ADMS 3595 Lecture Notes - Lecture 6: Measurement Uncertainty, Authorised Capital, Oregano
ADMS 3595 Solutions to Self Practice Questions
1
EXERCISE 15-2
(a)
Original Subscription:
Share Subscriptions Receivable .................................................. 880,000
(40,000 shares X $22 each)
Common Shares Subscribed .............................................. 880,000
Collection of Down Payments:
Cash ($880,000 X .35) ................................................................. 308,000
Share Subscriptions Receivable ......................................... 308,000
Collection of Balance:
Cash ($880,000 – $308,000) ........................................................ 572,000
Share Subscriptions Receivable ......................................... 572,000
Issuance of Shares:
Common Shares Subscribed ....................................................... 880,000
Common Shares ................................................................ 880,000
(b) Under ASPE, whether the Share Subscriptions Receivable account should be presented
as an asset or a contra equity account is a matter of professional judgement, although
conceptually, it makes sense to record as a reduction of equity. Note that Section 3251.10
of the CPA Canada Handbook, Part II requires that share purchase loans receivables must
be shown as contra equity unless the borrower is fully responsible for declines in value of
the shares and there is reasonable assurance that the full amounts will be collected. In the
United States, the SEC requires the Share Subscriptions Receivable account to be
presented as a reduction of equity. Under IFRS, specific guidance in not given, but using
first principles, the company would likely end up treating it the same as noted above.
(c) If a subscriber is unable to pay all instalments and therefore defaults on the agreement,
the possibilities include: (1) returning the amount already paid by the subscriber (possibly after
deducting some expenses), (2) treating the amount paid as forfeited and therefore transferring it
to the Contributed Surplus account, or (3) issuing fewer shares to the subscriber so that the
number of shares issued is equivalent to what the subscription payments already received
would have paid for fully. Note that in some jurisdictions, the limit to the liability of the subscriber
in case of corporate failure is the subscription price, rather than the amount paid up at the time
of the failure.
EXERCISE 15-6
Preferred
Common
Total
(a)
One year in arrears*
$ 37,500
$ 37,500
Current year**
37,500
$180,000
217,500
255,000
Participating (5.2414%***)
32,758
157,242
190,000
$107,758
$337,242
$445,000
*25,000 X $1.50 = $37,500
**Pro rata share to common:
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ADMS 3595 Solutions to Self Practice Questions
2
$3,000,000 X 6%**** = $180,000
***
$3,625,000
$255,000 - $445,000
= 5.2414%
5.2414% x 625,000 = 32,758
5.2424% x 3,000,000 = 157,242
****Dividend rate per share for preferred shares is 6% calculated: [$1.50 ÷ ($625,000 ÷
25,000 shares)]
(b)
$37,500
$407,500
$445,000
(c)
Current year
$37,500
$180,000
$217,500
Additional 4%** to common
120,000
120,000
337,500
Participating (2.9655%*)
18,535
88,965
107,500
$56,035
$388,965
$445,000
*
$3,625,000
$337,500 - $445,000
= 2.9655%
2.9655% x 625,000 =18,535
2.9655% x 3,000,000 = 88,965
**Dividend rate on common shares
Less: matching amount ($37,500 / $625,000)
Additional rate to common shares
10%
(6%)
4%
EXERCISE 15-11
(a)
Dividends ...........................................................
2,360,000
Common Stock Dividends
Distributable .........................................
2,360,000
(400,000 X 10% X $59)
Common Stock Dividends
Distributable ...................................................
2,360,000
Common Shares .....................................
2,360,000
(b)
Dividends (400,000 X $59) .................................
23,600,000
Common Stock Dividends
Distributable .........................................
23,600,000
Common Stock Dividends
Distributable ...................................................
23,600,000
Common Shares .....................................
23,600,000
(c) No entry. The number of shares outstanding increases to 800,000.
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ADMS 3595 Solutions to Self Practice Questions
3
EXERCISE 15-18
(a) Bennington Corp. is the more profitable in terms of return on total assets. This may be
shown as follows:
Bennington Corp.
$840,000
= 20%
$4,200,000
Kao Corp.
$756,000
= 18%
$4,200,000
It should be noted that these returns are based on net income related to total assets,
where the ending amount of total assets is considered representative. If the rate of return
on total assets uses net income before interest but after tax in the numerator, the rates of
return on total assets are as shown below:
Bennington Corp.
$840,000
= 20%
$4,200,000
Kao Corp.
$756,000 + $120,000 – $36,000*
=
$840,000
$4,200,000
$4,200,000
=
20%
*Tax on $120,000 x 30% = $36,000
(b) Kao Corp. is the more profitable in terms of return on shareholders’ equity. This may be
shown as follows:
Kao Corp.
$756,000
= 28%
$2,700,000
Bennington Corp.
$840,000
= 23.33%
$3,600,000
Note to instructor: To explain why the difference in rate of return on assets and rate of return on
shareholders’ equity occurs, the following schedule might be provided to the student.
Kao Corp.
Fund Supplies
Funds
Supplied
Rate of Return on
Funds at 20%*
Cost of
Funds
Accruing to
Common
Shares
Current liabilities
$ 300,000
$ 60,000
$ 0
$ 60,000
Long-term debt
1,200,000
240,000
84,000
**
156,000
Common shares
2,000,000
400,000
0
400,000
Retained earnings
700,000
140,000
0
140,000
$4,200,000
$840,000
$84,000
$756,000
*Determined in part (a), 20%
**The cost of funds is the interest of $120,000 (1,200,000 X 10%). This interest cost must be
reduced by the tax savings of $36,000 (30%) related to the interest.
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Document Summary
Share subscriptions receivable (40,000 shares x each) United states, the sec requires the share subscriptions receivable account to be presented as a reduction of equity. Under ifrs, specific guidance in not given, but using first principles, the company would likely end up treating it the same as noted above. Note that in some jurisdictions, the limit to the liability of the subscriber in case of corporate failure is the subscription price, rather than the amount paid up at the time of the failure. ****dividend rate per share for preferred shares is 6% calculated: [. 50 (,000 . The number of shares outstanding increases to 800,000. Exercise 15-11 (a) (400,000 x 10% x ) Bennington corp. is the more profitable in terms of return on total assets. It should be noted that these returns are based on net income related to total assets, where the ending amount of total assets is considered representative.
