Ch 15 Flashcards
What is the corporate form of business organization?
Legal entity: Separate from owners, greater legal protection, access to capital markets
What are the rights of common shareholders?
Voting rights, right to dividends, and right to assets upon liquidation
What are the rights of preferred shareholders?
Priority claim on dividends and assets, but typically no voting rights.
What is the difference between common shares and preferred shares?
Common shares have voting rights and variable dividends; preferred shares have fixed dividends and priority on assets.
What are in-substance common shares?
Investment with characteristics similar to common shares, but not legally called common shares.
What is the significance of treasury shares?
Shares repurchased by the company, which can be either held for re-issue or retired.
What rights do shareholders of treasury shares have?
They do not receive dividends.
What is the role of shareholders in electing directors?
Common shareholders have the right to vote and elect the board of directors.
What happens when shares are issued?
The company receives money, which is credited to share capital.
How is reacquisition of shares treated in accounting?
It’s a capital transaction, and any gain or loss is booked through equity.
How are reacquisition costs allocated if the price paid is higher than the original amount?
Allocated to share capital, then to contributed surplus, and lastly to retained earnings.
How are reacquisition costs allocated if the price paid is lower than the original amount?
Allocated to share capital and contributed surplus.
What is the treatment of shares with no par value?
The assigned value is based on the average per-share amount of the class of shares on the transaction date.
What is the difference between stock dividends and stock splits?
Stock dividends increase the number of shares and reduce retained earnings, while stock splits increase shares without changing total equity.
How are stock dividends treated in terms of shareholder equity?
They result in an increase in the number of shares and share capital, with a reduction in retained earnings.
What is a liquidating dividend?
Dividends paid from contributed surplus, returning shareholders’ investment (return of capital).
What is a stock split?
A process to reduce share price by increasing the number of shares without changing share capital or retained earnings.
When are stock dividends treated as stock splits?
If the dividend is larger than 20%-25%, it’s treated like a stock split (SEC rule).
What are the two types of dividends?
Return on capital (share of earnings) and return of capital (liquidating dividends).
What is the effect of dividends on shareholders’ equity?
Dividends reduce shareholders’ equity.
When does a dividend become a liability for the company?
When it is declared by the board of directors.
What are the three key dates related to dividends?
Date of declaration, date of record, and date of paymen
What is a dividend in kind?
A non-cash dividend paid in assets like merchandise, real estate, or investments.
How is a dividend in kind measured?
It’s measured at the fair value of the asset given up.
What is a stock dividend?
A dividend paid in additional shares of stock instead of cash.
What happens to the book value per share during a stock dividend?
It decreases because there are more shares outstanding.
What does shareholders’ equity represent?
The owners’ claim on the company after all liabilities are subtracted from assets.
What is accumulated other comprehensive income?
Changes in equity due to non-shareholder transactions, such as unrealized gains/losses, not included in net income.
How is shareholders’ equity presented under IFRS?
In the Statement of Changes in Shareholders’ Equity, including accumulated other comprehensive income.
What is required in capital disclosures under IFRS?
Objectives, policies, processes for managing capital, and quantitative data on capital management.
What are normal capital disclosures under ASPE?
Amount of authorized, issued, and fully paid shares, and details on rights, preferences, and restrictions
What is the return on equity (ROE)?
It shows how much net income was earned for each dollar invested by the owners.
What is the payout ratio?
The proportion of net income paid out as dividends to shareholders.
How does ASPE differ from IFRS?
ASPE provides more specific guidance, while IFRS is more flexible with broad principles.
When no explicit guidance is given, how do IFRS and ASPE compare?
The accounting treatment may end up being the same using basic principles.
How does the treatment of accumulated other comprehensive income differ between IFRS and ASPE?
IFRS includes it in the Statement of Changes in Shareholders’ Equity, while ASPE doesn’t require it.
How does IFRS handle capital management disclosures?
IFRS requires detailed disclosures on capital management objectives, policies, and changes.
Under IFRS, what is required for earnings not realized yet?
They are included in other comprehensive income, affecting equity.
What is contributed surplus?
Surplus created from transactions like the reacquisition of shares at a price different from the original value.
What happens when shares are issued at a price higher than par value?
The excess is credited to contributed surplus.
What is the difference between authorized shares and issued shares?
Authorized shares are the maximum allowed, while issued shares are those that have been sold.
What is the role of a shareholder agreement
It sets rules for the management and transfer of shares in private companies.
How are share issuance costs treated in accounting?
They are deducted from the proceeds of the share sale and recorded as a capital transaction.
What is a common method of allocating proceeds in a lump-sum sale?
Proceeds are allocated based on the relative fair value of each class of shares.
What happens if a shareholder defaults on a subscription?
The amount paid is refunded, or forfeited and transferred to contributed surplus.
What is the effect of buying back shares?
It reduces the number of shares outstanding and may increase earnings per share (EPS).
What are the consequences of issuing shares to employees?
This often involves lending money to employees or providing stock compensation.
What is the accounting for dividends declared?
It becomes a liability when declared by the board, reducing retained earnings.
j/e for defaulted subscription accounts
explanation
- return amt paid by subscriber (minus expenses)
- treat amount paid as forfeited and therefor transfer to Cont. surplus account
- Issue fewer shares to subscriber so # of shares equal to what subscription payments already received would have paid for fully
Default sub j/e
dr common share sub
cr share subs receivable
cr a/p
j/e for ant paid by subs forfeited
dr common shares subscribe
cr share sub receivable
cr contributed surplus
