companies formation
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Chapter 16Companies:
Formation and Operations
Chapter 16Companies:
Formation and Operations
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Learning Objectives
1. Understand the different types of companies which are permitted to exist bylaw in the Australian business environment
2. Appreciate the advantages anddisadvantages of the corporate form of organisation
3. Understand the documentation required for forming a company
4. Appreciate the management structurecommonly used for administering acompany
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Learning Objectives (contd)
5 . Understand the three main categories of equity in a company
6. Account for the issue of shares7. Understand the basic differences between
ordinary and preference shares8. Account for the declaration and payment of
cash dividends on shares, share dividendsand share splits
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Learning Objectives (contd)
9 . Account for the creation and reduction of the different types of reserves that areincluded in equity
10. Prepare the basic entries for income taxexpense in a company
11. Prepare a companys income statement
and balance sheet for internal use
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Lecture References
H oggett, Edwards & Medlin, 6th edition,Chapter 16
Corporations Act 2001
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Ty pes of Companies
L imited companies Proprietary companies
Public companies Companies limited by guarantee
Unlimited companiesN o-liability companies
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Ty pes of Companies (contd)
S pecial companies Investment Banking L ife insurance
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A dvantages and Disadvantagesof the Corporate Entit y
Advantages: L imited liability Broad source of capital Continuity of existence Ready transferability of shares Use of professional management
Potential income tax savings
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A dvantages and Disadvantagesof the Corporate Entit y (contd)
D isadvantages: Greater governmental regulation S eparation of ownership and management
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F orming a Compan y
Replaceable rules and constitutionCertificate of registration
T he prospectusF ormation costs and share issue costs
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A dministering a Compan y
ShareholdersShareholders
Board of DirectorsBoard of Directors
Managing Director Managing Director
Secretar ySecretar y Treasurer Treasurer Chief
F inancialOfficer
Chief F inancialOfficer
GeneralManager Inf S ys
GeneralManager Inf S ys
GeneralManager Prodn
GeneralManager Prodn
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Equit y in a Compan y
S hare capital F ully or partly paid shares Ordinary or preference shares
Retained earnings Accumulated losses
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Share issue b y a public compan y pa yable in full on application
S hares issued via a prospectus
E.g. Brazil Ltd Received applications for 100 000 sharesIssue price of $10 per share
E.g. Brazil Ltd Received applications for 100 000 sharesIssue price of $10 per share
Sept 30 Cash Trust 1000 000 Application 1000 000
receipt of cash of $10/share on 100 000 shares
Sept 30 Cash Trust 1000 000 Application 1000 000
receipt of cash of $10/share on 100 000 shares
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Share issue b y a public compan y pa yable in full on application (contd)
Refund of excess application monies
Date Application XX Cash Trust XX
refund of excess application money
to unsuccessful applicants
Date Application XX Cash Trust XX
refund of excess application money
to unsuccessful applicants
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Share issue b y a public compan y pa yable in full on application (contd)
Allotment of shares
Oct 1 Cash at Bank 1000 000 Cash Trust 1000 000
transfer of application money
Oct 1 Cash at Bank 1000 000 Cash Trust 1000 000
transfer of application money
Oct 1 Application 1000 000 Share Capital 1000 000
to record funds contributed for 100 000 shares paid in full
Oct 1 Application 1000 000 Share Capital 1000 000
to record funds contributed for 100 000 shares paid in full
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Share issue b y a public compan y pa yable in instalments
E.g. Brazil Ltd Issues 100 000 shares on 15 September Payable: $4 on application
$3 on 15 October $3 on 1 December
E.g. Brazil Ltd Issues 100 000 shares on 15 September Payable: $4 on application
$3 on 15 October $3 on 1 December
Sept 30 Cash Trust 400 000 Application 400 000
receipt of cash of $4/share on 100 000 shares
Sept 30 Cash Trust 400 000 Application 400 000
receipt of cash of $4/share on 100 000 shares
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Share issue b y a public compan y pa yable in instalments (contd)
Allotment of shares
Oct 1 Cash at Bank 400 000 Cash Trust 400 000 transfer of application money
Oct 1 Cash at Bank 400 000 Cash Trust 400 000 transfer of application money
Oct 1 Application 400 000 Share Capital 400 000
application fee of $4 on 100 000 shares
Oct 1 Application 400 000 Share Capital 400 000
application fee of $4 on 100 000 shares
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Share issue b y a public compan y pa yable in instalments (contd)
Amount due on allotment
Oct 1 Allotment 300 000
Share Capital 300 000 allotment fee of $3 receivable on 100 000 shares
Oct 1 Allotment 300 000
Share Capital 300 000 allotment fee of $3 receivable on 100 000 shares
Oct 15 Cash at Bank 300 000 Allotment 300 000
cash received on allotment
Oct 15 Cash at Bank 300 000 Allotment 300 000
cash received on allotment
Receipt of allotment monies
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Share issue b y a public compan y pa yable in instalments (contd)
Amount due on call
N ov 15 Call 300 000
Share Capital 300 000 call of $3 receivable on 100 000 shares
N ov 15 Call 300 000
Share Capital 300 000 call of $3 receivable on 100 000 shares
Dec 1 Cash at Bank 285 000 Call 285 000
receipt of call monies on 95 000 shares
Dec 1 Cash at Bank 285 000 Call 285 000
receipt of call monies on 95 000 shares
Receipt of call monies
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Share issue b y a public compan y pa yable in instalments (contd)
Share Capital
(100 000 ordinary shares called to $10) $1000 000 Less: Unpaid calls (5000 shares @ $3) 15 000 Total share capital $985 000
Share Capital
(100 000 ordinary shares called to $10) $1000 000 Less: Unpaid calls (5000 shares @ $3) 15 000 Total share capital $985 000
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U nder and Over Subscription
Undersubscription Applicants for fewer shares than offered
Oversubscription Applicants in excess of shares T reatment depends on constitution and
prospectus
Excess monies may be refunded or held againstfuture calls
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Preference Shares
Preferential treatment D ividend distribution (@ fixed rate) D istribution of assets on liquidation Redemption
Usually no voting rightsD ebt or equity?
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Dividends
D istribution of cash or other assets Replaceable rules Interim and final dividends
Cash dividends D eclared vs. paid
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Dividends (contd)
Au g 25 Retained E arnings 80 000 Final Dividend Payable 80 000
declared cash dividend of 20c/shareon 400 000 ordinary shares
Au g 25 Retained E arnings 80 000 Final Dividend Payable 80 000
declared cash dividend of 20c/shareon 400 000 ordinary shares
Sept 20 Final Dividend Payable 80 000 Cash at Bank 80 000
payment of the dividend declared on 25 Au gust
Sept 20 Final Dividend Payable 80 000 Cash at Bank 80 000
payment of the dividend declared on 25 Au gust
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Dividends (contd)
Preference dividends Cents/share or % of preference capital Cumulative vs. non-cumulative D ividend payable
J une 20 Retained E arnings 45 000 Preference Dividend Payable 15 000 O rdinary Dividend payable 30 000
to record dividends declared
J une 20 Retained E arnings 45 000 Preference Dividend Payable 15 000 O rdinary Dividend payable 30 000
to record dividends declared
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Dividends (contd)
S hare dividends Pro-rata distribution of additional shares N o effect on corporate assets or equity
J an 10 Retained E arnings xxx Share Capital xxx
to record the distribution of a share dividend
J an 10 Retained E arnings xxx Share Capital xxx
to record the distribution of a share dividend
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Reserves
Equity other than capital contributionsOften created by transfers from retained
earningsN o official definitionExamples: General reserve
Options reserve Plant replacement reserve
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Reserves (contd)
Creation of reserves
J une 30 Retained E arnings xxx
Reserve xxx to create a reserve by appropriating profits
J une 30 Retained E arnings xxx
Reserve xxx to create a reserve by appropriating profits
J une 30 Asset xx Accumulated Depreciation x
Revaluation Reserve xxx to revalue upwards the carrying amount of a non-current asset to fair value
J une 30 Asset xx Accumulated Depreciation x
Revaluation Reserve xxx to revalue upwards the carrying amount of a non-current asset to fair value
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Reserves (contd)
D isposal of reserves
J une 30 Reserve xxx Retained E arnings xxx
to transfer reserve back to retained earnings
J une 30 Reserve xxx Retained E arnings xxx
to transfer reserve back to retained earnings
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Income Tax
D educted after all other expenses beforearriving at final profit after tax
Based on taxable income Income T ax Assessment ActMethods for determining tax expense T ax payable method
T ax-effect accounting method
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F inancial Statements
Income S tatementS tatement of Changes in Equity
Balance S heetCash F low S tatement
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