Chapter 11 Solutions

Kimmel, Weygandt, Kieso, Trenholm, Irvine
Financial Accounting, Fifth Canadian Edition
CHAPTER 11
Reporting and Analyzing Shareholders Equity
EXERCISE 11-5
(a) (b) Total annual preferred dividend should be 400,000 $1 per share or $400,000 Dividends in arrears at the end of Year 1 are $100,000 ($400,000 annual dividend less dividends declared of $300,000). By the end of Year 2, the dividends paid of $500,000 are first allocated to the dividends in arrears of Year 1 of $100,000 and the remaining $400,000 is equal to the Year 2 dividend entitlement. Consequently by the end of Year 2, there are no dividends in arrears. (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. If the preferred shares were noncumulative, the corporation would have no obligation to pay any dividends. This is the same as if the preferred shares were cumulative. What is different with the noncumulative preferred shares is that in Year 2, the corporation is not obligated to pay any dividends in arrears before it can pay dividends for the current year. No arrears would exist from Year 1 if the shares had been noncumulative.
(d)
EXERCISE 11-8
1. Dec. 31 Dividends Payable (10,000 $5 4) ............. Cash Dividends ..................................... Stock Dividends ............................................. Dividends Payable ......................................... Long-Term Investments ........................ Stock Dividends Distributable ................ Common Shares (200,000 $5) ................... Stock Splits ........................................... 12,500 12,500 5,000 5,000 5,000 5,000 1,000,000 1,000,000
2.
Dec. 31
3.
Dec. 31
Solutions Manual 11-1 Chapter 11 Copyright 2012 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. Posted with permission from John Wiley & Sons Canada, Ltd.
EXERCISE 11-12
(a) SOBEYS INC. Statement of Retained Earnings Year Ended May 1, 2010 (in millions)
Retained earnings, May 2, 2009 .................................................................. Add: Profit .................................................................................................. Less: Cash dividends .................................................................................. Retained earnings, May 1, 2010 .................................................................. (b)
$1,068.2 262.8 1,331.0 58.0 $1,273.0
If Sobeys were a publicly traded corporation, a statement of changes in equity would be required instead of a statement of retained earnings.
PROBLEM 11-3A
(a) Transaction entries: Jan. 10 Common Shares ($1,050,000 70,000 10,000) ....... Retained Earnings............................... Cash ............................................. Cash ................................................... Preferred Shares (10,000 shares) Cash ................................................... Common Shares (20,000 shares). Cash Dividends ................................... Dividends Payable (18,000 $4 6/12) .................. No entry required Dividends Payable .............................. Cash ............................................. Buildings ............................................. Common Shares (5,000 shares)... 36,000 36,000 165,000 165,000
150,000 90,000 240,000 600,000 600,000 560,000 560,000 36,000 36,000
Feb.
April
May 29
June 12 July 1
Aug. 22
Closing entries: Dec. 31 Income Summary ................................ Retained Earnings ........................ Retained Earnings ............................... Cash Dividends ............................ 582,000 582,000 36,000 36,000
31
PROBLEM 11-3A (Continued) (b)

Preferred Shares Jan. 1 Bal. 440,000 Feb. 6 600,000 Dec. 31 Bal. 1,040,000 Jan. 10 Common Shares Jan.1 Bal. 1,050,000 150,000 April 6 560,000 Aug. 22 165,000 Dec. 31 Bal. 1,625,000
Jan. 10 Dec. 31
Retained Earnings 90,000 Jan. 1 Bal. 36,000 800,000 36,000 Dec. 31 582,000 Dec. 31 Bal. 1,256,000
Contributed Capital Reacquisition of Preferred Shares Jan. 1 Bal. 25,000
Number of preferred shares: 8,000 + 10,000 = 18,000 Number of common shares: 70,000 10,000 + 20,000 + 5,000 = 85,000
PROBLEM 11-3A (Continued) (c)

LARGENT CORPORATION Statement of Changes in Equity Year Ended December 31, 2012 Preferred Shares Number Legal of Shares Capital Balance, Jan. 1 Issued preferred shares Issued common shares Reacquired shares Dividends Profit Balance, Dec. 31 8,000 $ 440,000 10,000 600,000 Accumulated Common Shares Other Other Number Contributed Retained Comprehensive of Shares Legal Capital Capital Earnings Income 70,000 25,000 (10,000) $1,050,000 725,000 (150,000) $25,000 $800,000 $10,000
Total $2,325,000 600,000 725,000 (240,000) (36,000) 582,000 $3,956,000
18,000 $1,040,000
85,000
$1,625,000
(90,000) (36,000) 582,000 $25,000 $1,256,000
$10,000
Solutions Manual
11-5 Chapter 11 Copyright 2012 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. Posted with permission from John Wiley & Sons Canada, Ltd.
PROBLEM 11-3A (Continued)
(d)
LARGENT CORPORATION Statement of Financial Position (Partial) December 31, 2012 Shareholders equity Contributed capital Share capital $4 Preferred shares, no par value, cumulative, 200,000 shares authorized, 18,000 issued ........... Common shares, unlimited number of no par value shares authorized, 85,000 issued ........................ Contributed capitalreacquisition of preferred shares . Total contributed capital .................................................. Retained earnings ........................................................... Accumulated other comprehensive income ..................... Total shareholders equity....................................................
$1,040,000 1,625,000 25,000 2,690,000 1,256,000 10,000 $3,956,000
Note: Dividends of $36,000 (18,000 x $4 x /12) are in arrears on the cumulative preferred shares.
PROBLEM 11-5A
(a) Preferred Shares Jan. 1 Balance Jan. 1 Issue Dec. 31 Balance 500,000 500,000 1,000,000
Common Shares Jan. 1 Balance Oct. 1 Issue Dec. 31 Balance
2,700,000 1,000,000 3,700,000
Common Stock Dividend Distributable Dec. 31 Stock dividend** 407,000
Retained Earnings During year Cash dividend* 100,000 Jan. 1 Balance Dec. 31 Stock dividend** 407,000 Dec. 31 Profit Dec. 31 Balance * 20,000 $5 = $100,000 ** 370,000 5% $22 = $407,000
2,980,000 872,000 3,345,000
PROBLEM 11-5A (Continued) (b) ROBICHAUD CORPORATION Statement of Financial Position (Partial) December 31, 2012
Shareholders equity Contributed capital Share capital $5 Preferred shares, no par value, noncumulative, unlimited number of shares authorized, 20,000 issued .......................... $1,000,000 Common shares, no par value, unlimited number of shares authorized, 370,000 issued .......................................... $3,700,000 Common stock dividend distributable, 18,500 shares ............................................ 407,000 4,107,000 Total contributed capital .................................... 5,107,000 Retained earnings (See Note A) ....................... 3,345,000 Total shareholders equity ........................................ $8,452,000 Note A: On December 31, 2012 the Board of Directors authorized a $500,000 restriction of retained earnings for a plant expansion.
PROBLEM 11-10A 8A
(a) Although profits declined in 2008, it is likely that the dollar amount of dividends was unchanged. Comparing a fixed dividend to a lower profit amount would cause the dividend payout ratio to increase. The share price probably also declined a bit, resulting in a slight increase in the dividend yield. (b) As explained in (a) above, with the decline in profits, the market price of Barrick shares likely declined, but not to the same extent as the decline in profits. In this particular case, the share market price decline must have been modest in comparison to the decline in profit as shareholders were anticipating Barricks return to stronger profitability in the future. (c) As an investor seeking dividend income, I would be modestly happy with Barricks dividend policy because the company seems to be consistent in paying out dividends even in years of losses. This policy would give the investor more confidence that the company would return to profitability in the future. The payout also demonstrates that Barrick could afford to pay out dividends in spite of past losses. That said, the dividend yield is modest and one would likely purchase Barricks shares for their growth potential rather than solely for dividend purposes. (d) Because of the nature of the business, creditors should not be overly concerned with the companys continued payment of dividends, particularly since past experience would have given them the reassurance that the company would return to profitability. Due to the volatility of gold prices, creditors would carefully scrutinize the source of the losses of 2009 and reassess their risk in holding debt due from Barrick. Although creditors are generally more concerned with cash flow than profit, Barricks poor profit performance of 2009 would almost certainly result in decreased cash flows from operating activities. The companys continuous payment of dividends in the midst of decreased cash flows would put creditors on watch to ensure that this did not hinder Barricks ability to repay its debt.

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Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

$1,068.2 262.8 1,331.0 58.0 $1,273.0

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

150,000 90,000 240,000 600,000 600,000 560,000 560,000 36,000 36,000

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

PROBLEM 11-3A (Continued) (b)

Contributed Capital Reacquisition of Preferred Shares Jan. 1 Bal. 25,000

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

PROBLEM 11-3A (Continued) (c)

Total $2,325,000 600,000 725,000 (240,000) (36,000) 582,000 $3,956,000

(90,000) (36,000) 582,000 $25,000 $1,256,000

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

PROBLEM 11-3A (Continued)

$1,040,000 1,625,000 25,000 2,690,000 1,256,000 10,000 $3,956,000

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

Common Shares Jan. 1 Balance Oct. 1 Issue Dec. 31 Balance

2,700,000 1,000,000 3,700,000

Common Stock Dividend Distributable Dec. 31 Stock dividend** 407,000

2,980,000 872,000 3,345,000

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

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