Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Kinnear

Accounting Principles, Third Canadian Edition

CHAPTER 13 Corporations Corpor ations:: Organizatio Organization n and Share Capit Capita al Transactions ASSIGNMENT CLASSIFICATION CLA SSIFICATION TABLE TAB LE Brief Exercises

Exercises

Problems Set A

Problems Set B

Study Objectives

Questions

1. Identify and discuss the major characteristics of a corporation.

1, 2, 3, 4, 5, 6, 7, 8, 9,10

1, 2

1, 7

1, 11

1

2. Record common share transactions.

11, 12, 13, 14, 15

3, 4, 5, 6

2, 3, 4, 7, 11

2, 3, 4, 5, 6, 7, 11

2, 3, 4, 5, 6, 7, 11

3. Record preferred share transactions.

16, 17, 18, 19

7, 8, 9

3, 4, 5, 6, 7, 11

4, 5, 6, 7, 11

4, 5, 6, 7, 11

4. Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

20, 21, 22, 23, 24

10, 11, 12, 13

7, 8, 9, 10, 11

4, 5, 6, 7, 8, 9, 10, 11

4, 5, 6, 7, 8, 9, 10, 11

Solutions Manual 13-1 Chapter 13 Copyright © 2009 John Wiley & Sons Canada, Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.



ASSIGNMENT CHARACTERISTICS TABLE TAB LE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Simple

15-20

Moderate

25-30

1A

Determine form of business organization.

2A

Determine impact of reacquired shares.

3A

Allocate dividends between preferred and common shares.

Simple

15-20

4A

Show impact of transactions on accounts.

Simple

25-30

5A

Record and post transactions. Prepare shareholders’ equity section.

Moderate

45-60

6A


Moderate

40-50

7A


Moderate

50-60

8A

Record closing entries and prepare balance sheet.

Simple

30-40

9A

Prepare balance sheet and calculate return on equity.

Simple

25-35

10A

Calculate return on equity.

Simple

10-15

11A

Answer questions about shareholders’ equity section.

Simple

15-20

1B

Determine form of business organization.

Simple

15-20

2B

Determine impact of reacquired shares.

Moderate

25-30

3B

Allocate dividends between preferred and common shares.

Simple

15-20

4B

Show impact of transactions on accounts.

Simple

25-30

5B


Moderate

45-60

6B


Moderate

40-50

7B


Moderate

50-60




ASSIGNMENT CHARACTERISTICS TABL TA BLE E (Conti (Con ti nued) nu ed) Problem Number

Description

Difficulty Level

Time Allotted (min.)

8B

Record closing entries and prepare balance sheet.

Simple

30-40

9B

Prepare balance sheet and calculate return on equity.

Simple

25-35

10B

Calculate return on equity.

Simple

10-15

11B

Answer questions about shareholders’ equity section.

Simple

15-20




BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material. Study Objectives Objectives 1.

Identify and discuss the major characteristics of a corporation.

2.

Record common share transactions.

3.

Record preferred share transactions.

4.

Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

Broadening Your Perspective

Knowledge

Comprehension Comprehension

Q13-5

Q13-1 Q13-2 Q13-3 Q13-4 Q13-6 Q13-7 Q13-8 BE13-1 BE13-2 E13-7 Q13-12 Q13-13 Q13-14 Q13-15 E13-7

Q13-9 Q13-10 P13-11A

Q13-11 BE13-3 BE13-4 BE13-5 BE13-6 E13-2 E13-3 E13-4 P13-2A P13-3A P13-4A P13-5A

P13-6A P13-7A P13-11A P13-2B P13-3B P13-4B P13-5B P13-6B P13-7B P13-11B

E13-11

Q13-16 Q13-17 Q13-18 Q13-19 E13-7

BE13-7 BE13-8 BE13-9 E13-3 E13-4 E13-5 E13-6 P13-4A

E13-11

Q13-21 Q13-23 Q13-24 E13-7

BE13-10 BE13-11 BE13-12 BE13-13 E13-8 E13-9 E13-10 P13-4A P13-5A P13-6A P13-7A

P13-5A P13-6A P13-7A P13-11A P13-4B P13-5B P13-6B P13-7B P13-11B P13-8A P13-9A P13-10A P13-11A P13-4B P13-5B P13-6B P13-7B P13-8B P13-9B P13-10B P13-11B

BYP13-1 BYP13-3

BYP13-2 Continuing Cookie Chronicle

Q13-20 Q13-22

Application

Analysis

Synthesis Synthesis

E13-1 P13-1A P13-1B

E13-11

BYP13-4

BYP13-5


Evaluation Evaluation



ANSWERS TO QUESTIONS 1.

Classified Classifie d by Purpose: A business may be incorporated to make a profit, like Tim Hortons. Or, it may be incorporated as a not-for-profit, like the Canadian Cancer Society. Alternately, a business, like the Yellow Pages Group, could be created as an income trust, to invest in income-producing assets. Classified by Ownership: A corporation can be publicly held or privately held. A publicly held corporation, like The Forzani Group Ltd., may have thousands of shareholders, and its shares trade in an organized securities market. A privately held corporation, like McCain Foods Limited, usually only has a few shareholders, and its shares are not offered for sale to the general public.

2.

(a) Limited Li mited liability of shareholders. Because of its separate legal existence, creditors of a corporation ordinarily have recourse only to corporate assets to satisfy their claims. Thus, the liability of shareholders is normally limited to their investment in the corporation. (b) Transferable Transferabl e ownership rights. Ownership of a corporation is held in capital shares. The shares are transferable units. Shareholders may dispose of part or all of their interest by simply selling their shares. The transfer of ownership to another party is usually entirely at the discretion of the shareholder. shareholder. (c) Ability to acquire capital. A corporation has an easier time raising capital because of features such as limited liability and the ease of transferring shares. Also, because only small amounts of money need to be invested, many individuals can become shareholders. However, small, privately held corporations can have as much difficulty getting capital as any proprietorship or partnership.

3.

(a) Income taxation can be an advantage for a corporation because corporate tax rates are often lower than personal tax rates. Personal income tax can also be deferred until income is distributed to the shareholders as dividends. It can also be a disadvantage because the dividends are subject to “double” taxation—once at the corporate level and again at the personal rates of the shareholders who receive them. The impact of these taxes is somewhat reduced by the dividend tax credit that shareholders can claim on their personal tax returns. (b) Corporations must pay income tax on its taxable income. Income earned by proprietorships, partnerships and income trusts is taxed in the hands the owners. The businesses themselves do not pay income tax.




QUESTI QUESTION ONS S (Continu (Conti nued) ed) 4.

Small, privately held corporations are riskier than large publicly held ones. As a result, lenders will often require the owners to sign personal guarantees, thus eliminating the limited liability normally associated with corporations. Because the shares are not offered for sale to the general public, it is more difficult to raise capital. Small corporations may be run by the shareholders, rather than professional managers. This also means that if one of these shareholders sells his or her ownership interest, the corporation may be significantly significantly affected.

5.

In the absence of restrictive provisions, the basic ownership rights of common shareholders are the rights to:

• • •

vote in the election of the board of directors directors and in corporate actions that require shareholders' approval, share in corporate income by receiving dividends, and share in assets upon liquidation.

The basic ownership rights of preferred shareholders are the rights to receive:

• •

dividends ahead of the common shareholder, shareholder, and assets upon liquidation liquidation ahead of the common shareholder. shareholder.

In exchange for these preferences, preferred shareholders normally are not entitled to vote. 6.

The total number of shares shares a company is allowed allowed to sell sell is is called called its authorized shares—it may be an unlimited amount or a specified amount. No journal entry is recorded when the number of authorized shares is set. Issued shares are shares that have been sold. A journal entry will be prepared when shares are issued. The number of issued shares can never exceed the number of authorized shares.

7.

(a) Legal capital is capital that has been contributed by the shareholders that must remain in the corporation, to protect creditors. (b) Legal capital is unavailable for dividends. Retained earnings are available for dividends. Keeping the two amounts separate on the balance sheets enables users to see the amount of creditor protection that exists. The distinction between amounts contributed by the owners and amounts earned and retained by the company is not needed for proprietorships because the proprietor has unlimited personal liability for the debts of the business in any case.




QUESTI QUESTION ONS S (Continu (Conti nued) ed) 8.

Income trusts are established to invest in income producing assets. Unit holders expect regular distributions. As a result, most of the earnings of the trust are distributed, leaving very little “retained”. On the other hand, corporations often retain a large portion of their earnings to finance their continued operations, expansion plans, or to provide a measure of safety.

9.

When Jean-Guy Jean-Guy purchases the original shares as part of Innovate.com’s Innovate.com’s initial public offering, he is purchasing from the company. The $1,000 (100 X $10) he spends to buy the shares goes directly to Innovate.com and increases the company’s assets and shareholders’ equity. In the subsequent purchase, Jean Guy is buying in the secondary market from another investor. The proceeds from this sale go to the seller and not to Innovate.com. Therefore there is no impact on Innovate.com’s financial statements as a result of the second purchase. purchase.

10. There will be no impact impact on Abitibi’s Abitibi’s financial financial statements at the time of the share price decline. However, should Abitibi decide it would like to raise capital in the securities market, the price decline means it will have to sell more shares to raise the same amount of money. 11. When shares are issued issued for services services or noncash noncash assets, assets, the cost cost should be measured at the fair market value of the consideration given up (the shares). If that value cannot be reasonably determined, then the fair market value of the consideration received should be used (the land). In this case, the fair market value of the shares is more objectively determinable, since the shares are actively traded in the securities market. The appraised value of the land is merely an estimate of the land's value, while the market price of the shares is the amount the shares were actually worth on the date of exchange. Therefore, the land should be recorded at $90,000. 12. A corporation may acquire its own shares: (1) to increase trading of the company's shares in the securities market in the hope of enhancing its market value, (2) to increase earnings per share by reducing the number of shares issued, (3) to eliminate hostile shareholders by buying them out, (4) to have additional shares available to be reissued to officers and employees under bonus and stock compensation plans, or for use in the acquisition of other companies, and (5) to comply with percentage share ownership requirements. requirements.




QUESTI QUESTION ONS S (Continu (Conti nued) ed) 13. This transaction: transaction: (a) decreases total assets, (b) has no effect on total liabilities and, (c) decreases total shareholders' shareholders ' equity. 14. Share repurchases are transactions between the company and its shareholders. Therefore, any resulting gains or losses cannot be reported on the income statement. Such gains and losses are seen as an excess or deficiency belonging to the original shareholders and are reported as an increase or decrease in the shareholders’ equity section of the balance sheet. 15. If there have have been gains gains from similar similar transactions transactions in the past, past, the resulting credit balance of the contributed capital account is available to absorb some or all of the loss on reacquisition. However, the balance of the contributed capital account cannot go below zero. If the loss exceeds the balance in the contributed capital account, the excess amount is debited to retained earnings. 16. Common shares and preferred preferred shares both both represent represent ownership ownership of the corporation. Common shares signify the basic residual ownership; preferred shares represent ownership with certain privileges or preferences. Preferred shareholders typically have a preference as to dividends and as to assets in the event of liquidation. However, preferred shareholders generally do not have voting rights. 17. Cumulative Cumulati ve preferred shares are those that require preferred shareholders be paid both current year dividends and unpaid prior year dividends before common shareholders receive any dividends. Dividends not declared for noncumulative preferred shares are lost forever. Redeemable preferred shares can be purchased from the shareholders, by the issuing corporation, at the option of the corporation. If the shares are retractable they can be sold by the shareholder, to the issuing corporation, corporation, at the option of the shareholder. 18. (a) Dividends in arrears are dividends on cumulative preferred shares that were not declared in a given period. (b) Dividends in arrears are disclosed in the notes to the financial statements; they are not recorded as liabilities.




QUESTI QUESTION ONS S (Continu (Conti nued) ed) 19. When convertible preferred shares are are converted converted into into common shares, the shareholder simply exchanges preferred shares for common shares, according to a predetermined rate. To record the conversion, the amount originally paid for the preferred shares is transferred into the appropriate common shares account. If multiple share issues have occurred at varying prices, then the average cost for each preferred share is used instead of the original cost. This entry has no effect on (a) total assets, (b) total liabilities, or (c) total shareholders' equity. 20. The three three main components components of shareholders' shareholders' equity are: Contributed capital, Retained earnings, and Accumulated other other comprehensive comprehensive income. income. Contributed capital represents the amounts contributed by the shareholders. Share capital and additional contributed capital (e.g., from reacquisition of shares) are components of contributed capital. Retained earnings represent the cumulative net income (or loss) since incorporation that has been retained in company and not distributed to shareholders as dividends. Accumulated other comprehensive comprehensive income represents gains and losses not resulting from share transactions, that bypass net income. The most common example is unrealized gains and losses on investments. 21.

The answers are summarized in the table below: Account (a) (b) (c) (d) (e)

Common Shares Retained Earnings Contributed Capital – Reacquired Shares Accumulated Other Other Comprehensive Comprehensive Income Preferred Shares

Classification Classification Share capital—common shares Retained earnings Additional contributed contributed capital capital Accumulated other other comprehensive comprehensive income Share capital—preferred capital—preferred shares




QUESTI QUESTION ONS S (Continu (Conti nued) ed) 22. Comprehensive Comprehen sive income includes all changes in shareholders’ equity during a period except for changes that result from the sale or repurchase of shares or from the payment of dividends. dividends. Accumulated other comprehensive comprehensive income is reported separately from retained earnings to distinguish unrealized gains and losses from realized gains and losses and other sources of earned income that are accumulated in retained earnings. Reporting this information separately insulates income, and consequently consequently retained earnings, from fluctuations f luctuations in market value while still informing users of the gain or loss that could have occurred had the investment been sold. 23. Return on equity is the return earned by all the shareholders – both the preferred and common shareholders. It is calculated by dividing net income by the average shareholders’ equity. Return on common shareholder’s equity is the return earned by the common shareholders. It is calculated by dividing the net income available to the common shareholders by the average common shareholders’ equity. Preferred dividends are deducted from net income to determine the numerator. The legal capital of the preferred shareholders is deducted from total shareholders equity before calculating the average common shareholders’ equity. 24. Net income by by itself does does not provide provide shareholders shareholders with an indication of their return per dollar of investment. Comparing net income to shareholders’ equity provides investors with a meaningful measure of how many dollars are earned for each dollar of their investment. It also provides shareholders with the information necessary to compare investment opportunities in the marketplace.




SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 13-1 Characteristic Characteristic Proprietorshi p Partnership Partnership Corporation 1. Continuous life lif e X 2. Unlimited Unlimit ed liabili ty X X 3. Ease Ease of formatio for mation n X X 4. Income Incom e taxes X 5. Ability Abili ty to acquire X X capital 6. Shared Shared skill ski llss and X resources 7. Fewer Fewer government gov ernment X X regulations 8. Separation Separation of ownership and X management 9. Owners’ acts are X X binding 10. 10. Ease Ease of transfer trans fer of X ownership rights

BRIEF EXERCISE 13-2 The increa incr ease se in share price wi ll have h ave no impact im pact on Body Shop’s financial position. The balance sheet will be unchanged since the shares are listed at their issue price, not their current market value. On the other hand, the increased market valuation of the business would enable the Body Shop to raise funds more easil easily. y. The shareholders would see the value of their investment increase and could realize gains by selling some or all of their shares.




BRIEF EXERCISE 13-3 (a) June Ju ne 1 Dec. 15

Cash (2,000 X $6) .......................... Commo Com mon n Shares Shar es ............... ...................... .........

12,000

Cash (1,000 X $9) .......................... Commo Com mon n Shares Shar es .............. ...................... ..........

9,000

12,000 12,000 9,000

(b) Average Av erage iss i ssue ue pric pr ice: e: ($12,000 ($12,000 + $9,000 $9,000)) ÷ (2,000 (2,000 + 1,000) 1,000) = $7

BRIEF EXERCISE 13-4 (a) Dec. 20

Land Lan d (5,000 X $14)......................... Commo Com mon n Shares Shar es .............. ...................... ..........

70,000 70,000 70,000

(b) No, the answ answ er would wo uld not change. The market pric e of the shares is a reliable indicator of its value; the advertised price pric e of the land is not.




BRIEF EXERCISE 13-5 (a) Average Repurchase Repurc hase Price Pri ce = $10.80 $10.80 ($2,000,000 + $4,000,000) ÷ 555,600 shares (b) Init ial Average Issue Issu e Price Pric e = $3.60 $3.60 $2,000,00 $2,000,000 0 ÷ 555,600 sh ares (c) Cascades Cascades may may have repurc hased some som e of its own shares (1) (1) to increa inc rease se trading of the company's shares in t he stock market, in the hopes of enhancing its market value, (2) to reduce the number of shares issued and incr ease ease earnings earnings per share, or (3) to comply with percentage share ownership requirements. Some companies have been repurchasing their own shares lately because they have excess excess cash on hand and no better investments available. available.

BRIEF EXERCISE 13-6 (a) Feb. 15

(b) Feb. 15

Commo Com mon n Shares Shar es (5,000 (5,000 X $3.50*) $3.50*).... 17,500 17,500 Contributed Capital – Reacquired Commo Com mon n Shares Shar es ............... ...................... ........... .... Cash ................................. ............

2,500 2,500 15,000

Commo Com mon n Shares Shar es (5,000 (5,000 X $3.50*) $3.50*).... 17,500 17,500 Retained Retain ed Earnin Earn ings gs....... .............. ............... .............. ...... 2,500 2,500 Cash ................................. ............

20,000

*Average share price = $122,500 ÷ 35,000 shares = $3.50




BRIEF EXERCISE 13-7 (a) Jan. Jan . 28 June Ju ne 15

Cash (5,000 X $110) ..................... Preferr Pref erred ed Shares Shar es ............... ..................... ......

550,000

Cash (1,000 X $125) ..................... Preferr Pref erred ed Shares Shar es .............. ..................... .......

125,000

550,000 550,000 125,000 125,000

(b) Average issu is sue e pric pr ice: e: $112.5 $112.50 0 ($550,000 + $125,000) ÷ (5,000 + 1,000)

BRIEF EXERCISE 13-8 (a) Mar. Mar . 3 (b) Oct. Oct . 1

Cash (40,000 X $100).................... 4,000,000 Preferr Pref erred ed Shares Shar es ............... ..................... ...... 4,000,000 4,000,000 Preferr Pref erred ed Shares Shar es (10,000 (10,000 X $100) $100) 1,000,000 1,000,000 Commo Com mon n Shares .............. ...................... ........ 1,000,000 1,000,000 (40,000 shares)

BRIEF EXERCISE 13-9 (a) Dividend Divi dendss are in arrears arr ears by $80, $80,000 000 (40,00 (40,000 0 X $2). $2). (b) If the shares were noncumulative, there would be no dividends divi dends in arrears.




BRIEF EXERCISE 13-10 KAPOSI CORPORATION Balance Sheet (Partial) December 31, 2008 Shareholders' Shareholders' equity Contribut ed capital capital Share capital capit al Preferred shares, no par value, $5$5-nonc nonc umulati umu lative, ve, unlimit unli mited ed number of shares author authorize ized, d, 800 shares sh ares issu is sued ed $ 20,000 20,000 Common sh ares, ares, no par value, unlimi ted number o f share s haress authorize author ized, d, 5,000 5,000 shares sh ares issu is sued ed 50,000 50,000 Total share sh are capital capi tal 70,000 70,000 Contributed capital—rea capital—reacquis cquis ition itio n of common com mon shares 5,00 5,000 0 Total contri con tribut buted ed capital capit al 75,0 75,000 00 Retai Retained ned earnings earnin gs 29,000 29,000 Total shareholders' sharehol ders' equity equit y $104 $104,0 ,000 00




BRIEF EXERCISE 13-11 (a) KAPOSI CORPORATION Balance Sheet (Partial) December 31, 2008 Shareholders' Shareholders' equity Contribut ed capital capital Share capital capit al Preferred shares, no par value, $5$5-nonc nonc umulati umu lative, ve, unlimit unli mited ed number of shares author authorize ized, d, 800 shares sh ares issu is sued ed $ 20,000 20,000 Common sh ares, ares, no par value, unlimi ted number o f share s haress authori zed, zed, 5,000 5,000 shares sh ares issu is sued ed 50,000 50,000 Total share sh are capital capi tal 70,000 70,000 Contribut ed capital—reacquisit capital—reacquisition ion of common com mon shares 5,00 5,000 0 Total contri con tribut buted ed capital capit al 75,0 75,000 00 Retai Retained ned earnings earnin gs 29,000 29,000 Accu Ac cum m ulated ul ated other ot her com co m prehen pr ehensi si ve inc i ncom ome e 6,000 Total shareholders' sharehol ders' equity equit y $110 $110,0 ,000 00 (b) Total sharehold shareho lders’ ers’ equit y w oul d be $98,00 $98,000 0 ($104, ($104,000 000 $6,000)




BRIEF EXERCISE 13-12 Dec. 31

Revenues Reven ues ............................... ....... 2,000,000 Incom Inc ome e Summar Sum maryy ............... ..................... ...... 2,000,000 2,000,000

31

Incom Inc ome e Summar Sum maryy .............. ..................... ........... .... 1,500,000 1,500,000 Expens Exp enses es .............. ...................... ............... ............ ..... 1,500,000 1,500,000

31

Incom Inc ome e Summar Sum maryy .............. ..................... ........... .... Retained Retain ed Earnin Earn ings gs .............. ................... .....

500,000 500,000

Retained Retain ed Earni ngs............. ng s.................... ........... .... Divid Div idend endss ............... ...................... .............. ........... ....

50,000 50,000

31

500,000 500,000 50,000 50,000

BRIEF EXERCISE 13-13 (a) (a) Retur Return n on equity equit y $8,097 ($13 ($132 2, 49 495 5 + $1 $121 21,784) ÷ 2 (b)

= 6.4%

It would wo uld be the same.




SOLUTIONS TO EXERCISES EXERCISE 13-1 (a) High Hig h $60.85 $60.85 Low $41.45 (b) $0.75 (c) 1,000 X $60.41 = $60,410 (d) $59.25 $59.25 + $1.24 $1.24 = $60.49 $60.49 (closi (clo sing ng pric pr ice e + change) ch ange) (e) 9,837 X 100 = 983,700 shares sh ares (f)

Since the share price pric e is up $17. $17.80 80 over the 365365-day day low ($59.25 - $41.45) investors are probably looking primarily for capital c apital appreciation. appreciation.

EXERCISE 13-2 1. Dec. 5 Land Lan d .............................. ............ Commo Com mon n Shares Shar es .............. ................. ...

120,000

2. June Ju ne 1 Land Lan d (20,000 X $12) ................. Commo Com mon n Shares Shar es ............... ................. ..

240,000

120,000 120,000 240,000 240,000




EXERCISE 13-3 (a) Jan. Jan . 10 Cash (75,000 X $5) ................... Commo Com mon n Shares Shar es .............. ................. ...

375,000

Feb. 24 Cash (1,000 X $105) ................. Preferr Pref erred ed Shares Shar es .............. ................. ...

105,000

Jul Ju l y 1 Cash (50,000 X $6.50) .............. Commo Com mon n Shares Shar es .............. ................. ...

325,000

375,000 375,000 105,000 105,000 325,000 325,000

(b) (1) (1) The average average issue iss ue price pri ce of the preferred shares is $105 $105.. (2) (2) The The average average issue iss ue price pri ce of the t he common com mon shares is i s $5.60 $5.60 ($375,000 + $325,000) (75,000 + 50,000).

EXERCISE 13-4 (a) Jan. Jan . 6 Cash Cas h .................................. ...... Commo Com mon n Shares Shar es .............. ................ .. (200,000 (200,000 shares shar es X $1.50) $1.50)

300,000

12 Cash .................................. ...... Commo Com mon n Shares Shar es .............. ................. ... (50,000 (50,000 shares sh ares X $1.75)

87,500

Mar. Mar . 17 Cash .................................. ...... Preferr Pref erred ed Shares Shar es .............. ................ .. (1,000 (1,000 shares sh ares X $105) $105)

105,000

300,000 300,000

87,500 87,500

105,000 105,000

July Ju ly 18 Cash .................... ........................... ............... ............. ..... 2,000,000 2,000,000 Commo Com mon n Shares Shar es ............... ................. 2,000,000 2,000,000




EXERCISE 13-4 (Continued) (a) (Continued) Nov. 17 Commo Com mon n Shares Shar es *............... .................... ..... Retained Retain ed Earnin Earn ings gs ............... ................... .... Cash (200,000 X $1.95) .......

382,000 382,000 8,000

Dec. 30 Commo Com mon n Shares Shar es *............... .................... ..... 286,500 286,500 Contribut ed Capital Capital – Reacqui Reacquisi sitio tion n of Common Commo n Shares Cash (150,000 X $1.80) .......

390,000

16,5 16,500 00 270,000

*Average Cost per Common Com mon Share: Transaction Date Januar Jan uaryy 6 Januar Jan uaryy 12 J uly ul y 18 Total Tot al

Number of Common Shares Issued 200,000 200,000 50,000 50,000 1,000,000 1,250,000

Proceeds Proceeds of Issue $ 300,000 300,000 87,500 87,500 2,000,000 $2,387,500

$2,387,500 1,250,000 = $1.91 200,000 X $1.91 = $382,000 150,000 X $1.91 = $286,500




EXERCISE 13-4 (Continued) (b) There are 900 900,0 ,000 00 common com mon shares remaining remain ing,, at at an average average cost of $1.91**. **Average **Average Cost per Com mon Share: Share: Transaction Date Januar Jan uaryy 6 Januar Jan uaryy 12 July Ju ly 18 Nov. Nov . 17 Dec. 30 Total Tot al

Number of Common Shares Issued 200,000 200,000 50,000 50,000 1,000,000 1,000,000 (200,000) (150,000) 900,000

Proceeds Proceeds of Issue $ 300,000 300,000 87,500 87,500 2,000,000 2,000,000 (382,000) (286,500) $1,719,000

$1,719,000 900,000 = $1.91

EXERCISE 13-5 (a) 100,000 X $4 = $400,000 (b) Regular divi di vidend dend Arrear Ar rearss from fr om Year 1 Dividend Divi dend paid Arrear Ar rearss

Year 1 $400,0 $400,000 00 250,00 250,000 0 $150,000

Year 2 $400,0 $400,000 00 150,000 550,000 550,00 550,000 0 $ 0

(c) Dividends in arrea arrears rs should shoul d be disclosed disc losed in the notes to the financial statements. They are not recorded in the books. (d) The likely li kely amou amount nt is $4 per share, for a total of $400, $400,00 000. 0.




EXERCISE 13-6 (a) Nov. 15

Preferr Pref erred ed Shares Shar es .............. ................. ... Commo Com mon n Shares Shar es .............. ................ ..

230,000 230,000

Averag Av erage e s hare har e pri pr i c e ($1,000,000 + $3,600,000) 30,000) = $115 2,000 X $115 = $230,000

230,000 230,000 (10,000 +

(b) 10,000 10,000 + 30,000 30,000 – 2,000 = 38,000 38,000 preferr pref erred ed shares sh ares 2,000 2,000 X 5 = 10,00 10,000 0 com mon mo n shares s hares

EXERCISE 13-7 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m)

9. 1. 12. 12. 2. 5. 8. 7. 6. 4. 11. 11. 10. 10. 13. 3.

Legal capital capi tal Publicly Publicl y held corpor ation Organization costs cos ts Authori Autho rize zed d shares Issued Iss ued shares sh ares Initial publi c offering Secon Secondary dary market Retained Retained earni earnings ngs Common Comm on shares Comprehensi ve income inc ome Contri buted but ed capital capit al Convertible Cumulative




EXERCISE 13-8 Shareholders’ Shareholders’ Equity Other Acc ount ou nt

Share Capital

Add it io nal Contributed Capital

Retained Earnings

Acc um ul ated Other Comprehensive Income

1. Cash 2. Common shares 3. Contributed capital – reacquisition of common shares 4. Gain Gain on s ale of property, plant and equipment 5. Available-forsale security 6. Unrealized Unrealized gain on available-foravailable-forsale security 7. Preferred shares 8. Retained earnings 9. Legal fees expense 10. Dividend s

Solutions Manual

Financial Statement Balance Sheet

Classification Current Ass ets

X X

Balance Sheet

Other Revenue (Gain) Current Ass ets

Income Statement

Operating Expense

Income Statement

X X X

X

13-23 Copyright © 2009 John Wiley & Sons Canada, Ltd. Unauthorized copying, copying, distribution, or transmission of this page is strictly prohibited.


Chapter 13


EXERCISE 13-9 OZABAL INC. Parti Partial al Balance Balanc e Sheet Sheet December 31, 2008 Shareholders' Shareholders' equity Contribut ed capital capital Share capital capit al Preferred shares $4$4-non noncum cumulati ulative, ve, no par value, 100,000 shares authorized, 30,000 30,000 issu is sued ed Common sh ares, ares, no par value, unlimi ted ber of shares author aut horized, ized, 300 300,0 ,000 00

$ 150,000 150,000



EXERCISE 13-9 OZABAL INC. Parti Partial al Balance Balanc e Sheet Sheet December 31, 2008 Shareholders' Shareholders' equity Contribut ed capital capital Share capital capit al Preferred shares $4$4-non noncum cumulati ulative, ve, no par value, 100,000 shares authorized, 30,000 30,000 issu is sued ed Common sh ares, ares, no par value, unlimi ted number num ber of shares author aut horized, ized, 300 300,0 ,000 00 shares sh ares issu is sued ed Total share sh are capital capi tal Contribut ed capital—reacquisit capital—reacquisition ion of common com mon shares Total contri con tribut buted ed capital capit al Retai Retained ned earnings earnin gs Accu Ac cum m ulated ul ated other ot her com co m prehen pr ehensi si ve inc i ncom ome e Total shareholders’ sharehol ders’ equity equit y

$ 150,000 150,000 300,0 300,000 00 450,00 450,000 0 25,0 25,000 00 475, 475,00 000 0 900,0 900,000 00 75,000 $1,4 $1,450 50,0 ,000 00




EXERCISE 13-10 (a) REITMANS (CANADA) LIMITED Parti Partial al Balance Sheet January 28, 2006 (in thous ands) Shareholders' Shareholders' equity Share capital capit al Class Class A non-votin g (preferred) (preferred) shares, shares, unli mited mit ed numb nu mber er autho aut hori rized, zed, 56,747 56,747 issu is sued ed .............. ...................... ........ $ 16,892 16,892 Common shares, shares, unlimit unli mited ed number author auth orized, ized, 13,440 13,440 shares sh ares issu is sued ed ....... .......... ....... ........ ....... ..... .. 482 Total Tot al share sh are capit cap ital al .............. ...................... ............... .............. .............. ......... .. 17,374 17,374 Contr Con trii buted bu ted surp su rplu luss .............. ..................... ............... ............... .............. ............... ........ 2,523 Total Tot al cont co ntri ribu buted ted capit cap ital al ............... ...................... .............. .............. ............... ........ 19,897 19,897 Retained Retain ed earni ngs* ng s* ............... ...................... .............. ............... ............... .............. ......... .. 370,360 370,360 Total Tot al shareho sh arehold lders ers’’ equit equ ityy ............... ...................... .............. .......... ... $390,257 $390,257 *$316,191 + $84,889 - $29,345 - $1,375 = $370,360 (b) ($ in thousands tho usands)) Retur Return n on equity equit y = Net Net income incom e ÷ Average shareholders’ sharehol ders’ equity = $84,889 ÷ [($390,257 + $331,524) ÷ 2] = 23.52%




EXERCISE 13-11 (a) The average cost co st of the t he preferred preferr ed shares is $60 ($600 ($600,00 ,000 0 10,000 = $60). The average average cos t of the comm c omm on shares i s $3 ($1, ($1,80 800, 0,00 000 0 600,000 = $3). (b) It will wil l be able to sell an addition addit ional al 150, 150,00 000 0 common com mon shares sh ares (750,0 (750,000 00 authori autho rized zed - 600,000 600,000 issued). iss ued). (c) The company paid $2 per share, sh are, for a total of $200 $200,0 ,000 00.. $100,000 100,000 = $1 per share was credited to contributed capital. The average issue price of $3 per share was debited to the common shares account. The difference, dif ference, $2 $2 was the price pri ce paid per share. Commo Com mon n Shares........... Shar es.................. .............. ............... ............. ..... Contr Con trib ibut uted ed Capit al ............... ...................... ........... .... Cash ................................ ..................

300,000 300,000 100,000 100,000 200,000

(d) $5 X 10,000 = $50,000. (e) The retained earnings balance would be $1,208,000 ($1,158,000 + $50,000 dividends which were not paid nor declared). Dividends in arrears are only disclosed in the notes to t he financial statements. statements.




SOLUTIONS TO PROBLEMS PROBLEM 13-1A 1.

Kyle should shoul d run his beer beer cart business busin ess as a proprietorshi propr ietorship p because because this is t he simplest form of business busi ness to establis establish. h. It is also the least expensive. He is the only person involved in the business and is planning to operate for a short time.

2.

Joseph and Sabra Sabra should shoul d form a corporation corpo ration when they combine their operations. This is the best form of business for them to choose because they need to raise significant funds in the coming year and it is easier to raise funds in a corporation. A corporation may also receive more favourable income tax treatment.

3.

The professors should form a partnership for their business. It is simpler to form than a corporation and less costly. Each professor has contributed a similar amount of money and expertise, and there is no mention of additional funds being required.

4.

Abdur should shoul d form a corpor ation. This is the best form of business for him to choose because he will require significant funds to finance the chain of stores and it is easier to raise funds in a corporation. A corporation may also rece r eceive ive more mo re favourable incom e tax trea tr eatment. tment.

5.

A partnership woul d be the most likely lik ely form of business busin ess for Mary and Richard to choose. It is simpler to form than a corporation and less cos tly.




PROBLEM 13-2A (a) Shares author auth orized ized Shares issu is sued ed

100,00 100,000 0 11,000 11,000

(b) Common Comm on shares sh ares Contributed capital – reacquis reacquis ition iti on of common com mon shares Retained earnings earni ngs

$396,0 $396,000 00 $2,6 $2,600 00 $161,4 $161,400 00

Calculations: Common Number Averag Av erage e Contributed shares of issue capital – shares price reacquisition of common (a) (b) (a) ÷ (b) shares Bal 1. 2. 3. 4. 5.

$270,000 (12,000) 258,000 147,000 405,000 73,800 478,800 (36,000) 442,800 (46,800) $396,000

9,000 (400) 8,600 3,500 12,100 1,200 13,300 (1,000) 12,300 (1,300) 11,000

$30.00

Retained earnings $180,000

30.00

$ 9,000 (3,600) 5,400

33.47

5,400

180,000

36.00

5,400 (5,400) 0 2,600 $2,600

180,000 (18,600) 161,400 0000000 $161,400

36.00 36.00

180,000




PROBLEM 13-3A

Dividend Year Paid 1 $15,000 2 12,000 3 27,000 4 35,000

(a) (b) Noncumulative Cumulative Preferred Common Preferred Common $15,000 $ 0 $15,000 $ 0 12,000 0 12,000 0 15,000 12,000 18,000 9,000 15,000 20,000 15,000 20,000

1. Regular divid div idend end is $5 X 3,000 3,000 = $15,00 $15,000 0 2b. Arrear Ar rearss = $15,000 $15,000 - $12,000 $12,000 = $3,000 $3,000 3b. Preferred dividend = $15,000 (regular) + $3,000 (arrears) = $18,000




PROBLEM 13-4A Shareholders' Shareholders' Equity Asset As setss

Liabi Li abilili ti es

Preferred Shares

Common Shares

Acc umul um ulated ated Retained Other Earnings Comprehensive Income n/a n/a n/a

Other Contributed Capital

1.

+$100,000

n/a

n/a

+$100,000

2.

+5,500

n/a

n/a

+5,500

n/a

n/a

n/a

3.

n/a

n/a

-$300,000

+300,000

n/a

n/a

n/a

4.

+150,000

n/a

+150,000

n/a

n/a

n/a

n/a

5.

-72,500

n/a

-75,000

n/a

+$2,500

n/a

n/a

6.

-10,000

n/a

n/a

n/a

n/a

-$10,000

n/a

7.

-5,000

n/a

n/a

n/a

n/a

n/a

-$5,000

3. 5. 6.

$600,000 ÷ 4,000 = $150 $150 X 2,000 = $300,000 ($600,000 – $300,000 $300,000 + $150,000) $150,000) ÷ (4,000 (4,000 – 2,000 + 1,000) 1,000) = $150 $150 $150 X 500 = $75,000 $75,000 - $72,500 = $2,500 2,500 X $4 = $10,000

Solutions Manual



Chapter 13


PROBLEM 13-5A

(a) Date Date

GENERAL GENERAL JOURNAL Account Titles and Explanation Explanation

J1 Debit Debit

Jan. Jan . 10 Cash (100,000 X $2) ........................ Commo Com mon n Shares Shar es .............. ..................... .......... ...

200,000

Mar. Mar .

420,000

1 Cash Cas h (10,000 X $42)........................ Preferr Pref erred ed Shares Shar es

Credit Credit

200,000 200,000 420,000 420,000



PROBLEM 13-5A

(a) Date Date


J1 Debit Debit

Jan. Jan . 10 Cash (100,000 X $2) ........................ Commo Com mon n Shares Shar es .............. ..................... .......... ...

200,000

Mar. Mar .

1 Cash Cas h (10,000 X $42)........................ Preferr Pref erred ed Shares Shar es .............. ..................... .......... ...

420,000

1 Land Lan d (25,000 X $2.50) ..................... Commo Com mon n Shares .............. ...................... .......... ..

62,500

1 Cash Cas h (75,000 X $3).......................... Commo Com mon n Shares Shar es .............. ...................... .......... ..

225,000

Jul Ju l y 24 Cash .............. ..................... ............... ............... .............. ........... .... Equip Equ ipmen mentt ............... ...................... .............. ............... .......... .. Commo Com mon n Shares Shar es (16,800 (16,800 X $4)..

60,000 60,000 7,200

Nov. Nov .

1 Cash (2,000 X $48).......................... Preferr Pref erred ed Shares Shar es .............. ...................... .......... ..

96,000

Dec. 31 Incom Inc ome e Summar Sum maryy ............... ...................... ............ ..... Retained Retain ed Earnin Earn ings gs ............... ..................... ......

650,000 650,000

31 Divi Div i dends den ds ............... ...................... .............. .............. ........... .... Cash .............................. ..............

36,000 36,000

31 Retained Retain ed Earni Earn i ngs ng s .............. ..................... ............ ..... Divid Div idend endss ............... ...................... .............. ............. ......

36,000 36,000

Apr Ap r . May

Credit Credit

200,000 200,000 420,000 420,000 62,500 62,500 225,000 225,000

67,200 67,200 96,000 96,000 650,000 650,000 36,000 36,000 36,000




PROBL PROBLEM EM 13-5A 13-5A (Cont (Contin inued) ued) (b) Preferred Shares Date Date Explanation Explanatio n Mar. Nov.

1 1

Jan. 10 Apr Ap r . 1 May 1 July 24

Dec. 31 31

Ref. Ref.

Explanation Explanatio n Closing Closi ng entry

Closing entry Closing entry

Credit

Balance

420,000 420,000 96,000 516,000

Debit Debit

J1 J1 J1 J1

Retained Earnings Date Date Explanation Explanatio n Dec 31 31

Debit Debit

J1 J1

Common Shares Date Date Explanation Explanatio n

Dividends Date Date

Ref. Ref.

Credit 200,000 62,500 225,000 67,200

200,000 262,500 487,500 554,700

Ref. Ref.

Debit Debit

J1 J1

36,000

Ref. Ref.

Debit Debit

Credit

36,000

650,000 650,000 614,000

J1 J1

Credit

Balance

36,000

Balance 36,000 0

Balance




PROBL PROBLEM EM 13-5A 13-5A (Cont (Contin inued) ued) (c) HIGHLAND CORPORATION Balance Sheet (Partial) December 31, 2008 Shareholders' Shareholders' equity Share capital capit al Preferred shares, no par valu e, $3-noncumulative, $3-noncumulative, . unlimit unli mited ed number of shares autho aut hori rized,12,00 zed,12,000* 0* shares sh ares issu is sued ed .............. .................. .... $ 516,000 516,000 Common shares, no par value, value, unlimi ted number of shares sh ares author auth orized, ized, 216,80 216,800** 0** shares sh ares issu is sued ed 554,70 554,700 0 Total Tot al share sh are capit cap ital al ............... ...................... .............. ............... ............... ............. ...... 1,070,700 1,070,700 Retained Retain ed earnin earn ings gs ............... ...................... .............. ............... ............... ............ ..... 614,000 614,000 Total Tot al shareho sh arehold lders ers’’ equit equ ityy ............... ...................... .............. .......... ... $1,684,700 $1,684,700 * 10,000 + 2,000 = 12,000 shares

** 100,000 + 25,000 + 75,000 + 16,800 = 216,800 shares




PROBLEM 13-6A (a) Date Date

GENERAL GENERAL JOURNAL Account Acco unt Titles and Explanation Explanatio n

J1 Debit Debit

Feb. 1 Cash .............................. .................... Commo Com mon n Shares Shar es .............. ..................... ............. ......

75,000

Sept. Sept . 3 Cash .............................. .................... Commo Com mon n Shares Shar es .............. ..................... ............. ......

16,500

Oct. Oct . 25 Commo Com mon n Shares Shar es (10,000 (10,000 X $2.75*) $2.75*) .. Contributed Capital—R Capital—Rea eacqui cquisiti sition on of Commo Com mon n Shares Shar es ............... ...................... ......... Retained Retain ed Earnin Earn ings gs ............... ...................... ............. ...... Cash ................................. ..............

27,500 27,500

Credit 75,000 75,000 16,500 16,500

1,500 1,500 1,000 30,000

*Average *Average Cost per Comm on Share:

Transaction Transactio n Date Beginni Begi nni ng balance balanc e Februar Febr uaryy 1 Septemb Sept ember er 3 Total Tot al

Number Number of Common Proceeds Proceeds of Shares Shares Issued Iss ued Issue 1,000, 1,000,000 000 $2,741 $2,741,00 ,000 0 25,000 25,000 75,000 75,000 5,000 16,500 16,500 1,030,000 $2,832,500

$2,832,500 1,030,000 = $2.75 Nov. Nov . 3 Cash .............................. .................... 130,000 Preferr Pref erred ed Shares Shar es ............... ...................... ............ .....

130,000 130,000

Dec. 31 Incom Inc ome e Summar Sum maryy .............. ...................... ............... ....... 275,000 275,000 Retained Retain ed Earnin Earn ings gs .............. ..................... .......... ...

275,000 275,000




PROBL PROBLEM EM 13-6A 13-6A (Cont (Contin inued) ued) (a) (Continued) Dec. 31 Divid Div idend endss .............. ..................... ............... ............... ........... .... Cash ............................... ............. 31 Retained Retain ed Earnin Earn ings gs ............... ...................... ............. ...... Divid Div idend endss ............... ...................... ............... ............... ......... ..

30,000 30,000 30,000 30,000 30,000 30,000 30,000

(b) Preferred Shares Date Date Explanation Explanatio n Jan. Nov.

1 3

1 1 3 25

Debit Debit

Credit

Balance

130,000

500,000 630,000

Balance

Common Shares Date Date Explanation Explanatio n Jan. Feb. Sept. Oct.

Ref. Ref.

Ref. Ref.

Debit Debit

Balance J1 J1 J1

27,500

Credit

2,741,000 75,000 2,816,000 16,500 2,832,500 2,805,000

Contributed Capital—R Capital—Rea eacquis cquis ition iti on of Shares Shares Date Date Explanation Explanatio n Ref. Ref. Debit Debit Credit Jan. 1 Oct. 25 Dividends Date Date Dec. 31 31

Balance

Balance

Balance

Explanation Explanatio n Closing Closi ng entry

J1

1,500

Ref. Ref.

Debit Debit

J1 J1

30,000

1,500 0

Credit 30,000

Balance 30,000 0




PROBL PROBLEM EM 13-6A 13-6A (Cont (Contin inued) ued) (b) (Cont (Continu inued) ed) Retained Earnings Date Date Explanation Explanatio n Jan. 1 Balance Oct. 25 Dec. 31 Closing entry 31 Closing entry

Ref. Ref. J1 J1 J1

Debit Debit

Credit

Balance 1,816,000 1,000 1,815,000 275,000 2,090,000 30,000 2,060,000

(c) MOUNTAINHI CORPORATION Balance Sheet (Partial) December 31, 2008 _______________________ ___________________________________ ________________________ ___________________ _______ Shareholders' Shareholders' equity Share capital capit al $4 preferred sh ares, cumulati cum ulative, ve, no par value, valu e, 50,000 shares authorized, 10,000 10,000 shares sh ares issu is sued ed ............... ...................... .............. ............... ........ $ 630,000 630,000 Common shares, no par value, value, unlimi ted number of shares autho rized, ri zed, 1,020, 1,020,000 000** shares sh ares issu is sued ed 2,805, 2,805,000 000 Total Tot al share sh are capit cap ital al .............. ...................... ............... .............. .......... ... 3,435,000 3,435,000 Retained Retain ed earni ngs ng s (See Note Not e X)............... ...................... ............ ..... 2,060,000 2,060,000 Total Tot al shareho sh arehold lders ers'' equit equ ityy .............. ...................... ............... .............. ........... .... $5,495,00 $5,495,000 0 Note X: Dividends on preferred shares totalling $10,000 [10,000 X $1 per share] s hare] are in arrears. *1,000,000 + 25,000 + 5,000 – 10,000 = 1,020,000 shares






J1 Debit Debit

Feb. 06 Buil Bu ildi ding ng (1,000 (1,000 X $111) $111) .............. ................... ..... Preferr Pref erred ed Shares Shar es ............... ...................... ........... ....

111,000 111,000

July Ju ly 15 Preferr Pref erred ed Shares Shar es (2,000 (2,000 X $106*) $106*) ... Commo Com mon n Shares Shar es .............. ..................... ............ .....

212,000 212,000

Credit Credit 111,000 111,000 212,000 212,000

*($525,000 + $111,000) ÷ (5,000 + 1,000) = $106.00 Aug. Au g. 22 Cash (500 X $124)............................ Preferr Pref erred ed Shares Shar es .............. ..................... ............ .....

62,000

Nov. Nov . 1 Preferr Pref erred ed Shares Shar es (1,000 (1,000 X $108**) $108**) . Commo Com mon n Shares Shar es .............. ...................... ............ ....

108,000 108,000

62,000 62,000 108,000 108,000

**($525,000 + $111,000 – $212,000 $212,000 + $62,000) ÷ (5,000 + 1,000 – 2,000 + 500) = $108 Dec 31 Revenues Reven ues ................................ .......... Incom Inc ome e Summar Sum maryy .............. ...................... ........... ...

600,000

31 Incom Inc ome e Summar Sum maryy ............... ...................... .............. ......... Expens Exp enses es ............... ...................... ............... ............... .........

540,000 540,000

31 Incom Inc ome e Summar Sum maryy ............... ...................... .............. ......... Retained Retain ed Earnin Earn ings gs....... ............... ............... ......... ..

60,000 60,000

600,000 600,000 540,000 540,000 60,000 60,000




PROBL PROBLEM EM 13-7A 13-7A (Cont (Contin inued) ued) (a) (Continued) Preferred Shares Date Date Explanation Explanatio n Jan. 1 Feb. 6 July 15 Aug. Au g. 22 Nov. 1

Balance J1 J1 J1 J1

Common Shares Date Date Explanation Explanatio n Jan. 1 July 15 Nov. 1

Ref. Ref.

Debit Debit

Credit

Balance

525,000 111,000 636,000 424,000 212,000 62,000 486,000 378,000 108,000

Ref. Ref. Debit Debit

Balance

Credit

Balance

1,050,000 212,000 1,262,000 108,000 1,370,000

J1 J1

Contributed Capital—Reacquisition of Preferred Shares Date Date Explanation Explanatio n Ref. Ref. Debit Debit Credit Balance Jan.

1

Balanc e

Retained Earnings Date Date Explanation Explanatio n Jan. 1 Dec. 31

Balance Closing Entry

18,750 18,750

Ref. Ref.

Debit Debit

J1

Accu Ac cum m ulated ul ated Other Oth er Compr Com prehen ehensi sive ve Inco In com me Date Date Explanation Explanatio n Ref. Ref. Debit Debit Jan.

1

Balanc e

Credit

Balance

300,000 60,000 360,000

Credit

Balance 25,000 25,000




PROBL PROBLEM EM 13-7A 13-7A (Cont (Contin inued) ued) (c) DENISON CORPORATION Balance Sheet (Partial) December 31, 2008 Shareholders' Shareholders' equity Contribut ed capital capital Share capital capit al Preferred shares, no par valu e, $3-noncu $3-noncumul mulative, ative, con vertible, verti ble, 10,00 10,000 0 shares sh ares author auth orized, ized, 3,500* 3,500* shares sh ares issu is sued ed ...... ...... Common sh ares, ares, no par value, unlimi ted number num ber of shares auth orize ori zed, d, 94,0 94,000 00** ** shares sh ares issu is sued.......... ed.................. ............... .............. .............. ............... ............ .... Total Tot al share sh are capit cap ital al ............... ...................... .............. ............... ............... .............. ......... Addi Ad ditition onal al cont co ntrr i buted bu ted capi cap i tal Contributed capital- reacquis reacquis ition iti on of prefer pr eferred red shares sh ares .............. ...................... ............... .............. .............. ............. ...... Total Tot al cont co ntri ribu buted ted capit cap ital al ............... ...................... .............. .............. ............. ...... Retained Retain ed earnin earn ings gs ............... ...................... .............. .............. ............... ............... ......... .. Accu Ac cum m ulated ul ated other ot her com co m prehen pr ehensi sive ve inc i ncom ome e ........... Total Tot al shareho sh arehold lders ers'' equity equi ty .............. ...................... ............... .............. .............. .........

$ 378,00 378,000 0 1,370,000 1,370,000 1,748,000 1,748,000 18,750 18,750 1,766,750 1,766,750 360,000 360,000 25,000 $2,151,750 $2,151,750

*5,000 + 1,000 – 2,000 + 500 – 1,000 = 3,500 shares **70,000 + 16,000 + 8,000 = 94,000 shares






J1 Debit Debit

Credit Credit

Sep. 30 Commi Com miss ssio ion n Revenue Revenu e ............... ...................... ....... 314,850 314,850 Incom Inc ome e Summar Sum maryy.............. ...................... ............ ....

314,850 314,850

30 Incom Inc ome e Summar Sum maryy ............... ...................... .............. ....... 245,440 245,440 Salaries Salar ies Expens Exp ense e .............. ...................... ............ .... Rent Expens Exp ense e.............. ..................... ............... ........... ... Amor Am ortt i zation zati on Expens Exp ense e .................. Suppl Sup plies ies Expens Exp ense e.............. ...................... ........... ... Utili Uti litities es Expens Exp ense e.............. ..................... ............. ...... Interes Int erestt Expens Exp ense e.............. ..................... ............. ...... Incom Inc ome e Tax Expens Exp ense e .............. .................... ......

138,400 138,400 25,000 25,000 30,080 4,860 4,860 18,200 18,200 3,900 3,900 25,000 25,000

30 Incom Inc ome e Summar Sum maryy ............... ...................... .............. ....... Retained Retain ed Earnin Earn ings gs ............... ...................... ......... ..

69,410 69,410

30 Retained Retain ed Earnin Earn ings gs ............... ...................... ............. ...... Divid Div idend endss ............... ...................... ............... ............... .........

2,000 2,000

69,410 69,410 2,000




PROBL PROBLEM EM 13-8A 13-8A (Cont (Contin inued) ued) (b) MISCOU CORP. Balance Sheet September 30, 2008 ________________________ ___________________________________ _______________________ ___________________ _______ Asset As setss Current assets Cash ................................. .................................. .. Acco Ac coun unts ts r eceivab ecei vabll e.............................. ............... Suppl Sup plii es .............. ..................... ............... ............... .............. ............... ............... ............. ...... Total Tot al curr cu rrent ent assets ass ets ............... ...................... ............... ............... ......... Property, plant and equipment Equi Equ i pment pm ent ............... ...................... .............. ............... ............. ..... $150,400 $150,400 Less: Less : Accum Acc umul ulated ated amorti amor tizatio zation n ...... ...... (60,16 (60,160) 0) Franch Fran chis ise e .............. ...................... ............... .............. .............. .............. ....... Total Tot al assets ass ets .............. ...................... ............... .............. ............... ............... .........

$ 32,500 74,705 1,265 108,470 108,470 90,240 90,240 225,000 225,000 $423,710 $423,710

Liabilities Liabili ties and Shareholders’ Shareholders’ Equity Current liabilities Acco Ac coun unts ts payabl pay able e ............................. .................... Salaries Salar ies payabl e ............... ...................... .............. ............... ............... .............. ....... Interes Int erestt payabl e .............. ...................... ............... .............. .............. ............... .......... Incom Inc ome e tax payable payab le .............. ...................... ............... .............. ............... .......... .. Unearned comm co mmis issi sion on revenue revenu e ....... .......... ....... ........ ....... ....... ...... Current Curr ent port po rtio ion n of long lo ng-term -term debt ....... ........... ........ ....... ....... ...... Total curr cu rrent ent liabil li abilitities ies ....... ........... ........ ....... ....... ........ ....... ....... ...... Long-term debt Long Lo ng-ter -term m note no te payabl e ............... ...................... .............. .............. .......... ... Total Tot al liabi li abill ities it ies .............. ...................... ............... .............. .............. ........... ....

$ 43,000 8,400 8,400 900 2,000 5,500 5,500 5,000 5,000 64,800 64,800 55,000 55,000 119,800 119,800




PROBL PROBLEM EM 13-8A 13-8A (Cont (Contin inued) ued) (b) (Continued) MISCOU CORP. Balance Sheet September 30, 2008 _______________________ ___________________________________ ________________________ ___________________ _______ Shareholders’ Shareholders’ equity Contributed capital Share capital capit al $4 noncum ulative preferred preferred shares unli mited mit ed num ber of shares sh ares author auth orized, ized, 500 issu is sued ed ....... ....... Common shares, unlimit unli mited ed number of shares autho aut hori rized, zed, 40,000 40,000 i ss ssued ued ............... ...................... ............... ........... ... Total Tot al share sh are capit cap ital al ............... ...................... .............. ............... ............... .............. ....... Other Other contr ibuted capital Contributed capital – reacquisit reacquisition ion of preferred preferred s hares har es ................................. ............................... Total Tot al cont co ntri ribu buted ted capi cap i tal .............. ..................... .............. ............... ............... ......... Retained Retain ed earni ngs* ng s* .............. ...................... ............... .............. .............. ............... .......... .. Total Tot al shareho sh arehold lders ers’’ equit equ ityy .............. ..................... ............... ............... .............. ....... Total liabili li abili ties ti es and shareholders’ sharehol ders’ equity .... ....... ..... .... *Retained *Retained earni earnings ngs Balanc Bal ance, e, Oct 1, 2007............... ...................... ............... .......... Add: Ad d: Net inc i ncom ome e .............................. ....... Less: Les s: Divid Div idend endss ............... ...................... .............. ............... .......... Balanc Bal ance, e, Septemb Sept ember er 30, 2008 ............... .................

$ 50,000 50,000 110,000 110,000 160,000 160,000 1,500 161,500 161,500 142,410 142,410 303,910 303,910 $423 $423,7 ,710 10

$ 75,000 75,000 69,410 (2,000) (2,000) $142,410 $142,410




PROBLEM 13-9A (a) ANDRÉS WINES LTD. Balance Sheet March 31, 2006 (in thous ands) _______________________ ___________________________________ ________________________ ___________________ _______ Asset As setss Current assets Acc Ac c ount ou ntss recei r eceivab vabll e ................................. ............... $ 18,444 Invent Inv entor ories ies ............... ...................... .............. ............... ............... .............. .............. ............ ..... 70,528 70,528 Incom Inc ome e taxes tax es recov rec overabl erabl e ............... ...................... ............... ............... ......... .. 911 Prepaid Prep aid expens exp enses es ............... ...................... .............. ............... ............... .............. ......... 2,447 2,447 Total Tot al curr cu rrent ent assets ass ets .............. ..................... .............. ............... ............... ......... 92,330 92,330 Property, Prop erty, plant, pl ant, and equipm equi pment ent ....... ........... ........ ....... ...... ... $134 $134,69 ,697 7 Less: Less : Accum Acc umul ulated ated amorti amor tizatio zation n ....... ........... ....... ...... ... (49,10 (49,100) 0) 85,597 85,597 Goodw Goo dw ill il l ............... ...................... ............... ............... .............. .............. ............... ............... ............ ..... 35,862 35,862 Other Oth er long lo ng-ter -term m assets ass ets .............. ...................... ............... .............. .............. ........... .... 8,298 Total Tot al assets ass ets ............... ...................... .............. ............... ............... .............. .............. ........... .... $222,087 $222,087 Liabilities Liabili ties and Shareholders’ Shareholders’ Equity Current liabilities Bank Ban k indeb in debted tednes nesss ............... ...................... .............. ............... ............... ............. ...... Acc Ac c ount ou ntss payab p ayabll e and accru acc rued ed l i abil abi l i ties ti es .............. Divi Div i dends den ds payable payab le ............... ...................... .............. .............. ............... ............... ....... Current Curr ent porti por tion on of long-t lo ng-term erm debt ....... ........... ....... ....... ....... ....... ...... Total Tot al curr cu rrent ent l iabil iab il ities it ies ............... ...................... .............. ............... ........... ... Long-term liabilities Long Lo ng-ter -term m debt d ebt ............... ...................... .............. ............... ............. ..... $50,328 $50,328 Future Futu re income inco me tax liabil li abilitityy........ ........... ....... ....... ....... ....... ... 12,381 12,381 Other long lo ng-term -term liabil li abilitities ies ........ ........... ....... ....... ....... ....... ... 4,224 4,224 Total Tot al liabi li abililitities es .............. ...................... ............... .............. .............. ............... .......... ..

$ 37,295 37,295 21,613 778 5,888 5,888 65,574 65,574

66,933 $132,507 $132,507




PROBL PROBLEM EM 13-9A 13-9A (Cont (Contin inued) ued) (a)(Continu (Conti nued) ed) ANDRÉS WINES LTD. Balance Sheet March 31, 2006 (in thous ands) _______________________ ___________________________________ ________________________ ___________________ _______ Shareholders’ Shareholders’ equity Share capital capit al Class Class A shares, nonvoting, unl imited imi ted authorized, 3,963 i s sued su ed ............................... ..................... 6,975 Class Class B shares, voting, votin g, convertibl e into Class A shares, unlim unl imited ited authorized, author ized, 1,00 1,002 2 issued iss ued . 400 400 Total Tot al share sh are capit cap ital al .............. ..................... ............... ............... ......... 7,375 Retained Retain ed earnin earn ings gs** ............... ...................... .............. ............... ............... ............. ...... 82,205 82,205 Total Tot al shareho sh arehold lders ers’’ equit equ ityy ............... ...................... .............. ............ ..... 89,580 89,580 Total liabil li abilitities ies and sharehol sh areholders ders’’ equity equi ty ....... ........... ....... ..... $222,0 $222,087 87 *$79,260 + $6,054 – $3,109 = $82,205 (b) Retur Return n on equit y = Net Net incom in come e ÷ Average shareholders’ sharehol ders’ equi ty $6,054 = 6.85% $89,58 580 0 + $87, $87,16 168 8  $89,   2




PROBLEM 13-10A 13-10A (a) (a) Retur Return n on equity = Net Net income inc ome ÷ Average shareholders’ sharehol ders’ equity 2004

2005

$128.7 = 7.04%  $ 1 ,7 8 0 .5 + $ 1 ,8 7 7 .4    2 $770.8 = 61.11% $1,877 77.4 .4 + $645 $645.3 .3   $1,8   2

Sears’ return on equity has improved significantly during the last l ast year. (b) Sears Sears is performi ng as well as as the industry average average in both years.




PROBLEM 13-11A 13-11A (a) (a) Preferred dividends div idends ÷ Preferred dividend div idend per share $150,000 ÷ $5 = 30,000 preferred shares (b) Preferred Preferr ed share average pri ce = $3,150 $3,150,00 ,000 0 ÷ 30,0 30,000 00 shares sh ares issued = $105 per share Common Comm on share sh are average pric pr ice e = $1,00 $1,000,0 0,000 00 ÷ 250, 250,000 000 shares sh ares issued iss ued = $4 per share sh are (c) The shares were issued is sued for an average average selli ng price pri ce of $4 (see (b) above) which means the company would have reduced the Common Shares account by $100,000 (25,000 X $4). Since a reduction to retained earnings is shown relating to this reacquisition for $56,250, this indicates the company had to pay $156,250 ($100,000 + $56,250) to reacquire the 25,000 shares. (d) Limi ted liability for preferred preferred shareholders shareholders = $3,150,000 Limited liability for common shareholders shareholders = $4,600,000 - $3,150,000 = $1,450,000 (e) (e) It is a loss los s that bypasses the income inc ome statement because it has not yet been realized. An example is an unrealized loss on i nvestments th at are available available for s ale. ale.




PROBLEM 13-1B 1.

A partnership woul d be the most likely lik ely form of business busi ness for the students to choose. It is simpler to form than a corporation corpo ration and less less cost ly.

2.

Chris will wi ll likely operate operate his lawn maintenance maintenance service as a proprietorship because he is planning on operating it for a short time period and a proprietorship is the simplest and least least costly cos tly to for m and dissol ve.

3.

Ron woul d likely form a corporation corpo ration because because he probably needs needs to t o raise funds to buy equipm ent. ItIt is normally norm ally easie easierr to raise funds through a corporation. A corporation is also the only form of bus iness that that provides limited liability to it owners. ow ners. There There may also be income inc ome tax benefits .

4.

Hervé Hervé would wou ld likely lik ely form a corpor ation because because he needs needs to raise funds to invest in inventories and equipment. He has no savings or personal assets and it is normally easier to raise funds through th rough a corporation.

5.

A proprietorshi propr ietorship p would wou ld be the most likely lik ely form of business busin ess for Johnny. It is simpler to form than a corporation and less costly. A corporation is the only form of business that provides limited liability to it owners. However, is unlikely that incorporating the business would shield Johnny from personal liabili ty in the t he event event of an accident.




PROBLEM 13-2B (a) Shares author auth orized ized Shares issu is sued ed

500,00 500,000 0 200,00 200,000 0

(b) Common Comm on shares sh ares Contributed capital – reacqui reacquisiti sition on of Common Comm on shares sh ares Retained earning earni ngss

$830,0 $830,000 00 $10,50 $10,500 0 $680,0 $680,000 00

Calculations:

Common shares (a) Bal 1. 2. 3. 4. 5.

$1,000,000 127,500 1,127,500 (20,500) 1,107,000 55,000 1,162,000 (49,800) 1,112,200 (282,200) $ 830,000

Contributed Averag Av erage e capital – Number issue reacquisition of share sh aress price of common (b) (a) ÷ (b) shares 250,000 25,000 275,000 (5,000) 270,000 10,000 280,000 (12,000) 268,000 (68,000) 200,000

Retained earnings

$4.00

$10,000

$680,000

4.10

10,000 500 10,500

680,000

10,500 (10,200) 300 10,200 $10,500

680,000

4.10 4.15 4.15 4.15

680,000

680,000 000000 0 $680,000




PROBLEM 13-3B Year Dividend Paid 1 $20,000 2 15,000 3 30,000 4 35,000

(a) (b) Noncumulative Common Cumulative Common Preferred Preferred $20,000 $ 0 $20,000 $ 0 15,000 0 15,000 0 20,000 10,000 25,000 5,000 20,000 15,000 20,000 15,000

1. Regular divid div idend end is $4 X 5,000 5,000 = $20,00 $20,000 0 2b. Arrear Ar rearss = $20,000 $20,000 - $15,000 $15,000 = $5,000 $5,000 3b. Preferred dividend = $20,000 (regular) + $5,000 (arrears) = $25,000

Solutions Manual 13-49 Chapter 13 Copyright © 2009 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.



PROBLEM 13-4B Shareholders' Shareholders' Equity Asset As setss 1. 2. 3. 4. 5. 6. 7.

+$23,550 -200,000 n/a +25,000 +7,500 -15,000 +2,500

Liabi Li abilili ti es n/a n/a n/a n/a n/a n/a n/a

Preferred Shares n/a n/a -$70,000 n/a +7,500 n/a n/a

Accu Ac cumu mulat lated ed Other Common Retained Other Contributed Shares Earnings Comprehensive Capital Income +$23,550 n/a n/a n/a -160,500 -$30,000 -$9,500 n/a +70,000 n/a n/a n/a +25,000 n/a n/a n/a n/a n/a n/a n/a n/a n/a -15,000 -15,000 n/a n/a n/a n/a +$2,500

2. Average share price = ($2,400,000 + $23,550) ÷ (150,000 + 1,000) = $16.05 3. $350,000 ÷ 5,000 = $70; $70 X 1,000 = $70,000

Solutions Manual



Chapter 13


PROBLEM 13-5B

(a) Date Date

GENERAL JOURNAL Account Titles and Explanation Explanation

J1 Debit Debit

Credit Credit

Feb. 10 Cash (80,000 X $4).............................. 320,000 Commo Com mon n Shares Shar es .............. ..................... .............. .......

320,000 320,000

Mar. Mar . 1 Cash (5,000 X $115)............................ 575,000 Preferr Pref erred ed Shares Shar es ............... ...................... ............. ......

575,000 575,000



PROBLEM 13-5B

(a) Date Date

GENERAL JOURNAL Account Titles and Explanation Explanation

J1 Debit Debit

Credit Credit

Feb. 10 Cash (80,000 X $4).............................. 320,000 Commo Com mon n Shares Shar es .............. ..................... .............. .......

320,000 320,000

Mar. Mar . 1 Cash (5,000 X $115)............................ 575,000 Preferr Pref erred ed Shares Shar es ............... ...................... ............. ......

575,000 575,000

Apr Ap r . 1 Land Lan d (22,000 X $4.25) ......................... 93,500 Commo Com mon n Shares Shar es .............. ..................... .............. .......

93,500 93,500

Jun. Ju n. 20 Cash (78,000 X $4.50)......................... 351,000 Commo Com mon n Shares Shar es .............. ..................... .............. .......

351,000 351,000

Aug. Au g. 1 Legal Leg al Fees Expen Ex pense se (10,000 X $4.75) 47,500 Commo Com mon n Shares .............. ...................... .............. ......

47,500 47,500

Sep. 1 Cash (10,000 X $5)............................. . 50,000 Commo Com mon n Shares Shar es .............. ...................... .............. ......

50,000 50,000

Nov. Nov . 1 Cash (1,000 X $117)............................ 117,000 Preferr Pref erred ed Shares Shar es .............. ...................... .............. ......

117,000 117,000

Jan. Jan . 31 Incom Inc ome e Summar Sum maryy ............... ...................... .............. ......... .. 500,000 500,000 Retained Retain ed Earnin Earn ings gs ............... ...................... .......... ...

500,000 500,000

31 Divid Div idend endss .............. ...................... ............... .............. ............... ........ 24,000 24,000 Cash .............................. ..................

24,000

31 Retained Retain ed Earni Earn i ngs ng s .............. ..................... ............... .......... 24,000 24,000 Divid Div idend endss ............... ...................... .............. .............. .......... ...

24,000 24,000




PROBL PROBLEM EM 13-5B 13-5B (Con (Contitinued) nued) (b) Preferred Shares Date Date Explanation Explanatio n Mar. Nov.

1 1

10 1 20 1 1

Dividends Date Date Jan. 31 31

Ref. Ref.

Explanation Explanatio n Closing entry

Closing entry Closing entry

Ref. Ref.

Credit

Balance

575,000 575,000 117,000 692,000

Debit Debit

J1 J1 J1 J1 J1

Retained Earnings Date Date Explanation Explanatio n Jan. 31 31

Debit Debit

J1 J1

Common Shares Date Date Explanation Explanatio n Feb. Apr Ap r . June Aug. Au g. Sept.

Ref. Ref.

Credit 320,000 93,500 351,000 47,500 50,000

Debit Debit

Credit

320,000 413,500 764,500 812,000 862,000

Balance

J1 J1

24,000

Ref. Ref.

Debit Debit

Credit

24,000

500,000 500,000 476,000

J1 J1

24,000

Balance

24,000 0

Balance




PROBL PROBLEM EM 13-5B 13-5B (Con (Contitinued) nued) (c) WETLAND CORPORATION Balance Sheet (Partial) January 31, 2008 _______________________ ___________________________________ ________________________ ___________________ _______ Shareholders' Shareholders' equity Share capital capit al $4-noncu $4-noncumul mulative ative preferred shares, no par value, unlimit unli mited ed number of shares author authorize ized, d, 6,000* 6,000* shar s hares es issu is sued ed .............. ...................... ............... .............. ............... ........ $ 692,000 692,000 Common shares, no par value, value, unlimi ted number of shares sh ares author auth orized, ized, 200,00 200,000** 0** shares sh ares issu is sued ed 862,00 862,000 0 Total Tot al s hare har e capit cap ital al ............... ...................... .............. ............... ............... .............. .......... ... 1,554,000 1,554,000 Retained Retain ed earnin earn ings gs .............. ...................... ............... .............. ............... ............... ........... .... 476,000 476,000 Total Tot al shareho sh arehold lders ers’’ equ equitityy .............. ..................... ............... ............... .......... ... $2,030,000 $2,030,000 *5,000 *5,000 + 1,000 = 6,000 6,000 shares sh ares **80,000 + 22,000 + 78,000 + 10,000 + 10,000 = 200,000 shares




PROBLEM 13-6B (a)

GENERAL GENERAL JOURNAL

Date Date

Account Titles and Explanation Explanation

J1 Debit Debit

Credit Credit

Feb. 1 Cash .............................. ...................... 55,500 Commo Com mon n Shares Shar es .............. ..................... .............. .......

55,500 55,500

Sep. 3 Cash .............................. ...................... 107,000 Preferr Pref erred ed Shares Shar es .............. ..................... .............. .......

107,000 107,000

Oct. Oct . 25 Commo Com mon n Shares Shar es (10,000 (10,000 X $7.10*) $7.10*) .... 71,000 71,000 Contributed Capital – Reacquisit Reacquisition ion of Commo Com mon n Shares Shar es ............... ...................... ......... .. 2,500 Retained Retain ed Earnin Earn ings gs ............... ...................... .............. ......... 1,500 Cash ................................. ...............

75,000

*Average *Average Cost per Comm on Share:

Transaction Transactio n Date Beginni Begi nni ng balanc e Februar Febr uaryy 1 Total Tot al

Number of Common Shares Issued 200,00 200,000 0 5,000 205,000

Proceeds Proceeds of Issue $1,400 $1,400,00 ,000 0 55,500 55,500 $1,455,500

$1,455,500 205,000 = $7.10 Dec. 31 Incom Inc ome e Summar Sum maryy ............... ...................... .............. ......... .. 60,000 60,000 Retained Retain ed Earnin Earn ings gs ............... ...................... .......... ...

60,000 60,000

31 Divid Div idend endss .............. ...................... ............... .............. .............. ......... 12,000 12,000 Cash ............................... .................

12,000




PROBL PROBLEM EM 13-6B 13-6B (Con (Contitinued) nued) (a) (Continued) Dec. 31 Retained Retain ed Earnin Earn ings gs ............... ...................... .............. ......... 12,000 12,000 Divid Div idend endss .............. ..................... ............... ............... .......... ...

12,000 12,000

(b) Preferred Shares Date Date Explanation Explanatio n Jan. Sep.

1 3

Debit Debit

Balance

Ref. Ref.

Debit Debit

Balance J1 J1

Credit

Balance

320,000 107,000 427,000

J1

Common Shares Date Date Explanation Explanatio n Jan. 1 Feb. 1 Oct. 25

Ref. Ref.

71,000

Credit

Balance

1,400,000 55,500 1,455,500 1,384,500

Contributed Capital – Reacquisit Reacquisition ion of Shares Shares Date Date Explanation Explanatio n Ref. Ref. Debit Debit Credit Jan. 1 Oct. 25 Dividends Date Date Jan. 31 31

Balance

Explanation Explanatio n Closing entry

2,500 J1

2,500

Ref. Ref.

Debit Debit

J1 J1

Credit 12,000

12,000

Balance 2,500 0

Balance 12,000 0




PROBL PROBLEM EM 13-6B 13-6B (Con (Contitinued) nued) (b) (Continued) Retained Earnings Date Date Explanation Explanatio n Jan. 1 Oct. 25 Dec. 31 31

Ref. Ref.

Debit Debit

Balance Closing entry Closing etnry

J1 J1 J1

1,500 12,000

Credit

Balance

488,000 486,500 60,000 546,500 534,500

(c) CHEUNG CORPORATION Balance Sheet (Partial) December 31, 2008 _______________________ ___________________________________ ________________________ ____________________ ________ Shareholders' Shareholders' equity Share capital capit al $5-cumu $5-cumulativ lative e preferred shares, no par value, 25,000 25,000 shares sh ares authori autho rized, zed, 4,000* 4,000* shares sh ares iss ued $ 427,00 427,000 0 Common shares, no par value, value, unlimi ted number of shares sh ares author auth orized, ized, 195,00 195,000** 0** shares sh ares issu is sued ed 1,384, 1,384,500 500 Total Tot al share sh are capit cap ital al .............. ...................... ............... .............. ............... ............ .... 1,811,500 1,811,500 Retained Retain ed earnin earn ings gs ............... ...................... .............. .............. ............... ............... ......... .. 534,500 534,500 Total Tot al shareho sh arehold lders ers’’ equit equ ityy ............... ...................... .............. ......... $2,346,00 $2,346,000 0 *3,000 + 1,000 = 4,000 preferred shares ** 200,000 200,000 + 5,000 5,000 – 10,000 10,000 = 195,000 195,000 com mon mo n shar s hares es Note X: Dividend Divi dendss of $8,000 $8,000 are are in i n arrears ar rears.. (4,000 (4,000 X $5 $5 - $12,00 $12,000) 0)




PROBLEM 13-7B (a) Date Date


J1 Debit Debit

Feb. 1 Land Lan d (1,000 x $120) ......................... Preferr Pref erred ed Shares Shar es ............... ...................... ........... ....

120,000

Mar. 1 Preferr Pref erred ed Shares Shar es (500 X $112*) $112*) ...... Commo Com mon n Shares ............... ...................... ........... ....

56,000 56,000

Credit Credit 120,000 120,000 56,000 56,000

*Average cost of preferred shares: ($440,000 + $120,000) (4,000 + 1,000) = $112 Jul Ju l .

1 Cash (1,500 X $130)......................... Preferr Pref erred ed Shares Shar es ............... ...................... ........... ....

195,000 195,000 195,000

Sep. 1 Preferr Pref erred ed Shares Shar es (1,000 (1,000 X $116.50**) $116.50**) 116,500 116,500 Commo Com mon n Shares Shar es .............. ..................... ............ ..... 116,500 116,500 ** Average co st of preferr pr eferred ed shares: sh ares: ($440, ($440,000 000 + $120, $120,000 000 – $56,000 + $195,000) (4,000 + 1,000 – 500 + 1,500) = $116.50 Dec. 31 Revenues Reven ues ................................ ......... Incom Inc ome e Summar Sum maryy .............. ...................... ........... ...

500,000

31 Incom Inc ome e Summar Sum maryy ............... ...................... ............. ...... Expens Exp enses es .............. ..................... ............... ............... ......... ..

450,000 450,000

31 Incom Inc ome e Summar Sum maryy ............... ...................... ............. ...... Retained Retain ed Earnin Earn ings gs ............... ...................... .........

50,000 50,000

500,000 500,000 450,000 450,000 50,000 50,000




PROBL PROBLEM EM 13-7B 13-7B (Con (Contitinued) nued) (b) Preferred Shares Date Date Explanation Explanatio n Jan. Feb. Mar Jul Sep.

1 1 1 1 1

Balance J1 J1 J1 J1

Common Shares Date Date Explanation Explanatio n Jan. Mar Sep.

1 1 1

Ref. Ref.

Debit Debit

Credit

Balance

440,000 120,000 560,000 504,000 56,000 195,000 699,000 582,500 116,500

Ref. Ref. Debit Debit

Balance

Credit

Balance

1,050,000 56,000 1,106,000 116,500 1,222,500

J1 J1

Contributed Capital—Reacquisition of Preferred Shares Date Date Explanation Explanatio n Ref. Ref. Debit Debit Credit Balance Jan.

1

Balanc e

Retained Earnings Date Date Explanation Explanatio n Jan. 1 Dec. 31

Balance Closing Entry

25,000 25,000

Ref. Ref.

Debit Debit

J1

Accu Ac cum m ulated ul ated Other Oth er Compr Com prehen ehensi sive ve Inco In com me Date Date Explanation Explanatio n Ref. Ref. Debit Debit Jan.

1

Balanc e

Credit

Balance

300,000 50,000 350,000

Credit

Balance 10,000 10,000




PROBL PROBLEM EM 13-7B 13-7B (Con (Contitinued) nued) (c) REMMERS CORPORATION Balance Sheet (Partial) December 31, 2008 _______________________ ___________________________________ ________________________ ___________________ _______ Shareholders' Shareholders' equity Contributed capital Share capital capit al $5 cumulati cum ulative ve preferred shares, no par value, converti con vertible ble 10,0 10,000 00 shares autho rize ri zed, d, 5,000* 5,000* shares sh ares issu is sued ed .............. ...................... ............... .............. ............. ...... $ 582,500 582,500 Common sh ares, ares, no par value, unlimi ted shares autho aut hori rized, zed, 85,000** 85,000** shares sh ares issu is sued.......... ed................. ......... .. 1,222,500 1,222,500 Total Tot al share sh are capit cap ital al .............. ...................... ............... .............. ............... ............ .... 1,805,000 1,805,000 Addi Ad ditition onal al cont co ntrr i buted bu ted capi cap i tal Contributed capital – reacquis reacquis ition iti on of prefer pr eferred red shares sh ares .............. ...................... ............... .............. .............. ............. ...... 25,000 25,000 Total Tot al cont co ntri ribu buted ted capit cap ital al ............... ...................... .............. .............. ............. ...... 1,830,000 1,830,000 Retained Retain ed earni ngs ng s ............... ...................... .............. .............. ............... ............... ......... .. 350,000 350,000 Accu Ac cum m ulated ul ated other ot her com co m prehen pr ehensi sive ve inc i ncom ome e ........... 10,000 Total Tot al shareho sh arehold lders ers’’ equi ty .............. ..................... ............... ............... .............. ......... $2,190,000 $2,190,000 * 4,000 + 1,000 – 500 + 1,500 1,500 – 1,000 1,000 = 5,000 5,000 preferr pref erred ed shar s hares es ** 70,000 + 5,000 + 10,000 = 85,000 common shares Note X: Div idends id ends of $25,00 $25,000 0 (5,00 (5,000 0 X $5) $5) are in arrears




PROBLEM 13-8B (a) Date Date


J1 Debit Debit

Dec. 31 Sales Revenue Revenu e ............... ...................... .............. ........... .... Incom Inc ome e Summar Sum maryy .............. ..................... ........... ....

596,000 596,000

31 Incom Inc ome e Summar Sum maryy ............... ...................... ............. ...... Salaries Salar ies Expens Exp ense e .............. ...................... ........... ... Cost Cos t of Goods Goo ds Sold Sol d ............... ..................... ...... Amor Am ortt i zation zati on Expens Exp ense e ................. Interes Int erestt Expens Exp ense e .............. ..................... ............ ..... Rent Expens Exp ense e .............. ..................... ............... .......... .. Incom Inc ome e Tax Expens Exp ense e .............. ................... ..... Utili Uti litities es Expens Exp ense e .............. ..................... ............ ..... Insur Ins uranc ance e Expens Exp ense e ............... ...................... ....... Suppl Sup plies ies Expens Exp ense e .............. ..................... .......... ...

506,000 506,000

31 Incom Inc ome e Summar Sum maryy .............. ...................... .............. ...... Retained Retain ed Earnin Earn ings gs .............. ...................... ..........

90,000 90,000

31 Retained Retain ed Earnin Earn ings gs ............... ...................... ............ ..... Divid Div idend endss ............... ...................... .............. .............. ......... ..

10,000 10,000

Credit Credit 596,000 596,000 176,000 176,000 148,000 148,000 84,000 31,500 31,500 24,000 24,000 22,000 22,000 12,000 12,000 6,000 2,500 90,000 90,000 10,000 10,000




PROBL PROBLEM EM 13-8B 13-8B (Con (Contitinued) nued) (b) MOORCRAFT LTD. Balance Sheet December 31, 2008 _______________________ ___________________________________ ________________________ ___________________ _______ Ass As s ets Current assets Cash ............................... .................................. ............ $ 21,000 Acc Ac c ount ou ntss recei r eceivab vabll e ................................. .................. 69,000 Invent Inv entor oryy ............... ...................... ............... ............... .............. ............... ............... .............. .......... ... 40,000 40,000 Prepaid Prep aid insu in suran rance........... ce.................. ............... ............... .............. .............. ............... ........ 10,000 10,000 Suppl Sup plies ies ............... ...................... .............. ............... ............... .............. ............... ............... ........... .... 5,000 Total Tot al curr cu rrent ent assets ass ets .............. ..................... .............. ............... ............... ........... .... 145,000 145,000 Property, plant, and equipment Land Lan d .............................. .................................. $ 45,000 45,000 Buil Bu ildi ding ng ............... ...................... .............. ............... .......... .. $600,000 $600,000 Accu Ac cum m ulated ul ated amor am ortt i zation zati on ......... (80,000) 520,000 Equipment................................... $300,000 Accu Ac cum m ulated ul ated amor amo r tizati ti zati on ......... (90,000) 210,000 Total proper pr operty, ty, plant, pl ant, and equipm equi pment ent ....... .......... ....... ........ ....... ...... ... 775,00 775,000 0 Total Tot al assets ass ets ......... ................ .............. ............... ............... .............. .............. ............... ........ $920,000 $920,000 Liabilities Liabili ties and Shareholders’ Shareholders’ Equity Current liabilities Acco Ac coun untt s payabl pay able e ............................... ........................ $ 52,000 Salaries Salar ies payabl e.............. ..................... ............... ............... .............. .............. ............... ........ 8,000 8,000 Interes Int erestt payabl e .............. ..................... ............... ............... .............. .............. ............... ........ 2,500 2,500 Incom Inc ome e tax payabl e............... ...................... ............... ............... .............. ............... .......... 10,000 10,000 Unearned Unearn ed sales sal es revenu rev enue...... e............. .............. ............... ............... .............. .......... ... 24,000 24,000 Current Curr ent porti por tion on of long-t lo ng-term erm debt ....... ........... ....... ....... ........ ....... ....... .... 10,000 10,000 Total Tot al curr cu rrent ent l iabil iab il ities it ies ............... ...................... .............. ............... .............. ...... 106,500 106,500 Long-term debt Long-term Lon g-term mortgage, mor tgage, net of current cur rent porti por tion on ..... ....... .... ..... ..... 340, 340,00 000 0 Total Tot al liabi li abililitities es .............. ...................... ............... .............. ............... ............... ............ ..... 446,500 446,500 Solutions Manual 13-61 Chapter 13 Copyright © 2009 John Wiley & Sons Canada, Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.



PROBL PROBLEM EM 13-8B 13-8B (Con (Contitinued) nued) (b) (Continued) MOORCRAFT LTD. Balance Sheet December 31, 2008 _______________________ ___________________________________ ________________________ ___________________ _______ Shareholders’ Shareholders’ equity Contributed capital Share capital capit al $4 noncum ulative preferred shares, shares, unlimit unli mited ed autho aut hori rized, zed, 2,500 i ss ssued ued .............. ...................... ............... .............. ......... .. 50,000 50,000 Common sh ares, ares, unlimit unli mited ed authori authori zed, zed, 100,000 i s sued su ed ................................ ...................... 150,000 Total Tot al share sh are capit cap ital al .............. ...................... ............... .............. ............... .............. ...... 200,000 200,000 Other Other contr ibuted capital Reacq Reacqui uisi sitition on of comm co mmon on shares sh ares ....... .......... ....... ........ ....... ....... .... 5,000 5,000 Total Tot al cont co ntri ribu buted ted capi cap i tal .............. ..................... .............. ............... ............... ........... .... 205,000 205,000 Retained Retain ed earni ngs* ng s* .............. ...................... ............... .............. ............... ............... ............ ..... 245,000 245,000 Accu Ac cum m ulated ul ated other ot her c ompr om prehen ehenss i ve inc i ncom ome e................ 23,500 Total Tot al shareho sh arehold lders ers’’ equit equ ityy .............. ..................... ............... ............... .............. .......... ... 473,500 473,500 Total liabili liabi litities es and and sharehol ders’ equi ty .... ....... ..... ..... ..... $920 $920,0 ,000 00 *Retained *Retained earni earnings ngs Balanc Bal ance, e, Jan. Jan . 1............. 1.................... ............... ............... ............ ..... $165,000 $165,000 Add: Ad d: Net inc i ncom ome e .............................. ....... 90,000 Less: Les s: Divid Div idend endss ............... ...................... .............. ............... .......... (10,000) (10,000) Balance, Dec. 31 ..................................... $245,000




PROBLEM 13-9B (a) MAGNOTTA WINERY CORPORATION Balance Sheet January 31, 2006 _______________________ ___________________________________ ________________________ ___________________ _______ Asset As setss Current assets Acc Ac c ount ou ntss recei r eceivab vabll e ................................. ............... $ 347,669 Invent Inv entor ories ies ........ ................ ............... .............. ............... ............... .............. .............. ........... .... 20,505,669 20,505,669 Prepaid expenses expens es and deposi depo sits ts ........ ........... ....... ........ ....... ....... ....... ... 671,96 671,961 1 Total Tot al curr cu rrent ent assets asset s .............. ..................... .............. ............... ............... ......... 21,525,299 21,525,299 Capital Capi tal assets ass ets ............... ...................... .............. ............. ...... $33,129,08 $33,129,085 5 Accu Ac cum m ulated ul ated amor amo r tizati ti zati on ................ (11,298,085) 21,831,000 Winery Win ery l icens ic enses es .............. ..................... ............... ............... .............. ............... ............... ......... 251,516 251,516 Total Tot al assets ass ets ............... ...................... .............. ............... ............... .............. .............. ........... .... $43,607,81 $43,607,815 5 Liabilities Liabili ties and Shareholders’ Shareholders’ Equity Current liabilities Bank Ban k indeb in debted tednes nesss ............... ...................... .............. ............... ............... ............. ...... $ 4,757,181 4,757,181 Acc Ac c ount ou ntss payab p ayabll e and accru acc rued ed l i abil abi l i ties ti es .............. 1,289,814 Incom Inc ome e taxes tax es payabl e ............... ...................... .............. .............. ............... .......... .. 130,754 130,754 Current Curr ent porti por tion on of long-t lo ng-term erm debt ....... ........... ....... ....... ....... ....... ...... 1,477, 1,477,404 404 Total Tot al curr cu rrent ent l iabil iab il ities it ies ............... ...................... .............. ............... ........... ... 7,655,153 7,655,153 Long-term liabilities Long Lo ng-ter -term m debt deb t ............... ...................... .............. ....... $8,681,328 $8,681,328 Futur Fut ure e inco in come me taxes tax es .............. ..................... ....... 1,047,517 1,047,517 9,728,845 9,728,845 Total Tot al liabi li abililitities es .............. ...................... ............... .............. .............. ............... .......... .. 17,383,998 17,383,998




PROBL PROBLEM EM 13-9B 13-9B (Con (Contitinued) nued) (a) (Continued) MAGNOTTA WINERY CORPORATION Balance Sheet January 31, 2006 _______________________ ___________________________________ ________________________ ___________________ _______ Shareholders’ Shareholders’ equity Contribut ed capital capital Common sh ares, ares, unlim ited authori zed, zed, 13,670,005 i s sued su ed .................................. ......... 6,165,817 Other cont co ntri ribu buted ted capital capi tal ....... ........... ....... ....... ........ ....... ....... ........ ....... ... 210,00 210,000 0 Total cont co ntri ribut but ed capital capi tal ....... .......... ....... ........ ....... ....... ...... .. 6,375, 6,375,817 817 Retained Retain ed earn earnin ings gs** ............... ...................... .............. ............... ............... ............. ...... 19,848,000 19,848,000 Total Tot al shareho sh arehold lders ers’’ equit equ ityy ............... ...................... .............. ............ ..... 26,223,817 26,223,817 Total liabil li abilitities ies and an d shareho s harehold lders’ ers’ equity equi ty ....... ........... ....... ..... $43,6 $43,607, 07,815 815 *$17,273,203 + $2,574,797 = $19,848,000 (b) Retur Return n on equit y = Net Net incom in come e ÷ Average shareholders’ sharehol ders’ equi ty $2,574,797 = 10.34% $26,223,817 817 + $23,582,3 $23,582,360 60   $26,223,   2




PROBLEM 13-10B (a) (a) Retur Return n on equi equity ty = Net Net income inc ome ÷ Average shareholders’ sharehol ders’ equity 2005

2004

$330.1 = 13.86% $2,511.1 .1 + $2,251 $2,251.2 .2   $2,511   2 $291.5 = 13.66% $2,251.2 .2 + $2,017 $2,017.1 .1  $2,251   2

Canadian Canadian Tire’s Tire’s r eturn on equity has incr eased eased very slight ly during duri ng the t he last year. year. (b) Canadian Tire is performing at the same level as the industry indus try average average during both years. years.




PROBLEM 13-11B (a) $1,200 $1,200,00 ,000 0 ÷ 12,000 12,000 = $100 $100 average sell ing in g pric pr ice e of the th e preferred shares. $1,000,000 ÷ 100,000 = $10 average selling price of the comm on shares. (b) It appears appears that there were no dividends divi dends declared in 200 2008 8 since there was no decrease in retained earnings during the th e year. year. (c) Since the preferred shares are nonc umulati umu lative, ve, there are no dividends divi dends in arrears. arrears. (d) The shares were issued is sued for an an average average selli ng pric e of $10 $10 (see (a) above) which means the company would have reduced the common share account by $200,000 (20,000 X $10). Since the company has established a contributed capital account related to this reacquisition for $40,000, this indicates the company only had to pay $160,000 ($200,000 - $40,000) to reacquire the 20,000 shares. (e) (e) It is income inco me that bypasses bypasses the inco me statement. An example of accumulated other comprehensive income is unrealized gains on investments that are available for sale.




CONTINUING COOKIE CHRONICLE (a) (a) 1. One of the major advantages advantages of issui ng preferred shares is that the preferred shareholder does not have voting rights. In this case, Curtis’s dad and Natalie’s grandmother can participate in the future success of Cookie & Coffee Creations (by receiving annual dividends) without attempting to influence any decisions that would wo uld require r equire shareholder shareholder approval. Both will receive an annual dividend as long as the dividend is declared. Any additional dividends declared and paid will be paid to the common shareholders. This could prove to be another another advantage to both bo th Natalie Natalie and Curtis if the company is successful and has excess cash to pay out divid ends. 2. It is possibl poss ible e to pay pay for the $75 $750 0 legal legal bill by is suing suin g common shares. However, the cost principle still applies. Cost must equal the cash equivalent price which is generally the fair market value of the consideration given up. If this amount cannot be determined, we then look to the fair market value of the consi deration deration received received to d etermi etermine ne the cash cash equivalent price. In this case, Curtis and Natalie are receiving shares with a value of $1 per share. This $1 per share is the estimated fair value of the shares being given up in return for the legal fee expense. As a result, 750 shares should shoul d be given giv en up valued at $750 $750,, which whi ch i s the t he value value of the legal l egal fees.




CONTINUIN CONTINUING G COOKIE CHRONICLE CHRONICLE (Conti (Cont i nued) nu ed) GENERAL GENERAL JOURNAL Date Date (b) Nov. Nov .

(c) Nov. Nov .

Account Titles and Explanation Explanation

J1 Debit Debit

1 Cash ............................. .................... Acco Ac coun untt s Receivab Recei vabll e ...................... Merchandi Merch andise se Inventor Invent oryy ....... ........... ....... ....... ...... Equip Equ ipmen mentt ............... ...................... .............. ............... .......... .. Commo Com mon n Shares Shar es .............. ..................... ............ .....

17,500 600 1,580 1,580 3,500

1 Cash ............................. .................... Preferr Pref erred ed Shares Shar es ............... ...................... ........... ....

10,000

1 Legal Leg al Expens Exp ense e ............... ...................... .............. ........... .... Commo Com mon n Shares Shar es .............. ..................... ............ .....

750

Credit Credit

23,180 23,180

10,000 10,000 750




CONTINUIN CONTINUING G COOKIE CHRONICLE CHRONICLE (Conti (Cont i nued) nu ed) (d) COOKIE & COFFEE CREATIONS LTD. Balance Sheet November Novemb er 1, 2008 ________________________ ___________________________________ _______________________ ___________________ _______ Asset As setss Current assets Cash ................................. .................................. ........ $27,500 Acco Ac coun unts ts recei rec eivab vabll e............................... .................... 600 Merchan Merc handi dise se inven in vento tory ry ............... ...................... .............. .............. ............... .......... .. 1,580 Total Tot al curr cu rrent ent assets ass ets ............... ...................... ............... ............... .............. ....... 29,680 29,680 Property, plant, and equipment Equip Equ ipmen mentt ............... ...................... .............. ............... ............... .............. .............. ............... .......... 3,500 Total Tot al asset as setss .............. ...................... ............... .............. ............... ............... .............. ....... $33,180 $33,180 Shareholders' Shareholders' Equity Share capital capit al $0.5 $0.50 0 preferred shares, no p ar value, noncu mulative, mul ative, 10,000 10,000 autho aut hori rized, zed, 2,000 shares sh ares issu is sued ed ............. ............. $10,000 $10,000 Common shares, no par value, value, unlimi ted number of shares sh ares author auth orized, ized, 23,930 23,930 shares sh ares issu is sued ed ....... .......... ... 23,930 23,930 Total Tot al share sh are capit cap ital al .............. ...................... ............... .............. .............. ........... .... 33,930 33,930 Defic Defi c i t ................................. .................................. .............. (750) Total Tot al shareho sh arehold lders ers'' equi equ i ty ............... ...................... .............. ............ ..... $33,180 $33,180




BYP 13-1 FINANCIAL FINANCIAL REPORTING REPORTING PROBLEM (a) (a) The Forzani Grou Group p Limi ted has has 2 classes cl asses of shares. There There is an unlimited number of Class A shares authorized and 32,922,000 issued; and an unlimited number of preferred shares authori authori zed zed but none issued. iss ued. (b) Per Per note 8 to the financi al statements , Forzani issued is sued 47,0 47,000 00 shares shares upon employees employees exerci exercising sing stock options. optio ns. (c) Per Per note 8 to the financi fi nancial al statements, statements , it appears appears that Forzani repur chased 135,0 135,000 00 shares in fiscal fi scal 2005 2005 at at a cos t of $1,5 $1,510 10,0 ,000 00 but that none w ere repurc hased in 2006 2006.. (d) The average cost co st of the comm co mmon on shares is $4.20 $4.20 (138,1 (138,131 31 ÷ 32,922). (e) (e) Retur Return n on equi equity ty = Net Net Income ÷ Average shareholders’ sharehol ders’ equity 2005:

$21,545 = 8.68% $262,847 847 + $233,2 $233,296 96   $262,   2

The company’s return on equity has declined over the past year from 8.68% in fiscal 2005 to 5% in fiscal 2006.




B YP 13-2 INTERPRETING FINANCIAL STATEMENTS (a) (a) A corporation may acqui acquire re its own shares (1) (1) to increa incr ease se trading of the company's shares in the securities market in the hope of enhancing the company’s market value, (2) to reduce the number of shares issued in order to increase earnings per share, (3) to eliminate hostile shareholders by buying them out, (4) to have additional shares available so they can be reissued to officers and employees through bonus and stock compensation plans, or used to acquire other companies, and (5) to comply with percentage share ownership requirements. (b) The debit to retained earnings indicates that Talisman Energy Energy paid mo re to repurchase their com mon share s haress than their average cost. Common Shares ($355,000,000 – $290,000,000) ...... 65,000,000 Retained Retain ed Earn Earnin ings gs ............... ...................... .......... ... 290,000,00 290,000,000 0 Cash ............................... ............ 355,000,000 (c) Talisman’s profitability has improved in 2005. The company’s profit margin, return on assets, and return on equity are better th an in 2004 2004.. (d) The market value of Talisman’s shares depends on a number of factors, including the company's anticipated future earnings, its expected dividend rate per share, its current fi nancial positi on, the current state of the economy, economy, and the current s tate of the stock market. ItIt is i s apparent apparent that th at investors have a positive positiv e outlook fo r Talis Talisman. man.




BYP 13-3 COLLAB COLL ABORATIV ORATIVE E LEARNING ACTIVITY ACTIVITY All Al l of t he mater mat erii al s uppl up plem ement entii ng t he col co l l aborat abo ratii ve l earni earn i ng activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.




B YP 13-4 COMMUNICTION ACTIVITY Memorandum To: From: Re: Re:

Chief Chief Financial Officer Accountant Comprehensiv Comprehensive e Income reporting

The new standard concerning the recording and reporting of comprehensive income will affect the balance sheet prepared this fiscal fisc al year. year. Comprehensive income includes all changes in shareholders’ equity during a period except for changes that result from the sale or repurchase of shares or fro m the th e payment payment of divi dends. It includes the revenues, expenses, gains and losses included in net income, as well as the gains and losses that bypass net income but affect shareholders’ equity. The latter gains and losses loss es are know n as as “ other comprehensive incom e (loss)” . The most common example of other comprehensive income is unrealized gains and losses on investments that are available for sale. These investments must be shown at market value on the balance balance sheet. sheet. Any resulting unrealized unrealized gains o r losses lo sses wi ll be shown in the shareholders’ equity section, immediately beneath beneath Retained Retained Earnings Earni ngs.. Reporting comprehensive income will benefit current and potential shareholders. Net income is protected from market fluctuations. Also, readers will be shown the gain or loss that would have occurred if the investment had actually been sold. Lastly, since this method is used in Europe and the United States, it will be easier to consolidate the data from operations in other countries that are already using the international standard. Solutions Manual 13-73 Chapter 13 Copyright © 2009 John Wiley & Sons Canada, Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.



B YP 13-5 ETHICS CASE (a) (a) The stakeholders in this situation situ ation are: are: The director of Simplex's R & D divisi on. The president president of o f Simplex. Simp lex. The shareholders shareholders of Simplex. Those who live in the environment to be sprayed by the new (un-tested) chemical. chemi cal. (b) The president is risking the environment, and everything and everybody in it exposed to this new chemical, in order to enhance his company's sales and to preserve his job. Presidents and entrepreneurs frequently take risks in performing their leadership functions, but this action is both ir responsibl e and and unethical. (c) A parent parent company may protect itself against against loss and and most reasonable business risks by establishing separate subsidiary corporations, but whether it can insulate itself against this type of action is a matter of international corporate corpo rate law and crimi nal law.




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Chapter 13

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