EQUITY

Tifani Danisa 17812144012

M. Ikhsan Siregar 178121440

Preview of Chapter

Equity

Corporate Preference
Equity
Form Shares
– Corporate Law - Issuance Of Share - Features
– Share System - Reacquisition Of Shares - Accounting for
– Variety Of Ownership and Reporting of
Interest Preference Shares
The Corporate Form
Organization
– Three main forms of business organization

Proprietorship Partnership Corporate

– The special characteristics of the corporate form :

1. Influence of corporte law
2. Use of the share system
3. Development of variety of ownership interests
Corporate Law

– A corporation must generally submit articles of corporation to the appropriate

government agency
– The government agency issues a corporation charter/legal entity
– The company’s advantage to incorporate where laws favor the corporate form
of business organization
Share System

– In the absence of restrictive provisions, each share carries of the following

rights :
1. To share proportionately in profits and loses
2. To share proportionately in management ( the right to vote for directors)
3. To share proportionately in corporate assets upon liquidation
4. To share proportionately in ny new issues of shares of the same of the same
class (preemptive right)
Variety of Ownership interests

– Ordinary Shares repesent the residual corporate

a. Interest that bears the ultimate risks of loss
b. Receive the benefits os success
c. Guaranteed neither dividens or assets upon dissolution

– Preference Shares , special contracts between the corporation and its

shareholders however, the shareholders may sacrifice certain of these rights in
return for other special right or privileges, preference commonly dividens
Equity

– Equity is often subclassified on the statement of financial position int the

category :
1. Share capital
2. Share premium
3. Retained earnings
4. Accumulated other comprehensive income
5. Treasury shares
6. Non-controlling interest (minority interest)
Issuance of Shares

– The accounting problems involved in the issuance of shares :

1. Accounting for par value shares
2. Accounting for no-par shares
3. Accounting for shares issued in combination with other securities (lump-sum
sales)
4. Accounting for shares issued in non-cash transactions
5. Accounting for costs issuing shares
Par Values Shares

– To show the required information for issuance of par value shares, corporations
maintain accounts for each class of shares as follows.
1. Preference Shares or Ordinary Shares. Together, these two share accounts
reflect the par value of the corporation’s issued shares. The company credits
these accounts when it originally issues the shares. It makes no additional
entries in these accounts unless it issues additional shares or retires them.
2. Share Premium. The Share Premium account indicates any excess over par
value paid in by shareholders in return for the shares issued to them.
No-Par Shares

– The reasons for issuance of no-par shares are twofold.

– First, issuance of no-par shares avoids the contingent liability (see footnote 2)
that might occur if the corporation issued par value shares at a discount.
– Second, some confusion exists over the relationship (or rather the absence of a
relationship) between the par value and fair value.
If shares have no par value, the questionable treatment of using par value as a
basis for fair value never arises. This is particularly advantageous whenever issuing
shares for property items such as tangible or intangible fixed assets.
– For example, Video Electronics Corporation is organized with 10,000 ordinary
shares authorized without par value. Video Electronics makes only a memorandum
entry for the authorization, inasmuch as no amount is involved. If Video Electronics
then issues 500 shares for cash at €10 per share, it makes the following entry:
Cash 5,000
Share Capital—Ordinary 5,000
If it issues another 500 shares for €11 per share, Video Electronics makes this entry:
Cash 5,500
Share Capital—Ordinary 5,500
– True no-par shares should be carried in the accounts at issue price without
any share premium reported. But some countries require that no-par shares
have a stated value. The stated value is a minimum value below which a
company cannot issue it.
– For example, 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 15,000
Share Capital—Ordinary 5,000
Share Premium—Ordinary 10,000
Shares Issued with Other
Securities (Lump-Sum Sales)
– Companies use one of two methods of allocation:
1. The Proportional Method
If the fair value or other sound basis for determining relative value is available for each class of
security, the company allocates the lump sum received among the classes of securities on a
proportional basis.

2. The Incremental Method.

In instances where a company cannot determine the fair value of all classes of securities, it may
use the incremental method. It uses the fair value of the securities as a basis for those classes that
it knows, and allocates the remainder of the lump sum to the class for which it does not know the
fair value.
Proportional Method

– 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 price of $20 per share, and the preference shares
have a market price of $90 per share.
Number Amount Total
Ordinary shares 300 X $20 $6.000 (40%)
Preference shares 100 X $90 $9.000 (60%)
Fair Market Value 15.000 (100%)
Allocation: Ordinary Preference
Issue price $13.500 $13.500
Ordinary 40% 60%
Total $5.400 $8.100
Journal

– Cash 13.500
Share Capital - Preference (100 X $50) 5.000
Share Premium - Preference 3.100
Share Capital – Ordinary (300 X 10 $) 3.000
Share Premium – Ordinary 2.400
Incremental Method

– 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 price of $20 per share, and the preference shares
no have a market price .
Number Amount Total
Ordinary shares 300 X $20 $6.000
Preference shares 100 X- -
Fair Market Value $6.000
Allocation: Ordinary Preference
Issue price $13.500
Ordinary 6000 (6000)
Total $6000 $7.500
Journal

– Cash 13.500
Share Capital - Preference (100 X $50) 5.000
Share Premium - Preference 2.500
Share Capital - Ordinary (300 X 10 $) 3.000
Share Premium - Ordinary 3.000
 Shares Issued in Non-Cash
Transactions
– Accounting for the issuance of shares for property or services involves an issue of valuation. The general rule is companies should record shares issued for services or
property other than cash 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.
– Marlowe cannot readily determine the fair value of the patent, but it knows the fair value of the
shares is €140,000.
Patents 140,000
Share Capital—Ordinary (10,000 shares 3
€10 per share) 100,000
Share Premium—Ordinary 40,000
– Marlowe cannot readily determine the fair value of the shares, but it determines the fair value of
the patent is €150,000.

Patents 150,000
Share Capital—Ordinary (10,000 shares 3
€10 per share) 100,000
Share Premium—Ordinary 50,000
– Marlowe cannot readily determine the fair value of the shares nor the fair value of the patent. An
independent consultant values the patent at €125,000 based on discounted expected cash flows.

Patents 125,000
Share Capital—Ordinary (10,000 shares 3
€10 per share) 100,000
Share Premium—Ordinary 25,000
Costs of Issuing Shares

– it should report direct costs incurred to sell shares, such as

– underwriting costs
– accounting and legal fees
– printing costs
– taxes, as a reduction of the amounts paid in
As such, issue costs should reduce the proceeds received from the sale of the
shares.
Reacquisition of Shares

– Companies often buy back their own shares. Corporations purchase their
outstanding shares for several reasons:
1. To provide tax-efficient distributions of excess cash to shareholders.
2. To increase earnings per share and return on equity.
3. To provide shares for employee compensation contracts or to meet potential
merger needs.
4. To thwart takeover attempts or to reduce the number of shareholders.
5. To make a market in the shares.
Purchase of Treasury Shares

– Companies use two general methods of handling treasury shares in the

accounts: the cost method and the par value method. Both methods are
generally acceptable.
• The cost method results in debiting the Treasury Shares account for the
reacquisition cost and in reporting this account as a deduction from equity on
the statement of financial position.
• The par (stated) value method records all transactions in treasury shares at
their par value and reports the treasury shares as a deduction from share
capital only.
– To illustrate, assume that 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, 2015, Pacific acquires 10,000 of its shares at $11 per share.
Pacific records
the reacquisition as follows.
January 20, 2015
Treasury Shares 110,000
Cash 110,000
– shows the equity section for Pacific after purchase of the treasury shares.
Equity
Share capital—ordinary, $1 par value, 100,000 shares
issued and 90,000 outstanding $ 100,000
Share premium—ordinary $ 900,000
Retained earnings $ 300,000
Less: Cost of treasury shares (10,000 shares) $ 110,000
Total equity $ 1,190,000
 Sale of Treasury Shares

– Sale of Treasury Shares above Cost.

– illustrate, assume that 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.
March 10, 2015
Cash 15,000
Treasury Shares 11,000
Share Premium—Treasury 4,000

– Sale of Treasury Shares below Cost.

– if Pacific sells an additional 1,000 treasury shares on March 21 at $8 per share, it records the sale as
follows.
March 21, 2015
Cash 8,000
Share Premium—Treasury 3,000
Treasury Shares 11,000
Retiring Treasury Shares

– The board of directors may approve the retirement of treasury shares.

• This decision results in cancellation of the treasury shares
• Reduction in the number of issued shares.
Preference Shares

– The following features are those most often associated with preference share
issues.
1. Preference as to dividends.
2. Preference as to assets in the event of liquidation.
3. Convertible into ordinary shares.
4. Callable at the option of the corporation.
5. Non-voting.
Features of Preference
Shares
1. Cumulative Preference Shares
2. Participating Preference Shares
3. Convertible Preference Shares
4. Callable Preference Shares
5. Redeemable Preference Shares
Accounting for and Reporting of
Preference Shares

– To illustrate, assume that Bishop Co. issues 10,000 shares of £10 par value
preference shares for £12 cash per share. Bishop records the issuance as
follows.
Cash 120,000
Share Capital—Preference 100,000
Share Premium—Preference 20,000
Thank You