Reporting And

Analyzing Equity
 The Corporate Form Of
Organization
Characteristics Of A Corporation
Separate legal existence
Acts under its name, not under the owners name (stockholders)
Limited liability of stockholders
The liability of stockholders limited to the their investment
Transferable ownership rights
Stockholders can sell their shares to anyone who interested
Ability to acquire capital
Corporation obtaining capital by issuance of stock and sell it
Continuous life
It may be perpetual or has a limited of time. It does not bind to the
stockholders (owners) age of life.
 Corporation Management

Stockholders

Chairman & Board of

Directors

President & Chief

Executive Officer

Vice President
General Vice President
Vice President Finance/Chief Vice President
Counsel & Human
Marketing Financial Operations
Secretary Resources
Officer

Treasurer Controller

Kimmel, Weygant ,Keyso Wiley (2010)

 Government regulations
A corporation is subject to federal and state regulations
Additional taxes
Corporation pays taxes as a separate legal entity, as the stockholders
pays taxes on their dividends.
 The Corporate Form Of
Organization
Ownership Rights Of Stockholders
Vote in election of board of directors at annual meeting and
vote on actions that require stockholders approval.
Share the corporate earnings through receipt of dividends
Keep the same percentage ownership when new share of stock
are issued
Share in assets upon liquidation in proportion to their holdings.
This is called a residual claim: owners are paid with assets that
remain after all creditors claims have been paid.
 The Corporate Form Of
Organization
Stock Issue Considerations :
Authorized Stock
The maximum number of shares of a corporations capital stock that can
be issued as specified in the charter

Issued Stock
Represents the total number of shares of stock that have been sold
Par and No-Par Value Stocks
Par value a capital stock to which charter has a assigned a value per
share
No-Par value a capital stock to which the charter has not assigned a
value
 The Corporate Form Of
Organization
Corporate Capital :
Owners equity can be identified by various names :
i. Stockholders equity
ii. Shareholders equity
iii. Corporate capital
In the corporations balance sheet, it will consist 2 parts :
i. Paid-in (contributed) capital
Total amount of cash and other assets paid in to the corporation by
stockholders in exchange for capital stock
ii. Retained earnings (earned capital)
Net income that a corporation retains for future use
 The Corporate Form Of
Organization
Example: At the end of its first year of operation, Mahawangsa Corporation
has $850,000 of common stock and net income of $182,000. Prepare (a) the
closing entry for net income and (b) the stockholders equity section at
year-end.
Solution:
(a) Dt. Ct.
Income Summary 182,000
Retained Earnings 182,000

(b) Dt. Ct.

Stockholders Equity
Paid-in capital
Common stock 850,000
Retained Earnings 182,000
Total stockholders equity 1,032,000
 Accounting For Issues Of
Common Stock
Issuing Par Value Common Stock for Cash
Eg. Syarikat Syabas issues 2000 shares of $1 par value common stock at par for
cash.
Dt. Ct.
Cash 2,000
Common Stock 2,000

Then Syarikat Syabas issues an additional 3,000 shares of $1 par value

common stock at $5 per share,

Dt. Ct.
Cash 15,000
Common stock 3,000
Paid-In Capital in Excess of Par Value 12,000
 Accounting For Issues Of
Common Stock
Issuing No-Par Value Common Stock for Cash
Eg. Syarikat Syabas issues 8000 shares of $5 stated value no-par stock at $8
per share for cash.
Dt. Ct.
Cash 64,000
Common Stock 40,000
Paid-In Capital In Excess of Stated Value 24,000

If Syarikat Syabas stock does not have stated value to its no-par stock, and
the company issues 8,000 shares at $8 per share,
Dt. Ct.
Cash 64,000
Common stock 64,000
 Accounting For Issues Of
Common Stock
Issuing Common Stock for Services or Noncash Assets
Eg. Attorneys have helped Fakir Company Incorporate. They have billed the
company $6,000 for their services. They agree to accept 5000 shares of $1 par
value common stock for payment of their bill.
Dt. Ct.
Organization expense 6,000
Common stock 5,000
Paid-In Capital in Excess of Par Value 1,000

Miskin Inc. has $6 par value that actively traded at $9 per share. It bought a
land that advertised for a sale at $120,000 by issuing 10,000 shares. Therefore
it means that the company bought the land only at $90,000.
Dt. Ct.
Land 90,000
Common stock 60,000
Paid-In Capital In Excess of Par Value 30,000
 Accounting For Treasury Stock

Treasury stock a corporations own stock that had been

issued but was subsequently reacquired and is still being held
by that coporation.
The reason for the reacquisition :
i. To give it to the officers and employees under bonus and stock
compensation plans
ii. To signal to the stock market that management believes the stock is
underpriced, in the hope of enhancing its market value
iii. To have additional shares available for use in the acquisition of
other companies
iv. To reduce the number of shares outstanding and thereby increase
earnings per share
v. To rid the company of disgruntled investors, perhaps to avoid a
takeover
 Accounting For Treasury Stock

Treasury stocks have no voting, dividend, or other

stockholders rights.
Purchase of Treasury Stock
Eg. On February 1, 2010, Moybenk acquires 5,000 shares of its stock at $8
per share. The entry is :
Dt. Ct.
Feb. 1 Treasury Stock 40,000
Cash 40,000
 Accounting For Treasury Stock

Disposal Of Treasury Stock

Sales of Treasury Stock Above Cost
Eg. On July 1, Moybenk sells 1000 of its treasury stock for $10 per share
which previously acquired at $8 per share.
Dt. Ct.
July 1 Cash 10,000
Treasury Stock 8,000
Paid-In Capital from Treasury Stock 2,000

Sales of Treasury Stock Below Cost

Eg. Moybenk sells additional 800 shares of its treasury stock on October 1
at $7 per share.
July 1 Cash 5,600
Paid-In Capital from Treasury Stock 800
Treasury Stock 6,400
 Preferred Stock

Preferred stock is an additional stock that a corporation can

issued to public. Unlike common stock, preferred stock have
some advantages and disadvantages.

1. Preferred stockholders does not have voting rights

2. Have priority over payment of dividends and distribution
of assets if the corporation going out of business
3. Preferred stocks have a fixed dividends rate
 Preferred Stock

Current Dividend Preference - preferred stockholders will be

given priority when a corporation wants to pay the dividend.
Only after all preferred stockholders receives their dividends,
then the dividend will be distributed to all common
stockholders.
Cumulative Dividend Preference If all or a part of the
current dividend is not paid in full, the cumulative unpaid
amount, known as dividends in arrears must be paid before
any common dividends can be paid.
 Preferred Stock

Liquidation Preference If a corporation goes out of business,

besides creditors, preferred stockholders have a priority over
corporate assets. The preference to assets may be for the par
value of the shares or for a specified liquidating value.
 Statement Presentation

Companies report paid-in capital and retained earnings in the

stockholders equity section of the balance sheet. The specific
sources of paid-in capital are divided in two classifications.
i. Capital stock
Consists of preferred stock and common stock
Preferred stock appears before common stock
ii. Additional paid-in capital
Consists of amounts paid in over par or stated value
Paid-in capital from treasury stock
 Statement Presentation

Eg. Syarikat Jenab has issued 300,000 shares of $3 par value

common stock. It authorized 600,000 shares. The paid-in
capital in excess of par value on the common stock is
$380,000. Syarikat Jenab 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. Syarikat Jenab also has 4,000 shares issued and
outstanding of 8%, $100 par-value preferred stock. It
authorized 10,00 shares. The paid-in capital in excess of par
value on the preferred stock is $25,000. Retained earnings is
$610,000. Prepare the stockholders equity section of the
balance sheet.
 Solution
SYARIKAT JENAB
Balance Sheet
Stockholders equity
Paid-in capital
Capital stock
8% preferred stock, $100 par value, 10,000 shares
authorized, 4,000 shares issued and outstanding $400,000
Common stock, $3 par value, 600,000 shares authorized,
300,000 shares issued, and 285,000 shares outstanding 900,000
Total capital stock 1,300,000
Additional paid-in capital
In excess of par value preferred stock $ 25,000
In excess of par-value common stock 380,000
From treasury stock 72,000
Total additional paid-in capital 477,000
Total paid-in capital 1,777,000
Retained earnings 610,000
Total paid-in capital and retained earnings 2,387,000
Less: Treasury stock common (15,000 shares)(at cost) (50,000)
Total stockholders equity $2,337,000