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Chapter 15 discusses shareholders' equity, covering the characteristics of corporate organization, rights of shareholders, and types of shares, including common and preferred shares. It explains accounting for share transactions, dividends, and financial reorganizations, highlighting differences between IFRS and ASPE. The chapter also emphasizes the presentation and analysis of shareholders' equity, including required disclosures and common financial ratios.

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TB 15

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CHAPTER 15

SHAREHOLDERS’ EQUITY

CHAPTER STUDY OBJECTIVES

1. Discuss the characteristics of the corporate form of organization, rights of shareholders, and
different types of shares. The three main forms of organization are the proprietorships, partnerships,
and corporations. Incorporation gives shareholders protection against claims on their personal assets
and allows greater access to capital markets.
If there are no restrictive provisions, each share carries the following rights: (1) to share
proportionately in profits and losses, (2) to share proportionately in management (the right to vote for
directors), and (3) to share proportionately in corporate assets upon liquidation. An additional right to
share proportionately in any new issues of shares of the same class (called the pre-emptive right) may
also be attached to the share.
Preferred shares are a special class of share that have certain preferences or features that common
shares do not have. Most often, these features are a preference over dividends and a preference over
assets in the event of liquidation. Many other preferences may be attached to specific shares.
Preferred shareholders give up some or all of the rights normally attached to common shares.

2. Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits,
and dividend distribution. Shares are recognized and measured at net proceeds when issued. Shares
may be issued on a subscription basis, in which case they are not considered legally issued until they
are paid up. Shares may also be issued as a bundle with other securities, in which case the proceeds
must be allocated between the securities. The residual or relative fair value methods (sometimes
called the incremental or proportional methods) may be used for the allocation.
If the reacquisition cost of the shares is greater than the original proceeds, the acquisition cost is
allocated to share capital, then contributed surplus, and then retained earnings. If the cost is less, the
cost is allocated to share capital (to stated or assigned cost) and to contributed surplus.
Dividends paid to shareholders are affected by the dividend preferences of the preferred shares.
Preferred shares can be cumulative or non-cumulative, and fully participating, partially participating,
or non-participating.
A stock dividend is a capitalization of retained earnings that generally results in a reduction in
retained earnings and a corresponding increase in certain contributed capital accounts. The total
shareholders’ equity remains unchanged with a stock dividend. A stock split results in an increase or
decrease in the number of shares outstanding. However, no accounting entry is required.

3. Understand how shareholders’ equity is presented, disclosed, and analyzed. Contributed surplus
is additional surplus coming from shareholder transactions. Accumulated other comprehensive
income is accumulated non-shareholder income that has not been booked through net income. ASPE
does not recognize this concept. The shareholders’ equity section of the SFP includes share capital,

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

contributed surplus, retained earnings, and accumulated other comprehensive income. A statement
of changes in shareholders’ equity is required under IFRS.
Basic disclosure requirements include authorized and issued share capital and changes during the
period. Rights attached to shares should be presented, and where dividends are in arrears, this should
also be disclosed. Where there are restrictions on retained earnings or dividends, this should be
disclosed. Under IFRS, companies must also disclose information about their objectives, policies, and
processes for managing capital and show summary quantitative information regarding what the
company considers its capital.
Common ratios used in this area are the rate of return on common shareholders’ equity, payout ratio,
price earnings ratio, and book value per share.

4. Identify the major differences in accounting between IFRS and ASPE, and what changes are
expected in the near future. In several cases, ASPE provides more guidance, as noted in the
comparison chart in Illustration 15.8. IFRS requires a statement of changes in shareholders’ equity,
whereas ASPE requires a statement of changes in retained earnings (with additional note disclosure
regarding the changes in equity). Deliberations continue on the IASB’s Financial Instruments with
Characteristics of Equity project.

5. Explain how to account for par value and treasury shares. Par value shares may only be valued at
par value in the common or preferred share accounts. The excess goes to contributed surplus. On a
repurchase or cancellation, the par value is removed from the common or preferred share accounts
and any excess or deficiency is booked to contributed surplus or retained earnings, as was discussed
for no par shares.
Treasury shares are created when a company repurchases its own shares and does not cancel or retire
them at the same time; that is, they remain outstanding. The single-transaction method is used when
treasury shares are purchased. This method treats the purchase and subsequent resale or
cancellation as part of the same transaction.

6. Explain how to account for a financial reorganization. A corporation that has accumulated a large
debit balance (deficit) in retained earnings may enter into a process known as a financial
reorganization. During a reorganization, creditors and shareholders negotiate a deal to put the
company on a new footing. This generally involves a change in control and a comprehensive
revaluation of assets and liabilities. The procedure consists of the following steps: (1) The deficit is
reclassified so that the ending balance in Retained Earnings is zero. (2) The change in control is
recorded. (3) All assets and liabilities are comprehensively revalued at current values.

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS

Answer No. Description

c 1. Residual interest
b 2. REITs
a 3. Pre-emptive right
d 4. Shareholders’ liability
b 5. Features of cumulative preferred shares
c 6. Cumulative preferred shares dividend provisions
b 7. Callable preferred shares
c 8. Total shareholders' equity
b 9. Reasons for issuing preferred shares
c 10. Significance of par value
b 11. Rights of common shareholders
d 12. Common shares subscribed
d 13. Classification of subscriptions receivable
b 14. Allocation methods for a lump sum issuance
a 15. Direct costs of issuing shares
c 16. Reacquisition of shares
d 17. Reacquisition of shares at less than average share value
c 18. Reacquisition of shares at greater than original issue price
b 19. Retirement of shares
c 20. Retirement of shares
b 21. Retirement of preferred shares
c 22. Transactions causing a decrease in retained earnings
b 23. Transactions causing an increase in retained earnings
d 24. Legality of dividend distributions
b 25. Timing of entry to record dividends
c 26. Shares entitled to receive a cash dividend
a 27. Definition of a property dividend
c 28. Determine false statement regarding property dividends
d 29. Fair value of a property dividend
a 30. Effect of a stock dividend
b 31. Knowledge of dividend declarations
b 32. Knowledge of dividend declarations
d 33. Effect of large stock dividend
a 34. Accounting for stock split
b 35. Accounting for stock dividend
c 36. Large stock dividend
b 37. Reporting of common stock dividend distributable
a 38. Liquidating dividend
b 39. Entry to record a liquidating dividend
b 40. Effects of stock dividends and stock splits
a 41. Effects of a stock split
c 42. Valid reasons for stock splits
c 43. Knowledge of what shares receive dividends

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Answer No. Description

b 44. Noncumulative preferred dividends in arrears
b 45. Common shares issued in payment of services
d 46. Accounting for share subscriptions
b 47. Cash dividend dates
c 48. Valuation of a property dividend
a 49. Accounting effects of property dividends
b 50. Effect of a liquidating dividend on equity accounts
c 51. Effect of a stock dividend on equity accounts
d 52. Effect of a stock dividend on total equity
d 53. Effect of stock dividend and stock split
b 54. Calculation of contributed surplus
c 55. Calculation of contributed capital
b 56. Calculation of share account balance
a 57. Calculation of contributed surplus
b 58. Entry to record share subscriptions
a 59. Entry to record share subscriptions
b 60. Share subscriptions
a 61. Property dividend
c 62. Entry to record stock dividend
c 63. Calculation of share account after stock dividend
a 64. Calculation of retained earnings after stock dividend
c 65. Effect on equity accounts after dividend declarations
b 66. Effect of stock dividend on retained earnings
a 67. Effect of stock dividend on retained earnings
b 68. Effect of share cancellation on equity accounts
d 69. Effect of share cancellation on equity accounts
d 70. Calculation of cash dividend allocation
b 71. Calculation of cash dividend allocation
d 72. Calculation of cash dividend allocation
b 73. Calculation of cash dividend allocation
c 74. Calculation of cash dividend allocation
b 75. Calculation of cash dividend allocation
b 76. Calculation of cash dividend allocation
b 77. Calculation of cash dividend allocation
b 78. Determine entry to incorporate a proprietorship.
c 79. Calculate amount to credit preferred shares in lump sum issue.
c 80. Calculate contributed surplus from retirement of shares.
c 81. Allocation of cash dividend to common and preferred shares
d 82. Entry to record declaration of property dividend
a 83. Calculation of total equity
d 84. Classification of shareholders' equity
d 85. Cumulative preferred dividends in arrears
c 86. Statement of Changes in Shareholders’ Equity (IFRS)
b 87. Calculation of payout ratio
c 88. Rate of return on common shareholders’ equity

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Answer No. Description

b 89. Calculation of price earnings ratio
d 90. Book value per common share
a 91. Calculation of cash dividends paid (given payout ratio)
a 92. Calculation of price earnings ratio
b 93. Calculation of rate of return on common shareholders’ equity
c 94. Calculation of rate of return on common shareholders’ equity
b 95. Calculation of price earnings ratio
d 96. Calculation of book value
b 97. Calculation of basic EPS
c 98. Calculation of price earnings ratio
b 99. Share reacquisition
b 100. Receivables for loans issued to buy shares
c 101. Company financial reorganization
a *102. Sale of treasury shares
a *103. Reissuance of treasury shares at less than acquisition cost
c *104. Reporting treasury shares in the balance sheet
c *105. Common shares issued vs. outstanding
a *106. Effect of reissuance of treasury shares
c *107. Effect of treasury shares on number of shares outstanding
a *108. Effect on income statement of sale of treasury shares
c *109. Recording par value shares
d *110. Retirement of par value shares
c *111. Sale of treasury shares
a *112. Cancellation of treasury shares
c *113. Effect of treasury shares on equity
d *114. Total equity with treasury shares exchange
c *115. Calculation of contributed surplus with treasury shares transactions
d *116. Recording retirement of shares
b *117. Retained earnings balance with treasury shares transactions
a *118. Retained earnings balance with cancelled shares
b *119. Retained earnings balance with treasury shares transactions
c *120. Effect of stock dividend on retained earnings (with treasury shares)
a *121. Calculate balance in retained earnings
b *122. Effect of reissuance of treasury shares
d *123. Determining occurrence of financial reorganization
a *124. Balance of retained earnings after a financial reorganization
b *125. Financial reorganization requirements
b *126. IFRS vs. ASPE guidance
c *127. Determine false statement regarding financial reorganizations.
a *128. Adjustment of common shares in a financial reorganization
b *129. Effect on deficit from revaluation of assets in a financial reorganization
d *130. Effect of financial reorganization on retained earnings

*This topic is dealt with in an Appendix to the chapter.

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EXERCISES

Item Description
E15-131 Share subscriptions
E15-132 Lump sum issuance of shares
E15-133 Shareholders' equity
E15-134 Share subscriptions
E15-135 Shares issued in noncash transactions and trading on equity
E15-136 Reacquisition of shares
E15-137 Determination of dividend amount
E15-138 Stock dividends and retained earnings
E15-139 Stock dividends and stock splits
E15-140 Dividends on preferred shares
E15-141 Dividends on preferred shares
E15-142 Dividends on preferred shares
E15-143 Dividends on preferred shares
E15-144 Lump sum issuance of par value shares
E15-145 True or false questions
E15-146 Basis share rights and share capital
*E15-147 Calculation of selected financial ratios
*E15-148 Treasury shares
*E15-149 Treasury shares
*E15-150 Financial reorganization

*This topic is dealt with in an Appendix to the chapter.

PROBLEMS
Item Description
P15-151 Reacquisition of shares
P15-152 Issuance of shares for cash, noncash consideration, and by subscription
P15-153 Issuance of shares for cash, noncash consideration, and by subscription
P15-154 Allocation of cash dividends
P15-155 Share retirement and stock dividends
P15-156 Dividend distribution
P15-157 Equity transactions
P15-158 Calculation of selected financial ratios
P15-159 Statement of shareholders’ equity
P15-160 Shareholders’ equity section and capital disclosures
*P15-161 Treasury share transactions
*P15-162 Financial reorganization

*This topic is dealt with in an Appendix to the chapter.

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MULTIPLE CHOICE QUESTIONS

1. The residual interest in a corporation belongs to the

a) management.
b) creditors.
c) common shareholders.
d) preferred shareholders.

Answer: c

Difficulty: Easy
Learning Objective: Discuss the characteristics of the corporate form of organization, rights of
shareholders, and different types of shares.
Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

2. Which statement is correct regarding real estate income or investment trusts?

a) They are often set up as unlimited purpose trust funds.
b) They are considered to be special purpose entities.
c) The unitholders (investors) do not pay tax on the cash received from the trust.
d) The unitholders have unlimited liability.

Answer: b

3. The pre-emptive right enables a shareholder to

a) share proportionately in any new issues of shares in the same class.
b) receive cash dividends before other classes of shares without the pre-emptive right.
c) sell shares back to the corporation at the option of the shareholder.
d) receive the same amount of dividends on a percentage basis as the preferred shareholders.

Answer: a

Difficulty: Easy

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Discuss the characteristics of the corporate form of organization, rights of
shareholders, and different types of shares.
Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

4. The liability of shareholders is

a) similar to the liability of the owners of a partnership.
b) similar to the liability of the owner of a proprietorship.
c) equal to an amount sufficient to satisfy all creditors.
d) limited to their property or service invested in the corporation.

Answer: d

5. The cumulative feature of preferred shares

a) limits the amount of cumulative dividends to the par value of the preferred shares.
b) requires that dividends not paid in any year must be made up in a later year before dividends are
distributed to common shareholders.
c) means that the shareholder can accumulate preferred shares until they are equal to the stated
value of common shares, at which time they can be converted into common shares.
d) enables a preferred shareholder to accumulate dividends until they equal the stated value of the
shares and receive the shares in place of the cash dividends.

Answer: b

6. Dividends on cumulative preferred shares

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a) must be paid each year.

b) accumulate over the life of the shares and are paid on retirement.
c) must be paid before dividends may be paid on common shares.
d) if in arrears, must be calculated like compound interest.

Answer: c

7. Callable preferred shares

a) may be redeemed at any time at the shareholder’s option.
b) may be called or redeemed at the option of the issuing corporation.
c) usually have voting rights.
d) have rights to participate in any new share issuance.

Answer: b

8. Total shareholders' equity represents

a) a claim to specific assets contributed by the owners.
b) the maximum amount that can be borrowed by the corporation.
c) a claim against a portion of the total assets of the corporation.
d) only the amount of earnings that have been retained in the corporation.

Answer: c

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Bloomcode: Knowledge
AACSB: Analytic

9. Preferred shares are often issued instead of debt

a) to avoid paying dividends to the common shareholders.
b) because a corporation’s debt to equity ratio has become too high.
c) to increase the market value of the shares.
d) to decrease the market value of the shares.

Answer: b

10. In jurisdictions where par value shares are legally allowed, the only real significance of par value is
a) to enable the shares to be callable or convertible.
b) to require the corporation to pay dividends.
c) to establish the maximum responsibility of a shareholder in the event of insolvency.
d) to establish the maximum price at which the shares can be sold.

Answer: c

11. Which one of the following is NOT a right of common shareholders?

a) to share proportionately in profits and losses
b) to share proportionately in all management decisions
c) to share proportionately in corporate assets upon liquidation
d) to share proportionately in any new issues of stock of the same class

Answer: b

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12. Aye Corp. sells common shares on a subscription basis. The Common Shares account should be
credited when the
a) shares are subscribed for.
b) first payment is made.
c) last payment is made.
d) last payment is made and the shares are issued.

Answer: d

13. Subscriptions Receivable are reported as

a) a non-current asset.
b) a current asset.
c) a deduction from shareholders' equity.
d) either a current asset or a deduction from shareholders' equity.

Answer: d

14. The accounting problem in a lump sum sale of shares is the allocation of the proceeds between the
classes of securities. One acceptable method of allocation is the

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a) pro forma method.

b) relative fair value method.
c) direct method.
d) indirect method.

Answer: b

15. Direct incremental costs incurred to sell shares such as underwriting costs should be accounted
for as
a) a reduction of share capital.
b) an expense of the period in which the shares are issued.
c) an intangible asset.
d) a reduction of retained earnings.

Answer: a

16. According to the CBCA, when a company purchases its own shares on the market
a) the shares are recorded with a debit to Repurchased Shares.
b) the amount paid is deducted from the share class to which they belong.
c) the shares must be cancelled.
d) the excess of purchase price over cost is a loss.

Answer: c

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CPA: Financial Reporting

Bloomcode: Knowledge
AACSB: Analytic

17. When shares are reacquired at a cost less than the average per share value, the difference is
credited to
a) the appropriate share capital account.
b) Gain on Reacquisition of Shares.
c) Retained Earnings.
d) Contributed Surplus.

Answer: d

18. Assuming a corporation has no contributed surplus booked, when shares are reacquired at a cost
greater than their original issue price and cancelled, what account(s) should be debited?
a) the share account for the total cost
b) the share account for the original issue price and contributed surplus for the additional amount
c) the share account for the average per share amount and retained earnings for the additional
amount
d) the share account for the average per share amount and a loss account for the additional amount

Answer: c

19. When shares are purchased or redeemed and cancelled, guidelines have been established for the
sequence of accounts to adjust when allocating the cost. Which of the following is the first account to
be adjusted?
a) a Contributed Surplus account created from a previous reacquisition of the same class of shares

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) the Share Capital account

c) Retained Earnings
d) Accumulated Other Comprehensive Income

Answer: b

20. A possible result of the reacquisition and cancellation of shares by a corporation is that this may
a) directly increase but not decrease retained earnings.
b) increase net income if a gain is recognized.
c) directly decrease but not increase retained earnings.
d) decrease but not increase net income.

Answer: c

21. When all outstanding preferred shares are purchased and retired by the issuing corporation for
less than the original issue price, accounting for the retirement increases
a) the amount of dividends available to common shareholders.
b) the contributed capital of the common shareholders.
c) reported income for the period.
d) Accumulated Other Comprehensive Income.

Answer: b

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Bloomcode: Application
AACSB: Analytic

22. Which of the following transactions would NOT result in a decrease to retained earnings?
a) a declaration and issuance of a stock dividend
b) the incurrence of a net loss for the period
c) a reacquisition of shares for less than the original issue price
d) the correction of an error in which depreciation expense was understated in a prior period

Answer: c

23. Which of the following transactions would NOT result in an increase to retained earnings?
a) correction of an error in which expenses were overstated in a previous year
b) the issuance of a 3-for-1 stock split
c) retrospective application of a new accounting policy that results in higher net income in the
previous year.
d) earning of net income for the period

Answer: b

24. Which of the following statements is NOT generally true about the legality of dividend
distributions?
a) No amounts may be distributed unless the corporate capital is left intact.
b) The corporation must still be able to pay its liabilities when they become due.
c) A corporation may not pay dividends that are higher than their legally available retained earnings.
d) Dividends do not need to be formally approved by the Board of Directors.

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Answer: d

25. An entry for dividends is NOT made on the

a) date of declaration.
b) date of record.
c) date of payment (cash dividends).
d) date of distribution (stock dividends).

Answer: b

26. Cash dividends are paid on the basis of the number of shares
a) authorized.
b) issued.
c) outstanding.
d) outstanding less the number of treasury shares.

Answer: c

27. Jesse Corp. owns 4,000,000 shares of James Corp. On December 31, 2023, Jesse distributed these

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

shares as a dividend to its shareholders. This is an example of a

a) property dividend.
b) stock dividend.
c) liquidating dividend.
d) cash dividend.

Answer: a

28. Which of the following statements about property dividends is NOT correct?
a) A property dividend is a nonreciprocal transfer of nonmonetary assets.
b) A property dividend is also called a dividend in kind.
c) The accounting for a property dividend should be based on the carrying value (book value) of the
nonmonetary assets transferred.
d) The accounting for a property dividend should be based on the fair value of the nonmonetary
assets transferred.

Answer: c

29. The fair value of a property dividend should NOT be determined by

a) estimated realizable values in cash transactions involving similar assets.
b) quoted market prices.
c) independent appraisals.
d) arbitrary values assigned by the Board of Directors.

Answer: d

Difficulty: Easy

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

30. Declaration and issuance of a stock dividend

a) has no effect on total assets, liabilities, or shareholders' equity.
b) decreases the amount of working capital.
c) decreases total shareholders' equity.
d) increases the current ratio.

Answer: a

31. If a corporation wishes to "capitalize" part of its earnings, it may issue a

a) cash dividend.
b) stock dividend.
c) property dividend.
d) liquidating dividend.

Answer: b

32. Which type of dividends do NOT reduce total shareholders' equity?

a) cash dividends
b) stock dividends
c) property dividends

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d) liquidating dividends

Answer: b

33. The declaration and issuance of a stock dividend larger than 25% generally
a) increases common shares outstanding and increases total shareholders' equity.
b) increases retained earnings and increases total shareholders' equity.
c) may increase or decrease common shares but does not change total shareholders' equity.
d) decreases retained earnings but does not change total shareholders' equity.

Answer: d

34. Pryor Corporation issued a 2-for-1 common stock split. The shares had been originally issued at
$10 per share. At what amount should retained earnings be capitalized for the additional shares
issued?
a) There should be no capitalization of retained earnings.
b) $10 per share
c) market value on the declaration date
d) market value on the payment date

Answer: a

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AACSB: Analytic

35. The issuer of a 5% common stock dividend to common shareholders should transfer from retained
earnings to contributed capital an amount equal to the
a) book value of the shares issued.
b) market value of the shares issued.
c) minimum legal requirements.
d) par or stated value of the shares issued.

Answer: b

36. At a minimum, how large in relation to total outstanding shares may a stock distribution be before
it should be accounted for as a large stock dividend instead of as a small stock dividend?
a) no less than 2% to 5%
b) no less than 10% to 15%
c) no less than 20% to 25%
d) no less than 45% to 50%

Answer: c

37. The balance in the Common Stock Dividend Distributable account should be reported as a(n)
a) deduction from the Common Shares account.
b) addition to contributed capital.
c) current liability.
d) contra-asset.

Answer: b

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38. A dividend that is a return to shareholders as a portion of their original capital investments is
known as a
a) liquidating dividend.
b) property dividend.
c) cash dividend.
d) participating dividend.

Answer: a

39. A mining company declared a liquidating dividend. The journal entry to record the declaration
must include a debit to
a) Retained Earnings.
b) Contributed Capital.
c) Accumulated Other Comprehensive Income.
d) Dividend Payable.

Answer: b

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40. A common feature of both stock splits and stock dividends is

a) a transfer to earned capital of a corporation.
b) that there is no effect on total shareholders' equity.
c) an increase in total liabilities of a corporation.
d) a reduction in the contributed capital of a corporation.

Answer: b

41. What effect does the issuance of a 2-for-1 stock split have on each of the following?
Common Shares Retained Earnings
a) no effect no effect
b) increase no effect
c) decrease no effect
d) decrease decrease

Answer: a

42. Which of the following is NOT a valid reason for a stock split?
a) to increase the shareholder base by increasing the number of shares outstanding and making them
more marketable
b) to reduce the market price of the shares so that more individuals can afford to invest in the shares
c) to increase the market price of the shares to make the stock more attractive
d) to reduce the market price of the shares to make the stock more attractive

Answer: c

Difficulty: Medium

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43. Dividends are NOT paid on

a) noncumulative preferred shares.
b) non-participating preferred shares.
c) treasury shares.
d) non-voting common shares.

Answer: c

44. Noncumulative preferred dividends in arrears

a) must be paid before any other cash dividends can be distributed.
b) are not paid or disclosed.
c) are disclosed as a liability until paid.
d) are paid to preferred shareholders if sufficient funds remain after payment of the current preferred
dividend.

Answer: b

45. Aye Corp. was organized in January 2023 with authorized capital of 1,000,000 no par value
common shares. On February 1, 2023, shares were issued at $10 per share. On March 1, 2023, the
corporation's lawyer accepted 7,000 common shares with a fair value of $85,000 in settlement for

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legal services. Total shareholders’ equity would increase on

February 1, 2023 March 1, 2023
a) yes no
b) yes yes
c) no no
d) no yes

Answer: b

46. On December 1, 2023, Dee Ltd. agreed to sell 40,000 of its no par common shares on a subscription
basis. On that day, 25% of the subscription price was collected as a down payment, with the
remaining 75% due in 2024. On the December 31, 2023 statement of financial position, the
shareholders' equity section would report
a) common shares issued for 25% of the subscription price.
b) common shares issued for 100% of the subscription price less a subscription receivable for 75% of
the subscription price.
c) common shares subscribed for 75% of the subscription price.
d) common shares subscribed for 100% of the subscription price less a subscription receivable for
75% of the subscription price.

Answer: d

47. The dollar amount of a cash dividend to be paid is determined on the date of
a) record.
b) declaration.
c) declaration or date of record, whichever is earlier.
d) payment.

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: b

48. An investment in marketable securities was distributed to shareholders as a property dividend.

The dividend should be recorded at the
a) fair value of the asset transferred or the book value of the asset transferred, whichever is higher.
b) fair value of the asset transferred or the book value of the asset transferred, whichever is lower.
c) fair value of the asset transferred.
d) book value of the asset transferred.

Answer: c

49. Emily Corp. owned shares in Carr Ltd. On December 1, 2023, Emily declared and distributed a
property dividend of Carr shares when the fair value exceeded the carrying amount. As a consequence
of the dividend declaration and distribution, the accounting effects would be
Property Dividends
Recorded At Retained Earnings
a) fair value decreased
b) fair value increased
c) cost increased
d) cost decreased

Answer: a

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Bloomcode: Application
AACSB: Analytic

50. A corporation declared a dividend, a portion of which was liquidating. How would this distribution
affect each of the following?
Contributed
Surplus Retained Earnings
a) decrease no effect
b) decrease decrease
c) no effect decrease
d) no effect no effect

Answer: b

51. How would the declaration of a 15% stock dividend affect each of the following?
Total
Retained Earnings Shareholders' Equity
a) no effect no effect
b) no effect decrease
c) decrease no effect
d) decrease decrease

Answer: c

52. On May 1, 2023, when the market value of Jay Ltd.'s common shares was $15 per share, the
corporation had 100,000 no par value common shares issued and outstanding. On this day, Jay
declared and issued a 15% common stock dividend. As a result of this stock dividend, Jay's total

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

shareholders' equity
a) increased by $225,000.
b) decreased by $225,000.
c) decreased by $15,000.
d) did not change.

Answer: d

53. How would total shareholders' equity be affected by the declaration of each of the following?
Stock dividend Stock split
a) no effect increase
b) decrease decrease
c) decrease no effect
d) no effect no effect

Answer: d

54. Berlin Corporation was organized on January 1, 2023, with 400,000 no par value common shares
authorized. During 2023, the corporation had the following share transactions:
Jan. 5 Issued 150,000 shares at $10 per share
Apr. 6 Issued 50,000 shares at $12 per share
June 8 Issued 50,000 shares at $14 per share
July 28 Purchased 20,000 shares at $11 per share and cancelled them
Dec. 31 Issued 20,000 shares at $18 per share
What is the total amount of contributed surplus at December 31, 2023?
a) $0
b) $4,000
c) $20,000

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) $220,000

Answer: b

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: (150,000 × $10) + (50,000 × $12) + (50,000 × $14) = $2,800,000
$2,800,000 ÷ 250,000 = $11.20; $11.20 × 20,000 = $224,000
$11.00 × 20,000 = $220,000; $224,000 – $220,000 = $4,000.

55. Frieds Corp. was organized on January 1, 2023, with the following authorized share capital:
20,000 common shares, no par value
15,000, $.10, cumulative preferred shares, no par value
During 2023, the corporation issued 10,000 common shares for $700,000 and 10,000 preferred shares
at $28 per share. On December 20, 2023, subscriptions for 1,000 preferred shares were taken at a
purchase price of $30. These subscribed shares were paid for on January 2, 2024. What should Frieds
report as total contributed capital on its December 31, 2023, balance sheet?
a) $280,000
b) $700,000
c) $980,000
d) $1,130,000

Answer: c

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $700,000 + (10,000 × $28) = $980,000. (The Subscriptions Receivable and Common Shares
Subscribed accounts should preferably both be in contributed capital, so they would cancel each
other out.)

56. Berne Ltd. was organized on January 1, 2023, with 300,000 no par value common shares
authorized. During 2023, the corporation had the following share transactions:
Jan. 4 Issued 120,000 shares at $10 per share
Mar. 8 Issued 40,000 shares at $11 per share

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May 17 Purchased 15,000 shares at $12 per share and cancelled them
July 6 Issued 30,000 shares at $13 per share
Aug. 27 Issued 10,000 shares at $14 per share
The total amount in the Common Shares account at December 31, 2023 is
a) $2,170,000.
b) $2,016,250.
c) $2,007,250.
d) $1,990,000.

Answer: b

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: [(120,000 × $10) + (40,000 × $11)] ÷ 160,000 = $10.25
(120,000 × $10) + (40,000 × $11) – (15,000 × $10.25) + (30,000 × $13) +(10,000 × $14) = $2,016,250

57. Berne Ltd. was organized on January 1, 2023, with 300,000 no par value common shares
authorized. During 2023, the corporation had the following share transactions:
Jan. 4 Issued 120,000 shares at $10 per share
Mar. 8 Issued 40,000 shares at $11 per share
May 17 Purchased 15,000 shares at $12 per share and cancelled them
July 6 Issued 30,000 shares at $13 per share
Aug. 27 Issued 10,000 shares at $14 per share
The total amount of contributed surplus at December 31, 2023 is
a) $0.
b) $26,250.
c) $153,750.
d) $180,000.

Answer: a

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $-0. Paid more than carrying value of the shares, therefore difference Dr. to Retained
Earnings

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

58. Minosh Corp. is authorized to issue 400,000 no par value common shares. Subscribers agree to
purchase 75,000 shares at $12 per share with a 30% down payment.
The journal entry to record receipt of the subscriptions includes a
a) debit to Common Shares Subscribed for $900,000.
b) credit to Common Shares Subscribed for $900,000.
c) credit to Common Shares for $270,000.
d) credit to Subscriptions Receivable for $670,000.

Answer: b

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 75,000 × $12 = $900,000

59. Minosh Corp. is authorized to issue 400,000 no par value common shares. Subscribers agree to
purchase 75,000 shares at $12 per share with a 30% down payment.
The journal entry to record the issuance of the shares upon receipt of the final instalment includes a
a) debit to Common Shares Subscribed for $900,000.
b) credit to Common Shares for $670,000.
c) credit to Common Shares for $270,000.
d) debit to Subscriptions Receivable for $670,000.

Answer: a

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 75,000 × $12 = $900,000

60. Presented below is information related to Oistins Corporation:

Subscriptions Receivable, Common Shares........................ $240,000
Common Shares, no par value............................................. 7,620,000
Common Shares Subscribed................................................ 480,000

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

$4 Preferred Shares, no par value........................................ 2,880,000

Retained Earnings................................................................ 1,800,000
The total amount that will be added to the Common Shares account when the final subscriptions are
received will be
a) $240,000.
b) $480,000.
c) $720,000.
d) cannot be determined from the information given.

Answer: b

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $480,000, the subscription price

61. Elves Ltd. owns 150,000 shares of Rogue Ltd. common shares, which are being accounting for by
the equity method. On December 15, 2023, when Elves’s "Investment in Common Shares of Rogue
Ltd." account has a carrying value of $7.50 per share, Elves declares all these shares to its
shareholders as a property dividend, to be distributed on December 31, 2023. Elves had originally paid
$12 for each share. Rogue has 1,500,000 shares issued and outstanding, for which the quoted market
price was $10.50 per share on the declaration date and $13.50 per share on the distribution date.
Ignoring income taxes, what would be the reduction in Elves’s shareholders' equity as a result of the
above transactions?
a) $1,125,000
b) $1,050,000
c) $1,200,000
d) $1,575,000

Answer: a

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: (150,000 × $10.50) value of dividend – [150,000 x ($10.50 – $7.50)]
gain on appreciation = $1,125,000

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

62. Minnick Corp. has 900,000 no par common shares authorized, of which 400,000 shares are
outstanding. The average carrying value of the shares is $6 per share. When the market value was $10
per share, Miinick declared a 10% stock dividend. What entry, if any, should Minnick make to record
this dividend declaration?
a) No entry
b) Retained Earnings......................................................................................... 200,000
Common Stock Dividend Distributable................................................. 200,000
c) Retained Earnings......................................................................................... 400,000
Common Stock Dividend Distributable................................................. 400,000
d) Stock Dividend Payable................................................................................ 400,000
Common Stock Dividend Distributable................................................. 400,000

Answer: c

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 400,000 × $10 x 10% = $400,000

63. On June 30, 2023, when Wenn Inc.'s shares were selling at $32 per share, its capital accounts were
as follows:
Common Shares, no par, 40,000 shares issued
and outstanding........................................................................... $1,500,000
Retained Earnings................................................................................ 2,600,000
If a 5% stock dividend were declared and distributed, the Common Shares account balance would be
a) $3,064,000.
b) $1,500,000.
c) $1,564,000.
d) $2,600,000.

Answer: c

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $1,500,000 + (40,000 x 5% x $32) = $1,564,000

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

64. The shareholders' equity section of Zagreb Corp. at December 31, 2022 was:
Common shares, no par value; authorized 20,000 shares;
issued and outstanding 10,000 shares............................................. $50,000
Retained earnings..................................................................................... 200,000
$250,000
On February 28, 2023, when the market value of Zagreb’s shares was $12 per share, the board of
directors declared a 15% stock dividend, and accordingly 1,500 additional shares were issued. For the
two months ended February 28, 2023, Zagreb reported a net loss of $20,000.
What amount should Zagreb report as retained earnings at February 28, 2023?
a) $162,000
b) $180,000
c) $182,000
d) $198,000

Answer: a

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $200,000 – $20,000 – (1,500 × $12) = $162,000

65. Cash dividends declared on the no par value common shares of Athens Corp. were as follows:
1st quarter of 2023................................. $330,000
2nd quarter of 2023............................... 350,000
3rd quarter of 2023................................ 420,000
4th quarter of 2023................................ 450,000
The 4th quarter cash dividend was declared on December 20, 2023, to shareholders of record on
December 31, 2023, to be paid on January 9, 2024. In addition, Athens declared a 10% common stock
dividend on December 1, 2023, when there were 400,000 shares issued and outstanding, and the
market value of the common shares was $16 per share. The shares were issued on December 21, 2023.
What was the effect on Athens' shareholders' equity accounts during 2023 as a result of the above
transactions?
Common Shares Retained Earnings
a) $-0- $1,550,000 debit
b) $540,000 credit $1,740,000 debit
c) $640,000 credit $2,190,000 debit
d) $300,000 credit $1,950,000 debit

Answer: c

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 400,000 x 10% x $16 = $640,000 Cr. (common shares, i.e., stock dividend)
$330,000 + $350,000 + $420,000 + $450,000 + $640,000 = $2,190,000 Dr. (retained earnings)

66. The shareholders' equity of Tirana Ltd. at July 31, 2023 is presented below:
Common shares, no par value, authorized 400,000 shares,
issued and outstanding 200,000 shares........................................... $4,160,000
Retained earnings..................................................................................... 2,650,000
Total shareholders’ equity................................................................ $6,810,000
On August 1, 2023, the board of directors declared a 10% stock dividend, to be distributed on
September 15. The market price of Tirana's common shares was $35 on August 1 and $38 on
September 15. What is the debit to retained earnings as a result of the declaration and distribution of
this stock dividend?
a) $400,000
b) $700,000
c) $760,000
d) $1,400,000

Answer: b

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 200,000 × 10% × $35 = $700,000

67. On January 1, 2023, when the market value of its common shares was $15 per share, Crooks Inc.
declared a 10% common stock dividend. Shareholders' equity before the stock dividend was declared
was:
Common shares, no par value, authorized 300,000 shares,
issued and outstanding 180,000 shares........................................... $2,125,000
Retained earnings..................................................................................... 2,550,000
Total shareholders' equity................................................................ $4,675,000
What was the effect on Crook’s retained earnings as a result of the stock dividend?

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) $270,000 decrease
b) $450,000 decrease
c) $540,000 decrease
d) $750,000 decrease

Answer: a

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 180,000 × 10% × $15 = $270,000 decrease

68. Kryer Ltd. has 50,000 no par value common shares authorized, issued, and outstanding. All 50,000
shares were issued at $4 per share. Retained earnings are $60,000. If 5,000 common shares were
reacquired at $3 and cancelled,
a) shareholders' equity would decrease $75,000.
b) contributed surplus would increase $5,000.
c) contributed surplus would decrease $5,000.
d) retained earnings would decrease $15,000.

Answer: b

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 5,000 × ($4 – $3) = $5,000

69. Helix Corporation has 150,000 no par value common shares authorized, issued, and outstanding.
All 150,000 shares were issued at $80 per share. Retained earnings are $325,000. If 3,000 shares were
reacquired at $99 and cancelled, shareholders' equity would decrease by
a) $0.
b) $57,000.
c) $240,000.
d) $297,000.

Answer: d

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 3,000 × $99 = $297,000

70. On December 31, 2023, Monaco Ltd. had outstanding 2,000 no par value, $6, cumulative preferred
shares and 30,000 no par value common shares. At this time, dividends in arrears on the preferred
shares were $6,000. Cash dividends declared in 20241 totalled $30,000. The amounts paid to each
class of shares were
Preferred Shares Common Shares
a) $6,000 $24,000
b) $12,000 $18,000
c) $24,000 $6,000
d) $18,000 $12,000

Answer: d

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $6,000 + (2,000 × $6) = $18,000 (preferred shares)
$30,000 – $18,000 = $12,000 (common shares)

71. Riga Ltd. has outstanding 100,000 no par common shares and 20,000 no par, $0.40, preferred
shares issued at $5 each. The preferred shares are cumulative and non-participating. Dividends have
been paid every year except the past two years and the current year. Assuming that $50,000 will be
distributed as a dividend in the current year, how much will the common shareholders receive?
a) $24,000
b) $26,000
c) $34,000
d) $42,000

Answer: b

Difficulty: Medium

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

72. Riga Ltd. has outstanding 100,000 no par common shares and 20,000 no par, $0.40, preferred
shares issued at $5 each. The preferred shares are cumulative and non-participating. Dividends have
been paid every year except the past two years and the current year. Assuming that $21,000 will be
distributed as a dividend in the current year, how much will the preferred shareholders receive?
a) $0
b) $8,000
c) $16,000
d) $21,000

Answer: d

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 20,000 × $0.40 × 3 = $24,000 > $21,000

73. Riga Ltd. has outstanding 100,000 no par common shares and 20,000 no par, $0.40, preferred
shares issued at $5 each. The preferred shares are cumulative and non-participating. Dividends have
been paid every year except the past two years and the current year. The Common Shares account
currently shows a balance of $200,000. Assuming that $61,000 will be distributed as a dividend in the
current year, and the preferred shares are also fully participating, how much will the common
shareholders receive?
a) $37,000
b) $30,000
c) $31,000
d) $16,000

Answer: b

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Feedback: 8% × $200,000 = $16,000 (equivalent dividend)
*2 ÷ 3 × $21,000 = 14,000_ (participation)
$30,000
20,000 × $0.40 × 3 = $24,000 (preferred dividends)
$0.40 ÷ $5 = 8% dividend
$200,000 × 8% = $16,000 (equivalent common dividend)
Balance left = $61,000 – $24,000 – $16,000 = $21,000
*Shared $200,000: $100,000 C:P i.e., 2:1

74. Sarajevo Ltd. currently has outstanding 20,000 no par value common shares with a carrying value
of $200,000, and 10,000 no par value, $0.60, cumulative, fully participating preferred shares with a
carrying value of $100,000. Dividends on the preferred shares are one year in arrears. Assuming that
Sarajevo wishes to distribute $54,000 in dividends, the common shareholders will receive
a) $12,000.
b) $22,000.
c) $32,000.
d) $42,000.

Answer: c

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback:
Common Shares
$200,000 × 6% = $12,000 (current year)
$200,000 × 10%* = 20,000 (participating)
$32,000
Balance left = $54,000 – $12,000 – (10,000 × $0.60 × 2) = $30,000
* $30,000
$300,000 = 10%

75. Instanbul Corp. has outstanding 20,000 no par value, $0.80, preferred shares and 100,000 no par
value common shares. Dividends have been paid every year except last year and the current year. The
carrying value of the preferred shares is $200,000 and of the common shares is $300,000.
If the preferred shares are cumulative and non-participating and $100,000 is distributed as a dividend,

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

the common shareholders will receive

a) $0.
b) $68,000.
c) $84,000.
d) $100,000.

Answer: b

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $100,000 – (20,000 × $0.80 × 2) = $68,000

76. Instanbul Corp. has outstanding 20,000 no par value, $0.80, preferred shares and 100,000 no par
value common shares. Dividends have been paid every year except last year and the current year. The
carrying value of the preferred shares is $200,000 and of the common shares is $300,000.
If the preferred shares are noncumulative and fully participating and $70,000 is distributed as a
dividend, the common shareholders will receive
a) $0.
b) $42,000.
c) $46,000.
d) $54,000.

Answer: b

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback:
Common Shares
$300,000 × 8% = $24,000(current year)
$300,000 × 6%* = 18,000 (participating)
$42,000
*$70,000 – $24,000 – (20,000 × $0.80) = $30,000
$30,000
$500,000 = 6%

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77. Instanbul Corp. has outstanding 20,000 no par value, $0.80, preferred shares and 100,000 no par
value common shares. Dividends have been paid every year except last year and the current year. The
carrying value of the preferred shares is $200,000 and of the common shares is $300,000.
If the preferred shares are cumulative and fully participating and $101,000 is distributed as a dividend,
the common shareholders will receive
a) $0.
b) $51,000.
c) $61,000.
d) $69,000.

Answer: b

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback:
Common Shares
$300,000 × 8% = $24,000(current year)
$300,000 × 9%* = 27,000 (participating)
$51,000
*$101,000 – $24,000 – (20,000 × $0.80 × 2) = $45,000
$45,000 ÷ $500,000 = 9%

78. The December 31, 2023 condensed balance sheet of Bee Services, a proprietorship, follows:
Current assets....................................................................... $140,000
Property, plant, and equipment (net)................................. 130,000
$270,000
Liabilities............................................................................... $70,000
Betty Bee, Capital................................................................. 200,000
$270,000
Fair values at December 31, 2023, are as follows:
Current assets....................................................................... $160,000
Equipment............................................................................ 210,000
Liabilities............................................................................... 70,000
On January 1, 2024, Bee Services was incorporated as Bee-Line Ltd., with 10,000 no par value common
shares issued. How much should be credited to Common Shares?
a) $370,000
b) $300,000
c) $270,000
d) $200,000

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Answer: b

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $160,000 + $210,000 – $70,000 = $300,000

79. On July 1, 2023, Nehan Corp. issued 4,000 of its no par common shares and 8,000 of its no par
preferred shares for a lump sum of $200,000. At this date Nehan’s common shares were selling for $24
per share and the preferred shares for $18 per share. Using the relative fair value method, the amount
of the proceeds allocated to the preferred shares account should be
a) $100,000.
b) $110,000.
c) $120,000.
d) $72,000.

Answer: c

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($24 × 4,000) + ($18 × 8,000) = $240,000
$144,000
$240,000 × $200,000 = $120,000

80. Eff Ltd. was organized on January 2, 2023, with 100,000 no par value common shares authorized.
During 2023, Eff had the following capital transactions:
Jan. 5 Issued 75,000 shares at $14 per share
July 27 Purchased and retired 5,000 shares at $10 per share
Nov. 25 Issued 4,000 shares at $13 per share
What would be the balance in the Contributed Surplus account at December 31, 2023?
a) $0
b) $10,000
c) $20,000
d) $50,000

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Answer: c

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 5,000 × ($14 – $10) = $20,000

81. At December 31, 2022 and 2023, Gee Corp. had outstanding 3,000 no par value, $8, cumulative
preferred shares and 10,000 no par value common shares. At December 31, 2022, dividends in arrears
on the preferred shares were $12,000. Cash dividends declared in 2023 totalled $45,000. What
amounts were payable on each class of shares?
Preferred Shares Common Shares
a) $24,000 $21,000
b) $33,000 $12,000
c) $36,000 $9,000
d) $45,000 $0

Answer: c

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: (3,000 × $8) + $12,000 = $36,000
$45,000 – $36,000 = $9,000

82. Eye Corp. owned 20,000 shares of Lash Corp., which had been purchased in 2019 for $300,000. On
December 15, 2023, Eye declared a property dividend of all of its Lash Corp. shares. The property
dividend was distributed on January 15, 2024. On the declaration date, the fair value of Eye’s
investment in Lash was $400,000. The entry to record the declaration of the dividend would include a
debit to Retained Earnings of
a) $0.
b) $100,000.
c) $300,000.
d) $400,000.

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Answer: d

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $400,000 (market value)

83. Presented below is information related to Madrid Corporation:

Subscriptions Receivable, Common Shares............................................ $120,000
Common Shares, no par value................................................................. 3,810,000
Common Shares Subscribed.................................................................... 240,000
$4 Preferred Shares, no par value............................................................ 1,440,000
Retained Earnings..................................................................................... 900,000
The total shareholders' equity of Madrid Corporation is
a) $6,270,000.
b) $6,300,000.
c) $6,390,000.
d) $6,510,000.

Answer: a

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
Learning Objective: Understand how shareholders’ equity is presented, disclosed, and analyzed.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $3,810,000 + $240,000 + $1,440,000 + $900,000 – $120,000 = $6,270,000

84. Shareholders' equity is generally classified into two major categories:

a) contributed capital and donated capital.
b) contributed surplus and retained earnings.
c) retained earnings and accumulated other comprehensive income.
d) earned capital and contributed capital.

Answer: d

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Difficulty: Easy
Learning Objective: Understand how shareholders’ equity is presented, disclosed, and analyzed.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

85. How should cumulative preferred dividends in arrears be shown on the balance sheet?
a) as an increase in shareholders' equity
b) as an increase in current liabilities
c) as an increase in current liabilities for the amount expected to be declared within the next year, and
as an increase in long-term liabilities for the balance
d) by note disclosure only

Answer: d

86. Under IFRS, the Statement of Changes in Shareholders’ Equity must include
a) share capital and retained earnings only.
b) share capital and contributed surplus only.
c) share capital, accumulated other comprehensive income, contributed surplus, and retained
earnings.
d) retained earnings, share capital, and accumulated other comprehensive income.

Answer: c

87. The payout ratio can be calculated by

a) dividing cash dividends per share by earnings per share.
b) dividing cash dividends by net income less preferred dividends.
c) dividing cash dividends by market price per share.

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d) dividing net income by cash dividends per share.

Answer: b

88. The rate of return on common shareholders’ equity shows

a) the amount of leverage the corporation employs.
b) the amount that each common shareholder would receive if the company were liquidated.
c) how many dollars of net income were earned for each dollar invested by the owners.
d) how the market value of the shares relates to the current earnings per share.

Answer: c

89. The price earnings (P/E) ratio is calculated by

a) dividing dividends per share by earnings per share.
b) dividing the market price of the share by earnings per share.
c) dividing net income by cash dividends per share.
d) dividing cash dividends paid by the market price per share.

Answer: b

90. Hamilton Ltd. has both common shares and non-participating, noncumulative preferred shares
outstanding. The book value per common share is NOT affected by

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a) the declaration of a preferred stock dividend.

b) the declaration of a common stock dividend when the market price of the common is equal to its
issue price.
c) a 2-for-1 split of the common shares.
d) the payment of a previously declared cash dividend on the common shares.

Answer: d

91. Sofia Ltd. reported net income of $5,300,000 for 2023, and earnings per share of $5.00. Included in
the net income was $750,000 of bond interest expense related to its long-term debt. The income tax
rate for 2023 was 30%. Dividends paid on preferred shares was $1,000,000. The payout ratio on
common shares was 25%. What were the dividends paid on common shares in 2023?
a) $1,075,000
b) $1,325,000
c) $1,206,250
d) $1,612,500

Answer: a

Difficulty: Medium
Learning Objective: Understand how shareholders’ equity is presented, disclosed, and analyzed.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
X
Feedback: ($5,300,000  $1,000,000) = .25; X = $1,075,000

92. For calendar 2023, Budapest Corp. reported net income of $29,280 and earnings per share of $2.46.
There were 12,000 common shares outstanding during 2023. On Dec 31, 2023, the market price for
Budapest's common shares was $32. To the nearest whole number, what is Budapest's price earnings
ratio at Dec. 31, 2023?
a) 13
b) 32
c) 375
d) 915

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Answer: a

93. Presented below is information reported by Kiev Ltd. for its past two fiscal years:
Dec 31, 2024 Dec 31, 2023
Common shares.............................................................................. $75,000 $60,000
6% preferred shares, no par value, cumulative............................. 350,000 350,000
Retained earnings (post closing).................................................... 90,000 75,000
Net income for year........................................................................ 60,000 32,000
What is Kiev’s rate of return on common shareholders’ equity for 2024?
a) 48.8%
b) 26%
c) 25%
d) 22.4%

Answer: b

Difficulty: Medium
Learning Objective: Understand how shareholders’ equity is presented, disclosed, and analyzed.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
$60,000  (.06 $350,000)
Feedback: [($60,000  $75,000)  ($75,000  $90,000)] 2 = 26%
Note: preferred shares are not included in denominator

94. The following data are provided for Croatia Corp.’s past two fiscal years:
Dec 31, 2024 Dec 31, 2023
Cumulative preferred shares, $5, no par value,
4,000 shares outstanding........................................................ $200,000 $200,000
Common shares, no par, 24,000 shares outstanding.................... 400,000 310,000
Retained earnings (post closing).................................................... 480,000 430,000
Net income...................................................................................... 180,000
Additional information:
On May 1, 2024, 6,000 common shares were issued. Although dividends had been declared regularly
up to December 31, 2023, preferred dividends were NOT declared during 2024. The market price of the
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common shares was $100 at December 31, 2024.

To the nearest percent, the rate of return on common shareholders’ equity for 2024 is
a) 23%.
b) 22%.
c) 20%.
d) 18%.

Answer: c

Difficulty: Medium
Learning Objective: Understand how shareholders’ equity is presented, disclosed, and analyzed.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $180,000 – (4,000 x $5) = 20%
($400,000 + $480,000 + $310,000 + $430,000) ÷ 2
Note: preferred shares are not included in denominator

95. The following data are provided for Croatia Corp.’s past two fiscal years:
Dec 31, 2024 Dec 31, 2023
Cumulative preferred shares, $5, no par value,
4,000 shares outstanding........................................................ $200,000 $200,000
Common shares, no par, 24,000 shares outstanding.................... 400,000 310,000
Retained earnings (post closing).................................................... 480,000 430,000
Net income...................................................................................... 180,000
Additional information:
On May 1, 2024, 6,000 common shares were issued. Although dividends had been declared regularly
up to December 31, 2023, preferred dividends were NOT declared during 2024. The market price of the
common shares was $100 at December 31, 2024.
The price earnings ratio for 2024 is
a) 12.22.
b) 13.76.
c) 14.99.
d) 15.55.

Answer: b

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= 13.76

Feedback: $100 ¸ $180,000 – $20,000 = $100 ¸ ($160,000 ¸ 22,000) = 13.76

18,000 + (6,000 x 8 ¸ 12)

96. The following data are provided for Croatia Corp.’s past two fiscal years:
Dec 31, 2024 Dec 31, 2023
Cumulative preferred shares, $5, no par value,
4,000 shares outstanding........................................................ $200,000 $200,000
Common shares, no par, 24,000 shares outstanding.................... 400,000 310,000
Retained earnings (post closing).................................................... 480,000 430,000
Net income...................................................................................... 180,000
Additional information:
On May 1, 2024, 6,000 common shares were issued. Although dividends had been declared regularly
up to December 31, 2023, preferred dividends were NOT declared during 2024. The market price of the
common shares was $100 at December 31, 2024.
The book value per common share at December 31, 2024 is
a) $16.67.
b) $18.18.
c) $27.50.
d) $35.83.

Answer: d

Difficulty: Medium
Learning Objective: Understand how shareholders’ equity is presented, disclosed, and analyzed.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($400,000 + $480,000 – $20,000 pfd. div. in arrears) ÷ 24,000 = $35.83

97. Presented below is information reported by Kiev Ltd. for its past two fiscal years:
Dec 31, 2024 Dec 31, 2023
Common shares.............................................................................. $75,000 $60,000
6% preferred shares, no par value, non-cumulative..................... 350,000 350,000
Retained earnings (post closing).................................................... 90,000 75,000
Net income for year........................................................................ 60,000 32,000
On December 31, 2024, there were 10,000 common shares outstanding trading at $15/share. The
preferred dividend was paid. No common shares have been bought or sold during the year. What is
the basic earnings per share in 2024? (Round to two decimal places.)
a) $6.00
b) $3.90
c) $7.50
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d)$2.10

Answer: b

Difficulty: Medium
Learning Objective: Understand how shareholders’ equity is presented, disclosed, and analyzed.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $60,000 – ($350,000 x 6%) = $39,000; $39,000/10,000 = $3.90 EPS

98. Presented below is information reported by Kiev Ltd. for its past two fiscal years:
Dec 31, 2024 Dec 31, 2023
Common shares.............................................................................. $75,000 $60,000
6% preferred shares, no par value, non-cumulative..................... 350,000 350,000
Retained earnings (post closing).................................................... 90,000 75,000
Net income for year........................................................................ 60,000 32,000
On December 31, 2024, there were 10,000 common shares outstanding trading at $15/share. The
preferred dividend was paid. No common shares have been bought or sold during the year. What is
the price earnings ratio in 2024? (Round to two decimal places.)
a) 2.50
b) 2.67
c) 3.85
d) 4.0

Answer: c

Difficulty: Medium
Learning Objective: Understand how shareholders’ equity is presented, disclosed, and analyzed.
Section Reference: Presentation, Disclosure, and Analysis
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $60,000 – ($350,000 x 6%) = $39,000; $39,000/10,000 = $3.90 EPS; $15/$3.90 = 3.85

99. Which of the following statements regarding share reacquisition is CORRECT?

a) Under IFRS, there is specific guidance that the cost of shares should be allocated first to share
capital, then to contributed surplus, and then to retained earnings.
b) Under ASPE, there is specific guidance that the cost of shares should be allocated first to share
capital, then to contributed surplus, and then to retained earnings.
c) There is no specific guidance under either IFRS or ASPE; management should use its best
judgement.
d) There is specific guidance for both IFRS and ASPE; the same rules must be followed under either

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standard.

Answer: b

Difficulty: Easy
Learning Objective: Identify the major differences in accounting between IFRS and ASPE, and what
changes are expected in the near future.
Section Reference: A Comparison of IFRS and ASPE
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic

100. Under ASPE, if a receivable for loans issued to buy shares is deemed uncollectible it should be
a) written off to allowance for doubtful accounts.
b) presented as a contra equity.
c) presented as a current liability.
d) A receivable for loans issued to buy shares is not allowed under ASPE.

Answer: b

Difficulty: Easy
Learning Objective: Identify the major differences in accounting between IFRS and ASPE, and what are
expected in the near future.
Section Reference: A Comparison of IFRS and ASPE
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic

101. When a financial reorganization of a company occurs

a) there is no effect on the balance sheet.
b) there is no specific guidance on how to account for this under IFRS or ASPE.
c) ASPE requires assets to be revalued and debt and equity accounts to be readjusted to reflect the
new capital structure.
d) ASPE requires that the revaluation method be applied to all property, plant, and equipment.

Answer: c

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*102. A “gain" on the sale of treasury shares should be credited to

a) contributed surplus.
b) the share capital account.
c) retained earnings.
d) other income.

Answer: a

Difficulty: Easy
Learning Objective: Explain how to account for par value and treasury shares.
Section Reference: Par Value and Treasury Shares (Appendix 15A)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

*103. Gupta Corp. purchased its own shares on January 1, 2023 for $20,000 and debited Treasury
Shares for the purchase price. The shares were subsequently sold for $12,000. The $8,000 difference
between the cost and sales price should be recorded as a debit to
a) Contributed Surplus to the extent that previous net "gains" from sales or retirements of the same
class of shares are included therein; otherwise, to retained earnings.
b) Contributed Surplus regardless of whether there have been previous net "gains" from sales or
retirements of the same class of shares included therein.
c) Retained Earnings.
d) Loss from Sale of Treasury Shares.

Answer: a

*104. An acceptable method of reporting Treasury Shares in the balance sheet is

a) as a contra to contributed surplus.
b) as a contra to the share capital account.
c) as an account with a debit balance after retained earnings.
d) as a current asset.

Answer: c

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*105. Common shares issued would exceed common shares outstanding as a result of the
a) declaration of a cash dividend.
b) declaration of a stock dividend.
c) purchase of treasury shares.
d) payment in full of subscribed shares.

Answer: c

*106. At its date of incorporation, Emm Inc. sold 100,000 of its $10 par common shares at $11 per
share. During the current year, Emm acquired 20,000 of these common shares at $16 per share to hold
as treasury shares. Subsequently, these shares were sold at $12 per share. Emm has had no other
sales or acquisitions of its common shares. What effect does the sale of the treasury shares have on
the following accounts?
Retained Earnings Contributed Surplus
a) decrease decrease
b) no effect decrease
c) decrease no effect
d) no effect no effect

Answer: a

*107. The reacquisition of issued and outstanding shares will cause the number of shares outstanding

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to decrease if they are accounted for

As Treasury Shares By Retirement
a) yes no
b) no no
c) yes yes
d) no yes

Answer: c

*108. Minsk Corporation's shareholders' equity section at December 31, 2022 was:
Common shares, $5 par value, authorized 1,200,000 shares;
issued 900,000 shares; outstanding 800,000 shares;.................. $ 4,500,000
Contributed surplus............................................................................. 3,250,000
Retained earnings................................................................................ 5,240,000
12,990,000
Less treasury shares, at cost, 100,000 shares..................................... 800,000
Total shareholders' equity........................................................... $12,190,000
During 2023, Minsk sold 30,000 treasury shares at $10 per share. No other similar transactions
occurred during 2023. What amount should be reported for this transaction on the 2023 income
statement?
a) $0
b) $60,000 gain from sale
c) $60,000 comprehensive income
d) $20,000 gain from sale and $40,000 contributed surplus

Answer: a

Difficulty: Medium
Learning Objective: Explain how to account for par value and treasury shares.
Section Reference: Par Value and Treasury Shares (Appendix 15A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 30,000 × $2 = $60,000, recorded as contributed surplus (not an income statement item)

*109. Stockholm Corp. was organized on January 1, 2023, with 100,000 common shares authorized,
par value $10. On January 2, 2023, the corporation issued 15,000 of these shares for $190,000 cash.

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The entry to record this sale would be

a) Cash............................................................................................................... 190,000
Common Shares..................................................................................... 190,000
b) Cash............................................................................................................... 190,000
Common Shares..................................................................................... 150,000
Retained Earnings................................................................................... 40,000
c) Cash............................................................................................................... 190,000
Common Shares..................................................................................... 150,000
Contributed Surplus............................................................................... 40,000
d) Cash............................................................................................................... 100,000
Contributed Surplus.................................................................................... 90,000
Common Shares..................................................................................... 190,000

Answer: c

Difficulty: Medium
Learning Objective: Explain how to account for par value and treasury shares.
Section Reference: Par Value and Treasury Shares (Appendix 15A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Common shares 15,000 x $10 par = $150,000, balance to contributed surplus

*110. Nicosia Corp. was organized on January 1, 2023, with 50,000 common shares authorized, par
value $15, and immediately sold 10,000 shares for $20 each. Later, Nicosia bought back 1,000 of these
shares at $23 each and cancelled them. The entry to record the purchase would be
a) Common Shares............................................................................................ 23,000
Cash......................................................................................................... 23,000
b) Common Shares........................................................................................... 15,000
Retained Earnings........................................................................................ 8,000
Cash......................................................................................................... 23,000
c) Common Shares............................................................................................ 20,000
Contributed Surplus.................................................................................... 3,000
Cash......................................................................................................... 23,000
d) Common Shares........................................................................................... 15,000
Contributed Surplus.................................................................................... 8,000
Cash......................................................................................................... 23,000

Answer: d

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AACSB: Analytic
Feedback: Common shares 1,000 × $15 par = $15,000; balance to contributed surplus

*111. When Oslo Ltd. was organized last year, they issued 100,000 no par value common shares for
$1,200,000. Earlier this year, the corporation purchased 4,000 of these shares at $15 per share, to be
held in the treasury, and three months later, sold 2,000 treasury shares at $19 per share. There were
no other treasury share transactions.
To record the sale of the 2,000 treasury shares, Oslo should credit
a) Treasury Shares for $38,000.
b) Treasury Shares for $20,000 and Contributed Surplus for $18,000.
c) Treasury Shares for $30,000 and Contributed Surplus for $8,000.
d) Treasury Shares for $30,000 and Retained Earnings for $8,000.

Answer: c

*112. When Oslo Ltd. was organized last year, they issued 100,000 no par value common shares for
$1,200,000. Earlier this year, the corporation purchased 4,000 of these shares at $15 per share, to be
held in the treasury, and three months later, sold 2,000 treasury shares at $19 per share. There were
no other treasury share transactions.
If, instead of holding the 4,000 shares as treasury shares, Oslo had decided to cancel them, Oslo
should debit
a) Common Shares for $48,000 and Retained Earnings for $12,000.
b) Contributed Surplus for $48,000 and Retained Earnings for $12,000.
c) Contributed Surplus for $60,000.
d) Common Shares for $60,000.

Answer: a

Difficulty: Medium
Learning Objective: Explain how to account for par value and treasury shares.
Section Reference: Par Value and Treasury Shares (Appendix 15A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Common shares 4,000 × $12 (average issue price) = $48,000; R/E 4,000 × $3 = $12,000

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*113. London Corporation has 50,000 no par value common shares authorized, issued and
outstanding. All 50,000 shares were issued at $40 per share. Retained earnings are $40,000. If 3,000 of
these shares were reacquired at $50 and were held as treasury shares,
a) shareholders' equity would increase by $150,000.
b) contributed surplus would decrease by at least $30,000.
c) shareholders’ equity would decrease by $150,000.
d) common shares would increase by $150,000.

Answer: c

*114. On December 1, 20230, Dublin Ltd. exchanged 10,000 of its no par value common shares (being
held in the treasury) for a used machine. The treasury shares were acquired by Dublin for $35 per
share. On the date of the exchange, the common shares, which had originally been issued at $30 per
share, had a market value of $55 per share. As a result of this exchange, Dublin's total shareholders'
equity will increase by
a) $300,000.
b) $350,000.
c) $400,000.
d) $550,000.

Answer: d

*115. Galba Corp.'s shareholders' equity at January 1, 2023 was:

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During 2023, Galba had the following share transactions:

Acquired 2,000 treasury shares for $30,000
Sold 1,200 treasury shares at $19 a share
Retired the remaining treasury shares
No other share transactions occurred during 2023.
The total contributed surplus at December 31, 2023 is
a) $24,800.
b) $4,800.
c) $4,000.
d) $0.

Answer: c

Difficulty: Medium
Learning Objective: Explain how to account for par value and treasury shares.
Section Reference: Par Value and Treasury Shares (Appendix 15A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 1,200 × ($19 – $15) – 800 x ($15 – $14) = $4,800 – $800 = $4,000

*116. Galba Corp.'s shareholders' equity at January 1, 2023 was:

Common shares, no par value; authorized 200,000 shares;
outstanding 75,000 shares........................................................... $1,050,000
Retained earnings................................................................................ 730,000
Total.............................................................................................. $1,780,000
During 2023, Galba had the following share transactions:
Acquired 2,000 common shares for $30,000 and cancelled them
No other share transactions occurred during 2023.
The journal entry to record the retirement would be
a) Dr. Common Shares, $30,000; Cr. Cash, $30,000.
b) Dr. Treasury Shares, $30,000; Cr. Cash, $30,000.
c) Dr. Common Shares, $28,000; Dr. Contributed Surplus, $2,000; Cr. Cash, $30,000.
d) Dr. Common Shares, $28,000; Dr. Retained Earnings, $2,000; Cr. Cash, $30,000.

Answer: d

Difficulty: Medium
Learning Objective: Explain how to account for par value and treasury shares.
Section Reference: Par Value and Treasury Shares (Appendix 15A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: avg. issue price $1,050,000 ÷ 75,000 = $14, Dr C/S 2,000 x $14 = $28,000

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*117. At December 31, 2022, the balance in Helsinki Ltd.’s retained earnings account was $420,000.
During 2023, Helsinki had the following transactions:
Acquired 5,000 treasury shares at $27 a share. The shares are no par and had originally been
issued for $24 per share. There had been no previous treasury share transactions.
Sold the 5,000 treasury shares at $32 a share.
Reported net income of $150,000.
The balance in retained earnings at December 31, 2023 would be
a) $555,000.
b) $570,000.
c) $585,000.
d) $610,000.

Answer: b

Difficulty: Medium
Learning Objective: Explain how to account for par value and treasury shares.
Section Reference: Par Value and Treasury Shares (Appendix 15A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $420,000 + $150,000 = $570,000. Sale of treasury shares above cost has no effect on R/E.

*118. At December 31, 2022, the balance in Helsinki Ltd.’s retained earnings account was $420,000.
During 2023, Helsinki had the following transactions:
Acquired 5,000 common shares at $27 a share and cancelled them. The shares are no par and had
originally been issued for $24 per share.

Reported net income of $150,000.

The balance in retained earnings at December 31, 2023 would be
a) $555,000.
b) $570,000.
c) $585,000.
d) $610,000.

Answer: a

Difficulty: Medium
Learning Objective: Explain how to account for par value and treasury shares.
Section Reference: Par Value and Treasury Shares (Appendix 15A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $420,000 – (5,000 × ($27 – $24)) + $150,000 = $555,000

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*119. At December 31, 2022, the balance of Glasgow Ltd.’s retained earnings account was $450,000.
During 2023, the company had the following transactions:
Acquired 5,000 treasury shares at $75 per share. The shares are no par value and had originally
been issued for $65 per share. There had been no previous treasury share transactions.
Net income for 2023 was $400,000.
Sold the 5,000 treasury shares at $80 per share.
What is the balance in retained earnings at December 31, 2023?
a) $900,000
b) $850,000
c) $775,000
d) $762,500

Answer: b

Difficulty: Medium
Learning Objective: Explain how to account for par value and treasury shares.
Section Reference: Par Value and Treasury Shares (Appendix 15A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $450,000 + $400,000 = $850,000. Sale of treasury shares above cost has no effect on R/E.

*120. On January 1, 2023, Bratislava Corporation had 110,000 no par value common shares
outstanding, which had been issued at $5 each. On June 1, the corporation acquired 10,000 shares to
be held in the treasury. On December 1, when the market price of the shares was $4, the corporation
declared a 10% stock dividend to be issued to shareholders of record on December 16. What was the
impact of the 10% stock dividend on the retained earnings account?
a) $50,000 decrease
b) $44,000 decrease
c) $40,000 decrease
d) no effect

Answer: c

*121. On December 31, 2022, the shareholders' equity section of Kay Inc. was as follows:

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Common shares, no par value: authorized 30,000 shares;

issued and outstanding 9,000 shares............................................... $206,000
Retained earnings..................................................................................... 261,000
Total shareholders' equity................................................................ $467,000
On March 31, 2023, when the market value of Kay’s shares was $27 per share, the corporation declared
a 20% stock dividend, and accordingly 1,800 additional shares were issued. For the three months
ended March 31, 2023, Kay reported a net loss of $48,000. The balance of Kay’s retained earnings at
March 31, 2023, should be
a) $164,400.
b) $213,000.
c) $216,600.
d) $261,600.

Answer: a

*122. In 2023, Elle Corp. acquired 9,000 of its own no par value common shares at $18 per share, to be
held in the treasury. In 2024, Elle sold 6,000 of these shares at $25 per share. What accounts and what
amounts should Elle credit in 2024 to record this sale?
Treasury Contributed Retained Common
Shares Surplus Earnings Shares
a) $108,000 $42,000
b) $108,000 $42,000
c) $108,000 $42,000
d) $42,000 $108,000

Answer: b

*123. For a two-year period following a properly implemented financial reorganization, Grant

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Corporation operated profitably and paid dividends equal to 10% of its net income in each year. How
could one determine that the financial reorganization had occurred?
a) could not unless comparative statements of financial position were presented
b) from the shareholders’ equity section
c) by the conservative dividend policy
d) from the disclosure of the reorganization in the notes to the financial statements

Answer: d

Difficulty: Medium
Learning Objective: Explain how to account for a financial reorganization.
Section Reference: Financial Reorganization (Appendix 15B)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

*124. Immediately after a financial reorganization, the retained earnings account

a) has a zero balance.
b) remains the same as it was before the financial reorganization.
c) is frozen and dated, and subsequent transactions will be shown separately.
d) has a debit balance equal to the write down of the assets that were overstated.

Answer: a

Difficulty: Easy
Learning Objective: Explain how to account for a financial reorganization.
Section Reference: Financial Reorganization (Appendix 15B)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

*125. Which of the following statements is FALSE concerning the requirements that must be fulfilled
under a financial reorganization?
a) The corporation’s shareholders must approve the financial reorganization.
b) Immediately after the financial reorganization, the corporation must have a credit balance in
retained earnings.
c) New asset valuations should not deliberately over- or understate assets or liabilities.
d) The corporation may have additional contributed surplus arising from the financial reorganization.

Answer: b

Difficulty: Easy
Learning Objective: Explain how to account for a financial reorganization.
Section Reference: Financial Reorganization (Appendix 15B)

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CPA: Financial Reporting

Bloomcode: Knowledge
AACSB: Analytic

*126. Which of the following statements is correct?

a) IFRS gives specific guidance for reacquisition of shares.
b) IFRS does not give explicit guidance for accounting for financial reorganizations.
c) IFRS requires that changes in retained earnings are presented in a retained earnings statement, and
that changes in capital accounts are given in the notes.
d) ASPE does not give guidelines for accounting for financial reorganizations.

Answer: b

*127. Which statement is FALSE regarding financial reorganizations?

a) The proposed reorganization should receive the approval of the corporation’s shareholders before
it is put into effect.
b) The new asset and liability valuations should be fair.
c) Subsequent to the financial reorganization, no disclosures are required in subsequent periods.
d) After the reorganization, the corporation must have a zero balance in the Retained Earnings
account.

Answer: c

*128. The balances in Belfast Inc.’s shareholders’ equity accounts at December 31, 20230 are:
Common shares, no par, 50,000 authorized, 40,000 outstanding............. $1,300,000
Retained earnings (deficit).......................................................................... (364,000)
At this, time, a financial reorganization was approved. Equipment was written down $101,800, and
inventory increased $5,800.
As the first step of the reorganization, how much should the Common Shares account be adjusted by?

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a) $364,000
b) $400,000
c) $460,000
d) $1,000,000

Answer: a

*129. The balances in Belfast Inc.’s shareholders’ equity accounts at December 31, 20230 are:
Common shares, no par, 50,000 authorized, 40,000 outstanding............. $1,300,000
Retained earnings (deficit).......................................................................... (364,000)
At this, time, a financial reorganization was approved. Equipment was written down $101,800, and
inventory increased $5,800.
What is the net increase in the deficit from revaluation of assets?
a) $0
b) $96,000
c) $101,800
d) $107,600

Answer: b

*130. The balances in Belfast Inc.’s shareholders’ equity accounts at December 31, 20230 are:
Common shares, no par, 50,000 authorized, 40,000 outstanding............. $1,300,000
Retained earnings (deficit).......................................................................... (364,000)
At this, time, a financial reorganization was approved. Equipment was written down $101,800, and
inventory increased $5,800.
What will the balance in retained earnings be after the reorganization?
a) $936,000
b) $(460,000)

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c) $(268,000)
d) $0

Answer: d

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EXERCISES

Ex. 15-131 Share subscriptions

Kanye Corp. offers shares on a subscription basis to selected individuals, giving them the right to
purchase 25 common shares at a price of $20 per share. On March 1, one hundred individuals accept
the company’s offer and agree to pay 50% down and the remaining 50% at the end of six months.

Instructions
a) Prepare the journal entries required on Mar 1
b) Prepare the journal entries required on September 1.

Solution 15-131
a) Subscriptions Receivable (25 x $20 x 100).................................................. 50,000
Common Shares Subscribed.................................................................. 50,000

Cash ($50,000 x 50%)................................................................................... 25,000

Subscriptions Receivable....................................................................... 25,000

b) Cash.............................................................................................................. 25,000
Subscriptions Receivable....................................................................... 25,000

Common Shares Subscribed....................................................................... 50,000

Common Shares..................................................................................... 50,000

Ex. 15-132 Lump sum issuance of shares

Bertram Corp. is authorized to issue 15,000 no par value common shares and 5,000 no par value
preferred shares. On January 16, 2023, the corporation sold 50 common shares and 75 preferred
shares for a lump sum of $9,000. The common were selling at $50 and the preferred at $100.

Instructions
Using the relative fair value method, prepare the entry to record the sale for cash. Show calculations.

Solution 15-132
Cash................................................................................................................... 9,000
Common Shares..................................................................................... 2,250
Preferred Shares..................................................................................... 6,750
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Calculations:
Common ($2,500 ÷ $10,000) × $9,000 = $2,250
Preferred ($7,500 ÷ $10,000) × $9,000 = $6,750

Ex. 15-133 Shareholders’ equity

Indicate the effect of each of the following transactions on total shareholders' equity by placing an "X"
in the appropriate column.
Increase Decrease No Effect

1. Declaration of a cash dividend. __

2. Operating loss for the period. __

3. Retirement of bonds at more than

carrying value. __________ __________ __________

4. Declaration of a stock dividend. __

5. Exchanging common shares for machinery. __

6. Conversion of bonds into common shares. __

7. Not declaring a dividend on cumulative

preferred shares. __________ __________ __________

8. Payment of a cash dividend. __

Solution 15-133
Increase Decrease No Effect
1. Declaration of a cash dividend. X

2. Operating loss for the period. X

3. Retirement of bonds at more than

carrying value. X

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4. Declaration of a stock dividend. X

5. Exchanging common shares for machinery. X

6. Conversion of bonds into common shares. X

7. Not declaring a dividend on cumulative

preferred shares. X

8. Payment of a cash dividend. X

Ex. 15-134 Share subscriptions

On April 28, 2023, Sweden Inc. accepted subscriptions for 10,000 of its no par value common shares. At
this time, the shares were selling for $45 each. A 40% down payment was received with the remainder
due in six months. On October 28, 2023 the balance of the subscription price was received, and the
shares were issued.

Instructions
a) Prepare the journal entries required on April 28, 2023.
b) Prepare the journal entries required on October 28, 2023.

Solution 15-134
a) Subscriptions Receivable (10,000 x $45).................................................. 450,000
Common Shares Subscribed............................................................. 450,000

Cash ($450,000 x 40%)............................................................................... 180,000

Subscriptions Receivable.................................................................. 180,000

b) Cash........................................................................................................... 270,000
Subscriptions Receivable.................................................................. 270,000

Common Shares Subscribed.................................................................... 450,000

Common Shares................................................................................ 450,000

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.

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Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Ex. 15-135 Shares issued in noncash transactions and trading on equity

Clean Air Technologies Inc. is a new start-up company with limited available cash. The company is in
desperate need of a controller, but currently cannot afford to pay one. The company knows that you
are studying to be an accountant and approaches you to help them out in exchange for shares.

Instructions
a) Explain to Clean Air for the different options available for share valuation.
b) CRITICAL THINKING: The management team at Clean Air has also hear something about “trading
on equity” as a source of financing. Explain to the management team what trading on equity is
and whether, as a new start-up company this would be an option for Clean Air Tech.

Solution 15-135
a) The general rule to be applied when shares are issued for services or assets other than cash is that
the shares be recorded at either their fair value or the fair value of the services or assets, whichever is
more clearly determinable. If neither is readily determinable, the value to be assigned is generally
established by the board of directors.

b) CRITICAL THINKING: When the rate of return on total assets is lower than the rate of return on the
common shareholders’ investment, the company is said to be trading on the equity at a gain. Trading
on the equity is the practice of using borrowed money at fixed interest rates or issuing preferred
shares with constant dividend rates in anticipation of obtaining a higher rate of return on the money
used. (This is sometimes also referred to as leverage.) Since the company is brand new and there is
currently not established, this would not be an option.

Ex. 15-136 Reacquisition of shares

Norway Corp. originally sold 1,000,000 of its no par common shares at $13 a share. Later, Norway
bought back 6,000 shares of these shares at $17 a share. Norway is incorporated under the CBCA and
retired these shares.

Instructions
a) Record the retirement of the shares.
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b) CRITICAL THINKING: Explain why Norway may wish to re-purchase its shares? In repurchasing its
shares explain the effect on net income for Norway Corp. Explain how Norway Corp. would have
recorded the entry if the purchase price was less than the carrying value of the shares?

Solution 15-136
a) Common Shares (6,000 x $13).................................................................. 78,000
Retained Earnings..................................................................................... 24,000
Cash (6,000 x $17).............................................................................. 102,000

b) Critical Thinking: Norway Corp may wish to repurchase its shares for any one of the following
reasons:
1. To increase earnings per share and return on equity.
2. To provide shares for employee share compensation contracts or to meet potential merger
needs.
3. To stop takeover attempts or to reduce the number of shareholders.
4. To make a market in the share. By purchasing shares in the marketplace, management creates
a demand that may stabilize the share price or, in fact, increase it.
5. To return cash to shareholders.
There is no effect on net income as a result of the reacquisition and cancellation of shares.
If the acquisition cost of the shares (purchase price) is less than the carrying value of the shares,
the acquisition cost should be allocated (debited) to share capital, in an amount equal to the par,
stated, or average value of the shares, with the difference allocated (credited) to contributed
surplus.

Ex. 15-137 Determination of dividend amount

Describe some of the factors that a board of directors may consider when determining the amount of
cash dividends to declare.

Solution 15-137
Some factors are:
1. agreements (bond and loan covenants) with creditors that require the retention of retained
earnings
2. desire to use profits to reinvest in and expand the business
3. desire to have a smooth dividend stream even if income stream is not smooth
4. desire to build up a safety margin for losses or errors
5. availability of cash to pay the dividend (liquidity)

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Ex. 15-138 Stock dividends and retained earnings

Describe the accounting treatment for the declaration of a common stock dividend. What effect would
this have on retained earnings? What items increase / decrease retained earnings?

Solution 15-138
If the issuing corporation is incorporated under the CBCA, the declaration would result in the transfer
from retained earnings to contributed capital of an amount equal to the market value of each new
share issued. Retained Earnings is debited for the total amount transferred; Common Stock Dividend
Distributable is credited for the same amount.

If the dividend is less than 20–25%, it is considered a small stock dividend, and would be treated this
way. If, however, the stock dividend is greater than 20–25%, it is called a large stock dividend, and if
the issuing corporation is not incorporated under the CBCA, it can choose to account for it like a small
stock dividend, but measure at either the market value or the par or stated value of the shares, OR it
can treat it as a stock split (memo entry only). In the U.S., the SEC supports treating a large stock
dividend as a split. In Canada, there is no specific guidance, thus professional judgement must be
used, although there may be legal constraints to consider.

Items that increase retained earnings are net incomes, prior period adjustments (error corrections),
financial reorganization, and certain changes in accounting principle.

Items that decrease retained earnings are net losses, cash, property and most stock dividends, some
treasury shares transactions, prior period adjustments (error corrections), and certain changes in
accounting principle.

Ex. 15-139 Stock dividends and stock splits

Indicate the principal effects of a stock dividend versus a stock split as they affect the issuing

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corporation. Respond in the spaces as follows: "C" for change; "NC" for no change.
Stock dividend Stock split
Legal capital __________ __________
Number of shares outstanding __________ __________
Total shareholders’ equity __________ __________
Retained earnings __________ __________
Composition of shareholders' equity __________ __________

Solution 15-139
Stock dividend Stock split
Legal capital C NC
Number of shares outstanding C C
Total shareholders’ equity NC NC
Retained earnings C NC
Composition of shareholders' equity C NC

Ex. 15-140 Dividends on preferred shares

On December 31, 2023, the shareholders' equity of Finland Corporation shows the following:
Preferred shares—$6, no par, 8,000 shares outstanding......................... $ 400,000
Common shares—no par, 60,000 shares outstanding............................. 800,000
Retained earnings..................................................................................... 240,000
Total shareholders' equity................................................................ $1,440,000

Assume that preferred dividends were last paid on December 31, 2021, and that all the company's
retained earnings are to be paid out in dividends on December 31, 2023.

Instructions
If the preferred shares are cumulative and fully participating, how much should each class of shares
receive?

Solution 15-140
Preferred Common Total
Dividends in arrears ($6 × 8,000)..................... $ 48,000 $ — $ 48,000
Current year's dividends (1:2)......................... 48,000 96,000 144,000
Participating dividend (1:2)............................. 16,000 32,000 48,000
$112,000 $128,000 $240,000

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Ex. 15-141 Dividends on preferred shares

In each of the following independent cases, it is assumed that the corporation has outstanding 20,000,
$0.80, preferred shares, with a carrying value of $200,000, and 80,000 common shares, with a carrying
value of $800,000. Although dividends have been paid regularly up to 2020, no dividends were
declared in 2021 or 2022.
1. At December 31, 2023, the board of directors wants to distribute $125,000 in dividends. How
much will the preferred shareholders receive if their shares are cumulative and non-
participating?
2. At December 31, 2023, the board of directors wants to distribute $200,000 in dividends. How
much will the preferred shareholders receive if their shares are cumulative and participating up
to 15% in total?
3. On December 31, 2023, the preferred shareholders received an $80,000 dividend on their shares,
which are cumulative and fully participating. How much money was distributed in total for
dividends?

Solution 15-141
1. $48,000 (0.80 x 20,000 x 2) + (0.80 x 20,000 x1)

2. $62,000
Preferred Common Total
Dividends in arrears.............................................. $32,000 $ — $32,000
Current year's dividends....................................... 16,000 64,000 80,000
Participating dividend 1:4..................................... 14,000 74,000 88,000
$62,000 $136,000 $200,000

3. $272,000 ($192,000 to common and $80,000 to preferred)

Preferred Common Total
Dividends in arrears.............................................. $32,000 $ — $32,000
Current year's dividends....................................... 16,000 64,000 80,000
Participating dividend 1:4..................................... 32,000 128,000 160,000
$80,000 $192,000 $272,000

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CPA: Financial Reporting

Bloomcode: Application
AACSB: Analytic

Ex. 15-142 Dividends on preferred shares

At December 31, 2023, Russia Inc. has outstanding the following shares:
5,000, $3.20, no par value preferred shares with a carrying value of $200,000, and 40,000 no par
value common shares with a carrying value of $600,000.
No dividends have been paid since December 31, 2020. The corporation now desires to distribute
$120,000 in dividends.

Instructions
Calculate how much the preferred and common shareholders will receive if the preferred shares are
cumulative and fully participating.

Solution 15-142
Preferred Common Total
Dividends in arrears (5,000 × $3.20 × 2)................ $32,000 $ — $ 32,000
Current year's dividends (5,000 × $3.20) 1:3 ratio16,000 48,000 64,000
Participating dividend (1:3).................................. 6,000 18,000 24,000
$54,000 $66,000 $120,000

Ex. 15-143 Dividends on preferred shares

Lithuania Corp. has been authorized to issue 20,000 no par value, $6, cumulative and fully
participating preferred shares and 100,000 no par value common shares. The account balances at
December 31, 2023 are:
$6 Preferred shares, 4,000 shares outstanding........................................ $ 400,000
Common shares, 60,000 shares outstanding........................................... 1,600,000

No dividends have been paid since December 31, 2019. The corporation now desires to pay $280,000
in dividends.

Instructions
Calculate how much the preferred and common shareholders will receive.

Solution 15-143
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Preferred Common Total

Dividends in arrears (4,000 × $6 x 3)..................... $ 72,000 $ — $ 72,000
Current year's dividends (1:4)............................... 24,000 96,000 120,000
Participating dividend (1:4).................................. 17,600 70,400 88,000
$113,600 $166,400 $280,000

Ex. 15-144 Lump sum issuance of par value shares

Chile Corp. issued 2,000 common shares and 400 preferred shares to an investor for $72,000 cash.

Instructions
a) Prepare the journal entry for the issuance, assuming the par value of the common shares was $5
and the market value was $30, and the par value of the preferred shares was $40 and the market
value was $50.
b) Prepare the journal entry for the issuance, assuming the same facts as a), except the preferred
shares have no ready market and the common shares have a market value of $24.

Solution 15-144
a) Use the relative fair value method.

Cash........................................................................................................... 72,000
Common Shares (2,000 x $5)............................................................. 10,000
Contributed Surplus—Common ($54,000 – $10,000)....................... 44,000
Preferred Shares (400 x $40)............................................................. 16,000
Contributed Surplus—Preferred ($18,000 – $16,000)...................... 2,000

Common $30 × 2,000 = $60,000

Preferred $50 × 400 = 20,000
$80,000 market value

60 ÷ 80 × $72,000 = $54,000 Common

20 ÷ 80 × $72,000 = 18,000 Preferred
$72,000

b) Use the residual method.

Cash........................................................................................................... 72,000
Common Shares (2,000 x $5)............................................................. 10,000
Contributed Surplus—Common ($48,000 – $10,000)....................... 38,000
15-75
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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Preferred Shares (400 x $40)............................................................. 16,000

Contributed Surplus—Preferred (balance)...................................... 8,000

Ex. 15-145 True or false questions

Indicate True or False by writing T or F in the space provided.

_____ a) Common Shares Subscribed is a current asset.

_____ b) A stock split does not require a formal journal entry.

_____ c) Bad debt expense is recognized on defaulted subscriptions.

_____ d) The date of declaration for a dividend precedes the date of payment, but follows the date
of record.

_____ e) Retained earnings is part of contributed capital.

_____ f) Stock dividends distributable should be classified as a current liability.

_____ g) Stock dividends always involve the transfer of some per share amount of retained
earnings to share capital.

_____ h) At one time a nationally known distillery annually distributed a bottle of "its finest" to its
shareholders for every 10 shares outstanding; this was a property dividend.

Solution 15-145
a) F

b) T

c) F

d) F

e) F

f) F

g) T

h) T

Difficulty: Easy
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed.
Section Reference: Presentation, Disclosure, and Analysis
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

Ex. 15-146 Basis share rights and share capital

What are the three basic or inherent rights, if there are no restrictive provisions, each share provides?
What is the fourth right allowed by the CBCA for a corporation? What is the capital provided by share
purchases called? Identify and explain any other types of capital the company may accumulate.
Compare and contrast the two.

Solution 15-146
If there are no restrictive provisions, each share gives the following three basic or inherent rights:
1. To share proportionately in profits and losses
2. To share proportionately in management (that is, the share gives the right to vote for directors)
3. To share proportionately in the corporate assets upon liquidation of the corporation

The CBCA allows a corporation to assign a fourth right: the right to share proportionately in any new
issues of shares of the same class. This right is known as a pre-emptive right.

Contributed (paid-in) capital is the total amount that shareholders provide to the corporation for it
to use in the business. Earned capital is the capital that is created by the business operating
profitably. It consists of all undistributed income that remains invested in the enterprise. The
distinction between paid-in capital and earned capital is important from both legal and economic
points of view. Legally, there are restrictions on dividend payouts. These were discussed earlier in the
chapter. Economically, management, shareholders, and others want to see earnings for the
corporation’s continued existence and growth.

Difficulty: Easy
Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed.
Section Reference: Presentation, Disclosure and Analysis.
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication

*Ex. 15-147 Calculation of selected financial ratios

Cuba Corp. provides the following information for 2023:
Preferred shares, 8%, par value $100, cumulative, callable:
Call price per share............................................................................ $105
Shares outstanding........................................................................... 5,000
Dividends in arrears........................................................................... none
Common shares, no par value:
Shares issued..................................................................................... 60,000
Dividends paid per share.................................................................. $1.60
Market price per share...................................................................... $36.00
Carrying value.................................................................................... $800,000
Retained earnings (after closing).............................................................. $175,000
Treasury shares (common)....................................................................... $125,000
Number of treasury shares held....................................................... 5,000
Net income for 2023.................................................................................. $260,000

Instructions
Calculate the following (assume no changes in share account balances during 2023):
a) Total amount of shareholders’ equity on the December 31, 2023 statement of financial position
b) Earnings per share
c) Price earnings ratio of common shares
d) Payout ratio of common shares
e) Book value per common share

*Solution 15-147
a) (5,000 × $100) + $800,000 + $175,000 – $125,000 = $1,350,000

b) [$260,000 – (5,000 × $100 × 8%)] ÷ (60,000 – 5,000) = $220,000 ÷ 55,000 = $4.00

c) $36 ÷ $4 = 9

d) [($1.60 × 55,000) ÷ ($260,000 – $40,000)] = 40% OR dividend per share divided by EPS
$1.60 ÷ $4 = 40%

e) [($1,350,000 – 5,000 x $105) ÷ (60,000 – 5,000)] = $825,000 ÷ 55,000 = $15

Difficulty: Medium
Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed.
Section Reference: Presentation, Disclosure, and Analysis
Learning Objective: Explain how to account for par value and treasury shares.
Section Reference: Par Value and Treasury Shares (Appendix 15A)
CPA: Financial Reporting
Bloomcode: Application
15-78
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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

*Ex. 15-148 Treasury shares

At December 31, 2022, Ukraine Ltd.’s statement of financial position reported the following:
Common shares, no par value, 5,000 shares outstanding...................... $115,000
Retained earnings..................................................................................... 200,000

The following transactions occurred during 2023:

1. Purchased 140 common shares at $30 per share, to be held as treasury shares
2. Sold 120 treasury shares at $32 per share
3. Retired the remaining treasury shares

Instructions
Prepare journal entries for these transactions.

*Solution 15-148
1. Treasury Shares (140 x $30)...................................................................... 4,200
Cash.................................................................................................... 4,200

2. Cash (120 x $32)......................................................................................... 3,840

Treasury Shares (120 x $30).............................................................. 3,600
Contributed Surplus.......................................................................... 240

3. Common Shares 20 x ($115,000 ÷ 5,000).................................................. 460

Contributed Surplus.................................................................................. 140
Treasury Shares (20 x $30)................................................................ 600

*Ex. 15-149 Treasury shares

Zambia Ltd. currently has 150,000 no par value common shares outstanding, with a carrying value of
$3,900,000.

Instructions
Record the following transactions:
a) Purchased 1,500 common shares at $29 per share, to be held as treasury shares
b) Sold 800 treasury shares at $30 a share
c) Retired the rest of the treasury shares

*Solution 15-149
a) Treasury Shares (1,500 x $29)................................................................... 43,500
Cash.................................................................................................... 43,500

b) Cash (800 x $30)......................................................................................... 24,000

Treasury Shares (800 x $29).............................................................. 23,200
Contributed Surplus.......................................................................... 800

c) Common Shares [(700 x ($3,900,000 ÷ 150,000)]..................................... 18,200

Contributed Surplus (maximum)............................................................. 800
Retained Earnings (difference)................................................................. 1,300
Treasury Shares (700 x $29).............................................................. 20,300

*Ex. 15-150 Financial reorganization

The following shareholders’ equity accounts were reported by India Inc. at December 31, 2023.
Common shares, no par value, 10,000 shares outstanding.................... $720,000
Retained earnings (deficit)....................................................................... (247,000)

A financial reorganization was approved by the management team. Equipment is to be written down
by $68,000, and inventory increased by $5,200.

Instructions
Prepare the required journal entries for the financial reorganization.

*Solution 15-150
Common Shares................................................................................................ 62,800
Inventory........................................................................................................... 5,200
Equipment................................................................................................. 68,000

Common Shares................................................................................................ 247,000

Retained Earnings (Deficit)....................................................................... 247,000

AACSB: Analytic

PROBLEMS

Pr. 15-151 Reacquisition of shares

Transfixed Corporation has 300,000 no par value common shares authorized, issued, and outstanding
which were all issued at $40 per share. On February 28, 2023, Transfixed reacquired 6,000 shares at a
cost of $38 per share. On October 20, 2023, the company purchased and cancelled an additional 4,000
shares. The purchase cost was $44 per share.

Instructions
Prepare the journal entries to record the reacquisition of shares.

Solution 15-151
Feb. 28 Common Shares................................................................................ 240,000
Cash............................................................................................ 228,000
Contributed Surplus.................................................................. 12,000

Common shares = $40 x 6,000 = $240,000; Cash = $38 x 6,000 = $228,000;

Contributed surplus = $240,000 – $228,000 = $12,000

Oct. 20 Common Shares................................................................................ 160,000

Contributed Surplus.......................................................................... 12,000
Retained Earnings............................................................................. 4,000
Cash............................................................................................ 176,000

Common shares = $40 x 4,000 = $160,000; Cash = $44 x 4,000 = $176,000;

Retained earnings = $176,000 – $160,000 – $12,000 = $4,000
Contributed surplus = $176,000 – $160,000 – $4,000 = $12,000

Pr. 15-152 Issuance of shares for cash, noncash consideration, and by subscription
Presented below is information related to Rhodesia Corp.:
1. Rhodesia is granted a charter that authorizes issuance of 100,000 no par value preferred shares
and an unlimited number of no par value common shares.
2. 10,000 common shares are issued for land with a fair value of $400,000.
3. 3,000 preferred shares are sold for cash at $110 per share.
4. Rhodesia issues 100 common shares to its lawyer for costs associated with legal services when
15-81
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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

starting the company. At this time, the common shares are selling at $60 per share.
5. Rhodesia issues shares on a subscription basis, giving each subscriber the right to purchase 300
common shares at a price of $65 per share. Fifty individuals accept the company's offer and agree
to pay 10% down and the remainder in three equal instalments.
6. The final instalment payment (for the subscriptions) is received and the shares are issued.

Instructions
Prepare the required general journal entries to record these transactions.

Solution 15-152
1. No entry necessary.

2. Land........................................................................................................... 400,000
Common Shares................................................................................ 400,000

3. Cash (3,000 x $110).................................................................................... 330,000

Preferred Shares................................................................................ 330,000

4. Legal Expense (100 x $60)......................................................................... 6,000

Common Shares................................................................................ 6,000

5. Subscriptions Receivable (50 x 300 x $65)................................................ 975,000

Common Shares Subscribed............................................................. 975,000

Cash (10% x $975,000)............................................................................... 97,500

Subscriptions Receivable.................................................................. 97,500

Cash ($975,000 – $97,500)/ 3..................................................................... 292,500

Subscriptions Receivable.................................................................. 292,500
First instalment

Cash ($975,000 – $97,500)/ 3..................................................................... 292,500

Subscriptions Receivable.................................................................. 292,500
Second instalment

6. Cash [($975,000 – $97,500) x 1 ÷ 3]........................................................... 292,500

Subscriptions Receivable.................................................................. 292,500
Third and final instalment

Common Shares Subscribed.................................................................... 975,000

Common Shares................................................................................ 975,000

CPA: Financial Reporting

Bloomcode: Application
AACSB: Analytic

Pr. 15-153 Issuance of shares for cash, noncash consideration, and by subscription
Dahomey Corp. is authorized to issue an unlimited number of no par common shares. Prepare the
journal entries for the following transactions:
1. Sold 600,000 shares for $10 cash each, which was the fair market value of the shares.
2. Issued 80,000 shares and paid $140,000 cash in total payment for a piece of land. The market
value of the shares had not changed.
3. Received subscriptions for 40,000 shares at $18 per share; received 60% of the subscription price
in cash.
4. Received the balance of the subscriptions receivable.

Solution 15-153
1. Cash (600,000 x $10).................................................................................. 6,000,000
Common Shares................................................................................. 6,000,000

2. Land........................................................................................................... 940,000
Cash..................................................................................................... 140,000
Common Shares (80,000 x $10).......................................................... 800,000

3. Subscriptions Receivable (40,000 x $18).................................................. 720,000

Common Shares Subscribed............................................................. 720,000

Cash ($720,000 x 60%)............................................................................... 432,000

Subscriptions Receivable................................................................... 432,000

4. Cash ($720,000 x 40%)............................................................................... 288,000

Subscriptions Receivable................................................................... 288,000

Common Shares Subscribed.................................................................... 720,000

Common Shares................................................................................. 720,000

Pr. 15-154 Allocation of cash dividends

Togo Inc. has the following shares outstanding:

40,000, $0.80, no par value preferred shares...................... $400,000

60,000 no par value common shares................................... $600,000

All shares were sold for $10 each.

No dividends have been declared since December 31, 2020. It is now December 31, 2023, and the
board of directors wants to distribute $204,000 in dividends.

Instructions
Calculate how much the preferred and common shareholders will receive under each of the following
assumptions:
a) The preferred is noncumulative and non-participating.
b) The preferred is cumulative and non-participating.
c) The preferred is cumulative and fully participating.
d) The preferred is cumulative and participating to 12% total.

Solution 15-154
a) Preferred Common Total
Current year's dividend $.80 × 40,000.................. $32,000 $ — $ 32,000
Remainder to common......................................... 172,000 172,000
$32,000 $172,000 $204,000

b) ............................................................................... Preferred Common Total

Dividends in arrears, $.80 × 40,000 x 2.................. $64,000 $ — $ 64,000
Current year's dividend........................................ 32,000 — 32,000
Remainder to common......................................... 108,000 108,000
$96,000 $108,000 $204,000

c) ............................................................................... Preferred Common Total

Dividends in arrears, $.80 × 40,000 x 2.................. $ 64,000 $ — $ 64,000
Current year's dividend 2:3 ratio ......................... 32,000 48,000 80,000
Participating dividend 6% ($60,000 ÷ $1,000,000) 24,000 36,000 60,000
$120,000 $84,000 $204,000

d) ............................................................................... Preferred Common Total

Dividends in arrears, $.80 × 40,000 x 2.................. $ 64,000 $ —$ 64,000
Current year's dividend 2:3 ratio ......................... 32,000 48,000 80,000
*Participating dividend (additional 4% – max).... 16,000 24,000 40,000
Remainder to common......................................... — 20,000 20,000
$112,000 $92,000 $204,000

* basic PFD dividend is $.80 ÷ $100 = 8%

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Pr. 15-155 Share retirement and stock dividends

Sudan Enterprises Inc. reported the following shareholder’s equity at December 31, 2022:
Contributed Capital
Preferred shares, $1, no par value, 100,000 shares authorized, cumulative,
callable at $107 plus dividends in arrears;
issued and outstanding, 20,000 shares................................................................. $2,040,000
Common shares, no par, 100,000 shares authorized,
80,000 issued and outstanding.............................................................................. 640,000
Contributed surplus (retirement of common shares).................................................. 120,000
Retained earnings.......................................................................................................... 1,600,000
The following transactions took place in 2023:
Jan. 20 Redeemed 1,000 preferred shares at the call price. There were no dividends in arrears.
Jan. 28 Declared $100,000 in dividends. Use separate accounts for each class of dividends.
Feb. 28 Retired 8,000 common shares at $12 per share.
Mar. 2 Declared and distributed a 3% common stock dividend. The market value of the shares at
that time was $11.50.

Instructions
Prepare journal entries for the 2023 transactions.

Solution 15-155
Jan. 20:
Preferred Shares ($2,040,000 ÷ 20,000) × 1,000....................................... 102,000
Retained Earnings..................................................................................... 5,000
Cash ($107 × 1,000)............................................................................ 107,000

Jan. 28:
Retained Earnings..................................................................................... 100,000
Preferred Dividends Payable (19,000 × $1)....................................... 19,000
Common Dividends Payable ($100,000 – $19,000).......................... 81,000

Feb. 28:
Common Shares (8,000 × ($640,000 ÷ 80,000))........................................ 64,000
Contributed Surplus (retirement of common shares)............................. 32,000
Cash (8,000 × $12).............................................................................. 96,000

Mar. 2:
Retained Earnings (72,000 × 3% × $11.50)................................................ 24,840
Common Shares................................................................................ 24,840

Pr. 15-156 Dividend distribution

You have recently been appointed CEO of Dumbledore Ltd., a wholesale distributor of magic supplies.
One day your CFO reminds you that next week you will have to make recommendations to the board
of directors regarding this year’s annual dividend. This catches you totally by surprise. Luckily, the
CFO was kind enough to provide you with some additional information. He shows you the projected
income statement and balance sheet, without the effect of any dividend declaration.
Income Statement:
Sales..................................................................................................... 44,000,000
COGS..................................................................................................... 29,400,000
Gross profit........................................................................................... 14,600,000
Operating expenses............................................................................. 6,000,000
Operating income before interest....................................................... 8,600,000
Interest expense................................................................................... 1,000,000
Income before tax................................................................................ 7,600,000
Income tax (30%)................................................................................. 2,300,000
Net income........................................................................................... 5,300,000

Statement of Financial Position:

Current Assets
Cash...................................................................................................... 4,000,000
Accounts receivable............................................................................. 5,000,000
Inventory.............................................................................................. 2,000,000
Other..................................................................................................... 3,700,000
Total Current Assets............................................................................. 14,700,000

Long-term investments....................................................................... 7,000,000

Property, plant, and equipment (net)................................................. 17,000,000

Total Assets.......................................................................................... 38,700,000

Current Liabilities
Accounts payable................................................................................. 2,000,000
Accrued liabilities................................................................................. 3,000,000
Other..................................................................................................... 4,000,000
Total Current Liabilities....................................................................... 9,000,000

Non-current liabilities.......................................................................... 16,000,000

Shareholders’ Equity
Common shares................................................................................... 1,000,000
Contributed surplus............................................................................. 4,900,000
Retained earnings (includes this year’s net income)......................... 7,800,000
Total Shareholders’ Equity.................................................................. 13,700,000

Total Liabilities and Equity.......................................................................... 38,700,000

Other information:
1) Last year, the net income was $3,500,000, and $3,300,000 cash dividends were paid.
2) Dumbledore has two debt agreements that call for the corporation to maintain at least
$2,500,000 in retained earnings, as well as maintain a debt-to-total-assets ratio of no more than
70%.
3) There has been no change in the number of shares outstanding during the year.

You start to think about the recommendations you are going to make. It is the end of November, and
historically the corporation has declared dividends five days before the end of the year.

Instructions
a) What factors will limit the amount to be distributed as dividends?
b) CRITICAL THINKING: What are important considerations in your decision? What would you
recommend? Provide any journal entry that is related to your decision.

Solution 15-156
a) You need to determine how much can be distributed in dividends. Look at all your constraints.
i) Retained earnings constraint. The debt covenant requires that Dumbledore must maintain
$2,500,000 in retained earnings. The balance in retained earnings is currently $7,800,000, so
the maximum dividend is $5,300,000.
ii) Cash on hand constraint. As long as you do not decide to borrow additional cash, theoretically
you could distribute all your cash on hand, so the dividend would be a maximum of
$4,000,000. However, for practical purposes, the firm must maintain a certain level of cash for
its day-to-day operations, so the actual dividend you can pay is lower.
iii) Debt-to-total assets constraint. You can distribute dividends only to the point that this ratio
does not exceed 70%. Currently, the ratio is 64.6% as total debt is $25,000,000 and total assets
are $38,700,000. You are limited to distributing at most $3,000,000. This will bring the ratio to
70% = 25 ÷ 35.7.

b) CRITICAL THINKING: There are many considerations involved in this decision, and there is no
single correct answer. Some of the main considerations are:
i) Since Dumbledore distributed $3,300,000 in dividends last year, a dividend of “only”
$3,000,000 will imply a dividend reduction. Firms are usually reluctant to lower dividends, so
distributing $3,000,000 may not be good for shareholder relations or your image in the

marketplace.
ii) Even if you are not constrained, you might not want to make the dividend too large. True,
this year the firm fared well, but if you distribute all the income as a dividend, and next year’s
income is lower, you would have to lower your dividend, which again is not desirable.
iii) Another reason to not distribute a high dividend is that it might suggest the firm does not
have future growth opportunities. A business should limit dividends if the retained capital
can be invested in projects with high returns. If the business does not have such projects, it is
better off to distribute the earnings. If the business still has good investment opportunities,
then you do not want to send the wrong message.
iv) Last year’s payout ratio was very high - 94.3% (3.3 ÷ 3.5). However, maintaining a high payout
ratio might create the problems already mentioned.
v) You need to make sure that after you distribute cash dividends, enough resources are
available to pay current liabilities. Current ratio excluding cash = 10,700,000 ÷ 9,000,000 =
1.19, so the firm does seem to be able to meet its short-term obligations even if it distributes
all its cash.
vi) Another solution would be to distribute a cash dividend of $3,000,000 and then a stock
dividend (e.g. for $1,000,000). This will allow Dumbledore to increase the overall dividends
and not violate any of the constraints. However, since the stock dividend does not give cash
to the shareholders, they might not appreciate it.
vii) To be able to pay more cash dividends, you need to take some action. You could sell some
non-current assets and use some of the proceeds to pay down on debt, and some to
distribute as dividends. Suppose you sell a $4,000,000 asset at no gain and use $2,000,000 of
the proceeds to reduce debt. The change to the balance sheet amounts is:
Cash plus $2,000,000
Non-current assets minus $4,000,000
Liabilities minus $2,000,000

Debt is down to $23,000,000, total assets are down to $36,700,000, and cash is increased to
$6,000,000. The-debt-to-total-assets constraint allows you to distribute dividends of up to
$3,840,000 and you will have plenty of cash to do so. So if you declare a cash dividend of
$3,800,000, you are able to increase the dividend but still satisfy all constraints.
viii) Since Dumbledore has $7,000,000 in investments, given other constraints are satisfied,
another consideration is a property dividend.
ix) If time allows, the corporation could issue more shares, which will relax the debt-to-total-
assets ratio and the cash constraint.

Pr. 15-157 Equity transactions

Congo Corp. has the following capital structure at the beginning of this year:
Preferred shares, $3, no par value, cumulative, 20,000 shares authorized,
6,000 shares issued and outstanding............................................................... $ 300,000
Common shares, no par value, 60,000 shares authorized,
40,000 shares issued and outstanding............................................................. 510,000
Total contributed capital.................................................................................. 810,000
Retained earnings..................................................................................................... 340,000
Total shareholders' equity............................................................................... $1,150,000

Instructions
a) Record the following transactions that occurred consecutively this year. Show all calculations.
i. There are no dividends in arrears. A total cash dividend of $90,000 was declared. The preferred
shares are participating to a maximum of 10%. Record dividends payable to common and
preferred shares in separate accounts.
ii. A 10% common stock dividend was declared. The current market value of the common shares
is $16 a share.
iii. Net income for the year was $180,000. Record the closing entry.
b) Incorporating all the above information, construct the shareholders' equity.

Solution 15-157
a) Preferred Common Total
i. Current year's dividend, $3 × 6,000* $18,000 $30,600** $48,600
Participating dividend 4% 12,000 20,400 32,400
Remainder to common 9,000 9,000
$30,000 $60,000 $90,000

*basic div is $3 ÷ $50 = 6%

**6% x $510,000

Retained Earnings..................................................................................... 90,000

Dividends Payable—Common.......................................................... 60,000
Dividends Payable—Preferred.......................................................... 30,000

ii. 40,000 x 10% x $16 = $64,000

Retained Earnings............................................................................. 64,000

Common Stock Dividend Distributable................................. 64,000

iii. Income Summary.............................................................................. 180,000

Retained Earnings................................................................... 180,000

b) Shareholders' equity
Preferred shares, $3, no par value, cumulative, 20,000 shares authorized,
6,000 shares issued and outstanding............................................................... $ 300,000
15-89
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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Common shares, no par value, 60,000 shares authorized,

40,000 shares issued and outstanding............................................................. 510,000
Common stock dividends distributable.................................................................. 64,000
Total contributed capital.................................................................................. 874,000
Retained earnings***................................................................................................ 366,000
Total shareholders' equity............................................................................... $1,240,000

***$340,000 – $90,000 – $64,000 + $180,000 = $366,000

Difficulty: Medium
Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares,
stock splits, and dividend distribution.
Section Reference: Recognition, Derecognition, and Measurement
Learning Objective: Understand how shareholders’ equity is presented, disclosed, and analyzed.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Pr. 15-158 Calculation of selected financial ratios

Cuba Corp. provides the following information for 2023:
Preferred shares, 8%, par value $100, cumulative, callable:
Call price per share............................................................................ $105
Shares outstanding........................................................................... 5,000
Dividends in arrears........................................................................... none
Common shares, no par value:
Shares issued..................................................................................... 60,000
Dividends paid per share.................................................................. (a)
Market price per share...................................................................... (b)
Carrying value.................................................................................... $800,000
Retained earnings (after closing).............................................................. $175,000
Treasury shares (common)....................................................................... $125,000
Number of treasury shares held....................................................... 5,000
Shareholders’ equity, Dec 31 ................................................................... (c)
Net income for 2023.................................................................................. (d)
Earnings per share.................................................................................... $4.00
Price earnings ratio of common shares................................................... 9
Payout ratio............................................................................................... 40%
Book value per common share................................................................. (e)

Instructions
Complete the missing information.

Solution 15-158
15-90
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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) 40% x $4 = $1.60

b) 9 x $4 = $36

c) (5,000 × $100) + $800,000 + $175,000 – $125,000 = $1,350,000

d) [$X – (5,000 × $100 × 8%)] = $4.00 x (60,000 – 5,000)

$X – $40,000 = $220,000
$X = $260,000

e) [($1,350,000 – 5,000 x $105) ÷ (60,000 – 5,000)] = $825,000 ÷ 55,000 = $15

Pr. 15-159 Statement of shareholders’ equity

Following is information provided by Timbuktu Inc. for its past two year ends:

Balances at Balances at
Dec. 31, 2022 Dec. 31, 2023
Common Shares, no par value $300,000 ??
Common shares sold during year $ 50,000
Accumulated Other Comprehensive Income 60,000 ??
Other Comprehensive Income for year (unrealized
30,000
holding gain, after tax)
Retained Earnings 50,000 ??
Net income for year 110,000

Instructions
In good format, prepare a Statement of Shareholder’s Equity for the year ended December 31, 2023.

Solution 15-159
TIMBUKTU INC.
Statement of Shareholders’ Equity
For the Year Ended December 31, 2023

Accumulated
Total
Common Retained Other
Shareholders’
Shares Earnings Comprehensive
Equity
Income
15-91
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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Beginning balances $300,000 $ 50,000 $60,000 $410,000

Common shares sold 50,000 50,000
Net income 110,000 110,000
Other comprehensive
income 30,000 30,000
Ending balances $350,000 $160,000 $90,000 $600,000

Pr. 15-160 Shareholders’ equity section and capital disclosures

Mackenzie Corporation’s post-closing trial balance at December 31, 2023 was as follows:

MACKENZIE CORPORATION
Post-Closing Trial Balance
December 31, 2023

Dr. Cr.
Buildings $2,175,000
Accounts receivable 720,000
Land 600,000
Inventories 540,000
FV-NI investments 300,000
Cash 285,000
Treasury shares (15,000 common shares) 255,000
Prepaid expenses 60,000
Contributed surplus—Common $2,190,000
Preferred shares 750,000
Accounts payable 465,000
Bonds payable 450,000
Retained earnings 301,500
Common shares 300,000
Accumulated depreciation—Buildings 277,500
Accumulated other comprehensive income 150,000
Allowance for expected credit losses 45,000
Dividends payable on preferred shares 6,000
Totals $4,935,000 $4,935,000

At December 31, 2023, Mackenzie had the following numbers for its common and preferred shares:

Common Preferred
Authorized 900,000 90,000
Issued 300,000 15,000
Outstanding 285,000 15,000

The dividends on preferred shares are $7.50 cumulative and participating.

Instructions
a) Prepare the shareholders’ equity section of Mackenzie’s statement of financial position at
December 31, 2023. The company follows IFRS.
b) If the company followed ASPE, what types of disclosures would be required?

Solution 15-160
a) Shareholders' equity:
Preferred shares, no par value, $7.50, cumulative and participating,
authorized, 90,000 shares; issued and outstanding 15,000 shares $ 750,000
Common shares, no par value, authorized 900,000 shares; issued 300,000 shares,
of which 15,000 are in treasury 300,000
Contributed surplus—Common 2,190,000
Retained earnings 301,500
Accumulated other comprehensive income 150,000
3,691,500
Less: Cost of treasury shares (255,000)
Total shareholders' equity $3,436,500

b) ASPE disclosures include:

1. The authorized number of shares or a statement noting that this is unlimited.
2. The existence of unique rights (such as dividend preferences and the amounts of such dividends,
redemption and/or retroaction privileges, conversation rights, and whether or not the dividends
are cumulative).
3. The number of shares issued and amount received including those held by the entity or its
subsidiaries or associates.
4. Whether the shares are par value or no par value.
5. The amount of any dividends in arrears for cumulative preferred shares.
6. Details of changes during the year.
7. Restrictions on retained earnings.
8. Any shares reserved for future issue including terms and amounts.

*Pr. 15-161 Treasury share transactions

Algeria Corp. currently has 5,000 no par value common shares outstanding, with a book value of
$150,000.

Instructions
Record the share transactions given below:
a) Bought 300 common shares at $31 each, to be held as treasury shares
b) Sold 80 treasury shares at $30
c) Sold 40 treasury shares at $34
d) Retired the rest of the treasury shares

*Solution 15-161
a) Treasury Shares (300 x $31).................................................. 9,300
Cash............................................................................... 9,300

b) Cash (80 x $30)...................................................................... 2,400

Retained Earnings................................................................ 80
Treasury Shares (80 x $31)............................................ 2,480

c) Cash (40 x $34)...................................................................... 1,360

Treasury Shares (40 x $31)............................................ 1,240
Contributed Surplus..................................................... 120

d) Common Shares [($150,000 ÷ 5,000) x (300 – 80 – 40)]....... 5,400

Contributed Surplus (maximum)......................................... 120
Retained Earnings (balance)................................................ 60
Treasury Shares (180 x $31).......................................... 5,580

*Pr. 15-162 Financial reorganization

Petroleum Products Inc. has the following account balances on March 31, 2023:
Inventory................................................................................................... $375,000
Buildings (net)........................................................................................... 675,000
Patents (net).............................................................................................. 550,000
Bank loan payable..................................................................................... 325,000
Common shares, no par value, 10,000 shares outstanding.................... 850,000
Deficit......................................................................................................... (1,250,000)

In April 2023, management agrees to a financial reorganization. As part of the reorganization creditors
are willing to forgive the debt in exchange for 100% of the outstanding shares. It is determined that
assets have the following fair values: inventory $150,000, patent $250,000, and buildings $1,100,000.

Instructions
a) Prepare the required journal entries for the financial reorganization. Use Deficit account.
b) The CEO is reviewing the journal entries and does not understand how these figures have been
arrived at. Explain the steps used in the reorganization process.

*Solution 15-162
Deficit................................................................................................................ 525,000
Inventory ($375,000 – $150,000)............................................................... 225,000
Patents ($550,000 – $250,000).................................................................. 300,000

Common Shares................................................................................................ 1,775,000

Deficit ($525,000 + $1,250,000)................................................................. 1,775,000

Buildings ($1,100,000 – $675,000).................................................................... 425,000

Bank Loan Payable........................................................................................... 325,000
Common Shares........................................................................................ 750,000

b) A financial reorganization consists of the following steps:

1. Any asset writedowns or impairments that existed prior to the reorganization should be recorded
first.
2. The changes in debt and equity as negotiated are recorded. Often debt is exchanged for equity,
resulting in a change in control.
3. The assets and liabilities are comprehensively revalued. This step assigns appropriate fair values
to all assets and liabilities as per the negotiations. The difference between the carrying values
prior to the reorganization and the new values after is known as a revaluation adjustment. The
revaluation adjustment and any costs incurred to carry out the financial reorganization are
accounted for as capital transactions and are closed to Share Capital, Contributed Surplus, or a
separately identified account within shareholders’ equity. The new costs of the identifiable assets
and liabilities must not exceed the fair value of the entity if known.
4. The deficit balance (retained earnings) is brought to zero. The deficit is reclassified to Common
Shares, Contributed Surplus, or a separately identified account within shareholders’ equity.

LEGAL NOTICE

The data contained in these files are protected by copyright. This manual is furnished under licence
and may be used only in accordance with the terms of such licence.

The material provided herein may not be downloaded, reproduced, stored in a retrieval system,
modified, made available on a network, used to create derivative works, or transmitted in any form or
by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the
prior written permission of John Wiley & Sons Canada, Ltd.

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CHAPTER 15

CHAPTER STUDY OBJECTIVES

MULTIPLE CHOICE QUESTIONS

Answer No. Description

Answer No. Description

Answer No. Description

*This topic is dealt with in an Appendix to the chapter.

*This topic is dealt with in an Appendix to the chapter.

*This topic is dealt with in an Appendix to the chapter.

MULTIPLE CHOICE QUESTIONS

1. The residual interest in a corporation belongs to the

2. Which statement is correct regarding real estate income or investment trusts?

3. The pre-emptive right enables a shareholder to

4. The liability of shareholders is

5. The cumulative feature of preferred shares

6. Dividends on cumulative preferred shares

a) must be paid each year.

7. Callable preferred shares

8. Total shareholders' equity represents

9. Preferred shares are often issued instead of debt

11. Which one of the following is NOT a right of common shareholders?

13. Subscriptions Receivable are reported as

a) pro forma method.

CPA: Financial Reporting

b) the Share Capital account

25. An entry for dividends is NOT made on the

shares as a dividend to its shareholders. This is an example of a

29. The fair value of a property dividend should NOT be determined by

30. Declaration and issuance of a stock dividend

31. If a corporation wishes to "capitalize" part of its earnings, it may issue a

32. Which type of dividends do NOT reduce total shareholders' equity?

40. A common feature of both stock splits and stock dividends is

43. Dividends are NOT paid on

44. Noncumulative preferred dividends in arrears

legal services. Total shareholders’ equity would increase on

48. An investment in marketable securities was distributed to shareholders as a property dividend.

60. Presented below is information related to Oistins Corporation:

$4 Preferred Shares, no par value........................................ 2,880,000

Section Reference: Recognition, Derecognition, and Measurement

the common shareholders will receive

83. Presented below is information related to Madrid Corporation:

84. Shareholders' equity is generally classified into two major categories:

87. The payout ratio can be calculated by

d) dividing net income by cash dividends per share.

88. The rate of return on common shareholders’ equity shows

89. The price earnings (P/E) ratio is calculated by

a) the declaration of a preferred stock dividend.

common shares was $100 at December 31, 2024.

Feedback: $100 ¸ $180,000 – $20,000 = $100 ¸ ($160,000 ¸ 22,000) = 13.76

99. Which of the following statements regarding share reacquisition is CORRECT?

101. When a financial reorganization of a company occurs

*102. A “gain" on the sale of treasury shares should be credited to

*104. An acceptable method of reporting Treasury Shares in the balance sheet is

to decrease if they are accounted for

The entry to record this sale would be

*115. Galba Corp.'s shareholders' equity at January 1, 2023 was:

During 2023, Galba had the following share transactions:

*116. Galba Corp.'s shareholders' equity at January 1, 2023 was:

Reported net income of $150,000.

Common shares, no par value: authorized 30,000 shares;

*124. Immediately after a financial reorganization, the retained earnings account

CPA: Financial Reporting

*126. Which of the following statements is correct?

*127. Which statement is FALSE regarding financial reorganizations?

Ex. 15-131 Share subscriptions

Cash ($50,000 x 50%)................................................................................... 25,000

Common Shares Subscribed....................................................................... 50,000

Ex. 15-132 Lump sum issuance of shares

Ex. 15-133 Shareholders’ equity

1. Declaration of a cash dividend. __________ __________ __________

2. Operating loss for the period. __________ __________ __________

3. Retirement of bonds at more than

4. Declaration of a stock dividend. __________ __________ __________

5. Exchanging common shares for machinery. __________ __________ __________

6. Conversion of bonds into common shares. __________ __________ __________

7. Not declaring a dividend on cumulative

1. Declaration of a cash dividend. __

2. Operating loss for the period. __

4. Declaration of a stock dividend. __

5. Exchanging common shares for machinery. __

6. Conversion of bonds into common shares. __

8. Payment of a cash dividend. __