Learning Unit 6 focuses on close corporations.
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.
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.
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.
Legal Existence: Corporations have their own rights and responsibilities.
Limited Liability: Owners' liability is limited to their investment, protecting personal assets.
Perpetual Succession: Corporations continue to exist beyond the lives of their owners; shares or membership interests can be transferred.
Example 6.1 illustrates a change in members' interests within a close corporation.
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.
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.
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.
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%.
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.
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.