true/false. write 't' if the statement is true and 'f' if the...

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.1) A corporation is a separate legal entity apart from its owners. 1) _______

2) Shareholders in a corporation are personally liable for the debts of thecorporation.

2) _______

3) All shares issued by a corporation have voting rights. 3) _______

4) Double taxation refers to the fact that a corporation pays tax on itstaxable earnings and the shareholder also pays personal tax on all of thecorporation's taxable income.

4) _______

5) It is easier to achieve continuous life using the corporate structure for anorganization.

5) _______

6) Unlimited liability is one of the advantages of the corporate structurefor an organization.

6) _______

7) Mutual agency is one of the disadvantages of the corporate structure foran organization.

7) _______

8) The most that a shareholder can lose on an investment in a corporation'sshares is the cost of the investment.

8) _______

9) Corporations pay the same taxes as partnerships and proprietorships. 9) _______

10) Retained earnings is debited to transfer net income to the retainedearnings account during the closing process.

10) ______

11) Retained earnings represents investments by the shareholders of thecorporation.

11) ______

12) A debit balance in retained earnings is referred to as a deficit. 12) ______

13) Dividends distributed increase the assets and decrease the retainedearnings of the business.

13) ______

14) No-par-value shares are shares of stock that do not have a valueassigned to them by the articles of incorporation.

14) ______

15) Preferred shares normally have no voting rights. 15) ______

16) When a corporation issues shares in exchange for noncash assets, thenoncash assets are debited for their book value.

16) ______

17) The shareholders' equity section of a balance sheet lists common sharesfirst, followed by preferred shares second, and retained earnings last.

17) ______

18) Organization costs are intangible assets classified with property, plantand equipment.

18) ______

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19) Increases in contributed capital and in retained earnings come fromproducing revenue.

19) ______

20) Cash dividends decrease both the assets and the retained earnings of acorporation.

20) ______

21) The policy-making body of a corporation is called the board ofdirectors.

21) ______

22) The entry on the payment date for a cash dividend involves a debit toretained earnings and a credit to cash.

22) ______

23) Dividends become a liability of the corporation on the declaration date. 23) ______

24) Dividends in arrears on cumulative preferred shares are not a liability tothe corporation.

24) ______

25) Dividends payable are normally a long-term liability. 25) ______

26) In order to receive a cash dividend, an investor must own the share bythe payment date.

26) ______

27) The declaration date and the payment date of a cash dividend are thesame thing.

27) ______

28) Dividends cannot accumulate for common shares. 28) ______

29) If the preferred shares are not designated as cumulative, the corporationis obligated to pay any dividends in arrears.

29) ______

30) Convertible preferred shares must be converted into common shareswhen the corporation declares the conversion.

30) ______

31) Market value is a term referring to common shares and indicates theamount for which a person could buy or sell a share.

31) ______

32) If a company has both preferred and common shares outstanding, thepreferred shareholders have the first claim to shareholders' equity.

32) ______

33) Two common profitability measures are rate of return on total assetsand rate of return on common shareholders' equity.

33) ______

34) With respect to share capital, the primary difference between GAAP forprivate enterprises and international financial reporting standards(IFRS) is the required disclosure.

34) ______

MULTIPLE CHOICE. Choose the one alternative that best completes the statement oranswers the question.

35) The document(s) used by a government to grant permission to form acorporation is called (a):

35) ______

A) articles of incorporation B) share certificateC) proxy D) bylaw agreement


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36) All of the following represent advantages of corporations over otherbusiness entities except:

36) ______

A) ease of transferring ownershipB) continuity of existenceC) unlimited shareholders' liabilityD) separate legal entity

37) Which of the following statements describing a corporation is true? 37) ______A) Shareholders own the business and manage its day-to-day

operations.B) When ownership of a corporation changes, the corporation

terminates.C) A corporation is subject to greater governmental regulation than a

proprietorship or a partnership.D) Shareholders are the creditors of a corporation.

38) Which of the following forms of business organizations is a distinctlegal entity?

38) ______

A) partnershipB) only proprietorship and partnershipC) proprietorshipD) corporation

39) Shareholders' liability for corporation debts is generally limited to: 39) ______A) total shareholders' equityB) the cost of their investmentC) the market value of the sharesD) the par value of the shares

40) Which of the following is a disadvantage of the corporate form ofbusiness organization?

40) ______

A) mutual agencyB) difficulty in transferring ownershipC) government regulationD) limited liability

41) Which of the following forms of business organizations terminateswhen the ownership structure changes?

41) ______

A) share capital B) shareholders' equityC) partnership D) corporation

42) Share capital represents: 42) ______A) retained earningsB) investments by the creditors of a corporationC) investments by the shareholders of a corporationD) capital that the corporation has earned through profitable

operations

43) Retained earnings: 43) ______A) is classified as an asset on the corporate balance sheetB) represents investments by the shareholders of the corporation



C) is part of contributed capitalD) represents capital earned by profitable operations

44) The owners of a corporation are referred to as: 44) ______A) shareholders B) debtorsC) partners D) creditors

45) All of the following transactions increase shareholders' equity except: 45) ______A) declaration of a cash dividendB) issuance of convertible preferred sharesC) issuance of common sharesD) profitable operations

46) A profitable corporation would close out income summary by: 46) ______A) debiting income summary and crediting retained earningsB) debiting income summary and crediting share capitalC) crediting income summary and debiting share capitalD) crediting income summary and debiting retained earnings

47) A corporation operating at a loss would close out income summary by: 47) ______A) debiting income summary and crediting share capitalB) debiting income summary and crediting retained earningsC) crediting income summary and debiting retained earningsD) crediting income summary and debiting share capital

48) A debit balance in retained earnings is referred to as a(n): 48) ______A) liability B) normal balanceC) deficit D) asset

49) Cash dividends: 49) ______A) increase retained earningsB) decrease both the assets and the total shareholders' equity of the

corporationC) increase the assets and decrease the total shareholders' equity of

the corporationD) do not affect the retained earnings of a corporation

50) All of the following are basic rights of a common shareholder except: 50) ______A) the right to receive a proportionate share of any dividendB) the right to voteC) the right to receive a proportionate share of the corporate assets

prior to the payment of liabilities in liquidationD) the right to receive a proportionate share of the corporate assets

remaining after the corporation pays its liabilities in liquidation

51) Which of the following is a priority granted to preferred shareholders? 51) ______A) receiving dividends before common shareholdersB) receiving a guaranteed fixed dollar amount of dividends each yearC) voting for the corporate board of directorsD) receiving assets before creditors if the corporation liquidates

52) A corporation may issue: 52) ______



A) either common shares or preferred shares but not bothB) common shares but not preferred sharesC) common shares and preferred sharesD) preferred shares but not common shares

53) Why might corporations prefer issuing preferred shares to debt? 53) ______A) dividends are payable at the discretion of the corporationB) dividends are tax deductible to the corporationC) debt payments are payable at the discretion of the corporationD) interest expense is tax deductible to the corporation

54) An owner investment of cash in a corporation increases: 54) ______A) assets and increases shareholders' equityB) assets and increases liabilitiesC) assets and decreases shareholders' equityD) one asset and decreases another asset

55) The entry to record the issuance of 5,000 common shares for $12.50 pershare includes a:

55) ______

A) credit to retained earnings for $62,500B) debit to retained earnings for $62,500C) debit to common shares for $62,500D) debit to cash for $62,500

56) The entry to record the issuance of 6,000 common shares for $12.50 pershare includes a:

56) ______

A) debit to common shares for $75,000B) credit to retained earnings for $75,000C) credit to common shares for $75,000D) credit to cash for $75,000

57) The entry to record the issuance of 55,000 common shares at $13.50 pershare includes a:

57) ______

A) credit to retained earnings $742,500B) credit to cash for $742,500C) credit to common shares for $742,500D) debit to retained earnings for $742,500

58) When 35,000 common shares are issued at $16.50 per share, totalcontributed capital:

58) ______

A) increases by $350,000 B) decreases by $577,500C) increases by $577,500 D) increases by $227,500

59) Land is acquired by issuing 500 common shares. The land has a currentmarket value of $12,000. There is no market value for the commonshares available. The journal entry requires a:

59) ______

A) debit to cash for $12,000B) credit to common shares for $12,000C) credit to retained earnings for $12,000D) debit to common shares for $12,000

60) A corporation issues common shares in exchange for equipment with a mar ket



value of$15,000.Thistransactionwould:

60) ______

A) increase retained earnings by $15,000B) decrease total shareholders' equity by $15,000C) increase common shares by $15,000D) increase liabilities by $15,000

61) The heading, contributed capital, appears on which section of thebalance sheet?

61) ______

A) property, plant and equipmentB) current assetsC) long-term liabilitiesD) shareholders' equity

62) Accounting for the incorporation of an unincorporated going businessinvolves:

62) ______

A) leaving the owner equity accounts as is and setting up theshareholders' equity accounts for the corporation

B) closing the owner equity accounts of the prior entity and settingup the shareholder equity accounts of the corporation

C) closing the owner equity accounts of the prior entity to theretained earnings account of the corporation

D) closing the withdrawals accounts to the dividends payableaccounts

63) Organization costs appear on which section of the balance sheet? 63) ______A) shareholders' equity B) intangible assetsC) long-term liabilities D) current assets

Table 13-1

The following selected list of accounts with their normal balances was taken from the generalledger of Grant Corporation as of December 31, 2010:

Cash $173,500Common shares, 100,000 shares authorized, 50,000 shares issued 190,000Retained earnings 131,500Cash dividends payable 25,000Preferred shares, 200,000 shares authorized 100,000 shares issued 500,000

64) Refer to Table 13-1. The average issue price of a common share was: 64) ______A) $5.00 B) $1.90 C) $3.80 D) $0.95

65) Refer to Table 13-1. The average issue price of a preferred share was: 65) ______A) $5.00 B) $6.90 C) $3.80 D) $2.50

66) Refer to Table 13-1. Which account should be listed first in the shareholder



s' equitysection?

66) ______

A) Contributed surplus B) Retained earningsC) Common shares D) Preferred shares

67) Refer to Table 13-1. The total shareholders' equity as of December 31,2010 was:

67) ______

A) $821,500 B) $690,000 C) $881,500 D) $190,000

68) Dividends become a liability of the corporation: 68) ______A) on the payment dateB) on the day immediately following the date of declarationC) on the declaration dateD) on the date of record

69) The dividends payable liability of the corporation is eliminated: 69) ______A) on the day immediately following the date of declarationB) on the declaration dateC) on the date of recordD) on the payment date

70) The entry to record the declaration of a $0.50 per share dividend on12,500 outstanding common shares requires a:

70) ______

A) credit to retained earnings for $6,250B) credit to cash for $6,250C) debit to retained earnings for $6,250D) debit to dividends payable for $6,250

71) The entry to pay a previously declared dividend of $0.50 per share on12,500 outstanding common shares requires a:

71) ______

A) debit to retained earnings for $6,250B) debit to cash for $6,250C) credit to dividends payable for $6,250D) debit to dividends payable for $6,250

72) The declaration of a dividend: 72) ______A) increases total assetsB) increases total liabilitiesC) increases total shareholders' equityD) reduces total assets

73) The payment of a dividend: 73) ______A) reduces total shareholders' equityB) reduces total liabilitiesC) has no effect on total assetsD) increases total shareholders' equity

74) A dividend is declared by the: 74) ______A) corporate controller B) chief financial officerC) board of directors D) president of the corporation

75) Dividends on cumulative preferred shares of $2,500 are in arrears for 200 9.



During2010, thetotaldividendsdeclaredamountto$10,000.There are6,000shares of$1cumulativepreferredsharesoutstanding and10,000commonsharesoutstanding. Thetotalamountofdividends payableto eachclass ofshares in2010amountsto:

75) ______

A) $6,000 to preferred, $4,000 to commonB) $5,000 to preferred, $5,000 to commonC) $8,500 to preferred, $1,500 to commonD) $10,000 to preferred, $0 to common

76) Dividends on cumulative preferred shares of $2,500 are in arrears for2008 and 2009. During 2010, the total dividends declared amount to$10,000. There are 3,000 shares of $1 cumulative preferred sharesoutstanding and 10,000 common shares outstanding. The total amountof dividends payable to each class of shares in 2010 amounts to:

76) ______

A) $3,000 to preferred, $7,000 to commonB) $10,000 to preferred, $0 to commonC) $8,000 to preferred, $2,000 to commonD) $5,500 to preferred, $4,500 to common

77) Dividends on cumulative preferred shares of $2,500 are in arrears for2007, 2008, and 2009. During 2010, the total dividends declared amount

to$10,

000.There



are 3,000shares of$1cumulativepreferredsharesoutstanding and10,000commonsharesoutstanding. Thetotalamountofdividends payableto eachclass ofshares in2010amountsto:

77) ______

A) $8,000 to preferred, $2,000 to commonB) $5,500 to preferred, $4,500 to commonC) $10,000 to preferred, $0 to commonD) $3,000 to preferred, $7,000 to common

78) Dividends were not declared by Royal Inc. in 2008 or 2009. During2010, total dividends declared amount to $20,000. There are 6,000 sharesof $1 cumulative preferred shares outstanding and 10,000 commonshares outstanding. The total amount of dividends payable to each classof shares in 2010 amounts to:

78) ______

A) $18,000 to preferred, $2,000 to commonB) $10,000 to preferred, $10,000 to commonC) $12,000 to preferred, $8,000 to commonD) $6,000 to preferred, $14,000 to common

79) Dividends were not declared by Royal Inc. in 2009. During 2010, totaldividends declared amount to $20,000. There are 6,000 shares of $1cumulative preferred shares outstanding and 10,000 common sharesoutstanding. The total amount of dividends payable to each class ofshares in 2010 amounts to:

79) ______


80) During 2010, total dividends declared by Par Corporation amounted to$29,000. There were 5,000 shares of $2 noncumulative preferred shares

outstan

dingand



10,000commonsharesoutstanding. Nodividends weredeclaredin 2008or 2009.The totalamountofdividends payableto eachclass ofshares in2010amounted to:

80) ______

A) $29,000 to preferred, $0 to commonB) $0 to preferred, $29,000 to commonC) $19,000 to preferred, $10,000 to commonD) $10,000 to preferred, $19,000 to common

81) During 2010, total dividends declared by Par Corporation amounted to$29,000. There were 5,000 shares of $2 cumulative preferred sharesoutstanding and 10,000 common shares outstanding. No dividendswere declared in 2008 or 2009. The total amount of dividends payable toeach class of shares in 2010 amounted to:

81) ______

A) $10,000 to preferred, $19,000 to commonB) $0 to preferred, $29,000 to commonC) $19,000 to preferred, $10,000 to commonD) $29,000 to preferred, $0 to common

82) During 2010, total dividends declared by Jackson Corp. amounted to$29,000. There were 5,000 shares of $2 cumulative preferred sharesoutstanding and 10,000 common shares outstanding. No dividendswere declared in 2009. The total amount of dividends payable to eachclass of shares in 2010 amounted to:

82) ______

A) $10,000 to preferred, $19,000 to commonB) $20,000 to preferred, $9,000 to commonC) $9,000 to preferred, $20,000 to commonD) $29,000 to preferred, $0 to common

83) During 2010, total dividends declared by Jackson Corp. amounted to$29,000. There were 5,000 shares of $2 noncumulative preferred sharesoutstanding and 10,000 common shares outstanding. No dividendswere declared in 2009. The total amount of dividends payable to eachclass of shares in 2010 amounted to:

83) ______

A) $29,000 to preferred, $0 to common



B) $20,000 to preferred, $9,000 to commonC) $10,000 to preferred, $19,000 to commonD) $9,000 to preferred, $20,000 to common

84) Passed dividends on cumulative preferred shares: 84) ______A) are paid after common shareholders receive their dividendsB) are referred to as dividends in arrearsC) remain a liability of the corporation until they are paidD) are forever lost by the preferred shareholders

85) Dividends in arrears: 85) ______A) are never reported in the notes to the financial statementsB) are forever lost by the preferred shareholdersC) are passed dividends on cumulative preferred sharesD) are a liability on the balance sheet

86) Magic Corp. has 20,000 shares of noncumulative, $5 preferred sharesoutstanding as well as 100,000 common shares. The board of directorshave declared and distributed the required dividends for the past threeyears, not counting the current year. The board wants to give thecommon shareholders a $1.25 dividend per share for the current year.The total dividends to be declared must be:

86) ______

A) $225,000 B) $250,000 C) $525,000 D) $125,000

87) Newco Corporation has 20,000 shares of cumulative, $5 preferred sharesoutstanding as well as 100,000 common shares. As of the beginning ofthis fiscal year, there were three years of dividends in arrears on thepreferred shares. The board of directors wants to give the commonshareholders a $1.25 dividend per share. The total dividends to bedeclared must be:

87) ______

A) $400,000 B) $225,000 C) $525,000 D) $200,000

88) Resco Corporation has had 10,000 shares of $3, cumulative preferredshares outstanding as well as 35,000 common shares since it wasincorporated. During the first, second, and third years of operations,$15,000, $18,000 and $50,000 in dividends, respectively, were paid. Thedividends paid to the common shareholders in year three amounted to:

88) ______

A) $27,000 B) $18,000 C) $0 D) $30,000

89) Resco Corporation has had 10,000 shares of $3, cumulative preferredshares outstanding as well as 35,000 common shares since it wasincorporated. During the first, second, and third years of operations,$10,000, $20,000 and $80,000 in dividends, respectively, were paid. Thedividends paid to the common shareholders in year three amounted to:

89) ______

A) $0 B) $30,000 C) $18,000 D) $20,000

Table 13-2

Falcon Corporation has 12,000 shares of $5, noncumulative preferred shares outstanding and16,000 common shares outstanding. At the end of the current year, Falcon Corporation declares adividend of $120,000.



90) Refer to Table 13-2. How is the dividend allocated between preferredand common shareholders?

90) ______


91) Refer to Table 13-2. What is the dividend per share to preferred andcommon shareholders?

91) ______

A) $6.67 to preferred, $1.50 to commonB) $3.75 to preferred, $5.00 to commonC) $1.00 to preferred, $6.75 to commonD) $5.00 to preferred, $3.75 to common

Table 13-3

Spencer Corporation has 15,000 shares of $5, cumulative preferred shares outstanding and 25,000common shares. At the end of the current year, Spencer Corporation declares a dividend of$120,000. Dividends of $37,500 are in arrears as of January 1 of the current year.

92) Refer to Table 13-3. How is the dividend allocated between preferredand common shareholders?

92) ______

A) $112,500 to preferred, $7,500 to commonB) $0 to preferred, $120,000 to commonC) $120,000 to preferred, $0 to commonD) $75,000 to preferred, $45,000 to common

93) Refer to Table 13-3. What is the dividend per share to preferred andcommon shareholders?

93) ______

A) $5.00 to preferred, $1.80 to commonB) $7.50 to preferred, $0.30 to commonC) $1.80 to preferred, $5.00 to commonD) $5.00 to preferred, $0 to common

94) The following information is available for the Barber Corporation as ofDecember 31, 2010:

Preferred shares, cumulative, $10, 1,000 shares authorized and issued $100,000Common shares, 4,000 shares authorized and issued 400,000Retained earnings 100,000

Barber Corporation did not declare a dividend in 2009 or 2010. Theliquidation value of the preferred shares is $100 per share. Prior to 2009,there were no dividends in arrears. Compute book value per share forpreferred shares and common shares.

94) ______

A) $120 for preferred, $120 for commonB) $110 for preferred, $185 for commonC) $100 for preferred, $187.50 for commonD) $120 for preferred, $182.50 for common

95) The following information is available for the Frasier Corporation as ofDecember 31, 2010: Pref

erredshares,



$10,cumulative, 1,000sharesauthorized andissued $100,000Commonshares,6,000sharesauthorized andissued 500,000Retainedearnings 750,000

FrasierCorporationdeclaredadividendin 2010amounting to$5,000.Nodividends weredeclaredin 2009.Theliquidation valueof thepreferredstock is$100 pershare.Prior to2009,therewere nodividends inarrears.Computebookvalue forpreferredshares

and common shares in total. 95) ______



A) $125,000 for preferred, $1,225,000 for commonB) $105,000 for preferred, $1,245,000 for commonC) $115,000 for preferred, $1,235,000 for commonD) $120,000 for preferred, $1,230,000 for common

96) For a company that has only common shares outstanding, dividing totalshareholders' equity by the number of shares outstanding determinesthe:

96) ______

A) redemption value per share B) book value per shareC) liquidation value per share D) market value per share

97) The book value of preferred shares is equal to: 97) ______A) liquidation value minus any dividends in arrearsB) market value minus any dividends in arrearsC) liquidation value plus any dividends in arrearsD) market value plus any dividends in arrears

Table 13-4

The shareholders' equity section of the balance sheet of Cresco Corporation follows:

Contributed capital:Preferred shares, cumulative, $3.50, 4,000 shares outstanding,

liquidation value $56 per share $210,000Common shares, 20,000 shares outstanding 397,500Retained earnings 138,250

Note: There are two years dividends in arrears on the preferred shares, including the currentyear.

98) Refer to Table 13-4. The book value per share for preferred shares is: 98) ______A) $63.00 B) $57.00 C) $59.50 D) $56.00

99) Refer to Table 13-4. The book value per share for common shares is: 99) ______A) $25.39 B) $26.09 C) $25.89 D) $24.69

100) Pratt Corporation's balance sheet for 2010 reveals total shareholders'equity of $2,500,000. There are 10,000 shares of cumulative, $10preferred shares outstanding and 50,000 common shares outstanding.To date, dividends in arrears for the preferred shares amount to $25,000.The liquidation value of the preferred shares is $105 per share. Bookvalue per share of common shares is:

100) _____

A) $29.50 B) $29.00 C) $28.50 D) $28.75

101) Cooper Corporation's balance sheet for 2010 reveals total shareholders'equity of $2,500,000. There are 10,000 shares of noncumulative, $10preferred shares outstanding and 50,000 common shares outstanding.The liquidation value of the preferred shares is $105 per share. Bookvalue per share of common shares is:

101) _____

A) $28.75 B) $29.50 C) $28.50 D) $29.00

102) The ________ measures a company's success in using its assets to earn inco me for



thestakeholders whoarefinancingthebusiness.

102) _____

A) debt-to-equity ratio B) return on assetsC) current ratio D) return on equity

103) The formula for computing return on assets is: 103) _____A) (net income plus interest expense)/average total assetsB) (net income plus preferred dividends)/average total assetsC) (net income plus total assets)/average shareholders' equityD) (net income less total assets)/average shareholders' equity

104) The formula for computing return on equity is: 104) _____A) (net income less interest expense)/average shareholders' equityB) (net income plus interest expense)/average common shareholders'

equityC) (net income less preferred dividends)/average common

shareholders' equityD) (net income plus preferred dividends)/shareholders' equity at the

end of the period

Table 13-5

The following information is available for Jansen Corporation for the current year:

Net income $156,000Preferred dividends 24,000Interest expense 17,500Beginning of year:Total assets 850,000Total liabilities 375,000Total common shareholders' equity 395,000

End of year:Total assets 930,000Total liabilities 405,000Total common shareholders' equity 435,000

105) Refer to Table 13-5. The return on assets for Jansen Corporation was: 105) _____A) 16.8% B) 18.7% C) 17.5% D) 19.5%

106) Refer to Table 13-5. The return on equity for Jansen Corporation was: 106) _____A) 35.9% B) 37.6% C) 30.3% D) 31.8%

Table 13-6

The following selected list of accounts with their normal balances was taken from the generalledger of Gore Ltd. as of December 31, 2010:



Cash $199,000Common shares, 10,000 shares authorized, 5,000 shares issued 265,000Retained earnings 131,500Cash dividends payable 20,000Preferred shares, 500,000 shares authorized 100,000 shares issued 800,000

107) Refer to Table 13-6. The average issue price of a common share was: 107) _____A) $30.00 B) $53.00 C) $2.00 D) $20.00

108) Refer to Table 13-6. The average issue price of a preferred share was: 108) _____A) $8.00 B) $20.00 C) $40.00 D) $1.60

109) Refer to Table 13-6. Which account should be listed first in theshareholders' equity section?

109) _____

A) Retained earnings B) Preferred sharesC) Common shares D) Contributed surplus

MATCHING. Choose the item in column 2 that best matches each item in column 1.Match the following.

110) Documents used by a government togrant its permission to form acorporation

A) no-par-value shares 110) _____

B)preferred shares

111)Shares that do not have a valueassigned to them by the articles of

in

corporation C)President



111) _____

D)shareholders' equity

112) Shares of stock that gives its ownerscertain advantages over the commonshareholders.

E) 112) _____

outstanding sharesF)

articles of incorporation113) Chief operating officer in charge of

managing the day-to-day operationsof a corporation.

G) 113) _____

board of directors

114) Owners' equity of a corporation 114) _____

115) Shares in the hands of shareholders 115) _____

116) Group elected by the shareholders toset policy for a corporation and toappoint its officers.

116) _____

117) Amount of shareholders' equity onthe company's books for each shareof its stock.

A) deficit 117) _____

B)organization costs

118)Provision in the articles ofincorporation that permits acorporation to sell a certain numberof shares of stock.

C) book value 118) _____

D)authorization of shares

E)119) Debit balance in the retained

earnings accountrecord date 119) _____

F)payment date of dividend

120) Net income less preferred dividendsdivided by average commonshareholders' equity

G) 120) _____

market valueH)

return on equity121) The price for which a person could

buy or sell a shareI) 121) _____

return on assetsJ)



122) Distribution of equity to thecorporations' shareholders

limited liability 122) _____

K) declaration date of dividend123) The costs of organizing a corporation,

including legal fees, taxes, andcharges by promoters for selling theshares.

123) _____

L) dividend

124) No personal obligation of ashareholder for corporation debts.The most that a shareholder can loseon an investment in a corporation'sshares is the cost of the investment.

124) _____

125) The date with respect to a cashdividend that determines whichshareholder will be receiving thedividend

125) _____

126) The date with respect to a cashdividend where the liability iscreated and the retained earnings arereduced

126) _____

127) The date with respect to a cashdividend where the liability isreduced and the payment is made tothe shareholder

127) _____

128) The sum of net income plus interestexpense divided by average totalassets

128) _____

129) A corporation's capital that is earnedthrough profitable operation of thebusiness

A) cumulative preferred shares 129) _____

B)retained earnings

130)Preferred shares whose owners mustreceive all dividends in arrears beforethe corporation pays dividends to thecommon shareholders.

C) common shares 130) _____

D)liquidation value

131) The most basic form of share capital 131) _____



132) The amount a preferred shareholderwould receive for their shares in theevent the corporation is liquidated

132) _____

ESSAY. Write your answer in the space provided or on a separate sheet of paper.133) Discuss the characteristics of a corporation. Indicate, wherever appropriate, if the

characteristic is an advantage or a disadvantage of the corporate form of business.

134) Prepare a journal entry for each of the following transactions.

a) Masters Corporation sells 10,000 common shares for $13.25 per share.b) Masters Corporation sells 5,000 shares of $5, cumulative preferred shares for$55 per share.c) Received a building with a market value of $160,000, and issued 6,400common shares in exchange.d) Masters Corporation reports a net income for the current year of $56,000.Prepare the entry to close the income summary account.

Date Accounts Debit Credit

135) Prepare a journal entry for each of the following transactions.

a) Struthers Corporation sells 100,000 common shares for $4.50 per share.b) Struthers Corporation sells 6,000 shares of $3, cumulative preferred sharesfor $70 per share.c) Received equipment with a market value of $60,000, and issued 12,400common shares in exchange.d) Struthers Corporation reports a net income for the current year of $241,000.Prepare the entry to close the income summary account.


136) Prepare journal entries for the following transactions reported by Evans Corporationfor the month of May:



May 1 Issued 35,000 common shares at $15 per share.21 Issued 1,400 shares of $5, cumulative preferred shares for a total of

$144,200.28 Exchanged 5,000 common shares for a patent valued at $82,000.31 Jet Corporation reported a net loss for May amounting to $10,500.

Preparethe entryto closetheincomesummary

account.


137) From the following alphabetical list of selected accounts taken from the generalledger of Dorlin Corporation as of December 31, 2010, select the accounts that arepart of shareholders' equity. Then prepare the shareholders' equity section of thebalance sheet on December 31, 2010.

Accounts receivable 50,000Cash dividends payable 20,000Common shares, 20,000 shares outstanding 550,000Inventory 75,000Note payable 25,000Notes receivable 20,000Preferred shares, $10 cumulative,

1,000 shares outstanding 250,000Retained earnings 250,000Unearned revenue 15,000

Table 13-7Masters Inc.

Partial Balance SheetDecember 31, 2010

Shareholders' Equity

Contributed Capital:Preferred shares, $1.00, 100,000 shares authorized, 20,000

shares issued $ 100,000Common shares, unlimited number of shares authorized,

100,000 shares issued 350,000Total contributed capital 450,000Retained earnings 170,000Total shareholders' equity $620,000

138) Refer to Table 13-7. Assume that the preferred shares are not cumulative and thatthere have been no dividends declared in 2007, 2008, and 2009. Prepare the journalentry to record the declaration and payment of a dividend in the total amount of$25,000, on December 3, 2010. Use separate dividends payable accounts forpreferred and common shares.



139) Refer to Table 13-7. Assume that the preferred shares are cumulative and that therehave been no dividends declared in 2007, 2008 and 2009. Prepare the journal entryto record the declaration and payment of a dividend in the total amount of $85,000,on December 3, 2010. Use separate dividends payable accounts for preferred andcommon shares.

140) Refer to Table 13-7. Assume that the preferred shares are cumulative and that therehave been no dividends declared in 2008 and 2009. Prepare the journal entry torecord the declaration and payment of a dividend in the total amount of $85,000, onDecember 3, 2010. Use separate dividends payable accounts for preferred andcommon shares.

141) Refer to Table 13-7. Assume that the preferred shares are cumulative and that therehave been no dividends declared in 2008 and 2009. A dividend in the total amountof $85,000, was declared and paid on December 3, 2010. What was the dividendamount per share received by the common shareholders?

142) Refer to Table 13-7. Assume that the preferred shares are not cumulative and thatthere have been no dividends declared in 2008 and 2009. A dividend in the totalamount of $85,000, was declared and paid on December 3, 2010. What was thedividend amount per share received by the common shareholders?

143) Refer to Table 13-7. Assume that the preferred shares are cumulative and that therehave been no dividends declared in 2007, 2008, and 2009. Prepare the journalentries to record the declaration and payment of a dividend in the total amount of$25,000, on December 3, 2010. Use separate dividends payable accounts forpreferred and common shares, if required.

144) A section of IRC Incorporated's balance sheet appears as follows:

IRC IncorporatedPartial Balance SheetDecember 31, 2010


Contributed Capital:Preferred shares, $4.00, 10,000 shares authorized, 2,000

shares issued $ 200,000Common shares, unlimited number of shares authorized,

10,000 shares issued 450,000Total contributed capital 650,000Retained earnings 378,000Total shareholders' equity $1,028,000

a) How much in dividends must IRC Incorporated declare each year beforethe common shareholders receive cash dividends for the year?

b) Assume $40,000 was paid in dividends in the year 2010. What would be thebreakdown between common and preferred dividends assuming there are nodividends in arrears?



c) How would the declaration of a $50,000 dividend affect the shareholders' equitysection of IRC Incorporated's balance sheet?

145) Vitacom Technologies Corp. reports the following shareholders' equity as ofDecember 31, 2010:

Preferred shares, $5 cumulative, 200,000 shares authorized,90,000 shares issued $ 5,400,000

Common shares, 500,000 shares authorized,200,000 shares issued 2,750,000

Total contributed capital 8,150,000Retained earnings 3,400,000

Total shareholders' equity $11,550,000

Determine the following:

a) What was the average issue price per common share?b) What was the average issue price per preferred share?c) Assume net income for 2010 was $825,000. Journalize the entry to close netincome to retained earnings.d) Assume the board of directors declares dividends of $1,850,000 in 2010. Nodividends were declared in 2009. Calculate the amount per share each class ofshares will receive.

146) Following is the shareholders' equity section of the balance sheet for PhototronIncorporated as of December 1, 2010:

Preferred shares, $6 cumulative,6,500 shares issued $ 650,000

Common shares, 120,000 shares issued 1,620,000Retained earnings 467,200Total shareholders' equity $2,737,200

Phototron Incorporated reports the following transactions for December 2010:

Dec. 1 Declared the required cash dividend on the preferred shares anda $0.50 dividend on the common shares.

11 Paid the dividends declared on December 1.15 Sold 5,000 common shares for $15 per share.

For each transaction, show the dollar amount of the effect of each transaction on thefollowing accounts: common shares and retained earnings. Write "no effect" if anaccount is unaffected by a transaction.

Date Common Retained

147) Mowat Corporation reported a net loss in 2008, its first year of operations, of$15,460; a net loss in 2009 of $12,350; and a net income of $152,700 in 2010. MowatCorporation had outstanding throughout the three-year period the following



issuancesof shares:

$5,cumulativepreferredshares,175sharesissued $ 17,500

Common shares, 5,000 shares issued 100,000

No dividends were declared in 2008 or 2009.

a) What is the amount of dividends in arrears at the beginning of 2010?b) Assume that at the end of 2010, dividends of $70,025 were declared andpaid. What total amount of dividends is paid to preferred shareholders and whattotal amount of dividends is paid to common shareholders?c) What is the dividend per share paid to the preferred and commonshareholders in 2010?d) Prepare journal entries to declare and pay the dividends in 2010.

148) During 2006-2010, Warren Corporation had the following issuances of sharesoutstanding for the entire period:

25,000 shares of $5, cumulative preferred shares50,000 shares of common shares

Cash dividends declared by the board of directors during 2006-2010 were as follows:

2006 none2007 $125,0002008 $150,0002009 $150,0002010 $250,000

Compute the amount of total dividends and dividends per share payable to eachclass of shares during 2006-2010.

Year Total PreferredPer SharePreferred

Total CommonPer ShareCommon

149) Bueno Corporation has 15,500 shares of $4, cumulative preferred shares outstandingas well as 80,000 common shares. There are no dividends in arrears on the preferredshares. The following transactions were reported during December 2010:

Dec. 1 Declared the required dividend on the preferred shares and a $0.75 pershare dividend on the common shares.

14 The date of record for the dividend declared on December 1.28 Paid the dividend declared on December 1.31 Closed out the income summary account. Net income for the year was

$345,000.

a) Prepare journal entries to record the above transactions.b) Assuming the balance of retained earnings on January 1, 2010, was $49,800,determine the balance of retained earnings on December 31, 2010.




150) Sibley Corporation's balance sheet reported the following shareholders' equity atDecember 31, 2010:

Preferred shares, $3, cumulative, 11,000 sharesissued, liquidation value $55 per share $ 605,000

Common shares, 75,000 shares issued 2,000,000

Total contributed capital 2,605,000Retained earnings 550,000

Total shareholders' equity $3,155,000

Assuming there are two years dividends in arrears (including 2010), determine thebook value per share of both preferred and common shares.

151) Define and contrast each of the following share values:

∙ market value∙ book value

152) Gleason Corporation has gathered the following data for the current year:

Net Income $40,000Interest Expense 5,000Income Tax Expense 12,500Preferred Dividends 3,600

Beginning End ofof Year Year

Current assets $ 68,000 $ 81,000Current liabilities 41,000 39,000Property, plant, and equipment 340,000 365,000Long-term liabilities 100,000 90,000Common shareholders' equity 217,000 267,000Preferred shareholders' equity 50,000 50,000

a) Calculate the current ratio at year end.b) Calculate return on assets.c) Calculate return on equity.d) Comment on how these measures are used.

Table 13-8

The shareholders' equity section of the balance sheet of Crestor Ltd. follows:

Contributed capital:



Preferred shares, cumulative, $3, 4,000 shares outstanding, $200,000Common shares, 20,000 shares outstanding 300,000Retained earnings 138,250

153) Refer to Table 13-8. Assume that there were no dividends declared for the last twoyears. What is the total amount of the dividends that must be declared this year forthe common shareholders to get a $1 per share dividend?

154) Refer to Table 13-8. Assume that there were no dividends declared last year. What isthe total amount of the dividends that must be declared this year for the commonshareholders to get a $2 per share dividend?

155) Refer to Table 13-8. Assume that there are no dividends in arrears. What is the totalamount of the dividends that must be declared this year for the commonshareholders to get a $3 per share dividend?

156) Nevada Corporation was created on January 2, 2010. The articles of incorporationfrom the Government of Canada authorize Nevada Corporation to issue anunlimited number of common shares and 500,000 shares of $0.50 preferred shares.The company had the following transactions:

2010

Jan. 2 Gave 5,000 common shares to the corporation's legal firm forincorporating the business.

The total legal fee was $5,000.3 Issued 200,000 common shares for cash at $1 per share.4 Issued 10,000 preferred shares for cash at $10 per share.4 Exchanged $50,000 cash and 200,000 common shares for a building with

a market value of$260,000.

Dec. 31 Close Income Summary to Retained Earnings assuming that Nevadahad $63,000 of net income for the year

a) Journalize the above transactions. Explanations are not needed.b) Prepare the shareholders' equity section of the balance sheet as of the closeof business on December 31, 2010.

JournalDate Description Debit Credit



157) List some of the shareholder rights normally attached to common shares.

158) How does accounting for share capital under international financial reportingstandards (IFRS) differ from that required under GAAP for private enterprises?



1) TRUE2) FALSE3) FALSE4) FALSE5) TRUE6) FALSE7) FALSE8) TRUE9) FALSE

10) FALSE11) FALSE12) TRUE13) FALSE14) TRUE15) TRUE16) FALSE17) FALSE18) FALSE19) FALSE20) TRUE21) TRUE22) FALSE23) TRUE24) TRUE25) FALSE26) FALSE27) FALSE28) TRUE29) FALSE30) FALSE31) TRUE32) TRUE33) TRUE34) TRUE35) A36) C37) C38) D39) B40) C41) C42) C43) D44) A45) A46) A47) C48) C49) B50) C51) A



52) C53) A54) A55) D56) C57) C58) C59) B60) C61) D62) B63) B64) C65) A66) D67) A68) C69) D70) C71) D72) B73) B74) C75) C76) C77) C78) A79) A80) D81) D82) B83) C84) B85) C86) A87) C88) C89) D90) D91) D92) A93) B94) A95) C96) B97) C98) A99) D

100) C101) D102) B103) A



104) C105) D106) D107) B108) A109) B

110) F111) A112) B113) C114) D115) E116) G117) C118) D119) A120) H121) G122) L123) B124) J125) E126) K127) F128) I129) B130) A131) C132) D133) Students should mention the following characteristics:

Separate legal entityAbility to raise more capital-advantageContinuous life-advantageEase of ownership transfer-advantageNo mutual agency - advantageLimited liability of shareholders - advantageSeparation of management and owners - disadvantagePossible double taxation - disadvantageGovernment regulation - disadvantage



Addi tional costs unique to corporations - disadvantage134) Date Accounts Debit Credit

a) Cash 132,500Common Shares 132,500

b) Cash 275,000Preferred Shares 275,000

d) Building 160,000Common Shares 160,000

e) Income Summary 56,000Retained Earnings 56,000

135) Date Accounts Debit Credita) Cash 450,000

Common Shares 450,000b) Cash 420,000

Preferred Shares 420,000d) Equipment 60,000

Common Shares 60,000e) Income Summary 241,000

Retained Earnings 241,000

136) Date Accounts Debit CreditMay 1Cash 525,000

Common Shares 525,00021Cash 144,200

Preferred Shares 144,20028Patent 82,000

Common Shares 82,00031Retained Earnings 10,500

Income Summary 10,500

137) Dorlin CorporationPartial Balance SheetDecember 31, 2010

Shareholders' equityContributed capital:

Preferred shares, $10, cumulative,1,000 shares outstanding $ 250,000

Common shares, 20,000 shares outstanding 550,000Total contributed capital 800,000

Retained earnings 250,000Total shareholders' equity $1,050,000

138) General JournalDate2010 Accounts Debit Credit

Dec. 3Retained Earnings 25,000Dividends

Payable-Preferred 20,000Dividends

Payable-Common 5,000



Dividends Payable-Preferred 20,000Dividends Payable-Common 5,000

Cash 25,000






Cash 85,000






Cash 85,000

141)Total Dividend $85,000Dividend allocated to preferred shareholders(20,000 shares × $ 1 × 3 years) 60,000

Dividend allocated to common shareholders (remainder) 25,000Divided by the number of common shares outstanding 100,000

= $0.25 cents per share dividend142)

Total Dividend $85,000Dividend allocated to preferred shareholders(20,000 shares × $ 1 year) 20,000

Dividend allocated to common shareholders (remainder) 65,000Divided by the number of common shares outstanding 100,000

= $0.65 cents per share dividend143) General Journal

Date Accounts Debit CreditDec. 3Retained Earnings 25,000

DividendsPayable-Preferred 25,000



Dividends Payable-Preferred 25,000Cash 25,000

144) a) (2,000 × 4) = $8,000

b) 40,000 - (2,000 × 4) = $32,000 Common = $32,000. Preferred = $8,000.

c) Retained earnings and total shareholders' equity would decrease by $50,000.145) a) ($2,750,000)/200,000 = $13.75

b) ($5,400,000)/90,000 = $60

c) General JournalDate Accounts Debit Credit

Dec. 31Income Summary 825,000Retained Earnings 825,000

d) ($5 × 2) = $10 preferred ($10 × 90,000) = $900,000$1,850,000 - $900,000 = $950,000$950,000/200,000 = $4.75 common

146) Date Common RetainedDec. 1 no effect ($99,000) *

11 no effect no effect15 $50,000 no effect

* (6,500 × $6) = $39,000($0.50 × 120,000) = 60,000Total dividends $99,000

147) a) $5 × 2 × 175 = $1,750

b) $5 × 3 × 175 = $2,625 preferred

$70,025 - $2,625 = $67,400 common

c) $2,625/175 = $15 preferred

$67,400/5,000 = $13.48 common

d) General JournalDate Accounts Debit Credit





Cash 70,025

148)Year Total Preferred

Per SharePreferred

Total CommonPer ShareCommon



2006 $0 $0 $0 $02007 $125,000 $5 $0 $02008 $150,000 $6 $0 $0

2009 $150,000 $6 $0 $02010 $200,000 $8 $50,000 $1

149) Date Accounts Debit CreditDec. 1Retained Earnings 122,000

DividendsPayable-Preferred 62,000

DividendsPayable-Common 60,000

28Dividends Payable-Preferred 62,000Dividends Payable-Common 60,000

Cash 122,00031Income Summary 345,000

Retained Earnings 345,000

b) $49,800 + $345,000 - $122,000 = $272,800150) ($3 × 2 years) = $6 + $55 = $61 preferred

($61 × 11,000) = $671,000$3,155,000 - $671,000 = $2,484,000$2,484,000/75,000 = $33.12 common

151) Market value is the price for which a share could be bought or sold. Usually, it is the mostimportant value to the shareholder.

Book value is the amount of shareholders' equity on the company's books for each share.Preferred shares book value is calculated first and then common shares book value isdetermined by dividing shareholders' equity available to common shareholders by theaverage number of common shares.

152) a) $81,000/$39,000 = 2.08

b) $40,000 + $5,000 = $45.000; $45,000/$427,000* = 10.5%

* $68,000 + $340,000 = $408,000$81,000 + $365,000 = $446,000$408,000 + $446,000 = $854,000; $854,000/2 = $427,000

c) $40,000 - $3,600 = $36,400; $36,400/$242,000* = 15%

* $217,000 + $267,000 = $484,000; $484,000/2 = $242,000

d) The current ratio is used as a measure of liquidity, with 2.0 being somewhat of astandard.

The return on assets is used as a standard profitability measure that shows thecompany's success in using its assets to generate income. It helps investors compare onecompany to another especially within the same industry.

The return on equity is used as a standard profitability measure, which shows therelationship between net income and average common shareholders' equity. The higher therate of return, the more successful the company.

153) Common shares outstanding 20,000 × $1 $20,000Preferred shares dividend $3 × 4,000 × 3 years 36,000



Total dividend required: $56,000154) Common shares outstanding 20,000 × $2 $40,000

Preferred shares dividend $3 × 4,000 × 2 24,000Total dividend required: $64,000

155) Common shares outstanding 20,000 × $3 $60,000Preferred shares dividend $3 × 4,000 12,000Total dividend required: $72,000

156) JournalDate2010 Description Debit CreditJan. 2Organization Costs 5,000

Common Shares 5,000

Jan. 3Cash 200,000Common Shares 200,000

Jan. 4Cash 100,000Preferred Shares 100,000

Jan. 4Building 260,000Cash 50,000Common Shares 210,000

Dec. 31Income Summary 63,000Retained Earnings 63,000

Nevada CorporationPartial Balance SheetDecember 31, 2010


Contributed capital

Preferred shares,$0.50, 500,000 shares authorized,10,000 shares issued $ 100,000

Common shares, unlimited number of sharesauthorized, 405,000 shares issued 405,000

Total contributed capital 505,000Retained earnings 63,000Total shareholders' equity $568,000

157) -The right to sell the shares-The right to vote at shareholders' meetings-The right to receive a proportionate share of any dividends declared by the directors-The right to receive a proportionate share of any assets on the winding-up of thecompany, after the creditors and any higher ranking classes of shares have beenpaid.-The right to maintain one's proportionate ownership in the corporation.



158) The primary difference in the two sets of accounting standards has to do with the requireddisclosure for share capital. Under IFRS, companies must make disclosures about allclasses of shares authorized by the corporation. The requirements under GAAP are lessrigorous - they only require disclosure for classes of shares that have actually been issued.



Copyright © 2011 Pearson Canada Inc. 1

Chapter 13

Corporations: Share Capitaland the Balance Sheet

Questions1. Corporation characteristics:

• a separate legal entity, formed under federal or provincial law• continuous life and transferability of ownership• no mutual agency• limited liability of shareholders• separation of ownership and management• corporate earnings subject to a degree of double taxation• government regulation• corporations may incur costs unique to corporations.

2. The corporation itself pays income tax, and the shareholder pays personal tax onafter-tax dividends received from the corporation. However, a portion of thecorporate tax is allowed as a dividend tax credit to the shareholder to eliminatesome of the double taxation.

3. The incorporators pay the fees and file the required documents with theincorporating jurisdiction, and approval of articles of incorporation is grantedby the federal or a provincial government. The articles of incorporationinclude authorization for the corporation to issue a certain number of shares.The incorporators agree to a set of bylaws for governing the corporation. Thecorporation then issues its shares and receives assets. The shareholders electthe board of directors, which appoints the officers. At this point, thecorporation begins operations.

4. Characteristic Corporation PartnershipLegal Entity – a business entity – does not require

formed under federal federal or provincialor provincial law approval to do business

– corporation a distinct – partnership notentity; assets and distinct from partnersliabilities belong to who hold all assetscorporation and liabilities

Continuous Life – sale or transfer of – partnershipsand Transferability shares does not affect terminate whenof Ownership the continuity of the ownership changes

corporation



2 Copyright © 2011 Pearson Canada Inc.

Characteristic Corporation PartnershipMutual Agency – officers commit the – a partner can bind

corporation to contracts partnership bysigning contract

Liability – shareholders have no – partners are personallypersonal obligation for liable for all debts ofcorporate liabilities; the partnershiphowever, directors do

Ownership/ – corporations are – partners manageManagement owned by shareholders the partnership

who elect a board ofdirectors

– the board of directorsappoints officers tomanage the business

Taxation – corporate earnings are – partners are taxedsubject to two different on their share oftypes of taxation: partnership incomecorporate income istaxed and after-taxdividends are taxableto the shareholder

Additional costs – corporations incur costs – partnerships do not incurunique to corporations, these costssuch as the cost ofdirectors’ insurance

5. A common shareholder has the right to: (a) vote on matters that come beforethe shareholders, (b) receive a proportionate part of any dividends declared onthat class of shares, (c) receive a proportionate share of corporate assets if thecorporation liquidates, (d) sell the shares and (e) a pre-emptive right, the rightto maintain one’s proportionate ownership in the corporation. Preferred sharesare automatically voting, unless stated otherwise; however, they are typicallynonvoting. These rights may be withheld by the corporation only byagreement with the shareholders.

6. Issuance of shares increases the assets of the corporation, which receivesassets in exchange for shares issued. Authorization merely gives thecorporation permission to issue shares.

7. Issuance of 1,200 shares of $4.50 preferred shares for $100 would increasethe contributed capital by $120,000 (1,200 $100). The transaction wouldnot increase retained earnings because a company does not earn a profit byselling its shares to its own shareholders. Saskinc Ltd.’s annual cashdividend payments would increase by $5,400 (1,200 $4.50).

8. Cash 3,575Common shares [(150 $8) + (250 $9.50)] 3,575

9. Issuance of 1,500 common shares for land and a building worth $200,000increases contributed capital by $200,000.




10. Saxon, Capital ................................................ XXXCowle, Capital................................................ XXX

Common Shares...................................... XXX11. Intangible assets: Organization Cost

Current liabilities: Dividends PayableShareholders’ equity: Preferred Shares, Common Shares, Retained Earnings.

12. Organization Cost is an intangible asset account. It is debited for its costwhen acquired, and the cost is usually amortized as expense over a shortperiod of time.

13. Three important dates for dividends are: (a) Declaration date: the board ofdirectors announces the dividend, (b) Date of record: the corporation identifiesthe people who own the shares on this date so that they can receive the dividend.(c) Payment date: the corporation pays the dividend.

14. (a) Cumulative preferred: $13,125 (2,500 $1.75 3 years)Common: $11,875 ($25,000 – $13,125)

(b) Noncumulative preferred: $4,375 (2,500 $1.75)Common: $20,625 ($25,000 – $4,375)

15. A preferred shareholder would rather own cumulative preferred sharesbecause any preferred dividends passed by the corporation must be paidbefore paying dividends to the common shareholders. The corporation wouldrather issue noncumulative preferred shares in order to avoid having to paydividends in arrears to preferred shareholders.

16. Cumulative preferred dividends in arrears are reported in the notes to thefinancial statements. Dividends become a liability only after the board ofdirectors declares the dividends.

17. The market value of a share is the price at which a person could buy or sell asingle share. The book value of a share is the total amount of shareholders’equity in the company’s books divided by the number of shares issued.Market value is far more important to investors than book value.

18. In a company with both preferred and common shares outstanding, thepreferred shareholders have the first claim to shareholders’ equity. The bookvalue of preferred shares is their liquidation value plus any cumulativepreferred dividends in arrears if the preferred shares are cumulative. Theremaining equity divided by the number of common shares gives the bookvalue for each common share.

19. A healthy company’s return on shareholders’ equity should exceed its returnon total assets because of the interest expense component of return on assets.Shareholders demand a higher rate of return than creditors. If return on totalassets is higher than return on shareholders’ equity, the company may beover leveraged.




Starters

(5 min.) S 13-11. The chairperson of the board of directors is usually the most powerful person

in a corporation.2. The shareholders hold ultimate power in a corporation.3. The president or Chief Executive Officer (CEO) is in charge of day-to-day

operations.4. The vice-president of accounting and finance is in charge of accounting.

(5 min.) S 13-2DIFFERENCE:

A proprietorship’s balance sheet reports a single capital account, such as Joe Hopper, Capital. Acorporation balance sheet reports shareholders’ equity by source. There are two sources:contributed capital and retained earnings.

SIMILARITY:A proprietorship’s balance sheet and a corporation’s balance sheet both report assets andliabilities in the same way.




(5 min.) S 13-3Journal

ACCOUNT TITLES AND EXPLANATIONSPOST.REF. DEBIT CREDIT

a. Cash (1,000 × $50) 50,000Common Shares 50,000

b. Cash 48,000Preferred Shares 48,000


ACCOUNT TITLES AND EXPLANATIONSPOST.REF. DEBIT CREDIT

Cash 9,200Common Shares 9,200

Issued common shares.

(5-10 min.) S 13-51. Total contributed capital increased $11,000 ($90,000 $79,000). The increase

was due to the sale of common shares in 2010, shown by the increase in thenumber of shares from 2009 to 2010 and by the increase in the dollar balanceof the common shares from 2009 to 2010.

2. KD Corporation had a profit in 2010 because the balance of retained earningsincreased from 2009 to 2010 by $2,200 ($49,000 $46,800).




(5 min.) S 13-6Shareholders’ equity:

Common shares, 40,000 shares issued .................................. $28,500Retained earnings................................................................... 8,000Total shareholders’ equity ..................................................... $36,500

(5 min.) S 13-7a. Accounts payable................................................................... $ 3,000

Unearned revenue .................................................................. 2,600Long-term note payable......................................................... 3,800Total liabilities ....................................................................... $ 9,400

b. Total liabilities (from Req. a) ................................................ $ 9,400Total shareholders’ equity (from Starter 13-6)...................... 36,500Total assets............................................................................. $ 45,900





DATE2009 ACCOUNT TITLES AND EXPLANATIONS

POST.REF. DEBIT CREDIT

Dec. 15 Retained Earnings(5,000 × $5.00) + (50,000 × $0.60) 55,000

Dividends Payable — Preferred Shares 25,000Dividends Payable — Common Shares 30,000

Declared a cash dividend.

2010Jan. 4 Dividends Payable — Preferred Shares 25,000

Dividends Payable — Common Shares 30,000Cash 55,000

Paid the cash dividend.

(5-10 min.) S 13-91. The preferred shares are cumulative because they are specifically designated

as cumulative.

2. Preferred gets $1,000 (40,000 × $0.025).Common gets $14,000 ($15,000 – $1,000)

3. Preferred gets:2008 dividend in arrears (40,000 × $0.025) .......................... $1,0002009 dividend in arrears ....................................................... 1,0002010 current-year dividend.................................................... 1,000Total....................................................................................... $3,000Common gets ($15,000 – $3,000) ......................................... $12,000




(5 min.) S 13-10Preferred equity:

Book value or liquidating value (40,000 × $0.50)................. $ 20,000Cumulative dividends (40,000 × $0.025 × 5) ........................ 5,000Shareholders’ equity allocated to preferred .......................... $ 25,000

Common equity:Total shareholders’ equity ..................................................... $350,000Less preferred equity ............................................................. (25,000)Common equity ..................................................................... $325,000Book value per share ($325,000 ÷ 1,000,000 shares)............ $ 0.325

(5 min.) S 13-11Rate of return

on totalassets

=Net

income +Interestexpense = $6,100 + $400

Average total assets ($49,000 + $44,800) / 2

=$6,500

= 13.9%$46,900

Rate of returnon common

shareholders’ equity =

Netincome –

Preferreddividends

=$6,100 – $ 0

Average commonshareholders’ equity

($23,600 + $22,800) / 2

=$6,100

= 26.3%$23,200

These rates of return are quite high.




Exercises

(5-10 min.) E 13-1Note: Student responses will vary because different people have various reasons for the decisionsthey make.

Reasons for organizing as a corporation:1. Ease of raising capital from other investors2. Limited liability of shareholders for the business’s debts3. Ease of transferring ownership if a shareholder wants to sell his or her

interest in the business

Reasons for not organizing as a corporation:1. Must pay corporate tax and personal tax on dividends2. More government regulation of corporations

(5-10 min.) E 13-2MEMO TO: David Johnston and Lisa JacobsSUBJECT: Incorporation of D&L Decor Ltd.

In order to incorporate D&L Decor Ltd., you must obtain and complete the required documentsfrom either the province in which you wish to incorporate or the federal Ministry of Industry.The completed documents must be submitted with the required fee. The documents are calledarticles of incorporation and include a request for authorization for the corporation to issueshares. When the appropriate jurisdiction authorizes the incorporation, D&L Decor Ltd. willbecome a legal entity.

As soon as D&L Decor Ltd. is incorporated you will draw up and agree to a set of bylaws bywhich D&L Decor Ltd. will be governed. All those who purchase common shares in D&L DecorLtd. will be shareholders of the corporation. The shareholders will elect the board of directors ofthe corporation. The board of directors sets the policy for D&L Decor Ltd. and appoints theofficers of the corporation, including the president, who is the chief executive officer in chargeof managing day-to-day operations.

Instructional Note: Student responses may vary considerably.




Req. 1 (10-15 min.) E 13-3General Journal

DATE ACCOUNT TITLES AND EXPLANATIONPOST.REF. DEBIT CREDIT

Jan. 19 Cash 44,000Common Shares (4,000 $11.00) 44,000

Feb. 3 Cash 14,000Class A Preferred Shares (1,000 shares) 14,000

11 Inventory 27,000Equipment 16,500

Common Shares (5,800 shares) 43,500

15 Cash 26,000Class B Preferred Shares (2,000 $13) 26,000

Req. 2

Total Contributed Capital:Preferred: Class A $ 14,000

Class B 26,000Common: ($44,000 + $43,500) 87,500

Total contributed capital $127,500




(5-10 min) E 13-4

Case A—Issue shares and buy the assets in separate transactions. (10 min.) E 13-5General Journal

DATE ACCOUNT TITLES AND EXPLANATIONSPOST.REF. DEBIT CREDIT

Cash 1,260,000Common Shares 1,260,000

Issued shares.

Building 900,000Equipment 360,000

Cash 1,260,000Purchased property, plant, and equipment.

Case B—Issue shares to acquire the assets.

General JournalDATE ACCOUNT TITLES AND EXPLANATIONS


Building 900,000Equipment 360,000

Common Shares 1,260,000Issued shares to acquire building andequipment.

The balances in all accounts are the same because, in both cases, the value of the assets receivedfor the common shares issued is $1,260,000:

Building.......................................................... $900,000Equipment ...................................................... 360,000




To issue 10,000 common shares at $15.







Jan. 4 Cash 120,000Common Shares 120,000

Issued 5,000 common shares.

13 Cash 50,000Preferred Shares 50,000

Issued 500 preferred shares for cash.

14 Land 120,000Common Shares 120,000

Issued 4,000 common shares for land.

Dec. 31 Income Summary 150,000Retained Earnings 150,000

Closed net income to Retained Earnings.

Req. 2Mid-way Consulting Inc.

Shareholders’ EquityDecember 31, 2010

Contributed capital:Preferred shares, $4.00, 500,000 shares authorized, 500 shares issued $ 50,000Common shares, 1,000,000 shares authorized, 9,000 shares issued 240,000

Total contributed capital 290,000Retained earnings 150,000Total shareholders’ equity $440,000




(10 min.) E 13-7Contributed capital

Preferred shares, $1.50:Issued for cash (2,500 shares $20) $ 50,000

Common shares:Issued for cash (35,000 shares $12.50) $437,500Issued for organization cost 7,500Issued for patent 50,000 495,000

Total contributed capital $545,000

(10-15 min.) E 13-8General Journal


June 14 Organization Costs ($2,000 + $500) 2,500Cash 2,500

To pay legal fees and other fees toincorporate.

14 Sheila Mason, Capital 40,000Tom Neilson, Capital 30,000

Common Shares (7,000 shares) 70,000To incorporate the business, close thecapital accounts of the partnership, andissue common shares to the incorporators.






Mar. 23 Cash 120,000Common Shares 120,000

Issued 12,000 common shares at $10.00.

Apr. 12 Inventory 40,000Equipment 10,000

Common Shares 50,000Issued 5,000 common shares to acquireinventory and equipment.

17 Cash 15,000Preferred Shares, $2.25 15,000

Issued 1,500 preferred shares at $10 each.

Req. 2Lipton Technology Inc.Shareholders’ Equity

Contributed capitalPreferred shares, $2.25, 100,000 shares authorized, 1,500 shares issued $ 15,000Common shares, 250,000 shares authorized, 17,000 shares issued 170,000*Total contributed capital 185,000

Retained earnings 65,000Total shareholders’ equity $250,000

*Computation:Mar. 23: 12,000 shares $10.00 = $120,000Apr. 12: $40,000 + $10,000 = 50,000

$170,000




(10-15 min.) E 13-10Sunnee CorporationShareholders’ Equity

June 30, 2010Contributed capital

Preferred shares, $1.25, 100,000 shares authorized, 10,000 shares issued $87,500Common shares, 500,000 shares authorized, 100,000 shares issued 100,000Total contributed capital 187,500

Retained earnings 90,000Total shareholders’ equity $277,500

(10-15 min.) E 13-111. 1,000 shares $5.00 = $5,000

2. Preferred gets $5,000Common gets $15,000 ($20,000 – $5,000)

3. Preferred shares are noncumulative because they are not specificallydesignated as cumulative.

4. Preferred gets:2010 current-year dividend = $5,000Common gets $35,000 ($40,000 – $5,000)




(15-20 min) E 13-12Barclay Marketing Ltd.

Dividend Payment Schedule

PREFERRED COMMON TOTALTotal dividend $31,000

Preferred dividends in arrears for 2009:(50,000 $0.10) 5,000

Total preferred dividends in arrears 5,000Remainder 26,000

Dividends for 2010:Preferred

Total preferred dividends for 2010 5,000 5,000Remainder 21,000

Common $21,000 21,000Remainder $ 0

Totals $10,000 $21,000 $31,000




(10-15 min.) E 13-13Nature’s Design Technology Inc.

Book value per share of preferred and common shares:Preferred:

Liquidation value (in total) $15,000Book value per share ($15,000/300) $50.00

Common:Shareholders’ equity allocated to common

($15,000 + $187,500 + $115,000 – $15,000) $302,500Book value per share ($302,500/25,000 shares) $ 12.10

(10-15 min.) E 13-14Nature’s Design Technology Inc.

Book value per share of preferred and common shares:Preferred:

Liquidation value $ 15,000Dividends in arrears (300 $7.00 3) 6,300Total preferred equity $ 21,300Book value per share ($21,300/300 shares) $ 71.00

Common:Total shareholders’ equity ($15,000 + $187,500 + $115,000) $317,500Less: Total preferred equity 21,300Total common equity $296,200Book value per share ($296,200/25,000 shares) $ 11.85




(10-15 min.) E 13-15

Rate ofreturn on

total assets=

Net income+ Interest expense

=$3,250 + $5,200

=$8,450

Average totalassets

($105,000 + $95,000)/2 $100,000

= 0.0845 100 =8.45%


shareholders’equity

=

Net income– Preferreddividends

=$3,250 – (200 1.15)

=$3,020

Average commonshareholders’

equity

($46,500 + $43,000)/2 $44,750

= 0.0675 100 =6.75%

These profitability measures suggest some weakness because Waldy’s 6.75 percent return onshareholders’ equity is fair but the return on assets exceeds it by 1.7 percent meaning that thecompany is paying more for its borrowed funds than it is earning.




Req. 1 (5-10 min) E 13-16

Req. 2

General JournalDATE2011 ACCOUNT TITLES AND EXPLANATIONS


Feb. 1 Cash 50,000Preferred Shares 50,000

Issued 1,000 preferred shares at $50 each

Req. 3



Feb. 1 Organization Costs 1,500Cash 1,500

Legal fees and incorporation fees to organizethe corporation



Feb. 1 Carl Haupt, Capital 17,227Common Shares 17,227

To incorporate the business, close thecapital account of the proprietorship, andissue 20,000 common shares to theincorporator




(15-20 min.) E 13-17Common shares, Dec. 31, 2009 $ 300,000Issuance of shares for cash (3,000 shares at $50) 150,000Issuance of shares to purchase another company (15,000 shares at $70) 1,050,000Common shares, Dec. 31, 2010 $ 1,500,000

Retained earnings, Dec. 31, 2009 $ 1,538,000Net income 1,430,000Cash dividends (660,000)Retained earnings, Dec. 31, 2010 $2,308,000




Beyond the Numbers

BN 13-11. Contributed capital and retained earnings are reported separately as they

represent different sources of capital: Contributed capital represents investments in share capital by

shareholders Retained earnings is capital earned by profitable operations of the

corporation Incorporating acts require corporations to report the sources of their

capital.2. VC Inc. faces the problem of determining the market value of the land it

receives. The current market value of the land will determine the recordedvalue of the land and of the common shares issued.

3. Investors buy common shares in the hope of earning higher returns on theirinvestment than are available on an investment in preferred shares. For ahealthy company, the rate of return on common shareholders’ equity isusually higher than the rate of return on preferred shares. Also the marketvalue of common shares in such a company will increase more than itspreferred shares’ price.

4. Yes, if book value exceeds market value. No, if market value exceeds bookvalue. The shareholder will accept the offer that maximizes his or her wealth.

5. Convertible preferred shares may be exchanged by preferred shareholders, ifthey choose, for another specified class of shares in the corporation. Aninvestor would exercise the conversion privilege if the market value of theshares received on conversion exceeded the market value of the preferredshares held.




Ethical Issue

Req. 1Wertz’s reporting a $50,000 franchise at $375,000 is unethical. The franchise cost $50,000, not$375,000. The three transactions are not independent. Wertz and the corporation are effectivelythe same entity. The third party serves no purpose other than as an accomplice to increase thevalue of the franchise fraudulently.

Req. 2Potential buyers of the individual-language franchises can be harmed. Wertz’s balance sheetoverstates his assets. If outsiders believe his balance sheet, they may be induced to pay Wertzmore than the individual-language franchises are worth.

Lenders can also be harmed by loaning money to Wertz on more favourable terms than hisfinancial position warrants.

The public is also defrauded if Wertz amortizes the cost of the franchise for income tax purposes.Basing amortization on $375,000 overstates tax deductions and understates the corporation’sincome. As a result, the tax payments are lower than they should be.

Accounting plays the role of recording assets at their cost. This sequence of events was anattempt to arbitrarily increase the value at which the franchise was recorded.

Note: One of the authors experienced this actual situation in his first job after college.




Problems

Group A

(10-20 min.) P 13-1ADATE: _____________________________TO: Mark Mathews and Karen WillamasFROM: Student NameSUBJECT: Advantages and disadvantages of the corporate form of

business organization

The corporate form of business organization offers some advantages over the proprietorship andthe partnership forms. An important advantage of an established corporation is the limitedliability of shareholders for business debts. This enables a person to invest in a corporationwithout having to assume any personal obligation for the corporation’s liabilities. The most thatan investor can lose from investing in a corporation is his or her investment in the business.

The separate legal existence of the corporation apart from its owners eases the transfer ofownership from one person to another. A shareholder buying into or selling out of a corporationhas no effect on the operation of the corporation. A shareholder cannot commit the corporation toan obligation unless he or she is an officer of the business. These features enable a corporation toraise money from a large number of people. A partnership can raise owners’ equity only from thepartners. Most corporations have more owners and can grow larger than a partnership.

Shareholders elect a board of directors that appoints corporate officers to manage the business. Itis important that corporate officers manage the business for the benefit of the shareholders. In apartnership, the partners manage the business for their benefit only.

Corporations often have to pay fees to organize as a corporation. Corporations are also taxed ontheir business income but for an active business this rate is less than the one an individual wouldpay. It is also possible to smooth out large fluctuations in income by deferring salary payments toa subsequent year, which cannot be done by an individual. However, if the corporation paysdividends, the shareholders also pay income tax on the dividend income. Therefore, shareholdersare subject to a form of double taxation.

Also, corporations are regulated more heavily than partnerships. Complying with variousregulations can be expensive for a corporation. Corporations also may incur additional costscompared to partnerships, such as liability insurance for a corporation’s directors.

Instructional Note: Student responses will vary considerably.




Req. 1 (journal entries) (30-45 min.) P 13-2AGeneral Journal



Aug. 2 Organization Costs ($6,000 + $16,000) 22,000Cash 22,000

Paid fees and legal fees to incorporate.

2 Nuan Zhang, Capital 150,000Jen Phuah, Capital 187,500

Common Shares (45,000 shares) 337,500Incorporated the business, closed thecapital accounts of the partnership, andissued common shares to the incorporators.

Dec. 10 Computer Equipment 80,000Preferred Shares (1,000 shares) 80,000

Issued preferred shares to acquire acomputer system.

16 Cash 120,000Common Shares (15,000 shares) 120,000

Issued common shares for cash.




Req. 2 (shareholders’ equity section of balance sheet) (continued) P 13-2AA-1 Services Inc.

Balance Sheet (partial)December 31, 2010

Shareholders’ EquityContributed capital:

Preferred shares, $2.50, 500,000 shares authorized, 1,000 shares issued $ 80,000Common shares, 2,000,000 shares authorized, 60,000 shares issued* 457,500**

Total contributed capital 537,500Retained earnings 130,000

Total shareholders’ equity $667,500

* 20,000 + 25,000 + 15,000 = 60,000** $150,000 + $187,500 + $120,000 = $457,500




(15-20 min.) P 13-3AReq. 1$4.00 is the annual dividend rate on the preferred shares.

Annual dividend on 2,000 shares = $8,000 ($4.00 2,000 shares)

Req. 2Average issue price of common shares during 2009 =

$1.50 per share ($225,000 ÷ 150,000 shares)

Req. 3First-year operations were not profitable, as shown by the Deficit in Retained Earnings.Riverbend Inc. lost $50,000 in the first year of operations.

Req. 4a. Cash 37,500

Preferred Shares (1,500 $25) 37,500

b. Cash 8,750Common Shares (5,000 $1.75) 8,750

c. Building 200,000Common Shares (100,000 $2.00) 200,000

d. Income Summary 100,000Retained Earnings 100,000




Req. 5 (continued) P 13-3A

Riverbend Inc.Balance Sheet (partial)

December 31, 2010


Preferred shares, $4.00, 200,000 shares authorized, 1,500 shares issued $ 37,500Common shares, 1,000,000 shares authorized, 255,000 shares* issued 433,750**

Total contributed capital 471,250Retained earnings 50,000***


Computations:

* 150,000 + 5,000 + 100,000 = 255,000** $225,000 + $8,750 + $200,000 = $433,750*** ($50,000) + $100,000 = $50,000




(20-30 min.) P 13-4APlay-time Equipment Ltd.Balance Sheet (partial)

December 31, 2010Shareholders’ Equity

Contributed capital:Common shares, 200,000 shares authorized and issued $600,000

Total contributed capital 600,000Retained earnings (deficit) (10,000)


Computations:Common shares: 200,000 $3 = $600,000Retained earnings: –$75,000 – $30,000 + $35,000 + $60,000 = –$10,000

Lil-tikes Products Inc.Balance Sheet (partial)

December 31, 2010


Preferred shares, $1.10, cumulative, 200,000 shares authorized, 2,000 sharesissued $ 25,000Common shares, 1,000,000 shares authorized, 100,000 shares issued 300,000



Computations:

Preferred shares: 2,000 $12.50 = $25,000Common shares: Balance given as $300,000Retained earnings: $75,000 + $50,000 – (2,000 $1.10 2) = $120,600




(20-35 min.) P 13-5AReq. 1

Sefton Limited has $2.75 cumulative preferred shares and common shares outstanding.

Req. 2

The average issue price per preferred share is $5.00 ($500,000 ÷ 100,000 shares issued).

Req. 3



Cash 500,000Preferred Shares 500,000

Cash 1,850,000Common Shares 1,850,000




(continued) P 13-5AReq. 4



Retained Earnings 300,000Dividends Payable—Preferred Shares

(100,000 shares $2.75) 275,000Dividends Payable—Common Shares

($300,000 – $275,000) 25,000




Req. 1 (40-50 min.) P 13-6AEtse Manufacturing Inc.

Balance SheetDecember 31, 2010

AssetsCurrent assets:

Cash $ 35,000Accounts receivable, net 100,000Inventory 190,500Prepaid expenses 15,500

Total current assets $ 341,000

Property, plant, and equipment, net 281,000

Patent, net 37,000Total assets $659,000

LiabilitiesCurrent liabilities:

Accounts payable $ 36,000Dividends payable 4,500Accrued liabilities 23,000

Total current liabilities 63,500Long-term note payable 100,500

Total liabilities 164,000


Preferred shares, $0.15, 25,000 shares authorized,6,000 shares issued 30,000

Common shares, 100,000 shares authorized, 33,000 sharesissued 165,000

Total contributed capital 195,000Retained earnings 300,000*

Total shareholders’ equity 495,000Total liabilities and shareholders’ equity $659,000

*Retained earnings = Total assets – Total liabilities – Total contributed capital= $659,000 – $164,000 – $195,000 = $300,000




Req. 2 (continued) P 13-6A

Rate ofreturn on

total assets=


=$40,750 + $10,850

=$51,600

Average totalassets

($659,000 +$567,500)/2

$613,250

= 0.084 or 8.4%



=


= $40,750 – (6,000 $0.15)

=$39,850


equity

($465,000* +$520,000)/2

$492,500

= 0.081 or 8.1%

* Total shareholders’ equity $495,000Less: Preferred equity 30,000Common shareholders’ equity $465,000

Req. 3

These rates of return suggest weakness. Return on common shareholders’ equity is 0.3% lowerthan return on assets.

Preparing a fairly complex balance sheet will refine students’ understanding of the shareholders’equity of a corporation. This will help students understand what they are buying (shareholders’equity) when they purchase a company’s shares as an investment.

This problem also exposes students to two widely-used measures of profitability—return onassets and return on common shareholders’ equity. Students, investors, and others can evaluateinvestments on the basis of their returns on assets and returns on equity. Higher return figuresgenerally indicate better investments. Although these return measures are not the only indicatorsof profitability that investors use, they are helpful—along with other decision-making aids—inevaluating investments.




Req. 1a (preferred shares are noncumulative) (20-30 min.) P 13-7AEverest Corporation

Total Dividends to Preferred and Common Shares for 2007, 2008, and 2009

PREFERRED COMMON TOTAL2007

0 0 $ 0

2008Preferred (40,000 $0.50) $20,000Remainder to common $104,000

Total $124,000


Total $240,000

Req.1b (preferred shares are cumulative)Everest Corporation



$ 0 $ 0 $ 0

20082007 in arrears to preferred

($40,000 $0.50) $ 20,000Current to preferred (40,000 $0.50) 20,000Remainder to common $84,000

Total $ 40,000 $84,000 $124,000

2009Current to preferred (40,000 $0.50) $20,000Remainder to common $220,000

Total $240,000




Req. 2 (dividend entry) (continued) P 13-7AGeneral Journal


2009Dec. 22 Retained Earnings 240,000

Dividends Payable—Preferred Shares 20,000Dividends Payable—Common Shares 220,000

To declare dividends on shares.

2010Jan. 12 Dividends Payable—Preferred Shares 20,000

Dividends Payable—Common Shares 220,000Cash 240,000

To pay dividend declared December 22, 2009.




(15-20 min.) P 13-8AReq. 1The preferred shares are labelled as cumulative.

Req. 2Total contributed capital is $728,000 ($200,000 + $528,000)

Req. 3Total market value of the common shares: $1,232,000

44,000 shares $28.00 per share = $1,232,000

Req. 4 (book value per share of preferred and common shares)Tulameen Systems Inc.Book Value of Shares

Preferred:Liquidation value (10,000 $24.00) $240,000Cumulative dividend for two years (10,000 $1.20 2) 24,000Shareholders’ equity allocated to preferred $264,000Book value per share ($264,000/10,000 shares) $ 26.40

Common:Total shareholders’ equity $896,000Less shareholders’ equity allocated to preferred 264,000Shareholders’ equity allocated to common $632,000Book value per share ($632,000/44,000 shares) $ 14.36




Req. 1 (40-60 min.) P 13-9AGeneral Journal



Jan. 2 Tony Wong, Capital 60,000Patrick Wu, Capital 95,000

Common Shares (155,000 shares) 155,000To record shares issued for capital accounts.

17 Incorporation Costs 8,500Cash 2,500Common Shares (4,000 shares) 6,000

To record settlement of legal fee forincorporation.

Mar. 7 Cash 12,500Preferred Shares (5,000 shares) 12,500

Sale of preferred shares for cash.


To close books and record net income foryear.

2009Feb. 14 Retained Earnings 17,500

Dividends Payable—Preferred Shares(5,000 shares $0.75) 3,750

Dividends Payable—Common Shares($17,500 – $3,750) 13,750

Dividends declared on shares.

Apr. 11 Dividends Payable—Preferred Shares 3,750Dividends Payable—Common Shares 13,750

Cash 17,500Payment of dividends declared

February 14, 2009.




Req. 1 (continued) P 13-9AGeneral Journal



Sept. 7 Preferred Shares (1,000 shares) 2,500Common Shares (3,000 shares) 2,500

Conversion of 1,000 preferred shares to3,000 common shares.


To close books and record profit for year.




31 Income Summary 100,000Retained Earnings 100,000

Req. 2WW Tools Inc.


Contributed capital:Preferred shares, $0.75, convertible, 200,000 shares authorized, 4,000 sharesissued $ 10,000Common shares, 1,000,000 shares authorized, 162,000 shares issued 163,500Total contributed capital 173,500

Retained earnings* 199,500Total shareholders’ equity $373,000

* Retained earnings: $75,000 – $17,500 + $82,000 – $40,000 + $100,000 = $199,500




Req. 1 (40-50 min.) P 13-10AGeneral Journal



Dec. 1 Retained Earnings 175,000Dividends Payable—Preferred Shares

(30,000 $0.75 3 years) 67,500Dividends Payable—Common Shares,Class A 12,647*Dividends Payable—Common Shares,Class B 94,853*

To record dividends declared on shares.


To close books and record net income for year.

2009Jan. 7 Cash 225,000

Preferred Shares (10,000 $22.50) 225,000Sale of preferred shares for cash.

15 Dividends Payable—Preferred Shares 67,500Dividends Payable—Common Shares, Class A 12,647Dividends Payable—Common Shares, Class B 94,853


December 1, 2008.

Feb. 14 Cash 165,000Common Shares—Class B (15,000 $11) 165,000

Sale of common shares for cash.

* Class A common shares 20,000 (or 2/17 of total common shares)Class B common shares 150,000 (or 15/17 of total common shares)

170,000

Class A = 2/17 ($175,000 – $67,500) = $12,647Class B = 15/17 ($175,000 – $67,500) = $94,853




(continued) P 13-10AGeneral Journal



Dec. 2 Retained Earnings 90,000Dividends Payable—Preferred

(40,000 $0.75) 30,000Dividends Payable—Common Shares,Class A 6,486*Dividends Payable—Common Shares,Class B 53,514*




2010Jan. 15 Dividends Payable—Preferred 30,000

Dividends Payable—Common Shares, Class A 6,486Dividends Payable—Common Shares, Class B 53,514

Cash 90,000Payment of dividends declared December 2.

* Class A common shares 20,000 (or 2/18.5 of total shares)Class B common shares (150,000 + 15,000) 165,000 (or 16.5/18.5 of total shares)

185,000

Class A = 2/18.5 ($90,000 – $30,000) = $6,486Class B = 16.5/18.5 ($90,000 – $30,000) = $53,514




Req. 2 (continued) P 13-10ARed Deer Manufacturing Ltd.


LiabilitiesCurrent:

Dividend payable $ 90,000

Total current liabilities $ 90,000

Total liabilities 90,000Shareholders’ Equity

Contributed capital:Preferred shares, $0.75 cumulative,

liquidation price of $25.00, 100,000 sharesauthorized, 40,000 shares issued $425,000

Common shares:Class A, 20,000 shares authorized and issued 125,000Class B, unlimited number of shares authorized,

165,000 shares issued 1,665,000Total contributed capital 2,215,000

Retained earnings* 200,000Total shareholders’ equity 2,415,000

Total liabilities and shareholders’ equity $2,505,000

*Retained earnings: $300,000 – $175,000 + $60,000 – $90,000 + $105,000 = $200,000

Req. 3

Preferred shares, book value per share = liquidation price of $25.00 per share (as there are nodividends in arrears).

Common shares, book value per share = $7.65 [$2,415,000 – (40,000 $25.00)]/185,000

Req. 4

$125,000/20,000 = $6.25 per share




Problems

Group B

(10-20 min.) P 13-1BDATE: ________________________TO: Jack Rudd and Pam KinesFROM: Student NameSUBJECT: Advantages and disadvantages of the corporate form of business organization

A corporation has a separate legal existence apart from its owners. This eases the transfer ofownership from one person to another with no effect on the operation of the corporation. Ashareholder cannot commit the corporation to an obligation unless he or she acts in an officialcapacity for the business. The owners do not have personal liability for the debts and otheractions of the business. In many corporations, ownership is separate from management as theboard of directors appoints professionals to manage the business on a day-to-day basis. Thecontinuous life and transferability of ownership make it easy for a corporation to raise moneyfrom a large number of people. A partnership, on the other hand, can raise owners’ equity onlyfrom the partners. The net result of these features is that most corporations have more ownersand can grow larger than a partnership, the owners do not assume personal liability for debts ofthe corporation, and the business should be managed for the benefit of all the shareholders.

Corporations have disadvantages as compared to the partnership form of organization.Corporations often have to pay fees to organize. Corporations are also taxed on their businessincome but the rate for an active business is less than the one for an individual. If the corporationpays dividends, the shareholders also pay income tax on the dividend income. Therefore,shareholders may be subject to a degree of double taxation. Corporations are regulated moreheavily than partnerships. Complying with various regulations can be expensive for acorporation. Corporations also may incur additional costs compared to partnerships, such asliability insurance for a corporation’s directors.

Instructional Note: Student responses will vary considerably.




Req. 1 (journal entries) (30-45 min.) P 13-2BGeneral Journal



Jan. 2 Organization Costs ($1,500 + $6,000) 7,500Cash 7,500

Paid costs and legal fees to incorporate.

6 Equipment 175,000Common Shares 175,000

Issued 20,000 common shares for equipment.

12 Software 17,500Preferred Shares 17,500

Issued 100 preferred shares to acquiresoftware.

22 Cash 30,000Common Shares 30,000

Issued 5,000 common shares for cash.(5,000 × $6)

Req. 2 (shareholders’ equity section of balance sheet)Intuite Solutions Ltd.



Preferred shares, $2.00, 100,000 shares authorized, 100 shares issued $ 17,500Common shares, 250,000 shares authorized, 25,000 shares issued* 205,000**



* 20,000 + 5,000 = 25,000** $175,000 + $30,000 = $205,000




(15-20 min.) P 13-3BReq. 1The annual dividend rate on the preferred shares is $0.20.

Annual dividend on 2,000 shares = $400 ($0.20 2,000 shares)

Req. 2Issue price of common shares during 2009 =

$8.75 per share ($87,500/10,000 shares)

Req. 3First-year operations were not profitable, as shown by the Deficit in Retained Earnings.

Req. 4a. Cash 25,000

Preferred Shares (10,000 $2.50) 25,000

b. Cash 8,000Common Shares (1,000 $8) 8,000

c. Building 225,000Common Shares (25,000 $9) 225,000

d. Income Summary 62,500Retained Earnings 62,500




Req. 5Sloboda Corporation


Contributed capital:Preferred shares, $0.20, 50,000 shares authorized, 10,000 shares issued $ 25,000Common shares, 100,000 shares authorized, 36,000* shares issued 320,500**

Total contributed capital 345,500Retained earnings 42,500***


Computations:

*10,000 + 1,000 + 25,000 = 36,000** $87,500 + $8,000 + $225,000 = $320,500*** $62,500 - $20,000 = $42,500




(20-30 min.) P 13-4BAGI Inc.


Contributed capital:100,000 common shares authorized and issued $1,000,000

Total contributed capital 1,000,000Retained earnings 55,000

Total shareholders’ equity $1,055,000

Computations:Common shares: 100,000 $10 = $1,000,000Retained earnings: –$30,000 + $35,000 + $50,000 = $55,000

Canfer Corp.Balance Sheet (partial)

December 31, 2010Contributed capital:

Preferred shares, $1.25, cumulative, 50,000 shares authorized, 3,000 sharesissued $ 30,000Common shares, 500,000 shares authorized, 60,000 shares issued 150,000



Computations:Preferred shares: 3,000 $10 = $30,000Common shares: Balance given as $150,000Retained earnings: $75,000 + $62,500 – (3,000 shares $1.25 2 years) – (60,000 shares $0.50)

= $100,000




(20-35 min.) P 13-5B

Req. 1Preferred sharesCommon shares

Req. 2The preferred shares are cumulative based on their balance-sheet description.

Req. 3 (entries to record issuance of shares)



Cash 32,500Preferred Shares 32,500





(continued) P 13-5BReq. 4



Dec. 31 Retained Earnings 25,000Dividends Payable—Preferred Shares 10,000*Dividends Payable—Common Shares 15,000

To record the declaration of dividends onpreferred shares for the current year andall arrears, and on common shares.

* 20,000 × $0.25 × 2 years = $10,000




Req. 1 (40-50 min.) P 13-6BLabelle Systems Ltd.

Balance SheetJune 30, 2010

AssetsCurrent assets:

Cash $ 15,000Accounts receivable, net 52,500Inventory 93,500Prepaid expenses 12,000

Total current assets $173,000

Property, plant, and equipment, net 300,000Trademark, net 19,000Total assets $492,000

LiabilitiesCurrent liabilities:

Accounts payable $ 36,000Dividends payable 10,500Accrued liabilities 30,000

Total current liabilities 76,500Long-term note payable 48,500

Total liabilities 125,000


Preferred shares, $0.20, 10,000 shares authorized and issued 29,500Common shares, 500,000 shares authorized, 272,000 shares

issued 300,000Total contributed capital 329,500Retained earnings 37,500*

Total shareholders’ equity 367,000Total liabilities and shareholders’ equity $492,000

*Retained earnings = Total assets – Total liabilities – Total contributed capital= $492,000 – $125,000 – $329,500 = $37,500




Req. 2 (continued) P 13-6B

Rate ofreturn on

total assets=


=$25,000 + $7,200

=$32,200

Average totalassets

($492,000 +$410,000/2)

$451,000

= 0.071 100 = 7.1%



=


= $25,000 – (10,000 $0.20)

=$23,000


equity

($337,500* +$200,000)/2

$268,750

= 0.086 100 = 8.6%

* Total shareholders’ equity $367,000Less: Preferred equity 29,500Common shareholders’ equity $337,500

Req. 3

These rates of return suggest weakness. Return on common shareholders’ equity is only 1.5%higher than return on assets. An 8.6% rate of return on common shareholders’ equity is goodconsidering bank savings rates are currently below 2%; a 12% return is considered excellent inmost industries.

Preparing a fairly complex balance sheet will refine students’ understanding of the shareholders’equity of a corporation. This will help students understand what they are buying (shareholders’equity) when they purchase a company’s shares as an investment.

This problem also exposes students to two widely-used measures of profitability—return onassets and return on common shareholders’ equity. Students, investors, and others can evaluateinvestments on the basis of their returns on assets and returns on equity. Higher return figuresgenerally indicate better investments. Although these return measures are not the only indicatorsof profitability that investors use, they are helpful—along with other decision-making aids—inevaluating investments.




Req. 1a (preferred shares are noncumulative) (20-30 min.) P 13-7BMMT Broadcasting Inc.



Preferred (15,000 $2.50) $37,500Remainder to common $ 2,500

Total $ 40,000

2009$ 0 $ 0 $ 0


Total $120,000

Req.1b (preferred shares are cumulative)MMT Broadcasting Inc.



Preferred (15,000 $2.50) $37,500Remainder to common $ 2,500

Total $ 40,000

2009$ 0 $ 0 $ 0

2010Arrears to preferred (15,000 x $2.50) $37,500Current to preferred (15,000 $2.50) 37,500Remainder to common $45,000

Total $75,000 $45,000 $120,000




Req. 2 (dividend entries) (continued) P 13-7BGeneral Journal

DATE ACCOUNT TITLES AND EXPLANATIONPOST.REF. DEBIT CREDIT


Dividends Payable—Preferred Shares 75,000Dividends Payable—Common Shares 45,000

To declare dividends on shares.


Dividends Payable—Common Shares 45,000Cash 120,000

To pay dividends declared on Dec. 28, 2010.




(15-20 min.) P 13-8B

Req. 1

The preferred shares are labelled as cumulative.

Req. 2

The common shareholders control the company because the preferred shares are nonvoting.

Req. 3

Total contributed capital is $690,000 ($350,000 + $340,000)

Req. 4

Total market value of the common shares: $270,000

90,000 shares $3.00 per share = $270,000

Req. 5 (book value per share of preferred and common shares)Cohen Sales LimitedBook Value of Shares

Preferred:Liquidation value $375,000Cumulative dividend for three years (16,000 $1.40 3) 67,200Shareholders’ equity allocated to preferred $442,200Book value per share ($442,200/16,000 shares) $ 27.64

Common:Total shareholders’ equity $810,000Less shareholders’ equity allocated to preferred 442,200Shareholders’ equity allocated to common $ 367,800Book value per share ($367,800/90,000 shares) $ 4.09




Req. 1 (40-60 min.) P 13-9BGeneral Journal

DATE2007 ACCOUNT TITLES AND EXPLANATION


Jan. 2 Greg Sallows, Capital 50,000Billy Canovale, Capital 72,500

Common Shares (245,000 shares) 122,500To record shares issued for capital assumed.

15 Incorporation Costs 4,500Cash 2,000Common Shares (4,000 shares) 2,500

To record settlement of legal fee forincorporation.

Mar. 5 Cash 15,000Preferred Shares (4,000 shares) 15,000

Sale of shares for cash.



2008Feb. 12 Retained Earnings 10,000



Dividends declared on shares.

Apr. 8 Dividends Payable—Preferred Shares 1,200Dividends Payable—Common Shares 8,800

Cash 10,000Payment of dividends declared February 12.




(continued) P 13-9BGeneral Journal



July 7 Preferred Shares (1,000 shares) 3,750Common Shares (2,000 shares) 3,750

Conversion of 1,000 preferred shares to2,000 common shares. ($15,000 ×1,000/4,000)




Dividends Payable—Preferred Shares(3,000 shares $0.30) 900

Dividends Payable—Common Shares($30,000 – $900) 29,100

Dividends declared, payable February 11,2010.


Req. 2Welluck Carpets Corporation


Contributed capital:Preferred shares, $0.30 convertible, 100,000 shares authorized, 3,000 sharesissued $ 11,250Common shares, 500,000 shares authorized, 251,000* shares issued 128,750**Total contributed capital 140,000

Retained earnings 185,000***Total shareholders’ equity $325,000

* 100,000 + 145,000 + 4,000 + 2,000 = 251,000** $122,500 + $2,500 + $3,750 = $128,750*** $55,000 – $10,000 + $70,000 – $30,000 + $100,000 = $185,000




Req. 1 (40-50 min.) P 13-10BGeneral Journal




(40,000 $0.85 4 years) 136,000Dividends Payable—Common Shares,Class A 2,333*Dividends Payable—Common Shares,Class B 11,667*




2009Jan. 7 Cash 225,000

Preferred Shares (10,000 shares $22.5) 225,000Sale of preferred shares for cash.

14 Dividends Payable—Preferred Shares 136,000Dividends Payable—Common Shares, Class A 2,333Dividends Payable—Common Shares, Class B 11,667


December 1, 2008.

Feb. 14 Cash 90,000Common Shares—Class B

(15,000 shares $6) 90,000Sale of common shares for cash.

* Class A common shares 15,000 (or 1/6 of total shares)Class B common shares 75,000 (or 5/6 of total shares)

90,000

Class A = 1/6 ($150,000 – $136,000) = $2,333Class B = 5/6 ($150,000 – $136,000) = $11,667




(continued) P 13-10BGeneral Journal




(50,000 $0.85) 42,500Dividends Payable—Common Shares,Class A 4,643*Dividends Payable—Common Shares,Class B 27,857*





Dividends Payable—Common Shares, Class A 4,643Dividends Payable—Common Shares, Class B 27,857

Cash 75,000Payment of dividends declared December 2,2009.

* Class A common shares 15,000 (or 1/7 of total shares)Class B common shares (75,000 + 15,000) 90,000 (or 6/7 of total shares)

105,000

Class A = 1/7 ($75,000 – $42,500) = $4,643Class B = 6/7 ($75,000 – $42,500) = $27,857




Req. 2 (continued) P 13-10BBarton Ltd.



Preferred shares, $0.85, cumulative (no arrears),liquidation price of $25, 100,000 sharesauthorized, 50,000 shares issued $1,025,000

Common shares:Class A, 15,000 shares authorized and issued 120,000Class B, unlimited number of shares authorized,

90,000 shares issued 465,000Total contributed capital $ 1,610,000

Retained earnings* 208,000Total shareholders’ equity $1,818,000

*Retained earnings: $300,000 – $150,000 + $70,000 – $75,000 + $63,000 = $208,000

Req. 3

Preferred shares, book value per share = liquidation price of $25 per share (as there are nodividends in arrears).

Common shares, book value per share = $5.41 [$1,818,000 – (50,000 $25)]/105,000

Req. 4

$120,000/15,000 = $8.00 per share




Challenge Problems

P 13-1CThe student should look critically at incorporation from Bryan McNair’s perspective.

Separate legal entity This characteristic is not really an advantage to Bryan based onthe information given. He does not appear to be interested intaking on co-owners.

Continuous life This may be an advantage later but does not appear to be anadvantage at this time.

No mutual agency This characteristic does not appear to be advantageous unlessBryan sells shares to other people. The question states that theplan is for Bryan to hold all the shares.

Limited liability Limited liability would protect Bryan’s business assets fromcreditors other than the bank. It would also protect any ofBryan’s personal assets that do not form part of the bank’ssecurity.

Separation of Bryan will be the shareholder and the manager so thisownership and characteristic is not an issue.management

Corporate taxation The students are not likely to be aware of the fact that corporatetaxes and taxes on dividends may result in Bryan being taxed ata lower rate if he incorporates. The student is likely to suggestthat Bryan’s taxes will be the same or higher if he incorporates.

Personal taxation Students are likely unaware that by incorporating, if Bryan wereto eventually sell his shares in the company, the first $500,000of capital gains would be tax free.

Government regulation This characteristic would be a drawback as it is likely that Bryanwould have to spend more time preparing and filing forms.

Corporation costs As the sole shareholder, Bryan would also be the sole director,and as a director, he could be sued by outsiders doing businesswith his company. To protect himself, he would have to pay fordirector’s liability insurance, an additional cost of incorporating.

Conclusion The student may decide either way—the evidence suggestsincorporation may not be advantageous to Bryan at this point.




P 13-2CCommon The shares pay the lowest rate of return at 6%

($2.40/$40.00) but have the potential for paying a higher(or lower) rate of return in the future. Any misseddividends are missed forever. In addition, the marketprice of the shares has the potential for increasing.

Cumulative preferred The rate of return is 7% ($3.50/$50.00) and the dividendis cumulative. This is an advantage since shareholderswill receive a yearly dividend; a year might be missedbut must be made up before the common shareholdersreceive a dividend. The share price will not be likely tochange much up or down.

Convertible preferred The rate of return is 6.75% ($5.30/$78.50) and is fixed;the dividend is not cumulative. The shares areconvertible into common at the rate of 1 preferred for 2common. The present prices would give the shareholdera cost per common share after conversion of $39.25($78.50/2), which is below the current market price of$40.00.

Noncumulative The rate of return is 6.2% ($1.55/$25.00). The presentpreferred dividend at 6.2% is just slightly higher than the rate on

common of 6%. The share price is not likely to movemuch up or down.

Decision The student may select any one of the shares, other thanthe noncumulative preferred, given the cumulativepreferred have a higher rate of return, and the cumulativefeature has value. The common may appreciate in value;the cumulative preferred may be preferable if EGI’sincome fluctuates so that a dividend may be omitted inany one year; the convertible preferred may beadvantageous since it pays a higher dividend than thecommon and the shareholder can take advantage of anincrease in the price of common shares by exercising theconversion feature.




Decision ProblemReq. 1 (30-45 min.) Decision Problem



Software 100,000Common Shares (100,000 shares) 100,000

To incorporate the business and issuecommon shares to the incorporators fortheir software.

Req. 2



Plan 1:Cash 100,000

Preferred Shares (1,000 shares) 100,000To issue preferred shares to outside investors.

Cash 72,000Common Shares (60,000 shares) 72,000

To issue common shares to outside investors.

Plan 2:Cash 150,000

Preferred Shares (1,200 shares) 150,000To issue preferred shares to outside investors.




(continued) Decision Problem

Req. 3

Plan 1:

Shareholders’ Equity

Contributed capital:Preferred shares, $7.50, cumulative, 10,000 shares authorized,

1,000 shares issued $100,000Common shares, 1,000,000 shares authorized, 160,000 shares issued 172,000

Total contributed capital 272,000Retained earnings ($184,000 – $34,800) 149,200


Plan 2:

Shareholders’ Equity

Contributed capital:Preferred shares, $8.50, nonvoting, noncumulative,

10,000 shares authorized, 1,200 shares issued $150,000Common shares, 1,000,000 shares authorized, 100,000 shares issued 100,000

Total contributed capital 250,000Retained earnings ($184,000 – $34,800) 149,200





(continued) Decision Problem

Req. 4

Plan 2 appears to fit the plan of Carlyle and Friesen better than Plan 1. Recall that their primarygoal is to raise as much capital as possible without giving up control of the business. Under Plan1, the preferred shares have voting rights if the dividends are more than two years in arrears. Ifthey fall into arrears then the outside shareholders would have 110,000 votes (60,000 commonvotes and 50,000 preferred votes). If they can be sure that they will be able to make profits sothat they can pay dividends of $7,500 each year then this plan will fit their requirements.However, if they fail to pay the dividends, then Carlyle and Friesen will lose control becausethey will only have 100,000 votes.

Under Plan 2, the preferred shares do not have a vote even if the dividends are in arrears.Consequently Carlyle and Friesen would have complete control since they alone have votingshares.

The reason that Carlyle and Friesen are switching to a corporation is to raise capital. What theywill have to decide is whether they need the additional $22,000 so badly that they are prepared totake the risk that they cannot pay dividends. If $150,000 is sufficient for their needs, then theywould be better to take the certainty of Plan 2.




Financial Statement Cases

(20-30 min.) Financial Statement Case 1

1. The balance sheet states that capital stock has a value of $221,914,000. No furtherbreakdown is provided on the balance sheet, but the reader is referred to Note 18. In thisnote, more detail is provided.

Authorized shares:

An unlimited number of common shares without par value 33,964,324 class A shares without par value 25,000,000 first preferred shares without par value, issuable in series, of which

4,200,000 first preferred shares Series 1 and 4,200,000 first preferred sharesSeries 2 have been reserved

Shares issued and outstanding:

63,457,142 common shares None of the other two classes of shares have been issued yet.

2. It appears that the number of common shares increased during the year by 620,953 andthe value of the common shares increased by $2,910,000. Assuming no other changes tothis class of shares, the average price of a share issued during the year was $4.69($2,910,000/620,953).

(15–20 min.) Financial Statement Case 2

1. In Note 11 to the financial statements, Sun-Rype discloses that it has one class ofcommon shares. Sun-Rype is authorized to issue up to 100,000,000 shares (as opposed toCWB’s authorization for an unlimited number of common shares) and at December 31,2008, there were 10,827,600 shares issued.

2. The book value of the Sun-Rype common shares is calculated as follows:

Shareholders’ equity $28,978,000÷ Common shares outstanding 10,827,600

Book value per share $ 2.68




The book value is based on historical cost as reported on the balance sheet. The marketprice varies from it because it reflects the hopes and fears of investors regarding thefuture value of the company and its profitability.

3. Sun-Rype earned $(1.08) per common share. The information appears on the bottom ofthe Statement of Operations and Comprehensive Income.

