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CHAPTER 13
Corporations: Organization and Share Capital
Transactions
Exercises
Problems
Set A
Problems
Set B
1, 2, 3, 4,
5, 6, 7, 8,
9,10
1, 2
1, 7
1, 11
2. Record common
share transactions.
11, 12,
13, 14, 15
3, 4, 5, 6
2, 3, 4, 7,
11
2, 3, 4, 5,
6, 7, 11
2, 3, 4, 5,
6, 7, 11
3. Record preferred
share transactions.
16, 17,
18, 19
7, 8, 9
3, 4, 5, 6,
7, 11
4, 5, 6, 7,
11
4, 5, 6, 7,
11
4. Prepare the
shareholders equity
section of the
balance sheet and
calculate return on
equity.
20, 21,
22, 23, 24
10, 11,
12, 13
7, 8, 9,
10, 11
4, 5, 6, 7,
8, 9, 10,
11
4, 5, 6, 7,
8, 9, 10,
11
Study Objectives
Questions
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Description
Difficulty
Level
Time
Allotted (min.)
Simple
15-20
Moderate
25-30
1A
2A
3A
Simple
15-20
4A
Simple
25-30
5A
Moderate
45-60
6A
Moderate
40-50
7A
Moderate
50-60
8A
Simple
30-40
9A
Simple
25-35
10A
Simple
10-15
11A
Simple
15-20
1B
Simple
15-20
2B
Moderate
25-30
3B
Simple
15-20
4B
Simple
25-30
5B
Moderate
45-60
6B
Moderate
40-50
7B
Moderate
50-60
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Description
Difficulty
Level
Time
Allotted (min.)
8B
Simple
30-40
9B
Simple
25-35
10B
Simple
10-15
11B
Simple
15-20
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Chapter 13
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Identify and
discuss the
major
characteristics
of a
corporation.
2.
Record
common share
transactions.
3.
Record
preferred share
transactions.
4.
Prepare the
shareholders
equity section
of the balance
sheet and
calculate return
on equity.
Broadening Your
Perspective
Knowledge
Comprehension
Q13-5
Q13-1
Q13-2
Q13-3
Q13-4
Q13-6
Q13-7
Q13-8
BE13-1
BE13-2
E13-7
Q13-12
Q13-13
Q13-14
Q13-15
E13-7
Q13-20
Q13-22
Application
Q13-9
Q13-10
P13-11A
Analysis
Synthesis
E13-1
P13-1A
P13-1B
Q13-11
BE13-3
BE13-4
BE13-5
BE13-6
E13-2
E13-3
E13-4
P13-2A
P13-3A
P13-4A
P13-5A
P13-6A
P13-7A
P13-11A
P13-2B
P13-3B
P13-4B
P13-5B
P13-6B
P13-7B
P13-11B
E13-11
Q13-16
Q13-17
Q13-18
Q13-19
E13-7
BE13-7
BE13-8
BE13-9
E13-3
E13-4
E13-5
E13-6
P13-4A
E13-11
Q13-21
Q13-23
Q13-24
E13-7
BE13-10
BE13-11
BE13-12
BE13-13
E13-8
E13-9
E13-10
P13-4A
P13-5A
P13-6A
P13-7A
P13-5A
P13-6A
P13-7A
P13-11A
P13-4B
P13-5B
P13-6B
P13-7B
P13-11B
P13-8A
P13-9A
P13-10A
P13-11A
P13-4B
P13-5B
P13-6B
P13-7B
P13-8B
P13-9B
P13-10B
P13-11B
BYP13-1
BYP13-3
BYP13-2
Continuing Cookie
Chronicle
E13-11
BYP13-4
BYP13-5
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Chapter 13
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Evaluation
ANSWERS TO QUESTIONS
1.
2.
3.
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QUESTIONS (Continued)
4.
Small, privately held corporations are riskier than large publicly held ones.
As a result, lenders will often require the owners to sign personal
guarantees, thus eliminating the limited liability normally associated with
corporations. Because the shares are not offered for sale to the general
public, it is more difficult to raise capital. Small corporations may be run by
the shareholders, rather than professional managers. This also means that
if one of these shareholders sells his or her ownership interest, the
corporation may be significantly affected.
5.
7.
(a) Legal capital is capital that has been contributed by the shareholders
that must remain in the corporation, to protect creditors.
(b) Legal capital is unavailable for dividends. Retained earnings are
available for dividends. Keeping the two amounts separate on the
balance sheets enables users to see the amount of creditor protection
that exists. The distinction between amounts contributed by the
owners and amounts earned and retained by the company is not
needed for proprietorships because the proprietor has unlimited
personal liability for the debts of the business in any case.
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QUESTIONS (Continued)
8.
9.
10. There will be no impact on Abitibis financial statements at the time of the
share price decline. However, should Abitibi decide it would like to raise
capital in the securities market, the price decline means it will have to sell
more shares to raise the same amount of money.
11. When shares are issued for services or noncash assets, the cost should
be measured at the fair market value of the consideration given up (the
shares). If that value cannot be reasonably determined, then the fair
market value of the consideration received should be used (the land). In
this case, the fair market value of the shares is more objectively
determinable, since the shares are actively traded in the securities market.
The appraised value of the land is merely an estimate of the land's value,
while the market price of the shares is the amount the shares were actually
worth on the date of exchange. Therefore, the land should be recorded at
$90,000.
12. A corporation may acquire its own shares: (1) to increase trading of the
company's shares in the securities market in the hope of enhancing its
market value, (2) to increase earnings per share by reducing the number
of shares issued, (3) to eliminate hostile shareholders by buying them out,
(4) to have additional shares available to be reissued to officers and
employees under bonus and stock compensation plans, or for use in the
acquisition of other companies, and (5) to comply with percentage share
ownership requirements.
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QUESTIONS (Continued)
13. This transaction:
(a)
decreases total assets,
(b)
has no effect on total liabilities and,
(c)
decreases total shareholders' equity.
14. Share repurchases are transactions between the company and its
shareholders. Therefore, any resulting gains or losses cannot be reported
on the income statement. Such gains and losses are seen as an excess or
deficiency belonging to the original shareholders and are reported as an
increase or decrease in the shareholders equity section of the balance
sheet.
15. If there have been gains from similar transactions in the past, the resulting
credit balance of the contributed capital account is available to absorb
some or all of the loss on reacquisition. However, the balance of the
contributed capital account cannot go below zero. If the loss exceeds the
balance in the contributed capital account, the excess amount is debited to
retained earnings.
16. Common shares and preferred shares both represent ownership of the
corporation. Common shares signify the basic residual ownership;
preferred shares represent ownership with certain privileges or
preferences. Preferred shareholders typically have a preference as to
dividends and as to assets in the event of liquidation. However, preferred
shareholders generally do not have voting rights.
17. Cumulative preferred shares are those that require preferred shareholders
be paid both current year dividends and unpaid prior year dividends before
common shareholders receive any dividends. Dividends not declared for
noncumulative preferred shares are lost forever.
Redeemable preferred shares can be purchased from the shareholders,
by the issuing corporation, at the option of the corporation. If the shares
are retractable they can be sold by the shareholder, to the issuing
corporation, at the option of the shareholder.
18. (a) Dividends in arrears are dividends on cumulative preferred shares
that were not declared in a given period.
(b) Dividends in arrears are disclosed in the notes to the financial
statements; they are not recorded as liabilities.
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QUESTIONS (Continued)
19. When convertible preferred shares are converted into common shares, the
shareholder simply exchanges preferred shares for common shares,
according to a predetermined rate. To record the conversion, the amount
originally paid for the preferred shares is transferred into the appropriate
common shares account. If multiple share issues have occurred at varying
prices, then the average cost for each preferred share is used instead of
the original cost.
This entry has no effect on (a) total assets, (b) total liabilities, or (c) total
shareholders' equity.
20. The three main components of shareholders' equity are:
Contributed capital,
Retained earnings, and
Accumulated other comprehensive income.
Contributed capital represents the amounts contributed by the
shareholders. Share capital and additional contributed capital (e.g., from
reacquisition of shares) are components of contributed capital.
Retained earnings represent the cumulative net income (or loss) since
incorporation that has been retained in company and not distributed to
shareholders as dividends.
Accumulated other comprehensive income represents gains and losses
not resulting from share transactions, that bypass net income. The most
common example is unrealized gains and losses on investments.
21.
Common Shares
Retained Earnings
Contributed Capital Reacquired
Shares
Accumulated Other
Comprehensive Income
Preferred Shares
Classification
Share capitalcommon shares
Retained earnings
Additional contributed capital
Accumulated other
comprehensive income
Share capitalpreferred
shares
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QUESTIONS (Continued)
22. Comprehensive income includes all changes in shareholders equity during
a period except for changes that result from the sale or repurchase of
shares or from the payment of dividends.
Accumulated other comprehensive income is reported separately from
retained earnings to distinguish unrealized gains and losses from realized
gains and losses and other sources of earned income that are
accumulated in retained earnings. Reporting this information separately
insulates income, and consequently retained earnings, from fluctuations in
market value while still informing users of the gain or loss that could have
occurred had the investment been sold.
23. Return on equity is the return earned by all the shareholders both the
preferred and common shareholders. It is calculated by dividing net
income by the average shareholders equity.
Return on common shareholders equity is the return earned by the
common shareholders. It is calculated by dividing the net income available
to the common shareholders by the average common shareholders
equity. Preferred dividends are deducted from net income to determine the
numerator. The legal capital of the preferred shareholders is deducted
from total shareholders equity before calculating the average common
shareholders equity.
24. Net income by itself does not provide shareholders with an indication of
their return per dollar of investment. Comparing net income to
shareholders equity provides investors with a meaningful measure of how
many dollars are earned for each dollar of their investment. It also provides
shareholders with the information necessary to compare investment
opportunities in the marketplace.
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Dec. 15
12,000
9,000
12,000
9,000
70,000
70,000
(b) No, the answer would not change. The market price of the
shares is a reliable indicator of its value; the advertised
price of the land is not.
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(b)
Feb. 15
2,500
15,000
20,000
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June 15
550,000
125,000
550,000
125,000
(b)
Oct. 1
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Chapter 13
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Shareholders' equity
Contributed capital
Share capital
Preferred shares, no par value, $5-noncumulative,
unlimited number of shares authorized,
800 shares issued
$ 20,000
Common shares, no par value, unlimited
number of shares authorized,
5,000 shares issued
50,000
Total share capital
70,000
Contributed capitalreacquisition of
common shares
5,000
Total contributed capital
75,000
Retained earnings
29,000
Total shareholders' equity
$104,000
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Shareholders' equity
Contributed capital
Share capital
Preferred shares, no par value, $5-noncumulative,
unlimited number of shares authorized,
800 shares issued
$ 20,000
Common shares, no par value, unlimited
number of shares authorized,
5,000 shares issued
50,000
Total share capital
70,000
Contributed capitalreacquisition of
common shares
5,000
Total contributed capital
75,000
Retained earnings
29,000
Accumulated other comprehensive income
6,000
Total shareholders' equity
$110,000
(b) Total shareholders equity would be $98,000 ($104,000 $6,000)
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31
31
500,000
Retained Earnings........................
Dividends .................................
50,000
31
500,000
50,000
$8,097
($132, 495 + $121,784) 2
(b)
= 6.4%
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SOLUTIONS TO EXERCISES
EXERCISE 13-1
(a) High $60.85
Low $41.45
(b) $0.75
(c) 1,000 X $60.41 = $60,410
(d) $59.25 + $1.24 = $60.49 (closing price + change)
(e) 9,837 X 100 = 983,700 shares
(f)
EXERCISE 13-2
1.
2.
Dec. 5 Land..........................................
Common Shares .................
120,000
240,000
120,000
240,000
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EXERCISE 13-3
(a) Jan. 10 Cash (75,000 X $5) ...................
Common Shares .................
375,000
105,000
325,000
375,000
105,000
325,000
(b) (1) The average issue price of the preferred shares is $105.
(2) The average issue price of the common shares is $5.60
($375,000 + $325,000) (75,000 + 50,000).
EXERCISE 13-4
(a) Jan. 6 Cash ........................................
Common Shares ................
(200,000 shares X $1.50)
300,000
12 Cash ........................................
Common Shares .................
(50,000 shares X $1.75)
87,500
105,000
300,000
87,500
105,000
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382,000
8,000
390,000
16,500
270,000
Transaction
Date
January 6
January 12
July 18
Total
Number of
Common Shares
Issued
200,000
50,000
1,000,000
1,250,000
Proceeds of
Issue
$ 300,000
87,500
2,000,000
$2,387,500
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Chapter 13
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Transaction
Date
January 6
January 12
July 18
Nov. 17
Dec. 30
Total
Number of
Common Shares
Issued
200,000
50,000
1,000,000
(200,000)
(150,000)
900,000
Proceeds of
Issue
$ 300,000
87,500
2,000,000
(382,000)
(286,500)
$1,719,000
EXERCISE 13-5
(a) 100,000 X $4 = $400,000
(b)
Regular dividend
Arrears from Year 1
Dividend paid
Arrears
Year 1
$400,000
250,000
$150,000
Year 2
$400,000
150,000
550,000
550,000
$
0
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EXERCISE 13-6
(a) Nov. 15
230,000
230,000
EXERCISE 13-7
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
9.
1.
12.
2.
5.
8.
7.
6.
4.
11.
10.
13.
3.
Legal capital
Publicly held corporation
Organization costs
Authorized shares
Issued shares
Initial public offering
Secondary market
Retained earnings
Common shares
Comprehensive income
Contributed capital
Convertible
Cumulative
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EXERCISE 13-8
Shareholders Equity
Other
Account
Share
Capital
Additional
Contributed
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
1. Cash
2. Common shares
3. Contributed
capital
reacquisition of
common shares
4. Gain on sale of
property, plant
and equipment
5. Available-forsale security
6. Unrealized gain
on available-forsale security
7. Preferred shares
8. Retained
earnings
9. Legal fees
expense
10. Dividends
Solutions Manual
Financial
Statement
Balance
Sheet
Classification
Current
Assets
Balance
Sheet
Other
Revenue
(Gain)
Current
Assets
Income
Statement
Operating
Expense
Income
Statement
X
X
X
13-23
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Chapter 13
EXERCISE 13-9
OZABAL INC.
Partial Balance Sheet
December 31, 2008
Shareholders' equity
Contributed capital
Share capital
Preferred shares $4-noncumulative, no par
value, 100,000 shares authorized,
30,000 issued
Common shares, no par value, unlimited
number of shares authorized, 300,000
shares issued
Total share capital
Contributed capitalreacquisition of
common shares
Total contributed capital
Retained earnings
Accumulated other comprehensive income
Total shareholders equity
$ 150,000
300,000
450,000
25,000
475,000
900,000
75,000
$1,450,000
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EXERCISE 13-10
(a)
REITMANS (CANADA) LIMITED
Partial Balance Sheet
January 28, 2006
(in thousands)
Shareholders' equity
Share capital
Class A non-voting (preferred) shares, unlimited
number authorized, 56,747 issued ...................... $ 16,892
Common shares, unlimited number
authorized, 13,440 shares issued .......................
482
Total share capital .............................................
17,374
Contributed surplus ...................................................
2,523
Total contributed capital ............................................
19,897
Retained earnings* ..................................................... 370,360
Total shareholders equity ................................ $390,257
*$316,191 + $84,889 - $29,345 - $1,375 = $370,360
(b) ($ in thousands)
Return on equity = Net income Average shareholders equity
= $84,889 [($390,257 + $331,524) 2]
= 23.52%
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EXERCISE 13-11
(a) The average cost of the preferred shares is $60 ($600,000
10,000 = $60).
The average cost of the common shares is $3 ($1,800,000
600,000 = $3).
(b) It will be able to sell an additional 150,000 common shares
(750,000 authorized - 600,000 issued).
(c) The company paid $2 per share, for a total of $200,000.
$100,000 100,000 = $1 per share was credited to
contributed capital. The average issue price of $3 per share
was debited to the common shares account. The
difference, $2 was the price paid per share.
Common Shares......................................
Contributed Capital..........................
Cash ..................................................
300,000
100,000
200,000
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Chapter 13
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SOLUTIONS TO PROBLEMS
PROBLEM 13-1A
1.
2.
3.
4.
5.
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PROBLEM 13-2A
(a) Shares authorized
Shares issued
100,000
11,000
$396,000
$2,600
$161,400
Calculations:
Common
shares
(a)
Bal
1.
2.
3.
4.
5.
$270,000
(12,000)
258,000
147,000
405,000
73,800
478,800
(36,000)
442,800
(46,800)
$396,000
$30.00
Retained
earnings
$180,000
30.00
$ 9,000
(3,600)
5,400
33.47
5,400
180,000
36.00
5,400
(5,400)
0
2,600
$2,600
180,000
(18,600)
161,400
0000000
$161,400
36.00
36.00
180,000
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PROBLEM 13-3A
(a)
(b)
Dividend Noncumulative
Cumulative
Year
Paid
Preferred
Common Preferred Common
1
$15,000
$15,000
$
0
$15,000
$
0
2
12,000
12,000
0
12,000
0
3
27,000
15,000
12,000
18,000
9,000
4
35,000
15,000
20,000
15,000
20,000
1. Regular dividend is $5 X 3,000 = $15,000
2b. Arrears = $15,000 - $12,000 = $3,000
3b. Preferred dividend = $15,000 (regular) + $3,000 (arrears) =
$18,000
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PROBLEM 13-4A
Shareholders' Equity
Assets
Liabilities
Preferred
Shares
Common
Shares
Other
Contributed
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
1.
+$100,000
n/a
n/a
+$100,000
n/a
n/a
n/a
2.
+5,500
n/a
n/a
+5,500
n/a
n/a
n/a
3.
n/a
n/a
-$300,000
+300,000
n/a
n/a
n/a
4.
+150,000
n/a
+150,000
n/a
n/a
n/a
n/a
5.
-72,500
n/a
-75,000
n/a
+$2,500
n/a
n/a
6.
-10,000
n/a
n/a
n/a
n/a
-$10,000
n/a
7.
-5,000
n/a
n/a
n/a
n/a
n/a
-$5,000
3.
5.
6.
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Chapter 13
PROBLEM 13-5A
(a)
Date
GENERAL JOURNAL
Account Titles and Explanation
J1
Debit
200,000
Mar.
420,000
62,500
225,000
60,000
7,200
Nov.
96,000
650,000
31 Dividends ........................................
Cash ............................................
36,000
36,000
Apr.
May
Credit
200,000
420,000
62,500
225,000
67,200
96,000
650,000
36,000
36,000
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Chapter 13
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Explanation
1
1
Ref.
Debit
J1
J1
Credit
Balance
420,000 420,000
96,000 516,000
Common Shares
Date
Explanation
Jan. 10
Apr. 1
May 1
July 24
Ref.
Debit
J1
J1
J1
J1
Credit
200,000
62,500
225,000
67,200
Balance
200,000
262,500
487,500
554,700
Dividends
Date
Explanation
Dec. 31
31
Closing entry
Ref.
Debit
Credit
J1
J1
36,000
Ref.
Debit
Credit
36,000
650,000 650,000
614,000
36,000
Balance
36,000
0
Retained Earnings
Date
Dec
Explanation
31
31
Closing entry
Closing entry
J1
J1
Balance
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Shareholders' equity
Share capital
Preferred shares, no par value,
$3-noncumulative, . unlimited number of shares
authorized,12,000* shares issued .................. $ 516,000
Common shares, no par value, unlimited number
of shares authorized, 216,800** shares issued
554,700
Total share capital ..................................................
1,070,700
Retained earnings .................................................
614,000
Total shareholders equity................................ $1,684,700
* 10,000 + 2,000 = 12,000 shares
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PROBLEM 13-6A
(a)
Date
GENERAL JOURNAL
Account Titles and Explanation
J1
Debit
75,000
16,500
27,500
Credit
75,000
16,500
1,500
1,000
30,000
Transaction Date
Beginning balance
February 1
September 3
Total
Number of
Common
Shares Issued
1,000,000
25,000
5,000
1,030,000
Proceeds of
Issue
$2,741,000
75,000
16,500
$2,832,500
130,000
275,000
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30,000
30,000
30,000
30,000
(b)
Preferred Shares
Date
Jan.
Nov.
Explanation
1
3
Balance
Ref.
Debit
Credit
Balance
130,000
500,000
630,000
Common Shares
Date
Jan.
Feb.
Sept.
Oct.
Explanation
1
1
3
25
Balance
Ref.
J1
J1
J1
Debit
27,500
Credit
Balance
2,741,000
75,000 2,816,000
16,500 2,832,500
2,805,000
Explanation
Jan. 1
Oct. 25
Balance
Ref.
Debit
J1
1,500
Ref.
Debit
J1
J1
30,000
Credit
Balance
1,500
0
Dividends
Date
Dec. 31
31
Explanation
Closing entry
Credit
30,000
Balance
30,000
0
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Retained Earnings
Date
Jan. 1
Oct. 25
Dec. 31
31
Explanation
Balance
Closing entry
Closing entry
Ref.
J1
J1
J1
Debit
Credit
Balance
1,816,000
1,000
1,815,000
275,000 2,090,000
30,000
2,060,000
(c)
MOUNTAINHI CORPORATION
Balance Sheet (Partial)
December 31, 2008
______________________________________________________
Shareholders' equity
Share capital
$4 preferred shares, cumulative, no par value,
50,000 shares authorized,
10,000 shares issued .....................................
$ 630,000
Common shares, no par value, unlimited number
of shares authorized, 1,020,000* shares issued 2,805,000
Total share capital .......................................
3,435,000
Retained earnings (See Note X) ...........................
2,060,000
Total shareholders' equity ........................................
$5,495,000
Note X: Dividends on preferred shares totalling $10,000 [10,000
X $1 per share] are in arrears.
*1,000,000 + 25,000 + 5,000 10,000 = 1,020,000 shares
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PROBLEM 13-7A
(a)
Date
GENERAL JOURNAL
Account Titles and Explanation
J1
Debit
111,000
212,000
Credit
111,000
212,000
62,000
108,000
62,000
108,000
600,000
31 Income Summary..............................
Expenses ......................................
540,000
31 Income Summary..............................
Retained Earnings........................
60,000
600,000
540,000
60,000
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Explanation
Jan. 1
Feb. 6
July 15
Aug. 22
Nov. 1
Balance
Ref.
J1
J1
J1
J1
Debit
Credit
Balance
525,000
111,000 636,000
424,000
212,000
62,000 486,000
378,000
108,000
Common Shares
Date
Explanation
Jan. 1
July 15
Nov. 1
Balance
Ref. Debit
J1
J1
Credit
Balance
1,050,000
212,000 1,262,000
108,000 1,370,000
Explanation
1
Balance
Ref.
Debit
Credit
Balance
18,750
Retained Earnings
Date
Explanation
Jan. 1
Dec. 31
Balance
Closing Entry
Ref.
Debit
J1
Credit
Balance
300,000
60,000 360,000
Explanation
1
Balance
Ref.
Debit
Credit
Balance
25,000
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strictly prohibited.
PROBLEM 13-8A
(a)
Date
GENERAL JOURNAL
Account Titles and Explanation
J1
Debit
Credit
314,850
138,400
25,000
30,080
4,860
18,200
3,900
25,000
69,410
2,000
69,410
2,000
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$ 32,500
74,705
1,265
108,470
90,240
225,000
$423,710
$ 43,000
8,400
900
2,000
5,500
5,000
64,800
55,000
119,800
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$ 50,000
110,000
160,000
1,500
161,500
142,410
303,910
$423,710
$ 75,000
69,410
(2,000)
$142,410
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strictly prohibited.
PROBLEM 13-9A
(a)
ANDRS WINES LTD.
Balance Sheet
March 31, 2006
(in thousands)
______________________________________________________
Assets
Current assets
Accounts receivable ................................................
$ 18,444
Inventories ...............................................................
70,528
Income taxes recoverable .......................................
911
Prepaid expenses ....................................................
2,447
Total current assets ............................................
92,330
Property, plant, and equipment ..................... $134,697
Less: Accumulated amortization ................. (49,100)
85,597
Goodwill .......................................................................
35,862
Other long-term assets ...............................................
8,298
Total assets ..............................................................
$222,087
Liabilities and Shareholders Equity
Current liabilities
Bank indebtedness ..................................................
Accounts payable and accrued liabilities ..............
Dividends payable ...................................................
Current portion of long-term debt ..........................
Total current liabilities ........................................
Long-term liabilities
Long-term debt .......................................... $50,328
Future income tax liability......................... 12,381
Other long-term liabilities .........................
4,224
Total liabilities .....................................................
$ 37,295
21,613
778
5,888
65,574
66,933
$132,507
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$6,054
= 6.85%
$89,580 + $87,168
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PROBLEM 13-10A
(a) Return on equity = Net income Average shareholders
equity
2004
2005
$128.7
= 7.04%
$1,780.5 + $1,877.4
2
$770.8
= 61.11%
$1,877.4 + $645.3
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PROBLEM 13-11A
(a) Preferred dividends Preferred dividend per share
$150,000 $5 = 30,000 preferred shares
(b) Preferred share average price = $3,150,000 30,000 shares
issued = $105 per share
Common share average price = $1,000,000 250,000 shares
issued = $4 per share
(c) The shares were issued for an average selling price of $4
(see (b) above) which means the company would have
reduced the Common Shares account by $100,000 (25,000
X $4). Since a reduction to retained earnings is shown
relating to this reacquisition for $56,250, this indicates the
company had to pay $156,250 ($100,000 + $56,250) to
reacquire the 25,000 shares.
(d) Limited liability for preferred shareholders
= $3,150,000
Limited liability for common shareholders
= $4,600,000 - $3,150,000 = $1,450,000
(e) It is a loss that bypasses the income statement because it
has not yet been realized. An example is an unrealized loss
on investments that are available for sale.
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PROBLEM 13-1B
1.
2.
3.
4.
5.
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PROBLEM 13-2B
(a) Shares authorized
Shares issued
500,000
200,000
$830,000
$10,500
$680,000
Calculations:
Common
shares
(a)
Bal
1.
2.
3.
4.
5.
$1,000,000
127,500
1,127,500
(20,500)
1,107,000
55,000
1,162,000
(49,800)
1,112,200
(282,200)
$ 830,000
Contributed
Average
capital
Number
issue reacquisition
of shares
price
of common
(b)
(a) (b)
shares
250,000
25,000
275,000
(5,000)
270,000
10,000
280,000
(12,000)
268,000
(68,000)
200,000
Retained
earnings
$4.00
$10,000
$680,000
4.10
10,000
500
10,500
680,000
10,500
(10,200)
300
10,200
$10,500
680,000
4.10
4.15
4.15
4.15
680,000
680,000
000000 0
$680,000
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PROBLEM 13-3B
Year Dividend
Paid
1
$20,000
2
15,000
3
30,000
4
35,000
(a)
(b)
Noncumulative Common Cumulative Common
Preferred
Preferred
$20,000
$
0
$20,000 $
0
15,000
0
15,000
0
20,000
10,000
25,000
5,000
20,000
15,000
20,000
15,000
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PROBLEM 13-4B
Shareholders' Equity
Assets
Liabilities
Accumulated
Other
Retained
Preferred Common
Other
Contributed
Earnings Comprehensive
Shares
Shares
Capital
Income
n/a +$23,550
n/a
n/a
n/a
1.
+$23,550
n/a
2.
-200,000
n/a
n/a
-160,500
-$30,000
-$9,500
n/a
3.
n/a
n/a
-$70,000
+70,000
n/a
n/a
n/a
4.
+25,000
n/a
n/a
+25,000
n/a
n/a
n/a
5.
+7,500
n/a
+7,500
n/a
n/a
n/a
n/a
6.
-15,000
n/a
n/a
n/a
n/a
-15,000
n/a
7.
+2,500
n/a
n/a
n/a
n/a
n/a
+$2,500
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Chapter 13
PROBLEM 13-5B
(a)
Date
GENERAL JOURNAL
Account Titles and Explanation
J1
Debit
Credit
320,000
575,000
Apr.
93,500
351,000
47,500
50,000
117,000
500,000
24,000
24,000
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Explanation
1
1
Ref.
Debit
J1
J1
Credit
Balance
575,000 575,000
117,000 692,000
Common Shares
Date
Feb.
Apr.
June
Aug.
Sept.
Explanation
10
1
20
1
1
Ref.
Debit
J1
J1
J1
J1
J1
Credit
320,000
93,500
351,000
47,500
50,000
Balance
320,000
413,500
764,500
812,000
862,000
Dividends
Date
Jan. 31
31
Explanation
Closing entry
Ref.
Debit
Credit
24,000
Balance
J1
J1
24,000
0
24,000
Ref.
Debit
Credit
24,000
500,000 500,000
476,000
Retained Earnings
Date
Explanation
Jan. 31
31
Closing entry
Closing entry
J1
J1
Balance
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(c)
WETLAND CORPORATION
Balance Sheet (Partial)
January 31, 2008
______________________________________________________
Shareholders' equity
Share capital
$4-noncumulative preferred shares, no par value,
unlimited number of shares authorized,
6,000* shares issued ............................................ $ 692,000
Common shares, no par value, unlimited number
of shares authorized, 200,000** shares issued 862,000
Total share capital ...................................................... 1,554,000
Retained earnings....................................................... 476,000
Total shareholders equity ....................................... $2,030,000
*5,000 + 1,000 = 6,000 shares
**80,000 + 22,000 + 78,000 + 10,000 + 10,000 = 200,000 shares
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PROBLEM 13-6B
(a)
GENERAL JOURNAL
Date
J1
Debit
Credit
55,500
107,000
75,000
Transaction Date
Beginning balance
February 1
Total
Number of
Common
Shares Issued
200,000
5,000
205,000
Proceeds of
Issue
$1,400,000
55,500
$1,455,500
60,000
12,000
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12,000
(b)
Preferred Shares
Date
Jan.
Sep.
Explanation
1
3
Balance
Ref.
Debit
J1
Credit
Balance
320,000
107,000 427,000
Common Shares
Date
Explanation
Jan. 1
Feb. 1
Oct. 25
Balance
Ref.
J1
J1
Debit
71,000
Credit
Balance
1,400,000
55,500 1,455,500
1,384,500
Explanation
Jan. 1
Oct. 25
Balance
Ref.
Debit
J1
2,500
Ref.
Debit
Credit
2,500
Balance
2,500
0
Dividends
Date
Jan. 31
31
Explanation
Closing entry
J1
J1
Credit
12,000
12,000
Balance
12,000
0
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Explanation
Jan. 1
Oct. 25
Dec. 31
31
Balance
Closing entry
Closing etnry
Ref.
J1
J1
J1
Debit
1,500
12,000
Credit
Balance
488,000
486,500
60,000 546,500
534,500
(c)
CHEUNG CORPORATION
Balance Sheet (Partial)
December 31, 2008
_______________________________________________________
Shareholders' equity
Share capital
$5-cumulative preferred shares, no par value,
25,000 shares authorized, 4,000* shares issued $ 427,000
Common shares, no par value, unlimited number
of shares authorized, 195,000** shares issued 1,384,500
Total share capital................................................
1,811,500
Retained earnings.....................................................
534,500
Total shareholders equity .............................. $2,346,000
*3,000 + 1,000 = 4,000 preferred shares
** 200,000 + 5,000 10,000 = 195,000 common shares
Note X: Dividends of $8,000 are in arrears. (4,000 X $5 - $12,000)
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PROBLEM 13-7B
(a)
Date
GENERAL JOURNAL
Account Titles and Explanation
J1
Debit
120,000
56,000
Credit
120,000
56,000
195,000
195,000
500,000
450,000
50,000
500,000
450,000
50,000
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Explanation
1
1
1
1
1
Balance
Ref.
J1
J1
J1
J1
Debit
Credit
Balance
440,000
120,000 560,000
504,000
56,000
195,000 699,000
582,500
116,500
Common Shares
Date
Jan.
Mar
Sep.
Explanation
1
1
1
Balance
Ref. Debit
J1
J1
Credit
Balance
1,050,000
56,000 1,106,000
116,500 1,222,500
Explanation
1
Balance
Ref.
Debit
Credit
Balance
25,000
Retained Earnings
Date
Explanation
Jan. 1
Dec. 31
Balance
Closing Entry
Ref.
Debit
J1
Credit
Balance
300,000
50,000 350,000
Explanation
1
Balance
Ref.
Debit
Credit
Balance
10,000
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strictly prohibited.
PROBLEM 13-8B
(a)
Date
GENERAL JOURNAL
Account Titles and Explanation
J1
Debit
596,000
506,000
90,000
10,000
Credit
596,000
176,000
148,000
84,000
31,500
24,000
22,000
12,000
6,000
2,500
90,000
10,000
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*Retained earnings
Balance, Jan. 1........................................ $165,000
Add: Net income ..................................... 90,000
Less: Dividends ...................................... (10,000)
Balance, Dec. 31 ..................................... $245,000
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PROBLEM 13-9B
(a)
MAGNOTTA WINERY CORPORATION
Balance Sheet
January 31, 2006
______________________________________________________
Assets
Current assets
Accounts receivable ................................................ $ 347,669
Inventories ............................................................... 20,505,669
Prepaid expenses and deposits .............................
671,961
Total current assets ............................................ 21,525,299
Capital assets ................................... $33,129,085
Accumulated amortization................ (11,298,085) 21,831,000
Winery licenses ...........................................................
251,516
Total assets .............................................................. $43,607,815
Liabilities and Shareholders Equity
Current liabilities
Bank indebtedness .................................................. $ 4,757,181
Accounts payable and accrued liabilities .............. 1,289,814
Income taxes payable ..............................................
130,754
Current portion of long-term debt .......................... 1,477,404
Total current liabilities ........................................ 7,655,153
Long-term liabilities
Long-term debt .............................
$8,681,328
Future income taxes .....................
1,047,517
9,728,845
Total liabilities ..................................................... 17,383,998
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$2,574,797
= 10.34%
$26,223,817 + $23,582,360
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PROBLEM 13-10B
2004
$330.1
= 13.86%
$2,511.1 + $2,251.2
2
$291.5
= 13.66%
$2,251.2 + $2,017.1
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strictly prohibited.
PROBLEM 13-11B
(a) $1,200,000 12,000 = $100 average selling price of the
preferred shares.
$1,000,000 100,000 = $10 average selling price of the
common shares.
(b) It appears that there were no dividends declared in 2008
since there was no decrease in retained earnings during
the year.
(c) Since the preferred shares are noncumulative, there are no
dividends in arrears.
(d) The shares were issued for an average selling price of $10
(see (a) above) which means the company would have
reduced the common share account by $200,000 (20,000 X
$10). Since the company has established a contributed
capital account related to this reacquisition for $40,000,
this indicates the company only had to pay $160,000
($200,000 - $40,000) to reacquire the 20,000 shares.
(e) It is income that bypasses the income statement. An
example of accumulated other comprehensive income is
unrealized gains on investments that are available for sale.
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(c)
Nov.
J1
Debit
1 Cash .................................................
Accounts Receivable ......................
Merchandise Inventory ...................
Equipment .......................................
Common Shares ..........................
17,500
600
1,580
3,500
1 Cash .................................................
Preferred Shares ..........................
10,000
750
Credit
23,180
10,000
750
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$21,545
= 8.68%
$262,847 + $233,296
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