ch11.ppt

7/17/2019 ch11.ppt

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Chapter

11Corporations:

Organization, ShareTransactions, Dividends,

and Retained EarningsFinancial Accounting, IFRS Edition

Weygandt Kimmel Kieso

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1. Identify the maor characteristics of a corporation.

!. Record the iss"ance of ordinary shares.

#. E$p%ain the acco"nting for treas"ry shares.

&. Differentiate preference shares from ordinary shares.

'. (repare the entries for cash dividends and share

dividends.

). Identify the items that are reported in a retained earningsstatement.

*. (repare and ana%yze a comprehensive e+"ity section.

Study ObjectivesStudy Objectives

Study ObjectivesStudy Objectives

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Cash dividendsCash dividends

Share dividendsShare dividends

Share sp%itsShare sp%its

CorporateCorporate

Organization andOrganization and

ShareShare

TransactionsTransactions

CorporateCorporate

Organization andOrganization and

ShareShare

TransactionsTransactions

Corporate form ofCorporate form of

organizationorganization

Ordinary shareOrdinary share

iss"esiss"es

Treas"ry sharesTreas"ry shares

(reference shares(reference shares

Retained earningsRetained earnings

restrictionsrestrictions

(rior period(rior period

ad"stmentsad"stments

Retained earningsRetained earningsstatementstatement

DividendsDividends

DividendsDividendsRetainedRetained

EarningsEarnings

RetainedRetained

EarningsEarnings

StatementStatement

Presentation andPresentation and

nal!sisnal!sis

StatementStatement

Presentation andPresentation and

nal!sisnal!sis

Corporations" Organization# Share Transactions#Corporations" Organization# Share Transactions#

Dividends# and Retained EarningsDividends# and Retained Earnings

Corporations" Organization# Share Transactions#Corporations" Organization# Share Transactions#

Dividends# and Retained EarningsDividends# and Retained Earnings

(resentation(resentation

na%ysis na%ysis

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n entit! separate and distinct %rom its o&ners'

The Corporate Form of OrganizationThe Corporate Form of Organization


Classi%ied (! P)rpose

-otfor(rofit

/or (rofit

Classi%ied (! O&nership

("0%ic%y he%d

(rivate%y he%d

Compass ro"p 23R4 5y"ndai 6otors 27OR4 897OI8 2R9S4 oog%e 29S4

Sa%vation rmy 29S4 Internationa%

Committee of the Red

Cross 2C5E4 3i%% 6e%inda ates

/o"ndation 29S4

Cargi%% Inc.

29S4

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Separate 8ega% E$istence

8imited 8ia0i%ity of Shareho%ders

Transfera0%e O;nership Rights

0i%ity to c+"ire Capita%

Contin"o"s 8ife

Corporate 6anagement

overnment Reg"%ations

dditiona% Ta$es

SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.

dvantages

Disadvantages



Characteristics that disting"ish corporations fromproprietorships and partnerships.

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Characteristics of a CorporationCharacteristics of a CorporationCharacteristics of a CorporationCharacteristics of a Corporation


Corporation acts"nder its o;n namerather than in the

name of itsshareho%ders.





Contin"o"s 8ife



dditiona% Ta$es

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8imited to their

investment.





Contin"o"s 8ife



dditiona% Ta$es

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Shareho%ders mayse%% their share.





Contin"o"s 8ife



dditiona% Ta$es

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Corporation cano0tain capita%thro"gh the iss"anceof shares.





Contin"o"s 8ife



dditiona% Ta$es

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Contin"ance as agoing concern is notaffected 0y the;ithdra;a%, death, or

incapacity of ashareho%der,emp%oyee, or officer.





Contin"o"s 8ife



dditiona% Ta$es

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Contin"o"s 8ife



dditiona% Ta$es




Separation ofo;nership andmanagementprevents o;ners

from having anactive ro%e inmanaging thecompany.

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Contin"o"s 8ife



dditiona% Ta$es




overnment

reg"%ations aredesigned to protectthe o;ners of thecorporation.

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Contin"o"s 8ife



dditiona% Ta$es




Corporations payincome ta$es as aseparate %ega% entity

and in addition,shareho%ders payta$es on cashdividends.

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Shareho%ders

Chairman and3oard ofDirectors

(resident andChief E$ec"tive

Officer

enera%

Co"nse% andSecretary

<ice (resident6ar=eting

<ice (resident

/inance>Chief /inancia% Officer

<ice (residentOperations

<ice (resident

5"manReso"rces

Treas"rer Contro%%er

/ll)stration 11-1

Corporation organization

chart

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ns;er on notes page

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/i%e app%ication ;ith governmenta% agency in the

"risdiction in ;hich incorporation is desired.

overnment grants charter.Corporation deve%ops 0y%a;s.

/nitial Steps"

Forming a CorporationForming a CorporationForming a CorporationForming a Corporation


Companies incorporate in a state or co"ntry ;hose %a;s

are favora0%e to the corporate form of 0"siness.Corporations e0pense organization costs as inc"rred.

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1. ote in e%ection of 0oard of

directors and on actions that

re+"ire shareho%der approva%.

Shareholders have the right to:

Ownership ights of Shareho!dersOwnership ights of Shareho!dersOwnership ights of Shareho!dersOwnership ights of Shareho!ders


!. Share the corporate earnings thro"gh receipt of dividends.

/ll)stration 11-3

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#. 7eep the same percentage o;nership ;hen ne;

shares of share are iss"ed 2preemptive right4.




n"m0er of companies have e%iminated the preemptive right.

/ll)stration 11-3

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&. Share in assets "pon %i+"idation in proportion to

their ho%dings. This is ca%%ed a resid)al claim.




/ll)stration 11-3

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Class COO STOC5

Class COO STOC5

PR 67E81 PER S9RE

PR 67E81 PER S9RE

Share Certi%icate

-ame of corporation

shareho%der?s name

C%ass

Shares

Signat"re of corporateofficia%

(ren"m0ered/ll)stration 11-4

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Share Issue ConsiderationsShare Issue ConsiderationsShare Issue ConsiderationsShare Issue Considerations


Charter indicates the amo"nt of shares that a

corporation is a"thorized to se%%.

-"m0er of a"thorized shares is often reported in thee+"ity section.

)thorized Shares

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Corporation can iss"e shares direct%y to investors or

indirect%y thro"gh an investment 0an=ing firm.

/actors in setting price for a ne; iss"e of shares:

1. the company?s anticipated f"t"re earnings

!. its e$pected dividend rate per share

#. its c"rrent financia% position

&. the c"rrent state of the economy

'. the c"rrent state of the sec"rities mar=et

/ss)ance o% Shares

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Shares of p"0%ic%y he%d companies are traded on organized

e$changes.

Interaction 0et;een 0"yers and se%%ers determines theprices per share.

(rices set 0y the mar=etp%ace tend to fo%%o; the trend of a

company?s earnings and dividends.

/actors 0eyond a company?s contro% may ca"se daytoday

f%"ct"ations in mar=et prices.

ar:et al)e o% Shares

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@ears ago, par val)e determined the legal capital per

share that a company m"st retain in the 0"siness for the

protection of corporate creditors.

Today many governments do not re+"ire a par va%"e.

o-par va%"e shares are +"ite common today.

In many co"ntries the 0oard of directors assigns a statedval)e to nopar shares.

Par and o-Par al)e Shares

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Corporate Capita! Corporate Capita! Corporate Capita! Corporate Capita!


/ll)stration 11-$

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Comparison of the e+"ity acco"nts for a proprietorshipand a corporation.

/ll)stration 11-*


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t the end of its first year of operation, Dora%Corporation has C*'A,AAA of ordinary share and

ns;er onnotes page

net income of C1!!,AAA. (repare 2a4 the c%osing entry for net income

and 204 the e+"ity section at yearend.



==

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/ll)stration/ll)stration:: ss"me that 5ydroS%ide, Inc. iss"es !,AAA shares

of B1 par va%"e ordinary shares. (repare 5ydroS%ide?s o"rna%

entry if 2a4 1,AAA shares are iss"ed for B1 per share, and 204

1,AAA shares are iss"ed for B' per share.

Cash 1,AAA

Share capita% ordinary 21,AAA $ B14 1,AAA

Cash ',AAA

Share capita% ordinary 21,AAA $ B14 1,AAA

Share premi"m ordinary &,AAA

a.

0.

/ss)ing Par al)e Ordinar! Shares %or Cash

"ccounting for Ordinary Share Issues "ccounting for Ordinary Share Issues "ccounting for Ordinary Share Issues "ccounting for Ordinary Share Issues

SO # ecord the issuance of ordinary shares.SO # ecord the issuance of ordinary shares.

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/ll)stration 11-+



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/ll)stration/ll)stration:: ss"me that 5ydroS%ide, Inc. iss"es ',AAA shares

of B' stated va%"e nopar shares for B per share. The entry is:

Cash &A,AAA

Share capita% ordinary 2',AAA $ B'4 !',AAA

Share premi"m ordinary 1',AAA

/ss)ing o-Par Ordinar! Shares %or Cash

(repare the entry ass"ming there is no stated va%"e.

Cash &A,AAA

Share capita% ordinary &A,AAA



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/ss)ing Ordinar! Shares %or Services or oncash ssets

Corporations a%so may iss"e shares for:

Services 2attorneys or cons"%tants4.

-oncash assets 2%and, 0"i%dings, and e+"ipment4.

Cost is either the fair mar=et va%"e of the consideration given"p, or the fair mar=et va%"e of the consideration received,

;hichever is more c%ear%y determina0%e.



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/ll)stration" ss"me that attorneys have he%ped ordanCompany incorporate. They have 0i%%ed the company B',AAA for

their services. They agree to accept &,AAA shares of B1 par va%"e

shares in payment of their 0i%%. t the time of the e$change, there

is no esta0%ished mar=et price for the shares. (repare the o"rna% entry for this transaction.

Organizationa% e$pense ',AAA

Share capita% ordinary 2&,AAA $ B14 &,AAA

Share premi"m ordinary 1,AAA



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/ll)stration" ss"me that th%etic Research Inc. is an e$istingp"0%ic%y he%d corporation. Its B' par va%"e shares are active%y

traded at B per share. The company iss"es 1A,AAA shares to

ac+"ire %and recent%y advertised for sa%e at BA,AAA. (repare the

o"rna% entry for this transaction.

8and 21A,AAA $ B4 A,AAA

Share capita% ordinary 21A,AAA $ B'4 'A,AAA

Share premi"m ordinary #A,AAA



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Treas)r! Shares corporation?s o;n shares that it hasreac+"ired from shareho%ders, 0"t not retired.

Corporations p"rchase their o"tstanding share to:

1. Reiss"e the shares to officers and emp%oyees "nder 0on"s and

share compensation p%ans.

!. Enhance the share?s mar=et va%"e.

#. 5ave additiona% shares avai%a0%e for "se in the ac+"isition of

other companies.

&. Increase earnings per share.

'. Rid the company of disgr"nt%ed investors, perhaps to avoid a

ta=eover.

"ccounting for Treasury Shares "ccounting for Treasury Shares "ccounting for Treasury Shares "ccounting for Treasury Shares

SO $ %&p!ain the accounting for treasury shares.SO $ %&p!ain the accounting for treasury shares.

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P)rchase o% Treas)r! Shares

De0it Treas"ry Shares for the price paid to reac+"ire the

shares.

Treas"ry Shares is a contra e+"ity acco"nt.

Red"ces e+"ity.



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Treas"ry shares 2&,AAA $ B4 #!,AAA

Cash #!,AAA

/ll)stration" On /e0r"ary 1, !A11, 6ead ac+"ires &,AAA shares

of its share at B per share.



/ll)stration 11-,

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E+"ity Section ;ith Treas"ry Shares

3oth the n"m0er of shares iss"ed 21AA,AAA4, o"tstanding 2),AAA4, and the

n"m0er of shares he%d as treas"ry 2&,AAA4 are disc%osed.

/ll)stration 11-

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ns;er on notes page

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Disposal o% Treas)r! Shares

0ove Cost

3e%o; Cost

;oth increase total assets and e<)it!.



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Treas"ry shares 21,AAA $ B4 ,AAA

/ll)stration" On /e0r"ary 1, !A11, 6ead ac+"ired &,AAA of its

share at B per share.

On "%y 1, 6ead se%%s for B1A per share 1,AAA shares of its

treas"ry share, previo"s%y ac+"ired at B per share.



0oveCost

"%y 1

Share premi"m treas"ry !,AAA

Cash 1A,AAA

corporation does not rea%ize a gain or s"ffer a %oss from sharetransactions ;ith its o;n shareho%ders.

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Share premi"m treas"ry AA



On Oct. 1, 6ead se%%s an additiona% AA treas"ry shares at B*

per share.



Oct. 1

Treas"ry shares 2AA $ B4 ),&AA

Cash ',)AA

3e%o;Cost

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Share premi"m treas"ry 1,!AA



On Dec. 1, ass"me that 6ead, Inc. se%%s its remaining !,!AA

shares at B* per share.



Dec. 1

Retained earnings 1,AAA

Cash 1',&AA

Treas"ry shares 2!,!AA $ B4 1*,)AA

3e%o;Cost

6imitedto

(alanceon

hand

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Typica%%y, preference shareho%ders have a priority as to

1. distri0"tions of earnings 2dividends4 and

!. assets in the event of %i+"idation.

SO ' (ifferentiate preference shares from ordinary shares.

)reference Shares)reference Shares)reference Shares)reference Shares

cco"nting for preference shares at iss"ance is simi%ar to thatfor ordinary shares.

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/ll)stration" Stine Corporation iss"es 1A,AAA shares of B1A par va%"e preference shares for B1! cash per share.

o"rna%ize the iss"ance of the preference share.

Cash 1!A,AAAShare capita% preference 21A,AAA $ B1A4 1AA,AAA

Share premi"m F preference !A,AAA

(reference shares may have a par va%"e or nopar va%"e.



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Dividend Pre%erencesRight to receive dividends 0efore ordinary shareho%ders.

C)m)lative Dividend F preference shareho%ders m"st

0e paid 0oth c"rrentyear dividends and any "npaidprioryear dividends 0efore ordinary shareho%ders

receive dividends.

8i+"idation preference.



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distri0"tion of cash or shares to shareho%ders on a prorata 2proportiona%4 0asis.

Types of Dividends:

(ividends(ividends(ividends(ividends

SO * )repare the entries for cash dividends and share dividends.SO * )repare the entries for cash dividends and share dividends.

1. Cash dividends

!. (roperty dividends

Dividends e$pressed: 214 as a percentage of the par orstated va%"e, or 2!4 as a do%%ar amo"nt per share.

#. Scrip 2note4

&. Shares

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Cash Dividends

/or a corporation to pay a cash dividend, it m"st have:

1. Retained earnings - (ayment of cash dividends from

retained earnings is %ega% in a%% "risdictions.

!. de<)ate cash'

#. declaration o% dividends 0y the 3oard of Directors.

Cash (ividendsCash (ividendsCash (ividendsCash (ividends


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Dividends re+"ire information concerning three dates:


/ll)stration 11-12


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/ll)stration" On Dec. 1, the directors of 6edia enera%

dec%are a 'AG per share cash dividend on 1AA,AAA shares of

B1A par va%"e common share. The dividend is paya0%e on an.

!A to shareho%ders of record on Dec. !!H

Decem(er 12Dec%aration Date4

Cash dividends $.#...

Dividends pa!a(le $.#...

Decem(er 22 2Date of Record4

=an)ar! 2. 2(ayment Date4


Dividends pa!a(le $.#...

Cash $.#...

o entr!


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llocating Cash Dividends ;et&eenPre%erence and Ordinar! Shares


5o%ders of c"m"%ative preference shares m"st 0e paid

any "npaid prioryear dividends 0efore ordinary

shareho%ders receive dividends.


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Slide11-$3 SO * )repare the entries for cash dividends and share dividends.SO * )repare the entries for cash dividends and share dividends.

/ll)stration" On Decem0er #1, !A11, I3R Inc. has 1,AAA sharesof , B1AA par va%"e c"m"%ative preference share. It a%so has

'A,AAA shares of B1A par va%"e ordinary shares o"tstanding. t

Decem0er #1, !A11, the directors dec%are a B),AAA cash

dividend. (repare the entry to record the dec%aration of the

dividend.

Cash dividends ),AAA

Dividends paya0%e ),AAA

Dividends: 1,AAA shares $ B1AA par $ J B,AAA


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Slide11-$4 SO * )repare the entries for cash dividends and share dividends.SO * )repare the entries for cash dividends and share dividends.

K 1,AAA shares $ B1AA par $ J B,AAA

K

KK !A11 (fd. dividends B,AAA F dec%ared B),AAA J B!,AAA

KK

/ll)stration" t Decem0er #1, !A1!, I3R dec%ares a B'A,AAAcash dividend. Sho; the a%%ocation of dividends to each c%ass of

share.

B 'A,AAA

!,AAA

,AAA

B &A,AAA


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Slide11-$$ SO * )repare the entries for cash dividends and share dividends.SO * )repare the entries for cash dividends and share dividends.

Cash dividends 'A,AAA

Dividends paya0%e 'A,AAA

/ll)stration" t Decem0er #1, !A1!, I3R dec%ares a B'A,AAAcash dividend. (repare the entry to record the dec%aration of the

dividend.


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Slide11-$* Answer on notes page

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Share Dividends(ro rata distri0"tion of the corporation?s o;n share.

Share (ividendsShare (ividendsShare (ividendsShare (ividends


Res"%ts in decrease in retained earnings and increase share capita% and share premi"m.

/ll)stration 11-14

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Share DividendsReasons ;hy corporations iss"e share dividends:

1. To satisfy shareho%ders? dividend e$pectations ;itho"t

spending cash.

!. To increase the mar=eta0i%ity of the corporation?s shares.

#. To emphasize that a portion of shareho%ders? e+"ity has

0een permanent%y reinvested in the 0"siness.



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Size o% share Dividends

Small share dividend 2%ess than !AF!' of the

corporation?s iss"ed shares, recorded at fair mar=et

va%"e4

6arge share dividend 2greater than !AF!' of

iss"ed shares, recorded at par va%"e4



K This acco"nting is 0ased on the ass"mption that a sma%% sharedividend ;i%% have %itt%e effect on the mar=et price of theo"tstanding shares.

K

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1.> share dividend is declared

Share dividends ?$.#... 0 1.> 0 81$@ +$#...

Ordinar! share dividends distri()ta(le $.#...

Share premi)m - ordinar! 2$#...

Shares iss)edOrdinar! share dividends distri()ta(le $.#...

Share capital - ordinar! $.#...

/ll)stration" 6ed%and Corp. has 'A,AAA shares iss"ed and

o"tstanding. The par va%"e is B1A per share and mar=et

va%"e is B1' per share.



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Statement (resentation



/ll)stration 11-1$

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E%%ects o% Share Dividends /ll)stration 11-1*

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Lhich of the fo%%o;ing statements a0o"t sma%% sharedividends is tr"eH

a. de0it to Share Dividends for the par va%"e of the

shares iss"ed sho"%d 0e made.

0. sma%% share dividend decreases tota% shareho%ders?e+"ity.

c. 6ar=et va%"e per share sho"%d 0e assigned to thedividend shares.

d. sma%% share dividend ordinari%y ;i%% have no effect on0oo= va%"e per share of share.

A)estion



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Share SplitRed"ces the mar=et va%"e of shares.

-o entry recorded for a share sp%it.

Decrease par va%"e and increase n"m0er of

shares.

Share Sp!itsShare Sp!itsShare Sp!itsShare Sp!its


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/ll)stration" ss"me 6ed%and Corporation sp%its its 'A,AAA

shares of common share on a !for1 0asis.


/ll)stration 11-1+

Res"%ts in a red"ction of the par or stated va%"e per share.

Share Sp!itsShare Sp!its

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Retained earnings is net income that a companyretains for "se in the 0"siness.

-et income increases retained earnings and a net %oss

decreases retained earnings.

Retained earnings is part of the shareho%ders? c%aim on

the tota% assets of the corporation.

de0it 0a%ance in retained earnings is identified as a

de%icit.

etained %arningsetained %arningsetained %arningsetained %arnings

SO + Identify the items that are reported in a retained earnings statement.SO + Identify the items that are reported in a retained earnings statement.

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Restrictions can res"%t from:

1. 8ega% restrictions.

!. Contract"a% restrictions.

#. <o%"ntary restrictions.

etained %arnings estrictionsetained %arnings estrictionsetained %arnings estrictionsetained %arnings estrictions

/ll)stration 11-22


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Corrections o% ErrorsRes"%t from:

mathematica% mista=es

mista=es in app%ication of acco"nting princip%es

oversight or mis"se of facts

Corrections treated as prior period adB)stments

d"stment made to the 0eginning 0a%ance ofretained earnings

)rior )eriod "djustments)rior )eriod "djustments


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3efore iss"ing the report for the year ended Decem0er #1, !A11, yo" discover a

B'A,AAA error 2net of ta$4 that ca"sed the !A1A inventory to 0e overstated2overstated inventory ca"sed COS to 0e %o;er and th"s net income to 0e higher in

!A1A4. Lo"%d this discovery have any impact on the reporting of the Statement of

Retained Earnings for !A11H

)rior )eriod "djustments)rior )eriod "djustments)rior )eriod "djustments)rior )eriod "djustments


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)rior )eriod "djustments)rior )eriod "djustments)rior )eriod "djustments)rior )eriod "djustments


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etained %arnings Statement etained %arnings Statement etained %arnings Statement etained %arnings Statement

Transactions the ffect Retained Earnings

/ll)stration 11-24


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etained %arnings Statement etained %arnings Statement etained %arnings Statement etained %arnings Statement

/ll)stration 11-2$


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St t t ) t ti d " ! i

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Slide11-+4

Statement )resentation and "na!ysisStatement )resentation and "na!ysisStatement )resentation and "na!ysisStatement )resentation and "na!ysis

/ll)stration 11-2*

SO , )repare and ana!yze a comprehensive e-uity section.

S " ! i d ) iSt t t " ! i d ) t ti

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nal!sis

-et Income min"s (referenceDividends

Ret)rn onOrdinar!

ShareholdersE<)it!

J

verage Ordinary Shareho%ders?E+"ity

Statement "na!ysis and )resentationStatement "na!ysis and )resentationStatement "na!ysis and )resentationStatement "na!ysis and )resentation

This ratio sho;s ho; many do%%ars of net income the

company earned for each do%%ar invested 0y theshareho%ders.


St t t " ! i d ) t tiSt t t " ! i d ) t ti

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nal!sis

Statement "na!ysis and )resentationStatement "na!ysis and )resentationStatement "na!ysis and )resentationStatement "na!ysis and )resentation

So%"tion onnotes page

/ll)stration 11-2,


(111. ao Corporation ;as organized on an"ary 1, !A11. It is a"thorized to

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(11 1. ao Corporation ;as organized on an"ary 1, !A11. It is a"thorized toiss"e !A,AAA shares of ), 57B'AA par va%"e preference shares, and 'AA,AAAshares of nopar ordinary shares ;ith a stated va%"e of 57B!A per share. Thee+"ity transactions sho;n on the ne$t page ;ere comp%eted d"ring the first

year.

an. 1A Iss"ed 1AA,AAA ordinary shares for cash at 57B#A per share.6ar. 1 Iss"ed 1A,AAA preference shares for cash at 57B''A per share. pr. 1 Iss"ed !',AAA ordinary shares for %and. The as=ing price of the %and

;as 57BAA,AAA. The company?s estimate of the fair va%"e of the

%and ;as 57B'A,AAA.6ay 1 Iss"ed *',AAA ordinary shares for cash at 57B&A per share. "g. 1 Iss"ed 1A,AAA ordinary shares to attorneys in payment of their 0i%% for

57B'AA,AAA for services provided in he%ping the company organize.Sept. 1 Iss"ed ',AAA ordinary shares for cash at 57B)A per share.-ov. 1 Iss"ed !,AAA preference shares for cash at 57B'A per share.

/nstr)ctions2a4o"rna%ize the transactions.204(ost to the e+"ity acco"nts. 29se 1 as the posting reference.42c4(repare the share capita% section of e+"ity at Decem0er #1, !A11.

(11&. On an"ary 1, !A11, a%actica Corporation had the fo%%o;ing e+"ity acco"nts.

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y , , p g + y

Share Capita% F Ordinary 2B!A par va%"e, )A,AAA shares iss"ed and o"tstanding4Share (remi"m F OrdinaryRetained Earnings

D"ring the year, the fo%%o;ing transactions occ"rred./e0. 1 Dec%ared a B1 cash dividend per share to shareho%ders of record on /e0r"ary

1', paya0%e 6arch 1.6ar. 1 (aid the dividend dec%ared in /e0r"ary.

pr. 1 nno"nced a 'for1 share sp%it. (rior to the sp%it, the mar=et price per share;as B#'.

"%y 1 Dec%ared a ' share dividend to shareho%ders of record on "%y 1',distri0"ta0%e "%y #1. On "%y 1, the mar=et price ;as B* per share."%y #1 Iss"ed the shares for the share dividend.Dec. 1 Dec%ared a BA.'A per share dividend to shareho%ders of record on Decem0er

1', paya0%e an"ary ', !A1!.#1 Determined that net income for the year ;as B#A,AAA.

/nstr)ctions2a4o"rna%ize the transactions and c%osing entries.204Enter the 0eginning 0a%ances and post the entries to the e+"ity acco"nts. 2Openadditiona% e+"ity acco"nts as needed.42c4(repare an e+"ity section at Decem0er #1.

7 d t di 7 S GP

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s noted in the chapter# )nder /RS the term ReservesF is

o%ten )sed to descri(e e<)it! acco)nts other than those

arising %rom contri()ted capital' This most commonl!

incl)des comprehensive incomes ?s)ch as reval)ations)rpl)s and %air val)e di%%erences@ ()t is also sometimes

)sed %or retained earnings' GP has al&a!s disco)raged

the )se o% the term ReservesF in an! conte0t' 7nder GP#

comprehensive income items are reported in the e<)it!section o% the statement o% %inancial position in a line

la(eled acc)m)lated other comprehensive income'

7nderstanding 7'S' GP7nderstanding 7'S' GP

7ey Differences7ey Differences Shares and Retained Earnings

7 d t di 7 S GP

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s an e0ample o% ho& similar transactions )se di%%erent

terminolog! )nder GP# consider the acco)nting %or the

iss)ance o% 1#... shares o% 81 par val)e ordinar! shares %or

8$ per share' 7nder /RS# the credit acco)nts &o)ld (eShare CapitalHOrdinar! and Share Premi)mHOrdinar!'

7nder GP# the entr! is as %ollo&s'

Cash $#...

Common Stoc: 1#...Paid-in Capital in E0cess o% Par 4#...



7nderstanding 7 S GP

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maBor di%%erence (et&een /RS and GP relates to the

acco)nt Reval)ation S)rpl)s' Reval)ation S)rpl)s arises

)nder /RS (eca)se companies are permitted to reval)e

their propert!# plant# and e<)ipment to %air val)e )ndercertain circ)mstances' This acco)nt is part o% general

reserves )nder /RS and is not considered contri()ted

capital'

/RS sometimes )ses terms s)ch as retained pro%its or

acc)m)lated pro%it or loss to descri(e retained earnings'

The term retained earnings is also o%ten )sed# as is the

c)stom# )nder GP'



7 d di 7 S GP

7nderstanding 7 S GP

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8oo=ing to the /"t"re8oo=ing to the /"t"re


The /S; and the S; are c)rrentl! &or:ing on a proBect

related to %inancial statement presentation' n important part o%

this st)d! is to determine &hether certain line items# s)(totals#

and totals sho)ld (e clearl! de%ined and re<)ired to (edispla!ed in the %inancial statements' or e0ample# it is li:el!

that the statement o% shareholders e<)it! and its presentation

&ill (e e0amined closel!' /t is interesting to note that# in a

presentation o% a proposed statement o% %inancial position that

&as p)(lished as a res)lt o% this proBect# the term Reserves#F

&hich as noted is commonl! )sed )nder /RS# &as replaced (!

the phrase cc)m)lated other comprehensive income#F &hich

is the title )sed )nder GP'

Shares and Retained Earnings

St t t f Ch i % it

Statement of Changes in %-uity

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Statement of Changes in %-uity Statement of Changes in %-uity

SO (escribe the use and content of the statement of changes in e-uity.SO (escribe the use and content of the statement of changes in e-uity.

ppendi$ 11 ppendi$ 11/ll)stration 11-1

Lhen a statement of changes in e+"ity is presented, a retained

earnings statement is not necessary.

/ 0 ! " th ) Sh " t

/oo0 a!ue "nother )er Share "mount

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/oo0 a!ue2"nother )er3Share "mount /oo0 a!ue2"nother )er3Share "mount

ppendi$ 113 ppendi$ 113

/ll)stration 11;-1

The e+"ity an ordinary shareho%der has in the net assets of the

corporation.

;oo: al)e per Share

SO 4 Compute boo0 va!ue per share.SO 4 Compute boo0 va!ue per share.

/ 0 ! " th ) Sh " t


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The comp"tation of 0oo= va%"e per share invo%ves the

fo%%o;ing steps.

1. Comp"te the preference share e+"ity.

!. Determine the ordinary shareho%ders? e+"ity.

#. Determine 0oo= va%"e per share.

;oo: al)e per Share


/ 0 ! " th ) Sh " t


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/ll)stration" 9se the e+"ity section of ra0er Inc. sho;n in

I%%"stration 11!). ra0er?s preference shares are ca%%a0%e at B1!A

per share and are c"m"%ative. ss"me that dividends on ra0er?s

preference shares ;ere in arrears for one year, B'&,AAA 2),AAA B4.

The comp"tation of preference share e+"ity 2Step 1 in the

preceding %ist4 is:/ll)stration 11;-2


/ 0 ! " th ) Sh " t


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11-,+


Comp"tation of 0oo= va%"e:

/ll)stration 11;-2

/ll)stration 11;-3


/ 0 ! " th ) Sh " t


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11-,,




The corre%ation 0et;een 0oo= va%"e and the ann"a% range of a

company?s mar=et va%"e per share is often remote.

;oo: al)e vers)s ar:et al)e

/ll)stration 11;-4

C i htC i ht

CopyrightCopyright

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