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Solutionstoassignedexercises/problems

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Ltd.Theyareforstudentuseonly.Unauthorizeduseorreproductionofthese
solutionsisstrictlyprohibited.

EXERCISE153(1015minutes)

(a)

1. Cash[(6,000X$25)$2,000].............................................. 148,000

CommonShares.........................................................
148,000

2. Land.................................................................... 130,000

CommonShares.........................................................
130,000

Note: The appraised value of the land is used since IFRS 2 Share Based Payment
assumesthatthefairvalueoftheitemsacquiredcanbemeasuredinmostcases(IFRS2.10
and.13).Inthiscase,theappraisalsuppliesevidenceofthevalue.IFRSisaconstraintsince
the company is a public company as noted by the fact that the shares trade on a national
stockexchange.
3.

(b)

CommonShares(500X$34)...............................................

ContributedSurplus(commonshares).......................

Cash(500X$29)........................................................

17,000

2,500
14,500

Share repurchases are recorded at the average issue price or carrying amount per
share, or the average price at which the shares were issued for that class of shares.
The original issue price of the individual shares being repurchased is not used. The
original issue price of the individual shares repurchased would be considered in the
totalissuepricefortheclassofsharesbutwouldbeaveragedwithallothersharesof
thesameclass.

Last updated 20150213

Ch 15 Solutions

1/11


EXERCISE152(1520minutes)

(a)
OriginalSubscription:
ShareSubscriptionsReceivable.................................................
(40,000sharesX$22each)

CommonSharesSubscribed.............................................

CollectionofDownPayments:

880,000

Cash($880,000X.35)................................................................

ShareSubscriptionsReceivable........................................

CollectionofBalance:

308,000
308,000

Cash($880,000$308,000).......................................................

ShareSubscriptionsReceivable........................................

IssuanceofShares:

572,000
572,000

CommonSharesSubscribed......................................................

CommonShares...............................................................

880,000
880,000

(b)

880,000

UnderASPE,whethertheShareSubscriptionsReceivableaccountshouldbepresentedasanassetora
contraequityaccountisamatterofprofessionaljudgement,althoughconceptually,itmakessenseto
recordasareductionofequity.NotethatSection3251.10oftheCICAHandbook,PartIIrequiresthat
share purchase loans receivables must be shown as contra equity unless the borrower is fully
responsiblefordeclinesinvalueofthesharesandthereisreasonableassurancethatthefullamounts
willbecollected.IntheUnitedStates,theSECrequirestheShareSubscriptionsReceivableaccountto
be presented as a reduction of equity. Under IFRS, specific guidance in not given but using first
principles,thecompanywouldlikelyenduptreatingitthesameasnotedabove.

(c)

Ifasubscriberisunabletopayallinstalmentsandthereforedefaultsontheagreement,thepossibilities
include: (1) returning the amount already paid by the subscriber (possibly after deducting some
expenses), (2) treating the amount paid as forfeited and therefore transferring it to the Contributed
Surplus account, or (3) issuing fewer shares to the subscriber so that the number of shares issued is
equivalenttowhatthesubscriptionpaymentsalreadyreceivedwouldhavepaidforfully.Notethatin
some jurisdictions, the limit to the liability of the subscriber in case of corporate failure is the
subscriptionprice,ratherthantheamountpaidupatthetimeofthefailure.

Last updated 20150213

Ch 15 Solutions

2/11

EXERCISE155(1015minutes)

(a) Preferredshareis
noncumulative,
nonparticipating

Preferred

$21,000

$63,000

(b) Preferredshareis
cumulative,non
participating

(c) Preferredshareis
cumulative,participating

Dividendsinarrears

Currentdividend

Proratashareto
common

($280,000X7%*)

Balancedividendpro
rata

($300,000$580,000)
X$12,400**

($280,000$580,000)
X$12,400

Carryingamount:
Preferred:$100X3,000
Common:$40X7,000
Totalcarryingamount

Common

$74,000

$32,000

Total

$95,000

$95,000

$69,414

$42,000
21,000

$25,586

$19,600

6,414

_______
$69,414

$300,000
$280,000
$580,000

$95,000

$42,000
21,000

19,600

6,414

5,986
$25,586

5,986
$95,000

*Dividendratepershareof$7dividedby$100statedvalueforthepreferredshares.
**$95,000$42,000$21,000$19,600=$12,400

Last updated 20150213

Ch 15 Solutions

3/11

EXERCISE155(Continued)

(d)

Currentyearpayoutratiounder(a):

Payoutratio=

Cashdividendstocommon
__
NetincomePreferreddividends

=1.07

=____74,000____

90,00021,000

Currentyearpayoutratiounder(b):
Payoutratio=Cashdividendstocommon __


NetincomePreferreddividends

=1.19

=____32,000____

90,00063,000

Currentyearpayoutratiounder(c):
Payoutratio=Cashdividendstocommon __

NetincomePreferreddividends

=____25,586____

90,00069,414

=1.24
Ifthepreferredsharesarecumulativeanddividendsinarrearsarepaidintheyear,and/orif
thepreferredsharesareparticipating,thecompanyspayoutratiomayappearhigherthanit
would have been if the preferred shares were not cumulative or participating. A potential
investormaybeinterestedinearningdividendincomethroughownershipofthecompanys
commonshares,andmayrequireahighenoughpayoutratiotoprovideagoodyieldonthe
shares.Theinvestorshouldconsiderthatthecompanyspayoutratiomayappearhigherdue
tocertainpreferredsharedividendfeatures,andnotnecessarilyduetoexcessdistributionof
profittocommonshareholders.

Last updated 20150213

Ch 15 Solutions

4/11


EXERCISE159(1015minutes)

(a)

1.
Noentrysimplyamemorandumindicatingthenumberofshareshasincreasedto2
million.

143,000,000
2.
RetainedEarnings.......................................

CommonStock
Dividends

Distributable..............................
143,000,000

(1,000,000sharesX$143)

CommonStockDividends
Distributable............................................
143,000,000

CommonShares...............................
143,000,000

(b)
Large stock dividends and splits serve the same function with regard to the
securities markets. Both techniques allow the Board of Directors to increase the
quantity of shares outstanding and channel share prices into the popular trading
range.

ASPE & IFRS do not provide specific guidance on this topic. However, legal
requirements may dictate the accounting treatment of large stock dividends and
requirethejournalentrydisplayedinpart2above.Insuchacaseitisnecessaryto
capitalize the stated value with a stock dividend because the number of shares is
increased and the stated value per share remains the same. Accounting for stock
dividendsinthismannerissometimesreferredtoascapitalizationofearnings.In
the absence of such a legal requirement for accounting purposes the 20%25% rule
reasonably views large stock dividends as substantive stock splits and no journal
entryismade.

Forfurtherdiscussionofthetopicoflargestockdividendsseepage955inyourtext
(10thCanEd).

Last updated 20150213

Ch 15 Solutions

5/11


BRIEFEXERCISE1515

(a)

THESAWGRASSCORPORATION
StatementofChangesinShareholders'Equity
YearEndedDecember31,2014

ShareCapital
Numberof

Bal.Jan.1,2014
Issuedcommonshares
Repurchaseofshares
Declareddividends
Comprehensiveincome:
Netincome
HoldinggainOCI
Bal.Dec.31,2014

Shares

Legal

Other

Capital ContributedCapital

32,000$800,000
2,000 100,000
(1,000) (25,000)

Retained

AccumulatedOther
Comprehensive

Earnings

Income

$145,000

$1,500,000

Total

$40,000

(17,500)
(70,000)
400,000

33,000$875,000

$127,500

$1,830,000

25,000
$65,000

$2,485,000
100,000
(42,500)
(70,000)
400,000
25,000
$2,897,500

(b)
THESAWGRASSCORPORATION
StatementofFinancialPosition(Partial)
December31,2014

ShareCapital
Commonshares,noparvalue(33,000shares
issued,unlimitedsharesauthorized)...........................................
$ 875,000
Contributedsurplus..........................................................................
127,500
Totalpaidincapital.........................................................................
1,002,500
Retainedearnings..................................................................................
1,830,000
Accumulatedothercomprehensiveincome...........................................
65,000

Totalshareholdersequity............................................................
$2,897,500

(c) Other comprehensive income and accumulated other comprehensive income are not
recordedunderASPE.UnderASPE,changesinretainedearningsareusuallypresented
in a statement of retained earnings, and changes in capital accounts are usually
presentedinthenotestofinancialstatements.

Last updated 20150213

Ch 15 Solutions

6/11


BRIEF EXERCISE 1518 [assume a $0 balance in the Contributed Surplus (common shares)
accountbeforethetransactiononSeptember5th]

Sept.5
TreasuryShares(1,500X$75)................................ 112,500

Cash...........................................................

112,500

Nov.20
Cash(1,000X$80).................................................
80,000

TreasuryShares(1,000X$75)....................

75,000

ContributedSurplus(commonshares).......

5,000

And,iftheremaining500treasurysharesareresoldfor$40eachonDecember12th:

20,000
Dec.12
Cash(500X$40)....................................................................

ContributedSurplus(CommonShares)
5,000

RetainedEarnings
12,500

TreasuryShares(500X$75) .....................................

37,500

BRIEF EXERCISE 1519 [assume a $0 balance in the Contributed Surplus (common shares)
accountbeforethetransactiononSeptember5th]

Sept.5
TreasuryShares(1,500X$75)................................ 112,500

Cash...........................................................

112,500

Nov.20
Cash(1,000X$55).................................................
55,000

RetainedEarnings..................................................
20,000

TreasuryShares(1,000X$75)....................

75,000

And,iftheremaining500treasurysharesareresoldfor$40eachonDecember12th:

20,000
Dec.12
Cash(500X$40)....................................................................

RetainedEarnings
17,500

TreasuryShares(500X$75) .....................................

Last updated 20150213

Ch 15 Solutions

37,500

7/11

PROBLEM152
There may be a typing error in P15-2 under the heading Cash Dividends:
Dec. 15, 2014 should read Dec. 15, 2013.
The solution below is correct if you use Dec. 15, 2013.

(a)
OreganoInc.
BalanceSheet(PartialShareholdersEquitysection)
June30,2014
ShareCapital:

Preferredshares,$2.00,cumulative

andnonparticipating,100,000

sharesauthorized,50,000shares

issued
$2,200,000

Commonshares,300,000shares

authorized,116,000sharesissued
$3,918,3401

Commonsharessubscribed,
4,286,340

8,000shares
368,000

Totalsharecapital
6,486,340

Retainedearnings

AppropriatedNoteA
50,000
2

Unappropriated
331,660
381,660
Totalsharecapitalandretainedearnings
6,868,000
Less:Sharesubscriptionsreceivable
(368,000)
Totalshareholdersequity
$6,500,000

NoteA:
OreganoInc.isrequiredtoappropriateretainedearningsinanamountthatis
equaltothesinkingfunddepositof$50,000thatistobeaccumulatedtoretire
atermloan.

Notetoinstructor:TheRetainedEarningsappropriationcouldalsobereportedthroughnote
disclosureonly.

Last updated 20150213

Ch 15 Solutions

8/11

PROBLEM152(Continued)
There may be a typing error in P15-2 under the heading Cash Dividends: Dec. 15, 2014 should
read Dec. 15, 2013: the solution below is correct if you use Dec. 15, 2013.

Commonsharetransactions:

Date
Shares
Price
01/07/11
95,000
$31.00
24/07/11
01/03/12

30/06/12
Subtotal

01/10/13

Subtotal
30/11/13
Subtotal
31/01/14

5,000
10,000

42.00

110,000
2,000

46.00

112,000
(2,000)
110,000
5,500

32.83c
52.00

Commonshares

$2,945,000

220,000

420,000

3,585,000

92,000b

3,677,000
65,660

3,611,340

286,000

21,000

$3,918,340

20/06/14
500
Total

116,000

1
Commonsharetransactions:
a. The5,000sharesexchangedforaplotoflandarerecordedat$220,000ofshares(use
thecurrentfairvalueofthelandonJuly24tovaluetheshareissuance).
b. Theremainingsubscriptionsfor8,000sharesresultedin$368,000ofcommonshares
subscribed.
c. $3,677,000 / 112,000 = $32.83 per share. Retained Earnings is also debited for
$12,340,sincethereisnocontributedsurplus,thedifferencebetweentherepurchase
priceof$39persharelesstheaveragestatedpriceof$32.83pershare.

2
Retainedearnings,June30,2013
$690,000
Add:NetIncome
40,000
Deduct:

Appropriationforsinkingfund
$50,000

Excessofcostofreacquiredshares

overassignedvalue
12,340

Preferreddividend
50,000

Stockdividend,commonshares
286,000
398,340
UnappropriatedRetainedEarnings,June30,2014
$331,660
Last updated 20150213

Ch 15 Solutions

9/11

PROBLEM152(Continued)
There may be a typing error in P15-2 under the heading Cash Dividends: Dec. 15, 2014 should
read Dec. 15, 2013: the solution below is correct if you use Dec. 15, 2013.

(b)
October1,2013
Cash .......................................................................................
92,000
ShareSubscriptionsReceivable................................................ 368,000

CommonSharesSubscribed............................................

368,000

CommonShares..............................................................

92,000
November30,2013
CommonShares........................................................................... 65,660
RetainedEarnings......................................................................... 12,340

Cash(2,000X$39)...............................................................

78,000

December15,2013
RetainedEarnings......................................................................... 336,000
CommonStockDividendsDistributable..............................

PreferredsharesdividendsPayable....................................

286,000
50,000

January15,2014
PreferredsharesdividendsPayable............................................. 50,000

Cash....................................................................................

50,000

January31,2014
CommonStockDividendsDistributable........................................ 286,000
CommonShares..................................................................

286,000

April30,2014
InvestmentinSinkingFund..........................................................
Cash....................................................................................

50,000

50,000

June20,2014
Cash ........................................................................................... 21,000
CommonShares..................................................................

21,000

(c) Astockdividendiscurrentlydisadvantageousforcommonshareholderssincetheywillhavetopaytaxes
on the value of the stock dividend without the receipt of cash to settle the tax liability. The total book
valueoftheshareholdersholdingsdoesnotincreasetocompensateforthistaxburden.Theshareholders
ofOreganoInc.maybewillingtoacceptastockdividendinthecurrentyearifthecompanyiscommitted
tocontinuingitspaymentof$0.30pershareascashdividendsinthefuture.Inthiscase,thestockdividend
would result in higher cash dividends for common shareholders because each shareholder would hold
additionalshares.
Last updated 20150213

Ch 15 Solutions

10/11

EXERCISE1515(1520minutes)

(a)

ShareCapital

Liabilities

Share
holders
Equity

Item

Assets

Cont.
Surplus

1.

NE

NE

2.

NE

3.

NE

NE

4.

5.

Retained
Earnings

Acc.Other
Compre
hensive
Income

Net
Income

NE

NE

NE

NE

NE

NE

NE

NE

NE

NE

NE

NE

NE

NE

NE

NE

NE

NE

NE

NE

NE

NE

6.

NE

NE

NE

NE

7.

NE

NE

NE

NE(I)**

I(N/A)**

NE(I)**

8.

NE

NE

NE

NE

NE

9.

NE

NE

NE

I*(NE)**

D(N/A)**

I*(NE)**

10.

NE

NE

NE

NE

NE

NE

11.

NE

NE

NE

NE

NE

NE

NE

NE

12.

NE

NE

NE

NE

I=increase
;NE=noeffect ;D=decrease
*thissolutionassumesFV/OCIwithrecyclingthroughnetincome.
**green=ifunderASPE:N/A=notapplicablebecauseOCIdoesnotexistunderASPE.

Last updated 20150213

Ch 15 Solutions

11/11