chapter 11 corporations ( 公司會計 ): organization, share transactions, dividends, and retained...

Chapter 11 Corporations (公司會計 ):Organization, Share Transactions, Dividends, and Retained Earnings

Instructor: Chih-Liang Liu

Department of Industrial and Business Management, Chang Gung University

Learning Objectives

1. Identify the major characteristics of a cor

poration (公司的主要特徵 ).

2. Record the issuance of ordinary shares

(普通股 ).

3. Explain the accounting for treasury shar

es (庫藏股 ).

4. Differentiate preference shares (特別股 )

from ordinary shares.

Learning Objectives (Cont.)

• Prepare the entries for cash dividends (現金股利 ) and share dividends (股票股利 ).

• Identify the items reported in a retained earni

ngs statement.

• Prepare and analyze a comprehensive equity

section.

Preview of Chapter 11

An entity separate and distinct from its owners (所有權 ).

Classified by Purpose

Not-for-Profit ( 非營利 )

For Profit ( 營利 )

Classified by Ownership

Publicly held ( 公開發行 )

Privately held ( 私有化公司)

► Toyota (JPN)► Siemens (DEU)► Sinopec (CHN)► General

Electric (USA)

► Salvation Army (USA)

► International Committee of the Red Cross (CHE)

► Cargill Inc. (USA)

The Corporate Form of Organization

Separate Legal Existence

Limited Liability of Shareholders

Transferable Ownership Rights

Ability to Acquire Capital

Continuous Life

Corporate Management

Government Regulations

Additional Taxes

Characteristics that distinguish corporations from

proprietorships ( 獨資 ) and partnerships ( 合夥 ).

Advantages

Disadvantages

Characteristics of a Corporation

Advantages

2. Limited liability of shareholders (股東有限責任 ):

Limited to their investment.

Characteristics that distinguish corporations from proprietorships (獨資 ) and partnerships (合夥 ).

Characteristics of a Corporation

1. Separate legal existence (獨立法律個體 ): Corporation acts under its own name rather than in th

e name of its shareholders.

5. Continuous life (永續的生命 ): Continuance as a going concern is not affected by t

he withdrawal, death, or incapacity of a shareholder, employee, or officer.

Characteristics of a Corporation (Cont.)

4. Ability to acquire capital (取得資金的能力 ): Corporation can obtain capital through the issuance of s

hares.

3.Transferable ownership rights (可移轉所有權 ): Shareholders may sell their share.

1.Corporate management (公司的管理 ): Separation of ownership and management prevents ow

ners from having an active role in managing the company.

2. Government regulations (政府管制 ): Government regulations are designed to protect the

owners of the corporation.

3. Additional taxes (額外賦稅 ): Corporations pay income taxes as a separate legal entity and in addition, shareholders pay taxes on cash dividends.


Disadvantages

Shareholders

Chairman and Board of Directors

President andChief Executive

Officer

General Counsel and

Secretary

Vice PresidentMarketing

Vice PresidentFinance/Chief

Financial Officer

Vice PresidentOperations

Vice PresidentHuman

Resources

Treasurer Controller

Illustration 11-1 Corporation organization chart


File application with governmental agency ( 州政府 ) in the jurisdiction in which incorporation ( 設立公司 ) is desired

Government grants charter ( 特許證 ) .

Corporation develops by-laws ( 公司規章 ).

Initial Steps:

Companies incorporate in a state or country whose laws are fa

vorable to the corporate form of business.

Corporations expense organization costs ( 開辦費 ) as incurred

.

Forming a Corporation

1. Vote in election of board of directors ( 董事會成員 ) and on actions that require shareholder approval.

Shareholders have the right to:

2. Share the corporate earnings through receipt of dividends ( 股利 ).

Illustration 11-3

Ownership Rights of Shareholders

3. Keep the same percentage ownership when new shares are issued (preemptive right* ; 優先認股權 ).

* A number of companies have eliminated the preemptive right.



4. Share in assets upon liquidation ( 清算 ) in proportion to their holdings. This is called a residual claim (剩餘財產求償權 ).



Class A COMMON STOCK

Class A COMMON STOCK

PAR VALUE $1 PER SHARE

PAR VALUE $1 PER SHARE

Share Certificate(股票憑證 )

Share Certificate(股票憑證 )

Name of corporation

Shareholder’s name

Class

Shares

Signature of corporate official

PrenumberedIllustration 11-4


Charter indicates the amount of shares that a

corporation is authorized to sell.

Number of authorized shares is often reported

in the equity section.

Authorized Shares (核准股票 )

Share Issue Considerations

Corporation can issue ordinary shares directly to

investors or indirectly through an investment banking

firm.

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.

Issuance of Shares (股票發行 )


Shares of publicly held companies is traded on organize

d exchanges ( 交易所 ).

Interaction between buyers and sellers determines the p

rices 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.

Market Price of Shares (股票的市價 )


Par value shares determined the legal capital ( 法定資本 ) per share that a company must retain in the business

for the protection of corporate creditors ( 債權人 ).

Today many governments do not require a par value.

No-par value shares are fairly common today.

In many countries the board of directors assigns a stated

value ( 設定價值 ) to no-par shares.

Par (面額 ) and No-Par (無面額 ) Value Shares


Corporate Capital

Illustration 11-5

Comparison of the equity accounts for a proprietorship,

and a corporation.

Illustration 11-6

Corporate Capital

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.

Income summary 122,000

Retained earnings122,000

Equity

Share capital-ordinary €750,000

Retained earnings 122,000

Total equity€872,000

(a)

(b)

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.

Cash 1,000

Share Capital—Ordinary (1,000 x €1)

1,000Cash 5,000

Share Capital—Ordinary (1,000 x €1)

1,000Share Premium—Ordinary

4,000

a)

b)

Accounting for Share Transactions

Issuing Par Value Ordinary Shares for Cash

Illustration 11-7


Issuing No-Par Ordinary Shares for Cash

IllustrationIllustration: : 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)

25,000Share Premium - Ordinary

15,000Prepare the entry assuming there is no stated value.

Cash 40,000

Share Capital - Ordinary

40,000


Corporations also may issue shares for:

Services (attorneys; 律師費 or consultants; 顧問費).

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. ( 成本是以發行股票的公平市價，或所收到資產公平市價兩者中，較易決定者為準。 )


Issuing Ordinary Shares for Services or Non-Cash Assets

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


4,000Share Premium -Ordinary

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


50,000Share Premium - Ordinary

30,000


Treasury stock ( 庫藏股 ) - corporation’s own shares that it

has reacquired from shareholders, but not retired ( 註銷 ).

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 ( 購併 ) of other companies.

4. Increase earnings per share.

5. Eliminate hostile shareholders by buying them out.

Accounting for Treasury Shares

Purchase of Treasury Shares (買回庫藏股 )

Debit Treasury Shares for the price paid to reac

quire the shares (cost method; 成本法 ).

Treasury Shares is a contra equity account ( 權益扺減科目 ), not an asset.

Purchase of treasury shares reduces equity.


Treasury Shares (4,000 x HK$8) 320,000

Cash 320,000

Illustration: On February 1, 2014, Mead acquires 4,000 shares of its stock at HK$80 per share.

Illustration 11-8


Equity Section with Treasury Shares

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

Illustration 11-9


Sale of Treasury Shares

Above Cost ( 高於成本出售 )

Below Cost ( 低於成本出售 )

Both increase total assets and equity.


Disposal of Treasury Shares (處分庫藏股 )

Treasury Shares (1,000 x HK$80)

80,000

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

Share Premium - Treasury

20,000

Cash 100,000

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

Accounting for Treasury SharesAbove Cost

Share Premium -Treasury 8,000

Illustration: On Oct. 1, Mead sells an additional 800 treasury

shares at HK$70 per share.

Oct. 1

Treasury Shares (800 x HK$80)

64,000

Cash 56,000

Accounting for Treasury SharesBelow Cost

Illustration 11-10

Share Premium - Treasury 12,000

Illustration: On Dec. 1, assume that Mead, Inc. sells its

remaining 2,200 shares at HK$7 per share.

Dec. 1

Retained Earnings 10,000

Cash 154,000

Treasury Shares

176,000

Limited to balance on

hand

Accounting for Treasury SharesBelow Cost

Typically, preference shareholders ( 特別股東 ) h

ave a priority ( 優先 ) as to

1. distributions of earnings (dividends) and

2. assets in the event of liquidation ( 清算 ).

Accounting for preference shares at issuance is similar to that for ordinary shares.

Accounting for 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 shares.

Cash 120,000

Share Capital - Preference (10,000 x €10)

100,000Share Premium – Preference

20,000Preference shares may have a par value or no-par value.


Right to receive dividends before ordinary share

holders.

Cumulative Dividend (累積股利 ) – preference s

hareholders must be paid both current-year divid

ends and any unpaid prior-year dividends before

ordinary shareholders receive dividends.

No obligation ( 非負債 ) exists until board of direct

ors declares a dividend.

Liquidation preference ( 清算優先權 ).


Dividend Preferences (股利優先權 )


Cumulative Dividend (累積股利 )

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

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.


Liquidation Preferences (清算優先權 )

Distribution of cash or shares to shareholders on a pro

rata (proportional to ownership) ( 比例 ) basis.

Types of Dividends ( 股利 ):

1. Cash

2. Property ( 財產 )

Dividends expressed: (1) as a percentage of the par or

stated value, or (2) as a dollar amount per share.

3. Shares ( 股票 )

4. Scrip ( 本票 )

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.

DividendsCash Dividends (現金股利 )

Three dates:

Dividends

Illustration 11-12

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)

January 20 (Payment Date)

Dividends Payable 50,000Cash 50,000

No entry

Cash Dividends

Allocating Cash Dividends Between Preference and Ordinary Shares

Holders of cumulative preference shares ( 累積特別股 )

must be paid any unpaid prior-year dividends before ord

inary shareholders receive dividends.

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.


Dividends Payable 6,000

Preference Dividends: 1,000 shares x €100 par x 8% = €8,000

Dividends

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

Dividends

Illustration 11-13


Dividends Payable

50,000

Illustration: At December 31, 2015, IBR declares a €50,000 cash dividend. Prepare the entry to record the declaration of the dividend.

Dividends

Illustration 11-14

DividendsShare Dividends (股票股利 )

Pro rata distribution of the corporation’s own shares.

Results in decrease in retained earnings and increase share capital and share premium.

Reasons why corporations issue share dividends:

1. Satisfy shareholders’ dividend expectations without

spending cash.

2. Increase marketability ( 流動性 ) of the corporation’s

shares.

3. Emphasize a portion of equity has been permanently

reinvested ( 永久再投資 ) in the business.

DividendsShare Dividends

Small share dividend (小額股票股利 ) (less than 20–25% of the corporation’s issued shares, recorded at fair market value per share)

Large share dividend (大額股票股利 ) (greater than 20–25% of issued shares, recorded at par value per share)

* Accounting based on the assumption that a small share dividend will have little effect on the market price of the outstanding shares.

*

DividendsShare Dividends

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

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.

Dividends

Illustration 11-15Statement presentation of ordinary shares dividends distributable

Shares issued

Ordinary Share Dividends Distributable 50,000

Share Capital-Ordinary (50,000 x 10% x €10) 50,000

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.

Dividends

Effects of Share Dividends

Dividends

Illustration 11-16

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.

Question

Dividends

Dividends

Reduces the market value of shares.

No entry recorded for a share split.

Decrease par value and increase number of shares.

Share Split (股票分割 )

DividendsIllustration: 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.

Net income increases Retained Earnings and a net l

oss 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 (赤字 ).

Retained Earnings

Illustration 11-20

Restrictions can result from:

1. Legal restrictions ( 法律上的限制 ).

2. Contractual restrictions ( 契約上的限制 ).

3. Voluntary restrictions ( 自願性限制 ).

Companies generally disclose retained earnings

restrictions in the notes to the financial statements.

Retained Earnings Restrictions (保留盈餘限制 )

Retained Earnings

Correction of an error in previously issued financial

statements.

Result from:

► mathematical mistakes.

► mistakes in application of accounting principles.

Adjustment made to the beginning balance of retained

earnings.

Prior Period Adjustments (前期損益調整 )

Retained Earnings

Balance, January 1 £800,000Correction for overstatement of net income in prior period(depreciation error) (300,000)Balance, December 31 £500,000

Retained Earnings Statement (partial)General Microwave

Retained Earnings 300,000

Accumulated Depreciation-Equipment 300,000

Retained Earnings Statement

Debits and Credits to Retained Earnings

Illustration 11-24


Illustration 11-25


2014

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.

Question


Illustration 11-26

Statement Presentation and Analysis

Presentation

Net Income Available to Ordinary Shareholders

Return on Ordinary

Shareholders’ Equity

=

Average Ordinary Shareholders’ Equity

Ratio shows how many dollars of net income the company

earned for each dollar invested by the shareholders.


Analysis

Analysis

Illustration 11-28


chapter 11 corporations ( 公司會計 ): organization, share transactions, dividends, and retained...

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