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Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
CHAPTER 11
Brief A B
Study Objectives Questions Exercises Exercises Problems Problems BYP
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.
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.
(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.
(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.
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.
(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.
13.
(a) (b) (c)
Cash Stock Stock
dividend dividend split
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).
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.
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.
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.
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.
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.
(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.
(a)
(b)
Number Number
of shares of shares
authorized issued
(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:
(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.
20 No entry required
(a) NE + - NE
(b) - - NE NE
(c) NE NE +/- NE
(d) NE NE +/- +
(e) NE NE NE +
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
(a)
STIRLING FARMS LIMITED
Statement of Retained Earnings
Year Ended December 31, 2015
(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.
$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.
$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.
(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.
*10,000 × $2 = $20,000
(a)
Earnings $500,000 – $50,000*
= $2.25
per share 200,000
*25,000 × $2 = $50,000
(c)
Earnings $500,000
= $2.50
per share 200,000
$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.
SOLUTIONS TO EXERCISES
EXERCISE 11-1
(a) High $4.93
Low $2.97
EXERCISE 11-2
(a) June 12 Cash (50,000 × $6) ............................................ 300,000
Common Shares........................................ 300,000
EXERCISE 11-3
(a) Jan. 6 Cash ............................................................. 300,000
Common Shares (200,000 × $1.50) ...... 300,000
(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.
(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
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
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.
EXERCISE 11-6
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 + +
EXERCISE 11-8
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.
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
EXERCISE 11-10
(a)
(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
EXERCISE 11-11
(a)
SOBEYS INC.
Statement of Retained Earnings
Year Ended May 5, 2012
(in millions)
(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.
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
EXERCISE 11-14
$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
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).
EXERCISE 11-15
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.
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
PROBLEM 11-2A
Closing entries:
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
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
PROBLEM 11-3A
Closing entries:
(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
(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
PROBLEM 11-4A
20 No entry required
20 No entry required
20 No entry required
(a) (Continued)
Closing entries:
(b)
(c)
CONWAY LTD,
Statement of Retained Earnings
Year Ended December 31, 2015
(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
(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.
CONWAY LTD.
Statement of Changes in Equity
Year Ended December 31, 2015
Share Capital
Preferred Common Retained
Shares Shares Earnings Total
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
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
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.
PROBLEM 11-6A
(a)
(b)
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
PROBLEM 11-7A
31 No entry required
30 No entry required
Closing entries:
(c)
WIRTH CORPORATION
Statement of Changes in Equity
Year Ended December 31, 2015
Accumulated
Other
Common Retained Comprehensive
Shares Earnings Income Total
(d)
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
PROBLEM 11-8A
(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:
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.
PROBLEM 11-10A
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.
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.
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
PROBLEM 11-2B
Closing entries:
(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
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
PROBLEM 11-3B
Closing entries:
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
Retained Earnings
Feb. 1 Bal. 1,000,000
Jan. 31 CE 113,750
Jan. 31 CE 5,000
Jan. 31 Bal. 881,250
Cash Dividends
Dec 29 113,750 Jan 31 CE 113,750
Jan 31 Bal. 0
(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
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
PROBLEM 11-4B
22 No entry required
22 No entry required
22 No entry required
Closing entries:
(c)
SCHIPPER LTD.
Statement of Retained Earnings
Year Ended 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
(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
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
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
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
PROBLEM 11-6B
(a)
(b)
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
PROBLEM 11-7B
15 No entry required
15 No entry required
Closing entries:
(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
(c)
STENGEL CORPORATION
Statement of Changes in Equity
Year Ended December 31, 2015
Accumulated
Other
Common Retained Comprehensive
Shares Earnings Loss Total
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
PROBLEM 11-8B
(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.
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.
(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.
PROBLEM 11-10B
$2,493 $2,200
1. Payout ratio = 41.4% = 44.3%
$6,023 $4,965
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.
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.
(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.
(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 $21,571,000 for the 2011 fiscal year.
(a)
Both Shoppers and Jean Coutu report the same amount for both basic and diluted
earnings per share.
(b)
Shoppers Drug Mart Jean Coutu
Ratio
($ in thousands) ($ in millions)
$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.
(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).
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.
(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.
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.
(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.
(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).
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)
($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.
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.
(c)
KOEBEL’S FAMILY BAKERY LTD.
Statement of Retained Earnings
Year Ended June 30, 2015
(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
(a) (Continued)
(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
(b) (Continued)
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
(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
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
Retained Earnings
Jan. 1 Bal. 127,400
Dec. 31 CE 5,600 Dec. 31 CE 26,750
Dec. 31 Bal. 148,550
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
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
Interest Expense
Summary 4,000
Dec. 31 Adj. 350 Dec. 31 CE 4,350
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
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
(d) (1)
HAMPTON CORPORATION
Income Statement
Year Ended December 31, 2015
(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
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
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
2015
Dec. 31 Sales .............................................................................. 420,000
Income Summary .................................................. 420,000
Legal Notice
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