Accounting for Corporations
Chapter 11
Wild, Shaw, and Chiappetta
Financial & Managerial Accounting
6th Edition
Copyright © 2016 McGraw-Hill Education. All rights reserved. No
reproduction or distribution without the prior written consent of
McGraw-Hill Education.
11-C1: Characteristics of
Corporations
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13 - 3
Corporate Form of Organization
An entity
created by law
Existence is
separate from
owners
Privately Held
Ownership
can be
Publicly Held
Has rights and
privileges
C1
3
13 - 4
Characteristics of Corporations
Advantages
 Separate legal entity
 Limited liability of stockholders
 Transferable ownership rights
 Continuous life
 Lack of mutual agency for stockholders
 Ease of capital accumulation
Disadvantages
 Governmental regulation
 Corporate taxation
C1
4
13 - 5
Corporate Organization and
Management
Stockholders
Board of Directors
President, Vice President,
and other Officers
C1
Employees of the
Corporation
Corporate governance is
the system by which
companies are directed
and controlled.
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13 - 6
Corporate Organization and
Management
Corporate Organization Chart
Ultimate
control
Selected by a
vote of the
stockholders
Secretary
C1
Stockholders
Board of Directors
President
Vice President
Finance
Vice President
Production
Stockholders
usually meet
once a year
Overall
responsibility
for managing
the company
Vice President
Marketing
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13 - 7
Rights of Stockholders
 Vote at stockholders’ meetings (or
register proxy votes electronically)
 Sell stock
 Purchase additional shares of stock
 Receive dividends, if any
 Share equally in any assets remaining
after creditors are paid in a liquidation
C1
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13 - 8
Stock Certificates and Transfer
Each unit of
ownership is
called a share of
stock.
A stock certificate
serves as proof
that a stockholder
has purchased
shares.
When the stock is sold, the stockholder signs a transfer
endorsement on the back of the stock certificate.
C1
8
13 - 9
Basics of Capital Stock
Total amount of stock that a
corporation’s charter authorizes it to sell.
Stockholders' Equity
Common Stock, par value $0.01;
authorized 250,000,000 shares; issued
and outstanding 92,556,295 shares
$925,563
Total amount of stock that has been
issued or sold to stockholders.
C1
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13 - 10
Basics of Capital Stock
Par value is an
arbitrary amount
assigned to each
share of stock when
it is authorized.

Market price is the
amount that each
share of stock will
sell for in the market.
Classes of Stock
 Par Value
 No-Par Value
 Stated Value
C1
10
11-P1: Common Stock
11
13 - 12
Issuing Par Value Stock
Par Value Stock
On June 5, Dillon Snowboard’s, Inc. issued 30,000
shares of $10 par value stock for $12 per share.
Let’s record this transaction.
June 5 Cash
360,000
Common Stock, $10 par value
Paid-in Capital in Excess
of Par Value, Common
300,000
60,000
Issued 30,000 shares of common stock.
P1
12
13 - 13
Issuing Par Value Stock
Stockholders' Equity with Common Stock
Stockholders' Equity
Common Stock - $10 par value; 50,000 shares
authorized; 30,000 shares issued and
outstanding
$ 300,000
Paid-In Capital in Excess of Par
60,000
Retained earnings
65,000
Total stockholders' equity
$ 425,000
P1
13
13 - 14
Issuing Stock for Noncash Assets
Par Value Stock
On June 10, 4,000 shares of $20 par value stock for
land valued at $105,000. Let’s record this
transaction.
Dr
105,000
June 10 Land
Common Stock, $2 par value
Paid-in Capital in Excess
of Par Value, Common
Cr
80,000
25,000
Exchanged 100,000 common shares for land.
P1
14
NEED-TO-KNOW
Prepare journal entries to record the following four separate issuances of stock.
1) A corporation issued 80 shares of $5 par value common stock for $700 cash.
2) A corporation issued 40 shares of no-par common stock to its promoters in exchange for their efforts,
estimated to be worth $800. The stock has a $1 per share stated value.
3) A corporation issued 40 shares of no-par common stock in exchange for land, estimated to be worth
$800. The stock has no stated value.
4) A corporation issued 20 shares of $30 par value preferred stock for $900 cash.
General Journal
1)
2)
3)
4)
P1
Cash
Common Stock, $5 par value
(80 shares x $5)
Paid-in Capital in excess of par value, Common stock
Debit
700
Credit
400
300
Organization expenses
Common Stock, $1 stated value (40 shares x $1)
Paid-in Capital in excess of stated value, Common stock
800
Land
Common Stock, No-par value
800
Cash
Preferred Stock, $30 par value
(20 shares x $30)
Paid-in Capital in excess of par value, Preferred stock
900
40
760
800
600
300
15
11-P2: Dividends
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13 - 17
Cash Dividends
Regular cash dividends provide a return to investors and
almost always affect the stock’s market value.
Dividends
Stockholders
Corporation
To pay a cash dividend, the
corporation must have:
1. A sufficient balance in
retained earnings; and
2. The cash necessary to pay
the dividend.
% of Corporations Paying Divends
100%
80%
75%
60%
40%
22%
20%
0%
Common
P2
Preferred
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13 - 18
Accounting for Cash Dividends
Three Important Dates
Date of Declaration
Date of Record
Record liability
for dividend.
No entry
required.
P2
Date of Payment
Record payment of
cash to stockholders.
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13 - 19
Accounting for Cash Dividends
On January 9, a $1 per share cash dividend is declared
on Z-Tech, Inc.’s 5,000 common shares outstanding. The
dividend will be paid on February 1 to stockholders of
record on January 22.
Date of Declaration
Record liability
for dividend.
Jan. 9 Retained Earnings
Common Dividend Payable
Dr
5,000
Cr
5,000
Declared $1 per share cash dividend.
P2
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Accounting for Cash Dividends
On January 9, a $1 per share cash dividend is declared
on Z-Tech, Inc.’s 5,000 common shares outstanding. The
dividend will be paid on February 1 to stockholders of
record on January 22.
No entry required on January 22, the date of record.
Date of Payment
Record payment of cash to stockholders.
Feb. 1
Common Dividends Payable
Cash
Dr
5,000
Cr
5,000
Paid $1 per share cash dividend.
P2
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Deficits and Cash Dividends
A deficit is created when a company incurs
cumulative losses or pays dividends greater
than total profits earned in other years.
Stockholders' Equity
Common stock $10 par value,
5,000 shares authorized and outstanding
Retained earnings deficit
Total stockholders' equity
P2
$
$
50,000
(6,000)
44,000
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Stock Dividends
A distribution of a corporation’s own shares to its stockholders
without receiving any payment in return.
Why a stock dividend?
 Can be used to keep the market price on the stock affordable.
 Can provide evidence of management’s confidence that
the company is doing well.
Small Stock Dividend
Distribution is  25% of the previously outstanding shares.
Large Stock Dividend
Distribution is > 25% of the previously outstanding shares.
P2
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Recording a Small Stock Dividend
Quest has 10,000 shares of $1 par value stock outstanding. On December
31, Quest declared a 10% stock dividend, when the stock was selling for
$15 per share. The stock will be distributed to stockholders on January 20.
Let’s prepare the December 31 entry.
Capitalize retained earnings for the market
value of the shares to be distributed.
(10,000 × 10% = 1,000 × $15 = $15,000)
1,000 × $10 par
Dec. 31 Retained Earnings
15,000
Common Stock Dividend Distributable
Paid-In Capital in Excess
of Par Value
10,000
5,000
Declared a 1,000 share (10%) stock dividend.
P2
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13 - 24
Before the
stock
dividend.
After the
stock
dividend.
P2
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Recording a Small Stock Dividend
Quest has 10,000 shares of $1 par value stock outstanding. On December
31, Quest declared a 10% stock dividend, when the stock was selling for
$15 per share. The stock will be distributed to stockholders on January 20.
Let’s prepare the January 20 entry.
Jan. 20 Common Stock Dividend Distributable
Common Stock $10 Par Value
Paid-In Capital in Excess
P2
10,000
10,000
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Recording a Large Stock Dividend
Quest, Inc. has 10,000 shares of $1 par value stock
outstanding. On December 31, Quest declared a 30% stock
dividend. The stock will be distributed to stockholders on
January 20, 2014. Let’s prepare the December 31 entry.
Capitalize retained earnings for the minimum amount required
by state law, usually par or stated value of the shares.
(10,000 × 30% = 3,000 shares × $10 par value = $30,000)
Dec. 31 Retained Earnings
Dr
30,000
Common Stock Dividend Distributable
Cr
30,000
Declared a 10,000 share (30%) stock dividend.
P2
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Stock Splits
A distribution of additional shares of stock to
stockholders according to their percent ownership.
$20 par value
Common Stock
Old
Shares
100,000 shares
$10 par value
New
Shares
P2
Common Stock
200,000 shares
27
NEED-TO-KNOW
A company began the current year with the following balances in its Stockholders’ Equity accounts.
Common Stock- $10 par, 500 shares authorized, 200 shares issued and outstanding
Paid-in capital in excess of par, Common Stock
Retained earnings
Total
$2,000
1,000
5,000
$8,000
All outstanding common stock was issued for $15 per share when the company was created. Prepare
journal entries to account for the following transactions during the current year.
Jan. 10
Feb. 15
Mar. 31
May 1
Dec. 1
Dec. 31
P2
The board declared a $0.10 cash dividend per share to shareholders of record on Jan. 28.
Paid the cash dividend declared on January 10.
Declared a 20% stock dividend. The market value of the stock is $18 per share.
Distributed the stock dividend declared on March 31.
Declared a 40% stock dividend. The market value of the stock is $25 per share.
Distributed the stock dividend declared on December 1.
28
NEED-TO-KNOW
Common Stock- $10 par, 500 shares authorized, 200 shares issued and outstanding
Paid-in capital in excess of par, Common Stock
Retained earnings
Total
Jan. 10
Feb. 15
Mar. 31
May 1
Dec. 1
Dec. 31
The board declared a $0.10 cash dividend per share to shareholders of record on Jan. 28.
Paid the cash dividend declared on January 10.
Declared a 20% stock dividend. The market value of the stock is $18 per share.
Distributed the stock dividend declared on March 31.
Declared a 40% stock dividend. The market value of the stock is $25 per share.
Distributed the stock dividend declared on December 1.
Jan. 10
General Journal
Retained earnings
(200 shares x $0.10)
Common dividend payable
Jan. 28
No journal entry on the date of record
Feb. 15
Common dividend payable
Cash
Mar. 31
May 1
P2
$2,000
1,000
5,000
$8,000
Debit
20
Credit
20
20
20
Retained earnings (200 shares x 20% = 40 shares x $18 mkt.)
Common Stock dividend distributable (40 shares x $10 par)
Paid-in Capital in excess of par value, Common Stock
720
Common Stock dividend distributable
Common Stock, $10 par value
400
(40 shares x $10 par)
(40 shares x $10 par)
400
320
400
29
NEED-TO-KNOW
Common Stock- $10 par, 500 shares authorized, 200 shares issued and outstanding
Paid-in capital in excess of par, Common Stock
Retained earnings
Total
Jan. 10
Feb. 15
Mar. 31
May 1
Dec. 1
Dec. 31
The board declared a $0.10 cash dividend per share to shareholders of record Jan. 28.
Paid the cash dividend declared on January 10.
Declared a 20% stock dividend. The market value of the stock is $18 per share.
Distributed the stock dividend declared on March 31.
Declared a 40% stock dividend. The market value of the stock is $25 per share.
Distributed the stock dividend declared on December 1.
May 1
Dec. 1
Dec. 31
P2
$2,000
1,000
5,000
$8,000
General Journal
Common Stock dividend distributable
(40 shares x $10 par)
Common Stock, $10 par value
(40 shares x $10 par)
Debit
400
Retained earnings (240 shares x 40% = 96 shares x $10 par)
Common Stock dividend distributable (96 shares x $10 par)
960
Common Stock dividend distributable
Common Stock, $10 par value
960
(96 shares x $10 par)
(96 shares x $10 par)
Credit
400
960
960
30
11-C2: Issuance of Preferred
Stock
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13 - 32
Preferred Stock
A separate class of stock, typically having priority over
common shares in . . .
– Dividend distributions
– Distribution of assets in case of liquidation
Usually has a stated
dividend rate
C2
Normally has no
voting rights
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13 - 33
Preferred Stock
Cumulative
Dividends in arrears must
be paid before dividends
may be paid on common
stock. (Normal case)
vs.
Noncumulative
Undeclared dividends from
current and prior years do
not have to be paid in
future years.
Consider the following Stockholders’ Equity section of the
Balance Sheet. The Board of Directors declares $5,000 of
dividends in 2014. In 2015, the Board declared and paid cash
dividends of $42,000.
C2
Common stock, $50 par value; 4,000 shares
authorized, issued and outstanding
Preferred stock, 9%, $100 par value; 1,000
shares authorized, issued and outstanding
Total Paid-In capital
$ 200,000
100,000
$ 300,000
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Preferred Stock
C2
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13 - 35
Preferred Stock
Participating
Dividends may exceed a stated
amount once common
stockholders receive a dividend
equal to the preferred stated
rate.
vs.
Nonparticipating
Dividends are limited to a
maximum amount each year. The
maximum is usually the stated
dividend rate.
(Normal case)
Reasons for Issuing Preferred Stock
 To raise capital without sacrificing control
 To boost the return earned by common stockholders through
financial leverage
 To appeal to investors who may believe the common stock is
too risky or that the expected return on common stock is too
low
C2
35
NEED-TO-KNOW
A company’s outstanding stock consists of 80 shares of noncumulative 5% preferred stock with a $5
par value and also 200 shares of common stock with a $1 par value. During its first three years of
operation, the corporation declared and paid the following total cash dividends:
20X1
20X2
20X3
Total
Total
$15
5
200
$220
Part 1. Determine the amount of dividends paid each year to each of the two classes of stockholders:
preferred and common. Also compute the total dividends paid to each class for the three years.
Annual preferred dividend
Par value per preferred share
Dividend %
Dividend per preferred share
Number of preferred shares
Annual preferred dividend
20X1
20X2
20X3
Total
C2
$5
5%
$0.25
80
$20
Total
Preferred Common
$15
$15
$0
5
5
0
200
20
180
$220
$40
$180
36
NEED-TO-KNOW
A company’s outstanding stock consists of 80 shares of noncumulative 5% preferred stock with a $5
par value and also 200 shares of common stock with a $1 par value. During its first three years of
operation, the corporation declared and paid the following total cash dividends:
Annual preferred dividend
Par value per preferred share
Dividend %
Dividend per preferred share
Number of preferred shares
Annual preferred dividend
$5
5%
$0.25
80
$20
Part 2. Determine the amount of dividends paid each year to each of the two classes of stockholders
assuming that the preferred stock is cumulative. Also determine the total dividends paid to each class
for the three years combined.
20X1
20X2
20X3
Total
C2
Total
$15
5
200
$220
Preferred
$15
5
40
$60
Arrears
$5
20
0
Common
$0
0
160
$160
37
11-P3: Treasury Stock
38
13 - 39
Treasury Stock
Treasury stock represents shares of a company’s own
stock that has been acquired. A corporation might acquire
its own stock to:
1. Use its shares to buy other companies.
2. Avoid a hostile takeover.
3. Reissue to employees as compensation.
4. Support the market price.
Corporations and Treasury Stock
No Treasury Stock
38%
P3
With Treasury
Stock
62%
39
13 - 40
Purchasing Treasury Stock
On May 1, Cyber, Inc. purchased 1,000 of its own
shares of stock in the open market for $11.50 per
share.
May 1
Treasury Stock, Common
Cash
11,500
11,500
Purchased 1,000 treasury shares at $11.50 per share
Treasury stock is shown as a reduction in total
stockholders’ equity on the balance sheet.
P3
40
13 - 41
Selling Treasury Stock at Cost
On May 21, Cyber sold 100 shares of
its treasury stock for $11.50 per share.
May 21
Cash
1,150
Treasury Stock, Common
1,150
Sold 100 shares of treasury for $11.50 per share.
P3
41
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Selling Treasury Stock
Above Cost
On June 3, Cyber, Inc. sold an additional 400
shares of its treasury stock for $12 per share.
June 3
Cash
4,800
Treasury Stock, Common
Paid-In Capital, Treasury Stock
4,600
200
Sold 400 treasury shares for $12 per share.
Shares Per Share Total
Sale
400 $
12.00 $ 4,800
Cost
400
11.50
4,600
Paid-In Capital
$ 200
P3
42
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Selling Treasury Stock
Below Cost
On July 10, Cyber sold an additional 500 shares
of its treasury stock for $10 per share.
July 10
Cash
5,000
Paid-in Captial, Treasury Stock
Retaine
200
550
Treasury Stock, Common
5,750
Sold 500 treasury shares for $10 per share.
P3
Shares Per Share Total
Cost
500 $
11.50 $ 5,750
Sale
500
10.00
5,000
Difference
$ 750
43
NEED-TO-KNOW
A company began the current year with the following balances in its stockholders’ equity accounts.
Common Stock - $10 par, 500 shares authorized, 200 shares issued and outstanding $2,000
Paid-in capital in excess of par, Common Stock
1,000
Retained earnings
5,000
Total
$8,000
All outstanding common stock was issued for $15 per share when the company was created. Prepare
journal entries to account for the following transactions during the current year.
Jul. 1
Sep. 1
Dec. 1
P3
Purchased 30 shares of treasury stock at $20 per share.
Sold 20 treasury shares at $26 cash per share.
Sold the remaining 10 shares of treasury stock at $7 cash per share.
44
NEED-TO-KNOW
Common Stock - $10 par, 500 shares authorized, 200 shares issued and outstanding $2,000
Paid-in capital in excess of par, Common Stock
1,000
Retained earnings
5,000
Total
$8,000
Jul. 1
Sep. 1
Dec. 1
Purchased 30 shares of treasury stock at $20 per share.
Sold 20 treasury shares at $26 cash per share.
Sold the remaining 10 shares of treasury stock at $7 cash per share.
Jul. 1
Sep. 1
Dec. 1
P3
Treasury Stock
Cash
General Journal
(30 shares x $20 cost)
Debit
600
Credit
600
Cash
Treasury Stock
Paid-in Capital, Treasury Stock
(20 shares x $26)
(20 shares x $20 cost)
520
Cash
Paid-in Capital, Treasury Stock
Retained Earnings
Treasury Stock
(10 shares x $7)
(Available balance)
70
120
10
(10 shares x $20 cost)
400
120
200
45
11-C3: Statement of Retained
Earnings
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13 - 47
Statement of Retained Earnings
Retained earnings is the total cumulative amount of
reported net income less any net losses and dividends
declared since the company started operating.
Restricted Retained Earnings
Legal Restriction
Most states restrict
the amount of
treasury stock
purchases to the
amount of retained
earnings.
C3
Contractual Restriction
Loan agreements
can include
restrictions on paying
dividends below a
certain amount of
retained earnings.
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13 - 48
Prior Period Adjustments
Prior period adjustments are corrections of material errors in past
years’ financial statements that result in a change in the beginning
balance of retained earnings.
C3
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Statement of Stockholders’ Equity
This is a more inclusive statement than the statement of
retained earnings.
C3
49
13 - 50
Stock Options
The right to purchase common stock at a fixed price over a
specified period of time. As the stock’s price rises above
the fixed option price, the value of the option increases.
Option
purchase
price $30
per share.
Market
price of
stock $75
per share.
Options are given to key employees to motivate them to:
 focus on company performance,
 take a long-run perspective, and
 remain with the company.
C3
50
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Global View
U.S. GAAP and IFRS have similar procedures for issuing common stock
at par, at a premium, at a discount, and for noncash assets.
Accounting for and reporting cash dividends, stock dividends, and
stock splits, are consistent under both U.S. GAAP and IFRS.
Accounting for treasury stock is consistent under both U.S. GAAP and
IFRS. Companies do not report gains or losses on transactions
involving their own stock.
Preferred stock that is redeemable at the option of the preferred
stockholder is reported between liabilities and equity under U.S. GAAP,
but it is reported as a liability under IFRS. Also, the issue price of
convertible preferred stock (and bonds) is recorded entirely under
preferred stock (or bonds) and none is assigned to the conversion
feature under U.S. GAAP. However, IFRS requires that a portion of the
issue price be allocated to the conversion feature when it exists.51
11-A1: Earnings Per Share
52
13 - 53
Earnings Per Share
Earnings per share is one of the most widely
cited accounting statistics.
Basic
earnings =
per share
A1
Net income - Preferred dividends
Weighted-average common shares outstanding
53
11-A2: Price-Earnings Ratio
54
13 - 55
Price-Earnings Ratio
This ratio reveals information about the stock
market’s expectations for a company’s future growth
in earnings, dividends, and opportunities.
Price–
earnings
ratio
A2
Market value (price) per share
=
Earnings per share
55
11-A3: Dividend Yield
56
13 - 57
Dividend Yield
Tells us the annual amount of cash dividends
distributed to common stockholders relative to
the stock’s market price.
Dividend
yield
A3
=
Annual cash dividends per share
Market value per share
57
11-A4: Book Value Per Share
58
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Book Value per Common Share
Reflects the amount of stockholders’ equity
applicable to common shares on a per share basis.
Stockholders’ equity applicable
Book value per
to common shares
=
common share
Number of common
shares outstanding
A4
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Book Value per Preferred Share
Reflects the amount of stockholders’ equity
applicable to preferred shares on a per share basis.
Book value per
=
preferred share
A4
Stockholders’ equity applicable
to preferred shares
Number of preferred shares
outstanding
60
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End of Chapter 11
61