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CHAPTER 15
Equity
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1. Shareholders’ rights;
corporate form.
1, 2, 3
1
5. Treasury share
transactions,
cost method.
11, 12, 17
7, 8
3, 6, 7, 9,
10, 18
1, 2, 3,
5, 6, 7
7
6. Preference stock.
3, 13,
14, 15
9
2, 8
1, 3
10. Restrictions of retained
earnings.
27, 28
9
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1. Describe the corporate form and
the issuance of shares.
1, 2, 4, 5, 6,
9
1, 2, 3, 4, 5,
6, 8, 9, 10
1, 3, 4, 9, 12
1, 2, 3
4. Indicate how to present and
analyze equity.
3
17, 19, 20
1, 2, 6, 9, 11,
12
*5. Explain the different types of
15
8, 21, 22,
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E15.1
Recording the issuances of ordinary shares.
Simple
15–20
E15.2
Recording the issuance of ordinary and preference shares.
Simple
15–20
E15.3
Shares issued for land.
Simple
10–15
E15.10
Analysis of equity data and equity section preparation.
Moderate
20–25
E15.11
Equity items on the statement of financial position.
Simple
15–20
E15.12
Cash dividend and liquidating dividend.
Simple
10–15
E15.13
Share split and share dividend.
Simple
10–15
E15.14
Entries for share dividends and share splits.
Simple
10–12
E15.15
Dividend entries.
Simple
10–15
E15.16
Computation of retained earnings.
Simple
05–10
E15.17
Equity section.
Moderate
20–25
P15.1
Equity transactions and statement preparation.
Moderate
50–60
P15.2
Treasury share transactions and presentation.
Simple
25–35
P15.3
Equity transactions and statement preparation.
Moderate
25–30
P15.4
Share transactions—lump sum.
Moderate
20–30
P15.5
Treasury shares—cost method.
Moderate
30–40
CA15.1
Preemptive rights and dilution of ownership.
Moderate
10–20
CA15.2
Issuance of shares for land.
Moderate
15–20
CA15.3
Conceptual issues—equity.
Moderate
25–30
*This material is presented in an appendix to the chapter.
ANSWERS TO QUESTIONS
1. The basic rights of each shareholder (unless otherwise restricted) are to share proportionately:
2. The preemptive right protects existing shareholders from dilution of their ownership share in the
event the corporation issues new shares.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
3. Preference shares commonly have preference to dividends in the form of a fixed dividend rate
and a preference over ordinary shares to remaining corporate assets in the event of liquidation.
4. The distinction between contributed (paid-in) capital and retained earnings is important for both
legal and economic points of view. Legally, dividends can be declared out of retained earnings in
5. Authorized ordinary shares—the total number of shares authorized for issuance by the country of
incorporation.
6. Par value is an arbitrary, fixed per share amount assigned to a share by the incorporators. It is
7. The issuance for cash of no-par value ordinary shares at a price in excess of the stated value of
the ordinary shares is accounted for as follows:
(1) Cash is debited for the proceeds from the issuance of the ordinary shares.
Questions Chapter 15 (Continued)
8. The proportional method is used to allocate the lump sum received on sales of two or more
classes of securities when the fair value or other sound basis for determining relative value is
9. The general rule to be applied when shares are issued for services or property other than cash is
that companies should record the shares issued at the fair value of the goods or services
received, unless that fair value cannot be measured reliably. If the fair value of the goods or
10. The direct costs of issuing shares, such as underwriting costs, accounting and legal fees, printing
11. The major reasons for purchasing its own shares are: (1) to provide tax-efficient distributions of
excess cash to shareholders, (2) to increase earnings per share and return on equity, (3) to provide
12. (a) Treasury shares should not be classified as an asset since a corporation cannot own itself.
(b) The “gain” or “loss” on sale of treasury shares should not be treated as additions to or
deductions from income. If treasury shares are carried in the accounts at cost, these so-
called gains or losses arise when the treasury shares are sold. These “gains” or “losses”
13. The character of preference shares can be altered by being cumulative or non-cumulative, partici-
pating (fully or partially) or non-participating, convertible or non-convertible, and/or callable or
Questions Chapter 15 (Continued)
14. Nonparticipating means the security holder is entitled to no more than the specified fixed dividend.
If the security is partially participating, it means that in addition to the specified fixed dividend the
security may participate with the ordinary shares in dividends up to a certain stated rate or
15. Preference shares are generally reported at par value as the first item in the equity section of a
16. Elements of equity include (1) share capital, (2) share premium, (3) retained earnings,
17. When treasury shares are purchased, the Treasury Shares account is debited and Cash is
credited at cost (€290,000 in this case). Treasury Shares is a contra equity account and Cash is
18. The answers are summarized in the table below:
Account Classification
(a) Share Capital—Ordinary Share capital
19. The dividend policy of a company is influenced by (1) the availability of cash, (2) the stability of
Questions Chapter 15 (Continued)
20. In declaring a dividend, the board of directors must consider the condition of the corporation such
that a dividend is (1) legally permissible and (2) economically sound.
In general, directors should give consideration to the following factors in determining the legality
of a dividend declaration:
(1) Retained earnings, unless legally encumbered in some manner, is usually the correct basis
for dividend distribution.
21. Cash dividends are paid out of cash. A balance must exist in retained earnings to permit a legal
22. A cash dividend is a distribution in cash while a property dividend is a distribution in assets
other than cash. Any dividend not based on retained earnings is a liquidating dividend. A
23. A share dividend results in the transfer from retained earnings to share capital equal to the par
24. (a) A share split differs from a share dividend in the amount of retained earnings to be
capitalized. A share dividend involves capitalizing (charging) retained earnings equal to the
par value of the shares distributed.
Another distinction between a share dividend and a share split is that a share dividend
Questions Chapter 15 (Continued)
(b) A declared but unissued share dividend should be classified as part of equity rather than as a
liability in a statement of financial position. A share dividend affects only equity accounts; that is,
25. A partially liquidating dividend will be debited both to Retained Earnings and Share Premium.
The portion of dividends that is a return of capital should be debited to Share Premium.
LO: 3, Bloom: C, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
26. A property dividend is a nonreciprocal transfer of nonmonetary assets between an enterprise and
its owners. A transfer of a nonmonetary asset to a shareholder or to another entity in a
27. Retained earnings are restricted because of legal or contractual restrictions, or the necessity to
protect the working capital position.
LO: 4, Bloom: C, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
28. Restrictions of retained earnings are best disclosed in a note to the financial statements. This
Questions Chapter 15 (Continued)
*29.
Preference
Ordinary
Total
(a)
Current year’s dividend, 7%
$ 7,000
$21,000a
$28,000
The participating dividend was determined as follows:
Current year’s dividend:
(b)
Preference
Ordinary
Total
Dividends in arrears, 7% of $100,000
$ 7,000
$ 7,000
Current year’s dividend, 7%
7,000
$21,000
28,000
(c)
Preference
Ordinary
Total
Dividends in arrears ($100,000 X 7%) – $5,000
$2,000
$ 2,000
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 15.1
Cash .................................................................................. 4,500
BRIEF EXERCISE 15.2
(a) Cash ........................................................................... 8,200
Share Capital—Ordinary ................................... 8,200
BRIEF EXERCISE 15.3
WILCO SE
Equity
December 31, 2019
Share capital—ordinary, €5 par value ............................. € 510,000
Share premium—ordinary ................................................ 1,320,000
BRIEF EXERCISE 15.4
Cash .................................................................................. 13,500
Share Capital—Preference (100 X $50).................... 5,000
BRIEF EXERCISE 15.4 (Continued)
Allocated to ordinary
$6,000
$15,000
X $13,500 = $ 5,400
BRIEF EXERCISE 15.5
Land .................................................................................. 31,000
BRIEF EXERCISE 15.6
Cash ($60,000 – $1,500) .................................................... 58,500
BRIEF EXERCISE 15.7
7/1/19 Treasury Shares (100 X €87) ............................ 8,700
Cash ........................................................... 8,700
BRIEF EXERCISE 15.8
8/1/19 Treasury Shares (200 X R$80) ..................... 16,000
Cash ...................................................... 16,000
BRIEF EXERCISE 15.9
Cash .............................................................................. 61,500
BRIEF EXERCISE 15.10
Aug. 1
Retained Earnings (2,000,000 X $1) ...............................
2,000,000
Dividends Payable................................
2,000,000
BRIEF EXERCISE 15.11
Sep. 21
Equity Investments .........................................................
325,000
Unrealized Holding Gain or Loss—
Income (R$1,200,000 – R$875,000).......................
325,000
BRIEF EXERCISE 15.12
Apr. 20
Retained Earnings
(¥500,000,000 – ¥125,000,000) ................................
375,000,000
BRIEF EXERCISE 15.13
Declaration Date.
Retained Earnings ...........................................................
200,000
Ordinary Share Dividend Distributable
BRIEF EXERCISE 15.14
Declaration Date.
Retained Earnings ...........................................................
4,000,000
Ordinary Share Dividend Distributable
*BRIEF EXERCISE 15.15
(a) Preference shareholders would receive €60,000 (6% X €1,000,000) and
the remainder of €240,000 (€300,000 – €60,000) would be distributed to
SOLUTIONS TO EXERCISES
EXERCISE 15.1 (15–20 minutes)
(a) Jan. 10 Cash (80,000 X €6) ................................ 480,000
Share Capital—Ordinary
July 1 Cash (30,000 X €8) ................................ 240,000
Share Capital—Ordinary
(30,000 X €3) ................................. 90,000
Share Premium—Ordinary
(30,000 X €5) ................................ 150,000
(b) If the shares have a stated value of €2 per share, the entries in (a) would
be the same except for the euro amounts. For example, the Jan. 10
EXERCISE 15.2 (15–20 minutes)
Jan. 10 Cash (80,000 X $5) ....................................... 400,000
Share Capital—Ordinary
(80,000 X $2) ........................................ 160,000
April 1 Land .............................................................. 80,000
Share Capital—Ordinary
(24,000 X $2) ........................................ 48,000
Share Premium—Ordinary
($80,000 – $48,000) ............................. 32,000
Aug. 1 Organization Expense ................................. 50,000
Share Capital—Ordinary
(10,000 X $2) ........................................ 20,000
Share Premium—Ordinary
($50,000 – $20,000) ............................. 30,000
EXERCISE 15.3 (10–15 minutes)
(a) Land (£60 X 25,000) ................................................ 1,500,000
(b) One might use the cost of treasury shares. However, this is not a
relevant measure of this economic event. Rather, it is a measure of a
EXERCISE 15.4 (20–25 minutes)
(a) (1) Cash (CHF850 X 9,600) ....................................... 8,160,000
Bonds Payable
(CHF5,000,000 – CHF200,000*) ................ 4,800,000
Incremental method
Lump-sum receipt (9,600 X CHF850) ....................... CHF8,160,000
Computation of share capital and share premium
Balance allocated to ordinary shares ...................... CHF3,360,000
EXERCISE 15.4 (Continued)
Bond issue cost allocation
Total issue cost (400 X CHF850) ..................... CHF 340,000
Less: Amount allocated to bonds ................... 200,000
(2) Cash .................................................................. 8,160,000
Bonds Payable .......................................... 4,533,333
Share Capital—Ordinary
(100,000 X CHF5) ................................... 500,000
Share Premium—Ordinary ....................... 3,126,667
(b) One is not better than the other, but would depend on the relative
reliability of the valuations for the shares and bonds. This question is
presented to stimulate some thought and class discussion.
EXERCISE 15.5 (10–15 minutes)
(a) Fair value of Ordinary Shares (500 X €168) .......... € 84,000
Fair value of Preference Shares (100 X €210) ....... 21,000
€105,000
Allocated to Ordinary Shares:
(b) Lump-sum receipt €100,000
Allocated to ordinary (500 X €170) (85,000)
Balance allocated to preference € 15,000
Cash ......................................................................... 100,000
EXERCISE 15.6 (25–30 minutes)
(a) Cash [(5,000 X $45) – $7,000] .................................... 218,000
EXERCISE 15.6 (Continued)
(b) Land (1,000 X $46) ..................................................... 46,000
Share Capital—Ordinary (1,000 X $10)............. 10,000
EXERCISE 15.7 (15–20 minutes)
#
Assets
Liabilities
Equity
Share
Premium
Retained
Earnings
Net
Income
1.
D
NE
D
NE
NE
NE
EXERCISE 15.8 (15–20 minutes)
(a) $1,000,000 X 6% = $60,000; $60,000 X 3 = $180,000. The cumulative
dividend is disclosed in a note to the equity section; it is not reported
