Chapter Six Accounting of Companies

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CHAPTER SIX
ACCOUNTING COMPANIES
AAU Acfn 1032

11-1
Corporations: Organization, Share
Transactions, Dividends, and
Chapter 6 Retained Earnings
Learning Objectives
After studying this chapter, you should be able to:
1. Identify the major characteristics of a corporation.
2. Record the issuance of ordinary shares.
3. Explain the accounting for treasury shares.
4. Differentiate preference shares from ordinary shares.
5. Prepare the entries for cash dividends and share dividends.
6. Identify the items reported in a retained earnings statement.
7. Prepare and analyze a comprehensive equity section.
11-2
The Corporate Form of Organization
An entity separate and distinct from its owners.
Classified by Purpose Classified by Ownership

 Not-for-Profit  Publicly held
 For Profit  Privately held
► Salvation Army ► Toyota (JPN) ► Cargill Inc.

(USA) ► Siemens (DEU) (USA)
► International ► Sinopec (CHN)
Committee of the ► General
Red Cross (CHE) Electric (USA)
11-3 LO 1 Identify the major characteristics of a corporation.

Characteristics of a Corporation
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-
Ad.professional mgrs.
 Dis. Separation of ownership and mgt Disadvantages
 Government Regulations
 Additional Taxes LO 1 Identify the major characteristics of a corporation.
11-4

 Transferable Ownership Rights
Advantages
 Continuous Life
 Corporate Management
 Government Regulations Disadvantages
 Additional Taxes


Corporation acts
 Separate Legal Existence under its own name
 Limited Liability of Shareholders rather than in the
name of its
 Transferable Ownership Rights shareholders.
 Continuous Life


Limited to their
investment.
 Continuous Life


Shareholders may
 Transferable Ownership Rights sell their share.
 Continuous Life


 Transferable Ownership Rights Corporation can
 Ability to Acquire Capital obtain capital
through the issuance
 Continuous Life of shares.


 Transferable Ownership Rights Continuance as a
 Ability to Acquire Capital going concern is not
affected by the
 Continuous Life withdrawal, death, or
 Corporate Management incapacity of a
shareholder,
 Government Regulations employee, or officer.


 Transferable Ownership Rights Separation of
 Ability to Acquire Capital ownership and
management
 Continuous Life prevents owners
 Corporate Management from having an
active role in
 Government Regulations managing the
 Additional Taxes company.


 Continuous Life Government
 Corporate Management regulations are
designed to protect
 Government Regulations the owners of the
 Additional Taxes corporation.


 Ability to Acquire Capital Corporations pay
income taxes as a
 Continuous Life separate legal entity
 Corporate Management and in addition,
shareholders pay
 Government Regulations taxes on cash
 Additional Taxes dividends.

Shareholders
Illustration 11-1
Corporation organization
chart Chairman and
Board of
Directors
President and
Chief Executive
Officer
General Vice President Vice President

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

Initial Steps:
 File application with governmental agency in the
jurisdiction in which incorporation is desired.
 Government grants charter.
 Corporation develops by-laws.
Companies incorporate in a state or country whose laws are

favorable to the corporate form of business.
Corporations expense organization costs as incurred. legal and
government fees, and promotional expenditures involved in the organization of the
business

11-16
Ownership Rights of Shareholders
Shareholders have the right to: Illustration 11-3
1. Vote in election of board of

directors and 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*).
* A number of companies have eliminated the preemptive right.

4. Share in assets upon liquidation in proportion to

their holdings. This is called a residual claim.

Illustration 11-4 Prenumbered
Class A Class A
Class COMMON STOCK COMMON STOCK
PAR VALUE PAR VALUE

$1 PER SHARE $1 PER SHARE
Name of corporation
Shareholder’s name
Shares
Share Certificate
Signature of corporate
official
11-20 LO 1
Share Issue Considerations
Authorized Shares
 Charter indicates the amount of shares that a
corporation is authorized to sell.
 Number of authorized shares is often reported in the
equity section.
 For example, if Quanta Computer (TWN) was

authorized to sell 100,000 ordinary shares and issued
80,000 shares, 20,000 shares would remain unissued.

Issuance of Shares
Corporation can issue ordinary shares directly to investors or
indirectly through an investment banking firm- that specializes in
bringing securities to the attention of prospective investors (publicly held
corporations)
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 the economy.
5. Current state of the securities market.

Market Price of Shares

 Shares of publicly held companies is traded on organized
exchanges.
 Interaction between buyers and sellers determines the
prices 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. (change in interest ate,
inflation etc)

11-24
Par and No-Par Value Shares

Par value shares (sometimes nominal) are ordinary shares to
which the charter has assigned a value per share
 Years ago, par value determined the legal capital per
share that a company must retain in the business for the
protection of corporate creditors.
 Because par value is immaterial , its usefulness as a protective device to
creditors was questionable( ex. $0.01 per share, )yet a new issue would have
sold at a market price in the $39 per share range)
 Today many governments do not require a par value. Instead, they use
other means to protect creditors. No-par value shares are fairly common
today.
 In many countries the board of directors assigns a stated value to no-
Corporate Capital-
Illustration 11-5

Corporate Capital
Comparison of the equity accounts for a proprietorship, and

a corporation.
Illustration 11-6

At the end of its first year of operation, Doral Corporation has
€750,000 of ordinary share and net income of €122,000. Prepare
(a) the closing entry for net income and (b) the equity section at
year-end.
(a) Income summary 122,000

Retained earnings
122,000
(b)
(To close Income Summary and transfer net income
to retained earnings)
Equity
Share capital-ordinary €750,000
Retained earnings 122,000
Total equity
LO 1 Identify the major characteristics of a corporation.
11-28
€872,000
11-29
Accounting for Share Transactions
 As discussed earlier, par value does not indicate a share’s market price.
 Therefore, the cash proceeds from issuing par value shares may be equal
to, greater than, or less than par value.
 When the company records issuance of ordinary shares for cash, it credits
to Share Capital—Ordinary the par value of the shares.
 It records in a separate account the portion of the proceeds that is above or

below par value.
11-30
Issuing Par Value Ordinary Shares for Cash

Illustration: Hydro-Slide, Inc. issues 1,000 shares of €1 par
value ordinary shares. Prepare Hydro-Slide’s journal entry if (a)
1,000 shares are issued for €1 per share, and (b) 1,000 shares
are issued for €5 per share.
a) Cash 1,000
Share capital—ordinary (1,000 x €1)
b) 1,000
Cash 5,000
Share capital—ordinary (1,000 x €1)
Share premium—ordinary
1,000
11-31 4,000 LO 2 Record the issuance of ordinary shares.
Illustration 11-7
11-32 LO 2 Record the issuance of ordinary shares.

 Premium—Ordinary if a credit balance exists in this account.
 If a credit balance does not exist, then the corporation debits to
Retained Earnings the amount less than par.
 This situation occurs only rarely: Most jurisdictions do not
permit the sale of ordinary shares below par value because
shareholders may be held personally liable for the difference
between the price paid upon original sale and par value
11-33
Issuing No-Par Ordinary Shares for Cash
Illustration: Assume that Hydro-Slide, Inc. issues 5,000 shares

of €5 stated value no-par shares for €8 per share. The entry is:
Cash 40,000
Share capital - ordinary (5,000 x €5)
Share premium - ordinary
25,000
Prepare 15,000
the entry assuming there is no stated value.
Cash 40,000
Share capital - ordinary
LO 2 Record the issuance of ordinary shares.
11-34 40,000
Issuing Ordinary Shares for Services or

Non-Cash Assets
Corporations also may issue shares for:
 Services (Compensation for attorneys or consultants).
 Noncash 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: Assume that attorneys have helped Jordan

Company incorporate. They have billed the company €5,000 for
their services. They agree to accept 4,000 shares of €1 par value
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.
Organizational expense 5,000

4,000
1,000
Illustration: Assume that Athletic Research Inc. 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 (10,000 x €8) 80,000

50,000
30,000

DO IT
 Hefei Corporation begins operations on March 1 by issuing 1,000,000 ¥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 ¥500,000
for organization costs. Journalize the issuance of the shares, assuming the
shares are not publicly traded.
Solution
Mar. 1 Cash 12,000,000
Share Capital—Ordinary 10,000,000
Share Premium—Ordinary 2,000,000
(To record issuance of 1,000,000 shares at ¥12 per share)
Mar. 15 Organization Expense 500,000

Share Capital—Ordinary 500,000
11-38
ANATOMY OF A FRAUD
The president, chief operating officer, and chief financial officer of SafeNet (USA), a
software encryption company, were each awarded employee share options by the
company’s board of directors as part of their compensation package. Share options enable
an employee to buy a company’s shares sometime in the future at the price that existed
when the share option was awarded. For example, suppose that you received share
options today, when the share price of your company was $30. Three years later, if the
share price rose to $100, you could “exercise” your options and buy the shares for $30 per
share, thereby making $70 per share. After being awarded their share options, the three
employees changed the award dates in the company’s records to dates in the past, when
the company’s shares were trading at historical lows. For example, using the previous
example, they would choose a past date when the shares were selling for $10 per share,
rather than the $30 price on the actual award date. In our example, this would increase the
profit from exercising the options to $90 per share.
Total take: $1.7 million
The Missing Control

Independent internal verification. The company’s board of directors should have ensured
that the awards were properly administered. For example, the date on the minutes from the
board meeting could be compared to the dates that were recorded for the awards. In addition,
the dates should again be confirmed upon exercise.
11-39
Accounting for Treasury Shares
Treasury stock - corporation’s own shares that it has

reacquired from shareholders, but not retired.
Corporations purchase their outstanding shares to:

1. Reissue the shares to officers and employees under bonus
and share compensation plans.
2. Enhance the share’s market value.
3. Have additional shares available for use in the acquisition of
other companies.
4. Increase earnings per share.
5. Eliminate hostile shareholders by buying them out.
11-40 LO 3 Explain the accounting for treasury shares.

Purchase of Treasury Shares

 Debit Treasury Shares for the price paid to reacquire
the shares (cost method).
 Treasury Shares is a contra equity account, not an
asset.
 Purchase of treasury shares reduces equity.

Illustration 11-8
Illustration: On February 1, 2014, Mead acquires 4,000 shares of

its stock at HK$80 per share.
Treasury shares (4,000 x HK$80) 320,000

Cash 320,000

Equity Section with Treasury Shares

Illustration 11-9
Both the number of shares issued (100,000), outstanding (96,000), and the
number of shares held as treasury (4,000) are disclosed.

11-44
Disposal of Treasury Shares

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

Accounting for Treasury Shares Above
Cost
Illustration: On July 1, Mead sells for HK$100 per share 1,000

shares of its treasury shares, previously acquired at HK$80 per
share.
July 1 Cash 100,000

Treasury shares (1,000 x HK$80)
Share premium - treasury

80,000
20,000
A corporation does not realize a gain or suffer a loss from share

transactions with its own shareholders.

Mead does not record a HK$20,000 gain on sale of treasury
shares for two reasons:
(1)Gains on sales occur when assets are sold, and treasury shares
are not an asset.
(2)A corporation does not realize a gain or suffer a loss from
share transactions with its own shareholders.
Thus, companies should not include in net income any capital

arising from the sale of treasury shares. Instead, they report Share
Premium—Treasury separately on the statement of financial
position, as a part of equity.
11-47
Accounting for Treasury Shares Below
Cost
Illustration: On Oct. 1, Mead sells an additional 800 treasury

shares at HK$70 per share.
Oct. 1 Cash 56,000

Share premium - treasury 8,000
Treasury shares (800 x HK$80)
64,000 Illustration 11-10

Conti…
 When a company fully depletes the credit balance
in Share Premium—Treasury, it debits to Retained
Earnings any additional excess of cost over selling
price.
 To illustrate, assume that Mead, Inc. sells its
remaining 2,200 shares at HK$70 per share on
December 1. The excess of cost over selling price is
HK$22,000 [2,200 X (HK$80 - HK$70)].
 In this case, Mead debits HK$12,000 of the excess to
Share Premium—Treasury. It debits the remainder to
Retained Earnings.
11-49
Accounting for Treasury Shares Below
Cost
Illustration: On Dec. 1, assume that Mead, Inc. sells its

remaining 2,200 shares at HK$70 per share.
Dec. 1 Cash (2,200*$70) 154,000 Limited

to
Share premium - treasury 12,000 balance
on hand
Retained earnings 10,000
Treasury shares (2,200* $80)
176,000

Accounting for Preference Shares
Typically, preference shareholders have a priority as to
1. distributions of earnings (dividends) and
2. assets in the event of liquidation.
Accounting for preference shares at issuance is similar to that for

ordinary shares.
11-51 LO 4 Differentiate preference shares from ordinary shares.

Illustration: Stine Corporation issues 10,000 shares of €10

par value preference shares for €12 cash per share. Journalize
the issuance of the preference shares.
Cash 120,000
Share capital - preference (10,000 x €10)
Share premium – preference
100,000
20,000
Preference shares may have a par value or no-par value.

Dividend Preferences
 Right to receive dividends before ordinary shareholders.
 Cumulative Dividend – preference shareholders must be

paid both current-year dividends and any unpaid prior-year
dividends before ordinary shareholders receive dividends.
 No obligation exists until board of directors declares a
dividend.
 Liquidation preference.

Cumulative Dividend
Illustration: Scientific Leasing has 5,000 shares of 7%, €100 par
value, cumulative preference shares outstanding. Each €100
share pays a €7 dividend (.07 x €100). The annual dividend is
€35,000 (5,000 x €7 per share). If dividends are two years in
arrears, preference shareholders are entitled to receive the
following dividends in the current year.
Illustration 11-11

Liquidation Preferences
 Most preference shares have a preference on corporate
assets if the corporation fails.
 Provides security for the preference shareholder.
 Preference to assets may be for the par value of the

shares or for a specified liquidating value.

Dividends
Distribution of cash or shares to shareholders on a pro

rata (proportional) basis.
Types of Dividends:
1. Cash 3. Shares
2. Property 4. Scrip
Dividends expressed: (1) as a percentage of the par or stated

value, or (2) as a dollar amount per share.
11-56 LO 5 Prepare the entries for cash dividends and share dividends.
Dividends
Three dates: Illustration 11-12
Dividends
Cash Dividends
 The first claim to dividends does not, however, guarantee the payment
 of dividends
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.
 In general, cash dividend distributions from only the balance in share capital—ordinary (legal capital) are
illegal. A dividend declared out of share capital or share premium is termed liquidating dividend.
1. Adequate cash.
2. A declaration of dividends by the Board of Directors.
 At the record date, the company determines ownership of the outstanding shares
for dividend purposes.
 The shareholders’ records maintained by the corporation supply this information. In

the interval between the declaration date and the record date, the corporation
updates its share ownership records.
 For Media General, the record date is December 22. No entry is required on this
date because the corporation’s liability recognized on the declaration date is
unchanged
 On the payment date, the company makes cash dividend payments to the
shareholders of record (as of December 22) and records the payment of the
dividend. If January 20 is the payment date for Media General, the entry on that
date is:
11-59
Cash Dividends
Illustration: On Dec. 1, the directors of Media General declare a
€.50 per share cash dividend on 100,000 shares of €10 par value
ordinary shares. The dividend is payable on Jan. 20 to
shareholders of record on Dec. 22.
December 1 (Declaration Date)

Cash dividends 50,000
Dividends payable 50,000
December 22 (Date of Record) No entry
January 20 (Payment Date)

Cash 50,000
Dividends
Allocating Cash Dividends Between Preference

and Ordinary Shares
• Holders of cumulative preference shares must be paid
any unpaid prior-year dividends before ordinary
shareholders receive dividends.
• When preference shares are cumulative, preference
dividends not declared in a given period are called
dividends in arrears.
Dividends
Illustration: On December 31, 2014, 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, 2014, the directors declare a €6,000 cash dividend.
Prepare the entry to record the declaration of the dividend. In this
case, the entire dividend amount goes to preference shareholders because of their
dividend preference. The entry to record the declaration of the dividend is:

Preference Dividends: 1,000 shares x €100 par x 8% = €8,000
 Because of the cumulative feature, dividends of €2 (€8 -
€6) per share are in arrears on preference shares for 2014.
 IBR must pay these dividends to preference shareholders
before it can pay any future dividends to ordinary
shareholders.
 IBR should disclose dividends in arrears in the financial
statements.
 At December 31, 2015, IBR declares a €50,000 cash
dividend. The allocation of the dividend to the two classes
of shares is as follows.
11-63
Dividends
Illustration: At December 31, 2015, IBR declares a €50,000

cash dividend. Show the allocation of dividends to each class of
stock.
Illustration 11-13
Dividends
Illustration: At December 31, 2015, IBR declares a €50,000

cash dividend. Prepare the entry to record the declaration of the
dividend.

Dividends payable
50,000
11-66
Dividends
Share Dividends Illustration 11-14
Pro rata distribution of the corporation’s own shares.

40/120
Results in decrease in retained earnings and increase share capital and share premium.
 Whereas a company pays cash in a cash dividend, a company
issues shares in a share dividend
 A share dividend results in a decrease in retained earnings
and an increase in share capital and share premium.
Unlike a cash dividend, a share dividend does not decrease
total equity or total asset
 To illustrate, assume that you have a 2% ownership interest in
Cetus Inc.; you own 20 of its 1,000 (2% * 1,000shares)
ordinary shares.
 If Cetus declares a 10% share dividend, it would issue 100
shares (1,000 * 10%). You would receive two shares (2% *
100). Would your ownership interest change? No, it would
remain at 2% (22 / 1,100). You now own more shares, but
your ownership interest has not changed.

11-68 Cetus has disbursed no cash and has assumed no liabilities.
Dividends
Share Dividends
Reasons why(benefits of ) corporations issue share
dividends:
1. Satisfy shareholders’ dividend expectations without

spending cash.
2. Increase marketability of the corporation’s shares.

 When the number of shares outstanding increases, the market price per share
decreases. Decreasing the market price of the shares makes it easier for smaller
investors to purchase the share.
3.Emphasize a portion of equity has been permanently
reinvested in the business( and is unavailable for cash dividends)
 When the dividend is declared, the board of directors determines the
size of the share dividend and the value assigned to each dividend.
 IFRS is silent regarding the accounting for share dividends.
 One approach used in some countries is that if the company issues
a small share dividend (less than 20–25% of the corporation’s
issued shares), the value assigned to the dividend is the fair value
per share.
 This treatment is based on the assumption that a small share
dividend will have little effect on the market price of the shares
previously outstanding.
 Thus, many shareholders consider small share dividends to be
distributions of earnings equal to the fair value of the shares
distributed.
 If a company issues a large share dividend (greater than 20–25%),
the value assigned to the dividend is the par or stated value.
11-70
Dividends
Share Dividends
 Small share dividend (less than 20–25% of the
corporation’s issued shares, recorded at fair market
value) *
 Large share dividend (greater than 20–25% of issued

shares, recorded at par value)
* Accounting based on the assumption that a small share dividend will

have little effect on the market price of previously sold or the
outstanding shares.
Dividends-(Similar to Cash Dividends, Share Dividends decrease
retained earnings.)
Illustration: Medland Corporation has a balance of €300,000 in

retained earnings. It declares a 10% share dividend on its 50,000
shares of €10 par value ordinary shares. The current fair market
value of its shares is €15 per share.
10% share dividend is declared-
Share dividends (50,000 x 10% x €15) 75,000
Ordinary share dividends distributable 50,000
Share premium-ordinary 25,000
Shares issued by the co:

Ordinary share dividends distributable (-OS 50,000
Share capital-ordinary (50,000 x 10% x €10)(+OS 50,000
 Ordinary Share Dividends Distributable is an equity account.
It is not a liability because assets will not be used to pay the
dividend.
 If the company prepares a statement of financial position
before it issues the dividend shares, it reports the distributable
account as shown in Illustration 11-15 on the next page.
11-73
Dividends
Illustration 11-15
Statement Presentation Statement presentation
of ordinary shares
dividends distributable
EFFECTS OF SHARE DIVIDENDS
 How do share dividends affect equity?

 They change the composition of equity because
they transfer to share capital and share premium a
portion of retained earnings. However, total equity
remains the same.
 Share dividends also have no effect on the par or
stated value per share. But, the number of shares
outstanding increases.
 Illustration 11-16 shows these effects for Medland
Corporation
11-75
Dividends
Effects of Share Dividends

Illustration 11-16
Dividends
Question
Which of the following statements about small share dividends is
true?
a. A debit to Share Dividends for the par value of the shares
issued should be made.
b. A small share dividend decreases total equity.
c. Market value per share should be assigned to the dividend
shares.
d. A small share dividend ordinarily will have no effect on
book value per share.
Dividends
Share Split
 Reduces the market value of shares.
 No entry recorded for a share split.
 Decrease par value and increase number of shares.
 A share split, like a share dividend, involves issuance of additional shares to
shareholders according to their percentage ownership.
 However, a share split results in a reduction in the par or stated value per
share. The purpose of a share split is to increase the marketability of the shares by
lowering the market price per share. This, in turn, makes it easier for the
corporation to issue additional shares.
 The effect of a split on market price is generally inversely proportional to the size
of the split. For example, after a recent 2-for-1 share split, the market price
 of Nike’s shares fell from $111 to approximately $55. The lower market price
stimulated market activity, and within one year the shares were trading above $100
again.
 In a share split, the number of shares increases in the same proportion that par or
stated value per share decreases. For example, in a 2-for-1 split, one $10 par value
share is exchanged for two $5 par value shares.
 A share split does not have any effect on share capital, share premium,
retained earnings, or total equity.
 But, the number of shares outstanding increases, and par value per share decreases.
11-79
Dividends
Illustration: Assume Medland Corporation splits its 50,000

ordinary shares on a 2-for-1 basis.
Illustration 11-17
Results in a reduction of the par or stated value per share. A share

split does not affect the balances in any equity accounts. Therefore, it is
not necessary to journalize a share split..
11-81
Retained Earnings
 Net income increases Retained Earnings and a net loss

decreases Retained Earnings.
 Part of the shareholders’ claim on the total assets of

the corporation.
 Debit balance in Retained Earnings is identified as a

deficit.
Illustration 11-20
11-82 LO 6 Identify the items reported in a retained earnings statement.

Retained Earnings
Retained Earnings Restrictions

Restrictions can result from:
1. Legal restrictions.
2. Contractual restrictions.
3. Voluntary restrictions.
Companies generally disclose retained earnings restrictions in

the notes to the financial statements.

1. Legal restrictions. Many governments require a corporation to
restrict retained earnings for the cost of treasury shares
purchased. The restriction keeps intact the corporation’s legal
capital that is being temporarily held as treasury shares. When
the company sells the treasury shares, the restriction is lifted.
2. Contractual restrictions. Long-term debt contracts may
restrict retained earnings as a condition for the loan. The
restriction limits the use of corporate assets for payment of
dividends. Thus, it increases the likelihood that the corporation
will be able to meet required loan payments.
3. Voluntary restrictions. The board of directors may
voluntarily create retained earnings restrictions for specific
purposes. For example, the board may authorize a restriction for
future plant expansion. By reducing the amount of retained
earnings available for dividends, the company makes more cash
11-84available for the planned expansion.
Retained Earnings Statement-think?
Woods, Inc.
Retained Earnings Statement
For the Year Ended December 31, 2014
Balance, January 1 € 1,050,000

Net income 360,000
Dividends -300,000
Balance, December 31 € 1,110,000
Before issuing the report for the year ended December 31, 2014, you discover a
€50,000 error (net of tax) that caused the 2013 inventory to be overstated
(overstated inventory caused COGS to be lower and thus net income to be higher in
2013. Would this discovery have any impact on the reporting of the Retained
Earnings Statement for 2014?

Retained Earnings Statement
Question
All but one of the following is reported in a retained
earnings statement. The exception is:
a. cash and share dividends.
b. net income and net loss.
c. some disposals of treasury shares below cost.
d. sales of treasury shares above cost.

Statement Presentation and Analysis
Presentation Illustration 11-26
11-87 LO 7
Companies in Ethiopia
The commercial code( new) classified companies in

Ethiopia:
1. Share company
2.private limited company
2. One man private limited company
11-88
1.Share company
 A share company is a company whose capital is fixed

in advance and divided into shares and whose liabilities are
met only by the assets of the company.
 The obligation of the shareholders shall be limited to
making the contribution they pledged to make to the

company.
11-89
Minimum Capital and par value of Shares
1. Without prejudice to a contrary stipulation by an

other law, the capital of the company may not be less
than 50,000 (Fifty Thousand) Ethiopian Birr.
2. The amount of the par value of each share may not be

less than 100 (hundred) Ethiopian Birr.
11-90
Private Limited Companies-In Ethiopia
Private Limited Company

it is a company whose members are liable to the
extent of their contributions;
A private limited company cannot have less than 2 or
more than 50 members;
It required a minimum amount of capital of 15,000birr;
The amount of a share shall not be less than 10birr ;
All shares shall be of equal value;
A member may hold more than one share.
11-91 91
…PLCs in Ethiopia…cont`d
 PLCs cannot undertake banking, insurance, or any

business of a similar nature;
 PLCs do not issue transferable securities such as
shares & bonds.
 It may have a firm-name which followed by the
words “private limited company ‘PLC’;
 It has similar memorandum of association and
articles of association to that of a share company;
 A private limited company does not require having
auditors;
11-92 92
PLCs in Ethiopia…cont`d
 PLCs are not required to be managed by a board of

directors;
 PLCs can be managed by managers who can be
shareholders or outsiders appointed by decision of
shareholders or by the Article of association;
 In this case, the word share does not give the same
meaning to that of share in a share company ;
 IN PLCs the amount of contribution collected from
members is contribution in percent;
 In PLC Contribution can be in the form of skill,
property or in cash;
11-93 93
PLCs in Ethiopia…cont`d
 In PLCs shares are not easily transferable

(registered shares) unless the members
consented to issue a transferable share
(contribution).
11-94 94
Share Companies in Ethiopia…cont`d
Share Company
It is a company whose capital is fixed in advance
and divided into shares and one fourth of it shall
be paid up of capital;
Shareholders` liabilities are met only by the
assets of the company;
The name of a share company shall include the
words “share company;”
11-95 95
 The minimum amount of capital is 50,000birr;

 The stated amount of Birr 50,000 is not applicable for
banks and insurance in Ethiopia;
 The amount of the par value of each share cannot be
less than 10birr;
 A share company cannot be established by less than
five members;
11-96 96
 The format of a share company shall be public
memorandum and it shall contain:
 The names, nationality and address of the members, the
number of shares which they have subscribed, provide that a
member may not subscribe less than one share;
 The name of the company;
 The head office, and the branches, if any;
 The business purpose of the company;
 The amount of capital subscribed and paid;
 The par value, number, form and classes of shares;
 The value of contributions in kind, their object, the price at
which they are accepted, the designation of the shareholder
and the number of share allocated to him by way of
exchanges;
11-97 97
 The manner of distributing profits;
 Any share in the profits allocated to the founders and
reasons for such share;
 The number of directors and their powers and the
agents of the company;
 The auditors;
 The period of time for which the company is to be
established; and
 The manner in which the company will publish its
reports.
11-98 98
 The articles of association which govern the

operation of the company must be drawn up by
the founders in accordance with the law;
 Publicity requirements put down by the
commercial code should be fulfilled; and
 When the requirements as to publicity and
registration have been met, a company shall
have legal existence and legal personality even
if all the legal requirements relating to the
formation of a company have not been complied
with.
11-99 99
 A share company has the following:

1. General Meetings of Shareholders;
2. Board of Directors (3-12 members);
3. Auditors; and
4. General Manager/ Chief Executive Officer
(CEO).
 A share company can issue transferable securities
such as shares, bonds.
 A Share Co. can run bank and insurance businesses.
11-100 100

Chapter Six Accounting of Companies

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Chapter Six Accounting of Companies

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SEEK WISDOM, ELEVATE YOUR

INTELLECT & SERVE HUMANITY!

AAU Acfn 1032

1. Identify the major characteristics of a corporation.

2. Record the issuance of ordinary shares.

3. Explain the accounting for treasury shares.

4. Differentiate preference shares from ordinary shares.

5. Prepare the entries for cash dividends and share dividends.

6. Identify the items reported in a retained earnings statement.

7. Prepare and analyze a comprehensive equity section.

An entity separate and distinct from its owners.

Classified by Purpose Classified by Ownership

► Salvation Army ► Toyota (JPN) ► Cargill Inc.

11-3 LO 1 Identify the major characteristics of a corporation.

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

11-5 LO 1 Identify the major characteristics of a corporation.

Characteristics that distinguish corporations from

11-6 LO 1 Identify the major characteristics of a corporation.

Characteristics that distinguish corporations from

11-7 LO 1 Identify the major characteristics of a corporation.

Characteristics that distinguish corporations from

11-8 LO 1 Identify the major characteristics of a corporation.

Characteristics that distinguish corporations from

11-9 LO 1 Identify the major characteristics of a corporation.

Characteristics that distinguish corporations from

11-10 LO 1 Identify the major characteristics of a corporation.

Characteristics that distinguish corporations from

11-11 LO 1 Identify the major characteristics of a corporation.

Characteristics that distinguish corporations from

11-12 LO 1 Identify the major characteristics of a corporation.

Characteristics that distinguish corporations from

11-13 LO 1 Identify the major characteristics of a corporation.

General Vice President Vice President

11-14 LO 1 Identify the major characteristics of a corporation.

Companies incorporate in a state or country whose laws are

11-15 LO 1 Identify the major characteristics of a corporation.

Shareholders have the right to: Illustration 11-3

1. Vote in election of board of

2. Share the corporate earnings

11-17 LO 1 Identify the major characteristics of a corporation.

Shareholders have the right to: Illustration 11-3

3. Keep the same percentage ownership when new

* A number of companies have eliminated the preemptive right.

11-18 LO 1 Identify the major characteristics of a corporation.

Shareholders have the right to: Illustration 11-3

4. Share in assets upon liquidation in proportion to

11-19 LO 1 Identify the major characteristics of a corporation.

PAR VALUE PAR VALUE

 For example, if Quanta Computer (TWN) was

11-21 LO 1 Identify the major characteristics of a corporation.

11-22 LO 1 Identify the major characteristics of a corporation.

Market Price of Shares

11-23 LO 1 Identify the major characteristics of a corporation.

Par and No-Par Value Shares

11-26 LO 1 Identify the major characteristics of a corporation.

Comparison of the equity accounts for a proprietorship, and

11-27 LO 1 Identify the major characteristics of a corporation.

(a) Income summary 122,000

 It records in a separate account the portion of the proceeds that is above or

Issuing Par Value Ordinary Shares for Cash

11-32 LO 2 Record the issuance of ordinary shares.

Issuing No-Par Ordinary Shares for Cash