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York University (33,698)
ADMS 3595 (10)
Sung Kwon (2)

CHAPTER 15.docx

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York University
Administrative Studies
ADMS 3595
Sung Kwon

CHAPTER 15: SHAREHOLDER’S EQUITY Accounting for Issuance of Shares • Shares basic Example: Full amount of proceeds received is credited to the respective share capital account (preferred/common/class type) 500 common shares are sold for $10.00 each (issuance costs not included in this transaction). The journal entry is: Cash 5,000 Common Shares 5,000 • Shares sold on a subscription basis Example: 500 shares are sold on subscription for $20 each. 50% is due as initial payment. The initial journal entries would be: Subscription Receivable 10,000 Common Shares Subscribed 10,000 Cash 5,000 Subscription Receivable 5,000 If all payments are made as scheduled, the entries would be: Cash 5,000 Subscription Receivable 5,000 Shares Subscribed 10,000 Share Capital 10,000 If the subscriber defaults, one of the following may happen (depending on the contract terms and applicable legislation). • Defaulted Subscription accounts Default after first payment – funds refunded with no penalty. Shares Subscribed 10,000 Accounts Payable (or Cash) 5,000 Subscription Receivable 5,000 Default after first payment – shares issued for amount paid. Shares Subscribed 10,000 Share Capital 5,000 Subscription Receivable 5,000 Default after first payment – funds held by corporation. Shares Subscribed 10,000 Subscription Receivable 5,000 Contributed Surplus 5,000 • Shares issued in combination with other securities • When two or more classes of shares are sold for a lump sum • Accounting problem is the allocation of the funds received to the respective share classes • Two methods available • Proportional method (relative market value method) • Incremental method • Direct incremental costs incurred to sell shares include legal fees, accounting fees, underwriter fees & commissions, printing and mailing costs, taxes, etc. • These amounts are considered to be capital transactions (rather than operating transactions) and therefore should not be included in net income calculation • Accounting treatment—debit to Share Capital Accounting for Share Issue Costs Example 1,000 shares sold for $10.00 each, with $500 in issue costs Cash 9,500 Share Capital 500 Share Capital 10,000 Accounting for Reacquisition of Shares – Retired In January 2011, Cooke Corp. purchased and cancelled 500 Class A shares at $4 per share. There are 10,500 shares issued and outstanding, with total share capital of $63,000 Common Shares (500 [$63,000/10,500] ) 3,000 Cash (500 [email protected] $4.00) 2,000 Contributed Surplus (500 @$2.00) 1,000 Assigned share value = $63,000/10,500 = $ 6.00 Acquisition cost = per share price/cost 4.00 Value over assigned value $2.00 Accounting for Cash Dividends • First journal entry is on Date of Declaration – Dividend becomes legal obligation of the corporation – Equity
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