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Canada (158,278)
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BU397 (49)
Chapter 15

Chapter 15 Notes.docx

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Wilfrid Laurier University
Allan Foerster

Chapter 15 Capital - Legal capital (Stated Capital) o The full price received for shares issued  Previously, par value shares were valued at par not what was paid for them  This is no longer allowed under the CBCA o Authorized capital is the maximum number of shares a company can issue based on the articles of incorporation o Issued shares are the number of shares a company has issued Equity - IFRS o Equity is the residual interest in the assets of the entity after deducting all of the liabilities o Includes  Share capital  The legal/stated capital  Contributed surplus  Equity transactions not specifically included elsewhere  Can never have a debit balance  Retained earnings  All undistributed income that remains invested in the business  (Accumulated) Other comprehensive income  Cumulative change in equity due to revenues and expenses, and gains and losses from transactions not included in net income o Contributed capital is share capital and contributed surplus o Earned capital is comprehensive income and retained earnings Corporate Accounting - There are three important characteristics that impact accounting o Corporate law  Any company that wants to establish a corporation must submit articles of incorporation to the government  After the requirements are properly fulfilled, the corporate charter is issued  The corporation is then recognized as a legal entity under the relevant business corporations act  The articles of incorporation include  Company name  Location of registered office  Classes and authorized shares  Share transfer restrictions  Directors  Business restrictions  CBCA regulations used to require fs’s to be prepared in accordance with GAAP o Share capital system  Shares are grouped into classes  IFRS refers to common shares as ordinary shares  Within each class, each share is equal  Each class of share contains certain rights and privileges  The number of shares that are possessed determines the owner’s interest  If there are no restrictive provisions (listed in the articles in incorporation) to shares, each share gives the following basic rights  To share proportionately in profits and losses  To share proportionately in management  To share proportionately in the corporate assets upon liquidation of the corporation  Preemptive right to share proportionately in new share issues o This right is used to protect each shareholders proportional interest in the company o Protects the investor from the involuntary dilution of the shareholders ownership interest  Issuing shares offers an ease of transfer of ownership  This is advantageous to both the investor and the issuing corporation  The corporation is only required to maintain a list or subsidiary ledger of shareholders  Uses this as a guide to dividend payments, issuance of share rights, voting proxies, and similar elements  This ledger must be updated periodically o Usually before shareholders meetings and dividend payments o Limited Liability  Unlike partnerships or proprietorships, shareholders aren’t generally liable for the obligations of the corporation  The property or service that has been invested in the company by the investors is the limit on the investors possible loss  Creditors have no recourse against the personal assets of the investors in a company  The amount of shareholders investments that is represented in share capital accounts cannot be withdrawn unless all prior claims on corporate assets have been paid  The corporation must maintain the capital until dissolution of the corporation  Shares issued by corporations must be without a nominal value or a par value  All proceeds from the issuance of the shares must be credited to the appropriate share capital account and become part of the shareholders investment  Par value shares establishes the maximum responsibility a of a shareholder in the event of insolvency or other involuntary dissolution o It is an amount per share that has been determined by the incorporators of the company and stated in the corporation charter Types of Shares - Common Shares o Represents residual ownership interest  Have ultimate risk of loss and benefit from success o Dividends or assets on dissolution are not guaranteed o Advantage is control by way of voting o In substance common shares are shares that have the same characteristics as common shares but aren’t called common for legal purposes o The following should be considered when deciding whether a share is common or not  Subordination  Shares do not have preferred rank over other shares for dividend or distribution of assets  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  No obligation to transfer value  Only have value if the company’s net assets have value  No other common shares  All shares in the class in question have the same features  Redemption  The shares are redeemable only upon windup of the company - Preferred shares o Given priority claim on assets upon dissolution of the company compared to common shares o Assured dividends, at a stated rate, before any amount may be distributed to the common shareholders o They sacrifice the right to vote or to share any profits beyond the stated rate o Features of a preferred share  Cumulative  Dividends on cumulative shares that are not paid in a given year, dividends in arrears, must be paid to preferred shareholders before any profits can be distributed to common shareholders  Convertible  Allows the holder or the company to exchange the shares for common shares at a predetermined ratio  Callable/Redeemable  The corporation can call or redeem at its option the outstanding preferred shares at specified future dates and at stipulated prices o Any dividends in arrears must be paid when a preferred share is called for redemption  Retractable  Holders of the shares can put or sell their shares to the company  Normally after having given adequate notice  The company must then pay the holders for the shares  As soon as retractability kicks in it becomes debt and dividends to retractable shares become interest expenses  Participating  Can participate with ordinary shareholders in any profit distributions higher than the prescribed rate Issuance of Shares - Share issue basic o Occurs when shares are dsold for the price that they will bring in the market place o Normally specialists are hired to value and promote the sale of shares o As payments for their services, they take a percentage of the total share consideration that is received from investors o The net amount that is received by the company becomes a credit to the respective share capital account o DR Cash o CR Share capital account - Shares sold by subscription o When a share is sold on a subscription basis, its full price is not received immediately o Only a partial payment is made and the share is not issued until the full subscription is received  Any rights associated with the shares aren’t given until the full subscription price is received  Dividends may be attached to some subscription shares once the initial payment is received o Journal Entries  When the subscription is issued and agreed upon  DR Subscriptions receivable for the amount to be received in the future o Current asset  DR Cash for the down payments  CR Shares subscribed for the full amount of subscribed shares agreed upon o A different account should be set up for each of the different types of shares o Shown on the balance sheet below the respective share capital account  When ever an installment is made  DR Cash  CR subscription receivable  When all the installments have been paid off  DR Shares subscribed  CR Share capital o Defaults – When a subscription contract is defaulted the following are possible consequences  Funds paid to date are refunded with a deduction for expenses and the balance of the contract is cancelled  Funds paid to date are forfeited and transferred to the contributed surplus account  Balance is cancelled  Shares are issued for the amount paid to date with the balance being cancelled o Default JE’s  Funds refunded with no penalty  DR Shares subscribed  CR AP or Cash  CR Subscription receivable  Shares issued for amount paid  DR Shares subscribed  CR Share Capital  CR Subscription receivable  Funds held by corporation  DR Shares subscribed  CR Subscription receivable  CR Contributed surplus - Shares issued with other securities o Occurs whe
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