15

INTERMEDIATE
ACCOUNTING
TENTH CANADIAN EDITION
Kieso Weygandt Warfield Young Wiecek McConomy
CHAPTER 15
Shareholders
Equity
Prepared by:
Lisa Harvey, CPA, CA

Rotman School of Management,
University of Toronto
CHAPTE
15
R
SHAREHOLDERS EQUITY
After studying this chapter, you should be able to:
Discuss the characteristics of the corporate form of organization, rights of
shareholders, and different types of shares.
Explain how to account for the issuance, reacquisition, and retirement of
shares, stock splits, and dividend distribution.
Understand the components of shareholders equity and how they are
presented.
Understand capital disclosure requirements.
Calculate and interpret key ratios relating to equity.
Identify the major differences in accounting between ASPE and IFRS, and
what changes are expected in the near future.

Copyright John Wiley & Sons Canada,
Ltd.
Shareholders Equity
Understanding the
Corporate Form,
Share Capital and
Profit Distribution
Recognition,
Derecognition,
and
Measurement
Corporate law and

the share capital
system
Types of shares
Issuance of
shares
Reacquisition
and retirement of
shares
Dividends
Limited liability of
shareholders
Formality of profit
distribution
Presentation,
Disclosure,
and Analysis
Components
of
shareholders
equity
Capital
disclosures
Analysis

Ltd.
IFRS/ASPE
Comparison
Comparison
of IFRS and
ASPE
Looking
Ahead
Primary Forms of
Business Organization
Proprietorship
Engaged in making
financial returns for their
owners
Partnership
Corporation
Profit-oriented
Shares
privately held
Not-for-profit
No shares issued; created to

provide services for members or
society
Private
Sector
Public
Sector
Shares
publicly traded
Municipalities, Cities, Etc.

Crown
Created by government statute

to provide public services

Ltd.
Corporate Law
Articles of
Incorporation
Corporation Charter
Issued
Corporation
Recognized as Legal
Entity
Ltd.
Corporate Law
The Canada Business Corporation Act (CBCA)
is a relevant business corporation act
Provincial business corporation acts also exist but
vary from province to province
Articles of incorporation prepared and submitted
Company name
Location of registered office
Classes and authorized shares
Share transfer restrictions (if any)
Directors
Business restrictions
Ltd.
Share Capital System

Shares grouped by class (e.g. Class A
Common)
Within each class, each share equal
Each share contains certain rights and

privileges
Ease of transfer of ownership
Advantage to both issuing corporation and
investor
Share becomes more attractive investment
Ltd.
Share Capital System

As a minimum each share has these basic
or inherent rights
1.To share proportionately in profits and losses
2.The right to vote for directors
3.To share proportionately in assets upon
liquidation
Preemptive right for any new share issues

can also be assigned under CBCA
Ltd.
Types of Shares
Common Shares
Represent basic ownership interest
Represents residual ownership interest have ultimate risk of loss and benefit from
success
Dividends or assets on dissolution are not
guaranteed
True advantage is in the right of Common
Shares to ultimately control by way of voting
Ltd.
Types of Shares
Preferred Shares
Certain inherent rights given up or exchanged
for other special rights or privileges
Preference given on
Dividends (usually at a stated rate)
Claim to assets on dissolution
Preferred shares features (some or all may be

attached to a preferred share)
Cumulative Callable/redeemable
Convertible Retractable
Participating
Ltd.
10
Types of Shares
Preferred Shares Features
Cumulative: Dividends in arrears must be paid before any
profits can be distributed to common shareholders
Convertible: The company or holder can exchange the
shares for common shares at a predetermined ratio
Callable/Redeemable: The issuing company can call at
its option the preferred shares at specified future dates at
stipulated prices
Retractable: The holders can put (or sell) their shares to
the company
Participating: Holders can participate with common
shareholders in any profit distributions higher than the
prescribed rate
Ltd.
11
Limited Liability
Limited Liability of Shareholders
Unlike partnership or proprietorship form of
business
Shareholders not generally liable for the
obligations of the corporation
Shareholders losses restricted to the

amount invested in the corporate shares

Ltd.
12
Formality of Profit
Distribution
No amounts may be distributed unless corporate capital
is maintained intact
Under the CBCA:
1. There needs to be sufficient capital after the dividend to pay
liabilities as they are due
2. The realizable value of the corporate assets does not fall below
the total of the liabilities and the stated and legal capital for all
classes of shares
Formal approval of the Board of Directors required

Dividends must be in full agreement with share capital
contracts
Before declaration of a dividend, management should
consider availability of funds to pay the dividend
Ltd.
13
Shareholders Equity
Understanding the
Corporate Form,
Share Capital and
Profit Distribution
Recognition,
Derecognition,
and
Measurement
Corporate law and

the share capital
system
Types of shares
Issuance of
shares
Reacquisition
and retirement of
shares
Dividends
shareholders
Formality of profit
distribution
Presentation,
Disclosure,
and Analysis
Components
of
shareholders
equity
Capital
disclosures
Analysis

Ltd.
IFRS/ASPE
Comparison
Comparison
of IFRS and
ASPE
Looking
Ahead
14
Share Issue - Basic

Full amount of proceeds received is credited
to the respective share capital account
(preferred/common/class type)
500 common shares are sold for $10.00 each
(issuance costs not included in this transaction).
The journal entry is:
Cash
5,000
Common Shares
5,000

Ltd.
15
Shares Sold on a
Subscription Basis
Shares are sold, with instalment
payments
Shares are not issued, and any rights are
not given (e.g., voting, dividends) until the
full subscription price is received
Dividends may be attached to some
subscription shares, once the initial
payment is received

Ltd.
16
Shares Sold on a
Subscription Basis
Accounts in share subscription transaction
Common Shares Subscribed
Set up a separate one for each type/class of share

An equity account, reported below the respective share
capital account
Subscriptions Receivable
Normally considered a current asset

May be reported as a contra account to the Shares
Subscribed account in equity section
Share Capital
Credited only when the subscription is paid in full, or settled in

some other manner in the case of default

Ltd.
17
Shares Sold on a
Subscription Basis
500 shares are sold on subscription for $20
each. 50% is due as initial payment.
The initial journal entries would be:
Subscriptions Receivable
10,000
Common Shares Subscribed
10,000
Cash
5,000
Subscription Receivable
5,000

Ltd.
18
Shares Sold on a
Subscription Basis
If all payments are made as scheduled, the
entries would be:
Cash
5,000
Shares Subscribed
Share Capital
5,000
10,000
10,000

Ltd.
19
Shares Sold on a
Subscription Basis
If a subscription contract is defaulted there are
generally three possible consequences:
Funds paid to date are refunded, often with a
deduction for expenses, and the balance of the
contract is cancelled
Funds paid to date are forfeited transferring it to the
Contributed Surplus account, with no refund or shares
being issued; balance of the contract is cancelled
Shares are issued for the amount paid to date, with
the balance of the contract cancelled

Ltd.
20
Shares Sold on a
Subscription Basis
Default after first payment funds refunded with
no penalty.
Shares Subscribed
10,000
Accounts Payable (or Cash) 5,000
5,000
Default after first payment shares issued for

amount paid.
Shares Subscribed
10,000
Share Capital
5,000
5,000
Ltd.
21
Shares Sold on a
Subscription Basis
Default after first payment funds held by
corporation
Shares Subscribed
10,000
Contributed Surplus
5,000
5,000

Ltd.
22
Shares Issued
With Other Securities
When two or more classes of shares are
sold for a lump sum
Accounting problem is the allocation of the
funds received to the respective share
classes
Two methods available
Proportional method (relative market value
method)
Incremental method
Ltd.
23
Accounting for Share Issue

Costs
Direct incremental costs incurred to sell shares
include legal fees, accounting fees, underwriter
fees & commissions, printing and mailing costs,
taxes, etc.
These amounts are considered to be capital
transactions (rather than operating transactions)
and therefore should not be included in net
income calculation
Accounting treatment: debit to Share Capital
Ltd.
24
Accounting for Share Issue

Costs
Reduction of the amount paid in 1,000
shares sold for $10.00 each, with $500 in
issue costs
Cash
9,500
Share Capital
500
Share Capital
10,000

Ltd.
25
Reacquisition and
Retirement of Shares
Major reasons for the reacquisition of a
corporations own shares
Reduce the shares outstanding to increase EPS
Have enough shares on hand to meet employee
share compensation contracts
Buy out a particular ownership interest
Meet the needs of a potential merger
Stop (or slow down) takeover attempts
Reduce number of shareholders
Make a market in the companys shares
Return cash to shareholders
Ltd.
26
Reacquisition and
Shares may be retired when reacquired
May also (in limited circumstances and
jurisdictions) become Treasury Stock (held
in treasury for reissue)
In Canada, the CBCA requires
repurchased shares be cancelled and
restored to status of authorized but
unissued if a limit to authorized shares
exists
Ltd.
27
Reacquisition and
Share capital debited with the original
issue or assigned value only
The difference then allocated to equity
accounts:
Contributed Surplus
Retained Earnings

Ltd.
28
Reacquisition and
Retirement of Shares Example
In January 2013, Cooke Corp. purchased and
cancelled 500 Class A shares at $4 per share. There
are 10,500 shares issued and outstanding, with total
share capital of $63,000
Common Shares (500 [$63,000/10,500] ) 3,000
Cash (500 shares@ $4.00)
2,000
Contributed Surplus (500 @$2.00)
1,000
Assigned share value = $63,000/10,500 = $ 6.00
Acquisition cost = per share price/cost
4.00
Value over assigned value
$2.00
Ltd.
29
Dividends
Two basic classes of dividends:
1. Return on capital
2. Return of capital
Important dates:
Date of declaration
Date of record
Date of payment

Ltd.
30
Cash Dividends
First journal entry is on Date of
Declaration
Dividend becomes legal obligation of the
corporation
Dividends (or Retained Earnings) xxx
Dividends Payable
xxx
On Date of Payment, the liability is reduced
Ltd.
31
Cash Dividends
Before the dividend is paid, a current list of
shareholders needs to be prepared (as at
the date of record)
If a Dividends account is used rather than
Retained Earnings at the date of
declaration, this account is closed to
Retained Earnings at year end

Ltd.
32
Dividends in Kind
Dividends payable in corporation assets
other than cash
These dividends are normally measured
at the fair value of the asset given up
Fair value can be determined by referring
to estimated realizable value of same or
similar assets, quoted market prices,
independent appraisals etc.
Ltd.
33
Stock Dividends
No assets distributed (unlike cash dividends)
Unlike with cash dividends or dividends in kind,
total shareholders equity does not change
Amounts are re-arranged as a result of the stock
dividend
The transaction is measured at the fair value of the
shares at declaration date
Each shareholder has the same proportionate interest
in the corporation
However, book value per share decreases

Ltd.
34
Stock Dividends - Example
1,000 common shares outstanding

Retained earnings = $50,000
10% stock dividend declared
Fair (market) value of share = $130 per share
Stock Dividends Declared
Common Shares
1,000 x 10% =
100
Fair value
$13,000
Total
$13,000
13,000
13,000

Ltd.
35
Liquidating Dividends
Any dividends paid in excess of the
accumulated income of the company
represents a liquidating dividend
Results in a return of the shareholders
investment

Ltd.
36
Dividend Preferences
Given:
$50,000 total declared as dividends

Common share capital: $400,000
1,000 $6 Preferred shares: $100,000
Preferred share dividends have been paid for
the past 2 years
Calculate the dividend distribution to common
and preferred shareholders based on the
different types of dividend preferences
Ltd.
37
Non-cumulative
If shares are non-cumulative and nonparticipating:
Dividends are distributed only when declared, up to
the stated amount of the share
No amount is paid for years where dividends were not
declared
The dividend distribution is therefore:

Preferred Shareholders are paid $6,000 ($6 x 1000)
Common Shareholders are paid the remaining
amount of $44,000
Ltd.
38
Cumulative
If the preferred shares are cumulative and
non-participating:
The dividends that were not paid to preferred
shareholders in the previous 2 years must
also be paid
The dividend distribution is therefore:

Preferred Shareholders are paid $18,000 ( ($6
x 1000 x 2) + $6,000)
Common Shareholders are paid the remaining
$32,000 ($50,000 - $18,000)
Ltd.
39
Participating
If preferred shares are non-cumulative and fully
participating, using the previous data:
Preferred
Common
1. Current years:
Preferred ($6 x 1000)
Common (6% x $400,000)
$6,000
$24,000
2. Remaining $20,000 at a rate of $20,000/$500,000 (i.e.

4%):
Preferred (4% x $100,000)
Common (4% x $400,000)
TOTAL
$10,000
$4,000
$16,000
$40,000

Ltd.
40
Stock Dividends vs. Stock

Splits
Stock Dividend
A form of dividend must follow the requirements
of a dividend
Both the number of shares and the amount of
share capital generally affected
Shares are not exchanged
Stock Split
Increases the number of shares outstanding
Amount of share capital is not affected
Results in a market price manipulation
Ltd.
41
Shareholders Equity
Understanding the
Corporate Form,
Share Capital and
Profit Distribution
Recognition,
Derecognition,
and
Measurement
Corporate law and

the share capital
system
Types of shares
Issuance of
shares
Reacquisition
and retirement of
shares
Dividends
shareholders
Formality of profit
distribution
Presentation,
Disclosure,
and Analysis
Components
of
shareholders
equity
Capital
disclosures
Analysis

Ltd.
IFRS/ASPE
Comparison
Comparison
of IFRS and
ASPE
Looking
Ahead
42
Components of Shareholders
Equity
Share Capital:
Common
And/or
Preferred shares
Contributed
Capital
Contributed
Surplus
Retained Earnings
Accumulated other
Comprehensive
Income
Earned
Capital

Ltd.
43
Contributed Surplus
Contributed Surplus transactions
Par value share issue and/or retirement

Treasury share transactions
Liquidating dividends
Financial reorganization
Stock options and warrants
Issue of convertible debt
Share subscriptions forfeited
Donated assets by a shareholder
Redemption or conversion of shares
Ltd.
44
Retained Earnings
1.
2.
3.
4.
DEBITS
Net loss
Prior period
adjustments,
accounting principle
changes
Cash, property, stock
dividends
Some treasury share
transactions
CREDITS
1. Net Income
2. Prior period
adjustments,
accounting principle
changes
3. Adjustments from
financial reorganization

Ltd.
45
Accumulated Other
Comprehensive Income
(AOCI)
Cumulative change in equity from nonshareholder transactions which are
excluded from net income
Considered to be earned income
Note that the concept of comprehensive
income is not applicable under ASPE

Ltd.
46
Disclosure of Share Capital

Following basic disclosure is required:
Authorized share capital
Issued share capital
Changes in share capital since the last
statement of financial position date

Ltd.
47
Disclosure of Share Capital

Additional disclosures include:
Authorized number of shares (if no limit, then so stated)

The existence of unique rights
Number of shares issued and the amount received
Whether the shares are par value or no par value
Amount of any dividends in arrears for cumulative
preferred shares
Changes during the year, including new issuances and
redemptions (under IFRS, presented in statement of
changes in equity)
Restrictions on retained earnings
Ltd.
48
Shareholders Equity
Ratios
1.
Rate of return on common shareholders equity
2.
Payout ratio
3.
Price earnings ratio
4.
Book value per share
Net income Preferred dividends

Average common shareholders equity
Cash Dividends
Net income Preferred dividends
Market price per share
Earnings per share
Common shareholders equity
Number of outstanding shares
Ltd.
49
Shareholders Equity
Understanding the
Corporate Form,
Share Capital and
Profit Distribution
Recognition,
Derecognition,
and
Measurement
Corporate law and

the share capital
system
Types of shares
Issuance of
shares
Reacquisition
and retirement of
shares
Dividends
shareholders
Formality of profit
distribution
Presentation,
Disclosure,
and Analysis
Components
of
shareholders
equity
Capital
disclosures
Analysis

Ltd.
IFRS/ASPE
Comparison
Comparison
of IFRS and
ASPE
Looking
Ahead
50
Looking Ahead
There are several projects being
undertaken by IASB and FASB that may
impact accounting for shareholders equity
These include financial statement project,
and project on liabilities and equity

Ltd.
51
COPYRIGHT
Copyright 2013 John Wiley & Sons Canada, Ltd. All

rights reserved. Reproduction or translation of this work
beyond that permitted by Access Copyright (The Canadian
Copyright Licensing Agency) is unlawful. Requests for
further information should be addressed to the
Permissions Department, John Wiley & Sons Canada, Ltd.
The purchaser may make back-up copies for his or her
own use only and not for distribution or resale. The author
and the publisher assume no responsibility for errors,
omissions, or damages caused by the use of these
programs or from the use of the information contained
herein.

Ltd.
52

15

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

15

Uploaded by

Copyright:

Available Formats

INTERMEDIATE

Lisa Harvey, CPA, CA

what changes are expected in the near future.

Corporate law and

Copyright John Wiley & Sons Canada,

No shares issued; created to

Municipalities, Cities, Etc.

Created by government statute

Copyright John Wiley & Sons Canada,

Articles of incorporation prepared and submitted

Share Capital System

Each share contains certain rights and

Share Capital System

Preemptive right for any new share issues

Preferred shares features (some or all may be

Shareholders losses restricted to the

Copyright John Wiley & Sons Canada,

Formal approval of the Board of Directors required

Corporate law and

Copyright John Wiley & Sons Canada,

Share Issue - Basic

Copyright John Wiley & Sons Canada,

Copyright John Wiley & Sons Canada,

Set up a separate one for each type/class of share

Normally considered a current asset

Credited only when the subscription is paid in full, or settled in

Copyright John Wiley & Sons Canada,

Copyright John Wiley & Sons Canada,

Copyright John Wiley & Sons Canada,

Copyright John Wiley & Sons Canada,

Default after first payment shares issued for

Copyright John Wiley & Sons Canada,

Accounting for Share Issue

Accounting for Share Issue

Copyright John Wiley & Sons Canada,

Copyright John Wiley & Sons Canada,

Copyright John Wiley & Sons Canada,

Copyright John Wiley & Sons Canada,

Copyright John Wiley & Sons Canada,

Stock Dividends - Example

1,000 common shares outstanding

Stock Dividends Declared

Copyright John Wiley & Sons Canada,

Copyright John Wiley & Sons Canada,

$50,000 total declared as dividends

The dividend distribution is therefore:

The dividend distribution is therefore:

2. Remaining $20,000 at a rate of $20,000/$500,000 (i.e.

Copyright John Wiley & Sons Canada,

Stock Dividends vs. Stock

Corporate law and

Copyright John Wiley & Sons Canada,

Copyright John Wiley & Sons Canada,

Par value share issue and/or retirement

Copyright John Wiley & Sons Canada,

Copyright John Wiley & Sons Canada,

Disclosure of Share Capital

Copyright John Wiley & Sons Canada,

Disclosure of Share Capital

Authorized number of shares (if no limit, then so stated)

Rate of return on common shareholders equity

Price earnings ratio

Book value per share