TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
1) A corporation is a separate legal entity apart from its owners.
1) _______
2) Shareholders in a corporation are personally liable for the debts of the
corporation.
2) _______
3) All shares issued by a corporation have voting rights.
3) _______
4) Double taxation refers to the fact that a corporation pays tax on its
taxable earnings and the shareholder also pays personal tax on all of the
corporation's taxable income.
4) _______
5) It is easier to achieve continuous life using the corporate structure for an
organization.
5) _______
6) Unlimited liability is one of the advantages of the corporate structure
for an organization.
6) _______
7) Mutual agency is one of the disadvantages of the corporate structure for
an organization.
7) _______
8) The most that a shareholder can lose on an investment in a corporation's
shares is the cost of the investment.
8) _______
9) Corporations pay the same taxes as partnerships and proprietorships.
9) _______
10) Retained earnings is debited to transfer net income to the retained
earnings account during the closing process.
10) ______
11) Retained earnings represents investments by the shareholders of the
corporation.
11) ______
12) A debit balance in retained earnings is referred to as a deficit.
12) ______
13) Dividends distributed increase the assets and decrease the retained
earnings of the business.
13) ______
14) No-par-value shares are shares of stock that do not have a value
assigned to them by the articles of incorporation.
14) ______
15) Preferred shares normally have no voting rights.
15) ______
16) When a corporation issues shares in exchange for noncash assets, the
noncash assets are debited for their book value.
16) ______
17) The shareholders' equity section of a balance sheet lists common shares
first, followed by preferred shares second, and retained earnings last.
17) ______
18) Organization costs are intangible assets classified with property, plant
and equipment.
18) ______
19) Increases in contributed capital and in retained earnings come from
producing revenue.
19) ______
20) Cash dividends decrease both the assets and the retained earnings of a
corporation.
20) ______
21) The policy-making body of a corporation is called the board of
directors.
21) ______
22) The entry on the payment date for a cash dividend involves a debit to
retained earnings and a credit to cash.
22) ______
23) Dividends become a liability of the corporation on the declaration date.
23) ______
24) Dividends in arrears on cumulative preferred shares are not a liability to
the corporation.
24) ______
25) Dividends payable are normally a long-term liability.
25) ______
26) In order to receive a cash dividend, an investor must own the share by
the payment date.
26) ______
27) The declaration date and the payment date of a cash dividend are the
same thing.
27) ______
28) Dividends cannot accumulate for common shares.
28) ______
29) If the preferred shares are not designated as cumulative, the corporation
is obligated to pay any dividends in arrears.
29) ______
30) Convertible preferred shares must be converted into common shares
when the corporation declares the conversion.
30) ______
31) Market value is a term referring to common shares and indicates the
amount for which a person could buy or sell a share.
31) ______
32) If a company has both preferred and common shares outstanding, the
preferred shareholders have the first claim to shareholders' equity.
32) ______
33) Two common profitability measures are rate of return on total assets
and rate of return on common shareholders' equity.
33) ______
34) With respect to share capital, the primary difference between GAAP for
private enterprises and international financial reporting standards
(IFRS) is the required disclosure.
34) ______
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or
answers the question.
35) The document(s) used by a government to grant permission to form a
35) ______
corporation is called (a):
A) articles of incorporation
B) share certificate
C) proxy
D) bylaw agreement
36) All of the following represent advantages of corporations over other
business entities except:
A) ease of transferring ownership
B) continuity of existence
C) unlimited shareholders' liability
D) separate legal entity
36) ______
37) Which of the following statements describing a corporation is true?
A) Shareholders own the business and manage its day-to-day
operations.
B) When ownership of a corporation changes, the corporation
terminates.
C) A corporation is subject to greater governmental regulation than a
proprietorship or a partnership.
D) Shareholders are the creditors of a corporation.
37) ______
38) Which of the following forms of business organizations is a distinct
legal entity?
A) partnership
B) only proprietorship and partnership
C) proprietorship
D) corporation
38) ______
39) Shareholders' liability for corporation debts is generally limited to:
A) total shareholders' equity
B) the cost of their investment
C) the market value of the shares
D) the par value of the shares
39) ______
40) Which of the following is a disadvantage of the corporate form of
business organization?
A) mutual agency
B) difficulty in transferring ownership
C) government regulation
D) limited liability
40) ______
41) Which of the following forms of business organizations terminates
when the ownership structure changes?
A) share capital
B) shareholders' equity
C) partnership
D) corporation
41) ______
42) Share capital represents:
A) retained earnings
B) investments by the creditors of a corporation
C) investments by the shareholders of a corporation
D) capital that the corporation has earned through profitable
operations
42) ______
43) Retained earnings:
A) is classified as an asset on the corporate balance sheet
B) represents investments by the shareholders of the corporation
43) ______
C) is part of contributed capital
D) represents capital earned by profitable operations
44) The owners of a corporation are referred to as:
A) shareholders
B) debtors
C) partners
D) creditors
44) ______
45) All of the following transactions increase shareholders' equity except:
A) declaration of a cash dividend
B) issuance of convertible preferred shares
C) issuance of common shares
D) profitable operations
45) ______
46) A profitable corporation would close out income summary by:
A) debiting income summary and crediting retained earnings
B) debiting income summary and crediting share capital
C) crediting income summary and debiting share capital
D) crediting income summary and debiting retained earnings
46) ______
47) A corporation operating at a loss would close out income summary by:
A) debiting income summary and crediting share capital
B) debiting income summary and crediting retained earnings
C) crediting income summary and debiting retained earnings
D) crediting income summary and debiting share capital
47) ______
48) A debit balance in retained earnings is referred to as a(n):
A) liability
B) normal balance
C) deficit
D) asset
48) ______
49) Cash dividends:
A) increase retained earnings
B) decrease both the assets and the total shareholders' equity of the
corporation
C) increase the assets and decrease the total shareholders' equity of
the corporation
D) do not affect the retained earnings of a corporation
49) ______
50) All of the following are basic rights of a common shareholder except:
A) the right to receive a proportionate share of any dividend
B) the right to vote
C) the right to receive a proportionate share of the corporate assets
prior to the payment of liabilities in liquidation
D) the right to receive a proportionate share of the corporate assets
remaining after the corporation pays its liabilities in liquidation
50) ______
51) Which of the following is a priority granted to preferred shareholders?
A) receiving dividends before common shareholders
B) receiving a guaranteed fixed dollar amount of dividends each year
C) voting for the corporate board of directors
D) receiving assets before creditors if the corporation liquidates
51) ______
52) A corporation may issue:
52) ______
A)
B)
C)
D)
either common shares or preferred shares but not both
common shares but not preferred shares
common shares and preferred shares
preferred shares but not common shares
53) Why might corporations prefer issuing preferred shares to debt?
A) dividends are payable at the discretion of the corporation
B) dividends are tax deductible to the corporation
C) debt payments are payable at the discretion of the corporation
D) interest expense is tax deductible to the corporation
53) ______
54) An owner investment of cash in a corporation increases:
A) assets and increases shareholders' equity
B) assets and increases liabilities
C) assets and decreases shareholders' equity
D) one asset and decreases another asset
54) ______
55) The entry to record the issuance of 5,000 common shares for $12.50 per
share includes a:
A) credit to retained earnings for $62,500
B) debit to retained earnings for $62,500
C) debit to common shares for $62,500
D) debit to cash for $62,500
55) ______
56) The entry to record the issuance of 6,000 common shares for $12.50 per
share includes a:
A) debit to common shares for $75,000
B) credit to retained earnings for $75,000
C) credit to common shares for $75,000
D) credit to cash for $75,000
56) ______
57) The entry to record the issuance of 55,000 common shares at $13.50 per
share includes a:
A) credit to retained earnings $742,500
B) credit to cash for $742,500
C) credit to common shares for $742,500
D) debit to retained earnings for $742,500
57) ______
58) When 35,000 common shares are issued at $16.50 per share, total
contributed capital:
A) increases by $350,000
B) decreases by $577,500
C) increases by $577,500
D) increases by $227,500
58) ______
59) Land is acquired by issuing 500 common shares. The land has a current
market value of $12,000. There is no market value for the common
shares available. The journal entry requires a:
A) debit to cash for $12,000
B) credit to common shares for $12,000
C) credit to retained earnings for $12,000
D) debit to common shares for $12,000
59) ______
60) A corporation issues common shares in exchange for equipment with a
mar ket
value of 60)
$15,000.
This
transacti
on
would:
A)
B)
C)
D)
___
___
increase retained earnings by $15,000
decrease total shareholders' equity by $15,000
increase common shares by $15,000
increase liabilities by $15,000
61) The heading, contributed capital, appears on which section of the
balance sheet?
A) property, plant and equipment
B) current assets
C) long-term liabilities
D) shareholders' equity
61) ______
62) Accounting for the incorporation of an unincorporated going business
involves:
A) leaving the owner equity accounts as is and setting up the
shareholders' equity accounts for the corporation
B) closing the owner equity accounts of the prior entity and setting
up the shareholder equity accounts of the corporation
C) closing the owner equity accounts of the prior entity to the
retained earnings account of the corporation
D) closing the withdrawals accounts to the dividends payable
accounts
62) ______
63) Organization costs appear on which section of the balance sheet?
A) shareholders' equity
B) intangible assets
C) long-term liabilities
D) current assets
63) ______
Table 13-1
The following selected list of accounts with their normal balances was taken from the general
ledger of Grant Corporation as of December 31, 2010:
Cash
Common shares, 100,000 shares authorized, 50,000 shares issued
Retained earnings
Cash dividends payable
Preferred shares, 200,000 shares authorized 100,000 shares issued
$173,500
190,000
131,500
25,000
500,000
64) Refer to Table 13-1. The average issue price of a common share was:
A) $5.00
B) $1.90
C) $3.80
D) $0.95
64) ______
65) Refer to Table 13-1. The average issue price of a preferred share was:
A) $5.00
B) $6.90
C) $3.80
D) $2.50
65) ______
66) Refer to Table 13-1. Which account should be listed first in the
shareholder
s' equity 66)
section?
A) Contributed surplus
C) Common shares
___
___
B) Retained earnings
D) Preferred shares
67) Refer to Table 13-1. The total shareholders' equity as of December 31,
2010 was:
A) $821,500
B) $690,000
C) $881,500
D) $190,000
67) ______
68) Dividends become a liability of the corporation:
A) on the payment date
B) on the day immediately following the date of declaration
C) on the declaration date
D) on the date of record
68) ______
69) The dividends payable liability of the corporation is eliminated:
A) on the day immediately following the date of declaration
B) on the declaration date
C) on the date of record
D) on the payment date
69) ______
70) The entry to record the declaration of a $0.50 per share dividend on
12,500 outstanding common shares requires a:
A) credit to retained earnings for $6,250
B) credit to cash for $6,250
C) debit to retained earnings for $6,250
D) debit to dividends payable for $6,250
70) ______
71) The entry to pay a previously declared dividend of $0.50 per share on
12,500 outstanding common shares requires a:
A) debit to retained earnings for $6,250
B) debit to cash for $6,250
C) credit to dividends payable for $6,250
D) debit to dividends payable for $6,250
71) ______
72) The declaration of a dividend:
A) increases total assets
B) increases total liabilities
C) increases total shareholders' equity
D) reduces total assets
72) ______
73) The payment of a dividend:
A) reduces total shareholders' equity
B) reduces total liabilities
C) has no effect on total assets
D) increases total shareholders' equity
73) ______
74) A dividend is declared by the:
A) corporate controller
C) board of directors
74) ______
B) chief financial officer
D) president of the corporation
75) Dividends on cumulative preferred shares of $2,500 are in arrears for
200 9.
During 75)
2010, the
total
dividend
s
declared
amount
to
$10,000.
There are
6,000
shares of
$1
cumulati
ve
preferred
shares
outstandi
ng and
10,000
common
shares
outstandi
ng. The
total
amount
of
dividend
s payable
to each
class of
shares in
2010
amounts
to:
A)
B)
C)
D)
___
___
$6,000 to preferred, $4,000 to common
$5,000 to preferred, $5,000 to common
$8,500 to preferred, $1,500 to common
$10,000 to preferred, $0 to common
76) Dividends on cumulative preferred shares of $2,500 are in arrears for
2008 and 2009. During 2010, the total dividends declared amount to
$10,000. There are 3,000 shares of $1 cumulative preferred shares
outstanding and 10,000 common shares outstanding. The total amount
of dividends payable to each class of shares in 2010 amounts to:
A) $3,000 to preferred, $7,000 to common
B) $10,000 to preferred, $0 to common
C) $8,000 to preferred, $2,000 to common
D) $5,500 to preferred, $4,500 to common
76) ______
77) Dividends on cumulative preferred shares of $2,500 are in arrears for
2007, 2008, and 2009. During 2010, the total dividends declared amount
to 000.
$10, There
are 3,000 77)
shares of
$1
cumulati
ve
preferred
shares
outstandi
ng and
10,000
common
shares
outstandi
ng. The
total
amount
of
dividend
s payable
to each
class of
shares in
2010
amounts
to:
A)
B)
C)
D)
___
___
$8,000 to preferred, $2,000 to common
$5,500 to preferred, $4,500 to common
$10,000 to preferred, $0 to common
$3,000 to preferred, $7,000 to common
78) Dividends were not declared by Royal Inc. in 2008 or 2009. During
2010, total dividends declared amount to $20,000. There are 6,000 shares
of $1 cumulative preferred shares outstanding and 10,000 common
shares outstanding. The total amount of dividends payable to each class
of shares in 2010 amounts to:
A) $18,000 to preferred, $2,000 to common
B) $10,000 to preferred, $10,000 to common
C) $12,000 to preferred, $8,000 to common
D) $6,000 to preferred, $14,000 to common
78) ______
79) Dividends were not declared by Royal Inc. in 2009. During 2010, total
dividends declared amount to $20,000. There are 6,000 shares of $1
cumulative preferred shares outstanding and 10,000 common shares
outstanding. The total amount of dividends payable to each class of
shares in 2010 amounts to:
A) $12,000 to preferred, $8,000 to common
B) $6,000 to preferred, $14,000 to common
C) $10,000 to preferred, $10,000 to common
D) $18,000 to preferred, $2,000 to common
79) ______
80) During 2010, total dividends declared by Par Corporation amounted to
$29,000. There were 5,000 shares of $2 noncumulative preferred shares
outs ding
tan and
10,000
80)
common
shares
outstandi
ng. No
dividend
s were
declared
in 2008
or 2009.
The total
amount
of
dividend
s payable
to each
class of
shares in
2010
amounte
d to:
A)
B)
C)
D)
___
___
$29,000 to preferred, $0 to common
$0 to preferred, $29,000 to common
$19,000 to preferred, $10,000 to common
$10,000 to preferred, $19,000 to common
81) During 2010, total dividends declared by Par Corporation amounted to
$29,000. There were 5,000 shares of $2 cumulative preferred shares
outstanding and 10,000 common shares outstanding. No dividends
were declared in 2008 or 2009. The total amount of dividends payable to
each class of shares in 2010 amounted to:
A) $10,000 to preferred, $19,000 to common
B) $0 to preferred, $29,000 to common
C) $19,000 to preferred, $10,000 to common
D) $29,000 to preferred, $0 to common
81) ______
82) During 2010, total dividends declared by Jackson Corp. amounted to
$29,000. There were 5,000 shares of $2 cumulative preferred shares
outstanding and 10,000 common shares outstanding. No dividends
were declared in 2009. The total amount of dividends payable to each
class of shares in 2010 amounted to:
A) $10,000 to preferred, $19,000 to common
B) $20,000 to preferred, $9,000 to common
C) $9,000 to preferred, $20,000 to common
D) $29,000 to preferred, $0 to common
82) ______
83) During 2010, total dividends declared by Jackson Corp. amounted to
$29,000. There were 5,000 shares of $2 noncumulative preferred shares
outstanding and 10,000 common shares outstanding. No dividends
were declared in 2009. The total amount of dividends payable to each
class of shares in 2010 amounted to:
A) $29,000 to preferred, $0 to common
83) ______
B) $20,000 to preferred, $9,000 to common
C) $10,000 to preferred, $19,000 to common
D) $9,000 to preferred, $20,000 to common
84) Passed dividends on cumulative preferred shares:
A) are paid after common shareholders receive their dividends
B) are referred to as dividends in arrears
C) remain a liability of the corporation until they are paid
D) are forever lost by the preferred shareholders
84) ______
85) Dividends in arrears:
A) are never reported in the notes to the financial statements
B) are forever lost by the preferred shareholders
C) are passed dividends on cumulative preferred shares
D) are a liability on the balance sheet
85) ______
86) Magic Corp. has 20,000 shares of noncumulative, $5 preferred shares
outstanding as well as 100,000 common shares. The board of directors
have declared and distributed the required dividends for the past three
years, not counting the current year. The board wants to give the
common shareholders a $1.25 dividend per share for the current year.
The total dividends to be declared must be:
A) $225,000
B) $250,000
C) $525,000
D) $125,000
86) ______
87) Newco Corporation has 20,000 shares of cumulative, $5 preferred shares
outstanding as well as 100,000 common shares. As of the beginning of
this fiscal year, there were three years of dividends in arrears on the
preferred shares. The board of directors wants to give the common
shareholders a $1.25 dividend per share. The total dividends to be
declared must be:
A) $400,000
B) $225,000
C) $525,000
D) $200,000
87) ______
88) Resco Corporation has had 10,000 shares of $3, cumulative preferred
shares outstanding as well as 35,000 common shares since it was
incorporated. During the first, second, and third years of operations,
$15,000, $18,000 and $50,000 in dividends, respectively, were paid. The
dividends paid to the common shareholders in year three amounted to:
A) $27,000
B) $18,000
C) $0
D) $30,000
88) ______
89) Resco Corporation has had 10,000 shares of $3, cumulative preferred
shares outstanding as well as 35,000 common shares since it was
incorporated. During the first, second, and third years of operations,
$10,000, $20,000 and $80,000 in dividends, respectively, were paid. The
dividends paid to the common shareholders in year three amounted to:
A) $0
B) $30,000
C) $18,000
D) $20,000
89) ______
Table 13-2
Falcon Corporation has 12,000 shares of $5, noncumulative preferred shares outstanding and
16,000 common shares outstanding. At the end of the current year, Falcon Corporation declares a
dividend of $120,000.
90) Refer to Table 13-2. How is the dividend allocated between preferred
and common shareholders?
A) $40,000 to preferred, $80,000 to common
B) $80,000 to preferred, $40,000 to common
C) $12,000 to preferred, $108,000 to common
D) $60,000 to preferred, $60,000 to common
90) ______
91) Refer to Table 13-2. What is the dividend per share to preferred and
common shareholders?
A) $6.67 to preferred, $1.50 to common
B) $3.75 to preferred, $5.00 to common
C) $1.00 to preferred, $6.75 to common
D) $5.00 to preferred, $3.75 to common
91) ______
Table 13-3
Spencer Corporation has 15,000 shares of $5, cumulative preferred shares outstanding and 25,000
common shares. At the end of the current year, Spencer Corporation declares a dividend of
$120,000. Dividends of $37,500 are in arrears as of January 1 of the current year.
92) Refer to Table 13-3. How is the dividend allocated between preferred
and common shareholders?
A) $112,500 to preferred, $7,500 to common
B) $0 to preferred, $120,000 to common
C) $120,000 to preferred, $0 to common
D) $75,000 to preferred, $45,000 to common
92) ______
93) Refer to Table 13-3. What is the dividend per share to preferred and
common shareholders?
A) $5.00 to preferred, $1.80 to common
B) $7.50 to preferred, $0.30 to common
C) $1.80 to preferred, $5.00 to common
D) $5.00 to preferred, $0 to common
93) ______
94) The following information is available for the Barber Corporation as of
December 31, 2010:
94) ______
Preferred shares, cumulative, $10, 1,000 shares authorized and issued
Common shares, 4,000 shares authorized and issued
Retained earnings
$100,000
400,000
100,000
Barber Corporation did not declare a dividend in 2009 or 2010. The
liquidation value of the preferred shares is $100 per share. Prior to 2009,
there were no dividends in arrears. Compute book value per share for
preferred shares and common shares.
A) $120 for preferred, $120 for common
B) $110 for preferred, $185 for common
C) $100 for preferred, $187.50 for common
D) $120 for preferred, $182.50 for common
95) The following information is available for the Frasier Corporation as of
December 31, 2010:
erred
Pref shares,
$10,
and common shares in total.
cumulati
ve, 1,000
shares
authorize
d and
issued
Common
shares,
6,000
shares
authorize
d and
issued
Retained
earnings
Frasier
Corporat
ion
declared
a
dividend
in 2010
amounti
ng to
$5,000.
No
dividend
s were
declared
in 2009.
The
liquidati
on value
of the
preferred
stock is
$100 per
share.
Prior to
2009,
there
were no
dividend
s in
arrears.
Compute
book
value for
preferred
shares
95) ______
$100,000
500,000
750,000
A)
B)
C)
D)
$125,000 for preferred, $1,225,000 for common
$105,000 for preferred, $1,245,000 for common
$115,000 for preferred, $1,235,000 for common
$120,000 for preferred, $1,230,000 for common
96) For a company that has only common shares outstanding, dividing total
shareholders' equity by the number of shares outstanding determines
the:
A) redemption value per share
B) book value per share
C) liquidation value per share
D) market value per share
96) ______
97) The book value of preferred shares is equal to:
A) liquidation value minus any dividends in arrears
B) market value minus any dividends in arrears
C) liquidation value plus any dividends in arrears
D) market value plus any dividends in arrears
97) ______
Table 13-4
The shareholders' equity section of the balance sheet of Cresco Corporation follows:
Contributed capital:
Preferred shares, cumulative, $3.50, 4,000 shares outstanding,
liquidation value $56 per share
Common shares, 20,000 shares outstanding
Retained earnings
$210,000
397,500
138,250
Note: There are two years dividends in arrears on the preferred shares, including the current
year.
98) Refer to Table 13-4. The book value per share for preferred shares is:
A) $63.00
B) $57.00
C) $59.50
D) $56.00
98) ______
99) Refer to Table 13-4. The book value per share for common shares is:
A) $25.39
B) $26.09
C) $25.89
D) $24.69
99) ______
100) Pratt Corporation's balance sheet for 2010 reveals total shareholders'
equity of $2,500,000. There are 10,000 shares of cumulative, $10
preferred shares outstanding and 50,000 common shares outstanding.
To date, dividends in arrears for the preferred shares amount to $25,000.
The liquidation value of the preferred shares is $105 per share. Book
value per share of common shares is:
A) $29.50
B) $29.00
C) $28.50
D) $28.75
100) _____
101) Cooper Corporation's balance sheet for 2010 reveals total shareholders'
equity of $2,500,000. There are 10,000 shares of noncumulative, $10
preferred shares outstanding and 50,000 common shares outstanding.
The liquidation value of the preferred shares is $105 per share. Book
value per share of common shares is:
A) $28.75
B) $29.50
C) $28.50
D) $29.00
101) _____
102) The ________ measures a company's success in using its assets to earn
inco me for
the
102)
stakehol
ders who
are
financing
the
business.
A) debt-to-equity ratio
C) current ratio
____
_
B) return on assets
D) return on equity
103) The formula for computing return on assets is:
A) (net income plus interest expense)/average total assets
B) (net income plus preferred dividends)/average total assets
C) (net income plus total assets)/average shareholders' equity
D) (net income less total assets)/average shareholders' equity
103) _____
104) The formula for computing return on equity is:
A) (net income less interest expense)/average shareholders' equity
B) (net income plus interest expense)/average common shareholders'
equity
C) (net income less preferred dividends)/average common
shareholders' equity
D) (net income plus preferred dividends)/shareholders' equity at the
end of the period
104) _____
Table 13-5
The following information is available for Jansen Corporation for the current year:
Net income
Preferred dividends
Interest expense
Beginning of year:
Total assets
Total liabilities
Total common shareholders' equity
End of year:
Total assets
Total liabilities
Total common shareholders' equity
$156,000
24,000
17,500
850,000
375,000
395,000
930,000
405,000
435,000
105) Refer to Table 13-5. The return on assets for Jansen Corporation was:
A) 16.8%
B) 18.7%
C) 17.5%
D) 19.5%
105) _____
106) Refer to Table 13-5. The return on equity for Jansen Corporation was:
A) 35.9%
B) 37.6%
C) 30.3%
D) 31.8%
106) _____
Table 13-6
The following selected list of accounts with their normal balances was taken from the general
ledger of Gore Ltd. as of December 31, 2010:
Cash
Common shares, 10,000 shares authorized, 5,000 shares issued
Retained earnings
Cash dividends payable
Preferred shares, 500,000 shares authorized 100,000 shares issued
$199,000
265,000
131,500
20,000
800,000
107) Refer to Table 13-6. The average issue price of a common share was:
A) $30.00
B) $53.00
C) $2.00
D) $20.00
107) _____
108) Refer to Table 13-6. The average issue price of a preferred share was:
A) $8.00
B) $20.00
C) $40.00
D) $1.60
108) _____
109) Refer to Table 13-6. Which account should be listed first in the
shareholders' equity section?
A) Retained earnings
B) Preferred shares
C) Common shares
D) Contributed surplus
109) _____
MATCHING. Choose the item in column 2 that best matches each item in column 1.
Match the following.
110) Documents used by a government to
grant its permission to form a
corporation
A) no-par-value shares
110) _____
B)
preferred shares
111)
Shares that do not have a value
assigned to them by the articles of
i
n
corporation
C)Presid
ent
111)
____
_
D)
shareholders' equity
112) Shares of stock that gives its owners
certain advantages over the common
shareholders.
E)
112) _____
outstanding shares
F)
articles of incorporation
113) Chief operating officer in charge of
managing the day-to-day operations
of a corporation.
G)
113) _____
board of directors
114) Owners' equity of a corporation
114) _____
115) Shares in the hands of shareholders
115) _____
116) Group elected by the shareholders to
set policy for a corporation and to
appoint its officers.
116) _____
117) Amount of shareholders' equity on
the company's books for each share
of its stock.
A) deficit
117) _____
B)
organization costs
118)
Provision in the articles of
incorporation that permits a
corporation to sell a certain number
of shares of stock.
C) book value
118) _____
D)
authorization of shares
E)
119) Debit balance in the retained
earnings account
record date
119) _____
F)
payment date of dividend
120) Net income less preferred dividends
divided by average common
shareholders' equity
G)
120) _____
market value
H)
return on equity
121) The price for which a person could
buy or sell a share
I)
121) _____
return on assets
J)
122) Distribution of equity to the
corporations' shareholders
limited liability
122) _____
K) declaration date of dividend
123) The costs of organizing a corporation,
including legal fees, taxes, and
charges by promoters for selling the
shares.
123) _____
L) dividend
124) No personal obligation of a
shareholder for corporation debts.
The most that a shareholder can lose
on an investment in a corporation's
shares is the cost of the investment.
124) _____
125) The date with respect to a cash
dividend that determines which
shareholder will be receiving the
dividend
125) _____
126) The date with respect to a cash
dividend where the liability is
created and the retained earnings are
reduced
126) _____
127) The date with respect to a cash
dividend where the liability is
reduced and the payment is made to
the shareholder
127) _____
128) The sum of net income plus interest
expense divided by average total
assets
128) _____
129) A corporation's capital that is earned
through profitable operation of the
business
A) cumulative preferred shares
129) _____
B)
retained earnings
130)
Preferred shares whose owners must
receive all dividends in arrears before
the corporation pays dividends to the
common shareholders.
C) common shares
130) _____
D)
liquidation value
131) The most basic form of share capital
131) _____
132) The amount a preferred shareholder
would receive for their shares in the
event the corporation is liquidated
132) _____
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
133) Discuss the characteristics of a corporation. Indicate, wherever appropriate, if the
characteristic is an advantage or a disadvantage of the corporate form of business.
134) Prepare a journal entry for each of the following transactions.
a)
Masters Corporation sells 10,000 common shares for $13.25 per share.
b)
Masters Corporation sells 5,000 shares of $5, cumulative preferred shares for
$55 per share.
c)
Received a building with a market value of $160,000, and issued 6,400
common shares in exchange.
d)
Masters Corporation reports a net income for the current year of $56,000.
Prepare the entry to close the income summary account.
Date
Accounts
Debit
Credit
135) Prepare a journal entry for each of the following transactions.
a)
Struthers Corporation sells 100,000 common shares for $4.50 per share.
b)
Struthers Corporation sells 6,000 shares of $3, cumulative preferred shares
for $70 per share.
c)
Received equipment with a market value of $60,000, and issued 12,400
common shares in exchange.
d)
Struthers Corporation reports a net income for the current year of $241,000.
Prepare the entry to close the income summary account.
Date
Accounts
Debit
Credit
136) Prepare journal entries for the following transactions reported by Evans Corporation
for the month of May:
May
1 account.
Issued 35,000 common shares at $15 per share.
21
Issued 1,400 shares of $5, cumulative preferred shares for a total of
$144,200.
Date
Accounts
Debit
Credit
28
Exchanged 5,000 common shares for a patent valued at $82,000.
31
Jet Corporation reported a net loss for May amounting to $10,500.
Prepare
the entry
to close
the
income
summary
137) From the following alphabetical list of selected accounts taken from the general
ledger of Dorlin Corporation as of December 31, 2010, select the accounts that are
part of shareholders' equity. Then prepare the shareholders' equity section of the
balance sheet on December 31, 2010.
Accounts receivable
Cash dividends payable
Common shares, 20,000 shares outstanding
Inventory
Note payable
Notes receivable
Preferred shares, $10 cumulative,
1,000 shares outstanding
Retained earnings
Unearned revenue
50,000
20,000
550,000
75,000
25,000
20,000
250,000
250,000
15,000
Table 13-7
Masters Inc.
Partial Balance Sheet
December 31, 2010
Shareholders' Equity
Contributed Capital:
Preferred shares, $1.00, 100,000 shares authorized, 20,000
shares issued
Common shares, unlimited number of shares authorized,
100,000 shares issued
Total contributed capital
Retained earnings
Total shareholders' equity
$
100,000
350,000
450,000
170,000
$620,000
138) Refer to Table 13-7. Assume that the preferred shares are not cumulative and that
there have been no dividends declared in 2007, 2008, and 2009. Prepare the journal
entry to record the declaration and payment of a dividend in the total amount of
$25,000, on December 3, 2010. Use separate dividends payable accounts for
preferred and common shares.
139) Refer to Table 13-7. Assume that the preferred shares are cumulative and that there
have been no dividends declared in 2007, 2008 and 2009. Prepare the journal entry
to record the declaration and payment of a dividend in the total amount of $85,000,
on December 3, 2010. Use separate dividends payable accounts for preferred and
common shares.
140) Refer to Table 13-7. Assume that the preferred shares are cumulative and that there
have been no dividends declared in 2008 and 2009. Prepare the journal entry to
record the declaration and payment of a dividend in the total amount of $85,000, on
December 3, 2010. Use separate dividends payable accounts for preferred and
common shares.
141) Refer to Table 13-7. Assume that the preferred shares are cumulative and that there
have been no dividends declared in 2008 and 2009. A dividend in the total amount
of $85,000, was declared and paid on December 3, 2010. What was the dividend
amount per share received by the common shareholders?
142) Refer to Table 13-7. Assume that the preferred shares are not cumulative and that
there have been no dividends declared in 2008 and 2009. A dividend in the total
amount of $85,000, was declared and paid on December 3, 2010. What was the
dividend amount per share received by the common shareholders?
143) Refer to Table 13-7. Assume that the preferred shares are cumulative and that there
have been no dividends declared in 2007, 2008, and 2009. Prepare the journal
entries to record the declaration and payment of a dividend in the total amount of
$25,000, on December 3, 2010. Use separate dividends payable accounts for
preferred and common shares, if required.
144) A section of IRC Incorporated's balance sheet appears as follows:
IRC Incorporated
Partial Balance Sheet
December 31, 2010
Shareholders' Equity
Contributed Capital:
Preferred shares, $4.00, 10,000 shares authorized, 2,000
shares issued
Common shares, unlimited number of shares authorized,
10,000 shares issued
Total contributed capital
Retained earnings
Total shareholders' equity
$
200,000
450,000
650,000
378,000
$1,028,000
a)
How much in dividends must IRC Incorporated declare each year before
the common shareholders receive cash dividends for the year?
b)
Assume $40,000 was paid in dividends in the year 2010. What would be the
breakdown between common and preferred dividends assuming there are no
dividends in arrears?
c)
How would the declaration of a $50,000 dividend affect the shareholders' equity
section of IRC Incorporated's balance sheet?
145) Vitacom Technologies Corp. reports the following shareholders' equity as of
December 31, 2010:
Preferred shares, $5 cumulative, 200,000 shares authorized,
90,000 shares issued
Common shares, 500,000 shares authorized,
200,000 shares issued
Total contributed capital
Retained earnings
Total shareholders' equity
$ 5,400,000
2,750,000
8,150,000
3,400,000
$11,550,000
Determine the following:
a)
What was the average issue price per common share?
b)
What was the average issue price per preferred share?
c)
Assume net income for 2010 was $825,000. Journalize the entry to close net
income to retained earnings.
d)
Assume the board of directors declares dividends of $1,850,000 in 2010. No
dividends were declared in 2009. Calculate the amount per share each class of
shares will receive.
146) Following is the shareholders' equity section of the balance sheet for Phototron
Incorporated as of December 1, 2010:
Preferred shares, $6 cumulative,
6,500 shares issued
Common shares, 120,000 shares issued
Retained earnings
Total shareholders' equity
$
650,000
1,620,000
467,200
$2,737,200
Phototron Incorporated reports the following transactions for December 2010:
Dec.
1
11
15
Declared the required cash dividend on the preferred shares and
a $0.50 dividend on the common shares.
Paid the dividends declared on December 1.
Sold 5,000 common shares for $15 per share.
For each transaction, show the dollar amount of the effect of each transaction on the
following accounts: common shares and retained earnings. Write "no effect" if an
account is unaffected by a transaction.
Date
Common
Retained
147) Mowat Corporation reported a net loss in 2008, its first year of operations, of
$15,460; a net loss in 2009 of $12,350; and a net income of $152,700 in 2010. Mowat
Corporation had outstanding throughout the three-year period the following
issuances Common shares, 5,000 shares issued
100,000
of shares:
No dividends were declared in 2008 or 2009.
$5,
cumulati a)
What is the amount of dividends in arrears at the beginning of 2010?
ve
b)
Assume that at the end of 2010, dividends of $70,025 were declared and
preferred paid. What total amount of dividends is paid to preferred shareholders and what
shares,
total amount of dividends is paid to common shareholders?
175
c)
What is the dividend per share paid to the preferred and common
shares
shareholders in 2010?
issued
d)
Prepare journal entries to declare and pay
$ 17,500
the dividends in 2010.
148) During 2006-2010, Warren Corporation had the following issuances of shares
outstanding for the entire period:
25,000 shares of $5, cumulative preferred shares
50,000 shares of common shares
Cash dividends declared by the board of directors during 2006-2010 were as follows:
2006
2007
2008
2009
2010
none
$125,000
$150,000
$150,000
$250,000
Compute the amount of total dividends and dividends per share payable to each
class of shares during 2006-2010.
Year
Total Preferred
Per Share
Preferred
Total Common
Per Share
Common
149) Bueno Corporation has 15,500 shares of $4, cumulative preferred shares outstanding
as well as 80,000 common shares. There are no dividends in arrears on the preferred
shares. The following transactions were reported during December 2010:
Dec.
1
14
28
31
$345,000.
Declared the required dividend on the preferred shares and a $0.75 per
share dividend on the common shares.
The date of record for the dividend declared on December 1.
Paid the dividend declared on December 1.
Closed out the income summary account. Net income for the year was
a)
Prepare journal entries to record the above transactions.
b)
Assuming the balance of retained earnings on January 1, 2010, was $49,800,
determine the balance of retained earnings on December 31, 2010.
Date
Accounts
Debit
Credit
150) Sibley Corporation's balance sheet reported the following shareholders' equity at
December 31, 2010:
Preferred shares, $3, cumulative, 11,000 shares
issued, liquidation value $55 per share
$ 605,000
Common shares, 75,000 shares issued
Total contributed capital
Retained earnings
Total shareholders' equity
2,000,000
2,605,000
550,000
$3,155,000
Assuming there are two years dividends in arrears (including 2010), determine the
book value per share of both preferred and common shares.
151) Define and contrast each of the following share values:
∙
∙
market value
book value
152) Gleason Corporation has gathered the following data for the current year:
Net Income
Interest Expense
Income Tax Expense
Preferred Dividends
$40,000
5,000
12,500
3,600
Beginning
of Year
Current assets
$ 68,000
Current liabilities
41,000
Property, plant, and equipment
340,000
Long-term liabilities
100,000
Common shareholders' equity
217,000
Preferred shareholders' equity
50,000
a)
b)
c)
d)
End of
Year
$ 81,000
39,000
365,000
90,000
267,000
50,000
Calculate the current ratio at year end.
Calculate return on assets.
Calculate return on equity.
Comment on how these measures are used.
Table 13-8
The shareholders' equity section of the balance sheet of Crestor Ltd. follows:
Contributed capital:
Preferred shares, cumulative, $3, 4,000 shares outstanding,
Common shares, 20,000 shares outstanding
Retained earnings
$200,000
300,000
138,250
153) Refer to Table 13-8. Assume that there were no dividends declared for the last two
years. What is the total amount of the dividends that must be declared this year for
the common shareholders to get a $1 per share dividend?
154) Refer to Table 13-8. Assume that there were no dividends declared last year. What is
the total amount of the dividends that must be declared this year for the common
shareholders to get a $2 per share dividend?
155) Refer to Table 13-8. Assume that there are no dividends in arrears. What is the total
amount of the dividends that must be declared this year for the common
shareholders to get a $3 per share dividend?
156) Nevada Corporation was created on January 2, 2010. The articles of incorporation
from the Government of Canada authorize Nevada Corporation to issue an
unlimited number of common shares and 500,000 shares of $0.50 preferred shares.
The company had the following transactions:
2010
Jan. 2
Gave 5,000 common shares to the corporation's legal firm for
incorporating the business.
The total legal fee was $5,000.
3
Issued 200,000 common shares for cash at $1 per share.
4
Issued 10,000 preferred shares for cash at $10 per share.
4
Exchanged $50,000 cash and 200,000 common shares for a building with
a market value of
$260,000.
Dec. 31
Close Income Summary to Retained Earnings assuming that Nevada
had $63,000 of net
income for the year
a)
Journalize the above transactions. Explanations are not needed.
b)
Prepare the shareholders' equity section of the balance sheet as of the close
of business on December 31, 2010.
Date
Journal
Description
Debit
Credit
157) List some of the shareholder rights normally attached to common shares.
158) How does accounting for share capital under international financial reporting
standards (IFRS) differ from that required under GAAP for private enterprises?
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
11)
12)
13)
14)
15)
16)
17)
18)
19)
20)
21)
22)
23)
24)
25)
26)
27)
28)
29)
30)
31)
32)
33)
34)
35)
36)
37)
38)
39)
40)
41)
42)
43)
44)
45)
46)
47)
48)
49)
50)
51)
TRUE
FALSE
FALSE
FALSE
TRUE
FALSE
FALSE
TRUE
FALSE
FALSE
FALSE
TRUE
FALSE
TRUE
TRUE
FALSE
FALSE
FALSE
FALSE
TRUE
TRUE
FALSE
TRUE
TRUE
FALSE
FALSE
FALSE
TRUE
FALSE
FALSE
TRUE
TRUE
TRUE
TRUE
A
C
C
D
B
C
C
C
D
A
A
A
C
C
B
C
A
52)
53)
54)
55)
56)
57)
58)
59)
60)
61)
62)
63)
64)
65)
66)
67)
68)
69)
70)
71)
72)
73)
74)
75)
76)
77)
78)
79)
80)
81)
82)
83)
84)
85)
86)
87)
88)
89)
90)
91)
92)
93)
94)
95)
96)
97)
98)
99)
100)
101)
102)
103)
C
A
A
D
C
C
C
B
C
D
B
B
C
A
D
A
C
D
C
D
B
B
C
C
C
C
A
A
D
D
B
C
B
C
A
C
C
D
D
D
A
B
A
C
B
C
A
D
C
D
B
A
104)
105)
106)
107)
108)
109)
C
D
D
B
A
B
110)
111)
112)
113)
114)
115)
116)
117)
118)
119)
120)
121)
122)
123)
124)
125)
126)
127)
128)
129)
130)
131)
132)
133)
F
A
B
C
D
E
G
C
D
A
H
G
L
B
J
E
K
F
I
B
A
C
D
Students should mention the following characteristics:
Separate legal entity
Ability to raise more capital-advantage
Continuous life-advantage
Ease of ownership transfer-advantage
No mutual agency - advantage
Limited liability of shareholders - advantage
Separation of management and owners - disadvantage
Possible double taxation - disadvantage
Government regulation - disadvantage
Addi tional costs unique to corporations - disadvantage
134)
Date
Accounts
Debit
a)
Cash
132,500
Common Shares
b)
Cash
275,000
Preferred Shares
d)
Building
160,000
Common Shares
e)
Income Summary
56,000
Retained Earnings
135)
Date
a)
Cash
Accounts
b)
Cash
Debit
450,000
Common Shares
d)
e)
136)
275,000
160,000
56,000
Credit
450,000
Accounts
420,000
60,000
60,000
241,000
241,000
Debit
525,000
Common Shares
21Cash
Credit
525,000
144,200
Preferred Shares
28Patent
144,200
82,000
Common Shares
31Retained Earnings
Income Summary
137)
132,500
420,000
Preferred Shares
Equipment
Common Shares
Income Summary
Retained Earnings
Date
May 1Cash
Credit
82,000
10,500
10,500
Dorlin Corporation
Partial Balance Sheet
December 31, 2010
Shareholders' equity
Contributed capital:
Preferred shares, $10, cumulative,
1,000 shares outstanding
$
250,000
Common shares, 20,000 shares outstanding
550,000
Total contributed capital
800,000
Retained earnings
250,000
Total shareholders' equity
$1,050,000
General Journal
138)
Date
2010
Accounts
Debit
Credit
Dec. 3Retained Earnings
25,000
Dividends
Payable-Preferred
20,000
Dividends
Payable-Common
5,000
139)
Cash
Dividends Payable-Preferred
20,000
Dividends Payable-Common
5,000
General Journal
Date
2010
Accounts
Debit
Dec. 3Retained Earnings
85,000
Dividends
Payable-Preferred
Dividends
Payable-Common
Dividends Payable-Preferred
Dividends Payable-Common
Cash
140)
25,000
Credit
80,000
5,000
80,000
5,000
85,000
General Journal
Date
2010
Accounts
Dec. 3Retained Earnings
Dividends
Payable-Preferred
Dividends
Payable-Common
Debit
85,000
Credit
60,000
25,000
Dividends Payable-Preferred
Dividends Payable-Common
Cash
60,000
25,000
85,000
141)
Total Dividend
Dividend allocated to preferred shareholders
(20,000 shares × $ 1 × 3 years)
Dividend allocated to common shareholders (remainder)
Divided by the number of common shares outstanding
142)
60,000
25,000
100,000
= $0.25 cents per share dividend
Total Dividend
Dividend allocated to preferred shareholders
(20,000 shares × $ 1 year)
Dividend allocated to common shareholders (remainder)
Divided by the number of common shares outstanding
143)
$85,000
$85,000
20,000
65,000
100,000
= $0.65 cents per share dividend
General Journal
Date
Accounts
Debit
Credit
Dec. 3Retained Earnings
25,000
Dividends
Payable-Preferred
25,000
144) a)
Dividends Payable-Preferred
Cash
(2,000 × 4) = $8,000
b)
25,000
25,000
40,000 - (2,000 × 4) = $32,000 Common = $32,000. Preferred = $8,000.
c)
145) a)
Retained earnings and total shareholders' equity would decrease by $50,000.
($2,750,000)/200,000 = $13.75
b)
($5,400,000)/90,000 = $60
c)
General Journal
Date
Accounts
Dec. 31Income Summary
Retained Earnings
d)
146)
Debit
825,000
Credit
825,000
($5 × 2) = $10 preferred ($10 × 90,000) = $900,000
$1,850,000 - $900,000 = $950,000
$950,000/200,000 = $4.75 common
Date
Common
Retained
Dec. 1
no effect
($99,000) *
11
no effect
no effect
15
$50,000
no effect
* (6,500 × $6) =
$39,000
($0.50 × 120,000) =
60,000
Total dividends
$99,000
147) a)
$5 × 2 × 175 = $1,750
b)
$5 × 3 × 175 = $2,625 preferred
$70,025 - $2,625 = $67,400 common
c)
$2,625/175 = $15 preferred
$67,400/5,000 = $13.48 common
d)
General Journal
Date
Accounts
Dec. 31Retained Earnings
Dividends
Payable-Preferred
Dividends
Payable-Common
Dividends Payable-Preferred
Dividends Payable-Common
Cash
148)
Year
Total Preferred
Per Share
Preferred
Debit
70,025
Credit
2,625
67,400
2,625
67,400
70,025
Total Common
Per Share
Common
2006 2009 $0
$150,000 $0
$6
2007 2010 $125,000
$200,000 $5
$8
2008
$150,000
$6
149)
Date
Accounts
Dec. 1Retained Earnings
Dividends
Payable-Preferred
Dividends
Payable-Common
28Dividends Payable-Preferred
Dividends Payable-Common
Cash
31Income Summary
Retained Earnings
$0
$0
$0
$0
$50,000
Debit
122,000
$0
$0
$0
$0
$1
Credit
62,000
60,000
62,000
60,000
122,000
345,000
345,000
b)
$49,800 + $345,000 - $122,000 = $272,800
150) ($3 × 2 years) = $6 + $55 = $61 preferred
($61 × 11,000) = $671,000
$3,155,000 - $671,000 = $2,484,000
$2,484,000/75,000 = $33.12 common
151) Market value is the price for which a share could be bought or sold. Usually, it is the most
important value to the shareholder.
Book value is the amount of shareholders' equity on the company's books for each share.
Preferred shares book value is calculated first and then common shares book value is
determined by dividing shareholders' equity available to common shareholders by the
average number of common shares.
152) a) $81,000/$39,000 = 2.08
b) $40,000 + $5,000 = $45.000; $45,000/$427,000* = 10.5%
* $68,000 + $340,000 = $408,000
$81,000 + $365,000 = $446,000
$408,000 + $446,000 = $854,000; $854,000/2 = $427,000
c) $40,000 - $3,600 = $36,400; $36,400/$242,000* = 15%
* $217,000 + $267,000 = $484,000; $484,000/2 = $242,000
d) The current ratio is used as a measure of liquidity, with 2.0 being somewhat of a
standard.
The return on assets is used as a standard profitability measure that shows the
company's success in using its assets to generate income. It helps investors compare one
company to another especially within the same industry.
The return on equity is used as a standard profitability measure, which shows the
relationship between net income and average common shareholders' equity. The higher the
rate of return, the more successful the company.
153) Common shares outstanding 20,000 × $1
$20,000
Preferred shares dividend $3 × 4,000 × 3 years
36,000
Total dividend required:
154) Common shares outstanding 20,000 × $2
Preferred shares dividend $3 × 4,000 × 2
Total dividend required:
155) Common shares outstanding 20,000 × $3
Preferred shares dividend $3 × 4,000
Total dividend required:
Journal
156)
Date
Description
2010
Jan. 2Organization Costs
Common Shares
Jan.
3Cash
$56,000
$40,000
24,000
$64,000
$60,000
12,000
$72,000
Debit
5,000
5,000
200,000
Common Shares
Jan.
4Cash
200,000
100,000
Preferred Shares
Jan.
4Building
100,000
260,000
Cash
Common Shares
Dec.
Credit
31Income Summary
Retained Earnings
50,000
210,000
63,000
63,000
Nevada Corporation
Partial Balance Sheet
December 31, 2010
Shareholders' Equity
Contributed capital
Preferred shares,$0.50, 500,000 shares authorized,
10,000 shares issued
$ 100,000
Common shares, unlimited number of shares
authorized, 405,000 shares issued
405,000
Total contributed capital
505,000
Retained earnings
63,000
Total shareholders' equity
$568,000
157) -The right to sell the shares
-The right to vote at shareholders' meetings
-The right to receive a proportionate share of any dividends declared by the directors
-The right to receive a proportionate share of any assets on the winding-up of the
company, after
the creditors and any higher ranking classes of shares have been
paid.
-The right to maintain one's proportionate ownership in the corporation.
158) The primary difference in the two sets of accounting standards has to do with the required
disclosure for share capital. Under IFRS, companies must make disclosures about all
classes of shares authorized by the corporation. The requirements under GAAP are less
rigorous - they only require disclosure for classes of shares that have actually been issued.
Chapter 13
Corporations: Share Capital
and the Balance Sheet
Questions
1.
2.
3.
4.
Corporation characteristics:
•
a separate legal entity, formed under federal or provincial law
•
continuous life and transferability of ownership
•
no mutual agency
•
limited liability of shareholders
•
separation of ownership and management
•
corporate earnings subject to a degree of double taxation
•
government regulation
•
corporations may incur costs unique to corporations.
The corporation itself pays income tax, and the shareholder pays personal tax on
after-tax dividends received from the corporation. However, a portion of the
corporate tax is allowed as a dividend tax credit to the shareholder to eliminate
some of the double taxation.
The incorporators pay the fees and file the required documents with the
incorporating jurisdiction, and approval of articles of incorporation is granted
by the federal or a provincial government. The articles of incorporation
include authorization for the corporation to issue a certain number of shares.
The incorporators agree to a set of bylaws for governing the corporation. The
corporation then issues its shares and receives assets. The shareholders elect
the board of directors, which appoints the officers. At this point, the
corporation begins operations.
Characteristic
Corporation
Partnership
Legal Entity
– a business entity
– does not require
formed under federal
federal or provincial
or provincial law
approval to do business
– corporation a distinct
– partnership not
entity; assets and
distinct from partners
liabilities belong to
who hold all assets
corporation
and liabilities
Continuous Life – sale or transfer of
– partnerships
and Transferability shares does not affect
terminate when
of Ownership
the continuity of the
ownership changes
corporation
Copyright © 2011 Pearson Canada Inc.
1
Characteristic
Mutual Agency
5.
6.
7.
8.
9.
2
Corporation
Partnership
– officers commit the
– a partner can bind
corporation to contracts
partnership by
signing contract
Liability
– shareholders have no
– partners are personally
personal obligation for
liable for all debts of
corporate liabilities;
the partnership
however, directors do
Ownership/
– corporations are
– partners manage
Management
owned by shareholders
the partnership
who elect a board of
directors
– the board of directors
appoints officers to
manage the business
Taxation
– corporate earnings are – partners are taxed
subject to two different
on their share of
types of taxation:
partnership income
corporate income is
taxed and after-tax
dividends are taxable
to the shareholder
Additional costs – corporations incur costs – partnerships do not incur
unique to corporations,
these costs
such as the cost of
directors’ insurance
A common shareholder has the right to: (a) vote on matters that come before
the shareholders, (b) receive a proportionate part of any dividends declared on
that class of shares, (c) receive a proportionate share of corporate assets if the
corporation liquidates, (d) sell the shares and (e) a pre-emptive right, the right
to maintain one’s proportionate ownership in the corporation. Preferred shares
are automatically voting, unless stated otherwise; however, they are typically
nonvoting. These rights may be withheld by the corporation only by
agreement with the shareholders.
Issuance of shares increases the assets of the corporation, which receives
assets in exchange for shares issued. Authorization merely gives the
corporation permission to issue shares.
Issuance of 1,200 shares of $4.50 preferred shares for $100 would increase
the contributed capital by $120,000 (1,200  $100). The transaction would
not increase retained earnings because a company does not earn a profit by
selling its shares to its own shareholders. Saskinc Ltd.’s annual cash
dividend payments would increase by $5,400 (1,200  $4.50).
Cash
3,575
Common shares [(150  $8) + (250  $9.50)]
3,575
Issuance of 1,500 common shares for land and a building worth $200,000
increases contributed capital by $200,000.
Copyright © 2011 Pearson Canada Inc.
10. Saxon, Capital ................................................
XXX
Cowle, Capital................................................
XXX
Common Shares......................................
XXX
11. Intangible assets: Organization Cost
Current liabilities: Dividends Payable
Shareholders’ equity: Preferred Shares, Common Shares, Retained Earnings.
12. Organization Cost is an intangible asset account. It is debited for its cost
when acquired, and the cost is usually amortized as expense over a short
period of time.
13. Three important dates for dividends are: (a) Declaration date: the board of
directors announces the dividend, (b) Date of record: the corporation identifies
the people who own the shares on this date so that they can receive the dividend.
(c) Payment date: the corporation pays the dividend.
14. (a) Cumulative preferred:
$13,125 (2,500  $1.75  3 years)
Common:
$11,875 ($25,000 – $13,125)
(b) Noncumulative preferred: $4,375 (2,500  $1.75)
Common:
$20,625 ($25,000 – $4,375)
15. A preferred shareholder would rather own cumulative preferred shares
because any preferred dividends passed by the corporation must be paid
before paying dividends to the common shareholders. The corporation would
rather issue noncumulative preferred shares in order to avoid having to pay
dividends in arrears to preferred shareholders.
16. Cumulative preferred dividends in arrears are reported in the notes to the
financial statements. Dividends become a liability only after the board of
directors declares the dividends.
17. The market value of a share is the price at which a person could buy or sell a
single share. The book value of a share is the total amount of shareholders’
equity in the company’s books divided by the number of shares issued.
Market value is far more important to investors than book value.
18. In a company with both preferred and common shares outstanding, the
preferred shareholders have the first claim to shareholders’ equity. The book
value of preferred shares is their liquidation value plus any cumulative
preferred dividends in arrears if the preferred shares are cumulative. The
remaining equity divided by the number of common shares gives the book
value for each common share.
19. A healthy company’s return on shareholders’ equity should exceed its return
on total assets because of the interest expense component of return on assets.
Shareholders demand a higher rate of return than creditors. If return on total
assets is higher than return on shareholders’ equity, the company may be
over leveraged.
Copyright © 2011 Pearson Canada Inc.
3
Starters
(5 min.)
S 13-1
1. The chairperson of the board of directors is usually the most powerful person
in a corporation.
2. The shareholders hold ultimate power in a corporation.
3. The president or Chief Executive Officer (CEO) is in charge of day-to-day
operations.
4. The vice-president of accounting and finance is in charge of accounting.
(5 min.)
S 13-2
DIFFERENCE:
A proprietorship’s balance sheet reports a single capital account, such as Joe Hopper, Capital. A
corporation balance sheet reports shareholders’ equity by source. There are two sources:
contributed capital and retained earnings.
SIMILARITY:
A proprietorship’s balance sheet and a corporation’s balance sheet both report assets and
liabilities in the same way.
4
Copyright © 2011 Pearson Canada Inc.
(5 min.)
S 13-3
Journal
a.
b.
ACCOUNT TITLES AND EXPLANATIONS
Cash (1,000 × $50)
Common Shares
POST.
REF.
DEBIT
50,000
CREDIT
50,000
Cash
Preferred Shares
48,000
48,000
(5 min.)
S 13-4
Journal
ACCOUNT TITLES AND EXPLANATIONS
Cash
Common Shares
Issued common shares.
POST.
REF.
DEBIT
9,200
CREDIT
9,200
(5-10 min.)
S 13-5
1. Total contributed capital increased $11,000 ($90,000  $79,000). The increase
was due to the sale of common shares in 2010, shown by the increase in the
number of shares from 2009 to 2010 and by the increase in the dollar balance
of the common shares from 2009 to 2010.
2. KD Corporation had a profit in 2010 because the balance of retained earnings
increased from 2009 to 2010 by $2,200 ($49,000  $46,800).
Copyright © 2011 Pearson Canada Inc.
5
(5 min.)
Shareholders’ equity:
Common shares, 40,000 shares issued ..................................
Retained earnings...................................................................
Total shareholders’ equity .....................................................
$28,500
8,000
$36,500
(5 min.)
6
S 13-6
S 13-7
a. Accounts payable...................................................................
Unearned revenue ..................................................................
Long-term note payable.........................................................
Total liabilities .......................................................................
$ 3,000
2,600
3,800
$ 9,400
b. Total liabilities (from Req. a) ................................................
Total shareholders’ equity (from Starter 13-6)......................
Total assets.............................................................................
$ 9,400
36,500
$ 45,900
Copyright © 2011 Pearson Canada Inc.
(10 min.)
S 13-8
Journal
DATE
2009
Dec.
15
2010
Jan.
4
ACCOUNT TITLES AND EXPLANATIONS
Retained Earnings
(5,000 × $5.00) + (50,000 × $0.60)
Dividends Payable — Preferred Shares
Dividends Payable — Common Shares
Declared a cash dividend.
POST.
REF.
Dividends Payable — Preferred Shares
Dividends Payable — Common Shares
Cash
Paid the cash dividend.
DEBIT
CREDIT
55,000
25,000
30,000
25,000
30,000
55,000
(5-10 min.)
S 13-9
1. The preferred shares are cumulative because they are specifically designated
as cumulative.
2. Preferred gets $1,000 (40,000 × $0.025).
Common gets $14,000 ($15,000 – $1,000)
3. Preferred gets:
2008 dividend in arrears (40,000 × $0.025) ..........................
2009 dividend in arrears .......................................................
2010 current-year dividend....................................................
Total.......................................................................................
Common gets ($15,000 – $3,000) .........................................
Copyright © 2011 Pearson Canada Inc.
$1,000
1,000
1,000
$3,000
$12,000
7
(5 min.)
Preferred equity:
Book value or liquidating value (40,000 × $0.50).................
Cumulative dividends (40,000 × $0.025 × 5) ........................
Shareholders’ equity allocated to preferred ..........................
$ 20,000
5,000
$ 25,000
Common equity:
Total shareholders’ equity .....................................................
Less preferred equity .............................................................
Common equity .....................................................................
Book value per share ($325,000 ÷ 1,000,000 shares)............
$350,000
(25,000)
$325,000
$ 0.325
(5 min.)
Rate of return
on total
assets
=
Net
Interest
income
+
expense
Average total assets
=
=
Rate of return
on common
shareholders’ equity
=
Net
Preferred
income
–
dividends
Average common
shareholders’ equity
=
=
These rates of return are quite high.
8
S 13-10
Copyright © 2011 Pearson Canada Inc.
S 13-11
$6,100 + $400
($49,000 + $44,800) / 2
$6,500
$46,900
=
13.9%
$6,100 – $ 0
($23,600 + $22,800) / 2
$6,100
$23,200
=
26.3%
Exercises
(5-10 min.)
E 13-1
Note: Student responses will vary because different people have various reasons for the decisions
they make.
Reasons for organizing as a corporation:
1. Ease of raising capital from other investors
2. Limited liability of shareholders for the business’s debts
3. Ease of transferring ownership if a shareholder wants to sell his or her
interest in the business
Reasons for not organizing as a corporation:
1. Must pay corporate tax and personal tax on dividends
2. More government regulation of corporations
(5-10 min.)
MEMO TO:
SUBJECT:
E 13-2
David Johnston and Lisa Jacobs
Incorporation of D&L Decor Ltd.
In order to incorporate D&L Decor Ltd., you must obtain and complete the required documents
from either the province in which you wish to incorporate or the federal Ministry of Industry.
The completed documents must be submitted with the required fee. The documents are called
articles of incorporation and include a request for authorization for the corporation to issue
shares. When the appropriate jurisdiction authorizes the incorporation, D&L Decor Ltd. will
become a legal entity.
As soon as D&L Decor Ltd. is incorporated you will draw up and agree to a set of bylaws by
which D&L Decor Ltd. will be governed. All those who purchase common shares in D&L Decor
Ltd. will be shareholders of the corporation. The shareholders will elect the board of directors of
the corporation. The board of directors sets the policy for D&L Decor Ltd. and appoints the
officers of the corporation, including the president, who is the chief executive officer in charge
of managing day-to-day operations.
Instructional Note: Student responses may vary considerably.
Copyright © 2011 Pearson Canada Inc.
9
Req. 1
(10-15 min.)
E 13-3
General Journal
DATE
Jan.
19
Feb.
3
11
15
ACCOUNT TITLES AND EXPLANATION
Cash
Common Shares (4,000  $11.00)
POST.
REF.
Cash
Class A Preferred Shares (1,000 shares)
14,000
Inventory
Equipment
Common Shares (5,800 shares)
27,000
16,500
Cash
Class B Preferred Shares (2,000  $13)
26,000
Total Contributed Capital:
Preferred:
CREDIT
44,000
14,000
43,500
26,000
Req. 2
10
DEBIT
44,000
Class A
Class B
Common: ($44,000 + $43,500)
$ 14,000
26,000
87,500
Total contributed capital
$127,500
Copyright © 2011 Pearson Canada Inc.
(5-10 min)
E 13-4
General Journal
DATE
POST.
REF.
ACCOUNT TITLES AND EXPLANATIONS
Cash
Common Shares
To issue 10,000 common shares at $15.
DEBIT
150,000
CREDIT
150,000
Case A—Issue shares and buy the assets in separate transactions.
(10 min.)
E 13-5
General Journal
DATE
ACCOUNT TITLES AND EXPLANATIONS
Cash
Common Shares
Issued shares.
POST.
REF.
DEBIT
1,260,000
CREDIT
1,260,000
Building
Equipment
Cash
Purchased property, plant, and equipment.
900,000
360,000
1,260,000
Case B—Issue shares to acquire the assets.
General Journal
DATE
ACCOUNT TITLES AND EXPLANATIONS
Building
Equipment
Common Shares
Issued shares to acquire building and
equipment.
POST.
REF.
DEBIT
900,000
360,000
CREDIT
1,260,000
The balances in all accounts are the same because, in both cases, the value of the assets received
for the common shares issued is $1,260,000:
Building..........................................................
Equipment ......................................................
Copyright © 2011 Pearson Canada Inc.
$900,000
360,000
11
Req. 1
(15-20 min.)
E 13-6
General Journal
DATE
2010
Jan.
4
13
14
Dec.
31
ACCOUNT TITLES AND EXPLANATIONS
Cash
Common Shares
Issued 5,000 common shares.
POST.
REF.
DEBIT
120,000
CREDIT
120,000
Cash
Preferred Shares
Issued 500 preferred shares for cash.
50,000
Land
Common Shares
Issued 4,000 common shares for land.
120,000
Income Summary
Retained Earnings
Closed net income to Retained Earnings.
150,000
50,000
120,000
150,000
Req. 2
Mid-way Consulting Inc.
Shareholders’ Equity
December 31, 2010
Contributed capital:
Preferred shares, $4.00, 500,000 shares authorized, 500 shares issued
Common shares, 1,000,000 shares authorized, 9,000 shares issued
240,000
290,000
Total contributed capital
Retained earnings
150,000
Total shareholders’ equity
12
$ 50,000
$440,000
Copyright © 2011 Pearson Canada Inc.
E 13-7
(10 min.)
Contributed capital
Preferred shares, $1.50:
Issued for cash (2,500 shares  $20)
$
50,000
Common shares:
Issued for cash (35,000 shares  $12.50)
$437,500
Issued for organization cost
7,500
Issued for patent
495,000
50,000
Total contributed capital
$545,000
(10-15 min.)
E 13-8
General Journal
DATE
June
14
14
ACCOUNT TITLES AND EXPLANATIONS
Organization Costs ($2,000 + $500)
Cash
To pay legal fees and other fees to
incorporate.
POST.
REF.
Sheila Mason, Capital
Tom Neilson, Capital
Common Shares (7,000 shares)
To incorporate the business, close the
capital accounts of the partnership, and
issue common shares to the incorporators.
Copyright © 2011 Pearson Canada Inc.
DEBIT
2,500
CREDIT
2,500
40,000
30,000
70,000
13
(10-15 min.) E
Req. 1
13-9
General Journal
DATE
Mar.
23
Apr.
12
17
ACCOUNT TITLES AND EXPLANATIONS
Cash
Common Shares
Issued 12,000 common shares at $10.00.
POST.
REF.
DEBIT
120,000
CREDIT
120,000
Inventory
Equipment
Common Shares
Issued 5,000 common shares to acquire
inventory and equipment.
40,000
10,000
Cash
Preferred Shares, $2.25
Issued 1,500 preferred shares at $10 each.
15,000
50,000
15,000
Req. 2
Lipton Technology Inc.
Shareholders’ Equity
Contributed capital
Preferred shares, $2.25, 100,000 shares authorized, 1,500 shares issued
Common shares, 250,000 shares authorized, 17,000 shares issued
170,000*
Total contributed capital
185,000
Retained earnings
65,000
Total shareholders’ equity
$250,000
*Computation:
Mar. 23:
12,000 shares  $10.00
Apr. 12:
$40,000 + $10,000
14
$ 15,000
=
=
$120,000
50,000
$170,000
Copyright © 2011 Pearson Canada Inc.
(10-15 min.)
E 13-10
Sunnee Corporation
Shareholders’ Equity
June 30, 2010
Contributed capital
Preferred shares, $1.25, 100,000 shares authorized, 10,000 shares issued
$87,500
Common shares, 500,000 shares authorized, 100,000 shares issued
100,000
Total contributed capital
187,500
90,000
Retained earnings
Total shareholders’ equity
$277,500
(10-15 min.)
E 13-11
1.
1,000 shares  $5.00 = $5,000
2.
Preferred gets $5,000
Common gets $15,000 ($20,000 – $5,000)
3.
Preferred shares are noncumulative because they are not specifically
designated as cumulative.
4.
Preferred gets:
2010 current-year dividend = $5,000
Common gets $35,000 ($40,000 – $5,000)
Copyright © 2011 Pearson Canada Inc.
15
(15-20 min)
E 13-12
Barclay Marketing Ltd.
Dividend Payment Schedule
PREFERRED
COMMON
TOTAL
$31,000
Total dividend
Preferred dividends in arrears for 2009:
(50,000  $0.10)
5,000
Total preferred dividends in arrears
5,000
Remainder
26,000
Dividends for 2010:
Preferred
Total preferred dividends for 2010
5,000
5,000
Remainder
21,000
Common
$21,000
Remainder
Totals
16
21,000
$
$10,000
Copyright © 2011 Pearson Canada Inc.
$21,000
0
$31,000
(10-15 min.)
E 13-13
Nature’s Design Technology Inc.
Book value per share of preferred and common shares:
Preferred:
Liquidation value (in total)
$15,000
Book value per share ($15,000/300)
$50.00
Common:
Shareholders’ equity allocated to common
$302,500
($15,000 + $187,500 + $115,000 – $15,000)
Book value per share ($302,500/25,000 shares)
$
(10-15 min.)
12.10
E 13-14
Nature’s Design Technology Inc.
Book value per share of preferred and common shares:
Preferred:
Liquidation value
$ 15,000
Dividends in arrears (300  $7.00  3)
Total preferred equity
6,300
$ 21,300
Book value per share ($21,300/300 shares)
$ 71.00
Common:
Total shareholders’ equity ($15,000 + $187,500 + $115,000)
Less: Total preferred equity
$317,500
21,300
Total common equity
$296,200
Book value per share ($296,200/25,000 shares)
$ 11.85
Copyright © 2011 Pearson Canada Inc.
17
(10-15 min.)
Rate of
return on
total assets
Rate of return
on common
shareholders’
equity
Net income
+ Interest expense
=
Average total
assets
=
0.0845  100 =
8.45%
=
Net income
– Preferred
dividends
Average common
shareholders’
equity
=
0.0675  100 =
6.75%
=
=
E 13-15
$3,250 + $5,200
($105,000 + $95,000)/2
=
$8,450
$100,000
$3,250 – (200  1.15)
($46,500 + $43,000)/2
=
$3,020
$44,750
These profitability measures suggest some weakness because Waldy’s 6.75 percent return on
shareholders’ equity is fair but the return on assets exceeds it by 1.7 percent meaning that the
company is paying more for its borrowed funds than it is earning.
18
Copyright © 2011 Pearson Canada Inc.
Req. 1
(5-10 min)
E 13-16
General Journal
DATE
2011
Feb.
1
ACCOUNT TITLES AND EXPLANATIONS
Carl Haupt, Capital
Common Shares
To incorporate the business, close the
capital account of the proprietorship, and
issue 20,000 common shares to the
incorporator
POST.
REF.
DEBIT
17,227
CREDIT
17,227
Req. 2
General Journal
DATE
2011
Feb.
1
ACCOUNT TITLES AND EXPLANATIONS
Cash
Preferred Shares
Issued 1,000 preferred shares at $50 each
POST.
REF.
DEBIT
50,000
CREDIT
50,000
Req. 3
General Journal
DATE
2011
Feb.
1
ACCOUNT TITLES AND EXPLANATIONS
Organization Costs
Cash
Legal fees and incorporation fees to organize
the corporation
POST.
REF.
Copyright © 2011 Pearson Canada Inc.
DEBIT
1,500
CREDIT
1,500
19
(15-20 min.)
Common shares, Dec. 31, 2009
Issuance of shares for cash (3,000 shares at $50)
Issuance of shares to purchase another company (15,000 shares at $70)
E 13-17
$ 300,000
150,000
1,050,000
Common shares, Dec. 31, 2010
$ 1,500,000
Retained earnings, Dec. 31, 2009
$ 1,538,000
Net income
1,430,000
Cash dividends
(660,000)
Retained earnings, Dec. 31, 2010
20
Copyright © 2011 Pearson Canada Inc.
$2,308,000
Beyond the Numbers
BN 13-1
1.
2.
3.
4.
5.
Contributed capital and retained earnings are reported separately as they
represent different sources of capital:

Contributed capital represents investments in share capital by
shareholders

Retained earnings is capital earned by profitable operations of the
corporation

Incorporating acts require corporations to report the sources of their
capital.
VC Inc. faces the problem of determining the market value of the land it
receives. The current market value of the land will determine the recorded
value of the land and of the common shares issued.
Investors buy common shares in the hope of earning higher returns on their
investment than are available on an investment in preferred shares. For a
healthy company, the rate of return on common shareholders’ equity is
usually higher than the rate of return on preferred shares. Also the market
value of common shares in such a company will increase more than its
preferred shares’ price.
Yes, if book value exceeds market value. No, if market value exceeds book
value. The shareholder will accept the offer that maximizes his or her wealth.
Convertible preferred shares may be exchanged by preferred shareholders, if
they choose, for another specified class of shares in the corporation. An
investor would exercise the conversion privilege if the market value of the
shares received on conversion exceeded the market value of the preferred
shares held.
Copyright © 2011 Pearson Canada Inc.
21
Ethical Issue
Req. 1
Wertz’s reporting a $50,000 franchise at $375,000 is unethical. The franchise cost $50,000, not
$375,000. The three transactions are not independent. Wertz and the corporation are effectively
the same entity. The third party serves no purpose other than as an accomplice to increase the
value of the franchise fraudulently.
Req. 2
Potential buyers of the individual-language franchises can be harmed. Wertz’s balance sheet
overstates his assets. If outsiders believe his balance sheet, they may be induced to pay Wertz
more than the individual-language franchises are worth.
Lenders can also be harmed by loaning money to Wertz on more favourable terms than his
financial position warrants.
The public is also defrauded if Wertz amortizes the cost of the franchise for income tax purposes.
Basing amortization on $375,000 overstates tax deductions and understates the corporation’s
income. As a result, the tax payments are lower than they should be.
Accounting plays the role of recording assets at their cost. This sequence of events was an
attempt to arbitrarily increase the value at which the franchise was recorded.
Note: One of the authors experienced this actual situation in his first job after college.
22
Copyright © 2011 Pearson Canada Inc.
Problems
Group A
(10-20 min.)
DATE:
TO:
FROM:
SUBJECT:
P 13-1A
_____________________________
Mark Mathews and Karen Willamas
Student Name
Advantages and disadvantages of the corporate form of
business organization
The corporate form of business organization offers some advantages over the proprietorship and
the partnership forms. An important advantage of an established corporation is the limited
liability of shareholders for business debts. This enables a person to invest in a corporation
without having to assume any personal obligation for the corporation’s liabilities. The most that
an investor can lose from investing in a corporation is his or her investment in the business.
The separate legal existence of the corporation apart from its owners eases the transfer of
ownership from one person to another. A shareholder buying into or selling out of a corporation
has no effect on the operation of the corporation. A shareholder cannot commit the corporation to
an obligation unless he or she is an officer of the business. These features enable a corporation to
raise money from a large number of people. A partnership can raise owners’ equity only from the
partners. Most corporations have more owners and can grow larger than a partnership.
Shareholders elect a board of directors that appoints corporate officers to manage the business. It
is important that corporate officers manage the business for the benefit of the shareholders. In a
partnership, the partners manage the business for their benefit only.
Corporations often have to pay fees to organize as a corporation. Corporations are also taxed on
their business income but for an active business this rate is less than the one an individual would
pay. It is also possible to smooth out large fluctuations in income by deferring salary payments to
a subsequent year, which cannot be done by an individual. However, if the corporation pays
dividends, the shareholders also pay income tax on the dividend income. Therefore, shareholders
are subject to a form of double taxation.
Also, corporations are regulated more heavily than partnerships. Complying with various
regulations can be expensive for a corporation. Corporations also may incur additional costs
compared to partnerships, such as liability insurance for a corporation’s directors.
Instructional Note: Student responses will vary considerably.
Copyright © 2011 Pearson Canada Inc.
23
Req. 1 (journal entries)
(30-45 min.)
P 13-2A
General Journal
DATE
2010
Aug.
ACCOUNT TITLES AND EXPLANATIONS
2
2
Dec.
10
16
24
POST.
REF.
Organization Costs ($6,000 + $16,000)
Cash
Paid fees and legal fees to incorporate.
Nuan Zhang, Capital
Jen Phuah, Capital
Common Shares (45,000 shares)
Incorporated the business, closed the
capital accounts of the partnership, and
issued common shares to the incorporators.
DEBIT
22,000
22,000
150,000
187,500
337,500
Computer Equipment
Preferred Shares (1,000 shares)
Issued preferred shares to acquire a
computer system.
80,000
Cash
Common Shares (15,000 shares)
Issued common shares for cash.
120,000
Copyright © 2011 Pearson Canada Inc.
CREDIT
80,000
120,000
Req. 2 (shareholders’ equity section of balance sheet)
(continued)
P 13-2A
A-1 Services Inc.
Balance Sheet (partial)
December 31, 2010
Shareholders’ Equity
Contributed capital:
Preferred shares, $2.50, 500,000 shares authorized, 1,000 shares issued
Common shares, 2,000,000 shares authorized, 60,000 shares issued*
Total contributed capital
Retained earnings
$ 80,000
457,500**
537,500
130,000
Total shareholders’ equity
$667,500
* 20,000 + 25,000 + 15,000 = 60,000
** $150,000 + $187,500 + $120,000 = $457,500
Copyright © 2011 Pearson Canada Inc.
25
(15-20 min.)
P 13-3A
Req. 1
$4.00 is the annual dividend rate on the preferred shares.
Annual dividend on 2,000 shares = $8,000 ($4.00  2,000 shares)
Req. 2
Average issue price of common shares during 2009 =
$1.50 per share ($225,000 ÷ 150,000 shares)
Req. 3
First-year operations were not profitable, as shown by the Deficit in Retained Earnings.
Riverbend Inc. lost $50,000 in the first year of operations.
Req. 4
a. Cash
37,500
Preferred Shares (1,500  $25)
37,500
8,750
b. Cash
Common Shares (5,000  $1.75)
c. Building
8,750
200,000
Common Shares (100,000  $2.00)
d. Income Summary
100,000
Retained Earnings
26
200,000
100,000
Copyright © 2011 Pearson Canada Inc.
Req. 5
(continued)
P 13-3A
Riverbend Inc.
Balance Sheet (partial)
December 31, 2010
Shareholders’ Equity
Contributed capital:
Preferred shares, $4.00, 200,000 shares authorized, 1,500 shares issued
Common shares, 1,000,000 shares authorized, 255,000 shares* issued
Total contributed capital
Retained earnings
$
37,500
433,750**
471,250
50,000***
Total shareholders’ equity
$521,250
Computations:
* 150,000 + 5,000 + 100,000 = 255,000
** $225,000 + $8,750 + $200,000 = $433,750
*** ($50,000) + $100,000 = $50,000
Copyright © 2011 Pearson Canada Inc.
27
(20-30 min.)
P 13-4A
Play-time Equipment Ltd.
Balance Sheet (partial)
December 31, 2010
Shareholders’ Equity
Contributed capital:
Common shares, 200,000 shares authorized and issued
Total contributed capital
$600,000
600,000
(10,000)
Retained earnings (deficit)
Total shareholders’ equity
$590,000
Computations:
Common shares: 200,000  $3 = $600,000
Retained earnings: –$75,000 – $30,000 + $35,000 + $60,000 = –$10,000
Lil-tikes Products Inc.
Balance Sheet (partial)
December 31, 2010
Shareholders’ Equity
Contributed capital:
Preferred shares, $1.10, cumulative, 200,000 shares authorized, 2,000 shares
issued
Common shares, 1,000,000 shares authorized, 100,000 shares issued
Total contributed capital
Retained earnings
300,000
325,000
120,600
Total shareholders’ equity
Computations:
Preferred shares: 2,000  $12.50 = $25,000
Common shares: Balance given as $300,000
Retained earnings: $75,000 + $50,000 – (2,000  $1.10  2) = $120,600
28
$ 25,000
Copyright © 2011 Pearson Canada Inc.
$445,600
(20-35 min.)
P 13-5A
Req. 1
Sefton Limited has $2.75 cumulative preferred shares and common shares outstanding.
Req. 2
The average issue price per preferred share is $5.00 ($500,000 ÷ 100,000 shares issued).
Req. 3
General Journal
DATE
ACCOUNT TITLES AND EXPLANATIONS
Cash
Preferred Shares
POST.
REF.
Cash
Common Shares
Copyright © 2011 Pearson Canada Inc.
DEBIT
500,000
CREDIT
500,000
1,850,000
1,850,000
29
(continued)
P 13-5A
Req. 4
General Journal
DATE
30
ACCOUNT TITLES AND EXPLANATIONS
Retained Earnings
Dividends Payable—Preferred Shares
(100,000 shares  $2.75)
Dividends Payable—Common Shares
($300,000 – $275,000)
POST.
REF.
Copyright © 2011 Pearson Canada Inc.
DEBIT
300,000
CREDIT
275,000
25,000
Req. 1
(40-50 min.)
P 13-6A
Etse Manufacturing Inc.
Balance Sheet
December 31, 2010
Assets
Current assets:
Cash
$ 35,000
Accounts receivable, net
100,000
Inventory
190,500
Prepaid expenses
15,500
Total current assets
$ 341,000
Property, plant, and equipment, net
281,000
37,000
Patent, net
Total assets
$659,000
Liabilities
Current liabilities:
Accounts payable
$ 36,000
Dividends payable
4,500
Accrued liabilities
23,000
Total current liabilities
63,500
Long-term note payable
100,500
164,000
Total liabilities
Shareholders’ Equity
Contributed capital:
Preferred shares, $0.15, 25,000 shares authorized,
6,000 shares issued
30,000
Common shares, 100,000 shares authorized, 33,000 shares
issued
165,000
Total contributed capital
195,000
Retained earnings
300,000*
Total shareholders’ equity
Total liabilities and shareholders’ equity
*Retained earnings
=
=
495,000
$659,000
Total assets – Total liabilities – Total contributed capital
$659,000 – $164,000 – $195,000 = $300,000
Copyright © 2011 Pearson Canada Inc.
31
Req. 2
Rate of
return on
total assets
Rate of return
on common
shareholders’
equity
(continued)
Net income
+ Interest expense
=
Average total
assets
=
0.084 or 8.4%
=
Net income
– Preferred
dividends
Average common
shareholders’
equity
=
0.081 or 8.1%
* Total shareholders’ equity
Less: Preferred equity
Common shareholders’ equity
=
=
$40,750 + $10,850
($659,000 +
$567,500)/2
$40,750 – (6,000 
$0.15)
($465,000* +
$520,000)/2
P 13-6A
=
$51,600
$613,250
=
$39,850
$492,500
$495,000
30,000
$465,000
Req. 3
These rates of return suggest weakness. Return on common shareholders’ equity is 0.3% lower
than return on assets.
Preparing a fairly complex balance sheet will refine students’ understanding of the shareholders’
equity of a corporation. This will help students understand what they are buying (shareholders’
equity) when they purchase a company’s shares as an investment.
This problem also exposes students to two widely-used measures of profitability—return on
assets and return on common shareholders’ equity. Students, investors, and others can evaluate
investments on the basis of their returns on assets and returns on equity. Higher return figures
generally indicate better investments. Although these return measures are not the only indicators
of profitability that investors use, they are helpful—along with other decision-making aids—in
evaluating investments.
32
Copyright © 2011 Pearson Canada Inc.
Req. 1a (preferred shares are noncumulative)
(20-30 min.)
P 13-7A
Everest Corporation
Total Dividends to Preferred and Common Shares for 2007, 2008, and 2009
PREFERRED
COMMON
TOTAL
2007
0
0
$0
2008
Preferred (40,000  $0.50)
$20,000
$104,000
Remainder to common
Total
$124,000
2009
Preferred (40,000  $0.50)
$20,000
Remainder to common
$220,000
$240,000
Total
Req.1b (preferred shares are cumulative)
Everest Corporation
Total Dividends to Preferred and Common Shares for 2007, 2008, and 2009
PREFERRED
COMMON
TOTAL
2007
$0
$ 0
$0
2008
2007 in arrears to preferred
($40,000  $0.50)
$ 20,000
Current to preferred (40,000  $0.50)
20,000
Remainder to common
$84,000
$ 40,000
Total
$84,000
$124,000
2009
Current to preferred (40,000  $0.50)
$20,000
Remainder to common
$220,000
$240,000
Total
Copyright © 2011 Pearson Canada Inc.
33
Req. 2 (dividend entry)
(continued)
P 13-7A
General Journal
DATE
2009
Dec.
22
2010
Jan.
12
34
ACCOUNT TITLES AND EXPLANATIONS
POST.
REF.
DEBIT
Retained Earnings
Dividends Payable—Preferred Shares
Dividends Payable—Common Shares
To declare dividends on shares.
240,000
Dividends Payable—Preferred Shares
Dividends Payable—Common Shares
Cash
To pay dividend declared December 22, 2009.
20,000
220,000
Copyright © 2011 Pearson Canada Inc.
CREDIT
20,000
220,000
240,000
(15-20 min.)
P 13-8A
Req. 1
The preferred shares are labelled as cumulative.
Req. 2
Total contributed capital is $728,000 ($200,000 + $528,000)
Req. 3
Total market value of the common shares: $1,232,000
44,000 shares  $28.00 per share = $1,232,000
Req. 4 (book value per share of preferred and common shares)
Tulameen Systems Inc.
Book Value of Shares
Preferred:
Liquidation value (10,000  $24.00)
$240,000
Cumulative dividend for two years (10,000  $1.20  2)
24,000
Shareholders’ equity allocated to preferred
$264,000
Book value per share ($264,000/10,000 shares)
$
26.40
Common:
$896,000
Total shareholders’ equity
Less shareholders’ equity allocated to preferred
264,000
Shareholders’ equity allocated to common
$632,000
Book value per share ($632,000/44,000 shares)
$
Copyright © 2011 Pearson Canada Inc.
14.36
35
Req. 1
(40-60 min.)
P 13-9A
General Journal
DATE
2008
Jan.
ACCOUNT TITLES AND EXPLANATIONS
2
17
Mar.
Dec.
7
31
2009
Feb.
14
Apr.
36
11
POST.
REF.
Tony Wong, Capital
Patrick Wu, Capital
Common Shares (155,000 shares)
To record shares issued for capital accounts.
DEBIT
60,000
95,000
155,000
Incorporation Costs
Cash
Common Shares (4,000 shares)
To record settlement of legal fee for
incorporation.
8,500
Cash
Preferred Shares (5,000 shares)
Sale of preferred shares for cash.
12,500
Income Summary
Retained Earnings
To close books and record net income for
year.
75,000
Retained Earnings
Dividends Payable—Preferred Shares
(5,000 shares  $0.75)
Dividends Payable—Common Shares
($17,500 – $3,750)
Dividends declared on shares.
17,500
Dividends Payable—Preferred Shares
Dividends Payable—Common Shares
Cash
Payment of dividends declared
February 14, 2009.
3,750
13,750
Copyright © 2011 Pearson Canada Inc.
CREDIT
2,500
6,000
12,500
75,000
3,750
13,750
17,500
Req. 1
(continued)
P 13-9A
General Journal
DATE
2009
Sept.
7
Dec.
31
2010
Dec.
16
31
ACCOUNT TITLES AND EXPLANATIONS
Preferred Shares (1,000 shares)
Common Shares (3,000 shares)
Conversion of 1,000 preferred shares to
3,000 common shares.
POST.
REF.
DEBIT
2,500
2,500
Income Summary
Retained Earnings
To close books and record profit for year.
82,000
Retained Earnings
Dividends Payable—Preferred Shares
(4,000 shares  $0.75)
Dividends Payable—Common Shares
($40,000 – $3,000)
40,000
Income Summary
Retained Earnings
CREDIT
82,000
3,000
37,000
100,000
100,000
Req. 2
WW Tools Inc.
Shareholders’ Equity
December 31, 2010
Contributed capital:
Preferred shares, $0.75, convertible, 200,000 shares authorized, 4,000 shares
issued
$ 10,000
Common shares, 1,000,000 shares authorized, 162,000 shares issued
163,500
Total contributed capital
173,500
Retained earnings*
199,500
Total shareholders’ equity
$373,000
* Retained earnings: $75,000 – $17,500 + $82,000 – $40,000 + $100,000 = $199,500
Copyright © 2011 Pearson Canada Inc.
37
Req. 1
(40-50 min.)
P 13-10A
DEBIT
CREDIT
General Journal
DATE
2008
Dec.
ACCOUNT TITLES AND EXPLANATIONS
1
31
2009
Jan.
7
15
Feb.
14
POST.
REF.
Retained Earnings
Dividends Payable—Preferred Shares
(30,000  $0.75  3 years)
Dividends Payable—Common Shares,
Class A
Dividends Payable—Common Shares,
Class B
To record dividends declared on shares.
Income Summary
Retained Earnings
To close books and record net income for year.
Cash
Preferred Shares (10,000  $22.50)
Sale of preferred shares for cash.
Dividends Payable—Preferred Shares
Dividends Payable—Common Shares, Class A
Dividends Payable—Common Shares, Class B
Cash
Payment of dividends declared
December 1, 2008.
Cash
Common Shares—Class B (15,000  $11)
Sale of common shares for cash.
* Class A common shares
Class B common shares
20,000
150,000
170,000
(or 2/17 of total common shares)
(or 15/17 of total common shares)
Class A = 2/17  ($175,000 – $67,500) = $12,647
Class B = 15/17  ($175,000 – $67,500) = $94,853
38
Copyright © 2011 Pearson Canada Inc.
175,000
67,500
12,647*
94,853*
60,000
60,000
225,000
225,000
67,500
12,647
94,853
175,000
165,000
165,000
(continued)
P 13-10A
General Journal
DATE
2009
Dec.
ACCOUNT TITLES AND EXPLANATIONS
2
31
2010
Jan.
15
POST.
REF.
Retained Earnings
Dividends Payable—Preferred
(40,000  $0.75)
Dividends Payable—Common Shares,
Class A
Dividends Payable—Common Shares,
Class B
To record dividends declared on shares.
DEBIT
90,000
30,000
6,486*
53,514*
Income Summary
Retained Earnings
To close books and record net income for year.
105,000
Dividends Payable—Preferred
Dividends Payable—Common Shares, Class A
Dividends Payable—Common Shares, Class B
Cash
Payment of dividends declared December 2.
30,000
6,486
53,514
* Class A common shares
Class B common shares (150,000 + 15,000)
CREDIT
105,000
90,000
20,000 (or 2/18.5 of total shares)
165,000 (or 16.5/18.5 of total shares)
185,000
Class A = 2/18.5  ($90,000 – $30,000) = $6,486
Class B = 16.5/18.5  ($90,000 – $30,000) = $53,514
Copyright © 2011 Pearson Canada Inc.
39
Req. 2
(continued)
P 13-10A
Red Deer Manufacturing Ltd.
Partial Balance Sheet
December 31, 2009
Liabilities
Current:
Dividend payable
$ 90,000
$ 90,000
Total current liabilities
Total liabilities
90,000
Shareholders’ Equity
Contributed capital:
Preferred shares, $0.75 cumulative,
liquidation price of $25.00, 100,000 shares
authorized, 40,000 shares issued
$425,000
Common shares:
Class A, 20,000 shares authorized and issued
125,000
Class B, unlimited number of shares authorized,
165,000 shares issued
Total contributed capital
1,665,000
2,215,000
200,000
Retained earnings*
Total shareholders’ equity
Total liabilities and shareholders’ equity
2,415,000
$2,505,000
*Retained earnings: $300,000 – $175,000 + $60,000 – $90,000 + $105,000 = $200,000
Req. 3
Preferred shares, book value per share = liquidation price of $25.00 per share (as there are no
dividends in arrears).
Common shares, book value per share = $7.65 [$2,415,000 – (40,000  $25.00)]/185,000
Req. 4
$125,000/20,000 = $6.25 per share
40
Copyright © 2011 Pearson Canada Inc.
Problems
Group B
(10-20 min.)
DATE:
TO:
FROM:
SUBJECT:
P 13-1B
________________________
Jack Rudd and Pam Kines
Student Name
Advantages and disadvantages of the corporate form of business organization
A corporation has a separate legal existence apart from its owners. This eases the transfer of
ownership from one person to another with no effect on the operation of the corporation. A
shareholder cannot commit the corporation to an obligation unless he or she acts in an official
capacity for the business. The owners do not have personal liability for the debts and other
actions of the business. In many corporations, ownership is separate from management as the
board of directors appoints professionals to manage the business on a day-to-day basis. The
continuous life and transferability of ownership make it easy for a corporation to raise money
from a large number of people. A partnership, on the other hand, can raise owners’ equity only
from the partners. The net result of these features is that most corporations have more owners
and can grow larger than a partnership, the owners do not assume personal liability for debts of
the corporation, and the business should be managed for the benefit of all the shareholders.
Corporations have disadvantages as compared to the partnership form of organization.
Corporations often have to pay fees to organize. Corporations are also taxed on their business
income but the rate for an active business is less than the one for an individual. If the corporation
pays dividends, the shareholders also pay income tax on the dividend income. Therefore,
shareholders may be subject to a degree of double taxation. Corporations are regulated more
heavily than partnerships. Complying with various regulations can be expensive for a
corporation. Corporations also may incur additional costs compared to partnerships, such as
liability insurance for a corporation’s directors.
Instructional Note: Student responses will vary considerably.
Copyright © 2011 Pearson Canada Inc.
41
Req. 1 (journal entries)
(30-45 min.)
P 13-2B
General Journal
DATE
2010
Jan.
2
6
12
22
ACCOUNT TITLES AND EXPLANATIONS
Organization Costs ($1,500 + $6,000)
Cash
Paid costs and legal fees to incorporate.
POST.
REF.
Equipment
Common Shares
Issued 20,000 common shares for equipment.
DEBIT
7,500
CREDIT
7,500
175,000
175,000
Software
Preferred Shares
Issued 100 preferred shares to acquire
software.
17,500
Cash
Common Shares
Issued 5,000 common shares for cash.
(5,000 × $6)
30,000
17,500
30,000
Req. 2 (shareholders’ equity section of balance sheet)
Intuite Solutions Ltd.
Balance Sheet (partial)
December 31, 2010
Shareholders’ Equity
Contributed capital:
Preferred shares, $2.00, 100,000 shares authorized, 100 shares issued
Common shares, 250,000 shares authorized, 25,000 shares issued*
Total contributed capital
Retained earnings
205,000**
222,500
50,000
Total shareholders’ equity
* 20,000 + 5,000 = 25,000
** $175,000 + $30,000 = $205,000
42
$ 17,500
Copyright © 2011 Pearson Canada Inc.
$272,500
(15-20 min.)
P 13-3B
Req. 1
The annual dividend rate on the preferred shares is $0.20.
Annual dividend on 2,000 shares = $400 ($0.20  2,000 shares)
Req. 2
Issue price of common shares during 2009 =
$8.75 per share ($87,500/10,000 shares)
Req. 3
First-year operations were not profitable, as shown by the Deficit in Retained Earnings.
Req. 4
a. Cash
25,000
Preferred Shares (10,000  $2.50)
25,000
8,000
b. Cash
Common Shares (1,000  $8)
c. Building
8,000
225,000
Common Shares (25,000  $9)
d. Income Summary
225,000
62,500
Retained Earnings
62,500
Copyright © 2011 Pearson Canada Inc.
43
Req. 5
Sloboda Corporation
Balance Sheet (partial)
December 31, 2010
Contributed capital:
Preferred shares, $0.20, 50,000 shares authorized, 10,000 shares issued
Common shares, 100,000 shares authorized, 36,000* shares issued
Total contributed capital
Retained earnings
320,500**
345,500
42,500***
Total shareholders’ equity
Computations:
*10,000 + 1,000 + 25,000 = 36,000
** $87,500 + $8,000 + $225,000 = $320,500
*** $62,500 - $20,000 = $42,500
44
$ 25,000
Copyright © 2011 Pearson Canada Inc.
$388,000
(20-30 min.)
P 13-4B
AGI Inc.
Balance Sheet (partial)
December 31, 2010
Contributed capital:
100,000 common shares authorized and issued
Total contributed capital
$1,000,000
1,000,000
Retained earnings
55,000
$1,055,000
Total shareholders’ equity
Computations:
Common shares: 100,000  $10 = $1,000,000
Retained earnings: –$30,000 + $35,000 + $50,000 = $55,000
Canfer Corp.
Balance Sheet (partial)
December 31, 2010
Contributed capital:
Preferred shares, $1.25, cumulative, 50,000 shares authorized, 3,000 shares
issued
Common shares, 500,000 shares authorized, 60,000 shares issued
Total contributed capital
Retained earnings
$ 30,000
150,000
180,000
100,000
Total shareholders’ equity
$280,000
Computations:
Preferred shares: 3,000  $10 = $30,000
Common shares: Balance given as $150,000
Retained earnings: $75,000 + $62,500 – (3,000 shares  $1.25  2 years) – (60,000 shares  $0.50)
= $100,000
Copyright © 2011 Pearson Canada Inc.
45
(20-35 min.)
P 13-5B
Req. 1
Preferred shares
Common shares
Req. 2
The preferred shares are cumulative based on their balance-sheet description.
Req. 3 (entries to record issuance of shares)
General Journal
DATE
ACCOUNT TITLES AND EXPLANATIONS
Cash
Preferred Shares
POST.
REF.
Cash
Common Shares
46
Copyright © 2011 Pearson Canada Inc.
DEBIT
32,500
CREDIT
32,500
100,000
100,000
(continued)
P 13-5B
Req. 4
General Journal
DATE
2010
Dec.
31
*
ACCOUNT TITLES AND EXPLANATIONS
Retained Earnings
Dividends Payable—Preferred Shares
Dividends Payable—Common Shares
To record the declaration of dividends on
preferred shares for the current year and
all arrears, and on common shares.
POST.
REF.
DEBIT
25,000
CREDIT
10,000*
15,000
20,000 × $0.25 × 2 years = $10,000
Copyright © 2011 Pearson Canada Inc.
47
Req. 1
(40-50 min.)
P 13-6B
Labelle Systems Ltd.
Balance Sheet
June 30, 2010
Assets
Current assets:
Cash
$ 15,000
Accounts receivable, net
52,500
Inventory
93,500
Prepaid expenses
12,000
Total current assets
$173,000
Property, plant, and equipment, net
300,000
Trademark, net
19,000
$492,000
Total assets
Liabilities
Current liabilities:
Accounts payable
$ 36,000
Dividends payable
10,500
Accrued liabilities
30,000
76,500
Total current liabilities
Long-term note payable
48,500
Total liabilities
125,000
Shareholders’ Equity
Contributed capital:
Preferred shares, $0.20, 10,000 shares authorized and issued
29,500
Common shares, 500,000 shares authorized, 272,000 shares
issued
300,000
329,500
Total contributed capital
Retained earnings
37,500*
Total shareholders’ equity
Total liabilities and shareholders’ equity
*Retained earnings
48
=
=
Total assets – Total liabilities – Total contributed capital
$492,000 – $125,000 – $329,500 = $37,500
Copyright © 2011 Pearson Canada Inc.
367,000
$492,000
Req. 2
Rate of
return on
total assets
Rate of return
on common
shareholders’
equity
(continued)
Net income
+ Interest expense
=
Average total
assets
=
0.071  100
=
Net income
– Preferred
dividends
Average common
shareholders’
equity
=
0.086  100
* Total shareholders’ equity
Less: Preferred equity
Common shareholders’ equity
$25,000 + $7,200
($492,000 +
$410,000/2)
=
P 13-6B
$32,200
$451,000
=
= 7.1%
=
$25,000 – (10,000 
$0.20)
($337,500* +
$200,000)/2
=
$23,000
$268,750
= 8.6%
$367,000
29,500
$337,500
Req. 3
These rates of return suggest weakness. Return on common shareholders’ equity is only 1.5%
higher than return on assets. An 8.6% rate of return on common shareholders’ equity is good
considering bank savings rates are currently below 2%; a 12% return is considered excellent in
most industries.
Preparing a fairly complex balance sheet will refine students’ understanding of the shareholders’
equity of a corporation. This will help students understand what they are buying (shareholders’
equity) when they purchase a company’s shares as an investment.
This problem also exposes students to two widely-used measures of profitability—return on
assets and return on common shareholders’ equity. Students, investors, and others can evaluate
investments on the basis of their returns on assets and returns on equity. Higher return figures
generally indicate better investments. Although these return measures are not the only indicators
of profitability that investors use, they are helpful—along with other decision-making aids—in
evaluating investments.
Copyright © 2011 Pearson Canada Inc.
49
Req. 1a (preferred shares are noncumulative)
(20-30 min.)
P 13-7B
MMT Broadcasting Inc.
Total Dividends to Preferred and Common Shares for 2008, 2009, and 2010
PREFERRED
COMMON
TOTAL
2008
Preferred (15,000  $2.50)
$37,500
$ 2,500
Remainder to common
Total
$ 40,000
2009
$0
$ 0
$0
2010
Preferred (15,000  $2.50)
$37,500
Remainder to common
$82,500
$120,000
Total
Req.1b (preferred shares are cumulative)
MMT Broadcasting Inc.
Total Dividends to Preferred and Common Shares for 2008, 2009, and 2010
PREFERRED
COMMON
TOTAL
2008
Preferred (15,000  $2.50)
$37,500
Remainder to common
$ 2,500
$ 40,000
Total
2009
$0
$ 0
$0
2010
Arrears to preferred (15,000 x $2.50)
$37,500
Current to preferred (15,000  $2.50)
37,500
$45,000
Remainder to common
Total
50
$75,000
Copyright © 2011 Pearson Canada Inc.
$45,000
$120,000
Req. 2 (dividend entries)
(continued)
P 13-7B
General Journal
DATE
2010
Dec.
28
2011
Jan.
17
ACCOUNT TITLES AND EXPLANATION
POST.
REF.
Retained Earnings
Dividends Payable—Preferred Shares
Dividends Payable—Common Shares
To declare dividends on shares.
Dividends Payable—Preferred Shares
Dividends Payable—Common Shares
Cash
To pay dividends declared on Dec. 28, 2010.
Copyright © 2011 Pearson Canada Inc.
DEBIT
CREDIT
120,000
75,000
45,000
75,000
45,000
120,000
51
(15-20 min.)
P 13-8B
Req. 1
The preferred shares are labelled as cumulative.
Req. 2
The common shareholders control the company because the preferred shares are nonvoting.
Req. 3
Total contributed capital is $690,000 ($350,000 + $340,000)
Req. 4
Total market value of the common shares: $270,000
90,000 shares  $3.00 per share = $270,000
Req. 5 (book value per share of preferred and common shares)
Cohen Sales Limited
Book Value of Shares
Preferred:
Liquidation value
$375,000
Cumulative dividend for three years (16,000  $1.40  3)
67,200
Shareholders’ equity allocated to preferred
$442,200
Book value per share ($442,200/16,000 shares)
$
27.64
Common:
Total shareholders’ equity
$810,000
442,200
Less shareholders’ equity allocated to preferred
52
Shareholders’ equity allocated to common
$ 367,800
Book value per share ($367,800/90,000 shares)
$
Copyright © 2011 Pearson Canada Inc.
4.09
Req. 1
(40-60 min.)
P 13-9B
General Journal
DATE
2007
Jan.
ACCOUNT TITLES AND EXPLANATION
2
15
Mar.
Dec.
5
31
2008
Feb.
12
Apr.
8
POST.
REF.
Greg Sallows, Capital
Billy Canovale, Capital
Common Shares (245,000 shares)
To record shares issued for capital assumed.
DEBIT
50,000
72,500
122,500
Incorporation Costs
Cash
Common Shares (4,000 shares)
To record settlement of legal fee for
incorporation.
4,500
Cash
Preferred Shares (4,000 shares)
Sale of shares for cash.
15,000
Income Summary
Retained Earnings
To close books and record profit for year.
55,000
Retained Earnings
Dividends Payable—Preferred Shares
(4,000 shares  $0.30)
Dividends Payable—Common Shares
($10,000 – $1,200)
Dividends declared on shares.
10,000
Dividends Payable—Preferred Shares
Dividends Payable—Common Shares
Cash
Payment of dividends declared February 12.
Copyright © 2011 Pearson Canada Inc.
CREDIT
2,000
2,500
15,000
55,000
1,200
8,800
1,200
8,800
10,000
53
(continued)
P 13-9B
General Journal
DATE
2008
July
7
Dec.
31
2009
Dec.
31
Dec.
31
ACCOUNT TITLES AND EXPLANATION
Preferred Shares (1,000 shares)
Common Shares (2,000 shares)
Conversion of 1,000 preferred shares to
2,000 common shares. ($15,000 ×
1,000/4,000)
POST.
REF.
DEBIT
3,750
3,750
Income Summary
Retained Earnings
To close books and record profit for year.
70,000
Retained Earnings
Dividends Payable—Preferred Shares
(3,000 shares  $0.30)
Dividends Payable—Common Shares
($30,000 – $900)
Dividends declared, payable February 11,
2010.
30,000
Income Summary
Retained Earnings
CREDIT
70,000
900
29,100
100,000
100,000
Req. 2
Welluck Carpets Corporation
Shareholders’ Equity
December 31, 2009
Contributed capital:
Preferred shares, $0.30 convertible, 100,000 shares authorized, 3,000 shares
issued
$ 11,250
Common shares, 500,000 shares authorized, 251,000* shares issued
128,750**
Total contributed capital
140,000
Retained earnings
185,000***
Total shareholders’ equity
$325,000
* 100,000 + 145,000 + 4,000 + 2,000 = 251,000
** $122,500 + $2,500 + $3,750 = $128,750
*** $55,000 – $10,000 + $70,000 – $30,000 + $100,000 = $185,000
54
Copyright © 2011 Pearson Canada Inc.
Req. 1
(40-50 min.)
P 13-10B
DEBIT
CREDIT
General Journal
DATE
2008
Dec.
ACCOUNT TITLES AND EXPLANATION
1
31
2009
Jan.
7
14
Feb.
14
POST.
REF.
Retained Earnings
Dividends Payable—Preferred Shares
(40,000  $0.85  4 years)
Dividends Payable—Common Shares,
Class A
Dividends Payable—Common Shares,
Class B
To record dividends declared on shares.
Income Summary
Retained Earnings
To close books and record net income for year.
150,000
136,000
2,333*
11,667*
70,000
70,000
Cash
Preferred Shares (10,000 shares  $22.5)
Sale of preferred shares for cash.
225,000
Dividends Payable—Preferred Shares
Dividends Payable—Common Shares, Class A
Dividends Payable—Common Shares, Class B
Cash
Payment of dividends declared
December 1, 2008.
136,000
2,333
11,667
Cash
Common Shares—Class B
(15,000 shares  $6)
Sale of common shares for cash.
* Class A common shares
Class B common shares
15,000
75,000
90,000
225,000
150,000
90,000
90,000
(or 1/6 of total shares)
(or 5/6 of total shares)
Class A = 1/6  ($150,000 – $136,000) = $2,333
Class B = 5/6  ($150,000 – $136,000) = $11,667
Copyright © 2011 Pearson Canada Inc.
55
(continued)
P 13-10B
General Journal
DATE
2009
Dec.
ACCOUNT TITLES AND EXPLANATION
2
31
2010
Jan.
13
POST.
REF.
Retained Earnings
Dividends Payable—Preferred Shares
(50,000  $0.85)
Dividends Payable—Common Shares,
Class A
Dividends Payable—Common Shares,
Class B
To record dividends declared on shares.
75,000
Income Summary
Retained Earnings
To close books and record net income for year.
63,000
Dividends Payable—Preferred Shares
Dividends Payable—Common Shares, Class A
Dividends Payable—Common Shares, Class B
Cash
Payment of dividends declared December 2,
2009.
42,500
4,643
27,857
* Class A common shares
Class B common shares (75,000 + 15,000)
Copyright © 2011 Pearson Canada Inc.
CREDIT
42,500
4,643*
27,857*
63,000
15,000 (or 1/7 of total shares)
90,000 (or 6/7 of total shares)
105,000
Class A = 1/7  ($75,000 – $42,500) = $4,643
Class B = 6/7  ($75,000 – $42,500) = $27,857
56
DEBIT
75,000
Req. 2
(continued)
P 13-10B
Barton Ltd.
Partial Balance Sheet
December 31, 2009
Shareholders’ Equity
Contributed capital:
Preferred shares, $0.85, cumulative (no arrears),
liquidation price of $25, 100,000 shares
authorized, 50,000 shares issued
$1,025,000
Common shares:
Class A, 15,000 shares authorized and issued
120,000
Class B, unlimited number of shares authorized,
90,000 shares issued
465,000
Total contributed capital
$ 1,610,000
Retained earnings*
208,000
Total shareholders’ equity
$1,818,000
*Retained earnings: $300,000 – $150,000 + $70,000 – $75,000 + $63,000 = $208,000
Req. 3
Preferred shares, book value per share = liquidation price of $25 per share (as there are no
dividends in arrears).
Common shares, book value per share = $5.41 [$1,818,000 – (50,000  $25)]/105,000
Req. 4
$120,000/15,000 = $8.00 per share
Copyright © 2011 Pearson Canada Inc.
57
Challenge Problems
P 13-1C
The student should look critically at incorporation from Bryan McNair’s perspective.
58
Separate legal entity
This characteristic is not really an advantage to Bryan based on
the information given. He does not appear to be interested in
taking on co-owners.
Continuous life
This may be an advantage later but does not appear to be an
advantage at this time.
No mutual agency
This characteristic does not appear to be advantageous unless
Bryan sells shares to other people. The question states that the
plan is for Bryan to hold all the shares.
Limited liability
Limited liability would protect Bryan’s business assets from
creditors other than the bank. It would also protect any of
Bryan’s personal assets that do not form part of the bank’s
security.
Separation of
ownership and
management
Bryan will be the shareholder and the manager so this
characteristic is not an issue.
Corporate taxation
The students are not likely to be aware of the fact that corporate
taxes and taxes on dividends may result in Bryan being taxed at
a lower rate if he incorporates. The student is likely to suggest
that Bryan’s taxes will be the same or higher if he incorporates.
Personal taxation
Students are likely unaware that by incorporating, if Bryan were
to eventually sell his shares in the company, the first $500,000
of capital gains would be tax free.
Government regulation
This characteristic would be a drawback as it is likely that Bryan
would have to spend more time preparing and filing forms.
Corporation costs
As the sole shareholder, Bryan would also be the sole director,
and as a director, he could be sued by outsiders doing business
with his company. To protect himself, he would have to pay for
director’s liability insurance, an additional cost of incorporating.
Conclusion
The student may decide either way—the evidence suggests
incorporation may not be advantageous to Bryan at this point.
Copyright © 2011 Pearson Canada Inc.
P 13-2C
Common
The shares pay the lowest rate of return at 6%
($2.40/$40.00) but have the potential for paying a higher
(or lower) rate of return in the future. Any missed
dividends are missed forever. In addition, the market
price of the shares has the potential for increasing.
Cumulative preferred
The rate of return is 7% ($3.50/$50.00) and the dividend
is cumulative. This is an advantage since shareholders
will receive a yearly dividend; a year might be missed
but must be made up before the common shareholders
receive a dividend. The share price will not be likely to
change much up or down.
Convertible preferred
The rate of return is 6.75% ($5.30/$78.50) and is fixed;
the dividend is not cumulative. The shares are
convertible into common at the rate of 1 preferred for 2
common. The present prices would give the shareholder
a cost per common share after conversion of $39.25
($78.50/2), which is below the current market price of
$40.00.
Noncumulative
preferred
The rate of return is 6.2% ($1.55/$25.00). The present
dividend at 6.2% is just slightly higher than the rate on
common of 6%. The share price is not likely to move
much up or down.
Decision
The student may select any one of the shares, other than
the noncumulative preferred, given the cumulative
preferred have a higher rate of return, and the cumulative
feature has value. The common may appreciate in value;
the cumulative preferred may be preferable if EGI’s
income fluctuates so that a dividend may be omitted in
any one year; the convertible preferred may be
advantageous since it pays a higher dividend than the
common and the shareholder can take advantage of an
increase in the price of common shares by exercising the
conversion feature.
Copyright © 2011 Pearson Canada Inc.
59
Decision Problem
(30-45 min.) Decision
Req. 1
Problem
General Journal
DATE
ACCOUNT TITLES AND EXPLANATIONS
Software
Common Shares (100,000 shares)
To incorporate the business and issue
common shares to the incorporators for
their software.
POST.
REF.
DEBIT
100,000
CREDIT
100,000
Req. 2
General Journal
DATE
ACCOUNT TITLES AND EXPLANATIONS
Plan 1:
Cash
Preferred Shares (1,000 shares)
To issue preferred shares to outside investors.
POST.
REF.
Cash
Common Shares (60,000 shares)
To issue common shares to outside investors.
Plan 2:
Cash
Preferred Shares (1,200 shares)
To issue preferred shares to outside investors.
60
Copyright © 2011 Pearson Canada Inc.
DEBIT
CREDIT
100,000
100,000
72,000
72,000
150,000
150,000
(continued) Decision
Problem
Req. 3
Plan 1:
Shareholders’ Equity
Contributed capital:
Preferred shares, $7.50, cumulative, 10,000 shares authorized,
1,000 shares issued
$100,000
Common shares, 1,000,000 shares authorized, 160,000 shares issued
172,000
Total contributed capital
272,000
Retained earnings ($184,000 – $34,800)
149,200
$421,200
Total shareholders’ equity
Plan 2:
Shareholders’ Equity
Contributed capital:
Preferred shares, $8.50, nonvoting, noncumulative,
10,000 shares authorized, 1,200 shares issued
Common shares, 1,000,000 shares authorized, 100,000 shares issued
Total contributed capital
Retained earnings ($184,000 – $34,800)
Total shareholders’ equity
Copyright © 2011 Pearson Canada Inc.
$150,000
100,000
250,000
149,200
$399,200
61
(continued) Decision
Problem
Req. 4
Plan 2 appears to fit the plan of Carlyle and Friesen better than Plan 1. Recall that their primary
goal is to raise as much capital as possible without giving up control of the business. Under Plan
1, the preferred shares have voting rights if the dividends are more than two years in arrears. If
they fall into arrears then the outside shareholders would have 110,000 votes (60,000 common
votes and 50,000 preferred votes). If they can be sure that they will be able to make profits so
that they can pay dividends of $7,500 each year then this plan will fit their requirements.
However, if they fail to pay the dividends, then Carlyle and Friesen will lose control because
they will only have 100,000 votes.
Under Plan 2, the preferred shares do not have a vote even if the dividends are in arrears.
Consequently Carlyle and Friesen would have complete control since they alone have voting
shares.
The reason that Carlyle and Friesen are switching to a corporation is to raise capital. What they
will have to decide is whether they need the additional $22,000 so badly that they are prepared to
take the risk that they cannot pay dividends. If $150,000 is sufficient for their needs, then they
would be better to take the certainty of Plan 2.
62
Copyright © 2011 Pearson Canada Inc.
Financial Statement Cases
(20-30 min.) Financial
1.
Statement Case 1
The balance sheet states that capital stock has a value of $221,914,000. No further
breakdown is provided on the balance sheet, but the reader is referred to Note 18. In this
note, more detail is provided.
Authorized shares:



An unlimited number of common shares without par value
33,964,324 class A shares without par value
25,000,000 first preferred shares without par value, issuable in series, of which
4,200,000 first preferred shares Series 1 and 4,200,000 first preferred shares
Series 2 have been reserved
Shares issued and outstanding:


63,457,142 common shares
None of the other two classes of shares have been issued yet.
2. It appears that the number of common shares increased during the year by 620,953 and
the value of the common shares increased by $2,910,000. Assuming no other changes to
this class of shares, the average price of a share issued during the year was $4.69
($2,910,000/620,953).
(15–20 min.) Financial
Statement Case 2
1. In Note 11 to the financial statements, Sun-Rype discloses that it has one class of
common shares. Sun-Rype is authorized to issue up to 100,000,000 shares (as opposed to
CWB’s authorization for an unlimited number of common shares) and at December 31,
2008, there were 10,827,600 shares issued.
2. The book value of the Sun-Rype common shares is calculated as follows:
Shareholders’ equity
÷ Common shares outstanding
Book value per share
$28,978,000
10,827,600
$
2.68
Copyright © 2011 Pearson Canada Inc.
63
The book value is based on historical cost as reported on the balance sheet. The market
price varies from it because it reflects the hopes and fears of investors regarding the
future value of the company and its profitability.
3. Sun-Rype earned $(1.08) per common share. The information appears on the bottom of
the Statement of Operations and Comprehensive Income.
64
Copyright © 2011 Pearson Canada Inc.