Organization and Operation of Corporations

Chapter 13 Organization and Operation of Corporations QUICK STUDY SOLUTIONS Quick Study 13-1 (10 minutes) a and d Quick Study 13-2 (10 minutes) 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 Quick Study 13-3 (5 minutes) 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 Quick Study Solutions to accompany Fundamental Accounting Principles, 14th Canadian Edition. 2013 McGraw-Hill Ryerson Ltd. 1

Quick Study 13-4 (20 minutes) FORM OF BUSINESS ORGANIZATION Transaction Sole Proprietorship Corporation Jan. 1, 2014: The owner(s) invested $10,000 into the new business During 2014: Revenues of $50,000 were earned; all cash During 2014: Expenses of $30,000 were incurred; all cash Dec. 15, 2014: $15,000 cash was distributed to the owner(s) Dec. 31, 2014, Year End: All temporary accounts were closed Cash... 10,000 Ian Smith, Capital... 10,000 Cash... 50,000 Revenues... 50,000 Expenses... 30,000 Cash... 30,000 Ian Smith, Withdrawals 15,000 Cash... 15,000 Revenues... 50,000 Income Summary... 50,000 Cash...... 10,000 Common... 10,000 Cash... 50,000 Revenues... 50,000 Expenses... 30,000 Cash... 30,000 Cash Dividends... 15,000 (or R/E) Cash... 15,000 Revenues... 50,000 Income Summary. 50,000 Close Revenue account 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) Close Withdrawal/Cash Dividends Declared account section on the balance sheet at December 31, 2014 after the first year of operations. Income Summary... 20,000 Ian Smith, Capital... 20,000 Ian Smith, Capital... 15,000 Ian Smith, Withdrawals 15,000 Vision Consulting Partial Balance Sheet December 31, 2014 Ian Smith, capital... $15,000 Income Summary... 20,000 Retained Earnings. 20,000 Retained Earnings... 15,000 Cash Dividends... 15,000 No entry if debit Retained Earnings used above. Vision Consulting Inc. Partial Balance Sheet December 31, 2014 Common shares... $ 10,000 Retained earnings... 5,000 Total equity... $15,000 Quick Study Solutions to accompany Fundamental Accounting Principles, 14th Canadian Edition. 2013 McGraw-Hill Ryerson Ltd. 2

Quick Study 13-5 (10 minutes) $48,000 + $146,000 $47,000 $15,000 = $132,000 OR Retained Earnings 48,000 Bal. Dec. 31/14 Dividends, 2015 47,000 Net loss, 2016 15,000 146,000 Net income, 2015 132,000 Bal. Dec. 31/16 Quick Study 13-6 (5 minutes) 1. $300,000 $120,000 + $50,000 = $230,000 2. Net income 3. Dividends Quick Study 13-7 (10 minutes) Fisher Inc. Statement of Changes in For Year Ended December 31, 2015 Common Retained Earnings Total 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 Quick Study Solutions to accompany Fundamental Accounting Principles, 14th Canadian Edition. 2013 McGraw-Hill Ryerson Ltd. 3

Quick Study 13-8 (10 minutes) 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). Quick Study 13-9 (10 minutes) 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. Quick Study Solutions to accompany Fundamental Accounting Principles, 14th Canadian Edition. 2013 McGraw-Hill Ryerson Ltd. 4

Quick Study 13-10 (10 minutes) a. 2014 Oct. 3 Cash... 60,000 Preferred... 60,000 To record issuance of preferred shares; 4,000 $15 = 60,000. Nov. 19 Land... 52,480 Preferred... 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. Quick Study 13-11 (10 minutes) 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. Quick Study Solutions to accompany Fundamental Accounting Principles, 14th Canadian Edition. 2013 McGraw-Hill Ryerson Ltd. 5

Quick Study 13-12 (10 minutes) 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 Quick Study 13-13 (10 minutes) 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. Quick Study Solutions to accompany Fundamental Accounting Principles, 14th Canadian Edition. 2013 McGraw-Hill Ryerson Ltd. 6

Quick Study 13-14 (20 minutes) 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 For Year Ended May 31, 2014 Preferred Common Retained Earnings Total 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 could be omitted. Quick Study Solutions to accompany Fundamental Accounting Principles, 14th Canadian Edition. 2013 McGraw-Hill Ryerson Ltd. 7

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 For Year Ended November 30, 2014 Preferred Common Retained Earnings Total 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 could be omitted. Quick Study Solutions to accompany Fundamental Accounting Principles, 14th Canadian Edition. 2013 McGraw-Hill Ryerson Ltd. 8

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 For Year Ended August 31, 2014 Preferred Common Retained Earnings/(Deficit) Total 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 could be omitted. Quick Study Solutions to accompany Fundamental Accounting Principles, 14th Canadian Edition. 2013 McGraw-Hill Ryerson Ltd. 9