19.9: Exercises
- Page ID
- 97967
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)Identify if the following transactions will increase (I), decrease (D), or have no effect (NE) on retained earnings:
| Transaction | Effect |
| Issuance of common shares | |
| Share split | |
| A revaluation of surplus resulting from a remeasurement of an | |
| available-for-sale asset | |
| Declaration of a cash dividend | |
| Net income earned during the year | |
| Declaration of a share dividend | |
| Payment of a cash dividend | |
| Issuance of preferred shares | |
| Re-acquisition of common shares | |
| Appropriation of retained earnings for a reserve | |
| A cumulative, preferred dividend that is unpaid at the end of the year |
Lainez Ltd. was incorporated on January 1, 2021. During its first year of operations, the following share transactions occurred:
| January 1: | Issued 20,000 common shares for cash at a price of $15 per share. |
| February 1: | Issued 500 common shares to settle an invoice from the law firm that handled the incorporation of the company. The invoice amount was $9,000. |
| March 15: | Issued 10,000 preferred shares for cash at a price of $50 per share. |
| April 30: | Issued 2,500 common shares in exchange for a piece of specialized manufacturing equipment. The carrying value of the equipment on the seller's books was $40,000, but the asking price was $55,000. An independent engineering report estimated the value in use for this equipment at $50,000. |
| June 15: | Issued 5,000 common shares for cash at a price of $25 per share. |
Required: Prepare the journal entries for the share transactions.
Papini Inc. decides to issue its common shares on a subscription basis. Each share can be purchased for $15 per share, with a deposit of $5 per share due at the time of subscription, and the remaining $10 per share due after three months. A total of 100,000 shares was subscribed at the time of the initial offering.
Required:
- Prepare the journal entries to record the initial subscription and the receipt of the deposits.
- Prepare the journal entries to record the collection of the balance owed and the issuance of the shares, assuming all subscribers complete the transaction.
- Repeat part (b) assuming that 10% of the subscribers default on the final payment and the company refunds the deposits.
- Repeat part (b) assuming that 10% of the subscribers default on the final payment and the company keeps the deposits.
- Repeat part (b) assuming that 10% of the subscribers default on the final payment and the company issues pro-rata shares to the defaulting subscribers.
Pinera Ltd. reacquired 5,000 of its no-par common shares at a price of $11 per share. It subsequently resold the shares at $16 per share.
Required: Using the single-transaction method, record the above treasury share transactions.
On January 1, 2021, Alarcon Inc. issued 20,000, $5 par value shares at $17 each. On June 30, 2021, 10,000 of the shares were reacquired at $19 each and subsequently cancelled.
Required: Prepare the journal entries to record the issuance and re-acquisition of the above shares.
Tanizaki Enterprises Ltd. reported the following share transactions during 2021, its first year of operations:
| January 15: | Issued 150,000 no-par common shares at $25 each. |
| March 30: | Reacquired and cancelled 10,000 shares at $20 each. |
| July 31: | Issued 20,000 shares at $22 each. |
| October 31: | Reacquired and cancelled 15,000 shares at $29 each. |
Required: Prepare the journal entries to record the above transactions.
On January 1, 2022, Belloc Limited, a toy manufacturer, had outstanding share capital of 100,000 common shares. During 2022, the following dividend transactions occurred:
| May 5: | A 10% share dividend was declared and distributed. On this date, the ex-dividend price was $25 per share. |
| May 15: | A cash dividend of $0.80 per share was declared for shareholders of record on May 20, to be distributed on May 25. |
| May 25: | The cash dividend was distributed. |
| May 27: | In order to reduce some excess inventory levels, the company declared a property dividend. Each share was to receive eight units of the Atomic Accountant action figure. Due to declining sales levels, the inventory carrying amount had previously been written down to its estimated realizable value of $0.75 per unit. The record date for this dividend was May 30, and the distribution date was May 31. |
| May 31: | The property dividend was distributed. |
Required: Prepare all the journal entries necessary to record the above dividend transactions.
Ayme Inc. had the following share capital outstanding on January 1, 2022:
| Class A common shares, unlimited authorized, 250,000 issued | $ | 8,000,000 | |
| Class B preferred shares, $100 par value, $3 dividend, | |||
| 100,000 authorized, 50,000 issued | 5,000,000 |
At the end of 2022, the company declared total dividends of $1,200,000. No dividends had been paid in either 2020 or 2021.
Required:
Determine the amount of dividends paid to each class of share under each of the following independent conditions:
- The Class B preferred shares are non-cumulative and non-participating.
- The Class B preferred shares are cumulative and non-participating.
- The Class B preferred shares are cumulative and fully participating.
You have been asked to provide advice to the board of directors of Denevi Ltd., a publicly traded company. The company's shares are currently trading at $12 per share, and the board is considering whether to issue a 50% share dividend or a 3-for-2 share split, which means that for every two shares held, an additional share will be issued. The company currently has 5,000,000 common shares outstanding at a total carrying amount of $12,500,000 and retained earnings of $42,000,000. There are no other equity accounts reported.
Required:
- Calculate the price the shares are expected to trade at after each of the proposed transactions.
- Determine the balances to be reported in the shareholders' equity section after each of the proposed transactions.
- Provide a recommendation to the board of directors as to which action they should take.
Ocampo Inc. reported the following amounts in the shareholders' equity section of its December 31, 2021, balance sheet:
| Preferred shares, $2 dividend, 10,000 shares authorized, 4,500 issued | $ | 225,000 | |
| Common shares, 100,000 shares authorized, 35,000 issued | 280,000 | ||
| Contributed surplus | 7,000 | ||
| Retained earnings | 590,000 | ||
| Accumulated other comprehensive income | 115,000 |
The contributed surplus arose from past re-acquisitions of common shares.
During 2022, the following transactions occurred in the order listed below:
- Issued 5,000 common shares at $9 per share.
- Reacquired 10,000 of the outstanding common shares for $14 per share and cancelled them.
- Declared a 10% share dividend on the outstanding common shares. The ex-dividend price of the shares was $16.
- Issued the share dividend.
- Exchanged 1,000 preferred shares for a piece of vacant land. The land's fair value, as determined by a qualified appraiser, was $19,000 and the shares were actively traded on this day for $21 per share.
- Declared and paid the preferred share dividend and a $1 per share dividend on the common shares.
Required:
- Prepare the journal entries to record the 2022 equity transactions.
- Prepare the Statement of Changes in Shareholders' Equity for the year ended December 31, 2022. Net income for the year was $120,000 and other comprehensive income resulting from a revaluation of property, plant, and equipment was $23,000.
Manguel Merchandising Ltd. reported the following amounts in the shareholders' equity section of its December 31, 2020, balance sheet:
| Preferred shares, $1 cumulative dividend, 100,000 shares authorized, 75,000 issued | $ | 1,875,000 | |
| Common shares, unlimited shares authorized, 250,000 issued, | |||
| 210,000 outstanding | 3,800,000 | ||
| Contributed surplus | 58,000 | ||
| Treasury shares (40,000 common shares) | (440,000) | ||
| Retained earnings | 4,260,000 | ||
| Total shareholders' equity | $ | 9,553,000 |
The contributed surplus arose from past re-acquisitions of common shares. On December 31, 2020, two years of preferred dividends were in arrears, that is, preferred dividends were not paid in 2019 or 2020.
The following transactions occurred in 2021:
- January 15: 10,000 of the shares held in treasury were resold at a price of $13 per share.
- February 28: 50,000 common shares were reacquired and immediately cancelled for total cash proceeds of $705,000.
- June 30: 25,000 preferred shares were reacquired and immediately cancelled at a price of $31 per share.
- December 31: A 5% share dividend was declared and distributed on the common shares. The ex-dividend price of the share was $17. Preferred dividends were also declared and paid in cash, as they needed to be declared before the common share dividend could be declared.
Required: Prepare the journal entries to record 2021 equity transactions.