WILEY

PREVIEW OF CHAPTER 11

IFRS EDITION
Financial Accounting
Prepared by IFRS 3rd Edition
Coby Harmon
University of California, Santa Barbara Weygandt ● Kimmel ● Kieso
Westmont College
11-1 11-2

CHAPTER Corporations: Organization, The Corporate Form of Organization

11 Share Transactions, Dividends,

and Retained Earnings
An entity separate and distinct
from its owners.
Learning Objective 1
Identify the major
characteristics of a
corporation.

LEARNING OBJECTIVES
Classified by Purpose Classified by Ownership
After studying this chapter, you should be able to:
1. Identify the major characteristics of a corporation.  Not-for-Profit  Publicly held
2. Record the issuance of ordinary shares.  For Profit  Privately held
3. Explain the accounting for treasury shares.
4. Differentiate preference shares from ordinary shares.
5. Prepare the entries for cash dividends and share dividends.
6. Identify the items reported in a retained earnings statement.
7. Prepare and analyze a comprehensive equity section.

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 Characteristics of a Corporation Characteristics of a Corporation

Characteristics that distinguish corporations from Characteristics that distinguish corporations from
proprietorships and partnerships. proprietorships and partnerships.
Corporation acts
 Separate Legal Existence  Separate Legal Existence under its own name
 Limited Liability of Shareholders  Limited Liability of Shareholders rather than in the
name of its
 Transferable Ownership Rights  Transferable Ownership Rights shareholders.
Advantages
 Ability to Acquire Capital  Ability to Acquire Capital
 Continuous Life  Continuous Life
 Corporate Management  Corporate Management
 Government Regulations Disadvantages  Government Regulations
 Additional Taxes  Additional Taxes

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Characteristics of a Corporation Characteristics of a Corporation

Characteristics that distinguish corporations from Characteristics that distinguish corporations from
proprietorships and partnerships. proprietorships and partnerships.
 Separate Legal Existence  Separate Legal Existence
 Limited Liability of Shareholders Limited to their  Limited Liability of Shareholders
investment. Shareholders may
 Transferable Ownership Rights  Transferable Ownership Rights
sell their shares.
 Ability to Acquire Capital  Ability to Acquire Capital
 Continuous Life  Continuous Life
 Corporate Management  Corporate Management
 Government Regulations  Government Regulations
 Additional Taxes  Additional Taxes

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 Characteristics of a Corporation Characteristics of a Corporation

Characteristics that distinguish corporations from Characteristics that distinguish corporations from
proprietorships and partnerships. proprietorships and partnerships.
 Separate Legal Existence  Separate Legal Existence
 Limited Liability of Shareholders  Limited Liability of Shareholders
 Transferable Ownership Rights Corporation can  Transferable Ownership Rights Continuance as a
 Ability to Acquire Capital obtain capital  Ability to Acquire Capital going concern is not
through the issuance affected by the
 Continuous Life of shares.  Continuous Life withdrawal, death, or
 Corporate Management  Corporate Management incapacity of a
shareholder,
 Government Regulations  Government Regulations
employee, or officer.
 Additional Taxes  Additional Taxes

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Characteristics of a Corporation Characteristics of a Corporation

Characteristics that distinguish corporations from Characteristics that distinguish corporations from
proprietorships and partnerships. proprietorships and partnerships.
 Separate Legal Existence  Separate Legal Existence
 Limited Liability of Shareholders  Limited Liability of Shareholders
 Transferable Ownership Rights Separation of  Transferable Ownership Rights
 Ability to Acquire Capital ownership and  Ability to Acquire Capital
management
 Continuous Life prevents owners  Continuous Life
Government
 Corporate Management from having an  Corporate Management regulations are
active role in designed to protect
 Government Regulations  Government Regulations
managing the the owners of the
 Additional Taxes company.  Additional Taxes corporation.

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 Characteristics of a Corporation Characteristics of a Corporation

Characteristics that distinguish corporations from Shareholders

Illustration 11-1
proprietorships and partnerships. Corporation organization chart

 Separate Legal Existence Chairman and

Board of
Directors
 Limited Liability of Shareholders
 Transferable Ownership Rights President and
Chief Executive
 Ability to Acquire Capital Corporations pay Officer

income taxes as a
 Continuous Life
separate legal entity General Vice President Vice President
Vice President Vice President
 Corporate Management and in addition, Counsel and
Secretary
Marketing
Finance/Chief
Financial Officer
Operations
Human
Resources
shareholders pay
 Government Regulations
taxes on cash
 Additional Taxes dividends. Treasurer Controller

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Forming a Corporation Ownership Rights of Shareholders

Initial Steps: Shareholders have the right to:

 File application with governmental agency in the 1. Vote in election of board of
jurisdiction in which incorporation is desired. directors and on actions that
 Government grants charter. require shareholder approval.
 Corporation develops by-laws.

Companies incorporate in a state or country whose laws are

2. Share the corporate earnings
favorable to the corporate form of business.
through receipt of dividends.
Corporations expense organization costs as incurred.
Illustration 11-3
Ownership rights of shareholders

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 Ownership Rights of Shareholders Ownership Rights of Shareholders

Shareholders have the right to: Illustration 11-3

Ownership rights of shareholders
Shareholders have the right to:

3. Keep the same percentage ownership when new 4. Share in assets upon liquidation in proportion to
shares are issued (preemptive right*). their holdings. This is called a residual claim.

* A number of companies have eliminated the preemptive right. Illustration 11-3

Ownership rights of shareholders

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Share Issue Considerations Share Issue Considerations

ISSUANCE OF SHARES MARKET PRICE OF SHARES

 Corporation can issue ordinary shares directly to investors  Shares of publicly held companies is traded on organized
or indirectly through an investment banking firm. exchanges.
 Factors in setting price for a new issue of shares:  Interaction between buyers and sellers determines the
1. Company’s anticipated future earnings. prices per share.

2. Expected dividend rate per share.  Prices tend to follow the trend of a company’s earnings and
3. Current financial position. dividends.

4. Current state of the economy.  Factors beyond a company’s control may cause day-to-day
fluctuations in market prices.
5. Current state of the securities market.

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 Corporate Capital Corporate Capital

Equity is identified by various names:

 stockholders’ equity,

 shareholders’ equity, or

 corporate capital.

The equity section of a corporation’s statement of financial

position consists of two parts: Illustration 11-5
Equity section
1. share capital and

2. retained earnings (earned capital).

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Corporate Capital Accounting for Treasury Shares

Learning Objective 3
Comparison of the equity accounts for a proprietorship, and Treasury shares are a corporation’s own Explain the accounting for
treasury shares.

a corporation. shares that it has reacquired from

shareholders but not retired.
Corporations purchase their outstanding shares to:
1. Reissue the shares to officers and employees under bonus
and share compensation plans.
2. Enhance the share’s market value.
3. Have additional shares available for use in the acquisition of
other companies.
Illustration 11-6
Comparison of equity accounts 4. Increase earnings per share.
5. Eliminate hostile shareholders by buying them out.
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 Accounting for Treasury Shares Illustration 11-8
Accounting for Treasury Shares
Equity section with no
treasury shares

Equity Section with Treasury Shares Illustration 11-9

Illustration: On February 1, 2017, Mead acquires 4,000 shares of its

stock at HK$80 per share.

Treasury Shares (4,000 x HK$80) 320,000 Both the number of shares issued (100,000), outstanding (96,000),
and the number of shares held as treasury (4,000) are disclosed.
Cash 320,000

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Accounting for Preference Shares Accounting for Preference Shares

Learning Objective 4
Typically, preference shareholders have Differentiate preference
shares from ordinary
DIVIDEND PREFERENCES
shares.
a priority as to
 Right to receive dividends before ordinary shareholders.
1. distributions of earnings (dividends) and
 Cumulative Dividend – preference shareholders must be
2. assets in the event of liquidation. paid both current-year dividends and any unpaid prior-year
dividends before ordinary shareholders receive dividends.

 No obligation exists until board of directors declares a

dividend.
Accounting for preference shares at issuance is similar to that for
ordinary shares.  Liquidation preference.

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 Accounting for Preference Shares Cash Dividends

LIQUIDATION PREFERENCES Three dates: Illustration 11-12

Key dividend dates

 Most preference shares have a preference on corporate

assets if the corporation fails.

 Provides security for the preference shareholder.

 Preference to assets may be for the par value of the

shares or for a specified liquidating value.

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Cash Dividends Cash Dividends

For a corporation to pay a cash dividend, it must have: ALLOCATING CASH DIVIDENDS BETWEEN
1. Retained earnings - Payment of cash dividends from PREFERENCE AND ORDINARY SHARES
retained earnings is legal in all jurisdictions.
Holders of cumulative preference shares must be paid any
2. Adequate cash. unpaid prior-year dividends before ordinary shareholders
receive dividends.
3. A declaration of dividends by the Board of Directors.

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 Share Dividends Share Dividends

Reasons why corporations issue share dividends:  Small share dividend (less than 20–25% of the
corporation’s issued shares, recorded at fair market
1. Satisfy shareholders’ dividend expectations without value) *
spending cash.
 Large share dividend (greater than 20–25% of issued
2. Increase marketability of the corporation’s shares. shares, recorded at par value)
3. Emphasize a portion of equity has been permanently
reinvested in the business.

* Accounting based on the assumption that a small share dividend

will have little effect on the market price of the outstanding shares.

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Share Splits

 Reduces the market value of shares.

 No entry recorded for a share split.

 Decrease par value and increase number of shares.

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