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PREVIEW OF CHAPTER 15
Intermediate Accounting
IFRS 2nd Edition
Kieso, Weygandt, and Warfield
15-2
15 Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
15-4 LO 1
CORPORATE FORM OF ORGANIZATION
Corporate Law
Corporation must submit articles of incorporation to the
appropriate governmental agency for the country in which
incorporation is desired.
Governmental agency issues a corporation charter.
Advantage to incorporate where laws favor the corporate
form of business organization.
15-5 LO 1
CORPORATE FORM OF ORGANIZATION
Share System
In the absence of restrictive provisions, each share carries
the following rights:
1. To share proportionately in profits and losses.
15-6 LO 1
CORPORATE FORM OF ORGANIZATION
15-7 LO 1
15 Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Discuss the characteristics of the 5. Explain the accounting for and reporting
corporate form of organization. of preference shares.
3. Explain the accounting procedures for 7. Identify the various forms of dividend
issuing shares. distributions.
4. Describe the accounting for treasury 8. Explain the accounting for share
shares. dividends and share splits.
9. Indicate how to present and analyze
equity.
15-8
EQUITY
2. Share premium.
3. Retained earnings.
5. Treasury shares.
15-9 LO 2
EQUITY
Ordinary
OrdinaryShares
Shares
Account
Account
Contributed
Contributed Share
SharePremium
Premium
Capital
Capital Account
Account
Preference
PreferenceShares
Shares
Account
Account
Two Primary
Sources of Retained
RetainedEarnings
Earnings
Account
Account
Equity Assets
Liabilities =
Less:
Less: Equity
Treasury
TreasuryShares
Shares
Account
Account
15-10 LO 2
15 Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Discuss the characteristics of the 5. Explain the accounting for and reporting
corporate form of organization. of preference shares.
2. Identify the key components of equity. 6. Describe the policies used in
distributing dividends.
3. Explain the accounting
procedures for issuing shares. 7. Identify the various forms of dividend
distributions.
4. Describe the accounting for treasury
shares. 8. Explain the accounting for share
dividends and share splits.
9. Indicate how to present and analyze
equity.
15-11
EQUITY
Issuance of Shares
Accounting problems involved in the issuance of shares:
1. Par value shares.
2. No-par shares.
15-12 LO 3
EQUITY
15-13 LO 3
EQUITY
No-Par Shares
Reasons for issuance:
Avoids contingent liability.
Avoids confusion over recording par value versus fair
market value.
15-14 LO 3
EQUITY
Cash 5,000
Share CapitalOrdinary 5,000
Cash 5,500
Share CapitalOrdinary 5,500
15-15 LO 3
EQUITY
Cash 15,000
Share CapitalOrdinary 5,000
Share PremiumOrdinary 10,000
15-16 LO 3
EQUITY
15-17 LO 3
EQUITY
BE15-4: 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.
Proportional
Method
15-18 LO 3
EQUITY
BE15-4: 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.
Cash 13,500
Share CapitalPreference (100 X $50) 5,000
Share PremiumPreference 3,100
Share CapitalOrdinary (300 X $10) 3,000
Share PremiumOrdinary 2,400
15-19 LO 3
EQUITY
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.
Incremental
Method
15-20 LO 3
EQUITY
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.
Cash 13,500
Share CapitalPreference (100 X $50) 5,000
Share PremiumPreference 2,500
Share CapitalOrdinary (300 X $10) 3,000
Share PremiumOrdinary 3,000
15-21 LO 3
EQUITY
15-22 LO 3
EQUITY
Patent 140,000
Share CapitalOrdinary 100,000
Share PremiumOrdinary 40,000
15-23 LO 3
EQUITY
Patent 150,000
Share CapitalOrdinary 100,000
Share PremiumOrdinary 50,000
15-24 LO 3
EQUITY
Patent 125,000
Share CapitalOrdinary 100,000
Share PremiumOrdinary 25,000
15-25 LO 3
EQUITY
15-26 LO 3
15 Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Discuss the characteristics of the 5. Explain the accounting for and reporting
corporate form of organization. of preference shares.
2. Identify the key components of equity. 6. Describe the policies used in
3. Explain the accounting procedures for distributing dividends.
issuing shares. 7. Identify the various forms of dividend
distributions.
4. Describe the accounting for
treasury shares. 8. Explain the accounting for share
dividends and share splits.
9. Indicate how to present and analyze
equity.
15-27
EQUITY
Reacquisition of 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.
15-28 LO 4
EQUITY
15-29 LO 4
EQUITY
ILLUSTRATION 15-4
Equity with No Treasury
Shares
15-30 LO 4
EQUITY
15-31 LO 4
EQUITY
ILLUSTRATION 15-5
Equity with Treasury
Shares
15-32 LO 4
EQUITY
15-33 LO 4
EQUITY
Cash 15,000
Treasury Shares 11,000
Share PremiumTreasury 4,000
15-34 LO 4
EQUITY
Cash 8,000
Share PremiumTreasury 3,000
Treasury Shares 11,000
15-35 LO 4
EQUITY
ILLUSTRATION 15-6
Treasury Share
Transactions in Share
PremiumTreasury
Account
Cash 8,000
Share PremiumTreasury 1,000
Retained Earnings 2,000
Treasury Shares 11,000
15-36 LO 4
EQUITY
15-37 LO 4
15 Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Discuss the characteristics of the 6. Describe the policies used in
corporate form of organization. distributing dividends.
2. Identify the key components of equity. 7. Identify the various forms of dividend
3. Explain the accounting procedures for distributions.
issuing shares. 8. Explain the accounting for share
4. Describe the accounting for treasury dividends and share splits.
shares. 9. Indicate how to present and analyze
equity.
5. Explain the accounting for and
reporting of preference shares.
15-38
PREFERENCE SHARES
5. Non-voting.
15-39 LO 5
PREFERENCE SHARES
15-40 LO 5
PREFERENCE SHARES
Cash 120,000
Share CapitalPreference 100,000
Share PremiumPreference 20,000
15-41 LO 5
15 Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Discuss the characteristics of the 6. Describe the policies used in
corporate form of organization. distributing dividends.
2. Identify the key components of equity. 7. Identify the various forms of dividend
3. Explain the accounting procedures for distributions.
issuing shares. 8. Explain the accounting for share
4. Describe the accounting for treasury dividends and share splits.
shares. 9. Indicate how to present and analyze
5. Explain the accounting for and reporting equity.
of preference shares.
15-42
DIVIDEND POLICY
15-43 LO 6
DIVIDEND POLICY
15-44 LO 6
15 Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Discuss the characteristics of the 6. Describe the policies used in
corporate form of organization. distributing dividends.
2. Identify the key components of equity. 7. Identify the various forms of
3. Explain the accounting procedures for dividend distributions.
issuing shares. 8. Explain the accounting for share
4. Describe the accounting for treasury dividends and share splits.
shares. 9. Indicate how to present and analyze
5. Explain the accounting for and reporting equity.
of preference shares.
15-45
DIVIDEND POLICY
Types of Dividends
1. Cash dividends. 3. Liquidating dividends.
2. Property dividends. 4. Share dividends.
15-46 LO 7
DIVIDEND POLICY
Cash Dividends
Board of directors vote on the declaration of cash
dividends.
A declared cash dividend is a liability.
15-47 LO 7
DIVIDEND POLICY
15-48 LO 7
DIVIDEND POLICY
Property Dividends
Dividends payable in assets other than cash.
Restate at fair value the property it will distribute,
recognizing any gain or loss.
15-49 LO 7
DIVIDEND POLICY
Illustration: Tsen, Inc. transferred to shareholders some of its
investments (held-for-trading) in securities costing HK$1,250,000
by declaring a property dividend on December 28, 2014, to be
distributed on January 30, 2015, to shareholders of record on
January 15, 2015. At the date of declaration the securities have a
fair value of HK$2,000,000. Tsen makes the following entries.
15-50 LO 7
DIVIDEND POLICY
Illustration: Tsen, Inc. transferred to shareholders some of its
investments (held-for-trading) in securities costing HK$1,250,000
by declaring a property dividend on December 28, 2014, to be
distributed on January 30, 2015, to shareholders of record on
January 15, 2015. At the date of declaration the securities have a
fair value of HK$2,000,000. Tsen makes the following entries.
15-51 LO 7
DIVIDEND POLICY
Liquidating Dividends
Any dividend not based on earnings reduces amounts
paid-in by shareholders.
15-52 LO 7
DIVIDEND POLICY
Date of declaration
15-53 LO 7
DIVIDEND POLICY
Date of payment
15-54 LO 7
15 Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Discuss the characteristics of the 6. Describe the policies used in
corporate form of organization. distributing dividends.
2. Identify the key components of equity. 7. Identify the various forms of dividend
3. Explain the accounting procedures for distributions.
issuing shares. 8. Explain the accounting for share
4. Describe the accounting for treasury dividends and share splits.
shares. 9. Indicate how to present and analyze
5. Explain the accounting for and reporting equity.
of preference shares.
15-55
DIVIDEND POLICY
Share Dividends
Issuance by a corporation of its own shares to shareholders
on a pro rata basis, without receiving any consideration.
Par value, not the fair value, is used to record the share
dividend.
Share dividend does not affect any asset or liability.
Journal entry reflects a reclassification of equity.
Ordinary share dividend distributable reported in the equity
section as an addition to share capitalordinary.
15-56 LO 8
DIVIDEND POLICY
Date of declaration
15-57 LO 8
DIVIDEND POLICY
Date of distribution
15-58 LO 8
DIVIDEND POLICY
Share Splits
To reduce the market value of shares.
No entry recorded for a share split.
Decrease par value and increased number of
shares.
ILLUSTRATION 15-13
Effects of a Share Split
15-59 LO 8
DIVIDEND POLICY
15-60 LO 8
15 Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Discuss the characteristics of the 6. Describe the policies used in
corporate form of organization. distributing dividends.
2. Identify the key components of equity. 7. Identify the various forms of dividend
3. Explain the accounting procedures for distributions.
issuing shares. 8. Explain the accounting for share
4. Describe the accounting for treasury dividends and share splits.
shares. 9. Indicate how to present and analyze
5. Explain the accounting for and reporting equity.
of preference shares.
15-61
PRESENTATION AND ANALYSIS
15-62 LO 9
PRESENTATION AND ANALYSIS
ILLUSTRATION 15-17
Statement of Changes
in Equity
15-63 LO 9
PRESENTATION AND ANALYSIS
Analysis
Illustration: Gerbers 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 15-18
Illustration 15-15
ILLUSTRATION 15-19
15-65 LO 9
PRESENTATION AND ANALYSIS
ILLUSTRATION 15-20
Amount each share would receive if the company
were liquidated on the basis of amounts reported
on the statement of financial position.
15-66 LO 9
GLOBAL ACCOUNTING INSIGHTS
EQUITY
The accounting for transactions related to equity, such as issuance of shares,
purchase of treasury shares, and declaration and payment of dividends, are
similar under both IFRS and U.S. GAAP. Major differences relate to
terminology used and presentation of equity information.
15-67
GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Following are the key similarities and differences between U.S. GAAP and
IFRS related to equity.
Similarities
The accounting for the issuance of shares and purchase of treasury shares
are similar under both U.S. GAAP and IFRS.
The accounting for declaration and payment of dividends and the
accounting for share splits are similar under both U.S. GAAP and IFRS.
15-68
GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Differences
U.S. GAAP requires that small share dividends (referred to as stock
dividends) should be recorded by transferring an amount equal to the fair
value of the shares issued from retained earnings to share capital accounts.
IFRS is silent on the accounting for share dividends.
Major differences relate to terminology used, introduction of concepts such
as revaluation surplus, and presentation of equity information.
In the United States and the United Kingdom, many companies rely on
substantial investments from private investors. Other countries have
different investor groups. For example, in Germany, financial institutions
such as banks are not only the major creditors but often are the largest
shareholders as well.
15-69
GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Differences
The accounting for treasury share retirements differs between U.S. GAAP
and IFRS. Under U.S. GAAP, a company has three options: (1) charge the
excess of the cost of treasury shares over par value to retained earnings,
(2) allocate the difference between paid-in capital and retained earnings, or
(3) charge the entire amount to paid-in capital. Under IFRS, the excess may
have to be charged to paid-in capital, depending on the original transaction
related to the issuance of the shares.
The statement of changes in equity is usually referred to as the statement of
stockholders equity (or shareholders equity) under U.S. GAAP.
15-70
GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Differences
Both U.S. GAAP and IFRS use the term retained earnings. However, U.S.
GAAP uses the account Accumulated Other Comprehensive Income (Loss).
Use of this account is gaining prominence within the IFRS literature, which
traditionally has relied 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.
The term surplus is generally not used in U.S. GAAP, as the standards do
not allow revaluation accounting. 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.
15-71
GLOBAL ACCOUNTING INSIGHTS
On the Horizon
As indicated in earlier discussions, the IASB and the FASB have completed
some work on a project related to financial statement presentation. An
important part of this study is to determine whether certain line items,
subtotals, and totals should be clearly defined and required to be displayed in
the financial statements. For example, it is likely that the statement of changes
in equity and its presentation will be examined closely. In addition, the options
of how to present other comprehensive income under U.S. GAAP will change
in any converged standard.
15-72
DIVIDEND PREFERENCES AND BOOK
APPENDIX 15A
VALUE PER SHARE
Dividend Preferences
Illustration: In 2015, 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-1
Dividend Distribution, Non-
Cumulative and Non-
Participating Preference LO 10 Explain the different types of preference share
15-73
dividends and their effect on book value per share.
DIVIDEND PREFERENCES
Illustration: In 2015, 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.
15-74 LO 10
DIVIDEND PREFERENCES
3. If the preference shares is noncumulative and is fully participating:
ILLUSTRATION 15A-3
15-75 LO 10
DIVIDEND PREFERENCES
Illustration: In 2015, 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.
15-76 LO 10
BOOK VALUE PER SHARE
Book 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-5
Computation of Book Value per Share
No Dividends in Arrears
15-77 LO 10
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-6
15-78 Computation of Book Value per Sharewith Dividends in Arrears, Participating LO 10
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15-79