CHAPTER 15

EQUITY

Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield

15-1
 Equity

The Corporate Preference Dividend Presentation

Equity
Form Shares Policy and Analysis

Corporate law Issuance of Features Financial Presentation

Share system shares Accounting condition and Analysis
Reacquisition for and dividend
Variety of distributions
ownership of shares reporting
interests preference Types of
shares dividends
Shares split
Disclosure of
restrictions

15-2
 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.

15-3 LO 5 Explain the accounting for and reporting of preference shares.

 Preference Shares

Features of Preference Shares

 Cumulative
A corporation may attach
 Participating whatever preferences or
 Convertible restrictions, as long as it
 Callable does not violate its
country’s incorporation law.
 Redeemable

The accounting for preference shares at issuance is

similar to that for ordinary shares.

15-4 LO 5 Explain the accounting for and reporting of preference shares.

 Preference Shares

Illustration: Bishop Co. 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

15-5 LO 5 Explain the accounting for and reporting of preference shares.

 Dividend Policy

Few companies pay dividends in amounts equal to

their legally available retained earnings. Why?
 Maintain agreements with creditors.
 Meet state incorporation requirements.
 To finance growth or expansion.
 To smooth out dividend payments.
 To build up a cushion against possible losses.

15-6 LO 6 Describe the policies used in distributing dividends.

 Dividend Policy

Types of Dividends

1. Cash dividends. 3. Liquidating dividends.

2. Property dividends. 4. Share dividends.

All dividends, except for share dividends, reduce the total

equity in the corporation.

15-7 LO 7 Identify the various forms of dividend distributions.

 Dividend Policy

Cash Dividends
 Board of directors vote on the declaration of cash
dividends.

 A declared cash dividend is a liability.

 Companies do not
Three dates:
declare or pay cash
a. Date of declaration
dividends on treasury
b. Date of record
shares.
c. Date of payment

15-8 LO 7 Identify the various forms of dividend distributions.

 Dividend Policy

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
15-9 900,000 LO 7 Identify the various forms of dividend distributions.
 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.

15-10 LO 7 Identify the various forms of dividend distributions.

 Dividend Policy

Illustration: Trendler, 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, 2010, to be
distributed on January 30, 2011, to shareholders of record on
January 15, 2011. At the date of declaration the securities have a
fair value of $2,000,000. Trendler makes the following entries.

At date of declaration (December 28, 2010)

Equity Investments 750,000

Unrealized Holding Gain or Loss—Income
750,000
Retained Earnings 2,000,000
Property Dividends Payable
15-11 LO 7 Identify the various forms of dividend distributions.
2,000,000
 Dividend Policy

Illustration: Trendler, 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, 2010, to be
distributed on January 30, 2011, to shareholders of record on
January 15, 2011. At the date of declaration the securities have a
fair value of $2,000,000. Trendler makes the following entries.

At date of distribution (January 30, 2011)

Property Dividends Payable 2,000,000

Equity Investments
2,000,000

15-12 LO 7 Identify the various forms of dividend distributions.

 Dividend Policy

Liquidating Dividends
Any dividend not based on earnings reduces amounts
paid-in by shareholders.

15-13 LO 7 Identify the various forms of dividend distributions.

 Dividend Policy

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

ordinary 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
Share Premium—Ordinary 300,000
Dividends Payable
1,200,000

15-14 LO 7 Identify the various forms of dividend distributions.

 Dividend Policy

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

ordinary 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 payment
Dividends Payable 1,200,000
Cash
1,200,000

15-15 LO 7 Identify the various forms of dividend distributions.

 Dividend Policy

Share Dividends
 Issuance by a company of its own shares to
shareholders on a pro rata basis, without receiving
any consideration.

 When share dividend is less than 20–25 percent of

the ordinary shares outstanding, company transfers
fair market value from retained earnings (small
share dividend).

LO 8 Explain the accounting for small and large

15-16
share dividends, and for share splits.
 Dividend Policy

Illustration: Vine Corporation has outstanding 1,000 shares of

£100 par value ordinary 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 £130 per share, the entry is:

Date of declaration
Retained Earnings 13,000
Ordinary Share Dividend Distributable
10,000
Share Premium—Ordinary
3,000
LO 8 Explain the accounting for small and large
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share dividends, and for share splits.
 Dividend Policy

Illustration: Vine Corporation has outstanding 1,000 shares of

£100 par value ordinary 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 £130 per share, the entry is:

Date of distribution
Ordinary Share Dividend Distributable 10,000
Share Capital—Ordinary
10,000

LO 8 Explain the accounting for small and large

15-18
share dividends, and for share splits.
 Dividend Policy

Share Split
 To reduce the market value of shares.

 No entry recorded for a share split.

 Decrease par value and increased number of shares.

Illustration 15-9

LO 8 Explain the accounting for small and large

15-19
share dividends, and for share splits.
 Dividend Policy

Share Split and Share Dividend Differentiated

 Large Share Dividend - 20–25 percent of the
number of shares previously outstanding.

► Same effect on market price as a share split.

► Par value transferred from retained earnings to

share capital.

LO 8 Explain the accounting for small and large

15-20
share dividends, and for share splits.
 Dividend Policy
Illustration: Rockland Steel, Inc. declared a 30 percent share
dividend on November 20, payable December 29 to shareholders of
record December 12. At the date of declaration, 1,000,000 shares,
par value $10, are outstanding and with a fair value of $200 per
share. The entries are:

15-21 LO 8
 Presentation and Analysis of Equity

Presentation of Equity
Illustration 15-12

15-22 LO 9 Indicate how to present and analyze equity.

 Presentation and Analysis of Equity

Presentation of Statement of Changes in Equity

Illustration 15-13

15-23 LO 9 Indicate how to present and analyze equity.

 Presentation and Analysis of Equity

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 15-14

Ratio shows how many dollars of net income the company

earned for each dollar invested by the owners.
15-24 LO 9
 Presentation and Analysis of Equity

Illustration: Troy Co. has cash dividends of $100,000 and

net income of $500,000, and no preference shares
outstanding.
Illustration 15-15

It is important to some investors that the payout be

sufficiently high to provide a good yield on the share.

15-25 LO 9
 Presentation and Analysis of Equity

Illustration: Troy Co. has cash dividends of $100,000 and

net income of $500,000, and no preference shares
outstanding.
Illustration 15-16

Amount each share would receive if the company were

liquidated on the basis of amounts reported on the balance
sheet.
15-26 LO 9
  Many countries have different investor groups than the United States.
For example, in Germany, financial institutions like banks are not only
the major creditors but often are the largest shareholders as well. In the
United States and the United Kingdom, many companies rely on
substantial investment from private investors.
 The accounting for treasury share retirements differs between IFRS and
U.S. GAAP.
 The statement of changes in equity is usually referred to as the
statement of stockholders’ equity (or shareholders’ equity) under U.S.
GAAP.
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  Both IFRS and U.S. GAAP use the term retained earnings. However,
IFRS relies on the term “reserve” as a dumping ground for other types
of equity transactions, such as other comprehensive income items as
well as various types of unusual transactions related to convertible debt
and share option contracts. U.S. GAAP relies on the account
Accumulated Other Comprehensive Income (Loss).
 Under IFRS, it is common to report “Revaluation Surplus” related to
increases or decreases in items such as property, plant, and equipment;
mineral resources; and intangible assets. The term surplus is generally
not used in U.S. GAAP.
15-28
 Dividend Preferences
Illustration: In 2011, 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

LO 10 Explain the different types of preference share

15-29
dividends and their effect on book value per share.
 Illustration: In 2011, 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.

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

LO 10 Explain the different types of preference share

15-30
dividends and their effect on book value per share.
 3. If the preference shares is noncumulative and is fully participating:
Illustration 15A-3

15-31 LO 10
 Illustration: In 2011, 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.

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

LO 10 Explain the different types of preference share

15-32
dividends and their effect on book value per share.
 Book Value Per Share
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

LO 10 Explain the different types of preference share

15-33
dividends and their effect on book value per share.
 Assume that the same facts exist except that the 5 percent preference
share are cumulative, participating up to 8 percent, and that dividends
for three years before the current year are in arrears.
Illustration 15A-6

15-34 LO 10
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15-35