BAT4M - Chapter 15
ANSWERS TO QUESTIONS
01. (a) A dividend is a distribution by a corporation to its
shareholders on a pro rata (equal) basis, per share.
(b) Disagree. Dividends may take four forms: cash, property,
scrip (promissory note to pay cash), or shares.
02. Robin is not correct. Adequate cash is only one of the
conditions. In order for a cash dividend to occur, a corporation
must also have sufficient retained earnings and the dividend
must be declared by the board of directors.
03. (a) The three dates are:
 Declaration date is the date when the board of
directors formally declares the cash dividend and
announces it to shareholders. The declaration
commits the corporation to a binding legal obligation
that cannot be rescinded.
 Record date is the date that marks the time when
ownership of the shares is determined from the
shareholder records maintained by the corporation.
The purpose of this date is to identify the persons or
entities that will receive the dividend.
 Payment date is the date on which the dividend
cheques are mailed to the shareholders.
(b) The accounting entries and their dates are:
 Declaration date—Debit Cash Dividends and Credit
Dividends Payable.
 No entry is made on the record date.
 Payment date—Debit Dividends Payable and Credit
Cash.
Questions Chapter 15 (Continued)
0
4.
5.
From the perspective of the corporation, cash dividends
decrease assets, retained earnings, and total shareholders'
equity. A stock dividend decreases retained earnings,
increases share capital (contributed capital if the shares have a
stated or par value), and has no effect on total assets and total
shareholders' equity. If a cash dividend is paid, an individual
shareholder’s personal financial position will increase by the
amount of cash received. If a stock dividend is received, the
shareholder’s personal financial position will increase by the
market value of the share multiplied by the number of shares
received.
A corporation generally issues stock dividends for one of the
following reasons:
1. To satisfy shareholders' dividend expectations without
spending cash.
2. To increase the marketability of its share by increasing the
number of shares and thereby decreasing the market price
per share. Decreasing the market price of the share makes
the shares easier to purchase for smaller investors.
3. To emphasize that a portion of shareholders' equity that
had been reported as retained earnings has been
permanently reinvested in the business and therefore is
unavailable for cash dividends.
6.
In the Pella Corporation the number of shares will increase to
20,000 (10,000 X 2). The effect of a split on market value is
generally inversely proportional to the size of the split. In this
case, the market price would fall to approximately $70 per
share ($140  2).
7.
The different effects of a stock split versus a stock dividend
are:
Item
Stock Split
Stock Dividend
Total contributed capital
Total retained earnings
Total value recorded for
common shares
Legal capital per share
No Change
No Change
Increase
Decrease
No Change
Decrease
Increase
No Change
Questions Chapter 15 (Continued)
8.
A prior period adjustment is a correction of a material error in
reporting income of a prior period. The correction is reported in
the current year's statement of retained earnings as an
adjustment of the beginning balance of retained earnings.
9.
The understatement of amortization in a prior year overstates
the beginning retained earnings balance. The statement of
retained earnings presentation is:
Balance, January 1, as previously reported ................
Less: Correction for understatement of prior
prior year's amortization (net of
$22,500 income tax saving) .............................
Balance, January 1, as adjusted...................................
$240,000
67,500*
$172,500
*$90,000 – ($90,000 X 25% tax savings) = $67,500
10. The purpose of a retained earnings restriction is to indicate
that a portion of retained earnings is currently unavailable for
dividends. Restrictions may be either contractual or voluntary.
11. Retained earnings restrictions are generally reported in the
notes to the financial statements. (Occasionally, separate
accounts are created, within the shareholders’ equity section
of the balance sheet, for the restricted or appropriated
amounts.)
12. The debits and credits to retained earnings are:
1.
2.
3.
4.
Debits
Net loss
Prior period adjustments
for overstatements of net
income
Cash and stock dividends
Cumulative effect of a
change in accounting
principle that decreased
net income
Credits
1. Net income
2. Prior period adjustments for
understatements of net
income
3. Cumulative effect of a change
in accounting principle that
increased net income
Questions Chapter 15 (Continued)
13. The cumulative effect of a change in accounting principle on
net income is reported, net of applicable income tax, as an
adjustment to the opening balance of retained earnings. Thus,
your friend is correct.
14. Omar is incorrect. Only the ending balance of retained earnings
is reported in the shareholders' equity section of the balance
sheet. (The beginning balance appears in the statement of
retained earnings, however. It would also appear as the ending
balance of retained earnings for the preceding period, in a set
of comparative financial statements.)
15. (a)
(b)
(c)
(d)
(e)
Contributed Capital—Share Capital
Contributed Capital—Share Capital
Contributed Capital—Share Capital
Contributed Capital—Additional Contributed Capital
Retained Earnings
16. Nels should be told that although many factors affect the
market price of a share at a given time, the reported net income
is one of the most significant factors. When companies
announce increases or decreases in net income, the market
price of its share usually increases or decreases immediately.
Net income also provides an indication of the amount of
dividends that a company can distribute. In addition, net
income leads to a growth in retained earnings, which is often
reflected in a share's market price. Because net income is
found on the income statement not the balance sheet, it is
important to analyze all the financial statements when making
investment decisions.
17. The unique feature of a corporation income statement is a
separate section that shows income tax expense. The
presentation is as follows:
Income before income tax .........................................
$500,000
Income tax expense* ..................................................
..................................................................................... 0150,000
Net income ..................................................................
..................................................................................... $350,000
* This is usually subdivided, to show the portion which is
currently due and the portion which is due in future periods.
Questions Chapter 15 (Continued)
*18. Intraperiod tax allocation refers to assigning income tax within
the financial statements (income statement and statement of
retained earnings) to each item that directly affects the income
tax for the period. As a result, income tax expense is allocated
to income before income tax and to each nontypical item
(discontinued operations, extraordinary items, and changes in
accounting principles). Intraperiod tax allocation is important
because it reflects the true effective tax rate in the income
statement, and matches the income tax expense to the items
which affect the tax.
*19. Discontinued operations refer to the disposal of a significant
segment of the business, such as the cessation of an entire
activity or the elimination of a major class of customers. It is
important to report discontinued operations separately from
income from continuing operations because the discontinued
segment will not affect future income statements. Thus, the
predictive value of the income statement is enhanced.
20. Items (a), (d), and (g) are extraordinary items.
*21. Earnings per share (EPS) on income before extraordinary
items usually is more relevant to an investment decision than
EPS on net income. Income before extraordinary items
represents the results of continuing and ordinary business
activity. It is therefore a better basis for predicting future
operating results than an EPS figure which includes the effect
of extraordinary items that are not expected to recur again in
the foreseeable future.
22.
(a)
(b)
(c)
(d)
Favourable
Unfavourable
Favourable
Unfavourable
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 15-1
Nov.
Dec.
1
1
Dec. 31
Cash Dividends .................................................. 100,000
Dividends Payable ......................................
100,000
No entry required on record date.
Dividends Payable ............................................. 100,000
Cash ............................................................
100,000
BRIEF EXERCISE 15-2
Dec.
1
31
Stock Dividends (8,000 X $15)........................... 120,000
Stock Dividends Distributable ...................
120,000
Stock Dividends Distributable .......................... 120,000
Common Shares .........................................
120,000
BRIEF EXERCISE 15-3
Before Stock
Dividend
(a) Shareholders' equity
Common shares
Retained earnings
Total shareholders' equity
(b) Shares issued
(c) Book value per share
After Stock
Dividend
$1,000,000
300,000
$1,300,000
$ 1,160,000
140,000
$ 1,300,000
100,000
110,000
$13.00
$11.82
BRIEF EXERCISE 15-4
I would anticipate the market price after the split would be $8 ($12 x
2/3 = $8). The reason for a stock split is usually to increase the
marketability of the shares by reducing its price.
BRIEF EXERCISE 15-5
CADIEN INC.
Statement of Retained Earnings
For the Year Ended December 31, 2003
Balance, January 1 ............................................................................
Add: Net income..............................................................................
Less: Dividends................................................................................
Balance, December 31 ......................................................................
$220,000
0150,000
370,000
0085,000
$285,000
BRIEF EXERCISE 15-6
The cumulative prior income effect of a change in accounting
principle is reported as an adjustment to the opening balance of
retained earnings. In this case, the adjustment would be a
deduction of $49,000, as follows:
Cumulative effect of change in accounting principle
Effect on prior years' income of change in amortization
method, net of $21,000 ($70,000 X 30%) income tax
saving .................................................................................
$49,000
Changes for the current year are reported in the current year’s
income statement. The $8,000 would be included in the current
year’s amortization expense.
BRIEF EXERCISE 15-7
MÉNARD CORPORATION
Partial Balance Sheet
December 31, 2003
Shareholders' equity
Share capital
Common shares, no par value, unlimited
shares authorized, 5,000 shares issued .....
Common stock dividend distributable ..........
Total share capital ...................................
Retained earnings (see Note 3) .............................
Total shareholders' equity .............................
$50,000
15,000
65,000
29,000
$94,000
Note 3: Retained earnings of $20,000 has been restricted
for loan agreements
BRIEF EXERCISE 15-8
TEC.COM CORPORATION
Partial Income Statement
For the Year Ended November 30, 2003
Income before income tax ................................................................
Income tax expense ($300,000 X 25%) .............................................
Income before extraordinary item ....................................................
Extraordinary loss from flood, net of $20,000
($80,000 X 25%) income tax saving...............................................
Net income.........................................................................................
$300,000
0 75,000
225,000
0 60,000
$165,000
BRIEF EXERCISE 15-9
OSBERN CORPORATION
Partial Income Statement
For the Year Ended December 31, 2003
Discontinued operations
Loss from operations of Mexico facility, net of $105,000
($300,000 X 35%) income tax savings ..............................
Loss on disposal of Mexico facility, net of
$56,000 ($160,000 X 35%) income tax savings .................
$195,000
104,000
$299,000
BRIEF EXERCISE 15-10
Net income ($580,000 – $200,000 – $90,000) ...................................
$290,000
Earnings per share:
Income from continuing operations ................................................
Loss from discontinued operations.................................................
Income before extraordinary item ....................................................
Extraordinary loss.............................................................................
Net income.........................................................................................
BRIEF EXERCISE 15-11
(a) Earnings per share = $1.85 ($370,000  200,000)
(b) Earnings per share = $1.75 [($370,000 – $20,000)  200,000]
(c) There would be no difference. Since the preferred shares are
cumulative, they need to be paid before any of the earnings
become available to the common shareholders. Therefore,
cumulative preferred dividends must be deducted from net
income in calculating earnings per share, whether they are
declared and paid or not.
$5.80
(2.00)
3.80
(0.90)
$2.90
BRIEF EXERCISE 15-12
Share Price
Earnings
per Share
PriceEarnings
Current
$52.50
$5.00
10.5
After 2% stock dividend
$51.451
$4.903
10.5
After 2-for-1 stock split
$26.252
$2.504
10.5
1
2
3
4
$52.50 x 98% = $51.45
$52.50 ÷ 2 = $26.25
$5.00 x 98% = $4.90
$5.00 ÷ 2 = $2.50
Both the stock dividend and the stock split will increase the number
of shares, without changing the overall value of the company.
Therefore, both will (theoretically) decrease the market price per
share proportionately. Both will also decrease the earnings per
share proportionately. Consequently, the price-earnings ratio
should not be affected by either of these events.
However, the stock markets may react favourably to the stock
dividend and/or the stock split, with the result that the share price
does not decrease proportionately, and hence the price-earnings
ratio increases.
BRIEF EXERCISE 15-13
Payout ratio = Cash dividends per share ÷ Earnings per share
= $1.00 ÷ $ 3.75
= 26%
Dividend yield = Cash dividends per share ÷ Share price
= $1.00 ÷ $25.00
= 4%
SOLUTIONS TO EXERCISES
EXERCISE 15-1
(a)
Total dividend declaration
Allocation to preferred shares
Remainder to common shares
(b)
Total dividend declaration
Allocation to preferred shares
Remainder to common shares
1
2
2002
2003
2004
$6,000
06,000
$
0
$12,000
008,000
$ 4,000
$28,000
008,000
$20,000
2002
2003
2004
$6,000
06,000
$
0
$12,000
12,0001
$
0
$28,000
012,0002
$16,000
Cumulative dividend for 2002, $4,000, plus $8,000 for 2003
Cumulative dividend for 2003, $2,000, plus $10,000 for 2004
(c)
Dec. 31
Dec. 31
Cash Dividends—Preferred ................................. 8,000
Cash Dividends—Common ................................. 20,000
Dividends Payable ................................
28,000
Cash Dividends—Preferred ................................. 12,000
Cash Dividends—Common ................................. 16,000
Dividends Payable ................................
28,000
EXERCISE 15-2
Before
Action
After Stock
Dividend
After Stock
Split
$ 800,000
400,000
$ 1,200,000
$ 856,000*
344,000
$1,200,000
$ 800,000
400,000
$ 1,200,000
Shares issued
80,000
84,000
160,000
Book value per share
$15.00
$14.29
$7.50
Shareholders' equity
Common shares
Retained earnings
Total shareholders' equity
* $800,000 + (80,000 shares X 5% X $14) = $856,000
Note that the total shareholders’ equity is the same in each case.
EXERCISE 15-3
(a) (1) Book value before the stock dividend was $20.00
($400,000  20,000 = $20.00)
(2) Book value after the stock dividend is $18.18
($400,000  22,000 = $18.18)
(b) Share capital
Balance before dividend ....................................................
$225,000
Stock dividend (2,000 x $18) ............................................. 00336,000
New balance ...............................................................
$261,000
Retained earnings
Balance before dividend ....................................................
Stock dividend (2,000 X $18) .............................................
New balance ...............................................................
$175,000
0036,000
$139,000
EXERCISE 15-4
1.
2.
3.
Dec. 31
Dec. 31
Dec. 31
Cash Dividends ........................................
Dividend Expense .............................
30,000
Stock Dividends* ......................................
10,000
Dividends Payable ....................................
10,000
Common Stock Dividends Distributable
Retained Earnings* ...........................
30,000
10,000
10,000
Preferred Shares ..................................... 2,000,000
Retained Earnings ............................
2,000,000
No entry is required for a stock split
* Note: This portion of the correcting entry could be omitted since
the Stock Dividend account is closed into the Retained Earnings
account at year end.
EXERCISE 15-5
(a) April
1 Cash .............................................................. 85,000
Common Shares ...................................
June 15
July 10
Dec. 15
85,000
Cash Dividends (80,000 X $1) ...................... 80,000
Dividends Payable ................................
80,000
Dividends Payable ........................................ 80,000
Cash .......................................................
80,000
Cash .............................................................. 38,000
Common Shares ...................................
38,000
Cash Dividends (82,000 X $1.30) ................. 106,600
Dividends Payable ................................
106,600
(b) In the statement of retained earnings, cash dividends of
$186,600 will be deducted. In the balance sheet, dividends
payable of $106,600 will be reported as a current liability.
EXERCISE 15-6
WINDSOR CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2003
Balance, January 1, as previously reported ....................................
Less: Correction for overstatement of 2002 net
income due to amortization error, net of
$15,000 income tax saving .................................................
Balance, January 1, as adjusted ......................................................
Add: Net income ............................................................................
Less: Cash dividends .................................................. $120,000
Stock dividends ................................................. 0060,000
Balance, December 31 ......................................................................
$580,000
20,000
560,000
350,000
910,000
180,000
$730,000
EXERCISE 15-7
Contributed Capital
Item
Share
Capital
Additional
Retained
Earnings
Total Shareholders’ Equity
1.
NE
NE
D
D
2.
I
NE
NE
I
3.
NE
NE
NE
NE
4.
I
NE
D
NE
5.
NE
NE
D
D
6.
NE
NE
NE
NE
7.
NE
NE
NE
NE
8.
I
I
NE
I
EXERCISE 15-8
(a) Stock Dividends—Common (30,000* X $16) ............... 480,000
Stock Dividends Distributable .............................
480,000
* (150,000 + 50,000) X 15% = 30,000
(b)
KNOWLEDGE CORPORATION
Partial Balance Sheet
December 31, 2003
Shareholders' equity
Share capital
Common shares, no par value, unlimited
number authorized, 200,000 issued ....................
$ 2,200,000
Common stock dividends distributable .....................480,000
distributable
Total share capital ....................................................
2,680,000
Retained earnings ............................................................670,000*
Total shareholders' equity ...................................
$ 3,350,000
* $750,000 + $400,000 – $480,000 = $670,000
EXERCISE 15-9
BYUNG–KEE INC.
Partial Balance Sheet
December 31, 2003
Shareholders' equity
Contributed capital
Share capital
8% preferred shares, $5 stated value, cumulative,
40,000 shares authorized, 30,000 shares issued
Common shares, no par value, 400,000 shares
authorized, 300,000 shares issued ...................
Common stock dividends distributable ..................
Total share capital .....................................
Additional contributed capital
Contributed capital in excess of stated value
—preferred shares ............................................
Total contributed capital ...........................
Retained earnings (See Note R) .........................................
Total shareholders' equity ........................
$0,150,000
866,000
75,000
1,091,000
244,000
1,335,000
900,000
$2,235,000
Note R: Retained earnings restricted for plant expansion, $100,000.
EXERCISE 15-10
(a)
GROMETER CORPORATION
Partial Income Statement
For the Year Ended October 31, 2003
Income before income tax ...............................................
Income tax expense ($640,000 X 30%) ............................
Income before extraordinary item ...................................
Extraordinary loss from fire, net of $30,000
($100,000 X 30%) income tax saving ............................
Net income ........................................................................
(b) To:
From:
$640,000
0 192,000
448,000
00 70,000
$378,000
Dave Grometer Corporation
Independent Auditor
After reviewing your income statement for the year ended
October 31, 2003, we believe it is misleading for the following
reasons:
The amount reported for income before extraordinary items is
overstated by $30,000. The income tax expense should be 30%
of $640,000, or $192,000, not $162,000. The after-tax income
from operations was only $448,000, not $478,000.
Also, the effect of the extraordinary loss on net income is only
$70,000, not $100,000. An income tax savings of $30,000 should
be netted against the extraordinary loss. Taking these tax
savings into consideration, the real cost of the fire damage was
only $70,000, not $100,000.
EXERCISE 15-11
(a) DASOLA CORPORATION
Partial Income Statement
For the Year Ended December 31, 2003
Income from continuing operations ................................
Discontinued operations
Gain on discontinued division,
net of $15,000 income tax expense.......................
Income before extraordinary item ...................................
Extraordinary loss, net of $24,000 income tax saving ...
Net income........................................................................
$240,000
35,000
275,000
56,000
$219,000
(b) The correction of an error in last year's financial statements is
a prior period adjustment. The correction is reported in the
2003 statement of retained earnings as an adjustment that
increases the reported beginning balance of retained earnings
by $14,000, after income tax expense [$20,000 – ($20,000 X
30%)].
The effect on prior years of the change in accounting principle
(amortization method) should also be treated as an adjustment
to the reported beginning balance of retained earnings. It
would reduce the retained earnings by $24,500, after income
tax expense. [$35,000 – ($35,000 x 30%)]
EXERCISE 15-12
(a) $ 547,000 – $16,000 = $531,000 ÷ 100,000 = $5.31
(b) $ 547,000 – $16,000 = $531,000 ÷ 100,000 = $5.31
Note that, since the preferred dividends are cumulative, there is no
difference between parts (a) and (b)
EXERCISE 15-13
Earnings per share
Price-earnings ratio
Payout ratio
Dividend yield ratio
2000
1999
1998
$6.99
6.6X
28.6%
4.4%
$5.20
6.3X
36.2%
5.7%
$5.14
7.1X
34.3%
4.8%
Calculations:
Earnings per share
2000: $1,857,000,000 ÷ 265,659,000 = $6.99
1999: $1,382,000,000 ÷ 265,862,000 = $5.20
1998: $1,350,000,000 ÷ 262,511,000 = $5.14
Price-earnings
2000: $45.88 ÷ $6.99 = 6.6 times
1999: $32.72 ÷ $5.20 = 6.3 times
1998: $36.65 ÷ $5.14 = 7.1 times
Payout
2000: $2.00 ÷ $6.99 = 28.6%
1999: $1.88 ÷ $5.20 = 36.2%
1998: $1.76 ÷ $5.14 = 34.2%
Dividend yield
2000: $2.00 ÷ $45.88 = 4.4%
1999: $1.88 ÷ $32.72 = 5.7%
1998: $1.76 ÷ $36.65 = 4.8%
EXERCISE 15-13 (Continued)
Earnings per share have improved over the past year, moving from
$5.14 to $6.69. This indicates that the company is earning more
income for each of its common shareholders. This increase
occurred partially because net income is higher and partially
because the number of common shares issued has decreased.
The PE ratio declined in 1999, then rebounded slightly in 2000. This
number should be compared to other companies in the industry to
see if a multiple of around seven (6.6 in 2000) is good for this type
of business.
Even though the dividend is increasing, the dividend yield and the
payout ratios have generally decreased. The company is earning
more income but is not increasing its dividend proportionally.
Although some investors who like receiving dividends may be
concerned, the company may simply be retaining the remaining
income to finance further growth.
SOLUTIONS TO PROBLEMS
PROBLEM 15-1A
(a)
Cash Dividend
Stock Dividend
Assets
$13,500,000 - $80,000a
= $13,420,000
No effect = $13,500,000
Liabilities
No effect = $1,500,000
No effect = $1,500,000
Share capital
No effect = $2,000,000
$2,000,000 + $80,000b
= $2,080,000
Retained earnings
$10,000,000 - $80,000
= $9,920,000
$10,000,000 - $80,000
$ 9,920,000
Total shareholders’
equity
$12,000,000 - $80,000
= $11,920,000
No effect ($12,000,000 +
$80,000 - $80,000 =
$12,000,000)
Number of shares
a
b
No effect = 40,000
2,000 increase (2,000 +
40,000 = 42,000)
40,000 X $2 = $80,000
40,000 X 5% = 2,000 x $40 = $80,000
(b) 1.
Cash dividend
Cash dividend 1,000 X $2 = $2,000
Market value of shares 1,000 X $40 = $40,000
Stock Dividend
Stock dividend 1,000 x 5% = 50 x $40 = $2,000
Market value of shares 1,050 X $40 = $42,000
PROBLEM 15-1A (Continued)
(b) 1. (Continued)
In terms of final value the shareholder would be in the same
position having received either a cash or a stock dividend.
However, a stock dividend would allow the shareholder to
control the receipt of the cash and the related tax payment.
Since the shareholder can control when the shares are
sold, they can control when the income tax would have to
be paid on any gains. Alternatively, some shareholders may
prefer to receive a cash dividend since they do not have to
sell the shares to obtain the cash. As well, there are often
brokerage fees associated with selling shares.
The decision as to whether a cash or stock dividend would
be more beneficial really depends on the preferences of the
shareholder and their tax situation.
(b) 2. The shareholder would record the cash dividend as a debit
to Cash and a credit to Dividend Revenue. The stock
dividend would be recorded only as an increase in the
number of shares held.
PROBLEM 15-2A
Journal entries–not required
July 1
Aug . 1
Sept. 1
Dec.01
15
Cash Dividends–Common .............................
(180,000 X $0.25)
Dividends Payable–Common .................
45,000
Accumulated Amortization ............................
Income Tax Payable................................
Retained Earnings ...................................
72,000
Dividends Payable–Common.........................
Cash .........................................................
45,000
Stock Dividends–Common (18,000 X $15) ....
Common Stock Dividends Distributable
270,000
Cash Dividends–Preferred (4,000 X $10) ......
Dividends Payable–Preferred .................
40,000
45,000
22,000
50,000
45,000
270,000
40,000
PROBLEM 15-2A (Continued)
TMAO INC.
Statement of Retained Earnings
For the Year Ended December 31, 2003
Balance, January 1, as previously reported ........................
Add: Correction for overstatement of amortization
in 2002, net of income tax expense of $22,000 .....
Balance, January 1, as adjusted...........................................
Add: Net income .................................................................
Less: Cash dividends—preferred .................... $040,000
Cash dividends—common .....................
45,000
Stock dividends—common ....................
270,000
Balance, December 31...........................................................
$500,000
0050,000
550,000
0350,000
900,000
355,000
$545,000
PROBLEM 15-3A
GENERAL JOURNAL
J1
Date
Account Titles and Explanation
Jan. 20
Stock Dividend Distributable .................
Common Shares ..............................
200,000
Cash .........................................................
150,000
Feb. 12
Debit
200,000
Common Shares..............................
Mar. 31
Dec. 31
31
31
31
Credit
150,000
Income Tax Payable ................................
20,000
Retained Earnings ...................................
Inventory ..........................................
50,000
Cash Dividends .......................................
Cash .................................................
100,000
Revenues .................................................
Retained Earnings ...........................
900,000
Retained Earnings ...................................
Expenses .........................................
600,000
Retained Earnings ...................................
Cash Dividends ...............................
100,000
70,000
100,000
900,000
600,000
100,000
PROBLEM 15-3A (Continued)
(b)
Common Shares
Date
Explanation
Ref.
Debit

J1
J1
Jan.
1
20
Feb. 12
Credit
Balance
1,500,000
200,000 1,700,000
150,000 1,850,000
Common Stock Dividends Distributable
Date
Jan.
Explanation
1
20
Ref.
J1
J1
Debit
Credit
Balance
200,000 0200,000
0200,000
000,000
Cash Dividends
Date
Explanation
Jan. 1
Dec. 31 Closing entry
Ref.
Debit
J1
J1
100,000
Ref.
Debit
Credit
Balance
100,000
100,000
0
Credit
Balance
Retained Earnings
Date
Explanation
Jan. 1
Mar. 31
Dec. 31 Closing entry
31 Closing entry
31 Closing entry

J1
J1
J1
J1
600,000
50,000
550,000
900,000 1,450,000
600,000
850,000
100,000
750,000
PROBLEM 15-3A (Continued)
(c)
CEDENO INC.
Partial Balance Sheet
December 31, 2003
Shareholders' equity
Share capital
Common shares, no par value, unlimited
number of shares authorized,
580,000 shares issued ........................................
Retained earnings ..........................................................
Total shareholders' equity ......................................
$1,850,000
00,750,000
$2,600,000
PROBLEM 15-5A
(a) Total dividend
Allocated to preferred shares—
current year only (10,000 X $10)
Remainder to common shares
$600,000
0100,000
$500,000
Note: the preferred shares are noncumulative
therefore no dividends in arrears have to be paid
and
(b)
JAJOO CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2003
Balance, January 1 ...............................................
Add: Net income ................................................
Less: Cash dividends—Preferred ...................... $100,000
Cash dividends—Common ...................... 500,000
Stock dividends ........................................ 00140,000*
Balance, December 31 .........................................
* 400,000 x 5% = 20,000 x $7 = $140,000
$ 2,450,000
880,000
3,330,000
740,000
$2,590,000
PROBLEM 15-5A (Continued)
(c)
JAJOO CORPORATION
Partial Balance Sheet
December 31, 2003
Shareholders' equity
Contributed capital
Share capital
$10 preferred shares, no par value,
noncumulative, 20,000 shares
authorized, 10,000 shares issued ..............
Common shares, $5 stated value, 600,000
shares authorized, 400,000 shares issued
Common stock dividends distributable,
20,000 shares...........................................
Total share capital ...................................
Additional contributed capital
Contributed capital in excess of stated
value—common shares .............................
Total contributed capital .........................
Retained earnings (See Note 3) ....................................
Total shareholders' equity ......................
$1,200,000
2,000,000
140,000
3,340,000
1,100,000
4,440,000
2,590,000
$7,030,000
Note 3: Retained earnings restricted for plant expansion,
$100,000.
SOLUTIONS TO PROBLEMS
PROBLEM 15-1A
(a)
Cash Dividend
Stock Dividend
Assets
$13,500,000 - $80,000a
= $13,420,000
No effect = $13,500,000
Liabilities
No effect = $1,500,000
No effect = $1,500,000
Share capital
No effect = $2,000,000
$2,000,000 + $80,000b
= $2,080,000
Retained earnings
$10,000,000 - $80,000
= $9,920,000
$10,000,000 - $80,000
$ 9,920,000
Total shareholders’
equity
$12,000,000 - $80,000
= $11,920,000
No effect ($12,000,000 +
$80,000 - $80,000 =
$12,000,000)
Number of shares
No effect = 40,000
2,000 increase (2,000 +
40,000 = 42,000)
a
b
40,000 X $2 = $80,000
40,000 X 5% = 2,000 x $40 = $80,000
(b) 1.
Cash dividend
Cash dividend 1,000 X $2 = $2,000
Market value of shares 1,000 X $40 = $40,000
Stock Dividend
Stock dividend 1,000 x 5% = 50 x $40 = $2,000
Market value of shares 1,050 X $40 = $42,000
PROBLEM 15-1A (Continued)
(b) 1. (Continued)
In terms of final value the shareholder would be in the same
position having received either a cash or a stock dividend.
However, a stock dividend would allow the shareholder to
control the receipt of the cash and the related tax payment.
Since the shareholder can control when the shares are
sold, they can control when the income tax would have to
be paid on any gains. Alternatively, some shareholders may
prefer to receive a cash dividend since they do not have to
sell the shares to obtain the cash. As well, there are often
brokerage fees associated with selling shares.
The decision as to whether a cash or stock dividend would
be more beneficial really depends on the preferences of the
shareholder and their tax situation.
(b) 2. The shareholder would record the cash dividend as a debit
to Cash and a credit to Dividend Revenue. The stock
dividend would be recorded only as an increase in the
number of shares held.