Ch 11.2 Share capital JES

Question 1

is there a JE to record the authorization of common shares

Answer 1

no

Question 3

is there a JE to record the issue of shares

Answer 3

yes

dr Cash
cr Common Shares

Question 4

can a company issue common shares for non cash

Answer 4

yes, goods or services, or ppe

Question 5

when a public companys shares are issued for non cash, what should the issue of shares be recorded at

Answer 5

at fair value of the consideration receieved

Question 6

Noncash considerations tend to be found more often in private companies than in large publicly traded companies

Question 7

When shares are issued for a noncash consideration in a private company following ASPE, they should be recorded at the more reliable of the fair value of the consideration received or the fair value of the consideration given up. Quite often the fair value of the consideration received is the more reliable value because a private company’s shares seldom trade and therefore do not have an easily determinable fair value.

Question 8

why would a ocmpany repurchase own shares on secondary market

Answer 8

1) wants to distribute cash to shareholders without committing to recurring dividends
2) share repurchases to revitalize the market and increase share price
3) to give to employees
4) cut out hostile shareholders

Question 9

The repurchase of shares by a public company is often called a normal course issuer bid.

Question 10

can a company buy back all shares at once

Answer 10

there is a certain percentage that i ssubejct to approval

Question 11

how to record repurchasing of shares in the books

Answer 11

1) remove cost of shares from the share capital acct

DR common shares
CR Cash

NOTE: use the avg cost per share

2) record gain or loss on erpurchase
Gain: contributed surplus
Loss: Dr retained earnings
**but if there is a contributed surplus acct then this is debited first, and then remainder to RE

Question 12

why do we use different accounts to record gains and losses from buying back shares

Answer 12

not really gaining or losing anything cuz buying from own shareholders

NOT RECORDED ON THE SOI, THIS IS PART OF SHAREHOLDERS EQUITY

Question 13

CONTRIBUTED SURPLUS ACCT

normal bal
-how does it get a value?

Answer 13

credit
-only gets a value from the reacquiston of common shares

Question 14

preferred shares acct

normal balacne

Answer 14

credit

Question 15

if you repurchase shares below avg cost

JE

Answer 15

-> gain, so contributed surplus

Dr common shares
Cr contributed surplus
Cr Cash

Question 16

repurchase above avg cost

Answer 16

loss, so first dr contributed surplus, and then RE

JE:
DR common shares
Dr contributed surplus
DR RE
Cr Cash

Question 17

can CONTRIBUTED SURPLUS HAVE A DEBIT BALANCE

Answer 17

NEVER!! ANY EXCESS AMOUNT IS DEBITED TO RE

Question 18

how to record the issue of preffered shares

Answer 18

Dr Cash
CR preffered shares

Question 19

can preferred shares be issued for noncash

Answer 19

yes!

Question 20

can/are preferred shares ever repurchased

Answer 20

yes they can be, but not very common

BECAUSE PS include a redemption feature that enable a company to redeem them instead of having to repuchased on the marketplace

Question 21

pros of preferred shares

Answer 21

1) specified dividend rate preference
2) dividend preference
3) liqudiation preference
4) other prefereces

Question 22

what is specified dividend rate preference

Answer 22

Preferred shares are usually issued with a specified dividend rate, such as $1 per share annually. These would be called “$1 preferred,” with the $1 indicating the annual dividend rate. The annual dividend rate may also be stated as a percentage of the issue price (which would 4% in our example, calculated as $1 ÷ $25). Even though the dividend rate is reported as an annual dollar amount per share, it is usual to pay dividends quarterly. For example, if Hydro-Slide paid a quarterly dividend it would be $0.25 per share ($1.00÷ 4). The specified dividend rate makes shares attractive to investors who wish to earn dividend income. In contrast, common shares do not have a specified dividend associated with them, although the company’s board of directors may choose to pay dividends to common shareholders. For example, Leon’s pays dividends on its common shares, but these dividends were not specified when these shares were issued and are determined annually by the company’s board.The dividend rate on preferred shares may be resettable, fixed, or floating.Nearly three-quarters of the issued preferred shares in Canada are rate reset preferred shares, meaning the issuing corporation has the right to reset the dividend rate periodically, usually every five years. Normally the dividend rate on these preferred shares is set relative to a benchmark, such as the interest rate on five-year Government of Canada bonds, for a five-year period. After the five-year period, the holder of these preferred shares has the right to receive a new fixed rate for the next five-year period or receive a floating-rate dividend.Preferred shares can also be fixed rate, meaning that the dividend rate is fixed at the time of issue, or floating rate, meaning that the dividend rate changes. Floating-rate shares are often linked to a benchmark, such as the three-month Government of Canada T-bill rate.It is important to understand that, even though they may have a specified dividend rate, dividends on preferred shares are not a legal obligation. This means that companies are not obligated to declare and pay these dividends.

Question 23

what is dividend preference of preferred shares

Answer 23

A dividend preference simply means that the preferred shareholders must be paid dividends before any are paid to the common shareholders. For example, if Hydro-Slide’s preferred shares have a $1 annual dividend rate, common shareholders will not receive any dividends in the current year until preferred shareholders have received $1 per share.Thepreferred claim to dividends does not guarantee that dividends will be paid to the preferred shareholders. The payment of dividends depends on a number of factors, including having sufficient cash in the case of a cash dividend. In addition, all dividends must be formally declared (approved) by the board of directors. We will learn more about these factors in the section on Retained Earnings later in this chapter.Preferred shares with a dividend preference may be:Cumulative—this right means that, when dividends are declared to be payable, preferred shareholders must be paid both current-year dividends and any unpaid prior-year dividends before common shareholders receive dividends.Noncumulative—this means that if dividends are not declared in any particular year, they are lost forever. The majority of preferred shares issued in Canada are noncumulative.When preferred shares are cumulative, preferred dividends that are not declared in a period are called dividends in arrears. No dividends can be distributed to common shareholders until all dividends in arrears have been paid. It is unusual for a company to have any dividends in arrears.It is important to understand that dividends in arrears are not considered to be a liability. No obligation exists until a dividend is declared by the board of directors and, without the existence of an obligation, no liability can be recorded. However, the amount of dividends in arrears should be disclosed in the notes to the financial statements to allow investors to evaluate the potential impact of this commitment on the corporation’s financial position.Even though there is no requirement to pay an annual dividend, companies that are unable to meet their dividend obligations—whether noncumulative or cumulative on preferred shares—are not looked upon favourably by the investment community. Even announcements of dividend reductions tend to cause significant reductions in a company’s share price.

Question 24

what is liquidation preference

Answer 24

Preferred shareholders have a priority claim over common shareholders regarding the distribution of corporate assets if the corporation fails or liquidates. This means that, if the company ceases to operate, preferred shareholders will get their capital back before common shareholders do. The preference on assets may be for the legal value of the shares or for a specified liquidating value. Although creditors rank above all shareholders in terms of preference in liquidations, preferred shareholders rank above common shareholders. This is important because the money usually runs out before shareholders get their capital back.Sometimes a company will liquidate or wind up even if it is not going bankrupt. For example, assume that a private corporation’s preferred shares are owned by the parents of a family, while the common shares are held by the children. For various reasons, the company is to be liquidated. This is done by selling all of the assets and settling all of the liabilities. Assume that, after this, the statement of financial position shows the following: Cash $1,000,000, Preferred Shares $200,000, Common Shares $100,000, and Retained Earnings $700,000. Because of their preferences, upon liquidation, the parents will receive $200,000 for their preferred shares from the company and all of the remaining equity of $800,000 will be given to the children.

Question 25

what other preference of preferred shares

Answer 25

Most preferred shares are also issued with a redemption and/or a call feature.Redeemable (or callable) preferred shares—The issuing corporation has the right to purchase the shares from shareholders at specified future dates and prices. The redemption feature offers some flexibility to a corporation by enabling it to eliminate this type of equity security when it is advantageous to do so. The majority of preferred shares in Canada are redeemable.Retractable preferred shares—The shareholder has the right to require the company to repurchase shares at specified future dates and prices. Less than 1% of preferred shares issued in Canada currently have this feature.7The attractiveness of preferred shares as an investment is sometimes increased by adding a conversion privilege. Convertible preferred shares can be exchanged for common shares at a specified ratio. Convertible preferred shares are purchased by investors who want the greater security of preferred shares, but who also desire the option of conversion if the value of the common shares increases significantly. Convertible preferred shares are uncommon in Canada.

Question 26

is the price of common shares or prefered shares more volatiole

Answer 26

more for CS

because the RE of a common accres to common shares, and that why if a company is profitable cost of cs will rise over time and vice versa

Question 27

The major factor affecting the common share price is the profitability of the company, whereas the major factor affecting the preferred share price is the rate of dividends paid on these shares relative to other alternative investments.

Question 28

preferred shares vs liabilities like bonds

Answer 28

Preferred shares can have similar characteristics to liabilities such as bonds, including the following:Both preferred shares and bonds can be issued at fixed rates that are used to determine the amount of dividends to be declared or interest payments to be made, respectively.The prices of both bonds and preferred shares will typically have an inverse relationship with changes in interest rates.Preferred shares can be given credit ratings similar to those used for bonds.Both preferred shares and bonds can be converted into common shares under certain conditions.The key reason why preferred shares are not treated as liabilities is because there is no contractual obligation for a company to declare and pay dividends, whereas companies arelegally required to pay interest on bonds and other non-current liabilities. Some financial instruments are structured to have features of both debt and equity, but we will leave coverage of these for an intermediate accounting course.