second year

Sheets (2)
Chapter
Corporations :
Organization and 1
Capital stock transactions

‫ازهر‬

Edited by Dr/ Magdy Kamel

Tel/ 01273949660

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Accounting For Preferred Stock
 a corporation may issue an additional class of stock, called preferred stock
 Preferred stock has contractual provisions that give it some preference or priority
over common stock. Typically, preferred stockholders have a priority as to
(1) distributions of earnings (dividends) and
(2) assets in the event of liquidation. However, they generally do not have voting right
 Preferred stock may have either a par value or no-par value. In the stockholders’
equity section of the balance sheet, companies list preferred stock first because of
its dividend and liquidation preferences over common stock

Notes
 Costs incurred in the formation of a corporation are called organization costs.
 These costs include legal and state fees, and promotional expenditures involved in the
organization of the business.
 Corporations expense organization costs as incurred.
 Determining the amount and timing of future benefits is so difficult that it is standard procedure
to take a conservative approach of expensing these costs immediately

Example (2)
Star Corporation purchased from its stockholders 5,000 shares of its own previously
issued stock for $250,000. It later resold 2,000 shares for $53 per share, then 2,000
more shares for $48 per share, and finally 1,000 shares for $43 per share.
Instructions
Prepare journal entries for the purchase of the treasury stock and the three sales of
treasury stock.
Solution
1. Treasury Stock 250,000
Cash 250,000

2. Cash (2,000 X $53) 106,000

Treasury Stock (2,000 X $50) 100,000
Paid-in Capital from Treasury Stock 6,000
3. Cash (2,000 X $48) 96,000
Paid-in Capital from Treasury Stock 4,000
Treasury Stock (2,000 X $50) 100,000
4. Cash (1,000 X $43) 43,000
Paid-in Capital from Treasury Stock ($6,000 - $4,000) 2,000
Retained Earnings 5,000
Treasury Stock (1,000 X $50) 50,000

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(3) Rolman Corporation is authorized to issue 1,000,000 shares of $5 par value
common stock. In its first year, the company has the following stock transactions:
Jan. 10: Issued 400,000 shares of stock at $8 per share.
July 1: Issued 100,000 shares of stock for land. The land had an asking price of
$900,000. The stock is currently selling on a national exchange at $8.25 per share.
Sept. 1: Purchased 10,000 shares of common stock for the treasury at $9 per share.
Dec. 1: Sold 4,000 shares of the treasury stock at $10 per share.
Instructions
(a) Journalize the transactions.
(b) Prepare the stockholders' equity section assuming the company had retained
earnings of $200,000 at December 31.
Solution
Jan. 10 Cash (400,000 ×$8) 3,200,000
Common Stock (400,000 ×$5) 2,000,000
Paid-in Capital in Excess of Par—C.S 1,200,000
July 1 Land (100,000 × 8.25) 825,000
Common Stock (100,000 × $5) 500,000
Paid-in Capital in Excess of Par—C.S 325,000
Sept. 1 Treasury Stock (10,000 ×$9) 90,000
Cash 90,000
Dec. 1 Cash (4,000 × $10) 40,000
Treasury Stock (4,000 × $9) 36,000
Paid-in Capital from Treasury Stock 4,000

b) ROLMAN CORPORATION
Balance Sheet (partial)
Stockholders' equity
Paid-in capital
Capital stock
 Common stock, $5 par value, 1,000,000 shares authorized,
500,000 shares issued, 494,000 shares outstanding $2,500,000
Additional paid-in capital
 In excess of par—common stock $1,525,000
 From treasury stock 4,000
Total additional paid-in capital 1,529,000
= Total paid-in capital 4,029,000
(+) Retained earnings 200,000
= Total paid-in capital and retained earnings 4,229,000
Less: Treasury stock (6,000 shares) (54,000)
Total stockholders' equity $4,175,000

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 E 1-4 Beauty Island Corporation began operations on April 1 by issuing 60,000
shares of $5 par value common stock for cash at $13 per share. On April 19, it issued
2,000 shares of common stock to attorneys in settlement of their bill of $27,500 for
organization costs. In addition, Beauty Island issued 1,000 shares of $1 par value
preferred stock for $6 cash per share. Journalize the issuance of the common and
preferred shares, assuming the shares are not publicly traded
SOLUTION
Apr. 1 Cash (60,000 × $13) 780,000
Common stock [ 60,000 × $5] 300,000
Paid in capital in excess of par value – C.S 480,000
Apr. 19 Organization expense 27,500
Common stock (2,000 × $5) 10,000
Paid in capital in excess of par value – C.S 17,500
Cash (1,000 × $6) 6,000
Preferred stock [ 1,000 × $1] 1,000
Paid in capital in excess of par value – P.S 5,000

E 1-7: During its first year of operations, Foyle Corporation had the following
transactions pertaining to its common stock.
 Jan. 10 Issued 70,000 shares for cash at $5 per share.
 July 1 Issued 40,000 shares for cash at $7 per share.
Instructions
(a) Journalize the transactions, assuming that the common stock has a par value of
$5 per share. (b) Journalize the transactions, assuming that the common stock is no-
par with a stated value of $1 per share.

(a) Journal entries, assuming that the common stock has a par value of $5 per share
Jan. 10 Cash ( 70,000 × $5 ) 350,000
Common Stock 350,000

July. 1 Cash ( 40,000 × $7 ) 280,000

Common Stock ( 40,000 × $5 par) 200,000
Paid in capital in excess of par value 80,000
( 40,000 × $2)

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b)
Jan. 10 Cash ( 70,000 × $5 ) 350,000
Common Stock ( 70,000 × $1) 70,000
Paid in capital in excess of
stated value ( 70,000 × $4) 280,000
July. 1 Cash (40,000 × $7) 280,000
Common Stock (40,000 × $1) 40,000
Paid in capital in excess of
Stated value (40,000 × $7) 240,000

E1-9 Quay Co. had the following transactions during the current period.
Mar. 2: Issued 5,000 shares of $5 par value common stock to attorneys in payment
of a bill for $30,000 for services performed in helping the company to
incorporate
June 12: Issued 60,000 shares of $5 par value common stock for cash of $375,000.
July 11: Issued 1,000 shares of $100 par value preferred stock for cash at $110
per share
Nov. 28: Purchased 2,000 shares of treasury stock for $80,000.
Instructions
Journalize the transactions

Solution
May.2 Organization expense 30,000
Common stock (5,000 × $5) 25,000
Paid in capital in excess of par value – C.S 5,000
June.12 Cash 375,000
Common stock (60,000 × $5) 300,000
Paid in capital in excess of par value – C.S 75,000
July. 11 Cash (1,000 × $110) 110,000
Preferred stock (1,000 × $100) 100,000
Paid in capital in excess of par value – P.S 10,000
Nov. 28 Treasury stock 80,000
Cash 80,000

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 E 1-10 : As an auditor for the CPA firm of Hinkson and Calvert, you encounter the
following situations in auditing different clients.
1. LR Corporation is a closely held corporation whose stock is not publicly traded.
On December 5, the corporation acquired land by issuing 5,000 shares of its $20
par value common stock. The owners' asking price for the land was $120,000, and
the fair value of the land was $110,000.

2. Vera Corporation is a publicly held corporation whose common stock is traded on

the securities markets. On June 1, it acquired land by issuing 20,000 shares of its
$10 par value stock. At the time of the exchange, the land was advertised for sale at
$250,000. The stock was selling at $11 per share.

Instructions
Prepare the journal entries for each of the situations above.

Solution
1. Land 110,000
Common stock (5,000 ×$20) 100,000
Paid in capital in excess of par value – C.S 10,000
2. Land (20,000 × $11) 220,000
Common Stock (20,000 × $10) 200,000
Paid in capital in excess of par value – C.S 20,000

E 1-11 On January 1, 2017, the stockholders' equity section of Newlin Corporation

shows common stock ($5 par value) $1,500,000; paid-in capital in excess of par
$1,000,000; and retained earnings $1,200,000.
During the year, the following treasury stock transactions occurred.
 Mar. 1: Purchased 50,000 shares for cash at $15 per share.
 July 1: Sold 10,000 treasury shares for cash at $17 per share.
 Sept. 1: Sold 8,000 treasury shares for cash at $14 per share.
Instructions
1. Journalize the treasury stock transactions.
2. Restate the entry for September 1, assuming the treasury shares were sold at $12
per share.
Solution
a) Journal entries
Mar.1 Treasury stock (50,000 x $15) 750,000
Cash 750,000

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 July 1 Cash (10,000 × $17) 170,000
Treasury stock (10,000 × $15) 150,000
Paid-in capital from treasury stock 20,000

Sept. 1 Cash (8,000 x $14) 112,000

Paid-in capital from treasury stock 8,000
Treasury stock (8,000 × $15) 120,000

b)
Sept. 1 Cash (8,000 x $12) 96,000
Paid-in capital from treasury stock 20,000
Retained earnings 4,000
Treasury stock (8,000 × $15) 120,000

E 1-14: Gilliam Corporation recently hired a new accountant with extensive

experience in accounting for partnerships. Because of the pressure of the new job, the
accountant was unable to review his textbooks on the topic of corporation accounting.
During the first month, the accountant made the following entries for the
corporation's capital stock.

May. 2 Cash 130,000

Capital stock 130,000
(Issued 10,000 shares of $10 par value
common stock at $13 per share)
10 Cash 600,000
Capital stock 600,000
(Issued 10,000 shares of $50 par value
preferred stock at $60 per share)
15 Capital Stock 15,000
Cash 15,000
(Purchased 1,000 shares of common
stock for the treasury at $15 per share)
31 Cash 8,000
Capital Stock 5,000
Gain on Sale of Stock 3,000
(Sold 500 shares of treasury stock
at $16 per share)
instructions
On the basis of the explanation for each entry, prepare the entry
that should have been made for the capital stock transactions

solution

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journal entries
May. 2 Cash (10,000 × $13) 130,000
Common stock (10,000 × $10) 100,000
Paid in capital in excess of par value – C.S 30,000
10 Cash (10,000 × $60) 600,000
Preferred stock (10,000 × $50) 500,000
Paid in capital in excess of par value – P.S 100,000

15 Treasury stock (1,000 ×$15) 15,000

Cash 15,000

31 Cash (500 × $16) 8,000

Treasury stock (500 × $15) 7,500
Paid in capital from treasury stock 500

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 Quiz book
E 1-1 Indicate whether each of the following statements is true or false:
1- Similar to partners in a partnership, stockholders of a corporation have unlimited liability.

2- It is relatively easy for a corporation to obtain capital through the issuance of stock.

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 capital stock includes a credit to the
appropriate capital stock account.

5- All states require a par value per share for capital stock.

6- The corporation is an entity separate and distinct from its owners.

7- The liability of stockholders is normally limited to their investment in the corporation.

8- The relative lack of government regulation is an advantage of the corporate form of

business

9- There is no journal entry to record the authorization of capital stock.

10- No-par value stock is quite rare today.

11- Corporation management is both an advantage and a disadvantage of a corporation

compared to a proprietorship or a partnership.

12- Limited liability of stockholders, government regulations, and additional taxes are the
major disadvantages of a corporation.

13- When a corporation is formed, organization costs are recorded as an asset.

14- Each share of common stock gives the stockholder the ownership rights to vote at
stockholder meetings, share in corporate earnings, keep the same percentage ownership
when new shares of stock are issued, and share in assets upon liquidation.

15- The number of issued shares is always greater than or equal to the number of authorized
shares.

16- A journal entry is required for the authorization of capital stock.

17- Publicly held corporations usually issue stock directly to investors.

1. F 2. T 3. F 4. F 5. F 6. T 7. T 8. F
9. T 10. F 11. T 12. F 13. F 14. T 15. F 16. F 17. F

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18- The trading of capital stock on a securities exchange involves the transfer of already
issued shares from an existing stockholder to another investor

19- The market price of common stock is usually the same as its par value.

20- Retained earnings is the total amount of cash and other assets paid in to the corporation
by stockholders in exchange for capital stock

E 1-2 MULTIPLE-CHOICE QUESTIONS

1. Which of the following is not a major advantage of a corporate form of organization?

a. Separate legal existence. b. Continuous life.
c. Government regulations. d. Transferable ownership rights.

2. A major disadvantage of a corporation is:

a. limited liability of stockholders. b. additional taxes.
c. transferable ownership rights. d. separate legal existence.

3. Costs incurred in the formation of a corporation:

(a) do not include legal fees.
(b) are expensed as incurred.
(c) are recorded as an asset.
(d) provide future benefits whose amounts and timing are easily determined.

4. Which of the following statements is false?

(a) Ownership of common stock gives the owner a voting right.
(b) The stockholders' equity section begins with paid-in capital.
(c) The authorization of capital stock does not result in a formal accounting entry.
(d) Legal capital per share applies to par value stock but not to no-par value stock.

5. Total stockholders' equity (in the absence of treasury stock) equals:

(a) Total paid-in capital + Retained earnings.
(b) Paid-in capital + Capital stock + Retained earnings.
(c) Capital stock + Additional paid-in capital - Retained earnings.
(d) Common stock + Retained earnings.

6. The account Retained Earnings is:

(a) a subdivision of paid-in capital.
(b) net income retained in the corporation.
(c) reported as an expense in the income statement.
(d) closed to capital stock.

18. T 19. F 20. F 1. C 2. B

3. b 4. d 5. a 6. b

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7. A-Team Corporation issued 1,000 shares of $5 par value stock for land. The stock is
actively traded at $9 per share. The land was advertised for sale at $10,500.
The land should be recorded at:
(a) $4,000. (c) $9,000.
(b) $5,000. (d) $10,500

8. ABC Corporation issues 1,000 shares of $10 par value common stock at $13 per
share. In recording the transaction, credits are made to:
(a) Common Stock $10,000 and Paid-in Capital in Excess of Stated Value $3,000.
(b) Common Stock $13,000.
(c) Common Stock $10,000 and Paid-in Capital in Excess of Par $3,000.
(d) Common Stock $10,000 and Retained Earnings $3,000.

9. Lucroy Corporation issues 100 shares of $10 par value preferred stock at $12 per
share. In recording the transaction, credits are made to:
(a) Preferred Stock $1,200.
(b) Preferred Stock $1,000 and Retained Earnings$200.
(c) Preferred Stock $1,000 and Paid-in Capital in Excess of Preferred Value $200.
(d) Preferred Stock $1,000 and Paid-in Capital in Excess of Par—Preferred Stock $200.

10. Treasury stock may be repurchased:

(a) to reissue the shares to officers and employees under bonus and stock
compensation plans.
(b) to signal to the stock market that management believes the stock is underpriced.
(c) to have additional shares available for use in the acquisition of other companies.
(d) More than one of the above.

11. XYZ, Inc. sells 100 shares of $5 par value treasury stock at $13 per share. If the cost of
acquiring the shares was $10 per share, the entry for the sale should include credits to:
(a) Treasury Stock $1,000 and Paid-in Capital from Treasury Stock $300.
(b) Treasury Stock $500 and Paid-in Capital from Treasury Stock $800.
(c) Treasury Stock $1,000 and Retained Earnings $300.
(d) Treasury Stock $500 and Paid-in Capital in Excess of Par $800.

12. In the stockholders' equity section, the cost of treasury stock is deducted from:
(a) Total paid-in capital and retained earnings. (b) Retained earnings.
(c) Total stockholders' equity. (d) Common stock in paid-in capital.

13. Which of the following is not reported under additional paidin capital?
(a) Paid-in capital in excess of par. (b) Common stock.
(c) Paid-in capital in excess of stated value. (d) Paid-in capital from treasury stock.

14. In the stockholders' equity section of the balance sheet, common stock:
(a) is listed before preferred stock. (b) is added to total capital stock.
(c) is part of paid-in capital. (d) is part of additional paid-in capital.
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