Accounting Principles, Third Canadian Edition · 2A Determine impact of reacquired shares. Moderate...

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition

Solutions Manual 13-1 Chapter 13

Copyright © 2009 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

CHAPTER 13

Corporations: Organization and Share Capital Transactions

ASSIGNMENT CLASSIFICATION TABLE

Study Objectives

Questions

Brief Exercises

Exercises

Problems Set A

Problems Set B

1. Identify and discuss

the major characteristics of a corporation.

1, 2, 3, 4, 5, 6, 7, 8, 9,10

1, 2 1, 7 1, 11 1

2. Record common share transactions.

11, 12, 13, 14, 15

3, 4, 5, 6 2, 3, 4, 7, 11

2, 3, 4, 5, 6, 7, 11

2, 3, 4, 5, 6, 7, 11

3. Record preferred share transactions.

16, 17, 18, 19

7, 8, 9 3, 4, 5, 6, 7, 11

4, 5, 6, 7, 11

4, 5, 6, 7, 11

4. Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

20, 21, 22, 23, 24

10, 11, 12, 13

7, 8, 9, 10, 11

4, 5, 6, 7, 8, 9, 10, 11

4, 5, 6, 7, 8, 9, 10, 11




ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

1A Determine form of business organization.

Simple 15-20

2A Determine impact of reacquired shares.

Moderate 25-30

3A Allocate dividends between preferred and common shares.

Simple 15-20

4A Show impact of transactions on accounts.

Simple 25-30

5A Record and post transactions. Prepare shareholders’ equity section.

Moderate 45-60


Moderate 40-50


Moderate 50-60

8A Record closing entries and prepare balance sheet.

Simple 30-40

9A Prepare balance sheet and calculate return on equity.

Simple 25-35

10A Calculate return on equity.

Simple 10-15

11A Answer questions about shareholders’ equity section.

Simple 15-20

1B Determine form of business organization.

Simple 15-20

2B Determine impact of reacquired shares.

Moderate 25-30

3B Allocate dividends between preferred and common shares.

Simple 15-20

4B Show impact of transactions on accounts.

Simple 25-30

5B Record and post transactions. Prepare shareholders’ equity section.

Moderate 45-60


Moderate 40-50


Moderate 50-60




ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Description

Difficulty Level

Time Allotted (min.)

8B Record closing entries and prepare balance sheet.

Simple 30-40

9B Prepare balance sheet and calculate return on equity.

Simple 25-35

10B Calculate return on equity.

Simple 10-15

11B Answer questions about shareholders’ equity section.

Simple 15-20




BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material. Study Objectives Knowledge Comprehension Application Analysis Synthesis Evaluation

1. Identify and discuss the major characteristics of a corporation.

Q13-5

Q13-1 Q13-2 Q13-3 Q13-4 Q13-6 Q13-7 Q13-8 BE13-1 BE13-2 E13-7

Q13-9 Q13-10 P13-11A

E13-1 P13-1A P13-1B

2. Record common share transactions.

Q13-12 Q13-13 Q13-14 Q13-15 E13-7

Q13-11 BE13-3 BE13-4 BE13-5 BE13-6 E13-2 E13-3 E13-4 P13-2A P13-3A P13-4A P13-5A

P13-6A P13-7A P13-11A P13-2B P13-3B P13-4B P13-5B P13-6B P13-7B P13-11B

E13-11

3. Record preferred share transactions.

Q13-16 Q13-17 Q13-18 Q13-19 E13-7

BE13-7 BE13-8 BE13-9 E13-3 E13-4 E13-5 E13-6 P13-4A

P13-5A P13-6A P13-7A P13-11A P13-4B P13-5B P13-6B P13-7B P13-11B

E13-11

4. Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

Q13-20 Q13-22

Q13-21 Q13-23 Q13-24 E13-7

BE13-10 BE13-11 BE13-12 BE13-13 E13-8 E13-9 E13-10 P13-4A P13-5A P13-6A P13-7A

P13-8A P13-9A P13-10A P13-11A P13-4B P13-5B P13-6B P13-7B P13-8B P13-9B P13-10B P13-11B

E13-11

Broadening Your Perspective

BYP13-1 BYP13-3

BYP13-2 Continuing Cookie Chronicle

BYP13-4 BYP13-5




ANSWERS TO QUESTIONS 1. Classified by Purpose: A business may be incorporated to make a profit,

like Tim Hortons. Or, it may be incorporated as a not-for-profit, like the Canadian Cancer Society. Alternately, a business, like the Yellow Pages Group, could be created as an income trust, to invest in income-producing assets.

Classified by Ownership: A corporation can be publicly held or privately held. A publicly held corporation, like The Forzani Group Ltd., may have thousands of shareholders, and its shares trade in an organized securities market. A privately held corporation, like McCain Foods Limited, usually only has a few shareholders, and its shares are not offered for sale to the general public.

2. (a) Limited liability of shareholders. Because of its separate legal

existence, creditors of a corporation ordinarily have recourse only to corporate assets to satisfy their claims. Thus, the liability of shareholders is normally limited to their investment in the corporation.

(b) Transferable ownership rights. Ownership of a corporation is held in

capital shares. The shares are transferable units. Shareholders may dispose of part or all of their interest by simply selling their shares. The transfer of ownership to another party is usually entirely at the discretion of the shareholder.

(c) Ability to acquire capital. A corporation has an easier time raising

capital because of features such as limited liability and the ease of transferring shares. Also, because only small amounts of money need to be invested, many individuals can become shareholders. However, small, privately held corporations can have as much difficulty getting capital as any proprietorship or partnership.

3. (a) Income taxation can be an advantage for a corporation because

corporate tax rates are often lower than personal tax rates. Personal income tax can also be deferred until income is distributed to the shareholders as dividends. It can also be a disadvantage because the dividends are subject to “double” taxation—once at the corporate level and again at the personal rates of the shareholders who receive them. The impact of these taxes is somewhat reduced by the dividend tax credit that shareholders can claim on their personal tax returns.

(b) Corporations must pay income tax on its taxable income. Income

earned by proprietorships, partnerships and income trusts is taxed in the hands the owners. The businesses themselves do not pay income tax.




QUESTIONS (Continued) 4. Small, privately held corporations are riskier than large publicly held ones.

As a result, lenders will often require the owners to sign personal guarantees, thus eliminating the limited liability normally associated with corporations. Because the shares are not offered for sale to the general public, it is more difficult to raise capital. Small corporations may be run by the shareholders, rather than professional managers. This also means that if one of these shareholders sells his or her ownership interest, the corporation may be significantly affected.

5. In the absence of restrictive provisions, the basic ownership rights of

common shareholders are the rights to:

• vote in the election of the board of directors and in corporate actions that require shareholders' approval,

• share in corporate income by receiving dividends, and • share in assets upon liquidation.

The basic ownership rights of preferred shareholders are the rights to receive: • dividends ahead of the common shareholder, and • assets upon liquidation ahead of the common shareholder. In exchange for these preferences, preferred shareholders normally are not entitled to vote.

6. The total number of shares a company is allowed to sell is called its

authorized shares—it may be an unlimited amount or a specified amount. No journal entry is recorded when the number of authorized shares is set. Issued shares are shares that have been sold. A journal entry will be prepared when shares are issued. The number of issued shares can never exceed the number of authorized shares.

7. (a) Legal capital is capital that has been contributed by the shareholders

that must remain in the corporation, to protect creditors. (b) Legal capital is unavailable for dividends. Retained earnings are

available for dividends. Keeping the two amounts separate on the balance sheets enables users to see the amount of creditor protection that exists. The distinction between amounts contributed by the owners and amounts earned and retained by the company is not needed for proprietorships because the proprietor has unlimited personal liability for the debts of the business in any case.




QUESTIONS (Continued) 8. Income trusts are established to invest in income producing assets. Unit

holders expect regular distributions. As a result, most of the earnings of the trust are distributed, leaving very little “retained”. On the other hand, corporations often retain a large portion of their earnings to finance their continued operations, expansion plans, or to provide a measure of safety.

9. When Jean-Guy purchases the original shares as part of Innovate.com’s

initial public offering, he is purchasing from the company. The $1,000 (100 X $10) he spends to buy the shares goes directly to Innovate.com and increases the company’s assets and shareholders’ equity. In the subsequent purchase, Jean Guy is buying in the secondary market from another investor. The proceeds from this sale go to the seller and not to Innovate.com. Therefore there is no impact on Innovate.com’s financial statements as a result of the second purchase.

10. There will be no impact on Abitibi’s financial statements at the time of the

share price decline. However, should Abitibi decide it would like to raise capital in the securities market, the price decline means it will have to sell more shares to raise the same amount of money.

11. When shares are issued for services or noncash assets, the cost should

be measured at the fair market value of the consideration given up (the shares). If that value cannot be reasonably determined, then the fair market value of the consideration received should be used (the land). In this case, the fair market value of the shares is more objectively determinable, since the shares are actively traded in the securities market. The appraised value of the land is merely an estimate of the land's value, while the market price of the shares is the amount the shares were actually worth on the date of exchange. Therefore, the land should be recorded at $90,000.

12. A corporation may acquire its own shares: (1) to increase trading of the

company's shares in the securities market in the hope of enhancing its market value, (2) to increase earnings per share by reducing the number of shares issued, (3) to eliminate hostile shareholders by buying them out, (4) to have additional shares available to be reissued to officers and employees under bonus and stock compensation plans, or for use in the acquisition of other companies, and (5) to comply with percentage share ownership requirements.




QUESTIONS (Continued) 13. This transaction: (a) decreases total assets, (b) has no effect on total liabilities and, (c) decreases total shareholders' equity. 14. Share repurchases are transactions between the company and its

shareholders. Therefore, any resulting gains or losses cannot be reported on the income statement. Such gains and losses are seen as an excess or deficiency belonging to the original shareholders and are reported as an increase or decrease in the shareholders’ equity section of the balance sheet.

15. If there have been gains from similar transactions in the past, the resulting

credit balance of the contributed capital account is available to absorb some or all of the loss on reacquisition. However, the balance of the contributed capital account cannot go below zero. If the loss exceeds the balance in the contributed capital account, the excess amount is debited to retained earnings.

16. Common shares and preferred shares both represent ownership of the

corporation. Common shares signify the basic residual ownership; preferred shares represent ownership with certain privileges or preferences. Preferred shareholders typically have a preference as to dividends and as to assets in the event of liquidation. However, preferred shareholders generally do not have voting rights.

17. Cumulative preferred shares are those that require preferred shareholders

be paid both current year dividends and unpaid prior year dividends before common shareholders receive any dividends. Dividends not declared for noncumulative preferred shares are lost forever.

Redeemable preferred shares can be purchased from the shareholders,

by the issuing corporation, at the option of the corporation. If the shares are retractable they can be sold by the shareholder, to the issuing corporation, at the option of the shareholder.

18. (a) Dividends in arrears are dividends on cumulative preferred shares

that were not declared in a given period. (b) Dividends in arrears are disclosed in the notes to the financial

statements; they are not recorded as liabilities.




QUESTIONS (Continued) 19. When convertible preferred shares are converted into common shares, the

shareholder simply exchanges preferred shares for common shares, according to a predetermined rate. To record the conversion, the amount originally paid for the preferred shares is transferred into the appropriate common shares account. If multiple share issues have occurred at varying prices, then the average cost for each preferred share is used instead of the original cost.

This entry has no effect on (a) total assets, (b) total liabilities, or (c) total

shareholders' equity. 20. The three main components of shareholders' equity are: Contributed capital, Retained earnings, and Accumulated other comprehensive income. Contributed capital represents the amounts contributed by the

shareholders. Share capital and additional contributed capital (e.g., from reacquisition of shares) are components of contributed capital.

Retained earnings represent the cumulative net income (or loss) since

incorporation that has been retained in company and not distributed to shareholders as dividends.

Accumulated other comprehensive income represents gains and losses

not resulting from share transactions, that bypass net income. The most common example is unrealized gains and losses on investments.

21. The answers are summarized in the table below:

Account Classification (a) (b) (c) (d) (e)

Common Shares Retained Earnings Contributed Capital – Reacquired Shares Accumulated Other Comprehensive Income Preferred Shares

Share capital—common shares Retained earnings Additional contributed capital Accumulated other comprehensive income Share capital—preferred shares




QUESTIONS (Continued) 22. Comprehensive income includes all changes in shareholders’ equity during

a period except for changes that result from the sale or repurchase of shares or from the payment of dividends.

Accumulated other comprehensive income is reported separately from

retained earnings to distinguish unrealized gains and losses from realized gains and losses and other sources of earned income that are accumulated in retained earnings. Reporting this information separately insulates income, and consequently retained earnings, from fluctuations in market value while still informing users of the gain or loss that could have occurred had the investment been sold.

23. Return on equity is the return earned by all the shareholders – both the

preferred and common shareholders. It is calculated by dividing net income by the average shareholders’ equity.

Return on common shareholder’s equity is the return earned by the

common shareholders. It is calculated by dividing the net income available to the common shareholders by the average common shareholders’ equity. Preferred dividends are deducted from net income to determine the numerator. The legal capital of the preferred shareholders is deducted from total shareholders equity before calculating the average common shareholders’ equity.

24. Net income by itself does not provide shareholders with an indication of

their return per dollar of investment. Comparing net income to shareholders’ equity provides investors with a meaningful measure of how many dollars are earned for each dollar of their investment. It also provides shareholders with the information necessary to compare investment opportunities in the marketplace.




SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 13-1 Characteristic Proprietorship Partnership Corporation 1. Continuous life X 2. Unlimited liability X X 3. Ease of formation X X 4. Income taxes X 5. Ability to acquire

capital X X

6. Shared skills and resources X

7. Fewer government regulations X X

8. Separation of ownership and management

X

9. Owners’ acts are binding X X

10. Ease of transfer of ownership rights X

BRIEF EXERCISE 13-2 The increase in share price will have no impact on Body Shop’s financial position. The balance sheet will be unchanged since the shares are listed at their issue price, not their current market value. On the other hand, the increased market valuation of the business would enable the Body Shop to raise funds more easily. The shareholders would see the value of their investment increase and could realize gains by selling some or all of their shares.




BRIEF EXERCISE 13-3 (a) June 1 Cash (2,000 X $6) .......................... 12,000 Common Shares ....................... 12,000 Dec. 15 Cash (1,000 X $9) .......................... 9,000 Common Shares ....................... 9,000 (b) Average issue price: ($12,000 + $9,000) ÷ (2,000 + 1,000) =

$7 BRIEF EXERCISE 13-4 (a) Dec. 20 Land (5,000 X $14) ......................... 70,000 Common Shares ....................... 70,000 (b) No, the answer would not change. The market price of the

shares is a reliable indicator of its value; the advertised price of the land is not.




BRIEF EXERCISE 13-5 (a) Average Repurchase Price = $10.80 ($2,000,000 + $4,000,000) ÷ 555,600 shares (b) Initial Average Issue Price = $3.60 $2,000,000 ÷ 555,600 shares (c) Cascades may have repurchased some of its own shares

(1) to increase trading of the company's shares in the stock market, in the hopes of enhancing its market value, (2) to reduce the number of shares issued and increase earnings per share, or (3) to comply with percentage share ownership requirements. Some companies have been repurchasing their own shares lately because they have excess cash on hand and no better investments available.

BRIEF EXERCISE 13-6 (a) Feb. 15 Common Shares (5,000 X $3.50*) .... 17,500 Contributed Capital – Reacquired Common Shares .......................... 2,500 Cash ............................................. 15,000 (b) Feb. 15 Common Shares (5,000 X $3.50*) .... 17,500 Retained Earnings............................ 2,500 Cash ............................................. 20,000 *Average share price = $122,500 ÷ 35,000 shares = $3.50




BRIEF EXERCISE 13-7 (a) Jan. 28 Cash (5,000 X $110) ..................... 550,000 Preferred Shares ..................... 550,000 June 15 Cash (1,000 X $125) ..................... 125,000 Preferred Shares ..................... 125,000 (b) Average issue price: $112.50 ($550,000 + $125,000) ÷ (5,000 + 1,000)

BRIEF EXERCISE 13-8 (a) Mar. 3 Cash (40,000 X $100).................... 4,000,000 Preferred Shares ..................... 4,000,000 (b) Oct. 1 Preferred Shares (10,000 X $100) 1,000,000 Common Shares ...................... 1,000,000 (40,000 shares) BRIEF EXERCISE 13-9 (a) Dividends are in arrears by $80,000 (40,000 X $2). (b) If the shares were noncumulative, there would be no

dividends in arrears.




BRIEF EXERCISE 13-10

KAPOSI CORPORATION Balance Sheet (Partial)

December 31, 2008 Shareholders' equity Contributed capital Share capital Preferred shares, no par value, $5-noncumulative, unlimited number of shares authorized, 800 shares issued $ 20,000 Common shares, no par value, unlimited number of shares authorized, 5,000 shares issued 50,000 Total share capital 70,000 Contributed capital—reacquisition of common shares 5,000 Total contributed capital 75,000 Retained earnings 29,000 Total shareholders' equity $104,000




BRIEF EXERCISE 13-11 (a)

KAPOSI CORPORATION Balance Sheet (Partial)

December 31, 2008 Shareholders' equity Contributed capital Share capital Preferred shares, no par value, $5-noncumulative, unlimited number of shares authorized, 800 shares issued $ 20,000 Common shares, no par value, unlimited number of shares authorized, 5,000 shares issued 50,000 Total share capital 70,000 Contributed capital—reacquisition of common shares 5,000 Total contributed capital 75,000 Retained earnings 29,000 Accumulated other comprehensive income 6,000 Total shareholders' equity $110,000 (b) Total shareholders’ equity would be $98,000 ($104,000 -

$6,000)




BRIEF EXERCISE 13-12 Dec. 31 Revenues ...................................... 2,000,000 Income Summary ..................... 2,000,000 31 Income Summary ......................... 1,500,000 Expenses .................................. 1,500,000 31 Income Summary ......................... 500,000 Retained Earnings ................... 500,000 31 Retained Earnings........................ 50,000 Dividends ................................. 50,000 BRIEF EXERCISE 13-13 (a) Return on equity

(b) It would be the same.

$8,097 6.4%

($132,495 $121,784) 2=

+ ÷




SOLUTIONS TO EXERCISES EXERCISE 13-1 (a) High $60.85 Low $41.45 (b) $0.75 (c) 1,000 X $60.41 = $60,410 (d) $59.25 + $1.24 = $60.49 (closing price + change) (e) 9,837 X 100 = 983,700 shares (f) Since the share price is up $17.80 over the 365-day low

($59.25 - $41.45) investors are probably looking primarily for capital appreciation.

EXERCISE 13-2 1. Dec. 5 Land .......................................... 120,000 Common Shares ................. 120,000 2. June 1 Land (20,000 X $12) ................. 240,000 Common Shares ................. 240,000




EXERCISE 13-3 (a) Jan. 10 Cash (75,000 X $5) ................... 375,000 Common Shares ................. 375,000 Feb. 24 Cash (1,000 X $105) ................. 105,000 Preferred Shares ................. 105,000 July 1 Cash (50,000 X $6.50) .............. 325,000 Common Shares ................. 325,000 (b) (1) The average issue price of the preferred shares is $105.

(2) The average issue price of the common shares is $5.60 ($375,000 + $325,000) ÷ (75,000 + 50,000).

EXERCISE 13-4 (a) Jan. 6 Cash ........................................ 300,000 Common Shares ................ 300,000 (200,000 shares X $1.50) 12 Cash ........................................ 87,500 Common Shares ................. 87,500 (50,000 shares X $1.75) Mar. 17 Cash ........................................ 105,000 Preferred Shares ................ 105,000 (1,000 shares X $105) July 18 Cash ........................................ 2,000,000 Common Shares ................ 2,000,000




EXERCISE 13-4 (Continued) (a) (Continued) Nov. 17 Common Shares * .................... 382,000 Retained Earnings ................... 8,000 Cash (200,000 X $1.95) ....... 390,000 Dec. 30 Common Shares * .................... 286,500 Contributed Capital – Reacquisition of Common Shares 16,500 Cash (150,000 X $1.80) ....... 270,000 *Average Cost per Common Share:

Transaction

Date

Number of Common Shares

Issued

Proceeds of

Issue January 6 200,000 $ 300,000 January 12 50,000 87,500 July 18 1,000,000 2,000,000 Total 1,250,000 $2,387,500

$2,387,500 ÷ 1,250,000 = $1.91 200,000 X $1.91 = $382,000 150,000 X $1.91 = $286,500




EXERCISE 13-4 (Continued) (b) There are 900,000 common shares remaining, at an average

cost of $1.91**. **Average Cost per Common Share:

Transaction

Date

Number of Common Shares

Issued

Proceeds of

Issue January 6 200,000 $ 300,000 January 12 50,000 87,500 July 18 1,000,000 2,000,000 Nov. 17 (200,000) (382,000) Dec. 30 (150,000) (286,500) Total 900,000 $1,719,000

$1,719,000 ÷ 900,000 = $1.91 EXERCISE 13-5 (a) 100,000 X $4 = $400,000 (b) Year 1 Year 2

Regular dividend $400,000 $400,000 Arrears from Year 1 150,000 550,000 Dividend paid 250,000 550,000 Arrears $150,000 $ 0

(c) Dividends in arrears should be disclosed in the notes to

the financial statements. They are not recorded in the books.

(d) The likely amount is $4 per share, for a total of $400,000.




EXERCISE 13-6 (a) Nov. 15 Preferred Shares ................. 230,000 Common Shares ................ 230,000 Average share price ($1,000,000 + $3,600,000) ÷ (10,000 +

30,000) = $115 2,000 X $115 = $230,000 (b) 10,000 + 30,000 – 2,000 = 38,000 preferred shares 2,000 X 5 = 10,000 common shares EXERCISE 13-7 (a) 9. Legal capital (b) 1. Publicly held corporation (c) 12. Organization costs (d) 2. Authorized shares (e) 5. Issued shares (f) 8. Initial public offering (g) 7. Secondary market (h) 6. Retained earnings (i) 4. Common shares (j) 11. Comprehensive income (k) 10. Contributed capital (l) 13. Convertible (m) 3. Cumulative




EXERCISE 13-8

Account

Shareholders’ Equity Other

Share Capital

Additional Contributed

Capital

Retained Earnings

Accumulated

Other Comprehensive

Income Financial Statement

Classifi-cation

1. Cash Balance Sheet

Current Assets

2. Common shares X 3. Contributed

capital – reacquisition of common shares

X

4. Gain on sale of property, plant and equipment

Income Statement

Other Revenue (Gain)

5. Available-for-sale security Balance

Sheet Current Assets

6. Unrealized gain on available-for-sale security

X

7. Preferred shares X 8. Retained

earnings X

9. Legal fees expense Income

Statement Operating Expense

10. Dividends X




EXERCISE 13-9

OZABAL INC. Partial Balance Sheet

December 31, 2008 Shareholders' equity Contributed capital Share capital Preferred shares $4-noncumulative, no par value, 100,000 shares authorized, 30,000 issued $ 150,000 Common shares, no par value, unlimited number of shares authorized, 300,000 shares issued 300,000 Total share capital 450,000 Contributed capital—reacquisition of common shares 25,000 Total contributed capital 475,000 Retained earnings 900,000 Accumulated other comprehensive income 75,000 Total shareholders’ equity $1,450,000




EXERCISE 13-10 (a)

REITMANS (CANADA) LIMITED Partial Balance Sheet

January 28, 2006 (in thousands)

Shareholders' equity Share capital Class A non-voting (preferred) shares, unlimited number authorized, 56,747 issued ...................... $ 16,892 Common shares, unlimited number authorized, 13,440 shares issued ....................... 482 Total share capital ............................................. 17,374 Contributed surplus ................................................... 2,523 Total contributed capital ............................................ 19,897 Retained earnings* ..................................................... 370,360 Total shareholders’ equity ................................ $390,257 *$316,191 + $84,889 - $29,345 - $1,375 = $370,360 (b) ($ in thousands) Return on equity = Net income ÷ Average shareholders’ equity = $84,889 ÷ [($390,257 + $331,524) ÷ 2] = 23.52%




EXERCISE 13-11 (a) The average cost of the preferred shares is $60 ($600,000 ÷

10,000 = $60). The average cost of the common shares is $3 ($1,800,000 ÷

600,000 = $3). (b) It will be able to sell an additional 150,000 common shares

(750,000 authorized - 600,000 issued). (c) The company paid $2 per share, for a total of $200,000.

$100,000 ÷ 100,000 = $1 per share was credited to contributed capital. The average issue price of $3 per share was debited to the common shares account. The difference, $2 was the price paid per share.

Common Shares...................................... 300,000 Contributed Capital .......................... 100,000 Cash .................................................. 200,000 (d) $5 X 10,000 = $50,000. (e) The retained earnings balance would be $1,208,000

($1,158,000 + $50,000 dividends which were not paid nor declared). Dividends in arrears are only disclosed in the notes to the financial statements.




SOLUTIONS TO PROBLEMS

PROBLEM 13-1A 1. Kyle should run his beer cart business as a proprietorship

because this is the simplest form of business to establish. It is also the least expensive. He is the only person involved in the business and is planning to operate for a short time.

2. Joseph and Sabra should form a corporation when they

combine their operations. This is the best form of business for them to choose because they need to raise significant funds in the coming year and it is easier to raise funds in a corporation. A corporation may also receive more favourable income tax treatment.

3. The professors should form a partnership for their

business. It is simpler to form than a corporation and less costly. Each professor has contributed a similar amount of money and expertise, and there is no mention of additional funds being required.

4. Abdur should form a corporation. This is the best form of

business for him to choose because he will require significant funds to finance the chain of stores and it is easier to raise funds in a corporation. A corporation may also receive more favourable income tax treatment.

5. A partnership would be the most likely form of business

for Mary and Richard to choose. It is simpler to form than a corporation and less costly.




PROBLEM 13-2A

(a) Shares authorized 100,000 Shares issued 11,000 (b) Common shares $396,000 Contributed capital – reacquisition of common shares $2,600 Retained earnings $161,400 Calculations:

Common shares

(a)

Number of

shares

(b)

Average issue price

(a) ÷ (b)

Contributed capital –

reacquisition of common

shares

Retained earnings

Bal

$270,000

9,000

$30.00

$ 9,000

$180,000

1. (12,000) (400) (3,600) 258,000 8,600 30.00 5,400 180,000 2. 147,000 3,500 405,000 12,100 33.47 5,400 180,000 3. 73,800 1,200 478,800 13,300 36.00 5,400 180,000 4. (36,000) (1,000) (5,400) (18,600) 442,800 12,300 36.00 0 161,400 5. (46,800) (1,300) 2,600 0000000 $396,000 11,000 36.00 $2,600 $161,400




PROBLEM 13-3A (a) (b)

Year Dividend

Paid Noncumulative

Preferred Common Cumulative Preferred Common

1 $15,000 $15,000 $ 0 $15,000 $ 0 2 12,000 12,000 0 12,000 0 3 27,000 15,000 12,000 18,000 9,000 4 35,000 15,000 20,000 15,000 20,000 1. Regular dividend is $5 X 3,000 = $15,000 2b. Arrears = $15,000 - $12,000 = $3,000 3b. Preferred dividend = $15,000 (regular) + $3,000 (arrears) =

$18,000




PROBLEM 13-4A

Shareholders' Equity

Assets

Liabilities

Preferred Shares

Common Shares

Other Contributed

Capital

Retained Earnings

Accumulated Other

Comprehensive Income

1. +$100,000 n/a n/a +$100,000 n/a n/a n/a

2. +5,500 n/a n/a +5,500 n/a n/a n/a

3. n/a n/a -$300,000 +300,000 n/a n/a n/a

4. +150,000 n/a +150,000 n/a n/a n/a n/a

5. -72,500 n/a -75,000 n/a +$2,500 n/a n/a

6. -10,000 n/a n/a n/a n/a -$10,000 n/a

7. -5,000 n/a n/a n/a n/a n/a -$5,000 3. $600,000 ÷ 4,000 = $150 $150 X 2,000 = $300,000 5. ($600,000 – $300,000 + $150,000) ÷ (4,000 – 2,000 + 1,000) = $150 $150 X 500 = $75,000 $75,000 - $72,500 = $2,500 6. 2,500 X $4 = $10,000




PROBLEM 13-5A (a)

GENERAL JOURNAL

J1

Date Account Titles and Explanation

Debit

Credit

Jan. 10 Cash (100,000 X $2) ........................ 200,000 Common Shares ........................ 200,000 Mar. 1 Cash (10,000 X $42) ........................ 420,000 Preferred Shares ........................ 420,000 Apr. 1 Land (25,000 X $2.50) ..................... 62,500 Common Shares ........................ 62,500 May 1 Cash (75,000 X $3) .......................... 225,000 Common Shares ........................ 225,000 July 24 Cash ............................................... 60,000 Equipment ....................................... 7,200 Common Shares (16,800 X $4) .. 67,200 Nov. 1 Cash (2,000 X $48) .......................... 96,000 Preferred Shares ........................ 96,000 Dec. 31 Income Summary ........................... 650,000 Retained Earnings ..................... 650,000 31 Dividends ........................................ 36,000 Cash ............................................ 36,000 31 Retained Earnings .......................... 36,000 Dividends ................................... 36,000




PROBLEM 13-5A (Continued) (b) Preferred Shares Date

Explanation

Ref.

Debit

Credit

Balance

Mar. 1 Nov. 1

J1 J1

420,000 96,000

420,000 516,000

Common Shares Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 10 Apr. 1 May 1 July 24

J1 J1 J1 J1

200,000 62,500

225,000 67,200

200,000 262,500 487,500 554,700

Dividends Date

Explanation

Ref.

Debit

Credit

Balance

Dec. 31 31

Closing entry

J1 J1

36,000

36,000

36,000

0 Retained Earnings Date

Explanation

Ref.

Debit

Credit

Balance

Dec 31 31

Closing entry Closing entry

J1 J1

36,000

650,000

650,000 614,000




PROBLEM 13-5A (Continued) (c)

HIGHLAND CORPORATION Balance Sheet (Partial)

December 31, 2008

Shareholders' equity Share capital Preferred shares, no par value, $3-noncumulative, . unlimited number of shares authorized,12,000* shares issued .................. $ 516,000

Common shares, no par value, unlimited number of shares authorized, 216,800** shares issued 554,700

Total share capital .................................................. 1,070,700 Retained earnings ................................................. 614,000 Total shareholders’ equity ................................ $1,684,700 * 10,000 + 2,000 = 12,000 shares ** 100,000 + 25,000 + 75,000 + 16,800 = 216,800 shares




Feb. 1 Cash .................................................. 75,000 Common Shares ........................... 75,000 Sept. 3 Cash .................................................. 16,500 Common Shares ........................... 16,500 Oct. 25 Common Shares (10,000 X $2.75*) .. 27,500 Contributed Capital—Reacquisition of Common Shares ....................... 1,500 Retained Earnings ............................ 1,000 Cash ............................................... 30,000 *Average Cost per Common Share:

Transaction Date

Number of Common

Shares Issued

Proceeds of

Issue Beginning balance 1,000,000 $2,741,000 February 1 25,000 75,000 September 3 5,000 16,500 Total 1,030,000 $2,832,500

$2,832,500 ÷ 1,030,000 = $2.75 Nov. 3 Cash .................................................. 130,000 Preferred Shares ........................... 130,000 Dec. 31 Income Summary ............................. 275,000 Retained Earnings ........................ 275,000

PROBLEM 13-6A

(a)

GENERAL JOURNAL

J1 Date

Account Titles and Explanation

Debit

Credit




PROBLEM 13-6A (Continued) (a) (Continued) Dec. 31 Dividends ........................................ 30,000 Cash ............................................ 30,000 31 Retained Earnings ............................ 30,000 Dividends ....................................... 30,000 (b) Preferred Shares Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 Nov. 3

Balance

130,000

500,000 630,000

Common Shares Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 Feb. 1 Sept. 3 Oct. 25

Balance

J1 J1 J1

27,500

75,000 16,500

2,741,000 2,816,000 2,832,500 2,805,000

Contributed Capital—Reacquisition of Shares Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 Oct. 25

Balance

J1

1,500

1,500

0 Dividends Date

Explanation

Ref.

Debit

Credit

Balance

Dec. 31 31

Closing entry

J1 J1

30,000

30,000

30,000

0




PROBLEM 13-6A (Continued) (b) (Continued) Retained Earnings Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 Oct. 25 Dec. 31 31

Balance Closing entry Closing entry

J1 J1 J1

1,000

30,000

275,000

1,816,000 1,815,000 2,090,000 2,060,000

(c)

MOUNTAINHI CORPORATION Balance Sheet (Partial) December 31, 2008

______________________________________________________ Shareholders' equity Share capital $4 preferred shares, cumulative, no par value, 50,000 shares authorized, 10,000 shares issued ..................................... $ 630,000 Common shares, no par value, unlimited number of shares authorized, 1,020,000* shares issued 2,805,000 Total share capital ....................................... 3,435,000 Retained earnings (See Note X) ........................... 2,060,000 Total shareholders' equity ........................................ $5,495,000 Note X: Dividends on preferred shares totalling $10,000 [10,000 X $1 per share] are in arrears. *1,000,000 + 25,000 + 5,000 – 10,000 = 1,020,000 shares




PROBLEM 13-7A

(a)

GENERAL JOURNAL

J1


Debit

Credit

Feb. 06 Building (1,000 X $111) ................... 111,000 Preferred Shares .......................... 111,000 July 15 Preferred Shares (2,000 X $106*) ... 212,000 Common Shares .......................... 212,000

*($525,000 + $111,000) ÷ (5,000 + 1,000) = $106.00 Aug. 22 Cash (500 X $124) ............................ 62,000 Preferred Shares .......................... 62,000 Nov. 1 Preferred Shares (1,000 X $108**) . 108,000 Common Shares .......................... 108,000 **($525,000 + $111,000 – $212,000 + $62,000) ÷ (5,000 + 1,000 – 2,000 + 500) = $108 Dec 31 Revenues .......................................... 600,000 Income Summary ......................... 600,000 31 Income Summary .............................. 540,000 Expenses ...................................... 540,000 31 Income Summary .............................. 60,000 Retained Earnings........................ 60,000




PROBLEM 13-7A (Continued) (a) (Continued) Preferred Shares Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 Feb. 6 July 15 Aug. 22 Nov. 1

Balance

J1 J1 J1 J1

212,000

108,000

111,000

62,000

525,000 636,000 424,000 486,000 378,000

Common Shares Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 July 15 Nov. 1

Balance

J1 J1

212,000 108,000

1,050,000 1,262,000 1,370,000

Contributed Capital—Reacquisition of Preferred Shares Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 Balance

18,750

Retained Earnings Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 Dec. 31

Balance Closing Entry

J1

60,000

300,000 360,000

Accumulated Other Comprehensive Income Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 Balance

25,000




PROBLEM 13-7A (Continued) (c)

DENISON CORPORATION Balance Sheet (Partial)

December 31, 2008

Shareholders' equity Contributed capital Share capital Preferred shares, no par value, $3-noncumulative, convertible, 10,000 shares authorized, 3,500* shares issued ...... $ 378,000 Common shares, no par value, unlimited number of shares authorized, 94,000** shares issued................................................... 1,370,000 Total share capital .................................................... 1,748,000 Additional contributed capital Contributed capital- reacquisition of preferred shares ................................................. 18,750 Total contributed capital .......................................... 1,766,750 Retained earnings ..................................................... 360,000 Accumulated other comprehensive income ........... 25,000 Total shareholders' equity ............................................ $2,151,750 *5,000 + 1,000 – 2,000 + 500 – 1,000 = 3,500 shares **70,000 + 16,000 + 8,000 = 94,000 shares




PROBLEM 13-8A (a)

GENERAL JOURNAL

J1 Date

Account Titles and Explanation

Debit

Credit

Sep. 30 Commission Revenue ...................... 314,850 Income Summary .......................... 314,850 30 Income Summary ............................. 245,440 Salaries Expense .......................... 138,400 Rent Expense ................................ 25,000 Amortization Expense .................. 30,080 Supplies Expense ......................... 4,860 Utilities Expense ........................... 18,200 Interest Expense ........................... 3,900 Income Tax Expense .................... 25,000 30 Income Summary ............................. 69,410 Retained Earnings ........................ 69,410 30 Retained Earnings ............................ 2,000 Dividends ...................................... 2,000




PROBLEM 13-8A (Continued) (b)

MISCOU CORP. Balance Sheet

September 30, 2008 ______________________________________________________

Assets

Current assets Cash ..................................................................... $ 32,500 Accounts receivable ............................................. 74,705 Supplies ................................................................ 1,265 Total current assets ...................................... 108,470 Property, plant and equipment Equipment .......................................... $150,400 Less: Accumulated amortization ...... (60,160) 90,240 Franchise .................................................. 225,000 Total assets .................................................... $423,710

Liabilities and Shareholders’ Equity Current liabilities Accounts payable ................................................. $ 43,000 Salaries payable ................................................... 8,400 Interest payable .................................................... 900 Income tax payable .............................................. 2,000 Unearned commission revenue .......................... 5,500 Current portion of long-term debt ....................... 5,000 Total current liabilities .................................. 64,800 Long-term debt Long-term note payable ....................................... 55,000 Total liabilities ............................................... 119,800




PROBLEM 13-8A (Continued) (b) (Continued)

MISCOU CORP. Balance Sheet

September 30, 2008 ______________________________________________________ Shareholders’ equity Contributed capital Share capital $4 noncumulative preferred shares unlimited number of shares authorized, 500 issued ....... $ 50,000 Common shares, unlimited number of shares authorized, 40,000 issued ................................. 110,000 Total share capital ................................................... 160,000 Other contributed capital Contributed capital – reacquisition of preferred shares ................................................................ 1,500 Total contributed capital ............................................ 161,500 Retained earnings* ..................................................... 142,410 Total shareholders’ equity ........................................... 303,910 Total liabilities and shareholders’ equity .......... $423,710

*Retained earnings Balance, Oct 1, 2007 ............................... $ 75,000 Add: Net income ..................................... 69,410 Less: Dividends ...................................... (2,000) Balance, September 30, 2008 ................ $142,410




PROBLEM 13-9A (a)

ANDRÉS WINES LTD. Balance Sheet March 31, 2006 (in thousands)

______________________________________________________

Assets Current assets Accounts receivable ................................................ $ 18,444 Inventories ............................................................... 70,528 Income taxes recoverable ....................................... 911 Prepaid expenses .................................................... 2,447 Total current assets ............................................ 92,330 Property, plant, and equipment ..................... $134,697 Less: Accumulated amortization ................. (49,100) 85,597 Goodwill ....................................................................... 35,862 Other long-term assets ............................................... 8,298 Total assets .............................................................. $222,087

Liabilities and Shareholders’ Equity

Current liabilities Bank indebtedness .................................................. $ 37,295 Accounts payable and accrued liabilities .............. 21,613 Dividends payable ................................................... 778 Current portion of long-term debt .......................... 5,888 Total current liabilities ........................................ 65,574 Long-term liabilities Long-term debt .......................................... $50,328 Future income tax liability ......................... 12,381 Other long-term liabilities ......................... 4,224 66,933 Total liabilities ..................................................... $132,507




PROBLEM 13-9A (Continued) (a) (Continued)

ANDRÉS WINES LTD.

Balance Sheet March 31, 2006 (in thousands)

______________________________________________________

Shareholders’ equity Share capital Class A shares, nonvoting, unlimited authorized, 3,963 issued .................................................... 6,975 Class B shares, voting, convertible into Class A shares, unlimited authorized, 1,002 issued . 400 Total share capital ..................................... 7,375 Retained earnings* .................................................. 82,205 Total shareholders’ equity .................................. 89,580 Total liabilities and shareholders’ equity ............... $222,087 *$79,260 + $6,054 – $3,109 = $82,205 (b) Return on equity = Net income ÷ Average shareholders’ equity

$6,054 6.85%$89,580 $87,168

2

=+




PROBLEM 13-10A (a) Return on equity = Net income ÷ Average shareholders’

equity

2004 $128.7 7.04%$1,780.5 $1,877.4

2

=+

2005 $770.8 61.11%$1,877.4 $645.3

2

=+

Sears’ return on equity has improved significantly during

the last year. (b) Sears is performing as well as the industry average in both

years.




PROBLEM 13-11A

(a) Preferred dividends ÷ Preferred dividend per share $150,000 ÷ $5 = 30,000 preferred shares (b) Preferred share average price = $3,150,000 ÷ 30,000 shares

issued = $105 per share Common share average price = $1,000,000 ÷ 250,000 shares

issued = $4 per share (c) The shares were issued for an average selling price of $4

(see (b) above) which means the company would have reduced the Common Shares account by $100,000 (25,000 X $4). Since a reduction to retained earnings is shown relating to this reacquisition for $56,250, this indicates the company had to pay $156,250 ($100,000 + $56,250) to reacquire the 25,000 shares.

(d) Limited liability for preferred shareholders = $3,150,000 Limited liability for common shareholders = $4,600,000 - $3,150,000 = $1,450,000 (e) It is a loss that bypasses the income statement because it

has not yet been realized. An example is an unrealized loss on investments that are available for sale.




PROBLEM 13-1B

1. A partnership would be the most likely form of business for the students to choose. It is simpler to form than a corporation and less costly.

2. Chris will likely operate his lawn maintenance service as a

proprietorship because he is planning on operating it for a short time period and a proprietorship is the simplest and least costly to form and dissolve.

3. Ron would likely form a corporation because he probably

needs to raise funds to buy equipment. It is normally easier to raise funds through a corporation. A corporation is also the only form of business that provides limited liability to it owners. There may also be income tax benefits.

4. Hervé would likely form a corporation because he needs to

raise funds to invest in inventories and equipment. He has no savings or personal assets and it is normally easier to raise funds through a corporation.

5. A proprietorship would be the most likely form of business

for Johnny. It is simpler to form than a corporation and less costly. A corporation is the only form of business that provides limited liability to it owners. However, is unlikely that incorporating the business would shield Johnny from personal liability in the event of an accident.




PROBLEM 13-2B (a) Shares authorized 500,000 Shares issued 200,000 (b) Common shares $830,000 Contributed capital – reacquisition of Common shares $10,500 Retained earnings $680,000 Calculations:

Common shares

(a)

Number of shares

(b)

Average

issue price

(a) ÷ (b)

Contributed capital –

reacquisition of common

shares

Retained earnings

Bal

$1,000,000

250,000

$4.00

$10,000

$680,000

1. 127,500 25,000 1,127,500 275,000 4.10 10,000 680,000 2. (20,500) (5,000) 500 1,107,000 270,000 4.10 10,500 680,000 3. 55,000 10,000 1,162,000 280,000 4.15 10,500 680,000 4. (49,800) (12,000) (10,200) 1,112,200 268,000 4.15 300 680,000 5. (282,200) (68,000) 10,200 000000 0 $ 830,000 200,000 4.15 $10,500 $680,000




PROBLEM 13-3B (a) (b) Year Dividend

Paid Noncumulative

Preferred Common Cumulative

Preferred Common

1 $20,000 $20,000 $ 0 $20,000 $ 0 2 15,000 15,000 0 15,000 0 3 30,000 20,000 10,000 25,000 5,000 4 35,000 20,000 15,000 20,000 15,000

1. Regular dividend is $4 X 5,000 = $20,000 2b. Arrears = $20,000 - $15,000 = $5,000 3b. Preferred dividend = $20,000 (regular) + $5,000 (arrears) =

$25,000




PROBLEM 13-4B

Assets

Liabilities


Preferred Shares

Common Shares

Other Contributed

Capital

Retained Earnings

Accumulated Other

Comprehensive Income

1. +$23,550 n/a n/a +$23,550 n/a n/a n/a 2. -200,000 n/a n/a -160,500 -$30,000 -$9,500 n/a 3. n/a n/a -$70,000 +70,000 n/a n/a n/a 4. +25,000 n/a n/a +25,000 n/a n/a n/a 5. +7,500 n/a +7,500 n/a n/a n/a n/a 6. -15,000 n/a n/a n/a n/a -15,000 n/a 7. +2,500 n/a n/a n/a n/a n/a +$2,500 2. Average share price = ($2,400,000 + $23,550) ÷ (150,000 + 1,000) = $16.05 3. $350,000 ÷ 5,000 = $70; $70 X 1,000 = $70,000




PROBLEM 13-5B (a)

GENERAL JOURNAL

J1


Debit

Credit

Feb. 10 Cash (80,000 X $4) .............................. 320,000 Common Shares ............................ 320,000 Mar. 1 Cash (5,000 X $115) ............................ 575,000 Preferred Shares ............................ 575,000 Apr. 1 Land (22,000 X $4.25) ......................... 93,500 Common Shares ............................ 93,500 Jun. 20 Cash (78,000 X $4.50) ......................... 351,000 Common Shares ............................ 351,000 Aug. 1 Legal Fees Expense (10,000 X $4.75) 47,500 Common Shares ............................ 47,500 Sep. 1 Cash (10,000 X $5) .............................. 50,000 Common Shares ............................ 50,000 Nov. 1 Cash (1,000 X $117) ............................ 117,000 Preferred Shares ............................ 117,000 Jan. 31 Income Summary ............................... 500,000 Retained Earnings ......................... 500,000 31 Dividends ............................................ 24,000 Cash ................................................ 24,000 31 Retained Earnings .............................. 24,000 Dividends ....................................... 24,000




PROBLEM 13-5B (Continued) (b) Preferred Shares Date

Explanation

Ref.

Debit

Credit

Balance

Mar. 1 Nov. 1

J1 J1

575,000 117,000

575,000 692,000

Common Shares Date

Explanation

Ref.

Debit

Credit

Balance

Feb. 10 Apr. 1 June 20 Aug. 1 Sept. 1

J1 J1 J1 J1 J1

320,000 93,500

351,000 47,500 50,000

320,000 413,500 764,500 812,000 862,000

Dividends Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 31 31

Closing entry

J1 J1

24,000

24,000

24,000

0 Retained Earnings Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 31 31

Closing entry Closing entry

J1 J1

24,000

500,000

500,000 476,000




PROBLEM 13-5B (Continued) (c)

WETLAND CORPORATION Balance Sheet (Partial) January 31, 2008

______________________________________________________ Shareholders' equity Share capital $4-noncumulative preferred shares, no par value, unlimited number of shares authorized, 6,000* shares issued ............................................ $ 692,000 Common shares, no par value, unlimited number of shares authorized, 200,000** shares issued 862,000 Total share capital ...................................................... 1,554,000 Retained earnings ....................................................... 476,000 Total shareholders’ equity ....................................... $2,030,000 *5,000 + 1,000 = 6,000 shares **80,000 + 22,000 + 78,000 + 10,000 + 10,000 = 200,000 shares




PROBLEM 13-6B (a)

GENERAL JOURNAL

J1


Debit

Credit

Feb. 1 Cash .................................................... 55,500 Common Shares ............................ 55,500 Sep. 3 Cash .................................................... 107,000 Preferred Shares ............................ 107,000 Oct. 25 Common Shares (10,000 X $7.10*) .... 71,000 Contributed Capital – Reacquisition of Common Shares ........................ 2,500 Retained Earnings .............................. 1,500 Cash ................................................ 75,000 *Average Cost per Common Share:

Transaction Date

Number of Common

Shares Issued

Proceeds of

Issue Beginning balance 200,000 $1,400,000 February 1 5,000 55,500 Total 205,000 $1,455,500

$1,455,500 ÷ 205,000 = $7.10 Dec. 31 Income Summary ............................... 60,000 Retained Earnings ......................... 60,000 31 Dividends ............................................ 12,000 Cash ................................................ 12,000




PROBLEM 13-6B (Continued) (a) (Continued) Dec. 31 Retained Earnings .............................. 12,000 Dividends ....................................... 12,000 (b) Preferred Shares Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 Sep. 3

Balance

J1

107,000

320,000 427,000

Common Shares Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 Feb. 1 Oct. 25

Balance

J1 J1

71,000

55,500

1,400,000 1,455,500 1,384,500

Contributed Capital – Reacquisition of Shares Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 Oct. 25

Balance

J1

2,500

2,500

2,500

0 Dividends Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 31 31

Closing entry

J1 J1

12,000

12,000

12,000

0




PROBLEM 13-6B (Continued) (b) (Continued) Retained Earnings Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 Oct. 25 Dec. 31 31

Balance Closing entry Closing etnry

J1 J1 J1

1,500

12,000

60,000

488,000 486,500 546,500 534,500

(c)

CHEUNG CORPORATION

Balance Sheet (Partial) December 31, 2008

_______________________________________________________ Shareholders' equity Share capital $5-cumulative preferred shares, no par value, 25,000 shares authorized, 4,000* shares issued $ 427,000 Common shares, no par value, unlimited number of shares authorized, 195,000** shares issued 1,384,500 Total share capital ................................................ 1,811,500 Retained earnings ..................................................... 534,500 Total shareholders’ equity .............................. $2,346,000 *3,000 + 1,000 = 4,000 preferred shares ** 200,000 + 5,000 – 10,000 = 195,000 common shares Note X: Dividends of $8,000 are in arrears. (4,000 X $5 - $12,000)




PROBLEM 13-7B

(a)

GENERAL JOURNAL

J1


Debit

Credit

Feb. 1 Land (1,000 x $120) ......................... 120,000 Preferred Shares .......................... 120,000 Mar. 1 Preferred Shares (500 X $112*) ...... 56,000 Common Shares .......................... 56,000 *Average cost of preferred shares: ($440,000 + $120,000) ÷ (4,000 + 1,000) = $112 Jul. 1 Cash (1,500 X $130) ......................... 195,000 Preferred Shares .......................... 195,000 Sep. 1 Preferred Shares (1,000 X $116.50**) 116,500 Common Shares .......................... 116,500 ** Average cost of preferred shares: ($440,000 + $120,000 – $56,000 + $195,000) ÷ (4,000 + 1,000 – 500 + 1,500) = $116.50 Dec. 31 Revenues ......................................... 500,000 Income Summary ......................... 500,000 31 Income Summary ............................ 450,000 Expenses ...................................... 450,000 31 Income Summary ............................ 50,000 Retained Earnings ....................... 50,000




PROBLEM 13-7B (Continued) (b) Preferred Shares Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 Feb. 1 Mar 1 Jul 1 Sep. 1

Balance

J1 J1 J1 J1

56,000

116,500

120,000

195,000

440,000 560,000 504,000 699,000 582,500

Common Shares Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 Mar 1 Sep. 1

Balance

J1 J1

56,000 116,500

1,050,000 1,106,000 1,222,500

Contributed Capital—Reacquisition of Preferred Shares Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 Balance

25,000 Retained Earnings Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 Dec. 31

Balance Closing Entry

J1

50,000

300,000 350,000

Accumulated Other Comprehensive Income Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1 Balance

10,000




PROBLEM 13-7B (Continued) (c)

REMMERS CORPORATION Balance Sheet (Partial)

December 31, 2008 ______________________________________________________

Shareholders' equity Contributed capital Share capital $5 cumulative preferred shares, no par value, convertible 10,000 shares authorized, 5,000* shares issued .......................................... $ 582,500 Common shares, no par value, unlimited shares authorized, 85,000** shares issued................... 1,222,500 Total share capital ................................................ 1,805,000 Additional contributed capital Contributed capital – reacquisition of preferred shares ................................................. 25,000 Total contributed capital .......................................... 1,830,000 Retained earnings ..................................................... 350,000 Accumulated other comprehensive income ........... 10,000 Total shareholders’ equity ............................................ $2,190,000 * 4,000 + 1,000 – 500 + 1,500 – 1,000 = 5,000 preferred shares ** 70,000 + 5,000 + 10,000 = 85,000 common shares Note X: Dividends of $25,000 (5,000 X $5) are in arrears




PROBLEM 13-8B (a)

GENERAL JOURNAL

J1


Debit

Credit

Dec. 31 Sales Revenue ................................. 596,000 Income Summary ......................... 596,000 31 Income Summary ............................ 506,000 Salaries Expense ......................... 176,000 Cost of Goods Sold ..................... 148,000 Amortization Expense ................. 84,000 Interest Expense .......................... 31,500 Rent Expense ............................... 24,000 Income Tax Expense ................... 22,000 Utilities Expense .......................... 12,000 Insurance Expense ...................... 6,000 Supplies Expense ........................ 2,500 31 Income Summary ............................ 90,000 Retained Earnings ....................... 90,000 31 Retained Earnings ........................... 10,000 Dividends ...................................... 10,000




PROBLEM 13-8B (Continued) (b)

MOORCRAFT LTD. Balance Sheet

December 31, 2008 ______________________________________________________

Assets Current assets Cash ............................................................................. $ 21,000 Accounts receivable ................................................... 69,000 Inventory ..................................................................... 40,000 Prepaid insurance....................................................... 10,000 Supplies ...................................................................... 5,000 Total current assets ............................................... 145,000 Property, plant, and equipment Land ................................................................ $ 45,000 Building ....................................... $600,000 Accumulated amortization ......... (80,000) 520,000 Equipment................................... $300,000 Accumulated amortization ......... (90,000) 210,000 Total property, plant, and equipment ........................ 775,000 Total assets ............................................................ $920,000

Liabilities and Shareholders’ Equity Current liabilities Accounts payable ....................................................... $ 52,000 Salaries payable .......................................................... 8,000 Interest payable .......................................................... 2,500 Income tax payable ..................................................... 10,000 Unearned sales revenue............................................. 24,000 Current portion of long-term debt ............................. 10,000 Total current liabilities ........................................... 106,500 Long-term debt Long-term mortgage, net of current portion ............. 340,000 Total liabilities ........................................................ 446,500




PROBLEM 13-8B (Continued) (b) (Continued)

MOORCRAFT LTD.

Balance Sheet December 31, 2008

______________________________________________________ Shareholders’ equity Contributed capital Share capital $4 noncumulative preferred shares, unlimited authorized, 2,500 issued ...................................... 50,000 Common shares, unlimited authorized, 100,000 issued ...................................................... 150,000 Total share capital .................................................. 200,000 Other contributed capital Reacquisition of common shares ......................... 5,000 Total contributed capital ............................................... 205,000 Retained earnings* ........................................................ 245,000 Accumulated other comprehensive income ................ 23,500 Total shareholders’ equity .............................................. 473,500 Total liabilities and shareholders’ equity ............. $920,000

*Retained earnings Balance, Jan. 1........................................ $165,000 Add: Net income ..................................... 90,000 Less: Dividends ...................................... (10,000) Balance, Dec. 31 ..................................... $245,000




PROBLEM 13-9B (a)

MAGNOTTA WINERY CORPORATION Balance Sheet

January 31, 2006 ______________________________________________________

Assets

Current assets Accounts receivable ................................................ $ 347,669 Inventories ............................................................... 20,505,669 Prepaid expenses and deposits ............................. 671,961 Total current assets ............................................ 21,525,299 Capital assets ................................... $33,129,085 Accumulated amortization ................ (11,298,085) 21,831,000 Winery licenses ........................................................... 251,516 Total assets .............................................................. $43,607,815

Liabilities and Shareholders’ Equity

Current liabilities Bank indebtedness .................................................. $ 4,757,181 Accounts payable and accrued liabilities .............. 1,289,814 Income taxes payable .............................................. 130,754 Current portion of long-term debt .......................... 1,477,404 Total current liabilities ........................................ 7,655,153 Long-term liabilities Long-term debt ............................. $8,681,328 Future income taxes ..................... 1,047,517 9,728,845 Total liabilities ..................................................... 17,383,998




PROBLEM 13-9B (Continued) (a) (Continued)

MAGNOTTA WINERY CORPORATION

Balance Sheet January 31, 2006

______________________________________________________ Shareholders’ equity Contributed capital Common shares, unlimited authorized, 13,670,005 issued ........................................... 6,165,817 Other contributed capital .................................... 210,000 Total contributed capital ........................... 6,375,817 Retained earnings* .................................................. 19,848,000 Total shareholders’ equity .................................. 26,223,817 Total liabilities and shareholders’ equity ............... $43,607,815 *$17,273,203 + $2,574,797 = $19,848,000 (b) Return on equity = Net income ÷ Average shareholders’ equity

$2,574,797 10.34%$26,223,817 $23,582,360

2

=+




PROBLEM 13-10B (a) Return on equity = Net income ÷ Average shareholders’

equity

2005 $330.1 13.86%$2,511.1 $2,251.2

2

=+

2004 $291.5 13.66%$2,251.2 $2,017.1

2

=+

Canadian Tire’s return on equity has increased very slightly during the last year.

(b) Canadian Tire is performing at the same level as the

industry average during both years.




PROBLEM 13-11B

(a) $1,200,000 ÷ 12,000 = $100 average selling price of the preferred shares.

$1,000,000 ÷ 100,000 = $10 average selling price of the

common shares. (b) It appears that there were no dividends declared in 2008

since there was no decrease in retained earnings during the year.

(c) Since the preferred shares are noncumulative, there are no

dividends in arrears. (d) The shares were issued for an average selling price of $10

(see (a) above) which means the company would have reduced the common share account by $200,000 (20,000 X $10). Since the company has established a contributed capital account related to this reacquisition for $40,000, this indicates the company only had to pay $160,000 ($200,000 - $40,000) to reacquire the 20,000 shares.

(e) It is income that bypasses the income statement. An

example of accumulated other comprehensive income is unrealized gains on investments that are available for sale.




CONTINUING COOKIE CHRONICLE

(a) 1. One of the major advantages of issuing preferred shares

is that the preferred shareholder does not have voting rights. In this case, Curtis’s dad and Natalie’s grandmother can participate in the future success of Cookie & Coffee Creations (by receiving annual dividends) without attempting to influence any decisions that would require shareholder approval. Both will receive an annual dividend as long as the dividend is declared. Any additional dividends declared and paid will be paid to the common shareholders. This could prove to be another advantage to both Natalie and Curtis if the company is successful and has excess cash to pay out dividends.

2. It is possible to pay for the $750 legal bill by issuing common shares. However, the cost principle still applies. Cost must equal the cash equivalent price which is generally the fair market value of the consideration given up. If this amount cannot be determined, we then look to the fair market value of the consideration received to determine the cash equivalent price. In this case, Curtis and Natalie are receiving shares with a value of $1 per share. This $1 per share is the estimated fair value of the shares being given up in return for the legal fee expense. As a result, 750 shares should be given up valued at $750, which is the value of the legal fees.




CONTINUING COOKIE CHRONICLE (Continued)

GENERAL JOURNAL

J1


Debit

Credit

(b) Nov. 1 Cash ................................................. 17,500 Accounts Receivable ...................... 600 Merchandise Inventory ................... 1,580 Equipment ....................................... 3,500 Common Shares .......................... 23,180 (c) Nov. 1 Cash ................................................. 10,000 Preferred Shares .......................... 10,000 1 Legal Expense ................................. 750 Common Shares .......................... 750




CONTINUING COOKIE CHRONICLE (Continued) (d)

COOKIE & COFFEE CREATIONS LTD. Balance Sheet

November 1, 2008 ______________________________________________________

Assets

Current assets Cash ........................................................................... $27,500 Accounts receivable ................................................... 600 Merchandise inventory .............................................. 1,580 Total current assets ............................................ 29,680 Property, plant, and equipment Equipment ................................................................... 3,500 Total assets .......................................................... $33,180


Share capital $0.50 preferred shares, no par value, noncumulative, 10,000 authorized, 2,000 shares issued ............. $10,000 Common shares, no par value, unlimited number of shares authorized, 23,930 shares issued .......... 23,930 Total share capital ............................................... 33,930 Deficit ................................................................................. (750) Total shareholders' equity .................................. $33,180




BYP 13-1 FINANCIAL REPORTING PROBLEM

(a) The Forzani Group Limited has 2 classes of shares. There

is an unlimited number of Class A shares authorized and 32,922,000 issued; and an unlimited number of preferred shares authorized but none issued.

(b) Per note 8 to the financial statements, Forzani issued

47,000 shares upon employees exercising stock options. (c) Per note 8 to the financial statements, it appears that

Forzani repurchased 135,000 shares in fiscal 2005 at a cost of $1,510,000 but that none were repurchased in 2006.

(d) The average cost of the common shares is $4.20 (138,131 ÷

32,922). (e) Return on equity = Net Income ÷ Average shareholders’

equity

2005: $21,545 8.68%$262,847 $233,296

2

=+

The company’s return on equity has declined over the past year from 8.68% in fiscal 2005 to 5% in fiscal 2006.




BYP 13-2 INTERPRETING FINANCIAL STATEMENTS (a) A corporation may acquire its own shares (1) to increase

trading of the company's shares in the securities market in the hope of enhancing the company’s market value, (2) to reduce the number of shares issued in order to increase earnings per share, (3) to eliminate hostile shareholders by buying them out, (4) to have additional shares available so they can be reissued to officers and employees through bonus and stock compensation plans, or used to acquire other companies, and (5) to comply with percentage share ownership requirements.

(b) The debit to retained earnings indicates that Talisman

Energy paid more to repurchase their common shares than their average cost.

Common Shares ($355,000,000 – $290,000,000) ...... 65,000,000 Retained Earnings ......................... 290,000,000 Cash ........................................... 355,000,000 (c) Talisman’s profitability has improved in 2005. The

company’s profit margin, return on assets, and return on equity are better than in 2004.

(d) The market value of Talisman’s shares depends on a

number of factors, including the company's anticipated future earnings, its expected dividend rate per share, its current financial position, the current state of the economy, and the current state of the stock market. It is apparent that investors have a positive outlook for Talisman.




BYP 13-3 COLLABORATIVE LEARNING ACTIVITY

All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.




Memorandum To: Chief Financial Officer From: Accountant Re: Comprehensive Income reporting The new standard concerning the recording and reporting of comprehensive income will affect the balance sheet prepared this fiscal year. Comprehensive income includes all changes in shareholders’ equity during a period except for changes that result from the sale or repurchase of shares or from the payment of dividends. It includes the revenues, expenses, gains and losses included in net income, as well as the gains and losses that bypass net income but affect shareholders’ equity. The latter gains and losses are known as “other comprehensive income (loss)”. The most common example of other comprehensive income is unrealized gains and losses on investments that are available for sale. These investments must be shown at market value on the balance sheet. Any resulting unrealized gains or losses will be shown in the shareholders’ equity section, immediately beneath Retained Earnings. Reporting comprehensive income will benefit current and potential shareholders. Net income is protected from market fluctuations. Also, readers will be shown the gain or loss that would have occurred if the investment had actually been sold. Lastly, since this method is used in Europe and the United States, it will be easier to consolidate the data from operations in other countries that are already using the international standard.

BYP 13-4 COMMUNICTION ACTIVITY




BYP 13-5 ETHICS CASE (a) The stakeholders in this situation are:

The director of Simplex's R & D division. The president of Simplex. The shareholders of Simplex. Those who live in the environment to be sprayed by the new (un-tested) chemical.

(b) The president is risking the environment, and everything

and everybody in it exposed to this new chemical, in order to enhance his company's sales and to preserve his job. Presidents and entrepreneurs frequently take risks in performing their leadership functions, but this action is both irresponsible and unethical.

(c) A parent company may protect itself against loss and most

reasonable business risks by establishing separate subsidiary corporations, but whether it can insulate itself against this type of action is a matter of international corporate law and criminal law.




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