Chapter 13: Corporations:Organization andCapital Stock Transactions Flashcards
Capital stock
An individual’s ownership of the corporation’s capital. Issued as stock certificates
Outstanding stock
Issued stock in the hands of stockholders
Par Value
An amount assigned by a company to the share of it’s stock. Generally lower than expecting to sell at to avoid selling under par value
Underwriter
A firm that handles the issuance of a company’s stock to the public, usually assuming some of the risk by agreeing to buy the stock if the firm cannot sell all of the stock to it’s clients
Issue price
Amount the corporation receives from issuing stock (usually exceeds par value)
Premium
Amount above par at which a stock is issued
Reasons companies purchase treasury wtock
1) to increase net assets by buying low and selling high
2) to support the company’s stock price
3) to avoid a takeover by an outside party (by reducing the number of outstanding shares that have voting rights)
4) to reward employees with stock
Preferred Stock
Has contractual claims that give it priority over common stock:
- Preference as to dividends
- Preference as to assets in case of Liquidations
- Often Non-Voting
May have par value or non par-value
Often has designated annual dividend, stated as % of par value
Journaling is similar to common stock
Reasons for Treasury Stock
- to reissue shares to officer or employees (compensation)
- To enhance stock market value
- To have shares to use in acquisition of other companies
- To increase earnings per share
- To rid company of disgruntled investors
- To avoid a takeover
May indicate to investors that the company is not optimistic about growth (otherwise they would use the money to fund expansion)
Legal Capital
the portion of stockholders’ equity that cannot be used for dividends. (Not intended to protect stockholders.)
Stock Split
Increasing the number of shares and lowing the price so the overall value stays the same
Treasury Stock
Corporation owns the stock it has re-acquired from shareholders, but not retired.
- A contra-stockholders’ equity account
- Has a Debit Normal Balance
- NOT an asset
- Reduces stockholders’ equity
- No voting or dividend rights
(buy back of outstanding stock is the creation of treasury stock)
Preferred stock Dividend preferences
Per share dividend amount stated as percentage of preferred stock par value (or specified amount)
If not stated to be non-cumulative assumed to have cumulative dividends - holders of preferred stock must be paid annual dividends PLUS any dividends in arrears before common stockholders receive dividends
dividends in Arrears
Dividends not declared in a period. Not a liability. Disclosed in financial statement notes.
APIC
Paid-in capital in excess of par (or stated) value
AKA: Additional Paid-In Capital
AKA: Premium on stock
Sources of Owner’s Equity
Owner’s Equity = Corporate Capital
1) Money invested by Owners/ Stockholders:
- Paid in capital (common vs Preferred stock)
2) Money made by the corporation
- Retained Earnings
Retained Earnings
Net income a corporation retains for future use
Earned but not property of/ distributable to the owners
Stated Value of Shares
Board can assign a stated value to no-par value stock (= legal capital) in “many states”
If no stated value per GAAP all issuance proceeds = legal capital
Corporation
An entity separate and distinct from it’s owners
- for profit and not-for-profit
- publicly held vs. privately held (aka closely held)
- limited liability to stockholders (only investment amount can be lost)
- continuous life
- Transferable ownership rights (can acquire capital via issuing stock)
- Separate taxes
- Separation of ownership and management
Par Value Stock
Value per share assigned by corporate charter
used to equal legal capital per share that a company must retain to protect creditors, but that’s no longer required in most states
Issuance IPO and Market Price
- Can issue directly or through an investment firm
IPO price set using:
- anticipated earnings
- expected dividend rate per share
- current financial position and the economy
- state of security market
Market value = price on stock exchange
interaction between buyer and seller determines price, may be beyond company control
Authorized Shares
Amount of stock corporation is authorized to sell indicated in the charter.
- often reported in the Stockholders’ Equity section of reports
Issued = shares actually printed
Outstanding shares = issued shares less treasury stock
Unissued shares = additional shares to issue without amending the charter
Stockholder’s rights
1) Vote on actions requiring stockholder approval (such as board elections)
2) Share corporate earnings via receipt of dividends
3) Keep same percentage of ownership when new shares are issued (pre-emptive right)
4) Share in assets upon liquidation in proportion to their holdings (residual claim. Paid after liabilities)
Stockholders CANNOT bind the business in a contract (separation of owners and management)
Setting up a corporation
- File with secretary of state (pay incorporation fee)
- State grants charter (articles of incorporation)
- Corporation develops by-laws
- if engaged in interstate commerce must obtain license from each state
“Disadvantages” of corporate structure
- Government regulations (from multiple agencies: state, federal, SEC, Stock Exchange)
- Additional taxes (taxed as a separate legal entity)
- Corporate management
(owners are prevented from having active role in company management)
“Advantages” of corporate structure
- Separate legal existence
- Limited liability to stockholders
- Transferrable ownership rights
- Ability to acquire capital (by issuing stock)
- Continuous life (not linked to one executive officer or owner)
Journaling issuance of shares with Par Value
Issued at Par Value:
Debit Cash
Credit Common Stock
Issued Above Par Value:
Debit Cash
Credit Common Stock (qty x $/share)
Credit Paid-In Capital in excess of Par Value
Journaling Issuance of Shares No-Par value
Issued with stated value:
Debit Cash
Credit Common Stock (qty x $/share)
Credit Paid-In Capital in excess of stated value (if issued above stated value)
If no par or stated value
Debit Cash
Credit Common Stock
Organization Costs
Expensed as occur:
- legal fees
- state incorporation fees
- promotional costs
Corporate vs. Proprietor/ Partnership Capital
Proprietorship/ Partnership - all income flows to owner
Corporation - income is property of business
Proprietorship - one capital account
Partnership - one capital account per partner
Corporation- common stock account vs retained earnings account
(all are owner’s equity accounts so all have credit normal balance)
Steps in accounting for issuance of common stock
1) identify source of paid-in capital
2) maintain distinction between paid-in capital and retained earnings
Effects only paid-in capital accounts and cash/ assets received
Issuance of stock for services or assets
Cost = fair market value of shares given up or fair market value of service/ asset received, whichever is more clearly determinable
Debit Expense or Asset
Credit Common Stock (qty x $/share)
Credit APIC if applicable
Treasury Stock Transaction
GAAP Cost method is required
Repurchasing: treasury stock must be recorded at cost (price paid)
Re-issuing: treasury stock received + Profit/ loss effects
Profit/loss = $ received less cost paid for treasury stock
-no profit /loss : treasury stock reduced
- profit: increase paid in capital
- loss: decrease paid-in capital first, then retained earnings
(no income statement effect)
Journaling Repurchasing Treasury Stock
Debit Treasury Stock (qty x $/share)
Credit Cash
Treasury stock is a contra-asset account that decreases total stockholders equity
Always recorded at cost, no reference to par value
JounalingRe-Issuance of Treasury Stock
Debit Cash
(Debit Paid-in capital Treasury Stock if loss, Retained Earnings if insufficient balance)
Credit Treasury Stock (Qty x COST)
(Credit paid-In captial treasury stock if excess)
No gains or losses from stock transactions - just increase and decreases of assets and equity
Paid in Capital from Treasury Stock Account
Increased when treasury stock re-issued above cost, decreased when treasury stock re-issued below cost
Can only be decreased to 0 (only decrease by total balance on hand)
Any loss in excess of balance available debited to retained earnings
Closing Entries for Corporations
Income summary closed to retained earnings
Stock, retained earnings, paid-in capital in excess of par are permanent accounts, not closed at the end the financial period.
Common Stock on balance sheet
Stockholders Equity
Paid-In Capital
Common Stock
Paid-In Capital in excess of Par Value
Total Paid In Capital
Retained Earnings
Total Stockholders EquityCommon & Preferred Stock on Balance Sheet
Stockholders’ Equity
Paid-In Capital
% Preferred Stock, $ Par Value X shares authorized, X shares issued and outstanding
Common Stock, $ Value (par or stated) X shares authorized, X shares issued / outstanding
Total Capital Stock
Additional paid-in capital is also separated into preferred and common stock
Treasury stock on balance sheet
Stockholders Equity
Paid-In Capital
Common Stock
Paid-In Capital in excess of Par Value
Total Paid In Capital
Retained Earnings
Total Paid-In Capital and Retained Earnings
Less: Treasury Stock (qty @ cost)
Total Stockholders EquityReporting stock on the balance sheet
Preferred stock always listed before common
Report: Par value shares authorized, shares issued, and shares outstanding for each class of stock
Additional Paid-In capital is its own section
Stock Terminology GAAP vs IFRS
GAAP | IFRS
All Equity that is not paid-in capital | Reserves
Common stock | share capital- ordinary
Stockholders | shareholders
Par Value | Nominal or face value
Preferred Stock | Share Capital- Preference
Paid-in Capital in excess of par | share premium
Retained Earnings Deficit | Accumulated losses
Accumulated other comprehensive income | General reserve and other reserve accounts
