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PROBLEM 15.12 (Continued)
Account Balances
Share Capital—Ordinary
850,000
50,000
Treasury Shares
78,000
Share Premium—Ordinary
Share Premium—T.S.
Note that the Penzi PLC is authorized to issue 300,000 shares of
£10 par value ordinary shares and 100,000 shares of £25 par value,
cumulative and non-participating preference shares.
PROBLEM 15.12 (Continued)
Entries supporting the balances.
Entries
1. Cash ................................................................. 2,635,000
Share Capital—Ordinary ......................... 850,000
Share Premium—Ordinary ...................... 1,785,000
At the beginning of the year, Penzi had 110,000 ordinary shares out-
Preference Shares
Cash ................................................................. 1,760,000
Share Capital—Preference ...................... 1,000,000
Treasury Shares
Nov. 30 Treasury Shares ...................................... 78,000
Cash .................................................... 78,000
PROBLEM 15.12 (Continued)
The 2,000 treasury shares purchased resulted in a debit balance of
treasury shares of £78,000. Later, 500 shares were sold at £21,000,
Share Dividend
Dec. 15 Retained Earnings ................................... 54,000
Share Capital—Ordinary .................... 54,000*
*Shares outstanding, beginning of year: 110,000
Retained Earnings
The cash dividends only affect the retained earnings. Note that the
preference shares are in arrears for the dividends that should have
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 15.1 (Time 10–20 minutes)
Purpose—to provide the student with some familiarity with the applications of the ordinary share
CA 15.2 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to discuss the bases for recording the issuance of
shares in exchange for non-monetary assets.
CA 15.3 (Time 25–30 minutes)
Purpose—to provide a five-part theory case on equity based on the IASB conceptual framework. It
CA 15.4 (Time 25–30 minutes)
Purpose—to provide the student with an understanding of the conceptual framework which underlies
CA 15.5 (Time 15–20 minutes)
Purpose—to provide the student with an understanding of the theoretical concepts and implications that
CA 15.6 (Time 20–25 minutes)
Purpose—to provide the student with a situation containing a cash dividend declaration, a share
dividend, and a reacquisition and reissuance of shares requiring the student to explain the accounting
treatment.
CA 15.7 (Time 10–15 minutes)
Purpose—to provide an opportunity for the student to consider and discuss the ethical issues involved
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 15.1
(a) To share proportionately in any new issues of shares of the same class (the preemptive right).
(b) Derek Wallace bought an additional £100,000 par value shares. His original ownership was
(c) No information is given with respect to the fair value of the shares. In this situation, an estimate
for fair value could be developed based on market transactions involving comparable assets.
Otherwise, discounted expected cash flows could be used to approximate fair value. In this
CA 15.2
(a) 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
(b) If the fair value of the land can be measured reliably, it is used as a basis for recording the
exchange. The fair value could be determined by observing the cash sales price of similar pieces
of property or through independent appraisals.
(c) If the fair value of the land cannot be measured reliably, but the fair value of the shares issued is
determinable, the fair value of the shares is used as a basis for recording the exchange. If the
CA 15.3
(a) Equity, or net assets, is the residual interest in the assets of the entity after deducting all its
liabilities; in other words, equity equals assets less liabilities. Assets are resources controlled by
the entity as the result of past events and from which future economic benefits are expected to
(d) Dividends generally initially cause an increase in liabilities but eventually cause a decrease in
assets in addition to the decrease in equity. The purchase of treasury shares causes a decrease
in assets in addition to the decrease in equity.
CA 15.4
(a) A share dividend is the issuance by a corporation of its own shares to its shareholders on a
(1) From the legal standpoint a share split is distinguished from a share dividend in that a split
results in an increase in the number of shares outstanding and a corresponding decrease in
(2) The major distinction is that a share dividend requires a journal entry to decrease retained
earnings and increase paid-in capital, while there is no entry for a share split. Also, from the
accounting standpoint the distinction between a share dividend and a share split is
(b) The usual reason for issuing a share dividend is to give the shareholders something on a
dividend date and yet conserve working capital.
A share dividend that is charged to retained earnings reduces the total accumulated earnings,
CA 15.4 (Continued)
A share dividend also may be issued for the purpose of obtaining a wider distribution of the
shares. Although this is the main consideration in a share split, it may be a secondary
CA 15.5
Instructors who assign this case may wish to assign students additional outside material on the
(a) The case against treating an ordinary share dividend as income is supported by a majority of
accounting authorities. It is based upon “entity” and “proprietary” interpretations.
If the corporation is considered an entity separate from shareholders, the income of the corpora-
tion is corporate income and not income to shareholders, although the equity of the shareholders
(b) The case against issuing share dividends on treasury shares rests principally upon the argument
that shares reacquired by the corporation is a “reduction of equity” through the payment of cash
to reduce the number of outstanding shares. According to this view, the corporation cannot
obtain a proprietary interest in itself when it reacquires its own shares. The retained earnings are
CA 15.6
(a) Mask Company should account for the purchase of the treasury shares on August 15, 2019, by
debiting Treasury Shares and crediting Cash for the cost of the purchase (1,000 shares X €18
per share). Mask should account for the sale of the treasury shares on September 14, 2019, by
CA 15.6 (Continued)
(b) Mask should account for the share dividend by debiting Retained Earnings for €10 per share (the
par value of the shares in October 2019, the date of the share dividend) multiplied by the
(c) Mask should account for the cash dividend on December 20, 2019, the declaration date, by
CA 15.7
(a) The stakeholders are the dissident shareholders, the other shareholders, potential investors,
creditors, and Kenseth.
(b) The ethical issues are honesty, job security, and personal responsibility to others. That is, by
using her inside information and her authority to do the buy-back, she can benefit herself at the
FINANCIAL REPORTING PROBLEM
(a) M&S does not have any preference shares.
(d) At fiscal year-end 2016 and 2015, M&S had 1,622.96 million and
1,647.81 million ordinary shares outstanding, respectively.
There is no indication of treasury shares.
(e) The cash dividends caused M&S’s Retained Earnings to decrease by
£301.7 million.
(f) Return on ordinary share equity:
COMPARATIVE ANALYSIS CASE
(a) Par value:
adidas, No par.
Puma, No par.
(b) Number of authorized shares issued:
(d) Ordinary shares outstanding, year-end 2015:
adidas, 201.2 million.
Puma, 14.939 million.
(e) adidas declared cash dividends of €1.60 per share in 2015, reducing
(f) Rate of return on ordinary share equity.
2015 (€000,000):
COMPARATIVE ANALYSIS CASE (Continued)
2014:
adidas
€496
= 8.8%
€5,618*
(g) Payout ratios for 2015 (€000,000).
adidas
€309
= 48.3%
€640
FINANCIAL STATEMENT ANALYSIS CASES
CASE 1
(a) Management might purchase treasury shares to provide to share-
holders a tax-efficient method for receiving cash from the corporation.
In addition, it might have to repurchase shares to have them available
(b) Earnings per share is calculated by dividing net income by the weighted-
average number of shares outstanding during the year.
If shares are reduced by treasury share purchases, the denominator
(c) One measure of solvency is the ratio of debt divided by total assets.
This ratio shows how many dollars of assets are backing up each dollar
of debt, should the company become financially troubled. For the
current prior year, this can be calculated as follows:
FINANCIAL STATEMENT ANALYSIS CASES
CASE 2
(a) The date of record marks the time when ownership of the outstanding
shares is determined for dividend purposes. This in turn identifies
which shareholders will receive the share dividend. This date is also
used when a share split occurs. The date of distribution is when the
ACCOUNTING, ANALYSIS, AND PRINCIPLES
ACCOUNTING
January 15, 2019
Retained Earnings (€1.05 X 60,000) ................. 63,000
Cash ....................................................... 63,000
November 15, 2019
Cash (€18 X 1,000) ............................................ 18,000
Share Premium—Treasury ................... 3,000
Treasury Shares .................................... 15,000
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
The balances are indicated in the following partial statement of financial
position:
NADAL SE
Statement of Financial Position (partial)
December 31, 2019
Equity
Share capital—ordinary, €10 par value,
(1) €600,000 + €60,000
ANALYSIS
Payout ratio: €63,000 ÷ €370,000 = 17%
PRINCIPLES
Treasury shares sold above or below cost do not result in gains or losses
because treasury shares do not meet the definition of an asset. Rather,
they are unissued equity. Furthermore, gains or losses should not be
RESEARCH CASE
(b) An entity shall disclose the following, either in the statement of
financial position or the statement of changes in equity, or in the
notes:
(a) for each class of share capital:
(i) the number of shares authorised;
(ii) the number of shares issued and fully paid, and issued but
not fully paid;
(iii) par value per share, or that the shares have no par value;
(iv) a reconciliation of the number of shares outstanding at the
(b) a description of the nature and purpose of each reserve within
equity (para. 79).
An entity shall present, either in the statement of changes in equity or in
the notes, the amount of dividends recognised as distributions to owners
RESEARCH CASE (Continued)
Changes in an entity’s equity between the beginning and the end of the
reporting period reflect the increase or decrease in its net assets during the
period. Except for changes resulting from transactions with owners in their
IAS 8 requires retrospective adjustments to effect changes in accounting
policies, to the extent practicable, except when the transition provisions in
another IFRS require otherwise. IAS 8 also requires restatements to correct
GAAP CONCEPTS AND APPLICATION
GAAP15.1. No, Mary should not make that conclusion. While IFRS allows
unrealized losses on non-trading equity investments to be
GAAP15.2. Key similarities between IFRS and U.S. GAAP for transactions
related to equity pertain to (1) issuance of shares, (2) purchase
Major differences relate to terminology used, introduction of
items such as revaluation surplus, and presentation of
stockholder equity information. In addition, the accounting for
treasury stock retirements differs between IFRS and U.S.
GAAP. Under U.S. GAAP a company has the option of charging
dividends (less than 20–25%) are accounted for using the fair
value of shares issued in determining the transfer from retained
earnings. An IFRS/U.S. GAAP difference relates to the account
GAAP15.3. It is likely that the statement of stockholders’ equity and its
presentation will be examined closely in the financial statement
