Last revised: January 23, 2016.
SOLUTIONS MANUAL
to accompany
Fundamental Accounting Principles
15th Canadian Edition
by Larson/Jensen/Dieckmann
Prepared by:
Laura Dallas, Kwantlen Polytechnic University
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-1
Last revised: January 23, 2016.
Technical checks by:
Elizabeth Hicks, Douglas College
Michelle Young, CPA
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-2
Last revised: January 23, 2016.
Chapter 12 Organization and Operation of Corporations
Chapter Opening Critical Thinking Challenge Questions*
Why might a company stay private?
The owner(s) in a private corporation have control over the decisions being made whereas in a public company, the Board of Directors, who are representatives of the shareholders, oversee the organization.
Why might a private company go public?
A private company might go public to increase financing opportunities necessary for growth. By going public, ownership is inevitably diluted.
*The Chapter 12 Critical Thinking Challenge questions are asked at the beginning of this chapter. Students are reminded at the conclusion of Chapter 12 to refer to the Critical Thinking Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual and accessible to students on Connect.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-3
Last revised: January 23, 2016.
Concept Review Questions
1. The board of directors of a corporation is responsible for directing the corporation’s affairs.
2. Organization costs (also referred to as start-up costs) are incurred in creating a corporation. Examples include: legal fees, promoters’ fees, accountants’ fees, costs of printing share certificates, and fees paid to the provincial legal jurisdiction to obtain a corporate charter. Organization costs are expensed when incurred.
3. The general rights of common shareholders include: (1) the right to vote in shareholders’ meetings, (2) the right to sell or otherwise dispose of shares, (3) the pre-emptive right, (4) the right to share proportionately in dividends, and (5) the right to share proportionately in assets remaining after the creditors are paid if the corporation is liquidated. In addition, shareholders have the right to receive timely and useful financial reports that describe the corporation’s financial position and the results of its activities.
4. The pre-emptive right of common shareholders is the right to maintain their relative ownership interests in the corporation by having the first opportunity to purchase their proportionate share of any additional common shares issued by the corporation.
5. The call price is the amount that a corporation must pay if it exercises the option to buy back and retire callable shares.
6. Convertible preferred shares are attractive because they offer the safety of a regular return as well as the opportunity to share in the increased value of the issuer’s common shares.
7. Indigo had dividends paid in 2013 of $11,119,000 and in 2014, $8,348,000.
8. On the consolidated Statements of Cash Flows the Dividends paid appear under the heading, CASH FLOWS FROM FINANCIAL ACTIVITIES.
9. In Note 13, SHARE CAPITAL, page 48 of Indigo Financial Statements the distributed dividends per share for fiscal year 2014 was $0.33, and for 2013, $0.44.
10. The main difference between a private and a public corporation access to capital. A public company has the ability to issue shares to generate capital for expansion and other purposes. A private company is largely reliant on debt financing or targeted private equity investors. Stock exchange regulators require public companies to report audited financial statements on an annual basis as well as quarterly reviews. Private companies do not have this requirement. It is important to note that size does not signal public vs private status. Although many large companies are public, private companies can be very large too. Zara, Dole Foods, Lego, Toys R Us, and PWC (PricewaterhouseCoopers) are all examples of privately held companies.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-4
Last revised: January 23, 2016.
QUICK STUDY
Quick Study 12-1 (5 minutes)
a and d
Quick Study 12-2 (10 minutes)
MOGUL LTD.
Income Statement
For Year Ended October 31, 2017
Sales $ 982,000
Cost of goods sold 420,000
Gross profit $ 562,000
Operating expenses 162,000
Profit from operations $ 400,000
Other revenues and expenses:
Gain on sale of plant and equip. $ 4,000
Interest expense (6,200 ) (2,200)
Profit before tax $ 397,800
Income tax expense 99,450*
Profit $ 298,350
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-5
Last revised: January 23, 2016.
*Calculated as: 397,800 × .25 = 99,450
Quick Study 12-3 (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
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-6
Last revised: January 23, 2016.
Quick Study 12-4 (20 minutes)
FORM OF BUSINESS ORGANIZATION
Transaction Sole Proprietorship Corporation
Jan. 1, 2017:
The owner(s) invested $10,000
into the new business
Cash................................... 10,000
Ian Smith, Capital.......... 10,000
Cash........................... 10,000
Common Shares. . . 10,000
During 2017:
Revenues of $50,000 were earned; all cash
Cash................................... 50,000
Revenues....................... 50,000
Cash........................... 50,000
Revenues............... 50,000
During 2017:
Expenses of $30,000 were incurred; all cash
Expenses........................... 30,000
Cash............................... 30,000
Expenses................... 30,000
Cash....................... 30,000
Dec. 15, 2017:
$15,000 cash was distributed to the owner(s)
Ian Smith, Withdrawals… 15,000
Cash............................... 15,000
Cash Dividends......... 15,000
(or R/E)
Cash....................... 15,000
Dec. 31, 2017, Year End:
All temporary accounts were closed
—Close Revenue account
Revenues........................... 50,000
Income Summary.......... 50,000
Revenues................... 50,000
Income Summary…. 50,000
—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)
Income Summary.............. 20,000
Ian Smith, Capital.......... 20,000
Income Summary...... 20,000
Retained Earnings…. 20,000
—Close Withdrawal/Cash Ian Smith, Capital.............. 15,000 Retained Earnings..... 15,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-7
Last revised: January 23, 2016.
Dividends Declared account Ian Smith, Withdrawals… 15,000 Cash Dividends .... 15,000No entry if debit Retained Earnings used above.
Equity section on the balance sheet at December 31, 2017 after the first year of operations.
Vision HR Consulting
Partial Balance Sheet
December 31, 2017
Equity
Ian Smith, capital....... $15,000
Vision HR Consulting Inc.
Partial Balance Sheet
December 31, 2017
Equity
Common shares....................$ 10,000
Retained earnings................. 5,000
Total equity.................................$15,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-8
Last revised: January 23, 2016.
Quick Study 12-5 (10 minutes)
$48,000 + $146,000 – $47,000 – $15,000 = $132,000
OR
Retained Earnings
48,000 Bal. Dec. 31/17
146,000 Profit, 2018
Dividends, 2018 47,000
Loss, 2019 15,000
132,000 Bal. Dec. 31/19
Quick Study 12-6 (5 minutes)
1. $300,000 – $120,000 + $50,000 = $230,000
2. Profit
3. Dividends
Quick Study 12-7 (10 minutes)
Fisher Inc.
Statement of Changes in Equity
For Year Ended December 31, 2018
Common Shares
Retained Earnings Total Equity
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-9
Last revised: January 23, 2016.
Balance, January 1 $ 750,000 $(28,000) $ 722,000
Issuance of common shares 125,000 125,000
Profit 148,000 148,000
Dividends (40,000) (40,000)
Balance, December 31 $ 875,000 $ 80,000 $ 955,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-10
Last revised: January 23, 2016.
Quick Study 12-8 (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 12-9 (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.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-11
Last revised: January 23, 2016.
Quick Study 12-10 (10 minutes)
a.
2017
Oct. 3 Cash 60,000
Preferred Shares 60,000
To record issuance of preferred shares;
4,000 × $15 = 60,000.
Nov. 19 Land 52,480
Preferred Shares 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 12-11 (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.Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016
McGraw-Hill Education Ltd. 12-12
Last revised: January 23, 2016.
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.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-13
Last revised: January 23, 2016.
Quick Study 12-12 (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 12-13 (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 profit less any losses and dividends.
f. An unlimited number of common shares may be issued by the corporation based on its articles of incorporation.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-14
Last revised: January 23, 2016.
Quick Study 12-14 (20 minutes)
a.
2017
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 Equity
For Year Ended May 31, 2017
Preferred Shares
Common Shares
Retained Earnings
Total Equity
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-15
Last revised: January 23, 2016.
Balance, June 1 $ 7,000 $ 13,000 $ 29,000 $ 49,000
Issuance of shares -0- -0- -0-
Profit (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, 2017, the ‘Issuance of shares’ line in the Statement of Changes in Equity could be omitted.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-16
Last revised: January 23, 2016.
Quick Study 12-15 (20 minutes)
a.
2017
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 Equity
For Year Ended November 30, 2017
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-17
Last revised: January 23, 2016.
Preferred Shares
Common Shares
Retained Earnings
Total Equity
Balance, December 1 $ 10,000 $ 48,000 $ 42,000 $ 100,000
Issuance of shares -0- -0- -0-
Profit (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, 2017, the ‘Issuance of shares’ line in the Statement of Changes in Equity could be omitted.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-18
Last revised: January 23, 2016.
Quick Study 12-16 (20 minutes)
a.
2017
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 Equity
For Year Ended August 31, 2017
Preferred Shares
Common Shares
Retained Earnings/(Deficit)
Total Equity
Balance, September 1 $ 10,000 $ 48,000 $ 12,000 $ 70,000
Issuance of shares -0- -0- -0-
Profit (loss) (18,000) (18,000)
Dividends -0- -0-
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-19
Last revised: January 23, 2016.
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, 2017, the ‘Issuance of shares’ and ‘Dividends’ lines in the Statement of Changes in Equity could be omitted.
Quick Study 12-17 (10 minutes)
186,000 +24,000 = 210,000 ending shares
(186,000+210,000)/ 2=198,000 average shares outstanding
$5,841,000/ 198,000= $29.50 book value
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-20
Last revised: January 23, 2016.
EXERCISES
Exercise 12-1 (20 minutes)
a) Partnership
Feb. 14 Cash 325,000
Surj Uppal, Capital 162,500
Parvinder Atwal, Capital 162,500
To record investment into business by partners.
Dec. 23 Surj Uppal, Withdrawals 31,200
Parvinder Atwal, Withdrawals 31,200
Cash
To record withdrawals by owners.
62,400
31 Income Summary 124,800
Surj Uppal, Capital 62,400
Parvinder Atwal, Capital 62,400
To record closing of income summary to capital.
31 Surj Uppal, Capital 31,200
Parvinder Atwal, Capital 31,200
Surj Uppal, Withdrawals 31,200
Parvinder Atwal, Withdrawals 31,200
To record closing of withdrawals to capital.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-21
Last revised: January 23, 2016.
Exercise 12-1 (concluded)
b) Corporation
Feb. 14 Cash 325,000
Common Shares 325,000
To record issuance of common shares.
Dec. 20 Cash Dividends 62,400
Common Dividend Payable 62,400
To record declaration of dividends.
23 Common Dividend Payable 62,400
Cash 62,400
To record payment of dividends.
31 Income Summary 124,800
Retained Earnings 124,800
To record closing of income summary to retained earnings.
31 Retained Earnings 62,400
Cash Dividends 62,400
To record closing of dividends to retained earnings.
ORb) Corporation
Feb. 14 Cash 325,000
Common Shares 325,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-22
Last revised: January 23, 2016.
To record issuance of common shares.
Dec. 20 Retained Earnings 62,400
Common Dividend Payable 62,400
To record declaration of dividends (directly debited to retained earnings).
23 Common Dividend Payable 62,400
Cash 62,400
To record payment of dividends.
31 Income Summary 124,800
Retained Earnings 124,800
To record closing of income summary to retained earnings.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-23
Last revised: January 23, 2016.
Exercise 12-2 (15 minutes)
2017
Jan. 15 Organization Expenses (or other various expenses) 31,500
Common Shares 31,500
Issued common shares to promoters.
Feb. 21 Cash 210,000
Common Shares 210,000
Issued common shares for cash;
15,000 shares x $14/share = $210,000.
Mar. 9 Cash 110,600
Preferred Shares 110,600
Issued preferred shares for cash.
Aug. 15 Land 315,000
Building 420,000
Equipment 112,000
Common Shares 847,000
Issued common shares in exchange for land,
building, and equipment.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-24
Last revised: January 23, 2016.
Exercise 12-3 (30 minutes)
a)
2017
Jan. 1 Cash 60,000
Preferred Shares 60,000
Issued preferred shares; 5,000 × $12/share = 60,000.
Feb. 5 Cash 126,000
Common Shares 126,000
Issued common shares.
Mar. 20 Organization Expenses (or other various expenses) 28,800
Common Shares 28,800
Issued shares to organizers for their work.
May 15 Cash 350,400
Preferred Shares 158,400
Common Shares 192,000
Issued preferred and common shares; 12,000 × $13.20/share = $158,400; 20,000 × $9.60/share = $192,000.
Dec. 31 Retained Earnings 329,000
Income Summary 329,000
Closed the loss to Retained Earnings.
b) FIERRA SCEPTRE INC.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-25
Last revised: January 23, 2016.
Equity Section of the Balance Sheet
December 31, 2017
Contributed Capital:
Preferred Shares, $1.50; 50,000 shares authorized;
17,0001 shares issued and outstanding $218,4001
Common Shares
300,000 shares authorized;
38,0002 shares issued and outstanding 346,8002
Total contributed capital $565,200
Deficit (329,000)
Total equity $236,200
Calculations:
1. Preferred Shares: Shares Dollars
Jan. 1 Issued 5,000 shares (5,000 x $12.00) 5,000 $ 60,000
May 15 12,000 shares issued (12,000 x $13.20) 12,000 158,400
Totals 17,000 $ 218,400
Exercise 12-3 (concluded)
2. Common Shares:
Feb. 5 Issued 15,000 shares 15,000 $126,000
Mar. 20 Issued 3,000 shares 3,000 28,800
May 15 20,000 shares issued (20,000 x $9.60) 20,000 192,000
Totals 38,000 $346,800
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-26
Last revised: January 23, 2016.
c) The $1.50 is the dividend entitlement per preferred share or how much each preferred share is supposed to get in dividends each year.
Exercise 12-4 (10 minutes)
March 1 Cash Dividends or Retained Earnings 93,750
Common Dividends Payable 93,750
To record declaration of cash dividend on common
shares of $0.75 per share.
10 No entry.
31 Common Dividends Payable 93,750
Cash 93,750
Paid the dividends declared on March 1.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-27
Last revised: January 23, 2016.
Exercise 12-5 (15 minutes)
2017
June 5 Organization Expenses (or other various expenses) 84,500
Common Shares 84,500
Issued 4,000 common shares to promoters.
15 Cash 1,650,000
Common Shares 1,650,000
Issued common shares for cash;
75,000 shares x $22/share = $1,650,000.
16 Cash 390,000
Preferred Shares 390,000
Issued preferred shares for cash;
10,000 shares x $39/share = $390,000.
17 Accounts Payable 130,000
Common Shares 130,000
Issued 8,000 common shares to a creditor.
18 Cash Dividends or Retained Earnings 24,500
Common Dividends Payable 5,000
Preferred Dividends Payable 19,500
Declared dividends.
30 Machinery 2,600,000
Common Shares 2,600,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-28
Last revised: January 23, 2016.
Issued common shares in exchange for
machinery; valued at fair value of the asset acquired.
July 1 Common Dividends Payable 5,000
Preferred Dividends Payable 19,500
Cash 24,500
Paid the dividends declared June 18.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-29
Last revised: January 23, 2016.
Exercise 12-6 (25 minutes)
a)
2017
Jan. 1 Organization Expenses (or other various exp.) 12,000
Common Shares 12,000
To record issuance of shares.
5 Cash 202,500
Common Shares 202,500
To record issuance of shares, 15,000 × $13.50
15 Cash Dividends or Retained Earnings 12,000
Common Dividends Payable 12,000
Declared dividends; $0.75 x 16,000 = $12,000
20 Land 46,000
Common Shares 46,000
To record issuance of shares: 4,000 x $11.50.
31 Income Summary 165,000
Retained Earnings 165,000
To close income summary to retained
earnings.
31 Common Dividends Payable 12,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-30
Last revised: January 23, 2016.
Cash 12,000
Paid dividends.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-31
Last revised: January 23, 2016.
Exercise 12-6 (concluded)
b) WESTBY CORP.
Equity Section of the Balance Sheet
January 31, 2017
Common shares, unlimited shares authorized,
20,0001 shares issued and outstanding $260,5001
Retained earnings 153,000 2
Total equity $413,500
c) Average Issue Price $260,500 20,000 shares = $13.03 per share.
Calculations:
1. Shares Dollars
Jan. 1 Issued 1,000 shares 1,000 $ 12,000
5 Issued 15,000 shares (15,000 x $13.50) 15,000 202,500
20 Issued 4,000 shares (4,000 x $11.50) 4,000 46,000
Totals 20,000 $260,500
2. $165,000 – $12,000 = $153,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-32
Last revised: January 23, 2016.
Exercise 12-7 (25 minutes)
1. $3.75 Cumulative Preferred Shares:
$3.75/share × 40,000 shares = $150,000 each year × 3 years = $450,000
$10 Noncumulative Preferred Shares:
$10/share × 8,000 shares = $80,000
Common Shares:
$613,300 – (450,000 + 80,000) = $83,300
2. Dec. 31/16 Retained Earnings Balance + 2017 Profit of $1,250,000 – 2017 Dividends of $613,300 = Dec. 31/17 Retained Earnings Balance of $741,600
Therefore,
Dec. 31/16 Retained Earnings Balance = $104,900
OR
Retained Earnings
X
Bal.
Dec. 31/16
2017 dividends
613,300 1,250,000 2017 Profit
741,600
Bal.
Dec. 31/17
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-33
Last revised: January 23, 2016.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-34
Last revised: January 23, 2016.
Exercise 12-7 (concluded)
3.
ZOOMZOOM INC.
Statement of Changes in Equity
For Year Ended December 31, 2017
Preferred Shares,
$3.75 Cum.
Preferred Shares,
$10 Non-Cum.
Common Shares
Retained Earnings
Total Equity
Balance, January 1 $1,660,000 $ 670,000 $1,750,000 $ 104,900 $4,184,900
Issuance of shares -0- -0- -0- -0-
Profit (loss) 1,250,000 1,250,000
Dividends (613,300) (613,300)
Balance, December 31 $1,660,000 $ 670,000 $1,750,000 $ 741,600 $4,821,600
NOTE: Because no shares were issued during the year ended December 31, 2017, the ‘Issuance of shares’ line in the Statement of Changes in Equity could be omitted.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-35
Last revised: January 23, 2016.
Exercise 12-8 (15 minutes)
WHITE PEAR INC.
Equity Section of the Balance Sheet
December 31, 2017
Contributed Capital:
Preferred shares, $3.60 noncumulative:
100,000 shares authorized,
75,000 shares issued and outstandingA. $2,700,000
Common shares
Unlimited shares authorized, E. 250,000 shares B. 3,550,000 ? shares issued and outstanding
Total contributed capital $6,250,000
Retained earnings C. 1,380,000
Total equity D. $7,630,000
Calculations:
A. $36.00 × 75,000 shares = $2,700,000
B. $6,250,000 – $2,700,000 = $3,550,000
C. $192,000 + $1,728,000 – $540,000 = $1,380,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-36
Last revised: January 23, 2016.
OR
Retained Earnings
192,000
540,000 1,728,000
1,380,000
D. $6,250,000 + $1,380,000 = $7,630,000
E. $3,550,000 $14.20 = 250,000 shares
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-37
Last revised: January 23, 2016.
Exercise 12-9 (20 minutes)
1. $6/share × 8,000 shares = $48,000
2. Yes. Calculation is $48,000 × 2 years = $96,000
3. a) ($6 × 8,000 shares) = $48,000 × 3 years = $144,000
b) $4.80 × 45,000 = $216,000
4. $126,000 + $408,000 – $144,000 – $216,000 = $174,000
5. $192,000 + $540,000 = $732,000
6. $732,000 + $174,000 = $906,000
7. 10,000 – 8,000 = 2,000
8. $192,000/8,000 shares = $24/share
Exercise 12-10 (20 minutes)
NOTE: The holders of the cumulative preferred shares are entitled to no more than $451,200 of dividends in any year ($9.60 × 47,000 shares) plus any dividends in arrears.
Preferred Common
2017 ($0):
Preferred—current...................................................... $ 0
Common—remainder................................................. $ 0
Total for the year......................................................... $ 0 $ 0
2018 ($480,000):
Preferred—arrears...................................................... $ 451,200
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-38
Last revised: January 23, 2016.
Preferred—current ($480,000 – $451,200)................ 28,800
Common—remainder................................................. $ 0
Total for the year......................................................... $ 480,000 $ 0
2019 ($1,008,000):
Preferred—arrears ($451,200 – $28,800)................... $ 422,400
Preferred—current...................................................... 451,200
Common—remainder ($1,008,000 – $873,600)......... $134,400
Total for the year......................................................... $ 873,600 $134,400
2020 ($480,000):
Preferred—current...................................................... $ 451,200
Common—remainder ($480,000 – $451,200)............ $ 28,800
Total for the year......................................................... $ 451,200 $ 28,800
Total for four years..................................................... $1,804,800 $163,200
Exercise 12-11 (20 minutes)
NOTE: The holders of the noncumulative preferred shares are entitled to no more than $451,200 of dividends in any year ($9.60 × 47,000 shares).
Preferred Common
2017 ($0):
Preferred—current...................................................... $ 0
Common—remainder................................................. $ 0
Total for the year......................................................... $ 0 $ 0
2018 ($480,000):
Preferred—current...................................................... $ 451,200
Common—remainder ($480,000 – $451,200)............ $ 28,800
Total for the year......................................................... $ 451,200 $ 28,800
2019 ($1,008,000):
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-39
Last revised: January 23, 2016.
Preferred—current...................................................... 451,200
Common—remainder ($1,008,000 – $451,200)......... $556,800
Total for the year......................................................... $ 451,200 $556,800
2020 ($480,000):
Preferred—current...................................................... $ 451,200
Common—remainder ($480,000 – $451,200)............ $ 28,800
Total for the year......................................................... $ 451,200 $ 28,800
Total for four years..................................................... $1,356,600 $614,400
Exercise 12-12 (10 minutes)
1. B 4. E
2. A 5. D
3. F 6. C
Exercise 12-13 (10 minutes)
1. (15,000 shares × $5.40/share) × 2 years = $162,000
2. $180,000 Total dividends – $162,000 paid to preferred shareholders = $18,000 to common shareholders
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-40
Last revised: January 23, 2016.
Exercise 12-14 (20 minutes)
2017
Dec. 31 Revenue 271,600
Income Summary 271,600
To close the revenue account to the income summary.
31 Income Summary 149,800
Income Tax Expense 40,600
Operating Expenses 109,200
To close the expense accounts to the income summary.
31 Income Summary 121,800
Retained Earnings 121,800
To close the income summary to retained earnings.
31 Retained Earnings 19,600
Cash Dividends 19,600
To close the Cash Dividends account to Retained Earnings.
Post-Closing Balance in Retained Earnings:
Retained Earnings, December 31, 2016 $ 27,720
Add: Profit for the year 121,800
Less: Cash Dividends 19,600
Retained Earnings, December 31, 2017 $129,920
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-41
Last revised: January 23, 2016.
OR
Retained Earnings
27,720 Bal. Dec. 31/16
Cash Dividends
19,600 121,800
2017
Profit
129,920 Bal. Dec 31/17
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-42
Last revised: January 23, 2016.
Exercise 12-15 (30 minutes)
SPICER INC.
Balance Sheet
December 31, 2017
Assets
Current assets:
Cash $ 8,400
Accounts receivable 39,200
Total current assets $ 47,600
Property, plant and equipment:
Land $117,600
Warehouse $128,800
Less: Accumulated depreciation 21,280 107,520
Equipment $ 78,400
Less: Accumulated depreciation 10,640 67,760
Total property, plant and equipment 292,880
Total assets $340,480
Liabilities
Current liabilities :
Accounts payable $ 25,760
Non-Current liabilities:
Long term note payable, due in 2020 33,600
Total liabilities $ 59,360
Equity
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-43
Last revised: January 23, 2016.
Contributed Capital:
Preferred shares $ 39,200
Common shares 112,000
Total contributed capital $151,200
Retained earnings 129,920
Total equity 281,120
Total liabilities and equity $340,480
1. 83% ($281,120 ÷ $340,480 = 83%)
2. 83% ($281,120 ÷ $340,480 = 83%)
3. 17% ($59,360 ÷ $340,480 = 17%)
4. 71% [($112,000 + $129,920) ÷ $340,480 = 71%]
5. 12% ($39,200 ÷ $340,480 = 12%)
6. The main advantage to the common shareholders of issuing preferred shares over additional common shares is that the common shareholders will retain control as the preferred shareholders will not have a vote.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-44
Last revised: January 23, 2016.
Exercise 12-16
1.
2017
Jan. 3 Cash 34,400
Common Shares 34,400
Issued common shares for cash.
Mar . 1 Cash 24,000
Preferred Shares (5,000 x $4.80) 24,000
Issued preferred shares for cash.
June 15 Equipment 26,000
Common Shares 26,000
Issued common shares in exchange for equipment.
Dec. 31 Income Summary 280,000
Retained Earnings 280,000
Closed the income summary to retained earnings.
2. DELICIOUS ALTERNATIVE DESSERTS INC.
Equity Section of the Balance Sheet
December 31, 2017
Contributed Capital:
Preferred shares, $0.40 cumulative
80,000 shares authorized,
65,0001 shares issued and outstanding $264,0001
Common shares,
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-45
Last revised: January 23, 2016.
250,000 shares authorized,
147,0002 shares issued and outstanding 252,4002
Total contributed capital $516,400
Retained earnings3 428,000
Total equity $944,400
3. 15,000 (calculated as 80,000 shares authorized less 65,000 shares issued and outstanding)
4. 103,000 (calculated as 250,000 shares authorized less 147,000 shares issued and outstanding)
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-46
Last revised: January 23, 2016.
Exercise 12-16 (concluded)
Calculations:
1. Preferred Shares: Shares Dollars
Jan. 1 Balance brought forward 60,000 $240,000
Mar. 1 Issued 5,000 shares (5,000 x $4.80) 5,000 24,000
Totals 65,000 $264,000
2. Common Shares: Shares Dollars
Jan. 1 Balance brought forward 120,000 $192,000
3 20,000 shares issued 20,000 34,400
Jun. 15 Issued 7,000 shares 7,000 26,000
Totals 147,000 $252,400
3. Retained Earnings: Dollars
Jan. 1 Balance brought forward $148,000
Dec. 31 Profit 280,000
Totals $428,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-47
Last revised: January 23, 2016.
Exercise 12-17
Part A
2017
Oct. 1 Cash 4,800
Preferred Shares 4,800
Issued preferred shares; 1,000 shares × $4.80/share.
10 Cash 180,000
Common Shares 180,000
Issued common shares; 50,000 shares × $3.60/share.
15 Land 186,000
Cash 66,000
Notes Payable 120,000
Purchased land in exchange for cash and a note.
20 Cash 84,600
Preferred Shares 84,600
Issued preferred shares for cash.
24 Cash Dividends (or Retained Earnings) 36,480
Common Dividends Payable 26,880
Preferred Dividends Payable 9,600
Declared dividends; 16,000 preferred shares × $0.60 = $9,600.
31 Cash 900,000
Revenues 900,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-48
Last revised: January 23, 2016.
To record revenues.
31 Expenses 300,000
Cash 300,000
To record expenses.
31 Income Summary 600,000
Retained Earnings 600,000
To record closing of income summary to retained earnings.
31 Retained Earnings* 36,480
Cash Dividends 36,480
To record closing of dividends to retained earnings
(*or no entry if on Oct. 24 it was debited to Retained Earnings).
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-49
Last revised: January 23, 2016.
Exercise 12-17 (concluded)
Part B
EARTH STAR DIAMONDS INC.
Balance Sheet
October 31, 2017
Assets
Current assets:
Cash $803,400
Property, plant and equipment:
Land 186,000
Total assets $989,400
Liabilities
Current liabilities
Dividends payable $ 36,480
Non-Current liabilities:
Long term note payable 120,000
Total liabilities $156,480
Equity
Contributed Capital:
Preferred shares, $0.60 cumulative,
100,000 shares authorized,
16,000 shares issued and outstanding: $ 89,4001
Common shares,
500,000 shares authorized,
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-50
Last revised: January 23, 2016.
50,000 shares issued and outstanding: 180,000
Total contributed capital $269,400
Retained earnings 563,5202
Total equity 892,920
Total liabilities and equity $989,400
Calculations:
1. Preferred Shares: Shares Dollars
Oct. 1 Issued 1,000 shares (1,000 x $4.80) 1,000 $4,800
Oct. 20 Issued 15,000 shares 15,000 84,600
Totals 16,000 $89,400
2. Retained Earnings: Dollars
Oct. 24 Dividends $(36,480)
Oct. 31 Profit 600,000
Totals $563,520
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-51
Last revised: January 23, 2016.
Exercise 12-18 (20 minutes)
127,650 + 44,500 = 172,150 ending shares
(127,650 + 172,150)/ 2=149,900 average shares outstanding
$3,222,850/ 149,900= $21.50 book value
The book value was $21.50 on December 31, 2017 and the market value of $32.50 is an indication that the shareholders are willing to pay more for the shares, anticipating higher dividends or growth in the company. If the marketing plan does not work out, the market value could quickly drop below the book value amount of $21.50. Market values of a firm’s shares are typically higher than the book value, as investors take into consideration a variety of factors that go beyond reported net assets, such as revenue growth, cash flow, profitability, as well as current and future market conditions.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-52
Last revised: January 23, 2016.
PROBLEMS
Problem 12-1A (40 minutes)
SASSY PHARMACEUTICALS INC.
Balance Sheet
March 31, 2017
Assets
Current assets
Cash $ 28,800
Accounts receivable $67,200
Less: Allowance for doubtful accounts 3,600 63,600
Prepaid rent 55,200
Total current assets $147,600
Property, plant and equipment
Vehicles $ 81,600
Less: Accumulated depreciation, vehicles 62,400 $ 19,200
Equipment $468,000
Less: Accumulated depreciation, equipment 148,800 319,200
Total property, plant and equipment 338,400
Intangible assets
Patent $115,200
Less: Accumulated amortization, patent 50,400 64,800
Total assets $550,800
Liabilities
Current liabilities
Accounts payable $ 20,400
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-53
Last revised: January 23, 2016.
Advertising payable 3,000
Income tax payable 55,200
Unearned revenues 27,600
Current portion of notes payable 60,000
Total current liabilities $166,200
Non-Current liabilities
Notes payable, less $60,000 current portion 84,000
Total liabilities $250,200
Equity
Contributed capital
Common shares, 100,000 shares authorized,
25,000 shares issued $240,000
Retained earnings* 60,600*
Total equity 300,600
Total liabilities and equity $550,800
*Calculation: 550,800 – (250,200 + 240,000) = 60,600
Problem 12-1A (concluded)
Analysis component:
1. 45.42% (250,200/550,800 × 100)
2. 54.58% (100 – 45.42)
3. Assuming that 37% of the company’s assets were financed by debt at March 31, 2016, the balance sheet has not been strengthened over the current year.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-54
Last revised: January 23, 2016.
Problem 12-2A (20 minutes)
Retained earnings December 31, 2017 $558,608
Reductions in retained earnings due to transactions:
Cash dividends declared:
March 16, on 96,000 shares (96,000 × $0.20) $ 19,200
June 15, on 96,000 shares 19,200
Sept. 5, on 96,000 shares 19,200
Nov. 22, on 115,200 shares (115,200 × $0.20) 23,040 80,640
Less: Retained earnings December 31, 2018 459,600
Loss $ 18,368
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-55
Last revised: January 23, 2016.
Problem 12-3A (25 minutes)
2017
Apr. 1 Preferred Shares 240,000
Common Shares 240,000
To record the conversion of 1,000 preferred /
shares into 8,000 common shares;
$600,000 ÷ 2,500 shares = $240 average issue
price per preferred share; $240 x 1,000 = $240,000
(or 1,000/2,500 × $600,000 = $240,000).
Immediately after the conversion of the preferred shares, the equity section would still show 2,500 preferred shares authorized, but only 1,500 shares issued and outstanding. The amount of preferred shares would change from $600,000 to $360,000. Common shares would still show unlimited shares authorized, and 48,000 shares issued and outstanding. The amount of common shares would be $1,200,000 instead of $960,000. Retained earnings would not be affected. Total equity also would not be affected because $240,000 has simply shifted from the preferred shares section to the common shares section.
Analysis component:
As a result of the conversion, a smaller total dividend would be paid to preferred shares and a larger total dividend would be paid to common shares. However, as a common shareholder, you would not want the conversion of preferred shares to take place before the dividend. The reason is that the conversion increases the number of common shares outstanding by 8,000 and the dividend per share of common would be smaller. Even though there is more cash left over for the common shareholders after the conversion, the dividend per common share is less because there are more common shares dividing the cash. Before the conversion, there are 2,500 shares of $17 preferred. Therefore, $42,500 of the $720,000 paid out in dividends goes to the preferred shareholders. If the remaining $677,500 is divided by 40,000 common shares outstanding, the common dividend per share is $16.94. However, after the conversion, $25,500 ($17 x 1,500) of the $720,000 paid out in dividends goes to the 1,500 shares of $17 preferred, and the remaining $694,500 is divided between the 48,000 common shares outstanding. This reduces the dividend per share to $14.47.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-56
Last revised: January 23, 2016.
Problem 12-4A (25 minutes)
1. $540,000/$18 per share = 30,000 shares
2. 325,000 shares × $9.60 per share = $3,120,000
3. $540,000 + $3,120,000 = $3,660,000
4. $3,660,000 – $3,468,000 = $192,000 Deficit
5. 384,000 Beginning R/E Balance + 192,000 Ending Deficit Balance = 576,000 Loss
6. a) $3.00/share × 30,000 shares = $90,000 to preferred shareholders
b) $120,000 – $90,000 paid to preferred shareholders = $30,000 to common shareholders
7. a) $90,000/30,000 shares = $3.00/share
b) $30,000/325,000 shares = $.0923/share
8. No, because the preferred shares are non-cumulative.
9. Retained Earnings result when cumulative net earnings are greater than cumulative losses + dividends. A deficit results when cumulative earnings are less than cumulative losses and dividends.
10. Dividends in arrears represent undeclared dividends that must be paid to preferred shareholders before any dividends are given to common shareholders but only if dividends are declared. Dividends payable, in contrast, are dividends that have been declared but not yet paid.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-57
Last revised: January 23, 2016.
Problem 12-5A (20 minutes)
Part A – Non-cumulative (maximum annual dividend: 45,000 x $4.48 = $201,600)
1.
YearPreferred Dividends Common Dividends
Total Dividends
2015 $160,000 0 $ 160,000
2016 201,600 $198,400 400,000
2017 201,600 358,400 560,000
Total for three years $563,200 $556,800 $1,120,000
2. Preferred Shares: $201,600/45,000 shares = $4.48 per share
Common Shares: $358,400/80,000 shares = $4.48 per share
Part B — Cumulative
1.
YearPreferred Dividends Common Dividends
Total Dividends
2015 $160,000 0 $ 160,000
2016 201,600 + 41,600 = 243,200
$156,800 400,000
2017 201,600 358,400 560,000
Total for three years $604,800 $515,200 $1,120,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-58
Last revised: January 23, 2016.
2. Preferred Shares: $201,600/45,000 shares = $4.48 per share
Common Shares: $358,400/80,000 shares = $4.48 per share
Analysis component:
Cumulative preferred shares would have a greater market value than non-cumulative because undeclared dividends are never lost on cumulative preferred shares whereas undeclared dividends on non-cumulative shares are lost. Therefore, the potential return to the shareholder on cumulative preferred shares would be higher.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-59
Last revised: January 23, 2016.
Problem 12-6A (60 minutes)
Part 1. Journal entries:
2018
Jan. 5 Cash Dividends or Retained Earnings .............. 64,000
Common Dividend Payable............................. 64,000
Declared dividend on 20,000 outstanding shares.
Feb. 28 Common Dividend Payable...................................... 64,000
Cash.................................................................. 64,000
Paid cash dividend.
July 6 Cash (750 × $38.40)................................................... 28,800
Common shares............................................... 28,800
Issued common shares.
Aug. 22 Cash (1,250 × $27.20)................................................ 34,000
Common shares............................................... 34,000
Issued common shares.
Sept. 5 Cash Dividends or Retained Earnings............... 70,400
Common Dividend Payable............................. 70,400
Declared dividend on 22,000 outstanding shares.
Oct. 28 Common Dividend Payable...................................... 70,400
Cash.................................................................... 70,400
Paid cash dividend.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-60
Last revised: January 23, 2016.
Dec. 31 Income Summary...................................................... 347,200
Retained Earnings............................................. 347,200
Closed the Income Summary account.
31 Retained Earnings.................................................... 134,400
Cash Dividends.................................................. 134,400
Closed the cash dividend account (Note: No entry is required
if Retained Earnings was debited in the Sept. 5 entry and Jan. 5 entry).
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-61
Last revised: January 23, 2016.
Problem 12-6A (concluded)
Part 2
UMAMI SUSTAINABLE SEAFOOD INC.
Statement of Changes in Equity
For Year Ended December 31, 2018
Common Shares
Retained Earnings
Total Equity
Balance, January 1 $ 368,000 $ 216,000 $ 584,000
Issuance of shares 62,800 62,800
Profit (loss) 347,200 347,200
Dividends (134,400) (134,400)
Balance, December 31 $ 430,800 $ 428,800 $ 859,600
Part 3
UMAMI SUSTAINABLE SEAFOOD INC.
Equity Section of the Balance Sheet
December 31, 2018
Contributed capital:
Common shares, unlimited shares authorized, 22,0001 shares issued
and outstanding .................................................................. $430,8001
Retained earnings ..................................................................... 428,800
Total equity ................................................................................ $859,600
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-62
Last revised: January 23, 2016.
Calculations:
1. Common Shares: Shares Dollars
Jan. 1 Balance brought forward 20,000 $368,800
July 6 Issued 750 shares (750 x $38.40) 750 28,800
Aug. 22 Issued 1,250 shares (1,250 x $27.20) 1,250 34,000
Totals 22,000 $430,800
Analysis component:
The relationship between assets and retained earnings is that retained earnings represents how much of the assets are financed by the accumulated profits less losses less distributions of dividends. In other words, retained earnings is a component of equity and we know that assets are financed in part by equity. Using the information in Part (3) above for Umami Sustainable Seafood Inc., we know that $428,800 of the assets are financed by retained earnings as at December 31, 2018.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-63
Last revised: January 23, 2016.
Problem 12-7A (50 minutes)
Part 1
2017
Jan. 12 Cash 192,000
Common Shares 192,000
To record issuance of shares.
20 Organization Expenses (or various other expenses) 36,000
Common Shares 36,000
To record issuance of shares in exchange for organization efforts.
31 Land 360,000
Building 480,000
Equipment 48,000
Common Shares 888,000
To record exchange of shares for PPE assets.
Mar. 4 Equipment 8,160
Cash 8,160
To record purchase of equipment.
Dec. 31 Retained Earnings 96,000
Income Summary
To record closing of income summary to retained earnings.
96,000
2018
Jan. 4 Cash 360,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-64
Last revised: January 23, 2016.
Preferred Shares 360,000
To record issuance of preferred shares.
Dec. 31 Income Summary 216,000
Retained Earnings 216,000
To record closing of income summary to retained earnings.
2019
Dec. 4 Retained Earnings or Cash Dividends 87,120
Preferred Dividends Payable 72,000
Common Dividends Payable 15,120
To record declaration of dividends; 126,000 C/S × $0.12 = 15,120; 5,000 P/S × $14.40 = 72,000.
18 Preferred Dividends Payable 72,000
Common Dividends Payable 15,120
Cash 87,120
To record the payment of dividends.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-65
Last revised: January 23, 2016.
Problem 12-7A (continued)
31 Retained Earnings 87,120
Cash Dividends 87,120
To close the cash dividends account (assuming the
Cash Dividends account was debited on December 4).
31 Income Summary 192,000
Retained Earnings 192,000
To close the income summary account.
Part 2
HAMMOND MANUFACTURING INC.
Statement of Changes in Equity
For Year Ended December 31, 2019
Preferred Shares
Common Shares
Retained
Earnings
Total Equity
Balance, January 1 $360,000$1,116,00
0$120,00
0$1,596,00
0
Issuance of shares -0- -0- -0-
Profit (loss) 192,000 192,000
Dividends (87,120) (87,120)
Balance, December 31$360,000 $1,116,00
0$224,88
0$1,700,88
0
NOTE: Because no shares were issued during the year ended December 31, 2019, the ‘Issuance of shares’ line in the Statement of Changes in Equity could be omitted.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-66
Last revised: January 23, 2016.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-67
Last revised: January 23, 2016.
Problem 12-7A (concluded)
Part 3
HAMMOND MANUFACTURING INC.Equity Section of the Balance Sheet
December 31, 2019
Contributed Capital:
Preferred shares, $14.40 noncumulative, 100,000 shares
authorized, 5,000 shares issued & outstanding $ 360,000
Common shares, unlimited shares
authorized, 126,0001 shares issued and outstanding 1,116,0001
Total contributed capital $1,476,000
Retained earnings 224,880
Total equity $1,700,880
Calculations:
1. Common Shares:
2017 Shares Dollars
Jan. 12 Issued 40,000 shares (40,000 x $4.80) 40,000 $ 192,000
20 Issued 6,000 shares 6,000 36,000
31 Issued 80,000 shares 80,000 888,000
Totals 126,000 $1,116,000
Analysis component:
2017 2018 2019
Net assets
$192,000 + $36,000 + $888,000 – $96,000 =
$1,020,000
$1,020,000 + $360,000 + $216,000 = $1,596,000
$1,596,000 – $87,120 + $192,000 = $1,700,880
Trend F
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-68
Last revised: January 23, 2016.
(F or U)
The trend is favourable as net assets (aka equity) is increasing.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-69
Last revised: January 23, 2016.
Problem 12-8A (30 minutes)
1.
2017
Jan. 1 Cash 319,200
Common shares 319,200
Issued 30,000 common shares; 30,000 x $10.64.
5 Cash Dividends or Retained Earnings 231,000
Preferred Dividend Payable 126,000
Common Dividend Payable 105,000
Declared dividend on preferred shares
(20,000 x $2.10 x 3 years) and common
shares (231,000 – 126,000).
Feb. 28 Preferred Dividend Payable 126,000
Common Dividend Payable 105,000
Cash 231,000
Paid cash dividends.
July 1 Cash 156,800
Preferred Shares 159,800
Issued 7,000 preferred shares
(156,800 ÷ $22.40 = 7,000 shares).
Dec. 31 Retained Earnings 231,000
Cash Dividends 231,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-70
Last revised: January 23, 2016.
Closed the dividend account (assuming Retained
Earnings was not debited directly on the January
5 declaration date).
31 Income Summary 576,800
Retained Earnings 576,800
To close profit to retained earnings.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-71
Last revised: January 23, 2016.
Problem 12-8A (continued)
2018
Sept. 5 Cash Dividends or Retained Earnings 203,700
Preferred Dividend Payable 56,700
Common Dividend Payable 147,000
Declared dividend on preferred shares
($2.10 × 27,000 = 56,700) and common shares
($1.40 × 105,000 = 147,000).
Oct. 28 Preferred Dividend Payable 56,700
Common Dividend Payable 147,000
Cash 203,700
Paid cash dividends declared.
Dec. 31 Retained Earnings 203,700
Cash Dividends 203,700
Closed the dividend account (assuming Retained
Earnings was not debited directly on the September
5 declaration date).
31 Income Summary 543,200
Retained Earnings 543,200
Closed the Income Summary account.
2.
Opening balance (Jan 1, 2018) of retained earnings = $378,000 + 576,800 -
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-72
Last revised: January 23, 2016.
231,000
= $723,800
TACTEX CONTROLS INC.
Statement of Changes in Equity
For Year Ended December 31, 2018
Preferred
SharesCommon Shares
Retained Earnings
Total Equity
Balance, January 1$548,80
0$1,054,20
0$
723,800$2,326,80
0
Issuance of shares -0- -0- -0-
Profit (loss) 543,200 543,200
Dividends (203,700) (203,700)
Balance, December 31$548,80
0$1,054,20
0$1,063,30
0$2,666,30
0
NOTE: Because no shares were issued during the year ended December 31, 2018, the ‘Issuance of shares’ line in the Statement of Changes in Equity could be omitted.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-73
Last revised: January 23, 2016.
Problem 12-8A (concluded)
3.
TACTEX CONTROLS INC.
Equity Section of the Balance Sheet
December 31, 2018
Contributed Capital:
Preferred shares, $2.10 cumulative, unlimited shares authorized,
27,000 shares issued and outstanding $ 548,800
Common shares, unlimited shares authorized
105,000 shares issued and outstanding
1,054,200
Total contributed capital $1,603,000
Retained earnings 1,063,300
Total equity $2,666,300
Calculations:
1. Preferred Shares: Shares Dollars
2017
Jan. 1 Balance brought forward 20,000 $392,000
July 1 Issued 7,000 shares 7,000 156,800
Totals 27,000 $548,800
2. Common Shares:
2017
Jan. 1 Balance brought forward 75,000 $ 735,000
Jan. 1 Issued 30,000 shares (30,000 x $10.64) 30,000 319,200
Totals 105,000 $1,054,200
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-74
Last revised: January 23, 2016.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-75
Last revised: January 23, 2016.
ALTERNATE PROBLEMSProblem 12-1B (40 minutes)
MALTA INDUSTRIES INC.
Balance Sheet
October 31, 2017
Assets
Current assets:
Cash $ 497,000
Accounts receivable 315,000
Office supplies 119,000
Prepaid insurance 20,400
Total current assets $ 951,400
Property, plant, and equipment:
Land $1,400,000
Building $4,025,000
Less: Accumulated depreciation 1,166,200 2,858,800
Machinery $2,240,000
Less: Accumulated depreciation 1,068,200 1,171,800
Total property, plant and equipment 5,430,600
Total assets $6,382,000
Liabilities
Current liabilities:
Accounts payable $ 221,200
Wages payable 156,000
Unearned fees 33,600
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-76
Last revised: January 23, 2016.
Total current liabilities $ 410,800
Non-Current liabilities:
Long term liabilities (due in 2021) 770,000
Total liabilities $1,180,800
Equity
Contributed Capital:
Preferred Shares, $2.10 non-cumulative,
unlimited shares authorized,
30,000 shares issued and outstanding $1,440,0001
Common Shares, unlimited shares authorized,
50,000 shares issued and outstanding 2,240,0002
Total contributed capital $3,680,000
Retained earnings 1,521,2003
Total equity 5,201,200
Total liabilities and equity $6,382,000
(calculations for 1, 2, and 3 are on the next page)
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-77
Last revised: January 23, 2016.
Problem 12-1B (concluded)
Calculations:
1. 30,000 preferred shares × $48/share = $1,440,000
2. 50,000 common shares × $44.80/share = $2,240,000
3. $6,382,000 Total assets – $1,180,800 Total liabilities – $3,680,000 Total contributed capital = $1,521,200 Retained earnings
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-78
Last revised: January 23, 2016.
Problem 12-2B (20 minutes)
Retained earnings December 31, 2017 $1,176,432
Reductions in retained earnings due to transactions:
Cash dividends declared:
Feb. 11, on 175,000 shares (175,000 × $0.30) $52,500
May 24, on 175,000 shares 52,500
Aug. 13, on 182,500 shares (182,500 × $0.30) 54,750
Dec. 12, on 192,500 shares (192,500 × $0.30) 57,750 217,500
Less: Retained earnings December 31, 2018 1,320,300
Profit $ 361,368
Problem 12-3B (25 minutes)
2017
Dec. 1 Preferred Shares 240,000
Common Shares 240,000
To record the conversion of 1,000 preferred
shares into 8,000 common shares;
$480,000 ÷ 2,000 shares = $240 average issue
price per preferred share; $240 x 1,000 = $240,000
(or 1,000/2,000 × $480,000 = $240,000).
Immediately after the conversion of preferred shares, the equity section would still show 2,000 shares of preferred shares authorized, but only 1,000 shares issued and outstanding. The amount of preferred shares would change from $480,000 to $240,000. Common shares would still show unlimited shares authorized, and 68,000 shares issued. The amount of common shares would be $1,680,000 instead of $1,440,000. Retained earnings would not be affected. Total equity also would not be affected because $240,000 has simply shifted from the preferred share section to the common share section.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-79
Last revised: January 23, 2016.
Analysis component:
As a common shareholder, you would not want the conversion of preferred shares to take place. As a result of the conversion, a smaller total dividend would be paid to preferred shares and a larger total dividend would be paid to common shares. However, the dividend per common share is less because there are more common shares dividing the cash. Before the conversion, there are 2,000 shares of $13.20 preferred. Therefore, $26,400 of the $584,400 paid out in dividends goes to the preferred shareholders. If the remaining $558,000 is divided by 60,000 shares of common shares outstanding, the common dividend per share is $9.30. However, after the conversion, $13,200 of the $584,400 paid out in dividends goes to the 1,000 shares of $13.20 preferred, and the remaining $571,200 is divided between the 68,000 common shares outstanding. This reduces the common dividend per share to $8.40.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-80
Last revised: January 23, 2016.
Problem 12-4B (25 minutes)
1. A = $12/share × 45,000 shares = $540,000
2. B = $2,280,000/$60 per share = 38,000 shares
3. C = 265,000 shares × $3.00/share = $795,000
4. D = $540,000 + $2,280,000 + $795,000 = $3,615,000
5. E = $1,500,000 + $1,050,000 + $780,000 – $1,320,000 – $720,000 = $1,290,000
6. F = $3,615,000 + $1,290,000 = $4,905,000
7. 3 years (2015, 2016 2017) × ($4.80 per share × 45,000 shares) = $648,000
Problem 12-5B (20 minutes)
1.
Year
Dividends Declared
and Paid
Preferred
Dividends
Common
Dividends
2016 $360,000 $288,000 $ 72,000
2017 60,000 60,000 0
2018 150,000 150,000 0
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-81
Last revised: January 23, 2016.
2019 $900,000 $654,000 $246,000
2.
Year
Dividends Declared
and Paid
Preferred
Dividends
Common
Dividends
2016 $360,000 $288,000 $ 72,000
2017 60,000 60,000 0
2018 150,000 150,000 0
2019 $900,000 $288,000 $612,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-82
Last revised: January 23, 2016.
Problem 12-6B (60 minutes)
Part 1. Journal entries:
Mar. 2 Cash Dividends or Retained Earnings................... 90,000
Common Dividend Payable............................. 90,000
Declared dividend on 100,000 outstanding shares.
31 Common Dividend Payable...................................... 90,000
Cash.................................................................. 90,000
Paid cash dividend.
Nov. 11 Cash (12,000 × $7.80)................................................ 93,600
Common shares,.............................................. 93,600
Issued common shares.
25 Cash (8,000 × $5.70).................................................. 45,600
Common shares..................................................... 45,600
Issued common shares.
Dec. 1 Cash Dividends or Retained Earnings.................... 180,000
Common Dividend Payable............................. 180,000
Declared dividend on 120,000 outstanding shares; 120,000 × $1.50 = $180,000.
31 Income Summary...................................................... 321,600
Retained Earnings............................................ 321,600
Closed the Income Summary account.
31 Retained Earnings.................................................... 270,000
Cash Dividends................................................ 270,000
Closed the cash dividend account (assuming that
Cash Dividends was debited on March 2 and December 1).
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-83
Last revised: January 23, 2016.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-84
Last revised: January 23, 2016.
Problem 12-6B (continued)
Part 2
QUICKSTREAM INC.
Statement of Changes in Equity
For Year Ended December 31, 2018
Common Shares
Retained Earnings Total Equity
Balance, January 1 $480,000 $648,000 $1,128,000
Issuance of shares 139,200 139,200
Profit (loss) 321,600 321,600
Dividends (270,000) (270,000)
Balance, December 31 $619,200 $699,600 $1,318,800
Part 3
QUICKSTREAM INC.
Equity Section of the Balance Sheet
December 31, 2018
Contributed capital:
Common shares, unlimited shares authorized, 120,0001 shares issued
and outstanding ................................................................. $ 619,2001
Retained earnings ..................................................................... 699,600
Total equity ................................................................................ $1,318,800
Calculations:
1. Common Shares: Shares Dollars
Jan. 1 Balance brought forward 100,000 $480,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-85
Last revised: January 23, 2016.
Nov. 11 Issued 12,000 shares (12,000 x $7.80) 12,000 93,600
25 Issued 8,000 shares (8,000 x $5.70) 8,000 45,600
Totals 120,000 $619,200
Analysis component:
$1,318,800 of Quickstream Inc.’s assets at December 31, 2018 are financed by common equity ($619,200 contributed capital and $699,600 retained earnings). Other sources of financing that are available are from debt (liabilities) and from investment by preferred shareholders (preferred shareholders’ contributed capital).
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-86
Last revised: January 23, 2016.
Problem 12-7B (50 minutes)
Part 1
2015
Feb. 5 Cash...................................................................... 1,680,000
Common Shares.......................................... 1,680,000
Issued common shares; 70,000 × $24
28 Organization Exp. (or other various exp.)......... 96,000
Common Shares.......................................... 96,000
Issued common shares to corporation’s promoters.
Mar. 3 Land....................................................................... 192,000
Buildings............................................................... 504,000
Machinery............................................................. 372,000
Common shares.......................................... 1,068,000
Issued common shares for in exchange land, buildings, and machinery.
Dec. 31 Retained Earnings................................................ 64,800
Income Summary........................................ 64,800
Closed the Income Summary account.
2016
Jan. 28 Cash...................................................................... 960,000
Preferred Shares......................................... 960,000
Issued preferred shares; 4,000 × $240
Dec. 31 Income Summary................................................. 235,200
Retained Earnings....................................... 235,200
Closed the Income Summary account.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-87
Last revised: January 23, 2016.
Problem 12-7B (continued)
2017
Jan. 1 Cash Dividends or Retained Earnings...................... 152,520
Preferred Dividend Payable.............................. 96,000
Common Dividend Payable............................... 56,520
Preferred dividend = 4,000 × $24 = 96,000,
No. of common shares = 70,000 + 3,750 +
44,000 = 117,750
Common dividend = $0.48 × 117,750 = $56,520
Feb. 5 Preferred Dividend Payable....................................... 96,000
Common Dividend Payable........................................ 56,520
Cash.................................................................... 152,520
Paid dividends.
Dec. 31 Retained Earnings...................................................... 152,520
Cash Dividends.................................................. 152,520
Closed dividends (assuming Cash Dividends was debited on the January 1 declaration date).
31 Income Summary........................................................ 381,600
Retained Earnings.............................................. 381,600
Closed the Income Summary account.
Part 2
LABTECH PHARMACY INC.
Statement of Changes in Equity
For Year Ended December 31, 2017
Preferred Shares
Common Shares
Retained Earnings Total Equity
Balance, January 1 $960,000 $2,844,000 $170,400 $3,974,400Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016
McGraw-Hill Education Ltd. 12-88
Last revised: January 23, 2016.
Issuance of shares -0- -0- -0-
Profit (loss) 381,600 381,600
Dividends (152,520) (152,520)
Balance, December 31 $960,000 $2,844,000 $399,480 $4,203,480
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-89
Last revised: January 23, 2016.
Problem 12-7B (concluded)
Part 3
LABTECH PHARMACY INC.
Equity Section of the Balance Sheet
December 31, 2017
Contributed capital:
Preferred, $24, noncumulative, 100,000 shares
authorized, 4,000 issued and outstanding............................ $ 960,000
Common shares, unlimited shares authorized,
117,750 shares issued and outstanding ............................... 2,844,000
Total contributed capital............................................................. $3,804,000
Retained earnings ......................................................................... 399,480
Total equity .................................................................................... $4,203,480
Calculations:
1. Common Shares: Shares Dollars
2015
Feb. 5 Issued 70,000 shares 70,000 $1,680,000
28 Issued 3,750 shares 3,750 96,000
Mar. 3 Issued 44,000 shares 44,000 1,068,000
Totals 117,750 $2,844,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-90
Last revised: January 23, 2016.
Analysis component:
2015 2016 2017
Net Assets = A-L or E $1,680,000 + $96,000 + $1,068,000 - $64,800 = $2,779,200
$2,779,200 + $960,000 + $235,200 = $3,974,400
$4,203,480 (Total Equity from Part 3)
The trend in terms of the net assets held by Labtech Pharmacy Inc. is favourable given that it has increased from 2015 to 2017.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-91
Last revised: January 23, 2016.
Problem 12-8B (60 minutes)
1.
2016
Jan. 1 Cash……………………………………………………………. 570,000
Common shares 570,000
Issued 50,000 common shares; 50,000 x $11.40.
5 Cash Dividends or Retained Earnings 191,250
Preferred Dividend Payable 45,000
Common Dividend Payable 146,250
Declared dividend on preferred shares (25,000 x $1.80 = 45,000) and common shares (191,250 – 45,000 = 146,250).
Feb. 28 Preferred Dividend Payable 45,000
Common Dividend Payable 146,250
Cash 191,250
Paid cash dividends.
July 1 Cash 486,000
Preferred Shares 486,000
Issued 15,000 preferred shares
(486,000 ÷ $32.40 = 15,000 preferred shares).
Dec. 31 Retained Earnings 191,250
Cash Dividends 191,250
To close cash dividends (assuming Cash Dividend was debited on January 5, the declaration date).
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-92
Last revised: January 23, 2016.
31 Income Summary 768,000
Retained Earnings 768,000
Closed the Income Summary account.
2017
Sept. 5 Cash Dividends or Retained Earnings 263,250
Preferred Dividend Payable ($1.80 × 40,000) 72,000
Common Dividend Payable ($0.90 × 212,500) 191,250
Declared dividend on preferred and common shares.
Oct. 28 Preferred Dividend Payable 72,000
Common Dividend Payable 191,250
Cash 263,250
Paid cash dividends declared.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-93
Last revised: January 23, 2016.
Problem 12-8B (continued)
Dec. 31 Retained Earnings 263,250
Cash Dividends 263,250
Closed the dividend account (assuming Cash Dividends was debited on September 5).
31 Retained Earnings 240,000
Income Summary 240,000
Closed the Income Summary account (loss).
2.
PACE OIL & GAS CORP.
Statement of Changes in Equity
For Year Ended December 31, 2017
Preferred Shares
Common Shares
Retained Earnings
Total Equity
Balance, January 1$1,266,00
0$2,325,00
0$1,257,75
0$4,848,75
0
Issuance of shares* -0- -0- -0-
Profit (loss) (240,000) (240,000)
Dividends (263,250) (263,250)
Balance, December 31$1,266,00
0$2,325,00
0$
754,500$4,345,50
0
*NOTE: Because no shares were issued during the year ended December 31, 2017, the ‘Issuance of shares’ line in the Statement of Changes in Equity could be omitted.
3.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-94
Last revised: January 23, 2016.
PACE OIL & GAS CORP.
Equity Section of the Balance Sheet
December 31, 2017
Contributed Capital:
Preferred shares, $1.80 noncumulative, unlimited shares authorized
40,000** shares issued and outstanding $1,266,000**
Common shares, unlimited shares authorized,
212,500** shares issued and outstanding 2,325,000**
Total contributed capital $3,951,000
Retained earnings 754,500
Total equity $4,345,500
**See Calculations next page.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-95
Last revised: January 23, 2016.
Problem 12-8B (concluded)
Calculations:
1. Preferred Shares: Shares Dollars
Jan. 1 Balance brought forward 25,000 $ 780,000
July 1 Issued 15,000 shares 15,000 486,000
Totals 40,000 $1,266,000
1. Common Shares: Shares Dollars
Jan. 1 Balance brought forward 162,500 $1,755,000
1 Issued 50,000 shares (50,000 x $11.40) 50,000 570,000
Totals 212,500 $2,325,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-96
Last revised: January 23, 2016.
ANALYTICAL & REVIEW PROBLEMS
A&R Problem 12-1
1.
For the Years Ended December 31
Dec. 31/18 Dec. 31/17 Dec. 31/16
Net sales $5,000,000 $4,000,000 $3,000,000
Cost of goods sold 3,000,000 2,400,000 1,650,000
Gross profit $2,000,000 $1,600,000 $1,350,000
Operating expenses 1,400,000 1,300,000 900,000
Operating profit $ 600,000 $ 300,000 $ 450,000
Other revenues (expenses) (200,000) (220,000) 50,000
Profit before income tax $ 400,000 $80,000 $ 500,000
Income tax expense 80,000 16,000 100,000
Profit $ 320,000 $ 64,000 $ 400,000
2, 3, & 4.
Dec. 31/18 Dec. 31/17 Dec. 31/16
Contributed Capital:
Preferred shares, $2 noncumulative,
100,000 shares authorized,
20,000 issued & outstanding
Common shares
500,000 shares authorized
100,000 issued & outstanding
Total contributed capital
$ 400,000
550,000
$ 950,000
$ 400,000
550,000
$ 950,000
$ 400,000
550,000
$ 950,000
Retained earnings 684,000 364,000 300,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-97
Last revised: January 23, 2016.
Total equity $1,634,000 $1,314,000 $1,250,000
Analysis component:
2018 2017 2016
Liabilities $1,123,200 $ 936,000 $ 900,000
Equity 1,634,000 1,314,000 1,250,000
Total Assets $2,757,200 $2,250,000 $2,150,000
Liabilities/Total Assets 40.74% 41.60% 41.86%
Although liabilities are increasing in total they are decreasing slightly as a percentage of total assets (which is the same as total liabilities and equity). This indicates that the balance sheet has been strengthened from 2016 to 2018. A balance sheet is said to be strengthened when liabilities (and therefore the related risk) are decreasing.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-98
Last revised: January 23, 2016.
ETHICS CHALLENGE
EC 12-1
It appears that Jack may be in violation of copyright laws. This is both a legal issue and an ethical issue. To copy someone else’s work is ethically wrong. To incorporate as a means of protection against normal business risk is a well-accepted practice. The obvious intent here, however, is to use the corporate shell as a means of limiting any legitimate claim that Corel might have to Jack and Bill’s assets. Jack is recommending incorporation for deceptive purposes and Bill should hold his moral ground on this issue.
FOCUS ON FINANCIAL STATEMENTS
FFS 12-1
BowTie Fishing Expeditions Corp.
Statement of Changes in Equity
For Month Ended March 31, 2017
Preferred Shares
Common Shares
Retained Earning
sTotal
Equity
Balance, March 1 $ -0- $ -0- $ -0- $ -0-
Issuance of shares 42,000 150,000 192,000
Profit (loss) 190,000 190,000
Dividends (45,000) (45,000)
Balance, March 31 $42,000 $150,000 $145,000 $337,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-99
Last revised: January 23, 2016.
FFS 12-1 (continued) BowTie Fishing Expeditions Corp.
Balance Sheet
March 31, 2017
Assets
Current assets:
Cash $ 15,000
Accounts receivable $ 36,000
Less: Allowance for doubtful accounts 1,200 34,800
Prepaid rent 9,000
Total current assets $ 58,800
Property, plant and equipment:
Land $105,000
Building $148,600
Less: Accumulated depreciation 12,000 136,600
Equipment $140,000
Less: Accumulated depreciation 2,000 138,000
Furniture $ 75,000
Less: Accumulated depreciation 5,000 70,000
Total property, plant and equipment 449,600
Intangible assets:
Patent
Less: Accumulated amortization …………………….
$14,000
2,000 12,000
Total assets $520,400
Liabilities
Current liabilities:
Accounts payable $ 17,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-100
Last revised: January 23, 2016.
Current portion of long-term notes payable 30,000
Customer deposits 28,000
Dividends payable 45,000
Estimated warranty liabilities 3,400
Total current liabilities $123,400
Non-Current liabilities:
Notes payable, less $30,000 current portion 60,000
Total liabilities $183,400
Equity
Contributed capital:
Preferred shares, $2, cumulative,
Authorized: 30,000 shares
Issued and outstanding: 10,000 shares $ 42,000
Common shares,
Authorized: Unlimited
Issued and outstanding: 50,000 shares 150,000
Total contributed capital $192,000
Retained earnings 145,000
Total equity 337,000
Total liabilities and equity $520,400
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-101
Last revised: January 23, 2016.
FFS 12-1 (concluded)
Analysis component:
1. 337,000 ÷ 520,400 x 100 = 65%
2. 183,400 ÷ 520,400 x 100 = 35%
3. At March 31, 2017, 35.24% ($183,400/$520,400 × 100) of BowTie’s assets were financed by debt. Therefore, given that 30% of the assets were financed by debt at March 31, 2016, the risk associated with debt financing has increased because of the increase in debt as a percentage of assets (the balance sheet has been weakened as opposed to strengthened).
4. (150,000 + 145,000 = 295,000)/520,400 x 100 = 57%
5. 42,000/520,400 x 100 = 8%
FFS 12-2
1. 2014: $0.20/share × 1,164,669,608 common shares = $232,933,922;
2013: $0.50/share x 1,164,652,426 common shares = $582,326,213.
2. Dividends are a distribution of earnings to the shareholders (or owners) of the corporation. Dividends cause equity to decrease.
3. Barrick Gold has an unlimited number of common shares available for issue at December 31, 2014.
4. Although Barrick Gold has three types of preferred shares, none were issued and outstanding as at December 31, 2014.
5. The deficit of $10,739 million at January 1, 2014 means that the Retained Earnings account had a debit balance. A debit balance occurs in Retained earnings when debits exceed credits which may have occurred because of large losses.
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-102
Last revised: January 23, 2016.
CRITICAL THINKING MINI CASE
CT 12-1
Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity.
Problem:
— how to best finance the purchase of new equipment
Goal:*
— from the perspective of the manager of Jones Inc., the financing option with the lowest cost is the best option (the shareholders of Jones Inc. would want the option that not only has the lowest cost but that does not dilute the ownership of the common shareholders)
— another consideration would be to minimize risk to Jones Inc.
Principles:
— must comply with GAAP (disclose method of financing, for example)
Facts:
— as per the mini case study
— also, the following calculations can be derived from the information provided:
Borrow
Issue $1 cumulative
preferred shares
Profit before interest and tax $80,000 $80,000
Interest expense ($100,000 x 6%) 6,000 —
Profit before tax $74,000 $80,000
Income tax ($74,000 x 25%; $80,000 x 25%) 18,500 20,000
Profit $55,500 $60,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-103
Last revised: January 23, 2016.
Less dividends (6,000 x $1) — 6,000
Net earnings applicable to common shareholders
$55,500 $54,000
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-104
Last revised: January 23, 2016.
CT 12-1 (concluded)
Conclusions/Consequences:
— Is the primary goal risk minimization (issue shares) or minimize cost (borrow)?
— Common shareholders will want to maximize their earnings which points to borrowing but borrowing increases risk because principal and interest payments must be made; potential future creditors are sensitive to risk.
— Finance manager may be compensated based on performance so will prefer borrowing option.
— Alternatively, the finance manager could make a case to the board of directors to avoid the declaration of dividends in which case issuing preferred shares would generate the highest earnings applicable to common shareholders ($60,000 vs. $55,500) but this may have negative implications for future issuance of shares.
*The goal is highly dependent on “perspective.”
Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-105