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Slide

11-1

Chapter

11

Corporations:
Organization, Share
Transactions, Dividends,
and Retained Earnings
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
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11-2

Study
Study Objectives
Objectives

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11-3

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.

Corporations:
Corporations: Organization,
Organization, Share
Share Transactions,
Transactions,
Dividends,
Dividends, and
and Retained
Retained Earnings
Earnings
Corporate
Organization and
Share
Transactions
Corporate form of
organization
Ordinary share
issues
Treasury shares
Preference shares

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11-4

Dividends

Cash dividends
Share dividends
Share splits

Retained
Earnings

Retained earnings
restrictions
Prior period
adjustments
Retained earnings
statement

Statement
Presentation and
Analysis
Presentation
Analysis

The
The Corporate
Corporate Form
Form of
of Organization
Organization
An entity separate and distinct from its owners.
Classified by Purpose
Not-for-Profit

Publicly held

For Profit

Privately held

Salvation Army (USA)


International
Committee of the Red
Cross (CHE)
Bill & Melinda Gates
Foundation (USA)
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11-5

Classified by Ownership

Compass Group (GBR)


Hyundai Motors (KOR)
LUKOIL (RUS)
Google (USA)

Cargill Inc.
(USA)

The
The Corporate
Corporate Form
Form of
of Organization
Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital

Advantages

Continuous Life
Corporate Management
Government Regulations

Disadvantages

Additional Taxes
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11-6

SO 1 Identify the major characteristics of a corporation.

Characteristics
Characteristics of
of aa Corporation
Corporation
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights

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

Ability to Acquire Capital


Continuous Life
Corporate Management
Government Regulations
Additional Taxes
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11-7

SO 1 Identify the major characteristics of a corporation.

Characteristics
Characteristics of
of aa Corporation
Corporation
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights

Limited to their
investment.

Ability to Acquire Capital


Continuous Life
Corporate Management
Government Regulations
Additional Taxes
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11-8

SO 1 Identify the major characteristics of a corporation.

Characteristics
Characteristics of
of aa Corporation
Corporation
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights

Shareholders may
sell their share.

Ability to Acquire Capital


Continuous Life
Corporate Management
Government Regulations
Additional Taxes
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11-9

SO 1 Identify the major characteristics of a corporation.

Characteristics
Characteristics of
of aa Corporation
Corporation
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life

Corporation can
obtain capital
through the issuance
of shares.

Corporate Management
Government Regulations
Additional Taxes
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11-10

SO 1 Identify the major characteristics of a corporation.

Characteristics
Characteristics of
of aa Corporation
Corporation
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations

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

Additional Taxes
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11-11

SO 1 Identify the major characteristics of a corporation.

Characteristics
Characteristics of
of aa Corporation
Corporation
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
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11-12

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

SO 1 Identify the major characteristics of a corporation.

Characteristics
Characteristics of
of aa Corporation
Corporation
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
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11-13

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

SO 1 Identify the major characteristics of a corporation.

Characteristics
Characteristics of
of aa Corporation
Corporation
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
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11-14

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

SO 1 Identify the major characteristics of a corporation.

Characteristics
Characteristics of
of aa Corporation
Corporation
Shareholders

Illustration 11-1
Corporation organization
chart

Chairman and
Board of
Directors
President and
Chief Executive
Officer

General
Counsel and
Secretary

Vice President
Finance/Chief
Financial Officer

Vice President
Marketing

Treasurer
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11-15

Vice President
Operations

Vice President
Human
Resources

Controller

SO 1 Identify the major characteristics of a corporation.

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11-16

Answer on notes page

Forming
Forming aa Corporation
Corporation
Initial Steps:
File application with governmental agency in the
jurisdiction in which incorporation is desired.
Government grants charter.
Corporation develops by-laws.
Companies incorporate in a state or country whose laws
are favorable to the corporate form of business.
Corporations expense organization costs as incurred.

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11-17

SO 1 Identify the major characteristics of a corporation.

Ownership
Ownership Rights
Rights of
of Shareholders
Shareholders
Shareholders have the right to:

Illustration 11-3

1. Vote in election of board of


directors and on actions that
require shareholder approval.

2. Share the corporate earnings


through receipt of dividends.

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11-18

SO 1 Identify the major characteristics of a corporation.

Ownership
Ownership Rights
Rights of
of Shareholders
Shareholders
Shareholders have the right to:

Illustration 11-3

3. Keep the same percentage ownership when new


shares of share are issued (preemptive right*).

* A number of companies have eliminated the preemptive right.


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11-19

SO 1 Identify the major characteristics of a corporation.

Ownership
Ownership Rights
Rights of
of Shareholders
Shareholders
Shareholders have the right to:

Illustration 11-3

4. Share in assets upon liquidation in proportion to


their holdings. This is called a residual claim.

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11-20

SO 1 Identify the major characteristics of a corporation.

Ownership
Ownership Rights
Rights of
of Shareholders
Shareholders
Illustration 11-4

Class

Prenumbered
Class A

Class A

COMMON STOCK

COMMON STOCK

PAR VALUE
$1 PER SHARE

PAR VALUE
$1 PER SHARE

Name of corporation
shareholders name

Share Certificate

Shares

Signature of corporate
official
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11-21

SO 1 Identify the major characteristics of a corporation.

Share
Share Issue
Issue Considerations
Considerations
Authorized Shares
Charter indicates the amount of shares that a
corporation is authorized to sell.
Number of authorized shares is often reported in the
equity section.

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11-22

SO 1 Identify the major characteristics of a corporation.

Share
Share Issue
Issue Considerations
Considerations
Issuance of Shares
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 companys 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

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11-23

SO 1 Identify the major characteristics of a corporation.

Share
Share Issue
Issue Considerations
Considerations
Market Value of Shares
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
companys earnings and dividends.
Factors beyond a companys control may cause day-to-day
fluctuations in market prices.
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11-24

SO 1 Identify the major characteristics of a corporation.

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11-25

SO 1 Identify the major characteristics of a corporation.

Share
Share Issue
Issue Considerations
Considerations
Par and No-Par Value Shares
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.

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11-26

SO 1 Identify the major characteristics of a corporation.

Corporate
Corporate Capital
Capital
Illustration 11-5

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11-27

SO 1 Identify the major characteristics of a corporation.

Corporate
Corporate Capital
Capital
Comparison of the equity accounts for a proprietorship
and a corporation.
Illustration 11-6

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11-28

SO 1 Identify the major characteristics of a corporation.

Corporate
Corporate Capital
Capital
At the end of its first year of operation, Doral
Corporation has =
C750,000 of ordinary share and
net income of =
C122,000. Prepare (a) the closing entry for net income
and (b) the equity section at year-end.

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11-29

Answer on
notes page

SO 1 Identify the major characteristics of a corporation.

Accounting
Accounting for
for Ordinary
Ordinary Share
Share Issues
Issues
Issuing Par Value Ordinary Shares for Cash
Illustration: Assume that Hydro-Slide, Inc. issues 2,000 shares
of $1 par value ordinary shares. Prepare Hydro-Slides journal
entry if (a) 1,000 shares are issued for $1 per share, and (b)
1,000 shares are issued for $5 per share.
a.

Cash

1,000

Share capital - ordinary (1,000 x $1)


b.

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11-30

Cash

1,000
5,000

Share capital - ordinary (1,000 x $1)

1,000

Share premium - ordinary

4,000

SO 2 Record the issuance of ordinary shares.

Accounting
Accounting for
for Ordinary
Ordinary Share
Share Issues
Issues
Illustration 11-7

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11-31

SO 2 Record the issuance of ordinary shares.

Accounting
Accounting for
for Ordinary
Ordinary Share
Share Issues
Issues
Issuing No-Par Ordinary Shares for Cash
Illustration: 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)

25,000

Share premium - ordinary

15,000

Prepare the entry assuming there is no stated value.


Cash

40,000

Share capital - ordinary


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11-32

40,000

SO 2 Record the issuance of ordinary shares.

Accounting
Accounting for
for Ordinary
Ordinary Share
Share Issues
Issues
Issuing Ordinary Shares for Services or
Noncash 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.
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11-33

SO 2 Record the issuance of ordinary shares.

Accounting
Accounting for
for Ordinary
Ordinary Share
Share Issues
Issues
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

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11-34

5,000

Share capital - ordinary (4,000 x $1)

4,000

Share premium - ordinary

1,000

SO 2 Record the issuance of ordinary shares.

Accounting
Accounting for
for Ordinary
Ordinary Share
Share Issues
Issues
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)

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11-35

80,000

Share capital - ordinary (10,000 x $5)

50,000

Share premium - ordinary

30,000

SO 2 Record the issuance of ordinary shares.

Accounting
Accounting for
for Treasury
Treasury Shares
Shares
Treasury Shares - corporations 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 shares 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.
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11-36

SO 3 Explain the accounting for treasury shares.

Accounting
Accounting for
for Treasury
Treasury Shares
Shares
Purchase of Treasury Shares
Debit Treasury Shares for the price paid to reacquire the
shares.
Treasury Shares is a contra equity account.
Reduces equity.

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11-37

SO 3 Explain the accounting for treasury shares.

Accounting
Accounting for
for Treasury
Treasury Shares
Shares
Illustration 11-8

Illustration: On February 1, 2011, Mead acquires 4,000 shares


of its share at $8 per share.
Treasury shares (4,000 x $8)
Cash
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11-38

32,000
32,000

SO 3 Explain the accounting for treasury shares.

Accounting
Accounting for
for Treasury
Treasury Shares
Shares
Equity Section with Treasury Shares
Illustration 11-9

Both the number of shares issued (100,000), outstanding (96,000), and the
number of shares held as treasury (4,000) are disclosed.
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11-39

SO 3 Explain the accounting for treasury shares.

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11-40

Answer on notes page

Accounting
Accounting for
for Treasury
Treasury Shares
Shares
Disposal of Treasury Shares
Above Cost
Below Cost
Both increase total assets and equity.

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11-41

SO 3 Explain the accounting for treasury shares.

Accounting
Accounting for
for Treasury
Treasury Shares
Shares

Above
Cost

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.
July 1

Cash

10,000

Treasury shares (1,000 x $8)

8,000

Share premium - treasury

2,000

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


transactions with its own shareholders.
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11-42

SO 3 Explain the accounting for treasury shares.

Below
Cost

Accounting
Accounting for
for Treasury
Treasury Shares
Shares

Illustration: On February 1, 2011, Mead acquired 4,000 of its


share at $8 per share.
On Oct. 1, Mead sells an additional 800 treasury shares at $7
per share.
Oct. 1

Cash

5,600

Share premium - treasury


Treasury shares (800 x $8)

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11-43

800
6,400

SO 3 Explain the accounting for treasury shares.

Below
Cost

Accounting
Accounting for
for Treasury
Treasury Shares
Shares

Illustration: On February 1, 2011, Mead acquired 4,000 of its


share at $8 per share.
On Dec. 1, assume that Mead, Inc. sells its remaining 2,200
shares at $7 per share.
Dec. 1 Cash

15,400

Share premium - treasury

1,200

Retained earnings

1,000

Treasury shares (2,200 x $8)

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11-44

Limited
to
balance
on
hand

17,600

SO 3 Explain the accounting for treasury shares.

Preference
Preference Shares
Shares
Typically, preference shareholders have a priority as to
1.

distributions of earnings (dividends) and

2.

assets in the event of liquidation.

Accounting for preference shares at issuance is similar to that


for ordinary shares.

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11-45

SO 4 Differentiate preference shares from ordinary shares.

Preference
Preference Shares
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 share.
Cash

120,000

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


Share premium preference

100,000
20,000

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


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11-46

SO 4 Differentiate preference shares from ordinary shares.

Preference
Preference Shares
Shares
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.

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11-47

SO 4 Differentiate preference shares from ordinary shares.

Dividends
Dividends
A distribution of cash or shares to shareholders on a pro
rata (proportional) basis.
Types of Dividends:
1. Cash dividends

3. Scrip (note)

2. Property dividends

4. Shares

Dividends expressed: (1) as a percentage of the par or


stated value, or (2) as a dollar amount per share.

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11-48

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

Cash
Cash Dividends
Dividends
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.

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11-49

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

Cash
Cash Dividends
Dividends
Dividends require information concerning three dates:
Illustration 11-12

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11-50

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

Cash
Cash Dividends
Dividends
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
Dividends payable

50,000

December 22 (Date of Record)

No entry

50,000

January 20 (Payment Date)


Dividends payable
Cash
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11-51

50,000
50,000

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

Cash
Cash Dividends
Dividends
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.

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11-52

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

Cash
Cash Dividends
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.
Cash dividends

6,000

Dividends payable

6,000

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


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11-53

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

Cash
Cash Dividends
Dividends
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
* 1,000 shares x $100 par x 8% = $8,000
** 2011 Pfd. dividends $8,000 declared $6,000 = $2,000
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11-54

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

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

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11-55

50,000
50,000

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

Slide
11-56

Answer on notes page

Share
Share Dividends
Dividends
Share Dividends

Illustration 11-14

Pro rata distribution of the corporations own share.

Results in decrease in retained earnings and increase share capital and share premium.
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11-57

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

Share
Share Dividends
Dividends
Share Dividends
Reasons why corporations issue share dividends:
1.

To satisfy shareholders dividend expectations without


spending cash.

2.

To increase the marketability of the corporations shares.

3.

To emphasize that a portion of shareholders equity has


been permanently reinvested in the business.

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11-58

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

Share
Share Dividends
Dividends
Size of share Dividends
Small share dividend (less than 2025% of the
corporations issued shares, recorded at fair market
value) *
Large share dividend (greater than 2025% 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.
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11-59

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

Share
Share Dividends
Dividends
Illustration: Medland Corp. has 50,000 shares issued and
outstanding. The par value is $10 per share and market
value is $15 per share.
10% share dividend is declared
Share dividends
(50,000 x 10% x $15)
Ordinary share dividends distributable
Share premium - ordinary

75,000
50,000
25,000

Shares issued
Ordinary share dividends distributable
Share capital - ordinary
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11-60

50,000
50,000

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

Share
Share Dividends
Dividends
Statement Presentation
Illustration 11-15

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11-61

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

Share
Share Dividends
Dividends
Effects of Share Dividends

Slide
11-62

Illustration 11-16

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

Share
Share Dividends
Dividends
Question
Which of the following statements about small share
dividends is true?

Slide
11-63

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

Share
Share Splits
Splits
Share Split
Reduces the market value of shares.
No entry recorded for a share split.
Decrease par value and increase number of
shares.

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11-64

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

Share
Share Splits
Splits
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.


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11-65

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

Retained
Retained Earnings
Earnings
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.

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11-66

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

Retained
Retained Earnings
Earnings Restrictions
Restrictions
Restrictions can result from:
1.

Legal restrictions.

2.

Contractual restrictions.

3.

Voluntary restrictions.
Illustration 11-22

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11-67

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

Prior
Prior Period
Period Adjustments
Adjustments
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

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11-68

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

Prior
Prior Period
Period Adjustments
Adjustments

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?
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11-69

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

Prior
Prior Period
Period Adjustments
Adjustments

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11-70

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

Retained
Retained Earnings
Earnings Statement
Statement
Transactions the Affect Retained Earnings
Illustration 11-24

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11-71

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

Retained
Retained Earnings
Earnings Statement
Statement
Illustration 11-25

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11-72

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

Retained
Retained Earnings
Earnings Statement
Statement
Question

All but one of the following is reported in a retained


earnings statement. The exception is:

Slide
11-73

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.

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

Statement
Statement Presentation
Presentation and
and Analysis
Analysis
Illustration 11-26

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11-74

SO 7 Prepare and analyze a comprehensive equity section.

Statement
Statement Analysis
Analysis and
and Presentation
Presentation
Analysis
Return on
Ordinary
Shareholders
Equity

Net Income minus Preference


Dividends
=

Average Ordinary Shareholders


Equity

This ratio shows how many dollars of net income the


company earned for each dollar invested by the
shareholders.

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11-75

SO 7 Prepare and analyze a comprehensive equity section.

Statement
Statement Analysis
Analysis and
and Presentation
Presentation
Analysis

Illustration 11-28

Slide
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Solution on
notes page

SO 7 Prepare and analyze a comprehensive equity section.

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences

Shares and Retained Earnings

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.
Slide
11-77

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences

Shares and Retained Earnings

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 CapitalOrdinary and Share PremiumOrdinary.
Under GAAP, the entry is as follows.
Cash
5,000
Common Stock
Paid-in Capital in Excess of Par

Slide
11-78

1,000
4,000

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences

Shares and Retained Earnings

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.
Slide
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Understanding
Understanding U.S.
U.S. GAAP
GAAP
Looking to the Future

Shares and Retained Earnings

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.
Slide
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Statement
Statement of
of Changes
Changes in
in Equity
Equity
Appendix 11A

Illustration 11A-1

When a statement of changes in equity is presented, a retained


earnings statement is not necessary.
Slide
11-81

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

Book
Book ValueAnother
ValueAnother Per-Share
Per-Share Amount
Amount
Book Value per Share

Appendix 11B

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


corporation.
Illustration 11B-1

Slide
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SO 9 Compute book value per share.

Book
Book ValueAnother
ValueAnother Per-Share
Per-Share Amount
Amount
Appendix 11B

Book Value per Share

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.

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SO 9 Compute book value per share.

Book
Book ValueAnother
ValueAnother Per-Share
Per-Share Amount
Amount
Appendix 11B
Illustration: Use the equity section of Graber Inc. shown in
Illustration 11-26. Grabers preference shares are callable at $120
per share and are cumulative. Assume that dividends on Grabers
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

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SO 9 Compute book value per share.

Book
Book ValueAnother
ValueAnother Per-Share
Per-Share Amount
Amount
Illustration 11B-2

Computation of book value:

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Illustration 11B-3

SO 9 Compute book value per share.

Book
Book ValueAnother
ValueAnother Per-Share
Per-Share Amount
Amount
Book Value versus Market Value

Appendix 11B

The correlation between book value and the annual range of a


companys market value per share is often remote.
Illustration 11B-4

Slide
11-86

SO 9 Compute book value per share.

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