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Last revised Jan 2013

Solutions Manual to accompany Fundamental Accounting Principles, 14th Canadian Edition. © 2013 McGraw-Hill Ryerson Ltd. 13-1

SOLUTIONS MANUAL

to accompany

Fundamental Accounting Principles 14th Canadian Edition

by Larson/Jensen

Prepared by:

Tilly Jensen, Athabasca University Wendy Popowich, Northern Alberta Institute of Technology Susan Hurley, Northern Alberta Institute of Technology Ruby So Koumarelas, Northern Alberta Institute of Technology Technical checks by:

Ross Meacher Betty Young, Red River College, ANSR Source



Chapter 13 Organization and Operation of Corporations Chapter Opening Critical Thinking Challenge Questions* Why might a company stay private?

⎯ The owner(s) in a private corporation have control over the decisions being made whereas in a public company, the Board of Directors, who are representatives of the shareholders, oversee the organization.

Why might a private company go public?

⎯ A private company might go public to increase financing opportunities necessary for growth. By going public, ownership is inevitably diluted.

*The Chapter 13 Critical Thinking Challenge questions are asked at the beginning of this chapter. Students are reminded at the conclusion of Chapter 13 to refer to the Critical Thinking Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual and accessible to students on Connect.



Concept Review Questions 1. The board of directors of a corporation is responsible for directing the corporation’s

affairs. 2. Organization costs (also referred to as start-up costs) are incurred in creating a

corporation. Examples include: legal fees, promoters’ fees, accountants’ fees, costs of printing share certificates, and fees paid to the provincial legal jurisdiction to obtain a corporate charter. Organization costs are expensed when incurred.

3. The general rights of common shareholders include: (1) the right to vote in shareholders’ meetings, (2) the right to sell or otherwise dispose of shares, (3) the pre-emptive right, (4) the right to share proportionately in dividends, and (5) the right to share proportionately in assets remaining after the creditors are paid if the corporation is liquidated. In addition, shareholders have the right to receive timely and useful financial reports that describe the corporation’s financial position and the results of its activities.

4. The pre-emptive right of common shareholders is the right to maintain their relative ownership interests in the corporation by having the first opportunity to purchase their proportionate share of any additional common shares issued by the corporation.

5. The call price is the amount that a corporation must pay if it exercises the option to buy back and retire callable shares.

6. Convertible preferred shares are attractive because they offer the safety of a regular return as well as the opportunity to share in the increased value of the issuer’s common shares.

7. The average issue price for the 138,280,556 of common shares issued and outstanding on December 31, 2011 was $630,408,000/138,280,556 = $4.56 per share.

8. According to the statement of changes in equity, High Liner Foods Incorporated declared and paid dividends of $707,000 on the non-voting shares and $5,184,000 on the common shares.

9. The total dividends payable at December 31, 2011 for Shoppers Drug Mart were $53,119,000.



QUICK STUDY

Quick Study 13-1 (10 minutes)

a and d


LUDWIG LTD.

Income Statement For Year Ended October 31, 2014

Sales ......................................................................... $ 982,000 Cost of goods sold .................................................. 420,000 Gross profit .............................................................. $ 562,000 Operating expenses ................................................ 162,000 Income from operations .......................................... $ 400,000 Other revenues and expenses: Gain on sale of plant and equip. ........................ $ 4,000 Interest expense .................................................. (6,200 ) (2,200) Income before tax .................................................... $ 397,800 Income tax expense ................................................ 99,450* Net income ............................................................... $ 298,350

*Calculated as: 397,800 × .25 = 99,450


X Cash CC Preferred shares CC Common shares RE Retained earnings X Common dividend payable X Preferred dividend payable

RE Deficit CC Preferred shares, $5 non-cumulative




FORM OF BUSINESS ORGANIZATION Transaction Sole Proprietorship Corporation

Jan. 1, 2014: The owner(s) invested $10,000 into the new business

Cash ................................... 10,000 Ian Smith, Capital ......... 10,000

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

During 2014: Revenues of $50,000 were earned; all cash

Cash ................................... 50,000 Revenues ...................... 50,000

Cash ........................... 50,000 Revenues .............. 50,000

During 2014: Expenses of $30,000 were incurred; all cash

Expenses ........................... 30,000 Cash .............................. 30,000

Expenses ................... 30,000 Cash ....................... 30,000

Dec. 15, 2014: $15,000 cash was distributed to the owner(s)

Ian Smith, Withdrawals… 15,000 Cash .............................. 15,000

Cash Dividends ......... 15,000 (or R/E)

Cash ....................... 15,000 Dec. 31, 2014, Year End: All temporary accounts were closed —Close Revenue account

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

Revenues ................... 50,000 Income Summary…. 50,000

—Close Expense account Income Summary ............. 30,000 Expenses ...................... 30,000

Income Summary ...... 30,000 Expenses ............... 30,000

—Close Income Summary account to appropriate equity account(s)

Income Summary ............. 20,000 Ian Smith, Capital ......... 20,000

Income Summary ...... 20,000 Retained Earnings…. 20,000

—Close Withdrawal/Cash Dividends Declared account

Ian Smith, Capital ............. 15,000 Ian Smith, Withdrawals… 15,000

Retained Earnings .... 15,000 Cash Dividends ... 15,000 No entry if debit Retained Earnings used above.

Equity section on the balance sheet at December 31, 2014 after the first year of operations.

Vision Consulting Partial Balance Sheet

December 31, 2014 Equity Ian Smith, capital ...... $15,000

Vision Consulting Inc. Partial Balance Sheet

December 31, 2014 Equity Common shares ................... $ 10,000 Retained earnings ................ 5,000 Total equity ................................. $15,000




$48,000 + $146,000 – $47,000 – $15,000 = $132,000

OR

Retained Earnings 48,000 Bal. Dec. 31/14

146,000 Net income, 2015

Dividends, 2015 47,000 Net loss, 2016 15,000

132,000 Bal. Dec. 31/16


1. $300,000 – $120,000 + $50,000 = $230,000 2. Net income 3. Dividends


Fisher Inc. Statement of Changes in Equity

For Year Ended December 31, 2015

Common Shares

Retained Earnings Total Equity

Balance, January 1 $ 750,000 $(28,000) $ 722,000 Issuance of common shares 125,000 125,000 Net income 148,000 148,000 Dividends (40,000) (40,000) Balance, December 31 $ 875,000 $ 80,000 $ 955,000




Feb. 1 Cash ...................................................................... 252,440 Common shares ......................................... 252,440 Issued shares for cash. Feb. 12 Cash ...................................................................... 340,750 Common shares ......................................... 340,750 Issued shares for cash; 47,000 x $7.25. The average issue price is $7.02 calculated as: ($252,440 + $340,750) ÷ (37,500 + 47,000).


a. Sold common shares for cash.

b. Issued common shares to pay organization costs.

c. Issued common shares for inventory and machinery, and assumed a note payable.




a. 2014

Oct. 3 Cash ............................................................ 60,000 Preferred Shares ................................... 60,000 To record issuance of preferred shares;

4,000 × $15 = 60,000.

Nov. 19 Land ............................................................. 52,480 Preferred Shares ................................... 52,480 To record issuance of 3,400 preferred

shares in exchange for land.

b. (60,000 + 52,480)/(4,000 + 3,400) = $15.20 per preferred share.


Apr. 15 Cash Dividends ......................................................... 48,000 Common Dividend Payable ............................ 48,000 Declared a cash dividend on common

shares. June 30 Common Dividend Payable .................................... 48,000 Cash ................................................................. 48,000 Paid the cash dividend to common

shareholders. Dec. 31 Retained Earnings ................................................... 48,000 Cash Dividends ................................................ 48,000 To close the Cash Dividends account. OR Apr. 15 Retained Earnings .............................................. 48,000 Common Dividend Payable ....................... 48,000 Declared a cash dividend on common

shares. June 30 Common Dividend Payable ............................... 48,000 Cash ............................................................ 48,000 Paid the cash dividend to common

shareholders. Dec. 31 No entry required.




a. Total dividend . ................................................ 108,000

To preferred shareholders ........................ 60,000*

Remainder to common shareholders ...... $48,000

*75,000 shares × $0.40 × 2 years = $60,000 b. Total dividend . ................................................ 108,000

To preferred shareholders ........................ 30,000*

Remainder to common shareholders ...... $78,000

*75,000 shares × $0.40 for current year only = $30,000


a. The preferred shares are entitled to receive $0.50 per share when the board of directors declares dividends; if dividends are not declared, the undeclared dividends do not become a liability but go into arrears; arrears mean that the undeclared dividends must be paid to the preferred shareholders in the future along with any current dividends before the common shareholders receive dividends.

b. The total amount contributed, or given to the corporation, in exchange for ownership in the corporation.

c. The corporation is allowed to issue 20,000 shares based on its articles of incorporation.

d. 150,000 common shares have been sold and are held by shareholders. e. Accumulated net incomes less any net losses and dividends. f. An unlimited number of common shares may be issued by the corporation based

on its articles of incorporation.




a. 2014

May 31 Revenues .......................................................................... 92,000 Income Summary ........................................................ 92,000 To close revenues to the income summary. 31 Income Summary ............................................................. 58,000 Expenses ..................................................................... 58,000 To close expenses to the income summary. 31 Income Summary ............................................................. 34,000 Retained Earnings ....................................................... 34,000 To close the income summary to retained earnings. 31 Retained Earnings ...................................... 3,500 Cash Dividends ..................................... 3,500 To close cash dividends to retained earnings.

b.

PETER PUCK INC. Statement of Changes in Equity

For Year Ended May 31, 2014

Preferred

Shares Common Shares

Retained Earnings

Total Equity

Balance, June 1 $ 7,000 $ 13,000 $ 29,000 $ 49,000 Issuance of shares -0- -0- -0- Net income (loss) 34,000 34,000 Dividends (3,500) (3,500) Balance, May 31 $ 7,000 $ 13,000 $ 59,500 $ 79,500

NOTE: Because no shares were issued during the year ended May 31, 2014, the ‘Issuance of shares’ line in the Statement of Changes in Equity could be omitted.



Quick Study 13-15 (20 minutes) a.

2014 Nov. 30 Revenues ........................................................................ 87,000 Income Summary ...................................................... 87,000 To close revenues to the income summary. 30 Income Summary ........................................................... 96,000 Expenses ................................................................... 96,000 To close expenses to the income summary. 30 Retained Earnings .......................................................... 9,000 Income Summary ...................................................... 9,000 To close the income summary to retained

earnings regarding the loss.

30 Retained Earnings .......................................................... 14,000 Cash Dividends ......................................................... 14,000 To close cash dividends to retained

earnings.

b.

MORRIS INC. Statement of Changes in Equity

For Year Ended November 30, 2014

Preferred


Retained Earnings

Total Equity

Balance, December 1 $ 10,000 $ 48,000 $ 42,000 $ 100,000 Issuance of shares -0- -0- -0- Net income (loss) (9,000) (9,000) Dividends (14,000) (14,000) Balance, November 30 $ 10,000 $ 48,000 $ 19,000 $ 77,000

NOTE: Because no shares were issued during the year ended November 30, 2014, the ‘Issuance of shares’ line in the Statement of Changes in Equity could be omitted.



Quick Study 13-16 (20 minutes) a.

2014 Aug. 31 Revenues ........................................................................ 76,000 Income Summary ...................................................... 76,000 To close revenues to the income summary. 31 Income Summary ........................................................... 94,000 Expenses ................................................................... 94,000 To close expenses to the income summary. 31 Retained Earnings ......................................................... 18,000 Income Summary ...................................................... 18,000 To close the income summary to retained

earnings regarding the loss.

b.

VELOR LTD. Statement of Changes in Equity For Year Ended August 31, 2014

Preferred


Retained Earnings/(Deficit)

Total Equity

Balance, September 1 $ 10,000 $ 48,000 $ 12,000 $ 70,000 Issuance of shares -0- -0- -0- Net income (loss) (18,000) (18,000) Dividends -0- -0- Balance, August 31 $ 10,000 $ 48,000 $ (6,000) $ 52,000

NOTE: Because no shares were issued and no dividends were declared during the year ended August 31, 2014, the ‘Issuance of shares’ and ‘Dividends’ lines in the Statement of Changes in Equity could be omitted.



EXERCISES

Exercise 13-1 (20 minutes)

a) Partnership Feb. 14 Cash ........................................................................... 325,000 Les Barnhouse, Capital ..................................... 162,500 Joan Skoye, Capital ........................................... 162,500 To record investment into business by

partners.

Dec. 23 Les Barnhouse, Withdrawals ................................... 31,200 Joan Skoye, Withdrawals ......................................... 31,200 Cash ....................................................................

To record withdrawals by owners. 62,400

31 Income Summary ...................................................... 124,800 Les Barnhouse, Capital ..................................... 62,400 Joan Skoye, Capital ........................................... 62,400 To record closing of income summary to

capital.

31 Les Barnhouse, Capital ............................................ 31,200 Joan Skoye, Capital .................................................. 31,200 Les Barnhouse, Withdrawals ............................ 31,200 Joan Skoye, Withdrawals .................................. 31,200 To record closing of withdrawals to capital.



Exercise 13-1 (concluded)

b) Corporation Feb. 14 Cash ........................................................................... 325,000 Common Shares ................................................ 325,000 To record issuance of common shares. Dec. 20 Cash Dividends ......................................................... 62,400 Common Dividend Payable ............................... 62,400 To record declaration of dividends. 23 Common Dividend Payable ...................................... 62,400 Cash .................................................................... 62,400 To record payment of dividends. 31 Income Summary ...................................................... 124,800 Retained Earnings ............................................. 124,800 To record closing of income summary to

retained earnings.

31 Retained Earnings ..................................................... 62,400 Cash Dividends .................................................. 62,400 To record closing of dividends to

retained earnings.

OR b) Corporation Feb. 14 Cash ........................................................................... 325,000 Common Shares ................................................ 325,000 To record issuance of common shares. Dec. 20 Retained Earnings ..................................................... 62,400 Common Dividend Payable ............................... 62,400 To record declaration of dividends (directly

debited to retained earnings).

23 Common Dividend Payable ...................................... 62,400 Cash .................................................................... 62,400 To record payment of dividends. 31 Income Summary ...................................................... 124,800 Retained Earnings ............................................. 124,800 To record closing of income summary to

retained earnings.




2014 Jan. 15 Organization Expenses (or other various expenses) ........ 31,500 Common Shares ............................................................ 31,500 Issued common shares to promoters. Feb. 21 Cash ....................................................................................... 210,000 Common Shares ............................................................ 210,000 Issued common shares for cash;

15,000 shares x $14/share = $210,000.

Mar. 9 Cash ....................................................................................... 110,600 Preferred Shares ............................................................ 110,600 Issued preferred shares for cash. Aug. 15 Land ........................................................................................ 315,000 Building .................................................................................. 420,000 Equipment .............................................................................. 112,000 Common Shares ............................................................ 847,000 Issued common shares in exchange for land,

building, and equipment.




a) 2014

Jan. 1 Cash ............................................................................... 60,000 Preferred Shares ................................................... 60,000 Issued preferred shares; 5,000 × $12/share = 60,000. Feb. 5 Cash ............................................................................... 126,000 Common Shares ................................................... 126,000 Issued common shares. Mar. 20 Organization Expenses (or other various expenses) 28,800 Common Shares ................................................... 28,800 Issued shares to organizers for their work. May 15 Cash ............................................................................... 350,400 Preferred Shares ................................................... 158,400 Common Shares ................................................... 192,000 Issued preferred and common shares; 12,000 × $13.20/share =

$158,400; 20,000 × $9.60/share = $192,000.

Dec. 31 Retained Earnings ........................................................ 329,000 Income Summary .................................................. 329,000 Closed the net loss to Retained Earnings.

b) FIERRA SCEPTRE INC. Equity Section of the Balance Sheet December 31, 2014

Contributed Capital: Preferred Shares, $1.50; 50,000 shares authorized; 17,0001 shares issued and outstanding ................. $218,4001 Common Shares 300,000 shares authorized; 38,0002 shares issued and outstanding ................. 346,8002 Total contributed capital ............................................. $565,200 Deficit ................................................................................. (329,000) Total equity ....................................................................... $236,200

Calculations:

1. Preferred Shares: Shares Dollars Jan. 1 Issued 5,000 shares (5,000 x $12.00) ................................ 5,000 $ 60,000 May 15 12,000 shares issued (12,000 x $13.20) ............................ 12,000 158,400

Totals .................................................................................... 17,000 $ 218,400



Exercise 13-3 (concluded) 2. Common Shares:

Feb. 5 Issued 15,000 shares .......................................................... 15,000 $126,000 Mar. 20 Issued 3,000 shares ............................................................ 3,000 28,800 May 15 20,000 shares issued (20,000 x $9.60) .............................. 20,000 192,000

Totals .................................................................................... 38,000 $346,800 c) The $1.50 is the dividend entitlement per preferred share or how much each

preferred share is supposed to get in dividends each year.


March 1 Cash Dividends or Retained Earnings ........................... 93,750 Common Dividends Payable ................................. 93,750 To record declaration of cash dividend on common

shares of $0.75 per share.

10 No entry.

31 Common Dividends Payable ........................................... 93,750 Cash ...................................................................... 93,750 Paid the dividends declared on March 1.




2014 June 5 Organization Expenses (or other various expenses) ....... 84,500

Common Shares ............................................................. 84,500 Issued 4,000 common shares to promoters.

15 Cash ........................................................................................ 1,650,000 Common Shares ............................................................. 1,650,000 Issued common shares for cash;

75,000 shares x $22/share = $1,650,000.

16 Cash ........................................................................................ 390,000

Preferred Shares ............................................................ 390,000 Issued preferred shares for cash;

10,000 shares x $39/share = $390,000.

17 Accounts Payable ................................................................. 130,000

Common Shares ............................................................. 130,000 Issued 8,000 common shares to a creditor.

18 Cash Dividends or Retained Earnings ............................... 24,500 Common Dividends Payable ......................................... 5,000 Preferred Dividends Payable ......................................... 19,500 Declared dividends.

30 Machinery ............................................................................... 2,400,000

Common Shares ............................................................... 2,400,000 Issued common shares in exchange for

machinery; 150,000 shares x $16.00/share = $2,400,000.

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

Preferred Dividends Payable ...................................................................................... 19,500 Cash ....................................................................................................................... 24,500 Paid the dividends declared June 18.




a) 2014

Jan. 1 Organization Expenses (or other various exp.) ................................................................... 12,000 Common Shares ............................................................................................................... 12,000 To record issuance of shares. 5 Cash ............................................................................................................................................. 202,500 Common Shares ................................................................................................................. 202,500 To record issuance of shares, 15,000 × $13.50 15 Cash Dividends or Retained Earnings .................................................................................. 12,000 Common Dividends Payable ........................................................................................... 12,000 Declared dividends; $0.75 x 16,000 = $12,000 20 Land ........................................................................................................................................... 46,000 Common Shares ............................................................................................................... 46,000 To record issuance of shares:

4,000 x $11.50.

31 Income Summary ..................................................................................................................... 165,000 Retained Earnings ............................................................................................................ 165,000

To close income summary to retained

earnings.

31 Common Dividends Payable .................................................................................................. 12,000 Cash ................................................................................................................................... 12,000 Paid dividends.




b) ABGENIX CORP. Equity Section of the Balance Sheet January 31, 2014 Common shares, unlimited shares authorized, 20,0001 shares issued and outstanding ........... $260,5001 Retained earnings .................................................... 153,0002

Total equity ............................................................... $413,500 c) Average Issue Price $260,500 ÷ 20,000 shares = $13.03 per share.

Calculations:

1. Shares Dollars Jan. 1 Issued 1,000 shares ............................................................ 1,000 $ 12,000

5 Issued 15,000 shares (15,000 x $13.50) ............................ 15,000 202,500 20 Issued 4,000 shares (4,000 x $11.50) ................................ 4,000 46,000

Totals .................................................................................... 20,000 $260,500 2. $165,000 – $12,000 = $153,000




1. $3.75 Cumulative Preferred Shares: $3.75/share × 40,000 shares = $150,000 each year × 3 years = $450,000 $10 Noncumulative Preferred Shares: $10/share × 8,000 shares = $80,000 Common Shares: $613,300 – (450,000 + 80,000) = $83,300

2. Dec. 31/13 Retained Earnings Balance + 2014 Net Income of $1,250,000 – 2014

Dividends of $613,300 = Dec. 31/14 Retained Earnings Balance of $741,600

Therefore,

Dec. 31/13 Retained Earnings Balance = $104,900 OR

Retained Earnings

X Bal. Dec. 31/13

2014

dividends

613,300

1,250,000

2014 net income

741,600

Bal. Dec. 31/14




3. ZALICUS INC.

Statement of Changes in Equity For Year Ended December 31, 2014

Preferred Shares,

$3.75 Cum.

Preferred Shares,

$10 Non-Cum.

Common Shares

Retained Earnings

Total Equity

Balance, January 1

$1,660,000 $ 670,000 $1,750,000 $ 104,900 $4,184,900 Issuance of shares -0- -0- -0- -0- Net income (loss) 1,250,000 1,250,000 Dividends (613,300) (613,300)

Balance, December 31

$1,660,000

$ 670,000 $1,750,000 $ 741,600 $4,821,600

NOTE: Because no shares were issued during the year ended December 31, 2014, the ‘Issuance of shares’ line in the Statement of Changes in Equity could be omitted.




WHITE PEAR INC. Equity Section of the Balance Sheet

December 31, 2014 Contributed Capital: Preferred shares, $3.60 noncumulative: 100,000 shares authorized, 75,000 shares issued and outstanding

A. $2,700,000

Common shares

Unlimited shares authorized, E. 250,000 shares B. 3,550,000 ? shares issued and outstanding ................ Total contributed capital ................................... $6,250,000

Retained earnings .................................................. C. 1,380,000

Total equity ............................................................. D. $7,630,000

Calculations: A. $36.00 × 75,000 shares = $2,700,000 B. $6,250,000 – $2,700,000 = $3,550,000 C. $192,000 + $1,728,000 – $540,000 = $1,380,000

OR

Retained Earnings 192,000 540,000 1,728,000 1,380,000

D. $6,250,000 + $1,380,000 = $7,630,000 E. $3,550,000 ÷ $14.20 = 250,000 shares



Exercise 13-9 (20 minutes) 1. $6/share × 8,000 shares = $48,000 2. Yes. Calculation is $48,000 × 2 years = $96,000 3. a) ($6 × 8,000 shares) = $48,000 × 3 years = $144,000

b) $4.80 × 45,000 = $216,000 4. $126,000 + $408,000 – $144,000 – $216,000 = $174,000 5. $192,000 + $540,000 = $732,000 6. $732,000 + $174,000 = $906,000 7. 10,000 – 8,000 = 2,000 8. $192,000/8,000 shares = $24/share


NOTE: The holders of the cumulative preferred shares are entitled to no more than $451,200 of dividends in any year ($9.60 × 47,000 shares) plus any dividends in arrears.

Preferred Common

2014 ($0): Preferred—current ...................................................... $ 0 Common—remainder ................................................. $ 0 Total for the year ......................................................... $ 0 $ 0

2015 ($480,000): Preferred—arrears ...................................................... $ 451,200 Preferred—current ($480,000 – $451,200) ................ 28,800 Common—remainder ................................................. $ 0 Total for the year ......................................................... $ 480,000 $ 0

2016 ($1,008,000): Preferred—arrears ($451,200 – $28,800) ................... $ 422,400 Preferred—current ...................................................... 451,200 Common—remainder ($1,008,000 – $873,600) ......... $134,400 Total for the year ......................................................... $ 873,600 $134,400

2017 ($480,000): Preferred—current ...................................................... $ 451,200 Common—remainder ($480,000 – $451,200) ............ $ 28,800 Total for the year ......................................................... $ 451,200 $ 28,800 Total for four years ..................................................... $1,804,800 $163,200




NOTE: The holders of the noncumulative preferred shares are entitled to no more than $451,200 of dividends in any year ($9.60 × 47,000 shares).

Preferred Common

2014 ($0): Preferred—current ...................................................... $ 0 Common—remainder ................................................. $ 0 Total for the year ......................................................... $ 0 $ 0

2015 ($480,000): Preferred—current ...................................................... $ 451,200 Common—remainder ($480,000 – $451,200) ............ $ 28,800 Total for the year ......................................................... $ 451,200 $ 28,800

2016 ($1,008,000): Preferred—current ...................................................... 451,200 Common—remainder ($1,008,000 – $451,200) ......... $556,800 Total for the year ......................................................... $ 451,200 $556,800

2017 ($480,000): Preferred—current ...................................................... $ 451,200 Common—remainder ($480,000 – $451,200) ............ $ 28,800 Total for the year ......................................................... $ 451,200 $ 28,800

Total for four years ..................................................... $1,356,600 $614,400


1. B 4. E 2. A 5. D 3. F 6. C


1. (15,000 shares × $5.40/share) × 2 years = $162,000 2. $180,000 Total dividends – $162,000 paid to preferred shareholders = $18,000 to common shareholders




2014 Dec. 31 Revenue .......................................................................... 271,600

Income Summary .................................................... 271,600 To close the revenue account to the income

summary.

31 Income Summary ........................................................... 149,800

Income Tax Expense .............................................. 40,600 Operating Expenses ............................................... 109,200 To close the expense accounts to the income

summary.

31 Income Summary ........................................................... 121,800

Retained Earnings .................................................. 121,800 To close the income summary to retained earnings.

31 Retained Earnings ......................................................... 19,600 Cash Dividends ....................................................... 19,600 To close the Cash Dividends account to Retained

Earnings.

Post-Closing Balance in Retained Earnings: Retained Earnings, December 31, 2013 .................. $ 27,720 Add: Net income for the year .................................. 121,800 Less: Cash Dividends .............................................. 19,600 Retained Earnings, December 31, 2014 .................. $129,920 OR Retained Earnings 27,720 Bal. Dec. 31/13 Cash

Dividends

19,600

121,800

2014

Net income

129,920 Bal. Dec 31/14




XMET INC. Balance Sheet

December 31, 2014 Assets Current assets: Cash .................................................................... $ 8,400 Accounts receivable .......................................... 39,200 Total current assets ........................................ $ 47,600 Property, plant and equipment: Land .................................................................... $117,600 Warehouse ......................................................... $128,800 Less: Accumulated depreciation ................ 21,280 107,520 Equipment .......................................................... $ 78,400 Less: Accumulated depreciation ................ 10,640 67,760 Total property, plant and equipment .............. 292,880 Total assets .................................................................. $340,480 Liabilities Current liabilities : Accounts payable .............................................. $ 25,760 Long-term liabilities: Long term note payable, due in 2017 ............. 33,600 Total liabilities .............................................................. $ 59,360 Equity Contributed Capital: Preferred shares ................................................ $ 39,200 Common shares ................................................ 112,000 Total contributed capital ................................. $151,200 Retained earnings .................................................. 129,920 Total equity .................................................................. 281,120 Total liabilities and equity ........................................... $340,480

1. 83% ($281,120 ÷ $340,480 = 83%) 2. 83% ($281,120 ÷ $340,480 = 83%) 3. 17% ($59,360 ÷ $340,480 = 17%) 4. 71% [($112,000 + $129,920) ÷ $340,480 = 71%] 5. 12% ($39,200 ÷ $340,480 = 12%) 6. The main advantage to the common shareholders of issuing preferred shares over

additional common shares is that the common shareholders will retain ownership, hence, control.



Exercise 13-16

1. 2014

Jan. 3 Cash 34,400 Common Shares ................................................. 34,400 Issued common shares for cash. Mar . 1 Cash ............................................................................. 24,000 Preferred Shares (5,000 x $4.80) ....................... 24,000 Issued preferred shares for cash. June 15 Equipment ................................................................... 26,000 Common Shares ................................................. 26,000 Issued common shares in exchange for equipment. Dec. 31 Income Summary ....................................................... 280,000 Retained Earnings .............................................. 280,000 Closed the income summary to retained earnings. 2. DELICIOUS ALTERNATIVE DESSERTS INC.

Equity Section of the Balance Sheet December 31, 2014

Contributed Capital: Preferred shares, $0.40 cumulative 80,000 shares authorized, 65,0001 shares issued and outstanding ............... $264,0001 Common shares, 250,000 shares authorized, 147,0002 shares issued and outstanding ............. 252,4002 Total contributed capital ........................................... $516,400 Retained earnings3 ......................................................... 428,000 Total equity ..................................................................... $944,400

3. 15,000 (calculated as 80,000 shares authorized less 65,000 shares issued and

outstanding) 4. 103,000 (calculated as 250,000 shares authorized less 147,000 shares issued and

outstanding)




Calculations:

1. Preferred Shares: Shares Dollars Jan. 1 Balance brought forward .................................................... 60,000 $240,000 Mar. 1 Issued 5,000 shares (5,000 x $4.80) .................................. 5,000 24,000

Totals .................................................................................... 65,000 $264,000 2. Common Shares: Shares Dollars Jan. 1 Balance brought forward .................................................... 120,000 $192,000

3 20,000 shares issued .......................................................... 20,000 34,400 Jun. 15 Issued 7,000 shares ............................................................ 7,000 26,000

Totals .................................................................................... 147,000 $252,400 3. Retained Earnings: Dollars Jan. 1 Balance brought forward .................................................... $148,000 Dec. 31 Net income ........................................................................... 280,000

Totals .................................................................................... $428,000



Exercise 13-17

Part A 2014 Oct. 1 Cash .................................................................................... 4,800

Preferred Shares ........................................................... 4,800 Issued preferred shares; 1,000 shares × $4.80/share.

10 Cash .................................................................................... 180,000 Common Shares ............................................................ 180,000 Issued common shares; 50,000 shares × $3.60/share.

15 Land ..................................................................................... 186,000 Cash ............................................................................... 66,000 Notes Payable ................................................................ 120,000 Purchased land in exchange for cash and a note.

20 Cash .................................................................................... 84,600 Preferred Shares ........................................................... 84,600 Issued preferred shares for cash.

24 Cash Dividends (or Retained Earnings) ........................... 36,480 Common Dividends Payable ........................................ 26,880 Preferred Dividends Payable ....................................... 9,600 Declared dividends; 16,000 preferred shares × $0.60 = $9,600.

31 Cash .................................................................................... 900,000 Revenues ....................................................................... 900,000 To record revenues.

31 Expenses ............................................................................ 300,000 Cash ............................................................................... 300,000 To record expenses.

31 Income Summary ............................................................... 600,000 Retained Earnings ......................................................... 600,000 To record closing of income summary to retained earnings.

31 Retained Earnings* ............................................................ 36,480 Cash Dividends ............................................................. 36,480 To record closing of dividends to retained earnings (*or no entry if on Oct. 24 it was debited to Retained Earnings).




Part B EARTH STAR DIAMONDS INC.

Balance Sheet October 31, 2014

Assets Current assets: Cash .................................................................................. $803,400 Property, plant and equipment: Land ................................................................................. 186,000 Total assets ................................................................................ $989,400 Liabilities Current liabilities Dividends payable ........................................................... $ 36,480 Long term liabilities: Long term note payable .................................................. 120,000 Total liabilities ............................................................................ $156,480 Equity Contributed Capital: Preferred shares, $0.60 cumulative, 100,000 shares authorized, 16,000 shares issued and outstanding: ............................................

$ 89,4001

Common shares, 500,000 shares authorized, 50,000 shares issued and outstanding: .........................

180,000

Total contributed capital ...................................................... $269,400 Retained earnings ................................................................ 563,5202 Total equity ........................................................................... 892,920 Total liabilities and equity ......................................................... $989,400

Calculations:

1. Preferred Shares: Shares Dollars Oct. 1 Issued 1,000 shares (1,000 x $4.80) .................................. 1,000 $4,800 Oct. 20 Issued 15,000 shares ......................................................... 15,000 84,600

Totals .................................................................................... 16,000 $89,400

2. Retained Earnings: Dollars Oct. 24 Dividends ............................................................................. $(36,480) Oct. 31 Net income ........................................................................... ..... 600,000

Totals .................................................................................... $563,520



PROBLEMS

Problem 13-1A (40 minutes)

WARATAH PHARMACEUTICALS INC. Balance Sheet March 31, 2014

Assets

Current assets Cash ....................................................................... $ 28,800 Accounts receivable ............................................. $67,200 Less: Allowance for doubtful accounts ............. 3,600 63,600 Prepaid rent ........................................................... 55,200 Total current assets .............................................. $147,600 Property, plant and equipment Vehicles .................................................................. $ 81,600 Less: Accumulated depreciation, vehicles ........ 62,400 $ 19,200 Equipment .............................................................. $468,000 Less: Accumulated depreciation, equipment .... 148,800 319,200 Total property, plant and equipment ................... 338,400 Intangible assets Patent ..................................................................... $115,200 Less: Accumulated amortization, patent ........... 50,400 64,800 Total assets .............................................................. $550,800

Liabilities Current liabilities Accounts payable ................................................. $ 20,400 Advertising payable .............................................. 3,000 Income tax payable ............................................... 55,200 Unearned revenues ............................................... 27,600 Current portion of notes payable ........................ 60,000 Total current liabilities .......................................... $166,200 Long-term liabilities Notes payable, less $60,000 current portion ...... 84,000 Total liabilities .......................................................... $250,200

Equity Contributed capital Common shares, 100,000 shares authorized, 25,000 shares issued ...................................... $240,000 Retained earnings* ................................................ 60,600* Total equity ............................................................ 300,600 Total liabilities and equity ....................................... $550,800

*Calculation: 550,800 – (250,200 + 240,000) = 60,600



Problem 13-1A (concluded)

Analysis component: 1. 45.42% (250,200/550,800 × 100) 2. 54.58% (100 – 45.42) 3. Assuming that 37% of the company’s assets were financed

by debt at March 31, 2013, the balance sheet has not been strengthened over the current year.


Retained earnings December 31, 2014 .................................................... $558,608 Reductions in retained earnings due to transactions: Cash dividends declared: March 16, on 96,000 shares (96,000 × $0.20) .................................. $ 19,200 June 15, on 96,000 shares ................................................................ 19,200 Sept. 5, on 96,000 shares .................................................................. 19,200 Nov. 22, on 115,200 shares (115,200 × $0.20) 23,040 80,640 Less: Retained earnings December 31, 2015 ......................................... 459,600 Net loss ....................................................................................................... $ 18,368




2014 Apr. 1 Preferred Shares ................................................................ 240,000

Common Shares .......................................................... 240,000 To record the conversion of 1,000 preferred /

shares into 8,000 common shares; $600,000 ÷ 2,500 shares = $240 average issue price per preferred share; $240 x 1,000 = $240,000 (or 1,000/2,500 × $600,000 = $240,000).

Immediately after the conversion of the preferred shares, the equity section would still show 2,500 preferred shares authorized, but only 1,500 shares issued and outstanding. The amount of preferred shares would change from $600,000 to $360,000. Common shares would still show unlimited shares authorized, and 48,000 shares issued and outstanding. The amount of common shares would be $1,200,000 instead of $960,000. Retained earnings would not be affected. Total equity also would not be affected because $240,000 has simply shifted from the preferred shares section to the common shares section.

Analysis component:

As a result of the conversion, a smaller total dividend would be paid to preferred shares and a larger total dividend would be paid to common shares. However, as a common shareholder, you would not want the conversion of preferred shares to take place before the dividend. The reason is that the conversion increases the number of common shares outstanding by 8,000 and the dividend per share of common would be smaller. Even though there is more cash left over for the common shareholders after the conversion, the dividend per common share is less because there are more common shares dividing the cash. Before the conversion, there are 2,500 shares of $17 preferred. Therefore, $42,500 of the $720,000 paid out in dividends goes to the preferred shareholders. If the remaining $677,500 is divided by 40,000 common shares outstanding, the common dividend per share is $16.94. However, after the conversion, $25,500 ($17 x 1,500) of the $720,000 paid out in dividends goes to the 1,500 shares of $17 preferred, and the remaining $694,500 is divided between the 48,000 common shares outstanding. This reduces the dividend per share to $14.47.




1. $540,000/$18 per share = 30,000 shares 2. 325,000 shares × $9.60 per share = $3,120,000 3. $540,000 + $3,120,000 = $3,660,000 4. $3,660,000 – $3,468,000 = $192,000 Deficit 5. 384,000 Beginning R/E Balance + 192,000 Ending Deficit Balance = 576,000 Net Loss 6. a) $3.00/share × 30,000 shares = $90,000 to preferred shareholders

b) $120,000 – $90,000 paid to preferred shareholders = $30,000 to common shareholders

7. a) $90,000/30,000 shares = $3.00/share

b) $30,000/325,000 shares = $.0923/share 8. No, because the preferred shares are non-cumulative. 9. Retained Earnings result when cumulative net earnings are greater than cumulative

losses + dividends. A deficit results when cumulative earnings are less than cumulative losses and dividends.

10. Dividends in arrears represent undeclared dividends that must be paid to preferred

shareholders before any dividends are given to common shareholders but only if dividends are declared. Dividends payable, in contrast, are dividends that have been declared but not yet paid.




Part A – Non-cumulative (maximum annual dividend: 45,000 x $4.48 = $201,600) 1.

Year

Preferred Dividends

Common Dividends

Total Dividends

2012 $160,000 0 $ 160,000

2013 201,600 $198,400 400,000

2014 201,600 358,400 560,000

Total for three years $563,200 $556,800 $1,120,000

2. Preferred Shares: $201,600/45,000 shares = $4.48 per share

Common Shares: $358,400/80,000 shares = $4.48 per share Part B — Cumulative 1.

Year

Preferred Dividends

Common Dividends

Total Dividends

2012 $160,000 0 $ 160,000

2013 201,600 + 41,600 = 243,200

$156,800 400,000

2014 201,600 358,400 560,000

Total for three years $604,800 $515,200 $1,120,000

2. Preferred Shares: $201,600/45,000 shares = $4.48 per share Common Shares: $358,400/80,000 shares = $4.48 per share

Analysis component:

Cumulative preferred shares would have a greater market value than non-cumulative because undeclared dividends are never lost on cumulative preferred shares whereas undeclared dividends on non-cumulative shares are lost. Therefore, the potential return to the shareholder on cumulative preferred shares would be higher.




Part 1. Journal entries:

2015

Jan. 5 Cash Dividends or Retained Earnings .............. 64,000 Common Dividend Payable ............................. 64,000 Declared dividend on 20,000 outstanding

shares.

Feb. 28 Common Dividend Payable ..................................... 64,000 Cash .................................................................. 64,000 Paid cash dividend.

July 6 Cash (750 × $38.40) ................................................... 28,800 Common shares ............................................... 28,800 Issued common shares.

Aug. 22 Cash (1,250 × $27.20) ................................................ 34,000 Common shares ............................................... 34,000 Issued common shares.

Sept. 5 Cash Dividends or Retained Earnings ............... 70,400 Common Dividend Payable ............................. 70,400 Declared dividend on 22,000 outstanding

shares. Oct. 28 Common Dividend Payable ..................................... 70,400 Cash .................................................................... 70,400 Paid cash dividend.

Dec. 31 Income Summary ...................................................... 347,200 Retained Earnings ............................................. 347,200 Closed the Income Summary account.

31 Retained Earnings .................................................... 134,400 Cash Dividends .................................................. 134,400 Closed the cash dividend account (Note: No entry is required if Retained Earnings was debited in the Sept. 5 entry and Jan. 5 entry).




Part 2

UMAMI SUSTAINABLE SEAFOOD INC. Statement of Changes in Equity


Common

Shares Retained Earnings

Total Equity

Balance, January 1 $ 368,000 $ 216,000 $ 584,000 Issuance of shares 62,800 62,800 Net income (loss) 347,200 347,200 Dividends (134,400) (134,400) Balance, December 31 $ 430,800 $ 428,800 $ 859,600

Part 3

UMAMI SUSTAINABLE SEAFOOD INC. Equity Section of the Balance Sheet

December 31, 2015

Contributed capital: Common shares, unlimited shares authorized, 22,0001 shares issued and outstanding .................................................................. $430,8001 Retained earnings ..................................................................... 428,800 Total equity ................................................................................ $859,600

Calculations:

1. Common Shares: Shares Dollars Jan. 1 Balance brought forward .................................................... 20,000 $368,800 July 6 Issued 750 shares (750 x $38.40) ...................................... 750 28,800 Aug. 22 Issued 1,250 shares (1,250 x $27.20) ................................ 1,250 34,000

Totals .................................................................................... 22,000 $430,800 Analysis component: The relationship between assets and retained earnings is that retained earnings represents how much of the assets are financed by the accumulated profits less losses less distributions of dividends. In other words, retained earnings is a component of equity and we know that assets are financed in part by equity. Using the information in Part (3) above for Umami Sustainable Seafood Inc., we know that $428,800 of the assets are financed by retained earnings as at December 31, 2015.




Part 1

2014 Jan. 12 Cash ......................................................................................... 192,000 Common Shares ................................................................. 192,000 To record issuance of shares. 20 Organization Expenses (or various other expenses) ........ 36,000 Common Shares ................................................................. 36,000 To record issuance of shares in exchange for organization efforts. 31 Land ......................................................................................... 360,000 Building ................................................................................... 480,000 Equipment ............................................................................... 48,000 Common Shares ................................................................. 888,000 To record exchange of shares for PPE assets. Mar. 4 Equipment ............................................................................... 8,160 Cash ..................................................................................... 8,160 To record purchase of equipment. Dec. 31 Retained Earnings .................................................................. 96,000 Income Summary ................................................................

To record closing of income summary to retained earnings. 96,000

2015 Jan. 4 Cash ......................................................................................... 360,000 Preferred Shares ................................................................. 360,000 To record issuance of preferred shares. Dec. 31 Income Summary ................................................................... 216,000 Retained Earnings .............................................................. 216,000 To record closing of income summary to retained earnings. 2016 Dec. 4 Retained Earnings or Cash Dividends ................................ 87,120 Preferred Dividends Payable ............................................ 72,000 Common Dividends Payable ............................................. 15,120 To record declaration of dividends; 126,000 C/S × $0.12 = 15,120;

5,000 P/S × $14.40 = 72,000.

18 Preferred Dividends Payable ............................................. 72,000 Common Dividends Payable ............................................. 15,120 Cash ................................................................................. 87,120 To record the payment of dividends.



Problem 13-7A (continued)

31 Retained Earnings ............................................................... 87,120 Cash Dividends .............................................................. 87,120 To close the cash dividends account (assuming the

Cash Dividends account was debited on December 4).

31 Income Summary ................................................................ 192,000 Retained Earnings ........................................................ 192,000 To close the income summary account.

Part 2

HAMMOND MANUFACTURING INC. Statement of Changes in Equity


Preferred


Retained Earnings

Total Equity

Balance, January 1 $360,000 $1,116,000 $120,000 $1,596,000 Issuance of shares -0- -0- -0- Net income (loss) 192,000 192,000 Dividends (87,120) (87,120) Balance, December 31 $360,000 $1,116,000 $224,880 $1,700,880





Part 3

HAMMOND MANUFACTURING INC. Equity Section of the Balance Sheet

December 31, 2016 Contributed Capital:

Preferred shares, $14.40 noncumulative, 100,000 shares authorized, 5,000 shares issued & outstanding ..................................................... $ 360,000 Common shares, unlimited shares authorized, 126,0001 shares issued and outstanding ...........................................

1,116,0001 Total contributed capital ............................................................................................... $1,476,000

Retained earnings .............................................................................................................. 224,880 Total equity .......................................................................................................................... $1,700,880

Calculations:

1. Common Shares: 2014 Shares Dollars

Jan. 12 Issued 40,000 shares (40,000 x $4.80) .............................. 40,000 $ 192,000 20 Issued 6,000 shares ............................................................ 6,000 36,000 31 Issued 80,000 shares .......................................................... 80,000 888,000

Totals .................................................................................... 126,000 $1,116,000 Analysis component:

2014 2013 2016 Net assets

$192,000 + $36,000 + $888,000 – $96,000 =

$1,020,000

$1,020,000 + $360,000 + $216,000 = $1,596,000

$1,596,000 – $87,120 + $192,000 = $1,700,880

Trend (F or U)

F

The trend is favourable as net assets (aka equity) is increasing.




1. 2014

Jan. 1 Cash ....................................................................................... 319,200 Common shares .......................................................... 319,200 Issued 30,000 common shares; 30,000 x $10.64.

5 Cash Dividends or Retained Earnings ................................ 231,000 Preferred Dividend Payable ....................................... 126,000 Common Dividend Payable ........................................ 105,000 Declared dividend on preferred shares

(20,000 x $2.10 x 3 years) and common shares (231,000 – 126,000).

Feb. 28 Preferred Dividend Payable ................................................. 126,000 Common Dividend Payable .................................................. 105,000 Cash ............................................................................. 231,000 Paid cash dividends.

July 1 Cash ....................................................................................... 156,800 Preferred Shares ......................................................... 159,800 Issued 7,000 preferred shares

(156,800 ÷ $22.40 = 7,000 shares).

Dec. 31 Retained Earnings ................................................................ 231,000 Cash Dividends .............................................................. 231,000 Closed the dividend account (assuming Retained

Earnings was not debited directly on the January 5 declaration date).

31 Income Summary .................................................................. 576,800

Retained Earnings ......................................................... 576,800 To close net income to retained earnings.



Problem 13-8A (continued)

2015

Sept. 5 Cash Dividends or Retained Earnings ................................ 203,700 Preferred Dividend Payable ....................................... 56,700 Common Dividend Payable ........................................ 147,000 Declared dividend on preferred shares

($2.10 × 27,000 = 56,700) and common shares ($1.40 × 105,000 = 147,000).

Oct. 28 Preferred Dividend Payable ................................................. 56,700 Common Dividend Payable .................................................. 147,000 Cash ............................................................................. 203,700 Paid cash dividends declared. Dec. 31 Retained Earnings ................................................................ 203,700 Cash Dividends ........................................................... 203,700 Closed the dividend account (assuming Retained

Earnings was not debited directly on the September 5 declaration date).

31 Income Summary .................................................................. 543,200 Retained Earnings ...................................................... 543,200 Closed the Income Summary account. 2.

TACTEX CONTROLS INC. Statement of Changes in Equity


Preferred


Retained Earnings

Total Equity

Balance, January 1 $548,800 $1,054,200 $ 723,800 $2,326,800 Issuance of shares -0- -0- -0- Net income (loss) 543,200 543,200 Dividends (203,700) (203,700) Balance, December 31 $548,800 $1,054,200 $1,063,300 $2,666,300





3. TACTEX CONTROLS INC.

Equity Section of the Balance Sheet December 31, 2015

Contributed Capital:

Preferred shares, $2.10 cumulative, unlimited shares authorized, 27,000 shares issued and outstanding ............................................................................................................

$ 548,800

Common shares, unlimited shares authorized 105,000 shares issued and outstanding ..........................................................................................................

1,054,200

Total contributed capital ................................................................................................................................... $1,603,000 Retained earnings ....................................................................................................................................................

1,063,300 Total equity ............................................................................................................................................................... $2,666,300

Calculations:

1. Preferred Shares: Shares Dollars 2014

Jan. 1 Balance brought forward .................................................... 20,000 $392,000 July 1 Issued 7,000 shares ............................................................ 7,000 156,800

Totals .................................................................................... 27,000 $548,800 2. Common Shares:

2014 Jan. 1 Balance brought forward .................................................... 75,000 $ 735,000 Jan. 1 Issued 30,000 shares (30,000 x $10.64) ............................ 30,000 319,200

Totals .................................................................................... 105,000 $1,054,200



ALTERNATE PROBLEMS

Problem 13-1B (40 minutes)

IALTA INDUSTRIES INC. Balance Sheet

October 31, 2014 Assets Current assets: Cash .................................................................... $ 497,000 Accounts receivable .......................................... 315,000 Office supplies ................................................... 119,000 Prepaid insurance ............................................. 20,400 Total current assets .......................................... $ 951,400 Property, plant, and equipment: Land .................................................................... $1,400,000 Building .............................................................. $4,025,000 Less: Accumulated depreciation .................... 1,166,200 2,858,800 Machinery ........................................................... $2,240,000 Less: Accumulated depreciation ................... 1,068,200 1,171,800 Total property, plant and equipment ............... 5,430,600 Total assets .................................................................. $6,382,000 Liabilities Current liabilities: Accounts payable .............................................. $ 221,200 Wages payable ................................................... 156,000 Unearned fees .................................................... 33,600 Total current liabilities ...................................... $ 410,800 Long-term liabilities: Long term liabilities (due in 2018) .................... 770,000 Total liabilities ............................................................ $1,180,800 Equity Contributed Capital: Preferred Shares, $2.10 non-cumulative, unlimited shares authorized, 30,000 shares issued and outstanding ..............

$1,440,0001

Common Shares, unlimited shares authorized, 50,000 shares issued and outstanding ..............

2,240,0002

Total contributed capital ........................................ $3,680,000 Retained earnings .................................................. 1,521,2003 Total equity ................................................................ 5,201,200 Total liabilities and equity ........................................... $6,382,000 (calculations for 1, 2, and 3 are on the next page)



Problem 13-1B (concluded)

Calculations: 1. 30,000 preferred shares × $48/share = $1,440,000 2. 50,000 common shares × $44.80/share = $2,240,000 3. $6,382,000 Total assets – $1,180,800 Total liabilities – $3,680,000 Total contributed capital = $1,521,200 Retained earnings




Retained earnings December 31, 2014 .................................................... $1,176,432 Reductions in retained earnings due to transactions: Cash dividends declared: Feb. 11, on 175,000 shares (175,000 × $0.30) ................................ $52,500 May 24, on 175,000 shares .............................................................. 52,500 Aug. 13, on 182,500 shares (182,500 × $0.30) ............................... 54,750 Dec. 12, on 192,500 shares (192,500 × $0.30) ............................... 57,750 217,500 Less: Retained earnings December 31, 2015 ......................................... 1,320,300 Net income ................................................................................................. $ 361,368


2014 Dec. 1 Preferred Shares ................................................................ 240,000

Common Shares .......................................................... 240,000 To record the conversion of 1,000 preferred

shares into 8,000 common shares; $480,000 ÷ 2,000 shares = $240 average issue price per preferred share; $240 x 1,000 = $240,000 (or 1,000/2,000 × $480,000 = $240,000).

Immediately after the conversion of preferred shares, the equity section would still

show 2,000 shares of preferred shares authorized, but only 1,000 shares issued and outstanding. The amount of preferred shares would change from $480,000 to $240,000. Common shares would still show unlimited shares authorized, and 68,000 shares issued. The amount of common shares would be $1,680,000 instead of $1,440,000. Retained earnings would not be affected. Total equity also would not be affected because $240,000 has simply shifted from the preferred share section to the common share section.

Analysis component:

As a common shareholder, you would not want the conversion of preferred shares to take place. As a result of the conversion, a smaller total dividend would be paid to preferred shares and a larger total dividend would be paid to common shares. However, the dividend per common share is less because there are more common shares dividing the cash. Before the conversion, there are 2,000 shares of $13.20 preferred. Therefore, $26,400 of the $584,400 paid out in dividends goes to the preferred shareholders. If the remaining $558,000 is divided by 60,000 shares of common shares outstanding, the common dividend per share is $9.30. However, after the conversion, $13,200 of the $584,400 paid out in dividends goes to the 1,000 shares of $13.20 preferred, and the remaining $571,200 is divided between the 68,000 common shares outstanding. This reduces the common dividend per share to $8.40.




1. A = $12/share × 45,000 shares = $540,000 2. B = $2,280,000/$60 per share = 38,000 shares 3. C = 265,000 shares × $3.00/share = $795,000 4. D = $540,000 + $2,280,000 + $795,000 = $3,615,000 5. E = $1,500,000 + $1,050,000 + $780,000 – $1,320,000 – $720,000 = $1,290,000 6. F = $3,615,000 + $1,290,000 = $4,905,000 7. 3 years (2012, 2013 2014) × ($4.80 per share × 45,000 shares) = $648,000

Problem 13-5B (20 minutes) 1.

Year

Dividends Declared and Paid

Preferred Dividends

Common Dividends

2013

$360,000

$288,000

$ 72,000

2014

60,000

60,000

0

2015

150,000

150,000

0

2016

$900,000

$654,000

$246,000

2.

Year

Dividends Declared and Paid

Preferred Dividends

Common Dividends

2013

$360,000

$288,000

$ 72,000

2014

60,000

60,000

0

2012

150,000

150,000

0

2013

$900,000

$288,000

$612,000



Problem 13-6B (60 minutes) Part 1. Journal entries:

Mar. 2 Cash Dividends or Retained Earnings ................... 90,000 Common Dividend Payable ............................. 90,000 Declared dividend on 100,000 outstanding

shares.

31 Common Dividend Payable ..................................... 90,000 Cash .................................................................. 90,000 Paid cash dividend.

Nov. 11 Cash (12,000 × $7.80) ................................................ 93,600 Common shares, .............................................. 93,600 Issued common shares.

25 Cash (8,000 × $5.70) .................................................. 45,600 Common shares ..................................................... 45,600 Issued common shares.

Dec. 1 Cash Dividends or Retained Earnings .................... 180,000 Common Dividend Payable ............................. 180,000 Declared dividend on 120,000 outstanding

shares; 120,000 × $1.50 = $180,000.

31 Income Summary ...................................................... 321,600 Retained Earnings ........................................... 321,600 Closed the Income Summary account.

31 Retained Earnings .................................................... 270,000 Cash Dividends ................................................ 270,000 Closed the cash dividend account (assuming that Cash Dividends was debited on March 2 and December 1).



Problem 13-6B (continued)

Part 2

QuSTREAM INC. Statement of Changes in Equity


Common Shares


Balance, January 1 $480,000 $648,000 $1,128,000 Issuance of shares 139,200 139,200 Net income (loss) 321,600 321,600 Dividends (270,000) (270,000) Balance, December 31 $619,200 $699,600 $1,318,800

Part 3

QuSTREAM INC. Equity Section of the Balance Sheet

December 31, 2015 Contributed capital:

Common shares, unlimited shares authorized, 120,0001 shares issued and outstanding ................................................................. $ 619,2001 Retained earnings ..................................................................... 699,600 Total equity ................................................................................ $1,318,800

Calculations:

1. Common Shares: Shares Dollars Jan. 1 Balance brought forward .................................................... 100,000 $480,000 Nov. 11 Issued 12,000 shares (12,000 x $7.80) .............................. 12,000 93,600

25 Issued 8,000 shares (8,000 x $5.70) .................................. 8,000 45,600 Totals .................................................................................... 120,000 $619,200

Analysis component: $1,318,800 of QuStream Inc.’s assets at December 31, 2015 are financed by common equity ($619,200 contributed capital and $699,600 retained earnings). Other sources of financing that are available are from debt (liabilities) and from investment by preferred shareholders (preferred shareholders’ contributed capital).




Part 1

2012

Feb. 5 Cash ...................................................................... 1,680,000 Common Shares ......................................... 1,680,000 Issued common shares; 70,000 × $24

28 Organization Exp. (or other various exp.) ......... 96,000 Common Shares ......................................... 96,000 Issued common shares to corporation’s

promoters.

Mar. 3 Land ...................................................................... 192,000 Buildings .............................................................. 504,000 Machinery ............................................................. 372,000 Common shares .......................................... 1,068,000 Issued common shares for in exchange

land, buildings, and machinery.

Dec. 31 Retained Earnings ............................................... 64,800 Income Summary ........................................ 64,800 Closed the Income Summary account. 2013

Jan. 28 Cash ...................................................................... 960,000 Preferred Shares ......................................... 960,000 Issued preferred shares; 4,000 × $240

Dec. 31 Income Summary ................................................. 235,200 Retained Earnings ...................................... 235,200 Closed the Income Summary account.




2014 Jan. 1 Cash Dividends or Retained Earnings ...................... 152,520 Preferred Dividend Payable .............................. 96,000 Common Dividend Payable ............................... 56,520 Preferred dividend = 4,000 × $24 = 96,000, No. of common shares = 70,000 + 3,750 + 44,000 = 117,750 Common dividend = $0.48 × 117,750 = $56,520

Feb. 5 Preferred Dividend Payable ....................................... 96,000 Common Dividend Payable ....................................... 56,520 Cash .................................................................... 152,520 Paid dividends.

Dec. 31 Retained Earnings ...................................................... 152,520 Cash Dividends .................................................. 152,520 Closed dividends (assuming Cash

Dividends was debited on the January 1 declaration date).

31 Income Summary ........................................................ 381,600 Retained Earnings ............................................. 381,600 Closed the Income Summary account.

Part 2

LABOPHARM INC. Statement of Changes in Equity


Preferred



Balance, January 1 $960,000 $2,844,000 $170,400 $3,974,400 Issuance of shares -0- -0- -0- Net income (loss) 381,600 381,600 Dividends (152,520) (152,520) Balance, December 31 $960,000 $2,844,000 $399,480 $4,203,480




Part 3

LABOPHARM INC. Equity Section of the Balance Sheet

December 31, 2014 Contributed capital:

Preferred, $24, noncumulative, 100,000 shares authorized, 4,000 issued and outstanding ........................... $ 960,000 Common shares, unlimited shares authorized, 117,750 shares issued and outstanding .............................. 2,844,000 Total contributed capital ............................................................ $3,804,000 Retained earnings ......................................................................... 399,480 Total equity .................................................................................... $4,203,480

Calculations:

1. Common Shares: Shares Dollars 2012

Feb. 5 Issued 70,000 shares .......................................................... 70,000 $1,680,000 28 Issued 3,750 shares ............................................................ 3,750 96,000

Mar. 3 Issued 44,000 shares .......................................................... 44,000 1,068,000 Totals .................................................................................... 117,750 $2,844,000

Analysis component:

2012 2013 2014

Net Assets = A-L or E $1,680,000 + $96,000 + $1,068,000 - $64,800 = $2,779,200

$2,779,200 + $960,000 + $235,200 = $3,974,400

$4,203,480 (Total Equity from Part 3)

The trend in terms of the net assets held by Labopharm Inc. is favourable given that it has increased from 2012 to 2014.




1. 2013

Jan. 1 Cash……………………………………………………………. ..... 570,000 Common shares ........................................................... 570,000 Issued 50,000 common shares; 50,000 x $11.40.

5 Cash Dividends or Retained Earnings ................................. 191,250 Preferred Dividend Payable ........................................ 45,000 Common Dividend Payable ......................................... 146,250 Declared dividend on preferred shares

(25,000 x $1.80 = 45,000) and common shares (191,250 – 45,000 = 146,250).

Feb. 28 Preferred Dividend Payable .................................................. 45,000 Common Dividend Payable ................................................... 146,250 Cash .............................................................................. 191,250 Paid cash dividends.

July 1 Cash ........................................................................................ 486,000 Preferred Shares .......................................................... 486,000 Issued 15,000 preferred shares

(486,000 ÷ $32.40 = 15,000 preferred shares).

Dec. 31 Retained Earnings .................................................................. 191,250 Cash Dividends ............................................................ 191,250 To close cash dividends (assuming Cash Dividend

was debited on January 5, the declaration date).

31 Income Summary ................................................................... 768,000 Retained Earnings ........................................................ 768,000 Closed the Income Summary account.

2014 Sept. 5 Cash Dividends or Retained Earnings ................................. 263,250 Preferred Dividend Payable ($1.80 × 40,000) ............. 72,000 Common Dividend Payable ($0.90 × 212,500) ........... 191,250 Declared dividend on preferred and common

shares.

Oct. 28 Preferred Dividend Payable .................................................. 72,000 Common Dividend Payable ................................................... 191,250 Cash .................................................................... 263,250 Paid cash dividends declared.




Dec. 31 Retained Earnings .............................................................. 263,250 Cash Dividends ........................................................ 263,250 Closed the dividend account (assuming Cash

Dividends was debited on September 5).

31 Retained Earnings .............................................................. 240,000 Income Summary ..................................................... 240,000 Closed the Income Summary account (net loss). 2.

PACE OIL & GAS CORP. Statement of Changes in Equity


Preferred


Retained Earnings

Total Equity

Balance, January 1 $1,266,000 $2,325,000 $1,257,750 $4,848,750 Issuance of shares* -0- -0- -0- Net income (loss) (240,000) (240,000) Dividends (263,250) (263,250) Balance, December 31 $1,266,000 $2,325,000 $ 754,500 $4,345,500

*NOTE: Because no shares were issued during the year ended December 31, 2014, the ‘Issuance of shares’ line in the Statement of Changes in Equity could be omitted. 3.

PACE OIL & GAS CORP. Equity Section of the Balance Sheet

December 31, 2014

Contributed Capital: Preferred shares, $1.80 noncumulative, unlimited shares authorized 40,000** shares issued and outstanding ......................

$1,266,000

** Common shares, unlimited shares authorized, 212,500** shares issued and outstanding ....................

2,325,000** Total contributed capital ..................................................... $3,951,000

Retained earnings ................................................................... 754,500 Total equity .............................................................................. $4,345,500

**See Calculations next page.




Calculations:

1. Preferred Shares: Shares Dollars Jan. 1 Balance brought forward ................................................... 25,000 $ 780,000 July 1 Issued 15,000 shares .......................................................... 15,000 486,000

Totals .................................................................................... 40,000 $1,266,000 1. Common Shares: Shares Dollars

Jan. 1 Balance brought forward ................................................... 162,500 $1,755,000 1 Issued 50,000 shares (50,000 x $11.40) ............................ 50,000 570,000 Totals .................................................................................... 212,500 $2,325,000



ANALYTICAL & REVIEW PROBLEMS

A&R Problem 13-1

1.

For the Years Ended December 31 Dec. 31/15 Dec. 31/14 Dec. 31/13

Net sales ............................................................... $5,000,000 $4,000,000 $3,000,000 Cost of goods sold .............................................. 3,000,000 2,400,000 1,650,000 Gross profit .......................................................... $2,000,000 $1,600,000 $1,350,000 Operating expenses ............................................ 1,400,000 1,300,000 900,000 Operating income ................................................ $ 600,000 $ 300,000 $ 450,000 Other revenues (expenses) ................................ (200,000) (220,000) 50,000 Income before income tax .................................. $ 400,000 $80,000 $ 500,000 Income tax expense ............................................ 80,000 16,000 100,000 Net income ........................................................... $ 320,000 $ 64,000 $ 400,000

2, 3, & 4.

Dec. 31/15 Dec. 31/14 Dec. 31/13 Contributed Capital:

Preferred shares, $2 noncumulative, 100,000 shares authorized, 20,000 issued & outstanding ......................... Common shares 500,000 shares authorized 100,000 issued & outstanding ....................... Total contributed capital .....................................

$ 400,000

550,000 $ 950,000

$ 400,000

550,000 $ 950,000

$ 400,000

550,000 $ 950,000

Retained earnings ............................................... 684,000 364,000 300,000 Total equity .......................................................... $1,634,000 $1,314,000 $1,250,000

Analysis component:

2015 2014

2013

Liabilities $1,123,200 $ 936,000 $ 900,000 Equity 1,634,000 1,314,000 1,250,000 Total Assets $2,757,200 $2,250,000 $2,150,000 Liabilities/Total Assets 40.74% 41.60% 41.86% Although liabilities are increasing in total they are decreasing slightly as a percentage of total assets (which is the same as total liabilities and equity). This indicates that the balance sheet has been strengthened from 2013 to 2015. A balance sheet is said to be strengthened when liabilities (and therefore the related risk) are decreasing.



ETHICS CHALLENGE EC 13-1 It appears that Jack may be in violation of copyright laws. This is both a legal issue and an ethical issue. To copy someone else’s work is ethically wrong. To incorporate as a means of protection against normal business risk is a well accepted practice. The obvious intent here, however, is to use the corporate shell as a means of limiting any legitimate claim that Corel might have to Jack and Bill’s assets. Jack is recommending incorporation for deceptive purposes and Bill should hold his moral ground on this issue. FOCUS ON FINANCIAL STATEMENTS FFS 13-1

BowTie Fishing Expeditions Corp. Statement of Changes in Equity

For Month Ended March 31, 2011

Preferred


Retained Earnings

Total Equity

Balance, March 1 $ -0- $ -0- $ -0- $ -0- Issuance of shares 42,000 150,000 192,000 Net income (loss) 190,000 190,000 Dividends (45,000) (45,000) Balance, March 31 $42,000 $150,000 $145,000 $337,000



FFS 13-1 (continued) BowTie Fishing Expeditions Corp. Balance Sheet March 31, 2011

Assets Current assets: Cash ....................................................................................... $ 15,000 Accounts receivable ............................................................. $ 36,000 Less: Allowance for doubtful accounts ............................ 1,200 34,800 Prepaid rent ........................................................................... 9,000 Total current assets ............................................................ $ 58,800 Property, plant and equipment: Land ...................................................................................... $105,000 Building ................................................................................ $148,600 Less: Accumulated depreciation ................................... 12,000 136,600 Equipment ............................................................................ $140,000 Less: Accumulated depreciation 2,000 138,000 Furniture ............................................................................... $ 75,000 Less: Accumulated depreciation ................................... 5,000 70,000 Total property, plant and equipment ............................. 449,600 Intangible assets: Patent .................................................................................... Less: Accumulated amortization …………………….

$14,000 2,000

12,000

Total assets ................................................................................. $520,400 Liabilities Current liabilities: Accounts payable ................................................................ $ 17,000 Current portion of long-term notes payable ..................... 30,000 Customer deposits .............................................................. 28,000 Dividends payable ............................................................... 45,000 Estimated warranty liabilities ............................................. 3,400 Total current liabilities .................................................... $123,400 Long-term liabilities: Notes payable, less $30,000 current portion .................... 60,000 Total liabilities ......................................................................... $183,400 Equity Contributed capital: Preferred shares, $2, cumulative, Authorized: 30,000 shares Issued and outstanding: 10,000 shares ...................... $ 42,000 Common shares, Authorized: Unlimited Issued and outstanding: 50,000 shares ...................... 150,000 Total contributed capital .................................................... $192,000 Retained earnings ................................................................. 145,000 Total equity ............................................................................ 337,000 Total liabilities and equity .......................................................... $520,400



FFS 13-1 (concluded) Analysis component:

1. 337,000 ÷ 520,400 x 100 = 65% 2. 183,400 ÷ 520,400 x 100 = 35% 3. At March 31, 2011, 35.24% ($183,400/$520,400 × 100) of BowTie’s assets were

financed by debt. Therefore, given that 30% of the assets were financed by debt at March 31, 2013, the risk associated with debt financing has increased because of the increase in debt as a percentage of assets (the balance sheet has been weakened as opposed to strengthened).

4. (150,000 + 145,000 = 295,000)/520,400 x 100 = 57% 5. 42,000/520,400 x 100 = 8%

FFS 13-2

1. 2011: $0.51/share × 1,000,423,000 common shares = $510,215,730; 2010: $0.44/share x 998,500,000 common shares = $439,340,000.

2. Dividends are a distribution of earnings to the shareholders (or owners) of the corporation. Dividends cause equity to decrease.

3. Barrick Gold has an unlimited number of common shares available for issue at December 31, 2011.

4. Although Barrick Gold has two types of preferred shares, none were issued and outstanding as at December 31, 2011.

5. The deficit of $2,535 million at January 1, 2010 means that the Retained Earnings account had a debit balance. A debit balance occurs in Retained earnings when debits exceed credits which may have occurred because of a large net losses.



CRITICAL THINKING MINI CASE

CT 13-1

Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity.

Problem: — how to best finance the purchase of new equipment

Goal:*

— from the perspective of the manager of Jones Inc., the financing option with the lowest cost is the best option (the shareholders of Jones Inc. would want the option that not only has the lowest cost but that does not dilute the ownership of the common shareholders)

— another consideration would be to minimize risk to Jones Inc. Principles:

— must comply with GAAP (disclose method of financing, for example) Facts:

— as per the mini case study — also, the following calculations can be derived from the information provided:

Borrow

Issue $1 cumulative

preferred shares Income before interest and tax ........................... $80,000 $80,000 Interest expense ($100,000 x 6%) ........................ 6,000 — Income before tax ................................................. $74,000 $80,000 Income tax ($74,000 x 25%; $80,000 x 25%) ....... 18,500 20,000 Net income ............................................................ $55,500 $60,000 Less dividends (6,000 x $1) ................................. — 6,000 Net earnings applicable to common shareholders .........................................................

$55,500

$54,000



CT 13-1 (concluded)

Conclusions/Consequences: — Is the primary goal risk minimization (issue shares) or minimize cost (borrow)? — Common shareholders will want to maximize their earnings which points to

borrowing but borrowing increases risk because principal and interest payments must be made; potential future creditors are sensitive to risk.

— Finance manager may be compensated based on performance so will prefer borrowing option.

— Alternatively, the finance manager could make a case to the board of directors to avoid the declaration of dividends in which case issuing preferred shares would generate the highest earnings applicable to common shareholders ($60,000 vs. $55,500) but this may have negative implications for future issuance of shares.

*The goal is highly dependent on “perspective.”

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