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Chapter 18

SHAREHOLDERS’
EQUITY

© 2013 The McGraw-Hill Companies, Inc.

The Nature of Shareholders’ Equity

Assets – Liabilities = Shareholders’ Equity

Net Assets
Sources of
Shareholders’
Amounts invested Equity Amounts earned
by shareholders by corporation

Shareholders’ Equity
Other
Issued Capital gains and
Retained Earnings losses not
included in
Reserves net income
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Financial Reporting Overview

Shareholders' Equity
Issued Capital:
Share Capital:
Preference share capital - $100 par value; 1,000 shares
authorized; 400 shares issued and
outstanding $ 40,000
Ordinary share capital - $10 par value; 60,000 shares
authorized; 20,000 shares issued and
outstanding 200,000
Additional issued capital
Additional isued capital - preference shares 10,000
Additional issued capital - ordinary shares 300,000
Total issued capital $ 550,000
Retained earnings 121,500
Reserves:
Asset revaluation reserve (35,000)
Fair value reserve for investments 22,000 (13,000)
Treasury shares (at cost) (10,000)
Total shareholders' equity $ 648,500

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Reserves or Accumulated Other

Comprehensive Income
Reserves or Accumulated other comprehensive
income include the following types of gains and
losses that traditionally have been excluded from
net income.

Gains from Gains (losses)

revaluation of from foreign
PPE currency
translation.

Net unrealized Deferred gains Gains (losses)

gains (losses) on (losses) on from amendments
available-for-sale derivatives to postretirement
instruments benefit plans
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Share Capital
Ordinary Share is the basic voting share of the
corporation. It ranks after preference shares for
dividend and liquidation distribution. Dividends are
determined by the board of directors.

Generally does not Usually has a

have voting rights. par or stated value.

Preference
shares
Dividend and liquidation May be convertible,
preference over callable, and/or
ordinary share. redeemable.
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Preference Shares
• Are usually stated as a percentage of the par
or stated value.
• May be cumulative or noncumulative.
• May be partially participating, fully participating,
or nonparticipating.

Cumulative preference shares:

Unpaid dividends must be issued in full before any
distributions to ordinary shareholders.
Dividends in arrears are not liabilities, but the per
share and aggregate amounts must be disclosed.
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Shares Issued for Cash

10,000 shares of share are issued for $100,000 cash.

Cash ....................................................... 100,000

$1 Par Ordinary share capital, par value .............. 10,000
Value Ordinary share premium (remainder) …… 90,000
To record issue of ordinary share.

No Par Cash ....................................................... 100,000

Ordinary share capital............................. 100,000
Value To record issue of ordinary share.

No Par, Cash ................................................................... 100,000

Ordinary share capital, stated value ..................... 10,000
$1 Stated Ordinary share premium (remainder) …. 90,000
Value To record issue of ordinary share.

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Share Issue Costs

• Registration fees
• Underwriter commissions
• Printing and clerical costs
• Legal and accounting fees
• Promotional costs

Share issue costs reduce net proceeds

from selling shares, resulting in a lower
amount of additional issued capital.

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Share Buybacks
A corporation might reacquire shares of its share to . . .
• support the market price.
• increase earnings per share.
• distribute in share option plans.
• distribute in a bonus issue.
• use in mergers and acquisitions.
• thwart takeover attempts.
I can account for the reacquired
shares by retiring them or by holding
them as treasury shares.

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Accounting for Retired Shares

Price paid is more than issue price.
5,000 shares of $2 par value share that were issued
for $20 per share are reacquired for $25 per share.

Ordinary share capital................................................. 10,000

Ordinary share premium ………………..………………. 90,000
Additional issued capital – share repurchase ……….. 25,000
Cash ……………………………………………….. 125,000
To record repurchase and retirement of ordinary share.

Reduce Retained Earnings if the Additional issued capital

– share repurchase account balance is insufficient.
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Accounting for Treasury Shares

Treasury shares usually do not have:
•Voting rights.
•Dividend rights.
•Preemptive rights.
•Liquidation rights.
Treasury shares are reported as an unallocated reduction
of total Shareholders’ Equity.

Acquisition of Treasury Shares

•Recorded at cost to acquire.
Resale of Treasury Shares
•Treasury Shares credited for cost.
•Difference between cost and issuance price is (generally)
recorded in additional issued capital – share repurchase.
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Retained Earnings
Represents the undistributed earnings of
the company since its inception.
Balance January 1, 2013 $ 106,500
Net income 25,000
Cash dividends (10,000)
Balance December 31, 2013 $ 121,500

 Retained earnings may also be affected by the

correction of an accounting error that occurred in the
financial statements of a prior period, called a prior
period adjustment.
 Any restrictions on retained earnings must be disclosed
in the notes to the financial statements.
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Accounting for Cash Dividends

Declared by board of Not legally
directors. required.

Requires sufficient
Creates liability at
Retained Earnings and
declaration.
Cash.

Declaration date
• Board of directors declares a $10,000 cash dividend.
• Record a liability.
Declaration Date:
Retained earnings ........................................ 10,000
Dividends payable .............................. 10,000
To record declaration of cash dividend.

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Dividend Dates
Ex-dividend date
The first day the shares trade without the right to
receive the declared dividend. (No entry needed)
Date of Record
Shareholders holding shares on this date will receive
the dividend. (No entry needed)
Date of Payment
Record the dividend payment to shareholders.
Date of Payment:
Dividends payable ........................................ 10,000
Cash ……………….............................. 10,000
To record payment of cash dividend.

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