CHAPTER 10
Owners’ Equity
EXERCISES
E10-1.
a.
Dr. Cash 6,000,000
Cr. Common shares 6,000,000
To record the issue of 500,000 common shares
(500,000 shares $12 per share = $6,000,000)
b.
No journal entry is required for a stock split.
c.
June 7, 2015
Dr. Dividends (Retained Earnings) 27,500,000
Cr. Dividends payable 27,500,000
(250,000,000 shares $0.11 per share = $27,500,000)
July 4, 2015
Dr. Dividends payable 27,500,000
Cr. Cash 27,500,000
d.
Dr. Cash (2,000,000 shares $7.50 per share) 15,000,000
Cr. Common shares ($0.01 2,000,000) 20,000
Contributed surplus ($7.49 2,000,000) 14,980,000
Copyright © 2010 McGraw-Hill Ryerson Ltd. 1 e.
Dr. Retained earnings 6,720,000
Cr. Common shares 6,720,000
Using the market value of the shares on April 21, 2015 ((20,000,000 8%) $4.20).
Dr. Retained earnings 6,960,000
Cr. Common shares 6,960,000
Using the average price paid for the shares by investors
((20,000,000 8%) ($87,000,000 ÷ 20,000,000 shares)).
f.
December 4, 2015
Dr. Inventory 1,600,000
Cr. Gain on disposal of inventory 1,600,000
To recognize the gain on disposal of inventory.
(Market value – Carrying amount = $3,700,000 – $2,100,000)
December 4, 2015
Dr. Retained earnings 3,700,000
Cr. Property dividend distributable 3,700,000
To record the property dividend.
December 21, 2015
Dr. Property dividend distributable 3,700,000
Cr. Inventory 3,700,000
To distribute the property dividend.
E10-3.
Copyright © 2010 McGraw-Hill Ryerson Ltd. 2 Owners' Equity
Accumulate
Preferred Common d Retained
Date Asset Liability Shares Shares OCI Earnings
$22,000,00 $360,000,00 $218,500,00
Beginning 31-Dec-13 0 0 $1,750,000 0
(60,000,000
i During ) (60,000,000)
ii During 44,000,000 44,000,000
iii During 11,500,000 11,500,000
iv During 12,000,000 12,000,000
v During (4,500,000) (4,500,000)
vi During 44,000,000 (44,000,000)
ix During 71,400,000 (71,400,000)
Net Income 31-Dec-14 (800,000) 42,000,000
$71,400,00 $33,500,00 $460,000,00
Ending 31-Dec-14 $3,000,000 0 0 0 $950,000 $80,600,000
Number of Shares Outstanding
Preferred Common
Shares Shares
Number outstanding December 31, 2013 1,000,000 75,000,000
Issue of common shares 4,000,000
Issue of preferred shares 500,000
Issue of common for shares of another
company 1,000,000
Share dividend 4,000,000
Number outstanding December 31, 2014 1,500,000 84,000,000
Copyright © 2010 McGraw-Hill Ryerson Ltd. 3 Shareholders' equity
Preferred Shares (Authorized, 2,500,000; Outstanding, 1,500,000) $33,500,000
Common Shares (Authorized, 200,000,000; Outstanding, 84,000,000) 460,000,000
Accumulated OCI 950,000
Retained Earnings 80,600,000
$575,050,00
Total 0
E10-5.
Dr. Retained earnings 1,875,000
Cr. Accumulated depreciation 1,875,000
($5,000,000 ÷ 8 years 3 years)
In 2013, retained earnings must be reduced by $1,875,000 to $15,925,000. Since the error was discovered during 2013 the deprecation
expense of $625,000 for 2013 can be properly recorded for that year. The $1,875,000 adjustment has no bearing on 2013 and the error
results in prior years’ statements being misstated so retroactive adjustment makes sense.
E10-7.
2012 2013 2014 2015 2016
$95,00 $101,00
Net Income $ $75,000 $74,300 0 0
(10,000
OCI ) 3,700 20,000 (6,000)
115,00
Comprehensive income 65,000 78,000 0 95,000
Retained earnings (assuming after dividends) 250,00 315,000 377,300 457,30 538,300
Copyright © 2010 McGraw-Hill Ryerson Ltd. 4 0 0
(18,000 (14,300
Accumulated OCI (8,000) ) ) 5,700 (300)
Dividends 10,000 12,000 15,000 20,000
E10-9.
Basic Earnings per share = (Net income – preferred dividends)
Weighted average common shares
A B C D E
$400,00 $1,525,00 $(2,000,000 $45,000,00
Net Income 0 0 ) $400,000 0
Number of preferred shares outstanding - 500,000 1,000,000 1,000,000 10,000,000
Preferred dividends paid per share $0 $2 $0 $1 $3
$1,000,00 $1,000,00 $30,000,00
Preferred dividends paid $0 0 $0 0 0
Net income available to common shareholders $400,00 ($2,000,000 $15,000,00
(Net income – preferred dividends) 0 525,000 ) ($600,000) 0
Common shares issued June 30, 2014 - 500,000 - - 20,000,000
Common shares repurchased June 30, 2014 - 1,000,000 700,000 -
Percentage of year 50% 50% 50% 50% 50%
Amount added to common shares for weighted average - 250,000 (500,000) (350,000) 10,000,000
100,000,00
Number of common shares outstanding on Dec. 31, 2013 500,000 2,500,000 10,000,000 5,000,000 0
110,000,00
Weighted average common shares 500,000 2,750,000 9,500,000 4,650,000 0
Basic EPS (Dec. 31, 2014) $0.80 $0.19 ($0.21) ($0.13) $0.14
Copyright © 2010 McGraw-Hill Ryerson Ltd. 5 E10-11
Owners' Equity # of Shares - Issued
Preferred Common Retained Preferred
Date Asset Liability Shares Shares Earnings Shares
$7,500,00
i 1-Jul-14 0 $ $ $7,500,000 $
ii During 750,000 750,000
iii During 375,000 375,000 5,000
Net Income 30-Jun-15 (250,000)
Ending 30-Jun-15 $- $375,000 $8,250,000 ($250,000) 5,000
30-Jun-15 Total common shareholders’ equity 8,000,000
Total shareholders’ equity 8,375,000
a.
DR CR
i Cash 7,500,000
Common shares 7,500,000
Distribution rights
ii (asset) 750,000
Common shares 750,000
iii Cash 375,000
Preferred shares 375,000
b.
Shareholders' equity
Preferred Shares, no par value, non-cumulative, non-
participating,
redeemable @ $120 per share by 2019 (outstanding, 5,000) $375,000
Common Shares (outstanding, 600,000) 8,250,000
Retained Earnings (250,000)
$8,375,00
Total 0
c.
The ability to pay dividends depends on having adequate cash to do so. From the
available information it isn’t possible to tell whether enough cash is on hand or whether
it’s tied up in non-liquid assets. It would seem unlikely that a new business would be in a
position to pay dividends. However, in principle it could. Positive retained earnings
aren’t a requirement for the payment of dividends. If they did pay dividends, then the
dividend could be considered a partial return of the common shareholders’ original
investment or it would reduce negative (or deficit) retained earnings even more. As long
as Kamsack can meet its current liabilities, they have no restrictive covenants preventing
Copyright © 2010 McGraw-Hill Ryerson Ltd. 6 the payment of dividends, and they have the means to pay the dividends then they can
pay dividends.
E10-13.
a.
Number of Shares -
Issued
Weighted
Preferred Common average
shares shares Months % common
75,000 4,800,000 12 100% 4,800,000
500,000 8 67% 333,333
250,000 3 25% 62,500
75,000 6,750,000 5,195,833
Note: Cumulative preferred dividends are subtracted from net income whether they have
been paid or not.
Basic Earnings per share = Net income – preferred dividends
Weighted average common shares
30-Sep-14
$1,278,00
Net Income 0
Preferred Dividend 75,000
Weighted average common shares 5,195,833
Basic EPS $0.23
b.
Net income doesn’t give a strong clue about the amount of dividends investors should
expect. There is no indication that dividends were paid on the common shares in 2013
and this might be the best indicator of the prospect for dividends in 2014. The ability to
pay dividends depends on the availability of cash, the ability to generate cash, and the
availability of investment opportunities. If an entity has opportunities to make money by
investing rather than paying dividends that strategy can be more profitable in the long
run.
E10-15.
a. The conversion is an exchange of shares and has no cash effect. It doesn’t appear
in the cash flow statement.
b. No cash is involved in this transaction so it’s presented as a non-cash transaction
as additional information to the cash flow statement.
c. The split has no cash effect and doesn’t appear on the cash flow statement.
Copyright © 2010 McGraw-Hill Ryerson Ltd. 7 d. Payment of dividends is a distribution of cash to owners and is presented as an
outflow in the financing section or an operating cash outflow (IFRS).
e. Payment of dividends is a distribution of cash to owners and is presented as an
outflow in the financing section or an operating cash outflow (IFRS).
f. The declaration of dividends has no cash effect and doesn’t appear on the cash
flow statement. The cash flow will occur when the dividend is paid.
g. The issuance of shares is a financing cash inflow because cash is received from
shareholders.
h. The issuance of shares is a financing cash inflow because cash is received from
shareholders.
i. The stock dividend has no cash effect (shares, not cash, are distributed to
shareholders) and doesn’t appear on the cash flow statement.
j. Property, not cash, is distributed to shareholders so it’s presented as a non-cash
transaction as additional information to the statement of cash flows.
k. The repurchase is a financing activity outflow because it returns cash to
shareholders.
l. The cash inflow when the cash shares are issued is classified as a financing
activity.
E10-17.
a.
i.
Dr. Retained Earnings 2,500,000
Cr. Cash/Dividend Payable 2,500,000
ii.
Dr. Investment in Judson 1,500,000
Cr. Gain on disposal of investments 1,500,000
($2.50 – $1.00) (500,000 shares 2 shares per common share)
Dr. Retained Earnings 2,500,000
Cr. Investment in Judson/Property Dividend Payable 2,500,000
iii.
Dr. Retained Earnings 2,500,000
Cr. Common shares 2,500,000
(500,000 shares x 5% $100)
Copyright © 2010 McGraw-Hill Ryerson Ltd. 8 This entry assumes the company uses the market value method.
b.
# of Shares -
Owners' Equity Issued
Common Retained Common Weighted average number
Date Asset Shares Earnings Shares of common shares
i
31-Dec-14 7,500,000 12,500,000 500,000
(2,500,000 (2,500,000
) )
Ending 7,500,000 10,000,000 500,000 500,000
ii
31-Dec-14 7,500,000 12,500,000 500,000
1,500,000 1,500,000
(2,500,000 (2,500,000
) )
Ending 7,500,000 11,500,000 500,000 500,000
iii
31-Dec-14 7,500,000 12,500,000 500,000
(2,500,000
2,500,000 ) 50,000
10,000,00
Ending 0 10,000,000 550,000 500,000
Assuming dividends paid December 31, 2014
Cash Property Stock
Dividend Dividend Dividend
$10,000,00
Common shares $7,500,000 $7,500,000 0
Retained earnings 10,000,000 11,500,000 10,000,000
Shareholders’ equity 17,500,000 19,000,000 20,000,000
Copyright © 2010 McGraw-Hill Ryerson Ltd. 9 c.
Net Income $1,750,000 Net Income $3,250,000 Net Income $1,750,000
Weighted average Weighted average Weighted average
Number of Number of Number of
common shares 500,000 common shares 500,000 common shares 500,000
Basic EPS 3.50 Basic EPS 6.50 Basic EPS 3.50
This answer assumes the dividend is issued Dec. 31. This answer will vary depending on
when students assume the dividend is paid. The property dividend would probably create
a capital gain and trigger an additional cash outflow for income taxes. This isn’t reflected
in the answer
d.
There are significant differences among the alternatives. The property and stock
dividends conserve cash, although issuing the property dividend probably will bring the
gain into income and trigger an additional cash outflow for income taxes. If cash is
scarce, the company may wish to avoid the cash dividend. The property dividend
sacrifices an asset that could be valuable to the company. A stock dividend has
bookkeeping implications only.
e.
Dr. Cash 2,500,000
Cr. Gain on disposal of investments 1,500,000
Cr. Investment in Judson 1,000,000
Dr. Retained Earnings 2,500,000
Cr. Cash 2,500,000
Economically there is no difference to the issuing company. There is a difference to the
individual shareholders since they will incur transaction costs to sell the shares if they
choose not to hold them. This is particularly burdensome for small shareholders.
E10-19.
a.
Dr. Property, plant and equipment—Forklifts 380,000
Cr. Cash 380,000
To record the purchase of a forklifts Nov. 12, 2009
b.
Since this is a change in an accounting estimate, changes are made prospectively and
therefore no journal entries are required to adjust previously recorded transactions.
c.
Annual depreciation expense = ($380,000-$60,000)/10 = $32,000
Copyright © 2010 McGraw-Hill Ryerson Ltd. 10 Dr. Depreciation expense 32,000
Cr. Accumulated depreciation 32,000
To record the depreciation expense for fiscal 20010.
d.
Straight line
Cost Accumulated Carrying Depreciation
Year End depreciation amount expense
Oct. 31 (AD) (DE)
$380,00 $380,00
Purchase 0 $0 0 $0
31-Oct-10 380,000 32,000 348,000 32,000
31-Oct-11 380,000 64,000 316,000 32,000
31-Oct-12 380,000 96,000 284,000 32,000
31-Oct-13 380,000 128,000 252,000 32,000
31-Oct-14 380,000 160,000 220,000 32,000
31-Oct-15 380,000 192,000 188,000 32,000
31-Oct-16 380,000 210,111 169,889 18,111
31-Oct-17 380,000 228,222 151,778 18,111
31-Oct-18 380,000 246,333 133,667 18,111
31-Oct-19 380,000 264,444 115,556 18,111
31-Oct-20 380,000 282,556 97,444 18,111
31-Oct-21 380,000 300,667 79,333 18,111
31-Oct-22 380,000 318,778 61,222 18,111
31-Oct-23 380,000 336,889 43,111 18,111
31-Oct-24 380,000 355,000 25,000 18,111
Total $355,000
Original estimate Change in estimate
Cost 380,000 Carrying amount 188,000
Residual value 60,000 Residual value 25,000
Useful life 10 years Useful life remaining 9 years
Depreciation expense =
Carrying amount – Residual value
Useful life
Depreciation expense = 32,000 Depreciation expense = 18,111
The depreciation expense for 2016 on is = ($188,000-25,000))/9 = $18,111
[Since management changed the estimated useful life during fiscal 2016, the effect of the
change in estimate begins in 2016 and is applied prospectively from then.]
Dr. Depreciation expense 18,111
Cr. Accumulated depreciation 18,111
To record depreciation expense for fiscal 2018
e.
Copyright © 2010 McGraw-Hill Ryerson Ltd. 11 Straight line
Cost Accumulated Carrying Depreciation
Year End Depreciation amount expense
Oct. 31 (DA) (DE)
$380,00
Purchase $380,000 $0 0 $0
31-Oct-10 380,000 32,000 348,000 32,000
31-Oct-11 380,000 64,000 316,000 32,000
31-Oct-12 380,000 96,000 284,000 32,000
31-Oct-13 380,000 128,000 252,000 32,000
31-Oct-14 380,000 160,000 220,000 32,000
31-Oct-15 380,000 192,000 188,000 32,000
31-Oct-16 380,000 210,111 169,889 18,111
31-Oct-17 380,000 228,222 151,778 18,111
31-Oct-18 380,000 246,333 133,667 18,111
31-Oct-19 380,000 264,444 115,556 18,111
31-Oct-20 380,000 282,556 97,444 18,111
31-Jan-21 380,000 287,083 92,917 4,528
Total $287,083
Proceeds $25,000
carrying amount 92,917
Gain (loss) ($67,917)
Dr. Depreciation expense 4,528
Cr. Accumulated depreciation 4,528
To record depreciation expense for three months (Nov., Dec, & Jan - fiscal 2021)
Dr. Cash 25,000
Dr. Accumulated depreciation 287,084
Dr. Loss on disposal of Machinery 67,916
Cr. Machinery 380,000
To record the sale of the forklifts Jan. 31, 2021
E10-21.
Current ratio = Current Assets = $210,000 = 1.24
Current liabilities $168,750
Debt-to-equity ratio = Total Liabilities = $417,500 = 1.14
Total Equity $367,500
Copyright © 2010 McGraw-Hill Ryerson Ltd. 12 Return on assets = Net Income + interest expense (1- tax rate)
Average total assets
= $135,000 + $28,000 (1 – 0.155) = $158,660
($785,000 + $742,500) ÷ 2 $768,875
= 20.77%
Return on equity = Net Income – preferred dividends
Average common share equity
= $135,000 – $15,000 = $120,000
($311,250 + $236,250) ÷ 2 $273,750
= 4.38%
Basic earnings per share = Net income - preferred dividends
Weighted average common shares
= $135,000 – $15,000 = $120,000
50,000 shares 50,000
= $2.40
Price-to-book ratio = = $1,430,00 = 3.89
Market value of equity 0
Book value of equity $367,500
Market value of equity = Market value per common share Common shares outstanding
= $26 55,000 shares = $1,430,000
Book value of equity = Preferred shares + Common shares +
Accumulated other comprehensive income + Retained earnings
= $56,250 + $155,500 + $12,000 + $143,750 = $367,500
Copyright © 2010 McGraw-Hill Ryerson Ltd. 13 PROBLEMS
P10-1
Debt/Equ Current Return Price-to- Return on
ity Ratio on equity Basic EPS book ratio Assets
Ratio
Before transaction 0.9:1 1.3 11.5% $3.42 1.8 7.1%
or event
1. Issue shares for Decreases Increases Decrease Decrease (a) Decrease Decrease
cash (a) (b) (a)
2. Grant stock No effect No effect Decrease Decrease No effect Decrease
options (b)
3. Stock dividend No effect No effect No effect Decreases No effect No effect
4. Issue shares for Decreases No effect Decrease Decrease (a) Decrease Decrease
capital assets (a) (c) (a)
5. Declare cash Increases Decreases Increases No effect Increases No effect
dividend
1.
Dr. Cash (A+)
Cr. Common Shares (OE+)
(Increase in the number of common shares outstanding)
Note a: The effect on this ratio depends on the change in earnings with the change in
assets available. This answer assumes that earnings remain the same regardless of the
new equity. This answer also assumes that issuance of new common shares took place
prior to the end that they would increase in weighted average number of common shares
outstanding during the period.
Note b: This answer depends on the change in market value as a result of the issuance,
which is unknown. The answer presented assumes that the market value isn’t affected by
the issuance of new shares. Equity increases because the net assets have increased.
2.
Dr. Compensation expense (OE-) (E+)
Cr. Contributed Surplus (OE+)
Overall, there is no effect on owners’ equity but net income would decrease.
Note c: It’s unknown how the market will react to the issue of new stock options. If there
is no effect then the ratio is unchanged since shareholders’ equity is not affected by the
stock options.
3.
Dr. Retained Earnings (OE-)
Cr. Common Shares (OE+)
Copyright © 2010 McGraw-Hill Ryerson Ltd. 14 (Increase in the number of common shares outstanding. Total equity is un
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