CHAPTER 14

Corporations: ADDITIONAL TOPICS AND IFRS

CHAPTER STUDY OBJECTIVES

1. Explain how to account for stock dividends and stock splits, and compare their financial impact. Journal entries for stock dividends are required at the declaration and distribution dates. There is no journal entry for a stock split. Stock dividends reduce retained earnings and increase common shares, but have no impact on total shareholders’ equity. Both stock dividends and stock splits increase the number of shares issued. Stock dividends and splits reduce the fair value of the shares, but have no impact on the company’s financial position.

2. Explain how to account for the reacquisition of shares. When shares are reacquired, the average per share amount is debited to the Common Shares account. If the shares are reacquired at a price below the average per share amount, the difference is credited to a contributed surplus account. If the shares are reacquired at a price above the average per share amount, the difference is debited first to a contributed surplus account if a balance exists, and then to the Retained Earnings account.

3. Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Gains or losses on discontinued operations must be presented net of income tax after profit (or loss) from continuing operations. Companies following IFRS must prepare a statement of comprehensive income that reports all increases and decreases to shareholders’ equity during a period except changes resulting from the sale or repurchase of shares and from the payment of dividends. The statement of comprehensive income can be prepared on an all-inclusive basis, or can start with profit or loss as shown on a separate income statement.

4. Explain the different types of accounting changes and account for the correction of a prior period error. A change in an accounting estimate is not an error and only the current and future periods are revised. A change in accounting policy, from the method used in the previous year, is allowed only when there is a change in GAAP or if it results in the financial statements providing more reliable and relevant information. These changes are applied retrospectively when possible. If an error in a prior year’s profit is found after the temporary accounts have been closed and the statements have been issued, then beginning retained earnings is adjusted. This is shown in the financial statements as a correction to beginning retained earnings net of the related income tax impact.

5. Prepare a statement of changes in shareholders’ equity. A statement of changes in shareholders’ equity explains all of the changes in each of the shareholders’ equity accounts, and in total, for the reporting period. This includes changes in contributed capital (Common Shares, Preferred Shares, and any other contributed surplus accounts), Retained Earnings, and Accumulated Other Comprehensive Income. The statement is required for companies reporting under IFRS.

6. Explain earnings and dividend performance and calculate performance ratios. Profitability measures that are used to analyze shareholders’ equity include return on equity (discussed in Chapter 13), earnings per share, the price earnings ratio, and the payout ratio. Earnings (loss) per share is calculated by dividing profit (loss) available to the common shareholders by the weighted average number of common shares and is reported only under IFRS. The price earnings ratio is calculated by dividing the market price per share by the earnings per share. The payout ratio is calculated by dividing cash dividends by profit.

EXERCISES

Exercise 1

The following is information taken from the shareholders’ equity section of the projected summary financial statements of Deer Fly Corp. to December 31, 2021, prior to the board of directors’ meeting to decide on dividends or other share transactions related to its 10,000 issued common shares for the year.

Total assets $ 560,000

Total liabilities $ 320,000

Shareholders' equity

Common shares 30,000

Retained earnings 210,000

Total shareholders' equity 240,000

Total liabilities and shareholders' equity $ 560,000

Common shares market value $ 12.50

Instructions

Prepare in three-column comparative format, the shareholders’ equity section as it would appear under each of the following possible options that the board is considering. Only one of the options will be chosen, so assume they are mutually exclusive. Describe any additional disclosure that would be required.

a) The board declares a 20% stock dividend.

b) The board approves a 3-for-1 stock split.

Exercise 2

During 2021, Zelda Corporation had the following transactions and events:

1. Issued preferred shares for cash.

2. Issued common shares for cash.

3. Completed a 2-for-1 stock split of the common shares.

4. Declared a stock dividend when the market value was higher than the issue price.

5. Declared a cash dividend.

6. Issued the common shares required by the stock dividend declaration in 4 above.

Instructions