Financial_Accounting_chapter_11 Accounting

Financial Accounting

1. Slide
11-1
Lecturer : Muhammad Alif Nur Irvan S.Ak., M.Acc., Akt., CPA
Class : International Program

2. Slide
11-2
Chapter 11
Corporations:
Organization, Share
Transactions, Dividends,
and Retained Earnings
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso

3. Slide
11-3
1.Identify the major characteristics of a corporation.
2.Record the issuance of ordinary shares.
3.Explain the accounting for treasury shares.
4.Differentiate preference shares from ordinary shares.
5.Prepare the entries for cash dividends and share
dividends.
6.Identify the items that are reported in a retained earnings
statement.
7.Prepare and analyze a comprehensive equity section.
Study ObjectivesStudy Objectives

4. Slide
11-4
Cash dividendsCash dividends
Share dividendsShare dividends
Share splitsShare splits
Corporate Corporate
Organization and Organization and
Share Share
TransactionsTransactions
Corporate form of Corporate form of
organizationorganization
Ordinary share Ordinary share
issuesissues
Treasury sharesTreasury shares
Preference sharesPreference shares
Retained earnings Retained earnings
restrictionsrestrictions
Prior period Prior period
adjustmentsadjustments
Retained earnings Retained earnings
statementstatement
DividendsDividends
Retained Retained
EarningsEarnings
Statement Statement
Presentation and Presentation and
AnalysisAnalysis
Corporations: Organization, Share Transactions, Corporations: Organization, Share Transactions,
Dividends, and Retained EarningsDividends, and Retained Earnings
PresentationPresentation
AnalysisAnalysis

5. Slide
11-5
An entity separate and distinct from its owners.
The Corporate Form of OrganizationThe Corporate Form of Organization
Classified by Purpose
Not-for-Profit
For Profit
Classified by Ownership
Publicly held
Privately held
Compass Group (GBR)
Hyundai Motors (KOR)
LUKOIL (RUS)
Google (USA)
Salvation Army (USA)
International
Committee of the Red
Cross (CHE)
Bill & Melinda Gates
Foundation (USA)
Cargill Inc.
(USA)

6. Slide
11-6
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Advantages
Disadvantages
The Corporate Form of OrganizationThe Corporate Form of Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.

7. Slide
11-7
Characteristics that distinguish corporations from
proprietorships and partnerships.
Characteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Corporation acts
under its own name
rather than in the
name of its
shareholders.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes

8. Slide
11-8
Characteristics that distinguish corporations from
proprietorships and partnerships.
Characteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Limited to their
investment.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes

9. Slide
11-9
Characteristics that distinguish corporations from
proprietorships and partnerships.
Characteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Shareholders may
sell their share.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes

10. Slide
11-10
Characteristics that distinguish corporations from
proprietorships and partnerships.
Characteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Corporation can
obtain capital
through the issuance
of shares.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes

11. Slide
11-11
Characteristics that distinguish corporations from
proprietorships and partnerships.
Characteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Continuance as a
going concern is not
affected by the
withdrawal, death, or
incapacity of a
shareholder,
employee, or officer.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes

12. Slide
11-12
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics that distinguish corporations from
proprietorships and partnerships.
Characteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Separation of
ownership and
management
prevents owners
from having an
active role in
managing the
company.

13. Slide
11-13
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics that distinguish corporations from
proprietorships and partnerships.
Characteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Government
regulations are
designed to protect
the owners of the
corporation.

14. Slide
11-14
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics that distinguish corporations from
proprietorships and partnerships.
Characteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Corporations pay
income taxes as a
separate legal entity
and in addition,
shareholders pay
taxes on cash
dividends.

15. Slide
11-15
Characteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Shareholders
Chairman and
Board of
Directors
President and
Chief Executive
Officer
General
Counsel and
Secretary
Vice President
Marketing
Vice President
Finance/Chief
Financial Officer
Vice President
Operations
Vice President
Human
Resources
Treasurer Controller
Illustration 11-1
Corporation organization
chart

16. Slide
11-16
Answer on notes page

17. Slide
11-17
File application with governmental agency in the
jurisdiction in which incorporation is desired.
Government grants charter.
Corporation develops by-laws.
Initial Steps:
Forming a CorporationForming a Corporation
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Companies incorporate in a state or country whose laws
are favorable to the corporate form of business.
Corporations expense organization costs as incurred.

18. Slide
11-18
1.Vote in election of board of
directors and on actions that
require shareholder approval.
Shareholders have the right to:
Ownership Rights of ShareholdersOwnership Rights of Shareholders
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
2.Share the corporate earnings
through receipt of dividends.
Illustration 11-3

19. Slide
11-19
3.Keep the same percentage ownership when new
shares of share are issued (preemptive right*).
Shareholders have the right to:
Ownership Rights of ShareholdersOwnership Rights of Shareholders
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
* A number of companies have eliminated the preemptive right.
Illustration 11-3

20. Slide
11-20
4.Share in assets upon liquidation in proportion to
their holdings. This is called a residual claim.
Shareholders have the right to:
Ownership Rights of ShareholdersOwnership Rights of Shareholders
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Illustration 11-3

21. Slide
11-21
Ownership Rights of ShareholdersOwnership Rights of Shareholders
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Class A
COMMON STOCK
Class A
COMMON STOCK
PAR VALUE
$1 PER SHARE
PAR VALUE
$1 PER SHARE
Share Certificate
Name of corporation
shareholder’s name
Class
Shares
Signature of corporate
official
Prenumbered
Illustration 11-4

22. Slide
11-22
Share Issue ConsiderationsShare Issue Considerations
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Charter indicates the amount of shares that a
corporation is authorized to sell.
Number of authorized shares is often reported in the
equity section.
Authorized Shares

23. Slide
11-23
Share Issue ConsiderationsShare Issue Considerations
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Corporation can issue shares directly to investors or
indirectly through an investment banking firm.
Factors in setting price for a new issue of shares:
1.the company’s anticipated future earnings
2.its expected dividend rate per share
3.its current financial position
4.the current state of the economy
5.the current state of the securities market
Issuance of Shares

24. Slide
11-24
Share Issue ConsiderationsShare Issue Considerations
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Shares of publicly held companies are traded on organized
exchanges.
Interaction between buyers and sellers determines the
prices per share.
Prices set by the marketplace 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.
Market Value of Shares

25. Slide
11-25
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.

26. Slide
11-26
Share Issue ConsiderationsShare Issue Considerations
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Years ago, par value determined the legal capital per
share that a company must retain in the business for the
protection of corporate creditors.
Today many governments do not require a par value.
No-par value shares are quite common today.
In many countries the board of directors assigns a stated
value to no-par shares.
Par and No-Par Value Shares

27. Slide
11-27
Corporate CapitalCorporate Capital
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
Illustration 11-5

28. Slide
11-28
Corporate CapitalCorporate Capital
Comparison of the equity accounts for a proprietorship
and a corporation.
Illustration 11-6
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.

29. Slide
11-29
At the end of its first year of operation, Doral
Corporation has C750,000 of ordinary share and
Answer on
notes page
net income of C122,000. Prepare (a) the closing entry for net income
and (b) the equity section at year-end.
Corporate CapitalCorporate Capital
SO 1 Identify the major characteristics of a corporation.SO 1 Identify the major characteristics of a corporation.
=
=

30. Slide
11-30
IllustrationIllustration: : Assume that Hydro-Slide, Inc. issues 2,000 shares
of $1 par value ordinary shares. Prepare Hydro-Slide’s journal
entry if (a) 1,000 shares are issued for $1 per share, and (b)
1,000 shares are issued for $5 per share.
Cash 1,000
Share capital - ordinary (1,000 x $1)
1,000
Cash 5,000
Share capital - ordinary (1,000 x $1)
1,000
Share premium - ordinary
4,000
a.
b.
Issuing Par Value Ordinary Shares for Cash
Accounting for Ordinary Share IssuesAccounting for Ordinary Share Issues
SO 2 Record the issuance of ordinary shares.SO 2 Record the issuance of ordinary shares.

31. Slide
11-31
Illustration 11-7
Accounting for Ordinary Share IssuesAccounting for Ordinary Share Issues
SO 2 Record the issuance of ordinary shares.SO 2 Record the issuance of ordinary shares.

32. Slide
11-32
IllustrationIllustration: : Assume that Hydro-Slide, Inc. issues 5,000 shares
of $5 stated value no-par shares for $8 per share. The entry is:
Cash 40,000
Share capital - ordinary (5,000 x $5)
25,000
Share premium - ordinary
15,000
Issuing No-Par Ordinary Shares for Cash
Prepare the entry assuming there is no stated value.
Cash 40,000
Share capital - ordinary
40,000
Accounting for Ordinary Share IssuesAccounting for Ordinary Share Issues
SO 2 Record the issuance of ordinary shares.SO 2 Record the issuance of ordinary shares.

33. Slide
11-33
Issuing Ordinary Shares for Services or
Noncash Assets
Corporations also may issue shares for:
Services (attorneys or consultants).
Noncash 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.
Accounting for Ordinary Share IssuesAccounting for Ordinary Share Issues
SO 2 Record the issuance of ordinary shares.SO 2 Record the issuance of ordinary shares.

34. Slide
11-34
Illustration: Assume that 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
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.
Organizational expense 5,000
Share capital - ordinary (4,000 x $1)
4,000
Share premium - ordinary
1,000
Accounting for Ordinary Share IssuesAccounting for Ordinary Share Issues
SO 2 Record the issuance of ordinary shares.SO 2 Record the issuance of ordinary shares.

35. Slide
11-35
Illustration: Assume that Athletic Research Inc. 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 (10,000 x $8) 80,000
Share capital - ordinary (10,000 x $5)
50,000
Share premium - ordinary
30,000
Accounting for Ordinary Share IssuesAccounting for Ordinary Share Issues
SO 2 Record the issuance of ordinary shares.SO 2 Record the issuance of ordinary shares.

36. Slide
11-36
Treasury Shares - corporation’s own shares that it has
reacquired from shareholders, but not retired.
Corporations purchase their outstanding share to:
1.Reissue the shares to officers and employees under bonus and
share compensation plans.
2.Enhance the share’s market value.
3.Have additional shares available for use in the acquisition of
other companies.
4.Increase earnings per share.
5.Rid the company of disgruntled investors, perhaps to avoid a
takeover.
Accounting for Treasury SharesAccounting for Treasury Shares
SO 3 Explain the accounting for treasury shares.SO 3 Explain the accounting for treasury shares.

37. Slide
11-37
Purchase of Treasury Shares
Debit Treasury Shares for the price paid to reacquire
the shares.
Treasury Shares is a contra equity account.
Reduces equity.
Accounting for Treasury SharesAccounting for Treasury Shares
SO 3 Explain the accounting for treasury shares.SO 3 Explain the accounting for treasury shares.

38. Slide
11-38
Treasury shares (4,000 x $8) 32,000
Cash
32,000
Illustration: On February 1, 2011, Mead acquires 4,000 shares
of its share at $8 per share.
Accounting for Treasury SharesAccounting for Treasury Shares
SO 3 Explain the accounting for treasury shares.SO 3 Explain the accounting for treasury shares.
Illustration 11-8

39. Slide
11-39
Accounting for Treasury SharesAccounting for Treasury Shares
SO 3 Explain the accounting for treasury shares.SO 3 Explain the accounting for treasury shares.
Equity Section with Treasury Shares
Both the number of shares issued (100,000), outstanding (96,000), and the
number of shares held as treasury (4,000) are disclosed.
Illustration 11-9

40. Slide
11-40
Answer on notes page

41. Slide
11-41
Disposal of Treasury Shares
Above Cost
Below Cost
Both increase total assets and equity.
Accounting for Treasury SharesAccounting for Treasury Shares
SO 3 Explain the accounting for treasury shares.SO 3 Explain the accounting for treasury shares.

42. Slide
11-42
Treasury shares (1,000 x $8)
8,000
Illustration: On February 1, 2011, Mead acquired 4,000 of its
share at $8 per share.
On July 1, Mead sells for $10 per share 1,000 shares of its
treasury share, previously acquired at $8 per share.
Accounting for Treasury SharesAccounting for Treasury Shares
SO 3 Explain the accounting for treasury shares.SO 3 Explain the accounting for treasury shares.
Above
Cost
July 1
Share premium - treasury
2,000
Cash 10,000
A corporation does not realize a gain or suffer a loss from share
transactions with its own shareholders.

43. Slide
11-43
Share premium - treasury 800
Illustration: On February 1, 2011, Mead acquired 4,000 of its
share at $8 per share.
On Oct. 1, Mead sells an additional 800 treasury shares at $7
per share.
Accounting for Treasury SharesAccounting for Treasury Shares
SO 3 Explain the accounting for treasury shares.SO 3 Explain the accounting for treasury shares.
Oct. 1
Treasury shares (800 x $8)
6,400
Cash 5,600
Below
Cost

44. Slide
11-44
Share premium - treasury 1,200
Illustration: On February 1, 2011, Mead acquired 4,000 of its
share at $8 per share.
On Dec. 1, assume that Mead, Inc. sells its remaining 2,200
shares at $7 per share.
Accounting for Treasury SharesAccounting for Treasury Shares
SO 3 Explain the accounting for treasury shares.SO 3 Explain the accounting for treasury shares.
Dec. 1
Retained earnings 1,000
Cash 15,400
Treasury shares (2,200 x $8)
17,600
Below
Cost
Limited
to
balance
on
hand

45. Slide
11-45
Typically, preference shareholders have a priority as to
1.distributions of earnings (dividends) and
2.assets in the event of liquidation.
SO 4 Differentiate preference shares from ordinary shares.
Preference SharesPreference Shares
Accounting for preference shares at issuance is similar to that
for ordinary shares.

46. Slide
11-46
Illustration: Stine Corporation issues 10,000 shares of
$10 par value preference shares for $12 cash per share.
Journalize the issuance of the preference share.
Cash 120,000
Share capital - preference (10,000 x $10)
100,000
Share premium – preference
20,000
Preference shares may have a par value or no-par value.
Preference SharesPreference Shares
SO 4 Differentiate preference shares from ordinary shares.

47. Slide
11-47
Dividend Preferences
Right to receive dividends before ordinary shareholders.
Cumulative Dividend – preference shareholders must
be paid both current-year dividends and any unpaid
prior-year dividends before ordinary shareholders
receive dividends.
Liquidation preference.
Preference SharesPreference Shares
SO 4 Differentiate preference shares from ordinary shares.

48. Slide
11-48
A distribution of cash or shares to shareholders on a pro
rata (proportional) basis.
Types of Dividends:
DividendsDividends
SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.
1.Cash dividends
2.Property dividends
Dividends expressed: (1) as a percentage of the par or
stated value, or (2) as a dollar amount per share.
3.Scrip (note)
4.Shares

49. Slide
11-49
Cash Dividends
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 the Board of Directors.
Cash DividendsCash Dividends
SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.

50. Slide
11-50
Dividends require information concerning three dates:
SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.
Illustration 11-12
Cash DividendsCash Dividends

51. Slide
11-51
Illustration: On Dec. 1, the directors of Media General
declare a 50¢ per share cash dividend on 100,000 shares of
$10 par value common share. The dividend is payable on Jan.
20 to shareholders of record on Dec. 22?
December 1 (Declaration Date)
Cash dividends 50,000
Dividends payable 50,000
December 22 (Date of Record)
January 20 (Payment Date)
SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.
Dividends payable 50,000
Cash 50,000
No entry
Cash DividendsCash Dividends

52. Slide
11-52
Allocating Cash Dividends Between
Preference and Ordinary Shares
SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.
Holders of cumulative preference shares must be paid
any unpaid prior-year dividends before ordinary
shareholders receive dividends.
Cash DividendsCash Dividends

53. Slide
11-53
SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.
Illustration: On December 31, 2011, IBR Inc. has 1,000 shares
of 8%, $100 par value cumulative preference share. It also has
50,000 shares of $10 par value ordinary shares outstanding. At
December 31, 2011, the directors declare a $6,000 cash
dividend. Prepare the entry to record the declaration of the
dividend.
Cash dividends 6,000
Dividends payable
6,000
Dividends: 1,000 shares x $100 par x 8% = $8,000
Cash DividendsCash Dividends

54. Slide
11-54
SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.
2011 2012
Dividends declared 6,000$
Dividends in arrears
Allocation to preference 6,000
Remainder to ordinary -$
* 1,000 shares x $100 par x 8% = $8,000
*
** 2011 Pfd. dividends $8,000 – declared $6,000 = $2,000
**
Illustration: At December 31, 2012, IBR declares a $50,000
cash dividend. Show the allocation of dividends to each class of
share.
$ 50,000
2,000
8,000
$ 40,000
Cash DividendsCash Dividends

55. Slide
11-55
SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.
Cash dividends 50,000
Dividends payable
50,000
Illustration: At December 31, 2012, IBR declares a $50,000
cash dividend. Prepare the entry to record the declaration of the
dividend.
Cash DividendsCash Dividends

56. Slide
11-56
Answer on notes page

57. Slide
11-57
Share Dividends
Pro rata distribution of the corporation’s own share.
Share DividendsShare Dividends
SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.
Results in decrease in retained earnings and increase share capital and share premium.
Illustration 11-14

58. Slide
11-58
Share Dividends
Reasons why corporations issue share dividends:
1.To satisfy shareholders’ dividend expectations without
spending cash.
2.To increase the marketability of the corporation’s shares.
3.To emphasize that a portion of shareholders’ equity has
been permanently reinvested in the business.
Share DividendsShare Dividends
SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.

59. Slide
11-59
Size of share Dividends
Small share dividend (less than 20–25% of the
corporation’s issued shares, recorded at fair market
value)
Large share dividend (greater than 20–25% of
issued shares, recorded at par value)
Share DividendsShare Dividends
SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.
* This accounting is based on the assumption that a small share
dividend will have little effect on the market price of the
outstanding shares.
*

60. Slide
11-60
10% share dividend is declared
Share dividends (50,000 x 10% x $15) 75,000
Ordinary share dividends distributable 50,000
Share premium - ordinary 25,000
Shares issued
Ordinary share dividends distributable 50,000
Share capital - ordinary 50,000
Illustration: Medland Corp. has 50,000 shares issued and
outstanding. The par value is $10 per share and market
value is $15 per share.
Share DividendsShare Dividends
SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.

61. Slide
11-61
Statement Presentation
Share DividendsShare Dividends
SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.
Illustration 11-15

62. Slide
11-62
Share DividendsShare Dividends
SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.
Effects of Share Dividends
Illustration 11-16

63. Slide
11-63
Share Split
Reduces the market value of shares.
No entry recorded for a share split.
Decrease par value and increase number of
shares.
Share SplitsShare Splits
SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.

64. Slide
11-64
Illustration: Assume Medland Corporation splits its 50,000
shares of common share on a 2-for-1 basis.
SO 5 Prepare the entries for cash dividends and share dividends.SO 5 Prepare the entries for cash dividends and share dividends.
Illustration 11-17
Results in a reduction of the par or stated value per share.
Share Splits

65. Slide
11-65
Retained earnings is net income that a company
retains for use in the business.
Net income increases retained earnings and a net loss
decreases retained earnings.
Retained earnings is part of the shareholders’ claim on
the total assets of the corporation.
A debit balance in retained earnings is identified as a
deficit.
Retained EarningsRetained Earnings
SO 6 Identify the items that are reported in a retained earnings statement.SO 6 Identify the items that are reported in a retained earnings statement.

66. Slide
11-66
Restrictions can result from:
1.Legal restrictions.
2.Contractual restrictions.
3.Voluntary restrictions.
Retained Earnings RestrictionsRetained Earnings Restrictions
Illustration 11-22
SO 6 Identify the items that are reported in a retained earnings statement.SO 6 Identify the items that are reported in a retained earnings statement.

67. Slide
11-67
Corrections of Errors
Result from:
mathematical mistakes
mistakes in application of accounting principles
oversight or misuse of facts
Corrections treated as prior period adjustments
Adjustment made to the beginning balance of
retained earnings
Prior Period Adjustments
SO 6 Identify the items that are reported in a retained earnings statement.SO 6 Identify the items that are reported in a retained earnings statement.

68. Slide
11-68
Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2011
Balance, January 1 1,050,000$
Net income 360,000
Dividends (300,000)
Balance, December 31 1,110,000$
Before issuing the report for the year ended December 31, 2011, you discover a
$50,000 error (net of tax) that caused the 2010 inventory to be overstated
(overstated inventory caused COGS to be lower and thus net income to be higher in
2010). Would this discovery have any impact on the reporting of the Statement of
Retained Earnings for 2011?
Prior Period AdjustmentsPrior Period Adjustments
SO 6 Identify the items that are reported in a retained earnings statement.SO 6 Identify the items that are reported in a retained earnings statement.

69. Slide
11-69
Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2011
Balance, January 1, as previously reported 1,050,000$
Prior period adjustment - error correction (50,000)
Balance, January 1, as restated 1,000,000
Net income 360,000
Dividends (300,000)
Balance, December 31 1,060,000$
Prior Period AdjustmentsPrior Period Adjustments
SO 6 Identify the items that are reported in a retained earnings statement.SO 6 Identify the items that are reported in a retained earnings statement.

70. Slide
11-70
Retained Earnings StatementRetained Earnings Statement
Transactions the Affect Retained Earnings
Illustration 11-24
SO 6 Identify the items that are reported in a retained earnings statement.SO 6 Identify the items that are reported in a retained earnings statement.

71. Slide
11-71
Retained Earnings StatementRetained Earnings Statement
Illustration 11-25
SO 6 Identify the items that are reported in a retained earnings statement.SO 6 Identify the items that are reported in a retained earnings statement.

72. Slide
11-72
Statement Presentation and AnalysisStatement Presentation and Analysis
Illustration 11-26
SO 7 Prepare and analyze a comprehensive equity section.

73. Slide
11-73
Analysis
Net Income minus Preference
Dividends
Return on
Ordinary
Shareholders’
Equity
=
Average Ordinary Shareholders’
Equity
Statement Analysis and PresentationStatement Analysis and Presentation
This ratio shows how many dollars of net income the
company earned for each dollar invested by the
shareholders.
SO 7 Prepare and analyze a comprehensive equity section.

74. Slide
11-74
Analysis
Statement Analysis and PresentationStatement Analysis and Presentation
Solution on
notes page
Illustration 11-28
SO 7 Prepare and analyze a comprehensive equity section.

75. Slide
11-75
As noted in the chapter, under IFRS the term “Reserves” is
often used to describe equity accounts other than those
arising from contributed capital. This most commonly
includes comprehensive incomes (such as revaluation
surplus and fair value differences) but is also sometimes
used for retained earnings. GAAP has always discouraged
the use of the term “Reserves” in any context. Under GAAP,
comprehensive income items are reported in the equity
section of the statement of financial position in a line
labeled accumulated other comprehensive income.
Understanding U.S. GAAP
Key DifferencesKey Differences Shares and Retained Earnings

76. Slide
11-76
As an example of how similar transactions use different
terminology under GAAP, consider the accounting for the
issuance of 1,000 shares of $1 par value ordinary shares for
$5 per share. Under IFRS, the credit accounts would be
Share Capital—Ordinary and Share Premium—Ordinary.
Under GAAP, the entry is as follows.
Cash 5,000
Common Stock 1,000
Paid-in Capital in Excess of Par 4,000
Understanding U.S. GAAP
Key DifferencesKey Differences Shares and Retained Earnings

77. Slide
11-77
A major difference between IFRS and GAAP relates to the
account Revaluation Surplus. Revaluation Surplus arises
under IFRS because companies are permitted to revalue
their property, plant, and equipment to fair value under
certain circumstances. This account is part of general
reserves under IFRS and is not considered contributed
capital.
IFRS sometimes uses terms such as retained profits or
accumulated profit or loss to describe retained earnings.
The term retained earnings is also often used, as is the
custom, under GAAP.
Understanding U.S. GAAP
Key DifferencesKey Differences Shares and Retained Earnings

78. Slide
11-78
Looking to the FutureLooking to the Future
Understanding U.S. GAAP
The IASB and the FASB are currently working 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 shareholders’ equity and its presentation
will be examined closely. It is interesting to note that, in a
presentation of a proposed statement of financial position that
was published as a result of this project, the term “Reserves,”
which as noted is commonly used under IFRS, was replaced by
the phrase “Accumulated other comprehensive income,” which
is the title used under GAAP.
Shares and Retained Earnings

79. Slide
11-79
Statement of Changes in Equity
SO 8 Describe the use and content of the statement of changes in equity.SO 8 Describe the use and content of the statement of changes in equity.
Appendix 11AAppendix 11A
Illustration 11A-1
When a statement of changes in equity is presented, a retained
earnings statement is not necessary.

80. Slide
11-80
Book Value—Another Per-Share Amount
Appendix 11BAppendix 11B
Illustration 11B-1
The equity an ordinary shareholder has in the net assets of the
corporation.
Book Value per Share
SO 9 Compute book value per share.SO 9 Compute book value per share.

81. Slide
11-81
Book Value—Another Per-Share Amount
Appendix 11BAppendix 11B
The computation of book value per share involves the
following steps.
1.Compute the preference share equity.
2.Determine the ordinary shareholders’ equity.
3.Determine book value per share.
Book Value per Share
SO 9 Compute book value per share.SO 9 Compute book value per share.

82. Slide
11-82
Book Value—Another Per-Share Amount
Appendix 11BAppendix 11B
Illustration: Use the equity section of Graber Inc. shown in
Illustration 11-26. 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 $9).
The computation of preference share equity (Step 1 in the
preceding list) is:
Illustration 11B-2
SO 9 Compute book value per share.SO 9 Compute book value per share.

83. Slide
11-83
Book Value—Another Per-Share Amount
Computation of book value:
Illustration 11B-2
Illustration 11B-3
SO 9 Compute book value per share.SO 9 Compute book value per share.

84. Slide
11-84
Book Value—Another Per-Share Amount
SO 9 Compute book value per share.SO 9 Compute book value per share.
Appendix 11BAppendix 11B
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
Illustration 11B-4

85. Slide
11-85
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