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CHAPTER 11

Reporting and Analyzing Shareholders’ Equity

ASSIGNMENT CLASSIFICATION TABLE

Brief A B
Study Objectives Questions Exercises Exercises Problems Problems BYP

1. Identify and discuss 1, 2, 3, 4, 5 1 1 1, 3


the major
characteristics of a
corporation.

2. Record share 6, 7, 8, 9, 2, 3, 4 2, 3, 4, 5, 7 1A, 2A, 3A, 1B, 2B, 1, 3, 4,


transactions. 10 4A, 5A 3B, 4B, 5B 7

3. Prepare the entries 11, 12, 13, 5, 6, 7, 8 5, 6, 7 1A, 2A, 3A, 1B, 2B, 1, 5, 7
for cash dividends, 14, 15 4A, 5A, 6A, 3B, 4B,
stock dividends, and 7A 5B, 6B, 7B
stock splits, and
understand their
financial impact.

4. Indicate how 16, 17, 18, 9, 10, 11 7, 8, 9, 10, 1A, 2A, 3A, 1B, 2B, 1, 7
shareholders’ equity 19, 20 11 4A, 5A, 7A 3B, 4B,
is presented in the 5B, 7B
financial statements.

5. Evaluate dividend 21, 22, 23, 12, 13, 14, 12, 13, 14, 8A, 9A, 8B, 9B, 2, 3, 4,
and earnings 24, 25 15, 16, 17 15 10A, 11A 10B, 11B 6
performance.

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ASSIGNMENT CHARACTERISTICS TABLE

Problem Difficulty Time


Number Description Level Allotted (min.)

1A Show impact of transactions on accounts. Moderate 40-50

2A Record and post equity transactions; prepare Simple 30-40


shareholders’ equity section.

3A Record and post equity transactions; prepare Moderate 40-50


statements.

4A Record and post equity transactions; prepare Complex 30-40


statements under ASPE.

5A Reproduce equity accounts; prepare shareholders’ Moderate 30-40


equity section.

6A Compare impact of cash dividend, stock dividend, Moderate 30-40


and stock split.

7A Record and post dividend transactions, prepare Moderate 40-50


statements.

8A Calculate earnings per share. Moderate 20-30

9A Evaluate ratios. Moderate 20-30

10A Calculate and evaluate ratios. Complex 20-30

11A Evaluate profitability ratios. Complex 20-30

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ASSIGNMENT CHARACTERISTICS TABLE (Continued)


Problem Difficulty Time
Number Description Level Allotted (min.)

1B Show impact of transactions on accounts. Moderate 40-50

2B Record and post equity transactions; prepare Simple 30-40


shareholders’ equity section.

3B Record and post equity transactions; prepare Moderate 40-50


statements.

4B Record and post equity transactions; prepare Complex 30-40


statements under ASPE.

5B Reproduce equity accounts; prepare shareholders’ Moderate 30-40


equity section.

6B Compare impact of cash dividend, stock dividend, Moderate 30-40


and stock split.

7B Record and post dividend transactions, prepare Moderate 40-50


statements.

8B Calculate earnings per share. Moderate 20-30

9B Evaluate ratios. Moderate 30-40

10B Calculate and evaluate ratios. Complex 20-30

11B Evaluate profitability ratios. Complex 20-30

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ANSWERS TO QUESTIONS

1. (a) (1) Separate legal existence. A corporation is separate and distinct from its
shareholders (owners) and acts in its own name rather than in the name of its
shareholders. In addition, the acts of the shareholders do not bind the
corporation unless the shareholder is a duly appointed agent of the
corporation. This is an advantage to the corporate form of organization.

(2) 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. This is an advantage to the corporate form
of organization.

(3) Transferable ownership rights. Ownership of a corporation is shown in


shares, which are transferable. Shareholders may dispose of part or all of
their interest by simply selling their shares. The transfer of ownership to
another party is entirely at the discretion of the shareholder. This is an
advantage to the corporate form of organization.

(4) Ability to acquire capital. Corporations can raise capital quite easily by issuing
shares. Public corporations have an almost unlimited ability to acquire capital.
Investors find shares of corporations to be attractive since they need not
invest large sums of money to become shareholders. In addition,
shareholders benefit from limited liability. This is an advantage to the
corporate form of organization.

(5) Continuous life. Since a corporation is a separate legal entity, its continuance
as a going concern is not affected by the withdrawal, death or incapacity of a
shareholder, employee, or officer. This is an advantage to the corporate form
of organization.

(6) Separation of management and ownership. Although the shareholders of a


corporation are its owners, it is the board of directors that decides on the
operating policies of the company. The shareholders seldom get involved in
the company’s day-to-day activities. This is normally seen to be an advantage
to the corporate form of organization.

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Answers to Questions (Continued)


1. (a) (Continued)

(7) Government regulations. Corporations in Canada may incorporate federally


or provincially. Government regulations usually provide guidelines for issuing
shares, distributing profit, and reacquiring shares. Provincial securities
commissions also govern the sale of share capital to the general public.
When a corporation’s shares are listed or traded on a stock exchange, it must
adhere to the reporting requirements of that exchange. This may be a
disadvantage to the corporate form of organization because it adds extra cost
and complexity to the organization.

(8) Income taxation. Corporations must pay federal and provincial income tax as
separate legal entities. However, corporations usually benefit from more
favourable tax rates than do the owners of partnerships or proprietorships.
The shareholders of the corporation do not pay tax on the corporation’s profit
unless they receive dividends from the corporation. This is often seen to be
an advantage to the corporate form of organization.

(b) While public corporations have an almost unlimited ability to acquire capital, this
is not the case for private corporations. In addition, transferring ownership rights
can be much more limited given that private corporation shares are not publicly
traded. Private companies do not have as stringent reporting and disclosure
requirements as is the case for public companies.

2. (a) Letson has 60,000 shares issued and is eligible to issue an additional 40,000
shares (100,000 – 60,000).

(b) Only issued shares are recorded in the general journal. The number of
authorized shares is disclosed but not recorded until issued.

3. When Richard purchased the original shares as part of lululemon’s initial public
offering, he purchased these shares directly from the corporation. The $1,800 (100 ×
$18) he spent to buy the shares went directly to lululemon and increased the
company’s assets (Cash) and shareholders’ equity (Common Shares). There was no
impact on the company’s liabilities.

In the subsequent purchase, Richard bought shares in the secondary market from
another investor or investors. The proceeds from this sale went to the seller and not to
lululemon. Therefore there was no impact on lululemon’s assets, liabilities, or
shareholders’ equity a result of the second purchase.

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Answers to Questions (Continued)


4. Market capitalization is the measure of the fair value of a corporation’s equity. It is
calculated by multiplying the number of shares issued by the share market price at
any given date. It should not be confused with a corporation’s legal capital which
represents the amount paid to the corporation on the initial and any subsequent issue
of shares and consequently is the amount that appears on the statement of financial
position.

The market capitalization for Plazacorp Retail Properties Limited has increased in
2012. There are two primary reasons for an increase in the market capitalization of a
company which may happen separately or in combination. First, the number of shares
may have increased. If this is the case, assets (Cash) and shareholders’ equity
(Common Shares) would increase as a result of the issue of new shares. Liabilities
would be unaffected.

Second, the market price of the shares could have increased. Increases in the market
price of the shares can result for a number of reasons but are most likely due to the
market’s perception of the future ability of the corporation to earn profit. As a result,
investors bid up the price paid for the shares on the market. This possible reason for
the change in market capitalization does not affect any element on the statement of
financial position.

5. Legal capital is the portion of a company’s share capital which cannot be distributed to
shareholders. Legal capital is created largely for the protection of creditors. It is kept
separate from retained earnings because retained earnings may be distributed to
shareholders in the form of dividends, whereas legal capital may not be. The
proceeds received from a company’s share issue are considered to be legal capital.

6. Preferred shareholders have priority over common shareholders with respect to the
distribution of dividends and, in the event of liquidation, over the distribution of assets.
Preferred shareholders do not usually have the voting rights that the common
shareholders have.

7. When shares are issued for a consideration other than cash, such as goods or
services, IFRS requires that the transaction be recorded at the fair value of the
consideration received. If the fair value of the consideration received cannot be
reliably determined, then the fair value of the consideration given up (for example,
shares) can be used.

When shares are issued for a noncash consideration in a private company following
ASPE, the valuation of the shares can be slightly different than that described above
for a publicly traded company following IFRS. The shares of a private company should
be recorded at the most reliable of the two values—the fair value of the consideration
(such as goods or services) received or fair value of the consideration given up (such
as shares). Quite often, the fair value of the consideration received is the most reliable
value because a private company’s shares seldom trade and therefore do not have a
ready market value.

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Answers to Questions (Continued)


8. (a) A normal course issuer bid is synonymous with the reacquisition of shares. In a
normal course issuer bid, a company is allowed to repurchase up to a certain
percentage of its shares subject to regulatory approval. It can purchase the
shares gradually over a period of time, such as one year. This repurchasing
strategy allows the company to buy when its shares are favourably priced.

(b) A corporation may acquire its own shares (1) to increase trading of the
corporation'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 and return on equity ratio, (3) to eliminate hostile shareholders by buying
their shares, and (4) to have additional shares to issue if required to compensate
employees using stock options or to acquire other businesses.

9. Assad should expect to receive a dividend in the amount of $281.25 (1,000 shares ×
$1.125 ÷ 4) each quarter.

10. Preferred shares are cumulative or noncumulative with respect to their dividend
provisions. Cumulative preferred shares entitle the shareholder to any previous years’
dividends, which have not yet been paid, as well as their current dividend, before
common shareholders can get any dividends. Noncumulative preferred shares do not
entitle the shareholder to any unpaid dividends.

Dividends in arrears can only arise from cumulative preferred shares. If a dividend is
not declared for a noncumulative preferred share, the dividend entitlement is erased
and does not carry forward into the future. On the other hand, if a dividend is not
declared for a cumulative preferred share, the amount of the dividend shortfall
becomes dividends in arrears which must be paid first from any dividend declared in
the future.

11. For a cash dividend to be paid, a corporation must meet a solvency test to ensure that
it has sufficient cash to be able to pay its liabilities as they become due after the
dividend is declared and paid. In addition, a formal dividend declaration by the board
of directors is required.

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Answers to Questions (Continued)


12. On the declaration date, the board of directors formally authorizes the cash dividend
and announces it to shareholders. The declaration of a cash dividend commits the
corporation to a binding legal obligation. On the record date, ownership of the shares
is determined. On the payment date, dividends are paid to the shareholders. The table
below demonstrates the effect of three events on the financial statement elements.

(a) (b) (c)


Declaration Record Payment
date date date

(1) Assets No effect No effect Decrease


(2) Liabilities Increase No effect Decrease
(3) Share capital No effect No effect No effect
(4) Retained earnings Decrease No effect No effect
(5) Total shareholders' equity Decrease No effect No effect
(6) Number of shares No effect No effect No effect

13.
(a) (b) (c)
Cash Stock Stock
dividend dividend split

(1) Assets Decrease No effect No effect


(2) Liabilities No effect No effect No effect
(3) Share capital No effect Increase No effect
(4) Retained earnings Decrease Decrease No effect
(5) Total shareholders' equity Decrease No effect No effect
(6) Number of shares No effect Increase Increase

14. (a) In a stock split, the number of shares issued is increased. In the case of Bella
Corporation, the number of shares issued will increase from 10,000 to 30,000
(10,000 × 3).

(b) The effect of a split on market value is generally inversely proportional to the
size of the split. In this case, the market price would fall to approximately $40
per share ($120 ÷ 3).

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Answers to Questions (Continued)

15. Cash and stock dividends are recorded in the general journal because the financial
position of the company changes. In the case of a cash dividend, Cash Dividends are
increased, which in turn decreases retained earnings. Cash is also reduced with a
cash dividend. In the case of a stock dividend, Stock Dividends are increased, which
in turn decreases retained earnings. Common Shares are increased in the case of a
stock dividend. In the case of stock splits, there is no change in the financial position
of the company. No accounts are affected. Only the number of shares held by
shareholders changes, typically by a multiple (for example, 2 for 1).

16. (a) All six accounts appear individually on the statement of changes in equity, along
with the details of the transactions that increased and decreased the accounts
during the year being reported.

(b) The first three accounts (preferred shares, common shares, and stock dividends
distributable) would be reported under the sub-heading of share capital in the
shareholders’ equity section of the statement of financial position. The
remaining accounts would be reported separately in the same shareholders’
equity section of the statement of financial position.

17. The purpose of a retained earnings restriction is to indicate that a portion of retained
earnings is currently unavailable for dividends. Restrictions may result from the
following causes: legal, contractual, or voluntary. Although not reported separately on
the statement of changes in equity or statement of financial position, the portion of
retained earnings that is restricted is disclosed in a note to the financial statements.

18. Comprehensive income is the sum of profit and other comprehensive income and
appears on the statement of comprehensive income. Other comprehensive income (or
loss) is made up of temporary accounts added to, or deducted from, the opening
balance of accumulated other comprehensive income by closing entries at the end of
the year. These changes to the accumulated other comprehensive income account
are detailed on the statement of changes in equity. Accumulated other comprehensive
income is a permanent equity account and its ending balance appears in the
shareholders’ equity section of the statement of financial position.

19. (a) The statement of retained earnings shows all of the changes to retained earnings
for the accounting period being reported. The statement of retained earnings must
be prepared by private companies following ASPE.

The statement of changes in equity shows the changes in retained earnings,


similar to the statement of retained earnings. However, it also shows the changes
in amounts in share capital, as well as the changes in all of the remaining equity
accounts. This is a required statement by companies following IFRS.

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Answers to Questions (Continued)


19. (b) The statement of retained earnings shows the changes in determining the ending
balance of retained earnings, which is only one of the accounts that appears in
the shareholders’ equity section of the statement of financial position. The
statement of changes in equity shows the changes in determining each of the
shareholders’ accounts (for example, preferred shares, common shares, retained
earnings, and accumulated other comprehensive income). Each of these
accounts appears in the shareholders’ equity section of the statement of financial
position.

20. (a) Private companies that report using ASPE usually have a simpler capital structure
than publicly traded companies who use IFRS. Consequently, the shareholders’
equity section of the statement of financial position has fewer accounts with
ASPE. For example, private companies are not required to report accumulated
other comprehensive income, which publicly-traded companies are required to
report.

(b) Private companies using ASPE would prepare the following financial statements:
statement of financial position, income statement, statement of retained earnings,
and statement of cash flows. For companies using ASPE, fewer equity account
transactions occur and need to be explained and consequently there is no
requirement to prepare a statement of changes in equity. Rather, only a
statement of retained earnings is required, linking the income statement to the
retained earnings account shown in the shareholders’ equity section of the
statement of financial position.

Publicly-traded companies using IFRS would prepare the following financial


statements: statement of financial position, income statement and/or statement of
comprehensive income, statement of changes in equity, and statement of cash
flows. Under IFRS, a statement of comprehensive income is required (in
combination with, or along with the income statement) when there is other
comprehensive income during the year.

21. (a) Unfavourable


(b) Favourable
(c) Unfavourable
(d) Favourable

22. Pepsi had the higher share price. The market price of the share can be determined by
dividing the dividend per share by its dividend yield. Doing so would result in a market
price of approximately $67 ($1.00 ÷ 1.5%) and $72 ($2.15 ÷ 3.0%) per share for Coca-
Cola and Pepsi, respectively.

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Answers to Questions (Continued)


23. The weighted average number of shares is a more realistic measure of the number of
shares that the corporation had throughout the year and the use of the assets
generated from these shares. The profit generated on the share issue proceeds during
the year, or reduced by the shares repurchased during the year, is for only part of the
year so the number of shares should be weighted by the same partial year factor.
Given that companies routinely issue and retire shares, using the number of shares at
a specific point in time (such as year-end) may not provide a true representation of the
company’s earnings per share.

24. Companies must use the profit available to common shareholders (profit – preferred
dividends) in the calculation of their earnings per share figures because preferred
shareholders are subject to preferential treatment with respect to the distribution of the
company’s dividends. That is, common shareholders would not receive any dividends
before the preferred shareholders receive theirs.

Similarly, the preferred shareholders’ entitlement must be subtracted from both the
numerator (profit – preferred dividends) and denominator (total shareholders’ equity –
preferred shares) in the calculation of return on common shareholders’ equity.

Consequently, both ratios use profit available to common shareholders in their


numerators.

25. Company B pays out the highest proportion of its profits in dividends and these
dividends give shareholders the highest dividend yield, when compared to Company
A. Therefore Company B is the better choice for an investor interested in a steady
dividend income.

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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 11-1


(a) At Hudson’s Bay Company’s initial public offering, the shares issued were purchased
from the corporation. The $17 per share received goes directly to Hudson’s Bay and
increases assets (cash) and shareholders’ equity (share capital).

(b) At the January 2013 date, the market price of $16.81 per share is a result of the
buying and selling of shares occurring in the secondary market. The proceeds from
the sale of shares go to the seller and not to Hudson’s Bay. Therefore, there is no
impact on Hudson’s Bay Company’s financial position as a result of the trading
occurring on the stock market subsequent to the IPO.

BRIEF EXERCISE 11-2

(a)

May 2 Cash ................................................................................. 15,000


Common Shares (1,000 × $15) ................................ 15,000

June 15 Cash ................................................................................. 8,500


Common Shares (500 × $17) ................................... 8,500

Nov. 1 Cash ................................................................................. 3,000


Preferred Shares (100 × $30) ................................... 3,000

Dec. 15 Cash ................................................................................. 3,500


Preferred Shares (100 × $35) ................................... 3,500

(b)
Number Number
of shares of shares
authorized issued

(1) Preferred shares 100,000 200

(2) Common shares Unlimited 1,500

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BRIEF EXERCISE 11-3


(a)

Mar. 8 Cash ...................................................................................... 150,000


Preferred Shares (5,000 × $30) .................................... 150,000

April 20 Land ..................................................................................... 110,000


Preferred Shares (3,000 shares)................................... 110,000

(b) If the fair value of the land could not be determined, the fair value of the consideration
given up ($35 per share multiplied by 3,000 shares or $105,000) would be used. The
journal entry would be as follows:

April 20 Land ..................................................................................... 105,000


Preferred Shares (3,000 × $35) .................................... 105,000

BRIEF EXERCISE 11-4

(a) Dividends in arrears at the end of the current year = 20,000 × $2 = $40,000

(b) Dividends in arrears are not accrued as liabilities. The amount of the dividends in
arrears is disclosed in the notes to the financial statements.

(c) Dividends in arrears can only arise from cumulative preferred shares. If a dividend is
not declared for a noncumulative preferred share, the dividend entitlement does not
carry forward into the future.

BRIEF EXERCISE 11-5


Nov. 15 Cash Dividends (30,000 × $2 ÷ 4) .................................... 15,000
Dividends Payable .................................................... 15,000

Dec. 10 No entry required

31 Dividends Payable ............................................................ 15,000


Cash ......................................................................... 15,000

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BRIEF EXERCISE 11-6

Dec. 1 Stock Dividends (100,000 × 5% × $15) ......................... 75,000


Stock Dividends Distributable ............................... 75,000

20 No entry required

Jan. 10 Stock Dividends Distributable........................................ 75,000


Common Shares ................................................... 75,000

BRIEF EXERCISE 11-7

(a) Before the stock split: 129,000,000 shares


After the stock split: 129,000,000 × 3 = 387,000,000 shares
(b) Likely stock price after the stock split: $117 ÷ 3 = $39
(c) There would be no journal entry recorded for the stock split. Details of the stock split
would be discussed in the notes to the financial statements.

BRIEF EXERCISE 11-8


Shareholders’ Number of
Transaction Assets Liabilities Equity Shares

(a) NE + - NE
(b) - - NE NE
(c) NE NE +/- NE
(d) NE NE +/- +
(e) NE NE NE +

BRIEF EXERCISE 11-9

[1] $2,050,000 – $1,500,000 – $110,000 = $440,000


[2] $440,000 same as [1]
[3] $3,505,000 – $3,000,000 + $135,000 – $750,000 = $(110,000)
[4] $0
[5] $750,000 (same amount as increase in Retained Earnings)
[6] $125,000 – $100,000 = $25,000
[7] $500,000 (no change from beginning balance)
[8] $5,100,000 + $440,000 [2] – $135,000 + $750,000 [5] + $25,000 = $6,180,000 or
taken from ending balances $2,050,000 + $500,000 [7] + $3,505,000 + $125,000 =
$6,180,000

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BRIEF EXERCISE 11-10

LUXAT CORPORATION
Statement of Financial Position (Partial)
December 31, 2015

Shareholders' equity
Contributed capital
Common shares, unlimited number of shares
authorized, 550,000 issued ............................................ $2,050,000
Additional contributed capital ................................................ 500,000
Total contributed capital ................................................. 2,550,000
Retained earnings ...................................................................... 3,505,000 9
Accumulated other comprehensive income ................................ 125,000
Total shareholders' equity ................................................................. $6,180,000

BRIEF EXERCISE 11-11

(a)
STIRLING FARMS LIMITED
Statement of Retained Earnings
Year Ended December 31, 2015

Retained earnings, January 1 ...................................................................... $490,000


Add: Profit .................................................................................................. 150,000
640,000
Less: Cash dividends .................................................................................. 90,000
Retained earnings, December 31 ................................................................. $550,000

(b) If Stirling were a publicly traded corporation, a statement of changes in equity would
be required instead of a statement of retained earnings. It would report the changes in
each of the shareholders’ equity accounts; not just retained earnings.

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BRIEF EXERCISE 11-12

$60,000
(a) Payout ratio − last year = 10%
$600,000

(b) Dividends paid this year = $2,000,000 × 10% = $200,000 (assuming the same payout
ratio).

(c) (Not required) Dividends paid next year = $700,000 × 10% = $70,000 (assuming the
same payout ratio).

Maintaining a constant dividend payout ratio may or may not be a sound business
practice. Many factors, including the corporation’s cash flow and the type of investor
involved would have to be taken into consideration. Because dividend amounts are
relatively fixed (or with small increases), the payout ratio tends to fluctuate with
profits. Maintaining a constant dividend payout ratio when profit fluctuates will result in
variable dividend amounts being paid to shareholders, which may not be wise from a
cash flow or growth perspective.

BRIEF EXERCISE 11-13

(a) Canadian National Railway Canadian Pacific Railway

$1.50 $1.40
Dividend yield
$93.72 $108.55
= 1.6% = 1.3%

(b) Investors would likely prefer Canadian National Railway because of its higher
dividend yield if they wish to purchase shares for the purpose of dividend income.

BRIEF EXERCISE 11-14

Weighted average number of shares:

January 1 34,000 × 12/12 = 34,000


August 31 9,000 × 4/12 = 3,000
November 30 6,000 × 1/12 = 500
49,000 37,500

(a) The number of common shares issued at December 31, 2015 is 49,000.

(b) The weighted average number of common shares for 2015 is 37,500.

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BRIEF EXERCISE 11-15

Earnings $370,000 – $20,000*


= $9.33
per share 37,500

*10,000 × $2 = $20,000

BRIEF EXERCISE 11-16

(a)
Earnings $500,000 – $50,000*
= $2.25
per share 200,000

*25,000 × $2 = $50,000

(b) Same amount as in (a) $2.25

(c)
Earnings $500,000
= $2.50
per share 200,000

BRIEF EXERCISE 11-17

(a) Return on common shareholders’ equity:

$14,000
= 12.4%
($104,000 + $122,000) ÷ 2

(b) Had Salliq issued preferred shares and paid dividends to the preferred shareholders,
the amount of the profit available to common shareholders would be reduced by the
amount of the preferred dividend, reducing the return on common shareholders’
equity ratio.

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SOLUTIONS TO EXERCISES
EXERCISE 11-1
(a) High $4.93
Low $2.97

(b) $0.10 per share

(c) 1,000 × $4.02 = $4,020

(d) $4.02 + $0.08 = $4.10

(e) 12,260 × 1,000 = 12,260,000

EXERCISE 11-2
(a) June 12 Cash (50,000 × $6) ............................................ 300,000
Common Shares........................................ 300,000

July 11 Cash (1,000 × $25) ............................................ 25,000


Preferred Shares ....................................... 25,000

Oct. 1 Land ................................................................... 75,000


Common Shares (10,000 shares).............. 75,000

Nov. 15 Cash (25,000 × $28) .......................................... 700,000


Preferred Shares ....................................... 700,000

(b) Preferred: 2,500 + 1,000 + 25,000 = 28,500 shares


$55,000 + $25,000 + $700,000 = $780,000

Common: 140,000 + 50,000 + 10,000 = 200,000 shares


$700,000 + $300,000 + $75,000 = $1,075,000

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EXERCISE 11-3
(a) Jan. 6 Cash ............................................................. 300,000
Common Shares (200,000 × $1.50) ...... 300,000

12 Cash ............................................................. 87,500


Common Shares (50,000 × $1.75) ........ 87,500

18 Cash ............................................................. 250,000


Preferred Shares (10,000 × $25) ........... 250,000

31 Cash ............................................................. 15,000


Common Shares (10,000 shares) ......... 15,000

(b)
Total Number of Total Number of
Date Common Shares Issued Preferred Shares Issued
January 6 200,000
January 12 50,000
January 18 10,000
January 31 10,000 000 00
Total 260,000 10,000

(c) If Moosonee were a publicly traded company, the per share value of the shares
issued in exchange for the legal services would be easily obtained as they are
traded every business day. When shares are issued for a consideration other than
cash, such as goods or services, IFRS requires that the transaction be recorded at
the fair value of the consideration received. If the fair value of the consideration
received cannot be reliably determined, then the fair value of the consideration given
up (shares in this case) can be used. In this case the value of the services was given
and so the journal entry would not be any different under IFRS.

EXERCISE 11-4

(a) Total annual preferred dividend should be 400,000 × $1 per share or $400,000.

(b) Dividends in arrears at the end of Year 1 are $100,000 ($400,000 annual dividend
less dividends declared of $300,000).

By the end of Year 2, the dividends paid of $400,000 are first allocated to the
dividends in arrears of Year 1 of $100,000 and the remaining $300,000.
Consequently by the end of Year 2, dividends in arrears at the end of Year 2 remain
at $100,000.

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EXERCISE 11-4 (Continued)


(c) Dividends in arrears are not accrued as a liability. Rather, the amount of any
dividends in arrears is disclosed in the notes to the financial statements.

(d) If the preferred shares were noncumulative, the corporation would have no
obligation to pay any dividends. This is the same as if the preferred shares were
cumulative. What is different with the noncumulative preferred shares is that in Year
2, the corporation is not obligated to pay any dividends in arrears before it can pay
dividends for the current year. No arrears would exist in either of Year 1 or 2 if the
shares had been noncumulative.

EXERCISE 11-5
(a) Apr. 1 Cash .............................................................. 100,000
Common Shares (5,000 × $20) ............. 100,000

June 15 Cash Dividends (85,000 × $0.25) .................. 21,250


Dividends Payable ................................ 21,250

July 10 Dividends Payable ......................................... 21,250


Cash ...................................................... 21,250

Aug. 21 Stock Dividends ............................................. 93,500


Stock Dividends Distributable ................ 93,500
(80,000 + 5,000 = 85,000 × 5% = 4,250 × $22)

Sept. 20 Stock Dividends Distributable ........................ 93,500


Common Shares ................................... 93,500

Nov. 1 Cash .............................................................. 75,000


Common Shares (3,000 × $25) ............. 75,000

Dec. 20 Cash Dividends.............................................. 27,675


Dividends Payable ................................. 27,675
(80,000 + 5,000 + 4,250 + 3,000 = 92,250 × $0.30)

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EXERCISE 11-5 (Continued)


(b)
Common Shares
Jan. 1 Bal. 600,000
April 1 100,000
Sept. 20 93,500
Nov. 1 75,000
Dec. 31 Bal. 868,500

Cash Dividends
June 15 21,250
Dec. 20 27,675
Dec. 31 Bal. 48,925

Stock Dividends
Aug. 21 93,500
Dec. 31 Bal. 93,500

Stock Dividends Distributable


Sept. 20 93,500 Aug. 21 93,500
Dec. 31 Bal. 0

Retained Earnings
Jan. 1 Bal. 1,000,000
Dec. 31 Bal. 1,000,000*

* Note: This balance is before closing entries adding profit or deducting loss and dividends.

(c) Number of common shares at the end of the year:


80,000 + 5,000 + 4,250 + 3,000 = 92,250

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EXERCISE 11-6

(1) (2) (3)


Before After Cash After Stock After Stock
Action Dividend Dividend Split

Total assets $1,250,000 $1,200,000 $1,250,000 $1,250,000

Total liabilities $ 250,000 $ 250,000 $ 250,000 $ 250,000

Common shares 600,000 600,000 670,000* 600,000


Retained earnings 400,000 350,000 330,000 400,000
Total shareholders' equity 1,000,000 950,000 1,000,000 1,000,000
Total liabilities and
shareholders’ equity $1,250,000 $1,200,000 $1,250,000 $1,250,000

Number of common shares 100,000 100,000 105,000 200,000

* $600,000 + (100,000 shares × 5% × $14) = $670,000

EXERCISE 11-7

Shareholders’ Equity
Accumulated
Other Total
Share Retained Comprehensive Shareholders’
Assets Liabilities Capital Earnings Income Equity
1. + NE + NE NE +
2. NE + NE - NE -
3. - - NE NE NE NE
4. + NE + NE NE +
5. + NE + NE NE +
6. NE NE NE NE NE NE
7. NE NE + - NE +/-
8. NE NE +/- NE NE +/-
9. NE NE NE NE NE NE
10. + NE NE NE + +

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EXERCISE 11-8

Statement of Changes in Equity

Accumulated
Other
Compre- Other
Share Retained hensive Financial
Account Capital Earnings Income Statement Classification
1. Cash NE NE NE Statement Current
of financial assets
position
2. Common Common NE NE NE NE
shares shares
3. Revaluation NE NE Other NE NE
gain from comprehensi
revaluing ve income:
property, Revaluation
plant, and gain
equipment to
fair value
4. Long-term NE NE NE Statement Non-current
investments of financial assets
position
5. Preferred Preferred NE NE NE NE
shares shares
6. Retained NE Retained NE NE NE
earnings earnings
7. Gain on NE NE NE Income Operating
disposal statement expenses
(reduction of)
8. Cash NE Retained NE NE NE
dividends earnings

9. Stock split NE NE NE NE NE
10. Stock Common NE NE NE NE
dividends shares*
distributable

* Note to instructors: Preferred shares is also an acceptable answer here although common
shares are more often issued as stock dividends.

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EXERCISE 11-9

OZABAL INC.
Statement of Financial Position (Partial)
December 31, 2015

Shareholders’ equity
Contributed capital
Share capital
$1.25 Preferred shares, noncumulative, 100,000
authorized, 10,000 shares issued ........................... $250,000
Common shares, unlimited number of shares
authorized, 250,000 shares issued ......................... 500,000
Stock dividends distributable ................................... 50,000 $ 800,000
Additional contributed capital ....................................... 25,000
Total contributed capital ...................................................... 825,000
Retained earnings (Note R) ................................................ 900,000
Accumulated other comprehensive loss ............................. (50,000)
Total shareholders’ equity ........................................................... $1,675,000

Note R: Retained earnings restricted for plant expansion, $100,000.

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EXERCISE 11-10

(a)

THE BLUE CANOE LIMITED


Statement of Changes in Equity
Year Ended December 31, 2015
Accumu-
lated
Other
Additional Compre-
Common Contributed Retained hensive
Shares Capital Earnings Income Total
Balance Jan. 1 $800,000 $540,000 $1,500,000 $90,000 $2,930,000
Issued common shares 180,000 180,000
Profit 400,000 400,000
Cash dividends (70,000) (70,000)
Other comprehensive
income (25,000) (25,000)
Balance Dec. 31 $980,000 $540,000 $1,830,000 $65,000 $3,415,000

(b)
THE BLUE CANOE LIMITED
Statement of Financial Position (Partial)
December 31, 2015

Shareholders’ equity
Contributed capital
Common shares ............................................................. $980,000
Additional contributed capital ......................................... 540,000
Total contributed capital ...................................................... $1,520,000
Retained earnings ............................................................... 1,830,000
Accumulated other comprehensive income ........................ 65,000
Total shareholders’ equity ........................................................... $3,415,000

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EXERCISE 11-11
(a)
SOBEYS INC.
Statement of Retained Earnings
Year Ended May 5, 2012
(in millions)

Retained earnings, May 7, 2011 .................................................................. $1,362.8


Add: Profit .................................................................................................. 322.5
1,685.3
Less: Cash dividends ...................................................................... $70.5
Other deductions .................................................................. 47.5 118.0
Retained earnings, May 5, 2012 .................................................................. $1,567.3

(b) If Sobeys were a publicly traded corporation, a statement of changes in equity would
be required instead of a statement of retained earnings. A statement of changes in
equity would explain the changes in each component of shareholders’ equity; not just
retained earnings.

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EXERCISE 11-12

(a)
Nike (in millions of USD) Adidas (in millions of euros)
(1) Payout ratio $619 ÷ $2,223 = 27.8% €282 ÷ €791 = 35.7%
(2) Dividend yield $1.565 ÷ $53.68 = 2.9% €1.35 ÷ €67.33 = 2.0%

(b) Investors would likely prefer Nike for dividend income purposes because of its higher
dividend yield. Adidas pays out more of its profits in dividends, yet its dividend yield
of 2% is not as high as Nike’s at 2.9%.

EXERCISE 11-13
(a) Profit available to common shareholders
= Profit – Preferred share dividends
= $351,250 – (20,000 × $1 × ¼)
= $346,250

(b) Weighted average number of shares


Dec. 1 60,000 × 12/12 = 60,000
Feb. 28 15,000 × 9/12 = 11,250
Nov. 1 6,000 × 1/12 = 500
71,750

(c) Earnings per share


= Profit available to common shareholders ÷ Weighted average number of
common shares
= $346,250 ÷ 71,750
= $4.83

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EXERCISE 11-14

($ in millions) 2012 2011

$1,470 $1,391 =
= 46.3% 51.7%
(1) Payout ratio $3,173 $2,690

$3.64 $3.51
(2) Dividend yield = 4.6% = 4.7%
$78.56 $73.96

Earnings $3,173 $2,690


(3) = $7.85 = $6.79
per share 404 396

Return on
common
(4) $3,173 = 22.1% $2,690 = 21.5%
shareholders'
equity ($15,332 + $13,335) ÷ 2 ($13,335 + $11,643) ÷ 2

The dividends paid by CIBC in 2012 increased in absolute amount. However, when
dividends are expressed as a percentage of the profit, the result—the payout ratio—
decreased from 51.7% to 46.3%. This is because profit increased at a higher rate than did
dividends.

Similarly, even though the dividends per share increased in 2012, because the increase in
the market price was proportionately greater than the increase in the amount of dividends
paid, the dividend yield reduced marginally from 4.7% in 2011 to 4.6% in 2012.

CIBC’s profit improved in 2012 both in total amount and on a per share basis. Its return on
common shareholders’ equity also improved slightly from 21.5% to 22.1%. With improved
profitability, the bank’s shareholders were willing to pay a higher market price for the
common shares in 2012 ($78.56) compared to 2011 ($73.96).

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EXERCISE 11-15

As an investor interested in an income-oriented investment, the dividend ratios will carry a


great deal of weight when choosing between Stanley and Snap-on. The dividend payout of
Stanley is much stronger than that of Snap-on. Stanley is also a better choice based on the
dividend yield ratio.

The choice between the two companies should not be based on the earnings per share,
which are not comparable between companies. The earnings per share can only be
interpreted in conjunction with the market price of the share (for example, the price-
earnings ratio) or the amount of dividends paid per share (for example, the dividend payout
ratio). A higher earnings per share ratio does not necessarily mean a more profitable
company or a better investment.

The return on common shareholders’ equity ratio, while a profitability ratio of interest, would
not be a primary ratio relied upon to assess whether to purchase a company’s shares for
income (dividend) purposes.

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SOLUTIONS TO PROBLEMS

PROBLEM 11-1A

Shareholders’ Equity
Accumulated
Other
Preferred Common Retained Comprehensive
Assets Liabilities Shares Shares Earnings Income
1. +$140,000 NE NE +$140,000 NE NE
2. +70,0001 NE NE +70,000 NE NE
3. +100,000 NE +$100,000 NE NE NE
4. -42,0002 NE NE NE -$42,000 NE
5. -5,000 NE NE NE NE -$5,000

1
5,000 × $14 = $70,000
2
(6,000 + 1,000) × $6 = $42,000

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PROBLEM 11-2A

(a) Transaction entries:

Jan. 10 Cash (500,000 × $2) ............................................ 1,000,000


Common Shares ......................................... 1,000,000

Mar. 1 Cash (10,000 × $50) ............................................ 500,000


Preferred Shares ......................................... 500,000

May 1 Cash (50,000 × $3) .............................................. 150,000


Common Shares ......................................... 150,000

July 24 Cash .................................................................... 60,000


Equipment ........................................................... 8,000
Common Shares (16,800 shares) ............... 68,000

Sept. 1 Cash (5,000 × $5) ................................................ 25,000


Common Shares ......................................... 25,000

Nov. 1 Cash (2,000 × $50) .............................................. 100,000


Preferred Shares ......................................... 100,000

Dec. 15 Cash Dividends.................................................... 36,000


Dividends Payable ...................................... 36,000

Closing entries:

Dec. 31 Retained Earnings ............................................... 36,000


Cash Dividends............................................ 36,000

31 Income Summary................................................. 650,000


Retained Earnings ....................................... 650,000

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PROBLEM 11-2A (Continued)


(b)
Preferred Shares
Mar. 1 500,000
Nov. 1 100,000
Dec. 31 Bal. 600,000

Common Shares
Jan. 10 1,000,000
May 1 150,000
July 24 68,000
Sept. 1 25,000
Dec. 31 Bal. 1,243,000

Cash Dividends
Dec. 15 36,000 Dec. 31 CE 36,000
Dec. 31 Bal. 0

Retained Earnings
Dec. 31 CE 36,000 Dec. 31 CE 650,000
Dec. 31 Bal. 614,000

CE: Closing entry

(c) Number of preferred shares:


10,000 + 2,000 = 12,000

Number of common shares:


500,000 + 50,000 + 16,800 + 5,000 = 571,800

REMMERS CORPORATION
Statement of Financial Position (Partial)
December 31, 2015

Shareholders’ equity
Share capital
$3 Preferred shares, noncumulative, unlimited
number authorized, 12,000 shares issued.......................... $ 600,000
Common shares, unlimited number authorized,
571,800 shares issued .............................................................. 1,243,000
Total share capital........................................................................... 1,843,000
Retained earnings ........................................................................... 614,000
Total shareholders’ equity .................................................................... $2,457,000

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PROBLEM 11-3A

(a) Transaction entries:

Feb. 6 Cash .............................................................. 600,000


Preferred Shares (10,000 shares) ......... 600,000

April 6 Cash .............................................................. 560,000


Common Shares (20,000 shares) .......... 560,000

May 29 Cash Dividends.............................................. 36,000


Dividends Payable
[(8,000 + 10,000) × $4 × 6/12] ............... 36,000

June 12 No entry required

July 1 Dividends Payable ......................................... 36,000


Cash ...................................................... 36,000

Aug. 22 Buildings ........................................................ 165,000


Common Shares (5,000 shares) ............ 165,000

Closing entries:

Dec. 31 Income Summary........................................... 582,000


Retained Earnings ................................. 582,000

31 Retained Earnings ......................................... 36,000


Cash Dividends...................................... 36,000

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PROBLEM 11-3A (Continued)


(b)
Preferred Shares Common Shares
Jan. 1 Bal. 440,000 Jan.1 Bal. 1,050,000
Feb. 6 600,000 April 6 560,000
Dec. 31 Bal. 1,040,000 Aug. 22 165,000
Dec. 31 Bal. 1,775,000

Additional Contributed Capital


Jan. 1 Bal. 25,000
Dec. 31 Bal. 25,000

Cash Dividends Retained Earnings


May 29 36,000 Dec. 31 CE 36,000 Jan. 1 Bal. 800,000
Dec. 31 Bal. 0 Dec. 31CE 36,000 Dec. 31 CE 582,000
Dec. 31 Bal. 1,346,000

Accumulated Other Comprehensive Income


Jan. 1 Bal. 10,000
Dec. 31 Bal. 10,000

CE: Closing entry

(d)
LARGENT CORPORATION
Statement of Financial Position (Partial)
December 31, 2015

Shareholders’ equity
Share capital
$4 Preferred shares, cumulative,
200,000 shares authorized, 18,000 issued ............................. $1,040,000
Common shares, unlimited number of shares
authorized, 95,000 issued ........................................................ 1,775,000
Additional contributed capital..................................................... 25,000
Total share capital........................................................................... 2,840,000
Retained earnings ........................................................................... 1,346,000
Accumulated other comprehensive income .................................... 10,000
Total shareholders’ equity .................................................................... $4,196,000

Note: Dividends of $36,000 (18,000 × $4 × 6/12) are in arrears on the cumulative


preferred shares.

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PROBLEM 11-3A (Continued)

(c)
LARGENT CORPORATION
Statement of Changes in Equity
Year Ended December 31, 2015

Accumulated
Share Capital Additional Other
Preferred Common Contributed Retained Comprehensive
Shares Shares Capital Earnings Income Total

Balance Jan. 1 $ 440,000 $1,050,000 $25,000 $ 800,000 $10,000 $2,325,000


Issued preferred shares 600,000 600,000
Issued common shares 725,000 725,000
Cash dividends (36,000) (36,000)
Profit 582,000 582,000
Balance Dec. 31 $1,040,000 $1,775,000 $25,000 $1,346,000 $10,000 $4,196,000

Number of preferred shares:


8,000 + 10,000 = 18,000

Number of common shares:


70,000 + 20,000 + 5,000 = 95,000

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PROBLEM 11-4A

(a) Transaction entries:

Jan. 2 Cash ......................................................... 10,000,000


Preferred Shares (100,000 × $100) .. 10,000,000

Feb. 8 Land ......................................................... 105,000


Common Shares (50,000 shares) ..... 105,000

Mar. 5 Cash Dividends (100,000 × $5 × 3/12) ..... 125,000


Dividends Payable ............................ 125,000

20 No entry required

April 1 Dividends Payable .................................... 125,000


Cash ................................................. 125,000

18 Cash (200,000 × $3) ................................. 600,000


Common Shares ............................... 600,000

June 5 Cash Dividends (100,000 × $5 × 3/12) ..... 125,000


Dividends Payable ............................ 125,000

20 No entry required

July 1 Dividends Payable .................................... 125,000


Cash ................................................. 125,000

Sept. 5 Cash Dividends (100,000 × $5 × 3/12) ..... 125,000


Dividends Payable ............................ 125,000

20 No entry required

Oct. 1 Dividends Payable .................................... 125,000


Cash ................................................. 125,000

Dec. 5 Cash Dividends (100,000 × $5 × 3/12) ..... 125,000


Dividends Payable ............................ 125,000

Dec. 14 Cash Dividends (1,750,000* × $0.50) ....... 875,000


Dividends Payable ............................ 875,000
*1,500,000 + 50,000 + 200,000 = 1,750,000 shares

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PROBLEM 11-4A (Continued)

(a) (Continued)

Closing entries:

Dec. 31 Income Summary ...................................... 1,000,000


Retained Earnings ............................ 1,000,000

31 Retained Earnings .................................... 1,375,000


Cash Dividends................................. 1,375,000

(b)

Preferred Shares Common Shares


Jan. 1 Bal. 0 Jan. 1 Bal. 1,500,000
Jan. 2 10,000,000 Feb. 8 105,000
Dec. 31 Bal. 10,000,000 April 18 600,000
Dec. 31 Bal. 2,205,000

Retained Earnings Cash Dividends


Jan. 1 Bal. 1,900,000 Jan. 1 Bal. 0 Dec. 31 CE 1,375,000
Dec. 31CE 1,375,000 Dec. 31 CE 1,000,000 Mar. 5 125,000
Dec. 31 Bal. 1,525,000 June 5 125,000
Sept. 5 125,000
Dec. 5 125,000
Dec. 14 875,000
Dec. 31 Bal. 0
CE: Closing entry

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PROBLEM 11-4A (Continued)

(c)

CONWAY LTD,
Statement of Retained Earnings
Year Ended December 31, 2015

Retained earnings, January 1 ................................................................ $1,900,000


Add: Profit ............................................................................................ 1,000,000
2,900,000
Less: Cash dividends ............................................................................ 1,375,000
Retained earnings, December 31 .......................................................... $1,525,000

(d)
CONWAY LTD.
Statement of Financial Position (Partial)
December 31, 2015

Shareholders’ equity
Share capital
$5 Preferred shares, noncumulative, unlimited
number authorized, 100,000 shares issued......................... $10,000,000
Common shares, unlimited number authorized,
1,750,000 shares issued ................................................... 2,205,000
Total share capital......................................................................... 12,205,000
Retained earnings ......................................................................... 1,525,000
Total shareholders’ equity ..................................................................... $13,730,000

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PROBLEM 11-4A (Continued)

(e) If Conway Ltd. was a public company it would be reporting under IFRS. The
transaction concerning the purchase of the land on February 8 would still be
recorded at the fair value of the land of $105,000 even if the shares had a reliable
value. As well, under IFRS requirements, Conway would report a statement of
changes in equity rather than a statement of retained earnings.

The statement of changes in equity follows (optional):

CONWAY LTD.
Statement of Changes in Equity
Year Ended December 31, 2015

Share Capital
Preferred Common Retained
Shares Shares Earnings Total

Balance Jan, 1 $1,500,000 $1,900,000 $3,400,000


Issued preferred shares $10,000,000 10,000,000
Issued common shares 705,000 705,000
Cash dividends (1,375,000) (1,375,000)
Profit 1,000,000 1,000,000
Balance Dec. 31 $10,000,000 $2,205,000 $1,525,000 $13,730,000

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PROBLEM 11-5A

(a)
Preferred Shares
Jan. 1 Balance 500,000
Jan. 1 Issue 500,000
Dec. 31 Balance 1,000,000

Common Shares
Jan. 1 Balance 2,700,000
Oct. 1 Issue 1,000,000
Dec. 31 Balance 3,700,000

Stock Dividends
Jan. 1 Balance 0
Dec. 31 Declaration** 407,000 Dec. 31 CE 407,000
Dec. 31 Balance 0

Stock Dividends Distributable


Dec. 31 Declaration** 407,000

Retained Earnings
During year CE Cash dividend* 100,000 Jan. 1 Balance 2,980,000
Dec. 31 CE Stock dividend** 407,000 Dec. 31 CE Profit 872,000
Dec. 31 Balance 3,345,000

* 20,000 × $5 = $100,000
** 370,000 × 5% × $22 = $407,000

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PROBLEM 11-5A (Continued)


(b) ROBICHAUD CORPORATION
Statement of Financial Position (Partial)
December 31, 2015

Shareholders’ equity
Share capital
$5 Preferred shares, noncumulative, unlimited
number of shares authorized, 20,000 issued ............ $1,000,000
Common shares, unlimited number of shares
authorized, 370,000 issued ................................... $3,700,000
Stock dividends distributable, 18,500 common shares 407,000 4,107,000
Total share capital ......................................................... 5,107,000
Retained earnings (See Note A) .................................... 3,345,000
Total shareholders’ equity ..................................................... $8,452,000

Note A: On December 31, 2015 the Board of Directors authorized a $500,000 restriction of
retained earnings for a plant expansion.

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PROBLEM 11-6A

(a)

Cash Dividend Stock Dividend Stock Split


(1) Assets $16,000,000 – No effect No effect
$600,000a = $16,000,000 $16,000,000
$15,400,000
(2) Liabilities No effect No effect No effect
$6,000,000 $6,000,000 $6,000,000
(3) Common No effect $2,000,000 + No effect
shares $2,000,000 $600,000b = $2,000,000
$2,600,000
(4) Retained $8,000,000 – $8,000,000 – No effect
earnings $600,000 = $600,000 = $8,000,000
$7,400,000 $7,400,000
(5) Total $10,000,000 – No effect No effect
shareholders’ $600,000 = $10,000,000 + $10,000,000
equity $9,400,000 $600,000 –
$600,000 =
$10,000,000
(6) Number of No effect 20,000 increase 200,000c
shares 400,000 (20,000 + 400,000 = increase
420,000) (400,000 +
200,000 =
600,000)
a
400,000 × $1.50 = $600,000
b
400,000 × 5% = 20,000 × $30 = $600,000
c
400,000 ÷ 2 = 200,000 × 3 = 600,000 after the 3-for-2 stock split

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PROBLEM 11-6A (Continued)

(b)

Cash Dividend Stock Dividend Stock Split


Advantages:
•Share price will likely •Retains cash •Retains cash
fall slightly (in •Share price will •Share price reduces
proportion to likely fall slightly significantly making shares
dividend). May (in proportion to more affordable to a
make shares dividend). May broader number of
slightly more make shares investors
affordable and slightly more •Share price generally starts
attract new affordable and increasing after split
investors attract new
•Makes shares investors
attractive for •Converts retained
investors wanting earnings to share
dividend income capital

Disadvantages:
•Reduces cash •Reduces earnings per •Reduces earnings per share
share •More shares on which to pay
•More shares on which future cash dividends
to pay future cash
dividends

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PROBLEM 11-7A

(a) Transaction entries:

Jan. 15 Cash Dividends (110,000 × $1) ..................... 110,000


Dividends Payable................................. 110,000

31 No entry required

Feb. 15 Dividends Payable ......................................... 110,000


Cash ...................................................... 110,000

Apr. 15 Stock Dividends (11,000* × $15) ................... 165,000


Stock Dividends Distributable ................ 165,000
* 110,000 × 10% = 11,000

30 No entry required

May 15 Stock Dividends Distributable ........................ 165,000


Common Shares ................................... 165,000

Oct. 1 No journal entry (memorandum entry only: 121,000 common shares × 2


= 242,000 common shares)

Closing entries:

Dec. 31 Income Summary........................................... 350,000


Retained Earnings ................................. 350,000

31 Retained Earnings ......................................... 275,000


Cash Dividends ..................................... 110,000
Stock Dividends..................................... 165,000

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PROBLEM 11-7A (Continued)


(b)

CE: Closing entry

Common Shares Retained Earnings


Jan. 1 Bal. 1,100,000 Jan. 1 Bal. 540,000
May 15 165,000 Dec. 31 CE 275,000 Dec. 31 CE 350,000
Dec. 31 Bal.1,265,000 Dec. 31 Bal. 615,000

Cash Dividends Stock Dividends


Jan. 15 110,000 Dec. 31 CE 110,000 Apr. 15 165,000 Dec. 31 CE 165,000
Dec. 31 Bal. 0 Dec. 31 Bal. 0

Stock Dividends Distributable Accumulated Other Comprehensive Income


May 15 165,000 Apr. 15 165,000 Jan. 1 60,000
Dec. 31 Bal. 0

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PROBLEM 11-7A (Continued)

(c)

WIRTH CORPORATION
Statement of Changes in Equity
Year Ended December 31, 2015
Accumulated
Other
Common Retained Comprehensive
Shares Earnings Income Total

Balance Jan, 1 $1,100,000 $540,000 $60,000 $1,700,000


Cash dividends (110,000) (110,000)
Stock dividends 165,000 (165,000) 0
Profit 350,000 350,000
Balance Dec. 31 $1,265,000 $615,000 $60,000 $1,940,000

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PROBLEM 11-7A (Continued)

(d)

Number of common shares: 110,000 + 11,000 + 121,000 = 242,000

WIRTH CORPORATION
Statement of Financial Position (Partial)
December 31, 2015

Shareholders’ equity
Common shares, unlimited number of shares
authorized, 242,000 issued ................................................. $1,265,000
Retained earnings ............................................................... 615,000
Accumulated other comprehensive income ......................... 60,000
Total shareholders’ equity ........................................... $1,940,000

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PROBLEM 11-8A

(a) Weighted Average Number of Shares

Aug. 1 350,000 × 12/12 = 350,000


Dec. 1 60,000 × 8/12 = 40,000
Feb. 1 10,000 × 6/12 = 5,000
420,000 395,000

(b) Earnings per Share

= Profit available to common shareholders ÷ Weighted average


number of common shares
= ($1,280,000 – $125,000*) ÷ 395,000
= $2.92

*Preferred dividend: $5 × 25,000 = $125,000

(c) A weighted average number of shares is used in the EPS calculation because the
issue of shares and other activities affecting the number of shares issued during the
period changes the amount of net assets upon which profit can be earned. Using the
number of shares at a point in time such as year-end to calculate earnings-per-share
does not take into account the year’s economic activity and other factors, which
might have impacted the number of shares issued during the period.

(d) Because the preferred shares are noncumulative, the dividend would not be
deducted in the calculation of profit available to common shareholders. The earnings
per share would be as follows:

= Profit available to common shareholders ÷ Weighted average


number of common shares
= $1,280,000 ÷ 395,000
= $3.24

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PROBLEM 11-9A

(a) Although profits were low in 2008, as demonstrated by the earnings per share ratio, it
is likely that the dollar amount of dividends remained unchanged from previous years
resulting in a higher than normal payout ratio in that year. Once Barrick experienced a
more normal level of profit in 2010 the payout ratio decreased to a level that is also
more normal for its operations. With the improved profit, likely came a share price
increase, resulting in a slight decrease in the dividend yield.

(b) If the dividend per share remained unchanged or even increased marginally, the
increase in the dividend yield most likely resulted from a decline in share price. With
the decline from a profit in 2011 to a loss in 2012, the market price of Barrick shares
likely declined significantly.

(c) Because of the nature of the business, creditors should not be overly concerned with
the company’s continued payment of dividends, particularly since past experience
would have given them the reassurance that the company would return to profitability.
Due to the volatility of gold prices, creditors would carefully scrutinize the source of
the losses of 2009 and 2012 and reassess their risk in holding debt due from Barrick.
Although creditors are generally more concerned with cash flow than profit, Barrick’s
poor profit performance of 2009 and 2012 would almost certainly result in decreased
cash flows from operating activities. The company’s continuous payment of dividends
in the midst of decreased cash flows would put creditors on watch to ensure that this
did not hinder Barrick’s ability to repay its debt.

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PROBLEM 11-10A

(a) (in millions, except per share information)

Ratio 2012 2011

1. Payout ratio $485 $437


= 31.9% = 38.4%
$1,518 $1,137

2. Dividend $3.08 $2.74


yield = 4.0% = 3.9%
$77.18 $69.61

3. Earnings $1,518 $1,137


= $9.41 = $7.00
per share 161.4 162.4

4. Return on
common $1,518 = 24.9% $1,137 = 20.5%
shareholders' $6,089 $5,535
equity

(b) For the year 2012, National Bank’s dividend yield, earnings per share, and return on
common shareholders’ equity ratios all improved over 2011. Its payout ratio declined,
most likely due to the increase in profits (profitability).

Compared to its industry, National Bank payout, dividend yield, and return on
common shareholders’ equity ratios are in line with its peers.

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PROBLEM 11-11A

(a) World Oil is the more profitable of the two companies in spite of having a lower profit
margin than Petro-Boost. Petro-Boost’s profit margin of 10% is higher than World Oil’s
8.4% and in line with the average company in the industry, which has a profit margin
of 10.9%. Despite this, World Oil’s return on common shareholders’ equity, return on
assets, and asset turnover ratios are much higher than those of Petro-Boost and the
average company in the industry.

(b) Petro-Boost would be the better investment for someone interested in generating a
regular income from his or her investment. Petro-Boost has a higher payout ratio
(12.3% versus 9.9% for World Oil) and dividend yield (1.9% versus 0.7% for World
Oil), which is good for an investor who needs a regular income from their investment.

(c) The higher price-earnings ratio of 17.1 times indicates that investors have higher
expectations of future profitability for World Oil than Petro-Boost. Therefore, an
investor interested in experiencing a return in the form of future capital gains would
have a better chance of attaining those gains by investing in World Oil.

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PROBLEM 11-1B

Shareholders’ Equity
Accumulated
Other
Preferred Common Retained Comprehensive
Assets Liabilities Shares Shares Earnings Income
1. +$300,000 NE NE +$300,000 NE NE
2. +50,0001 NE +$50,000 NE NE NE
3. +29,000 NE NE +29,000 NE NE
4. -71,0002 NE NE NE -$71,000 NE
5. +5,000 NE NE NE NE +$5,000

1
500 × $100 = $50,000
2
(35,000 + 500) × $2 = $71,000

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PROBLEM 11-2B

(a) Transaction entries:

June 5 Cash (80,000 × $4) ........................................ 320,000


Common Shares ................................... 320,000

Aug. 21 Cash (5,000 × $100) ...................................... 500,000


Preferred Shares ................................... 500,000

Sept. 15 Land .............................................................. 95,000


Common Shares ................................... 95,000

Nov. 20 Cash (78,000 × $4.50) ................................... 351,000


Common Shares ................................... 351,000

Mar. 9 Cash (10,000 × $5) ........................................ 50,000


Common Shares ................................... 50,000

April 16 Cash (2,000 × $100) ...................................... 200,000


Preferred Shares ................................... 200,000

May 15 Cash Dividends (7,000 × $4) ......................... 28,000


Dividends Payable ................................ 28,000

Closing entries:

May 31 Retained Earnings .......................................... 28,000


Cash Dividends..................................... 28,000

31 Income Summary............................................ 250,000


Retained Earnings .................................. 250,000

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PROBLEM 11-2B (Continued)

(b)

Preferred Shares
Aug. 21 500,000 Cash Dividends
Apr. 16 200,000 May 15 28,000 May 31 CE 28,000
May 31 Bal. 700,000 May 31 Bal. 0

Common Shares Retained Earnings


June 5 320,000 May 31 CE 28,000 May 31 CE 250,000
Sept. 15 95,000 May 31 Bal. 222,000
Nov. 20 351,000
Mar. 9 50,000
May 31 Bal. 816,000

CE: Closing entry

(c) Number of preferred shares:


5,000 + 2,000 = 7,000

Number of common shares:


80,000 + 22,000 + 78,000 + 10,000 = 190,000

WETLAND CORPORATION
Statement of Financial Position (Partial)
May 31, 2015

Shareholders’ equity
Share capital
$4 Preferred shares, cumulative, unlimited
number authorized, 7,000 shares issued................................... $ 700,000
Common shares, unlimited number authorized
190,000 shares issued ........................................................... 816,000
Total share capital........................................................................... 1,516,000
Retained earnings ........................................................................... 222,000
9 Total shareholders' equity...................................................................... $1,738,000

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PROBLEM 11-3B

(a) Transaction entries:

Feb. 28 Cash ......................................................... 150,000


Preferred Shares (1,500 shares) ...... 150,000

April 12 Cash ......................................................... 3,500,000


Common Shares (100,000 shares) ... 3,500,000

May 25 Land .......................................................... 85,000


Common Shares (2,500 shares) ....... 85,000

Dec. 29 Cash Dividends......................................... 113,750


Dividends Payable ............................ 113,750
(44,000 + 1,500) × $2.50 = $113,750

Jan. 15 No entry required

Closing entries:

Jan. 31 Retained Earnings .................................... 113,750


Cash Dividends................................. 113,750

31 Retained Earnings .................................... 5,000


Income Summary.............................. 5,000

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PROBLEM 11-3B (Continued)

(b) CE: Closing entry

Preferred Shares
Feb. 1 Bal. 440,000
Feb. 28 150,000
Jan. 31 Bal. 590,000

Common Shares
Feb.1 Bal. 1,050,000
April 12 3,500,000
May 25 85,000
Jan. 31 Bal. 4,635,000

Additional Contributed Capital


Feb. 1 Bal. 75,000
Jan. 31 Bal 75,000

Retained Earnings
Feb. 1 Bal. 1,000,000
Jan. 31 CE 113,750
Jan. 31 CE 5,000
Jan. 31 Bal. 881,250

Accumulated Other Comprehensive Income


Feb. 1 Bal. 65,000
Jan. 31 Bal. 65,000

Cash Dividends
Dec 29 113,750 Jan 31 CE 113,750
Jan 31 Bal. 0

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PROBLEM 11-3B (Continued)

(c)

UJJAL CORPORATION
Statement of Changes in Equity
Year Ended January 31, 2016

Accumulated
Share Capital Additional Other
Preferred Common Contributed Retained Comprehensive
Shares Shares Capital Earnings Income Total

Balance Feb. 1, 2015 $440,000 $1,050,000 $75,000 $1,000,000 $65,000 $2,630,000


Issued preferred shares 150,000 150,000
Issued common shares 3,585,000 3,585,000
Cash dividends (113,750) (113,750)
Loss (5,000) (5,000)
Balance Jan. 31, 2016 $590,000 $4,635,000 $75,000 $881,250 $65,000 $6,246,250

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PROBLEM 11-3B (Continued)


(d)

Number of preferred shares:


44,000 + 1,500 = 45,500

Number of common shares:


70,000 + 100,000 + 2,500 = 172,500

UJJAL CORPORATION
Statement of Financial Position (Partial)
January 31, 2016

Shareholders’ equity
Contributed capital
Share capital
$5 Preferred shares, noncumulative, unlimited
number of shares authorized, 45,500 issued.............. $ 590,000
Common shares, unlimited number of shares
authorized, 172,500 issued ........................................ 4,635,000 $5,225,000
Additional contributed capital ............................................................... 75,000
Total contributed capital ....................................................................... 5,300,000
Retained earnings ................................................................................ 881,250
Accumulated other comprehensive income ......................................... 65,000
Total shareholders’ equity ........................................................................... $6,246,250

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PROBLEM 11-4B

(a) Transaction entries:

Jan. 2 Cash ......................................................... 500,000


Preferred Shares (10,000 × $50) ...... 500,000

Mar. 10 Cash Dividends (10,000 × $2 × 3/12) ....... 5,000


Dividends Payable ............................ 5,000

22 No entry required

April 1 Dividends Payable .................................... 5,000


Cash ................................................. 5,000

June 10 Cash Dividends (10,000 × $2 × 3/12) ....... 5,000


Dividends Payable ............................ 5,000

22 No entry required

July 1 Dividends Payable .................................... 5,000


Cash ................................................. 5,000

Aug. 12 Cash ......................................................... 73,000


Common Shares (10,000 × $7.30) ... 73,000

Sept. 1 Cash Dividends (10,000 × $2 × 3/12) ....... 5,000


Dividends Payable ............................ 5,000

22 No entry required

Oct. 1 Dividends Payable .................................... 5,000


Cash ................................................. 5,000

Oct. 15 Equipment................................................. 15,000


Common Shares (2,000 shares) ....... 15,000

Closing entries:

Dec. 31 Retained Earnings .................................... 50,000


Income Summary.............................. 50,000

31 Retained Earnings .................................... 15,000


Cash Dividends................................. 15,000

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PROBLEM 11-4B (Continued)


(b)

Preferred Shares Common Shares


Jan. 2 500,000 Jan. 1 Bal. 150,000
Aug. 12 73,000
Oct. 15 15,000
Dec. 31 Bal. 238,000

Retained Earnings Cash Dividends


Jan. 1 Bal. 580,000 Jan. 1 Bal. 0 Dec. 31 CE 15,000
Dec. 31 CE 15,000 Mar. 10 5,000
Dec. 31 CE 50,000 June 10 5,000
Dec. 31 Bal. 515,000 Sept. 1 5,000
Dec. 31 Bal. 0
CE: Closing entry

(c)
SCHIPPER LTD.
Statement of Retained Earnings
Year Ended December 31, 2015

Retained earnings, January 1 .................................................................... $580,000


Less: Loss ................................................................................................ 50,000
530,000
Less: Cash dividends............................................................................... 15,000
Retained earnings, December 31 .............................................................. $515,000

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PROBLEM 11-4B (Continued)


(d)
SCHIPPER LTD.
Statement of Financial Position (Partial)
December 31, 2015

Shareholders’ equity
Share capital
$2 Preferred shares, noncumulative, unlimited number
authorized, 10,000 issued ............................................................. $ 500,000
Common shares, unlimited number
authorized, 112,000* issued .......................................................... 238,000
Total share capital ............................................................................ 738,000
Retained earnings ............................................................................. 515,000
Total shareholders’ equity ................................................................. $1,253,000

*Number of common shares: 100,000 + 10,000 + 2,000 = 112,000

(e) If Schipper Ltd. was a public company, the transaction concerning the purchase of
the equipment on October 15 would still be recorded at the fair value of the
equipment of $15,000 even if the shares had a reliable value. As well, under IFRS
requirements, Schipper would report a statement of changes in equity rather than a
statement of retained earnings. The statement of changes in equity follows
(optional):

SCHIPPER LTD.
Statement of Changes in Equity
Year Ended December 31, 2015

Share Capital
Preferred Common Retained
Shares Shares Earnings Total

Balance Jan, 1 $150,000 $580,000 $730,000


Issued preferred shares $500,000 500,000
Issued common shares 88,000 88,000
Cash dividends (15,000) (15,000)
Loss (50,000) (50,000)
Balance Dec. 31 $500,000 $238,000 $515,000 $1,253,000

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PROBLEM 11-5B

(a)

Preferred Shares
Jan. 1 Balance 750,000
Dec. 31 Balance 750,000

Common Shares
Jan. 1 Balance 3,210,000
March 1 Issue 350,0001
Sept. 25 Stock dividend 297,000
Dec. 31 Balance 3,857,000

Stock Dividends
Aug. 18 Declaration 297,0002 Dec. 31 CE 297,000
Dec. 31 Balance 0

Stock Dividends Distributable


Sept. 25 Issue 297,000 Aug. 18 Declaration 297,0002
Dec. 31 Balance 0

Retained Earnings
Jan.-Dec. CE Cash dividend 60,0003 Jan. 1 Balance 980,000
Dec. 31 CE Stock dividend 297,000 Dec. 31 CE Profit 750,000
Dec. 31 Balance 1,373,000
1
Common Shares: 20,000 × $17.50 = $350,000
2
Common Shares: (255,000 + 20,000) × 6% = 16,500 × $18 = $297,000. Note that the
stock dividend was declared on August 18 (thus the debit to Stock Dividends) and
distributed on September 25 (thus the credit to Common Shares).
3
Preferred Shares:15,000 × $4 = $60,000

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PROBLEM 11-5B (Continued)


(b)
MAGGIO CORPORATION
Statement of Financial Position (Partial)
December 31, 2015

Shareholders’ equity
Share capital
$4 Preferred shares, cumulative, unlimited number
of shares authorized, 15,000 issued ............................................ $ 750,000
Common shares, unlimited number of shares
authorized, 291,500 issued ......................................................... 3,857,000
Total share capital .................................................................................. 4,607,000
Retained earnings (Note X) .................................................................... 1,373,000
Total shareholders’ equity ............................................................................. $5,980,000

Note X: $200,000 of retained earnings are restricted by a debt covenant.

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PROBLEM 11-6B

(a)

Cash Dividend Stock Dividend Stock Split

(1) Assets $9,000,000 – No effect = No effect =


$500,000a = $9,000,000 $9,000,000
$8,500,000

(2) Liabilities No effect = No effect = No effect =


$2,500,000 $2,500,000 $2,500,000

(3) Common shares No effect = $3,000,000 + No effect =


$3,000,000 $375,000b $3,000,000
= $3,375,000

(4) Retained earnings $3,500,000 – $3,500,000 – No effect =


$500,000 $375,000 $3,500,000
= $3,000,000 = $3,125,000

(5) Total shareholders’ $6,500,000 – No effect No effect =


equity $500,000 ($6,500,000 + $6,500,000
= $6,000,000 $375,000 –
$375,000 =
$6,500,000)

(6) Number of shares No effect = 25,000 increase 500,000 increase


500,000 (25,000 + 500,000 (500,000 × 2 =
= 525,000) 1,000,000)
a
500,000 × $1.00 = $500,000
b
500,000 × 5% × $15 = $375,000

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PROBLEM 11-6B (Continued)

(b)

Cash Dividend Stock Dividend Stock Split


Advantages:
•Share price will likely •Retains cash •Retains cash
fall slightly (in •Share price will •Share price reduces
proportion to likely fall slightly significantly making shares
dividend). May (in proportion to more affordable to a
make shares dividend). May broader number of
slightly more make shares investors
affordable and slightly more •Share price generally starts
attract new affordable and increasing after split
investors attract new
•May attract investors investors
looking for dividend •Converts retained
income earnings to share
capital

Disadvantages:
•Reduces cash •Reduces earnings per •Reduces earnings per share
share •More shares on which to pay
•More shares on which future cash dividends
to pay future cash
dividends

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PROBLEM 11-7B

(a) Transaction entries:

Feb. 1 Cash Dividends (75,000 × $1) ....................... 75,000


Dividends Payable................................. 75,000

15 No entry required

Mar. 1 Dividends Payable ......................................... 75,000


Cash ...................................................... 75,000

Apr. 1 No journal entry required (memorandum entry only)

July 1 Stock Dividends (11,250* × $14) ................... 157,500


Stock Dividends Distributable ............... 157,500
*75,000 shares × 3 = 225,000 × 5% = 11,250

15 No entry required

31 Stock Dividends Distributable ........................ 157,500


Common Shares ................................... 157,500

Closing entries:

Dec. 31 Income Summary........................................... 400,000


Retained Earnings ................................. 400,000

31 Retained Earnings ......................................... 232,500


Stock Dividends..................................... 157,500
Cash Dividends ..................................... 75,000

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PROBLEM 11-7B (Continued)

(b)
Common Shares Retained Earnings
Jan. 1 Bal. 1,700,000 Jan. 1 Bal. 900,000
July 31 157,500 Dec. 31 CE 232,500 Dec. 31 CE 400,000
Dec. 31 Bal.1,857,500 Dec. 31 Bal. 1,067,500

Stock
Dividends Distributable Accumulated Other Comprehensive Loss
July 31 157,500 July 1 157,500 Jan. 1 125,000
Dec. 31 Bal. 0

Cash Dividends Stock Dividends


Feb. 1 75,000 Dec. 31 CE 75,000 July 1 157,500 Dec. 31 CE 157,500
Dec. 31 Bal. 0 Dec. 31 Bal. 0

(c)
STENGEL CORPORATION
Statement of Changes in Equity
Year Ended December 31, 2015
Accumulated
Other
Common Retained Comprehensive
Shares Earnings Loss Total

Balance Jan, 1 $1,700,000 $ 900,000 $(125,000) $2,475,000


Cash dividends (75,000) (75,000)
Stock dividends 157,500 (157,500) 0
Profit 400,000 400,000
Balance Dec. 31 $1,857,500 $1,067,500 $(125,000) $2,800,000

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PROBLEM 11-7B (Continued)


(d)

Number of common shares: 75,000 × 3 = 225,000 + 11,250 = 236,250

STENGEL CORPORATION
Statement of Financial Position (Partial)
December 31, 2015

Shareholders’ equity
Common shares, unlimited number of shares
authorized, 236,500 issued .............................................. $1,857,500
Retained earnings .................................................................... 1,067,500
Accumulated other comprehensive loss ................................... (125,000)
Total shareholders’ equity ................................................................. $2,800,000

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PROBLEM 11-8B

(a) Weighted Average Number of Shares

April 1 500,000 × 12/12 = 500,000


June 1 2,000 × 10/12 = 1,667
July 1 50,000 × 9/12 = 37,500
552,000 539,167

(b) Earnings per Share


= ($1,016,750 – $100,000*) ÷ 539,167
= $1.70

*Preferred dividend: 20,000 × $5 = $100,000

(c) It is important to use the profit available to common shareholders because the
preferred shareholders must receive any dividends to which they are entitled before
the common shareholders receive their dividends. The corporation’s preferred
shareholders also have a prior claim on the corporation’s assets in the event of its
liquidation.

(d) Because the preferred shares are cumulative there would be no change in the
calculation of the earnings per share if the dividend had not been declared to the
preferred shareholders during the year.

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PROBLEM 11-9B

(a) The increase in the payout ratio in 2009 compared to 2008 is related to the decline
in profit, as indicated by the earnings per share ratio. The earnings per share
amount is the denominator in the calculation of the payout ratio (when dividend per
share is used as the numerator). When the denominator declines, the ratio result
increases. The dollar amount of the dividend likely did not change.

(b) In 2012, TransAlta’s experienced a large loss as is demonstrated by the earnings


per share. Because of the nature of the business, creditors are not likely overly
concerned with the company’s continued payment of dividends, particularly since
past experience would have given them the reassurance that the company would
return to profitability. Investors would view a suspension of dividends as a very
negative signal.

(c) If the dividend per share remained unchanged or even increased marginally, the
increase in the dividend yield most likely resulted from a decline in share price. With
the decline in profit in 2011 to a loss in 2012, the market price of TransAlta’s shares
likely declined significantly.

(d) Investors seeking dividend income would be happy with the corporation’s dividend
policy. A higher dividend payout ratio means that a greater portion of the company’s
profit is distributed to investors in the form of dividends. Since dividend yield is often
compared to fixed income interest rates, a dividend yield in 2012 of 7.7% is much
higher than the rate of interest that could have been earned by an investor on debt
investments.

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PROBLEM 11-10B

(a) (in millions, except for per share information)

Ratio 2012 2011

$2,493 $2,200
1. Payout ratio = 41.4% = 44.3%
$6,023 $4,965

2. Dividend $2.19 $2.05


yield = 4.0% = 3.9%
$54.25 $52.53

3. Earnings $6,023 $4,965


= $5.32 = $4.63
per share 1,133 1,072

4. Return on
common $6,023 = 19.6% $4,965 = 20.7%
shareholders' $30,804 $24,042
equity

(b) During 2012, Scotiabank’s payout ratio decreased primarily because the bank’s profit
rose proportionately more than the amount of cash dividends paid to the common
shareholders. Its dividend yield slightly increased, primarily because of an increase in
share prices. Its return on common shareholders’ equity declined in 2012. Despite an
increase in profit, its shareholders’ equity increased more proportionately.

The Scotiabank’s payout and dividend yield ratios are in line with those of its industry
peers. Its return on common shareholders’ equity, although higher than the industry in
2011, is quite a bit lower than the industry in 2012.

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PROBLEM 11-11B

(a) Overall, Bargain Hunters is the more profitable of the two companies. Its profit
margin, return on common shareholders’ equity, and return on assets ratios are
higher than both Discount Paradise and the average company in the industry. In
addition, Bargain Hunters has a lower asset turnover ratio than its competitors. This
may mean that the company is not using its assets as productively as its
competitors.

(b) Discount Paradise would be the better investment for someone interested in
generating a regular income from his or her investment. Discount Paradise has a
much higher payout ratio than Bargain Hunters (25% versus 9.4% for Bargain
Hunters), indicating that it has a policy of paying out more profit as dividends which
is good for an investor who needs a regular income from their investment. The
dividend yield provided by Discount Paradise is also superior to Bargain Hunters, at
about three times the amount.

(c) Even though Discount Paradise is paying out more of its profits as dividends than
Bargain Hunters, it has the higher price-earnings ratio. This indicates that investors
have higher expectations for future growth for Discount Paradise. Consequently,
Discount Paradise can be expected to have a faster and higher growth in its share
price.

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BYP 11-1 FINANCIAL REPORTING

(a) 1. Shoppers Drug Mart’s reported basic earnings per share for the year ended
December 29, 2012 was $2.92 and for the year ended December 31, 2011 was
$2.84.

2. Shoppers reported a weighted average number of common shares of 208.4


million in 2012, lower than the 216.4 million reported in 2011.

(b)
(Number shares in thousands) 2012 2011
1. Number of common shares authorized unlimited unlimited
1. Number of preferred shares authorized unlimited unlimited
2. Number of common shares issued 204,451.8 212,475.6
2. Number of preferred shares issued nil nil

The number of common shares issued does not correspond to the weighted
average number of common shares because the number of shares is the actual
number of shares issued as of the end of the fiscal year while the weighted
average amount of shares weights shares issued and repurchased during each
fiscal year for the proportion of the year they have been outstanding.

3. 7,949,400 common shares were repurchased during the 2012 fiscal year using a
normal course issuer bid at an average cost of $41.53 per share ($330,128,000
÷ 7,949,400).

(c) 1. Shoppers reported other comprehensive loss in the amount of $4,978,000 for the
2012 fiscal year and a loss in the amount of $21,571,000 for the 2011 fiscal year.

2. Shoppers declared quarterly dividends to common shareholders in the amount of


$0.265 per share during the 2012 fiscal year for a total of $1.06 per share. This
amount compares to $0.25 per share in the 2011 fiscal year for a total of $1.00
per share.

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BYP 11-2 COMPARATIVE ANALYSIS

(a)

Ratio Shoppers Drug Mart Jean Coutu

Earnings per share (basic) $2.92 $2.57

Diluted earnings per share $2.92 $2.57

Both Shoppers and Jean Coutu report the same amount for both basic and diluted
earnings per share.

(b)
Shoppers Drug Mart Jean Coutu
Ratio
($ in thousands) ($ in millions)

Payout ratio $215,671 $60.8


= 35.4% = 10.9%
$608,481 $558.4

Dividend yield $1.08 $0.28


= 2.5% = 1.8%
$42.80 $15.78

$42.80 $15.78
Price-earnings ratio = 14.7 times = 6.1 times
$2.92 $2.57

(c) Investors who are interested in dividend income would favour Shoppers over Jean
Coutu based on its higher payout and dividend yield ratios. The earnings per share
calculated in (a) is not comparable between companies because of differing capital
structures.

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BYP 11-3 COMPARING IFRS AND ASPE

(a) Companies choose different types of ownership structures for a variety of reasons.
One of the most common reasons companies choose to go public it is to access the
funds available through the capital market. However, this access to capital comes
with costs. Once a company goes public, it must follow the securities regulations,
which results in additional costs and requirements such as filing quarterly financial
statements, audited annual financial statements, expanded disclosure requirements,
and various other reports. Also, because public companies must publicly disclose
financial information, competitors may have access to useful information.

Although private companies may have more difficulty accessing large amounts of
capital, some choose to remain private in order to retain control over the company.
Once a company is public, it is answerable to a variety of stakeholders.
Consequently, some companies choose to remain private in order to avoid revealing
information to the general public, in particular to their competitors.

(b) Public companies should record noncash transactions at the fair value of the
consideration received (the new restaurant). If that consideration cannot be reliably
determined, the fair value of the consideration given up (the shares) should be used
instead. Since Boston Pizza is a public company, it can easily obtain an objective
measure of the fair value of its shares through the TSX (the exchange in what it is
listed).

Private companies should record noncash transactions at the most reliable fair value
of what was received or given up. When private companies such as Pizza Pizza
whose shares are not publicly traded need to determine the fair value of their
shares, they often hire a business valuation expert to provide them a valuation. It is
more usual that they find the fair value of the consideration received (that is, of the
new restaurant) to be more reliable and relevant to use than the fair value of the
consideration given up, given the lack of a readily available share price.

(c) When the standard setters developed ASPE, a major focus was on the objectives
and needs of the users of the financial statements. The users generally fall into two
broad groups: lenders and other creditors, and private shareholders. The two groups
are generally more focused on shorter-term cash flows, liquidity, balance sheet
strength, interest coverage, and solvency issues. Given these users’ needs,
earnings per share (EPS), is not usually considered to be relevant to the
shareholders. In addition, the shares are usually very closely held. Therefore, ASPE
does not require that private companies report EPS (but if the company thinks EPS
is relevant information, it is free to report it).

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BYP 11-4 CRITICAL THINKING CASE

Note to instructors: All of the material supplementing this group activity, including a
suggested solution, can be found in the Collaborative Learning section of the Instructor
Resource site accompanying this textbook as well as in the Prepare and Present section of
WileyPLUS.

Option 1 Option 2 Option 3


All equity All debt Debt & equity
At the beginning of the year:
Assets $1,000,000 $1,000,000 $2,000,000
Liabilities 999,999 1,000,000
Shareholders' equity 1,000,000 1 1,000,000

(a) Projected income statements:

Option 1 Option 2 Option 3


All equity All debt Debt & equity

Revenue (= to assets) $1,000,000 $1,000,000 $2,000,000


Operating expenses (85% of revenue) 850,000 850,000 1,700,000
Profit from operations 150,000 150,000 300,000
Interest expense (6% of liabilities) - 60,000 60,000
Profit before income tax 150,000 90,000 240,000
Income tax expense (25% of profit
before income tax) 37,500 22,500 60,000
Profit $ 112,500 $ 67,500 $ 180,000

(b) The return on common shareholders’ equity for each option is calculated below. Please
note that because the profit will be paid out as dividends, the retained earnings at the
end of the year will be zero so the average common shareholders equity at the end of
the year will be the same amount that it was at the beginning of the year.

Option 1 Option 2 Option 3


All equity All debt Debt & equity
Profit for the year $ 112,500 $67,500 $ 180,000
Common shareholder's equity, beg. of year 1,000,000 1 1,000,000
Common shareholder's equity, end of year 1,000,000 1 1,000,000
Average shareholder's equity for the year 1,000,000 1 1,000,000
Return on common shareholders’ equity 11.3% 6,750,000.0% 18.0%

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BYP 11-4 (Continued)


(b) (Continued)

The option with the lowest return is the one with the lowest level of debt relative to
equity. When no debt is taken out, a company cannot take advantage of leverage,
which means that the company does not profit by using the bank’s money. As a result,
the best return is the one with all debt, Option 2. Because the denominator is so low
(only $1 of equity), the return appears to be astronomically high.

(c) The amount of cash that Depinder would have before income tax is calculated in the
table below. He will have the most cash under Option 3 if he borrows money from the
bank and buys the larger restaurant.

Option 1 Option 2 Option 3


All equity All debt Debt & equity
Dividends received by Depinder $112,500 $ 67,500 $180,000
Interest received by Depinder 60,000
$127,500

(d) If the operating expenses are greater than the revenues, then the company will have a
loss. The return on common shareholders’ equity will be negative.

If the company has more debt, additional interest will have to be paid to the bank and
this will make the loss greater and the return on common shareholder’s equity lower
than it would have been otherwise.

(e) If the bank loan was replaced with preferred shares, there would be no interest expense
on the income statement and profit would rise. The preferred dividends would be
reported on the statement of changes in equity and not on the income statement. The
profit for the large restaurant would be exactly double what is currently reported on the
income statement for the Option 1, the purchase of the small restaurant.

(f) The preferred shares that the Uncle would purchase would be considered to be
retractable since he has the right to require the company buy back the shares. This
makes the shares similar to debt because there is a contractual obligation to pay an
amount in the future (this is in essence the definition of a liability). Because of this, the
preferred shares would be shown as a liability rather an equity item. Consequently, the
dividends on those shares would be treated as interest in the income statement rather
than as dividends in the statement of changes in equity for consistency with its
presentation on the statement of financial position.

(g) If the business was not incorporated, the income statement would still be prepared but
income tax expense would not be shown. This is because the profit of the business is
paid at the personal level as the business is not a separate legal entity.

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BYP 11-5 ETHICS CASE

(a) The stakeholders in this situation are:


Vince Ramsey, president of Flambeau Corporation.
Janice Rahn, financial vice-president.
The shareholders of Flambeau Corporation.

(b) The stock dividend results in a decrease in retained earnings and an increase of the
same amount in share capital with no change in total shareholders’ equity. There is no
change in total assets and no change in total liabilities and shareholders’ equity.

(c) The 5% stock dividend will likely reduce the value at which the shares are trading by
around 5%—at least in the immediate future. Since essentially nothing has changed
in the company’s financial position, the only effect a 5% stock dividend will have on
the market value of the shares is to allocate the equity of the business over 5% more
shares.

(d) There is nothing unethical in declaring and issuing a stock dividend. However, the
president’s order to write a press release convincing the shareholders that the stock
dividend is just as good as a cash dividend is unethical. A stock dividend is not a
cash dividend and does not necessarily leave the shareholder in the same position. A
stock dividend is a “paper” dividend—the company issues a certificate, not a cheque
(cash).

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BYP 11-6 “ALL ABOUT YOU” ACTIVITY

Note to instructors: All of the material supplementing this group activity, including a
suggested solution, can be found in the Collaborative Learning section of the Instructor
Resource site accompanying this textbook as well as in the Prepare and Present section of
WileyPLUS.

(a)

Alternative 1 Alternative 2 Alternative 3


(Borrow $50,000) (Issue $50,000 common (Issue $50,000 preferred
shares) shares)
Debt to total $71,980 ÷ $195,280 $31,980 ÷ $207,680 $31,980 ÷ $204,680
assets = 36.9% = 15.4% = 15.6%

($24,000 – $3,000) ÷
Return on $21,600 ÷ [[($50,000 + $24,000 ÷ [[($50,000 +
[[($50,000 + $51,700) +
common $51,700) + ($50,000 + $51,700) + ($100,000 +
($50,000 + $72,700)] ÷
shareholders’ $73,300)] ÷ 2)] $75,700)] ÷ 2)]
2)]
equity = 19.2% = 17.3%
= 18.7%
Earnings per $21,600 ÷ 500 ($24,000 - $3,000) ÷ 500
$24,000 ÷ 1,000 = $24.00
share = $43.20 = $42.00

(b) Alternatives 2 and 3 provide for the least amount of debt—$31,980 instead of
$71,980 reported in Alternative 1. Instead of borrowing the company has issued
shares in Alternatives 2 and 3.

(c) Alternative 1, borrowing instead of issuing shares, provides for the highest return
on equity and the highest earnings per share.

(d) If I were a shareholder, I would choose Alternative 1. This alternative would


generate a smaller amount of profit because of the amount of after tax interest
expense paid on the loan; however, the return on common shareholder’s equity
and earnings per share would increase because the distribution of profit is limited
to current shareholders.

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BYP 11-7 SERIAL CASE

(a) June 15 Cash Dividends .................................................... 75,000


Dividends Payable ........................................ 75,000

June 30 Dividends Payable ................................................ 75,000


Cash ............................................................. 75,000

Since the date of record on the declaration of the dividend is June 20, 2015, only
shareholders on that date are eligible to receive dividends. Natalie, Janet, and Brian
each receive ⅓ of the dividend and will each receive $25,000.

(b) June 30 Vehicles ................................................................ 45,000


Cash ..................................................................... 62,500
Common Shares (100 × $1,075) .................. 107,500

(c)
KOEBEL’S FAMILY BAKERY LTD.
Statement of Retained Earnings
Year Ended June 30, 2015

Retained earnings, July 1, 2014 ................................................................... $182,601


Add: Profit .................................................................................................. 216,069
398,670
Less: Cash dividends .................................................................................. 75,000
Retained earnings, June 30, 2015 ............................................................... $323,670

If Koebel’s followed IFRS rather than ASPE, a statement of changes in equity


explaining the changes in each component of shareholder’s equity would be required
instead of a statement of retained earnings.

(d)
KOEBEL’S FAMILY BAKERY LTD.
Statement of Financial Position (Partial)
June 30, 2015

Shareholders’ equity
Common shares, unlimited number authorized, 400 issued .......... $107,800
Retained earnings .......................................................................... 323,670
Total shareholders’ equity ...................................................................... $431.470

($300 + $107,500 = $107,800)

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COMPREHENSIVE CASE: CHAPTERS 3 – 11

(a) Summary Transaction Entries:

1. Cash ...................................................................................... 50,000


Preferred Shares ............................................................. 50,000

2. Cash ...................................................................................... 30,000


Common Shares .............................................................. 30,000

3. Accounts Receivable ............................................................. 320,000


Cash ...................................................................................... 100,000
Sales ................................................................................ 420,000

Cost of Goods Sold ............................................................... 250,000


Merchandise Inventory..................................................... 250,000

4. Cash ...................................................................................... 296,000


Accounts Receivable ....................................................... 296,000

5. Supplies ................................................................................ 35,100


Accounts Payable ............................................................ 35,100

6. Merchandise Inventory .......................................................... 330,000


Accounts Payable ............................................................ 330,000

7. Accounts Payable ................................................................. 322,000


Merchandise Inventory (2% × $322,000) ......................... 6,440
Cash ................................................................................ 315,560

8. Salaries Expense .................................................................. 88,200


Cash ................................................................................ 88,200

9. Allowance for Doubtful Accounts........................................... 1,700


Accounts Receivable ....................................................... 1,700

10. Interest Expense ................................................................... 4,000


Mortgage Payable ................................................................. 2,000
Cash ................................................................................ 6,000

11. Cash Dividends ($1,400 + $4,200) ........................................ 5,600


Dividends Payable ........................................................... 5,600

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COMPREHENSIVE CASE: CHAPTERS 3–11(Continued)

(a) (Continued)

Adjusting Journal Entries:

1. Dec.31 Supplies Expense ($4,400 + $35,100 – $5,900) ....... 33,600


Supplies ........................................................... 33,600

2. 31 Bad Debts Expense ($1,500 – $1,700 + $3,500) ...... 3,700


Allowance for Doubtful Accounts ..................... 3,700

3. 31 Depreciation Expense............................................... 4,400


Accumulated Depreciation—Buildings ............. 4,400
($142,000 – $10,000) ÷ 30

4. 31 Interest Expense ....................................................... 350


Interest Payable ............................................... 350

5. 31 Bank Charges Expense ............................................ 3,000


Cash ................................................................ 3,000

6. 31 Income Tax Expense ................................................ 6,000


Income Tax Payable ........................................ 6,000

(b)

Cash
Jan. 1 Bal. 24,000
Summary 50,000 Summary 315,560
Summary 30,000 Summary 88,200
Summary 100,000 Summary 6,000
Summary 296,000 Adj. 3,000
Dec. 31 Bal. 87,240

Accounts Receivable
Jan. 1 Bal. 45,500 Summary 296,000
Summary 320,000 Summary 1,700
Dec. 31 Bal. 67,800

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COMPREHENSIVE CASE: CHAPTERS 3–11 (Continued)

(b) (Continued)

Allowance for Doubtful Accounts


Summary 1,700 Jan. 1 Bal. 1,500
Dec. 31 Adj. 3,700
Dec. 31 Bal. 3,500

Merchandise Inventory
Jan. 1 Bal. 70,000 Summary 250,000
Summary 330,000 Summary 6,440
Dec. 31 Bal. 143,560

Supplies
Jan. 1 Bal. 4,400 Dec. 31 Adj. 33,600
Summary 35,100
Dec. 31 Bal. 5,900

Land
Jan. 1 Bal. 40,000

Buildings
Jan. 1 Bal. 142,000

Accumulated Depreciation—Buildings
Jan. 1 Bal. 22,000
Dec. 31 Adj. 4,400
Dec. 31 Bal. 26,400

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COMPREHENSIVE CASE: CHAPTERS 3–11 (Continued)

(b) (Continued)

Accounts Payable
Jan. 1 Bal. 55,600
Summary 322,000 Summary 35,100
Summary 330,000
Dec. 31 Bal. 98,700

Interest Payable
Dec. 31 Adj. 350

Dividends Payable
Summary 5,600

Income Tax Payable


Dec. 31 Adj. 6,000

Mortgage Payable
Summary 2,000 Jan. 1 Bal. 80,000
Dec. 31 Bal. 78,000

Preferred Shares
Summary 50,000

Common Shares
Jan. 1 30,000
Summary 30,000
Dec. 31 Bal. 60,000

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COMPREHENSIVE CASE: CHAPTERS 3–11 (Continued)

(b) (Continued) and (e)

CE – Means closing entry

Retained Earnings
Jan. 1 Bal. 127,400
Dec. 31 CE 5,600 Dec. 31 CE 26,750
Dec. 31 Bal. 148,550

Accumulated Other Comprehensive Income


Jan. 1 Bal. 9,400

Cash Dividends
Summary 5,600 Dec. 31 CE 5,600
Dec. 31 Bal. 0

Sales
Dec. 31 CE 420,000 Summary 420,000
Dec. 31 Bal. 0

Cost of Goods Sold


Summary 250,000 Dec. 31 CE 250,000
Dec. 31 Bal. 0

Salaries Expense
Summary 88,200 Dec. 31 CE 88,200
Dec. 31 Bal. 0

Supplies Expense
Dec. 31 Adj. 33,600 Dec. 31 CE 33,600
Dec. 31 Bal. 0

Depreciation Expense
Dec. 31 Adj. 4,400 Dec. 31 CE 4,400
Dec. 31 Bal. 0

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COMPREHENSIVE CASE: CHAPTERS 3–11 (Continued)

(b) and (e) (Continued)

Bad Debts Expense


Dec. 31 Adj. 3,700 Dec. 31 CE 3,700
Dec. 31 Bal. 0

Bank Charges Expense


Dec. 31 Adj. 3,000 Dec. 31 CE 3,000
Dec. 31 Bal. 0

Interest Expense
Summary 4,000
Dec. 31 Adj. 350 Dec. 31 CE 4,350
Dec. 31 Bal. 0

Income Tax Expense


Dec. 31 Adj. 6,000 Dec. 31 CE 6,000
Dec. 31 Bal. 0

Income Summary
Dec. 31 CE 393,250 Dec. 31 CE 420,000
Dec. 31 CE 26,750
Dec. 31 Bal. 0

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COMPREHENSIVE CASE: CHAPTERS 3–11 (Continued)


(c)
HAMPTON CORPORATION
Adjusted Trial Balance
December 31, 2015

Debit Credit
Cash $ 87,240
Accounts receivable 67,800
Allowance for doubtful accounts $ 3,500
Merchandise inventory 143,560
Supplies 5,900
Land 40,000
Buildings 142,000
Accumulated depreciation—buildings 26,400
Accounts payable 98,700
Interest payable 350
Dividends payable 5,600
Income tax payable 6,000
Mortgage payable 78,000
Preferred shares 50,000
Common shares 60,000
Retained earnings 127,400
Accumulated other comprehensive income 9,400
Cash dividends 5,600
Sales 420,000
Cost of goods sold 250,000
Salaries expense 88,200
Supplies expense 33,600
Depreciation expense 4,400
Bad debts expense 3,700
Bank charges expense 3,000
Interest expense 4,350
Income tax expense 6,000
$885,350 $885,350

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COMPREHENSIVE CASE: CHAPTERS 3–11 (Continued)

(d) (1)

HAMPTON CORPORATION
Income Statement
Year Ended December 31, 2015

Sales ........................................................................ $420,000


Cost of goods sold.................................................... 250,000 $170,000
Gross profit
Operating expenses
Salaries expense ............................................. $88,200
Supplies expense ............................................ 33,600
Depreciation expense ...................................... 4,400
Bad debts expense .......................................... 3,700
Bank charges expense .................................... 3,000
Total operating expenses ....................... 132,900
Profit from operations ............................................... 37,100
Other revenues and expenses
Interest expense .............................................. 4,350
Profit before income tax ........................................... 32,750
Income tax expense ................................................. 6,000
Profit ........................................................................ $ 26,750

(2)
HAMPTON CORPORATION
Statement of Changes in Equity
Year Ended December 31, 2015
Accumulated
Share Capital Other
Preferred Common Retained Comprehensive
Shares Shares Earnings Income Total

Balance Jan. 1 $30,000 $127,400 $9,400 $166,800


Issued preferred shares $50,000 50,000
Issued common shares 30,000 30,000
Cash dividends (5,600) (5,600)
Profit 26,750 26,750
Balance Dec. 31 $50,000 $60,000 $148,550 $9,400 $267,950

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COMPREHENSIVE CASE: CHAPTERS 3–11 (Continued)

(d) (Continued) (3)


HAMPTON CORPORATION
Statement of Financial Position
December 31, 2015

Assets
Current assets
Cash........................................................... $ 87,240
Accounts receivable ................................... $67,800
Less: Allowance for doubtful accounts ...... 3,500 64,300
Merchandise inventory ............................... 143,560
Supplies ..................................................... 5,900
Total current assets ............................. 301,000
Property, plant and equipment
Land ........................................................... $ 40,000
Buildings .................................................... $142,000
Less: Accumulated depreciation ............... 26,400 115,600
Total property, plant, and equipment... 155,600
Total assets......................................................... $456,600

Liabilities and Shareholders’ Equity


Current liabilities
Accounts payable ....................................... $98,700
Interest payable ......................................... 350
Dividends payable ...................................... 5,600
Income tax payable .................................... 6,000
Current portion of mortgage payable ......... 2,500
Total current liabilities ....................... $113,150
Non-current liabilities
Mortgage payable ...................................... 75,500
Total liabilities.................................... 188,650

Shareholders’ equity
Share capital
$2.80 Preferred shares, cumulative, 50,000
shares authorized, 500 issued ............................... $ 50,000
Common shares, unlimited number of shares
authorized, 3,500 issued ........................................ 60,000
Total share capital .......................................................... 110,000
Retained earnings .......................................................... 148,550
Accumulated other comprehensive income .................... 9,400
Total shareholders’ equity ............................................ 267,950
Total liabilities and shareholders’ equity.............. $456,600

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COMPREHENSIVE CASE: CHAPTERS 3–11 (Continued)

(e) Closing Entries:

2015
Dec. 31 Sales .............................................................................. 420,000
Income Summary .................................................. 420,000

31 Income Summary ........................................................... 393,250


Cost of Goods Sold ............................................... 250,000
Salaries Expense .................................................. 88,200
Supplies Expense ................................................. 33,600
Depreciation Expense ........................................... 4,400
Bad Debts Expense .............................................. 3,700
Bank Charges Expense ........................................ 3,000
Interest Expense ................................................... 4,350
Income Tax Expense ............................................ 6,000

031 Income Summary ........................................................... 26,750


Retained Earnings................................................. 26,750

31 Retained Earnings.......................................................... 5,600


Dividends .............................................................. 5,600

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Solutions Manual 11-91 Chapter 11


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