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EXERCISE153(1015minutes)
(a)
1. Cash[(6,000X$25)$2,000].............................................. 148,000
CommonShares.........................................................
148,000
2. Land.................................................................... 130,000
CommonShares.........................................................
130,000
Note: The appraised value of the land is used since IFRS 2 Share Based Payment
assumesthatthefairvalueoftheitemsacquiredcanbemeasuredinmostcases(IFRS2.10
and.13).Inthiscase,theappraisalsuppliesevidenceofthevalue.IFRSisaconstraintsince
the company is a public company as noted by the fact that the shares trade on a national
stockexchange.
3.
(b)
CommonShares(500X$34)...............................................
ContributedSurplus(commonshares).......................
Cash(500X$29)........................................................
17,000
2,500
14,500
Share repurchases are recorded at the average issue price or carrying amount per
share, or the average price at which the shares were issued for that class of shares.
The original issue price of the individual shares being repurchased is not used. The
original issue price of the individual shares repurchased would be considered in the
totalissuepricefortheclassofsharesbutwouldbeaveragedwithallothersharesof
thesameclass.
Ch 15 Solutions
1/11
EXERCISE152(1520minutes)
(a)
OriginalSubscription:
ShareSubscriptionsReceivable.................................................
(40,000sharesX$22each)
CommonSharesSubscribed.............................................
CollectionofDownPayments:
880,000
Cash($880,000X.35)................................................................
ShareSubscriptionsReceivable........................................
CollectionofBalance:
308,000
308,000
Cash($880,000$308,000).......................................................
ShareSubscriptionsReceivable........................................
IssuanceofShares:
572,000
572,000
CommonSharesSubscribed......................................................
CommonShares...............................................................
880,000
880,000
(b)
880,000
UnderASPE,whethertheShareSubscriptionsReceivableaccountshouldbepresentedasanassetora
contraequityaccountisamatterofprofessionaljudgement,althoughconceptually,itmakessenseto
recordasareductionofequity.NotethatSection3251.10oftheCICAHandbook,PartIIrequiresthat
share purchase loans receivables must be shown as contra equity unless the borrower is fully
responsiblefordeclinesinvalueofthesharesandthereisreasonableassurancethatthefullamounts
willbecollected.IntheUnitedStates,theSECrequirestheShareSubscriptionsReceivableaccountto
be presented as a reduction of equity. Under IFRS, specific guidance in not given but using first
principles,thecompanywouldlikelyenduptreatingitthesameasnotedabove.
(c)
Ifasubscriberisunabletopayallinstalmentsandthereforedefaultsontheagreement,thepossibilities
include: (1) returning the amount already paid by the subscriber (possibly after deducting some
expenses), (2) treating the amount paid as forfeited and therefore transferring it to the Contributed
Surplus account, or (3) issuing fewer shares to the subscriber so that the number of shares issued is
equivalenttowhatthesubscriptionpaymentsalreadyreceivedwouldhavepaidforfully.Notethatin
some jurisdictions, the limit to the liability of the subscriber in case of corporate failure is the
subscriptionprice,ratherthantheamountpaidupatthetimeofthefailure.
Ch 15 Solutions
2/11
EXERCISE155(1015minutes)
(a) Preferredshareis
noncumulative,
nonparticipating
Preferred
$21,000
$63,000
(b) Preferredshareis
cumulative,non
participating
(c) Preferredshareis
cumulative,participating
Dividendsinarrears
Currentdividend
Proratashareto
common
($280,000X7%*)
Balancedividendpro
rata
($300,000$580,000)
X$12,400**
($280,000$580,000)
X$12,400
Carryingamount:
Preferred:$100X3,000
Common:$40X7,000
Totalcarryingamount
Common
$74,000
$32,000
Total
$95,000
$95,000
$69,414
$42,000
21,000
$25,586
$19,600
6,414
_______
$69,414
$300,000
$280,000
$580,000
$95,000
$42,000
21,000
19,600
6,414
5,986
$25,586
5,986
$95,000
*Dividendratepershareof$7dividedby$100statedvalueforthepreferredshares.
**$95,000$42,000$21,000$19,600=$12,400
Ch 15 Solutions
3/11
EXERCISE155(Continued)
(d)
Currentyearpayoutratiounder(a):
Payoutratio=
Cashdividendstocommon
__
NetincomePreferreddividends
=1.07
=____74,000____
90,00021,000
Currentyearpayoutratiounder(b):
Payoutratio=Cashdividendstocommon __
NetincomePreferreddividends
=1.19
=____32,000____
90,00063,000
Currentyearpayoutratiounder(c):
Payoutratio=Cashdividendstocommon __
NetincomePreferreddividends
=____25,586____
90,00069,414
=1.24
Ifthepreferredsharesarecumulativeanddividendsinarrearsarepaidintheyear,and/orif
thepreferredsharesareparticipating,thecompanyspayoutratiomayappearhigherthanit
would have been if the preferred shares were not cumulative or participating. A potential
investormaybeinterestedinearningdividendincomethroughownershipofthecompanys
commonshares,andmayrequireahighenoughpayoutratiotoprovideagoodyieldonthe
shares.Theinvestorshouldconsiderthatthecompanyspayoutratiomayappearhigherdue
tocertainpreferredsharedividendfeatures,andnotnecessarilyduetoexcessdistributionof
profittocommonshareholders.
Ch 15 Solutions
4/11
EXERCISE159(1015minutes)
(a)
1.
Noentrysimplyamemorandumindicatingthenumberofshareshasincreasedto2
million.
143,000,000
2.
RetainedEarnings.......................................
CommonStock
Dividends
Distributable..............................
143,000,000
(1,000,000sharesX$143)
CommonStockDividends
Distributable............................................
143,000,000
CommonShares...............................
143,000,000
(b)
Large stock dividends and splits serve the same function with regard to the
securities markets. Both techniques allow the Board of Directors to increase the
quantity of shares outstanding and channel share prices into the popular trading
range.
ASPE & IFRS do not provide specific guidance on this topic. However, legal
requirements may dictate the accounting treatment of large stock dividends and
requirethejournalentrydisplayedinpart2above.Insuchacaseitisnecessaryto
capitalize the stated value with a stock dividend because the number of shares is
increased and the stated value per share remains the same. Accounting for stock
dividendsinthismannerissometimesreferredtoascapitalizationofearnings.In
the absence of such a legal requirement for accounting purposes the 20%25% rule
reasonably views large stock dividends as substantive stock splits and no journal
entryismade.
Forfurtherdiscussionofthetopicoflargestockdividendsseepage955inyourtext
(10thCanEd).
Ch 15 Solutions
5/11
BRIEFEXERCISE1515
(a)
THESAWGRASSCORPORATION
StatementofChangesinShareholders'Equity
YearEndedDecember31,2014
ShareCapital
Numberof
Bal.Jan.1,2014
Issuedcommonshares
Repurchaseofshares
Declareddividends
Comprehensiveincome:
Netincome
HoldinggainOCI
Bal.Dec.31,2014
Shares
Legal
Other
Capital ContributedCapital
32,000$800,000
2,000 100,000
(1,000) (25,000)
Retained
AccumulatedOther
Comprehensive
Earnings
Income
$145,000
$1,500,000
Total
$40,000
(17,500)
(70,000)
400,000
33,000$875,000
$127,500
$1,830,000
25,000
$65,000
$2,485,000
100,000
(42,500)
(70,000)
400,000
25,000
$2,897,500
(b)
THESAWGRASSCORPORATION
StatementofFinancialPosition(Partial)
December31,2014
ShareCapital
Commonshares,noparvalue(33,000shares
issued,unlimitedsharesauthorized)...........................................
$ 875,000
Contributedsurplus..........................................................................
127,500
Totalpaidincapital.........................................................................
1,002,500
Retainedearnings..................................................................................
1,830,000
Accumulatedothercomprehensiveincome...........................................
65,000
Totalshareholdersequity............................................................
$2,897,500
(c) Other comprehensive income and accumulated other comprehensive income are not
recordedunderASPE.UnderASPE,changesinretainedearningsareusuallypresented
in a statement of retained earnings, and changes in capital accounts are usually
presentedinthenotestofinancialstatements.
Ch 15 Solutions
6/11
BRIEF EXERCISE 1518 [assume a $0 balance in the Contributed Surplus (common shares)
accountbeforethetransactiononSeptember5th]
Sept.5
TreasuryShares(1,500X$75)................................ 112,500
Cash...........................................................
112,500
Nov.20
Cash(1,000X$80).................................................
80,000
TreasuryShares(1,000X$75)....................
75,000
ContributedSurplus(commonshares).......
5,000
And,iftheremaining500treasurysharesareresoldfor$40eachonDecember12th:
20,000
Dec.12
Cash(500X$40)....................................................................
ContributedSurplus(CommonShares)
5,000
RetainedEarnings
12,500
TreasuryShares(500X$75) .....................................
37,500
BRIEF EXERCISE 1519 [assume a $0 balance in the Contributed Surplus (common shares)
accountbeforethetransactiononSeptember5th]
Sept.5
TreasuryShares(1,500X$75)................................ 112,500
Cash...........................................................
112,500
Nov.20
Cash(1,000X$55).................................................
55,000
RetainedEarnings..................................................
20,000
TreasuryShares(1,000X$75)....................
75,000
And,iftheremaining500treasurysharesareresoldfor$40eachonDecember12th:
20,000
Dec.12
Cash(500X$40)....................................................................
RetainedEarnings
17,500
TreasuryShares(500X$75) .....................................
Ch 15 Solutions
37,500
7/11
PROBLEM152
There may be a typing error in P15-2 under the heading Cash Dividends:
Dec. 15, 2014 should read Dec. 15, 2013.
The solution below is correct if you use Dec. 15, 2013.
(a)
OreganoInc.
BalanceSheet(PartialShareholdersEquitysection)
June30,2014
ShareCapital:
Preferredshares,$2.00,cumulative
andnonparticipating,100,000
sharesauthorized,50,000shares
issued
$2,200,000
Commonshares,300,000shares
authorized,116,000sharesissued
$3,918,3401
Commonsharessubscribed,
4,286,340
8,000shares
368,000
Totalsharecapital
6,486,340
Retainedearnings
AppropriatedNoteA
50,000
2
Unappropriated
331,660
381,660
Totalsharecapitalandretainedearnings
6,868,000
Less:Sharesubscriptionsreceivable
(368,000)
Totalshareholdersequity
$6,500,000
NoteA:
OreganoInc.isrequiredtoappropriateretainedearningsinanamountthatis
equaltothesinkingfunddepositof$50,000thatistobeaccumulatedtoretire
atermloan.
Notetoinstructor:TheRetainedEarningsappropriationcouldalsobereportedthroughnote
disclosureonly.
Ch 15 Solutions
8/11
PROBLEM152(Continued)
There may be a typing error in P15-2 under the heading Cash Dividends: Dec. 15, 2014 should
read Dec. 15, 2013: the solution below is correct if you use Dec. 15, 2013.
Commonsharetransactions:
Date
Shares
Price
01/07/11
95,000
$31.00
24/07/11
01/03/12
30/06/12
Subtotal
01/10/13
Subtotal
30/11/13
Subtotal
31/01/14
5,000
10,000
42.00
110,000
2,000
46.00
112,000
(2,000)
110,000
5,500
32.83c
52.00
Commonshares
$2,945,000
220,000
420,000
3,585,000
92,000b
3,677,000
65,660
3,611,340
286,000
21,000
$3,918,340
20/06/14
500
Total
116,000
1
Commonsharetransactions:
a. The5,000sharesexchangedforaplotoflandarerecordedat$220,000ofshares(use
thecurrentfairvalueofthelandonJuly24tovaluetheshareissuance).
b. Theremainingsubscriptionsfor8,000sharesresultedin$368,000ofcommonshares
subscribed.
c. $3,677,000 / 112,000 = $32.83 per share. Retained Earnings is also debited for
$12,340,sincethereisnocontributedsurplus,thedifferencebetweentherepurchase
priceof$39persharelesstheaveragestatedpriceof$32.83pershare.
2
Retainedearnings,June30,2013
$690,000
Add:NetIncome
40,000
Deduct:
Appropriationforsinkingfund
$50,000
Excessofcostofreacquiredshares
overassignedvalue
12,340
Preferreddividend
50,000
Stockdividend,commonshares
286,000
398,340
UnappropriatedRetainedEarnings,June30,2014
$331,660
Last updated 20150213
Ch 15 Solutions
9/11
PROBLEM152(Continued)
There may be a typing error in P15-2 under the heading Cash Dividends: Dec. 15, 2014 should
read Dec. 15, 2013: the solution below is correct if you use Dec. 15, 2013.
(b)
October1,2013
Cash .......................................................................................
92,000
ShareSubscriptionsReceivable................................................ 368,000
CommonSharesSubscribed............................................
368,000
CommonShares..............................................................
92,000
November30,2013
CommonShares........................................................................... 65,660
RetainedEarnings......................................................................... 12,340
Cash(2,000X$39)...............................................................
78,000
December15,2013
RetainedEarnings......................................................................... 336,000
CommonStockDividendsDistributable..............................
PreferredsharesdividendsPayable....................................
286,000
50,000
January15,2014
PreferredsharesdividendsPayable............................................. 50,000
Cash....................................................................................
50,000
January31,2014
CommonStockDividendsDistributable........................................ 286,000
CommonShares..................................................................
286,000
April30,2014
InvestmentinSinkingFund..........................................................
Cash....................................................................................
50,000
50,000
June20,2014
Cash ........................................................................................... 21,000
CommonShares..................................................................
21,000
(c) Astockdividendiscurrentlydisadvantageousforcommonshareholderssincetheywillhavetopaytaxes
on the value of the stock dividend without the receipt of cash to settle the tax liability. The total book
valueoftheshareholdersholdingsdoesnotincreasetocompensateforthistaxburden.Theshareholders
ofOreganoInc.maybewillingtoacceptastockdividendinthecurrentyearifthecompanyiscommitted
tocontinuingitspaymentof$0.30pershareascashdividendsinthefuture.Inthiscase,thestockdividend
would result in higher cash dividends for common shareholders because each shareholder would hold
additionalshares.
Last updated 20150213
Ch 15 Solutions
10/11
EXERCISE1515(1520minutes)
(a)
ShareCapital
Liabilities
Share
holders
Equity
Item
Assets
Cont.
Surplus
1.
NE
NE
2.
NE
3.
NE
NE
4.
5.
Retained
Earnings
Acc.Other
Compre
hensive
Income
Net
Income
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
6.
NE
NE
NE
NE
7.
NE
NE
NE
NE(I)**
I(N/A)**
NE(I)**
8.
NE
NE
NE
NE
NE
9.
NE
NE
NE
I*(NE)**
D(N/A)**
I*(NE)**
10.
NE
NE
NE
NE
NE
NE
11.
NE
NE
NE
NE
NE
NE
NE
NE
12.
NE
NE
NE
NE
I=increase
;NE=noeffect ;D=decrease
*thissolutionassumesFV/OCIwithrecyclingthroughnetincome.
**green=ifunderASPE:N/A=notapplicablebecauseOCIdoesnotexistunderASPE.
Ch 15 Solutions
11/11