chapter 16 - tex-cetera 15ce v2 sm12.docx · web viewfundamental accounting principles, 1 4 th...

Last revised: January 23, 2016.

SOLUTIONS MANUAL

to accompany

Fundamental Accounting Principles

15th Canadian Edition

by Larson/Jensen/Dieckmann

Prepared by:

Laura Dallas, Kwantlen Polytechnic University

Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016 McGraw-Hill Education Ltd. 12-1


Technical checks by:

Elizabeth Hicks, Douglas College

Michelle Young, CPA



Chapter 12 Organization and Operation of Corporations

Chapter Opening Critical Thinking Challenge Questions*

Why might a company stay private?

The owner(s) in a private corporation have control over the decisions being made whereas in a public company, the Board of Directors, who are representatives of the shareholders, oversee the organization.

Why might a private company go public?

A private company might go public to increase financing opportunities necessary for growth. By going public, ownership is inevitably diluted.

*The Chapter 12 Critical Thinking Challenge questions are asked at the beginning of this chapter. Students are reminded at the conclusion of Chapter 12 to refer to the Critical Thinking Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual and accessible to students on Connect.



Concept Review Questions

1. The board of directors of a corporation is responsible for directing the corporation’s affairs.

2. Organization costs (also referred to as start-up costs) are incurred in creating a corporation. Examples include: legal fees, promoters’ fees, accountants’ fees, costs of printing share certificates, and fees paid to the provincial legal jurisdiction to obtain a corporate charter. Organization costs are expensed when incurred.

3. The general rights of common shareholders include: (1) the right to vote in shareholders’ meetings, (2) the right to sell or otherwise dispose of shares, (3) the pre-emptive right, (4) the right to share proportionately in dividends, and (5) the right to share proportionately in assets remaining after the creditors are paid if the corporation is liquidated. In addition, shareholders have the right to receive timely and useful financial reports that describe the corporation’s financial position and the results of its activities.

4. The pre-emptive right of common shareholders is the right to maintain their relative ownership interests in the corporation by having the first opportunity to purchase their proportionate share of any additional common shares issued by the corporation.

5. The call price is the amount that a corporation must pay if it exercises the option to buy back and retire callable shares.

6. Convertible preferred shares are attractive because they offer the safety of a regular return as well as the opportunity to share in the increased value of the issuer’s common shares.

7. Indigo had dividends paid in 2013 of $11,119,000 and in 2014, $8,348,000.

8. On the consolidated Statements of Cash Flows the Dividends paid appear under the heading, CASH FLOWS FROM FINANCIAL ACTIVITIES.

9. In Note 13, SHARE CAPITAL, page 48 of Indigo Financial Statements the distributed dividends per share for fiscal year 2014 was $0.33, and for 2013, $0.44.

10. The main difference between a private and a public corporation access to capital. A public company has the ability to issue shares to generate capital for expansion and other purposes. A private company is largely reliant on debt financing or targeted private equity investors. Stock exchange regulators require public companies to report audited financial statements on an annual basis as well as quarterly reviews. Private companies do not have this requirement. It is important to note that size does not signal public vs private status. Although many large companies are public, private companies can be very large too. Zara, Dole Foods, Lego, Toys R Us, and PWC (PricewaterhouseCoopers) are all examples of privately held companies.



QUICK STUDY

Quick Study 12-1 (5 minutes)

a and d


MOGUL LTD.

Income Statement

For Year Ended October 31, 2017

Sales $ 982,000

Cost of goods sold 420,000

Gross profit $ 562,000

Operating expenses 162,000

Profit from operations $ 400,000

Other revenues and expenses:

Gain on sale of plant and equip. $ 4,000

Interest expense (6,200 ) (2,200)

Profit before tax $ 397,800

Income tax expense 99,450*

Profit $ 298,350



*Calculated as: 397,800 × .25 = 99,450


X Cash CC Preferred shares

CC Common shares RE Retained earnings

X Common dividend payable X Preferred dividend payable

RE Deficit CC Preferred shares,

$5 non-cumulative




FORM OF BUSINESS ORGANIZATION

Transaction Sole Proprietorship Corporation

Jan. 1, 2017:

The owner(s) invested $10,000

into the new business

Cash................................... 10,000

Ian Smith, Capital.......... 10,000

Cash........................... 10,000

Common Shares. . . 10,000

During 2017:

Revenues of $50,000 were earned; all cash

Cash................................... 50,000

Revenues....................... 50,000

Cash........................... 50,000

Revenues............... 50,000

During 2017:

Expenses of $30,000 were incurred; all cash

Expenses........................... 30,000

Cash............................... 30,000

Expenses................... 30,000

Cash....................... 30,000

Dec. 15, 2017:

$15,000 cash was distributed to the owner(s)

Ian Smith, Withdrawals… 15,000

Cash............................... 15,000

Cash Dividends......... 15,000

(or R/E)

Cash....................... 15,000

Dec. 31, 2017, Year End:

All temporary accounts were closed

—Close Revenue account

Revenues........................... 50,000

Income Summary.......... 50,000

Revenues................... 50,000

Income Summary…. 50,000

—Close Expense account Income Summary.............. 30,000

Expenses....................... 30,000

Income Summary...... 30,000

Expenses............... 30,000

—Close Income Summary account to appropriate equity account(s)

Income Summary.............. 20,000

Ian Smith, Capital.......... 20,000

Income Summary...... 20,000

Retained Earnings…. 20,000

—Close Withdrawal/Cash Ian Smith, Capital.............. 15,000 Retained Earnings..... 15,000



Dividends Declared account Ian Smith, Withdrawals… 15,000 Cash Dividends .... 15,000No entry if debit Retained Earnings used above.

Equity section on the balance sheet at December 31, 2017 after the first year of operations.

Vision HR Consulting

Partial Balance Sheet

December 31, 2017

Equity

Ian Smith, capital....... $15,000

Vision HR Consulting Inc.

Partial Balance Sheet

December 31, 2017

Equity

Common shares....................$ 10,000

Retained earnings................. 5,000

Total equity.................................$15,000




$48,000 + $146,000 – $47,000 – $15,000 = $132,000

OR

Retained Earnings

48,000 Bal. Dec. 31/17

146,000 Profit, 2018

Dividends, 2018 47,000

Loss, 2019 15,000

132,000 Bal. Dec. 31/19


1. $300,000 – $120,000 + $50,000 = $230,000

2. Profit

3. Dividends


Fisher Inc.

Statement of Changes in Equity

For Year Ended December 31, 2018

Common Shares

Retained Earnings Total Equity



Balance, January 1 $ 750,000 $(28,000) $ 722,000

Issuance of common shares 125,000 125,000

Profit 148,000 148,000

Dividends (40,000) (40,000)

Balance, December 31 $ 875,000 $ 80,000 $ 955,000




Feb. 1 Cash...................................................................... 252,440

Common shares ......................................... 252,440

Issued shares for cash.

Feb. 12 Cash...................................................................... 340,750

Common shares ......................................... 340,750

Issued shares for cash; 47,000 x $7.25.

The average issue price is $7.02 calculated as:

($252,440 + $340,750) ÷ (37,500 + 47,000).


a. Sold common shares for cash.

b. Issued common shares to pay organization costs.

c. Issued common shares for inventory and machinery, and assumed a note payable.




a.

2017

Oct. 3 Cash 60,000

Preferred Shares 60,000

To record issuance of preferred shares;

4,000 × $15 = 60,000.

Nov. 19 Land 52,480


To record issuance of 3,400 preferred

shares in exchange for land.

b. (60,000 + 52,480)/(4,000 + 3,400) = $15.20 per preferred share.


Apr. 15 Cash Dividends......................................................... 48,000

Common Dividend Payable ............................ 48,000

Declared a cash dividend on common shares.

June 30 Common Dividend Payable ..................................... 48,000

Cash ................................................................. 48,000

Paid the cash dividend to common shareholders.

Dec. 31 Retained Earnings ................................................... 48,000

Cash Dividends................................................ 48,000

To close the Cash Dividends account.Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016

McGraw-Hill Education Ltd. 12-12


OR

Apr. 15 Retained Earnings ............................................... 48,000

Common Dividend Payable ....................... 48,000

Declared a cash dividend on common shares.

June 30 Common Dividend Payable ................................ 48,000

Cash ............................................................. 48,000

Paid the cash dividend to common shareholders.

Dec. 31 No entry required.




a. Total dividend .............................................. 108,000

To preferred shareholders........................ 60,000*

Remainder to common shareholders...... $48,000

*75,000 shares × $0.40 × 2 years = $60,000

b. Total dividend ............................................. 108,000

To preferred shareholders........................ 30,000*

Remainder to common shareholders...... $78,000

*75,000 shares × $0.40 for current year only = $30,000


a. The preferred shares are entitled to receive $0.50 per share when the board of directors declares dividends; if dividends are not declared, the undeclared dividends do not become a liability but go into arrears; arrears mean that the undeclared dividends must be paid to the preferred shareholders in the future along with any current dividends before the common shareholders receive dividends.

b. The total amount contributed, or given to the corporation, in exchange for ownership in the corporation.

c. The corporation is allowed to issue 20,000 shares based on its articles of incorporation.

d. 150,000 common shares have been sold and are held by shareholders.

e. Accumulated profit less any losses and dividends.

f. An unlimited number of common shares may be issued by the corporation based on its articles of incorporation.




a.

2017

May 31 Revenues 92,000

Income Summary 92,000

To close revenues to the income summary.

31 Income Summary 58,000

Expenses 58,000

To close expenses to the income summary.


Retained Earnings 34,000

To close the income summary to retained earnings.

31 Retained Earnings 3,500

Cash Dividends 3,500

To close cash dividends to retained earnings.

b.

PETER PUCK INC.


For Year Ended May 31, 2017

Preferred Shares

Common Shares

Retained Earnings

Total Equity



Balance, June 1 $ 7,000 $ 13,000 $ 29,000 $ 49,000

Issuance of shares -0- -0- -0-

Profit (loss) 34,000 34,000

Dividends (3,500) (3,500)

Balance, May 31 $ 7,000 $ 13,000 $ 59,500 $ 79,500

NOTE: Because no shares were issued during the year ended May 31, 2017, the ‘Issuance of shares’ line in the Statement of Changes in Equity could be omitted.




a.

2017

Nov. 30 Revenues 87,000




Expenses 96,000




To close the income summary to retained

earnings regarding the loss.



To close cash dividends to retained

earnings.

b.

MORRIS INC.


For Year Ended November 30, 2017



Preferred Shares

Common Shares

Retained Earnings

Total Equity

Balance, December 1 $ 10,000 $ 48,000 $ 42,000 $ 100,000


Profit (loss) (9,000) (9,000)

Dividends (14,000) (14,000)

Balance, November 30 $ 10,000 $ 48,000 $ 19,000 $ 77,000

NOTE: Because no shares were issued during the year ended November 30, 2017, the ‘Issuance of shares’ line in the Statement of Changes in Equity could be omitted.




a.

2017

Aug. 31 Revenues 76,000




Expenses 94,000




To close the income summary to retained

earnings regarding the loss.

b.

VELOR LTD.


For Year Ended August 31, 2017

Preferred Shares

Common Shares

Retained Earnings/(Deficit)

Total Equity

Balance, September 1 $ 10,000 $ 48,000 $ 12,000 $ 70,000


Profit (loss) (18,000) (18,000)

Dividends -0- -0-



Balance, August 31 $ 10,000 $ 48,000 $ (6,000) $ 52,000

NOTE: Because no shares were issued and no dividends were declared during the year ended August 31, 2017, the ‘Issuance of shares’ and ‘Dividends’ lines in the Statement of Changes in Equity could be omitted.


186,000 +24,000 = 210,000 ending shares

(186,000+210,000)/ 2=198,000 average shares outstanding

$5,841,000/ 198,000= $29.50 book value



EXERCISES

Exercise 12-1 (20 minutes)

a) Partnership

Feb. 14 Cash 325,000

Surj Uppal, Capital 162,500

Parvinder Atwal, Capital 162,500

To record investment into business by partners.

Dec. 23 Surj Uppal, Withdrawals 31,200

Parvinder Atwal, Withdrawals 31,200

Cash

To record withdrawals by owners.

62,400


Surj Uppal, Capital 62,400


To record closing of income summary to capital.

31 Surj Uppal, Capital 31,200


Surj Uppal, Withdrawals 31,200

Parvinder Atwal, Withdrawals 31,200

To record closing of withdrawals to capital.



Exercise 12-1 (concluded)

b) Corporation

Feb. 14 Cash 325,000

Common Shares 325,000

To record issuance of common shares.

Dec. 20 Cash Dividends 62,400

Common Dividend Payable 62,400

To record declaration of dividends.

23 Common Dividend Payable 62,400

Cash 62,400

To record payment of dividends.



To record closing of income summary to retained earnings.



To record closing of dividends to retained earnings.

ORb) Corporation

Feb. 14 Cash 325,000




To record issuance of common shares.

Dec. 20 Retained Earnings 62,400


To record declaration of dividends (directly debited to retained earnings).

23 Common Dividend Payable 62,400

Cash 62,400

To record payment of dividends.







2017

Jan. 15 Organization Expenses (or other various expenses) 31,500


Issued common shares to promoters.

Feb. 21 Cash 210,000


Issued common shares for cash;

15,000 shares x $14/share = $210,000.

Mar. 9 Cash 110,600


Issued preferred shares for cash.

Aug. 15 Land 315,000

Building 420,000

Equipment 112,000


Issued common shares in exchange for land,

building, and equipment.




a)

2017

Jan. 1 Cash 60,000


Issued preferred shares; 5,000 × $12/share = 60,000.

Feb. 5 Cash 126,000


Issued common shares.

Mar. 20 Organization Expenses (or other various expenses) 28,800


Issued shares to organizers for their work.

May 15 Cash 350,400



Issued preferred and common shares; 12,000 × $13.20/share = $158,400; 20,000 × $9.60/share = $192,000.



Closed the loss to Retained Earnings.

b) FIERRA SCEPTRE INC.



Equity Section of the Balance Sheet

December 31, 2017

Contributed Capital:

Preferred Shares, $1.50; 50,000 shares authorized;

17,0001 shares issued and outstanding $218,4001

Common Shares

300,000 shares authorized;

38,0002 shares issued and outstanding 346,8002

Total contributed capital $565,200

Deficit (329,000)

Total equity $236,200

Calculations:

1. Preferred Shares: Shares Dollars

Jan. 1 Issued 5,000 shares (5,000 x $12.00) 5,000 $ 60,000

May 15 12,000 shares issued (12,000 x $13.20) 12,000 158,400

Totals 17,000 $ 218,400


2. Common Shares:

Feb. 5 Issued 15,000 shares 15,000 $126,000

Mar. 20 Issued 3,000 shares 3,000 28,800

May 15 20,000 shares issued (20,000 x $9.60) 20,000 192,000

Totals 38,000 $346,800



c) The $1.50 is the dividend entitlement per preferred share or how much each preferred share is supposed to get in dividends each year.


March 1 Cash Dividends or Retained Earnings 93,750

Common Dividends Payable 93,750

To record declaration of cash dividend on common

shares of $0.75 per share.

10 No entry.

31 Common Dividends Payable 93,750

Cash 93,750

Paid the dividends declared on March 1.




2017

June 5 Organization Expenses (or other various expenses) 84,500


Issued 4,000 common shares to promoters.

15 Cash 1,650,000

Common Shares 1,650,000

Issued common shares for cash;

75,000 shares x $22/share = $1,650,000.

16 Cash 390,000


Issued preferred shares for cash;

10,000 shares x $39/share = $390,000.

17 Accounts Payable 130,000


Issued 8,000 common shares to a creditor.

18 Cash Dividends or Retained Earnings 24,500


Preferred Dividends Payable 19,500

Declared dividends.

30 Machinery 2,600,000

Common Shares 2,600,000



Issued common shares in exchange for

machinery; valued at fair value of the asset acquired.

July 1 Common Dividends Payable 5,000


Cash 24,500

Paid the dividends declared June 18.




a)

2017

Jan. 1 Organization Expenses (or other various exp.) 12,000


To record issuance of shares.

5 Cash 202,500


To record issuance of shares, 15,000 × $13.50



Declared dividends; $0.75 x 16,000 = $12,000

20 Land 46,000


To record issuance of shares: 4,000 x $11.50.



To close income summary to retained

earnings.

31 Common Dividends Payable 12,000



Cash 12,000

Paid dividends.




b) WESTBY CORP.


January 31, 2017

Common shares, unlimited shares authorized,


Retained earnings 153,000 2


c) Average Issue Price $260,500 20,000 shares = $13.03 per share.

Calculations:

1. Shares Dollars

Jan. 1 Issued 1,000 shares 1,000 $ 12,000

5 Issued 15,000 shares (15,000 x $13.50) 15,000 202,500

20 Issued 4,000 shares (4,000 x $11.50) 4,000 46,000

Totals 20,000 $260,500

2. $165,000 – $12,000 = $153,000




1. $3.75 Cumulative Preferred Shares:

$3.75/share × 40,000 shares = $150,000 each year × 3 years = $450,000

$10 Noncumulative Preferred Shares:

$10/share × 8,000 shares = $80,000

Common Shares:

$613,300 – (450,000 + 80,000) = $83,300

2. Dec. 31/16 Retained Earnings Balance + 2017 Profit of $1,250,000 – 2017 Dividends of $613,300 = Dec. 31/17 Retained Earnings Balance of $741,600

Therefore,

Dec. 31/16 Retained Earnings Balance = $104,900

OR

Retained Earnings

X

Bal.

Dec. 31/16

2017 dividends

613,300 1,250,000 2017 Profit

741,600

Bal.

Dec. 31/17




3.

ZOOMZOOM INC.



Preferred Shares,

$3.75 Cum.

Preferred Shares,

$10 Non-Cum.

Common Shares

Retained Earnings

Total Equity

Balance, January 1 $1,660,000 $ 670,000 $1,750,000 $ 104,900 $4,184,900

Issuance of shares -0- -0- -0- -0-

Profit (loss) 1,250,000 1,250,000

Dividends (613,300) (613,300)

Balance, December 31 $1,660,000 $ 670,000 $1,750,000 $ 741,600 $4,821,600

NOTE: Because no shares were issued during the year ended December 31, 2017, the ‘Issuance of shares’ line in the Statement of Changes in Equity could be omitted.




WHITE PEAR INC.


December 31, 2017


Preferred shares, $3.60 noncumulative:

100,000 shares authorized,

75,000 shares issued and outstandingA. $2,700,000

Common shares

Unlimited shares authorized, E. 250,000 shares B. 3,550,000 ? shares issued and outstanding

Total contributed capital $6,250,000

Retained earnings C. 1,380,000

Total equity D. $7,630,000

Calculations:

A. $36.00 × 75,000 shares = $2,700,000

B. $6,250,000 – $2,700,000 = $3,550,000

C. $192,000 + $1,728,000 – $540,000 = $1,380,000



OR

Retained Earnings

192,000

540,000 1,728,000

1,380,000

D. $6,250,000 + $1,380,000 = $7,630,000

E. $3,550,000 $14.20 = 250,000 shares




1. $6/share × 8,000 shares = $48,000

2. Yes. Calculation is $48,000 × 2 years = $96,000

3. a) ($6 × 8,000 shares) = $48,000 × 3 years = $144,000

b) $4.80 × 45,000 = $216,000

4. $126,000 + $408,000 – $144,000 – $216,000 = $174,000

5. $192,000 + $540,000 = $732,000

6. $732,000 + $174,000 = $906,000

7. 10,000 – 8,000 = 2,000

8. $192,000/8,000 shares = $24/share


NOTE: The holders of the cumulative preferred shares are entitled to no more than $451,200 of dividends in any year ($9.60 × 47,000 shares) plus any dividends in arrears.

Preferred Common

2017 ($0):

Preferred—current...................................................... $ 0

Common—remainder................................................. $ 0

Total for the year......................................................... $ 0 $ 0

2018 ($480,000):

Preferred—arrears...................................................... $ 451,200



Preferred—current ($480,000 – $451,200)................ 28,800


Total for the year......................................................... $ 480,000 $ 0

2019 ($1,008,000):

Preferred—arrears ($451,200 – $28,800)................... $ 422,400

Preferred—current...................................................... 451,200

Common—remainder ($1,008,000 – $873,600)......... $134,400

Total for the year......................................................... $ 873,600 $134,400

2020 ($480,000):

Preferred—current...................................................... $ 451,200

Common—remainder ($480,000 – $451,200)............ $ 28,800

Total for the year......................................................... $ 451,200 $ 28,800

Total for four years..................................................... $1,804,800 $163,200


NOTE: The holders of the noncumulative preferred shares are entitled to no more than $451,200 of dividends in any year ($9.60 × 47,000 shares).

Preferred Common

2017 ($0):

Preferred—current...................................................... $ 0


Total for the year......................................................... $ 0 $ 0

2018 ($480,000):




2019 ($1,008,000):



Preferred—current...................................................... 451,200

Common—remainder ($1,008,000 – $451,200)......... $556,800

Total for the year......................................................... $ 451,200 $556,800

2020 ($480,000):




Total for four years..................................................... $1,356,600 $614,400


1. B 4. E

2. A 5. D

3. F 6. C


1. (15,000 shares × $5.40/share) × 2 years = $162,000

2. $180,000 Total dividends – $162,000 paid to preferred shareholders = $18,000 to common shareholders




2017

Dec. 31 Revenue 271,600


To close the revenue account to the income summary.


Income Tax Expense 40,600

Operating Expenses 109,200

To close the expense accounts to the income summary.



To close the income summary to retained earnings.



To close the Cash Dividends account to Retained Earnings.

Post-Closing Balance in Retained Earnings:

Retained Earnings, December 31, 2016 $ 27,720

Add: Profit for the year 121,800

Less: Cash Dividends 19,600

Retained Earnings, December 31, 2017 $129,920



OR

Retained Earnings

27,720 Bal. Dec. 31/16

Cash Dividends

19,600 121,800

2017

Profit

129,920 Bal. Dec 31/17




SPICER INC.

Balance Sheet

December 31, 2017

Assets

Current assets:

Cash $ 8,400

Accounts receivable 39,200

Total current assets $ 47,600

Property, plant and equipment:

Land $117,600

Warehouse $128,800

Less: Accumulated depreciation 21,280 107,520

Equipment $ 78,400


Total property, plant and equipment 292,880

Total assets $340,480

Liabilities

Current liabilities :

Accounts payable $ 25,760

Non-Current liabilities:

Long term note payable, due in 2020 33,600

Total liabilities $ 59,360

Equity




Preferred shares $ 39,200

Common shares 112,000


Retained earnings 129,920

Total equity 281,120

Total liabilities and equity $340,480

1. 83% ($281,120 ÷ $340,480 = 83%)

2. 83% ($281,120 ÷ $340,480 = 83%)

3. 17% ($59,360 ÷ $340,480 = 17%)

4. 71% [($112,000 + $129,920) ÷ $340,480 = 71%]

5. 12% ($39,200 ÷ $340,480 = 12%)

6. The main advantage to the common shareholders of issuing preferred shares over additional common shares is that the common shareholders will retain control as the preferred shareholders will not have a vote.



Exercise 12-16

1.

2017

Jan. 3 Cash 34,400


Issued common shares for cash.

Mar . 1 Cash 24,000

Preferred Shares (5,000 x $4.80) 24,000


June 15 Equipment 26,000


Issued common shares in exchange for equipment.

Dec. 31 Income Summary 280,000


Closed the income summary to retained earnings.

2. DELICIOUS ALTERNATIVE DESSERTS INC.


December 31, 2017


Preferred shares, $0.40 cumulative



Common shares,




147,0002 shares issued and outstanding 252,4002


Retained earnings3 428,000


3. 15,000 (calculated as 80,000 shares authorized less 65,000 shares issued and outstanding)

4. 103,000 (calculated as 250,000 shares authorized less 147,000 shares issued and outstanding)




Calculations:


Jan. 1 Balance brought forward 60,000 $240,000

Mar. 1 Issued 5,000 shares (5,000 x $4.80) 5,000 24,000

Totals 65,000 $264,000

2. Common Shares: Shares Dollars


3 20,000 shares issued 20,000 34,400

Jun. 15 Issued 7,000 shares 7,000 26,000

Totals 147,000 $252,400

3. Retained Earnings: Dollars

Jan. 1 Balance brought forward $148,000

Dec. 31 Profit 280,000

Totals $428,000



Exercise 12-17

Part A

2017

Oct. 1 Cash 4,800


Issued preferred shares; 1,000 shares × $4.80/share.

10 Cash 180,000


Issued common shares; 50,000 shares × $3.60/share.

15 Land 186,000

Cash 66,000

Notes Payable 120,000

Purchased land in exchange for cash and a note.

20 Cash 84,600



24 Cash Dividends (or Retained Earnings) 36,480



Declared dividends; 16,000 preferred shares × $0.60 = $9,600.

31 Cash 900,000

Revenues 900,000



To record revenues.

31 Expenses 300,000

Cash 300,000

To record expenses.




31 Retained Earnings* 36,480


To record closing of dividends to retained earnings

(*or no entry if on Oct. 24 it was debited to Retained Earnings).




Part B

EARTH STAR DIAMONDS INC.

Balance Sheet

October 31, 2017

Assets

Current assets:

Cash $803,400


Land 186,000


Liabilities

Current liabilities

Dividends payable $ 36,480


Long term note payable 120,000

Total liabilities $156,480

Equity


Preferred shares, $0.60 cumulative,


16,000 shares issued and outstanding: $ 89,4001

Common shares,




50,000 shares issued and outstanding: 180,000





Calculations:


Oct. 1 Issued 1,000 shares (1,000 x $4.80) 1,000 $4,800

Oct. 20 Issued 15,000 shares 15,000 84,600

Totals 16,000 $89,400

2. Retained Earnings: Dollars

Oct. 24 Dividends $(36,480)

Oct. 31 Profit 600,000

Totals $563,520




127,650 + 44,500 = 172,150 ending shares

(127,650 + 172,150)/ 2=149,900 average shares outstanding

$3,222,850/ 149,900= $21.50 book value

The book value was $21.50 on December 31, 2017 and the market value of $32.50 is an indication that the shareholders are willing to pay more for the shares, anticipating higher dividends or growth in the company. If the marketing plan does not work out, the market value could quickly drop below the book value amount of $21.50. Market values of a firm’s shares are typically higher than the book value, as investors take into consideration a variety of factors that go beyond reported net assets, such as revenue growth, cash flow, profitability, as well as current and future market conditions.



PROBLEMS

Problem 12-1A (40 minutes)

SASSY PHARMACEUTICALS INC.

Balance Sheet

March 31, 2017

Assets

Current assets

Cash $ 28,800

Accounts receivable $67,200

Less: Allowance for doubtful accounts 3,600 63,600

Prepaid rent 55,200

Total current assets $147,600

Property, plant and equipment

Vehicles $ 81,600

Less: Accumulated depreciation, vehicles 62,400 $ 19,200

Equipment $468,000

Less: Accumulated depreciation, equipment 148,800 319,200


Intangible assets

Patent $115,200

Less: Accumulated amortization, patent 50,400 64,800


Liabilities

Current liabilities




Advertising payable 3,000

Income tax payable 55,200

Unearned revenues 27,600

Current portion of notes payable 60,000

Total current liabilities $166,200

Non-Current liabilities

Notes payable, less $60,000 current portion 84,000


Equity

Contributed capital

Common shares, 100,000 shares authorized,

25,000 shares issued $240,000

Retained earnings* 60,600*



*Calculation: 550,800 – (250,200 + 240,000) = 60,600

Problem 12-1A (concluded)

Analysis component:

1. 45.42% (250,200/550,800 × 100)

2. 54.58% (100 – 45.42)

3. Assuming that 37% of the company’s assets were financed by debt at March 31, 2016, the balance sheet has not been strengthened over the current year.




Retained earnings December 31, 2017 $558,608

Reductions in retained earnings due to transactions:

Cash dividends declared:

March 16, on 96,000 shares (96,000 × $0.20) $ 19,200

June 15, on 96,000 shares 19,200

Sept. 5, on 96,000 shares 19,200

Nov. 22, on 115,200 shares (115,200 × $0.20) 23,040 80,640

Less: Retained earnings December 31, 2018 459,600

Loss $ 18,368




2017

Apr. 1 Preferred Shares 240,000


To record the conversion of 1,000 preferred /

shares into 8,000 common shares;

$600,000 ÷ 2,500 shares = $240 average issue

price per preferred share; $240 x 1,000 = $240,000

(or 1,000/2,500 × $600,000 = $240,000).

Immediately after the conversion of the preferred shares, the equity section would still show 2,500 preferred shares authorized, but only 1,500 shares issued and outstanding. The amount of preferred shares would change from $600,000 to $360,000. Common shares would still show unlimited shares authorized, and 48,000 shares issued and outstanding. The amount of common shares would be $1,200,000 instead of $960,000. Retained earnings would not be affected. Total equity also would not be affected because $240,000 has simply shifted from the preferred shares section to the common shares section.

Analysis component:

As a result of the conversion, a smaller total dividend would be paid to preferred shares and a larger total dividend would be paid to common shares. However, as a common shareholder, you would not want the conversion of preferred shares to take place before the dividend. The reason is that the conversion increases the number of common shares outstanding by 8,000 and the dividend per share of common would be smaller. Even though there is more cash left over for the common shareholders after the conversion, the dividend per common share is less because there are more common shares dividing the cash. Before the conversion, there are 2,500 shares of $17 preferred. Therefore, $42,500 of the $720,000 paid out in dividends goes to the preferred shareholders. If the remaining $677,500 is divided by 40,000 common shares outstanding, the common dividend per share is $16.94. However, after the conversion, $25,500 ($17 x 1,500) of the $720,000 paid out in dividends goes to the 1,500 shares of $17 preferred, and the remaining $694,500 is divided between the 48,000 common shares outstanding. This reduces the dividend per share to $14.47.




1. $540,000/$18 per share = 30,000 shares

2. 325,000 shares × $9.60 per share = $3,120,000

3. $540,000 + $3,120,000 = $3,660,000

4. $3,660,000 – $3,468,000 = $192,000 Deficit

5. 384,000 Beginning R/E Balance + 192,000 Ending Deficit Balance = 576,000 Loss

6. a) $3.00/share × 30,000 shares = $90,000 to preferred shareholders

b) $120,000 – $90,000 paid to preferred shareholders = $30,000 to common shareholders

7. a) $90,000/30,000 shares = $3.00/share

b) $30,000/325,000 shares = $.0923/share

8. No, because the preferred shares are non-cumulative.

9. Retained Earnings result when cumulative net earnings are greater than cumulative losses + dividends. A deficit results when cumulative earnings are less than cumulative losses and dividends.

10. Dividends in arrears represent undeclared dividends that must be paid to preferred shareholders before any dividends are given to common shareholders but only if dividends are declared. Dividends payable, in contrast, are dividends that have been declared but not yet paid.




Part A – Non-cumulative (maximum annual dividend: 45,000 x $4.48 = $201,600)

1.

YearPreferred Dividends Common Dividends

Total Dividends

2015 $160,000 0 $ 160,000

2016 201,600 $198,400 400,000

2017 201,600 358,400 560,000

Total for three years $563,200 $556,800 $1,120,000

2. Preferred Shares: $201,600/45,000 shares = $4.48 per share

Common Shares: $358,400/80,000 shares = $4.48 per share

Part B — Cumulative

1.

YearPreferred Dividends Common Dividends

Total Dividends

2015 $160,000 0 $ 160,000

2016 201,600 + 41,600 = 243,200

$156,800 400,000

2017 201,600 358,400 560,000

Total for three years $604,800 $515,200 $1,120,000



2. Preferred Shares: $201,600/45,000 shares = $4.48 per share

Common Shares: $358,400/80,000 shares = $4.48 per share

Analysis component:

Cumulative preferred shares would have a greater market value than non-cumulative because undeclared dividends are never lost on cumulative preferred shares whereas undeclared dividends on non-cumulative shares are lost. Therefore, the potential return to the shareholder on cumulative preferred shares would be higher.




Part 1. Journal entries:

2018

Jan. 5 Cash Dividends or Retained Earnings .............. 64,000

Common Dividend Payable............................. 64,000

Declared dividend on 20,000 outstanding shares.

Feb. 28 Common Dividend Payable...................................... 64,000

Cash.................................................................. 64,000

Paid cash dividend.

July 6 Cash (750 × $38.40)................................................... 28,800

Common shares............................................... 28,800


Aug. 22 Cash (1,250 × $27.20)................................................ 34,000

Common shares............................................... 34,000


Sept. 5 Cash Dividends or Retained Earnings............... 70,400



Oct. 28 Common Dividend Payable...................................... 70,400

Cash.................................................................... 70,400

Paid cash dividend.



Dec. 31 Income Summary...................................................... 347,200

Retained Earnings............................................. 347,200

Closed the Income Summary account.

31 Retained Earnings.................................................... 134,400

Cash Dividends.................................................. 134,400

Closed the cash dividend account (Note: No entry is required

if Retained Earnings was debited in the Sept. 5 entry and Jan. 5 entry).




Part 2

UMAMI SUSTAINABLE SEAFOOD INC.



Common Shares

Retained Earnings

Total Equity

Balance, January 1 $ 368,000 $ 216,000 $ 584,000

Issuance of shares 62,800 62,800

Profit (loss) 347,200 347,200

Dividends (134,400) (134,400)

Balance, December 31 $ 430,800 $ 428,800 $ 859,600

Part 3

UMAMI SUSTAINABLE SEAFOOD INC.


December 31, 2018

Contributed capital:

Common shares, unlimited shares authorized, 22,0001 shares issued

and outstanding .................................................................. $430,8001

Retained earnings ..................................................................... 428,800

Total equity ................................................................................ $859,600



Calculations:



July 6 Issued 750 shares (750 x $38.40) 750 28,800

Aug. 22 Issued 1,250 shares (1,250 x $27.20) 1,250 34,000

Totals 22,000 $430,800

Analysis component:

The relationship between assets and retained earnings is that retained earnings represents how much of the assets are financed by the accumulated profits less losses less distributions of dividends. In other words, retained earnings is a component of equity and we know that assets are financed in part by equity. Using the information in Part (3) above for Umami Sustainable Seafood Inc., we know that $428,800 of the assets are financed by retained earnings as at December 31, 2018.




Part 1

2017

Jan. 12 Cash 192,000


To record issuance of shares.

20 Organization Expenses (or various other expenses) 36,000


To record issuance of shares in exchange for organization efforts.

31 Land 360,000

Building 480,000

Equipment 48,000


To record exchange of shares for PPE assets.

Mar. 4 Equipment 8,160

Cash 8,160

To record purchase of equipment.


Income Summary


96,000

2018

Jan. 4 Cash 360,000




To record issuance of preferred shares.

Dec. 31 Income Summary 216,000



2019

Dec. 4 Retained Earnings or Cash Dividends 87,120



To record declaration of dividends; 126,000 C/S × $0.12 = 15,120; 5,000 P/S × $14.40 = 72,000.

18 Preferred Dividends Payable 72,000


Cash 87,120

To record the payment of dividends.



Problem 12-7A (continued)



To close the cash dividends account (assuming the

Cash Dividends account was debited on December 4).



To close the income summary account.

Part 2

HAMMOND MANUFACTURING INC.



Preferred Shares

Common Shares

Retained

Earnings

Total Equity

Balance, January 1 $360,000$1,116,00

0$120,00

0$1,596,00

0


Profit (loss) 192,000 192,000

Dividends (87,120) (87,120)

Balance, December 31$360,000 $1,116,00

0$224,88

0$1,700,88

0





Part 3

HAMMOND MANUFACTURING INC.Equity Section of the Balance Sheet

December 31, 2019


Preferred shares, $14.40 noncumulative, 100,000 shares

authorized, 5,000 shares issued & outstanding $ 360,000

Common shares, unlimited shares

authorized, 126,0001 shares issued and outstanding 1,116,0001



Total equity $1,700,880

Calculations:

1. Common Shares:

2017 Shares Dollars

Jan. 12 Issued 40,000 shares (40,000 x $4.80) 40,000 $ 192,000

20 Issued 6,000 shares 6,000 36,000

31 Issued 80,000 shares 80,000 888,000

Totals 126,000 $1,116,000

Analysis component:

2017 2018 2019

Net assets

$192,000 + $36,000 + $888,000 – $96,000 =

$1,020,000

$1,020,000 + $360,000 + $216,000 = $1,596,000

$1,596,000 – $87,120 + $192,000 = $1,700,880

Trend F



(F or U)

The trend is favourable as net assets (aka equity) is increasing.




1.

2017

Jan. 1 Cash 319,200


Issued 30,000 common shares; 30,000 x $10.64.


Preferred Dividend Payable 126,000


Declared dividend on preferred shares

(20,000 x $2.10 x 3 years) and common

shares (231,000 – 126,000).

Feb. 28 Preferred Dividend Payable 126,000


Cash 231,000

Paid cash dividends.

July 1 Cash 156,800


Issued 7,000 preferred shares

(156,800 ÷ $22.40 = 7,000 shares).





Closed the dividend account (assuming Retained

Earnings was not debited directly on the January

5 declaration date).



To close profit to retained earnings.



Problem 12-8A (continued)

2018

Sept. 5 Cash Dividends or Retained Earnings 203,700



Declared dividend on preferred shares

($2.10 × 27,000 = 56,700) and common shares

($1.40 × 105,000 = 147,000).

Oct. 28 Preferred Dividend Payable 56,700


Cash 203,700

Paid cash dividends declared.



Closed the dividend account (assuming Retained

Earnings was not debited directly on the September

5 declaration date).




2.

Opening balance (Jan 1, 2018) of retained earnings = $378,000 + 576,800 -



231,000

= $723,800

TACTEX CONTROLS INC.



Preferred

SharesCommon Shares

Retained Earnings

Total Equity

Balance, January 1$548,80

0$1,054,20

0$

723,800$2,326,80

0


Profit (loss) 543,200 543,200

Dividends (203,700) (203,700)

Balance, December 31$548,80

0$1,054,20

0$1,063,30

0$2,666,30

0





3.

TACTEX CONTROLS INC.


December 31, 2018


Preferred shares, $2.10 cumulative, unlimited shares authorized,

27,000 shares issued and outstanding $ 548,800

Common shares, unlimited shares authorized

105,000 shares issued and outstanding

1,054,200


Retained earnings 1,063,300


Calculations:


2017


July 1 Issued 7,000 shares 7,000 156,800

Totals 27,000 $548,800

2. Common Shares:

2017

Jan. 1 Balance brought forward 75,000 $ 735,000

Jan. 1 Issued 30,000 shares (30,000 x $10.64) 30,000 319,200

Totals 105,000 $1,054,200



ALTERNATE PROBLEMSProblem 12-1B (40 minutes)

MALTA INDUSTRIES INC.

Balance Sheet

October 31, 2017

Assets

Current assets:

Cash $ 497,000

Accounts receivable 315,000

Office supplies 119,000

Prepaid insurance 20,400


Property, plant, and equipment:

Land $1,400,000

Building $4,025,000

Less: Accumulated depreciation 1,166,200 2,858,800

Machinery $2,240,000

Less: Accumulated depreciation 1,068,200 1,171,800

Total property, plant and equipment 5,430,600

Total assets $6,382,000

Liabilities

Current liabilities:


Wages payable 156,000

Unearned fees 33,600



Total current liabilities $ 410,800


Long term liabilities (due in 2021) 770,000

Total liabilities $1,180,800

Equity


Preferred Shares, $2.10 non-cumulative,

unlimited shares authorized,

30,000 shares issued and outstanding $1,440,0001

Common Shares, unlimited shares authorized,

50,000 shares issued and outstanding 2,240,0002


Retained earnings 1,521,2003

Total equity 5,201,200

Total liabilities and equity $6,382,000

(calculations for 1, 2, and 3 are on the next page)



Problem 12-1B (concluded)

Calculations:

1. 30,000 preferred shares × $48/share = $1,440,000

2. 50,000 common shares × $44.80/share = $2,240,000

3. $6,382,000 Total assets – $1,180,800 Total liabilities – $3,680,000 Total contributed capital = $1,521,200 Retained earnings



Problem 12-2B (20 minutes)

Retained earnings December 31, 2017 $1,176,432

Reductions in retained earnings due to transactions:

Cash dividends declared:

Feb. 11, on 175,000 shares (175,000 × $0.30) $52,500

May 24, on 175,000 shares 52,500

Aug. 13, on 182,500 shares (182,500 × $0.30) 54,750

Dec. 12, on 192,500 shares (192,500 × $0.30) 57,750 217,500

Less: Retained earnings December 31, 2018 1,320,300

Profit $ 361,368


2017

Dec. 1 Preferred Shares 240,000


To record the conversion of 1,000 preferred

shares into 8,000 common shares;

$480,000 ÷ 2,000 shares = $240 average issue

price per preferred share; $240 x 1,000 = $240,000

(or 1,000/2,000 × $480,000 = $240,000).

Immediately after the conversion of preferred shares, the equity section would still show 2,000 shares of preferred shares authorized, but only 1,000 shares issued and outstanding. The amount of preferred shares would change from $480,000 to $240,000. Common shares would still show unlimited shares authorized, and 68,000 shares issued. The amount of common shares would be $1,680,000 instead of $1,440,000. Retained earnings would not be affected. Total equity also would not be affected because $240,000 has simply shifted from the preferred share section to the common share section.



Analysis component:

As a common shareholder, you would not want the conversion of preferred shares to take place. As a result of the conversion, a smaller total dividend would be paid to preferred shares and a larger total dividend would be paid to common shares. However, the dividend per common share is less because there are more common shares dividing the cash. Before the conversion, there are 2,000 shares of $13.20 preferred. Therefore, $26,400 of the $584,400 paid out in dividends goes to the preferred shareholders. If the remaining $558,000 is divided by 60,000 shares of common shares outstanding, the common dividend per share is $9.30. However, after the conversion, $13,200 of the $584,400 paid out in dividends goes to the 1,000 shares of $13.20 preferred, and the remaining $571,200 is divided between the 68,000 common shares outstanding. This reduces the common dividend per share to $8.40.




1. A = $12/share × 45,000 shares = $540,000

2. B = $2,280,000/$60 per share = 38,000 shares

3. C = 265,000 shares × $3.00/share = $795,000

4. D = $540,000 + $2,280,000 + $795,000 = $3,615,000

5. E = $1,500,000 + $1,050,000 + $780,000 – $1,320,000 – $720,000 = $1,290,000

6. F = $3,615,000 + $1,290,000 = $4,905,000

7. 3 years (2015, 2016 2017) × ($4.80 per share × 45,000 shares) = $648,000


1.

Year

Dividends Declared

and Paid

Preferred

Dividends

Common

Dividends

2016 $360,000 $288,000 $ 72,000

2017 60,000 60,000 0

2018 150,000 150,000 0



2019 $900,000 $654,000 $246,000

2.

Year

Dividends Declared

and Paid

Preferred

Dividends

Common

Dividends

2016 $360,000 $288,000 $ 72,000

2017 60,000 60,000 0

2018 150,000 150,000 0

2019 $900,000 $288,000 $612,000




Part 1. Journal entries:

Mar. 2 Cash Dividends or Retained Earnings................... 90,000



31 Common Dividend Payable...................................... 90,000

Cash.................................................................. 90,000

Paid cash dividend.

Nov. 11 Cash (12,000 × $7.80)................................................ 93,600

Common shares,.............................................. 93,600


25 Cash (8,000 × $5.70).................................................. 45,600

Common shares..................................................... 45,600


Dec. 1 Cash Dividends or Retained Earnings.................... 180,000


Declared dividend on 120,000 outstanding shares; 120,000 × $1.50 = $180,000.

31 Income Summary...................................................... 321,600

Retained Earnings............................................ 321,600


31 Retained Earnings.................................................... 270,000

Cash Dividends................................................ 270,000

Closed the cash dividend account (assuming that

Cash Dividends was debited on March 2 and December 1).



Problem 12-6B (continued)

Part 2

QUICKSTREAM INC.



Common Shares


Balance, January 1 $480,000 $648,000 $1,128,000

Issuance of shares 139,200 139,200

Profit (loss) 321,600 321,600

Dividends (270,000) (270,000)

Balance, December 31 $619,200 $699,600 $1,318,800

Part 3

QUICKSTREAM INC.


December 31, 2018


Common shares, unlimited shares authorized, 120,0001 shares issued

and outstanding ................................................................. $ 619,2001

Retained earnings ..................................................................... 699,600

Total equity ................................................................................ $1,318,800

Calculations:





Nov. 11 Issued 12,000 shares (12,000 x $7.80) 12,000 93,600

25 Issued 8,000 shares (8,000 x $5.70) 8,000 45,600

Totals 120,000 $619,200

Analysis component:

$1,318,800 of Quickstream Inc.’s assets at December 31, 2018 are financed by common equity ($619,200 contributed capital and $699,600 retained earnings). Other sources of financing that are available are from debt (liabilities) and from investment by preferred shareholders (preferred shareholders’ contributed capital).




Part 1

2015

Feb. 5 Cash...................................................................... 1,680,000

Common Shares.......................................... 1,680,000

Issued common shares; 70,000 × $24

28 Organization Exp. (or other various exp.)......... 96,000

Common Shares.......................................... 96,000

Issued common shares to corporation’s promoters.

Mar. 3 Land....................................................................... 192,000

Buildings............................................................... 504,000

Machinery............................................................. 372,000

Common shares.......................................... 1,068,000

Issued common shares for in exchange land, buildings, and machinery.

Dec. 31 Retained Earnings................................................ 64,800

Income Summary........................................ 64,800


2016

Jan. 28 Cash...................................................................... 960,000

Preferred Shares......................................... 960,000

Issued preferred shares; 4,000 × $240

Dec. 31 Income Summary................................................. 235,200

Retained Earnings....................................... 235,200





2017

Jan. 1 Cash Dividends or Retained Earnings...................... 152,520

Preferred Dividend Payable.............................. 96,000

Common Dividend Payable............................... 56,520

Preferred dividend = 4,000 × $24 = 96,000,

No. of common shares = 70,000 + 3,750 +

44,000 = 117,750

Common dividend = $0.48 × 117,750 = $56,520

Feb. 5 Preferred Dividend Payable....................................... 96,000

Common Dividend Payable........................................ 56,520

Cash.................................................................... 152,520

Paid dividends.

Dec. 31 Retained Earnings...................................................... 152,520

Cash Dividends.................................................. 152,520

Closed dividends (assuming Cash Dividends was debited on the January 1 declaration date).

31 Income Summary........................................................ 381,600

Retained Earnings.............................................. 381,600


Part 2

LABTECH PHARMACY INC.



Preferred Shares

Common Shares


Balance, January 1 $960,000 $2,844,000 $170,400 $3,974,400Solutions Manual to accompany Fundamental Accounting Principles, 15th Canadian Edition. © 2016

McGraw-Hill Education Ltd. 12-88



Profit (loss) 381,600 381,600

Dividends (152,520) (152,520)

Balance, December 31 $960,000 $2,844,000 $399,480 $4,203,480




Part 3

LABTECH PHARMACY INC.


December 31, 2017


Preferred, $24, noncumulative, 100,000 shares

authorized, 4,000 issued and outstanding............................ $ 960,000


117,750 shares issued and outstanding ............................... 2,844,000

Total contributed capital............................................................. $3,804,000

Retained earnings ......................................................................... 399,480

Total equity .................................................................................... $4,203,480

Calculations:


2015

Feb. 5 Issued 70,000 shares 70,000 $1,680,000

28 Issued 3,750 shares 3,750 96,000

Mar. 3 Issued 44,000 shares 44,000 1,068,000

Totals 117,750 $2,844,000



Analysis component:

2015 2016 2017

Net Assets = A-L or E $1,680,000 + $96,000 + $1,068,000 - $64,800 = $2,779,200

$2,779,200 + $960,000 + $235,200 = $3,974,400

$4,203,480 (Total Equity from Part 3)

The trend in terms of the net assets held by Labtech Pharmacy Inc. is favourable given that it has increased from 2015 to 2017.




1.

2016

Jan. 1 Cash……………………………………………………………. 570,000


Issued 50,000 common shares; 50,000 x $11.40.




Declared dividend on preferred shares (25,000 x $1.80 = 45,000) and common shares (191,250 – 45,000 = 146,250).

Feb. 28 Preferred Dividend Payable 45,000


Cash 191,250

Paid cash dividends.

July 1 Cash 486,000


Issued 15,000 preferred shares

(486,000 ÷ $32.40 = 15,000 preferred shares).



To close cash dividends (assuming Cash Dividend was debited on January 5, the declaration date).






2017

Sept. 5 Cash Dividends or Retained Earnings 263,250

Preferred Dividend Payable ($1.80 × 40,000) 72,000

Common Dividend Payable ($0.90 × 212,500) 191,250

Declared dividend on preferred and common shares.

Oct. 28 Preferred Dividend Payable 72,000


Cash 263,250

Paid cash dividends declared.






Closed the dividend account (assuming Cash Dividends was debited on September 5).



Closed the Income Summary account (loss).

2.

PACE OIL & GAS CORP.



Preferred Shares

Common Shares

Retained Earnings

Total Equity

Balance, January 1$1,266,00

0$2,325,00

0$1,257,75

0$4,848,75

0

Issuance of shares* -0- -0- -0-

Profit (loss) (240,000) (240,000)

Dividends (263,250) (263,250)

Balance, December 31$1,266,00

0$2,325,00

0$

754,500$4,345,50

0

*NOTE: Because no shares were issued during the year ended December 31, 2017, the ‘Issuance of shares’ line in the Statement of Changes in Equity could be omitted.

3.



PACE OIL & GAS CORP.


December 31, 2017


Preferred shares, $1.80 noncumulative, unlimited shares authorized

40,000** shares issued and outstanding $1,266,000**


212,500** shares issued and outstanding 2,325,000**




**See Calculations next page.




Calculations:


Jan. 1 Balance brought forward 25,000 $ 780,000

July 1 Issued 15,000 shares 15,000 486,000

Totals 40,000 $1,266,000


Jan. 1 Balance brought forward 162,500 $1,755,000

1 Issued 50,000 shares (50,000 x $11.40) 50,000 570,000

Totals 212,500 $2,325,000



ANALYTICAL & REVIEW PROBLEMS

A&R Problem 12-1

1.

For the Years Ended December 31

Dec. 31/18 Dec. 31/17 Dec. 31/16

Net sales $5,000,000 $4,000,000 $3,000,000

Cost of goods sold 3,000,000 2,400,000 1,650,000

Gross profit $2,000,000 $1,600,000 $1,350,000

Operating expenses 1,400,000 1,300,000 900,000

Operating profit $ 600,000 $ 300,000 $ 450,000

Other revenues (expenses) (200,000) (220,000) 50,000

Profit before income tax $ 400,000 $80,000 $ 500,000

Income tax expense 80,000 16,000 100,000

Profit $ 320,000 $ 64,000 $ 400,000

2, 3, & 4.

Dec. 31/18 Dec. 31/17 Dec. 31/16


Preferred shares, $2 noncumulative,


20,000 issued & outstanding

Common shares

500,000 shares authorized

100,000 issued & outstanding

Total contributed capital

$ 400,000

550,000

$ 950,000

$ 400,000

550,000

$ 950,000

$ 400,000

550,000

$ 950,000

Retained earnings 684,000 364,000 300,000



Total equity $1,634,000 $1,314,000 $1,250,000

Analysis component:

2018 2017 2016

Liabilities $1,123,200 $ 936,000 $ 900,000

Equity 1,634,000 1,314,000 1,250,000

Total Assets $2,757,200 $2,250,000 $2,150,000

Liabilities/Total Assets 40.74% 41.60% 41.86%

Although liabilities are increasing in total they are decreasing slightly as a percentage of total assets (which is the same as total liabilities and equity). This indicates that the balance sheet has been strengthened from 2016 to 2018. A balance sheet is said to be strengthened when liabilities (and therefore the related risk) are decreasing.



ETHICS CHALLENGE

EC 12-1

It appears that Jack may be in violation of copyright laws. This is both a legal issue and an ethical issue. To copy someone else’s work is ethically wrong. To incorporate as a means of protection against normal business risk is a well-accepted practice. The obvious intent here, however, is to use the corporate shell as a means of limiting any legitimate claim that Corel might have to Jack and Bill’s assets. Jack is recommending incorporation for deceptive purposes and Bill should hold his moral ground on this issue.

FOCUS ON FINANCIAL STATEMENTS

FFS 12-1

BowTie Fishing Expeditions Corp.


For Month Ended March 31, 2017

Preferred Shares

Common Shares

Retained Earning

sTotal

Equity

Balance, March 1 $ -0- $ -0- $ -0- $ -0-

Issuance of shares 42,000 150,000 192,000

Profit (loss) 190,000 190,000

Dividends (45,000) (45,000)

Balance, March 31 $42,000 $150,000 $145,000 $337,000



FFS 12-1 (continued) BowTie Fishing Expeditions Corp.

Balance Sheet

March 31, 2017

Assets

Current assets:

Cash $ 15,000

Accounts receivable $ 36,000

Less: Allowance for doubtful accounts 1,200 34,800

Prepaid rent 9,000



Land $105,000

Building $148,600


Equipment $140,000


Furniture $ 75,000



Intangible assets:

Patent

Less: Accumulated amortization …………………….

$14,000

2,000 12,000


Liabilities

Current liabilities:




Current portion of long-term notes payable 30,000

Customer deposits 28,000

Dividends payable 45,000

Estimated warranty liabilities 3,400

Total current liabilities $123,400


Notes payable, less $30,000 current portion 60,000


Equity


Preferred shares, $2, cumulative,

Authorized: 30,000 shares

Issued and outstanding: 10,000 shares $ 42,000

Common shares,

Authorized: Unlimited

Issued and outstanding: 50,000 shares 150,000







FFS 12-1 (concluded)

Analysis component:

1. 337,000 ÷ 520,400 x 100 = 65%

2. 183,400 ÷ 520,400 x 100 = 35%

3. At March 31, 2017, 35.24% ($183,400/$520,400 × 100) of BowTie’s assets were financed by debt. Therefore, given that 30% of the assets were financed by debt at March 31, 2016, the risk associated with debt financing has increased because of the increase in debt as a percentage of assets (the balance sheet has been weakened as opposed to strengthened).

4. (150,000 + 145,000 = 295,000)/520,400 x 100 = 57%

5. 42,000/520,400 x 100 = 8%

FFS 12-2

1. 2014: $0.20/share × 1,164,669,608 common shares = $232,933,922;

2013: $0.50/share x 1,164,652,426 common shares = $582,326,213.

2. Dividends are a distribution of earnings to the shareholders (or owners) of the corporation. Dividends cause equity to decrease.

3. Barrick Gold has an unlimited number of common shares available for issue at December 31, 2014.

4. Although Barrick Gold has three types of preferred shares, none were issued and outstanding as at December 31, 2014.

5. The deficit of $10,739 million at January 1, 2014 means that the Retained Earnings account had a debit balance. A debit balance occurs in Retained earnings when debits exceed credits which may have occurred because of large losses.



CRITICAL THINKING MINI CASE

CT 12-1

Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity.

Problem:

— how to best finance the purchase of new equipment

Goal:*

— from the perspective of the manager of Jones Inc., the financing option with the lowest cost is the best option (the shareholders of Jones Inc. would want the option that not only has the lowest cost but that does not dilute the ownership of the common shareholders)

— another consideration would be to minimize risk to Jones Inc.

Principles:

— must comply with GAAP (disclose method of financing, for example)

Facts:

— as per the mini case study

— also, the following calculations can be derived from the information provided:

Borrow

Issue $1 cumulative

preferred shares

Profit before interest and tax $80,000 $80,000

Interest expense ($100,000 x 6%) 6,000 —

Profit before tax $74,000 $80,000

Income tax ($74,000 x 25%; $80,000 x 25%) 18,500 20,000

Profit $55,500 $60,000



Less dividends (6,000 x $1) — 6,000

Net earnings applicable to common shareholders

$55,500 $54,000



CT 12-1 (concluded)

Conclusions/Consequences:

— Is the primary goal risk minimization (issue shares) or minimize cost (borrow)?

— Common shareholders will want to maximize their earnings which points to borrowing but borrowing increases risk because principal and interest payments must be made; potential future creditors are sensitive to risk.

— Finance manager may be compensated based on performance so will prefer borrowing option.

— Alternatively, the finance manager could make a case to the board of directors to avoid the declaration of dividends in which case issuing preferred shares would generate the highest earnings applicable to common shareholders ($60,000 vs. $55,500) but this may have negative implications for future issuance of shares.

*The goal is highly dependent on “perspective.”


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