Вы находитесь на странице: 1из 57

CHAPTER 11

REPORTING AND ANALYZING SHAREHOLDERS’ EQUITY


SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF
DIFFICULTY, BLOOM’S TAXONOMY, CPA CODES, AND AACSB CODES
Item LO LOD Bloom’s CPA AACSB Item LO LOD Bloom’s CPA AACSB Item LO LOD Bloom’s CPA AACSB
True-False Statements
1. 1 E C F AN 13. 2 E C F AN 25. 4 E C F AN
2. 1 M C F AN 14. 2 M K F AN 26. 4 E K F AN
3. 1 E K F AN 15. 2 M K F AN 27. 4 E K F AN
4. 1 E K F AN 16. 2 E K F AN 28. 4 E K F AN
5. 1 E K F AN 17. 2 E K F AN 29. 4 E K F AN
6. 1 E C F AN 18. 3 E C F AN 30. 4 M K F AN
7. 1 E K F AN 19. 3 M C F AN 31. 5 M K F AN
8. 1 E K F AN 20. 3 E C F AN 32. 5 M K F AN
9. 1 E K F AN 21. 3 M C F AN 33. 5 M K F AN
10. 1 H K F AN 22. 3 M C F AN 34. 5 E K F AN
11. 1 M C F AN 23. 3 E K F AN 35. 5 E K F AN
12. 2 M K F AN 24. 4 E C F AN

LOD: E = Easy M = Medium H = Hard


Bloom’s: C = Comprehension K = Knowledge
CPA: F = Financial Reporting
AACSB: AN = Analytic

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 2 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF


DIFFICULTY, BLOOM’S TAXONOMY, CPA CODES, AND AACSB CODES
(CONT’D)
LO Bloom’ CP AACS L LO Bloom’ CP AACS L LO Bloom’ CP
Item LO Item Item AACSB
D s A B O D s A B O D s A
Multiple Choice Questions
36. 1 M C F AN 70. 2 M K F AN 104. 3 M K F AN
37. 1 M C F AN 71. 2 H K F AN 105. 3 M C F AN
38. 1 E K F AN 72. 2 H K F AN 106. 3 E C F AN
39. 1 M K F AN 73. 3 E K F AN 107. 3 E C F AN
40. 1 M K F AN 74. 3 M C F AN 108. 3 H C F AN
41. 1 E K F AN 75. 3 E C F AN 109. 3 E C F AN
42. 1 E K F AN 76. 3 M C F AN 110. 3 M AP F AN
43. 1 M K F AN 77. 3 E C F AN 111. 3 E AP F AN
44. 1 E C F AN 78. 3 E C F AN 112. 3 H C F AN
45. 1 M C F AN 79. 3 H C F AN 113. 3 E C F AN
46. 1 M K F AN 80. 3 E C F AN 114. 3 H C F AN
47. 1 E K F AN 81. 3 H C F AN 115. 3 E C F AN
48. 1 M K F AN 82. 3 M C F AN 116. 4 H C F AN
49. 1 E K F AN 83. 3 E K F AN 117. 4 E C F AN
50. 1 M K F AN 84. 3 E K F AN 118. 4 M K F AN
51. 1 M K F AN 85. 3 M C F AN 119. 4 E C F AN
52. 1 M K F AN 86. 3 E C F AN 120. 4 M C F AN
53. 1 H K F AN 87. 3 E C F AN 121. 4 E C F AN
54. 1 H K F AN 88. 3 E K F AN 122. 4 H AP F AN
55. 1 M C F AN 89. 3 M C F AN 123. 4 M K F AN
56. 1 E K F AN 90. 3 M K F AN 124. 4 E K F AN
57. 1 M K F AN 91. 3 M K F AN 125. 4 E K F AN
58. 1 E K F AN 92. 3 E K F AN 126. 4 E K F AN
59. 2 M C F AN 93. 3 E K F AN 127. 4 E K F AN
60. 2 E C F AN 94. 3 E K F AN 128. 4 M AP F AN
61. 2 E C F AN 95. 3 M C F AN 129. 4 M K F AN
62. 2 M K F AN 96. 3 E K F AN 130. 5 E K F AN
63. 2 M K F AN 97. 3 E C F AN 131. 5 E K F AN
64. 2 H K F AN 98. 3 E AP F AN 132. 5 M C F AN
65. 2 E K F AN 99. 3 E AP F AN 133. 5 M C F AN
66. 2 H K F AN 100. 3 M C F AN 134. 5 E AP F AN
67. 2 E AP F AN 101. 3 H AP F AN 135. 5 M C F AN
68. 2 E C F AN 102. 3 E K F AN 136. 5 M AP F AN
69. 2 M K F AN 103. 3 E K F AN

LOD: E = Easy M = Medium H = Hard


Bloom’s: AP = Application C = Comprehension K = Knowledge
CPA: F = Financial Reporting
AACSB: AN = Analytic

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 3 Reporting and Analyzing Shareholders’ Equity

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF


DIFFICULTY, BLOOM’S TAXONOMY, CPA CODES, AND AACSB CODES
(CONT’D)
Bloom’ CP AACS LO Bloom’ CP AACS L LO Bloom’ CP
Item LO LOD Item LO Item AACSB
s A B D s A B O D s A
Exercises
137 F AN AP F AN AP F AN
1 E K 147. 2,3 E 157. 4 E
.
138 K F AN AP F AN AP F AN
1 E 148. 2,3 H 158. 4 H
.
139 C F AN AP F AN AP F AN
2 E 149. 2,4 M 159. 4 H
.
140 AP F AN AP F AN AP F AN
2 E 150. 2,4 M 160. 4 E
.
141 AP F AN AP F AN F AN
2 E 151. 3 E 161. 4 E AP
.
142 AP F AN AP F AN AP F AN
2 H 152. 3 M 162. 4 M
.
143 AP F AN C F AN AP F AN
2 E 153. 3 H 163. 5 E
.
144 AP F AN AP F AN F AN
2 M 154. 3,4 H 164. 5 M C
.
145 AP F AN AP F AN AP F AN
2,3 E 155. 4 M 165. 5 H
.
146 F AN F AN
2,3 H AP 156. 4 M AP
.
Matching
166 E,M, K F AN
1–5 H
.
Short-Answer Essay
167 F AN F AN F,C AN,C
1,2 H K 170. 3 M C 173. 5 H C
.
168 F,E AN,E F AN
2,3 M C 171. 4 E C
.
169 F,C AN,C
3 H C 172. 5 H C
.
CPA Questions
174 F AN F AN AN
1 M C 176. 2 M C 178. 4 M AN F
.
175 1,4, F AN F AN
M K 177. 3 M C
. 5

LOD: E = Easy M = Medium H = Hard


Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge
CPA: C = Communication E = Professional and Ethical Behaviour F = Financial Reporting
AACSB: AN = Analytic C = Communication E = Ethics

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 4 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learning Objective 1
1. TF 7. TF 37. MC 43. MC 49. MC 55. MC 166. Ma
2. TF 8. TF 38. MC 44. MC 50. MC 56. MC 167. SAE
3. TF 9. TF 39. MC 45. MC 51. MC 57. MC 174. CP
4. TF 10. TF 40. MC 46. MC 52. MC 58. MC 175. CP
5. TF 11. TF 41. MC 47. MC 53. MC 137. Ex
6. TF 36. MC 42. MC 48. MC 54. MC 138. Ex
Learning Objective 2
12. TF 59. MC 65. MC 71. MC 143. Ex 149. Ex
13. TF 60. MC 66. MC 72. MC 144. Ex 150. Ex
14. TF 61. MC 67. MC 139. Ex 145. Ex 166. Ma
15. TF 62. MC 68. MC 140. Ex 146. Ex 167. SAE
16. TF 63. MC 69. MC 141. Ex 147. Ex 168. SAE
17. TF 64. MC 70. MC 142. Ex 148. Ex 176. CP
Learning Objective 3
18. TF 76. MC 85. MC 94. MC 103. MC 112. MC 152. Ex
19. TF 77. MC 86. MC 95. MC 104. MC 113. MC 153. Ex
20. TF 78. MC 87. MC 96. MC 105. MC 114. MC 154. Ex
21. TF 79. MC 88. MC 97. MC 106. MC 115. MC 166. Ma
22. TF 80. MC 89. MC 98. MC 107. MC 145. Ex 168. SAE
23. TF 81. MC 90. MC 99. MC 108. MC 146. Ex 169. SAE
73. MC 82. MC 91. MC 100. MC 109. MC 147. Ex 170. SAE
74. MC 83. MC 92. MC 101. MC 110. MC 148. Ex 177. CP
75. MC 84. MC 93. MC 102. MC 111. MC 151. Ex
Learning Objective 4
24. TF 30. TF 121. MC 127. MC 155. Ex 161. Ex
25. TF 116. MC 122. MC 128. MC 156. Ex 162. Ex
26. TF 117. MC 123. MC 129. MC 157. Ex 166. Ma
27. TF 118. MC 124. MC 149. Ex 158. Ex 171. SAE
28. TF 119. MC 125. MC 150. Ex 159. Ex 175. CP
29. TF 120. MC 126. MC 154. Ex 160. Ex 178. CP
Learning Objective 5
31. TF 34. TF 131. MC 134. MC 163. Ex 166. Ma 175. CP
32. TF 35. TF 132. MC 135. MC 164. Ex 172. SAE
33. TF 130. MC 133. MC 136. MC 165. Ex 173. SAE

Note: TF = True-False MC = Multiple Choice Ma = Matching


Ex = Exercise SAE = Short-Answer Essay CP = CPA Questions

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 5 Reporting and Analyzing Shareholders’ Equity

CHAPTER LEARNING OBJECTIVES

1. Identify and discuss the major characteristics of a corporation. The major characteristics of a
corporation are separate legal existence, limited liability of shareholders, transferable ownership rights, the
ability to acquire capital, continuous life, separation of corporation management from ownership, increased
cost and complexity of government regulations, and the possibility of reduced corporate income tax. Some
of these characteristics may differ depending on the size of the corporation.
Corporations issue shares for sale to investors. The proceeds received from the issue of shares become
the company’s legal capital. Shares then trade among investors on the secondary stock market and do not
affect the company’s financial position.

2. Record share transactions. If only one class of shares is issued, they are considered to be common
shares. Common shareholders have the right to vote and, as such, are the “owners” of the company.
When shares are issued for noncash goods or services in a company using IFRS, the fair value of the
goods or services received is used to record the transaction if it can be reliably determined. If not, the fair
value of the common shares is used. For a private company following ASPE, the more reliable of the two
fair values should be used, which is usually also the fair value of the goods or services received.
When shares are reacquired, the Common Shares (or Preferred Shares) account is reduced by the
average cost of these shares immediately prior to the reacquisition. If the price paid to reacquire the
shares is lower than their average cost, the difference is recorded as an increase to the Contributed
Surplus account. If the price paid to reacquire the shares is greater than their average cost, the difference
is first applied to any Contributed Surplus previously recorded from acquisitions of shares of the same
class and any remaining difference is then applied to reduce the Retained Earnings account.
The accounting for preferred shares is similar to the accounting for common shares. Preferred shares do
not have the right to vote—only common shares have voting rights—but have contractual provisions that
give them preference over common shares for dividends and assets in the event of liquidation. Dividends
are quoted at an annual rate (such as $5 preferred), but are normally paid quarterly (such as $1.25 per
quarter). In addition, preferred shares may have other preferences, such as the right to redeem or to
periodically reset dividend rates based on changes in interest rates.

3. Prepare the entries for cash dividends, stock dividends, and stock splits, and understand their
financial impact. Entries for both cash and stock dividends are required at the declaration date and the
payment or distribution date. There is no entry (other than a memo entry) for a stock split. The overall
impact of a cash dividend is to reduce assets (cash) and shareholders’ equity (retained earnings). Stock
dividends increase common shares and decrease retained earnings but do not affect assets, liabilities, or
shareholders’ equity in total. Stock splits also have no impact on assets, liabilities, or shareholders’ equity.
The number of shares increases with both stock dividends and stock splits.

4. Indicate how shareholders’ equity is presented in the financial statements. In the shareholders’
equity section of the statement of financial position for companies using IFRS, share capital, retained
earnings, and accumulated other comprehensive income, if any, are reported separately. If contributed
surplus exists, then the caption “contributed capital” is used for share capital (preferred and common
shares) and contributed surplus that may have been created from various sources. A statement of
changes in equity explains the changes in each shareholders’ equity account, and in total, for the reporting
period. Notes to the financial statements explain details about authorized and issued shares, restrictions
on retained earnings, and dividends in arrears, if there are any.
For private companies reporting using ASPE, comprehensive income is not reported and a statement of
changes in equity is not required. Instead, a statement of retained earnings is prepared that explains the
changes in the Retained Earnings account for the reporting period. Changes to share capital and any
other equity items are disclosed in the notes to the statements.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 6 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

5. Evaluate dividend and earnings performance. A company’s dividend record can be evaluated by
looking at the dividend payout ratio (cash dividends declared divided by net income), which measures
what percentage of net income it chooses to pay out in dividends, and by the dividend yield ratio
(dividends per share divided by the share price), which measures dividends as a percentage of the share
price.
Earnings performance can be measured by two profitability ratios: basic earnings per share (net income
less preferred dividends divided by the weighted average number of common shares) and the return on
common shareholders’ equity ratio (net income less preferred dividends divided by average common
shareholders’ equity).
The return on shareholders’ equity is affected by the extent to which a company uses debt or equity to
finance the acquisition of its assets. Taking on more debt is risky because the company is legally bound to
make principal and interest payments on debt, but on the other hand, the ownership interests of existing
shareholders are not diluted when greater debt is assumed. Furthermore, any excess income generated
from assets financed with debt accrues to the shareholders, not the creditors.

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 7 Reporting and Analyzing Shareholders’ Equity

TRUE-FALSE STATEMENTS

1. The trading of a corporation's shares on the secondary market has no impact on the corporation's financial
position.

2. A company can control the market value of its shares.

3. Most companies in Canada have an unlimited amount of authorized shares.

4. A corporation is not an entity that is separate and distinct from its owners.

5. The liability of a shareholder is usually limited to the shareholder’s investment in the corporation.

6. The sale of shares in a corporation by one shareholder to another affects the total capital of the corporation.

7. A corporation acts under its’ own name rather than in the name of its shareholders.

8. A shareholder owning common shares has the right to vote in the election of the board of directors.

9. An initial public offering occurs the first time a corporation sells shares to the public.

10. The market capitalization of a company is calculated by multiplying the number of shares authorized by the
share price at any given date.

11. The number of common shares authorized can never be greater than the number of shares issued.

12. Contributed capital is the amount shareholders paid or contributed to the corporation in exchange for
shares of ownership.

13. The issue of common shares affects both share capital and retained earnings.

14. One of the reasons a company may reacquire its own shares is to reduce the market value to make the
shares more affordable.

15. Preferred shares have a contractual preference over common shares in certain areas, but do not have the
right to vote.

16. Preferred shares are generally issued to appeal to a larger segment of potential investors.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 8 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

17. When preferred shares are cumulative, preferred dividends not declared in a given period are called
dividends in arrears.

18. Cash dividends are not a liability of the corporation until they are declared by the board of directors.

19. The liability for a cash dividend is recorded on the date of record, because it is on that date that the
shareholders who will receive the dividend are identified.

20. Declaration and distribution of a stock dividend does not affect the total amount of shareholders’ equity.

21. Stock Dividends Distributable is reported as a liability on the statement of financial position.

22. A stock split results in a transfer at market value from retained earnings to share capital.

23. The main purpose of a stock split is to increase the marketability of the shares.

24. Retained earnings represents the amount of cash available for dividends.

25. If a corporation reports a net income, it should be closed to retained earnings. If it reports a loss, it should
be closed to a contributed capital account.

26. A debit balance in the Retained Earnings account is called a deficit.

27. Retained earnings that are restricted are unavailable for dividends.

28. The statement of changes in equity discloses changes in total shareholders’ equity for the period as well as
changes in each shareholders’ equity account.

29. Corporations reporting under IFRS have the option of preparing either a statement of changes in equity or
a statement of retained earnings.

30. Accumulated other comprehensive income is reported in the shareholders’ equity section of the statement
of financial position for a publicly-traded company.

31. The payout ratio is calculated by dividing the cash dividends paid on common shares by retained earnings.

32. Return on common shareholders’ equity is calculated by dividing net income by ending shareholders’
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 9 Reporting and Analyzing Shareholders’ Equity

equity.

33. Investors tend to buy shares with low payout ratios and dividend yields if they are looking for more capital
appreciation from the shares.

34. Basic earnings per share is calculated by dividing the net income available to common shareholders by the
number of common shares issued at year end.

35. Companies reporting under ASPE must disclose basic earnings per share, but companies reporting under
IFRS do not.

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 10 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

ANSWERS TO TRUE-FALSE STATEMENTS

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. T 6. F 11. F 16. T 21. F 26. T 31. F
2. F 7. T 12. T 17. T 22. F 27. T 32. F
3. T 8. T 13. F 18. T 23. T 28. T 33. T
4. F 9. T 14. F 19. F 24. F 29. F 34. F
5. T 10. F 15. T 20. T 25. F 30. T 35. F

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 11 Reporting and Analyzing Shareholders’ Equity

MULTIPLE CHOICE QUESTIONS


36. Legal capital
(a) can be distributed to shareholders.
(b) does not need to remain invested in the corporation.
(c) can be distributed to shareholders up to the limit of their investment.
(d) cannot be distributed to the shareholders, but must remain invested in the corporation.

37. Under the corporate form of business organization


(a) a shareholder is personally liable for the debts of the corporation.
(b) a shareholder’s acts can bind the corporation even though he/she has not been appointed as an agent of
the corporation.
(c) the corporation's life is continuous.
(d) shareholders wishing to sell their shares must get the approval of other shareholders.

38. Shareholders directly elect the corporation’s


(a) president.
(b) board of directors.
(c) controller.
(d) auditor.

39. Those most responsible for the major policy decisions of a corporation are the
(a) shareholders.
(b) board of directors.
(c) management.
(d) employees.

40. Which one of the following would not be considered an advantage of the corporate form of organization?
(a) limited liability of shareholders
(b) separate legal existence
(c) continuous life
(d) government regulation

41. The two ways that a corporation can be classified by ownership are
(a) publicly held and privately held.
(b) shares and non-shares.
(c) federal and provincial.
(d) majority and minority.

42. Which of the following would not be true of a privately held corporation?
(a) It is sometimes called a closely held corporation.
(b) Its shares are regularly traded on the Toronto Stock Exchange.
(c) It does not offer its shares for sale to the general public.
(d) It is usually smaller than a publicly held company.

43. Which of the following is not true of a corporation?


(a) It may buy, own, and sell property.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 12 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

(b) It may sue and be sued.


(c) The acts of its shareholders bind the corporation.
(d) It may enter into binding legal contracts in its own name.

44. Ford Harrison has invested $650,000 in a corporation. The corporation does not do well and must declare
bankruptcy. What amount does Harrison stand to lose?
(a) up to his total investment of $650,000
(b) zero
(c) the $650,000 plus any personal assets the creditors demand
(d) $325,000

45. Which of the following statements reflects the transferability of ownership rights in a corporation?
(a) If a shareholder decides to transfer ownership, he/she must transfer all of his/her shares.
(b) A shareholder may dispose of part or all of his/her shares.
(c) A shareholder must obtain permission of the board of directors before selling shares.
(d) A shareholder must obtain permission from at least three other shareholders before selling shares.

46. A corporate board of directors does not generally


(a) select officers.
(b) formulate operating policies.
(c) declare dividends.
(d) execute policy.

47. Limited liability of shareholders means


(a) dividends will be paid regardless of net income.
(b) creditors have no legal claim on a shareholder’s personal assets.
(c) the life of the corporation is limited.
(d) deferral or reduction of taxes.

48. The ability of a corporation to obtain capital is


(a) enhanced because of limited liability and ease of share transferability.
(b) less than a partnership.
(c) restricted because of the limited life of the corporation.
(d) about the same as a proprietorship.

49. Which of the following statements is considered an advantage of the corporate form of organization?
(a) additional income tax
(b) government regulations
(c) limited liability of shareholders
(d) increased disclosure requirements

50. All of the following are advantages of the corporate form of organization except
(a) government regulation.
(b) reduced income tax.
(c) ease of transfer of ownership.
(d) continuous life.

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 13 Reporting and Analyzing Shareholders’ Equity

51. A disadvantage of the corporate form of organization is


(a) its status as a separate legal entity.
(b) continuous existence.
(c) government regulation.
(d) ease of transfer of ownership.

52. Which one of the following is not an ownership right of a common shareholder?
(a) to vote in the election of officers
(b) to declare dividends on the common shares
(c) to share in assets upon liquidation
(d) to share in corporate net income

53. Which of the following factors does not affect the initial market price of a share?
(a) the company's anticipated future net income
(b) the legal value of the share
(c) the current state of the economy
(d) the expected dividend rate per share

54. Legal capital


(a) cannot be distributed to shareholders.
(b) reflects the most recent market price.
(c) is voted on by the shareholders.
(d) is indicative of the worth of the share.

55. Mr. Gold sold 100 shares of Delia Corp. to Mrs. Silver for $2,200. As a result of this transaction, Delia
Corp.’s
(a) shareholders’ equity did not change.
(b) shareholders’ equity increased by $2,200.
(c) shareholders’ equity decreased by $2,200.
(d) assets increased by $2,200.

56. The authorization of common shares


(a) must be approved by Canada Revenue Agency.
(b) does not require a journal entry.
(c) increases shareholders’ equity.
(d) decreases shareholders’ equity.

57. Authorized shares of a corporation


(a) are the minimum amount of shares that must be issued.
(b) increase shareholders’ equity.
(c) are specified in its articles of incorporation.
(d) must be recorded by a formal accounting entry.

58. The number of shares that may be issued according to the corporation’s articles of incorporation is referred
to as the
(a) authorized shares.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 14 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

(b) issued shares.


(c) unissued shares.
(d) redeemable shares.

59. $3 cumulative preferred shares means that each preferred shareholder is eligible to receive
(a) a quarterly dividend of $3 per share.
(b) an annual dividend of $3 per share.
(c) a monthly dividend of $3 per share.
(d) no dividend.

60. If Tools Corporation issues 5,000 common shares for $200,000, which account will be credited?
(a) Common Shares
(b) Retained Earnings
(c) Contributed Capital
(d) Cash

61. The sale of common shares should be recorded as a


(a) debit to Retained Earnings and a credit to Cash.
(b) debit to Cash and a credit to Retained Earnings.
(c) debit to Cash and a credit to Common Shares.
(d) debit to Common Shares and a credit to Cash.

62. When setting the price of a new share issue, a corporation does not need to consider
(a) future net income.
(b) expected dividend rate.
(c) current financial position.
(d) future trading on the secondary market.

63. Which of the following usually represents the largest number of common shares?
(a) restricted shares.
(b) issued shares.
(c) treasury shares.
(d) authorized shares.

64. For a corporation reporting under IFRS, when shares are issued for a noncash consideration and a ready
market for the shares exists, they are recorded at
(a) zero.
(b) the fair value of the shares.
(c) the fair value of the assets acquired.
(d) the average of the fair value of the shares and the fair value of the assets acquired.

65. A company may reacquire its own shares for all of the following reasons except to
(a) enhance market value.
(b) reduce market value.
(c) increase basic earnings per share.
(d) have additional shares available for use.

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 15 Reporting and Analyzing Shareholders’ Equity

66. Apricot Inc. is reacquiring 25,000 common shares. The price is $4.25/share and the average price is $4.00.
Assuming that there is a contributed surplus balance of $5,000, the entry to record the transaction would be
(a) debit to Common shares, Contributed Surplus, and Retained Earnings and credit to Cash
(b) debit to Common shares and Contributed Surplus and credit to Cash
(c) debit to Common shares and Retained Earnings and credit to Cash
(d) debit to Common shares and credit to Cash
Solution: ($4.25 – $4.00) * 25,000 shares = $6,250 – $5,000 Dr. to Contributed surplus, $1,250 Dr. to R/E

Use the following information for questions 67–68.

Fair Corporation issues 7,500 preferred shares for $25 per share.

67. The entry to record the transaction will consist of a debit to Cash for $187,500 and a credit or credits to
(a) Preferred Shares for $187,500.
(b) Preferred Shares for $100,000 and Share Capital for $87,500.
(c) Preferred Shares for $100,000 and Retained Earnings for $87,500.
(d) Investment in Preferred Shares for $187,500.
Solution: $7,500 x $25 = $187,500

68. In the statement of financial position, the effects of the above transaction will be reported under
(a) Liabilities.
(b) Retained Earnings.
(c) Share Capital.
(d) Accumulated Other Comprehensive Income.

69. Baria Inc. is reacquiring 10,000 common shares. The price is $5.00/share and the average price is $5.10.
Assuming that there is a contributed surplus balance of $5,000, which accounts will be affected by the
transaction?
(a) Common shares, Contributed Surplus, Retained Earnings and Cash
(b) Common shares, Contributed Surplus and Cash
(c) Common shares, Retained Earnings and Cash
(d) Common shares and Cash
Solution: ($5.00 – $5.10) * 10,000 shares = $1,000 – $1,000 Cr. to Contributed Surplus

70. Dividends in arrears on cumulative preferred shares


(a) are considered to be a non-current liability.
(b) are considered to be a current liability.
(c) only occur when preferred dividends have been declared.
(d) should be disclosed in the notes to the financial statements.

71. Dividends in arrears are dividends on


(a) cumulative preferred shares that have been declared but have not been paid.
(b) noncumulative preferred shares that have not been declared for a given period of time.
(c) cumulative preferred shares that have not been declared for a given period of time.
(d) common dividends that have been declared but have not been paid.

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 16 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

72. Retractable preferred shares are


(a) included in contributed capital on the statement of financial position.
(b) callable at the corporation’s option.
(c) never issued.
(d) presented under liabilities on the statement of financial position.

73. The date on which a cash dividend becomes a binding legal obligation is on the
(a) declaration date.
(b) date of record.
(c) payment date.
(d) last day of the fiscal year.

74. The board of directors of Wessex Inc. declared a cash dividend on November 15, 2018, to be paid on
December 15, 2018, to shareholders owning shares on November 30, 2018. Given these facts, the date of
November 30, 2018, is referred to as the
(a) declaration date.
(b) record date.
(c) payment date.
(d) authorization date.

75. The effect of the declaration of a cash dividend is to


Increase Decrease
(a) Shareholders’ equity Assets
(b) Assets Liabilities
(c) Liabilities Shareholders’ equity
(d) Liabilities Assets

76. The cumulative effect of the declaration and payment of a cash dividend on a company's financial
statements is to
(a) decrease both total liabilities and shareholders' equity.
(b) increase both total expenses and total liabilities.
(c) increase both total assets and shareholders' equity.
(d) decrease both total assets and shareholders' equity.

77. Which of the following is the appropriate general journal entry to record the declaration of cash dividends?
(a) Dividends Declared
Cash
(b) Dividends Payable
Cash
(c) Share Capital
Dividends Payable
(d) Dividends Declared
Dividends Payable

Use the following information for questions 78–81.

On July 15, 2018, the board of directors of George Easton Limited declared a cash dividend of $0.50 per share
on 84,000 common shares. The dividend is to be paid on August 15, 2018, to shareholders of record on July
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 17 Reporting and Analyzing Shareholders’ Equity

31, 2018.

78. The journal entry to be recorded on July 15, 2018, will include a
(a) debit to Dividends Payable.
(b) debit to Dividends Declared.
(c) credit to Cash.
(d) credit to Retained Earnings.

79. The effects of the journal entry to record the declaration of the dividend on July 15, 2018, are to
(a) decrease shareholders’ equity and increase liabilities.
(b) decrease shareholders’ equity and decrease assets.
(c) increase shareholders’ equity and increase liabilities.
(d) increase shareholders’ equity and decrease assets.

80. The correct entry to be recorded on August 15, 2018 will include a
(a) debit to Dividends Declared.
(b) credit to Retained Earnings.
(c) credit to Dividends Payable.
(d) debit to Dividends Payable.

81. The effects of the journal entry to record the payment of the dividend on August 15, 2018, are to
(a) decrease shareholders’ equity and decrease liabilities.
(b) decrease liabilities and decrease assets.
(c) increase shareholders’ equity and increase liabilities.
(d) increase shareholders’ equity and decrease assets.

82. The net effect on the corporation’s books of the declaration and payment of a cash dividend are to
(a) decrease liabilities and decrease shareholders’ equity.
(b) increase shareholders’ equity and decrease liabilities.
(c) decrease assets and decrease shareholders’ equity.
(d) increase assets and increase shareholders’ equity.

83. A corporation records a dividend-related liability


(a) on the record date.
(b) on the payment date.
(c) when dividends are in arrears.
(d) on the declaration date.

84. Stock Dividends Distributable is classified as a(n)


(a) asset account.
(b) shareholders' equity account.
(c) expense account.
(d) liability account.

85. The effect of a stock dividend is to


(a) decrease total assets and shareholders' equity.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 18 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

(b) change the composition of shareholders' equity.


(c) decrease total assets and total liabilities.
(d) increase the book value per share of common shares.

86. If a corporation declares a 10% stock dividend on its common shares, the account to be debited on the
date of declaration is
(a) Stock Dividends Distributable.
(b) Common Shares.
(c) Share Capital.
(d) Dividends Declared.

87. Which one of the following events would not require a journal entry on a corporation's books?
(a) 2-for-1 stock split
(b) 100% stock dividend
(c) 2% stock dividend
(d) $1 per share cash dividend

88. Which of the following would not affect the balance of the Retained Earnings account?
(a) net income
(b) stock dividend
(c) stock split
(d) cash dividend

89. Stock dividends and stock splits have the following effects on retained earnings:
Stock Splits Stock Dividends
(a) increase
no change
(b) no change decrease
(c) decrease
decrease
(d) no change no change

90. The main purpose of a stock split is to


(a) decrease the marketability of the stock by increasing the price.
(b) increase the marketability of the stock by increasing the price.
(c) increase the marketability of the stock by decreasing the price.
(d) reduce the number of issued shares.

91. Cash dividends are declared out of


(a) Dividends Payable.
(b) Preferred Shares.
(c) Common Shares.
(d) Retained Earnings.

92. Which of the following is not a significant date with respect to dividends?
(a) the declaration date
(b) the incorporation date
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 19 Reporting and Analyzing Shareholders’ Equity

(c) the record date


(d) the payment date

93. On the dividend record date


(a) a dividend becomes a current obligation.
(b) no entry is required.
(c) an entry may be required if it is a stock dividend.
(d) dividends payable is debited.

94. Which of the following statements regarding the date of a cash dividend declaration is not true?
(a) The dividend can be cancelled once it has been declared.
(b) The corporation is committed to a legal, binding obligation.
(c) The board of directors formally authorizes the cash dividend.
(d) A liability account must be created or increased.

95. Indicate the respective effects of the declaration of a cash dividend on the following statement of financial
position sections:
Total Assets Total Liabilities Total Shareholders' Equity
(a) increase decrease no change
(b) no change increase decrease
(c) decrease increase decrease
(d) decrease no change increase

96. Which of the following statements about dividends is not correct?


(a) Cash dividends are generally declared quarterly as a dollar amount per share.
(b) Dividends can be declared on both preferred and common shares.
(c) The board of directors is obligated to declare dividends.
(d) Dividends can be in cash or stock.

97. The declaration and distribution of a stock dividend will


(a) increase total shareholders' equity.
(b) increase total assets.
(c) decrease total assets.
(d) have no effect on total assets.

98. Ethel Inc. has 15,000, $3, noncumulative preferred shares and 200,000 common shares issued. What is
the total annual dividend on the preferred shares?
(a) $15,000
(b) $45,000
(c) $200,000
(d) $400,000
Solution: 15,000 x $3 = $45,000

99. At December 31, 2018, Fashion Forward Inc. has 15,000, $4, cumulative preferred shares issued. If the
board of directors declares a $55,000 dividend at this date
(a) the company will still owe the preferred shareholders $5,000 and should record a dividend payable for this
amount.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 20 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

(b) the company will owe the preferred shareholders nothing further.
(c) $5,000 will be disclosed as dividends in arrears in the notes to the financial statements.
(d) the company still has to pay the preferred shareholders $60,000, regardless of what amount was declared.
Solution: 15,000 x $4 = $60,000 – $55,000 = $5,000 in arrears

100. Coombs Corp. declared a two-for-one stock split. Solly Fogarty owned 500 shares of Coombs that were
trading for $20 each before the split. Which of the following is likely to be true after the split?
(a) The number of shares Solly owns will increase by 50%.
(b) The market price per share will drop by 50%.
(c) The total market value of Solly’s shares will double.
(d) The market price per share will increase by 100%.

101. Cambridge Corp. declared a 5% stock dividend. Will Wales owned 300 shares of Cambridge before the
dividend. Cambridge shares were trading at $21 before the dividend. Which of the following will be true after
the dividend is distributed?
(a) The total market value of Will’s shares was $6,300 before the stock dividend but will probably decrease
after the stock dividend.
(b) The total market value of Will’s shares was $6,300 before the stock dividend and $6,615 after the stock
dividend.
(c) Will owned 300 shares before the stock dividend and 315 shares after the stock dividend.
(d) Fewer investors will be able to buy Cambridge shares.
Solution: 300 x 1.05 = 315 shares

102. The board of directors must assign a per share value to a stock dividend declared that is equal to the
(a) average cost.
(b) zero.
(c) original issue price.
(d) fair value.

103. Corporations generally issue stock dividends in order to


(a) increase the market price per share.
(b) exceed shareholders' dividend expectations.
(c) increase the marketability of the shares.
(d) decrease the amount of capital in the corporation.

104. If the statement of financial position is prepared after a stock dividend has been declared but before it has
been distributed, the stock dividend distributable would be reported in the
(a) liabilities section.
(b) contributed capital section of shareholders’ equity.
(c) assets section.
(d) It would not be reported in the statement of financial position.

105. When stock dividends are distributed


(a) Stock Dividends Distributable is decreased.
(b) Retained Earnings is decreased.
(c) Common Shares is debited.
(d) no entry is necessary.

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 21 Reporting and Analyzing Shareholders’ Equity

106. A stock dividend results in a decrease in


(a) current liabilities.
(b) net income.
(c) share capital.
(d) retained earnings.

107. The journal entry to record the declaration of a stock dividend includes
(a) a credit to Stock Dividends Distributable.
(b) a credit to Stock Dividends Payable.
(c) a credit to Dividends Declared.
(d) a credit to Cash.

108. Identify the effect the declaration of a cash dividend and a stock dividend has on the total shareholders’
equity of a corporation:
Cash Dividend Stock Dividend
(a) increase decrease
(b) no effect increase
(c) decrease no effect
(d) no effect decrease

109. The declaration of a stock dividend will


(a) increase share capital.
(b) change total shareholders' equity.
(c) increase total liabilities.
(d) increase total assets.

Use the following information for questions 110–111.

On January 1, BearBack Corporation had 300,000 common shares issued. On April 10, the company declared
a 10% stock dividend to be distributed on April 30. The market value of the shares was $7 on April 10 and $10
on April 30.

110. The entry to record the transaction of April 10 would include a


(a) credit to Retained Earnings for $30,000.
(b) credit to Cash for $210,000.
(c) credit to Stock Dividends Distributable for $210,000.
(d) debit to Stock Dividends Distributable for $300,000.
Solution: 300,000 x.10 = 30,000 shares; 30,000 x $7 = $210,000

111. The entry to record the transaction of April 30 would include a


(a) credit to Cash for $210,000.
(b) debit to Stock Dividends Distributable for $210,000.
(c) credit to Retained Earnings for $300,000.
(d) debit to Dividends Declared for $210,000.
Solution: 300,000 x.10 = 30,000 shares; 30,000 x $7 = $210,000

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 22 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

112. Which of the following shows the proper effect of a stock split and a stock dividend?
Item Stock Split Stock Dividend
(a) Total share capital increase increase
(b) Total retained earnings decrease decrease
(c) Total shareholders’ equity decrease increase
(d) Number of shares increase increase

113. A stock split will


(a) have no effect on retained earnings.
(b) increase total share capital.
(c) increase total assets.
(d) decrease the number of shares issued.

114. Which of the following statements about a 2-for-1 stock split is not true?
(a) The market value of the shares will probably decrease.
(b) A shareholder with 200 shares before the split owns 400 shares after the split.
(c) Legal capital per share is reduced to half of what it was before the split.
(d) Total share capital increases.

115. Irwin Inc. had 300,000 common shares before a stock split occurred and 600,000 shares after the stock
split. The stock split was
(a) 1 for 2.
(b) 4 for 1.
(c) 1 for 4.
(d) 2 for 1.
Solution: 600,000 / 300,000 = 2 for 1

116. Total comprehensive income equals


(a) net income plus other comprehensive income.
(b) net income plus accumulated other comprehensive income.
(c) net income plus comprehensive income.
(d) other comprehensive income plus comprehensive income.

117. If the board of directors authorizes a $250,000 restriction of retained earnings for a future plant expansion,
the effect of this action is to
(a) decrease total assets and total shareholders' equity.
(b) increase shareholders' equity and to decrease total liabilities.
(c) decrease total retained earnings and increase total liabilities.
(d) reduce the amount of retained earnings available for dividend declarations.

118. Retained earnings are occasionally restricted


(a) to set aside cash for dividends.
(b) to keep the legal capital associated with share capital intact.
(c) due to contractual loan restrictions.
(d) if preferred dividends are in arrears.

119. When retained earnings are restricted, total retained earnings


Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 23 Reporting and Analyzing Shareholders’ Equity

(a) are unaffected.


(b) increase.
(c) decrease.
(d) may increase or decrease.

120. Placing a restriction on retained earnings will


(a) ensure that the corporation has sufficient cash for a specific purpose.
(b) increase total shareholders’ equity.
(c) inform readers that a portion of retained earnings is unavailable for dividends.
(d) decrease shareholders’ equity.

121. A loss
(a) occurs if operating expenses exceed cost of goods sold.
(b) is not closed to Retained Earnings if it would result in a debit balance in that account.
(c) is closed to Retained Earnings even if it would result in a debit balance in that account.
(d) is closed to the Common Shares account.

122. Based on the following account balances, what is the total shareholders’ equity?
Common Shares......................................................... $600,000
Stock Dividends Distributable...................................... 40,000
Retained Earnings....................................................... 190,000
Preferred Shares......................................................... 20,000
Dividends Payable....................................................... 30,000
(a) $620,000
(b) $800,000
(c) $820,000
(d) $850,000
Solution: $600,000 + $40,000 + $190,000 + $20,000 = $850,000

123. In the shareholders' equity section of the statement of financial position,


(a) Stock Dividends Distributable will be classified as a contra account to Retained Earnings.
(b) Stock Dividends Distributable will appear in its own subsection of shareholders' equity.
(c) Preferred and Common Shares appear under the subsection Share Capital.
(d) Dividends in Arrears will appear as a restriction of Retained Earnings.

124. A retained earnings restriction would appear in the financial statements under
(a) share capital.
(b) retained earnings.
(c) notes to financial statements.
(d) a liability.

125. Two classifications appearing in the share capital section of the statement of financial position are
(a) dividends payable and dividends distributable.
(b) share capital and retained earnings.
(c) preferred shares and common shares.
(d) contributed capital and retained earnings.

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 24 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

126. All of the following are normally found in a publicly-traded corporation’s shareholders’ equity section
except
(a) dividends in arrears.
(b) accumulated other comprehensive income.
(c) share capital.
(d) retained earnings.

127. A debit balance in retained earnings is called a


(a) loss.
(b) capital surplus.
(c) deficit.
(d) contributed capital.

128. At January 1, 2018, Blue Corporation had a credit balance of $3,050,000 in its retained earnings account.
During the year, Blue paid $275,000 in dividends, reported net income of $420,000 and other comprehensive
income of $750,000. The December 31 balance of retained earnings is
(a) $3,195,000.
(b) $3,945,000.
(c) $2,445,000.
(d) $2,775,000.
Solution: $3,050,000 – $275,000 + $420,000 = $3,195,000

129. Under IFRS, which of the following describes how other comprehensive income should be reported?
(a) Must be reported in a statement of comprehensive income
(b) Should not be reported in the financial statements, but should only be disclosed in the footnotes
(c) Must be reported in the income statement
(d) Must be reported in the shareholders’ equity section of the statement of financial position

130. The payout ratio is calculated by dividing


(a) total cash dividends paid by retained earnings.
(b) dividends paid per share by net income.
(c) total cash dividends paid by net income.
(d) dividends paid per share by year-end share price.

131. The return on common shareholders’ equity is calculated by dividing net income
(a) by ending common shareholders’ equity.
(b) by average common shareholders’ equity.
(c) less preferred dividends by ending common shareholders’ equity.
(d) less preferred dividends by average common shareholders’ equity.

132. Which of the following is false about the dividend yield ratio?
(a) Dividend yield ratio = Dividends per share ÷ Market price per share
(b) Measures the net income generated by each share for the shareholder based on the market price of the
shares
(c) A low dividend yield is neither bad nor good by itself
(d) Dividend yield ratio = Market price per share ÷ Dividends per share

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 25 Reporting and Analyzing Shareholders’ Equity

133. Return on common shareholders’ equity is a ratio that


(a) is calculated by dividing net income plus preferred dividends by average common shareholders’ equity.
(b) shows the relationship between net income available for common shareholders and average common
shareholders’ equity.
(c) cannot be calculated if the company has preferred shares in addition to common shares.
(d) is calculated by dividing net income plus preferred dividends by average common shareholders’ equity and
shows the relationship between net income available for common shareholders and average common
shareholders’ equity.

134. For last year, Casper Corporation reported net income of $625,000, and paid $175,000 in dividends for
the 300,000 preferred shares issued. The weighted average of common shares was 1,000,000 shares. Roxy’s
basic earnings per share was
(a) $0.63.
(b) $0.33.
(c) $0.45.
(d) $0.15.
Solution: ($625,000 – $175,000) / 1,000,000 = $0.45

135. Diluted earnings per share


(a) is sometimes higher than basic earnings per share.
(b) takes into account all securities issued that can be converted into common shares.
(c) shows how many dollars were earned for each dollar invested by common shareholders.
(d) is not required to be disclosed for corporations reporting under IFRS.

136. For 2018, Jicama Ltd. reported net sales of $2,200,000, net income of $120,000 and year-end total assets
of $3 million. For the year, Jicama’s average common shareholders’ equity was $1.5 million. There are no
preferred shares issued. Therefore, for 2018, Jicama’s return on common shareholders’ equity is
(a) 8.0%.
(b) 12.5%.
(c) 5.5%.
(d) 4.0%.
Solution: $120,000 / $1,500,000 = 8%

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 26 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

ANSWERS TO MULTIPLE CHOICE QUESTIONS

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
36. d 51. c 66. a 81. b 96. c 111. b 126. a
37. c 52. b 67. a 82. c 97. d 112. d 127. c
38. b 53. b 68. c 83. d 98. b 113. a 128. a
39. b 54. a 69. b 84. b 99. c 114. d 129. a
40. d 55. a 70. d 85. b 100. b 115. d 130. c
41. a 56. b 71. c 86. d 101. c 116. a 131. d
42. b 57. c 72. d 87. a 102. d 117. d 132. d
43. c 58. a 73. a 88. c 103. c 118. c 133. b
44. a 59. b 74. b 89. b 104. b 119. a 134. c
45. b 60. a 75. c 90. c 105. a 120. c 135. b
46. d 61. c 76. d 91. d 106. d 121. c 136. a
47. b 62. d 77. d 92. b 107. a 122. d
48. a 63. d 78. b 93. b 108. c 123. c
49. c 64. c 79. a 94. a 109. a 124. c
50. a 65. b 80. d 95. b 110. c 125. c

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 27 Reporting and Analyzing Shareholders’ Equity

EXERCISES

Ex. 137
Identify (by letter) each of the following characteristics as being an advantage, a disadvantage, or not
applicable to the corporate form of business organization.
A = Advantage
D = Disadvantage
N = Not Applicable

Characteristics
_____ 1. Separate legal entity

_____ 2. May result in reduced taxes

_____ 3. Continuous life

_____ 4. Limited liability of shareholders

_____ 5. Government regulation

_____ 6. Separation of ownership and management

_____ 7. Ability to acquire capital

_____ 8. Ease of transfer of ownership

_____ 9. Disclosure requirements

Solution 137 (3–5 min.)


1. A

2. A

3. A

4. A

5. D

6. A

7. A

8. A

9. D

Ex. 138
Name three advantages of a corporation.

Solution 138 (3 min.)


Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 28 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

Advantages of a corporation:
1. separate legal existence
2. limited liability of shareholders
3. transferable ownership rights
4. continuous life
5. ability to acquire capital
6. potentially lower income tax
7. separation of management and ownership

Ex. 139
The corporate charter of Downy Corporation allows the issue of a maximum of 5,000,000 common shares.
During its first three years of operation, Downy issued 2,500,000 shares at $12 per share.

Instructions
Based on the above information, answer the following questions:
(a) How many shares were authorized?
(b) How many shares were issued?
(c) What is the balance of the Common Shares account?

Solution 139 (8–11 min.)


(a) 5,000,000 shares were authorized.

(b) 2,500,000 shares were issued.

(c) The balance of the Common Shares account is $30,000,000 ($12 × 2,500,000 shares).

Ex. 140
In its first year of operations, Jagger Ltd. had the following transactions relating to its common shares:
Feb 1 Issued 5,000 shares for cash at $45 per share.
Jul 1 Issued 3,000 shares for cash at $43 per share.
Nov 1 Issued 4,000 shares for the acquisition of land. The land has a fair value of $160,000 and the
shares are currently trading at $44 each.

Instructions
Record the above transactions.

Solution 140 (10 min.)


Feb 1 Cash................................................................................... 225,000
Common Shares......................................................... 225,000
Issued 5,000 shares at $45 per share

Jul 1 Cash................................................................................... 129,000


Common Shares......................................................... 129,000
Issued 3,000 shares at $43 per share

Nov 1 Land................................................................................... 160,000


Common Shares......................................................... 160,000

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 29 Reporting and Analyzing Shareholders’ Equity

Ex. 141
The following items were shown on the statement of financial position of Kettle Corporation on December 31,
2018:

Shareholders’ Equity
Share capital
$8, noncumulative preferred shares, 24,000 shares authorized,
8,000 shares issued....................................................................... $ 120,000
Common shares, 1,000,000 shares authorized, _?_ shares issued..... 3,600,000
Total share capital......................................................................... 3,720,000
Retained earnings....................................................................................... 500,000
Total shareholders' equity..................................................................... $4,220,000

Instructions
Complete the following statements and show your calculations.
(a) If the average issue price was $9, the number of common shares issued was ______
(b) The average issue price of the preferred shares was $______.

Solution 141 (6 min.)


(a) $3,600,000 ÷ $9 = 400,000 shares issued.

(b) $120,000 ÷ 8,000 = $15 per share.

Ex. 142
Mannequin Ltd. was incorporated on January 1, 2018. During the year the company entered into the following
transactions:
Jan 5 Issued 50,000 common shares for $2.50 per share.
Jan 20 Issued 3,000 common shares to settle legal expenses. The value of the legal expenses was
$10,000.
Feb 10 Issued 10,000 preferred shares for $30.00 per share.
Aug 12 Reacquired 15,000 common shares for $2.40 per share.
Oct 1 Issued 5,000 common shares for $2.25 per share.
Dec 31 Reacquired 20,000 common shares for $2.65 per share.

Instructions
Record the above transactions.

Solution 142
Jan 5 Cash................................................................................... 125,000
Common Shares (50,000 × $2.50).............................. 125,000

20 Legal Expense................................................................... 10,000


Common Shares......................................................... 10,000

Feb 10 Cash................................................................................... 300,000


Preferred Shares (10,000 × $30)................................. 300,000

Aug 12 Common Shares (15,000 × $2.55*).................................... 38,250


Contributed Surplus..................................................... 2,250
Cash (15,000 × $2.40)................................................. 36,000
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 30 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

*[($125,000 + $10,000) / (50,000 + 3,000) = $2.55

Oct 1 Cash .................................................................................. 11,250


Common Shares (5,000 x $2.25)................................. 11,250

Dec 15 Common Shares (20,000 x $2.51*).................................... 50,200


Contributed Surplus ........................................................... 2,250
Retained Earnings.............................................................. 550
Cash (20,000 x $2.65)................................................. 53,000
*[($125,000 + $10,000 – $38,250 + $11,250) / (50,000 + 3,000 – 15,000 + 5,000)]
= $2.51

Ex. 143
Lactose Inc. reported the following transactions:
1. Issued 10,000 preferred shares for $7.50 cash per share.
2. Issued 14,000 common shares for $84,000 cash.

Instructions
Prepare the appropriate journal entries.

Solution 143 (5 min.)


1. Cash (10,000 x $7.50)................................................................... 75,000
Preferred Shares..................................................................... 75,000

2. Cash.............................................................................................. 84,000
Common Shares..................................................................... 84,000

Ex. 144
Afrikana Crafts Inc. had the following transactions related to common shares:
Jan 5 Issued 25,000 common shares for $2 per share.
Mar 10 Issued 10,000 common shares in exchange for land. The land was valued at $25,000.
Apr 21 Issued 2,500 common shares to settle legal expenses of $7,500.
Oct 5 Issued 5,000 common shares for $3.50 per share.

Instructions
(a) Journalize the share transactions.
(b) Calculate the average cost of Afrikana’s common shares, assuming the company has a December 31 year
end.

Solution 144
(a)
Jan 5 Cash (25,000 x $2)............................................................. 50,000
Common Shares (25,000 shares)................................ 50,000

Mar 10 Land................................................................................... 25,000


Common Shares (10,000 shares)................................ 25,000

Apr 21 Legal Expense................................................................... 7,500


Common Shares (2,500 shares).................................. 7,500

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 31 Reporting and Analyzing Shareholders’ Equity

Oct 5 Cash (5,000 x $3.50).......................................................... 17,500


Common Shares (5,000 shares)............................... 17,500

(b) Total shares issued = 25,000 + 10,000 + 2,500 + 5,000 = 42,500


Total cost = $50,000 + $25,000 + $7,500 + $17,500 = $100,000
Average cost = $100,000 ÷ 42,500 = $2.35

Ex. 145
Herold Corporation is authorized to issue 2,000,000 common shares. During 2018, Herold had the following
share transactions:
Jan 15 Issued 550,000 shares at $3 per share.
Dec 6 Declared a $0.20 per share dividend to shareholders of record on December 25, payable January
5, 2016.

Instructions
Record the above transactions for Herold Corporation.

Solution 145 (5–7 min.)


Jan. 15 Cash (550,000 x $3)........................................................... 1,650,000
Common Shares......................................................... 1,650,000

Dec. 6 Dividends Declared............................................................ 110,000


Dividends Payable (550,000 × $0.20).......................... 110,000

Ex 146
During 2018, Maldives Corporation reported the following selected transactions:
Jan 1 Issued 20,000 common shares at $15 per share.
Jun 15 Issued 2,000 common shares at $14 per share in exchange for equipment valued at $27,000.
Sep 30 The board of directors declared a 10% common stock dividend. The market price of the common
shares on this date was $12 per share.
Oct 10 The 10% common stock dividend is distributed.
Nov 30 The board of directors declared a cash dividend of $0.22 per share to shareholders of record on
December 15, payable on December 20.

Instructions
Prepare the journal entries to record the above transactions assuming Maldives Corporation follows IFRS.

Solution 146 (15–20 min.)

Jan 1 Cash................................................................................... 300,000


Common Shares (20,000 x $15).................................. 300,000

Jun 15 Equipment......................................................................... 27,000


Common Shares......................................................... 27,000

Sep 30 Dividends Declared............................................................ 26,400


Stock Dividend Distributable........................................ 26,400
(22,000 x 10% x $12)

Oct 10 Stock Dividends Distributable............................................. 26,400


Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 32 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

Common Shares......................................................... 26,400

Nov 30 Cash Dividends (22,000 x 1.1 x $0.22)............................... 5,324


Dividends Payable....................................................... 5,324

Dec 20 Dividends Payable.............................................................. 5,324


Cash............................................................................ 5,324

Ex. 147
On January 1, 2018, AntEater Corporation had 80,000 common shares issued. During the year, the following
transactions occurred:
Mar 1 Issued 30,000 common shares for $300,000.
Jun 1 Declared a cash dividend of $0.50 per share to shareholders of record on June 15.
Jun 30 Paid the $0.50 cash dividend.

Instructions
Prepare journal entries to record the above transactions.

Solution 147 (10 min.)


Mar 1 Cash................................................................................... 300,000
Common Shares......................................................... 300,000

Jun 1 Dividends Declared............................................................ 55,000


Dividends Payable....................................................... 55,000
(110,000 × $0.50 = $55,000)

Jun 30 Dividends Payable.............................................................. 55,000


Cash............................................................................ 55,000

Ex. 148
The shareholders’ equity section of Alumni Inc. is shown below:

Alumni Inc.
Statement of Financial Position (partial)
December 31, 2017
Shareholders’ Equity
Share Capital
$2 noncumulative Preferred Shares, 50,000 shares authorized,
10,000 shares issued....................................................... $ 650,000
Common shares, unlimited number authorized, 500,000 issued 2,100,000
Total Share Capital.......................................................... 2,750,000
Retained earnings.......................................................................... 975,000
Total Shareholders’ Equity...................................................... $3,725,000

During 2018 Alumni entered into the following transactions:


1. Jan 10 Declared a $2 cash dividend to preferred shareholders, payable February 10.
2. Jul 1 Split the common shares 2-for-1. The market price per share was $4.75.
3. Oct 15 Declared a 10% stock dividend to common shareholders of record at November
5 to be distributed November 22. The share price on declaration was $2.50 per share
and $2.25 on distribution date.

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 33 Reporting and Analyzing Shareholders’ Equity

Instructions
(a) Prepare the appropriate journal entries.
(b) Determine the number of common shares and value at November 30, 2018.
(c) Record the journal entry assuming that Alumni reacquired 25,000 shares at $1.75 on December 20, 2018.

Solution 148
(a)
Jan 10 Dividends Declared—Preferred ($2 x 10,000).................... 20,000
Dividend Payable........................................................ 20,000

Feb 10 Dividends Payable—Preferred ($2 x 10,000)..................... 20,000


Cash............................................................................ 20,000

Jul 1 No entry - memorandum entry only, Number of Common shares increases by


500,000

Oct 15 Dividends Declared (100,000 x $2.50)............................... 250,000


Stock Dividends Distributable...................................... 250,000

Nov 22 Stock Dividends Distributable............................................. 250,000


Common Shares (100,000 shares).............................. 250,000
(1,000,000 shares * 10%)

Shares Cost Avg. Cost


(b) Common Shares Issued 500,000 $2,100,000
Stock Split (500,000 x 1) 500,000 -
Stock Dividend (1,000,000 x.10) 100,000 250,000
Total 1,100,000 $2,350,000 $2.14/share

(c)
Dec 20 Common Shares (25,000 x $2.14)................................... 53,500
Contributed Surplus.................................................. 9,750
Cash (25,000 x $1.75)............................................... 43,750

Ex. 149
As of December 31, 2017, Shannon Corporation had 500,000 common shares authorized, 100,000 of which
had been issued for proceeds of $1.9 million. The Retained Earnings balance was $1,150,000 and
Accumulated Other Comprehensive Income was $1,800,000.

On January 18, 2018, 50,000 common shares were issued at $25 per share. Net income for 2018 was
$275,000. No dividends were declared in 2018.

Instructions
(a) Prepare the entry to record the common share issue on January 18.
(b) Prepare the shareholders' equity section of the statement of financial position at December 31, 2018.

Solution 149 (10 min.)


(a) Jan. 18 Cash............................................................................ 1,250,000
Common Shares................................................... 1,250,000
To record issue of 50,000 common shares (50,000* $25/share)

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 34 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

(b) Shareholders' equity


Share capital
Common shares, 500,000 shares authorized;
150,000 shares issued*................................................................. $3,150,000
Retained earnings**.............................................................................. 1,425,000
Accumulated other comprehensive income.......................................... 1,800,000
Total shareholders' equity.............................................................. $6,375,000

* $1,900,000 + $1,250,000 = $3,150,000


** $1,150,000 + $275,000 = $1,425,000

Ex. 150
On January 1, 2018, Blue Corporation reported $3,000,000 in its Common Shares account (200,000 issued)
and retained earnings of $1,000,000. During 2018, the following events occurred:
1. On July 1, the company issued 100,000 common shares at $17 per share.
2. On December 15, the board of directors declared a 15% stock dividend to common shareholders of record
on December 31, payable on January 15, 2019.
3. The market value of Blue Corporation common shares was $16 per share on December 15 and $14 per
share on December 31.
4. Net income for 2018 was $625,000.

Instructions
(a) Record the issue of shares on July 1 and the declaration of the stock dividend on December 15.
(b) Prepare the shareholders' equity section of the statement of financial position at December 31, 2018.

Solution 150 (10–15 min.)


(a) Jul 1 Cash............................................................................ 1,700,000
Common Shares................................................... 1,700,000
Issued 100,000 shares at $17/share.

Dec 15 Dividends Declared (45,000 × $16)............................. 720,000


Stock Dividends Distributable............................... 720,000
(200,000 + 100,000) × 15% = 45,000 shares)

(b)
BLUE CORPORATION
Statement of Financial Position (partial)
December 31, 2018
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Shareholders' equity
Share capital
Common shares, 300,000 shares issued.............................................. $4,700,000
Stock dividend distributable.................................................................. 720,000
Total share capital......................................................................... 5,420,000
Retained earnings*...................................................................................... 905,000
Total shareholders' equity.............................................................. $6,325,000

* Retained earnings = $1,000,000 – $720,000 + $625,000 = $905,000

Ex. 151
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 35 Reporting and Analyzing Shareholders’ Equity

Maha Corporation has 2,000,000 authorized common shares. As of June 30, 2018, there were 350,000 shares
issued. On this date, the board of directors declared a $0.25 per share cash dividend to be paid on August 1,
2018 to shareholders of record on July 7, 2018.

Instructions
Prepare the necessary journal entries to be recorded on (a) the date of declaration, (b) the date of record, and
(c) the date of payment. If no entry is needed write “No entry required.”

Solution 151 (5–10 min.)


(a) Jun 30 Dividends Declared..................................................... 87,500
Dividends Payable................................................ 87,500
(350,000 × $0.25)

(b) Jul 7 No entry required.

(c) Aug 1 Dividends Payable....................................................... 87,500


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

Ex. 152
The shareholders' equity section of Starr Corporation at December 31, 2017, included the following:
$3 preferred shares, cumulative,
10,000 shares authorized, 9,000 shares issued................................... $ 900,000
Common shares, 500,000 shares authorized, 400,000 shares issued........ 2,000,000

Dividends were not declared on the preferred shares in 2017 and are in arrears.

On September 15, 2018, the board of directors declared dividends on the preferred shares for 2017 and 2018,
to shareholders of record on October 1, 2018, payable on October 15, 2018.

On November 1, 2018, the board of directors declared a $0.50 per share dividend on the common shares,
payable November 30, 2018, to shareholders of record on November 15, 2018.

Instructions
Prepare the journal entries that should be made by Starr Corporation on the following dates in 2018: September
15, October 1, October 15, November 1, November 15, and November 30. If no entry is needed write “No entry
required.”

Solution 152 (12–15 min.)


Sep 15 Dividends Declared............................................................ 54,000
Dividends Payable....................................................... 54,000
To record declaration of dividends in arrears and the
current year's preferred dividend (9,000 shares × $3 × 2)

Oct 1 No entry required.

Oct 15 Dividends Payable.............................................................. 54,000


Cash............................................................................ 54,000
To record payment of cash preferred dividend

Nov 1 Dividends Declared............................................................ 200,000


Dividends Payable....................................................... 200,000
To record declaration of a cash dividend on common
shares (400,000 shares × $0.50)
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 36 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

Nov 15 No entry required.

Nov 30 Dividends Payable.............................................................. 200,000


Cash............................................................................ 200,000
To record payment of common share cash dividends

Ex. 153
Determine whether a cash dividend, stock dividend, or stock split will result in the effect listed in the first
column. For example, for the first item, indicate by inserting a yes or no in the space provided whether a cash
dividend will result in a decrease in total assets; whether a stock dividend will result in a decrease in total
assets; and whether a stock split will result in a decrease in total assets.

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 37 Reporting and Analyzing Shareholders’ Equity

Possible Transaction
Effect Cash Dividend Stock Dividend Stock Split
Decrease in total assets
Decrease in total shareholders' equity
Increase in share capital
Decrease in retained earnings
Increase in the number of shares

Solution 153 (10 min.)

Possible Transaction
Effect Cash Dividend Stock Dividend Stock Split
Decrease in total assets Yes No No
Decrease in total shareholders' equity Yes No No
Increase in share capital No Yes No
Decrease in retained earnings Yes Yes No
Increase in the number of shares No Yes Yes

Ex. 154
Glenn Corporation's shareholders' equity section at December 31, 2017 appears below:
Shareholders' equity
Share capital
Common shares, 82,000 issued.................................................... $ 799,860
Retained earnings................................................................................ 150,000
Accumulated other comprehensive income.......................................... 450,000
Total shareholders' equity............................................................................ $1,399,860

On June 30, 2018, the board of directors declared a 15% stock dividend, distributable on July 31 to
shareholders of record on July 15. The fair value of Glenn Corporation's shares on June 30 was $14.

On December 1, 2018, the board of directors declared a 2-for-1 stock split effective December 15. Glenn
Corporation's shares were selling for $20 on December 1, 2018, before the stock split was declared. Net
income for 2018 was $230,000 and there were no cash dividends declared.

Instructions
(a) Prepare the journal entries on the appropriate dates to record the stock dividend and the stock split. If no
entry is needed write “No entry required.”
(b) Prepare all closing entries required on December 31, 2018.
(c) Fill in the amounts that would appear in the shareholders' equity section for Glenn Corporation at
December 31, 2018, for the following items:
1. Common shares $______
2. Number of shares issued ______
3. Legal capital per share $______
4. Retained earnings $______
5. Total shareholders' equity $______

Solution 154 (20 min.)


(a) Jun 30 Dividends Declared..................................................... 172,200
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 38 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

Stock Dividends Distributable............................... 172,200


To record declaration of stock dividend
(82,000 × 15% = 12,300 × $14 = $172,200)

Jul 15 No entry required.

Jul 31 Stock Dividends Distributable...................................... 172,200


Common Shares................................................... 172,200
To record issue of 12,300 shares in a stock dividend

Dec 1 No entry required.

Dec 15 Memo: 188,600 common shares (82,000 + 12,300) × 2

(b) Dec 31 Retained Earnings....................................................... 172,200


Dividends Declared............................................... 172,200
To close dividends

Dec 31 Income Summary........................................................ 230,000


Retained Earnings................................................ 230,000
To close net income for year

(c) 1. Common shares ($799,860 + $172,200)................................................... $972,060


2. Number of shares issued [(82,000 + 12,300) x 2]...................................... 188,600
3. Legal capital per share ($972,060  188,600)........................................... $5.15
4. Retained earnings ($150,000 + $230,000 – $172,200)............................. $207,800
5. Total shareholders' equity ($1,399,860 + $230,000)................................. $1,629,860

Ex. 155
As of December 31, 2018, Shaka Son Inc. had the following share capital:
1. 750,000 common shares authorized, 350,000 of which had been issued for a total of $5,250,000.
2. 100,000 noncumulative, $10.50 preferred shares authorized, 10,000 of which had been issued at $200 per
share.

Instructions
Prepare the share capital section of the statement of financial position at December 31, 2018.

Solution 155 (5–10 min.)


SHAKA SON INC.
Statement of Financial Position (partial)
December 31, 2018
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Share capital
$10.50 preferred shares, noncumulative, 100,000 shares authorized,
10,000 shares issued..................................................................... $2,000,000
Common shares, 750,000 shares authorized, 350,000 shares issued.. 5,250,000
Total share capital......................................................................... $7,250,000

Ex. 156
The following accounts appear on the adjusted trial balance of Airway Machinery Inc. at December 31, 2018:
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 39 Reporting and Analyzing Shareholders’ Equity

Common Shares, 1,000,000 shares authorized, 800,000 shares issued..... $1,600,000


Stock Dividends Distributable...................................................................... 240,000
$4 Preferred Shares, 10,000 shares authorized, 5,000 shares issued........ 750,000
Retained Earnings....................................................................................... 925,000
Accumulated Other Comprehensive Income............................................... 250,000

Instructions
Prepare the shareholders' equity section at December 31, 2018, assuming that retained earnings is restricted
for plant expansion in the amount of $250,000.

Solution 156 (15–20 min.)


AIRWAY MACHINERY INC.
Statement of Financial Position (partial)
December 31, 2018
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Shareholders' equity
Share Capital
$4 preferred shares, 10,000 shares authorized, 5,000 shares issued... $ 750,000
Common shares, 1,000,000 shares authorized, 800,000 shares issued 1,600,000
Stock dividends distributable................................................................ 240,000
Total share capital......................................................................... 2,590,000
Retained earnings (see note)...................................................................... 925,000
Accumulated other comprehensive income................................................. 250,000
Total shareholders' equity..................................................................... $3,765,000

Note: Retained earnings is restricted in the amount of $250,000 for plant expansion.

Ex. 157
Before closing, the Retained Earnings account of Radar Ltd. has a credit balance of $210,000 at December 31,
2018. There was a loss of $238,000 for 2018. The share capital consists of 40,000 common shares issued for
$480,000.

Instructions
Prepare the shareholders’ equity section of the statement of financial position at December 31, 2018.

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 40 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

Solution 157 (5 min.)


RADAR LTD.
Statement of Financial Position (partial)
December 31, 2018
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Shareholders' equity
Common shares, 40,000 shares issued.................................................. $480,000
R/E Deficit ($210,000 – $238,000).......................................................... (28,000)
Total shareholders’ equity.............................................................................. $452,000

Ex. 158
Mean Green Corporation had the following shareholders’ equity balances at January 1, 2018:
Common shares, unlimited authorized, 200,000 issued.............................. $800,000
Retained earnings....................................................................................... 120,000
Accumulated other comprehensive income................................................. 30,000

The following events occurred in 2018:


1. Issued 50,000 common shares for $150,000 cash.
2. Declared and paid dividends of $25,000.
3. Reported net income of $40,000.
4. Reported other comprehensive income of $10,000.

Instructions
Prepare a statement of changes in shareholders’ equity.

Solution 158 (10 min.)


Mean Green Inc.
Statement of Changes in Shareholders’ Equity
Year ended December 31, 2018

Accumulated
Common Retained Other
Total
Shares Earnings Comprehensive
Income
Jan 1, 2018 $800,000 $120,000 $30,000 $950,000
Issued
common 150,000 150,000
shares
Declared
(25,000) (25,000)
Dividends
Net income 40,000 40,000
Other
comprehensive (10,000) (10,000)
income
Dec 31, 2018 $950,000 $135,000 $20,000 $1,105,000

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 41 Reporting and Analyzing Shareholders’ Equity

Ex. 159
At December 31, 2017, Houston Corp. reported the following adjusted balances:
Common shares: 480,000 issued................................................................ $3,000,000
Preferred shares: 120,000 issued................................................................ 900,000
Contributed surplus..................................................................................... 36,000
Retained earnings....................................................................................... 480,000
Accumulated other comprehensive income................................................. 144,000

The following events occurred in 2018:


1 Issued 60,000 preferred shares, $600,000.
2. Reported total comprehensive income of $185,000, which included net income of $225,000 and other
comprehensive loss of $40,000.
3. Declared and paid dividends to the preferred shareholders of $125,000.

Instructions
Prepare a statement of changes in equity for the year ended December 31, 2018.

Solution 159 (15 min.)


Houston Corp.
Statement of Changes in Shareholders’ Equity
Year ended December 31, 2018

Accumulated
Preferred Common Contributed Retained Other
Total
Shares Shares surplus Earnings Comprehensive
Income
Jan. 1, 2018 $900,000 $3,000,000 $36,000 $480,000 $144,000 $4,560,000
Net income 225,000 225,000
Other
comprehensive (40,000) (40,000)
income
Issued preferred
$600,000 600,000
shares
Paid
(125,000) (125,000)
dividends
Dec 31, 2018 $1,500,000 $3,000,000 $36,000 $580,000 $104,000 $5,220,000

Ex. 160
At December 31, 2017, Magnolia Inc., a private company reporting under ASPE, had the following
shareholders’ equity:
Common shares, 100,000 issued................................................................ $1,000,000
Retained earnings....................................................................................... 1,600,000

During 2018, the following events occurred:


1. On June 1, the company declared and paid a $0.50 cash dividend.
2. On October 14, the company issued another 30,000 shares at $10 each.
3. At December 31, the company reported a net income of $325,000 for the year.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 42 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

Instructions
Prepare a statement of retained earnings for the year ended December 31, 2018.

Solution 160 (10 min.)


MAGNOLIA INC.
Statement of Retained Earnings
Year Ended December 31, 2018
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Balance, January 1............................................................................................. $1,600,000
Add: Net income................................................................................................. 325,000
$1,925,000
Less: Dividends declared (100,000 x $0.50)....................................................... (50,000)
Balance, December 31....................................................................................... $1,875,000

Ex. 161
At December 31, 2017, Red Roberts Limited, a private company reporting under ASPE, had the following
shareholders’ equity:
Common shares, 75,000 issued.................................................................. $300,000
Retained earnings....................................................................................... 750,000

During 2018, the following events occurred:


1. On February 1, the company declared and paid a $0.50 cash dividend.
2. On June 10, the company split the common shares two for one.
3. On December 1, the company declared and paid a $0.40 cash dividend.
4. At December 31, the company reported a loss of $106,000 for the year.

Instructions
(a) Prepare a statement of retained earnings for the year ended December 31, 2018.
(b) If Red River were a publicly-traded corporation, would it still prepare a statement of retained earnings?
Explain.

Solution 161 (15 min.)


(a)
RED ROBERTS LIMITED
Statement of Retained Earnings
Year Ended December 31, 2018
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Balance, January 1............................................................................................. $750,000
Less: Loss.......................................................................................................... (106,000)
Less: Dividends declared (75,000 x $0.50) + (150,000 x $0.40)......................... (97,500)
Balance, December 31....................................................................................... $546,500

(b) If Red Roberts were a publicly-traded corporation, it must report under IFRS, and thus, instead of a
statement of retained earnings, must prepare a statement of changes in equity. This is a more detailed
statement which explains the changes in each shareholder’s equity account (for example, common
shares), not just retained earnings.

Ex. 162
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 43 Reporting and Analyzing Shareholders’ Equity

At December 31, 2017, Snow White Corp., a private company reporting under ASPE, had the following
shareholders’ equity:
Preferred shares, 30,000 issued.................................................................. $150,000
Common shares, 60,000 issued.................................................................. 420,000
Retained earnings....................................................................................... 740,000

During 2018, the following events occurred:


1. On May 1, the company declared a 5% common stock dividend. The fair value of the common shares was
estimated to be $8 at this time. The shares were distributed on June 1.
2. On September 10, the company issued 25,000 common shares at $7.95 each.
3. On December 15, the company declared a cash dividend of $0.30 per share to the common shareholders
of record on December 31, payable on January 15, 2017. It also declared a cash dividend of $.50 per
share to the preferred shareholders, on the same dates.
4. At December 31, the company reported a net income of $310,000 for the year.

Instructions
(a) Prepare a statement of retained earnings for the year ended December 31, 2018.
(b) If Snow White were a publicly-traded corporation, why would it not prepare a statement of retained
earnings? Explain.

Solution 162 (20 min.)


(a)
SNOW WHITE CORP.
Statement of Retained Earnings
Year Ended December 31, 2018
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Balance, January 1............................................................................................. $ 740,000
Add: Net income................................................................................................. _ 310,000
1,050,000
Less: Dividends declared ($26,400 + $15,000) ................................................. (41,400)1
Less: Dividends declared (60,000 x 5% x $8)..................................................... (24,000)
Balance, December 31....................................................................................... $984,600
1
Common dividend: (60,000 + 3,000 + 25,000) x $0.30 = $26,400
Preferred dividend 30,000 x $0.50 = $15,000

Note: the cash dividend is deducted from retained earnings because it has been declared. The payment date is
irrelevant.

(b) If Snow White were a publicly-traded corporation, it must report under IFRS, and IFRS requires the
preparation of a statement of changes in equity. This is a more detailed statement which explains the
changes in each shareholder’s equity account (for example, preferred and common shares), not just
retained earnings.

Ex. 163
Using the following information, calculate the payout ratio and the return on common shareholders’ equity:
Dividends..................................................................................................... $210,000
Dividends per share..................................................................................... $0.32
Net income.................................................................................................. $1,500,000

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 44 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

Share price at end of year........................................................................... $26.00


Average common shareholders’ equity........................................................ $60,000,000

Solution 163 (5 min.)

$210,000
Payout ratio: ———–––— x 100 = 14.0%
$1,500,000

$1,500,000
Return on common shareholders’ equity: ————–––— x 100 = 2.5%
$60,000,000

Ex. 164
Blue Rays Incorporated reported the following selected information:
2018 2017
Weighted average number of common shares 75,000 73,500
Net income $450,000 $410,500
Preferred share dividends $50,000 $34,500
Common shareholders’ equity $3,500,000 $3,300,000
Dividends declared per share $2.50 $2.40
Market price per share $30.00 $32.50

Instructions
Calculate the following ratios for 2018 and 2017 respectively:
(a) Basic earnings per share
(b) Return on common shareholders’ equity (assume 2016 common shareholders’ equity of $3,250,000)
(c) Dividend yield
(d) Payout ratio

Solution 164
2018 2017

(a) Basic earnings per share = ($450,000 – $50,000) ($410,500 – $34,500)


75,000 73,500
= $5.33 = $5.12

Return on common
shareholders’ equity = ($450,000 – $50,000) ($410,500 – $34,500)
($3,500,000 + $3,300,000)/2 ($3,300,000 + $3,250,000)/2
= 11.8% =11.5%

Dividend yield = $2.50 $2.40


$30.00 $32.50
= 8.3% = 7.4%

Payout ratio = $2.50 $2.40


$5.33 $5.12
= 46.9% = 46.9%

Ex. 165
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 45 Reporting and Analyzing Shareholders’ Equity

Solutions Plus Inc. operates on a calendar year basis. During the year the company had the following
transactions related to common shares:
Jan 1 Issued 250,000 common shares for $2 per share.
Feb 1 Issued 60,000 common shares for $2.25 per share.
Mar 10 Issued 2,500 preferred shares for $50 per share.
May 1 Issued 600,000 common shares for $2.50 per share.
Sep 1 Reacquired 75,000 common shares for $1.95 per share.
Nov 1 Reacquired 45,000 common shares for $1.75 per share.

In addition, Solutions Plus reported net income of $1,433,625 and paid $55,000 in preferred dividends.

Instructions
(a) Calculate the weighted average number of shares.
(b) Calculate the basic earnings per share.

Solution 165
(a)
Jan 1 250,000 x 12/12 = 250,000
Feb 1 60,000 x 11/12 = 55,000
May 1 600,000 x 8/12 = 400,000
Sep 1 (75,000) x 4/12 = (25,000)
Nov 1 (45,000) x 2/12 = (7,500)
Weighted Average # of Shares 672,500

(b) Basic earnings per share = ($1,433,625 – $55,000) = $2.05


672,500

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 46 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

MATCHING QUESTIONS

166. Match the items below by entering the appropriate code letter in the space provided.

A. Stock split F. Retained earnings restrictions


B. Deficit G. Legal capital
C. Payout ratio H. Private corporation
D. Stock dividend I. Cumulative feature
E. Declaration date J. Statement of changes in equity

____ 1. A corporation whose shares are not available on a public stock exchange

____ 2. The amount that must be retained in the business for the protection of creditors

____ 3. Preferred shareholders have a right to receive current and unpaid prior year dividends before
common shareholders receive any dividends

____ 4. The date the board of directors formally declares a dividend

____ 5. Does not affect total share capital, retained earnings, or shareholders’ equity

____ 6. A pro rata distribution of the corporation’s own shares to shareholders

____ 7. A portion of the balance is unavailable for dividends

____ 8. A debit balance in retained earnings

____ 9. A statement detailing the changes in the components of shareholders’ equity prepared by publicly-
traded corporations

____10. Measures the percentage of net income distributed in the form of dividends to common
shareholders

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 47 Reporting and Analyzing Shareholders’ Equity

ANSWERS TO MATCHING

1. H

2. G

3. I

4. E

5. A

6. D

7. F

8. B

9. J

10. C

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 48 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

SHORT-ANSWER ESSAY QUESTIONS

S-A E 167
(a) Explain the difference between comprehensive income, other comprehensive income (OCI) and
accumulated other comprehensive income (AOCI).
(b) Which type of companies report other comprehensive income?
(c) Which financial statements are prepared for reporting purposes?

Solution 167
(a) Comprehensive income is the sum of net income and other comprehensive income. Comprehensive
income; therefore, includes: (1) the revenues, expenses, gains, and losses included in net income, and (2)
the gains and losses that are reported in OCI.

Other comprehensive income reflects certain gains and losses (e.g. gains on revaluing property, plant &
equipment) that bypass net income.

Accumulated other comprehensive income reflects the accumulation of other comprehensive income.
AOCI is increased by other comprehensive income and decreased by other comprehensive losses.

(b) Only companies using IFRS have to report other comprehensive income. Companies using ASPE do not,
because OCI is not used under these standards. Of course, not all companies using IFRS will have
transactions affecting other comprehensive income.

(c) Comprehensive income is reported on the Statement of Comprehensive Income, while accumulated other
comprehensive income is reported in the shareholders’ equity section of the statement of financial position
and the statement of changes in shareholders’ equity.

S-A E 168
Jake Granville, the president and CEO of Earth Systems, Inc., a waste management firm, was recently
hospitalized, suffering from exhaustion and a heart ailment. Immediately prior to his hospitalization, Earth
Systems had experienced a sharp decline in its share price, and trading activity became almost nonexistent.
The primary reason for this was concern expressed in the media over a new untested waste management
system implemented by the company. Mr. Granville had been unwilling to submit the procedure to testing
before implementation, but he reluctantly agreed to limited tests after the system was operational. No problems
have been identified by the tests to date.

The other members of the management team called a meeting to determine what they should do. Roger
Hastings, the marketing manager, suggested that the company purchase a large number of its own shares on
the open market. In that way, investors might notice that activity had picked up, and might decide to buy some
more shares. However, this plan would use up most of the company's available cash, so that there will be no
money available for cash dividends. Earth Systems has paid cash dividends every quarter for over ten years.

Instructions
(a) Is Mr. Hastings's suggestion ethical? Explain.
(b) Is it ethical to discontinue the cash dividend? Explain.

Solution 168
(a) There is no definite answer as to whether Mr. Hastings's suggestion is ethical. There are several points
that might be made, supporting either premise. First, it is a large transaction being made in the absence of
the CEO, and made entirely to boost share price. It is not clear what the long-term benefit to the company
will be, even if it is successful. Thus, a student might argue that the large purchase of shares, using up
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 49 Reporting and Analyzing Shareholders’ Equity

most of the available cash, might be unethical because of the potential damage done to the company,
without a large enough potential reward. On the other hand, the company might benefit by keeping its
share price high (assuming that this purchase will enhance the share price) by being able to issue
additional shares to finance future expansion. It is to be hoped that the students can articulate the concept
that legality of an action is not the only determinant of whether an action is ethical (or not).

(b) A company may discontinue its dividend at will. Common shareholders should know that they are not
entitled to dividends, even when they have been declared and paid every year. There is no express or
implied contract to pay a dividend to common shareholders, and so the discontinuance of the dividend is
ethical. However, the company may lose more in share price by discontinuing a long-standing dividend
than it gains by a large purchase of its own shares.

S-A E 169
Copper Corp. has just split its stock 2 for 1.
(a) Why would Copper Corp. have done this?
(b) What impact would the split have on the share price?
(c) Why would the share price change?
(d) Would the impact on the share price be any different if the company declared a 10% stock dividend
instead? Explain.

Solution 169
(a) Copper Corp. probably split its stock in order to bring its share price down and improve the marketability of
its shares.

(b) The price should drop by about 50%, but, it may not fall by quite that much due to the increased
marketability.

(c) The number of shares has doubled, while the net assets have not changed. The “pie” has been sliced into
twice as many pieces, so each slice represents a smaller portion than before.

(d) A stock dividend is a distribution of shares to shareholders that affects share capital because common or
preferred shares is increased when the new shares are issued for the dividend. Similar to a stock split,
marketability also increases with the issue of the stock dividend. The share price decreases as a result of
the increased number of available shares. However, a stock split is usually much larger than a stock
dividend so a drop in share price would likely be greater with a stock split than a stock dividend.

S-A E 170
Why must a corporation meet a two-part solvency test before it may declare cash dividends?

Solution 170
A corporation must meet the following solvency test before declaring and paying cash dividends:
1. It must have sufficient cash or resources to be able to pay its liabilities as they become due after the
dividend is declared and paid, and
2. The net realizable value of its assets must exceed the total of its liabilities and share capital.

Corporations must ensure that a payment of dividends does not result in the company being unable to pay its
liabilities as they become due or render the company insolvent as a protection for its creditors. In addition,
corporations are frequently constrained by agreements with their lenders to pay dividends only from retained
earnings.

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 50 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

S-A E 171
As part of a Careers in Accounting program sponsored by accounting organizations and supported by your
company, you will be taking a group of high school students through the accounting department in your
company. You will also provide them with various materials to explain the work of an accountant. One of the
materials you will provide is a statement of changes in equity.

Instructions
Describe the statement, including how it links to the statement of financial position.

Solution 171
The statement of changes in equity discloses changes in total shareholders’ equity for the period, as well as
changes in each shareholders’ equity account, including contributed capital, retained earnings, and
accumulated other comprehensive income.

The ending account balances listed on the statement of changes in equity appear in the shareholders’ equity
section of the statement of financial position.

S-A E 172
Your friend Antonia is studying accounting ratios, and asks you to explain the difference between basic
earnings per share and return on common shareholders’ equity. “Aren’t they practically the same thing?” she
asks. “After all, they’re both a function of the net income available to common shareholders.”

Instructions
Explain to your friend the difference between these two ratios.

Solution 172
You are right, Antonia, in that both of these ratios use net income available to common shareholders (i.e., net
income less preferred dividends) as the numerator. However, they have different denominators because they
measure two different things. Basic earnings per share (EPS) uses the weighted average of common shares
outstanding during the year, and when you divide the net income available to common shareholders by this
figure, the result is the amount of net income earned (on paper) by each common share for that year.

On the other hand, return on common shareholders’ equity (or just “return on equity”) uses the average
common shareholders’ equity from the statement of financial position, and when you divide the net income
available to common shareholders by this figure, the result shows the percentage return on the shareholders’
investment for that year. Note this is a percentage, whereas EPS is a dollar amount.

S-A E 173
“I can’t figure out the difference between the payout ratio and the dividend yield!” exclaimed your classmate
Jonathan. “I know they both have to do with dividends paid by a corporation. But why do we need to know
both?”

Instructions
Explain to Jonathan what each ratio is and the significance of each one.

Solution 173
The payout ratio is calculated by dividing the total cash dividends paid during the year by the net income for
the year, i.e., it uses figures from the corporation records. It measures the percentage of net income distributed
as cash dividends (if any). A high ratio means that the company is paying out a lot of its net income as
dividends. This is usually alright if it is a solid, well-established company, but would not be good for a
comparatively new company planning on expanding and growing. One would expect such a company to have
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 51 Reporting and Analyzing Shareholders’ Equity

a low or zero payout ratio (i.e. not paying dividends at all) since they should be retaining as much of their net
income as possible to invest in their future growth.

The dividend yield looks at the shareholder’s return on investment (ROI) in the form of dividends received, and
is calculated by dividing the dividend per share (not total dividends) by the market price. It shows the
percentage return to the investor based on the market price. Investors look for a high dividend yield. However,
like the payout ratio, a high dividend yield suggests the corporation is paying out a high percentage of its net
income and not retaining it for future growth. Therefore again, for a growth oriented company, one would
expect a low (or zero) dividend yield.

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 52 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

OBJECTIVE FORMAT QUESTIONS

174. Juan Rodriquez is the president and CEO of Balsam Industries Ltd, and owns 100% of the common
shares of this private corporation. He is considering taking the company public in order to raise much needed
capital. Of the following comments made below, which are correct?
(a) The new public corporation will have an unlimited life and may exist past Juan’s own life expectancy.
(b) If the company becomes public, Juan will probably have limited liability for corporate obligations.
(c) If the company becomes public, Juan will lose control of the company.
(d) Since a public corporation is a separate legal entity, Juan by himself will no longer be able to make key
decisions such as decisions related to buying property, borrowing money, or entering into contracts.
(e) When the company goes public, many of the shares will now trade on a public stock exchange so Juan will
not be able to influence those buying or selling the company’s shares.
(f) The reporting requirements for Balsam Industries will vary depending on the stock exchange its shares are
listed on.

Solution 174
(a), (e), and (f) are correct

(b) The company most likely, already has limited liability as a privately held corporation, although sometimes
there can be exceptions if creditors like banks require personal guarantees from shareholders so the
comment made in the question is not always correct.

(c) This is not necessarily correct. Juan can still own the majority of shares (50% + 1 share or more), which
will enable him to retain control.

(d) If Juan maintains majority ownership and continues to work as an officer of the company, going public will
not change his ability to make decisions. However, if he only maintains a minority ownership, the board of
directors could potentially vote to remove him from the board and from his position as an officer of the
company. Even if this does not occur, the board could override his decisions.

175. Choose whether the corporation is likely following IFRS or ASPE from the following statements:
(a) Issue (sale) of share capital is shown on the statement of changes in equity.
(b) The changes to contributed surplus that arises from the retirement of shares are shown in the notes to the
financial statements only.
(c) Net income is reported on the statement of retained earnings.
(d) Share capital, retained earnings, and accumulated other comprehensive income, if any, must be reported
separately.
(e) An issue of common shares is disclosed in the notes to the financial statements.
(f) The disclosure of basic earnings per share is required.
(g) The company is a public corporation.
(h) When shares are issued for noncash goods or services, the transaction is recorded at the fair value of the
goods or services or the fair value of the shares, whichever is more reliable.

Solution 175
(a) IFRS. A statement of changes in equity is prepared by companies following IFRS only. ASPE companies
prepare a statement of retained earnings.

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 53 Reporting and Analyzing Shareholders’ Equity

(b) ASPE. Changes to contributed surplus are disclosed in the notes under ASPE because changes in this
account are not shown in the statement of retained earnings.

(c) ASPE. Companies following ASPE prepare a statement of retained earnings, not a statement of changes
in equity and because net income affects retained earnings it will be reported on this statement.

(d) IFRS. Only companies following IFRS report accumulated other comprehensive income.

(e) ASPE. Companies following ASPE prepare a statement of retained earnings. Consequently, changes in
other equity accounts such as the issue of common shares are not shown on this statement. Therefore,
information about share issues will be shown in the notes to the financial statements.

(f) IFRS. The disclosure of basic earnings per share is only a requirement under IFRS.

(g) IFRS. All public companies must follow IFRS if there shares are listed only on Canadian stock exchanges.
Private corporations have the choice of following IFRS or ASPE.

(h) ASPE. When shares are issued for noncash goods or services in a company using IFRS, the fair value of
the goods or services received is used to record the transaction if it can be reliably determined. If not, the
fair value of the common shares is used. IFRS therefore has a preference for recording such transactions
based on the value of consideration received. For a private company following ASPE, the more reliable of
the two fair values should be used.

176. The following is a selection of journal entries related to share transactions. Indicate all of the entries that
are correctly recorded.

(a) Cash 78,000


Common Shares 78,000
To record issuance of 26,000 common shares at $3.00 per share.

(b) Common Shares 6,000


Cash 6,000
Reacquired and retired 3,000 common shares at $2.00. Average
cost of shares is $3.00.

(c) Cash 12,600


Common Shares, Preferred 12,600
To record issuance of 1,800 preferred shares at $7.00 per share.

(d) Common Shares 15,000


Contributed Surplus 3,000
Retained Earnings 2,000
Cash 20,000
Reacquired and retired 5,000 common shares at $4.00. Average
cost of shares is $3.00. Balance in Contributed Surplus account was
$3,000 prior to this entry.

(e) Land 240,000


Common Shares 240,000
Issued 80,000 common shares in exchange for land valued at
$240,000. This is a reliable value. Share price at the time of
exchange is $3.50.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 54 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

(f) Common Shares 55,000


Cash 40,000
Contributed Surplus 15,000
Reacquired and retired 10,000 common shares at $4.00. Average
cost of shares is $5.50.

(g) Vehicles 40,000


Common Shares 40,000
Issued 10,000 common shares in exchange for a new bus valued at
$44,000. Share price at date of exchange was $4.00.

Solution 176
Journal entries (a), (d), (e), and (f) are correctly prepared

(b) When shares are reacquired and retired at a price that is below the average carrying amount of the
shares, the entry should be
Common Shares................................................... 9,000
Cash............................................................ 6,000
Contributed Surplus..................................... 3,000

The difference between the average cost of the shares and repurchase price is credited to the Contributed
Surplus account to reflect the gain that was made on reacquisition.

(c) The correct journal entry to record the issue of preferred shares should have a credit to Preferred Shares,
not Common Shares as follows:
Cash..................................................................... 12,600
Preferred Shares......................................... 12,600

(g) The share issuance should be recorded at the fair value of the bus, rather than at the current share price
(the item given up) as long as the value of the bus is a fair value. The correct journal entry to record the
issue of common shares for the automobile is
Vehicles................................................................ 44,000
Common Shares......................................... 44,000

177. For each event indicate the effect (+/-) on retained earnings and share capital:
(a) Dividends of $0.75 per share are declared on 50,000 common shares.
(b) Dividends of $35,700 are paid to common shareholders.
(c) A total of 15,000 new common shares are issued at $5.00 per share.
(d) Existing shareholders sell 1,500 shares for a total of $9,000 on the open market.
(e) A 10% stock dividend is declared to common shareholders.
(f) A 10% stock dividend is distributed after it was declared.
(g) A stock split of 2-for-1 is declared on the 50,000 common shares trading.

Solution 177
a) Dividends of $0.75 Retained When dividends are declared, Dividends
per share are earnings – Declared is debited and Dividend Payable
declared on 50,000 is credited. Dividends Declared is closed
common shares. into Retained Earnings (it decreases
retained earnings). There is no effect on
share capital.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 55 Reporting and Analyzing Shareholders’ Equity

(b) Dividends of No effect When dividends are paid, the Dividends


$35,700 are paid to Payable account is debited and Cash is
common credited. There is no effect on retained
shareholders. earnings or share capital.

(c) A total of 15,000 Share When new common shares are issued,
new common capital + Cash is debited and Common Shares is
shares are issued at credited. Therefore, share capital
$5.00 per share. increases. There is no effect on retained
earnings.

(d) Existing No effect This does not affect the company’s


shareholders sell financial records. Resale of existing shares
1,500 shares for a on the open market occur externally to the
total of $9,000 on company and do not affect the company’s
the open market. accounting records because such a
transaction occurs between shareholders,
so the company is not involved,

(e) A 10% stock Retained When a stock dividend is declared,


dividend is declared earnings – Dividends Declared is debited and Stock
to common Dividends Distributable is credited.
shareholders. Dividends Declared is closed into Retained
Earnings (it decreases Retained Earnings).
There is no effect on share capital until the
stock dividend is distributed.

(f) A 10% stock Share When a stock dividend is declared, stock


dividend is capital + dividends distributable is debited and
distributed after it common shares is credited. Therefore,
was declared. share capital increases. There is no effect
on retained earnings.

(g) A stock split of 2-for- No effect When a stock split is declared, there is no
1 is declared on the change in the value of retained earnings or
50,000 common share capital. Only the number of shares
shares trading. outstanding increases but this does not
affect the balance of any accounts on the
financial statements.

178. The following information was provided for Linker Corporation which reports under IFRS for 2018:

January 1, 2018 account balances:


Retained earnings $127,000
Common shares (23,850 shares) $56,700
Contributed surplus $4,500
Accumulated other comprehensive income $670 credit

Events that took place during 2018:


 A 10% stock dividend was declared on July 31. Fair value of each share was $3.00.
 Cash dividends of $0.20 per share were declared March 1.

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 56 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

 Total revenue earned by the company during the year was $126,000.
 Total expenses incurred by the company during the year were $87,000.
 25,000 new common shares were issued in exchange for land on October 1. The fair value of the land was
$50,000. The fair value of each common share was $2.75.

Using the above information, prepare a statement of changes in equity. Using this statement, indicate all of the
following statements that are correct:
(a) Shareholders’ equity on December 31, 2018 totaled $273,100.
(b) The balance of common shares on December 31, 2018 is $106,700.
(c) The balance of retained earnings at December 31, 2018 is $154,075.
(d) Shareholders’ equity on December 31, 2018 totaled $277,200.
(e) The balance retained earnings at December 31, 2018 is $158,845.
(f) The balance of common shares on December 31, 2018 is $113,855.
(g) The total change in retained earnings during the year is $39,000.
(h) Shareholders’ equity on January 1, 2018 totaled $188,200.

Solution 178
(a), (c), and (f) are correct

The following statement of changes in equity for Linker Corporation shows the correct calculations.
Linker Corporation
Statement of Changes in Equity
Year Ended December 31, 2018

Contributed Capital Accumulated


Other
Common Contributed Retained Comprehensive
Shares Surplus Earnings Income Total
Balance, January 1 $56,700 $4,500 $127,000 $670 $188,870
Issued common shares 50,000 50,000
Cash dividends declared (4,770) (4,770)
Stock dividends 7,155 (7,155)
Comprehensive income
Net income 39,000 39,000
Other comprehensive income 0 0 0
Balance, December 31 $113,855 $4,500 $154,045 $670 $273,100

Calculations:
Cash dividends and stock dividends:
Cash dividends = $0.20 x 23,850 shares = $4,770
Stock dividends = 10% x $3.00 x 23,850 shares = $7,155
Net income = $126,000 – $87,000 = $39,000
The common shares issued on October 1, in exchange for the land, were recorded at the fair value of the land
because Linker Corporation follows IFRS.

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
11 - 57 Reporting and Analyzing Shareholders’ Equity

LEGAL NOTICE

Copyright © 2017 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved.

The data contained in these files are protected by copyright. This manual is furnished under licence
and may be used only in accordance with the terms of such licence.

The material provided herein may not be downloaded, reproduced, stored in a retrieval system,
modified, made available on a network, used to create derivative works, or transmitted in any form or
by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the
prior written permission of John Wiley & Sons Canada, Ltd.

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited