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1. FA3 Liabilities Intermediate > Chapter 14 > Flashcards

Chapter 14 Flashcards

1
Q

what type of company as a limited number of shares

A

private

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2
Q

How many shares is a private company generally limited to

A

50 shares maximum

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3
Q

can a private company’s shares be traded publicly?

A

no

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4
Q

what is often stated for private shares

A

the agreement describes the way in which shares can be transferred

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5
Q

What can private companies use IFRS or ASPE?

A

either

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6
Q

What happens with public companies’ stocks

A

their securities, debt or equity, are traded on stock exchange

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7
Q

what do shares represent

A

ownership in a company

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8
Q

can publicly traded shares be bought or transferred by shareholders without the consent of the corporation

A

yes, unless there is an enforceable agreement to the contrary

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9
Q

A corporation may be authorized to issue several different classes of shares each with distinctive rights and privileges
what might be different about the different classes

A

dividends entitlements and voting rights are characteristics that might be altered among classes

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10
Q

describe common shares

A
  1. have voting rights
  2. receives the residual interest (if any) in the assets if the company are liquidated or dissolved and
  3. dividends paid only when declared
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11
Q

what are special shares

A

may have multiple votes

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12
Q

what are restrictive shares

A

may be non-voting

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13
Q

Preferred shares confer certain preferences, or differences, over common shares
Preference may involve one of the following (7)

A
  1. limited voting or nonvoting rights
  2. receive dividends before the common
  3. cumulative or non-cumulative
  4. participating - right to share in additional dividends
  5. priority over common on liquidation
  6. convertible to other securities
  7. guaranteed return by redemption or retraction
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14
Q

what are par value shares

A

have a designated dollar amount per share, as stated in the articles of incorporation

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15
Q

who allows par value shares

A

limited number of provincial business corporations acts (not allowed by CBCA and other provinces)

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16
Q

on issuance, par amount is assigned to the

A

share account

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17
Q

on issuance, premium amount received over par is allocated to what

A

a separate account in equity

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18
Q

what is another name for common shares

A

residual ownership shares, since they get whatever is left after the creditors and other investors have had their share in earnings and net assets

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19
Q

what kind of risk do common shareholders have

A

risk over ownership. they are at risk with respect to their original investment and return on that investment. they also have the rewards of ownership since they get the residual of earnings and have control over the company through their voting shares

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20
Q

what are no-par shares

A

do not carry a designate or assigned value per share

- the entire amount of proceeds received is credited to share capital

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21
Q

what type of share may have a guarantee on their invested principal?

A

preferred shares

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22
Q

no

A

no

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23
Q

what is issued share capital

A

the number of shares that have been issued to shareholders to date

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24
Q

what is outstanding share capital

A

issued and currently owned by shareholders

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25
Q

what is subscribed shares

A

un-issued shares set aside to meet subscription contracts

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26
Q

no par value shares issued for cash: when shares are issued what happens

A

a certificate, specifying the number of shares represented, is prepared for each shareholder

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27
Q

the number of shares held by each shareholder is made in the

A

shareholder ledger, a subsidiary ledger to the share capital account

28
Q

what are the accounts used to record the share

A

debit cash

credit share capital amount for amount received

29
Q

if par value shares issued, the premium over par is allocated to

A

contributed surplus

30
Q

how can a corporation issue non-cash share capital

A

issue share capital for non-cash assets or to settle debt

31
Q

how do your record an issuance of a non-cash share capital

A

record transaction at the fair value of the asset received, if reliably determinable

32
Q

what are basket sales of share capital

A

a corporation sells two or more classes for one lump-sum amount

33
Q

what are the two methods to record a basket sale of share capital

A
  1. proportional method

2. incremental method

34
Q

what is the proportional method for basket sale of shares

A

weighted average

35
Q

what is the incremental method for basket sale of shares

A

we know the fair value of all but one class involved in the transaction

36
Q

which method for basket sales is preferred

A

proportional

37
Q

what if no market value for any classes of shares for the basket sale is known

A

do whatever you want to figure it out

- BOD may arbitrarily split the proceeds between the securities

38
Q

what are share issue costs

A

costs incurred when share issued in a public offering

39
Q

what can share issue costs include

A
  1. registration fees
  2. underwriter commissions
  3. legal
  4. accounting
  5. printing costs
  6. clerical costs
  7. promotional costs
40
Q

what are the two method of accounting for shares issue costs

A
  1. offset method

2. retained earnings method

41
Q

what is the offset method for accounting for share issue costs

A

share issue costs are treated as a reduction of the amount received from the sale of the related share capital - usual method

42
Q

what is the retained earnings method for accounting for share issue costs

A

share issue costs are charged directly to retained earnings in a radiation of the offset method

43
Q

if issuance is not completed what happens to issue costs

A

they are expensed

44
Q

what does it mean by retractable

A

at the option of the shareholder, and at a contractually arranged price, a company is REQUIRED to buy back its shares

45
Q

what does it mean when it is callable or redeemable

A

there are specific buy-back provisions, at the option of the company

46
Q

A company may retire shares for the following reasons: to

A
  1. increase earnings per share
  2. provide cash flow to shareholders in lieu of dividends
  3. acquire shares when they appear to be undervalued
  4. buy out one or more particular shareholders and thwart take-over bids or
  5. reduce future dividend payments by reducing the shares outstanding
47
Q

When shares are purchased and immediately retired, all capital items relating to the specific shares are

A

removed form the accounts

48
Q

If cumulative preferred shares are retired, and there are dividends in arrears, such dividends are

A

paid and charged to retained earnings in the normal manner

49
Q

what do you do when shares converted

A
  1. account for at book value

2. equal decrease in one class and increase in the other class

50
Q

a firm may also buy its own shares and hold them for

A

eventual resale

- may not vote at shareholder meetings or receive dividends

51
Q

The CBCA and some provincial legislation modelled after the act –stipulate corporations that reacquire their own shares must

A

immediately retire those shares

- limited circumstances where shares may be purchased and held in trust for employee compensation arrangements

52
Q

what does retained earnings represent

A
  1. accumulated net income or net loss
  2. error corrections and retrospective changes in accounting policy
  3. less accumulated cash dividends or stock dividends; and
  4. other amounts related to share repurchases
53
Q

The following items affect retained earnings:

Decreases (debits):

A
  1. net loss
  2. cash and other dividends
  3. stock dividends
  4. share retirement
  5. share issue costs
  6. spin off of investments to shareholders
  7. adjustments related to complex financial instruments
  8. error correction (may also be a credit)
    9, effect of a change in accounting policy applied retrospectively (may also be a credit)
54
Q

The following items affect retained earnings:

Increases (credits)

A
  1. earnings

2. removal of deficit in a financial reorganization

55
Q

what are the standards in IFRS for when a company purchases and retires its own shares

A

there are no standards in IFRS

- Canadian practice is described as an acceptable practice

56
Q

how do you account for retired shares

A

contributed capital relating to the specific shares are removed from the accounts.

57
Q

when reacquisition costs exceeds the average price per share issued to date (retiring shares), the cost should be charged to

A

a. first, to share capital, at the average price per issued share
b. any remaining amount, to other contributed capital
- a separate contributed capital account is set up for EACH class of shares that are retired

58
Q

when buying back their own shares, does a corporation report a gain or loss?

A

no

59
Q

how are conversion of shares accounted for

A 
at book value, wit an equal decrease to one share class and an increase to another 
- no gain or loss reported
60
Q

CBCA provides that if a company reacquires its own shares it must

A

retire those shares immediately

61
Q

one of the fundamental principles in accounting for shareholders’ equity is that it

A

does not have an impact on net income

62
Q

appropriated retained earnings result form

A

discretionary management action

63
Q

restricted retained earnings result form

A

a legal contract or corporate law

64
Q

what are some examples of appropriations or restrictions

A
  1. to fulfil a contractual agreement (a debt covenant)
    - restrict the use of retained earnings for dividends
  2. appropriation of a specified portion of retained earnings in anticipation of possible future losses
  3. to fulfil a legal requirement, as in the case of a provincial corporate law requiring a restriction on retained earnings equivalent to the cost of treasury stock held
65
Q

what is the definition of a dividend

A

a distribution of earnings to shareholders in the form of assets or shares
- typically credit the account that represents the item distributed (cash, non-cash asset, or share capital) and debit to retained earnings

1. FA3 Liabilities Intermediate (7 decks)

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