Ch 15 Kieso Slides (8e)
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Transcript of 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
Shares Sold by Subscription
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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
Shares Sold by Subscription
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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
Shares Sold by Subscription
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Shares Sold by Subscription
If all payments are made as scheduled, theentries would be:
Cash 5,000
Subscription Receivable 5,000
Shares Subscribed 10,000
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.
Shares Subscribed 10,000
Subscription Receivable 5,000
Contributed Surplus 5,000
Shares Sold by Subscription
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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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