Chapter 15 & 16

Organizational Costs

Organizational costs are costs incurred to set up a business; such costs include legal fees and promoter’s fees.

Organizational costs are an intangible asset, where half of the costs may be expensed for tax purposes at a 10% declining-balance method.

The journal entry for organizational costs is:

Organizational Costs      XX

            Cash                         XX


Financial Statements for a Corporation

Income tax expense occurs in a corporation where net income means income after tax.

Statement of retained earnings replaces statement of owner’s equity in a proprietorship

It measures changes that result from net income, which increases retained earnings, and dividends, which decreases retained earnings.

Shareholder’s equity in a corporation is divided into share capital and retained earnings. Total shareholder’s equity is the sum of the two.



Shares are issued in exchange for cash and in this case the journal entry is:

Cash                                XX

            Common Shares       XX

Other assets can also be exchanges for common shares and the journal entry is:

Asset (cash, land, building, etc)       XX

            Common Shares                         XX


Preferred Shares

Preferred shares are another class of corporate shares and often include a preference of payment of dividends and distribution of assets in liquidation.

Different types of preferred shares are:

Cumulative preferred shares– entitle preferred shareholders to receive all their past as well as current dividends before the common shareholders may receive any dividends.

Non-cumulative preferred shares– entitle preferred shareholders to receive only their current dividends if declared and cannot claim any previous dividends which weren’t declared at the time.

Unpaid dividends/Arrears– they appear on the balance sheet when declared, but one must place a footnote to disclose the amounts.

Participating preferred shares– entitle the preferred shareholder to additional dividends including their stated amount

Convertible preferred shares– allow one to exchange preferred shares for a fixed number of common shares

Journal entry for issuing preferred shares is:

Cash                               XX

            Preferred Shares      XX




Dividends are a distribution of earning and they decrease retained earnings as one pays dividends with cash from retained earnings.

There are three important dates that affect dividends:

Date of declaration-record the dividend as a liability

Date of record-nothing is recorded

Date of payment-record payment to shareholders

There are two methods when it comes to paying dividends which are:

Method 1

1. Retained Earnings                             XX

               Common Dividends Payable      XX

2. Common Dividends Payable            XX

                Cash                                           XX


Method 2

  1. Cash Dividends Declared                XX

          Common Dividends Payable      XX

  1. Common Dividends Payable           XX

                Cash                                            XX

  1. Retained Earnings                           XX

                Cash Dividends Declared           XX

Preferred Dividends– a fixed amount that must be paid before the common shareholder receives dividends. It is used as leverage for the common shareholders. It is a way to raise capital and one doesn’t lose control. The preferred shareholder earns a fixed return and any excess in profits is considered a return for common shareholders.

The journal entry for preferred dividends is:

1. Retained Earnings                             XX

                Preferred Dividends Payable      XX

2. Preferred Dividends Payable             XX

                Cash                                            XX

Shock Dividends– A corporation distributes additional shares from its own stock to shareholders and they do not receive any payment for doing so.  This transfers a portion of equity from retained earnings into contributed capital. This increases retained earnings.

This is done to keep the market price of stock affordable and conserves cash for the expansion of a business. It also provides evidence for management that a company is doing well.

The journal entry for declaring and distributing stock dividends is:

1. Retained Earning                                             XX

            Common Share Dividends Distributable      XX

2. Common Share Dividends Distributable         XX

            Common Shares                                            XX


Stock Splits

Distributing additional stock to shareholders according to their percentage ownership and calling in outstanding shares and replacing them with more than one new share for each old share is a stock split. There are no journal entries and only affect the shareholder’s equity as the number of shares increases or can decrease if it was a reverse stock split, which reduces the number of shares.


Repurchase of Shares

Corporations may choose to repurchase shares that may have retired or been cancelled from its outstanding share capital.

Nothing is gained on repurchasing shares, but Contributed Capital from Retirement of Common Shares may remain is shares are retired for less than the average of the issue price.

Retained earnings decreases when retired shares are retired for more than the average issue price.

The journal entry for repurchasing shares that were retired for more than the average issue price is:

Common Shares         XX

Retained Earnings      XX

            Cash                     XX

If there is a balance in Contributed Capital from Retirement of Common Shares, then this account is used for the extent of its balance.

The journal entry is:

Common Shares                                                                             XX

            Contributed Capital from Retirement of Common Shares      XX

            Common Shares                                                                       XX


Earnings per Share

The formula for basic earnings per share is:


Basic earnings per share = (Net income-preferred dividends) / Weighted average of outstanding common shares

 By: Niesanthan, Kuzie, Deep, Chris, Hanaga, Kojana

Capital Assets

  • Assets that are used in the operation of a company and have useful lives that are longer than one period


  • cost that helps match the cost of a capital asset over the time the asset is used
  • Amortization Expense and Accumulated Amortization are used to record amortization over the period and the useful life of an asset
  • Amounts used to calculate amortization are:
    • Cost – the initial cost of the asset
    • Salvage Value – the estimated value of the asset at the end of its useful life
    • Useful Life – the estimated length of time the asset can be used
    • Units Produced – the estimated number of units the asset can produce through its useful lifetime
    • Methods of Amortization:
      •  Straight Line Method– the same amount is amortized each full period of the asset’s useful life
  • Double Declining Balance Method* – larger amounts are amortized during the earlier years of the asset’s useful life and decreases year after year
    • * salvage is not used in calculations, and be careful not to exceed the total value
  • Units of Production Method*– amortization calculated by the number of units that are produced in each period
    • * Remember to Check if the estimated total units of production is equal to the actual units of production
    • To journalize amortization, debit amortization expense and credit accumulated amortization

Partial Year Amortization:

  • Two methods of amortization
    • Nearest whole month
    • Half year rule: first year is always half a year regardless of time of purchase

Revising Amortization Rates

  • When it is discovered that the original estimate was inaccurate one must change the amortization
    • One revises the rate when:
      • Assumptions are changed
      • The device changed or an addition was made 
      • Example: Ronald has purchased a tickle machine for $1000 on Jan 2nd 2005 and estimates it will have a life of 4 years and have a final salvage value of $100. At 2006 he sprays it with scented lavender adding $225 to the device and increased the life by 1 year. What was the amortization expense in 2006.
      •  (1000-100)/4 = 225
      • 1 * 225 =225
      • ((1000-225)+225))/(4-1+1) = 225


Disposal of Capital Assets

  • Discarding, selling or exchanging assets due to obsolescence or damage


Journalizing Steps

  1. Record amortization expense up to date of disposal
  2. Update accumulated amortization
  3. Remove the balance of disposable asset
  4. Record the cash or account receivable
  5. Journalize any loss or gain from the book value


  • If the asset is fully amortized, and there is no loss, it would be journalized as an example below:
    • Ex, A machine costing $2000, with accumulated amortization of $2000 is discarded on April 17th, 2005.


Apr 17   Accumulated amortization, machine      2000

                                Machine                                                                              2000

                    To record disposal of asset.

  • If the asset is not fully amortized, then record a loss (debit) equal to the book value.     
    • Ex. A machine costing $8000 with accumulated amortization of $6000 on December 31st, 2008 is discarded on July 1st, 2009. The equipment is being amortized for 8 years w/o salvage value.



Jul 1       Amortization expense, machine                                              500        

                                Accumulated amortization, machine                      500

                    To record amortization.


Jul 1       Accumulated amortization, machine                      6500

                Loss of disposal                                                                                1500      

                                Machine                                                                                              8000

                   To record the disposal of machine.


Selling Capital Assets

  • When the value received for the asset sold is greater than its book value, it is a gain.
  • When the value received for the asset sold is less than its book value, it is a loss.
  • Debit: cash received and accumulated amortization
  • Credit: asset cost
    • Ex. Fitness equipment costing $16000 with accumulated amortization of $12000 (on Dec 31st, 2009) is sold on April 1, 2010 for $7000. Annual amortization is $4000 (straight-line).


Apr 1     Amortization expense, equipment                                         1000

                                Accumulated amortization, equipment                                                1000

                   To record amortization.


Apr 1     Cash                                                                                                                      7000

                Accumulated amortization, equipment                                                13000

                                Equipment                                                                                                         16000

                                Gain of disposal                                                                                               4000

                   To record disposal of equipment.

Intangible Assets

Intangible assets serves are rights, privileges and competitive advantage to the owner of these capital assets. Intangible assets as the name suggests has no physical form and are usually acquired for operational use. These assets are also non-current assets, and their useful life is hard to determine due

Examples of Intangible assets:

  • Patents
  • Copyrights
  • Leaseholds
  • Leasehold Improvements
  • Goodwill
  • Trademarks and Trade Names


Amortization for Intangible assets

  • Amortize over a shorter economic/ legal life, and has a maximum of 40years
  • No contra accounts (ie of contra account is accumulated amortization)
  • Amortization account is an expense
  • Use straight line method unless told otherwise


  • Is an exclusive right to a company to manufacture and sell patented goods/ machine
  • When purchased the account “Patents” is debited
  • The cost is amortize over the shorter of its legal life/ estimated useful life



  • Granted by the federal government or by international agreement
  • Gives the owner the exclusive right to publish and sell their artistic work (music, literacy, or art)
  • Useful life: the life of the creator + 50 years (however most copyright has a shorter life)
  • Amortized over its useful life


  • Goodwill is no longer amortized under revised Canadian GAAP
  • The amount by which the amount paid for a company exceeds its market value
  • ONLY purchased goodwill is intangible


its the long awaited chapter 12 quiz!!!!


links right down belowwww


part one
part two

here is part two of the beautiful quiz we have prepared



here is the link to the first 5 questions of our little quiz, brought to you by sam & associates:


Samuel Tang & Hulland Bui



-CEO’s, the head, the big cheese, everybody knows of them, and everybody wants to be them.

-They are easily one of the highest paid positions within a company, often times, make at least 10 times what the President of the United States makes.

-Their pay cheques are often within the millions

-There is a CEO for every company that you can imagine

-Some CEO’s that you may know are, Steve Jobs (apple), Bill Gates (Microsoft), Warren Buffet (Berkshire Hathaway), Larry Page (Google), Mark Zuckerberg (facebook).

-These people usually have more money than they can even use, however many of them are philanthropists.



Well first of all, executives would be paid “an executive compensation” this basically means that their pay consists of many different things combined. Such as stock options, golden parachute, bonuses, etc.

-Ted Rogers, $21.5 million

-The President, $400,000

-Steve Jobs, $1

Why is this so low?



You may be wondering why there is such a huge range, and why the CEO of Apple only makes $1 a year.

(Well, in reality, Steve Jobs doesn’t actually make $1, that’s just what it says on his job description)

How else would he get his money?

(Well, sometimes they would be paid in the form of shares and bonuses)

Before SFAS 123 and all of that jazz, companies didn’t need to write down any of the salary given in the form of shares.

In 2006 the FASB required companies to expense the value of the stock options given to employees. Before that, SFAS 123 required only to state that they used stock options in the foot note and to state a fair value, because stating the stock prices would have a “negative effect” on their actual stock prices.

They didn’t put it into full effect because the dot com boom relied heavily upon stock options that they gave to their employees, because they weren’t seen as that profitable or profitable yet. Also it gave incentive to work harder, as the results would directly affect you. Some companies took the initiative of starting to put in stock option expense in order to give themselves a good rep, in light of all the companies that were being exposed for accounting fraud.

So, the problems were that CEO’s would artificially pump up their stock prices to increase their gains (if they were planning on leaving sooner).

It wouldn’t show up on the income statements.

It has its advantages when it comes to taxes as well. Certified/official stock option is not taxed, when received the option grant, this is because the number is ever fluctuating. Non-qualified stock options however are taxed.

Options Backdating, so some would state the expense as the lowest day that the stock has closed within the month.

June 15, 2005 was when companies had to start expensing stock options, which solved only one of the major problems. It was the GAAP SFAS 123(R).

The Financial Accounting Standards board (FASB) pushed the new trendy rule called the SFAS-123.  What was this rule?  This rule made all companies post their stock options as expenses on their income statement.  As of a result of this, there were net income reductions and also this gave stockholders a better glimpse of everything.


Work Cited:


Pizzigati, S.(2008, September 16) Let’s get serious about CEO pay.

Retrieved March 22, 2011 from ourfuture.org

< http://www.ourfuture.org/blog-entry/2008093816/let-s-get-serious-about-ceo-pay>


Knowledge @ Horton, (2006, May 3) How new accounting rules are changing the way CEO’s are getting paid.

Retrieved March 22, 2011 for Knowledge @ Horton

< http://knowledge.wharton.upenn.edu/article.cfm?articleid=1465>


Financial Accounting Standards Board, Summary for interpretation No.44.

Retrieved March 22, 2011 from fasb.org

< http://www.fasb.org/summary/finsum44.shtml>


(2004, September 21) Bill Gates Quotes:  Wealth quotations – Master of Business, Online celebrities News, Reference and Society

Retrieved on April 6th, 2011 from money.cnn.com

< http://money.cnn.com/2004/09/21/technology/gates_pay/index.htm >


Williams. R (2010, August 5) Are CEO salaries out of control?

Retrieved on April 6th, 2011 from business.financialpost.com

< http://business.financialpost.com/2010/08/05/are-ceo-salaries-out-of-control/#comments >


Peterson. J (2010, April 22) Are CEO salary and compensation plans of control-YES

Retrieved on April 6th, 2011 from www.usmoneytalk.com

< http://www.usmoneytalk.com/finance/are-ceo-salary-and-compensation-plans-out-of-control-yes-904/ >


“CEO pay greed soars out of control while workers earn less”

Retrieved on April 6th, 2011 from http://www.fa-ir.org

< http://www.fa-ir.org/ai/wagegap.htm >


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