Accounting for Corporations

Instructor: Dr. Anthony A. LIU

 Accounting for Corporations
• Topic Description in Syllabus

2
 Accounting for Corporations
• Topic Description in STP

3
C1

Corporate Form of Organization

An
An entity
entity created
created
by
by law
law

Existence Privately Held

Existence isis Ownership
separate
separate from
from can be
owners
owners

Has
Has rights
rights and
and
privileges
privileges
Publicly Held
C1

Characteristics of Corporations
Advantages
 Separate legal entity
 Limited liability of shareholders
 Transferable ownership rights
 Continuous life
 Lack of mutual agency for shareholders
 Ease of capital accumulation
Disadvantages
 Governmental regulation
 Corporate taxation
Advantages v.s. Disadvantages
C1 Corporate Organization and
Management
Shareholders

Board of Directors

President, Vice-President, and

Other Officers

Employees of the Corporation

C1

Rights of Shareholders
Vote at shareholders’ meetings
Sell shares
Purchase additional shares
Receive dividends, if any
Share equally in any assets remaining
after creditors are paid in a liquidation
C1

Basics of Share Capital

Total number of shares that a corporation is
authorized to sell or issue.

Total number of shares that has been sold or

issued to shareholders.
C1

Basics of Share Capital


Par value is an
Market price is the
arbitrary amount
amount that each
assigned to each share
share will sell for in the
when it is authorized.
market.

Classes of Shares
 Par Value
 No-Par Value
 Stated Value
Basics of Share Capital
P1

Issuing Par Value Shares at Par

On June 5, Dillion Snowboards issued 30,000 shares of
$10 par value for $300,000.
Let’s record this transaction.
P1
Issuing Par Value Shares at Par

The shareholders’ equity section of Dillon Snowboards’ statement of

financial position at year-end 2015 (its first year of operations) after
profit of $65,000 and no dividend payments.
P1

Issuing Par Value Shares at a Premium

On June 5, Dillion Snowboards issued 30,000 shares of
$10 par value at $12 per share.
Let’s record this transaction.
P1

Issuing Par Value Shares at a Premium

The shareholders’ equity section of Dillon Snowboards’ statement of

financial position at year-end 2015 (its first year of operations) after
profit of $65,000 and no dividend payments.
P1

Issuing No-Par Value Shares

On October 20, a corporation issued 1,000 shares of no-
par value for $40 per share.
Let’s record this transaction.
P1

Issuing Stated Value Shares

On October 20, a corporation issued 1,000 no-par value
shares having a stated value of $40 per share for $50 per
share.
Let’s record this transaction.
P1
Issuing Shares for Noncash Assets
On June 10, a corporation issued 4,000 shares of $20 par
value for land valued at $105,000. Let’s record this
transaction.
Issuing Shares for Services
Ordinary Shares
P2

Cash Dividends
Regular cash dividends provide a return to investors
and almost always affect the share’s market value.

Corporation Dividends Shareholders

To pay a cash dividend, the corporation must have:

1. A sufficient balance in retained earnings; and
2. The cash necessary to pay the dividend.
P2

Accounting for Cash Dividends

Three important dates

en ds
D i vi d

Date of Declaration Date of Record Date of Payment

Record liability No entry Record payment of
for dividend. required. cash to shareholders.
P2

Accounting for Cash Dividends

On January 19, a $1 per share cash dividend is declared
on Dana, Inc.’s 10,000 ordinary shares outstanding. The
dividend will be paid on March 19 to shareholders of
record on February 19.

nd s
id e
D iv
Date of Declaration
Record liability
for dividend.

Dr Cr
Jan. 19 Retained Earnings 10,000
Ordinary Dividend Payable 10,000
To record the declaration of $1 per ordinary share cash dividend.
 P2

Accounting for Cash Dividends

On January 19, a $1 per share cash dividend is declared
on Dana, Inc.’s 10,000 ordinary shares outstanding. The
dividend will be paid on March 19 to shareholders of
record on February 19.
No entry required on February 19, the date of record.

Date of Payment
Record payment of
cash to shareholders.
Dr Cr
Mar. 19 Ordinary Dividend Payable 10,000
Cash 10,000
To record the payment of $1 per ordinary share cash dividend.
P2

Bonus Issues or Share Dividends

A distribution of a corporation’s own shares to its shareholders
without receiving any cash payment in return.
Why a share dividend?
 Can be used to keep the market price on the shares affordable.
 Can provide evidence of management’s confidence that
the company is doing well.

Capitalization: Transferring a portion of equity from Retained

Earnings to Share Capital.
Bonus Shares: An Example
P2

Share Splits
Notice that an accounting
A distribution entry
of additional is notto
shares required, and that
shareholders
Retained to
according Earnings is not ownership.
their percent reduced.

$10 par value

Ordinary Shares Old

Shares
100 shares

$5 par value
New
Shares Ordinary Shares
200 shares
Dividends
INTENDED BLANK
C2

Preference Shares
A separate class of shares, typically having
priority over ordinary shares in . . .
– Dividend distributions
– Distribution of assets in case of liquidation

Usually has a stated Normally has no

dividend rate voting rights

Usually this stated dividend

rate is expressed as a
percentage of its par value
C2

Preference Shares
Cumulative preference shareholders have the right to be paid both
the current and all prior periods’ unpaid dividends before any
dividends are paid to ordinary shareholders. When the preference
shares are cumulative and the directors do not declare a dividend to
preference shareholders, the unpaid dividend is called a dividend in
arrears and must be disclosed in the financial statements. Most
preference shares are cumulative.

Noncumulative preference shares have no rights to prior periods’

dividends if they were not declared in those prior periods.
C2

Preference Shares
Cumulative vs. Noncumulative
Dividends in arrears must be Undeclared dividends from
paid before dividends may be current and prior years do not
paid on ordinary shares. have to be paid in future years.
(Normal case)

Consider the following Shareholders’ Equity section of the

Statement of Financial Position. The Board of Directors did not
declare or pay dividends in 2014. In 2015, the Board declared and
paid cash dividends of $42,000.
 C2

Preference Shares

If Preference Shares Are Noncumulative: Preference Ordinary

Year 2014: No dividends paid. $ - $ -
Year 2015:
1. Pay 2015 preference dividend. $ 9,000
2. Remainder goes to ordinary. $ 33,000
If Preference Share Are Cumulative: Preference Ordinary
Year 2014: No dividends paid. $ - $ -
Year 2015:
1. Pay 2014 preference dividend in arrears. $ 9,000
2. Pay 2015 preference dividend. 9,000
3. Remainder goes to ordinary. $ 24,000
Totals $ 18,000 $ 24,000
 Preference Shares
An additional preference for preference shares
is participation in dividends if they are declared
above certain limits. This participation feature
does not apply until ordinary shareholders
receive dividends equal to the preference
shares’ dividend percent.

Participating vs. Nonparticipating

C2

Preference Shares
Participating vs.
Dividends may exceed a stated
amount once ordinary
shareholders receive a
dividend equal to the
preference stated rate.
Nonparticipating
Dividends are limited to a
maximum amount each year.
The maximum is usually the
stated dividend rate.
(Normal case)

Reasons for Issuing Preference Shares

 To raise capital without sacrificing control
 To boost the return earned by ordinary shareholders
through financial leverage
 To appeal to investors who may believe the ordinary
shares are too risky or that the expected return on
ordinary shares is too low
Preference Shares
P3

Treasury Shares
Treasury shares are a company’s own shares
that have been acquired. Corporations might
acquire its own shares to:
1. Use their shares to buy other companies.
2. Avoid a hostile takeover.
3. Reissue to employees as compensation.
4. Support the market price.
P3

Purchasing Treasury Shares

On May 8, Whitt, Inc. purchased 2,000 of its own
shares in the open market for $4 per share.
Dr Cr
May 8 Treasury Shares-Ordinary 8,000
Cash 8,000
To record the purchase of 2,000 treasury shares
at $4 per share.

Treasury shares are shown as a reduction in total

shareholders’ equity on the statement of financial position.
 P3

Selling Treasury Shares at Cost

On June 30, Whitt sold 100 shares of
its treasury shares for $4 per share.

Dr Cr
June 30 Cash 400
Treasury Shares-Ordinary 400
To record the receipt of $4 per share for 100 treasury shares
for $4 per share.

Let’s see what happens when the selling price of the

treasury shares is different from its cost.
 P3 Selling Treasury Shares
Above Cost
On July 19, Whitt, Inc. sold an additional 500
treasury shares for $8 per share.

Dr Cr
July 19 Cash 4,000
Treasury Shares-Ordinary 2,000
Share Premium-Treasury Shares 2,000
To record the receipt of $8 per share for 500 treasury shares costing $4 per share.

Now, let’s see what happens if we sell treasury

shares for less than its original cost
 P3 Selling Treasury Shares
Below Cost
On August 27, Whitt sold an additional 400 treasury
shares for $1.50 per share.

Dr Cr
Aug. 27 Cash 600
Share Premium-Treasury Shares 1,000
Treasury Shares-Ordinary 1,600
To record the receipt of $1.50 per share for 400 treasury shares costing $4 per share.

When the credit balance in this premium account is eliminated, any

remaining difference between the cost and selling price is debited to
Retained Earnings.
A company never reports a loss (or gain) from the sale of treasury
shares. Note that in all the sale transactions, we credit the account
Treasury Shares at cost.
Treasury Shares
C3 Statement of Profit or Loss
and Other Comprehensive Income
Statement of Profit or Loss
and Other Comprehensive
Income

All non-owner
changes in equity +
other comprehensive
income

Can be 2 statements:
Statement of Profit or
Loss + Statement of
Comprehensive
Income
C3 Statement of Profit or Loss
and Other Comprehensive Income
C3

Statement of Changes in Equity

Statement of
Changes in
Equity (SCE)

All owner changes

in equity, including
changes in
accounting policies

Dividends
C3

Statement of Changes in Equity

C3

Reserves
• Most reserves result from accounting standards to reflect
certain measurement changes in equity rather than the
income statement, e.g. asset revaluation reserve, foreign
currency translation reserve and other statutory reserves.
• Retained earnings are also called revenue reserves.
Ending Retained Earnings =
Beginning Retained Earnings + Net Profit – Dividends

A company’s cumulative net profit less any net losses and dividends
declared since its inception.
Reporting of P/L and Equity
A1

Earnings Per Share

Earnings per share is one of the most widely cited
accounting statistics.

Basic
earnings Net profit - Preference dividends
=
per share Weighted-average ordinary shares outstanding
A2

PRICE–EARNINGS RATIO
This ratio reveals information about the stock
market’s expectations for a company’s future growth
in earnings, dividends, and opportunities.

Price–
Market value (price) per share
Earnings =
Ratio Earnings per share
A3

Dividend Yield
Tells us the annual amount of cash dividends
distributed to ordinary shareholders relative to
the share’s market price.

Dividend Annual cash dividends per share

=
Yield Market value per share
A4

BOOK VALUE PER SHARE–ORDINARY

Reflects the amount of shareholders’ equity

applicable to ordinary shares on a per share basis.

Shareholders’ equity applicable

Book value per to ordinary shares
=
ordinary share Number of ordinary
shares outstanding
End of Chapter 13