Shareholders' Equity: Tenth Canadian Edition

INTERMEDIATE ACCOUNTING
TENTH CANADIAN EDITION

Kieso • Weygandt • Warfield • Young • Wiecek • McConomy
CHAPTER 15
Shareholders’ Equity
Prepared by:
Lisa Harvey, CPA, CA
Rotman School of Management,
University of Toronto
CHAPTER 15
SHAREHOLDERS’ EQUITY
After studying this chapter, you should be able to:
• Discuss the characteristics of the corporate form of organization,
rights of shareholders, and different types of shares.
• Explain how to account for the issuance, reacquisition, and
retirement of shares, stock splits, and dividend distribution.
• Understand the components of shareholders’ equity and how they
are presented.
• Understand capital disclosure requirements.
• Calculate and interpret key ratios relating to equity.
• Identify the major differences in accounting between ASPE and
IFRS, and what changes are expected in the near future.
Copyright © John Wiley & Sons Canada, Ltd. 2

Understanding the Recognition, Presentation, IFRS/ASPE

Corporate Form, Derecognition, Disclosure, Comparison
Share Capital and and and Analysis •Comparison of
Profit Distribution Measurement •Components of IFRS and
•Corporate law and the shareholders’ ASPE
•Issuance of shares
share capital system equity •Looking Ahead
•Reacquisition and
•Types of shares retirement of shares •Capital
disclosures
•Limited liability of •Dividends
shareholders •Analysis
•Formality of profit
distribution

Primary Forms of
Business Organization
Proprietorship Engaged in making
financial returns for their
Partnership
owners
Corporation
Profit-oriented Shares Shares
privately held publicly traded
Private
Sector
No shares issued; created to
Not-for-profit provide services for members or
Public society
Sector
Municipalities, Cities, Etc.
Created by government statute

Crown to provide public services
Corporate Law
Articles of Incorporation
Corporation Charter Issued
Corporation Recognized
as Legal Entity

Corporate Law
• The Canada Business Corporation Act (CBCA)

is a relevant business corporation act
– Provincial business corporation acts also exist but
vary from province to province
• Articles of incorporation prepared and submitted
– Company name
– Location of registered office
– Classes and authorized shares
– Share transfer restrictions (if any)
– Directors
– Business restrictions

Share Capital System
• Shares grouped by “class” (e.g. Class A

Common)
– Within each class, each share equal
• Each share contains certain rights and
privileges
• Ease of transfer of ownership
– Advantage to both issuing corporation and
investor
– Share becomes more attractive investment

Share Capital System
• As a minimum each share has these basic

or inherent rights
1.To share proportionately in profits and losses
2.The right to vote for directors
3.To share proportionately in assets upon
liquidation
• Preemptive right for any new share issues
can also be assigned under CBCA

Types of Shares
Common Shares
• Represent basic ownership interest
• Represents residual ownership interest -
have ultimate risk of loss and benefit from
success
• Dividends or assets on dissolution are not
guaranteed
• True advantage is in the right of Common
Shares to ultimately control by way of voting

Types of Shares
Preferred Shares
• Certain inherent rights given up or exchanged
for other special rights or privileges
• Preference given on
– Dividends (usually at a stated rate)
– Claim to assets on dissolution
• Preferred shares features (some or all may be
attached to a preferred share)
– Cumulative − Callable/redeemable
– Convertible − Retractable
– Participating
Types of Shares
Preferred Shares Features

• Cumulative: Dividends in arrears must be paid before any
profits can be distributed to common shareholders
• Convertible: The company or holder can exchange the
shares for common shares at a predetermined ratio
• Callable/Redeemable: The issuing company can “call” at
its option the preferred shares at specified future dates at
stipulated prices
• Retractable: The holders can “put” (or sell) their shares to
the company
• Participating: Holders can participate with common
shareholders in any profit distributions higher than the
prescribed rate

Limited Liability
• Limited Liability of Shareholders

– Unlike partnership or proprietorship form of
business
– Shareholders not generally liable for the
obligations of the corporation
• Shareholders losses restricted to the

amount invested in the corporate shares

Formality of Profit Distribution
• No amounts may be distributed unless corporate capital

is maintained intact
• Under the CBCA:
1. There needs to be sufficient capital after the dividend to pay
liabilities as they are due
2. The realizable value of the corporate assets does not fall below
the total of the liabilities and the stated and legal capital for all
classes of shares
• Formal approval of the Board of Directors required
• Dividends must be in full agreement with share capital
contracts
• Before declaration of a dividend, management should
consider availability of funds to pay the dividend


disclosures
distribution

Share Issue - Basic
Full amount of proceeds received is credited

to the respective share capital account
(preferred/common/class type)
500 common shares are sold for $10.00 each

(issuance costs not included in this transaction).
The journal entry is:
Cash 5,000
Common Shares 5,000
Shares Sold on a Subscription Basis
• Shares are sold, with “instalment”

payments
• Shares are not issued, and any rights are
not given (e.g., voting, dividends) until the
full subscription price is received
• Dividends may be attached to some
subscription shares, once the initial
payment is received

Accounts in share subscription transaction

– Common Shares Subscribed
• Set up a separate one for each type/class of share
• An equity account, reported below the respective share
capital account
– Subscriptions Receivable
• Normally considered a current asset
• May be reported as a contra account to the Shares
Subscribed account in equity section
– Share Capital
• Credited only when the subscription is paid in full, or settled in
some other manner in the case of default

500 shares are sold on subscription for $20

each. 50% is due as initial payment.
The initial journal entries would be:
Subscriptions Receivable 10,000

Common Shares Subscribed 10,000
Cash 5,000
Subscription Receivable 5,000

If all payments are made as scheduled, the

entries would be:
Cash 5,000
Shares Subscribed 10,000
Share Capital 10,000

• If a subscription contract is defaulted there are

generally three possible consequences:
– Funds paid to date are refunded, often with a
deduction for expenses, and the balance of the
contract is cancelled
– Funds paid to date are forfeited transferring it to the
Contributed Surplus account, with no refund or shares
being issued; balance of the contract is cancelled
– Shares are issued for the amount paid to date, with
the balance of the contract cancelled

• Default after first payment – funds refunded with

no penalty.
Accounts Payable (or Cash) 5,000
• Default after first payment – shares issued for
amount paid.
Share Capital 5,000
• Default after first payment – funds held by

corporation

Contributed Surplus 5,000

Shares Issued
With Other Securities
• When two or more classes of shares are

sold for a lump sum
• Accounting problem is the allocation of the
funds received to the respective share
classes
• Two methods available
– Proportional method (relative market value
method)
– Incremental method
EQUITY
Ravonette Corporation issued 300 shares of common shares and 100
shares of preferred shares for a lump sum of $13,500. The common
shares have a market value of $20 per share, and the preferred shares
have a market value of $90 per share.
Number Amount Total Percent

Ordinary shares 300 x $ 20.00 = $ 6,000 40%
Preference shares 100 x 90.00 9,000 60%
Fair Market Value $ 15,000 100%
Allocation: Ordinary Preference

Issue price $ 13,500 $ 13,500 Proportional
Allocation % 40% 60% Method
Total $ 5,400 $ 8,100
15-24 LO 3
EQUITY
Ravonette Corporation issued 300 shares of common shares and 100
shares of preferred shares for a lump sum of $13,500. The common
shares have a market value of $20 per share, and the preferred shares
have a market value of $90 per share.
Journal entry (Proportional):
Cash 13,500
Preferred Shares 8,100
Common Shares 5,400
15-25 LO 3
EQUITY
(Variation): Ravonette Corporation issued 300 shares of common shares
and 100 shares of preferred shares for a lump sum of $13,500. The
ordinary shares have a market value of $20 per share, and the value of
preference shares are unknown.
Number Amount Total

Ordinary shares 300 x $ 20.00 = $ 6,000
Preference shares 100 x -
Fair Market Value $ 6,000
Allocation: Ordinary Preference

Issue price $ 13,500
Incremental
Ordinary (6,000) Method
Total $ 6,000 $ 7,500
15-26 LO 3
EQUITY
(Variation): Ravonette Corporation issued 300 shares of common shares
and 100 shares of preferred shares for a lump sum of $13,500. The
ordinary shares have a market value of $20 per share, and the value of
preference shares are unknown.
Journal entry (Incremental):
Cash 13,500
Preferred Shares 7,500
Common Shares 6,000
15-27 LO 3
Accounting for Share Issue Costs
• Direct incremental costs incurred to sell shares

include legal fees, accounting fees, underwriter
fees & commissions, printing and mailing costs,
taxes, etc.
• These amounts are considered to be capital
transactions (rather than operating transactions)
and therefore should not be included in net
income calculation
• Accounting treatment: debit to Share Capital

Accounting for Share Issue Costs
Reduction of the amount paid in 1,000

shares sold for $10.00 each, with $500 in
issue costs
Cash 9,500
Share Capital 500
Share Capital 10,000

Reacquisition and Retirement of
Shares
• Major reasons for the reacquisition of a
corporation’s own shares
– Reduce the shares outstanding to increase EPS
– Have enough shares on hand to meet employee
share compensation contracts
– Buy out a particular ownership interest
– Meet the needs of a potential merger
– Stop (or slow down) takeover attempts
– Reduce number of shareholders
– Make a market in the company’s shares
– Return cash to shareholders

Shares
• Shares may be retired when reacquired
• May also (in limited circumstances and
jurisdictions) become Treasury Stock (held
in treasury for reissue)
• In Canada, the CBCA requires
repurchased shares be cancelled and
restored to status of authorized but
unissued if a limit to authorized shares
exists

Shares
• Share capital debited with the original
issue or assigned value only
• The difference then allocated to equity
accounts:
– Contributed Surplus
– Retained Earnings

Shares - Example
In January 2013, Cooke Corp. purchased and
cancelled 500 Class A shares at $4 per share. There
are 10,500 shares issued and outstanding, with total
share capital of $63,000
Common Shares (500 [$63,000/10,500] ) 3,000
Cash (500 shares@ $4.00) 2,000
Contributed Surplus (500 @$2.00) 1,000
Assigned share value = $63,000/10,500 = $ 6.00

Acquisition cost = per share price/cost 4.00
Value over assigned value $2.00
Dividends
• Two basic classes of dividends:

1. Return on capital
2. Return of capital
• Important dates:
– Date of declaration
– Date of record
– Date of payment

Cash Dividends
• First journal entry is on Date of Declaration

– Dividend becomes legal obligation of the
corporation
Dividends (or Retained Earnings) xxx

Dividends Payable xxx
– On Date of Payment, the liability is reduced

Cash Dividends
• Before the dividend is paid, a current list of

shareholders needs to be prepared (as at
the date of record)
• If a Dividends account is used rather than
Retained Earnings at the date of
declaration, this account is closed to
Retained Earnings at year end

Dividends in Kind
• Dividends payable in corporation assets

other than cash
• These dividends are normally measured at
the “fair value” of the asset given up
• Fair value can be determined by referring
to estimated realizable value of same or
similar assets, quoted market prices,
independent appraisals etc.

DIVIDEND POLICY
Property Dividends
 Dividends payable in assets other than cash.
 Restate at fair value the property it will distribute,

recognizing any gain or loss.
15-38 LO 7
DIVIDEND POLICY
Illustration: Tsen, Inc. transferred to shareholders some of its

investments (held-for-trading) in securities costing $1,250,000 by
declaring a property dividend on December 28, 2014, to be
distributed on January 30, 2015, to shareholders of record on
January 15, 2015. At the date of declaration the securities have a
fair value of $2,000,000. Tsen makes the following entries.
At date of declaration (December 28, 2014)
Equity Investments 750,000

Unrealized Holding Gain or Loss—Income 750,000
Retained Earnings 2,000,000
Property Dividends Payable 2,000,000
15-39 LO 7
DIVIDEND POLICY
Illustration: Tsen, Inc. transferred to shareholders some of its

investments (held-for-trading) in securities costing $1,250,000 by
declaring a property dividend on December 28, 2014, to be
distributed on January 30, 2015, to shareholders of record on
January 15, 2015. At the date of declaration the securities have a
fair value of $2,000,000. Tsen makes the following entries.
At date of distribution (January 30, 2015)
Property Dividends Payable 2,000,000

Equity Investments 2,000,000
15-40 LO 7
Stock Dividends
• No assets distributed (unlike cash dividends)

• Unlike with cash dividends or dividends in kind,
total shareholders equity does not change
– Amounts are “re-arranged” as a result of the stock
dividend
– The transaction is measured at the fair value of the
shares at declaration date
– Each shareholder has the same proportionate interest
in the corporation
– However, book value per share decreases

Stock Dividends - Example
• 1,000 common shares outstanding

• Retained earnings = $50,000
• 10% stock dividend declared
• Fair (market) value of share = $130 per share
Stock Dividends Declared 13,000

Common Shares 13,000
1,000 x 10% = 100
Fair value $13,000
Total $13,000

DIVIDEND POLICY
Share Dividends
 Issuance by a corporation of its own shares to shareholders
on a pro rata basis, without receiving any consideration.
 Par value, not the fair value, is used to record the share
dividend.
 Share dividend does not affect any asset or liability.
 Journal entry reflects a reclassification of equity.
 Ordinary share dividend distributable reported in the equity

section as an addition to share capital—ordinary.
15-43 LO 8
DIVIDEND POLICY
Illustration: Vine Corporation has outstanding 1,000 shares of $1

par value common shares and retained earnings of $50,000. If Vine
declares a 10 percent share dividend, it issues 100 additional shares
to current shareholders. If the fair value of the shares at the time of
the share dividend is $100 per share, the entry is:
Date of declaration
Retained Earnings 10,000
Common Stock Dividends Distributable 10,000
15-44 LO 8
DIVIDEND POLICY
Illustration: Vine Corporation has outstanding 1,000 shares of $1

par value common shares and retained earnings of $50,000. If Vine
declares a 10 percent share dividend, it issues 100 additional shares
to current shareholders. If the fair value of the shares at the time of
the share dividend is $100 per share, the entry is:
Date of distribution
Common Stock Dividends Distributable 10,000
Common Shares 10,000
15-45 LO 8
Liquidating Dividends
• Any dividends paid in excess of the

accumulated income of the company
represents a liquidating dividend
– Results in a return of the shareholders’
investment

DIVIDEND POLICY
Illustration: McChesney Mines Inc. issued a “dividend” to its

common shareholders of $1,200,000. The cash dividend
announcement noted that shareholders should consider $900,000
as income and the remainder a return of capital. McChesney Mines
records the dividend as follows.
Date of declaration
Retained Earnings 900,000

Contributed Surplus 300,000
Dividends Payable 1,200,000
15-47 LO 7
Dividend Preferences
Given:
• $50,000 total declared as dividends
• Common share capital: $400,000
• 1,000 $6 Preferred shares: $100,000
Calculate the dividend distribution to common

and preferred shareholders based on the
different types of dividend preferences

Non-cumulative
• If shares are non-cumulative and non-

participating:
– Dividends are distributed only when declared, up to
the stated amount of the share
– No amount is paid for years where dividends were not
declared
• The dividend distribution is therefore:
– Preferred Shareholders are paid $6,000 ($6 x 1000)
– Common Shareholders are paid the remaining
amount of $44,000

Cumulative
• If the preferred shares are cumulative and

non-participating:
– The dividends that were not paid to preferred
shareholders in the previous 2 years must
also be paid
• The dividend distribution is therefore:
– Preferred Shareholders are paid $18,000 ( ($6
x 1000 x 2) + $6,000)
– Common Shareholders are paid the remaining
$32,000 ($50,000 - $18,000)
Participating
• If preferred shares are non-cumulative and fully

participating, using the previous data:
Preferred Common
1. Current year’s:
– Preferred ($6 x 1000) $6,000
– Common (6% x $400,000) $24,000
2. Remaining $20,000 at a rate of $20,000/$500,000 (i.e.
4%):
– Preferred (4% x $100,000) $4,000
– Common (4% x $400,000) $16,000
TOTAL $10,000 $40,000

Stock Dividends vs. Stock Splits
Stock Dividend
• A form of dividend must follow the requirements
of a dividend
• Both the number of shares and the amount of
share capital generally affected
• Shares are not exchanged
Stock Split
• Increases the number of shares outstanding
• Amount of share capital is not affected
• Results in a market price manipulation
DIVIDEND POLICY
Stock Splits
 To reduce the market value of shares.
 No entry recorded for a share split.
 Decrease par value and increased number of shares.
ILLUSTRATION 15-13
Effects of a Share Split
15-53 LO 8
DIVIDEND POLICY
Stock Split and Stock Dividend Differentiated

A share split differs from a share dividend. How?
 A share split increases the number of shares
outstanding and decreases the par or stated value per
share.
 A share dividend,
► increases the number of shares outstanding.
► does not decrease the par value.
► increases the total par value of outstanding shares.
15-54 LO 8

disclosures
distribution

Components of Shareholders’ Equity
Share Capital:
Common
Contributed
And/or
Capital
Preferred shares
Contributed
Surplus
Retained Earnings Earned
Capital
Accumulated other
Comprehensive
Income
Contributed Surplus
Contributed Surplus transactions

• Par value share issue and/or retirement
• Treasury share transactions
• Liquidating dividends
• Financial reorganization
• Stock options and warrants
• Issue of convertible debt
• Share subscriptions forfeited
• Donated assets by a shareholder
• Redemption or conversion of shares
Retained Earnings
DEBITS CREDITS
1. Net loss 1. Net Income
2. Prior period 2. Prior period
adjustments, adjustments,
accounting principle
accounting principle
changes
changes
3. Adjustments from
3. Cash, property, stock financial reorganization
dividends
4. Some treasury share
transactions

Accumulated Other Comprehensive
Income (AOCI)
• Cumulative change in equity from non-

shareholder transactions which are
excluded from net income
• Considered to be earned income
• Note that the concept of comprehensive
income is not applicable under ASPE

Disclosure of Share Capital
• Following basic disclosure is required:

– Authorized share capital
– Issued share capital
– Changes in share capital since the last
statement of financial position date

Disclosure of Share Capital
• Additional disclosures include:

– Authorized number of shares (if no limit, then so stated)
– The existence of unique rights
– Number of shares issued and the amount received
– Whether the shares are par value or no par value
– Amount of any dividends in arrears for cumulative
preferred shares
– Changes during the year, including new issuances and
redemptions (under IFRS, presented in statement of
changes in equity)
– Restrictions on retained earnings

PRESENTATION AND ANALYSIS
Presentation of Equity ILLUSTRATION 15-17

Comprehensive Equity
Presentation
15-62 LO 9
Presentation of Statement of Changes in Equity
ILLUSTRATION 15-18
Statement of Changes
in Equity
15-63 LO 9
Shareholders’ Equity Ratios
1. Rate of return on common shareholders’ equity

Net income – Preferred dividends
Average common shareholders’ equity
2. Payout ratio
Cash Dividends
Net income – Preferred dividends
3. Price earnings ratio
Market price per share
Earnings per share
4. Book value per share
Common shareholders’ equity
Number of outstanding shares
Analysis
Illustration: Gerber’s Inc. had net income of $360,000, declared
and paid preference dividends of $54,000, and average ordinary
shareholders’ equity of $2,550,000.
ILLUSTRATION 15-18
Ratio shows how many dollars of net income the company

15-65
earned for each dollar invested by the owners. LO 9
Illustration: Troy Co. has cash dividends of €100,000 and net

income of €500,000, and no preference shares outstanding.
Illustration 15-15
ILLUSTRATION 15-19
15-66 LO 9
Illustration: Chen Corporation’s ordinary shareholders’ equity is

HK$1,000,000 and it has 100,000 ordinary shares outstanding.
ILLUSTRATION 15-20
Amount each share would receive if the company

were liquidated on the basis of amounts reported
on the statement of financial position.
15-67 LO 9

disclosures
distribution

Looking Ahead
• There are several projects being

undertaken by IASB and FASB that may
impact accounting for shareholders’ equity
• These include financial statement project,
and project on liabilities and equity

COPYRIGHT
• Copyright © 2013 John Wiley & Sons Canada, Ltd. All

rights reserved. Reproduction or translation of this work
beyond that permitted by Access Copyright (The Canadian
Copyright Licensing Agency) is unlawful. Requests for
further information should be addressed to the Permissions
Department, John Wiley & Sons Canada, Ltd. The
purchaser may make back-up copies for his or her own use
only and not for distribution or resale. The author and the
publisher assume no responsibility for errors, omissions, or
damages caused by the use of these programs or from the
use of the information contained herein.

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INTERMEDIATE ACCOUNTING

TENTH CANADIAN EDITION

Copyright © John Wiley & Sons Canada, Ltd. 2

Understanding the Recognition, Presentation, IFRS/ASPE

Copyright © John Wiley & Sons Canada, Ltd. 3

Created by government statute

Corporation Charter Issued

Copyright © John Wiley & Sons Canada, Ltd. 5

• The Canada Business Corporation Act (CBCA)

Copyright © John Wiley & Sons Canada, Ltd. 6

• Shares grouped by “class” (e.g. Class A

Copyright © John Wiley & Sons Canada, Ltd. 7

• As a minimum each share has these basic

Copyright © John Wiley & Sons Canada, Ltd. 8

Copyright © John Wiley & Sons Canada, Ltd. 9

Preferred Shares Features

Copyright © John Wiley & Sons Canada, Ltd. 11

• Limited Liability of Shareholders

• Shareholders losses restricted to the

Copyright © John Wiley & Sons Canada, Ltd. 12

• No amounts may be distributed unless corporate capital

Copyright © John Wiley & Sons Canada, Ltd. 13

Understanding the Recognition, Presentation, IFRS/ASPE

Copyright © John Wiley & Sons Canada, Ltd. 14

Full amount of proceeds received is credited

500 common shares are sold for $10.00 each

• Shares are sold, with “instalment”

Copyright © John Wiley & Sons Canada, Ltd. 16

Accounts in share subscription transaction

Copyright © John Wiley & Sons Canada, Ltd. 17

500 shares are sold on subscription for $20

Subscriptions Receivable 10,000

Copyright © John Wiley & Sons Canada, Ltd. 18

If all payments are made as scheduled, the

Copyright © John Wiley & Sons Canada, Ltd. 19

• If a subscription contract is defaulted there are

Copyright © John Wiley & Sons Canada, Ltd. 20

• Default after first payment – funds refunded with

• Default after first payment – funds held by

Shares Subscribed 10,000

Copyright © John Wiley & Sons Canada, Ltd. 22

• When two or more classes of shares are

Number Amount Total Percent

Allocation: Ordinary Preference

Journal entry (Proportional):

Number Amount Total

Allocation: Ordinary Preference

Journal entry (Incremental):

• Direct incremental costs incurred to sell shares

Copyright © John Wiley & Sons Canada, Ltd. 28

Reduction of the amount paid in 1,000

Copyright © John Wiley & Sons Canada, Ltd. 29

Copyright © John Wiley & Sons Canada, Ltd. 30

Copyright © John Wiley & Sons Canada, Ltd. 31

Copyright © John Wiley & Sons Canada, Ltd. 32

Assigned share value = $63,000/10,500 = $ 6.00

• Two basic classes of dividends:

Copyright © John Wiley & Sons Canada, Ltd. 34

• First journal entry is on Date of Declaration

Dividends (or Retained Earnings) xxx

– On Date of Payment, the liability is reduced

Copyright © John Wiley & Sons Canada, Ltd. 35

• Before the dividend is paid, a current list of