Doug, Bev, and Emily are thrilled with the success of ABC. That success, however, has meant that the Anthonys have had no time to enjoy personal interests. When Emily was hired, Doug and Bev believed that they would have more time to take holidays, leaving Emily in charge. Because of the growth in the business and the service contract with Software Solutions Inc., that has not happened.
Software Solutions has increased the volume of services required on a monthly basis, and the business is trying to keep up with the demand. Doug, Bev, and Emily recognize that additional help is needed with running the business. Currently, each of them owns 100 shares of the 300 common shares issued.
Emily's brother, Daniel, has worked in sales and marketing in an international city for a number of years. After being away from Canada for over a decade, he has a keen interest in returning home and getting involved in the family business. He believes that his sales and marketing experience will prove to be a great resource that ABC can rely upon as it continues to experience significant growth. Daniel would like to purchase a 25% interest in the company in exchange for cash.
The share capital and retained earnings of ABC Ltd. at July 1, 2017, are as follows:
Share capital
$6 cumulative preferred shares, 10,000 shares authorized, none issued
Common shares, unlimited number of shares authorized, 300 shares issued ..........$ 300
Retained earnings.................................................................................................177,834
Net income for the year ended June 30, 2018, was $156,069. In addition, a dividend of $60,000 was declared on June 15, 2018, to common shareholders of record on June 20, payable on June 30. ABC decides to issue 100 common shares to Daniel for $1,250 per share, effective at the close of business on June 30, 2018. After the issue of shares to Daniel, each member of the Anthony family will hold a 25% interest in the common shares of ABC.
Instructions
(a) Prepare the journal entries required for the dividend declared on June 15, 2018, and paid on June 30. Who will receive the dividend to be paid on June 30, and for what amount?
(b) Prepare the journal entry to record the issue of common shares to Daniel on June 30, 2018, in exchange for $1,250 cash per share.
(c) Prepare a statement of retained earnings for the year ended June 30, 2018. If ABC followed IFRS rather than ASPE, would it still have to prepare a statement of retained earnings? Explain.
(d) Prepare the shareholders' equity section of the statement of financial position at June 30, 2018.