Solution manual Financial accounting 6th kieso kimmel ch11

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Financial Accounting, Sixth Canadian Edition

CHAPTER 11
Reporting and Analyzing Shareholders’ Equity
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives

Questions

Brief
Exercises

Exercises

A
Problems

B
Problems

BYP

1. Identify and discuss
the major
characteristics of a
corporation.

1, 2, 3, 4, 5 1

1

1, 3

2. Record share
transactions.

6, 7, 8, 9,
10

2, 3, 4

2, 3, 4, 5, 7 1A, 2A, 3A, 1B, 2B,
1, 3, 4,
4A, 5A
3B, 4B, 5B 7

3. Prepare the entries
for cash dividends,
stock dividends, and
stock splits, and
understand their
financial impact.

11, 12, 13,
14, 15

5, 6, 7, 8

5, 6, 7

1A, 2A, 3A, 1B, 2B,
1, 5, 7
4A, 5A, 6A, 3B, 4B,
7A
5B, 6B, 7B

4. Indicate how
shareholders’ equity
is presented in the
financial statements.

16, 17, 18,
19, 20

9, 10, 11

7, 8, 9, 10,
11

1A, 2A, 3A, 1B, 2B,
4A, 5A, 7A 3B, 4B,
5B, 7B

1, 7

5. Evaluate dividend
and earnings
performance.

21, 22, 23,
24, 25

12, 13, 14,
15, 16, 17

12, 13, 14,
15

8A, 9A,
10A, 11A

2, 3, 4,
6

8B, 9B,
10B, 11B

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ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number

Description

Difficulty
Level

Time
Allotted (min.)

Moderate

40-50

1A

Show impact of transactions on accounts.

2A

Record and post equity transactions; prepare
shareholders’ equity section.

Simple

30-40

3A

Record and post equity transactions; prepare
statements.

Moderate

40-50

4A

Record and post equity transactions; prepare
statements under ASPE.

Complex

30-40

5A

Reproduce equity accounts; prepare shareholders’
equity section.

Moderate

30-40

6A

Compare impact of cash dividend, stock dividend,
and stock split.

Moderate

30-40

7A

Record and post dividend transactions, prepare
statements.

Moderate

40-50

8A

Calculate earnings per share.

Moderate

20-30

9A

Evaluate ratios.

Moderate

20-30

10A

Calculate and evaluate ratios.

Complex

20-30

11A

Evaluate profitability ratios.

Complex

20-30

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ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Problem
Number

Description

Difficulty
Level

Time
Allotted (min.)

Moderate

40-50

1B

Show impact of transactions on accounts.

2B

Record and post equity transactions; prepare
shareholders’ equity section.

Simple

30-40

3B

Record and post equity transactions; prepare
statements.

Moderate

40-50

4B

Record and post equity transactions; prepare
statements under ASPE.

Complex

30-40

5B

Reproduce equity accounts; prepare shareholders’
equity section.

Moderate

30-40

6B

Compare impact of cash dividend, stock dividend,
and stock split.

Moderate

30-40

7B

Record and post dividend transactions, prepare
statements.

Moderate

40-50

8B

Calculate earnings per share.

Moderate

20-30

9B

Evaluate ratios.

Moderate

30-40

10B

Calculate and evaluate ratios.

Complex

20-30

11B

Evaluate profitability ratios.

Complex

20-30

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ANSWERS TO QUESTIONS
1.

(a) (1) Separate legal existence. A corporation is separate and distinct from its
shareholders (owners) and acts in its own name rather than in the name of its
shareholders. In addition, the acts of the shareholders do not bind the

corporation unless the shareholder is a duly appointed agent of the
corporation. This is an advantage to the corporate form of organization.
(2) Limited liability of shareholders. Because of its separate legal existence,
creditors of a corporation ordinarily have recourse only to corporate assets to
satisfy their claims. Thus, the liability of shareholders is normally limited to
their investment in the corporation. This is an advantage to the corporate form
of organization.
(3) Transferable ownership rights. Ownership of a corporation is shown in
shares, which are transferable. Shareholders may dispose of part or all of
their interest by simply selling their shares. The transfer of ownership to
another party is entirely at the discretion of the shareholder. This is an
advantage to the corporate form of organization.
(4) Ability to acquire capital. Corporations can raise capital quite easily by issuing
shares. Public corporations have an almost unlimited ability to acquire capital.
Investors find shares of corporations to be attractive since they need not
invest large sums of money to become shareholders. In addition,
shareholders benefit from limited liability. This is an advantage to the
corporate form of organization.
(5) Continuous life. Since a corporation is a separate legal entity, its continuance
as a going concern is not affected by the withdrawal, death or incapacity of a
shareholder, employee, or officer. This is an advantage to the corporate form
of organization.
(6) Separation of management and ownership. Although the shareholders of a
corporation are its owners, it is the board of directors that decides on the
operating policies of the company. The shareholders seldom get involved in
the company’s day-to-day activities. This is normally seen to be an advantage
to the corporate form of organization.

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Answers to Questions (Continued)
1.

(a) (Continued)
(7) Government regulations. Corporations in Canada may incorporate federally
or provincially. Government regulations usually provide guidelines for issuing
shares, distributing profit, and reacquiring shares. Provincial securities
commissions also govern the sale of share capital to the general public.
When a corporation’s shares are listed or traded on a stock exchange, it must
adhere to the reporting requirements of that exchange. This may be a
disadvantage to the corporate form of organization because it adds extra cost
and complexity to the organization.
(8) Income taxation. Corporations must pay federal and provincial income tax as
separate legal entities. However, corporations usually benefit from more
favourable tax rates than do the owners of partnerships or proprietorships.
The shareholders of the corporation do not pay tax on the corporation’s profit
unless they receive dividends from the corporation. This is often seen to be
an advantage to the corporate form of organization.
(b) While public corporations have an almost unlimited ability to acquire capital, this
is not the case for private corporations. In addition, transferring ownership rights
can be much more limited given that private corporation shares are not publicly

traded. Private companies do not have as stringent reporting and disclosure
requirements as is the case for public companies.

2.

3.

(a)

Letson has 60,000 shares issued and is eligible to issue an additional 40,000
shares (100,000 – 60,000).

(b)

Only issued shares are recorded in the general journal. The number of
authorized shares is disclosed but not recorded until issued.

When Richard purchased the original shares as part of lululemon’s initial public
offering, he purchased these shares directly from the corporation. The $1,800 (100 ×
$18) he spent to buy the shares went directly to lululemon and increased the
company’s assets (Cash) and shareholders’ equity (Common Shares). There was no
impact on the company’s liabilities.
In the subsequent purchase, Richard bought shares in the secondary market from
another investor or investors. The proceeds from this sale went to the seller and not to
lululemon. Therefore there was no impact on lululemon’s assets, liabilities, or
shareholders’ equity a result of the second purchase.

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Answers to Questions (Continued)
4.

Market capitalization is the measure of the fair value of a corporation’s equity. It is
calculated by multiplying the number of shares issued by the share market price at
any given date. It should not be confused with a corporation’s legal capital which
represents the amount paid to the corporation on the initial and any subsequent issue
of shares and consequently is the amount that appears on the statement of financial
position.
The market capitalization for Plazacorp Retail Properties Limited has increased in
2012. There are two primary reasons for an increase in the market capitalization of a
company which may happen separately or in combination. First, the number of shares
may have increased. If this is the case, assets (Cash) and shareholders’ equity
(Common Shares) would increase as a result of the issue of new shares. Liabilities
would be unaffected.
Second, the market price of the shares could have increased. Increases in the market
price of the shares can result for a number of reasons but are most likely due to the
market’s perception of the future ability of the corporation to earn profit. As a result,
investors bid up the price paid for the shares on the market. This possible reason for
the change in market capitalization does not affect any element on the statement of
financial position.

5.

Legal capital is the portion of a company’s share capital which cannot be distributed to
shareholders. Legal capital is created largely for the protection of creditors. It is kept
separate from retained earnings because retained earnings may be distributed to
shareholders in the form of dividends, whereas legal capital may not be. The
proceeds received from a company’s share issue are considered to be legal capital.

6.

Preferred shareholders have priority over common shareholders with respect to the
distribution of dividends and, in the event of liquidation, over the distribution of assets.
Preferred shareholders do not usually have the voting rights that the common
shareholders have.

7.

When shares are issued for a consideration other than cash, such as goods or
services, IFRS requires that the transaction be recorded at the fair value of the
consideration received. If the fair value of the consideration received cannot be
reliably determined, then the fair value of the consideration given up (for example,
shares) can be used.
When shares are issued for a noncash consideration in a private company following
ASPE, the valuation of the shares can be slightly different than that described above
for a publicly traded company following IFRS. The shares of a private company should
be recorded at the most reliable of the two values—the fair value of the consideration
(such as goods or services) received or fair value of the consideration given up (such
as shares). Quite often, the fair value of the consideration received is the most reliable
value because a private company’s shares seldom trade and therefore do not have a
ready market value.

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Answers to Questions (Continued)
8.

9.

(a)

A normal course issuer bid is synonymous with the reacquisition of shares. In a
normal course issuer bid, a company is allowed to repurchase up to a certain
percentage of its shares subject to regulatory approval. It can purchase the
shares gradually over a period of time, such as one year. This repurchasing
strategy allows the company to buy when its shares are favourably priced.

(b)

A corporation may acquire its own shares (1) to increase trading of the
corporation's shares in the stock market, in the hopes of enhancing its market
value, (2) to reduce the number of shares issued and increase earnings per

share and return on equity ratio, (3) to eliminate hostile shareholders by buying
their shares, and (4) to have additional shares to issue if required to compensate
employees using stock options or to acquire other businesses.

Assad should expect to receive a dividend in the amount of $281.25 (1,000 shares ×
$1.125 ÷ 4) each quarter.

10. Preferred shares are cumulative or noncumulative with respect to their dividend
provisions. Cumulative preferred shares entitle the shareholder to any previous years’
dividends, which have not yet been paid, as well as their current dividend, before
common shareholders can get any dividends. Noncumulative preferred shares do not
entitle the shareholder to any unpaid dividends.
Dividends in arrears can only arise from cumulative preferred shares. If a dividend is
not declared for a noncumulative preferred share, the dividend entitlement is erased
and does not carry forward into the future. On the other hand, if a dividend is not
declared for a cumulative preferred share, the amount of the dividend shortfall
becomes dividends in arrears which must be paid first from any dividend declared in
the future.
11. For a cash dividend to be paid, a corporation must meet a solvency test to ensure that
it has sufficient cash to be able to pay its liabilities as they become due after the
dividend is declared and paid. In addition, a formal dividend declaration by the board
of directors is required.

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Answers to Questions (Continued)
12. On the declaration date, the board of directors formally authorizes the cash dividend
and announces it to shareholders. The declaration of a cash dividend commits the
corporation to a binding legal obligation. On the record date, ownership of the shares
is determined. On the payment date, dividends are paid to the shareholders. The table
below demonstrates the effect of three events on the financial statement elements.

(1)
(2)
(3)
(4)
(5)
(6)

Assets
Liabilities
Share capital
Retained earnings
Total shareholders' equity
Number of shares

(a)
Declaration
date

(b)

Record
date

(c)
Payment
date

No effect
Increase
No effect
Decrease
Decrease
No effect

No effect
No effect
No effect
No effect
No effect
No effect

Decrease
Decrease
No effect
No effect
No effect
No effect

(a)
Cash

dividend

(b)
Stock
dividend

(c)
Stock
split

Decrease
No effect
No effect
Decrease
Decrease
No effect

No effect
No effect
Increase
Decrease
No effect
Increase

No effect
No effect
No effect
No effect
No effect
Increase

13.

(1)
(2)
(3)
(4)
(5)
(6)

Assets
Liabilities
Share capital
Retained earnings
Total shareholders' equity
Number of shares

14. (a)

In a stock split, the number of shares issued is increased. In the case of Bella
Corporation, the number of shares issued will increase from 10,000 to 30,000
(10,000 × 3).

(b)

The effect of a split on market value is generally inversely proportional to the
size of the split. In this case, the market price would fall to approximately $40
per share ($120 ÷ 3).

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Answers to Questions (Continued)
15. Cash and stock dividends are recorded in the general journal because the financial
position of the company changes. In the case of a cash dividend, Cash Dividends are
increased, which in turn decreases retained earnings. Cash is also reduced with a
cash dividend. In the case of a stock dividend, Stock Dividends are increased, which
in turn decreases retained earnings. Common Shares are increased in the case of a
stock dividend. In the case of stock splits, there is no change in the financial position
of the company. No accounts are affected. Only the number of shares held by
shareholders changes, typically by a multiple (for example, 2 for 1).
16. (a)

All six accounts appear individually on the statement of changes in equity, along
with the details of the transactions that increased and decreased the accounts
during the year being reported.

(b)

The first three accounts (preferred shares, common shares, and stock dividends
distributable) would be reported under the sub-heading of share capital in the
shareholders’ equity section of the statement of financial position. The

remaining accounts would be reported separately in the same shareholders’
equity section of the statement of financial position.

17. The purpose of a retained earnings restriction is to indicate that a portion of retained
earnings is currently unavailable for dividends. Restrictions may result from the
following causes: legal, contractual, or voluntary. Although not reported separately on
the statement of changes in equity or statement of financial position, the portion of
retained earnings that is restricted is disclosed in a note to the financial statements.
18. Comprehensive income is the sum of profit and other comprehensive income and
appears on the statement of comprehensive income. Other comprehensive income (or
loss) is made up of temporary accounts added to, or deducted from, the opening
balance of accumulated other comprehensive income by closing entries at the end of
the year. These changes to the accumulated other comprehensive income account
are detailed on the statement of changes in equity. Accumulated other comprehensive
income is a permanent equity account and its ending balance appears in the
shareholders’ equity section of the statement of financial position.
19. (a)

The statement of retained earnings shows all of the changes to retained earnings
for the accounting period being reported. The statement of retained earnings must
be prepared by private companies following ASPE.
The statement of changes in equity shows the changes in retained earnings,
similar to the statement of retained earnings. However, it also shows the changes
in amounts in share capital, as well as the changes in all of the remaining equity
accounts. This is a required statement by companies following IFRS.

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Answers to Questions (Continued)
19. (b)

The statement of retained earnings shows the changes in determining the ending
balance of retained earnings, which is only one of the accounts that appears in
the shareholders’ equity section of the statement of financial position. The
statement of changes in equity shows the changes in determining each of the
shareholders’ accounts (for example, preferred shares, common shares, retained
earnings, and accumulated other comprehensive income). Each of these
accounts appears in the shareholders’ equity section of the statement of financial
position.

20. (a)

Private companies that report using ASPE usually have a simpler capital structure
than publicly traded companies who use IFRS. Consequently, the shareholders’
equity section of the statement of financial position has fewer accounts with
ASPE. For example, private companies are not required to report accumulated
other comprehensive income, which publicly-traded companies are required to
report.

(b)

Private companies using ASPE would prepare the following financial statements:
statement of financial position, income statement, statement of retained earnings,
and statement of cash flows. For companies using ASPE, fewer equity account
transactions occur and need to be explained and consequently there is no
requirement to prepare a statement of changes in equity. Rather, only a
statement of retained earnings is required, linking the income statement to the
retained earnings account shown in the shareholders’ equity section of the
statement of financial position.
Publicly-traded companies using IFRS would prepare the following financial
statements: statement of financial position, income statement and/or statement of
comprehensive income, statement of changes in equity, and statement of cash
flows. Under IFRS, a statement of comprehensive income is required (in
combination with, or along with the income statement) when there is other
comprehensive income during the year.

21. (a)
(b)
(c)
(d)

Unfavourable
Favourable
Unfavourable
Favourable

22. Pepsi had the higher share price. The market price of the share can be determined by
dividing the dividend per share by its dividend yield. Doing so would result in a market
price of approximately $67 ($1.00 ÷ 1.5%) and $72 ($2.15 ÷ 3.0%) per share for CocaCola and Pepsi, respectively.

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Answers to Questions (Continued)
23. The weighted average number of shares is a more realistic measure of the number of
shares that the corporation had throughout the year and the use of the assets
generated from these shares. The profit generated on the share issue proceeds during
the year, or reduced by the shares repurchased during the year, is for only part of the
year so the number of shares should be weighted by the same partial year factor.
Given that companies routinely issue and retire shares, using the number of shares at
a specific point in time (such as year-end) may not provide a true representation of the
company’s earnings per share.
24. Companies must use the profit available to common shareholders (profit – preferred
dividends) in the calculation of their earnings per share figures because preferred
shareholders are subject to preferential treatment with respect to the distribution of the
company’s dividends. That is, common shareholders would not receive any dividends
before the preferred shareholders receive theirs.
Similarly, the preferred shareholders’ entitlement must be subtracted from both the
numerator (profit – preferred dividends) and denominator (total shareholders’ equity –
preferred shares) in the calculation of return on common shareholders’ equity.
Consequently, both ratios use profit available to common shareholders in their
numerators.
25. Company B pays out the highest proportion of its profits in dividends and these

dividends give shareholders the highest dividend yield, when compared to Company
A. Therefore Company B is the better choice for an investor interested in a steady
dividend income.

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SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 11-1
(a)

At Hudson’s Bay Company’s initial public offering, the shares issued were purchased
from the corporation. The $17 per share received goes directly to Hudson’s Bay and
increases assets (cash) and shareholders’ equity (share capital).

(b)

At the January 2013 date, the market price of $16.81 per share is a result of the
buying and selling of shares occurring in the secondary market. The proceeds from
the sale of shares go to the seller and not to Hudson’s Bay. Therefore, there is no
impact on Hudson’s Bay Company’s financial position as a result of the trading
occurring on the stock market subsequent to the IPO.

BRIEF EXERCISE 11-2
(a)
May

2

June 15
Nov.

1

Dec. 15

Cash .................................................................................
Common Shares (1,000 × $15) ................................

15,000

Cash .................................................................................
Common Shares (500 × $17) ...................................

8,500

Cash .................................................................................
Preferred Shares (100 × $30) ...................................

3,000

Cash .................................................................................

Preferred Shares (100 × $35) ...................................

3,500

15,000

8,500
3,000

3,500

(b)
Number
of shares
authorized
(1) Preferred shares

100,000

(2) Common shares

Unlimited

Number
of shares
issued
200
1,500

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BRIEF EXERCISE 11-3
(a)
Mar. 8

April 20

(b)

Cash ......................................................................................
Preferred Shares (5,000 × $30) ....................................

150,000

Land .....................................................................................
Preferred Shares (3,000 shares)...................................

110,000

150,000

110,000

If the fair value of the land could not be determined, the fair value of the consideration
given up ($35 per share multiplied by 3,000 shares or $105,000) would be used. The
journal entry would be as follows:

April 20

Land .....................................................................................
Preferred Shares (3,000 × $35) ....................................

105,000
105,000

BRIEF EXERCISE 11-4
(a)

Dividends in arrears at the end of the current year = 20,000 × $2 = $40,000

(b)

Dividends in arrears are not accrued as liabilities. The amount of the dividends in
arrears is disclosed in the notes to the financial statements.

(c)

Dividends in arrears can only arise from cumulative preferred shares. If a dividend is
not declared for a noncumulative preferred share, the dividend entitlement does not
carry forward into the future.

BRIEF EXERCISE 11-5
Nov. 15

Dec. 10
31

Cash Dividends (30,000 × $2 ÷ 4) ....................................
Dividends Payable ....................................................

15,000
15,000

No entry required
Dividends Payable ............................................................
Cash .........................................................................

15,000
15,000

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BRIEF EXERCISE 11-6
Dec.

1

Jan.

Stock Dividends (100,000 × 5% × $15) .........................
Stock Dividends Distributable ...............................

20

No entry required

10

Stock Dividends Distributable........................................
Common Shares ...................................................

75,000
75,000

75,000
75,000

BRIEF EXERCISE 11-7
(a)
(b)
(c)

Before the stock split: 129,000,000 shares
After the stock split: 129,000,000 × 3 = 387,000,000 shares
Likely stock price after the stock split: $117 ÷ 3 = $39
There would be no journal entry recorded for the stock split. Details of the stock split
would be discussed in the notes to the financial statements.

BRIEF EXERCISE 11-8
Transaction

Assets

Liabilities

Shareholders’
Equity

Number of
Shares

(a)
(b)
(c)
(d)
(e)

NE
NE
NE
NE

+
NE
NE
NE

NE
+/+/NE

NE
NE
NE
+
+

BRIEF EXERCISE 11-9
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]

$2,050,000 – $1,500,000 – $110,000 = $440,000
$440,000 same as [1]
$3,505,000 – $3,000,000 + $135,000 – $750,000 = $(110,000)
$0
$750,000 (same amount as increase in Retained Earnings)
$125,000 – $100,000 = $25,000

$500,000 (no change from beginning balance)
$5,100,000 + $440,000 [2] – $135,000 + $750,000 [5] + $25,000 = $6,180,000 or
taken from ending balances $2,050,000 + $500,000 [7] + $3,505,000 + $125,000 =
$6,180,000

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BRIEF EXERCISE 11-10
LUXAT CORPORATION
Statement of Financial Position (Partial)
December 31, 2015

Shareholders' equity
Contributed capital
Common shares, unlimited number of shares
authorized, 550,000 issued ............................................
Additional contributed capital ................................................
Total contributed capital .................................................
Retained earnings ......................................................................
Accumulated other comprehensive income ................................
Total shareholders' equity .................................................................

$2,050,000
500,000
2,550,000
3,505,000
125,000
$6,180,000

BRIEF EXERCISE 11-11
(a)
STIRLING FARMS LIMITED
Statement of Retained Earnings
Year Ended December 31, 2015

Retained earnings, January 1 ......................................................................
Add: Profit ..................................................................................................
Less: Cash dividends ..................................................................................
Retained earnings, December 31 .................................................................
(b)

$490,000
150,000
640,000
90,000
$550,000

If Stirling were a publicly traded corporation, a statement of changes in equity would
be required instead of a statement of retained earnings. It would report the changes in
each of the shareholders’ equity accounts; not just retained earnings.

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BRIEF EXERCISE 11-12
$60,000
$600,000

(a)

Payout ratio − last year

(b)

Dividends paid this year = $2,000,000 × 10% = $200,000 (assuming the same payout
ratio).

(c)

(Not required) Dividends paid next year = $700,000 × 10% = $70,000 (assuming the
same payout ratio).

= 10%

Maintaining a constant dividend payout ratio may or may not be a sound business
practice. Many factors, including the corporation’s cash flow and the type of investor
involved would have to be taken into consideration. Because dividend amounts are
relatively fixed (or with small increases), the payout ratio tends to fluctuate with
profits. Maintaining a constant dividend payout ratio when profit fluctuates will result in
variable dividend amounts being paid to shareholders, which may not be wise from a
cash flow or growth perspective.

BRIEF EXERCISE 11-13
Canadian National Railway

(a)
Dividend yield

(b)

$1.50
$93.72
= 1.6%

Canadian Pacific Railway
$1.40
$108.55
= 1.3%

Investors would likely prefer Canadian National Railway because of its higher
dividend yield if they wish to purchase shares for the purpose of dividend income.

BRIEF EXERCISE 11-14
Weighted average number of shares:
January 1
August 31
November 30

34,000 × 12/12 =
9,000 × 4/12 =
6,000 × 1/12 =
49,000

34,000
3,000
500
37,500

(a)

The number of common shares issued at December 31, 2015 is 49,000.

(b)

The weighted average number of common shares for 2015 is 37,500.

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BRIEF EXERCISE 11-15
Earnings
per share

$370,000 – $20,000*
37,500

= $9.33

*10,000 × $2 = $20,000

BRIEF EXERCISE 11-16
(a)
Earnings
per share

$500,000 – $50,000*
200,000

= $2.25

*25,000 × $2 = $50,000
(b)

Same amount as in (a) $2.25

(c)
Earnings
per share

$500,000
200,000

= $2.50

BRIEF EXERCISE 11-17
(a)

Return on common shareholders’ equity:

$14,000
= 12.4%
($104,000 + $122,000) ÷ 2
(b)

Had Salliq issued preferred shares and paid dividends to the preferred shareholders,
the amount of the profit available to common shareholders would be reduced by the
amount of the preferred dividend, reducing the return on common shareholders’
equity ratio.

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SOLUTIONS TO EXERCISES
EXERCISE 11-1
(a)

High $4.93
Low $2.97

(b)

$0.10 per share

(c)

1,000 × $4.02 = $4,020

(d)

$4.02 + $0.08 = $4.10

(e)

12,260 × 1,000 = 12,260,000

EXERCISE 11-2
(a)

June 12

July 11

Oct.

1

Nov. 15

(b)

Cash (50,000 × $6) ............................................
Common Shares........................................

300,000

Cash (1,000 × $25) ............................................
Preferred Shares .......................................

25,000

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

75,000

Cash (25,000 × $28) ..........................................
Preferred Shares .......................................

700,000

300,000

25,000

75,000

700,000

Preferred: 2,500 + 1,000 + 25,000 = 28,500 shares
$55,000 + $25,000 + $700,000 = $780,000
Common: 140,000 + 50,000 + 10,000 = 200,000 shares
$700,000 + $300,000 + $75,000 = $1,075,000

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EXERCISE 11-3

(a)

Jan.

6

12

18

31

Cash .............................................................
Common Shares (200,000 × $1.50) ......

300,000

Cash .............................................................
Common Shares (50,000 × $1.75) ........

87,500

Cash .............................................................
Preferred Shares (10,000 × $25) ...........

250,000

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

15,000

300,000

87,500

250,000

15,000

(b)
Date
January 6
January 12
January 18
January 31
Total
(c)

Total Number of
Common Shares Issued
200,000
50,000
10,000
260,000

Total Number of
Preferred Shares Issued

10,000

000 00
10,000

If Moosonee were a publicly traded company, the per share value of the shares
issued in exchange for the legal services would be easily obtained as they are
traded every business day. When shares are issued for a consideration other than
cash, such as goods or services, IFRS requires that the transaction be recorded at
the fair value of the consideration received. If the fair value of the consideration
received cannot be reliably determined, then the fair value of the consideration given
up (shares in this case) can be used. In this case the value of the services was given
and so the journal entry would not be any different under IFRS.

EXERCISE 11-4
(a)

Total annual preferred dividend should be 400,000 × $1 per share or $400,000.

(b)

Dividends in arrears at the end of Year 1 are $100,000 ($400,000 annual dividend
less dividends declared of $300,000).
By the end of Year 2, the dividends paid of $400,000 are first allocated to the
dividends in arrears of Year 1 of $100,000 and the remaining $300,000.
Consequently by the end of Year 2, dividends in arrears at the end of Year 2 remain
at $100,000.

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EXERCISE 11-4 (Continued)
(c)

Dividends in arrears are not accrued as a liability. Rather, the amount of any
dividends in arrears is disclosed in the notes to the financial statements.

(d)

If the preferred shares were noncumulative, the corporation would have no
obligation to pay any dividends. This is the same as if the preferred shares were
cumulative. What is different with the noncumulative preferred shares is that in Year
2, the corporation is not obligated to pay any dividends in arrears before it can pay
dividends for the current year. No arrears would exist in either of Year 1 or 2 if the
shares had been noncumulative.

EXERCISE 11-5
(a)

Apr.

1

June 15

July 10

Aug. 21

Sept. 20

Nov.

1

Dec. 20

Cash ..............................................................
Common Shares (5,000 × $20) .............

100,000

Cash Dividends (85,000 × $0.25) ..................
Dividends Payable ................................

21,250

Dividends Payable .........................................
Cash ......................................................

21,250

Stock Dividends .............................................
Stock Dividends Distributable ................

(80,000 + 5,000 = 85,000 × 5% = 4,250 × $22)

93,500

Stock Dividends Distributable ........................
Common Shares ...................................

93,500

Cash ..............................................................
Common Shares (3,000 × $25) .............

75,000

100,000

21,250

21,250

93,500

93,500

Cash Dividends..............................................
27,675
Dividends Payable .................................
(80,000 + 5,000 + 4,250 + 3,000 = 92,250 × $0.30)

75,000

27,675

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EXERCISE 11-5 (Continued)
(b)
Common Shares
Jan. 1 Bal.
April 1
Sept. 20
Nov. 1
Dec. 31 Bal.

June 15
Dec. 20
Dec. 31 Bal.

Cash Dividends
21,250
27,675

48,925

Aug. 21
Dec. 31 Bal.

Stock Dividends
93,500
93,500

Sept. 20

Stock Dividends Distributable
93,500 Aug. 21
Dec. 31 Bal.
Retained Earnings
Jan. 1 Bal.
Dec. 31 Bal.

600,000
100,000
93,500
75,000
868,500

93,500
0

1,000,000
1,000,000*

* Note: This balance is before closing entries adding profit or deducting loss and dividends.

(c)

Number of common shares at the end of the year:
80,000 + 5,000 + 4,250 + 3,000 = 92,250

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EXERCISE 11-6
(1)
After Cash
Dividend

Before
Action

(2)
After Stock
Dividend

(3)
After Stock
Split

Total assets

$1,250,000

$1,200,000

$1,250,000

$1,250,000

Total liabilities

$ 250,000

$ 250,000

$ 250,000

$ 250,000

600,000
400,000
1,000,000

600,000
350,000

950,000

$1,250,000

$1,200,000

$1,250,000

$1,250,000

100,000

100,000

105,000

200,000

Common shares
Retained earnings
Total shareholders' equity
Total liabilities and
shareholders’ equity
Number of common shares

670,000*
330,000
1,000,000

600,000

400,000
1,000,000

* $600,000 + (100,000 shares × 5% × $14) = $670,000

EXERCISE 11-7

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Assets
+
NE
+
+
NE
NE
NE
NE
+

Liabilities

NE
+
NE
NE
NE
NE
NE
NE
NE

Share
Capital
+
NE
NE
+
+
NE
+
+/NE
NE

Shareholders’ Equity
Accumulated
Other
Total
Retained Comprehensive Shareholders’
Earnings
Income
Equity

NE
NE
+
NE
NE
NE
NE
+
NE
NE
NE
+
NE
NE
NE
NE
+/NE
NE
+/NE
NE
NE
NE
NE
+
+

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EXERCISE 11-8
Statement of Changes in Equity
Accumulated
Other
CompreOther
hensive
Financial
Income
Statement
NE
Statement
of financial
position
NE
NE

Share
Capital
NE

Retained
Earnings
NE

2. Common
shares
3. Revaluation
gain from
revaluing
property,
plant, and
equipment to
fair value
4. Long-term
investments

Common
shares
NE

NE
NE

Other
comprehensi
ve income:
Revaluation
gain

NE

NE

NE

NE

5. Preferred
shares
6. Retained
earnings
7. Gain on
disposal

Preferred
shares
NE

NE

NE

Statement
of financial
position
NE

Retained
earnings
NE

NE

NE

NE

NE

Income
statement

8. Cash
dividends

NE

Retained
earnings

NE

NE

Operating
expenses
(reduction of)
NE

NE
Common
shares*

NE
NE

NE
NE

NE
NE

NE
NE

Account
1. Cash

9. Stock split
10. Stock
dividends
distributable

NE

Classification
Current
assets
NE
NE

Non-current
assets

NE

* Note to instructors: Preferred shares is also an acceptable answer here although common
shares are more often issued as stock dividends.

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EXERCISE 11-9
OZABAL INC.
Statement of Financial Position (Partial)
December 31, 2015
Shareholders’ equity
Contributed capital
Share capital
$1.25 Preferred shares, noncumulative, 100,000
authorized, 10,000 shares issued ...........................
Common shares, unlimited number of shares
authorized, 250,000 shares issued .........................
Stock dividends distributable ...................................
Additional contributed capital .......................................
Total contributed capital ......................................................

Retained earnings (Note R) ................................................
Accumulated other comprehensive loss .............................
Total shareholders’ equity ...........................................................

$250,000
500,000
50,000

$ 800,000
25,000
825,000
900,000
(50,000)
$1,675,000

Note R: Retained earnings restricted for plant expansion, $100,000.

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EXERCISE 11-10
(a)

THE BLUE CANOE LIMITED
Statement of Changes in Equity
Year Ended December 31, 2015

Balance Jan. 1
Issued common shares
Profit
Cash dividends
Other comprehensive
income
Balance Dec. 31

Common
Shares
$800,000
180,000

Additional
Contributed
Capital
$540,000

Retained
Earnings
$1,500,000

Accumulated
Other
Comprehensive
Income

$90,000

400,000
(70,000)

$980,000

$540,000

$1,830,000

(25,000)
$65,000

Total
$2,930,000
180,000
400,000
(70,000)
(25,000)
$3,415,000

(b)
THE BLUE CANOE LIMITED
Statement of Financial Position (Partial)
December 31, 2015
Shareholders’ equity
Contributed capital
Common shares .............................................................
Additional contributed capital .........................................

Total contributed capital ......................................................
Retained earnings ...............................................................
Accumulated other comprehensive income ........................
Total shareholders’ equity ...........................................................

$980,000
540,000
$1,520,000
1,830,000
65,000
$3,415,000

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