SM 11

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition
CHAPTER 11
REPORTING AND ANALYZING SHAREHOLDERS’
EQUITY
LEARNING OBJECTIVES
1. Identify and discuss the major characteristics of a corporation.
2. Record share transactions.
3. Prepare the entries for cash dividends, stock dividends, and stock splits, and
understand their financial impact.
4. Indicate how shareholders’ equity is presented in the financial statements.
5. Evaluate dividend and earnings performance.
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

AND BLOOM’S TAXONOMY
Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT
Questions
1. 1 C 7. 2 C 13. 3 K 19. 4 C 25. 5 C
2. 1 AP 8. 2 K 14. 3 C 20. 4 C 26. 5 C
3. 1 C 9. 2 K 15. 3 C 21. 4 K 27. 5 AN
4. 1 C 10. 2 C 16. 3 AP 22. 4 C 28. 5 C
5. 1 C 11. 2 AP 17. 3 K 23. 5 K
6. 2 C 12. 2 C 18. 4 K 24. 5 AN
Brief Exercises
1. 1 C 5. 2 AN 9. 3 AN 13. 5 AN 17. 5 AP
2. 2 AP 6. 3 AP 10. 4 AN 14. 5 AN 18. 5 AP
3. 2 AP 7. 3 AP 11. 4 AP 15. 5 AP
4. 2 AP 8. 3 AN 12. 4 AP 16. 5 AP
Exercises
1. 1 AN 4. 2 AN 7. 2,3,4 AN 10. 4 AP 13. 5 AN
2. 2 AP 5. 2,3 AP 8. 4 C 11. 5 AN 14. 5 AN
3. 2 AN 6. 3 AP 9. 4 AP 12. 5 AP 15. 5 AN
Problems: Set A and B
1. 2,3,4 AN 4. 2,3,4 AP 7. 3,4 AP 10. 5 AN
2. 2,3,4 AN 5. 2,3,4 AP 8. 5 AP 11. 5 AN
3. 2,3,4 AN 6. 3 AN 9. 5 AN
Accounting Cycle Review
1. 2,3,4 AP
Cases
1. 3,4 C 3. 2,4 S 5. 5 E
2. 1,2,5 C 4. 3 C 6. 2,3,4 AP
Solutions Manual 11-1 Chapter 11

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Legend: The following abbreviations will appear throughout the solutions manual
file.
LO Learning objective
BT Bloom's Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
S Simple
M Moderate
C Complex
Time: Estimated time to prepare in minutes
AACSB Association to Advance Collegiate Schools of Business
Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency
cpa-e001 Ethics Professional and Ethical Behaviour
cpa-e002 PS and DM Problem-Solving and Decision-Making
cpa-e003 Comm. Communication
cpa-e004 Self-Mgt. Self-Management
cpa-e005 Team & Lead Teamwork and Leadership
cpa-t001 Reporting Financial Reporting
cpa-t002 Stat. & Gov. Strategy and Governance
cpa-t003 Mgt. Accounting Management Accounting
cpa-t004 Audit Audit and Assurance
cpa-t005 Finance Finance
cpa-t006 Tax Taxation

ANSWERS TO QUESTIONS
1. (a) (1) Separate legal existence. A corporation is separate and distinct from
its shareholders (owners) and acts in its own name rather than in
the name of its shareholders. In addition, the acts of the
shareholders do not bind the corporation unless the shareholder is
a duly appointed agent of the corporation. This is an advantage to
the corporate form of organization.
(2) 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. This is an advantage to the corporate form of
organization.
(3) Transferable ownership rights. Ownership of a corporation is shown

in shares, which are transferable. Shareholders may dispose of part
or all of their interest by simply selling their shares. The transfer of
ownership to another party is entirely at the discretion of the
shareholder. This is an advantage to the corporate form of
organization.
(4) Ability to acquire capital. Corporations can raise capital quite easily
by issuing shares. Public corporations have an almost unlimited
ability to acquire capital. Investors find shares of corporations to be
attractive since they need not invest large sums of money to become
shareholders. In addition, shareholders benefit from limited liability.
This is an advantage to the corporate form of organization.
(5) Continuous life. Since a corporation is a separate legal entity, its

continuance as a going concern is not affected by the withdrawal,
death, or incapacity of a shareholder, employee, or officer. This is
an advantage to the corporate form of organization.

1. (a) (continued)
(6) Separation of management and ownership. Although the

shareholders of a corporation are its owners, it is the board of
directors that decides on the operating policies of the company. The
shareholders seldom get involved in the company’s day-to-day
activities. This is normally seen to be an advantage to the corporate
form of organization.
(7) Government regulations. Corporations in Canada may incorporate

federally or provincially. Government regulations usually provide
guidelines for issuing shares, distributing net income, and
reacquiring shares. Provincial securities commissions also govern
the sale of share capital to the general public. When a corporation’s
shares are listed or traded on a stock exchange, it must adhere to
the reporting requirements of that exchange. This may be a
disadvantage to the corporate form of organization because it adds
extra cost and complexity to the organization.
(8) Income tax. Corporations must pay federal and provincial income
tax as separate legal entities. However, corporations usually benefit
from more favourable tax rates than do the owners of partnerships
or proprietorships. The shareholders of the corporation do not pay
tax on the corporation’s net income unless they receive dividends
from the corporation. This is often seen to be an advantage to the
corporate form of organization.
(b) While public corporations have an almost unlimited ability to acquire

capital, this is not the case for private corporations. In addition,
transferring ownership rights can be much more limited given that
private corporation shares are not publicly traded. Private companies
do not have as stringent reporting and disclosure requirements as
public companies.
LO 1 BT: C Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001, cpa-t006 CM: Reporting and Tax

2. (a) Letson has 60,000 shares issued and is eligible to issue an additional
40,000 shares (100,000 – 60,000).
(b) Only issued shares are recorded in the general journal. The number
of authorized shares is disclosed but not recorded until issued.
LO 1 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
3. When Richard purchased the original shares as part of lululemon’s initial

public offering, he purchased these shares directly from the corporation.
The $1,800 (100 × $18) he spent to buy the shares went directly to
lululemon and increased the company’s assets (Cash) and shareholders’
equity (Common Shares). There was no impact on the company’s
liabilities.
In the subsequent purchase, Richard bought shares in the secondary

market from another investor or investors. The proceeds from this sale
went to the seller and not to lululemon. Therefore, there was no impact on
lululemon’s assets, liabilities, or shareholders’ equity a result of the second
purchase.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
4. Market capitalization is the measure of the fair value of a corporation’s

equity. It is calculated by multiplying the number of shares issued by the
share market price at any given date. It should not be confused with a
corporation’s legal capital which represents the amount paid to the
corporation on the initial and any subsequent issue of shares and
consequently is the amount that appears on the statement of financial
position.

4. (continued)
Dollarama Inc.’s market capitalization decreased in 2015. There are two

primary reasons for a decrease in the market capitalization of a company,
which may happen separately or in combination. First, the number of
shares may have decreased because the company repurchased some of
its shares. If this is the case, assets (Cash) and shareholders’ equity
(Common Shares) would decrease as a result of the repurchase. Liabilities
would be unaffected.
The second and more likely reason for the decrease in the market
capitalization is the decrease in the market price of the shares. Decreases
in the market price of the shares can result from a number of reasons but
are most likely due to the market’s perception of the future ability of the
corporation to earn income. As a result, investors bid down the price paid
for the shares on the market. This possible reason for the change in market
capitalization does not affect any element on the statement of financial
position.
5. (a) Legal capital is the portion of a company’s share capital that cannot
be distributed to shareholders. Legal capital is created largely for the
protection of creditors.
(b) The proceeds received by the company when issuing shares
determine the carrying amount of the shares recorded in the
accounts. The proceeds are considered to be legal capital that must
remain invested in the company for the protection of corporate
creditors.
(c) Par value is very common in the United States and very rare in
Canada. Federally incorporated companies and most provincially
incorporated companies have no par value shares.
(d) Legal capital is kept separate from retained earnings because
retained earnings may be distributed to shareholders in the form of
dividends, whereas legal capital may not be distributed to
shareholders until the company is liquidated.

6. (a) Preferred shareholders have priority over common shareholders with

respect to the distribution of dividends and, in the event of liquidation,
over the distribution of assets. Preferred shareholders do not usually
have the voting rights that the common shareholders have.
(b) Companies issue preferred shares for a permanent type of equity

financing for the company.
7. When shares are issued for a consideration other than cash, such as goods
or services, IFRS requires that the transaction be recorded at the fair value
of the consideration received. If the fair value of the consideration received
cannot be reliably determined, then the fair value of the consideration given
up (for example, shares) can be used.
When shares are issued for a noncash consideration in a private company
following ASPE, the valuation of the shares can be slightly different than
that described above for a publicly traded company following IFRS. The
shares of a private company should be recorded at the most reliable of the
two values—the fair value of the consideration (such as goods or services)
received or fair value of the consideration given up (such as shares). Quite
often, the fair value of the consideration received is the most reliable value
because a private company’s shares seldom trade and therefore do not
have a ready market value.

8. (a) A normal course issuer bid is synonymous with the reacquisition of

shares. In a normal course issuer bid, a company is allowed to
repurchase up to a certain percentage of its shares subject to
regulatory approval. It can purchase the shares gradually over a
period of time, such as one year. This repurchasing strategy allows
the company to buy when its shares are favourably priced.
(b) A corporation may acquire its own shares (1) to increase trading of
the corporation's shares in the stock market, in the hopes of
enhancing its market value, (2) to reduce the number of shares issued
and increase basic earnings per share and return on equity ratios, (3)
to eliminate hostile shareholders by buying their shares, and (4) to
have additional shares to issue if required to compensate employees
using stock options, or to acquire other businesses.
LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
9. Because companies cannot realize a gain or incur a loss from share

transactions with their own shareholders, these amounts are not reported
on the income statement. They are seen instead as an excess or deficiency
that belongs to the remaining shareholders and are recorded directly into
the shareholders’ equity accounts such as Contributed Surplus or Retained
Earnings.
10. When reacquiring shares, if the amount paid by the company is less than
the average cost of the shares on hand, the difference is credited to
Contributed Surplus, increasing it. If the opposite is true (i.e., the amount
paid to reacquire the shares is greater than the average cost of the shares
on hand), the difference is applied to reduce (debit) Contributed Surplus,
but because that account cannot have a negative (debit) balance, if the
debit arising from the reacquisition is greater than the balance in the
Contributed Surplus account, then the remainder of the debit is applied
against the Retained Earnings account, reducing it.

11. David should expect to receive a dividend in the amount of $295.00 (1,000
shares × $1.18 ÷ 4) each quarter. When the Royal Bank resets the dividend
rate, it will be adjusted to more closely reflect market interest rates. If David
invested in the preferred shares because he hoped to earn a more
attractive return from dividends compared to the rate of return he could
receive from interest earned on a debt investment, he may be disappointed
when the dividend rate is reset at the lower market interest rate. On the
other hand, because the resetting of the dividend rate occurs only
periodically, if David believes that interest rates will fall, he may be very
pleased to own these preferred shares (at least until the dividend rate is
reset at the same level as the lower interest rates). Furthermore, if David
believes that the interest rates will be volatile in the future, the reset feature
will make the investment in the preferred shares more appealing because
at least until the next reset, David will know what his rate of return will be.
LO 2 BT: AP Difficulty: C Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

CM: Reporting and Finance
12. (a) Redeemable (or callable) preferred shares give the issuing
corporation the right to purchase these shares from shareholders at
specified future dates and prices. Retractable preferred shares are
similar to redeemable or callable preferred shares, except that it is at
the shareholder’s option, rather than the corporation’s option, that the
shares are redeemed. This usually occurs at an arranged price and
date.
(b) Preferred shares are cumulative or noncumulative with respect to

their dividend provisions. Cumulative preferred shares entitle the
shareholder to any previous years’ dividends that have not yet been
paid, as well as their current dividend, before common shareholders
can receive any dividends.

12. (continued)
(c) Dividends in arrears can only arise from cumulative preferred shares.
If a dividend is not declared for a noncumulative preferred share, the
dividend entitlement is erased and does not carry forward into the
future. On the other hand, if a dividend is not declared for a cumulative
preferred share, the amount of the dividend shortfall becomes
dividends in arrears which must be paid first from any dividend
declared in the future.
13. Cash dividends cannot exceed the balance of the Retained Earnings
account. For a cash dividend to be paid, a corporation must meet a
solvency test to ensure that it has sufficient cash to be able to pay its
liabilities as they become due after the dividend is declared and paid. The
test essentially requires the net realizable value of the assets of a company
to exceed the total of its liabilities and share capital. In addition, a formal
dividend declaration by the board of directors is required. Also, any
required preferred dividends must be paid before common dividends are
paid.

14. On the declaration date, the board of directors formally authorizes the cash
dividend and announces it to shareholders. The declaration of a cash
dividend commits the corporation to a binding legal obligation. On the
record date, ownership of the shares is determined. On the payment date,
dividends are paid to the shareholders. The table below demonstrates the
effect of three events on the financial statement elements.
(a) (b) (c)

Declaration Record Payment
date date date
(1) Assets No effect No effect Decrease
(2) Liabilities Increase No effect Decrease
(3) Share capital No effect No effect No effect
(4) Retained earnings Decrease No effect No effect
(5) Total shareholders' equity Decrease No effect No effect
(6) Number of shares No effect No effect No effect
15.
(a) (b) (c)
Cash Stock Stock
dividend dividend split
(1) Assets Decrease No effect No effect
(2) Liabilities No effect No effect No effect
(3) Share capital No effect Increase No effect
(4) Retained earnings Decrease Decrease No effect
(5) Total shareholders' equity Decrease No effect No effect
(6) Number of shares No effect Increase Increase

16. (a) In a stock split, the number of shares issued is increased. In the case
of Bella Corporation, the number of shares issued will increase from
10,000 to 30,000 (10,000 × 3).
(b) The effect of a split on market value is generally inversely proportional

to the size of the split. In this case, the market price would fall to
approximately $40 per share ($120  3).
LO 3 BT: AP Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
17. Cash and stock dividends are recorded in the general journal because the
financial position of the company changes. In the case of a cash dividend,
the account dividends declared is increased, which in turn decreases
retained earnings. Cash is also reduced when a cash dividend is paid. In
the case of a stock dividend, the dividends declared account is increased,
which in turn decreases retained earnings. Common Shares are increased
in the case of a stock dividend when the distribution date is reached. In the
case of stock splits, there is no change in the financial position of the
company. No accounts are affected. Only the number of shares held by
shareholders will change, typically by a multiple (for example, 2 for 1).
LO 3 BT: K Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
18. (a) All six accounts appear individually on the statement of changes in
equity, along with the details of the transactions that increased and
decreased the accounts during the year being reported.
(b) The first three accounts (preferred shares, common shares, and stock
dividends distributable) would be reported under the sub-heading of
share capital in the shareholders’ equity section of the statement of
financial position with balances at the reporting date. The remaining
accounts would be reported separately in the shareholders’ equity
section of the statement of financial position, after the total share
capital.

19. The purpose of a retained earnings restriction is to indicate that a portion

of retained earnings is currently unavailable for dividends. Restrictions may
result from the following causes: legal, contractual, or voluntary. Although
not reported separately on the statement of changes in equity or statement
of financial position, the portion of retained earnings that is restricted is
disclosed in a note to the financial statements.
20. Comprehensive income is the sum of net income (loss) and other
comprehensive income and appears on the statement of comprehensive
income. Other comprehensive income (or loss) is made up of temporary
accounts added to, or deducted from, the opening balance of accumulated
other comprehensive income by closing entries at the end of the year.
These changes to the accumulated other comprehensive income account
are detailed on the statement of changes in equity. Accumulated other
comprehensive income is a permanent equity account and its ending
balance appears in the shareholders’ equity section of the statement of
financial position.
21. (a) The statement of retained earnings shows all of the changes to
retained earnings for the accounting period being reported. The
statement of retained earnings must be prepared by private
companies following ASPE.
The statement of changes in equity shows the changes in retained

earnings, similar to the statement of retained earnings. However, it
also shows the changes in amounts in share capital, as well as the
changes in all of the remaining equity accounts. This is a required
statement for companies following IFRS.
(b) The statement of retained earnings shows the changes that

determine the ending balance of retained earnings, which is only one
of the accounts that appears in the shareholders’ equity section of the
statement of financial position.

21.(b) (continued)
The statement of changes in equity shows the changes that determine

each of the shareholders’ accounts (for example, preferred shares,
common shares, retained earnings, and accumulated other
comprehensive income). Each of these accounts appears in the
shareholders’ equity section of the statement of financial position.
22. (a) Private companies that report using ASPE usually have a simpler
capital structure than publicly traded companies who use IFRS.
Consequently, the shareholders’ equity section of the statement of
financial position has fewer accounts with ASPE. For example, private
companies are not required to report accumulated other
comprehensive income, which publicly traded companies are
required to report.
(b) Private companies using ASPE would prepare the following financial
statements: statement of financial position, income statement,
statement of retained earnings, and statement of cash flows. For
companies using ASPE, fewer equity account transactions occur that
need to be explained and consequently there is no requirement to
prepare a statement of changes in equity. Rather, only a statement of
retained earnings is required, linking the income statement to the
retained earnings account shown in the shareholders’ equity section
of the statement of financial position.
Publicly traded companies using IFRS would prepare the following

financial statements: statement of financial position, income
statement and/or statement of comprehensive income, statement of
changes in equity, and statement of cash flows. Under IFRS, a
statement of comprehensive income is required (in combination with,
or along with the income statement) when there is other
comprehensive income during the year.

23. (a) Unfavourable

(b) Favourable
(c) Unfavourable
(d) Favourable
LO 5 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005
24. Pepsi had the higher share price. The market price of the share can be
determined by dividing the dividend per share by its dividend yield.
Coca-
Ratio Cola Pepsi
Dividend per share $1.32 $2.76

Dividend yield 2.9% 2.7%
Market price per share $45.52 $102.22
LO 5 BT: AN Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
25. The weighted average number of shares is a more realistic measure of the
number of shares that the corporation had throughout the year and the use
of the assets generated from these shares. The net income generated on
the share issue proceeds during the year, or reduced by the shares
repurchased during the year, is for only part of the year so the number of
shares should be weighted by the same partial year factor. Given that
companies routinely issue and retire shares, using the number of shares
at a specific point in time (such as year end) may not provide a true
representation of the company’s basic earnings per share.
LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

26. Companies must use the income available to common shareholders (net
income – preferred dividends) in the calculation of their basic earnings per
share figures because preferred shareholders receive preferential
treatment with respect to the distribution of the company’s dividends. That
is, common shareholders would not receive any dividends before the
preferred shareholders receive theirs.
Similarly, the preferred shareholders’ entitlement must be subtracted from

both the numerator (net income – preferred dividends) and denominator
(total shareholders’ equity – preferred shares) in the calculation of return
on common shareholders’ equity.
Consequently, both ratios use income available to common shareholders

in their numerators.
LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t005
27. (a) Company B pays out the higher proportion of its net income in
dividends and these dividends give shareholders the higher dividend
yield, when compared to Company A. Therefore, Company B is the
better choice for an investor interested in a steady dividend income.
(b) If an investor had purchased the shares for growth, Company A would
have been preferred by the investor as Company A is not using up as
much cash to pay dividends and is reinvesting more of its net income
back into the business to grow operations.
LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t005

28. Two companies can have the same return on assets but a different return
on common shareholders’ equity for a number of reasons. Since neither
company has issued preferred shares, both ratios will have the same
numerator, so any difference in these two ratio values will arise from
differences in the denominator. The difference between a company’s
assets (the denominator in the return on assets ratio) and a company’s
common shareholders’ equity (the denominator in the return on common
shareholders’ equity ratio) consists of either liabilities or preferred shares
but in this case will consist of only liabilities. Therefore, a company that has
a significant amount of liabilities will tend to have a more significant
difference between its return on assets and its return on common
shareholders’ equity. Company A likely has a higher portion of its assets
financed with liabilities than Company B has.
In taking on more liabilities, Company A can become more profitable and

have a higher return on common shareholders’ equity only if the after-tax
rate of interest paid to creditors is lower than the return on assets that were
purchased with funds borrowed from creditors. The difference between the
return on these assets and the interest paid on the funds borrowed to buy
these assets will go (be attributed to) to the common shareholders,
increasing the return on common shareholders’ equity.
LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t005

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 11-1
(a) At Hydro One Limited’s initial public offering, the shares issued were
purchased from the corporation. The $20.50 per share received goes
directly to Hydro One and increases assets (cash) and shareholders’ equity
(share capital).
(b) At the March 2016 date, the market price of $24.00 per share is a result of
the buying and selling of shares occurring in the secondary market. The
proceeds from the sale of shares go to the seller and not to Hydro One.
Therefore, there is no impact on Hydro One Limited’s financial position as
a result of the trading occurring on the stock market subsequent to the IPO.

BRIEF EXERCISE 11-2
(a)
May 2 Cash ............................................................. 30,000
Common Shares (2,000 × $15) ............ 30,000
June 15 Cash ............................................................. 17,000

Common Shares (1,000 × $17) ............ 17,000
Nov. 1 Cash ............................................................. 6,000

Preferred Shares (200 × $30) .............. 6,000
Dec. 15 Cash ............................................................. 7,000

Preferred Shares (200 × $35) .............. 7,000
(b)
Number Number
of shares of shares
authorized issued
(1) Preferred shares 200,000 400 (200+200)
(2) Common shares Unlimited 3,000 (2,000 + 1,000)

BRIEF EXERCISE 11-3
(a) Average cost of common shares on:

Balance
Common Number of Average
Date Shares Shares Cost
June 8 $300,000 ÷ 60,000 = $5.00
Aug. 19 $90,000 15,000

Bal. $390,000 ÷ 75,000 = $5.20
Nov. 2 $(31,200) (1) (6,000)

Bal. $358,800 ÷ 69,000 = $5.20
Dec. 7 $(41,600) (2) (8,000)

Bal. $317,200 ÷ 61,000 = $5.20
(1) 6,000 shares x average cost $5.20 = $31,200

(2) 8,000 shares x average cost $5.20 = $41,600
(b)
June 8 Cash .................................................................. 300,000
Common Shares ........................................ 300,000
Aug. 19 Cash .................................................................. 90,000
Common Shares ........................................ 90,000
Nov. 2 Common Shares (1) above .................................. 31,200
Contributed Surplus ($31,200 - $ 28,800).. 2,400
Cash .......................................................... 28,800
Dec. 7 Common Shares (2) above .................................. 41,600

Contributed Surplus (balance).............................. 2,400
Retained Earnings ................................................ 8,000
Cash .......................................................... 52,000
LO 2 BT: AP Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

BRIEF EXERCISE 11-4
(a)
Mar. 8 Cash ................................................................. 150,000
Preferred Shares (5,000 × $30)................ 150,000
April 20 Land ................................................................. 110,000

Preferred Shares (3,000 shares) .............. 110,000
(b) If the current value of the land could not be determined, the fair value of
the consideration given up ($35 per share multiplied by 3,000 shares or
$105,000) would be used. The journal entry would be as follows:
April 20 Land ................................................................. 105,000

Preferred Shares (3,000 × $35)................ 105,000
(c) If Daschen Inc. was a private company using ASPE, the value of the shares
would not be as easily obtained since they do not trade on a stock
exchange. Consequently, the amount recorded on the exchange of
preferred shares for land will more likely be determined by the value of the
consideration received, which is the current value of the land. In this case,
the entry would not change since the current value of the land is the more
clearly determinable value in the exchange.
LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

BRIEF EXERCISE 11-5
(a) Dividends in arrears at the end of the current year = 20,000 × $2 = $40,000
(b) Dividends in arrears are not accrued as liabilities. The amount of the
dividends in arrears is disclosed in the notes to the financial statements.
(c) Dividends in arrears can only arise from cumulative preferred shares. If a
dividend is not declared for a noncumulative preferred share, the dividend
entitlement does not carry forward into the future.
LO 2 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 11-6

Nov. 15 Dividends Declared (60,000 × $2 ÷ 4) .............. 30,000
Dividends Payable ................................... 30,000
Dec. 10 No entry required
31 Dividends Payable ........................................... 30,000

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

BRIEF EXERCISE 11-7
Dec. 1 Dividends Declared (100,000 × 5% × $15) 75,000

Stock Dividends Distributable .............. 75,000
20 No entry required
Jan. 10 Stock Dividends Distributable ....................... 75,000

Common Shares .................................. 75,000
(Stock Dividends = Number of shares issued × Market price per share when declared)

BRIEF EXERCISE 11-8
(a) Before the stock split: 19,500,000 shares

After the stock split: 19,500,000 × 3 = 58,500,000 shares
(b) Likely stock price after the stock split: $67.30 ÷ 3 = $22.43
(c) There would be no journal entry recorded for the stock split. Details of the
stock split would be discussed in the notes to the financial statements.
BRIEF EXERCISE 11-9

Shareholders’ Number of
Transaction Assets Liabilities Equity Shares
(a) NE + - NE
(b) - - NE NE
(c) NE NE NE NE
(d) NE NE NE +
(e) NE NE NE +
LO 3 BT: AN Difficulty: C Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 11-10
[1] $2,050,000 – $1,500,000 – $110,000 = $440,000

[2] $440,000 same as [1]
[3] $3,505,000 – $3,000,000 + $135,000 – $750,000 = $(110,000) or same as
the amount of increase in Common Shares
[4] $0
[5] $750,000 (same amount as increase in Retained Earnings)
[6] $125,000 – $100,000 = $25,000
[7] $500,000 (no change from beginning balance)
[8] $5,100,000 + $440,000 [2] – $135,000 + $750,000 [5] + $25,000 =
$6,180,000 or taken from ending balances $2,050,000 + $500,000 [7] +
$3,505,000 + $125,000 = $6,180,000
LUXAT CORPORATION
Statement of Financial Position (Partial)
December 31, 2018
Shareholders' equity
Contributed capital
Common shares, unlimited number of shares
authorized, 550,000 issued ............................................. $2,050,000
Contributed surplus ............................................................... 500,000
Total contributed capital .................................................. 2,550,000
Retained earnings ....................................................................... 3,505,000
Accumulated other comprehensive income ................................ 125,000
Total shareholders' equity .................................................................. $6,180,000

(a) STIRLING FARMS LIMITED

Statement of Retained Earnings
Year Ended December 31, 2018
Retained earnings, January 1 .................................................... $490,000

Add: Net income ...................................................................... 150,000
640,000
Less: Dividends declared.......................................................... 90,000
Retained earnings, December 31 .............................................. $550,000
(Ending retained earnings = Beginning retained earnings + Net income – Dividends declared)
(b) If Stirling were a publicly traded corporation, a statement of changes in

equity would be required instead of a statement of retained earnings. It
would report the changes in each of the shareholders’ equity accounts, not
just retained earnings.

$60,000
(a) Payout ratio  last year = 10%
$600,000
(Payout ratio = Cash dividends declared ÷ Net income)
(b) Dividends paid this year = $2,000,000 × 10% = $200,000 (assuming the
same payout ratio).
(c) (Not required) Dividends paid next year = $700,000 × 10% = $70,000
(assuming the same payout ratio).
Maintaining a constant dividend payout ratio may or may not be a sound

business practice. Many factors, including the corporation’s cash flow and
the type of investor involved would have to be taken into consideration.
Because dividend amounts are relatively fixed (or with small increases),
the payout ratio tends to fluctuate with profits. Maintaining a constant
dividend payout ratio when net income fluctuates will result in variable
dividend amounts being paid to shareholders, which may not be wise from
a cash flow or growth perspective. It is also difficult to determine in advance
exactly what the net income for the year will be. Trying to keep exactly the
same payout ratio is therefore not always possible.
LO 5 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

(a) Canadian National Railway Canadian Pacific Railway
$1.25 $1.40
Dividend yield
$80.00 $168.00
= 1.6% = 0.8%
(Dividend yield = Dividends declared per share ÷ Market price per share)
(b) Investors would prefer Canadian National Railway because of its higher
dividend yield if they wished to purchase shares for the purpose of earning
dividend income.

Weighted average number of shares:
January 1 34,000 × 12/12 = 34,000

May 1 (3,000) x 8/12 = (2,000)
August 31 9,000 × 4/12 = 3,000
November 30 6,000 × 1/12 = 500
46,000 35,500
(a) The number of common shares issued at December 31, 2018 is 46,000.
(b) The weighted average number of common shares for 2018 is 35,500.

Basic earnings $370,000 – $20,000*

= $9.86
per share 35,500
*10,000 × $2 = $20,000
(Basic earnings per share = (Net income – preferred dividends) ÷ Weighted average
number of common shares)
(a)
Basic earnings $800,000 – $100,000*
= $2.33
per share 300,000
*50,000 × $2 = $100,000
(Basic earnings per share = (Net income – preferred dividends) ÷ Weighted

average number of common shares)
(b) Same amount as in (a) $2.33
(c)
Basic earnings $800,000
= $2.67
per share 300,000

(a) Return on common shareholders’ equity:
$14,000
12.4%
($104,000 $122,000) 2
(Return on common shareholders’ equity = (Net income – preferred dividends) ÷

Average common shareholders’ equity)
(b) Had Salliq issued preferred shares and paid dividends to the preferred
shareholders, the amount of income available to common shareholders
would be reduced by the amount of the preferred dividend, reducing the
return on common shareholders’ equity ratio.

SOLUTIONS TO EXERCISES
EXERCISE 11-1
(a) High $44.56

Low $32.87
Increase $11.69 x 100 shares = $1,169.00 income
(b) $0.56 per share
(c) 1,000 × $43.56 = $43,560
(d) $43.56 - $0.19 = $43.37
(e) 216,740 shares

EXERCISE 11-2
(a) June 12 Cash (50,000 × $6) .................................... 300,000

Common Shares ................................ 300,000
July 11 Cash (1,000 × $25) .................................... 25,000

Preferred Shares ............................... 25,000
Oct. 1 Land ........................................................... 75,000

Common Shares (10,000 shares) ...... 75,000
Nov. 15 Cash (25,000 × $28) .................................. 700,000

Preferred Shares ............................... 700,000
(b) Preferred: 2,500 + 1,000 + 25,000 = 28,500 shares

$55,000 + $25,000 + $700,000 = $780,000
Common: 140,000 + 50,000 + 10,000 = 200,000 shares

$700,000 + $300,000 + $75,000 = $1,075,000

EXERCISE 11-3
(a) Jan. 6 Cash ............................................................. 300,000
Common Shares (200,000 × $1.50)...... 300,000
12 Cash ............................................................. 87,500

Common Shares (50,000 × $1.75) ....... 87,500
17 Cash ............................................................. 250,000

Preferred Shares (10,000 × $25) .......... 250,000
18 Cash ............................................................. 1,000,000

Common Shares (500,000 × $2.00)...... 1,000,000
24 Common Shares (200,000 × $1.85) ............. 370,000*

Retained Earnings ($380,000 - $370,000) .... 10,000
Cash (200,000 × $1.90) ........................ 380,000
31 Professional Fees Expense........................... 15,000

Common Shares (10,000 shares) ......... 15,000
*Refer to part (b) $1,387,500 ÷ 750,000 = $1.85; $1.85 x 200,000 = $370,000

EXERCISE 11-3 (CONTINUED)

(b) For preferred shares, there was only the one transaction on January 17 and so
the number of shares is 10,000 and the average cost is $25.00 at January 31.
For common shares:

Number of
shares Issue Contribute Average
Date issued price d Capital cost
January 6 200,000 $1.50 $300,000
January 12 50,000 $1.75 87,500
January 18 500,000 $2.00 1,000,000

Sub. Total 750,000 1,387,500 $1.85
January 24
(200,000) $1.85 (370,000)
January 31 10,000 15,000

Balance
560,000 $1,032,500 $1.844
(c) If Moosonee were a publicly traded company, the per-share value of the
shares issued in exchange for the legal services would be easily obtained
as they are traded every business day. When shares are issued for a
consideration other than cash, such as goods or services, IFRS requires
that the transaction be recorded at the fair value of the consideration
received. If the current value of the consideration received cannot be
reliably determined, then the current value of the consideration given up
(shares in this case) can be used. In this case, the value of the services
was given so the journal entry would not be any different under IFRS .
LO 2 BT: AN Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 11-4
(a) Total annual preferred dividend should be 400,000 × $2 per share or

$800,000.
(b) Dividends in arrears at the end of Year 1 are $200,000 ($800,000 annual
dividend less dividends declared of $600,000).
By the end of Year 2, the dividends paid of $400,000 are first allocated to
the $200,000 dividends in arrears from Year 1 and the remaining $200,000
is for Year 2. Consequently, by the end of Year 2, dividends in arrears at
that time are $600,000. ($800,000 - $200,000)
(c) Dividends in arrears are not accrued as a liability. Rather, the amount of
any dividends in arrears is disclosed in the notes to the financial
statements.
(d) The corporation has no obligation to pay any dividends regardless of

whether the preferred shares are cumulative or noncumulative. What is
different with the noncumulative preferred shares is that in Year 2 the
corporation is not obligated to pay any dividends in arrears before it can
pay dividends for the current year. No arrears would exist in either of Year
1 or 2 if the shares had been noncumulative.
(e) Since undeclared dividends are lost completely in the case of

noncumulative preferred shares, from a perspective of an investor,
cumulative shares are preferred because the investor does not lose the
right to receive an undeclared dividend. Since cumulative preferred shares
are more attractive to investors, they will be easier to sell by the company.
LO 2 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 11-5
(a) Apr. 2 Cash ............................................................... 100,000

Common Shares (5,000 × $20) .............. 100,000
June 15 Dividends Declared (85,000 × $0.25) ............. 21,250
Dividends Payable ................................ 21,250
July 10 Dividends Payable ......................................... 21,250
Cash....................................................... 21,250
Aug. 21 Dividends Declared ........................................ 93,500
Stock Dividends Distributable ................ 93,500
(80,000 + 5,000 = 85,000 × 5% = 4,250 × $22)
(Stock Dividends = Number of shares issued × Market price per share on declaration date)
Sept. 20 Stock Dividends Distributable......................... 93,500

Common Shares ................................... 93,500
Nov. 1 Cash ............................................................... 75,000
Common Shares (3,000 × $25) .............. 75,000
Dec. 20 Dividends Declared ........................................ 27,675
Dividends Payable ................................. 27,675
((80,000 + 5,000 + 4,250 + 3,000) x $0.30 = 92,250 × $0.30)
(b) Number of common shares at the end of the year:

80,000 + 5,000 + 4,250 + 3,000 = 92,250
LO 2,3 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 11-6
(1) (2) (3)
Before After Cash After Stock After Stock
Action Dividend Dividend Split
Total assets $1,250,000 $1,200,000 $1,250,000 $1,250,000
Total liabilities $ 250,000 $ 250,000 $ 250,000 $ 250,000
Common shares 600,000 600,000 670,000* 600,000

Retained earnings 400,000 350,000 330,000 400,000
Total shareholders' equity 1,000,000 950,000 1,000,000 1,000,000
Total liabilities and
shareholders’ equity $1,250,000 $1,200,000 $1,250,000 $1,250,000
Number of common shares 100,000 100,000 105,000 200,000
* $600,000 + (100,000 shares × 5% × $14) = $670,000

(Contributed capital is increased by the total amount of the stock dividend)

EXERCISE 11-7
Shareholders’ Equity
Accumulated
Other Total
Share Retained Comprehensive Shareholders’
Assets Liabilities Capital Earnings Income Equity
1. + NE + NE NE +
2. NE + NE - NE -
3. - - NE NE NE NE
4. + NE + NE NE +
5. + NE + NE NE +
6. NE NE NE NE NE NE
7. NE NE + - NE +/-
8. NE NE +/- NE NE +/-
9. NE NE NE NE NE NE
10. + NE NE NE + +
LO 2,3,4 BT: AN Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 11-8
Statement of Changes in Equity

Other
Share Retained Financial
Account Capital Earnings AOCI Statement Classification
1. Cash NE NE NE Statement Current
of financial assets
position
2. Common Common NE NE NE NE
shares shares
3. Other NE NE OCI: NE NE
comprehensive Revaluation
income– gain
Revaluation
gain from
revaluing
property, plant,
and equipment
to fair value
4. Long-term NE NE NE Statement Non-current
investments of financial assets
position
5. Preferred Preferred NE NE NE NE
shares shares
6. Retained NE Retained NE NE NE
earnings earnings
7. Gain on NE NE NE Income Operating
disposal statement expenses
(reduction of)
8. Dividends NE Retained NE NE NE
declared earnings
9. Stock split NE NE NE NE NE
10. Stock Common NE NE NE NE
dividends shares*
distributable
Legend:
AOCI : Accumulated Other Comprehensive Income
OCI: Other Comprehensive Income
* Note to instructors: Preferred shares is also an acceptable answer here

although common shares are more often issued as stock dividends.

EXERCISE 11-9
OZABAL INC.
December 31, 2018
Shareholders’ equity
Contributed capital
Share capital
$1.25 Preferred shares, noncumulative, 100,000
authorized, 10,000 shares issued ............................ $250,000
authorized, 250,000 shares issued .......................... 500,000
Stock dividends distributable ................................... 50,000 $ 800,000
Contributed surplus ...................................................... 25,000
Total contributed capital ...................................................... 825,000
Retained earnings (Note R)................................................. 900,000
Accumulated other comprehensive loss .............................. (50,000)
Total shareholders’ equity............................................................ $1,675,000
Note R: Retained earnings restricted for plant expansion, $100,000.


EXERCISE 11-10
(a)
THE BLUE CANOE LIMITED
Accumu-
lated
Other
Compre-
Common Contributed Retained hensive
Shares surplus Earnings Income Total
Balance Jan. 1 $800,000 $540,000 $1,500,000 $90,000 $2,930,000
Issued common shares 180,000 180,000
Common shares
reacquired (200,000) (40,000) (240,000)
Net income 400,000 400,000
Dividends declared (70,000) (70,000)
Other comprehensive
income (25,000) (25,000)
Balance Dec. 31 $780,000 $500,000 $1,830,000 $65,000 $3,175,000

(b)
THE BLUE CANOE LIMITED
December 31, 2018
Contributed capital
Common shares.............................................................. $780,000
Contributed surplus ........................................................ 500,000
Total contributed capital ...................................................... $1,280,000
Retained earnings ............................................................... 1,830,000
Accumulated other comprehensive income......................... 65,000
Total shareholders’ equity............................................................ $3,175,000

EXERCISE 11-11
(a)
Nike (in millions of USD) Adidas (in millions of
euros)
(1) Payout ratio $931 ÷ $3.273 = 28.4% €320 ÷ €634 = 50.5%
(2) Dividend yield $1.08 ÷ $62.50 = 1.7% €1.60 ÷ €89.91 = 1.8%
(Payout ratio = Cash dividends declared ÷ Net income)

(Dividend yield = Dividends declared per share ÷ Market price per share)
(b) Investors would likely prefer Adidas for dividend income purposes because
of its slightly higher dividend yield, but if the difference between these two
yields is not important to an investor, they may prefer Nike because its
lower payout ratio indicates that it retains a larger portion of its income to
foster future growth.

EXERCISE 11-12
(a) Income available to common shareholders
= Net income – Preferred share dividends
= $963,750 – (60,000 × $1 × ¼)
= $948,750
(b) Weighted average number of common shares

Dec. 1 180,000 × 12/12 = 180,000
Feb. 28 45,000 × 9/12 = 33,750
Nov. 1 18,000 × 1/12 = 1,500
215,250
(c) Basic earnings per share

= Income available to common shareholders ÷ Weighted average number of
common shares
= $948,750 ÷ 215,250
= $4.41

EXERCISE 11-13
(a)
($ in millions) 2015 2014
$1,708 $1,567 =
= 48.4% 50.0%
(1) Payout ratio $3,531 $3,131
$4.30 $3.94
(2) Dividend yield = 4.3% = 3.8%
$100.28 $102.89
Basic earnings $3,531 $3,131

(3) = $8.89 = $7.87
per share 397 398
Return on
common
(4) $3,531 = 18.6% $3,131 = 18.3%
shareholders'
equity ($20,360 + $17,588) ÷ 2 ($17,588 + $16,546) ÷ 2
(1) (Payout ratio = Cash dividends declared ÷ Net income)

(2) (Dividend yield = Dividends declared per share ÷ Market price per share)
(3) (Basic earnings per share = (Net income – preferred dividends) ÷ Weighted average
(4) (Return on common shareholders’ equity = (Net income – preferred dividends ÷ Average
common shareholders’ equity)


(b) The dividends paid by CIBC in 2015 increased in absolute amount.
However, when dividends are expressed as a percentage of the net
income, the result—the payout ratio—decreased from 50.0% to 48.4%.
This is because net income increased at a higher rate than did dividends.
The dividend yield increased from 3.8% in 2014 to 4.3% in 2015. This
occurred not just because of an increase in dividends but also because of
a slight decrease in the market price of a share. Both of these effects will
cause the dividend yield to increase.
CIBC’s net income improved in 2015 both in total amount and on a per-
share basis. Its return on common shareholders’ equity also improved
slightly from 18.3% to 18.6%. In spite of the improved profitability, the
bank’s shareholders were not willing to pay a higher market price for the
common shares in 2015 ($100.28) compared to 2014 ($102.89). This
decrease may be due to perceived risk on the part of shareholders.

EXERCISE 11-14
As an investor interested in an income-oriented investment, the dividend ratios

will carry a great deal of weight when choosing between Stanley and Snap-on.
The dividend payout of Stanley is much stronger than that of Snap-on. Stanley is
also a better choice based on the dividend yield ratio.
The choice between the two companies should not be based on the basic
earnings per share, which are not comparable between companies. The earnings
per share can only be interpreted in conjunction with the market price of the share
(for example, the price-earnings ratio) or the dividends paid per share (for
example, the dividend payout ratio).
The return on common shareholders’ equity ratio, while a profitability ratio of

interest, would not be a primary ratio relied upon to assess whether to purchase
a company’s shares for income (dividend) purposes.
For investors seeking future price appreciation in the shares of these companies,
Snap-On has a better chance for future price appreciation. It is retaining a higher
percentage of its income, and its return on common shareholders’ equity is higher.


EXERCISE 11-15
(a)
No-Debt Option Debt Option
Income from operations $80,000 $80,000
Interest expense (4%) 0 10,000 [7]
Income before income tax $80,000 [1] $70,000 [8]
Income tax expense (30%) 24,000 [2] 21,000 [9]
Net income $56,000 [3] $49,000 [10]
Average total assets $500,000 $500,000
Average common shareholders’ equity $500,000 $250,000
Number of common shares 50,000 25,000
Basic earnings per share $1.12 [4] $1.96 [11]
Dividends declared $56,000 [3] $49,000 [10]
Payout ratio 100% [5] 100% [12]
Return on common shareholders’ equity 11.2% [6] 19.6% [13]
[1] $80,000 - $0 = $80,000 [7] $250,000 x 4% = $10,000

[2] $80,000 x 30% = $24,000 [8] $80,000 - $10,000 = $70,000
[3] $80,000 - $24,000 = $56,000 [9] $70,000 x 30% = $21,000
[4] $56,000 ÷ 50,000 = $1.12 [10] $70,000 - $21,000 = $49,000
[5] Given as 100% of Net Income [3] above [11] $49,000 ÷ 25,000 = $1.96
[6] $56,000 ÷ $500,000 = 11.2% [12] Given as 100% of Net Income [10] above
[13] $49,000 ÷ $250,000 = 19.6%


(b) The main factors affecting the ratio results include the interest expense for
the debt option and the corresponding tax savings from the deductible
interest expense. The other main factor affecting the ratios is the number
of shares issued to obtain half the financing needed of $250,000. Other
scenarios, with different proportions of debt and equity financing, different
interest rates, and different tax rates will provide different results. The only
ratio that remains unchanged is the payout ratio which is based on the
assumptions given.

SOLUTIONS TO PROBLEMS
PROBLEM 11-1A
Accumulated
Share Capital Other
Liabilitie Preferred Common Retained Comprehensive
Assets s Shares Shares Earnings Income
1. -$240,0001 NE NE 2
-$160,000 -$80,000 NE
2. +140,000 NE NE +140,000 NE NE
3. +70,0003 NE NE +70,000 NE NE
4. +100,000 NE +$100,00 NE NE
0 NE
5. -42,0004 NE NE NE -42,000 NE
6. -5,000 NE NE NE NE -$5,000
1 20,000 × $12 = $240,000

2 ($4,000,000 ÷ 500,000) x 20,000 = $160,000
3 5,000 × $14 = $70,000
4 (6,000 + 1,000) × $6 = $42,000
LO 2,3,4 BT: AN Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11-2A
(a) Transaction entries:
Jan. 10 Cash (1,000,000 × $2) ......................................... 2,000,000

Common Shares .......................................... 2,000,000
Mar. 1 Cash (20,000 × $50) ............................................ 1,000,000
Preferred Shares ......................................... 1,000,000
May 1 Cash (250,000 × $3) ............................................ 750,000
Common Shares .......................................... 750,000
June 1 Common Shares (10,000 x $2.20 below) ............. 22,000
Cash (10,000 x $2.00) ................................. 20,000
Contributed Surplus ($22,000 - $20,000)..... 2,000
Balance
Jan. 10 $2,000,000 1,000,000
May 1 750,000 250,000
$2,750,000 ÷ 1,250,000 = $2.20
July 24 Cash .................................................................... 120,000

Equipment (at current value) ................................ 16,000
Common Shares (33,500 shares) ................ 136,000
Sept. 4 Cash (10,000 × $5) .............................................. 50,000
Common Shares ......................................... 50,000
Nov. 1 Cash (4,000 × $50) .............................................. 200,000

Preferred Shares ......................................... 200,000

PROBLEM 11-2A (CONTINUED)

(a) (continued)
Nov. 20 Common Shares (15,000 x $2.27 below) ............. 34,050

Contributed Surplus (balance from June 1).......... 2,000
Retained Earnings * ............................................. 23,950
Cash (15,000 x $4.00) ................................. 60,000
*($60,000 - $34,050 - $2,000) = $23,950
Balance
Jan. 10 $2,000,000 1,000,000
May 1 750,000 250,000
June 1 (22,000) (10,000)
July 24 136,000 33,500
Sept. 4 50,000 10,000
$2,914,000 ÷ 1,283,500 = $2.27
Dec. 14 Dividends Declared .............................................. 72,000

Dividends Payable ...................................... 72,000
Closing entries:
Dec. 31 Retained Earnings................................................ 72,000
Dividends Declared ...................................... 72,000
31 Income Summary ................................................. 1,300,000
Retained Earnings ....................................... 1,300,000


(b)
Preferred Shares Dividends Declared
Mar. 1 1,000,000 Dec. 14 72,000 Dec. 31 CE 72,000
Nov. 1 200,000 Dec. 31 Bal. 0
Dec. 31 Bal. 1,200,000
Retained Earnings
Common Shares Nov. 20 23,950
June 1 22,000 Jan. 10 2,000,000 Dec. 31 CE 72,000 Dec. 31 CE 1,300,000
Nov. 20 34,050 May 1 750,000 Dec. 31 Bal. 1,204,050
July 24 136,000 CE: Closing entry
Sept. 4 50,000
Dec. 31 Bal. 2,879,950
Contributed Surplus
Nov. 20 2,000 June 1 2,000
Dec. 31 Bal. 0


(c) Number of preferred shares:
20,000 + 4,000 = 24,000
Number of common shares:

1,000,000 + 250,000 – 10,000 + 33,500 + 10,000 – 15,000 = 1,268,500
REMMERS CORPORATION
December 31, 2018
Share capital
$3 Preferred shares, noncumulative, unlimited
number authorized, 24,000 shares issued ................... $ 1,200,000
Common shares, unlimited number authorized,
1,268,500 shares issued .............................................. 2,879,950
Total share capital ............................................................. 4,079,950
Retained earnings ............................................................. 1,204,050
Total shareholders’ equity ...................................................... $5,284,000

PROBLEM 11-3A

Feb. 6 Cash ............................................................... 600,000
Preferred Shares (10,000 shares) .......... 600,000
April 6 Cash ............................................................... 570,000
Common Shares (20,000 shares) .......... 570,000
April 27 Common Shares (3,000 x $18.00 below) ....... 54,000
Cash (3,000 x $17.00) ........................... 51,000
Contributed Surplus ($54,000 - $51,000). 3,000
Balance
Jan. 1 Bal. $1,050,000 70,000
April 6 570,000 20,000
$1,620,000 ÷ 90,000 = $18.00
May 29 Dividends Declared ........................................ 36,000

Dividends Payable
[(8,000 + 10,000) × $4 × 6/12]................ 36,000
June 12 No entry required
July 1 Dividends Payable ......................................... 36,000
Cash....................................................... 36,000
Aug. 22 Buildings ........................................................ 165,000

Common Shares (9,000 shares) ............ 165,000
Closing entries:
Dec. 31 Income Summary ........................................... 582,000
Retained Earnings.................................. 582,000
31 Retained Earnings.......................................... 36,000
Dividends Declared ................................ 36,000


(b)
Preferred Shares Common Shares
Jan. 1 Bal. 440,000 Apr. 27 54,000 Jan.1 Bal. 1,050,000
Feb. 6 600,000 April 6 570,000
Dec. 31 Bal. 1,040,000 Aug. 22 165,000
Dec. 31 Bal. 1,731,000
Dividends Declared Retained Earnings

May 29 36,000 Dec. 31 CE 36,000 Jan. 1 Bal. 800,000
Dec. 31 Bal. 0 Dec. 31CE 36,000 Dec. 31 CE 582,000
Dec. 31 Bal. 1,346,000
Accumulated Other Comprehensive Income

Jan. 1 Bal. 10,000
Dec. 31 Bal. 10,000
CE: Closing entry


(c)
LARGENT CORPORATION
Accumulated
Share Capital Other
Preferred Common Contributed Retained Comprehensive
Shares Shares surplus Earnings Income Total
Balance Jan. 1 $ 440,000 $1,050,000 $25,000 $ 800,000 $10,000 $2,325,000

Issued preferred shares 600,000 600,000
Repurchased common shares (54,000) 3,000 (51,000)
Net income 582,000 582,000
Balance Dec. 31 $1,040,000 $1,731,000 $28,000 $1,346,000 $10,000 $4,155,000


(d) Number of preferred shares:
8,000 + 10,000 = 18,000

70,000 + 20,000 + 9,000 – 3,000 = 96,000
LARGENT CORPORATION
December 31, 2018
Share capital
$4 Preferred shares, cumulative,
200,000 shares authorized, 18,000 issued ............................ $1,040,000
authorized, 96,000 issued ......................................................... 1,731,000
Contributed surplus .................................................................... 28,000
Total share capital ........................................................................... 2,799,000
Retained earnings ........................................................................... 1,346,000
Accumulated other comprehensive income..................................... 10,000
Total shareholders’ equity .................................................................... $4,155,000
Note: Dividends of $36,000 (18,000 × $4 × 6/12) are in arrears on the

cumulative preferred shares.

PROBLEM 11-4A

Jan. 2 Cash .......................................................... 5,000,000
Preferred Shares (200,000 × $25) .... 5,000,000
Feb. 8 Land ......................................................... 210,000

Common Shares (100,000 shares) ... 210,000
Mar. 5 Dividends Declared (200,000 × $1 × 3/12) 50,000
Dividends Payable ............................ 50,000
April 2 Dividends Payable .................................... 50,000
Cash ................................................. 50,000
18 Cash (400,000 × $3) ................................. 1,200,000
Common Shares ............................... 1,200,000
June 5 Dividends Declared (200,000 × $1 × 3/12) 50,000
July 1 Dividends Payable .................................... 50,000
Cash ................................................. 50,000
Sept. 5 Dividends Declared (200,000 × $1 × 3/12) 50,000
Oct. 1 Dividends Payable .................................... 50,000
Cash ................................................. 50,000
Oct. 4 Cash ......................................................... 1,000,000

Preferred Shares (40,000 × $25) ...... 1,000,000


(a) (continued)
Dec. 5 Dividends Declared (240,000* × $1 × 3/12) 60,000
*200,000 + 40,000 = 240,000 shares
Dec. 14 Dividends Declared (3,500,000* × $0.50) . 1,750,000
Dividends Payable ............................ 1,750,000
*3,000,000 + 100,000 + 400,000 = 3,500,000 shares
Closing entries:
Dec. 31 Income Summary ...................................... 1,000,000
Retained Earnings............................. 1,000,000
31 Retained Earnings..................................... 1,960,000
Dividends Declared ........................... 1,960,000
(b)
Jan. 1 Bal. 0 Jan. 1 Bal. 3,000,000
Jan. 2 5,000,000 Feb. 8 210,000
Oct. 4 1,000,000 April 18 1,200,000
Dec. 31 Bal. 6,000,000 Dec. 31 Bal. 4,410,000
Retained Earnings Dividends Declared

Jan. 1 Bal. 3,800,000 Jan. 1 Bal. 0 Dec. 31 CE 1,960,000
Dec. 31CE 1,960,000 Dec. 31 CE 1,000,000 Mar. 5 50,000
Dec. 31 Bal. 2,840,000 June 5 50,000
Sept. 5 50,000
Dec. 5 60,000
Dec. 14 1,750,000
Dec. 31 Bal. 0
CE: Closing entry

(c)
CONWAY LTD,
Retained earnings, January 1 .................................................. $3,800,000

Add: Net income .................................................................... 1,000,000
4,800,000
Less: Dividends declared.......................................................... 1,960,000
Retained earnings, December 31 ............................................... $2,840,000
(d)
CONWAY LTD.
December 31, 2018
Share capital
number authorized, 240,000 shares issued ........................ $6,000,000
Common shares, unlimited number authorized,
3,500,000 shares issued ................................................... 4,410,000
Total share capital ......................................................................... 10,410,000
Retained earnings ......................................................................... 2,840,000
Total shareholders’ equity...................................................................... $13,250,00
(e) If Conway Ltd. was a public company, it would be reporting under IFRS.
The transaction concerning the purchase of the land on February 8 would
still be recorded at the current value of the land of $210,000 even if the
shares had a reliable value. As well, under IFRS requirements, Conway
would report a statement of changes in equity rather than a statement of
retained earnings.
The statement of changes in equity follows (optional):
CONWAY LTD.
Share Capital
Preferred Common Retained

Shares Shares Earnings Total
Balance Jan, 1 $3,000,000 $3,800,000 $6,800,000

Issued preferred shares $6,000,000 6,000,000
Issued common shares 1,410,000 1,410,000
Dividends declared (1,960,000) (1,960,000)
Net income 1,000,000 1,000,000
Balance Dec. 31 $6,000,000 $4,410,000 $2,840,000 $13,250,000
LO 2,3,4 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11-5A
(a)
Preferred Shares
Jan. 1 Balance 500,000
Jan. 1 Issue 500,000
Dec. 31 Balance 1,000,000
Common Shares
Jan. 1 Balance 2,700,000
Oct. 1 Issue 1,000,000
Dividends Declared
Jan. 1 Balance 0
During year Cash dividend* 100,000
Dec. 31 Stock dividend declared** 407,000 Dec. 31 CE 507,000
Dec. 31 Balance 0
Stock Dividends Distributable

Dec. 31 Declaration** 407,000
Retained Earnings
Dec. 31 CE Dividends declared**507,000 Dec. 31 CE Net income 872,000
* 20,000 × $5 = $100,000
** 370,000 × 5% × $22 = $407,000


(b) ROBICHAUD CORPORATION
December 31, 2018
Share capital
number of shares authorized, 20,000 issued ............ $1,000,000
authorized, 370,000 issued .................................... $3,700,000
Stock dividends distributable, 18,500 common shares 407,000 4,107,000
Total share capital .......................................................... 5,107,000
Retained earnings (Note A) ............................................ 3,345,000
Total shareholders’ equity ..................................................... $8,452,000
(Contributed capital is increased by the total amount of the stock dividend)
Note A: On December 31, 2018, the Board of Directors authorized a $500,000

restriction of retained earnings for a plant expansion.
LO 2,3,4 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11-6A
(a)
Cash Dividend Stock Dividend Stock Split

(1) Assets $16,000,000 – $600,000a No effect No effect
= $15,400,000 $16,000,000 $16,000,000
(2) Liabilities No effect No effect No effect $6,000,000
$6,000,000 $6,000,000
(3) Common No effect $2,000,000 No effect
shares $2,000,000 + $600,000b $2,000,000
= $2,600,000
(4) Retained $8,000,000 – $600,000 $8,000,000 No effect
earnings = $7,400,000 – $600,000 $8,000,000
= $7,400,000
(5) Total $10,000,000 – $600,000 No effect No effect
shareholders’ = $9,400,000 $10,000,000 $10,000,000
equity + $600,000
– $600,000
= $10,000,000
(6) Number of No effect 20,000 increase 200,000c increase
shares 400,000 (20,000 + 400,000 (400,000 + 200,000
= 420,000) = 600,000)
a 400,000 × $1.50 = $600,000

b 400,000 × 5% x $30 = 20,000 × $30 = $600,000
c 400,000 ÷ 2 x 3 = 200,000 × 3 = 600,000 after the 3-for-2 stock split


(b)

Advantages:
• Share price will • Retains cash • Retains cash
likely fall slightly (in • Share price will • Share price reduces
proportion to likely fall slightly significantly making shares
dividend). May (in proportion to more affordable to a
make shares dividend). May broader number of
slightly more make shares investors
affordable and slightly more • Share price generally starts
attract new affordable and increasing after split
investors attract new
• Makes shares investors
attractive for • Converts retained
investors wanting earnings to share
dividend income capital
Disadvantages:
• Reduces cash • Reduces basic • Reduces basic earnings
earnings per share per share
• More shares on • More shares on which to
which to pay future pay future cash dividends
cash dividends

PROBLEM 11-7A

Jan. 15 Dividends Declared (220,000 × $1)................ 220,000
Feb. 15 Dividends Payable ......................................... 220,000
Cash ...................................................... 220,000
Apr. 16 Dividends Declared (22,000* × $15) .............. 330,000
Stock Dividends Distributable ................ 330,000
*(220,000 × 10% = 22,000)
(Stock Dividends = Number of shares issued × Market price per share at date of declaration)
May 15 Stock Dividends Distributable ........................ 330,000
Common Shares .................................... 330,000
Oct. 1 No journal entry (memorandum entry only: 242,000 (220,000
+ 22,000) common shares × 2 = 484,000 common shares)
Closing entries:
Retained Earnings ................................. 700,000
Dividends Declared................................ 550,000
($220,000 + $330,000 = $550,000)


(b) CE: Closing entry
Common Shares Retained Earnings

Jan. 1 Bal. 2,200,000 Jan. 1 Bal. 1,080,000
May 15 330,000 Dec. 31 CE 550,000 Dec. 31 CE 700,000
Dec. 31 Bal. Dec. 31 Bal. 1,230,000
2,530,000
Dividends Declared Accumulated Other Comprehensive Income

Jan. 15 220,000 Dec. 31 CE 550,000 Jan. 1 120,000
Apr. 16 330,000
Dec. 31 Bal. 0

May 15 330,000 Apr. 16 330,000
Dec. 31 Bal. 0


(c)
WIRTH CORPORATION
Accumulated
Other
Common Retained Comprehensive
Shares Earnings Income Total
Balance Jan, 1 $2,200,000 $1,080,000 $120,000 $3,400,000

Declared and issued
stock dividends 330,000 (330,000) 0
Net income 700,000 700,000
Balance Dec. 31 $2,530,000 $1,230,000 $120,000 $3,880,000
(A stock dividend reduces retained earnings by the number of shares issued × market
price per share)
Note that some companies may combine the information above pertaining to cash and
stock dividends and report them on a single line on this statement with a breakdown
between the amount of the stock and cash dividends shown in a note to the financial
statements.


(d) Number of common shares: 220,000 + 22,000 + 242,000 = 484,000
WIRTH CORPORATION
December 31, 2018
authorized, 484,000 issued ................................................. $2,530,000
Retained earnings............................................................... 1,230,000
Accumulated other comprehensive income ........................ 120,000
Total shareholders’ equity .......................................... $3,880,000

PROBLEM 11-8A
(a) Weighted Average Number of Shares

Aug. 1 350,000 × 12/12 = 350,000
Oct. 1 (24,000) × 10/12 = (20,000)
Dec. 1 60,000 × 8/12 = 40,000
Feb. 1 10,000 × 6/12 = 5,000
396,000 375,000
(b) Basic Earnings per Share

= Income available to common shareholders ÷ Weighted average
number of common shares
= ($1,280,000 – $100,000*) ÷ 375,000
= $3.15
*Preferred dividend: $1 × 100,000 = $100,000
(c) A weighted average number of shares is used in the basic EPS calculation
because the issue of shares and other activities affecting the number of
shares issued during the period changes the amount of net assets upon
which net income can be earned. Using the number of shares at a point in
time such as year end to calculate basic earnings per share does not take
into account the year’s economic activity and other factors that might have
impacted the number of shares issued during the period.
(d) Because the preferred shares are noncumulative, the dividend would not
be deducted in the calculation of income available to common
shareholders. The basic earnings per share would be as follows:
= Income available to common shareholders ÷ Weighted average

number of common shares
= $1,280,000 ÷ 375,000
= $3.41


PROBLEM 11-9A
(a) The common dividends per share can be calculated as follows:
2015 2014 2013 2012

A. Basic EPS $2.13 $1.21 $1.33 $1.98
B. Payout ratio 72.3% 122.3% 106.0% 67.2%
Common dividends per share (A × B) $1.54 $1.48 $1.41 $1.33
We can see from the calculation above that any change in the payout ratio
was more likely caused by changes in basic earnings per share rather than
changes in dividends per share because the latter increased gradually in
each of the four years shown above Although net income was almost
double on a per-share basis in 2015, as demonstrated by the basic
earnings per share ratio, the dividends per share changed only slightly,
resulting in a lower payout ratio in 2015 compared to the two previous
years. Cineplex is likely trying to give its shareholders a stable dividend
per year, in good years and in bad. This goes a long way towards satisfying
investors.
(b) As explained in (a) above, Cineplex is likely trying to give its shareholders
a stable dividend per share each year so changes in the payout ratio in
this case are more attributable to changes in basic earnings per share
rather than changes in dividends per share. Because the earnings per
share fell in 2013, this caused the payout ratio to rise as dividends per
share that year were increased despite the drop in basic earnings per
share.


(c) Because of the nature of the business, creditors should not be overly
concerned with the company’s continued payment of dividends and the fact
that the dividend payout exceeded basic earnings per share. The creditors
are likely drawing on past experience with Cineplex which would have
given them the reassurance that the company would return to stronger
profitability. Creditors would carefully scrutinize the source for the decline
in profitability in 2013 and 2014 and reassess their risk in holding debt due
from Cineplex. Although creditors are generally more concerned with cash
flow than net income, Cineplex’s poor net income performance of 2013 and
2014 would almost certainly result in decreased cash flows from operating
activities. The company’s continuous payment of dividends in the midst of
decreased cash flows would put creditors on watch to ensure that this did
not hinder Cineplex’s ability to repay its debt.
(d)
2015 2014
A. Common dividends per share $1.54 $1.48
B. Dividend yield 3.2% 3.3%
Market price per share (A ÷ B) $48.13 $44.85
When the basic earnings per share rose 76% in 2015, the share price
increased less than 10%. This most likely occurred because investors in
Cineplex shares are more focused on common dividends per share rather
than basic earnings per share. Since the dividends increased only slightly
in 2015, so did the share price. It would appear that share price
movements, at least for this company, are more correlated with common
dividends per share rather than basic earnings per share.


PROBLEM 11-10A
(a) (in millions, except per-share information)
Ratio 2015 2014
1. Payout ratio $672 $616

= 42.7% = 41.1%
$1,574 $1,498
2. Dividend $2.04 $1.88

yield = 4.7% = 3.6%
$43.31 $52.68
3. Basic earnings $1,574 $1,498

= $4.73 = $4.52
per share 333.1 331.1
4. Return on
common $1,574 = 16.1% $1,498 = 17.1%
shareholders' $9,806 $8,778
equity

(4) (Return on common shareholders’ equity = (Net income – preferred dividends) ÷ Average

(b) National Bank’s payout ratio rose in 2015 because the dividend increase
was greater than the increase in net income. The board of directors makes
the decision to increase dividends and they must have felt that it was
prudent to increase the dividend at a slightly faster rate than the rise in net
income. Despite the increased dividend, the company’s share price fell in
2015 and both of these effects caused the dividend yield to rise that year.
The basic earnings per share increased because net income increased
(the denominator in this ratio, which is the weighted average number of
common shares, did not change significantly enough to affect basic EPS).
Return on common shareholders’ equity decreased despite the slight
increase in net income because shareholders’ equity rose by a larger
percentage than the net income did. Compared to its industry, National
Bank’s 2015 dividend yield and return on common shareholders’ equity
ratios exceed its peers with the payout ratio slightly below the industry
average.

PROBLEM 11-11A
(a) Together, the profit margin and the asset turnover explain the return on
assets ratio. When multiplying the profit margin by the asset turnover, we
obtain the return on assets ratio.
For example, in the case of Petro-Boost, profit margin x asset turnover =

10.0% x 1.1 times = 11.0% return on assets ratio.
For World Oil, the much higher asset turnover overcomes the lower profit
margin, compared to Petro-Boost, to come up with the higher return on
assets ratio.
(b) World Oil has the largest difference between its return on shareholders’
equity and its return on assets. The most likely reason is that World Oil has
proportionately the least amount of equity and the highest amount of
liabilities. The heavier debt level also negatively affects net income and the
profit margin.
(c) Petro-Boost would be the better investment for someone interested in

generating a regular income from his or her investment. Petro-Boost has a
higher payout ratio (12.3% versus 9.9% for World Oil) and dividend yield
(1.9% versus 0.7% for World Oil), which is good for an investor who needs
a regular income from their investment.
(d) The higher price-earnings ratio of 17.1 times indicates that investors have
higher expectations of future profitability for World Oil than Petro-Boost.
Therefore, an investor interested in experiencing a return in the form of
future capital gains would have a better chance of attaining those gains by
investing in World Oil.
LO 5 BT: AN Difficulty: C Time: 30 min. AACSB: None CPA: cpa-t001, cpa-t005

PROBLEM 11-11A
Accumulated
Other
Preferred Common Retained Comprehensive
Assets Liabilities Shares Shares Earnings Income
1. $520,0001 NE NE -$320,0002 -$200,000 NE
2. +300,000 NE NE +300,000 NE NE
3. +50,0003 NE +$50,000 NE NE NE
4. +29,000 NE NE +29,000 NE NE
5. -71,0004 NE NE NE -$71,000 NE
6. +5,000 NE NE NE NE +$5,000
1 20,000 × $26 = $520,000

2 ($2,400,000 ÷ 150,000) x 20,000 = $320,000
3 500 × $100 = $50,000
4 (35,000 + 500) × $2 = $71,000

PROBLEM 11-2B
June 5 Cash (240,000 × $4) ................................. 960,000

Common Shares ............................... 960,000
Aug. 21 Cash (15,000 × $100) ............................... 1,500,000
Preferred Shares .............................. 1,500,000
Sept. 15 Land ......................................................... 285,000
Common Shares (60,000 shares) ..... 285,000
Oct. 20 Common Shares (20,000 x $4.15 below) .. 83,000
Cash (20,000 x $4.00) ...................... 80,000
Contributed Surplus ($83,000 - $80,000). 3,000
Balance
June 5 $ 960,000 240,000
Sept. 15 285,000 60,000
$1,245,000 ÷ 300,000 = $4.15
Nov. 20 Cash (220,000 × $4.95) ............................ 1,089,000

Common Shares ............................... 1,089,000
Mar. 9 Common Shares (25,000 x $4.50 below) .. 112,500

Contributed Surplus (balance from Oct. 20) 3,000
Retained Earnings * .................................. 9,500
Cash (25,000 x $5.00) ...................... 125,000
*($125,000 - $112,500 - $3,000) = $9,500

PROBLEM 11-2B (CONTINUED)

(a) (continued)
Balance
June 5 $ 960,000 240,000
Sept. 15 285,000 60,000
Oct. 20 (83,000) (20,000)
Nov. 20 1,089,000 220,000
$2,251,000 ÷ 500,000 = $4.50
April 16 Cash (6,000 × $100) ................................. 600,000

Preferred Shares .............................. 600,000
May 15 Dividends Declared [(15,000 + 6,000) × $4] . 84,000
Dividends Payable ........................... 84,000
Closing entries:
May 31 Retained Earnings..................................... 84,000
Dividends Declared ........................... 84,000
31 Income Summary ...................................... 250,000
Retained Earnings............................. 250,000

(b)
Preferred Shares
Aug. 21 1,500,000
Apr. 16 600,000
May 31 Bal. 2,100,000
Common Shares
Oct. 20 83,000 June 5 960,000
Mar.9 112,500 Sept. 15 285,000
Nov. 20 1,089,000
May 31 Bal. 2,138,500
Contributed Surplus
Mar. 9 3,000 Oct. 20 3,000
Dec. 31 Bal. 0
Dividends Declared
May 15 84,000 May 31 CE 84,000
May 31 Bal. 0
Retained Earnings
Mar. 9 9,500
May. 31 CE 84,000 May 31 CE 250,000
May 31 Bal. 156,500
CE: Closing entry


(c) Number of preferred shares:
15,000 + 6,000 = 21,000
240,000 + 60,000 – 20,000 + 220,000 - 25,000 = 475,000
WETLAND CORPORATION
May 31, 2018
Share capital
$4 Preferred shares, cumulative, unlimited
number authorized, 21,000 shares issued ................ $ 2,100,000
Common shares, unlimited number authorized
475,000 shares issued ........................................... 2,138,500
Total share capital .......................................................... 4,238,500
Retained earnings ........................................................... 156,500
9 Total shareholders' equity ..................................................... $4,395,000

PROBLEM 11-3B

Feb. 28 Cash .......................................................... 150,000
Preferred Shares (1,500 shares) ....... 150,000
April 11 Cash .......................................................... 3,500,000
Common Shares (100,000 shares) ... 3,500,000
May 25 Land .......................................................... 85,000
Common Shares (2,500 shares) ....... 85,000
Nov. 26 Common Shares (10,000 x $26.87 below) 268,700

Contributed Surplus*......................... 28,700
Cash (10,000 x $24.00) .................... 240,000
*($268,700 - $240,000) = $28,700
Balance
Feb. 1 Bal. $ 1,050,000 70,000
April 11 3,500,000 100,000
May 25 85,000 2,500
$4,635,000 ÷ 172,500 = $26.87
Dec. 31 Dividends Declared ................................... 113,750

(44,000 + 1,500) × $2.50 = $113,750
Jan. 15 No entry required
Closing entries:
Jan. 31 Retained Earnings..................................... 113,750
31 Retained Earnings..................................... 5,000
Income Summary .............................. 5,000


(b) CE: Closing entry
Preferred Shares
Feb. 1 Bal. 440,000
Feb. 28 150,000
Jan. 31 Bal. 590,000
Common Shares
Nov. 26 268,700 Feb.1 Bal. 1,050,000
April 11 3,500,000
May 25 85,000
Jan. 31 Bal. 4,366,300
Contributed surplus
Feb. 1 Bal. 75,000
Nov. 26 28,700
Jan. 31 Bal 103,700
Retained Earnings
Feb. 1 Bal. 1,000,000
Jan. 31 CE 113,750
Jan. 31 CE 5,000
Jan. 31 Bal. 881,250

Feb. 1 Bal. 65,000
Jan. 31 Bal. 65,000
Dividends Declared
Dec 31 113,750 Jan 31 CE 113,750
Jan 31 Bal. 0


(c)
UJJAL CORPORATION
Year Ended January 31, 2019
Accumulated
Share Capital Other
Preferred Common Contributed Retained Comprehensive
Shares Shares surplus Earnings Income Total
Balance Feb. 1, 2018 $440,000 $1,050,000 $75,000 $1,000,000 $65,000 $2,630,000
Issued preferred shares 150,000 150,000

Issued common shares 3,585,000 3,585,000
Repurchased common shares (268,700) 28,700 (240,000)
Net loss (5,000) (5,000)
Balance Jan. 31, 2019 $590,000 $4,366,300 $103,700 $881,250 $65,000 $6,006,250

(d) Number of preferred shares:

44,000 + 1,500 = 45,500

70,000 + 100,000 + 2,500 – 10,000 = 162,500
UJJAL CORPORATION
January 31, 2019
Contributed capital
Share capital
number of shares authorized, 45,500 issued .............. $ 590,000
authorized, 162,500 issued ......................................... 4,366,300 $4,956,300
Contributed surplus ........................................................................... 103,700
Total contributed capital ....................................................................... 5,060,000
Retained earnings ................................................................................ 881,250
Accumulated other comprehensive income.......................................... 65,000
Total shareholders’ equity ........................................................................... $6,006,250

PROBLEM 11-4B

Jan. 2 Cash .......................................................... 1,000,000
Preferred Shares (20,000 × $50) ...... 1,000,000
Mar. 10 Dividends Declared (20,000 × $2 × 3/12).. 10,000

April 2 Dividends Payable .................................... 10,000

Cash.................................................. 10,000
June 10 Dividends Declared (20,000 × $2 × 3/12).. 10,000

July 2 Dividends Payable .................................... 10,000

Cash.................................................. 10,000
Aug. 12 Cash .......................................................... 73,000

Common Shares (10,000 × $7.30) .... 73,000
Sept. 10 Dividends Declared (20,000 × $2 × 3/12).. 10,000

Sept. 22 No entry required
Oct. 1 Dividends Payable .................................... 10,000

Cash.................................................. 10,000
Oct. 8 Cash .......................................................... 500,000

Preferred Shares (10,000 shares x $50) 500,000

(a) (continued)
Oct. 15 Equipment ................................................. 15,000
Common Shares (2,000 shares) ....... 15,000
The value of the equipment is a more reliable amount to

measure the value of this transaction rather than the value the
shares traded at in the past.
Closing entries:
Dec. 31 Retained Earnings..................................... 50,000
Income Summary .............................. 50,000
31 Retained Earnings..................................... 30,000



(b)
Jan. 2 1,000,000 Jan. 1 Bal. 300,000
Oct. 8 500,000 Aug. 12 73,000
1,500,000 Oct. 15 15,000
Dec. 31 Bal. 388,000
Retained Earnings Dividends Declared
Jan. 1 Bal. 990,000 Jan. 1 Bal. 0 Dec. 31 CE 30,000
Dec. 31 CE 30,000 Mar. 10 10,000
Dec. 31 CE 50,000 June 10 10,000
Dec. 31 Bal. 910,000 Sept. 10 10,000
Dec. 31 Bal. 0
CE: Closing entry
(c)
SCHIPPER LTD.
Retained earnings, January 1 .................................................... $990,000

Less: Loss ............................................................................... 50,000
940,000
Less: Dividends declared ........................................................ 30,000
Retained earnings, December 31 .............................................. $910,000


(d)
SCHIPPER LTD.
December 31, 2018
Share capital
$2 Preferred shares, noncumulative, unlimited number
authorized, 30,000 issued ............................................. $ 1,500,000
Common shares, unlimited number
authorized, 212,000* issued .......................................... 388,000
Total share capital ............................................................. 1,888,000
Retained earnings ............................................................. 910,000
Total shareholders’ equity ................................................. $2,798,000
*Number of common shares: 200,000 + 10,000 + 2,000 = 212,000

(e) If Schipper Ltd. was a public company, the transaction concerning the
purchase of the equipment on October 15 would still be recorded at the
current value of the equipment of $15,000 even if the shares had a reliable
value. As well, under IFRS requirements, Schipper would report a
statement of changes in equity rather than a statement of retained
earnings. The statement of changes in equity follows (optional):
SCHIPPER LTD.
Share Capital
Preferred Common Retained
Shares Shares Earnings Total
Balance Jan, 1 $300,000 $990,000 $1,290,000

Issued preferred shares $1,500,000 1,500,000
Net loss (50,000) (50,000)
Balance Dec. 31 $1,500,000 $388,000 $910,000 $2,798,000

PROBLEM 11-5B
(a)
Preferred Shares
Dec. 31 Balance 750,000
Common Shares
Mar. 1 Issue 350,0001
Sept. 25 Stock dividend 297,000
Dividends Declared
Mar. 30 Declaration 15,0002
Jun. 30 Declaration 15,000
Aug. 18 Declaration 297,0002
Sept. 30 Declaration 15,000
Dec. 31 Declaration 15,000 Dec. 31 CE 357,000
Dec. 31 Balance 0

Sept. 25 Issue 297,000 Aug. 18 Declaration 297,0002
Dec. 31 Balance 0
Retained Earnings
Dec. 31 CE Dividends 357,000 Dec. 31 CE Net income 750,000
1 Common Shares: 20,000 × $17.50 = $350,000
2 Preferred Shares:15,000 × $4 × ¼ = $15,000
3 Common Shares: (255,000 + 20,000) × 6% x $18 = 16,500 × $18 = $297,000.
Note that the stock dividend was declared on August 18 (thus the debit to
Dividends Declared) and distributed on September 25 (thus the credit to
Common Shares).


(b)
MAGGIO CORPORATION
December 31, 2018
Share capital
$4 Preferred shares, cumulative, unlimited number
of shares authorized, 15,000 issued ............................ $ 750,000
authorized, 291,500 issued .......................................... 3,857,000
Total share capital .................................................................. 4,607,000
Retained earnings (Note X) .................................................... 1,373,000
Total shareholders’ equity ............................................................. $5,980,000
(A stock dividend reduces retained earnings by the number of shares issued × market
price per share)
Note X: $200,000 of retained earnings are restricted by a debt covenant.
LO 2,3,4 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11-6B
(a)
(1) Assets $9,000,000 No effect No effect
– $500,000a = $9,000,000 = $9,000,000
= $8,500,000
(2) Liabilities No effect No effect No effect
= $2,500,000 = $2,500,000 = $2,500,000
(3) Common shares No effect $3,000,000 No effect
= $3,000,000 + $375,000b = $3,000,000
= $3,375,000
(4) Retained earnings $3,500,000 $3,500,000 No effect
– $500,000 – $375,000 = $3,500,000
= $3,000,000 = $3,125,000
(5) Total shareholders’ $6,500,000 No effect No effect
equity – $500,000 ($6,500,000 = $6,500,000
= $6,000,000 + $375,000
– $375,000
= $6,500,000)
(6) Number of shares No effect 25,000 increase 500,000 increase
= 500,000 (25,000 + 500,000 (500,000 × 2
= 525,000) = 1,000,000)
a 500,000 × $1.00 = $500,000

b 500,000 × 5% × $15 = $375,000


(b)

Advantages:
• Share price will • Retains cash • Retains cash
likely fall slightly (in • Share price will • Share price reduces
proportion to likely fall slightly significantly, making
dividend). May (in proportion to shares more affordable to
make shares dividend). May a broader number of
slightly more make shares investors
affordable and slightly more • Share price generally starts
attract new affordable and increasing after split
investors attract new
• May attract investors
investors looking for • Converts retained
dividend income earnings to share
capital
Disadvantages:
• Reduces cash • Reduces basic • Reduces basic earnings
earnings per share per share
• More shares on • More shares on which to
which to pay future pay future cash dividends
cash dividends

PROBLEM 11-7B

Feb. 1 Dividends Declared (150,000 × $1)................ 150,000
Mar. 1 Dividends Payable ......................................... 150,000
Cash ...................................................... 150,000
Apr. 2 No journal entry required (memorandum entry only)
July 2 Dividends Declared (22,500* × $14) .............. 315,000
Stock Dividends Distributable ............... 315,000
*150,000 shares × 3 x 5% = 450,000 × 5% = 22,500
(Stock Dividends = Number of shares issued × Market price per share)
July 16 No entry required

31 Stock Dividends Distributable ........................ 315,000
Common Shares .................................... 315,000
Closing entries:
Dividends Declared................................ 465,000
($150,000 + $315,000 = $465,000)

(b)
Common Shares Retained Earnings
Jan. 1 Bal. 3,400,000 Jan. 1 Bal. 1,800,000
July 31 315,000 Dec. 31 CE 465,000 Dec. 31 CE 800,000
Dec. 31 Bal. 3,715,000 Dec. 31 Bal. 2,135,000
Stock Dividends Distributable Accumulated Other Comprehensive Loss

July 31 315,000 July 2 315,000 Jan. 1 250,000
Dec. 31 Bal. 0
Dividends Declared
Feb. 1 150,000 Dec. 31 CE 465,000
July 2 315,000
Dec. 31 Bal. 0

(c)
STENGEL CORPORATION
Accumulated
Other
Common Retained Comprehensive
Shares Earnings Loss Total
Balance Jan, 1 $3,400,000 $1,800,000 $(250,000) $4,950,000

Stock dividends
declared and
distributed 315,000 (315,000) 0
Net income 800,000 800,000
Balance Dec. 31 $3,715,000 $2,135,000 $(250,000) $5,600,000
(Ending retained earnings = Beginning retained earnings + Net income – (Stock dividends
+ Dividends declared)
Note that some companies may combine the information above pertaining to cash and
stock dividends and report them on a single line on this statement with a breakdown
between the amount of the stock and cash dividends shown in a note to the financial
statements.

(d) Number of common shares: 150,000 × 3 = 450,000 + 22,500 = 472,500
STENGEL CORPORATION
December 31, 2018
authorized, 472,500 issued .............................. $3,715,000
Retained earnings..................................................... 2,135,000
Accumulated other comprehensive loss ................... (250,000)
Total shareholders’ equity ................................................. $5,600,000

PROBLEM 11-8B
(a) Weighted Average Number of Shares
April 1 500,000 × 12/12 = 500,000

May 1 (12,000) × 11/12 = (11,000)
June 1 6,000 × 10/12 = 5,000
July 1 50,000 × 9/12 = 37,500
544,000 531,500
(b) Basic Earnings per Share
= ($1,016,750 – $78,000*) ÷ 531,500
= $1.77
*Preferred dividend: 78,000 × $1 = $78,000
(Basic earnings per share = (Net income – preferred dividends) ÷ Weighted

average number of common shares)
(c) It is important to use the income available to common shareholders

because the preferred shareholders must receive any dividends to which
they are entitled before the common shareholders receive their dividends.
The corporation’s preferred shareholders also have a prior claim on the
corporation’s assets in the event of its liquidation.
(d) Because the preferred shares are cumulative, there would be no change
in the calculation of the basic earnings per share if the dividend had not
been declared to the preferred shareholders during the year.

PROBLEM 11-9B
(a) We can derive the dividend per share by taking the basic earnings per
share and multiplying it by the payout ratio as follows:
2015 2014 2013

Basic EPS (A) $1.01 $1.48 $1.32
Payout ratio (B) 32.7% 15.5% 13.6%
Dividends per
share (A x B) $0.33 $0.23 $0.18
The amount of dividends per share that a company pays out is based
entirely upon the discretion of the board of directors and their assessment
of whether the shareholders should receive this distribution of income
taking into consideration how much cash needs to be retained in the
business for future growth.
(b) As noted, in 2015 basic EPS decreased and depending on the reason for
the decline in net income, a company may or may not decrease their
dividends when net income falls. For example, if the decline in net income
is from recording an impairment of goodwill, this reduction in net income
will not bring about a decline in cash generated from operating activities.
In that case, the company may decide to keep the dividend at the same
levels in spite of a decline in the basic earnings per share because cash
has been unaffected by the decline in net income. If, on the other hand, the
decline in net income has a corresponding decline in cash generated from
operating activities, a company would be far more inclined to reduce or
even suspend dividends, depending on the seriousness of the liquidity
position of the business. In this case, the dividends per share were
increased despite a decreasing earnings per share so the board must have
felt that the company has sufficient cash to do so.

(c) We can derive the share price by dividing the dividends per share by the
dividend yield as follows
2015 2014 2013
Dividends per share (A) $0.33 $0.23 $0.18
Dividend yield (B) 0.84% 0.75% 0.75%
Market share price (A÷B) $39.29 $30.67 $24.00
The dividend yield increased in 2015 because the amount of the dividends
per share was increased more than the increase in the market price of the
company’s shares.
(d) Investors seeking dividend income would likely be happy with the
corporation’s dividend policy as dividends per share increased every year
even when earnings per share fell in 2015. On the other hand, the dividend
yield, even though it rose in 2015, was still below 1% and many investors
could have probably earned that type of return with a fixed income
investment like a GIC or term deposit. However, this is a company with a
significantly growing share price so investors are not just rewarded with
dividends. The rising share price reflects the growing nature of this
business and that growth would not have been possible if a high level of
dividends had been declared.

PROBLEM 11-10B
(a) (in millions, except for per share information)
Ratio 2015 2014
$3,289 $3,110
1. Payout ratio = 45.6% = 42.6%
$7,213 $7,298
2. Dividend $2.72 $2.56

yield = 4.4% = 3.7%
$61.49 $69.02
3. Basic earnings $7,213 $7,298

= $5.96 = $6.01
per share 1,210 1,214
4. Return on
common $7,213 = 15.3% $7,298 = 17.1%
shareholders' $47,025 $42,565
equity

(4) (Return on common shareholders’ equity = (Net income – preferred dividends) ÷ Average

(b) During 2015, Bank of Nova Scotia (BNS)’s payout ratio increased primarily
because, in spite of the bank’s slight decline in net income, there were
fewer shares on which cash dividends were paid and so the amount of
dividends paid per share increased from $2.56 in 2014 to $2.72 in 2015.
BNS’s payout ratio is very similar to the industry average in 2015.
BNS’s dividend yield increased, primarily because of the decline in share

price combined with the increase in the absolute amount of dividends paid
per share. The trend showing an increase in the dividend yield from 2014
to 2015 is very consistent with the industry average.
The basic earnings per share for BNS dropped slightly from 2014 to 2015.
BNS’s return on common shareholders’ equity declined in 2015. This

decline in the ratio is steeper than the decline in income available to
common shareholders. This result is due to a substantial increase in its
average shareholders’ equity in 2015. BNS’s decline in return on common
shareholders’ equity is consistent with the industry average, although it is
better than the industry average in both years.

PROBLEM 11-11B
(a) Together, the profit margin and the asset turnover explain the return on
assets ratio. By multiplying the profit margin with the asset turnover, we
obtain the return on assets ratio.
For example, in the case of Discount Paradise profit margin x asset
turnover = 3.5% x 2.5 times = 8.8% return on assets ratio.
For Bargain Hunters, the much higher profit margin overcomes the lower
asset turnover, compared to Discount Paradise to come up with the highest
return on assets ratio.
Bargain Hunters has the largest difference between its return on common
shareholders’ equity and its return on assets because it is using the
advantage of leverage. When a company increases its liabilities by taking
on more debt (rather than issuing shares and increasing equity) and uses
that debt to increase income, there will be an increase in the return on
common shareholders’ equity to a much greater extent than the increase
in the return on assets ratio, causing a widening of the difference between
these two ratios. This spread increases because the denominators in these
ratios are widening as assets increase faster than equity when debt is
taken on.
(b) Discount Paradise would be the better investment for someone interested
in generating a regular income from his or her investment. Discount
Paradise has a much higher payout ratio than Bargain Hunters (25%
versus 9.4% for Bargain Hunters), indicating that it has a policy of paying
out more net income as dividends which is good for an investor who needs
a regular income from their investment. The dividend yield provided by
Discount Paradise is also superior to Bargain Hunters, at about three times
the amount.


(c) Even though Discount Paradise is paying out more of its net income as
dividends than Bargain Hunters, it has the higher price-earnings ratio. This
indicates that investors have higher expectations for future growth for
Discount Paradise but this may not be the case given its high payout ratio.
Bargain Hunters may have greater growth in the future and its lower price-
earnings ratio indicates that Bargain Hunters’ share price is cheaper
relative to its earnings. There is no clearly superior choice here.
LO 5 BT: AN Difficulty: C Time: 30 min. AACSB: None CPA: cpa-t001, cpa-t005

ACR11-1 ACCOUNTING CYCLE REVIEW

(a) Summary Transaction Entries:
1. Cash .............................................................................. 50,000
Preferred Shares ...................................................... 50,000
2. Cash .............................................................................. 30,000

Common Shares ...................................................... 30,000
3. Accounts Receivable ..................................................... 320,000

Cash .............................................................................. 100,000
Sales ........................................................................ 420,000
Cost of Goods Sold ....................................................... 250,000

Inventory .................................................................. 250,000
4. Cash .............................................................................. 296,000

Accounts Receivable ................................................ 296,000
5. Supplies ......................................................................... 35,100

Accounts Payable .................................................... 35,100
6. Inventory ........................................................................ 330,000

Accounts Payable .................................................... 330,000
7. Accounts Payable .......................................................... 322,000

Inventory (2% × $322,000) ....................................... 6,440
Cash ......................................................................... 315,560
8. Salaries Expense ........................................................... 88,200

Cash ......................................................................... 88,200
9. Allowance for Doubtful Accounts ................................... 1,700

Accounts Receivable ................................................ 1,700

ACR11-1 (CONTINUED)
10. Interest Expense ............................................................ 4,000

Mortgage Payable ......................................................... 2,000
Cash ......................................................................... 6,000
11. Dividends Declared ($1,400 + $4,200) .......................... 5,600

Dividends Payable ................................................... 5,600
(c) Adjusting Journal Entries:

1. Dec.31 Supplies Expense ($4,400 + $35,100 – $5,900) ....... 33,600
Supplies ........................................................... 33,600
2. 31 Bad Debts Expense ($1,500 – $1,700 + $3,500) ...... 3,700

Allowance for Doubtful Accounts...................... 3,700
3. 31 Depreciation Expense ............................................... 4,400

Accumulated Depreciation—Buildings ............. 4,400
($142,000 – $10,000) ÷ 30
4. 31 Interest Expense ....................................................... 350

Interest Payable ............................................... 350
5. 31 Bank Charges Expense ............................................ 3,000

Cash ................................................................. 3,000
6. 31 Income Tax Expense ................................................ 6,000

Income Tax Payable ........................................ 6,000

ACR11-1 (CONTINUED)
(b), (c), and (f)
Land
Cash
Jan. 1 Bal. 40,000
Jan. 1 Bal. 24,000
Summary 50,000 Summary 315,560 Buildings
Summary 30,000 Summary 88,200 Jan. 1 Bal. 142,000
Summary 100,000 Summary 6,000
Summary 296,000 Adj. 3,000 Accumulated Depreciation—Buildings
Dec. 31 Bal. 87,240 Jan. 1 Bal. 22,000

Dec. 31 Adj. 4,400
Accounts Receivable Dec. 31 Bal. 26,400
Jan. 1 Bal. 45,500 Summary 296,000
Accounts Payable
Jan. 1 Bal. 55,600
Dec. 31 Bal. 67,800
Summary 330,000
Allowance for Doubtful Accounts Dec. 31 Bal. 98,700
Summary 1,700 Jan. 1 Bal. 1,500
Dec. 31 Adj. 3,700 Interest Payable
Dec. 31 Bal. 3,500 Dec. 31 Adj. 350
Inventory Dividends Payable

Jan. 1 Bal. 70,000 Summary 250,000 Summary 5,600
Dec. 31 Bal. 143,560 Income Tax Payable
Dec. 31 Adj. 6,000
Supplies Mortgage Payable
Summary
Jan. 1 Bal. 4,400 Dec. 31 Adj. 33,600
2,000 Jan. 1 Bal. 80,000
Summary 35,100 Dec. 1 Bal. 78,000
Dec. 31 Bal. 5,900

ACR11-1 (CONTINUED)
Supplies Expense
(b), (c), and (f) (continued)
Dec. 31 Adj. 33,600 Dec. 31 CE 33,600
Preferred Shares
Dec. 31 Bal. 0
Summary 50,000
Depreciation Expense
Dec. 31 Adj. 4,400 Dec. 31 CE 4,400
Common Shares
Dec. 31 Bal. 0
Jan. 1 30,000
Summary 30,000 Bad Debts Expense
Dec. 31 Bal. 60,000 Dec. 31 Adj. 3,700 Dec. 31 CE 3,700
Dec. 31 Bal. 0
CE – Means closing entry
Retained Earnings Bank Charges Expense
Jan. 1 Bal. 127,400 Dec. 31 Adj. 3,000 Dec. 31 CE 3,000
Dec. 31 CE 5,600 Dec. 31 CE 26,750 Dec. 31 Bal. 0
Dec. 31 Bal. 148,550 Interest Expense
Summary 4,000
Dec. 31 Adj. 350 Dec. 31 CE 4,350
Jan. 1 Bal. 9,400
Dec. 31 Bal. 0
Dividends Declared Income Tax

Summary 5,600 Dec. 31 CE 5,600 Expense
Dec. 31 Bal. 0 Dec. 31 Adj. 6,000 Dec. 31 CE 6,000
Dec. 31 Bal. 0
Sales
Dec. 31 CE 420,000 Summary 420,000 Income Summary
Dec. 31 Bal. 0 Dec. 31 CE 393,250 Dec. 31 CE 420,000
Dec. 31 CE 26,750
Cost of Goods Sold Dec. 31 Bal. 0
Summary 250,000 Dec. 31 CE 250,000
Dec. 31 Bal. 0
Salaries Expense
Summary 88,200 Dec. 31 CE 88,200
Dec. 31 Bal. 0

ACR11-1 (CONTINUED)
(d)
HAMPTON CORPORATION
Adjusted Trial Balance
December 31, 2018
Debit Credit
Cash $ 87,240
Accounts receivable 67,800
Allowance for doubtful accounts $ 3,500
Inventory 143,560
Supplies 5,900
Land 40,000
Buildings 142,000
Accumulated depreciation—buildings 26,400
Accounts payable 98,700
Interest payable 350
Dividends payable 5,600
Income tax payable 6,000
Mortgage payable 78,000
Preferred shares 50,000
Common shares 60,000
Retained earnings 127,400
Accumulated other comprehensive income 9,400
Dividends declared 5,600
Sales 420,000
Cost of goods sold 250,000
Salaries expense 88,200
Supplies expense 33,600
Depreciation expense 4,400
Bad debts expense 3,700
Bank charges expense 3,000
Interest expense 4,350
Income tax expense 6,000
$885,350 $885,350

ACR11-1 (CONTINUED)
(e) (1)
HAMPTON CORPORATION
Income Statement
Sales........................................................................ $420,000
Cost of goods sold ................................................... 250,000
Gross profit $170,000
Operating expenses
Salaries expense ............................................ $88,200
Supplies expense ........................................... 33,600
Depreciation expense ..................................... 4,400
Bad debts expense ......................................... 3,700
Bank charges expense ................................... 3,000
Total operating expenses....................... 132,900
Income from operations ........................................... 37,100
Other revenues and expenses
Interest expense ............................................. 4,350
Income before income tax ....................................... 32,750
Income tax expense................................................. 6,000
Net income .............................................................. $ 26,750

ACR11-1 (CONTINUED)
(e) (2)
HAMPTON CORPORATION
Accumulated
Share Capital Other
Preferred Common Retained Comprehensive
Shares Shares Earnings Income Total
Balance Jan. 1 $30,000 $127,400 $9,400 $166,800

Issued preferred shares $50,000 50,000
Net income 26,750 26,750
Balance Dec. 31 $50,000 $60,000 $148,550 $9,400 $267,950
(Ending retained earnings = Beginning retained earnings + Net income – Dividends

declared)

ACR11-1 (CONTINUED)
(e) (3)
HAMPTON CORPORATION
Statement of Financial Position
December 31, 2018
Assets
Current assets
Cash .......................................................... $ 87,240
Accounts receivable ................................... $67,800
Less: Allowance for doubtful accounts ...... 3,500 64,300
Inventory .................................................... 143,560
Supplies ..................................................... 5,900
Total current assets ............................. 301,000
Property, plant and equipment
Land ........................................................... $ 40,000
Buildings .................................................... $142,000
Less: Accumulated depreciation ............... 26,400 115,600
Total property, plant, and equipment .. 155,600
Total assets ........................................................ $456,600

ACR11-1 (CONTINUED)
(e) (3)(continued)
Liabilities and Shareholders’ Equity

Current liabilities
Accounts payable ...................................... $98,700
Interest payable ......................................... 350
Dividends payable ..................................... 5,600
Income tax payable .................................... 6,000
Current portion of mortgage payable ......... 2,500
Total current liabilities ....................... $113,150
Non-current liabilities
Mortgage payable ...................................... 75,500
Total liabilities ................................... 188,650
Share capital
$2.80 Preferred shares, cumulative, 50,000
shares authorized, 500 issued .............................. $ 50,000
authorized, 3,500 issued ........................................ 60,000
Total share capital .......................................................... 110,000
Retained earnings ......................................................... 148,550
Accumulated other comprehensive income.................... 9,400
Total shareholders’ equity............................................. 267,950
Total liabilities and shareholders’ equity .............. $456,600

ACR11-1 (CONTINUED)
(f) Closing Entries:
2018
Dec. 31 Sales ............................................................... 420,000
Income Summary ................................... 420,000
31 Income Summary ............................................ 393,250

Cost of Goods Sold ................................ 250,000
Salaries Expense ................................... 88,200
Supplies Expense .................................. 33,600
Depreciation Expense ............................ 4,400
Bad Debts Expense ............................... 3,700
Bank Charges Expense ......................... 3,000
Interest Expense .................................... 4,350
Income Tax Expense ............................. 6,000
031 Income Summary ............................................ 26,750

31 Retained Earnings .......................................... 5,600

Dividends Declared ................................ 5,600

CT11-1 FINANCIAL REPORTING CASE
(a) 1. The North West Company Inc. reported $1.44 basic earnings per
share for the year ended January 31, 2016 and $1.30 for the year
ended January 31, 2015.
2. North West reported a weighted average number of common shares

of 48,509,000 in 2016, and 48,432,000 in 2015.
(b)
2016 2015
1. Number of common shares authorized unlimited unlimited
1. Number of preferred shares authorized N/A N/A
2. Number of common shares issued 48,523,341 48,497,199
2. Number of preferred shares issued N/A N/A
Although very close in amount, the number of common shares issued
does not correspond to the weighted average number of common
shares because the number of shares issued is the actual number of
shares issued as at the end of the fiscal year while the weighted
average number of shares weights shares issued and repurchased
during each fiscal year for the proportion of the year they have been
outstanding.
3. The dollar amount showing in Note 15 for the Common Shares
account is $167,910,000 and this is the amount received by the
company when it issued the 48,523,341 common shares that are
currently outstanding. The company would have received on average
$3.46 per share ($167,910,000 ÷ 48,523,341).
(c) 1. North West reported other comprehensive income in the amount of
$11,953,000 for the 2016 fiscal year and other comprehensive
income of $11,384,000 for the 2015 fiscal year.
2. North West declared dividends to common shareholders in the
amount of $58,210,000 for the 2016 fiscal year and $56,180,000 for
fiscal 2015.
LO 3,4 BT: C Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT11-2 FINANCIAL ANALYSIS CASE

(a) Companies choose different types of ownership structures for a variety of
reasons. One of the most common reasons companies choose to go public
is to access the funds available through the capital markets. However, this
access to capital comes with costs. Once a company goes public, it must
follow the securities regulations, which results in additional costs and
requirements such as filing quarterly financial statements, audited annual
financial statements, expanded disclosure requirements, and various other
reports. Also, because public companies must publicly disclose financial
information, competitors may have access to useful information.
Although private companies may have more difficulty accessing large
amounts of capital, some choose to remain private in order to retain control
over the company. Once a company is public, it is answerable to a variety
of stakeholders. Consequently, some companies choose to remain private
in order to avoid revealing information to the general public, in particular to
their competitors.
(b) Public companies should record noncash transactions at the fair value (or
current value) of the consideration received (the new restaurant). If that
consideration cannot be reliably determined, the fair value of the
consideration given up (the shares) should be used instead. Since Boston
Pizza is a public company, it can easily obtain an objective measure of the
fair value of its shares through the TSX (the exchange where it is listed).
Private companies should record noncash transactions at the most reliable
fair value of what was received or given up. When private companies such
as Pizza Pizza, whose shares are not publicly traded, need to determine
the fair value of their shares, they often hire a business valuation expert to
provide them a valuation. It is more usual that they find the fair value of the
consideration received (that is, of the new restaurant) to be more reliable
and relevant to use than the current value of the consideration given up,
given the lack of a readily available share price.

CT11-2 (CONTINUED)
(c) When the standard setters developed ASPE, a major focus was on the
objectives and needs of the users of the financial statements. The users
generally fall into two broad groups: lenders and other creditors, and
private shareholders. The two groups are generally more focused on
shorter-term cash flows, liquidity, balance sheet strength, interest
coverage, and solvency issues. Given these users’ needs, basic earnings
per share (EPS) is not usually considered to be relevant. In addition, the
shares are usually very closely held. Therefore, ASPE does not require
that private companies report EPS (but if the company thinks EPS is
relevant information, it is free to report it).
LO 1,2,5 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

CT11-3 PROFESSIONAL JUDGEMENT CASE
Note to instructors: All of the material supplementing this group activity, including
a suggested solution, can be found in the Collaborative Learning section of the
Instructor Resource site accompanying this textbook as well as in the Prepare
and Present section of WileyPLUS.
Option 1 Option 2 Option 3

All equity All debt Debt and equity
At the beginning of the year:
Assets $1,000,000 $1,000,000 $2,000,000
Liabilities 999,999 1,000,000
Shareholders' equity 1,000,000 1 1,000,000
(a) Projected income statements:

Revenue (= to assets) $1,000,000 $1,000,000 $2,000,000

Operating expenses (85% of revenue) 850,000 850,000 1,700,000
Income from operations 150,000 150,000 300,000
Interest expense (6% of liabilities) - 60,000 60,000
Income before income tax 150,000 90,000 240,000
Income tax expense (25% of income
before income tax) 37,500 22,500 60,000
Net income $ 112,500 $ 67,500 $ 180,000

CT11-3 (CONTINUED)
(b) The return on common shareholders’ equity for each option is calculated
(c) below. Note that because the net income will be paid out as dividends, the
retained earnings at the end of the year will be zero so the average
common shareholders’ equity at the end of the year will be the same
amount that it was at the beginning of the year.
(d)
Net income for the year $ 112,500 $67,500 $ 180,000
Common shareholder's equity, beg. of year 1,000,000 1 1,000,000
Common shareholder's equity, end of year 1,000,000 1 1,000,000
Average shareholder's equity for the year 1,000,000 1 1,000,000
Return on common shareholders’ equity 11.3% 6,750,000% 18.0%
The option with the lowest return is the one with the lowest level of debt
relative to equity. When no debt is taken out, a company cannot take
advantage of leverage, which means that the company does not profit by
using the bank’s money. As a result, the best return is the one with all debt,
Option 2. Because the denominator is so low (only $1 of equity), the return
appears to be astronomically high.
(e) The amount of cash that Depinder would have before income tax is
calculated in the table below. He will have the most cash under Option 3 if
he borrows money from the bank and buys the larger restaurant.
Option 1
Option 2 Option 3
All equity
All debt Debt and equity
Dividends received by Depinder $112,500
$ 67,500 $180,000
Interest received by Depinder 60,000
$127,500
(d) If the operating expenses are greater than the revenues, then the company
will have a loss. The return on common shareholders’ equity will be
negative. If the company has more debt, additional interest will have to be
paid to the bank and this will make the loss greater and the return on
common shareholder’s equity lower than it would have been otherwise.

CT11-3 (CONTINUED)
(e) If the bank loan was replaced with preferred shares, there would be no
interest expense on the income statement and net income would rise. The
preferred dividends would be reported on the statement of changes in
shareholders’ equity and not on the income statement. The net income for
the large restaurant would be exactly double what is currently reported on
the income statement for Option 1, the purchase of the small restaurant.
(f) The preferred shares that the uncle would purchase would be considered
to be retractable since he has the right to require the company buy back
the shares. This makes the shares similar to debt because there is a
contractual obligation to pay an amount in the future (this is in essence the
definition of a liability). Because of this, the preferred shares would be
shown as a liability rather an equity item. Consequently, the dividends on
those shares would be treated as interest on the income statement rather
than as dividends on the statement of changes in equity for consistency
with its presentation on the statement of financial position.
(g) If the business was not incorporated, the income statement would still be
prepared but income tax expense would not apply and therefore not be
shown. This is because the net income of the business is taxed at the
personal level as the business is not a separate legal entity.
LO 2,4 BT: S Difficulty: C Time: 50 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

CT11-4 ETHICS CASE
(a) The stakeholders in this situation are:
Vince Ramsey, president of Flambeau Corporation

Janice Rahn, financial vice-president
The shareholders of Flambeau Corporation
(b) The stock dividend results in a decrease in retained earnings and an

increase of the same amount in share capital with no change in total
shareholders’ equity. There is no change in total assets and no change in
total liabilities and shareholders’ equity.
(c) The 5% stock dividend will likely reduce the value at which the shares are
trading by around 5%—at least in the immediate future. Since essentially
nothing has changed in the company’s financial position, the only effect a
5% stock dividend will have on the market value of the shares is to allocate
the equity of the business over 5% more shares.
(d) There is nothing unethical in declaring and issuing a stock dividend.

However, the president’s order to write a press release convincing the
shareholders that the stock dividend is just as good as a cash dividend is
unethical. A stock dividend is not a cash dividend and does not necessarily
leave the shareholders in the same position. A stock dividend is a “paper”
dividend—the company issues a certificate, not a cheque (cash).
LO 3 BT: C Difficulty: M Time: 20 min. AACSB: Analytic, Ethics, and Communication

CPA: cpa-t001, cpa-e001 CM: Reporting and Ethics

CT11-5 FINANCIAL ANALYSIS CASE
Note to instructors: All of the material supplementing this group activity, including
a suggested solution, can be found in the Collaborative Learning section of the
Instructor Resource site accompanying this textbook as well as in the Prepare
and Present section of WileyPLUS.
(a)
Alternative 1 Alternative 2 Alternative 3
(Borrow $50,000) (Issue $50,000 common (Issue $50,000 preferred
shares) shares)
Debt to total $71,980 ÷ $195,280 $31,980 ÷ $207,680 $31,980 ÷ $204,680
assets = 36.9% = 15.4% = 15.6%
($24,000 – $3,000) ÷
Return on $21,600 ÷ [[($50,000 + $24,000 ÷ [[($50,000 +
[[($50,000 + $51,700) +
common $51,700) + ($50,000 + $51,700) + ($100,000 +
($50,000 + $72,700)] ÷
shareholders’ $73,300)] ÷ 2)] $75,700)] ÷ 2)]
2)]
equity = 19.2% = 17.3%
= 18.7%
Basic earnings $21,600 ÷ 500 ($24,000 - $3,000) ÷ 500

$24,000 ÷ 1,000 = $24.00
per share = $43.20 = $42.00
(Debt to assets ratio = Total liabilities ÷ Total assets)

(Return on common shareholders’ equity = (Net income – preferred dividends) ÷ Average
(Basic earnings per share = (Net income – preferred dividends) ÷ Weighted average
(b) Alternatives 2 and 3 provide for the least amount of debt—$31,980 instead
of $71,980 reported in Alternative 1. Instead of borrowing, the company
has issued shares in Alternatives 2 and 3.

CT11-5 (CONTINUED)
(c) Alternative 1, borrowing instead of issuing shares, provides for the highest
return on equity and the highest basic earnings per share.
(d) If I were John, I would choose Alternative 1. This alternative would
generate a smaller amount of net income because of the amount of after-
tax interest expense paid on the loan; however, the return on common
shareholder’s equity and basic earnings per share would increase because
the distribution of net income is limited to current shareholders.
LO 5 BT: E Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005


CT11-6 SERIAL CASE
(a) June 15 Dividends Declared .................................... 60,000

Dividends Payable .............................. 60,000
June 30 Dividends Payable ....................................... 60,000

Cash ................................................... 60,000
Since the date of record on the declaration of the dividend is June 20, 2018,
only shareholders on that date are eligible to receive dividends. Bev, Doug,
and Emily each receive one-third of the dividend and will each receive
$20,000.
(b) June 30 Cash ............................................................ 125,000

Common Shares (100 × $1,250) ......... 125,000
(c) ANTHONY BUSINESS COMPANY LTD.

Year Ended June 30, 2018
Retained earnings, July 1, 2017 ....................................................................... $177,834

Add: Net income ............................................................................................ 156,069
........................................................................................................................ 333,903
Less: Dividends declared ................................................................................ 60,000
Retained earnings, June 30, 2018 ................................................................... $273,903
(Ending retained earnings = Beginning retained earnings + Net income – Dividends

declared)
If ABC followed IFRS rather than ASPE, a statement of changes in equity

explaining the changes in each component of shareholder’s equity would be
required instead of a statement of retained earnings.

CT11-6 (CONTINUED)
(d) ANTHONY BUSINESS COMPANY LTD.

June 30, 2018
Common shares, unlimited number authorized, 400 issued ... $125,300
Retained earnings .................................................................. 273,903
Total shareholders’ equity .............................................................. $399.203
($300 + $125,000 = $125,300)

Legal Notice
Copyright © 2017 by John Wiley & Sons Canada, Ltd. or related companies. All
rights reserved.
The data contained in these files are protected by copyright. This manual is
furnished under licence and may be used only in accordance with the terms of
such licence.
The material provided herein may not be downloaded, reproduced, stored in a

retrieval system, modified, made available on a network, used to create derivative
works, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording, scanning, or otherwise without the prior written
permission of John Wiley & Sons Canada, Ltd.
(MMXVII vi F2)


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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

Solutions Manual 11-1 Chapter 11

Solutions Manual 11-2 Chapter 11

(2) Limited liability of shareholders. Because of its separate legal

(3) Transferable ownership rights. Ownership of a corporation is shown

(5) Continuous life. Since a corporation is a separate legal entity, its

Solutions Manual 11-3 Chapter 11

(6) Separation of management and ownership. Although the

(7) Government regulations. Corporations in Canada may incorporate

(b) While public corporations have an almost unlimited ability to acquire

Solutions Manual 11-4 Chapter 11

3. When Richard purchased the original shares as part of lululemon’s initial

In the subsequent purchase, Richard bought shares in the secondary

4. Market capitalization is the measure of the fair value of a corporation’s

Solutions Manual 11-5 Chapter 11

Dollarama Inc.’s market capitalization decreased in 2015. There are two

Solutions Manual 11-6 Chapter 11

6. (a) Preferred shareholders have priority over common shareholders with

(b) Companies issue preferred shares for a permanent type of equity

Solutions Manual 11-7 Chapter 11

8. (a) A normal course issuer bid is synonymous with the reacquisition of

9. Because companies cannot realize a gain or incur a loss from share

Solutions Manual 11-8 Chapter 11

LO 2 BT: AP Difficulty: C Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

(b) Preferred shares are cumulative or noncumulative with respect to

Solutions Manual 11-9 Chapter 11

Solutions Manual 11-10 Chapter 11

(a) (b) (c)

Solutions Manual 11-11 Chapter 11

(b) The effect of a split on market value is generally inversely proportional

Solutions Manual 11-12 Chapter 11

19. The purpose of a retained earnings restriction is to indicate that a portion

The statement of changes in equity shows the changes in retained

(b) The statement of retained earnings shows the changes that

Solutions Manual 11-13 Chapter 11

The statement of changes in equity shows the changes that determine

Publicly traded companies using IFRS would prepare the following

Solutions Manual 11-14 Chapter 11

23. (a) Unfavourable

Dividend per share $1.32 $2.76

Solutions Manual 11-15 Chapter 11

Similarly, the preferred shareholders’ entitlement must be subtracted from

Consequently, both ratios use income available to common shareholders

Solutions Manual 11-16 Chapter 11

In taking on more liabilities, Company A can become more profitable and

Solutions Manual 11-17 Chapter 11

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 11-1

Solutions Manual 11-18 Chapter 11

BRIEF EXERCISE 11-2

June 15 Cash ............................................................. 17,000

Nov. 1 Cash ............................................................. 6,000

Dec. 15 Cash ............................................................. 7,000

Solutions Manual 11-19 Chapter 11

BRIEF EXERCISE 11-3

(a) Average cost of common shares on:

June 8 $300,000 ÷ 60,000 = $5.00

Aug. 19 $90,000 15,000

Nov. 2 $(31,200) (1) (6,000)

Dec. 7 $(41,600) (2) (8,000)

(1) 6,000 shares x average cost $5.20 = $31,200

Dec. 7 Common Shares (2) above .................................. 41,600