Chapter 7 Corporation- Transactions after Formation

TRANSACTIONS AFTER FORMATION

Operations, Dividends, Book Value per Share , Earnings per Share, Treasury
Capital Retirement, Preference Shares conversion to Ordinary Shares, Share/
Reverse , Recapitalization
OPERATIONS (FINANCIAL STATEMENTS)
1. Statement of Comprehensive Income
Net Income (Net Loss) XXX

Earnings per Share= Net Income attributable to ordinary shareholders / outstanding number of ordinary shares

2. Statement of Changes in Equity

ABC Corporation
Statement of Changes in Shareholders’ Equity
For the Year Ended December 31, 20xx
Prefer
Ordinary
Preference Share ence
Share
Capital, PXX Par Share
Capital, PX
Value Premi
Par Value
um
January 1 x x x
Issuances of Preference Shares x x
Issuances of Ordinary Shares x
Profit for the Year
December 31 x x x

3. Statement of Financial Position

Shareholders’ Equity Section

Contributed Capital:
Share Capital
10% Preference Shares, Pxx par value, XXX, XXX shares
authorized, xx,xxx shares issued and outstanding
Ordinary Shares , Px par value, XXX, XXX shares
authorized, xx,xxx shares issued and outstanding
Additional Paid-in Capital
Preference Share Premium
Ordinary Share Premium
Retained Earnings
Total Shareholders’ Equity

4. Statement of Cash Flows

Cash Flows from Financing Activities

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 Chapter 7 Corporation- Transactions after Formation

5. Notes to the Financial Statements

DIVIDENDS
1. Declaration Date
2. Shareholders of record Date
3. Payment/Distribution Date

Types:
1. Cash Dividend
Journal Entry to Record the Declaration: Journal Entry to Record the
Retained Earnings x Cash Dividends Payable
Cash Dividends Payable x

*Decrease total assets & retained earnings

2. Scrip Dividend/ Deferred Cash Dividend

Journal Entry to Record the Declaration: Journal Entry to Record the
Retained Earnings x Scrip Dividends Payable
Scrip Dividends Payable x Interest Expense

*Decrease total assets & retained earnings

*Additional Interest Expense

3. NonCash/Property Dividend
Journal Entry to Record the Declaration: Journal Entry to Record the
Retained Earnings x Property Dividends Payab
Property Dividends Payable x

*Record dividend at FAIR VALUE of the property Property Dividends Payab

*Decrease total assets & retained earnings

Property Dividends Payab

Loss on Distribution of No

4. Share Capital/ Stock Dividends

Journal Entry to Record the Declaration: Journal Entry to Record the
Retained Earnings x Share Capital Dividends D
Share Capital Dividends Distributable x

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 Chapter 7 Corporation- Transactions after Formation
Paid -In Capital from Share Capital Dividends x

*Record at the FAIR Value of the Shares FOR SMALL DIVIDENDS

*Record at the PAR Value of the Shares FOR LARGE DIVIDENDS
*Does not affect total assets and total Equity
*increases number of outstanding shares

DIVIDENDS ON PREFERENCE SHARES

-Must be paid before any payment to ordinary shareholders

1. Non-cumulative and Non-participating

2. Cumulative and Non-participating
3. Noncumulative and Participating
4. Cumulative and Participating

*dividend in arrears Cumulative PS

*Full participation rate: Excess dividend to be distributed/ total par value of PS and OS
*Lower between full participation rate and % participation rate

BOOK VALUE PER SHARE

-Peso equity in corporate capital of each share capital

1. One class of shares

BV= Total SHE / outstanding number of shares

2. Two classes of shares

*for Preference shares Liquidation Value of PS= Liquidation value per share x outstanding Preference shares

*for Ordinary shares BV=( Total SHE- LV of PS- Dividends in arrears) / outstanding number of shares

EARNINGS PER SHARE

-Amount earned during a given period on each ordinary shares outstanding

1. BASIC EPS

a. One class of shares

EPS= Profit/ Outstanding number of shares

b. Two classes of shares

EPS= (Profit – Dividend of PS) / Outstanding number of ordinary shares

2. DILUTED EPS *Higher accounting subject

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 Chapter 7 Corporation- Transactions after Formation

APPROPRIATION OF RETAINED EARNINGS

Journal Entry to record the appropriation of RE:

Retained Earnings x
Appropriated RE x

Special or specific purpose

Reasons:
1. Reacquisition of its own shares---- Treasury Shares
2. Retention as required by the contractual restrictions
3. Discretionary of the BOD---- plant expansion & general contingencies

Retained Earnings
Profit
Dividend
Appropriations

EXAMPLE:
ABC has paid dividends for the last 3 years as follows: year 1- P2.5M, year 2- P3.5M and year 3-P6.5M.
During the last 3 years, the company has the following outstanding share capital: 100,000 shares of P100 par, 12%
preference shares and 500,000 share of P10 par Ordinary shares. Dividends are arrears for 2 years.

1. PS is non-cumulative and non-participating

100, 000 shares 500,000 shares
Dividends 12% Preference Share Ordinary Share
Year 1
2,500,000 1,200,000 1,300,000
Dividends per share 12 3

Year 2
3,500,000 1,200,000 2,300,000
Dividends per share 12 5

Year 3
6,500,000 1,200,000 5,300,000
Dividends per share 12 11

2. PS is cumulative but non-participating

100, 000 shares 500,000 shares
12% Preference Share Ordinary Share
Year 1
2,500,000 2,500,000 0 ###
Dividends per share 25 0 ###
Year 2 ###
3,500,000 2,300,000 1,200,000 ###

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 Chapter 7 Corporation- Transactions after Formation
Dividends per share 23 2 ###
Year 3 ###
6,500,000 1,200,000 5,300,000 ###
Dividends per share 12 11 ###
0
###
###
3. PS is non-cumulative but participating 0
100, 000 shares 500,000 shares
12% Preference Share Ordinary Share
Year 1
2,500,000 1,200,000 600,000 1,800,000
466,667 233,333 700,000
1,666,666.67 833,333.33
Dividends per share 17 2
Year 2
3,500,000 1,200,000 600,000 1,800,000
1,133,333 566,667 1,700,000
2,333,333.33 1,166,666.67
Dividends per share 23 2

Year 3
6,500,000 1,200,000 600,000 1,800,000
3,133,333 1,566,667 4,700,000
4,333,333.33 2,166,666.67
Dividends per share 43 4

4. PS is cumulative and participating

100, 000 shares 500,000 shares
12% Preference Share Ordinary Share
Year 1
2,500,000 2,400,000 2,400,000
100,000 100,000
2,500,000.00 0.00
Dividends per share 25 0
Year 2
3,500,000 1,100,000 1,100,000
1,200,000 600,000 1,800,000
400,000 200,000 600,000
2,700,000.00 800,000.00
Dividends per share 27 2

Year 3
6,500,000 1,200,000 600,000 1,800,000
3,133,333 1,566,667 4,700,000
4,333,333.33 2,166,666.67
Dividends per share 43 4

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 Chapter 7 Corporation- Transactions after Formation
5. PS is non-cumulative and participating up to an additional 8%
100, 000 shares 500,000 shares
12% Preference Share Ordinary Share
Year 1
2,500,000 1,200,000 600,000 1,800,000
466,667 233,333 700,000
1,666,666.67 833,333.33
Dividends per share 17 2
Year 2
3,500,000 0 0
1,200,000 600,000 1,800,000
800,000 900,000 1,700,000
2,000,000.00 1,500,000.00
Dividends per share 20 3

Year 3
6,500,000 1,200,000 600,000 1,800,000
800,000 3,900,000 4,700,000
2,000,000.00 4,500,000.00
Dividends per share 20 9

Treasury Shares

Accounting method: COST METHOD -Share capital reacquisition

Acquisition Journal Entry: -reduces outstanding shares but not the to
(a) by Puchase: Dr. Treasury Shares -not entitled to dividends
Cr. Cash -Appropriations of RE is required = to the t

Dr. Retained Earnings

Cr. Appropriated RE issued= outstanding
issued<Outstanding= Treasury shares

(b) by Donation: Memorandum entry or Dr. Treasury Shares

Cr. Donated Capital- recorded at FV of

Share Capital Retirement

Dr. Share Capital

Dr. APIC -Cancellation of Stock Certificate, Share C
Cr. Cash -reduces outstanding shares and the total
-Issuance price VS. Retirement price.
-IS=RP
Dr. Share Capital -IP>RP = credit to APIC from share capital
Dr. APIC -IP<RP= debit to RE

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 Chapter 7 Corporation- Transactions after Formation
Cr. Cash
CR. APIC from share capital retirement

Dr. Share Capital

Dr. APIC
Dr. Retained Earnings
Cr. Cash

Preference Shares conversion to Ordinary Shares

Dr. Preference Share Capital -At the OPTION of the Shareholders

Dr. Preference Share Premium -Higher price but lower dividend rate kind o
Cr. Ordinary Share Capital -Cancellation of PS Stock Certificate, Shar
IP=Par value of OS
IP>Par value of OS
Dr. Preference Share Capital IP<Par value of OS
Dr. Preference Share Premium
Cr. Ordinary Share Capital
Cr. Apic from conversion of PS to OS

Dr. Preference Share Capital

Dr. Preference Share Premium
Dr. Retained Earnings
Cr. Ordinary Share Capital

Share/Stock Split and Reverse

Memorandum entry -Increase in the NUMBER of. SHARES OU

-Share split 2 for 1 will increase shares and
- No effect in the TOTAL SHE.
or
-Decrease in the NUMBER of. SHARES O
-Share split 1 for 2 will decrease shares an
Dr. Ordinary Shares, Px par value - No effect in the TOTAL SHE.
Cr. Ordinary Shares, Px par value

Recapitalization

*change from PAR to No Par and vice-versa - No effect in the TOTAL SHE.
*reduction in the Par Value

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 Chapter 7 Corporation- Transactions after Formation

RMATION
gs per Share, Treasury Shares, Share
dinary Shares, Share/Stock Split and
tion
ATEMENTS)

ng number of ordinary shares

uity

Retai
Ordinary
ned
Share Total
Earni
Premium
ngs
x x x
x
x x
x x
x x x

Pxx

xx

xx
xx Pxx
xx
Pxx

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 Chapter 7 Corporation- Transactions after Formation

Journal Entry to Record the Payment of Dividends:

Cash Dividends Payable x
Cash x

Journal Entry to Record the Payment of Dividends:

Scrip Dividends Payable x
Interest Expense x
Cash x

Journal Entry to Record the Payment of Dividends:

Property Dividends Payablx Carrying value of payable=
Asset x CV of assets

Property Dividends Payablx Carrying value of payable<

Asset x CV of assets
Gain on Distribution of NonCash x

Property Dividends Payablx Carrying value of payable>

Loss on Distribution of No x CV of assets
Asset x

Journal Entry to Record the Payment of Dividends:

Share Capital Dividends Dix
Share Capital x

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 Chapter 7 Corporation- Transactions after Formation

Part of the Contributed Capital

al par value of PS and OS

ARE

anding Preference shares

g number of shares

RE

of ordinary shares

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 Chapter 7 Corporation- Transactions after Formation

D EARNINGS
Journal Entry to record the cancellation of appropriation to RE:

Appropriated RE x
Retained Earnings x

hares of P100 par, 12%

arrears
current year 2012

2012

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 Chapter 7 Corporation- Transactions after Formation
arrears
current year 2013

2013

current year 2014

2,014

Share capital ratio

PS ### 2/3
OS ### 1/3

###

2,400,000 arrears
1,200,000 current year 2012
3,600,000
-2,500,000 2012

1,100,000 arrears
1,200,000 current year 2013
2,300,000

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 Chapter 7 Corporation- Transactions after Formation

Maximum additional Full particapat Max %

800,000 8.00%
466,667 / 4.67%

800,000 / 8.00%
1,133,333 11.33%

800,000 / 8.00%
3,133,333 31.33%

apital reacquisition
outstanding shares but not the total issued shares
led to dividends
iations of RE is required = to the total cost of Treasury shares

Outstanding= Treasury shares

onated Capital- recorded at FV of shares at the time of donation

ment

ation of Stock Certificate, Share Capital Account & retaled APIC

outstanding shares and the total issued shares
e price VS. Retirement price.

= credit to APIC from share capital retirement

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 Chapter 7 Corporation- Transactions after Formation

Ordinary Shares

PTION of the Shareholders

price but lower dividend rate kind of PS, because of Conversion Privilege
ation of PS Stock Certificate, Share Capital Account & retaled APIC

everse

e in the NUMBER of. SHARES OUTSTANDING

plit 2 for 1 will increase shares and will decrease par value
ct in the TOTAL SHE.

se in the NUMBER of. SHARES OUTSTANDING

plit 1 for 2 will decrease shares and will increase par value
ct in the TOTAL SHE.

ct in the TOTAL SHE.

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