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ACCT 352 - CHAPT 15 - NOTES.pdf

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ACCT 352
Ralph Cecere

ACCT 352 - CHAPT 15 - SHAREHOLDERS EQUITY Owner's equity in a corporation is defined as SE or corporate capital. The following four categories normally appear as part of the SE: Contributed capital is the total amount that shareholders provide to the corporation of it to use in the business. The earned caital is the capital that is created by the business operating profitability. The distinction between both is important on both an econ and legal level. Legally, there are restrictions on DIVIDEND PAYOUTS. The Corporate Form o Corporate Accounting: ACCT 352 - CHAPT 15 - SHAREHOLDERS EQUITY Special Characteristics that impact on accounting are Corporate law, share capital system and limited liabilitiy Corporate Law: Anyone who wants to establish a corporation must submit articles of Incorporation to the provincial or fed gov, depending on whether the person wants to do business in a specific province or across the country. Once requirements are properly fulfiled, the corporation Charter is issued, and the corporation is recognized as a Legal Entity under the relevant business corporation act. Articles of incorporation specify such things such as: Company name Location of registered office Classes and authorized shares Share transfer restrictions (if any) Directors Business restrictions Share Capital System: All the shares of the corporation are grouped by classes (Class A, B...). Within each class, each share is exactly equal to every other share. Each share has certain rights and priviledges that can only be restricted by provisions in the articles of incorporation. If there are no provisions, the minimum each share has has these three basis or inherent rights: - To share proportionally in Profits and Losses - To share proportionally in management (i.e. the share gives the Right to Vote for directors). - To share proportionally in the corporate Assets Upon Liquidation of the corporation. CBCA also allows the preemptive rights which is the right to share proportionately in any new issues of shares of the same class. The Preemptive Right protects an existing SH from the involuntary dilution of the SH's ownership interest. This means that without this, the corporation could be able to issue additional shares without notifying the SH and at prices that were not favourable to the SH, which could result in the SH's specific percentage interest (the proportional ownership of the corporation) to be reduced. The share capital system makes it easy to transfer an interest in a business from one individual to another. Individuals owning shares in a company could sale them at Any Time and at Any Price without obtaining the consent of the corporation. Share Capital o Types of Shares Common Shares: Represent the Basic Ownership interest. Represent the Residual ownership Interest in the company, suffer the ultimate risks of loss, and receive Benefits of success. A common SH is not Guaranteed Annual Dividends and is not guaranteed assets upon dissolution of the corporation. However, Common SH generally Control Management through the Voting Rights attached to these shares. The following should be considered when deciding whether to treat financial instruments as common shares for financial statement purposes: - Subordination: the shares do not have a preferred rank over other shares for dividend distributions or for the distribution of company assets upon windup of the company. - Risks and rewards of ownership: the shares participate in the earnings/losses of the company and the appreciation/depreciation in value of the company - Obligation to transfer value: these shares have no obligation to transfer value. Given that they represent a residual interest in the company, they only have value if the company' net assets have value. - No other common shares: all shares in the class in question have the same features - Redemption: the shares are retractable/redeemable only upon windup of the company.ACCT 352 - CHAPT 15 - SHAREHOLDERS EQUITY Preferred Shares: Some of the three inherent rights for shares are given up by the SH in return for other special rights of priviledges. Prefeference is generally given up on: - Dividends (usually at a stated rate) before any dividend is given to Common SH - Priority claim to assets on dissolution of the company. Ranked before the common SH for assets. In return for these rights, preferred SH may sacrifice the right to a voice in management or the right to share in profits beyond the stated rate. Features of Preferred Shares: A corporation may attach whatver preferences or restrictions it desired to a preferred share issue, and in whatever combination, as long as the corporation doesn't specifically violate its incorporation law, and it may issue more than one class of preferred share. Some of the features of a PS are: - Cumulative: Dividends on cumulative shares that are not paud in any given year are known as dividends in arrears and must be made up in a later year before any profits can be distributed to CSH. No liability however until the BOD has declared a dividend. - Convertible: feature allows the PSH to convert to common shares at a predetermined ratio. - Callable/Redeemable: company has this right of calling back the shares or redeeming them at a call price. When preferred shares are called for redemption, any dividends in arrears must be paid. - Retractable: the holders of the shares can put or sale their shares to the company, normally after having given adequate notice, and the company then has to pay the SH for th
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