Chapter 14/15
Practice Questions – from textbook
A)
B)
C)
D)
E)
F)
Ch
Ch
Ch
Ch
Ch
Ch
14 Self Study #1-7 (p. 673)
14 Questions #2a, 7, 11, 15 (p. 673)
14 Brief Exercises #4, 7, 11 (p. 674)
14 BYP 14-1 (p. 684)
15 Questions #1, 5, 6 (p. 717)
15 Brief Exercises #1, 11 (p. 718)
Chapter 14/15
Practice Questions – from textbook
A)
B)
C)
D)
E)
F)
Ch
Ch
Ch
Ch
Ch
Ch
14 Self Study #1-7 (p. 673)
14 Questions #2a, 7, 11, 15 (p. 673)
14 Brief Exercises #4, 7, 11 (p. 674)
14 BYP 14-1 (p. 684)
15 Questions #1, 5, 6 (p. 717)
15 Brief Exercises #1, 11 (p. 718)
Chapter 14/15
Practice Questions – from textbook
A)
B)
C)
D)
E)
F)
Ch
Ch
Ch
Ch
Ch
Ch
14 Self Study #1-7 (p. 673)
14 Questions #2a, 7, 11, 15 (p. 673)
14 Brief Exercises #4, 7, 11 (p. 674)
14 BYP 14-1 (p. 684)
15 Questions #1, 5, 6 (p. 717)
15 Brief Exercises #1, 11 (p. 718)
Chapter 14/15
Practice Questions – from textbook
A)
B)
C)
D)
E)
F)
Ch
Ch
Ch
Ch
Ch
Ch
14 Self Study #1-7 (p. 673)
14 Questions #2a, 7, 11, 15 (p. 673)
14 Brief Exercises #4, 7, 11 (p. 674)
14 BYP 14-1 (p. 684)
15 Questions #1, 5, 6 (p. 717)
15 Brief Exercises #1, 11 (p. 718)
Solutions
A) Self Study – solutions in textbook
B) Ch 14 Questions #2a, 7, 11, 15 (p. 673)
2.
(a) Taxation is an advantage because corporate tax rates are often lower than
personal tax rates. It can be a disadvantage because profits distributed to
the shareholders are not a tax deductible expense for the corporation.
Therefore profits can be subject to “double” taxation—once at the
corporate level and again at the personal rates of the shareholders who
receive dividends paid out of these profits (the impact of these taxes is
somewhat reduced by the dividend tax credit that shareholders can claim
on their personal tax returns).
7.
Each of the three basic financial statements for a corporation differs from those
for a proprietorship. The income statement for a corporation will have income
tax expense. For a corporation, a statement of retained earnings is prepared to
show the changes in retained earnings during the period. In the balance sheet,
the owner's equity section is called the shareholders' equity section, and consists
of share capital (contributed capital if the shares have a stated value) and
retained earnings.
11.
If share prices fall below their par or stated value a company will not be able to
use the stock market as a source of financing. Under the law, a share cannot be
sold for less than its par or stated value.
Also, as market prices increase
further away from par or stated value, creditors could have an inadequate
“equity” cushion of protection if the company only retains assets equal to its
minimum legal capital. Consequently, many companies in Canada issue no par
value shares to avoid these potential problems.
15.
A corporation may acquire its own shares (1) to reissue the shares to officers and
employees under bonus and stock compensation plans, (2) to increase trading of
the company's shares in the stock market, in the hopes of enhancing its market
value, (3) to have additional shares available for use in the acquisition of other
companies, (4) to reduce the number of shares issued and increase earnings per
share, and (5) to comply with percentage share ownership requirements.
C) Ch 14 Brief Exercises #4, 7, 11 (p. 674)
BRIEF EXERCISE 14-4
(a) June 1Cash (2,000 X $6) .........................................................
Common Shares ..............................................
12,000
(b) June 1Cash (2,000 X $6) .........................................................
Common Shares (2,000 X $1) ...............................
Contributed Capital in Excess of
Stated Value ................................................
12,000
12,000
2,000
10,000
BRIEF EXERCISE 14-7
Jan. 28Cash (5,000 X $110) .....................................................
Preferred Shares ..........................................
550,000
550,000
BRIEF EXERCISE 14-11
The impact of this drop on Nortel’s financial position is that the company will find it
more difficult to raise capital in the stock market. Investors may not be willing to
invest in the company given its weak share price. As well, because the price is lower,
Nortel will have to issue many more shares to raise the same amount of capital then it
would have when the shares were selling for $124.50.
BYP 14-1 FINANCIAL REPORTING PROBLEM
(a)
(b)
(c)
(d)
Yes, the Second Cup does have an unlimited number of preferred shares in
its authorized share capital. However, none of them have been issued (See
Note 8).
Average issue price at June 24, 2000 = $62,355,000 ÷ 9,359,559 shares =
$6.66
Average issue price at June 30, 1999 = $61,670,000 ÷ 9,310,389 shares =
$6.62
Per Note 8, the last time shares were repurchased was in 1999. There were
5,035,800 shares repurchased for $33,387,000.
1999 Return on equity
$3,791,000
 26.4%
 $17,725,000  $10,950,000 


2
This is significantly higher that the return on equity of 9.5% for 2000.
(e)
Book value per share for Proforma 1999 = $17,725,000 ÷ 9,347,389 = $1.90
This is higher than the 2000 amount of $0.18 reported in the chapter
because of the decrease in the 2000 shareholders’ equity due to the
payment of a special dividend of $2.00 per share—see note 8 to the financial
statements.
Note to instructors: Students may use the year-end balance of common
shares of 9,310,389 reported in the notes to the financial statements, rather
than the weighted average number of 9,347,389 reported on the statement
of earnings. The book value will remain at $1.90 regardless of which number
is used in the denominator.
Ch15 Questions #1,5,6
01.
5.
(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.
A corporation generally issues stock dividends for one of the following reasons:
1.
2.
To satisfy shareholders' dividend expectations without spending cash.
To increase the marketability of its share by increasing the number of
shares and thereby decreasing the market price per share. Decreasing the
3.
6.
market price of the share makes the shares easier to purchase for smaller
investors.
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.
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).
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 ............................................................
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.
100,000