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LEARNING OBJECTIVES
CHAPTER 16 1. Describe the different types of companies and summarise the advantages and
disadvantages of the corporate form of organisation
Companies: formation 2. Describe the documentation required for forming a company and identify the
management structure commonly used for administering a company
and operations 3.
4.
Describe the three main categories of equity in a company
Account for the issue of shares
5. Account for the declaration and payment of cash dividends on shares, share
PowerPoint Presentation by dividends and share splits
Phil Johnson 6. Account for the creation and reduction of the different types of reserves that
are included in equity
2015 John Wiley & Sons 7. Review a company's income statement, statement of changes in equity and
Australia Ltd balance sheet for internal use
DISADVANTAGES OF THE
FORMING A COMPANY
CORPORATE ENTITY
Greater governmental regulation Corporations Act application lodged with ASIC
Separation of ownership and management Application requirements
Can be costly Replaceable rules and constitution
Certificate of registration
The prospectus
Raising funds
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CATEGORIES OF EQUITY
ACCOUNTING FOR SHARE ISSUES
IN A COMPANY
The equity of a typical company split into 3 Number of choices available:
major categories: Types of shares
Share capital Ordinary shares
Fully or partly paid shares Preference shares
Ordinary or preference shares Payment for shares
Retained earnings Payable in full on application
Or accumulated losses Deposit payable on application and the remainder on
Other reserves allotment
Part payment on application, part on allotment, and
remainder in one or more instalments or calls
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UNDERSUBSCRIPTION AND
RIGHTS ISSUE OF SHARES
OVERSUBSCRIPTION
Undersubscription An issue of new shares giving existing
Applicants for fewer shares than offered (but above shareholders the right to an additional number
minimum subscription) of shares in proportion to current shareholding
Oversubscription If renounceable, then 3 options:
Applicants in excess of shares 1. Exercise rights and acquire more shares
Treatment depends on constitution and prospectus 2. Decline to exercise rights and let lapse
Excess monies may be refunded or held against future 3. Sell rights on stock exchange
calls
EXAMPLE
BONUS SHARE ISSUE
RIGHTS ISSUE OF SHARES
Mexico Ltd An issue of shares to existing shareholders in
Planned to raise $4.2 million from existing shareholders proportion of their current shareholdings, at no
through a renounceable 1-to-6 rights issue
Terms were 6 478 611 shares to be issue at 65c each
cost to shareholder
Market price of companys shares was 80c Reasons for bonus share issue
General Journal Provide return to shareholder without cash outlay
Cash at Bank 4 211 097 Capitalise reserves or retained earnings by converting
Share Capital 4 211 097 to share issue
(Receipt of 65c per share on rights issue Signal to capital market that company expects good
of 6 478 611 shares)
future profitability levels
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SHARE DIVIDENDS
SHARE SPLITS
(Bonus Share Issue)
Pro rata distribution of additional shares to Share splits
shareholders Reduce the market price of shares
No effect on corporate assets or total equity Make shares available to wider range of investors
Capitalising profits No journal entry necessary because no change
General Journal in balance in any of the equity accounts
General Reserve 12 500
Share Capital 12 500
(Distribution of a 1-for-20 share dividend
on 250 000 ordinary shares, at a value of
$1 each)
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PREPARING THE
FINANCIAL STATEMENTS
Income Statement Shows all relevant income and
(Statement of Profit or Loss and Other expenses to measure profit
Comprehensive Income) performance for the period