Kế toán, kiểm toán - Chương học 15: Equity

Volume 2 H A P T E R 15EQUITYIntermediate AccountingIFRS EditionKieso, Weygandt, and Warfield Discuss 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.Describe the policies used in distributing dividends.Identify the various forms of dividend distributions.Explain the accounting for small and large share dividends, and for share splits.Indicate how to present and analyze equity.Learning ObjectivesIssuance of sharesReacquisition of sharesThe Corporate FormEquityPreference SharesDividend PolicyPresentation and AnalysisCorporate lawShare systemVariety of ownership interestsFeaturesAccounting for and reporting preference sharesFinancial condition and dividend distributionsTypes of dividendsShares splitDisclosure of restrictionsPresentationAnalysisEquityThree primary forms of business organizationThe Corporate Form of OrganizationProprietorshipPartnershipCorporationLO 1 Discuss the characteristics of the corporate form of organization.Special characteristics of the corporate form:Influence of state corporate law.Use of the share system.Development of a variety of ownership interests.State Corporate LawThe Corporate Form of OrganizationLO 1 Discuss the characteristics of the corporate form of organization.Corporation must submit articles of incorporation to the appropriate governmental agency for the country in which incorporation is desired.General Motors - incorporated in Delaware.U.S. Steel - incorporated in New Jersey.Accounting for equity follows the provisions of the business incorporation act of each government. Share SystemThe Corporate Form of OrganizationLO 1 Discuss the characteristics of the corporate form of organization.In 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.Variety of Ownership InterestsThe Corporate Form of OrganizationLO 1 Discuss the characteristics of the corporate form of organization.Ordinary 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. Contributed CapitalRetained EarningsAccountShare PremiumAccountLess:Treasury SharesAccountTwo Primary Sources of EquityEquityLO 2 Identify the key components of equity.Ordinary SharesAccountPreference SharesAccountAssets – Liabilities = EquityIssuance of SharesAccounting problems: Par value shares.No-par shares.Shares issued in combination with other securities.Shares issued in non-cash transactions.Costs of issuing shares.LO 3 Explain the accounting procedures for issuing shares.EquityShares authorized - Shares sold - Shares issuedPar Value SharesLow par values help companies avoid a contingent liability. Corporations maintain accounts for:Preference Shares or Ordinary Shares.Share PremiumLO 3 Explain the accounting procedures for issuing shares.EquityNo-Par SharesReasons for issuance:Avoids contingent liability.Avoids confusion over recording par value versus fair market value.LO 3 Explain the accounting procedures for issuing shares.EquityA 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. Illustration: 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.LO 3 Explain the accounting procedures for issuing shares.EquityCash 5,000 Share Capital—Ordinary 5,000Illustration: 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.LO 3 Explain the accounting procedures for issuing shares.EquityCash 15,000 Share Capital—Ordinary 5,000 Share Premium—Ordinary 10,000Shares Issued with Other SecuritiesTwo methods of allocating proceeds:Proportional method.Incremental method.LO 3 Explain the accounting procedures for issuing shares.EquityLO 3EquityProportional 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. LO 3 Explain the accounting procedures for issuing shares.EquityCash 13,500 Preference shares (100 x $50) 5,000Journal entry (Proportional): Share premium - preference 3,100 Ordinary shares (300 x $10) 3,000 Share premium - ordinary 2,400BE15-4: 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. BE15-4 (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. LO 3 Explain the accounting procedures for issuing shares.EquityIncremental MethodLO 3 Explain the accounting procedures for issuing shares.EquityCash 13,500 Preference shares (100 x $50) 5,000Journal entry (Incremental): Share premium - preference 2,500 Ordinary shares (300 x $10) 3,000 Share premium - ordinary 3,000BE15-4 (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. Shares 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.LO 3 Explain the accounting procedures for issuing shares.EquityLO 3 Explain the accounting procedures for issuing shares.EquityIllustration: 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 40,000LO 3 Explain the accounting procedures for issuing shares.Equity2. 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 50,000LO 3 Explain the accounting procedures for issuing shares.Equity3. 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 25,000Costs 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.LO 3 Explain the accounting procedures for issuing shares.EquityReacquisition of SharesLO 4 Describe the accounting for treasury shares.Corporations 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.EquityPurchase of Treasury SharesTwo acceptable methods: Cost method (more widely used). Par or Stated value method. Treasury shares reduces equity.EquityLO 4 Describe the accounting for treasury shares.EquityIllustration: 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. LO 4 Describe the accounting for treasury shares.Illustration 15-3EquityIllustration: 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, 2011, Pacific acquires 10,000 of its shares at $11 per share. Pacific records the reacquisition as follows.LO 4 Describe the accounting for treasury shares.Treasury Shares 110,000 Cash 110,000EquityLO 4 Describe the accounting for treasury shares.Illustration 15-4Illustration: The equity section for Pacific after purchase of the treasury shares.Sale of Treasury SharesAbove Cost Below CostBoth increase total assets and equity. EquityLO 4 Describe the accounting for treasury shares.EquitySale 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.LO 4 Describe the accounting for treasury shares.Cash 15,000 Treasury Shares 11,000 Share Premium—Treasury 4,000EquitySale 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.LO 4 Describe the accounting for treasury shares.Cash 8,000Share Premium—Treasury 3,000 Treasury Shares 11,000EquityIllustration: Assume that Pacific sells an additional 1,000 shares at $8 per share on April 10.LO 4 Describe the accounting for treasury shares.Illustration 15-5Cash 8,000Share Premium—Treasury 1,000Retained Earnings 2,000 Treasury Shares 11,000Retiring Treasury SharesDecision results in cancellation of the treasury shares and a reduction in the number of shares of issued shares.EquityLO 4 Describe the accounting for treasury 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.LO 5 Explain the accounting for and reporting of preference shares.Preference SharesCumulativeParticipatingConvertibleCallableRedeemablePreference SharesFeatures 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.LO 5 Explain the accounting for and reporting of preference shares.Illustration: Bishop Co. issues 10,000 shares of £10 par value preference shares for £12 cash per share. Bishop records the issuance as follows:Preference SharesLO 5 Explain the accounting for and reporting of preference shares.Cash 120,000 Share Capital—Preference 100,000 Share Premium—Preference 20,000LO 6 Describe the policies used in distributing dividends.Dividend PolicyFew companies pay dividends in amounts equal to their legally available retained earnings. Why?Maintain agreements with creditors.Meet state incorporation requirements.To finance growth or expansion.To smooth out dividend payments.To build up a cushion against possible losses.Cash dividends.Property dividends.LO 7 Identify the various forms of dividend distributions.All dividends, except for share dividends, reduce the total equity in the corporation.Liquidating dividends.Share dividends.Types of DividendsDividend PolicyCash DividendsBoard of directors vote on the declaration of cash dividends.A declared cash dividend is a liability.LO 7 Identify the various forms of dividend distributions.Three dates:Date of declarationDate of recordDate of paymentCompanies do not declare or pay cash dividends on treasury shares.Dividend PolicyLO 7 Identify the various forms of dividend distributions.Illustration: 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 PolicyProperty DividendsDividends payable in assets other than cash.Restate at fair value the property it will distribute, recognizing any gain or loss.LO 7 Identify the various forms of dividend distributions.Dividend PolicyLO 7 Identify the various forms of dividend distributions.Illustration: Trendler, Inc. transferred to shareholders some of its investments (held-for-trading) in securities costing $1,250,000 by declaring a property dividend on December 28, 2010, to be distributed on January 30, 2011, to shareholders of record on January 15, 2011. At the date of declaration the securities have a fair value of $2,000,000. Trendler makes the following entries.At date of declaration (December 28, 2010)Equity Investments 750,000 Unrealized Holding Gain or Loss—Income 750,000Retained Earnings 2,000,000 Property Dividends Payable 2,000,000Dividend PolicyLO 7 Identify the various forms of dividend distributions.Illustration: Trendler, Inc. transferred to shareholders some of its investments (held-for-trading) in securities costing $1,250,000 by declaring a property dividend on December 28, 2010, to be distributed on January 30, 2011, to shareholders of record on January 15, 2011. At the date of declaration the securities have a fair value of $2,000,000. Trendler makes the following entries.At date of distribution (January 30, 2011)Dividend PolicyProperty Dividends Payable 2,000,000 Equity Investments 2,000,000Liquidating DividendsAny dividend not based on earnings reduces amounts paid-in by shareholders.LO 7 Identify the various forms of dividend distributions.Dividend PolicyLO 7 Identify the various forms of dividend distributions.Illustration: 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 7 Identify the various forms of dividend distributions.Illustration: 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 payment Dividends Payable 1,200,000 Cash 1,200,000Dividend PolicyShare DividendsIssuance by a company of its own shares to shareholders on a pro rata basis, without receiving any consideration.When share dividend is less than 20–25 percent of the ordinary shares outstanding, company transfers fair market value from retained earnings (small share dividend).LO 8 Explain the accounting for small and large share dividends, and for share splits.Dividend PolicyIllustration: Vine Corporation has outstanding 1,000 shares of £100 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 £130 per share, the entry is:Date of declarationRetained Earnings 13,000 Ordinary Share Dividend Distributable 10,000 Share Premium—Ordinary 3,000Dividend PolicyLO 8 Explain the accounting for small and large share dividends, and for share splits.Illustration: Vine Corporation has outstanding 1,000 shares of £100 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 £130 per share, the entry is:Date of distributionOrdinary Share Dividend Distributable 10,000 Share Capital—Ordinary 10,000Dividend PolicyLO 8 Explain the accounting for small and large share dividends, and for share splits.To reduce the market value of shares.No entry recorded for a share split.Decrease par value and increased number of shares.LO 8 Explain the accounting for small and large share dividends, and for share splits.Share SplitIllustration 15-9Dividend PolicyShare Split and Share Dividend DifferentiatedLO 8 Explain the accounting for small and large share dividends, and for share splits.Dividend PolicyLarge Share Dividend - 20–25 percent of the number of shares previously outstanding.Same effect on market price as a share split.Par value transferred from retained earnings to share capital.LO 8Illustration: Rockland Steel, Inc. declared a 30 percent share dividend on November 20, payable December 29 to shareholders of record December 12. At the date of declaration, 1,000,000 shares, par value $10, are outstanding and with a fair value of $200 per share. The entries are:Dividend PolicyLO 9 Indicate how to present and analyze equity.Illustration 15-12Presentation and Analysis of EquityPresentation of EquityIllustration 15-13LO 9 Indicate how to present and analyze equity.Presentation of Statement of Changes in EquityPresentation and Analysis of EquityIllustration: 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 15-14LO 9Presentation and Analysis of EquityAnalysisRatio shows how many dollars of net income the company earned for each dollar invested by the owners.Illustration: Troy Co. has cash dividends of $100,000 and net income of $500,000, and no preference shares outstanding.Illustration 15-15LO 9Presentation and Analysis of EquityIt is important to some investors that the payout be sufficiently high to provide a good yield on the share.Illustration: Troy Co. has cash dividends of $100,000 and net income of $500,000, and no preference shares outstanding.Illustration 15-16LO 9Presentation and Analysis of EquityAmount each share would receive if the company were liquidated on the basis of amounts reported on the balance sheet.Many countries have different investor groups than the United States. For example, in Germany, financial institutions like banks are not only the major creditors but often are the largest shareholders as well. In the United States and the United Kingdom, many companies rely on substantial investment from private investors. The accounting for treasury share retirements differs between IFRS and U.S. GAAP.The statement of changes in equity is usually referred to as the statement of stockholders’ equity (or shareholders’ equity) under U.S. GAAP.Both IFRS and U.S. GAAP use the term retained earnings. However, IFRS relies 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. U.S. GAAP relies on the account Accumulated Other Comprehensive Income (Loss). 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. The term surplus is generally not used in U.S. GAAP. Dividend PreferencesIllustration: In 2011, 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:Illustration 15A-1LO 10 Explain the different types of preference share dividends and their effect on book value per share.Illustration: In 2011, 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-2LO 10 Explain the different types of preference share dividends and their effect on book value per share.If the preference shares is noncumulative and is fully participating:Illustration 15A-3LO 10Illustration: In 2011, 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.Illustration 15A-44. 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:LO 10 Explain the different types of preference share dividends and their effect on book value per share.Book Value Per ShareBook 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.Illustration 15A-5LO 10 Explain the different types of preference share dividends and their effect on book value per share.Assume 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-6LO 10Copyright © 2011 John Wiley & Sons, Inc. All rights reserved. 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