marketing

Vice President
Finance/Chief
Financial Officer

Treasurer

LO 1

Vice President
Operations

Vice President
Human
Resources

Controller

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Characteristics of 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
Corporate Management

A corporation is subject to
numerous state and federal

Government Regulations

regulations

Additional Taxes
LO 1

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Characteristics of 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

Corporations pay income taxes as
a separate legal entity and in

Corporate Management

addition, stockholders pay taxes
on cash dividends

Government Regulations
Additional Taxes
LO 1

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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.

LO 1

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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.

LO 1

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Stock Issue Considerations
When a corporation decides to issue stock, it must resolve a number of basic questions:

LO 1

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
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

LO 1

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Stock Issue Considerations
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.
2.
3.
4.
5.
LO 1

Company’s anticipated future earnings
Expected dividend rate per share
Current financial position
Current state of economy
Current state of securities market
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Stock Issue Considerations
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

LO 1

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Stock Issue Considerations
Which of the following statements is false?

LO 1

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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DO IT! 1a Corporate Organization
Indicate whether each of the following statements is true or false.

False1. 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.
True
_______ 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
False
stock account.
_______ 5. All states require a par value per share for capital stock.
False

False

LO 1

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Corporate Capital
Common Stock
Account
Paid-in Capital in Excess of Par

Paid-in Capital

Account
Preferred Stock
Account

Two Primary Sources of Equity

Retained Earnings
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.

LO 1

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Corporate Capital
Common Stock
Account
Paid-in Capital in Excess of Par

Paid-in Capital

Account
Preferred Stock
Account

Two Primary Sources of Equity

Retained Earnings

Account

Retained earnings is net income that a corporation retains for future use.

LO 1

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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.

ILLUSTRATION 13.5

Delta Robotics

Stockholders’ equity section

Balance Sheet (partial)
Stockholders' equity
Paid-in capital
Common stock

$800,000

Retained earnings

130,000

Total stockholders' equity

LO 1

$930,000

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Corporate Capital
Comparison of the owners’ equity (stockholders’ equity) accounts reported on a balance
sheet.
Proprietorship

Partnership

Corporation

Owner's Capital

Able, Capital

Common Stock

Normal

Normal

Normal

balance

balance

balance

Baker, Capital
ILLUSTRATION 13.6
Comparison of owners’ equity accounts

LO 1

Retained Earnings

Normal

Normal

balance

balance

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