instructor: chih-liang liu department of industrial and business management, chang gung university
Post on 03-Jan-2016
42 Views
Preview:
DESCRIPTION
TRANSCRIPT
Chapter 11 Corporations (公司會計 ):Organization, Share Transactions, Dividends, and Retained Earnings
Instructor: Chih-Liang Liu
Department of Industrial and Business Management, Chang Gung University
Learning Objectives
1. Identify the major characteristics of a cor
poration (公司的主要特徵 ).
2. Record the issuance of ordinary shares
(普通股 ).
3. Explain the accounting for treasury shar
es (庫藏股 ).
4. Differentiate preference shares (特別股 )
from ordinary shares.
Learning Objectives (Cont.)
• Prepare the entries for cash dividends (現金股利 ) and share dividends (股票股利 ).
• Identify the items reported in a retained earni
ngs statement.
• Prepare and analyze a comprehensive equity
section.
Preview of Chapter 11
An entity separate and distinct from its owners (所有權 ).
Classified by Purpose
Not-for-Profit ( 非營利 )
For Profit ( 營利 )
Classified by Ownership
Publicly held ( 公開發行 )
Privately held ( 私有化公司)
► Toyota (JPN)► Siemens (DEU)► Sinopec (CHN)► General
Electric (USA)
► Salvation Army (USA)
► International Committee of the Red Cross (CHE)
► Cargill Inc. (USA)
The Corporate Form of Organization
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics that distinguish corporations from
proprietorships ( 獨資 ) and partnerships ( 合夥 ).
Advantages
Disadvantages
Characteristics of a Corporation
Advantages
2. Limited liability of shareholders (股東有限責任 ):
Limited to their investment.
Characteristics that distinguish corporations from proprietorships (獨資 ) and partnerships (合夥 ).
Characteristics of a Corporation
1. Separate legal existence (獨立法律個體 ): Corporation acts under its own name rather than in th
e name of its shareholders.
5. Continuous life (永續的生命 ): Continuance as a going concern is not affected by t
he withdrawal, death, or incapacity of a shareholder, employee, or officer.
Characteristics of a Corporation (Cont.)
4. Ability to acquire capital (取得資金的能力 ): Corporation can obtain capital through the issuance of s
hares.
3.Transferable ownership rights (可移轉所有權 ): Shareholders may sell their share.
1.Corporate management (公司的管理 ): Separation of ownership and management prevents ow
ners from having an active role in managing the company.
2. Government regulations (政府管制 ): Government regulations are designed to protect the
owners of the corporation.
3. Additional taxes (額外賦稅 ): Corporations pay income taxes as a separate legal entity and in addition, shareholders pay taxes on cash dividends.
Characteristics of a Corporation (Cont.)
Disadvantages
Shareholders
Chairman and Board of Directors
President andChief Executive
Officer
General Counsel and
Secretary
Vice PresidentMarketing
Vice PresidentFinance/Chief
Financial Officer
Vice PresidentOperations
Vice PresidentHuman
Resources
Treasurer Controller
Illustration 11-1 Corporation organization chart
Characteristics of a Corporation (Cont.)
File application with governmental agency ( 州政府 ) in the jurisdiction in which incorporation ( 設立公司 ) is desired
Government grants charter ( 特許證 ) .
Corporation develops by-laws ( 公司規章 ).
Initial Steps:
Companies incorporate in a state or country whose laws are fa
vorable to the corporate form of business.
Corporations expense organization costs ( 開辦費 ) as incurred
.
Forming a Corporation
1. Vote in election of board of directors ( 董事會成員 ) and on actions that require shareholder approval.
Shareholders have the right to:
2. Share the corporate earnings through receipt of dividends ( 股利 ).
Illustration 11-3
Ownership Rights of Shareholders
3. Keep the same percentage ownership when new shares are issued (preemptive right* ; 優先認股權 ).
* A number of companies have eliminated the preemptive right.
Ownership Rights of Shareholders
Shareholders have the right to:
4. Share in assets upon liquidation ( 清算 ) in proportion to their holdings. This is called a residual claim (剩餘財產求償權 ).
Ownership Rights of Shareholders
Shareholders have the right to:
Class A COMMON STOCK
Class A COMMON STOCK
PAR VALUE $1 PER SHARE
PAR VALUE $1 PER SHARE
Share Certificate(股票憑證 )
Share Certificate(股票憑證 )
Name of corporation
Shareholder’s name
Class
Shares
Signature of corporate official
PrenumberedIllustration 11-4
Ownership Rights of Shareholders
Charter indicates the amount of shares that a
corporation is authorized to sell.
Number of authorized shares is often reported
in the equity section.
Authorized Shares (核准股票 )
Share Issue Considerations
Corporation can 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 the economy.
5. Current state of the securities market.
Issuance of Shares (股票發行 )
Share Issue Considerations
Shares of publicly held companies is traded on organize
d exchanges ( 交易所 ).
Interaction between buyers and sellers determines the p
rices per share.
Prices tend to follow the trend of a company’s earnings
and dividends.
Factors beyond a company’s control may cause day-to-
day fluctuations in market prices.
Market Price of Shares (股票的市價 )
Share Issue Considerations
Par value shares determined the legal capital ( 法定資本 ) per share that a company must retain in the business
for the protection of corporate creditors ( 債權人 ).
Today many governments do not require a par value.
No-par value shares are fairly common today.
In many countries the board of directors assigns a stated
value ( 設定價值 ) to no-par shares.
Par (面額 ) and No-Par (無面額 ) Value Shares
Share Issue Considerations
Corporate Capital
Illustration 11-5
Comparison of the equity accounts for a proprietorship,
and a corporation.
Illustration 11-6
Corporate Capital
At the end of its first year of operation, Doral Corporation has
€750,000 of ordinary share and net income of €122,000. Prepare
(a) the closing entry for net income and (b) the equity section at
year-end.
Income summary 122,000
Retained earnings122,000
Equity
Share capital-ordinary €750,000
Retained earnings 122,000
Total equity€872,000
(a)
(b)
Illustration: Hydro-Slide, Inc. issues 1,000 shares of €1 par value ordinary shares. Prepare Hydro-Slide’s journal entry if (a) 1,000 shares are issued for €1 per share, and (b) 1,000 shares are issued for €5 per share.
Cash 1,000
Share Capital—Ordinary (1,000 x €1)
1,000Cash 5,000
Share Capital—Ordinary (1,000 x €1)
1,000Share Premium—Ordinary
4,000
a)
b)
Accounting for Share Transactions
Issuing Par Value Ordinary Shares for Cash
Illustration 11-7
Accounting for Share Transactions
Issuing No-Par Ordinary Shares for Cash
IllustrationIllustration: : Assume that Hydro-Slide, Inc. issues 5,000 shares of
€5 stated value no-par shares for €8 per share.
The entry is:
Cash 40,000
Share Capital - Ordinary (5,000 x €5)
25,000Share Premium - Ordinary
15,000Prepare the entry assuming there is no stated value.
Cash 40,000
Share Capital - Ordinary
40,000
Accounting for Share Transactions
Corporations also may issue shares for:
Services (attorneys; 律師費 or consultants; 顧問費).
Noncash 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. ( 成本是以發行股票的公平市價,或所收到資產公平市價兩者中,較易決定者為準。 )
Accounting for Share Transactions
Issuing Ordinary Shares for Services or Non-Cash Assets
Illustration: Assume that 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 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.
Organizational Expense 5,000
Share Capital - Ordinary (4,000 x €1)
4,000Share Premium -Ordinary
1,000
Accounting for Share Transactions
Illustration: Assume that Athletic Research Inc. 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 (10,000 x €8) 80,000
Share Capital - Ordinary (10,000 x €5)
50,000Share Premium - Ordinary
30,000
Accounting for Share Transactions
Treasury stock ( 庫藏股 ) - corporation’s own shares that it
has reacquired from shareholders, but not retired ( 註銷 ).
Corporations purchase their outstanding shares to:
1. Reissue the shares to officers and employees under bonus and share compensation plans.
2. Enhance the share’s market value.
3. Have additional shares available for use in the acquisition ( 購併 ) of other companies.
4. Increase earnings per share.
5. Eliminate hostile shareholders by buying them out.
Accounting for Treasury Shares
Purchase of Treasury Shares (買回庫藏股 )
Debit Treasury Shares for the price paid to reac
quire the shares (cost method; 成本法 ).
Treasury Shares is a contra equity account ( 權益扺減科目 ), not an asset.
Purchase of treasury shares reduces equity.
Accounting for Treasury Shares
Treasury Shares (4,000 x HK$8) 320,000
Cash 320,000
Illustration: On February 1, 2014, Mead acquires 4,000 shares of its stock at HK$80 per share.
Illustration 11-8
Accounting for Treasury Shares
Equity Section with Treasury Shares
Both the number of shares issued (100,000), outstanding (96,000), and the number of shares held as treasury (4,000) are disclosed.
Illustration 11-9
Accounting for Treasury Shares
Sale of Treasury Shares
Above Cost ( 高於成本出售 )
Below Cost ( 低於成本出售 )
Both increase total assets and equity.
Accounting for Treasury Shares
Disposal of Treasury Shares (處分庫藏股 )
Treasury Shares (1,000 x HK$80)
80,000
Illustration: On July 1, Mead sells for HK$100 per share
1,000 shares of its treasury shares, previously acquired at
HK$80 per share.
July 1
Share Premium - Treasury
20,000
Cash 100,000
A corporation does not realize a gain or suffer a loss from share transactions with its own shareholders.
Accounting for Treasury SharesAbove Cost
Share Premium -Treasury 8,000
Illustration: On Oct. 1, Mead sells an additional 800 treasury
shares at HK$70 per share.
Oct. 1
Treasury Shares (800 x HK$80)
64,000
Cash 56,000
Accounting for Treasury SharesBelow Cost
Illustration 11-10
Share Premium - Treasury 12,000
Illustration: On Dec. 1, assume that Mead, Inc. sells its
remaining 2,200 shares at HK$7 per share.
Dec. 1
Retained Earnings 10,000
Cash 154,000
Treasury Shares
176,000
Limited to balance on
hand
Accounting for Treasury SharesBelow Cost
Typically, preference shareholders ( 特別股東 ) h
ave a priority ( 優先 ) as to
1. distributions of earnings (dividends) and
2. assets in the event of liquidation ( 清算 ).
Accounting for preference shares at issuance is similar to that for ordinary shares.
Accounting for Preference Shares
Illustration: Stine Corporation issues 10,000 shares of
€10 par value preference shares for €12 cash per share.
Journalize the issuance of the preference shares.
Cash 120,000
Share Capital - Preference (10,000 x €10)
100,000Share Premium – Preference
20,000Preference shares may have a par value or no-par value.
Accounting for Preference Shares
Right to receive dividends before ordinary share
holders.
Cumulative Dividend (累積股利 ) – preference s
hareholders must be paid both current-year divid
ends and any unpaid prior-year dividends before
ordinary shareholders receive dividends.
No obligation ( 非負債 ) exists until board of direct
ors declares a dividend.
Liquidation preference ( 清算優先權 ).
Accounting for Preference Shares
Dividend Preferences (股利優先權 )
Accounting for Preference Shares
Cumulative Dividend (累積股利 )
Illustration: Scientific Leasing has 5,000 shares of 7%, €100 par
value, cumulative preference shares outstanding. Each €100
share pays a €7 dividend (.07 x €100). The annual dividend is
€35,000 (5,000 x €7 per share). If dividends are two years in
arrears, preference shareholders are entitled to receive the
following dividends in the current year.Illustration 11-11
Most preference shares have a preference on
corporate assets if the corporation fails.
Provides security for the preference
shareholder.
Preference to assets may be for the par value of
the shares or for a specified liquidating value.
Accounting for Preference Shares
Liquidation Preferences (清算優先權 )
Distribution of cash or shares to shareholders on a pro
rata (proportional to ownership) ( 比例 ) basis.
Types of Dividends ( 股利 ):
1. Cash
2. Property ( 財產 )
Dividends expressed: (1) as a percentage of the par or
stated value, or (2) as a dollar amount per share.
3. Shares ( 股票 )
4. Scrip ( 本票 )
Dividends
For a corporation to pay a cash dividend, it must have:
1. Retained earnings - Payment of cash dividends from
retained earnings is legal in all jurisdictions.
2. Adequate cash.
3. A declaration of dividends by the Board of Directors.
DividendsCash Dividends (現金股利 )
Three dates:
Dividends
Illustration 11-12
Illustration: On Dec. 1, the directors of Media General declare a €.50 per share cash dividend on 100,000 shares of €10 par value ordinary shares. The dividend is payable on Jan. 20 to shareholders of record on Dec. 22.
December 1 (Declaration Date)
Cash Dividends 50,000
Dividends Payable 50,000
December 22 (Date of Record)
January 20 (Payment Date)
Dividends Payable 50,000Cash 50,000
No entry
Cash Dividends
Allocating Cash Dividends Between Preference and Ordinary Shares
Holders of cumulative preference shares ( 累積特別股 )
must be paid any unpaid prior-year dividends before ord
inary shareholders receive dividends.
Dividends
Illustration: On December 31, 2014, IBR Inc. has 1,000 shares of 8%, €100 par value cumulative preference shares. It also has 50,000 shares of €10 par value ordinary shares outstanding. At December 31, 2014, the directors declare a €6,000 cash dividend. Prepare the entry to record the declaration of the dividend.
Cash Dividends 6,000
Dividends Payable 6,000
Preference Dividends: 1,000 shares x €100 par x 8% = €8,000
Dividends
Illustration: At December 31, 2015, IBR declares a €50,000 cash dividend. Show the allocation of dividends to each class of stock.
Dividends
Illustration 11-13
Cash Dividends 50,000
Dividends Payable
50,000
Illustration: At December 31, 2015, IBR declares a €50,000 cash dividend. Prepare the entry to record the declaration of the dividend.
Dividends
Illustration 11-14
DividendsShare Dividends (股票股利 )
Pro rata distribution of the corporation’s own shares.
Results in decrease in retained earnings and increase share capital and share premium.
Reasons why corporations issue share dividends:
1. Satisfy shareholders’ dividend expectations without
spending cash.
2. Increase marketability ( 流動性 ) of the corporation’s
shares.
3. Emphasize a portion of equity has been permanently
reinvested ( 永久再投資 ) in the business.
DividendsShare Dividends
Small share dividend (小額股票股利 ) (less than 20–25% of the corporation’s issued shares, recorded at fair market value per share)
Large share dividend (大額股票股利 ) (greater than 20–25% of issued shares, recorded at par value per share)
* Accounting based on the assumption that a small share dividend will have little effect on the market price of the outstanding shares.
*
DividendsShare Dividends
10% share dividend is declared
Share Dividends (50,000 x 10% x €15) 75,000
Ordinary Share Dividends Distributable 50,000
Share Premium-Ordinary 25,000
Illustration: Medland Corporation has a balance of €300,000 in retained earnings. It declares a 10% share dividend on its 50,000 shares of €10 par value ordinary shares. The current fair market value of its shares is €15 per share.
Dividends
Illustration 11-15Statement presentation of ordinary shares dividends distributable
Shares issued
Ordinary Share Dividends Distributable 50,000
Share Capital-Ordinary (50,000 x 10% x €10) 50,000
Illustration: Medland Corporation has a balance of €300,000 in retained earnings. It declares a 10% share dividend on its 50,000 shares of €10 par value ordinary shares. The current fair market value of its shares is €15 per share.
Dividends
Effects of Share Dividends
Dividends
Illustration 11-16
Which of the following statements about small share dividends is true?
a. A debit to Share Dividends for the par value of the shares issued should be made.
b. A small share dividend decreases total equity.
c. Market value per share should be assigned to the dividend shares.
d. A small share dividend ordinarily will have no effect on book value per share.
Question
Dividends
Dividends
Reduces the market value of shares.
No entry recorded for a share split.
Decrease par value and increase number of shares.
Share Split (股票分割 )
DividendsIllustration: Assume Medland Corporation splits its 50,000 ordinary shares on a 2-for-1 basis.
Illustration 11-17
Results in a reduction of the par or stated value per share.
Net income increases Retained Earnings and a net l
oss decreases Retained Earnings.
Part of the shareholders’ claim on the total assets of
the corporation.
Debit balance in Retained Earnings is identified as a
deficit (赤字 ).
Retained Earnings
Illustration 11-20
Restrictions can result from:
1. Legal restrictions ( 法律上的限制 ).
2. Contractual restrictions ( 契約上的限制 ).
3. Voluntary restrictions ( 自願性限制 ).
Companies generally disclose retained earnings
restrictions in the notes to the financial statements.
Retained Earnings Restrictions (保留盈餘限制 )
Retained Earnings
Correction of an error in previously issued financial
statements.
Result from:
► mathematical mistakes.
► mistakes in application of accounting principles.
Adjustment made to the beginning balance of retained
earnings.
Prior Period Adjustments (前期損益調整 )
Retained Earnings
Balance, January 1 £800,000Correction for overstatement of net income in prior period(depreciation error) (300,000)Balance, December 31 £500,000
Retained Earnings Statement (partial)General Microwave
Retained Earnings 300,000
Accumulated Depreciation-Equipment 300,000
Retained Earnings Statement
Debits and Credits to Retained Earnings
Illustration 11-24
Retained Earnings Statement
Illustration 11-25
Retained Earnings Statement
2014
All but one of the following is reported in a
retained earnings statement. The exception is:
a. cash and share dividends.
b. net income and net loss.
c. some disposals of treasury shares below
cost.
d. sales of treasury shares above cost.
Question
Retained Earnings Statement
Illustration 11-26
Statement Presentation and Analysis
Presentation
Net Income Available to Ordinary Shareholders
Return on Ordinary
Shareholders’ Equity
=
Average Ordinary Shareholders’ Equity
Ratio shows how many dollars of net income the company
earned for each dollar invested by the shareholders.
Statement Presentation and Analysis
Analysis
Analysis
Illustration 11-28
Statement Presentation and Analysis
top related