Concept Review Solutions

CHAPTER 14: SHAREHOLDERS’ EQUITY

PAGE

1. The essential difference between a public corporation and a private corporation is that the
shares of the latter cannot be publicly traded.
2. The most common preference right of preferred shares over common shares is a priority claim on
dividends declared.
3. Restricted shares are a type (or class) of common share with no voting rights or limited voting
rights.
4. Treasury shares are shares that are reacquired by corporation, and held pending resale. They are
issued but not outstanding.

PAGE

1. In general, when shares are issued for non-cash assets the transaction should be recognized at
the fair value of the assets received, assuming that this value is reliably determinable. The fair value
of the equity shares issued could only be used in very rate circumstances when the fair value of the
assets received cannot be determined.
2. When shares are issued as a basket, the total proceeds may be allocated by either the
proportional method, in which the lump sum received is allocated proportionately among the classes
of shares on the basis of the relative fair value of each security; or the incremental method in which
the fair of one security is used as a basis for that security and the remainder of the lump sum is
allocated to the other class of security. When there is no fair value for any of the issued shares,
proceeds may be allocated arbitrarily.
3. When shares are redeemed or retired, the cost of the redemption should be charged to the
shareholders’ equity accounts as follows: when the cost is lower than the average price per share
issued to date, first, to share capital at the average price per issued share; second, to contributed
capital; and when the cost is higher than the average price per share issued to date, first, to share
capital at the average price per issued share; second, to contributed capital, if any has been created
by previous treasury stock transactions in the same class of shares; and finally, any remaining
amount to retained earnings.

PAGE

Concept Review Solutions Intermediate Accounting, 7e, Volume 2

© 2017 McGraw-Hill Ryerson, Ltd.
1. The dates that require entries are the declaration date and the payment date. The entries are:
On date of declaration:

Retained earnings ×××

×
  Cash dividends payable ××××

On date of payment:
Cash dividends payable ×××
×
  Cash ××××

2. In paying a cash dividend, retained earnings are reduced by the amount of the dividend paid, as is
the cash account. A stock dividend will also reduce retained earnings but will not affect assets,
liabilities, or the total shareholders’ equity of the issuing corporation. A stock dividend is a proportional
distribution to shareholders of additional common or preferred shares of the corporation. Retained
earnings are reduced by the amount of the stock dividend; the common or preferred stock accounts
are increased by the same amount.
3. A participating preferred dividend allows the holder to participate in dividends above the stated
preferential rate on a pro rata basis in dividend declarations with common shareholders. First, the
preferred shareholders receive their preference rate. Second, the common shareholders receive a
specified matching dividend. Then, if the total dividend declaration is larger than the aggregate of
these two amounts, the excess is divided pro rata between the two share classes.

PAGE

1. A stock split is a change in the number of shares outstanding with no change in the recorded
capital. A stock dividend is the capitalization of retained earnings to share capital. The former does
not affect shareholders’ equity accounts. A stock dividend will affect shareholders’ equity accounts by
reducing retained earnings by the amount of the dividend declared, and increasing share capital by
the same amount.
2. Transactions that may result in additions to contributed capital include the following: receipt of
donated assets, retirement of shares at a price less than average issue price, and treasury stock
transactions with shares reissued above cost.
3. The following items are included in accumulated other comprehensive income:

 Gains and losses on FVTOCI financial instruments.

Concept Review Solutions Intermediate Accounting, 7e, Volume 2

© 2017 McGraw-Hill Ryerson, Ltd.
 Revaluation reserves caused by revaluing property, plant and equipment to fair value.
 Gains and losses on certain hedging instruments.
 Translations gains and losses on self-sustaining foreign operations.

Concept Review Solutions Intermediate Accounting, 7e, Volume 2

© 2017 McGraw-Hill Ryerson, Ltd.