Docstoc

Accounting for Companies

Document Sample
Accounting for Companies Powered By Docstoc
					ACCG204 Accounting for Business Two

Lecture 5 Accounting for Companies - 1

Objectives
1. Identify the characteristics of a company 2. Differentiate between different classes of shares 3. Record the issue of shares

Objective 1
Identify the characteristics of a company

Separate legal entity
In the eyes of the law, a company has an existence separate from its owners. This means it has the rights and obligations of a natural person. It can: buy, sell and own property enter into contracts sue and be sued.

Continuous life and transferability of ownership
Most companies have a continuous life which is independent of the company’s ownership. The equity of a company is divided into shares. The owners are called shareholders. The transfer of shares (change of ownership) does not affect the life of the company.

No mutual agency
A shareholder cannot conduct business on behalf of the company, or commit the company to a contract.

Limited liability
Shareholders are not responsible for the debts of the company If a company cannot pay its debts, the obligation of the shareholders is limited to any amount unpaid on their shares, so if the shares are fully paid, the shareholder is under no obligation to pay more. The most a shareholder can lose is the price of the fully paid shares

Separation of ownership and management
Most shareholders play no direct part in management. They elect the board of directors who then appoint the executives who manage the business.

Company taxation
Companies are recognised as legal entities in their own right and therefore pay tax on their earnings. Shareholder earnings are in the form of dividends which are paid by the company on after tax profits. There is a dividend imputation system in place in Australia so shareholders do not have to pay income tax on dividends on which the tax has already been paid (franked dividends)

Government regulation
Companies are subject to many regulations in order to protect creditors and shareholders. The Corporations Law dictates many of the requirements of companies, particularly in relation to the disclosure of information.



A quick quiz

………….

1. A shareholder has no personal obligation for
debts of the business. This is called: A. B. Mutual agency Transferability of ownership

C.
D.

Limited liability
Limited agency

2. The company’s board of directors is:
A. B. appointed by the government elected by shareholders

C.
D.

elected by management
Appointed by ASIC

Organisation of a company






To set up a company, the organisers (promoters) lodge an application with ASIC (the Australian Securities and Investments Commission), along with an application fee. A certificate of registration is then issued and the company comes into existence as a legal entity. Companies are subject to the Corporations law. However, the Corporations Law basic rules for management are mostly replaceable and the company constitution, which regulates the specific company, may change some or all of these rules.

Shareholders’ Equity
Equity in a company has two main components 1. Share capital (also known as issued capital or contributed equity) is the issue price of the shares. Shares in public companies are traded on the stock exchange so the current market price may be very different to the issue price.

2. Retained Profits are those profits retained by the company, i.e. they have not been paid out as dividends to the shareholders

Classes of Shares
– –

–

Ordinary shares - are issued by all companies Ordinary shareholders are entitled to four basic rights, unless specific rights are altered or withheld by agreement.

Vote
Each share entitles the shareholder to one vote unless stated otherwise in the constitution

Dividends
Each shareholder is entitled to a proportionate share of any dividends paid to shareholders in that class. This means that if you own 10% of the shares in a class, you will get 10% of the dividend paid to that class. However, this does not mean the shareholders are guaranteed a dividend

Payment on Liquidation
If the company liquidates, shareholders are entitled to their proportionate share of any assets remaining after payment of creditors and other liabilities.

Pre-emption
The Oxford dictionary defines pre-emption as: “Purchase by one person or corporation before an opportunity is offered to others” This means that if there is a new share issue, the existing shareholders are given the option of subscribing to the issue (buying the shares) before the shares are offered to the public. A person who has a 10% shareholding will be offered 10% of any new shares issued. Shareholders have the right to maintain their proportionate ownership of the company.

Preference shares
–

–

–

–

–

–

Are preferred as to payment of dividends, usually a set amount. E.g. 9% preference shares paying a dividend of 9% of the issue price each year. They are also preferred as to return of capital in case of a wind up. This means they will have their capital returned before that of ordinary shareholders in case of a wind up. Unless otherwise stated they share the same rights as ordinary shareholders but they: - May not have voting rights - May be issued for a set term after which they are bought back (Redeemable preference shares) - May be convertible at the end of their term to ordinary shares



A quick quiz

………….

1. The ownership of ordinary shares entitles the
shareholder to all the following rights except: A. B. Voting right Right of pre-emption

C.
D.

Right to a proportionate share of assets on liquidation
Right to a guaranteed dividend

2. The right of pre-emption means:
A. Existing shareholders have the right to take up a new share offer before anyone else If new shares are offered, existing shareholders must buy them Shareholders have the right to maintain the same proportionate ownership of shares Shareholders have the right to a proportionate share of assets on liquidation

B. C.

D.

Objective 3 Record the Issue of Shares

Raising funds
There are two ways in which a public company can raise funds from the public; by issuing shares (equity) and by issuing debentures (debt).

Issuing shares
Before issuing shares to the public, a company first issues a prospectus. This is a document describing the company and the terms of the share issue. It also contains an application form which the applicant must return, along with application money. The application money may be the full price of the shares applied for or a portion (part payment). If the company accepts the application it allots (issues) shares to the applicant.

Share Issue
In order to record the issue of shares we will consider one company.

Example – Share Issue

Now let’s look at each item separately

Issuing founder shares – not a public share issue




July 1 2003 The partnership of Hamid and Lee incorporated as HL Ltd. On this date 20,000 ordinary shares were issued to each of the former partners for $5 each

Issue of founder shares
Amount raised = 20,000 x 5 x 2 = $200,000

Issuing founder shares
July 1 03 Cash Ordinary Share Capital

200,000 200,000

40,000 ordinary shares issued to company founders

Public share issue
 

Aug 1 2003 A prospectus was issued inviting the public to apply for 100,000 ordinary shares at a price of $5 payable in full on application



There is no transfer of funds so no transaction is recorded at this date

Public share issue




Sep 15 2003 Closing date for applications. Applications were received for 110,000 shares. 100,000 shares were allotted and refunds were made to unsuccessful applicants

Oversubscription
When a share offer is made it is common for the number of shares applied for to be greater than the number of shares available for allotment. The issue is then said to be oversubscribed. The application money received is placed in a temporary Trust Cash account as the company is not entitled to the money till the shares are allotted.

There are 4 steps to this entry
1. Receipt of application money 2. Issue (allotment) of shares 3. Refund excess application money (if any) 4. Bank remaining money

Receipt of application money


How much was received? 110,000 x $5 = $550,000 How much was due? 100,000 x $5 = $500,000 How much was refunded? 550,000 – 500,000 = $50,000 How much was banked?

The amount due, which was

$500,000

Public share issue
1. Receipt of application money

Sep 15 03 (1) Trust Cash 550,000 Application 550,000 Applications received for 110,000 ordinary shares

Ledger of HL Ltd
Ordinary Share Capital
1/7/03 Founder shares

200,000

Application
15/9/03 (1) Received

550,000

Trust Cash
15/9/03 (1) Received

550,000

Public share issue
2. Allotment (issue) of shares
Sep 15 03 (2) Application Ordinary Share Capital 100,000 shares allotted

500,000

500,000

Ledger of HL Ltd
Ordinary Share Capital
1/7/03 Founder shares 15/9/03 (2) Public Issue

200,000 500,000

Application
15/9/03 (2) Public issue

500,000

15/9/03 (1)

550,000

Trust Cash
15/9/03 (1)

550,000

Public share issue
3. Refund excess application money

Sep 15 03 (3) Application 50,000 Trust Cash 50,000 Refund of excess application money

Ledger of HL Ltd
Ordinary Share Capital
1/7/03 Founder shares

200,000 500,000

15/9/03 (2)

Application
15/9/03 (2)
15/9/03 (3) Refunds

__________________________________________________________________________________________________________________________________________________

Bal

500,000 50,000 0

15/9/03 (1)

550,000

Trust Cash
15/9/03 (1)

550,000

15/9/03 (3) Refunds

50,000

Public share issue
4. Transfer balance of trust account to normal Bank account

Sep 15 03 (4) Cash Trust Cash Trust account closed

500,000 500,000

Ledger of HL Ltd
Ordinary Share Capital
1/7/03 Founder shares

200,000 500,000

15/9/03 (2)

Application
15/9/03 (2) 15/9/03 (3) Balance

500,000 50,000

15/9/03 (1)

550,000

0 Trust Cash

15/9/03 (1)

550,000 15/9/03 (3)
15/9/03 (4) Banked

__________________________________________________________________________________________________________________________________________________

50,000 500,000

Bal

0

Important
Both the Application account and the Trust Cash account must be closed once the shares are allotted

Issuing Shares as payment for assets other than cash
Nov 30 2003 40,000 8% preference shares of $10 each were issued to pay for factory premises When a company issues shares in exchange for assets other than cash, the assets are recorded at their current market value

Issuing shares for assets other than cash
Nov 30 03 Factory Premises 400,000 Preference Share Capital 400,000 Shares issued in payment for factory premises

Public share issue Shares payable in instalments
Sometimes the share issue does not require full payment at the time of application. This is called Payment by instalment. Temporary accounts are set up to record amounts due on application, at allotment and any calls.

These are the terms of the issue as set out in the prospectus

Amount due on application is the amount of application money due for the shares that are allotted (Not to be confused with the amount of application money actually received)

Amount due on allotment is additional money to be paid when the shares are allotted (issued)

Amount due on call If the shares are not fully paid on application and allotment, the company can ask for further payment later. This is known as making a call on the shares.

Entries increasing equity
When shares are issued:
Application
Amount due on application Amount due on allotment Total due on both

Allotment

Share Capital

Entries increasing equity
When a call is made:
Call
Amount due on the call

Share Capital

Amount due on the call

Public share issue Shares payable in instalments
Feb 10 2004 A prospectus was issued inviting the public to apply for 50,000 shares of $6. The shares were to be paid for $2 on application, $2 on allotment, with the remainder to be called as and when needed No transfer of funds here so no transaction

Public share issue Shares payable in instalments
Mar 31 2004 Closing date for applications. Applications were received for 60,000 shares. 50,000 shares were allotted to the applicants on a pro-rata basis and the directors reserved the right to retain excess application money and apply it towards allotment and future calls

Oversubscription
When there is an oversubscription, the shares may be allotted on a first come first serve basis or the directors may allot a lesser number than those applied for by each applicant. For example, each applicant may be allotted 4 shares for every 5 applied for. This is a pro-rata allotment (as in this example)

Excess application money
If the shares are payable in instalments, the excess application money may be applied towards that due on allotment and future calls. In order for this to occur, the directors must let the investors know that they have reserved this right (included in the terms of the issue). Otherwise the excess application money is refunded

Accounting for the issue


1. 2. 3. 4.

The accounting treatment is similar to the 4 step process described before, but excess application money is transferred to Allotment and (when necessary) future calls Record receipt of application money Allot shares Transfer excess application money to allotment and future calls Close Trust account to normal bank account

Shares payable in instalments
1. Receipt of application money




Amount received on application = 60,000 x $2 = $120,000 Mar 31 04 (1) Trust Cash Application





120,000
120,000





Applications received for 60,000 ordinary shares

Ledger of HL Ltd
Ordinary Share Capital
Bal B/F

Pg 61
700,000

Application
31/3/04 (1) Received

120,000

Trust Cash
31/3/04 (1) Received

120,000

Shares payable in instalments
2. Allotment (issue) of shares
 

Amount due on application = 50,000 x $2 = $100,000 Amount due on allotment = 50,000 x $2 = $100,000



(2)







Application 100,000 Allotment 100,000 Ordinary Share Capital 200,000 50,000 ordinary shares allotted

Ledger of HL Ltd
Ordinary Share Capital
Bal B/F 700,000 200,000
31/3/04 (2) Public Issue

Application
31/3/04 (2) Amount Due

100,000 31/3/04 (1)

120,000

Allotment
31/3/04 (2) Amount Due

100,000

Shares payable in instalments
3. Transfer of excess application money to Allotment and Future Calls
Excess application money $120,000 - $100,000 = $20,000 This is less than the amount due on allotment so the whole amount can be transferred to the Allotment account (3) Application 20,000 Allotment 20,000 Excess application money transferred
   

Ledger of HL Ltd
Ordinary Share Capital
Bal B/F
31/3/04 (2)

700,000 200,000

Application
31/3/04 (2) 31/3/03 (3) Transfer Bal

100,000
20,000

31/3/04 (1)

120,000

____________________________________________________________________________________________________________________________________________________________

0

Allotment
31/3/04 (2)

100,000 31/3/04 (3) Transfer

20,000

The Application account is now closed

Shares payable in instalments
4. Transfer of money to normal Bank account

(4) Cash 120,000 Trust Cash 120,000 Application money transferred on allotment of shares

Ledger of HL Ltd
Trust Cash
31/3/04 (1) 120,000 0
31/3/04 (4) Banked

120,000

______________________________________________________________________________________________________________________________________________________________________

Bal

The Trust Cash account is now closed

Ordinary Share Capital

Trust Cash
(1) Bal 120,000 0 (4) 120,000
________________________________________________________________

B/F 700,000
(2) 200,000

Application
(2) (3) Bal 100,000 20,000 0 (1) 120,000

Allotment
(2) 100,000 (3) 20,000

____________________________________________________________

Shares payable in instalments
April 30 2004 The balance owing on allotment was received

Shares payable in instalments
Balance owing on allotment received
Amount owing on allotment = Amount due on allotment – Excess application money transferred to Allotment = $100,000 – $20,000 = $80,000

Apr 30 04 Cash 80,000 Allotment 80,000 Balance owing on allotment received

Ledger of HL Ltd
Allotment
31/3/04 (2) Bal 100,000 31/3/04 (3)
30/4/04 Balance rec’d 0

20,000
80,000

______________________________________________________________________________________________________________________________________________________________________

The Allotment account is now closed



A quick quiz

………….

1.

Mallory Ltd offered 20,000 ordinary shares of $6 each payable in full on application. Applications were received for 23,400 shares. 20,000 shares are allotted and the excess application money was refunded

The amount received was …$140,400 The amount due was …

$120,000

The amount refunded was … $20,400 The amount banked was … $120,000

Using the amounts just calculated, record the 4 steps of the share issue
1. Trust Cash Application 140,400 140,400

2. Application 120,000 Ordinary Share Capital 120,000
3. Application Trust Cash 4. Cash Trust Cash 20,400 20,400 120,000

120,000

To be continued …
End of Lecture 5


				
DOCUMENT INFO
Categories:
Stats:
views:166
posted:6/24/2009
language:English
pages:78
Description: Identify the characteristics of a company Differentiate between different classes of shares Record the issue of shares