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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
CHAPTER 15
SHAREHOLDERS’ EQUITY
ASSIGNMENT CLASSIFICATION TABLE
TopicsBrie
E!ercises E!ercises Pro"#e$s%ri&i'(Assi('$e'&s
1. The cororate form!share caital! and rofitdistri"utions.
Si'ce Ar&*r’s r2&e o re&*r' o' s2reo#.ers’ e:*i&+ e!cee.s &er2&e o re&*r' o' 2sse&s &e co$p2'+ is &r2.i'( o' &e e:*i&+2#so 8'o7' 2s e$p#o+i'( #e)er2(e &o &e 2.)2'&2(e o &eco$p2'+6
,@- P2r&icip2&i'( .i)i.e'.;Si'ce &e co$$o' s2reo#.ers 7i## recei)e 2 per s2re .i)i.e'. 1 per s2re is i' e!cess o &e @.i)i.e'. per s2re p2r&icip2&io' &reso#.6
E!cess .i)i.e'. 1N*$"er o co$$o' s2res o*&s&2'.i'( /
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
TIME AND PURPOSE OF PROBLEMS
ro"lem 1%81 ;Time $%8(- minutes<
urose=to ro'ide the student 2ith an understanding of the necessary entriesto roerly account for a cororation/s share transactions. The ro"lem in'ol'essuch concets as noncash share e7changes, sale of referred and commonshares, and the reac&uisition of "oth referred and common shares. The studentis re&uired to reare the resecti'e >ournal entries and the shareholders/ e&uitysection of the "alance sheet so as to reflect these transactions. The student mustalso discuss the distinction "et2een aid8in caital and retained earnings andho2 different tyes of referred shares 2ould affect the reurchase transaction.
ro"lem 1%8#
;Time (%8%% minutes<
urose=to ro'ide the student a comrehensi'e ro"lem in'ol'ing all facets of the shareholders/ e&uity section. The student must reare the shareholders/e&uity section of the "alance sheet, analy6ing and classifying differenttransactions to come u 2ith roer accounts and amounts. ?ournal entries for the transactions are also re&uired.
ro"lem 1%8$
;Time #-8$- minutes<
urose=to ro'ide the student 2ith an understanding of the necessary entriesto roerly account for a cororation/s share transactions. This ro"lem in'ol'essuch e'ents as lum8sum sales of shares, and a noncash share e7change.
ro"lem 1%8(
;Time #-8$- minutes<
urose=to ro'ide the student 2ith an understanding of 'arious entries relatingto share issuances. This ro"lem in'ol'es non8monetary, lum8sum andsu"scrition issuances.
ro"lem 1%8% ;Time #-8$- minutes<
urose=to ro'ide the student 2ith an understanding of the roer entries toreflect the reac&uisition, and issuance of a cororation/s shares. The student isre&uired to reare the >ournal entries to reflect these transactions.
ro"lem 1%8) ;Time 1%8#%minutes<
urose=to ro'ide the student 2ith an oortunity to record fi'e different >ournal entries. The entries in'ol'e a share su"scrition, collection of therecei'a"le, and default on certain of these recei'a"les. In addition, a reurchaseof shares and a lum8sum issuance must "e recorded.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
TIME AND PURPOSE OF PROBLEMS ,CONTINUED-
ro"lem 1%8*
;Time #%8$- minutes<
urose=to ro'ide the student 2ith an oortunity to record a nonmonetaryshare issuance, a share reurchase and a cash di'idend ayment. Thecalculation of the cash di'idend is challenging due to cumulati'e, articiatingreferred shares.
5ro"lem 1%8+ ;Time #%8$% minutes<
urose=to ro'ide the student 2ith an oortunity to analy6e a set of transactions affecting shareholders/ e&uity and reare the comany/sshareholders/ e&uity section. Transactions include issuance of ar 'alue sharesto "uy machinery, lum8sum sale, collection of su"scri"ed shares, and areac&uisition of shares.
ro"lem 1%8 ;Time 1%8#- minutes<
urose=to ro'ide the student 2ith an understanding of the roer accountingfor the declaration and ayment of cash di'idends on "oth referred andcommon shares. This ro"lem also in'ol'es a di'idend arrearage on referredshares, 2hich 2ill "e satisfied "y the issuance of common shares. The student isre&uired to reare the necessary >ournal entries for the di'idend declaration andayment, assuming that they occur simultaneously.
ro"lem 1%81-
;Time #-8#% minutes<
urose=to ro'ide the student 2ith an understanding of the effect 2hichcertain referred share ro'isions, such as cumulati'e and fully articiating,ha'e on di'idend distri"utions to common and referred shareholders. Thestudent is re&uired to allocate the di'idends to each tye of share under t2odifferent assumtions@ ;1< the referred share does ossess these t2oaforementioned ro'isions, and ;#< the referred share does not.
ro"lem 1%811 ;Time #-8#% minutes<
urose=to ro'ide the student 2ith an understanding of the accounting effectsrelated to the cash, roerty, stock di'idends and stock slits. The student isre&uired to analy6e their effect on total assets, common shares, contri"utedsurlus, retained earnings, and total shareholders/ e&uity.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
TIME AND PURPOSE OF PROBLEMS ,CONTINUED-
ro"lem 1%81# ;Time $-8(- minutes<
urose=to ro'ide the student 2ith an understanding of the resecti'e entriesfor a series of transactions in'ol'ing e&uity accounts, such as the declaration of roerty di'idends and stock di'idends and the donation of land. The student isre&uired to reare the roer >ournal entries to reflect these transactions and toreare a shareholders/ e&uity section to reflect the entries during the eriod.
ro"lem 1%81$
;Time $-8(- minutes<
urose=to ro'ide the student 2ith an understanding of the roer accountingfor the issuance of shares, issuance costs, shares sold on a su"scrition "asis,
and defaulted su"scritions. The student is re&uired to reare "oth thenecessary >ournal entries to record the e&uity transactions and reare theshareholders/ e&uity section of the "alance sheet.
ro"lem 1%81( ;Time #%8$- minutes<
urose=to ro'ide the student 2ith an oortunity to reare a statement of changes in shareholders/ e&uity and the shareholders/ e&uity section of the"alance sheet to reflect the changes from fi'e different transactions in'ol'ingshare issuances, reac&uisitions, stock slits, and di'idend declarations.Throughout the ro"lem the student needs to kee track of the num"er of shares
outstanding.
ro"lem 1%81% ;Time $%8(% minutes<
urose=to ro'ide the student 2ith an understanding of the roer accountingfor the declaration and ayment of "oth a cash and stock di'idend. The studentis re&uired to reare "oth the necessary >ournal entries to record the cash andstock di'idends and the shareholders/ e&uity section of the "alance sheet. Thestudent is also re&uired to reare the statement of changes in shareholders/e&uity.
26 Te 5 s2res e!c2'(e. or 2 p#o& o #2'. 2re recor.e.
2& 99 o s2res ,*se &e c*rre'& 2ir )2#*e o &e #2'.o' *#+ 9 &o )2#*e &e s2re iss*2'ce-6
"6 Te re$2i'i'( s*"scrip&io's or s2res res*#&e. i'@ o co$$o' s2res s*"scri"e.6
c6 @ > 119 @96@ per s2re6 Re&2i'e. E2r'i'(sis 2#so .e"i&e. or 19@ si'ce &ere is 'o co'&ri"*&e.s*rp#*s &e .iere'ce "e&7ee' &e rep*rc2se price o @ per s2re #ess &e 2)er2(e s&2&e. price o @96@ per s2re6
No&e; Tis &r2's2c&io' is 2 p2r&i2# .is&ri"*&io' 2'. &e e'&r+represe'&s re)2#*2&io' o o'#+ &e 5 s2res .is&ri"*&e. o &e&o&2# o o' 2'.6 I' 2..i&io' 2 por&io' o &e Acc*$*#2&e.O&er Co$pree'si)e I'co$e 7i## "e rec#2ssiie. &o 2cco*'& or &e por&io' o &e 2ir )2#*e i'cre2se &2& 2s "ee' re2#i3e.&ro*( &e .i)i.e'.6
U're2#i3e. G2i' or Loss 0 OCI66666666666666666666666666666666666666666@95G2i' o' S2#e o I')es&$e'&s66666666666666666666666666666666666 @95 ,5 s2res / 1- Less; cos& o 5 s2res 95
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
CA 1501 ,CONTINUED-
A'2#+sis 2'. reco$$e'.2&io's
Issue@ 9aluation of the comany assets.
e'alue assets Bea'e as is
8 nder I34, the entity may use
the re'aluation method to
re'alue their assets.
8 This 2ould "e more reflecti'e of
reality as the assets 2ould "e
'alued to fair 'alue. ising real
estate rices are not currentlyreflected in the statements.
8 The "ankers need this
information so more rele'ant.
8 Gther.
8 Historical costs are more
relia"le.
8 lans to "uy ne2 e&uiment in
any case ;assuming they can get
funding< and so ne2 e&uiment
2ill reflect more current cost.
8 More costly from a recordkeeing ersecti'e to use the
re'aluation method.
8 Gther.
ecommendation@
In this case, e'en though the costs of re'aluing the assets are higher, it maymake more sense to use the re'aluation method in order to ro'ide moremeaningful information to the "ankers.
4olutions Manual 1%81-(
Coyright #-1$ ?ohn Wiley : 4ons Canada, Btd. nauthori6ed coying, distri"ution, or transmission of this age is strictly rohi"ited.
8 A glo"al comany 2ith u"licly traded shares=therefore I34 constraint.8 It has recently undergone a restructuring=therefore no2 may "e a good
time to ensure assets are not o'er'alued since the markets e7ect 2rite8offs in a restructuring situation.
8 Currently it has a high credit rating and share rice due to increasingre'enues and recent restructuring=it 2ould not 2ant to >eoardi6e this.
8 Credit rating agencies 2ill "e looking to the comany toreassesssu"stantiate their recent rating.8 In'estors and shareholders 2ill "e looking to the comany to assess
'alue.8 Fo'ernment 2ill look to the financial statements to assess 2hether toll
road re'enues are e7cessi'e.8 G'erall, the management must "e careful to resent a fair reresentation
of the 'alue of the comany ;high 'alue< 2ithout aearing to "e charginge7cessi'e re'enues for toll roads. e'enues aear to "e a key num"er.
A'2#+sis 2'. reco$$e'.2&io's
Issue@ estructuring charges
resent searately on I48 The markets are taking the restructuring as a ositi'e factor and should
therefore sho2 searately to gi'e more information.8 These items are non8recurring and should "e segregated so that users
may assess normali6ed earnings.
4olutions Manual 1%81-%
Coyright #-1$ ?ohn Wiley : 4ons Canada, Btd. nauthori6ed coying, distri"ution, or transmission of this age is strictly rohi"ited.
ecogni6e asset imairment 0o nothing8 If the comany/s a"ility to raise tolls isrestricted "y the go'ernment, the asset'alue changes. This change incondition signals a otential imairment2hich must "e measured.8 3ull recognition of this otentialimairment may affect share rice andcredit ratings.8 Gther.
8 The comany/s la2yers "elie'e thatthe comany has a contractual right toraise re'enues and are 2illing tocontest this.8 0isclosure of the issue in the financialstatements may not "e necessary if theinformation is a'aila"le through theress or if the comany feels that thego'ernment claim is unsu"stantiated.8 eorting this ro"lem 2ill imly thatfuture re'enue streams are imaired
and thus this may affect share ricesand credit ratings.8 Gther.
ecommendation@
Bea'e the assets as is and do not disclose on the "asis that the la2yers feel thatthe comany is on sold ground.
Issue@ ound tri trades
4ho2 gross re'enues 4ho2 net8 Accounts for (-J of the
increased re'enues.8 If sho2n net 2ould otentially
affect credit rating and sharerices.
8 Their "usiness is "uying andselling energy contracts maytake legal title of the goodstraded ; must esta"lish this2ith comany la2yers<.
8 Gther.
8 As traders, economic su"stanceis that they are earningcommissions on the trades similar to a real estate agent.
8 They ne'er take ossession ofthe goods traded and thereforeaear to "e acting as agents.
8 Gther.
ecommendation@
0ifficult to >ustify treating these as sales unless legal title is taken to the energytraded. The comany must sho2 that they ha'e the risks and re2ards of o2nershi of the energy.
4olutions Manual 1%81-)
Coyright #-1$ ?ohn Wiley : 4ons Canada, Btd. nauthori6ed coying, distri"ution, or transmission of this age is strictly rohi"ited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
IC 1501 ,CONTINUED-
Issue@ Ho2 to account for the urchase of the engineering "usiness
ecord notes as assets ecord notes as share reduction or notat all8 The 'alue of the transaction should "edetermined at the transaction date.8 Currently, the note reresents a"enefit to the comany that thecomany has access to.8 As the situation changes, then this2ould "e reassessed.8 If the notes are no longer reaya"le,the 'alue might "e added to the cost ofthe in'estment since it really
reresents additional considerationaid for the "usiness.8 Makes the comany look "etter.8 Gther.
8 Alternati'ely, this reresents acontingency the 'endor shareholders2ill o2e 4I an additional amount if theengineering firm does not e7ceede7ectations.8 ecogni6e the contingency if likelyand measura"le this is difficult tomeasure at this oint since futurerofits are unkno2n. Therefore, sincethe shares are already issued and
currently ha'e fair 'alue, should recordthe note. Fi'en the tie in to theac&uisition may consider recordingthe notes as a contra account to thecommon shares ;share urchaserecei'a"le<. The e7cess ayment inshares o'er the 39 of the engineeringcomany is similar to a contingentad'ance on future rofits, so adeduction from the share caital 2ouldreresent the su"stance of thetransaction.8 Gther.
ecommendation@
ecord as an asset since it has future "enefit at this oint in time.
4olutions Manual 1%81-*
Coyright #-1$ ?ohn Wiley : 4ons Canada, Btd. nauthori6ed coying, distri"ution, or transmission of this age is strictly rohi"ited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
IC 1509 %IND AND SOLAR
G'er'ie2
8 De2 comany e7eriencing cash flo2 difficulties. Lank has refused toad'ance more funds and there is a de"t co'enant that focuses on de"t toe&uity ratio. Therefore, this 2ill "e a sensiti'e ratio.
8 T2o shareholders are "ound "y a share agreement 2hich has a "uyoutclause. Gne shareholder 2ants to "e "ought out. The amount of theayout is a function of net income therefore a sensiti'e num"er as 2ell.
8 The engineers are "eing aid 2ith shares and may cash these in during#-1(. The amount of ayout 2ill "e "ased on a 'aluation of the comany2hich 2ill "e "ased on #-1$ and #-1( net income.
8 ri'ate comany so no FAA constraint "ut "ank 2ill likely 2ant tomonitor the de"t to e&uity ratio and financial condition so 2ill 2ant FAA.
In addition lans to go u"lic so may 2ant to follo2 I34. 3ollo2ingI34 no2 2ill sa'e transition costs later.8 As auditor gi'en the a"o'e 2ill 2ant to "e more conser'ati'e.
Analysis and recommendations
4olutions Manual 1%81-+
Coyright #-1$ ?ohn Wiley : 4ons Canada, Btd. nauthori6ed coying, distri"ution, or transmission of this age is strictly rohi"ited.
8 As a ne2 comany, W4I mustdecide 2hether to caitali6einterest on the financing duringconstruction of the 2indmills and
A4E ermits.8 The interest is definitely a cost
incurred during construction=acost that 2ouldn/t "e incurredduring this eriod if the 2indmills2ere ac&uired from anotherarty.
8 Caitali6ing 2ould affect netincome, making it higher than itother2ise 2ould "e, and alsoincrease assets, retainedearnings and e&uity.
8 This, ho2e'er, 2ould increasethe "uy8out ayment to Winstonas 2ell as to the engineers.
8 I34 re&uires caitali6ation.8 It does not seem e&uita"le to
reduce net income "y the
interest cost as no re'enue has"een generated against 2hichthe e7ense could "e deducted.
8 Gther.
8 W4I does not kno2 2hetherthey 2ill "e a"le to reco'er thefull cost of construction of the2indmills from future oerations,so the interest should not "eadded to the asset cost.
8 As W4I has recei'ed funding ufront from W0, interest incomefrom in'esting any surlus fundscould go through net income,offset "y the cost of the funds to
W4I, netting the effect of thecost out to some e7tent.
8 Interest is the cost of "orro2edmoney. W4I has "orro2edmoney, therefore, the financingcost should "e recogni6ed in theeriod incurred.
8 Gther.
ecommend@ Caitali6e interest as there ha'e "een no re'enues generated yet,and it is a directly attri"uta"le and legitimate cost of construction.
4olutions Manual 1%81-
Coyright #-1$ ?ohn Wiley : 4ons Canada, Btd. nauthori6ed coying, distri"ution, or transmission of this age is strictly rohi"ited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
IC 1509 ,Co'&i'*e.-
Issue@ Windmill o2nershi 8 W0 2indmillsecogni6e as assets 0o not
8 W0 financed the de'eloment of the2indmills 2hich are o2ned and 2ill "eoerated "y W4I.8 W4I 2ill deri'e future "enefits throughthe oeration of the 2indmills and theycontrol access to the 2indmills therefore assets of W4I.8 Gther.
8 W0 is aying W4I to "uild andoerate these 2indmills on "ehalf ofW0.8 Costs should "e recogni6ed as cost of sales 2hen re'enues recogni6ed.8 Will decrease DI and thereforedecrease "uyout and cash8outamounts.8 Gther
ecommend@ treat as assets to "e consistent 2ith the treatment of the funds asfinancing.
Issue@ Engineersecogni6e salary e7ense 0o not
8 Engineers are 2orking and"eing comensated "y W4I.Therefore should e7ensesalaries.
8 Will lo2er DI and therefore, theamount of the shareholder"uyout and the e'entual ayoutshould the engineers cash out.
8 4hould "e a"le to measure "ylooking at the fair 'alue of thesalaries.
8 Engineers are really >ust "uyinginto the comany "ut instead ofaying cash, are aying 2ithser'ices.
8 This is a nonmonetarytransaction "ut it is too difficult tomeasure the 'alue of the sharesat this oint.
ecommend@ treat as salary e7ense since ro'iding ser'ice.
4olutions Manual 1%811-
Coyright #-1$ ?ohn Wiley : 4ons Canada, Btd. nauthori6ed coying, distri"ution, or transmission of this age is strictly rohi"ited.
8 Don8refunda"lee'en if minimumamount ofelectricity not
deli'ered.
8 Ha'e not earned untildeli'er electricity or#-1$#-1( eriod ends.Treat as unearnedre'enues maynegati'ely affectde"te&uity ratio andcause de"t to "ecomedue.
8 In su"stance this is ago'ernment grant tooffset the cost of "uilding2indmills.8 4hould "e "ooked as areduction of the cost ofthe 2indmills.Will affect future netincome.
8 art financing 2hich isreaya"le in electricityThe comany has ano"ligation to deli'erelectricity.
Gr multile element arrangement art re'enue and art go'ernment grant ho2 to slit"ifurcate could use residual method since do not really kno2 fair'alues of "oth resecti'e arts ;'alue of ro'iding the electricity is kno2n<.
ecommend@ More conser'ati'e to delay recognition of re'enues until ser'icero'ided. May treat art as go'ernment grant ;if electricity ro'ided falls short ofminimum amount< and credit to cost of 2indmill.
4olutions Manual 1%8111
Coyright #-1$ ?ohn Wiley : 4ons Canada, Btd. nauthori6ed coying, distri"ution, or transmission of this age is strictly rohi"ited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
TIME AND PURPOSE OF WRITING ASSIGNMENTS
WA 1%81 ;Time 1%#- minutes<urose=to ro'ide the student 2ith an oortunity to discuss the otions for reorting common shares su"scri"ed and su"scritions recei'a"le and under share urchase lans for emloyees
WA 1%8# ;Time #-#% minutes<
uroseto re&uire the student to define e&uity, e7amine 2hat the differentcomonents of e&uity are, ho2 these are reorted, and to ro'ide e7amles of transactions and e'ents that change the terms defined under I34 and A4E.
WA 1%8$ ;Time #%$- minutes<urose=to ro'ide the student 2ith an understanding of the concetualframe2ork that underlies a stock di'idend and a stock slit. The student isre&uired to e7lain 2hat a stock di'idend is, the amount of retained earnings to"e caitali6ed in connection 2ith a stock di'idend, and ho2 it differs from a stockslit "oth from a legal standoint and an accounting standoint. This case alsore&uires an e7lanation of the 'arious reasons 2hy a cororation declares astock di'idend or a stock slit.
5WA 1%8( ;Time #-$- minutes<
urose=to ro'ide the student 2ith an understanding of the concets thatcomrise a financial reorgani6ation. The student is re&uired to descri"e thecharacteristics of a financial reorgani6ation and list the conditions under 2hich itgenerally is >ustified.
WA 1%8% ;Time #%$- minutes<
urose=to ro'ide the student 2ith an oortunity to "ecome more familiar 2ith current literature on 2hat is an e&uity instrument. 4tudents are re&uired togo to the IA4L 2e"site to gain current information on this ro>ect of defining ande&uity instruments. 4tudents are then asked to discuss 'arious instruments andif they 2ould "e classified e&uity under these definitions.
WA 1%8) ;Time #-#% minutes<
urose to ro'ide students 2ith an oortunity to understand the differences"et2een A4E and I34 and the concetual reasons for these differences.4tudents are also e7licitly asked to detail the difference in caital disclosurere&uirements and discuss ho2 these disclosures ro'ide additional information
4olutions Manual 1%811#
Coyright #-1$ ?ohn Wiley : 4ons Canada, Btd. nauthori6ed coying, distri"ution, or transmission of this age is strictly rohi"ited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
WA 1%8* ;Time 1%#- minutes<
urose to ro'ide students 2ith an oortunity to e'aluate and discuss'arious attri"utes assigna"le to shares and the financial imact they ha'e onshare ricing.
4olutions Manual 1%811$
Coyright #-1$ ?ohn Wiley : 4ons Canada, Btd. nauthori6ed coying, distri"ution, or transmission of this age is strictly rohi"ited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
SOLUTIONS TO %RITING ASSIGNMENTS
%A 1501
Dote@ Algon&uin is a ri'ate comany since it does not ha'e shares or de"t that
is u"licly traded.
;a< The account Common shares su"scri"ed indicates the cororation/so"ligation to issue shares of its common stock uon ayment of finalsu"scrition "alances "y those 2ho ha'e su"scri"ed for shares. This accountsignifies a commitment against the unissued common shares. It is reorted inthe shareholders/ e&uity section "elo2 Common 4hares.
;"< The account 4u"scritions recei'a"le indicates the amount yet to "e collected"efore su"scri"ed shares 2ill "e issued. Lecause this is a recei'a"le similar to Accounts recei'a"le, it is argued that this account should "e reorted as acurrent asset. This account reresents a claim to cash that is generallycollecti"le 2ithin a year or less, >ustifying its classification as a current asset.
;c< Many accountants argue that 4u"scritions recei'a"le should "e reorted asa deduction from Common shares su"scri"ed in the shareholders/ e&uitysection "ecause of the risk of collecta"ility. Do deficiency >udgment can "esought for failure of a su"scri"er to ay the unaid "alance of a su"scrition
recei'a"le.
;d< Common shares su"scri"ed ;%-,--- shares< #,---,---
Bess 4u"scritions recei'a"le ;*--,---<
1,$--,---
;e< A4E secifically states ;CICA Handbook-Accounting Part II Section3251.10) that this recei'a"le for the urchases of shares 2ould likely "ereorted as a reduction of the share caital unless there is no risk that theshares 2ill decline in 'alue, and there is reasona"le assurance that therecei'a"le 2ill "e fully collected. 4ince it is unlikely that the comany canmake this claim, the recei'a"le 2ould "e reorted as a reduction of the sharecaital issued.
nder I34, this treatment is likely the same. Although I34 has no secificstandard 2ith resect to the treatment of this recei'a"le, under the concetual
4olutions Manual 1%811(
Coyright #-1$ ?ohn Wiley : 4ons Canada, Btd. nauthori6ed coying, distri"ution, or transmission of this age is strictly rohi"ited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
%A 1509
;a< nder A4E, 4ection 1--- of the CICA Handbook – Accounting art II,
defines e&uity for a rofit8seeking enterrise as the o2nershi interest in theassets after deducting the lia"ilities.I34 defines Ne&uityO under its 3rame2ork for rearation and resentationof 3inancial 4tatements, ;ar (.(< as a residual interest in the assets, after deducting lia"ilities. This definition is similar to that under A4E. In "othcases, Ne&uityO is synonymous 2ith net assets and is a residual interest in theassets of the enterrise. Conse&uently, e&uity can only "e measured as aresult of measuring assets and lia"ilities.
;"< nder A4E, comonents of e&uity that must "e resented searatelyinclude ;as outlined under CICA Handbook –art II, $#%1.-( and .-%<@
;a< retained earnings!
;"< contri"uted surlus!
;c< share caital!
;d< reser'es ursuant to "y8la2s or incororation articles of the comany
;e< non8controlling interests!
and
;h< any other changes.
nder I34 ;IA4 1 aragrahs 1-) to 11-<, comonents of e&uity 2ould
include@;a< retained earnings!
;"< contri"uted surlus!
;c< share caital!
;d< reser'es attri"uta"le to o2ners of the cororation!
;e< non8controlling interests!
;f< accumulated totals for each class of other comrehensi'e incomeitems including@
• foreign e7change gains and losses from su"sidiaries!
• gains and losses on those financial instruments classified asDI through GCI!
• gains and losses on cash flo2 hedges
• re'aluations surluses
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• certain gains and losses on emloyee future "enefits
;h< any other changes.
%A 1509 ,Co'&i'*e.-
The ma>or differences in these comonents relate to the other comrehensi'e income items re&uired "y I34. A4E does not ha'e other comrehensi'e income items ;In some cases, items are osted directly toe&uity accounts andnot through other comrehensi'e income. In other cases, there are nounreali6ed gains and losses recogni6ed under A4E, so there is nore&uirement for these items to "e recorded.<
;c< nder A4E, a statement of retained earnings is re&uired to resent thechanges in retained earnings. These changes can result from rofit or
losses for the year, di'idends, or other increases or reductions allo2edagainst retained earnings. Changes in the other comonents of e&uity may"e disclosed in the notes. Fenerally, ri'ate enterrises ha'e relati'elysimle e&uity structures, 2ith fe2 changes to e&uity in the normal course of "usiness. As a result, likely only retained earnings 2ould change e'ery year and therefore, re&uires annual resentation in the financial statements.
nder I34, the statement of changes in e&uity outlines the changes ineach comonent of e&uity in a single statement. 4ince the e&uity of comanies adoting I34 ;generally u"licly traded entities< is usuallycomlicated, and e&uity in'estors are a rimary user of these financial
statements, details of any changes are necessary to ha'e in one sot in thefinancial statements. This aids in trying to reconcile the oening and closinge&uity "alances of the entity.
;d< Transactions or e'ents that change o2ners/ e&uity include re'enues ande7enses, gains and losses ;reali6ed and unreali6ed<, in'estments "yo2ners, distri"utions to o2ners, and changes 2ithin o2ners/ e&uity. Alsoayments on su"scrition recei'a"les that ha'e "een recorded as areduction of share caital 2ould cause shareholders/ e&uity to change year o'er year. These transactions 2ould result in changes under "oth A4E andI34.
;e< 4ome e7amles of changes 2ithin o2ners/ e&uity that do not change thetotal amount of o2ners/ e&uity under either A4E or I34 are the retirementof treasury shares accounted for "y the single transaction method,con'ersion of referred shares into common shares, stock di'idends, andretained earnings aroriations. nder A4E, secial guidance is ro'idedfor the reclassification of a deficit to share caital in a financialreorgani6ation
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nder I34, transfer of the re'aluation surlus or actuarial gains and lossesdirectly to retained earnings, 2ould not imact the total shareholders/ e&uityaccount.
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;a< A stock di'idend is the issuance "y a cororation of its o2n shares to its
shareholders on a ro8rata "asis 2ithout recei'ing ayment for the shares.The stock di'idend results in an increase in the amount of the legal or statedcaital of the enterrise. The di'idend is charged to retained earnings and, ineffect, acts to caitali6e retained earnings.
3rom a legal standoint, a stock slit is distinguished from a stock di'idendin that a slit results in an increase in the num"er of shares outstanding anda corresonding decrease in the stated 'alue er share. Though a stockdi'idend, results in an increase in the num"er of shares outstanding, it doesnot necessarily result in a decrease in the stated 'alue of the shares.
3rom an accounting standoint, the ma>or distinction is that a stock di'idendre&uires a >ournal entry to decrease retained earnings and increase aid8incaital, 2hile there is no entry for a stock slit. Also, the distinction "et2eena stock di'idend and a stock slit is deendent uon the intent of the Loardof 0irectors in making the declaration. If the intent is to gi'e to shareholderssome searate e'idence of a art of their ro8rata interests in accumulatedcororate earnings, the action results in a stock di'idend. If the intent is toissue enough shares to reduce the market rice er share, the action resultsin a stock slit, regardless of the form it may take. In other 2ords, if theaction takes the form of a stock di'idend "ut reduces the market ricemarkedly, it should "e considered a stock slit. 4uch reduction 2ill seldom
occur unless the num"er of shares issued is at least #-#%J of the num"er re'iously outstanding.
;"< The usual reason for issuing a stock di'idend is to gi'e the shareholderssomething on a di'idend date and yet conser'e 2orking caital.
A stock di'idend that is charged to retained earnings reduces the totalaccumulated earnings, and all stock di'idends reduce the er share earnings.Issuing a stock di'idend to achie'e these ends 2ould "e a u"lic relationsgesture in that the u"lic 2ould "e less likely to critici6e the cororation for high rofits or undue retention of earnings.
A stock di'idend also may "e issued for the urose of o"taining a 2ider distri"ution of the shares. Although this is the main consideration in a stockslit, it may "e a secondary consideration in the issuance of a stock di'idend.The issuance of a series of stock di'idends 2ill accomlish the sameo">ecti'e as a stock slit.
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A stock slit is intended to o"tain 2ider distri"ution and imro'edmarketa"ility of shares "y means of a reduction in the market 'alue of thecomany/s shares.
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;c< The amount of retained earnings to "e caitali6ed in connection 2ith a stockdi'idend ;in the accounting sense< might "e ;1< the legal minimum ;usually
ar<, ;#< the a'erage contri"uted caital er outstanding share, or ;$< themarket 'alue of the shares.
The third "asis is generally recommended on the grounds that reciients tendto regard the market 'alue of the shares recei'ed as a di'idend as theamount of earnings distri"uted to them. If the cororation in such cases doesnot caitali6e an amount e&ual to the fair 'alue of the shares distri"uted as adi'idend, there is left in the cororation/s retained earnings account anamount of earnings that the shareholders "elie'e has "een distri"uted tothem. This amount 2ould "e su">ect to further stock di'idends or to cashdi'idends. The reciients might thus "e misled into "elie'ing that thecomany/s distri"utions=and earnings=are greater than they actually are.
If the er share market 'alue of the shares is materially reduced as a result of a distri"ution ;usually #-#%J or more of shares outstanding<, no matter 2hatform the distri"ution takes, the action is in su"stance a stock slit and should"e so designated.
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;a< The urose of a financial reorgani6ation is to ena"le a comany that hasgone through financial difficulty to ha'e a Nfresh startO for financial reorting
uroses. Fenerally, this 2ould "e a ossi"ility for a comany that hasincurred losses for se'eral eriods and, as a result, has a deficit. In suchcircumstances, the comany may ha'e difficulty meeting interest andrincial ayments on de"t, and is una"le to ay di'idends until earningsare sufficient to offset the deficit. This can result in serious &uestionsregarding the comany/s sur'i'al. ather than declaring "ankrutcy,ho2e'er, 'arious e'ents ;e.g. economic conditions, ne2 roductsde'eloed, ne2 management team< may signal romise for successfuloerations. Therefore, a financial reorgani6ation, and not "ankrutcy, may"e in the "est interests of all stakeholders in the "usiness. This 2ould resultin elimination of the deficit, comrehensi'e re'aluation of assets and
lia"ilities, and realignment of e&uity and non8e&uity interests ;i.e. to ena"lethe comany to continue as if it 2ere a ne2 entity<.
;"< The re&uirements and accounting for a financial reorgani6ation to result in aNfresh startO are as follo2s@
1. There must "e a negotiated agreement "et2een all e&uity and non8e&uity holders.
#. There is a su"stantial realignment of the e&uity and non8e&uity interestssuch that the rights and claims of each change relati'e to each other.
$. The same arty does not control the comany "oth "efore and after thereorgani6ation. ;This is re&uired "efore comrehensi'e asset and lia"ilityre'aluation can take lace.<
Dote that comanies are al2ays ermitted to 2rite do2n their assets2hen aroriate. It is the recognition of non8recorded assets andrecognition of higher fair 'alues that is the issue here.
(. The assets and lia"ilities are comrehensi'ely re'alued at amountsnegotiated in the agreement or, if not esta"lished in the agreement, atfair 'alue. The re'alued net assets cannot e7ceed the fair 'alue of the
enterrise as a 2hole. The re'aluation ad>ustment ;difference "et2eenthe rior8to8reorgani6ation carrying 'alues and these ne2 'alues< isaccounted for as a caital transaction and recorded as share caital,contri"uted surlus, or a searately identified account in shareholders/e&uity.
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%. The retained earnings ;deficit< account "alance rior to thereorgani6ation is "rought u to the date of the reorgani6ation. This
includes recording any 2rite8do2ns related to circumstances that e7istedrior to the reorgani6ation. Then the udated "alance in retainedearnings ;deficit< is reclassified as share caital, contri"uted surlus, or asearately identified account 2ithin shareholders/ e&uity.
;c< 4ince the e'idence indicates that the comany has reached a turning ointand that rofita"le oerations can "e e7ected thereafter, a financialreorgani6ation to eliminate the accumulated deficit 2ould "e aroriate if the shareholders allo2 it. The urose of eliminating the deficit=and theurose of a financial reorgani6ation=is to relie'e the comany from thehandica of ast losses that result in an unfa'oura"le reorting of currentfinancial osition e'en after conditions resulting in the losses ha'e changed.
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%A 1505
Ans2ers "elo2 ha'e "een adated from N0iscussion aer 3inancial
Instruments 2ith Characteristics of E&uity 4etem"er #--+O 2hich has "eenused as reference material.;a< A "asic o2nershi instrument 2ould allo2 the holder to ha'e a claim;su"ordinate to all other claims< on li&uidation of the entity at the date theclassification decision is "eing made ;i.e. issue date<! and the holder 2ould "eentitled to a ercentage of assets that remain after all higher claims ha'e "eensatisfied.
An o2nershi8settlement aroach 2ould classify as e&uity all of the instrumentsthat met the "asic o2nershi aroach. In addition, 2here there 2ere differentoutcomes that could "e reali6ed "y the holder of the instrument, and oneoutcome 2ould gi'e a return similar to holding e&uity ;i.e. "asic o2nershiinstrument< then a comonent of the instrument could "e sho2n as e&uity.
The EG ;reassessed e7ected outcomes< aroach 2ould include as e&uity,any instrument 2hose fair 'alue changes mo'e in the same direction ;or oositedirection for a contra8e&uity< to the fair 'alue of the "asic o2nershi instruments.
;"< The IA4L has made a reliminary decision that an e&uity instrument 2ouldgi'e its holder a claim on the assets of the entity after all lia"ility claims ha'e"een settled, and ayments of cash 2ould "e re&uired for one of the follo2ingstiulated reasons@ ayout on li&uidation, 2ind8u, or 2here the issuer choosesto distri"ute all of its assets and a di'idend is aid or the shares are reurchased.
;c< A "ond con'erti"le into a fi7ed num"er of shares@
•
nder the "asic aroach this con'erti"le "ond 2ould "e reorted as alia"ility, since at the date of issue the holder is not entitled to a ercentage
of the assets remaining after higher claims are made. In this case, the
amount of any claim is set "y the o"ligation of the de"t.
• nder the o2nershi settlement aroach, a ortion of the roceeds
recei'ed on issue of the con'erti"le "ond 2ould "e sho2n as e&uity since
one ossi"le outcome is that the de"t 2ill "e con'erted to a fi7ed num"er
of shares, and the 'alue of these shares 2ould fluctuate deending on the
rice. This 2ould gi'e the holder the same return as holding e&uity in the
entity.
• nder the EG aroach, the fair 'alue of the con'erti"le de"t 2ouldcertainly "e imacted "y the underlying share rice of the entity. 4ince the
num"er of shares is fi7ed, the 'alue of the e&uity that this "ond can "e
con'erted into 2ill fluctuate gi'en the underlying share rice of the shares.
As a result, a comonent of the roceeds on issuance 2ould "e reorted
as e&uity.
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Fenerally, A4E has "een designed to reduce comle7ity in the recognitionand measurement of items, to reduce disclosure re&uirements and to makethe information useful for the main users, 2ho ha'e "een defined ascreditors. Fi'en this, 2e 2ill see the imact in the discussion "elo2 of thedifferences "et2een A4E and I34.The fe2 differences "et2een I34 and A4E in this chater are as follo2s@
a< A4E gi'es a lot more secificguidance on recognition and derecognition of shares and on thereac&uisition of shares. A4E also gi'es secific guidance on ho2recei'a"les on loans issued to "uy shares should "e recogni6ed.These standards 2ere in ractice rior to the creation of A4E andha'e "een retained. I34 has no e7licit guidance in these areas.
"< 4ecific guidance is ro'ided under A4E for comrehensi'ere'aluations of assets, lia"ilities and e&uity arising from courtaro'ed restructurings. These standards 2ere in ractice rior to thecreation of A4E and ha'e "een retained. I34 has no secificguidance 2ith resect to this, e7cet that re'aluations of assets areallo2ed under normal conditions for roerty, lant and e&uiment,in'estment roerties and intangi"le assets. Also I3IC 1 does gi'esome guidance on e7tinguishing de"t for e&uity instruments.
c< 0i'idends in kind that are a sin8off of assets to the o2ners of the
"usiness are generally measured at carrying 'alue under A4E,unless the transaction &ualifies as a related arty transaction and thenre8measurement 2ould "e re&uired. These standards 2ere in racticerior to the creation of A4E and ha'e "een retained. There is nomeasurement guidance under I34 for either circumstance.
d< A statement of retained earnings is re&uired under A4E. Changes inother comonents of e&uity only re&uire note disclosure. The sharecaital and e&uity transactions of a ri'ate enterrise are not comle7,and rarely change year to year, and therefore, only a statement of retained earnings is re&uired. A4E also has no other comrehensi'e
income items that add comle7ity to the comonents of e&uity, and2ould change annually. nder I34, a statement of changes in e&uityis re&uired that 2ould sho2 all changes in each comonent of e&uity.u"lic enterrises ha'e comle7 e&uity sections, numerouscomonents and many annual changes, re&uiring a statement to sho2the changes and reconcile the oening and closing "alances of e&uityfor users.
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e< With resect to caital disclosures I34 re&uires detailed caitaldisclosure notes 2hich include information on@
• Comany/s o">ecti'es, olicies and rocesses to manage its caital;"eing cash, de"t and e&uity<
• What secifically is included in the comany/s definition of caital
• Whether or not there are e7ternally imosed restrictions on thiscaital, and if so, if the comany is in comliance 2ith these.
These caital disclosures are designed to assist market articiants to make
detailed assessments and cross >urisdictional comarisons of a Comany/scaital ositions and create consistency in u"lic reorting.
nder A4E, the only disclosure re&uired is 2hether or not the comany isin comliance 2ith co'enants on the de"t.
The main reason for these differences is that ri'ate comanies tend to notha'e 'ery comle7 caital arrangements. Fenerally, there might "e de"tthat is outstanding to the "ank, and small amounts of e&uity issued to themanager8shareholders of the comany. As the creditors are the rimaryusers of the financial statements, they 2ould already "e familiar 2ith
restrictions ut on the "alance sheet of the comany. Fi'en these facts, it2as thought to "e too costly for ri'ate enterrises to reare and disclosethis data and that the costs 2ould not >ustify the "enefits.
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A comany may choose to attach 'arious features to referred shares itissues to attract a secific tye of in'estor, allo2 for short term shares to "eissued, or to install 'arious classes of shares to allo2 for reference tocertain shareholders.
Although not an e7hausti'e list, the follo2ing features may "e attached toreferred shares@
a< Cumulati'eThese tyes of referred shares accumulate di'idends 2hich are inarrears ;not declared "y the "oard and therefore not yet aid< and 2ill"e aid in years after the declaration. This feature 2ould increase the'alue of a share as it 2ould ensure the ayment of any missed
di'idends to the shareholder rior to ayments of ne2 share di'idendto common shareholders.
"< Con'erti"le
These are referred issues 2hich holders can e7change for aredetermined num"er of the comanyPs common shares. Thise7change may occur at any time the in'estor chooses, regardless of
the market rice of the common stock. This gi'es the shareholder thea"ility and choice to artake in the rofit of the comany and thisa"ility to con'ert on demand 2ould raise the rice of such a share.
c< Calla"leedeema"leThese shares carry the ro'ision that allo2s the issuer of the share toreurchase or NcallO the share at a certain rice and retire it. As theotion to call the share is at the discretion of the issuer, this tye of attri"ute 2ould reduce the rice of the share as there is no guaranteeto the holder of continued financial in'estment or articiation in futurerofits or di'idends.
d< etracta"le
These shares are similar to redeema"le shares, ho2e'er the otionlies 2ith the shareholder to sell or NutO the share "ack to the comanyat a certain rice. This otion 2ould make the share more attracti'e toin'estors as it 2ould guarantee a minimum 'alue of the shares andgi'e the holder more fle7i"ility, therefore increasing the financial riceof the shares.
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RESEARCH AND FINANCIAL ANALYSIS
RA1501 MAGNA INTERNATIONAL INC6;a< The follo2ing chart resents the t2o classes of shares, 2hich are authori6ed
as at 0ecem"er $1, #-11 .
N2$e o s2rec#2ss
reference shares Common 4hares
N*$"er2*&ori3e.
,*)-,--- unlimited
W o&es per
s2re
not stated 1 'ote er share
W o s2resiss*e.
#$$,$1*,*#
Ri(&s i' &er$so .i)i.e'.s
reference 4u"ordinate toreference shares
;"< E'en though authori6ed caital consists of the t2o classes of shares
authori6ed, there 2ere no reference shares outstanding at 0ecem"er $1,#--, #-1- or #-11. The caital structure for Magna 2as changed, as theComany urchased for cancellation all of the outstanding Class L shares,2hich 2ere held "y the 4tronach grou. The Magna Articles 2ere thenamended to remo'e the Class L shares from the authori6ed caital,conse&uentially renaming the Class A 4u" ordinate 9oting 4hares asCommon 4hares.
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RA1501 ,Co'&i'*e.-
;c< The a'erage carrying 'alue er Common 4hare for the years ended #-11,and #-1- as 2ell as the closing share rice for each year end are calculated
"elo2.
Dec @1911
Dec @191
Dum"er of shares ;total of "oth classes<
#$$,$1*,*# #(#,%)(,)1)
Total shareholders/ e&uity;4<
+,1*% M +,-#$ M
A'erage carrying 'alueer share ;4<
$%.-( $$.-+
Closing share rice 4 $(.+$ %1.1
;d< 3rom Dotes 1+ : 1, one can see that there are the follo2ing tyes of sharestransactions that occurred during the three years #-- to #-11@
• issuance of shares for cash!
• reurchase of shares using cash for cancellation!
• shares issued under incenti'e stock otions lans!
• shares issued under di'idend rein'estment lans!
• shares issued under restricted share units lans! and
• shares issued under share areciation rights lans.
;e< The comany aid cash di'idends of 1.-- er common share outstanding.The total cash aid in #-11 for di'idends 2as 4#$) million.
;f<Dece$"er @1 911
USDece$"er @1 91
USDet income 1,-1% M 1--$ MTotal shareholder/s e&uity 8oening
+,11# M *,(*) M
Total shareholder/s e&uity 8 closing +,($% M +,11# M A'erage shareholder/s e&uity +,#*$.% M *,*( M
eturn on shareholders/ e&uity 1#.$J 1#.JTotal di'idends aid #$) M 1-- Mayout ratio #$.#J 1-JMarket share rice $(.+$ %1.1Earnings er share="asic (.#) (.$)rice earnings ratio +.#Q 11.Q
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RA1501 ,Co'&i'*e.-
5 calculated from the notes that sho2 the closing "alances for eachcomonent of shareholders/ e&uity
;g< Magna manages its caital to ensure that it has ade&uate "orro2ingcaacity and a caital structure that gi'es the comany financialfle7i"ility ensuring ade&uate returns for its shareholders. Magnauses the ratio of de"t to caitali6ation to monitor its caital. Itincludes in caital@ "ank inde"tedness, interest "earing long termde"t and shareholders/ e&uity.
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RA1509 BAN< OF MONTREAL ERSUS ROYAL BAN< OFCANADA
;a< and ;"<B2'8 o Mo'&re2# Ro+2# B2'8 o
C2'2.2
Year8end GCT $1, #-1# GCT $1, #-1#
Lalance of common
shares ; millions<
11,%* M 1$,$#$ M
Dum"er of common
shares outstanding
)%-,*#,)(( 1,((%,$-#,)--
A'erage carrying 'alue 1+.$* .##
Market rice on Gcto"er
$1, #-1#
;as listed on T4Q<
%.-# %).(
;"< Authori6ed share
caital@
referred shares, in
series
nlimited num"er nlimited num"er
Common shares nlimited num"er nlimited num"er
;c< Loth comanies resent their share caital information in a com"inedNConsolidated 4tatement of 4hareholders/ E&uityO, rather than a statementof retained earnings 2ith additional share caital information in the notes tothe financial statements. 3or "oth comanies, the statement of shareholders/ e&uity is resented on a comarati'e "asis for three years,2hereas the "alance sheet is resented for t2o years. This is consistent2ith the comarati'e resentation of the income statement, 2hich is also for three years. The statement of shareholders/ e&uity sho2s "eginning"alances, issuances, redemtions, and ending "alances to the referredand common shares. The Lank of Montreal also sho2s the imact of thisinformation on the num"er of shares outstanding for its common shares
only. The imact of the transactions on the num"er of referred shares isdisclosed in the notes to the financial statements. 3or the oyal Lank, thechange in the num"er of referred and common shares outstanding isdisclosed in the notes to the financial statements.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
RA1509 ,Co'&i'*e.-
;e< The amount of cash di'idends declared er share and the total amount "y2hich di'idends affected shareholders/ e&uity are resented "elo2 foreach comany.
C2s .i)i.e'.s .ec#2re. i' 919B2'8 o Mo'&re2#
Ro+2# B2'8o C2'2.2
referred cash di'idend er share 8 class L series % 1.33
referred cash di'idend er share 8 class L series 1-
referred cash di'idend er share 8 class L series 1$ 1.13
referred cash di'idend er share 8 class L series 1( 1.31
referred cash di'idend er share 8 class L series 1% 1.(%
referred cash di'idend er share 8 class L series 1) 1.30referred cash di'idend er share 8 class L series 1+ 1.63
referred cash di'idend er share 8 class L series #1 1.63
referred cash di'idend er share 8 class L series #$ 1.35
referred cash di'idend er share 8 class L series #% 0.98
referred cash di'idend er share 8 series W 1.#$
referred cash di'idend er share 8 series AA 1.11
referred cash di'idend er share 8 series AL 1.18
referred cash di'idend er share 8 series AC 1.15
referred cash di'idend er share 8 series A0 1.13
referred cash di'idend er share 8 series AE 1.13referred cash di'idend er share 8 series A3 1.11
referred cash di'idend er share 8 series AF 1.1$
referred cash di'idend er share 8 series AH 1.41
referred cash di'idend er share 8 series A? 1.25
referred cash di'idend er share 8 series AB 1.40
referred cash di'idend er share 8 series AD 1.56
referred cash di'idend er share 8 series A 1.56
referred cash di'idend er share 8 series A 1.56
referred cash di'idend er share 8 series AT 1.%)
referred cash di'idend er share 8 series A91.56
referred cash di'idend er share 8 series AQ 1.53
Common cash di'idend er share #.+#
#.#+
Total imact on shareholders/ e&uity
;#,()%<
;(,+1$<
;in millions of dollars<
4olutions Manual 1%81$%
Coyright #-1$ ?ohn Wiley : 4ons Canada, Btd. nauthori6ed coying, distri"ution, or transmission of this age is strictly rohi"ited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
RA1509 ,Co'&i'*e.-
;f< The rate of return on common shareholders/ e&uity for each comany for #-1# is resented "elo2. ;Dote that the num"ers used relate to theshareholders of the "ank and the net income to "ank shareholders.< oyalLank/s return on common shareholders/ e&uity is higher than that of Lankof Montreal.
B2'8 o Mo'&re2#
Ro+2#B2'8 o C2'2.2
Det income ;1< millions of C (,11% *,((#Bess@ referred di'idends ;#< ;1$)<Ne& i'co$e 2)2i#2"#e &o co$$o' s2reo#.ers ,@- ,1- 0 ,9-
$,* *,((#
Total shareholdersP e&uity, "eginning ;(< #),$%$ $,*-#Bess@ referred shares ;%< ;#,+)1< ;(,+1$<Common shareholdersP e&uity, "eginning ;)< S ;(< 8;%<
#$,(# $(,++
Total shareholdersP e&uity, ending ;*< #+,)%% ((,#)*Bess@ referred shares ;+< ;#,()%< ;(,+1$<Common 4hareholdersP e&uity, ending ;< S ;*< 8 ;+< #),1- $,(%(A)er2(e Co$$o' s2reo#.ers? e:*i&+ ,1- K,- ,- >,9-
The contri"uted surlus remaining "alance 2as 1.1 as of 0ecem"er $1, #-11,
therefore there 2ould "e no amounts charged to retained earnings.
;e< The a'erage carrying 'alue of the shares at the "eginning of the year 2as
.11 ;*1-.% million *+,-#-,#-+ shares<. The shares 2ere reurchased at
)#.1* ;11. million 11,$)<. The market rice of the shares as of ?anuary
$, #-1# 2as )%.)%, 2hich is much higher than the a'erage carrying 'alue
er share at the "eginning of the year.
;f< As er note +, Canadian Tire has t2o o">ecti'es in managing its caital@
• ensuring sufficient li&uidity to suort its financial o"ligationsand e7ecute its oerating and strategic lans!
• maintaining healthy li&uidity reser'es and access to caital!
and
• minimi6ing the after8ta7 cost of caital 2hile taking into
consideration current and future industry, market and
economic risks and conditions.
The comany uses t2o ratios to monitor its caital@ long term de"t tocaitali6ation ratio and interest co'erage ratio.Included in Canadian Tire/s caital is@ long term de"t, long term deosits,deri'ati'es used to hedge caital items, and shareholders/ e&uity.
4olutions Manual 1%81$+
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
RA150 SUNCOR ENERGY INC6
;a< 4uncor might ha'e declared a stock slit to reduce its rice er share. Fi'enthe e7treme increase in the market 'alue of the shares in #--*, reducing the
rice "y half might "e seen to make it more attracti'e to otential in'estors.
;"< The stock slit 2ould ha'e 6ero dollar imact on total shareholders/ e&uityand on total "ook 'alue. The num"er of outstanding shares 2ould dou"lesince each outstanding share 2as slit into t2o shares. 4ince total "ook 'alue2as unaffected and the num"er of shares outstanding dou"led, the "ook'alue er share 2ould decrease "y fifty ercent. This change is maderetrosecti'ely for the #--* data as seen "elo2@
#--* as ad>usted in #--+for stock slit
#--* as originally filed
Dum"er of Commonshares outstanding #%,%)),--- ()#,*+$,---
Amount for commonshares ;< ++1 million ++1 million
E4 "asic $.#$ ).1(
Dote that in the restatement of the #--* "asic E4, the amount is not e7actlyhalf of the original "asic E4 as re'iously reorted. This is "ecause the#--* financial statements 2ere also retroacti'ely restated for a change in
accounting olicy concerning in'entories.;c< The share/s market 'alue 2ould also decrease "y fifty ercent as a result of
the stock slit since each share 2ould no2 reresent one8half of the 'alue of one share "efore the slit. The market rice on 0ecem"er $1, #--* 2as1-*.1. As of 0ecem"er $1, #--+, the rice 2as #$.*# er share. Thelarge reduction in the rice 2as due rimarily to economic factors, since this2as far "elo2 the slit rice.
4olutions Manual 1%81$
Coyright #-1$ ?ohn Wiley : 4ons Canada, Btd. nauthori6ed coying, distri"ution, or transmission of this age is strictly rohi"ited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
RA1505 STATEMENTS OF CHANGES IN EQUITY
The tye of o2nershi structure and the nature of transactionse'entsdetermine the tyes of accounts that affect the e&uity section. In a
cororation, Common 4hares, Contri"uted 4urlus, 0i'idends, and etainedEarnings and accumulated "alances in other comrehensi'e income itemsare commonly used accounts. Fi'en that common shares and retainedearnings are reorted in the shareholders/ e&uity section of the "alance sheet,and that re'enues and e7enses are reorted on the income statement, itmay "e sufficient to re&uire the statements of changes in retained earnings2hen the share transactions of comanies are not comle7 ; i.e. ri'ateenterrises<. Ho2e'er, as the comle7ity and num"er of comonentsincluded in e&uity increases, a statement of changes in e&uity is far moreuseful that >ust the statement of retained earnings. Ha'ing all the changesreorted on one statement a'oids confusion for the reader and time to searchall the searate notes to ro'ide the details. In addition, transactions that
imact se'eral e&uity comonents accounts ;such as a reurchase of sharesthat could imact share caital, contri"uted surlus and retained earnings<can "e made more o"'ious.
In re'ie2ing the 4tatement of Changes in E&uity for Bufthansa for the #-11fiscal year end, reconciliations of the oening and closing "alances of thefollo2ing comonents are ro'ided in detail;
• issued caital
• caital reser'e
• fair 'alue measurement of financial instruments
• currency differences
• re'aluation reser'e
• other reser'es
• retained earnings, and
• minority interests
This statement of changes in e&uity is 'ery useful since all changes arereorted in one sot, rather than ha'ing to search through the comany/s'arious notes. In addition, transactions that imact se'eral comonents suchas reclassifications 2ithin e&uity, and the other comrehensi'e income itemsare commonly dislayed.
The only items that 2ould "e similar for a ri'ate enterrise 2ould "e@ sharecaital and caital reser'e ;contri"uted surlus<, retained earnings, andossi"ly the non8controlling interest in limited cases6
4olutions Manual 1%81(-
Coyright #-1$ ?ohn Wiley : 4ons Canada, Btd. nauthori6ed coying, distri"ution, or transmission of this age is strictly rohi"ited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
RA 150 TEMBEC INC6
(a) Note 1 describes the Plan of Arrangement implemented on February 29,
2008 as follows:• 41.# "illion of senior unsecured de"t is con'erted into e&uity, gi'ing
Doteholders ++J of the e&uity of the comany for full settlement of theirnotes!
• E&uity 2as issued to noteholders 2ho "ackstoed the loan, resenting*J o2nershi in the e&uity of the comany!
• E7isting shareholders recei'ed %J of the e&uity of the comany and2arrants in lieu of 1--J of the old and issued common shares.
• A ne2 four8year term loan of 4 $-- million 2as o"tained
• The 'alue of the ne2 e&uity issued 2as determined to "e %*- million,
reresenting the enterrise 'alue of the comany after the re'aluation.;"< In order to imlement Nfresh startO accounting, the comany is allo2ed tore'alue its assets and lia"ilities if a restructuring is "eing comleted. Thecomany is first re&uired to determine the enterrise 'alue of the entity, and thenthe assets and lia"ilities are ad>usted to their fair 'alues.
;c< The >ournal entries to record the lan of Arrangement are as follo2s@ ;all in4 millions<
Bong term de"t....................................................................................1,1+1
edeema"le referred shares............................................................#)Contri"uted surlus.................................................................. #+
To record cancellation of referred shares 2ith a ne2 ( million loan and therefinancing of #- million loan 2ith a ne2 1( million loan.
;d<3resh start accounting 2as alied "y re'aluing the assets and lia"ilities totheir fair 'alues. Dote 1 itemi6es 2hat 'alue 2as used and the ad>ustmentsre&uired as follo2s ;in 4 millions<
• In'entories ad>usted to estimated fair 'alue 8 reduction of #
•In'estments ad>usted to fair 'alue reduction of 1
• Gther assets, deferred credits ;2hich include deferred financing costs,good2ill and cutting rights<and unamorti6ed financing items ad>usted tonil reduction of 1)# ;1$+ #(<
• ension assets and emloyee o"ligations ad>usted to fair 'alue increase of 1#$ ;11- 1$<
• 3uture ta7es ad>usted to reflect fair 'alue ad>ustments in 'alues of assets and lia"ilities net reduction of *% ; *)81<
• Ad>ustment to share caital and contri"uted surlus and deficits to reset
to nil e7cet for share caital 2hich is set at the enterrise 'alue of %*-.
o 4hare caital decreased "y +1
o Contri"uted surlus decreased "y )()
o Accumulated GCI increased "y #+
o 0eficit increased "y $*$
4olutions Manual 1%81($
Coyright #-1$ ?ohn Wiley : 4ons Canada, Btd. nauthori6ed coying, distri"ution, or transmission of this age is strictly rohi"ited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian
Edition
RA 150 ROGERS SUGAR INC6
(a) Described in the Consolidated Statement of Changes in Shareholder’s equity,the opening share balance for Rogers Sugar Inc. was 88,842,333. During theyear there was a conversion of convertible debentures to 5,148,427 shares andan issuance of 100,000 new shares, leaving a balance of 94,090,760 outstandingcommon shares as of September 29, 2012.
As described in the capital disclosures (Note 21 – Capital and Other Componentsof Equity) the authorized capital of the Company consists of: (i) an unlimitednumber of voting common shares; and (ii) a number of preferred shares issuablein series. Since there are only common shares outstanding, the company is inline with its authorized capital policy.
;"< As descri"ed in Dote #1 of the financial statements, the Comany/s has thefollo2ing o">ecti'es in regards to caital management.
• To ensure proper capital investment is done in the manufacturinginfrastructure to provide stability and competitiveness of the operations.Achieved through annual investments in its capital expenditures rangingbetween $6.0 and $9.0 million.
• To achieve stability in the dividend payments made to shareholderswhile maintaining appropriate cash reserves. Achieved by maintaining
proper cash reserves and only raising dividends to shareholders aftercarefully assessing various factors of the Company.
• To maintain appropriate debt levels to reduce any financial constraintson the use of capital. The Company maintains an appropriate revolvingline of credit for use of financing its normal operations during the year.
• To repurchase shares or debentures when trading values do not reflectfair value. This is achieved through monitoring of key financial ratiosand, upon favorable conditions, the repurchase of Company shares ifcash is available through a Normal Course Issuer Bid in place.
4olutions Manual 1%81((
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