chapter 13 and 14 Flashcards
The Corporate Form of Organization
𝗔 𝗹𝗲𝗴𝗮𝗹 𝗲𝗻𝘁𝗶𝘁𝘆 ᵃˢˢᵒᶜⁱᵃᵗⁱᵒⁿ / ᵒʳᵍᵃⁿⁱᶻᵃᵗⁱᵒⁿ ᵗʰᵃᵗ ᶜᵃⁿ ᵉⁿᵗᵉʳ ⁱⁿᵗᵒ ᶜᵒⁿᵗʳᵃᶜᵗˢ, ᵖᵃʸ ᵈᵉᵇᵗˢ, ˢᵘᵉ ᵃⁿᵈ ᵇᵉ ˢᵘᵉᵈ.
𝘁𝗵𝗮𝘁 𝗶𝘀 𝘀𝗲𝗽𝗮𝗿𝗮𝘁𝗲 𝗳𝗿𝗼𝗺 𝗶𝘁𝘀 𝗼𝘄𝗻𝗲𝗿𝘀 ˢʰᵃʳᵉʰᵒˡᵈᵉʳˢ
𝗖𝗹𝗮𝘀𝘀𝗶𝗳𝗶𝗲𝗱 𝗯𝘆 𝗽𝘂𝗿𝗽𝗼𝘀𝗲 (𝗳𝗼𝗿 𝗽𝗿𝗼𝗳𝗶𝘁 𝘃𝘀 𝗻𝗼𝗻)𝗮𝗻𝗱 𝗼𝘄𝗻𝗲𝗿𝘀𝗵𝗶𝗽:
𝑷𝒖𝒃𝒍𝒊𝒄 𝒄𝒐𝒓𝒑𝒐𝒓𝒂𝒕𝒊𝒐𝒏:shares are available for purchase on an organized securities market
𝑷𝒓𝒊𝒗𝒂𝒕𝒆 𝒄𝒐𝒓𝒑𝒐𝒓𝒂𝒕𝒊𝒐𝒏:shares are held by a few individuals and are not traded
Characteristics of a Corporation
Separate legal existence from owners
💠Acts under its own name
💠Owners do not bind the corporation
Limited Liability of Shareholders
Limited to the amount of their investment
Ability to acquire capital
💠Can raise capital by issuing shares
💠May be difficult for closely-held corporations
Continuous & unlimited life
💠Unaffected by change in ownership
Government Regulations
💠Specific laws that govern operations of corporations
Income Tax
💠Taxed as a separate entity
Transferable ownership rights
💠Shares of capital represent ownership of a corporation
💠Shares may be bought and sold
💠No effect on operating activities of corporation
Forming a Corporation
-Can incorporate federally or provincially
-Done by filing articles of incorporation(the company’s “constitution”):
Provide info such as :
Name and purpose of company
Number of shares and kinds of shares
Location of corporation’s head office
By-laws: internal rules and policies
By-laws: internal rules and policies
Organization costs:
🍟Costs of forming a corporation
🍟Must be expensed when incurred
🍟Include:
Fees to underwriters
Legal fees
Incorporation fees
Promotional expenditures
Ownership Rights of Shareholders
Ownership rights are in the form of shares
Can be divided into different classes
🌷As stated in the articles of incorporation
🌷Each class has rights and privileges
🌷Usually referred to as common and preferred shares
Common Shares
Shares where the owners have the right:
To ** vote** on certain matters
To ** dividends** : the distribution of profit
To remaining assets in a ** liquidation**
Preferred Shares
A corporation may issue these shares in addition to common shares
Preferred shares have a preference, or priority, over common shares in certain areas, including
-To dividends: the distribution of profit
-To remaining assets in a liquidation
They generally do not have voting rights.
(𝐏𝐫𝐢𝐨𝐫𝐢𝐭𝐲 𝐨𝐯𝐞𝐫 𝐜𝐨𝐦𝐦𝐨𝐧 𝐬𝐡𝐚𝐫𝐞𝐬 𝐟𝐨𝐫 𝗱𝗶𝘃𝗶𝗱𝗲𝗻𝗱𝘀 𝐚𝐧𝐝 𝐚𝐬𝐬𝐞𝐭𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐞𝐯𝐞𝐧𝐭 𝐨𝐟 𝗹𝗶𝗾𝘂𝗶𝗱𝗮𝘁𝗶𝗼𝗻 𝐨𝐟 𝐭𝐡𝐞 𝐜𝐨𝐦𝐩𝐚𝐧𝐲)
Corporation Management
Shareholders manage the corporation through the Board of Directors that they elect
The board:
-Decides on the corporation’s operating policies
-Selects officers (such as the Chief Executive Officer or CEO) to perform daily management functions
Share Issue Considerations–>A corporation must determine?
❀How many different classes of shares it will issue
❀The specific rights and privileges of each class of shares
❀How many of each class of shares can be sold to shareholders
❀How many it will sell and at what price
Authorized share capital
-Number of shares company is allowed to sell
-Many companies have unlimited number of shares
Issue of shares
🐥Issued directly to investors or through an investment dealer
🐥First public sale is called an initial public offering (IPO)
Market value of shares
🌠Once issued, shares trade on a secondary market
🌠Prices determined by buyers and sellers and other external factors
Retained Earnings
= cumulative profit or loss since incorporation that has been retained in the company for future use
ᴵᵗ ʰᵃˢ ⁿᵒᵗ ᵇᵉᵉⁿ ᵈⁱˢᵗʳⁱᵇᵘᵗᵉᵈ ᵗᵒ ˢʰᵃʳᵉʰᵒˡᵈᵉʳˢ
Retained earnings are earned capital and can be distributed as dividends
The cumulative total of profit less losses and less declared dividends since incorporation
Two major components:
Profit
Dividends: cash distributions to owners
Shares are usually issued for cash: do this example:
Hydroslide Inc., a private company, is authorized to issue an unlimited number of common shares. It issues 20,000 of these shares for $1 cash per share on January 2.
Jan 2 Dr. Cash 20,000
————-Cr. Common shares 20,000
To record issue of 20,000 common shares
Shares can be issued in exchange for services or noncash assets. Explain more.
🐢Recorded at fair value of goods/services received:
Dr. Service or asset (e.g. Legal Fees Expense)
————Cr. Common shares
🐢Under IFRS, if fair value of goods/services not measurable, use fair value of shares given up
🐢Under ASPE, can use either of the above valuation methods
do this example: On February 25, the lawyer who helped Hydroslide incorporate billed the company $3,900 for her services. If Hydroslide has limited cash available, it may offer to issue common shares to the lawyer instead of cash. Since Hydroslide is a private company, we can offer the lawyer 3,900 shares (at $1 from previous example) in exchange for legal services. The lawyer negotiates and wants 4,000 cash as she is not getting paid cash.
Remember the value of the shares needs to be recorded at the fair value of the lawyer’s services, not at the value of the shares issued.
Feb. 25 Dr. Legal Fees Expense 3,900
—————–Cr. Common shares 3,900
To record issue of 4,000 common shares for legal services
Preferred Shares —>Entries to record issue and reacquisition of preferred shares similar to entries for common shares
Transactions for each class of share is recorded in a separate account. do this ex: Hydroslide Inc. issues 500, $5 preferred shares for $100 per share on July 7
July 7 Dr. Cash 50,000
Cr. Preferred shares 50,000
To record issue of 500 preferred shares
Dividend Preference—–>preferred shares
Preferred shareholders have a right to dividends before common shareholders
𓂃 ࣪˖ There is no guarantee that dividends will be paid
𓂃 ࣪˖ ִIt depends on many factors, such as having enough money in retained earnings and available cash
𓂃 ࣪˖ ִAll dividends must be approved and declared by the board of directors
Cumulative preferred shares
Cumulative preferred shares have a right to current year’s dividends and any prior years’ dividends owing before dividends are paid on common shares
Any unpaid dividends (in arrears) are not considered a liability
𓂃 ࣪˖No obligation to pay unless dividend is declared by the Board of Directors
do this example: Hydroslide Inc.’s $5 preferred shares are cumulative. Hydroslide’s annual total preferred dividend is $2,500 (500 x $5 per share). If dividends are two years in arrears, what is the amount dividends that preferred shareholders are entitled to receive?
Dividends in arrears (2,500 x2) $5,000
Current year dividends ͟ ͟2͟,͟5͟0͟0͟
Total preferred dividends $7,500
Convertible Preferred Shares
🐰Provide option to exchange preferred shares to common shares at a specified ratio
🐰Conversion is recorded by transferring cost from Preferred Shares to Common Shares account
SOO Confusing example:
Ross Industries Inc. issues 1,000 convertible preferred shares at $100 per share. One preferred share is convertible into 10 common shares. The current fair value of the common shares is $10.50 per share. (total shares converted 1000 x 10 = 10,000)
June 10 DR Preferred Shares 100k( 1000 x $100)
————- CR Common Shares 100k
To record conversion of 1000 preferred shares into 10 k common shares
Redeemable and Retractable Preferred Shares
⛄Corporation (redeemable/callable) or the shareholder (retractable) can redeem the shares at specified future dates and prices
⛄Similar to debt: offers a repayment of the principal
⛄Considered a financial instrument
⛄These preferred shares usually reported in the liabilities section of the balance sheet
ll of the following are examples of organization costs except:
registration costs
legal fees
directors’ fees.
accounting fees
directors’ fees.
If a corporation has only one class of shares, they are referred to as
common shares
A company’s authorized shares are
the total number of shares the company is allowed to sell.
Under IFRS, corporations that issue shares in return for noncash assets should record the transaction at:
the fair market value of the asset acquired.
Preferred shares that require the corporation to buy back the shares at the shareholders’ option at an arranged price and date are called:
retractable preferred shares.
Which of the following is not true? Preferred shares:
-generally have voting rights
-have priority over common shareholder dividends
-have priority over common shareholders for assets in the even of liquidation
-can be reacquired
generally have voting rights
ABC Corporation issues 1,000 common shares at $12 per share. In recording the transaction, a credit is made to:
Common Shares for $12,000
On August 5, Hansen Corporation issued 2,000 common shares for $12 per share. On September 10, Hansen issued an additional 500 shares for $13 per share.
What is the share transaction journal entry for August 5th? What is the share transaction journal entry for September 10th?
What is the average cost per share of common shares following the last transaction?
Aug 5 DR cash CR common shares AMOUNT: $24000
Sept 10 DR cash CR common shares
AMOUNT: $6,500
AVG cost per share of common shares following the last transaction? $ 12.20. ( total cost of shares (6500+24000) divided by total amount of shares (500+2000) )
mature vs growing company
A growing company normally avoids dividend payments, so that it can use its retained earnings for capital expenditures, acquisitions, research and development etc.
It may also need to use retained earnings to pay off debt rather than pay dividends
It may be held in reserve in case of future losses
As a company reaches maturity, it has less need for retained earnings, so it will distribute some portion of it to investors
major difference in corporate income stats
One major difference is income taxes
Since a corporation is a separate legal entity
Affects income statement (Income Tax Expense account ) and balance sheet (through a liability account called Income Tax Payable)
Dec 31 Income Tax Expense XXXX
—————-Income Tax Payable XXX
example:https://docs.google.com/presentation/d/1gPlJh2kAZ9YtFCmQFvB6lXA0dkE5x2pwCVPguNcLGbw/edit#slide=id.p7
Assuming Media General Limited has a 20% income tax rate, then the income tax expense would be $56,250 (281,250 * .20)
dividends
Pro-rata (per share) distribution of a portion of corporation’s retained earnings to shareholders
Pro-rata: based on the proportion of shares owned
We will be looking at:
Cash dividends
1.To pay dividends, a corporation must:
2. deceleration date?
To pay dividends, a corporation must:
—Have enough retained earnings and cash
—Declare a dividend payable
Declaration date:
—Board of directors formally declares dividend
—Commits company to a legal obligation
—Declaration is recorded:
—————–Declaration date—————-
Dec 1 Cash Dividends-Common 50k
Dividends payable 50k
to record declaration of cash dividend
On December 1, the directors of Media General Limited declare a $0.50-per-share quarterly cash dividend on the company’s 100,000 common shares. They are payable on January 23.
($0.50 x 100,000) = $50,000
—————–Declaration date—————-
Dec 1 Cash Dividends-Common 50k
——————–Dividends payable 50k
Note: It is also acceptable to debit Retained Earnings when the dividends are declared because dividends reduce retained earnings. Difference is Cash Dividends account will have to be closed at the end of the accounting period.
Record date? Payment date?
Record date:
-Ownership of shares is determined
-Shareholders of record on this date will receive dividend
-No journal entry required
Payment date:
-Dividend is paid to shareholders and recorded:
—————-Payment date—————-
Jan 23 Dividends Payable 50k
———————–Cash 50k
to record payment of cash dividend
SHAREHOLDERS EQUITY SECTION
https://docs.google.com/presentation/d/1gPlJh2kAZ9YtFCmQFvB6lXA0dkE5x2pwCVPguNcLGbw/edit#slide=id.p18
Return on Equity
-Also called return on investment
-Considered to be the most important measure of a firm’s profitability
-It evaluates how many dollars are earned for each dollar invested by shareholders
-It is expressed as a percentage. The higher the ratio, the better the investment.
profit ÷ avg shareholders equity =ROI
Return on Equity-EXAMPLE
The following information is available for Tanim’s Sewing Goods for the three recent years:
Total Shareholder’s equity: 2014 $659,200 2013 $599,822 2012 $558,850
Profit: 2014 79,170 2013 54,630 2012 40,620
Calculate the return on equity for Tanim’s Sewing Goods for 2014 and 2013.
2014: 79,170 ÷ (659,200+599,822) / 2 = 12.6%
2013: 54,630÷ (599,822 + 558,850) / 2 = 9.4%
