ACCNT 2: CH. 13

Sale of Treasury Stock Above Cost. Illustration: On July 1, Mead, Inc. sells for $10 per share 1,000 of the 4,000 shares of its treasury stock previously acquired at $8 per share. The entry is as follows.

Jul. 1 dr.Cash 10,000 cr. Treasury Stock (1,000 × $8) 8,000 cr. Paid-in Capital from Treasury Stock 2,000 (To record sale of 1,000 shares of treasury stock above cost) >>A corporation does not realize a gain or suffer a loss from stock transactions with its own stockholders.

Common Stock for Services. Illustration: 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. Prepare the journal entry for this transaction

Land 80,000 Common stock 50,000 Paid- in Capital in excess of par value-common stock 30,000 (to record issuance of 10,000 shares of $5 par value stock for land )

Limited Liability of Stockholders → Limited to their investment.

Limited to their investment.

Common Stock for Services. Illustration: 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. Prepare the journal entry for this transaction.

Organizational expense 5,000 common stock (4,000x $1) 4,000 Paid-in capital in excess of par value-common stock 1,000 ( to record issuance of 4,000 shares of $1 par value stock to attorneys)

Accounting for Common Stock

Primary Objectives: 1.Identify the specific sources of paid-in capital. 2.Maintain the distinction between paid-in capital and retained earnings. >>Other than consideration received, the issuance of common stock affects only paid-in capital accounts.

Accounting for Common Stock

Primary Objectives: 1.Identify the specific sources of paid-in capital. Maintain the distinction between paid-in capital and retained earnings >>Other than consideration received, the issuance of common stock affects only paid-in capital accounts.

Comparison of the owners' equity (stockholders' equity) accounts reported on a balance sheet.

Proprietorship> Owners capitol> Normal balance (cr) Partnership> Able, Capital> Normal balance (cr) >Baker, Capital> Normal balance (cr) Corporation> Common stock >Normal balance (cr) Retained Earnings> Normal Balance (cr)

Ex problem for Retained Earnings, If Delta Robotics has a balance of $800,000 in common stock and $130,000 in retained earnings at the end of its first year, its stockholders' equity section is as follows.

Stockholders Equity Paid-in capitol common stock 800,000 Retained earnings 130,000 Total stockholders' equity =930,000

Accounting for stock transactions

Stockholders equity Paid-in capital Common stock 2,000 In excess of par-comm stock 4,000 Total paid-in capital =6,000 Retained earnings 27,000 Total stockholders' equity =33,000

Accounting for Stock Transactions

Stockholders equity Paid in Capital Common stock 2,000 In excess of par-common stock 4,000 Total Paid in Capital =6,000 Retained earnings 27,000 Total stockholders equity =33,000

Statement Presentation of Stockholders' Equity. Companies report paid-in capital and retained earnings in the stockholders' equity section of the balance sheet. Paid-in capital includes:

1.Capital 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. Excess amounts paid in over par or stated value and paid-in capital from treasury stock.

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

1.How many shares should it authorize for sale? 2.How should it issue the stock? 3.What value should the corporation assign to the stock?

stockholder rights

1.Vote in election of board of directors at annual meeting and vote on actions that require stockholder approval. 2.Share the corporate earnings through receipt of dividends. 3.Keep the same percentage ownership when new shares of stock are issued (preemptive right). 4.Share in assets upon liquidation in proportion to their holdings. This is called a residual claim.

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.

Answer: Legal capital per share applies to par value stock but not to no-par value stock.

Accounting for Preferred Stock. Illustration: Stine Corporation issues 10,000 shares of $10 par value preferred stock for $12 cash per share. The journal entry to record the issuance is:

Cash Common stock (10,000 x $10) Paid-in cap in excess of par value- preferred stock ( to record the issuance of 10,000 shares at $10 par value preferred stock) >>Preferred stock may have a par value or no-par value.

Issuance of Stock. Illustration: Cayman Corporation begins operations on March 1 by issuing 100,000 shares of $1 par value common stock for cash at $12 per share. Journalize the issuance of the common shares on March 1 assuming the shares are not publicly traded.

Cash 1,200,000 Common stock (10,000 x $1) 100,000 Paid in cap in ex. pv- common stock 1,100,000 (to record issuance of 100,000 shares at $12 per share)

Issuing No-Par Common Stock for Cash. Illustration: 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.

Cash 40,000 Common stock (5,000 x $5) 25,000 Paid in capital in excess of stated value-common stock 15,000 (record issue of 5,000 shares of $5 stated value no-par stock)

Issuing No-Par Common Stock for Cash. Illustration: Assume further that the no-part stock does not have a stated value and the company issues 5,000 shares at $8 per share for cash.

Cash 40,000 Common stock 40,000 (to record issue of 5,000 shares of no-par stock)

Issuance of Stock. Illustration: On March 28, Cayman issues 1,500 shares of $10 par value preferred stock for cash at $30 per share. Journalize the issuance of preferred shares.

Cash 45,000 Preferred Stock (1,500 × $10) 15,000 Paid-in Capital in Excess of Par Value—Preferred Stock 30,000 (To record issuance of 1,500 shares at $30 per share)

Issuance of Stock

Companies issue common stock directly to investors or indirectly through an investment banking firm >>Factors in setting price for a new issue of stock: 1.Company's anticipated future earnings 2.Expected dividend rate per share 3.Current financial position 4.Current state of economy 5.Current state of securities market

Continuous Life →

Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer

•Separate Legal Existence →

Corporation acts under its own name rather than in the name of its stockholders.

Ability to Acquire Capital →

Corporation can obtain capital through the issuance of stock.

Accounting for Treasury Stock: **Treasury stock** is a corporation's own stock that it has issued and subsequently reacquired from shareholders but not retired.

Corporations acquire treasury stock for various reasons: 1.To reissue the shares to officers and employees under bonus and stock compensation plans. 2.To enhance the stock's market value. 3.To have additional shares available for use in the acquisition of other companies. To increase earnings per share.

Issuing Common Stock for Services or Noncash Assets

Corporations also may issue stock for: •Services (attorneys or consultants) •Noncash assets (land, buildings, and equipment) >>>Cost is either the fair market value of the consideration given up, or the fair market value of the consideration received, whichever is more clearly determinable.

Additional Taxes →

Corporations pay income taxes as a separate legal entity and in addition, stockholders pay taxes on cash dividends.

Issuing common stock for cash Ex. Illustration: Assume that Hydro-Slide, Inc. issues 1,000 shares of $1 par value common stock. Prepare Hydro-Slide's journal entry if (a) 1,000 share are issued for $1 per share, and (b) 1,000 shares are issued for $5 per share.

a) DR.Cash 1,000 CR. Common stock (1,000 x $1) 1,000 (To record issuance of 1,000 shares of $1 par common common stock at par) b) DR.Cash 5,000 CR.Common stock (1,000 x $1) 1,000 CR.Paid- in capital in excess of par- common stock 4,000 (To record issuance of 1,000 shares of $1 common stock)

Issuing common stock for cash. Illustration: Assume that Hydro-Slide, Inc. issues 1,000 shares of $1 par value common stock. Prepare Hydro-Slide's journal entry if (a) 1,000 share are issued for $1 per share, and (b) 1,000 shares are issued for $5 per share.

a) dr.Cash 1,000 cr.Common stock (1,000 x $1) 1,000 (To record issuance of 1,000 shares of $1 par common stock at par.) b)dr.Cash 5,000 cr.Common stock (1,000 x $1) 1,000 cr.Paid-in capital in excess par- common stock 4,000 (to record issuance of 1,000 shares of $1 par common stock)

Corporate Capitol ex: Illustration: 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.

a. dr. Income summary 122,000 cr. Retained Earnings 122,000 (to close income summary and transfer net income into retained earnings) b. Stockholders equity Paid in Capital dr. Common Stock 750,000 dr. Retained earnings 122,000 Total stockholders equity =872,000

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.

july 1st. dr.Treasury Stock 180,000 cr. Cash 180,000 (To record the purchase of 3,000 shares at $60 per share) Nov. 1 dr. Cash 70,000 cr.Treasury Stock 60,000 Paid-in Capital from Treasury Stock 10,000 (To record the sale of 1,000 shares at $70 per share)

Retained earnings is

net income that a corporation retains for future use.

Characteristics of corporation.

separate legal existence, limited liability of stockholders, transferable ownership rights, ability to acquire capital, continuous life, corporation management, government regulations, additional taxes

Paid-in capital is

the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock

Government Regulations →

•A corporation is subject to numerous state and federal regulations.

Authorized Stock

•Charter indicates amount of stock that a corporation is authorized to sell •Number of authorized shares is often reported in stockholders' equity section •No formal accounting entry

Accounting for Treasury Stock

•Companies generally use cost method •Debit Treasury Stock for price paid to reacquire shares •Treasury stock is a contra stockholders' equity account •Reduces stockholders' equity

To form a corporation:

•File application with the Secretary of State •State grants charter •Corporation develops by-laws >>Companies generally incorporate in a state whose laws are favorable to the corporate form of business. >>Corporations engaged in interstate commerce must obtain a license from each state in which they do business.

Corporate Management →

•Separation of ownership and management often reduces an owner's ability to actively manage the company.

Accounting for Preferred Stock

Typically, preferred stockholders have a priority as to: 1.Distributions of earnings (dividends). 2.Assets in event of liquidation. >>>Generally do not have voting rights. Accounting for preferred stock at issuance is similar to that for common stock.

Indicate whether each of the following statements is true or false. If false, indicate how to correct the statement. 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.

Answer: 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.

Issuance of Stock. Illustration: On March 15, Cayman issues 5,000 shares of common stock to attorneys in settlement of their bill of $50,000 for organization costs. Journalize the issuance of these shares.

Organization expense dr. 50,000 Common stock (5,000 x $1) cr. 5,000 Paid-in capital in ex. pv- common stock cr.45,000 (to record issuance of 5,000 shares for attorneys fees)

On December 1, assume that Mead, Inc. sells its remaining 2,200 shares at $7 per share and makes the following entry.

dr. Cash (2,200 × $7) 15,400 dr. Paid-in Capital from Treasury Stock 1,200 dr. Retained Earnings 1,000 cr. Treasury Stock (2,200 × $8) 17,600 (Limited to balance on hand) (To record sale of 2,200 shares of treasury stock at $7 per share)

Sale of Treasury Stock Below Cost. If Mead, Inc. sells an additional 800 shares of treasury stock on October 1 at $7 per share, it makes the following entry.

dr.Cash (800 × $7) 5,600 dr.Paid-in Capital from Treasury Stock 800 cr.Treasury Stock (800 × $8) 6,400 (To record sale of 800 shares of treasury stock below cost)

Transferable Ownership →

•Stockholders may sell their stock.

Par and No-Par Value Stocks

•Years ago, par value determined legal capital per share that a company must retain in business for protection of corporate creditors •No-par value stock is fairly common today •In many states, the board of directors assigns a stated value to no-par shares

Accounting for Treasury Stock: Illustration: On February 1, 2020, Mead acquires 4,000 shares of its stock at $8 per share. The entry is as follows.

Feb. 1 Treasury Stock (4,000 × $8) dr. 32,000 Cash cr. 32,000 (To record purchase of 4,000 shares of treasury stock at $8 per share)