Chapter 06 - Accounting for Corporations.pdf

ADVICE TO ALL EMPLOYEES

1. Build a home earlier. Be it rural home or urban home. Building a house at 50 is not an achievement. Don't get used to government houses. This comfort is so dangerous. Let all your family have good time in your house.

2. Go home. Don't stick at work all the year. You are not the pillar of your department. If you drop dead today, you will be replaced immediately and operations will continue. Make your family a priority.

3. Don't chase promotions. Master your skills and be excellent at what you do. If they want to promote you, that's fine if they don't, stay positive to your personal.
development.

4. Avoid office or work gossip. Avoid things that tarnish your name or reputation. Don't join the bandwagon that backbites your bosses and colleagues. Stay away from negative gatherings that have only people as their agenda.

5. Don't ever compete with your bosses. You will burn your fingers. Don't compete with your colleagues, you will fry your brain.

6. Ensure you have a side business. Your salary will not sustain your needs in the long run.

7. Save some money. Let it be deducted automatically from your payslip.

8. Borrow a loan to invest in a business or to change a situation not to buy luxury. Buy luxury from your profit.

9. Keep your life,marriage and family private. Let them stay away from your work. This is very important.

10. Be loyal to yourself and believe in your work. Hanging around your boss will alienate you from your colleagues and your boss may finally dump you when he leaves.

11. Retire early. The best way to plan for your exit was when you received the employment letter. The other best time is today. By 40 to 50 be out.

12. Join work welfare and be an active member always. It will help you a lot when any eventuality occurs.

13.Take leave days utilize them by developing yr future home or projects..usually what you do during yr leave days is a reflection of how you'll live after retirement..If it means you spend it all holding a remote control watching series on Zee world, expect nothing different after retirement.

14. Start a project whilst still serving or working. Let your project run whilst at work and if it doesn't do well, start another one till it's running viably. When your project is viably running then retire to manage your business. Most people or pensioners fail in life because they retire to start a project instead of retiring to run a project.

15. Pension money is not for starting a project or buy a stand or build a house but it's money for your upkeep or to maintain yourself in good health. Pension money is not for paying school fees or marrying a young wife but to look after yourself.

16. Always remember, when you retire never be a case study for living a miserable life after retirement but be a role model for colleagues to think of retiring too.

17. Don't retire just because you are finished or you are now a burden to the company and just wait for your day t

1. Chapter 6
Accounting for Corporations

2. Learning Objective 1
Discuss the Major Characteristics of a
Corporation
2

3. •A corporation is a legal entity, distinct and separate
from the individuals who create and operate it.
•Stakeholders include those who have an economic
interest in an organization and those who are
affected by its activities.


3

4. •Stakeholders include those who have an economic
interest in an organization and those who are
affected by its activities.

4

5. Authorized
Issued
Outstanding
Number of Shares
Sources of Paid-In Capital

5

6. Money
available
for
dividends
Common
Stockholders
Preferred
Stockholders
Classes of Stockholders
The two primary classes of paid-in capital are common
stock and preferred stock. The primary attractiveness of
preferred stocks is that they are preferred over common
as to dividends.

6

7. Classes of Stockholders
Common Stock—the basic ownership of stock with rights
to vote in election of directors, share in distribution of
earnings, and purchase additional shares.
Preferred Stock—A class of stock with preferential rights
over common stock in payment of dividends and
company liquidation.

7

8. Characteristics that distinguish corporations from
proprietorships and partnerships.
•Separate Legal Existence
•Limited Liability of Shareholders
•Transferable Ownership Rights
•Ability to Acquire Capital
•Continuous Life
•Corporate Management
•Government Regulations
•Additional Taxes
8
Characteristics of Corporation (1 of 10)
Advantages
Disadvantages

9. 9
Characteristics that distinguish corporations from
proprietorships and partnerships.
•Separate Legal Existence
•Limited Liability of Shareholders
•Transferable Ownership Rights
•Ability to Acquire Capital
•Continuous Life
•Corporate Management
•Government Regulations
•Additional Taxes
Characteristics of Corporation (2 of 10)
Corporation acts
under its own
name rather than
in the name of its
shareholders

10. 10
Characteristics that distinguish corporations from
proprietorships and partnerships.
•Separate Legal Existence
•Limited Liability of Shareholders
•Transferable Ownership Rights
•Ability to Acquire Capital
•Continuous Life
•Corporate Management
•Government Regulations
•Additional Taxes
Characteristics of Corporation (3 of 10)
Limited to their
investment

11. 11
Characteristics that distinguish corporations from
proprietorships and partnerships.
•Separate Legal Existence
•Limited Liability of Shareholders
•Transferable Ownership Rights
•Ability to Acquire Capital
•Continuous Life
•Corporate Management
•Government Regulations
•Additional Taxes
Characteristics of Corporation (4 of 10)
Shareholders may
sell their shares

12. 12
Characteristics that distinguish corporations from
proprietorships and partnerships.
•Separate Legal Existence
•Limited Liability of Shareholders
•Transferable Ownership Rights
•Ability to Acquire Capital
•Continuous Life
•Corporate Management
•Government Regulations
•Additional Taxes
Characteristics of Corporation (5 of 10)
Corporation can
obtain capital
through the
issuance of shares

13. 13
Characteristics that distinguish corporations from
proprietorships and partnerships.
•Separate Legal Existence
•Limited Liability of Shareholders
•Transferable Ownership Rights
•Ability to Acquire Capital
•Continuous Life
•Corporate Management
•Government Regulations
•Additional Taxes
Characteristics of Corporation (6 of 10)
Continuance as a
going concern is
not affected by the
withdrawal, death,
or incapacity of a
shareholder,
employee, or
officer

14. 14
Characteristics that distinguish corporations from
proprietorships and partnerships.
•Separate Legal Existence
•Limited Liability of Shareholders
•Transferable Ownership Rights
•Ability to Acquire Capital
•Continuous Life
•Corporate Management
•Government Regulations
•Additional Taxes
Characteristics of Corporation (7 of 10)
Separation of
ownership and
management often
reduces an owner’s
ability to actively
manage the
company

15. 15
Shareholders
Chairman and
Board of
Directors
President and
Chief Executive
Officer
General
Counsel/
Secretary
Vice President
Marketing
Vice President
Finance/Chief
Financial Officer
Vice President
Operations
Vice President
Human
Resources
Treasurer Controller
Corporation
organization
chart
Characteristics
of Corporation
(8 of 10)

16. 16
Characteristics that distinguish corporations from
proprietorships and partnerships.
•Separate Legal Existence
•Limited Liability of Shareholders
•Transferable Ownership Rights
•Ability to Acquire Capital
•Continuous Life
•Corporate Management
•Government Regulations
•Additional Taxes
Characteristics of Corporation (9 of 10)
A corporation is
subject to
numerous
governmental
regulations

17. 17
Characteristics that distinguish corporations from
proprietorships and partnerships.
•Separate Legal Existence
•Limited Liability of Shareholders
•Transferable Ownership Rights
•Ability to Acquire Capital
•Continuous Life
•Corporate Management
•Government Regulations
•Additional Taxes
Characteristics of Corporation (10 of 10)
Corporations pay
income taxes as a
separate legal
entity and in
addition,
shareholders pay
taxes on cash
dividends

18. 18
Initial Steps:
•File application with governmental agency in the
jurisdiction in which incorporation is desired
•Government grants charter
•Corporation develops by-laws
Companies generally incorporate in a state or country whose
laws are favorable to the corporate form of business.
Corporations engaged in commerce outside their state or
country must obtain a license from each government in which
they do business.
Forming a Corporation

19. 19
1.Vote in election of board of directors at annual
meeting and vote on actions that require
shareholder approval.
2.Share the corporate earnings through receipt of
dividends.
3.Keep the same percentage ownership when new
shares are issued (preemptive right).
4.Share in assets upon liquidation in proportion to
their holdings. This is called a residual claim.
Shareholder Rights

20. 20
When a corporation decides to issue shares, it must
resolve a number of basic questions:
1.How many shares should it authorize for sale?
2.How should it issue the shares?
3.What value should the corporation assign to the
shares?


Share Issue Considerations (1 of 6)

21. 21
Authorized Shares
•Charter indicates amount of shares that a corporation
is authorized to sell
•Number of authorized shares is often reported in
equity section
•No formal accounting entry
Share Issue Considerations (2 of 6)

22. 22
Issuance of Shares
•Companies issue ordinary shares directly to investors
or indirectly through an investment banking firm
•Factors in setting price for a new issue of shares:
1.Company’s anticipated future earnings
2.Expected dividend rate per share
3.Current financial position
4.Current state of economy
5.Current state of securities market
Share Issue Considerations (3 of 6)

23. 23
Market Price of Shares
•Shares of publicly held companies are traded on
organized exchanges
•Interaction between buyers and sellers determines
the prices per share
•Prices tend to follow the trend of a company’s
earnings and dividends
•Factors beyond a company’s control may cause day-
to-day fluctuations in market prices

Share Issue Considerations (4 of 6)

24. 24
Par and No-Par Value Shares
•Years ago, par value determined legal capital per
share that a company must retain in business for
protection of corporate creditors
•Today many governments do not require a par value
•No-par value shares is fairly common today
•In many countries, the board of directors assigns a
stated value to no-par shares
Share Issue Considerations (5 of 6)

25. 25
Equity is identified by various names:
•stockholders’ equity,
•shareholders’ equity, or
•corporate capital.
The equity section of a corporation’s statement of
financial position consists of two parts:
1.share capital and
2.retained earnings (earned capital).
Corporate Capital (1 of 3)

26. 26
Share Capital
Share capital is the total amount of cash and other assets
paid in to the corporation by shareholders in exchange
for shares.
Corporate Capital (2 of 3)

27. 27
Retained Earnings
Net income that a corporation retains for future use.
Net income is recorded in Retained Earnings by a closing
entry. For example, assuming that net income for Delta
Robotics in its first year of operations is HK$1,300,000,
the closing entry is:
Corporate Capital (3 of 3)
Income Summary 1,300,000
Retained Earnings 1,300,000

28. 28
If Delta Robotics has a balance of HK$800,000 in Share
Capital—Ordinary and HK$130,000 in retained earnings at the
end of its first year, its equity section is as follows:
Retained Earnings
Equity
Share capital—ordinary HK$8,000,000
Retained earnings 1,300,000
Total equity HK$9,300,000
Delta Robotics
Statement of Financial Position (partial)

29. 29
Comparison of the equity accounts reported on a
statement of financial position for a proprietorship and a
corporation.
Corporate Capital

30. 30
Illustration: At the end of its first year of operation, Doral AG
has €750,000 of ordinary shares 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 122,000
(b) Equity
Share capital—ordinary €750,000
Retained earnings 122,000
Total equity €872,000
DO IT! 1b: Corporate Capital

31. Learning Objective 2
Explain How to Account for Ordinary,
Preference, and Treasury Shares
31

32. 32
Accounting for Ordinary Shares
Primary Objective is to identify the specific sources of
capital.
Accounting for Share Transactions

33. 33
Issuing Par Value Ordinary Shares for Cash
•Par value does not indicate a share’s market price
•Cash proceeds from issuing par value shares may be
equal to, greater than, or less than par value
•Issuance of ordinary shares for cash
Credit par value of shares to Share Capital—
Ordinary
Record in a separate account portion of proceeds
that is above or below par value
Accounting for Ordinary Shares

34. 34
Illustration: Assume that Hydro-Slide SA issues 1,000 shares
of €1 par value ordinary shares. Prepare the entry to record
this transaction.
Cash 1,000
Share Capital—Ordinary (1,000 x €1) 1,000
Issuing Par Value Ordinary Shares for
Cash (1 of 3)

35. 35
Now assume that Hydro-Slide issues an additional 1,000
shares of the €1 par value ordinary shares for cash at €5 per
share. Prepare the entry to record this transaction.
Cash 5,000
Share Capital—Ordinary (1,000 x €1) 1,000
Share Premium—Ordinary 4,000
Issuing Par Value Ordinary Shares for
Cash (2 of 3)

36. 36
Hydro-Slide SA
Statement of Financial Position (partial)
Issuing Par Value Ordinary Shares for
Cash (3 of 3)
Equity
Share capital—ordinary € 2,000
Share premium—ordinary 4,000
Retained earnings 27,000
Total equity €33,000

37. 37
Illustration: Assume that instead of €1 par value shares,
Hydro-Slide SA has €5 stated value no-par shares and the
company issues 5,000 shares at €8 per share for cash.
Cash 40,000
Share Capital—Ordinary 25,000
Share Premium—Ordinary 15,000
Issuing No-Par Ordinary Shares (1 of 2)

38. 38
Illustration: if Hydro-Slide does not assign a stated value to its
no-par shares, it records the issuance of the 5,000 shares at
€8 per share for cash as follows.
Cash 40,000
Share Capital—Ordinary 40,000


Issuing No-Par Ordinary Shares (2 of 2)

39. 39
Corporations also may issue shares for:
•Services (attorneys or consultants)
•Non-cash assets (land, buildings, and equipment)
Cost is either the fair market value of the consideration
given up, or the fair market value of the consideration
received, whichever is more clearly determinable.
Issuing Ordinary Shares for Services or
Non-cash Assets

40. 40
Illustration: Attorneys have helped Jordan Company
incorporate. They have billed the company €5,000 for their
services. They agree to accept 4,000 shares of €1 par value
ordinary shares in payment of their bill. At the time of the
exchange, there is no established market price for the shares.
Prepare the journal entry for this transaction.
Organization Expense 5,000
Share Capital—Ordinary 4,000
Share Premium—Ordinary 1,000
Ordinary Shares for Services

41. 41
Illustration: Athletic Research AG is an existing publicly held
corporation. Its €5 par value shares are actively traded at €8
per share. The company issues 10,000 shares to acquire land
recently advertised for sale at €90,000. Prepare the journal
entry for this transaction.
Land 80,000
Share Capital—Ordinary 50,000
Share Premium—Ordinary 30,000
Ordinary Shares for Non-Cash Assets

42. 42
Typically, preferred shareholders have a priority as to:
1.Distributions of earnings (dividends).
2.Assets in event of liquidation.
Generally do not have voting rights.
Accounting for preference shares at issuance is similar to
that for ordinary shares.
Accounting for Preference Shares (1 of 2)

43. 43
Illustration: Florence SpA issues 10,000 shares of €10 par
value preference shares for €12 cash per share. The journal
entry to record the issuance is:
Cash 120,000
Share Capital—Preference 100,000
Share Premium—Preference 20,000
Preference shares may have a par value or no-par value.
Accounting for Preference Shares (2 of 2)

44. Net income $20,000 $55,000 $62,000
Amount retained 10,000 20,000 40,000
Amount distributed $10,000 $35,000 $22,000
2005 2006 2007
Nonparticipating Preferred Stock

A nonparticipating preferred stock is limited to a certain
amount. Assume 1,000 shares of $4 nonparticipating
preferred stock and 4,000 shares of common stock and
the following:

44

45. Dividends per share:
Preferred $ 4.00 $ 4.00 $ 4.00
Common $ 1.50 $ 7.75 $ 4.50
Amount distributed $10,000 $35,000 $22,000
Preferred dividend
(1,000 shares) 4,000 4,000 4,000
Common dividend
(4,000 shares) $6,000 $31,000 $18,000
Nonparticipating Preferred Stock

45

46. Cumulative Preferred Stock

•So, preferred dividends are two years in arrears.

Assume 1,000 shares of $4 cumulative preferred stock
and 4,000 shares of common stock. No dividends were
paid in 2005 and 2006. On March 7, 2007, the board of
directors declares dividends of $22,000.


46

47. $4,000
$4,000
$4,000
Preferred Stock Dividends Dividends Paid in 2007
Total dividends paid,
$22,000
$4,000
2005
(In arrears) $4,000
2006
(In arrears) $4,000
2007
(Current dividend)
Preferred
Stock
Common
Stock
$10,000
Cumulative Preferred Stock

47

48. 48
Treasury shares are a corporation’s own shares that it has
reacquired from shareholders but not retired.
Corporations acquire treasury shares for various reasons:
1.To reissue the shares to officers and employees
under bonus and share compensation plans.
2.To enhance the share’s market value.
3.To have additional shares available for use in the
acquisition of other companies.
4.To increase earnings per share.
Accounting for Treasury Shares

49. 49
•Companies generally use cost method
•Debit Treasury Shares for price paid to reacquire
shares
•Treasury shares is a contra equity account
•Reduces equity
Purchase of Treasury Shares (1 of 3)

50. 50
Mead, Ltd.
Statement of Financial Position (partial)
ILLUSTRATION 12.8
Equity section with
no treasury shares
Illustration: On February 1, 2020, Mead acquires 4,000 shares of its
stock at HK$80 per share. The entry is as follows.
Treasury Shares 320,000
Cash 320,000
Purchase of Treasury Shares (2 of 3)
Equity
Share capital—ordinary, HK$50 par value, 100,000
shares issued and outstanding HK$5,000,000
Retained earnings 2,000,000
Total equity HK$7,000,000

51. 51
Mead, Ltd.
Statement of Financial Position (partial)
Both the number of shares issued (100,000) and the number of
shares held as treasury (4,000) are disclosed.
Purchase of Treasury Shares (3 of 3)
Equity
Share capital—ordinary, HK$50 par value, 100,000
shares issued and 96,000 shares outstanding HK$5,000,000
Retained earnings 2,000,000
7,000,000
Less: Treasury stock (4,000 shares) 320,000
Total equity HK$6,680,000
ILLUSTRATION 12.9
Equity section with
treasury shares

52. 52
Illustration: On July 1, Mead, Ltd. sells for HK$100 per share
1,000 of the 4,000 treasury shares previously acquired at
HK$80 per share. The entry is as follows.
Cash 100,000
Treasury Shares 80,000
Share Premium—Treasury 20,000
A corporation does not realize a gain or suffer a loss from
shares transactions with its own shareholders.
Sale of Treasury Shares Above Cost

53. Treasury Shares Share Premium––Treasury
Feb. 1 320,000 July 1 80,000 Oct. 1 8,000 July 1 20,000
Oct. 1 64,000 Oct. 1 Bal. 12,000
Oct. 1 Bal. 176,000
53
If Mead, Ltd. sells an additional 800 treasury shares on
October 1 at HK$70 per share, it makes the following entry.
Cash (800 × HK$70) 56,000
Share Premium—Treasury 8,000
Treasury Shares 64,000

Sale of Treasury Shares Below Cost (1 of 2)

54. 54
On December 1, assume that Mead, Ltd. sells its remaining
2,200 shares at HK$70 per share and makes the following
entry.
Cash (2,200 × HK$70) 154,000
Share Premium—Treasury 12,000
Retained Earnings 10,000
Treasury Shares 176,000
Sale of Treasury Shares Below Cost (2 of 2)
Limited to
balance on
hand

55. Learning Objective 3
Explain How to Account for Cash
Dividends, Share Dividends, and Share
Splits
55

56. 56
Distribution of cash or shares to shareholders on a pro
rata (proportional to ownership) basis.
Types of Dividends:
1.Cash
2.Property
3.Shares
4.Scrip (promissory note to pay cash)

Dividends and Splits

57. 57
For a corporation to pay a cash dividend, it must have:
1.Retained earnings - Payment of cash dividends from
retained earnings is legal in all jurisdictions.
2.Adequate cash.
3.A declaration of dividends by Board of Directors.

Accounting for Cash Dividends (1 of 3)

58. 58
Three dates are important:

Accounting for Cash Dividends (2 of 3)

59. 59
Illustration: On December 1, 2020, 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 January 20 to shareholders of record on December
22.
Dec. 1 Cash Dividends 50,000
Dividends Payable 50,000
Dec. 22 No entry
Jan. 20 Dividends Payable 50,000
Cash 50,000
Accounting for Cash Dividends (3 of 3)

60. 60
•Right to receive dividends before ordinary
shareholders
•Per share dividend amount is stated as a percentage
of preference shares par value or as a specified
amount
•Cumulative Dividend - Preference shareholders must
be paid both current-year dividends and any unpaid
prior-year dividends before ordinary shareholders are
paid dividends
Dividend Preferences (1 of 3)

61. 61
Cumulative Dividend
Illustration: Scientific Leasing has 5,000 shares of 7%, €100
par value, cumulative preference shares outstanding. Each
€100 share pays a €7 dividend (.07 × €100). The annual
dividend is €35,000 (5,000 × €7 per share). If dividends are
two years in arrears, preference shareholders are entitled to
receive the following dividends.
Dividends in arrears (€35,000 × 2) € 70,000
Current-year dividends 35,000
Total preference dividends €105,000
Dividend Preferences (2 of 3)

62. 62
Allocating Cash Dividends between Preference
and Ordinary Shares
Holders of cumulative preference shares must be paid any
unpaid prior-year dividends and their current year’s dividend
before ordinary shareholders receive dividends.

Dividend Preferences (3 of 3)

63. 63
Illustration: On December 31, 2019, IBR Inc. has 1,000 shares
of 8%, €100 par value cumulative preference shares. It also
has 50,000 shares of €10 par value ordinary shares
outstanding. At December 31, 2019, the directors declare a
€6,000 cash dividend. Calculate the annual preferred
dividend.
€100 par x 8% x 1,000 shares = €8,000
Prepare the entry to record the declaration of the dividend.
Dec. 31 Cash Dividends 6,000
Dividends Payable 6,000
Allocating Cash Dividends (1 of 3)

64. 64
Illustration: At December 31, 2020, IBR declares a €50,000
cash dividend. Show the allocation of dividends to each class
of stock.
Allocating Cash Dividends (2 of 3)
Total dividend €50,000
Allocated to preference shares
Dividends in arrears, 2019 (1,000 × €2) €2,000
2020 dividend (1,000 × €8) 8,000 10,000
Remainder allocated to common shares €40,000

65. 65
Illustration: At December 31, 2020, IBR declares a €50,000
cash dividend. Prepare the entry to record the declaration of
the dividend.
Dec. 31 Cash Dividends 50,000
Dividends Payable 50,000
Allocating Cash Dividends (3 of 3)

66. 66
A pro rata (proportional to ownership) distribution of the
corporation’s own shares to shareholders.
Reasons why corporations issue share dividends:
1.Satisfy shareholders’ dividend expectations without
spending cash
2.Increase marketability of corporation’s shares
3.Emphasize a portion of shareholders’ equity has
been permanently reinvested in business
Accounting for Share Dividends (1 of 2)

67. 67
•Small share dividend (less than 20–25% of
corporation’s issued shares, recorded at fair market
value)
Accounting based on assumption that a small
share dividend will have little effect on market
price of outstanding shares
•Large share dividend (greater than 20–25% of issued
share, recorded at par value)
Accounting for Share Dividends (2 of 2)

68. 68
Illustration: Danshui Ltd. declares a 10% share dividend on its
50,000 shares of NT$100 par value ordinary shares. The current fair
market value of its shares is NT$150 per share. Record the entry on
the declaration date:
Share Dividends 750,000
Ordinary Share Dividends Distributable 500,000
Share Premium—Ordinary 250,000
Entries for Share Dividends (1 of 2)
Share capital NT$5,000,000
Ordinary share dividends distributable 500,000
NT$5,500,000
Equity Section Statement Presentation:

69. 69
Illustration: When Danshui issues the dividend shares, it debits
Ordinary Share Dividends Distributable and credits Share Capital—
Ordinary as follows.
Ordinary Share Dividends Distributable 500,000
Share Capital—Ordinary 500,000
Entries for Share Dividends (2 of 2)

70. 70
Effects of Share Dividends

Before
Dividend Change
After
Dividend
Equity
Share capital—ordinary NT$5,000,000 NT$500,000 NT$5,500,000
Share premium—ordinary — 250,000 250,000
Total share capital 5,000,000 +750,000 5,750,000
Retained earnings 3,000,000 −750,000 2,250,000
Total equity NT$8,000,000 NT$0 NT$8,000,000
Outstanding shares 50,000 +5,000 55,000
Par value per share NT$100.00 NT$0 NT$100.00

71. 71
•Issuance of additional shares to shareholders
according to their percentage ownership
•Reduction in par or stated value per share
•Increase in number of shares outstanding
•Reduces market value of shares
•No journal entry recorded, no effect on the balances
in any equity accounts

Accounting for Share Splits (1 of 3)

72. 72
Effect of 4-for-1 stock split for shareholders
Accounting for Share Splits (2 of 3)

73. Effects for Danshui Ltd., assuming that it splits its 50,000
ordinary shares on a 2-for-1 basis.
73

Before
Share Split Change
After
Share Split
Equity
Share capital—ordinary NT$5,000,000 NT$ –0– NT$5,000,000
Share premium—ordinary –0– –0– –0–
Retained earnings 3,000,000 –0– 3,000,000
Total equity NT$8,000,000 NT$ –0– NT$8,000,000
Outstanding shares 50,000 +50,000 100,000
Par value per share NT$100.00 −NT$50.00 NT$50.00
Accounting for Share Splits (3 of 3)

74. Learning Objective 4
Discuss How Equity is Reported and
Analyzed
74

75. 75
Retained earnings
Includes net income that a company retains in the
business.
•Part of shareholders’ claim on total assets of
corporation
•Does not represent a claim on any specific asset
•Amount cannot be associated with the balance of any
asset account
Reporting

76. 76
•If cumulative losses exceed cumulative income over a
company’s life, a debit balance in Retained Earnings
results
•Debit balance is identified as a deficit

Retained Earnings (1 of 3)
Statement of Financial Position (partial)
Equity
Share capital—ordinary €800,000
Retained earnings (deficit) (50,000)
Total equity €750,000

77. 77
In some cases there may be retained earnings restrictions.
•These make a portion of the retained earnings balance
currently unavailable for dividends
•Companies generally disclose retained earnings
restrictions in the notes to the financial statements.
Retained Earnings (2 of 3)
Tektronix Inc.
Notes to the Financial Statements
Certain of the Company’s debt agreements require compliance with debt
covenants. Management believes that the Company is in compliance with such
requirements. The Company had unrestricted retained earnings of $223.8 million
after meeting those requirements.

78. 78
Retained Earnings (3 of 3)
Balance, January 1 €1,050,000
Add: Net income 410,000
1,460,000
Less: Cash Dividends 100,000
Share Dividends 200,000
Balance, December 31 €1,160,000
Graber SA
Statement of Retained Earnings
For the Year Ended December 31, 2020
Statement for Graber SA, based on assumed data.

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Graber SA
Statement of Financial Position (partial)
Statement of Financial Position
Equity
Share capital—preference, 9% €100 par value,
cumulative, callable at €120, 10,000 shares
authorized, 6,000 shares issued and outstanding € 600,000
Share capital—ordinary, no-par, €5 stated
value, 500,000 shares authorized,
400,000 shares issued and 390,000 outstanding €2,000,000
Ordinary share dividends distributable 50,000 2,050,000
Share premium—preference 30,000
Share premium—ordinary 1,050,000 1,080,000
Retained earnings (see Note R) 1,160,000
Less: Treasury shares (10,000 shares) 80,000
Total equity €4,810,000
Note R: Retained earnings is restricted for the cost of treasury
shares, €80,000.

80. Learning Objective 5
Describe the Use and Content of the
Statement of Changes in Equity
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When statements of financial position and income statements are
presented by a corporation, changes in the separate accounts
comprising equity should also be disclosed.
•Disclosures are made in an additional statement called the
statement of changes in equity.
•Statement shows the changes in each equity account and in
total equity during the year
•When a statement of changes in equity is presented, a
retained earnings statement is not necessary because the
retained earnings column explains the changes in this account
Statement Presentation of Equity (1 of 2)

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Statement Presentation of Equity (2 of 2)

83. Learning Objective 6
Compute Book Value per Share
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Book Value per Share
The equity an ordinary shareholder has in the net assets
of the corporation.
Book Value—Another per Share
Amount

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Computation of book value per share involves the following
steps.
1.Compute the preference share equity. This equity is
equal to the sum of the call price of preference shares
plus any cumulative dividends in arrears. If the
preference shares do not have a call price, the par value
of the shares is used.
2.Determine the ordinary shareholders’ equity. Subtract
the preference share equity from total equity.
3.Determine book value per share. Divide ordinary
shareholders’ equity by ordinary shares.
Book Value per Share (1 of 3)

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Illustration: Using the equity section of Graber SA as
previously shown. Graber’s preference shares are callable at
€120 per share and are cumulative. Assume that dividends on
Graber’s preference shares were in arrears for one year,
€54,000 (6,000 x €9). The computation of preference share
equity (Step 1 in the preceding list) is:
Book Value per Share (2 of 3)

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Book Value per Share (3 of 3)
Computation of book value:

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The correlation between book value and the annual range of a
company’s market value per share is often remote.

Book Value versus Market Value

89. End of Chapter
89