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SHAREHOLDER’S EQUITY

Represents the interest of


shareholders in the company
Share capital
Retained earnings
Other reserves
Key features of a corporation

Separate legal existence


Limited liability of shareholders
Free transferability of ownership
rights
Perpetual existence
Common seal
Professional management
Government regulation
Share Capital
Capital stock is divided into number of units
called shares which represent right of ownership
Authorised capital which is the maximum
number of shares that may be issued by company
as specified in memorandum of association
Issued capital is the number of shares issued by
the company
Subscribed capital is the number of shares taken
by public
Paid up capital is the amount of share capital
received by the company
Par value or face value is the minimum amount
that must be paid by the shareholder
Dividends
Dividend is distribution of cash to
shareholders.
Paid by special cheque-Dividend
Warrant
Date of record -to determine the
right of shareholder to receive
dividend
Cum-dividend and ex-dividend
Accounting for dividend
Assuming that on June 10 the BOD recommended
a dividend of 10% on 40,000 shares of Rs.10
each.The shareholders declared the dividend at
AGM on July18.The date of record was August
1.Dividend warrants were issued on August 10.

June10 Dividend 40,000


Proposed Dividend 40,000
July18 Proposed Dividend 40,000
Dividend Payable 40,000
August10 Dividend Payable 40,000
Cash 40,000
Accounting for Share Capital
Par value/Face value stock and No-par stock
Share premium-Any amount in excess of par value

X company issues 1000 shares for Rs.10 equity shares at


par.
Cash 10,000
Equity share capital 10,000
If shares are issued at Rs.15 each
Cash 10,000
Equity share capital 10,000
Share premium 5000
If 1000 shares are issued of no-par value at Rs.15 each
Cash 15,000
Equity share capital 15,000
Receipt of Share Capital in Instalments
The offer of shares to existing shareholders of a company in
pursuance of the right of pre-emption is called rights issue.

X company issued 10,000 shares of Rs.10 each at par


payable as follows: Rs.3 with application,Rs.2 on
allotment,and the balance when called.On April 3,the
company received applications for 15,000 shares.On May
20,the company board allotted 10,000 shares and refunded
the application money for remaining shares.The amounts
payable on allotment were received on June 25.On August
7,the board made the first call for Rs.3 per share and the
amounts were received on September 16.The second and
final call was made on November 22 and the amounts were
received on December 29.Assume that X company did not
receive the amount on second call on 100 shares and the
shares were forfeited on January 17.
April 3 Cash 45,000
Share application and allotment
45,000

May 20 Share application and allotment 65,000


Equity share capital
50,000
Cash 15,000

June 25 Cash 20,000


Share application and allotment
20,000

Aug 7 First share call 30,000


Equity share capital
30,000

Sep 16 Cash 30,000


Share first call 30,000
Nov 22 Share second and final call 20,000
Equity share capital 20,000

Dec 29 Cash 20,000


Share second and final call 20,000

Jan 17 Equity share capital 1000


Shares second and final call 200
Shares forfeited 800
Preference Share Capital
Preference over equity shareholders with
respect to dividend payments and
distribution of assets on liquidation
Fixed rate of dividend
Cumulative and non-cumulative
preference shares
Participating and non-participating
preference shares
Redeemable and non-redeemable
preference shares
Convertible and non-convertible
preference shares
Reserves
Capital reserve is one that is not available for dividend
payment.e.g.share premium and capital redemption reserves
Revenue reserves arise from business operations and
distributed as dividends.e.g.P/L account and general
reserves
Statutory reserves are created to comply with requirement
of laws.e.g.investment allowance reserves and export profit
reserves
Realised reserves represent cash or other assets received in
exchange transactions.e.g.Profit on sale of equipment
Unrealised reserves are accounting entries without any
exchange transactions.e.g.Revaluation reserves

Appropriation is the process of transfer of amounts from the


current P/L account to various reserve accounts such as
general reserve,contingency reserve,dividend equalisation
reserve and development reserve.
Buy-Back of shares
Companies are allowed to re-acquire their own shares
Reasons: to avoid hostile takeover,to maintain favourable
market price of shares,to be given to employees as
bonuses,to reduce the share capital
Act stipulates buyback shall not exceed 25% of paid-up
capital and free reserves
X company has 10,000 shares of Rs.10 each and a balance
of Rs.50,000 in the share premium account.The company
decides to buy back 200 shares at Rs.25 each.
Equity share capital 2000
Share premium 3000
Cash 5000
Companies Act require transfer to capital redemption
reserve account of a sum equal to nominal values of buy
back shares
Share premium 2000
Treasury stock Operations
Treasury stock is company’s own share capital that was
issued and reacquired by company as investment
It may be equity or preference shares,held for any period
of time,reissued or retired
Dividends and voting rights are not there
Excluded for calculation of EPS
Purchase of treasury stock: X company purchases 1000 of
its fully paid shares at Rs.22 per share
Treasury stock 22,000
Cash 22,000
Reissuance of treasury stock: Reissued at cost,above cost or
below cost
X company sells 500 of the treasury shares purchased at
Rs.22 for Rs.25
Cash 12,500
Treasury stock 11,000
Share premium,treasury stock 1,500
Bonus Shares
Additional shares of a company’s share capital distributed
to its shareholders without having to pay for them
Also known as capitalisation of reserves
Reasons:To avoid strain on cash by payment of
dividend,to reduce the market price of shares by increasing
the number of shares,to signal to shareholder’s their belief
about company prospects
Issued out of R.E. or other reserves(issued by capitalising
share premium and P/L account)
X company issues 1,00,000 shares of Rs.10 par value and
has Rs.4,00,000 in share premium account,Rs.2,30,000 in
revaluation reserve and Rs.2,50,000 in P/L account.BOD
declares 50% bonus on August 10,distributable on
September 30.
Sept 30 Share premium,Equity 4,00,000
R.E.(or/L account) 1,00,000
Equity share capital 5,00,000
Stock split:it results in the increase in the
number of share in the market but does not affect
the shareholder’s equity
Stock-based compensation:The employees
receives shares of stock or stock options,or the
employer incurs a liability to the employee in
amounts based on the price of the employer’s
stock
A stock option plan gives the employees the
right to acquire shares in future at less than market
price
It is used to attract,motivate and retain
employees by fast-growing,knowledge-based
companies that do not pay large salaries
A minimum service period is required to be
eligible for options
EPS
Important measure of corporate performance for
shareholders and potential investors
EPS= PAT/ Number of equity shares(only equity share
capital)
EPS= PAT-preference dividend/ Number of equity
shares(equity and preference share capital)
Issue and buy back of share: X issued 1,00,000 shares on
April 1,2004and issued 50,000 shares on July 1,2004 and
brought back 30,000 shares on March 31,2005
100000 X 3/12= 25,000
150000 X 6/12 =75,000
120000 X 3/12= 30,000
TOTAL =130000
EPS =500000/130000=Rs.3.85
Bonus issue and share split: X company issued 50% bonus
issue on October 1,2005 and PAT for the year is 5,22,000
Total shares=2,40,000+1,20,000 =3,60,000
EPS = 5,22,000/3,60,000 = Rs.1.45

Diluted EPS : In companies having complex capital


structure that includes securities that may be converted into
equity share capital.Examples of potentially dilutive
securities include convertible preference shares,convertible
debentures,options,and warrants.
Assumption is that all potentially dilutive securities were
converted into equity shares

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