CH 15

Intermediate Accounting
IFRS Edition
Kieso, Weygandt, Warfield
Fourth Edition
Chapter 15
Equity
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
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Copyright © 2020 John Wiley & Sons, Inc.
Review
Assumption: Limited Amount of Resources
Manufacturer Consumer
Financial
(Company’s (External
Information
Management) Users)
Review: Accounting Standards
What is an Accounting Standard?
• Simply put, common set of principles, standards, and procedures that

define the basis of financial accounting policies and procedures.
Need for an Accounting Standard?
• To standardize the accounting policies and principles to ensure the financial

statement to be useful.
LO 1
The role of an Auditor
Assumption:
Assumption:Limited
LimitedAmount
Amount of Resources
Resources
Manufacturer
Manufacturer Consumer
Financial
Financial Consumer
(Company’s
(Company’s (External
Information
Information (External Users)
Management)
Management) Users)
Auditor
김밥천국 (Gimbap Heaven)
• Need W10,000,000 to open a Gimbap Heaven. I only have W2,000,000.
• My mother invested W4,000,000, My dad invested W1,000,000.
• My boyfriend HeungMin lent me W2,000,000; the Bank lent me W1,000,000.
• In February purchased followings for Gimbap Heaven.
 Oven, Refrigerator, Tables, Chairs, Cups, Napkins, and etc (W5,500,000).
 Bicycle (W500,000) for delivery.
 Remaining cash W4,000,000 put in bank
• March 1: Store Opened. First customer walks in:

 orders 2 Ramens (Price W2,500/ramen).
 drank 3 cups of water and used 6 sheets of napkins.
 cost for one Ramen is W500.
 Customer pays W5,000 and cashier inputs in the system
• After work, as my hobby I buy LEGO for W4,000 on my way home.
• March 25: paid monthly rent (W10,000).
• Until end of the month, no other customer came to the store.
Sales: 5,000
Cost: 11,000
Loss: 6,000
Asset = Liabilities + Equity
Learning Objectives
After studying this chapter, you should be able to:
LO 1 Describe the corporate form and the issuance of
shares.
LO 2 Explain the accounting and reporting for treasury
shares.
LO 3 Explain the accounting and reporting issues related
to dividends.
LO 4 Indicate how to present and analyze equity.
Copyright © 2020 John Wiley & Sons, Inc. 7

Learning Objective 1
Describe the corporate form and the
issuance of shares.
LO 1 Copyright © 2020 John Wiley & Sons, Inc. 8

Share System
In the absence of restrictive provisions, each share carries the

following rights:
1. To share proportionately in profits and losses.
2. To share proportionately in management (the right to vote
for directors).
3. To share proportionately in assets upon liquidation.
4. To share proportionately in any new issues of shares of
the same class—called the preemptive right.

Variety of Ownership Interests
Ordinary shares represent the residual corporate interest that

• Bears ultimate risks of loss.
• Receives the benefits of success.
• Not guaranteed dividends nor assets upon dissolution.
Preference shares are created by contract, when
shareholders’ sacrifice certain rights in return for other rights
or privileges, usually dividend preference.

Components of Equity
Equity is often subclassified on the statement of financial
position into the following categories
1. Share capital.
2. Share premium.
3. Retained earnings.
4. Accumulated other comprehensive income.
5. Treasury shares.
6. Non-controlling interest (minority interest).

Components of Equity Diagram

Components of Equity
Ordinary Shares
Account
Contributed
Share Premium
Capital Account
Preference Shares
Two Primary Account
Sources of
Equity
Retained Earnings
Earned Capital Account
Less:
Treasury Shares
Assets –
Account Liabilities =
Equity
LO 1
11-14
Ownership Rights of Shareholders
Paper stock of SEC
Name of corporation
PAR VALUE
W5000 PER SHARE
11-15 Prenumbered LO 1
Ownership Rights of Shareholders
Common Stock
PAR VALUE
$0.001 PER SHARE
11-16 LO 1
Share Issue Considerations
AUTHORIZED SHARES
 Charter indicates the amount of shares that a corporation is
authorized to sell.
 Number of authorized shares is often reported in the equity

section.
11-17 LO 1
ISSUANCE OF SHARES
 Corporation can issue ordinary shares directly to investors
or indirectly through an investment banking firm.
 Factors in setting price for a new issue of shares:
1. Company’s anticipated future earnings.
2. Expected dividend rate per share.
3. Current financial position.
4. Current state of the economy.
5. Current state of the securities market.
11-18 LO 1
11-19
MARKET PRICE OF SHARES

 Shares of publicly held companies is traded on organized
exchanges.
 Interaction between buyers and sellers determines the prices

per share.
 Prices tend to follow the trend of a company’s earnings and

dividends.
 Factors beyond a company’s control may cause day-to-day

fluctuations in market prices.
11-20 LO 1
PAR AND NO-PAR VALUE SHARES

 Years ago, par value determined the legal capital per share
that a company must retain in the business for the
protection of corporate creditors.
 Today many governments do not require a par value.
 No-par value shares are fairly common today.
 In many countries the board of directors assigns a stated

value to no-par shares.
11-21 LO 1
11-22
Issuance of Shares
Par Value Shares
Low par values help companies avoid a contingent liability.
Corporations maintain accounts for:
• Preference Shares or Ordinary Shares.
• Share Premium.

Issuance of Shares
No-Par Shares
Reasons for issuance:
• Avoids contingent liability.
• Avoids confusion over recording par value versus fair
market value.

Issuance of Shares
Journal Entries for No-Par Shares
Illustration: Video Electronics AG is organized with 10,000 ordinary
shares authorized without par value. If Video Electronics issues 500
shares for cash at €10 per share, it makes the following entry.
Cash 5,000
Share Capital — Ordinary 5,000
Video Electronics issues another 500 shares for €11 per share.
Cash 5,500

Issuance of Shares
Journal Entry for Stated Value Shares
Illustration: Some countries require that no-par shares have a
stated value. If a company issued 1,000 of the shares with a
€5 stated value at €15 per share for cash, it makes the
following entry.
Cash 15,000
Share Premium — Ordinary 10,000

Preference Shares
Features often associated with preference shares.
1. Preference as to dividends.
2. Preference as to assets in the event of liquidation.
3. Convertible into ordinary shares.
4. Callable at the option of the corporation.
5. Non-voting.

Features of Preference Shares
Features of Preference Shares
• Cumulative
• Participating
• Convertible
• Callable
A corporation may attach whatever preferences or

restrictions it desires, as long as it does not violate its
country’s incorporation law.
The accounting for preference shares at issuance is similar to

that for ordinary shares.
Journal Entry to Issue Preference Shares
Illustration: Bishop plc issues 10,000 shares of £10 par value

preference shares for £12 cash per share. Bishop records the
issuance as follows:
Cash 120,000
Share Capital — Preference 100,000
Share Premium — Preference 20,000

Issuance of Shares
Shares Issued with Other Securities
What is the big idea?
Selling more than one type securities in a bundle for one price :
Common Stock + Preferred Stock
Two methods of allocating proceeds:

• Proportional method (Fair values of securities known)
• Incremental method (Fair value of one security is known)

Proportional Method
BE15-4: Ravonette Corporation issued 300 shares of $10 par
value ordinary shares and 100 shares of $50 par value
preference shares for a lump sum of $13,500. The ordinary
shares have a market value of $20 per share, and the
preference shares have a market value of $90 per share.

Journal Entry Using Proportional Method
BE15-4: Ravonette Corporation issued 300 shares of $10 par
value ordinary shares and 100 shares of $50 par value
preference shares for a lump sum of $13,500. The ordinary
shares have a market value of $20 per share, and the
preference shares have a market value of $90 per share.

Incremental Method
BE15-4 (Variation): Ravonette Corporation issued 300 shares
of $10 par value ordinary shares and 100 shares of $50 par
value preference 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 Using Incremental Method
BE15-4 (Variation): Ravonette Corporation issued 300 shares

of $10 par value ordinary shares and 100 shares of $50 par
value preference 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.

Issuance of Shares
Shares Issued in Noncash Transactions
The general rule: Companies should record shares

issued for services or property other than cash at the
• fair value of the goods or services received.
• if the fair value of the goods or services cannot be
measured reliably, use the fair value of the shares
issued.

Issuance of Shares
Costs of Issuing Stock
Direct costs incurred to sell shares, such as

• underwriting costs,
• accounting and legal fees,
• printing costs, and
• taxes,
should reduce the proceeds received from the sale of
the shares.

Explain the accounting and reporting
for treasury shares

Reacquisition of Shares
Companies purchase their outstanding shares to:
1. Provide tax-efficient distributions of excess cash to
shareholders.
2. Increase earnings per share and return on equity.
3. Provide shares for employee compensation contracts or to
meet potential merger needs.
4. Thwart takeover attempts or to reduce the number of
shareholders.
5. Make a market in the shares.

Purchase of Treasury Shares
Two acceptable methods:

• Cost method (more widely used).
• Par (stated) value method.
Treasury shares reduce equity.

Equity with No Treasury Shares
Illustration: Pacific Company issued 100,000 shares of $1 par
value ordinary shares at a price of $10 per share. In addition,
it has retained earnings of $300,000.
ILLUSTRATION 15.5

Journal Entry to Record Purchase of
Treasury Shares
Illustration: Pacific Company issued 100,000 shares of $1 par
value ordinary shares at a price of $10 per share. In addition,
it has retained earnings of $300,000.
On January 20, 2020, Pacific acquires 10,000 of its shares at
$11 per share. Pacific records the reacquisition as follows.
Treasury Shares 110,000

Cash 110,000

Equity with Treasury Shares
Illustration: The equity section for Pacific after purchase of
the treasury shares.
ILLUSTRATION 15.6

Sale of Treasury Shares
• Above Cost
• Below Cost
Both increase total assets and equity.

Sale of Treasury Shares Above Cost
Pacific acquired 10,000 treasury shares at $11 per share. It
now sells 1,000 shares at $15 per share on March 10. Pacific
records the entry as follows.
Cash (1,000 x $15) 15,000

Treasury Shares (1,000 x $11) 11,000
Share Premium — Treasury 4,000

Sale of Treasury Shares Below Cost
Pacific sells an additional 1,000 treasury shares on March 21
at $8 per share, it records the sale as follows.
Cash (1,000 x $8) 8,000


Sale of Treasury Shares Below Cost
(continued)
ILLUSTRATION 15.7
Assume that Pacific sells an additional 1,000 shares at $8 per share

on April 10. After eliminating the credit balance in share
Premium—Treasury, the corporation debits any additional excess
of cost over selling price to Retained Earnings.
Cash (1,000 x $8) 8,000
Retained Earnings 2,000

Retiring Treasury Shares
Decision results in
• cancellation of the treasury shares and
• a reduction in the number of shares of issued shares.
Retired treasury shares have the status of authorized and
unissued shares.

Explain the accounting and reporting
issues related to dividends.

Dividend Policy
Few companies pay dividends in amounts equal to their
legally available retained earnings. Why?
1. Maintain agreements with creditors.
2. Meet corporation requirements.
3. To finance growth or expansion.
4. To smooth out dividend payments.
5. To build up a cushion against possible losses.

Financial Condition and Dividend
Distributions
• Before declaring a dividend, management must consider
availability of funds to pay the dividend.
• Should not pay a dividend unless both the present and
future financial position warrant the distribution.

Types of Dividends
1. Cash dividends.
2. Property dividends
3. Liquidating dividends.
4. Share dividends.
All dividends, except for share dividends, reduce the total
equity in the corporation.

Cash Dividends
• Board of directors vote on the Three dates:
declaration of cash dividends.
a. Date of
• A declared cash dividend is a declaration
liability.
b. Date of record
• Companies do not declare or pay
cash dividends on treasury shares. c. Date of payment

Ex-Dividend Date and Record date Last chance to purchase
Ex-Dividend date
Cash Dividends Journal Entries
Illustration: Roadway Freight Corp. on June 10 declared a cash
dividend of 50 cents a share on 1.8 million shares payable July 16 to
all shareholders of record June 24.
At date of declaration (June 10)
Retained Earnings 900,000
Dividends Payable 900,000
At date of record (June 24) No entry
At date of payment (July 16)
Dividends Payable 900,000
Cash 900,000
ILLUSTRATION 15.10

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.

Share Dividends
Journal Entry on Date of Declaration
Illustration: Vine plc has outstanding 100,000 shares of £1 par
value ordinary shares and retained earnings of £50,000. If
Vine declares a 10 percent share dividend, it issues 10,000
additional shares to current shareholders. If the fair value of
the shares at the time of the share dividend is £8 per share,
the entry is:
At date of declaration
Retained Earnings (Share Dividend Declared) 10,000

Ordinary Share Dividend Distributable 10,000

Share Dividends
Journal Entry on Date of Distribution
Illustration: Vine plc has outstanding 100,000 shares of £1 par
value ordinary shares and retained earnings of £50,000. If
Vine declares a 10 percent share dividend, it issues 10,000
additional shares to current shareholders. If the fair value of
the shares at the time of the share dividend is £8 per share,
the entry is:
At date of distribution
Ordinary Share Dividend Distributable 10,000

Effects of Share Dividends
ILLUSTRATION 15.13

Share Splits
• To reduce the market value of shares.
• No entry recorded for a share split.
• Decrease par value and increased number of shares.
ILLUSTRATION 15.14

Share Split and Share Dividend
Differentiated
Share Split and Share 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,
o increases the number of shares outstanding.
o does not decrease the par value.
o increases the total par value of outstanding shares.

Effects of Dividends and Share Splits on
Financial Statement Elements
ILLUSTRATION 15.15

Indicate how to present and analyze equity.

Comprehensive Equity Presentation
ILLUSTRATION 15.16

Disclosure of Restrictions on Retained
Earnings
Such restrictions are best disclosed by note.
• Restrictions imposed by bond indentures and loan
agreements commonly require an extended explanation.
• The note disclosure should reveal
o the source of the restriction,
o pertinent provisions, and
o the amount of retained earnings subject to restriction or
the amount not restricted.

Disclosure of Restrictions on Retained
Earnings and Dividends
ILLUSTRATION 15.17

Statement of Changes in Equity
ILLUSTRATION 15.18

Analysis of Equity
Computation of Return on Ordinary Share Equity
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.
Return on Net Income  Preference Dividends

Ordinary Share Equity Average Ordinary Shareholders' Equity
$360,000  $54,000

$2,550,000
 12%
ILLUSTRATION 15.19
Ratio shows how many dollars of net income the company earned
for each dollar invested by the owners.

Analysis
Payout Ratio
Illustration: Troy SA has cash dividends of €100,000 and net
income of €500,000, and no preference shares outstanding.
Cash Dividends
Payout Ratio 
Net Income  Preference Dividends
€100,000

€500,000
 20%
ILLUSTRATION 15.20

Analysis
Computation of Book Value per Share
Illustration: Chen Ltd.’s ordinary shareholders’ equity is
HK$1,000,000 and it has 100,000 ordinary shares outstanding.
Book Value Ordinary Shareholders' Equity

per Share Outstanding Share
HK$1,000,000

100,000
 HK$10 per share
ILLUSTRATION 15.21
Amount each share would receive if the company were liquidated
on the basis of amounts reported on the statement of financial
position.

Discuss the different types of
preference share dividends and their
effect on book value per share.

Dividend Distribution
Non-Cumulative and Non-Participating Preference
Illustration: In 2022, Mason Company is to distribute €50,000 as
cash dividends, its outstanding ordinary shares have a par value
of €400,000, and its 6 percent preference shares have a par value
of €100,000.
1. If the preference shares are noncumulative and
nonparticipating:
ILLUSTRATION 15A.1

Cumulative and Non-Participating Preference Shares,
with Dividends in Arrears
of €100,000.
2. If the preference shares are cumulative and non-
participating, and Mason Company did not pay dividends on
the preference shares in the preceding two years:
ILLUSTRATION 15A.2

Non-Cumulative and Fully Participating Preference
Shares
Illustration: In 2022, Mason Company is to distribute €50,000 as cash
dividends, its outstanding ordinary shares have a par value of €400,000,
and its 6 percent preference shares have a par value of €100,000.
3. If the preference shares is noncumulative and is fully participating:
ILLUSTRATION 15A.3

Cumulative and Fully Participating Preference Shares,
with Dividends in Arrears
of €100,000.
4. If the preference shares are cumulative and fully
participating, and Mason Company did not pay dividends on
the preference shares in the preceding two years:
ILLUSTRATION 15A.4

No Dividends in Arrears
Book value per share is computed as net assets divided by
outstanding shares at the end of the year. The computation
becomes more complicated if a company has preference shares.
ILLUSTRATION 15A.5

Dividends in Arrears and Participating
Assume that the same facts exist except that the 5 percent
preference shares are cumulative, participating shares up to 8
percent, and that dividends for three years before the current
year are in arrears.
ILLUSTRATION 15A.6

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Intermediate Accounting

What is an Accounting Standard?

• Simply put, common set of principles, standards, and procedures that

Need for an Accounting Standard?

• To standardize the accounting policies and principles to ensure the financial

• March 1: Store Opened. First customer walks in:

Copyright © 2020 John Wiley & Sons, Inc. 7

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 8

In the absence of restrictive provisions, each share carries the

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 9

Ordinary shares represent the residual corporate interest that

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 10

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 11

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 12

 Number of authorized shares is often reported in the equity

MARKET PRICE OF SHARES

 Interaction between buyers and sellers determines the prices

 Prices tend to follow the trend of a company’s earnings and

 Factors beyond a company’s control may cause day-to-day

PAR AND NO-PAR VALUE SHARES

 Today many governments do not require a par value.

 No-par value shares are fairly common today.

 In many countries the board of directors assigns a stated

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 23

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 24

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 25

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 26

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 27

A corporation may attach whatever preferences or

The accounting for preference shares at issuance is similar to

Illustration: Bishop plc issues 10,000 shares of £10 par value

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 29

Two methods of allocating proceeds:

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 30

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 31

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 32

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 33

BE15-4 (Variation): Ravonette Corporation issued 300 shares

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 34

The general rule: Companies should record shares

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 35

Direct costs incurred to sell shares, such as

LO 1 Copyright © 2020 John Wiley & Sons, Inc. 36

LO 2 Copyright © 2020 John Wiley & Sons, Inc. 37

LO 2 Copyright © 2020 John Wiley & Sons, Inc. 38

Two acceptable methods:

LO 2 Copyright © 2020 John Wiley & Sons, Inc. 39

LO 2 Copyright © 2020 John Wiley & Sons, Inc. 40

Treasury Shares 110,000

LO 2 Copyright © 2020 John Wiley & Sons, Inc. 41

LO 2 Copyright © 2020 John Wiley & Sons, Inc. 42

LO 2 Copyright © 2020 John Wiley & Sons, Inc. 43

Cash (1,000 x $15) 15,000

LO 2 Copyright © 2020 John Wiley & Sons, Inc. 44

Cash (1,000 x $8) 8,000

LO 2 Copyright © 2020 John Wiley & Sons, Inc. 45

Assume that Pacific sells an additional 1,000 shares at $8 per share

LO 2 Copyright © 2020 John Wiley & Sons, Inc. 46

LO 2 Copyright © 2020 John Wiley & Sons, Inc. 47