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Ch. 15
Intermediate Accounting (CTRL713)
The German University in Cairo
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Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 15-
CHAPTER 15
Equity
15-2 Copyright © 2011 John Wiley & Sons, Inc. Kieso, Intermediate: IFRS Edition, Solutions Manual
SOLUTIONS TO EXERCISES
EXERCISE 15-1 (15 – 20 minutes)
(a) Jan. 10 Cash (80,000 X € 6) ................................ 480, Share Capital — Ordinary (80,000 X € 3) ................................ 240, Share Premium — Ordinary ............ 240,
Mar. 1 Organization Expense ......................... 35, Share Capital — Ordinary (5,000 X € 3) .................................. 15, Share Premium — Ordinary ............ 20,
July 1 Cash (30,000 X € 8) ................................ 240, Share Capital — Ordinary (30,000 X € 3) ................................ 90, Share Premium — Ordinary (30,000 X € 5) ............................... 150,
Sept. 1 Cash (60,000 X € 10) .............................. 600, Share Capital — Ordinary (60,000 X € 3) ................................ 180, Share Premium — Ordinary (60,000 X € 7) ............................... 420,
(b) If the shares have a stated value of € 2 per share, the entries in (a) would be the same except for the euro amounts. For example, the Jan. 10 entry would include credits of € 160,000 to Share Capital — Ordinary and € 320 ,000 to Share Premium — Ordinary.
15-4 Copyright © 2011 John Wiley & Sons, Inc. Kieso, Intermediate: IFRS Edition, Solutions Manual
EXERCISE 15-3 (10 – 15 minutes)
(a) Land ($60 X 25,000) ................................................. 1,500, Treasury Shares ($48 X 25,000) ...................... 1,200, Share Premium — Treasury ............................. 300,
(b) One might use the cost of treasury shares. However, this is not a relevant measure of this economic event. Rather, it is a measure of a prior, unrelated event. The appraised value of the land is a reasonable alternative (if based on appropriate fair value estimation techniques). However, it is an appraisal as opposed to a market-determined price. The trading price of the shares is probably the best measure of fair value in this transaction.
EXERCISE 15-4 (20 – 25 minutes)
(a) (1) Cash ($850 X 9,600) ............................................. 8,160, Bonds Payable ($5,000,000 – $200,000*) .... 4,800, Share Capital — Ordinary (100,000 X $5) ..... 500, Share Premium — Ordinary .......................... 2,860,
*[$340,000 ($850 X 400) X $500/$850]
Assumes bonds are properly priced and issued at par; the residual attributed to share capital has a questionable measure of fair value.
Incremental method
Lump-sum receipt (9,600 X $850) ............................. $8,160, Allocated to subordinated debenture (9,600 X $500) ......................................................... (4,800,000) Balance allocated to ordinary shares ...................... $3,360,
Computation of share capital and share premium
Balance allocated to ordinary shares ...................... $3,360, Less: Share capital (10,000 X $5 X 10) ..................... 500, Share premium .......................................................... $2,860,
Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 15-
EXERCISE 15-4 (Continued)
Bond issue cost allocation
Total issue cost (400 X $850) .......................... $ 340, Less: Amount allocated to bonds ................... 200, Amount allocated to ordinary shares ............. $ 140,
Investment banking costs 400 @ $850 = $340,000 allocate 5/8 to debentures and 3.5/8 to ordinary shares. Bond portion is bond issue costs; share capital portion is a reduction of share premium, which means that total contributed (paid-in) capital is $3,360, ($3,500,000 – $140,000).
(2) Cash .................................................................. 8,160, Bonds Payable ......................................... 4,533, Share Capital — Ordinary (100,000 X $5) ........................................ 500, Share Premium — Ordinary ....................... 3,126,
The allocation based on fair value for one unit is Subordinated debenture .......................... $ Ordinary shares (10 shares X $40) .......... 400 Total fair value .......................................... $
Therefore 5/9 is allocated to the bonds and 4/9 to the ordinary shares.
$8,500,000 X (5/9) = $4,722,222 To Debentures $8,500,000 X (4/9) = $3,777,778 To Ordinary Shares $340,000 X (5/9) = $188, $340,000 X (4/9) = $151, Share Premium = $3,777,778 – $500,000 – $151, = $3,126,
(b) One is not better than the other, but would depend on the relative reliability of the valuations for the shares and bonds. This question is presented to stimulate some thought and class discussion.
Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 15-
EXERCISE 15-6 (Continued)
(b) Land (1,000 X $46) ..................................................... 46, Share Capital — Ordinary (1,000 X $10) ............. 10, Share Premium — Ordinary ($46,000 – $10,000) .......................................... 36,
Note: The fair value of the shares ($46,000) is used to value the exchange because it is a more objective measure than the appraised value of the land ($50,000).
(c) Treasury Shares (500 X $44) .................................... 22, Cash .................................................................... 22,
EXERCISE 15-7 (15 – 20 minutes)
nullAssets Liabilities Equity
Share Premium
Retained Earnings
Net Income
- D NE D NE NE NE
- I NE I NE D NE
- I NE I I NE NE
EXERCISE 15-8 (15 – 20 minutes)
(a) $1,000,000 X 6% = $60,000; $60,000 X 3 = $180,000. The cumulative dividend is disclosed in a note to the equity section; it is not reported as a liability.
(b) Share Capital — Preference (3,000 X $100) .............. 300, Share Capital — Ordinary (3,000 X 7 X $10) ...... 210, Share Premium — Ordinary ............................... 90,
(c) Preference shares, $100 par 6%, 10,000 shares issued ............................................. $1,000, Share premium — preference (10,000 X $7) ............. 70,
15-8 Copyright © 2011 John Wiley & Sons, Inc. Kieso, Intermediate: IFRS Edition, Solutions Manual
EXERCISE 15-9 (15 – 20 minutes)
May 2 Cash .................................................................. 192, Share Capital — Ordinary (12,000 X $10) ........................................ 120, Share Premium — Ordinary (12,000 X $6) .......................................... 72,
10 Cash .................................................................. 600, Share Capital — Preference (10,000 X $30) ........................................ 300, Share Premium — Preference (10,000 X $30) ........................................ 300,
15 Treasury Shares ............................................... 14, Cash .......................................................... 14,
31 Cash .................................................................. 8, Treasury Shares (500 X $14) .................... 7, Share Premium — Treasury (500 X $3) ..... 1,
EXERCISE 15-10 (20 – 25 minutes)
(a) (1) The par value is $2. This amount is obtained from either of the following: 2011 — $545 ÷ 218 or 2010 — $540 ÷ 216.
(2) The cost of treasury shares was higher in 2011. The cost at December 31, 2011 was $42 per share ($1,428 ÷ 34) compared to the cost at December 31, 2010 of $34 per share ($918 ÷ 27).
(b) Equity (in millions of dollars) Share capital — ordinary, $2 par value, 500,000, shares authorized, 218,000,000 shares issued, and 184,000,000 shares outstanding ...................... $ 545 Share premium — ordinary ........................................... 891 Retained earnings ............................................................... 7, Less: Cost of treasury shares (34,000,000 shares) .......... 1, Total equity ........................................................... $ 7,
15-10 Copyright © 2011 John Wiley & Sons, Inc. Kieso, Intermediate: IFRS Edition, Solutions Manual
EXERCISE 15-13 (Continued)
(c) Share dividends and splits serve the same function with regard to the securities markets. Both techniques allow the board of directors to increase the quantity of shares and reduce share prices into a desired ―trading range.‖
For accounting purposes the 20% – 25% rule reasonably views large share dividends as substantive share splits. In this case, it is necessary to capitalize par value with a share dividend because the number of shares is increased and the par value remains the same. Earnings are capitalized for purely procedural reasons.
EXERCISE 15-14 (10 – 12 minutes)
(a) Retained Earnings (10,000 X € 37) ..............................., Ordinary Share Dividend Distributable ..................... 100, Share Premium — Ordinary ................................ 270,
Ordinary Share Dividend Distributable ........................, Share Capital — Ordinary ................................ 100,
(b) Retained Earnings (200,000 X € 10) ...............................,000, Ordinary Share Dividend Distributable ..................... 2,000,
Ordinary Share Dividend Distributable ........................,000, Share Capital — Ordinary ................................ 2,000,
(c) No entry, the par value becomes € 5 and the number of shares out- standing increases to 400,000.
EXERCISE 15-15 (10 – 15 minutes)
(a) Retained Earnings ........................................................., Ordinary Share Dividend Distributable................. 30, Share Premium — Ordinary ................................ 87, (60,000 shares X 5% X R39 = $117,000)
Ordinary Share Dividend Distributable ........................, Share Capital — Ordinary ................................ 30,
Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 15-
EXERCISE 15-15 (Continued)
(b) No entry; memorandum to indicate that par value is reduced to R
and shares outstanding are now 300,000 (60,000 X 5).
(c) January 5, 2011 Debt Investments ..........................................................., Unrealized Holding Gain or Loss — Income ..................................................... 35,
Retained Earnings ........................................................., Property Dividends Payable ................................ 125,
January 25, 2011 Property Dividends Payable ................................ 125, Debt Investments ................................................... 125,
EXERCISE 15-16 (5 – 10 minutes)
Total income since incorporation ............................. W287, Less: Total cash dividends paid .............................. W60, Total value of share dividends ....................... 40,000 100, Current balance of retained earnings ....................... W187,
The accumulated other comprehensive income is shown as part of equity;
the gains on treasury share transactions are recorded as share premium.
Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 15-
EXERCISE 15-18 (Continued)
Retained Earnings (1,800* X $45) ..............................., Ordinary Share Dividend Distributable (1,800 X $5) .......................................................... 9, Share Premium — Ordinary ................................ 72, *(20,000 – 2,700 + 700 = 18,000; 18,000 X 10%)
Ordinary Share Dividend Distributable ........................, Share Capital — Ordinary ................................ 9,
Retained Earnings ........................................................., Dividends Payable — Preference (2,500 X $8) .......................................................... 20, Dividends Payable — Ordinary (19,800* X $2) ....................................................... 39, *(18,000 + 1,800)
(b)
ELIZABETH COMPANY
Partial Statement of Financial Position December 31, 2011
Equity
Share capital — preference shares,
8%, $100 par, 10,000 shares
authorized, 2,500 shares issued and
outstanding ...........................................................$250,
Share capital — ordinary stock,
$5 par, 100,000 shares
authorized, 21,800 shares issued, 19,
shares outstanding .............................................. 109,000 $ 359,
Share premium ........................................................ 201,
Retained earnings ................................................... 639, Treasury shares (2,000 ordinary shares) .................... (80,000) Total equity ............................................................. $1,119,
15-14 Copyright © 2011 John Wiley & Sons, Inc. Kieso, Intermediate: IFRS Edition, Solutions Manual
EXERCISE 15-18 (Continued)
Computations: Preference shares $200,000 + $50,000 = $250, Ordinary shares $100,000 + $ 9,000 = $109, Share premium: $125,000 + $2,000 + $2,500 + $72,000 = $201,
Retained earnings: $450,000 – $81,000 – $59,600 + $330,000 = $639,
Treasury shares $108,000 – $28,000 = $80,
EXERCISE 15-19 (20 – 25 minutes)
(a) Wilder Company is the more profitable in terms of rate of return on total assets. This may be shown as follows:
Wilder Company $720,000 = 17% $4,200,
Ingalls Company
$648,
= 15%
$4,200,
Note to Instructor: These returns are based on net income related to total assets, where the ending amount of total assets is considered representative. If the rate of return on total assets uses net income before interest but after taxes in the numerator, the rates of return on total assets are the same as shown below:
Wilder Company $720,000 = 17% $4,200,
Ingalls Company
$648,000 + $120,000 – $48,000 = $720,
$4,200,000 $4,200,
= 17%
15-16 Copyright © 2011 John Wiley & Sons, Inc. Kieso, Intermediate: IFRS Edition, Solutions Manual
EXERCISE 15-19 (Continued)
(d) Yes, from the point of view of net income it is advantageous for the shareholders of Ingalls Company to have non-current liabilities out- standing. The assets obtained from incurrence of this debt are earning a higher return than their cost to Ingalls Company.
(e) Book value per share.
Ingalls Company $2,000,000 + $700,000 = $27. 100,
Wilder Company $2,900,000 + $700,000 = $24. 145,
EXERCISE 15-20 (15 minutes)
(a) Rate of return on ordinary share equity:
€ 213,718 = € 213,718 = 14% € 875,000 + € 575,000 € 1,450,
Rate of interest paid on bonds payable:
€ 135,000 = 9%
€ 1,500,
(b) DeVries Plastics, Inc. is trading on the equity successfully, since its return on ordinary share equity is greater than interest paid on bonds.
Note: Some analysts use after-tax interest expense to compute the bond rate.
*EXERCISE 15-21 (10 – 15 minutes)
Preference Ordinary Total (a) Preference shares are non-cumulative, Non-participating (2,000 X $100 X 6%) $12, Remainder ($70,000 – $12,000) $58,000 $70,
(b) Preference shares are cumulative, Non-participating ($12,000 X 3) $36, Remainder ($70,000 – $36,000) $34,000 $70,
Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 15-
*EXERCISE 15-21 (Continued)
Preference Ordinary Total (c) Preference shares are cumulative, participating $44,444 $25,556 $70,
The computation for these amounts is as follows:
Preference Ordinary Total Dividends in arrears (2 X $12,000) $24,000 $24, Current dividend 12,000 12, Pro-rata share to ordinary (5,000 X $50 X 6%) $15,000 15, Balance dividend pro-rata 8,444 10,556 19,000* $44,444 $25,556 $70,
*Additional amount available for participation ($70,000 – $24,000 – $12,000 – $15,000) 19, Par value of shares that are to participate Preference (2,000 X $100) $200, Ordinary (5,000 X $50) 250,000 450, Rate of participation $19,000 ÷ $450,000 4% Participating dividend Preference, 4% X $200,000 $ 8, Ordinary, 4% X $250,000 10, $19,
Note to instructor: Another way to compute the participating amount is as follows:
Preference
$200,
X $19,
$ 8,
$450,
Ordinary
$250,
X $19,
10,
$19,
$450,
Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 15-
*EXERCISE 15-22 (Continued)
Note to instructor: Another way to compute the participating amount is as follows:
(b) Preference Ordinary Total Preference shares are non-cumulative and non-participating $10,000 $256,000 $266,
The computation for these amounts is as follows: Current dividend (preferred) (5% X $10 X 20,000) $ 10, Remainder to ordinary ($266,000 – $10,000) 256, $266,
(c) Preference Ordinary Total Preference shares are non-cumulative and participating in distributions in excess of 7% $12, $253, $266,
The computation for these amounts is as follows: Preference Ordinary Total Current year Preference (5% X $10 X 20,000) $10,000 $ 10, Ordinary (5% X $3,000,000) $150,000 150, Additional 2% to ordinary (2% X $3,000,000) 60, 60, Balance dividend pro-rata 2,875 43,125 46,000* $12,875 $253,125 $266,
*Additional amount available for participation ($266,000 – $10,000 – $150,000 – $60,000) $ 46, Par value of shares that are to participate ($200,000 + $3,000,000) $3,200, Rate of participation $46,000 ÷ $3,200,000 1% Participating dividend Preference 1% X $200,000 $ 2, Ordinary 1% X $3,000,000 43, $ 46,
15-20 Copyright © 2011 John Wiley & Sons, Inc. Kieso, Intermediate: IFRS Edition, Solutions Manual
*EXERCISE 15-23 (10 – 15 minutes)
Assumptions
(a) (b) Preference, non-cumulative, and non-participating
Preference, cumulative, and fully participating Year Paid-out Preference Ordinary Preference Ordinary 2009 $12,000 $4 – 0 – $ 4 – 0 – 2010 $26,000 $6 $ .73 $ 7 $. 2011 $52,000 $6 $2 $13 $1. 2012 $76,000 $6 $4 $19 $1.
The computations for part (a) are as follows:
2009
Dividends paid ................................................... $12, Amount due preference (2,500 X $100 X 6%) ... $15, Preference per share ($12,000 ÷ 2,500) .............. $4. Ordinary per share ............................................ – 0 –
2010 Dividends paid ................................................... $26, Amount due preference .................................... 15, Amount due ordinary ........................................ $11, Preference per share ($15,000 ÷ 2,500) .............. $6. Ordinary per share ($11,000 ÷ 15,000) ............... $.
2011
Dividends paid ................................................... $52, Amount due preference .................................... 15, Amount due ordinary ........................................ $37, Preference per share ($15,000 ÷ 2,500) .............. $6. Ordinary per share ($37,000 ÷ 15,000) ............... $2.
Ch. 15
Course: Intermediate Accounting (CTRL713)
University: The German University in Cairo
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