Accounting Principles
Thirteenth Edition Weygandt Kimmel Kieso
Chapter 13
Corporations: Organization and
Capital Stock Transactions
Chapter 13
Corporations: Organization and
Share Capital Transactions
Chapter Outline
Learning Objectives
LO
1 Discuss the major characteristics of a corporation.
LO 2 Explain how to account for the issuance of ordinary and preference shares.
LO 3 Explain the accounting for treasury shares.
LO 4 Prepare an equity section.
An entity separate and distinct from its owners.
Corporate Form of Organization
Classified by Purpose
Not-for-Profit
For Profit
Classified by Ownership
Publicly held
Privately held
► McDonald’s
► Nike
► PepsiCo
► Salvation Army
► American Cancer Society
► Cargill Inc.
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders Transferable Ownership Rights Ability to Acquire Capital
Continuous Life
Corporate Management Government Regulations
Characteristics of Corporation
Advantages
Disadvantages
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders Transferable Ownership Rights Ability to Acquire Capital
Continuous Life
Corporate Management Government Regulations Additional Taxes
Characteristics of Corporation
Corporation acts under its own name rather than in the name of its
shareholders
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders Transferable Ownership Rights Ability to Acquire Capital
Continuous Life
Corporate Management Government Regulations
Characteristics of Corporation
Limited to their investment
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders Transferable Ownership Rights Ability to Acquire Capital
Continuous Life
Corporate Management Government Regulations Additional Taxes
Characteristics of Corporation
Shareholders may sell their shares
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders Transferable Ownership Rights Ability to Acquire Capital
Continuous Life
Corporate Management Government Regulations
Characteristics of Corporation
Corporation can obtain capital
through the issuance of shares
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders Transferable Ownership Rights Ability to Acquire Capital
Continuous Life
Corporate Management Government Regulations Additional Taxes
Characteristics of Corporation
Continuance as a going concern is not affected by the withdrawal, death,
or incapacity of a shareholder, employee, or
officer
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders Transferable Ownership Rights Ability to Acquire Capital
Continuous Life
Corporate Management Government Regulations
Characteristics of Corporation
Separation of ownership and management often reduces an owner’s
ability to actively manage the
Shareholders
Chairman and Board of Directors President and Chief Executive
Officer
General Counsel/
Secretary
Vice President Marketing
Vice President Finance/Chief Financial Officer
Vice President Operations
Vice President Human Resources
Treasurer Controller
ILLUSTRATION 13.1
Corporation organization chart
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders Transferable Ownership Rights Ability to Acquire Capital
Continuous Life
Corporate Management Government Regulations
Characteristics of Corporation
A corporation is subject to numerous governmental
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders Transferable Ownership Rights Ability to Acquire Capital
Continuous Life
Corporate Management Government Regulations Additional Taxes
Characteristics of Corporation
Corporations pay income taxes as a
separate legal entity and in
addition,
shareholders pay taxes on cash
dividends
Initial Steps:
File application with the appropriate governmental agency Government grants charter
Corporation develops by-laws
Companies generally incorporate in a state or country whose laws are favorable to the corporate form of business.
Corporations engaged in commerce outside their state or
country must obtain a license from each government in which they do business.
Forming a Corporation
1. Vote in election of board of directors at annual meeting and vote on actions that require
shareholder approval.
2. Share the corporate earnings through receipt of dividends.
3. Keep the same percentage ownership when new shares are issued (preemptive right).
4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim.
Shareholder Rights
When a corporation decides to issue shares, it must resolve a number of basic questions:
1. How many shares should it authorize for sale?
2. How should it issue the shares?
3. What value should the corporation assign to the shares?
Share Issue Considerations
Authorized Shares
Charter indicates amount of shares that a corporation is authorized to sell
Number of authorized shares is often reported in equity section
No formal accounting entry
Share Issue Considerations
Issuance of Shares
Companies issue ordinary shares directly to
investors or indirectly through an investment banking firm
Factors in setting price for a new issue of shares:
1. Company’s anticipated future earnings 2. Expected dividend rate per share
3. Current financial position
Share Issue Considerations
Par and No-Par Value Shares
Years ago, par value determined legal capital per share that a company must retain in business for protection of corporate creditors
Today many governments do not require a par value No-par value shares is fairly common today
In many countries, the board of directors assigns a stated value to no-par shares
Share Issue Considerations
Which of the following statements is false?
a. Ownership of ordinary shares gives the owner a voting right.
b. The equity section begins with share capital.
c. The authorization of ordinary shares does not result in a formal accounting entry.
d. Legal capital per share applies to par value shares but not to no-par value shares.
Share Issue Considerations
Indicate whether each of the following statements is true or false.
_______ 1. Similar to partners in a partnership, shareholders of a corporation have unlimited liability.
_______ 2. It is relatively easy for a corporation to obtain capital through the issuance of shares.
_______ 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
ordinary shares includes a credit to the appropriate share capital account.
DO IT! 1a Corporate Organization
False True False False
Corporate Capital
Retained Earnings Account
Two Primary Sources of Equity
Share capital is the total amount of cash and other assets paid in to the corporation by shareholders in exchange for shares.
Share Capital Share Premium—
Ordinary Account Share Capital—
Ordinary Account Preference Shares
Account
Corporate Capital
Retained Earnings Account
Two Primary Sources of Equity
Retained earnings is net income that a corporation retains for future use.
Share Capital Share Premium—
Ordinary Account Share Capital—
Ordinary Account Preference Shares
Account
If Delta Robotics has a balance of HK$800,000 in
Share Capital—Ordinary and HK$130,000 in retained earnings at the end of its first year, its equity section is as follows Illustration 13.5.
Retained Earnings
Delta Robotics
Statement of Financial Position (partial) Equity
Share capital—ordinary HK$800,000 Retained earnings 1,300,000
Total equity HK$9,300,000
ILLUSTRATION 13.5 Equity section
Comparison of the owners’ equity accounts reported on a balance sheet.
Corporate Capital
ILLUSTRATION 13.6 Comparison of equity accounts
Owner's Capital
Normal bal.
Share Capital—Ordinary Normal bal.
Retained Earnings Normal bal.
Proprietorship Corporation
WKK Corporation
xxxxxxxxx x xxxxxxxxxx
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Illustration: At the end of its first year of operation, Doral AG has €750,000 of ordinary shares and net income of €122,000.
Prepare (a) the closing entry for net income and (b) the equity section at year-end.
(a) Income Summary 122,000
Retained Earnings 122,000 (b) Equity
Share capital—ordinary €750,000 Retained earnings 122,000
DO IT! 1b Corporate Capital
Accounting for Ordinary Shares
Primary Objectives:
1. Identify the specific sources of capital.
2. Maintain the distinction between share capital and retained earnings.
Other than consideration received, the issuance of ordinary shares affects only Share Capital—Ordinary accounts.
Accounting for Share Transactions
Illustration: Assume that Hydro-Slide SA issues 1,000 shares of €1 par value ordinary shares. Prepare Hydro-Slide’s journal entry if (a) 1,000 shares are issued for €1 per share, and (b) 1,000 shares are issued for €5 per share.
(a) Cash 1,000
Share Capital—Ordinary (1,000 x €1) 1,000
(b) Cash 5,000
Share Capital—Ordinary (1,000 x €1)
Issuing Par Value Ordinary Shares for Cash
Hydro-Slide SA
Statement of Financial Position (partial) Equity
Share capital—ordinary € 2,000
Share premium—ordinary 4,000
Retained earnings 27,000
Total equity €33,000
ILLUSTRATION 13.7 Share premium
Accounting for Share Transactions
Illustration: Assume that instead of €1 par value shares, Hydro-Slide SA has €5 stated value no-par shares and the company issues 5,000 shares at €8 per share for cash.
Cash 40,000
Share Capital—Ordinary 25,000
Share Premium—Ordinary 15,000 (To record issuance of 5,000 €5 stated
value no-par shares)
Issuing No-Par Ordinary Shares for Cash
Illustration: Assume further that the no-par share does not have a stated value and the company issues 5,000 shares at
€8 per share for cash.
Cash 40,000
Share Capital—Ordinary 40,000 (To record issuance of 5,000 no-par shares)
Issuing No-Par Ordinary Shares for Cash
Corporations also may issue shares for:
Services (attorneys or consultants)
Non-cash 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.
Issuing Ordinary Shares for Services or
Non-cash Assets
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 ordinary shares in payment of their bill. At the time of the
exchange, there is no established market price for the shares.
Prepare the journal entry for this transaction.
Organization Expense 5,000
Share Capital—Ordinary 4,000 Share Premium—Ordinary 1,000
(To record issuance of 4,000 €1 par value
shares to attorneys)
Ordinary Shares for Services
Illustration: Athletic Research AG is an existing publicly held corporation. Its €5 par value shares are actively traded at €8 per share. The company issues 10,000 shares to acquire land recently advertised for sale at €90,000. Prepare the journal entry for this transaction.
Land 80,000
Share Capital—Ordinary 50,000 Share Premium—Ordinary 30,000
(To record issuance of 10,000 €5 par value
Ordinary Shares for Non-Cash Assets
Typically, preferred shareholders have a priority as to:
1. Distributions of earnings (dividends).
2. Assets in event of liquidation.
Generally do not have voting rights.
Accounting for preference shares at issuance is similar to that for ordinary shares.
Accounting for Preference Shares
Illustration: Florence SpA issues 10,000 shares of €10 par value preference shares for €12 cash per share. The journal entry to record the issuance is:
Cash 120,000
Share Capital—Preference 100,000
Share Premium—Preference 20,000 (To record issuance of 10,000 shares
at ¥12 per share)
Preference shares may have a par value or no-par value.
Accounting for Preference Shares
Illustration: Hefei Ltd. begins operations on March 1 by
issuing 1,000,000 shares of €10 par value ordinary shares for cash at ¥12 per share. Journalize the issuance of the shares on March 1 assuming the shares are not publicly traded.
Cash 12,000,000
Share Capital—Ordinary 10,000,000 Share Premium—Ordinary 2,000,000
DO IT! 2 Issuance of Shares
Illustration: On March 15, Hefei Ltd. issues 50,000 ordinary shares to attorneys in settlement of their bill of ¥600,000 for organization costs. Journalize the issuance of these shares.
Organization Expense 600,000
Share Capital—Ordinary 500,000 Share Premium—Ordinary 100,000
DO IT! 2 Issuance of Shares
Accounting for Treasury Shares
Share Capital
Retained Earnings Account
Share Premium—
Ordinary Account
Two Primary Sources of Equity
Share Capital—
Ordinary Account
Preference Shares Account
Less:
Treasury Shares Account
Treasury shares are a corporation’s own shares that it has reacquired from shareholders but not retired.
Corporations acquire treasury shares for various reasons:
1. To reissue the shares to officers and employees under bonus and share compensation plans.
2. To enhance the share’ smarket value.
3. To have additional shares available for use in the acquisition of other companies.
Accounting for Treasury Shares
Companies generally use cost method
Debit Treasury Shares for price paid to reacquire shares
Treasury shares is a contra equity account Reduces equity
Accounting for Treasury Shares
Mead, Ltd.
Statement of Financial Position (partial) Equity
Share capital—ordinary, HK$50 par value,
100,000 shares issued and outstanding HK$5,000,000
Retained earnings 2,000,000
Total equity HK$7,000,000
ILLUSTRATION 13.8 Equity section with no treasury shares
Illustration: On February 1, 2020, Mead acquires 4,000 shares of its stock at HK$80 per share. The entry is as follows.
Treasury Shares 32,000
Cash 32,000
(To record purchase of 4,000 treasury
Mead, Ltd.
Statement of Financial Position (partial) Equity
Share capital—ordinary, HK$50 par value, 100,000
shares issued and 96,000 shares outstanding HK$5,000,000
Retained earnings 2,000,000
7,000,000 Less: Treasury stock (4,000 shares) 320,000
Total equity HK$6,680,000
ILLUSTRATION 13.9
Equity section with treasury shares
Both the number of shares issued (100,000) and the number of shares held as treasury (4,000) are disclosed.
Illustration: On July 1, Mead, Ltd. sells for HK$100 per share 1,000 of the 4,000 treasury shares previously acquired at HK$80 per share. The entry is as follows.
Cash 100,000
Treasury Shares 80,000
Share Premium—Treasury 20,000
(To record sale of 1,000 treasury shares above cost)
A corporation does not realize a gain or suffer a loss from
Sale of Treasury Shares Above Cost
If Mead, Ltd. sells an additional 800 treasury shares on
October 1 at HK$70 per share, it makes the following entry.
Cash (800 × HK$70) 56,000
Share Premium—Treasury 8,000 Treasury Shares 64,000
(To record sale of 800 treasury shares below cost)
Sale of Treasury Shares Below Cost
Treasury Shares Share Premium––Treasury
Feb. 1 320,000 July 1 80,000 Oct. 1 800 July 1 20,000
Oct. 1 6,400 Oct. 1 Bal. 1,200
Oct. 1 Bal. 17,600
ILLUSTRATION 13.10
On December 1, assume that Mead, Ltd. sells its remaining 2,200 shares at HK$70 per share and makes the following entry.
Cash (2,200 × HK$70) 154,000 Share Premium—Treasury 12,000 Retained Earnings 10,000
Treasury Shares 176,000
(To record sale of 2,200 treasury shares at HK$70 per share)
Sale of Treasury Shares Below Cost
Limited to balance on
hand
Salvador SA purchases 3,000 shares of its R$50 par value
ordinary shares for R$180,000 cash on July 1. It will hold the shares in the treasury until resold. On November 1, the
corporation sells 1,000 treasury shares for cash at R$70 per share. Journalize the treasury share transactions.
July 1 Treasury Shares 180,000
Cash 180,000
Nov. 1 Cash 70,000
Treasury Shares 60,000
Share Premium—Treasury 10,000
DO IT! 3 Treasury Shares
Companies report share capital and retained earnings in the equity section of the statement of financial position. Sources of equity include:
1. Share capital. This category consists of preference and ordinary shares. Preference shares are shown before ordinary shares because of their preferential rights. Par value, shares authorized, shares issued, and shares
outstanding are reported for each class of shares.
2. Share premium. This includes the excess of amounts paid over par or stated value and share premium from treasury
Statement Presentation of Equity
Qiang Ltd.
Statement of Financial Position (partial) December 31, 2020 ( ¥ in thousands) Equity
Share capital—preference,
8% ¥100 par, 10,000 shares authorized,
2,500 shares issued and outstanding ¥250,000 Share capital—ordinary,
¥5 par, 100,000 shares authorized, 21,800 shares issued, 19,800 shares
outstanding 109,000
Share premium—preference 127,500
Share premium—treasury 2,000
Retained earnings 711,400
Less: Treasury shares (2,000 ordinary shares) 80,000
Total equity ¥1,119,900
ILLUSTRATION 13.11 Equity section
Jennifer NV has issued 300,000 shares of €3 par value
ordinary shares. It is authorized to issue 600,000 shares. The share premium on the ordinary shares is €380,000. The
corporation has reacquired 15,000 shares at a cost of €50,000 and is currently holding those shares. The corporation also
has 4,000 shares issued and outstanding of 8%, €100 par value preference shares. It authorized 10,000 shares. The
share premium on the preference shares is €25,000. Retained earnings is €610,000.
Prepare the equity section of the statement of financial position.
DO IT! 4 Equity Section
Jennifer NV
Statement of financial position (partial) Equity
Share capital, preference 8%, €100 par value, 10,000 shares
authorized, 4,000 shares issued and outstanding € 400,000 Share capital, ordinary, €3 par value, 600,000 shares
authorized, 300,000 shares issued, and 285,000
shares outstanding 900,000
Share premium—preference € 25,000
Share premium—ordinary 380,000
Share premium—treasury 72,000 477,000
Retained earnings 610,000
Less: Treasury shares (15,000 shares) 50,000
Total equity €2,337,000
Key Points
Similarities
Aside from the terminology used, the accounting transactions for the issuance of shares and the purchase of treasury stock are similar.
Like IFRS, GAAP does not allow a company to record gains or losses on purchases of its own shares.
A Look at U.S. GAAP
Key Points
Differences
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.
A Look at U.S. GAAP
Key Points
Differences
There are often terminology differences for equity accounts.
GAAP IFRS
Common stock Share capital—ordinary Stockholders Shareholders
Par value Nominal or face value
Authorized stock Authorized share capital Preferred stock Share capital—preference Paid-in capital Issued/allocated share capital
Paid-in capital in excess of par—common stock Share premium—ordinary Paid-in capital in excess of par—preferred stock Share premium—preference Retained earnings Retained earnings or Retained profits
Retained earnings deficit Accumulated losses
A Look at U.S. GAAP
Key Points
Differences
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 GAAP, such as shareholders’
equity, owners’ equity, and stockholders’ equity.
A Look at U.S. GAAP
Looking to the Future
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.
A Look at U.S. GAAP
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