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Shareholders Equity
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1. Discuss the characteristics of thecorporate form of organization.
2. Explain the key components ofshareholders equity.
3. Explain the accounting procedures forissuing shares of share.
4. Explain the accounting for treasuryshare.
After studying this chapter, you shouldbe able to:
Shareholders Equity Accounting
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5. Explain the accounting for and reporting ofpreference share.
6. Describe the policies used in distributing
dividends.7. Identify the various forms of dividend
distributions.
8. Explain the accounting for small and largeshare dividends, and for share splits.
9. Indicate how shareholders equity ispresented and analyzed.
Shareholders Equity Accounting
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The shareholders have the right to:
share proportionately in profits and losses
share proportionately in management
share proportionately in corporate assets
upon liquidation
share proportionately in any new issues ofshare of the same class (preemptive right)
The Rights of Shareholders
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Normally three categories:
1. Capital stock
2. Share premium
3. Earned capital or surplus
The first two represent contributed
capital, whereas retained earnings isearned capital.
Components of Shareholders
Equity
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EQUITY
Earned capital(Ret. Earn).
Contributed capital
Less:T.shareat COST
Less: T.shareat PAR
Restricted Unrestritcted
Paid-in
capital
Additional
Paid-in
ordinary preference ordinary preference
Components of Equity
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Accounts must be maintained for:
Par value sharepreference share or ordinary share
paid-in capital in excess of par
discount on share (if present)
No par share
preference share or ordinary sharepaid-in capital in excess of par
Accounting for Share Issues
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Par value has no economic significance.
When par value share is issued for cash:Cash (proceeds)
ordinary share (# of Sh. X Par value)
Paid in Capital in Excess of Par (balance)
Many states permit no-par share.
When no-par share is issued for cash:Cash (proceeds)
ordinary share (proceeds)
Share Issuance
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Both ordinary and preference shares areissued for cash in a single transaction.
The two methods of allocation available are:
Proportional Method [relative fair market values] Incremental Method
When share is issued for services or propertyother than cash, the property or services are
recorded at either the fair market value of assets received or
the fair value of the non-cash consideration received,whichever is more clearly determinable
Share Issued in Lump-Sum Sales
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Outstanding share, purchased by the corporation,
is known as treasury share.
The reasons as to why corporations buy back their
outstanding share may include:1. to increase earnings per share and return on equity
2. to provide tax efficient distributions of excess cash
to shareholders
3. to provide share for employee share compensationcontracts
4. to thwart takeover attempts
5. to create or improve the market for the share
Treasury Share
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COST METHOD: Treasury share is recorded at purchase
COST
Treasury share is a contra-shareholdersaccount.
PAR VALUE METHOD:
Treasury share is recorded at PAR value It is presented as a deduction from capital
share
RecordingTreasury Share:Methods
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Debit treasury share for purchase cost,
and credit treasury share at cost if
shares reissued. The initial issue price of share does not
affect subsequent treasury share
transactions.
No gain or loss can be recognized when
treasury shares are re-issued.
Treasury share: Cost Method
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Given:
Issued: 1,000 ordinary shares; Par, P100;issued at P110.
Reacquired: 100 shares at P112 each. 10 shares were reissued at 112 (at cost).
10 shares were reissued at 130 (above cost).
10 shares were reissued at P98 (below cost).
10 shares reissued at P105 (below cost).
Show journal entries for these
transactions.
Cost Method: Example
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Issued: (par, P100);
1,000 sh. at P110.
Cash 110,000
Ordinary share 100,000
Additional PIC:
ordinary share 10,000
1
10 shares reissued
@ 112.Cash 1,120
Treasury share 1,120
3
Reacquired:
100 at P112.
Treasury share 11,200
Cash 11,200
2
Cost Method: Example
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10 shares reissued
at 130.
Cash 1,300
Treasury share 1,120
Additional PIC:
Treasury share 180
4
10 shares reissued
at P98.Cash 980
Additional PIC:
(T/share) 140Treasury share 1,120
5
Cost Method: Example
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Cash 1,050
Addl PIC (T/share) 40Retained earnings 30
Treasury share 1120
Reissued 10 treasury shares at P105 (cost = P112)6
Use Additional PIC (Treasury share) firstto absorb any shortfall. Then, use retained
earnings.
Cost Method: Example
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Treasury share is recorded at par when
bought or reissued.
Any shortfalls between the par value andthe reissue price of treasury share is borne:
first by Paid-In and then by Retained
Earnings
Par Value Method: Main Points
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Repurchase of share does NOT mean
retirement
Retired share becomes authorized/unissued
share
Active retirement is effected by application
to the State
Constructive retirement is effected by BoardResolution
Retirement of Treasury share
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Preference Share has certain preferences or
features not possessed by ordinary share.
These features are: preference as to dividends
preference as to assets in the event of liquidation
may be convertibility into ordinary share at the
option of the shareholders may be callable at the option of the issuer
absence of voting rights
Preference Share
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Cumulative Preference Shares
Participating Preference Share:
Fully Participating
Partially Participating
Convertible Preference Share
Callable Preference Share
Redeemable Preference Share
Preference Shares: Features
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Dividends come from present and past
earnings in majority of states.
Dividends come also from appreciationof assets in some states.
Dividends restrictions are based on
liquidity and solvency tests.
Legality of Dividends
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1. Cash dividends
2. Property dividends
3. Share dividends4. Liquidating dividends
Types of Dividends
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There are three important dates:
1. the declaration date (dividends are
declared and accrued)
2. the record date (list of shareholders towhom dividends are to be paid is finalized)
3. the payment date (dividends are paid toshareholders of record)
Cash Dividends: Important Dates
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DATE DECLARED
DATE OF RECORD
DATE OF PAYMENT
Retained Earnings
Dividends Payable
No Entry
Dividends PayableCash
Cash Dividends: Journal Entries
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Are payable in assets of company
Are non-reciprocal transfers between
corporation and shareholders Are equal to the fair market value of
assets distributed at time ofdeclaration [except in spin-offs and
reorganizations] Corporation recognizes gain/loss on
the distribution
Property Dividends
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Share dividends result in more shares beingissued as dividend (no cash flow is involved).
Small share dividends involve issues of less
than 20%25% of share. The accounting for small share dividends is
based on the fair market value of shareissued.
The accounting for large share dividends(more than 20%25%) is based on the parvalue of share issued.
share Dividends: Concept
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Par value of a share does
not change
Total number of sharesincreases
Total shareholders equity
does not change
The composition of equity
changes (less of retained
earnings; more of share)
share dividends require
journal entries
Par value of a share
decreases
Total number of sharesincreases
Total shareholders equity
does not change
The composition of equity
does not change (same
amounts of share and RE)
share splits do not require
journal entries
Share Dividends Share Splits
Share Dividends and Share Splits
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Typical format:
1. Balance at beginning of the period
2. Additions
3. Deductions
4. Balance at end of period
Statement of Shareholders Equity
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Thats all folks!!