Principles of Accounting: Chapter Fourteen

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Chapter Summary

Chapter 14 provides in-depth coverage of accounting issues that are unique to corporations. The chapter begins with a discussion of the nature of the corporate entity, and its advantages and disadvantages. There are various types of stock, and each type has unique features. The second section of the chapter highlights common and preferred stock, and identifies features that should be fully understood. The presence of multiple classes of stock requires deeper understanding of dividends and capital structure, as described in the chapter.

Companies may buy back shares of their own stock, which are known as treasury shares. The proper accounting for treasury stock involves certain unique principles and practices. Companies would generally not recognize gains and losses on such transactions.

As described in the chapter, the appropriate accounting for stock splits and stock dividends depends on the legal form of the transaction. The accounting methodology is further impacted for stock dividends, based upon whether a transaction is deemed to be a large or small stock dividend. The chapter concludes with an illustrative statement of stockholders' equity, which is more extensive and often substituted for a statement of retained earnings.

To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. You will find these exercises very helpful in providing models and guidelines for solving all of the problems at principlesofaccounting.com.

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Objectives: Chapter Fourteen

The following learning objectives for this chapter map to the curriculum design for our online university-level courses. These courses are offered through Utah State University, and result in the awarding of up to 6 hours of highly transferrable college credit. To learn more, check out the classroom link.

Characteristics of the corporate form of organization.

Define the essence of the corporate form of entity.

Describe the process by which a corporation is formed, and how business operations commence.

Cite and explain the advantages of the corporate form of organization.

What is a prospectus?

Cite and explain the disadvantages of the corporate form of organization.

Generally describe the regulatory environment for issuing stock to the public.

Common and preferred stock.

Distinguish between common and preferred stocks, carefully detailing the rights and features of each class.

What is meant by the term "callable?"

What is meant by the term "convertible?"

What is the significance of par value?

Be able to prepare complete journal entries to record the issuance of par value stock.

How is stock accounted for that is issued for assets other than cash?

Describe the important dates that pertain to dividends.

When are journal entries recorded for dividend transactions?

How are declared but unpaid dividends reported in the financial statements?

Define "legal capital."

Note the distinction between "additional paid-in capital" and "total paid-in capital."

Be able to prepare a complete stockholders' equity section for a corporate entity.

Note the thorough nature of the capital stock descriptions on the face of the balance sheet.

Be able to perform dividend calculations in cases involving cumulative and noncumulative preferred stock.

Treasury stock.

What is treasury stock, and where is it positioned on a balance sheet?

Prepare journal entries for treasury stock transactions, including reissuances.

Do gains and losses arise on treasury stock transactions?

Can retained earnings be increased or decreased as a result of treasury stock transactions?

Stock splits and stock dividends.

Differentiate between a stock split and a stock dividend, and the related accounting significance of each.

Know that journal entries are not needed for stock splits.

Understand the balance sheet modification necessitated by a stock split.

What is a stock dividend?

Be able to give reasons for issuing stock dividends.

Be able to prepare journal entries for small and large stock dividends, and cite examples of when each is appropriate.

Be able to provide computations demonstrating the impact of stock dividends on equity accounts.

Explain the probable impact on market value of stock splits and stock dividends.

The statement of stockholders' equity.

Be able to prepare a statement of stockholders' equity.

Know about the international approach of presenting a statement of recognized income and expense.

Know about the international approach of adjusting equity for asset revaluations.

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