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ANSWERS TO QUESTIONS
01. (a) A dividend is a distribution by a corporation to its
shareholders on a pro rata (equal) basis, per share.
(b) Disagree. Dividends may take four forms: cash, property,
scrip (promissory note to pay cash), or shares.
02. Robin is not correct. Adequate cash is only one of the
conditions. In order for a cash dividend to occur, a corporation
must also have sufficient retained earnings and the dividend
must be declared by the board of directors.
03. (a) The three dates are:
Declaration date is the date when the board of
directors formally declares the cash dividend and
announces it to shareholders. The declaration
commits the corporation to a binding legal obligation
that cannot be rescinded.
Record date is the date that marks the time when
ownership of the shares is determined from the
shareholder records maintained by the corporation.
The purpose of this date is to identify the persons or
entities that will receive the dividend.
Payment date is the date on which the dividend
cheques are mailed to the shareholders.
(b) The accounting entries and their dates are:
Declaration dateDebit Cash Dividends and Credit
Dividends Payable.
No entry is made on the record date.
Payment dateDebit Dividends Payable and Credit
Cash.
5.
6.
7.
Stock Split
Stock Dividend
No Change
No Change
Increase
Decrease
No Change
Decrease
Increase
No Change
8.
9.
$240,000
67,500*
$172,500
3.
4.
Debits
Net loss
Prior period adjustments
for overstatements of net
income
Cash and stock dividends
Cumulative effect of a
change in accounting
principle that decreased
net income
Credits
1. Net income
2. Prior period adjustments for
understatements of net
income
3. Cumulative effect of a change
in accounting principle that
increased net income
16. Nels should be told that although many factors affect the
market price of a share at a given time, the reported net income
is one of the most significant factors. When companies
announce increases or decreases in net income, the market
price of its share usually increases or decreases immediately.
Net income also provides an indication of the amount of
dividends that a company can distribute. In addition, net
income leads to a growth in retained earnings, which is often
reflected in a share's market price. Because net income is
found on the income statement not the balance sheet, it is
important to analyze all the financial statements when making
investment decisions.
17. The unique feature of a corporation income statement is a
separate section that shows income tax expense. The
presentation is as follows:
Income before income tax .........................................
$500,000
Income tax expense* ..................................................
..................................................................................... 0150,000
Net income ..................................................................
..................................................................................... $350,000
(a)
(b)
(c)
(d)
Favourable
Unfavourable
Favourable
Unfavourable
Dec.
Dec. 31
100,000
100,000
31
120,000
120,000
After Stock
Dividend
$1,000,000
300,000
$1,300,000
$ 1,160,000
140,000
$ 1,300,000
100,000
110,000
$13.00
$11.82
$220,000
0150,000
370,000
0085,000
$285,000
Shareholders' equity
Share capital
Common shares, no par value, unlimited
shares authorized, 5,000 shares issued .....
Common stock dividend distributable ..........
Total share capital ...................................
Retained earnings (see Note 3) .............................
Total shareholders' equity .............................
$50,000
15,000
65,000
29,000
$94,000
$300,000
0 75,000
225,000
0 60,000
$165,000
Discontinued operations
Loss from operations of Mexico facility, net of $105,000
($300,000 X 35%) income tax savings ..............................
Loss on disposal of Mexico facility, net of
$56,000 ($160,000 X 35%) income tax savings .................
$195,000
104,000
$299,000
$290,000
$5.80
(2.00)
3.80
(0.90)
$2.90
Share Price
Earnings
per Share
PriceEarnings
Current
$52.50
$5.00
10.5
$51.451
$4.903
10.5
$26.252
$2.504
10.5
1
2
3
4
Both the stock dividend and the stock split will increase the number
of shares, without changing the overall value of the company.
Therefore, both will (theoretically) decrease the market price per
share proportionately. Both will also decrease the earnings per
share proportionately. Consequently, the price-earnings ratio
should not be affected by either of these events.
However, the stock markets may react favourably to the stock
dividend and/or the stock split, with the result that the share price
does not decrease proportionately, and hence the price-earnings
ratio increases.
SOLUTIONS TO EXERCISES
EXERCISE 15-1
(a)
Total dividend declaration
Allocation to preferred shares
Remainder to common shares
(b)
Total dividend declaration
Allocation to preferred shares
Remainder to common shares
1
2
2002
2003
2004
$6,000
06,000
$
0
$12,000
008,000
$ 4,000
$28,000
008,000
$20,000
2002
2003
2004
$6,000
06,000
$
0
$12,000
12,0001
$
0
$28,000
012,0002
$16,000
(c)
Dec. 31
Dec. 31
28,000
28,000
EXERCISE 15-2
Before
Action
After Stock
Dividend
After Stock
Split
$ 800,000
400,000
$ 1,200,000
$ 856,000*
344,000
$1,200,000
$ 800,000
400,000
$ 1,200,000
Shares issued
80,000
84,000
160,000
$15.00
$14.29
$7.50
Shareholders' equity
Common shares
Retained earnings
Total shareholders' equity
EXERCISE 15-3
(a) (1) Book value before the stock dividend was $20.00
($400,000 20,000 = $20.00)
(2) Book value after the stock dividend is $18.18
($400,000 22,000 = $18.18)
(b) Share capital
Balance before dividend ....................................................
$225,000
Stock dividend (2,000 x $18) ............................................. 00336,000
New balance ...............................................................
$261,000
Retained earnings
Balance before dividend ....................................................
Stock dividend (2,000 X $18) .............................................
New balance ...............................................................
$175,000
0036,000
$139,000
EXERCISE 15-4
1.
2.
3.
Dec. 31
Dec. 31
Dec. 31
30,000
30,000
10,000
10,000
EXERCISE 15-5
(a) April
June 15
July 10
Dec. 15
85,000
80,000
80,000
38,000
106,600
EXERCISE 15-6
WINDSOR CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2003
$580,000
20,000
560,000
350,000
910,000
180,000
$730,000
EXERCISE 15-7
Contributed Capital
Item
Share
Capital
Additional
Retained
Earnings
1.
NE
NE
2.
NE
NE
3.
NE
NE
NE
NE
4.
NE
NE
5.
NE
NE
6.
NE
NE
NE
NE
7.
NE
NE
NE
NE
8.
NE
EXERCISE 15-8
(a) Stock DividendsCommon (30,000* X $16) ............... 480,000
Stock Dividends Distributable .............................
480,000
EXERCISE 15-9
BYUNGKEE INC.
Partial Balance Sheet
December 31, 2003
Shareholders' equity
Contributed capital
Share capital
8% preferred shares, $5 stated value, cumulative,
40,000 shares authorized, 30,000 shares issued
Common shares, no par value, 400,000 shares
authorized, 300,000 shares issued ...................
Common stock dividends distributable ..................
Total share capital .....................................
Additional contributed capital
Contributed capital in excess of stated value
preferred shares ............................................
Total contributed capital ...........................
Retained earnings (See Note R) .........................................
Total shareholders' equity ........................
$0,150,000
866,000
75,000
1,091,000
244,000
1,335,000
900,000
$2,235,000
EXERCISE 15-10
(a)
GROMETER CORPORATION
Partial Income Statement
For the Year Ended October 31, 2003
(b) To:
From:
$640,000
0 192,000
448,000
00 70,000
$378,000
EXERCISE 15-11
(a) DASOLA CORPORATION
Partial Income Statement
For the Year Ended December 31, 2003
$240,000
35,000
275,000
56,000
$219,000
EXERCISE 15-12
(a) $ 547,000 $16,000 = $531,000 100,000 = $5.31
(b) $ 547,000 $16,000 = $531,000 100,000 = $5.31
Note that, since the preferred dividends are cumulative, there is no
difference between parts (a) and (b)
EXERCISE 15-13
2000
1999
1998
$6.99
6.6X
28.6%
4.4%
$5.20
6.3X
36.2%
5.7%
$5.14
7.1X
34.3%
4.8%
Calculations:
Earnings per share
2000: $1,857,000,000 265,659,000 = $6.99
1999: $1,382,000,000 265,862,000 = $5.20
1998: $1,350,000,000 262,511,000 = $5.14
Price-earnings
2000: $45.88 $6.99 = 6.6 times
1999: $32.72 $5.20 = 6.3 times
1998: $36.65 $5.14 = 7.1 times
Payout
2000: $2.00 $6.99 = 28.6%
1999: $1.88 $5.20 = 36.2%
1998: $1.76 $5.14 = 34.2%
Dividend yield
2000: $2.00 $45.88 = 4.4%
1999: $1.88 $32.72 = 5.7%
1998: $1.76 $36.65 = 4.8%
Earnings per share have improved over the past year, moving from
$5.14 to $6.69. This indicates that the company is earning more
income for each of its common shareholders. This increase
occurred partially because net income is higher and partially
because the number of common shares issued has decreased.
The PE ratio declined in 1999, then rebounded slightly in 2000. This
number should be compared to other companies in the industry to
see if a multiple of around seven (6.6 in 2000) is good for this type
of business.
Even though the dividend is increasing, the dividend yield and the
payout ratios have generally decreased. The company is earning
more income but is not increasing its dividend proportionally.
Although some investors who like receiving dividends may be
concerned, the company may simply be retaining the remaining
income to finance further growth.
SOLUTIONS TO PROBLEMS
PROBLEM 15-1A
(a)
Cash Dividend
Stock Dividend
Assets
$13,500,000 - $80,000a
= $13,420,000
No effect = $13,500,000
Liabilities
No effect = $1,500,000
No effect = $1,500,000
Share capital
No effect = $2,000,000
$2,000,000 + $80,000b
= $2,080,000
Retained earnings
$10,000,000 - $80,000
= $9,920,000
$10,000,000 - $80,000
$ 9,920,000
Total shareholders
equity
$12,000,000 - $80,000
= $11,920,000
No effect ($12,000,000 +
$80,000 - $80,000 =
$12,000,000)
Number of shares
a
b
No effect = 40,000
40,000 X $2 = $80,000
40,000 X 5% = 2,000 x $40 = $80,000
(b) 1.
Cash dividend
Cash dividend 1,000 X $2 = $2,000
Market value of shares 1,000 X $40 = $40,000
Stock Dividend
Stock dividend 1,000 x 5% = 50 x $40 = $2,000
Market value of shares 1,050 X $40 = $42,000
PROBLEM 15-2A
Aug . 1
Sept. 1
Dec.01
15
45,000
72,000
Dividends PayableCommon.........................
Cash .........................................................
45,000
270,000
40,000
45,000
22,000
50,000
45,000
270,000
40,000
TMAO INC.
Statement of Retained Earnings
For the Year Ended December 31, 2003
$500,000
0050,000
550,000
0350,000
900,000
355,000
$545,000
PROBLEM 15-3A
GENERAL JOURNAL
J1
Date
Jan. 20
200,000
Cash .........................................................
150,000
Feb. 12
Debit
200,000
Common Shares..............................
Mar. 31
Dec. 31
31
31
31
Credit
150,000
20,000
50,000
100,000
Revenues .................................................
Retained Earnings ...........................
900,000
600,000
100,000
70,000
100,000
900,000
600,000
100,000
Explanation
Ref.
Debit
J1
J1
Jan.
1
20
Feb. 12
Credit
Balance
1,500,000
200,000 1,700,000
150,000 1,850,000
Explanation
1
20
Ref.
J1
J1
Debit
Credit
Balance
200,000 0200,000
0200,000
000,000
Cash Dividends
Date
Explanation
Jan. 1
Dec. 31 Closing entry
Ref.
Debit
J1
J1
100,000
Ref.
Debit
Credit
Balance
100,000
100,000
0
Credit
Balance
Retained Earnings
Date
Explanation
Jan. 1
Mar. 31
Dec. 31 Closing entry
31 Closing entry
31 Closing entry
J1
J1
J1
J1
600,000
50,000
550,000
900,000 1,450,000
600,000
850,000
100,000
750,000
(c)
CEDENO INC.
Partial Balance Sheet
December 31, 2003
Shareholders' equity
Share capital
Common shares, no par value, unlimited
number of shares authorized,
580,000 shares issued ........................................
Retained earnings ..........................................................
Total shareholders' equity ......................................
$1,850,000
00,750,000
$2,600,000
PROBLEM 15-5A
$600,000
0100,000
$500,000
and
(b)
JAJOO CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2003
$ 2,450,000
880,000
3,330,000
740,000
$2,590,000
Shareholders' equity
Contributed capital
Share capital
$10 preferred shares, no par value,
noncumulative, 20,000 shares
authorized, 10,000 shares issued ..............
Common shares, $5 stated value, 600,000
shares authorized, 400,000 shares issued
Common stock dividends distributable,
20,000 shares...........................................
Total share capital ...................................
Additional contributed capital
Contributed capital in excess of stated
valuecommon shares .............................
Total contributed capital .........................
Retained earnings (See Note 3) ....................................
Total shareholders' equity ......................
$1,200,000
2,000,000
140,000
3,340,000
1,100,000
4,440,000
2,590,000
$7,030,000
SOLUTIONS TO PROBLEMS
PROBLEM 15-1A
(a)
Cash Dividend
Stock Dividend
Assets
$13,500,000 - $80,000a
= $13,420,000
No effect = $13,500,000
Liabilities
No effect = $1,500,000
No effect = $1,500,000
Share capital
No effect = $2,000,000
$2,000,000 + $80,000b
= $2,080,000
Retained earnings
$10,000,000 - $80,000
= $9,920,000
$10,000,000 - $80,000
$ 9,920,000
Total shareholders
equity
$12,000,000 - $80,000
= $11,920,000
No effect ($12,000,000 +
$80,000 - $80,000 =
$12,000,000)
Number of shares
No effect = 40,000
a
b
40,000 X $2 = $80,000
40,000 X 5% = 2,000 x $40 = $80,000
(b) 1.
Cash dividend
Cash dividend 1,000 X $2 = $2,000
Market value of shares 1,000 X $40 = $40,000
Stock Dividend
Stock dividend 1,000 x 5% = 50 x $40 = $2,000
Market value of shares 1,050 X $40 = $42,000