SM 11

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Eighth Canadian Edition
CHAPTER 11
REPORTING AND ANALYZING SHAREHOLDERS’
EQUITY
LEARNING OBJECTIVES
1. Identify and discuss the major characteristics of a corporation.
2. Record share transactions.
3. Prepare the entries for cash dividends, stock dividends, and stock splits, and
understand their financial impact.
4. Indicate how shareholders’ equity is presented in the financial
statements.
5. Evaluate dividend and earnings performance.
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

AND BLOOM’S TAXONOMY
Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT
Questions
1. 1 C 7. 2 C 13. 2 C 19. 4 K 25. 5 AN
2. 1 AP 8. 2 K 14. 3 K 20. 4 C 26. 5 C
3. 1 C 9. 2 K 15. 3 C 21. 4 C 27. 5 C
4. 1 C 10. 2 C 16. 3 C 22. 4 C 28. 5 AN
5. 1 C 11. 2 AP 17. 3 AP 23. 4 C 29 5 C
6. 2 C 12. 2 C 18. 3 K 24. 5 K
Brief Exercises
1. 1 C 5. 2 AN 9. 3 AN 13. 5 AN 17. 5 AP
2. 2 AP 6. 3 AP 10. 4 AN 14. 5 AN 18. 5 AP
3. 2 AP 7. 3 AP 11. 4 AP 15. 5 AP
4. 2 AP 8. 3 AN 12. 4 AP 16. 5 AP
Exercises
1. 1 AN 4. 2 AN 7. 2,3,4 AN 10. 4 AP 13. 5 AN
2. 2 AP 5. 2,3 AP 8. 4 C 11. 5 AN 14. 5 AN
3. 2 AN 6. 3 AP 9. 4 AP 12. 5 AP 15. 5 AN
Problems: Set A and B
1. 2,3,4 AN 4. 2,3,4 AP 7. 3,4 AP 10. 5 AN
2. 2,3,4 AN 5. 2,3,4 AP 8. 5 AP 11. 5 AN
3. 2,3,4 AN 6. 3 AN 9. 5 AN
Accounting Cycle Review
1. 2,3,4 AP
Cases
1. 2,3 C 3. 1,5 C 5. 3 C 7. 2,3,4 AP
2. 4,5 C 4. 2,3,4,5 S 6. 5 E
Solutions Manual 11-1 Chapter 11

Copyright © 2020 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Legend: The following abbreviations will appear throughout the solutions manual file.
LO Learning objective
BT Bloom's Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
S Simple
M Moderate
C Complex
Time: Estimated time to prepare in minutes
AACSB Association to Advance Collegiate Schools of Business
Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency
cpa-e001 Ethics Professional and Ethical Behaviour
cpa-e002 PS and DM Problem-Solving and Decision-Making
cpa-e003 Comm. Communication
cpa-e004 Self-Mgt. Self-Management
cpa-e005 Team & Lead Teamwork and Leadership
cpa-t001 Reporting Financial Reporting
cpa-t002 Stat. & Gov. Strategy and Governance
cpa-t003 Mgt. Accounting Management Accounting
cpa-t004 Audit Audit and Assurance
cpa-t005 Finance Finance
cpa-t006 Tax Taxation

ANSWERS TO QUESTIONS
1. (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 do 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
(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.

1. (a) (continued)
(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
(7) Government regulations. Corporations in Canada may incorporate

federally or provincially. Government regulations usually provide
guidelines for issuing shares, distributing net income, 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 tax. Corporations must pay federal and provincial income tax as
separate legal entities. However, corporations usually benefit from more
favourable tax rates than do the owners of partnerships or proprietorships.
The shareholders of the corporation do not pay tax on the corporation’s
net income 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 do not have as stringent
reporting and disclosure requirements as public companies.
LO 1 BT: C Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001, cpa-t006 CM: Reporting and Tax

2. (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.
LO 1 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
3. When Richard purchased the original shares as part of

Aritzia Inc,’s initial public offering, he purchased these shares directly from the
corporation. The $1,600 (100 × $16) he spent to buy the shares went directly to
Aritzia 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 Aritzia. Therefore, there was no impact on Aritzia’s assets, liabilities, or
shareholders’ equity a result of the second purchase.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
4. 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 price of Dollarama’s shares dropped
between 2018 and 2019 causing a corresponding drop in market capitalization.

4. (continued)
Dollarama Inc.’s market capitalization decreased in 2019. There are two primary
reasons for a decrease in the market capitalization of a company, which may
happen separately or in combination. First, the number of shares may have
decreased because the company repurchased some of its shares. If this is the
case, assets (Cash) and shareholders’ equity (Common Shares) would decrease as
a result of the repurchase. Liabilities would be unaffected.
The second and more likely reason for the decrease in the market capitalization is
the decrease in the market price of the shares. Decreases in the market price of
the shares can result from a number of reasons but are most likely due to the
market’s perception of the future ability of the corporation to earn income. As a
result, investors bid down 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.
5. (a) Legal capital is the portion of a company’s share capital that cannot be
distributed to shareholders. Legal capital is created largely for the
protection of creditors.
(b) The proceeds received by the company when issuing shares determine the
carrying amount of the shares recorded in the accounts. The proceeds are
considered to be legal capital that must remain invested in the company for
the protection of corporate creditors.
(c) Par value is very common in the United States and very rare in Canada.
Federally incorporated companies and most provincially incorporated
companies have no par value shares.
(d) Legal capital 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 distributed to shareholders until the
company is liquidated.

6. (a) 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 do not usually have the
voting rights that the common shareholders have.
(b) Companies issue preferred shares for a permanent type of equity financing
for the company. They issue preferred shares to appeal to a larger segment
of investors. Also, issuing preferred shares (which are usually non-voting)
does not dilute ownership interest of common shareholders.
7. 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 more reliable value because a private company’s
shares seldom trade and therefore do not have a ready market value.

8. (a) A normal course issuer bid is synonymous with the repurchase 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 basic
earnings per share and return on equity ratios, (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.
LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
9. Because companies cannot realize a gain or incur a loss from share transactions
with their own shareholders, these amounts are not reported on the statement of
income. They are seen instead as an excess or deficiency that belongs to the
remaining shareholders and are recorded directly into the shareholders’ equity
accounts such as Contributed Surplus or Retained Earnings.
10. When reacquiring shares, if the amount paid by the company is less than the
average cost of the shares on hand, the difference is credited to Contributed
Surplus, increasing it. If the opposite is true (i.e., the amount paid to reacquire
the shares is greater than the average cost of the shares on hand), the difference is
applied to reduce (debit) Contributed Surplus, but because that account cannot
have a negative (debit) balance, if the debit arising from the repurchase is greater
than the balance in the Contributed Surplus account, then the remainder of the
debit is applied against the Retained Earnings account, reducing it.

11. David should expect to receive a dividend in the amount of $421.88 (1,500
shares × $1.125 ÷ 4) each quarter. When the Bank of Montreal resets the
dividend rate, it will be adjusted to more closely reflect market interest rates. If
David invested in the preferred shares because he hoped to earn a more attractive
return from dividends compared to the rate of return he could receive from
interest earned on a debt investment, he may be disappointed when the dividend
rate is reset at the lower market interest rate. On the other hand, because the
resetting of the dividend rate occurs only periodically, if David believes that
interest rates will fall, he may be very pleased to own these preferred shares (at
least until the dividend rate is reset at the same level as the lower interest rates).
Furthermore, if David believes that the interest rates will be volatile in the future,
the reset feature will make the investment in the preferred shares more appealing
because at least until the next reset, David will know what his rate of return will
be.
LO 2 BT: AP Difficulty: C Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

CM: Reporting and Finance
12. (a) Redeemable (or callable) preferred shares give the issuing corporation the
right to purchase these shares from shareholders at specified future dates
and prices. Retractable preferred shares are similar to redeemable or
callable preferred shares, except that it is at the shareholder’s option, rather
than the corporation’s option, that the shares are redeemed. This usually
occurs at an arranged price and date.
(b) Preferred shares are cumulative or noncumulative with respect to their

dividend provisions. Cumulative preferred shares entitle the shareholder to
any previous years’ dividends that have not yet been paid, as well as their
current dividend, before common shareholders can receive any dividends.
(c) 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.

13. Rate reset preferred shares allow the company the right to reset the dividend rate
periodically, usually every five years. Fixed rate preferred shares do not provide
for the option to change the dividend rate. Investors would prefer the rate reset
preferred shares on the assumption that interest rates are predicted to rise over
the long term. The reason shareholders would find rate reset preferred shares
more attractive is that they will be able to receive higher dividends in the future
when the dividend rate is adjusted to a higher rate caused by the rise in interest
rates.
14. Cash dividends cannot exceed the balance of the Retained Earnings account. 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. The test essentially requires the net realizable
value of the assets of a company to exceed the total of its liabilities and share
capital. In addition, a formal dividend declaration by the board of directors is
required. Also, any required preferred dividends must be paid before common
dividends are paid.
15. 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.
(a) (b) (c)

Declaration Payment
date Record date date
(1) Assets No effect No effect Decrease
(2) Liabilities Increase No effect Decrease
(3) Share capital No effect No effect No effect
(4) Retained earnings Decrease No effect No effect
(5) Total shareholders' equity Decrease No effect No effect
(6) Number of shares No effect No effect No effect

16.
(a) (b) (c)
Cash Stock Stock
dividend dividend split
(1) Assets Decrease No effect No effect
(2) Liabilities No effect No effect No effect
(3) Share capital No effect Increase No effect
(4) Retained earnings Decrease Decrease No effect
(5) Total shareholders' equity Decrease No effect No effect
(6) Number of shares No effect Increase Increase
17. (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).
LO 3 BT: AP Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
18. 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, the
account dividends declared is increased, which in turn decreases retained
earnings. Cash is also reduced when a cash dividend is paid. In the case of a
stock dividend, the dividends declared account is increased, which in turn
decreases retained earnings. Common Shares are increased in the case of a stock
dividend when the distribution date is reached. 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 will change, typically by a
multiple (for example, 2 for 1).
LO 3 BT: K Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

19. (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 with balances at the reporting date. The remaining accounts would
be reported separately in the shareholders’ equity section of the statement
of financial position, after the total share capital.
20. 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.
21. Comprehensive income is the sum of net income (loss) 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.

22. (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 for companies
following IFRS.
(b) The statement of retained earnings shows the changes that determine 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 that determine 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.

23. (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, statement of income, statement
of retained earnings, and statement of cash flows. For companies using
ASPE, fewer equity account transactions occur that 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 statement of income 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, statement of income
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 statement of
income) when there is other comprehensive income during the year.
24. (a) Unfavourable

(b) Favourable
(c) Unfavourable
(d) Favourable
LO 5 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005

25. 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.
Coca-
Ratio Cola Pepsi
Dividend per share $1.60 $3.82

Dividend yield 3.04% 2.85%
Market price per share $52.63 $134.04
LO 5 BT: AN Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
26. The weighted average number of shares is a more realistic measure of the
number of shares that the corporation had throughout the year and the use of the
assets generated from these shares. The net income generated on the share issue
proceeds during the year, or reduced by the shares repurchased during the year, is
for only part of the year so the number of shares should be weighted by a partial
year factor. Given that companies routinely issue and retire shares, using the
number of shares at a specific point in time (such as year end) may not provide a
true representation of the company’s basic earnings per share.
LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance
27.
Companies must use the income available to common shareholders (net
income – preferred dividends) in the calculation of their basic earnings per share
figures because preferred shareholders receive preferential treatment with respect
to the distribution of the company’s dividends. That is, common shareholders
would not receive any dividends before the preferred shareholders receive theirs.
Similarly, the preferred shareholders’ entitlement must be subtracted from both

the numerator (net income – preferred dividends) and denominator (total
shareholders’ equity – preferred shares) in the calculation of return on common
shareholders’ equity.
Consequently, both ratios use income available to common shareholders in their

numerators.
LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t005

28. (a) Company B pays out the higher proportion of its net income in dividends
and these dividends give shareholders the higher dividend yield, when
compared to Company A. Therefore, Company B is the better choice for an
investor interested in a steady dividend income.
(b) If an investor had purchased the shares for growth, Company A would have
been preferred by the investor as Company A is not using up as much cash
to pay dividends and is reinvesting more of its net income back into the
business to grow operations.
LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t005
29. Two companies can have the

same return on assets but a different return on common shareholders’ equity for a
number of reasons. Since neither company has issued preferred shares, both
ratios will have the same numerator, so any difference in these two ratio values
will arise from differences in the denominator. The difference between a
company’s assets (the denominator in the return on assets ratio) and a company’s
common shareholders’ equity (the denominator in the return on common
shareholders’ equity ratio) consists of either liabilities or preferred shares but in
this case will consist of only liabilities. Therefore, a company that has a
significant amount of liabilities will tend to have a more significant difference
between its return on assets and its return on common shareholders’ equity.
Company A likely has a higher portion of its assets financed with liabilities than
Company B has.
In taking on more liabilities, Company A can become more profitable and have a
higher return on common shareholders’ equity only if the after-tax rate of interest
paid to creditors is lower than the return on assets that were purchased with funds
borrowed from creditors. The difference between the return on these assets and
the after-tax interest paid on the funds borrowed to buy these assets will go (be
attributed to) to the common shareholders, increasing the return on common
shareholders’ equity.
LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t005

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 11.1
a. At Lightspeed POS Inc’s initial public offering, the shares issued were purchased
from the corporation. The $16.00 per share received goes directly to Lightspeed
and increases assets (cash) and shareholders’ equity (share capital).
b. At the November 15, 2019 date, the market price of $31.04 per share is a result
of the buying and selling of shares occurring in the secondary market. The
proceeds from the sale of shares go to the seller and not to Lightspeed.
Therefore, there is no impact on Lightspeed POS Inc’s financial position as a
result of the trading occurring on the stock market subsequent to the IPO.

BRIEF EXERCISE 11.2
a.
May 2 Cash...................................................................... 30,000
Common Shares (2,000 × $15)................... 30,000
June 15 Cash ..........................................................17,000

Common Shares (1,000 × $17)................... 17,000
Nov. 1 Cash ............................................................6,000

Preferred Shares (200 × $30)...................... 6,000
Dec. 15 Cash ............................................................7,000

Preferred Shares (200 × $35)...................... 7,000
b.
Number Number
of shares of shares
authorized issued
(1) Preferred shares 200,000 400 (200+200)
(2) Common shares Unlimited 3,000 (2,000 + 1,000)

BRIEF EXERCISE 11.3
a. Average cost of common shares on:

Balance
Common Number of Average
Date Shares Shares Cost
June 8 $300,000 ÷ 30,000 = $10.00
Aug. 19 $90,000 7,500

Bal. $390,000 ÷ 37,500 = $10.40
Nov. 2 $(31,200) (1) (3,000)

Bal. $358,800 ÷ 34,500 = $10.40
Dec. 7 $(41,600) (2) (4,000)

Bal. $317,200 ÷ 30,500 = $10.40
(1) 3,000 shares x average cost $10.40 = $31,200

(2) 4,000 shares x average cost $10.40 = $41,600
b.
June 8 Cash ........................................................................... 300,000
Common Shares.................................................
300,000
Aug. 19 Cash ........................................................................... 90,000
Common Shares.................................................
90,000
Nov. 2 Common Shares (1) above............................................
Contributed Surplus ($31,200 - $ 28,800).........
2,400
Cash...................................................................
28,800
Dec. 7 Common Shares (2) above............................................ 41,600

Contributed Surplus (balance)....................................... 2,400
Retained Earnings......................................................... 8,000
Cash...................................................................
52,000
LO 2 BT: AP Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

BRIEF EXERCISE 11.4
a.
Mar. 8 Cash........................................................................... 150,000
Preferred Shares (5,000 × $30)........................ 150,000
April 20.....................................................................Land 110,000

Preferred Shares (3,000 shares)....................... 110,000
b. If the fair value of the land could not be determined, the fair value of the
consideration given up ($35 per share multiplied by 3,000 shares or $105,000)
would be used. The journal entry would be as follows:
April 20.....................................................................Land 105,000

Preferred Shares (3,000 × $35)........................ 105,000
c. If Daschen Inc. was a private company using ASPE, the value of the shares
would not be as easily obtained since they do not trade on a stock exchange.
Consequently, the amount recorded on the exchange of preferred shares for land
will more likely be determined by the value of the consideration received, which
is the fair value of the land. In this case, the entry would not change since the fair
value of the land is the more clearly determinable value in the exchange.
LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

BRIEF EXERCISE 11.5
a. Dividends in arrears can only arise from cumulative preferred shares. If a

entitlement does not carry forward into the future.
b. Dividends in arrears at the end of the current year would be = 20,000 × $2 =

$40,000
c. Dividends in arrears are not accrued as liabilities. The amount of the dividends in
arrears is disclosed in the notes to the financial statements.
.
LO 2 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 11.6
May 15 Dividends Declared (110,000 × $1.50 ÷ 4).............. 41,250

Dividends Payable........................................... 41,250
June 10 No entry required
30 Dividends Payable.................................................... 41,250

Cash................................................................. 41,250

BRIEF EXERCISE 11.7
Dec. 1 Dividends Declared (100,000 × 5% × $15)...... 75,000

Stock Dividends Distributable.................... 75,000
20 No entry required
Jan. 10 Stock Dividends Distributable............................. 75,000

Common Shares.......................................... 75,000
(Stock Dividends = Number of shares issued × Market price per share when declared)


BRIEF EXERCISE 11.8
a. Before the stock split: 100 shares

After the stock split: 100 × 3 = 300 shares
b. Likely stock price after the stock split: $153.49 ÷ 3 = $51.16
c. There would be no journal entry recorded for the stock split. Details of the stock
split would be discussed in the notes to the financial statements.
BRIEF EXERCISE 11.9

Shareholders’ Number of
Transaction Assets Liabilities Equity Shares
(a) NE + - NE
(b) - - NE NE
(c) NE NE NE NE
(d) NE NE NE +
(e) NE NE NE +
LO 3 BT: AN Difficulty: C Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 11.10
[1] $2,050,000 – $1,500,000 – $110,000 = $440,000

[2] $440,000 same as [1]
[3] $3,505,000 – $3,000,000 + $135,000 – $750,000 = $(110,000) or same as the
amount of increase in Common Shares
[4] $0
[5] $750,000 (same amount as increase in Retained Earnings)
[6] $125,000 – $100,000 = $25,000
[7] $500,000 (no change from beginning balance)
[8] $5,100,000 + $440,000 [2] – $135,000 + $750,000 [5] + $25,000 = $6,180,000
or taken from ending balances $2,050,000 + $500,000 [7] + $3,505,000 +
$125,000 = $6,180,000
LUXAT CORPORATION
Statement of Financial Position (Partial)
December 31, 2021
Shareholders' equity
Share capital
Common shares, unlimited number of shares
authorized, 550,000 issued........................................................ $2,050,000
Contributed surplus.......................................................................... 500,000
Total share capital..................................................................... 2,550,000
Retained earnings................................................................................... 3,505,000
Accumulated other comprehensive income........................................... 125,000
Total shareholders' equity.............................................................................. $6,180,000

a. STIRLING FARMS LIMITED

Statement of Retained Earnings
Year Ended December 31, 2021
Retained earnings, January 1................................................................ $510,000

Add: Net income................................................................................. 323,000
833,000
Less: Dividends declared..................................................................... 115,000
Retained earnings, December 31.......................................................... $718,000
(Ending retained earnings = Beginning retained earnings + Net income – Dividends declared)
b. If Stirling were a publicly traded corporation, a statement of changes in equity

would be required instead of a statement of retained earnings. It would report the
changes in each of the shareholders’ equity accounts, not just retained earnings.

a. Payout ratio  last $60,000

= 10%
year $600,000
(Payout ratio = Cash dividends declared ÷ Net income)
b. Dividends paid this year = $2,000,000 × 10% = $200,000 (assuming the same
payout ratio).
c. (Not required) Dividends paid next year = $700,000 × 10% = $70,000 (assuming
the same payout ratio).
Maintaining a constant dividend payout ratio may or may not be a sound

business practice. Many factors, including the corporation’s cash flow and the
type of investor involved would have to be taken into consideration. Because
dividend amounts are relatively fixed (or with small increases), the payout ratio
tends to fluctuate with profits. Maintaining a constant dividend payout ratio
when net income fluctuates will result in variable dividend amounts being paid to
shareholders, which may not be wise from a cash flow or growth perspective. It
is also difficult to determine in advance exactly what the net income for the year
will be. Trying to keep exactly the same payout ratio is therefore not always
possible.
LO 5 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

a. Canadian National Railway Canadian Pacific Railway
Dividend yield $2.15 $3.32

$123.94 $319.91
= 1.7% = 1.0%
(Dividend yield = Dividends declared per share ÷ Market price per share)
b. Investors would prefer Canadian National Railway because of its higher dividend
yield if they wished to purchase shares for the purpose of earning dividend
income.
Weighted average number of shares:
January 1 34,000 × 12/12 = 34,000

May 1 (3,000) x 8/12 = (2,000)
August 31 9,000 × 4/12 = 3,000
November 30 6,000 × 1/12 = 500
46,000 35,500
a. The number of common shares issued at December 31, 2021 is 46,000.

b. The weighted average number of common shares for 2021 is 35,500.

Basic earnings $370,000 – $20,000*

= $9.86
per share 35,500
*10,000 × $2 = $20,000
(Basic earnings per share = (Net income – preferred dividends) ÷ Weighted average number of
common shares)
a.
Basic earnings $800,000 – $100,000*
= $2.33
per share 300,000
*50,000 × $2 = $100,000
(Basic earnings per share = (Net income – preferred dividends) ÷ Weighted average
number of common shares)
b.
Basic earnings $800,000
per share = $2.67
300,000
c. Same amount as in a. $2.33


a. Return on common shareholders’ equity:
$14,000
 12.4%
($104,000  $122,000)  2
(Return on common shareholders’ equity = (Net income – preferred dividends) ÷ Average

common shareholders’ equity)
b. Had Salliq issued preferred shares and paid dividends to the preferred
shareholders, the amount of income available to common shareholders would be
reduced by the amount of the preferred dividend, reducing the return on common
shareholders’ equity ratio.

SOLUTIONS TO EXERCISES
EXERCISE 11.1
a. High $59.03
Low $42.29
Increase $16.74 x 100 shares = $1,674.00 income
b. $0.80 per share. 1,000 shares x $0.80 = $800.00
c. 1,000 × $55.90 = $55,900
d. $55.90 - $0.44 = $55.46
e. 410,544 shares

EXERCISE 11.2
a. June 12 Cash (50,000 × $6)............................................. 300,000

Common Shares........................................
300,000
July 11 Cash (1,000 × $25)............................................. 25,000

Preferred Shares........................................
25,000
Oct. 1 Land ................................................................... 75,000

Common Shares (10,000 shares)..............
75,000
Nov. 15 Cash (25,000 × $28)........................................... 700,000

Preferred Shares........................................ 700,000
b. Preferred: 2,500 + 1,000 + 25,000 = 28,500 shares

$55,000 + $25,000 + $700,000 = $780,000
Common: 140,000 + 50,000 + 10,000 = 200,000 shares

$700,000 + $300,000 + $75,000 = $1,075,000

EXERCISE 11.3
a. Jan. 6 Cash ....................................................................... 300,000
Common Shares (200,000 × $1.50).............. 300,000
12 Cash ....................................................................... 87,500

Common Shares (50,000 × $1.75)................ 87,500
17 Cash ....................................................................... 250,000

Preferred Shares (10,000 × $25)................... 250,000
18 Cash ....................................................................... 1,000,000

Common Shares (500,000 × $2.00).............. 1,000,000
24 Common Shares (200,000 × $1.85) ...................... 370,000*

Retained Earnings ($380,000 - $370,000)............. 10,000
Cash (200,000 × $1.90)................................ 380,000
31 Professional Fees Expense..................................... 15,000

Common Shares (10,000 shares).................. 15,000
*Refer to part (b) $1,387,500 ÷ 750,000 = $1.85; $1.85 x 200,000 = $370,000

EXERCISE 11.3 (CONTINUED)

b. For preferred shares, there was only the one transaction on January 17 and so the
number of shares is 10,000 and the average cost is $25.00 at January 31.
For common shares:

Number of
shares Issue Share Average
Date issued price Capital cost
January 6 200,000 $1.50 $300,000
January 12 50,000 $1.75 87,500
January 18 500,000 $2.00 1,000,000

Sub. Total 750,000 1,387,500 $1.85
January 24 (200,000) $1.85 (370,000)
January 31 10,000 15,000

Balance 560,000 $1,032,500 $1.844
c. If Moosonee were a publicly traded company, the per-share value of the shares
issued in exchange for the legal services would be easily obtained as they are
traded every business day. 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 (shares in this case) can be used. In this case, the value of
the services was given so the journal entry would not be any different under
IFRS.
LO 2 BT: AN Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 11.4
a. Total annual preferred dividend should be 900,000 × $1.10 per share or

$990,000.
b. Dividends in arrears can only arise from cumulative preferred shares. If a

entitlement does not carry forward into the future. If the shares are cumulative,
dividends in arrears at the end of Year 1 are $340,000 ($990,000 annual dividend
less dividends declared of $650,000).
By the end of Year 2, the dividends paid of $550,000 are first allocated to the
$340,000 dividends in arrears from Year 1 and the remaining $210,000 is for
Year 2. Consequently, by the end of Year 2, dividends in arrears at that time are
$780,000. ($990,000 - $210,000)
c. Dividends in arrears are not accrued as a liability. Rather, the amount of any
dividends in arrears is disclosed in the notes to the financial statements.
d. March is required to pay annual dividends of $990,000 to its preferred

shareholders first before paying dividends to the common shareholders.
preferred shares were cumulative, dividend arrears of $780,000 and the annual
dividend of $990,000 for a total of $1,770,000 would have to be paid to the
preferred shareholders before any dividend could be paid to the common
shareholders.
LO 2 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 11.5
a. Apr. 2 Cash ..........................................................100,000

Common Shares (5,000 × $20)..................... 100,000
June 15 Dividends Declared (85,000 × $0.25).................... 21,250
Dividends Payable ........................................ 21,250
July 10 Dividends Payable.................................................. 21,250
Cash............................................................... 21,250
Aug. 21 Dividends Declared................................................ 93,500
Stock Dividends Distributable...................... 93,500
(80,000 + 5,000 = 85,000 × 5% = 4,250 × $22)
(Stock Dividends = Number of shares issued × Market price per share on declaration date)
Sept. 20 Stock Dividends Distributable............................... 93,500

Common Shares........................................... 93,500
Nov. 1 Cash ............................................................75,000
Common Shares (3,000 × $25)..................... 75,000
Dec. 20 Dividends Declared................................................ 27,675
Dividends Payable......................................... 27,675
((80,000 + 5,000 + 4,250 + 3,000) x $0.30 = 92,250 × $0.30)
b. Number of common shares at the end of the year:

80,000 + 5,000 + 4,250 + 3,000 = 92,250
LO 2,3 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 11.6
(1) (2) (3)
Before After Cash After Stock After Stock
Action Dividend Dividend Split
Total assets $1,250,000 $1,200,000 $1,250,000 $1,250,000
Total liabilities $ 250,000 $ 250,000 $ 250,000 $ 250,000
Common shares 600,000 600,000 670,000* 600,000

Retained earnings 400,000 350,000 330,000 400,000
Total shareholders' equity 1,000,000 950,000 1,000,000 1,000,000
Total liabilities and
shareholders’ equity $1,250,000 $1,200,000 $1,250,000 $1,250,000
Number of common shares 100,000 100,000 105,000 200,000
* $600,000 + (100,000 shares × 5% × $14) = $670,000

(Share capital is increased by the total amount of the stock dividend)

EXERCISE 11.7
Shareholders’ Equity
Accumulated
Other Total
Share Retained Comprehensive Shareholders’
Assets Liabilities Capital Earnings Income Equity
1. + NE + NE NE +
2. NE + NE - NE -
3. - - NE NE NE NE
4. + NE + NE NE +
5. + NE + NE NE +
6. NE NE NE NE NE NE
7. NE NE + - NE +/-
8. NE NE +/- NE NE +/-
9. NE NE NE NE NE NE
10. + NE NE NE + +
LO 2,3,4 BT: AN Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 11.8
Statement of Changes in Equity

Other
Share Retained Financial
Account Capital Earnings AOCI Statement Classification
1. Cash NE NE NE Statement of Current assets
financial
position
2. Common shares Common NE NE NE NE
shares
3. Other NE NE OCI: NE NE
comprehensive Revaluation
income– gain
Revaluation gain
from revaluing
property, plant,
and equipment
to fair value
4. Long-term NE NE NE Statement of Non-current
investments financial assets
position
5. Preferred shares Preferred NE NE NE NE
shares
6. Retained NE Retained NE NE NE
earnings earnings
7. Gain on disposal NE NE NE Statement of Operating
Income expenses
(reduction of)
8. Dividends NE Retained NE NE NE
declared earnings
9. Stock split NE NE NE NE NE
10. Stock dividends Common NE NE NE NE
distributable shares*

Legend:
AOCI : Accumulated Other Comprehensive Income
OCI: Other Comprehensive Income
* Note to instructors: Preferred shares is also an acceptable answer here although

common shares are more often issued as stock dividends.

EXERCISE 11.9
OZABAL INC.
December 31, 2021
Shareholders’ equity
Share capital
$1.40 Preferred shares, noncumulative, 100,000
authorized, 10,000 shares issued....................................... $250,000
authorized, 300,000 shares issued..................................... 750,000
Stock dividends distributable............................................ 90,000 $1,090,000
Contributed surplus ................................................................ 61,000
Total share capital .................................................................. 1,151,000
Retained earnings (Note R)............................................................ 1,340,000
Accumulated other comprehensive income................................... 48,500
Total shareholders’ equity....................................................................... $2,539,500
Note R: Retained earnings restricted for plant expansion, $450,000.


EXERCISE 11.10
a.
THE TAKAYA CANOE LIMITED
Accumu-
lated Other
Compre-
Common Contributed Retained hensive
Shares surplus Earnings Income Total
Balance Jan. 1 $800,000 $540,000 $1,500,000 $90,000 $2,930,000
Issued common shares 180,000 180,000
Common shares
reacquired (200,000) (40,000) (240,000)
Net income 400,000 400,000
Dividends declared (70,000) (70,000)
Other comprehensive (2
income 5,000) (25,000)
Balance Dec. 31 $780,000 $500,000 $1,830,000 $65,000 $3,175,000
b.
THE TAKAYA CANOE LIMITED
December 31, 2021
Share capital
Common shares......................................................................... $780,000
Contributed surplus .................................................... 500,000
Total share capital .................................................................. $1,280,000
Retained earnings........................................................................... 1,830,000
Total shareholders’ equity....................................................................... $3,175,000

EXERCISE 11.11
a.
Nike (in millions of Adidas (in millions of
US $) US $)
(1) Payout ratio $1,360 ÷ $4,029 = 33.8% $666 ÷ $1,706 = 39.0%
(2) Dividend yield $0.98 ÷ $93.04 = 1.1% $1.882 ÷ $147.96 = 1.3%
(Payout ratio = Cash dividends declared ÷ Net income)

(Dividend yield = Dividends declared per share ÷ Market price per share)
b. Investors would likely prefer Adidas for dividend income purposes because of its
higher dividend yield, but if the difference between these two yields is not
important to an investor, they may prefer Nike because its lower payout ratio
indicates that it retains a larger portion of its income to foster future growth.

EXERCISE 11.12
a. Income available to common shareholders

= Net income – Preferred share dividends
= $963,750 – (60,000 × $1 × ¼)
= $948,750
b. Weighted average number of common shares

Dec. 1 180,000 × 12/12 = 180,000
Feb. 28 45,000 × 9/12 = 33,750
Nov. 1 18,000 × 1/12 = 1,500
215,250
c. Basic earnings per share

= Income available to common shareholders ÷ Weighted average number of
common shares
= $948,750 ÷ 215,250
= $4.41

EXERCISE 11.13
a.
($ in millions) 2018 2017

$2,356 + $89 $2,121 + $52 =
= 46.4% 46.2%
(1) Payout ratio $5,267 $4,699
$5,32 $5.08
(2) Dividend yield = 4.7% = 4.5%
$113.68 $113.56
Basic earnings $5,267 - $89 $4,699 - $52

(3) = $11.69 = $11.25
per share 443 413
Return on
common
(4) $5,267 - $89 = 16.6% $4,699 - $52 = 17.8%
shareholders'
equity ($32,866 + $29,440) ÷ 2 ($29,440 + $22,673) ÷ 2
(1) (Payout ratio = Cash dividends declared ÷ Net income)

(2) (Dividend yield = Dividends declared per share ÷ Market price per share)
(3) (Basic earnings per share = (Net income – preferred dividends) ÷ Weighted average number
of common shares)
(4) (Return on common shareholders’ equity = (Net income – preferred dividends ÷ Average

b. The dividends paid by CIBC in 2018 increased in absolute amount. However,

when dividends are expressed as a percentage of the net income, the result—the
payout ratio—increased slightly from 46.2% to 46.4%.
The dividend yield increased from 4.5% in 2017 to 4.7% in 2018. The yield
increased because dividends grew by a larger percentage than did the market
price of a share. [($5.32 - $5.08) / $5.08 = 4.7% increase in dividends; ($113.68 -
$113.56) / $113.56 = 0.1% increase in share price]
CIBC’s net income improved in 2018 both in total amount and on a per-share
basis. On the other hand, its return on common shareholders’ equity decreased
from 17.8% to 16.6%. In spite of the improved profitability, the bank’s
shareholders were not willing to pay a much higher market price for the common
shares in 2018 ($113.68) compared to 2017 ($113.56).

EXERCISE 11.14
As an investor interested in an income-oriented investment, the dividend ratios will carry

a great deal of weight when choosing between Stanley and Snap-On. The dividend
payout of Stanley is much stronger than that of Snap-On. On the other hand, Snap-On
has a slight edge over Stanley and is a better choice based on the dividend yield ratio.
The choice between the two companies should not be based on the basic earnings per
share, which are not comparable between companies. The earnings per share can only be
interpreted in conjunction with the market price of the share (for example, the price-
earnings ratio) or the dividends paid per share (for example, the dividend payout ratio).
The return on common shareholders’ equity ratio, while a profitability ratio of interest,
would not be a primary ratio relied upon to assess whether to purchase a company’s
shares for income (dividend) purposes.
For investors seeking future price appreciation in the shares of these companies, Snap-
On has a better chance for future price appreciation. It is retaining a higher percentage of
its income, and its return on common shareholders’ equity is higher.


EXERCISE 11.15
a.
No-Debt Option Debt Option
Income from operations $80,000 $80,000
Interest expense (4%) 0 10,000 [7]
Income before income tax $80,000 [1] $70,000 [8]
Income tax expense (30%) 24,000 [2] 21,000 [9]
Net income $56,000 [3] $49,000 [10]
Average total assets $500,000 $500,000
Average common shareholders’ equity $500,000 $250,000
Number of common shares 50,000 25,000
Basic earnings per share $1.12 [4] $1.96 [11]
Dividends declared $56,000 [3] $49,000 [10]
Payout ratio 100% [5] 100% [12]
Return on common shareholders’ equity 11.2% [6] 19.6% [13]
[1] $80,000 - $0 = $80,000 [7] $250,000 x 4% = $10,000

[2] $80,000 x 30% = $24,000 [8] $80,000 - $10,000 = $70,000
[3] $80,000 - $24,000 = $56,000 [9] $70,000 x 30% = $21,000
[4] $56,000 ÷ 50,000 = $1.12 [10] $70,000 - $21,000 = $49,000
[5] Given as 100% of Net Income [3] above [11] $49,000 ÷ 25,000 = $1.96
[6] $56,000 ÷ $500,000 = 11.2% [12] Given as 100% of Net Income [10] above
[13] $49,000 ÷ $250,000 = 19.6%

b. One main factor affecting the ratio results is the interest expense for the debt
option and the resulting tax savings from the deductible interest expense. The
other main factor affecting the ratios is the number of shares issued to obtain the
financing needed. In this scenario, a higher rate of return was earned on the
assets compared to the after-tax rate of borrowing the $250,000. Other scenarios,
with different proportions of debt and equity financing, different interest rates,
and different tax rates will provide different results. The only ratio that remains
unchanged is the payout ratio which is based on the assumptions given.

SOLUTIONS TO PROBLEMS
PROBLEM 11.1A
Shareholders’ Equity
Accumulated
Share Capital Other
Preferred Common Contributed Retained Comprehensive
Assets Liabilities Shares Shares Surplus Earnings Income
1. +$130,000 NE NE +$130,000 NE NE NE
2. -240,0001 NE NE -162,0002 -$50,000 $28,0003 NE
3. +72,5004 NE NE +72,500 NE NE NE
4. +100,000 NE +$100,000 NE NE NE NE
5. -121,5005 NE NE NE NE -121,500 NE
1
20,000 × $12 = $240,000
2
($4,000,000 + $130,000) ÷ (500,000 + 10,000) = $8.10; $8.10 x 20,000 =
$162,000
3
$240,000 - $162,000 - $50,000 = $28,000
4
5,000 × $14.50 = $72,500
5
(50,000 + 4,000) × $2.25 = $121,500
LO 2,3,4 BT: AN Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.2A
a. Transaction entries:
Jan. 10 Cash (1,000,000 × $2)................................................... 2,000,000

Common Shares.................................................. 2,000,000
Mar. 1 Cash (20,000 × $50)...................................................... 1,000,000

Preferred Shares.................................................. 1,000,000
May 1 Cash (250,000 × $3)...................................................... 750,000

Common Shares.................................................. 750,000
June 1 Common Shares (10,000 x $2.20 below)..................... 22,000

Cash (10,000 x $2.00)......................................... 20,000
Contributed Surplus ($22,000 - $20,000)............ 2,000
Balance
Jan. 10 $2,000,000 1,000,000
May 1 750,000 250,000
$2,750,000 ÷ 1,250,000 = $2.20
July 24 Cash ............................................................................. 120,000

Equipment (at fair value).............................................. 16,000
Common Shares (33,500 shares)......................... 136,000
Sept. 4 Cash (10,000 × $5)........................................................ 50,000

Common Shares ................................................. 50,000
Nov. 1 Cash (4,000 × $50)........................................................ 200,000

Preferred Shares.................................................. 200,000

PROBLEM 11.2A (CONTINUED)

a. (continued)
Nov. 20 Common Shares (15,000 x $2.27 below)..................... 34,050

Contributed Surplus (balance from June 1).................. 2,000
Retained Earnings *...................................................... 23,950
Cash (15,000 x $4.00)......................................... 60,000
*($60,000 - $34,050 - $2,000) = $23,950
Balance
Jan. 10 $2,000,000 1,000,000
May 1 750,000 250,000
June 1 (22,000) (10,000)
July 24 136,000 33,500
Sept. 4 50,000 10,000
$2,914,000 ÷ 1,283,500 = $2.27
Dec. 14 Dividends Declared....................................................... 52,000

Dividends Payable ..............................................
52,000
Closing entries:
Dec. 31 Retained Earnings......................................................... 52,000
Dividends Declared.............................................. 52,000
31 Income Summary.......................................................... 1,300,000
Retained Earnings................................................ 1,300,000

b.
Preferred Shares Dividends Declared
Mar. 1 1,000,000 Dec. 14 52,000 Dec. 31 CE 52,000
Nov. 1 200,000 Dec. 31 Bal. 0
Dec. 31 Bal. 1,200,000
Retained Earnings
Common Shares Nov. 20 23,950
June 1 22,000 Jan. 10 2,000,000 Dec. 31 CE 52,000 Dec. 31 CE 1,300,000
Nov. 20 34,050 May 1 750,000 Dec. 31 Bal. 1,224,050
July 24 136,000 CE: Closing entry
Sept. 4 50,000
Dec. 31 Bal. 2,879,950
Contributed Surplus
Nov. 20 2,000 June 1 2,000
Dec. 31 Bal. 0

c. Number of preferred shares:

20,000 + 4,000 = 24,000
Number of common shares:

1,000,000 + 250,000 – 10,000 + 33,500 + 10,000 – 15,000 = 1,268,500
REMMERS CORPORATION
December 31, 2021
Share capital
$3 Preferred shares, noncumulative, unlimited
number authorized, 24,000 shares issued.............................. $ 1,200,000
Common shares, unlimited number authorized,
1,268,500 shares issued.......................................................... 2,879,950
Total share capital .....................................................4,079,950
Retained earnings .................................................... 1,224,050
Total shareholders’ equity................................................................. $5,304,000

PROBLEM 11.3A
Feb. 6 Cash........................................................................ 600,000
Preferred Shares (10,000 shares)................... 600,000
April 6 Cash ..........................................................570,000

Common Shares (20,000 shares)................... 570,000
April 27 Common Shares (3,000 x $18.00 below)............... 54,000

Cash (3,000 x $17.00)...................................
51,000
Contributed Surplus ($54,000 - $51,000).......
3,000
Balance
Jan. 1 Bal. $1,050,000 70,000
April 6 570,000 20,000
$1,620,000 ÷ 90,000 = $18.00
May 29 Dividends Declared................................................ 36,000

Dividends Payable. .
[(8,000 + 10,000) × $4 × 6/12]...................... 36,000
June 12 No entry required

July 1 Dividends Payable.................................................. 36,000
Cash............................................................... 36,000
Aug. 22 Buildings................................................................ 165,000

Common Shares (9,000 shares)..................... 165,000
Closing entries:
Dec. 31 Income Summary................................................... 582,000
Retained Earnings......................................... 582,000
31 Retained Earnings.................................................. 36,000
Dividends Declared....................................... 36,000

b.
Preferred Shares Common Shares
Jan. 1 Bal. 440,000 Apr. 27 54,000 Jan.1 Bal. 1,050,000
Feb. 6 600,000 April 6 570,000
Dec. 31 Bal. 1,040,000 Aug. 22 165,000
Dec. 31 Bal. 1,731,000
Dividends Declared Retained Earnings

May 29 36,000 Dec. 31 CE 36,000 Jan. 1 Bal. 800,000
Dec. 31 Bal. 0 Dec. 31CE 36,000 Dec. 31 CE 582,000
Dec. 31 Bal. 1,346,000
Accumulated Other Comprehensive Income

Jan. 1 Bal. 10,000
Dec. 31 Bal. 10,000
CE: Closing entry


c.
LARGENT CORPORATION
Accumulated
Share Capital Other
Preferred Common Contributed Retained Comprehensive
Shares Shares surplus Earnings Income Total
Balance Jan. 1 $ 440,000 $1,050,000 $25,000 $ 800,000 $10,000 $2,325,000

Issued preferred shares 600,000 600,000
Issued common shares 735,000 735,000
Repurchased common shares (54,000) 3,000 (51,000)
Net income 582,000 582,000
Balance Dec. 31 $1,040,000 $1,731,000 $28,000 $1,346,000 $10,000 $4,155,000

d. Number of preferred shares:

8,000 + 10,000 = 18,000
Number of common shares:

70,000 + 20,000 + 9,000 – 3,000 = 96,000
LARGENT CORPORATION
December 31, 2021
Share capital
$4 Preferred shares, noncumulative,
200,000 shares authorized, 18,000 issued.......................................... $1,040,000
authorized, 96,000 issued ..................................................................... 1,731,000
Contributed surplus............................................................................... 28,000
Total share capital .....................................................................2,799,000
Retained earnings .....................................................................1,346,000
Accumulated other comprehensive income................................................ 10,000
Total shareholders’ equity................................................................................ $4,155,000
Note: Dividends of $36,000 (18,000 × $4 × 6/12) are in arrears on the cumulative

preferred shares.

PROBLEM 11.4A
Jan. 2 Cash................................................................... 5,000,000
Preferred Shares (200,000 × $25)............ 5,000,000
Feb. 8 Land ................................................................. 210,000

Common Shares (100,000 shares)........... 210,000
Mar. 5 Dividends Declared (200,000 × $1.40 × 3/12)70,000
Dividends Payable...................................
70,000
April 2 Dividends Payable............................................ 70,000
Cash ........................................................ 70,000
18 Cash (400,000 × $3).......................................... 1,200,000
Common Shares....................................... 1,200,000
June 5 Dividends Declared (200,000 × $1.40 × 3/12)70,000
Dividends Payable................................... 70,000
July 1 Dividends Payable............................................ 70,000
Cash ........................................................ 70,000
Sept. 5 Dividends Declared (200,000 × $1.40 × 3/12)70,000
Oct. 1 Dividends Payable............................................ 70,000

Cash ........................................................ 70,000
Oct. 4 Cash .................................................1,000,000

Preferred Shares (40,000 × $25).............. 1,000,000

a. (continued)
Dec. 5 Dividends Declared (240,000* × $1.40 × 3/12) 84,000

*200,000 + 40,000 = 240,000 shares
Dec. 14 Dividends Declared (2,000,000* × $0.50)........ 1,000,000
Dividends Payable................................... 1,000,000
*1,500,000 + 100,000 + 400,000 = 2,000,000 shares
Closing entries:
Dec. 31 Income Summary.............................................. 2,300,000
Retained Earnings.................................... 2,300,000
31 Retained Earnings............................................. 1,294,000
Dividends Declared.................................. 1,294,000
b.
Preferred Shares Common Shares
Jan. 1 Bal. 0 Jan. 1 Bal. 3,000,000
Jan. 2 5,000,000 Feb. 8 210,000
Oct. 4 1,000,000 April 18 1,200,000
Dec. 31 Bal. 6,000,000 Dec. 31 Bal. 4,410,000
Retained Earnings Dividends Declared

Jan. 1 Bal. 3,800,000 Jan. 1 Bal. 0 Dec. 31 CE 1,294,000
Dec. 31CE 1,294,000 Dec. 31 CE 2,300,000 Mar. 5 70,000
Dec. 31 Bal. 4,806,000 June 5 70,000
Sept. 5 70,000
Dec. 5 84,000
Dec. 14 1,000,000
Dec. 31 Bal. 0
CE: Closing entry

c.
CONWAY LTD,
Statement of Retained Earnings
Retained earnings, January 1............................................................... $3,800,000

Add: Net income............................................................................... 2,300,000
6,100,000
Less: Dividends declared..................................................................... 1,294,000
Retained earnings, December 31 ..................................................... $4,806,000
(Ending retained earnings = Beginning retained earnings + Net income – Dividends declared)
d.
CONWAY LTD.
December 31, 2021
Share capital
$1.40 Preferred shares, noncumulative, unlimited
number authorized, 240,000 shares issued.................................... $6,000,000
Common shares, unlimited number authorized,
2,000,000 shares issued................................................................ 4,410,000
Total share capital..................................................................................... 10,410,000
Retained earnings...................................................................................... 4,806,000
Total shareholders’ equity..................................................................................
$15,216,000
e. If Conway Ltd. were a public company, it would be reporting under IFRS. The
transaction concerning the purchase of the land on February 8 would still be
recorded at the fair value of the land of $210,000 even if the shares had a reliable
value. As well, under IFRS requirements, Conway would report a statement of
changes in equity rather than a statement of retained earnings.

The statement of changes in equity follows (optional):
CONWAY LTD.
Share Capital
Preferred Retained
Shares Common Shares Earnings Total
Balance Jan, 1 $3,000,000 $3,800,000 $6,800,000

Issued preferred shares $6,000,000 6,000,000
Issued common shares 1,410,000 1,410,000
Dividends declared (1,294,000) (1,294,000)
Net income 2,300,000 2,300,000
Balance Dec. 31 $6,000,000 $4,410,000 $4,806,000 $15,216,000
LO 2,3,4 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.5A
a.
Preferred Shares
Jan. 1 Balance 500,000
Jan. 1 Issue 500,000
Dec. 31 Balance 1,000,000
Common Shares
Jan. 1 Balance 2,700,000
Oct. 1 Issue 1,000,000
Dividends Declared
Jan. 1 Balance 0
During year Cash dividend* 100,000
Dec. 31 Stock dividend declared** 407,000 Dec. 31 CE 507,000
Dec. 31 Balance 0
Stock Dividends Distributable

Dec. 31 Declaration** 407,000
Retained Earnings
Jan. 1 Balance 2,980,000
Dec. 31 CE Dividends declared** 507,000 Dec. 31 CE Net income 872,000
* 20,000 × $5 = $100,000
** 370,000 × 5% × $22 = $407,000

b. ROBICHAUD CORPORATION
December 31, 2021
Share capital
$5 Preferred shares, noncumulative, unlimited
number of shares authorized, 20,000 issued.......................
$1,000,000
authorized, 370,000 issued.............................................. $3,700,000
Stock dividends distributable, 18,500 common shares 407,000 4,107,000
Total share capital.....................................................................
5,107,000
Retained earnings (Note A)......................................................
3,345,000
Total shareholders’ equity ............................................................
$8,452,000
(Share capital is increased by the total amount of the stock dividend)
Note A: On December 31, 2021, the Board of Directors authorized a $500,000

restriction of retained earnings for a plant expansion.
LO 2,3,4 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.6A
a.
Cash Dividend Stock Dividend Stock Split

(1) Assets $16,000,000 – $600,000a = No effect No effect
$15,400,000 $16,000,000 $16,000,000
(2) Liabilities No effect No effect No effect $6,000,000
$6,000,000 $6,000,000
(3) Common No effect $2,000,000 No effect
shares $2,000,000 + $600,000b $2,000,000
= $2,600,000
(4) Retained $8,000,000 – $600,000 $8,000,000 No effect
earnings = $7,400,000 – $600,000 $8,000,000
= $7,400,000
(5) Total $10,000,000 – $600,000 No effect No effect
shareholders’ = $9,400,000 $10,000,000 $10,000,000
equity + $600,000
– $600,000
= $10,000,000
(6) Number of No effect 20,000 increase 200,000c increase
shares 400,000 (20,000 + 400,000 (400,000 + 200,000
= 420,000) = 600,000)
a
400,000 × $1.50 = $600,000
b
400,000 × 5% x $30 = 20,000 × $30 = $600,000
c
400,000 ÷ 2 x 3 = 200,000 × 3 = 600,000 after the 3-for-2 stock split

b.
Cash Dividend Stock Dividend Stock Split

Advantages:
 Share price will likely  Retains cash  Retains cash
fall slightly (in  Share price will  Share price reduces
proportion to likely fall slightly significantly making shares
dividend). May make (in proportion to more affordable to a broader
shares slightly more dividend). May number of investors
affordable and attract make shares  Share price generally starts
new investors slightly more increasing after split
 Makes shares affordable and
attractive for attract new
investors wanting investors
dividend income  Converts retained
earnings to share
capital
Disadvantages:
 Reduces cash  Reduces basic earnings  Reduces basic earnings per
per share share
 More shares on which  More shares on which to pay
to pay future cash future cash dividends
dividends

PROBLEM 11.7A
Jan. 15 Dividends Declared (55,000 × $1.25).................... 68,750
Dividends Payable........................................
68,750
Feb. 15 Dividends Payable.................................................. 68,750
Cash .............................................................
68,750
Apr. 16 Dividends Declared (5,500* × $12)....................... 66,000
Stock Dividends Distributable......................
66,000
*(55,000 × 10% = 5,500)
(Stock Dividends = Number of shares issued × Market price per share at date of declaration)
May 15 Stock Dividends Distributable............................... 66,000

Common Shares............................................
66,000
Oct. 1 No journal entry (memorandum entry only: 60,500 (55,000 + 5,500)
common shares × 2 = 121,000 common shares)
Closing entries:
Dec. 31 Income Summary................................................... 628,000
Retained Earnings.........................................
628,000
31 Retained Earnings.................................................. 134,750
Dividends Declared......................................
134,750
($68,750 + $66,000 = $134,750)

b. CE: Closing entry
Common Shares Retained Earnings

Jan. 1 Bal. 2,200,000 Jan. 1 Bal. 1,420,000
May 15 66,000 Dec. 31 CE 134,750 Dec. 31 CE 628,000
Dec. 31 Bal. 2,266,000 Dec. 31 Bal. 1,913,250
Dividends Declared Accumulated Other Comprehensive Income

Jan. 15 68,750 Dec. 31 CE 134,750 Jan. 1 68,000
Apr. 16 66,000
Dec. 31 Bal. 0
Stock Dividends Distributable

May 15 66,000 Apr. 16 66,000
Dec. 31 Bal. 0

c.
WIRTH CORPORATION
Accumulated
Other
Common Retained Comprehensive
Shares Earnings Income Total
Balance Jan, 1 $2,200,000 $1,420,000 $68,000 $3,688,000

Declared and issued
stock dividends 66,000 (66,000) 0
Net income 628,000 628,000
Balance Dec. 31 $2,266,000 $1,913,250 $68,000 $4,247,250
(A stock dividend reduces retained earnings by the number of shares issued × market price per
share)
Note that some companies may combine the information above pertaining to cash and stock
dividends and report them on a single line on this statement with a breakdown between the
amount of the stock and cash dividends shown in a note to the financial statements.


d. Number of common shares: 55,000 + 5,500 + 60,500 = 121,000
WIRTH CORPORATION
December 31, 2021
authorized, 121,000 issued............................................... $2,266,000
Retained earnings...........................................................................
1,913,250
Total shareholders’ equity.................................................... $4,247,250
LO 3,4 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.8A
a. Weighted Average Number of Shares

Aug. 1 350,000 × 12/12 = 350,000
Oct. 1 (24,000) × 10/12 = (20,000)
Dec. 1 60,000 × 8/12 = 40,000
Feb. 1 10,000 × 6/12 = 5,000
396,000 375,000
b. Basic Earnings per Share
= Income available to common shareholders ÷ Weighted average

number of common shares
= ($1,280,000 – $100,000*) ÷ 375,000
= $3.15
*Preferred dividend: $1 × 100,000 = $100,000
c. A weighted average number of shares is used in the basic EPS calculation
because the issue of shares and other activities affecting the number of shares
issued during the period changes the amount of net assets upon which net income
can be earned. Using the number of shares at a point in time such as year end to
calculate basic earnings per share does not take into account the year’s economic
activity and other factors that might have impacted the number of shares issued
during the period.


PROBLEM 11.9A
a. The common dividends per share can be calculated as follows:
2018 2017 2016 2015

A. Basic EPS $1.22 $1.11 $1.26 $2.13
B. Payout ratio 137.5% 159.7% 75.5% 108.9%
Common dividends per share (A × B) $1.68 $1.77 $0.95 $2.32
Net income increased on a per-share basis in 2018, as demonstrated by the basic

earnings per share ratio. The dividends per share declined slightly. This
combination resulted in a lower payout ratio in 2018 compared to 2017.
Cineplex is likely trying to give its shareholders a stable dividend per year, in
good years and in bad. This goes a long way towards satisfying investors.
b. As explained in (a) above, with the exception of 2016, Cineplex is likely trying
to give its shareholders a stable dividend per share each year so changes in the
payout ratio in this case are more attributable to changes in basic earnings per
share rather than changes in dividends per share. The earnings per share fell in
2017 and 2018, compared to 2016, and this caused the payout ratio to rise as
dividends per share in those two years were increased despite the drop in basic
earnings per share.
c. Because of the nature of the business, creditors should not be overly concerned
with the company’s continued payment of dividends and the fact that the
dividend payout exceeded basic earnings per share. The creditors are likely
drawing on past experience with Cineplex which would have given them the
reassurance that the company would return to stronger profitability. Creditors
would carefully scrutinize the source for the decline in profitability in 2017 and
reassess their risk in holding debt due from Cineplex. Although creditors are
generally more concerned with cash flow than net income, Cineplex’s poor net
income performance of 2017 would almost certainly result in decreased cash
flows from operating activities. The company’s continuous payment of dividends
in the midst of decreased cash flows would put creditors on watch to ensure that
this did not hinder Cineplex’s ability to repay its debt.

d.
2018 2017
A. Common dividends per share $1.68 $1.77
B. Dividend yield 6.76% 4.47%
Market price per share (A ÷ B) $24.85 $39.60
When the basic earnings per share rose 5% in 2018, the share price declined
37%. This most likely occurred because investors in Cineplex shares are more
focused on common dividends per share rather than basic earnings per share.
Because of the decline in the share price, a lower amount of dividend per share
caused the dividend yield to increase dramatically. Investors are focussed on
dividend yield.


PROBLEM 11.10A
a. (in millions, except per-share information)
Ratio 2018 2017
1. Payout ratio $829 $778

= 37.1% = 38.4%
$2,232 $2,024
2. Dividend $2.44 $2.28

yield = 4.1% = 3.6%
$59.76 $62.61
3. Basic earnings $2,040 $1,855

= $6.01 = $5.44
per share 339.372 340.809
4. Return on
common $2,040 = 14.6% $1,855 = 14.7%
shareholders' $13,976 $12,601
equity
(1) (Payout ratio = Cash dividends declared ÷ Net income)

(2) (Dividend yield = Dividends declared per share ÷ Market price per share)
(3) (Basic earnings per share = (Net income – preferred dividends) ÷ Weighted average number
of common shares)
(4) (Return on common shareholders’ equity = (Net income – preferred dividends) ÷ Average

b. National Bank’s payout ratio declined in 2018 because the dividend increase of
6.6% was lower than the 10% increase in income. The board of directors makes
the decision to increase dividends and they must have felt that it was prudent to
increase the dividend at a lower rate than the rise in income. Despite the
increased dividend, the company’s share price fell in 2018 and both of these
effects caused the dividend yield to rise that year. The basic earnings per share
increased because income increased (the denominator in this ratio, which is the
weighted average number of common shares, did not change significantly
enough to affect basic EPS). Return on common shareholders’ equity decreased
slightly despite the increase in income because shareholders’ equity rose by a
larger percentage than the net income did. Compared to its industry, National
Bank’s 2018 dividend yield exceed its peers while the return on common
shareholders’ equity and the payout ratio are below the industry average.

PROBLEM 11.11A
a. Together, the profit margin and the asset turnover explain the return on assets
ratio. When multiplying the profit margin by the asset turnover, we obtain the
return on assets ratio.
For example, in the case of Petro-Boost, profit margin x asset turnover = 10.0% x
1.1 times = 11.0% return on assets ratio.
For World Oil, the much higher asset turnover overcomes the lower profit
margin, compared to Petro-Boost, to come up with the higher return on assets
ratio.
b. World Oil has the largest difference between its return on shareholders’ equity
and its return on assets. The most likely reason is that World Oil has
proportionately the least amount of equity and the highest amount of liabilities.
The heavier debt level also negatively affects net income and the profit margin.
c. Petro-Boost would be the better investment for someone interested in generating

a regular income from his or her investment. Petro-Boost has a higher payout
ratio (27% [1.9% Dividend yield x 14.2 PE ratio] versus 12% [0.07% Dividend
yield x 17.1 PE ratio] for World Oil) and dividend yield (1.9% versus 0.7% for
World Oil), which is good for an investor who needs a regular income from their
investment.
d. The higher price-earnings ratio of 17.1 times indicates that investors have higher
expectations of future profitability for World Oil than Petro-Boost. Therefore, an
investor interested in experiencing a return in the form of future capital gains
would have a better chance of attaining those gains by investing in World Oil.
LO 5 BT: AN Difficulty: C Time: 30 min. AACSB: None CPA: cpa-t001, cpa-t005


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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Eighth Canadian Edition

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

Solutions Manual 11-1 Chapter 11

Solutions Manual 11-2 Chapter 11

(2) Limited liability of shareholders. Because of its separate legal existence,

(3) Transferable ownership rights. Ownership of a corporation is shown in

(5) Continuous life. Since a corporation is a separate legal entity, its

Solutions Manual 11-3 Chapter 11

(6) Separation of management and ownership. Although the shareholders of

(7) Government regulations. Corporations in Canada may incorporate

(b) While public corporations have an almost unlimited ability to acquire

Solutions Manual 11-4 Chapter 11

3. When Richard purchased the original shares as part of

4. Market capitalization is the measure of the fair value of a corporation’s equity. It

Solutions Manual 11-5 Chapter 11

Solutions Manual 11-6 Chapter 11

6. (a) Preferred shareholders have priority over common shareholders with

Solutions Manual 11-7 Chapter 11

Solutions Manual 11-8 Chapter 11

LO 2 BT: AP Difficulty: C Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

(b) Preferred shares are cumulative or noncumulative with respect to their

Solutions Manual 11-9 Chapter 11

(a) (b) (c)

Solutions Manual 11-10 Chapter 11

(b) The effect of a split on market value is generally inversely proportional to

Solutions Manual 11-11 Chapter 11

20. The purpose of a retained earnings restriction is to indicate that a portion of

Solutions Manual 11-12 Chapter 11

The statement of changes in equity shows the changes in retained earnings,

Solutions Manual 11-13 Chapter 11

Publicly traded companies using IFRS would prepare the following

24. (a) Unfavourable

Solutions Manual 11-14 Chapter 11

Dividend per share $1.60 $3.82

Similarly, the preferred shareholders’ entitlement must be subtracted from both

Consequently, both ratios use income available to common shareholders in their

Solutions Manual 11-15 Chapter 11

29. Two companies can have the

Solutions Manual 11-16 Chapter 11

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 11.1

Solutions Manual 11-17 Chapter 11

BRIEF EXERCISE 11.2

June 15 Cash ..........................................................17,000

Nov. 1 Cash ............................................................6,000

Dec. 15 Cash ............................................................7,000

Solutions Manual 11-18 Chapter 11

BRIEF EXERCISE 11.3

a. Average cost of common shares on:

June 8 $300,000 ÷ 30,000 = $10.00

Aug. 19 $90,000 7,500

Nov. 2 $(31,200) (1) (3,000)

Dec. 7 $(41,600) (2) (4,000)

(1) 3,000 shares x average cost $10.40 = $31,200

Dec. 7 Common Shares (2) above............................................ 41,600

Solutions Manual 11-19 Chapter 11

BRIEF EXERCISE 11.4

April 20.....................................................................Land 110,000

April 20.....................................................................Land 105,000

Solutions Manual 11-20 Chapter 11

BRIEF EXERCISE 11.5

a. Dividends in arrears can only arise from cumulative preferred shares. If a

b. Dividends in arrears at the end of the current year would be = 20,000 × $2 =