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Chapter 15 Organization and Operation of Corporations
Questions
1. The board of directors of a corporation is responsible for directing the corporation’s affairs.
2. Organization costs are incurred in creating a corporation. Examples include: legal fees, promoters’ fees, accountants’ fees, costs of printing share certificates, and fees paid to the provincial legal jurisdiction to obtain a corporate charter.
3. Organization costs are intangible assets, if material. If not, can be expensed.4. The general rights of common shareholders include: (1) the right to vote in shareholders’
meetings, (2) the right to sell or otherwise dispose of shares, (3) the preemptive right, (4) the right to share proportionately in dividends, and (5) the right to share proportionately in assets remaining after the creditors are paid if the corporation is liquidated. In addition, shareholders have the right to receive timely and useful financial reports that describe the corporation’s financial position and the results of its activities.
5. The preemptive right of common shareholders is the right to maintain their relative ownership interests in the corporation by having the first opportunity to purchase their proportionate share of any additional common shares issued by the corporation.
6. The call price is the amount that a corporation must pay if it exercises the option to buy back and retire callable shares.
7. Convertible preferred shares are attractive because they offer the safety of a regular return as well as the opportunity to share in the increased value of the issuer’s common shares.
8. According to Note 7(b), WestJet Airlines had 129,575,099 common and variable shares issued and outstanding at December 31, 2005 for a total of $429,613,000. The average issue price at December 31, 2005 is $429,613,000/129,575,099 = $3.32 per common share.
9. According to the statement of retained earnings, Danier Leather declared and paid dividends of $1,620,000 during the year ended June 25, 2005.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 15 180
QUICK STUDY
Quick Study 15-1 (10 minutes)a, d
Quick Study 15-2 (10 minutes)2011Jan.
1Organization Costs....................... 56,000
Cash........................................ 50,000 Common Shares....................... 6,000 To record payment of organization costs and issuance of shares as part consideration.
Dec. 31
Amortization Expense, Organization Costs...........................................
11,200
Accumulated Amort., Organization Costs.......................
11,200
To record accumulated amortization, organization costs; 56,000/5 = 11,200.
Quick Study 15-3 (10 minutes)
LUDWIG LTD.Income Statement
For Year Ended October 31, 2011Sales................................ $
982,000Cost of goods sold............. 420,00
0Gross profit....................... $
562,000Operating expenses.......... 162,00
0Income from operations..... $
400,000Other revenues and expenses: Gain on sale of capital assets...............................
$ 4,000
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.181 Fundamental Accounting Principles, Twelfth Canadian Edition
Interest expense........... (6,200) (2,200 )Income before tax............. $
397,800Income tax expense.......... 99,45
0Net income....................... $
298,350
Quick Study 15-4 (5 minutes)X Cash CC Preferred sharesCC Common shares RE Retained earningsX Common dividend
payableX Preferred dividend
payableRE Deficit CC Preferred shares,
$5 noncumulative
Quick Study 15-5 (20 minutes)FORM OF BUSINESS ORGANIZATION
Transaction Sole Proprietorship CorporationJan. 1, 2011:The owner(s) invested $10,000into the new business
Cash.................10,000 Ian Smith, Capital........................10,000
Cash............10,000 Common Shares.........10,000
During 2011:Revenues of $50,000 were earned; all cash
Cash.................50,000 Revenues...................50,000
Cash............50,000 Revenues. 50,000
During 2011:Expenses of $30,000 were incurred; all cash
Expenses..........30,000 Cash..........................30,000
Expenses......30,000 Cash........ 30,000
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 15 182
Dec. 15, 2011:$15,000 cash was distributed to the owner(s)
Ian Smith, Withdrawals 15,000 Cash..........................15,000
Cash Dividends 15,000 (or R/E) Cash......... 15,000
Dec. 31, 2011, Year End:All temporary accounts were closed—Close Revenue account
Revenues.........50,000 Income Summary............. 50,000
Revenues.....50,000 Income Summary.........50,000
—Close Expense account
Income Summary..............30,000 Expenses...................30,000
Income Summary 30,000 Expenses. 30,000
—Close Income Summary account to appropriate equity account(s)
Income Summary..............20,000 Ian Smith, Capital........................20,000
Income Summary 20,000 Retained Earnings.........20,000
—Close Withdrawal/Cash Dividends Declared account
Ian Smith, Capital..............15,000 Ian Smith, Withdrawals.....15,000
Retained Earnings15,000 Cash Dividends 15,000No entry if debit Retained Earnings used above.
Equity section on the balance sheet at December 31, 2011 after the first year of operations.
Vision ConsultingPartial Balance SheetDecember 31, 2011
Owner’s Equity Ian Smith,
capital………… $15,000
Vision Consulting Inc.Partial Balance SheetDecember 31, 2011
Shareholders’ Equity Common shares……….$ 10,000 Retained earnings…….
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.183 Fundamental Accounting Principles, Twelfth Canadian Edition
5,000
Total shareholders’ equity. 15,000
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 15 184
Quick Study 15-6 (10 minutes)$48,000 + $146,000 – $47,000 – $15,000 = $132,000
OR
Retained Earnings 48,000
Bal. Dec. 31/11
146,000
Net income, 2012
Dividends, 2012
47,000
Net loss, 2013
15,000
132,000
Bal. Dec. 31/13
Quick Study 15-7 (5 minutes)1. 300,000 – 120,000 + 50,000 = 230,0002. Net income 3. Dividends
Quick Study 15-8 (10 minutes)Feb. 1............................................Cash 252,440
Common shares ................ 252,440 Issued shares for cash.
Feb. 12............................................Cash 340,750 Common shares ................ 340,750
Issued shares for cash; 47,000 x $7.25.
The average issue price is $7.02 calculated as:
($252,440 + $340,750) ÷ (37,500 + 47,000).
Quick Study 15-9 (10 minutes)a. Sold common shares for cash.b. Issued common shares to pay organization costs.
c. Issued common shares for inventory and machinery, and assumed a note payable.
Quick Study 15-10 (10 minutes)a.2011Oct.
3Cash................................. 60,000
Preferred Shares.......... 60,000 To record issuance of preferred shares; 4,000 × $15 = 60,000.
Nov. 19
Land................................. 52,480
Preferred Shares.......... 52,480 To record issuance of 3,400 preferred shares in exchange for land.
b. (60,000 + 52,480)/(4,000 + 3,400) = $15.20 per preferred share.
Quick Study 15-11 (10 minutes)Apr. 15...............................................Cash Dividends48,000.00
Common Dividend Payable . . 48,000.00 Declared a cash dividend on common shares.
June 30...............................................Common Dividend Payable ..............................................48,000.00
Cash ................................... 48,000.00 Paid the cash dividend to common shareholders.
Dec. 31...............................................Retained Earnings 48,000.00
Cash Dividends.................... 48,000.00 To close the Cash Dividends account.
OR
Apr. 15............................................Retained Earnings 48,000.00
Common Dividend Payable 48,000.00 Declared a cash dividend on common shares.
June30.............................................Common Dividend Payable ........................................... 48,000.00
Cash ................................ 48,000.00 Paid the cash dividend to common shareholders.
Dec. 31 No entry required.
Quick Study 15-12 (10 minutes) a. Total dividend ............... 108,000 To preferred shareholders 60,000* Remainder to common shareholders $48,000 *75,000 shares × $0.40 × 2 years = $60,000
b. Total dividend ............... 108,000 To preferred shareholders 30,000* Remainder to common shareholders $78,000 *75,000 shares × $0.40 for current year only =
$30,000
Quick Study 15-13 (10 minutes)a. The preferred shares are entitled to receive $0.50 per
share when the board of directors declares dividends; if dividends are not declared, the undeclared dividends do not become a liability but go into arrears; arrears mean that the undeclared dividends must be paid to the preferred shareholders in the future along with any current dividends before the common shareholders receive dividends.
b. The total amount contributed, or given to the corporation, as a result of the shareholders’ purchase of shares.
c. The corporation is allowed to issue 20,000 shares based on its articles of incorporation.
d. 150,000 common shares have been ‘sold’ and are held by shareholders.
e. Accumulated net profits less any net losses and dividends.
f. An unlimited number of common shares may be issued by the corporation based on its articles of incorporation.
Quick Study 15-14 (20 minutes)a.2011May
31Revenues...................................... 92,000
Income Summary...................... 92,000
To close revenues to the income summary.
31 Income Summary........................... 58,000 Expenses.................................. 58,00
0 To close expenses to the income summary.
31 Income Summary........................... 34,000 Retained Earnings..................... 34,00
0 To close the income summary to retained earnings.
Quick Study 15-14 (concluded)2011May.
31Retained Earnings.......................... 3,500
Cash Dividends......................... 3,500 To close cash dividends to retained earnings.
b.
PETER PUCK INC.Statement of Retained Earnings
For Year Ended May 31, 2011Retained earnings, June 1........................... $
29,000Add: Net income........................................ 34,
000 Total........................................................ $
63,000Less: Dividends......................................... 3,
500Retained earnings, May 31......................... $
59,500
Quick Study 15-15 (20 minutes)a.2011
Nov. 30
Revenues..................................... 87,000
Income Summary..................... 87,000 To close revenues to the income summary.
30 Income Summary.......................... 96,000 Expenses................................. 96,000 To close expenses to the income summary.
30 Retained Earnings........................ 9,000 Income Summary..................... 9,000 To close the income summary to retained earnings regarding the loss.
30 Retained Earnings........................ 14,000 Cash Dividends........................ 14,000
To close cash dividends to retained earnings.
Quick Study 15-15 (concluded) b.
MORRIS INC.Statement of Retained Earnings
For Year Ended November 30, 2011Retained earnings, December 1 $42,00
0Less:
Net loss.................................... 9,000
Dividends.................................. 14,000
23,00 0
Retained earnings, November 30....... $19,000
Quick Study 15-16 (20 minutes)a.2011Aug.
31Revenues..................................... 76,000
Income Summary..................... 76,000 To close revenues to the income summary.
31 Income Summary.......................... 94,000 Expenses................................. 94,000 To close expenses to the income summary.
31 Retained Earnings........................ 18,000 Income Summary..................... 18,000 To close the income summary to retained earnings regarding the loss.
b.
VELOR LTD.Statement of Retained Earnings (Deficit)
For Year Ended August 31, 2011Retained earnings, September 1............ $12,0
00Less: Net loss....................................... 18,0
00Retained Earnings (Deficit), August 31. . . $ )
(6,000
*Quick Study 15-17 (20 minutes)a.
Total shareholders’ equity................. $920,000
Less equity attributable to preferred shares: — paid-in capital........................... 100,0
00Equity applicable to common shares... $820,0
00Book value of common shares ($820,000/75,000).............................
$ 10.93
b.Total shareholders’ equity................. $920,0
00Less equity attributable to preferred shares: — paid-in capital........................... 100,00
0 — dividends in arrears (10,000 × $5 × 3 years).........................................
150,0 00
Equity applicable to common shares... $670,000
Book value of common shares ($670,000/75,000).............................
$ 8.93
c.Total shareholders’ equity................. $920,0
00Less equity attributable to preferred shares: — call price (10,000 × $30)............ 300,0
00Equity applicable to common shares... $620,0
00Book value of common shares ($620,000/75,000).............................
$ 8.27
EXERCISES
Exercise 15-1 (20 minutes)a) PartnershipFeb.
14
Cash......................................... 250,000.00
Tom Seabrink, Capital.......... 125,000.00
Joan Miller, Capital............... 125,00
0.00 To record investment into business by partners.
Dec.
23
Tom Seabrink, Withdrawals....... 24,000.00
Joan Miller, Withdrawals............ 24,000.00
Cash.................................... To record withdrawals by owners.
48,000.00
31
Income Summary....................... 96,000.00
Tom Seabrink, Capital.......... 48,000.00
Joan Miller, Capital............... 48,000.00
To record closing of income summary to capital.
31
Tom Seabrink, Capital................ 24,000.00
Joan Miller, Capital.................... 24,000.00
Tom Seabrink, Withdrawals. . 24,000.00
Joan Miller, Withdrawals....... 24,000.00
To record closing of withdrawals to capital.
Exercise 15-1 (concluded)b) CorporationFeb.
14
Cash......................................... 250,000.00
Common Shares................... 250,000.00
To record issuance of common shares.
Dec.
20
Cash Dividends.......................... 48,000.00
Common Dividend Payable. . . 48,000.00
To record declaration of dividends.
23
Common Dividend Payable......... 48,000.00
Cash.................................... 48,000.00
To record payment of dividends.
31
Income Summary....................... 96,000.00
Retained Earnings................ 96,000.00
To record closing of income summary to retained earnings.
31
Retained Earnings..................... 48,000.00
Cash Dividends.................... 48,000.00
To record closing of dividends to retained earnings.
ORb) CorporationFeb.
14
Cash......................................... 250,000.00
Common Shares................... 250,000.00
To record issuance of common shares.
De 2 Retained Earnings..................... 48,000.
c. 0 00 Common Dividend Payable. . . 48,000.
00 To record declaration of dividends (directly to retained earnings).
23
Common Dividend Payable......... 48,000.00
Cash.................................... 48,000.00
To record payment of dividends.
31
Income Summary....................... 96,000.00
Retained Earnings................ 96,000.00
To record closing of income summary to retained earnings.
Exercise 15-2 (15 minutes)2011Jan. 15
Organization Costs....................... 22,500
Common Shares..................... 22,500 Issued common shares to promoters.
Feb. 21
Cash............................................ 150,000
Common Shares..................... 150,000
Issued common shares for cash; 15,000 shares x $10/share = $150,000.
Mar. 9
Cash............................................ 79,000
Preferred Shares.................... 79,000 Issued preferred shares for cash.
Aug. 15
Land............................................ 225,000
Building....................................... 300,000
Equipment.................................... 80,000 Common Shares..................... 605,00
0 Issued common shares in exchange for capital assets.
Exercise 15-3 (30 minutes)a)2011
Jan.
1 Cash...................................... 50,000.00
Preferred Shares............... 50,000.00
Issued preferred shares.
Feb.
5 Cash...................................... 105,000.00
Common Shares................ 105,000.00
Issued common shares.
Mar.
20
Organization Costs................. 24,000.00
Common Shares................ 24,000.00
Issued shares to organizers for their work.
May
15
Cash...................................... 292,000.00
Preferred Shares............... 132,000.00
Common Shares................ 160,000.00
Issued preferred and common shares.
Dec.
31
Retained Earnings 235,000.00
Income Summary.............. 235,000.00
Closed the net loss to Retained Earnings.
Exercise 15-3 (continued)
b) ABC Inc.Shareholders’ EquityDecember 31, 2011
Contributed Capital: Preferred Shares, $2.00; 50,000 shares authorized; 17,0001 shares issued and outstanding.................................
$182,000.001
Common Shares 300,000 shares authorized; 38,0002 shares issued and outstanding.................................
289,00 0.002
Total contributed capital........... $471,000.00
Deficit......................................... 235,00 0.00
Total shareholders’ equity............ $236,000.00
c) The $2.00 is the dividend entitlement per preferred share or how much each preferred share is supposed to get in dividends each year.
Calculations:1. Preferred Shares: Shares Dollars
Jan. 1
Issued 5,000 shares (5,000 x $10.00)...........................
5,000 $ 50,000
May 15
12,000 shares issued (12,000 x $11.00)...............
12,000 132,00 0
Totals................................ 17,000 $ 182,000
2. Common Shares:Feb.
5Issued 15,000 shares.......... 15,000 $105,00
0Mar.
20Issued 3,000 shares............ 3,000 24,000
May 15
20,000 shares issued (20,000 x $8.00).................
20,000 160,00 0
Totals................................ 38,000 $289,000
Exercise 15-4 (10 minutes)March
1 Cash Dividends or Retained Earnings........................................
25,000
Common Dividends Payable. . 25,000
To record common dividend of $0.50 per share.
10
No entry.
31
Common Dividends Payable........... 25,000
Cash................................... 25,000
Paid the dividends declared on March 1.
Exercise 15-5 (15 minutes)2011June
5Organization Costs....................... 65,000
Common Shares..................... 65,000 Issued 4,000 common shares to promoters.
15 Cash............................................ 1,275,000
Common Shares..................... 1,275,000
Issued common shares for cash; 75,000 shares x $17/share = $1,275,000.
16 Cash............................................ 300,000
Preferred Shares.................... 300,000
Issued preferred shares for cash; 10,000 shares x $30/share = $300,000.
17 Accounts Payable......................... 100,000
Common Shares..................... 100,000
Issued 8,000 common shares to a creditor.
18 Cash Dividends or Retained Earnings.......................................
20,000
Common Dividends Payable.... 5,000 Preferred Dividends Payable... 15,000 Declared dividends.
30 Machinery.................................... 1,980,000
Common Shares....................... 1,980,000
Issued common shares in exchange for machinery; 150,000 shares x $13,20/share = $1,980,000.
July Common Dividends Payable.............. 5,000
1Preferred Dividends Payable............. 15,000 Cash.......................................... 20,000 Paid the dividends declared June 18.
Exercise 15-6 (25 minutes)a)2011
Jan.
1 Organization Costs.............. 8,000.00
Common Shares............. 8,000.00
To record issuance of shares.
5 Cash.................................. 135,000.00
Common Shares............. 135,000.00
To record issuance of shares, 15,000 × $9
15
Cash Dividends or Retained Earnings.............................
8,000.00
Common Dividends Payable..............................
8,000.00
Declared dividends; $0.50 x 16,000 = $8,000
20
Land.................................. 43,000.00
Common Shares............. 43,000.00
To record issuance of shares: 4,000 x $10.75.
31
Income Summary................ 110,000.00
Retained Earnings.......... 110,000.00
To close income summary to retained earnings.
31
Common Dividends Payable. 8,000.00
Cash............................. 8,000.00
Paid dividends.
Exercise 15-6 (concluded)
b) LINDSAY LTD.Shareholders’ Equity
January 31, 2011
Common shares, unlimited shares authorized, 20,0001 shares issued and outstanding............................
$186,0001
Retained earnings................... 102,00 0 2
Total shareholders’ equity....... $288,000
c) Average Issue Price $186,000 20,000 shares = $9.30 per share.
Calculations:1. Shares Dollars
Jan. 1
Issued 1,000 shares............ 1,000 $ 8,000
5 Issued 15,000 shares (15,000 x $9.00).................
15,000 135,000
20 Issued 4,000 shares (4,000 x $10.75)...........................
4,000 43,00 0
Totals................................ 20,000 $186,000
2. $110,000 – $8,000 = $102,000
Exercise 15-71. $4.50 Cumulative Preferred Shares:
$4.50/share × 40,000 shares = $180,000 each year × 3 years = $540,000
$12 Noncumulative Preferred Shares:$12/share × 8,000 shares = $96,000
Common Shares:$736,000 – (540,000 + 96,000) = $100,000
2. Dec. 31/10 Retained Earnings Balance + 2011 Net Income of $1,500,000 – 2011 Dividends of $736,000 = Dec. 31/11 Retained Earnings Balance of $890,000
Therefore,
Dec. 31/10 Retained Earnings Balance = $126,000
OR
Retained Earnings
XBal. Dec. 31/10
2011 dividen
ds
736,000
1,500,000
2011 net income
890,000Bal.Dec. 31/11
3.MARITIME INC.
Statement of Retained EarningsFor Year Ended December 31, 2011
Retained earnings, January 1...............$ 126,000Add: Net income ............................... 1,500,000 Total ..............................................$1,626,000Less: Cash dividends........................... 736,000Retained earnings, December 31 ........$ 890,000
Exercise 15-8BLUE IGUANA INC.
Shareholders’ EquityDecember 31, 2011
Contributed Capital: Preferred shares, $3.00 noncumulative: 100,000 shares authorized, 75,000 shares issued and outstanding A
.$2,250,
000
Common shares Unlimited shares authorized, E. 250,000
sharesB.
4,000,000 250,000 shares issued
and outstanding...
Total contributed capital.... $6,250,000
Retained earnings.................. C.
1,150,000
Total shareholders’ equity...... D.
$7,400,000
Calculations:A. $30.00 × 75,000 shares = $2,250,000B. $6,250,000 – $2,250,000 = $4,000,000C. $160,000 + $1,440,000 – $450,000 = $1,150,000
OR
Retained Earnings
160,000
450,000
1,440,000
1,150,000
D. $6,250,000 + $1,150,000 = $7,400,000E. $4,000,000 $16.00 = 250,000 shares
Exercise 15-91. $5/share × 8,000 shares = $40,0002. Yes. Calculation is $40,000 × 2 years = $80,0003. a) ($5 × 8,000 shares) = $40,000 × 3 years = $120,000
b) $4 × 45,000 = $180,0004. 105,000 + 340,000 – 120,000 – 180,000 = 145,0005. 160,000 + 450,000 = 610,0006. 610,000 + 145,000 = 755,0007. 10,000 – 8,000 = 2,0008. $160,000/8,000 shares = $20/share
Exercise 15-10 (20 minutes)NOTE: The holders of the cumulative preferred shares are entitled to no more than $376,000 of dividends in any year ($8 × 47,000 shares) plus any dividends in arrears.
Preferred Common2011 ($0):Preferred—current.....................$ 0Common—remainder.................. $ 0Total for the year.......................$ 0$ 02012 ($400,000):Preferred—arrears......................$ 376,000Preferred—current (400,000 – 376,000) 24,000Common—remainder.................. $ 0Total for the year.......................$ 400,000$ 02013 ($840,000):Preferred—arrears (376,000 – 24,000) $ 352,000Preferred—current.....................376,000Common—remainder (840,000 – 728,000)
.................$112,000Total for the year....................... $ 728,000
$112,000
2014 ($400,000):Preferred—current.....................$ 376,000Common—remainder (400,000 – 376,000)
..................$ 24,000Total for the year.......................$ 376,000 $ 24,000Total for four years....................$1,504,000
$136,000Exercise 15-11 (20 minutes)NOTE: The holders of the noncumulative preferred shares are entitled to no more than $376,000 of dividends in any year ($8 × 47,000 shares).
Preferred Common2011 ($0):Preferred—current.....................$ 0Common—remainder.................. $ 0Total for the year.......................$ 0$ 0
2012 ($400,000):Preferred—current.....................$ 376,000Common—remainder (400,000 – 376,000)
..................$ 24,000Total for the year.......................$ 376,000 $ 24,000
2013 ($840,000):Preferred—current.....................376,000Common—remainder (840,000 – 376,000)
..................$464,000Total for the year....................... $ 376,000
$464,000
2014 ($400,000):Preferred—current.....................$ 376,000Common—remainder (400,000 – 376,000)
..................$ 24,000Total for the year.......................$ 376,000 $ 24,000
Total for four years....................$1,128,000$512,000
Exercise 15-12 (10 minutes)
1. B2. A3. F4. E5. D6. C
Exercise 15-131. (15,000 shares × $4.50/share) × 2 years = $135,000
2. $150,000 Total dividends – $135,000 paid to preferred shareholders = $15,000 to common shareholders
Exercise 15-14 (20 minutes)2011Dec.
31Revenue....................................... 194,00
0 Income Summary................... 194,00
0 To close the revenue account to the income summary.
31 Income Summary.......................... 107,000
Income Tax Expense............... 29,000 Operating Expenses............... 78,000 To close the expense accounts to the income summary.
31 Income Summary.......................... 87,000 Retained Earnings.................. 87,000 To close the income summary to retained earnings.
31 Retained Earnings........................ 14,000 Cash Dividends...................... 14,000 To close the Cash Dividends account to Retained Earnings.
Post-Closing Balance in Retained Earnings: Retained Earnings, December 31, 2010............................................
$19,800
Add: Net income for December 87,000 Less: Cash Dividends............... 14,00
0 Retained Earnings, December 31, 2011............................................
$92,800
OR
Retained Earnings19,800 Bal. Dec.
31/10
Cash Dividend
s14,00
087,000
2011Net income
92,800 Bal. Dec 31/11
Exercise 15-15 (30 minutes)Gildan Corp.
Balance SheetDecember 31, 2011
Assets Current assets: Cash.................................. $ 6,000 Accounts receivable........... 28,000 Total current assets......... $34,00
0 Property, plant and equipment: Land................................. $84,000 Warehouse........................ $92,0
00 Less: Accumulated amortization...............................
15, 200
76,800
Equipment......................... $56,000
Less: Accumulated amortization...............................
7,6 00
48,400
Total property, plant and equipment..................................
209,200
Total assets................................ $243,200
Liabilities Current liabilities : Accounts payable.............. $ 18,400 Long-term liabilities: Long term note payable, due in 2014................................
24,000
Total liabilities............................ $ 42,400
Shareholders’ Equity Contributed Capital: Preferred shares..................................................................
$28,000
Common shares................. 80,000 Total contributed capital. . $108,00
0 Retained earnings.................. 92,800 Total shareholders’ equity........... 200,80
0Total liabilities and shareholders’ $243,2
equity........................................ 00
1. 83% (200,800 ÷ 243,200 = 83%)2. 83% (200,800 ÷ 243,200 = 83%)3. 17% (42,400 ÷ 243,200 = 17%)4. 71% [(80,000 + 92,800) ÷ 243,200 = 71%]5. 12% (28,000 ÷ 243,200 = 12%)
The main advantage to the common shareholders of issuing preferred shares over additional common shares is that the common shareholders will retain ownership, hence, control.
Exercise 15-161.2011
Jan. 3 Cash........................................ 21,500.00
Common Shares.................. 21,500.00
Issued common shares for cash.
Mar .
1 Cash........................................ 15,000.00
Preferred Shares (5,000 x 3) 15,000.00
Issued preferred shares for cash.
June
15
Equipment............................... 10,000.00
Common Shares.................. 10,000.00
Issued common shares in exchange for equipment.
Dec.
31
Income Summary...................... 175,000.00
Retained Earnings............... 175,000.00
Closed the income summary to retained earnings.
2. TGIF Inc.Shareholders’ EquityDecember 31, 2011
Contributed Capital: Preferred shares, $0.25 cumulative 80,000 shares authorized, 65,0001 shares issued and outstanding................................
$165,0001
Common shares, 250,000 shares authorized, 147,0002 shares issued and outstanding................................
151,50 02
Total contributed capital.......... $316,500
Retained earnings*..................... 267,50 0
Total shareholders’ equity........... $584,000
*$92,500 + $175,0003.
15,000
4.
103,000
Exercise 15-16 (concluded)
Calculations:1. Preferred Shares: Shares Dollars
Jan. 1
Balance brought forward..... 60,000 $150,000
Mar. 1
Issued 5,000 shares (5,000 x $3.00).............................
5,000 15,00 0
Totals................................ 65,000 $165,000
2. Common Shares: Shares Dollars Jan.
1Balance brought forward..... 120,000 $120,00
03 20,000 shares issued.......... 20,000 21,500
Jun. 15
Issued 7,000 shares............ 7,000 10,00 0
Totals................................ 147,000 $151,500
Exercise 15-17Part A
2011
Oct. 1
Cash.............................................. 4,000
Preferred Shares....................... 4,000 Issued preferred shares; 1,000 shares × $4.00/share.
10 Cash.............................................. 150,000
Common Shares........................ 150,000
Issued common shares; 50,000 shares × $3.00/share.
12 Organization Costs......................... 11,250 Preferred Shares....................... 11,250 Issued preferred shares in exchange for organization efforts; 2,500 shares × $4.50/share.
15 Land.............................................. 155,000
Cash......................................... 55,000 Notes Payable........................... 100,00
0 Purchased land in exchange for cash and a note.
20 Cash.............................................. 70,500 Preferred Shares....................... 70,500 Issued preferred shares for cash.
24 Cash Dividends (or Retained Earnings).......................................
31,650
Common Dividends Payable....... 22,400 Preferred Dividends Payable...... 9,250 Declared dividends; 18,500 preferred shares × $0.50 = $9,250.
31 Cash.............................................. 750,000
Revenues.................................. 750,000
To record revenues.
31 Expenses....................................... 250,000
Cash......................................... 250,000
To record expenses.
31 Income Summary........................... 500,000
Retained Earnings..................... 500,000
To record closing of income summary to retained earnings.
31 Retained Earnings*........................ 31,650 Cash Dividends......................... 31,650 To record closing of dividends to retained earnings(*or no entry if on Oct. 24 it was debited to Retained Earnings).
Exercise 15-17 (concluded)Part B
ABC INC.Balance Sheet
October 31, 2011Assets Current assets: Cash.......................................... $669,
500 Property, plant and equipment: Land......................................... 155,0
00 Intangible assets: Organization costs.................... 11,
250Total assets........................................ $835,
750
Liabilities Current liabilities Dividends payable..................... $
31,650
Long term liabilities: Long term note payable............. 100,0
00Total liabilities.................................... $131,
650
Shareholders’ EquityContributed Capital: Preferred shares, $0.50 cumulative, 100,000 shares authorized, 18,500 shares issued and outstanding:
$ 85,75
0 Common shares, 500,000 shares authorized, 50,000 shares issued and outstanding:.......................................
150, 000
Total contributed capital................ $235,750
Retained earnings.......................... 468, 350
Total shareholders’ equity.............. 704, 100
Total liabilities and shareholders’ equity................................................
$835,750
*Exercise 15-18 (20 minutes)a.
Total shareholders’ equity.................... $1,585,000
Less equity applicable to preferred shares: Call price ($60 × 5,000)...................... $300,00
0 Cumulative dividends in arrears (none)
0 (300,00
0)
Equity applicable to common shares..... $1,285,000
Book value of preferred shares ($300,000/5,000)..................................
$ 60.00
Book value of common shares ($1,285,000/40,000).............................
$ 32.13
b.Total shareholders’ equity.................... $1,585,
000Less equity applicable to preferred shares: Call price ($60 × 5,000)...................... $300,00
0 Cumulative dividends in arrears (3 × $3.00 × 5,000)............................ 45,00
0 (345,0
00)
Equity applicable to common shares..... $1,240,000
Book value of preferred shares ($345,000/5,000)..................................
$ 69.00
Book value of common shares ($1,240,000/40,000).............................
$ 31.00
PROBLEMS
Problem 15-1A (40 minutes)SOUTHGATE INC.
Balance SheetMarch 31, 2011
AssetsCurrent assets
Cash..........................................
$ 24,00
0
Accounts receivable...................$56,0
00 Less: Allowance for doubtful accounts......................................
3,00 0
53,000
Prepaid rent.............................. 46,0
00
Total current assets...................$123,
000Property, plant and equipment
Vehicles....................................
$ 68,00
0
Less: Accumulated amortization, vehicles...................
52,0 00
$ 16,00
0
Equipment.................................$390,
000 Less: Accumulated amortization, equipment...............
124,000
266,000
Total property, plant and equipment....................................
282,000
Intangible assets
Franchise..................................
$ 96,00
0 Less: Accumulated amortization, franchise.................
42,000
54, 000
Total assets..................................$459,
000Liabilities
Current liabilities
Accounts payable.......................
$ 17,00
0
Advertising payable................... 2,500
Income tax payable....................46,00
0
Unearned revenues....................23,00
0
Current portion of notes payable 50,0
00
Total current liabilities...............
$ 138,5
00Long-term liabilities Notes payable, less $50,000 current portion.............................
70,0 00
Total liabilities.............................208,5
00Shareholders' equity
Contributed capital Common shares, 100,000 shares authorized,
25,000 shares issued............$200,
000
Retained earnings...................... 50,5
00
Total shareholders' equity.......... 250,
500Total liabilities and shareholders' equity..........................................
$459,000
Problem 15-1A (concluded)
Analysis component:1. 45.42% (208,500/459,000 × 100)2. 54.58% (100 – 45.42)3. Assuming that 37% of Southgate’s
assets were financed by debt at March 31, 2010, the balance sheet has not been strengthened over the current year.
Problem 15-2A (20 minutes)Retained earnings December 31, 2011.......... $1,117,
216
Reductions in retained earnings due to transactions: Cash dividends declared: March 16, on 96,000 shares (96,000 × $0.40)..........................................................
$ 38,40
0 June 25, on 96,000 shares..................... 38,40
0 Sept. 25, on 96,000 shares.................... 38,40
0 Nov. 22, on 115,200 shares (115,200 × $0.40)
46,0 80
161,280
Less: Retained earnings December 31, 2012. 919,2 00
Net loss....................................................... $ 36,736
Problem 15-3A (25 minutes)201
1Apr.
1Preferred Shares............................ 200,00
0 Common Shares...................... 200,00
0 To record the conversion of 1,000 preferred / shares into 8,000 common shares; $500,000 ÷ 2,500 shares = $200 average issue price per preferred share; $200 x 1,000 = $200,000.
Immediately after the conversion of the preferred shares, the shareholders’ equity section would still show 2,500 preferred shares authorized, but only 1,500 shares issued and outstanding. The amount of preferred shares would change from $500,000 to $300,000. Common shares would still show unlimited shares authorized, and 48,000 shares issued and outstanding. The amount of common shares would be $1,000,000 instead of $800,000. Retained earnings would not be affected. Total shareholders’ equity also would not be affected because $200,000 has simply shifted from the preferred shares section to the common shares section.
Analysis component: As a result of the conversion, a smaller total dividend would be paid to preferred shares and a larger total dividend would be paid to common shares. However, as a common shareholder, you would not want the conversion of preferred shares to take place before the dividend. The reason is that the conversion increases the number of common shares outstanding by 8,000 and the dividend per share of common would be smaller. Even though there is more cash left over for the common shareholders after the conversion, the dividend per common share is less because there are more common shares dividing the cash. Before the conversion, there are 2,500 shares of $16 preferred. Therefore, $40,000 of the $600,000 paid out in dividends goes to the preferred shareholders. If the remaining $560,000 is divided by 40,000 common shares outstanding, the common dividend per share is $14.00. However, after the conversion, $24,000 ($16 x
1,500) of the $600,000 paid out in dividends goes to the 1,500 shares of $16 preferred, and the remaining $576,000 is divided between the 48,000 common shares outstanding. This reduces the dividend per share to $12.00.
Problem 15-4A (25 minutes)1. $450,000/$15 per share = 30,000 shares2. 325,000 shares × $8 per share = $2,600,0003. 450,000 + 2,600,000 = 3,050,000
4. $3,050,000 – $2,890,000 = $160,000 Deficit
5. 2,890,000 – 3,050,000 = 160,000 Deficit; 320,000 + 160,000 = 480,000 Net Loss
6. a) $2.50/share × 30,000 shares = $75,000 to preferred shareholdersb)$100,000 – $75,000 paid to preferred shareholders =
$25,000 to common shareholders7. a) $75,000/30,000 shares = $2.50/share
b)$25,000/325,000 shares = $.0769/share8. No, because the preferred shares are non-cumulative.9. Retained Earnings result when cumulative net earnings are
greater than cumulative losses + dividends. A deficit results when cumulative earnings are less than cumulative losses and dividends.
10. Dividends in arrears represent undeclared dividends that must be paid to preferred shareholders before any dividends are given to common shareholders but only if dividends are declared. Dividends payable, in contrast, are dividends that have been declared but not yet paid.
Problem 15-5A (20 minutes)Part A – Non-cumulative (maximum annual dividend: 45,000 x $5.60 = $252,000)1.
YearPreferred Dividends
Common Dividends
Total Dividen
ds2009 $200,000 0 $200,00
02010 252,000 248,000 500,000
2011 252,000 448,000 700,000Total for
three years $704,000 $696,000
$1,400,000
Problem 15-5A (concluded)
2. Preferred Shares: $252,000/45,000 shares = $5.60 per share
Common Shares: $448,000/80,000 shares = $5.60 per share
Part B — Cumulative1.
YearPreferred Dividends
Common Dividends
Total Dividen
ds2009 $200,000 0 $200,00
02010 252,000 +
52,000 = 304,000
196,000 500,000
2011 252,000 448,000 700,000Total for
three years $756,000 $644,000
$1,400,000
2. Preferred Shares: $252,000/45,000 shares = $5.60 per share
Common Shares: $448,000/80,000 shares = $5.60 per share
Analysis component:Cumulative preferred shares would have a greater market value than non-cumulative because undeclared dividends are never lost on cumulative preferred shares whereas undeclared dividends on non-cumulative shares are lost. Therefore, the potential return to the shareholder on cumulative preferred shares would be higher.
Problem 15-6A (60 minutes)
Part 1. Journal entries:Jan. 5............................................Cash Dividends or Retained Earnings ........................... 80,000
Common Dividend Payable. . . 80,000 Declared dividend on 20,000 outstanding shares.
Feb. 28..............................................Common Dividend Payable............................................... 80,000
Cash.................................... 80,000 Paid cash dividend.
July 6..............................................Cash (750 × $48)36,000
Common shares................... 36,000 Issued common shares.
Aug. 22...............................................Cash (1,250 × $34)42,500
Common shares................... 42,500 Issued common shares.
Sept. 5............................................Cash Dividends or Retained Earnings............................ 88,000
Common Dividend Payable. . . 88,000 Declared dividend on 22,000 outstanding shares.
Oct. 28.............................................Common Dividend Payable............................................... 88,000
Cash.................................... 88,000 Paid cash dividend.
Dec. 31.............................................Income Summary434,000
Retained Earnings................ 434,000 Closed the Income Summary account.
31 Retained Earnings.....................168,000 Cash Dividends.................... 168,000 Closed the cash dividend account (Note: No entry is
required
if Retained Earnings was debited in the Sept. 5 entry and Jan. 5 entry).
Problem 15-6A (concluded)
Part 2CLARKE CORPORATION
Statement of Retained EarningsFor Year Ended December 31, 2012
Retained earnings, January 1...............$270,000Add: Net income ............................... 434,000 Total ..............................................$704,000Less: Cash dividends........................... 168,000Retained earnings, December 31 ........$536,000
Part 3CLARKE CORPORATION
Shareholders’ Equity Section of the Balance SheetDecember 31, 2012
Contributed capital: Common shares, unlimited shares authorized, 22,0001 shares issued and outstanding ...........................$ 538,5001
Retained earnings .............................. 536,000Total shareholders’ equity ..................$1,074,500
Calculations:1. Common Shares: Shares Dollars
Jan. 1
Balance brought forward..... 20,000 $460,000
July 6
Issued 750 shares (750 x $48.00)..............................
750 36,000
Aug. 22
Issued 1,250 shares (1,250 x $34.00)...........................
1,250 42,50 0
Totals................................ 22,000 $538,500
Analysis component:
The relationship between assets and retained earnings is that retained earnings represents how much of the assets are financed by the accumulated profits less losses less distributions of dividends. In other words, retained earnings is a component of equity and we know that assets are financed in part by equity. Using the information in Part (3) above for Clarke Corporation, we know that $536,00000 of the assets are financed by retained earnings as at December 31, 2012.
Problem 15-7A (50 minutes)Part 12011Jan. 1
2Cash............................................... 160,00
0 Common Shares............................ 160,00
0 To record issuance of shares.
20
Organization Costs.......................... 30,000
Common Shares............................ 30,000 To record issuance of shares in exchange for organization efforts.
31
Land............................................... 300,000
Building.......................................... 400,000
Equipment...................................... 40,000 Common Shares............................ 740,00
0 To record exchange of shares for capital assets.
Mar.
4 Equipment...................................... 6,800
Cash............................................ 6,800 To record purchase of equipment.
Dec.
31
Retained Earnings........................... 80,000
Income Summary.......................... To record closing of income summary to retained earnings.
80,000
2012Jan. 4 Cash............................................... 300,00
0 Preferred Shares.......................... 300,00
0 To record issuance of preferred shares.
Dec 3 Income Summary............................. 180,00
. 1 0 Retained Earnings......................... 180,00
0 To record closing of income summary to retained earnings.
2013Dec.
4 Retained Earnings or Cash Dividends 72,600
Preferred Dividends Payable.......... 60,000 Common Dividends Payable........... 12,60
0 To record declaration of dividends; 126,000 C/S × $0.10 = 12,600; 5,000 P/S × $12 = 60,000.
18
Preferred Dividends Payable.......... 60,000
Common Dividends Payable........... 12,600 Cash........................................ 72,600 To record the payment of dividends.
Problem 15-7A (continued)
31
Retained Earnings......................... 72,600
Cash Dividends......................... 72,600 To close the cash dividends account (assuming the Cash Dividends account was debited on December 4).
31
Income Summary........................... 160,000
Retained Earnings................... 160,000
To close the income summary account.
Part 2WRIGHTSON CORP.
Statement of Retained EarningsFor Year Ended December 31, 2013
Retained earnings, January 1......................... $ 100,000Add: Net income........................................... 160,000 Total.......................................................... $260,000Less: Cash dividends.................................... 72,600Retained earnings, December 31.................... $ 187,400
Part 3WRIGHTSON CORP.
Shareholders’ Equity December 31, 2013
Contributed Capital:Preferred shares, $12 noncumulative, 100,000 shares authorized, 5,000 shares issued & outstanding.... $
300,000
Common shares, unlimited shares authorized, 126,0001 shares issued and outstanding..........................................................
930, 0001
Total contributed capital....................................... $1,230,000
Retained earnings .................................................. 187, 400
Total shareholders’ equity....................................... $1,417,400
Calculations:1. Common Shares:2011 Shares Dollars Jan.
12Issued 40,000 shares (40,000 x $4.00).................
40,000 $ 160,000
20 Issued 6,000 shares............ 6,000 30,00031 Issued 80,000 shares.......... 80,000 740,00
0 Totals................................ 126,000 $930,00
0 Problem 15-7A (concluded)Analysis component:
2011 2012 2013Net assets
$160,000 + $30,000 +
$740,000 – $80,000 = $850,000
$850,000 + $300,000 + $180,000 = $1,330,000
$1,330,000 –- $72,600 +
$160,000 = $1,417,400
Trend (F or U)
F
Problem 15-8A (30 minutes)1.2011Jan.
1Cash................................................ 228,00
0 Common shares...................... 228,00
0 Issued 30,000 common shares; 30,000 x $7.60.
5 Cash Dividends or Retained Earnings 165,000
Preferred Dividend Payable..... 90,000 Common Dividend Payable...... 75,000 Declared dividend on preferred shares (20,000 x $1.50 x 3 years) and
common shares (165,000 – 90,000).
Feb. 28
Preferred Dividend Payable.............. 90,000
Common Dividend Payable............... 75,000 Cash....................................... 165,00
0 Paid cash dividends.
July 1
Cash................................................ 112,000
Preferred Shares..................... 112,000
Issued 7,000 preferred shares (112,000 ÷ 16.00 = 7,000 shares).
Dec. 31
Retained Earnings............................ 165,000
Cash Dividends.......................... 165,000
Closed the dividend account (assuming Retained Earnings was not debited directly on the January 5 declaration date).
31 Income Summary............................. 412,000
Retained Earnings..................... 412,000
To close net income to retained earnings.
Problem 15-8A (continued)
2012Sept.
5Cash Dividends or Retained Earnings 145,50
0 Preferred Dividend Payable..... 40,500 Common Dividend Payable...... 105,00
0 Declared dividend on preferred shares ($1.50 × 27,000 = 40,500) and common shares ($1.00 × 105,000 = 105,000).
Oct. 28
Preferred Dividend Payable.............. 40,500
Common Dividend Payable............... 105,000
Cash....................................... 145,500
Paid cash dividends declared.Dec.
31Retained Earnings............................ 145,50
0 Cash Dividends....................... 145,50
0 Closed the dividend account (assuming Retained Earnings was not debited directly on the September 5 declaration date).
31 Income Summary............................. 388,000
Retained Earnings................... 388,000
Closed the Income Summary account.
Problem 15-8A (concluded)2.
TECHNO CORPORATIONStatement of Retained Earnings
For Year Ended December 31, 2012
Retained earnings, January 1.........................$517,000Add: Net income .......................................... 388,000 Total ........................................................$905,000Less: Cash dividends..................................... 145,500Retained earnings, December 31 ...................$759,500
3.TECHNO CORPORATIONShareholders’ EquityDecember 31, 2012
Contributed Capital:
Preferred shares, $1.50 cumulative, unlimited shares authorized, 27,000 shares issued and outstanding.....
$ 392,00
0Common shares, unlimited shares authorized 105,000 shares issued and outstanding... 753,
000 Total contributed capital......................... $1,145,
000Retained earnings 759,
500Total shareholders’ equity $1,904,
500
Calculations:1. Preferred Shares: Shares Dollars 2011Jan.
1Balance brought forward..... 20,000 $280,00
0July
1Issued 7,000 shares............ 7,000 112,0
00 Totals................................ 27,000 $392,00
0 2. Common Shares:2011Jan.
1Balance brought forward..... 75,000 $525,00
0
Jan. 1
Issued 30,000 shares (30,000 x $7.60).................
30,000 228,00 0
Totals................................ 105,000 $753,000
*Problem 15-9A (40 minutes)
1. Market value = $85.00 per share (given) x 4,000 shares = $340,000.
2. $80,000 was contributed by the residual owners (common shareholders).
3. Book values:Preferred book value per share = $50,000 1,000 = $50Common shares:
Total equity............................ $ 280,00
0Less preferred........................ (50,00
0)
Common shares equity............ $ 230,00
0Number of outstanding shares 4,000Book value per share.............. $
57.504. Book values with two years’ dividends in arrears:
Preferred shares:Annual dividend ($2.50 × 1,000) $
2,500Preferred share value............. $
50,000Plus two years’ dividends in arrears...................................
5,0 00
Preferred equity..................... $ 55,000
Number of outstanding shares 1,000Book value per share.............. $
55.00Common shares:
Total equity............................ $ 280,00
0Less preferred........................ (55,0
00)
Common shares equity............ $ 225,00
0Number of outstanding shares 4,000
Book value per share.............. $ 56.25
5. Book values with call price and two years’ dividends in arrears:Preferred shares:
Annual dividend...................... $ 2,500
Preferred shares call price (1,000 × $55)..........................
$ 55,000
Plus two years’ dividends in arrears...................................
5,00 0
Preferred equity..................... $ 60,000
Number of outstanding shares 1,000Book value per share.............. $
60.00Common shares:
Total equity............................ $ 280,00
0Less preferred........................ (60,00
0)
Common shares equity............ $ 220,00
0Number of outstanding shares 4,000Book value per share.............. $
55.00*Problem 15-9A (concluded)
6. Dividend allocation in totalPrefer
redComm
on2 years’ dividends in arrears... $5,000 0Current year dividends............ 2,500 Remainder to common....... $2,500Dividends per share for the common shares:
$2,500/4,000 shares = $0.6257. Equity represents the residual interest of owners in the
assets of the business after subtracting claims of creditors. With few exceptions, these assets and liabilities are reported at historical cost, not market value. Therefore, the book value of common shares does not
reflect most market value changes. Also the book value of common shares is based on past transactions and events, whereas the market value takes into account expected future earnings, dividends, and factors that may impact the economy.
*Problem 15-10A (25 minutes)Part 1:a.Book value per common share Book value per preferred
share1,225,000 – [220,000 + ($4 × 10,000 × 2 years)]
220,000 + ($4 × 10,000 × 2 years)
25,000 10,000= $37.00 = $30.00
b.Book value per common share Book value per preferred
share1,225,000 – 220,000 220,000
25,000 10,000= $40.20 = $22.00
*Problem 15-10A (concluded)Part 2:c.Book value per common share Book value per preferred
share1,225,000 – 220,000 220,000
25,000 10,000= $40.20 = $22.00
d.Book value per common share Book value per preferred
share1,225,000 – 220,000 220,000
25,000 10,000= $40.20 = $22.00
Part 3:e.Book value per common share Book value per preferred
share1,225,000 – [($30 × 10,000) + ($4 × 10,000 × 2 years)]
($30 × 10,000) + ($4 × 10,000 × 2 years)
25,000 10,000= $33,80 = $38.00
Problem 15-1B (40 minutes)JENSTAR INC
Balance SheetOctober 31, 2011
Assets Current assets: Cash.................................. $
355,000
Accounts receivable........... 225,000
Office supplies................... 85,000 Prepaid insurance.............. 17,
000 Total current assets........... $
682,000
Property, plant, and equipment: Land.................................. $1,000,
000 Building............................. $2,875,
000 Less: Accumulated amortization...............................
833, 000
2,042,000
Machinery......................... $1,600,000
Less: Accumulated amortization ..............................
763, 000
837, 000
Total property, plant and equipment..................................
3,879, 000
Total assets................................ $4,561,000
Liabilities Current liabilities: Accounts payable............... $
158,000
Wages payable.................. 130,000
Unearned fees................... 28,0 00
Total current liabilities....... $ 316,00
0
Long-term liabilities: Long term liabilities (due in 2015)..........................................
550, 000
Total liabilities.......................... $ 866,00
0Shareholders’ EquityContributed Capital: Preferred Shares, $1.50 non-cumulative, unlimited shares authorized, 30,000 shares issued and outstanding................................
$1,200,0001
Common Shares, unlimited shares authorized, 50,000 shares issued and outstanding................................
1,600 ,0002
Total contributed capital......... $2,800,000
Retained earnings.................. 895, 000
Total shareholders’ equity......... 3,695, 000
Total liabilities and shareholders’ equity.........................................
$4,561,000
1. 30,000 preferred shares × $40/share = $1,200,0002. 50,000 common shares × $32/share = $1,600,000
Problem 15-2B (20 minutes)Retained earnings December 31, 2011......... $1,960
,720Reductions in retained earnings due to transactions: Cash dividends declared: Feb. 11, on 350,000 shares (350,000 × $0.25)......................................................
$ 87,50
0 May 24, on 350,000 shares................. 87,50
0 Aug. 13, on 365,000 shares (365,000 × $0.25)......................................................
91,250
Dec. 12, on 385,000 shares (385,000 × $0.25)......................................................
96,2 50
362,500
Less: Retained earnings December 31, 2012 2,200 ,500
Net income.................................................. $ 602,28
0
Problem 15-3B (25 minutes)a.
2011
Dec. 1
Preferred Shares............................ 100,000
Common Shares...................... 100,000
To record the conversion of 1,000 preferred shares into 8,000 common shares; $200,000 ÷ 2,000 shares = $100 average issue price per preferred share; $100 x 1,000 = $100,000.
Immediately after the conversion of preferred shares, the shareholders’ equity section would still show 2,000 shares of preferred shares authorized, but only 1,000 shares issued and outstanding. The amount of preferred shares would change from $200,000 to $100,000. Common shares would still show unlimited shares authorized, and 68,000 shares issued. The amount of common shares would be $700,000 instead of $600,000.
Retained earnings would not be affected. Total shareholders’ equity also would not be affected because $100,000 has simply shifted from the preferred share section to the common share section.
b. As a common shareholder, you would not want the conversion of preferred shares to take place. As a result of the conversion, a smaller total dividend would be paid to preferred shares and a larger total dividend would be paid to common shares. However, the dividend per common share is less because there are more common shares dividing the cash. Before the conversion, there are 2,000 shares of $11 preferred. Therefore, $22,000 of the $487,000 paid out in dividends goes to the preferred shareholders. If the remaining $465,000 is divided by 60,000 shares of common shares outstanding, the common dividend per share is $7.75. However, after the conversion, $11,000 of the $487,000 paid out in dividends goes to the 1,000 shares of $11 preferred, and the remaining $476,000 is divided between the 68,000 common shares outstanding. This reduces the dividend per share to $7.00.
Problem 15-4B (25 minutes)1. A = $20/share × 45,000 shares = $900,000
2. B = $3,800,000/$100 per share = 38,000 shares
3. C = 265,000 shares × $5/share = $1,325,000
4. D = 900,000 + 3,800,000 + 1,325,000 = $6,025,000
5. E = 2,500,000 + 1,750,000 + 1,300,000 – 2,200,000 – 1,200,000 = $2,150,000
6. F = 6,025,000 + 2,150,000 = 8,175,000
7. 3 years (2009, 2010, 2011) × ($8 per share × 45,000 shares) = $1,080,000
Problem 15-5B (20 minutes)
1.
YearDividends Declared and Paid
PreferredDividends
CommonDividends
2010 600,000 480,000 120,000
2011 100,000 100,000 0
2012 250,000 250,000 0
2013 1,500,000 1,090,000 410,000
2.
YearDividends Declared and Paid
PreferredDividends
CommonDividends
2010 600,000 480,000 120,000
2011 100,000 100,000 0
2012 250,000 250,000 0
2013 1,500,000 480,000 1,020,000
Problem 15-6B (60 minutes)Part 1. Journal entries:Mar. 2 Cash Dividends or Retained Earnings 150,000.00
Common Dividend Payable. . . 150,000.00 Declared dividend on 100,000 outstanding shares.
31Common Dividend Payable........150,000.00 Cash.................................... 150,000.00
Paid cash dividend.Nov. 11...............................................Cash (12,000 × $13)
156,000.00 Common shares,.................. 156,000.00
Issued common shares. 25...............................................Cash (8,000 × $9.50)
76,000.00 Common shares...................... 76,000.00Issued common shares.
Dec. 1 Cash Dividends or Retained Earnings 300,000.00 Common Dividend Payable. . . 300,000.00
Declared dividend on 120,000 outstanding shares.
31 Income Summary......................536,000.00 Retained Earnings................ 536,000.00
Closed the Income Summary account.
31 Retained Earnings.....................450,000.00 Cash Dividends.................... 450,000.00
Closed the cash dividend account (assuming that Cash Dividends was debited on March 2 and
December 1).
Part 2CALDWELL CORP.
Statement of Retained EarningsFor Year Ended December 31, 2012
Retained earnings, January 1...............$1,080,000Add: Net income ............................... 536,000 Total ..............................................$1,616,000
Less: Cash dividends........................... 450,000 Retained earnings, December 31 ........$1,166,000
Problem 15-6B (concluded)Part 3
CALDWELL CORP.Shareholders’ EquityDecember 31, 2012
Contributed capital: Common shares, unlimited shares authorized, 120,0001 shares issued and outstanding ..........................$1,032,0001
Retained earnings .............................. 1,166,000Total shareholders’ equity ..................$2,198,000
Calculations:1. Common Shares: Shares Dollars
Jan. 1
Balance brought forward..... 100,000 $800,000
Nov. 11
Issued 12,000 shares (12,000 x $13.00)...............
12,000 156,000
25 Issued 8,000 shares (8,000 x $9.50).............................
8,000 76, 000
Totals................................ 120,000 $1,032,000
Analysis component:$2,198,000 of Caldwell’s assets at December 31, 2012 are financed by common shareholders’ equity ($1,032,000 contributed capital and $1,166,000 retained earnings). Other sources of financing that are available are from debt (liabilities) and from investment by preferred shareholders (preferred shareholders’ contributed capital).
Problem 15-7B (50 minutes)Part 12011 Feb. 5 Cash (70,000 × $10)............... 700,000.00
Common Shares................ 700,000.00 Issued common shares.
28Organization Costs................. 40,000.00 Common Shares................ 40,000.00
Issued common shares to corporation’s promoters.
Mar. 3 Land...................................... 80,000.00Buildings................................ 210,000.00 Machinery.............................. 155,000.00
Common shares................ 445,000.00 Issued common shares for
land, buildings, machinery.Dec. 31............................................Retained Earnings27,000.00
Income Summary.............. 27,000.00 Closed the Income Summary account.
Problem 15-7B (continued)2012Jan. 28.............................................Cash (4,000 × $100)400,000.00
Preferred Shares............... 400,000.00 Issued preferred shares.
Dec. 31............................................Income Summary98,000.00
Retained Earnings............. 98,000.00 Closed the Income Summary account.
2013Jan.1 Cash Dividends or Retained Earnings 63,550.00
Preferred Dividend Payable... 40,000.00Common Dividend Payable... . 23,550.00
Preferred dividend = 4,000 × $10 = 40,000,No. of common shares = 70,000 + 3,750 + 44,000 = 117,750Common dividend = $0.20 × 117,750 = $23,550
Feb.5 Preferred Dividend Payable........40,000.00Common Dividend Payable..........23,550.00
Cash..................................... 63,550.00 Paid dividends.
Dec.31.................................................Retained Earnings63,550.00
Cash Dividends..................... 63,550.00 Closed dividends (assuming Cash Dividends was debited on the January 1 declaration date).
31 Income Summary........................159,000.00 Retained Earnings................. 159,000.00
Closed the Income Summary account.
Part 2SOLAR ENERGY COMPANY INC.
Statement of Retained EarningsFor Year Ended December 31, 2013
Retained earnings, January 1...... $ 71,000
Add: Net income ....................... 159,000 Total ..................................... $230,000Less: Cash dividends.................. 63,550 Retained earnings, December 31 $166,450
Problem 15-7B (concluded) Part 3
SOLAR ENERGY COMPANY INC.Shareholders’ EquityDecember 31, 2013
Contributed capital: Preferred, $10, noncumulative, unlimited shares authorized, 4,000 issued and outstanding $ 400,000 Common shares, unlimited shares authorized, 117,750 shares issued and outstanding 1,185,000 Total contributed capital.....................$1,585,000Retained earnings ................................ 166,450Total shareholders’ equity ....................$1,751,450
Calculations:1. Common Shares: Shares Dollars 2011Feb.
5Issued 70,000 shares........ 70,000 $
700,00028 Issued 3,750 shares.......... 3,750 40,000
Mar. 3
Issued 44,000 shares........ 44,000 445,0 00
Totals.............................. 117,750 $1,185,000
Problem 15-8B (60 minutes)1.2011
Jan. 1 Cash 617,500
Common shares....................... 617,500
Issued 130,000 common shares; 130,000 x $4.75.
5 Cash Dividends or Retained Earnings. 270,000
Preferred Dividend Payable...... 75,000 Common Dividend Payable....... 195,00
0 Declared dividend on preferred shares (100,000 x $0.75 = 75,000) and common shares (270,000 – 75,000 = 195,000).
Feb.
28
Preferred Dividend Payable............... 75,000
Common Dividend Payable................ 195,000
Cash........................................ 270,000
Paid cash dividends.
July 1 Cash................................................. 675,000
Preferred Shares...................... 675,000
Issued 50,000 preferred shares (675,000 ÷ 13.50 = 50,000 preferred shares).
Dec.
31
Retained Earnings............................. 270,000
Cash Dividends........................ 270,000
To close cash dividends (assuming Cash Dividends was debited on January 5, the declaration date).
31
Income Summary.............................. 320,000
Retained Earnings.................... 320,000
Closed the Income Summary account.
2012Sept.
5 Cash Dividends or Retained Earnings. 307,500
Preferred Dividend Payable ($0.75 × 150,000).............................
112,500
Common Dividend Payable ($0.25 × 780,000).............................
195,000
Declared dividend on preferred and common shares.
Oct. 28
Preferred Dividend Payable............... 112,500
Common Dividend Payable................. 195,000
Cash.................................. 307,500
Paid cash dividends declared.
Problem 15-8B (concluded)Dec.
31
Retained Earnings........................... 307,500
Cash Dividends...................... 307,500
Closed the dividend account (assuming Cash Dividends was debited on September 5).
31
Retained Earnings........................... 480,000
Income Summary................... 480,000
Closed the Income Summary account (net loss).
2.FRANCOIS CORP.
Statement of Retained EarningsFor Year Ended December 31, 2012
Retained earnings, January 1............... $1,185,000
Less:.......................................Net loss 480,000
Cash dividends............................. 307,500
787, 500
Retained earnings, December 31 ......... $ 397,50
0
3.FRANCOIS CORP.
Shareholders’ EquityDecember 31, 2012
Contributed Capital:Preferred shares, $0.75 noncumulative, unlimited shares authorized 150,000 shares issued and outstanding
$1,975,000
Common shares, unlimited shares authorized, 780,000 shares issued and outstanding 3,542,
500Total contributed capital.................. $5,517,
500
Retained earnings............................. 397, 500
Total shareholders’ equity................. $5,915,000
Calculations:1. Preferred Shares: Shares Dollars
Jan. 1
Balance brought forward..... 100,000 $1,300,000
July 1
Issued 50,000 shares.......... 50,000 675, 000
Totals................................ 150,000 $1,975,000
1. Common Shares: Shares Dollars Jan.
1Balance brought forward..... 650,000 $2,925,
0001 Issued 130,000 shares
(130,000 x $4.75)...............130,000 617,5
00 Totals................................ 780,000 $3,542,
500 *Problem 15-9B (25 minutes)a. Book value per share of preferred is call
price.....................................................$
106.00Total shareholders’ equity..................... $920,0
00Less total book value of preferred ($106 × 2,000)...............................................
212,0 00
Total book value of common.................. $708,000
Book value per share of common ($708,000/60,000).................................
$ 11.80
b. Call price.............................................. $ 106.00
Dividends in arrears.............................. 11. 00
Book value per share of preferred.......... $ 117.00
Total shareholders’ equity..................... $920,000
Less total book value of preferred ($117 × 2,000)...............................................
234,0 00
Total book value of common.................. $686,000
Book value per share of common $
($686,000/60,000)................................. 11.43
c. Call price.............................................. $ 106.00
Dividends in arrears ($11 × 3)............... 33. 00
Book value per share of preferred.......... $ 139.00
Total shareholders’ equity..................... $920,000
Less total book value of preferred ($139,000 × 2,000)...............................
278,0 00
Total book value of common.................. $642,000
Book value per share of common ($642,000/60,000).................................
$ 10.70
*Problem 15-10B (25 minutes)Part 1:a.Book value per common share Book value per preferred
share1,800,000 – [400,000 + ($0.75 × 50,000 × 2 years)]
400,000 + ($0.75 × 50,000 × 2 years)
125,000 50,000= $10.60 = $9.50
b.Book value per common share Book value per preferred
share1,800,000 – 400,000 400,000
125,000 50,000= $11.20 = $8.00
Part 2:c.Book value per common share Book value per preferred
share1,800,000 – (400,000 + 25,000*) 400,000 + 25,000
125,000 50,000= $11.00* $0.75 × 50,000 × 2 years = $75,000;$75,000 – $50,000 dividends paid =
$25,000 arrears
= $8.50
d.Book value per common share Book value per preferred
share1,800,000 – 400,000 400,000
125,000 50,000= $11.20 = $8.00 Part 3:e.
Book value per common share Book value per preferred share
1,800,000 – ($12 × 50,000) $12 × 50,000 125,000 50,000
= $9.60 = $12.00
ANALYTICAL & REVIEW PROBLEMSA&R Problem 15-1
1.For the Years Ended December 31
Dec. 31/12
Dec. 31/11
Dec. 31/10
Net sales............................... $5,000,000
$4,000,000
$3,000,000
Cost of goods sold.................. 3,000, 000
2,400, 000
1,650,000
Gross profit............................ $2,000,000
$1,600,000
$1,350,000
Operating expenses............... 1,400, 000
1,300, 000
900, 000
Operating income................... $ 600,00
0
$ 300,00
0
$ 450,00
0Other revenues (expenses)..... (200,0
00) (220,
000) 50,
000Income before income tax...... $
400,000
$80,000
$ 500,00
0Income tax expense............... 80,
000 16,
000 100,
000Net income............................ $
320,000
$ 64,000
$ 400,00
0
2, 3, & 4.Dec. 31/12
Dec. 31/11
Dec. 31/10
Contributed Capital:Preferred shares, $2 noncumulative, 100,000 shares authorized, 20,000 issued & outstanding...........................Common shares 500,000 shares authorized 100,000 issued & outstanding...........................Total contributed capital........
$ 400,00
0
550, 000
$ 950,00
0
$ 400,00
0
550, 000
$ 950,00
0
$ 400,00
0
550, 000
$ 950,00
0Retained earnings.................. 684, 364, 300,
000 000 000Total shareholders’ equity...... $1,634,
000$1,314,
000$1,250,
000
Analysis component:2012 2011 2010
Liabilities $1,123,200
$ 936,000
$ 900,000
Equity 1,634,000
1,314,000
1,250,000
Total Assets $2,757,200
$2,250,000
$2,150,000
Liabilities/Total Assets
40.74% 41.60% 41.86%
Although liabilities are increasing in total they are decreasing slightly as a percentage of total assets (which is the same as total liabilities and shareholders’ equity). This indicates that the balance sheet has been strengthened from 2010 to 2012. A balance sheet is said to be strengthened when liabilities (and therefore the related risk) are decreasing.
EC 15-1 - Ethics Challenge
It appears that Jack may be in violation of copyright laws. This is both a legal issue and an ethical issue. To copy someone else’s work is ethically wrong. To incorporate as a means of protection against normal business risk is a well accepted practice. The obvious intent here, however, is to use the corporate shell as a means of limiting any legitimate claim that Corel might have to Jack and Bill’s assets. Jack is recommending incorporation for deceptive purposes and Bill should hold his moral ground on this issue.
Focus on Financial Statements
FFS 15-1
Part A:BowTie Fishing Expeditions Corp.Statement of Retained EarningsFor Month Ended March 31, 2011
Retained earnings, March 1...... $ -0-
Add: Net income...................... 190,000
Less: Dividends declared......... 45,0 00
Retained earnings, March 31... . $145,000
FFS 15-1 (continued)BowTie Fishing Expeditions Corp.
Balance SheetMarch 31, 2011
Assets Current assets: Cash.............................................. $
15,000
Accounts receivable....................... $36,000
Less: Allowance for doubtful accounts.............................................
1,20 0
34,800
Prepaid rent.................................. 9,000 Total current assets....................... $
58,800
Property, plant and equipment: Land............................................. $105,
000 Building........................................ $148,
600 Less: Accumulated amortization. 12,
000136,6
00 Equipment.................................... $140,
000 Less: Accumulated amortization 2,0
00138,0
00 Furniture...................................... $
75,000
Less: Accumulated amortization. 5,0 00
70,000
Total property, plant and equipment...........................................
449,600
Intangible assets: Patent.......................................... Less: Accumulated amortization
…………………….
$14,000
2,0 00
12,0 00
Total assets......................................... $520,400
Liabilities Current liabilities: Accounts payable.......................... $
17,000
Current portion of long-term notes payable...............................................
30,000
Customer deposits........................ 28,000
Dividends payable......................... 45,000
Estimated warranty liabilities........ 3,40 0
Total current liabilities................. $123,400
Long-term liabilities: Notes payable, less $30,000 current portion....................................
60,0 00
Total liabilities.................................. $183,400
Shareholders’ Equity Contributed capital: Preferred shares, $2, cumulative, Authorized: 30,000 shares Issued and outstanding: 10,000 shares......................................
$ 42,00
0 Common shares, Authorized: Unlimited Issued and outstanding: 50,000 shares......................................
150,000
Total contributed capital.............. $192,000
Retained earnings........................... 145,000
Total shareholders’ equity............... 337,000
Total liabilities and shareholders’ equity.................................................
$520,400
FFS 15-1 (concluded)
Analysis component:
1. 337,000 ÷ 520,400 x 100 = 65%2. 183,400 ÷ 520,400 x 100 = 35%3. At March 31, 2011, 35.24% ($183,400/$520,400 × 100) of
BowTie’s assets were financed by debt. Therefore, given that 30% of the assets were financed by debt at March 31, 2010, the risk associated with debt financing has increased because of the increase in debt as a percentage of assets (the balance sheet has been weakened as opposed to strengthened).
4. (150,000 + 145,000 = 295,000)/520,400 x 100 = 57%5. 150,000/520,400 x 100 = 29%
FFS 15-2
1. Note 7 of Danier’s financial statements indicate that 5,321,825 shares were issued as of June 25, 2005.
2.a. The total dividends declared during the year ended June 25, 2005 were $1,620 (thousand).
b. Because there are no dividends payable on the balance sheet, it would appear that all of the dividends declared in 2005 were paid in 2005.
c. Dividends are a distribution of cash* to Danier’s shareholders representing the shareholders’ share of earnings generated by Danier.3.
— Danier’s net loss caused equity, specifically retained earnings, to decrease by $185 (thousand).
— Dividends cause equity to decrease because the cash dividends* distributed to the shareholders represent the shareholders’ share of earnings generated by the business.
Critical Thinking Mini Case
CT 15-1
Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity.Problem:
— how to best finance the purchase of new equipment
Goal:*— from the perspective of the manager of Jones Inc., the
financing option with the lowest cost is the best option (the shareholders of Jones Inc. would want the option that not only has the lowest cost but that does not dilute the ownership of the common shareholders)
— another consideration would be to minimize risk to Jones Inc.
Principles:— must comply with GAAP (disclose method of financing,
for example)
Facts:— as per the mini case study— also, the following calculations can be derived from the
information provided:
BorrowIssue $1
cumulative preferred
sharesIncome before interest and tax $80,00
0$80,000
Interest expense ($100,000 x 6%)........................................
6,00 0
—
Income before tax................... $74,000
$80,000
Income tax ($74,000 x 25%; $80,000 x 25%).......................
18,50 0
20,000
Net income............................. $55,500
$60,000
Less dividends ($100,000 x 6,000 x $1).............................
—
6,000
Net earnings applicable to common shareholders............. $55,50
0$54,000
CT 15-1 (concluded)Conclusions/Consequences:
— Is the primary goal risk minimization (issue shares) or minimize cost (borrow)?
— Common shareholders will want to maximize their earnings which points to borrowing but borrowing increases risk because principal and interest payments must be made; potential future creditors are sensitive to risk.
— Finance manager may be compensated based on performance so will prefer borrowing option.
— Alternatively, the finance manager could make a case to the board of directors to avoid the declaration of dividends in which case issuing preferred shares would generate the highest earnings applicable to common shareholders ($60,000 vs $55,500) but this may have negative implications for future issuance of shares.
*The goal is highly dependent on ”perspective.”
