Chapter 18

Exercise 18.1

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Exercise 18.2

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Exercise 18.3

1. 
2. 
3. 
4. 
5. 

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Exercise 18.4

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Exercise 18.5

Note: The contributed surplus is reduced on a pro-rata basis, as this surplus resulted from a share premium on issue, and not from a previous re-acquisition.

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Exercise 18.6

Also, note that the contributed surplus is fully utilized because it resulted from a previous re-acquisition of the same class of shares. As such, we do not need to allocate it on a pro-rata basis.

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Exercise 18.7

May 20 – no journal entry required

May 30 – no journal entry required

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Exercise 18.8

1. Calculation	Preferred	Common	Total
   Current year: (50,000 share × $3)	$150,000		$150,000
   Balance of dividends	–	$1,050,000	1,050,000
   	$150,000	$1,050,000	$1,200,000

2. Calculation	Preferred	Common	Total
   Arrears: (50,000 shares × $3 × 2 years)	$300,000		$300,000
   Current year: ([50,000 shares × $3)	150,000		150,000
   Balance of dividends	–	$750,000	750,000
   	$450,000	$750,000	$1,200,000

3. Calculation	Preferred	Common	Total
   Arrears, as before	$300,000		$300,000
   Current year year basic dividend	150,000	$240,000	390,000
   Current year participating dividend	196,146	313,854	510,000
   	$646,146	$553,854	$1,200,000

   Note: The basic preferred dividend is calculated as before. Then, a like amount is allocated to the common shares. The preferred dividend can be expressed as a percentage: (or ). Therefore, the common shares are also allocated a basic dividend of () = $240,000. This leaves a remaining dividend of $510,000, which is available for participation. The participation is allocated on a pro-rata basis as follows:

   Carrying amounts of each class:

   Preferred		$5,000,000		38.46%
   Common		8,000,000		61.54%
   Total		$13,000,000		100%

   The participating dividend is therefore:

   Preferred:	$510,000 × 38.46%	=	$196,146
   Common:	$510,000 × 61.54%	=	$313,854

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Exercise 18.9

1. Implied value of the company before the dividend:50% share dividend would issue an additional shares. The ex-dividend price should be per share. A 3-for-2 share split results in the same number of shares being issued as above, making the share price $8.
2. For the 50% share dividend, the dividend amount will be calculated as Therefore, after the dividend, the equity section will appear as follows:

   Common shares		$32,500,000
   Retained earnings		22,000,000
   Total equity		$54,500,000

   A 3-for-2 share split has no effect on the accounts, as it simply increases the number of outstanding shares. Therefore, the equity section will appear as follows:

   Common shares		$12,500,000
   Retained earnings		42,000,000
   Total equity		$54,500,000

3. Either action will result in the share price dropping to $8 per share from $12. However, the total reported equity will not change as it’s just a question of how the deck will be shuffled, so to speak, in the equity section. The decision will depend on both the legal framework in the company’s jurisdiction and the corporate objectives of the distribution. There may be legal restrictions and tax implications, with respect to the share dividend, which would make the share split easier to implement. On the other hand, if the directors would like to capitalize some of the retained earnings to potentially reduce future shareholder demands for dividends, then the share dividend would be the better approach. The directors will also have to consider if the shareholder response will be different for each scenario. The directors should also consider if there are any other contracts or agreements, such as loan covenants, that would be affected by the decision.

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Exercise 18.10

a.

Average issue price =

Preferred dividend:
Common dividend:

b.

Ocamp Inc. Statement of Changes in Shareholders’ Equity Year Ended 31 December 2022
	Total	Preferred Shares	Common Shares	Contributed Surplus	Retained Earnings	Accumulated Other Comp. Income
Balance on January 1	$1,217,000	$225,000	$280,000	$7,000	$590,000	$115,000
Comprehensive Income:
Net Income	120,000				120,000
Revaluation	23,000					23,000
Total comprehensive
Income	143,000
Shares issued	64,000	19,000	45,000
Shares retired	(140,000)		(81,250)	(7,000)	(51,750)
Cash dividend – Common	(33,000)				(33,000)
Cash dividend – Preferred	(11,000)				(11,000)
Share dividend – Common	—		48,000		(48,000)
Balance by December 31	$1,240,000	$244,000	$291,750	—	$566,250	$138,000

Note: Additional details of the transactions and the authorized and issued shares would be contained in the notes to the financial statements.

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Exercise 18.11

Note: Treasury shares were acquired at a price of per share. This is the price used to remove the treasury shares on resale.

Average issue price = per share

Average issue price = per share

There is no contributed surplus balance associated with preferred share re-acquisitions, so the full difference is charged to retained earnings.

Common dividend:

Note: The shares remaining in treasury are excluded from the dividend calculation, as the company cannot pay itself a dividend. The company’s issued share capital includes the treasury shares, although they are not outstanding.

Preferred dividend:

Note: This calculation assumes that the cumulative, unpaid dividend on the retired preferred shares was not paid. Depending on the articles of incorporation and local legislation, the cumulative, unpaid dividend may need to be paid prior to retirement of the shares. This would result in an additional dividend of $50,000 () paid on the date of retirement.

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Exercise 18.12

Jun 1, Y6	Share Subscription Receivable		236,500
		Common Shares Subscribed		236,500
	(10,000 shares × $23.65)
Jun 1, Y6	Cash		82,775
		Share Subscription Receivable		82,775
	down payment received of $236,500 × 35%
12/1/Y6	Cash		153,725
		Share Subscription Receivable		153,725
	remainder of payment received on subscribed shares
12/1/Y6	Common Shares Subscribed		236,500
		Common Shares		236,500
	subscribed shares fully paid, shares then issued

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Exercise 18.13

1. Journal Entry

Jul 1, Y7	Common Shares (1)		162,500
	Contributed Surplus		42,670
	Retained Earnings		28,830
		Cash (2)		234,000
	(1) Common shares - remove at average price = 10,000 shares × $16.25.
	(2) Cash - based on market price = 10,000 shares × $23.40.
	clear and contributed surplus first, then use retained earnings.

2. Journal Entry

Jul 1, Y7	Common Shares (1)		162,500
	Contributed Surplus		71,500
		Cash (2)		234,000
	(1) Common shares - remove at average price = 10,000 shares × $16.25.
	(2) Cash - based on market price = 10,000 shares × $23.40.
	no need to use retained earnings since contributed surplus has a large enough balance.

3. Journal Entry

Jul 1, Y7	Common Shares (1)		162,500
	Retained earnings		71,500
		Cash (2)		234,000
	(1) Common shares - remove at average price = 10,000 shares × $16.25.
	(2) Cash - based on market price = 10,000 shares × $23.40.
	only use retained earnings since there is no balance in contributed surplus.

4. Difference between ASPE and IFRS

There is no real difference between IFRS and ASPE. IFRS does not provide guidance and therefore, the ASPE method is acceptable.

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Exercise 18.14

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

	Preferred	Common	Total
Preferred (4,000 shares × $3.00)	12,000		12,000
Common - get the remainder	-	118,000	118,000
	$12,000	$118,000	$130,000
If there is $130,000 to be paid and the preferred receive a set amount of $12,000, then the remainder ($130,000 - $12,000 = $118,000) is paid to common shareholders.

2. The preferred shares are cumulative and non-participating

	Preferred	Common	Total
Preferred (4,000 shares × $3.00)	12,000		12,000
Preferred (4,000 shares × $3.00)	12,000		12,000
Preferred (4,000 shares × $3.00)	12,000		12,000
Common - get the remainder	-	94,000	94,000
	$36,000	$94,000	$130,000
If there is $130,000 to be paid and the preferred receive a set amount of $12,000.
There are three years that should be paid to the preferred shareholders: the current year and the preceeding two years, since preferred shares are cumulative.
The remainder ($130,000 - $36,000 = $94,000) is paid to common shareholders.

3. The preferred shares are cumulative and participating

	Preferred	Common	Total
Preferred (4,000 shares × $3.00)	12,000		12,000
Preferred (4,000 shares × $3.00)	12,000		12,000
Preferred (4,000 shares × $3.00)	12,000		12,000
Common - treat the same as preferred		9,000	9,000
Split the remainder	48,571	36,429	85,000
	$84,571	$45,429	$130,000
There are three years that should be paid to the preferred shareholders: the current year and the preceeding two years, since preferred shares are cumulative.
Treat the common shareholders the same as preferred:
Preferred receive $3/$100 stated value = 3% dividend. Common shareholder $300,000 × 3%.

Pro rate split on remainder of dividend to be distributed:
Value of preferred	57.14%	$400,000	4,000 shares × $100 stated value given
Value of common	42.86%	$300,000
		$700,000
Remaining dividend to be split = $130,000 - $12,000 - $12,000 - $12,000 - $9,000
		85,000
To preferred	57.14%	$48,571
To common	42.86%	$36,429
		$85,000