1. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil Kwantlen Polytechnic University Chapter 13 Corporations: Organization and Share Capital Transactions

2. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Corporations: Organization and Share Capital Transactions The corporate form of organization The corporate form of organization CharacteristicsCharacteristics Forming a corporationForming a corporation Ownership rights of shareholdersOwnership rights of shareholders Share issue considerationsShare issue considerations Common shares Common shares Issuing shares for cash, services or noncash assetsIssuing shares for cash, services or noncash assets Reacquisition of sharesReacquisition of shares Preferred shares Preferred shares Dividend preferenceDividend preference Convertible, redeemable and retractable featuresConvertible, redeemable and retractable features Liquidation preferenceLiquidation preference Statement presentation and analysis Statement presentation and analysis

3. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. The Corporate Form of Organization A legal entity separate from its owners (known as shareholders) A legal entity separate from its owners (known as shareholders) Classified by purpose and ownership: Classified by purpose and ownership: Purpose: for profit or not-for-profitPurpose: for profit or not-for-profit Ownership:Ownership: Publicly held: shares are traded on an organized securities marketPublicly held: shares are traded on an organized securities market Privately held: shares are held by a few individuals and are not tradedPrivately held: shares are held by a few individuals and are not traded

4. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Characteristics of a Corporation Separate legal existence from its owners Separate legal existence from its owners Acts under its own nameActs under its own name Owners do not bind the corporationOwners do not bind the corporation Limited liability of shareholders Limited liability of shareholders Limited to the amount of their investmentLimited to the amount of their investment Transferable ownership rights Transferable ownership rights Shares may be bought and soldShares may be bought and sold No effect on operating activities of corporationNo effect on operating activities of corporation Ability to acquire capital Ability to acquire capital Can raise capital by issuing sharesCan raise capital by issuing shares May be difficult for closely-held corporationsMay be difficult for closely-held corporations

5. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Characteristics of a Corporation 2 Continuous and indefinite life Continuous and indefinite life Unaffected by change in ownershipUnaffected by change in ownership Corporation management Corporation management Shareholders manage through elected board of directors, who select corporation managementShareholders manage through elected board of directors, who select corporation management Government regulations Government regulations Specific laws that govern operations of corporationsSpecific laws that govern operations of corporations Distribution of Profit Distribution of Profit Via dividends to shareholdersVia dividends to shareholders Income tax Income tax Taxed as a separate entityTaxed as a separate entity

6. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Forming a Corporation Can incorporate federally or provincially Can incorporate federally or provincially Done by filing articles of incorporation Done by filing articles of incorporation Provide information such as :Provide information such as : Name and purpose of companyName and purpose of company Amounts and kinds of share capitalAmounts and kinds of share capital Names and addresses of incorporatorsNames and addresses of incorporators Location of corporation’s head officeLocation of corporation’s head office By-laws: internal rules and policies By-laws: internal rules and policies Organization costs: Organization costs: Costs of forming a corporationCosts of forming a corporation Must be expensedMust be expensed

7. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Ownership Rights of Shareholders Ownership rights are in the form of shares Ownership rights are in the form of shares Can be divided into different classesCan be divided into different classes As stated in the articles of incorporationAs stated in the articles of incorporation Each class has rights and privilegesEach class has rights and privileges Usually referred to as common and preferred sharesUsually referred to as common and preferred shares Shareholders have rights: Shareholders have rights: To vote on certain mattersTo vote on certain matters To dividends: the distribution of profitTo dividends: the distribution of profit To remaining assets in a liquidationTo remaining assets in a liquidation

8. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Share Issue Considerations Authorized share capital Authorized share capital Number of shares company is allowed to sellNumber of shares company is allowed to sell Many companies have unlimited number of sharesMany companies have unlimited number of shares Issue of shares Issue of shares Issued directly to investors or through an investment dealerIssued directly to investors or through an investment dealer First public sale is called an initial public offering (IPO)First public sale is called an initial public offering (IPO)

9. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Share Issue Considerations 2 Market value of shares Market value of shares Once issued, shares trade on a secondary marketOnce issued, shares trade on a secondary market Prices determined by buyers and sellers and other external factorsPrices determined by buyers and sellers and other external factors Legal capital Legal capital Share capital is legal capital and cannot be distributed to shareholdersShare capital is legal capital and cannot be distributed to shareholders Retained earnings are earned capital and can be distributed as dividendsRetained earnings are earned capital and can be distributed as dividends

10. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Common Shares: Issuing Shares Shares are usually issued for cash: Shares are usually issued for cash: Dr. Cash Cr. Common shares Shares can be issued in exchange for services or noncash assets Shares can be issued in exchange for services or noncash assets Recorded at fair value of goods/services received:Recorded at fair value of goods/services received: Dr. Service or asset (e.g. Legal Fees Expense) Cr. Common shares If fair value of goods/services not measurable, use fair value of shares given upIf fair value of goods/services not measurable, use fair value of shares given up

11. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Common Shares: Reacquisition of Shares Companies can reacquire their shares to: Companies can reacquire their shares to: Increase trading on securities marketsIncrease trading on securities markets Increase earnings per shareIncrease earnings per share Buyout hostile shareholdersBuyout hostile shareholders Have shares available for compensation or other usesHave shares available for compensation or other uses Comply with share ownership restrictionsComply with share ownership restrictions Reacquired shares are retired and cancelled Reacquired shares are retired and cancelled

12. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Common Shares: Reacquisition of Shares 2 Steps to record a reacquisition: Steps to record a reacquisition: Remove cost of shares from share capital accountRemove cost of shares from share capital account Based on average cost per share (must be calculated)Based on average cost per share (must be calculated) Record cash paid for the sharesRecord cash paid for the shares Record the gain or loss on reacquisitionRecord the gain or loss on reacquisition

13. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Reacquisition of Shares: Below Average Cost Average cost of shares: Average cost of shares: Balance in Common Shares Account Number of Common Shares Issued Balance in Common Shares Account Number of Common Shares Issued If shares reacquired at a price < average cost: If shares reacquired at a price < average cost: Difference is credited to a new shareholders’ equity account for the contributed capital from the reacquisition:Difference is credited to a new shareholders’ equity account for the contributed capital from the reacquisition: =

14. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Reacquisition of Shares: Above Average Cost If shares reacquired at a price > average cost: If shares reacquired at a price > average cost: Additional cost of shares is first debited to contributed capital from previous reacquisitions (if any)Additional cost of shares is first debited to contributed capital from previous reacquisitions (if any) Remaining difference is debited to retained earnings :Remaining difference is debited to retained earnings :

15. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Preferred Shares Priority over common shares for dividends and assets in the event of liquidation of the company Priority over common shares for dividends and assets in the event of liquidation of the company Entries to record issue and reacquisition of preferred shares similar to entries for common 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 Transactions for each class of share is recorded in a separate account

16. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Dividend Preference Preferred shareholders have a right to dividends before common shareholders Preferred shareholders have a right to dividends before common shareholders Cumulative preferred shares have a right to current year’s dividends and any prior years’ dividends owing before dividends are paid on common 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 Any unpaid dividends (in arrears) are not considered a liability No obligation to pay unless dividend is declaredNo obligation to pay unless dividend is declared

17. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Convertible Preferred Shares Provide option to exchange preferred shares to common shares at a specified ratio 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 Conversion is recorded by transferring cost from Preferred Shares to Common Shares account

18. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Redeemable and Retractable Preferred Shares Corporation (redeemable) or the shareholder (retractable) can redeem the shares at specified future dates and prices Corporation (redeemable) or the shareholder (retractable) can redeem the shares at specified future dates and prices Similar to debt: offers a repayment of the principal Similar to debt: offers a repayment of the principal Considered a financial instrument Considered a financial instrument These preferred shares usually reported in the liabilities section of the balance sheet These preferred shares usually reported in the liabilities section of the balance sheet

19. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Shareholders’ Equity on the Balance Sheet Contributed Capital Contributed Capital Share capital: preferred and common sharesShare capital: preferred and common shares Additional contributed capital: amounts contributed from acquiring and retiring sharesAdditional contributed capital: amounts contributed from acquiring and retiring shares Retained Earnings Retained Earnings Cumulative profit (loss) since incorporationCumulative profit (loss) since incorporation Annual profit (loss) is added (deducted); dividends are deductedAnnual profit (loss) is added (deducted); dividends are deducted Accumulated Other Comprehensive Income Accumulated Other Comprehensive Income Used by companies that follow IFRSUsed by companies that follow IFRS Certain gains and losses that bypass profitCertain gains and losses that bypass profit Recorded directly to shareholders’ equityRecorded directly to shareholders’ equity

20. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Sample Shareholders’ Equity Section

21. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Return on Equity Also called return on investment Also called return on investment Considered to be the most important measure of a firm’s profitability 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 evaluates how many dollars are earned for each dollar invested by shareholders Profit Average Shareholders’ Equity Return on Equity ÷ =

22. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. COPYRIGHT Copyright © 2010 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.