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Principles
Second Canadian Edition
Weygandt · Kieso · Kimmel · Trenholm
Prepared by:
Carole Bowman, Sheridan College
CHAPTER
14
CORPORATIONS:
ORGANIZATION AND SHARE
CAPITAL TRANSACTIONS
CORPORATE FORM OF
ORGANIZATION
Advantages Disadvantages
Shareholders’ equity
Contributed capital
Common shares, 100,000 no par value
shares authorized, 50,000 issued $800,000
Shareholders’ equity
Contributed capital
Common shares, 10,000 shares of $1 stated value authorized,
2,000 shares issued $ 2,000
Contributed capital in excess of stated value 4,000
Total contributed capital 6,000
Retained earnings 27,000
Total shareholders’ equity $33,000
ISSUING COMMON SHARES FOR
SERVICES OR NON-CASH ASSETS
Shares may be issued for services, such as
compensation to lawyers, or for non-cash assets,
such as land.
When common shares are issued for services or
non-cash assets, cost is either the fair market
value of the consideration given up or the
consideration received, whichever is more clearly
determinable.
REACQUIRED SHARES
Liquidation preference
Cumulative (dividends in arrears)
Convertible (book value)
Redeemable/callable (company option)
Retractable (shareholder option)
DIVIDEND PREFERENCES
CUMULATIVE DIVIDEND
A cumulative dividend requires that preferred
shareholders be paid both current and prior year
dividends before common shareholders receive any
dividends.
Preferred dividends not declared in a given period are
called dividends in arrears.
Dividends in arrears are not considered a liability, but
the amount of the dividends in arrears should be
disclosed in the notes to the financial statements.
CONVERTIBLE PREFERRED
SHARES
Convertible preferred shares allow the exchange
of preferred shares into common shares at a
specified ratio.
This kind of share is purchased by investors who
want the greater security of a preferred share, but
who also desire the added option of conversion.
In recording the conversion, the book value of the
preferred shares is used.
The conversion of preferred shares does not result
in either gain or loss to the corporation.
The market value of the shares is not considered.
REDEEMABLE PREFERRED
Redeemable (callable) preferred shares grant the issuing
corporation the right to purchase the shares from
shareholders at specified future dates and prices.
This call feature allows some flexibility to a corporation
by enabling it to eliminate this type of equity when
it is advantageous to do so.
While convertible shares are for the
benefit of the shareholder, redeemable
shares are for the benefit of the
corporation.
RETRACTABLE PREFERRED
Retractable preferred shares are similar to
redeemable preferred shares except that the
shareholder can redeem shares at their option instead
of the corporation’s.
Retractable preferred shares and debt have many
similarities.
Both offer a rate of return to the investor, and with
the redemption of the shares they both offer a
repayment of the principal investment.
Retractable preferred shares are presented in the
liability section of the balance sheet rather than in the
equity section because it has more of the features of
debt than equity.
REMINDER-
STATEMENT PRESENTATION OF
SHAREHOLDERS’ EQUITY
In the shareholders’ equity section of the balance
sheet, contributed capital and retained earnings
are reported and the specific sources of
contributed capital are identified.
Within contributed capital, two classifications are
recognized:
1. Share capital
2. Additional contributed capital
ILLUSTRATION 14-10
SHAREHOLDERS’ EQUITY
PRESENTATION
ZABOSCHUK INC.
Partial Balance Sheet
Shareholders’ equity
Contributed capital
Share capital
$9 preferred shares, no-par value,
cumulative, 10,000 shares authorized,
6,000 shares issued
$ 770,000
Common shares, $5 stated value, unlimited shares
authorized, 400,000 shares issued
2,000,000
Total share capital
2,770,000
Additional contributed capital
Contributed capital in excess of stated value - common shares
860,000
Total contributed capital
3,630,000
Retained earnings
1,058,000
Total shareholders’ equity
$4,688,000
RETURN ON EQUITY
Average
Return on
Net Income Shareholders
Equity
= Equity
BOOK VALUE PER SHARE
Book value per share represents the equity a
common shareholder has in the net assets of
the corporation from owning one share.
The formula for calculating book value per
share when a corporation has only one class of
shares is:
Total Number of
Shareholders’
Equity
Common
Shares
= Book Value
per Share
CALCULATION OF BOOK VALUE
WITH PREFERRED SHARES
When a company has both preferred and common
shares, the calculation of book value is more complex.
Steps required are:
1. Calculate the preferred shareholders’ equity (the sum of
redemption price of preferred shares plus any
cumulative dividends in arrears).
2. Determine the common shareholders’ equity (total
shareholders’ equity less preferred shareholders’
equity).
3. Divide common shareholders’ equity by the number of
common shares to determine book value per share.
BOOK VALUE VS. MARKET VALUE
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