Ch 15 Kieso Slides (8e)

7/27/2019 Ch 15 Kieso Slides (8e)

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Prepared by :

Patricia Zima, CAMohawk College of Applied Arts and Technology

Chapter 15Shareholders Equity


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Shareholders Equity

CorporateForm

CorporateLaw

Sharecapitalsystem

PresentationandDisclosure

Special

presentationissues

Share Capital

Types ofshares

Limitedliability ofshareholders

Issuance

Reacquisition

Retirement

RetainedEarnings

Formalityof profit

distribution

Types ofdividends

Stock splits

OtherComponents

Contributedsurplus

AccumulatedOthercomprehensiveincome

Perspectives

Analysis

Appendix 15A Par Value and TreasuryShares

Par value shares

Treasury shares

Appendix 15B FinancialReorganization

Comprehensive revaluation


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ContributedCapital

Earned

Capital

Share Capital:

CommonAnd/or

Preferred shares

ContributedSurplus

Components of ShareholdersEquity

Retained

Earnings

Accumulatedother

Comprehensive

Income


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All Transactions and Events That CauseChanges in Shareholders Equity

Net Income Transfers Between Entity andOwners

Revenues&

Expenses

Gainsand

LossesInvestmentsby Owners

Distributionsto Owners

Major Sources of Changes inShareholders Equity


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Legal capital (stated capital) the full price received for shares issued

If par value shares are issued, then legal/statedcapital = par value Par value shares are not permitted under CBCA

Permitted under some provincial jurisdictions

(see Appendix)

Defining Capital


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Defining Capital

Accounting definition of capital Shareholders equity which includes:

Share capital the legal/stated capital

Contributed surplus equity transactions not specifically included

elsewhere

Retained earnings all undistributed income that remains invested in

the businessAccumulated other comprehensive income

Cumulative change in equity due to revenuesand expenses, and gains and losses from

transactions not included in net income


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Primary Forms ofBusiness Organization

Proprietorship

Partnership

Corporation

Not-for-profit

No shares issued; created to

provide services for members orsociety

Profit-oriented

Engaged in makingfinancial returns for theirowners

Sharespublicly traded

Sharesprivately held

PrivateSector

PublicSector

Crown

Created by government statute

to provide public services

Municipalities, Cities, Etc.


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Corporate Accounting

Special characteristics that impact onaccounting:

1. Corporate law2. Share capital system

3. Limited Liability


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Corporate Law

CorporationRecognized as

Legal Entity

Articles ofIncorporation

CorporationCharterIssued


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Share Capital System

Shares grouped by class (e.g. Class ACommon)

Within each class, each share equal

Each share contains certain rights andprivileges

Ease of transfer of ownership

Advantage to both issuing corporation andinvestor

Share becomes more attractive investment


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Share Capital System

As a minimum each share has these basicor inherent rights

1. To share proportionately in profits and

losses

2. The right to votefor directors

3. To share proportionately in assets upon

liquidation4. Preemptive right for any new share issues


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Share Capital

Common shares

Represent basic ownership interest

Represents residual ownership interest -have ultimate risk of loss and benefit fromsuccess

Dividends, or assets on dissolution, not

guaranteed True advantage is in the right of Common

Shares to ultimately control by way of voting


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Share Capital

Preferred Shares Certain inherent rights given up or exchanged

for other special rights or privileges

Preference given on

Dividends (usually at a stated rate)

Claim to assets on dissolution

Preferred shares features (some or all maybe

attached to a preferred share Cumulative Callable/redeemable Convertible Retractable Participating


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Share CapitalPreferred Shares Features

Cumulative: Dividends in arrears must be paidbefore any profits can be distributed to commonshareholders

Convertible: The company or holder can

exchange the shares for common shares at apredetermined ratio

Callable/Redeemable: The issuing company cancall at its option the preferred shares atspecified future dates at stipulated prices

Retractable:The holders can put (or sell) theirshares to the company

Participating: Holders can participate withcommon shareholders in any profit distributionshigher than the prescribed rate


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Limited Liability

Limited Liability of Shareholders

Unlike partnership or proprietorship form ofbusiness

Shareholders not generally liable for theobligations of the corporation

Shareholders losses restricted to

Amount invested in the corporate shares


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Shares basic

Shares sold on a subscription basis

Defaulted Subscription accounts Shares issued in combination with other

securities

Accounting for theIssuance of Shares


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Full amount of proceeds received is credited to therespective share capital account(preferred/common/class type)

500 common shares are sold for $10.00 each(issuance costs not included in this transaction).The journal entry is:

Cash 5,000

Common Shares 5,000

Shares Issue - Basic


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Shares are sold, with instalment payments

Shares are not issued, and any rights are notgiven (e.g., voting, dividends) until the fullsubscription price is received

Dividends maybe attached to somesubscription shares, once the initial payment isreceived

Shares Sold by Subscription


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Accounts in share subscription transaction Shares Subscribed

Set up a separate one for each type/class of share An equity account, reported below the respective share

capital account on the Balance Sheet Subscription Receivable

Normally considered a current asset May be reported as a contra account to the Shares

Subscribed account in equity section of the BalanceSheet

Share Capital Credited onlywhen the subscription is paid in full, or

settled in some other manner, in the case of default



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If a subscription contract is defaulted there aregenerally three possible consequences: Funds paid to date are refunded, often with a

deduction for expenses, and the balance of thecontract is cancelled

Funds paid to date are forfeited transferring it to theContributed Surplus account, with no refund or

shares being issued; balance of the contract iscancelled Shares are issued for the amount paid to date, with

the balance of the contract cancelled



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500 shares are sold on subscription for $20.00each. 50% is due as initial payment.

The initial journal entries would be:

Subscription Receivable 10,000

Shares Subscribed 10,000

Cash 5,000Subscription Receivable 5,000



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If all payments are made as scheduled, theentries would be:

Cash 5,000



Share Capital 10,000

If the subscriber defaults, one of the followingmay happen (depending on the contract termsand applicable legislation).


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Default after first payment funds held bycorporation.



Contributed Surplus 5,000



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When two or more classes of shares are sold fora lump sum

Accounting problem is the allocation of the fundsreceived to the respective share classes

Two methods available

Proportional method (relative market value

method)

Incremental method

Shares IssuedWith Other Securities


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Accounting for Share Issue Costs

Reduction of the amount paid in

1,000 shares sold for $10.00 each, with $500 in

issue costsCash 9,500

Share Capital 500

Share Capital 10,000


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Major reasons for the reacquisition of acorporations own shares

Reduce the shares outstanding to increase EPS

Have enough shares on hand to meet employee

share compensation contracts

Buy out a particular ownership interest

Meet the needs of a potential merger

Stop (or slow down) takeover attempts Reduce number of shareholders

Make a market in the companys shares

Return cash to shareholders

Share Repurchase


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Share Repurchase

Other reasons may include: Reduce the operations of the business Change the debt-to-equity ratio

Settle a debt Provide a boost to shareholders (remainingshareholders end up with a larger portion ofthe entity)

Fulfill the terms of a contract Satisfy a claim from a shareholder Change from a public to a private corporation


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Shares may be retired when reacquired May also (in limited circumstances and jurisdictions)become Treasury Stock (see Appendix)

In Canada, the CBCA requires repurchased shares

be cancelled and restored to status of authorizedbut unissued, if a limit to authorized shares exists

In either case, the accounts affected are:

Share Capital

Contributed Surplus Retained Earnings

Treasury Stock (for Treasury Stock only)

Reacquisition of Shares


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Share capital debited with the original issue orassigned value only

The difference then allocated to equity accounts: Contributed Surplus

Retained earnings

Contributed Surplus NEVER goes to a debit balance

Reacquisition of Shares


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In January 2007, Cooke Corp. purchased and

cancelled 500 Class A shares at $4 per share.There are 10,500 shares issued and outstanding,with total share capital of $63,000

Common Shares (500 [$63,000/10,500] ) 3,000Cash (500 shares@ $4.00) 2,000

Contributed Surplus (500 @$2.00) 1,000

Assigned share value = $63,000/10,500 = $ 6.00

Acquisition cost = per share price/cost 4.00

Value over assigned value $2.00

Reacquisition of Shares - Retired


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Items Affecting RetainedEarnings

DEBITS

1. Net loss

2. Prior periodadjustments,accounting principlechanges

3. Cash, property, stock

dividends

4. Treasury stock

CREDITS

1. Net Income

2. Prior period

adjustments,accounting principlechanges

3. Adjustments fromfinancialreorganization


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Dividend Distributions

Types of dividends1. Return on capital

Cash dividend

Stock dividend2. Return ofcapital

Liquidating dividends

3. Important dates Date of declaration

Date of record

Date of payment


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Cash Dividends

First journal entry is on Date of Declaration Dividend becomes legal obligation of the

corporation

Equity account is debited, liability account

is credited

Cash Dividends Declared

(or Retained Earnings) xxx

Dividends Payable xxx

On Date of Payment liability is reduced


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Cash Dividends

Before the dividend is paid, a current list ofshareholders needs to be prepared (as at the

date of record) If a Cash Dividends Declared account is used

rather than Retained Earnings at the date ofdeclaration, this account is closed to

Retained Earnings at year end


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Dividends in Kind

Dividends payable in corporation assets otherthan cash

These dividends are normally measured at

the fair value of the asset given up Fair value is determined by referring to:

estimated realizable value of same or similar

assets, quoted market prices, independentappraisals


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Stock Dividends

1,000 common shares outstanding Retained earnings = $50,000

10% stock dividend declared

Fair (market) value of share = $130 per share

Stock Dividends Declared 13,000

Common Shares 13,000

1,000 x 10% = 100

Fair value $ 130

Total $13,000


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Dividend Preferences

Example Data

$50,000 total declared as dividends

Common share capital = $400,000 Preferred shares: 1,000 $6 outstanding

(issued at $100,000)


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Non-cumulative

If shares are non-cumulative and non-participating Dividends are distributed only when declared,

up to the stated amount of the share

No amount is paid for years where dividends

were not declared

Referring to previous data:

Preferred Shareholders are paid $6,000

($6 x 1000) and

Common Shareholders are paid the remainingamount of $44,000


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Cumulative

If the preferred shares are cumulative andnon-participating, and dividends not paid to

the preferred shareholders in previous 2years:

Preferred Shareholders are paid $18,000

( ($6 x 1000 x 2) + $6,000)

Common Shareholders are paid the remaining$32,000 ($50,000 - $18,000)


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Stock Dividends vs. Stock Splits

Stock Dividend As form of dividend must follow the

requirements of a dividend

Both the number of shares, and the amount

of share capital are affected Shares are not exchanged

Stock Split

Increases the number of shares outstanding

Amount of share capital is not affected

Results in a market price manipulation


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Components of ShareholdersEquity

Contributed Surplus transactions

Par value share issue and/or retirement

Liquidating dividends

Financial reorganization

Stock options and warrants

Issue of convertible debt

Share subscriptions forfeited

Donated shares

Redemption or conversion of shares


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Components of Shareholders

Equity

Accumulated Other Comprehensive Income

Cumulative change in equity from non-shareholder transactions which are excludedfrom net income

Considered to be earned income


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Disclosure of Share Capital

PerCICA Handbook, Section 3240, thefollowing disclosure is required:

Authorized share capital

Issued share capital Changes in share capital since last

balance sheet date

May be disclosed in the notes to thefinancial statements, or in the body of theBalance Sheet


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Disclosure of Share Capital

Note disclosure will contain the following information:

Authorized number of shares (if no limit, then sostated)

The existence of unique rights

Number of shares issued, and the amountreceived

Whether the shares are par-value or no-par value

Amount of any dividends in arrears for cumulative

preferred shares Changes during the year, including new issuances

and redemptions

Restrictions on retained earnings


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Shareholders Equity Ratios

1. Rate of return on common shareholders equityNet income Preferred dividendsAverage common shareholders equity

2. Payout ratio

Cash DividendsNet income Preferred dividends

3. Price earnings ratioMarket price per share

Earnings per share4. Book value per share

Common shareholders equityNumber of outstanding shares


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International

IAS requires a separate statement forchanges in all equity accounts

Canadian GAAP only requires separateretained earnings statement


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Copyright 2007 John Wiley & Sons Canada, Ltd.All rights reserved. Reproduction or translation ofthis work beyond that permitted by Access Copyright(The Canadian Copyright Licensing Agency) is

unlawful. Requests for further information should beaddressed to the Permissions Department, JohnWiley & Sons Canada, Ltd. The purchaser may makeback-up copies for his or her own use only and notfor distribution or resale. The author and thepublisher assume no responsibility for errors,

omissions, or damages caused by the use of theseprograms or from the use of the informationcontained herein.

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