7Apx--1 College Accounting Heintz & Parry 20 th Edition.

7Apx--1

College

Accounting

College

Accounting

Heintz & ParryHeintz & Parry2020thth Edition Edition

Heintz & ParryHeintz & Parry2020thth Edition Edition

ChapterChapter 2020

Corporations: Organization and

Capital Stock

Corporations: Organization and

Capital Stock

1

Describe the

characteristics, formation,

and organization of a

corporation.

CORPORATIONSCORPORATIONS

• Sell more goods and services in total than sole proprietorships and partnerships combined– There are fewer businesses organized as

corporations• Is a separate legal entity that exists separate

from its owners– A corporation’s assets and liabilities are those

of the business, not the owners– A corporation can own property, enter into

contracts, and incur debt in its own name– It can sue and be sued

CHARACTERISTICSCHARACTERISTICS

LIMITED LIABILITY OF OWNERS

Owners of a corporation generally have no personal liability for the debts of the

corporation.

Major advantageof corporations


TRANSFERABLE OWNERSHIP UNITS

Owner’s equity in a corporation is called capital stock. Capital stock is divided into shares that can be transferred from one person to another without the consent of the other owners and without disturbing the corporation’s normal activities.


EASE OF RAISING CAPITALThe limited liability and transferable

ownership characteristics are attractive to investors. Therefore, a

corporation generally can obtain capital by selling additional shares of

stock.


NO MUTUAL AGENCY

Unlike partnerships, in a corporation individual owners do not have the power

to act as an agent of the business.


UNLIMITED LIFE

The corporation’s charter states the life as either perpetual or renewable.

Changes in ownership have no effect on

the life of a corporation.


TAXATION OF EARNINGS

Corporations must pay income taxes. In addition, the corporation’s owners pay personal income tax on the dividends they receive. This results in “double

taxation.”

Disadvantage


GOVERNMENT REGULATION

Activities of the corporation are regulated by federal, state, and local laws. These

laws may restrict the corporation’s ownership of real property, the purchase of its own stock, and the retention of its

earnings.

Disadvantage

CORPORATIONCORPORATION

• States have the power to create corporations– Incorporators file an application with the state– Once the application is approved, the charter,

also called a certificate of incorporation, is prepared, stating the:

• Name of the corporation• Location of the principal office• Purpose of the business• Description of the capital stock• Names and addresses of the incorporators

TERMINOLOGYTERMINOLOGY

• Bylaws – Provide general guidelines for conducting the business

• Stockholders – Owners in a corporation• Stock certificate – A form that shows the

name of the stockholder and the number of shares owned

• Board of directors – Elected by stockholders; determine corporate policies

• Officers – Manage the corporation and are responsible to the board

CORPORATE ORGANIZATIONCORPORATE ORGANIZATION

OWNERS(Stockholders)

Who elect the Who appoint the

OFFICERS (President,Vice President, Secretary,

Treasurer)

Who manage the EMPLOYEES

BOARD OFDIRECTORS

ORGANIZATION COSTSORGANIZATION COSTS

IncorporationFees

Attorneys’Fees

PromotionExpenses

EXAMPLES:

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GENERAL JOURNALGENERAL JOURNAL

DATE DESCRIPTION PR DEBIT CREDIT

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Organization Expenses 8,000

8,000Accounts Payable (or Cash)

Organization costs are expensed when incurred and reported

under “Other expenses”on the income statement.

2

Describe stockholders’

equity and the types of

capital stock, and compute

dividends on preferred and

common stock.

EQUITY ACCOUNTSEQUITY ACCOUNTS

SOLE PROPRIETORSHIP

Owner, Capital Owner, Drawing

Two equity accounts


SOLE PROPRIETORSHIP

Owner, Capital Owner, Drawing

All equity transactions eventuallyaffect the one capital account.

1. Investments2. Net income

2. Net loss 3. Drawing 4. Closing4. Closing


PARTNERSHIP

Partner A, Capital Partner A, Drawing1. Investments2. Net income

2. Net loss 3. Drawing 4. Closing4. Closing

Partner B, Capital1. Investments2. Net income

2. Net loss4. Closing

Partner B, Drawing3. Drawing 4. Closing

A partnership is similar to a sole proprietorship buthas multiple capital and drawing accounts.


CORPORATION

Capital Stock

Additional Paid-In Capital

1. Investments

1. Investments

Only recordsinvestments by owners


CORPORATION

Capital Stock


1. Investments

Retained Earnings

1. Investments

A separate account which

records the earnings

of the corporation

2. Net income2. Net loss


CORPORATION

Capital Stock


1. Investments

Retained Earnings

1. Investments

Corporations make a distinction

betweencapital invested by the owners (paid-in

capital)and earnings

retained in the business.

2. Net income2. Net loss


CORPORATION

Capital Stock


1. Investments

Retained Earnings

1. Investments

Dividends

Drawings are now called Dividends and are closed to Retained

Earnings.

2. Net income2. Net loss4. Closing

4. Closing 3. Dividends

CAPITAL STOCKCAPITAL STOCK

• Authorized stock – The total number of shares the corporate charter authorizes a corporation to issue

• Issued stock – Stock that has been sold and issued

• Treasury stock – Stock that has been bought back

• Outstanding stock – Number of shares in the hands of stockholders

STOCK VALUESSTOCK VALUES

Par ValueDollar amount

printed on stock

certificateRecorded in the capital stock

account

Market ValueAmount for which the

stock can be sold

No-Par StockNo dollar amount

printed on it

Amount assigned by

board of directors

Stated Value

COMMON STOCKCOMMON STOCK

• If a corporation has only one type of stock, it is called “common stock”

• Gives its owner the right to:– Vote at stockholder meetings– Share in earnings distributions– Purchase additional shares in

proportion to the owner’s present holding if more shares are issued

• Called the “preemptive right”

– Share in the assets if the corporation liquidates

PREFERRED STOCKPREFERRED STOCK

• Type of stock that gives its owners certain rights and privileges superior to those of common stockholders– Example: The right to receive dividends

before common stockholders• Dividends are stated as a dollar amount or

a percent of par value

• Does not give the same rights as common stock– Example: Preferred stockholders do not

have the right to vote

DIVIDEND ALLOCATIONDIVIDEND ALLOCATION

EXAMPLE: Pref Company has 2,000 shares of $50 par, $4 preferred stock, and 2,000 shares of $10 par common

stock outstanding. The amount available for dividends for the year is

$14,000.Preferred Stockholders

Common Stockholders

$8,000

$4 dividend for each share of preferred stock

(2,000 shares)



stock outstanding. The amount available for dividends for the year is $14,000.

Preferred Stockholders

CommonStockholders

$8,000$14,00

0Available for dividends– 8,000For preferred stockholders$

6,000Leftover for the common shareholders

$6,000



stock outstanding. The company declared no dividends in year 1 and

$22,000 in year 2.Preferred Stockholders

Common Stockholders

Depends on the type of preferred stock…

cumulative or noncumulative

Should we go back and give the preferred stockholders the dividend for year 1?




$22,000 in year 2.Preferred Stockholders

Common Stockholders

Cumulative preferred stock accumulates unpaid dividends

from year to year.

$ 8,000 Year 1

8,000 Year 2


EXAMPLE: Pref Company has 2,000 shares of $50 par, $4 preferred stock, and 2,000 shares

of $10 par common stock outstanding. The company declared no dividends in year 1 and

$22,000 in year 2.Preferred

StockholdersCommon

Stockholders

Preferred stockholders receive both

years’ dividends before commonstockholders receive any

dividends.

$ 8,000 Year 1

8,000 Year 2

$16,000

$6,000$22,000

– 16,000




$22,000 in year 2.PreferredStockholders

CommonStockholders

Noncumulative preferred stock does

not carry dividends from year to year.

$8,000 Year 2 $14,000$22,000

– 8,000

PARTICIPATING PREFERRED STOCKPARTICIPATING PREFERRED STOCK

• Gives owners the right to share with common stock owners in dividends in excess of a stated dividend rate– Rare to find anymore

• Nonparticipating preferred stock limits the preferred stock owners to the stated dividend rate

3

Account for capital stock

transactions.

CAPITAL STOCK TRANSACTIONSCAPITAL STOCK TRANSACTIONS

• Corporations issue capital stock in exchange for cash and noncash assets. – Issuance for cash is the most common

transaction– Stock may be issued:

• At par• At a premium• At a discount

Let’s look at some examples.




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Cash 50,000

50,000Common Stock

Linc Corp. issues 10,000 shares

of $5 par common stock at par

for $50,000 cash.

Issued common stock at par




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Cash 60,000

Common Stock

What if the stock had been issued for $60,000 cash?




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Cash 60,000

Common Stock

Shares issued Par value(10,000 shares $5 par

value)

50,000




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5

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9

10

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Cash 60,000

Common Stock

Extra received above par value

50,000

Paid-In Capital in Excess of

Par—Common Stock 10,000

Issued common stock at a

premium




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5

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9

10

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Cash 96,000

4,000

Preferred Stock

Linc Corp. issues 2,000 shares

of $50 par, 8% preferred stock

for $96,000 cash.

Issued preferred stock at

Discount on Preferred Stock

100,000

a discount

DISCOUNTSDISCOUNTS

• Seldom used because:– Firms generally set very low par values– The purchaser is liable to the

corporation’s creditors for the difference between the par value and the amount paid

– Illegal in many states

STATED VALUE STOCKSTATED VALUE STOCK

EXAMPLE: Stat Company issued 5,000 shares of no-par common stock with a

stated value of $10 per share for $70,000 cash.

Stock may have a stated value instead of a par value. Accounting for stated value is very similar to par value, but with a

few account title changes.




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Cash 70,000

Common Stock

Shares Stated value per share

50,000




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Cash 70,000

Common Stock 50,000

Paid-In Capital in Excess of

Stated Value—Common Stk. 20,000

Slight change in thetitle of the account




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Cash 70,000

Common Stock

EXAMPLE: Noll Company issued

5,000 shares of no-par common

stock for $70,000.

70,000




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Cash 70,000

Common Stock

Common Stock is creditedfor entire amount received.A paid-in capital in excess of

par account is not used.

70,000

STOCK ISSUED FOR NONCASH ASSETS


• Guideline:– The assets received are recorded at the

fair market value of the assets or of the stock, whichever can be more clearly determined



EXAMPLE: Linc Corp. issues 5,000 shares of $5 par common stock for a

truck. It is hard to determine the market value of the stock, but the truck has a

known market value of $30,000.




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Truck 30,000

Common Stock

The truck is recorded at its fair market value.

Common Stock is recorded at par.Paid-In Capital is credited for the

difference.

25,000

Paid-In Capital in Excess

of Par—Common Stock 5,000

STOCK SUBSCRIPTIONSSTOCK SUBSCRIPTIONS

• An agreement in which a buyer (subscriber) contracts to buy shares of stock from a corporation at a specific price

– The subscriber generally agrees to pay the amount in full on a specified date or in installments

– The stock is not issued until the subscriber makes the full payment




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Stock Subscriptions Receivable 60,000

Common Stock Subscribed

EXAMPLE: Linc Corp. received subscriptions for 10,000 shares

of its $5 par common stock for

$60,000.

50,000






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Stock Subscriptions Receivable 60,000

Common Stock Subscribed

EXAMPLE: Partial payment is received.

50,000



Cash

Stock Subcriptions Receivable

40,00040,000




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22

EXAMPLE: Final payment is received.

Cash

Stock Subscriptions Receivable

20,00020,000




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Stock is issued.

Common Stock Subscribed 50,000

Common Stock 50,000

TREASURY STOCKTREASURY STOCK

• When a company buys back its own stock, it’s called “treasury stock”

• When treasury stock is purchased:– Treasury Stock is debited for the

amount paid regardless of par value– Treasury stock account is a contra-

stockholders’ equity account




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Common Treasury Stock 18,000

Cash

EXAMPLE: Linc Corp purchases 3,000 shares of its $5 par common stock for $6 per share, a total of $18,000.

18,000




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Cash

EXAMPLE: Linc Corp sells 2,000 of the 3,000 treasury shares

for $7 per share, a total of $14,000.

18,000

Cash 14,000

Common Treasury Stock




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Cash

2,000 shares $6 per share

18,000

Cash 14,000





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5

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Cash 18,000

Cash 14,000


Paid-In Capital from Sale

of Treasury Stock 2,000

Paid-In Capital from Sale of Treasury Stock is

credited for the difference.




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20

21

22

Cash

Paid-In Capital from Sale

5,500

500


of Treasury Stock

Linc sells the remaining 1,000treasury shares for $5.50

per share, a total of $5,500. In this case, Paid-In Capital from

Sale of Treasury Stock is debited.

REVIEW OF NEW ACCOUNTSREVIEW OF NEW ACCOUNTS

ACCOUNT NAME:

TYPE OF ACCOUNT:

Common Stock and Preferred Stock

Stockholders’ Equity

PURPOSE:

Credited for the par or stated value (if stated). If no-par or stated value,

credited for the amount received for stock issued

BALANCE SHEET PRESENTATION:

Part of paid-in capital


ACCOUNT NAME:

TYPE OF ACCOUNT:

Paid-In Capital in Excess of Par (or Stated Value)—Common (or Preferred)

Stock


PURPOSE:Credited for the amount by which the issue price exceeds the par or stated value (not

used when issuing no-par stock)


Addition to paid-in capital


ACCOUNT NAME:

TYPE OF ACCOUNT:

Discount on Common (or

Preferred) Stock

Contra-Stockholders’

EquityPURPOSE:

Debited for the amount by which the par or stated value exceeds the issue price


Deduction from paid-in capital


ACCOUNT NAME:

TYPE OF ACCOUNT:

Common (or Preferred) Stock Subscriptions

Receivable


Equity

PURPOSE:

Debited for the subscription price of stock


Deduction from the total of paid-in capital and retained earnings


ACCOUNT NAME:

TYPE OF ACCOUNT:

Common (or Preferred)

Stock Subscribed


PURPOSE:

Credited for the par or stated value (if stated) of the stock subscribed. If no-par or stated value, credited for the amount

of stock subscriptionBALANCE SHEET PRESENTATION:



ACCOUNT NAME:

TYPE OF ACCOUNT:

Treasury Stock—Common and

Preferred


EquityPURPOSE:

Debited for the cost of stock purchased


Deduction from the total of paid-in capital and retained earnings


ACCOUNT NAME:

TYPE OF ACCOUNT:

Paid-In Capital from Sale of Treasury

Stock


PURPOSE:

Credited for the excess of the selling price over cost. Debited for the excess of

cost over the selling price



4

Prepare the stockholders’

equity section of a

corporation balance sheet.


Paid-In Capital and Retained Earnings

Equity is separated by source:Paid-In Capital = Amounts contributed by

ownersRetained Earnings = Accumulated,

undistributed earnings


Paid-in capital:Preferred stock, 7%, $10 par(20,000 shares auth., 14,000 shares issued)

Preferred stock subscribed (6,000 shares)$140,000

60,000 $200,000

Preferred stock is listed firstbecause of its preferred

claimto dividends and assets.



Preferred stock subscribed (6,000 shares)

Common stock, no par(40,000 shares auth., 16,300 shares issued)

Common stock subscribed (4,000 shares)

Additional paid-in capital:Paid-in capital in excess of par—preferredPaid-in capital from sale of treasury stock

Total paid-in capital

$140,00060,000 $200,000

$163,00040,000 203,000

$56,000600 56,600

$459,600

Paid-in capital is further separated by source…

Preferred, common, subscriptions, etc.







Total paid-in capital

$140,00060,000 $200,000

$163,00040,000 203,000

$56,000600 56,600

$459,600

Stock characteristics are indicated:Dividend rate for preferred par or no-par

value







Total paid-in capital Retained earnings

$140,00060,000 $200,000

$163,00040,000 203,000

$56,000600 56,600

$459,60060,000

$519,600Retained earnings is listed

after all paid-in capital.


Paid-in capital:


Less: Preferred stock subscriptions receivable

Total stockholders’ equity

$459,60060,000

$519,600

22,000$447,600

Number of shares authorized,

subscribed, issued, and held

as treasury are indicated.

Common treasury stock (2,000 shares at cost)

Common stock subscriptions receivable$20,000

30,00072,000


Paid-in capital:




$459,60060,000

$519,600

22,000$447,600



30,00072,000

Preferred and common stock subscriptions

receivable are subtracted from total paid-in capital and retained

earnings.


Paid-in capital:




$459,60060,000

$519,600

22,000$447,600



30,00072,000

Treasury stock is subtracted from total paid-in capital

and retained earnings.

7Apx--1 College Accounting Heintz & Parry 20 th Edition.

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Transcript of 7Apx--1 College Accounting Heintz & Parry 20 th Edition.