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.


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