Financial accounting IFRS 4 kieoso ch12 PPT

Separate Legal Existence Limited Liability of Shareholders Transferable Ownership Rights Ability to Acquire Capital... Separate Legal Existence Limited Liability of Shareholders Transfer

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Financial Accounting

IFRS 4th Edition

Chapter 12

Corporations: Organization, Share

Transactions, and Equity

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Chapter Outline

Learning Objectives

LO 1 Discuss the major characteristics of a corporation.

LO 2 Explain how to account for ordinary, preference, and treasury shares.

LO 3 Explain how to account for cash dividends, share dividends, and share splits.

LO 4 Discuss how equity is reported and analyzed.

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Learning Objective 1

Discuss the Major Characteristics of a Corporation

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An entity separate and distinct from its owners.

The Corporate Form of Organization

Red Cross (CHE)

► Bill & Melinda Gates

Foundation (USA)

► Cargill Inc.

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Characteristics that distinguish corporations from

proprietorships and partnerships

Separate Legal Existence

Limited Liability of Shareholders

Transferable Ownership Rights

Ability to Acquire Capital

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in the name of its shareholders

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or incapacity of a shareholder, employee, or officer

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Shareholders

Chairman and Board of Directors

President and Chief Executive Officer

General

Counsel/

Secretary

Vice President Marketing

Vice President Finance/Chief Financial Officer

Vice President Operations

Vice President Human Resources

Treasurer Controller

Corporation organization

chart

Characteristics

of Corporation

(8 of 10)

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Initial Steps:

File application with governmental agency in the jurisdiction

in which incorporation is desired

Government grants charter

Corporation develops by-laws

Companies generally incorporate in a state or country whose laws are favorable to the corporate form of business

Corporations engaged in commerce outside their state or

country must obtain a license from each government in which they do business

Forming a Corporation

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1 Vote in election of board of directors at annual

meeting and vote on actions that require

shareholder approval.

2 Share the corporate earnings through receipt of

dividends.

3 Keep the same percentage ownership when new

shares are issued (preemptive right).

4 Share in assets upon liquidation in proportion to

their holdings This is called a residual claim.

Shareholder Rights

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When a corporation decides to issue shares, it must resolve a number of basic questions:

1 How many shares should it authorize for sale?

2 How should it issue the shares?

3 What value should the corporation assign to the

shares?

Share Issue Considerations (1 of 6)

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Authorized Shares

Charter indicates amount of shares that a

corporation is authorized to sell

Number of authorized shares is often reported in

equity section

No formal accounting entry

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Issuance of Shares

Companies issue ordinary shares directly to

investors or indirectly through an investment

banking firm

Factors in setting price for a new issue of shares:

1 Company’s anticipated future earnings

2 Expected dividend rate per share

3 Current financial position

4 Current state of economy

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Market Price of Shares

Shares of publicly held companies are traded on

organized exchanges

Interaction between buyers and sellers determines the prices per share

Prices tend to follow the trend of a company’s

earnings and dividends

Factors beyond a company’s control may cause to-day fluctuations in market prices

day-Share Issue Considerations (4 of 6)

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Par and No-Par Value Shares

Years ago, par value determined legal capital per

share that a company must retain in business for protection of corporate creditors

Today many governments do not require a par value

In many countries, the board of directors assigns a

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Which of the following statements is false?

a Ownership of ordinary shares gives the owner a

voting right.

b The equity section begins with share capital.

c The authorization of ordinary shares does not

result in a formal accounting entry.

d Legal capital per share applies to par value

shares but not to no-par value shares.

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Indicate whether each of the following statements is true or false

_ 1 Similar to partners in a partnership, shareholders of a

corporation have unlimited liability.

_ 2 It is relatively easy for a corporation to obtain capital

through the issuance of shares.

_ 3 The separation of ownership and management is an

advantage of the corporate form of business.

_ 4 The journal entry to record the authorization of

ordinary shares includes a credit to the appropriate share capital account.

False

True

False

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Equity is identified by various names:

stockholders’ equity,

shareholders’ equity, or

corporate capital

The equity section of a corporation’s statement of

financial position consists of two parts:

1 share capital and

2 retained earnings (earned capital)

Corporate Capital (1 of 3)

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Share Capital

Share capital is the total amount of cash and other

assets paid in to the corporation by shareholders in exchange for shares.

Corporate Capital (2 of 3)

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If Delta Robotics has a balance of HK$800,000 in Share Capital

—Ordinary and HK$130,000 in retained earnings at the end of its first year, its equity section is as follows:

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Comparison of the equity accounts reported on a

statement of financial position for a proprietorship

and a corporation.

Corporate Capital

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Illustration: At the end of its first year of operation, Doral AG

has €750,000 of ordinary shares and net income of €122,000 Prepare (a) the closing entry for net income and (b) the equity section at year-end

(a) Income Summary 122,000

Retained Earnings 122,000(b) Equity

Share capital—ordinary €750,000Retained earnings 122,000

Total equity €872,000

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Explain How to Account for Ordinary,

Preference, and Treasury Shares

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Accounting for Ordinary Shares

Primary Objective is to identify the specific sources of capital.

Accounting for Share Transactions

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Issuing Par Value Ordinary Shares for Cash

Par value does not indicate a share’s market price

Cash proceeds from issuing par value shares may be equal to, greater than, or less than par value

Issuance of ordinary shares for cash

 Credit par value of shares to Share Capital—

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Illustration: Assume that Hydro-Slide SA issues 1,000 shares

of €1 par value ordinary shares Prepare the entry to record this transaction

Share Capital—Ordinary (1,000 x €1) 1,000

Issuing Par Value Ordinary Shares for

Cash (1 of 3)

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Now assume that Hydro-Slide issues an additional 1,000

shares of the €1 par value ordinary shares for cash at €5 per share Prepare the entry to record this transaction

Cash 5,000

Share Capital—Ordinary (1,000 x €1) 1,000Share Premium—Ordinary 4,000

Cash (2 of 3)

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Hydro-Slide SA Statement of Financial Position (partial)

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Illustration: Assume that instead of €1 par value shares,

Hydro-Slide SA has €5 stated value no-par shares and the

company issues 5,000 shares at €8 per share for cash

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Illustration: if Hydro-Slide does not assign a stated value to its

no-par shares, it records the issuance of the 5,000 shares at

€8 per share for cash as follows

Cash 40,000

Share Capital—Ordinary 40,000

Issuing No-Par Ordinary Shares (2 of 2)

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Corporations also may issue shares for:

Services (attorneys or consultants)

Non-cash assets (land, buildings, and equipment)

Cost is either the fair market value of the

consideration given up, or the fair market value of the consideration received, whichever is more clearly

determinable.

Issuing Ordinary Shares for Services or Non-cash Assets

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Illustration: Attorneys have helped Jordan Company

incorporate They have billed the company €5,000 for their services They agree to accept 4,000 shares of €1 par value ordinary shares in payment of their bill At the time of the

exchange, there is no established market price for the shares Prepare the journal entry for this transaction

Organization Expense 5,000

Share Capital—Ordinary 4,000 Share Premium—Ordinary 1,000

Ordinary Shares for Services

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Illustration: Athletic Research AG is an existing publicly held

corporation Its €5 par value shares are actively traded at €8 per share The company issues 10,000 shares to acquire land recently advertised for sale at €90,000 Prepare the journal entry for this transaction

Land 80,000

Share Capital—Ordinary 50,000Share Premium—Ordinary 30,000

Ordinary Shares for Non-Cash Assets

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Typically, preferred shareholders have a priority as to:

1 Distributions of earnings (dividends).

2 Assets in event of liquidation.

Generally do not have voting rights.

Accounting for preference shares at issuance is similar

to that for ordinary shares.

Accounting for Preference Shares (1 of 2)

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Illustration: Florence SpA issues 10,000 shares of €10 par

value preference shares for €12 cash per share The journal entry to record the issuance is:

Cash 120,000

Share Capital—Preference 100,000Share Premium—Preference 20,000Preference shares may have a par value or no-par value

Accounting for Preference Shares (2 of 2)

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Illustration: Hefei Ltd begins operations on March 1 by

issuing 1,000,000 shares of €10 par value ordinary shares for cash at ¥12 per share Journalize the issuance of the shares on March 1 assuming the shares are not publicly traded

Cash 12,000,000

Share Capital—Ordinary 10,000,000Share Premium—Ordinary 2,000,000

DO IT! 2: Issuance of Shares (1 of 3)

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Illustration: On March 15, Hefei Ltd issues 50,000 ordinary

shares to attorneys in settlement of their bill of ¥600,000 for organization costs Journalize the issuance of these shares

Organization Expense 600,000

Share Capital—Ordinary 500,000Share Premium—Ordinary 100,000

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Illustration: On March 28, Hefei issues 15,000 shares of ¥100

par value preference shares for cash at ¥250 per share

Journalize the issuance of these shares

Cash 3,750,000

Share Capital—Preference ( 15,000 × ¥100) 1,500,000Share Premium—Preference (15,000 × ¥150) 2,250,000

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has reacquired from shareholders but not retired.

Corporations acquire treasury shares for various

reasons:

1 To reissue the shares to officers and employees

under bonus and share compensation plans.

2 To enhance the share’s market value

3 To have additional shares available for use in the

acquisition of other companies.

4 To increase earnings per share

Accounting for Treasury Shares

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Companies generally use cost method

Debit Treasury Shares for price paid to reacquire

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Illustration: On February 1, 2020, Mead acquires 4,000 shares of its

stock at HK$80 per share The entry is as follows.

Treasury Shares 320,000

Cash 320,000

Purchase of Treasury Shares (2 of 3)

Equity

Share capital—ordinary, HK$50 par value, 100,000

shares issued and outstanding HK$5,000,000

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Mead, Ltd.

Statement of Financial Position (partial)

Both the number of shares issued (100,000) and the number of

shares held as treasury (4,000) are disclosed.

Purchase of Treasury Shares (3 of 3)

Equity

Share capital—ordinary, HK$50 par value, 100,000

shares issued and 96,000 shares outstanding HK$5,000,000

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Illustration: On July 1, Mead, Ltd sells for HK$100 per share

1,000 of the 4,000 treasury shares previously acquired at

HK$80 per share The entry is as follows

Treasury Shares 80,000Share Premium—Treasury 20,000

A corporation does not realize a gain or suffer a loss from

shares transactions with its own shareholders

Sale of Treasury Shares Above Cost

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Treasury Shares Share Premium––Treasury

Oct 1 Bal 176,000

If Mead, Ltd sells an additional 800 treasury shares on

October 1 at HK$70 per share, it makes the following entry

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On December 1, assume that Mead, Ltd sells its remaining

2,200 shares at HK$70 per share and makes the following

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Salvador SA purchases 3,000 shares of its R$50 par value

ordinary shares for R$180,000 cash on July 1 It will hold the shares in the treasury until resold On November 1, the

corporation sells 1,000 treasury shares for cash at R$70 per share Journalize the treasury share transactions

July 1 Treasury Shares 180,000

Nov 1 Cash 70,000

Treasury Shares 60,000Share Premium—Treasury 10,000

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Explain How to Account for Cash

Dividends, Share Dividends, and Share Splits

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