issues in accounting

7/17/2019 Issues in Accounting

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Corporation: Dividends,Corporation: Dividends,

Retained Earnings,Retained Earnings,

Income Reporting andIncome Reporting and

Shareholders EquityShareholders Equity

InstructorInstructor

Adnan ShoaibAdnan Shoaib

PART II: Corporate Accounting Concepts and IssuesPART II: Corporate Accounting Concepts and Issues

Lecture 16Lecture 16


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1. Discuss the characteristics of the corporate form of organization.2. Identify the key components of stockholders equity.

3. Explain the accounting procedures for issuing shares of stock.

. Descri!e the accounting for treasury stock.

". Explain the accounting for and reporting of preferred stock.

#. Descri!e the policies used in distri!uting di$idends.

%. Identify the $arious forms of di$idend distri!utions.

&. Explain the accounting for small and large stock di$idends' and for

share splits.

(. Indicate ho) to present and analyze stockholders equity.

Learning !"ectivesLearning !"ectives

Learning !"ectivesLearning !"ectives


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Issuance of

stock

*eacquisition

of shares

+referred

,tocks

$he

Corporate

%orm

EquityRetained

Earnings

Dividend

&olicy

&resentation

and 'nalysis

-orporate la)

-apital stock

or share

system

ariety of

o)nership

interests

*etained

earnings

restrictions

+rior period

ad/ustments

*etained

earnings

statement

0inancial

condition and

di$idend

distri!utions

ypes of

di$idends

,tock split

Disclosure of

restrictions

,tockholders

Equity

+resentation

,tockholders

Equity nalysis

Income

,tatement

+resentation

Income

,tatement

nalysis

Stoc(holders) EquityStoc(holders) Equity

Stoc(holders) EquityStoc(holders) Equity


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hree primary forms of !usiness organization

$he Corporate %orm o+ rganiation$he Corporate %orm o+ rganiation


&roprietorship &artnership Corporation

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

,pecial characteristics of the corporate form

1. 4se of capital stock or share system.

2. De$elopment of a $ariety of o)nership interests.


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Capital Stoc( or Share System




In the a!sence of restricti$e pro$isions' each share carries

the follo)ing rights

1. o share proportionately in profits and losses.

2. o share proportionately in management 5the right to $ote

for directors6.

3. o share proportionately in assets upon liquidation.. o share proportionately in any ne) issues of stock of the

same class7called the preemptive right.


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/ariety o+ 0nership Interests




-ommon stock represent the residual corporate interest.

8ears ultimate risks of loss.

*ecei$es the !enefits of success.

9ot guaranteed di$idends nor assets upon dissolution.

&re+erred stoc(is created !y contract' )hen stockholders sacrificecertain rights in return for other rights or pri$ileges' usually di$idend

preference.


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-ontri!uted-ontri!uted-apital-apital

-ontri!uted-ontri!uted-apital-apital

*etained Earnings*etained Earnings'ccount'ccount

*etained Earnings*etained Earnings'ccount'ccount

dditional +aid:indditional +aid:in-apital-apital'ccount'ccount

dditional +aid:indditional +aid:in-apital-apital'ccount'ccount

;ess;ess

reasury ,tockreasury ,tock'ccount

;ess;ess

reasury ,tockreasury ,tock'ccount

$0o &rimary

Sources o+

Equity

Corporate CapitalCorporate CapitalCorporate CapitalCorporate Capital

LO 2 Identify the key components of stockholders equity.

-ommon ,tock-ommon ,tock'ccount'ccount

-ommon ,tock-ommon ,tock'ccount'ccount

+referred ,tock+referred ,tock'ccount'ccount

+referred ,tock+referred ,tock

'ccount'ccount

'ssets 'ssets

Lia!ilities 3Lia!ilities 3EquityEquity


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4

Issuance o+ Stoc(

ccounting pro!lems

1. +ar $alue stock.

2. 9o:par stock.

3. ,tock issued in com!ination )ith other securities.

. ,tock issued in noncash transactions.

". -osts of issuing stock.

LO !"plain the accounting procedures for issuing shares of stock.


Shares authoried 5 Shares sold 5 Shares issued


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&ar /alue Stoc(

;o) par $alues help companies a$oid a contingent lia!ility.

-orporations maintain accounts for

+referred ,tock or -ommon ,tock.

+aid:in -apital in Excess of +ar 5+I-6




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8lue Diamond -orporation issued 3


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9o5&ar Stoc(

*easons for issuance

$oids contingent lia!ility.

$oids confusion o$er recording par $alue $ersus

fair market $alue.

ma/or disadvantageof no:par stock is that some states le$y ahigh tax on these issues. In addition' in some states the total issueprice for no:par stock may !e considered legal capital' )hich couldreduce the flexi!ility in paying di$idends.




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Illustration: ideo Electronics -orporation is organized )ith

1


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Illustration: ,ome states require that no:par stock ha$e a

stated $alue. If a company issued 1'


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Stoc( Issued 0ith ther Securities

)o methods of allocating proceeds

+roportional method.

Incremental method.




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1- LO

&roportional>ethod

*a$onette -orporation issued 3


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-ash 13'"


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*a$onette -orporation issued 3


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-ash 13'"


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Stoc( Issued in 9oncash $ransactions

$he general rule: -ompanies should record stock

issued for ser$ices or property other than cash at the

fair $alue of the stock issued or

fair $alue of the noncash consideration recei$ed'

?hiche$er is more clearly determina!le.




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Illustration: he follo)ing series of transactions illustratesthe procedure for recording the issuance of 1


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2arlo)e cannot readily determine the fair $alue of thestock' !ut it determines the fair $alue of the patent is

=1"


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#arlo)e cannot readily determine the fair $alue of thestock nor the fair $alue of the patent. n independent

consultant $alues the patent at =12"'


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2#

Costs o+ Issuing Stoc(

Direct costs incurred to sell stock' such as

under)riting costs'

accounting and legal fees'

printing costs' and

taxes'

should !e reported as a reduction of the amounts paid in

5+aid:in -apital in Excess of +ar6.




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2*

&urchase o+ $reasury Stoc(

)o accepta!le methods

-ost method 5more )idely used6.

+ar or ,tated $alue method.

reasury stock reduces stockholders equity.

LO # Descri$e the accounting for treasury stock.



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Illustration +acific -ompany issued 1


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2.

Illustration +acific -ompany issued 1


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Illustration 1-5*

Illustration he stockholders equity section for +acific afterpurchase of the treasury stock.




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Sale o+ $reasury Stoc(

!o$e -ost

8elo) -ost

8oth increase total assets and stockholders equity.




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Sale o+ $reasury Stoc( a!oveCost


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#7

Sale o+ $reasury Stoc( !elo0Cost< +acific sells an additional1'


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#1

Illustration: ssume that +acific sells an additional 1'


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#2

Retiring $reasury Stoc(

Decision results in

cancellation of the treasury stock and

a reduction in the num!er of shares of issued

stock.




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%eatures o+ten associated 0ith pre+erred stoc(any countries ha$e different in$estor groups than the 4nited

,tates. 0or example' in Bermany' financial institutions like !anks are

not only the ma/or creditors !ut often are the largest shareholders as

)ell. In the 4nited ,tates and the 4nited ingdom' many companies

rely on su!stantial in$estment from pri$ate in$estors.

he accounting for treasury share retirements differs !et)een I0*,

and B+. 4nder B+' a company has three options 516 charge

the excess of the cost of treasury shares o$er par $alue to retained

earnings' 526 allocate the difference !et)een paid:in capital andretained earnings' or 536 charge the entire amount to paid:in capital.

4nder I0*,' the excess may ha$e to !e charged to paid:in capital'

depending on the original transaction related to the issuance of the

shares.


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RELE/'9$ %'C$S he statement of changes in equity is usually referred to as the

statement of stockholders equity under B+.

8oth I0*, and B+ use the term retained earnings. o)e$er'

I0*, relies on the term reser$eF as a dumping ground for othertypes of equity transactions' such as other comprehensi$e income

items as )ell as $arious types of unusual transactions related to

con$erti!le de!t and share option contracts. B+ relies on the

account ccumulated @ther -omprehensi$e Income 5;oss6.

4nder I0*,' it is common to report *e$aluation ,urplusF related to

increases or decreases in items such as property' plant' and

equipmentJ mineral resourcesJ and intangi!le assets. he term

surplus is generally not used in B+. In addition' unrealized gains

on the a!o$e items are not reported under B+.


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End o+ Lecture 1.End o+ Lecture 1.End o+ Lecture 1.End o+ Lecture 1.

issues in accounting

Documents

o share

corporate accounting

corporate form1

orm o rganiationlo

corporate form of organization

accounting procedures

ne issues of stock

shares of stock