Kế toán, kiểm toán - Chương 15: Equity

PREVIEW OF CHAPTERIntermediate AccountingIFRS 2nd EditionKieso, Weygandt, and Warfield 15Explain the accounting for and reporting of preference shares.Describe the policies used in distributing dividends.Identify the various forms of dividend distributions.Explain the accounting for share dividends and share splits.Indicate how to present and analyze equity.After studying this chapter, you should be able to:Equity15LEARNING OBJECTIVESDiscuss the characteristics of the corporate form of organization.Identify the key components of equity.Explain the accounting procedures for issuing shares.Describe the accounting for treasury shares.Three primary forms of business organization.ProprietorshipPartnershipCorporationSpecial characteristics of the corporate form:Influence of corporate law.Use of the share system.Development of a variety of ownership interests.CORPORATE FORM OF ORGANIZATIONLO 1Corporate LawCorporation must submit articles of incorporation to the appropriate governmental agency for the country in which incorporation is desired.Governmental agency issues a corporation charter. Advantage to incorporate where laws favor the corporate form of business organization.CORPORATE FORM OF ORGANIZATIONLO 1Share SystemIn the absence of restrictive provisions, each share carries the following rights:To share proportionately in profits and losses.To share proportionately in management (the right to vote for directors).To share proportionately in assets upon liquidation.To share proportionately in any new issues of shares of the same class—called the preemptive right.CORPORATE FORM OF ORGANIZATIONLO 1Variety of Ownership InterestsOrdinary shares represent the residual corporate interest.Bears ultimate risks of loss.Receives the benefits of success.Not guaranteed dividends nor assets upon dissolution.Preference shares are created by contract, when shareholders’ sacrifice certain rights in return for other rights or privileges, usually dividend preference. CORPORATE FORM OF ORGANIZATIONLO 1Explain the accounting for and reporting of preference shares.Describe the policies used in distributing dividends.Identify the various forms of dividend distributions.Explain the accounting for share dividends and share splits.Indicate how to present and analyze equity.After studying this chapter, you should be able to:Equity15LEARNING OBJECTIVESDiscuss the characteristics of the corporate form of organization.Identify the key components of equity.Explain the accounting procedures for issuing shares.Describe the accounting for treasury shares.Equity is often subclassified on the statement of financial position into the following categoriesShare capital.Share premium.Retained earnings.Accumulated other comprehensive income.Treasury shares.Non-controlling interest (minority interest).EQUITYLO 2Contributed CapitalRetained EarningsAccountShare PremiumAccountLess:Treasury SharesAccountTwo Primary Sources of EquityOrdinary SharesAccountPreference SharesAccountAssets – Liabilities = EquityEQUITYLO 2Explain the accounting for and reporting of preference shares.Describe the policies used in distributing dividends.Identify the various forms of dividend distributions.Explain the accounting for share dividends and share splits.Indicate how to present and analyze equity.After studying this chapter, you should be able to:Equity15LEARNING OBJECTIVESDiscuss the characteristics of the corporate form of organization.Identify the key components of equity.Explain the accounting procedures for issuing shares.Describe the accounting for treasury shares.Issuance of SharesAccounting problems involved in the issuance of shares: Par value shares.No-par shares.Shares issued in combination with other securities.Shares issued in non-cash transactions.Costs of issuing shares.EQUITYLO 3Par Value SharesLow par values help companies avoid a contingent liability. Corporations maintain accounts for:Preference Shares or Ordinary Shares.Share Premium.EQUITYLO 3No-Par SharesReasons for issuance:Avoids contingent liability.Avoids confusion over recording par value versus fair market value.A major disadvantage of no-par shares is that some countries levy a high tax on these issues. In addition, in some countries the total issue price for no-par shares may be considered legal capital, which could reduce the flexibility in paying dividends. EQUITYLO 3Illustration: Video Electronics Corporation is organized with 10,000 ordinary shares authorized without par value. If Video Electronics issues 500 shares for cash at €10 per share, it makes the following entry.Cash 5,000 Share Capital—Ordinary 5,000EQUITYVideo Electronics issues another 500 shares for €11 per share.Cash 5,500 Share Capital—Ordinary 5,500LO 3Illustration: Some countries require that no-par shares have a stated value. If a company issued 1,000 of the shares with a €5 stated value at €15 per share for cash, it makes the following entry.Cash 15,000 Share Capital—Ordinary 5,000 Share Premium—Ordinary 10,000EQUITYLO 3Shares Issued with Other SecuritiesTwo methods of allocating proceeds:Proportional method.Incremental method.EQUITYLO 3Proportional MethodBE15-4: Ravonette Corporation issued 300 shares of $10 par value ordinary shares and 100 shares of $50 par value preference shares for a lump sum of $13,500. The ordinary shares have a market value of $20 per share, and the preference shares have a market value of $90 per share. EQUITYLO 3Cash 13,500 Share Capital—Preference (100 X $50) 5,000 Share Premium—Preference 3,100 Share Capital—Ordinary (300 X $10) 3,000 Share Premium—Ordinary 2,400Journal entry (Proportional):EQUITYBE15-4: Ravonette Corporation issued 300 shares of $10 par value ordinary shares and 100 shares of $50 par value preference shares for a lump sum of $13,500. The ordinary shares have a market value of $20 per share, and the preference shares have a market value of $90 per share. LO 3BE15-4 (Variation): Ravonette Corporation issued 300 shares of $10 par value ordinary shares and 100 shares of $50 par value preference shares for a lump sum of $13,500. The ordinary shares have a market value of $20 per share, and the value of preference shares are unknown. Incremental MethodEQUITYLO 3Journal entry (Incremental):EQUITYBE15-4 (Variation): Ravonette Corporation issued 300 shares of $10 par value ordinary shares and 100 shares of $50 par value preference shares for a lump sum of $13,500. The ordinary shares have a market value of $20 per share, and the value of preference shares are unknown. Cash 13,500 Share Capital—Preference (100 X $50) 5,000 Share Premium—Preference 2,500 Share Capital—Ordinary (300 X $10) 3,000 Share Premium—Ordinary 3,000LO 3Shares Issued in Noncash TransactionsThe general rule: Companies should record shares issued for services or property other than cash at the fair value of the goods or services received. If the fair value of the goods or services cannot be measured reliably, use the fair value of the shares issued.EQUITYLO 3Illustration: The following series of transactions illustrates the procedure for recording the issuance of 10,000 shares of €10 par value ordinary shares for a patent for Marlowe Company, in various circumstances. 1. Marlowe cannot readily determine the fair value of the patent, but it knows the fair value of the shares is €140,000.Patent 140,000 Share Capital—Ordinary 100,000 Share Premium—Ordinary 40,000EQUITYLO 32. Marlowe cannot readily determine the fair value of the shares, but it determines the fair value of the patent is €150,000.Patent 150,000 Share Capital—Ordinary 100,000 Share Premium—Ordinary 50,000EQUITYLO 33. Marlowe cannot readily determine the fair value of the shares nor the fair value of the patent. An independent consultant values the patent at €125,000 based on discounted expected cash flows.Patent 125,000 Share Capital—Ordinary 100,000 Share Premium—Ordinary 25,000EQUITYLO 3Costs of Issuing StockDirect costs incurred to sell shares, such as underwriting costs, accounting and legal fees, printing costs, andtaxes, should reduce the proceeds received from the sale of the shares.EQUITYLO 3Explain the accounting for and reporting of preference shares.Describe the policies used in distributing dividends.Identify the various forms of dividend distributions.Explain the accounting for share dividends and share splits.Indicate how to present and analyze equity.After studying this chapter, you should be able to:Equity15LEARNING OBJECTIVESDiscuss the characteristics of the corporate form of organization.Identify the key components of equity.Explain the accounting procedures for issuing shares.Describe the accounting for treasury shares.Reacquisition of SharesCorporations purchase their outstanding shares to:Provide tax-efficient distributions of excess cash to shareholders.Increase earnings per share and return on equity.Provide shares for employee compensation contracts or to meet potential merger needs.Thwart takeover attempts or to reduce the number of shareholders.Make a market in the shares.EQUITYLO 4Purchase of Treasury SharesTwo acceptable methods: Cost method (more widely used). Par or Stated value method. Treasury shares reduce equity.EQUITYLO 4Illustration: Pacific Company issued 100,000 shares of $1 par value ordinary shares at a price of $10 per share. In addition, it has retained earnings of $300,000. EQUITYILLUSTRATION 15-4Equity with No TreasurySharesLO 4Illustration: Pacific Company issued 100,000 shares of $1 par value ordinary shares at a price of $10 per share. In addition, it has retained earnings of $300,000. On January 20, 2015, Pacific acquires 10,000 of its shares at $11 per share. Pacific records the reacquisition as follows.Treasury Shares 110,000 Cash 110,000EQUITYLO 4Illustration: The equity section for Pacific after purchase of the treasury shares.EQUITYILLUSTRATION 15-5Equity with TreasurySharesLO 4Sale of Treasury SharesAbove Cost Below CostBoth increase total assets and equity. EQUITYLO 4Sale of Treasury Shares above Cost. Pacific acquired 10,000 treasury shares at $11 per share. It now sells 1,000 shares at $15 per share on March 10. Pacific records the entry as follows.Cash 15,000 Treasury Shares 11,000 Share Premium—Treasury 4,000EQUITYLO 4Sale of Treasury Shares below Cost. Pacific sells an additional 1,000 treasury shares on March 21 at $8 per share, it records the sale as follows.Cash 8,000Share Premium—Treasury 3,000 Treasury Shares 11,000EQUITYLO 4Illustration: Assume that Pacific sells an additional 1,000 shares at $8 per share on April 10.Cash 8,000Share Premium—Treasury 1,000Retained Earnings 2,000 Treasury Shares 11,000EQUITYILLUSTRATION 15-6Treasury ShareTransactions in SharePremium—TreasuryAccountLO 4Retiring Treasury SharesDecision results in cancellation of the treasury shares and a reduction in the number of shares of issued shares.Retired treasury shares have the status of authorized and unissued shares.EQUITYLO 4Describe the policies used in distributing dividends.Identify the various forms of dividend distributions.Explain the accounting for share dividends and share splits.Indicate how to present and analyze equity.After studying this chapter, you should be able to:Equity15LEARNING OBJECTIVESDiscuss the characteristics of the corporate form of organization.Identify the key components of equity.Explain the accounting procedures for issuing shares.Describe the accounting for treasury shares.Explain the accounting for and reporting of preference shares.Features often associated with preference shares.Preference as to dividends.Preference as to assets in the event of liquidation.Convertible into ordinary shares.Callable at the option of the corporation.Non-voting.PREFERENCE SHARESLO 5CumulativeParticipatingConvertibleCallableRedeemableFeatures of Preference SharesA corporation may attach whatever preferences or restrictions, as long as it does not violate itscountry’s incorporation law.The accounting for preference shares at issuance is similar to that for ordinary shares.PREFERENCE SHARESLO 5Illustration: Bishop Co. issues 10,000 shares of £10 par value preference shares for £12 cash per share. Bishop records the issuance as follows:Cash 120,000 Share Capital—Preference 100,000 Share Premium—Preference 20,000PREFERENCE SHARESLO 5Describe the policies used in distributing dividends.Identify the various forms of dividend distributions.Explain the accounting for share dividends and share splits.Indicate how to present and analyze equity.After studying this chapter, you should be able to:Equity15LEARNING OBJECTIVESDiscuss the characteristics of the corporate form of organization.Identify the key components of equity.Explain the accounting procedures for issuing shares.Describe the accounting for treasury shares.Explain the accounting for and reporting of preference shares.DIVIDEND POLICYFew companies pay dividends in amounts equal to their legally available retained earnings. Why?Maintain agreements with creditors.Meet corporation requirements.To finance growth or expansion.To smooth out dividend payments.To build up a cushion against possible losses.LO 6DIVIDEND POLICYBefore declaring a dividend, management must consider availability of funds to pay the dividend. Should not pay a dividend unless both the present and future financial position warrant the distribution.Financial Condition and Dividend DistributionsLO 6Describe the policies used in distributing dividends.Identify the various forms of dividend distributions.Explain the accounting for share dividends and share splits.Indicate how to present and analyze equity.After studying this chapter, you should be able to:Equity15LEARNING OBJECTIVESDiscuss the characteristics of the corporate form of organization.Identify the key components of equity.Explain the accounting procedures for issuing shares.Describe the accounting for treasury shares.Explain the accounting for and reporting of preference shares.Cash dividends.Property dividends.All dividends, except for share dividends, reduce the total equity in the corporation.Liquidating dividends.Share dividends.Types of DividendsDIVIDEND POLICYLO 7Cash DividendsBoard of directors vote on the declaration of cash dividends.A declared cash dividend is a liability.Three dates:Date of declarationDate of recordDate of paymentCompanies do not declare or pay cash dividends on treasury shares.DIVIDEND POLICYLO 7Illustration: Roadway Freight Corp. on June 10 declared a cash dividend of 50 cents a share on 1.8 million shares payable July 16 to all shareholders of record June 24.At date of declaration (June 10) Retained Earnings 900,000 Dividends Payable 900,000At date of record (June 24) No entryAt date of payment (July 16) Dividends Payable 900,000 Cash 900,000DIVIDEND POLICYLO 7Dividends payable in assets other than cash.Restate at fair value the property it will distribute, recognizing any gain or loss.DIVIDEND POLICYProperty DividendsLO 7Illustration: Tsen, Inc. transferred to shareholders some of its investments (held-for-trading) in securities costing HK$1,250,000 by declaring a property dividend on December 28, 2014, to be distributed on January 30, 2015, to shareholders of record on January 15, 2015. At the date of declaration the securities have a fair value of HK$2,000,000. Tsen makes the following entries.At date of declaration (December 28, 2014)Equity Investments 750,000 Unrealized Holding Gain or Loss—Income 750,000Retained Earnings 2,000,000 Property Dividends Payable 2,000,000DIVIDEND POLICYLO 7At date of distribution (January 30, 2015)Property Dividends Payable 2,000,000 Equity Investments 2,000,000DIVIDEND POLICYIllustration: Tsen, Inc. transferred to shareholders some of its investments (held-for-trading) in securities costing HK$1,250,000 by declaring a property dividend on December 28, 2014, to be distributed on January 30, 2015, to shareholders of record on January 15, 2015. At the date of declaration the securities have a fair value of HK$2,000,000. Tsen makes the following entries.LO 7Any dividend not based on earnings reduces amounts paid-in by shareholders.DIVIDEND POLICYLiquidating DividendsLO 7Illustration: McChesney Mines Inc. issued a “dividend” to its ordinary shareholders of £1,200,000. The cash dividend announcement noted that shareholders should consider £900,000 as income and the remainder a return of capital. McChesney Mines records the dividend as follows.Date of declaration Retained Earnings 900,000 Share Premium—Ordinary 300,000 Dividends Payable 1,200,000DIVIDEND POLICYLO 7Date of payment Dividends Payable 1,200,000 Cash 1,200,000DIVIDEND POLICYIllustration: McChesney Mines Inc. issued a “dividend” to its ordinary shareholders of £1,200,000. The cash dividend announcement noted that shareholders should consider £900,000 as income and the remainder a return of capital. McChesney Mines records the dividend as follows.LO 7Describe the policies used in distributing dividends.Identify the various forms of dividend distributions.Explain the accounting for share dividends and share splits.Indicate how to present and analyze equity.After studying this chapter, you should be able to:Equity15LEARNING OBJECTIVESDiscuss the characteristics of the corporate form of organization.Identify the key components of equity.Explain the accounting procedures for issuing shares.Describe the accounting for treasury shares.Explain the accounting for and reporting of preference shares.Issuance by a corporation of its own shares to shareholders on a pro rata basis, without receiving any consideration.Par value, not the fair value, is used to record the share dividend. Share dividend does not affect any asset or liability. Journal entry reflects a reclassification of equity. Ordinary share dividend distributable reported in the equity section as an addition to share capital—ordinary.DIVIDEND POLICYShare DividendsLO 8Illustration: Vine Corporation has outstanding 1,000 shares of £1 par value ordinary shares and retained earnings of £50,000. If Vine declares a 10 percent share dividend, it issues 100 additional shares to current shareholders. If the fair value of the shares at the time of the share dividend is £8 per share, the entry is:Date of declarationRetained Earnings 10,000 Ordinary Share Dividend Distributable 10,000DIVIDEND POLICYLO 8Date of distributionOrdinary Share Dividend Distributable 10,000 Share Capital—Ordinary 10,000DIVIDEND POLICYLO 8Illustration: Vine Corporation has outstanding 1,000 shares of £1 par value ordinary shares and retained earnings of £50,000. If Vine declares a 10 percent share dividend, it issues 100 additional shares to current shareholders. If the fair value of the shares at the time of the share dividend is £8 per share, the entry is:To reduce the market value of shares.No entry recorded for a share split.Decrease par value and increased number of shares.Share SplitsDIVIDEND POLICYILLUSTRATION 15-13Effects of a Share SplitLO 8Share Split and Share Dividend DifferentiatedA share split differs from a share dividend. How? A share split increases the number of shares outstanding and decreases the par or stated value per share. A share dividend, increases the number of shares outstanding.does not decrease the par value.increases the total par value of outstanding shares.DIVIDEND POLICYLO 8Describe the policies used in distributing dividends.Identify the various forms of dividend distributions.Explain the accounting for share dividends and share splits.Indicate how to present and analyze equity.After studying this chapter, you should be able to:Equity15LEARNING OBJECTIVESDiscuss the characteristics of the corporate form of organization.Identify the key components of equity.Explain the accounting procedures for issuing shares.Describe the accounting for treasury shares.Explain the accounting for and reporting of preference shares.PRESENTATION AND ANALYSISPresentation of EquityILLUSTRATION 15-16Comprehensive EquityPresentationLO 9Presentation of Statement of Changes in EquityPRESENTATION AND ANALYSISILLUSTRATION 15-17Statement of Changesin EquityLO 9Illustration: Gerber’s Inc. had net income of $360,000, declared and paid preference dividends of $54,000, and average ordinary shareholders’ equity of $2,550,000.ILLUSTRATION 15-18AnalysisRatio shows how many dollars of net income the company earned for each dollar invested by the owners.PRESENTATION AND ANALYSISLO 9Illustration: Troy Co. has cash dividends of €100,000 and net income of €500,000, and no preference shares outstanding.Illustration 15-15PRESENTATION AND ANALYSISILLUSTRATION 15-19LO 9Illustration: Chen Corporation’s ordinary shareholders’ equity is HK$1,000,000 and it has 100,000 ordinary shares outstanding.ILLUSTRATION 15-20Amount each share would receive if the company were liquidated on the basis of amounts reported on the statement of financial position.PRESENTATION AND ANALYSISLO 9EQUITYThe accounting for transactions related to equity, such as issuance of shares, purchase of treasury shares, and declaration and payment of dividends, are similar under both IFRS and U.S. GAAP. Major differences relate to terminology used and presentation of equity information.GLOBAL ACCOUNTING INSIGHTSRelevant FactsFollowing are the key similarities and differences between U.S. GAAP and IFRS related to equity.SimilaritiesThe accounting for the issuance of shares and purchase of treasury shares are similar under both U.S. GAAP and IFRS. The accounting for declaration and payment of dividends and the accounting for share splits are similar under both U.S. GAAP and IFRS.GLOBAL ACCOUNTING INSIGHTSRelevant FactsDifferencesU.S. GAAP requires that small share dividends (referred to as stock dividends) should be recorded by transferring an amount equal to the fair value of the shares issued from retained earnings to share capital accounts. IFRS is silent on the accounting for share dividends. Major differences relate to terminology used, introduction of concepts such as revaluation surplus, and presentation of equity information. In the United States and the United Kingdom, many companies rely on substantial investments from private investors. Other countries have different investor groups. For example, in Germany, financial institutions such as banks are not only the major creditors but often are the largest shareholders as well.GLOBAL ACCOUNTING INSIGHTSRelevant FactsDifferencesThe accounting for treasury share retirements differs between U.S. GAAP and IFRS. Under U.S. GAAP, a company has three options: (1) charge the excess of the cost of treasury shares over par value to retained earnings, (2) allocate the difference between paid-in capital and retained earnings, or (3) charge the entire amount to paid-in capital. Under IFRS, the excess may have to be charged to paid-in capital, depending on the original transaction related to the issuance of the shares. The statement of changes in equity is usually referred to as the statement of stockholders’ equity (or shareholders’ equity) under U.S. GAAP.GLOBAL ACCOUNTING INSIGHTSRelevant FactsDifferencesBoth U.S. GAAP and IFRS use the term retained earnings. However, U.S. GAAP uses the account Accumulated Other Comprehensive Income (Loss). Use of this account is gaining prominence within the IFRS literature, which traditionally has relied on the term “reserve” as a dumping ground for other types of equity transactions, such as other comprehensive income items as well as various types of unusual transactions related to convertible debt and share option contracts. The term surplus is generally not used in U.S. GAAP, as the standards do not allow revaluation accounting. Under IFRS, it is common to report “revaluation surplus” related to increases or decreases in items such as property, plant, and equipment; mineral resources; and intangible assets.GLOBAL ACCOUNTING INSIGHTSOn the HorizonAs indicated in earlier discussions, the IASB and the FASB have completed some work on a project related to financial statement presentation. An important part of this study is to determine whether certain line items, subtotals, and totals should be clearly defined and required to be displayed in the financial statements. For example, it is likely that the statement of changes in equity and its presentation will be examined closely. In addition, the options of how to present other comprehensive income under U.S. GAAP will change in any converged standard.GLOBAL ACCOUNTING INSIGHTSDividend PreferencesIllustration: In 2015, Mason Company is to distribute €50,000 as cash dividends, its outstanding ordinary shares have a par value of €400,000, and its 6 percent preference shares have a par value of €100,000.1. If the preference shares are noncumulative and nonparticipating:LO 10 Explain the different types of preference share dividends and their effect on book value per share.APPENDIX 15ADIVIDEND PREFERENCES AND BOOK VALUE PER SHAREILLUSTRATION 15A-1Dividend Distribution, Non-Cumulative and Non-Participating PreferenceIllustration: In 2015, Mason Company is to distribute €50,000 as cash dividends, its outstanding ordinary shares have a par value of €400,000, and its 6 percent preference shares have a par value of €100,000.If the preference shares are cumulative and non-participating, and Mason Company did not pay dividends on the preference shares in the preceding two years:ILLUSTRATION 15A-2DIVIDEND PREFERENCESLO 10If the preference shares is noncumulative and is fully participating:ILLUSTRATION 15A-3DIVIDEND PREFERENCESLO 104. If the preference shares are cumulative and fully participating, and Mason Company did not pay dividends on the preference shares in the preceding two years:ILLUSTRATION 15A-4DIVIDEND PREFERENCESIllustration: In 2015, Mason Company is to distribute €50,000 as cash dividends, its outstanding ordinary shares have a par value of €400,000, and its 6 percent preference shares have a par value of €100,000.LO 10Book value per share is computed as net assets divided by outstanding shares at the end of the year. The computation becomes more complicated if a company has preference shares.BOOK VALUE PER SHAREILLUSTRATION 15A-5Computation of Book Value per Share—No Dividends in ArrearsLO 10Assume that the same facts exist except that the 5 percent preference share are cumulative, participating up to 8 percent, and that dividends for three years before the current year are in arrears.ILLUSTRATION 15A-6Computation of Book Value per Share—with Dividends in Arrears, ParticipatingLO 10BOOK VALUE PER SHARECopyright © 2015 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. 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