CH 12

Financial Accounting
IFRS 4th Edition

Weygandt ● Kimmel ● Kieso
Chapter 12
Corporations: Organization, Share
Transactions, and Equity
Chapter Outline
Learning Objectives
LO 1 Discuss the major characteristics of a corporation.
LO 2 Explain how to account for ordinary, preference,
and treasury shares.
LO 3 Explain how to account for cash dividends, share
dividends, and share splits.
LO 4 Discuss how equity is reported and analyzed.
Copyright ©2019 John Wiley & Son, Inc. 2

Learning Objective 1
Discuss the Major Characteristics of a
Corporation
Copyright ©2019 John Wiley & Sons, Inc. 3

The Corporate Form of Organization
A legal entity that is separate and distinct from its
owners.
Classified by Purpose Classified by Ownership
 Not-for-Profit  Publicly held
 For Profit  Privately held
► International ► Toyota (JPN) ► Cargill Inc.

Committee of the ► Lenovo (CHN)
Red Cross (CHE) ► Google (USA)
► Bill & Melinda Gates
Foundation (USA)
Characteristics of Corporation (1 of 10)
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Advantages
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations Disadvantages
Additional Taxes
Corporation acts
Separate Legal Existence under its own
Limited Liability of Shareholders name rather than
Transferable Ownership Rights in the name of its
shareholders
Continuous Life
Government Regulations
Additional Taxes
Limited to their
investment
Continuous Life
Additional Taxes
Transferable Ownership Rights Shareholders may
sell their shares
Continuous Life
Additional Taxes
Transferable Ownership Rights Corporation can
Ability to Acquire Capital obtain capital
through the
Continuous Life issuance of shares
Additional Taxes
Transferable Ownership Rights Continuance as a
going concern is
Ability to Acquire Capital not affected by the
Continuous Life withdrawal, death,
or incapacity of a
Corporate Management shareholder,
Government Regulations employee, or
officer
Additional Taxes
Ability to Acquire Capital Separation of
ownership and
Continuous Life management often
Corporate Management reduces an owner’s
Government Regulations ability to actively
manage the
Additional Taxes company
Characteristics Shareholders
of Corporation Corporation
(8 of 10)
Chairman and
organization
Board of chart
Directors
President and
Chief Executive
Officer
General Vice President Vice President

Vice President Vice President
Counsel/ Finance/Chief Human
Marketing Operations
Secretary Financial Officer Resources
Treasurer Controller

Continuous Life A corporation is
Corporate Management subject to
Government Regulations numerous
governmental
Additional Taxes regulations
Transferable Ownership Rights Corporations pay
Ability to Acquire Capital income taxes as a
separate legal
Continuous Life entity and in
Corporate Management addition,
Government Regulations shareholders pay
taxes on cash
Additional Taxes dividends
Forming a Corporation
Initial Steps:
 File application with the Secretary of State.
 State grants charter (đăng ký kinh doanh).
 Corporation develops by-laws (điều lệ).

Shareholder Rights
1. Vote in election of board of directors at annual
meeting and vote on actions that require
shareholder approval.
2. Share the corporate earnings through receipt of
dividends.
3. Keep the same percentage ownership when new
shares are issued (preemptive right – quyền ưu
tiên mua trước).
4. Share in assets upon liquidation in proportion to
their holdings. This is called a residual claim.
Share Issue Considerations (1 of 6)
When a corporation decides to issue shares, it must
resolve a number of basic questions:
1. How many shares should it authorize for sale?
2. How should it issue the shares?
3. What value should the corporation assign to the
shares?

Authorized Shares
Charter indicates amount of shares that a
corporation is authorized to sell
Number of shares unissued = number of share
authorized to issue – number of share in issue
No formal accounting entry

Issuance of Shares
Companies issue ordinary shares directly to
investors or indirectly through an investment
banking firm
Factors in setting price for a new issue of shares:
1. Company’s anticipated future earnings
2. Expected dividend rate per share
3. Current financial position
4. Current state of economy
5. Current state of ©2019
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John Wiley & Son, Inc. 19
Market Price of Shares
Shares of publicly held companies are traded on organized exchanges
Interaction between buyers and sellers determines the market price per
share
Prices tend to follow the trend of a company’s earnings and dividends
Factors beyond a company’s control may cause day-to-day fluctuations in
market prices
The trading of ordinary shares on securities exchanges involves the
transfer of already issued shares from an existing shareholder to
another investor. These transactions have no impact on a
corporation’s equity.

Par and No-Par Value Shares
Years ago, par value determined legal capital per
share that a company must retain in business for
protection of corporate creditors
Today many governments do not require a par value
No-par value shares is fairly common today
In many countries, the board of directors assigns a
stated value to no-par shares

DO IT! 1a: Corporate Organization
Indicate whether each of the following statements is true or false.
_______ 1. Similar to partners in a partnership, shareholders of a
corporation have unlimited liability.
_______ 2. It is relatively easy for a corporation to obtain capital
through the issuance of shares.
_______ 3. The journal entry to record the authorization of
ordinary shares includes a credit to the appropriate
share capital account.
_______ 4. The separation of ownership and management is an
advantage of the corporate form of business.
_______ 5. All states require a par value per share for capital stock
Corporate Capital (1 of 2)
Equity can be called by various names: stockholders’ equity,
shareholders’ equity, or corporate capital.
The equity of a corporation consists of two parts:
1. share capital and
2. retained earnings (earned capital)
Share Capital: is the total amount of cash and other assets paid
in to the corporation by shareholders in exchange for shares.
Retained Earnings: is accumulated net income that a
corporation retains for future use.

Retained Earnings
If Delta Robotics has a balance of HK$800,000 in Share Capital
—Ordinary and HK$130,000 in retained earnings at the end of
its first year, its equity section is as follows:
Delta Robotics
Statement of Financial Position (partial)
Equity
Share capital—ordinary HK$8,000,000
Retained earnings 1,300,000
Total equity HK$9,300,000

Explain How to Account for Ordinary,
Preference, and Treasury Shares

Accounting for Ordinary Shares
Issuing Par Value Ordinary Shares for Cash
Cash proceeds are often equal to or greater than par value
Issuance of ordinary shares for cash
 Credit par value to Share Capital—Ordinary
 Portion of proceeds that is above par value: recorded in
a separate account named Share Premium – Ordinary
Illustration: Assume that Hydro-Slide SA issues 1,000 shares of
€1 par value ordinary shares. Prepare journal entry if
(a) 1,000 share are issued for €1 per share,
(b) 1,000 shares are issued for €5 per share.
Issuing Par Value Ordinary Shares for
Cash (3 of 3)
Hydro-Slide SA
Equity
Share capital—ordinary € 2,000
Share premium—ordinary 4,000
Retained earnings 27,000
Total equity €33,000

Issuing No-Par Ordinary Shares (1 of 2)
When no-par ordinary shares have a stated value, the entries are
similar to those illustrated for par value shares.
When no-par shares do not have a stated value, the corporation
credits the entire proceeds to Share Capital—Ordinary.
Illustration 1: Hydro-Slide SA issues 5,000 shares at €8 per share
for cash. The company assigns a stated value of €5 to its no-par
shares.
Illustration 2: Hydro-Slide SA issues 5,000 shares at €8 per share for
cash. The company does not assign a stated value to its no-par
shares.

Issuing Ordinary Shares for Services or Non-
cash Assets
Corporations also may issue shares for:
Services (attorneys or consultants)
Non-cash 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.
Illustration: Attorneys have helped Jordan Co. incorporate. They
have billed the company €5,000 for their services. They agree to
accept 4,000 shares of €1 par value ordinary 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.
Ordinary Shares for Non-Cash Assets
Illustration: Athletic Research AG 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 80,000
Share Capital—Ordinary 50,000
Share Premium—Ordinary 30,000

Accounting for Preference Shares (1 of 2)
Typically, preferred shareholders have a priority as to:
1. Distributions of earnings (dividends).
2. Assets in event of liquidation.
Generally do not have voting rights.
Accounting for preference shares at issuance is similar
to that for ordinary shares using 2 following accounts:
- Share Capital – Preference
- Share Premium - Preference
DO IT! 2: Issuance of Shares (1 of 3)
Illustration:
Hefei Corporation begins operations on March 1 by issuing
1,000,000 of ¥10 par value ordinary shares for cash at ¥12 per
share.
On March 15, it issues 50,000 ordinary shares to attorneys in
settlement of their bill of ¥600,000 for organization costs.
On March 28, Hefei issues 15,000 shares of ¥100 par value
preference shares for cash at ¥250 per share.
Required: Journalize the issuance of the shares.

Accounting for Treasury Shares
Treasury shares are a corporation’s own shares that it has
reacquired from shareholders but not retired.
Corporations acquire treasury shares for various reasons:
1. To enhance the share’s market value.
2. To reissue the shares to officers and employees
under bonus and share compensation plans.
3. To have additional shares available for use in the
future investment
4. To reduce the number of shares outstanding and
thereby increase earnings per share.
Purchase of Treasury Shares (1 of 3)
Companies generally use cost method to account
for Treasury shares
Debit Treasury Shares account for price paid to
reacquire shares. This is a contra equity account.
Treasury Shares is in negative form in equity section
on Statement of financial position

Purchase of Treasury Shares (2 of 3) ILLUSTRATION 12.8
Equity section with
no treasury shares
Mead, Ltd.
Equity
Share capital—ordinary, HK$50 par value, 100,000
shares issued and outstanding HK$5,000,000
Illustration: On February 1, 2020, Mead acquires 4,000 shares of its

stock at HK$80 per share. The entry is as follows.
Treasury Shares 320,000
Cash 320,000
Purchase of Treasury Shares (3 of 3) ILLUSTRATION 12.9
Equity section with
treasury shares
Mead, Ltd.
Equity
Share capital—ordinary, HK$50 par value, 100,000
shares issued and 96,000 shares outstanding HK$5,000,000
7,000,000
Less: Treasury stock (4,000 shares) 320,000
Both the number of shares issued (100,000) and the number of

shares held as treasury (4,000) are disclosed.

Sale of Treasury Shares Above Cost
Illustration: On July 1, Mead, Ltd. sells 1,000 shares for
HK$100 of the 4,000 treasury shares previously acquired at
HK$80 per share. The entry is as follows.
Cash 100,000
Share Premium—Treasury 20,000
A corporation does not realize a gain or suffer a loss from

shares transactions with its own shareholders.

Sale of Treasury Shares Below Cost (1 of 2)
If Mead, Ltd. sells an additional 800 treasury shares on
October 1 at HK$70 per share, it makes the following entry.
Cash (800 × HK$70) 56,000
Share Premium—Treasury 8,000

Sale of Treasury Shares Below Cost (2 of 2)
On December 1, assume that Mead, Ltd. sells its remaining
2,200 shares at HK$70 per share and makes the following
entry.
Cash (2,200 × HK$70) 154,000
Limited to
Share Premium—Treasury 12,000 balance on
hand
Retained Earnings 10,000

DO IT! 2b: Treasury Shares
Salvador SA purchases 3,000 shares of its R$50 par
value ordinary shares for R$180,000 cash on July 1. It
will hold the shares in the treasury until resold. On
November 1, the corporation sells 1,000 treasury
shares for cash at R$70 per share. Journalize the
treasury share transactions.

Explain How to Account for Cash
Dividends, Share Dividends, and Share
Splits

Dividends and Splits
Distribution of cash or shares to shareholders on a
pro rata (proportional to ownership) basis.
Types of Dividends:
1. Cash
2. Property
3. Shares
4. Scrip (promissory note to pay cash)

Accounting for Cash Dividends (1 of 3)
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 Board of Directors.

Three dates are important:

Illustration: On December 1, 2020, the directors of Media
General declare a €0.50 per share cash dividend on 100,000
shares of €10 par value ordinary shares. The dividend is
payable on January 20 to shareholders of record on December
22.
Dec. 1 Cash Dividends 50,000
Dividends Payable 50,000
Dec. 22 No entry
Jan. 20 Dividends Payable 50,000
Cash 50,000
Dividend Preferences (1 of 3)
Right to receive dividends before ordinary
shareholders
Per share dividend amount is stated as a percentage
of preference shares par value or as a specified
amount
Cumulative Dividend - Preference shareholders
must be paid both current-year dividends and any
unpaid prior-year dividends before ordinary
shareholders are paid dividends

Dividends preference
Illustration: On December 31, 2019, IBR Inc. has 1,000 shares
of 8%, €100 par value cumulative preference shares. It also has
50,000 shares of €10 par value ordinary shares outstanding. At
December 31, 2019, the directors declare a €6,000 cash dividend.
-Annual preferred dividend
€100 par x 8% x 1,000 shares = €8,000
Cash dividend is only €6,000 => the entire dividend amount goes
to preference shareholders
- Entry to record the declaration of the dividend.
Dividends preference
Illustration: At December 31, 2020, IBR declares a €50,000 cash
dividend. Show the allocation of dividends to each class of stock.
Total dividend €50,000

Dividend allocated to preference shares
Dividends in arrears, 2019 (1,000 × €2) €2,000
2020 dividend (1,000 × €8) 8,000 10,000
Dividend allocated to common shares €40,000
- Entry to record the declaration of the dividend.

DO IT! 3a: Dividends on Preference and
Ordinary Shares (1 of 3)
Master Mind Gaming has 2,000 shares of 6%, ¥100 par value
preference shares outstanding at December 31, 2020. At
December 31, 2020, the company declared a ¥60,000 cash
dividend. Determine the dividend paid to preference
shareholders and ordinary shareholders under each of the
following scenarios.
1. The preference shares are non-cumulative, and the company
has not missed any dividends in previous years.
2. The preference shares are non-cumulative, and the company
did not pay a dividend in each of the two previous years.
3. The preference shares are cumulative, and the company did
not pay a dividend in each of the two previous years.
Accounting for Share Dividends (Self-study)
A pro-rata (proportional to ownership) distribution of the
corporation’s own shares to shareholders.
Shareholders’ ownership interest does not change
Reasons why corporations issue share dividends:
1. Satisfy shareholders’ dividend expectations without
spending cash
2. Increase marketability of corporation’s shares
3. Emphasize a portion of shareholders’ equity has been
permanently reinvested in business

Accounting for Share Dividends (self-study)
a. Small share dividend (less than 20–25% of
corporation’s issued shares, recorded at fair market
value)
 Accounting based on assumption that a small
share dividend will have little effect on market
price of outstanding shares
b. Large share dividend (greater than 20–25% of issued
share, recorded at par value)

Entries for Share Dividends (self-study)
Illustration: Danshui Ltd. declares a 10% share dividend on its
50,000 shares of NT$100 par value ordinary shares. The current fair
market value of its shares is NT$150 per share. Record the entry on
the declaration date:
Share Dividends 750,000
Ordinary Share Dividends Distributable 500,000
Share Premium—Ordinary 250,000
Equity Section Statement Presentation:

Share capital NT$5,000,000
Ordinary share dividends distributable 500,000
NT$5,500,000
Entries for Share Dividends (self-study)
Illustration: When Danshui issues the dividend shares, it debits
Ordinary Share Dividends Distributable and credits Share Capital—
Ordinary as follows.
Ordinary Share Dividends Distributable 500,000
Share Capital—Ordinary 500,000

Effects of Share Dividends (self-study)
Before After
Dividend Change Dividend
Equity
Share capital—ordinary NT$5,000,000 NT$500,000 NT$5,500,000
Share premium—ordinary — 250,000 250,000
Total share capital 5,000,000 +750,000 5,750,000
Retained earnings 3,000,000 −750,000 2,250,000
Total equity NT$8,000,000 NT$0 NT$8,000,000
Outstanding shares 50,000 +5,000 55,000
Par value per share NT$100.00 NT$0 NT$100.00

Share Dividends (self-study)
Review Question
Which of the following statements about small share
dividends is true?
a. A debit to Retained Earnings should be made for
the par value of the shares issued.
b. A small share dividend decreases total equity.
c. Market price per share should be assigned to the
dividend shares.
d. A small share dividend ordinarily will have an
effect on par value per share.
Accounting for Share Splits (2 of 3)
Effect of 4-for-1 stock split for shareholders

Accounting for Share Splits (3 of 3)
Effects for Danshui Ltd., assuming that it splits its 50,000
ordinary shares on a 2-for-1 basis.
Before After
Share Split Change Share Split
Equity
Share capital—ordinary NT$5,000,000 NT$ –0– NT$5,000,000
Share premium—ordinary –0– –0– –0–
Retained earnings 3,000,000 –0– 3,000,000
Total equity NT$8,000,000 NT$ –0– NT$8,000,000

Par value per share NT$100.00 −NT$50.00 NT$50.00

DO IT! 3b: Share Dividends and Splits (self
study)
Sing CD has had five years of record earnings. Due to this success,
the market price of its 500,000 shares of £2 par value ordinary
shares has tripled from £15 per share to £45. During this period,
the sum of share capital and share premium remained the same at
£2,000,000. Retained earnings increased from £1,500,000 to
£10,000,000. CEO Joan Elbert is considering either a 10% share
dividend or a 2-for-1 share split. She asks you to show the before-
and-after effects of each option on retained earnings, total equity,
shares outstanding, and par value per share.

Effects of Share Dividends (self study)
Effects for Sing CD, assuming that it issues 10% share dividends.
Before After
Dividend Change Dividend
Equity
Share capital—ordinary £1,000,000 £100,000 £1,100,000
Share premium—ordinary £1,000,000 2,150,000 3,150,000
Total share capital £2,000,000 +2,250,000 4,250,000
Retained earnings £10,000,000 −2,250,000 7,750,000
Total equity £12,000,000 £0 £12,000,000
Par value per share £2.00 £0 £2.00

Accounting for Share Splits (self study)
Effects for Sing CD, assuming that it splits its 500,000
ordinary shares on a 2-for-1 basis.
Before After
Share Split Change Share Split
Equity
Share capital—ordinary £1,000,000 NT$ –0– £1,000,000
Share premium—ordinary £1,000,000 –0– £1,000,000
Retained earnings £10,000,000 –0– £10,000,000
Total equity £12,000,000 NT$ –0– £12,000,000
Outstanding shares 500,000 +500,000 1,000,000

Par value per share £2.00 −£1.00 £1.00

Discuss How Equity is Reported and
Analyzed

Reporting and Analyzing Equity
Retained earnings
• Retained earnings can have either debit or credit
balance.
• A credit balance occurs when cumulative income exceed
cumulative loss over a company’s life. A credit balance
in RE will be in positive form in equity section of
Statement of Financial position.
• A negative balance occurs when cumulative losses
exceed cumulative income over a company’s life. A
debit balance in Retained Earnings is identified as a
deficit, will be in negative form in equity section of
Statement of Financial position.
Retained Earnings
a. Debit balance is identified as a deficit

Equity
Share capital—ordinary €800,000
Retained earnings (deficit) (50,000)
Total equity €750,000

Retained Earnings (2 of 3)
In some cases there may be retained earnings restrictions.
a. These make a portion of the retained earnings balance
currently unavailable for dividends
b. Companies generally disclose retained earnings
restrictions in the notes to the financial statements.
Tektronix Inc.
Notes to the Financial Statements
Certain of the Company’s debt agreements require compliance with debt
covenants. Management believes that the Company is in compliance with such
requirements. The Company had unrestricted retained earnings of $223.8 million
after meeting those requirements.

Retained Earnings (3 of 3)
Statement for Graber SA, based on assumed data.
Graber SA
Statement of Retained Earnings
For the Year Ended December 31, 2020
Balance, January 1 €1,050,000
Add: Net income 410,000
1,460,000
Less: Cash Dividends 100,000
Share Dividends 200,000
Balance, December 31 €1,160,000

Statement of Financial Position
Graber SA
Equity
Share capital—preference, 9% €100 par value,
cumulative, callable at €120, 10,000 shares
authorized, 6,000 shares issued and outstanding € 600,000
Share capital—ordinary, no-par, €5 stated
value, 500,000 shares authorized,
400,000 shares issued and 390,000 outstanding €2,000,000
Ordinary share dividends distributable 50,000 2,050,000
Share premium—preference 30,000
Share premium—ordinary 1,050,000 1,080,000
Retained earnings (see Note R) 1,160,000
Less: Treasury shares (10,000 shares) 80,000
Total equity €4,810,000
Note R: Retained earnings is restricted for the cost of treasury
shares, €80,000.

DO IT! 4a: Equity Section (1 of 2)
Jennifer NV has issued 300,000 shares of €3 par value ordinary
shares. It authorized 600,000 shares. The share premium on the
ordinary shares is €380,000. The corporation has reacquired
15,000 shares at a cost of €50,000 and is currently holding those
shares.
The company also has 4,000 shares issued and outstanding of
8%, €100 par value preference shares. It authorized 10,000
shares. The share premium on the preference shares is €25,000.
Retained earnings is €610,000.
Required: Prepare the equity section of the SOFP

Analysis
Return on Ordinary Shareholders’ Equity
a. Indicates how many euros of net income the
company earned for each euro invested by ordinary
shareholders
Carrefour’s (FRA) beginning and ending ordinary
shareholders’ equity was €8,047 and €8,597 million
respectively. Net income
Net Income minus wasOrdinary
Average €1,263 million, no
Return on Ordinary
Preference
preference shares÷wereShareholders’
outstanding. = Shareholders’ Equity
Dividends Equity
(€8,047 + €8,597)
(€1,263 - €0) ÷ = 15.2%
2

DO IT! 4b: Return on Shareholders’
Equity (1 of 2)
On January 1, 2020, Siena purchased 2,000 treasury shares. Other
information regarding Siena is provided below.
2019 2020
Net income €110,000 €110,000
Dividends on preference shares 10,000 10,000
Dividends on ordinary shares 2,000 1,600
Weighted-average number of shares outstanding 10,000 8,000
Ordinary shareholders’ equity, beginning of year 500,000 400,000*
Ordinary shareholders’ equity, ending of year 500,000 400,000*
*Adjusted for purchase of treasury shares.
Compute return on ordinary shareholders’ equity for each year.

Homework: P12.1, P12.2
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Financial Accounting

IFRS 4th Edition

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► International ► Toyota (JPN) ► Cargill Inc.

General Vice President Vice President

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Illustration: On February 1, 2020, Mead acquires 4,000 shares of its

Both the number of shares issued (100,000) and the number of

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

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Total dividend €50,000

- Entry to record the declaration of the dividend.

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Equity Section Statement Presentation:

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Par value per share NT$100.00 NT$0 NT$100.00

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Outstanding shares 50,000 +50,000 100,000

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Par value per share £2.00 £0 £2.00

Outstanding shares 500,000 +500,000 1,000,000

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Statement of Financial Position (partial)

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Compute return on ordinary shareholders’ equity for each year.

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