Companies Formation

8/9/2019 Companies Formation

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Chapter 16Companies:

Formation and Operations

Chapter 16Companies:

Formation and Operations


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Learning Objectives

1. Understand the different types of companies which are permitted to exist bylaw in the Australian business environment

2. Appreciate the advantages anddisadvantages of the corporate form of organisation

3. Understand the documentation required for forming a company

4. Appreciate the management structurecommonly used for administering acompany


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Learning Objectives (contd)

5 . Understand the three main categories of equity in a company

6. Account for the issue of shares7. Understand the basic differences between

ordinary and preference shares8. Account for the declaration and payment of

cash dividends on shares, share dividendsand share splits


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Learning Objectives (contd)

9 . Account for the creation and reduction of the different types of reserves that areincluded in equity

10. Prepare the basic entries for income taxexpense in a company

11. Prepare a companys income statement

and balance sheet for internal use


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Lecture References

H oggett, Edwards & Medlin, 6th edition,Chapter 16

Corporations Act 2001


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Ty pes of Companies

L imited companies Proprietary companies

Public companies Companies limited by guarantee

Unlimited companiesN o-liability companies


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Ty pes of Companies (contd)

S pecial companies Investment Banking L ife insurance


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A dvantages and Disadvantagesof the Corporate Entit y

Advantages: L imited liability Broad source of capital Continuity of existence Ready transferability of shares Use of professional management

Potential income tax savings


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A dvantages and Disadvantagesof the Corporate Entit y (contd)

D isadvantages: Greater governmental regulation S eparation of ownership and management


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F orming a Compan y

Replaceable rules and constitutionCertificate of registration

T he prospectusF ormation costs and share issue costs


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A dministering a Compan y

ShareholdersShareholders

Board of DirectorsBoard of Directors

Managing Director Managing Director

Secretar ySecretar y Treasurer Treasurer Chief

F inancialOfficer

Chief F inancialOfficer

GeneralManager Inf S ys

GeneralManager Inf S ys

GeneralManager Prodn

GeneralManager Prodn


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Equit y in a Compan y

S hare capital F ully or partly paid shares Ordinary or preference shares

Retained earnings Accumulated losses


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Share issue b y a public compan y pa yable in full on application

S hares issued via a prospectus

E.g. Brazil Ltd Received applications for 100 000 sharesIssue price of $10 per share

E.g. Brazil Ltd Received applications for 100 000 sharesIssue price of $10 per share

Sept 30 Cash Trust 1000 000 Application 1000 000

receipt of cash of $10/share on 100 000 shares




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Share issue b y a public compan y pa yable in full on application (contd)

Refund of excess application monies

Date Application XX Cash Trust XX

refund of excess application money

to unsuccessful applicants

Date Application XX Cash Trust XX

refund of excess application money

to unsuccessful applicants


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Share issue b y a public compan y pa yable in full on application (contd)

Allotment of shares

Oct 1 Cash at Bank 1000 000 Cash Trust 1000 000

transfer of application money

Oct 1 Cash at Bank 1000 000 Cash Trust 1000 000

transfer of application money

Oct 1 Application 1000 000 Share Capital 1000 000

to record funds contributed for 100 000 shares paid in full


to record funds contributed for 100 000 shares paid in full


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Share issue b y a public compan y pa yable in instalments

E.g. Brazil Ltd Issues 100 000 shares on 15 September Payable: $4 on application

$3 on 15 October $3 on 1 December

E.g. Brazil Ltd Issues 100 000 shares on 15 September Payable: $4 on application

$3 on 15 October $3 on 1 December






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Share issue b y a public compan y pa yable in instalments (contd)

Allotment of shares

Oct 1 Cash at Bank 400 000 Cash Trust 400 000 transfer of application money

Oct 1 Cash at Bank 400 000 Cash Trust 400 000 transfer of application money


application fee of $4 on 100 000 shares


application fee of $4 on 100 000 shares


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Amount due on allotment

Oct 1 Allotment 300 000

Share Capital 300 000 allotment fee of $3 receivable on 100 000 shares

Oct 1 Allotment 300 000

Share Capital 300 000 allotment fee of $3 receivable on 100 000 shares

Oct 15 Cash at Bank 300 000 Allotment 300 000

cash received on allotment

Oct 15 Cash at Bank 300 000 Allotment 300 000

cash received on allotment

Receipt of allotment monies


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Amount due on call

N ov 15 Call 300 000

Share Capital 300 000 call of $3 receivable on 100 000 shares

N ov 15 Call 300 000

Share Capital 300 000 call of $3 receivable on 100 000 shares

Dec 1 Cash at Bank 285 000 Call 285 000

receipt of call monies on 95 000 shares

Dec 1 Cash at Bank 285 000 Call 285 000

receipt of call monies on 95 000 shares

Receipt of call monies


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Share Capital

(100 000 ordinary shares called to $10) $1000 000 Less: Unpaid calls (5000 shares @ $3) 15 000 Total share capital $985 000

Share Capital

(100 000 ordinary shares called to $10) $1000 000 Less: Unpaid calls (5000 shares @ $3) 15 000 Total share capital $985 000


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U nder and Over Subscription

Undersubscription Applicants for fewer shares than offered

Oversubscription Applicants in excess of shares T reatment depends on constitution and

prospectus

Excess monies may be refunded or held againstfuture calls


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Preference Shares

Preferential treatment D ividend distribution (@ fixed rate) D istribution of assets on liquidation Redemption

Usually no voting rightsD ebt or equity?


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Dividends

D istribution of cash or other assets Replaceable rules Interim and final dividends

Cash dividends D eclared vs. paid


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Dividends (contd)

Au g 25 Retained E arnings 80 000 Final Dividend Payable 80 000

declared cash dividend of 20c/shareon 400 000 ordinary shares

Au g 25 Retained E arnings 80 000 Final Dividend Payable 80 000

declared cash dividend of 20c/shareon 400 000 ordinary shares

Sept 20 Final Dividend Payable 80 000 Cash at Bank 80 000

payment of the dividend declared on 25 Au gust

Sept 20 Final Dividend Payable 80 000 Cash at Bank 80 000

payment of the dividend declared on 25 Au gust


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Dividends (contd)

Preference dividends Cents/share or % of preference capital Cumulative vs. non-cumulative D ividend payable

J une 20 Retained E arnings 45 000 Preference Dividend Payable 15 000 O rdinary Dividend payable 30 000

to record dividends declared

J une 20 Retained E arnings 45 000 Preference Dividend Payable 15 000 O rdinary Dividend payable 30 000

to record dividends declared


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Dividends (contd)

S hare dividends Pro-rata distribution of additional shares N o effect on corporate assets or equity

J an 10 Retained E arnings xxx Share Capital xxx

to record the distribution of a share dividend

J an 10 Retained E arnings xxx Share Capital xxx

to record the distribution of a share dividend


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Reserves

Equity other than capital contributionsOften created by transfers from retained

earningsN o official definitionExamples: General reserve

Options reserve Plant replacement reserve


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Reserves (contd)

Creation of reserves

J une 30 Retained E arnings xxx

Reserve xxx to create a reserve by appropriating profits

J une 30 Retained E arnings xxx

Reserve xxx to create a reserve by appropriating profits

J une 30 Asset xx Accumulated Depreciation x

Revaluation Reserve xxx to revalue upwards the carrying amount of a non-current asset to fair value

J une 30 Asset xx Accumulated Depreciation x

Revaluation Reserve xxx to revalue upwards the carrying amount of a non-current asset to fair value


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Reserves (contd)

D isposal of reserves

J une 30 Reserve xxx Retained E arnings xxx

to transfer reserve back to retained earnings

J une 30 Reserve xxx Retained E arnings xxx

to transfer reserve back to retained earnings


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Income Tax

D educted after all other expenses beforearriving at final profit after tax

Based on taxable income Income T ax Assessment ActMethods for determining tax expense T ax payable method

T ax-effect accounting method


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F inancial Statements

Income S tatementS tatement of Changes in Equity

Balance S heetCash F low S tatement


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Companies Formation

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