BE15.

1 (LO1) Kaymer SA issued 300 shares of €10 par value ordinary shares
for €4,500. Prepare Kaymer's journal entry.
BE15.2 (LO1) Swarten AG issued 600 shares of no-par ordinary shares for
€8,200. Prepare Swarten's journal entry if (a) the shares have no stated
value, and (b) the shares have a stated value of €2 per share.
BE15.3 (LO2, 4) Wilco SE has the following equity balances at December 31,
2019.

Share capital—ordinary, €5 par value € 510,000

Treasury shares 90,000
Retained earnings 2,340,000
Share premium—ordinary 1,320,000
Prepare Wilco's December 31, 2019, equity section in the statement of
financial position.
BE15.4 (LO1) Ravonette Corporation issued 300 shares of $10 par value
ordinary shares and 100 shares of $50 par value preference shares for a
lump sum of $13,500. The ordinary shares have a market price of $20 per
share, and the preference shares have a market price of $90 per share.
Prepare the journal entry to record the issuance.
BE15.5 (LO1) On February 1, 2019, Gruber plc issued 3,000 shares of its £5
par value ordinary shares for land worth £31,000. Prepare the February 1,
2019, journal entry.
BE15.6 (LO1) Moonwalker Corporation issued 2,000 shares of its $10 par
value ordinary shares for $60,000. Moonwalker also incurred $1,500 of
costs associated with issuing the shares. Prepare Moonwalker's journal
entry to record the issuance of the company's shares.
BE15.7 (LO2) Sprinkle SE has outstanding 10,000 shares of €10 par value
ordinary shares. On July 1, 2019, Sprinkle reacquired 100 shares at €87 per
share. On September 1, Sprinkle reissued 60 shares at €90 per share. On
November 1, Sprinkle reissued 40 shares at €83 per share. Prepare
Sprinkle's journal entries to record these transactions using the cost
method.
BE15.8 (LO2) Arantxa S.A. has outstanding 20,000 shares of R$5 par value
ordinary shares. On August 1, 2019, Arantxa reacquired 200 shares at
R$80 per share. On November 1, Arantxa reissued the 200 shares at R$70
per share. Arantxa had no previous treasury share transactions. Prepare
 Arantxa's journal entries to record these transactions using the cost
method.
BE15.9 (LO1) Hinges SpA issued 500 shares of €100 par value preference
shares for €61,500. Prepare Hinges's journal entry.
BE15.10 (LO3) Woolford Inc. declared a cash dividend of $1 per share on its
2 million outstanding shares. The dividend was declared on August 1,
payable on September 9 to all shareholders of record on August 15.
Prepare all journal entries necessary on those three dates.
BE15.11 (LO3) Silva SpA owns shares of Costa S.A. classified as a trading
equity investment. At December 31, 2019, the trading equity investment
was carried in Silva's accounting records at its cost of R$875,000, which
equals its fair value. On September 21, 2020, when the fair value of the
investment was R$1,200,000, Silva declared a property dividend whereby
the Costa securities are to be distributed on October 23, 2020, to
shareholders of record on October 8, 2020. Prepare all journal entries
necessary on those three dates.
BE15.12 (LO3) Zhang Mining Company declared, on April 20, a dividend of
¥500,000,000 payable on June 1. Of this amount, ¥125,000,000 is a return
of capital. Prepare the April 20 and June 1 entries for Zhang.
BE15.13 (LO3) Green Day Corporation has outstanding 400,000 shares of
$10 par value ordinary shares. The corporation declares a 5% share
dividend when the fair value is $65 per share. Prepare the journal entries for
Green Day Corporation for both the date of declaration and the date of
distribution.
BE15.14 (LO3) Use the information from BE15.13 but assume Green Day
Corporation declared a 100% share dividend rather than a 5% share
dividend. Prepare the journal entries for both the date of declaration and the
date of distribution.
BE15.15 (LO5) Nottebart AG has outstanding 10,000 shares of €100 par
value, 6% preference shares and 60,000 shares of €10 par value ordinary
shares. The preference shares were issued in January 2019, and no
dividends were declared in 2019 or 2020. In 2021, Nottebart declares a
cash dividend of €300,000. How will the dividend be shared by ordinary and
preference shareholders if the preference is (a) non-cumulative and (b)
cumulative?

Exercises
E15.1 (LO1) (Recording the Issuances of Ordinary Shares) During its first
year of operations, Sitwell SE had the following transactions pertaining to its
ordinary shares.

Jan. 10 Issued 80,000 shares for cash at €6 per share.

Mar. 1 Issued 5,000 shares to attorneys in payment of a bill for €35,000 for
services rendered in helping the company to incorporate.
July 1 Issued 30,000 shares for cash at €8 per share.
Sept. 1 Issued 60,000 shares for cash at €10 per share.
Instructions

a. Prepare the journal entries for these transactions, assuming that the
ordinary shares have a par value of €3 per share.
b. Briefly discuss how the entries in part E15.1a. will change if the shares
are no-par with a stated value of €2 per share.
E15.2 (LO1) (Recording the Issuance of Ordinary and Preference Shares)
Abernathy Corporation was organized on January 1, 2019. It is authorized
to issue 10,000 shares of 8%, $50 par value preference shares, and
500,000 shares of no-par ordinary shares with a stated value of $2 per
share. The following share transactions were completed during the first
year.

Jan. 10 Issued 80,000 ordinary shares for cash at $5 per share.

Mar. 1 Issued 5,000 preference shares for cash at $108 per share.
Apr. 1 Issued 24,000 ordinary shares for land. The asking price of the land
was $90,000; the fair value of the land was $80,000.
May 1 Issued 80,000 ordinary shares for cash at $7 per share.
Aug. 1 Issued 10,000 ordinary shares to attorneys in payment of their bill
of $50,000 for services rendered in helping the company organize.
Sept. 1 Issued 10,000 ordinary shares for cash at $9 per share.
Nov. 1 Issued 1,000 preference shares for cash at $112 per share.
Instructions

Prepare the journal entries to record the above transactions.

E15.3 (LO1) (Shares Issued for Land) Twenty-five thousand shares
reacquired by Pierce plc for £48 per share were exchanged for
 undeveloped land that has an appraised value of £1,700,000. At the time of
the exchange, the ordinary shares were trading at £60 per share on an
organized exchange.
Instructions

a. Prepare the journal entry to record the acquisition of land, assuming

that the purchase of the shares was originally recorded using the cost
method.
b. Briefly identify the possible alternatives (including those that are totally
unacceptable) for quantifying the cost of the land and briefly support
your choice.
E15.4 (LO1) (Lump-Sum Sale of Shares with Bonds) Fogelberg Industries
is a regional company, whose securities are thinly traded. Fogelberg has
issued 10,000 units. Each unit consists of a CHF500 par, 12% subordinated
debenture and 10 shares of CHF5 par ordinary shares. The investment
banker has retained 400 units as the underwriting fee. The other 9,600 units
were sold to outside investors for cash at CHF850 per unit. Prior to this
sale, the 2-week ask price of ordinary shares was CHF40 per share. Twelve
percent is a reasonable market yield for the debentures, and therefore the
par value of the bonds is equal to the fair value.
Instructions

a. Prepare the journal entry to record Fogelberg's transaction, under the

following conditions. (Round to the nearest CHF.)
1. Employing the incremental method.
2. Employing the proportional method, assuming the recent price
quote on the ordinary shares reflects fair value.
b. Briefly explain which method is, in your opinion, the better method.
E15.5 (LO1) (Lump-Sum Sales of Ordinary and Preference Shares)
Hartman SE issues 500 shares of €10 par value ordinary shares and 100
shares of €100 par value preference shares for a lump sum of €100,000.
Instructions

a. Prepare the journal entry for the issuance when the fair value of the
ordinary shares is €168 each and fair value of the preference shares is
€210 each. (Round to the nearest euro.)
b. Prepare the journal entry for the issuance when only the fair value of
 the ordinary shares (€170 per share) is known.
E15.6 (LO1, 2) (Share Issuances and Repurchase) Loxley Corporation is
authorized to issue 50,000 shares of $10 par value ordinary shares. During
2019, Loxley took part in the following selected transactions.
1. Issued 5,000 shares at $45 per share, less costs related to the
issuance of the shares totaling $7,000.
2. Issued 1,000 shares for land appraised at $50,000. The shares were
actively traded on a national securities exchange at approximately $46
per share on the date of issuance.
3. Purchased 500 treasury shares at $44 per share. The treasury shares
purchased were issued in 2018 at $40 per share.
Instructions

a. Prepare the journal entry to record item 1.

b. Prepare the journal entry to record item 2.
c. Prepare the journal entry to record item 3 using the cost method.
E15.7 (LO2) (Effect of Treasury Share Transactions on Financials)
Goosen SA has outstanding 40,000 shares of €5 par ordinary shares which
had been issued at €30 per share. Goosen then entered into the following
transactions.
1. Purchased 5,000 treasury shares at €45 per share.
2. Resold 500 of the treasury shares at €40 per share.
3. Resold 2,000 of the treasury shares at €49 per share.
Instructions

Use the following code to indicate the effect each of the three transactions has
on the financial statement categories listed in the table below, assuming
Goosen SA uses the cost method: I = Increase; D = Decrease; and NE = No
effect.

# Assets Liabilities Equity Share Retained Net

Premium Earnings Incom
1
2
3
E15.8 (LO1, 5) (Preference Share Entries and Dividends) Weisberg
Corporation has 10,000 shares of $100 par value, 6%, preference shares
and 50,000 ordinary shares of $10 par value outstanding at December 31,
2019.
Instructions

Answer the questions in each of the following independent situations.

a. If the preference shares are cumulative and dividends were last paid
on the preference shares on December 31, 2016, what are the
dividends in arrears that should be reported on the December 31,
2019, statement of financial position? How should these dividends be
reported?
b. If the preference shares are convertible into seven shares of $10 par
value ordinary shares and 3,000 shares are converted, what entry is
required for the conversion, assuming the preference shares were
issued at par value?
c. If the preference shares were issued at $107 per share, how should
the preference shares be reported in the equity section?
E15.9 (LO1, 2) (Correcting Entries for Equity Transactions) Davison plc
recently hired a new accountant with extensive experience in accounting for
partnerships. Because of the pressure of the new job, the accountant was
unable to review what he had learned earlier about corporation accounting.
During the first month, he made the following entries for the corporation's
ordinary shares.
May Cash 192,000
2
Share Capital—Ordinary 192,000
(Issued 12,000 shares of £10 par value ordinary
shares at £16 per share)
10 Cash 600,000
Share Capital—Ordinary 600,000
(Issued 10,000 shares of £30 par value preference
shares at £60 per share)
15 Share Capital—Ordinary 14,000
Cash 14,000
 (Purchased 1,000 ordinary shares for the treasury
at £14 per share)
31 Cash 8,500
Share Capital—Ordinary 5,000
Gain on Sale of Shares 3,500
(Sold 500 treasury shares at £17 per share)
Instructions

On the basis of the explanation for each entry, prepare the entries that should
have been made for the ordinary share transactions.
E15.10 (LO1, 2) (Analysis of Equity Data and Equity Section Preparation)
For a recent 2-year period, the statement of financial position of Jiang
Group showed the following equity data at December 31 (amounts in
millions).
2020 2019
Share premium—ordinary HK$ 891 HK$ 817
Share capital—ordinary 545 540
Retained earnings 7,167 5,226
Treasury shares (1,428) (918)
Total equity HK$7,175 HK$5,665
Ordinary shares issued 218 216
Ordinary shares authorized 500 500
Treasury shares 34 27
Instructions

a. Answer the following questions.

1. What is the par value of the ordinary shares?
2. What is the cost per treasury share at December 31, 2020, and at
December 31, 2019?
b. Prepare the equity section of the statement of financial position at
December 31, 2020.
E15.11 (LO3) (Equity Items on the Statement of Financial Position) The
following are selected transactions that may affect equity.
 1. Recorded accrued interest earned on a note receivable.
2. Declared and distributed a share split.
3. Declared a cash dividend.
4. Recorded a retained earnings restriction.
5. Recorded the expiration of insurance coverage that was previously
recorded as prepaid insurance.
6. Paid the cash dividend declared in item 3 above.
7. Recorded accrued interest expense on a note payable.
8. Declared a share dividend.
9. Distributed the share dividend declared in item 8.
Instructions

In the following table, indicate the effect each of the nine transactions has on
the financial statement elements listed. Use the following code:

I = Increase D = Decrease NE = No effect

Item Assets Liabilities Equity Share Retained Net
Premium Earnings Income

E15.12 (LO3) (Cash Dividend and Liquidating Dividend) Addison

Corporation has 10 million shares of ordinary shares issued and
outstanding. On June 1, the board of directors voted a 60 cents per share
cash dividend to shareholders of record as of June 14, payable June 30.
Instructions

a. Prepare the journal entry for each of the dates above, assuming the
dividend represents a distribution of earnings.
b. How would the entry differ if the dividend were a liquidating dividend?
E15.13 (LO3) (Share Split and Share Dividend) The ordinary shares of Otuk
Holding are currently selling at 110 per share. The directors wish to reduce
the share price and increase share volume prior to a new issue. The per
share par value is 10; book value is 70 per share. Five million shares are
issued and outstanding.
Instructions

Prepare the necessary journal entries assuming the following.

a. The board votes a 2-for-1 share split.
b. The board votes a 100% share dividend.
c. Briefly discuss the accounting and securities market differences
between these two methods of increasing the number of shares
outstanding.
E15.14 (LO3) (Entries for Share Dividends and Share Splits) The equity
accounts of Lawrence Group have the following balances on December 31,
2019.

Share Capital—Ordinary, €10 par, 200,000 shares issued and €2,000,000

outstanding
Share Premium—Ordinary 1,200,000
Retained Earnings 5,600,000
Shares of Lawrence Group are currently selling at €37.
Instructions

Prepare the appropriate journal entries for each of the following cases.
a. A share dividend of 5% is declared and issued.
b. A share dividend of 100% is declared and issued.
c. A 2-for-1 share split is declared and issued.
E15.15 (LO3) (Dividend Entries) The following data were taken from the
statement of financial position accounts of Murless SA on December 31,
2019.

Current Assets R$540,000

Investments 624,000
Share Capital—Ordinary (par value R$10) 600,000
Share Premium—Ordinary 150,000
Retained Earnings 840,000
Instructions
Prepare the required journal entries for the following unrelated items.
a. A 5% share dividend is declared and distributed at a time when the
market price of the shares is R$39 per share.
b. The par value of the ordinary shares is reduced to R$2 with a 5-for-1
share split.
c. A dividend is declared January 5, 2020, and paid January 25, 2020, in
bonds held as an investment. The bonds have a book value of
R$90,000 and a fair value of R$125,000.
E15.16 (LO3) (Computation of Retained Earnings) The following
information has been taken from the ledger accounts of Choi Corporation
(all amounts in thousands).

Total Income since Incorporation 287,000

Total Cash Dividends Paid 60,000
Total Value of Share Dividends Distributed 40,000
Gains on Treasury Share Transactions 18,000
Accumulated Other Comprehensive Income 32,000
Instructions

Determine the current balance of retained earnings.

E15.17 (LO4) (Equity Section) Teller SE's post-closing trial balance at
December 31, 2019, was as follows.

TELLER CORPORATION
Post-Closing Trial Balance
December 31, 2019

Dr. Cr.
Accounts payable € 310,000
Accounts receivable € 480,000
Accumulated depreciation—buildings 185,000
Allowance for doubtful accounts 30,000
Bonds payable 700,000
Buildings 1,450,000
 Cash 190,000
Dividends payable (preference shares—cash) 4,000
Inventory 560,000
Land 400,000
Prepaid expenses 40,000
Retained earnings 201,000
Share capital—ordinary (€1 par value) 200,000
Share capital—preference (€50 par value) 500,000
Share premium—ordinary 1,000,000
Share premium—treasury 160,000
Treasury shares (ordinary at cost) 170,000
Total €3,290,000 €3,290,000
At December 31, 2019, Teller had the following number of ordinary and
preference shares.

Ordinary Preference
Authorized 600,000 60,000
Issued 200,000 10,000
Outstanding 190,000 10,000
The dividends on preference shares are €4 cumulative. In addition, the
preference shares have a preference in liquidation of €50 per share.
Instructions

Prepare the equity section of Teller's statement of financial position at

December 31, 2019.
E15.18 (LO2, 3) (Dividends and Equity Section) Elizabeth Company
reported the following amounts in the equity section of its December 31,
2019, statement of financial position.

Share capital—preference, 8%, $100 par (10,000 shares $200,000

authorized, 2,000 shares issued)
Share capital—ordinary, $5 par (100,000 shares authorized, 100,000
20,000 shares issued)
Share premium—preference 125,000
Retained earnings 450,000
Total $875,000
During 2020, Elizabeth took part in the following transactions concerning
equity.
1. Paid the annual 2019 $8 per share dividend on preference shares and
a $2 per share dividend on ordinary shares. These dividends had been
declared on December 31, 2019.
2. Purchased 2,700 shares of its own outstanding ordinary shares for $40
per share. Elizabeth uses the cost method.
3. Reissued 700 treasury shares for land with a fair value of $30,000.
4. Issued 500 preference shares at $105 per share.
5. Declared a 10% share dividend on the outstanding ordinary shares
when the shares are selling for $45 per share.
6. Issued the share dividend.
7. Declared the annual 2020 $8 per share dividend on preference shares
and the $2 per share dividend on ordinary shares. These dividends are
payable in 2021.
Instructions

a. Prepare journal entries to record the transactions described above.

b. Prepare the December 31, 2020, equity section of the statement of
financial position. Assume 2020 net income was $330,000.
E15.19 (LO4) (Comparison of Alternative Forms of Financing) Shown
below is the equity and liabilities section of the statement of financial
position for Ingalls plc and Wilder Ltd. Each has assets totaling £4,200,000.
Ingalls plc Wilder Ltd
Share capital—ordinary £2,000,000 Share capital—ordinary £2,900,000
(£20 par) (£20 par)
Retained earnings (Cash 700,000 Retained earnings 700,000
dividends, £220,000) (Cash dividends,
£328,000)
Non-current liabilities, 1,200,000 Current liabilities 600,000
10%
Current liabilities
300,000
£4,200,000 £4,200,000
For the year, each company has earned the same income before interest and
taxes.

Ingalls plc Wilder Ltd

Income from operations £1,200,000 £1,200,000
Interest expense 120,000 –0–
Income before income tax 1,080,000 1,200,000
Income tax (40%) 432,000 480,000
Net income £ 648,000 £ 720,000
At year-end, the market price of an Ingalls' share was £101, and Wilder's was
£63.50. Assume statement of financial position amounts are representative for
the entire year.
Instructions

a. Which company is more profitable in terms of return on total assets?

b. Which company is more profitable in terms of return on ordinary share
equity?
c. Which company has the greater net income per share? Neither
company issued or reacquired shares during the year.
d. From the point of view of net income, is it advantageous to the
shareholders of Ingalls plc to have the non-current liabilities
outstanding? Why?
e. What is the book value per share for each company?
E15.20 (LO4) (Trading on the Equity Analysis) Presented below is
information from the annual report of DeVries Plastics.
Operating income € 532,150
Bond interest expense 135,000
Income before income tax 397,150
Income tax 183,432
Net income € 213,718
 Bonds payable €1,500,000
Share capital—ordinary 875,000
Retained earnings 575,000
Instructions

a. Compute the return on ordinary share equity and the rate of interest
paid on bonds. (Assume balances for debt and equity accounts
approximate averages for the year.)
b. Is DeVries Plastics trading on the equity successfully? Explain.
E15.21 (LO5) (Preference Dividends) The outstanding share capital of
Pennington Corporation consists of 2,000 shares of $100 par value, 6%
preference, and 5,000 shares of $50 par value ordinary.
Instructions

Assuming that the company has retained earnings of $70,000, all of which is
to be paid out in dividends, and that preference dividends were not paid
during the 2 years preceding the current year, determine how much each
class of shares should receive under each of the following conditions.
a. The preference shares are non-cumulative and non-participating.
b. The preference shares are cumulative and non-participating.
c. The preference shares are cumulative and participating. (Round
dividend rate percentages to four decimal places.)
E15.22 (LO5) (Preference Dividends) Martinez SA's ledger shows the
following balances on December 31, 2019.
Share Capital—Preference, 5%—€10 par value, outstanding €
20,000 shares 200,000
Share Capital—Ordinary—€100 par value, outstanding 30,000 3,000,000
shares
Retained Earnings 630,000
Instructions

Assuming that the directors decide to declare total dividends in the amount of
€266,000, determine how much each class of shares should receive under
each of the conditions stated below. One year's dividends are in arrears on
the preference shares.
a. The preference shares are cumulative and fully participating.
b. The preference shares are non-cumulative and non-participating.
c. The preference shares are non-cumulative and are participating in
distributions in excess of a 7% dividend rate on the ordinary shares.
E15.23 (LO5) (Preference Share Dividends) Hagar Ltd. has outstanding
2,500 shares of £100 par, 6% preference shares and 15,000 shares of £10
par value ordinary. The schedule below shows the amount of dividends paid
out over the last 4 years.
Instructions

Allocate the dividends to each type of shares under assumptions (a) and (b).
Express your answers in per share amounts using the format shown below.

Assumptions
(a) (b)
Preference, non-cumulative, and non- Preference,
participating cumulative,
and fully
participating
Year Paid- Preference Ordinary Preference Ordinary
out
2018 £12,000
2019 £26,000
2020 £52,000
2021 £76,000
E15.24 (LO5) (Computation of Book Value per Share) Johnstone Inc.
began operations in January 2014 and reported the following results for
each of its 3 years of operations.

2018 $260,000 net loss 2019 $40,000 net loss 2020 $700,000 net income
At December 31, 2020, Johnstone Inc. share capital accounts were as
follows.
Share Capital—Preference, 6% cumulative, par value $100; $500,000
authorized, issued, and outstanding 5,000 shares
Share Capital—Ordinary, par value $1.00; authorized 1,000,000 $750,000
shares; issued and outstanding 750,000 shares
Johnstone Inc. has never paid a cash or share dividend. There has been no
change in the share capital accounts since Johnstone began operations. The
country law permits dividends only from retained earnings.
Instructions

a. Compute the book value of the ordinary shares at December 31, 2020.
b. Compute the book value of the ordinary shares at December 31, 2020,
assuming that the preference shares have a liquidating value of $106
per share.

Problems

P15.1 (LO1, 2, 4) (Equity Transactions and Statement Preparation) On

January 5, 2019, Phelps Corporation received a charter granting the right to
issue 5,000 shares of $100 par value, 8% cumulative and non-participating
preference shares, and 50,000 shares of $10 par value ordinary shares. It
then completed these transactions.
Jan. 11 Issued 20,000 ordinary shares at $16 per share.
Feb. 1 Issued to Sanchez Corp. 4,000 preference shares for the following
assets: machinery with a fair value of $50,000; a factory building
with a fair value of $160,000; and land with an appraised value of
$270,000.
July 29 Purchased 1,800 ordinary shares at $17 per share. (Use cost
method.)
Aug. 10 Sold the 1,800 treasury shares at $14 per share.
Dec. 31 Declared a $0.25 per share cash dividend on the ordinary shares
and declared the preference dividend.
Dec. 31 Closed the Income Summary account. There was $175,700 net
income.
Instructions

a. Record the journal entries for the transactions listed above.

b. Prepare the equity section of Phelps Corporation's statement of
financial position as of December 31, 2019.
P15.2 (LO2, 4) (Treasury Share Transactions and Presentation) Clemson
SE had the following equity as of January 1, 2019.

Share capital—ordinary, €5 par value, 20,000 shares issued €100,000

Share premium—ordinary 300,000
Retained earnings 320,000
Total equity €720,000
During 2019, the following transactions occurred.

Feb. 1 Clemson repurchased 2,000 treasury shares at a price of €19 per

share.
Mar. 1 800 shares of treasury shares repurchased above were reissued at
€17 per share.
Mar. 18 500 shares of treasury shares repurchased above were reissued at
€14 per share.
Apr. 22 600 shares of treasury shares repurchased above were reissued at
€20 per share.
Instructions

a. Prepare the journal entries to record the treasury share transactions in

2019, assuming Clemson uses the cost method.
b. Prepare the equity section of the statement of financial position as of
April 30, 2019. Net income for the first 4 months of 2019 was €130,000.
P15.3 (LO1, 2, 3) (Equity Transactions and Statement Preparation) Hatch
plc has two classes of share capital outstanding: 8%, £20 par preference
and £5 par ordinary. At December 31, 2018, the following accounts were
included in equity.
Share Capital—Preference, 150,000 shares £ 3,000,000
Share Capital—Ordinary, 2,000,000 shares 10,000,000
Share Premium—Preference 200,000
Share Premium—Ordinary 27,000,000
Retained Earnings 4,500,000
The following transactions affected equity during 2019.

Jan. 1 30,000 preference shares issued at £22 per share.

Feb. 1 50,000 ordinary shares issued at £20 per share.
June 1 2-for-1 share split (par value reduced to £2.50).
July 1 30,000 ordinary treasury shares purchased at £10 per share. Hatch
uses the cost method.
Sept. 15 10,000 treasury shares reissued at £11 per share.
Dec. 31 The preference dividend is declared, and an ordinary dividend of 50
pence per share is declared.
Dec. 31 Net income is £2,100,000.
Instructions

Prepare the equity section of the statement of financial position for Hatch plc
at December 31, 2019. Show all supporting computations.
P15.4 (LO1) (Share Transactions—Lump Sum) Seles SA's charter
authorized issuance of 100,000 ordinary shares of €10 par value and
50,000 shares of €50 preference shares. The following transactions
involving the issuance of shares were completed. Each transaction is
independent of the others.
1. Issued a €10,000, 9% bond payable at par and gave as a bonus one
preference share, which at that time was selling for €106 a share.
2. Issued 500 ordinary shares for machinery. The machinery had been
appraised at €7,100; the seller's book value was €6,200. The most
recent market price of the ordinary shares is €16 a share.
3. Issued 375 ordinary shares and 100 preference shares for a lump sum
amounting to €10,800. The ordinary shares had been selling at €14
and the preference shares at €65.
4. Issued 200 shares of ordinary and 50 shares of preference for furniture
and fixtures. The ordinary shares had a fair value of €16 per share; the
furniture and fixtures have a fair value of €6,500.
Instructions

Record the transactions listed above in journal entry form.

P15.5 (LO2) (Treasury Shares—Cost Method) Before Smith Ltd. engages in
the treasury share transactions listed below, its general ledger reflects,
among others, the following account balances (par value is £30 per share).
Share Premium—Ordinary Share Capital—Ordinary Retained Earnings
 £99,000 £270,000 £80,000
Instructions

Record the treasury share transactions (given below) under the cost method
of handling treasury shares; use the FIFO method for purchase-sale
purposes.
a. Bought 380 treasury shares at £40 per share.
b. Bought 300 treasury shares at £45 per share.
c. Sold 350 treasury shares at £42 per share.
d. Sold 110 treasury shares at £38 per share.
P15.6 (LO2, 3, 4) (Treasury Shares—Cost Method—Equity Section
Preparation) Washington Company has the following equity accounts at
December 31, 2019.

Share Capital—Ordinary—$100 par value, authorized 8,000 $480,000

shares
Retained Earnings 294,000
Instructions

a. Prepare entries in journal form to record the following transactions,

which took place during 2020.
1. 280 ordinary shares were purchased at $97 per share. (These are
to be accounted for using the cost method.)
2. A $20 per share cash dividend was declared.
3. The dividend declared in No. 2 above was paid.
4. The treasury shares purchased in No. 1 above were resold at
$102 per share.
5. 500 shares were purchased at $105 per share.
6. 350 of the shares purchased in No. 5 above were resold at $96
per share.
b. Prepare the equity section of Washington Company's statement of
financial position after giving effect to these transactions, assuming that
the net income for 2020 was $94,000. Country law requires restriction
of retained earnings for the amount of treasury shares.
P15.7 (LO2, 3) (Cash Dividend Entries) The books of Conchita SA carried
the following account balances as of December 31, 2019.

Cash R$
195,000
Share Capital—Preference (6% cumulative, non-participating, 300,000
R$50 par)
Share Capital—Ordinary (no-par value, 300,000 shares issued) 1,500,000
Share Premium—Preference 150,000
Treasury Shares (ordinary 2,800 shares at cost) 33,600
Retained Earnings 105,000
The company decided not to pay any dividends in 2019.
The board of directors, at their annual meeting on December 21, 2020,
declared the following: “The current year dividends shall be 6% on the
preference and R$0.30 per share on the ordinary. The dividends in arrears
shall be paid by issuing 1,500 treasury shares.” At the date of declaration, the
preference is selling at R$80 per share, and the ordinary at R$12 per share.
Net income for 2020 is estimated at R$77,000.
Instructions

a. Prepare the journal entries required for the dividend declaration and
payment, assuming that they occur simultaneously.
b. Could Conchita SA give the preference shareholders 2 years'
dividends and ordinary shareholders a 30 cents per share dividend, all
in cash?
P15.8 (LO3) (Dividends and Splits) Myers SpA provides you with the
following condensed statement of financial position information.

Assets Equity and Liabilities

Equipment (net) €250,000 Equity
Intangibles 60,000 Share capital—ordinary €
(€5 par) 20,000
Investments in ABC Share premium— 110,000
shares ordinary
(10,000 shares at 70,000 Retained earnings 180,000 €310,000
cost)
Current assets 40,000 Non-current and current 110,000
liabilities
Total assets €420,000 Total equity and liabilities €420,000
Instructions

For each transaction below, indicate the euro impact (if any) on the following
five items: (1) total assets, (2) share capital—ordinary, (3) share premium—
ordinary, (4) retained earnings, and (5) equity. (Each situation is independent.)
a. Myers declares and pays a €1 per share cash dividend.
b. Myers declares and issues a 10% share dividend when the market
price is €14 per share.
c. Myers declares and issues a 100% share dividend when the market
price is €15 per share.
d. Myers declares and distributes a property dividend. Myers gives one
ABC share for every two shares held of Myers SpA. ABC is selling for
€10 per share on the date the property dividend is declared.
e. Myers declares a 2-for-1 share split and issues new shares.
P15.9 (LO1, 2, 3, 4) (Equity Section of Statement of Financial Position)
The following is a summary of all relevant transactions of Vicario
Corporation since it was organized in 2019.
In 2019, 15,000 shares were authorized and 7,000 ordinary shares ($50 par
value) were issued at a price of $57. In 2020, 1,000 shares were issued as a
share dividend when a share was selling for $60. Three hundred ordinary
shares were bought in 2021 at a cost of $64 per share. These 300 shares are
still in the company treasury.
In 2020, 10,000 preference shares were authorized and the company issued
5,000 of them ($100 par value) at $113. Some of the preference shares were
reacquired by the company and later reissued for $4,700 more than it cost the
company.
The corporation has earned a total of $610,000 in net income and paid out a
total of $312,600 in cash dividends since incorporation.
Instructions

Prepare the equity section of the statement of financial position in proper form
for Vicario Corporation as of December 31, 2021. Account for treasury shares
using the cost method.
P15.10 (LO3) (Share Dividends and Share Split) Ortago S.A.'s €10 par
ordinary shares are selling for €110 per share. Four million shares are
currently issued and outstanding. The board of directors wishes to stimulate
interest in Ortago S.A. ordinary shares before a forthcoming share issue but
does not wish to distribute cash at this time. The board also believes that
too many adjustments to the equity section, especially retained earnings,
might discourage potential investors.
The board has considered three options for stimulating interest in the shares:
1. A 20% share dividend.
2. A 100% share dividend.
3. A 2-for-1 share split.
Instructions

Acting as financial advisor to the board, you have been asked to report briefly
on each option and, considering the board's wishes, make a recommendation.
Discuss the effects of each of the foregoing options.
P15.11 (LO3, 4) (Share and Cash Dividends) Earnhart Corporation has
outstanding 3,000,000 ordinary shares with a par value of $10 each. The
balance in its retained earnings account at January 1, 2019, was
$24,000,000, and it then had Share Premium of $5,000,000. During 2019,
the company's net income was $4,700,000. A cash dividend of $0.60 per
share was declared on May 5, 2019, and was paid June 30, 2019, and a
6% share dividend was declared on November 30, 2019, and distributed to
shareholders of record at the close of business on December 31, 2019. You
have been asked to advise on the proper accounting treatment of the share
dividend.
The existing shares of the company are quoted on a national securities
exchange. The market price of the shares has been as follows.

October 31, 2019 $31

November 30, 2019 $34
December 31, 2019 $38
Instructions

a. Prepare the journal entry to record the declaration and payment of the
 cash dividend.
b. Prepare the journal entry to record the declaration and distribution of
the share dividend.
c. Prepare the equity section (including schedules of retained earnings
and share premium) of the statement of financial position of Earnhart
Corporation for the year 2019 on the basis of the foregoing information.
Draft a note to the financial statements setting forth the basis of the
accounting for the share dividend, and add separately appropriate
comments or explanations regarding the basis chosen.
P15.12 (LO1, 2, 3, 4) (Analysis and Classification of Equity Transactions)
Penzi plc was formed on July 1, 2017. It was authorized to issue 300,000
shares of £10 par value ordinary shares and 100,000 shares of 8% £25 par
value, cumulative and non-participating preference shares. Penzi plc has a
July 1–June 30 fiscal year.
The following information relates to the equity accounts of Penzi plc.
Ordinary Shares
Prior to the 2019–2020 fiscal year, Penzi plc had 110,000 ordinary shares
outstanding issued as follows.
1. 85,000 shares were issued for cash on July 1, 2017, at £31 per share.
2. On July 24, 2017, 5,000 shares were exchanged for a plot of land
which cost the seller £70,000 in 2011 and had an estimated fair value
of £220,000 on July 24, 2017.
3. 20,000 shares were issued on March 1, 2018, for £42 per share.
During the 2019–2020 fiscal year, the following transactions regarding
ordinary shares took place.
November Penzi purchased 2,000 of its own shares on the open market at
30, 2019 £39 per share. Penzi uses the cost method for treasury shares.
December Penzi declared a 5% share dividend for shareholders of record on
15, 2019 January 15, 2020, to be issued on January 31, 2020. Penzi was
having a liquidity problem and could not afford a cash dividend at
the time. Penzi's ordinary shares were selling at £52 per share on
December 15, 2019.
June 20, Penzi sold 500 of its own ordinary shares that it had purchased
2020 on November 30, 2019, for £21,000.
Preference Shares
Penzi issued 40,000 preference shares at £44 per share on July 1, 2018.
Cash Dividends
Penzi has followed a schedule of declaring cash dividends in December and
June, with payment being made to shareholders of record in the following
month. The cash dividends which have been declared since inception of the
company through June 30, 2020, are shown below.

Declaration Date Ordinary Shares Preference Shares

12/15/18 £0.30 per share £1.00 per share
6/15/19 £0.30 per share £1.00 per share
12/15/19 — £1.00 per share
No cash dividends were declared during June 2020 due to the company's
liquidity problems.
Retained Earnings
As of June 30, 2019, Penzi's retained earnings account had a balance of
£690,000. For the fiscal year ending June 30, 2020, Penzi reported net
income of £40,000.
Instructions

Prepare the equity section of the statement of financial position, including

appropriate notes, for Penzi Company as of June 30, 2020, as it should
appear in its annual report to the shareholders.

Concepts for Analysis

CA15.1 (LO1) (Preemptive Rights and Dilution of Ownership) Wallace

Computer is a small, closely held company. Eighty percent of the shares are
held by Derek Wallace, president. Of the remainder, 10% are held by
members of his family and 10% by Kathy Baker, a former officer who is now
retired. The statement of financial position of the company at June 30,
2019, was substantially as shown here.
Assets Equity and Liabilities
Cash £ 22,000 Share capital—ordinary £250,000
Other 450,000 Retained earnings 172,000
 £472,000 Current liabilities 50,000
£472,000
Additional authorized ordinary shares of £300,000 par value have never been
issued. To strengthen the cash position of the company, Wallace issued
ordinary shares with a par value of £100,000 to himself at par for cash. At the
next shareholders' meeting, Baker objected and claimed that her interests had
been injured.
Instructions

a. Which shareholder's right was ignored in the issue of shares to Derek

Wallace?
b. How may the damage to Baker's interests be repaired most simply?
c. If Derek Wallace offered Baker a personal cash settlement and they
agreed to employ you as an impartial arbitrator to determine the
amount, what settlement would you propose? Present your calculations
with sufficient explanation to satisfy both parties.
CA15.2 (LO1) (Issuance of Shares for Land) Martin Corporation is planning
to issue 3,000 shares of its own $10 par value ordinary shares for two acres
of land to be used as a building site.
Instructions

a. What general rule should be applied to determine the amount at which

the land should be recorded?
b. Under what circumstances should this transaction be recorded at the
fair value of the land?
c. Under what circumstances should this transaction be recorded at the
fair value of the shares issued?
d. Assume Martin intentionally records this transaction at an amount
greater than the fair value of the land and the shares. Discuss this
situation.
CA15.3 (LO1, 2, 3) (Conceptual Issues—Equity) The IASB has set forth the
Conceptual Framework that it will use in developing standards. As part of
this Conceptual Framework, the IASB defines various elements of financial
statements.
Instructions
Answer the following questions based on the Conceptual Framework.
a. Define and discuss the term “equity.”
b. What transactions or events change equity?
c. What financial statement element other than equity is typically affected
by owner investments?
d. What financial statement element other than equity is typically affected
by distributions to owners?
e. What are examples of changes within equity that do not change the
total amount of equity?
CA15.4 (LO3) (Share Dividends and Splits) The directors of Merchant ASA
are considering the issuance of a share dividend. They have asked you to
discuss the proposed action by answering the following questions.
Instructions

a. What is a share dividend? How is a share dividend distinguished from

a share split (1) from a legal standpoint, and (2) from an accounting
standpoint?
b. For what reasons does a company usually declare a share dividend? A
share split?
c. Discuss the amount, if any, of retained earnings to be capitalized in
connection with a share dividend.
CA15.5 (LO3) (Share Dividends) Yamada Inc., a client, is considering the
authorization of a 10% ordinary share dividend. The financial vice president
of Yamada wishes to discuss the accounting implications of such an
authorization with you before the next meeting of the board of directors.
Instructions

a. The first topic the vice president wishes to discuss is the nature of the
share dividend to the recipient. Discuss the case against considering
the share dividend as income to the recipient.
b. The other topic for discussion is the propriety of issuing the share
dividend to all “shareholders of record” or to “shareholders of record
exclusive of shares held in the name of the corporation as treasury
shares.” Discuss the case against issuing share dividends on treasury
shares.
CA15.6 (LO3) (Share Dividend, Cash Dividend, and Treasury Shares)
Mask SE has 30,000 shares of €10 par value ordinary shares authorized
and 20,000 shares issued and outstanding. On August 15, 2019, Mask
purchased 1,000 shares of treasury shares for €18 per share. Mask uses
the cost method to account for treasury shares. On September 14, 2019,
Mask sold 500 shares of the treasury shares for €20 per share.
In October 2019, Mask declared and distributed 1,950 shares as a share
dividend from unissued shares when the market price of the ordinary shares
was €21 per share.
On December 20, 2019, Mask declared a €1 per share cash dividend, payable
on January 10, 2020, to shareholders of record on December 31, 2019.
Instructions

a. How should Mask account for the purchase and sale of the treasury
shares, and how should the treasury shares be presented in the
statement of financial position at December 31, 2019?
b. How should Mask account for the share dividend, and how would it
affect equity at December 31, 2019? Why?
c. How should Mask account for the cash dividend, and how would it
affect the statement of financial position at December 31, 2019? Why?
CA15.7 (LO2) (Treasury Shares) Lois Kenseth, president of Sycamore
Corporation, is concerned about several large shareholders who have been
very vocal lately in their criticisms of her leadership. She thinks they might
mount a campaign to have her removed as the corporation's CEO. She
decides that buying them out by purchasing their shares could eliminate
them as opponents, and she is confident they would accept a “good” offer.
Kenseth knows the corporation's cash position is decent, so it has the cash
to complete the transaction. She also knows the purchase of these shares
will increase earnings per share, which should make other investors quite
happy. (Earnings per share is calculated by dividing net income available for
the ordinary shareholders by the weighted-average number of shares
outstanding. Therefore, if the number of shares outstanding is decreased by
purchasing treasury shares, earnings per share increases.)
Instructions

Answer the following questions.

a. Who are the stakeholders in this situation?
 b. What are the ethical issues involved?
c. Should Kenseth authorize the transaction?

Using Your Judgment

Financial Reporting Problem

Marks and Spencer plc (M&S)

The financial statements of M&S (GBR) are presented in Appendix A. The

company's complete annual report, including the notes to the financial
statements, is available online.
Instructions

Refer to M&S's financial statements and the accompanying notes to answer

the following questions.
a. What is the par or stated value of M&S's preference shares?
b. What is the par or stated value of M&S's ordinary shares?
c. What percentage of M&S's authorized ordinary shares was issued at
year-end 2016?
d. How many ordinary shares were outstanding at year-end 2015 and
2016?
e. What was the pound amount effect of the cash dividends on M&S's
equity?
f. What is M&S's return on ordinary share equity for 2016 and 2015?
g. What is M&S's payout ratio for 2016 and 2015?

Comparative Analysis Case

adidas and Puma

The financial statements of adidas (DEU) and Puma (DEU) are presented in
Appendices B and C, respectively. The complete annual reports, including the
notes to the financial statements, are available online.
Instructions

Use the companies' financial statements to answer the following questions.

 a. What is the par or stated value of adidas's and Puma's ordinary
shares?
b. How many shares were issued by adidas and Puma at December 31,
2015?
c. How many shares are held as treasury shares by adidas at December
31, 2015, and by Puma at December 31, 2015?
d. How many adidas ordinary shares are outstanding at December 31,
2015? How many Puma ordinary shares are outstanding at December
29, 2015?
e. What amounts of cash dividends per share were declared by adidas
and Puma in 2015? What were the monetary amount effects of the
cash dividends on each company's equity?
f. What are adidas's and Puma's return on equity for 2015 and 2014?
Which company gets the higher return on the equity of its
shareholders?
g. What are adidas's and Puma's payout ratios for 2015?

Financial Statement Analysis Cases

Case 1: BHP Billiton

BHP Billiton (GBR) is the world's largest diversified natural resources

company. The company extracts and processes minerals, oil, and gas from its
production operations located primarily in Australia, the Americas, and
southern Africa. BHP Billiton sells its products globally, with sales and
marketing taking place through its principal hubs of The Hague and
Singapore. Presented below are some basic facts for BHP Billiton.
Billiton
(in thousands)
Current Year Prior Year
Sales $ 65,986 $ 72,226
Net earnings 11,075 15,532
Total assets 138,109 129,273
Total liabilities 66,074 62,188
Share capital 2,255 2,255
 Reserves 1,970 1,912
Retained earnings 66,979 62,236
Treasury shares (540) (533)
Number of shares outstanding (millions) 5,322 5,323

Instructions

a. What are some of the reasons that management purchases its own
shares?
b. Explain how earnings per share might be affected by treasury share
transactions.
c. Calculate the ratio of debt to assets for the current and prior years, and
discuss the implications of the change.
Case 2: Jinpain International Ltd.

The following note related to equity was reported in Jinpain International's

(CHN) annual report.
On February 1, the Board of Directors declared a 2-for-1 share split,
distributed on February 25 to shareholders of record on February 10.
Accordingly, all numbers of common (ordinary) shares, except unissued
shares and treasury shares, and all per share data have been restated to
reflect this share split.
Instructions

a. What is the significance of the date of record and the date of

distribution?
b. Why might Jinpain have declared a 2-for-1 for share split?
c. What impact does Jinpain's share split have on (1) total equity, (2) total
par value, (3) outstanding shares, and (4) book value per share?

Accounting, Analysis, and Principles

On January 1, 2019, Nadal SE had the following equity accounts.
Share Capital—Ordinary (€10 par value, 60,000 shares issued and €600,000
outstanding)
Share Premium—Ordinary 500,000
Retained Earnings 620,000

During 2019, the following transactions occurred.

Jan. 15 Declared and paid a €1.05 cash dividend per share to shareholders.
Apr. 15 Declared and issued a 10% share dividend. The market price of the
shares was €14 per share.
May 15 Reacquired 2,000 ordinary shares at a market price of €15 per
share.
Nov. 15 Reissued 1,000 shares held in treasury at a price of €18 per share.
Dec. 31 Determined that net income for the year was €370,000.
Accounting

Journalize the above transactions. (Include entries to close net income to

Retained Earnings.) Determine the ending balances to be reported for Share
Capital—Ordinary, Retained Earnings, and Equity.
Analysis

Calculate the payout ratio and the return on equity ratio.

Principles

The Federer Group is examining Nadal's financial statements and wonders

whether the “gains” or “losses” on Nadal's treasury share transactions should
be included in income for the year. Briefly explain whether, and the conceptual
reasons why, gains or losses on treasury share transactions should be
recorded in income.

Bridge to the Profession

Authoritative Literature References

[1] Conceptual Framework for Financial Reporting, “Chapter 4, The
Framework (1989): The Remaining Text” (London, U.K.: IASB, September
2010), par. 4.20.
[2] International Financial Reporting Standard 2, Share-Based Payment
(London, U.K.: International Accounting Standards Committee Foundation,
2004), par. 10.
[3] International Accounting Standard 32, Financial Instruments: Presentation
(London, U.K.: International Accounting Standards Committee Foundation,
2003), paras. 18–20.
[4] International Accounting Standard 1, Presentation of Financial Statements
(London, U.K.: International Accounting Standards Committee Foundation,
2003), par. 79.
[5] International Accounting Standard 1, Presentation of Financial Statements
(London, U.K.: International Accounting Standards Committee Foundation,
2003), paras. 106–107.

Research Case

Recall from Chapter 13 that Hincapie Co. (a specialty bike-accessory

manufacturer) is expecting growth in sales of some products targeted to the
low-price market. Hincapie is contemplating a preference share issue to help
finance this expansion in operations. The company is leaning toward
preference shares because ownership will not be diluted, but the investors will
get an extra dividend if the company does well. The company management
wants to be certain that its reporting of this transaction is transparent to its
current shareholders and wants you to research the disclosure requirements
related to its capital structure.
Instructions

Access the IFRS authoritative literature at the IASB website

(http://eifrs.iasb.org/) (you may register for free eIFRS access at this site).
When you have accessed the documents, you can use the search tool in your
Internet browser to respond to the following questions. (Provide paragraph
citations.)
a. Identify the authoritative literature that addresses disclosure of
information about capital structure.
b. What information about share capital must companies disclose?
Discuss how Hincapie should report the proposed preference share
issue.

Global Accounting Insights

LEARNING OBJECTIVE 6
 Compare the accounting procedures for equity under IFRS and U.S.
GAAP.

The accounting for transactions related to equity, such as issuance of shares,

purchase of treasury shares, and declaration and payment of dividends, are
similar under both IFRS and U.S. GAAP. Major differences relate to
terminology used and presentation of equity information.

Relevant Facts

Following are the key similarities and differences between U.S. GAAP and
IFRS related to equity.
Similarities

The accounting for the issuance of shares and purchase of treasury

shares are similar under both U.S. GAAP and IFRS.
The accounting for declaration and payment of dividends and the
accounting for share splits are similar under both U.S. GAAP and IFRS.
Similarities

U.S. GAAP requires that small share dividends (referred to as stock

dividends) should be recorded by transferring an amount equal to the fair
value of the shares issued from retained earnings to share capital
accounts. IFRS is silent on the accounting for share dividends.
Major differences relate to terminology used, introduction of concepts such
as revaluation surplus, and presentation of equity information.
In the United States and the United Kingdom, many companies rely on
substantial investments from private investors. Other countries have
different investor groups. For example, in Germany, financial institutions
such as banks are not only the major creditors but often are the largest
shareholders as well.
The accounting for treasury share retirements differs between U.S. GAAP
and IFRS. Under U.S. GAAP, a company has three options: (1) charge the
excess of the cost of treasury shares over par value to retained earnings,
(2) allocate the difference between paid-in capital and retained earnings,
or (3) charge the entire amount to paid-in capital. Under IFRS, the excess
may have to be charged to paid-in capital, depending on the original
 transaction related to the issuance of the shares.
The statement of changes in equity is usually referred to as the statement
of stockholders' equity (or shareholders' equity) under U.S. GAAP.
Both U.S. GAAP and IFRS use the term retained earnings. However, U.S.
GAAP uses the account Accumulated Other Comprehensive Income
(Loss). Use of this account is gaining prominence within the IFRS
literature, which traditionally has relied on the term “reserve” as a dumping
ground for other types of equity transactions, such as other comprehensive
income items as well as various types of unusual transactions related to
convertible debt and share option contracts.
The term surplus is generally not used in U.S. GAAP, as the standards do
not allow revaluation accounting. Under IFRS, it is common to report
“revaluation surplus” related to increases or decreases in items such as
property, plant, and equipment; mineral resources; and some intangible
assets.

About the Numbers

As indicated, numerous differences in terminology exist in comparing equity

under U.S. GAAP and IFRS. The following excerpt from a U.S. statement of
financial position (balance sheet) illustrates these distinctions (you might
compare the presentation here to that in Illustration 15.16 under IFRS).

FROST COMPANY
STOCKHOLDERS' EQUITY
DECEMBER 31, 2019
Capital stock
Preferred stock, $100 par value, 7% cumulative, $ 3,000,000
100,000 shares authorized, 30,000 shares issued
and outstanding
Common stock, no par, stated value $10 per share, 4,000,000
500,000 shares authorized, 400,000 shares issued
Common stock dividend distributable, 20,000 shares 200,000
Total capital stock 7,200,000
Additional paid-in capital
Excess over par—preferred $150,000
Excess over stated value—common 840,000 990,000
Total paid-in capital 8,190,000
Retained earnings 4,360,000
Total paid-in capital and retained earnings 12,550,000
Less: Cost of treasury stock (2,000 shares, common) 190,000
Accumulated other comprehensive loss 360,000
Total stockholders' equity $12,000,000

On the Horizon

As indicated in earlier discussions, the IASB and the FASB have completed
some work on a project related to financial statement presentation. An
important part of this study is to determine whether certain line items,
subtotals, and totals should be clearly defined and required to be displayed in
the financial statements. For example, it is likely that the statement of changes
in equity and its presentation will be examined closely. In addition, the options
of how to present other comprehensive income under U.S. GAAP will change
in any converged standard.

GAAP Self-Test Questions

1. Which of the following does not represent a pair of U.S. GAAP/IFRS-
comparable terms?
a. Treasury stock/Repurchase reserve.
b. Additional paid-in capital/Share premium.
c. Common stock/Share capital—ordinary.
d. Preferred stock/Preference share.
2. Under U.S. GAAP, the amount of capital received in excess of par value
would be credited to:
a. Retained Earnings.
b. Contributed Capital.
c. Share Premium.
d. Par value is not used under U.S. GAAP.
3. The term “reserves” is used under U.S. GAAP with reference to all of the
 following except.
a. gains and losses on revaluation of property, plant, and equipment.
b. capital received in excess of the par value of issued shares.
c. retained earnings.
d. U.S. GAAP does not use the term reserves.
4. Which of the following is false?
a. Under U.S. GAAP, companies cannot record gains on transactions
involving their own shares.
b. Under U.S. GAAP, companies do not make an entry for a share split.
c. Under U.S. GAAP, the statement of stockholders' equity is a required
statement.
d. Under U.S. GAAP, a company records a revaluation surplus when it
experiences an increase in the price of its common stock.
5. Under U.S. GAAP, a purchase by a company of its own shares results in.
a. an increase in treasury shares.
b. a decrease in assets.
c. a decrease in equity.
d. All of the above.

GAAP Concepts and Application

GAAP15.1 Mary Tokar is comparing a U.S. GAAP-based company to a

company that uses IFRS. Both companies report investments, with
unrealized gains and losses not reported in income. The IFRS company
reports unrealized losses on these investments under the heading
“Reserves” in its equity section. However, Mary cannot find similar
heading in the U.S. GAAP company financial statements. Can Mary
conclude that the U.S. GAAP company has no unrealized gains or losses
on its non-trading equity investments? Explain.
GAAP15.2 Briefly describe some of the similarities and differences
between U.S. GAAP and IFRS with respect to the accounting for equity.
GAAP15.3 Briefly discuss the implications of the financial statement
presentation project for the reporting of equity.
Notes
1 This privilege is referred to as a share right or warrant . The warrants
issued in these situations are of short duration, unlike the warrants issued
with other securities.
2 Companies rarely, if ever, issue shares at a value below par value. The
reason: The corporation may call on the original purchaser or the current
holder of the shares issued below par to pay in the amount of the discount
to prevent creditors from sustaining a loss upon liquidation of the
corporation.
3 The possible justification for classifying these shares as assets is that the
company will use them to liquidate a specific liability that appears on the
statement of financial position.
4 If making numerous acquisitions of blocks of treasury shares at different
prices, a company may use inventory costing methods—such as specific
identification, average-cost, or FIFO—to identify the cost at date of
reissuance.
5 One recent study of large international companies showed that in the
decade ending in March 2013, companies with the highest dividend
payouts showed the highest share price increases. See “Rising Corporate
Cash: What It Means for Investors,” T. Rowe Price Report (Summer 2013).
and G. Zuckerman and A. Kuriloff, “High-Dividend Stocks Gain Appeal,”
Wall Street Journal , (February 28, 2016).
6 If the corporation buys its own outstanding shares, it reduces its contributed
capital and distributes assets to shareholders. If permitted, the corporation
could, by purchasing treasury shares at any price desired, return to the
shareholders their investments and leave creditors with little or no
protection against loss.
7 Theoretically, the ex-dividend date is the day after the date of record.
However, to allow time for transfer of the shares, the securities exchanges
generally advance the ex-dividend date two to four days. Therefore, the
party who owns the shares on the day prior to the expressed ex-dividend
date receives the dividends. The party who buys the shares on and after
the ex-dividend date does not receive the dividend. Between the
declaration date and the ex-dividend date, the market price of the shares
 includes the dividend.
8 An alternative approach (required in the United States) is the fair value
approach. Under this approach, for small share dividends (defined as those
less than 20–25%) companies transfer the fair value of the shares issued
from retained earnings. This approach was adopted, at least in part, to
influence the share dividend policies of corporations—some of which were
possibly misleading investors as to the real impact of the share dividend.
That is, some argued that “many recipients of share dividends look upon
them as distributions of corporate earnings and usually in an amount
equivalent to the fair value of the additional shares received.” (See Stephen
A. Zeff, “The Rise of ‘Economic Consequences,’” The Journal of
Accountancy (December 1978), pp. 53–66 for a complete discussion of the
evolution of this issue.) IFRS is silent on the accounting for share dividends
under either the par value or fair value method. We show the par value
method because it is more conceptually sound, as it is generally accepted
that share dividends are not income for investors.
9 Looking at Illustration 15.16 , note that companies may include a number of
items in “Accumulated other comprehensive loss” or “Accumulated other
comprehensive income.” Among these items are “Foreign currency
translation adjustments” (covered in advanced accounting), “Unrealized
holding gains and losses for non-trading equity investments” (covered in
Chapter 17), and “Unrealized holding gains or losses on property, plant,
and equipment” (covered in Chapter 11), often referred to as revaluation
surplus.
10 Andrew Blackman, “How Well Do You Know … Dividends?” Wall Street
Journal (September 10, 2007), p. R5. Also, see payout data at
http://pages.stern.nyu.edu/∼%20adamodar/New_Home_Page/data.html .
and M. Bivd, “Dividend Energy Starts to Cool Down,” Wall Street Journal
(November 2, 2016).
11 When preference shares are participating, there may be different
agreements as to how the participation feature is to be executed. However,
in the absence of any specific agreement the following procedure is
recommended:
a. After the preference shares are assigned the current year's
dividend, the ordinary shares will receive a “like” percentage of par
value outstanding. In example (3), this amounts to 6 percent of
€400,000.
b. In example (3), shown in Illustration 15.23, the remainder of the
declared dividend is €20,000. We divide this amount by total par
value (€500,000) to find the rate of participation to be applied to
each class of shares. In this case, the rate of participation is 4%
(€20,000 ÷ €500,000), which we then multiply by the par value of
each class of shares to determine the amount of participation.