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ACCT1040 - Quiz #4 (Spring 2017) - Kathy Faber Version 1 You are required to read the following before commencing with the test. Important: You have 45 minutes to complete this test. All answers are to be recorded in this booklet. You may use a BAII Plus calculator. Programmable calculators are not permitted. Type Sections # of Questions Marks Part I Corporations - Common and Preferred Dividends 1 10 Part II Corporate Shareholders' Equity 1 23 Part III Income Statement 1 21 Part IV Statement of Financial Position 1 17 TOTAL Student Grade 71 Name: Student No: Instructions for this Take-Home Test This Take-Home Quiz is due at the beginning of class on Wednesday, July 19 at 1pm in Room 1D17. If for some reason you are unable to submit your completed quiz at that time, you may submit your completed quiz into the wooden drop box across the hall from Room 2D18 before the deadline. Good luck! Page 1 Part I Corporations - Common and Preferred Dividends (10 marks) The shareholders' equity section of Dantantia Inc.'s balance sheet on January 1, 2016 contained the following information: 1E+07 2E+05 3 100 32000 2000 2016 Shareholders' Equity Authorized: 11,000,000 common shares and 200,000 $3 cumulative preferred shares. Issued: 32,000 common shares $900,000 2,000 cumulative preferred shares 200,000 Total share capital 1,100,000 Retained earnings 320,000 Total shareholders' equity $1,420,000 85000 3E+05 8 On February 17, 2016, the company declared dividends of $85,000. The date of record and the date of payment are March 2 and March 31, 2016 respectively. Net income after tax for the year was $250,000. Dividends were last declared in 2014. No shares had been issued or redeemed since the last time dividends were paid. 2 (a) Calculate the amount of dividends to be paid to the preferred shareholders. (b) Prepare any necessary journal entries on the date of dividend declaration, the date of record and the date of payment using cash dividends account. Account Title and Explanation Date 1000 30 2000 Page 2 Debit Credit (c) On December 20, 2016, Dantantia issues 1,000 common shares for $30,000 cash, and incurs a total of $2,000 in share issue costs. Journalize this transaction using the offset method. Date Account Title and Explanation Debit Credit (d) Calculate ending retained earnings balance at December 31, 2016. (e) Calculate ending common shares balance and number of common shares at December 31, 2016. Part II Corporate Shareholders' Equity (23 marks) Varghese Inc.'s balance sheet shows the following shareholders' equity section at the beginning of the year 2016. 2016 Varghese Inc. Shareholders' Equity As at January 1, 2016 Share capital Preferred shares, $3 non-cumulative, 100,000 shares authorized, 10,000 3 shares issued and outstanding $130,000 10000 Common shares, 1,000,000 shares authorized, 40,000 shares issued and 10 outstanding 400,000 40000 Total share capital 530,000 Retained earnings 425,000 Total shareholders' equity $955,000 Page 3 Transactions for the year 2016: Jan 6 Sold 10,000 common shares for $150,000 cash. Mar 8 Issued 6,000 preferred shares in exchange for land valued at $84,000. Jun 18 Purchased 3,000 of its own common shares at a price of $16 per share. Declared a cash dividend of $70,000 to be paid on January 10, 2016. (Use cash dividends Dec 15 account.) Dec 20 Declared a two-for-one stock split. Closed net income of $194,000, which has already been closed to the income summary Dec 31 account, to retained earnings. Dec 31 Closed the cash dividends account. a) Prepare any necessary journal entries for the above transactions. (12 marks) Date Account Title and Explanation Page 4 Debit Credit 10000 6000 3000 900 14 150000 70000 194000 b) Complete the shareholders' equity section as of December 31, 2016. (11 marks) Varghese Inc. Shareholders' Equity As at December 31, 2016 Part III Income Statement (21 marks) Dysa Inc. is a private Canadian company using ASPE. Its revenue and expense accounts contained the following amounts for the year ending December 31, 2016. 2016 Account Title Sales Revenue Interest Revenue Gain on Sale of Assets from Discontinued Operations Operating Income from Discontinued Operations Sales Returns and Allowances Sales Discounts Cost of Goods Sold Insurance Expense Utility Expense Salaries Expense Telephone Expense Interest Expense Depreciation Expense Debit Credit 290,000 200 17,400 52,200 9,000 6,000 130,500 4,000 2,000 16,000 1,000 800 20,300 Page 5 # Prepare an income statement under ASPE, assuming the tax rate is 30%. 30 Dysa Inc. Income Statement For the year ended December 31, 2016 Page 6 Part IV Statement of Financial Position (17 marks) The adjusted trial balance for Picvy Corporation's June 30, 2016 year-end is as follows: 2016 Account Title Cash Accounts Receivable Prepaid Insurance Office Supplies Property, Plant and Equipment Accumulated Depreciation Accounts Payable Unearned Revenue Bank Loan - Current Portion Bank Loan - Non-Current Portion Common Shares, unlimited shares authorized, 4,000 shares issued and outstanding Retained Earnings Cash Dividends Sales Revenue Interest Revenue Cost of Goods Sold Depreciation Expense Income Tax Expense Insurance Expense Interest Expense Repairs Expense Salaries Expense Supplies Expense Total 5 Debit Credit $42,793 6,680 3,500 3,340 100,200 $36,072 4,676 6,012 5,344 23,380 20,000 64,336 6,680 173,680 500 79,893 16,700 1,445 8,000 799 3,200 56,780 3,990 $334,000 Page 7 $334,000 Required: Prepare the statement of financial position under IFRS. 67,709 Picvy Corporation Statement of Financial Position As at June 30, 2016 Page 8 Chapter 6 Corporations: Contributed Capital and Dividends learning outcomes 1 Describe the characteristics of corporate organizations 7 Record 2 Describe 9 Calculate differences between public and private corporations 3 Explain shareholders' equity 4 Record the issuance of shares 6 Record stock splits and stock dividends 5 Record the payment of cash dividends 8 Record income tax expense the closing entries for a corporation 10 Explain retained earnings the importance of ethics for corporate reporting Appendix 11 Record the reacquisition of shares Access ameengage.com for integrated resources including tutorials, practice exercises, the digital textbook and more. Assessment Questions AS-1 ( 1 ) What is a common term that is used to call an owner of a corporation? An owner of a corporation, or a holder of a corporation's shares, is called a shareholder. AS-2 ( 1 ) Why is tax paid twice on earnings from a corporation? What is this phenomenon called? Because a corporation is a separate legal entity from its owners, the corporation must pay income tax on its earnings. When the corporation pays dividends, shareholders must also pay personal income tax on the dividend revenue. Therefore, tax is paid twice (at different rates) on earnings of a corporation. This is called double taxation. 253 Chapter 6 Corporations: Contributed Capital and Dividends AS-3 ( 1 ) List four advantages and two disadvantages of the corporate form of ownership. Advantages Separate legal existence means the corporation can operate as an individual and shareholders are not legally responsible for its actions. Limited liability of the shareholders means shareholders are not responsible for the debts of the corporation. Formal organizational structure means shareholders do not have to run the business. They vote for a board of directors which then hires competent professionals to run the corporation. Unlimited life means the corporation is not tied to any particular shareholder. Ability to raise capital means the corporation can have access to large amounts of cash by selling shares. Disadvantages Double taxation means that the corporation will pay tax on earnings and shareholders will pay tax on dividends. Dividends are paid from after-tax profit. Government requirements mean that corporations have many more regulations to meet than other forms of organization. Thus, it can be more expensive and time consuming to set up and run a corporation. 254 Corporations: Contributed Capital and Dividends Chapter 6 AS-4 ( 1 ) What is a not-for-profit corporation? How is it different from a for-profit corporation? A not-for-profit corporation is formed with a different purpose other than generating profits for shareholders. The purpose of a not-for-public corporation is usually to generate public benefits in such forms as art, education and other social and environmental causes. A forprofit corporation, on the other hand, is formed with the purpose of generating profits for its shareholders. AS-5 ( 2 ) Explain the main difference between a public corporation and a private corporation. A public corporation trades its shares on a stock exchange, which means that its shares are available to be traded publicly. A private corporation does not offer its shares to the public. The company's shares are instead owned and exchanged privately. AS-6 ( 2 ) From which two accounting standards can a private corporation choose? It can decide to either adopt International Financial Reporting Standards (IFRS), or it can use Accounting Standards for Private Enterprises (ASPE). AS-7 ( 2 ) Why might a private corporation choose to adopt ASPE over IFRS? ASPE requires fewer disclosures than IFRS. Since ASPE is less complex, it can cost less to prepare ASPE statements. 255 Chapter 6 Corporations: Contributed Capital and Dividends AS-8 ( 2 ) What are some reasons why a private enterprise would adopt IFRS over ASPE? It could be to make its statements more comparable to competitors' statements. It could be to increase the sources of capital from global financial markets. It could be because of the motivation to \"go public\" or sell shares in a stock market in the future. AS-9 ( 3 ) Which portion of shareholders' equity relates to contributions by shareholders? Which relates to accumulated earnings? Contributed capital relates to contributions made by the shareholders. Retained earnings relates to accumulated earnings. AS-10 ( 3 ) Name the two sub-categories of contributed capital. Contributed capital is comprised of two sub-categories called share capital and contributed surplus. AS-11 ( 3 ) You are preparing the financial statements for a corporation. You must disclose the number of shares authorized. Where would you find the number of shares authorized? In the corporate charter, or articles of incorporation. 256 Corporations: Contributed Capital and Dividends Chapter 6 AS-12 ( 3 ) What is meant by \"outstanding shares\"? Outstanding shares are the number of shares that have been issued and sold to investors. AS-13 ( 3 ) Define \"retained earnings.\" Retained earnings are the earnings that are accumulated by the company after dividends have been paid to shareholders. AS-14 ( 4 ) What may shares be issued for? Shares may be issued for cash, for assets other than cash or for services rendered. AS-15 ( 3 ) What are some differences between common shareholders and preferred shareholders? Common shareholders have voting rights and the right to receive dividends when they are declared by the board of directors. Preferred shareholders do not have voting rights but do have dividend preference over common shareholders and also a higher claim on the assets of the company over common shareholders. 257 Chapter 6 Corporations: Contributed Capital and Dividends AS-16 ( 3 ) List some characteristics of common shares. Common shares usually have the following characteristics. represent ownership in the corporation owners elect board of directors owners vote on corporate policy in the event of liquidation, common shareholders rank after preferred shareholders right to receive dividends if declared by directors owners can freely sell shares if there are buyers AS-17 ( 3 ) List some characteristics of preferred shares. Preferred shares have the following characteristics. higher claim on assets and earnings than common shares generally have a dividend that must be paid before dividends to common shares, if dividends are declared no voting rights owners can freely sell shares if there are buyers 258 Corporations: Contributed Capital and Dividends Chapter 6 AS-18 ( 3 ) Which feature of preferred shares gives shareholders the right to receive dividends in arrears? Preferred shares that have a cumulative feature allow the shareholders the right to be paid the current year's dividends and to accumulate any unpaid dividends from previous years. Preferred shares that do not have the right to receive any accumulated unpaid dividends are known as non-cumulative shares. AS-19 ( 3 ) Explain the difference between no-par value shares and par value shares. How are no-par value shares valued at issuing? Par value shares are issued with an assigned value, while no-par value shares are issued with no assigned value. When no-par value shares are issued, the equity account is credited for the entire proceeds of the sale. AS-20 ( 4 ) When shares of a corporation are issued in exchange for assets or services, how are the shares valued in the corporation's books? In a non-monetary share issuance, the transaction can be recorded at either the fair value of the assets or services received, or the fair value of the shares being exchanged. 259 Chapter 6 Corporations: Contributed Capital and Dividends AS-21 ( 5 ) List and describe the three dates associated with accounting for dividends. Dividends involve three important dates. date of declarationthe date on which the directors announce that dividends will be paid to shareholders date of recordall shareholders that own shares on this date are eligible to receive the dividend date of paymentthe date on which the dividend is paid to the shareholders that owned the shares on the date of record ______________________________________________________________________________ AS-22 ( 5 6 ) Who decides the amount of a dividend to be paid to shareholders? The amount of the dividend per share is decided by the board of directors. AS-23 ( 4 ) What are the two methods of accounting for share issue costs? The offset method and retained earnings method. Under the offset method, the share issue costs are debited to the appropriate share account (common or preferred). Under the retained earnings method, the share issue costs are debited directly to retained earnings. 260 Corporations: Contributed Capital and Dividends Chapter 6 AS-24 ( 1 ) What does it mean when a corporation is considered a going concern? It means that a corporation continues to operate for the foreseeable future regardless of the comings and goings of shareholders. AS-25 ( 6 ) Explain a stock split and a reverse stock split. A stock split is an action that increases the number of a corporation's outstanding shares, which in turn decreases the individual price of each share traded on the stock market. On the contrary, a reverse stock split happens when a company reduces the number of stocks outstanding and increases the value of the shares. AS-26 ( 11 ) Provide a few possible reasons why a company may want to reacquire its shares. Share reacquisition may take place for a number of different reasons. For example, a corporation may purchase its shares to reduce the number of shares outstanding, hence increasing earnings per share. A company may also purchase its own shares with the intention of increasing share market price by attracting interest in the stock due to a larger trading volume in the stock market. Some corporations may also reacquire shares to give back cash to shareholders or to remove a specific group of shareholders. 261 Chapter 6 Corporations: Contributed Capital and Dividends AS-27 ( 11 ) What effect does a share reacquisition transaction have on a company's assets, liabilities and shareholders' equity? Assets decrease because cash is used to repurchase shares. Shareholders' equity mostly decreases because some outstanding shares are bought back and retired. Shareholders' equity could also be increased by the contributed surplus which is generated by repurchasing shares for less than their average cost. There is no effect on a company's liabilities. AS-28 ( 11 ) Describe the contributed surplus account. Provide an example of a situation that causes the contributed surplus account balance to increase. Contributed surplus is a part of contributed capital. It contains other types of additions to shareholders' contributions besides the capital raised from the sale of shares. Reacquisition of shares at below the average cost of shares is an example of a situation that increases the contributed surplus account balance. 262 Corporations: Contributed Capital and Dividends Chapter 6 Application Questions Group A AP-1A ( 7 ) At year-end on December 31, 2016, Shuster Home Decor Inc. has accounting income (before income tax expense calculation) of $102,000. Write the journal entry to record the income tax expense. Assume the tax rate is 30%. Date Dec 31 Account Title and Explanation Income Tax Expense Debit Credit 30,600 Income Tax Payable 30,600 To record the income tax expense for the year 30% x $102,000 AP-2A ( 8 ) An extract from MC Consulting's pre-closing trial balance for the year ended December 31, 2016 is shown below. The company's net income for the year was $82,000. MC Consulting Trial Balance (Extract) December 31, 2016 Account Title Debit Sales Revenue Cost of Goods Sold 85,000 Salaries Expense 50,000 Rent Expense 10,000 Income Tax Expense 13,000 Credit 240,000 263 Chapter 6 Corporations: Contributed Capital and Dividends Prepare the closing entries for MC Consulting assuming the company uses the income summary account. Date Dec 31 Account Title and Explanation Sales Revenue Debit Credit 240,000 Income Summary 240,000 To close the revenue account Dec 31 Income Summary 158,000 Cost of Goods Sold 85,000 Salaries Expense 50,000 Rent Expense 10,000 Income Tax Expense 13,000 To close expense accounts Dec 31 Income Summary 82,000 Retained Earnings 82,000 To close net income for the year to retained earnings AP-3A ( 5 ) On February 1, 2016, Adam Enterprises declares a dividend of $4,800 to common shareholders to be paid on February 4. Record the journal entry associated with this transaction. Date Feb 1 Account Title and Explanation Cash Dividends Debit Credit 4,800 Dividends Payable 4,800 Record dividend payable of $4,800 Feb 4 Dividends Payable Cash Pay dividends declared Feb 1 264 4,800 4,800 Corporations: Contributed Capital and Dividends Chapter 6 AP-4A ( 3 ) The shareholders' equity of Thomas Inc. at March 31, 2016 is shown below. Additional Information The preferred shares have an average issue price of $5.00 per share. The common shares have an average issue price of $3.00 per share. Fill in the grey areas in the table below with the correct numbers. Thomas Inc. Shareholders' Equity As at March 31, 2016 Share Capital Preferred Shares, 280,000 shares authorized, 23,000 shares issued and outstanding $115,000 Common Shares, unlimited shares authorized, 120,000 shares issued and outstanding 360,000 Total Share Capital 475,000 58,675 Retained Earnings Total Shareholders' Equity $533,675 Analysis A corporation has the choice to issue only common shares or issue mainly preferred shares. (All corporations must have at least one class of common shares outstanding). If you were a director on the board of a newly incorporated, fast-growing corporation, which is planning to issue shares to the general public, what type of shares would you suggest the management to issue? I would suggest issuing mainly common shares to the public, due to the fact that a new and fast-growing corporation needs to retain as much profit in the retained earnings account as possible, and to reinvest its profit back to its business and generate more revenue. With common shares, dividend payment is optional; therefore, the corporation can choose not to pay out any dividends in the near future to preserve its cash for business operations. 265 Chapter 6 Corporations: Contributed Capital and Dividends AP-5A ( 4 ) Earnestine, Kepplinger & Co. began a new public corporation. During the first month of operations, it had the following share transactions. Required a) Earnestine, Kepplinger & Co. issued 10,000 common shares for $100,000 on May 1, 2016. Write the journal entry to record the transaction. Date May 1 Account Title and Explanation Cash Debit Credit 100,000 Common Shares 100,000 Issued 10,000 common shares for $100,000 b) On May 1, 2016, Earnestine, Kepplinger & Co. issued an additional 10,000 common shares in exchange for land and a building. The land was valued at $60,000 and the building was valued at $50,000. Record the transaction. Date May 1 Account Title and Explanation Land 60,000 Building 50,000 Common Shares Exchanged land and building for 10,000 common shares 266 Debit Credit 110,000 Corporations: Contributed Capital and Dividends Chapter 6 c) The lawyer that handled the issue of shares has sent a bill for $5,000. The lawyer has agreed to accept 500 common shares instead of cash. Record the transaction on May 10, 2016. Date May 10 Account Title and Explanation Legal Expense Common Shares Debit Credit 5,000 5,000 Paid lawyer's fee with 500 common shares Analysis In the case of non-monetary exchanges of assets and services for issued shares, a corporation can choose to evaluate the fair value of shares issued with two options. Option 1: Fair value of assets or services received Option 2: Fair value of the shares issued Think of a scenario when option 1 is preferred over option 2 by accountants and explain why. Option 1 is preferred over option 2 when there is a very reliable fair value (market value) of the assets or services received, yet the fair value of shares issued cannot be determined easily. 267 Chapter 6 Corporations: Contributed Capital and Dividends AP-6A ( 4 ) Swanson Inc. was formed on January 1, 2016 and issued 10,000 common shares for $2 per share on that date. During the year the following additional share transactions occurred. May 15 Jul 1 Sep 26 Issued 4,500 common shares for $2.75 per share. Issued 5,000 common shares in exchange for equipment with a fair value of $14,500. Issued 2,800 common shares for $2.50 per share. Required a) Prepare the journal entries to record the above transactions (including the entry to record the formation of Swanson Inc.). Date Jan 1 Account Title and Explanation Debit Cash Credit 20,000 Common Shares 20,000 Issued 10,000 shares for cash May 15 Cash 12,375 Common Shares 12,375 Issued 4,500 shares for cash Jul 1 Equipment 14,500 Common Shares 14,500 Issued 5,000 shares for equipment Sep 26 Cash 7,000 Common Shares 7,000 Issued 2,800 shares for cash b) Determine the total number and value of common shares issued and outstanding as at December 31, 2016 by completing the following table. Date Jan 1 $ per share Total ($) 10,000 $2.00 $20,000 May 15 4,500 $2.75 $12,375 Jul 1 5,000 $2.90 $14,500 Sep 26 2,800 $2.50 $7,000 22,300 $2.42 $53,875 Total Dec 31, 2016 268 # of shares issued Corporations: Contributed Capital and Dividends Chapter 6 Analysis Suppose that Joe, the president of Swanson Inc., owns 14,500 of the outstanding shares. What percentage ownership does Joe have? Each common share represents an equal amount of ownership, regardless of the amount paid for it. Ownership Percentage: 14,500 22,300 = 65% AP-7A ( 5 ) a) On July 1, 2016 Jonus Enterprises declares a dividend of $5,000 to shareholders on record on July 4, 2016. Record the journal entry associated with this transaction. Jonus Enterprises uses the retained earnings method to record dividends. Date Jul 1 Account Title and Explanation Retained Earnings Debit Credit 5,000 Dividends Payable 5,000 Record dividend payable of $5,000 b) Record the journal entry when Jonus Enterprises pays out the dividend on August 15, 2016. Date Aug 15 Account Title and Explanation Dividends Payable Cash Debit Credit 5,000 5,000 Record payment of dividend declared on July 1 269 Chapter 6 Corporations: Contributed Capital and Dividends Analysis Both the cash dividend and retained earnings methods are acceptable accounting methods that produce the same result in recording cash dividend payouts. Why do you think some corporations prefer to use the cash dividends method, despite the fact it needs more entries than the other method? What advantages does that method offer to the corporation that chooses to use it? Using a separate cash dividend account can offer the corporation a clear audit trail of cash dividends declared. All outstanding balances can be transferred to the retained earnings account with a single journal entry at the fiscal year-end, instead of debiting the retained earnings account every time cash dividends are declared. AP-8A ( 5 ) On November 1, 2016, Mistry Inc. declared $850,000 of dividends payable to shareholders on January 15, 2017. Outstanding are 220,000 common shares worth $2,000,000 and 30,000, $4 cumulative preferred shares worth $3,000,000. No new shares were issued during the year and dividends were last declared in 2012. Mistry had retained earnings of $4,500,000 at the beginning of 2016 and earned a net income of $1,200,000 during the year. Required a) Calculate how much Mistry Inc. owes the preferred shareholders. Amount owed to preferred shareholders $4 x 30,000 for 2013 $4 x 30,000 for 2014 $4 x 30,000 for 2015 $4 x 30,000 for 2016 $120,000 + $120,000 + $120,000 + $120,000 = $480,000 270 Corporations: Contributed Capital and Dividends Chapter 6 b) Write the journal entry to record the declaration and subsequent payout of the dividends. Mistry uses the cash dividends method to record dividends. Date Account Title and Explanation Debit Nov 1, 2016 Cash DividendsPreferred 480,000 Cash DividendsCommon 370,000 Dividends Payable Credit 850,000 Record dividend payable on 30,000 preferred shares and 220,000 common shares Jan 15, 2017 Dividends Payable 850,000 Cash 850,000 Record payment of dividend declared on Nov 1 AP-9A ( 6 ) Bishop Lutz Hockey Paraphernalia Ltd. has 50,000 common shares issued. On January 1, 2016 the organization declared a 25% stock dividend. Prepare the journal entry to record the declaration and distribution (on February 1, 2016) of the dividend. The market price on the date of declaration was $15 per share. The company uses the stock dividends method to account for stock dividends. Date Jan 1 Account Title and Explanation Stock Dividends Debit Credit 187,500 Stock Dividends Distributable 187,500 Record stock dividends payable on 50,000 common shares (50,000 x 25% x $15) Feb 1 Stock Dividends Distributable Common Shares 187,500 187,500 Record distribution of 12,500 common shares declared on Jan 1 271 Chapter 6 Corporations: Contributed Capital and Dividends AP-10A ( 5 ) Martin Inc. was formed on January 1, 2014. Its shares were all issued during the first year of operations and were comprised as follows: 80,000 common shares and 10,000, $2 cumulative preferred shares. Over the past four years, Martin Inc. has declared and paid the following cash dividends. Year Total 2014 $30,000 2015 $35,000 2016 $0 2017 $45,000 Calculate the amount of dividends paid to each class of shareholders for each year. Class of Shares # of shares 2014 2015 2016 2017 Preferred Sharescumulative 10,000 $20,000 $20,000 $0 $40,000 Common Shares 80,000 $10,000 $15,000 $0 $5,000 $30,000 $35,000 $0 $45,000 Total dividends paid AP-11A ( 3 5 ) Given below is the equity section of Lizzy Dizzy Corporation at December 31, 2016. Preferred shares were sold at $100 each. Lizzy Dizzy Corporation Shareholders' Equity As at December 31, 2016 Share Capital Preferred Shares, $7, cumulative, 200,000 authorized Common Shares, unlimited authorized, 4,000,000 issued and outstanding Total Share Capital Retained Earnings Total Shareholders' Equity Required From the information provided above, calculate the following. a) Calculate the number of preferred shares issued. Number of preferred shares issued = $20,000,000 $100 = 200,000 272 $20,000,000 59,000,000 79,000,000 64,450,000 $143,450,000 Corporations: Contributed Capital and Dividends Chapter 6 b) Calculate the total amount of annual dividend payable to preferred shareholders. Amount of dividend payable to preferred shareholders = 200,000 x $7 = $1,400,000 c) Calculate the average issuance price per common share. Average issue price per common share = $59,000,000 4,000,000 = $14.75 d) Calculate the amount due to preferred shareholders if the company last declared dividends in 2012. Amount due to preferred shareholders = $1,400,000 x 4 = $5,600,000 e) Suppose that the company declared to pay $25,000,000 as dividend on December 31, 2016 and paid dividends on January 10, 2017. Prepare journal entries to record the declaration and payment of dividends assuming the company uses the cash dividends method. Date Dec 31, 2016 Jan 10, 2017 Account Title and Explanation Debit Cash DividendsPreferred Cash DividendsCommon Dividends Payable Dividend payable 5,600,000 19,400,000 Dividend Payable Cash Recording payment of dividend declared on Dec 31 25,000,000 Credit 25,000,000 25,000,000 273 Chapter 6 Corporations: Contributed Capital and Dividends AP-12A ( 5 ) On May 1, 2016, Crackle Canine Inc. declared $196,000 of dividends payable to shareholders on June 3, 2016. There are 24,800 common shares and 14,700, $1 cumulative preferred shares. Dividends were last paid in 2012. Write the journal entry to record the declaration and subsequent payout of the dividends. Assume the company uses the cash dividends method to record dividends. Date May 1 Account Title and Explanation Debit Cash DividendsPreferred 58,800 Cash DividendsCommon 137,200 Dividends Payable Credit 196,000 Record dividend payable Jun 3 Dividends Payable 196,000 Cash 196,000 Record payment of dividend AP-13A ( 5 9 ) The shareholders' equity of Khan Corporation at January 1, 2016 was as follows. Khan Corporation Shareholders' Equity As at January 1, 2016 Share Capital Preferred Shares, $3, non-cumulative, 200,000 authorized, 2,000 issued and outstanding Common Shares, unlimited authorized, 32,000 issued and outstanding Total Share Capital Retained Earnings Total Shareholders' Equity $200,000 1,200,000 1,400,000 320,000 $1,720,000 No dividend was declared for common shareholders. However on December 15, 2016 the directors decided to pay dividends to preferred shareholders. The dividend payment date was December 28, 2016. Net income for the year was $180,000. The company uses the retained earnings method to record dividends. 274 Corporations: Contributed Capital and Dividends Chapter 6 Required a) Calculate the amount of dividend to be paid to preferred shareholders. Dividend payable to preferred shareholders = 2,000 x $3 = $6,000 b) Prepare journal entry for declaration and payment of preferred dividend. Date Account Title and Explanation Dec 15 Dec 28 Debit Credit Retained Earnings Dividends Payable Dividend payable on preferred shares 6,000 Dividends Payable Cash Recording payment of dividend 6,000 6,000 6,000 c) Calculate the ending balance of retained earnings for the year ended December 31, 2016. Calculation of Retained Earnings For the Year Ended December 31, 2016 BalanceJanuary 1, 2016 $320,000 Add: Net Income for the Year 180,000 500,000 6,000 Less: Cash Dividends $494,000 BalanceDecember 31, 2016 275 Chapter 6 Corporations: Contributed Capital and Dividends AP-14A ( 6 ) Tross Co. was incorporated and began operations on January 1, 2014. Tross Co. presented the following information at the end of the 2016 fiscal year. Common Shares, unlimited authorized, 75,000 issued and outstanding Retained Earnings $225,000 148,000 Tross Co. declared a 15% stock dividend on December 31, 2016. The common shares were issued in 2014 for $3.00 each, but the current market price is $5.20 per share. The date of payment is January 5, 2017. Prepare the journal entries to record the declaration and payment of the dividend. The company uses the retained earnings method to record dividends. Date Account Title and Explanation Debit Credit 2016 Dec 31 Retained Earnings Stock Dividends Distributable 58,500 58,500 Declared a 15% stock dividend 58,500 Common Shares 58,500 Paid the stock dividend 2017 Jan 5 Stock Dividends Distributable AP-15A ( 5 6 ) Enigma Inc. is reaching the end of its fiscal year and has declared the following dividends. $20,000 cash dividend 10% stock dividend (on common shares) The following information is also available. There are 10,000 common shares outstanding, issued for $12 per share There are 1,000, $5 non-cumulative preferred shares outstanding Common shares are currently trading for $10 per share For both dividends, the date of declaration is May 21, 2016 and the date of payment is May 31, 2016 Enigma Inc. had net income of $45,000 during the year The balance of retained earnings at the beginning of the year was $123,500 276 Corporations: Contributed Capital and Dividends Chapter 6 Required a) Prepare the journal entries to record the declaration and payment of the dividends. The company uses the cash dividend method to record dividends. Date May 21 Account Title and Explanation Stock Dividends Stock Dividends Distributable 10,000 10,000 Declared a 10% stock dividend May 21 Cash DividendsPreferred 5,000 Cash DividendsCommon 15,000 Dividends Payable 20,000 Declared a $20,000 cash dividend 10,000 May 31 Stock Dividends Distributable Common Shares 10,000 Paid the stock dividend 20,000 20,000 May 31 Credit Debit Dividends Payable Cash Paid the cash dividend b) Calculate the ending balance of retained earnings for the year. Calculation of Retained Earnings For the year ended May 31, 2016 BalanceJune 1, 2015 Add: Net Income $123,500 45,000 Less: Cash DividendsPreferred 5,000 Cash DividendsCommon 15,000 Stock Dividends 10,000 BalanceMay 31, 2016 $138,500 277 Chapter 6 Corporations: Contributed Capital and Dividends Analysis Identify where each of the following accounts would be found on the balance sheet. The first one has been done as an example. Cash Current Assets Common Shares Shareholders' Equity Dividends Payable Current Liabilities Retained Earnings Shareholders' Equity Stock Dividends Distributable Shareholders' Equity AP-16A ( 5 9 ) The shareholders' equity of Genghis Corporation at January 1, 2016 was as follows. Genghis Corporation Shareholders' Equity As at January 1, 2016 Share Capital Preferred Shares, $5, non-cumulative, 200,000 authorized, 1,000 issued and outstanding $225,000 Common Shares, unlimited authorized, 35,000 issued and outstanding 1,070,000 Total Share Capital Retained Earnings Total Shareholders' Equity 1,295,000 253,000 $1,548,000 No dividend was declared for common shareholders. However on December 15, 2016 the directors decided to pay dividends to preferred shareholders. The dividend payment date was December 28, 2016. Net income for the year was $240,000. The company uses the cash dividends method to record dividends. Required a) Calculate the amount of dividend to be paid to preferred shareholders. Dividend payable to preferred shareholders = 1,000 $5 = $5,000 278 Corporations: Contributed Capital and Dividends Chapter 6 b) Prepare the journal entry for the declaration and payment of the preferred dividend. Date Dec 15 Dec 28 Account Title and Explanation Debit Cash DividendsPreferred Dividends Payable Record dividend payable 5,000 Dividends Payable Cash Record payment of dividend 5,000 Credit 5,000 5,000 c) Calculate the ending balance of retained earnings for the year ended December 31, 2016. Calculation of Retained Earnings For the Month Ended December 31, 2016 Opening Balance $253,000 Add: Net Income 240,000 Less: Cash DividendsPreferred BalanceDecember 31, 2016 5,000 $488,000 AP-17A ( 3 4 5 9 ) In 2016, Elizabeth and some of her friends invested money to start a company named FRIENDZ Corporation. The following transactions occurred during 2016. Jan 1 The corporate charter authorized to issue 70,000, $5 cumulative preferred shares and unlimited common shares up to a maximum amount of $20,000,000. Jan 6 Issued 200,000 common shares at $16 per share. Shares were issued to Elizabeth and other investors. Jan 7 Issued another 500 common shares to Elizabeth in exchange for her services in organizing the corporation. The shareholders agreed that the services were worth $8,000. Jan 12 Issued 3,500 preferred shares for $350,000. Jan 14 Issued 10,000 common shares in exchange for a building acquired. For this purpose shares were valued at $16. Nov 15 The first annual dividend on preferred shares was declared. Dec 20 Paid the dividends declared on preferred shares. 279 Chapter 6 Corporations: Contributed Capital and Dividends FRIENDZ Corporation generated a $125,000 net income during the year. The company uses the retained earnings method to record dividends. Required a) Prepare the journal entries to record the above transactions in 2016. Date Jan 6 Jan 7 Jan 12 Jan 14 Nov 15 Dec 20 Dec 31 280 Account Title and Explanation Cash Common Shares Issued 200,000 shares for cash at $16 per share Company Organization Expenses Common Shares Issued 500 shares in exchange for organization services Debit 3,200,000 3,200,000 8,000 8,000 Cash Preferred Shares Issue of preferred shares for cash 350,000 Building Common Shares Issue of 10,000 common shares for building 160,000 350,000 160,000 Retained Earnings Dividends Payable Dividend declared on preferred shares 17,500 Dividends Payable Cash Recording payment of dividend 17,500 Income Summary Retained Earnings To close income summary account for the year Credit 17,500 17,500 125,000 125,000 Corporations: Contributed Capital and Dividends Chapter 6 b) Calculate the ending balance of retained earnings for the year ended December 31, 2016. Calculation of Retained Earnings For the Year Ended December 31, 2016 Opening Balance $0 Add: Net Income for the Year 125,000 125,000 17,500 Less: Cash Dividends $107,500 BalanceDecember 31, 2016 c) Prepare the shareholders' equity section of the balance sheet as at December 31, 2016. FRIENDZ Corporation Shareholders' Equity December 31, 2016 Share Capital Preferred Shares, $5, cumulative, 70,000 authorized, 3,500 issued and outstanding $350,000 Common Shares, unlimited authorized, 210,500 issued and outstanding 3,368,000 Total Share Capital 3,718,000 Retained Earnings 107,500 Total Shareholders' Equity $3,825,500 AP-18A ( 3 4 5 9 ) In 2016, Joanna and some of her friends invested money to start a company named BUDZ Corporation. The following transactions occurred during 2016. Jan 1 The corporate charter authorized 76,000, $4 cumulative preferred shares and unlimited common shares up to a maximum amount of $22,000,000 to be issued. Jan 6 Issued 231,000 common shares at $15 per share. Shares were issued to Joanna and other investors. Jan 7 Issued another 450 common shares to Joanna in exchange for her legal services in setting up the corporation. The shareholders agreed that the legal services were worth $6,750. Jan 12 Issued 3,900 preferred shares for $321,000. Jan 14 Issued 10,000 common shares in exchange for a building acquired. For this purpose shares were valued at $19. Nov 15 The first annual dividend on preferred shares was declared. Dec 20 Paid the dividends declared on preferred shares. 281 Chapter 6 Corporations: Contributed Capital and Dividends BUDZ Corporation generated a $147,000 net income during the year. Assume the company uses the retained earnings method to record dividends. Required a) Prepare the journal entries to record the above transactions. Date Jan 6 Account Title and Explanation Cash Debit Credit 3,465,000 Common Shares 3,465,000 Issued common shares for cash Jan 7 Legal Expense 6,750 Common Shares 6,750 Issued common shares in exchange for services Jan 12 Cash 321,000 Preferred Shares 321,000 Issue of preferred shares for cash Jan 14 Building 190,000 Common Shares 190,000 Issued common shares for building Nov 15 Retained Earnings 15,600 Dividends Payable 15,600 Dividend declared on preferred shares Dec 20 Dividends Payable Cash Recording payment of dividend 282 15,600 15,600 Corporations: Contributed Capital and Dividends Chapter 6 b) Calculate the ending balance of retained earnings for the year ended December 31, 2016. Calculation of Retained Earnings For the Year Ended December 31, 2016 Opening Balance $0 Add: Net Income 147,000 Less: Cash Dividends 15,600 BalanceDecember 31, 2016 $131,400 c) Prepare the shareholders' equity section of the balance sheet as at December 31, 2016. BUDZ Corporation Shareholders' Equity December 31, 2016 Share Capital Authorized: 76,000, $4 cumulative preferred shares and unlimited common shares Issued: 241,450 Common Shares 3,900, $4 Preferred Shares $3,661,750 321,000 Total Share Capital 3,982,750 Retained Earnings 131,400 Total Shareholders' Equity $4,114,150 283 Chapter 6 Corporations: Contributed Capital and Dividends AP-19A ( 3 5 6 8 9 ) The shareholders' equity of East West Corporation at January 1, 2016 was as follows. East West Corporation Shareholders' Equity As at January 1, 2016 Share Capital Preferred Shares, $5, non-cumulative, 200,000 authorized, 1,000 issued and outstanding Common Shares, unlimited authorized, 30,000 issued and outstanding Total Share Capital Retained Earnings Total Shareholders' Equity $100,000 1,500,000 1,600,000 1,970,000 $3,570,000 The following transactions occurred in 2016. Jan 15 Jan 28 Feb 10 Nov 30 Dec 12 The Board decided to declare a total cash dividend of $120,000 to common and preferred shareholders. Date of record of dividend. Paid the cash dividend declared on January 15. Declared a 20% stock dividend to common shareholders. Current market price was $55. Distributed the stock dividends. East West Corporation generated a $980,000 net income during the year. The company uses the cash and stock dividends method to record dividends. 284 Corporations: Contributed Capital and Dividends Chapter 6 Required a) Prepare the journal entries to record the above transactions in 2016. Date Account Title and Explanation Debit Credit Jan 15 Cash DividendsPreferred 5,000 Cash DividendsCommon 115,000 Dividends Payable Feb 10 Nov 30 Dec 12 Dec 31 Dividend payable on common and preferred shares Dividends Payable 120,000 120,000 Cash Recording payment of dividends Stock Dividends 120,000 Stock Dividends Distributable 330,000 Stock Dividends Distributable Shares dividend payable on 30,000 shares 330,000 330,000 Common Shares 330,000 To record distribution of 6,000 shares Income Summary 980,000 Retained Earnings 980,000 To close income summary account for the year Dec 31 Retained Earnings 450,000 Cash DividendsPreferred 5,000 Cash DividendsCommon 115,000 Stock Dividends 330,000 To close dividends 285 Chapter 6 Corporations: Contributed Capital and Dividends b) Calculate the ending balance of retained earnings for the year ended December 31, 2016. Calculation of Retained Earnings For the Year Ended December 31, 2016 BalanceJanuary 1, 2016 $1,970,000 Add: Net Income for the Year 980,000 2,950,000 Less: Cash DividendsPreferred 5,000 Cash DividendsCommon 115,000 Stock Dividends 330,000 BalanceDecember 31, 2016 $2,500,000 c) Prepare the shareholders' equity section of the balance sheet as at December 31, 2016. East West Corporation Shareholders' Equity December 31, 2016 Share Capital Preferred Shares, $5, non-cumulative 200,000 authorized, $100,000 1,000 issued and outstanding Common Shares, unlimited authorized, 36,000 issued and outstanding Total Share Capital 1,930,000 Retained Earnings 2,500,000 Total Shareholders' Equity 286 1,830,000 $4,430,000 Corporations: Contributed Capital and Dividends Chapter 6 AP-20A ( 11 ) On March 31, 2016, Darred Inc. had 500,000 outstanding common shares. Its balance sheet on March 31, 2016 shows the common shares balance of $500,000 and the contributed surplus balance of zero. The following are the only changes to Darred's common shares that occurred between March 31, 2016 and March 31, 2017. On April 1, 2016, Darred paid $10,000 cash to reacquire 15,000 of its own common shares. On August 1, 2016, Darred reacquired an additional 30,000 shares for $60,000 cash. On March 31, 2017, Darred issued 10,000 shares at $1.50 per share. Required a) Record the share reacquisition journal entry on April 1, 2016. Date Account Title and Explanation Apr 1 Debit Common Shares Credit 15,000 Contributed Surplus 5,000 Cash 10,000 To record reacquiring and retiring of shares [($500,000 500,000) x 15,000] b) Record the share reacquisition journal entry on August 1, 2016. Date Aug 1 Account Title and Explanation Debit Common Shares Contributed Surplus Retained Earnings Cash Credit 30,000 5,000 25,000 60,000 To record reacquiring and retiring of shares [($485,000 485,000) x 30,000] c) After the share issuance on March 31, 2017, how many outstanding common shares would Darred have? Also, what would be Darred's common share balance and average cost of shares after the share issuance? Outstanding common shares = 500,000 15,000 30,000 + 10,000 = 465,000 shares Common share balance = $500,000 $15,000 $30,000 + (10,000 x $1.50) = $470,000 Average cost of shares = $470,000 465,000 shares = $1.01 287 Chapter 6 Corporations: Contributed Capital and Dividends AP-21A ( 11 ) The beginning balances of Adcha Corporation's shareholders' equity accounts for the fiscal year ending September 30, 2017 are as follows. Common shares (unlimited number of shares authorized, 50,000 shares issued) Contributed surplus Retained earnings $150,000 7,000 100,000 The following are the only transactions related to shareholders' equity that happened between September 30, 2016 and September 30, 2017. On October 15, 2016, Adcha received $42,500 from issuing 5,000 common shares. On May 30, 2017, Adcha paid $40,000 to repurchase 10,000 common shares. Required a) Record the share reacquisition journal entry on May 30, 2017. Date May 30 Account Title and Explanation Common Shares Contributed Surplus Cash Debit Credit 35,000 5,000 40,000 To record reacquiring and retiring of shares [($192,500 55,000) x 10,000] b) Fill in the number of shares issued (or outstanding) and the balances for all shareholders' equity accounts in the partial balance sheet on May 30, 2017 after the purchase of the shares. Adcha Corporation Balance Sheet (partial) May 30, 2017 Shareholders' equity Common shares (unlimited number of shares authorized, 45,000* shares issued) Contributed surplus Retained earnings 100,000 Total shareholders' equity $259,500 *45,000 = 50,000 + 5,000 10,000 $157,500 = $150,000 + $42,500 $35,000 288 $157,500 2,000 Corporations: Contributed Capital and Dividends Chapter 6 Application Questions Group B AP-1B ( 7 ) At year-end on December 31, 2016, F'Brae Cheerleading Inc. has accounting income of $210,000. Write the journal entry to record the income tax expense. Assume the tax rate is 30%. Date Dec 31 Account Title and Explanation Debit Income Tax Expense Credit 63,000 Income Tax Payable 63,000 To record the income tax expense for the year 30% x $210,000 AP-2B ( 8 ) Aniston Corporation has the following trial balance at the end of its fiscal year. Aniston Corporation Trial Balance For the Year Ended December 31, 2016 Account Title Cash Accounts Receivable Debit Credit $51,000 42,000 Prepaid Insurance 5,000 Accounts Payable $36,000 Unearned Revenue 4,000 Common Shares 30,000 Retained Earnings 6,300 Sales Revenue 162,000 Cost of Goods Sold 72,900 Insurance Expense 2,700 Rent Expense 16,000 Salaries and Wages Expense 38,000 Depreciation Expense 2,300 Income Tax Expense 8,400 $238,300 $238,300 Totals 289 Chapter 6 Corporations: Contributed Capital and Dividends Complete the closing entries at year-end, using the income summary account. Date Dec 31 Account Title and Explanation Sales Revenue Income Summary To close the revenue accounts Debit 162,000 Credit Dec 31 Income Summary Cost of Goods Sold Insurance Expense Rent Expense Salaries and Wages Expense Depreciation Expense Income Tax Expense To close the expense accounts 140,300 72,900 2,700 16,000 38,000 2,300 8,400 Dec 31 Income Summary Retained Earnings 21,700 21,700 To close the income summary account 162,000 AP-3B ( 8 ) For the year 2016, Tinsmith Company experienced a net loss of $140,000. The revenues and expenses have already been closed to the income summary account. Prepare the final entry to complete the closing process, assuming that the company has a December 31 year-end. Date Dec 31 Account Title and Explanation Retained Earnings Income Summary To close net loss for the year to retained earnings 290 Debit Credit 140,000 140,000 Corporations: Contributed Capital and Dividends Chapter 6 AP-4B ( 3 9 ) The shareholders' equity of Sharp Ltd. at December 31, 2016 is as follows. Additional Information The preferred shares have an average issue price of $55 per share. The common shares have an average issue price of $40 per share. Retained earnings as at January 1, 2016 was $187,000, net income for the year was $65,450 and $9,800 of dividends were declared, payable on January 10, 2017 Fill in the grey areas in the table below with the correct numbers. Sharp Ltd. Shareholders' Equity As at December 31, 2016 Share Capital Preferred shares, $0.50, 5,000 shares authorized, 1,000 shares issued and outstanding $55,000 Common shares, 30,000 shares authorized, 6,500 shares issued and outstanding 260,000 Total Share Capital 315,000 Retained Earnings 242,650 Total Shareholders' Equity $557,650 Analysis Some corporations prefer to issue mainly preferred shares to their shareholders instead of common shares. Discuss reasons that might motivate a corporation to issue mainly preferred shares instead of common shares. Preferred shares usually don't have voting rights, while common shares usually do. So if the board of directors want to maintain its voting power on critical issues of the corporation, they might choose to issue mainly preferred shares. 291 Chapter 6 Corporations: Contributed Capital and Dividends AP-5B ( 4 ) Sherm & Co. issued 12,100 common shares for $91,000 on June 3, 2016. Required a) Write the journal entry to record the transaction. Date Jun 3 Account Title and Explanation Cash Debit Credit 91,000 Common Shares 91,000 Issue common shares for cash b) In addition to shares issued for cash, on June 3, 2016 Sherm & Co. issued an additional 13,600 common shares in exchange for machinery and a building. The machinery was valued at $61,000 and the building was valued at $101,000. The company could not readily determine the fair value of the shares. Record the transaction. Date Jun 3 Account Title and Explanation Building Machinery Common Shares Issue common shares for capital assets 292 Debit Credit 101,000 61,000 162,000 Corporations: Contributed Capital and Dividends Chapter 6 c) The accountant that handled the issue of shares for Sherm & Co. has sent a bill for $5,600. The accountant has agreed to accept 550 common shares instead of cash. The company could not readily determine the fair value of the shares. Record the transaction on June 9, 2016. Date Jun 9 Account Title and Explanation Accounting Fees Expense Common Shares Debit Credit 5,600 5,600 Issue common shares for expense Analysis In the case of non-monetary exchanges of assets and services exchanged for issued shares a corporation can choose to evaluate the fair value of shares issued with two options. Option 1: Fair value of assets or services received Option 2: Fair value of the shares issued Think of a scenario when option 2 is preferred by accountants over option 1 and explain why. Option 2 is preferred over option 1 when there is very reliable fair value (market value) of shares issued but the fair value of assets or services received, cannot be determined easily. AP-6B ( 4 ) Flanders Inc. was formed on March 1, 2016. Upon formation, it issued 8,000 common shares for $22 each and 5,500 preferred shares for $30 each. In addition to the initial share issuance, the following share transaction occurred during the fiscal year. Jun 7 Aug 31 Jan 9 Issued 1,000 common shares for $25 per share. Issued 800 preferred shares for $33 per share. Issued 2,500 common shares for $24 per share and 300 preferred shares for $32 per share. 293 Chapter 6 Corporations: Contributed Capital and Dividends Required a) Prepare the journal entries to record the above transactions (including the entries to record the formation of Flanders Inc.). Date Account Title and Explanation Mar 1, 2016 Debit Cash Credit 341,000 Preferred Shares 165,000 Common Shares 176,000 Issued shares for cash Jun 7, 2016 Cash 25,000 Common Shares 25,000 Issued 1,000 shares for cash Aug 31, 2016 Cash 26,400 Preferred Shares 26,400 Issued 800 shares for equipment Jan 9, 2017 Cash 69,600 Preferred Shares 9,600 Common Shares 60,000 Issued shares for cash b) Determine the total number and value of common shares issued and outstanding as at March 31, 2017, by completing the following table. Date $ per share Total Mar 1, 2016 8,000 $22.00 $176,000 Jun 7, 2017 1,000 $25.00 $25,000 Jan 9, 2017 2,500 $24.00 $60,000 11,500 $22.70 $261,000 Total March 31, 2017 294 # of shares issued Corporations: Contributed Capital and Dividends Chapter 6 Analysis Suppose that Ned, the president of Flanders Inc., owns 990 of the outstanding preferred shares and 6,000 of the common shares. What percentage ownership does Ned have? Preferred shares do not represent ownership in a corporation. Only common shares do. Each common share represents an equal amount of ownership, regardless of the amount paid for it. Ownership Percentage: 6,000 11,500 = 52% AP-7B ( 5 ) On February 1, 2016, Adam Enterprises declares a dividend of $4,800 to common shareholders to be paid on February 4. Required a) Record the journal entry associated with this transaction. Assume the company uses the cash dividends method to record dividends. Date Feb 1 Account Title and Explanation Cash Dividends Debit Credit 4,800 Dividends Payable 4,800 Record declaration of dividends b) Record the journal entry when Adam Enterprises pays out the dividend on February 4. Date Feb 4 Account Title and Explanation Dividends Payable Cash Debit Credit 4,800 4,800 Record payment of dividends 295 Chapter 6 Corporations: Contributed Capital and Dividends Analysis While a corporation is using the cash dividend method to record dividend payouts, cash dividend amounts are usually debited to the cash dividends account and credited to the dividends payable account on the date of declaration. When cash dividends are paid on the date of payment, the dividends payable account is debited. However, after the date of payment, there will still be debit balances in the cash dividends account. Record the journal entry that Adam Enterprises will have to make at year-end to close the cash dividends account. Date Dec 31 Account Title and Explanation Retained Earnings Debit Credit 4,800 Cash Dividends 4,800 AP-8B ( 5 ) On December 1, 2016, Fickle Feline Inc. declared $200,000 of dividends payable to shareholders on January 3, 2017. There are 20,000 common shares worth $800,000 and 10,000, $0.50 cumulative preferred shares worth $500,000. No new shares were issued during the year and dividends were last declared in 2013. Fickle Feline had retained earnings of $2,500,000 at the beginning of 2016 and earned a net income of $650,000 during the year. Required a) Calculate how much Fickle Feline Inc. owes the preferred shareholders. Amount owed to preferred shareholders $0.50 x 10,000 for 2014 $0.50 x 10,000 for 2015 $0.50 x 10,000 for 2016 $5,000 + $5,000 + $5,000 = $15,000 296 Corporations: Contributed Capital and Dividends Chapter 6 b)\t\u0007Write the journal entry to record the declaration and subsequent payout of the dividends. Fickle Feline uses the cash dividends method to record dividends. Date Account Title and Explanation Debit Dec 1, 2016 Cash DividendsPreferred 15,000 Cash DividendsCommon 185,000 Dividends Payable Credit 200,000 Record dividend payable on 10,000 preferred shares and 20,000 common shares Jan 3, 2017 Dividends Payable 200,000 Cash 200,000 Record payment of dividend declared on Dec 1 AP-9B ( 6 ) Silang Vayman Ltd is a travel agency that specializes in tours to the Philippines and Russia. It has 75,000 common shares issued. On March 15, 2016, the organization declared a 45% stock dividend. Prepare the journal entry to record the declaration and distribution (on April 1, 2016) of the dividend. The market price on the date of declaration was $25 per share. The company uses the stock dividends method to account for stock dividends. Date Mar 15 Account Title and Explanation Stock Dividends Debit Credit 843,750 Stock Dividends Distributable 843,750 Record stock dividends payable on 75,000 common shares Apr 1 Stock Dividends Distributable Common Shares 843,750 843,750 Record distribution of 33,750 common shares declared on Mar 15 297 Chapter 6 Corporations: Contributed Capital and Dividends AP-10B ( 5 ) Tilda Inc. was formed on January 1, 2015. Its shares were all issued during the first year of operations and were issued as follows: 10,000 common shares; 7,000, $4 cumulative preferred shares; and 4,000, $3 non-cumulative preferred shares. Over the past four years Tilda Inc. has declared and paid the following cash dividends. Year Total 2015 $60,000 2016 0 2017 100,000 2018 70,000 Calculate the amount of dividends paid to each class of shareholders for each year. Class of Shares # of shares 2015 2016 2016 2017 $4 Preferredcumulative 7,000 $28,000 $0 $56,000 $28,000 $3 Preferrednon-cumulative 4,000 $12,000 $0 $12,000 $12,000 10,000 $20,000 $0 $32,000 $30,000 $60,000 $0 $100,000 $70,000 Common Total dividends paid AP-11B ( 3 5 ) Given below is the equity section of Hudson Corporation at December 31, 2016. Hudson Corporation Shareholders' Equity As at December 31, 2016 Share Capital Preferred Shares, $12, non-cumulative, 100,000 authorized, 8,000 issued and outstanding $800,000 Preferred Shares, $9, cumulative, 100,000 authorized, 20,000 issued and outstanding 2,000,000 Common Shares, unlimited authorized, 40,000 issued and outstanding 2,000,000 Total Share Capital $4,800,000 Assume that no dividends were paid in 2014 or 2015. On December 31, 2016, Hudson Corporation declared a total cash dividend of $736,000. Required a) Calculate the amount of cash dividend paid to each of the three classes of share capital. Common shares $9 cumulative preferred shares (3 years) $12 non-cumulative preferred shares 298 $736,000 540,000 96,000 20,000 x $9 x 3 8,000 x $12 $100,000 $540,000 $96,000 Corporations: Contributed Capital and Dividends Chapter 6 b) Calculate the dividend paid per share for each of the three classes of share capital. Common Shares Total dividends # of shares Cumulative Preferred Shares Non-Cumulative Preferred Shares $100,000 540,000 $96,000 40,000 20,000 8,000 $2.50 $27 $12 c) Calculate the average issue price of each type of shares. Common Shares Cumulative Preferred Shares Non-Cumulative Preferred Shares Book value $2,000,000 $2,000,000 $800,000 # of shares 40,000 20,000 8,000 $50 $100 $100 Average price per share d) Prepare the journal entry for recording dividends in arrears for the last two years. There is no journal entry to record dividends in arrears; however, the amount is disclosed in the financial statements. AP-12B ( 5 ) Tea Time Inc. is a distributor of fine artisan tea and has a June 30 year-end. Due to several years of poor financial performance, dividends were last paid in 2013. On June 30, 2016 the company declared $100,000 of dividends. The dividends will be paid on July 5, 2016. As at June 30, 2016, the following shares were outstanding: 90,000 common shares; 40,000, $0.30 cumulative preferred shares; and 35,000, $0.20 non-cumulative preferred shares. Required a) Calculate how much Tea Time Inc. owes in dividends to each of the shareholders as at June 30, 2016. Dividend Paid per Share Total dividend paid Cumulative Preferred Shares Non-Cumulative Preferred Shares Common Shares $0.30 $0.20 # of Shares 40,000 35,000 90,000 # of Years in Arrears 3 n/a Dividends $100,000 $36,000 $7,000 $57,000 299 Chapter 6 Corporations: Contributed Capital and Dividends b) Prepare the journal entry to record the declaration and subsequent payout of the dividends in 2016. Assume the company uses the cash dividend method to record dividends. Date Jun 30 300 Debit Cash DividendsPreferred, cumulative Cash DividendsPreferred, non-cumulative Cash DividendsCommon Dividends Payable Credit 36,000 7,000 57,000 100,000 Declare dividends 100,000 100,000 Jul 5 Account Title and Explanation Dividends Payable Cash Pay dividends to shareholders Corporations: Contributed Capital and Dividends Chapter 6 AP-13B ( 5 9 ) On November 1, 2016, the financial records of Sam Inc. showed the following balances. Sam Inc. Shareholders' Equity As at November 1, 2016 Share Capital Preferred Shares, $5, cumulative, 200,000 authorized, 2,000 issued and outstanding $200,000 Common Shares, unlimited authorized, 25,000 issued and outstanding 1,300,000 Total Share Capital 1,500,000 Retained Earnings 620,000 Total Shareholders' Equity $2,120,000 On November 15, 2016, Sam Inc. declared $320,000 of dividends payable to shareholders. Dividends were last declared in 2013. The declared dividend was paid on December 5, 2016. During the period November 1-December 31, 2016 the company earned a net income of $50,000. Required a) Calculate how much Sam Inc. owes the preferred shareholders. Dividend for the year Number of years dividend was not paid 2,000 x $5 $10,000 (2014-2016) 3 years Total dividend in arrears 30,000 b) Prepare the journal entries to record the declaration and payment of dividends. The company uses the cash dividends method to record dividends. Date Nov 15 Account Title and Explanation Debit Cash DividendsPreferred 30,000 Cash DividendsCommon 290,000 Dividends Payable Credit 320,000 Dividend payable Dec 5 Dividends Payable Cash 320,000 320,000 Recording payment of dividend 301 Chapter 6 Corporations: Contributed Capital and Dividends c) Calculate the ending balance of retained earnings for the two-month period of November 1-December 31, 2016. Calculation of Retained Earnings For the Two Months Ended December 31, 2016 BalanceNovember 1, 2016 $620,000 50,000 Add: Net Income for the Period 670,000 Less: Cash DividendsPreferred 30,000 Cash DividendsCommon 290,000 $350,000 BalanceDecember 31, 2016 AP-14B ( 6 ) On May 31, 2016, Red Synapse Corporation's shareholders' equity section shows the following balances. Red Synapse Corporation Shareholders' Equity As at May 31, 2016 Share Capital Common shares, unlimited authorized 30,000 shares issued and outstanding Retained Earnings Total Shareholders' Equity $450,000 370,000 $820,000 Scenario 1 May 31 302 After preparing the shareholders' equity section shown above, the company declared and immediately distributed a 100% stock dividend. Current market price was $10. The company recorded the stock dividends by debiting retained earnings. Corporations: Contributed Capital and Dividends Chapter 6 Required a) Calculate the ending balance of retained earnings after the stock dividend. Red Synapse Corporation Calculation of Retained Earnings For the Month Ended May 31, 2016 Opening Balance $370,000 Less: Stock Dividends 300,000 BalanceMay 31, 2016 $70,000 b) Prepare the shareholders' equity section of balance sheet as at May 31, 2016 (after the stock dividend has been distributed). Red Synapse Corporation Shareholders' Equity May 31, 2016 Share Capital Common shares, unlimited authorized $750,000 60,000 issued and outstanding Retained Earnings Total Shareholders' Equity 70,000 $820,000 Scenario 2 May 31 After preparing the shareholders' equity section shown at the beginning of this question, the company implemented a 2-for-1 stock split. c) Calculate the number of outstanding shares. Number of outstanding shares = 30,000 x 2 = 60,000 303 Chapter 6 Corporations: Contributed Capital and Dividends d) Prepare the shareholders' equity section of the balance sheet as at May 31, 2016 (after the stock split). Red Synapse Corporation Shareholders' Equity May 31, 2016 Share Capital Common Shares, unlimited authorized 60,000 issued and outstanding Retained Earnings Total Shareholders' Equity $450,000 370,000 $820,000 AP-15B ( 5 6 ) At the end of Pataya Inc.'s third fiscal quarter in 2016, the shareholders' equity section of the balance sheet was as follows. Pataya Inc. Shareholders' Equity As at September 30, 2016 Share Capital Common Shares, unlimited authorized, 60,000 issued and outstanding Retained Earnings $960,000 580,000 $1,540,000 Total Shareholders' Equity In the fourth quarter of 2016, the following entries related to its equity accounts were recorded. Date Oct 2 Account Title and Explanation Retained Earnings Debit 110,000 Dividends Payable Oct 25 Dividends Payable 110,000 110,000 Cash Oct 31 Retained Earnings 110,000 140,000 Stock Dividends Distributable Nov 5 Stock Dividends Distributable Common Shares 304 Credit 140,000 140,000 140,000 Corporations: Contributed Capital and Dividends Chapter 6 Required a) Explain each journal ent