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BAT4M - Chapter 15

ANSWERS TO QUESTIONS

01. (a) A dividend is a distribution by a corporation to itsshareholders on a pro rata (equal) basis, per share.

(b) Disagree. Dividends may take four forms: cash, property,scrip (promissory note to pay cash), or shares.

02. Robin is not correct. Adequate cash is only one of theconditions. In order for a cash dividend to occur, a corporationmust also have sufficient retained earnings and the dividendmust be declared by the board of directors.

03. (a) The three dates are:

Declaration date is the date when the board ofdirectors formally declares the cash dividend andannounces it to shareholders. The declarationcommits the corporation to a binding legal obligationthat cannot be rescinded.

Record date is the date that marks the time whenownership of the shares is determined from theshareholder records maintained by the corporation.The purpose of this date is to identify the persons orentities that will receive the dividend.

Payment date is the date on which the dividendcheques are mailed to the shareholders.

(b) The accounting entries and their dates are:

Declaration date—Debit Cash Dividends and CreditDividends Payable.

No entry is made on the record date.

Payment date—Debit Dividends Payable and CreditCash.



Questions Chapter 15 (Continued)

04. From the perspective of the corporation, cash dividends

decrease assets, retained earnings, and total shareholders'equity. A stock dividend decreases retained earnings,increases share capital (contributed capital if the shares have astated or par value), and has no effect on total assets and totalshareholders' equity. If a cash dividend is paid, an individualshareholder’s personal financial position will increase by theamount of cash received. If a stock dividend is received, theshareholder’s personal financial position will increase by themarket value of the share multiplied by the number of sharesreceived.

5. A corporation generally issues stock dividends for one of thefollowing reasons:

1. To satisfy shareholders' dividend expectations withoutspending cash.

2. To increase the marketability of its share by increasing thenumber of shares and thereby decreasing the market priceper share. Decreasing the market price of the share makes

the shares easier to purchase for smaller investors.3. To emphasize that a portion of shareholders' equity that

had been reported as retained earnings has beenpermanently reinvested in the business and therefore isunavailable for cash dividends.

6. In the Pella Corporation the number of shares will increase to20,000 (10,000 X 2). The effect of a split on market value isgenerally inversely proportional to the size of the split. In this

case, the market price would fall to approximately $70 pershare ($140 2).

7. The different effects of a stock split versus a stock dividendare:

Item Stock Split Stock Dividend

Total contributed capitalTotal retained earnings

Total value recorded forcommon sharesLegal capital per share

No ChangeNo Change

No ChangeDecrease

IncreaseDecrease

IncreaseNo Change




8. A prior period adjustment is a correction of a material error in

reporting income of a prior period. The correction is reported inthe current year's statement of retained earnings as anadjustment of the beginning balance of retained earnings.

9. The understatement of amortization in a prior year overstatesthe beginning retained earnings balance. The statement ofretained earnings presentation is:

Balance, January 1, as previously reported ................ $240,000Less: Correction for understatement of prior

prior year's amortization (net of$22,500 income tax saving) ............................. 67,500*

Balance, January 1, as adjusted ................................... $172,500

*$90,000 – ($90,000 X 25% tax savings) = $67,500

10. The purpose of a retained earnings restriction is to indicatethat a portion of retained earnings is currently unavailable fordividends. Restrictions may be either contractual or voluntary.

11. Retained earnings restrictions are generally reported in thenotes to the financial statements. (Occasionally, separateaccounts are created, within the shareholders’ equity sectionof the balance sheet, for the restricted or appropriatedamounts.)

12. The debits and credits to retained earnings are:

Debits Credits1. Net loss2. Prior period adjustments

for overstatements of netincome

3. Cash and stock dividends4. Cumulative effect of a

change in accountingprinciple that decreasednet income

1. Net income2. Prior period adjustments for

understatements of netincome

3. Cumulative effect of a changein accounting principle thatincreased net income




13. The cumulative effect of a change in accounting principle on

net income is reported, net of applicable income tax, as anadjustment to the opening balance of retained earnings. Thus,your friend is correct.

14. Omar is incorrect. Only the ending balance of retained earningsis reported in the shareholders' equity section of the balancesheet. (The beginning balance appears in the statement ofretained earnings, however. It would also appear as the endingbalance of retained earnings for the preceding period, in a setof comparative financial statements.)

15. (a) Contributed Capital—Share Capital(b) Contributed Capital—Share Capital(c) Contributed Capital—Share Capital(d) Contributed Capital—Additional Contributed Capital(e) Retained Earnings

16. Nels should be told that although many factors affect themarket price of a share at a given time, the reported net income

is one of the most significant factors. When companiesannounce increases or decreases in net income, the marketprice of its share usually increases or decreases immediately.Net income also provides an indication of the amount ofdividends that a company can distribute. In addition, netincome leads to a growth in retained earnings, which is oftenreflected in a share's market price. Because net income isfound on the income statement not the balance sheet, it isimportant to analyze all the financial statements when making

investment decisions.

17. The unique feature of a corporation income statement is aseparate section that shows income tax expense. Thepresentation is as follows:

Income before income tax .........................................$500,000

Income tax expense* ..................................................

.....................................................................................0150,000Net income ..................................................................

..................................................................................... $350,000



* This is usually subdivided, to show the portion which is

currently due and the portion which is due in future periods.




*18. Intraperiod tax allocation refers to assigning income tax within

the financial statements (income statement and statement ofretained earnings) to each item that directly affects the incometax for the period. As a result, income tax expense is allocatedto income before income tax and to each nontypical item(discontinued operations, extraordinary items, and changes inaccounting principles). Intraperiod tax allocation is importantbecause it reflects the true effective tax rate in the incomestatement, and matches the income tax expense to the itemswhich affect the tax.

*19. Discontinued operations refer to the disposal of a significantsegment of the business, such as the cessation of an entireactivity or the elimination of a major class of customers. It isimportant to report discontinued operations separately fromincome from continuing operations because the discontinuedsegment will not affect future income statements. Thus, thepredictive value of the income statement is enhanced.

20. Items (a), (d), and (g) are extraordinary items.

*21. Earnings per share (EPS) on income before extraordinaryitems usually is more relevant to an investment decision thanEPS on net income. Income before extraordinary itemsrepresents the results of continuing and ordinary businessactivity. It is therefore a better basis for predicting futureoperating results than an EPS figure which includes the effectof extraordinary items that are not expected to recur again inthe foreseeable future.

22. (a) Favourable(b) Unfavourable(c) Favourable(d) Unfavourable



SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 15-1

Nov. 1 Cash Dividends .................................................. 100,000Dividends Payable ...................................... 100,000

Dec. 1 No entry required on record date.

Dec. 31 Dividends Payable ............................................. 100,000Cash ............................................................ 100,000

BRIEF EXERCISE 15-2

Dec. 1 Stock Dividends (8,000 X $15) ........................... 120,000Stock Dividends Distributable ................... 120,000

31 Stock Dividends Distributable .......................... 120,000Common Shares ......................................... 120,000

BRIEF EXERCISE 15-3Before Stock

DividendAfter StockDividend

(a) Shareholders' equityCommon sharesRetained earnings

Total shareholders' equity

(b) Shares issued

(c) Book value per share

$1,000,000300,000

$1,300,000

100,000

$13.00

$ 1,160,000140,000

$ 1,300,000

110,000

$11.82



BRIEF EXERCISE 15-4

I would anticipate the market price after the split would be $8 ($12 x2/3 = $8). The reason for a stock split is usually to increase the

marketability of the shares by reducing its price.

BRIEF EXERCISE 15-5

CADIEN INC.Statement of Retained Earnings

For the Year Ended December 31, 2003

Balance, January 1 ............................................................................ $220,000Add: Net income .............................................................................. 0150,000

370,000Less: Dividends ................................................................................ 0085,000Balance, December 31 ...................................................................... $285,000

BRIEF EXERCISE 15-6

The cumulative prior income effect of a change in accountingprinciple is reported as an adjustment to the opening balance ofretained earnings. In this case, the adjustment would be adeduction of $49,000, as follows:

Cumulative effect of change in accounting principleEffect on prior years' income of change in amortization

method, net of $21,000 ($70,000 X 30%) income taxsaving .................................................................................

$49,000

Changes for the current year are reported in the current year’sincome statement. The $8,000 would be included in the currentyear’s amortization expense.



BRIEF EXERCISE 15-7

MÉNARD CORPORATIONPartial Balance Sheet

December 31, 2003

Shareholders' equityShare capital

Common shares, no par value, unlimitedshares authorized, 5,000 shares issued ..... $50,000

Common stock dividend distributable .......... 15,000Total share capital ................................... 65,000

Retained earnings (see Note 3) ............................. 29,000Total shareholders' equity ............................. $94,000

Note 3: Retained earnings of $20,000 has been restrictedfor loan agreements

BRIEF EXERCISE 15-8

TEC.COM CORPORATIONPartial Income Statement

For the Year Ended November 30, 2003

Income before income tax ................................................................ $300,000Income tax expense ($300,000 X 25%) ............................................. 0 75,000Income before extraordinary item .................................................... 225,000Extraordinary loss from flood, net of $20,000

($80,000 X 25%) income tax saving............................................... 0 60,000Net income ......................................................................................... $165,000



BRIEF EXERCISE 15-9

OSBERN CORPORATIONPartial Income Statement


Discontinued operationsLoss from operations of Mexico facility, net of $105,000

($300,000 X 35%) income tax savings .............................. $195,000Loss on disposal of Mexico facility, net of

$56,000 ($160,000 X 35%) income tax savings ................. 104,000$299,000

BRIEF EXERCISE 15-10

Net income ($580,000 – $200,000 – $90,000) ................................... $290,000

Earnings per share:

Income from continuing operations ................................................ $5.80Loss from discontinued operations................................................. (2.00)

Income before extraordinary item .................................................... 3.80Extraordinary loss ............................................................................. (0.90)Net income ......................................................................................... $2.90


(a) Earnings per share = $1.85 ($370,000 200,000)

(b) Earnings per share = $1.75 [($370,000 – $20,000) 200,000]

(c) There would be no difference. Since the preferred shares arecumulative, they need to be paid before any of the earningsbecome available to the common shareholders. Therefore,cumulative preferred dividends must be deducted from netincome in calculating earnings per share, whether they aredeclared and paid or not.




Share PriceEarningsper Share

Price-Earnings

Current $52.50 $5.00 10.5

After 2% stock dividend $51.451 $4.903 10.5

After 2-for-1 stock split $26.252 $2.504 10.5

1 $52.50 x 98% = $51.452 $52.50 ÷ 2 = $26.253 $5.00 x 98% = $4.904 $5.00 ÷ 2 = $2.50

Both the stock dividend and the stock split will increase the numberof shares, without changing the overall value of the company.Therefore, both will (theoretically) decrease the market price pershare proportionately. Both will also decrease the earnings pershare proportionately. Consequently, the price-earnings ratioshould not be affected by either of these events.

However, the stock markets may react favourably to the stockdividend and/or the stock split, with the result that the share pricedoes not decrease proportionately, and hence the price-earningsratio increases.


Payout ratio = Cash dividends per share ÷ Earnings per share

= $1.00 ÷ $ 3.75= 26%

Dividend yield = Cash dividends per share ÷ Share price= $1.00 ÷ $25.00= 4%



SOLUTIONS TO EXERCISES

EXERCISE 15-1

(a) 2002 2003 2004

Total dividend declarationAllocation to preferred sharesRemainder to common shares

$6,00006,000$ 0

$12,000008,000$ 4,000

$28,000008,000$20,000

(b) 2002 2003 2004

Total dividend declarationAllocation to preferred sharesRemainder to common shares

$6,00006,000$ 0

$12,00012,0001 $ 0

$28,000012,0002 $16,000

1 Cumulative dividend for 2002, $4,000, plus $8,000 for 20032 Cumulative dividend for 2003, $2,000, plus $10,000 for 2004

(c)

Dec. 31 Cash Dividends—Preferred ................................. 8,000Cash Dividends—Common ................................. 20,000Dividends Payable ................................ 28,000

Dec. 31 Cash Dividends—Preferred ................................. 12,000Cash Dividends—Common ................................. 16,000

Dividends Payable ................................ 28,000



EXERCISE 15-2

BeforeAction

After StockDividend

After StockSplit

Shareholders' equityCommon sharesRetained earnings

Total shareholders' equity

Shares issued

Book value per share

$ 800,000400,000

$ 1,200,000

80,000

$15.00

$ 856,000*344,000

$1,200,000

84,000

$14.29

$ 800,000400,000

$ 1,200,000

160,000

$7.50

* $800,000 + (80,000 shares X 5% X $14) = $856,000

Note that the total shareholders’ equity is the same in each case.

EXERCISE 15-3

(a) (1) Book value before the stock dividend was $20.00($400,000 20,000 = $20.00)

(2) Book value after the stock dividend is $18.18($400,000 22,000 = $18.18)

(b) Share capitalBalance before dividend .................................................... $225,000Stock dividend (2,000 x $18) ............................................. 00336,000

New balance ............................................................... $261,000

Retained earningsBalance before dividend .................................................... $175,000Stock dividend (2,000 X $18) ............................................. 0036,000

New balance ............................................................... $139,000



EXERCISE 15-4

1. Dec. 31 Cash Dividends ........................................ 30,000Dividend Expense ............................. 30,000

2. Dec. 31 Stock Dividends* ...................................... 10,000Dividends Payable .................................... 10,000

Common Stock Dividends Distributable 10,000Retained Earnings* ........................... 10,000

3. Dec. 31 Preferred Shares ..................................... 2,000,000Retained Earnings ............................ 2,000,000

No entry is required for a stock split

* Note: This portion of the correcting entry could be omitted sincethe Stock Dividend account is closed into the Retained Earningsaccount at year end.

EXERCISE 15-5

(a) April 1 Cash .............................................................. 85,000

Common Shares ................................... 85,000

June 15 Cash Dividends (80,000 X $1) ...................... 80,000Dividends Payable ................................ 80,000

July 10 Dividends Payable ........................................ 80,000Cash ....................................................... 80,000

Dec. 15 Cash .............................................................. 38,000

Common Shares ................................... 38,000

Cash Dividends (82,000 X $1.30) ................. 106,600Dividends Payable ................................ 106,600

(b) In the statement of retained earnings, cash dividends of$186,600 will be deducted. In the balance sheet, dividendspayable of $106,600 will be reported as a current liability.



EXERCISE 15-6

WINDSOR CORPORATIONStatement of Retained Earnings


Balance, January 1, as previously reported .................................... $580,000Less: Correction for overstatement of 2002 net

income due to amortization error, net of$15,000 income tax saving ................................................. 20,000

Balance, January 1, as adjusted ...................................................... 560,000Add: Net income ............................................................................ 350,000

910,000Less: Cash dividends .................................................. $120,000

Stock dividends ................................................. 0060,000 180,000Balance, December 31 ...................................................................... $730,000

EXERCISE 15-7

Contributed Capital

ItemShareCapital Additional

RetainedEarnings

Total Share-holders’ Equity

1.

2.

3.

4.

5.

6.

7.

8.

NE

I

NE

I

NE

NE

NE

I

NE

NE

NE

NE

NE

NE

NE

I

D

NE

NE

D

D

NE

NE

NE

D

I

NE

NE

D

NE

NE

I



EXERCISE 15-8

(a) Stock Dividends—Common (30,000* X $16) ............... 480,000Stock Dividends Distributable ............................. 480,000

* (150,000 + 50,000) X 15% = 30,000

(b)KNOWLEDGE CORPORATION

Partial Balance SheetDecember 31, 2003


Common shares, no par value, unlimitednumber authorized, 200,000 issued .......Common stock dividends distributable ........

Total share capital .......................................Retained earnings ...............................................

Total shareholders' equity ......................

$ 2,200,000480,000

2,680,000670,000*

$ 3,350,000

* $750,000 + $400,000 – $480,000 = $670,000



EXERCISE 15-9

BYUNG –KEE INC.Partial Balance Sheet

December 31, 2003

Shareholders' equityContributed capital

Share capital8% preferred shares, $5 stated value, cumulative,

40,000 shares authorized, 30,000 shares issued $0,150,000Common shares, no par value, 400,000 shares

authorized, 300,000 shares issued ................... 866,000Common stock dividends distributable .................. 75,000

Total share capital ..................................... 1,091,000Additional contributed capital

Contributed capital in excess of stated value—preferred shares ............................................ 244,000

Total contributed capital ........................... 1,335,000Retained earnings (See Note R) ......................................... 900,000

Total shareholders' equity ........................ $2,235,000

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



EXERCISE 15-10

(a)GROMETER CORPORATION

Partial Income StatementFor the Year Ended October 31, 2003

Income before income tax ............................................... $640,000Income tax expense ($640,000 X 30%) ............................ 0 192,000Income before extraordinary item ................................... 448,000Extraordinary loss from fire, net of $30,000

($100,000 X 30%) income tax saving ............................ 00 70,000Net income ........................................................................ $378,000

(b) To: Dave Grometer Corporation

From: Independent Auditor

After reviewing your income statement for the year endedOctober 31, 2003, we believe it is misleading for the followingreasons:

The amount reported for income before extraordinary items isoverstated by $30,000. The income tax expense should be 30%of $640,000, or $192,000, not $162,000. The after-tax incomefrom operations was only $448,000, not $478,000.

Also, the effect of the extraordinary loss on net income is only$70,000, not $100,000. An income tax savings of $30,000 shouldbe netted against the extraordinary loss. Taking these tax

savings into consideration, the real cost of the fire damage wasonly $70,000, not $100,000.



EXERCISE 15-11

(a) DASOLA CORPORATIONPartial Income Statement


Income from continuing operations ................................ $240,000Discontinued operations

Gain on discontinued division,net of $15,000 income tax expense ....................... 35,000

Income before extraordinary item ................................... 275,000Extraordinary loss, net of $24,000 income tax saving ... 56,000Net income ........................................................................ $219,000

(b) The correction of an error in last year's financial statements isa prior period adjustment. The correction is reported in the2003 statement of retained earnings as an adjustment thatincreases the reported beginning balance of retained earningsby $14,000, after income tax expense [$20,000 – ($20,000 X30%)].

The effect on prior years of the change in accounting principle

(amortization method) should also be treated as an adjustmentto the reported beginning balance of retained earnings. Itwould reduce the retained earnings by $24,500, after incometax expense. [$35,000 – ($35,000 x 30%)]

EXERCISE 15-12

(a) $ 547,000 – $16,000 = $531,000 ÷ 100,000 = $5.31

(b) $ 547,000 – $16,000 = $531,000 ÷ 100,000 = $5.31

Note that, since the preferred dividends are cumulative, there is nodifference between parts (a) and (b)



EXERCISE 15-13

2000 1999 1998

Earnings per share $6.99 $5.20 $5.14Price-earnings ratio 6.6X 6.3X 7.1XPayout ratio 28.6% 36.2% 34.3%Dividend yield ratio 4.4% 5.7% 4.8%

Calculations:

Earnings per share2000: $1,857,000,000 ÷ 265,659,000 = $6.991999: $1,382,000,000 ÷ 265,862,000 = $5.201998: $1,350,000,000 ÷ 262,511,000 = $5.14

Price-earnings2000: $45.88 ÷ $6.99 = 6.6 times1999: $32.72 ÷ $5.20 = 6.3 times1998: $36.65 ÷ $5.14 = 7.1 times

Payout

2000: $2.00 ÷ $6.99 = 28.6%1999: $1.88 ÷ $5.20 = 36.2%1998: $1.76 ÷ $5.14 = 34.2%

Dividend yield2000: $2.00 ÷ $45.88 = 4.4%1999: $1.88 ÷ $32.72 = 5.7%1998: $1.76 ÷ $36.65 = 4.8%



EXERCISE 15-13 (Continued)

Earnings per share have improved over the past year, moving from

$5.14 to $6.69. This indicates that the company is earning moreincome for each of its common shareholders. This increaseoccurred partially because net income is higher and partiallybecause the number of common shares issued has decreased.

The PE ratio declined in 1999, then rebounded slightly in 2000. Thisnumber should be compared to other companies in the industry tosee if a multiple of around seven (6.6 in 2000) is good for this typeof business.

Even though the dividend is increasing, the dividend yield and thepayout ratios have generally decreased. The company is earningmore income but is not increasing its dividend proportionally.Although some investors who like receiving dividends may beconcerned, the company may simply be retaining the remainingincome to finance further growth.

SOLUTIONS TO PROBLEMS

PROBLEM 15-1A

(a)Cash Dividend Stock Dividend

Assets $13,500,000 - $80,000a

= $13,420,000No effect = $13,500,000

Liabilities No effect = $1,500,000 No effect = $1,500,000

Share capital No effect = $2,000,000 $2,000,000 + $80,000b = $2,080,000

Retained earnings $10,000,000 - $80,000= $9,920,000

$10,000,000 - $80,000$ 9,920,000

Total shareholders’

equity

$12,000,000 - $80,000

= $11,920,000

No effect ($12,000,000 +

$80,000 - $80,000 =$12,000,000)



Number of shares No effect = 40,000 2,000 increase (2,000 +40,000 = 42,000)

a 40,000 X $2 = $80,000b

40,000 X 5% = 2,000 x $40 = $80,000

(b) 1. Cash dividendCash dividend 1,000 X $2 = $2,000Market value of shares 1,000 X $40 = $40,000

Stock DividendStock dividend 1,000 x 5% = 50 x $40 = $2,000Market value of shares 1,050 X $40 = $42,000



PROBLEM 15-1A (Continued)

(b) 1. (Continued)

In terms of final value the shareholder would be in the sameposition having received either a cash or a stock dividend.However, a stock dividend would allow the shareholder tocontrol the receipt of the cash and the related tax payment.Since the shareholder can control when the shares aresold, they can control when the income tax would have tobe paid on any gains. Alternatively, some shareholders mayprefer to receive a cash dividend since they do not have tosell the shares to obtain the cash. As well, there are oftenbrokerage fees associated with selling shares.

The decision as to whether a cash or stock dividend wouldbe more beneficial really depends on the preferences of theshareholder and their tax situation.

(b) 2. The shareholder would record the cash dividend as a debitto Cash and a credit to Dividend Revenue. The stockdividend would be recorded only as an increase in the

number of shares held.



PROBLEM 15-2A

Journal entries –not required

July 1 Cash Dividends –Common ............................. 45,000(180,000 X $0.25)

Dividends Payable –Common ................. 45,000

Aug . 1 Accumulated Amortization ............................ 72,000Income Tax Payable................................ 22,000Retained Earnings ................................... 50,000

Sept. 1 Dividends Payable –Common ......................... 45,000Cash ......................................................... 45,000

Dec.01 Stock Dividends –Common (18,000 X $15) .... 270,000Common Stock Dividends Distributable 270,000

15 Cash Dividends –Preferred (4,000 X $10) ...... 40,000Dividends Payable –Preferred ................. 40,000




TMAO INC.

Statement of Retained EarningsFor the Year Ended December 31, 2003

Balance, January 1, as previously reported ........................ $500,000Add: Correction for overstatement of amortization

in 2002, net of income tax expense of $22,000 ..... 0050,000Balance, January 1, as adjusted ........................................... 550,000Add: Net income ................................................................. 0350,000

900,000Less: Cash dividends—preferred .................... $040,000

Cash dividends—common ..................... 45,000Stock dividends—common .................... 270,000 355,000

Balance, December 31 ........................................................... $545,000



PROBLEM 15-3A

GENERAL JOURNAL J1Date Account Titles and Explanation Debit Credit

Jan. 20 Stock Dividend Distributable ................. 200,000Common Shares .............................. 200,000

Feb. 12 Cash ......................................................... 150,000

Common Shares .............................. 150,000

Mar. 31 Income Tax Payable ................................ 20,000

Retained Earnings ................................... 50,000Inventory .......................................... 70,000

Dec. 31 Cash Dividends ....................................... 100,000Cash ................................................. 100,000

31 Revenues ................................................. 900,000Retained Earnings ........................... 900,000

31 Retained Earnings ................................... 600,000Expenses ......................................... 600,000

31 Retained Earnings ................................... 100,000Cash Dividends ............................... 100,000




(b)

Common SharesDate Explanation Ref. Debit Credit Balance

Jan. 120

Feb. 12

J1J1

200,000150,000

1,500,0001,700,0001,850,000

Common Stock Dividends Distributable

Date Explanation Ref. Debit Credit Balance

Jan. 120

J1J1 0200,000

200,000 0200,000000,000

Cash Dividends


Jan. 1Dec. 31 Closing entry

J1J1 100,000

100,000 100,0000

Retained Earnings


Jan. 1

Mar. 31Dec. 313131

Closing entryClosing entryClosing entry

J1J1J1J1

50,000

600,000100,000

900,000

600,000

550,0001,450,000850,000750,000




(c) CEDENO INC.



Common shares, no par value, unlimitednumber of shares authorized,580,000 shares issued ........................................ $1,850,000

Retained earnings .......................................................... 00,750,000Total shareholders' equity ...................................... $2,600,000

PROBLEM 15-5A

(a) Total dividend $600,000Allocated to preferred shares—

current year only (10,000 X $10) 0100,000Remainder to common shares $500,000

Note: the preferred shares are noncumulative andtherefore no dividends in arrears have to be paid

(b)JAJOO CORPORATION

Statement of Retained Earnings


Balance, January 1 ............................................... $ 2,450,000Add: Net income ................................................ 880,000

3,330,000Less: Cash dividends—Preferred ...................... $100,000

Cash dividends—Common ...................... 500,000Stock dividends ........................................ 00140,000* 740,000

Balance, December 31 ......................................... $2,590,000

* 400,000 x 5% = 20,000 x $7 = $140,000




(c)JAJOO CORPORATION


Shareholders' equityContributed capital

Share capital$10 preferred shares, no par value,

noncumulative, 20,000 sharesauthorized, 10,000 shares issued .............. $1,200,000

Common shares, $5 stated value, 600,000shares authorized, 400,000 shares issued 2,000,000

Common stock dividends distributable,20,000 shares ........................................... 140,000Total share capital ................................... 3,340,000

Additional contributed capitalContributed capital in excess of stated

value—common shares ............................. 1,100,000

Total contributed capital ......................... 4,440,000Retained earnings (See Note 3) .................................... 2,590,000

Total shareholders' equity ...................... $7,030,000

Note 3: Retained earnings restricted for plant expansion,$100,000.



SOLUTIONS TO PROBLEMS

PROBLEM 15-1A

(a)Cash Dividend Stock Dividend

Assets $13,500,000 - $80,000a

= $13,420,000No effect = $13,500,000

Liabilities No effect = $1,500,000 No effect = $1,500,000

Share capital No effect = $2,000,000 $2,000,000 + $80,000

b

= $2,080,000

Retained earnings $10,000,000 - $80,000= $9,920,000

$10,000,000 - $80,000$ 9,920,000

Total shareholders’equity

$12,000,000 - $80,000= $11,920,000

No effect ($12,000,000 +$80,000 - $80,000 =$12,000,000)

Number of shares No effect = 40,000 2,000 increase (2,000 +40,000 = 42,000)

a 40,000 X $2 = $80,000b 40,000 X 5% = 2,000 x $40 = $80,000

(b) 1. Cash dividendCash dividend 1,000 X $2 = $2,000

Market value of shares 1,000 X $40 = $40,000

Stock DividendStock dividend 1,000 x 5% = 50 x $40 = $2,000Market value of shares 1,050 X $40 = $42,000




(b) 1. (Continued)

In terms of final value the shareholder would be in the sameposition having received either a cash or a stock dividend.However, a stock dividend would allow the shareholder tocontrol the receipt of the cash and the related tax payment.Since the shareholder can control when the shares aresold, they can control when the income tax would have tobe paid on any gains. Alternatively, some shareholders mayprefer to receive a cash dividend since they do not have tosell the shares to obtain the cash. As well, there are oftenbrokerage fees associated with selling shares.

The decision as to whether a cash or stock dividend wouldbe more beneficial really depends on the preferences of theshareholder and their tax situation.

(b) 2. The shareholder would record the cash dividend as a debitto Cash and a credit to Dividend Revenue. The stockdividend would be recorded only as an increase in the

number of shares held.

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