CHAPTER 14
Corporations: Organization and Share Capital Transactions
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief
Exercises
1. Identify and discuss the major
characteristics of a corporation.
1, 2, 3, 4, 5
1, 3
2. Differentiate between contributed
capital and retained earnings.
6, 7
2
3. Record the issue of common
shares.
8, 9, 10,
11, 12, 13,
14, 15, 16
3, 4, 5, 6
4. Differentiate and journalize preferred
and common share transactions.
17, 18
5. Prepare the shareholders’ equity
section of the balance sheet.
6. Calculate return on equity and book
value per share.
Exercises
Problems
Set B
1
1, 2
2
2
2, 3, 4, 5, 6,
7
2, 3, 4, 5, 8
2, 3, 4, 5
7
5, 6, 7
2, 3, 4, 5
2, 3, 4, 5
19
8
7, 8, 9
2, 3, 4, 5, 6,
9
2, 3, 4, 5, 6,
9
20, 21
9,10, 11
9, 10
5, 6, 7, 8, 9
4, 5, 6, 7, 8,
9
14-1
1
Problems
Set A
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Determine forms of business organization.
Simple
35-45
2A
Answer questions about shareholders’ equity section.
Simple
20-30
3A
Journalize and post share transactions. Prepare contributed
capital section.
Moderate
25-35
4A
Journalize and post shareholders’ equity transactions. Prepare
shareholders’ equity section.
Moderate
30-40
5A
Journalize and post share transactions, and prepare a
shareholders’ equity section. Calculate the return on equity and
book value.
Moderate
20-30
6A
Prepare shareholders’ equity section and calculate book value.
Moderate
20-30
7A
Show impact of transactions on ratios.
Moderate
15-25
8A
Calculate book values; compare to amounts paid in.
Moderate
15-25
9A
Prepare balance sheet; calculate return on equity and book
value.
Moderate
30-40
1B
Determine forms of business organization.
Simple
35-45
2B
Answer questions about shareholders’ equity section.
Simple
20-30
3B
Journalize and post share transactions. Prepare contributed
capital section.
Moderate
25-35
4B
Journalize and post shareholders’ equity transactions. Prepare
shareholders’ equity section. Calculate return on equity.
Moderate
30-40
5B
Journalize and post share transactions, and prepare a
shareholders’ equity section. Calculate the book value and
return on equity.
Moderate
20-30
6B
Prepare shareholders’ equity section and calculate book value.
Moderate
20-30
7B
Show impact of transaction on ratios.
Moderate
15-25
8B
Calculate return on equity and book value.
Moderate
15-25
9B
Prepare balance sheet; calculate return on equity and book
value.
Moderate
30-40
14-2
BLOOM’S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material
1.
Study Objectives
Identify and
discuss the major
characteristics of a
corporation.
Knowledge
Q14-4
Comprehension
Q14-1
Q14-2
Q14-3
Q14-5
BE14-1
BE14-3
Application
P14-2B
Q14-6
Q14-7
BE14-2
P14-2A
P14-2B
Analysis
E14-1
P14-1A
P14-1B
Synthesis
P14-8A
E14-7
2.
Differentiate
between
contributed capital
and retained
earnings.
3.
Record the issue
of common
shares.
Q14-9
Q14-10
Q14-11
Q14-15
Q14-16
BE 14-3
Q14-8
Q14-12
Q14-13
Q14-14
BE14-4
BE14-5
BE14-6
E14-2
E14-3
E14-4
E14-5
E14-6
P14-2A
P14-3A
P14-4A
P14-5A
P14-2B
P14-3B
P14-4B
P14-5B
P14-8B
4.
Differentiate and
journalize
preferred and
common share
transactions.
Q14-17
Q14-18
BE 14-7
E14-5
E14-6
P14-2A
P14-3A
P14-4A
P14-5A
P14-2B
P14-3B
P14-4B
P14-5B
E14-7
5.
Prepare the
shareholders’
equity section of
the balance sheet.
Q14-19
BE14-8
E14-8
E14-9
P14-2A
P14-3A
P14-4A
P14-5A
P14-6A
P14-9A
P14-2B
P14-3B
P14-4B
P14-5B
P16-6B
P14-9B
E14-7
6.
Calculate return
on equity and
book value per
share.
Q14-21
BE14-10
BE14-11
BE14-9
E14-9
E14-10
P14-5A
P14-6A
P14-7A
P14-9A
P14-4B
P14-5B
P14-6B
P14-7B
P14-9B
BYP14-6
BYP14-1
BYP14-2
BYP14-3
Broadening Your
Perspective
Q14-20
14-3
Evaluation
P14-8A
P14-8B
BYP14-4
BYP14-5
BYP14-7
ANSWERS TO QUESTIONS
01. (a) Separate legal existence. A corporation is separate and distinct
from its owners and acts in its own name rather than in the name of
its shareholders. In contrast to a partnership, the acts of the
owners (shareholders) do not bind the corporation unless the
owners are duly appointed agents of the corporation.
(b) Limited liability of shareholders. Because of its separate legal
existence, creditors of a corporation ordinarily have recourse only
to corporate assets to satisfy their claims. Thus, the liability of
shareholders is normally limited to their investment in the
corporation.
(c) Transferable ownership rights. Ownership of a corporation is held
in capital shares. The shares are transferable units. Shareholders
may dispose of part or all of their interest by simply selling their
shares. The transfer of ownership to another party is (usually)
entirely at the discretion of the shareholder.
02. (a) Taxation is an advantage because corporate tax rates are often
lower than personal tax rates. It can be a disadvantage because
profits distributed to the shareholders are not a tax deductible
expense for the corporation. Therefore profits can be subject to
“double” taxation—once at the corporate level and again at the
personal rates of the shareholders who receive dividends paid out
of these profits (the impact of these taxes is somewhat reduced by
the dividend tax credit that shareholders can claim on their
personal tax returns).
14-4
Questions Chapter 14 (Continued)
2. (b) Two other disadvantages of a corporation are government
regulations and corporate management.
• A corporation is subject to numerous provincial and federal
regulations. For example, laws prescribe the requirements for
issuing shares, and govern the sale of shares to the general
public.
• Professional managers often run corporations with ownership
being separate from management. Professional managers
may act in their own best interests to the detriment of the
company and its owners.
Two advantages of a corporation are
shareholders and ability to raising capital.
limited
liability
of
• A corporation is a separate legal entity and therefore the
shareholders are usually only liable up to their investment in
the corporation.
• A corporation has an easier time raising capital because of
features such as limited liability and the ease of transferring
shares.
3.
(a) (1) A charter is a document that creates a corporation. A charter is
also referred to as the articles of incorporation.
(2) Organization costs are costs incurred in the formation of a
corporation. Organization costs are normally expensed in the
year they occur, rather than being capitalized as an intangible
asset, because of the difficulty in matching the cost with the
future benefits.
(b) No, this is not correct. Companies in certain industries which are
under federal jurisdiction must incorporate federally. However,
most companies in Canada are incorporated provincially, and are
free to operate in other provinces – although they may be required
to register in other provinces in which they operate.
14-5
Questions Chapter 14 (Continued)
4.
In the absence of restrictive provisions, the basic ownership rights of
common shareholders are the rights to:
04.
•
•
•
•
vote in the election of the board of directors and in corporate
actions that require shareholders' approval,
share in corporate earnings by receiving dividends,
maintain the same percentage ownership when additional shares
of common shares are issued (the pre-emptive right), and
share in assets upon liquidation.
5.
The market value of shares depends on a number of factors, including
the company's anticipated future earnings, its expected dividend rate
per share, its current financial position, the current state of the
economy, and the current state of the stock market.
6.
The two principal components of shareholders' equity for a
corporation are contributed capital (the investment of cash and other
assets in the corporation by shareholders in exchange for share
capital) and retained earnings (net income minus dividends).
05.
7. Each of the three basic financial statements for a corporation differs
from those for a proprietorship. The income statement for a
corporation will have income tax expense. For a corporation, a
statement of retained earnings is prepared to show the changes in
retained earnings during the period. In the balance sheet, the owner's
equity section is called the shareholders' equity section, and consists
of share capital (contributed capital if the shares have a stated value)
and retained earnings.
8.
The maximum number of shares that a corporation is legally allowed to
issue is the number authorized. Letterman Corporation is authorized to
sell 100,000 common shares. Of these shares, 53,000 common shares
(60,000 issued – 7,000 reacquired) have been issued.
In Canada, shares which are reacquired are usually cancelled and
restored to the status of authorized but unissued shares.
14-6
Questions Chapter 14 (Continued)
9.
Stated value does not indicate the market value of shares, it is an
amount that represents the legal capital per share. Based on the
information provided, there is no way to tell which of these common
shares is the better investment.
10. The issue of share capital does not have any effect on the issuer's net
income. If shares are issued at a price above stated value, the excess
is credited to a shareholders' equity account, Contributed Capital in
Excess of Stated Value. This excess is part of the company's
contributed capital, and is not considered a revenue or a gain.
11. If share prices fall below their par or stated value a company will not
be able to use the stock market as a source of financing. Under the
law, a share cannot be sold for less than its par or stated value. Also,
as market prices increase further away from par or stated value,
creditors could have an inadequate “equity” cushion of protection if
the company only retains assets equal to its minimum legal capital.
Consequently, many companies in Canada issue no par value shares
to avoid these potential problems.
12.
When Jean-Guy purchases the original shares as part of
Innovate.com’s initial public offering, he is purchasing from the
company. The $1,000 (100 X $10) he spends to buy the shares goes
directly to Innovate.com and increases the company’s shareholder’s
equity. In the subsequent purchase, Jean Guy is buying in the
secondary market from another investor. The proceeds from this sale
go to this seller and not to Innovate.com. Therefore there is no impact
on Innovate.Com’s financial statements as a result of the second
purchase.
13. There will be no impact on Chapters’ financial statements at the time of
the share price decline. However, should Chapters decide it would like
to raise capital in the stock market, the price decline means they will
have to sell more shares to raise the same amount of money.
14-7
Questions Chapter 14 (Continued)
14. When shares are issued for services or noncash assets, the cost
should be measured at the fair market value of the consideration given
up (in this case, the shares). If that value cannot be reasonably
determined, then the fair market value of the consideration received
should be used (in this case, the land). In this case, the fair market
value of the shares is more objectively determinable than that of the
land, since the shares are actively traded in the stock market. The
appraised value of the land is merely an estimate of the land's value,
while the market price of the shares is the amount the shares were
actually worth on the date of exchange. Therefore, the land should be
recorded at $90,000.
15. A corporation may acquire its own shares (1) to reissue the shares to
officers and employees under bonus and stock compensation plans,
(2) to increase trading of the company's shares in the stock market, in
the hopes of enhancing its market value, (3) to have additional shares
available for use in the acquisition of other companies, (4) to reduce
the number of shares issued and increase earnings per share, and (5)
to comply with percentage share ownership requirements.
16. This transaction (a) decreases total assets, (b) has no effect on total
liabilities and, (c) decreases total shareholders' equity.
17. (a) Common shares and preferred shares both represent ownership of
the corporation. Common shares signify the basic residual
ownership; preferred shares represent ownership with certain
privileges or preferences. Preferred shareholders typically have a
preference as to dividends and as to assets in the event of
liquidation. However, preferred shareholders generally do not have
voting rights.
(b) Many preferred share issues are cumulative, which means that
preferred shareholders must be paid both current year dividends
and unpaid prior year dividends before common shareholders
receive any dividends.
(c) Dividends in arrears are disclosed in the notes to the financial
statements; they are not recorded as liabilities.
14-8
Questions Chapter 14 (Continued)
18. When convertible preferred shares are converted into common shares,
the shareholder simply exchanges preferred shares for common
shares, according to a predetermined rate. To record the conversion,
the amount originally paid for the preferred shares is transferred into
the appropriate common shares account.
This entry has no effect on (a) total assets, (b) total liabilities, or (c)
total shareholders' equity.
19. The answers are summarized in the table below:
Account
(a)
(b)
(c)
(d)
Classification
Common Shares
Retained Earnings
Contributed Capital in Excess
of Stated Value
Preferred Shares
Share capital—common shares
Retained earnings
Additional contributed capital
Share capital—preferred shares
20. The formula for calculating book value per share when a corporation
has only common shares issued is:
Total
Shareholders'
Equity
Number of
Common
Shares
Issued
Book
value
=
÷
per
share
represents
the equity a common shareholder has in the net assets of the corporation from owning one common share.
21. Book value per share represents the equity a common shareholder has
in the net assets of the corporation, from owning one common share.
Book value is based on recorded historical costs.
Market value is at best only remotely related to book value. A
share's market value will reflect many factors, including the company's
anticipated future earnings, its expected dividend rate per share, its
current financial position, the current state of the economy, and the
current state of the stock market.
14-9
B
V
per
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 14-1
The advantages and disadvantages of a corporation are as follows:
Advantages
Disadvantages
Separate legal existence
Limited liability of shareholders
Corporation management—
separation of ownership and
management
Ability to acquire capital
Government regulations
Continuous life
Potential for additional income
tax
Corporation management—
professional management
Potential for deferred or
reduced income tax
Transferable ownership rights
BRIEF EXERCISE 14-2
Dec. 31
31
Revenue .................................................
Retained Earnings ...........................
2,000,000
Retained Earnings ................................
Expenses..........................................
1,500,000
14-10
2,000,000
1,500,000
BRIEF EXERCISE 14-3
Open Text may wish to repurchase shares for a number of reasons
including:
1. To increase trading of the company’s shares in the stock market in
hopes of enhancing market value.
2. To reduce the number of common shares issued and thereby
increase earnings per share
3. To have additional shares available to reissue to officers and
employees under bonus and stock compensation plans.
4. To have additional shares available for use in the acquisition of
other companies.
5. To comply with percentage share ownership requirements.
The pre-emptive right protects shareholders from dilution of their
ownership interest due to the company selling or repurchasing additional
shares. If pre-emptive rights exist current shareholders have the first
opportunity to buy or sell their shares so that they have the same
percentage of ownership both before and after any sales/repurchases by
the company.
BRIEF EXERCISE 14-4
(a) June 1
(b) June 1
Cash (2,000 X $6) ............................................
Common Shares ........................................
12,000
Cash (2,000 X $6) ............................................
Common Shares (2,000 X $1) ...................
Contributed Capital in Excess of
Stated Value ............................................
12,000
12,000
2,000
10,000
BRIEF EXERCISE 14-5
Dec. 20
Land (5,000 X $14)........................................
Common Shares .....................................
70,000
70,000
The market price of the shares is a reliable indicator of its value; the
advertised price of the land is not.
14-11
BRIEF EXERCISE 14-6
When issuing shares for noncash consideration, the cost is determined to
be the fair market value of the consideration given. If the fair market value
of the consideration given is not readily determinable, then the fair market
value of the consideration received can be used. However, in this case,
since the fair market value of the consideration given up (the shares) is
known, then the purchase of the assets and issue of the common shares
should be recorded at $9.1 million. This accounting treatment is in
accordance with the cost principle.
BRIEF EXERCISE 14-7
Jan. 28
Cash (5,000 X $110)........................................
Preferred Shares.....................................
550,000
550,000
BRIEF EXERCISE 14-8
KAPOSI CORPORATION
Balance Sheet (Partial)
December 31, 2003
Shareholders' equity
Contributed capital
Share capital
8% preferred shares, cumulative, $25 stated
value, unlimited number of shares authorized,
800 shares issued ....................................................
Common shares, no par value, unlimited number
of shares authorized, 5,000 shares issued ............
Additional contributed capital
Contributed capital in excess of stated value—
preferred shares.......................................................
Total contributed capital .....................................
Retained earnings .......................................................................
Total shareholders' equity
14-12
$ 20,000
50,000
10,000
80,000
0 29,000
$109,000
BRIEF EXERCISE 14-9
Book value per share = $21.50 ($860,000 ÷ 40,000)
BRIEF EXERCISE 14-10
Shareholders were anxious to pay increasing amounts because of their
expectations of the future profitability of the company. They expected that
the company would be successful in the future and wanted to buy the
shares while the price was relatively low.
BRIEF EXERCISE 14-11
The impact of this drop on Nortel’s financial position is that the company
will find it more difficult to raise capital in the stock market. Investors may
not be willing to invest in the company given its weak share price. As well,
because the price is lower, Nortel will have to issue many more shares to
raise the same amount of capital then it would have when the shares were
selling for $124.50.
14-13
SOLUTIONS TO EXERCISES
EXERCISE 14-1
(a) High $260.00
Low $35.00
(b) 575,000
(c) 1,000 X $164.50 = $164,500
(d) Since this company has not paid any dividends this year but has had
significant growth, the person purchasing these shares would most
likely be looking for price increases.
(e) $164.50 – $17.25 = $147.25 (closing price – net change)
EXERCISE 14-2
(a) Jan. 10 Cash (70,000 X $5) ....................................
Common Shares................................
350,000
July 01 Cash (40,000 X $7) ....................................
Common Shares (40,000 X $7) .........
280,000
(b) Jan. 10 Cash (70,000 X $5) ....................................
Common Shares (70,000 X $2) .........
Contributed Capital in Excess of
Stated Value (70,000 X $3) .............
350,000
July 01 Cash (40,000 X $7) ....................................
Common Shares (40,000 X $2) .........
Contributed Capital in Excess of
Stated Value (40,000 X $5) .............
280,000
14-14
350,000
280,000
140,000
210,000
80,000
200,000
EXERCISE 14-3
(1) Dec. 5 Land ............................................................
Common Shares ................................
115,000
(2) June 1
220,000
Land (20,000 X $11) ..................................
Common Shares ................................
115,000
220,000
EXERCISE 14-4
(a)
When a federally incorporated company, such as Air Canada, buys
back its own shares it is generally required to cancel them. This
reduces the number of shares issued and the amount recorded in the
Common Shares account. It increases the earnings per share because
there are fewer shares issued (earnings are not affected). In an
efficient market, the price should not be affected. However, depending
on the number of shares purchased, the increase in trading volume
may lead to an increase in share prices.
(b)
The reason for Air Canada’s purchase may have been to try to reduce
the likelihood of a future takeover bid.
EXERCISE 14-5
Mar.
2
June 12
July
11
Legal Fees Expense (1,600 X $15) ........
Common Shares..............................
24,000
Equipment ...............................................
Common Shares..............................
360,000
Cash (1,000 X $105) ................................
Preferred Shares (1,000 X $105) ....
105,000
14-15
24,000
360,000
105,000
EXERCISE 14-6
(a) Nov. 15
Preferred Shares (2,000 X $100) ...........
Common Shares (10,000 shares)...
200,000
200,000
(b) The entry is the same as in (a) because market values are ignored in
accounting for the conversion of preferred shares.
(c) Nov. 15
Preferred Shares (2,000 X $100) ...........
Common Shares (16,000 shares) ..
200,000
200,000
Note that, in each case, the conversion is recorded at book value. The
amount originally paid for the preferred shares is simply transferred to the
common shares account.
14-16
EXERCISE 14-7
MEMORANDUM
To:
President
From:
Subject:
Shareholders’ Equity
Date:
There are two classes of shares issued by Shumway Corporation—
preferred and common.
The preferred shares are cumulative, which means that the preferred
shareholders will be paid their annual dividend ($6 per share) for the
current and prior years whenever a dividend is declared (up to the amount
of the dividend declared). Unpaid dividends from prior years (dividends in
arrears) are not recorded because they are not a liability of the company
until declared. They are disclosed in the notes to the financial statements.
The common shares have a $3 stated value per share ($1,800,000 ÷
600,000). Only the stated value is recorded in the Common Shares account.
Any excess of the issue price over stated value is recorded in a separate
contributed capital account, Contributed Capital in Excess of Stated Value.
The common shares were originally sold for $4 per share [($1,800,000 +
$600,000) ÷ 600,000].
Summary of answers to questions:
(a) The stated value of the common shares is $3 per share ($1,800,000 ÷
600,000 shares).
(b) The average issue price per share of the common shares was $4 per
share [($1,800,000 + $600,000) ÷ 600,000 shares].
(c) The annual dividend is $6 per share ($36,000 ÷ 6,000 shares).
(d) Dividends in arrears are not recorded until declared. They are,
however, disclosed in the notes to the financial statements.
14-17
EXERCISE 14-8
Account
Shareholders’ Equity
Contributed Capital
Additional
Share
Retained
Contributed
Capital
Earnings
Capital
1. Cash
Other
Financial
Statement
Classification
Balance
Sheet
Current Asset
4. Gain on sale of
capital assets
Income
Statement
Other
Revenue
(Gain)
5. Patents
Balance
Sheet
Capital Asset
Income
Statement
Operating
Expense
2. Common
Shares
Common
Shares
3. Contributed
Capital in
Excess of
Stated Value—
Preferred
Shares
6. Preferred
Shares
Contributed
Capital in
Excess of
Stated
Value—
Preferred
Shares
Preferred
Shares
7. Retained
Earnings
Retained
Earnings
8. Legal Fees
Expense
14-18
EXERCISE 14-9
(a)
FUTURE SHOP LTD.
Partial Balance Sheet
April 1, 2000
(in thousands)
Shareholders' equity
Common shares, no par value, unlimited number
authorized, 16,189,545 shares issued .........................
Retained earnings .................................................................
Total shareholders’ equity............................................
$78,783
1,450
$80,233
Note to the financial statements: An unlimited number of no par value
preferred shares are authorized. None have been issued.
(b)
Return on Equity = Net Income ÷ Average shareholders’ equity
= $23,680 ÷ [($80,233 + $56,329) ÷ 2]
= 34.68%
Book Value per Share = Total shareholders’ equity ÷ Number of common
shares
= $80,233,000 ÷ 16,189,545
= $4.96
Note: there is no adjustment required for preferred share equity since
there are no preferred shares issued.
14-19
EXERCISE 14-10
(a)
Total shareholders' equity
$4,000,000
Less: Preferred shareholders’ equity
Stated value
(500,000)
Dividends in arrears ($500,000 X 10%)
000000000
550$3,500,000
Common shareholders’ equity
Common shares issued
Book value per share
14-20
(b)
$4,000,000
(500,000)
(50,000)
$3,450,000
00250,000
00250,000
$14.00
00 $13.80
SOLUTIONS TO PROBLEMS
PROBLEM 14-1A
(a)
The professors should incorporate their business because of their
concerns about the legal liabilities. A corporation is the only form of
business that provides limited liability to it owners.
(b)
Joseph should run his bait shop as a proprietorship because this is
the simplest form of business to establish. It is also the least
expensive. He is the only person involved in the business and is
planning to operate for a limited time.
(c)
Robert and Tom should form a corporation when they combine their
operations. This is the best form of business for them to choose
because they expect to raise significant funds in the coming year and
it is easier to raise funds in a corporation. A corporation may also
receive more favourable income tax treatment.
(d)
A partnership would be the most likely form of business for Darcy,
Ellen and Meg to choose. It is simpler to form than a corporation and
less costly.
(e)
Hervé is most likely to select to operate his business as a
proprietorship. He wants to maintain control of the business.
Operating as a proprietorship will allow him to do this. He has no
savings or personal assets, therefore will not require a corporation to
protect his personal assets.
14-21
PROBLEM 14-2A
(a) $1,200,000 ÷ $60 = 20,000 preferred shares
(b) $1,200,000 + $200,000 = $1,400,000 ÷ 20,000 shares = $70 per share
(c) $1,200,000 X 8% = $96,000
(d) It appears that there were no dividends declared in 2003 since there
was no decrease for dividends in the retained earnings.
(e) Since no dividends were declared in 2003 and the preferred share
dividends are cumulative—there are $96,000 in dividends in arrears
at the end of 2003.
14-22
PROBLEM 14-3A
(a)
GENERAL JOURNAL
J1
Date
Account Titles and Explanation
Debit
Credit
Jan. 10
Cash (80,000 X $3) ......................................... 240,000
Common Shares (80,000 X $2) ..............
160,000
Contributed Capital in Excess of
Stated Value—Common Shares
(80,000 X $1) ........................................
80,000
Mar. 01
Cash (5,000 X $105) ....................................... 525,000
Preferred Shares (5,000 X $105)............
525,000
Apr. 01
Land (24,000 X $3.50).....................................
Common Shares (24,000 X $2) ..............
Contributed Capital in Excess of
Stated Value—Common Shares
($84,000 – $48,000) .............................
84,000
48,000
36,000
June 020 Cash (80,000 X $4) ......................................... 320,000
Common Shares (80,000 X $2) ..............
160,000
Contributed Capital in Excess of
Stated Value—Common Shares
(80,000 X $2) ........................................
160,000
Aug. 01
Sept. 01
Legal Fees Expense (10,000 X $5)................
Common Shares (10,000 X $2) ..............
Contributed Capital in Excess of
Stated Value—Common Shares
($50,000 – $20,000) .............................
50,000
Cash (10,000 X $5) ......................................... 50,000
Common Shares (10,000 X $2) ..............
Contributed Capital in Excess of Stated
Value—Common Shares (10,000 X $3)
14-23
20,000
30,000
20,000
30,000
PROBLEM 14-3A (Continued)
(a) (Continued)
GENERAL JOURNAL
J2
Date
Account Titles and Explanation
Debit
Credit
Nov. 01
Cash (1,000 X $108) ....................................... 108,000
Preferred Shares (1,000 X $108)............
108,000
(b)
Preferred Shares
Date
Mar.
Nov.
Explanation
Ref.
1
1
Debit
J1
J2
Credit
Balance
525,000
108,000
525,000
633,000
Credit
Balance
160,000
048,000
160,000
020,000
020,000
160,000
208,000
368,000
388,000
408,000
Common Shares
Date
Jan.
Apr.
June
Aug.
Sept.
Explanation
Ref.
10
1
20
1
1
Debit
J1
J1
J1
J1
J1
Contributed Capital in Excess of Stated Value—Common Shares
Date
Jan.
Apr.
June
Aug.
Sept.
Explanation
Ref.
10
1
20
1
1
J1
J1
J1
J1
J1
14-24
Debit
Credit
Balance
080,000
036,000
160,000
030,000
030,000
080,000
116,000
276,000
306,000
336,000
PROBLEM 14-3A (Continued)
(c)
WETLAND CORPORATION
Balance Sheet (Partial)
December 31, 2003
Shareholders' equity
Contributed capital
Share capital
8% preferred shares, no par value,
10,000 shares authorized,
6,000 shares issued ....................................
Common shares, $2 stated value,
500,000 shares authorized,
204,000 shares issued ................................
Total share capital..................................
$0,633,000
00
408,000
1,041,000
Additional contributed capital
Contributed capital in excess of stated
value—common shares ..............................
336,000
Total contributed capital........................
$1,377,000
14-25
PROBLEM 14-4A
(a)
(b)
Date
$400,000 + $60,000 = $460,000 ÷ 4,000 shares = $115 per share
GENERAL JOURNAL
Account Titles and Explanation
J1
Debit
Credit
Feb. 1 Land (1,050 x $115)........................................ 120,750
Preferred Shares (1,050 X $100) ............
105,000
Contributed Capital in Excess of Stated
Value—Preferred Shares (1,050 X $15)
15,750
Mar. 1 Cash (1,000 X $120) ....................................... 120,000
Preferred Shares (1,000 X $100) ............
100,000
Contributed Capital in Excess of Stated
Value—Preferred Shares (1,000 X $20)
20,000
July 1 Preferred Shares (1,000 X $100) ...................
Contributed Capital in Excess of Stated
Value—Preferred Shares (1,000 X $15)......
Common Shares .....................................
100,000
Sept. 1 Patent (400 X $125)........................................
Preferred Shares (400 X $100) ...............
Contributed Capital in Excess of Stated
Value—Preferred Shares (400 X $25).
50,000
Dec. 1 Preferred Shares (1,000 X $100) ...................
Contributed Capital in Excess of Stated
Value—Preferred Shares (1,000 X $20) .....
Common Shares .....................................
100,000
15,000
115,000
40,000
10,000
20,000
120,000
Note that the conversions are recorded at book values, not market
values.
14-26
PROBLEM 14-4A (Continued)
(b) (Continued)
GENERAL JOURNAL
J2
Date
Account Titles and Explanation
Dec. 31
Revenues ....................................................
Retained Earnings...............................
400,000
Retained Earnings......................................
Expenses .............................................
250,000
31
14-27
Debit
Credit
400,000
250,000
PROBLEM 14-4A (Continued)
(c)
Preferred Shares
Date
Jan.
Feb.
Mar.
July
Sept.
Dec.
Explanation
Ref.
9
J1
J1
J1
J1
J1
1 Balance
1
1
1
1
1
Debit
Credit
105,000
100,000
100,000
40,000
100,000
Balance
400,000
505,000
605,000
505,000
545,000
445,000
Contributed Capital in Excess of Stated Value— Preferred Shares
Date
Jan.
Feb.
Mar.
July
Sept.
Dec.
Explanation
Ref.
9
J1
J1
J1
J1
J1
1 Balance
1
1
1
1
1
Debit
Credit
0
015,750
20,000
15,000
010,000
20,000
Balance
060,000
75,750
95,750
80,750
90,750
70,750
Common Shares
Date
Jan.
July
Dec.
Explanation
1
1
1
Ref.
Debit
9
J1
J1
Balance
Credit
Balance
1,050,000
115,000 1,165,000
120,000 1,285,000
Retained Earnings
Date
Explanation
Jan. 1
Dec. 31
31
Balance
Closing entry
Closing entry
Ref.
9
J2
J2
14-28
Debit
Credit
400,000
250,000
Balance
300,000
700,000
450,000
PROBLEM 14-4A (Continued)
(d)
REMMERS CORPORATION
Balance Sheet (Partial)
December 31, 2003
Shareholders' equity
Contributed capital
Share capital
10% convertible preferred shares, $100
stated value, 10,000 shares authorized,
4,450 shares issued ......................................
Common shares, no par value,
200,000 shares authorized,
90,000 shares issued .....................................
Total share capital.....................................
Additional contributed capital
Contributed capital in excess of stated
value—preferred shares
Total contributed capital...........................
Retained earnings ............................................................
Total shareholders’ equity...............................................
$0,445,000
1,285,000
1,730,000
70,750
1,800,750
450,000*
$2,250,750
* Retained earnings: $300,000 Jan. 1 balance + $150,000 net income =
$450,000 Dec. 31 balance
14-29
PROBLEM 14-5A
GENERAL JOURNAL
Date
J1
Account Titles and Explanation
Debit
Cash .............................................................
Common Shares..................................
25,000
Cash .............................................................
Preferred shares..................................
107,000
Patent ...........................................................
Common Shares..................................
13,000
(b) Dec. 31 Revenues......................................................
Retained Earnings...............................
500,000
31 Retained Earnings ........................................
Expenses .............................................
260,000
(a) Feb. 01
July 20
Sept. 03
14-30
Credit
25,000
107,000
13,000
500,000
260,000
PROBLEM 14-5A (Continued)
(c)
Preferred Shares
Date
Explanation
Jan.
1
July 20
Balance
Ref.
Debit
9
J1
Credit
Balance
107,000
0,320,000
427,000
Credit
Balance
25,000
13,000
1,425,000
1,450,000
1,463,000
Credit
Balance
Common Shares
Date
Explanation
Jan. 1
Feb. 1
Sept. 3
Balance
Ref.
Debit
9
J1
J1
Retained Earnings
Date
Explanation
Jan. 1
Dec. 31
31
Balance
Closing entry
Closing entry
Ref.
9
J1
J1
14-31
Debit
500,000
260,000
488,000
988,000
728,000
PROBLEM 14-5A (Continued)
(d)
CHUNG CORPORATION
Balance Sheet (Partial)
December 31, 2003
Shareholders' equity
Share capital
Preferred shares, no par value, $10
noncumulative, 5,000 shares authorized,
4,000 shares issued .........................................
Common shares, no par value, unlimited
number of shares authorized,
206,000 shares issued .....................................
Total share capital ..................................................
$ 427,000
Retained earnings ...........................................................
728,000
Total shareholders’ equity.....................................
$2,618,000
1,463,000
1,890,000
(e) Return on equity = Net income ÷ Average shareholders’ equity
$240,000
= 9.9%
 $2,618,000 + $2,233,000 


2
(f) Total shareholders' equity .....................................................
Less: Preferred shareholders’ equity...................................
Common shareholders’ equity ..............................................
$2,618,000
00,427,000
$2,191,000
Common shares issued..........................................................
206,000
Book value per share ($2,191,000 ÷ 206,000) .......................
$10.64
14-32
PROBLEM 14-6A
(a)
HUY CORPORATION
Balance Sheet (Partial)
December 31, 2003
Shareholders' equity
Contributed capital
Share capital
$6 preferred shares, $100 stated value,
cumulative, 100,000 shares authorized,
4,000 shares issued ......................................
Common shares, no par value, unlimited
number of shares authorized,
150,000 shares issued ...................................
Total share capital.....................................
Additional contributed capital
Contributed capital in excess of stated
value—preferred shares................................
Total contributed capital...........................
$
400,000
2,400,000
2,800,000
300,000
3,100,000
Retained earnings.............................................................
1,276,000
Total shareholders' equity........................
$4,376,000
14-33
PROBLEM 14-6A (Continued)
(b) The book value of the common shares is $26.51, calculated as follows:
Total shareholders' equity
Less: Preferred shareholders’ equity
Stated value ($100 x 4,000)
Common shareholders’ equity
Common shares issued
$4,376,000
400,000
$3,976,000
150,000
Book value per share ($3,976,000 ÷ 150,000)
$26.51
Note: No preferred dividends are assigned to the preferred
shareholders’ equity because there are no dividends in arrears.
(c) The book value of the common shares is unchanged at $26.51,
calculated as follows:
Total shareholders' equity ($2,400,000 + $300,000
+ $400,000 + $1,300,000)
Less: Preferred shareholders’ equity
Stated value ($100 X 4,000)
Preferred dividends in arrears ($400,000 X $6)
Common shareholders’ equity
Common shares issued
$4,400,000
00,400,000
24,000
$3,976,000
150,000
Book value per share ($3,976,000 ÷ 150,000)
14-34
$26.51
PROBLEM 14-7A
Book Value per
Share ($10)
Return on
Equity (10%)
(a) Issue 1,000 no par value
common shares for $25
Increase
Decrease
(b) Issue 100 no par value
preferred shares for $50 per
share
No Effect
Decrease
(c) Reported net income of
$100,000 for the year
Increase
Increase
Transaction
14-35
PROBLEM 14-8A
(a) The book value of the common shares is $8.18, calculated as follows:
Total shareholders' equity .......................................................
Less: Preferred shareholders’ equity .....................................
Dividends in arrears (20,000 x $4 x 2) ..........................
Common shareholders’ equity ................................................
$5,850,000
1,600,000
160,000
$4,090,000
Common shares issued............................................................
500,000
Book value per share ($4,090,000 ÷ 500,000) .........................
$8.18
(b) The book value of the common shares is $7.70, calculated as follows:
Total shareholders' equity .......................................................
Less: Preferred shareholders’ equity .....................................
Dividends in arrears (20,000 x $4 x 5) ..........................
Common shareholders’ equity ................................................
$5,850,000
1,600,000
400,000
$3,850,000
Common shares issued............................................................
500,000
Book value per share ($3,850,000 ÷ 500,000) .........................
$7.70
(c) The average amount paid in, or contributed, per common share is
$4,000,000 ÷ 500,000 shares = $8.00 per share. The book value per
share is $8.18 in part (a) and $7.70 in part (b). This illustrates that the
book value may be higher or lower than the average amount paid in,
depending upon factors such as the terms of the preferred shares, the
relative value of the preferred shares, and the amount of retained
earnings.
14-36
PROBLEM 14-9A
(a)
REITMANS (CANADA) LIMITED
Balance Sheet
February 3, 2001
(in thousands)
Assets
Current assets
Cash and short-term deposits .................................................
Accounts receivable.................................................................
Merchandise inventories..........................................................
Prepaid expenses .....................................................................
Total current assets .............................................................
Capital assets .............................................................. $127,172
Less: Accumulated amortization ...............................
(41,136)
Investments......................................................................................
Accrued pension asset ...................................................................
Total assets ..........................................................................
$ 20,008
2,556
38,481
8,816
69,861
86,036
81,399
6,903
$244,199
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable and accrued items....................................
Income tax payable..................................................................
Total current liabilities........................................................
Future income tax payable ............................................................
Total liabilities .....................................................................
14-37
$ 35,187
5,124
40,311
1,381
41,692
PROBLEM 14-9A (Continued)
(a) (Continued)
REITMANS (CANADA) LIMITED
Balance Sheet (Continued)
February 3, 2001
(in thousands)
Shareholders’ equity
Share capital
Class A nonvoting shares, unlimited authorized,
6,709,582 issued...............................................................
Common shares, unlimited authorized,
1,680,000 issued...............................................................
Total share capital........................................................
Retained earnings....................................................................
Total shareholders’ equity .................................................
Total liabilities and shareholders’ equity..........................
*Retained earnings
Balance, January 29, 2000
Add: Net income
Less: Dividends and other deductions
Balance, February 3, 2001
(b)
8,065
482
8,547
193,960*
202,507
$244,199
$185,256
20,202
(11,498)
$193,960
Return on Equity = Net Income ÷ Average Shareholders’ Equity
$20,202
= 10.2%
 $194,121 + $202,507 


2
(c)
Book Value Per Share = Total shareholders’ equity available to
common shareholders ÷ Number of common shares
$202,507,000 - $8,065,000 = $194,442,000 ÷ 1,680,000 = $115.74
14-38
PROBLEM 14-1B
(a)
Dawn will likely operate her vegetable stand as a proprietorship
because she is planning on operating it for a short time period and a
proprietorship is the simplest and least costly to form and dissolve.
(b) Joseph and Sabra should form a corporation when they combine their
operations. This is the best form of business for them to choose
because they expect to raise significant funds in the coming year. It is
easier to raise funds in a corporation. A corporation may also receive
more favourable tax treatment.
(c)
The professors should incorporate their business because of their
concerns about the legal liabilities. A corporation is the only form of
business that provides limited liability to it owners.
(b)
Abdur would likely form a corporation because he needs to raise
funds to invest in inventories and capital assets. He has no savings or
personal assets and it is normally easier to raise funds through a
corporation.
(c)
A partnership would be the most likely form of business for Mary and
Richard to choose. It is simpler to form than a corporation and less
costly.
14-39
PROBLEM 14-2B
(a)
Preferred dividends ÷ Preferred dividend per share
$75,000 ÷ $4 = 18,750 preferred shares
(b)
Preferred share average price = $3,125,000 ÷ 18,750 shares issued
= $166.67 per share
(c)
Annual preferred dividend
= 18,750 shares x $4
= $75,000
(d)
Limited liability for preferred shareholders
= $3,125,000
14-40
PROBLEM 14-3B
(a)
GENERAL JOURNAL
J1
Date
Account Titles and Explanation
Jan. 10
Cash (100,000 X $3)......................................
Common Shares...................................
300,000
Cash (10,000 X $52) .....................................
Preferred Shares ..................................
520,000
Land (25,000 X $3.50)...................................
Common Shares...................................
87,500
Cash (75,000 X $4) .......................................
Common Shares...................................
300,000
Legal Fees Expense (10,000 X $4.50).........
Common Shares...................................
45,000
Cash (5,000 X $6) .........................................
Equipment ....................................................
Common Shares...................................
30,000
5,000
Cash (2,000 X $54) .......................................
Preferred Shares ..................................
108,000
Mar. 01
Apr. 01
May 01
July 24
Sept. 01
Nov. 01
14-41
Debit
Credit
300,000
520,000
87,500
300,000
45,000
35,000
108,000
PROBLEM 14-3B (Continued)
(b)
Preferred Shares
Date
Explanation
Mar.
Nov.
Ref.
1
1
Debit
J1
J1
Credit
520,000
108,000
Balance
520,000
628,000
Common Shares
Date
Explanation
Jan.
Apr.
May
July
Sept.
Ref.
10
1
1
24
1
Debit
J1
J1
J1
J1
J1
Credit
Balance
300,000
87,500
0300,000
45,000
0035,000
300,000
387,500
687,500
732,500
767,500
(c)
HIGHLAND CORPORATION
Balance Sheet (Partial)
December 31, 2003
Shareholders' equity
Share capital
$3 preferred shares, no par value, 20,000
shares authorized, 12,000 shares issued .............
Common shares, no par value, 500,000
shares authorized, 215,000 shares issued...........
Total share capital ............................................................
14-42
$0,628,000
00,767,500
$1,395,500
PROBLEM 14-4B
(a)
GENERAL JOURNAL
J1
Date
Account Titles and Explanation
Debit
Credit
Feb. 06
Building (1,000 X $120) ................................. 120,000
Preferred Shares ....................................
120,000
July0 15
Preferred Shares (2,000 X $110) .................. 220,000
Common Shares.....................................
220,000
Sept. 22
Land (400 X $130)..........................................
Preferred Shares ....................................
52,000
52,000
Dec. 01
Preferred Shares (1,000 X $130) .................. 130,000
Common Shares.....................................
130,000
31
Revenues ....................................................... 600,000
Retained Earnings..................................
600,000
31
Retained Earnings......................................... 340,000
Expenses.................................................
340,000
14-43
PROBLEM 14-4B (Continued)
(b)
Preferred Shares
Date
Jan.
Feb.
July
Sept.
Dec.
Explanation
1
1
1
1
1
Ref.
Debit
9
J1
J1
J1
J1
220,000
Ref.
Debit
Balance
Credit
120,000
052,000
130,000
Balance
575,000
695,000
475,000
527,000
397,000
Common Shares
Date
Jan.
July
Dec.
Explanation
1
1
1
9
J1
J1
Balance
Credit
Balance
1,050,000
220,000 1,270,000
130,000 1,400,000
Retained Earnings
Date
Explanation
Jan. 1
Dec. 31
31
Balance
Closing entry
Closing entry
Ref.
9
J1
J1
14-44
Debit
Credit
600,000
340,000
Balance
300,000
900,000
560,000
PROBLEM 14-4B (Continued)
(c)
DENISON CORPORATION
Balance Sheet (Partial)
December 31, 2003
Shareholders' equity
Share capital
Preferred shares, no par value, $10 convertible
10,000 shares authorized, 3,400 shares issued .. $ 397,000
Common shares, no par value, 125,000 shares
authorized, 94,000 shares issued .......................... , 1,400,000
Total share capital ....................................................... 1,797,000
Retained earnings ..............................................................
560,000
Total shareholders' equity ........................................................ $2,357,000
(d) Return on equity = Net income ÷ Average shareholders’ equity
$260,000
= 12.1%
 $1,925,000 * +$2,357,000 


2
*$575,000 + $1,050,000 + $300,000 = $1,925,000 total shareholders’
equity on January 1, 2003
14-45
PROBLEM 14-5B
GENERAL JOURNAL
Date
(a) Feb. 01
Sept. 03
(b) Dec. 31
31
J1
Account Titles and Explanation
Debit
Cash .............................................................
Common Shares..................................
100,000
Equipment ...................................................
Common Shares..................................
25,000
Revenues .....................................................
Retained Earnings...............................
750,000
100,000
25,000
Retained Earnings ...................................... 348,000
Expenses..............................................
14-46
Credit
750,000
348,000
PROBLEM 14-5B (Continued)
(c)
Preferred Shares
Date
Jan.
Explanation
1
Ref.
Debit
Credit
9
Balance
Balance
0,500,000
Common Shares
Date
Explanation
Jan. 1
Feb. 1
Sept. 3
Balance
Ref.
Debit
9
J1
J1
Credit
Balance
2,450,000
100,000 2,550,000
025,000 2,575,000
Retained Earnings
Date
Explanation
Jan. 1
Dec. 31
31
Balance
Closing entry
Closing entry
Ref.
9
J1
J1
14-47
Debit
Credit
Balance
1,816,000
750,000 2,566,000
2,218,000
348,000
PROBLEM 14-5B (Continued)
(d)
DAOUST CORPORATION
Balance Sheet (Partial)
December 31, 2003
Shareholders' equity
Share capital
Preferred shares, $6 cumulative, no par value,
10,000 shares authorized,
8,000 shares issued ..............................................
Common shares, no par value,
unlimited number of shares authorized,
1,033,000 shares issued .......................................
Total share capital.........................................
Retained earnings (See Note X) .....................................
Total shareholders' equity............................
$
500,000
2,575,000
3,075,000
2,218,000
$5,293,000
Note X: Dividends on preferred shares totalling $48,000 [8,000 X $6
per share] are in arrears.
(e) Total shareholders' equity .................................
Less: Preferred shareholders’ equity ...............
Dividends in arrears ($6 x 8,000 shares)
Common shareholders’ equity ..........................
(f)
$5,293,000
$500,000
48,000
548,000
$4,745,000
Common shares issued......................................
1,033,000
Book value per share ($4,745,000 ÷ 1,033,000)
$4.59
Return on Equity = Net income ÷ Average shareholders’ equity
$402,000
= 8.0%
 $4,766,000 * +$5,293,000 


2
*500,000 + $2,450,000 + $1,816,000 = $4,766,000
14-48
PROBLEM 14-6B
DESSERUD CORPORATION
Balance Sheet (Partial)
August 31, 2003
Shareholders’ equity
Share capital
$8 preferred shares, no par value, noncumulative,
unlimited number of shares authorized,
4,000 shares issued ................................. .............
Common shares, unlimited number of no par
value shares authorized, 500,000 shares issued
Total share capital ...............................................
$
800,000
4,000,000
4,800,000
Retained earnings ..............................................................
1,958,000
Total shareholders’ equity .........................................
$6,758,000
(b) The book value of the common shares is $25.16, calculated as follows:
Total shareholders' equity
Less: Preferred shareholders’ equity
Common shareholders’ equity
Common shares issued
$6,758,000
800,000
$5,958,000
500,000
Book value per share ($5,958,000 ÷ 5,000,000)
14-49
$11.92
PROBLEM 14-7B
Book Value per
Share ($10)
Return on
Equity (10%)
(a) Issue 1,000 no par value
common shares for $25
Increase
Decrease
(b) Reported net income of
$200,000
for the year
Increase
Increase
(c) Reacquired and cancelled 4,000
common shares for $100,000
Decrease
Increase
Transaction
14-50
PROBLEM 14-8B
(a) Return on Equity ($ in millions)
1999:
$199.6
= 15.9%
 $1,346.3 + $1,164.3 


2
2000:
$225.8
= 15.6%
 $1,549.3 + $1,346.3 


2
The return on equity has deteriorated slightly from 1999 to 2000.
(b) Sears appears to be doing better than the industry average.
(c) Book Value per Share ($ in millions)
1999: $1,346.3 ÷ 106.2 = $12.67
2000: $1,549.3 ÷ 106.5 = $14.55
This assumes there are no preferred shares.
Book value per share usually does not equal market value. Book value is
based on historical cost whereas market value is based on investor
perceptions of the company’s future potential for earnings and dividends.
14-51
PROBLEM 14-9B
(a)
LEON’S FURNITURE LIMITED
Balance Sheet
December 31, 2000
(in thousands)
Assets
Current assets
Cash and cash equivalents.........................................................
Marketable securities ..................................................................
Accounts receivable....................................................................
Inventory.......................................................................................
Total current assets..............................................................
Fixed assets ...................................................................... $179,335
Less: Accumulated amortization .................................... (70,754)
Future tax asset ..................................................................................
Total assets ..................................................................................
$ 24,802
78,567
14,605
49,171
167,145
108,581
4,930
$280,656
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable and accrued liabilities..................................
Dividends payable .......................................................................
Customers’ deposits ...................................................................
Income tax payable......................................................................
Total current liabilities .........................................................
Redeemable share liability.................................................................
Total liabilities..............................................................................
$ 68,742
2,098
6,507
885
78,232
79
78,311
Shareholders’ equity
Common shares, unlimited authorized, 20,228,542 issued
Retained earnings........................................................................
Total shareholders’ equity ...................................................
Total liabilities and shareholders’ equity ..................................
9,518
192,827*
202,345
$280,656
14-52
PROBLEM 14-9B (Continued)
(a) (Continued)
*Retained earnings ($ in thousands)
Balance, January 1, 1999
Add: Net income
Dividends and other deductions
Balance, December 31, 2000
(b)
$170,909
36,700
( (14,782)
$192,827
Return on equity = Net income ÷ Average shareholders’ equity
$36,700,000
= 19.3%
 $202,345,000 + $178,313,000 


2
(c)
Book value per share = Total shareholders’ equity available to
common shareholders ÷ Number of common shares
= $202,345,000 ÷ 20,228,542 = $10.00
14-53
BYP 14-1 FINANCIAL REPORTING PROBLEM
(a) Yes, the Second Cup does have an unlimited number of preferred
shares in its authorized share capital. However, none of them have
been issued (See Note 8).
(b) Average issue price at June 24, 2000 = $62,355,000 ÷ 9,359,559 shares
= $6.66
Average issue price at June 30, 1999 = $61,670,000 ÷ 9,310,389 shares
= $6.62
(c)
Per Note 8, the last time shares were repurchased was in 1999. There
were 5,035,800 shares repurchased for $33,387,000.
(d) 1999 Return on equity
$3,791,000
= 26.4%
 $17,725,000 + $10,950,000 


2
This is significantly higher that the return on equity of 9.5% for 2000.
(e) Book value per share for Proforma 1999 = $17,725,000 ÷ 9,347,389 =
$1.90
This is higher than the 2000 amount of $0.18 reported in the chapter
because of the decrease in the 2000 shareholders’ equity due to the
payment of a special dividend of $2.00 per share—see note 8 to the
financial statements.
Note to instructors: Students may use the year-end balance of
common shares of 9,310,389 reported in the notes to the financial
statements, rather than the weighted average number of 9,347,389
reported on the statement of earnings. The book value will remain at
$1.90 regardless of which number is used in the denominator.
14-54
BYP 14-2 INTERPRETING FINANCIAL STATEMENTS
(a)
Return on Equity
2000
1999
($2,977,729)
$2,220,967
= (134.1%)
($1,089,966)
$979,635
= (111.3%)
(b)
Investors may be willing to pay an increasing market price for Net
Nanny’s shares despite the poor operating performance because they
believe that the long-term prospects for the company are positive.
(c)
Net Nanny may be financing through equity rather than debt because
they do not want to use available cash for payment of interest
charges.
14-55
BYP 14-3 ACCOUNTING ON THE WEB
Due to the frequency of change with regard to information available on the
world wide web, the Accounting on the Web cases are updated as required.
Their suggested solutions are also updated whenever necessary, and can
be found on-line in the Instructor Resources section of our homepage
[www.wiley.com/Canada/weygandt2].
14-56
BYP 14-4 COLLABORATIVE LEARNING ACTIVITY
(a) The cumulative provision means that preferred shareholders must be
paid both current year dividends and any unpaid prior year dividends
before common shareholders receive any dividends. When preferred
shares is cumulative, preferred dividends not declared in a given
period are called dividends in arrears.
(b) The market price of a share is affected by many factors. Among the
factors to be considered are (1) the corporation's anticipated future
earnings, (2) its expected dividend rate per share, (3) its current
financial position, (4) the current state of the economy, and (5) the
current state of the stock market.
Stated value is the amount assigned to each share by the Board of
Directors. Generally, the amount of stated value is quite low and
shares cannot be issued for less than that amount.
Stated value is not indicative of the worth or market value of the
shares. The significance of stated value is a legal matter. Stated value
represents the legal capital per share that must be retained in the
business for the protection of corporate creditors.
(c) It is important to distinguish between legal capital and total
contributed capital. Stated value represents the legal capital per share
that must be retained in the business for the protection of corporate
creditors. Additional contributed capital is not legal capital, and
therefore a distinction between stated value and additional contributed
capital (i.e., amounts in excess of stated value) must be maintained.
(d) Additional detail such as repurchase information is usually disclosed
in the notes to the financial statements.
14-57
BYP 14-5 COLLABORATIVE LEARNING ACTIVITY
(a) 1.
Generally accepted accounting principles dictate that the cost of
an asset acquired as the result of a noncash exchange should be
equal to the fair market value of the consideration given up. If this
is not clearly determinable, then the fair market value of the
consideration received should be used.
Since the most recent issue of shares was last year at $20 per
share, the $20 value is probably dated and no longer reliable. An
advertised price is usually not a reliable indicator of the real value
of the property, but in this case, the advertised price is also the
appraisal value. This appraised value of up-to-date and
independent, and therefore should be objective and reliable.
2.
(b) 1.
2.
Using the rule stated above, since 8,000 shares were given in
exchange for land, and the shares had a $20 per share market
value, the land should be recorded at $20 X 8,000 or $160,000,
regardless of its advertised selling price or assessed value.
Land........................................................................ 125,000
Building .................................................................. 375,000
Common Shares ............................................
500,000
Land........................................................................
Common Shares ............................................
160,000
14-58
160,000
BYP 14-6 COMMUNICATION ACTIVITY
Dear Uncle Lou,
Thanks for your recent letter and for asking me to explain some terms.
Here are my explanations:
(1) Authorized shares are the total amount of shares that a corporation is
given permission to sell, as indicated in its charter. If all authorized
share capital is sold, a corporation must obtain an amendment of its
charter before it can issue additional shares.
(2) Issued shares are the shares that have been sold, either directly to
investors or indirectly through an investment banking or brokerage
firm.
(3) Preferred shares are share capital that has contractual preferences
over common shares with respect to dividend payments and in the
event of liquidation of the company. However, preferred shareholders
do not usually have voting rights.
(4) Common shares are the voting shares of a corporation. They are
generally the first shares issued upon incorporation. If a corporation
has only one class of shares, they are considered to be common.
I really enjoy my accounting classes and especially like the accounting
instructors. I hope your corporation does well, and I wish you continued
success with your inventions.
Regards,
14-59
BYP 14-7 ETHICS CASE
(a) The stakeholders in this situation are:
The director of Simplex's R & D division.
The president of Simplex.
The shareholders of Simplex.
Those who live in the environment to be sprayed by the new (untested) chemical.
(b) The president is risking the environment, and everything and
everybody in it exposed to this new chemical, in order to enhance his
company's sales and to preserve his job. Presidents and
entrepreneurs frequently take risks in performing their leadership
functions, but this action is both irresponsible and unethical.
(c) A parent company may protect itself against loss and most reasonable
business risks by establishing separate subsidiary corporations, but
whether it can insulate itself against this type of action is a matter of
international corporate law and criminal law.
14-60