Chapter 11-Financial Accounting

Characteristics of a Corporation

1) Separate Legal Existence* 2) Limited Liability of Stockholders 3) Transferable Ownership Rights* 4) Ability to Acquire Capital 5) Continuous Life 6) Corporation Management 7) Government Regulations 8) Additional Taxes

Paid in Capital vs. Retained Earnings

Accounts in the SE section but... Retained Earnings have dividends Paid in Capital do not have dividends

The charter indicates the amount of stock that a corporation is _______ to sell

Authorized

The total amount of ___________ at the time of incorporation normally anticipates both initial and subsequent _______ needs

Authorized stock Capital

The Authorization of _________ DOES NOT result in a formal accounting entry. The reason is that the event has not immediate effect on either corporate assets or stockholders' equity

Capital Stock

Journal Entry: Hydro-Slide, Inc. issues 1,000 shares of the $1 par value common stock at par for cash

Cash (debit) $1,000 Common Stock (credit) $1,000

Sale of Treasury Stock Above Cost Journal Entry: 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 *record sale of 1,000 shares of treasury stock above cost*

Cash (debit) 10,000 Treasury Stock (credit) 8,000 Paid-In Capital from Treasury Stock (credit) 2,000

Issuing No-Par Common Stock for Cash Journal Entry: 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 (debit) 40,000 Common Stock (credit) 25,000 Paid in Capital in Excess of Stated Value-Common Stock 15,000

Journal Entry: 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 *record issue of 5,000 shares of no-par stock*

Cash (debit) 40,000 Common stock (credit) 40,000

Journal Entry Part 2: 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

Cash (debit) 5,000 Common stock (credit) 1,000 Paid in Capital in Excess of Par-Common Stock (credit) 4,000

Sale of Treasury Stock Below Cost Journal Entry: If Mead, Inc. sells an additional 800 shares of treasury stock on October 1 at $7 per share

Cash (debit) 5,600 Paid-in Capital from Treasury Stock (debit) 800 Treasury Stock (credit) 6,400

To comply with the historical cost principle, in a non-cash transaction cost is the ________ 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

Cash Equivalent Price (issue a stock and do not receive cash, you receive a service or a non-cash asset instead)

A corporation is formed by grant of a state ______

Charter

A _______ is a document that describes the name and purpose of the corporation, the types and number of shares of stock that are ____________, the names of the individuals that formed the company, and the number of shares that these individuals agreed to purchase

Charter Authorized to be issued

When a corporation has only one class of stock, it is ________

Common Stock

Treasury stock is a ________________ account

Contra stockholder's equity account

"a _______ is defined 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 ________ is an entity separate and distinct from its owners

Corporation

Companies generally account for treasury stock by the _________ method

Cost

Journal Entry to close income summary and transfer net income to RE

Income Summary (debit) Retained Earnings (credit)

The purpose of a stock split is to _________ the marketability of the stock by lowering its market price per share

Increase

Corporations expense organization costs as ______

Incurred

Journal Entry: 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 non-cash transaction is the market price of the consideration given, $80,000.

Land (debit) 80,000 Common Stock (credit) 50,000 Paid in Capital in Excess of Par-Common Stock (credit) 30,000

A corporation is created by ____ and its continued existence depends upon the _____ of the state in which it is incorporated

Law Statutes

A corporation may acquire treasury stock for various reasons: Long-Term and Short- Term

Long-Term: 1) To reissue the shares to officers and employees under bonus and stock compensation plans 2) To have additional shares available for use in the acquisition of other companies Short-Term: 3)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 4) To reduce the number of shares outstanding and thereby increase earnings per share

Par Value does not need to equal _________

Market Value

For profit corporations are examples of :

McDonald's, Nike, PepsiCo, and Google

Not-for-profit corporations are organized for charitable, _______, or educational purposes. Examples include:

Medical -Salvation Army and the American Cancer Society

__________ is capital stock to which the charter has not assigned a value

No-par value Ex: Nike & Proctor & Gamble have no-par stock

Journal Entry: Assume that attorneys have helped Jordan Company Inc. 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 is received, $5,000, is more clearly evident.

Organization Expense (debit) 5,000 Common Stock (credit) 4,000 Paid-In Capital in Excess of Par--Common Stock (credit) 1,000

The issuance of common stock affects only _________ accounts

Paid in Capital

_______ is the total amount of CASH and other assets paid in to the corporation by stockholders in exchange for CAPITAL STOCK

Paid-in-Capital

If market value = par value than those shares are sold at ____

Par

________ is capital stock to which the charter has assigned a value per share

Par Value Stock

A _________ corporation usually has only a few stockholders and does not offer its stock for sale to the general public (generally much smaller) Ex:

Privately Held Corporation Ex: Cargill Inc. trades in grain and other commodities and is one of the largest companies in the United States

A __________ corporation may have thousands of stockholders. Its stock is regularly traded on a national securities exchange such as the New York Stock Exchange. Examples include:

Publicly Held Corporation Ex: IBM, Caterpillar, and General Electric

Two common ways to classify corporations are by _______ and by ________ .

Purpose Ownership

Authorized stock

Raise money: 1) borrow money (debt) 2) sells shares of ownership -Use it for capital needs that help generate revenue

Under this method, the company debits treasury stock for the price paid to _______ the shares

Reacquire

However, a stock split results in a ______ in the par or stated value per share

Reduction

_________ is NET INCOME that a corporation retains for future use

Retained Earnings (net income is recorded in Retained Earnings by a closing entry that is on next flash card)

When the company disposes of the shares, it credits to Treasury stock the _______ amount it paid to reacquire the shares

Same

Stockholders Equity is also identified as:

Shareholders' equity, owners equity, or corporate capital

The number of shares authorized generally exceeds the number initially _____ If it sells all authorized stock, corporation must obtain consent of the state to _____ its charter before it can issue additional shares

Sold Amend

A _________, like a stock dividend, involves issuance of additional shares to stockholders according to their percentage ownership

Stock Split

The number of authorized shares is often reported in the ___________ section

Stockholder's Equity

______ method uses the cost of the shares purchased to value the treasury stock.

The Cost Method

The sales of treasury stock increases both _________ and __________

Total Assets & Total Stockholder's Equity

________ is a corporation's own stock that it has issued and subsequently reacquired from shareholders but not retired

Treasury Stock

Journal Entry: On Feb. 1 2015, Mead acquires 4,000 shares of its stock at $8 per share

Treasury Stock (debit) 32,000 Cash (credit) 32,000