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Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the corporate form 3. Explain the accounting and
and the issuance of shares. reporting issues related to
2. Explain the accounting and dividends.
reporting for treasury shares. 4. Indicate how to present and
analyze equity.
15-1
Components of 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
15-2 LO 1
EQUITY
3. Retained earnings.
5. Treasury shares.
15-3 LO 2
EQUITY
a. Generally, the amount of ordinary shares
repurchased. 1. Share capital.
15-4 LO 2
Issuance of Shares
2. No-par shares.
15-5 LO 1
Issuance of Shares
15-6 LO 1
Issuance of Shares
15-7 LO 3
Issuance of Shares
No-Par Shares
15-8 LO 1
No-Par Shares in Hong Kong
15-9 LO 3
Issuance of No-Par Shares
Cash 5,000
Share Capital—Ordinary 5,000
Video Electronics issues another 500 shares for €11 per share.
Cash 5,500
Share Capital—Ordinary 5,500
15-10 LO 1
Issuance of No-Par Shares
Cash 15,000
Share Capital—Ordinary 5,000
Share Premium—Ordinary 10,000
15-11 LO 1
Issuance of Shares
15-12 LO 1
Issuance of Shares
15-13 LO 3
Issuance of Shares
15-14 LO 1
Shares Issued with Other Securities
Illustration: 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.
15-15 LO 1
Shares Issued with Other Securities
Illustration: 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 Capital—Preference (100 X $50) 5,000
8,100
Share Premium—Preference 3,100
Share Capital—Ordinary (300 X $10) 3,000
5,400
Share Premium—Ordinary 2,400
15-16 LO 1
Shares Issued with Other Securities
Illustration: 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.
15-17 LO 1
Shares Issued with Other Securities
Illustration: 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 Capital—Preference (100 X $50) 5,000
7,500
Share Premium—Preference 2,500
Share Capital—Ordinary (300 X $10) 3,000
6,000
Share Premium—Ordinary 3,000
15-18 LO 1
CPA Question (Poll)
On July 1, 2019, Nall Co. issued 2,500 shares of its €10 par
ordinary shares and 5,000 shares of its €10 par convertible
preference shares for a lump sum of €125,000. At this date
Nall’s ordinary shares were selling for €24 per share and the
convertible preference shares for €18 per share. The amount
of the proceeds allocated to Nall’s preference shares should be
A. €62,500.
B. €75,000.
C. €90,000.
D. €68,750.
15-19 . LO 1
Preference Shares
Preference shares: a special class of shares that
possess certain preferences of features not
possessed by ordinary shares.
Features often associated with preference shares.
1. Preference as to dividends.
4. Non-voting.
15-21 LO 5
PREFERENCE SHARES
15-22 LO 5
PREFERENCE SHARES
15-23 LO 5
Convertible Preference Shares
Illustration:
Imagine you bought 100 shares of convertible preferred stock in
XYZ corporation. The preferred stock cost you $500 per share, so
your total investment is $50,000. The conversion privilege allows
you to convert each share of preferred stock into 50 shares of
common stock.
Your "cost" of converting to common is $10 per share ($500
preferred stock divided by 50 shares of common stock = $10 cost
per share in the event of conversion).
If the common stock is less than $10, your convertible preferred
rights aren't worth much. If the common stock is higher than $10 ,
your conversion rights can be valuable.
15-24 LO 5
Preference Shares
Cash 120,000
Share Capital—Preference 100,000
Share Premium—Preference 20,000
15-25 LO 1
Dual-class Shares
15-26 LO 5
15-27 LO 5
15-28 LO 5
LEARNING OBJECTIVE 2
Reacquisition of Shares Explain the accounting and
reporting for treasury shares.
15-29 LO 2
Stock Buybacks: Destroy Capital?
15-30
Reacquisition of Shares
Treasury Shares
15-31 LO 4
Treasury Shares
15-32 LO 4
Reacquisition of Shares
15-33 LO 2
Purchase of Treasury Shares
ILLUSTRATION 15.4
Equity with No Treasury Shares
15-34 LO 2
Purchase of Treasury Shares
Reduce Equity
15-35 LO 2
Purchase of Treasury Shares
ILLUSTRATION 15.5
Equity with Treasury Shares
15-36 LO 2
Reacquisition of Shares
15-37 LO 2
Sale of Treasury Shares
15-38 LO 2
Sale of Treasury Shares
Cash 8,000
Share Premium—Treasury 3,000
Treasury Shares 11,000
15-39 LO 2
Sale of Treasury Shares
ILLUSTRATION 15.6
Treasury Share
Transactions in Share
Premium—Treasury
Account
15-42 LO 3
Dividend Policy
15-43 LO 6
Dividend Policy
Types of Dividends
15-44 LO 3
Dividend Policy
Cash Dividends
Board of directors vote on the declaration of cash
dividends.
A declared cash dividend is a liability.
15-45 LO 3
Dividend Policy
15-46 LO 3
CPA Question (Poll)
Property Dividends
Dividends payable in assets other than cash.
Restate at fair value the property it will distribute,
recognizing any gain or loss.
15-48 LO 3
Dividend Policy
15-49 LO 3
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 capital—ordinary.
15-53 LO 3
Share Dividends
Date of distribution
15-55 LO 3
Share Splits
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
15-56 LO 3
15-57 LO 8
15-58 LO 8
Share Dividends vs. Share Splits
15-59 LO 3
CPA Question (Poll)
On December 31, 2018, the equity section of Arndt, Inc., was as follows:
Share capital—ordinary, par value €10; authorized 30,000 shares; issued and
outstanding 9,000 shares € 90,000
Share premium—ordinary 116,000
Retained earnings 174,000
Total equity €380,000
On March 31, 2019, Arndt declared a 10% share dividend, and accordingly 900
additional shares were issued, when the fair value was €18 per share. For the
three months ended March 31, 2019, Arndt sustained a net loss of €32,000.
The balance of Arndt’s retained earnings as of March 31, 2019, should be
a. €125,800.
b. €133,000.
c. €134,800.
d. €142,000.
15-60 LO 3
Ortago S.A.’s €10 par ordinary shares are selling for €110 per
share. Four million shares are currently issued and outstanding.
The board of directors wished to stimulate interest in Ortago S.A
ordinary shares before a forthcoming share issue but does not wish
to distribute cash at this time. The board also believes that too
many adjustments to the equity section, especially retained
earnings, might discourage potential investors. The Board has
considered three options for stimulating interest in the shares:
15-61
Suggested End-of-Chapter Exercises
• P15-5
• P15-7
• P15-8
15-62 LO 5