# Chapter 18

## Solutions

### Exercise 18.1

Transaction Effect
Issuance of common shares NE
Share split NE
A revaluation of surplus resulting from a remeasurement of an available-for-sale asset NE
Declaration of a cash dividend D
Net income earned during the year I
Declaration of a share dividend D
Payment of a cash dividend NE
Issuance of preferred shares NE
Re-acquisition of common shares D or NE
Appropriation of retained earnings for a reserve D
A cumulative, preferred dividend that is unpaid at the end of the year NE

### 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.

### Exercise 18.6

 Note: Average issue cost of shares = =

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.

### Exercise 18.7

May 20 – no journal entry required

May 30 – no journal entry required

### 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 ### 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.

### Exercise 18.10

a.

Average issue price =

Preferred dividend:
Common dividend:

b.

### 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

### 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.

### 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