Lecture Principles of financial accouting - Chapter 13: Accounting for corporations

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., CPA
McGraw­Hill/Irwin

        Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved.


13 ­ 2

C 1

Corporate Form of Organization
An
An entity
entity
created
created by
by law
law
Existence
Existence is
is
separate

separate from
from
owners
owners
Has
Has rights
rights and
and
privileges
privileges

Ownership
can be

Privately Held

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


13 ­ 4

C 1

Corporate Organization and
Management
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.

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.
Classes of Shares
 Par Value
 No-Par Value

 Stated Value

Market price is the
amount that each
share will sell for in
the market.


13 ­ 8

P 1

Issuing Par Value Share
Par Value Share
On September 1, Matrix, Inc. issued 100,000
shares of $2 par value for $25 per share. Let’s
record this transaction.

Sept. 1

Dr
2,500,000

Cash
Share Capital-Ordinary, $2 par value
Share Premium-Ordinary
Issued 100,000 ordinary shares.

Cr
200,000

2,300,000


13 ­ 9

P 1

Issuing Par Value Shares


13 ­ 10

P 1

Issuing Shares for Noncash Assets
Par Value Shares
On September 1, Matrix, Inc. issued 100,000
shares of $2 par value for land valued at
$2,500,000. Let’s record this transaction.

Sept. 1

Dr
2,500,000

Land
Share Capital-Ordinary, $2 par value
Share Premium-Ordinary

Exchanged 100,000 ordinary shares for land.

Cr
200,000
2,300,000


13 ­ 11

P 2

Cash Dividends

Regular cash dividends provide a return to investors
and almost always affect the share’s market value.

Corporation

Dividends

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.

Shareholders
% of Corporations Paying Divends

100%

80%

75%

60%
40%

22%

20%
0%
Common

Preferred


13 ­ 12

P 2

Accounting for Cash Dividends

Three important dates
ds
n
e
id
Div

Date of Declaration

Date of Record

Date of Payment

Record liability
for dividend.

No entry
required.

Record payment of
cash to shareholders.


13 ­ 13

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.

D

ds
n

e
ivid

Jan. 19

Date of Declaration
Record liability
for dividend.
Retained Earnings
Ordinary Dividend Payable

Dr
10,000

Declared $1 per share cash dividend.

Cr
10,000


13 ­ 14

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.
Mar. 19

Ordinary Dividend Payable
Cash
Paid $1 per share cash dividend.

Dr
10,000

Cr
10,000


13 ­ 15

P 2

Share Dividends or Bonus Issue

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.

Capitalization: Transferring a portion of equity from retained
earnings to contributed capital.


13 ­ 16

P 2

Share Splits
A distribution of additional shares to shareholders
according to their percent ownership.
$10 par value

Ordinary Shares

Old
Shares

100 shares

$5 par value

New
Shares

Ordinary Shares
200 shares

13 ­ 17

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 ­ 18

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 Balance Sheet. The Board of Directors did not
declare or pay dividends in 2010. In 2011, the Board
declared and paid cash dividends of $42,000.


13 ­ 19

C2

preference shares

If Preference Shares Are Noncumulative:
Year 2010: No dividends paid.
Year 2011:
1. Pay 2011 preference dividend.
2. Remainder goes to ordinary.

Preference
$
-

If Preference Share Are Cumulative:

Year 2010: No dividends paid.
Year 2011:
1. Pay 2010 preference dividend in arrears.
2. Pay 2011 preference dividend.
3. Remainder goes to ordinary.
Totals

Preference
$
-

$

Ordinary
$
-

9,000
$

$
$

33,000

Ordinary
$
-

9,000

9,000
18,000

$
$

24,000
24,000


13 ­ 20

C2

Preference Shares
Participating

Dividends may exceed a
stated amount once
common shareholders
receive a dividend equal to
the preferred 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
common stock is too low


13 ­ 21

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 ­ 22

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.

May 8

Treasury Shares-Ordinary
Cash

Dr
8,000

Cr
8,000

Purchase 2,000 treasury shares
at $4 per share.

Treasury
Treasury shares
shares are
are shown
shown as
as aa reduction
reduction in
in total
total
shareholders
shareholders’’ equity
equity on

on the
the balance
balance sheet.
sheet.


13 ­ 23

P 3

Selling Treasury Shares at Cost
On June 30, Whitt sold 100 shares of
its treasury shares for $4 per share.

June 30

Dr
400

Cash
Treasury Shares-Ordinary
Sold 100 treasury shares
for $4 per share.

Cr
400


13 ­ 24

P 3

Selling Treasury Shares
Above Cost
On July 19, Whitt, Inc. sold an additional 500
treasury shares for $8 per share.

July 19

Cash
Treasury Shares-Ordinary
Share Premium-Treasury Shares

Dr
4,000

Sold 500 treasury shares for $8 per share.

Cr
2,000
2,000


13 ­ 25

Selling Treasury Shares
Below Cost

P 3

On August 27, Whitt sold an additional 400
treasury shares for $1.50 per share.

Aug. 27

Cash
Share Premium-Treasury Shares
Treasury Shares-Ordinary

Dr
600
1,000

Sold 500 treasury shares for $1.50 per share.

Cr

1,600