1. CORPORATIONS: ORGANIZATION AND SHARE CAPITAL TRANSACTIONS
UNIT 11
CORPORATIONS: ORGANIZATION AND SHARE CAPITAL TRANSACTIONS

2. CORPORATE FORM OF ORGANIZATION
A corporation is a legal entity created by law that is separate and distinct from its owners

3. CLASSIFICATION OF CORPORATIONS
A corporation’s purpose may be to earn a profit, or it may be organized as non-profit.
Classification by ownership distinguishes between publicly-held corporations and privately-held corporations.

4. CHARACTERISTICS Separate legal existence
Limited liability of shareholders
Transferable ownership rights
Ability to acquire capital
Continuous life
Corporation management
Government regulations
Additional taxes

5. ILLUSTRATION 14-1 ADVANTAGES AND DISADVANTAGES OF A CORPORATION
Advantages Disadvantages
Corporate management - professional managers
Separate legal existence
Limited liability of shareholders
Deferred or reduced income taxes
Transferable ownership rights
Ability to acquire capital
Continuous life
Corporation management - ownership separated from management
Increased costs and complexity to adhere to government regulation
Potential for additional income taxes

6. ORGANIZATION COSTS
Costs incurred in forming a corporation are called organization costs.
These costs include fees to underwriters, legal fees, incorporation fees, and promotional expenditures.
Organization costs are normally expensed in the year the organization cost is incurred.

7. Forming a Corporation
File an application with the provincial or federal authorities.
Issuance of shares. A corporation has the choice of issuing common shares directly to investors or indirectly through an investment dealer (brokerage house). A first-time issue is known as an initial public offering (IPO).
Types of Shares. Shares of a company are divided into different classes, such as Class A, Class B, and so on. The different classes are often identified by the generic terms common shares and preferred shares.
Market value of shares. The market price per share is established by the interaction between buyers and sellers. Generally, the price follows earnings trends.

8. COMMON SHAREHOLDER RIGHTS
VOTING:Each share entitles the owner to one vote in the election of the board of directors and in corporate actions that require shareholder approval.
DIVIDENDS:Through the receipt of dividends a shareholder receives a portion of the profits.
PREEMPTIVE RIGHTS: In many companies and jurisdictions, common shareholders are granted the first right to purchase any additional shares in proportion to their present holdings.
RESIDUAL CLAIM: Common shareholders have a claim on corporate assets in proportion to their holdings if the corporation is terminated.

9. SHARE TERMINOLOGY
Authorized shares – maximum amount of shares a corporation is allowed to sell as authorized by corporate charter
Issued shares – number of shares sold
(issued = sold)

10. STATED AND PAR SHARE VALUES
Stated value – assigned value to no-par value shares
Par value – assigned legal capital value
Seldom Used
Must retain legal capital.
Stated and par values have NO
relationship to market value

11. Must retain legal capital. relationship to market value once issued.
NO PAR SHARE VALUES
No assigned legal capital value
Legal capital equals issue price (proceeds)
Must retain legal capital.
No-par value has NO
relationship to market value once issued.

12. ISSUING NO PAR VALUE COMMON SHARES FOR CASH
Shares are most commonly issued for cash. When no par value common shares are issued, the entire proceeds from the issue becomes legal capital.
Account Titles and Explanation
Debit
Credit
Cash
1, ,000
Common Shares
To record issue of 1,000 shares.

13. CORPORATE CAPITAL Shareholders’ equity (owner’s equity)
The shareholders’ equity section of a corporation’s balance sheet consists of:
Contributed capital
Share capital
Additional contributed capital
Retained earnings
The cumulative net income (loss) that has been retained (not issued to shareholders)

14. ILLUSTRATION 14-6 SHAREHOLDERS’ EQUITY SECTION
Contributed capital
Common shares, 100,000 no par value shares authorized, 50,000 issued
Retained earnings
Total shareholders’ equity
$800,000
130,000
$930,000

15. ISSUING STATED VALUE COMMON SHARES FOR CASH
Sated value shares cannot be sold for less than the stated value. When common shares have a stated value, the stated value is credited to Common Shares. When the selling price exceeds the stated value, the excess is credited to Contributed Capital in Excess of Stated Value.
Account Titles and Explanation
Debit
Credit
Cash
5, , ,000
Common Shares
Contributed Capital in Excess of Stated Value
To record issue of 1,000 shares.

16. SHAREHOLDERS’ EQUITY - CONTRIBUTED CAPITAL IN EXCESS OF STATED VALUE
Common shares, 10,000 shares of $1 stated value authorized,
2,000 shares issued
Contributed capital in excess of stated value
Total contributed capital
Retained earnings
Total shareholders’ equity
$ 2,000
4,000
6,000
27,000
$33,000

17. EXAMPLE

18. ISSUING COMMON SHARES FOR SERVICES OR ASSETS
Shares may be issued for services, such as compensation to lawyers, or for non-cash assets, such as land.
When common shares are issued for services or non-cash assets, cost is either the fair market value of the consideration given up or the consideration received, whichever is more clearly determinable.

19. ISSUING COMMON SHARES FOR SERVICES OR ASSETS
EXAMPLE
Panjer Corporation purchased land with a sale value of $100,000 in exchange for 20,000 shares. The shares active trading price is $4.00 per share.
Land $80,000
Common Shares (20,000 x 4.00) $80,000
To record issue of 20,000 no par value shares for land
Note that the value of the shares is recorded not the sale value of the land. If there was no market price for the shares the land value would be recorded.

20. REACQUIRED SHARES
Reacquired shares are a corporation’s own shares that have been issued, fully paid for, and then reacquired by the corporation.
Reacquired shares are generally retired and cancelled.
In certain restricted circumstances, these shares are not retired, but are held as treasury shares for later reissue.

21. REACQUISITION OF SHARES
Why would a company choose to reacquire its shares?
Reduce quantity/raise share price
Increase EPS
If authorized share limit reached, may need additional shares for use in bonus or compensation plans or acquisitions

22. PREFERRED SHARES
Preferred shares have priority over common shares with regards to:
1. Dividends and
2. Assets in the event of liquidation
Preferred shareholders usually do not have voting rights
Preferred shares are shown first in the share capital section of shareholders' equity

23. PREFERRED SHARE PREFERENCES
Liquidation preference
Cumulative (dividends in arrears)
Convertible (book value)
Redeemable/callable (company option)
Retractable (shareholder option)

24. DIVIDEND PREFERENCES CUMULATIVE DIVIDEND
A cumulative dividend requires that preferred shareholders be paid both current and prior year dividends before common shareholders receive any dividends.
Preferred dividends not declared in a given period are called dividends in arrears.
Dividends in arrears are not considered a liability, but the amount of the dividends in arrears should be disclosed in the notes to the financial statements.

25. CONVERTIBLE PREFERRED SHARES
Convertible preferred shares allow the exchange of preferred shares into common shares at a specified ratio.
This kind of share is purchased by investors who want the greater security of a preferred share, but who also desire the added option of conversion.
In recording the conversion, the book value of the preferred shares is used.
The conversion of preferred shares does not result in either gain or loss to the corporation.
The market value of the shares is not considered.

26. REDEEMABLE PREFERRED
Redeemable (callable) preferred shares grant the issuing corporation the right to purchase the shares from shareholders at specified future dates and prices.
This call feature allows some flexibility to a corporation by enabling it to eliminate this type of equity when it is advantageous to do so.
While convertible shares are for the benefit of the shareholder, redeemable shares are for the benefit of the corporation.

27. RETRACTABLE PREFERRED
Retractable preferred shares are similar to redeemable preferred shares except that the shareholder can redeem shares at their option instead of the corporation’s.
Retractable preferred shares and debt have many similarities.
Both offer a rate of return to the investor, and with the redemption of the shares they both offer a repayment of the principal investment.
Retractable preferred shares are presented in the liability section of the balance sheet rather than in the equity section because it has more of the features of debt than equity.

28. REMINDER- STATEMENT PRESENTATION OF SHAREHOLDERS’ EQUITY
In the shareholders’ equity section of the balance sheet, contributed capital and retained earnings are reported and the specific sources of contributed capital are identified.
Within contributed capital, two classifications are recognized:
1. Share capital
2. Additional contributed capital

29. ILLUSTRATION 14-10 SHAREHOLDERS’ EQUITY PRESENTATION
ZABOSCHUK INC.
Partial Balance Sheet
Shareholders’ equity
Contributed capital
Share capital
Preferred shares, $9, no-par value, cumulative, 10,000 shares authorized, ,000 shares issued
Common shares, $5 stated value, unlimited shares authorized, 400,000 shares issued
Total share capital
Additional contributed capital
Contributed capital in excess of stated value - common shares
Total contributed capital
Retained earnings
Total shareholders’ equity
$ ,000
2,000,000
2,770,000
860,000
3,630,000
1,058,000
$4,688,000

30. Average Shareholders Equity
RETURN ON EQUITY
Return on equity (or return on investment) is considered to be the most important measure of a firm’s profitability and efficiency.
Evaluates how many dollars were earned for each dollar invested by the owners.  =
Net Income
Average Shareholders Equity
Return on Equity

31. Total Shareholders’ Equity Number of Common Shares
BOOK VALUE PER SHARE
Book value per share represents the equity a common shareholder has in the net assets of the corporation from owning one share.
The formula for calculating book value per share when a corporation has only one class of shares is:  =
Total Shareholders’ Equity
Number of Common Shares
Book Value per Share

32. CALCULATION OF BOOK VALUE WITH PREFERRED SHARES
When a company has both preferred and common shares, the calculation of book value is more complex.
Steps required are:
1. Calculate the preferred shareholders’ equity (the sum of redemption price of preferred shares plus any cumulative dividends in arrears).
2. Determine the common shareholders’ equity (total shareholders’ equity less preferred shareholders’ equity).
3. Divide common shareholders’ equity by the number of common shares to determine book value per share.

33. BOOK VALUE VS. MARKET VALUE
Book value per share seldom equals market value.
Book value is based on historical costs; market value reflects the subjective judgement of thousands of shareholders and prospective investors about the company’s potential for future earnings and dividends.
Market value per share may exceed book value per share, but that fact does not necessarily mean that the shares are overpriced.