Download - ch11: saham kieso

2

Chapter 11

Corporations: Organization, Share

Transactions, Dividends, and Retained Earnings

Financial Accounting, IFRS EditionWeygandt Kimmel Kieso

3

1. Identify the major characteristics of a corporation.

2. Record the issuance of ordinary shares.

3. Explain the accounting for treasury shares.

4. Differentiate preference shares from ordinary shares.

5. Prepare the entries for cash dividends and share dividends.

6. Identify the items that are reported in a retained earnings statement.

7. Prepare and analyze a comprehensive equity section.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

4

Cash dividendsCash dividends

Share dividendsShare dividends

Share splitsShare splits

Corporate Corporate Organization and Organization and

Share Share TransactionsTransactions

Corporate Corporate Organization and Organization and

Share Share TransactionsTransactions

Corporate form of Corporate form of organizationorganization

Ordinary share Ordinary share issuesissues

Treasury sharesTreasury shares

Preference sharesPreference shares

Retained earnings Retained earnings restrictionsrestrictions

Prior period Prior period adjustmentsadjustments

Retained earnings Retained earnings statementstatement

DividendsDividendsDividendsDividends Retained Retained EarningsEarningsRetained Retained EarningsEarnings

Statement Statement Presentation and Presentation and

AnalysisAnalysis

Statement Statement Presentation and Presentation and

AnalysisAnalysis

Corporations: Organization, Share Transactions, Corporations: Organization, Share Transactions, Dividends, and Retained EarningsDividends, and Retained Earnings

Corporations: Organization, Share Transactions, Corporations: Organization, Share Transactions, Dividends, and Retained EarningsDividends, and Retained Earnings

PresentationPresentation

AnalysisAnalysis

5

An entity separate and distinct from its owners.

The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization

Classified by Purpose

Not-for-Profit

For Profit

Classified by Ownership

Publicly held

Privately held

Compass Group (GBR) Hyundai Motors (KOR) LUKOIL (RUS) Google (USA)

Salvation Army (USA) International

Committee of the Red Cross (CHE)

Bill & Melinda Gates Foundation (USA)

Cargill Inc. (USA)

6

Separate Legal Existence

Limited Liability of Shareholders

Transferable Ownership Rights

Ability to Acquire Capital

Continuous Life

Corporate Management

Government Regulations

Additional Taxes

SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.

Advantages

Disadvantages

The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization

Characteristics that distinguish corporations from proprietorships and partnerships.

7


Characteristics of a CorporationCharacteristics of a CorporationCharacteristics of a CorporationCharacteristics of a Corporation


Corporation acts under its own name rather than in the name of its shareholders.





Continuous Life



Additional Taxes

8




Limited to their investment.





Continuous Life



Additional Taxes

9




Shareholders may sell their share.





Continuous Life



Additional Taxes

10




Corporation can obtain capital through the issuance of shares.





Continuous Life



Additional Taxes

11




Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a shareholder, employee, or officer.





Continuous Life



Additional Taxes

12





Continuous Life



Additional Taxes




Separation of ownership and management prevents owners from having an active role in managing the company.

13





Continuous Life



Additional Taxes




Government regulations are designed to protect the owners of the corporation.

14





Continuous Life



Additional Taxes




Corporations pay income taxes as a separate legal entity and in addition, shareholders pay taxes on cash dividends.

15



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

16 Answer on notes page

17

File application with governmental agency in the jurisdiction in which incorporation is desired.

Government grants charter.

Corporation develops by-laws.

Initial Steps:

Forming a CorporationForming a CorporationForming a CorporationForming a Corporation


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

Corporations expense organization costs as incurred.

18

1. Vote in election of board of directors and on actions that require shareholder approval.

Shareholders have the right to:

Ownership Rights of ShareholdersOwnership Rights of ShareholdersOwnership Rights of ShareholdersOwnership Rights of Shareholders


2. Share the corporate earnings through receipt of dividends.

Illustration 11-3

19

3. Keep the same percentage ownership when new shares of share are issued (preemptive right*).




* A number of companies have eliminated the preemptive right.

Illustration 11-3

20

4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim.




Illustration 11-3

21



Class A COMMON STOCK

Class A COMMON STOCK

PAR VALUE $1 PER SHARE

PAR VALUE $1 PER SHARE

Share CertificateShare Certificate

Name of corporation

shareholder’s name

Class

Shares

Signature of corporate official

PrenumberedIllustration 11-4

22

Share Issue ConsiderationsShare Issue ConsiderationsShare Issue ConsiderationsShare Issue Considerations


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

23



Corporation can issue shares directly to investors or indirectly through an investment banking firm.

Factors in setting price for a new issue of shares:

1. the company’s anticipated future earnings

2. its expected dividend rate per share

3. its current financial position

4. the current state of the economy

5. the current state of the securities market

Issuance of Shares

24



Shares of publicly held companies are traded on organized

exchanges.

Interaction between buyers and sellers determines the

prices per share.

Prices set by the marketplace 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 Value of Shares

25 SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.

26



Years ago, par value determined the legal capital per

share that a company must retain in the business for the

protection of corporate creditors.

Today many governments do not require a par value.

No-par value shares are quite common today.

In many countries the board of directors assigns a stated

value to no-par shares.

Par and No-Par Value Shares

27

Corporate CapitalCorporate CapitalCorporate CapitalCorporate Capital


Illustration 11-5

28


Comparison of the equity accounts for a proprietorship and a corporation.

Illustration 11-6


29

At the end of its first year of operation, Doral

Corporation has C750,000 of ordinary share and

Answer on notes page

net income of C122,000. Prepare (a) the closing entry for net income

and (b) the equity section at year-end.



==

30

IllustrationIllustration: : Assume that Hydro-Slide, Inc. issues 2,000 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


1,000Share premium - ordinary

4,000

a.

b.

Issuing Par Value Ordinary Shares for Cash

Accounting for Ordinary Share IssuesAccounting for Ordinary Share IssuesAccounting for Ordinary Share IssuesAccounting for Ordinary Share Issues

SO 2 Record the issuance of ordinary shares.SO 2 Record the issuance of ordinary shares.

31

Illustration 11-7



32

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



15,000

Issuing No-Par Ordinary Shares for Cash

Prepare the entry assuming there is no stated value.

Cash 40,000

Share capital - ordinary

40,000



33

Issuing Ordinary Shares for Services orNoncash Assets

Corporations also may issue shares for:

Services (attorneys or consultants).

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.



34

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



1,000



35

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



30,000



36

Treasury Shares - corporation’s own shares that it has reacquired from shareholders, but not retired.

Corporations purchase their outstanding share 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 of

other companies.

4. Increase earnings per share.

5. Rid the company of disgruntled investors, perhaps to avoid a

takeover.

Accounting for Treasury SharesAccounting for Treasury SharesAccounting for Treasury SharesAccounting for Treasury Shares

SO 3 Explain the accounting for treasury shares.SO 3 Explain the accounting for treasury shares.

37

Purchase of Treasury Shares

Debit Treasury Shares for the price paid to reacquire

the shares.

Treasury Shares is a contra equity account.

Reduces equity.



38

Treasury shares (4,000 x $8) 32,000

Cash

32,000

Illustration: On February 1, 2011, Mead acquires 4,000 shares of its share at $8 per share.



Illustration 11-8

39



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

40

Answer on notes page

41

Disposal of Treasury Shares

Above Cost

Below Cost

Both increase total assets and equity.



42

Treasury shares (1,000 x $8)

8,000

Illustration: On February 1, 2011, Mead acquired 4,000 of its share at $8 per share.

On July 1, Mead sells for $10 per share 1,000 shares of its treasury share, previously acquired at $8 per share.



Above Cost

July 1

Share premium - treasury

2,000

Cash 10,000

A corporation does not realize a gain or suffer a loss from share transactions with its own shareholders.

43

Share premium - treasury 800


On Oct. 1, Mead sells an additional 800 treasury shares at $7 per share.



Oct. 1

Treasury shares (800 x $8)

6,400

Cash 5,600

Below Cost

44

Share premium - treasury 1,200


On Dec. 1, assume that Mead, Inc. sells its remaining 2,200 shares at $7 per share.



Dec. 1

Retained earnings 1,000

Cash 15,400

Treasury shares (2,200 x $8)

17,600

Below Cost

Limited to

balance on

hand

45

Typically, preference shareholders have a priority as to

1. distributions of earnings (dividends) and

2. assets in the event of liquidation.

SO 4 Differentiate preference shares from ordinary shares.

Preference SharesPreference SharesPreference SharesPreference Shares

Accounting for preference shares at issuance is similar to that for ordinary shares.

46

Illustration: Stine Corporation issues 10,000 shares of$10 par value preference shares for $12 cash per share. Journalize the issuance of the preference share.

Cash 120,000

Share capital - preference (10,000 x $10)

100,000Share premium – preference

20,000

Preference shares may have a par value or no-par value.



47

Dividend Preferences

Right to receive dividends before ordinary shareholders.

Cumulative Dividend – preference shareholders must

be paid both current-year dividends and any unpaid

prior-year dividends before ordinary shareholders

receive dividends.

Liquidation preference.



48

A distribution of cash or shares to shareholders on a pro rata (proportional) basis.

Types of Dividends:

DividendsDividendsDividendsDividends

SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.

1. Cash dividends

2. Property dividends

Dividends expressed: (1) as a percentage of the par or stated value, or (2) as a dollar amount per share.

3. Scrip (note)

4. Shares

49

Cash 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.

Cash DividendsCash DividendsCash DividendsCash Dividends


50

Dividends require information concerning three dates:


Illustration 11-12


51

Illustration: On Dec. 1, the directors of Media General declare a 50¢ per share cash dividend on 100,000 shares of $10 par value common share. 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 50,000

Cash 50,000

No entry


52

Allocating Cash Dividends Between Preference and Ordinary Shares


Holders of cumulative preference shares must be paid

any unpaid prior-year dividends before ordinary

shareholders receive dividends.


53 SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.

Illustration: On December 31, 2011, IBR Inc. has 1,000 shares of 8%, $100 par value cumulative preference share. It also has 50,000 shares of $10 par value ordinary shares outstanding. At December 31, 2011, the directors declare a $6,000 cash dividend. Prepare the entry to record the declaration of the dividend.


Dividends payable

6,000Dividends: 1,000 shares x $100 par x 8% = $8,000



2011 2012

Dividends declared 6,000$

Dividends in arrears

Allocation to preference 6,000

Remainder to ordinary -$

* 1,000 shares x $100 par x 8% = $8,000

*

** 2011 Pfd. dividends $8,000 – declared $6,000 = $2,000

**

Illustration: At December 31, 2012, IBR declares a $50,000 cash dividend. Show the allocation of dividends to each class of share.

$ 50,000

2,000

8,000

$ 40,000




Dividends payable

50,000

Illustration: At December 31, 2012, IBR declares a $50,000 cash dividend. Prepare the entry to record the declaration of the dividend.


56 Answer on notes page

57

Share Dividends

Pro rata distribution of the corporation’s own share.

Share DividendsShare DividendsShare DividendsShare Dividends


Results in decrease in retained earnings and increase share capital and share premium.

Illustration 11-14

58

Share Dividends

Reasons why corporations issue share dividends:

1. To satisfy shareholders’ dividend expectations without

spending cash.

2. To increase the marketability of the corporation’s shares.

3. To emphasize that a portion of shareholders’ equity has

been permanently reinvested in the business.



59

Size of share Dividends

Small share dividend (less than 20–25% of the corporation’s issued shares, recorded at fair market value)

Large share dividend (greater than 20–25% of issued shares, recorded at par value)



* This accounting is based on the assumption that a small share dividend will have little effect on the market price of the outstanding shares.

*

60

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

Shares issued

Ordinary share dividends distributable 50,000

Share capital - ordinary 50,000

Illustration: Medland Corp. has 50,000 shares issued and outstanding. The par value is $10 per share and market value is $15 per share.



61

Statement Presentation



Illustration 11-15

62



Effects of Share DividendsIllustration 11-16

63

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 shareholders’ 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 of share.

Question



64

Share Split

Reduces the market value of shares.

No entry recorded for a share split.

Decrease par value and increase number of

shares.

Share SplitsShare SplitsShare SplitsShare Splits


65

Illustration: Assume Medland Corporation splits its 50,000

shares of common share on a 2-for-1 basis.


Illustration 11-17

Results in a reduction of the par or stated value per share.

Share SplitsShare Splits

66

Retained earnings is net income that a company

retains for use in the business.

Net income increases retained earnings and a net loss

decreases retained earnings.

Retained earnings is part of the shareholders’ claim on

the total assets of the corporation.

A debit balance in retained earnings is identified as a

deficit.

Retained EarningsRetained EarningsRetained EarningsRetained Earnings

SO 6 Identify the items that are reported in a retained earnings statement.SO 6 Identify the items that are reported in a retained earnings statement.

67

Restrictions can result from:

1. Legal restrictions.

2. Contractual restrictions.

3. Voluntary restrictions.

Retained Earnings RestrictionsRetained Earnings RestrictionsRetained Earnings RestrictionsRetained Earnings Restrictions

Illustration 11-22


68

Corrections of Errors

Result from: mathematical mistakes

mistakes in application of accounting principles

oversight or misuse of facts

Corrections treated as prior period adjustments

Adjustment made to the beginning balance of

retained earnings

Prior Period AdjustmentsPrior Period Adjustments


69

Woods, Inc.Statement of Retained Earnings

For the Year Ended December 31, 2011

Balance, January 1 1,050,000$ Net income 360,000 Dividends (300,000) Balance, December 31 1,110,000$

Before issuing the report for the year ended December 31, 2011, you discover a $50,000 error (net of tax) that caused the 2010 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2010). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2011?

Prior Period AdjustmentsPrior Period AdjustmentsPrior Period AdjustmentsPrior Period Adjustments


70

Woods, Inc.Statement of Retained Earnings

For the Year Ended December 31, 2011

Balance, January 1, as previously reported 1,050,000$ Prior period adjustment - error correction (50,000) Balance, January 1, as restated 1,000,000 Net income 360,000 Dividends (300,000) Balance, December 31 1,060,000$

Prior Period AdjustmentsPrior Period AdjustmentsPrior Period AdjustmentsPrior Period Adjustments


71

Retained Earnings StatementRetained Earnings StatementRetained Earnings StatementRetained Earnings Statement

Transactions the Affect Retained Earnings

Illustration 11-24


72


Illustration 11-25


73

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



74

Statement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and AnalysisIllustration 11-26

SO 7 Prepare and analyze a comprehensive equity section.

75

Analysis

Net Income minus Preference Dividends

Return on Ordinary

Shareholders’ Equity

=

Average Ordinary Shareholders’ Equity

Statement Analysis and PresentationStatement Analysis and PresentationStatement Analysis and PresentationStatement Analysis and Presentation

This ratio shows how many dollars of net income the company earned for each dollar invested by the shareholders.


76

Analysis

Statement Analysis and PresentationStatement Analysis and PresentationStatement Analysis and PresentationStatement Analysis and Presentation

Solution on notes page

Illustration 11-28


77

As noted in the chapter, under IFRS the term “Reserves” is

often used to describe equity accounts other than those

arising from contributed capital. This most commonly

includes comprehensive incomes (such as revaluation

surplus and fair value differences) but is also sometimes

used for retained earnings. GAAP has always discouraged

the use of the term “Reserves” in any context. Under GAAP,

comprehensive income items are reported in the equity

section of the statement of financial position in a line

labeled accumulated other comprehensive income.

Understanding U.S. GAAPUnderstanding U.S. GAAP

Key DifferencesKey Differences Shares and Retained Earnings

78

As an example of how similar transactions use different

terminology under GAAP, consider the accounting for the

issuance of 1,000 shares of $1 par value ordinary shares for

$5 per share. Under IFRS, the credit accounts would be

Share Capital—Ordinary and Share Premium—Ordinary.

Under GAAP, the entry is as follows.

Cash 5,000Common Stock 1,000Paid-in Capital in Excess of Par 4,000



79

A major difference between IFRS and GAAP relates to the

account Revaluation Surplus. Revaluation Surplus arises

under IFRS because companies are permitted to revalue

their property, plant, and equipment to fair value under

certain circumstances. This account is part of general

reserves under IFRS and is not considered contributed

capital.

IFRS sometimes uses terms such as retained profits or

accumulated profit or loss to describe retained earnings.

The term retained earnings is also often used, as is the

custom, under GAAP.



80

Looking to the FutureLooking to the Future


The IASB and the FASB are currently working on a project

related to financial statement presentation. An important part of

this study is to determine whether certain line items, subtotals,

and totals should be clearly defined and required to be

displayed in the financial statements. For example, it is likely

that the statement of shareholders’ equity and its presentation

will be examined closely. It is interesting to note that, in a

presentation of a proposed statement of financial position that

was published as a result of this project, the term “Reserves,”

which as noted is commonly used under IFRS, was replaced by

the phrase “Accumulated other comprehensive income,” which

is the title used under GAAP.

Shares and Retained Earnings

81

Statement of Changes in EquityStatement of Changes in Equity

SO 8 Describe the use and content of the statement of changes in equity.SO 8 Describe the use and content of the statement of changes in equity.

Appendix 11AAppendix 11AIllustration 11A-1

When a statement of changes in equity is presented, a retained earnings statement is not necessary.

82

Book Value—Another Per-Share AmountBook Value—Another Per-Share Amount

Appendix 11BAppendix 11B

Illustration 11B-1

The equity an ordinary shareholder has in the net assets of the

corporation.

Book Value per Share

SO 9 Compute book value per share.SO 9 Compute book value per share.

83



The computation of book value per share involves the

following steps.

1. Compute the preference share equity.

2. Determine the ordinary shareholders’ equity.

3. Determine book value per share.

Book Value per Share


84



Illustration: Use the equity section of Graber Inc. shown in

Illustration 11-26. Graber’s preference shares are callable at $120

per share and are cumulative. Assume that dividends on Graber’s

preference shares were in arrears for one year, $54,000 (6,000 $9).

The computation of preference share equity (Step 1 in the

preceding list) is:Illustration 11B-2


85


Computation of book value:

Illustration 11B-2

Illustration 11B-3


86




The correlation between book value and the annual range of a

company’s market value per share is often remote.

Book Value versus Market Value

Illustration 11B-4

87

“Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.

Reproduction or translation of this work beyond that permitted in

Section 117 of the 1976 United States Copyright Act without the

express written permission of the copyright owner is unlawful.

Request for further information should be addressed to the

Permissions Department, John Wiley & Sons, Inc. The purchaser

may make back-up copies for his/her own use only and not for

distribution or resale. The Publisher assumes no responsibility for

errors, omissions, or damages, caused by the use of these

programs or from the use of the information contained herein.”

CopyrightCopyrightCopyrightCopyright

Download - ch11: saham kieso

Top Related