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 13 - 2 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 13 - 3 C1 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 C1 CORPORATE ORGANIZATION AND MANAGEMENT Shareholders Board of Directors President, Vice-President, and Other Officers Employees of the Corporation 13 - 5 C1 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 C1 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. 13 - 7 C1 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 P1 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. 13 - 9 P1 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. 13 - 10 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. 13 - 11 P1 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. 13 - 12 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. 13 - 13 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. 13 - 14 P1 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. 13 - 15 P2 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. 13 - 16 P2 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. 13 - 17 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. 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. 13 - 18 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. 13 - 19 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. 13 - 20 P2 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 - 21 C2 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 - 22 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 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 13 - 23 C2 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 13 - 24 C2 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 13 - 25 P3 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 - 26 P3 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. 13 - 27 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. 13 - 28 P3 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. 13 - 29 SELLING TREASURY SHARES BELOW COST P3 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. 13 - 30 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 13 - 31 C3 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME 13 - 32 C3 STATEMENT OF CHANGES IN EQUITY Statement of Changes in Equity (SCE) All owner changes in equity, including changes in accounting policies Dividends 13 - 33 C3 STATEMENT OF CHANGES IN EQUITY 13 - 34 C3 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. 13 - 35 A1 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 13 - 36 A2 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 13 - 37 A3 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 13 - 38 A4 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 13 - 39 END OF CHAPTER 13