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Canada (158,358)
Management (802)
MGT120H5 (65)
Chapter 9

Chapter 9.docx

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University of Toronto Mississauga
Catherine Seguin

Chapter 9 - shareholders' equity Separate legal entity - a corporation is a business entity formed under federal or provincial law. It has a distinct entity, and artificial person that exists apart from its owners, the shareholders. The corporation has many rights that a person has. Like..a corporation my buy, sell, and own property. It can be sued, sue, enter into contracts. Assets and liabilities in the business belong to the corporation not the owners. Corporations have continuous lives regardless of changes in their ownership. Shareholders also has limited liability for debts. They have no personal obligation for the corporation's liabilities. The most a shareholder can lose on an investment in a corporation's shares is the cost of the investment. Shareholders own the corporation, but a board of directors - elected by the shareholders - appoints officers to manage the business. Corporate taxation - corporations are separate taxable entities. They pay a variety of taxes not borne by proprietorships or partnerships, such as federal and provincial taxes. Corporations pay taxes on their corporate income, then shareholders pay personal income tax on the dividends they receive. Advantages Disadvantages Raise more capital than a proprietorship or partnership can. Separation of ownership and management Continuous life Corporate taxation Ease of transferring ownership Gov't regulation Limiter liability Shareholder's rights  sell shares, vote, dividends, liquidation (right to receive proportionate shares of any assets remaining after the corp. pays all liabilities in liquidation), pre-emption (the right to maintain one's proportionate ownership in the corporation). Cash dividends are declared from retained earnings. Outstanding shares means that they are in the hands of the shareholders. Companies incorporate themselves with the Canada Business Corporations Act so that they can issue an unlimited number of shares. Common shares are the most basic form of capital stock. It is an ordinary share that is an equity instrument that is subordinate to all other classes of equity instruments. Common shareholders have the five basic rights of share ownership. They have their own account. Preferred shares give their owners certain advantages over common shareholders. They receive dividends before the common shareholders and receive assets before the common shareholders if the corporation liquidates. They also have the five basic rights. They have their own account. The most preferred shareholders can expect to earn is their fixed dividend. Preferred shares are non-voting. Like common shares, their dividends is not required to be paid unless the board of directors has declared the dividend. Preferred dividends are cumulative. No-stated-value shares are shares of stock that don't have value assigned to them by the articles of incorporation. The board will assign the value to the shares when they're issued, this value will be known as the stated value. Common shares • This is with stated value: suppose the company issues 100,000 common shares for cash with a stated value of $50 per share. The entry for this is: Cash 5,000,000 (100,000*50) common shares 5,000,000 • Assume that the company received the $5,000,000, this is the amount invested in the company, this is called contributed capital. • If common shares are issued for assets other than cash, the company is required to measure the goods/services received and the resultant increase in shareholders' equity as the fair value of the goods or services received. If that fair value can't be determined, the fair value of the shares given up will be the value assigned to the transaction. • So like if a company issued 15,000 common shares for equipment worth $4,000 and a building worth $120,000 the entry is equipment 4000 building 120000 common shares 124000 Preferred shares - Issuance of this has the same journal entry with common shares, but to a preferred shares account. DIS ON PAGE 462. Repurchase of shares by a corporation • Companies repurchase shares to fulfill future share issuance commitments, such as those related to share option plans and conversions of bonds and preferred shares into common shares. • The purchase may help support the share's current market price by decreasing the supply of shares available to the public. • They repurchase because management wants to avoid a takeover by an outside party. • If the shares are repurchased for cancellation and the price paid is more than the per-share paid-on capital, Capital Stock is debited for the per- share paid-in capital amount and retained earnings is debited for the excess. • If the shares are repurchased for less, Capital Stock is debited for the per-share paid-in capital amount and the retained earnings is credited for the excess. • If the shares are repurchased pursuant to a share option plan, the amount paid for the shares by the company is debited to Treasury Shares, a contra account to Capital Stock. • To record repurchase: DR, COMMON SHARES AND RETAINED EARNINGS. CR, CASH. On page 467 • When a company repurchases its shares for cancellation for more than the shares were issued for originally, it is deemed to be distributing profits (from Retained Earnings) to those shareholders who are selling their shares back to the company.
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