Authorized Shares: Chapter 11: Shareholders' Equity: Capital Shareholders' Equity of A Corporation

Chapter 11: Shareholders’ Equity: Capital
Shareholders’ equity of a corporation
S h a r e h o l d e r s ' e q u it y is
in c r e a s e d in tw o w a y s .
C o n tr ib u tio n s b y R e te n tio n o f p r o fits

in v e s to r s in e x c h a n g e e a r n e d b y th e
fo r s h a r e . c o r p o r a tio n .
P a id C a p ita l R e ta in e d E a r n in g s
There are several terms related to share capital that must be understood.
Authorized
shares
Issued Unissued
shares shares
Outstanding Treasury
shares shares
Authorized shares are the maximum number of shares in the share capital that can be sold to the
public. The number of authorized shares is identified in the corporation’s M&A, issued by the relevant
authority in its location of incorporation.
Authorized shares can be classified as issued and unissued. Unissued shares are shares that have never
been sold to the public. Issued shares are shares that have been sold to the public at some point.
Issued shares can be classified as outstanding shares and treasury shares. Outstanding shares are
shares that are currently owned by shareholders.
Treasury shares are shares that once were owned by shareholders but were repurchased by the
corporation in the stock market. Thus, the corporation is now the owner of those shares.
Par value is an arbitrary amount assigned to each share in the company’s M&A. Par value is typically a
nominal amount. It is not related in any manner to market value, which is the selling price of a share.
Share can have a par value, not have a par value, or have a stated value.
Par Value Ordinary Share
Issuance of Par Value Share
Record:
1. The cash received.
2. The number of shares issued × the par value per share in the Ordinary Share account.
3. The remainder is assigned to Share Premium (or Additional Paid-in Capital).
Assume a corporation issues 10,000 shares of its $2 par value share for $25 per share. RE= 65,000.
Description Debit Credit
Cash 250,000
Ordinary Share 20,000 (10,000 x 2)
Share Premium 230,000 (10,000x(25-2))
Shareholders' Equity with Ordinary

Share
Shareholders' Equity
Contributed capital:
Ordinary share - $2 par value; 50,000 shares
authorized; 10,000 shares issued and
outstanding $ 20,000
Share premium 230,000
Retained earnings 65,000
Total shareholders' equity $ 315,000

Preference Share: A separate class of share, typically having priority over ordinary shares in . . .
 Dividend distributions (rate is usually stated).

 Distribution of assets in case of liquidation.
 Specific characteristics (say redeemable) can affect its presentation in the statement of financial
position as liabilities (IAS 32).
Preference share usually has a stated dividend that is expressed as a percentage of its par value
Other Features Include:
Cumulative dividend rights.

Normally has no voting rights
Cumulative preference share has the right to be paid in both the current and all prior periods’ unpaid
dividends before any dividends are paid to ordinary shareholders. When the preference share is
cumulative and the directors do not declare a dividend to preference shareholders, the unpaid dividend
is called a dividend in arrears and must be disclosed in the financial statements.
Noncumulative preference share has no rights to prior periods’ dividends if they were not declared in
those prior periods.
Dividends in arrears: is all or any part of the regular dividend on the preference share is omitted in a
given year, the amount omitted is said to be in arrears.
9% x 100,000 = 9,000
Preference Ordinary
If Preference Share is Noncumulative:
Year 2012 $5,000 dividends declared $ 5,000
Year 2013
Step 1: Current preference dividend $ 9,000
Step 2: Remainder to ordinary shareholders $ 33,000

If Preference Share is Cumulative:
Year 2012 $5,000 dividends declared $ 5,000
Year 2013
Step 1: Dividends in arrears $ 4,000
Step 2: Current preference dividend 9,000
Step 3: Remainder to ordinary shareholders $ 29,000
Totals $ 13,000 $ 29,000

Book value is used in evaluating the reasonableness of the market price of a share.
If a share is selling at a price above book value, investors believe that management has created a
business worth more than the historical cost of the resources entrusted to its care. i.e. sign of successful
corporation.
If the market price is less than book value, investors believe that the company’s resources are worth less
than their cost while under control of current management.
Thus the relationship between book value and market price is one measure of investors’ confidence in a
company’s management.

Authorized Shares: Chapter 11: Shareholders' Equity: Capital Shareholders' Equity of A Corporation

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Chapter 11: Shareholders’ Equity: Capital

Shareholders’ equity of a corporation

C o n tr ib u tio n s b y R e te n tio n o f p r o fits

Par Value Ordinary Share

Issuance of Par Value Share

Description Debit Credit

Ordinary Share 20,000 (10,000 x 2)

Share Premium 230,000 (10,000x(25-2))

Shareholders' Equity with Ordinary

 Dividend distributions (rate is usually stated).

Other Features Include:

Cumulative dividend rights.

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