Equity section of statement of financial position. Share dividends and share split. Share and cash dividends. Analysis and classification of equity transactions. Issuance of shares for land. Share dividends and splits. Share dividend, cash dividend, and treasury shares. The basic rights of each shareholder unless otherwise restricted are to share proportionately: The preemptive right protects existing shareholders from dilution of their ownership share in the event the corporation issues new shares.
Preference shares commonly have preference to dividends in the form of a fixed dividend rate and a preference over ordinary shares to remaining corporate assets in the event of liquidation. Preference shares usually do not give the holder the right to share in the management of the company.
Ordinary shares are the residual security possessing the greater risk of loss and the greater potential for gain; they are guaranteed neither dividends nor assets upon dissolution but they generally control the management.
The distinction between contributed paid-in capital and retained earnings is important for both legal and economic points of view. Legally, dividends can be declared out of retained earnings in all countries, but in many countries dividends cannot be declared out of contributed paid-in capital.
Economically, management, shareholders, and others look to earnings for the continued existence and growth of the corporation. Authorized ordinary shares—the total number of shares authorized by the country of incorporation for issuance. Unissued ordinary shares—the total number of shares authorized but not issued. Issued ordinary shares—the total number of shares issued distributed to shareholders.
Outstanding ordinary shares—the total number of shares issued and still in the hands of shareholders issued less treasury shares. Treasury shares—shares issued and repurchased by the issuing corporation but not retired. Par value is an arbitrary, fixed per share amount assigned to a share by the incorporators. It is recognized as the amount that must be paid in for each share if the shares are to be fully paid when issued. If not fully paid, the shareholder has a contingent liability for the discount results.
The issuance for cash of no-par value ordinary shares at a price in excess of the stated value of the ordinary shares is accounted for as follows: The proportional method is used to allocate the lump sum received on sales of two or more classes of securities when the fair value or other sound basis for determining relative value is available for each class of security.
In instances where the fair value of all classes of securities is not determinable in a lump-sum sale, the incremental method must be used. The value of the securities is used for those classes that are known and the remainder is allocated to the class for which the value is not known.
The general rule to be applied when shares are issued for services or property other than cash is that companies should record the shares issued at the fair value of the goods or services received, unless that fair value cannot be measured reliably. If the fair value of the goods or services cannot be measured reliably, use the fair value of the shares issued.
If a company cannot readily determine either the fair value of the shares it issues or the property or services it receives, it should employ an appropriate valuation technique. Depending on available data, the valuation may be based on market transactions involving comparable assets or the use of discounted expected future cash flows.
Companies should avoid the use of the book, par, or stated values as a basis of valuation for these transactions. The direct costs of issuing shares, such as underwriting costs, accounting and legal fees, printing costs, and taxes, should be reported as a reduction of the amounts paid in. Issue costs are therefore debited to Share Premium because they are unrelated to corporate operations.
The major reasons for purchasing its own shares are: If treasury shares are carried in the accounts at cost, these socalled gains or losses arise when the treasury shares are sold. Since treasury shares cannot be considered an asset, dividends on treasury shares are not properly included in net income. Nonparticipating means the security holder is entitled to no more than the specified fixed dividend.
If the security is partially participating, it means that in addition to the specified fixed dividend the security may participate with the ordinary shares in dividends up to a certain stated rate or amount.
A fully participating security shares pro rata with the ordinary shares dividends declared without limitation.
In this case, Kim Inc. Cumulative means dividends not paid in any year must be made up in a later year before any profits can be distributed to ordinary shareholders. Any dividends not paid on cumulative preference shares constitute a dividend in arrears. A dividend in arrears is not a liability until the board of directors declares a dividend.
Any excess over par value is reported as share premium-preference. Sources of equity include 1 share capital, 2 share premium, 3 retained earnings, 4 accumulated other comprehensive income, and reduced by 5 treasury shares. Treasury Shares is a contra equity account and Cash is an asset. Thus, this transaction has: The answers are summarized in the table below: The dividend policy of a company is influenced by 1 the availability of cash, 2 the stability of earnings, 3 current earnings, 4 prospective earnings, 5 the existence or absence of contractual restrictions on working capital or retained earnings, and 6 a retained earnings balance.
In declaring a dividend, the board of directors must consider the condition of the corporation such that a dividend is 1 legally permissible and 2 economically sound. In general, directors should give consideration to the following factors in determining the legality of a dividend declaration: In addition, in some jurisdictions, share premium may be used for dividends, although such dividends may be limited to preference shares.
Generally, deficits in retained earnings and debits in contributed paid-in capital accounts must be restored before payment of any dividends. In order that dividends be economically sound, the board of directors should consider: In addition, the ability to expand or replace existing facilities should be considered. Cash dividends are paid out of cash. A balance must exist in retained earnings to permit a legal distribution of profits, but having a balance in retained earnings does not ensure the ability to pay a dividend if the cash situation does not permit it.
A cash dividend is a distribution in cash while a property dividend is a distribution in assets other than cash. Any dividend not based on retained earnings is a liquidating dividend. A share dividend is the issuance of additional shares in a nonreciprocal exchange involving existing shareholders with no change in the par or stated value. No formal journal entries are required for a share split, but a notation in the ledger accounts would be appropriate to show that the par value of the shares has changed.
From an accounting viewpoint, it should be disclosed as a share split effected in the form of a dividend because it meets the accounting definition of a share split as explained above. An ordinary share dividend involves capitalizing charging retained earnings equal to the fair value of the shares distributed. A share split effected in the form of a dividend involves charging retained earnings for the par stated value of the additional shares issued.
Another distinction between a share dividend and a share split is that a share dividend usually involves distributing additional shares of the same class with the same par or stated value. A share split usually involves distributing additional shares of the same class but with a proportionate reduction in par or stated value.
The aggregate par or stated value would then be the same before and after the share split. A share dividend affects only equity accounts; that is, retained earnings is decreased and share capital and share premium are increased.
Thus, there is no debt to be paid, and, consequently, there is no severance of corporate assets when a share dividend is issued.
Finally, the corporation usually will formally announce its intent to issue a specific number of additional shares, and these shares must be reserved for this purpose.
A partially liquidating dividend will be debited both to Retained Earnings and Share Premium. The portion of dividends that is a return of capital should be debited to Share Premium. A property dividend is a nonreciprocal transfer of nonmonetary assets between an enterprise and its owners. A transfer of a nonmonetary asset to a shareholder or to another entity in a nonreciprocal transfer should be recorded at the fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset.
Retained earnings are restricted because of legal or contractual restrictions, or the necessity to protect the working capital position.
Restrictions of retained earnings are best disclosed in a note to the financial statements. This allows a more complete explanation of the restriction. No, Mary should not make that conclusion. GAAP requires these losses to be reported as other comprehensive income. GAAP for transactions related to equity pertain to 1 issuance of shares, 2 purchase of treasury shares, 3 declaration and payment of dividends, 4 , the costs associated with issuing shares reduce the proceeds from the issuance and reduce contributed paid-in capital, and 5 the accounting for par, no par and no par shares with a stated value.
GAAP a company has the option of charging the excess of the cost of treasury stock over par value to 1 retained earnings, 2 allocate the difference between paid in capital and retained earnings, or 3 charge the entire amount to paid-in capital.
Under IFRS, the excess may have to be charged to paid-in capital, depending on the original transaction related to the issuance of the stock. Revaluation surplus arises under IFRS because of increases or decreases in property, plant and equipment, mineral resources, and intangible assets. This account is part of general reserves under IFRS and is not considered contributed capital. In addition the options of how to present other comprehensive income under U. GAAP will change in any converged standard in this area.
Ordinary Share Dividend Distributable July 1 1 Sept. For example, the Jan. However, this is not a relevant measure of this economic event. Rather, it is a measure of a prior, unrelated event. The appraised value of the land is a reasonable alternative if based on appropriate fair value estimation techniques. However, it is an appraisal as opposed to a market-determined price.
The trading price of the shares is probably the best measure of fair value in this transaction. Balance allocated to ordinary shares Amount allocated to bonds Amount allocated to ordinary shares This question is presented to stimulate some thought and class discussion. Allocated to Preference Shares: The cumulative dividend is disclosed in a note to the equity section; it is not reported as a liability.
This amount is obtained from either of the following: Cost of treasury shares 34,, shares In this case, it is necessary to capitalize par value with a share dividend because the number of shares is increased and the par value remains the same. Earnings are capitalized for purely procedural reasons. Total cash dividends paid Total value of share dividends Current balance of retained earnings W, W60, 40, , W, The accumulated other comprehensive income is shown as part of equity; the gains on treasury share transactions are recorded as share premium.
Treasury shares 2, ordinary shares Preference shares Ordinary shares Share premium: This may be shown as follows: These returns are based on net income related to total assets, where the ending amount of total assets is considered representative.
If the rate of return on total assets uses net income before interest but after taxes in the numerator, the rates of return on total assets are the same as shown below: To explain why the difference in rate of return on assets and rate of return on ordinary share equity occurs, the following schedule might be provided to the student. The excess earned on the borrowed assets represents additional income for the shareholders and has resulted in the higher income per share.
Due to the debt financing, Ingalls has fewer shares outstanding. The assets obtained from incurrence of this debt are earning a higher return than their cost to Ingalls Company. Some analysts use after-tax interest expense to compute the bond rate. Another way to compute the participating amount is as follows: Liquidating premium to preference This problem involves such concepts as shares sold for cash, noncash stock transactions, and declaration and distribution of share dividends.
The student is required to prepare the respective journal entries and the equity section of the statement of financial position to reflect these transactions. Problem Time 25—35 minutes Purpose—to provide the student with an opportunity to record the acquisition of treasury shares and its sale at three different prices. In addition, an equity section of the statement of financial position must be prepared. Problem Time 25—30 minutes Purpose—to provide the student with an opportunity to record seven different transactions involving share issuances, reacquisitions, and dividend payments.
Throughout the problem the student needs to keep track of the shares outstanding. This problem involves such concepts as a lump-sum sale of capital shares and a non-cash stock exchange. The student is required to prepare the journal entries to reflect these transactions.
The student is required to record these treasury share transactions under the cost method, assuming the FIFO method for purchase and sale purposes. This problem involves such concepts as the reacquisition, and reissuance of shares; plus a declaration and payment of a cash dividend. Problem Time 15—20 minutes Purpose—to provide the student with an understanding of the proper accounting for the declaration and payment of cash dividends on both preference and ordinary shares.
This problem also involves a dividend arrearage on preference stock, which will be satisfied by the issuance of treasury shares. The student is required to prepare the necessary journal entries for the dividend declaration and payment, assuming that they occur simultaneously. Problem Time 20—25 minutes Purpose—to provide the student with an understanding of the accounting effects related to share dividends and share splits. The student is required to analyze their effect on total assets, share capital— ordinary, share premium—ordinary, retained earnings, and total equity.
The student is required to prepare the equity section of the statement of financial position in proper form reflecting the above transactions.
Acting as a financial advisor to the Board of Directors, the student must report on each option and make a recommendation. Problem Time 25—35 minutes Purpose—to provide the student with an understanding of the proper accounting for the declaration and payment of both a cash and share dividend. The student is required to prepare both the necessary journal entries to record cash and share dividends and the equity section of the statement of financial position, including a note to the financial statements setting forth the basis of the accounting for the share dividend.
Problem Time 35—45 minutes Purpose—to provide the student a comprehensive problem involving all facets of the equity section. The student must prepare the equity section of the statement of financial position, analyzing and classifying a dozen different transactions to come up with proper accounts and amounts. A good review of Chapter Retained earnings Total equity Net income for period Retained earnings ending balance February 1 purchase 2, shares March 1 sale shares March 18 sale shares April 12 sale shares Treasury shares ending balance Treasury shares 20, ordinary shares If the shares are not regularly traded, the machinery would be recorded at its estimated fair value.
I'm having major trouble studying for my accounting class. I used to do tons of practice problems from my accounting textbooks because they had solutions provided to see if you got it correct. However, I can't find solutions for this edition! Can anyone help me? I want to study and understand this material, but I have no way to practice and see if I'm doing it right. Here is the link as many people are asking for it.
Hi MightyElmo, do you mind sending me the link too? I have such a hard time in my accounting class. The questions in the 14th edition are just about the same as the 15th. I can't say for the newest updated 15th edition.
Torrent sites have the solutions manual as well as instructors manuals which is also very helpful , test banks which my intermediate I professor used for making her tests this has a shit ton of questions so don't try and remember questions , excel templates, and another exercise B solution set.
These are all very helpful. On wiley's website you can also find under student resources study guides for each chapter, which is essentially chapter outlines, and pp slides for each chapter. Intermediate is all about practice, so I would highly recommenced the extra two books, along with the solutions manual for the textbook, and the test banks.
The test banks are a good place to start since there's like questions per chapter. There's lots of multiple choice and a bunch of lengthy exercises. Don't think of using a test bank as cheating, college is about learning, and the amount of examples some professors give don't allow the practice students need, so it's up to you to get those resources and practice at your own speed.
Simple 15–20 E Stock issued for land. Simple 10–15 E Lump-sum sale of stock with bonds. Moderate 20–25 E Lump-sum sales of stock with preferred stock. Simple 10–15 E Stock issuances and repurchase. Moderate 25–30 E Effect of treasury stock transactions on financials. Moderate 15–20 E Preferred stock entries and .
Accounting being the process of preparing financial statements prepares them as per the accounting principles and analyzes the prepared financial statements on the basis of ratios. Accounting principles are the general rule which states the preparation of accounting and financial statements.
McConomy Intermediate Accounting = $ Share Subscriptions Receivable Bal shares Solutions Manual Chapter 15 Copyright © John Wiley & Sons Canada. Ltd. $ 5. Common shares = $2 par value X Debit to Retained Earnings: ($15 X /5(3). Chapter 15 - Leases The lease is a capital lease to Seminole because the present value of the minimum lease payments ($ million) is greater than 90% of the fair value of the asset (90% x $ million = $ million). Since the additional lessor conditions also are met, it is a capital lease to Lukawitz%(9).
Copyright © John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Questions Chapter 15 (Continued) 9. The general rule to be applied. Start studying Chapter 15 - Intermediate Accounting. Learn vocabulary, terms, and more with flashcards, games, and other study tools.