Pengantar Akuntansi 2 - Ch11 Corporations

Chapter

11

Corporations:
Organization, Share
Transactions, Dividends,
and Retained Earnings
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide
11-1

Study Objectives
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 that are reported in a retained earnings
statement.
7. Prepare and analyze a comprehensive equity section.
Slide
11-2

Corporations: Organization, Share Transactions,
Dividends, and Retained Earnings

Corporate
Organization and
Share
Transactions

Dividends

Corporate form of
organization

Cash dividends

Ordinary share
issues

Share splits

Treasury shares
Preference shares

Slide
11-3

Share dividends

Retained
Earnings

Retained earnings
restrictions
Prior period
adjustments
Retained earnings
statement

Statement
Presentation and
Analysis
Presentation

Analysis

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 (USA)
 International
Committee of the Red
Cross (CHE)
 Bill & Melinda Gates
Foundation (USA)
Slide
11-4






Compass Group (GBR)
Hyundai Motors (KOR)
LUKOIL (RUS)
Google (USA)

 Cargill Inc.
(USA)

The Corporate Form of Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights

Ability to Acquire Capital

Advantages

Continuous Life
Corporate Management
Government Regulations

Disadvantages

Additional Taxes
Slide
11-5

SO 1 Identify the major characteristics of a corporation.

Characteristics of a Corporation

Corporation acts
under its own name
rather than in the
name of its
shareholders.

Continuous Life
Additional Taxes
Slide
11-6



Limited to their
investment.


Continuous Life
Additional Taxes
Slide
11-7



Shareholders may
sell their share.

Continuous Life
Additional Taxes
Slide
11-8



Continuous Life

Corporation can
obtain capital
through the issuance
of shares.

Additional Taxes
Slide
11-9



Continuous Life

Continuance as a
going concern is not
affected by the
withdrawal, death, or
incapacity of a
shareholder,
employee, or officer.

Additional Taxes
Slide
11-10



Continuous Life
Additional Taxes
Slide
11-11

Separation of
ownership and
management
prevents owners
from having an
active role in
managing the
company.



Continuous Life
Additional Taxes
Slide
11-12

Government
regulations are
designed to protect
the owners of the
corporation.



Continuous Life
Additional Taxes
Slide
11-13

Corporations pay
income taxes as a
separate legal entity
and in addition,
shareholders pay
taxes on cash
dividends.


Shareholders

Illustration 11-1
Corporation organization
chart

Chairman and
Board of
Directors
President and
Chief Executive
Officer

General
Counsel and
Secretary

Vice President
Finance/Chief
Financial Officer

Vice President
Marketing

Treasurer
Slide
11-14

Vice President
Operations

Vice President
Human
Resources

Controller


15

Answer on notes page

Forming a Corporation
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.

Slide
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.

Slide
11-17



Illustration 11-3

3. Keep the same percentage ownership when new
shares of share are issued (preemptive right*).

* A number of companies have eliminated the preemptive right.
Slide
11-18



Illustration 11-3

4. Share in assets upon liquidation in proportion to
their holdings. This is called a residual claim.

Slide
11-19


Illustration 11-4

Prenumbered
Class A

Class A

COMMON STOCK

COMMON STOCK

PAR VALUE
$1 PER SHARE

Class

PAR VALUE
$1 PER SHARE

Name of corporation
shareholder’s name

Share Certificate

Shares

Signature of corporate
official
Slide
11-20


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.

Slide
11-21


Issuance of Shares
Corporation can issue shares directly to investors or
indirectly through an investment banking firm.
Factors in setting price for a new issue of shares:

1. the company’s anticipated future earnings
2. its expected dividend rate per share
3. its current financial position
4. the current state of the economy
5. the current state of the securities market

Slide
11-22


Market Value of Shares
Shares of publicly held companies are traded on organized
exchanges.
Interaction between buyers and sellers determines the
prices per share.

Prices set by the marketplace 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.
Slide
11-23


24


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

Slide
11-25


Corporate Capital
Illustration 11-5

Slide
11-26


Corporate Capital
Comparison of the equity accounts for a proprietorship
and a corporation.
Illustration 11-6

Slide
11-27


Corporate Capital
At the end of its first year of operation, Doral
Corporation has =
C750,000 of ordinary share and
net income of =
C122,000. Prepare (a) the closing entry for net income
and (b) the equity section at year-end.

Slide
11-28

Answer on
notes page


Accounting for Ordinary Share Issues
Issuing Par Value Ordinary Shares for Cash
Illustration: Assume that Hydro-Slide, Inc. issues 2,000 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.

Cash

1,000
5,000

Share premium - ordinary
Slide
11-29

1,000
4,000

SO 2 Record the issuance of ordinary shares.

Illustration 11-7

Slide
11-30


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


25,000


15,000

Prepare the entry assuming there is no stated value.
Cash

40,000

Share capital - ordinary
Slide
11-31

40,000


Issuing Ordinary Shares for Services or
Noncash Assets
Corporations also may issue shares for:
Services (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.
Slide
11-32


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


Slide
11-33

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


Slide
11-34

50,000
30,000


Accounting for Treasury Shares
Treasury Shares - corporation’s own shares that it has
reacquired from shareholders, but not retired.
Corporations purchase their outstanding share 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. Rid the company of disgruntled investors, perhaps to avoid a
takeover.
Slide
11-35

SO 3 Explain the accounting for treasury shares.

Purchase of Treasury Shares
Debit Treasury Shares for the price paid to reacquire
the shares.
Treasury Shares is a contra equity account.
Reduces equity.

Slide
11-36


Illustration 11-8

Illustration: On February 1, 2011, Mead acquires 4,000 shares
of its share at $8 per share.
Treasury shares (4,000 x $8)
Cash
Slide
11-37

32,000
32,000


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.
Slide
11-38


39


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

Slide
11-40


Above
Cost


Illustration: On February 1, 2011, Mead acquired 4,000 of its
share at $8 per share.
On July 1, Mead sells for $10 per share 1,000 shares of its
treasury share, previously acquired at $8 per share.
July 1

Cash

10,000


8,000

Share premium - treasury

2,000

A corporation does not realize a gain or suffer a loss from share
transactions with its own shareholders.
Slide
11-41


Below
Cost


On Oct. 1, Mead sells an additional 800 treasury shares at $7
per share.
Oct. 1

Cash

5,600

Treasury shares (800 x $8)

Slide
11-42

800
6,400


Below
Cost


On Dec. 1, assume that Mead, Inc. sells its remaining 2,200
shares at $7 per share.
Dec. 1 Cash

15,400


1,200

Retained earnings

1,000


Slide
11-43

Limited
to
balance
on
hand

17,600


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.

Slide
11-44

SO 4 Differentiate preference shares from ordinary shares.

Preference 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 share.
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.
Slide
11-45


Preference Shares
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.
Liquidation preference.

Slide
11-46


Dividends
A distribution of cash or shares to shareholders on a pro
rata (proportional) basis.
Types of Dividends:
1. Cash dividends

3. Scrip (note)

2. Property dividends

4. Shares

Dividends expressed: (1) as a percentage of the par or
stated value, or (2) as a dollar amount per share.

Slide
11-47

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

Cash Dividends
Cash 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.
2. Adequate cash.
3. A declaration of dividends by the Board of Directors.

Slide
11-48


Cash Dividends
Dividends require information concerning three dates:
Illustration 11-12

Slide
11-49


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 common share. The dividend is payable on Jan.
20 to shareholders of record on Dec. 22?
December 1 (Declaration Date)
Cash dividends
Dividends payable

50,000

December 22 (Date of Record)

No entry

50,000

January 20 (Payment Date)
Dividends payable
Cash
Slide
11-50

50,000
50,000


Cash 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.

Slide
11-51


Cash Dividends
Illustration: On December 31, 2011, IBR Inc. has 1,000 shares
of 8%, $100 par value cumulative preference share. It also has
50,000 shares of $10 par value ordinary shares outstanding. At
December 31, 2011, the directors declare a $6,000 cash
dividend. Prepare the entry to record the declaration of the
dividend.
Cash dividends

6,000

Dividends payable

6,000

Dividends: 1,000 shares x $100 par x 8% = $8,000
Slide
11-52


Cash Dividends
Illustration: At December 31, 2012, IBR declares a $50,000
cash dividend. Show the allocation of dividends to each class of
share.
2011
Dividends declared

$

2012

6,000

2,000 **

Dividends in arrears
Allocation to preference
Remainder to ordinary

$ 50,000

6,000
$

-

8,000 *
$ 40,000

* 1,000 shares x $100 par x 8% = $8,000
** 2011 Pfd. dividends $8,000 – declared $6,000 = $2,000
Slide
11-53


Cash Dividends
Illustration: At December 31, 2012, IBR declares a $50,000
cash dividend. Prepare the entry to record the declaration of the
dividend.
Cash dividends
Dividends payable

Slide
11-54

50,000
50,000


55


Share Dividends
Share Dividends

Illustration 11-14

Pro rata distribution of the corporation’s own share.

Results in decrease in retained earnings and increase share capital and share premium.
Slide
11-56


Share Dividends
Share Dividends
Reasons why corporations issue share dividends:
1. To satisfy shareholders’ dividend expectations without
spending cash.
2. To increase the marketability of the corporation’s shares.

3. To emphasize that a portion of shareholders’ equity has
been permanently reinvested in the business.

Slide
11-57


Share Dividends
Size of 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)
* This accounting is based on the assumption that a small share
dividend will have little effect on the market price of the
outstanding shares.
Slide
11-58


Share Dividends
Illustration: Medland Corp. has 50,000 shares issued and
outstanding. The par value is $10 per share and market value
is $15 per share.
10% share dividend is declared
Share dividends
(50,000 x 10% x $15)
Ordinary share dividends distributable

75,000
50,000
25,000

Shares issued
Ordinary share dividends distributable
Share capital - ordinary
Slide
11-59

50,000

50,000


Share Dividends
Statement Presentation
Illustration 11-15

Slide
11-60


Share Dividends
Effects of Share Dividends
Illustration 11-16

Slide
11-61


Share 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 shareholders’
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 of share.
Slide
11-62


Share Splits
Share Split
Reduces the market value of shares.
No entry recorded for a share split.
Decrease par value and increase number of

shares.

Slide
11-63


Share Splits
Illustration: Assume Medland Corporation splits its 50,000
shares of common share on a 2-for-1 basis.
Illustration 11-17

Results in a reduction of the par or stated value per share.
Slide
11-64


Retained Earnings
Retained earnings is net income that a company
retains for use in the business.

Net income increases retained earnings and a net loss
decreases retained earnings.
Retained earnings is part of the shareholders’ claim on
the total assets of the corporation.
A debit balance in retained earnings is identified as a
deficit.

Slide
11-65

SO 6 Identify the items that are reported in a retained earnings statement.

Retained Earnings Restrictions
Restrictions can result from:
1. Legal restrictions.

2. Contractual restrictions.
3. Voluntary restrictions.
Illustration 11-22

Slide
11-66


Prior Period Adjustments
Corrections of Errors
Result from:


mathematical mistakes



mistakes in application of accounting principles



oversight or misuse of facts

Corrections treated as prior period adjustments
Adjustment made to the beginning balance of
retained earnings

Slide
11-67


Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2011
Balance, January 1
Net income
Dividends
Balance, December 31

$

$

1,050,000
360,000
(300,000)
1,110,000

Before issuing the report for the year ended December 31, 2011, you discover a
$50,000 error (net of tax) that caused the 2010 inventory to be overstated
(overstated inventory caused COGS to be lower and thus net income to be higher in
2010). Would this discovery have any impact on the reporting of the Statement of
Retained Earnings for 2011?
Slide
11-68


Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2011
Balance, January 1, as previously reported
Prior period adjustment - error correction
Balance, January 1, as restated
Net income
Dividends
Balance, December 31

Slide
11-69

$

$

1,050,000
(50,000)
1,000,000
360,000
(300,000)
1,060,000


Retained Earnings Statement
Transactions the Affect Retained Earnings
Illustration 11-24

Slide
11-70


Illustration 11-25

Slide
11-71



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.

Slide
11-72


Statement Presentation and Analysis
Illustration 11-26

Slide
11-73

SO 7 Prepare and analyze a comprehensive equity section.

Statement Analysis and Presentation
Analysis
Return on
Ordinary
Shareholders’
Equity

Net Income minus Preference
Dividends
=

Average Ordinary Shareholders’
Equity

This ratio shows how many dollars of net income the
company earned for each dollar invested by the
shareholders.

Slide
11-74


Statement Analysis and Presentation
Analysis

Illustration 11-28

Slide
11-75

Solution on
notes page


Understanding U.S. GAAP
Key Differences

Shares and Retained Earnings

As noted in the chapter, under IFRS the term “Reserves” is
often used to describe equity accounts other than those
arising from contributed capital. This most commonly
includes comprehensive incomes (such as revaluation
surplus and fair value differences) but is also sometimes
used for retained earnings. GAAP has always discouraged
the use of the term “Reserves” in any context. Under GAAP,
comprehensive income items are reported in the equity
section of the statement of financial position in a line labeled
accumulated other comprehensive income.
Slide
11-76

Key Differences


As an example of how similar transactions use different
terminology under GAAP, consider the accounting for the
issuance of 1,000 shares of $1 par value ordinary shares for
$5 per share. Under IFRS, the credit accounts would be
Share Capital—Ordinary and Share Premium—Ordinary.
Under GAAP, the entry is as follows.
Cash
5,000
Common Stock
Paid-in Capital in Excess of Par

Slide
11-77

1,000
4,000

Key Differences


A major difference between IFRS and GAAP relates to the
account Revaluation Surplus. Revaluation Surplus arises
under IFRS because companies are permitted to revalue
their property, plant, and equipment to fair value under
certain circumstances. This account is part of general
reserves under IFRS and is not considered contributed
capital.
IFRS sometimes uses terms such as retained profits or
accumulated profit or loss to describe retained earnings.
The term retained earnings is also often used, as is the
custom, under GAAP.
Slide
11-78

Looking to the Future


The IASB and the FASB are currently working on a project
related to financial statement presentation. An important part of
this study is to determine whether certain line items, subtotals,
and totals should be clearly defined and required to be
displayed in the financial statements. For example, it is likely

that the statement of shareholders’ equity and its presentation
will be examined closely. It is interesting to note that, in a
presentation of a proposed statement of financial position that
was published as a result of this project, the term “Reserves,”

which as noted is commonly used under IFRS, was replaced by
the phrase “Accumulated other comprehensive income,” which
is the title used under GAAP.
Slide
11-79

Statement of Changes in Equity
Appendix 11A
Illustration 11A-1

When a statement of changes in equity is presented, a retained
earnings statement is not necessary.
Slide
11-80

SO 8 Describe the use and content of the statement of changes in equity.

Book Value—Another Per-Share Amount
Book Value per Share

Appendix 11B

The equity an ordinary shareholder has in the net assets of the
corporation.
Illustration 11B-1

Slide
11-81

SO 9 Compute book value per share.

Appendix 11B

Book Value per Share

The computation of book value per share involves the
following steps.
1. Compute the preference share equity.
2. Determine the ordinary shareholders’ equity.
3. Determine book value per share.

Slide
11-82


Appendix 11B
Illustration: Use the equity section of Graber Inc. shown in
Illustration 11-26. Graber’s preference shares are callable at $120
per share and are cumulative. Assume that dividends on Graber’s
preference shares were in arrears for one year, $54,000 (6,000 $9).
The computation of preference share equity (Step 1 in the
preceding list) is:
Illustration 11B-2

Slide
11-83


Illustration 11B-2

Computation of book value:

Slide
11-84

Illustration 11B-3


Book Value versus Market Value

Appendix 11B

The correlation between book value and the annual range of a
company’s market value per share is often remote.
Illustration 11B-4

Slide
11-85


Copyright
“Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.”

Slide
11-86

Pengantar Akuntansi 2 - Ch11 Corporations

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