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Chapter 13
Corporations: Organization and
Share Capital Transactions
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Agenda
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Learning goals
Vocabulary
Lesson 1: The Corporate form of
organization
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Characteristics of a corporation
Forming a Corporation
Ownership rights of shareholders
Shares Issue Considerations
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Learning goals
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2.
3.
4.
Identify and discuss the major
characteristics of a corporation
Record common shares transactions
Record preferred shares transactions
Prepare the shareholders’ equity of the
balance sheet and calculate return on
equity.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Vocabulary
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Authorized shares
Common shares
Comprehensive income
Contributed capital
Convertible preferred shares
Corporation
Cumulative dividend
Dividends in arrears
Financial instrument
Initial public offering (IPO)
Issuing shares
Legal capital
No par value shares
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Noncumulative
Organization costs
Preferred shares
Privately held corporation
Publicly held corporation
Redeemable (callable) preferred
shares
Retained earnings
Retractable preferred shares
Return on equity
Share capital
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
The Corporate Form of
Organization
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The corporation: is a legal entity that is
separate form its owners, who are known
as shareholders.
• As a legal entity, a corporation has most of
the rights and privileges of a person.
• Obligation to respect laws and pay income tax
• It can not vote or hold public office.
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Corporation can be for profit and not for
profit
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Classification by Ownership
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Publicly held corporation: The shares are traded
on organized securities markets, such as
Toronto Stock Exchange. Available for anyone in
the general public to buy or sell.
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Privately held corporation: Shares are owned by
a few private shareholders. The share are not
traded on stock exchanges and are not available
to the general public.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Characteristics of a Corporation
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Separate legal existence from its owners
Limited liability of shareholders to the amount of their
investment
• Transferable ownership rights by buying and selling
shares
• Ability to acquire capital by issuing shares
• Continuous and indefinite life
• Corporation management
• Shareholders manage through an elected board of directors
• Board of directors selects corporation management
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Government regulations
• Canada Business Corporation Act regulates what corporation can
or can not do
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Income tax
• Taxed as a separate entity
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Advantages and Disadvantage
of a Corporation
Advantages
Disadvantages
• Corporate management –
• Corporate
professional managers
management –
• Separate legal existence
ownership separated
• Limited liability to shareholders
from management
• Potential for deferred or reduced • Increased cost and
income tax (shareholder do not
complexity to follow
pay tax on income earned until it
government
is distributed to them)
regulations
• Transferable ownership rights
• Potential for additional
• Ability to acquire capital
income tax
• Continuous life
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Forming a Corporation
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Can incorporate federally or provincially
• Done by filing articles of incorporation
• Provide information such as :
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Name and purpose of company
Amounts and kinds of share capital
Names and addresses of incorporators
Location of corporation’s head office
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By-laws: internal rules and policies
• Organization costs:
• Costs of forming a corporation (legal fees, accounting
fees and regulation)
• Normally expensed
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Ownership Rights of Shareholders
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Ownership rights are in the form of shares
• Can be divided into different classes
• As stated in the articles of incorporation
• Each class has rights and privileges
• Usually referred to as common and preferred
shares
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Shareholders have rights:
• To vote on certain matters
• To dividends: the distribution of income
• To remaining assets in a liquidation
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Share Issue Considerations
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Authorized share capital
• Number of shares company is allowed to sell
• Many companies have unlimited number of
shares
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Issued shares
• Authorized shares that have been sold
• Issued directly to investors or through an
investment dealer
• First public sale is called an initial public
offering (IPO)
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Share Issue Considerations 2
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Market value of shares
• Once issued, shares trade on a secondary
market
• Prices determined by buyers and sellers and
other external factors
Legal capital
• Is the amounts contributed to the corporations by
shareholders in exchange for shares of
ownership it is considered legal capital and can
not be distributed to shareholders
• Retained earnings are earned capital and can be
distributed as dividends
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Practice questions
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BE 13-1 & 2 on page 689
• E13-1 on page 690
• P13-1A on page 694
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Agenda
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Common Shares
• Issuing shares for cash
• Reacquisition of shares
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Preferred shares
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What are they
Dividend preference
Convertible preferred
Redeemable and retractable preferred
Liquidation Preference
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Common Shares:
Issuing Shares
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Shares are usually issued for cash:
Dr. Cash
Cr. Common shares
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Shares can be issued in exchange for services
(compensation for lawyers or consultants or
noncash assets (land, building and equipment)
• Recorded at market value of shares given up:
Dr. Service or asset (amount = mkt value of shares)
Cr. Common shares
• If market value of shares not determinable, use value
of services or noncash assets
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Common Shares:
Issuing Shares
Assume that they lawyer who helped Hydroslide
incorporated billed the company $5,000 for her
services. On January 18, she agreed to accept
4,000 common shares in payment for her bill. At
the time of the exchange, the market price for the
shares is $1
Jan 18
legal Fees Expense
4,000
Common Shares
4,000
To record issue of 4,000 common shares for legal service
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Common Shares:
Issuing Shares
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For noncash transactions the cost is the
cash equivalent price.
This means that when there is an issue of
shares in exchange for services or
noncash assets, the cash equivalent price
is the market value of the common shares
given up.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Common Shares:
Issuing Shares
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When common shares do not have a
ready market value (meaning they can not
be bought or sold easily) their market
cannot be determined.
In these cases, the market value of the
consideration that is received would
instead be used to determine the cash
equivalent price.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Common Shares:
Issuing Shares
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Newly incorporated company issued 10,000 shares on
October 1 to acquire land with an appraised value of
$80,000.
• At the time of the acquisition the company's shares do
not have a reliable market value because they are not
actively traded yet.
• In this case, the land would be recorded at the market
value of the consideration received $80,000
Oct 1
Land
80,000
Common shares 80,000
To record issue of 10,000 common shares for land
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Common Shares:
Reacquisition of Shares
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Companies can reacquire their shares to:
1) Increase trading on securities markets to increase
market value
2) Increase earnings per share by reducing shares
3) Buyout hostile shareholders
4) Have shares available for compensation or other
uses (employee and managers)
5) Comply with share ownership restrictions (limits of
foreign ownership)
• Reacquired shares are retired and cancelled
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Common Shares:
Reacquisition of Shares 2
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Steps to record a reacquisition:
• Remove cost of shares from share capital
account
• Based on average cost per share (must be
calculated)
• Record cash paid for the shares
• Record the gain or loss on reacquisition
• Price paid to acquire the shares – original cost
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Reacquisition of Shares:
Below Average Cost
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Average cost of shares:
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Balance in Common Shares Account
Number of Common Shares Issued
If shares reacquired at a price < average cost:
Sept. 23
Common Shares (5,000 x $2)
Contributed Capital - Reacquisition of Shares
Cash (5,000 x $1.50)
To record reacquisition and retirement of 5,000 shares
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
10,000
2,500
7,500
Reacquisition of Shares:
Above Average Cost
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If shares reacquired at a price > average cost:
• Additional cost of shares is first debited to
contributed capital from previous
reacquisitions (only when there is a balance
the account otherwise:
• Remaining difference is debited to retained
earnings:
Sept. 23
Common Shares (5,000 x $2)
Contributed Capital--Reacquisition of Shares
Cash (5,000 x $2.50)
To record reacquisition and retirement of 5,000 shares
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
10,000
2,500
12,500
Checking for Understanding
Victoria Corporation begins operations on
March 1 by issuing 100,000 common shares
for cash at $12 per share. On March 15, it
issues 5,000 common shares to its lawyers
in settlement of their bill for $65,000. The
shares continue to trade at $12 per share on
march 15. On June 1, Victoria repurchased
10,000 of it’s shares at an average price per
share of $10 per share. Record the share
transactions. (page 677)
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Preferred Shares and Dividends
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Preferred Shares: Have priority over
common shares for dividends and assets
in the event of liquidation of the company.
Generally do not have voting rights
Entries to record issue and reacquisition of
preferred shares similar to entries for
common shares
Transactions for each class of share is
recorded in a separate account
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Dividend Preference
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Preferred shareholders have a right to
dividends before common shareholders do
Cumulative preferred shares have a right
to current year’s dividends and any prior
years’ dividends owing before dividends
are paid on common shares
Any unpaid dividends (in arrears) are not
considered a liability
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Dividend Preference
Staudinger Corporation has 10,000 $3-cumulative
preferred shares. The $3 is the per share dividend
amount, which is usually expressed as an annual
amount, similar to interest rates. So, Staudinger’s
annual total dividend is $30,000 (10,000 * $3 per
share) (pg. 678)
Dividends in arrears ($30,000 * 2)
Current year dividends
Total preferred dividends
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
$60,000
$30,000
$90,000
Convertible Preferred Shares
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Provide option to exchange preferred
shares to common shares at a specified
ratio
Conversion is recorded by transferring
cost from Preferred Shares to Common
Shares account
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Convertible Preferred Shares
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Ross Industries Inc. issues 1,000 convertible preferred
shares at $100 per share. One preferred she is
convertible into 10 common shares. The current
market price of the common shares is $9 per share. If
the market price of the convertible preferred shares is
$101 and common shares is $12 on June 10. The
convertible preferred shareholder will choose to
convert their shares.
June 10
Preferred Shares
Common Shares
To record conversion of 1,000 preferred shares into
10,000 common shares
100,000
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
100,000
Redeemable and Retractable
Preferred Shares
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Corporation (redeemable) give the issuing
corporation the right to purchase the
shares at specified future dates and prices
shareholder (retractable) gives the
shareholder the option to sell the shares
back to the corporation at a future date
and price
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Redeemable and Retractable
Preferred Shares
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Redeemable and retractable preferred
shares are similar in some ways to debt.
Considered a financial instrument
(contract between two or more parties that
establishes financial rights or obligation)
Usually reported in the liabilities section of
the balance sheet
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Checking for understanding
Turin Corporation issued 50,000 preferred
shares on February 22 for $20,000 each. Each
share was convertible into 10 common shares.
ON April 12, another 30,000 preferred shares
were issued for $30 each. On June 5, when the
price of the common share was $4 and the
price of the preferred shares was $35,
shareholder converted 20,000 of the preferred
share into common. Record the 3 transactions
in a journal (page 681)
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Practice
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Self-Study Questions 3-7 on pg. 687
Questions 11, 13 and 14 on pg. 688
BE13-3, 4, 6-9 on pg. 689 and 690
E13-4, 5, 6 on pg. 691 and 692
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Agenda
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Statement presentation and analysis
• Presentation of shareholder’s equity
• Analysis of the statement
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Shareholders’ Equity on the
Balance Sheet
Contributed Capital: the amount contributed
by (or accruing to) the shareholders.
•Share capital: preferred and common
shares
• Preferred shares are listed first
•Additional
contributed capital: amounts
contributed from acquiring and retiring
shares
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Shareholders’ Equity on the
Balance Sheet
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Retained Earnings
• Cumulative net income (loss) since
incorporation (not distributed to shareholders).
• Annual net income is added (or net loss is
deducted); dividends are deducted (similar to
drawings by the owner in a proprietorship) to
determine ending net earnings amount.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Shareholders’ Equity on the
Balance Sheet
Closing journal entries
Dec. 31
Service Revenue
500,000
Income Summary
500,000
To close revenue to income summary
Dec. 31
Income Summary
290,000
Operating expenses
290,000
To close operating expenses to income summary
Dec. 31
Income Summary
210,000
Retained earnings
To close income summary (500,000-290,000) to retained earnings
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
210,000
Shareholders’ Equity on the
Balance Sheet
Dec. 31
Retained Earnings
80,000
Dividends
To close dividends to retained earnings.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
80,000
Shareholders’ Equity on the
Balance Sheet
Accumulated Other Comprehensive Income
•Certain gains and losses that bypass net income but
affect shareholder’s equity.
•Recorded directly to shareholders’ equity
•Things like:
• unrealized gain or loss on available for share
securities.
• Gain/loss of cash flow hedge
• Gain/loss from foreign currency translation
• Gain/loss on defined benefit pension plan
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Sample Shareholders’ Equity
Section
ZABOSCH U K IN C.
Ba la nc e She e t (p a rtia l)
D e c e mb e r 31, 2008
Shareholders' equity
Contributed capital
Share capital
$6 noncumulative preferred shares, no par value, 50,000
shares authorized, 6,000 shares issued
Common shares, no par value, unlimited shares
authorized, 400,000 shares issued
Total share capital
Additional contributed capital
Contributed capital - reacquired common shares
Total contributed capital
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
$
770,000
2,800,000
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
$ 3,570,000
60,000
3,630,000
1,058,000
312,000
$ 5,000,000
Return on Equity
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Also called return on investment
• Considered to be the most important
measure of a firm’s profitability
• It evaluates how many dollars are earned
for each dollar invested by shareholders
Net income
÷
Average
Shareholders’
Equity
=
Return on Equity
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Check for understanding
Look on page 684-685 and the
demonstration problem
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Practice
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BE13-10 and 13 on page 690
E13-10 on page 693
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.