Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition CHAPTER 11 Reporting and Analyzing Shareholders’ Equity ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Exercises A Problems B Problems BYP Identify and discuss the major characteristics of a corporation 1, 2, 3, 4, 1 1, Record share transactions 6, 7, 8, 9, 10 2, 3, 2, 3, 4, 5, 1A, 2A, 3A, 1B, 2B, 1, 3, 4, 4A, 5A 3B, 4B, 5B Prepare the entries for cash dividends, stock dividends, and stock splits, and understand their financial impact 11, 12, 13, 14, 15 5, 6, 7, 5, 6, 1A, 2A, 3A, 1B, 2B, 1, 5, 4A, 5A, 6A, 3B, 4B, 7A 5B, 6B, 7B Indicate how shareholders’ equity is presented in the financial statements 16, 17, 18, 19, 20 9, 10, 11 7, 8, 9, 10, 11 1A, 2A, 3A, 1B, 2B, 4A, 5A, 7A 3B, 4B, 5B, 7B 1, Evaluate dividend and earnings performance 21, 22, 23, 24, 25 12, 13, 14, 15, 16, 17 12, 13, 14, 15 8A, 9A, 10A, 11A 2, 3, 4, 8B, 9B, 10B, 11B Solutions Manual 11-1 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description Difficulty Level Time Allotted (min.) Moderate 40-50 1A Show impact of transactions on accounts 2A Record and post equity transactions; prepare shareholders’ equity section Simple 30-40 3A Record and post equity transactions; prepare statements Moderate 40-50 4A Record and post equity transactions; prepare statements under ASPE Complex 30-40 5A Reproduce equity accounts; prepare shareholders’ equity section Moderate 30-40 6A Compare impact of cash dividend, stock dividend, and stock split Moderate 30-40 7A Record and post dividend transactions, prepare statements Moderate 40-50 8A Calculate earnings per share Moderate 20-30 9A Evaluate ratios Moderate 20-30 10A Calculate and evaluate ratios Complex 20-30 11A Evaluate profitability ratios Complex 20-30 Solutions Manual 11-2 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number Description Difficulty Level Time Allotted (min.) Moderate 40-50 1B Show impact of transactions on accounts 2B Record and post equity transactions; prepare shareholders’ equity section Simple 30-40 3B Record and post equity transactions; prepare statements Moderate 40-50 4B Record and post equity transactions; prepare statements under ASPE Complex 30-40 5B Reproduce equity accounts; prepare shareholders’ equity section Moderate 30-40 6B Compare impact of cash dividend, stock dividend, and stock split Moderate 30-40 7B Record and post dividend transactions, prepare statements Moderate 40-50 8B Calculate earnings per share Moderate 20-30 9B Evaluate ratios Moderate 30-40 10B Calculate and evaluate ratios Complex 20-30 11B Evaluate profitability ratios Complex 20-30 Solutions Manual 11-3 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition ANSWERS TO QUESTIONS (a) (1) Separate legal existence A corporation is separate and distinct from its shareholders (owners) and acts in its own name rather than in the name of its shareholders In addition, the acts of the shareholders not bind the corporation unless the shareholder is a duly appointed agent of the corporation This is an advantage to the corporate form of organization (2) Limited liability of shareholders Because of its separate legal existence, creditors of a corporation ordinarily have recourse only to corporate assets to satisfy their claims Thus, the liability of shareholders is normally limited to their investment in the corporation This is an advantage to the corporate form of organization (3) Transferable ownership rights Ownership of a corporation is shown in shares, which are transferable Shareholders may dispose of part or all of their interest by simply selling their shares The transfer of ownership to another party is entirely at the discretion of the shareholder This is an advantage to the corporate form of organization (4) Ability to acquire capital Corporations can raise capital quite easily by issuing shares Public corporations have an almost unlimited ability to acquire capital Investors find shares of corporations to be attractive since they need not invest large sums of money to become shareholders In addition, shareholders benefit from limited liability This is an advantage to the corporate form of organization (5) Continuous life Since a corporation is a separate legal entity, its continuance as a going concern is not affected by the withdrawal, death or incapacity of a shareholder, employee, or officer This is an advantage to the corporate form of organization (6) Separation of management and ownership Although the shareholders of a corporation are its owners, it is the board of directors that decides on the operating policies of the company The shareholders seldom get involved in the company’s day-to-day activities This is normally seen to be an advantage to the corporate form of organization Solutions Manual 11-4 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Answers to Questions (Continued) (a) (Continued) (7) Government regulations Corporations in Canada may incorporate federally or provincially Government regulations usually provide guidelines for issuing shares, distributing profit, and reacquiring shares Provincial securities commissions also govern the sale of share capital to the general public When a corporation’s shares are listed or traded on a stock exchange, it must adhere to the reporting requirements of that exchange This may be a disadvantage to the corporate form of organization because it adds extra cost and complexity to the organization (8) Income taxation Corporations must pay federal and provincial income tax as separate legal entities However, corporations usually benefit from more favourable tax rates than the owners of partnerships or proprietorships The shareholders of the corporation not pay tax on the corporation’s profit unless they receive dividends from the corporation This is often seen to be an advantage to the corporate form of organization (b) While public corporations have an almost unlimited ability to acquire capital, this is not the case for private corporations In addition, transferring ownership rights can be much more limited given that private corporation shares are not publicly traded Private companies not have as stringent reporting and disclosure requirements as is the case for public companies (a) Letson has 60,000 shares issued and is eligible to issue an additional 40,000 shares (100,000 – 60,000) (b) Only issued shares are recorded in the general journal The number of authorized shares is disclosed but not recorded until issued When Richard purchased the original shares as part of lululemon’s initial public offering, he purchased these shares directly from the corporation The $1,800 (100 × $18) he spent to buy the shares went directly to lululemon and increased the company’s assets (Cash) and shareholders’ equity (Common Shares) There was no impact on the company’s liabilities In the subsequent purchase, Richard bought shares in the secondary market from another investor or investors The proceeds from this sale went to the seller and not to lululemon Therefore there was no impact on lululemon’s assets, liabilities, or shareholders’ equity a result of the second purchase Solutions Manual 11-5 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Answers to Questions (Continued) Market capitalization is the measure of the fair value of a corporation’s equity It is calculated by multiplying the number of shares issued by the share market price at any given date It should not be confused with a corporation’s legal capital which represents the amount paid to the corporation on the initial and any subsequent issue of shares and consequently is the amount that appears on the statement of financial position The market capitalization for Plazacorp Retail Properties Limited has increased in 2012 There are two primary reasons for an increase in the market capitalization of a company which may happen separately or in combination First, the number of shares may have increased If this is the case, assets (Cash) and shareholders’ equity (Common Shares) would increase as a result of the issue of new shares Liabilities would be unaffected Second, the market price of the shares could have increased Increases in the market price of the shares can result for a number of reasons but are most likely due to the market’s perception of the future ability of the corporation to earn profit As a result, investors bid up the price paid for the shares on the market This possible reason for the change in market capitalization does not affect any element on the statement of financial position Legal capital is the portion of a company’s share capital which cannot be distributed to shareholders Legal capital is created largely for the protection of creditors It is kept separate from retained earnings because retained earnings may be distributed to shareholders in the form of dividends, whereas legal capital may not be The proceeds received from a company’s share issue are considered to be legal capital Preferred shareholders have priority over common shareholders with respect to the distribution of dividends and, in the event of liquidation, over the distribution of assets Preferred shareholders not usually have the voting rights that the common shareholders have When shares are issued for a consideration other than cash, such as goods or services, IFRS requires that the transaction be recorded at the fair value of the consideration received If the fair value of the consideration received cannot be reliably determined, then the fair value of the consideration given up (for example, shares) can be used When shares are issued for a noncash consideration in a private company following ASPE, the valuation of the shares can be slightly different than that described above for a publicly traded company following IFRS The shares of a private company should be recorded at the most reliable of the two values—the fair value of the consideration (such as goods or services) received or fair value of the consideration given up (such as shares) Quite often, the fair value of the consideration received is the most reliable value because a private company’s shares seldom trade and therefore not have a ready market value Solutions Manual 11-6 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Answers to Questions (Continued) (a) A normal course issuer bid is synonymous with the reacquisition of shares In a normal course issuer bid, a company is allowed to repurchase up to a certain percentage of its shares subject to regulatory approval It can purchase the shares gradually over a period of time, such as one year This repurchasing strategy allows the company to buy when its shares are favourably priced (b) A corporation may acquire its own shares (1) to increase trading of the corporation's shares in the stock market, in the hopes of enhancing its market value, (2) to reduce the number of shares issued and increase earnings per share and return on equity ratio, (3) to eliminate hostile shareholders by buying their shares, and (4) to have additional shares to issue if required to compensate employees using stock options or to acquire other businesses Assad should expect to receive a dividend in the amount of $281.25 (1,000 shares ì $1.125 ữ 4) each quarter 10 Preferred shares are cumulative or noncumulative with respect to their dividend provisions Cumulative preferred shares entitle the shareholder to any previous years’ dividends, which have not yet been paid, as well as their current dividend, before common shareholders can get any dividends Noncumulative preferred shares not entitle the shareholder to any unpaid dividends Dividends in arrears can only arise from cumulative preferred shares If a dividend is not declared for a noncumulative preferred share, the dividend entitlement is erased and does not carry forward into the future On the other hand, if a dividend is not declared for a cumulative preferred share, the amount of the dividend shortfall becomes dividends in arrears which must be paid first from any dividend declared in the future 11 For a cash dividend to be paid, a corporation must meet a solvency test to ensure that it has sufficient cash to be able to pay its liabilities as they become due after the dividend is declared and paid In addition, a formal dividend declaration by the board of directors is required Solutions Manual 11-7 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Answers to Questions (Continued) 12 On the declaration date, the board of directors formally authorizes the cash dividend and announces it to shareholders The declaration of a cash dividend commits the corporation to a binding legal obligation On the record date, ownership of the shares is determined On the payment date, dividends are paid to the shareholders The table below demonstrates the effect of three events on the financial statement elements (1) (2) (3) (4) (5) (6) Assets Liabilities Share capital Retained earnings Total shareholders' equity Number of shares (a) Declaration date (b) Record date (c) Payment date No effect Increase No effect Decrease Decrease No effect No effect No effect No effect No effect No effect No effect Decrease Decrease No effect No effect No effect No effect (a) Cash dividend (b) Stock dividend (c) Stock split Decrease No effect No effect Decrease Decrease No effect No effect No effect Increase Decrease No effect Increase No effect No effect No effect No effect No effect Increase 13 (1) (2) (3) (4) (5) (6) Assets Liabilities Share capital Retained earnings Total shareholders' equity Number of shares 14 (a) In a stock split, the number of shares issued is increased In the case of Bella Corporation, the number of shares issued will increase from 10,000 to 30,000 (10,000 × 3) (b) The effect of a split on market value is generally inversely proportional to the size of the split In this case, the market price would fall to approximately $40 per share ($120 ÷ 3) Solutions Manual 11-8 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Answers to Questions (Continued) 15 Cash and stock dividends are recorded in the general journal because the financial position of the company changes In the case of a cash dividend, Cash Dividends are increased, which in turn decreases retained earnings Cash is also reduced with a cash dividend In the case of a stock dividend, Stock Dividends are increased, which in turn decreases retained earnings Common Shares are increased in the case of a stock dividend In the case of stock splits, there is no change in the financial position of the company No accounts are affected Only the number of shares held by shareholders changes, typically by a multiple (for example, for 1) 16 (a) All six accounts appear individually on the statement of changes in equity, along with the details of the transactions that increased and decreased the accounts during the year being reported (b) The first three accounts (preferred shares, common shares, and stock dividends distributable) would be reported under the sub-heading of share capital in the shareholders’ equity section of the statement of financial position The remaining accounts would be reported separately in the same shareholders’ equity section of the statement of financial position 17 The purpose of a retained earnings restriction is to indicate that a portion of retained earnings is currently unavailable for dividends Restrictions may result from the following causes: legal, contractual, or voluntary Although not reported separately on the statement of changes in equity or statement of financial position, the portion of retained earnings that is restricted is disclosed in a note to the financial statements 18 Comprehensive income is the sum of profit and other comprehensive income and appears on the statement of comprehensive income Other comprehensive income (or loss) is made up of temporary accounts added to, or deducted from, the opening balance of accumulated other comprehensive income by closing entries at the end of the year These changes to the accumulated other comprehensive income account are detailed on the statement of changes in equity Accumulated other comprehensive income is a permanent equity account and its ending balance appears in the shareholders’ equity section of the statement of financial position 19 (a) The statement of retained earnings shows all of the changes to retained earnings for the accounting period being reported The statement of retained earnings must be prepared by private companies following ASPE The statement of changes in equity shows the changes in retained earnings, similar to the statement of retained earnings However, it also shows the changes in amounts in share capital, as well as the changes in all of the remaining equity accounts This is a required statement by companies following IFRS Solutions Manual 11-9 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Answers to Questions (Continued) 19 (b) The statement of retained earnings shows the changes in determining the ending balance of retained earnings, which is only one of the accounts that appears in the shareholders’ equity section of the statement of financial position The statement of changes in equity shows the changes in determining each of the shareholders’ accounts (for example, preferred shares, common shares, retained earnings, and accumulated other comprehensive income) Each of these accounts appears in the shareholders’ equity section of the statement of financial position 20 (a) Private companies that report using ASPE usually have a simpler capital structure than publicly traded companies who use IFRS Consequently, the shareholders’ equity section of the statement of financial position has fewer accounts with ASPE For example, private companies are not required to report accumulated other comprehensive income, which publicly-traded companies are required to report (b) Private companies using ASPE would prepare the following financial statements: statement of financial position, income statement, statement of retained earnings, and statement of cash flows For companies using ASPE, fewer equity account transactions occur and need to be explained and consequently there is no requirement to prepare a statement of changes in equity Rather, only a statement of retained earnings is required, linking the income statement to the retained earnings account shown in the shareholders’ equity section of the statement of financial position Publicly-traded companies using IFRS would prepare the following financial statements: statement of financial position, income statement and/or statement of comprehensive income, statement of changes in equity, and statement of cash flows Under IFRS, a statement of comprehensive income is required (in combination with, or along with the income statement) when there is other comprehensive income during the year 21 (a) (b) (c) (d) Unfavourable Favourable Unfavourable Favourable 22 Pepsi had the higher share price The market price of the share can be determined by dividing the dividend per share by its dividend yield Doing so would result in a market price of approximately $67 ($1.00 ÷ 1.5%) and $72 ($2.15 ÷ 3.0%) per share for CocaCola and Pepsi, respectively Solutions Manual 11-10 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 11-4 (Continued) (b) (Continued) The option with the lowest return is the one with the lowest level of debt relative to equity When no debt is taken out, a company cannot take advantage of leverage, which means that the company does not profit by using the bank’s money As a result, the best return is the one with all debt, Option Because the denominator is so low (only $1 of equity), the return appears to be astronomically high (c) The amount of cash that Depinder would have before income tax is calculated in the table below He will have the most cash under Option if he borrows money from the bank and buys the larger restaurant Dividends received by Depinder Interest received by Depinder Option All equity $112,500 Option All debt $ 67,500 60,000 $127,500 Option Debt & equity $180,000 (d) If the operating expenses are greater than the revenues, then the company will have a loss The return on common shareholders’ equity will be negative If the company has more debt, additional interest will have to be paid to the bank and this will make the loss greater and the return on common shareholder’s equity lower than it would have been otherwise (e) If the bank loan was replaced with preferred shares, there would be no interest expense on the income statement and profit would rise The preferred dividends would be reported on the statement of changes in equity and not on the income statement The profit for the large restaurant would be exactly double what is currently reported on the income statement for the Option 1, the purchase of the small restaurant (f) The preferred shares that the Uncle would purchase would be considered to be retractable since he has the right to require the company buy back the shares This makes the shares similar to debt because there is a contractual obligation to pay an amount in the future (this is in essence the definition of a liability) Because of this, the preferred shares would be shown as a liability rather an equity item Consequently, the dividends on those shares would be treated as interest in the income statement rather than as dividends in the statement of changes in equity for consistency with its presentation on the statement of financial position (g) If the business was not incorporated, the income statement would still be prepared but income tax expense would not be shown This is because the profit of the business is paid at the personal level as the business is not a separate legal entity Solutions Manual 11-77 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 11-5 ETHICS CASE (a) The stakeholders in this situation are: Vince Ramsey, president of Flambeau Corporation Janice Rahn, financial vice-president The shareholders of Flambeau Corporation (b) The stock dividend results in a decrease in retained earnings and an increase of the same amount in share capital with no change in total shareholders’ equity There is no change in total assets and no change in total liabilities and shareholders’ equity (c) The 5% stock dividend will likely reduce the value at which the shares are trading by around 5%—at least in the immediate future Since essentially nothing has changed in the company’s financial position, the only effect a 5% stock dividend will have on the market value of the shares is to allocate the equity of the business over 5% more shares (d) There is nothing unethical in declaring and issuing a stock dividend However, the president’s order to write a press release convincing the shareholders that the stock dividend is just as good as a cash dividend is unethical A stock dividend is not a cash dividend and does not necessarily leave the shareholder in the same position A stock dividend is a “paper” dividend—the company issues a certificate, not a cheque (cash) Solutions Manual 11-78 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 11-6 “ALL ABOUT YOU” ACTIVITY Note to instructors: All of the material supplementing this group activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook as well as in the Prepare and Present section of WileyPLUS (a) Alternative (Borrow $50,000) Alternative (Issue $50,000 common shares) Alternative (Issue $50,000 preferred shares) Debt to total assets $71,980 ÷ $195,280 = 36.9% $31,980 ÷ $207,680 = 15.4% $31,980 ÷ $204,680 = 15.6% Return on common shareholders’ equity $21,600 ÷ [[($50,000 + $51,700) + ($50,000 + $73,300)] ÷ 2)] = 19.2% $24,000 ÷ [[($50,000 + $51,700) + ($100,000 + $75,700)] ÷ 2)] = 17.3% ($24,000 – $3,000) ÷ [[($50,000 + $51,700) + ($50,000 + $72,700)] ÷ 2)] = 18.7% Earnings per share $21,600 ÷ 500 = $43.20 $24,000 ÷ 1,000 = $24.00 ($24,000 - $3,000) ÷ 500 = $42.00 (b) Alternatives and provide for the least amount of debt—$31,980 instead of $71,980 reported in Alternative Instead of borrowing the company has issued shares in Alternatives and (c) Alternative 1, borrowing instead of issuing shares, provides for the highest return on equity and the highest earnings per share (d) If I were a shareholder, I would choose Alternative This alternative would generate a smaller amount of profit because of the amount of after tax interest expense paid on the loan; however, the return on common shareholder’s equity and earnings per share would increase because the distribution of profit is limited to current shareholders Solutions Manual 11-79 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 11-7 SERIAL CASE (a) June 15 Cash Dividends Dividends Payable 75,000 June 30 Dividends Payable Cash 75,000 75,000 75,000 Since the date of record on the declaration of the dividend is June 20, 2015, only shareholders on that date are eligible to receive dividends Natalie, Janet, and Brian each receive ⅓ of the dividend and will each receive $25,000 (b) June 30 Vehicles Cash Common Shares (100 × $1,075) 45,000 62,500 107,500 (c) KOEBEL’S FAMILY BAKERY LTD Statement of Retained Earnings Year Ended June 30, 2015 Retained earnings, July 1, 2014 Add: Profit Less: Cash dividends Retained earnings, June 30, 2015 $182,601 216,069 398,670 75,000 $323,670 If Koebel’s followed IFRS rather than ASPE, a statement of changes in equity explaining the changes in each component of shareholder’s equity would be required instead of a statement of retained earnings (d) KOEBEL’S FAMILY BAKERY LTD Statement of Financial Position (Partial) June 30, 2015 Shareholders’ equity Common shares, unlimited number authorized, 400 issued Retained earnings Total shareholders’ equity $107,800 323,670 $431.470 ($300 + $107,500 = $107,800) Solutions Manual 11-80 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition COMPREHENSIVE CASE: CHAPTERS – 11 (a) Summary Transaction Entries: Cash Preferred Shares 50,000 Cash Common Shares 30,000 Accounts Receivable Cash Sales 320,000 100,000 Cost of Goods Sold Merchandise Inventory 250,000 Cash Accounts Receivable 296,000 Supplies Accounts Payable 35,100 Merchandise Inventory Accounts Payable 330,000 Accounts Payable Merchandise Inventory (2% × $322,000) Cash 322,000 Salaries Expense Cash 88,200 Allowance for Doubtful Accounts Accounts Receivable 1,700 10 Interest Expense Mortgage Payable Cash 4,000 2,000 11 Cash Dividends ($1,400 + $4,200) Dividends Payable 5,600 50,000 30,000 420,000 250,000 296,000 35,100 330,000 6,440 315,560 88,200 1,700 6,000 5,600 Solutions Manual 11-81 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition COMPREHENSIVE CASE: CHAPTERS 3–11(Continued) (a) (Continued) Adjusting Journal Entries: Dec.31 31 31 31 31 31 Supplies Expense ($4,400 + $35,100 – $5,900) Supplies 33,600 Bad Debts Expense ($1,500 – $1,700 + $3,500) Allowance for Doubtful Accounts 3,700 Depreciation Expense Accumulated Depreciation—Buildings ($142,000 – $10,000) ÷ 30 4,400 Interest Expense Interest Payable 350 Bank Charges Expense Cash 3,000 Income Tax Expense Income Tax Payable 6,000 33,600 3,700 4,400 350 3,000 6,000 (b) Cash Jan Bal 24,000 Summary 50,000 Summary 315,560 Summary 30,000 Summary 88,200 Summary 100,000 Summary 6,000 Summary 296,000 Adj 3,000 Dec 31 Bal 87,240 Accounts Receivable Jan Bal Summary Dec 31 Bal 45,500 Summary 296,000 320,000 Summary 1,700 67,800 Solutions Manual 11-82 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition COMPREHENSIVE CASE: CHAPTERS 3–11 (Continued) (b) (Continued) Allowance for Doubtful Accounts Summary 1,700 Jan Bal 1,500 Dec 31 Adj 3,700 Dec 31 Bal 3,500 Merchandise Inventory Jan Bal Summary Dec 31 Bal 70,000 Summary 250,000 330,000 Summary 6,440 143,560 Supplies Jan Bal Summary Dec 4,400 Dec 31 Adj 33,600 35,100 31 Bal 5,900 Land Jan Bal 40,000 Buildings Jan Bal 142,000 Accumulated Depreciation—Buildings Jan Bal 22,000 Dec 31 Adj 4,400 Dec 31 Bal 26,400 Solutions Manual 11-83 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition COMPREHENSIVE CASE: CHAPTERS 3–11 (Continued) (b) (Continued) Accounts Payable Jan Summary Bal 55,600 322,000 Summary 35,100 Summary 330,000 Dec 31 Bal 98,700 Interest Payable Dec 31 Adj 350 Dividends Payable Summary 5,600 Income Tax Payable Dec 31 Adj 6,000 Mortgage Payable Summary 2,000 Jan Bal 80,000 Dec 31 Bal 78,000 Preferred Shares Summary 50,000 Common Shares Jan Summary Dec 30,000 30,000 31 Bal 60,000 Solutions Manual 11-84 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition COMPREHENSIVE CASE: CHAPTERS 3–11 (Continued) (b) (Continued) and (e) CE – Means closing entry Retained Earnings Dec 31 CE Jan Bal 127,400 5,600 Dec 31 CE 26,750 31 Bal 148,550 Dec Accumulated Other Comprehensive Income Jan Bal 9,400 Cash Dividends Summary 5,600 Dec 31 Bal Dec 31 CE 5,600 Sales Dec 31 CE 420,000 Summary Dec 31 Bal 420,000 Cost of Goods Sold Summary Dec 31 CE 250,000 Dec 31 Bal 250,000 Salaries Expense Summary Dec 88,200 31 Bal Dec 31 CE 88,200 Supplies Expense Dec 31 Adj Dec 31 Bal 33,600 Dec 31 CE 33,600 Depreciation Expense Dec 31 Adj Dec 31 Bal 4,400 Dec 31 CE 4,400 Solutions Manual 11-85 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition COMPREHENSIVE CASE: CHAPTERS 3–11 (Continued) (b) and (e) (Continued) Bad Debts Expense Dec 31 Adj Dec 31 Bal 3,700 Dec 31 CE 3,700 Bank Charges Expense Dec 31 Adj Dec 31 Bal 3,000 Dec 31 CE 3,000 CE 4,350 Interest Expense Summary 4,000 Dec 31 Adj Dec 31 Bal 350 Dec 31 Income Tax Expense Dec 31 Adj Dec 31 Bal 6,000 Dec 31 CE 6,000 Income Summary Dec 31 CE 393,250 Dec 31 CE 26,750 Dec 31 Bal Dec 31 CE 420,000 Solutions Manual 11-86 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition COMPREHENSIVE CASE: CHAPTERS 3–11 (Continued) (c) HAMPTON CORPORATION Adjusted Trial Balance December 31, 2015 Debit Cash Accounts receivable Allowance for doubtful accounts Merchandise inventory Supplies Land Buildings Accumulated depreciation—buildings Accounts payable Interest payable Dividends payable Income tax payable Mortgage payable Preferred shares Common shares Retained earnings Accumulated other comprehensive income Cash dividends Sales Cost of goods sold Salaries expense Supplies expense Depreciation expense Bad debts expense Bank charges expense Interest expense Income tax expense Credit $ 87,240 67,800 $ 3,500 143,560 5,900 40,000 142,000 26,400 98,700 350 5,600 6,000 78,000 50,000 60,000 127,400 9,400 5,600 420,000 250,000 88,200 33,600 4,400 3,700 3,000 4,350 6,000 $885,350 $885,350 Solutions Manual 11-87 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition COMPREHENSIVE CASE: CHAPTERS 3–11 (Continued) (d) (1) HAMPTON CORPORATION Income Statement Year Ended December 31, 2015 Sales Cost of goods sold Gross profit Operating expenses Salaries expense Supplies expense Depreciation expense Bad debts expense Bank charges expense Total operating expenses Profit from operations Other revenues and expenses Interest expense Profit before income tax Income tax expense Profit $420,000 250,000 $170,000 $88,200 33,600 4,400 3,700 3,000 132,900 37,100 4,350 32,750 6,000 $ 26,750 (2) HAMPTON CORPORATION Statement of Changes in Equity Year Ended December 31, 2015 Balance Jan Issued preferred shares Issued common shares Cash dividends Profit Balance Dec 31 Accumulated Other Comprehensive Income Share Capital Preferred Common Shares Shares Retained Earnings $30,000 $127,400 $9,400 (5,600) 26,750 $148,550 $9,400 $50,000 30,000 $50,000 $60,000 Total $166,800 50,000 30,000 (5,600) 26,750 $267,950 Solutions Manual 11-88 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition COMPREHENSIVE CASE: CHAPTERS 3–11 (Continued) (d) (Continued) (3) HAMPTON CORPORATION Statement of Financial Position December 31, 2015 Assets Current assets Cash Accounts receivable Less: Allowance for doubtful accounts Merchandise inventory Supplies Total current assets Property, plant and equipment Land Buildings Less: Accumulated depreciation Total property, plant, and equipment Total assets $ 87,240 $67,800 3,500 64,300 143,560 5,900 301,000 $ 40,000 $142,000 26,400 115,600 155,600 $456,600 Liabilities and Shareholders’ Equity Current liabilities Accounts payable Interest payable Dividends payable Income tax payable Current portion of mortgage payable Total current liabilities Non-current liabilities Mortgage payable Total liabilities Shareholders’ equity Share capital $2.80 Preferred shares, cumulative, 50,000 shares authorized, 500 issued Common shares, unlimited number of shares authorized, 3,500 issued Total share capital Retained earnings Accumulated other comprehensive income Total shareholders’ equity Total liabilities and shareholders’ equity $98,700 350 5,600 6,000 2,500 $113,150 75,500 188,650 $ 50,000 60,000 110,000 148,550 9,400 267,950 $456,600 Solutions Manual 11-89 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition COMPREHENSIVE CASE: CHAPTERS 3–11 (Continued) (e) Closing Entries: 2015 Dec 31 31 031 31 Sales Income Summary 420,000 Income Summary Cost of Goods Sold Salaries Expense Supplies Expense Depreciation Expense Bad Debts Expense Bank Charges Expense Interest Expense Income Tax Expense 393,250 Income Summary Retained Earnings 26,750 Retained Earnings Dividends 5,600 420,000 250,000 88,200 33,600 4,400 3,700 3,000 4,350 6,000 26,750 5,600 Solutions Manual 11-90 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Legal Notice Copyright Copyright © 2014 by John Wiley & Sons Canada, Ltd or related companies All rights reserved The data contained in these files are protected by copyright This manual is furnished under licence and may be used only in accordance with the terms of such licence The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd (MMXIII xi FI) Solutions Manual 11-91 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited ... yield, when compared to Company A Therefore Company B is the better choice for an investor interested in a steady dividend income Solutions Manual 11- 11 Chapter 11 Copyright © 2014 John Wiley & Sons... shareholders were willing to pay a higher market price for the common shares in 2012 ($78.56) compared to 2 011 ($73.96) Solutions Manual 11- 28 Chapter 11 Copyright © 2014 John Wiley & Sons Canada, Ltd... $540,000 (110 ,000) (165,000) 350,000 $615,000 165,000 $1,265,000 Accumulated Other Comprehensive Income $60,000 $60,000 Total $1,700,000 (110 ,000) 350,000 $1,940,000 Solutions Manual 11- 46 Chapter 11