Chapter 13 ACCOUNTING FOR CORPORATIONS PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Winston Kwok, Ph.D., CA Copyright 2015 by McGraw-Hill Education (Asia). All rights reserved
C 1 CORPORATE FORM OF ORGANIZATION 13-2 An entity created by law Existence is separate from owners Ownership can be Privately Held Has rights and privileges Publicly Held
13-3 C 1 CHARACTERISTICS OF CORPORATIONS Advantages Separate legal entity Limited liability of shareholders Transferable ownership rights Continuous life Lack of mutual agency for shareholders Ease of capital accumulation Disadvantages Governmental regulation Corporate taxation
C 1 CORPORATE ORGANIZATION AND MANAGEMENT 13-4 Shareholders Board of Directors President, Vice-President, and Other Officers Employees of the Corporation
13-5 C 1 RIGHTS OF SHAREHOLDERS Vote at shareholders meetings Sell shares Purchase additional shares Receive dividends, if any Share equally in any assets remaining after creditors are paid in a liquidation
13-6 C 1 BASICS OF SHARE CAPITAL Total number of shares that a corporation is authorized to sell or issue. Shareholders' Equity Share capital-ordinary, par value $.01; authorized 250,000,000 shares; issued and outstanding 92,556,295 shares $925,563 Total number of shares that has been sold or issued to shareholders.
13-7 C 1 BASICS OF SHARE CAPITAL Par value is an arbitrary amount assigned to each share when it is authorized. Market price is the amount that each share will sell for in the market. Classes of Shares Par Value No-Par Value Stated Value
13-8 P 1 ISSUING PAR VALUE SHARES AT PAR On June 5, Dillion Snowboards issued 30,000 shares of $10 par value for $300,000. Let s record this transaction.
P 1 ISSUING PAR VALUE SHARES AT PAR 13-9 The shareholders equity section of Dillon Snowboards statement of financial position at year-end 2015 (its first year of operations) after profit of $65,000 and no dividend payments.
13-10 P 1 ISSUING PAR VALUE SHARES AT A PREMIUM On June 5, Dillion Snowboards issued 30,000 shares of $10 par value at $12 per share. Let s record this transaction.
13-11 P 1 ISSUING PAR VALUE SHARES AT A PREMIUM The shareholders equity section of Dillon Snowboards statement of financial position at year-end 2015 (its first year of operations) after profit of $65,000 and no dividend payments.
13-12 P 1 ISSUING NO-PAR VALUE SHARES On October 20, a corporation issued 1,000 shares of no-par value for $40 per share. Let s record this transaction.
13-13 P 1 ISSUING STATED VALUE SHARES On October 20, a corporation issued 1,000 no-par value shares having a stated value of $40 per share for $50 per share. Let s record this transaction.
P 1 ISSUING SHARES FOR NONCASH ASSETS On June 10, a corporation issued 4,000 shares of $20 par value for land valued at $105,000. Let s record this transaction. 13-14
13-15 P 2 CASH DIVIDENDS Regular cash dividends provide a return to investors and almost always affect the share s market value. Corporation Dividends Shareholders To pay a cash dividend, the corporation must have: 1. A sufficient balance in retained earnings; and 2. The cash necessary to pay the dividend.
13-16 P 2 ACCOUNTING FOR CASH DIVIDENDS Three important dates Dividends Date of Declaration Record liability for dividend. Date of Record No entry required. Date of Payment Record payment of cash to shareholders.
13-17 P 2 ACCOUNTING FOR CASH DIVIDENDS On January 19, a $1 per share cash dividend is declared on Dana, Inc. s 10,000 ordinary shares outstanding. The dividend will be paid on March 19 to shareholders of record on February 19. Dividends Date of Declaration Record liability for dividend. Dr Cr Jan. 19 Retained Earnings 10,000 Ordinary Dividend Payable 10,000 To record the declaration of $1 per ordinary share cash dividend.
13-18 P 2 ACCOUNTING FOR CASH DIVIDENDS On January 19, a $1 per share cash dividend is declared on Dana, Inc. s 10,000 ordinary shares outstanding. The dividend will be paid on March 19 to shareholders of record on February 19. No entry required on February 19, the date of record. Date of Payment Record payment of cash to shareholders. Dr Cr Mar. 19 Ordinary Dividend Payable 10,000 Cash 10,000 To record the payment of $1 per ordinary share cash dividend.
P 2 BONUS ISSUES OR SHARE DIVIDENDS A distribution of a corporation s own shares to its shareholders without receiving any cash payment in return. Why a share dividend? Can be used to keep the market price on the shares affordable. Can provide evidence of management s confidence that the company is doing well. 13-19 Capitalization: Transferring a portion of equity from Retained Earnings to Share Capital.
13-20 P 2 SHARE SPLITS A distribution of additional shares to shareholders according to their percent ownership. $10 par value Ordinary Shares 100 shares Old Shares New Shares $5 par value Ordinary Shares 200 shares
13-21 C 2 PREFERENCE SHARES A separate class of shares, typically having priority over ordinary shares in... Dividend distributions Distribution of assets in case of liquidation Usually has a stated dividend rate Normally has no voting rights
13-22 C2 PREFERENCE SHARES Cumulative Dividends in arrears must be paid before dividends may be paid on ordinary shares. (Normal case) vs. Noncumulative Undeclared dividends from current and prior years do not have to be paid in future years. Consider the following Shareholders Equity section of the Statement of Financial Position. The Board of Directors did not declare or pay dividends in 2014. In 2015, the Board declared and paid cash dividends of $42,000. Share Capital-Ordinary, $5 par value; 40,000 shares authorized, issued and outstanding $ 200,000 Share Capital-Preference, 9%, $100 par value; 1,000 shares authorized, issued and outstanding 100,000 Total Share Capital $ 300,000
13-23 C2 PREFERENCE SHARES If Preference Shares Are Noncumulative: Preference Ordinary Year 2014: No dividends paid. $ - $ - Year 2015: 1. Pay 2015 preference dividend. $ 9,000 2. Remainder goes to ordinary. $ 33,000 If Preference Share Are Cumulative: Preference Ordinary Year 2014: No dividends paid. $ - $ - Year 2015: 1. Pay 2014 preference dividend in arrears. $ 9,000 2. Pay 2015 preference dividend. 9,000 3. Remainder goes to ordinary. $ 24,000 Totals $ 18,000 $ 24,000
13-24 C2 PREFERENCE SHARES Participating Dividends may exceed a stated amount once ordinary shareholders receive a dividend equal to the preference stated rate. vs. Nonparticipating Dividends are limited to a maximum amount each year. The maximum is usually the stated dividend rate. (Normal case) Reasons for Issuing Preference Shares To raise capital without sacrificing control To boost the return earned by ordinary shareholders through financial leverage To appeal to investors who may believe the ordinary shares are too risky or that the expected return on ordinary shares is too low
13-25 P 3 TREASURY SHARES Treasury shares are a company s own shares that have been acquired. Corporations might acquire its own shares to: 1. Use their shares to buy other companies. 2. Avoid a hostile takeover. 3. Reissue to employees as compensation. 4. Support the market price.
13-26 P 3 PURCHASING TREASURY SHARES On May 8, Whitt, Inc. purchased 2,000 of its own shares in the open market for $4 per share. Dr Cr May 8 Treasury Shares-Ordinary 8,000 Cash 8,000 To record the purchase of 2,000 treasury shares at $4 per share. Treasury shares are shown as a reduction in total shareholders equity on the statement of financial position.
P 3 SELLING TREASURY SHARES AT COST On June 30, Whitt sold 100 shares of its treasury shares for $4 per share. 13-27 Dr Cr June 30 Cash 400 Treasury Shares-Ordinary 400 To record the receipt of $4 per share for 100 treasury shares for $4 per share.
P 3 SELLING TREASURY SHARES ABOVE COST On July 19, Whitt, Inc. sold an additional 500 treasury shares for $8 per share. 13-28 Dr Cr July 19 Cash 4,000 Treasury Shares-Ordinary 2,000 Share Premium-Treasury Shares 2,000 To record the receipt of $8 per share for 500 treasury shares costing $4 per share.
P 3 SELLING TREASURY SHARES BELOW COST 13-29 On August 27, Whitt sold an additional 400 treasury shares for $1.50 per share. Dr Aug. 27 Cash 600 Share Premium-Treasury Shares 1,000 Treasury Shares-Ordinary 1,600 To record the receipt of $1.50 per share for 400 treasury shares costing $4 per share. Cr
13-30 C3 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
13-31 C3 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
13-32 C3 STATEMENT OF CHANGES IN EQUITY
13-33 C3 STATEMENT OF CHANGES IN EQUITY
13-34 C3 RESERVES Most reserves result from accounting standards to reflect certain measurement changes in equity rather than the income statement, e.g. asset revaluation reserve, foreign currency translation reserve and other statutory reserves. Retained earnings are also called revenue reserves. Ending Retained Earnings = Beginning Retained Earnings + Net Profit Dividends A company s cumulative net profit less any net losses and dividends declared since its inception.
13-35 A 1 EARNINGS PER SHARE Earnings per share is one of the most widely cited accounting statistics. Basic earnings per share = Net profit - Preference dividends Weighted-average ordinary shares outstanding
13-36 A 2 PRICE EARNINGS RATIO This ratio reveals information about the stock market s expectations for a company s future growth in earnings, dividends, and opportunities. Price Earnings Ratio = Market value (price) per share Earnings per share
13-37 A 3 DIVIDEND YIELD Tells us the annual amount of cash dividends distributed to ordinary shareholders relative to the share s market price. Dividend Yield = Annual cash dividends per share Market value per share
A 4 BOOK VALUE PER SHARE ORDINARY 13-38 Reflects the amount of shareholders equity applicable to ordinary shares on a per share basis. Book value per ordinary share = Shareholders equity applicable to ordinary shares Number of ordinary shares outstanding