Chapter 11

Copyright © 2015 by McGraw-Hill Education (Asia).

All rights reserved.
An
An entity
entity created
created
by
by law.
law.

Existence
Existence is
is Privately, or
separate
separate from
from Ownership Closely Held
owners.
owners. can be

Has
Has rights
rights and
and
privileges.
privileges.
Publicly Held

11-2
 Voting (in person or
by proxy).

Proportionate
Rights
distribution of
dividends.

Shareholders Proportionate
distribution of assets
in a liquidation.

11-3
 S h a r e h o ld e r s ' e q u i t y is
in c r e a s e d in tw o w a y s .

C o n tr ib u tio n s b y R e te n tio n o f p r o fits

in v e s to r s in e x c h a n g e e a rn e d b y th e
fo r s h a re . c o r p o r a tio n .

P a id C a p ita l R e ta in e d E a r n in g s
11-4
Authorized
Shares
The maximum
number of
shares that can
be sold to the
public.

11-5
 Authorized
Shares Issued Unissued
shares are shares are
authorized authorized
Usually shares that shares that
shares are have been never have
sold sold. been sold.
through an
underwriter.

11-6
 Outstanding shares are
Authorized issued shares that are
Shares owned by
shareholders.
Outstanding
Unissued
Issued Shares
Shares
Shares
Treasury shares are
Treasury issued shares that
Shares have been reacquired
by the corporation.
11-7
• Par value is an arbitrary amount assigned
to each share when it is authorized.
• Market price is the amount that each
share will sell for in the market.

11-8
 Record:
1.The cash received.
2.The number of shares issued × the par value
per share in the Ordinary Share account.
3.The remainder is assigned to Share Premium
(or Additional Paid-in Capital).

Assume a corporation issues 10,000 shares

of its $2 par value share for $25 per share.

11-9
Assume a corporation issues 10,000 shares
of its $2 par value share for $25 per share.
Description Debit Credit
Cash   250,000  
Ordinary Share   20,000
Share Premium   230,000
       

10,000 × $2 = $20,000

11-10
Shareholders' Equity with Ordinary Share
Shareholders' Equity  
Contributed capital:  
Ordinary share - $2 par value; 50,000 shares
authorized; 10,000 shares issued and
outstanding $ 20,000
Share premium 230,000
Retained earnings 65,000
Total shareholders' equity $ 315,000
   

11-11
 A separate class of share, typically having
priority over ordinary shares in . . .
 Dividend distributions (rate is usually
stated).
 Distribution of assets in case of
liquidation.

Other Features Include:

Cumulative Normally has
dividend no voting
rights. rights.
11-12
 Cumulative Vs. Noncumulative
Dividends in Undeclared
arrears must be dividends from
paid before current and prior
dividends may be years do not have
paid on ordinary to be paid in future
share. years.

11-13
Example: Consider the following partial
Statement of Shareholders’ Equity.

During 2012, the directors declare cash

dividends of $5,000. In 2013, the directors
declare cash dividends of $42,000.
11-14
 Preference
Preferred Common
Ordinary
If Preference
Preferred Stock
Share is is
Noncumulative:
Noncumulative:
Year 2008
2012 $5,000 dividends declared $ 5,000 $ -
Year 2009
2013
Step 1: Current preference
preferred dividend
dividend $ 9,000
Step 2: Remainder to ordinary
commonshareholders
shareholders $ 33,000

If Preference
Preferred Stock
Shareis is
Cumulative:
Cumulative:
Year 2008
2012 $5,000 dividends declared $ 5,000 $ -
Year 2009
2013
Step 1: Dividends in arrears $ 4,000
Step 2: Current preference
preferred dividend
dividend 9,000
Step 3: Remainder to ordinary
commonshareholders
shareholders $ 29,000
Totals $ 13,000 $ 29,000

11-15
Shareholders' Equity with Ordinary and Preference Share
Shareholders' Equity
Contributed Capital:
Preference Share - $100 par value; 1,000 shares
authorized; 50 shares issued and
outstanding $ 5,000
Ordinary Shares - $10 par value; 50,000 shares
authorized; 30,000 shares issued and
outstanding 300,000
Share Premium 1,000
Retained Earnings 65,000
Total Shareholders' Equity $ 371,000

11-16
 Treasury
shares are
issued shares
that have been
reacquired but
not cancelled
by the
corporation.

When share is reacquired, the corporation

records the treasury share at cost.
11-17
Riley Corporation reacquires 3,000 shares
of its ordinary share at $55 per share.
Prepare the journal entry to record the
purchase of treasury share.
Description
Description Debit
Debit Credit
Credit
Treasury Share
Stock 165,000
Cash 165,000
3,000 shares × $55 = $165,000

11-18
Riley Corporation reissued 1,000 shares of
the treasury share originally purchased for
$55 per share. The shares were reissued at
$75 per share.
1,000 shares × $75 = $75,000
Description Debit Credit
Cash 75,000
Treasury Share 55,000
Share Premium: Treasury Share 20,000

1,000 shares × $55 cost = $55,000

11-19
Shareholders' Equity
Contributed capital:
Preference Share - $100 par value; 1,000 shares
authorized; 50 shares issued & outstanding $ 5,000
Ordinary Share - $10 par value; 50,000 shares
authorized; 30,000 shares issued and 28,000 shares
outstanding 300,000
Share Premium 21,000
Retained earnings 65,000
Subtotal $ 391,000
Less: Treasury share (2,000 x $55) 110,000
Total Shareholders' equity $ 281,000

11-20
Shareholders' Equity
Contributed capital:
Preference Share - $100 par value; 1,000 shares
authorized; 50 shares issued & outstanding $ 5,000
Ordinary Share - $10 par value; 50,000 shares
authorized; 30,000 shares issued and 28,000 shares
outstanding 300,000
Share Premium 1,000
Retained earnings 65,000
Subtotal $ 371,000
Less: Treasury share 110,000
Total Shareholders' equity $ 261,000

11-21
 Any difference between the purchase price
of the treasury shares and the cash
received when they are reissued is reported
as an increase or decrease in the
corporation's share capital.

11-22
Some corporations have buyback programs, in which
they repurchase large amounts of their own ordinary
share. As a result of these programs, treasury share
has become a material item in the statement of
financial position of many corporations.

Share option plans are an important part of employee

compensation for many companies. Treasury share
purchases are an effective means by which the
company can have available the shares needed to
satisfy the requirement of share option plans to issue
the shares to employees.

11-23
11-24