Harrison FA IFRS 11e CH10 SM

Chapter 10
Shareholders’ Equity
Short Exercises
(5 min.) S 10-1
Corporation’s advantages:
• Separate legal entity

• Continuous life
• Transferability of ownership
• Limited liability of the shareholders
• Ease of raising capital
Corporation’s disadvantages:
• Corporate taxation
• Government regulation
• Separation of ownership and management
716 Financial Accounting: IFRS 11/e Solutions Manual

(5 min.) S 10-2
1. The shareholders hold ultimate power in a corporation.
2. The chairperson of the board of directors is usually the most

powerful person in a corporation. Title is CEO.
3. The president is in charge of day-to-day operations. Title is

COO.
4. The chief financial officer is in charge of accounting and

finance. Title is CFO*.
*An alternative title is the chief accounting officer, CAO.
Chapter 10 Shareholders’ Equity 717

(5-10 min.) S 10-3
1. The ordinary shareholders are the real owners of a
corporation
2. Preference shareholders have priority over ordinary

shareholders in (1) receipt of dividends and (2) receipt of
assets if the corporation liquidates. Preference shareholders
may also have the right to receive skipped past years’
dividends before ordinary dividends can be declared
(cumulative rights).
3. Ordinary shareholders benefit more from a successful

corporation because the preference shareholders’ dividends
are limited to a specified amount. The ordinary shareholders
take more risk so their potential for gains through an
increase in the company’s share price is correspondingly
greater.

(5-10 min.) S 10-4
DATE: _____________
TO: Kitty Page and Jean Scott
FROM: [Student Name]
RE: Steps in forming a corporation
The first step in organizing a corporation is to obtain a charter

from the state. The charter authorizes the corporation to issue
a certain number of shares to the owners of the business, who
are called shareholders. The corporation will exist when the
incorporators
• Pay fees,
• Sign the charter,
• File documents with the state, and
• Agree to a set of bylaws to determine how the corporation
is to be governed internally.
• Later steps include the shareholders will electing a board
of directors who in turn appoint officers to manage the
corporation on a day-to-day basis. These officers consist
of the chairperson of the board (the chief executive
officer) and the president (the chief operating officer) who
lead the chief financial officer who manage the day to day
operations of the controller (accounting officer) and
treasurer (finance officer).

(5-10 min.) S 10-5
The $74,925,000 was paid-in capital. It was not a profit and
therefore had no effect on net income.
The par value of shares has no effect on total paid-in capital.

Total paid-in capital is the total amount that shareholders have
invested in (paid into) a corporation, including the par value of
shares issued plus any additional paid-in capital.
(10 min.) S 10-6

Millions
Harry Printer:
Cash……………………………………………. 17,224
Share capital……………………………….. 24
Additional Paid-in Capital……………….. 17,200
Delightful Doughnuts:
Cash……………………………………………. 294
Share capital……………………………….. 294

(10 min.) S 10-7
Case A — Issue shares and buy the assets in separate
transactions:
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Cash……………………………………….. 850,000
Share capital (10,000 × $20)……....... 200,000
Paid-in capital in excess of par……. 650,000
Issued shares.
Building…………………………………… 620,000
Equipment………………………………… 230,000
Cash…………………………………….. 850,000
Purchased PPE.
Case B — Issue shares to acquire the assets:
Journal
Building…………………………………… 620,000
Equipment………………………………... 230,000
Share capital (10,000 × $20)………... 200,000
Paid-in capital in excess of par….... 650,000
Issued shares to acquire building and equipment.
The balances in all accounts are the same:
Building…………………………………… $620,000
Equipment……………………………….… 230,000
Share capital (10,000 x $20)…………… 200,000
Paid-in capital in excess of par……….. 650,000

(5-10 min.) S 10-8
Thousands
Shareholders’ equity:
Share capital, $.01 par, 400 shares issued $ 4
Paid-in capital in excess of par…………………. 196
Retained earnings…………………………………. 648
Other shareholders’ equity………………………. (22)
Total shareholders’ equity……………………….. $826
(10 min.) S 10-9

Amounts in Thousands
a. Total revenues……………………………………….. $1,430
Total expenses……………………………………….. (808)
Net income………………………………….………… $ 622
b. Accounts payable…………………………………… $ 450

Other current liabilities……………………………... 2,579
Long-term debt………………………………………. 27
Total liabilities………………………………………... $3,056
c. Total liabilities (from Req. b)………………………. $3,056

Total shareholders’ equity (from S 10-7)……… 826
Total assets…………………………………………… $3,882

(5 min.) S 10-10
Journal
Millions
Treasury shares……………………………. 24
Cash……………………………………….. 24
Cash………………………………………….. 6
Treasury shares…………………………. 2
Paid-in Capital from Treasury share
Transactions………………………….. 4
Overall, shareholders’ equity decreased by $18 million ($24

million paid − $6 million received).

(15-20 min.) S 10-11
Req. 1
MEMORANDUM
TO: PIE Investments, Board of Directors
FROM: [Student Name]
RE: How the purchase of treasury shares will make it

more difficult for outsiders to take over the company
Purchasing treasury shares decreases the amount of shares

outstanding. If PIE Investments holds a sufficient quantity of
company shares in the treasury, outsiders may not be able to
acquire a controlling interest (>50%) of the outstanding shares
from the remaining shareholders. Because it takes cash to buy
treasury shares, the purchase decreases the size of the
corporation. Reducing the company’s cash position may make
the company sufficiently unattractive to cause the outside
investors to abandon their takeover plan.
Req. 2
Sales of treasury shares at prices above the purchase price

increase company assets because of the greater amount of
assets coming in from the sale than went out to buy the shares.
Treasury shares transactions do not affect liabilities, so the
sale of treasury shares also increases shareholders’ equity.
These sales of treasury shares will not affect net income
because the company is dealing with its owners. Transactions
between the corporation and its owners cannot generate a
profit or a loss that is reported on the income statement.
Student responses may vary.

(10 min.) S 10-12
Journal
20X6
Dec. 15 Retained Earnings
($100,000 × .06) + (50,000 × $1.00)… 56,000
Dividends Payable………………… 56,000
Declared a cash dividend……………
20X7
Jan. 4 Dividends Payable…………………… 56,000
Cash…………………………………. 56,000
Paid cash dividend.
During 20X6, Retained Earnings increased by $42,000 (net

income of $98,000 − dividends of $56,000).
(5-10 min.) S 10-13

1. $320,000 (200,000 shares × $1.60 per share)
2. Preference: $320,000
Ordinary: $ 30,000
3. Cumulative, because it is not labeled noncumulative
4. Preference: $960,000 ($320,000 × 3)

Ordinary: $440,000 ($1,400,000 − $960,000)

(5-10 min.) S 10-14
Req. 1
Journal
May 11 Retained Earnings (12,000 × .15 × $25.00)….. 45,000

Share capital (12,000 × .15 × $3)………....... 5,400
Paid-in Capital in Excess of Par-Ordinary.. 39,600
Req. 2
No effect on total assets.

No effect on total liabilities.
No effect on total shareholders’ equity.
(10 min.) S 10-15

Total shareholders’ $4,151,000
equity…………………………….
Less: Preference (198,000)
shares……………………………..
Preference dividends in arrears
(34,000 × .04 × $5 x (20,400)
3)………………………
Ordinary $3,932,600
equity………………………………………….
Number of ordinary shares outstanding
(64,000 − ÷ 62,600
1,400)……………………………………….
Book value per share of ordinary $ 62.82
shares…………..
(5-10 min.) S 10-16
(a) Net income –

Preference dividends
Earnings per share = Average number of
ordinary shares
outstanding
(b)
Rate of return Net income − Preference
on ordinary dividends
=
shareholders' Average ordinary
equity shareholders’ equity
1. and 2. Preference shareholders have the first claim to the

company’s net income through preference dividends.
Therefore, preference dividends are subtracted from net
income to compute EPS and ROE.

(10-15 min.) S 10-17
Net Pref.
income - dividends ¥120
Earnings per = Average number of = 500
share shares
= ¥0.24
Rate of return Net Preference

on ordinary income − dividends ¥120 − ¥0
= =
shareholders’ Average ordinary (¥3,212 + ¥2,878) / 2
equity shareholders’ equity
¥120
= = 3.9%
¥3,045
Note: 15% is considered good in most industries, so Sakura’s

return on equity is very weak.

(20-30 min.) S 10-18
1. Corporations report share capital and retained earnings
separately as prescribed by the relevant laws and accounting
standards. The laws and standards require corporations to
report shareholders’ equity by source to distinguish paid-in
capital, which cannot be used for cash dividends, from
retained earnings.
2. We should first determine the market value of the land. Then

divide the land’s value by the market value of each share of
shares. The result will tell us how many shares of our shares
to issue for the land.
3. Investors buy ordinary shares in the hope of potentially

earning higher returns on their investment than are available
on an investment in preference shares.
4. The redemption value of our preference shares requires us to

pay the preference shareholders this amount when we buy
back the preference shares.
5.
Book value per Total shareholders’ equity − Preference
share of equity
=
ordinary Number of shares of ordinary shares
shares outstanding
There may be other market sentiments that affect the market

value per share, as opposed to book value per share which
does not take these into account.

(5-10 min.) S 10-19
Billions
Cash flows from financing activities:
Paid off long-term notes payable…………………… $(2.5)
Issued share capital…………………………………… 1.2
Purchased treasury shares………………………….. (3.6)
Paid cash dividends…………………………………… (1.6)
Cash flows from financing activities $(6.5)

Exercises
Group A
(5-10 min.) E 10-20A
Req. 1
Journal
Jan. 19 Cash (10,000 × $6.00) .......................... 60,000

Share capital (10,000 × $2.00) ....... 20,000
Paid-in capital in excess of par .... 40,000
Apr. 3 Cash ..................................................... 55,000

Preference shares .......................... 55,000
11 Inventory .............................................. 16,200

Equipment............................................ 9,800
Share capital (3,800 × $2.00) ......... 7,600
Paid-in capital in excess of par .... 18,400
Req. 2
Preference shares, no par
7,000 shares authorized, 500 shares issued……. $55,000
Share capital, $2.00 par,
120,000 shares authorized, 13,800 shares issued… 27,600
Paid-in capital in excess of par-ordinary
($40,000 + $18,400)……………………………………. 58,400
Retained earnings (deficit)………………………….…… (45,000)
Total shareholders’ equity……………………….…… $96,000

(10-15 min.) E 10-21A
Preference shares, 10,000 shares

authorized, 800 shares issued ................................. $ 24,000
Share capital, $1.50 par, 20,000 shares authorized,
5,000 shares issued ....................................................... 7,500
Paid-in capital in excess of par..................................... 82,200*
Retained earnings .......................................................... 45,000
Total shareholders’ equity ....................................... $158,700
_____
*Computation:
April 23: 1,800 shares × ($16.50 − $1.50) =………………… $27,000
May 12: $20,000 + $40,000 − (3,200 shares × $1.50) =…… 55,200
$82,200
Journal entries (not required):
Apr. 23 Cash……………………………………... 29,700

Share capital .................................. 2,700
Paid-in capital in excess of par…. 27,000
May 2 Cash .................................................... 24,000

Preference shares ......................... 24,000
12 Inventory ............................................. 20,000

Equipment ........................................... 40,000
Share capital .................................. 4,800
Paid-in capital in excess of par…. 55,200

(10 min.) E 10-22A
Paid-in capital consists of:
Preference equity:
Issued for cash (3,000 shares × $120) ........... $360,000
Ordinary equity:
Issued for cash (20,000 shares × $1.00)…… 20,000
Issued for organizing the corporation 22,000
Issued for patent……………………………….. 83,000
Total paid-in capital…………………………………… $485,000
Unused data:
Net income
Dividends declared
Short-cut solution :
1. $ 22,000
2. 83,000
3. 360,000 (3,000 × $120)
4. 20,000 (20,000 × $1.00)
$485,000 = Total paid-in capital

(10-15 min.) E 10-23A
Shareholders’ Equity (Thousands)
Share capital, $0.75 par, 800 shares

authorized, 320 shares issued……………………… $ 240
Paid-in capital in excess of par………………………… 899
Retained earnings………………………………………… 2,220
Other shareholders’ equity……………………………… (730)
Less: Treasury shares, ordinary, 100 shares at cost. (1,150)
Total shareholders’ equity…………………………... $1,479
Parker Software paid a higher price to acquire treasury shares

than the price Parker received when it issued its shares. This
explains why Treasury shares have a greater balance than the
sum of Share Capital plus Paid-in Capital in Excess of Par.

(10-15 min.) E 10-24A
Journal
Jan. 17 Cash (2,100 × $10)……………………..... 21,000

Share capital (2,100 × $2.50)……….. 5,250
Paid-in capital in excess of par…… 15,750
To issue share capital.
May 23 Treasury shares - Ordinary (400 × $12). 4,800

Cash……………………………………... 4,800
To purchase treasury shares.
Jul. 11 Cash (300 × $20)………………………….... 6,000

Treasury shares - Ordinary (300 ×$12) 3,600
Paid-in Capital from Treasury
Shares Transactions……………….. 2,400
To sell treasury shares.
Overall effect on shareholders’ equity

($21,000 − $4,800 + $6,000) — $22,200 increase

(10 min.) E 10-25A
Journal
Millions
b. Cash (9 million × $13.50)…………………… 121.5
Share capital (9 million × $2.00)……..... 18
Paid-in capital in excess of par….…….. 103.5
c. Treasury shares……………………………… 16
Cash…………………………………………. 16
d. Retained Earnings…………………………… 32
Dividends Payable………………………… 32
Dividends Payable…………………………… 32
Cash……………………………………….… 32
or one entry only:

Retained Earnings …………………………... 32
Cash……………………………………….… 32

(10 min.) E 10-26A
Dollars in
Millions
Shareholders’ Equity:
Share capital, $2.00 par value,
2,109 million shares issued ($4,200 + $18.0) $ 4,218
Capital in excess of par value ($8,400 + $103.5) 8,503.5
Retained earnings ($250 + $446 − $32)………. 664
Treasury shares (70 + 16)…………………..…… (86)
Total shareholders’ equity…………………… $13,299.5

(20-30 min.) E 10-27A
Req. 1
Conversion of preference shares into ordinary shares

Retirement of preference shares
Req. 2
Issuance of ordinary shares:

a. To preference shareholders who converted their
preference shares into ordinary shares
b. For cash or other assets
c. Shares dividend
Req. 3
(Millions
of shares)
Dec. 31, 20X7
Ordinary shares issued……………………………. 300
Less: Treasury shares, number of shares……. (52)
Ordinary shares outstanding……………………... 248

(continued) E 10-27A
Req. 4
Retained Earnings (Millions)

Dividends Dec. 31, 20X6 Bal. 5,066
during 20X7 176 Net income 20X7 1,380
Dec. 31, 20X7 Bal. 6,270
Req. 5 (All amounts in millions)
December 31, Purchases

20X7 20X6 During 20X7
Cost of treasury shares……………. $1,144 − $228 = $ 916
Treasury shares, number of shares 52 − 12 = ÷ 40
Average price per share paid for
treasury shares purchased during 20X7. $22.90

(15 min.) E 10-28A
PREFERENCE ORDINARY TOTAL
20X6 Total dividend……………. $ 70,000

Current year —
20X6: 50,000 shares X
$0.50(par) per share X .09 =
Total to preference………... $2,250
Remainder to ordinary…. $67,750
20X7 Total dividend……………. $130,000

Preference dividends:
Current year —
20X7: 50,000 shares X $2,250
$0.50(par) per share X .09 =
Remainder to ordinary…. $127,750

(15-20 min.) E 10-29A
Req. 1
Journal
May 11 Retained Earnings (400,000 × .15 × $19)… 1,140,000

Share capital (400,000 × .15 × $0.80). 48,000
Paid-in Capital in Excess of
Par - Ordinary………………………… 1,092,000
To distribute a shares dividend.
Req. 2
Shareholders’ equity
Share capital, $0.80 par, 2,600,000 shares authorized,
460,000 issued ($320,000 + $48,000)……….. $ 368,000
Paid-in capital in excess of par - ordinary
($307,200 + $1,092,000)…………………… 1,399,200
Retained earnings ($7,122,000 − $1,140,000).. 5,982,000
Other………………………………………………….. (200,000)
Total shareholders’ equity…………………….. $7,549,200

(continued) E 10-29A
Req. 3
The shares dividend did not change total shareholders’ equity

because the company didn’t distribute assets to the
shareholders as it would in a traditional dividend. The company
merely transferred $1,140,000 from Retained Earnings to Share
Capital ($48,000) and Paid-in Capital in Excess of Par
($1,092,000).
Req. 4
HD’s maximum cash dividend is limited to $580,000, the

balance of its cash account.

(15-20 min.) E 10-30A
a. Decrease shareholders’ equity by $75 million.
b. No effect.
c. No effect.
d. Decrease shareholders’ equity by $9,450 (1,800 × $5.25).
e. Increase shareholders’ equity by $5,600 (800 × $7).
f. No effect.

(10-15 min.) E 10-31A
Millions
Share capital, $1.50 par, 2,250 million shares
(750 million × 3) authorized,
1,230 million shares (410 million × 3) issued… $ 615
Additional paid-in capital……………………………. 318
Retained earnings…………………………………….. 2,399
Other…………………………………………………….. (148)
Total shareholders’ equity………………………. $3,184

(10-15 min.) E 10-32A
Req. 1
Ordinary:
Total shareholders’ $113,000
equity…………………………..
Less: Preference equity — redemption (54,000)
value…..
Total ordinary $59,000
equity………………………………....
Book value per share ($59,000 / 7,000 $ 8.43
shares)….
Req. 2
Ordinary:
Total shareholders’ equity…………………………... $ 113,000
Less: Preference equity [$54,000 +($36,000 ×.04 × 3)] (58,320)
Total ordinary equity…………………………………. $ 54,680
Book value per share ($54,680 /7,000 shares)……….. $ 7.81
Req. 3
Luxury Rug’s shares are not necessarily a good buy.

Investment decisions should be based on more than one ratio.

(10-15 min.) E 10-33A
Earnings Net income +
return Interest expense $1,529 + $224 1,753
= = = = 0 .118
on assets Average total assets ($15,910 + $13,710) / 2 $14,810
Net income
Rate of return − Preference $1,529 − $0 $1,529
on ordinary dividends = = = 0.187
=
shareholders' equity Average ordinary ($8,550* + $8,195
shareholders’ $7,840**) / 2
equity
*$ 45 + $11,524 − $3,019 = $8,550

**$392 + $16,493 − $9,045 = $7,840
These profitability measures suggest strength because (1)

Luna’s 18.7% return on equity is very good and (2) it exceeds
return on assets by a wide margin.

(10-15 min.) E 10-34A
Net income -
Earnings Preference $1,880 – 0
dividends
= = = $ 3.76
Per share Average number of 500
shares
Net income −
Return Preference dividends $1,880− $0 $1,880
on equity = Average ordinary = ($23,478 + $14,034) / 2 = $18,756 = 0.100
equity
The rate of return is low — below the targets of most

companies — but not terribly weak. The company is profitable,
but the return on equity could be improved.
(10 min.) E 10-35A

Payment of long-term debt……………………….. $(17,090)
Proceeds from issuance of share capital……. 8,600
Borrowings…………………………………………... 6,570
Dividends paid………………………………………. (230)

Exercises
Group B
(5-10 min.) E 10-36B
Req. 1
Journal
Aug. 19 Cash (18,000 × 7.50)………………… 135,000

Share capital (18,000 × 3.50)….. 63,000
Paid-in capital in excess of par 72,000
Apr. 3 Cash .................................................... 56,000

Preference shares ......................... 56,000
11 Inventory ............................................. 18,400

Equipment ........................................... 10,600
Share capital (4,000 × 3.50) ........... 14,000
Paid-in capital in excess of par 15,000
Req. 2
Preference shares, no par
8,000 shares authorized, 700 shares issued……… 56,000
Share capital, €3.50 par,
120,000 shares authorized, 22,000 shares issued… 77,000
(72,000 + 15,000)………………………………………. 87,000
Retained earnings (deficit)………………………….…… (48,000)
Total shareholders’ equity……………………….…… €172,000

(10-15 min.) E 10-37B
Preference shares, no-par, 8,000 shares

authorized, 500 shares issued ................................. € 32,000
Share capital, €2.00 par, 16,000 shares authorized,
5,000 shares issued 10,000
Paid-in capital in excess of par..................................... 74,500*
Retained earnings .......................................................... 45,000
Total shareholders’ equity ....................................... €161,500
_____
*Computation:
JUNE 23: 1,400 shares × (17.50 − 2.00) =…………………… $21,700
JULY12: 18,000 + 42,000 − (3,600 shares × 2.00) =………. 52,800
€74,500
Journal entries (not required):
Jun. 23 Cash……………………………………... 24,500

Share capital ................................... 2,800
Paid-in Capital in Excess of Par… 21,700
July 2 Cash ..................................................... 32,000

Preference shares .......................... 32,000
12 Inventory .............................................. 18,000

Equipment............................................ 42,000
Share capital .................................... 7,200
Paid-in Capital in Excess of Par… 52,800

(10 min.) E 10-38B
Paid-in capital consists of:
Preference equity:
Issued for cash (4,000 shares × €90) ........... €360,000
Ordinary equity:
Issued for cash (18,000 shares × €18.00) 324,000
Issued for organizing the corporation 25,000
Issued for patent……………………………….. 87,000
Total paid-in capital…………………………………… €796,000
Unused data:
Net income
Dividends declared
Short-cut solution:
1. € 25,000
2. 87,000
3. 360,000 (4,000 × €90)
4. 324,000 (18,000 × €18.00)
€796,000 = Total paid-in capital

(10-15 min.) E 10-39B
Shareholders’ Equity (Thousands)
Share capital, €0.50 par, 900 shares

authorized, 300 shares issued……………………… € 150
Paid-in capital in excess of par………………………… 897
Retained earnings………………………………………… 2,270
Other shareholders’ equity……………………………… (726)
Less: Treasury shares, ordinary, 100 shares at cost. (1,610)
Total shareholders’ equity…………………………... € 981
Baikal Software paid a higher price to acquire treasury shares

than the price Baikal received when it issued its shares. This
explains why Treasury shares has a greater balance than the
sum of Share capital plus Paid-in Capital in Excess of Par.

(10-15 min.) E 10-40B
Journal
Mar. 17 Cash (2,500 × $7)………………………….. 17,500

Share capital (2,500 × $1.50)………… 3,750
Paid-in capital in excess of par……. 13,750
To issue share capital.
Apr. 20 Treasury shares-Ordinary (700 × $16)…. 11,200

Cash…………………………………….... 11,200
To purchase treasury shares.
Aug. 8 Cash (500 × $17)………………………….. 8,500

Treasury shares-Ordinary (500 × $16) 8,000
Paid-in capital from treasury
shares transactions……………….. 500
To sell treasury shares.
Overall effect on shareholders’ equity

($17,500 − 11,200 + 8,500) — $14,800 increase

(10 min.) E 10-41B
Journal
Millions
b. Cash (10 million × 12.50)……………………. 125
Share capital (10 million × 1.50)……..... 15
Paid-in capital in excess of par…….….. 110
c. Treasury shares……………………………… 15
Cash…………………………………………. 15
d. Retained earnings……………………………. 35
Dividends payable………………………… 35
Dividends payable…………………………… 35
Cash……………………………………….… 35
or one entry only:

Retained earnings………………………….... 35
Cash……………………………………….… 35

(10 min.) E 10-42B
Dollars in
Millions
Shareholders’ Equity:
Share capital, €1.50 par value,
1,700 million shares issued (2,550 + 15) € 2,565
Capital in excess of par value (7,650 + 110) 7,760
Retained earnings (260 + 447 − 35)………… 672
Treasury shares...………………………………….. (25)
Total shareholders’ equity…………………….. €10,972

(20-30 min.) E 10-43B
Req. 1
Conversion of preference shares into share capital

Retirement of preference shares
Req. 2
Issuance of ordinary shares:

a. To preference shareholders who converted their
preference shares into ordinary shares
b. For cash or other assets
c. Shares dividend
Req. 3
(Millions
of shares)
Dec. 31, 20X7
Ordinary shares issued……………………………. 500
Less: Treasury shares, number of shares……. (54)
Ordinary shares outstanding……………………... 446

(Continued) E 10-43B
Req. 4
Retained Earnings (Millions)

Dividends Dec. 31, 20X6 Bal. 5,025
during 20X7 203 Net income 20X7 1,478
Dec. 31, 20X7 Bal. 6,300
Req. 5 (All amounts in millions)
December 31, Purchases

20X7 20X6 During 20X7
Cost of treasury shares…………….. 1,242 − 280 = € 962
Treasury shares, number of shares 54 − 14 = ÷ 40
Average price per share paid for
treasury shares purchased during 20X7. €24.05

(15 min.) E 10-44B
PREFERENCE ORDINARY TOTAL
20X6 Total dividend……………. € 110,000

Preference dividends
in arrears:
20X4: 60,000 shares X 1.50 6,300
(par) per share X .07 =
20X5: 60,000 shares X 1.50 6,300
(par) per share X .07
Current year —
20X6: 60,000 shares X 1.50 6,300
Total to preference………... 18,900
Remainder to ordinary…. 91,100
20X7 Total dividend……………. €220,000

Preference dividends:
Current year —
20X7: 60,000 shares X 1.50 6,300
Remainder to ordinary…. 213,700

(15-20 min.) E 10-45B
Req. 1
Journal
Aug. 11 Retained Earnings (500,000 × .20 × €15) 1,500,000

Share capital (500,000 × .20 × €0.30) 30,000
Paid-in Capital in Excess of Par -
Ordinary………………………… 1,470,000
To distribute a share capital dividend.
Req. 2
Shareholders’ equity
Share capital, €0.30 par, 2,200,000 shares authorized,
600,000 issued (150,000 + 30,000)……….. € 180,000
(409,600 + 1,470,000)……………………….. 1,879,600
Retained earnings (7,133,000 − 1,500,000)…. 5,633,000
Other………………………………………………….. (185,000)
Total shareholders’ equity…………………….. €7,507,600

(continued) E 10-45B
Req. 3
The shares dividend did not change total shareholders’ equity

because the company gave its shareholders no assets. The
company merely transferred €1,500,000 from Retained Earnings
to Share Capital (30,000) and Paid-in Capital in Excess of Par
(1,470,000).
Req. 4
HD’s maximum cash dividend is limited to €570,000, the

balance of its cash account.

(15-20 min.) E 10-46B
a. Decrease shareholders’ equity by €88 million.
b. No effect.
c. No effect.
d. Decrease shareholders’ equity by €10,000 (1,600 × €6.25).
e. Increase shareholders’ equity by €7,200 (800 × €9).
f. No effect.
(10-15 min.) E 10-47B
Millions
Share capital, €0.10 par, 1,500 million shares
(500 million × 3) authorized,
1,380 million shares (460 million × 3) issued… € 138
Additional paid-in capital……………………………. 315
Retained earnings…………………………………….. 2,393
Other…………………………………………………….. (146)
Total shareholders’ equity………………………. €2,700

(10-15 min.) E 10-48B
[Errata: Total shareholders’ equity should be €131,000, not €134,000.
We have used the correct value for the computation of this solution.
The print book will be updated]
Req. 1
Ordinary:
Total shareholders’ equity…………………………. €131,000
Less: Preference equity — redemption value…. (28,500)
Total ordinary equity………………………………... €102,500
Book value per share (€102,500 / 11,000 shares) € 9.32
Req. 2
Ordinary:
Total shareholders’ equity…………………………... € 131,000
Less: Preference equity [28,500 + (21,000 ×.10 × 3)] (34,800)
Total ordinary equity…………………………………. € 96,200
Book value per share (96,200 / 11,000 shares)……. € 8.75
Req. 3
Eclectic Rug’s shares are not necessarily a good buy.

Investment decisions should be based on more than one ratio.

(10-15 min.) E 10-49B
Rate of Net income +
return Interest expense 1,533 + 214 1,747
= = = = 0 .117
on assets Average total assets (16,020 + 13,760) / 2 14,890
Net income
Rate of return − Preference 1,533 − 0
on ordinary 1,533
dividends
shareholders' = = = = 0.187
equity Average ordinary
(8,600* + 8,200
shareholders’
equity 7,800**) / 2
*39 + 11,522 − 2,961 = 8,600

**385 + 16,534 − 9,119 = 7,800
These profitability measures suggest strength because (1)

LaSalle Inn’s 18.7% return on equity is very good and (2) it
exceeds return on assets by a wide margin.

(10-15 min.) E 10-50B
Net income -
Earnings Preference 1,874 - 0
dividends
= = = = €3.748
per share Average ordinary 500
equity
Net income −
Return Preference dividends 1,874− 0 1,872
on equity = Average ordinary = (23,472 + 14,044) / 2 = 18,758 = 0.100
equity
The rate of return is low — below the targets of most

companies — but not terribly weak. The company is profitable,
but its ROE could stand to be improved.
(10 min.) E 10-51B

Payment of long-term debt……………………….. €(17,120)
Proceeds from issuance of share capital……. 8,485
Borrowings………………………………………….. 6,580
Dividends paid……………………………………… (225)

Challenge Exercises
(20-25 min.) E 10-52
Journal
(a) Cash (51,000* × $3) .....................................153,000

Share capital .......................................... 51,000
Additional Paid-in Capital ..................... 102,000
Issued ordinary shares.
(b) Treasury shares (1,000 × $9)………… 9,000

Cash……………………………………. 9,000
Purchased treasury shares.
(c) Cash……………………………………….. 1,350

Treasury shares ($9,000 − $7,650).. 1,350
Resold treasury shares.
(d) Revenues…………………………………. 178,000

Expenses……………………………… 118,000
Retained Earnings…………………... 60,000
Closed net income to Retained Earnings.
(d) Retained Earnings ($60,000 − $35,000) 25,000

Cash……………………………………. 25,000
Declared and paid dividends.
_____
*$51,000 ÷ $1 par value per share = 51,000 shares issued.

(20-25 min.) E 10-53
Statement of cash flows:
Cash Flows from Financing Activities:
Issuance of share $153,000
capital……………………….
Purchase of treasury (9,000)
shares…………………..
Sale of treasury 1,350
shares…………………………
Payment of (25,000)
dividends…………………………..
Journal entries are given in the solution to Exercise 10-52.
T-accounts of the shareholders’ equity accounts:
Share capital
Issuance of
51,000
shares
Balance 51,000
Additional Paid-in Capital

Issuance of
shares 102,000
Balance 102,000
Retained Earnings
Dividends 25,000 Net income 60,000
Balance 35,000
Treasury shares
Purchase 9,000 Sale 1,350
Balance 7,650

(15 min.) E 10-54
Preference shares:
Moon Walk retired preference shares of $130 million ($740 −
$610).
Share capital and Additional paid-in capital:

Moon Walk issued 16 million shares of ordinary
shares for $49 million, computed as follows: Millions
Share capital ($908 − $889)………………………. $ 19
Additional paid-in capital ($1,512 − $1,482)…… 30
Total received for issuance of ordinary shares $49
Retained earnings: Millions

Beginning balance…………………………………….. $19,100
Add: Net income…………………………………….. 2,950
Less: Dividends………………………………………. (1,415)*
Ending balance………………………………………… $20,635
*$19,100 + $2,950 − $20,635 = $1,415
Treasury shares:
Moon Walk purchased treasury shares for $185 million ($2,785
− $2,600).

(15 min.) E 10-55
Additional
Share Paid-in Retained Treasury Total
+ −
Amounts in Millions Capital Capital + Earnings Shares = Equity
Balance, Dec. 31, 20X6......... $ 71 $10 $35 $52
Issuance of shares………… 52 152 20
Shares dividend………......... 1.2 3 6 5 (7.2)4 —
Purchase of treasury shares $(8)6 (8)
Net income………………….. 24 24
Cash dividends…………….. (13) (13)
Balance, Dec. 31, 20X7…… $13.2 $31 $38.8 $(8) $75
Computations (not required):

1
7,000,000 × $1 par = $7,000,000
2
5,000,000 × $1 par = $5,000,000
5,000,000 × ($4 − $1) = $15,000,000
3
(7,000,000 + 5,000,000) × .10 × $1 par = $1,200,000
4
(7,000,000 + 5,000,000) × .10 × $6 market value = $7,200,000
5
$7,200,000 market value − $1,200,000 par value = $6,000,000
6
4,000,000 × $2 per share = $8,000,000

Quiz
Q10-56 d
Q10-57 c
Q10-58 e
Q10-59 d
Q10-60 c
Q10-61 b
Q10-62 a ($317,000 + $220,000 + $85,000 = $622,000)
Q10-63 b ($622,000 + $71,300 − $5,200 = $688,100)
Q10-64 c {($119,100 − $8,500) / [($681,500 + $603,100*)
2] = .172}
*$688,100 − $85,000 = $603,100
Q10-65 a
Q10-66 b
Q10-67 e
Q10-68 b
Q10-69 d
Q10-70 c 40,000 × $100 × .08 = $320,000
Q10-71 b ($500,000 − $320,000) / 40,000 = $4.50
Q10-72 d
Q10-73 b
Q10-74 a
Q10-75 a {($30,000) / [($540,000 + $660,000)/2] = 5%}

Problems
Group A
(30-45 min.) P 10-76A
Req. 1
Journal
May 6 Organization Expense…………………… 22,500

Share capital (900 × $8)……………… 7,200
Par - Ordinary……….................... 15,300
Issued shares to promoter for
assisting with issuance of shares.
9 Cash (22,000 × $25 per share)…………. 550,000

Share capital (22,000 × $8)………….. 176,000
Par - Ordinary………................... 374,000
Issued ordinary shares for cash.
10 Patent………………………………………. 20,000
Preference shares……..................... 20,000
Issued preference shares to acquire a patent.
26 Cash (1,000 × $25)………………………... 25,000

Share capital (1,000 × $8)…………… 8,000
Par - Ordinary……….................... 17,000
Issued share capital for cash.

(continued) P 10-76A
Req. 2
Cullen Canoes, Inc.

Balance Sheet (partial)
May 31, 20X6
Preference shares, no-par, 10,000 shares authorized,
800 shares issued …………………………………… $20,000
Share capital, $8 par,
80,000 shared authorized, 23,900 shares issued*. 191,200
Paid-in capital in excess of par - ordinary**…………... 406,300
Retained earnings………………………………………….. 56,000
Total shareholders’ equity……………………………. $673,500
_____
* 900 + 10,000 + 12,000 + 1,000 = 23,900 shares
**$15,300 + $374,000 + $17,000 = $406,300

(10-15 min.) P 10-77A
Garry Corp.
December 31, 20X6
Preference shares, 5%, $140 par, 8,000 shares
authorized, 1,600 shares issued……………………. $224,000
Share capital, no-par, 600,000 shares
authorized, 120,000 shares issued…………………. 540,000
Retained earnings…………………………………………. 98,600
Total shareholders’ equity…………………………… $862,600
_____
Computations:
Preference shares: 1,600 × $140 = $224,000
Share capital: Balance given as $540,000
Retained earnings: $75,000 + $94,000 − ($224,000 ×.05 × 2) −

(120,000 × $.40) = $98,600

(20-30 min.) P 10-78A
Share capital [(475,000 + 380,000) × $6] + $359,100. $ 5,489,100
Additional paid-in capital

475,000 × ($8 − $6)……………………………….......... 950,000
380,000 × ($10 − $6)…………………………………….. 1,520,000
40,000 × ($10 − $7.25)…………………………………. 110,000
From shares dividend………………………………….. 282,150
Retained earnings ($1,000,000 − $600,000 − $641,250) (241,250)
Treasury shares [(60,000 − 40,000) × $7.25]…………… (145,000)
Total shareholders’ equity………………………………. $7,965,000
Total assets…………………………………………….. $14,800,000
− Total liabilities………………………………………….. ( 6,835,000)
= Total shareholders’ equity…………………………… $7,965,000

(25-35 min.) P 10-79A
[Errata: Total shareholders’ equity should be 20,607,000, not 20407,000. We have
used the correct value for the computation of this solution. The print book will be
updated.]
Req. 1
Carved Outdoor Furniture Company has Class A cumulative

preference shares, Class B cumulative preference shares, and
ordinary shares outstanding.
Req. 2
Journal
Cash…………………………………. 2,765,000
Class A Preference shares….. 2,765,000
Cash…………………………………. 3,080,000
Class B Preference shares….. 3,080,000
Cash ($840,000 + $5,542,000)… 6,382,000

Share capital…………………… 840,000
Additional Paid-in Capital -
Ordinary…………………….. 5,542,000
Req. 3
Carved Outdoor Furniture would have to pay all preference

dividends in arrears and pay the current year’s dividends
before paying dividends to ordinary shareholders because the
preference shares are cumulative.

Req. 4
Carved must pay preference dividends of $379,925 each year to

avoid having preference dividends in arrears.
_____
Computation:
Class A Preference: 79,000 x $35 × 0.065 = $179,725
Class B Preference: 88,000 x $35 × 0.065 = 200,200
Total preference dividends………………….. $379,925
Req. 5
Journal
20X7
Feb. 28 Retained Earnings……………………….. 860,000
Dividends Payable, Class A
Preference ($2,765,000 ×.065 × 2) 359,450
Dividends Payable, Class B
Preference ($3,080,000 ×.065 × 2) 400,400
Dividends Payable, Ordinary
($860,000 − $359,450 − $400,400). 100,150

(15-20 min.) P 10-80A
Req. 1
Journal
Feb. 13 Cash (5,400 × $6)…………………………. 32,400

Share capital (5,400 × $4)………….... 21,600
Paid-in capital in excess of par -
Ordinary……………………………… 10,800
Jun. 7 Retained earnings………………………… 210

Dividends payable
(300 shares × $0.70)…………………… 210
24 Dividends payable………………………... 210

Cash……………………………………… 210
Aug. 9 Retained earnings

(11,900 shares × 0.10 × $7)……………… 8,330
Share capital 11,900 × 0.10 × $4)…… 4,760
Ordinary……………………………… 3,570
Oct. 26 Treasury shares (500 × $8)……………… 4,000

Cash……………………………………… 4,000
Nov. 20 Cash (200 × $13)…………………………... 2,600

Treasury shares, (200 × 8)…………… 1,600
Paid-in capital from treasury
shares transactions……………….. 1,000

Req. 2
$.70 cumulative preference shares, $5 par, 300
shares
issued…………………………………………………………. $ 1,500
Share capital, $4 par, 13,090 shares issued
($26,000 + $21,600 + $4,760)…………………………… 52,360
($17,800 + $10,800 + $3,570)…………………………… 32,170
Paid-in capital from treasury shares transactions…… 1,000
Retained earnings
($25,000 + $28,000 − $210 − $8,330)………………..... 44,460
Less: Treasury shares, 300 shares at cost
($4,000 − $1,600)…………………………………… (2,400)
Total shareholders’ equity…………………………….. $129,090

(20-30 min.) P 10-81A
SHAREHOLDERS’
ASSETS = LIABILITIES + EQUITY
Feb. 3 + 445,000 = 0 + + 445,000
Mar. 19 − 65,000 = 0 − 65,000
Apr. 24 + 42,900 = 0 + + 42,900
Aug. 15 0 = + 7,400 − 7,400
Sept. 1 − 7,400 = − 7,400 + 0
Nov. 18 0 = 0 + 0

(40-50 min.) P 10-82
Req. 1
Pelican Designers, Inc.
Balance Sheet
December 31, 20X6
ASSETS LIABILITIES
Current: Current:
Cash…………………... $ 55,000 Accounts payable………... $136,000
Accounts rec., net….. 34,000 Dividends payable……….. 6,000
Inventory……………... 93,000 Accrued liabilities………... 24,000
Prepaid expenses.….. 13,000 Total current
Total current liabilities….……………. 166,000
assets…………….. 195,000Long-term note payable…… 99,000
Total liabilities………………. 265,000
Property, plant, and
equipment, net……… 364,000
SHAREHOLDERS’
EQUITY
Intangible assets: Preference shares, $.50,
Goodwill……………… 13,000 no-par, 11,000 shares
Trademarks, net……. 4,000 authorized and issued…... $ 29,700
Share capital,
$2 par, 600,000 shares
authorized, 116,000
shares issued……………... 232,000
Paid-in capital in excess
of par — ordinary………… 20,000
Retained earnings………….. 53,300*
Less: Treasury shares,
ordinary, 21,000 shares
at cost………………………. (24,000)
Total shareholders’ equity... 311,000
Total liabilities and
Total assets……………. $576,000 shareholders’ equity…….. $576,000
*Retained earnings = Total assets − Total liabilities − Total paid-in capital =

$576,000 − $265,000 − $29,700 − $232,000 − $20,000 − (− $24,000) = $53,300

Req. 2
Net income
Rate of return
− Preference
on ordinary $32,000 − (11,000 × $.50) $26,500
= dividends = = = 0.105
shareholders'
Average ordinary ($281,300* + $222,000) / 2 $251,650
equity
shareholders' equity
*Total shareholders’ equity………………………... $311,000

Less: Preference equity………………………….. (29,700)
Ordinary shareholders’ equity…………………... $281,300
Req. 3
These rates of return suggest some weakness. Return on

ordinary shareholders’ equity is well below 15%, mentioned in
the text as a good return on equity.

(20-30 min.) P 10-83A
Journal
ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Millions
Retained earnings……………………………….. 1,850
Dividends payable……………………………. 1,850
Dividends payable……………………………….. 1,850

Cash…………………………………………….. 1,850
OR
Retained earnings……………………………….. 1,850
Cash…………………………………………….. 1,850
Cash………………………………………………… 1,243
Share capital………………………………..... 1,243
Cash………………………………………………… 52
Long-term notes payable…………………... 52
Treasury shares………………………………….. 3,060

Cash…………………………………………….. 3,060
Long-term notes payable………………………. 165

Cash…………………………………………….. 165

Problems
Group B
(30-45 min.) P 10-84B
Req. 1
Journal
Jan. 6 Organization Expense…………………………… 7,500

Share capital (500 × 8)…………………....... 4,000
Par - Ordinary……………………………... 3,500
Issued shares to promoter for assistance in
issuing share capital.
9 Cash (19,000 × €15)……………………………… 285,000

Share capital (19,000 × €8)…………………. 152,000
Par - Ordinary……………………………... 133,000
Issued ordinary shares for cash.
10 Patent………………………………………………. 12,000
Preference shares……………………….…… 12,000
Issued preference shares to acquire a patent.
26 Cash………………………………………………… 21,000
Share capital (1,400 × €8)…………………… 11,200
Par - Ordinary……………………………... 9,800
Issued share capital for cash.

(continued) P 10-84B
Req. 2
Laurel Canoes, Inc.

January 31, 20X6
Preference shares, no-par, 8,000 shares authorized,
600 shares issued……………………………………….. € 12,000
Share capital, €8 par, 120,000 shares
authorized, 20,900 shares issued*…………............... 167,200
Paid-in capital in excess of par - ordinary……………… 146,300**
Retained earnings…………………………………………… 56,000
Total shareholders’ equity……………………………... €381,500
_____
*500 + 19,000 + 1,400 = 20,900 shares
**3,500 + 133,000 + 9,800 = 146,300

(10-15 min.) P 10-85B
Harry Corp.
December 31, 20X6
Preference shares, 8%, €120 par, 5,000 shares authorized,
1,000 shares issued……………………………………... €120,000
Share capital, no-par, 400,000 shares authorized,
80,000 shares issued……………………………………. 520,000
Retained earnings…………………………………………… 89,800
Total shareholders’ equity……………………………... €729,800
_____
Computations:
Preference shares: 1,000 × €120 = €120,000
Share capital: Balance given as €520,000
Retained earnings: 72,000 + 93,000 − (120,000 × 0.08 x 2) –

(80,000 x 0.70) = 89,800

(20-30 min.) P 10-86B
[Errata: Rich purchased 62,000 shares, not 612,000 shares. We have
used the correct number of shares for the computation of this solution.
The print book will be updated.]
Share capital [(500,000 + 395,000) × $3] + $214,800. $ 2,899,800
Additional paid-in capital

500,000 × (€6.00 − €3.00)………………………………. 1,500,000
395,000 × (€9.00 − €3.00)………………………………. 2,370,000
38,000 × (€8 − €7.25)…………………………………… 28,500
From shares dividend…………………………………. 429,600
Retained earnings (€1,250,000 − 800,000 − €644,400). (194,400)
Treasury shares [(62,000 − 38,000) × 7.25]…………… (174,000)
Total shareholders’ equity………………………………. €6,859,500
Total assets…………………………………………….. €14,300,000
− Total liabilities………………………………………….. (7,440,500)
= Total shareholders’ equity…………………………… €6,859,500

(25-35 min.) P 10-87B
Req. 1
Rustic Outdoor Furniture Company has Class A cumulative

preference shares, Class B cumulative preference shares, and
ordinary shares outstanding.
Req. 2
Journal
Cash………………………………. 1,540,000
Class A Preference shares.. 1,540,000
Cash………………………………. 1,960,000
Class B Preference shares.. 1,960,000
Cash (€960,000 + €5,328,000) 6,288,000

Share capital………………… 960,000
Additional Paid-in Capital -
Ordinary…………………… 5,328,000
Req. 3
Rustic Outdoor Furniture would have to pay all preference

dividends in arrears before paying dividends to ordinary
shareholders because the preference shares are cumulative.

Req. 4
Rustic must pay preference dividends of €140,000 each year to

avoid having preference dividends in arrears.
_____
Computation:
Class A Preference: 77,000 x $20 × 0.04 = € 61,600
Class B Preference: 98,000 x $20 × 0.04 = 78,400
Total preference dividends……………….. €140,000
Req. 5
Journal
20X7
Feb. 28 Retained Earnings……………………….. 840,000
Dividends Payable, Class A
Preference (€1,540,000 × .04 × 2) 123,200
Dividends Payable, Class B
Preference (€1,960,000 × .04 × 2) 156,800
Dividends Payable, Ordinary
(€840,000 −€$123,200 − $156,800) 560,000

(15-20 min.) P 10-88B
Req. 1
Journal
Feb. 13 Cash (5,200 × 7)……………………………. 36,400

Share capital (5,200 × 2)……………. 10,400
Ordinary………………………………... 26,000
June 7 Retained earnings………………………….. 320

Dividends payable
(400 shares × 0.80)……………………... 320
24 Dividends payable………………………….. 320

Cash………………………………………... 320
Aug. 9 Retained earnings

(11,500 shares × 0.20 × 8)………………… 18,400
Share capital (11,500 × 0.20 × 2)…….. 4,600
Ordinary………………………………... 13,800
Oct. 26 Treasury shares, Ordinary (900 × 9)....... 8,100

Cash……………………………………….. 8,100
Nov. 20 Cash (600 × 14)……………………………. 8,400

Treasury shares, Ordinary (600 × 9).. 5,400
Paid-in Capital from Treasury Shares
Transactions…………………........... 3,000

Req. 2
€0.80 cumulative preference shares, €15 par,
400 shares issued………………………………………. € 6,000
Share capital, €2 par, 13,800 shares issued
(€12,600 + 10,400 + 4,600)……............................... 27,600
Paid-in capital in excess of par – ordinary
(17,400 + 26,000 + 13,800)…………………………. 57,200
Paid-in capital from treasury shares transactions….. 3,000
Retained earnings (€23,000 + 24,000 − 320 − $18,400) 28,280
Less: Treasury shares, ordinary, 300 shares
at cost (8,100 – 5,400)…………………………. (2,700)
Total shareholders’ equity…………………………….. €119,380

(20-30 min.) P 10-89B
SHAREHOLDERS’
ASSETS = LIABILITIES + EQUITY
Feb. 4 +360,000 = 0 + +360,000
Mar. 20 -48,400 = 0 -48,400
Apr. 25 +27,900 = 0 + +27,900
Aug. 17 0 = +12,000 -12,000
Sept. 8 - 12,000 = -12,000 + 0
Nov. 28 0 = 0 + 0

(40-50 min.) P 10-90B
Req. 1
Eagle Designers, Inc.

Balance Sheet
December 31, 20X6
ASSETS LIABILITIES
Current: Current:
Cash……………………. € 43,000 Accounts payable............….. € 133,000
Accounts receivable, Dividends payable...........….. 12,000
net……………………. 22,000 Accrued liabilities............….. 27,000
Inventory………………. 94,000 Total current liabilities.….. 172,000
Prepaid expenses……. 16,000 Long-term note payable.....….. 96,000
Total current assets. 175,000 Total liabilities....................…... 268,000
SHAREHOLDERS’
Property, plant, and EQUITY
equipment, net……….. 359,000 Preference shares, $.50
Intangible assets: no- par, 12,000
Trademarks, net……… 10,000 shares authorized,
Goodwill……………….. 11,000 12,000 shares issued.........… € 32,400
Share capital, $2
par, 300,000 shares
authorized, 117,000
shares issued...................….. 234,000
Additional paid-in
capital — ordinary...........….. 0
Retained earnings...............….. 42,600*
Less: Treasury shares, ordinary
19,000 shares at cost..........… ( 22,000)
Total shareholders’ equity....... 287,000
Total liabilities and
Total assets…………….. €555,000 shareholders’ equity........….. €555,000
_____
*Retained earnings = Total assets − Total liabilities − Total paid-in capital
= 555,000 −268,000 − 32,400 − 234,000 − (− 22,000)
= 42,600

Req. 2
Net income
Rate of return
− Preference
on ordinary 30,000 − (12,000 × .50) 24,000
= dividends = = = 0.100
shareholders'
Average ordinary (254,600** + 225,000)/2 239,800
equity
shareholders' equity
**Total shareholders’ equity………………………. €287,000

Less: Preference equity………………………… (32,400)
Ordinary shareholders’ equity…………………. €254,600
Req. 3
These rates of return suggest a mid range. Return on ordinary

shareholders’ equity is below 15%, mentioned in the text as a
good rate of return.

(20-30 min.) P 10-91B
Journal
ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Retained earnings…………………………… 1,880

Dividends payable……………………….. 1,880
Dividends payable…………………………… 1,880

Cash………………………………………… 1,880
OR
Retained earnings…………………………… 1,880
Cash………………………………………… 1,880
Cash……………………………………………. 1,236
Share capital……………………………… 1,236
Cash…………………………………………… 59
Long-term notes payable………………. 59
Treasury shares……………………………… 3,084

Cash………………………………………… 3,084
Long-term notes payable………………….. 126 2,100

Cash ……………………………………….. 126 2,100

Decision Cases
(30-45 min.) Decision Case 1

Req. 1
Journal
Santiago, Capital………………………… 25,000
Perez, Capital……………………………… 25,000
Share capital…………………………… 50,000
To incorporate the business, close the capital accounts of
Santiago and Perez, and issue share capital to them.
Req. 2
Journal
Plan 1:
Cash…………………………………………. 100,000
Preference shares (1,000 × $100)…… 100,000
To issue preference shares to outside investors.
Plan 2:
Cash…………………………………………. 60,000
Preference shares…………………….. 60,000
To issue preference shares to outside investors.
Cash…………………………………………. 50,000
Share capital…………………………… 50,000
To issue ordinary shares to outside investors.

(continued) Decision Case 1
Req. 3
Plan 1:
Preference shares, 6%, $100 par, nonvoting,
10,000 shares authorized, 1,000 shares issued. $ 100,000
Share capital, $1 par, 500,000 shares authorized,
50,000 shares issued……………………………….. 50,000
Retained earnings ($120,000 − $30,000)……………. 90,000
Total shareholders’ equity………………………… $240,000
Plan 2:
Preference shares, $5, no-par, 5,000 shares authorized,
600 shares issued…………………………………… $ 60,000
Share capital, $1 par, 500,000 shares authorized,
100,000 shares issued……………………………… 100,000
Retained earnings ($120,000 − $30,000)……………. 90,000
Total shareholders’ equity………………………… $250,000

Req. 4
Plan 1 appears to fit the plans of Santiago and Perez better than
Plan 2 because:
• Their primary goal is to raise as much capital as possible
without giving up control of the business. Under Plan 2,
the outside shareholders would have 80,000 votes [50,000
ordinary votes + 30,000 preference votes (600 shares × 50
votes per share)]. Santiago and Perez would lose control
of the business because they would have only 50,000
votes.
• Under Plan 1 preference shareholders have no votes.
Santiago and Perez would have complete control since
they would hold all the voting shares.
• Plan 2 would raise only $10,000 more than Plan 1 whilst
giving up more than 50% of the voting control in the
company.

Req. 1
The shares dividend does not affect your proportionate

ownership in the company because all the shareholders receive
10% new shares. All shareholders are in the same relative
position after the dividends as they were before.
Req. 2
Cash dividends received last year were $8,250 (10,000 shares ×

$0.825 per share). Cash dividends after the share dividend will
be $8,250 (11,000 shares × $0.75 per share). Thus, there is no
change in cash dividends.
Req. 3
You incur no loss in value because the market value of your

investment after the shares dividend — $610,500 (11,000 shares
× $55.50) — is the same as it was before the dividend — 10,000
shares × $61.05. The increase in the number of shares you own
at $55.50 per share offsets the decrease in the market price per
share.
Req. 4
If the company continues paying the $0.825 cash dividend per

share, after issuing the 10% shares dividend, total cash

dividends will increase. (Your annual dividends will rise to
$9,075 [11,000 shares × $0.825].) The increase in dividends
might attract new investors, who view the increased cash
dividends as an indication that the business is operating quite
well. This investor interest may result in an increase in the
market value of UPS shares, or at least keep the value higher
than it would be without the increase in cash dividends.
Req. 1
Millions
a. Net income, as reported for 2000…………………... $979
b. Net income after new developments

[$979 − $130 − ($2,000 × .12)]……………............. $609
c. The trend of net income is down. The reasons for the

downward trend are (a) inclusion of the money-losing
companies and (b) the interest expense on the new debt.
Req. 2 (amounts in millions)
Assets = Liabilities + Equity

As reported………………... $65,503 = $54,033 + $11,470
Adjustments
for 2001:
Inclusion of companies 5,700 = 5,600 + 100
Exchange of notes 0 = 2,000 – 2,000
payable for shares…….
Interest expense
on new debt……………. 0 = 240 – 240
As adjusted………………... $71,203 = $61,873 + $9,330

Req. 3
As Reported As Adjusted
Dollars in millions
Total
Debt liabilities $54,033 $61,873
= =
ratio Total $65,503 $71,203
assets
= 0.82 = 0.87
Req. 4
I would recommend downgrading Enron’s debt for two

reasons:
1. Downturn in net income due to (a) inclusion of the money-

losing companies, and (b) the added interest expense on
the new debt.
2. Increase in the debt ratio due to the same two factors.

Ethical Issue 1
Req. 1
The ethical issue is, “What is the correct amount at which to

record and disclose the value of the franchise on Campbell’s
balance sheet?”
Req. 2 and Req.3
The stakeholders in the transaction include Campbell, the

potential buyers of the franchises, and potential lenders who
loan them the money to buy the franchises in the future.
Campbell and the corporation are effectively the same entity.
The third party serves no purpose other than as an accomplice
to overvalue the franchise.
Analysis of the decision to overvalue the franchise:

(a) Economic: Campbell is better off temporarily, unless
potential buyers sue him for damages, in which case he could
be worse off. Potential buyers of the individual-language
franchises can be harmed. Campbell’s balance sheet
overstates his assets. If outsiders believe his balance sheet,
they may be induced to pay Campbell more than the individual-
language franchises are worth. Lenders can also be harmed
by loaning money to Campbell on more favorable terms than
his financial position warrants.
(b) Legal: If potential buyers are damaged by Campbell’s
actions, they might sue him for recovery of those damages. In
this situation, the public is also defrauded if Campbell
amortizes the cost of the franchise for income tax purposes.
Basing amortization on $500,000 overstates tax deductions and
understates Campbell’s income. As a result, his tax payments
are lower than they should be. This could expose Campbell to
future investigations from the IRS.
(c) Ethical: This type of scheme is harmful to everyone

involved. It is not truthful, and it violates the rights of
individuals and business entities to full and complete
disclosure of the proper valuation of a business. It is an
example of the type of transaction that meets the letter of the
law without meeting the spirit of the law.
Req. 4
The franchise should be valued at its true value, which is
$50,000. Campbell should focus his time and energy on ways
to make the business profitable in the long run in other ways,
rather than focusing on turning a quick buck and playing legal
games that could well get him into trouble with a lot of other
parties.
Note: One of the authors experienced this actual situation in
his first job after college.
Ethical Issue 2
Req. 1
The ethical issue is whether the company acted properly in

purchasing their shares on the open market based on inside
information known only to them.
Req. 2 and Req. 3

Stakeholders include the company, its officers and directors,
the shareholders from whom the shares were purchased, and
the general public.
(a) Economic analysis: The company, and likely its officers

and directors, benefitted temporarily at the other shareholders’
expense. The managers purchased the shares at $6 and could
sell it for $27. Thus, the managers enriched shareholders who
held on to their shares at the expense of the shareholders who
sold company shares at $6.
Had the shareholders known of the oil discovery, those selling

shareholders probably would have held their St. Genevieve
shares. Shareholders wanting to sell company shares would
have demanded a price based on all relevant information about
the company, including news of the discovery.

(b) Legal analysis: If St. Genevieve is a public company, their
actions are illegal. The Securities Exchange Act of 1934
prohibits insider trading. It imposes stiff penalties for unethical
conduct of this type. The SEC will prosecute them for insider
trading, probably fine them, and possibly send the officers and
directors responsible for the decision to prison. In addition,
actions such as these have been the basis for numerous civil
shareholder lawsuits, to recover monetary damages suffered
because of the actions of the company.
(c) Ethical analysis: The managers clearly did not behave

ethically, violating the rights of existing shareholders as well as
the good faith of the investing public. Managers defrauded the
shareholders by withholding important information prior to
buying company shares.
Req. 4
The correct way to handle this transaction is never to have
proposed it in the first place. However, if it did happen, the
disclosure principle is relevant to the situation. The
transaction should be disclosed in the footnotes to the
financial statements, and if potential liability to the SEC or
others is probable and can be estimated, a loss be disclosed in
the income statement and a liability should be accrued on the
balance sheet.
Focus on Financials: Nestlé
(30-40 min.)
1. Nestlé has a single class of shares. As of December 31,

2016, Nestlé has share capital of total value of £4,182
million and additional paid-in capital of £153,760 million
2. According to Note 17, Nestlé purchased 88.9 million
treasury shares for the year ended December 31, 2015.
From the Consolidated Cash Flow Statement, the company
spent CHF 6,377 million to purchase these shares.
Therefore, each share should cost the company CHF 71.73.
3. The company earned and reported net income of CHF
8,531 million (after deducting for portion earned by
minority interests). This amount appears in the
Consolidated Income Statement and is booked under
retained earnings in the balance sheet. Additionally, the
account is also affected by dividends of CHF 6,937 million
that were paid out for the year ending December 31, 2016.
This sum would appear under the Statement of
Consolidated Cash Flows as well.
4.
DR. Income Summaries 8,531
CR. Retained Earnings 8,531
DR. Retained Earnings 6,937
CR. Dividends Payable 6,937
DR. Dividends Payable 6,937
CR. Cash 6,937
DR Share Capital 5,481
CR Treasury Shares 5,481
The T accounts are as follows:

Retained Earnings (in CHF million)
Dr Cr
88,014 Beg Bal
Other
comprehensive Profit for
income 154 8,531 the year
Dividends 6,937
Movement of
treasury shares 27
Equity
compensation
plans 27
Changes in non-
controlling
interests 991
Reduction in share
capital 5,481
Other movements 58
82,870 End Bal

5.
Return on 8,531
= = 13.44%
Equity 2016 (64,590 + 62,338) / 2
Return on 9,066
= = 13.69%
Equity 2015 (62,338 + 70,130) / 2
ROE became worse from 2015 to 2016.

Group Project in Ethics
(1-3 hours, including discussion)
Req. 1
Stakeholders in a corporation vary widely with the nature of the
corporation. In the case of the corporations included in this
case (GM, Chrysler, AIG, Citibank, Bank of America) because of
their size and the scope of their operations, stakeholders
include the shareholders, bondholders, other creditors,
employees, suppliers, customers, local, regional, national and
international economies, federal, state and local
governments—just about everyone in the broadest sense of the
term.
Req. 2
Student opinions on this will vary. It might be interesting to
divide the class into two teams and conduct a debate, each
team taking a side.

Req. 3
The measures of “deficiency” can vary, but usually are:
excessively high debt ratios, continuing and increasing deficits
in retained earnings, debt covenants that are being violated,
labor troubles, litigation. If the company is not too far gone, in
some cases, downsizing helps by cutting costs to be more in
line with revenues. Students’ teams might brainstorm this
question as well.
Req. 4
Student opinions on this will vary.
Req. 5
Student opinions on this will vary and should be related to the
opinions they express in requirement 4. This question has
economic, political and social ramifications. Some would say
that government taking equity positions in private businesses
violates principles of free market economics and tends toward
socialism. If the equity positions were carefully crafted and
sufficiently restricted to appear to have more debt than equity
features, perhaps this could be justified in some people’s
minds.

Harrison FA IFRS 11e CH10 SM

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Chapter 10

• Separate legal entity

716 Financial Accounting: IFRS 11/e Solutions Manual

2. The chairperson of the board of directors is usually the most

3. The president is in charge of day-to-day operations. Title is

4. The chief financial officer is in charge of accounting and

*An alternative title is the chief accounting officer, CAO.

Chapter 10 Shareholders’ Equity 717

2. Preference shareholders have priority over ordinary

3. Ordinary shareholders benefit more from a successful

718 Financial Accounting: IFRS 11/e Solutions Manual

TO: Kitty Page and Jean Scott

FROM: [Student Name]

RE: Steps in forming a corporation

The first step in organizing a corporation is to obtain a charter

Chapter 10 Shareholders’ Equity 719

The par value of shares has no effect on total paid-in capital.

(10 min.) S 10-6

720 Financial Accounting: IFRS 11/e Solutions Manual

Case B — Issue shares to acquire the assets:

The balances in all accounts are the same:

Chapter 10 Shareholders’ Equity 721

(10 min.) S 10-9

b. Accounts payable…………………………………… $ 450

c. Total liabilities (from Req. b)………………………. $3,056

722 Financial Accounting: IFRS 11/e Solutions Manual

Overall, shareholders’ equity decreased by $18 million ($24

Chapter 10 Shareholders’ Equity 723

TO: PIE Investments, Board of Directors

FROM: [Student Name]

RE: How the purchase of treasury shares will make it

Purchasing treasury shares decreases the amount of shares

Sales of treasury shares at prices above the purchase price

Student responses may vary.

724 Financial Accounting: IFRS 11/e Solutions Manual

During 20X6, Retained Earnings increased by $42,000 (net

(5-10 min.) S 10-13

3. Cumulative, because it is not labeled noncumulative

4. Preference: $960,000 ($320,000 × 3)

Chapter 10 Shareholders’ Equity 725

May 11 Retained Earnings (12,000 × .15 × $25.00)….. 45,000

No effect on total assets.

(10 min.) S 10-15

(a) Net income –

1. and 2. Preference shareholders have the first claim to the

Chapter 10 Shareholders’ Equity 727

Rate of return Net Preference

Note: 15% is considered good in most industries, so Sakura’s

728 Financial Accounting: IFRS 11/e Solutions Manual

2. We should first determine the market value of the land. Then

3. Investors buy ordinary shares in the hope of potentially

4. The redemption value of our preference shares requires us to

There may be other market sentiments that affect the market

Chapter 10 Shareholders’ Equity 729

730 Financial Accounting: IFRS 11/e Solutions Manual

Jan. 19 Cash (10,000 × $6.00) .......................... 60,000

Apr. 3 Cash ..................................................... 55,000

11 Inventory .............................................. 16,200

Chapter 10 Shareholders’ Equity 731

Preference shares, 10,000 shares

Journal entries (not required):

Apr. 23 Cash……………………………………... 29,700

May 2 Cash .................................................... 24,000