Ch. 11 Corporate Form of Organization

Preview of Chapter 11
Financial Accounting
IFRS Second Edition
Weygandt Kimmel Kieso
11-1
The Corporate Form of Organization

An entity separate and distinct from its owners.
Classified by Purpose
11-2
Classified by Ownership
Not-for-Profit
Publicly held
For Profit
Privately held
LO 1 Identify the major characteristics of a corporation.
Characteristics of a Corporation
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-3
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Corporation acts
under its own name
rather than in the
name of its
shareholders.
11-4
Continuous Life
Additional Taxes
Limited to their
investment.
11-5
Continuous Life
Additional Taxes
Shareholders may
sell their share.
11-6
Continuous Life
Additional Taxes
Corporation can
obtain capital
through the issuance
of shares.
11-7
Continuous Life
Additional Taxes
Continuance as a
going concern is not
affected by the
withdrawal, death, or
incapacity of a
shareholder,
employee, or officer.
11-8
Continuous Life
Additional Taxes
Separation of
ownership and
management
prevents owners
from having an
active role in
managing the
company.
11-9
Continuous Life
Additional Taxes
Government
regulations are
designed to protect
the owners of the
corporation.
11-10
Continuous Life
Additional Taxes
Corporations pay
income taxes as a
separate legal entity
and in addition,
shareholders pay
taxes on cash
dividends.
Shareholders
Illustration 11-1
Corporation organization
chart
Chairman and
Board of
Directors
President and
Chief Executive
Officer
General
Counsel and
Secretary
Vice President
Finance/Chief
Financial Officer
Vice President
Marketing
Treasurer
11-11
Vice President
Operations
Vice President
Human
Resources
Controller
Ownership Rights of Shareholders

Shareholders have the right to:
Illustration 11-3
1. Vote in election of board of

directors and on actions that
require shareholder approval.
2. Share the corporate earnings

through receipt of dividends.
11-12

Illustration 11-3
3. Keep the same percentage ownership when new

shares are issued (preemptive right*).
* A number of companies have eliminated the preemptive right.

11-13

Illustration 11-3
4. Share in assets upon liquidation in proportion to

their holdings. This is called a residual claim.
11-14

Illustration 11-4
Class
Prenumbered
Class A
Class A
COMMON STOCK
COMMON STOCK
PAR VALUE
$1 PER SHARE
PAR VALUE
$1 PER SHARE
Name of corporation
Shareholders name
Share Certificate
Shares
Signature of corporate
official
11-15
LO 1
Share Issue Considerations

Authorized Shares
11-16
Charter indicates the amount of shares that a

corporation is authorized to sell.
Number of authorized shares is often reported in the

equity section.

Issuance of Shares
Corporation can issue ordinary shares directly to investors

or indirectly through an investment banking firm.
Factors in setting price for a new issue of shares:

1. Companys anticipated future earnings.
2. Expected dividend rate per share.
3. Current financial position.
4. Current state of the economy.
5. Current state of the securities market.
11-17

Market Price of Shares
11-18
Shares of publicly held companies is traded on organized

exchanges.
Interaction between buyers and sellers determines the

prices per share.
Prices tend to follow the trend of a companys earnings and

dividends.
Factors beyond a companys control may cause day-to-day

fluctuations in market prices.
At the end of its first year of operation, Doral Corporation has

750,000 of ordinary share and net income of 122,000. Prepare
(a) the closing entry for net income and (b) the equity section at
year-end.
(a)
Income summary
122,000
Retained earnings
(b)
Equity
Share capital-ordinary
Retained earnings
Total equity
11-19
122,000
750,000
122,000
872,000
Accounting for Share Transactions

Issuing Par Value Ordinary Shares for Cash
Illustration: Hydro-Slide, Inc. issues 1,000 shares of 1 par
value ordinary shares. Prepare Hydro-Slides journal entry if (a)
1,000 shares are issued for 1 per share, and (b) 1,000 shares
are issued for 5 per share.
a)
Cash
1,000
Share capitalordinary (1,000 x 1)

b)
11-20
Cash
1,000
5,000
Share capitalordinary (1,000 x 1)
1,000
Share premiumordinary
4,000
LO 2 Record the issuance of ordinary shares.
Accounting for Share Transactions

Illustration 11-7
11-21
LO 2 Record the issuance of ordinary shares.
Accounting for Treasury Shares

Treasury stock - corporations own shares that it has
reacquired from shareholders, but not retired.
Corporations purchase their outstanding shares to:
1. Enhance the shares market value.
2. Have additional shares available for use in the acquisition of
other companies.
3. Increase earnings per share.
4. Eliminate hostile shareholders by buying them out.
11-22
LO 3 Explain the accounting for treasury shares.

Purchase of Treasury Shares
11-23
Debit Treasury Shares for the price paid to reacquire

the shares (cost method).
Treasury Shares is a contra equity account, not an

asset.
Purchase of treasury shares reduces equity.

Illustration 11-8
Illustration: On February 1, 2014, Mead acquires 4,000 shares of

its stock at HK$80 per share.
Treasury shares (4,000 x HK$80)
Cash
11-24
320,000
320,000

Equity Section with Treasury Shares
Illustration 11-9
Both the number of shares issued (100,000), outstanding (96,000), and the
number of shares held as treasury (4,000) are disclosed.
11-25

Disposal of Treasury Shares
Sale of Treasury Shares
Above Cost
Below Cost
Both increase total assets and equity.
11-26
Above
Cost
Illustration: On July 1, Mead sells 1,000 shares for HK$100 per

share of its treasury shares, previously acquired at HK$80 per
share.
July 1
Cash (1000*100)
100,000
Treasury shares (1,000 x HK$80)
80,000
Share premium - treasury (1000*20)
20,000
A corporation does not realize a gain or suffer a loss from share

transactions with its own shareholders.
11-27
Below
Cost
Illustration: On Oct. 1, Mead sells an additional 800 treasury

shares at HK$70 per share.
Oct. 1
Cash (800*70)
56,000
Share premium - treasury (800*10)

Treasury shares (800 x HK$80)
8,000
64,000
Illustration 11-10
11-28
Below
Cost
Illustration: On Dec. 1, assume that Mead, Inc. sells its

remaining 2,200 shares at HK$70 per share.
Dec. 1 Cash (2200*70)
154,000
Share premium - treasury
12,000
Retained earnings
10,000
Treasury shares (2200*80)
11-29
Limited
to
balance
on hand
176,000
Accounting for Preference Shares

Typically, preference shareholders have a priority as to
1. distributions of earnings (dividends) and
2. assets in the event of liquidation.
Accounting for preference shares at issuance is similar to that for

ordinary shares.
11-30
LO 4 Differentiate preference shares from ordinary shares.
Accounting for Preference Shares

Illustration: Stine Corporation issues 10,000 shares of 10
par value preference shares for 12 cash per share. Journalize
the issuance of the preference shares.
Cash (10,000 * 12)
11-31
120,000
Share capital - preference (10,000 x 10)
100,000
Share premium preference (10,000 * 2)
20,000
LO 4 Differentiate preference shares from ordinary shares.
Dividends
Distribution of cash or shares to shareholders on a pro
rata (proportional) basis.
Types of Dividends:
1. Cash
3. Shares
2. Property
Dividends expressed: (1) as a percentage of the par or stated
value, or (2) as a dollar amount per share.
11-32
LO 5 Prepare the entries for cash dividends and share dividends.
Dividends
Three dates:
11-33
Illustration 11-12
Dividends
Cash Dividends
For a corporation to pay a cash dividend, it must have:
11-34
1.
Retained earnings - Payment of cash dividends from

retained earnings is legal in all jurisdictions.
2.
Adequate cash.
3.
A declaration of dividends by the Board of Directors.
Cash Dividends
Illustration: On Dec. 1, the directors of Media General declare a
0.50 per share cash dividend on 100,000 shares of 10 par value
ordinary shares. The dividend is payable on Jan. 20 to
shareholders of record on Dec. 22.
December 1 (Declaration Date)
Cash dividends (100,000 * 0.5)
Dividends payable
December 22 (Date of Record)
50,000
50,000
No entry
January 20 (Payment Date)

Dividends payable
Cash
11-35
50,000
50,000
Dividends
Share Dividends
Illustration 11-14
Pro rata distribution of the corporations own shares.
Results in decrease in retained earnings and increase share capital and share premium.
11-36
Dividends
Share Dividends
Reasons why corporations issue share dividends:
11-37
1.
Satisfy shareholders dividend expectations without

spending cash.
2.
Increase marketability of the corporations shares.
3.
Emphasize a portion of equity has been permanently

reinvested in the business.
Dividends
Question
Which of the following statements about small share dividends is
true?
a. A debit to Share Dividends for the par value of the shares
issued should be made.
b. A small share dividend decreases total equity.
c. Market value per share should be assigned to the dividend
shares.
d. A small share dividend ordinarily will have no effect on
book value per share.
11-38
Retained Earnings
Net income increases Retained Earnings and a net loss

decreases Retained Earnings.
Part of the shareholders claim on the total assets of the

corporation.
Debit balance in Retained Earnings is identified as a

deficit.
Illustration 11-20
11-39
LO 6 Identify the items reported in a retained earnings statement.
Retained Earnings Statement
Before issuing the report for the year ended December 31, 2014, you discover a
50,000 error (net of tax) that caused the 2013 inventory to be overstated
(overstated inventory caused COGS to be lower and thus net income to be higher in
2013. Would this discovery have any impact on the reporting of the Retained
Earnings Statement for 2014?
11-40
11-41

Debits and Credits to Retained Earnings
Illustration 11-24
11-42

Question
All but one of the following is reported in a retained
earnings statement. The exception is:
a. cash and share dividends.
b. net income and net loss.
c. some disposals of treasury shares below cost.
d. sales of treasury shares above cost.
11-43
Statement Presentation and Analysis

Presentation
11-44
Illustration 11-26
LO 7
Thanks for good listening
11-45

Ch. 11 Corporate Form of Organization

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Ch. 11 Corporate Form of Organization

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Preview of Chapter 11

The Corporate Form of Organization

LO 1 Identify the major characteristics of a corporation.

Separate Legal Existence

Limited Liability of Shareholders

Transferable Ownership Rights

Ability to Acquire Capital

LO 1 Identify the major characteristics of a corporation.

Separate Legal Existence

Limited Liability of Shareholders

Transferable Ownership Rights

Ability to Acquire Capital

LO 1 Identify the major characteristics of a corporation.

Separate Legal Existence

Limited Liability of Shareholders

Transferable Ownership Rights

Ability to Acquire Capital

LO 1 Identify the major characteristics of a corporation.

Separate Legal Existence

Limited Liability of Shareholders

Transferable Ownership Rights

Ability to Acquire Capital

LO 1 Identify the major characteristics of a corporation.

Separate Legal Existence

Limited Liability of Shareholders

Transferable Ownership Rights

Ability to Acquire Capital

LO 1 Identify the major characteristics of a corporation.

Separate Legal Existence

Limited Liability of Shareholders

Transferable Ownership Rights

Ability to Acquire Capital

LO 1 Identify the major characteristics of a corporation.

Separate Legal Existence

Limited Liability of Shareholders

Transferable Ownership Rights

Ability to Acquire Capital

LO 1 Identify the major characteristics of a corporation.

Separate Legal Existence

Limited Liability of Shareholders

Transferable Ownership Rights

Ability to Acquire Capital

LO 1 Identify the major characteristics of a corporation.

LO 1 Identify the major characteristics of a corporation.

Ownership Rights of Shareholders

1. Vote in election of board of

2. Share the corporate earnings

LO 1 Identify the major characteristics of a corporation.

Ownership Rights of Shareholders

3. Keep the same percentage ownership when new

* A number of companies have eliminated the preemptive right.

LO 1 Identify the major characteristics of a corporation.

Ownership Rights of Shareholders

4. Share in assets upon liquidation in proportion to

LO 1 Identify the major characteristics of a corporation.

Ownership Rights of Shareholders

Share Issue Considerations

Charter indicates the amount of shares that a

Number of authorized shares is often reported in the

LO 1 Identify the major characteristics of a corporation.

Share Issue Considerations

Corporation can issue ordinary shares directly to investors

Factors in setting price for a new issue of shares:

LO 1 Identify the major characteristics of a corporation.