Libby 4ce Solutions Manual - Ch12

Chapter 12
Reporting and Interpreting Owners’ Equity

Revised: May 14, 2011
ANSWERS TO QUESTIONS
1. A Corporation is a separate legal entity (authorized by law to operate as an individual).

It is owned by a number of persons and/or entities whose ownership is evidenced by
common shares. Its primary advantages are: (a) ease of ownership through purchase
of only a few shares that are not usually too expensive, b) transferability of ownership,
and (c) limited liability to the owners.
2. The charter of a corporation is a legal document issued by the government that

authorizes its creation as a separate legal entity. The charter specifies the name of the
entity, its purpose, the type and number of shares it can issue, and the minimum
amount of capital that owners must invest at the date of organization.
3. (a) Authorized share capital — the maximum number of shares that can be sold and
issued as specified in the charter of the corporation.
(b) Issued share capital — the total number of shares that have been issued by the
corporation at a particular date.
(c) Outstanding share capital — the number of shares currently owned by the
shareholders.
4. Common shareholders may:
a) Vote in the shareholders’ meeting (or by proxy) on major issues concerning

management of the corporation.
b) Participate proportionately with other shareholders in the distribution of the
corporation’s profits.
c) Share proportionately with other shareholders in the distribution of corporate
assets upon liquidation.
Being able to vote is the most important of the rights because this ensures that the
owners have an input at the shareholders’ meeting and some control of the
management of the corporation, thus enabling them to protect their rights as
shareholders.
5. Common shares — the usual or normal shares of the corporation. These represent the
basic units of ownership in a corporation. They are the voting shares and generally
rank after the preferred shares for dividends and distribution of assets upon
Financial Accounting, 4ce, Libby, Libby, Short, Kanaan, Gowing © 2011 McGraw-Hill Ryerson Limited. All rights reserved.
12-1
dissolution. Common shares may be either par value or no-par value.
Preferred shares — when one or more classes of shares are issued, the additional
classes are called preferred shares. Preferred shares have preferences that make them
different from the common shares. Generally, preferred shares have both favourable
and unfavourable features in comparison with common shares. Preferred shares
usually are par value shares and usually specify a dividend rate such as “6% preferred
shares.”
6. Par or stated value is a nominal per share amount established by the charter of the
corporation for the common and/or preferred shares, and is printed on the face of
each share certificate. Since 1985, Canadian laws forbid the initial sale of par value
common shares. No-par value shares do not have an amount per share specified in the
charter. As a consequence, they may be issued at any price.
7. The usual characteristics of preferred shares are: (1) a stated value, (2) a preference
over common shares in the distribution of dividends, (3) a preference over common
shares in asset distribution upon dissolution of the company, and (4) nonvoting
privileges.
8. The two basic sources of shareholders’ equity are:

Contributed capital — the amount of capital contributed by investors in a corporation.
One element of contributed capital is the amount initially received from the sale of
shares to investors. The second distinct element is contributed surplus for which no
shares are issued.
Retained earnings — the accumulated amount of all Profit (minus net losses) since the
organization of the corporation, less the accumulated amount of dividends declared by
the corporation since its organization.
9. Owners’ equity is accounted for in terms of source. This means that several accounts
are maintained for the various sources of owners’ equity, such as issuance of common
shares, issuance of preferred shares, receiving contributions from shareholders
without issuing shares (contributed surplus), and earning income that is not
distributed to shareholders (retained earnings).
10. The two basic requirements to support a cash dividend are: (1) availability of cash or
the ability to obtain cash sufficient to pay the dividend and (2) a sufficient balance in
retained earnings, because the dividend represents a distribution of earnings to the
shareholders. A cash dividend reduces both the assets of a corporation and its
shareholders’ equity by the same amount.
12-2
11. Cumulative preferred shares have a dividend preference such that, should the
dividends on the preferred shares for any year, or series of years, not be paid,
dividends cannot be paid to the holders of cumulative preferred shares. Non-
cumulative preferred shares do not have this option; therefore, dividends not paid in
past periods will never be paid to the non-cumulative preferred shareholders.
12. A stock dividend involves the issuance to the shareholders of a dividend in the
corporation’s own shares (rather than cash). A stock dividend is significantly different
from a cash dividend in that the corporation does not disburse any assets, while in the
case of a cash dividend, cash is decreased by the amount of the dividend. A cash
dividend also reduces total shareholders’ equity by the amount of the dividend. In
contrast, a stock dividend does not change total shareholders’ equity since it merely
reallocates a portion of retained earnings to common share capital.
13. The primary purposes of issuing a stock dividend are: (1) to maintain dividend
consistency; that is, to pay dividends each year either in cash or in shares, and (2) to
capitalize retained earnings; that is, a stock dividend requires a transfer from the
Retained earnings account to the permanent share capital account for the amount of
the dividend. Although this transfer does not change shareholders’ equity in total, it
does cause a shift from retained earnings to share capital.
14. When a dividend is declared and paid, the three important dates are:
Declaration date — the date on which the board of directors officially approves the
dividend. In the case of a cash dividend, a liability comes into existence on the date of
declaration, and must be recorded as a debit to Retained earnings and as a credit to
Dividends payable.
Date of record — this date usually is about one month after the date of declaration. It
is the date on which the corporation extracts from its legal records the list of
individuals owning shares. The dividend is paid only to those names listed on the
record date. No entry in the accounts is made on this date.
Date of payment — the date on which the cash is disbursed to pay the dividend. It
follows the date of record as specified in the dividend announcement. The entry to
record the cash disbursement for the dividend is a debit to Dividends payable and a
credit to Cash.
15. Total retained earnings is the accumulated amount of all profits of the corporation less
all losses and less the accumulated amount of all dividends declared to date. The
primary components of retained earnings are beginning balance, profit (or loss), and
dividends declared. Prior period adjustments also are reported on the statement of
retained earnings.
12-3
16. In special circumstances, the statement of retained earnings reports an item called
prior period adjustments. Prior period adjustments are corrections of errors in the
financial statements of prior periods.
A prior period adjustment is reported as an adjustment to the beginning balance of

Retained Earnings.
17. Accumulated other comprehensive income (loss) reflects the financial effect of events
that cause changes in shareholders’ equity, other than investments by shareholders or
distributions to shareholders. Such changes in equity result from unrealized gains or
losses because of the valuation of specific assets and liabilities at fair value. These
include such items as unrealized gains or losses on available-for-sale assets, unrealized
gains or losses on derivatives transactions that are designated as cash flow hedges,
and unrealized gains or losses on translating the financial statements of companies
that have operations in other countries but are controlled by the Canadian reporting
entity. The gains and losses resulting from these changes are not reported on the
income statement because they have not been realized yet. For this reason, they are
reported as a separate component of shareholders’ equity.
18. Common shares are the basic voting shares issued by a corporation. They rank after
preferred shares when dividends are declared and when assets are distributed upon
liquidation of the corporation. The dividend amount for common shares is determined
by the board of directors, and is based on the company’s profitability. The dividend
amount for preferred shares is fixed by a contract. Common shares have more
potential for growth than preferred shares if the company is profitable. On the other
hand, the investor may lose more money with common shares than with preferred
shares if the company is not profitable.
The choice between investing in common or preferred shares depends on the

investor’s preference for or aversion of risk. Although common shares have generally
performed better than other types of investments over time, they are more volatile
than preferred shares that pay a fixed amount of annual dividends. Retired people
need a steady source of income that is not subject to major changes in value. For this
reason, I would advise my parents to invest in preferred shares.
12-4
Authors’ Recommended Solution Time
(Time in minutes)
Alternate Cases and

Exercises Problems Problems Projects
No. Time No. Time No. Time No. Time
1 25 E 1 45 E 1 30 E 1 30 M
2 10 E 2 45 E 2 30 M 2 30 E
3 25 E 3 25 E 3 30 M 3 25 M
4 25 E 4 45 D 4 45 D 4 25 M
5 25 E 5 20 M 5 30 D 5 25 M
6 30 M 6 40 M 6 20 M 6 25 D
7 30 M 7 30 M 7 *
8 30 M 8 20 M
9 30 M 9 45 D
10 15 E 10 20 M
11 30 E 11 40 M
12 20 E
13 5E
14 25 M
15 15 E
16 20 M
E = Easy M = Moderate D = Difficult
* Due to the nature of these cases and projects, it is very difficult to estimate the amount of
time students will need to complete the assignment. As with any open-ended project, it is
possible for students to devote a large amount of time to these assignments. While students
often benefit from the extra effort, we find that some become frustrated by the perceived
difficulty of the task. You can reduce student frustration and anxiety by making your
expectations clear. For example, when our goal is to sharpen research skills, we devote
class time discussing research strategies. When we want the students to focus on a real
accounting issue, we offer suggestions about possible companies or industries.
EXERCISES
E12–1
Req. 1
12-5
Kelly Incorporated
Shareholders’ Equity
December 31, 2011
Share capital:
Preferred shares, $1.50, authorized 5,000 shares,
issued and outstanding, 2,000 shares.............................................................................. $ 50,000
Common shares, no par value, authorized 100,000 shares,
issued and outstanding, 30,000 shares............................................................................ 540,000
Total share capital................................................................................................................... 590,000
Retained earnings.............................................................................................................................. 42,000
Total Shareholders’ Equity.................................................................................................. $632,000
Req. 2
The answer would depend on the Kelly’s profitability and the stability of its earnings. The
preferred shares have a $1.50 dividend per share. This is a return of 6% per year
($1.50/$25 = 6%). If Kelly earns a net profit more than 6%, the additional earnings would
accrue to the common shareholders. If Kelly earns less than 6%, it would have to pay 6%
annually to the preferred shareholders. In the current year, profit after the preferred share
dividend was $39,000, which represents a return of 7.2% ($39,000 / $540,000) to common
shareholders. If this is representative of future performance, then I would prefer to invest
in additional common shares.
E12–2
Req. 1
Retained Earnings, Dec, 31 = Retained Earnings, Jan. 1 + Profit – Dividends
$850,000 = X + $1,200,000 - $800,000; X = $450,000
Req. 2
Earnings per share = Profit / Weighted Number of Common Shares Outstanding
= $1,200,000 / ($6,000,000 / $20) = $4
Req. 3
Sun Media Inc.
December 31, 2012
Share capital:
Common shares, issued and outstanding 300,000 shares.................................... $6,000,000
Retained earnings ........................................................................................................................ 850,000
Shareholders’ equity................................................................................................................... $6,850,000
E12–3
Req. 1
12-6
a. Cash (+A) (6,000 shares x $22)................................................................. 132,000
Common shares (+SE).............................................................................. 132,000
Sold common shares.
b. Land (+A) (600 shares x $22).................................................................... 13,200

Common shares (+SE).............................................................................. 13,200
Purchased land in exchange for 600 common shares.
c. Cash (+A) (1,000 shares x $23)................................................................. 23,000

Common shares (+SE).............................................................................. 23,000
Sold common shares.
d. Retained earnings (–SE)............................................................................... 7,000

Income summary ....................................................................................... 7,000
Closing entry to transfer the loss to Retained earnings.
Req. 2
Sampson Corporation
December 31, 2011
Share capital:
Common shares, authorized 12,000 shares,
outstanding 7,600 shares................................................................................................ $168,200
Retained earnings (deficit)....................................................................................................... (7,000)
Shareholders’ equity................................................................................................................... $161,200
Req. 3
Sampson has a negative balance in retained earnings, which, in most cases, would preclude
the payment of dividends. Dividends are a distribution of earnings to the owners. In the
absence of earnings, dividends should not be paid. However, a corporation may declare
and pay dividends if payment of the dividend does not place the company into a position
which would prevent it from paying its liabilities as they become due, as indicated in
section 42 of the Canada Business Corporation Act.
12-7
E12–4
Req. 1
Nguyen Corporation
December 31, 2012
Share capital:
Preferred shares, $1, authorized 50,000 shares,
issued and outstanding, 8,000 shares........................................................................ $200,000
issued and outstanding, 30,500 shares..................................................................... 612,500
Total share capital......................................................................................................... $812,500
Retained earnings*............................................................................................................................ 15,000
Total shareholders’ equity................................................................................................... $827,500
*($40,000, profit – $25,000, dividends = $15,000)
Req. 2
Preferred shares provide the investor with a specific dividend per share that is payable
when they are declared by the company’s board of directors. The dividend on preferred
shares is typically higher than the dividend on common shares, because common
shareholders benefit from the appreciation in the price per share that would reflect
retained earnings that accrue to them. An investor who needs a steady source of income
may prefer to invest in preferred shares that pay dividends on a regular basis rather than
invest in common shares that are riskier. In this case the dividend rate on the preferred
shares is 4%. In the current year the dividends on common shares were 2.8% [= ($25,000 –
$8,000) / $612,500]. Common shareholders also generally expect to gain from an increase
in share value.
Req. 3
The price that the company receives for selling its shares to new investors is the result of
an agreement between both parties whereby the shareholder agrees to pay the requested
amount. As such, the company can ask for a higher price per share than the price originally
paid by the organizers, especially after the company has started operations and showed
evidence of profitability. Sale of the shares at $25 instead of $20 per share would be
unethical if the price being asked is based on misleading information disclosed by the
company for the sole purpose of luring investors into paying a higher price per share.
12-8
E12–5
Req. 1
a. Cash (+A) (9,000 shares x $25)................................................................. 225,000

Land (+A) (3,000 shares x $25)................................................................ 75,000
Common shares (+SE).............................................................................. 300,000
Issued 12,000 common shares to organizers. Collected cash
and received land.
b. Cash (+A) (6,000 shares x $50)................................................................. 300,000

Common shares (+SE).............................................................................. 300,000
Sold 6,000 common shares at $50 per share.
c. Cash (+A) (8,000 shares x $25)................................................................. 200,000

Preferred shares (+SE)............................................................................. 200,000
Sold 8,000 preferred shares at $25 per share.
d. Income summary............................................................................................. 42,000

Retained earnings (+SE).......................................................................... 42,000
Closing entry.
Req. 2
The memo should address the following points.
The land was valued at the market value of the common shares issued to pay for it; this
valuation is in accordance with the cost principle (3,000 shares x $25 = $75,000). The cash
price per share paid by the other organizers is a reliable measure of the value of the land.
Req. 3
The price that the company receives for selling its shares to new investors is the result of
an agreement between both parties whereby the shareholder agrees to pay the requested
amount. As such, the company can ask for a higher price per share than the price originally
paid by the organizers, especially after the company has started operations and showed
evidence of profitability. Although in this case a doubling of the price within a short period
may be questionable. Sale of the shares at $50 instead of $25 per share would be unethical
if the price being asked is based on misleading information disclosed by the company for
the sole purpose of luring investors into paying a higher price per share.
12-9
E12-6
Req. 1
Items affecting Retained Earnings during the year ended December 31, 2011:
Retained earnings, January 1, 2011.............................................................................. $67,000

Prior period adjustment: correction of error (net of income tax)................... (8,000)
Beginning balance, adjusted............................................................................................. 59,000
Profit for the year.................................................................................................................. 28,000
Total........................................................................................................................................ 87,000
Less: Dividends....................................................................................................................... 18,000
Retained earnings, December 31, 2011....................................................................... $69,000
Req. 2
Blake Corporation
December 31, 2011
Contributed capital:
Common shares, no par value, authorized 100,000 shares, issued and
outstanding 36,000 shares............................................................................................. $540,000
Contributed surplus............................................................................................................. 150,000
Total contributed capital............................................................................................... 690,000
Retained earnings (per above statement)....................................................................... 69,000
Total Shareholders’ Equity........................................................................................... $759,000
Req. 3
The dividend yield ratio is $18,000 / (36,000 x $17.89) = 2.79%. While this yield seems low
when compared to some alternative investments (such as the yield on government bonds),
it is very typical of investments in common shares. Investors in shares receive a return
from both dividends and share price appreciation.
12-10
E12–7
(Note to instructor: These questions have been included to permit you to expand on the text’s
discussion of share price reactions to information contained in accounting reports).
Req. 1
Case 1
When companies unexpectedly announce increases in dividends, share prices typically
increase. Depending on the objectives of the course, the instructor may want to discuss
research in finance concerning dividend policy.
Case 2
Share price is based on expectations. If the increase in operating performance was not
expected, the share price should increase. On the other hand, if investors expected profit
and cash flows to increase by more than 50 percent, then share price would likely decrease.
It is not necessary to increase dividends to have a favourable share price reaction.
Case 3
Stock dividends do not provide any economic value but they may have a signal effect and
are often associated with an increase in cash dividends. As a result, stock dividends do not
appear to directly cause an increase in stock price but are often associated with factors that
do impact favourably on price.
Req. 2
Stock prices react to underlying economic events and not to changes in reporting methods,
per se. Markets are relatively effective in recognizing the difference between profit
generated by operations and profit generated by the use of liberal accounting policies.
12-11
E12–8
Req. 1 Preferred Common

(6,000 (40,000
Shares) Shares) Total
a) Noncumulative:
Preferred (6,000 x $2)............................................................... $12,000 $12,000
Balance to common ($62,000 – $12,000)......................... $50,000 50,000
$12,000 $50,000 $62,000
Per share.......................................................................................... $2.00 $1.25
b) Cumulative:
Preferred, arrears (6,000 x $2 x 2 years).......................... $24,000 $24,000
Preferred, current year (6,000 x $2)................................... 12,000 12,000
Balance to common ($62,000 – $36,000)......................... $26,000 26,000
$36,000 $26,000 $62,000
Per share.......................................................................................... $6.00 $0.65
Req. 2
The memo should address the following point.
The dividend per common share was lower under the second assumption because the
dividend per preferred share increased because of dividends in arrears while at the same
time total dividends remained the same.
Req. 3
Investors in shares expect to benefit from their investments in two ways: (1) receipt of
dividends, preferably in cash, and (2) appreciation in the value of the shares over time.
Preferred shareholders receive usually cash dividends when they are declared by the
company’s board of directors. However, preferred share prices do not fluctuate
significantly because many of the preferred shares issued by companies are callable or
redeemable at specific prices that are slightly higher than the issuance price. In contrast,
common shares may pay low dividends compared to preferred shares, but common
shareholders would be entitled to receive any excess of Profit over the preferred dividends.
These retained earnings cause an appreciation of the price per common share over time. In
this particular case, the price per preferred share, $25, is the same as the issuance price
($150,000/6,000 shares). In contrast, the price per common share has increased from $20
($800,000/40,000) to $40 per share by September 1, 2012. Shareholders who sell their
shares at $40 would earn a profit of $20 per share, which more than compensates for the
lower dividend rate on common shares.
12-12
E12–9
Item Effect of Cash Dividend (Preferred) Effect of Stock Dividend (Common)

Assets –No effect on the declaration date. No effect because no assets are
–Decreased by the amount of the disbursed.
dividend ($32,000) on the payment
date.
Liabilities –Increased on the declaration date No effect — no entry on the
($32,000). declaration date because no
–Decreased on the payment date contractual liability is created (no
($32,000). assets are disbursed).
Shareholders’ Decreased by the amount of the –Total shareholders’ equity is not
Equity dividend (retained earnings changed.
decreased by $32,000). –Retained earnings are reduced and
share capital is increased by the
same amount ($96,000).
E12–10
Req. 1
February 11, 2010

Dividends declared – common (–SE)...................................................... 203,400,000
Dividends payable – common (+L)..................................................... 203,400,000
Declaration of dividends on common shares ($0.36 x 565
million shares).
March 31, 2010

Dividends payable – common (–L).......................................................... 203,400,000
Cash (–A)........................................................................................................ 203,400,000
Payment of dividends on common shares.
Req. 2
February 11, 2010
Dividends declared – preferred* (–SE).................................................. 21,331,250
Dividends payable – preferred (+L)................................................... 21,331,250
Declaration of dividends on preferred shares.
March 31, 2010

Dividends payable – preferred (–L)........................................................ 21,331,250
Cash (–A)........................................................................................................ 21,331,250
Payment of dividends on preferred shares.
12-13
*Preferred dividends = $0.296875 x 16 million + $0.30 x 13 million + $0.278125 x 10
million + $0.278125 x 12 million + $0.28125 x 10 million + $0.375 x 10 million =
$21,331,250
12-14
E12–11
Req. 1
Before Stock After Stock
Dividend Dividend
Outstanding: 25,000 shares $250,000
Outstanding: 28,000 shares $304,000 (a)
Contributed surplus............................................................... 12,000 12,000
Retained earnings......................... 75,000 21,000 (b)
Total shareholders’ equity........................................... $337,000 $337,000
Computations:
(a) 25,000 x 12% = 3,000 additional shares; 3,000 x $18 = $54,000;
$250,000 + $54,000 = $304,000
(b) $75,000 – 3,000 shares x $18 = $21,000
Req. 2
Item Effects of Stock Dividend

Assets No change because no assets were disbursed.
Liabilities No change because no liability was created (no assets were to be
disbursed).
Shareholders’ – Total shareholders’ equity is not changed.
Equity – Retained earnings were reduced by the amount of the dividend
($54,000).
– Share capital was increased by the same amount ($54,000).
12-15
E12–12
Req. 1
Before Stock After Stock
Dividend Dividend
Share capital:
Common shares, authorized 60,000 shares
Outstanding: 36,000 shares.......................................... $360,000
Outstanding: 72,000 shares.......................................... $720,000
Retained earnings......................... 750,000 390,000
Total shareholders’ equity........................................... $1,110,000 $1,110,000
Req. 2
Item Effects of Stock Dividend
Assets No change because no assets were disbursed.
Liabilities No change because no liability was created (no assets were to be
disbursed).
Shareholders’ –Total shareholders’ equity not changed.
equity –Retained earnings were reduced by the amount of the dividend.
Because it was a large stock dividend (100%), retained earnings
were capitalized at the average issue price of the shares (36,000 x
100% x $10 = $360,000).
–share capital was increased by the same amount.
E12-13
Stock Dividend Stock Split

1. No change in assets No change in assets
2. No change in liability No change in liability
3. Increase in Common Shares No change in Common Shares
4. No change in shareholders’ equity: decrease No change in shareholders’
retained earnings and increase share capital equity
by the same amount.
5. Decreases market value Decrease in market value
Stock dividends are viewed as a distribution of the company’s earnings in the form of
additional shares instead of cash. Consequently, they result in a reduction of retained
earnings and a corresponding increase in share capital. In contrast, the purpose of a stock
split is to increase the number of shares outstanding so as to increase their marketability.
Therefore, stock splits do not affect the company’s equity accounts whereas stock
dividends cause a transfer of retained earnings to share capital.
12-16
E12-14
Req. 1
A corporation does not need to earn profit in a given year or quarter in order to declare and
pay dividends. There are two requirements to declare and pay dividends: (1) the balance of
retained earnings must have exceeded the amount of the loss, and (2) there must be
sufficient cash on hand. H&R Block’s cumulative retained earnings must have been
sufficient to absorb the losses and still maintain a positive balance. They are in effect
declaring dividends from prior years’ undistributed earnings. As explained in the news
release H&R normally has a loss in the second quarter. Shareholders may want and expect
a regular dividend over the year and this may be why a dividend is declared despite a
quarterly loss.
Req. 2
Clearly the board determined that the balances in retained earnings and cash were
sufficient to pay dividends. The board probably analyzed cash flow for the current and
future years to determine whether the payment of dividends would create any problems in
subsequent years. The board also probably took into consideration the impact of skipping a
dividend. If the company did not pay a dividend, many investors might assume that the
board concluded that the company might incur losses in the future. This lack of confidence
could have a significant impact on the price of the company’s shares. By paying a dividend,
the company sent a signal to the market that the board had confidence in the long-term
health of the company.
E12-15
Req. 1
Assets: –$15,000,000; Shareholders’ Equity: –$15,000,000
Cash decreases on the statement of financial position by $15 million, and the Common
shares account decreases by the same amount.
Req. 2
Winnebago may have decided to repurchase its shares in order to develop an employee
bonus plan that provides employees with some of the company’s shares as part of their
compensation. Because of security commission regulations concerning newly issued
shares, many companies find it cheaper to give their employees shares that were
repurchased from shareholders than to issue new shares.
Req. 3
If the repurchased shares are cancelled, then the amount of dividends that Winnebago
must pay in future years will be reduced. If the shares are used to compensate employees,
then the repurchased shares will be reissued to new shareholders, and there will be no
impact on the amount of dividends.
12-17
E12-16
Req. 1
Average repurchase price = $1,593,000 / 367,160 shares = $4.34
Req. 2
Summary journal entry:

Common shares (–SE)................................................................................... 1,556,000
Retained earnings (–SE)............................................................................... 37,000
Cash (–A)....................................................................................................... 1,593,000
Repurchase of common shares for cancellation.
Note that the Common shares account is reduced by the paid-in value of the shares. That is,
the amount that was received on average by the company when it sold the shares initially
to investors.
12-18
PROBLEMS
P12–1
Req. 1
Shares authorized = 200,000 (given)
Shares issued and outstanding = $2,125,000  $17 = 125,000
Req. 2
Earnings per shares: $118,000  125,000 shares = $0.94 (rounded).
Req. 3
Dividend per share: $75,000  125,000 shares = $0.60.
Req. 4
The prior period adjustment should be reported on the statement of retained earnings as an
addition to the beginning balance of retained earnings.
Req. 5
Retained earnings available for dividends = $164,000 (= $155,000, given + $9,000, prior
period adjustment).
Req. 6
Average issue price after the split, $17  2 = $8.50.
Number of shares outstanding after the split = 125,000 x 2 = 250,000 shares
Req. 7
Both the 100 percent stock split and the 100 percent stock dividend will result in doubling
the number of shares outstanding, and reducing the price per share by 50 percent. The
stock split reduces the average issue price per share, but does not change any of the
elements of shareholders’ equity. In contrast, a stock dividend results in a reduction of
retained earnings and an equal increase in share capital.
12-19
P12-2
Req. 1
(a) Cash (+A) (80,000 shares x $9)................................................................. 720,000

Land (+A) (40,000 shares x 70% x $9) ................................................. 252,000
Building (+A) (40,000 shares x 30% x $9)........................................... 108,000
Common shares (+SE) 1,080,000
Sold and issued 120,000 common shares at $9 per share.
(b) Cash (+A) (4,800 shares x $25)................................................................. 120,000

Preferred shares (+SE)............................................................................. 120,000
Sold and issued 2,400 preferred shares at $25 per share.
(c) Cash (+A)............................................................................................................. 124,000
Preferred shares (4,000 x $25) (+SE)................................................ 100,000
Common shares (2,000 x $12) (+SE).................................. 24,000
Sold and issued 2,000 preferred shares at $25 per share and
1,000 common shares at $12 per share.
(d) Closing entries:
Revenues (–R)................................................................................................... 440,000
Expenses (–E)............................................................................................... 320,000
Income summary........................................................................................ 120,000
Income summary............................................................................................. 120,000
Req. 2
Under the cost principle the cost of the non-cash assets received were valued at the current
market value of the shares issued. The price per share paid by the other organizers is the
market value for this purpose. The total cost is allocated between the land and building
based on the information given in the question (i.e., 30% of the value to the building).
Req. 3
Pappas Corporation
December 31, 2012
Share capital:
Preferred shares, 9 percent, $25 par value, 80,000 shares authorized, 8,800
shares outstanding............................................................................................................ $220,000
Common shares, no par value, 160,000 shares authorized; 122,000 shares
outstanding.......................................................................................................................... 1,104,000
Retained earnings...................................................................................................................... 120,000
Total shareholders’ equity................................................................................................ $1,444,000
12-20
P12-3
Req. 1
January 2
Land (+A)............................................................................................................
880,000
Building (+A) ($2,200,000 x 60%)........................................................... 1,320,000
Common shares (+SE)............................................................................... 2,200,000
Purchased land and building in exchange for common
shares.
January 3
Cash (+A).............................................................................................................
1,250,000
Preferred shares (+SE)............................................................................. 1,250,000
Sold and issued preferred shares for cash.
April 1
Dividends declared – P (–SE) [50,000 x $1]........................................50,000
Dividends payable (+L)............................................................................ 50,000
Declared quarterly dividends on preferred shares.
April 10
Dividends declared – C (–SE) [100,000 x 5% x $24]....................... 120,000
Common shares (+SE)............................................................................... 120,000
Declared and issued 10 percent common stock
dividend.
April 25
Dividend payable (–L) ..................................................................................50,000
Cash (–A)......................................................................................................... 50,000
Paid dividends on preferred shares.
Req. 2
Eddie Edward Limited
June 30, 2011
Share capital:
Preferred shares, $1, no par, callable at 103, 100,000 shares authorized, $1,250,000
50,000 shares outstanding.........................................................................................
Common shares, no par value, unlimited number of shares authorized; 2,320,000*
issued and outstanding 105,000 shares...............................................................
Retained earnings................................................................................................................... 330,000**
Total shareholders’ equity............................................................................................. $3,900,000
* $2,200,000 + $240,000 ** $500,000 – $50,000 – $120,000 = $330,000
12-21
P12-4
Req. 1
Case A — Preferred shares are non cumulative (total amount of dividends, $15,000):
Preferred Common
(1,200 (30,000
shares) shares) Total
Preferred ($30,000 x 7%)............................................................... $2,100 $ 2,100
Balance to common ($15,000 – $2,100)................................... $12,900 12,900
$2,100 $12,900 $15,000
Per share................................................................................................. $1.75 $0.43
Case B — Preferred shares are cumulative

(total amount of dividends, $6,300):
Preferred:
Arrears ($30,000 x 7% x 2 years)........................................... $4,200 $4,200
Current year ($30,000 x 7%).................................................... 2,100 2,100
Common –0–
$6,300 –0– $6,300
Per share................................................................................................. $5.25 $–0–
Case C — Preferred shares are cumulative

Preferred:
Arrears ($30,000 x 7% x 2 years)........................................... $4,200 $ 4,200
Current year ($30,000 x 7%).................................................... 2,100 2,100
Common ($33,000 – $6,300)......................................................... $26,700 26,700
$6,300 $26,700 $33,000
Per share................................................................................................. $5.25 $0.89
Req. 2
The declaration of a 10% common stock dividend results in the issuance of 3,000 (30,000 x
10%) additional shares, and a reduction in Retained earnings by $72,000 (3,000 x $24),
and an equal increase in Common shares.
12-22
P12-4 (continued)
Schedule of Comparative Differences (with Comments)

Item Amount of Dollar Increase (Decrease)
Cash Dividend–Common – Case C Common Stock Dividend
Assets $26,700 decrease No assets were disbursed.
Liabilities Current liabilities increased by $26,700 No effect – no contractual liability was
on the declaration date and decreased created.
by $26,700 on the payment date. The
net effect is zero.
Shareholders’ $26,700 decrease (debit to retained No effect on total shareholders’ equity.
equity earnings). The decrease in retained earnings by
$72,000 is matched by an equal
increase in share capital.
Summary comment:
(1) A cash dividend decreases assets and shareholders’ equity by the amount of the
dividend because resources were disbursed.
(2) A stock dividend does not change total assets or total shareholders’ equity because no
resources are disbursed; only the balances of individual components of shareholders’
equity are changed.
P12-5
Req. 1
David has some concern about whether Dana is looking in the right place on the statement
of cash flows for dividends. He shouldn’t be concerned; dividends paid are reported in the
financing activities section of the statement.
The repurchase of shares does not preclude the Company from paying dividends if the
board of directors decides to pay dividends. The increase in cash flows from operations
exceeds the amount paid to repurchase shares. However, the Company may have used the
extra cash from operations to pay for the acquisition of long-lived assets in order to
maintain a competitive position in the industry or to pay long-term debt in order to reduce
its financial risk.
Req. 2
The fact that the Company generated cash from operations that exceeded the amount paid
to repurchase shares indicates that the excess cash could have been used to pay dividends.
However, the decision of the Company’s board of directors to not declare dividends
indicates that they prefer to expand on the company’s investments and operations and/or
pay back some of the outstanding debt. Reinvesting the cash resources into productive
capacity is likely to increase profit in the future and increase share price, which would
compensate shareholders for the lack of dividend payments.
12-23
P12-6
Item Comparative Effects Explained

Cash Dividend on Preferred Stock Dividend on Common
a) Through December 31, 2011:
Assets None — No cash yet disbursed. None — No entry (no assets to

be disbursed).
Liabilities Increased current liability by the None — No entry made on the
amount of the dividend declaration date.
($100,000 = 25,000 x $4).
Shareholders’ Decreased by the amount of the Total shareholders’ equity is
equity dividend. not changed. Retained
earnings are decreased by
$90,000 (45,000 x 5% x $40),
and a new account Stock
Dividend to Be Issued is
credited for the same amount.
b) On February 15, 2012:
Assets Decreased by the amount of the None — No assets are

dividend liability (credit Cash disbursed.
$100,000).
Liabilities Decreased by the amount of the None — No liability was
cash payment (debit Dividends created.
Payable $100,000).
Shareholders’ No change since Dec. 31, 2011. Total shareholders’ equity not
equity The effect was recorded in 2011. changed. Stock Dividend to Be
Issued is reduced by the
amount of the dividend
($90,000), and Common
Shares is increased by the
same amount.
c) Overall Effects From December 1, 2011, through February 15, 2012:
Assets Decreased by $100,000. No effect.

Liabilities No effect. No effect.
Shareholders’ Decreased by $100,000. No effect on total equity.
equity
12-24
P12-7
Req. 1
March 3, 2006:
Dividends declared - common (–SE)...................................................... 7,280,000
Stock dividends to be issued (+SE)................................................ 7,280,000
Declaration of a 100% stock dividend on common shares to be
issued to current shareholders on May 24, 2006. Because it is
a large stock dividend, retained earnings are capitalized based
on the average issue price of the shares (1,300,000 x $5.60).
Note: The press release does not indicate the date of issuance of the additional
shares. We assume that they are issued on May 24, 2006 at the same time as
common dividends are paid.
May 24, 2006

Stock dividend to be issued (–SE)............................................................ 7,280,000
Common shares (+SE).......................................................................... 7,280,000
Issuance of shares to current shareholders as common stock
dividend.
March 3, 2006:
Dividends declared – common (–SE)...................................................... 936,000
Dividends payable (+L)....................................................................... 936,000
(1,300,000 x $0.72)
May 24, 2006:
Dividends payable (–L)................................................................................. 936,000
Cash (–A)................................................................................................... 936,000
Payment of cash dividend.
Req. 2
This simple question can give the instructor an excellent opportunity to discuss the
relevancy of dividend policy. There is a strong theoretical argument to be made that
dividend policy is irrelevant. There are several real world factors that make the question
more difficult to answer (e.g., the impact of taxes, information content of dividends, and the
clientele effect). The level of the discussion of this issue will depend on the amount of
finance that has been introduced during the instructor’s lectures.
Req. 3
The board must consider the balances in the retained earnings and cash accounts before
declaring a cash dividend. In addition, the board probably considered the impact of the
stock dividend and the increase in cash dividends on the price of the shares. They made the
decision with the expectation that it would have a favourable impact on the long-term
value of the shares.
12-25
P12-8
Req. 1
Balance of Retained Earnings at March 31, 2005:
Retained earnings, beginning of year..................................................... $74,494

Effect of prior period adjustment............................................................. (593)
Restated retained earnings ........................................................................ 73,901
Profit..................................................................................................................... 8,467
Dividends declared......................................................................................... (3,109)
Retained earnings, end of year.................................................................. 79,259
Andrew Peller Ltd.

March 31, 2005
Share capital................................................................................................. $ 7,375
Retained earnings....................................................................................... 79,259
Total Shareholders’ Equity..................................................................... $86,634
Req. 2
Retained earnings (–SE)............................................................................... 664

Income taxes recoverable (+A) ................................................................ 408
Inventories (–A)...................................................................................... 1,072
12-26
P12-9
Req. 1
Balance of Retained Earnings at December 31, 2009:

(millions of Canadian dollars)
Retained earnings, beginning of year..................................................... $10,650

Profit..................................................................................................................... 840
Dividends declared......................................................................................... (929)
Retained earnings, end of year.................................................................. $10,561
Req. 2
Thompson Reuters Corporation
December 31
2009 2008
Share capital 3,129 3,050
Contributed surplus 220 156
Retained earnings 10,561 10,650
Accumulated other comprehensive income (loss) (1,471) (2,268)
Total shareholders’ equity 12,439 11,588
12-27
2009 2008
Share Capital
Balance, beginning of year 3,050 2,727
Stock options exercised 57 46
Shares issued under dividend reinvestment plan 22 190
Shares issued – 96
Shares purchased for cancellation – (9)
Balance, end of year 3,129 3,050
Contributed Surplus
Balance, beginning of year 156 109
Stock-based compensation 64 218
Excess of purchase price over carrying value of shares
repurchased and cancelled – (171)
Balance, end of year 220 156
Retained Earnings
Balance, beginning of year 10,650 10,476
Profit 840 965
Dividends declared (929) (791)
Balance, end of year 10,561 10,650
Accumulated other comprehensive income

Balance, beginning of year (2,268) 1
Other comprehensive income (loss) 797 (2,269)
Balance, end of year (1,471) (2,268)
P12-10
Req. 1
The repurchase of common shares could be done for a variety of reasons:

 Reduction of the number of common shares outstanding in order to increase earnings
per share,
 Increase the price per share by reducing the number of common shares outstanding,
 A smaller number of outstanding common shares allows the company’s management to
maintain control of the company’s operations as well as investment and financing
activities,
 Lack of investment opportunities for the use of cash generated from operations.
 Planned issuance of additional shares to management personnel as a result of stock
options with the desire to maintain the same number of shares outstanding.
Req. 2
Journal entry for summary of repurchase transactions (in millions):
12-28
Common shares (–SE)................................................................................................. 31,063,000
Retained earnings (–SE) ........................................................................................... 12,964,000
Cash (–A)................................................................................................................. 44,027,000
Repurchase of 2,694,376 common shares at $16.34 per share.
Req. 3
Average issuance price per common share = $147,161 / 30,468 = $4.83 (rounded)
The price per share has increased significantly since the company sold and issued its shares
in the past. The increase in the share price reflects the company’s profitable operations
over time and the retention of earnings for reinvestment in the business.
Req. 4
The total amount of dividends that would be declared and paid in the future will be
reduced because the total number of shares outstanding will be smaller as a result of the
repurchased shares.
12-29
P12-11
Req. 1
Case A: Sole Proprietorship

A, Capital......................................................................................................... 20,000
Income summary................................................................................... 20,000
A, Capital......................................................................................................... 8,000
A, Drawings.............................................................................................. 8,000
Case B: Partnership
A, Capital......................................................................................................... 10,000
B, Capital......................................................................................................... 10,000
Income summary................................................................................... 20,000
A, Capital......................................................................................................... 5,000
B, Capital......................................................................................................... 9,000
A, Drawings.............................................................................................. 5,000
B, Drawings.............................................................................................. 9,000
Case C: Corporation
Retained earnings...................................................................................... 20,000
Income summary................................................................................... 20,000
12-30
P12-11 (continued)
Req. 2
Case A: Sole Proprietorship

NewBiz
Statement of Owner’s Equity
December 31, 2012
A, Capital, January 1, 2012........................................................................... $50,000
Less: Net loss..................................................................................................... 20,000
Total.................................................................................................................. 30,000
Less: Withdrawals........................................................................................... 8,000
A, Capital, December 31, 2012................................................................... $22,000
Case B: Partnership
NewBiz
Partners’ Equity
December 31, 2012
A, Capital.............................................................................................................. $25,000
B, Capital.............................................................................................................. 19,000
Total Partners’ Equity.............................................................................. $44,000
Statement of Partners’ Equity
A B Total
Partners’ equity, January 1, 2012.................................. $40,000 $38,000 $78,000
Deduct: Net loss..................................................................... 10,000 10,000 20,000
Total....................................................................................... 30,000 28,000 58,000
Deduct: Withdrawals.......................................................... 5,000 9,000 14,000
Partners’ Equity, December 31, 2012.......................... $25,000 $19,000 $44,000
Case C: Corporation
NewBiz
December 31, 2012
Share capital, authorized 30,000 shares, outstanding 15,000
shares........................................................................................................... $150,000
Contributed surplus.................................................................................. 5,000
Total contributed capital.................................................................... 155,000
Retained earnings........................................................................................... 45,000*
Total Shareholders’ Equity........................................................... $200,000
*$65,000 – $20,000 (loss)
12-31
ALTERNATE PROBLEMS
AP12–1
Req. 1
Common Shares $1,500,000 / $75 = 20,000 shares
Shares issued and outstanding = 20,000
Req. 2
Earnings per share = $4,800,000 / 20,000 shares = $240
Req. 3
Total dividends paid on common shares during 2012 are $40,000 (20,000 x $2).
Req. 4
After the split, the average issue price per share will be $37.50, and the number of
outstanding shares will double to 40,000.
Req. 5
Stock dividends do not affect the total amount of shareholders’ equity. They simply
decrease retained earnings and increase share capital by the same amount of $182,000
(20,000 x 10% x $91). In this case, the market value of the shares is used to determine the
decrease in retained earnings because the dividend is small (less than 20 – 25%).
12-32
AP12–2
Req. 1
(a) Cash (+A) ............................................................................................................ 1,650,000

Common shares (400,000 shares x $35) (+SE)............................. 1,400,000
Preferred shares (10,000 shares x $25) (+SE).............................. 250,000
Issued share capital for cash.
(b) Land (+A)............................................................................................................ 125,000

Preferred shares (5,000 shares x $25) (+SE)................................. 125,000
Issued preferred shares in exchange for plant site.
(c) Dividends declared (–SE) [(10,000 +5,000) x (8%/4) x $25] 7,500

Cash (–A)........................................................................................................ 7,500
Declared and paid quarterly cash dividend on preferred shares.
(d) Income summary............................................................................................. 67,000

Closing entry for profit.
Req. 2
The significant difference between acquiring an asset for cash and acquiring it in exchange
for shares is the cash flow impact. In terms of accounting, the acquired asset is recorded at
its fair market value without regard to the nature of the consideration that is paid. Some
students see the issuance of shares to have no real cost to the corporation because it is
simply issuing a piece of paper. The payment of cash seems to have a higher economic cost
because of the time value of money. The issuance of new shares has an economic cost that
is as real because it involves giving up a part ownership in all of the other assets of the
company. There are also costs associated with issuing shares.
12-33
AP12–3
Req. 1
March 10:
Building (+A).....................................................................................................1,000,000
Preferred shares (+SE) (14,000 x $50)............................................ 700,000
Common shares (+SE)............................................................................... 300,000
Issued 14,000 preferred shares and 15,000 common shares
in exchange for building.
July 1:
Dividends declared – Common (–SE)..................................................... 52,000
Dividends declared – Preferred (–SE).................................................... 132,500
Dividend payable – Preferred shares (+L)....................................... 52,000
Dividend payable – Common shares (+L)........................................ 132,500
Declared dividends on both common shares and preferred
shares, including dividends in arrears.
Preferred: 6,000 x $2 x 1 year + (6,000 + 14,000) x $2
Common: (250,000 + 15,000) x $0.50
August 1:
Dividend payable – Preferred shares (−L) .......................................... 52,000
Dividend payable – Common shares (−L) ........................................... 132,500
Cash (–A)......................................................................................................... 184,500
Paid dividends on preferred and common shares.
December 31:
Income summary............................................................................................. 385,000
Closing entry for profit.
Req. 2
Freeman Inc.
December 31, 2011
Share capital:
Preferred shares, $2, cumulative, no par value, issued and outstanding $1,000,000*
20,000 shares........................................................................................................................
Common shares, no par value, issued and outstanding 265,000 shares................ 800,000**
Retained earnings ($600,000 + $385,000 - $184,500)................................................... 800,500
Total shareholders’ equity........................................................................................................$2,600,500
*$300,000 + $700,000
** $500,000 + $300,000
12-34
AP12–4
Req. 1
Case A — Preferred shares are non-cumulative (total amount of dividends, $25,000):
Preferred Common
(8,400 shares) (50,000
shares) Total
Preferred ($210,000 x 8%)............................................................... $16,800 $16,800
Balance to common ($25,000 – $16,800)................................... $8,200 8,200
$16,800 $8,200 $25,000
Per share.................................................................................................... $2.00 $.164
Case B — Preferred shares are cumulative

Preferred:
Arrears ($210,000 x 8% x 2 years = $33,600)..................... $25,000 $25,000
Current year (none available)..................................................... –0– –0–
$25,000 –0– $25,000
Per share.................................................................................................... $2.98 –0–
Case C — Preferred shares are cumulative

Preferred:
Arrears ($210,000 x 8% x 2 years)........................................... $33,600 $33,600
Current year ($210,000 x 8%).................................................... 16,800 16,800
Common ($75,000 – $50,400). $24,600 24,600
$50,400 $24,600 $75,000
Per share.................................................................................................... $6.00 $.049
12-35
AP12–4 (continued)
Req. 2
Schedule of Comparative Differences (with Comments)
Item Amount of Dollar Increase (Decrease)
Cash Dividend–Common – Case C Common Stock Dividend
Assets $24,600 decrease No assets were disbursed.
Liabilities Current liabilities increased by No effect – no contractual liability
$24,600 on the declaration date was created.
and decreased by $24,600 on the
payment date. The net effect is
zero.
Shareholders’ $24,600 decrease (debit to No effect on total shareholders’
equity retained earnings). equity. Retained earnings are
reduced by the amount of the
dividend and the Common shares
account is increased by the same
amount $375,000 (50,000 x 15%
x $50).
Summary comment:
(1) A cash dividend decreases assets and shareholders’ equity by the amount of the
dividend because resources were disbursed.
(2) A stock dividend does not change total assets or total shareholders’ equity because no
resources are disbursed; only the balances of individual components of shareholders’
equity are changed.
12-36
AP12–5
Req. 1
Balance of Retained Earnings at April 25, 2010:

Retained earnings, beginning of year..................................................... $ 932.6

Excess of purchase price over carrying value of Class A
multiple voting shares and Class B subordinate voting
shares repurchased and cancelled (43.4)
Restated retained earnings ........................................................................ 889.2
Profit..................................................................................................................... 302.9
Dividends declared......................................................................................... (25.1)
Retained earnings, end of year.................................................................. $1,167.0
Req. 2
Alimentation Couche Tard Inc.
April 25, 2010
Share capital................................................................................................. $320.6
Contributed surplus.................................................................................. 17.7
Retained earnings....................................................................................... 1,167.0
Accumulated other comprehensive income.................................... 109.0
Total Shareholders’ Equity..................................................................... $1,614.3
Share capital
Balance, beginning of year $329.1
Shares issued under stock option-based compensation 1.1
Shares issued under stock options exercised 3.4
Shares purchased for cancellation (13.0)
Balance, end of year $320.6
Accumulated other comprehensive income

Balance, beginning of year $ 46.6
Other comprehensive income for the year, net 62.4
Balance, end of year $109.0
12-37
AP12-6
Req. 1
The repurchase of common shares could be done for a variety of reasons:

 Reduction of the number of common shares outstanding in order to increase earnings
per share,
 Increase the price per share by reducing the number of common shares outstanding,
 A smaller number of outstanding common shares allows the company’s management to
maintain control of the company’s operations as well as investment and financing
activities,
 Lack of investment opportunities for the use of cash generated from operations.
 Issuance of additional shares to management personnel as a result of stock options with
the desire to maintain the same number of shares outstanding.
Req. 2
Journal entry for summary of repurchase transactions (in millions):
Common shares (–SE)................................................................................................. 67,300,000
Retained earnings (–SE) ........................................................................................... 24,100,000
Cash (–A)................................................................................................................. 91,400,000
Repurchase of 12,311,000 common shares at $7.42 per share.
Req. 3
Average issuance price per common share = $648.1 / 118.6 = $5.46 (rounded)
The price per share has increased significantly since the company sold and issued its shares
in the past. The increase in the share price reflects the company’s profitable operations
over time and the retention of earnings for reinvestment in the business.
Req. 4
The total amount of dividends that would be declared and paid in the future will be
reduced because the total number of shares outstanding will be smaller as a result of the
repurchased shares. The reduction will be approximately 9 percent (12.3 ÷ 130.9).
12-38
CASES AND PROJECTS
FINDING AND INTERPRETING FINANCIAL INFORMATION
CP12–1
Req. 1
Nestlé has only one class of shares authorized. Each share confers the right to one vote. No
shareholders may be registered with the right to vote for shares which they hold, directly
or indirectly, in excess of 5 percent of the share capital.
These details are provided in Note 21 to the financial statements.
Req. 2
Note 21.4 states that as at December 31, 2008 there were 3,830,000,000 shares
outstanding.
Req. 3
The cash flow statement shows that Nestlé paid CHF 4,573 million in dividends in 2008.
Note 21.8 provides details of the dividends paid in 2008 and those payable in 2009. The
note states:
“… Shareholders approved the proposed dividend of CHF 12.20 per share, resulting in a
total dividend of CHF 4,573 million.”
Dividends payable are not accounted for until they have been ratified at the Annual
General Meeting. At the meeting on 23 April 2009, a dividend of CHF 1.40 per share will be
proposed, resulting in a total dividend of CHF 5127 million. For further details, refer to the
Financial Statements of Nestlé S.A.
The Financial Statements for the year ended 31 December 2008 do not reflect this
proposed distribution, which will be treated as an appropriation of profit in the year
ending 31 December 2009.”
Req. 4
Nestlé’s notes to its financial statements do not indicate that it declared any stock dividend.
However, Note 21.1 indicates that the Company plans a 10 for 1 stock split that is intended
to increase the liquidity and tradability of the stock.
12-39
FINANCIAL REPORTING AND ANALYSIS CASES
CP12-2
Req. 1
Dividends declared = 2,917,000,000 shares x $1.64 = $4,783,880,000.
Req. 2
Companies retain earnings instead of declaring dividends to shareholders so that they can
preserve cash and use it for operating purposes and to expand on the company’s operating
and investing activities. Companies retain earnings and preserve cash with the expectation
that reinvesting in the company will be more beneficial to shareholders than simply paying
them cash.
Req. 3
Earnings per share = Profit Available to Common Shareholders/Weighted Average

Number of Shares Outstanding
= $13,436 / 2,917 = $4.61
EPS is widely used in evaluating the operating performance and profitability of a company.
It indicates how much the company earned during a period on a per share basis. But it
ignores the amount invested to generate these earnings, and it cannot be used to compare
performance of different companies because of differences in the market prices of their
shares.
12-40
CP12-3
Req. 1
The preferred securities have the following characteristics:
1. They carry a preferential annual fixed dividend amount of $1.30 per share,
2. The dividend is not cumulative. Shareholders will lose the annual dividend if the
company’s board of directors does not declare dividends in a given year.
3. The shares are callable (redeemable) starting October 31, 2009 at an initial amount
of $25.60 and then decreasing by $0.20 per share for each subsequent year.
4. The shares are convertible to common shares at the option of the Corporation,
starting July 31. 2012.
5. The shares are convertible to common shares at the option of the holder, starting
October 31, 2012.
Req. 2
The preferred shares have some of the characteristics of debt. They pay a fixed dividend
rate, much like a note or bond that pays a fixed interest rate. They are also redeemable at
the company’s option starting October 31, 2009, and convertible into common shares at the
option of the holder on or after October 31, 2012. By giving the holders of the preferred
shares the option to convert their shares to common shares at specific dates, the company
is essentially indicating that it does not want to keep these shares forever. In some cases,
the company’s intention of issuing preferred shares instead of notes or bonds should be
taken into consideration in properly classifying these financial instruments. Even though
Power Corporation labeled them as preferred shares, it classified them as liabilities on its
statement of financial position.
12-41
CP12-4
Req. 1
The dividend payout ratio, computed in the table below, has increased steadily over time,
especially from 2003 to 2008. The ratio increased by 2.6 percentage points per year, on
average, during this five-year period. Assuming a dividend payout ratio of 32% percent
(29.4% + 2.6%) for 2011, and a profit of $15,400, the estimated amount of dividends for
2011 is $4,928.
2010 2009 2008 2007 2006 2005 2004 2003

Dividends $4,217 $3,746 $3,586 $ 2,802 $ 2,511 $ 2,214 $1,569 $1,328
Net income (Profit) 14,335 13,346 12,075 11,284 11,231 10,267 9,054 7,955
Dividend payout ratio 29.4% 28.1% 29.7% 24.8% 22.3% 21.6% 17.3% 16.7%
Req. 2
The dividend per share information shows that dividends for 2009 and 2010 increased by
$0.07 and $0.26 per share, respectively, over the previous year. One could then expect a
dividend of $1.47 per share for 2011, reflecting an increase by $0.26 over the dividend
level for 2010.
This estimate can be used to calculate the total amount of dividends for 2011. Assuming
that the number of shares outstanding does not change during 2011 ($4,217,000,000 /
$1.21), then the estimated dividends for 2011 would be $5,123,132,100 (= $1.47 x
3,485,123,900 shares). This estimated amount is 3.95% more than the $4,928 million
computed above. This indicates that the dividend per common share is increasing faster
than the dividend payout ratio.
Req. 3
Dividend yield = Dividend per share / Market price per share
2.50 percent = $1.21 / Price; Price = $1.21 / 0.025 = $48.40
12-42
CRITICAL THINKING CASES
CP12-5
The payment of a stock dividend is a cosmetic solution with no cash flow effects. If the
stock is valued by the market for its steady cash dividends, then a stock dividend will not
prevent a negative response. Unfortunately, there is no easy way to solve this problem. We
find that most students think the priority should be on maintaining the long-term health of
the company.
CP12-6
We do not have any easy answer to this question. We use this case to discuss corporate
governance and responsibilities.
FINANCIAL REPORTING AND ANALYSIS TEAM PROJECT
CP12-7
Student response depends on the company selected.
12-43

Libby 4ce Solutions Manual - Ch12

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Libby 4ce Solutions Manual - Ch12

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Chapter 12

Reporting and Interpreting Owners’ Equity

1. A Corporation is a separate legal entity (authorized by law to operate as an individual).

2. The charter of a corporation is a legal document issued by the government that

4. Common shareholders may:

a) Vote in the shareholders’ meeting (or by proxy) on major issues concerning

8. The two basic sources of shareholders’ equity are:

A prior period adjustment is reported as an adjustment to the beginning balance of

The choice between investing in common or preferred shares depends on the

Alternate Cases and

E = Easy M = Moderate D = Difficult

b. Land (+A) (600 shares x $22).................................................................... 13,200

c. Cash (+A) (1,000 shares x $23)................................................................. 23,000

d. Retained earnings (–SE)............................................................................... 7,000

a. Cash (+A) (9,000 shares x $25)................................................................. 225,000

b. Cash (+A) (6,000 shares x $50)................................................................. 300,000

c. Cash (+A) (8,000 shares x $25)................................................................. 200,000

d. Income summary............................................................................................. 42,000

Retained earnings, January 1, 2011.............................................................................. $67,000

Req. 1 Preferred Common

The memo should address the following point.

Item Effect of Cash Dividend (Preferred) Effect of Stock Dividend (Common)

February 11, 2010

March 31, 2010

March 31, 2010

Item Effects of Stock Dividend

Stock Dividend Stock Split

Assets: –$15,000,000; Shareholders’ Equity: –$15,000,000

Average repurchase price = $1,593,000 / 367,160 shares = $4.34

Summary journal entry:

Earnings per shares: $118,000  125,000 shares = $0.94 (rounded).

Dividend per share: $75,000  125,000 shares = $0.60.

Average issue price after the split, $17  2 = $8.50.

Number of shares outstanding after the split = 125,000 x 2 = 250,000 shares

(a) Cash (+A) (80,000 shares x $9)................................................................. 720,000

(b) Cash (+A) (4,800 shares x $25)................................................................. 120,000

Case B — Preferred shares are cumulative

Case C — Preferred shares are cumulative

Schedule of Comparative Differences (with Comments)

Item Comparative Effects Explained

a) Through December 31, 2011:

Assets None — No cash yet disbursed. None — No entry (no assets to

b) On February 15, 2012:

Assets Decreased by the amount of the None — No assets are

c) Overall Effects From December 1, 2011, through February 15, 2012:

Assets Decreased by $100,000. No effect.

May 24, 2006

Balance of Retained Earnings at March 31, 2005:

Retained earnings, beginning of year..................................................... $74,494

Andrew Peller Ltd.

Retained earnings (–SE)............................................................................... 664

Balance of Retained Earnings at December 31, 2009:

Retained earnings, beginning of year..................................................... $10,650

Accumulated other comprehensive income

The repurchase of common shares could be done for a variety of reasons:

Case A: Sole Proprietorship

Case A: Sole Proprietorship

*$65,000 – $20,000 (loss)

(a) Cash (+A) ............................................................................................................ 1,650,000

(b) Land (+A)............................................................................................................ 125,000

(c) Dividends declared (–SE) [(10,000 +5,000) x (8%/4) x $25] 7,500

(d) Income summary............................................................................................. 67,000

Case B — Preferred shares are cumulative