2024-2 Principles of ACCT CH 13

Chapter 13: Corporations - Organizations and Share Capital Transactions

Equity

• Definition: Equity is also known as stockholders’ equity, shareholders’ equity, or corporate capital.

• Components of Equity Section (Statement of Financial Position):

  • Share Capital: Total cash and other assets paid in by shareholders in exchange for shares.

  • Retained Earnings: Net income that is retained by the corporation for future use.

Issuing Par Value Ordinary Shares for Cash

• Par Value: Represents the value assigned to a single common share as determined by the corporation’s charter.

• Example of Share Issuance:

  • Suppose Hydro-Slide SA issues 1,000 shares of €1 par value ordinary shares:

    • (a) If issued for €1 per share:

      • Journal Entry: Debit Cash €1,000, Credit Share Capital €1,000.

    • (b) If issued for €5 per share:

      • Journal Entry: Debit Cash €5,000, Credit Share Capital €5,000.

Legal Capital and Preference Shares

• Preference Shares: These shares have specific contractual provisions providing priority over ordinary shares.

  • Rights of Preference Shareholders:

    1. Priority in earnings distribution (dividends).

    2. Priority in asset distribution during liquidation.

  • Limitation: Preference shareholders typically do not have voting rights.

Treasury Shares

• Definition: Treasury shares are a corporation’s own shares that have been reacquired from shareholders but not retired.

• Reasons for Acquiring Treasury Shares:

  1. To reissue shares to officers/employees under compensation plans.

  2. To enhance the market value of the shares.

  3. To maintain additional shares for acquisitions.

  4. To increase earnings per share.

• Accounting Method: Corporations typically use the cost method where the company debits treasury shares for the amount paid to reacquire shares.

Example of Treasury Shares Acquisition

• Case Study (Mead):

  • On February 1, 2020, Mead acquires 4,000 shares at HK$80 each:

    • Entry: Debit Treasury Shares HK$320,000, Credit Cash HK$320,000.

• Shares Outstanding: Number of issued shares currently held by shareholders.

• Effect on Equity: Treasury shares account as a contra equity account reduces total equity.

Selling Treasury Shares

• When Selling at Cost: If treasury shares are sold at the same price as cost:

  • Take entry: Debit Cash and Credit Treasury Shares.

• If Selling Above Cost: Credit the difference to Share Premium – Treasury.

  • Example: On July 1, Mead sells 1,000 treasury shares for HK$100 each:

    • Journal Entry: Debit Cash HK$100,000, Credit Treasury Shares HK$80,000, Credit Share Premium – Treasury HK$20,000.

• If Selling Below Cost: Debit Share Premium – Treasury for the excess of cost over the selling price.

  • Example: On October 1, Mead sells 800 treasury shares at HK$70 each:

    • Entry: Debit Cash, Debit Share Premium – Treasury, Credit Treasury Shares.

• After Depleting Credit Balance: If Share Premium – Treasury is depleted, debit Retained Earnings for any additional excess cost.

  • Example: On December 1, Mead sells 2,200 shares at HK$70:

    • Record accordingly, monitoring both total assets and total equity.