C450 - Shareholder's Equity - Lecture Notes
C450 - Shareholder's Equity - Lecture Notes
C450 - Shareholder's Equity - Lecture Notes
- Fixed dividend
- Senior
- Convertible
- Redeemable
- Retractable
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3. What does it mean if a share has a “par value”?
4. What are treasury shares? How are they presented on the balance sheet?
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5. Why do companies occasionally repurchase common shares from investors?
• Signalling
6. What is the accounting procedure for canceling shares that have been
repurchased and cancelled? What about resale of shares from treasury?
Repurchase Price > Avg. Issue Price Repurchase Price < Avg. Issue Price
Repurchase and (A) Dr to share capital, in an amount equal (A) Dr to share capital, in an amount
Cancellation to the par or assigned value of the shares; equal to the par or assigned value of the
shares;
(B) Any excess, Dr to contributed surplus,
to the extent that contributed surplus was (B) The difference, Cr to contributed
created by a net excess of proceeds over
surplus.
cost on previous cancellations or resale of
shares of the same class;
Sale Price < Avg. Treasury Cost Sale Price > Avg. Treasury Cost
Resale from - Any deficiency should be charged to - Where a company resells shares that it
Treasury contributed surplus to the extent that a has acquired, any excess of the proceeds
previous net excess from resale or over cost should be credited to contributed
cancellation of shares of the same class is surplus
included therein, otherwise to retained
earnings.
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7. Transactions not part of normal business operations are included in equity.
– Costs of issuing shares
– Revaluation surplus (rare)
– Unrealized foreign exchange gains/losses (common)
– Dividend distributions
– Retained earnings
= Beg. R/E + NI – Div
= Cumul NI – Cumul Div ± Other adjustments
(e.g., share repurch.)
– Dividend considerations
– Cash flow
– Future performance
– Signalling
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10. What is a stock dividend? Why do companies declare/issue stock dividends?
11. What is a stock split? Why do companies occasionally “split” their shares?
Do questions 1,2,3
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Question #1 Contraction of Shareholders’ Equity
Contributed Surplus:
Type A) Re: Original issuance of shares (proceeds over par) 8,000,000
Type B) Re: Previous resales/cancellations 200,000
Type C) Re: Other sources (same class) 100,000
*Note: If the common shares had no par value, then there would be no “Type
A” contributed surplus. Thus common shares would be DR for the full
$900,000 (the average issue price). With par value shares, we also DR at the
average issue price. The only difference is that the $900,000 has to be split
between the par value and the proceeds over par.
Cash
Treasury Shares
Common shares
No par value; Unlimited number authorized; 1,200,000 issued……… 9,600,000
Contributed surplus (previous common share transactions).… 120,000
Treasury shares
320,000 common shares……………………………………………… (1,920,000)
** 100,000 warrants are outstanding as at January 1, 2008. Each warrant allows the holder to
purchase one common share at a price of $7.
The following transactions occurred during the year ended December 31, 2008:
a. January 31st, the company resold half of the shares in treasury for $7.50 each.
b. March 27th, all 100,000 warrants were exercised and the company immediately issued
common shares in settlement of the transaction.
c. March 30th, the company repurchased (in the open market) and immediately cancelled
100,000 common shares in exchange for $860,000. This was done to offset the
dilution caused by the warrants being exercised.
d. June 1st, 175,000 preferred shares were redeemed at the specified price of $30. These
preferred shares lost rights to any dividends (current and in arrears).
e. July 13th, the company issued 250,000 common shares in exchange for some heavy
machinery. The market price of the common shares was $9 on this day.
f. August 1st, the remaining shares held in treasury were retired/cancelled.
g. November 1st, 25,000 preferred shares converted to common. These shares lost rights
to any dividends (current and in arrears). The company uses the book value method to
record share conversions.
h. December 31st, when the common shares were trading at $9.75, the company’s board
of directors approved a common stock dividend of 5% that was issued on the same
day.
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Required:
Prepare all of the necessary journal entries for the year ended December 31,
2008.
Date Accounts/Description DR CR
1/31 Cash
Treasury shares
Contr. surplus (prev. C/S tranx.)
3/27 Cash
Contr. surplus - Warrants
Common shares
7/13 Machinery
Common shares
Retained earnings
Common shares
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Supporting calculations:
2: $1,920,000 x 50%
4: 175,000 x $10
6: Plug This amount must go to R/E as you cannot draw down the
“Contributed surplus on initial issuance” any further (it is a type “A” surplus
account). Also, you cannot draw down the contributed surplus relating to the
common shares (different class of share).
7: ($9,600,000+$900,000–$807,692+$2,250,000) / (1,200,000+100,000–
100,000+250,000) x 160,000
9: 25,000 x $10
11: Remember that preferred shareholders must be satisfied in full (i.e., current
year dividends and all dividends in arrears) if a common share dividend is
declared at any point during the year.
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Question #3 Shareholder Equity Transactions & Balances (Self-Study)
Year 20x8
January 1: Playa Inc. was incorporated with 10,000,000 authorized shares of no
par value common stock. The corporation issued 700,000 shares of its
common stock for a total of $1,400,000. December 31 is the fiscal
year-end.
June 30: Playa bought 200,000 shares at $3.00 per share and placed them in
treasury.
Dec. 31: Reported net income for the year was $1,300,000. Share price was
$4.50
Year 20x9
July 31: Playa bought 100,000 shares for treasury at $5.00 each.
Aug. 30: Declared and issued a 10% stock dividend on common shares. The
market price per share was $6.
Sept. 30: One third of the options were exercised when the market price was $7
per share.
Dec. 31: Declared and paid a dividend of $1.00 per common share.
Reported net income for the year was $1,600,000.
Required:
a. Prepare the shareholders’ equity section as at December 31, 20x8.
b. Prepare the shareholders’ equity section as at December 31, 20x9.
Note: Although not required, doing the journal entries will help in determining
the year-end balances in shareholders’ equity.
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January 1, 20x8
DR Cash 1,400,000
CR Common shares 1,400,000
As the options vest immediately (as opposed to over a period of a few years), the full
amount of the expense is recorded in the current year.
* 700,000 x 10% x $6
Note: Treasury shares are not eligible to receive cash dividends. However, they do
accrue stock dividends in order to maintain parity with shares that are issued and
outstanding. That is why we use the 700,000 (issued) in the calculation and not
400,000 (issued and outstanding 700,000 – 200,000 – 100,000).
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November 30, 20x9
DR Cash 800,000
CR Treasury shares 333,333
CR Contributed surplus – Previous C/S transactions 466,667
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Required:
a. Prepare the shareholders’ equity section at December 31, 20x8.
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