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Unit 4
The Accounting Cycle for a
Merchandising Corporation
Chapter 14 Accounting for Sales and Cash Receipts
Chapter 15 Accounting for Purchases and Cash Payments
Chapter 16 Special Journals: Sales and Cash Receipts
Chapter 17 Special Journals: Purchases and Cash Payments
Chapter 18 Adjustments and the Ten-Column Work Sheet
Chapter 19 Financial Statements for a Corporation
Chapter 20 Completing the Accounting Cycle for a Merchandising Corporation
Chapter 21 Accounting for Publicly Held Corporations
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Chapter 21
Accounting for Publicly Held Corporations
What You’ll Learn
 Describe the characteristics of the corporate form of
business organization.
 Prepare journal entries to record the issue of stock
to investors.
 Prepare journal entries to record the distribution of
earnings to owners.
 Prepare financial statements for publicly held
corporations.
 Define the accounting terms introduced in this
chapter.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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Chapter 21, Section 1
Publicly Held Corporations
What Do You Think?
What is a major advantage for a corporation making
stock available to the public?
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.1
Publicly Held Corporations
Main Idea
Investors from the general public purchase stock of
publicly held corporations.
You Will Learn
 the unique features of a corporation.
 how to account for the issue of stock.
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Publicly Held Corporations
SECTION 21.1
Key Terms

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closely held corporation
publicly held corporation
board of directors
authorized capital stock
par value
common stock
proxy
preferred stock
Paid-in Capital in Excess of Par
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.1
Publicly Held Corporations
Characteristics of a Corporation
A closely held corporation is one that is owned by a
few persons or by a family, and the stock is not sold to
the public. A publicly held corporation is one whose
stock is widely owned, has a large market, and is usually
traded on a stock exchange.
The corporation has several unique features:
 Legal Permission to Operate
 Separate Legal Entity
 Stockholders
 Professional Management – stockholders elect a
board of directors to govern the affairs of the
corporation
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SECTION 21.1
Publicly Held Corporations
Capital Stock
A corporation has a maximum number of shares it may
issue called authorized capital stock. The corporation
must assign a value, par value, to each share before
selling to the public. The two main types of capital stock
are
 common and
 preferred.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.1
Publicly Held Corporations
Common Stock
If only one class of capital stock is issued, it is called
common stock. Owners participate in the following
ways:
 They elect and exercise control through the board
of directors. Elections are held at stockholders’
meetings. A stockholder may send a proxy to
vote in his or her place.
 They share in earnings of the corporation by
receiving dividends.
 They are entitled to share in the assets of the
corporation if it goes out of business.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.1
Publicly Held Corporations
Preferred Stock
A corporation can issue preferred stock to appeal to
many investors. Owners participate in the following
ways:
 They are entitled to receive dividends before
common stockholders.
 They are given preference over common
stockholders to distribution of corporate assets if
the company goes out of business.
Preferred stockholders give up two rights:
 to vote
 to participate in the control of the corporation
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.1
Publicly Held Corporations
Issuing Common Stock
When common stock is issued, the Common Stock
account is credited for the par value of the stock.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.1
Publicly Held Corporations
Issuing Common Stock at Par Value
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.1
Publicly Held Corporations
Issuing Common Stock in Excess of Par Value
When a stock sells for more than par value, the excess
is credited to a separate stockholders’ equity account,
Paid-in Capital in Excess of Par. This account follows
the rules of debit and credit of other stockholders’ equity
accounts.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.1
Publicly Held Corporations
Issuing Common Stock in Excess of Par Value
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.1
Publicly Held Corporations
Issuing Preferred Stock
When preferred stock is issued, the Preferred Stock
account is credited for the stock’s par value.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.1
Publicly Held Corporations
Key Terms Review
 closely held corporation
A corporation, often owned by a few people or by
a family, that does not offer its stock for sale to
the general public.
 publicly held corporation
A corporation whose stock is widely held, has a
large market, and is usually traded on a stock
exchange.
 board of directors
A group of people, elected by the stockholders,
who govern and are responsible for the affairs of
a corporation.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.1
Publicly Held Corporations
Key Terms Review
 authorized capital stock
The maximum number of shares of stock a
corporation may issue.
 par value
The dollar amount assigned to each share of
stock before it is sold to the public; used to
determine the amount credited to the capital stock
account.
 common stock
The stock issued by a corporation when it issues
only one class of stock.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.1
Publicly Held Corporations
Key Terms Review
 proxy
A document that transfers a stockholder’s voting
rights to someone else.
 preferred stock
Stock whose owners have certain privileges over
common stockholders.
 Paid-in Capital in Excess of Par
The account that represents the amount of cash
received by a corporation over the stock’s par
value.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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Chapter 21, Section 2
Distribution of corporate Earnings
What Do You Think?
How do corporations distribute earnings to
stockholders?
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.2
Distribution of Corporate Earnings
Main Idea
A corporation distributes a portion of its earnings to
stockholders in the form of dividends.
You Will Learn
 how to account for dividends.
 how to record dividend transactions.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.2
Distribution of Corporate Earnings
Key Term
 dividend
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SECTION 21.2
Distribution of Corporate Earnings
Dividends Account
Stockholders cannot withdraw cash whenever they
want, but they receive dividends. A dividend is a
distribution of cash to stockholders.
Dividends decrease retained earnings, so there must be
an adequate balance in the Retained Earnings
account. The Dividends account is used to record
dividends declared and is closed to the Retained
Earnings account at the end of the period.
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SECTION 21.2
Distribution of Corporate Earnings
Dividend Transactions
A corporation authorized to issue two types of stocks
uses separate dividend and dividend payable accounts
for each type.
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SECTION 21.2
Distribution of Corporate Earnings
Dividends on Preferred Stock
Preferred stockholders have the right to receive
dividends before common stockholders. This amount is
predetermined, or stated.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.2
Distribution of Corporate Earnings
Date of Declaration
A journal entry records the dividend on the date of
declaration, the date the board declares it.
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SECTION 21.2
Distribution of Corporate Earnings
Date of Record
On this date, the corporation checks its records and
makes a list of stockholders entitled to receive the
dividend.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.2
Distribution of Corporate Earnings
Date of Payment
A check for the total dividend payment is written and
deposited in a dividends checking account. Checks are
written on this account to each preferred stockholder.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.2
Distribution of Corporate Earnings
Dividends on Common Stock
Dividends on common stock can be declared in two
ways.
 The board of directors may declare a dividend
amount per common share.
 The board may decide to declare the total cash
dividend for both preferred and common stock.
Dividends can be paid annually, semiannually, or
quarterly.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.2
Distribution of Corporate Earnings
Key Term Review
 dividend
A distribution of cash to stockholders of a
corporation; reduces the corporation’s retained
earnings.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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Chapter 21, Section 3
Financial Reporting for a Publicly
Held Corporation
What Do You Think?
Who is interested in a publicly held corporation’s
financial statements versus those of a proprietorship?
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.3
Financial Reporting for a
Publicly Held Corporation
Main Idea
Corporate financial statements report stock issues and
dividends.
You Will Learn
 about a corporate income statement.
 how and why corporations prepare a statement of
stockholders’ equity.
 about a corporate balance sheet.
 about a corporate statement of cash flows.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.3
Financial Reporting for a
Publicly Held Corporation
Key Term
 statement of stockholders’ equity
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.3
Financial Reporting for a
Publicly Held Corporation
The Income Statement
The income statement of a publicly held corporation is
similar to that of a closely held corporation.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.3
Financial Reporting for a
Publicly Held Corporation
The Statement of Stockholders’ Equity
Many corporations are preparing a statement of
stockholders’ equity rather than a statement of
retained earnings. This statement reports the changes in
all stockholders’ equity accounts during the period.
Information reported on the statement includes
 the number of shares of each type of stock
issued,
 the total amount received for those shares,
 the net income or net loss for the period, and
 dividends declared during the period.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.3
Financial Reporting for a
Publicly Held Corporation
The Statement of Stockholders’ Equity
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SECTION 21.3
Financial Reporting for a
Publicly Held Corporation
The Balance Sheet
The Dividends Payable accounts are reported in the
liabilities section on the balance sheet. Each listing in
the stockholders’ equity section of the balance sheet
describes
 the par value,
 the number of shares authorized, and
 the number of shares issued.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.3
Financial Reporting for a
Publicly Held Corporation
The Balance Sheet
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.3
Financial Reporting for a
Publicly Held Corporation
The Statement of Cash Flows
Stock issue results in cash inflow and payment of
dividends is a cash outflow.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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SECTION 21.3
Financial Reporting for a
Publicly Held Corporation
Key Term Review
 statement of stockholders’ equity
A financial statement that reports the changes
that have taken place in all of the stockholders’
equity accounts during the period.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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CHAPTER 21
Chapter 21 Review
Question 1
On February 14, Excalibur Corporation issued 2,000 shares
of $25 par common stock at $35 per share. List the steps to
record this transaction.
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CHAPTER 21
Chapter 21 Review
Answer 1
Step 1: Identify the accounts affected.
The accounts Cash in Bank, Common Stock, and
Paid-in Capital in Excess of Par are affected.
Step 2: Classify the accounts affected.
Cash in Bank is an asset account; Common Stock
and Paid-in Capital in Excess of Par are capital
accounts.
Step 3: Determine the amount of increase or decrease for
each account affected.
Cash in Bank is increased by $70,000 (2,000 
$35). Common Stock is increased by $50,000
(2,000  $25) and Paid-in Capital in Excess of
Par is increased by $20,000 (2,000  $10).
(continued)
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CHAPTER 21
Chapter 21 Review
Answer 1
Step 4: Which account is debited? For what amount?
Increases in the asset accounts are recorded as
debits. Debit Cash in Bank for $70,000.
Step 5: Which account is credited? For what amount?
Increases in stockholder’s equity accounts are
recorded as credits. Credit Common Stock for
$50,000 and Paid-in Capital in Excess of Par for
$20,000.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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CHAPTER 21
Chapter 21 Review
Question 2
List one advantage each for holding common and
preferred stock.
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CHAPTER 21
Chapter 21 Review
Answer 2
Common stock: Answers will vary, but advantages of
holding common stock include these: (a) electing the
corporation’s board of directors and, through it,
exercising control over its operations, (b) sharing in the
earnings of the corporation by receiving dividends, and
(c) receiving a share of the assets if the business
ceases operations and liquidates.
Preferred stock: Answers will vary, but advantages of
holding preferred stock include these: (a) receiving
dividends before common stockholders in a set amount
and (b) receiving preference over common stockholders
in the distribution of assets upon liquidation.
Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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