BM4120 Business Accounting & Analysis PDF

Official (Open) BM4120 – BUSINESS ACCOUNTING & ANALYSIS Topic 1.2 Prepare Journal Entries for Corporate Actions of a Company (Part 2) 1 Official (Open) B...

Official (Open) BM4120 – BUSINESS ACCOUNTING & ANALYSIS Topic 1.2 Prepare Journal Entries for Corporate Actions of a Company (Part 2) 1 Official (Open) Business Accounting & Analysis Competencies to acquire 1. Prepare journal entries for the various corporate actions of a company: - Cash dividends - Bonus issue - Rights issue 2. Explain the effects on the shareholders’ equity section. 2 Official (Open) Dividends Dividends – (1) Cash dividends (2) Share dividends (Bonus shares) 3 Official (Open) DIVIDENDS  A dividend is a company’s return to its shareholders of some of the benefits of earnings, most commonly in the form of cash payments - Dividends to be declared (i.e. approved) by directors - No obligation to pay dividend until declared, which then is a liability to company 4 Official (Open) Dividends Interim Dividends Declared mid-way through the financial year Final Dividends Declared at the end of the year Dividend declared at the end of the financial year is normally paid in the following financial year 5 Official (Open) Cash Dividends Declared Declared by by board board Not Not legally legally of of directors. directors. required. required. Requires Requires sufficient sufficient Creates Creates liability liability Retained Retained Earnings Earnings at at declaration. declaration. and and Cash. Cash. 6 Official (Open) Cash Dividend Dates Date Date of of Declaration Declaration (i.e.approval) (i.e.approval) Board  Board of of directors directors declares declares the the dividend. dividend. Record  Record aa liability. liability. Date Description Debit Credit Retained Earnings ( ↓OE) $$$$ Dividends Payable (↑liab) $$$$ 7 Official (Open) Dividend Dates Date Date of of Record Record  Shareholders holding shares on this date Shareholders holding shares on this date will will receive receive the the dividend. dividend. (No (No entry) entry) X 8 Official (Open) Cash Dividend Dates Date Date of of Payment Payment  Record the payment of the dividend to Record the payment of the dividend to shareholders. shareholders. Date Description Debit Credit Dividends Payable(↓Liab) $$$$ Cash (↓Assets) $$$$ 9 Official Cash Dividend Dates - (Open) Question On On June June 1, Date Date 1, 2006, 2006, aa corporation’s Description Description corporation’s Debit Debit board board Credit Credit of of directors 15-Jul declared declared and approved aa20,000 15-Jul Dividends Dividends Payable directors Cash Cash Payable and approved 20,000 20,000 dividend dividend for 20,000 for the the 250,000 250,000 shares shares at at $0.08 $0.08 per per share. share. TheThe dividend dividend willwill be be paid paid onon July July 15. 15. Which Which of of the the following following willwill be be included included inin the the July July 1515 entry? entry? a. a. Debit Debit Retained Retained Earnings Earnings $20,000. $20,000. b. b. Debit Debit Dividends Payable Dividends$0.08 Payable $20,000. $20,000. $0.08××250,000 250,000==$20,000 $20,000total total c. c. Credit Credit Dividends Payable Dividendsdividend $20,000. dividend $20,000. Payable d. d. Credit Credit Preferred Preferred Stock Stock $20,000. $20,000. 10 Official (Open) Cash Dividend 11 Official (Open) Cash Dividend 12 Official (Open) Share Dividends Distribution Distribution of of additional additional shares shares to to shareholders. shareholders. No Nochange changein intotal total shareholders’ shareholders’ equity. equity. All All shareholders shareholders retain retainsame same percentage percentage ownership. ownership. 13 Official (Open) SHARE DIVIDENDS (BONUS SHARES) – A proportional distribution by a company of its own shares to its shareholders in proportion to the number of shares the shareholders already owned – Increases the share capital account and decreases Retained Earnings – Different from cash dividends because share dividends do not transfer the company’s assets to the shareholders – Distributed free to shareholders @ fair value Ordinary Share 14 Official (Open) Reasons for share dividends – To continue dividends but conserve cash, no cash payment – To reduce the market price of its share & increase marketability – To correct capital structure of company, where retained earnings has grown too large compared to issued share capital – To prevent takeover bid of company 15 Official (Open) Share Dividend Dates Date Date of of Declaration Declaration (i.e. (i.e. approval) approval) –– Board Board of of directors directors declares declares and and approve approve the the dividend. dividend. –– Record Record aa liability. liability. Date Description Debit Credit Retained Earnings (↓OE) $$$$ Share Dividends $$$$ Distributable (↑Liab) 16 Official (Open) Share Dividend Dates Date Date of of Payment Payment  Record the issue of the share dividend to Record the issue of the share dividend to shareholders. shareholders. Date Description Debit Credit Share Dividends Distributable (↓Liab) $$$$ Share capital (↑OE) $$$$ 17 Official (Open) Share Dividend 18 Official (Open) Summary of effects of Cash & Share Dividends. Cash Cash Share Share dividend dividend dividends dividends Total Total Shareholders' Shareholders' Decreases Decreases No NoEffect Effect Equity Equity Paid-up Paid-upCapital Capital No NoEffect Effect Increases Increases Retained RetainedEarnings Earnings Decreases Decreases Decreases Decreases 19 Official (Open) RIGHTS SHARES Additional issue of shares @ favourable price to current shareholders, in proportion to shareholding To raise additional funds for the company Lower than market price Can sell to 3rd parties -Shareholders who do not wish to subscribe can sell the rights to third parties, who then apply for the shares at the rights issue price 20 Official (Open) RIGHTS SHARES Seetoh Company has 220,000 ordinary shares issued and paid up. It wants to issue rights shares at a proportion of 1 : 5. Or basis of 1 for 5 ie. Issue price is $2.50. Right to buy 1 share for every 5 shares held (a) Calculate no. of rights shares to be issued: 220,000 / 5 = 44,000 No. of shares to be issued No. of issued shares under this rights shares 21 Official (Open) RIGHTS SHARES (b) (b) Prepare Prepare the the journal journal entries entries to to record record the the rights rights shares shares issued issued at at $2.50. $2.50. Date Description Debit Credit Cash(↑Asset) 44,000 x $2.50 110,000 Share Capital (↑OE) 110,000 Journal entries similar to issue of new shares (IPO) 22 Official (Open) RIGHTS SHARES (c) (c) Shareholders’ Shareholders’ equity equity would would reflect reflect as: as: Issued & Paidup capital 264,000 ordinary shares 220,000 + 44,000 shares 23 Official (Open) RIGHTS SHARES 24 Official (Open) Summary New Share Issue Bonus Issue/Share Rights Issue Dividend Issue to all Given to existing Issue to existing shareholders shareholders Issue price Free Share, ie no issue Issue price, usu price cheaper than mkt px No ratio Ratio to compute no. of Ratio to compute no. of bonus shares rights shares to be issued Dr Cash Dr Retained Profits Dr Cash Cr Share Cap Cr Share Cap Cr Share Cap Increase in total No change in total Increase in total shareholders’ equity shareholders’ equity & shareholders’ equity & Increase in cash no change in cash & increase in cash Official (Open) Topic 1.2 - Lecture Illustration 1 : - IPO, Bonus, Cash Dividends, Rights 26