10.8: Exercises

EXERCISE 10–1 (LO1,2)

Bagan Corporation, a profitable growth company with 200,000 shares of common shares outstanding, is in need of $40 million in new funds to finance a required expansion. Management has three options:

1. Sell $40 million of 12% bonds at face value.
2. Sell preferred shares: 400,000, $10 shares at $100 per share.
3. Sell an additional 200,000 common shares at $200 per share.

Operating income (before interest and income taxes) upon completion of the expansion is expected to average $12 million per year; assume an income tax rate of 50 per cent.

Required:

1. Complete the schedule below.

   	12%	Preferred	Common
   	Bonds	Shares	Shares
   Income before interest and income taxes
   Less: Interest expense
   Income before taxes
   Less: Income taxes at 50%
   Net income
   Less: Preferred dividends
   Net income available to common shareholders
   Number of common shares outstanding
   Earnings per common share

• Which financing option is most advantageous to the common shareholders? Why?

EXERCISE 10–2 (LO2)

A tract of land valued at $50,000 has been given to a corporation in exchange for 1,000 preferred shares.

Required:

1. Prepare the journal entry to record the transaction.
2. Where would the transaction be classified in the balance sheet?

EXERCISE 10–3 (LO1,2)

The equity section of Gannon Oilfield Corporation's balance sheet at December 31, 2023 is shown below.

Preferred Shares
Authorized – 100 shares
Issued and Outstanding – 64 Shares	$3,456
Common Shares
Authorized – 2,000 Shares
Issued and Outstanding – 800 Shares	1680
Retained Earnings	600

Required:

1. What is the average price received for each issued preferred share?
2. What is the average price received for each issued common share?
3. What is the total contributed capital of the company?

EXERCISE 10–4 (LO3)

Strada Controls Inc. has 100,000 common shares outstanding on January 1, 2023. On May 25, 2023, the board of directors declared a semi-annual cash dividend of $1 per share. The dividend will be paid on June 26, 2023 to shareholders of record on June 7, 2023.

Required: Prepare journal entries for

1. The declaration of the dividend.
2. The payment of the dividend.

EXERCISE 10–5 (LO1,3)

Landers Flynn Inc. has 1,000, $5 cumulative preferred shares outstanding. Dividends were not paid last year. The corporation also has 5,000 common shares outstanding. Landers Flynn declared a $14,000 cash dividend to be paid in the current year.

Required:

1. Calculate the dividends received by the preferred and common shareholders
2. If the preferred shares were non-cumulative, how would your answers to part (a) above change?

EXERCISE 10–6 (LO1,3)

The following note appeared on the balance sheet of Sabre Rigging Limited:

As of December 31, 2023, dividends on the 1,000 issued and outstanding shares of cumulative preferred shares were in arrears for three years at the rate of $5 per share per year or $15,000 in total.

Required:

1. Does the $15,000 of dividends in arrears appear as a liability on the December 31, 2023 balance sheet? Explain your answer.
2. Why might the dividends be in arrears?
3. The comptroller of Sabre Rigging projects net income for the 2020 fiscal year of $35,000. When the company last paid dividends, the directors allocated 50 per cent of current year's net income for dividends. If dividends on preferred shares are declared at the end of 2020 and the established policy of 50 per cent is continued, how much will be available for dividends to the common shareholders if the profit projection is realized?

EXERCISE 10–7 (LO1,2,3,4)

The December 31, 2022 balance sheet for Arrow Streaming Corporation shows that as of that date it issued a total of 10,000 common shares for $140,000. On April 1, 2023 Arrow Streaming declared a 10 per cent share dividend, payable on April 15 to shareholders of record on April 10. The market value of Arrow's shares on April 1 was $15. On June 1, the company declared a $2 cash dividend per share to common shareholders of record on June 10, and paid the dividend on June 30. Assume the year end of the corporation is December 31.

Required: Prepare journal entries for the above transactions, including closing entries.

EXERCISE 10–8 (LO2,5)

The equity section of Pembina Valley Manufacturing Limited's balance sheet at December 31, 2023 is shown below.

Share Capital
Preferred Shares, Cumulative
Authorized – 500 shares
Issued and Outstanding – 300 Shares	$300
Common Shares
Authorized – 100 Shares
Issued and Outstanding – 20 Shares	500
Total Contributed Capital	800
Retained Earnings	192
Total Equity	$992

Note: There were $30 of dividends in arrears on the preferred shares at December 31, 2019.

Required:

1. Calculate the December 31, 2023 book value per share of
   1. the preferred shares; and
   2. the common shares.
2. Assume that the common shares were split 2 for 1 on January 2, 2024 and that there was no change in any other account at that time. Calculate the new book value of common shares immediately following the share split.

EXERCISE 10–9 (LO2)

Essential Financial Service Corp. was incorporated on January 1, 2023 to prepare business plans for small enterprises seeking bank financing.

Required: Prepare journal entries to record the following transactions on January 2, 2023:

1. Received an incorporation charter authorizing the issuance of an unlimited number of no par-value common shares and 10,000, 4% preferred shares.
2. Issued in exchange for incorporation costs incurred by shareholders 10,000 common shares at $1.
3. Issued for cash 1,000 preferred shares at $3 each.

EXERCISE 10–10 (LO4)

The shareholders' equity section of Lakeview Homes Corporation's statement of financial position at December 31, 2023 is reproduced below:

Shareholders' Equity
Common shares
Authorized unlimited shares, issued 5,000 shares	$	20,000
Retained earnings		100,000
Total shareholders' equity	$	120,000

On January 15, 2023, Lakeview Homes declared a 10 per cent share dividend to holders of common shares. At this date, the common shares of the corporation were trading on the stock exchange at $10 each. The share dividend was issued February 15, 2023.

Required: Prepare the journal entries to record the share dividend.

EXERCISE 10–11 (LO2,3,4)

Blitz Power Tongs Inc. received a charter that authorized it to issue an unlimited number of common shares. The following transactions were completed during 2018:

Jan 5	Issued 10 common shares for a total of $150 cash.
Jan 12	Exchanged 50 shares of common shares for assets listed at their fair values: machinery – $100; building – $100; land – $50.
Feb 28	Declared a 10% share dividend. Market value is $7 per share. Net income to date is $60.
Mar 15	Issued the share dividend.
Dec 31	Closed the 2023 net income of $200 from the Income Summary account in the general ledger to the Retained Earnings account.
Dec 31	Declared a $1 per share cash dividend.

Required:

1. Prepare journal entries for the 2023 transactions, including closing entries.
2. Prepare the shareholders' equity section of the statement of financial position at:
   1. January 31, 2023
   2. February 28, 2023
   3. December 31, 2023

EXERCISE 10–12 (LO1)

The board of directors of Oolong Ltd. is planning to expand its manufacturing facilities. To raise the $1.5 million capital needed, the following financing methods are being considered:

1. Sell $1.5 million of 10% bonds at face value.
2. Sell $10 preferred shares: 15,000 shares at $100 a share (no other preferred shares are outstanding).
3. Sell another 30,000 shares of common shares at $50 a share (currently 20,000 common shares are outstanding).

Income before interest and income taxes is expected to average $750,000 per year following the expansion; the income tax rate is 30%.

Required:

1. Calculate the earnings per common share for each alternative.
2. Which financing method will the shareholders most likely prefer and why?

EXERCISE 10–13 (LO2,3)

At December 31, 2022, the shareholders' equity section of the statement of financial position for Belfast Steel Ltd. totalled $30,000,000. Following are the balances of various general ledger accounts at that date.

Preferred shares, $1.00, cumulative	Issued 100,000 shares	$	1,000,000
Common shares	Issued 1,250,000 shares		25,000,000
Retained earnings			4,000,000

The following transactions occurred during 2019:

Feb 20	A cash dividend of $0.50 per preferred share was declared, payable Mar 1 to shareholders of record on Feb 25.
Mar 1	Payment of previously declared dividend on preferred shares was made.
Apr 15	A cash dividend on common shares of $0.60 per share was declared, payable Jun 10 to shareholders of record on May 1.
Jun 10	Payment of the previously-declared dividend on common shares was made.
Aug 1	10,000 common shares were issued for $250,000 cash.
Dec 31	A cash dividend totalling $425,000 was declared and paid.

Required:

1. Prepare journal entries for the 2023 transactions. Separate the dividends for preferred and common shares into the two classes of shares.
2. Prepare the statement of changes in equity for the year ended December 31, 2023 assuming net income for the year amounted to $500,000.

EXERCISE 10–14 (LO2,3)

Bray Co. was authorized to issue 10,000 $2.00 preferred shares and unlimited common shares. December 31 is Bray's year-end. During 2016, its first year of operations, the following selected transactions occurred:

1. January 15: Issued 32,000 common shares to the corporation's organizers in exchange for services to get the company operational. Their efforts are estimated to be worth $15,000.
2. February 20: 15,000 common shares were issued for cash of $6 per share.
3. March 7: 4,500 preferred shares were issued for cash totalling $90,000.
4. April 9: 60,000 common shares were issued in exchange for land and building with appraised values of $300,000 and $120,000 respectively.
5. May 1: 3,500 of the preferred shares were issued for a cash price of $18.00 per share.
6. May 15: Declared and paid dividends to the shareholders of record May 18. Total cash paid dividends was $50,000.
7. Junuary 5: 16,000 of the common shares were issued for a cash total of $112,000.
8. July 15: 2,000 preferred shares and 20,000 common shares were issued for a cash price of $17.50 and $7.50 respectively.
9. December 31: The company closed all its temporary accounts. The Income Summary account showed a debit balance of $25,000.

Required:

1. Prepare journal entries for each of the items above during Bray's first year of operations.
2. Prepare the equity section of the balance sheet in good form with all disclosures and subtotals, for the year ended December 31, 2023.

EXERCISE 10–15 (LO2,3)

The partial balance sheet for the Carman Corp. reported the following components of equity on December 31, 2016:

Carman Corp.
Equity Section of the Balance Sheet
December 31, 2022
Contributed capital:
Preferred shares, $1.50 cumulative, 20,000 shares authorized;
10,000 shares issued and outstanding	$	150,000
Common shares, unlimited shares authorized;
25,000 shares issued and outstanding.		250,000
Total contributed capital	$	400,000
Retained earnings		250,000
Total equity	$	650,000

In 2023, Carman Corp. had the following transactions affecting the various equity accounts:

Jan 4	Sold 15,000 common shares at $11 per share.
Jan 8	The directors declared a total cash dividend of $57,500 payable on Jan. 31 to the Jan. 21 shareholders of record. Dividends had not been declared for 2015 and 2016. All of the preferred shares had been issued during 2015.
Jan 31	Paid the dividends declared on January 8.
July 1	Sold preferred shares for a total of $77,500. The average issue price was $15.50 per share.
Aug 7	The directors declared a $1.00 dividend per common share cash dividend payable on Aug. 31 to the Aug. 20 shareholders of record.
Aug 31	Paid the dividends declared on Aug 7.

Required:

1. Prepare journal entries to record the transactions for 2023.
2. Prepare a statement of changes in equity for the year ended December 31, 2023. For purposes of preparing this statement, assume that the retained earnings balance at December 31, 2023 was $102,500.
3. Prepare the equity section of the company's balance sheet as at December 31, 2023 in good form with all required disclosures and subtotals.
4. Calculate the book value per preferred share and per common share as at December 31, 2022 and December 31, 2023. Round final answer to nearest two decimal places.

Problems

PROBLEM 10–1 (LO2)

Following is the equity section of Critter Contracting Inc. shown before and after the board of directors authorized a 5 for 1 share split on April 15, 2023.

Before split		After split
Equity		Equity
Common Shares		Common Shares
Authorized – 5,000 Shares		Authorized – ? Shares
Issued and Outstanding		Issued and Outstanding
– 1,000 Shares	$100,000	– ? Shares	$ ?

Required:

1. Complete the equity section of the balance sheet after the split.
2. Record a memorandum indicating the new number of shares.
3. If the market value per share was $40 before the split, what would be the market value after the split? Why?

PROBLEM 10–2 (LO3,4)

The equity section of TWR Contracting Inc.'s December 31, 2022 balance sheet showed the following:

Equity
Share Capital
Preferred Shares, $0.60, Cumulative, Issued and Outstanding – 40 Shares	$ 400
Common Shares, Issued and Outstanding – 2,000 Shares	2,000
Total Contributed Capital	2,400
Retained Earnings	900
Total Equity	$3,300

The following transactions occurred during 2023:

Feb. 15	Declared the regular $0.30 per share semi-annual dividend on its preferred shares and a $0.05 per share dividend on the common shares to holders of record March 5, payable April 1.
Apr. 1	Paid the dividends declared on February 15.
May 1	Declared a 10 per cent share dividend to common shareholders of record May 15 to be issued June 15, 2016. The market value of the common shares at May 1 was $2 per share.
June 15	Distributed the dividends declared on May 1.
Aug. 15	Declared the regular semi-annual dividend on preferred shares and a dividend of $0.05 on the common shares to holders of record August 31, payable October 1.
Oct. 1	Paid the dividends declared on August 15.
Dec. 15	Declared a 10 per cent share dividend to common shareholders of record December 20 to be issued on December 27, 2019. The market value of the common shares at December 15 was $3 per share.
Dec. 27	Distributed the dividends declared on December 15.
Dec. 31	Net income for the year ended December 31, 2023 was $1,400.

Required:

1. Prepare journal entries to record the 2023 transactions, including closing entries for the December 31 year end date. Show calculations. Descriptive narrative is not needed.
2. Prepare the statement of changes in equity for the year ended December 31, 2023.

PROBLEM 10–3 (LO1,2,3,4)

The equity section of Wondra Inc.'s December 31, 2022 balance sheet showed the following:

Contributed Capital
Preferred Shares; $0.50 cumulative; unlimited shares authorized; 30,000 shares issued and outstanding	$ 480,000
Common Shares; unlimited shares authorized; 70,000 shares issued and outstanding	560,000
Total contributed capital	$1,040,000
Retained Earnings	95,000
Total Equity	$1,135,000

At December 31, 2022 there were $15,000 of dividends in arrears.

The following transactions occurred during 2023:

Feb. 10	Declared a total dividend of $32,000 to shareholders of record on February 15, payable March 1.
Mar. 1	Paid dividends declared February 10.
5	Issued for cash 2,000 preferred shares at $18 each.
Apr. 15	The Board of Directors declared a 2:1 split on the preferred and common shares.
Jun. 22	Issued for cash 20,000 common shares at $4.00 per share.
Nov. 10	Declared a 20% share dividend to common shareholders of record on Nov. 14, distributable Dec. 15. The market price of the shares on Nov. 10 was $3.50.
Dec. 15	Distributed share dividend declared on November 10.
Dec. 31	Closed the Income Summary account which had a credit balance of $290,000.
31	Closed the dividend accounts.

Required:

1. Journalize the 2023 transactions.
2. Prepare the equity section of the December 31, 2023 balance sheet.

PROBLEM 10–4 (LO1,2,5)

The following is the equity section of the balance sheet of Tridon Construction Limited at December 31, 2023.

Equity
Share Capital
Common Shares
Authorized – 500 shares
Issued and Outstanding – 300 Shares	$3,070
Retained Earnings	500
Total Equity	$3,570

Required:

1. What is the paid-in capital per common share? ...the book value per common share? Round calculations to two decimal places.
2. On December 31, the Tridon Construction common shares traded at $24. Why is the market value different from the book value of commons shares?

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1. The amount of net income earned in a year can be divided by the number of common shares outstanding to establish how much return has been earned for each outstanding share. EPS is calculated as: