Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
CHAPTER 13
Corporations: Organization and Share Capital
Transactions
ASSIGNMENT CLASSIFICATION TABLE
Brief
Exercises
Exercises
Problems
Set A
Problems
Set B
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
Study Objectives
Questions
1. Identify and discuss
the major
characteristics of a
corporation.
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Accounting Principles, Third Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE
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
Record and post transactions. Prepare
shareholders’ equity section.
Moderate
40-50
7A
Record and post transactions. Prepare
shareholders’ equity section.
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
Record and post transactions. Prepare
shareholders’ equity section.
Moderate
45-60
6B
Record and post transactions. Prepare
shareholders’ equity section.
Moderate
40-50
7B
Record and post transactions. Prepare
shareholders’ equity section.
Moderate
50-60
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Accounting Principles, Third Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
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
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Accounting Principles, Third Canadian Edition
BLOOM’S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material.
Study 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
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
Q13-20
Q13-22
Application
Q13-9
Q13-10
P13-11A
Analysis
Synthesis
E13-1
P13-1A
P13-1B
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
E13-11
BYP13-4
BYP13-5
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Evaluation
Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
ANSWERS TO QUESTIONS
1.
Classified 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 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 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.
(c)
3.
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.
(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.
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QUESTIONS (Continued)
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 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 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, and
assets upon liquidation ahead of the common shareholder.
In exchange for these preferences, preferred shareholders normally are
not entitled to vote.
6.
The total number of shares a company is allowed to sell is 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.
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QUESTIONS (Continued)
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 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 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.
10. There will be no impact on Abitibi’s 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 for services or noncash assets, the 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.
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QUESTIONS (Continued)
13. This transaction:
(a)
decreases total assets,
(b)
has no effect on total liabilities and,
(c)
decreases total 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 been gains from similar transactions in the 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 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.
17. Cumulative 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, 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.
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QUESTIONS (Continued)
19. 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. 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 main components of shareholders' equity are:
Contributed capital,
Retained earnings, and
Accumulated other comprehensive 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 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
Comprehensive Income
Preferred Shares
Classification
Share capital—common shares
Retained earnings
Additional contributed capital
Accumulated other
comprehensive income
Share capital—preferred
shares
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QUESTIONS (Continued)
22. Comprehensive 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.
Accumulated other 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 retained earnings, from fluctuations 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 itself does not provide 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.
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SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 13-1
Characteristic
Proprietorship Partnership Corporation
1. Continuous life
X
2. Unlimited liability
X
X
3. Ease of formation
X
X
4. Income taxes
X
5. Ability to acquire
X
X
capital
6. Shared skills and
X
resources
7. Fewer government
X
X
regulations
8. Separation of
ownership and
X
management
9. Owners’ acts are
X
X
binding
10. Ease of transfer of
X
ownership rights
BRIEF EXERCISE 13-2
The increase in share price will have no impact 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 easily.
The shareholders would see the value of their investment
increase and could realize gains by selling some or all of their
shares.
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BRIEF EXERCISE 13-3
(a)
June 1
Dec. 15
Cash (2,000 X $6) ..........................
Common Shares .......................
12,000
Cash (1,000 X $9) ..........................
Common Shares .......................
9,000
12,000
9,000
(b) Average issue price: ($12,000 + $9,000) ÷ (2,000 + 1,000) =
$7
BRIEF EXERCISE 13-4
(a)
Dec. 20
Land (5,000 X $14) .........................
Common Shares .......................
70,000
70,000
(b) No, the answer would not change. The market price of the
shares is a reliable indicator of its value; the advertised
price of the land is not.
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BRIEF EXERCISE 13-5
(a) Average Repurchase Price = $10.80
($2,000,000 + $4,000,000) ÷ 555,600 shares
(b) Initial Average Issue Price = $3.60
$2,000,000 ÷ 555,600 shares
(c) Cascades may have repurchased some of its own shares
(1) to increase trading of the company's shares in the stock
market, in the hopes of enhancing its market value, (2) to
reduce the number of shares issued and increase 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 cash on hand and no better investments available.
BRIEF EXERCISE 13-6
(a)
Feb. 15
(b)
Feb. 15
Common Shares (5,000 X $3.50*).... 17,500
Contributed Capital – Reacquired
Common Shares ..........................
Cash .............................................
2,500
15,000
Common Shares (5,000 X $3.50*).... 17,500
Retained Earnings............................ 2,500
Cash .............................................
20,000
*Average share price = $122,500 ÷ 35,000 shares = $3.50
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BRIEF EXERCISE 13-7
(a)
Jan. 28
June 15
Cash (5,000 X $110) .....................
Preferred Shares .....................
550,000
Cash (1,000 X $125) .....................
Preferred Shares .....................
125,000
550,000
125,000
(b) Average issue price: $112.50
($550,000 + $125,000) ÷ (5,000 + 1,000)
BRIEF EXERCISE 13-8
(a)
Mar. 3
(b)
Oct. 1
Cash (40,000 X $100).................... 4,000,000
Preferred Shares .....................
4,000,000
Preferred Shares (10,000 X $100) 1,000,000
Common Shares ......................
1,000,000
(40,000 shares)
BRIEF EXERCISE 13-9
(a) Dividends are in arrears by $80,000 (40,000 X $2).
(b) If the shares were noncumulative, there would be no
dividends in arrears.
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BRIEF EXERCISE 13-10
KAPOSI CORPORATION
Balance Sheet (Partial)
December 31, 2008
Shareholders' equity
Contributed capital
Share capital
Preferred shares, no par value, $5-noncumulative,
unlimited number of shares authorized,
800 shares issued
$ 20,000
Common shares, no par value, unlimited
number of shares authorized,
5,000 shares issued
50,000
Total share capital
70,000
Contributed capital—reacquisition of
common shares
5,000
Total contributed capital
75,000
Retained earnings
29,000
Total shareholders' equity
$104,000
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BRIEF EXERCISE 13-11
(a)
KAPOSI CORPORATION
Balance Sheet (Partial)
December 31, 2008
Shareholders' equity
Contributed capital
Share capital
Preferred shares, no par value, $5-noncumulative,
unlimited number of shares authorized,
800 shares issued
$ 20,000
Common shares, no par value, unlimited
number of shares authorized,
5,000 shares issued
50,000
Total share capital
70,000
Contributed capital—reacquisition of
common shares
5,000
Total contributed capital
75,000
Retained earnings
29,000
Accumulated other comprehensive income
6,000
Total shareholders' equity
$110,000
(b) Total shareholders’ equity would be $98,000 ($104,000 $6,000)
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BRIEF EXERCISE 13-12
Dec. 31
Revenues ...................................... 2,000,000
Income Summary.....................
2,000,000
31
Income Summary ......................... 1,500,000
Expenses..................................
1,500,000
31
Income Summary .........................
Retained Earnings ...................
500,000
Retained Earnings........................
Dividends .................................
50,000
31
500,000
50,000
BRIEF EXERCISE 13-13
(a) Return on equity
$8,097
($132, 495 + $121,784) ÷ 2
(b)
= 6.4%
It would be the same.
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SOLUTIONS TO EXERCISES
EXERCISE 13-1
(a) High $60.85
Low $41.45
(b) $0.75
(c) 1,000 X $60.41 = $60,410
(d) $59.25 + $1.24 = $60.49 (closing price + change)
(e) 9,837 X 100 = 983,700 shares
(f)
Since the share price is up $17.80 over the 365-day low
($59.25 - $41.45) investors are probably looking primarily
for capital appreciation.
EXERCISE 13-2
1.
2.
Dec. 5 Land..........................................
Common Shares .................
120,000
June 1 Land (20,000 X $12) .................
Common Shares .................
240,000
120,000
240,000
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EXERCISE 13-3
(a) Jan. 10 Cash (75,000 X $5) ...................
Common Shares .................
375,000
Feb. 24 Cash (1,000 X $105) .................
Preferred Shares .................
105,000
July 1 Cash (50,000 X $6.50) ..............
Common Shares .................
325,000
375,000
105,000
325,000
(b) (1) The average issue price of the preferred shares is $105.
(2) The average issue price of the common shares is $5.60
($375,000 + $325,000) ÷ (75,000 + 50,000).
EXERCISE 13-4
(a) Jan. 6 Cash ........................................
Common Shares ................
(200,000 shares X $1.50)
300,000
12 Cash ........................................
Common Shares .................
(50,000 shares X $1.75)
87,500
Mar. 17 Cash ........................................
Preferred Shares ................
(1,000 shares X $105)
105,000
300,000
87,500
105,000
July 18 Cash ........................................ 2,000,000
Common Shares ................
2,000,000
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Accounting Principles, Third Canadian Edition
EXERCISE 13-4 (Continued)
(a) (Continued)
Nov. 17 Common Shares *....................
Retained Earnings ...................
Cash (200,000 X $1.95) .......
382,000
8,000
Dec. 30 Common Shares *.................... 286,500
Contributed Capital –
Reacquisition of Common Shares
Cash (150,000 X $1.80) .......
390,000
16,500
270,000
*Average Cost per Common Share:
Transaction
Date
January 6
January 12
July 18
Total
Number of
Common Shares
Issued
200,000
50,000
1,000,000
1,250,000
Proceeds of
Issue
$ 300,000
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
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Accounting Principles, Third Canadian Edition
EXERCISE 13-4 (Continued)
(b) There are 900,000 common shares remaining, at an average
cost of $1.91**.
**Average Cost per Common Share:
Transaction
Date
January 6
January 12
July 18
Nov. 17
Dec. 30
Total
Number of
Common Shares
Issued
200,000
50,000
1,000,000
(200,000)
(150,000)
900,000
Proceeds of
Issue
$ 300,000
87,500
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 dividend
Arrears from Year 1
Dividend paid
Arrears
Year 1
$400,000
250,000
$150,000
Year 2
$400,000
150,000
550,000
550,000
$
0
(c) Dividends in arrears should be disclosed in the notes to
the financial statements. They are not recorded in the
books.
(d) The likely amount is $4 per share, for a total of $400,000.
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EXERCISE 13-6
(a) Nov. 15
Preferred Shares .................
Common Shares ................
230,000
230,000
Average share price ($1,000,000 + $3,600,000) ÷ (10,000 +
30,000) = $115
2,000 X $115 = $230,000
(b) 10,000 + 30,000 – 2,000 = 38,000 preferred shares
2,000 X 5 = 10,000 common shares
EXERCISE 13-7
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
9.
1.
12.
2.
5.
8.
7.
6.
4.
11.
10.
13.
3.
Legal capital
Publicly held corporation
Organization costs
Authorized shares
Issued shares
Initial public offering
Secondary market
Retained earnings
Common shares
Comprehensive income
Contributed capital
Convertible
Cumulative
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Accounting Principles, Third Canadian Edition
EXERCISE 13-8
Shareholders’ Equity
Other
Account
Share
Capital
Additional
Contributed
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
1. Cash
2. Common shares
3. Contributed
capital –
reacquisition of
common shares
4. Gain on sale of
property, plant
and equipment
5. Available-forsale security
6. Unrealized gain
on available-forsale security
7. Preferred shares
8. Retained
earnings
9. Legal fees
expense
10. Dividends
Solutions Manual
Financial
Statement
Balance
Sheet
Classification
Current
Assets
X
X
Balance
Sheet
Other
Revenue
(Gain)
Current
Assets
Income
Statement
Operating
Expense
Income
Statement
X
X
X
X
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Chapter 13
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Accounting Principles, Third Canadian Edition
EXERCISE 13-9
OZABAL INC.
Partial Balance Sheet
December 31, 2008
Shareholders' equity
Contributed capital
Share capital
Preferred shares $4-noncumulative, no par
value, 100,000 shares authorized,
30,000 issued
Common shares, no par value, unlimited
number of shares authorized, 300,000
shares issued
Total share capital
Contributed capital—reacquisition of
common shares
Total contributed capital
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
$ 150,000
300,000
450,000
25,000
475,000
900,000
75,000
$1,450,000
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EXERCISE 13-10
(a)
REITMANS (CANADA) LIMITED
Partial Balance Sheet
January 28, 2006
(in thousands)
Shareholders' equity
Share capital
Class A non-voting (preferred) shares, unlimited
number authorized, 56,747 issued ...................... $ 16,892
Common shares, unlimited number
authorized, 13,440 shares issued .......................
482
Total share capital .............................................
17,374
Contributed surplus ...................................................
2,523
Total contributed capital ............................................
19,897
Retained earnings* ..................................................... 370,360
Total shareholders’ equity ................................ $390,257
*$316,191 + $84,889 - $29,345 - $1,375 = $370,360
(b) ($ in thousands)
Return on equity = Net income ÷ Average shareholders’ equity
= $84,889 ÷ [($390,257 + $331,524) ÷ 2]
= 23.52%
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Accounting Principles, Third Canadian Edition
EXERCISE 13-11
(a) The average cost of the preferred shares is $60 ($600,000 ÷
10,000 = $60).
The average cost of the common shares is $3 ($1,800,000 ÷
600,000 = $3).
(b) It will be able to sell an additional 150,000 common shares
(750,000 authorized - 600,000 issued).
(c) The company paid $2 per share, for a total of $200,000.
$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, $2 was the price paid per share.
Common Shares......................................
Contributed Capital..........................
Cash ..................................................
300,000
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 the financial statements.
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SOLUTIONS TO PROBLEMS
PROBLEM 13-1A
1.
Kyle should run his beer cart business 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
short time.
2.
Joseph and Sabra should form a corporation 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 form a corporation. 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 receive more favourable income tax treatment.
5.
A partnership would be the most likely form of business
for Mary and Richard to choose. It is simpler to form than
a corporation and less costly.
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PROBLEM 13-2A
(a) Shares authorized
Shares issued
100,000
11,000
(b) Common shares
Contributed capital – reacquisition of
common shares
Retained earnings
$396,000
$2,600
$161,400
Calculations:
Common
shares
(a)
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
Number Average Contributed
of
issue
capital –
shares
price
reacquisition
of common
(b)
(a) ÷ (b)
shares
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
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Accounting Principles, Third Canadian Edition
PROBLEM 13-3A
(a)
(b)
Dividend Noncumulative
Cumulative
Year
Paid
Preferred
Common Preferred Common
1
$15,000
$15,000
$
0
$15,000
$
0
2
12,000
12,000
0
12,000
0
3
27,000
15,000
12,000
18,000
9,000
4
35,000
15,000
20,000
15,000
20,000
1. Regular dividend is $5 X 3,000 = $15,000
2b. Arrears = $15,000 - $12,000 = $3,000
3b. Preferred dividend = $15,000 (regular) + $3,000 (arrears) =
$18,000
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Accounting Principles, Third Canadian Edition
PROBLEM 13-4A
Shareholders' Equity
Assets
Liabilities
Preferred
Shares
Common
Shares
Other
Contributed
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
1.
+$100,000
n/a
n/a
+$100,000
n/a
n/a
n/a
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 + $150,000) ÷ (4,000 – 2,000 + 1,000) = $150
$150 X 500 = $75,000
$75,000 - $72,500 = $2,500
2,500 X $4 = $10,000
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Chapter 13
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Accounting Principles, Third Canadian Edition
PROBLEM 13-5A
(a)
Date
GENERAL JOURNAL
Account Titles and Explanation
J1
Debit
Jan. 10 Cash (100,000 X $2) ........................
Common Shares ........................
200,000
Mar.
1 Cash (10,000 X $42) ........................
Preferred Shares ........................
420,000
1 Land (25,000 X $2.50) .....................
Common Shares ........................
62,500
1 Cash (75,000 X $3) ..........................
Common Shares ........................
225,000
July 24 Cash ...............................................
Equipment.......................................
Common Shares (16,800 X $4) ..
60,000
7,200
Nov.
1 Cash (2,000 X $48) ..........................
Preferred Shares ........................
96,000
Dec. 31 Income Summary ...........................
Retained Earnings .....................
650,000
31 Dividends ........................................
Cash ............................................
36,000
31 Retained Earnings ..........................
Dividends ...................................
36,000
Apr.
May
Credit
200,000
420,000
62,500
225,000
67,200
96,000
650,000
36,000
36,000
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Accounting Principles, Third Canadian Edition
PROBLEM 13-5A (Continued)
(b)
Preferred Shares
Date
Mar.
Nov.
Explanation
1
1
Ref.
Debit
J1
J1
Credit
Balance
420,000 420,000
96,000 516,000
Common Shares
Date
Explanation
Jan. 10
Apr. 1
May 1
July 24
Ref.
Debit
J1
J1
J1
J1
Credit
200,000
62,500
225,000
67,200
Balance
200,000
262,500
487,500
554,700
Dividends
Date
Explanation
Dec. 31
31
Closing entry
Ref.
Debit
Credit
J1
J1
36,000
Ref.
Debit
Credit
36,000
650,000 650,000
614,000
36,000
Balance
36,000
0
Retained Earnings
Date
Dec
Explanation
31
31
Closing entry
Closing entry
J1
J1
Balance
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PROBLEM 13-5A (Continued)
(c)
HIGHLAND CORPORATION
Balance Sheet (Partial)
December 31, 2008
Shareholders' equity
Share capital
Preferred shares, no par value,
$3-noncumulative, . unlimited number of shares
authorized,12,000* shares issued .................. $ 516,000
Common shares, no par value, unlimited number
of shares authorized, 216,800** shares issued
554,700
Total share capital ..................................................
1,070,700
Retained earnings .................................................
614,000
Total shareholders’ equity................................ $1,684,700
* 10,000 + 2,000 = 12,000 shares
** 100,000 + 25,000 + 75,000 + 16,800 = 216,800 shares
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PROBLEM 13-6A
(a)
Date
GENERAL JOURNAL
Account Titles and Explanation
J1
Debit
Feb. 1 Cash ..................................................
Common Shares ...........................
75,000
Sept. 3 Cash ..................................................
Common Shares ...........................
16,500
Oct. 25 Common Shares (10,000 X $2.75*) ..
Contributed Capital—Reacquisition
of Common Shares .......................
Retained Earnings ............................
Cash ...............................................
27,500
Credit
75,000
16,500
1,500
1,000
30,000
*Average Cost per Common Share:
Transaction Date
Beginning balance
February 1
September 3
Total
Number of
Common
Shares Issued
1,000,000
25,000
5,000
1,030,000
Proceeds of
Issue
$2,741,000
75,000
16,500
$2,832,500
$2,832,500 ÷ 1,030,000 = $2.75
Nov. 3 Cash .................................................. 130,000
Preferred Shares ...........................
130,000
Dec. 31 Income Summary ............................. 275,000
Retained Earnings ........................
275,000
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PROBLEM 13-6A (Continued)
(a) (Continued)
Dec. 31 Dividends ........................................
Cash ............................................
30,000
30,000
31 Retained Earnings ............................
Dividends.......................................
30,000
30,000
(b)
Preferred Shares
Date
Jan.
Nov.
Explanation
1
3
Balance
Ref.
Debit
Credit
Balance
130,000
500,000
630,000

Common Shares
Date
Jan.
Feb.
Sept.
Oct.
Explanation
1
1
3
25
Balance
Ref.

J1
J1
J1
Debit
27,500
Credit
Balance
2,741,000
75,000 2,816,000
16,500 2,832,500
2,805,000
Contributed Capital—Reacquisition of Shares
Date
Explanation
Jan. 1
Oct. 25
Balance
Ref.
Debit

J1
1,500
Ref.
Debit
J1
J1
30,000
Credit
Balance
1,500
0
Dividends
Date
Dec. 31
31
Explanation
Closing entry
Credit
30,000
Balance
30,000
0
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PROBLEM 13-6A (Continued)
(b) (Continued)
Retained Earnings
Date
Jan. 1
Oct. 25
Dec. 31
31
Explanation
Balance
Closing entry
Closing entry
Ref.

J1
J1
J1
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' equity
Share capital
$4 preferred shares, cumulative, no par value,
50,000 shares authorized,
10,000 shares issued .....................................
$ 630,000
Common shares, no par value, unlimited number
of shares authorized, 1,020,000* shares issued 2,805,000
Total share capital .......................................
3,435,000
Retained earnings (See Note X) ...........................
2,060,000
Total shareholders' equity ........................................
$5,495,000
Note X: Dividends on preferred shares totalling $10,000 [10,000
X $1 per share] are in arrears.
*1,000,000 + 25,000 + 5,000 – 10,000 = 1,020,000 shares
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PROBLEM 13-7A
(a)
Date
GENERAL JOURNAL
Account Titles and Explanation
J1
Debit
Feb. 06 Building (1,000 X $111) ...................
Preferred Shares ..........................
111,000
July 15 Preferred Shares (2,000 X $106*) ...
Common Shares ..........................
212,000
Credit
111,000
212,000
*($525,000 + $111,000) ÷ (5,000 + 1,000) = $106.00
Aug. 22 Cash (500 X $124) ............................
Preferred Shares ..........................
62,000
Nov. 1 Preferred Shares (1,000 X $108**) .
Common Shares ..........................
108,000
62,000
108,000
**($525,000 + $111,000 – $212,000 + $62,000) ÷ (5,000 + 1,000 –
2,000 + 500) = $108
Dec 31 Revenues ..........................................
Income Summary .........................
600,000
31 Income Summary..............................
Expenses ......................................
540,000
31 Income Summary..............................
Retained Earnings........................
60,000
600,000
540,000
60,000
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PROBLEM 13-7A (Continued)
(a) (Continued)
Preferred Shares
Date
Explanation
Jan. 1
Feb. 6
July 15
Aug. 22
Nov. 1
Balance
Ref.

J1
J1
J1
J1
Debit
Credit
Balance
525,000
111,000 636,000
424,000
212,000
62,000 486,000
378,000
108,000
Common Shares
Date
Explanation
Jan. 1
July 15
Nov. 1
Balance
Ref. Debit

J1
J1
Credit
Balance
1,050,000
212,000 1,262,000
108,000 1,370,000
Contributed Capital—Reacquisition of Preferred Shares
Date
Jan.
Explanation
1
Balance
Ref.
Debit
Credit

Balance
18,750
Retained Earnings
Date
Explanation
Jan. 1
Dec. 31
Balance
Closing Entry
Ref.
Debit

J1
Credit
Balance
300,000
60,000 360,000
Accumulated Other Comprehensive Income
Date
Jan.
Explanation
1
Balance
Ref.

Debit
Credit
Balance
25,000
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PROBLEM 13-7A (Continued)
(c)
DENISON CORPORATION
Balance Sheet (Partial)
December 31, 2008
Shareholders' equity
Contributed capital
Share capital
Preferred shares, no par value,
$3-noncumulative, convertible, 10,000
shares authorized, 3,500* shares issued ...... $ 378,000
Common shares, no par value, unlimited
number of shares authorized, 94,000**
shares issued................................................... 1,370,000
Total share capital .................................................... 1,748,000
Additional contributed capital
Contributed capital- reacquisition of
preferred shares .................................................
18,750
Total contributed capital .......................................... 1,766,750
Retained earnings.....................................................
360,000
Accumulated other comprehensive income ...........
25,000
Total shareholders' equity ............................................ $2,151,750
*5,000 + 1,000 – 2,000 + 500 – 1,000 = 3,500 shares
**70,000 + 16,000 + 8,000 = 94,000 shares
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Accounting Principles, Third Canadian Edition
PROBLEM 13-8A
(a)
Date
GENERAL JOURNAL
Account Titles and Explanation
J1
Debit
Credit
Sep. 30 Commission Revenue ...................... 314,850
Income Summary..........................
314,850
30 Income Summary ............................. 245,440
Salaries Expense ..........................
Rent Expense................................
Amortization Expense ..................
Supplies Expense .........................
Utilities Expense...........................
Interest Expense...........................
Income Tax Expense ....................
138,400
25,000
30,080
4,860
18,200
3,900
25,000
30 Income Summary .............................
Retained Earnings ........................
69,410
30 Retained Earnings ............................
Dividends ......................................
2,000
69,410
2,000
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Accounting Principles, Third Canadian Edition
PROBLEM 13-8A (Continued)
(b)
MISCOU CORP.
Balance Sheet
September 30, 2008
______________________________________________________
Assets
Current assets
Cash .....................................................................
Accounts receivable .............................................
Supplies ................................................................
Total current assets ......................................
Property, plant and equipment
Equipment .......................................... $150,400
Less: Accumulated amortization......
(60,160)
Franchise ..................................................
Total assets ....................................................
$ 32,500
74,705
1,265
108,470
90,240
225,000
$423,710
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable .................................................
Salaries payable ...................................................
Interest payable ....................................................
Income tax payable ..............................................
Unearned commission revenue ..........................
Current portion of long-term debt .......................
Total current liabilities ..................................
Long-term debt
Long-term note payable .......................................
Total liabilities ...............................................
$ 43,000
8,400
900
2,000
5,500
5,000
64,800
55,000
119,800
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Accounting Principles, Third Canadian Edition
PROBLEM 13-8A (Continued)
(b) (Continued)
MISCOU CORP.
Balance Sheet
September 30, 2008
______________________________________________________
Shareholders’ equity
Contributed capital
Share capital
$4 noncumulative preferred shares unlimited
number of shares authorized, 500 issued .......
Common shares, unlimited number of shares
authorized, 40,000 issued .................................
Total share capital ...................................................
Other contributed capital
Contributed capital – reacquisition of preferred
shares ................................................................
Total contributed capital ............................................
Retained earnings* .....................................................
Total shareholders’ equity ...........................................
Total liabilities and shareholders’ equity ..........
*Retained earnings
Balance, Oct 1, 2007 ...............................
Add: Net income .....................................
Less: Dividends ......................................
Balance, September 30, 2008 ................
$ 50,000
110,000
160,000
1,500
161,500
142,410
303,910
$423,710
$ 75,000
69,410
(2,000)
$142,410
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Accounting Principles, Third Canadian Edition
PROBLEM 13-9A
(a)
ANDRÉS WINES LTD.
Balance Sheet
March 31, 2006
(in thousands)
______________________________________________________
Assets
Current assets
Accounts receivable ................................................
$ 18,444
Inventories ...............................................................
70,528
Income taxes recoverable .......................................
911
Prepaid expenses ....................................................
2,447
Total current assets ............................................
92,330
Property, plant, and equipment ..................... $134,697
Less: Accumulated amortization ................. (49,100)
85,597
Goodwill .......................................................................
35,862
Other long-term assets ...............................................
8,298
Total assets ..............................................................
$222,087
Liabilities and Shareholders’ Equity
Current liabilities
Bank indebtedness ..................................................
Accounts payable and accrued liabilities ..............
Dividends payable ...................................................
Current portion of long-term debt ..........................
Total current liabilities ........................................
Long-term liabilities
Long-term debt .......................................... $50,328
Future income tax liability......................... 12,381
Other long-term liabilities .........................
4,224
Total liabilities .....................................................
$ 37,295
21,613
778
5,888
65,574
66,933
$132,507
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Accounting Principles, Third Canadian Edition
PROBLEM 13-9A (Continued)
(a) (Continued)
ANDRÉS WINES LTD.
Balance Sheet
March 31, 2006
(in thousands)
______________________________________________________
Shareholders’ equity
Share capital
Class A shares, nonvoting, unlimited authorized,
3,963 issued ....................................................
6,975
Class B shares, voting, convertible into Class A
shares, unlimited authorized, 1,002 issued .
400
Total share capital .....................................
7,375
Retained earnings* ..................................................
82,205
Total shareholders’ equity..................................
89,580
Total liabilities and shareholders’ equity...............
$222,087
*$79,260 + $6,054 – $3,109 = $82,205
(b)
Return on equity = Net income ÷ Average shareholders’ equity
$6,054
= 6.85%
 $89,580 + $87,168 


2
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Accounting Principles, Third Canadian Edition
PROBLEM 13-10A
(a) Return on equity = Net income ÷ Average shareholders’
equity
2004
2005
$128.7
= 7.04%
 $1,780.5 + $1,877.4 


2
$770.8
= 61.11%
 $1,877.4 + $645.3 


2
Sears’ return on equity has improved significantly during
the last year.
(b) Sears is performing as well as the industry average in both
years.
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PROBLEM 13-11A
(a) Preferred dividends ÷ Preferred dividend per share
$150,000 ÷ $5 = 30,000 preferred shares
(b) Preferred share average price = $3,150,000 ÷ 30,000 shares
issued = $105 per share
Common share average price = $1,000,000 ÷ 250,000 shares
issued = $4 per share
(c) The shares were issued for an average selling price 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) Limited liability for preferred shareholders
= $3,150,000
Limited liability for common shareholders
= $4,600,000 - $3,150,000 = $1,450,000
(e) It is a loss that bypasses the income statement because it
has not yet been realized. An example is an unrealized loss
on investments that are available for sale.
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Accounting Principles, Third Canadian Edition
PROBLEM 13-1B
1.
A partnership would be the most likely form of business
for the students to choose. It is simpler to form than a
corporation and less costly.
2.
Chris will likely operate his lawn 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 costly to form and dissolve.
3.
Ron would likely form a corporation because he probably
needs to raise funds to buy equipment. It is normally easier
to raise funds through a corporation. A corporation is also
the only form of business that provides limited liability to it
owners. There may also be income tax benefits.
4.
Hervé would likely form a corporation because he 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 a corporation.
5.
A proprietorship would be the most likely form of business
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 liability in the event of an accident.
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Accounting Principles, Third Canadian Edition
PROBLEM 13-2B
(a) Shares authorized
Shares issued
500,000
200,000
(b) Common shares
Contributed capital – reacquisition of
Common shares
Retained earnings
$830,000
$10,500
$680,000
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
Average
capital –
Number
issue reacquisition
of shares
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
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Accounting Principles, Third Canadian Edition
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 dividend is $4 X 5,000 = $20,000
2b. Arrears = $20,000 - $15,000 = $5,000
3b. Preferred dividend = $20,000 (regular) + $5,000 (arrears) =
$25,000
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Accounting Principles, Third Canadian Edition
PROBLEM 13-4B
Shareholders' Equity
Assets
Liabilities
Accumulated
Other
Retained
Preferred Common
Other
Contributed
Earnings Comprehensive
Shares
Shares
Capital
Income
n/a +$23,550
n/a
n/a
n/a
1.
+$23,550
n/a
2.
-200,000
n/a
n/a
-160,500
-$30,000
-$9,500
n/a
3.
n/a
n/a
-$70,000
+70,000
n/a
n/a
n/a
4.
+25,000
n/a
n/a
+25,000
n/a
n/a
n/a
5.
+7,500
n/a
+7,500
n/a
n/a
n/a
n/a
6.
-15,000
n/a
n/a
n/a
n/a
-15,000
n/a
7.
+2,500
n/a
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
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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
PROBLEM 13-5B
(a)
Date
GENERAL JOURNAL
Account Titles and Explanation
J1
Debit
Credit
Feb. 10 Cash (80,000 X $4) .............................. 320,000
Common Shares ............................
320,000
Mar. 1 Cash (5,000 X $115) ............................ 575,000
Preferred Shares ............................
575,000
Apr.
1 Land (22,000 X $4.25) ......................... 93,500
Common Shares ............................
93,500
Jun. 20 Cash (78,000 X $4.50) ......................... 351,000
Common Shares ............................
351,000
Aug. 1 Legal Fees Expense (10,000 X $4.75) 47,500
Common Shares ............................
47,500
Sep. 1 Cash (10,000 X $5) .............................. 50,000
Common Shares ............................
50,000
Nov. 1 Cash (1,000 X $117) ............................ 117,000
Preferred Shares ............................
117,000
Jan. 31 Income Summary ............................... 500,000
Retained Earnings .........................
500,000
31 Dividends ............................................ 24,000
Cash ................................................
24,000
31 Retained Earnings .............................. 24,000
Dividends .......................................
24,000
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PROBLEM 13-5B (Continued)
(b)
Preferred Shares
Date
Mar.
Nov.
Explanation
1
1
Ref.
Debit
J1
J1
Credit
Balance
575,000 575,000
117,000 692,000
Common Shares
Date
Feb.
Apr.
June
Aug.
Sept.
Explanation
10
1
20
1
1
Ref.
Debit
J1
J1
J1
J1
J1
Credit
320,000
93,500
351,000
47,500
50,000
Balance
320,000
413,500
764,500
812,000
862,000
Dividends
Date
Jan. 31
31
Explanation
Closing entry
Ref.
Debit
Credit
24,000
Balance
J1
J1
24,000
0
24,000
Ref.
Debit
Credit
24,000
500,000 500,000
476,000
Retained Earnings
Date
Explanation
Jan. 31
31
Closing entry
Closing entry
J1
J1
Balance
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PROBLEM 13-5B (Continued)
(c)
WETLAND CORPORATION
Balance Sheet (Partial)
January 31, 2008
______________________________________________________
Shareholders' equity
Share capital
$4-noncumulative preferred shares, no par value,
unlimited number of shares authorized,
6,000* shares issued ............................................ $ 692,000
Common shares, no par value, unlimited number
of shares authorized, 200,000** shares issued 862,000
Total share capital ...................................................... 1,554,000
Retained earnings....................................................... 476,000
Total shareholders’ equity ....................................... $2,030,000
*5,000 + 1,000 = 6,000 shares
**80,000 + 22,000 + 78,000 + 10,000 + 10,000 = 200,000 shares
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PROBLEM 13-6B
(a)
GENERAL JOURNAL
Date
Account Titles and Explanation
J1
Debit
Credit
Feb. 1 Cash .................................................... 55,500
Common Shares ............................
55,500
Sep. 3 Cash .................................................... 107,000
Preferred Shares ............................
107,000
Oct. 25 Common Shares (10,000 X $7.10*) .... 71,000
Contributed Capital – Reacquisition
of Common Shares ........................ 2,500
Retained Earnings .............................. 1,500
Cash ................................................
75,000
*Average Cost per Common Share:
Transaction Date
Beginning balance
February 1
Total
Number of
Common
Shares Issued
200,000
5,000
205,000
Proceeds of
Issue
$1,400,000
55,500
$1,455,500
$1,455,500 ÷ 205,000 = $7.10
Dec. 31 Income Summary ............................... 60,000
Retained Earnings .........................
60,000
31 Dividends ............................................ 12,000
Cash ................................................
12,000
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PROBLEM 13-6B (Continued)
(a) (Continued)
Dec. 31 Retained Earnings .............................. 12,000
Dividends .......................................
12,000
(b)
Preferred Shares
Date
Jan.
Sep.
Explanation
1
3
Balance
Ref.
Debit

J1
Credit
Balance
320,000
107,000 427,000
Common Shares
Date
Explanation
Jan. 1
Feb. 1
Oct. 25
Balance
Ref.

J1
J1
Debit
71,000
Credit
Balance
1,400,000
55,500 1,455,500
1,384,500
Contributed Capital – Reacquisition of Shares
Date
Explanation
Jan. 1
Oct. 25
Balance
Ref.
Debit

J1
2,500
Ref.
Debit
Credit
2,500
Balance
2,500
0
Dividends
Date
Jan. 31
31
Explanation
Closing entry
J1
J1
Credit
12,000
12,000
Balance
12,000
0
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PROBLEM 13-6B (Continued)
(b) (Continued)
Retained Earnings
Date
Explanation
Jan. 1
Oct. 25
Dec. 31
31
Balance
Closing entry
Closing etnry
Ref.

J1
J1
J1
Debit
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' equity
Share capital
$5-cumulative preferred shares, no par value,
25,000 shares authorized, 4,000* shares issued $ 427,000
Common shares, no par value, unlimited number
of shares authorized, 195,000** shares issued 1,384,500
Total share capital................................................
1,811,500
Retained earnings.....................................................
534,500
Total shareholders’ equity .............................. $2,346,000
*3,000 + 1,000 = 4,000 preferred shares
** 200,000 + 5,000 – 10,000 = 195,000 common shares
Note X: Dividends of $8,000 are in arrears. (4,000 X $5 - $12,000)
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PROBLEM 13-7B
(a)
Date
GENERAL JOURNAL
Account Titles and Explanation
J1
Debit
Feb. 1 Land (1,000 x $120) .........................
Preferred Shares ..........................
120,000
Mar. 1 Preferred Shares (500 X $112*) ......
Common Shares ..........................
56,000
Credit
120,000
56,000
*Average cost of preferred shares:
($440,000 + $120,000) ÷ (4,000 + 1,000) = $112
Jul.
1 Cash (1,500 X $130) .........................
Preferred Shares ..........................
195,000
195,000
Sep. 1 Preferred Shares (1,000 X $116.50**) 116,500
Common Shares ..........................
116,500
** Average cost of preferred shares: ($440,000 + $120,000 –
$56,000 + $195,000) ÷ (4,000 + 1,000 – 500 + 1,500) = $116.50
Dec. 31 Revenues .........................................
Income Summary .........................
500,000
31 Income Summary ............................
Expenses ......................................
450,000
31 Income Summary ............................
Retained Earnings .......................
50,000
500,000
450,000
50,000
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PROBLEM 13-7B (Continued)
(b)
Preferred Shares
Date
Jan.
Feb.
Mar
Jul
Sep.
Explanation
1
1
1
1
1
Balance
Ref.

J1
J1
J1
J1
Debit
Credit
Balance
440,000
120,000 560,000
504,000
56,000
195,000 699,000
582,500
116,500
Common Shares
Date
Jan.
Mar
Sep.
Explanation
1
1
1
Balance
Ref. Debit

J1
J1
Credit
Balance
1,050,000
56,000 1,106,000
116,500 1,222,500
Contributed Capital—Reacquisition of Preferred Shares
Date
Jan.
Explanation
1
Balance
Ref.
Debit
Credit

Balance
25,000
Retained Earnings
Date
Explanation
Jan. 1
Dec. 31
Balance
Closing Entry
Ref.
Debit

J1
Credit
Balance
300,000
50,000 350,000
Accumulated Other Comprehensive Income
Date
Jan.
Explanation
1
Balance
Ref.

Debit
Credit
Balance
10,000
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PROBLEM 13-7B (Continued)
(c)
REMMERS CORPORATION
Balance Sheet (Partial)
December 31, 2008
______________________________________________________
Shareholders' equity
Contributed capital
Share capital
$5 cumulative preferred shares, no par value,
convertible 10,000 shares authorized,
5,000* shares issued .......................................... $ 582,500
Common shares, no par value, unlimited shares
authorized, 85,000** shares issued................... 1,222,500
Total share capital................................................ 1,805,000
Additional contributed capital
Contributed capital – reacquisition of
preferred shares .................................................
25,000
Total contributed capital .......................................... 1,830,000
Retained earnings.....................................................
350,000
Accumulated other comprehensive income ...........
10,000
Total shareholders’ equity ............................................ $2,190,000
* 4,000 + 1,000 – 500 + 1,500 – 1,000 = 5,000 preferred shares
** 70,000 + 5,000 + 10,000 = 85,000 common shares
Note X: Dividends of $25,000 (5,000 X $5) are in arrears
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PROBLEM 13-8B
(a)
Date
GENERAL JOURNAL
Account Titles and Explanation
J1
Debit
Dec. 31 Sales Revenue .................................
Income Summary .........................
596,000
31 Income Summary ............................
Salaries Expense .........................
Cost of Goods Sold .....................
Amortization Expense .................
Interest Expense ..........................
Rent Expense ...............................
Income Tax Expense ...................
Utilities Expense ..........................
Insurance Expense ......................
Supplies Expense ........................
506,000
31 Income Summary ............................
Retained Earnings .......................
90,000
31 Retained Earnings ...........................
Dividends......................................
10,000
Credit
596,000
176,000
148,000
84,000
31,500
24,000
22,000
12,000
6,000
2,500
90,000
10,000
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PROBLEM 13-8B (Continued)
(b)
MOORCRAFT LTD.
Balance Sheet
December 31, 2008
______________________________________________________
Assets
Current assets
Cash............................................................................. $ 21,000
Accounts receivable ...................................................
69,000
Inventory .....................................................................
40,000
Prepaid insurance.......................................................
10,000
Supplies ......................................................................
5,000
Total current assets ............................................... 145,000
Property, plant, and equipment
Land ................................................................ $ 45,000
Building.......................................
$600,000
Accumulated amortization.........
(80,000) 520,000
Equipment...................................
$300,000
Accumulated amortization.........
(90,000) 210,000
Total property, plant, and equipment ........................ 775,000
Total assets ............................................................ $920,000
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable ....................................................... $ 52,000
Salaries payable..........................................................
8,000
Interest payable ..........................................................
2,500
Income tax payable .....................................................
10,000
Unearned sales revenue.............................................
24,000
Current portion of long-term debt .............................
10,000
Total current liabilities ........................................... 106,500
Long-term debt
Long-term mortgage, net of current portion............. 340,000
Total liabilities ........................................................ 446,500
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PROBLEM 13-8B (Continued)
(b) (Continued)
MOORCRAFT LTD.
Balance Sheet
December 31, 2008
______________________________________________________
Shareholders’ equity
Contributed capital
Share capital
$4 noncumulative preferred shares, unlimited
authorized, 2,500 issued ......................................
50,000
Common shares, unlimited authorized,
100,000 issued ...................................................... 150,000
Total share capital.................................................. 200,000
Other contributed capital
Reacquisition of common shares .........................
5,000
Total contributed capital ............................................... 205,000
Retained earnings* ........................................................ 245,000
Accumulated other comprehensive income ................
23,500
Total shareholders’ equity .............................................. 473,500
Total liabilities and shareholders’ equity ............. $920,000
*Retained earnings
Balance, Jan. 1........................................ $165,000
Add: Net income ..................................... 90,000
Less: Dividends ...................................... (10,000)
Balance, Dec. 31 ..................................... $245,000
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PROBLEM 13-9B
(a)
MAGNOTTA WINERY CORPORATION
Balance Sheet
January 31, 2006
______________________________________________________
Assets
Current assets
Accounts receivable ................................................ $ 347,669
Inventories ............................................................... 20,505,669
Prepaid expenses and deposits .............................
671,961
Total current assets ............................................ 21,525,299
Capital assets ................................... $33,129,085
Accumulated amortization................ (11,298,085) 21,831,000
Winery licenses ...........................................................
251,516
Total assets .............................................................. $43,607,815
Liabilities and Shareholders’ Equity
Current liabilities
Bank indebtedness .................................................. $ 4,757,181
Accounts payable and accrued liabilities .............. 1,289,814
Income taxes payable ..............................................
130,754
Current portion of long-term debt .......................... 1,477,404
Total current liabilities ........................................ 7,655,153
Long-term liabilities
Long-term debt .............................
$8,681,328
Future income taxes .....................
1,047,517
9,728,845
Total liabilities ..................................................... 17,383,998
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PROBLEM 13-9B (Continued)
(a) (Continued)
MAGNOTTA WINERY CORPORATION
Balance Sheet
January 31, 2006
______________________________________________________
Shareholders’ equity
Contributed capital
Common shares, unlimited authorized,
13,670,005 issued ........................................... 6,165,817
Other contributed capital....................................
210,000
Total contributed capital ........................... 6,375,817
Retained earnings* .................................................. 19,848,000
Total shareholders’ equity.................................. 26,223,817
Total liabilities and shareholders’ equity............... $43,607,815
*$17,273,203 + $2,574,797 = $19,848,000
(b)
Return on equity = Net income ÷ Average shareholders’ equity
$2,574,797
= 10.34%
 $26,223,817 + $23,582,360 


2
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PROBLEM 13-10B
(a) Return on equity = Net income ÷ Average shareholders’
equity
2005
2004
$330.1
= 13.86%
 $2,511.1 + $2,251.2 


2
$291.5
= 13.66%
 $2,251.2 + $2,017.1


2
Canadian Tire’s return on equity has increased very slightly
during the last year.
(b) Canadian Tire is performing at the same level as the
industry average during both years.
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PROBLEM 13-11B
(a) $1,200,000 ÷ 12,000 = $100 average selling price of the
preferred shares.
$1,000,000 ÷ 100,000 = $10 average selling price of the
common shares.
(b) It appears that there were no dividends declared in 2008
since there was no decrease in retained earnings during
the year.
(c) Since the preferred shares are noncumulative, there are no
dividends in arrears.
(d) The shares were issued for an average selling price of $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) It is income that bypasses the income statement. An
example of accumulated other comprehensive income is
unrealized gains on investments that are available for sale.
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CONTINUING COOKIE CHRONICLE
(a) 1. One of the major advantages of issuing 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 require 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 advantage to both Natalie and
Curtis if the company is successful and has excess
cash to pay out dividends.
2. It is possible to pay for the $750 legal bill by issuing
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
consideration received to determine the 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 be given up valued at $750, which is the value of
the legal fees.
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CONTINUING COOKIE CHRONICLE (Continued)
GENERAL JOURNAL
Date
(b)
Nov.
(c)
Nov.
Account Titles and Explanation
J1
Debit
1 Cash .................................................
Accounts Receivable ......................
Merchandise Inventory ...................
Equipment .......................................
Common Shares ..........................
17,500
600
1,580
3,500
1 Cash .................................................
Preferred Shares ..........................
10,000
1 Legal Expense .................................
Common Shares ..........................
750
Credit
23,180
10,000
750
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CONTINUING COOKIE CHRONICLE (Continued)
(d)
COOKIE & COFFEE CREATIONS LTD.
Balance Sheet
November 1, 2008
______________________________________________________
Assets
Current assets
Cash ........................................................................... $27,500
Accounts receivable ...................................................
600
Merchandise inventory ..............................................
1,580
Total current assets ............................................ 29,680
Property, plant, and equipment
Equipment ...................................................................
3,500
Total assets .......................................................... $33,180
Shareholders' Equity
Share capital
$0.50 preferred shares, no par value, noncumulative,
10,000 authorized, 2,000 shares issued ............. $10,000
Common shares, no par value, unlimited number of
shares authorized, 23,930 shares issued .......... 23,930
Total share capital ............................................... 33,930
Deficit .................................................................................
(750)
Total shareholders' equity .................................. $33,180
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BYP 13-1 FINANCIAL REPORTING PROBLEM
(a) The Forzani Group Limited has 2 classes of shares. There
is an unlimited number of Class A shares authorized and
32,922,000 issued; and an unlimited number of preferred
shares authorized but none issued.
(b) Per note 8 to the financial statements, Forzani issued
47,000 shares upon employees exercising stock options.
(c)
Per note 8 to the financial statements, it appears that
Forzani repurchased 135,000 shares in fiscal 2005 at a cost
of $1,510,000 but that none were repurchased in 2006.
(d) The average cost of the common shares is $4.20 (138,131 ÷
32,922).
(e)
Return on equity = Net Income ÷ Average shareholders’
equity
2005:
$21,545
= 8.68%
 $262,847 + $233,296 


2
The company’s return on equity has declined over the past
year from 8.68% in fiscal 2005 to 5% in fiscal 2006.
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BYP 13-2 INTERPRETING FINANCIAL STATEMENTS
(a) 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 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 paid more to repurchase their common shares than
their average cost.
Common Shares
($355,000,000 – $290,000,000) ...... 65,000,000
Retained Earnings ......................... 290,000,000
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 than in 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 financial position, the current state of the economy,
and the current state of the stock market. It is apparent that
investors have a positive outlook for Talisman.
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BYP 13-3
Accounting Principles, Third Canadian Edition
COLLABORATIVE LEARNING ACTIVITY
All of the material supplementing the collaborative learning
activity, including a suggested solution, can be found in the
Collaborative Learning section of the Instructor Resources site
accompanying this textbook.
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BYP 13-4 COMMUNICTION ACTIVITY
Memorandum
To:
From:
Re:
Chief Financial Officer
Accountant
Comprehensive Income reporting
The new standard concerning the recording and reporting of
comprehensive income will affect the balance sheet prepared
this fiscal 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 from the payment of dividends.
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 are known as “other comprehensive income (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 sheet. Any resulting unrealized gains or losses will
be shown in the shareholders’ equity section, immediately
beneath Retained Earnings.
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.
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BYP 13-5 ETHICS CASE
(a) The stakeholders in this situation are:
The director of Simplex's R & D division.
The president of Simplex.
The shareholders of Simplex.
Those who live in the environment to be sprayed by
the new (un-tested) chemical.
(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 irresponsible and unethical.
(c) A parent company may protect itself against loss 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 law and criminal law.
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rights reserved.
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derivative works, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, scanning, or otherwise without the prior
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