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INTERMEDIATE ACCOUNTING Seventh Canadian Edition KIESO, WEYGANDT, WARFIELD, YOUNG, WIECEK. Prepared by: Gabriela H. Schneider, CMA Northern Alberta Institute of Technology. C H A P T E R. 16. Shareholders’ Equity. Learning Objectives.

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intermediate accounting seventh canadian edition kieso weygandt warfield young wiecek


Prepared by:

Gabriela H. Schneider, CMANorthern Alberta Institute of Technology




Shareholders’ Equity


Learning Objectives

1. Discuss the characteristics of the corporate form of organization.

2. Identify the rights of shareholders.

3. Describe the major features of preferred shares.

4. Explain the accounting procedures for issuing shares.

5. Identify the major reasons for repurchasing shares.


Learning Objectives

  • 6. Explain the accounting for reacquisition and retirement of shares.
  • Explain the accounting for various forms of dividend distributions.
  • Explain the effect of different types of dividend preferences.
  • Distinguish between stock dividends and stock splits.
learning objectives
Learning Objectives
  • Understand the nature of other components of shareholders’ equity.
  • Indicate how shareholders’ equity is presented.
  • Analyse shareholders’ equity.
  • Explain accounting for par value shares (Appendix 16A).
  • Explain accounting for treasury shares (Appendix 16A).
  • Describe the accounting for a financial reorganization (Appendix 16B).
shareholders equity

Appendix 16B Reorganizations

Comprehensive revaluation

Shareholders’ Equity

Retained Earnings

Formality of profit distribution

Types of dividends

Stock splits

Presentation and Disclosure

Special presentation issues

Statement of shareholders’ equity

Corporate Form

Corporate Law

Share capital system

Share Capital

Types of shares

Limited liability of shareholders




Other Components

Contributed surplus

Other comprehensive income



Appendix 16A – Par Value and Treasury Shares

Par value shares

Treasury shares


Share Capital



Preferred shares

Contributed Surplus

Retained Earnings

Components of Shareholders’ Equity

Contributed Capital

Earned Capital


Net Income

Transfers Between Entity and Owners

Revenues & Expenses

Gains and Losses

Investments by Owners

Distributions to Owners

Major Sources of Changes in Shareholders’ Equity

All Transactions and Events That Cause

Changes in Shareholders’ Equity

defining capital
Defining Capital
  • Legal capital (stated capital)
    • the full price received for shares issued
  • If par value shares are issued, then legal/stated capital = par value
    • Par value shares are not permitted under CBCA
    • Permitted under some provincial jurisdictions (see Appendix)
defining capital10
Defining Capital

Accounting definition of capital

  • Shareholders’ equity which includes:
    • Share capital
      • the legal/stated capital
    • Contributed surplus
      • equity transactions not specifically included elsewhere
    • Retained earnings
      • all undistributed income that remains invested in the business
primary forms of business organization


Engaged in making financial returns for their owners



Shares privately held

Shares publicly traded


Private Sector

No shares issued; created to provide services for members or society


Public Sector

Municipalities, Cities, Etc.

Created by government statute to provide public services


Primary Forms of Business Organization
corporate accounting
Corporate Accounting

Special characteristics that impact on accounting:

  • Corporate law
  • Share capital system
  • Limited Liability
corporate law

Articles of





Corporate Law


Recognized as

Legal Entity

corporate law14
Corporate Law
  • Canada Business Corporation Act (CBCA)
  • Articles of incorporation prepared and submitted
      • Company name
      • Location of registered office
      • Classes and authorized shares
      • Share transfer restrictions (if any)
      • Directors
      • Business restrictions
  • CBCA regulations required financial statements be prepared in accordance with GAAP
share capital system
Share Capital System
  • Shares grouped by “class” (e.g. Class A Common)
    • Within each class, each share equal
  • Each share contains certain rights and privileges
  • Ease of transfer of ownership
    • Advantage to both issuing corporation and investor
    • Share becomes more attractive investment
share capital system16
Share Capital System
  • As a minimum each share has these basic or inherent rights
    • To share proportionately in profits and losses
    • The right to votefor directors
    • To share proportionately in assets upon liquidation
    • Preemptive right for any new share issues
share capital
Share Capital
  • Common shares
  • Represent basic ownership interest
  • Have ultimate risk of loss and benefit from success
  • Dividends, or assets on dissolution, not guaranteed
  • True advantage is in the right of Common Shares to ultimately control by way of voting
share capital18
Share Capital

Preferred Shares

  • Certain inherent rights given up or exchanged for other rights
  • Preference given on
    • Dividends
    • Claim to assets on dissolution
  • Preferred shares features (some or all may be attached to a preferred share
    • Cumulative  Callable/redeemable
    • Convertible  Retractable
    • Participating
disclosure of share capital
Disclosure of Share Capital
  • Note disclosure will contain the following information:
    • Authorized number of shares (if no limit then so stated)
    • If any unique rights attached to share class, which rights and to which shares
    • Number of shares issued, and the amount received
    • Whether the shares are par-value or no-par value
    • Amount of any dividends in arrears
    • Changes during the year, including new issuances, redemptions and resale of treasury shares
limited liability
Limited Liability
  • Limited Liability of Shareholders
    • Unlike partnership or proprietorship form of business
    • Shareholders not generally liable for the obligations of the corporation
  • Shareholders gains (“profit”) restricted to
    • Gain on the market price of their share
    • Dividends declared by the Board of Directors
  • Shareholders losses restricted to
    • Amount invested in the corporate shares
accounting for the issuance of shares
Accounting for the Issuance of Shares
  • Shares basic
  • Shares sold on a subscription basis
  • Shares issued in combination with other securities
shares issue basic
Shares Issue - Basic

Full amount of proceeds received is credited to the respective share capital account (preferred/common/class type)

500 shares are sold for $10.00 each (issuance costs not included in this transaction). The journal entry is:

Cash 5,000

Share Capital 5,000

shares sold by subscription
Shares Sold by Subscription
  • Shares are sold, with “instalment” payments
  • Shares are not issued, and any rights are not given (e.g., voting, dividends) until the full price is paid and the contract is settled
  • Dividends may be attached to some subscription shares, once the initial payment is received
shares sold by subscription24
Shares Sold by Subscription

Accounts in share subscription transaction

  • Shares Subscribed
    • Set up a separate one for each type/class of share
    • An equity account, reported below the respective share capital account on the Balance Sheet
  • Subscription Receivable
    • Normally considered a current asset
    • May be reported as a contra account to the Shares Subscribed account in equity section of the Balance Sheet
  • Share Capital
    • Credited only when the subscription is paid in full, or settled in some other manner, in the case of default
shares sold by subscription25
Shares Sold by Subscription
  • If a subscription contract is defaulted there are generally three possible consequences:
    • Funds paid to date are refunded, often with a deduction, and the balance of the contract is cancelled
    • Funds paid to date are forfeited, with no refund or shares being issued; balance of the contract is cancelled
    • Shares are issued for the amount paid to date, with the balance of the contract cancelled
shares sold by subscription26
Shares Sold by Subscription

500 shares are sold on subscription for $20.00 each. 50% is due as initial payment.

The initial journal entries would be:

Subscription Receivable 10,000

Shares Subscribed 10,000

Cash 5,000

Subscription Receivable 5,000

shares sold by subscription27
Shares Sold by Subscription

If all payments are made as scheduled, the entries would be:

Cash 5,000

Subscription Receivable 5,000

Shares Subscribed 10,000

Share Capital 10,000

If the subscriber defaults, one of the following may happen (depending on the contract terms and applicable legislation).

shares sold by subscription28
Shares Sold by Subscription

Default after first payment – funds refunded with no penalty.

Shares Subscribed 10,000

Accounts Payable (Cash) 5,000

Subscription Receivable 5,000

Default after first payment – shares issued for amount paid.

Shares Subscribed 10,000

Share Capital 5,000

Subscription Receivable 5,000

shares sold by subscription29
Shares Sold by Subscription

Default after first payment – funds held by corporation.

Shares Subscribed 10,000

Subscription Receivable 5,000

Contributed Surplus 5,000

share subscription exercise e16 2
Share Subscription Exercise: E16-2

30,000 shares @ $20.00

Subscription terms:

30% down; balance in six (6) months

Journal entries?

share subscription exercise e16 231
Share Subscription Exercise: E16-2

Share Subscription Receivable 420,000Cash 180,000 Shares Subscribed 600,000 (30,000 x $20.00) = $600,000

600,000 x 30% = $180,000

Record initial subscriptions and down payment received

share subscription exercise e16 232
Share Subscription Exercise: E16-2

Cash 420,000 Share Subscription Receivable 420,000Record receipt of the balance due on the subscription

Shares Subscribed 600,000 Share Capital 600,000Record issuance of shares from subscription sale

shares issued with other securities
Shares Issued With Other Securities
  • When two or more classes of shares are sold for a lump sum
  • Accounting problem is the allocation of the funds received to the respective share classes
  • Two methods available
    • Proportional method (relative market value method)
    • Incremental method
accounting for share issue costs
Accounting for Share Issue Costs
  • Include legal fees, accounting fees, underwriter fees & commissions, printing and mailing costs, advertising and administrative expenses of preparation
  • CICA Handbook (Section 3610) deems these amounts to be capital transactions and therefore should not be included in net income calculation
  • Accounting treatment—debit to Share Capital
share repurchase
Share Repurchase
  • Major reasons for the reacquisition of a corporation’s own shares
    • Reduce the shares outstanding to increase EPS
    • Have enough shares on hand to meet employee stock option contracts
    • Buy out a particular ownership interest
    • Meet the needs of a potential merger
    • Stop (or slow down) takeover attempts
    • Reduce number of shareholders
    • Make a market in the company’s shares
    • Return cash to shareholders
share repurchase36
Share Repurchase
  • Other reasons may include:
    • Reduce the operations of the business
    • Change the debt-to-equity ratio
    • Settle a debt
    • Provide a kind of boost to shareholders (remaining shareholders end up with a larger portion of the entity)
    • Fulfill the terms of a contract
    • Satisfy a claim from a shareholder
    • Change from a public to a private corporation
reacquisition of shares
Reacquisition of Shares
  • Shares may be retired when reacquired
  • May also (in limited circumstances and jurisdictions) become Treasury Stock (see Appendix)
  • In either case, the accounts affected are:
    • Share Capital
    • Contributed Surplus
    • Retained Earnings
    • Treasury Stock (for Treasury Stock only)
accounting for share issue costs38
Accounting for Share Issue Costs

Reduction of the amount paid in

1,000 shares sold for $10.00 each, with $500 in issue costs

Cash 9,500

Share Capital 500

Share Capital 10,000

reacquisition of shares39
Reacquisition of Shares
  • Share capital debited with the original issue or assigned value only
  • The difference then allocated to equity accounts:
    • Contributed Surplus
    • Retained earnings

Contributed Surplus NEVER goes to a debit balance

reacquisition of shares retired
Reacquisition of Shares - Retired

In January 2005, Cooke Corp. repurchased and retired 500 shares at $4 per share. There are 10,500 shares issued and outstanding, with total share capital of $63,000

  • Common Shares (500[$63,000/10,500]) 3,000
    • Cash (500 shares@ $4.00) 2,000
    • Contributed Surplus (500 @$2.00) 1,000
    • Assigned share value = $63,000/10,500 = $ 6.00
    • Acquisition cost = per share price/cost 4.00
    • Value over assigned value $2.00
disclosure of share capital41
Disclosure of Share Capital
  • Per CICA Handbook, Section 3240, the following disclosure is required:
    • Authorized share capital
    • Issued share capital
    • Changes in share capital since last balance sheet date
  • May be disclosed in the notes to the financial statements, or in the body of the Balance Sheet
items affecting retained earnings

Net loss

Prior period adjustments, accounting principle changes

Cash, property, stock dividends

Treasury stock


Net Income

Prior period adjustments, accounting principle changes

Adjustments from financial reorganization

Items Affecting Retained Earnings
formality of profit distribution
Formality of Profit Distribution
  • No amounts may be distributed unless corporate capital is maintained intact
    • Sufficient capital remains after the dividend to pay liabilities as they are due
    • The realizable value of the corporate assets does fall below the total of the liabilities
  • Formal approval of the Board of Directors required
  • Dividends are in full agreement with share provisions
dividend distributions
Dividend Distributions
  • Types of dividends
    • Return on capital
      • Cash dividend
      • Stock dividend
    • Return of capital
      • Liquidating dividends
    • Important dates
      • Date of declaration
      • Date of record
      • Date of payment
cash dividends
Cash Dividends
  • First journal entry is on Date of Declaration
    • Dividend becomes legal obligation of the corporation
    • Equity account is debited, liability account is creditedDividends Declared xxx Dividends Payable xxx
    • On Date of Payment liability is reduced
stock dividends
Stock Dividends
  • No assets distributed (unlike cash dividends)
  • Unlike with cash, or other asset, dividends, total shareholders equity does not change
    • Amounts are “re-arranged” as a result of the stock dividend
    • Amount transferred generally equal to the fair value at declaration date
stock dividend
1,000 shares outstanding

Retained earnings = $50,000

10% stock dividend declared

Fair (market) value of share = $130 per share

Stock Dividend Declared 13,000

Common Stock 13,000

1,000 x 10% = 100

Fair value $ 130

Total $13,000

Stock Dividend
dividend preferences
Dividend Preferences

Example Data

  • $50,000 total declared as dividends
  • Common share capital = $400,000
  • Preferred shares: 1,000 outstanding 6% Share capital - $100,000
non participating
  • If shares are non-cumulative and non-participating
    • Dividends are distributed only when declared, up to the stated amount of the share
    • No amount is paid for years where dividends were not declared
  • If no specific participation agreement exists, participation generally follows these guidelines
    • Following assignment to preferred shares of current year dividends (any cumulative dividends have been allocated first); common shares receive an amount to give them the same return rate as the preferred
    • Any remaining dividend amount is shared by both preferred and common in proportion to the carrying value of each share class
stock dividends vs stock splits
Stock Dividends vs. Stock Splits

Stock Dividend

  • As form of dividend must follow the requirements of a dividend
  • Both the number of shares, and the amount of share capital are affected
  • Shares are not exchanged

Stock Split

  • Done to exact a market price manipulation
  • Amount of share capital is not affected
components of shareholders equity
Components of Shareholders’ Equity

Contributed Surplus transactions

  • Par value share issue, retirement
  • No-par value share repurchase/retirement
  • Liquidating dividends
  • Financial reorganization
  • Stock rights and warrants
  • Issue of convertible debt
  • Share subscriptions forfeited
shareholders equity ratios
Shareholders’ Equity Ratios
  • Rate of return on common shareholders equityNet income – Preferred dividendsAverage common shareholders’ equity
  • Payout ratio Cash Dividends Net income – Preferred dividends
  • Price earnings ratioMarket price per share Earnings per share
  • Book value per shareCommon shareholders’ equityNumber of outstanding shares

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