Natalie, Janet, and Brian are thrilled with the success of Koebel's Family Bakery Ltd. That success, however, has meant that the Koebels have had no time to enjoy personal interests. When Natalie was hired, Janet and Brian believed that they would have a little more time to take a holiday, leaving Natalie in charge. Because of the weekly cupcake contract with Coffee Beans, that has not happened.
Coffee Beans has increased the volume of cupcakes required on a weekly basis, and the bakery is desperately trying to keep up with the demand. Natalie, Janet, and Brian recognize that more help is needed with running the business. Currently, each of them owns 100 shares of the 300 common shares issued.
Natalie's brother, Daniel, has been operating a trucking business in a major Canadian city for a number of years. After being away for over a decade, he has returned with a keen interest in helping his family out at the bakery. He believes that the experience he has obtained operating his trucking business will prove to be a great resource that Koebel's 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 and one of the delivery trucks he has kept.
The share capital and retained earnings of Koebel's Family Bakery Ltd. at July 1, 2011, are as follows:
Share capital
$6 cumulative preferred shares, no par value, 10,000 shares authorized, none issued
Common shares, no par value, unlimited number of shares authorized, 300 shares issued...$300
Retained earnings....................................................................................214,957
Profit for the year ended June 30, 2012, was $216,069. In addition, a dividend of $90,000 was declared on June 15, 2012, to common shareholders of record on June 20, 2012, payable on June 30, 2012.
Based on the bakery's success, the Koebels would like to issue 100 common shares to Daniel for $1,200 per share. The fair value of the delivery truck is estimated at $45,000. The sale of shares to Daniel is expected to take place on June 30, 2012. After the sale of the shares to Daniel, each member of the Koebel family will hold a 25% interest in the common shares of Koebel's Family Bakery.
Instructions
(a) Prepare the journal entries required for the dividend declared on June 15 and paid on June 30, 2012. Who will receive the dividend to be paid on June 30, 2012, and for what amount?
(b) Assume Daniel purchases a total of 100 common shares on June 30, 2012, in exchange for his delivery truck and cash of $75,000. Prepare the journal entries required.
(c) Prepare a statement of retained earnings for the year ended June 30, 2012. If Koebel's followed IFRS rather than ASPE, would it still have to prepare a statement of retained earnings?
(d) Prepare the shareholders' equity section of the statement of financial position at June 30, 2012.
(e) Calculate the average cost per common share before and after shares are issued to Daniel. Why do you think there has been an increase in the value of the common shares?