Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
13-1
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
SP
13-5
C2. Explain characteristics of, and
5, 6, 7, 17,
13-9, 13-10
13-7, 13-8,
13-1, 13-5,
13-1, 13-7
C3. Explain the items reported in
retained earnings.
13-13
13-11, 13-17,
13-18
13-2, 13-4,
GL 13-1,
GL 13-2
13-3, 13-5
13-9
Analytical objectives:
A1 Compute earnings per share
and describe its use.
15
13-14, 13-15
13-12, 13-13
13-1, 13-2,
13-4, 13-8,
13-9
A2. Compute price-earnings ratio
and describe its use in analysis.
13-16
13-14
13-2, 13-4,
13-8
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.
16
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
13-1, SP
P2. Record transactions
involving cash dividends, stock
dividends and stock splits.
8, 9, 10, 11
12
13-6, 13-7,
13-8, 13-12
13-5, 13-6,
13-18
13-2, 13-3,
13-4, ES
GL13-1,
GL13-2
13-7
P3. Record purchases and sales
of treasury stock.
13, 14
13-11, 13-12
13-10, 13-18
13-2, 13-4,
GL 13-1,
GL 13-2
13-6
*See additional information on next page that pertains to these quick studies, exercises and problems.
distribute dividends between
common and preferred stock.
18, 19
13-9
SP
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Additional Information on Related Assignment Material
Connect
Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all Exercises and
Problems Set A. Connect also provides algorithmic versions for Quick Study, Exercises and Problems. It allows
instructors to monitor, promote, and assess student learning. It can be used in practice, homework, or exam mode.
Connect Insight
The first and only analytics tool of its kind, Connect Insight is a series of visual data displays that are each framed
by an intuitive question and provide at-a-glance information regarding how an instructor’s class is performing.
Connect Insight is available through Connect titles.
The Serial Problem for Success Systems continues in this chapter.
General Ledger
Assignable within Connect, General Ledger (GL) problems offer students the ability to see how transactions post
from the general journal all the way through the financial statements. Critical thinking and analysis components are
added to each GL problem to ensure understanding of the entire process. GL problems are auto-graded and provide
instant feedback to the student.
Excel Simulations
Assignable within Connect, Excel Simulations allow students to practice their Excel skills—such as basic formulas
and formatting—within the context of accounting. These questions feature animated, narrated Help and Show Me
tutorials (when enabled). Excel Simulations are auto-graded and provide instant feedback to the student.
Synopsis of Chapter Revisions
NEW opener—Tesla Motors and entrepreneurial assignment.
Streamlined discussion of corporate characteristics.
Updated the Target stock quote data.
Simplified section on stock dividends.
Continued 5-step process for stock dividends.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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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
(officers and managers), operates with the same rights, duties,
and responsibilities of a person.
2. Limited liability of stockholders—stockholders are not liable
for corporate acts or debt.
3. Transferable ownership rights—transfer of shares generally
has no effect on corporation operation.
4. Continuous life⎯corporation’s life 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
investors and enables a corporation to accumulate large
amounts of capital.
B. Characteristics of a Corporation—Disadvantages
2. Corporate taxation—corporate income is taxed; and when
income is distributed to shareholders as dividends, it is taxed a
second time as personal income (double taxation).
C. Corporate Organization and Management
fees, promoters’ fees, and amounts paid to obtain a charter.
Expensed as incurred.
1. Incorporation—A corporation is created by obtaining a charter
from a state government. A charter application, signed by
prospective stockholders (incorporators or promoters) must
be filed with the state and fees must be paid.
2. Organization Expenses (organization costs)—include legal
3. Management of a Corporation
a. Stockholders control corporation by electing its board of
directors.
b. Board of directors (BOD) has final managing authority,
but it usually limits its actions to setting broad policy.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
c. Executive officers (appointed by the BOD) manage the
day-to-day direction of corporation. President is often the
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.
b. Sell or otherwise dispose of their stock.
c. Purchase their proportional shares of any common stock
later issued; called preemptive right.
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
transfer agent (usually large banks or financial institutions).
a. Registrar—keeps stockholder records and prepares
official lists of stockholders for stockholders’ meetings
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.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
3. Market value of stock—the price at which a stock is bought
and sold.
4. Classes of stock
common stockholders in one or more ways.
a. Common—the name of stock when all classes have same
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”
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.
II. Common Stock—Issuance of stock affects only paid-in capital
accounts, not retained earnings accounts.
A. Issuing Par Value Stock
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.)
growth, and other company and economic events.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
3. Issuing par value stock at a discount— Discount occurs when
stock is sold for less than its par value (prohibited by most
states).
a. Debit Cash (# shares issued x market price).
b. Credit Common Stock (# shares issued x par value).
B. Issuing No Par Value Stock
When no-par stock is not assigned a stated value, the entire
amount received becomes legal capital and is recorded as
Common Stock.
C. Issuing Stated Value Stock
Stated value becomes legal capital and is credited to a no-par stock
account. If stock is issued at an amount in excess of stated value,
this excess is credited to Paid-In Capital in Excess of Stated Value,
Common Stock.
D. Issuing Stock for Noncash Assets
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.
2. Issuing par value stock for organizational costs—stock is
issued in exchange for services (from promoters, lawyers,
accountants) in organizing the corporation
a. Record the transaction at the market value of the services
received debiting this amount to Organization Expense.
III. Dividends
A. Cash Dividends—decision to pay these dividends rest with board
of directors and is based on evaluating the amounts of retained
earnings and cash as well as many other factors.
1. Accounting for cash dividends involves three important dates.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
b. Date of Record—date specified for identifying
stockholders (owners on this date will receive dividend).
c. Date of Payment—date corporation makes payment.
2. Cash Dividend Entries—reduce in equal amounts both cash
and the retained earnings component of stockholders’ equity.
b. At payment—Debit Dividends Payable and credit Cash.
3. Deficits and Cash Dividends—a debit (abnormal) balance in
retained earnings is called a retained earnings deficit.
of original investment back to investors.
a. Arises when cumulative losses and/or dividends are
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.
company is doing well.
1. Reasons for a stock dividend
2. Accounting for stock dividends—transfers a portion of equity
from retained earnings to contributed capital (called
capitalizing retained earnings)
a. Small stock dividend is 25% or less of the issuing
corporation’s previously outstanding shares; the market
value of the shares to be distributed is capitalized.
b. Large stock dividend is more than 25% of the shares
outstanding before the dividend; only the legally required
minimum amount (par or stated value of shares) must be
capitalized.
Distributable and credit Common Stock (to transfer par).
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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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.
2. Only a memorandum entry is required.
4. Reverse stock splits reduce number of shares and increase par
value.
IV. Preferred Stock—Has special rights that give it priority over common
stock in one or more areas such as preference for receiving dividends
and for the distribution of assets if the corporation is liquidated.
Usually does not have right to vote.
A. Issuance of Preferred Stock
Usually has a par value; can be sold at a price different from par.
1. Separate contributed capital accounts are used to record
preferred stock.
3. Paid-in in Excess of Par Value, Preferred Stock is used to
record any value received above the par value.
B. Dividend Preference of Preferred Stock
Preferred stockholders are allocated their dividends before any
dividends are allocated to common stockholders. The dividends
allocated per share is usually expressed as a set dollar amount per
share or a percent applied to the par value.
1. Cumulative or Noncumulative Dividend
a. Cumulative preferred stock has a right to be paid both
current and all prior periods’ unpaid dividends before any
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
2. Participating or Nonparticipating Dividend
a. Nonparticipating—dividends are limited each year to a
C. 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
equity.
V. Treasury Stock—A corporation acquires their own shares for several
reasons such as to acquire another company, or to avoid a hostile
takeover, or to use for employee compensation, or to maintain a strong
market for their stock.
A. Purchasing Treasury Stock—Cost Method
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
4. Places a restriction on retained earnings.
B. Reissuing Stock
1. Sale at cost—Treasury stock is reduced (credited) for the cost
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.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
13–10
Chapter Outline
Notes
VI. Reporting of Equity
A. Statement of Retained Earnings—Retained Earnings is total
cumulative amount of reported net income less any net losses and
dividends declared since the company’s inception. It is part of
stockholders’ equity (claim to the assets) and is not implying that
any certain amount of cash or other assets actually exists.
1. Restrictions and Appropriations
a. Restricted retained earnings refers to both statutory and
2. Prior Period Adjustments
a. Corrections of material errors made in prior periods.
b. Include arithmetic mistakes, unacceptable accounting, and
missed facts.
3. Closing Process
a. Close credit balances in revenue accounts to Income
Summary
B. Statement of Stockholders’ Equity
1. Provided by most companies rather than a separate statement
2. Lists the beginning and ending balances of each equity
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
VII. Decision Analysis
A. Earnings per Share (EPS)
1. Amount of income earned by each share of outstanding
common stock; reported on the income statement.
B. Price-Earnings Ratio (PE ratio)
1. Used to gain understanding of the market’s expected receipts
C. Dividend Yield
1. Used to determine whether a company’s stock is an income
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. Equity Applicable to Preferred shares
a. The stockholders’ equity applicable to preferred shares
number of shares outstanding.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter 13 Alternate Demonstration Problem #1
Uzi Company received a charter granting the right to issue 200,000 shares
of $1 par value common stock and 10,000 shares of 8% cumulative and
nonparticipating, $50 par value preferred stock that is callable at $80 per
share. Selected transactions are presented below.
2017
Feb.
19
Issued 45,000 shares of common stock at par for cash.
22
Gave the corporation’s promoters 30,000 shares of common
stock for their services in getting the corporation organized.
The directors valued the services at $50,000.
Mar
30
Exchanged 100,000 shares of common stock for the
following assets at fair market values: land, $25,000;
building, $100,000; and machinery, $125,000.
Dec.
31
Closed the Income Summary account. A $25,000 loss was
incurred.
2018
Jan.
12
Issued 1,000 shares of preferred stock at $75 per share.
Dec.
15
The board of directors declared an 8% dividend on preferred
shares and $0.10 per share on outstanding common shares,
payable on January 31 to the January 17 stockholders of
record.
31
Closed the Income Summary account. A $69,000 net income
was earned.
2019
Jan.
31
Paid the previously declared dividends.
Required:
1. Prepare general journal entries to record the selected transactions.
2. Prepare a stockholders’ equity section as of the close of business on
December 31, 2018.
3. Determine the book value per preferred share and per common stock
as of December 31, 2018.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
13–13
Chapter 13 Solution: Alternate Demonstration Problem #1
Part 1
2017
Feb.
19
Cash …………………………………………………….
45,000
Common Stock ………………………………..
45,000
Mar.
30
Land ……………………………………………………
25,000
Buildings ………………………………………………
Machinery …………………………………………….
Common Stock
Value, Common Stock ………………….
Dec.
31
Retained Earnings …………………………………
25,000
Income Summary …………………………….
25,000
2018
Jan.
12
Cash …………………………………………………….
75,000
Preferred Stock ……………………………….
50,000
Value, Preferred Stock ………………….
25,000
Dec.
15
Retained Earnings …………………………………
21,500
Common Dividend Payable ………………
17,500
Preferred Dividend Payable ……………..
31
Income Summary ………………………………….
69,000
Retained Earnings …………………………...
69,000
2019
Jan.
31
Preferred Dividend Payable …………………..
Common Dividend Payable ……………………
17,500
21,500
22
Organizational Expense ………………………..
50,000
Common Stock ………………………………..
30,000
Value, Common Stock ………………….
20,000
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
Part 2
Stockholders’ Equity
Preferred stock, $50 par value, 8% cumulative and
nonparticipating, 10,000 shares authorized, 1,000
shares issued ………………………………………………………
Common stock, $1 par value, 200,000 shares
authorized, 175,000 issued ……………………………………
Total Paid-in capital …………………………………………………..
Retained earnings ……………………………………………………..
Part 3
Book value per preferred share = call value (or par value if stock does not
have a call value) plus any dividends in arrears if cumulative stock. There
are no arrears.
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Chapter 13 Alternate Demonstration Problem #2
At the beginning of 2017, Austin Corporation’s stockholders’ equity
consisted of the following:
Common stock, $25 par value, 30,000 shares authorized,
24,000 shares issued ……………………………………………………..
$600,000
Paid–In capital in excess of par value common stock ……………
90,000
Retained earnings ……………………………………………………………….
230,000
Total stockholders’ equity ………………………………………………
$920,000
During the year, the company completed these transactions:
June
6
Purchased 1,000 shares of treasury stock at $40 per share.
23
The directors voted a $0.50 per share cash dividend payable
on July 25 to the July 20 stockholders of record.
July
25
Paid the dividend declared on June 23.
Aug.
10
Sold 500 of the treasury shares at $45 per share.
Oct.
20
Sold 500 of the treasury shares at $38 per share.
Dec.
15
The directors voted a $0.50 per share cash dividend payable
on January 20 to the January 15 stockholders of record, and
they voted a 2% stock dividend distributable on January 30 to
the January 20 stockholders of record. The market value of
the stock was $40 per share.
31
Closed the Income Summary account and carried the
company’s $60,000 net income to Retained Earnings.
Required:
1. Prepare general journal entries to record the transactions.
2. Prepare a retained earnings statement for the year and the
stockholders’ equity section of the company’s year-end balance sheet.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
13–16
Chapter 13 Solution: Alternate Demonstration Problem #2
Part 1
June
6
Treasury Stock, Common ………………………
40,000
Cash ………………………………………………..
40,000
23
Retained Earnings …………………………………
11,500
Common Dividend Payable ………………
11,500
25
Common Dividend Payable ……………………
11,500
Cash ………………………………………………..
11,500
10
22,500
Treasury Stock, Common
20,000
Transactions ………………………………..
20
19,000
Transactions ………………………………..
Treasury Stock, Common …………………
20,000
15
Retained Earnings …………………………………
31,200
Common Dividend Payable ………………
12,000
Common Stock Dividend Distributable.
12,000
Common Stock ………………………………..
31
Income Summary ………………………………….
60,000
Retained Earnings …………………………...
60,000
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
Part 2
AUSTIN CORPORATION
Statement of Retained Earnings
For Year Ended December 31, 2017
Retained earnings, January 1, 2017 ……………………
$230,000
Additions:
Deductions:
Cash dividends declared ………………………………
Retained earnings, December 31, 2017 ……………….
$247,300
Stockholders’ Equity
Common stock, $25 par value, 30,000 shares authorized,
24,000 shares issued ………………………………………………….
$600,000
Common stock dividend distributable, 480 shares ……………….
Total common stock issued and to be issued …………………
Total capital paid-in by common stockholders …………
Other Paid-in capital: …………………………………………………………..
Total Paid-in capital ………………………………………………..
Retained earnings ……………………………………………………………….
Total stockholders’ equity ……………………………………….
$958,000