companies: share capital and the statement of financial position
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Companies: Share Capital and the Statement of Financial Position. Chapter 14. HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT. Objectives. 1.Identify the characteristics of a company. 2.Record the issue of shares - PowerPoint PPT PresentationTRANSCRIPT
Companies: Share Capital and the
Statement of Financial Position
Chapter 14
HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT
14 - 2Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Objectives1.Identify the characteristics of a company.2.Record the issue of shares3.Prepare the shareholders’ equity section of a
company’s statement of financial position4.Account for cash dividends5.Use different share values in decision-making6.Evaluate a company’s return on assets and
return on shareholders’ equity7.Account for the income tax of a company
14 - 3Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Objective 1
Identify the characteristicsof a company.
14 - 4Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Characteristics
– separate legal entity– continuous life and transferability of
ownership– no mutual agency– limited liability of shareholders– separation of ownership and management– company taxation– government regulation
14 - 5Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Organising a company
The process of creating a company begins when the organisers (promoters) obtain a certificate of registration from ASIC.
The Corporations Act includes a number of basic rules for managing the company.
The company can accept these rules or replace them with their own company constitution.
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Organising a company
Shareholders elect the board of directors. The board sets policy, appoints the
officers, and elects a chairperson. The board also designates the managing
director, who is often known as the chief executive officer (CEO).
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Authority Structurein a Company
Shareholders
Board of Directors
Chairperson of the Board
Chief Executive Officer
Various Executives and Company Secretary
Controller? Treasurer?
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Share Capital
Company ownership is evidenced by a ‘share certificate’ or ‘shareholder holding statement’ which may be for any number of shares.
See Exhibit 14-3 and 14-4 in your textbook A share that is held by a shareholder is
said to be an ‘issued share’.
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Shareholders’ Equity
Share capital
Retained profits
Owners’ equity in the companyhas two components:
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Shareholders’ Equity Example
On June 1, the Wong’s companyissued share valued at $10,000.
June 1Cash 10,000
Share Capital 10,000Issue of share
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Shareholders’ Equity Example
Wong’s company net profitfor the year was $8,000.
June 30 Profit and Loss Summary 8,000
Retained Profits 8,000 To close net profit to Retained Profits
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Shareholders’ Rights
The ownership of share entitles shareholders to four basic rights, unless specific rights are withheld by agreement.
1 Vote2 Dividends3 Liquidation4 Preemption
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Classes of share
Ordinary share is the most basic form of capital share.
Preference share gives its owners certain advantages over ordinary shareholders.
In Australia shares are now issued without a par value (it makes the accounting easier).
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Objective 2
Record the issue of shares.
14 - 15Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Issuing Shares Example
On January 13, Martin Limited, which manufactures skateboards, issues 10,000 ordinary share for $10 per share.
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Issuing Shares Example
The 10,000 shares were issued for $10 each.
January 13Cash 100,000
Ordinary Share Capital 100,000
Issue no par value ordinary share
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Issuing Shares Example
On February 11, Martin company issued 15,000 shares of its ordinary share for a building worth $100,000.
What is the journal entry?
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Issuing Shares Example
February 11Building 100,000
Ordinary Share Capital (15,000 shares)100,000Issued ordinary share in exchange for a building
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Issuing Shares ExampleBy Instalment
Shares may sometimes be issued by instalments.
Money may be payable: When the investor makes application for the shares. When the shares are issued or the allotment made Later when more money is asked for or a call is made
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Issuing Shares ExampleBy Instalment
Huang Limited issues 10,000 shares $5 payable on application $3 on allotment and $2 call.
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Issuing Shares Example
Applications received for 10,000shares
Cash Trust (10,000 x $5) 50,000Application 50,000
Received application money, to be held in trust
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Issuing Shares Example
The 10,000 shares were issued (allotted).
Application (10,000 x $5) 50,000Allotment (10,000 x $3) 30,000
Ordinary Share Capital 80,000
Issue ordinary share
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Issuing Shares Example
The application money is now ours, so it can be transferred from the trust account
to our account .
Cash 50,000Cash Trust 50,000
Transfer application money to company’s bank account
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Issuing Shares Example
Received allotment money
Cash 30,000Allotment 30,000
Collected amount due on allotment
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Issuing Shares Example
Made the call and then received the money
Call 20,000 Ordinary Share Capital 20,000
Called up balance outstanding on partly paid shares
Cash 20,000 Call 20,000
Collected call on ordinary shares
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Issuing Shares ExampleOversubscription
Investors may apply for more shares than are available to be issues.
If there is an oversubscription management may: Refund the money or Apply it to later amounts payable; allotment and
or call. Assume Huang received applications for
12,000 shares (12,000 x $5)
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Issuing Shares Example
OrApplication 10,000
Allotment 10,000Apply excess application money to amountdue on allotment
Application 10,000Cash Trust 10,000
Refund excess application money
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Issuing Shares ExampleForfeiture
Investors who do not pay the allotment or call may forfeit their shares.
Assume the holder of 100 Huang shares did not pay the call
The “Call” account was originally debited $20,000
But only $19,800 cash was received
14 - 29Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Issuing Shares Example
Ordinary Share Capital (100 x $10) 300Call (100 x $2) 300Forfeited Share Account 700
Record forfeiture of 100 shares
To forfeit the shares
14 - 30Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Issuing Shares Example
Cash 950Forfeited Share Account 50
Ordinary Share Capital 1,000Reissued 100 forfeited shares
The forfeited shares were reissued for $9.50 each
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Issuing Preference share
Accounting for preference share follows the pattern illustrated for ordinary share.
Shareholders’ equity on the statement of financial position lists, ordinary share, preference share, and retained profit – in that order.
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Objective 3
Prepare the shareholders’equity section of a company’s statement of financial position.
14 - 33Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Contributed equity: 400 ordinary shares, fully paid 4,000 100 preference shares (70c per share annual dividend) fully paid 2,000Retained profits 3,000
Total equity 9,000
Review of Accountingfor Paid-up Capital
Shareholders’ Equity
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Review of Accountingfor Paid-up Capital
Contributed equity and retained profits represent the shareholders’ equity (ownership) in the assets of the company.
Contributed equity comes from the company’s shareholders who invested in the company.
Retained profits come from the company’s customers – but has become the shareholders’.
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Objective 4
Account for cash dividends.
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Dividend Dates
A company must declare a dividend before paying it.
The board of directors alone has the authority to declare a dividend.
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Dividend Dates
Declaration date
Date of record Payment date
Three relevant dates for dividends are:
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Cash Dividends Example
On April 1, the board declares a dividend of $1 per share payable June 15 to shareholders of record on May 15.
There are 60,000 shares outstanding.
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Cash Dividends Example
June 15Dividends Payable 60,000
Cash 60,000Paid a cash dividend
April 1Retained Profits 60,000
Dividends Payable 60,000Declared a cash dividend
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Cash Dividends Example
1,000 Preference shares $6 annual dividend per share
25,000 Ordinary shares
$50,000 dividends declared
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Cash Dividends Example
Preference dividend$6 × 1,000 = $6,000
Ordinary dividend $50,000 – $6,000 = $44,000
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Preference dividend$6 × 10,000 = $60,000
(The full $50,000 goes to preference shares)
Suppose there were 10,000 preference shares, $6 annual dividend per share
Ordinary shareholders receive nothing.
Cash Dividends Example
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Cumulative and Non-cumulativePreference Shares
If the preference is cumulative, the $10,000 shortage must be paid before any dividend is paid to ordinary shareholders.
If noncumulative, a passed dividend not paid or not fully paid is simply lost.
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Objective 5
Use different share valuesin decision-making.
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Share Values
The business community refers to different share values in addition to the original issue price.
– market value– liquidation value– book value
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Share Values Example
Book value preference =(Liquidation value + Dividends in arrears)
÷ Number of shares outstanding
Book value per share =Total shareholders’ equity ÷ Total shares outstanding
Book value ordinary =(Shareholders’ equity – Amount allocated to preference)
÷ Number of shares outstanding
14 - 47Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Share Values Example
Contributed Equity:Ordinary share, 10,000 shares, fully paid $300,000
Retained profits 100,000
Total shareholders’ equity $400,000
Book value per share: $400,000 ÷ 10,000 = $40
Shareholders’ Equity
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Share Values Example
Book value per share preference:($210,000 + $12,000) ÷ 2,000 = $111.00liquidation + cumulative ÷ number = book value dividends shares value
Book value per share ordinary: ($606,000 – 222,000) ÷ 10,000 = $38.40(total equity – preference ÷ number = book book value) shares value
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Objective 6
Evaluate a company’s returnon assets and return on
shareholders’ equity.
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Return on Assets
Rate of return on total assets =Earnings before (interest + tax)
÷ Average total assets
It is a measure of a company’s ability to generate profits from the use of its assets.
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Return on Equity
Rate of return on ordinary shareholders’ equity =(Net profit – Preference dividends)
÷ Average ordinary shareholders’ equity
It is a measure of the profits earnedfrom the ordinary shareholders’
investment in the company.
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Objective 7
Account for the income taxof a company.
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Accounting for Income Taxesby Company’s
Income tax expense =Profits before income tax
(from the statement of financial performance.) × Income tax rate
Income tax payable =Taxable income (from the tax return filed with the ATO)
× Income tax rate
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Accounting for Income Taxesby Company’s
Deferred tax liability is the difference between income tax expense and income tax payable for any one year.
Revenues and expenses may be reported in different periods for statements of financial performance and tax return purposes.
Alternative depreciation methods may be used for book and tax purposes.
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End of Chapter 14