Learning_unit_6

Page 1: Introduction to Close Corporations

• Learning Unit 6 focuses on close corporations.

Page 2: Learning Objectives

• Key characteristics of close corporations.

• Advantages and disadvantages of a close corporation.

• Accounting and reporting requirements for a close corporation.

• Recording entries for setting up a close corporation.

• Preparing financial transactions due to membership changes.

Page 3: Financial Statements Preparation

• Prepare appropriation account.

• Statement of profit or loss and other comprehensive income.

• Statement of financial position for a close corporation.

• Statement of changes in net investment for a close corporation.

• Notes to the financial statements for a close corporation.

Page 4: Definition and Membership of Close Corporations

• Recognized as separate legal entities under the CC Act.

• Membership of a close corporation is capped at 10 members.

• Members must be natural persons.

• Each member holds a specific percentage of membership interest.

• Review advantages and disadvantages on pages 179 – 180.

Page 5: Characteristics of Corporations

1. Legal Existence: Corporations have their own rights and responsibilities.

2. Limited Liability: Owners' liability is limited to their investment, protecting personal assets.

3. Perpetual Succession: Corporations continue to exist beyond the lives of their owners; shares or membership interests can be transferred.

Page 6: Example of Changes in Membership Interest

• Example 6.1 illustrates a change in members' interests within a close corporation.

Page 7: Scenario 1 - Member D Joins the CC

• Members and % interests before and after Member D joins:

  • A: 10% (loses 2%), B: 40% (loses 8%), C: 50% (loses 10%), D: 20%.

• Member D's buy-in causes a redistribution of existing members' interests based on their initial holdings.

Page 8: Financial Impact of D Joining

• Members' contributions before D joins:

  • A: 10k, B: 44k, C: 32k, D: 0; Total Retained earnings: 287k.

• After D joins, a breakdown of the retained income attributable to D's investment (20% of CC) is provided, impacting existing members' shares of retained income.

Page 9: Scenario 2 - Member B Resigns

• Members’ interests before B resigns: A: 10%, B: 40%, C: 50%.

• After B resigns, interest distribution changes: A: 16.67%, B: 0%, C: 83.33%.

• Calculation of the split based on remaining members' ownership ratios.

Page 10: Scenario 3 - Internal Transfer

• Before transfer, members’ interests are A: 10%, B: 40%, C: 50%.

• B buys 20% of C’s interest, transforming ownership structures as follows: A: 10%, B: 50%, C: 40%.

Page 11: Effect of Transfer on Contributions and Earnings

• Members’ contributions before transfer:

  • A: 10k, B: 44k, C: 32k, total: 86k; Retained earnings: 287k.

• Adjustments of contributions and retained earnings due to internal transactions affecting overall financial health.

Page 12: The Appropriation Account

• Example transaction details for appropriation account:

  • Income tax and distributions impacting retained earnings.

• Summary of transactions affecting profit and loss entered into the records, important for financial accountability.