Capital paid-in in excess of par value share premium 3.. The 'face value' of the shares is called their par value or legal value or sometimes the nominal value.. The amount at which th
Trang 1Shareholders’ Equity
Topic list
1 Share capital
2 Capital paid-in in excess of par value (share premium)
3 Revaluation surplus
4 Retained earnings/(losses)
5 Other reserves
1 Share capital
The proprietors' capital in a limited liability company
consists of share capital
The 'face value' of the shares is called their par value
or legal value (or sometimes the nominal value)
The amount at which the shares are issued may exceed
their par value is described not as share capital, but as
share premium or capital paid-up in excess of par
value
The share premium account
A share premium account is an account into which sums received as payment for shares in excess of their nominal value must be placed (capital paid-in in excess of par value)
The share premium account cannot be distributed as dividend under any circumstances
Trang 2If X Co issues 1,000 $1 ordinary shares at $2.60 each the
book entry will be:
CREDIT Ordinary shares 1,000
Authorized, issued share capital
(a) Authorized (or legal) capital is the maximum amount of share capital that a company is empowered
to issue The amount of authorized share capital varies from company to company, and can change by agreement
(b) Issued capital is the par amount of
share capital that has been issued to
shareholders.
The amount of issued capital cannot
exceed the amount of authorized capital
Ordinary shares and preferred shares
Preferred shares are shares which confer certain
preferential rightson their holder
Ordinary shares are shares which are not preferred with regard to dividend payments Thus a holder only
receives a dividend after fixed dividends have been paid to preferred shareholders
Trang 3(a) Preferred shareholders have a priority right
over ordinary shareholders to a return of their
capital if the company goes into liquidation.
(b) Preferred shares do not carry a right to vote.
(c) If the preferred shares are cumulative, it
means that before a company can pay an
ordinary dividend it must not only pay the
current year's preferred dividend, but must also
make good any arrears of preferred dividends
unpaid in previous years.
EXAMPLE
Garden Gloves Co has issued 50,000 ordinary shares
of 50 cents each and 20,000 7% preference shares of
$1 each Its profits after taxation for the year to 30 September 20X5 were $8,400 The management board has decided to pay an ordinary dividend (ie a dividend on ordinary shares) which is 50% of profits after tax and preferred dividend
Required
Show the amount in total of dividends and of retained profits, and calculate the dividend per share on ordinary shares
SOLUTION
Preferred dividend (7% of $1 × 20,000) 1,400
Earnings (profit after tax and preference dividend) 7,000
Ordinary dividend (50% of earnings) 3,500
Retained profit (also 50% of earnings) 3,500
The ordinary dividend is 7 cents per share ($3,500 ÷ 50,000 ordinary
shares).
The appropriation of profit would be shown as follows:
$ $
The market value of shares
There are certainly no accounting entriesto be made for the transfer of existing shares (changing the register
of members only)
Trang 42 Revaluation surplus
The result of an upward revaluation of non-current
assets is a 'revaluation surplus' This is
non-distributable as it represents unrealized
profits on the revalued assets It is another
capital reserve
The revaluation surplus may fall, however,
if an asset which had previously been revalued
upwards suffered a fall in value in the next
revaluation
3 Reserves
(a) Statutory reserves, which are reserves which a company is required to set up by law, and which are
not available for the distribution of dividends
(b) Non-statutory reserves, which are reserves consisting of profits which are distributable as dividends, if the company wishes
Example
Profits are transferred to these reserves by making an
appropriation out of profits, usually profits for the year
Typically, you might come across the following
Profit after taxation 100,000
Appropriations of profit
Dividend 60,000
Transfer to general reserve 10,000
70,000 Retained profit for the year 30,000
Retained earnings b/f 250,000
Retained earnings c/f 280,000
Retained earnings
This is the most significant reserve and is variously described as:
(a) Retained earnings (as in IAS 1) (b) Revenue reserve
(c) Retained profits (d) Accumulated profits (e) Undistributed profits (f) Unappropriated profits
Trang 5Distinction between reserves and
provisions
A reserve is an appropriation of distributable profits
for a specific purpose(eg plant replacement) while
a provision is an amount charged against revenue
as an expense
A provision (allowance) relates either to a
diminution in the value of an asset(eg doubtful
debts) or a known liability(eg audit fees), the
amount of which cannot be established with any
accuracy
4 Dividends
Dividends are appropriations of profit after tax Many companies pay dividends in two stages during the course
of their accounting year
(a) In mid year, after the half-year financial results are known, the company might pay an interim dividend
(b) At the end of the year, the company might pay a further final dividend
At the end of an accounting year, a company's
managers may have proposed a final dividend
payment, but this will not yet have been paid
This means that the final dividend should be
appropriated out of profitsand shown as a
current liabilityin the balance sheet
Note that only dividends declared by the balance
sheet date are included Under IAS 10 dividends
declared after the balance sheet are
non-adjusting and are disclosed by way of note
Example
A company has authorized share capital of 1,000,000 50c ordinary shares and an issued share capital of 800,000 50c ordinary shares If an ordinary dividend of 5% is declared, what is the amount payable to shareholders?
Trang 6The terminology of dividend payments can be expressed
either in the form, as 'x cents per share'or as 'y%
If the managers wish to pay a dividend of $5,000, they
may propose either:
(a) a dividend of 5c per share (100,000 × 5c = $5,000); or
(b) a dividend of 10% (10% × $50,000 = $5,000).
Revision
Accounting process
Cash and receivables
Inventories
Fixed assets
Shareholders’ equity