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Chapter 13 - Accounting for Corporations
CHAPTER 13
ACCOUNTING FOR CORPORATIONS
Related Assignment Materials
Student Learning Objectives Questions
Quick
Studies* Exercises* Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Identify characteristics of
corporations and their
organization.
1, 2, 3, 4 13-1 13-1 13-5
C2. Explain characteristics of, and
distribute dividends between
common and preferred stock.
5, 6, 7,8, 9,
20, 21, 22
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13-1, 13-5 13-1, 13-7
C3. Explain the items reported in
retained earnings.
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13-2, 13-4 13-3, 13-5
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Analytical objectives:
A1 Compute earnings per share
and describe its use.
17 13-14, 13-15 13-12, 13-13 13-1, 13-2,
13-4, 13-8,
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A2. Compute price-earnings ratio
and describe its use in analysis.
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A3. Compute dividend yield and
explain its use in analysis.
13-17 13-15 13-2, 13-8
A4. Compute book value and
explain its use in analysis.
19 13-18 13-16 13-5 13-1, 13-2
Procedural objectives:
P1. Record the issuance of
corporate stock.
13-2, 13-3,
13-4, 13-5,
13-19
13-2, 13-3,
13-4, 13-17
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P2. Record transactions
involving cash dividends, stock
dividends and stock splits.
10, 11, 12,
13, 14, 18
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13-8, 13-12
13-5, 13-6,
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13-2, 13-3,
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P3. Record purchases and sales
of treasury stock and the
retirement of stock.
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*See additional information on next page that pertains to these quick studies, exercises and problems.
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Chapter 13 - Accounting for Corporations
Additional Information on Related Assignment Material
Corresponding problems in set B (in text) also relate to learning objectives identified in grid on
previous page. The Serial Problem for Success Systems continues in this chapter. Problem 13-2A
can be completed with Sage 50 or QuickBooks.
Connect (Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all
Exercises and Problems Set A. Connect provides new numbers each time the Quick Study, Exercise or
Problem is worked. It allows instructors to monitor, promote, and assess student learning. It can be
used in practice, homework, or exam mode.
Synopsis of Chapter Revisions
Alibaba Group: NEW opener with new entrepreneurial assignment
New dividend taxation information
New learning notes for computations
Updated PE and dividend yield ratios for Amazon and Altria
Chapter Outline Notes
I. Corporate Form of Organization—An entity created by law that is
separate from its owners. Owners are called stockholders. A publicly
held corporation offers its stock for public sale (organized stock
market) whereas a privately held (closely held) corporation does not.
A. Characteristics of a Corporation—Advantages
1. Separate legal entity—a corporation, through its agents
2. Limited liability of stockholders—stockholders are not liable
for corporate debt or corporate acts.
3. Transferable ownership rights—transfer of shares generally
has no effect on corporation operation.
4. Continuous lifelife is indefinite because it is not tied to
physical life of owners.
5. Lack of mutual agency for stockholders—stockholders do not
have the power to bind the corporation to contracts.
6. Ease of capital accumulation—Buying stock is attractive to
1. Governmental regulation—must meet requirements of a state’s
incorporation laws.
2. Corporate taxation—corporate income is taxed; and when
13-2
1. Incorporation—A corporation is created by obtaining a charter
2. Organization Expenses (organization costs)—include legal
3. Management of a Corporation
a. Stockholders have ultimate control through vote to elect
board of directors.
b. Board of directors (BOD) has final managing authority,
but it usually limits its actions to setting broad policy.
Chapter Outline Notes
c. Executive officers (appointed by the BOD) manage the
day-to-day direction of corporation. President is often the
chief executive officer (CEO) unless one person has the
dual role of chairperson of the BOD and CEO, then the
president is the chief operation officer (COO).
D. Stockholders of Corporations
1. Rights of Stockholders—Specific rights are granted by the
charter and general rights by state laws. State laws vary but
common stockholders general rights usually include right to:
a. Vote at stockholders’ meeting.
2. Stock Certificates and Transfer
a. Stock certificate is sometimes received as proof of share
3. Registrar and Transfer Agents—if stock is traded on a major
exchange, the corporation must have both a registrar and
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Chapter 13 - Accounting for Corporations
and dividend payments.
b. Transfer agent—assists with purchases and sales of shares
by receiving and issuing certificates as necessary.
E. Basics of Capital Stock—shares issued to obtain capital (owner
financing).
1. Authorized stock—the total amount of stock that the charter
authorizes for sale.
2. Issuing stock—can be sold directly/indirectly to stockholders.
Chapter Outline Notes
3. Market value of stock—the price at which a stock is bought
and sold.
4. Classes of stock
a. Common—the name of stock when all classes have same
rights and privileges.
b. Preferred stock—gives its owners a priority status over
common stockholders in one or more ways.
c. Additional classes—corporation may issue more than one
class of common and/or preferred stock.
5. Par value stock—a class of stock that is assigned a value per
share by the corporation in its charter.
a. Printed on the stock certificate.
b. In many states, used to establish minimum legal capital.
6. No-par value stock—not assigned a value per share by the
corporate charter.
7. Stated value stock—no-par stock that is assigned a “stated”
value per share by the directors. This stated value becomes
legal capital.
8. Stockholders’ (Shareholders’) Equity—has two parts:
a. Paid-in capital (contributed capital)—the total amount of
cash and other assets received by the corporation from its
stockholders in exchange for stock.
b. Retained earnings—the cumulative net income and losses
not distributed as dividends to stockholders..
II. Common Stock—Issuance of stock affects only paid-in capital
accounts, not retained earnings accounts.
A. Issuing Par Value Stock
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Chapter 13 - Accounting for Corporations
1. At par for cash—debit Cash for # shares issued x market price
and credit Common Stock for # shares issued x par value
2. Issuing par value stock at a premium. (Premium on stock is an
amount paid in excess of par by the purchasers of newly
issued stock.)
a. Debit Cash (# shares issued x market price).
b. Credit Common Stock (# shares issued x par value).
c. Credit Paid-In Capital in Excess of Par Value, Common
Stock (for the amount of the premium).
Chapter Outline Notes
3. Issuing par value stock at a discount— Discount occurs when
a corporation sells its stock for less than its par value
(prohibited by most states).
a. Debit Cash (# shares issued x market price).
1. Issuing par value stock for other assets
a. Record the transaction at the market value of the noncash
asset as of the date of the transaction.
b. Record par value or stated value of stock issued in stock
account.
c. Record the amount that market value exceeds par value or
stated value of stock in the Paid-In Capital in Excess
account.
2. Issuing par value stock for organizational costs—stock is
issued in exchange for services (from promoters, lawyers,
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Chapter 13 - Accounting for Corporations
Capital in Excess account.
III. Dividends
A. Cash Dividends—decision to pay these dividends rest with board
of directors and is based on evaluating the amounts of retained
earning and cash as well as many other factors.
1. Accounting for cash dividends involves three important dates.
a. Date of Declaration—date the directors vote to pay a
2. Cash Dividend Entries—reduce in equal amounts both cash
and the retained earnings component of stockholders' equity.
a. At declaration—Debit Retained Earnings and credit
Dividends Payable.
b. At date of record – no entry ndded
c. At payment—Debit Dividends Payable and credit Cash.
3. Deficit and Cash Dividends—a debit (abnormal) balance in
retained earnings is called a deficit
a. Arises when cumulative losses and/or dividends are
greater than total profits earned in prior years.
b. Deducted on the balance sheet.
c. In cases of deficit, some states allow a liquidating cash
dividend where paid-in capital accounts are debited
instead of retained earnings because this is returning part
of original investment back to investors.
B. Stock Dividends—Distribution of additional shares of stock to
stockholders without receipt of any payment in return. They do not
reduce assets or total equity, just the components of equity.
1. Reasons for a stock dividend
a. To keep the market price of stock affordable.
b. To provide evidence of management's confidence that the
company is doing well.
2. Accounting for stock dividends—transfers a portion of equity
from retained earnings to contributed capital (called
capitalizing retained earnings)
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Chapter 13 - Accounting for Corporations
c. Declaration entry—Debit Retained Earnings (full
capitalized amount), credit Common Stock Dividend
Distributable (par value of dividend shares) and credit
Paid-in Capital in Excess of Par (any capitalization above
par).
d. Payment entry—Debit Common Stock Dividend
Distributable and credit Common Stock (to transfer par).
Chapter Outline Notes
C. Stock Splits
The distribution of additional shares of stock to stockholders
according to their percent of ownership. Involves “calling in” the
outstanding shares of stock and replacing them with a larger
number of shares that have a lower par value.
1. Reason for stock splits is similar to those for stock dividends..
2. Only a memorandum entry is required.
3. Splits do not affect any equity account balances or any
individual stockholder’s percentage of ownership.
4. Reverse stock splits reduce number of shares and increase par
value.
1. Separate contributed capital accounts are used to record
preferred stock.
2. Preferred Stock account is used to record the par value of
shares issued.
3. Paid-in in Excess of Par Value, Preferred Stock is used to
record any value received above the par value.
1. Cumulative or Noncumulative Dividend
a. Cumulative preferred stock has a right to be paid both
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Chapter 13 - Accounting for Corporations
d. Full-disclosure principle requires that the amount of
preferred dividends in arrears be reported as of the balance
sheet date, normally in a note to the financial statements.
Undeclared dividends are not a liability.
Chapter Outline Notes
2. Participating or Nonparticipating Dividend
a. Nonparticipating—dividends are limited each year to a
maximum amount determined by applying the preferred
percentage to the par value. Any remaining declared
dividend amounts are received by common stockholders.
b. Participating—gives its owners the right to share in
dividends in excess of the stated percentage or amount
after common stockholders have received the same rate.
C. Convertible Preferred Stock
1. Gives holders the option of exchanging their preferred shares
into common shares at a specified rate.
2. Offers investors a higher potential return.
D. Callable Preferred Stock
1. Gives the issuing corporation the right to purchase (retire) this
stock from its holders at specified future prices and dates.
2. Amount paid to call and retire a preferred share is its call
price, or redemption value, and is set when stock is issued.
3. Dividends in arrears must be paid when stock is called.
E. Reasons for Issuing Preferred Stock
1. To raise capital without sacrificing control of the corporation.
2. To boost the return earned by common stockholders on
corporate assets. Called financial leverage or trading on
1. Reduces the corporation's assets and stockholders' equity by
equal amounts.
2. Debit Treasury Stock (contra-equity) and credit Cash for full
cost. (Reduces total assets and total equity).
3. The equity reduction is reported by subtracting Treasury Stock
account balance from the total of Paid-in Capital accounts and
Retained Earnings on the Balance Sheet.
4. Places a restriction on retained earnings.
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Chapter 13 - Accounting for Corporations
Chapter Outline Notes
B. Reissuing Treasury Stock
1. Sale at cost—Treasury stock is reduced (credited) for the cost
of the reissued shares and Cash is debited for the amount
received.
2. Sale above cost—the amount received in excess of cost is
credited to Paid-in Capital, Treasury Stock.
3. Sale below cost—entry depends on whether the Paid-in
Capital, Treasury Stock account has a balance. If it has no
4. A company ever reports a loss or gain from the sale of
treasury stock.
C. Retiring Stock—results in a reduction in assets and equity equal to
the amount paid for the retired stock. Reduces the number of
issued shares.
1. When stock is purchased for retirement, all capital amounts
2. Any excess of original issuance price over cost from the
transaction should be credited to Paid-in Capital from
Retirement of Stock.
3. Any excess of cost over original issuance price from the
transaction should be debited to Retained Earnings.
1. Restrictions and Appropriations
a. Restricted retained earnings refers to both statutory and
contractual restrictions.
b. Appropriated retained earnings refers to a voluntary
transfer of amounts from the Retained Earnings account.
Chapter Outline Notes
2. Prior Period Adjustments
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Chapter 13 - Accounting for Corporations
2. Closing Process
a. Close credit balances in revenue accounts to Income
Summary
b. Close debit balances in expense accounts to Income
Summary.
c. Close Income Summary to Retained Earnings
d. Close Dividends account to Retained Earnings (if
dividends were recorded in a Dividends account).
B. Statement of Stockholders’ Equity
1. Provided by most companies rather than a separate statement
of retained earnings; the statement of stockholders’ equity
includes changes in retained earnings.
2. Lists the beginning and ending balances of each equity
account and describes the changes that occurred during the
period.
C. Reporting Stock Options
1. Stock options are rights to purchase common stock at a fixed
price over a specified period of time. As stock prices rise
above the fixed price, the option value increases.
2. Stock options are said to motivate employees and managers..
VII. Global View—Compares U.S. GAAP to IFRS
A. Accounting for Common Stock—both systems have similar
procedures for issuing common. Rights and responsibilities and
terminology, may differ due to legal and cultural differences.
B. Accounting for Dividends—consistent under both systems for
cash and stock dividends, and stock splits.
C. Accounting for Preferred Stock—similar under both systems, but
redeemable preferred stock is reported between liabilities and
equity in U.S. GAAP balance sheets but as a liability in IFRS.
Differences also exist in reporting convertible preferred stock.
D. Accounting for Treasury Stock—Both systems are consistent as
applied to treasury stock purchases, reissuances, and retirements.
Chapter Outline Notes
VIII. Decision Analysis
A. Earnings per Share (EPS)
1. Amount of income earned by each share of outstanding
common stock; reported on the income statement.
2. Basic earnings per share is computed by dividing the net
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Chapter 13 - Accounting for Corporations
income less preferred dividends by the weighted average
number of shares outstanding.
B. Price-Earnings Ratio (PE ratio)
1. Used to gain understanding of the market's expected receipts
for the stockholders.
2. Calculated as market value per share divided by earnings per
share.
3. Can be based on current or expected EPS.
C. Dividend Yield
1. Used to determine whether a company's stock is an income
stock (pays large and regular dividends) or a growth stock
(pays little or no cash dividends).
2. Calculated as annual cash dividends per share divided by
market value per share.
D. Book Value per Share—stockholders' claim to the assets on a per
share basis.
1. Book value per common share
a. If only one class outstanding, equals total stockholders’
equity divided by the number of common shares
2. Book value per preferred share
a. The stockholders' equity applicable to preferred shares
equals the preferred share’s call price (or par value if the
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