finac 2 she

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Shareholders Equity

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1. Discuss the characteristics of thecorporate form of organization.

2. Explain the key components ofshareholders equity.

3. Explain the accounting procedures forissuing shares of share.

4. Explain the accounting for treasuryshare.

After studying this chapter, you shouldbe able to:

Shareholders Equity Accounting

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5. Explain the accounting for and reporting ofpreference share.

6. Describe the policies used in distributing

dividends.7. Identify the various forms of dividend

distributions.

8. Explain the accounting for small and largeshare dividends, and for share splits.

9. Indicate how shareholders equity ispresented and analyzed.

Shareholders Equity Accounting

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The shareholders have the right to:

share proportionately in profits and losses

share proportionately in management

share proportionately in corporate assets

upon liquidation

share proportionately in any new issues ofshare of the same class (preemptive right)

The Rights of Shareholders

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Normally three categories:

1. Capital stock

2. Share premium

3. Earned capital or surplus

The first two represent contributed

capital, whereas retained earnings isearned capital.

Components of Shareholders

Equity

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EQUITY

Earned capital(Ret. Earn).

Contributed capital

Less:T.shareat COST

Less: T.shareat PAR

Restricted Unrestritcted

Paid-in

capital

Additional

Paid-in

ordinary preference ordinary preference

Components of Equity

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Accounts must be maintained for:

Par value sharepreference share or ordinary share

paid-in capital in excess of par

discount on share (if present)

No par share

preference share or ordinary sharepaid-in capital in excess of par

Accounting for Share Issues

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Par value has no economic significance.

When par value share is issued for cash:Cash (proceeds)

ordinary share (# of Sh. X Par value)

Paid in Capital in Excess of Par (balance)

Many states permit no-par share.

When no-par share is issued for cash:Cash (proceeds)

ordinary share (proceeds)

Share Issuance

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Both ordinary and preference shares areissued for cash in a single transaction.

The two methods of allocation available are:

Proportional Method [relative fair market values] Incremental Method

When share is issued for services or propertyother than cash, the property or services are

recorded at either the fair market value of assets received or

the fair value of the non-cash consideration received,whichever is more clearly determinable

Share Issued in Lump-Sum Sales

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Outstanding share, purchased by the corporation,

is known as treasury share.

The reasons as to why corporations buy back their

outstanding share may include:1. to increase earnings per share and return on equity

2. to provide tax efficient distributions of excess cash

to shareholders

3. to provide share for employee share compensationcontracts

4. to thwart takeover attempts

5. to create or improve the market for the share

Treasury Share

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COST METHOD: Treasury share is recorded at purchase

COST

Treasury share is a contra-shareholdersaccount.

PAR VALUE METHOD:

Treasury share is recorded at PAR value It is presented as a deduction from capital

share

RecordingTreasury Share:Methods

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Debit treasury share for purchase cost,

and credit treasury share at cost if

shares reissued. The initial issue price of share does not

affect subsequent treasury share

transactions.

No gain or loss can be recognized when

treasury shares are re-issued.

Treasury share: Cost Method

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Given:

Issued: 1,000 ordinary shares; Par, P100;issued at P110.

Reacquired: 100 shares at P112 each. 10 shares were reissued at 112 (at cost).

10 shares were reissued at 130 (above cost).

10 shares were reissued at P98 (below cost).

10 shares reissued at P105 (below cost).

Show journal entries for these

transactions.

Cost Method: Example

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Issued: (par, P100);

1,000 sh. at P110.

Cash 110,000

Ordinary share 100,000

Additional PIC:

ordinary share 10,000

1

10 shares reissued

@ 112.Cash 1,120

Treasury share 1,120

3

Reacquired:

100 at P112.


Cash 11,200

2


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10 shares reissued

at 130.

Cash 1,300


Additional PIC:

Treasury share 180

4

10 shares reissued

at P98.Cash 980

Additional PIC:

(T/share) 140Treasury share 1,120

5


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Cash 1,050

Addl PIC (T/share) 40Retained earnings 30

Treasury share 1120

Reissued 10 treasury shares at P105 (cost = P112)6

Use Additional PIC (Treasury share) firstto absorb any shortfall. Then, use retained

earnings.


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Treasury share is recorded at par when

bought or reissued.

Any shortfalls between the par value andthe reissue price of treasury share is borne:

first by Paid-In and then by Retained

Earnings

Par Value Method: Main Points

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Repurchase of share does NOT mean

retirement

Retired share becomes authorized/unissued

share

Active retirement is effected by application

to the State

Constructive retirement is effected by BoardResolution

Retirement of Treasury share

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Preference Share has certain preferences or

features not possessed by ordinary share.

These features are: preference as to dividends

preference as to assets in the event of liquidation

may be convertibility into ordinary share at the

option of the shareholders may be callable at the option of the issuer

absence of voting rights

Preference Share

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Cumulative Preference Shares

Participating Preference Share:

Fully Participating

Partially Participating

Convertible Preference Share

Callable Preference Share

Redeemable Preference Share

Preference Shares: Features

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Dividends come from present and past

earnings in majority of states.

Dividends come also from appreciationof assets in some states.

Dividends restrictions are based on

liquidity and solvency tests.

Legality of Dividends

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1. Cash dividends

2. Property dividends

3. Share dividends4. Liquidating dividends

Types of Dividends

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There are three important dates:

1. the declaration date (dividends are

declared and accrued)

2. the record date (list of shareholders towhom dividends are to be paid is finalized)

3. the payment date (dividends are paid toshareholders of record)

Cash Dividends: Important Dates

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DATE DECLARED

DATE OF RECORD

DATE OF PAYMENT

Retained Earnings

Dividends Payable

No Entry

Dividends PayableCash

Cash Dividends: Journal Entries

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Are payable in assets of company

Are non-reciprocal transfers between

corporation and shareholders Are equal to the fair market value of

assets distributed at time ofdeclaration [except in spin-offs and

reorganizations] Corporation recognizes gain/loss on

the distribution

Property Dividends

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Share dividends result in more shares beingissued as dividend (no cash flow is involved).

Small share dividends involve issues of less

than 20%25% of share. The accounting for small share dividends is

based on the fair market value of shareissued.

The accounting for large share dividends(more than 20%25%) is based on the parvalue of share issued.

share Dividends: Concept

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Par value of a share does

not change

Total number of sharesincreases

Total shareholders equity

does not change

The composition of equity

changes (less of retained

earnings; more of share)

share dividends require

journal entries

Par value of a share

decreases

Total number of sharesincreases

Total shareholders equity

does not change

The composition of equity

does not change (same

amounts of share and RE)

share splits do not require

journal entries

Share Dividends Share Splits

Share Dividends and Share Splits

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Typical format:

1. Balance at beginning of the period

2. Additions

3. Deductions

4. Balance at end of period

Statement of Shareholders Equity

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Thats all folks!!

finac 2 she

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