Lecture 8 - Equity Flashcards
What is the definition of Equity?
Residual interest in the assets of the entity after deduction of liabilities
How is Equity measured?
Residual interest is dependant on measurement of assets and liabilities. Equity is enhanced by profitable operations and owner contributions.
What are the three categories of Equity?
1) Contributed Equity -> Share Capital
2) Reserves
3) Retained Profits (accumulated losses)
What is Contributed Equity?
Capital contributed by owners (shares) . On liquidation, owners rate after debt holders.
What are Ordinary Shares? (2 key points)
1) No specific distribution of capital rights
2) Residual equity holders
What are preference shares? (6 key points)
1) Preferred for dividends, distribution of assets etc.
2) No voting rights nor rights to participate beyond fixed dividend %age
3) CUMULATIVE -> accumulate rights to divs in future
4) PARTICIPATING ->gives holder a right to share in divs
5) REDEEMABLE -> Company may buy back @ a price determined in terms of issue
6) CONVERTIBLE -> holder may convert to ordinary shares
When are preference shares liabilities?
If redemption is an option (redeemable pref shares) at the discretion of Holder.
What is the Journal Entry for Dividends? (3 stages)
Time 1 -> Dividend Declared Dr Dividend Declared Cr Dividend Payable Time 2 -> Dividend Paid Dr Dividend payable Cr Cash at Bank Time 3 -> Balance Date Dr Retained Profits Cr Dividends Declared
What are Reserves?
Items of Shareholder equity OTHER THAN retained profits. Transfers to reserves are APPROPRIATIONS OF PROFITS rather than expenses.
What is the Journal Entry to transfer TO reserves?
Dr Retained Profits
Cr General Reserve
What is the Journal Entry to transfer FROM reserves?
Dr General Reserv
Cr Retained Profits
What are 5 reasons for changes in retained profits?
1) Profit/Loss for current reporting period
2) Dividends
3) Transfers to/from reserves
4) Changes in accounting Policies
5) Error Connections
What is the formula for closing retained profits? (relates to first 3 reasons for changes in retained profits)
Retained Profits (Opening)
Adjust for Tax to get:
Net Profit available for appropriation/distribution
Less dividends
Less Transfers to reserves
Add Transfers from reserves
EQUALS: Retained Profits ClosingWhat is the Journal Entry for Share Repurchase?
Dr Share Capital (by A)
Dr Retained Profit (by B)
Cr Cash (by C)
Such that A = initial cost of shares
B = repurchase price - A
C = repurchase price (A+B)
