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LEARNING OBJECTIVES
CHAPTER 16 1. Describe the different types of companies and summarise the advantages and
disadvantages of the corporate form of organisation

Companies: formation 2. Describe the documentation required for forming a company and identify the
management structure commonly used for administering a company

and operations 3.
4.
Describe the three main categories of equity in a company
Account for the issue of shares
5. Account for the declaration and payment of cash dividends on shares, share
PowerPoint Presentation by dividends and share splits
Phil Johnson 6. Account for the creation and reduction of the different types of reserves that
are included in equity
2015 John Wiley & Sons 7. Review a company's income statement, statement of changes in equity and
Australia Ltd balance sheet for internal use

ADVANTAGES OF THE CORPORATE

TYPES OF COMPANIES
ENTITY
1. Limited companies
Proprietary companies shares Limited liability
Public companies - shares Broad source of capital
Companies limited by guarantee no shares
2. Unlimited companies Continuity of existence
3. No-liability companies Ready transferability of shares
4. Special companies
Investment Use of professional management
Banking
Life insurance
Potential income tax savings

DISADVANTAGES OF THE
FORMING A COMPANY
CORPORATE ENTITY
Greater governmental regulation Corporations Act application lodged with ASIC
Separation of ownership and management Application requirements
Can be costly Replaceable rules and constitution
Certificate of registration
The prospectus
Raising funds

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ADMINISTERING A COMPANY ADMINISTERING A COMPANY

Shareholders are owners, but administration
rests with directors
Duties of the board of directors include
Protecting rights of shareholders
Setting officers salaries
Recommending and declaring dividends
Authorising long-term borrowing, additional share
issues and major capital projects
Reviewing the system of internal control

CATEGORIES OF EQUITY
ACCOUNTING FOR SHARE ISSUES
IN A COMPANY
The equity of a typical company split into 3 Number of choices available:
major categories: Types of shares
Share capital Ordinary shares
Fully or partly paid shares Preference shares
Ordinary or preference shares Payment for shares
Retained earnings Payable in full on application
Or accumulated losses Deposit payable on application and the remainder on
Other reserves allotment
Part payment on application, part on allotment, and
remainder in one or more instalments or calls

PUBLIC SHARE ISSUE, PAYABLE IN

PRIVATE SHARE PLACEMENTS
FULL ON APPLICATION
Money may be raised privately by prospective Shares issued via a prospectus
shareholders contributing funds to the company Example Sept 30: Brazil Ltd received applications
Example Two shareholders each contribute for 100,000 shares at an issue price of $10 each
$50,000 to buy shares in a proprietary company General Journal
Sept 30 Cash Trust 1 000 000
General Journal
Application 1 000 000
Jul 1 Cash at Bank 100 000
(Receipt of cash of $10 per share on
Share Capital 100 000 100 000 shares)
(Cash contributed to the company by its
two shareholders)

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PUBLIC SHARE ISSUE, PAYABLE IN PUBLIC SHARE ISSUE, PAYABLE IN

FULL ON APPLICATION FULL ON APPLICATION
If the number of shares applied for exceed the When the shares are allotted
number being issued excess funds must be Application money becomes available for use
refunded Share capital is recognised
General Journal
General Journal Oct 1 Cash at Bank 1 000 000
Sept 30 Application X Cash Trust 1 000 000
Cash Trust X (Application money transferred to cash
account)
(Refund excess application money to
unsuccessful applicants)
Application 1 000 000
Share Capital 1 000 000
(Allocation of 100 000 shares paid in full)
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PUBLIC SHARE ISSUE, PAYABLE BY PUBLIC SHARE ISSUE, PAYABLE BY

INSTALMENTS INSTALMENTS
Example Sept 15: Brazil Ltd decides to issue Transfer to Cash at Bank of application money
100 000 shares, payable in three instalments
General Journal
$4 on application
Oct 1 Cash at Bank 400 000
$3 payable on 15 October Cash Trust 400 000
$3 payable on 1 December (Application money transferred to cash
account)
General Journal
Sept 30 Cash Trust 400 000
Application 400 000
(Receipt of cash of $4 per share on
100 000 shares)

PUBLIC SHARE ISSUE, PAYABLE BY PUBLIC SHARE ISSUE, PAYABLE BY

INSTALMENTS INSTALMENTS
Allotment of shares and amounts due Receipt after allotment

General Journal General Journal

Oct 1 Application 400 000 Oct 15 Cash at Bank 300 000
Share Capital 400 000 Allotment 300 000
(Allocation of 100 000 shares paid to $4) (Cash received on allotment)

Oct 1 Allotment 300 000

Share Capital 300 000
(Allotment fee of $3 receivable on
100 000 shares)

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PUBLIC SHARE ISSUE, PAYABLE BY PUBLIC SHARE ISSUE, PAYABLE BY

INSTALMENTS INSTALMENTS
Amounts due on call and receipt Note that holders of 5 000 shares have not paid
the call.
General Journal
Also known as calls in arrears
Nov 15 Call 300 000
Share Capital 300 000 Deducted from share capital in balance sheet
(Call of $3 receivable on 100 000 shares)
Balance Sheet (partial)
Share Capital
Dec 1 Cash at Bank 285 000
- 100 000 ordinary shares called to $10 $1 000 000
Call 285 000
Less: Unpaid calls (5 000 shares @ $3) 15 000
(Call money received on 95 000 shares)
Total share capital $ 985 000

UNDERSUBSCRIPTION AND
RIGHTS ISSUE OF SHARES
OVERSUBSCRIPTION
Undersubscription An issue of new shares giving existing
Applicants for fewer shares than offered (but above shareholders the right to an additional number
minimum subscription) of shares in proportion to current shareholding
Oversubscription If renounceable, then 3 options:
Applicants in excess of shares 1. Exercise rights and acquire more shares
Treatment depends on constitution and prospectus 2. Decline to exercise rights and let lapse
Excess monies may be refunded or held against future 3. Sell rights on stock exchange
calls

EXAMPLE
BONUS SHARE ISSUE
RIGHTS ISSUE OF SHARES
Mexico Ltd An issue of shares to existing shareholders in
Planned to raise $4.2 million from existing shareholders proportion of their current shareholdings, at no
through a renounceable 1-to-6 rights issue
Terms were 6 478 611 shares to be issue at 65c each
cost to shareholder
Market price of companys shares was 80c Reasons for bonus share issue
General Journal Provide return to shareholder without cash outlay
Cash at Bank 4 211 097 Capitalise reserves or retained earnings by converting
Share Capital 4 211 097 to share issue
(Receipt of 65c per share on rights issue Signal to capital market that company expects good
of 6 478 611 shares)
future profitability levels

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EXAMPLE
BONUS SHARE ISSUE
Assuming that a bonus issue of $60 000 is
declared and paid out of general reserve, the
accounting entry is:
General Journal
General Reserve
Share Capital
(Payment of bonus share issue out of
general reserve)
PREFERENCE SHARES
Preferential treatment
Dividend distribution (at fixed rate)
Distribution of assets on liquidation
Redemption
Usually no voting rights
Debt or equity?
Substance vs Form
CASH DIVIDENDS
Declaration and Payment of Final Dividends
General Journal
Aug 25 Retained Earnings
Final Dividend Payable
(Declared a cash dividend of 20c per
share on 400 000 ordinary shares)
Sept 20 Final Dividend Payable
Cash at Bank
(Payment of dividend declared on 25
August)
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FORMATION COSTS
AND SHARE ISSUE COSTS
Formation Costs
Also known as preliminary or start-up costs
Include registration, legal, accounting fees etc.
Must be expensed as incurred
60 000 Share Issue Costs
60 000 Stamp duty, broker and underwriter fees etc.
These costs are treated as a deduction from equity
(contra-equity)
DIVIDENDS
Distribution of cash or other assets or shares
May be interim or final
Must not be paid unless
Assets exceed liabilities
Move from Profits test toward Solvency test
Payment of dividend is fair and reasonable
Payment does not prejudice creditors
Directors determine if dividend is payable and fix
amount, payment time and payment method
PREFERENCE DIVIDENDS
Dividends must be paid on preference shares
before any are paid on ordinary shares
80 000 Preference shares may be cumulative
80 000 Any undeclared dividends accumulate
Accumulated amount plus current years preference
dividend must be paid before any dividend to ordinary
80 000
shareholders
80 000 Participating Preference Shares
Rights to further dividends under certain conditions
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SHARE DIVIDENDS
SHARE SPLITS
(Bonus Share Issue)
Pro rata distribution of additional shares to Share splits
shareholders Reduce the market price of shares
No effect on corporate assets or total equity Make shares available to wider range of investors
Capitalising profits No journal entry necessary because no change
General Journal in balance in any of the equity accounts
General Reserve 12 500
Share Capital 12 500
(Distribution of a 1-for-20 share dividend
on 250 000 ordinary shares, at a value of
$1 each)

RESERVES CREATION OF RESERVES

Represent those items of equity other than Basic journal entry
capital contributed by owners General Journal
Retained Earnings Jun 30 Retained Earnings X
Reserve X
Others created by transfers from retained earnings
(Creation of reserve from profits)
Examples:
Creation of revaluation surplus
Revaluation surplus
General Journal
General reserve Jun 30 Asset X
Options reserve Accumulated Depreciation X
Revaluation Surplus X
Plant replacement reserve
(Revaluation upwards of the carrying
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amount of a non-current asset to fair value)

DISPOSAL OF RESERVES INCOME TAX

Reserve accounts may be written off or reduced Deducted after all other expenses before
through arriving at final profit after tax
Payment as a dividend (refer previous discussion) Based on taxable income
Transferring back to retained earnings Income Tax Assessment Act
General Journal Tax-effect accounting
Jun 30 Reserve X
Retained Earnings X
(Transfer of reserve to profits)

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PREPARING THE
FINANCIAL STATEMENTS
Income Statement
(Statement of Profit or Loss and Other
Comprehensive Income)
Statement of Changes in Equity
Balance Sheet
(Statement of Financial Position)
Statement of Cash Flows
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Shows all relevant income and
expenses to measure profit
performance for the period
Shows how equity accounts have
changed in the period
Shows assets, liabilities and equity
on last day of period
Shows sources and uses of cash
resources during the current
period