Preview of Chapter 15: ACCT2110 Intermediate Accounting II Weeks 4, 5 & 6

PREVIEW OF CHAPTER 15
ACCT2110 Intermediate Accounting II Weeks 4, 5 & 6
Copyright ©2020 John Wiley & Sons, Inc. 1

Corporate Capital Learning Objective 1
Describe the corporate form
and the issuance of shares.
Three primary forms of business organization.
Special characteristics of the corporate form:

1.Influence of corporate law.
2.Use of the share system.
3.Development of a variety of ownership interests.
LO 1 Copyright ©2020 John Wiley & Sons, Inc. 2

Corporate Law (Brief)
• Corporation (like Tesla) must submit articles of

incorporation 公司章程 to the appropriate
governmental agency for the country in which
incorporation is desired.
• Governmental agency issues a corporation
charter 公司組織章程 .
• Advantage to incorporate where laws favor
the corporate form of business organization.

Share System
In the absence of restrictive provisions, each share
carries the following rights:
1.To share proportionately in profits and losses.
2.To share proportionately in management (the right
to vote for directors).
3.To share proportionately in assets upon liquidation.
•To share proportionately in any new issues of shares
of the same class—called the preemptive right 優先購
買權 .

Variety of Ownership Interests
Ordinary shares represent the residual corporate
interest that
•Bears ultimate risks of loss.
•Receives the benefits of success.
•Not guaranteed dividends nor assets on dissolution.
Preference shares are created by contract, when
shareholders’ sacrifice certain rights in return for
other rights or privileges, usually dividend preference.

Components of Equity
Equity is often subclassified on the statement of
financial position into the following categories
1.Share capital.
2.Share premium.
3.Retained earnings.
4.Accumulated other comprehensive income.
5.Treasury shares.
6.Non-controlling interest (minority interest).

Components of Equity
Ordinary
OrdinaryShares
Shares
Contributed
Contributed Account
Account Share
Share
Capital
Capital Preference
Premium
Premium
Preference Account
Account
Shares
Shares
Account
Account
Two Primary Retained

Retained
Sources of Earnings
Earnings
Equity Account
Account Assets –
Less: Liabilities =
Less:
Treasury
TreasuryShares
Shares 庫藏
庫藏 Equity
股
股
Account
Account
LO 1
Issuance of Shares
Accounting problems involved in the issuance of
shares:
1.Par value shares.
2.No-par shares.
3.Shares issued in combination with other
securities.
4.Shares issued in non-cash transactions.
5.Costs of issuing shares.

Issuance of Shares
Par Value Shares
Low par values help companies avoid a contingent

liability.
Corporations maintain accounts for:
•Preference Shares or Ordinary Shares.
•Share Premium.

Issuance of Shares
No-Par Shares
Reasons for issuance:
•Avoids contingent liability.
•Avoids confusion over recording par value versus fair market
value.
A major disadvantage of no-par shares is that some countries
levy a high tax on these issues. In addition, in some countries
the total issue price for no-par shares may be considered legal
capital, which could reduce the flexibility in paying dividends.

Issuance of Shares
Journal Entries for No-Par Shares
Illustration: Video Electronics AG is organized with 10,000 ordinary
shares authorized without par value. If Video Electronics issues
500 shares for cash at €10 per share, it makes the following entry.
Cash 5,000
Share Capital — Ordinary 5,000
Video Electronics issues another 500 shares for €11 per share.
Cash 5,500
Issuance of Shares
Journal Entry for Stated Value Shares
Illustration: Some countries require that no-par shares have
a stated value. If a company issued 1,000 of the shares
with a €5 stated value at €15 per share for cash, it makes
the following entry.
Cash 15,000
Share Premium — Ordinary 10,000

Issuance of Shares
Shares Issued with Other Securities
Two methods of allocating proceeds:

•Proportional method.
•Incremental method.

Proportional Method
BE15-4: Ravonette Corporation issued 300 shares of $10 par value
ordinary shares and 100 shares of $50 par value preference shares
for a lump sum of $13,500. The ordinary shares have a market
value of $20 per share, and the preference shares have a market
value of $90 per share.

Journal Entry Using Proportional Method
BE15-4: Ravonette Corporation issued 300 shares of $10 par
value ordinary shares and 100 shares of $50 par value
preference shares for a lump sum of $13,500. The ordinary
shares have a market value of $20 per share, and the
preference shares have a market value of $90 per share.

Incremental Method
BE15-4 (Variation): Ravonette Corporation issued 300 shares of
$10 par value ordinary shares and 100 shares of $50 par value
preference shares for a lump sum of $13,500. The ordinary
shares have a market value of $20 per share, and the value of
preference shares are unknown.

Journal Entry Using Incremental Method
BE15-4 (Variation): Ravonette Corporation issued 300 shares
of $10 par value ordinary shares and 100 shares of $50 par
value preference shares for a lump sum of $13,500. The
ordinary shares have a market value of $20 per share, and
the value of preference shares are unknown.

Issuance of Shares
Shares Issued in Noncash Transactions
The general rule: Companies should record shares
issued for services or property other than cash at the
•fair value of the goods or services received.
•if the fair value of the goods or services cannot be
measured reliably, use the fair value of the shares
issued.

Situation 1
Illustration: The following series of transactions illustrates
the procedure for recording the issuance of 10,000 shares of
€10 par value ordinary shares for a patent for Marlowe
Company, in various circumstances.
1.Marlowe cannot readily determine the fair value of the
patent, but it knows the fair value of the shares is €140,000.
Patent 版權 140,000
Situation 2
2. Marlowe cannot readily determine the fair value of the
shares, but it determines the fair value of the patent is
€150,000.
Patent 版權 150,000

Situation 3
3. Marlowe cannot readily determine the fair value of the
shares nor the fair value of the patent. An independent
consultant values the patent at €125,000 based on
discounted expected cash flows.
Patent 125,000

Issuance of Shares
Costs of Issuing Stock
Direct costs incurred to sell shares, such as

•underwriting 承銷 costs,
•accounting and legal fees, Attempt E15-1
•printing costs, and
•taxes,
should reduce the proceeds received from the sale
of the shares.

Preference Shares
Features often associated with preference shares.

1.Preference as to dividends.
2.Preference as to assets in the event of
liquidation.
3.Convertible into ordinary shares.
4.Callable at the option of the corporation.
5.Non-voting.

Features of Preference Shares
Features of Preference Shares A corporation may
•Cumulative attach whatever
•Participating preferences or
•Convertible restrictions it desires,
•Callable as long as it does not
•Redeemable violate its country’s
incorporation law.
The accounting for preference shares at issuance is similar to

that for ordinary shares.

Journal Entry to Issue Preference Shares
Bishop plc issues 10,000 shares of £10 par value

Illustration:
preference shares for £12 cash per share. Bishop records
the issuance as follows:
Cash 120,000
Share Capital — Preference 100,000
Share Premium — Preference 20,000

Reacquisition of Shares Learning Objective 2
Explain the accounting
and reporting for
treasury shares
Companies purchase their outstanding shares to:
1.Provide tax-efficient distributions of excess cash to
shareholders.
2.Increase earnings per share and return on equity.
3.Provide shares for employee compensation contracts
or to meet potential merger needs.
4.Thwart 阻撓 takeover attempts or to reduce the
number of shareholders.
5.Make a market in the shares.
Purchase of Treasury Shares
Two acceptable methods:

•Cost method (more widely used).
•Par (stated) value method.
Treasury shares reduce equity.

Equity with No Treasury Shares
Illustration: Pacific Company issued 100,000 shares of $1
par value ordinary shares at a price of $10 per share. In
addition, it has retained earnings of $300,000.

ILLUSTRATION 15.5
Journal Entry to Record Purchase of Treasury
Shares
Illustration: Pacific Company issued 100,000 shares of $1 par
value ordinary shares at a price of $10 per share. In
addition, it has retained earnings of $300,000.
On January 20, 2020, Pacific acquires 10,000 of its shares at
$11 per share. Pacific records the reacquisition as follows.
Treasury Shares 110,000

Cash 110,000

Equity with Treasury Shares
Illustration: The equity section for Pacific after purchase
of the treasury shares.
ILLUSTRATION 15.6

Sale of Treasury Shares
• Above Cost
• Below Cost
Both increase total assets and equity.

Sale of Treasury Shares Above Cost
Pacific acquired 10,000 treasury shares at $11 per
share. It now sells 1,000 shares at $15 per share
on March 10. Pacific records the entry as follows.
Cash (1,000 x $15) 15,000

Treasury Shares (1,000 x $11) 11,000
Share Premium — Treasury 4,000

Sale of Treasury Shares Below Cost
Pacific sells an additional 1,000 treasury shares
on March 21 at $8 per share, it records the sale
as follows.
Cash (1,000 x $8) 8,000

Sale of Treasury Shares Below Cost (continued)
ILLUSTRATION 15.7
Assume that Pacific sells an additional 1,000 shares at $8 per

share on April 10. After eliminating the credit balance in share
Premium—Treasury, the corporation debits any additional
excess of cost over selling price to Retained Earnings.
Cash (1,000 x $8) 8,000
Retained Earnings 2,000
Retiring Treasury Shares
Attempt
E15-6
Decision results in
•cancellation of the treasury shares and
•a reduction in the number of shares of
issued shares.
Retired treasury shares have the status of
authorized and unissued shares.

Refer to course outline
Week 4 classwork
E15-1, E15-6
Week 4 homework
# P15-1 (for each group 2 student presentation)
Week 5 classwork
E15-5, E15-10, E15-15
Week 5 homework
^ P15-2, P15-3
# P15-11 (for each group 3 student presentation)
Dividend Policy Learning Objective 3
Explain the accounting and
reporting issues related to
dividends.
Few companies pay dividends in amounts equal
to their legally available retained earnings. Why?
1.Maintain agreements with creditors.
2.Meet corporation requirements.
3.To finance growth or expansion.
4.To smooth out dividend payments.
5.To build up a cushion against possible losses.
Financial Condition and Dividend
Distributions
• Before declaring a dividend, management
must consider availability of funds to pay the
dividend.
• Should not pay a dividend unless both the
present and future financial position warrant
the distribution.

Types of Dividends
1. Cash dividends.
2. Property dividends
3. Liquidating dividends.
4. Share dividends.
All dividends, except for share dividends,
reduce the total equity in the corporation.

Cash Dividends
• Board of directors vote on the Three dates:
declaration of cash dividends. a.Date of declaration
• A declared cash dividend is a b.Date of record
liability.
c.Date of payment
• Companies do not declare or
pay cash dividends on treasury
shares.

Cash Dividends Journal Entries
Illustration: Roadway Freight Corp. on June 10 declared a
cash dividend of 50 cents a share on 1.8 million shares
payable July 16 to all shareholders of record June 24.
At date of declaration (June 10)
Dividends Payable 900,000
At date of record (June 24) No entry
At date of payment (July 16)
Dividends Payable 900,000
Cash ILLUSTRATION 15.10
900,000
Property Dividends
• Dividends payable in assets other than

cash.
• Restate at fair value the property it will
distribute, recognizing any gain or loss.

Property Dividends
Journal Entry on Declaration Date
Illustration: Tsen, Ltd. transferred to shareholders some of its
investments in securities with a carrying value of HK$1,250,000 by
declaring a property dividend on December 28, 2021, to be
distributed on January 30, 2022, to shareholders of record on
January 15, 2022. At the date of declaration the securities have a
fair value of HK$2,000,000. Tsen makes the following entries.
At date of declaration (December 28, 2021)
Equity Investments 750,000
Unrealized Holding Gain or Loss — Income 750,000
Retained Earnings 2,000,000
Property Dividends Payable 2,000,000
LO 3 ILLUSTRATION 15.11 Copyright ©2020 John Wiley & Sons, Inc. 43

Property Dividends
Journal Entry on Date of Distribution
Illustration: Tsen, Ltd. transferred to shareholders some of its
investments in securities with a carrying value of HK$1,250,000
by declaring a property dividend on December 28, 2021, to be
distributed on January 30, 2022, to shareholders of record on
January 15, 2022. At the date of declaration the securities have
a fair value of HK$2,000,000. Tsen makes the following entries.
At date of distribution (January 30, 2022)
Property Dividends Payable 2,000,000

Equity Investments 2,000,000
ILLUSTRATION 15.11
Liquidating Dividends
Any dividend not based on earnings

reduces amounts paid-in by shareholders.

Journal Entry on Date of Declaration
Illustration: McChesney Mines Inc. issued a “dividend” to its
ordinary shareholders of £1,200,000. The cash dividend
announcement noted that shareholders should consider
£900,000 as income and the remainder a return of capital.
McChesney Mines records the dividend as follows.
At date of declaration
Dividends Payable 1,200,000
ILLUSTRATION 15.12

Journal Entry on Date of Payment
Illustration: McChesney Mines Inc. issued a “dividend” to its
ordinary shareholders of £1,200,000. The cash dividend
announcement noted that shareholders should consider
£900,000 as income and the remainder a return of capital.
McChesney Mines records the dividend as follows.
At date of payment
Dividends Payable 1,200,000

Cash 1,200,000
ILLUSTRATION 15.12

Share Dividends
• Issuance by a corporation of its own shares to
shareholders on a pro rata basis, without receiving any
consideration.
• Par value, not the fair value, is used to record the share
dividend.
• Share dividend does not affect any asset or liability.
• Journal entry reflects a reclassification of equity.
• Ordinary share dividend distributable reported in the
equity section as an addition to share capital—ordinary.

Share Dividends
Journal Entry on Date of Declaration
Illustration: Vine plc has outstanding 100,000 shares of £1
par value ordinary shares and retained earnings of
£50,000. If Vine declares a 10 percent share dividend, it
issues 10,000 additional shares to current shareholders.
If the fair value of the shares at the time of the share
dividend is £8 per share, the entry is:
At date of declaration
Retained Earnings (Share Dividend 10,000
Declared)
Ordinary Share Dividend Distributable 10,000

Share Dividends
Journal Entry on Date of Distribution
Illustration: Vine plc has outstanding 100,000 shares of £1 par
value ordinary shares and retained earnings of £50,000. If
Vine declares a 10 percent share dividend, it issues 10,000
additional shares to current shareholders. If the fair value of
the shares at the time of the share dividend is £8 per share,
the entry is:
At date of distribution
Ordinary Share Dividend 10,000

Distributable
Effects of Share Dividends

ILLUSTRATION 15.13
Share Splits
• To reduce the market value of shares.
• No entry recorded for a share split.
• Decrease par value and increased number of shares.
ILLUSTRATION 15.14

Share Split and Share Dividend
Differentiated
Share Split and Share Dividend Differentiated
A share split differs from a share dividend. How?
•A share split increases the number of shares outstanding and
decreases the par or stated value per share.
•A share dividend,
o increases the number of shares outstanding.
o does not decrease the par value.
o increases the total par value of outstanding shares.

Effects of Dividends and Share Splits on Financial
Statement Elements

Week 5 exercises
E15-5, E15-10, E15-15
Homework for participation check in Week 6

^ P15-2, P15-3
Week 6 Group presentation

# P15-11 (for each group 3 student presentation
Comprehensive Equity Presentation
Learning Objective 4
Indicate how to present
and analyze equity.

Disclosure of Restrictions on Retained
Earnings
Such restrictions are best disclosed by note.
•Restrictions imposed by bond indentures and loan
agreements commonly require an extended explanation.
•The note disclosure should reveal
o the source of the restriction,
o pertinent provisions, and
o the amount of retained earnings subject to restriction
or the amount not restricted.

Disclosure of Restrictions on Retained Earnings and Dividends

ILLUSTRATION 15.17
Statement of Changes in Equity

Analysis of Equity
Computation of Return on Ordinary Share Equity
Illustration: Gerber’s Inc. had net income of $360,000,
declared and paid preference dividends of $54,000, and
average ordinary shareholders’ equity of $2,550,000.
Return on Net Income  Preference Dividends

Ordinary Share Equity Average Ordinary Shareholders' Equity
$360,000  $54,000

$2,550,000
 12%
ILLUSTRATION 15.19
Ratio shows how many dollars of net income the company
earned for each dollar invested by the owners.
Analysis
Payout Ratio
Illustration: Troy SA has cash dividends of €100,000 and net
income of €500,000, and no preference shares outstanding.
Cash Dividends
Payout Ratio 
Net Income  Preference Dividends
€100,000

€500,000
 20%
ILLUSTRATION 15.20

Analysis
Computation of Book Value per Share
Illustration: Chen Ltd.’s ordinary shareholders’ equity is HK$1,000,000
and it has 100,000 ordinary shares outstanding.
Book Value Ordinary Shareholders' Equity


per Share Outstanding Share
HK$1,000,000

100,000
 HK$10 per share
ILLUSTRATION 15.21
Amount each share would receive if the company were
liquidated on the basis of amounts reported on the statement of
financial position.
Learning Objective 5
Discuss the different types of
preference share dividends and their
effect on book value per share.

Dividend Distribution
Non-Cumulative and Non-Participating Preference
Illustration: In 2022, Mason Company is to distribute €50,000
as cash dividends, its outstanding ordinary shares have a par
value of €400,000, and its 6 percent preference shares have a
par value of €100,000.
1.If the preference shares are noncumulative and
nonparticipating:

ILLUSTRATION 15A.1
Cumulative and Non-Participating Preference Shares, with Dividends
in Arrears
Illustration: In 2022, Mason Company is to distribute €50,000 as cash
dividends, its outstanding ordinary shares have a par value of €400,000,
& its 6 percent preference shares have a par value of €100,000.
2.If the preference shares are cumulative and non-participating, and
Mason Company did not pay dividends on the preference shares in the
preceding two years:
ILLUSTRATION 15A.2
Non-Cumulative and Fully Participating Preference Shares
dividends, its outstanding ordinary shares have a par value of €400,000,
and its 6 percent preference shares have a par value of €100,000.
3.If the preference shares is noncumulative and is fully participating:
ILLUSTRATION 15A.3

Cumulative and Fully Participating Preference Shares, with Dividends in
Arrears
dividends, its outstanding ordinary shares have a par value of
€400,000, and its 6 percent preference shares have a par value of
€100,000.
4.If the preference shares are cumulative and fully participating, and
Mason Company did not pay dividends on the preference shares in
the preceding two years:
ILLUSTRATION 15A.4

No Dividends in Arrears
Book value per share is computed as net assets divided by
outstanding shares at the end of the year. The computation
becomes more complicated if a company has preference shares.
ILLUSTRATION 15A.5
Dividends in Arrears and Participating
Assume that the same facts exist except that the 5 percent preference
shares are cumulative, participating shares up to 8 percent, and that
dividends for three years before the current year are in arrears.
ILLUSTRATION 15A.6

Week 6 classwork
P15-9, P15-10 (brief)

Preview of Chapter 15: ACCT2110 Intermediate Accounting II Weeks 4, 5 & 6

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PREVIEW OF CHAPTER 15

ACCT2110 Intermediate Accounting II Weeks 4, 5 & 6

Copyright ©2020 John Wiley & Sons, Inc. 1

Special characteristics of the corporate form:

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 2

• Corporation (like Tesla) must submit articles of

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 3

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 4

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 5

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Two Primary Retained

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 8

Low par values help companies avoid a contingent

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LO 1 Copyright ©2020 John Wiley & Sons, Inc. 12

Two methods of allocating proceeds:

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LO 1 Copyright ©2020 John Wiley & Sons, Inc. 15

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Direct costs incurred to sell shares, such as

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Features often associated with preference shares.

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The accounting for preference shares at issuance is similar to

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Bishop plc issues 10,000 shares of £10 par value

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Two acceptable methods:

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Treasury Shares 110,000

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Cash (1,000 x $15) 15,000

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Assume that Pacific sells an additional 1,000 shares at $8 per

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• Dividends payable in assets other than

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Property Dividends Payable 2,000,000

Any dividend not based on earnings

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Dividends Payable 1,200,000

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Ordinary Share Dividend 10,000

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