BAF4M – Chapter 14
ANSWERS TO QUESTIONS
01. (a) Separate legal existence. A corporation is separate and
distinct from its owners and acts in its own name rather
than in the name of its shareholders. In contrast to a
partnership, the acts of the owners (shareholders) do not
bind the corporation unless the owners are duly appointed
agents of the corporation.
(b) Limited liability of shareholders. Because of its separate
legal existence, creditors of a corporation ordinarily have
recourse only to corporate assets to satisfy their claims.
Thus, the liability of shareholders is normally limited to
their investment in the corporation.
(c) Transferable ownership rights. Ownership of a corporation
is held in capital shares. The shares are transferable units.
Shareholders may dispose of part or all of their interest by
simply selling their shares. The transfer of ownership to
another party is (usually) entirely at the discretion of the
shareholder.
02. (a) Taxation is an advantage because corporate tax rates are
often lower than personal tax rates. It can be a
disadvantage because profits distributed to the
shareholders are not a tax deductible expense for the
corporation. Therefore profits can be subject to ―double‖
taxation—once at the corporate level and again at the
personal rates of the shareholders who receive dividends
paid out of these profits (the impact of these taxes is
somewhat reduced by the dividend tax credit that
shareholders can claim on their personal tax returns).
Questions Chapter 14 (Continued)
2. (b) Two other disadvantages of a corporation are government
regulations and corporate management.
 A corporation is subject to numerous provincial and
federal regulations. For example, laws prescribe the
requirements for issuing shares, and govern the sale
of shares to the general public.
 Professional
ownership
Professional
interests to
owners.
managers often run corporations with
being separate from management.
managers may act in their own best
the detriment of the company and its
Two advantages of a corporation are limited liability of
shareholders and ability to raising capital.
 A corporation is a separate legal entity and therefore
the shareholders are usually only liable up to their
investment in the corporation.
 A corporation has an easier time raising capital
because of features such as limited liability and the
ease of transferring shares.
3.
(a) (1) A charter is a document that creates a corporation. A
charter is also referred to as the articles of
incorporation.
(2) Organization costs are costs incurred in the formation
of a corporation. Organization costs are normally
expensed in the year they occur, rather than being
capitalized as an intangible asset, because of the
difficulty in matching the cost with the future benefits.
(b) No, this is not correct. Companies in certain industries
which are under federal jurisdiction must incorporate
federally. However, most companies in Canada are
incorporated provincially, and are free to operate in other
provinces – although they may be required to register in
other provinces in which they operate.
Questions Chapter 14 (Continued)
4.
In the absence of restrictive provisions, the basic ownership
rights of common shareholders are the rights to:
04.




vote in the election of the board of directors and in
corporate actions that require shareholders' approval,
share in corporate earnings by receiving dividends,
maintain the same percentage ownership when additional
shares of common shares are issued (the pre-emptive
right), and
share in assets upon liquidation.
5.
The market value of shares depends on a number of factors,
including the company's anticipated future earnings, its
expected dividend rate per share, its current financial position,
the current state of the economy, and the current state of the
stock market.
6.
The two principal components of shareholders' equity for a
corporation are contributed capital (the investment of cash and
other assets in the corporation by shareholders in exchange
for share capital) and retained earnings (net income minus
dividends).
05.
7. Each of the three basic financial statements for a corporation
differs from those for a proprietorship. The income statement
for a corporation will have income tax expense. For a
corporation, a statement of retained earnings is prepared to
show the changes in retained earnings during the period. In the
balance sheet, the owner's equity section is called the
shareholders' equity section, and consists of share capital
(contributed capital if the shares have a stated value) and
retained earnings.
8.
The maximum number of shares that a corporation is legally
allowed to issue is the number authorized. Letterman
Corporation is authorized to sell 100,000 common shares. Of
these shares, 53,000 common shares (60,000 issued – 7,000
reacquired) have been issued.
In Canada, shares which are reacquired are usually cancelled
and restored to the status of authorized but unissued shares.
Questions Chapter 14 (Continued)
9.
Stated value does not indicate the market value of shares, it is
an amount that represents the legal capital per share. Based
on the information provided, there is no way to tell which of
these common shares is the better investment.
10. The issue of share capital does not have any effect on the
issuer's net income. If shares are issued at a price above stated
value, the excess is credited to a shareholders' equity account,
Contributed Capital in Excess of Stated Value. This excess is
part of the company's contributed capital, and is not
considered a revenue or a gain.
11. If share prices fall below their par or stated value a company
will not be able to use the stock market as a source of
financing. Under the law, a share cannot be sold for less than
its par or stated value.
Also, as market prices increase
further away from par or stated value, creditors could have an
inadequate ―equity‖ cushion of protection if the company only
retains assets equal to its minimum legal capital.
Consequently, many companies in Canada issue no par value
shares to avoid these potential problems.
12.
When Jean-Guy purchases the original shares as part of
Innovate.com’s initial public offering, he is purchasing from the
company. The $1,000 (100 X $10) he spends to buy the shares
goes directly to Innovate.com and increases the company’s
shareholder’s equity. In the subsequent purchase, Jean Guy is
buying in the secondary market from another investor. The
proceeds from this sale go to this seller and not to
Innovate.com. Therefore there is no impact on Innovate.Com’s
financial statements as a result of the second purchase.
13. There will be no impact on Chapters’ financial statements at
the time of the share price decline. However, should Chapters
decide it would like to raise capital in the stock market, the
price decline means they will have to sell more shares to raise
the same amount of money.
Questions Chapter 14 (Continued)
14. When shares are issued for services or noncash assets, the
cost should be measured at the fair market value of the
consideration given up (in this case, the shares). If that value
cannot be reasonably determined, then the fair market value of
the consideration received should be used (in this case, the
land). In this case, the fair market value of the shares is more
objectively determinable than that of the land, since the shares
are actively traded in the stock 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.
15. A corporation may acquire its own shares (1) to reissue the
shares to officers and employees under bonus and stock
compensation plans, (2) to increase trading of the company's
shares in the stock market, in the hopes of enhancing its
market value, (3) to have additional shares available for use in
the acquisition of other companies, (4) to reduce the number of
shares issued and increase earnings per share, and (5) to
comply with percentage share ownership requirements.
16. This transaction (a) decreases total assets, (b) has no effect on
total liabilities and, (c) decreases total shareholders' equity.
17. (a) Common shares and preferred shares both represent
ownership of the corporation. Common shares signify the
basic residual ownership; preferred shares represent
ownership with certain privileges or preferences. Preferred
shareholders typically have a preference as to dividends
and as to assets in the event of liquidation. However,
preferred shareholders generally do not have voting rights.
(b) Many preferred share issues are cumulative, which means
that preferred shareholders must be paid both current year
dividends and unpaid prior year dividends before common
shareholders receive any dividends.
(c) Dividends in arrears are disclosed in the notes to the
financial statements; they are not recorded as liabilities.
Questions Chapter 14 (Continued)
18. When convertible preferred shares are converted into common
shares, the shareholder simply exchanges preferred shares for
common shares, according to a predetermined rate. To record
the conversion, the amount originally paid for the preferred
shares is transferred into the appropriate common shares
account.
This entry has no effect on (a) total assets, (b) total liabilities,
or (c) total shareholders' equity.
19. The answers are summarized in the table below:
Account
(a)
(b)
(c)
(d)
Common Shares
Retained Earnings
Contributed Capital in Excess
of Stated Value
Preferred Shares
Classification
Share capital—common shares
Retained earnings
Additional contributed capital
Share capital—preferred shares
20. The formula for calculating book value per share when a
corporation has only common shares issued is:
Total
Shareholders'
Equity
Number of
Common
Shares
Issued
Book
value

per
share
represents
the equity a common shareholder has in the net assets of the
corporation from owning one common share.
21. Book value per share represents the equity a common
shareholder has in the net assets of the corporation, from
owning one common share. Book value is based on recorded
historical costs.
Market value is at best only remotely related to book value.
A share's market value will reflect many factors, including the
company's anticipated future earnings, its expected dividend
rate per share, its current financial position, the current state of
the economy, and the current state of the stock market.
=
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 14-1
The advantages and disadvantages of a corporation are as follows:
Advantages
Separate legal existence
Disadvantages
Limited liability of shareholders
Corporation management—
separation of ownership and
management
Ability to acquire capital
Government regulations
Continuous life
Potential for additional income
tax
Corporation management—
professional management
Potential for deferred or
reduced income tax
Transferable ownership rights
BRIEF EXERCISE 14-2
Dec. 31
31
Revenue ...............................................
Retained Earnings ..........................
2,000,000
Retained Earnings ...............................
Expenses ........................................
1,500,000
2,000,000
1,500,000
BRIEF EXERCISE 14-3
Open Text may wish to repurchase shares for a number of reasons
including:
1. To increase trading of the company’s shares in the stock
market in hopes of enhancing market value.
2. To reduce the number of common shares issued and
thereby increase earnings per share
3. To have additional shares available to reissue to officers
and employees under bonus and stock compensation
plans.
4. To have additional shares available for use in the
acquisition of other companies.
5. To comply with percentage share ownership requirements.
The pre-emptive right protects shareholders from dilution of their
ownership interest due to the company selling or repurchasing
additional shares. If pre-emptive rights exist current shareholders
have the first opportunity to buy or sell their shares so that they
have the same percentage of ownership both before and after any
sales/repurchases by the company.
BRIEF EXERCISE 14-4
(a) June 1
(b) June 1
Cash (2,000 X $6) ............................................
Common Shares ........................................
12,000
Cash (2,000 X $6) ............................................
Common Shares (2,000 X $1) ...................
Contributed Capital in Excess of
Stated Value ............................................
12,000
12,000
2,000
10,000
BRIEF EXERCISE 14-5
Dec. 20
Land (5,000 X $14) .......................................
Common Shares .....................................
70,000
The market price of the shares is a reliable indicator of its value; the
advertised price of the land is not.
70,000
BRIEF EXERCISE 14-6
When issuing shares for noncash consideration, the cost is
determined to be the fair market value of the consideration given. If
the fair market value of the consideration given is not readily
determinable, then the fair market value of the consideration
received can be used. However, in this case, since the fair market
value of the consideration given up (the shares) is known, then the
purchase of the assets and issue of the common shares should be
recorded at $9.1 million. This accounting treatment is in accordance
with the cost principle.
BRIEF EXERCISE 14-7
Jan. 28
Cash (5,000 X $110) .......................................
Preferred Shares ....................................
550,000
550,000
BRIEF EXERCISE 14-8
KAPOSI CORPORATION
Balance Sheet (Partial)
December 31, 2003
Shareholders' equity
Contributed capital
Share capital
8% preferred shares, cumulative, $25 stated
value, unlimited number of shares authorized,
800 shares issued ...................................................
Common shares, no par value, unlimited number
of shares authorized, 5,000 shares issued............
Additional contributed capital
Contributed capital in excess of stated value—
preferred shares......................................................
Total contributed capital ....................................
Retained earnings .....................................................................
Total shareholders' equity
$ 20,000
50,000
10,000
80,000
0 29,000
$109,000
BRIEF EXERCISE 14-9
Book value per share = $21.50 ($860,000  40,000)
BRIEF EXERCISE 14-10
Shareholders were anxious to pay increasing amounts because of
their expectations of the future profitability of the company. They
expected that the company would be successful in the future and
wanted to buy the shares while the price was relatively low.
SOLUTIONS TO EXERCISES
EXERCISE 14-1
(a) High $260.00
Low $35.00
(b) 575,000
(c) 1,000 X $164.50 = $164,500
(d) Since this company has not paid any dividends this year but
has had significant growth, the person purchasing these
shares would most likely be looking for price increases.
(e) $164.50 – $17.25 = $147.25 (closing price – net change)
EXERCISE 14-2
(a) Jan. 10 Cash (70,000 X $5) ....................................
Common Shares................................
350,000
July 01 Cash (40,000 X $7) ....................................
Common Shares (40,000 X $7) .........
280,000
(b) Jan. 10 Cash (70,000 X $5) ....................................
Common Shares (70,000 X $2) .........
Contributed Capital in Excess of
Stated Value (70,000 X $3) .............
350,000
350,000
280,000
140,000
210,000
July 01 Cash (40,000 X $7) ....................................
Common Shares (40,000 X $2) .........
Contributed Capital in Excess of
Stated Value (40,000 X $5) .............
280,000
80,000
200,000
EXERCISE 14-3
(1) Dec. 5 Land ...........................................................
Common Shares ................................
115,000
(2) June 1
220,000
Land (20,000 X $11) ..................................
Common Shares ................................
115,000
220,000
EXERCISE 14-4
(a)
When a federally incorporated company, such as Air Canada,
buys back its own shares it is generally required to cancel
them. This reduces the number of shares issued and the
amount recorded in the Common Shares account. It increases
the earnings per share because there are fewer shares issued
(earnings are not affected). In an efficient market, the price
should not be affected. However, depending on the number of
shares purchased, the increase in trading volume may lead to
an increase in share prices.
(b)
The reason for Air Canada’s purchase may have been to try to
reduce the likelihood of a future takeover bid.
EXERCISE 14-5
Mar.
2
June 12
July 11
Legal Fees Expense (1,600 X $15) .........
Common Shares..............................
24,000
Equipment...............................................
Common Shares..............................
360,000
Cash (1,000 X $105) ................................
Preferred Shares (1,000 X $105) .....
105,000
24,000
360,000
105,000
EXERCISE 14-6
(a) Nov. 15
Preferred Shares (2,000 X $100)............
Common Shares (10,000 shares) ...
200,000
200,000
(b) The entry is the same as in (a) because market values are
ignored in accounting for the conversion of preferred shares.
(c) Nov. 15
Preferred Shares (2,000 X $100)............
Common Shares (16,000 shares) ..
200,000
Note that, in each case, the conversion is recorded at book value.
The amount originally paid for the preferred shares is simply
transferred to the common shares account.
200,000
EXERCISE 14-7
MEMORANDUM
To:
President
From:
Subject:
Shareholders’ Equity
Date:
There are two classes of shares issued by Shumway Corporation—preferred and common.
The preferred shares are cumulative, which means that the preferred shareholders will be paid their
annual dividend ($6 per share) for the current and prior years whenever a dividend is declared (up to the amount
of the dividend declared). Unpaid dividends from prior years (dividends in arrears) are not recorded because they
are not a liability of the company until declared. They are disclosed in the notes to the financial statements.
The common shares have a $3 stated value per share ($1,800,000 ÷ 600,000). Only the stated value is
recorded in the Common Shares account. Any excess of the issue price over stated value is recorded in a separate
contributed capital account, Contributed Capital in Excess of Stated Value. The common shares were originally
sold for $4 per share [($1,800,000 + $600,000) ÷ 600,000].
Summary of answers to questions:
(a) The stated value of the common shares is $3 per share
($1,800,000  600,000 shares).
(b) The average issue price per share of the common shares was
$4 per share [($1,800,000 + $600,000)  600,000 shares].
(c) The annual dividend is $6 per share ($36,000  6,000 shares).
(d) Dividends in arrears are not recorded until declared. They are,
however, disclosed in the notes to the financial statements.
EXERCISE 14-8
Account
Shareholders’ Equity
Contributed Capital
Additional
Share
Retained
Contributed
Capital
Earnings
Capital
1. Cash
Other
Financial
Statement
Classification
Balance
Sheet
Current Asset
4. Gain on sale of
capital assets
Income
Statement
Other
Revenue
(Gain)
5. Patents
Balance
Sheet
Capital Asset
Income
Statement
Operating
Expense
2. Common
Shares
Common
Shares
3. Contributed
Capital in
Excess of
Stated Value—
Preferred
Shares
6. Preferred
Shares
7. Retained
Earnings
8. Legal Fees
Expense
Contributed
Capital in
Excess of
Stated
Value—
Preferred
Shares
Preferred
Shares
Retained
Earnings
EXERCISE 14-9
(a)
FUTURE SHOP LTD.
Partial Balance Sheet
April 1, 2000
(in thousands)
Shareholders' equity
Common shares, no par value, unlimited number
authorized, 16,189,545 shares issued .........................
Retained earnings ................................................................
Total shareholders’ equity ...........................................
$78,783
1,450
$80,233
Note to the financial statements: An unlimited number of no par
value preferred shares are authorized. None have been issued.
(b)
Return on Equity = Net Income ÷ Average shareholders’ equity
= $23,680 ÷ [($80,233 + $56,329) ÷ 2]
= 34.68%
Book Value per Share
= Total shareholders’ equity ÷ Number of common
shares
= $80,233,000 ÷ 16,189,545
= $4.96
Note: there is no adjustment required for preferred share equity
since there are no preferred shares issued.
EXERCISE 14-10
(a)
Total shareholders' equity
Less: Preferred shareholders’
equity
Stated value
Dividends in arrears ($500,000 X
10%)
Common shareholders’ equity
Common shares issued
$4,000,000
(500,000)
000000000
550$3,500,000
(b)
$4,000,000
(500,000)
(50,000)
$3,450,000
00250,000
00250,000
$14.00
00 $13.80
Book value per share
PROBLEM 14-1A
(a)
The professors should incorporate their business because of
their concerns about the legal liabilities. A corporation is the
only form of business that provides limited liability to it
owners.
(b)
Joseph should run his bait shop as a proprietorship because
this is the simplest form of business to establish. It is also the
least expensive. He is the only person involved in the
business and is planning to operate for a limited time.
(c)
Robert and Tom should form a corporation when they
combine their operations. This is the best form of business for
them to choose because they expect 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.
(d)
A partnership would be the most likely form of business for
Darcy, Ellen and Meg to choose. It is simpler to form than a
corporation and less costly.
(e)
Hervé is most likely to select to operate his business as a
proprietorship. He wants to maintain control of the business.
Operating as a proprietorship will allow him to do this. He has
no savings or personal assets, therefore will not require a
corporation to protect his personal assets.
PROBLEM 14-2A
(a) $1,200,000 ÷ $60 = 20,000 preferred shares
(b) $1,200,000 + $200,000 = $1,400,000 ÷ 20,000 shares = $70 per
share
(c) $1,200,000 X 8% = $96,000
(d) It appears that there were no dividends declared in 2003
since there was no decrease for dividends in the retained
earnings.
(e) Since no dividends were declared in 2003 and the preferred
share dividends are cumulative—there are $96,000 in
dividends in arrears at the end of 2003.
PROBLEM 14-3A
(a)
GENERAL JOURNAL
J1
Date
Account Titles and Explanation
Debit
Jan. 10
Cash (80,000 X $3) ........................................
Common Shares (80,000 X $2) .............
Contributed Capital in Excess of
Stated Value—Common Shares
(80,000 X $1) .......................................
240,000
Cash (5,000 X $105) ......................................
Preferred Shares (5,000 X $105) ...........
525,000
Land (24,000 X $3.50)....................................
Common Shares (24,000 X $2) .............
Contributed Capital in Excess of
Stated Value—Common Shares
($84,000 – $48,000).............................
84,000
June 020 Cash (80,000 X $4) ........................................
Common Shares (80,000 X $2) .............
Contributed Capital in Excess of
Stated Value—Common Shares
(80,000 X $2) .......................................
320,000
Mar. 01
Apr. 01
Aug. 01
Sept. 01
Legal Fees Expense (10,000 X $5) ...............
Common Shares (10,000 X $2) .............
Contributed Capital in Excess of
Stated Value—Common Shares
($50,000 – $20,000).............................
Credit
160,000
80,000
525,000
48,000
36,000
160,000
160,000
50,000
Cash (10,000 X $5) ........................................
50,000
Common Shares (10,000 X $2) .............
Contributed Capital in Excess of Stated
Value—Common Shares (10,000 X $3)
20,000
30,000
20,000
30,000
PROBLEM 14-3A (Continued)
(a) (Continued)
GENERAL JOURNAL
J2
Date
Account Titles and Explanation
Debit
Nov. 01
Cash (1,000 X $108) ......................................
Preferred Shares (1,000 X $108) ...........
108,000
Credit
108,000
(b)
Preferred Shares
Date
Mar.
Nov.
Explanation
1
1
Ref.
Debit
J1
J2
Credit
Balance
525,000
108,000
525,000
633,000
Credit
Balance
160,000
048,000
160,000
020,000
020,000
160,000
208,000
368,000
388,000
408,000
Common Shares
Date
Jan.
Apr.
June
Aug.
Sept.
Explanation
10
1
20
1
1
Ref.
Debit
J1
J1
J1
J1
J1
Contributed Capital in Excess of Stated Value—Common Shares
Date
Jan.
Apr.
June
Aug.
Sept.
Explanation
10
1
20
1
1
Ref.
J1
J1
J1
J1
J1
Debit
Credit
Balance
080,000
036,000
160,000
030,000
030,000
080,000
116,000
276,000
306,000
336,000
PROBLEM 14-3A (Continued)
(c)
WETLAND CORPORATION
Balance Sheet (Partial)
December 31, 2003
Shareholders' equity
Contributed capital
Share capital
8% preferred shares, no par value,
10,000 shares authorized,
6,000 shares issued ....................................
Common shares, $2 stated value,
500,000 shares authorized,
204,000 shares issued ................................
Total share capital ..................................
$0,633,000
00
408,000
1,041,000
Additional contributed capital
Contributed capital in excess of stated
value—common shares ..............................
336,000
Total contributed capital ........................
$1,377,000
PROBLEM 14-4A
(a)
share
(b)
Date
$400,000 + $60,000 = $460,000  4,000 shares = $115 per
GENERAL JOURNAL
Account Titles and Explanation
J1
Debit
Credit
Feb. 1 Land (1,050 x $115) ....................................... 120,750
Preferred Shares (1,050 X $100) ............
105,000
Contributed Capital in Excess of Stated
Value—Preferred Shares (1,050 X $15)
15,750
Mar. 1 Cash (1,000 X $120) ....................................... 120,000
Preferred Shares (1,000 X $100) ............
100,000
Contributed Capital in Excess of Stated
Value—Preferred Shares (1,000 X $20)
20,000
July 1 Preferred Shares (1,000 X $100) ...................
Contributed Capital in Excess of Stated
Value—Preferred Shares (1,000 X $15) ......
Common Shares .....................................
100,000
Sept. 1 Patent (400 X $125) ........................................
Preferred Shares (400 X $100) ...............
Contributed Capital in Excess of Stated
Value—Preferred Shares (400 X $25) .
50,000
Dec. 1 Preferred Shares (1,000 X $100) ...................
Contributed Capital in Excess of Stated
Value—Preferred Shares (1,000 X $20) .....
Common Shares .....................................
100,000
15,000
115,000
40,000
10,000
20,000
Note that the conversions are recorded at book values, not
market values.
120,000
PROBLEM 14-4A (Continued)
(b) (Continued)
GENERAL JOURNAL
J2
Date
Account Titles and Explanation
Dec. 31
Revenues .................................................... 400,000
Retained Earnings ...............................
400,000
Retained Earnings ..................................... 250,000
Expenses .............................................
250,000
31
Debit
Credit
PROBLEM 14-4A (Continued)
(c)
Preferred Shares
Date
Jan.
Feb.
Mar.
July
Sept.
Dec.
Explanation
1 Balance
1
1
1
1
1
Ref.

J1
J1
J1
J1
J1
Debit
Credit
105,000
100,000
100,000
40,000
100,000
Balance
400,000
505,000
605,000
505,000
545,000
445,000
Contributed Capital in Excess of Stated Value— Preferred Shares
Date
Jan.
Feb.
Mar.
July
Sept.
Dec.
Explanation
1 Balance
1
1
1
1
1
Ref.

J1
J1
J1
J1
J1
Debit
Credit
0
015,750
20,000
15,000
010,000
20,000
Balance
060,000
75,750
95,750
80,750
90,750
70,750
Common Shares
Date
Jan.
July
Dec.
Explanation
1
1
1
Balance
Ref.
Debit

J1
J1
Credit
Balance
1,050,000
115,000 1,165,000
120,000 1,285,000
Retained Earnings
Date
Explanation
Jan. 1
Dec. 31
31
Balance
Closing entry
Closing entry
Ref.

J2
J2
Debit
Credit
400,000
250,000
Balance
300,000
700,000
450,000
PROBLEM 14-4A (Continued)
(d)
REMMERS CORPORATION
Balance Sheet (Partial)
December 31, 2003
Shareholders' equity
Contributed capital
Share capital
10% convertible preferred shares, $100
stated value, 10,000 shares authorized,
4,450 shares issued .....................................
Common shares, no par value,
200,000 shares authorized,
90,000 shares issued ....................................
Total share capital ....................................
Additional contributed capital
Contributed capital in excess of stated
value—preferred shares
Total contributed capital ..........................
$0,445,000
1,285,000
1,730,000
70,750
1,800,750
Retained earnings ...........................................................
Total shareholders’ equity .............................................
450,000*
$2,250,750
* Retained earnings: $300,000 Jan. 1 balance + $150,000 net
income = $450,000 Dec. 31 balance
PROBLEM 14-8A
(a) The book value of the common shares is $8.18, calculated as
follows:
Total shareholders' equity ....................................................... $5,850,000
Less: Preferred shareholders’ equity .....................................
1,600,000
Dividends in arrears (20,000 x $4 x 2)...........................
160,000
Common shareholders’ equity ................................................ $4,090,000
Common shares issued ...........................................................
500,000
Book value per share ($4,090,000  500,000)..........................
$8.18
(b) The book value of the common shares is $7.70, calculated as
follows:
Total shareholders' equity ....................................................... $5,850,000
Less: Preferred shareholders’ equity .....................................
1,600,000
Dividends in arrears (20,000 x $4 x 5)...........................
400,000
Common shareholders’ equity ................................................ $3,850,000
Common shares issued ...........................................................
500,000
Book value per share ($3,850,000  500,000)..........................
$7.70
(c) The average amount paid in, or contributed, per common share
is $4,000,000  500,000 shares = $8.00 per share. The book
value per share is $8.18 in part (a) and $7.70 in part (b). This
illustrates that the book value may be higher or lower than the
average amount paid in, depending upon factors such as the
terms of the preferred shares, the relative value of the preferred
shares, and the amount of retained earnings.