18.8 Exercises

Exercise 18.1

Identify if the following transactions will increase (I), decrease (D), or have no effect (NE) on retained earnings:

Exercise 18.2

Lainez Ltd. was incorporated on January 1, 2021. During its first year of operations, the following share transactions occurred:

Required:

Prepare the journal entries for the share transactions.

Exercise 18.3

Papini Inc. decides to issue its common shares on a subscription basis. Each share can be purchased for $15 per share, with a deposit of $5 per share due at the time of subscription, and the remaining $10 per share due after three months. A total of 100,000 shares was subscribed at the time of the initial offering.

Required:

1. Prepare the journal entries to record the initial subscription and the receipt of the deposits.
2. Prepare the journal entries to record the collection of the balance owed and the issuance of the shares, assuming all subscribers complete the transaction.
3. Repeat part (b) assuming that 10% of the subscribers default on the final payment and the company refunds the deposits.
4. Repeat part (b) assuming that 10% of the subscribers default on the final payment and the company keeps the deposits.
5. Repeat part (b) assuming that 10% of the subscribers default on the final payment and the company issues pro-rata shares to the defaulting subscribers.

Exercise 18.4

Pinera Ltd. reacquired 5,000 of its no-par common shares at a price of $11 per share. It subsequently resold the shares at $16 per share.

Required:

Using the single-transaction method, record the above treasury share transactions.

Exercie 18.5

On January 1, 2021, Alarcon Inc. issued 20,000, $5 par value shares at $17 each. On June 30, 2021, 10,000 of the shares were reacquired at $19 each and subsequently cancelled.

Required:

Prepare the journal entries to record the issuance and re-acquisition of the above shares.

Exercise 18.6

Tanizaki Enterprises Ltd. reported the following share transactions during 2021, its first year of operations:

Required:

Prepare the journal entries to record the above transactions.

Exercise 18.7

On January 1, 2022, Belloc Limited, a toy manufacturer, had outstanding share capital of 100,000 common shares. During 2022, the following dividend transactions occurred:

Required:

Prepare all the journal entries necessary to record the above dividend transactions.

Exercise 18.8

Ayme Inc. had the following share capital outstanding on January 1, 2022:

At the end of 2022, the company declared total dividends of $1,200,000. No dividends had been paid in either 2020 or 2021.

Required:

Determine the amount of dividends paid to each class of share under each of the following independent conditions:

1. The Class B preferred shares are non-cumulative and non-participating.
2. The Class B preferred shares are cumulative and non-participating.
3. The Class B preferred shares are cumulative and fully participating.

Exercise 18.9

You have been asked to provide advice to the board of directors of Denevi Ltd., a publicly traded company. The company’s shares are currently trading at $12 per share, and the board is considering whether to issue a 50% share dividend or a 3-for-2 share split, which means that for every two shares held, an additional share will be issued. The company currently has 5,000,000 common shares outstanding at a total carrying amount of $12,500,000 and retained earnings of $42,000,000. There are no other equity accounts reported.

Required:

1. Calculate the price the shares are expected to trade at after each of the proposed transactions.
2. Determine the balances to be reported in the shareholders’ equity section after each of the proposed transactions.
3. Provide a recommendation to the board of directors as to which action they should take.

Exercise 18.10

Ocampo Inc. reported the following amounts in the shareholders’ equity section of its December 31, 2021, balance sheet:

The contributed surplus arose from past re-acquisitions of common shares.

During 2022, the following transactions occurred in the order listed below:

1. Issued 5,000 common shares at $9 per share.
2. Reacquired 10,000 of the outstanding common shares for $14 per share and cancelled them.
3. Declared a 10% share dividend on the outstanding common shares. The ex-dividend price of the shares was $16.
4. Issued the share dividend.
5. Exchanged 1,000 preferred shares for a piece of vacant land. The land’s fair value, as determined by a qualified appraiser, was $19,000 and the shares were actively traded on this day for $21 per share.
6. Declared and paid the preferred share dividend and a $1 per share dividend on the common shares.

Required:

1. Prepare the journal entries to record the 2022 equity transactions.
2. Prepare the Statement of Changes in Shareholders’ Equity for the year ended December 31, 2022. Net income for the year was $120,000 and other comprehensive income resulting from a revaluation of property, plant, and equipment was $23,000.

Exercise 18.11

Manguel Merchandising Ltd. reported the following amounts in the shareholders’ equity section of its December 31, 2020, balance sheet:

The contributed surplus arose from past re-acquisitions of common shares. On December 31, 2020, two years of preferred dividends were in arrears, that is, preferred dividends were not paid in 2019 or 2020.

The following transactions occurred in 2021:

1. January 15: 10,000 of the shares held in treasury were resold at a price of $13 per share.
2. February 28: 50,000 common shares were reacquired and immediately cancelled for total cash proceeds of $705,000.
3. June 30: 25,000 preferred shares were reacquired and immediately cancelled at a price of $31 per share.
4. December 31: A 5% share dividend was declared and distributed on the common shares. The ex-dividend price of the share was $17. Preferred dividends were also declared and paid in cash, as they needed to be declared before the common share dividend could be declared.

Required:

Prepare the journal entries to record 2021 equity transactions.

Exercise 18.12

Baytown Limited sold 10,000 shares at $23.65 per share on a subscription basis at June 1, Y6. Baytown accepted 35% down at that time.

On December 1, Y6, Baytown received the remaining payment and then issued the shares.

Required:

Prepare the required and necessary journal entries to reflect the above transactions.

Exercise 18.13

La Porte Limited has 100,000 common shares outstanding with an average issue price of $16.25 per share.

On July 1, Y7, La Porte reacquired and cancelled 10,000 shares when the market price was $23.40 per share.

There is a balance in contributed surplus of $42,670 which is a result from net excess of proceeds over cost on a previous cancellation of common shares.

Required:

1. Prepare the journal entry to record this transaction if La Porte follows ASPE.
2. Prepare the journal entry assuming the balance in contributed surplus is $242,670 (La Porte still follows IFRS).
3. Prepare the journal entry assuming the balance in contributed surplus is $0 (La Porte still follows IFRS).
4. Would there be any difference to the entry if La Porte follows IFRS?

Exercise 18.14

Oak Forest Limited has both preferred and common shares in it’s share capital. The company has 4,000 preferred shares outstanding and 10,000 common shares outstanding. Common shares were issued for $300,000.

The preferred shares carry a $3.00 per share dividend and have a $100.00 stated value.

Oak Forest has declared a dividend of $130,000. Preferred dividends have not been paid during the two years preceeding the current year.

Required:

How much should each class of shares receive under each of the following conditions:

1. The preferred shares are non-cumulative and non-participating.
2. The preferred shares are cumulative and non-participating.
3. The preferred shares are cumulative and participating.