Supplemental Instruction Handouts Financial Accounting Chapter 13: Organization and Operation of Corporations Answers
1. CM Company is authorized by its articles of incorporation to issue an unlimited number of common shares and 100,000 shares of $8, noncumulative preferred. The company completed the following transactions:
Required:
A) Prepare the journal entries for these transactions.
February 2nd issued for cash 200,000 common shares at $2 per share.
General Journal Page ____ Date Account Titles and Explanations PR Debit Credit Feb 2 Cash 400,000 Common Shares 400,000 (200,000 x $2)
February 28th gave the corporations promoters 50,000 common shares for their services in organizing the corporation. The directors valued the services at $110,000.
General Journal Page ____ Date Account Titles and Explanations PR Debit Credit Feb 28 Organization Expense 110,000 Common Shares 110,000
Academic Success Centre www.rrc.mb.ca/asc These answers were created by Michael Reimer for the Academic Success Centre.
March 10th issued 125,000 common shares in exchange for the following assets with the indicated reliable market values: land, $70,000; buildings, $130,000; and machinery, $89,000.
General Journal Page ____ Date Account Titles and Explanations PR Debit Credit Mar 10 Land 70,000 Building 130,000 Machinery 89,000 Common Shares ($70,000 + $130,000 + 89,000) 289,000
April 1st issued for cash 10,000 preferred shares at $100 per share.
General Journal Page ____ Date Account Titles and Explanations PR Debit Credit Apr 1 Cash 1,000,000 Preferred Shares (10,000 x $100) 1,000,000
May 1st the board of directors declared the required $8 cash dividend to preferred shares and $0.20 per share cash dividend to outstanding common shares, payable on May 25th to the May 16th shareholders of record.
General Journal Page ____ Date Account Titles and Explanations PR Debit Credit May 1 Retained Earnings 155,000 Preferred Dividend Payable (10,000 x $8) 80,000 Common Dividend Payable 75,000 (200,000 + 50,000 + 125,000 = 375,000 x $0.20)
May 25th paid the previously declared dividends.
General Journal Page ____ Date Account Titles and Explanations PR Debit Credit May 25 Preferred Dividend Payable 80,000 Common Dividend Payable 75,000 Cash 155,000
Academic Success Centre www.rrc.mb.ca/asc These answers were created by Michael Reimer for the Academic Success Centre.
December 31st closed the Income Summary account. A $262,000 net income was earned.
General Journal Page ____ Date Account Titles and Explanations PR Debit Credit Dec 31 Income Summary 262,000 Retained Earnings 262,000
1. B) Prepare a statement of changes in equity for the year ended December 31, 2012.
CM Company Statement of Changes in Equity For the year ended December 31, 2012
Preferred Common Retained Total Shares Shares Earnings Equity Balance January 1, 2012 $0 $0 $0 $0 Changes in Equity for 2012 Issuance of Share Capital 1,000,000 799,000 1,799,000 Net Income 262,000 262,000 Dividends (155,000) (155,000) Balance December 31, 2012 $1,000,000 $799,000 $107,000 $1,906,000
C) Prepare the equity section of the Balance Sheet.
CM Company Equity Section of the Balance Sheet December 31, 2012
Contributed Capital: Preferred Shares, $8 noncumulative, 100,000 shares authorized, 10,000 shares issued and Outstanding $1,000,000 Common Shares, unlimited shares authorized, 375,000 shares issued and outstanding 799,000 Total Contributed Capital $1,799,000 Retained Earnings 107,000 Total Equity $1,906,000
Academic Success Centre www.rrc.mb.ca/asc These answers were created by Michael Reimer for the Academic Success Centre.
2. AC Cookware Company has 4,000 outstanding shares of $8 preferred and 56,000 shares of common. During a seven year period, the company paid out the following amounts in dividends:
2006 $0 2007 46,000 2008 0 2009 60,000 2010 74,000 2011 68,400 2012 144,000
Required:
A) Calculate the amount of dividends each class would get if the preferred shares were noncumulative.
4,000 shares x $8 = $32,000
Year Preferred Shares Common Shares Total 2006 $0 $0 $0 2007 $32,000 $14,000 $46,000 2008 $0 $0 $0 2009 $32,000 $28,000 $60,000 2010 $32,000 $42,000 $74,000 2011 $32,000 $36,400 $68,400 2012 $32,000 $112,000 $144,000 Totals $160,000 $232,400 $392,400
B) Calculate the amount of dividends each class would get if the preferred shares were cumulative.
Year Preferred Common Total Owed to Preferred Shares Shares 2006 $0 $0 $0 $32,000 - $0 = $32,000 2007 $46,000 $0 $46,000 $32,000 + $32,000 = $64,000 - $46,000 = $18,000 2008 $0 $0 $0 $18,000 + $32,000 = $50,000 - $0 = $50,000 2009 $60,000 $0 $60,000 $50,000 + $32,000 = $82,000 - $60,000 = $22,000 2010 $54,000 $20,000 $74,000 $22,000 + $32,000 = $54,000 - $54,000 = $0 2011 $32,000 $36,400 $68,400 $0 + $32,000 = $32,000 - $32,000 = $0 2012 $32,000 $112,000 $144,000 $0 + $32,000 = $32,000 - $32,000 = $0 Totals $224,000 $168,400 $392,400
Academic Success Centre www.rrc.mb.ca/asc These answers were created by Michael Reimer for the Academic Success Centre.