CORPORATIONS: CONTRIBUTED CAPITAL AND DIVIDENDS Assessment Questions. List four advantages and two disadvantages of the corporate form of ownership.

CORPORATIONS: CONTRIBUTED CAPITAL AND DIVIDENDS Assessment Questions AS-1 ( 1, 2 ) List four advantages and two disadvantages of the corporate form of ownership. Advantages: Attractive for investors investors can buy shares, and leave management to the professionals; a larger amount of money can be raised than from the proprietorship or partnership form of business because the number of owners is virtually unlimited. Fixed organizational structure the corporate form of organization requires directors and managers. The directors protect the interest of the owners, and tell the managers, in general terms, how the business should be run. Limited liability an investor s liability is limited to the amount paid for the shares Shares can be transferred shares can be sold easily without affecting the corporation. When shares are sold the management structure of the business remains unchanged. Tax treatment although the business itself pays taxes, the owners do not pay taxes until the company pays out dividends (part of the profits). Unlimited life regardless of changes in ownership of shares, the corporation will continue to exist. Professional managers shareholders do not have to manage the business themselves. They can hire skilled, professional managers. 69

Disadvantages Annual fees and costs the corporate form of organization may require annual fees, and costs, such as audit fees, and annual reports to be filed with securities authorities. Annual formalities to be followed annual meetings, directors meetings, etc. must be held. Forms need to be filed the corporate form of organization means that a number of forms must be filed with authorities. Double taxation taxes are paid by the corporation. Taxes are also paid by owners receiving dividends. Set up the set up of a corporation requires the involvement of lawyers, filing of forms, preparation of incorporation documents etc. which can be very costly. AS-2 ( 3 ) Which portion of the equity section of a set of corporate financial statements relates to money invested by the owners? Which relates to accumulated earnings? Contributed capital relates to money invested by the owners. Retained earnings relates to accumulated earnings. AS-3 ( 3 ) You are preparing the financial statements for a corporation. You must disclose the number of shares authorized. Where would you find the number of shares authorized? In the corporate charter, or letters patent. 70

AS-4 ( 3 ) What is meant by outstanding shares? Outstanding shares are the number of shares that have been issued and sold to all investors. AS-5 ( 3 ) Define retained earnings. Simply put, retained earnings are the amount of profits (earnings) that have not been paid out to shareholders in the form of dividends. In other words, this represents the amount of profit that has been retained in the company. AS-6 ( 4 ) What may shares be issued for? Shares may be issued for cash, assets other than cash, or for services rendered. The number of shares to be issued in a particular transaction is determined by the directors of the company. AS-7 ( 5 ) What is the main difference between common and preferred shares? The main difference between common shares and preferred shares is usually the fact that preferred shares pay a regular fixed dividend, whereas common shares pay dividends only when directors feel that it is appropriate to pay dividends. In addition, preferred shares usually have no voting rights so they have no say in the direction of the company (common shareholders have voting rights and have a say in how the company is managed). If the company had to be liquidated, preferred shareholders would be paid their share of the assets of the company before the common shareholders. 71

AS-8 ( 5 ) List the usual characteristics of common shares. Common shares usually have the following characteristics: represent ownership in the corporation. owners elect board of directors. owners vote on corporate policy. in the event of liquidation, common shareholders rank after bondholders, preferred shareholders and other debt holders. right to receive dividends if declared by directors. owners can freely sell shares if there are buyers. AS-9 ( 5 ) List the usual characteristics of preferred shares. Preferred shares have these characteristics: higher claim on assets and earnings than common shares. generally have a dividend that must be paid before dividends to common shares. no voting rights to receive dividends if declared by directors. owners can freely sell shares if there are buyers. AS-10 ( 6 ) List and describe the three important dates associated with accounting for dividends. Dividends involve three important dates: date of declaration this is the date on which the directors decide that a dividend is appropriate. date of record all shareholders that own shares on this date are eligible to receive the dividend. date of payment this is the date on which the dividend is paid to shareholders who owned shares on the date of record. 72

AS-11 ( 6 ) Who decides the amount of a dividend to be paid to shareholders? Discuss. The amount of the dividend per share is decided by the board of directors. There must be a sufficient balance in retained earnings to pay the dividend. There should also be enough cash to pay the dividend on the payment date. Remember that a business can make a profit and still have no cash. AS-12 ( 1 ) What are two sets of accounting rules that private corporations choose to comply to? They can decide to either adopt IFRS, or they can use Accounting Standards for Private Enterprises (ASPE), also known as Private Enterprise GAAP. AS-13 ( 1 ) What are two reasons that a private corporation may choose to continue to use private enterprise GAAP? They may choose to use private enterprise GAAP because they are resistant to change or do not wish to incur the high costs of converting to IFRS. AS-14 ( 1 ) What are two reasons that a private corporation may choose to transition to IFRS? They may choose to convert to IFRS because they may be considering becoming a public corporation in the near future or the company has international operations. 73

Application Questions AP-1 ( 4 ) Earnestine, Kepplinger & Co. issued 10,000 common shares for $100,000 on May 1, 2014. Write the journal entry to record the transaction. Date Account Title and Explanation Debit Credit May 1 Cash 100,000 Common Shares 100,000 Issued 10,000 common shares for $100,000 AP-2 ( 4 ) Refer to AP-1. In addition to shares issued for cash on May 1, 2014, Earnestine, Kepplinger & Co. issued an additional 10,000 common shares in exchange for land and a building. The land was valued at $60,000 and the building valued at $50,000. Record the transaction. Date Account Title and Explanation Debit Credit May 1 Land 60,000 Building 50,000 Common Shares 110,000 Exchanged land and building for 10,000 common shares AP-3 ( 4 ) The lawyer that handled the issue of shares discussed in AP-2 and AP-3 above has sent a bill for $5,000. The lawyer has agreed to accept 500 common shares instead of cash. Record the transaction on May 10, 2014. Date Account Title and Explanation Debit Credit May 10 Legal Expense 5,000 Common Shares 5,000 Paid lawyer fee with 500 common shares 74

AP-4 ( 6 ) On July 1st, Jonus Enterprises declares a dividend of $5,000 to shareholders on record on July 4th. Record the journal entry associated with this transaction. Date Account Title and Explanation Debit Credit Jul 1 Retained Earnings 5,000 Dividends Payable 5,000 Record dividend payable of $5,000 AP-5 ( 6 ) Using the facts from AP-4, record the journal entry when Jonus Enterprises pays out the dividend on August 15th. Date Account Title and Explanation Debit Credit Aug 15 Dividends Payable 5,000 Cash 5,000 Record payment of dividend declared on July 1 AP-6 ( 6 ) On November 1st, 2014, Mistry Inc. declared $850,000 of dividends payable to shareholders on January 15, 2015. Outstanding are 220,000 common shares worth $2,000,000 and 30,000, $4 cumulative preferred shares worth $3,000,000. No new shares were issued during the year and no dividends have been declared since 2010. Mistry had retained earnings of $4,500,000 at the beginning of 2014 and earned net income of $1,200,000 during the year. Calculate how much Mistry Inc. owes the preferred shareholders. Write the journal entry to record the declaration and subsequent payout of the dividends. Amount owed to preferred shareholders: $4 x 30,000 for 2011 $4 x 30,000 for 2012 $4 x 30,000 for 2013 $4 x 30,000 for 2014 $120,000 + $120,000 + $120,000 + $120,000 = $480,000 75

Date Account Title and Explanation Debit Credit Nov 1 Retained Earnings 850,000 Dividends Payable Common 370,000 Dividends Payable Preferred 480,000 Record dividend payable on 30,000 preferred shares and 220,000 common shares Jan 15 Dividends Payable Common 370,000 Dividends Payable Preferred 480,000 Cash 850,000 Record payment of dividend declared on Nov 1 AP-7 ( 6 ) On December 1st, 2014, Fickle Feline Inc. (a distributor of cat products) declared $200,000 of dividends payable to shareholders on January 3, 2015. There are 20,000 common shares worth $800,000 and 10,000, $0.50 cumulative preferred shares worth $500,000. No new shares were issued during the year and no dividends have been declared since 2011. Fickle Feline had retained earnings of $2,500,000 at the beginning of 2014 and earned net income of $650,000 during the year. Calculate how much Fickle Feline Inc. owes the preferred shareholders. Write the journal entry to record the declaration and subsequent payout of the dividends. Amount owed to preferred shareholders: $0.50 x 10,000 for 2012 $0.50 x 10,000 for 2013 $0.50 x 10,000 for 2014 $5,000 + $5,000 + $5,000 = $15,000 Date Account Title and Explanation Debit Credit Dec 1 Retained Earnings 200,000 Dividends Payable Common 185,000 Dividends Payable Preferred 15,000 Record dividend payable on 10,000 preferred shares and 20,000 common shares Jan 3 Dividends Payable Common 185,000 Dividends Payable Preferred 15,000 Cash 200,000 Record payment of dividend declared on Dec 1 76

AP-8 ( 7 ) Bishop Lutz Hockey Paraphernalia Ltd has 50,000 common shares issued. On January 1st, 2014, the organization declared a 25% stock dividend. Prepare the journal entry to record the declaration and distribution (on February 1st, 2014) of the dividend. The current market price per share is $15. Date Account Title and Explanation Debit Credit Jan 1 Retained Earnings 187,500 Common Share Dividends Distributable 187,500 Record stock dividends payable on 50,000 common shares Feb 1 Common Share Dividends Distributable 187,500 Common Shares 187,500 Record distribution of 12,500 common shares AP-9 ( 7 ) Silang Vayman Ltd is a travel agency that specializes in tours to the Philippines and Russia. It has 75,000 common shares issued. On March 15th, 2014, the organization declared a 45% stock dividend. Prepare the journal entry to record the declaration and distribution (on April 1st, 2014) of the dividend. The current market price per share is $25. Date Account Title and Explanation Debit Credit Mar 15 Retained Earnings 843,750 Common Share Dividends Distributable 843,750 Record stock dividends payable on 75,000 common shares Apr 1 Common Share Dividends Distributable 843,750 Common Shares 843,750 Record distribution of 33,750 common shares 77

AP-10 ( 3, 4, 5, 6 ) Ping Pong Inc. began operations on January 1, 2013. The following transactions relating to shareholders equity occurred in the first two years of the company s operations: 2013 Jan 1 Jan 2 Jan 3 Jan 4 Jan 5 The corporate charter authorized the issuance of unlimited common shares and 200,000, $3 non-cumulative preferred shares worth $100 each. Issued 400,000 common shares for $11 per share. Issued 200,000 common shares in exchange for a building valued at $750,000 and inventory valued at $320,000. Instead of paying a $40,000 fee in cash, the company offered the accountant 400, $3 preferred shares. Issued 15,000, $3 preferred shares for $100 cash per share. For the year ended December 31, 2013, the newly incorporated company had a net income of $950,000. At the directors meeting on January 15, 2014, the company decided to pay out a total of 20% of the net income to preferred and common shareholders. The date of record of the dividends is January 30, 2014. The dividend payment date is February 28, 2014. During the period January 1 February 28, 2014, the company had a net income of $160,000. 2014 The following transactions were incurred by Ping Pong Inc. during the year ended December 31, 2014: Jun 4 Issued 100,000 common shares for $15 per share. For the year ended December 31, 2014, the company had a net income of $1,540,000. At the board of directors meeting held on January 15, 2015, the company decided to pay out a total of 25% of the net income to preferred and common shareholders. The date of record of dividend is January 31, 2015. The dividend is to be paid on February 28, 2015. During the period January 1 February 28, 2015, the company had a net income of $250,000. 78

Required: a) Prepare journal entries to record the above transactions. Date Account Title and Explanation Debit Credit Jan 2, 2013 Cash 4,400,000 Common Shares 4,400,000 Issued 400,000 shares for cash at $11 per share Jan 3, 2013 Building 750,000 Inventory 320,000 Common Shares 1,070,000 Issue of 200,000 common shares for land, building and inventory Jan 4, 2013 Accounting Fee Expense 40,000 Preferred Shares 40,000 Issue of 400 $3 preferred shares in exchange for accounting services Jan 5, 2013 Cash 1,500,000 Preferred Shares 1,500,000 Issue of 15,000 $3 preferred shares for cash Dec 31, 2013 Income Summary 950,000 Retained Earnings 950,000 To close income summary account for the year Jan 15, 2014 Retained Earnings 190,000 Dividends Payable Common 143,800 Dividends Payable Preferred 46,200 Recording dividend payable Feb 28, 2014 Dividends Payable Common 143,800 Dividends Payable Preferred 46,200 Cash 190,000 Recording payment of dividends Jun 4, 2014 Cash 1,500,000 Common Shares 1,500,000 Issued 100,000 shares for cash at $15 per share 79

Date Account Title and Explanation Debit Credit Dec 31, 2014 Income Summary 1,540,000 Retained Earnings 1,540,000 To close income summary account for the year Jan 15, 2015 Retained Earnings 385,000 Dividends Payable Common 338,800 Dividends Payable Preferred 46,200 Recorded dividends payable Feb 28, 2015 Dividends Payable Common 338,800 Dividends Payable Preferred 46,200 Cash 385,000 Recording payment of dividends Note to instructor: The closing entry on December 31 of both years can be optional since closing entries will not be covered until chapter 16. b) Prepare the statement of retained earnings for the year 2013 and for the period January 1 to February 28, 2014. Ping Pong Inc. Statement of Retained Earnings For the Year Ended December 31, 2013 Opening Balance $0 Add: Net Income for the Year 950,000 Balance - December 31, 2013 $950,000 Ping Pong Inc. Statement of Retained Earnings For the Two Months Ended February 28, 2014 Balance - January 1, 2014 $950,000 Add: Net Income for the Period 160,000 1,110,000 Less: Dividends Paid 190,000 Balance - February 28, 2014 $920,000 80

c) Prepare the statement of retained earnings for the year 2014 and for the period January 1 to February 28, 2015. Ping Pong Inc. Statement of Retained Earnings For the Year Ended December 31, 2014 Balance - January 1, 2014 $950,000 Add: Net Income for the Year 1,540,000 2,490,000 Less: Dividends Paid 190,000 Balance - December 31, 2014 $2,300,000 Ping Pong Inc. Statement of Retained Earnings For the Two Months Ended February 28, 2015 Balance - January 1, 2015 $2,300,000 Add: Net Income for the Period 250,000 2,550,000 Less: Dividends Paid 385,000 Balance - February 28, 2015 $2,165,000 d) Prepare the shareholders equity section of the balance sheet as at December 31, 2013 and December 31, 2014. Contributed Capital Ping Pong Inc. Shareholders Equity December 31, 2013 Preferred Shares, $3, 200,000 authorized, 15,400 issued $1,540,000 Common Shares, unlimited authorized, 600,000 shares issued 5,470,000 Total Contributed Capital 7,010,000 Retained Earnings 950,000 Total Shareholders' Equity $7,960,000 81

Contributed Capital Ping Pong Inc. Shareholders Equity December 31, 2014 Preferred Shares, $3, 200,000 authorized, 15,400 issued $1,540,000 Common Shares, unlimited authorized, 700,000 shares issued 6,970,000 Total Contributed Capital 8,510,000 Retained Earnings 2,300,000 Total Shareholders' Equity $10,810,000 AP-11 ( 3, 6, 7 ) At the beginning of the year 2014, Mystery Corporation had the following balances: Contributed Capital: Common shares, 1,000,000 shares authorized; 200,000 shares issued and outstanding $2,000,000 Retained Earnings $925,000 The following transactions occurred during 2014: Jan 10 The Board decided to declare $40,000 dividends to common shareholders. Feb 15 Paid the cash dividend declared on January 10. Nov 30 Declared a 20% stock dividend. The market value was $12 per share. Dec 15 Distributed the stock dividend declared on November 30. Mystery Corporation generated a $250,000 net income during the year. 82

Required: a) Prepare journal entries to record the above transactions. Date Account Title and Explanation Debit Credit Jan 10 Retained Earnings 40,000 Dividends Payable Common 40,000 Dividend payable on common shares Feb 15 Dividends Payable Common 40,000 Cash 40,000 Recording payment of dividends Nov 30 Retained Earnings 480,000 Common Share Dividends Distributable 480,000 Shares dividend payable on 200,000 shares Dec 15 Common Share Dividends Distributable 480,000 Common Shares 480,000 To record distribution of 40,000 shares Dec 31 Income Summary 250,000 Retained Earnings 250,000 To close income summary account for the year Note to instructor: The closing entry on December 31 can be optional since closing entries will not be covered until chapter 16. b) Prepare the statement of retained earnings for the year ended December 31, 2014. Mystery Corporation Statement of Retained Earnings For the Year Ended December 31, 2014 Balance - January 1, 2014 $925,000 Add: Net Income for the year 250,000 1,175,000 Less: Dividends Paid 40,000 Less: Stock Dividend 480,000 Balance December 31, 2014 $655,000 83

c) Prepare the shareholders equity section of the balance sheet as at December 31, 2014. Contribued Capital Common Shares, 1,000,000 authorized, Mystery Corporation Shareholders Equity December 31, 2014 240,000 issued and outstanding $2,480,000 Retained Earnings 655,000 Total Shareholders' Equity $3,135,000 AP-12 ( 3, 7 ) On May 31, 2014, XYZ Corporation s shareholders equity section shows the following balances: Contributed Capital: Common shares, unlimited authorized 30,000 shares issued and outstanding $450,000 Retained Earnings 370,000 Total Shareholders Equity $820,000 Scenario 1 May 31 The company declared and immediately distributed a 100% stock dividend. Current market price was $10. The company recorded the stock dividends by debiting Retained Earnings. Required: a) Prepare the statement of retained earnings after the stock dividend. Note: If students assume the stock dividends are recorded after the information given, their answer should match what is shown on the left. If students assume the stock dividends were recorded before the information given, their answer should match what is shown on the right. XYZ Corporation Statement of Retained Earnings For the Month Ended May 31, 2014 Opening Balance $370,000 Less: Stock Dividend 300,000 Balance May 31, 2014 $70,000 XYZ Corporation Statement of Retained Earnings For the Month Ended May 31, 2014 Opening Balance $670,000 Less: Stock Dividend 300,000 Balance May 31, 2014 $370,000 84

b) Prepare the shareholders equity section of balance sheet as at May 31, 2014 (after the stock dividend has been distributed). Note: If students assume the stock dividends are recorded after the information given, their answer should match what is shown on the left. If students assume the stock dividends were recorded before the information given, their answer should match what is shown on the right. XYZ Corporation Shareholders Equity May 31, 2014 Contributed Capital Common shares, unlimited authorized 60,000 issued and outstanding $750,000 Retained Earnings 70,000 Total Shareholders' Equity $820,000 XYZ Corporation Shareholders Equity May 31, 2014 Contributed Capital Common shares, unlimited authorized 60,000 issued and outstanding $750,000 Retained Earnings 370,000 Total Shareholders' Equity $1,120,000 Scenario 2 May 31 The company implemented a 2-for-1 stock split. Required: a) Calculate the number of outstanding shares. Number of outstanding shares = 30,000 x 2 = 60,000 b) Prepare the shareholders equity section of the balance sheet as at May 31, 2014. XYZ Corporation Shareholders Equity May 31, 2014 Contributed Capital Common Shares, unlimited authorized 60,000 issued and outstanding $450,000 Retained Earnings 370,000 Total Shareholders' Equity $820,000 85

AP-13 ( 3, 5, 6, 7 ) The shareholders equity of East West Corporation at January 1, 2014 was as follows: Contributed Capital: Preferred Shares, $5, non-cumulative, 200,000 authorized, 1,000 issued and outstanding $100,000 Common Shares, unlimited authorized, 30,000 issued and outstanding 1,500,000 Total Contributed Capital 1,600,000 Retained Earnings 1,970,000 Total Shareholders Equity $3,570,000 The following transactions incurred in 2014: Jan 15 Jan 28 The Board decided to declare a total cash dividend of $120,000 to common and preferred shareholders. Date of record of dividend. Feb 10 Paid the cash dividend declared on January 15. Nov 30 Dec 12 Declared a 20% stock dividend to common shareholders. Current market price was $55. Distributed the stock dividends. East West Corporation generated a $980,000 net income during the year. Required: a) Prepare the journal entries to record the above transactions. Date Account Title and Explanation Debit Credit Jan 15 Retained Earnings 120,000 Dividends Payable Common 115,000 Dividends Payable Preferred 5,000 Dividend payable on common and preferred shares Feb 10 Dividends Payable Common 115,000 Dividends Payable Preferred 5,000 Cash 120,000 Recording payment of dividends 86

Date Account Title and Explanation Debit Credit Nov 30 Retained Earnings 330,000 Common Share Dividends Distributable 330,000 Shares dividend payable on 30,000 shares Dec 12 Common Share Dividends Distributable 330,000 Common Shares 330,000 To record distribution of 6,000 shares Dec 31 Income Summary 980,000 Retained Earnings 980,000 To close income summary account for the year Note to instructor: The closing entry on December 31 can be optional since closing entries will not be covered until chapter 16. b) Prepare the statement of retained earnings for the year ended December 31, 2014. East West Corporation Statement of Retained Earnings For the Year Ended December 31, 2014 Balance - January 1, 2014 $1,970,000 Add: Net Income for the Year 980,000 2,950,000 Less: Dividends Paid 120,000 Less: Stock Dividend 330,000 Balance December 31, 2014 $2,500,000 c) Prepare the shareholders equity section of the balance sheet as at December 31, 2014. Contributed Capital East West Corporation Shareholders Equity December 31, 2014 Preferred Shares, $5, non-cumulative 200,000 authorized, 1,000 issued and outstanding $100,000 Common Shares, unlimited authorized, 36,000 issued and outstanding 1,830,000 Total Contributed Capital 1,930,000 Retained Earnings 2,500,000 Total Shareholders Equity $4,430,000 87

AP-14 ( 3, 5, 6 ) The shareholders equity of Khan Corporation at January 1, 2014 was as follows: Contributed Capital: Preferred Shares, $3, non-cumulative, 200,000 authorized, 2,000 issued and outstanding $200,000 Common Shares, unlimited authorized, 32,000 issued and outstanding 1,200,000 Total Contributed Capital 1,400,000 Retained Earnings 320,000 Total Shareholders Equity $1,720,000 No dividend was declared for common shareholders. However on December 15, 2014 the directors decided to pay dividends to preferred shareholders. The dividend payment date was December 28, 2014. Net income for the year was $180,000. Required: a) Calculate the amount of dividend to be paid to preferred shareholders. Dividend payable to preferred shareholders = 2,000 x $3 = $6,000 b) Prepare journal entry for declaration and payment of preferred dividend. Date Account Title and Explanation Debit Credit Dec 15 Retained Earnings 6,000 Dividends Payable Preferred 6,000 Dividend payable on preferred shares Dec 28 Dividends Payable Preferred 6,000 Cash 6,000 Recording payment of dividend c) Prepare statement of retained earnings for the year ended December 31, 2014. Khan Corporation Statement of Retained Earnings For the Year Ended December 31, 2014 Balance - January 1, 2014 $320,000 Add: Net Income for the Year 180,000 500,000 Less: Dividends Paid 6,000 Balance December 31, 2014 $494,000 88

AP-15 ( 3, 5, 6 ) On November 1, 2014, the financial records of Sam Inc. showed the following balances: Contributed Capital: Preferred Shares, $5, cumulative, 200,000 authorized, 2,000 issued and outstanding $200,000 Common Shares, unlimited authorized, 25,000 issued and outstanding 1,300,000 Total Contributed Capital 1,500,000 Retained Earnings 620,000 Total Shareholders Equity $2,120,000 On November 15, 2014, Sam Inc. declared $320,000 of dividends payable to shareholders. No dividends have been declared since 2011. The declared dividend was paid on December 5, 2014. During the period November 1 December 31, 2014 the company earned net income of $50,000. Required: a) Calculate how much Sam Inc. owes the preferred shareholders. Dividend for the year 2,000 x $5 $10,000 Number of years dividend was not paid (2014-2011) 3 years Total dividend in arrears 30,000 b) Prepare the journal entries to record the declaration and payment of dividends. Date Account Title and Explanation Debit Credit Nov 15 Retained Earnings 320,000 Dividends payable - Common 290,000 Dividends Payable Preferred 30,000 Dividend payable Dec 5 Dividends Payable - Common 290,000 Dividends Payable Preferred 30,000 Cash 320,000 Recording payment of dividend 89

c) Prepare the statement of retained earnings for the 2 month period of November 1 December 31, 2014. Sam Inc. Statement of Retained Earnings For the Two Months Ended December 31, 2014 Balance - November 1, 2014 $620,000 Add: Net Income for the Period 50,000 670,000 Less: Dividends Paid 320,000 Balance December 31, 2014 $350,000 AP-16 ( 6, 7 ) At the end of ABC Inc. s 3rd fiscal quarter, the balance of shareholders equity was: Contributed Capital Common Shares, unlimited authorized, 60,000 issued and outstanding $960,000 Total Contributed Capital 960,000 Retained Earnings 580,000 Total Shareholders Equity $1,540,000 In the fourth quarter, the following entries related to its equity accounts were recorded: Date Account Title and Explanation Debit Credit Oct 2 Retained Earnings 110,000 Common Dividends Payable 110,000 Oct 25 Common Dividends Payable 110,000 Cash 110,000 Oct 31 Retained Earnings 140,000 Common Shares Dividend Distributable 140,000 Nov 5 Common Share Dividends Distributable 140,000 Common Shares 140,000 90

Required: a) Explain each journal entry. 1. The entry is to record the declaration of a dividend on common shares at October 2. 2. The entry is to record the payment of the common dividends declared on October 2. 3. The entry is to record the stock dividend declared. 4. The entry is to record the distribution of shares as a stock dividend. b) Complete the following table showing the equity balances at each indicated date. October 2 October 25 October 31 November 5 Common Shares $960,000 $960,000 $960,000 $1,100,000 Common Share Dividends Distributable - - 140,000 - Retained Earnings 470,000 470,000 330,000 330,000 Total Equity $1,430,000 $1,430,000 $1,430,000 $1,430,000 AP-17 ( 4, 5, 6 ) Given below is the equity section of Lizzy Dizzy Corporation at December 31, 2014. Preferred shares were sold at $100 each. Contributed Capital: Preferred Shares, $7, cumulative, 200,000 authorized $20,000,000 Common Shares, unlimited authorized, 4,000,000 issued and outstanding 59,000,000 Total Contributed Capital 79,000,000 Retained Earnings 64,450,000 Total Shareholders Equity $143,450,000 Required: From the information provided above, calculate the following: a) Calculate the number of preferred shares issued. Number of preferred shares issued = $20,000,000 $100 = 200,000 b) Calculate total amount of annual dividend payable to preferred shareholders. Amount of dividend payable to preferred shareholders = 200,000 x $7 = $1,400,000 91

c) Calculate the average issuance price per common share. Average issue price per common share = $59,000,000 4,000,000 = $14.75 d) Calculate the amount due to preferred shareholders if the company has not declared dividends since 2010. Amount due to preferred shareholders = $1,400,000 x 4 = $5,600,000 e) Suppose that the company declared to pay $25,000,000 as dividend on December 31, 2014 and paid dividends on January 10, 2015. Prepare journal entries to record the declaration and payment of dividends. Date Account Title and Explanation Debit Credit Dec 31 Retained Earnings 25,000,000 Dividend Payable - Common 19,400,000 Dividends Payable Preferred 5,600,000 Dividend payable Jan 10 Dividend Payable - Common 19,400,000 Dividends Payable Preferred 5,600,000 Cash 25,000,000 Recording payment of dividend AP-18 ( 4, 5, 6 ) Given below is the equity section of Hudson Corporation at December 31, 2014: Contributed Capital Preferred Shares, $12, non-cumulative, 100,000 authorized, 8,000 issued and outstanding $800,000 Preferred Shares, $9, cumulative, 100,000 authorized, 20,000 issued and outstanding 2,000,000 Common Shares, unlimited authorized, 40,000 issued and outstanding 2,000,000 Total Contributed Capital $4,800,000 Assume that no dividends were paid in 2012 or 2013. On December 31, 2014, Hudson Corporation declared a total cash dividend of $736,000. Required: a) Calculate the amount of cash dividend paid to each of the three classes of share capital. Common shares $736,000-540,000-96,000 $100,000 $9 cumulative preferred shares (3 years) 20,000 x $9 x 3 $540,000 $12 non cumulative preferred shares 8,000 x $12 $96,000 92

b) Calculate the dividend paid per share for each of the three classes of share capital. Common shares Cumulative preferred shares Non cumulative preferred shares Total dividends $100,000 540,000 $96,000 # of shares 40,000 20,000 8,000 $ 2.50 $ 27 $ 12 c) Calculate the average issue price of each type of shares. Common shares Cumulative preferred shares Non cumulative preferred shares Book value $2,000,000 $2,000,000 $800,000 # of shares 40,000 20,000 8,000 Average price per share $50 $100 $100 d) Prepare the journal entry for recording dividends in arrears for last two years. There is no journal entry to record dividends in arrears; however, the amount is disclosed in the financial statements. AP-19 ( 1, 4, 5, 6 ) In 2014, Elizabeth and some of her friends invested money to start a company named FRIENDZ Corporation. The following transactions occurred during 2014: Jan 1 Jan 6 Jan 7 The corporate charter authorized to issue 70,000, $5 cumulative preferred shares and unlimited common shares up to a maximum amount of $20,000,000. Issued 200,000 common shares at $16 per share. Shares were issued to Elizabeth and other investors. Issued another 500 common shares to Elizabeth in exchange for her services in organizing the corporation. The shareholders agreed that the services were worth $60,000. Jan 12 Issued 3,500 preferred shares for $350,000. Jan 14 Nov 15 Dec 20 Issued 10,000 common shares in exchange for a building acquired. For this purpose shares were valued at $16. The first annual dividend on preferred shares was declared. Paid the dividends declared on preferred shares. FRIENDZ Corporation generated a $125,000 net income during the year. 93

Required: a) Prepare the journal entries to record the above transactions. Date Account Title and Explanation Debit Credit Jan 6 Cash 3,200,000 Common Shares 3,200,000 Issued 200,000 shares for cash at $16 per share Jan 7 Company Organization Expenses 60,000 Common Shares 60,000 Issued 500 shares in exchange for organization services Jan 12 Cash 350,000 Preferred Shares 350,000 Issue of preferred shares for cash Jan 14 Building 160,000 Common Shares 160,000 Issue of 10,000 common shares for building Nov 15 Retained Earnings 17,500 Dividends Payable Preferred 17,500 Dividend declared on preferred shares Dec 20 Dividends Payable Preferred 17,500 Cash 17,500 Recording payment of dividend Dec 31 Income Summary 125,000 Retained Earnings 125,000 To close income summary account for the year Note to instructor: The closing entry on December 31 can be optional since closing entries will not be covered until chapter 16. b) Prepare the statement of retained earnings for the year ended December 31, 2014. FRIENDZ Corporation Statement of Retained Earnings For the Year Ended December 31, 2014 Opening Balance $0 Add: Net Income for the Year 125,000 125,000 Less: Dividends Paid 17,500 Balance December 31, 2014 $107,500 94

c) Prepare the shareholders equity section of the balance sheet as at December 31, 2014. Contributed Capital FRIENDZ Corporation Shareholders Equity December 31, 2014 Preferred Shares, $5, cumulative, 70,000 authorized, 3.500 issued and outstanding $350,000 Common Shares, unlimited authorized, 210,500 issued and outstanding 3,420,000 Total Contributed Capital 3,770,000 Retained Earnings 107,500 Total Shareholders Equity $3,877,500 d) Suppose one of Elizabeth s friends (who is also a board member of Doda Dola, a public corporation) informs her that the company will be releasing its financial statements for the quarter next week and that the earnings are excellent! Elizabeth s friend encourages her to buy shares in Doda Dola now so that she can benefit from the increase in share price after the earnings are released next week. Comment on this scenario if Elizabeth decides to purchase shares in Doda Dola using this information. If Elizabeth purchases the shares, she and her friend could both be found guilty of insider trading as they are using financial information that is not yet released to the public to better their financial situation. AP-20 ( 6 ) Tea Time Inc. is a distributor of fine artisan tea and has a June 30 year-end. Due to several years of poor financial performance, no dividends have been declared since 2010. On June 30, 2013 the company declared $100,000 of dividends. The dividends will be paid on July 5, 2013. As at June 30, 2013, the following shares were outstanding: 90,000 common shares, 40,000, $0.30 cumulative preferred shares, and 35,000, $0.20 non-cumulative preferred shares. a) Calculate how much Tea Time Inc. owes in dividends to each of the shareholders as at June 30, 2013. Dividend paid per share # of shares # of years in arrears Dividends Total dividend paid $100,000 Cumulative Preferred Shares $0.30 40,000 3 $36,000 Non-Cumulative Preferred Shares $0.20 35,000 n/a $7,000 Common Shares 90,000 $57,000 95

b) Prepare the journal entry to record the declaration and subsequent payout of the dividends. Date Account Title and Explanation Debit Credit Jun 30 Retained Earnings 100,000 Dividend Payable - Common shares 57,000 Dividend Payable - Preferred shares, cumulative 36,000 Dividend Payable - Preferred shares, non-cumulative 7,000 Declare dividends Jul 5 Dividend Payable - Common Shares 57,000 Dividend Payable - Preferred shares, cumulative 36,000 Dividend Payable - Preferred shares, non-cumulative 7,000 Cash 100,000 Pay dividends to shareholders 96

Exercise Questions EX-1 ( 4 ) a) Sherm & Co. issued 12,100 common shares for $91,000 on June 3, 2014. Write the journal to record the transaction. Date Account Title and Explanation DR CR Jun 3 Cash 91,000 Common Shares 91,000 Issue common shares for cash b) In addition to shares issued for cash on June 3, 2014, Sherm & Co. issued an additional 13,600 common shares in exchange for machinery and a building. The machinery was valued at $61,000 and the building valued at $101,000. Record the transaction. Date Account Title and Explanation DR CR Jun 3 Building 101,000 Machinery 61,000 Common Shares 162,000 Issue common shares for capital assets c) The accountant that handled the issue of shares for Sherm & Co. has sent a bill for $5,600. The accountant has agreed to accept 550 common shares instead of cash. Record the transaction on June 9, 2014. Date Account Title and Explanation DR CR Jun 9 Accounting Fees Expense 5,600 Common Shares 5,600 Issue common shares for expense EX-2 ( 6 ) a) On February 1st, Adam Enterprises declares a dividend of $4,800 to common shareholders to be paid on February 4th. Record the journal entry associated with this transaction. Date Account Title and Explanation DR CR Feb 1 Retained Earnings 4,800 Dividends Payable - Common 4,800 Record declaration of dividends 97

b) Record the journal entry when Adam Enterprises pays out the dividend on March 19th. Date Account Title and Explanation DR CR Mar 19 Dividends Payable - Common 4,800 Cash 4,800 Record payment of dividends EX-3 ( 6 ) On May 1st, 2014, Crackle Canine Inc. (a distributor of dog products) declared $196,000 of dividends payable to shareholders on June 3, 2014. There are 24,800 common shares and 14,700, $1.00 cumulative preferred shares. Dividends were last paid in 2010. Write the journal entry to record the declaration and subsequent payout of the dividends. Date Account Title and Explanation DR CR May 1 Retained Earings 196,000 Dividends Payable - Common 137,200 Dividends Payable - Preferred 58,800 Record dividend payable Jun 3 Dividends Payable - Common 137,200 Dividends Payable - Preferred 58,800 Cash 196,000 Record payment of dividend EX-4 ( 3, 5, 6 ) The shareholders equity of Genghis Corporation at January 1, 2014 was as follows: Contributed Capital Preferred Shares, $5, non-cumulative, 200,000 authorized, 1,000 issued and outstanding Common Shares, unlimited authorized, 35,000 issued and outstanding $225,000 $1,070,000 Total Contributed Capital 1,295,000 Retained Earnings 253,000 Total Shareholders Equity $1,548,000 No dividend was declared for common shareholders. However on December 15, 2014 the directors decided to pay dividends to preferred shareholders. The dividend payment date was December 28, 2014. Net income for the year was $240,000. 98

a) Calculate the amount of dividend to be paid to preferred shareholders. Dividends Payable $5,000 b) Prepare the journal entry for the declaration and payment of the preferred dividend. Date Account Title and Explanation DR CR Dec 15 Retained Earnings 5,000 Dividends Payable - Preferred 5,000 Record dividend payable Dec 28 Dividends Payable - Preferred 5,000 Cash 5,000 Record payment of dividend c) Prepare the statement of retained earnings for the year ended December 31, 2014. Genghis Corporation Statement of Retained Earnings For the Month Ended December 31, 2014 Opening Balance $253,000 Add: Net Income 240,000 Less: Dividends Paid 5,000 Balance December 31, 2014 $488,000 EX-5 ( 1, 4, 5, 6 ) In 2014, Joanna and some of her friends invested money to start a company named FRIENDZ Corporation. The following transactions occurred during 2014: Jan 1 Jan 6 Jan 7 The corporate charter authorized 76,000, $4 cumulative preferred shares and unlimited common shares up to a maximum amount of $22,000,000 to be issued. Issued 231,000 common shares at $15 per share. Shares were issued to Joanna and other investors. Issued another 450 common shares to Joanna in exchange for her legal services in setting up the corporation. The shareholders agreed that the legal services were worth $7,650. Jan 12 Issued 3,900 preferred shares for $321,000. Jan 14 Nov 15 Dec 20 Issued 10,000 common shares in exchange for a building acquired. For this purpose shares were valued at $19. The first annual dividend on preferred shares was declared. Paid the dividends declared on preferred shares. 99

FRIENDZ Corporation generated a $147,000 net income during the year. a) Prepare the journal entries to record the above transactions. Date Account Title and Explanation DR CR Jan 6 Cash 3,465,000 Common Shares 3,465,000 Issued common shares for cash Jan 7 Legal Expense 7,650 Common Shares 7,650 Issued common shares in exchange for services Jan 12 Cash 321,000 Preferred Shares 321,000 Issue of preferred shares for cash Jan 14 Building 190,000 Common Shares 190,000 Issued common shares for building Nov 15 Retained Earnings 15,600 Dividends Payable Preferred 15,600 Dividend declared on preferred shares Dec 20 Dividends Payable Preferred 15,600 Cash 15,600 Recording payment of dividend b) Prepare the statement of retained earnings for the year ended December 31, 2014. FRIENDZ Corporation Statement of Retained Earnings For the Year Ended December 31, 2014 Opening Balance $0 Add: Net Income 147,000 Less: Dividends Paid 15,600 Balance December 31, 2014 $131,400 100

c) Prepare the shareholders equity section of the balance sheet as at December 31, 2014. Contributed Capital FRIENDZ Corporation Shareholders Equity December 31, 2014 Authorized: 76,000 $4 cumulative preferred shares and unlimited common shares Issued: 241,450 Common Shares 3,662,650 3,900, $4 Preferred Shares 321,000 Total Share Capital 3,983,650 Retained Earnings 131,400 Total Shareholders Equity 4,115,050 EX-6 ( 4 ) Swanson Inc. was formed on January 1, 2014 and issued 10,000 common shares for $2 per share. During the year the following transactions occurred: May 15 Jul 1 Sep 26 Issued 4,500 common shares for $2.75 per share Issued 5,000 common shares in exchange for equipment with a fair value of $14,500 Issued 2,800 common shares for $2.50 per share a) Prepare the journal entries to record the above transactions (including the entry to record the formation of Swanson Inc.). Date Account Title and Explanation DR CR Jan 1 Cash 20,000 Common Shares 20,000 Issued 10,000 shares for cash May 15 Cash 12,375 Common Shares 12,375 Issued 4,500 shares for cash Jul 1 Equipment 14,500 Common Shares 14,500 Issued 5,000 shares for equipment Sep 26 Cash 7,000 Common Shares 7,000 Issued 2,800 shares for cash 101

b) Determine the total number and value of common shares issued and outstanding as at December 31, 2014. Date # of shares issued $/Share Total ($) Jan 1 10,000 $2.00 $20,000 May 15 4,500 $2.75 $12,375 Jul 1 5,000 $2.90 $14,500 Sep 26 2,800 $2.50 $7,000 Total Dec 31, 2014 22,300 $2.42 $53,875 c) What is the average issue price per common share. Average Issue Price = $53,875/22,300 = $2.42 Analysis Component: Suppose that Joe, the president of Swanson Inc., owns 14,500 of the outstanding shares. What percentage ownership does Joe have? Each common share represents an equal amount of ownership, regardless of the amount paid for it. Ownership Percentage: 14,500 22,300 = 65% EX-7 ( 4 ) Flanders Inc. was formed on March 1, 2014; upon formation, it issued 8,000 common shares for $22 each and 5,500 preferred shares for $30 each. During the year, the following transactions occurred: Jun. 7 Aug 31 Jan 9 Issued 1,000 common shares for $25 per share. Issued 800 preferred shares for $33 per share. Issued 2,500 common shares for $24 per share and 300 preferred shares for $32 per share. 102

a) Prepare the journal entries to record the above transactions (including the entries to record the formation of Flanders Inc.). Date Account Title and Explanation DR CR Mar 1 Cash 341,000 Preferred Shares 165,000 Common Shares 176,000 Issued shares for cash Jun 7 Cash 25,000 Common Shares 25,000 Issued 1,000 shares for cash Aug 31 Cash 26,400 Preferred Shares 26,400 Issued 800 shares for equipment Jan 9 Cash 69,600 Preferred Shares 9,600 Common Shares 60,000 Issued shares for cash b) Determine the total number and value of common shares issued and outstanding as at March 31, 2015. Date # of shares issued $/Share Total ($) Mar 1 8,000 $22.00 $176,000 Jun 7 1,000 $25.00 $25,000 Jan 9 2,500 $24.00 $60,000 Total March 31, 2015 11,500 $22.70 $261,000 c) What is the average issue price per common share? Analysis Component: Average Issue Price = $261,000/11,500 = $22.70 Suppose that Ned, the president of Flanders Inc., owns 990 of the outstanding preferred shares and 6,000 of the common shares. What percentage ownership does Ned have? Preferred shares do not represent ownership in a corporation. Only common shares do. Each common share represents an equal amount of ownership, regardless of the amount paid for it. Ownership Percentage: 6,000 11,500 = 52% 103

EX-8 ( 6 ) Martin Inc. was formed on January 1, 2011. Its shares were all issued during the first year of operations and were comprised as follows: 80,000 common shares and 10,000 $2 cumulative preferred shares. Over the past four years, Martin Inc. has declared and paid the following cash dividends: Year Total 2011 $30,000 2012 $35,000 2013 $0 2014 $45,000 Calculate the amount of dividends paid to each class of shareholders for each year. Class of Shares # of shares 2011 2012 2013 2014 Preferred Shares - cumulative 10,000 $20,000 $20,000 $0 $40,000 Common Shares 80,000 $10,000 $15,000 $0 $5,000 Total dividends paid $30,000 $35,000 $0 $45,000 EX-9 ( 6 ) Tilda Inc. was formed on January 1, 2011. Its shares were all issued during the first year of operations and were issued as follows: 10,000 common shares, 7,000 $4 cumulative preferred shares, and 4,000 $3 non-cumulative preferred shares. Over the past four years Tilda Inc. has declared and paid the following cash dividends: Year Total 2011 $60,000 2012 $0 2013 $100,000 2014 $70,000 Calculate the amount of dividends paid to each class of shareholders for each year. Class of Shares # of shares 2011 2012 2013 2014 $4 Preferred - cumulative 7,000 $28,000 $0 $56,000 $28,000 $3 Preferred - non-cumulative 4,000 $12,000 $0 $12,000 $12,000 Common 10,000 $20,000 $0 $32,000 $30,000 Total dividends paid $60,000 $0 $100,000 $70,000 104

EX-10 ( 4, 6 ) Vitamin Corporation was incorporated and began operations on May 1, 2010. Vitamin presented the following information at the end of the 2013 fiscal year: Preferred Shares, $3 cumulative, 300,000 shares authorized, 5,000 shares issued and outstanding $14,500 Common Shares, unlimited authorized, 40,000 shares issued and outstanding $280,000 Retained Earnings $645,000 Dividends were last paid out in 2012 fiscal year. The following transactions relating to shareholders equity occurred during the 2014 fiscal year: Date Transaction May 1 Jun 2 Issued 60,000 common shares for $8 per share and 15,000 preferred shares for $3 per share. Issued 5,000 common shares valued at $30,000 to Vitamin Corp. s lawyer for service provided when setting up the corporation. Aug 4 Issued 40,000 common shares in exchange for machinery valued at $250,000. Nov 15 Apr 30 Issued 10,000 common shares for $8.50 each and 5,000 preferred shares for $3.25 each. Net income for the year was $97,200. Dividends of $165,000 were declared and are payable on May 5, 2014. a) Prepare the journal entries to record the above transactions. Date Account Title and Explanation DR CR May 1 Cash 525,000 Preferred Shares 45,000 Common Shares 480,000 Issued shares for cash Jun 2 Legal expense 30,000 Common Shares 30,000 Issued shares for legal services provided Aug 4 Machinery 250,000 Common Shares 250,000 Issued shares for machinery Nov 15 Cash 101,250 Preferred Shares 16,250 Common Shares 85,000 Issued shares for cash 105

Apr 30 Retained Earnings 165,000 Dividends Payable - Preferred 75,000 Dividends Payable - Common 90,000 Declared a cash dividend b) Prepare the statement of retained earnings for the 2014 fiscal year. Vitamin Corporation Statement of Retained Earnings For the year ended April 30, 2014 Balance - May 1, 2013 $645,000 Add: net income for the period 97,200 Less: dividends paid 165,000 Balance - April 30, 2014 $577,200 EX-11 ( 3 ) The shareholders equity of Thomas Inc. at March 31, 2014 is as follows: Shareholders Equity Contributed Capital Thomas Inc. Shareholders' Equity As at March 31, 2014 Preferred shares, $2, 80,000 shares authorized, 23,000 shares issued and outstanding $115,000 Common shares, unlimited shares authorized, 120,000 shares issued and outstanding $360,000 Total Contributed Capital $475,000 Retained Earnings $58,675 Total Shareholders' Equity $533,675 Additional Information: The preferred shares have an average issue price of $5.00 per share. The common shares have an average issue price of $3.00 per share. Required: Fill in the grey areas in the above table with the correct numbers. 106

EX-12 ( 3 ) The shareholders equity of Sharp Ltd. at December 31, 2014 is as follows: Shareholders' Equity Contributed Capital Sharp Ltd. Shareholders' Equity As at December 31, 2014 Preferred shares, $0.50, 5,000 shares authorized, 1,000 shares issued and outstanding $55,000 Common shares, 30,000 shares authorized, 6,500 shares issued and outstanding $260,000 Total Contributed Capital $315,000 Retained Earnings $242,650 Total Shareholders' Equity $557,650 Additional Information: The preferred shares have an average issue price of $55 per share. The common shares have an average issue price of $40 per share. Retained earnings as at January 1, 2014 was $187,000, net income for the year was $65,450 and $9,800 of dividends were declared, payable on January 10, 2015 Required: Fill in the grey areas in the above table with the correct numbers. EX-13 ( 3 ) The shareholder s equity of WEISS Corp. at June 30, 2014 is as follows: Shareholders' Equity Contributed Capital WEISS Corp. Shareholders' Equity As at June 30, 2014 Preferred Shares, $5, 140,000 shares authorized, 19,500 shares issued and outstanding $351,000 Common Shares, 500,000 shares authorized, 9,800 shares issued and outstanding $68,600 Total Contributed Capital $419,600 Retained Earnings $485,750 Total Shareholders' Equity $905,350 Additional Information: The preferred shares have an average issue price of $18 per share. The common shares have an average issue price of $7 per share. Retained earnings as at June 30, 2013 was $398,500, net income for the year was $184,750 and dividends were paid to preferred shareholders only (the preferred shares are non-cumulative). Required: Fill in the grey areas in the above table with the correct numbers. 107