Weygandt, Kieso, Kimmel, Trenholm, Kinnear CHAPTER 13 Corporations: Organization and Share Capital Transactions ASSIGNMENT CLASSIFICATION TABLE ‘Accounting Principles, Third Canadian Edition Brief Probiems | Problems Study Objectives Questions | Exercises | Exercises | SetA | SetB 7. Identify and discuss | 7,2,3,4, [7,2 17 711 7 the major 5,6,7,8, characteristics of a | 9,10 corporation. 2. Record common 1,72, (3456 (2347, [2345 (23.45, share transactions. | 13, 14, 15 4 e711 167,11 3. Record preferred 16,77, [7,89 |3,4,5,6, [4,5,6,7, |4,5.6,7, share transactions. | 18, 19 71 1 1 4. Prepare the 20,27, (70,77, (7.8.9 (45.67, |46.67, shareholders’ equity | 22, 23,24 |12.13 10,11 | 8,9, 10, | 8,9, 10, section of the 14 1 balance sheet and calculate return on equity. Solutions Manual 134 chapter 13 Copyright ©2009 Jonn Way & Sons Canade, Lid. Unauinarzed copying, dlstibulon, oF vansmission of tis pages stncty prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear ASSIGNMENT CHARACTERISTICS TABLE ‘Accounting Principles, Third Canadian Edition Problem Difficulty Time Number | Description Level | Allotted (mi 7A _| Determine form of business organization. ‘Simple 75-20 2A | Determine impact of reacquired shares. Moderate 25-30 3A | Allocate dividends between preferred and common | Simple 15-20 shares. 4K__| Show impact of transactions on accounts, Simple 25-30 5A __| Record and post transactions. Prepare Moderate 45-60 shareholders’ equity section. ‘GA__| Record and post transactions. Prepare Moderate 40-50 shareholders’ equity section. TA _ | Record and post transactions. Prepare Moderate 50-60 shareholders’ equity section. ‘BA__| Record closing entries and prepare balance sheet. | Simple 30-40 ‘SA__| Prepare balance sheet and caloulate retum on ‘Simple 25-35 equity. TOA | Calculate return on equity ‘Simple 10-15 TTA__| Answer questions about shareholders’ equity Simple 15-20 section. 7B | Determine form of business organization. ‘Simple 75-20 2B | Determine impact of reacquired shares. Moderate 25-30 3B Allocate dividends between preferred and common | Simple 15-20 shares. 4B__| Show impact of transactions on accounts, Simple 25-30 5B | Record and post transactions. Prepare Moderate 45-60 shareholders’ equity section. ‘GB | Record and post transactions. Prepare Moderate 40-50 shareholders’ equity section. 7B | Record and post transactions. Prepare Moderate 50-60 shareholders’ equity section. Solutions Manual 132 Chapter 13 Copyright ©2609 Jonn Way & Sons Canade, Lid. Lnauinarzed copying, dlstibulon, oF vansmission of tis pages stncty prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Difficulty Time Number | Description Level | Alotted (ni 3B | Ravard closing aniries and prapare balance cheat. | Simple BAT 9B Prepare balance sheet and calculate return on ‘Simple 25-35 eau 10B Calculate return on equity. ‘Simple 10-15 718 | Anewer questions about shareholders” equity Simple 7520 section. Solitons Manual 139 chapter 13 ‘Copyright ©2009 Jonn Way & Sons Canade, Lid. Unauinarzed copying, dlstibulon, oF vansmission of tis pages stncty prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom's Taxonomy, Study Objectives and End-of- Chapter Material. ‘Study Objectives | Knowledge | Comprehension | Application | Analysis | Synthesis | Evaluation 7 Wenttyand | 073-5 osT OTs8 E134 discuss the 132 a1s-10 PI34a major 133 PISA, PIB characteristics ais ota a136 corporation. O137 138 BE1S4 BET3.2 13.7 2 Record Qigtz OisiT [PIRGA [EIST common share 1313 Be133 | P1Z7A transactions. ansia BEIS4 | P1314 1315 BE139 | P1328 £137 BEIS6 | P1338 513.2 | P1348 E133 | P1356 E134 | P1386, Pi32a | P1378. Pis3a | PIS118, Pisa PI35A, = Record arse BEIS7 [PISA | E1317 preferred share 1317 BE138 | P1268 transactions, i318 BE139 | P127A a1318 E133 | PISA, £137 E134 | P1348 E135 | P1356 E136 | P1368 PIs4A | P1378, P1318, & Preparethe | 13-20 Ors2t BETS | PISBA | E1317 shareholders’ | 13-22 213-23 BE13-11 | P13-98 equity section 13.24 BE13-12 | P13-108 of the balance E17 BEIS13 | PIS-114, sheet and E138 | P1348 calculate return £139 | P1358 fon equ E1310 | P1386 Pis4a | P1378 PIssA | P1336 PIS6A | P1398 PITA | P13-108, P13-118, Broadening Your BYPIS1 BYPTS2 BYPISS | BYPIRS Perspective BYP 13.3, Continuing Cookie Chronicle Solutions Manual 13.4 chapter 13 Copyright © 2609 Jonn Way & Sons Canade, Lid. Unauinarzed copying, dlstibulon, or vansmission of tis page stncty prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition ANSWERS TO QUESTIONS 1. Classified by Purpose: A business may be incorporated to make a profit, like Tim Hortons. Or, it may be incorporated as a not-for-profit, like the Canadian Cancer Society. Alternately, a business, like the Yellow Pages Group, could be created as an income trust, to invest in income-producing assets. Classified by Ownership: A corporation can be publicly held or privately held. A publicly held corporation, like The Forzani Group Ltd., may have thousands of shareholders, and its shares trade in an organized securities market. A privately held corporation, like McCain Foods Limited, usually only has a few shareholders, and its shares are not offered for sale to the general public. 2. (a) 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 (b) Transferable ownership rights. Ownership of a corporation is held in capital shares. The shares are transferable units, Shareholders may dispose of part or all of their interest by simply selling their shares. The transfer of ownership to another party is usually entirely at the discretion of the shareholder. (c) Ability to acquire capital. A corporation has an easier time raising capital because of features such as limited liability and the ease of transferring shares. Also, because only small amounts of money need to be invested, many individuals can become shareholders. However, small, privately held corporations can have as much difficulty getting capital as any proprietorship or partnership 3. (a) Income taxation can be an advantage for a corporation because corporate tax rates are often lower than personal tax rates. Personal income tax can also be deferred until income is distributed to the shareholders as dividends. It can also be a disadvantage because the dividends are subject to “double” taxation—once at the corporate level and again at the personal rates of the shareholders who receive them. The impact of these taxes is somewhat reduced by the dividend tax credit that shareholders can ciaim on their personal tax returns. (b) Corporations must pay income tax on its taxable income. Income eamed by proprietorships, partnerships and income trusts is taxed in the hands the owners. The businesses themselves do not pay income tax. Solutions Manual 135 chapter 13 Copyright ©2009 Jonn Wilay & Sons Canade, Lid. Lnauinarzed copying, dlstibulon, oF vansmission of tis pages stncty prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition QUESTIONS (Continued) 4. Small, privately held corporations are riskier than large publicly held ones. As a result, lenders will often require the owners to sign personal guarantees, thus eliminating the limited liability normally associated with corporations. Because the shares are not offered for sale to the general public, it is more difficult to raise capital. Small corporations may be run by the shareholders, rather than professional managers. This also means that if one of these shareholders sells his or her ownership interest, the corporation may be significantly affected 5. In the absence of restrictive provisions, the basic ownership rights of common shareholders are the rights to: + vote in the election of the board of directors and in corporate actions that require shareholders’ approval, ‘* share in corporate income by receiving dividends, and «share in assets upon liquidation. The basic ownership rights of preferred shareholders are the rights to receive: + dividends ahead of the common shareholder, and assets upon liquidation ahead of the common shareholder. In exchange for these preferences, preferred shareholders normally are not entitled to vote. 6. The total number of shares a company is allowed to sell is called its authorized shares—it may be an unlimited amount or a specified amount No journal entry is recorded when the number of authorized shares is set. Issued shares are shares that have been sold. A journal entry will be prepared when shares are issued. The number of issued shares can never exceed the number of authorized shares. 7. (a) Legal capital is capital that has been contributed by the shareholders that must remain in the corporation, to protect creditors. (b) Legal capital is unavailable for dividends. Retained earings are available for dividends. Keeping the two amounts separate on the balance sheets enables users to see the amount of creditor protection that exists. The distinction between amounts contributed by the owners and amounts earned and retained by the company is not needed for proprietorships because the proprietor has unlimited personal liability for the debts of the business in any case. Solutions Manual 138 chapter 13 Copyright © 2609 Jonn Way & Sons Canade, Lid. Unauinarzed copying, dlstibulon, oF vansmission of tis pages stncty prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition QUESTIONS (Continued) 8. Income trusts are established to invest in income producing assets. Unit holders expect regular distributions. As a result, most of the earings of the trust are distributed, leaving very little “retained”. On the other hand, corporations often retain a large portion of their earnings to finance their continued operations, expansion plans, or to provide a measure of safety. 9. When Jean-Guy purchases the original shares as part of Innovate.com’s initial public offering, he is purchasing from the company. The $1,000 (100 X $10) he spends to buy the shares goes directly to Innovate.com and increases the company's assets and shareholders’ equity. In the subsequent purchase, Jean Guy is buying in the secondary market from another investor. The proceeds from this sale go to the seller and not to Innovate.com. Therefore there is no impact on Innovate.com's financial statements as a result of the second purchase. 10. There will be no impact on Abitibi's financial statements at the time of the share price decline. However, should Abitibi decide it would like to raise capital in the securities market, the price decline means it will have to sell more shares to raise the same amount of money. 14. When shares are issued for services or noncash assets, the cost should be measured at the fair market value of the consideration given up (the shares). If that value cannot be reasonably determined, then the fair market value of the consideration received should be used (the land). In this case, the fair market value of the shares is more objectively determinable, since the shares are actively traded in the securities market. The appraised value of the land is merely an estimate of the land's value, while the market price of the shares is the amount the shares were actually worth on the date of exchange. Therefore, the land should be recorded at $90,000. 12. A corporation may acquire its own shares: (1) to increase trading of the company’s shares in the securities market in the hope of enhancing its market value, (2) to increase earnings per share by reducing the number of shares issued, (3) to eliminate hostile shareholders by buying them out, (4) to have additional shares available to be reissued to officers and employees under bonus and stock compensation plans, or for use in the acquisition of other companies, and (5) to comply with percentage share ownership requirements. Solutions Manual 137, chapter 13 Copyright ©2609 Jonn Way & Sons Canade, Lid. Unauinarzed copying, dlstibulon, oF vansmission of tis pages stncty prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition QUESTIONS (Continued) 13. 14. 15. 16. 17. 18. This transaction: (a) decreases total assets, (b) has no effect on total liabilities and, (©) decreases total shareholders’ equity. Share repurchases are transactions between the company and its shareholders. Therefore, any resulting gains or losses cannot be reported on the income statement. Such gains and losses are seen as an excess or deficiency belonging to the original shareholders and are reported as an increase or decrease in the shareholders’ equity section of the balance sheet, If there have been gains from similar transactions in the past, the resulting credit balance of the contributed capital account is available to absorb some or alll of the loss on reacquisition. However. the balance of the contributed capital account cannot go below zero. If the loss exceeds the balance in the contributed capital account, the excess amount is debited to retained earings Common shares and preferred shares both represent ownership of the corporation. Common shares signify the basic residual ownership; preferred shares represent ownership with certain privileges or preferences, Preferred shareholders typically have a preference as to dividends and as to assets in the event of liquidation. However, preferred shareholders generally do not have voting rights Cumulative preferred shares are those that require preferred shareholders be paid both current year dividends and unpaid prior year dividends before common shareholders receive any dividends. Dividends not declared for noncumulative preferred shares are lost forever. Redeemable preferred shares can be purchased from the shareholders, by the issuing corporation, at the option of the corporation. If the shares are retractable they can be sold by the shareholder, to the issuing corporation, at the option of the shareholder. (@) Dividends in arrears are dividends on cumulative preferred shares that were not declared in a given period (b) Dividends in arrears are disclosed in the notes to the financial statements; they are not recorded as liabilities. Solutions Manual 138 chapter 13 Copyright © 2609 Jonn Way & Sons Canade, Lid. Unauinarzed copying, dlstibulon, oF vansmission of tis page stncty prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition QUESTIONS (Continued) 19. When convertible preferred shares are converted into common shares, the shareholder simply exchanges preferred shares for common shares, according to a predetermined rate. To record the conversion, the amount originally paid for the preferred shares is transferred into the appropriate common shares account. If multiple share issues have occurred at varying prices, then the average cost for each preferred share is used instead of the original cost. This entry has no effect on (a) total assets, (b) total liabilities, or (c) total shareholders’ equity 20. The three main components of shareholders’ equity are: Contributed capital, Retained earnings, and Accumulated other comprehensive income. Contributed capital represents the amounts contributed by the shareholders. Share capital and additional contributed capital (e.g., from reacquisition of shares) are components of contributed capital. Retained earings represent the cumulative net income (or loss) since incorporation that has been retained in company and not distributed to shareholders as dividends. Accumulated other comprehensive income represents gains and losses not resulting from share transactions, that bypass net income. The most common example is unrealized gains and losses on investments. 21. The answers are summarized in the table below: Account Classification (a) Common Shares Share capital—common shares (b) Retained Earnings Retained earnings (c) Contributed Capital - Reacquired Additional contributed capital Shares (d) Accumulated Other Accumulated other Comprehensive Income comprehensive income (e) Preferred Shares Share capital—preferred shares Solitons Manual 139 caster 13 Copyright ©2609 Jonn Wilay & Sons Canade, Lid. Unauthorized copying, dlstibulon, oF vansmission of tis pages stncty prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition QUESTIONS (Continued) 22. Comprehensive income includes all changes in shareholders’ equity during a period except for changes that result from the sale or repurchase of shares or from the payment of dividends Accumulated other comprehensive income is reported separately from retained earnings to distinguish unrealized gains and losses from realized gains and losses and other sources of earned income that are accumulated in retained earnings. Reporting this information separately insulates income, and consequently retained earnings, from fluctuations in market value while still informing users of the gain or loss that could have occurred had the investment been sold. 23. Retum on equity is the return eared by all the shareholders — both the preferred and common shareholders. It is calculated by dividing net income by the average shareholders’ equity. Return on common shareholder's equity is the return earned by the common shareholders. It is calculated by dividing the net income available to the common shareholders by the average common shareholders’ equity. Preferred dividends are deducted from net income to determine the numerator. The legal capital of the preferred shareholders is deducted from total shareholders equity before calculating the average common shareholders’ equity 24. Net income by itself does not provide shareholders with an indication of their return per dollar of investment. Comparing net income to shareholders’ equity provides investors with a meaningful measure of how many dollars are earned for each dollar of their investment. It also provides shareholders with the information necessary to compare investment opportunities in the marketplace. Solutions Manual 1310 chapter 13 Copyright © 209 Jonn Wilay & Sons Canade, Lid. Lnauinarzed copying, dlstibulon, oF vansmission of tis pages stncty prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 13-1 Characteristic Proprietorship Partnership Corporation 1, Continuous life x 2. Unlimited liability x x 3. Ease of formation x x 4. Income taxes x 5. Ability to acquire capital Shared skills and resources 7. Fewer government regulations 8. Separation of ownership and x management 9. Owners’ acts are binding 10. Ease of transfer of ownership rights 2 BRIEF EXERCISE 13-2 The increase in share price will have no impact on Body Shop’s financial position. The balance sheet will be unchanged since the shares are listed at their issue price, not their current market value. On the other hand, the increased market valuation of the business would enable the Body Shop to raise funds more easily. The shareholders would see the value of their investment increase and could realize gains by selling some or all of their shares. Salton Manual 3-11 chapter 13 ght 2009 ohn Wily & Sons Canade, Lid. Unaunarzed copying, dsinbuton or ransmision of ts pages strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition BRIEF EXERCISE 13-3 (a) June 1 Cash (2,000 X $6) 12,000 Common Shares 12,000 Dec. 15 Cash (1,000 X $9) 9,000 Common Shares 9,000 (b) Average issue price: ($12,000 + $9,000) + (2,000 + 1,000) = $7 BRIEF EXERCISE 13-4 (a) Dec. 20 Land (5,000 x $14) Common Shares 70,000 70,000 (b) No, the answer would not change. The market price of the shares is a reliable indicator of its value; the advertised price of the land is not. Salton Manual 3-12 chapter 13 ght 2000 ohn Wily & Sons Canade, Lid. Unauthorized copying, dsibuton, or ansmission of ts pages strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition BRIEF EXERCISE 13-5 (a) Average Repurchase Price ($2,000,000 + $4,000,000) = 55,600 shares (b) Initial Average Issue Price = $3.60 $2,000,000 + 555,600 shares (c) Cascades may have repurchased some of its own shares (1) to increase trading of the company’s shares in the stock market, in the hopes of enhancing its market value, (2) to reduce the number of shares issued and increase earnings per share, or (3) to comply with percentage share ownership requirements. Some companies have been repurchasing their own shares lately because they have excess cash on hand and no better investments available. BRIEF EXERCISE 13-6 (a) Feb. 15 Common Shares (5,000 X $3.50*)..... 17,500 Contributed Capital - Reacquired Common Shares 2,500 Cash 15,000 (b) Feb. 15 Common Shares (5,000 X $3.50’ 17,500 Retained Earnings. 2,500 Cash... 20,000 *Average share price = $122,500 + 35,000 shares = $3.50 Sokons Mana 13 chapter 13 13 hgh © 2009 John Wiley & Sons Canada, Lid. Unaunonizea copying, asiebuton, of tearsmssion of this page IS strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition BRIEF EXERCISE 13-7 (a) Jan. 28 Cash (5,000 X $110) 550,000 Preferred Shares 550,000 June 15 Cash (1,000 X $125) 125,000 Preferred Shares 125,000 (b) Average issue price: $112.50 ($550,000 + $125,000) = (5,000 + 1,000) BRIEF EXERCISE 13-8 (a) Mar. 3 Cash (40,000 X $100). 4,000,000 Preferred Shares 4,000,000 (b) Oct. 1 Preferred Shares (10,000 X $100) 1,000,000 Common Share: 1,000,000 (40,000 shares) BRIEF EXERCISE 13-9 (a) Dividends are in arrears by $80,000 (40,000 X $2). (b) If the shares were noncumulative, there would be no dividends in arrears. nual 1314 chapter 13 int © 2009 Jonn Wiley & Sons Canada, Lid. Unauthorized copying, disirbution, or wansmission of his page i= strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition BRIEF EXERCISE 13-10 KAPOSI CORPORATION Balance Sheet (Partial) December 31, 2008 Shareholders’ equity Contributed capital Share capital Preferred shares, no par value, $5-noncumulative, unlimited number of shares authorized, 800 shares issued $ 20,000 Common shares, no par value, unlimited number of shares authorized, 5,000 shares issued 50,000 Total share capital 70,000 Contributed capital—reacquisition of common shares 5,000 Total contributed capital 75,000 Retained earnings 29,000 Total shareholders’ equity $104,000 Sokons Mana 3-15 chapter 13 ght 2000 ohn Wily & Sons Canade, Lid. Unauthorized copying, dsibton, or ansmission of ts pages strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition BRIEF EXERCISE 13-11 (a) KAPOSI CORPORATION Balance Sheet (Partial) December 31, 2008 Shareholders’ equity Contributed capital Share capital Preferred shares, no par value, $5-noncumulative, unlimited number of shares authorized, 800 shares issued $ 20,000 Common shares, no par value, unlimited number of shares authorized, 5,000 shares issued 50,000 Total share capital 70,000 Contributed capital—reacquisition of common shares 5,000 Total contributed capital 75,000 Retained earnings 29,000 Accumulated other comprehensive income 6,000 Total shareholders’ equity $110,000 (b) Total shareholders’ equity would be $98,000 ($104,000 - $6,000) Salton Manual 3-16 chapter 13 ght © 2000 ohn Wily & Sons Canade, Lid. Unauthorized copying, dsibuton or ansmision of ts pages strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition BRIEF EXERCISE 13-12 Dec. 31 Revenues..... 2,000,000 Income Summary. 2,000,000 31. Income Summary... 1,500,000 Expenses... 1,500,000 31. Income Summary... 500,000 Retained Earnings... 500,000 31 Retained Earnings. 50,000 Dividends 50,000 BRIEF EXERCISE 13-13 (a) Return on equity $8,097 —____——______ - 6. 4% ($132,495 + $121,784) +2 (b) It would be the same. Solutions Manual 13:17 chapter 13 Copyright © 2009 Jonn Wilay & Sons Canade, Lid. Lnauinarzed copying, dlstibulon, or vansmission of tis pages strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition SOLUTIONS TO EXERCISES EXERCISE 13-1 (a) High $60.85 Low $41.45 (b) $0.75 (c) 1,000 X $60.41 = $60,410 (d) $59.25 + $1.24 = $60.49 (closing price + change) (e) 9,837 X 100 = 983,700 shares (f) Since the share price is up $17.80 over the 365-day low ($59.25 - $41.45) investors are probably looking primarily for capital appreciation. EXERCISE 13-2 1. Dec. 5 Land... 120,000 Common Shares 120,000 2. June 1 Land (20,000 X $12) 240,000 Common Shares 240,000 nual 13.18 chapter 13 ight © 2009 Jonn Wiley & Sons Canada, Lid. Unauthorized copying, disirbution, or wansmission of his page i= strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition EXERCISE 13-3 (a) Jan. 10 Cash (75,000 X $5)... 375,000 Common Shares 375,000 Feb. 24 Cash (1,000 X $105) 105,000 Preferred Shares 105,000 July 1 Cash (50,000 X $6.50)... 325,000 Common Shares ... 325,000 (b) (1) The average issue price of the preferred shares is $105. (2) The average issue price of the common shares is $5.60 ($375,000 + $325,000) + (75,000 + 50,000). EXERCISE 13-4 (a) Jan. 6 Cash .. Common Shares (200,000 shares X $1.50) 300,000 300,000 12 Cash .. Common Shares (50,000 shares X $1.75) 87,500 87,500 Mar. 17 Cash .. Preferred Shares (1,000 shares X $105) 105,000 105,000 July 18 Cash .. Common Shares 2,000,000 2,000,000 nual 13.19 chapter 13 ight © 2009 Jonn Wiley & Sons Canada, Lid. Unautnorzed copying, dsirbution, or wansmission of his page i= strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition EXERCISE 13-4 (Continued) (a) (Continued) Nov. 17 Common Shares *.. 382,000 Retained Earnings 8,000 Cash (200,000 X $1.95) .. 390,000 Dec. 30 Common Shares 286,500 Contributed Capital - Reacquisition of Common Shares 16,500 Cash (150,000 X $1.80) .. 270,000 “Average Cost per Common Share: Number of Transaction | Common Shares Proceeds of Date Issued Issue January 6 200,000 $ 300,000 January 12 50,000 87,500 duly 18 1,000,000 2,000,000 Total 1,250,000 $2,387,500 $2,387,500 + 1,250,000 = $1.91 200,000 X $1.91 = $382,000 150,000 X $1.91 = $286,500 Solutions Manual 1320 chapter 13 ‘Copyright © 2009 John Wilby & Sons Canada, Lid. Unauinozed copying, csirbutlon or tansmission of his page strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear EXERCISE 13-4 (Continued) ‘Accounting Principles, Third Canadian Edition (b) There are 900,000 common shares remaining, at an average cost of $1.91**. “Average Cost per Common Share: Number of Transaction | Common Shares Proceeds of Date Issued Issue January 6 200,000 $ 300,000 January 12 50,000 87,500 July 18 4,000,000 2,000,000 Nov. 17 (200,000) (382,000) Dec. 30 150,000) 286,500) Total 900,000 $1,719,000 $1,719,000 = 900,000 = $1.91 EXERCISE 13-5 (a) 100,000 X $4 = $400,000 (b) Year1 Year 2 Regular dividend $400,000 $400,000 Arrears from Year 1 150,000 550,000 Dividend paid 250,000 550,000 Arrears $150,000 $ oO (c) Dividends in arrears should be disclosed in the notes to the financial statements. They are not recorded in the books. (d)_ The likely amount is $4 per share, for a total of $400,000. Solutions Manual 13.2 chat Copyright ©2609 Jonn Wilay & Sons Canade, Lid. Unauinarzed copying, dlstibulon, oF vansmission of tis pages strictly prohibited ter 13Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition EXERCISE 13-6 (a) Nov. 15 Preferred Share: Common Shares . 230,000 230,000 Average share price ($1,000,000 + $3,600,000) = (10,000 + 30,000) = $115 2,000 X $115 = $230,000 (b) 10,000 + 30,000 — 2,000 = 38,000 preferred shares 2,000 X 5 = 10,000 common shares EXERCISE 13-7 (a) 9. Legal capital (b) 1. Publicly held corporation (c) 12. Organization costs (d) 2. Authorized shares (e) 5. Issued shares (f) 8. Initial public offering (g) 7. Secondary market (h) 6. Retained earnings (i) 4. Common shares (j) 11. Comprehensive income (k) 10. Contributed capital (l) 13. Convertible (m) 3. Cumulative Sokons Mana 3.22 chapter 13 nt 2000 ohn Wily & Sons Canade, Lid. Unauthorized copying, dsibuton or ansmision of ts pages strictly prohibitedWeygand., Kieso, Kimmel, Trenholm. Kinnear ‘Accounting Principles, The Canadian Eaton EXERCISE 13-8 ‘Shareholders’ Equity Capital “capital, F@™INSS Comprehensive Financial —_Classifi- 1. Cash Sheet Assets property, plant Income Revenue and equipment (Gain) true xWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition EXERCISE 13-9 OZABAL INC. Partial Balance Sheet December 31, 2008 Shareholders’ equity Contributed capital Share capital Preferred shares $4-noncumulative, no par value, 100,000 shares authorized, 30,000 issued $ 150,000 Common shares, no par value, unlimited number of shares authorized, 300,000 shares issued 300,000 Total share capital 450,000 Contributed capital—reacquisition of common shares 25,000 Total contributed capital 475,000 Retained earnings 900,000 Accumulated other comprehensive income 75,000 Total shareholders’ equity $1,450,000 Solitons Manual 3.24 ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unauihorzed coping, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition EXERCISE 13-10 (a) REITMANS (CANADA) LIMITED Partial Balance Sheet January 28, 2006 (in thousands) Shareholders’ equity Share capital Class A non-voting (preferred) shares, unlimited number authorized, 56,747 issued... - $ 16,892 Common shares, unlimited number authorized, 13,440 shares issued 482 Total share capital 17,374 Contributed surplus 2,523 Total contributed capital 19,897 Retained earnings” .. 370,360 Total shareholders’ equity *$316,191 + $84,889 - $29,345 - $1,375 = $370,360 (b) ($ in thousands) Return on equity = Net income + Average shareholders’ equity 84,889 + [($390,257 + $331,524) + 2] = 23.52% Solutions Manual 3.25 ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition EXERCISE 13-11 (a) The average cost of the preferred shares is $60 ($600,000 + 10,000 = $60). The average cost of the common shares is $3 ($1,800,000 + 600,000 = $3). (b] It will be able to sell an additional 150,000 common shares (750,000 authorized - 600,000 issued). (c) The company paid $2 per share, for a total of $200,000. $100,000 + 100,000 = $1 per share was credited to contributed capital. The average issue price of $3 per share was debited to the common shares account. The difference, $2 was the price paid per share. Common Shares. Contributed Capital. Cash.. 300,000 100,000 200,000 (d $5 X 10,000 = $50,000. (e) The retained earnings balance would be $1,208,000 ($1,158,000 + $50,000 dividends which were not paid nor declared). Dividends in arrears are only disclosed in the notes to the financial statements. Solutions Manual 3.25 ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts pages strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition SOLUTIONS TO PROBLEMS PROBLEM 13-1A 1. Kyle should run his beer cart business as a proprietorship because this is the simplest form of business to establish. It is also the least expensive. He is the only person involved in the business and is planning to operate for a short time. 2. Joseph and Sabra should form a corporation when they combine their operations. This is the best form of business for them to choose because they need to raise significant funds in the coming year and it is easier to raise funds in a corporation. A corporation may also receive more favourable income tax treatment. 3. The professors should form a partnership for their business. It is simpler to form than a corporation and less costly. Each professor has contributed a similar amount of money and expertise, and there is no mention of additional funds being required. 4. Abdur should form a corporation. This is the best form of business for him to choose because he will require significant funds to finance the chain of stores and it is easier to raise funds in a corporation. A corporation may also receive more favourable income tax treatment. 5. A partnership would be the most likely form of business for Mary and Richard to choose. It is simpler to form than a corporation and less costly. Solutions Manual 3.27 ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unauihorzed copying, drbuten, or tensmsson of tis pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-2A (a) Shares authorized 100,000 Shares issued 11,000 (b) Common shares $396,000 Contributed capital — reacquisition of common shares $2,600 Retained earnings $161,400 Calculations: Common Number Average Contributed shares of issue capital — shares price —_ reacquisition of common Retained (a) (b) (a) = (b) shares earnings Bal $270,000 9,000 $30.00 $9,000 $180,000 1. (12,000) _(400) (3,600) 258,000 8,600 30.00 5,400 180,000 2. 147,000 _3,500 405,000 12,100 33.47 5,400 180,000 3. 73,800 _1,200 478,800 13,300 36.00 5,400 180,000 4, (36,000) (1,000) (8,400) (18,600) 442,800 12,300 36.00 0 © 161,400 5. (46,800) (1,300) 2,600 $396,000 11,000 36.00 32,600 $161,400 Sautons venue 328 Chapin ooygnt@ 2000 John Wily & Sons Canad, Lt. Unauihorzed coping, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear PROBLEM 13-34, ‘Accounting Principles, Third Canadian Edition (a) (b) Dividend | Noncumulative Cumulative Year Paid Preferred Common | Preferred | Common 1 | $15,000| $15,000 ee ee) 2 | 12,000| 12,000 0 42,000 0 3 27,000 15,000 12,000 18,000 9,000 4 35,000 15,000 20,000 15,000 20,000 1. Regular dividend is $5 X 3,000 = $15,000 2b. Arrears = $15,000 - $12,000 = $3,000 3b. Preferred dividend = $15,000 (regular) + $3,000 (arrears) = $18,000 Solutions Manual ‘Chapter 13 Copyright 22000 John Wey & Sons Canad, Ll. Unaitarzed copying, dsrbuton or tensmsson of is popes strictly prohibitedWeygandt Kieso, Kimmel, Tronbolm, Kinnear ‘Accounting Principles, Thed Canadian Eaton PROBLEM 13-44 Shareholders’ Equity ‘Accumulated Other Preferred | Common | co cuiviteg | Retained Other Assets | Liabilities | Shares | Shares | COUINUIS4 Earnings Comprehensive PI Income 1. | +8100,000 nia nia| +$100,000 nia na nia 2.) +8,800 nia na| —_ +8,500 na nia na 3. nia n/a] -$300,000| +300,000 nia nia na 4,| +180,000 nal +150,000 na nia nia nla 8.) -72,500 nial 75,000 na) +$2,600 na nia 6.) -10,000 nla nla na nia! -$10,000 nia 7.) -5,000 na nia na nia na $5,000 3. $600,000 + 4,000 = $150 $150 X 2,000 = $300,000 5. ($800,000 - $300,000 + $180,000) = (4,000 - 2,000 + 1,000) = $150 $180 X 500 = $75,000 $75,000 - $72,500 = $2,500 6. 2,500 X $4= $10,000Weygandt, Kieso, Kimmel, Trenholm, Kinnear PROBLEM 13-5A Accounting Principles, Third Canadian Edition (a) GENERAL JOURNAL v1 Date Account Titles and Explanation Debit Credit Jan. 10 Cash (100,000 X $2). 200,000 Common Shares 200,000 Mar. 1 Cash (10,000 X $42) 420,000 Preferred Shares. 420,000 Apr. 1 Land (25,000 X $2.50) 62,500 Common Shares 62,500 May 1 Cash (75,000 X $3)..... 225,000 Common Shares ... 225,000 July 24 Cash 60,000 Equipment. 7,200 Common Shares (16,800 X $4) 67,200 Nov. 1 Cash (2,000 X $48). 96,000 Preferred Shares. 96,000 Dec. 31 Income Summary ... 650,000 Retained Earnings ... 650,000 31 Dividends 36,000 Cash 36,000 31 Retained Earnings. 36,000 Dividends 36,000 Solutions Manual ‘Chapter 13 3-31 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unauihorzed coping, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear PROBLEM 13-5A (Continued) Accounting Principles, Third Canadian Edition (b) Preferred Shares Date Explanation Ref. Debit Credit Balance Mar. 1 v1 420,000 420,000 Nov. 1 J 96,000 516,000 Common Shares Date Explanation Ref. Debit Credit Balance Jan. 10 1 200,000 200,000 Apr. 1 1 62,500 262,500 May 1 1 225,000 487,500 July 24 v1 67,200 554,700 Dividends Date Explanation Ref. Debit Credit Balance Dec. 31 J1 36,000 36,000 31 Closing entry J1 36,000 0 Retained Earnings Date Explanation Ref. Debit Credit Balance Dec 31 Closing entry J1 650,000 650,000 31 Closing entry J1 36,000 614,000 Solutions Manual ‘Chapter 13 332 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-5A (Continued) (c) HIGHLAND CORPORATION Balance Sheet (Partial) December 31, 2008 Shareholders’ equity Share capital Preferred shares, no par value, $3-noncumulative, .unlimited number of shares authorized,12,000* shares issued .. .. § §16,000 Common shares, no par value, unlimited number of shares authorized, 216,800** shares issued 554,700 Total share capital 1,070,700 Retained earnings. 614,000 Total shareholders’ equi $1,684,700 * 10,000 + 2,000 = 12,000 shares ** 100,000 + 25,000 + 75,000 + 16,800 = 216,800 shares Solutions Manual 3-33 ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tansmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear (a) PROBLEM 13-6A Accounting Principles, Third Canadian Edition GENERAL JOURNAL v4 Date Account Titles and Explanation Debit Credit Feb. 1 Cash... 75,000 Common Shares 75,000 Sept. 3. Cash... 16,500 Common Shares 16,500 Oct. 25 Common Shares (10,000 X $2.75*).. 27,500 Contributed Capital—Reacquisition of Common Shares 1,500 Retained Earnings. 1,000 Cash. 30,000 *Average Cost per Common Share: Number of Common Proceeds of Transaction Date Shares Issued Issue Beginning balance 1,000,000 $2,741,000 February 1 25,000 75,000 September 3 5,000 16,500 Total 1,030,000 $2,832,500 $2,832,500 + 1,030,000 = $2.75 Nov. 3 Cash.... 130,000 Preferred Shares. 130,000 Dec. 31 Income Summary .. 275,000 Retained Earnings 275,000 Solutions Manual 3-34 ooygnt@ 2000 John Wily & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts pegs strictly prohibited ‘Chapter 13Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-6A (Continued) (a) (Continued) Dec. 31 Dividends... 30,000 Cash... 30,000 31 Retained Earnings.. 30,000 30,000 (b) Preferred Shares Date Explanation Ref. Debit Credit Balance Jan. 1 Balance v 500,000 Nov. 3 130,000 630,000 Common Shares Date Explanation Ref. Debit Credit Balance van. 1 Balance v 2,741,000 Feb. 1 4 75,000 2,816,000 Sept. 3 v1 16,500 2,832,500 Oct. 25 J1 27,500 2,805,000 Contributed Capital—Reacquisition of Shares Date Explanation Ref. Debit Credit Balance Jan. 1 Balance v 1,500 Oct. 25 J1— 1,500 0 Dividends Date Explanation Ref. Debit Credit Balance Dec. 31 J1 30,000 30,000 341 Closing entry J 30,000 0 Solitons Manual 335 ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tansmsson of ts popes strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-6A (Continued) (b) (Continued) Retained Earnings Date Explanation Ref. Debit Credit Balance Jan. 1 Balance v 1,816,000 Oct. 25 v1 1,000 1,815,000 Dec. 31 Closingentry 1 275,000 2,090,000 31 Closing entry J1 30,000 2,060,000 (c) MOUNTAINHI CORPORATION Balance Sheet (Partial) December 31, 2008 Shareholders’ equity Share capital $4 preferred shares, cumulative, no par value, 50,000 shares authorized, 10,000 shares issued .. -- $ 630,000 Common shares, no par value, unlimited number of shares authorized, 1,020,000* shares issued 2,805,000 Total share capital... 3,435,000 Retained earnings (See Note 2,060,000 Total shareholders’ equity..... $5,495,000 Note X: Dividends on preferred shares totalling $10,000 [10,000 X $4 per share] are in arrears. *4,000,000 + 25,000 + 5,000 — 10,000 = 1,020,000 shares Solutions Manual 3-38 ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed copying, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-7A (a) GENERAL JOURNAL v1 Date Account Titles and Explanation Debit Credit Feb. 6 Building (1,000 X $111). 111,000 Preferred Shares. 111,000 July 15 Preferred Shares (2,000 X $106")... 212,000 Common Shares .. . 212,000 *($525,000 + $111,000) + (5,000 + 1,000) = $106.00 Aug. 22 Cash (500 X $124) 62,000 Preferred Shares.. 62,000 Nov. 1 Preferred Shares (1,0 000 X $108") - 108,000 Common Shares ... 108,000 **($525,000 + $111,000 - $212,000 + $62,000) + (5,000 + 1,000 — 2,000 + 500) = $108 Dec 31 Revenues... 600,000 Income Summary .. 600,000 31 Income Summary... 540,000 Expenses... 540,000 31 Income Summary... 60,000 Retained Earnings. 60,000 Solitons Manual 3.37 ‘Chapter 13 ony @ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-7A (Continued) (a) (Continued) Preferred Shares Date Explanation Ref. Debit Credit Balance van. 1 Balance v 525,000 Feb, 6 v4 111,000 636,000 July 15 J1 212,000 424,000 Aug. 22 1 62,000 486,000 Nov. 1 J1 108,000 378,000 Common Shares Date Explanation Ref. Debit Credit Balance van. 1 Balance v 1,050,000 July 15 v1 212,000 1,262,000 Nov. 1 J 108,000 1,370,000 Contributed Capital—Reacquisition of Preferred Shares Date Explanation Ref. Debit Credit Balance Jan. 1 Balance v 18,750 Retained Earnings Date Explanation Ref. Debit Credit Balance Jan. 1 Balance v 300,000 Dec. 31 Closing Entry J1 60,000 360,000 Accumulated Other Comprehensive Income Date Explanation Ref. Debit Credit Balance Jan. 1 Balance v 25,000 Solitons Manual 33 ‘Chapter 13 8 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-7A (Continued) (c) DENISON CORPORATION Balance Sheet (Partial) December 31, 2008 Shareholders’ equity Contributed capital Share capital Preferred shares, no par value, $3-noncumulative, convertible, 10,000 shares authorized, 3,500* shares issued...... $ 378,000 Common shares, no par value, unlimited number of shares authorized, 94,000** shares issued.. 1,370,000 Total share capital 1,748,000 Additional contributed capital Contributed capital- reacquisition of preferred shares 18,750 Total contributed capita! 1,766,750 Retained earnings. 360,000 Accumulated other comprehensive income 25,000 Total shareholders’ equity... $2,151,750 *6,000 + 1,000 — 2,000 + 500 - 1,000 = 3,500 shares **70,000 + 16,000 + 8,000 = 94,000 shares Solutions Manual 3-39 ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-8A (a) GENERAL JOURNAL J1 Date Account Titles and Explanation Debit Credit Sep. 30 Commission Revenue 314,850 Income Summary... 314,850 30 Income Summary ... 245,440 Salaries Expense 138,400 Rent Expense... 25,000 Amortization Expense.. 30,080 Supplies Expense. 4,860 Utilities Expense. 18,200 Interest Expense. 3,900 Income Tax Expense... 25,000 30 Income Summary ... 69,410 Retained Earnings 69,410 30 Retained Earnings.. 2,000 Dividends .. 2,000 Solitons Manual 340 ‘Chapter 13 Sopyttt © 2008 John Wiley & Sons Canada, id. Unautherzed copying, dstbutin or transmssion ofthis pe ia strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-8A (Continued) (b) MISCOU CORP. Balance Sheet September 30, 2008 Assets Current assets Cash $ 32,500 Accounts receivable.. 74,705 Supplies... 1,265 Total current assets 108,470 Property, plant and equipment Equipment..... $150,400 Less: Accumulated amortization (60,160) 90,240 Franchise 225,000 Total assets. $423,710 Li 's and Shareholders’ Equity Current liabilities Accounts payable. $ 43,000 Salaries payable 8,400 Interest payable .. 900 Income tax payable 2,000 Unearned commission revenue .. 5,500 Current portion of long-term debt.. 5,000 Total current liabilities ... 64,800 Long-term debt Long-term note payable... 55,000 Total liabilities .... 119,800 Solitons Manual ‘Chapter 13 ooygnt@ 2000 John Wily & Sons Canad, Lt. Unauthorized coping, drbuten, or tensmsson of tis pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-8A (Continued) (b) (Continued) MISCOU CORP. Balance Sheet September 30, 2008 Shareholders’ equity Contributed capital Share capital $4 noncumulative preferred shares unlimited number of shares authorized, 500 issued... $ 50,000 Common shares, unlimited number of shares authorized, 40,000 issued 110,000 Total share capital ... 160,000 Other contributed capital Contributed capital — reacquisition of preferred shares .. 1,500 Total contributed capital 161,500 Retained earnings”... 142,410 Total shareholders’ equity. 303,910 Total liabilities and shareholders’ equity $423,710 *Retained earnings Balance, Oct 1, 2007. $ 75,000 Add: Net income 69,410 Less: Dividends. (2,000) Balance, September 30, 2008 .. $142,410 Solitons Manual ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tansmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-9A (a) ANDRES WINES LTD. Balance Sheet March 31, 2006 (in thousands) Assets Current assets Accounts receivable $ 18,444 Inventories .. 70,528 Income taxes recoverable. 911 Prepaid expenses... 2,447 Total current asset: 92,330 Property, plant, and equipmen $134,697 Less: Accumulated amortization (49,100) 85,597 Goodwill. 35,862 Other long-term assets 8,298 Total assets..... $222,087 Liabilities and Shareholders’ Equity Current liabilities Bank indebtedness.. $ 37,295 Accounts payable and accrued lial 21,613 Dividends payable 778 Current portion of 5,888 Total current liabilities..... 65,574 Long-term liabilities Long-term debt... $50,328 Future income tax liability. 12,381 Other long-term liabilities 4,224 66.933 Total liabilities . $132,507 Solitons Manual 43 ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-9A (Continued) (a)(Continued) ANDRES WINES LTD. Balance Sheet March 31, 2006 (in thousands) Shareholders’ equity Share capital Class A shares, nonvoting, unlimited authorized, 3,963 issued... 6,975 Class B shares, voting, convertible into Class A shares, unlimited authorized, 1,002 issued. 400 Total share capital . 7,375 Retained earnings” .. 82,205 Total shareholders’ equi 89,580 Total liabilities and shareholders’ equit $222,087 *$79,260 + $6,054 — $3,109 = $82,205 (b) Return on equity = Net income + Average shareholders’ equity $6,054 | $89,580 sSr.168 | 2 = 6.85% Solutions Manual a4 ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed copying, drbuten, or tansmsson of ts pages strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-10A (a) Return on equity = Net income + Average shareholders’ equity $128.7 9 2004 T§1,780.5+ $1,877 o4% L 2 $770.8 61.11% 2008 $1,877.4 + $645.3 Sears’ return on equity has improved significantly during the last year. (b) Sears is performing as well as the industry average in both years. Solutions Manual ‘Chapter 13 Sopytt © 2008 John Wiley & Sons Canada, id. Unatherzed copying, dsrbutin, or transmission ofthis pe ia strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-11A (a) Preferred dividends + Preferred dividend per share $150,000 + $5 = 30,000 preferred shares (b Preferred share average price = $3,150,000 + 30,000 shares issued = $105 per share Common share average price = $1,000,000 + 250,000 shares issued = $4 per share (c) The shares were issued for an average selling price of $4 (see (b) above) which means the company would have reduced the Common Shares account by $100,000 (25,000 X $4). Since a reduction to retained earnings is shown relating to this reacquisition for $56,250, this indicates the company had to pay $156,250 ($100,000 + $56,250) to reacquire the 25,000 shares. (d Limited liability for preferred shareholders = $3,150,000 Limited liability for common shareholders = $4,600,000 - $3,150,000 = $1,450,000 (e} It is a loss that bypasses the income statement because it has not yet been realized. An example is an unrealized loss on investments that are available for sale. Solutions Manual ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuton, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-1B 1. A partnership would be the most likely form of business for the students to choose. It is simpler to form than a corporation and less costly. 2. Chris will likely operate his lawn maintenance service as a proprietorship because he is planning on operating it for a short time period and a proprietorship is the simplest and least costly to form and dissolve. 3. Ron would likely form a corporation because he probably needs to raise funds to buy equipment. It is normally easier to raise funds through a corporation. A corporation is also the only form of business that provides limited liability to it owners. There may also be income tax benefits. 4. Hervé would likely form a corporation because he needs to raise funds to invest in inventories and equipment. He has no savings or personal assets and it is normally easier to raise funds through a corporation. 5. Aproprietorship would be the most likely form of business for Johnny. It is simpler to form than a corporation and less costly. A corporation is the only form of business that provides limited liability to it owners. However, is unlikely that incorporating the business would shield Johnny from personal liability in the event of an accident. Solutions Manual ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-2B (a) Shares authorized 500,000 Shares issued 200,000 (b) Common shares $830,000 Contributed capital — reacquisition of Common shares $10,500 Retained earnings $680,000 Calculations: Contributed Average capital — Common Number issue reacquisition shares of shares price ofcommon Retained (a) (b) (a)#(b) Shares earnings Bal $1,000,000 250,000 $4.00 $10,000 $680,000 1. 127,500 25,000 1,127,500 275,000 4.10 10,000 680,000 2. (20,500) (5.000) 500 1,107,000 270,000 4.10 10,500 680,000 3. 55,000 10,000 1,162,000 280,000 4.45 10,500 680,000 4, (49,800) 12,000) 10,200) 1,112,200 268,000 4.15 300 680,000 5. 282,200) 68.000) 10,200 $ 830,000 200,000 4.15 $10,500 $680,000 Solitons Manual ‘Chapter 13 48 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts popes strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-3B (a) (b) Year | Dividend | Noncumulative | Common | Cumulative Common Paid Preferred Preferred 1 $20,000 $20,000 $ 0 $20,000) $ 0 2 15,000 15,000 0 15,000 0 3 30,000 20,000 40,000 25,000 5,000 4 35,000 20,000 15,000 20,000 15,000 1. Regular idend is $4 X 5,000 = $20,000 2b. Arrears = $20,000 - $15,000 = $5,000 3b. Preferred dividend = $20,000 (regular) + $5,000 (arrears) = $25,000 Solutions Manual 13.49 Chapter 13, ‘Copyright © 2009 John Wiley & Sons Canada, Lid, Unauthorzed copying, distrauton, or transmission of tis page is, ‘tly prohibitedWeyoandt Kieso, Kimmel, Tronbolm, Kinnear ‘Accounting Principles, Thed Canadian Eaton PROBLEM 13-48 ‘Shareholders’ Equity Preferred | ci Other retained | “otner Assets Liabilities Preferred = Common contributed | Berane’ all Shares Shares C. Earnings Comprehensive -apital 1 income 1. | +$23,550 nla nla | +$23,550 nla nla nla 2.) -200,000 nla nla| -160,500 ~$30,000 -$9,500 nla 3. nia nla -$70,000 — +70,000 nia na nla 4. +25,000 nla nla| _+25,000 nla nla nla 5. ++7,500 nla +7,500 nla nia nla nla 6. -15,000 nla nia nla nla -15,000 nla 7. ++2,500 nla nia nla nla nla +$2,500 2. Average share price = ($2,400,000 + $23,550) + (150,000 + 1,000) = $16.05 3, $350,000 + 6,000 = $70; $70 X 1,000 = $70,000Weygandt, Kieso, Kimmel, Trenholm, Kinnear PROBLEM 13-5B GENERAL JOURNAL Accounting Principles, Third Canadian Edition (a) a Date Account Titles and Explanation Debit Credit Feb. 10 Cash (80,000 X $4). 320,000 Common Shares 320,000 Mar. 1 Cash (5,000 X $115)... ... 575,000 Preferred Shares... 575,000 Apr. 1 Land (22,000 X $4.25)... - 93,500 Common Shares ... 93,500 Jun, 20 Cash (78,000 X $4.50). 351,000 Common Shares 351,000 Aug. 1 Legal Fees Expense (10,000 X $4.75) 47,500 Common Shares... 47,500 Sep. 1 Cash (10,000 X $5). 50,000 Common Shares 50,000 Nov. 1 Cash (1,000 X $117) 117,000 Preferred Shares. 117,000 Jan. 31 Income Summary ... 500,000 Retained Earnings 500,000 31 Dividends 24,000 Cash 24,000 31 Retained Earnings. 24,000 Dividends .... 24,000 Solutions Manual ‘Chapter 13 351 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear PROBLEM 13-5B (Continued) Accounting Principles, Third Canadian Edition (b) Preferred Shares Date Explanation Ref. Debit Credit Balance Mar. 1 v1 575,000 575,000 Nov. 1 1 117,000 692,000 Common Shares Date Explanation Ref. Debit Credit Balance Feb. 10 1 320,000 320,000 Apr. 1 1 93,500 413,500 June 20 v1 351,000 764,500 Aug. 1 v1 47,500 812,000 Sept. 1 J 50,000 862,000 Dividends Date Explanation Ref. Debit Credit Balance Jan. 31 v1 24,000 24,000 34 Closing entry J1- 24,000 0 Retained Earnings Date Explanation Ref. Debit Credit Balance Jan. 31 Closing entry 1 500,000 500,000 31 Closing entry J1 24,000 476,000 Solutions Manual ‘Chapter 13 3-52 ooygnt@ 2000 John Wily & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts popes strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-5B (Continued) (c) WETLAND CORPORATION Balance Sheet (Partial) January 31, 2008 Shareholders equity Share capital $4-noncumulative preferred shares, no par value, unlimited number of shares authorized, 6,000* shares issued $ 692,000 Common shares, no par value, unlimited number of shares authorized, 200,000** shares issued __ 862,000 Total share capital ... . 1,554,000 Retained earnings... 476,000 Total shareholders’ equity $2,030,000 *5,000 + 1,000 = 6,000 shares **80,000 + 22,000 + 78,000 + 10,000 + 10,000 = 200,000 shares Solutions Manual 3-89 ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed copying, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-6B (a) GENERAL JOURNAL v1 Date Account Titles and Explanation Debit Credit Feb. 1 Cash... . 55,500 Common Shares... 55,500 Sep. 3 Cash... 107,000 Preferred Shares 107,000 Oct. 25 Common Shares (10,000 X $7.10*)..... 71,000 Contributed Capital - Reacquisition of Common Shares 2,500 Retained Earnings. 1,500 Cash... 75,000 *Average Cost per Common Share: Number of Common Proceeds of Transaction Date = Shares Issued Issue Beginning balance 200,000 $1,400,000 February 1 5,000 55,500 Total 205,000 $1,455,500 $1,455,500 = 205,000 = $7.10 Dec. 31 Income Summary .. 60,000 Retained Earnings 60,000 31 Dividends 12,000 12,000 Solitons Manual 35 ‘Chapter 13 4 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts popes strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-6B (Continued) (a) (Continued) Dec. 31 Retained Earnings... . 12,000 Dividends ..... 12,000 (b) Preferred Shares Date Explanation Ref. Debit Credit Balance Jan. 1 Balance v 320,000 Sep. 3 1 107,000 427,000 Common Shares Date Explanation Ref. Debit Credit Balance Jan. 1 Balance v 1,400,000 Feb. 1 v1 55,500 1,455,500 Oct. 25 J1 71,000 1,384,500 Contributed Capital — Reacquisition of Shares Date Explanation Ref. Debit Credit Balance van. 1 Balance v 2,500 2,500 Oct. 25 v1 2,500 0 Dividends Date Explanation Ref. Debit Credit Balance Jan, 31 v1 12,000 12,000 31 Closing entry J1 12,000 0 Solitons Manual ‘Chapter 13 Copyright 22000 John Wiley & Sons Canad, Ll. Unaiterzed copying, dsrbuton or tensmsson of tis popes strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-6B (Continued) (b) (Continued) Retained Earnings Date Explanation Ref. Debit Credit Balance van. 1 Balance v 488,000 Oct. 25 J1 1,500 486,500 Dec. 31 Closing entry v1 60,000 546,500 31 Closingetnry -J1_—«12,000 534,500 (c) CHEUNG CORPORATION Balance Sheet (Partial) December 31, 2008 Shareholders’ equity Share capital $5-cumulative preferred shares, no par value, 25,000 shares authorized, 4,000* shares issued$ 427,000 Common shares, no par value, unlimited number of shares authorized, 195,000** shares issued 1,384,500 Total share capital 1,811,500 Retained earnings. 534,500 Total shareholders’ equity $2,346,000 *3,000 + 1,000 = 4,000 preferred shares ** 200,000 + 5,000 — 10,000 = 195,000 common shares Note X: Dividends of $8,000 are in arrears. (4,000 X $5 - $12,000) Solutions Manual 3-85 ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts pepe s strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-7B (a) GENERAL JOURNAL v1 Date Account Titles and Explanation Debit Credit Feb. 1 Land (1,000 x $120) 120,000 Preferred Shares. 120,000 Mar. 1 Preferred Shares (500 X $112°)...... 56,000 Common Shares .... 56,000 “Average cost of preferred shares: ($440,000 + $120,000) + (4,000 + 1,000) = $112 Jul. 1 Cash (1,500 X $130 195,000 Preferred Shares. 195,000 Sep. 1 Preferred Shares (1,000 X $116.50**) 116,500 Common Shares .... 116,500 ** Average cost of preferred shares: ($440,000 + $120,000 — $56,000 + $195,000) + (4,000 + 1,000 — 500 + 1,500) = $116.50 Dec. 31 Revenues... 500,000 Income Summary 500,000 31 Income Summary 450,000 Expenses... 450,000 31 Income Summary .. 50,000 Retained Earnings 50,000 Solitons Manual 357 ‘Chapter 13 ooygnt@ 2000 John Wily & Sons Canad, Lt. Unaihorzed copying, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear PROBLEM 13-7B (Continued) (b) Preferred Shares Accounting Principles, Third Canadian Edition Date Explanation Ref. Debit Credit Balance Jan. 1 Balance v 440,000 Feb. 1 v1 120,000 560,000 Mar 1 v1 56,000 504,000 Jul 1 1 195,000 699,000 Sep. 1 J1 116,500 582,500 Common Shares Date Explanation Ref. Debit Credit Balance van. 1 Balance v 1,050,000 Mar 1 v1 56,000 1,106,000 Sep. 1 J 116,500 1,222,500 Contributed Capital—Reacquis! n_of Preferred Shares Date Explanation Ref. Debit Credit Balance Jan. 1 Balance v 25,000 Retained Earnings Date Explanation Ref. Debit Credit Balance Jan. 1 Balance v 300,000 Dec. 31 ClosingEntry J 50,000 350,000 Accumulated Other Comprehensive Income Date Explanation Ref. Debit Credit Balance van. 1 Balance v 10,000 Solutions Manual ‘Chapter 13 Copyrgrt 22000 John Wiley & Sons Canad, Ll. Unaiterzed copying, dsrbuton or tansmsson of tis popes strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-7B (Continued) (c) REMMERS CORPORATION Balance Sheet (Partial) December 31, 2008 Shareholders equity Contributed capital Share capital $5 cumulative preferred shares, no par value, convertible 10,000 shares authorized, 5,000* shares issued... . $ 582,500 Common shares, no par value, unlimited shares authorized, 85,000** shares issue Total share capital.. Additional contributed capital Contributed capital — reacquisition of preferred shares... 4,222,500 1,805,000 25,000 Total contributed capital 1,830,000 Retained earnings.... 350,000 Accumulated other comprehensive income 10,000 Total shareholders’ equity.... $2,190,000 * 4,000 + 1,000 — 500 + 1,500 - 1,000 = 5,000 preferred shares ** 70,000 + 5,000 + 10,000 = 85,000 common shares Note X: Dividends of $25,000 (5,000 X $5) are in arrears Solutions Manual 3-50 ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear PROBLEM 13-8B Accounting Principles, Third Canadian Edition (a) GENERAL JOURNAL v1 Date Account Titles and Explanation Debit Credit Dec. 31 Sales Revenue. 596,000 Income Summary 596,000 31 Income Summary ... 506,000 Salaries Expense 176,000 Cost of Goods Sold 148,000 Amortization Expense .. 84,000 Interest Expense 31,500 Rent Expense... 24,000 Income Tax Expense 22,000 Utilities Expense 12,000 Insurance Expense 6,000 Supplies Expense .. 2,500 31 Income Summary ... 90,000 Retained Earnings 90,000 31° Retained Earnings.. 10,000 Dividends... 10,000 Solutions Manual ‘Chapter 13 0 ooygnt@ 2000 John Wily & Sons Canad, Lt. Unauihorzed copying, drbuten, or tansmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-8B (Continued) (b) MOORCRAFT LTD. Balance Sheet December 31, 2008 Assets Current assets Cash... $ 21,000 Accounts receivable 69,000 Inventory . 40,000 Prepaid insurance. 10,000 Supplies ... 5,000 Total current assets .. 145,000 Property, plant, and equipment Land +» $ 45,000 Buildin $600,000 Accumulated amortization. (80,000) 520,000 Equipment... $300,000 Accumulated amortization. (90,000) 210,000 Total property, plant, and equipment.. 775,000 Total assets .. Lia 's and Shareholders’ Equity Current liabilities Accounts payable $ 52,000 Salaries payable 8,000 Interest payable 2,500 Income tax payable.. 10,000 Unearned sales revenue. 24,000 Current portion of long-term debt 10,000 Total current liabilities..... 106,500 Long-term debt Long-term mortgage, net of current portion 340,000 Total liabilities... 446,500 Solitons Manual ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unauihorzed copying, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-8B (Continued) (b) (Continued) MOORCRAFT LTD. Balance Sheet December 31, 2008 Shareholders’ equity Contributed capital Share capital $4 noncumulative preferred shares, unlimited authorized, 2,500 issued... 50,000 Common shares, unlimited authorized, 100,000 issued. 150,000 Total share capital 200,000 Other contributed capital Reacquisition of common shares 5,000 Total contributed capital 205,000 Retained earnings‘. 245,000 Accumulated other comprehensive income. 23,500 Total shareholders’ equity... 473,500 Total liabilities and shareholders’ equity $920,000 *Retained earnings Balance, Jan. 1 $165,000 Add: Net income 90,000 Less: Dividends. 10,000) Balance, Dec. 31 Solutions Manual 13-62 ‘Chapter 13 ‘Copyright © 2008 John Wiley & Sons Canade, Lid. Unauthorized copying, distribution or transmission ofthis page is strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-9B (a) MAGNOTTA WINERY CORPORATION Balance Sheet January 31, 2006 Assets Current assets Accounts receivable $ 347,669 Inventories .. 20,505,669 Prepaid expenses and deposits 671,961 Total current assets 21,525,299 Capital assets ..... Accumulated amortization. Winery licenses... Total assets..... $33,129,085 (11,298,085) 21,831,000 wee 251,516 $43,607,815 Lia s and Shareholders’ Equity Current liabilities Bank indebtedness.. $ 4,757,181 Accounts payable and accrued liabil 1,289,814 Income taxes payable. 130,754 Current portion of long-term debt 1,477,404 Total current liabilities... 7,655,153 Long-term liabilities Long-term debt.... $8,681,328 Future income taxes 1,047,517 9,728,845 Total liabilities . 17,383,998 Solitons Manual a ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unauihorzed coping, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-9B (Continued) (a) (Continued) MAGNOTTA WINERY CORPORATION Balance Sheet January 31, 2006 Shareholders’ equity Contributed capital Common shares, unlimited authorized, 13,670,005 issued . 6,165,817 Other contributed capital. 210,000 Total contributed capital .. 6,375,817 Retained earnings” .. 19,848,000 Total shareholders’ equi 26,223,817 Total liabilities and shareholders’ equity. $43,607,815 “$17,273,203 + $2,574,797 = $19,848,000 (b) Return on equity = Net income + Average shareholders’ equity 82,874,797 [$26,223,817 £$25,582,500 | L 2 = 10.34% Solutions Manual 54 ‘Chapter 13 ooygnt@ 2000 John Wily & Sons Canad, Lt. Unaihorzed copying, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition PROBLEM 13-10B (a) Return on equity = Net income = Average shareholders’ equity $330.1 OS 9 2008 $2,511.1-82,2512] 0% 2 $291.5, _ aa geo 2004 52,251.2 +82,017 ‘| = 18.66% 2 Canadian Tire’s return on equity has increased very slightly during the last year. Canadian Tire is performing at the same level as the industry average during both years. (b) Solutions Manual ‘Chapter 13 Copyright 22000 John Wiley & Sons Canad, Ll. Unaiterzed copying, dsrbuton or tensmsson of is popes strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition (a) (b) (c) (d) (e) PROBLEM 13-11B $1,200,000 = 12,000 = $100 average selling price of the preferred shares. $1,000,000 = 100,000 = $10 average selling price of the common shares. It appears that there were no dividends declared in 2008 since there was no decrease in retained earnings during the year. Since the preferred shares are noncumulative, there are no dividends in arrears. The shares were issued for an average selling price of $10 (see (a) above) which means the company would have reduced the common share account by $200,000 (20,000 X $10). Since the company has established a contributed capital account related to this reacquisition for $40,000, this indicates the company only had to pay $160,000 ($200,000 - $40,000) to reacquire the 20,000 shares. It is income that bypasses the income statement. An example of accumulated other comprehensive income is unrealized gains on investments that are available for sale. Solutions Manual ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition CONTINUING COOKIE CHRONICLE (a) 1. One of the major advantages of issuing preferred shares is that the preferred shareholder does not have voting rights. In this case, Curtis's dad and Natalie’s grandmother can participate in the future success of Cookie & Coffee Creations (by receiving annual dividends) without attempting to influence any decisions that would require shareholder approval. Both will receive an annual dividend as long as the dividend is declared. Any additional dividends declared and paid will be paid to the common shareholders. This could prove to be another advantage to both Natalie and Curtis if the company is successful and has excess cash to pay out dividends. 2. It is possible to pay for the $750 legal bill by issuing common shares. However, the cost principle still applies. Cost must equal the cash equivalent price which is generally the fair market value of the consideration given up. If this amount cannot be determined, we then look to the fair market value of the consideration received to determine the cash equivalent price. In this case, Curtis and Natalie are receiving shares with a value of $1 per share. This $1 per share is the estimated fair value of the shares being given up in return for the legal fee expense. As a result, 750 shares should be given up valued at $750, which is the value of the legal fees. Solutions Manual ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unauihorzed coping, drbuten, or tensmsson of tis pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition CONTINUING COOKIE CHRONICLE (Continued) GENERAL JOURNAL v1 Date Account Titles and Explanation Debit Credit (b) Nov. 1 Cash... 17,500 Accounts Receivabl 600 Merchandise Inventory 1,580 Equipment ... 3,500 Common Shares 23,180 (c) Nov. 1 Cash... 10,000 Preferred Shares. 10,000 1 Legal Expense... 750 Common Shares 750 Solitons Manual ‘Chapter 13 Copyright 22000 John Wiley & Sons Canad, Ll. Unaiterzed copying, dsrbuton or tensmsson of is popes strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition CONTINUING COOKIE CHRONICLE (Continued) (d) COOKIE & COFFEE CREATIONS LTD. Balance Sheet November 1, 2008 Assets Current assets $27,500 Accounts receivable. 600 Merchandise inventory 1,580 Total current assets 29,680 Property, plant, and equipment Equipment... 3,500 Total assets. $33,180 Shareholders’ Equity Share capital $0.50 preferred shares, no par value, noncumulative, 10,000 authorized, 2,000 shares issued.. . $10,000 Common shares, no par value, unlimited number of shares authorized, 23,930 shares issued ... o Total share capital Deficit. Total shareholders’ equity Solutions Manual ry ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition BYP 13-1 FINANCIAL REPORTING PROBLEM (a) (b) (c) (d) (e) The Forzani Group Limited has 2 classes of shares. There is an unlimited number of Class A shares authorized and 32,922,000 issued; and an unlimited number of preferred shares authorized but none issued. Per note 8 to the financial statements, Forzani issued 47,000 shares upon employees exercising stock options. Per note 8 to the financial statements, it appears that Forzani repurchased 135,000 shares in fiscal 2005 at a cost of $1,510,000 but that none were repurchased in 2006. The average cost of the common shares is $4.20 (138,131 = 32,922). Return on equity = Net Income + Average shareholders’ equity $21,545 [ee $255,796) 2 2005: = 8.68% The company’s return on equity has declined over the past year from 8.68% in fiscal 2005 to 5% in fiscal 2006. Solutions Manual 3-70 ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of tis popes strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition BYP 13-2 INTERPRETING FINANCIAL STATEMENTS (a) (b) (c) (d) A corporation may acquire its own shares (1) to increase trading of the company's shares in the securities market in the hope of enhancing the company’s market value, (2) to reduce the number of shares issued in order to increase earnings per share, (3) to eliminate hostile shareholders by buying them out, (4) to have additional shares available so they can be reissued to officers and employees through bonus and stock compensation plans, or used to acquire other companies, and (5) to comply with percentage share ownership requirements. The debit to retained earnings indicates that Talisman Energy paid more to repurchase their common shares than their average cost. Common Shares ($355,000,000 - $290,000,000) Retained Earnings Cash.... 65,000,000 290,000,000 355,000,000 Talisman’s profitability has improved in 2005. The company’s profit margin, return on assets, and return on equity are better than in 2004. The market value of Talisman’s shares depends on a number of factors, including the company’s anticipated future earnings, its expected dividend rate per share, its current financial position, the current state of the economy, and the current state of the stock market. It is apparent that investors have a positive outlook for Talisman. Solutions Manual 371 ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed copying, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition BYP 13-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook. Solutions Manual ‘Chapter 13 Copyright 22000 John Wiley & Sons Canad, Ll. Unaiterze copying, dsrbuton or tensmsson of tis popes strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition BYP 13-4 COMMUNICTION ACTIVITY Memorandum To: Chief Financial Officer From: Accountant Re: Comprehensive Income reporting The new standard concerning the recording and reporting of comprehensive income will affect the balance sheet prepared this fiscal year. Comprehensive income includes all changes in shareholders’ equity during a period except for changes that result from the sale or repurchase of shares or from the payment of dividends. It includes the revenues, expenses, gains and losses included in net income, as well as the gains and losses that bypass net income but affect shareholders’ equity. The latter gains and losses are known as “other comprehensive income (loss)”. The most common example of other comprehensive income is unrealized gains and losses on investments that are available for sale. These investments must be shown at market value on the balance sheet. Any resulting unrealized gains or losses will be shown in the shareholders’ equity section, immediately beneath Retained Earnings. Reporting comprehensive income will benefit current and potential shareholders. Net income is protected from market fluctuations. Also, readers will be shown the gain or loss that would have occurred if the investment had actually been sold. Lastly, since this method is used in Europe and the United States, it will be easier to consolidate the data from operations in other countries that are already using the international standard. Solutions Manual 373 ‘cnaster 13, ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed coping, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition BYP 13-5 ETHICS CASE (a) (b) (c) The stakeholders in this situation are: The director of Simplex's R & D division. The president of Simplex. The shareholders of Simplex. Those who live in the environment to be sprayed by the new (un-tested) chemical. The president is risking the environment, and everything and everybody in it exposed to this new chemical, in order to enhance his company's sales and to preserve his job. Presidents and entrepreneurs frequently take risks in performing their leadership functions, but this action is both irresponsible and unethical. A parent company may protect itself against loss and most reasonable business risks by establishing separate subsidiary corporations, but whether it can insulate itself against this type of action is a matter of international corporate law and criminal law. Solutions Manual 374 ‘Chapter 13 ooygnt@ 2000 John Wiley & Sons Canad, Lt. Unaihorzed copying, drbuten, or tensmsson of ts pegs strictly prohibitedWeygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition Legal Notice Copyright wiley Copyright © 2009 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 ‘Solutions Manual 1375 ‘Chapter 13 ‘Copyright © 2009 John Wiley & Sons Canade, Ltd. Unauthorized copying, distribution, or transmission of tis page is strictly prohibited