Lecture 9 - Shareholders' Equity

Question 1

Mention 5 advantages and 3 disadvantages of Corporations

Answer 1

Advantages:
1. separate legal entity
2. continuous life
3. easy to transfer ownership
4. limited liability
5. ability to raise more capital

Disadvantages:
1. separation of ownership and management
2. double taxation
3. government regulations

Question 2

Mention the typically 5 top layers of a Corporation

Answer 2

1) Shareholders
2) Board of Directors
3) Chairperson
4) Chief Executive Officer CEO
5) Chief Operating Officer COO

Question 3

Mention and define the 4 Shareholders’ Rights

Answer 3

1) Vote
-The right to participate in management by voting on matters that come before the shareholders, usually in an Annual General Meeting AGM

2) Dividends
-The right to receive a proportionate part of any dividend

3) Liquidation
-The right to receive a proportionate share of any assets remaining after the corporation pays its liabilities

4) Preemption
-The right to maintain one’s proportionate ownership. When new shares are issued you should be offered to by the same percentage of them as you already own

Question 4

Mention the 2 classes of Shares and their characteristics

Answer 4

1) Ordinary Shares
-Basic form of shares
-4 basic rights

2) Preference Shares
-Not common
-Advantages: Receives dividends first and receives assets first in liquidation
-4 basic rights
-Earn a fixed amount of dividend on investment

Question 5

What is par value? And what should be recorded when issuing ordinary shares at par value?

Answer 5

1) Arbitrary nominal amount assigned by a company to its share - usually below the issuance price

D: Cash
C: Ordinary Shares
To issue ordinary shares

Question 6

What is above par value?
What should be recorded if a company issues ordinary shares above par?

Answer 6

1) When the issuance price is higher than the par value

2)
D: Cash - full amount
C: Ordinary Shares - the par value
C: Paid-in Capital Excess of Par - the remaining
To issue ordinary shares above par

Question 7

How is it recorded if a company issues shares for assets other than cash?
Use a building as an example

Answer 7

D: Building (The asset’s worth = the value of the issuance price )
C: Ordinary shares (the par value)
C: Paid-in capital in excess of par (issuance price - par value)
To issue no-par shares in exchange for a building

Question 8

Explain the following shares:
1) Authorized
2) Issued
3) Outstanding (+ formula)

Answer 8

1) The maximum number of shares a company can issue under its constitution

2) The number of shares the company has issued to its shareholders

3) The number of shares that the shareholders own
= Issued shares - treasury shares

Question 9

What are Treasury Shares?
Mention 4 reasons to buy them

Answer 9

• A company’s own shares that it has issued and later reacquired

1) Needs shares for distribution to compensate employees

2) Buying the shares low and selling at a higher price

3) Avoid takeover

4) Increase earnings per share EPS

Question 10

Mention 4 facts of the Recording of Treasury Shares

Answer 10

1) Recorded at cost/market price on the date of the purchase

2) Disregard par value

3) Contra account to Share Capital

4) Reported as a negative number on the Balance Sheet

Question 11

How is a purchase of Treasury Shares reported?

Answer 11

D: Treasury Shares
C: Cash
To record purchase of treasury shares

Question 12

Mention 3 facts about the Reselling of Treasury Shares

Answer 12

1) Increases assets + shareholders equity by the amount of cash received

2) Amount received in excess/short of original amount paid is recorded as paid-in capital from treasury share transaction (under share capital)
Excess —> Credit share capital
Less ——-> Debit share capital

3) A fundamental of accounting: A company neither earns a profit nor incurs a loss when it sells its shares to or buys its shares from its own shareholders.

Question 13

How to you report a Resale of Treasury Shares?
*With excess

Answer 13

D: Cash
C: Treasury shares (original value)
C: Share capital (excess value)
To record sale of treasury share

Question 14

Mention 3 forms of Dividends

Answer 14

1) Cash
2) Share
3) Non-cash assets

Question 15

Mention 3 facts about cash dividends and 3 relevant dates

Answer 15

Facts
1) Most common

2) Must have enough retained earnings to declare dividend and the cash to pay it

3) The board of directors have the authority to declare: but company has no obligation until it has been declared

Dates:
1) Declaration date
2) Date of record - only shareholders this date will receive the dividend
3) Payment date

Question 16

Cash Dividends: Show what to report at:
1) Declaration date
2) Date of record
3) Payment date

Answer 16

1)
D: Retained earnings
C: Dividends payable
Declared a cash dividend

2) Nothing

3)
D: Dividends payable
C: Cash
Paid cash dividend

Question 17

How is Cash Dividend stated on Preference Shares and how should it be reported in a company declares Cash Dividends with enough to both Preference and Ordinary Shares?

Answer 17

• Stated as either
  1) Percent of par value
  2) Amount per share

D: Retained earnings (full amount)
C: Dividends Payable, Preference (the amount promised to the preference shares
C: Dividends payable, ordinary (the remaining amount of declared dividends
To declare a cash dividend

Question 18

Shareholders Equity Transactions’ effects on Assets, Liability and Equity

Transactions:
Issuance of shares
Purchases of Treasury Shares
Sale of Treasury Shares
Declaration of Cash Dividend
Payment of Cash Dividend

Answer 18

1)Issuance of shares
A: up
L: =
E: up

2)Purchases of Treasury Shares
A: down
L: =
E: down

3)Sale of Treasury Shares
A: up
L: =
E: down

4)Declaration of Cash Dividend
A: =
L: up
E: down

5)Payment of Cash Dividend
A: down
L: down
E: =

Question 19

Mention and explain 3 different values of shares

3
1
1 + formula

Answer 19

1) Market value/price
-The price at which a person can sell and buy a share
-Varies with net income, financial position, future prospects and general economic conditions
-Mostly what shareholders are concerned about

2) Liquidation Value
-The amount a company must pay a preferred shareholder in the event that the company goes out of business

3) Book value per ordinary share
-The amount of ordinary shareholders’ equity on a company books for each share outstanding
= Total equity - preference equity/ number of ordinary shares outstanding