chapter 13 and 14 Flashcards
(39 cards)
The Corporate Form of Organization
𝗔 𝗹𝗲𝗴𝗮𝗹 𝗲𝗻𝘁𝗶𝘁𝘆 ᵃˢˢᵒᶜⁱᵃᵗⁱᵒⁿ / ᵒʳᵍᵃⁿⁱᶻᵃᵗⁱᵒⁿ ᵗʰᵃᵗ ᶜᵃⁿ ᵉⁿᵗᵉʳ ⁱⁿᵗᵒ ᶜᵒⁿᵗʳᵃᶜᵗˢ, ᵖᵃʸ ᵈᵉᵇᵗˢ, ˢᵘᵉ ᵃⁿᵈ ᵇᵉ ˢᵘᵉᵈ.
𝘁𝗵𝗮𝘁 𝗶𝘀 𝘀𝗲𝗽𝗮𝗿𝗮𝘁𝗲 𝗳𝗿𝗼𝗺 𝗶𝘁𝘀 𝗼𝘄𝗻𝗲𝗿𝘀 ˢʰᵃʳᵉʰᵒˡᵈᵉʳˢ
𝗖𝗹𝗮𝘀𝘀𝗶𝗳𝗶𝗲𝗱 𝗯𝘆 𝗽𝘂𝗿𝗽𝗼𝘀𝗲 (𝗳𝗼𝗿 𝗽𝗿𝗼𝗳𝗶𝘁 𝘃𝘀 𝗻𝗼𝗻)𝗮𝗻𝗱 𝗼𝘄𝗻𝗲𝗿𝘀𝗵𝗶𝗽:
𝑷𝒖𝒃𝒍𝒊𝒄 𝒄𝒐𝒓𝒑𝒐𝒓𝒂𝒕𝒊𝒐𝒏:shares are available for purchase on an organized securities market
𝑷𝒓𝒊𝒗𝒂𝒕𝒆 𝒄𝒐𝒓𝒑𝒐𝒓𝒂𝒕𝒊𝒐𝒏:shares are held by a few individuals and are not traded
Characteristics of a Corporation
Separate legal existence from owners
💠Acts under its own name
💠Owners do not bind the corporation
Limited Liability of Shareholders
Limited to the amount of their investment
Ability to acquire capital
💠Can raise capital by issuing shares
💠May be difficult for closely-held corporations
Continuous & unlimited life
💠Unaffected by change in ownership
Government Regulations
💠Specific laws that govern operations of corporations
Income Tax
💠Taxed as a separate entity
Transferable ownership rights
💠Shares of capital represent ownership of a corporation
💠Shares may be bought and sold
💠No effect on operating activities of corporation
Forming a Corporation
-Can incorporate federally or provincially
-Done by filing articles of incorporation(the company’s “constitution”):
Provide info such as :
Name and purpose of company
Number of shares and kinds of shares
Location of corporation’s head office
By-laws: internal rules and policies
By-laws: internal rules and policies
Organization costs:
🍟Costs of forming a corporation
🍟Must be expensed when incurred
🍟Include:
Fees to underwriters
Legal fees
Incorporation fees
Promotional expenditures
Ownership Rights of Shareholders
Ownership rights are in the form of shares
Can be divided into different classes
🌷As stated in the articles of incorporation
🌷Each class has rights and privileges
🌷Usually referred to as common and preferred shares
Common Shares
Shares where the owners have the right:
To ** vote** on certain matters
To ** dividends** : the distribution of profit
To remaining assets in a ** liquidation**
Preferred Shares
A corporation may issue these shares in addition to common shares
Preferred shares have a preference, or priority, over common shares in certain areas, including
-To dividends: the distribution of profit
-To remaining assets in a liquidation
They generally do not have voting rights.
(𝐏𝐫𝐢𝐨𝐫𝐢𝐭𝐲 𝐨𝐯𝐞𝐫 𝐜𝐨𝐦𝐦𝐨𝐧 𝐬𝐡𝐚𝐫𝐞𝐬 𝐟𝐨𝐫 𝗱𝗶𝘃𝗶𝗱𝗲𝗻𝗱𝘀 𝐚𝐧𝐝 𝐚𝐬𝐬𝐞𝐭𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐞𝐯𝐞𝐧𝐭 𝐨𝐟 𝗹𝗶𝗾𝘂𝗶𝗱𝗮𝘁𝗶𝗼𝗻 𝐨𝐟 𝐭𝐡𝐞 𝐜𝐨𝐦𝐩𝐚𝐧𝐲)
Corporation Management
Shareholders manage the corporation through the Board of Directors that they elect
The board:
-Decides on the corporation’s operating policies
-Selects officers (such as the Chief Executive Officer or CEO) to perform daily management functions
Share Issue Considerations–>A corporation must determine?
❀How many different classes of shares it will issue
❀The specific rights and privileges of each class of shares
❀How many of each class of shares can be sold to shareholders
❀How many it will sell and at what price
Authorized share capital
-Number of shares company is allowed to sell
-Many companies have unlimited number of shares
Issue of shares
🐥Issued directly to investors or through an investment dealer
🐥First public sale is called an initial public offering (IPO)
Market value of shares
🌠Once issued, shares trade on a secondary market
🌠Prices determined by buyers and sellers and other external factors
Retained Earnings
= cumulative profit or loss since incorporation that has been retained in the company for future use
ᴵᵗ ʰᵃˢ ⁿᵒᵗ ᵇᵉᵉⁿ ᵈⁱˢᵗʳⁱᵇᵘᵗᵉᵈ ᵗᵒ ˢʰᵃʳᵉʰᵒˡᵈᵉʳˢ
Retained earnings are earned capital and can be distributed as dividends
The cumulative total of profit less losses and less declared dividends since incorporation
Two major components:
Profit
Dividends: cash distributions to owners
Shares are usually issued for cash: do this example:
Hydroslide Inc., a private company, is authorized to issue an unlimited number of common shares. It issues 20,000 of these shares for $1 cash per share on January 2.
Jan 2 Dr. Cash 20,000
————-Cr. Common shares 20,000
To record issue of 20,000 common shares
Shares can be issued in exchange for services or noncash assets. Explain more.
🐢Recorded at fair value of goods/services received:
Dr. Service or asset (e.g. Legal Fees Expense)
————Cr. Common shares
🐢Under IFRS, if fair value of goods/services not measurable, use fair value of shares given up
🐢Under ASPE, can use either of the above valuation methods
do this example: On February 25, the lawyer who helped Hydroslide incorporate billed the company $3,900 for her services. If Hydroslide has limited cash available, it may offer to issue common shares to the lawyer instead of cash. Since Hydroslide is a private company, we can offer the lawyer 3,900 shares (at $1 from previous example) in exchange for legal services. The lawyer negotiates and wants 4,000 cash as she is not getting paid cash.
Remember the value of the shares needs to be recorded at the fair value of the lawyer’s services, not at the value of the shares issued.
Feb. 25 Dr. Legal Fees Expense 3,900
—————–Cr. Common shares 3,900
To record issue of 4,000 common shares for legal services
Preferred Shares —>Entries to record issue and reacquisition of preferred shares similar to entries for common shares
Transactions for each class of share is recorded in a separate account. do this ex: Hydroslide Inc. issues 500, $5 preferred shares for $100 per share on July 7
July 7 Dr. Cash 50,000
Cr. Preferred shares 50,000
To record issue of 500 preferred shares
Dividend Preference—–>preferred shares
Preferred shareholders have a right to dividends before common shareholders
𓂃 ࣪˖ There is no guarantee that dividends will be paid
𓂃 ࣪˖ ִIt depends on many factors, such as having enough money in retained earnings and available cash
𓂃 ࣪˖ ִAll dividends must be approved and declared by the board of directors
Cumulative preferred shares
Cumulative preferred shares have a right to current year’s dividends and any prior years’ dividends owing before dividends are paid on common shares
Any unpaid dividends (in arrears) are not considered a liability
𓂃 ࣪˖No obligation to pay unless dividend is declared by the Board of Directors
do this example: Hydroslide Inc.’s $5 preferred shares are cumulative. Hydroslide’s annual total preferred dividend is $2,500 (500 x $5 per share). If dividends are two years in arrears, what is the amount dividends that preferred shareholders are entitled to receive?
Dividends in arrears (2,500 x2) $5,000
Current year dividends ͟ ͟2͟,͟5͟0͟0͟
Total preferred dividends $7,500
Convertible Preferred Shares
🐰Provide option to exchange preferred shares to common shares at a specified ratio
🐰Conversion is recorded by transferring cost from Preferred Shares to Common Shares account
SOO Confusing example:
Ross Industries Inc. issues 1,000 convertible preferred shares at $100 per share. One preferred share is convertible into 10 common shares. The current fair value of the common shares is $10.50 per share. (total shares converted 1000 x 10 = 10,000)
June 10 DR Preferred Shares 100k( 1000 x $100)
————- CR Common Shares 100k
To record conversion of 1000 preferred shares into 10 k common shares
Redeemable and Retractable Preferred Shares
⛄Corporation (redeemable/callable) or the shareholder (retractable) can redeem the shares at specified future dates and prices
⛄Similar to debt: offers a repayment of the principal
⛄Considered a financial instrument
⛄These preferred shares usually reported in the liabilities section of the balance sheet
ll of the following are examples of organization costs except:
registration costs
legal fees
directors’ fees.
accounting fees
directors’ fees.
If a corporation has only one class of shares, they are referred to as
common shares
