CHAPTER 11

REPORTING AND ANALYZING SHAREHOLDERS’ EQUITY

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

LOD: E = Easy M = Medium H = Hard

Bloom’s: C = Comprehension K = Knowledge

CPA: F = Financial Reporting

AACSB: AN = Analytic

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

(Cont’d)

LOD: E = Easy M = Medium H = Hard

Bloom’s: AP = Application C = Comprehension K = Knowledge

CPA: F = Financial Reporting

AACSB: AN = Analytic

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

(Cont’d)

LOD: E = Easy M = Medium H = Hard

Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge

CPA: C = Communication E = Professional and Ethical Behaviour F = Financial Reporting

AACSB: AN = Analytic C = Communication E = Ethics

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Note: TF = True-False MC = Multiple Choice Ma = Matching

Ex = Exercise SAE = Short-Answer Essay CP = CPA Questions

CHAPTER LEARNING OBJECTIVES

1. Identify and discuss the major characteristics of a corporation. The major characteristics of a corporation are separate legal existence, limited liability of shareholders, transferable ownership rights, the ability to acquire capital, continuous life, separation of corporation management from ownership, increased cost and complexity of government regulations, and the possibility of reduced corporate income tax. Some of these characteristics may differ depending on the size of the corporation.

Corporations issue shares for sale to investors. The proceeds received from the issue of shares become the company’s legal capital. Shares then trade among investors on the secondary stock market and do not affect the company’s financial position.

2. Record share transactions. If only one class of shares is issued, they are considered to be common shares. Common shareholders have the right to vote and, as such, are the “owners” of the company. When shares are issued for noncash goods or services in a company using IFRS, the fair value of the goods or services received is used to record the transaction if it can be reliably determined. If not, the fair value of the common shares is used. For a private company following ASPE, the more reliable of the two fair values should be used, which is usually also the fair value of the goods or services received.

When shares are repurchased, the Common Shares (or Preferred Shares) account is reduced by the average cost of these shares immediately prior to the repurchase. If the price paid to repurchase the shares is lower than their average cost, the difference is recorded as an increase to the Contributed Surplus account. If the price paid to repurchase the shares is greater than their average cost, the difference is first applied to any Contributed Surplus previously recorded from acquisitions of shares of the same class and any remaining difference is then applied to reduce the Retained Earnings account.

The accounting for preferred shares is similar to the accounting for common shares. Preferred shares do not have the right to vote—only common shares have voting rights—but have contractual provisions that give them preference over common shares for dividends and assets in the event of liquidation. Dividends are quoted at an annual rate per share (such as $5 preferred), but are normally paid quarterly (such as $1.25 per quarter). In addition, preferred shares may have other preferences, such as the right to redeem or to periodically reset dividend rates based on changes in interest rates.

3. Prepare the entries for cash dividends, stock dividends, and stock splits, and understand their financial impact. Entries for both cash and stock dividends are required at the declaration date and the payment or distribution date. There is no entry (other than a memo entry) for a stock split. The overall impact of a cash dividend is to reduce assets (cash) and shareholders’ equity (retained earnings). Stock dividends increase common shares and decrease retained earnings but do not affect assets, liabilities, or shareholders’ equity in total. Stock splits also have no impact on assets, liabilities, or shareholders’ equity. The number of shares increases with both stock dividends and stock splits.

4. Indicate how shareholders’ equity is presented in the financial statements. In the shareholders’ equity section of the statement of financial position for companies using IFRS, share capital, contributed surplus, retained earnings, and accumulated other comprehensive income, if any, are reported separately. A statement of changes in equity explains the changes in each shareholders’ equity account, and in total, for the reporting period. Notes to the financial statements explain details about authorized and issued shares, restrictions on retained earnings, and dividends in arrears, if there are any.

For private companies reporting using ASPE, comprehensive income is not reported and a statement of changes in equity is not required. Instead, a statement of retained earnings is prepared that explains the changes in the Retained Earnings account for the reporting period. Changes to share capital and any other equity items are disclosed in the notes to the statements.

5. Evaluate dividend and earnings performance. A company’s dividend record can be evaluated by looking at the dividend payout ratio (cash dividends declared divided by net income), which measures what percentage of net income it chooses to pay out in dividends, and by the dividend yield ratio (dividends per share divided by the share price), which measures dividends as a percentage of the share price.

Earnings performance can be measured by two profitability ratios: basic earnings per share (net income less preferred dividends divided by the weighted average number of common shares) and the return on common shareholders’ equity ratio (net income less preferred dividends divided by average common shareholders’ equity).

The return on shareholders’ equity is affected by the extent to which a company uses debt or equity to finance the acquisition of its assets. Taking on more debt is risky because the company is legally bound to make principal and interest payments on debt, but on the other hand, the ownership interests of existing shareholders are not diluted when greater debt is assumed. Furthermore, any excess income generated from assets financed with debt accrues to the shareholders, not the creditors.

TRUE-FALSE STATEMENTS

1. The trading of a corporation's shares on the secondary market has no impact on the corporation's financial position.

2. A company can control the market value of its shares.

3. Most companies in Canada have an unlimited number of authorized shares.

4. A corporation is not an entity that is separate and distinct from its owners.

5. The liability of a shareholder is usually limited to the shareholder’s investment in the corporation.

6. The sale of shares in a corporation by one shareholder to another affects the total capital of the corporation.

7. A corporation acts under its’ own name rather than in the name of its shareholders.

8. A shareholder owning common shares has the right to vote in the election of the board of directors.

9. An initial public offering occurs the first time a corporation sells shares to the public.

10. The market capitalization of a company is calculated by multiplying the number of shares authorized by the share price at any given date.

11. The number of common shares authorized can never be greater than the number of shares issued.

12. Share capital is the amount shareholders paid or contributed to the corporation in exchange for shares of ownership.

13. The issue of common shares affects both share capital and retained earnings.

14. One of the reasons a company may repurchase its own shares is to reduce the market value to make the shares more affordable.

15. Preferred shares have a contractual preference over common shares in certain areas, but do not have the right to vote.

16. Preferred shares are generally issued to appeal to a larger segment of potential investors.

17. When preferred shares are cumulative, preferred dividends not declared in a given period are called dividends in arrears.

18. Cash dividends are not a liability of the corporation until they are declared by the board of directors.

19. The liability for a cash dividend is recorded on the date of record, because it is on that date that the shareholders who will receive the dividend are identified.

20. Declaration and distribution of a stock dividend does not affect the total amount of shareholders’ equity.

21. Stock Dividends Distributable is reported as a liability on the statement of financial position.

22. A stock split results in a transfer at market value from retained earnings to share capital.

23. The main purpose of a stock split is to increase the marketability of the shares.

24. Retained earnings represents the amount of cash available for dividends.

25. If a corporation reports a net income, it should be closed to retained earnings. If it reports a loss, it should be closed to the contributed surplus account.

26. A debit balance in the Retained Earnings account is called a deficit.

27. Retained earnings that are restricted are unavailable for dividends.

28. The statement of changes in equity discloses changes in total shareholders’ equity for the period as well as changes in each shareholders’ equity account.

29. Corporations reporting under IFRS have the option of preparing either a statement of changes in equity or a statement of retained earnings.

30. Accumulated other comprehensive income is reported in the shareholders’ equity section of the statement of financial position for a publicly-traded company.

31. The payout ratio is calculated by dividing the cash dividends paid on common shares by retained earnings.

32. Return on common shareholders’ equity is calculated by dividing net income by ending shareholders’ equity.

33. Investors tend to buy shares with low payout ratios and dividend yields if they are looking for more capital appreciation from the shares.

34. Basic earnings per share is calculated by dividing the net income available to common shareholders by the number of common shares issued at year end.

35. Companies reporting under ASPE must disclose basic earnings per share, but companies reporting under IFRS do not.

Answers to True-False Statements

MULTIPLE CHOICE QUESTIONS

36. Legal capital

(a) can be distributed to shareholders.

(b) does not need to remain invested in the corporation.

(c) can be distributed to shareholders up to the limit of their investment.

(d) cannot be distributed to the shareholders but must remain invested in the corporation.

37. Under the corporate form of business organization

(a) a shareholder is personally liable for the debts of the corporation.

(b) a shareholder’s acts can bind the corporation even though he/she has not been appointed as an agent of the corporation.

(c) the corporation's life is continuous.

(d) shareholders wishing to sell their shares must get the approval of other shareholders.

38. Shareholders directly elect the corporation’s

(a) president.

(b) board of directors.

(c) controller.

(d) auditor.

39. Those most responsible for the major policy decisions of a corporation are the

(a) shareholders.

(b) board of directors.

(c) management.

(d) employees.

40. Which one of the following would not be considered an advantage of the corporate form of organization?

(a) limited liability of shareholders

(b) separate legal existence

(c) continuous life

(d) government regulation

41. The two ways that a corporation can be classified by ownership are

(a) publicly held and privately held.

(b) shares and non-shares.

(c) federal and provincial.

(d) majority and minority.

42. Which of the following would not be true of a privately held corporation?

(a) It is sometimes called a closely held corporation.

(b) Its shares are regularly traded on the Toronto Stock Exchange.

(c) It does not offer its shares for sale to the general public.

(d) It is usually smaller than a publicly held company.

43. Which of the following is not true of a corporation?

(a) It may buy, own, and sell property.

(b) It may sue and be sued.

(c) The acts of its shareholders bind the corporation.

(d) It may enter into binding legal contracts in its own name.

44. Ford Harrison has invested $650,000 in a corporation. The corporation does not do well and must declare bankruptcy. What amount does Harrison stand to lose?

(a) up to his total investment of $650,000

(b) zero

(c) the $650,000 plus any personal assets the creditors demand

(d) $325,000

45. Which of the following statements reflects the transferability of ownership rights in a corporation?

(a) If a shareholder decides to transfer ownership, he/she must transfer all of his/her shares.

(b) A shareholder may dispose of part or all of his/her shares.

(c) A shareholder must obtain permission of the board of directors before selling shares.

(d) A shareholder must obtain permission from at least three other shareholders before selling shares.

46. A corporate board of directors does not generally

(a) select officers.

(b) formulate operating policies.

(c) declare dividends.

(d) execute policy.

47. Limited liability of shareholders means

(a) dividends will be paid regardless of net income.

(b) creditors have no legal claim on a shareholder’s personal assets.

(c) the life of the corporation is limited.

(d) deferral or reduction of taxes.

48. The ability of a corporation to obtain capital is

(a) enhanced because of limited liability and ease of share transferability.

(b) less than a partnership.

(c) restricted because of the limited life of the corporation.

(d) about the same as a proprietorship.

49. Which of the following statements is considered an advantage of the corporate form of organization?

(a) additional income tax

(b) government regulations

(c) limited liability of shareholders

(d) increased disclosure requirements

50. All of the following are advantages of the corporate form of organization except

(a) government regulation.

(b) reduced income tax.

(c) ease of transfer of ownership.

(d) continuous life.

51. A disadvantage of the corporate form of organization is

(a) its status as a separate legal entity.

(b) continuous existence.

(c) government regulation.

(d) ease of transfer of ownership.

52. Which one of the following is not an ownership right of a common shareholder?

(a) to vote in the election of officers

(b) to declare dividends on the common shares

(c) to share in assets upon liquidation

(d) to share in corporate net income

53. Which of the following factors does not affect the initial market price of a share?

(a) the company's anticipated future net income

(b) the legal value of the share

(c) the current state of the economy

(d) the expected dividend rate per share

54. Legal capital

(a) cannot be distributed to shareholders.

(b) reflects the most recent market price.

(c) is voted on by the shareholders.

(d) is indicative of the worth of the share.

55. Mr. Gold sold 100 shares of Delia Corp. to Mrs. Silver for $2,200. As a result of this transaction, Delia Corp.’s

(a) shareholders’ equity did not change.

(b) shareholders’ equity increased by $2,200.

(c) shareholders’ equity decreased by $2,200.

(d) assets increased by $2,200.

56. The authorization of common shares

(a) must be approved by Canada Revenue Agency.

(b) does not require a journal entry.

(c) increases shareholders’ equity.

(d) decreases shareholders’ equity.

57. Authorized shares of a corporation

(a) are the minimum number of shares that must be issued.

(b) increase shareholders’ equity.

(c) are specified in its articles of incorporation.

(d) must be recorded by a formal accounting entry.

58. The number of shares that may be issued according to the corporation’s articles of incorporation is referred to as the

(a) authorized shares.

(b) issued shares.

(c) unissued shares.

(d) redeemable shares.

59. When shares are traded on the secondary market it means

(a) it’s the first time a corporation’s shares are offered for sale to the public.

(b) that the public can purchase shares directly from the company.

(c) that investors can purchase and sell shares from each other using a stock exchange.

(d) that this is the same thing as an initial public offering.

60. If a company repurchase shares for a price less than the average price of the shares then the difference in price will be a

(a) debit to retained earnings.

(b) credit retained earnings.

(c) debit to contributed surplus.

(d) credit to contributed surplus.

61. $3 cumulative preferred shares means that each preferred shareholder is eligible to receive

(a) a quarterly dividend of $3 per share.

(b) an annual dividend of $3 per share.

(c) a monthly dividend of $3 per share.

(d) no dividend.

62. If Tools Corporation issues 5,000 common shares for $200,000, which account will be credited?

(a) Common Shares

(b) Retained Earnings

(c) Contributed Surplus

(d) Cash

63. The sale of common shares should be recorded as a

(a) debit to Retained Earnings and a credit to Cash.

(b) debit to Cash and a credit to Retained Earnings.

(c) debit to Cash and a credit to Common Shares.

(d) debit to Common Shares and a credit to Cash.

64. When setting the price of a new share issue, a corporation does not need to consider

(a) future net income.

(b) expected dividend rate.

(c) current financial position.

(d) future trading on the secondary market.

65. Which of the following usually represents the largest number of common shares?

(a) restricted shares.

(b) issued shares.

(c) treasury shares.

(d) authorized shares.

66. For a corporation reporting under IFRS, when shares are issued for a noncash consideration and a ready market for the shares exists, they are recorded at

(a) zero.

(b) the fair value of the shares.

(c) the fair value of the assets acquired.

(d) the average of the fair value of the shares and the fair value of the assets acquired.

67. A company may repurchase its own shares for all of the following reasons except to

(a) enhance market value.

(b) reduce market value.

(c) increase basic earnings per share.

(d) have additional shares available for use.

68. Apricot Inc. is repurchasing 25,000 common shares. The price is $4.25/share and the average price is $4.00. Assuming that there is a contributed surplus balance of $5,000, the entry to record the transaction would be

(a) debit to Common shares, Contributed Surplus, and Retained Earnings and credit to Cash

(b) debit to Common shares and Contributed Surplus and credit to Cash

(c) debit to Common shares and Retained Earnings and credit to Cash

(d) debit to Common shares and credit to Cash

Ex. 142

Identify (by letter) each of the following characteristics as being an advantage, a disadvantage, or not applicable to the corporate form of business organization.

A = Advantage

D = Disadvantage

N = Not Applicable

Characteristics

_____ 1. Separate legal entity

_____ 2. May result in reduced taxes

_____ 3. Continuous life

_____ 4. Limited liability of shareholders

_____ 5. Government regulation

_____ 6. Separation of ownership and management

_____ 7. Ability to acquire capital

_____ 8. Ease of transfer of ownership

_____ 9. Disclosure requirements

Ex. 143

Name three advantages of a corporation.

Ex. 144

Indicate whether each of the following statements is True or False and explain why.

1. Ordinary shares are the same as common shares.

2. When a corporation has only one class of shares that class has the rights and privileges of preferred shares.

3. Many Canadian public companies are incorporated federally rather than provincially.

4. Corporations must only pay federal taxes as separate legal entities.

5. Corporations must record a journal entry when there is a transfer of ownership rights between shareholders whether public or private.

6. A corporation acts under its own name rather than in the name of its shareholders.

7. A private corporation has to follow Accounting Standards for Private Enterprises (ASPE).

Ex. 145

Dixon Corporation. has a December 31 year end. On January 1, 2022, the company had the following shareholder’s equity accounts:

Preferred Shares, $ 2 non-cumulative, unlimited number authorized,

5,000 issued $ 1,275,000

Common Shares, unlimited number authorized, 225,000 issued 3,375,000

Retained Earnings 2,625,000

Dixon had the following transactions during 2022:

Feb 28 Issued 1,000 Preferred shares at $ 110 per share.

Apr 3 Reacquired 10,000 Common Shares at $ 13 a share.

Instructions

Prepare the appropriate journal entries for the transactions during 2022.

Ex. 146

The corporate charter of Massey Corporation allows the issue of a maximum of 10,000,000 common shares. During its first three years of operation, Downy issued 5,000,000 shares at $14 per share.

Instructions

Based on the above information, answer the following questions:

(a) How many shares were authorized?

(b) How many shares were issued?

(c) What is the balance of the Common Shares account?

Ex. 147

In its first year of operations, Jagger Ltd. had the following transactions relating to its common shares:

Feb 1 Issued 5,000 shares for cash at $45 per share.

Jul 1 Issued 3,000 shares for cash at $43 per share.

Nov 1 Issued 4,000 shares for the acquisition of land. The land has a fair value of $160,000 and the shares are currently trading at $44 each.

Instructions

Record the above transactions.

Ex. 148

The following items were shown on the statement of financial position of Kettle Corporation on December 31, 2022:

Shareholders’ Equity

Share capital

$8, noncumulative preferred shares, 24,000 shares authorized,

8,000 shares issued $ 120,000

Common shares, 1,000,000 shares authorized, _?_ shares issued 3,600,000

Total share capital 3,720,000

Retained earnings 500,000

Total shareholders' equity $4,220,000

Instructions

Complete the following statements and show your calculations.

(a) If the average issue price was $9, the number of common shares issued was ______

(b) The average issue price of the preferred shares was $______.

Ex. 149

Mannequin Ltd. was incorporated on January 1, 2022. During the year the company entered into the following transactions:

Jan 5 Issued 50,000 common shares for $2.50 per share.

Jan 20 Issued 3,000 common shares to settle legal expenses. The value of the legal expenses was $10,000.

Feb 10 Issued 10,000 preferred shares for $30.00 per share.

Aug 12 Repurchased 15,000 common shares for $2.40 per share.

Oct 1 Issued 5,000 common shares for $2.25 per share.

Dec 31 Repurchased 20,000 common shares for $2.65 per share.

Instructions

Record the above transactions.

Ex. 150

Lactose Inc. reported the following transactions:

1. Issued 10,000 preferred shares for $7.50 cash per share.

2. Issued 14,000 common shares for $84,000 cash.

Instructions

Prepare the appropriate journal entries.

Ex. 151

Afrikana Crafts Inc. had the following transactions related to common shares:

Jan 5 Issued 25,000 common shares for $2 per share.

Mar 10 Issued 10,000 common shares in exchange for land. The land was valued at $25,000.

Apr 21 Issued 2,500 common shares to settle legal expenses of $7,500.

Oct 5 Issued 5,000 common shares for $3.50 per share.

Instructions

(a) Journalize the share transactions.

(b) Calculate the average cost of Afrikana’s common shares, assuming the company has a December 31 year end.

Ex. 152

Maslow Corporation is authorized to issue 4,000,000 common shares. During 2022, Maslow had the following share transactions:

Jan 15 Issued 1,100,000 shares at $5 per share.

Dec 6 Declared a $0.15 per share dividend to shareholders of record on December 25, payable January 5, 2023.

Instructions

Record the above transactions for Herold Corporation.

Ex. 154

On January 1, 2022, AntEater Corporation had 80,000 common shares issued. During the year, the following transactions occurred:

Mar 1 Issued 30,000 common shares for $300,000.

Jun 1 Declared a cash dividend of $0.50 per share to shareholders of record on June 15.

Jun 30 Paid the $0.50 cash dividend.

Instructions

Prepare journal entries to record the above transactions.

Ex. 155

The shareholders’ equity section of Alumni Inc. is shown below:

Statement of Financial Position (partial)

December 31, 2021

Shareholders’ Equity

Share Capital

$2 noncumulative Preferred Shares, 50,000 shares authorized,

10,000 shares issued $ 650,000

Common shares, unlimited number authorized, 500,000 issued 2,100,000

Total Share Capital 2,750,000

Retained earnings 975,000

Total Shareholders’ Equity $3,725,000

During 2022 Alumni entered into the following transactions:

1. Jan 10 Declared a $2 cash dividend to preferred shareholders, payable February 10.

2. Jul 1 Split the common shares 2-for-1. The market price per share was $4.75.

3. Oct 15 Declared a 10% stock dividend to common shareholders of record at November 5 to be distributed November 22. The share price on declaration was $2.50 per share and $2.25 on distribution date.

Instructions

(a) Prepare the appropriate journal entries.

(b) Determine the number of common shares and value at November 30, 2022.

(c) Record the journal entry assuming that Alumni repurchased 25,000 shares at $1.75 on December 20, 2022.

Ex. 156

As of December 31, 2021, Shannon Corporation had 500,000 common shares authorized, 100,000 of which had been issued for proceeds of $1.9 million. The Retained Earnings balance was $1,150,000 and Accumulated Other Comprehensive Income was $1,800,000.

On January 18, 2022, 50,000 common shares were issued at $25 per share. Net income for 2022 was $275,000. No dividends were declared in 2022.

Instructions

(a) Prepare the entry to record the common share issue on January 18.

(b) Prepare the shareholders' equity section of the statement of financial position at December 31, 2022.

Ex. 157

On January 1, 2022, Blue Corporation reported $3,000,000 in its Common Shares account (200,000 issued) and retained earnings of $1,000,000. During 2022, the following events occurred:

1. On July 1, the company issued 100,000 common shares at $17 per share.

2. On December 15, the board of directors declared a 15% stock dividend to common shareholders of record on December 31, payable on January 15, 2023.

3. The market value of Blue Corporation common shares was $16 per share on December 15 and $14 per share on December 31.

4. Net income for 2022 was $625,000.

Instructions

(a) Record the issue of shares on July 1 and the declaration of the stock dividend on December 15.

(b) Prepare the shareholders' equity section of the statement of financial position at December 31, 2022.

Ex. 158

Complete the below table by identifying the effect a cash dividend, stock dividend and stock split have on a company’s financial position by indicating: “+” means increase, “-” means decrease, and “NE” means “no effect.”

Total

Share Retained Shareholders’ Number of

Assets = Liabilities + Capital + Earnings Equity Shares

Cash dividend

Stock dividend

Stock split

Ex. 159

Maha Corporation has 2,000,000 authorized common shares. As of June 30, 2022, there were 350,000 shares issued. On this date, the board of directors declared a $0.25 per share cash dividend to be paid on August 1, 2022 to shareholders of record on July 7, 2022.

Instructions

Prepare the necessary journal entries to be recorded on (a) the date of declaration, (b) the date of record, and (c) the date of payment. If no entry is needed write “No entry required.”

Ex. 160

The shareholders' equity section of Starr Corporation at December 31, 2021, included the following:

$3 preferred shares, cumulative,

10,000 shares authorized, 9,000 shares issued $ 900,000

Common shares, 500,000 shares authorized, 400,000 shares issued 2,000,000

Dividends were not declared on the preferred shares in 2021 and are in arrears.

On September 15, 2022, the board of directors declared dividends on the preferred shares for 2021 and 2022, to shareholders of record on October 1, 2022, payable on October 15, 2022.

On November 1, 2022, the board of directors declared a $0.50 per share dividend on the common shares, payable November 30, 2022, to shareholders of record on November 15, 2022.

Instructions

Prepare the journal entries that should be made by Starr Corporation on the following dates in 2022: September 15, October 1, October 15, November 1, November 15, and November 30. If no entry is needed write “No entry required.”

Ex. 161

Determine whether a cash dividend, stock dividend, or stock split will result in the effect listed in the first column. For example, for the first item, indicate by inserting a yes or no in the space provided whether a cash dividend will result in a decrease in total assets; whether a stock dividend will result in a decrease in total assets; and whether a stock split will result in a decrease in total assets.

Ex. 162

Glenn Corporation's shareholders' equity section at December 31, 2021 appears below:

Shareholders' equity

Share capital

Common shares, 82,000 issued $ 799,860

Retained earnings 150,000

Accumulated other comprehensive income 450,000

Total shareholders' equity $1,399,860

On June 30, 2022, the board of directors declared a 15% stock dividend, distributable on July 31 to shareholders of record on July 15. The fair value of Glenn Corporation's shares on June 30 was $14.

On December 1, 2022, the board of directors declared a 2-for-1 stock split effective December 15. Glenn Corporation's shares were selling for $20 on December 1, 2022, before the stock split was declared. Net income for 2022 was $230,000 and there were no cash dividends declared.

Instructions

(a) Prepare the journal entries on the appropriate dates to record the stock dividend and the stock split. If no entry is needed write “No entry required.”

(b) Prepare all closing entries required on December 31, 2022.

(c) Fill in the amounts that would appear in the shareholders' equity section for Glenn Corporation at December 31, 2022, for the following items:

1. Common shares $______

2. Number of shares issued ______

3. Legal capital per share $______

4. Retained earnings $______

5. Total shareholders' equity $______

Ex. 163

Evangeline Corporation had the following shareholders’ equity balances at January 1, 2022:

Common shares, unlimited number authorized, 250,000 issued $500,000

Retained earnings 300,000

Accumulated other comprehensive income 50,000

The following selected information is available for the year ended December 31, 2022:

1. Issued 50,000 common shares for $150,000 on January 1.

2. Declared and paid dividends of $0.10 per share in December.

3. Reported net income of $180,000 for the year.

4. Reported other comprehensive income of $12,500 for the year.

Instructions

Prepare a statement of changes in equity.

Ex. 164

As of December 31, 2022, Shaka Son Inc. had the following share capital:

1. 750,000 common shares authorized, 350,000 of which had been issued for a total of $5,250,000.

2. 100,000 noncumulative, $10.50 preferred shares authorized, 10,000 of which had been issued at $200 per share.

Instructions

Prepare the share capital section of the statement of financial position at December 31, 2022.

Ex. 165

The following accounts appear on the adjusted trial balance of Airway Machinery Inc. at December 31, 2022:

Common Shares, 1,000,000 shares authorized, 800,000 shares issued $1,600,000

Stock Dividends Distributable 240,000

$4 Preferred Shares, 10,000 shares authorized, 5,000 shares issued 750,000

Retained Earnings 925,000

Accumulated Other Comprehensive Income 250,000

Instructions

Prepare the shareholders' equity section at December 31, 2022, assuming that retained earnings is restricted for plant expansion in the amount of $250,000.

Ex. 166

Before closing, the Retained Earnings account of Radar Ltd. has a credit balance of $210,000 at December 31, 2022. There was a loss of $238,000 for 2022. The share capital consists of 40,000 common shares issued for $480,000.

Instructions

Prepare the shareholders’ equity section of the statement of financial position at December 31, 2022.

Ex. 167

Mean Green Corporation had the following shareholders’ equity balances at January 1, 2022:

Common shares, unlimited authorized, 200,000 issued $800,000

Retained earnings 120,000

Accumulated other comprehensive income 30,000

The following events occurred in 2022:

• 1. Issued 50,000 common shares for $150,000 cash.
  2. Declared and paid dividends of $25,000.
  3. Reported net income of $40,000.
  4. Reported other comprehensive income of $10,000.

Instructions

Prepare a statement of changes in shareholders’ equity.

Ex. 168

At December 31, 2021, Houston Corp. reported the following adjusted balances:

Common shares: 480,000 issued $3,000,000

Preferred shares: 120,000 issued 900,000

Contributed surplus 36,000

Retained earnings 480,000

Accumulated other comprehensive income 144,000

The following events occurred in 2022:

1 Issued 60,000 preferred shares, $600,000.

2. Reported total comprehensive income of $185,000, which included net income of $225,000 and other comprehensive loss of $40,000.

3. Declared and paid dividends to the preferred shareholders of $125,000.

Instructions

Prepare a statement of changes in equity for the year ended December 31, 2022.

Ex. 169

At December 31, 2021, Magnolia Inc., a private company reporting under ASPE, had the following shareholders’ equity:

Common shares, 100,000 issued $1,000,000

Retained earnings 1,600,000

During 2022, the following events occurred:

1. On June 1, the company declared and paid a $0.50 cash dividend.

2. On October 14, the company issued another 30,000 shares at $10 each.

3. At December 31, the company reported a net income of $325,000 for the year.

Instructions

Prepare a statement of retained earnings for the year ended December 31, 2022.

Ex. 170

At December 31, 2021, Red Roberts Limited, a private company reporting under ASPE, had the following shareholders’ equity:

Common shares, 75,000 issued $300,000

Retained earnings 750,000

During 2022, the following events occurred:

1. On February 1, the company declared and paid a $0.50 cash dividend.

2. On June 10, the company split the common shares two for one.

3. On December 1, the company declared and paid a $0.40 cash dividend.

4. At December 31, the company reported a loss of $106,000 for the year.

Instructions

(a) Prepare a statement of retained earnings for the year ended December 31, 2022.

(b) If Red River were a publicly-traded corporation, would it still prepare a statement of retained earnings? Explain.

Ex. 171

At December 31, 2021, Snow White Corp., a private company reporting under ASPE, had the following shareholders’ equity:

Preferred shares, 30,000 issued $150,000

Common shares, 60,000 issued 420,000

Retained earnings 740,000

During 2022, the following events occurred:

1. On May 1, the company declared a 5% common stock dividend. The fair value of the common shares was estimated to be $8 at this time. The shares were distributed on June 1.

2. On September 10, the company issued 25,000 common shares at $7.95 each.

3. On December 15, the company declared a cash dividend of $0.30 per share to the common shareholders of record on December 31, payable on January 15, 2021. It also declared a cash dividend of $.50 per share to the preferred shareholders, on the same dates.

4. At December 31, the company reported a net income of $310,000 for the year.

Instructions

(a) Prepare a statement of retained earnings for the year ended December 31, 2022.

(b) If Snow White were a publicly-traded corporation, why would it not prepare a statement of retained earnings? Explain.

Ex. 172

Select data for Banana Corp is identified below:

2022 2021

Net income $40,800 $21,500

Dividends declared 30,000 18,000

Dividends per share 1.15 1.10

Share price 40.00 25.00

Instructions

(a) Calculate the payout ratio and dividend yield for each company.

(b) Comment on the year-over-year change(s).

Ex. 173

Using the following information, calculate the payout ratio and the return on common shareholders’ equity:

Dividends $210,000

Dividends per share $0.32

Net income $1,500,000

Share price at end of year $26.00

Average common shareholders’ equity $60,000,000

Ex. 174

Blue Rays Incorporated reported the following selected information:

2022 2021

Weighted average number of common shares 75,000 73,500

Net income $450,000 $410,500

Preferred share dividends $50,000 $34,500

Common shareholders’ equity $3,500,000 $3,300,000

Dividends declared per share $2.50 $2.40

Market price per share $30.00 $32.50

Instructions

Calculate the following ratios for 2022 and 2021 respectively:

1. Basic earnings per share
2. Return on common shareholders’ equity (assume 2020 common shareholders’ equity of $3,250,000)
3. Dividend yield
4. Payout ratio

Ex. 175

Solutions Plus Inc. operates on a calendar year basis. During the year the company had the following transactions related to common shares:

Jan 1 Issued 250,000 common shares for $2 per share.

Feb 1 Issued 60,000 common shares for $2.25 per share.

Mar 10 Issued 2,500 preferred shares for $50 per share.

May 1 Issued 600,000 common shares for $2.50 per share.

Sep 1 Repurchased 75,000 common shares for $1.95 per share.

Nov 1 Repurchased 45,000 common shares for $1.75 per share.

In addition, Solutions Plus reported net income of $1,433,625 and paid $55,000 in preferred dividends.

Instructions

1. Calculate the weighted average number of shares.
2. Calculate the basic earnings per share.