What's Cooking?
What major U.S. corporation got its start 41 years ago with a waffle iron? Hint: It doesn't sell food. Another hint: Swoosh. Another hint: “Just do it.” That's right, Nike. In 1971, Nike co-founder Bill Bowerman put a piece of rubber into a kitchen waffle iron, and the trademark waffle sole was born. It seems fair to say that at Nike, “They don't make 'em like they used to.”
Nike was co-founded by Bowerman and Phil Knight, a member of Bowerman's University of Oregon track team. Each began in the shoe business independently during the early 1960s. Bowerman got his start by making hand-crafted running shoes for his University of Oregon track team. Knight, after completing graduate school, started a small business importing low-cost, high-quality shoes from Japan. In 1964, the two joined forces, each contributing $500, and formed Blue Ribbon Sports, a partnership that marketed Japanese shoes.
It wasn't until 1971 that the company began manufacturing its own line of shoes. With the new shoes came a new corporate name–Nike–the Greek goddess of victory. It is hard to imagine that the company that now boasts a stable full of world-class athletes as promoters at one time had part-time employees selling shoes out of car trunks at track meets. Nike has achieved its success through relentless innovation combined with unbridled promotion.
By 1980, Nike was sufficiently established and issued its first stock to the public. That same year, it created a stock ownership program for its employees, allowing them to share in the company's success. Since then, Nike has enjoyed phenomenal growth, with 2011 sales reaching $20.7 billion and total dividends paid of $569 million.
Nike is not alone in its quest for the top of the sport shoe world. Reebok used to be Nike's arch rival (get it? “arch”), but then Reebok was acquired by the German company adidas. Now adidas pushes Nike every step of the way.
The shoe market is fickle, with new styles becoming popular almost daily and vast international markets still lying untapped. Whether one of these two giants does eventually take control of the pedi-planet remains to be seen. Meanwhile, the shareholders sit anxiously in the stands as this Olympic-size drama unfolds.
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Learning Objectives
After studying this chapter, you should be able to:
[1] Identify the major characteristics of a corporation.
[2] Differentiate between paid-in capital and retained earnings.
[3] Record the issuance of common stock.
[4] Explain the accounting for treasury stock.
[5] Differentiate preferred stock from common stock.
[6] Prepare a stockholders’ equity section.
Preview of Chapter 13
Corporations like Nike and adidas have substantial resources at their disposal. In fact, the corporation is the dominant form of business organization in the United States in terms of sales, earnings, and number of employees. All of the 500 largest companies in the United States are corporations. In this chapter, we will explain the essential features of a corporation and the accounting for a corporation's capital stock transactions. In Chapter 14, we will look at other issues related to accounting for corporations.
The content and organization of Chapter 13 are as follows.
The Corporate Form of Organization
LEARNING OBJECTIVE 1
Identify the major characteristics of a corporation.
In 1819, Chief Justice John Marshall defined a corporation as “an artificial being, invisible, intangible, and existing only in contemplation of law.” This definition is the foundation for the prevailing legal interpretation that a corporation is an entity separate and distinct from its owners.
A corporation is created by law, and its continued existence depends upon the statutes of the state in which it is incorporated. As a legal entity, a corporation has most of the rights and privileges of a person. The major exceptions relate to privileges that only a living person can exercise, such as the right to vote or to hold public office. A corporation is subject to the same duties and responsibilities as a person. For example, it must abide by the laws, and it must pay taxes.
Two common ways to classify corporations are by purpose and by ownership. A corporation may be organized for the purpose of making a profit, or it may be not-for-profit. For-profit corporations include such well-known companies as McDonald's, Nike, PepsiCo, and Google. Not-for-profit corporations are organized for charitable, medical, or educational purposes. Examples are the Salvation Army and the American Cancer Society.
Classification by ownership differentiates publicly held and privately held corporations. A publicly held corporation may have thousands of stockholders. Its stock is regularly traded on a national securities exchange such as the New York Stock Exchange. Examples are IBM, Caterpillar, and General Electric.
In contrast, a privately held corporation usually has only a few stockholders, and does not offer its stock for sale to the general public. Privately held companies are generally much smaller than publicly held companies, although some notable exceptions exist. Cargill Inc., a private corporation that trades in grain and other commodities, is one of the largest companies in the United States.
Alternative Terminology Privately held corporations are also referred to as closely held corporations.
Characteristics of a Corporation
In 1964, when Nike's founders Phil Knight and Bill Bowerman were just getting started in the running shoe business, they formed their original organization as a partnership. In 1968, they reorganized the company as a corporation. A number of characteristics distinguish corporations from proprietorships and partnerships. We explain the most important of these characteristics below.
SEPARATE LEGAL EXISTENCE
As an entity separate and distinct from its owners, the corporation acts under its own name rather than in the name of its stockholders. Nike may buy, own, and sell property. It may borrow money, and may enter into legally binding contracts in its own name. It may also sue or be sued, and it pays its own taxes.
In a partnership, the acts of the owners (partners) bind the partnership. In contrast, the acts of its owners (stockholders) do not bind the corporation unless such owners are agents of the corporation. For example, if you owned shares of Nike stock, you would not have the right to purchase inventory for the company unless you were designated as an agent of the corporation.
LIMITED LIABILITY OF STOCKHOLDERS
Since a corporation is a separate legal entity, creditors have recourse only to corporate assets to satisfy their claims. The liability of stockholders is normally limited to their investment in the corporation. Creditors have no legal claim on the personal assets of the owners unless fraud has occurred. Even in the event of bankruptcy, stockholders' losses are generally limited to their capital investment in the corporation.
TRANSFERABLE OWNERSHIP RIGHTS
Shares of capital stock give ownership in a corporation. These shares are transferable units. Stockholders may dispose of part or all of their interest in a corporation simply by selling their stock. The transfer of an ownership interest in a partnership requires the consent of each owner. In contrast, the transfer of stock is entirely at the discretion of the stockholder. It does not require the approval of either the corporation or other stockholders.
The transfer of ownership rights between stockholders normally has no effect on the daily operating activities of the corporation. Nor does it affect the corporation's assets, liabilities, and total ownership equity. The transfer of these ownership rights is a transaction between individual owners. The company does not participate in the transfer of these ownership rights after the original sale of the capital stock.
ABILITY TO ACQUIRE CAPITAL
It is relatively easy for a corporation to obtain capital through the issuance of stock. Buying stock in a corporation is often attractive to an investor because a stockholder has limited liability and shares of stock are readily transferable. Also, numerous individuals can become stockholders by investing relatively small amounts of money.
CONTINUOUS LIFE
The life of a corporation is stated in its charter. The life may be perpetual, or it may be limited to a specific number of years. If it is limited, the company can extend the life through renewal of the charter. Since a corporation is a separate legal entity, its continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer. As a result, a successful company can have a continuous and perpetual life.
CORPORATION MANAGEMENT
Stockholders legally own the corporation. However, they manage the corporation indirectly through a board of directors they elect. Philip Knight is the chairman of Nike. The board, in turn, formulates the operating policies for the company. The board also selects officers, such as a president and one or more vice presidents, to execute policy and to perform daily management functions. As a result of the Sarbanes-Oxley Act, the board is now required to monitor management's actions more closely. Many feel that the failures of Enron, WorldCom, and more recently MF Global could have been avoided by more diligent boards.
Illustration 13-1 (page 610) presents a typical organization chart showing the delegation of responsibility.
The chief executive officer (CEO) has overall responsibility for managing the business. As the organization chart shows, the CEO delegates responsibility to other officers. The chief accounting officer is the controller. The controller's responsibilities include (1) maintaining the accounting records, (2) maintaining an adequate system of internal control, and (3) preparing financial statements, tax returns, and internal reports. The treasurer has custody of the corporation's funds and is responsible for maintaining the company's cash position.
The organizational structure of a corporation enables a company to hire professional managers to run the business. On the other hand, the separation of ownership and management often reduces an owner's ability to actively manage the company.
Ethics Note 
Managers who are not owners are often compensated based on the performance of the firm. They thus may be tempted to exaggerate firm performance by inflating income figures.
Illustration 13-1 Corporation organization chart
GOVERNMENT REGULATIONS
A corporation is subject to numerous state and federal regulations. For example, state laws usually prescribe the requirements for issuing stock, the distributions of earnings permitted to stockholders, and the acceptable methods for buying back and retiring stock. Federal securities laws govern the sale of capital stock to the general public. Also, most publicly held corporations are required to make extensive disclosure of their financial affairs to the Securities and Exchange Commission (SEC) through quarterly and annual reports. In addition, when a corporation lists its stock on organized securities exchanges, it must comply with the reporting requirements of these exchanges. Government regulations are designed to protect the owners of the corporation.
ADDITIONAL TAXES
Owners of proprietorships and partnerships report their share of earnings on their personal income tax returns. The individual owner then pays taxes on this amount. Corporations, on the other hand, must pay federal and state income taxes as a separate legal entity. These taxes can be substantial. They can amount to as much as 40% of taxable income.
In addition, stockholders must pay taxes on cash dividends (pro rata distributions of net income). Thus, many argue that the government taxes corporate income twice (double taxation)—once at the corporate level and again at the individual level.
In summary, Illustration 13-2 shows the advantages and disadvantages of a corporation compared to a proprietorship and a partnership.
Forming a Corporation
A corporation is formed by grant of a state charter. The charter is a document that describes the name and purpose of the corporation, the types and number of shares of stock that are authorized to be issued, the names of the individuals that formed the company, and the number of shares that these individuals agreed to purchase. Regardless of the number of states in which a corporation has operating divisions, it is incorporated in only one state.
Illustration 13-2 Advantages and disadvantages of a corporation
Alternative Terminology The charter is often referred to as the articles of incorporation
It is to the company's advantage to incorporate in a state whose laws are favorable to the corporate form of business organization. For example, although General Motors has its headquarters in Michigan, it is incorporated in New Jersey. In fact, more and more corporations have been incorporating in states with rules that favor existing management. For example, Gulf Oil changed its state of incorporation to Delaware to thwart possible unfriendly takeovers. There, certain defensive tactics against takeovers can be approved by the board of directors alone, without a vote by shareholders.
Upon receipt of its charter from the state of incorporation, the corporation establishes by-laws. The by-laws establish the internal rules and procedures for conducting the affairs of the corporation. Corporations engaged in interstate commerce must also obtain a license from each state in which they do business. The license subjects the corporation's operating activities to the general corporation laws of the state.
Costs incurred in the formation of a corporation are called organization costs. These costs include legal and state fees, and promotional expenditures involved in the organization of the business. Corporations expense organization costs as incurred. Determining the amount and timing of future benefits is so difficult that it is standard procedure to take a conservative approach of expensing these costs immediately.
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 world's 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 doesn't need major physical resources, it doesn't have inventory, and it doesn't really need much money for marketing. So in the past, the company hasn't 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: I'm Rich! Facebook Flotation to Create 1,000 Millionaires Among Company's Rank and File,” Daily Mail Reporter (February 1, 2012).
Why did Mark Zuckerberg, the CEO and founder of Facebook, delay taking his company's shares public through an initial public offering (IPO)? (See page 643.)
Stockholder Rights
When chartered, the corporation may begin selling shares of stock. When a corporation has only one class of stock, it is common stock. Each share of common stock gives the stockholder the ownership rights pictured in Illustration 13-3. The articles of incorporation or the by-laws state the ownership rights of a share of stock.
Illustration 13-3 Ownership rights of stockholders
Proof of stock ownership is evidenced by a form known as a stock certificate. As Illustration 13-4 shows, the face of the certificate shows the name of the corporation, the stockholder's name, the class and special features of the stock, the number of shares owned, and the signatures of authorized corporate officials. Prenumbered certificates facilitate accountability. They may be issued for any quantity of shares.
Stock Issue Considerations
Although Nike incorporated in 1968, it did not sell stock to the public until 1980. At that time, Nike evidently decided it would benefit from the infusion of cash that a public sale would bring. When a corporation decides to issue stock, it must resolve a number of basic questions: How many shares should it authorize for sale? How should it issue the stock? What value should the corporation assign to the stock? We address these questions in the following sections.
Illustration 13-4 A stock certificate
AUTHORIZED STOCK
The charter indicates the amount of stock that a corporation is authorized to sell. The total amount of authorized stock at the time of incorporation normally anticipates both initial and subsequent capital needs. As a result, the number of shares authorized generally exceeds the number initially sold. If it sells all authorized stock, a corporation must obtain consent of the state to amend its charter before it can issue additional shares.
The authorization of capital stock does not result in a formal accounting entry. The reason is that the event has no immediate effect on either corporate assets or stockholders’ equity. However, the number of authorized shares is often reported in the stockholders’ equity section. It is then simple to determine the number of unissued shares that the corporation can issue without amending the charter: subtract the total shares issued from the total authorized. For example, if Advanced Micro was authorized to sell 100,000 shares of common stock and issued 80,000 shares, 20,000 shares would remain unissued.
ISSUANCE OF STOCK
A corporation can issue common stock directly to investors. Alternatively, it can issue the stock indirectly through an investment banking firm that specializes in bringing securities to the attention of prospective investors. Direct issue is typical in closely held companies. Indirect issue is customary for a publicly held corporation.
In an indirect issue, the investment banking firm may agree to underwrite the entire stock issue. In this arrangement, the investment banker buys the stock from the corporation at a stipulated price and resells the shares to investors. The corporation thus avoids any risk of being unable to sell the shares. Also, it obtains immediate use of the cash received from the underwriter. The investment banking firm, in turn, assumes the risk of reselling the shares, in return for an underwriting fee.2
For example, Google (the world's number-one Internet search engine) used underwriters when it issued a highly successful initial public offering, raising $1.67 billion. The underwriters charged a 3% underwriting fee (approximately $50 million) on Google's stock offering.
How does a corporation set the price for a new issue of stock? Among the factors to be considered are (1) the company's anticipated future earnings, (2) its expected dividend rate per share, (3) its current financial position, (4) the current state of the economy, and (5) the current state of the securities market. The calculation can be complex and is properly the subject of a finance course.
MARKET PRICE OF STOCK
The stock of publicly held companies is traded on organized exchanges. The interaction between buyers and sellers determines the prices per share. In general, the prices set by the marketplace tend to follow the trend of a company's earnings and dividends. But, factors beyond a company's control, such as an oil embargo, changes in interest rates, and the outcome of a presidential election, may cause day-to-day fluctuations in market prices.
The trading of capital stock on securities exchanges involves the transfer of already issued shares from an existing stockholder to another investor. These transactions have no impact on a corporation's stockholders’ equity.
INVESTOR INSIGHT 
How to Read Stock Quotes
Organized exchanges trade the stock of publicly held companies at dollar prices per share established by the interaction between buyers and sellers. For each listed security, the financial press reports the high and low prices of the stock during the year, the total volume of stock traded on a given day, the high and low prices for the day, and the closing market price, with the net change for the day. Nike is listed on the New York Stock Exchange. Here is a listing for Nike:
These numbers indicate the following. The high and low market prices for the last 52 weeks have been $78.55 and $48.76. The trading volume for the day was 5,375,651 shares. The high, low, and closing prices for that date were $72.44, $69.78, and $70.61, respectively. The net change for the day was a decrease of $1.69 per share.
For stocks traded on organized exchanges, how are the dollar prices per share established? What factors might influence the price of shares in the marketplace? (See page 643.)
PAR AND NO-PAR VALUE STOCKS
Par value stock is capital stock to which the charter has assigned a value per share. Years ago, par value determined the legal capital per share that a company must retain in the business for the protection of corporate creditors. That amount was not available for withdrawal by stockholders. Thus, in the past, most states required the corporation to sell its shares at par or above.
However, par value was often immaterial relative to the value of the company's stock—even at the time of issue. Thus, its usefulness as a protective device to creditors was questionable. For example, Loews Corporation's par value is $0.01 per share, yet a new issue in 2012 would have sold at a market price in the $32 per share range. Thus, par has no relationship with market price. In the vast majority of cases, it is an immaterial amount. As a consequence, today many states do not require a par value. Instead, they use other means to protect creditors.
No-par value stock is capital stock to which the charter has not assigned a value. No-par value stock is fairly common today. For example, Nike and Procter & Gamble both have no-par stock. In many states, the board of directors assigns a stated value to no-par shares.
DO IT!
Corporate Organization
Indicate whether each of the following statements is true or false.
______ 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.
Solution
1. False. The liability of stockholders is normally limited to their investment in the corporation.
2. True.
3. False. The separation of ownership and management is a disadvantage of the corporate form of business.
4. False. The authorization of capital stock does not result in a formal accounting entry.
5. False. Many states do not require a par value.
Action Plan
Review the characteristics of a corporation and understand which are advantages and which are disadvantages.
Understand that corporations raise capital through the issuance of stock, which can be par or no-par.
Related exercise material: BE13-1, E13-1, E13-2, and DO IT! 13-1.
Corporate Capital
Owners’ equity is identified by various names: stockholders’ equity, shareholders’ equity, or corporate capital. The stockholders’ equity section of a corporation's balance sheet consists of two parts: (1) paid-in (contributed) capital and (2) retained earnings (earned capital).
The distinction between paid-in capital and retained earnings is important from both a legal and a financial point of view. Legally, corporations can make distributions of earnings (declare dividends) out of retained earnings in all states. However, in many states they cannot declare dividends out of paid-in capital. Management, stockholders, and others often look to retained earnings for the continued existence and growth of the corporation.
LEARNING OBJECTIVE 2
Differentiate between paid-in capital and retained earnings.
PAID-IN CAPITAL
Paid-in capital is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock. As noted earlier, when a corporation has only one class of stock, it is common stock.
RETAINED EARNINGS
Retained earnings is net income that a corporation retains for future use. Net income is recorded in Retained Earnings by a closing entry that debits Income Summary and credits Retained Earnings. For example, assuming that net income for Delta Robotics in its first year of operations is $130,000, the closing entry is:
If Delta Robotics has a balance of $800,000 in common stock at the end of its first year, its stockholders’ equity section is as follows.
Illustration 13-5 Stockholders’ equity section
Illustration 13-6 compares 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
PEOPLE, PLANET, AND PROFIT INSIGHT 
The Impact of Corporate Social Responsibility
A recent survey conducted by Institutional Shareholder Services, a proxy advisory firm, shows that 83% of investors now believe environmental and social factors can significantly impact shareholder value over the long term. This belief is clearly visible in the rising level of support for shareholder proposals requesting action related to social and environmental issues.
The following table shows that the number of corporate social responsibility (CSR)-related shareholder proposals rose from 150 in 2000 to 191 in 2010. Moreover, those proposals received average voting support of 18.4% of votes cast versus just 7.5% a decade earlier.
Trends in Shareholder Proposals on Corporate Responsibility
Source: Investor Responsibility Research Center, Ernst & Young, Seven Questions CEOs and Boards Should Ask About: “Triple Bottom Line” Reporting.
Why are CSR-related shareholder proposals increasing? (See page 643.)
DO IT!
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.
Action Plan
Record net income in Retained Earnings by a closing entry in which Income Summary is debited and Retained Earnings is credited.
In the stockholders’ equity section, show
(1) paid-in capital and
(2) retained earnings.
Solution
Related exercise material: BE13-2 and DO IT! 13-2.
Accounting for Issues of Common Stock
Let's now look at how to account for issues of common stock. The primary objectives in accounting for the issuance of common stock are (1) to identify the specific sources of paid-in capital, and (2) to maintain the distinction between paid-in capital and retained earnings. The issuance of common stock affects only paid-in capital accounts.
LEARNING OBJECTIVE 3
Record the issuance of common stock.
Issuing Par Value Common Stock for Cash
As discussed earlier, par value does not indicate a stock's market price. Therefore, the cash proceeds from issuing par value stock may be equal to, greater than, or less than par value. When the company records issuance of common stock for cash, it credits the par value of the shares to Common Stock. It also records in a separate paid-in capital account the portion of the proceeds that is above or below par value.
To illustrate, assume that Hydro-Slide, Inc. issues 1,000 shares of $1 par value common stock at par for cash. The entry to record this transaction is:
Now assume that Hydro-Slide issues an additional 1,000 shares of the $1 par value common stock for cash at $5 per share. The amount received above the par value, in this case $4 ($5 – $1), is credited to Paid-in Capital in Excess of Par—Common Stock. The entry is:
The total paid-in capital from these two transactions is $6,000, and the legal capital is $2,000. Assuming Hydro-Slide, Inc. has retained earnings of $27,000, Illustration 13-7 shows the company's stockholders’ equity section.
Illustration 13-7 Stockholders’ equity—paid-in capital in excess of par
Alternative Terminology Paid-in Capital in Excess of Par is also called Premium on Stock.
When a corporation issues stock for less than par value, it debits the account Paid-in Capital in Excess of Par—Common Stock if a credit balance exists in this account. If a credit balance does not exist, then the corporation debits to Retained Earnings the amount less than par. This situation occurs only rarely. Most states do not permit the sale of common stock below par value because stockholders may be held personally liable for the difference between the price paid upon original sale and par value.
Issuing No-Par Common Stock for Cash
When no-par common stock has a stated value, the entries are similar to those illustrated for par value stock. The corporation credits the stated value to Common Stock. Also, when the selling price of no-par stock exceeds stated value, the corporation credits the excess to Paid-in Capital in Excess of Stated Value—Common Stock.
For example, 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. The entry is:
Hydro-Slide, Inc. reports Paid-in Capital in Excess of Stated Value—Common Stock as part of paid-in capital in the stockholders’ equity section.
What happens when no-par stock does not have a stated value? In that case, the corporation credits the entire proceeds to Common Stock. Thus, if Hydro-Slide does not assign a stated value to its no-par stock, it records the issuance of the 5,000 shares at $8 per share for cash as follows.
Issuing Common Stock for Services or Noncash Assets
Corporations also may issue stock for services (compensation to attorneys or consultants) or for noncash assets (land, buildings, and equipment). In such cases, what cost should be recognized in the exchange transaction? To comply with the historical cost principle, in a noncash transaction cost is the cash equivalent price. Thus, cost is either the fair value of the consideration given up or the fair value of the consideration received, whichever is more clearly determinable.
To illustrate, assume that 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. In this case, the fair value of the consideration received, $5,000, is more clearly evident. Accordingly, Jordan Company makes the following entry.
As explained on page 611, organization costs are expensed as incurred.
In contrast, assume that 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. The most clearly evident value in this noncash transaction is the market price of the consideration given, $80,000. The company records the transaction as follows.
As illustrated in these examples, the par value of the stock is never a factor in determining the cost of the assets received. This is also true of the stated value of no-par stock.
ANATOMY OF A FRAUD
The president, chief operating officer, and chief financial officer of SafeNet, a software encryption company, were each awarded employee stock options by the company's board of directors as part of their compensation package. Stock options enable an employee to buy a company's stock sometime in the future at the price that existed when the stock option was awarded. For example, suppose that you received stock options today, when the stock price of your company was $30. Three years later, if the stock price rose to $100, you could “exercise” your options and buy the stock for $30 per share, thereby making $70 per share. After being awarded their stock options, the three employees changed the award dates in the company's records to dates in the past, when the company's stock was trading at historical lows. For example, using the previous example, they would choose a past date when the stock was selling for $10 per share, rather than the $30 price on the actual award date. In our example, this would increase the profit from exercising the options to $90 per share.
Total take: $1.7 million
THE MISSING CONTROL
Independent internal verification. The company's board of directors should have ensured that the awards were properly administered. For example, the date on the minutes from the board meeting could be compared to the dates that were recorded for the awards. In addition, the dates should again be confirmed upon exercise.
DO IT!
Issuance of Stock
Cayman Corporation begins operations on March 1 by issuing 100,000 shares of $10 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. Journalize the issuance of the shares, assuming the stock is not publicly traded.
Solution
Action Plan
In issuing shares for cash, credit Common Stock for par value per share.
Credit any additional proceeds in excess of par to a separate paid-in capital account.
When stock is issued for services, use the cash equivalent price.
For the cash equivalent price, use either the fair value of what is given up or the fair value of what is received, whichever is more clearly determinable.
Related exercise material: BE13-3, BE13-4, BE13-5, E13-3, E13-4, E13-6, and DO IT! 13-3.
Accounting for Treasury Stock
Treasury stock is a corporation's own stock that it has issued and subsequently reacquired from shareholders but not retired. A corporation may acquire treasury stock for various reasons:
LEARNING OBJECTIVE 4
Explain the accounting for treasury stock.
1. To reissue the shares to officers and employees under bonus and stock compensation plans.
2. To increase trading of the company's stock in the securities market. Companies expect that buying their own stock will signal that management believes the stock is underpriced, which they hope will enhance its market price.
3. To have additional shares available for use in the acquisition of other companies.
4. To reduce the number of shares outstanding and thereby increase earnings per share.
Helpful Hint Treasury shares do not have dividend rights or voting rights.
Another infrequent reason for purchasing shares is that management may want to eliminate hostile shareholders by buying them out.
Many corporations have treasury stock. For example, approximately 65% of U.S. companies have treasury stock.3 In a recent year, Nike purchased more than 6 million treasury shares.
Purchase of Treasury Stock
Companies generally account for treasury stock by the cost method. This method uses the cost of the shares purchased to value the treasury stock. Under the cost method, the company debits Treasury Stock for the price paid to reacquire the shares. When the company disposes of the shares, it credits to Treasury Stock the same amount it paid to reacquire the shares.
To illustrate, assume that on January 1, 2014, the stockholders’ equity section of Mead, Inc. has 400,000 shares authorized and 100,000 shares of $5 par value common stock outstanding (all issued at par value) and Retained Earnings of $200,000. The stockholders’ equity section before purchase of treasury stock is as follows.
Illustration 13-8 Stockholders’ equity with no treasury stock
On February 1, 2014, Mead acquires 4,000 shares of its stock at $8 per share. The entry is:
Mead debits Treasury Stock for the cost of the shares purchased ($32,000). Is the original paid-in capital account, Common Stock, affected? No, because the number of issued shares does not change.
In the stockholders’ equity section of the balance sheet, Mead deducts treasury stock from total paid-in capital and retained earnings. Treasury Stock is a contra stockholders’ equity account. Thus, the acquisition of treasury stock reduces stockholders’ equity. The stockholders’ equity section of Mead, Inc. after purchase of treasury stock is as follows.
Illustration 13-9 Stockholders’ equity with treasury stock
Mead discloses in the balance sheet both the number of shares issued (100,000) and the number in the treasury (4,000). The difference is the number of shares of stock outstanding (96,000). The term outstanding stock means the number of shares of issued stock that are being held by stockholders.
Some maintain that companies should report treasury stock as an asset because it can be sold for cash. But under this reasoning, companies would also show unissued stock as an asset, which is clearly incorrect. Rather than being an asset, treasury stock reduces stockholder claims on corporate assets. This effect is correctly shown by reporting treasury stock as a deduction from total paid-in capital and retained earnings.
Ethics Note
The purchase of treasury stock reduces the cushion (cash available) for creditors and preferred stockholders.
A restriction for the cost of treasury stock purchased is often required. The restriction is usually applied to retained earnings.
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 Reebok's 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 management's belief in good future earnings.
Skeptics, however, suggested that Reebok's management was repurchasing shares to make it less likely that another company would acquire Reebok (in which case Reebok's 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.
What signal might a large stock repurchase send to investors regarding management's belief about the company's growth opportunities? (See page 644.)
Disposal of Treasury Stock
Treasury stock is usually sold or retired. The accounting for its sale differs when treasury stock is sold above cost than when it is sold below cost.
SALE OF TREASURY STOCK ABOVE COST
If the selling price of the treasury shares is equal to their cost, the company records the sale of the shares by a debit to Cash and a credit to Treasury Stock. When the selling price of the shares is greater than their cost, the company credits the difference to Paid-in Capital from Treasury Stock.
To illustrate, assume that on July 1, Mead, Inc. sells for $10 per share the 1,000 shares of its treasury stock previously acquired at $8 per share. The entry is as follows.
Helpful Hint Treasury stock transactions are classified as capital stock transactions. As in the case when stock is issued, the income statement is not involved.
Mead does not record a $2,000 gain on sale of treasury stock for two reasons. (1) Gains on sales occur when assets are sold, and treasury stock is not an asset. (2) A corporation does not realize a gain or suffer a loss from stock transactions with its own stockholders. Thus, companies should not include in net income any paid-in capital arising from the sale of treasury stock. Instead, they report Paid-in Capital from Treasury Stock separately on the balance sheet, as a part of paid-in capital.
SALE OF TREASURY STOCK BELOW COST
When a company sells treasury stock below its cost, it usually debits to Paid-in Capital from Treasury Stock the excess of cost over selling price. Thus, if Mead, Inc. sells an additional 800 shares of treasury stock on October 1 at $7 per share, it makes the following entry.
Observe the following from the two sales entries. (1) Mead credits Treasury Stock at cost in each entry. (2) Mead uses Paid-in Capital from Treasury Stock for the difference between cost and the resale price of the shares. (3) The original paid-in capital account, Common Stock, is not affected. The sale of treasury stock increases both total assets and total stockholders’ equity.
After posting the foregoing entries, the treasury stock accounts will show the following balances on October 1.
Illustration 13-10
Treasury stock accounts
When a company fully depletes the credit balance in Paid-in Capital from Treasury Stock, it debits to Retained Earnings any additional excess of cost over selling price. To illustrate, assume that Mead, Inc. sells its remaining 2,200 shares at $7 per share on December 1. The excess of cost over selling price is $2,200 [2,200 × ($8 – $7)]. In this case, Mead debits $1,200 of the excess to Paid-in Capital from Treasury Stock. It debits the remainder to Retained Earnings. The entry is:
DO IT!
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.
Action Plan
Record the purchase of treasury stock at cost.
When treasury stock is sold above its cost, credit the excess of the selling price over cost to Paid-in Capital from Treasury Stock.
When treasury stock is sold below its cost, debit the excess of cost over selling price to Paid-in Capital from Treasury Stock.
Solution
Related exercise material: BE13-6, E13-5, E13-7, E13-8, and DO IT! 13-4.
Accounting for Preferred Stock
LEARNING OBJECTIVE 5
Differentiate preferred stock from common stock.
To appeal to a larger segment of potential investors, a corporation may issue an additional class of stock, called preferred stock. Preferred stock has contractual provisions that give it some preference or priority over common stock. Typically, preferred stockholders have a priority as to (1) distributions of earnings (dividends) and (2) assets in the event of liquidation. However, they generally do not have voting rights.
Like common stock, corporations may issue preferred stock for cash or for non-cash assets. The entries for these transactions are similar to the entries for common stock. When a corporation has more than one class of stock, each paid-in capital account title should identify the stock to which it relates. A company might have the following accounts: Preferred Stock, Common Stock, Paid-in Capital in Excess of Par—Preferred Stock, and Paid-in Capital in Excess of Par—Common Stock.
For example, if Stine Corporation issues 10,000 shares of $10 par value preferred stock for $12 cash per share, the entry to record the issuance is:
Preferred stock may have either a par value or no-par value. In the stockholders’ equity section of the balance sheet, companies list preferred stock first because of its dividend and liquidation preferences over common stock.
Dividend Preferences
As indicated above, preferred stockholders have the right to receive dividends before common stockholders. For example, if the dividend rate on preferred stock is $5 per share, common shareholders will not receive any dividends in the current year until preferred stockholders have received $5 per share. The first claim to dividends does not, however, guarantee the payment of dividends. Dividends depend on many factors, such as adequate retained earnings and availability of cash. If a company does not pay dividends to preferred stockholders, it cannot of course pay dividends to common stockholders.
For preferred stock, companies state the per share dividend amount as a percentage of the par value or as a specified amount. For example, Earthlink specifies a 3% dividend on its $100 par value preferred. PepsiCo pays $4.56 per share on its no-par value stock.
CUMULATIVE DIVIDEND
Preferred stock often contains a cumulative dividend feature. This right means that preferred stockholders must be paid both current-year dividends and any unpaid prior-year dividends before common stockholders receive dividends. When preferred stock is cumulative, preferred dividends not declared in a given period are called dividends in arrears.
To illustrate, assume that Scientific Leasing has 5,000 shares of 7%, $100 par value, cumulative preferred stock outstanding. Each $100 share pays a $7 dividend (.07 × $100). The annual dividend is $35,000 (5,000 × $7 per share). If dividends are two years in arrears, preferred stockholders are entitled to receive the following dividends in the current year.
Illustration 13-11 Computation of total dividends to preferred stock
The company cannot pay dividends to common stockholders until it pays the entire preferred dividend. In other words, companies cannot pay dividends to common stockholders while any preferred dividends are in arrears.
Are dividends in arrears considered a liability? No—no payment obligation exists until the board of directors declares a dividend. However, companies should disclose in the notes to the financial statements the amount of dividends in arrears. Doing so enables investors to assess the potential impact of this commitment on the corporation's financial position.
The investment community does not look favorably on companies that are unable to meet their dividend obligations. As a financial officer noted in discussing one company's failure to pay its cumulative preferred dividend for a period of time, “Not meeting your obligations on something like that is a major black mark on your record.” The accounting entries for preferred stock dividends are explained in Chapter 14.
Liquidation Preference
Most preferred stocks also have a preference on corporate assets if the corporation fails. This feature provides security for the preferred stockholder. The preference to assets may be for the par value of the shares or for a specified liquidating value.
For example, Commonwealth Edison's preferred stock entitles its holders to receive $31.80 per share, plus accrued and unpaid dividends, in the event of liquidation. The liquidation preference establishes the respective claims of creditors and preferred stockholders in litigation involving bankruptcy lawsuits.
Statement Presentation
LEARNING OBJECTIVE 6
Prepare a stockholders’ equity section.
Companies report paid-in capital and retained earnings in the stockholders’ equity section of the balance sheet. They identify the specific sources of paid-in capital, using the following classifications.
1. Capital stock. This category consists of preferred and common 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. This category includes the excess of amounts paid in over par or stated value and paid-in capital from treasury stock.
The stockholders’ equity section of Connally Inc. in Illustration 13-12 includes most of the accounts discussed in this chapter. The disclosures pertaining to Connally's common stock indicate that the company issued 400,000 shares; 100,000 shares are unissued (500,000 authorized less 400,000 issued); and 390,000 shares are outstanding (400,000 issued less 10,000 shares in treasury).
Alternative Terminology Paid-in capital is sometimes called contributed capital.
Illustration 13-12 Stockholders’ equity section
DO IT!
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.
Action Plan
Present capital stock first; list preferred stock before common stock.
Present additional paid-in capital after capital stock.
Report retained earnings after capital stock and additional paid-in capital.
Deduct treasury stock from total paid-in capital and retained earnings.
Solution
Related exercise material: BE13-8, E13-9, E13-12, E13-13, E13-14, E13-15, and DO IT! 13-5.
Comprehensive DO IT!
Rolman Corporation is authorized to issue 1,000,000 shares of $5 par value common stock. In its first year, the company has the following stock transactions.
| Jan. 10 | Issued 400,000 shares of stock at $8 per share. |
| July 1 | Issued 100,000 shares of stock for land. The land had an asking price of $900,000. The stock is currently selling on a national exchange at $8.25 per share. |
| Sept. 1 | Purchased 10,000 shares of common stock for the treasury at $9 per share. |
| Dec. 1 | Sold 4,000 shares of the treasury stock at $10 per share. |
Instructions
(a) Journalize the transactions.
(b) Prepare the stockholders’ equity section assuming the company had retained earnings of $200,000 at December 31.
Action Plan
When common stock has a par value, credit Common Stock for par value.
Solution to Comprehensive DO IT!
Use fair value in a noncash transaction.
Debit and credit the Treasury Stock account at cost.
Record differences between the cost and selling price of treasury stock in stockholders’ equity accounts, not as gains or losses.
SUMMARY OF LEARNING OBJECTIVES
1 Identify the major characteristics of a corporation. The major characteristics of a corporation are separate legal existence, limited liability of stockholders, transferable ownership rights, ability to acquire capital, continuous life, corporation management, government regulations, and additional taxes.
2 Differentiate between paid-in capital and retained earnings. Paid-in capital is the total amount paid in on capital stock. It is often called contributed capital. Retained earnings is net income retained in a corporation. It is often called earned capital.
3 Record the issuance of common stock. When companies record the issuance of common stock for cash, they credit the par value of the shares to Common Stock. They record in a separate paid-in capital account the portion of the proceeds that is above or below par value. When no-par common stock has a stated value, the entries are similar to those for par value stock. When no-par stock does not have a stated value, companies credit the entire proceeds to Common Stock.
4 Explain the accounting for treasury stock. The cost method is generally used in accounting for treasury stock. Under this approach, companies debit Treasury Stock at the price paid to reacquire the shares. They credit the same amount to Treasury Stock when they sell the shares. The difference between the sales price and cost is recorded in stockholders’ equity accounts, not in income statement accounts.
5 Differentiate preferred stock from common stock. Preferred stock has contractual provisions that give it priority over common stock in certain areas. Typically, preferred stockholders have preferences (1) to dividends and (2) to assets in liquidation. They usually do not have voting rights.
6 Prepare a stockholders’ equity section. In the stockholders’ equity section, companies report paid-in capital and retained earnings and identify specific sources of paid-in capital. Within paid-in capital, two classifications are shown: capital stock and additional paid-in capital. If a corporation has treasury stock, it deducts the cost of treasury stock from total paid-in capital and retained earnings to obtain total stockholders’ equity.
GLOSSARY
Authorized stock The amount of stock that a corporation is authorized to sell as indicated in its charter. (p. 613).
Charter A document that is issued by the state to set forth important terms and features regarding the creation of a corporation. (p. 610).
Corporation A business organized as a legal entity separate and distinct from its owners under state corporation law. (p. 608).
Cumulative dividend A feature of preferred stock entitling the stockholder to receive current and unpaid prior-year dividends before common stockholders receive dividends. (p. 625).
No-par value stock Capital stock that has not been assigned a value in the corporate charter. (p. 615).
Organization costs Costs incurred in the formation of a corporation. (p. 611).
Outstanding stock Capital stock that has been issued and is being held by stockholders. (p. 622).
Paid-in capital Total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock. (p. 616).
Par value stock Capital stock that has been assigned a value per share in the corporate charter. (p. 614).
Preferred stock Capital stock that has some preferences over common stock. (p. 624).
Privately held corporation A corporation that has only a few stockholders and whose stock is not available for sale to the general public. (p. 608).
Publicly held corporation A corporation that may have thousands of stockholders and whose stock is regularly traded on a national securities exchange. (p. 608).
Retained earnings Net income that the corporation retains for future use. (p. 616).
Stated value The amount per share assigned by the board of directors to no-par value stock. (p. 615).
Treasury stock A corporation's own stock that has been issued and subsequently reacquired from shareholders by the corporation but not retired. (p. 620).
Self-Test, Brief Exercises, Exercises, Problem Set A, and many more components are available for practice in WileyPLUS.
SELF-TEST QUESTIONS
Answers are on page 644.
(LO 1)
1. Which of the following is not a major advantage of a corporate form of organization?
(a) Separate legal existence.
(b) Continuous life.
(c) Government regulations.
(d) Transferable ownership rights.
(LO 1)
2. A major disadvantage of a corporation is:
(a) limited liability of stockholders.
(b) additional taxes.
(c) transferable ownership rights.
(d) separate legal existence.
(LO 1)
3. Costs incurred in the formation of a corporation:
(a) do not include legal fees.
(b) are expensed as incurred.
(c) are recorded as an asset.
(d) provide future benefits whose amounts and timing are easily determined.
(LO 1)
4. 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.
(LO 2)
5. Total stockholders’ equity (in the absence of treasury stock) equals:
(a) Total paid-in capital + Retained earnings.
(b) Paid-in capital + Capital stock + Retained earnings.
(c) Capital stock + Additional paid-in capital − Retained earnings.
(d) Common stock + Retained earnings.
(LO 2)
6. The account Retained Earnings is:
(a) a subdivision of paid-in capital.
(b) net income retained in the corporation.
(c) reported as an expense in the income statement.
(d) closed to capital stock.
(LO 3)
7. A-Team Corporation issued 1,000 shares of $5 par value stock for land. The stock is actively traded at $9 per share. The land was advertised for sale at $10,500. The land should be recorded at:
(a) $4,000.
(c) $9,000.
(b) $5,000.
(d) $10,500.
(LO 3)
8. ABC Corporation issues 1,000 shares of $10 par value common stock at $12 per share. In recording the transaction, credits are made to:
(a) Common Stock $10,000 and Paid-in Capital in Excess of Stated Value $2,000.
(b) Common Stock $12,000.
(c) Common Stock $10,000 and Paid-in Capital in Excess of Par $2,000.
(d) Common Stock $10,000 and Retained Earnings $2,000.
(LO 4)
9. Treasury stock may be repurchased:
(a) to reissue the shares to officers and employees under bonus and stock compensation plans.
(b) to signal to the stock market that management believes the stock is underpriced.
(c) to have additional shares available for use in the acquisition of other companies.
(d) More than one of the above.
(LO 4)
10. XYZ, Inc. sells 100 shares of $5 par value treasury stock at $13 per share. If the cost of acquiring the shares was $10 per share, the entry for the sale should include credits to:
(a) Treasury Stock $1,000 and Paid-in Capital from Treasury Stock $300.
(b) Treasury Stock $500 and Paid-in Capital from Treasury Stock $800.
(c) Treasury Stock $1,000 and Retained Earnings $300.
(d) Treasury Stock $500 and Paid-in Capital in Excess of Par $800.
(LO 4)
11. In the stockholders’ equity section, the cost of treasury stock is deducted from:
(a) total paid-in capital and retained earnings.
(b) retained earnings.
(c) total stockholders’ equity.
(d) common stock in paid-in capital.
(LO 5)
12. Preferred stock may have priority over common stock except in:
(a) dividends.
(b) assets in the event of liquidation.
(c) cumulative dividend features.
(d) voting.
(LO 5)
13. M-Bot Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding at December 31, 2014. No dividends were declared in 2012 or 2013. If M-Bot wants to pay $375,000 of dividends in 2014, common stockholders will receive:
(a) $0.
(b) $295,000.
(c) $215,000.
(d) $135,000.
(LO 6)
14. Which of the following is not reported under additional paid-in capital?
(a) Paid-in capital in excess of par.
(b) Common stock.
(c) Paid-in capital in excess of stated value.
(d) Paid-in capital from treasury stock.
(LO 6)
15. In the stockholders’ equity section of the balance sheet, common stock:
(a) is listed before preferred stock.
(b) is added to total capital stock.
(c) is part of paid-in capital.
(d) is part of additional paid-in capital.
Go to the book's companion website, www.wiley.com/college/weygandt, for additional Self-Test Questions.
QUESTIONS
1. Mark Kemp, a student, asks your help in understanding the following characteristics of a corporation: (a) separate legal existence, (b) limited liability of stockholders, and (c) transferable ownership rights. Explain these characteristics to Mark.
2. (a) Your friend Katie Fehr cannot understand how the characteristic of corporation management is both an advantage and a disadvantage. Clarify this problem for Katie.
(b) Identify and explain two other disadvantages of a corporation.
3. (a) The following terms pertain to the forming of a corporation: (1) charter, (2) by-laws, and (3) organization costs. Explain the terms.
(b) Donna Fleming believes a corporation must be incorporated in the state in which its headquarters’ office is located. Is Donna correct? Explain.
4. What are the basic ownership rights of common stockholders in the absence of restrictive provisions?
5. (a) What are the two principal components of stockholders’ equity?
(b) What is paid-in capital? Give three examples.
6. How do the financial statements for a corporation differ from the statements for a proprietorship?
7. The corporate charter of Luney Corporation allows the issuance of a maximum of 100,000 shares of common stock. During its first two years of operations, Luney sold 70,000 shares to shareholders and reacquired 7,000 of these shares. After these transactions, how many shares are authorized, issued, and outstanding?
8. Which is the better investment—common stock with a par value of $5 per share, or common stock with a par value of $20 per share? Why?
9. What factors help determine the market price of stock?
10. What effect does the issuance of stock at a price above par value have on the issuer's net income? Explain.
11. Why is common stock usually not issued at a price that is less than par value?
12. Land appraised at $80,000 is purchased by issuing 1,000 shares of $20 par value common stock. The market price of the shares at the time of the exchange, based on active trading in the securities market, is $95 per share. Should the land be recorded at $20,000, $80,000, or $95,000? Explain.
13. For what reasons might a company like IBM repurchase some of its stock (treasury stock)?
14. Meng, Inc. purchases 1,000 shares of its own previously issued $5 par common stock for $12,000. Assuming the shares are held in the treasury, what effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity?
15. The treasury stock purchased in Question 14 is resold by Meng, Inc. for $16,000. What effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity?
16. (a) What are the principal differences between common stock and preferred stock?
(b) Preferred stock may be cumulative. Discuss this feature.
(c) How are dividends in arrears presented in the financial statements?
17. Diaz Inc.'s common stock has a par value of $1 and a current market price of $15. Explain why these amounts are different.
18. Indicate how each of the following accounts should be classified in the stockholders’ equity section.
(a) Common stock.
(b) Paid-in capital in excess of par—common stock.
(c) Retained earnings.
(d) Treasury stock.
(e) Paid-in capital from treasury stock.
(f) Paid-in capital in excess of stated value—common stock.
(g) Preferred stock.
19. How many shares of common stock did Apple have at September 24, 2011, and at September 25, 2010?
BRIEF EXERCISES
BE13-1 Angie Baden is studying for her accounting midterm examination. Identify for Angie the advantages and disadvantages of the corporate form of business organization.
List the advantages and disadvantages of a corporation.
(LO 1)
BE13-2 At December 31, Ortiz Corporation reports net income of $480,000. Prepare the entry to close net income.
Prepare closing entries.
(LO 2)
BE13-3 On May 10, Jack Corporation issues 2,000 shares of $10 par value common stock for cash at $18 per share. Journalize the issuance of the stock.
Prepare entries for issuance of par value common stock.
(LO 3)
BE13-4 On June 1, Noonan Inc. issues 4,000 shares of no-par common stock at a cash price of $6 per share. Journalize the issuance of the shares assuming the stock has a stated value of $1 per share.
Prepare entries for issuance of no-par value common stock.
(LO 3)
BE13-5 Lei Inc.'s $10 par value common stock is actively traded at a market price of $15 per share. Lei issues 5,000 shares to purchase land advertised for sale at $85,000. Journalize the issuance of the stock in acquiring the land.
Prepare entries for issuance of stock in a noncash transaction.
(LO 3)
BE13-6 On July 1, Raney Corporation purchases 500 shares of its $5 par value common stock for the treasury at a cash price of $9 per share. On September 1, it sells 300 shares of the treasury stock for cash at $11 per share. Journalize the two treasury stock transactions.
Prepare entries for treasury stock transactions.
(LO 4)
BE13-7 Garb Inc. issues 5,000 shares of $100 par value preferred stock for cash at $130 per share. Journalize the issuance of the preferred stock.
Prepare entries for issuance of preferred stock.
(LO 5)
BE13-8 Pine Corporation has the following accounts at December 31: Common Stock, $10 par, 5,000 shares issued, $50,000; Paid-in Capital in Excess of Par—Common Stock $30,000; Retained Earnings $45,000; and Treasury Stock, 500 shares, $11,000. Prepare the stockholders’ equity section of the balance sheet.
Prepare stockholders’ equity section.
(LO 6)
DO IT! 13-1 Indicate whether each of the following statements is true or false.
_____ 1. The corporation is an entity separate and distinct from its owners.
_____ 2. The liability of stockholders is normally limited to their investment in the corporation.
_____ 3. The relative lack of government regulation is an advantage of the corporate form of business.
_____ 4. There is no journal entry to record the authorization of capital stock.
_____ 5. No-par value stock is quite rare today.
Analyze statements about corporate organization.
(LO 1)
DO IT! 13-2 At the end of its first year of operation, Goss Corporation has $1,000,000 of common stock and net income of $236,000. Prepare (a) the closing entry for net income and (b) the stockholders’ equity section at year-end.
Close net income and prepare stockholders’ equity section.
(LO 2)
DO IT! 13-3 Beauty Island Corporation began operations on April 1 by issuing 60,000 shares of $5 par value common stock for cash at $13 per share. On April 19, it issued 2,000 shares of common stock to attorneys in settlement of their bill of $27,500 for organization costs. Journalize both issuances, assuming the stock is not publicly traded.
Journalize issuance of stock.
(LO 3)
DO IT! 13-4 Fouts Corporation purchased 2,000 shares of its $10 par value common stock for $130,000 on August 1. It will hold these shares in the treasury until resold. On December 1, the corporation sold 1,200 shares of treasury stock for cash at $72 per share. Journalize the treasury stock transactions.
Journalize treasury stock transactions.
(LO 4)
DO IT! 13-5 Anders Corporation has issued 100,000 shares of $5 par value common stock. It authorized 500,000 shares. The paid-in capital in excess of par on the common stock is $240,000. The corporation has reacquired 7,000 shares at a cost of $46,000 and is currently holding those shares. Treasury stock was reissued in prior years for $47,000 more than its cost.
Prepare stockholders’ equity section.
(LO 6)
The corporation also has 2,000 shares issued and outstanding of 7%, $100 par value preferred stock. It authorized 10,000 shares. The paid-in capital in excess of par on the preferred stock is $23,000. Retained earnings is $372,000.
Prepare the stockholders’ equity section of the balance sheet.
EXERCISES
E13-1 Andrea has prepared the following list of statements about corporations.
1. A corporation is an entity separate and distinct from its owners.
2. As a legal entity, a corporation has most of the rights and privileges of a person.
3. Most of the largest U.S. corporations are privately held corporations.
4. Corporations may buy, own, and sell property; borrow money; enter into legally binding contracts; and sue and be sued.
5. The net income of a corporation is not taxed as a separate entity.
6. Creditors have a legal claim on the personal assets of the owners of a corporation if the corporation does not pay its debts.
7. The transfer of stock from one owner to another requires the approval of either the corporation or other stockholders.
8. The board of directors of a corporation legally owns the corporation.
9. The chief accounting officer of a corporation is the controller.
10. Corporations are subject to fewer state and federal regulations than partnerships or proprietorships.
Identify characteristics of a corporation.
(LO 1)
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
E13-2 Andrea (see E13-1) has studied the information you gave her in that exercise and has come to you with more statements about corporations.
Identify characteristics of a corporation.
(LO 1, 2)
1. Corporation management is both an advantage and a disadvantage of a corporation compared to a proprietorship or a partnership.
2. Limited liability of stockholders, government regulations, and additional taxes are the major disadvantages of a corporation.
3. When a corporation is formed, organization costs are recorded as an asset.
4. Each share of common stock gives the stockholder the ownership rights to vote at stockholder meetings, share in corporate earnings, keep the same percentage ownership when new shares of stock are issued, and share in assets upon liquidation.
5. The number of issued shares is always greater than or equal to the number of authorized shares.
6. A journal entry is required for the authorization of capital stock.
7. Publicly held corporations usually issue stock directly to investors.
8. The trading of capital stock on a securities exchange involves the transfer of already issued shares from an existing stockholder to another investor.
9. The market price of common stock is usually the same as its par value.
10. Retained earnings is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock.
Journalize issuance of common stock.
(LO 3)
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
E13-3 During its first year of operations, Foyle Corporation had the following transactions pertaining to its common stock.
Jan. 10 Issued 70,000 shares for cash at $5 per share.
July 1 Issued 40,000 shares for cash at $7 per share.
Instructions
(a) Journalize the transactions, assuming that the common stock has a par value of $5 per share.
(b) Journalize the transactions, assuming that the common stock is no-par with a stated value of $1 per share.
E13-4 Osage Corporation issued 2,000 shares of stock.
Instructions
Prepare the entry for the issuance under the following assumptions.
(a) The stock had a par value of $5 per share and was issued for a total of $52,000.
(b) The stock had a stated value of $5 per share and was issued for a total of $52,000.
(c) The stock had no par or stated value and was issued for a total of $52,000.
(d) The stock had a par value of $5 per share and was issued to attorneys for services during incorporation valued at $52,000.
(e) The stock had a par value of $5 per share and was issued for land worth $52,000.
Journalize issuance of common stock.
(LO 3)
E13-5 Quay Co. had the following transactions during the current period.
| Mar. 2 | Issued 5,000 shares of $5 par value common stock to attorneys in payment of a bill for $30,000 for services performed in helping the company to incorporate. |
| June 12 | Issued 60,000 shares of $5 par value common stock for cash of $375,000. |
| July 11 | Issued 1,000 shares of $100 par value preferred stock for cash at $110 per share. |
| Nov. 28 | Purchased 2,000 shares of treasury stock for $80,000. |
Journalize issuance of common and preferred stock and purchase of treasury stock.
(LO 3, 4, 5)
Instructions
Journalize the transactions.
E13-6 As an auditor for the CPA firm of Hinkson and Calvert, you encounter the following situations in auditing different clients.
1. LR Corporation is a closely held corporation whose stock is not publicly traded. On December 5, the corporation acquired land by issuing 5,000 shares of its $20 par value common stock. The owners’ asking price for the land was $120,000, and the fair value of the land was $110,000.
2. Vera Corporation is a publicly held corporation whose common stock is traded on the securities markets. On June 1, it acquired land by issuing 20,000 shares of its $10 par value stock. At the time of the exchange, the land was advertised for sale at $250,000. The stock was selling at $11 per share.
Journalize noncash common stock transactions.
(LO 3)
Instructions
Prepare the journal entries for each of the situations above.
E13-7 On January 1, 2014, the stockholders’ equity section of Newlin Corporation shows common stock ($5 par value) $1,500,000; paid-in capital in excess of par $1,000,000; and retained earnings $1,200,000. During the year, the following treasury stock transactions occurred.
| Mar. 1 | Purchased 50,000 shares for cash at $15 per share. |
| July 1 | Sold 10,000 treasury shares for cash at $17 per share. |
| Sept. 1 | Sold 8,000 treasury shares for cash at $14 per share. |
Journalize treasury stock transactions.
(LO 4)
Instructions
(a) Journalize the treasury stock transactions.
(b) Restate the entry for September 1, assuming the treasury shares were sold at $12 per share.
E13-8 Rinehart Corporation purchased from its stockholders 5,000 shares of its own previously issued stock for $255,000. It later resold 2,000 shares for $54 per share, then 2,000 more shares for $49 per share, and finally 1,000 shares for $43 per share.
Instructions
Prepare journal entries for the purchase of the treasury stock and the three sales of treasury stock.
Journalize treasury stock transactions.
(LO 4)
E13-9 Tran Corporation is authorized to issue both preferred and common stock. The par value of the preferred is $50. During the first year of operations, the company had the following events and transactions pertaining to its preferred stock.
| Feb. 1 | Issued 20,000 shares for cash at $53 per share. |
| July 1 | Issued 12,000 shares for cash at $57 per share. |
Instructions
(a) Journalize the transactions.
(b) Post to the stockholders’ equity accounts.
(c) Indicate the financial statement presentation of the related accounts.
Journalize preferred stock transactions and indicate statement presentation.
(LO 5, 6)
E13-10 Hodge Corporation issued 100,000 shares of $20 par value, cumulative, 6% preferred stock on January 1, 2013, for $2,300,000. In December 2015, Hodge declared its first dividend of $500,000.
Instructions
(a) Prepare Hodge's journal entry to record the issuance of the preferred stock.
(b) If the preferred stock is not cumulative, how much of the $500,000 would be paid to common stockholders?
(c) If the preferred stock is cumulative, how much of the $500,000 would be paid to common stockholders?
Differentiate between preferred and common stock.
(LO 5)
E13-11 Gilliam Corporation recently hired a new accountant with extensive experience in accounting for partnerships. Because of the pressure of the new job, the accountant was unable to review his textbooks on the topic of corporation accounting. During the first month, the accountant made the following entries for the corporation's capital stock.
Prepare correct entries for capital stock transactions.
(LO 3, 4, 5)
Instructions
On the basis of the explanation for each entry, prepare the entry that should have been made for the capital stock transactions.
E13-12 The following stockholders’ equity accounts, arranged alphabetically, are in the ledger of Eudaley Corporation at December 31, 2014.
Prepare a stockholders’ equity section.
(LO 6)
Instructions
Prepare the stockholders’ equity section of the balance sheet at December 31, 2014.
E13-13 The stockholders’ equity section of Haley Corporation at December 31 is as follows.
Answer questions about stockholders’ equity section.
(LO 3, 4, 5, 6)
Instructions
From a review of the stockholders’ equity section, as chief accountant, write a memo to the president of the company answering the following questions.
(a) How many shares of common stock are outstanding?
(b) Assuming there is a stated value, what is the stated value of the common stock?
(c) What is the par value of the preferred stock?
(d) If the annual dividend on preferred stock is $30,000, what is the dividend rate on preferred stock?
(e) If dividends of $60,000 were in arrears on preferred stock, what would be the balance in Retained Earnings?
E13-14 The stockholders’ equity section of Aluminum Company of America (Alcoa) showed the following (in alphabetical order): additional paid-in capital $6,101, common stock $925, preferred stock $55, retained earnings $7,428, and treasury stock 2,828. All dollar data are in millions.
The preferred stock has 557,740 shares authorized, with a par value of $100 and an annual $3.75 per share cumulative dividend preference. At December 31 of the current year, 557,649 shares of preferred are issued and 546,024 shares are outstanding. There are 1.8 billion shares of $1 par value common stock authorized, of which 924.6 million are issued and 844.8 million are outstanding at December 31.
Instructions
Prepare the stockholders’ equity section of the current year, including disclosure of all relevant data.
Prepare a stockholders’ equity section.
(LO 6)
E13-15 The ledger of Rolling Hills Corporation contains the following accounts: Common Stock, Preferred Stock, Treasury Stock, Paid-in Capital in Excess of Par—Preferred Stock, Paid-in Capital in Excess of Stated Value—Common Stock, Paid-in Capital from Treasury Stock, and Retained Earnings.
Instructions
Classify each account using the following table headings.
Classify stockholders’ equity accounts.
(LO 6)
EXERCISES: SET B AND CHALLENGE EXERCISES
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Exercise Set B and Challenge Exercises.
PROBLEMS: SET A
Journalize stock transactions, post, and prepare paid-in capital section.
(LO 3, 5, 6)
P13-1A DeLong Corporation was organized on January 1, 2014. It is authorized to issue 10,000 shares of 8%, $100 par value preferred stock, and 500,000 shares of no-par common stock with a stated value of $2 per share. The following stock transactions were completed during the first year.
| Jan. 10 | Issued 80,000 shares of common stock for cash at $4 per share. |
| Mar. 1 | Issued 5,000 shares of preferred stock for cash at $105 per share. |
| Apr. 1 | Issued 24,000 shares of common stock for land. The asking price of the land was $90,000. The fair value of the land was $85,000. |
| May 1 | Issued 80,000 shares of common stock for cash at $4.50 per share. |
| Aug. 1 | Issued 10,000 shares of common stock to attorneys in payment of their bill of $30,000 for services performed in helping the company organize. |
| Sept. 1 | Issued 10,000 shares of common stock for cash at $5 per share. |
| Nov. 1 | Issued 1,000 shares of preferred stock for cash at $109 per share. |
Instructions
(a) Journalize the transactions.
(b) Post to the stockholders’ equity accounts. (Use J5 as the posting reference.)
(c) Prepare the paid-in capital section of stockholders’ equity at December 31, 2014.
(c) Total paid-in capital $1,479,000
Journalize and post treasury stock transactions, and prepare stockholders’ equity section.
(LO 4, 6)
P13-2A Fechter Corporation had the following stockholders’ equity accounts on January 1, 2014: Common Stock ($5 par) $500,000, Paid-in Capital in Excess of Par—Common Stock $200,000, and Retained Earnings $100,000. In 2014, the company had the following treasury stock transactions.
| Mar. 1 | Purchased 5,000 shares at $8 per share. |
| June 1 | Sold 1,000 shares at $12 per share. |
| Sept. 1 | Sold 2,000 shares at $10 per share. |
| Dec. 1 | Sold 1,000 shares at $7 per share. |
Fechter Corporation uses the cost method of accounting for treasury stock. In 2014, the company reported net income of $30,000.
Instructions
(a) Journalize the treasury stock transactions, and prepare the closing entry at December 31, 2014, for net income.
(b) Open accounts for (1) Paid-in Capital from Treasury Stock, (2) Treasury Stock, and (3) Retained Earnings. Post to these accounts using J10 as the posting reference.
(c) Prepare the stockholders’ equity section for Fechter Corporation at December 31, 2014.
(b) Treasury Stock $8,000
(c) Total stockholders’ equity $829,000
P13-3A The stockholders’ equity accounts of Castle Corporation on January 1, 2014, were as follows.
Journalize and post transactions, and prepare stockholders’ equity section.
(LO 2, 3, 4, 6)
During 2014, the corporation had the following transactions and events pertaining to its stockholders’ equity.
| Feb. 1 | Issued 25,000 shares of common stock for $120,000. |
| Apr. 14 | Sold 6,000 shares of treasury stock—common for $33,000. |
| Sept. 3 | Issued 5,000 shares of common stock for a patent valued at $35,000. |
| Nov. 10 | Purchased 1,000 shares of common stock for the treasury at a cost of $6,000. |
| Dec. 31 | Determined that net income for the year was $452,000. |
No dividends were declared during the year.
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Enter the beginning balances in the accounts, and post the journal entries to the stockholders’ equity accounts. (Use J5 for the posting reference.)
(c) Prepare a stockholders’ equity section at December 31, 2014, including the disclosure of the preferred dividends in arrears.
(c) Total stockholders’ equity $5,350,000
P13-4A Peck Corporation is authorized to issue 20,000 shares of $50 par value, 10% preferred stock and 125,000 shares of $5 par value common stock. On January 1, 2014, the ledger contained the following stockholders’ equity balances.
Journalize and post stock transactions, and prepare stockholders’ equity section.
(LO 2, 3, 5, 6)
During 2014, the following transactions occurred.
| Feb. 1 | Issued 2,000 shares of preferred stock for land having a fair value of $120,000. |
| Mar. 1 | Issued 1,000 shares of preferred stock for cash at $65 per share. |
| July 1 | Issued 16,000 shares of common stock for cash at $7 per share. |
| Sept. 1 | Issued 400 shares of preferred stock for a patent. The asking price of the patent was $30,000. Market price for the preferred stock was $70 and the fair value for the patent was indeterminable. |
| Dec. 1 | Issued 8,000 shares of common stock for cash at $7.50 per share. |
| Dec. 31 | Net income for the year was $260,000. No dividends were declared. |
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Enter the beginning balances in the accounts, and post the journal entries to the stockholders’ equity accounts. (Use J2 for the posting reference.)
(c) Prepare a stockholders’ equity section at December 31, 2014.
(c) Total stockholders’ equity $2,570,000
P13-5A The following stockholders’ equity accounts arranged alphabetically are in the ledger of Galindo Corporation at December 31, 2014.
Prepare stockholders’ equity section.
(LO 6)
Total stockholders’ equity $6,707,000
Prepare entries for stock transactions and prepare stockholders’ equity section.
(LO 3, 4, 5, 6)
Instructions
Prepare a stockholders’ equity section at December 31, 2014.
P13-6A Irwin Corporation has been authorized to issue 20,000 shares of $100 par value, 10%, noncumulative preferred stock and 1,000,000 shares of no-par common stock. The corporation assigned a $2.50 stated value to the common stock. At December 31, 2014, the ledger contained the following balances pertaining to stockholders’ equity.
The preferred stock was issued for land having a fair value of $140,000. All common stock issued was for cash. In November, 1,500 shares of common stock were purchased for the treasury at a per share cost of $11. In December, 500 shares of treasury stock were sold for $14 per share. No dividends were declared in 2014.
Instructions
(a) Prepare the journal entries for the:
(1) Issuance of preferred stock for land.
(2) Issuance of common stock for cash.
(3) Purchase of common treasury stock for cash.
(4) Sale of treasury stock for cash.
(b) Prepare the stockholders’ equity section at December 31, 2014.
(b) Total stockholders’ equity $3,012,500
PROBLEMS: SET B
Journalize stock transactions, post, and prepare paid-in capital section.
(LO 3, 5, 6)
P13-1B Mendoza Corporation was organized on January 1, 2014. It is authorized to issue 20,000 shares of 6%, $40 par value preferred stock, and 500,000 shares of no-par common stock with a stated value of $2 per share. The following stock transactions were completed during the first year.
| Jan. 10 | Issued 100,000 shares of common stock for cash at $3 per share. |
| Mar. 1 | Issued 10,000 shares of preferred stock for cash at $55 per share. |
| Apr. 1 | Issued 25,000 shares of common stock for land. The asking price of the land was $90,000. The company's estimate of fair value of the land was $75,000. |
| May 1 | Issued 75,000 shares of common stock for cash at $4 per share. |
| Aug. 1 | Issued 10,000 shares of common stock to attorneys in payment of their bill for $50,000 for services performed in helping the company organize. |
| Sept. 1 | Issued 5,000 shares of common stock for cash at $6 per share. |
| Nov. 1 | Issued 2,000 shares of preferred stock for cash at $60 per share. |
Instructions
(a) Journalize the transactions.
(b) Post to the stockholders’ equity accounts. (Use J1 as the posting reference.)
(c) Prepare the paid-in capital section of stockholders’ equity at December 31, 2014.
(c) Total paid-in capital $1,425,000
Journalize and post treasury stock transactions, and prepare stockholders’ equity section.
(LO 4, 6)
P13-2B Hawthorne Corporation had the following stockholders’ equity accounts on January 1, 2014: Common Stock ($1 par) $400,000, Paid-in Capital in Excess of Par—Common Stock $500,000, and Retained Earnings $100,000. In 2014, the company had the following treasury stock transactions.
| Mar. 1 | Purchased 5,000 shares at $7 per share. |
| June 1 | Sold 1,000 shares at $10 per share. |
| Sept. 1 | Sold 2,000 shares at $9 per share. |
| Dec. 1 | Sold 1,000 shares at $5 per share. |
Hawthorne Corporation uses the cost method of accounting for treasury stock. In 2014, the company reported net income of $80,000.
(a) Journalize the treasury stock transactions, and prepare the closing entry at December 31, 2014, for net income.
(b) Open accounts for (1) Paid-in Capital from Treasury Stock, (2) Treasury Stock, and (3) Retained Earnings. Post to these accounts using J12 as the posting reference.
(c) Prepare the stockholders’ equity section for Hawthorne Corporation at December 31, 2014.
(b) Treasury Stock $7,000
(c) Total stockholders’ equity $1,078,000
P13-3B The stockholders’ equity accounts of Lore Corporation on January 1, 2014, were as follows.
Journalize and post transactions, and prepare stockholders’ equity section.
(LO 2, 3, 4, 6)
During 2014, the corporation had the following transactions and events pertaining to its stockholders’ equity.
| Feb. 1 | Issued 3,000 shares of common stock for $25,500. |
| Mar. 20 | Purchased 1,500 additional shares of common treasury stock at $8 per share. |
| June 14 | Sold 4,000 shares of treasury stock—common for $36,000. |
| Sept. 3 | Issued 2,000 shares of common stock for a patent valued at $19,000. |
| Dec. 31 | Determined that net income for the year was $350,000. |
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Enter the beginning balances in the accounts and post the journal entries to the stockholders’ equity accounts. (Use J1 as the posting reference.)
(c) Prepare a stockholders’ equity section at December 31, 2014.
(c) Total stockholders’ equity $2,611,500
P13-4B Gerstner Corporation is authorized to issue 10,000 shares of $40 par value, 10% preferred stock and 200,000 shares of $5 par value common stock. On January 1, 2014, the ledger contained the following stockholders’ equity balances.
Journalize and post stock transactions, and prepare stockholders’ equity section.
(LO 2, 3, 5, 6)
During 2014, the following transactions occurred.
| Feb. 1 | Issued 1,000 shares of preferred stock for land having a fair value of $65,000. |
| Mar. 1 | Issued 2,000 shares of preferred stock for cash at $60 per share. |
| July 1 | Issued 20,000 shares of common stock for cash at $5.80 per share. |
| Sept. 1 | Issued 800 shares of preferred stock for a patent. The asking price of the patent was $60,000. Market price for the preferred stock was $65 and the fair value for the patent was indeterminable. |
| Dec. 1 | Issued 10,000 shares of common stock for cash at $6 per share. |
| Dec. 31 | Net income for the year was $210,000. No dividends were declared. |
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Enter the beginning balances in the accounts, and post the journal entries to the stockholders’ equity accounts. (Use J2 as the posting reference.)
(c) Prepare a stockholders’ equity section at December 31, 2014.
(c) Total stockholders’ equity $2,233,000
P13-5B The following stockholders’ equity accounts arranged alphabetically are in the ledger of Alpers Corporation at December 31, 2014.
Prepare stockholders’ equity section.
(LO 6)
Total stockholders’ equity $3,222,400
Prepare entries for stock transactions and prepare stockholders’ equity section.
(LO 3, 4, 5, 6)
Instructions
Prepare a stockholders’ equity section at December 31, 2014.
P13-6B Kingsley Corporation has been authorized to issue 40,000 shares of $100 par value, 8%, noncumulative preferred stock and 2,000,000 shares of no-par common stock. The corporation assigned a $5 stated value to the common stock. At December 31, 2014, the ledger contained the following balances pertaining to stockholders’ equity.
The preferred stock was issued for land having a fair value of $296,000. All common stock issued was for cash. In November, 1,500 shares of common stock were purchased for the treasury at a per share cost of $22. In December, 500 shares of treasury stock were sold for $28 per share. No dividends were declared in 2014.
Instructions
(a) Prepare the journal entries for the:
(1) Issuance of preferred stock for land.
(2) Issuance of common stock for cash.
(3) Purchase of common treasury stock for cash.
(4) Sale of treasury stock for cash.
(b) Prepare the stockholders’ equity section at December 31, 2014.
(b) Total stockholders’ equity $7,237,000
PROBLEMS: SET C
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Problem Set C.
CONTINUING COOKIE CHRONICLE
(Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 12.)
CCC13 Natalie's friend, Curtis Lesperance, decides to meet with Natalie after hearing that her discussions about a possible business partnership with her friend Katy Peterson have failed. Because Natalie has been so successful with Cookie Creations and Curtis has been just as successful with his coffee shop, they both conclude that they could benefit from each other's business expertise. Curtis and Natalie next evaluate the different types of business organization. Because of the advantage of limited personal liability, they decide to form a corporation. Natalie and Curtis are very excited about this new business venture. They come to you with information about their businesses and with a number of questions.
Go to the book's companion website, www.wiley.com/college/weygandt, to see the completion of this problem.
Broadening Your Perspective
Financial Reporting and Analysis
Financial Reporting Problem: Apple Inc.
BYP13-1 The stockholders’ equity section for Apple Inc. is shown in Appendix A. Instructions for accessing and using the company's complete annual report, including the notes to the financial statements, are also provided in Appendix A.
(a) What is the par or stated value per share of Apple's common stock?
(b) What percentage of Apple's authorized common stock was issued at September 24, 2011?
Comparative Analysis Problem:
PepsiCo vs. Coca-Cola
BYP13-2 PepsiCo, Inc.'s financial statements are presented in Appendix B. Financial statements of The Coca-Cola Company are presented in Appendix C. Instructions for accessing and using the complete annual reports of PepsiCo and Coca-Cola, including the notes to the financial statements, are also provided in Appendices B and C, respectively.
Instructions
(a) What is the par or stated value of Coca-Cola's and PepsiCo's common stock?
(b) What percentage of authorized shares was issued by Coca-Cola at December 31, 2011, and by PepsiCo at December 31, 2011?
(c) How many shares are held as treasury stock by Coca-Cola at December 31, 2011, and by PepsiCo at December 31, 2011?
(d) How many Coca-Cola common shares are outstanding at December 31, 2011? How many PepsiCo shares of common stock are outstanding at December 31, 2011?
Comparative Analysis Problem:
Amazon.com, Inc. vs. Wal-Mart Stores, Inc.
BYP13-3 Amazon.com, Inc.'s financial statements are presented in Appendix D. Financial statements of Wal-Mart Stores, Inc. are presented in Appendix E. Instructions for accessing and using the complete annual reports of Amazon and Wal-Mart, including the notes to the financial statements, are also provided in Appendices D and E, respectively.
Instructions
(a) What is the par or stated value of Amazon's and Wal-Mart's common stock?
(b) What percentage of authorized shares was issued by Amazon at December 31, 2011, and by Wal-Mart at January 31, 2012?
(c) How many shares are held as treasury stock by Amazon at December 31, 2011, and by Wal-Mart at January 31, 2012?
(d) How many Amazon common shares are outstanding at December 31, 2011? How many Wal-Mart shares of common stock are outstanding at January 31, 2012?
Real-World Focus
BYP13-4 SEC filings of publicly traded companies are available to view online.
Address: http://biz.yahoo.com/i, or go to www.wiley.com/college/weygandt
Steps
1. Pick a company and type in the company's name.
2. Choose Quote.
Instructions
Answer the following questions.
(a) What company did you select?
(b) What is its stock symbol?
(c) What was the stock's trading range today?
(d) What was the stock's trading range for the year?
Critical Thinking
Decision-Making Across the Organization 
BYP13-5 The stockholders’ meeting for Percival Corporation has been in progress for some time. The chief financial officer for Percival is presently reviewing the company's financial statements and is explaining the items that comprise the stockholders’ equity section of the balance sheet for the current year. The stockholders’ equity section of Percival Corporation at December 31, 2014, is as follows.
At the meeting, stockholders have raised a number of questions regarding the stockholders’ equity section.
Instructions
With the class divided into groups, answer the following questions as if you were the chief financial officer for Percival Corporation.
(a) “What does the cumulative provision related to the preferred stock mean?”
(b) “I thought the common stock was presently selling at $29.75, but the company has the stock stated at $1 per share. How can that be?”
(c) “Why is the company buying back its common stock? Furthermore, the treasury stock has a debit balance because it is subtracted from stockholders’ equity. Why is treasury stock not reported as an asset if it has a debit balance?”
Communication Activity
BYP13-6 Joe Moyer, your uncle, is an inventor who has decided to incorporate. Uncle Joe knows that you are an accounting major at U.N.O. In a recent letter to you, he ends with the question, “I'm filling out a state incorporation application. Can you tell me the difference in the following terms: (1) authorized stock, (2) issued stock, (3) outstanding stock, (4) preferred stock?”
Instructions
In a brief note, differentiate for Uncle Joe among the four different stock terms. Write the letter to be friendly, yet professional.
Ethics Case
BYP13-7 The R&D division of Piqua Chemical Corp. has just developed a chemical for sterilizing the vicious Brazilian “killer bees” which are invading Mexico and the southern states of the United States. The president of the company is anxious to get the chemical on the market to boost the company's profits. He believes his job is in jeopardy because of decreasing sales and profits. The company has an opportunity to sell this chemical in Central American countries, where the laws are much more relaxed than in the United States.
The director of Piqua's R&D division strongly recommends further testing in the laboratory for side-effects of this chemical on other insects, birds, animals, plants, and even humans. He cautions the president, “We could be sued from all sides if the chemical has tragic side-effects that we didn't even test for in the labs.” The president answers, “We can't wait an additional year for your lab tests. We can avoid losses from such lawsuits by establishing a separate wholly owned corporation to shield Piqua Corp. from such lawsuits. We can't lose any more than our investment in the new corporation, and we'll invest in just the patent covering this chemical. We'll reap the benefits if the chemical works and is safe, and avoid the losses from lawsuits if it's a disaster.” The following week, Piqua creates a new wholly owned corporation called Finlay Inc., sells the chemical patent to it for $10, and watches the spraying begin.
Instructions
(a) Who are the stakeholders in this situation?
(b) Are the president's motives and actions ethical?
(c) Can Piqua shield itself against losses of Finlay Inc.?
All About You
BYP13-8 A high percentage of Americans own stock in corporations. As a shareholder in a corporation, you will receive an annual report. One of the goals of this course is for you to learn how to navigate your way around an annual report.
Instructions
Use the annual report provided in Appendix A to answer the following questions.
(a) What CPA firm performed the audit of Apple's financial statements?
(b) What was the amount of Apple's earnings per share in 2011?
(c) What were net sales in 2011?
(d) How much cash did Apple spend on capital expenditures in 2011?
(e) Over what life does the company depreciate its buildings?
(f) What were the proceeds from issuance of common stock in 2011?
FASB Codification Activity
BYP13-9 If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following.
(a) How is common stock defined?
(b) How is preferred stock defined?
(c) What is the meaning of the term shares?
Answers to Chapter Questions
Answers to Insight and Accounting Across the Organization Questions
p. 611 A Thousand Millonaires! Q: Why did Mark Zuckerberg, the CEO and founder of Face-book, delay taking his company's shares public through an initial public offering (IPO)? A: Facebook did not need to invest in factories, distribution systems, or even marketing, so it did not need to raise a lot of cash. Also, by delaying the decision to go public, Zuckerberg had more control over the direction of the company. In addition, publicly traded companies face many more financial reporting disclosure requirements.
p. 614 How to Read Stock Quotes Q: For stocks traded on organized stock exchanges, how are the dollar prices per share established? A: The dollar prices per share are established by the interaction between buyers and sellers of the shares. Q: What factors might influence the price of shares in the marketplace? A: The price of shares is influenced by a company's earnings and dividends as well as by factors beyond a company's control, such as changes in interest rates, labor strikes, scarcity of supplies or resources, and politics. The number of willing buyers and sellers (demand and supply) also plays a part in the price of shares.
p. 617 The Impact of Corporate Social Responsibility Q: Why are CSR-related shareholder proposals increasing? A: The increase in shareholder proposals reflects a growing belief that a company's social and environmental policies correlate strongly with its risk-management strategy and ultimately its financial performance.
p. 622 Why Did Reebok Buy Its Own Stock? Q: What signal might a large stock repurchase send to investors regarding management's belief about the company's growth opportunities? A: When a company has many growth opportunities, it will normally conserve its cash in order to be better able to fund expansion. A large use of cash to buy back stock (and essentially shrink the company) would suggest that management was not optimistic about its growth opportunities.
Answers to Self-Test Questions
1. c 2. b 3. b 4. d 5. a 6. b 7. c (1,000 × $9) 8. c 9. d 10. a 11. a 12. d 13. d 14. b 15. c
A Look at IFRS
The accounting for transactions related to stockholders’ equity, such as issuance of shares and purchase of treasury stock, are similar under both IFRS and GAAP. Major differences relate to terminology used, introduction of items such as revaluation surplus, and presentation of stockholders’ equity information.
LEARNING OBJECTIVE 7
Compare the accounting procedures for stockholders’ equity under GAAP and IFRS.
Key Points
- 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.
- There are often terminology differences for equity accounts. The following summarizes some of the common differences in terminology.
As an example of how similar transactions use different terminology under IFRS, consider the accounting for the issuance of 1,000 shares of $1 par value common stock for $5 per share. Under IFRS, the entry is as follows.
- The accounting for treasury stock differs somewhat between IFRS and GAAP. (However, many of the differences are beyond the scope of this course.) Like GAAP, IFRS does not allow a company to record gains or losses on purchases of its own shares. One difference worth noting is that, when a company purchases its own shares, IFRS treats it as a reduction of stockholders’ equity, but it does not specify which particular stockholders’ equity accounts are to be affected. Therefore, it could be shown as an increase to a contra equity account (Treasury Stock) or a decrease to retained earnings or share capital.
- 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.
Looking to the Future
As indicated in earlier discussions, 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.
IFRS Practice
IFRS Self-Test Questions
1. Under IFRS, a purchase by a company of its own shares is recorded by:
(a) an increase in Treasury Stock.
(b) a decrease in contributed capital.
(c) a decrease in share capital.
(d) All of these are acceptable treatments.
2. 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 accounting for treasury stock differs extensively between GAAP and IFRS.
3. 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.
4. Which of the following is false?
(a) Under GAAP, companies cannot record gains on transactions involving their own shares.
(b) Under IFRS, companies cannot record gains on transactions involving their own shares.
(c) Under IFRS, the statement of stockholders’ equity is a required statement.
(d) Under IFRS, a company records a revaluation surplus when it experiences an increase in the price of its common stock.
5. Which of the following does not represent a pair of GAAP/IFRS-comparable terms?
(a) Additional paid-in capital/Share premium.
(b) Treasury stock/Repurchase reserve.
(c) Common stock/Share capital.
(d) Preferred stock/Preference shares.
IFRS Exercises
IFRS13-1 On May 10, Jaurez Corporation issues 1,000 shares of $10 par value ordinary shares for cash at $18 per share. Journalize the issuance of the shares.
IFRS13-2 Meenen Corporation has the following accounts at December 31 (in euros): Share Capital—Ordinary, €10 par, 5,000 shares issued, €50,000; Share Premium—Ordinary €10,000; Retained Earnings €45,000; and Treasury Shares—Ordinary, 500 shares, €11,000. Prepare the equity section of the statement of financial position.
IFRS13-3 Overton Co. had the following transactions during the current period.
| Mar. 2 | Issued 5,000 shares of $1 par value ordinary shares to attorneys in payment of a bill for $30,000 for services provided in helping the company to incorporate. |
| June 12 | Issued 60,000 shares of $1 par value ordinary shares for cash of $375,000. |
| July 11 | Issued 1,000 shares of $100 par value preference shares for cash at $110 per share. |
| Nov. 28 | Purchased 2,000 treasury shares for $80,000. |
Instructions
Journalize the above transactions.
International Financial Reporting Problem: Zetar plc
IFRS13-4 The financial statements of Zetar plc are presented in Appendix F. Instructions for accessing and using the company's complete annual report, including the notes to its financial statements, are also provided in Appendix F.
Instructions
Use the company's annual report to answer the following questions.
(a) Using the information in the statement of changes in equity, prepare the journal entry to record the issuance of ordinary shares during the year ended April 30, 2010.
(b) Examine the equity section of the company's balance sheet. For each item in the equity section, provide the comparable label that would be used under GAAP.
Answers to IFRS Self-Test Questions
1. d 2. c 3. c 4. d 5. b
__________
1A number of companies have eliminated the preemptive right because they believe it makes an unnecessary and cumbersome demand on management. For example, by stockholder approval, IBM has dropped its preemptive right for stockholders.
2Alternatively, the investment banking firm may agree only to enter into a best-efforts contract with the corporation. In such cases, the banker agrees to sell as many shares as possible at a specified price. The corporation bears the risk of unsold stock. Under a best-efforts arrangement, the banking firm is paid a fee or commission for its services.
3Accounting Trends & Techniques 2011 (New York: American Institute of Certified Public Accountants).