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
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C1
CORPORATE FORM OF ORGANIZATION
An entity
created by law
Existence is
separate from
owners
Has rights and
privileges
Privately Held
Ownership
can be
Publicly Held
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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
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CORPORATE ORGANIZATION AND
MANAGEMENT
Shareholders
Board of Directors
President, Vice-President,
and Other Officers
Employees of the Corporation
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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
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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.
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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.
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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.
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ISSUING PAR VALUE SHARES AT PAR
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.
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P1
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.
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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.
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P1
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.
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P1
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.
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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.
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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.
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ACCOUNTING FOR CASH DIVIDENDS
Three important dates
Date of Declaration
Date of Record
Date of Payment
Record liability
for dividend.
No entry
required.
Record payment of
cash to shareholders.
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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.
Date of Declaration
Record liability
for dividend.
Jan. 19 Retained Earnings
Ordinary Dividend Payable
Dr
10,000
Cr
10,000
To record the declaration of $1 per ordinary share cash dividend.
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P2
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
Dr
10,000
Cr
10,000
To record the payment of $1 per ordinary share cash dividend.
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P2
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.
Capitalization: Transferring a portion of equity from Retained
Earnings to Share Capital.
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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
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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
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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
Share Capital-Preference, 9%, $100 par value; 1,000
shares authorized, issued and outstanding
Total Share Capital
$
200,000
$
100,000
300,000
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PREFERENCE SHARES
If Preference Shares Are Noncumulative:
Year 2014: No dividends paid.
Year 2015:
1. Pay 2015 preference dividend.
2. Remainder goes to ordinary.
Preference Ordinary
$
$
-
If Preference Share Are Cumulative:
Year 2014: No dividends paid.
Year 2015:
1. Pay 2014 preference dividend in arrears.
2. Pay 2015 preference dividend.
3. Remainder goes to ordinary.
Totals
Preference Ordinary
$
$
-
$
9,000
$
$
$
33,000
9,000
9,000
18,000
$
$
24,000
24,000
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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
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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.
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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
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.
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P3
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
Cr
400
To record the receipt of $4 per share for 100 treasury shares
for $4 per share.
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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
Cr
2,000
2,000
To record the receipt of $8 per share for 500 treasury shares costing $4 per share.
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SELLING TREASURY SHARES
BELOW COST
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On August 27, Whitt sold an additional 400
treasury shares for $1.50 per share.
Aug. 27
Dr
600
Cash
Share Premium-Treasury Shares
Treasury Shares-Ordinary
Cr
1,000
1,600
To record the receipt of $1.50 per share for 400 treasury shares costing $4 per share.
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C3
STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
Statement of Profit or
Loss and Other
Comprehensive Income
All non-owner
changes in equity +
other comprehensive
income
Can be 2 statements:
Statement of Profit or
Loss + Statement of
Comprehensive
Income
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STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
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STATEMENT OF CHANGES IN EQUITY
Statement of
Changes in
Equity (SCE)
All owner changes
in equity,
including changes
in accounting
policies
Dividends
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STATEMENT OF CHANGES IN EQUITY
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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.
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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
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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
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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
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BOOK VALUE PER SHARE–ORDINARY
Reflects the amount of shareholders’ equity
applicable to ordinary shares on a per share basis.
Shareholders’ equity applicable
Book value per
to ordinary shares
=
ordinary share
Number of ordinary
shares outstanding
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END OF CHAPTER 13