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Chapter 15
Equity
**1. Share capital.
- Share premium.
- Retained earnings.
- Accumulated other comprehensive income.
- Treasury shares.
- Non-controlling interest (minority interest).**
Issuance of Shares
Accounting problems involved in the issuance of shares:
- Par value shares.
- No-par shares.
- Shares issued in combination with other securities.
- Shares issued in non-cash transactions.
- Costs of issuing shares.
1- Par Value Shares
Low par values help companies avoid a contingent liability.
Illustration: Video Electronics AG is organized with 10,000 ordinary shares authorized without par value. If Video Electronics issues 500 shares for cash at €10 per share, it makes the following entry.
Cash 5,
Share Capital—Ordinary 5,
2- No-Par Shares
Reasons for issuance:
Avoids contingent liability.
Avoids confusion over recording par value versus fair market value.
Illustration : Some countries require that no-par shares have a stated value. If a company issued 1,000 of the shares with a €5 stated value at €15 per share for cash, it makes the following entry.
Cash 15,
Share Capital—Ordinary 5,
Share Premium—Ordinary 10,
3- Shares Issued with Other Securities
Two methods of allocating proceeds:
Proportional method. Incremental method.
BE15- 4 : Ravonette Corporation issued 300 shares of $10 par value ordinary shares and 100 shares of $50 par value preference shares for a lump sum of $13,500. The ordinary shares have a market value of $20 per share, and the preference shares have a market value of $90 per share.
Cash 13,
Share Capital—Preference (100 X $50) 5, Share Premium—Preference 3,
Share Capital—Ordinary (300 X $10) 3,
Share Premium—Ordinary 2,
BE15-4 (Variation): Ravonette Corporation issued 300 shares of $10 par value ordinary shares and 100 shares of $50 par value preference shares for a lump sum of $13,500. The ordinary shares have a market value of $20 per share, and the value of preference shares are unknown.
5- Costs of Issuing Stock
Direct costs incurred to sell shares, such as
underwriting costs,
accounting and legal fees,
printing costs, and
taxes,
Should reduce the proceeds received from the sale of the shares.
Preference Shares
Features of Preference Shares
Cumulative: a preference share whose annual fixed-rate dividend, if it cannot be paid in any year, accrues until it can. Participating: gives the holder the right to receive dividends equal to the normally specified rate. Convertible: an option for the holder to convert the preferred shares into a fixed number of common shares, usually any time after a predetermined date. Callable: the issuer has the right to call in or redeem the stock at a preset price after a defined date. Redeemable: are hybrid securities because they have characteristics to both debt and equity.
The accounting for preference shares at issuance is similar to that for ordinary
shares.
Reacquisition of Shares
Purchase of Treasury Shares
Two acceptable methods:
Cost method (more widely used).
Par (stated) value method.
Treasury shares reduce equity.
Illustration: Pacific Company issued 100,000 shares of $1 par value ordinary shares at a price of $10 per share. In addition, it has retained earnings of $300,000.
On January 20, 2019, Pacific acquires 10,000 of its shares at $11 per share. Pacific records the reacquisition as follows.
Treasury Shares 110,
Cash 110,
Sale of Treasury Shares
Above Cost
Below Cost
Both increase total assets and equity.
Sale of Treasury Shares above Cost. Pacific acquired 10,000 treasury shares at $11 per share. It now sells 1,000 shares at $15 per share on March 10. Pacific records the entry as follows.
Cash 15,
Treasury Shares 11,
Share Premium—Treasury 4,
Sale of Treasury Shares below Cost. Pacific sells an additional 1,000 treasury shares on March 21 at $8 per share, it records the sale as follows.
Cash 8,
Share Premium—Treasury 3,
Treasury Shares 11,
At date of record (June 24) No entry
At date of payment (July 16)
Dividends Payable 900,
Cash 900,
Property Dividends Dividends payable in assets other than cash.
Restate at fair value the property it will distribute, recognizing any gain or loss.
Illustration: Tsen, Ltd. transferred to shareholders some of its investments (held-for- trading) in securities costing HK$1,250,000 by declaring a property dividend on December 28, 2018, to be distributed on January 30, 2019, to shareholders of record on January 15, 2019. At the date of declaration the securities have a fair value of HK$2,000,000. Tsen makes the following entries.
At date of declaration (December 28, 2018)
Equity Investments 750, Unrealized Holding Gain or Loss—Income 750,
Retained Earnings 2,000,
Property Dividends Payable 2,000,
At date of distribution (January 30, 2019)
Property Dividends Payable 2,000,
Equity Investments 2,000,
Liquidating Dividends Any dividend not based on earnings reduces amounts paid-in by shareholders.
Illustration: McChesney Mines Inc. issued a “dividend” to its ordinary shareholders of £1,200,000. The cash dividend announcement noted that shareholders should consider £900,000 as income and the remainder a return of capital. McChesney Mines records the dividend as follows.
Date of declaration
Retained Earnings 900,
Share Premium—Ordinary 300,
Dividends Payable 1,200,
Date of payment
Dividends Payable 1,200,
Cash 1,200,
Share Dividends
o Issuance by a corporation of its own shares to shareholders on a pro rata basis, without receiving any consideration.
o Par value, not the fair value, is used to record the share dividend.
o Share dividend does not affect any asset or liability.
o Journal entry reflects a reclassification of equity.
o Ordinary share dividend distributable reported in the equity section as an addition to share capital—ordinary.
Illustration: Vine plc has outstanding 1,000 shares of £1 par value ordinary shares and retained earnings of £50,000. If Vine declares a 10 percent share dividend, it issues 100 additional shares to current shareholders. If the fair value of the shares at the time of the share dividend is £8 per share, the entry is:
Date of declaration
Retained Earnings 10,
Ordinary Share Dividend Distributable 10,
Date of distribution
Ordinary Share Dividend Distributable 10,
Share Capital—Ordinary 10,
Share Splits
To reduce the market value of shares.
No entry recorded for a share split.
Decrease par value and increased number of shares.
A share split differs from a share dividend. How?
A share split increases the number of shares outstanding and decreases the par or stated value per share.
A share dividend ,
- increases the number of shares outstanding. * does not decrease the par value.
