Chapter 14 - Companies

Lecture 2
Week 18 - 22 July 2022
Agenda
• Section B
• Issue of par value shares
• Composition of a company’s equity
• Initial costs and share issue costs
• Dividends
• Scope of certain items

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Par value shares
• Companies incorporated after 1 May 2011 may not issue par
value shares (only no-par value shares)
• Existing companies may have par value shares
• May issue only previously authorized par value shares
• “Par value” is the minimum amount a share may be issued for.
• Amount in excess of the par value is the share premium
• Share issue costs written off against the share premium

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Issue of par value shares – class
example (CE) 1
• Kamza Ltd has an authorised share capital of 1 000 000 shares.
On 1 January, Kamza issued for the first time 500 000 shares
with a par value of R1 at an issue price of R25 per share on 1
January 2022.
• Prepare the journal entries to account for the transaction.
• Prepare the necessary note disclosure.

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Issue of par value shares - solution

2022 DR CR
1 Jan Bank (SFP) 12 500 000
Share Capital (SFP) (stated at par value) 500 000
Share premium (SFP) 12 000 000

500 000 x R1 = R500 000

500 000 x R24 = R12 000 000

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EXAMPLE – Presentation & Disclosure
STATEMENT OF FINANCIAL POSITION Notes R
Equity & liabilities
Equity
Share capital 23 500 000
Share premium 12 000 000

NOTES TO THE FINANCIAL STATEMENTS

23. Share capital
Authorised (number)
1000 000 ordinary shares with par value of R1

Issued (number + rand amount)

500 000 ordinary shares with par value of R1 500 000

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EXAMPLE – Presentation & Disclosure

NOTES TO THE FINANCIAL STATEMENTS (cont.)

Reconciliation of the number of shares issued
Issued at beginning of the year 0
Issued at during the year 500 000
Issued at the end of the year 500 000

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What makes up the equity of a company?

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Composition of a company’s equity
Notes R
Equity
Share Capital 23 XXXX
Share premium (if there are par-value shares) XXXX
Retained earnings XXXX

• Share capital includes both ordinary share capital and preference share
capital.

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I did not know incorporation of a company can involve so many costs. What are
those cost and don’t they form part of the equity of the company?

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Initial costs
• Incurred during incorporation of the company (eg. registration,
legal, administrative costs)
• Incurred before commencement of operating activities.
• Recognised as an expense (P/L)
• No VAT applicable as company not yet registered for VAT at this
stage (not yet incorporated)
DR CR

Date Initial costs (P/L) XXXX

Bank/Payable (SFP) XXX
Recognise initial costs incurred
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 Share issue costs
• Incurred during issuing of shares (eg. drafting and publishing
the prospectus)
• Recognised as a reduction of the issued share capital (Dr
Equity)
• When issue of shares has actually occurred:
No-Par Value shares :Written off against the share capital
account of the specific class of shares issued.
Par Value shares: Written off against the share premium account
of the specific class of shares issued.

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 Share issue costs
. DR CR

Date Ordinary (or preference) share issue costs (SCE) xxx

VAT Input (SFP) xxx
Bank/Payable (SFP) xxx
Recognise share issue costs incurred

Ordinary share capital [NPV]/ Ordinary Share premium[PV] xxx

(SFP)
Ordinary share issue costs (SCE) xxx
Recognise write-off of share issue costs

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Class example 2
On 3 March 2021, UCA Ltd offered to the public:
• 500 000 Ordinary shares (NPV) for R45 each, and
• 700 000 10% Preference shares for R20 each to the existing
shareholders.
• Offer closed 15 April. Subscriptions for 500 000 ordinary shares and
700 000 10% preference shares were received and paid for.
• The shares were allotted on 30 April.
• Share issue costs R2 000 000 and R1 000 000 (incl. VAT) were
incurred for the ordinary and 10% preference share issues respectively.
Required: Recognize the above transactions through journals.

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 Solution to CE 2
. 2021 DR CR
15 Apr Bank (SFP) 36 500 000
Ordinary application and allotment account (SFP) 22 500 000
10% Preference application and allotment account (SFP) 14 000 000
Recognise application for 500 000 ordinary shares and 700
000 10% preference shares. [(500 000 x R45) + (700 000 x
R20)]

30 Apr Ordinary application and allotment account (SFP) 22 500 000

Ordinary share capital (SFP) 22 500 000
Recognise the allotment of 500 000 ordinary shares

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 Solution to CE 2 cont.
. 2021 DR CR
30 Apr 10% Preference application and allotment account (SFP) 14 000 000
10% Preference share capital (SFP) 14 000 000
Recognise the allotment of 700 000 ordinary shares

30 Apr Ordinary share issues costs (SCE) 1 739 131

10% Preference share issue costs (SCE) 869 565
VAT Input (SFP) 391 304
Bank/Payable (SFP) 3 000 000
Recognise share issue costs incurred
3000 000 x 15/115 = 391 304
2 000 000 x 100/115 = 1 739 131
1 000 000 x 100/115 = 869 565
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 Solution to CE 2 cont.
. 2021 DR CR
30 Apr Ordinary share capital (SFP) 1 739 131
Ordinary share issues costs (SCE) 1 739 131
Write-off of ordinary share issue costs

30 Apr 10% Preference share capital (SFP) 869 565

10% Preference share issue costs (SCE) 869 565
Write-off of preference share issue costs
Recognise share issue costs incurred

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Class example 3
• TDT Ltd has authorized share capital of 10 000 000 ordinary shares of
R2 each.
• On 15 February 2022 the directors offer the existing shareholders
1 000 000 shares at a premium of R8.
• The offer closed on 28 February with all the shares subscribed for.
• The shares were allotted on 30 March 2022.
• Share issue costs of R450 000 (incl. VAT) were incurred and paid on 30
March 2022.
Required: Recognize the above transactions through journals

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 Solution to CE 3
. 2022 DR CR
28 Feb Bank (SFP) 10 000 000
Ordinary application and allotment account (SFP) 10 000 000
Recognise application for 1 000 000 ordinary shares at a
premium of R8 each.( 1m shares x R10)

30 Mar Ordinary application and allotment account (SFP) 10 000 000

Ordinary share capital (SFP) (1 000 000 * 2) 2 000 000
Ordinary share premium (SFP) (1 000 000 * 8) 8 000 000
Recognise allotment of 1 000 000 ordinary shares per
director's resolution.

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 Solution to CE 3 cont.
. 2022 DR CR
30 Mar Ordinary share issues costs (SCE) 391 304
VAT Input (SFP) 58 696
Bank (SFP) 450 000
Recognise share issue costs incurred
450 000 x 100/115 = 391 304

30 Mar Ordinary share premium (SFP) 391 304

Ordinary share issue costs (SCE) 391 304
Write-off of ordinary share issue costs

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What about the payments made to the shareholders?
How do I deal with them?

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Dividends
• Distributions to shareholders (their share of profits)
• Dividends on ordinary shares- expressed as cents per share
• Dividends on 8% preference share calculated at 8% of issue price
of preference share.
• Preference dividends paid first before ordinary dividend (take
preference)
• Must be approved/”declared” by the directors
• Recognise only on date of declaration
• Must pass the “solvency and liquidity” test (to protect
payables/creditors)

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 Dividends cont.
• Dividends (like drawings for sole trader) is a payment to the
owners therefore a Debit to Equity (not expense in P/L)
• Credit “Shareholders for dividends” account (current liability)
• Ordinary dividend calc: Number of shares x dividend per share
(cents)
• Preference dividend calc: Total value of preference shares x pref
share %
• Dividends usually declared in arrears eg. Dividends from 2020 profit
declared in 2021 therefore SOCE reflects dividend under retained
earnings column and NOT share capital column!!

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 Journal entries to account for the dividend
. DECLARATION OF DIVIDEND DR CR
Date Ordinary dividend – distribution (SCE) xxx
Shareholders for dividend (SFP) xxx
Recognise declared ordinary dividend

PAYMENT OF DIVIDEND
Date Shareholders for dividend (SFP) xxx
Bank (SFP) xxx
Derecognise shareholders for declared ordinary dividend
due to settlement

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Dividends cont.
Solvency and liquidity test:
• FV of assets equal to or exceed FV of liabilities; and
• Will company be able to pay debts as they become due in the
ordinary course of business in the next 12 months?

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 Class example 4
• On 31 December 2021, PF Ltd has a 10% preference share
capital of R700 000 and 2 500 000 issued ordinary shares.
• After applying the solvency and liquidity test, the directors
declared a 10% preference dividend and a 10c per share
ordinary dividend on 15 January 2022.
• The dividends were paid on 30 January 2022.
Required: Recognize the above transactions through
journals

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 Solution to CE 4
. 2022 DR CR
15 Jan Preference dividend – distribution (SCE) (R700 000 * 10%) 70 000
Shareholders for dividends (SFP) 70 000
Recognise declared preference dividend

15 Jan Ordinary dividend – distribution (SCE) (2 500 000 * 10c) 250 000
Shareholders for dividends (SFP) 250 000
Recognise declared ordinary dividend

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Solution to CE 4 cont.
2022 DR CR
30 Jan Shareholders for dividends (SFP) 320 000
Bank (SFP) 320 000
Derecognise shareholders for dividend liability due to
settlement

• Ordinary dividends can only be declared after the preference dividends

declared
• Dividends not “expenses”, but distributions
• Reflected in the Statement of changes in equity (SCE)
• Shareholder for dividends a liability – why?
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Dividends cont.
Interim and final dividends
• Due to time-lag between year profit earned and dividends
declared
• Interim dividend declared during the year
• Final dividend declared after the period (supplements the
interim dividend)

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Dividends cont.
• Disclose separately (interim and final) and total
• Expressed in cents per share for each declaration
• Presentation: directly underneath the SCE

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Dividends per share- presentation
KK LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 June 2022

Ordinary Retained
share capital earnings

The below information is stated below the statement of changes in equity

2022
Dividends declared during the year 195c
Final Dividend 95c
Interim Dividend 100c

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Earnings per share- presentation
KK LTD
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 June 2022

2022
Finance costs (xxx)
Profit before tax xxxx
Income tax expense (xxxx)
Profit for the year xxxxx

Earnings per share (in cents) 240c

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Scope of certain items
• Auditors (para 128 – par 139) (page 561 – page 563)
• Need to know the presentation disclosure of auditor’s remuneration (para
135)
• Directors (par 140 – 146) (page 563 – page 564)
• Need to know presentation and disclosure of director’s emoluments (para
145)
• Earnings per share (para 147-148) ( page 564 – page 566)
• Need to know presentation and disclosure of earnings per share. You will
always be given the amount. Example 14.8 (b)
• Dividends per share (para 149-152) (page 566)
• Need to know presentation and disclosure of earnings per share. You will
always be given the amount. Example 14.8 (b)

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Homework
• Read Section C – Companies- Chapter 14
• Familiarise yourself with the presentation and disclosure
on page 577 to page 592.
• As you cover the various topics, you need to come back to
these pages to see how the presentation & disclosure should
be done.
• Prepare Textbook example 14.10

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