Chapter

Chapter 16
16
Companies:
Companies:
Formation
Formation and
and Operations
Operations
 Learning Objectives

1. Understand the different types of

companies which are permitted to exist by
law in the Australian business environment
2. Appreciate the advantages and
disadvantages of the corporate form of
organisation
3. Understand the documentation required for
forming a company
4. Appreciate the management structure
commonly used for administering a
company
 Learning Objectives (cont’d)

5. Understand the three main categories of

equity in a company
6. Account for the issue of shares
7. Understand the basic differences between
ordinary and preference shares
8. Account for the declaration and payment of
cash dividends on shares, share dividends
and share splits
 Learning Objectives (cont’d)

9. Account for the creation and reduction of

the different types of reserves that are
included in equity
10. Prepare the basic entries for income tax
expense in a company
11. Prepare a company’s income statement
and balance sheet for internal use
 Lecture References

• Hoggett, Edwards & Medlin, 6th edition,

Chapter 16
• Corporations Act 2001
 Types of Companies

• Limited companies
– Proprietary companies
– Public companies
– Companies limited by guarantee
• Unlimited companies
• No-liability companies
 Types of Companies (cont’d)

• Special companies
– Investment
– Banking
– Life insurance
 Advantages and Disadvantages
of the Corporate Entity

• Advantages:
– Limited liability
– Broad source of capital
– Continuity of existence
– Ready transferability of shares
– Use of professional management
– Potential income tax savings
 Advantages and Disadvantages
of the Corporate Entity (cont’d)

• Disadvantages:
– Greater governmental regulation
– Separation of ownership and management
 Forming a Company

• Replaceable rules and constitution

• Certificate of registration
• The prospectus
• Formation costs and share issue costs
 Administering a Company
Shareholders
Shareholders

Board
Boardof
ofDirectors
Directors

Managing
ManagingDirector
Director

Chief
Chief General
General General
General
Secretary Treasurer
Treasurer Financial
Financial Manager
Manager Manager
Manager
Secretary
Officer
Officer Prod’n
Prod’n Inf
InfSys
Sys
 Equity in a Company

• Share capital
– Fully or partly paid shares
– Ordinary or preference shares
• Retained earnings
– Accumulated losses
 Accounting for Share Issues

• Share issue to private individuals

Date
Date Cash
Cash atat Bank
Bank XXX
XXX
Share
Share Capital
Capital XXX
XXX
toto record
record cash
cash contributed
contributed toto the
the
company
company by by its
its shareholders
shareholders
 Share issue by a public company
payable in full on application

• Shares issued via a prospectus

E.g.
E.g. Brazil
Brazil Ltd
Ltd
Received
Receivedapplications
applicationsfor
for100
100000
000shares
shares
Issue
Issueprice
priceofof$10
$10per
pershare
share

Sept
Sept 30
30 Cash
Cash Trust
Trust 1000
1000 000
000
Application
Application 1000
1000 000
000
receipt
receiptofofcash
cashofof$10/share
$10/shareon
on100
100000
000shares
shares
 Share issue by a public company
payable in full on application (cont’d)

• Refund of excess application monies

Date
Date Application
Application XX
XX
Cash
Cash Trust
Trust XX
XX
refund
refundofofexcess
excessapplication
applicationmoney
money
totounsuccessful
unsuccessfulapplicants
applicants
 Share issue by a public company
payable in full on application (cont’d)

• Allotment of shares

Oct
Oct11 Cash
CashatatBank
Bank 1000
1000000
000
Cash
CashTrust
Trust 1000
1000000
000
transfer
transferofofapplication
applicationmoney
money

Oct
Oct11 Application
Application 1000
1000000
000
Share
ShareCapital
Capital 1000
1000000
000
totorecord
recordfunds
fundscontributed
contributedforfor
100
100000000shares
sharespaid
paidininfull
full
 Share issue by a public company
payable in instalments

E.g.
E.g. Brazil
Brazil Ltd
Ltd
Issues
Issues100
100000
000shares
shareson
on15
15September
September
Payable:
Payable: $4
$4on
onapplication
application
$3
$3on
on15
15October
October
$3
$3on
on11December
December

Sept
Sept 30
30 Cash
Cash Trust
Trust 400
400 000
000
Application
Application 400
400 000
000
receipt
receiptofofcash
cashofof$4/share
$4/shareon
on100
100000
000shares
shares
 Share issue by a public company
payable in instalments (cont’d)

• Allotment of shares

Oct
Oct11 Cash
CashatatBank
Bank 400
400000
000
Cash
CashTrust
Trust 400
400000
000
transfer
transferofofapplication
applicationmoney
money

Oct
Oct11 Application
Application 400
400000
000
Share
ShareCapital
Capital 400
400000
000
application
applicationfee
feeofof$4
$4on
on100
100000
000shares
shares
 Share issue by a public company
payable in instalments (cont’d)

• Amount due on allotment

Oct
Oct11 Allotment
Allotment 300
300000
000
Share
ShareCapital
Capital 300
300000
000
allotment
allotmentfee
feeofof$3
$3receivable
receivableon
on100
100000
000shares
shares

• Receipt of allotment monies

Oct
Oct15
15 Cash
CashatatBank
Bank 300
300000
000
Allotment
Allotment 300
300000
000
cash
cashreceived
receivedon
onallotment
allotment
 Share issue by a public company
payable in instalments (cont’d)

• Amount due on call

Nov
Nov15
15 Call
Call 300
300000
000
Share
ShareCapital
Capital 300
300000
000
call
callofof$3
$3receivable
receivableon
on100
100000
000shares
shares
• Receipt of call monies
Dec
Dec11 Cash
CashatatBank
Bank 285
285000
000
Call
Call 285
285000
000
receipt
receiptofofcall
callmonies
monieson
on95
95000
000shares
shares
 Share issue by a public company
payable in instalments (cont’d)

Share
ShareCapital
Capital
(100
(100000
000ordinary
ordinaryshares
sharescalled
calledtoto$10)
$10) $1000
$1000000
000
Less
Less::Unpaid
Unpaidcalls
calls(5000
(5000shares
shares@ @$3)
$3) 15
15000
000
Total
Totalshare
sharecapital
capital $985
$985000
000
 Under and Over Subscription

• Undersubscription
– Applicants for fewer shares than offered
• Oversubscription
– Applicants in excess of shares
– Treatment depends on constitution and
prospectus
– Excess monies may be refunded or held against
future calls
 Preference Shares

• Preferential treatment
– Dividend distribution (@ fixed rate)
– Distribution of assets on liquidation
– Redemption
• Usually no voting rights
• Debt or equity?
 Dividends

• Distribution of cash or other assets

– Replaceable rules
– Interim and final dividends
• Cash dividends
– Declared vs. paid
 Dividends (cont’d)

Aug
Aug25
25 Retained
RetainedEarnings
Earnings 80
80000
000
Final
FinalDividend
DividendPayable
Payable 80
80000
000
declaredcash
declared cashdividend
dividendofof20c/share
20c/share
on
on400
400000000ordinary
ordinaryshares
shares

Sept
Sept20
20 Final
FinalDividend
DividendPayable
Payable 80
80000
000
Cash
CashatatBank
Bank 80
80000
000
payment
paymentofofthe
thedividend
dividenddeclared
declaredon
on25
25August
August
 Dividends (cont’d)

• Preference dividends
– Cents/share or % of preference capital
– Cumulative vs. non-cumulative
– Dividend payable

June
June20
20 Retained
RetainedEarnings
Earnings 45
45000
000
Preference
PreferenceDividend
DividendPayable
Payable 15
15000
000
Ordinary
OrdinaryDividend
Dividendpayable
payable 30
30000
000
totorecord
recorddividends
dividendsdeclared
declared
 Dividends (cont’d)

• Share dividends
– Pro-rata distribution of additional shares
– No effect on corporate assets or equity

Jan
Jan10
10 Retained
RetainedEarnings
Earnings xxx
xxx
Share
ShareCapital
Capital xxx
xxx
totorecord
recordthe
thedistribution
distributionofofaashare
sharedividend
dividend
 Dividends (cont’d)

• Share splits
– Reduce market price of shares
– No change to shareholder’s equity balance
• Share dividends vs. share splits
 Reserves

• Equity other than capital contributions

• Often created by ‘transfers’ from retained
earnings
• No official definition
• Examples:
– General reserve
– Options reserve
– Plant replacement reserve
 Reserves (cont’d)

• Creation of reserves

June
June30
30 Retained
RetainedEarnings
Earnings xxx
xxx
Reserve
Reserve xxx
xxx
totocreate
createaareserve
reserveby
byappropriating
appropriatingprofits
profits
June
June30
30 Asset
Asset xx
xx
Accumulated
AccumulatedDepreciation
Depreciation xx
Revaluation
RevaluationReserve
Reserve xxx
xxx
totorevalue
revalueupwards
upwardsthe
thecarrying
carryingamount
amountofofaanon-current
non-current
asset
assettotofair
fairvalue
value
 Reserves (cont’d)

• Disposal of reserves

June
June30
30 Reserve
Reserve xxx
xxx
Retained
RetainedEarnings
Earnings xxx
xxx
tototransfer
transferreserve
reserveback
backtotoretained
retainedearnings
earnings
 Income Tax

• Deducted after all other expenses before

arriving at final profit after tax
• Based on ‘taxable income’
– Income Tax Assessment Act
• Methods for determining tax expense
– Tax payable method
– Tax-effect accounting method
 Financial Statements

• Income Statement
• Statement of Changes in Equity
• Balance Sheet
• Cash Flow Statement
 Where to get more information

• Insert details of additional resources here