Chapter 12 Solutions Manual

OverviewCHAPTER 12PROFIT AND CHANGESIN RETAINED EARNINGSOVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL THINKING CASESBriefLearningExercisesTopicObjectivesSkillsB. Ex. 12.1Extraordinary loss1AnalysisB. Ex. 12.2Extraordinary gain1AnalysisB. Ex. 12.3Discontinued operations1AnalysisB. Ex. 12.4Cash and stock dividends6AnalysisB. Ex. 12.5Statement of changes in equity5AnalysisB. Ex. 12.6Statement of changes in equity7,8AnalysisB. Ex. 12.7Cash dividend journal entries6AnalysisB. Ex. 12.8stock dividend journal entries6AnalysisB. Ex. 12.9Shareholders' equity section of balance sheet6,8AnalysisB. Ex. 12.10Comprehensive income4AnalysisLearning ObjectivesExercisesTopicSkills12.1Stock dividends and share splits6Analysis, communication12.2Terminology14, 6-8Analysis12.3Discontinued operations1, 2Analysis12.4Extraordinary items1, 2Analysis12.5Earnings per share: effect of preference share2Analysis12.6Restating earnings per share for stock dividends2, 6Analysis12.7Stock dividends and splits6Analysis12.8Effect of stock dividends on share price6Communication12.9Effects of transactions upon financial measurements8Analysis12.10Effects of transactions upon earnings per share2, 6Communication12.11Identifying source of desired financial information1, 5, 8Analysis12.12Comprehensive income4Analysis12.13Cash and stock dividends6Analysis, communication,judgment12.14Real World: adidas AG3, 4Analysis, communicationEPS and dividends12.15Real World: adidas AG1, 8Analysis, communicationAnalysis of share information

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Overview (p.2)ProblemsLearning ObjectivesSets A, BTopicSkills12.1 A,BReporting unusual events1, 2Analysis12.2 A, BFormat of statements of income and retained earnings1, 2, 5, 7Analysis, communication12.3 A, BReporting unusual events: a comprehensive problem1, 2, 4, 7Analysis, communication12.4 A, BShare splits, stock dividends, treasury share, and book value6Analysis, communication12.5 A, BStatement of shareholders equity6, 8Analysis, communication12.6 A, BDividends and treasury share transactions6Analysis12.7 A, BEffects of transactions upon financial measurements8Analysis, communication12.8 A, BShareholders equity: comprehensive6Analysis12.9 A, BFormat of an income statement1, 2AnalysisCritical Thinking Cases12.1Real World: Hutchison Telecommunications International Limited, Vodafone plc, Cathay Pacific, Shiseido Company, limited1Analysis, communicationReporting special events12.2Forecasting continuing operations1Analysis, communication12.3Interpreting earnings per share13Analysis, communication12.4Analyzing statement of shareholders equity8Analysis, communication12.5Classifying unusual items1, 2, 8Analysis, communication12.6Real World: Vodafone plc8Communication, research, technologyAnalyzing shareholders' equity and EPSTechnology


Description ProblemsDESCRIPTIONS OF PROBLEMS ANDCRITICAL THINKING CASESBelow are brief descriptions of each problem and case. These descriptions are accompanied by the estimated time (in minutes) required for completion and by a difficulty rating. The time estimates assume use of the partially filled-in working papers.Problems (Sets A and B)12.1 A,BGreater Asian Airlines/Pacific Airlines30 EasyPreparation of a condensed income statement and earnings pershare figures for a company with a discontinued segment and an extraordinary loss. Emphasizes format of the income statement rather than computation of amounts. Students also are asked to forecast future operating results.12.2 A,BSlick Software Limited/Beach Limited30 MediumA comprehensive problem on reporting the results of operations. Stresses the format of an income statement and statement of changes in equity, with disclosure of unusual items. EPS computation involves ordinary and preference shares outstanding.12.3 A,BPhoenix Limited/Dexter Limited35 StrongGiven an incorrectly prepared income statement, student is asked to draft a revised income statement and a statement of changes in equity. Includes discontinued operations, an extraordinary item, an accounting change, and a prior period adjustment.12.4 A,BAlbers Limited/Jessel Limited20 EasyDemonstrates the effect of various transactions upon total shareholders equity, number of shares outstanding, and book value per share. Includes share splits, stock dividends, and treasury share transactions.12.5 A,BStrait Corporation/ Dry Wall Limited20 MediumPreparation of a statement of shareholders equity. Stresses an understanding of the effects of various transactions upon the elements of shareholders equity.12.6 A,BThompson Service/Greene Limited40 StrongA comprehensive problem on cash dividends, stock dividends, and treasury share transactions. Requires journal entries and preparation of shareholders equity section of the balance sheet. Student is asked to compute maximum amount available for dividends.12.7 A,BTech Process Limited/Hot Water Limited30 StrongExplanation of the effects of equity transactions on various financial measures.*


Desc. of CasesProblems (cont'd)12.8 A,BMandella Corporation/Adams Corporation50 StrongPreparation of the shareholders equity section of a balance sheet in two successive years. Transactions affecting shareholders equity include issuance of ordinary share, a stock dividend, purchase and sale of treasury share, cash dividends, and a share split.12.9 A,BEsper Corporation/Blue Jay Manufacturing Corp.25 StrongPreparation of a partial income statement for Esper Corp., including discontinued operations, an extraordinary loss, and an accounting change. Emphasizes format of the income statement rather than computation of amounts. Students also are asked to compute earnings per share.Critical Thinking Cases12.1What's This?20 EasyFour unusual events taken from the published financial statements of well-known corporations. Students are asked to indicate whether each event qualifies as an extraordinary item, a discontinued operation, or an accounting change.12.2Is There Life Without Baseball?20 MediumStudent is presented with an income statement containing discontinued operations and an extraordinary item and is asked to forecast future earnings. Requires an understanding of recurring versus nonrecurring events. Good practice for interpreting annual reports.12.3Using Earnings Per Share Statistics30 StrongStudent is given six earnings per share figures, including earnings from continuing operations, earnings before extraordinary items, and net earnings, computed on both a basic and diluted basis. From this information, student is asked to determine the amount of the extraordinary loss, to use a p/e ratio to estimate share price, and to forecast future performance.12.4Interpreting a Statement of Shareholders' Equity35 StrongStudent is asked to answer specific questions requiring analysis and understanding of items reported in the statement of shareholders' equity.12.5Classification of Unusual Items - and the Potential Financial Impact60 StrongStudents discuss the classification of unusual items from several perspectivesaccounting principles, pressures on management, cash flows, and probable effects on share price. Adapted from an actual case; illustrates the real world aspects of financial reporting. Good group assignment.____________*Supplemental Topic, Special Types of Liabilities.____________*Supplemental Topic, Other Depreciation Methods.ETHICS, FRAUD &CORPORATE GOVERNANCE


Desc. of Cases (p.2)Critical Thinking Cases (cont'd).12.6Comparing Price-Earnings Ratios30 EasyInternetStudents are to obtain information on the Internet about a Fortune 500 company and an emerging company. They are to compare p/e ratios and speculate on the reasons for the differences.____________*Supplemental Topic, Special Types of Liabilities.____________*Supplemental Topic, Other Depreciation Methods.ETHICS, FRAUD &CORPORATE GOVERNANCE


Q1-7SUGGESTED ANSWERS TO DISCUSSION QUESTIONS1.The purpose of presenting subtotals such as Profit from Continuing Operations and Profit from Discontinued Operations is to assist users of the income statement in making forecasts of future earnings. By excluding the operating results of discontinued operations and the effects of unusual and nonrecurring transactions, these subtotals indicate the amount of income derived from the companys ongoing, normal operations.2.The discontinued operations classification is used in the income statement only when a business discontinues an entire segment of its activities. Franks has two business segmentspizza parlors and the baseball team. Only if one of these segments is discontinued in its entirety will the company report discontinued operations. The sale or closure of a few parlors does not represent the disposal of the pizza parlor segment of the companys business activities.3.Extraordinary items are defined as 'income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and therefore are not expected to recur frequently or regularly'.According IAS 1 paragraph 85, "An entity shall not present any items of income and expense as extraordinary items, either on the face of the income statement or in the notes." It is because items treated as extraordinary result from the normal business risks faced by an entity and do not warrant presentation in a separate component of the income statement. The nature or function of a transaction rather than frequency, should determine its presentation within the income statement. Items currently classified as 'extraordinary' are only a subset of the items of income and expense that may warrant disclosure to assist users in predicting an entity's future performance.4.The restructuring charges should be combined and presented as a line item in the companys income statement in determining operating income.In predicting future earnings for the company, the charges generally should not be considered to be costs that will be incurred in the future. In fact, if the program of downsizing is successful, operating results in the future could be expected to improve as a result of having incurred the restructuring charges.5.A material error represents a correction of an error in the amount of income reported in a prior period. A material error are shown in the statement of changes in equity (or statement of shareholders equity) as an adjustment to the balance of retained earnings at the beginning of the period in which the error is identified.6.Irregular income items, such as discontinued operations, and material error, are legitimate parts of the earnings history of a company. On the other hand, they are non-recurring and should not carry the same weight in evaluating future profitability as normal, recurring operating revenues and expenses.7.a.The current-year preference share dividend is deducted from profit to determine the earnings allocable to the ordinary shareholders. (the preference share dividend is deducted only if declared.)7


Q8-13b.The par value of all preference share outstanding and the amount of all dividends in arrears on preference share are deducted from total shareholders equity to determine the aggregate book value allocable to the ordinary shareholders.8.No, the number of ordinary shares used in computing earnings per share may be different fromthat used to determine book value per share. In computing earnings per share, earningsallocable to the ordinary shareholders is divided by the weighted-average number of ordinaryshares outstanding throughout the period. In computing book value per share at a specified date, shareholders' equity allocable to the ordinary shareholders is divided by the number of ordinary shares actually outstanding on that date. If the number of ordinary shares outstanding has not changed during the period, the weighted-average number of ordinary shares outstanding during the period will be equal to the number of ordinary shares outstanding on a particular date.9.a.The price-earnings ratio is computed by dividing the market price of a share of ordinary share by the annual earnings per share.b.The amount of basic earnings per share is computed by dividing the profit available for ordinary share by the weighted-average number of ordinary shares outstanding during the year.c.The amount of diluted earnings per share is computed by dividing profit by the maximum potential number of shares outstanding after convertible securities are assumed to have been converted.10.a.Shares used in computing basic earnings per share:Ordinary shares outstanding throughout the year .3,000,000b.Shares used in computing diluted earnings per share:Ordinary shares outstanding throughout the year .3,000,000Additional ordinary shares that would exist if preference share hadbeen converted at the beginning of the year (150,000 x 2) ..300,000Total shares used in diluted earnings computation .3,300,00011.The analyst should recognize the risk that the outstanding convertible securities may be converted into additional ordinary share, thereby diluting (reducing) basic earnings per share in future years. If any of the convertible securities are converted, basic earnings per share probably will increase at a slower rate than profit. In fact, if enough dilution occurs, basic earnings per share could actually decline while profit continues to increase.12.Date of declaration is the day the obligation to pay a dividend comes into existence by actionof the board of directors. Date of record is the day on which the particular shareholders whoare entitled to receive a dividend is determined. Persons listed in the corporate records asowning share on this day will receive the dividend. Date of payment is the day the dividend is distributed by the corporation. Ex-dividend date (usually three business days prior to the dateof record) is the day on which the right to receive a recently declared dividend no longerattaches to share. As a result, the market price of the shares usually falls by theamount of the dividend.13.The purpose of a stock dividend is to make a distribution of perceived value to shareholders as a representation of the profitability of the company while, at the same time, conserving cash.11


Q14-1814.A share split occurs when there is a relatively large increase in the number of shares issued without any change in the total amount of stated capital (because the par value per share is reduced proportionately to the increase in the number of shares).A stock dividend occurs when there is a relatively small increase in the number of shares issued, with no change in the net assets of the company but a transfer from retained earnings to the issued and paid capital section of the balance sheet. The par value of share remains the same.The distinction in the accounting treatment of a stock dividend and a share split stems directly from the difference in the effect on stated (legal) capital and retained earnings. There is no difference in the probable effect on per-share market price of a stock dividend and a share split of equal size, although share splits are usually much larger than stock dividends.15.Restructuring charges result when the company incurs costs in the process of reorganization, often downsizing. The purpose of reorganization is to benefit future operations in terms of more efficient operations, but the cost is ordinarily charged to current operations. Restructuring charges are not extraordinary items, and unless they directly related to a discontinued part of the business, are not presented as discontinued operations. They are often presented as a single line item in the income statement, before income taxes.16.Three items that may be shown in a statement of comprehensive income as causing changes in the balance of retained earnings are:(1)Profit or loss for the period(2)Dividends declared (both cash dividends and stock dividends)(3)Gains or losses arising from the fair value changes of Available For Sale investments17.If the price of the share declines in proportion to the distribution of shares in a stock dividend, at the time of that distribution the shareholder does not benefit. He/she holds exactly the same percentage of the outstanding shares, and the value per share has declined in proportion to the increased number of shares. Often, however, the value does not drop in proportion to the increased number of shares, meaning that the recipient of the shares has an immediate benefit. For example, if an investor who held 2,000 share that had a market value of $10 each received a 10% stock dividend, and the market price only declined 5%, the following would result:Market value before stock dividend:2,000 shares @ $10 .$20,000Market value after stock dividend:(2,000 shares x 110%) x ($10 x 95%) .$20,900The investor has benefited by $900. He/she could sell about 95 shares [$900/($10 x 95%)] at $9.50 and still have a share investment equal to the value before the stock dividend, although the investor would own a smaller percentage of the company after the sale.18.A liquidating dividend is a return of the investment made in the company to the investor, in contrast to a non-liquidating dividend which is a return on the investment in the company. A liquidating dividend occurs when dividends are distributed in excess of a companys retained earnings.


Q19-2019.The student is right in one senseboth share splits and stock dividends are distributions of a companys shares to existing shareholders with the company receiving no payment in return. The student is incorrect, however, in stating that the two are exactly the same. The primary difference is one of magnitude and, thus, the impact on market value. A stock dividend is usually relatively small5% to 20% of the outstanding shares. A share split, on the other hand, is usually some multiple of the number of outstanding shares, like a 2:1 split (100% increase) or a 3:1 split (200% increase). The market price reacts strongly to a distribution as large as a share split while stock dividends are often unnoticed in the share price.


BE12.1,2,3,4SOLUTIONS TO BRIEF EXERCISESB.Ex. 12.1FELLUPS LIMITEDPartial Income StatementFor year ended _______________Profit from continuing operations$75,000Loss from discontinued operations, net of $40,000 income taxes(60,000)Profit .$15,000B.Ex. 12.2WALKER COMPANYIncome StatementFor year ended _______________Revenues$1,500,000Expenses1,200,000Operating Profit$300,000Other non-operating profit149,500Profit$449,500IFRS does not allow the presentation of extraordinary item in the financial statementsB.Ex. 12.3WABASH LIMITEDIncome StatementFor year ended _______________Revenues$480,000Expenses430,000Income from continuing operations$50,000Discontinued operations:Operating income from discontinued operations, net of $10,000 income taxes$15,000Loss on the sale of discontinued operations, net of $22,000 income tax benefit33,000($18,000)Profit$32,000B.Ex. 12.4Number of ordinary shares outstanding after stock dividend:100,000 shares x 110% = 110,000Cash required to pay $.50 per stock dividend:110,000 shares x $.50 = $55,000


BE12.5,6,7B.Ex. 12.5MESSER COMPANYStatement of Comprehensive IncomeFor year ended _______________Profit for the year88,000Other comprehensive income:Gain on fair value changes of available for sale investments25,000Total comprehensive income$113,000B.Ex. 12.6SALT & PEPPER LIMITEDStatement of Changes in EquityFor year ended _______________Share capital, beginning of the year$100,000Retained earnings, beginning of year$460,000Corrections of error in prior year's financial statements(65,000)Shareholders' Equity, beginning of year, as restated$495,000Add: Profit250,000$745,000Deduct: Preference share dividends$20,000*Ordinary dividends100,000**120,000Shareholders' Equity, end of year$625,000*10,000 shares $1 x 2 years = $20,000**200,000 shares x $.50 = $100,000B.Ex. 12.7Cash dividend on preference share:100,000 shares x $100 par x 6%$600,000Cash dividend on ordinary share:750,000 shares x $.75562,500Total dividends$1,162,500Journal entries to record declaration and payment of cash dividends:Retained earnings1,162,500Dividends payable..1,162,500To record dividends declared on preference and ordinary shares.Dividends payable.1,162,500Cash.1,162,500To record payment of dividends.


BE12.8,9,10B.Ex. 12.8Retained earnings375,000*Stock dividend to be distributed.250,000**Share premium125,000***To record declaration of stock dividend.*500,000 shares x 5% x $15 = $375,000**500,000 shares x 5% x $10 = $250,000***500,000 shares x 5% x ($15 - $10) = $125,000Stock dividend to be distributed250,000Ordinary shares250,000To record distribution of stock dividend.B.Ex. 12.9ALEXANDER LIMITEDShareholders' Equity Section of Balance Sheet(Date)Ordinary share, 770,000 shares, $5 par value$3,850,000*Share premium on ordinary shares2,590,000**$6,440,000Retained earnings155,000***Total shareholders' equity$6,595,000*700,000 shares x 1.10 x $5 = $3,850,000**700,000 shares x ($8 - $5) + 70,000 shares x ($12 - 5) = $2,100,000 + $490,000 = $2,590,000***$995,000 - (70,000 shares x $12) = $155,000B.Ex. 12.10CRASHER COMPANYStatement of Comprehensive IncomeFor year ended _______________Profit for the year$500,000Other comprehensive income:Gain on the fair value changes of available for sale investments20,000Total comprehensive income$520,000


E12.1,2,3SOLUTIONS TO EXERCISESEx. 12.1a.1,440 shares = [(200 x 2) x 120%] x 3$17,280 = 1,440 x $12.b.Since Smiley is a small and growing corporation, the board of directors probably decided that cash from operations was needed to finance the companys expanding operations.c.You are probably better off because of the boards decision not to declare cash dividends. Smiley was obviously able to invest the funds to earn a high rate of return, as evidenced by the value of your investment, which has grown from $1,000 to $17,280.Ex. 12.2a.None (Treasury share is not an asset; it represents shares that have been reacquired by the company, not shares that have not yet been issued.)b.Stock dividendc.Share premiumd.Retrospective restatemente.P/e ratio (Market price divided by earnings per ordinary share.)f.Discontinued operations (Showing the discontinued operations in a separate section of the income statement permits presentation of the subtotal, Income from Continuing Operations.)g.Diluted earnings per shareh.Total comprehensive incomeEx. 12.3a.SPORTS LIMITEDIncome StatementFor the Year Ended December 31, 20__Sales ..$12,500,000Costs and expenses (including applicable income tax)8,600,000Profit from continuing operations$3,900,000Discontinued operations:Operating loss from tennis shops (net of incometax benefit) ..$192,000Loss on sale of tennis shops (net of income tax benefit) 348,000(540,000)Profit .$3,360,000Earnings per share:Earnings from continuing operations ($3,900,000 182,000 shares)$21.43Loss from discontinued operations ($540,000 182,000) .(2.97)Net earnings ($3,360,000 182,000 shares) ..$18.46


E12.4,5b.The $21.43 earnings per share figure from continuing operations (part a) is probably the most useful one for predicting future operating results for Sports Limited Earnings per share from continuing operations represents the results of continuing and ordinary business activity, which is expected to continue in the future. Discontinued operations and extraordinary items are not likely to recur in the future.Ex. 12.4a.GLOBAL EXPORTSIncome StatementFor the Year Ended December 31, 20__Net sales .$7,750,000Less: Costs and expenses (including income tax) .6,200,000Profit from continuing operations .1,550,000Gain on disposal of discontinued operations, net of income tax 420,000Profit ..$1,970,000Earnings per share of ordinary share:Earnings from continuing operations ($1,550,000 910,000 shares) ..$1.70Earnings arising from the disposal of discontinued operations ($420,000 910,000 shares) 0.46Net earnings ($1,970,000 910,000 shares) $2.16b.The $1.70 earnings per share before continuing operations is the figure used to compute the price-earnings ratio for Global Exports. If a company reports a gain or loss resulting from discontinued operations, the price-earnings ratio is computed using the per-share earnings before discountinued item.Ex. 12.5a.1.Profit (all applicable to ordinary shares) $1,920,000Ordinary shares outstanding throughout the year ..400,000Earnings per share ($1,920,000 400,000 shares) ..$4.802.Profit ..$1,920,000Less: Preference share dividend (100,000 x 8% x $100) .800,000Earnings available for ordinary share .$1,120,000Ordinary shares outstanding throughout the year ..300,000Earnings per share ($1,120,000 300,000 shares) $3.73b.The earnings per share figure computed in part a (2) is a basic EPS figure. Although the company has outstanding both ordinary and preference share, the preference share must be convertible into ordinary share in order to result in a diluted computation of earnings per share. The potential conversion of preference share into ordinary share is what necessitates disclosure of diluted EPS. Because the preference share in this exercise is not convertible, the EPS computation is basic.


E12.6,7Ex. 12.6a.200920082007Earnings per share .$1.88$1.575 (1)$1.20 (2)(1)$3.15 originally reported, divided by 2 (twice as many shares)(2)$2.40 originally reported, divided by 2b.Following the stock dividend, the earnings per share of earlier periods should be retroactively restated to reflect the increased number of shares. In this situation, each "new share (after the 100% stock dividend) is equal to only one-half of a 2008 or 2007 share. If the earnings of each 2008 or 2007 share are allocated between the two new shares, each new share is viewed as having earned one-half of the original amount ($3.15 2 = $1.575; $2.40 2 = $1.20).Ex. 12.7a.Apr.30Memorandum: Issued an additional 1,000,000 shares in a 2-for-1 share split. Par value reduced from $1 per share to $0.50 per share.June1Dividends .1,200,000Dividends Payable .1,200,000To record the declaration of a dividend of 60 cents per share on 2 million share outstanding.July1Dividends Payable .1,200,000Cash ..1,200,000To record payment of the dividend declared on June1.Aug.1Retained Earnings 1,900,000Stock Dividend to Be Distributed .50,000Share Premium: Stock Dividends1,850,000To record declaration of a 5% stock dividend consisting of 100,000 shares (2,000,000 shares x 5%) of $0.50 par value ordinary share. Amount of retained earnings transferred to equity is based on market price of $19 a share.Sept.10Stock Dividend to Be Distributed 50,000Ordinary Shares .50,000To record distribution of a stock dividend of 100,000 shares.b.2,100,000 shares1,000,000 + 1,000,000 + 100,000c.$0.50 par value per share ($1 par reduced to $0.50 par due to 2-for-1 share split on April 30.)d.Share splitNo effectDeclaration/payment of cash dividendDecrease retained earningsDeclaration/distribution of stock dividendNo effect


E12.8,9,10Ex. 12.8The market value of the total Express Limiteds shares outstanding is $5,280,000 (80,000 $66) before the stock dividend. Because the issuance of new shares has no effect on the net assets of the company, there is no basis of predicting any change in total market value of the companys share as a result of the stock dividend. The logical conclusion is, therefore, that the market price per share should fall to $60 ($5,280,000 88,000 shares). The fact that this exact result does not always follow in practice must be attributed to a lack of understanding on the part of the investing public and to other factors affecting per-share market price at the time of a stock dividend.Ex. 12.9Net Cash FlowCurrent AssetsShareholders Equity(from AnyEventProfitSource)aDDNEDbNENENENEcNENENENEdDDNEDeIINEIEx. 12.10a.After a share split, earnings per share are expressed in terms of the new shares. Therefore, a 3-for-1 share split will cause earnings per share figures to be restated at one-third of their former amounts.b.Realization of a gain from most sources, including discontinued operations, increases net earnings per share. (As this gain relates to discontinued operations, however, it would not increase the per-share earnings from continuing operations.)c.Dividends declared or paid do not enter into the determination of profit. Therefore, the declaration and/or payment of a cash dividend on ordinary share has no effect upon earnings per share.d.Earnings per share are restated to reflect the increased number of shares resulting from a stock dividend. Therefore, a stock dividend causes a proportionate reduction in the earnings per share reported in past periods, as well as in the current period. (This effect parallels that of a share split, only smaller.)e.Acquisition of treasury shares reduces the weighted average number of shares currently outstanding and, therefore, increases earnings per share.


E12.11,12Ex. 12.11a.Balance sheet.b.Statement of Changes in Equityc.This information is not included in any formal financial statementit is quoted daily in publications such as The Financial Times.d.Statement of Changes in Equitye.Statement of Changes in Equity and/or notes to financial statements.f.Income statement.g.This information may be reported in the annual report, but it is not a required disclosure in any formal financial statement. It is also reported by investors services.h.This information may be included in the annual report, but it is not a required disclosure in financial statements. It is reported by investors services and in the financial pages of most newspapers.i.Statement of Changes in Equity, and statement of cash flows.Ex. 12.12a.Revenues .$572,000Expenses .282,000Profit before income tax .$290,000Income tax* .101,500Profit ..$188,500*$290,000 x 35%b.Profit for the year$188,500Other comprehensive income:Gains arising from the fair value changes of available-for-sale investments* 1,105Total comprehensive income .$189,605* $19,200 - $17,500 = $1,700 gain$1,700 - ($1,700 x 35% income tax) = $1,105 gains.


E12.13,14c.Profit is unchanged.Profit for the year .188,500Other comprehensive income:Loss arising from the Fair Value Changes of available-for-sale investments* .$(2,145)Comprehensive income $186,355* $17,500 - $14,200 = $3,300 loss$3,300 - ($3,300 x 35% income tax benefit) = $2,145 lossEx. 12.13a.10% stock dividend: 500,000 shares x 1.10 = 550,000 shares2:1 share split: 550,000 x 2 = 1,100,000 sharesNote: The cash dividends do not affect the number of outstanding shares.b.$1 cash dividend: 550,000 shares x $1 = $550,000$.60 cash dividend: 1,100,000 shares x $.60 = $660,000Total cash paid: $550,000 + $660,000 = $1,210,000Note: No cash is paid out with a stock dividend or a share split.c.220 shares [(100 shares x 1.10) x 2]Market value of portfolio before the four transactions: 100 shares x $65 = $6,500Market value of portfolio after the four transactions:220 shares x $40 = $8,800Your portfolio after the four transactions is $8,800 compared to $6,500 before the four transactions. In addition, you would have received cash dividends, as follows:(100 shares x 1.10 x $1) + (110 shares x 2 x $.60) = $110 + $132 = $242Ex. 12.14a.adidas AG seems to be an aggressive company. It is constantly acquiring or introducing new brands and products and making extensive promotion plan, that requires large amounts of capital. The company retains the majority of its earnings in order to have the capital available to take advantage of its growth opportunities and to constantly introducing new brands and products for its growing business.b.Based on information in the Case-in-Point in this chapter, unless you have an extreme need for cash, you should probably be pleased that adidas AG retains its earnings rather than paying them to you in the form of higher dividends. The company is doing well investing its earnings, probably better than you could do as an individual investor with the additional dividends you would receive if the company paid higher dividends.


E12.15Ex. 12.15a.adidas AG did not report any irregular items for the year 2008 and 2009.b.adidas AG seems to have one kind of share in its capital structure. 209 million share capital had been issued. No information is available for its par value and authorized capital. Indeed, note 26 of adidas AG (not enclosed) shows adidas' share having no par value.c.During the two years presented, adidas AG repurchased shares in 2007 (with a decrease in share capital of 10 million and capital reserves of 399 million) and issued share for the conversion of convertiable bond (with an increase in share capital of 16 million and in capital reserves of 384 million).


P12.1ASOLUTIONS TO PROBLEMS SET A30 Minutes, EasyPROBLEM 12.1AGREATER ASIAN AIRLINESa.GREATER ASIAN AIRLINESIncome StatementFor the Year Ended December 31, 20__Sales55,120,000Costs and expenses (including income taxes on continuingoperations)$43,320,000Profit from continuing operations11,800,000Discontinued operations:Operating profit from motels (net of income tax)$864,000Gain on sale of motels (net of income tax)$4,956,000$5,820,000Profit17,620,000Earnings per share of ordinary share:Earnings from continuing operations ($11,800,000 1,000,000 shares)$11.80Profit from discontinued operations ($5,820,000 1,000,000 shares)5.82Profit ($17,620,000 1,000,000 shares)$17.62b.Estimated net earnings per share next year:Earnings per share from continuing operations$11.80Estimated decrease ($11.80 x 5%)(0.59)Estimated net earnings per share next year$11.21The profitability of the motels is not relevant, as thesemotels are no longer owned by Greater Asian Airlines.


P12.2A30 Minutes, MediumPROBLEM 12.2ASLICK SOFTWARE LIMITEDa.SLICK SOFTWARE LIMITEDCondensed Income StatementFor the Year Ended December 31, 2009Sales19,850,000Costs and expenses (including applicable income taxes)$16,900,000Profit from continuing operations$2,950,000Discontinued operations:Operating profit (net of income tax)$140,000Loss on disposal (net of income tax benefit)$(550,000)$(410,000)Profit$2,540,000Earnings per share:Earnings from continuing operations[($2,950,000 - $500,000*) 200,000 shares]$12.25Loss from discontinued operations ($410,000 200,000 shares)(2.05)Net earnings[($2,540,000 - $500,000 preference share dividends) 200,000 shares$10.20Net earnings[($1,640,000 - $500,000 preference share dividends) $5.70200,000 shares]*Preference share dividends: 80,000 shares x $6.25 = $500,000


P12.2A (p.2)PROBLEM 12.2ASLICK SOFTWARE LIMITED (concluded)b.Total cash dividends declared during 2009 (data given)$950,000Less: Preference share dividend (80,000 shares x $6.25 per share)$500,000Cash dividends to ordinary shareholders$450,000Number of ordinary shares outstanding through 2009$200,000Cash dividend per ordinary share ($450,000 200,000 shares)$2.25c.The single 2010 $8.00 figure for EPS is unfavorable in comparison with 2009 performance. Since 2010 has only one EPS figure, it should be compared to the earnings per share from continuing operations in 2009, which amounted to $12.25 per share. Slick Software Limiteds earnings per share from continuing operations fell $4.25 per share (approximately 35%) from 2009 to 2010.


P12.3A35 Minutes, StrongPROBLEM 12.3APHOENIX LIMITEDa.PHOENIX LIMITEDIncome StatementFor the Year Ended December 31, 2009Sales10,836,000Costs and expenses:Cost of goods sold$6,000,000Selling expenses$1,104,000General and administrative expenses$1,896,000Loss from settlement of litigation$24,000Income tax on continuing operations$720,000$9,744,000Profit from continuing operations1,092,000Discontinued operations:Operating loss on discontinued operations (net ofincome tax benefit)$(252,000)Loss on disposal of discontinued operations (net ofincome tax benefit)$(420,000)$(672,000)Profit420,000Earnings per share on ordinary share:Earnings from continuing operations ($1,092,000 180,000 shares)$6.07Loss from discontinued operations ($672,000 180,000 shares)(3.73)Net earnings ($420,000 180,000 shares)$2.34Note: Selected EPS numbers have been rounded $.01 in orderfor EPS schedule to foot.


P12.3A (p.2)PROBLEM 12.3APHOENIX LIMITED (concluded)b.The gain on sale of treasury share represents the excess of reissue price received over the cost Phoenix paid to acquire some of its own share. Although a corporation may reissue treasury share at prices above or below its cost of acquiring its own share, the difference between amounts received and the cost of treasury shares does not result in gains or losses recognized in the income statement. Rather, the amount described as gain on sale of treasury share is included as part of share premium in the shareholders equity section of the balance sheet.


P12.4A20 Minutes, EasyPROBLEM 12.4AALBERS LIMITEDTotalNumberBook ValueShareholders'of SharesperEquityOutstandingShareBeginning balance$840,000$40,000$21.00Jan. 10Declared and distributed 5% share div.$2,000Balance$840,000$42,000$20.00Mar. 15Acquired 2,000 treasury shareat cost of $21.00 per share$(42,000)$(2,000)Balance$798,000$40,000$19.95May 30Reissued 2,000 treasury shareat price of $31.50 per share$63,000$2,000Balance$861,000$42,000$20.50July 31Share capital split 2-for-1$42,000Balance$861,000$84,000$10.25Dec. 15Declared $1.10 per share cash dividend$(92,400)Balance$768,600$84,000$9.15Dec. 31Profit$525,000Balance$1,293,600$84,000$15.40Note to instructor: Profit actually increases book value throughout the year, not merely on the date upon which profit is closed into retained earnings.


P12.5A20 Minutes, MediumPROBLEM 12.5ASTRAIT CORPORATIONSTRAIT CORPORATIONStatement of Shareholders' EquityFor the Year Ended December 31, 20__a.Share CapitalTotal($10 parShareRetainedTreasuryShareholders'value)PremiumEarningsShareEquityBalances, January 1, 20__$1,100,000$1,765,000$950,0000.0$3,815,000Prior period errors (net of income tax benefit)(80,000)(80,000)Issuance of ordinary share; 10,000 shares @ $34100,000240,000340,000Declaration and distribution of 5% stock dividend(6,000 shares at market price of $36 per share)60,000156,000(216,000)0Purchased 1,000 treasury share @$35(35,000)(35,000)Sale of 500 treasury shares @ $3650017,50018,000Profit845,000845,000Cash dividends(142,700)(142,700)Balances, December 31, 20__=SUM(f10.f18)$1,260,000$2,161,500$1,356,300$(17,500)$4,760,300(part b is on following page)


P12.5A(p.2)PROBLEM 12.5ASTRAIT CORPORATION (concluded)b.Declaration/distribution of a 5% stock dividend has no effect on total shareholders equity. Declaration of a cash dividend reduces total shareholders equity by the amount of the dividend.The two types of dividends do not have the same impact upon shareholders equity. A cash dividend is a distribution of a corporations assets (cash) to shareholders and, as such, causes a decrease in shareholders equity. A stock dividend is simply issuing more share certificates to the existing group of shareholders with no accompanying increase or outflow of assets; a corporations own share is not an asset of the corporation. With both small and large share dividends, shareholders equity is adjusted to reflect the increased number of shares outstanding, but there is no additional equity created and no decrease in equity.


P12.6A40 Minutes, StrongPROBLEM 12.6ATHOMPSON SERVICEa.General Journal2009Jan3Dividends$382,000Dividends Payable$382,000To record declaration of $1 per share cashdividend payable on Feb. 15 to shareholders ofrecord on Jan. 31Feb$15Dividends Payable$382,000Cash$382,000To record payment of dividend declared Jan. 3.Apr$12Treasury Share$240,000Cash$240,000Purchased 6,000 treasury share at $40per share.May$9Cash$176,000Treasury Share$160,000Share Premium: Treasury Share$16,000Sold 4,000 treasury share, which cost$160,000, at a price of $44 per share.June$1Retained Earnings$798,000Stock Dividend to Be Distributed$19,000Share Premium: Stock Dividends$779,000Declared a 5% stock dividend (19,000 shares) on380,000 outstanding shares. Market price $42, parvalue $1. To be distributed on June 30 toshareholders of record.$30Stock Dividend to Be Distributed$19,000Share Capital$19,000Issued 19,000 shares of share capital as 5% stockdividend.Aug$4Cash$22,200Share Premium: Treasury Share$1,800Treasury Share$24,000Sold 600 shares of treasury share, which cost $24,000,at a price of $37 per share.Dec$31Income Summary$1,928,000Retained Earnings$1,928,000To close Income Summary account for the year.Dec$31Retained Earnings$382,000Dividends$382,000To close Dividends account.


P12.6A (p.2)PROBLEM 12.6ATHOMPSON SERVICE (concluded)b.THOMPSON SERVICEPartial Balance SheetDecember 31, 2009Shareholders equity:Share capital, $1 par value, 500,000 shares authorized,401,000 shares issued, of which 1,400 are held in the treasury$401,000Share premium:From issuance of share capital$4,202,000From stock dividend$779,000From treasury share$14,200$4,995,200Total issued and fully paid capital$5,396,200Retained earnings*$3,452,600$8,848,800Less: Treasury share, 1,400 shares at cost$56,000Total shareholders equity$8,792,800*Computation of retained earnings at Dec. 31, 2009:Retained earnings at beginning of year$2,704,600Add: Profit for the year$1,928,000Subtotal$4,632,600Less:Cash dividend declared Jan. 3$382,000Stock dividend declared June 1$798,000$1,180,000Retained earnings, Dec. 31, 2009$3,452,600c.Computation of maximum legal cash dividendper share at Dec. 31, 2009:Retained earnings at Dec. 31, 2009$3,452,600Less: Restriction of retained earnings fortreasury share owned$56,000Unrestricted retained earnings$3,396,600Number of shares outstanding(401,000 shares issued, minus 1,400 sharesheld in treasury)$399,600Maximum legal cash dividend per share ($3,396,600divided by 399,600 shares)$8.50


P12.7A30 Minutes, StrongPROBLEM 12.7ATECH PROCESS LIMITEDa.Net Cash FlowCurrent AssetsShareholders Equity(from AnyEventProfitSource)1NEDNENE2DNENED3DDNED4IINEI5NENENENEI = IncreaseD = DecreaseNE = No effectb.1.Declaration of a cash dividend has no immediate effect upon profit or cashflows. It increases current liabilities (dividends payable), but has no effect oncurrent assets. Also, retained earnings is decreased, resulting in a decrease inshareholders equity.2.Payment of a cash dividend has no effect on revenue or expenses, but it reduces cash. Since it reduces cash, it also reduces current assets. The transaction has no effect on shareholders equity, which has already been decreased when the dividend was declared.3.The purchase of treasury share has no effect on either revenue or expenses and,therefore, does not affect profit. But cash is used to purchase the treasuryshare, and this decreases cash and current assets. Because treasury share isdeducted from shareholders equity in the balance sheet, its purchase decreasesshareholders equity.4.Reissuance of treasury share at a price less than its original cost results in a loss, but these losses are not recorded in the income statement. Instead share premium is decreased for the amount of the loss. Therefore, this transaction does not affect profit. Since the treasury share account is deducted from shareholders equity, reissuance of the share increases the total amount of shareholders equity. Also, both cash and current assets are increased as a result of the cash received from sale of the share.5.Declaration of a stock dividend results in a reclassification of amounts from Retained Earnings to the Share Capital and Share Premium accounts. It has no effect on cash, current assets, shareholders equity, or profit.


P12.8A50 Minutes, StrongPROBLEM 12.8AMANDELLA CORPORATIONa.MANDELLA CORPORATIONPartial Balance SheetDecember 31, 2008Shareholders equity:Share Capital:Ordinary share, $10 par, 500,000 shares authorized,150,000 shares issued, of which 10,000 are heldin the treasury1,500,000Stock dividend to be distributed (1)$140,000Share premium:From issuance of ordinary share$3,000,000From stock dividend (2)$350,000$3,350,000Total issued and paid capital4,990,000Retained earnings (3)$450,0005,440,000Less: Treasury share, 10,000 shares at cost of $34 per share$340,000Total shareholders equity5,100,000(1)(150,000 shares - 10,000 shares) x 10% = 140,000 shares@$10 par(2)Total stock dividend (14,000 shares x $35)$490,000Par value (14,000 shares x $10)$(140,000)Share premium: stock dividend$350,000(3)Profit for 2008$940,000Less: Stock dividend (14,000 shares x $35)$490,000Retained earnings at end of 2008$450,000b.MANDELLA CORPORATIONPartial Balance SheetDecember 31, 2009Shareholders equity:Share capital:Ordinary share, $5 par, 1,000,000 shares authorized,328,000 shares issued and outstanding (1)1,640,000Share premium:From issuance of ordinary share$3,000,000From stock dividend$350,000From treasury share (2)$50,000$3,400,000Total fully issued and paid capital5,040,000Retained earnings (3)$874,000Total shareholders equity5,914,000(1)(150,000 shares +14,000 shares) x 2 = 328,000 shares@ $5 par(2)10,000 shares x ($39 reissuance price - $34 cost) = $50,000(3)Retained earnings at end of 2008$450,000Profit for 2009$1,080,000Subtotal$1,530,000Less: Cash dividend (328,000 shares x $2)$656,000Retained earnings at end of 2009$874,000


P12.9A25 Minutes, StrongPROBLEM 12.9AESPER CORP.a.ESPER CORP.Partial Income StatementFor the Year Ended December 31, 20__(Dollars inThousands)Loss from continuing operations(24,516)Profit from discontinued operations$6,215Loss$(18,301)b.Loss$(18,301)Less: Preference share dividend requirements$(2,778)Net loss applicable to ordinary shareholders$(21,079)Weighted-average number of ordinary share$39,739Loss per share ($21,079 39,739)$(0.53)


P12.1BSOLUTIONS TO PROBLEMS SET B30 Minutes, EasyPROBLEM 12.1BPACIFIC AIRLINESa.PACIFIC AIRLINESIncome StatementFor the Year Ended December 31, 20__Sales61,440,000Costs and expenses (including income taxes oncontinuing and other items of operations)$57,100,000Profit from continuing operations4,340,000Discontinued operations:Operating profit from car rental (net of income tax)$670,000Gain on sale of car rental business (net of income tax)$4,330,000$5,000,000Profit9,340,000Earnings per ordinary share:Earnings from continuing operations ($4,340,000 4,000,000 shares)$1.09Income from discontinued operations ($5,000,000 4,000,000 shares)1.25Net earnings ($9,340,000 4,000,000 shares)$2.34b.Estimated net earnings per share next year:Earnings per share from continuing operations$1.87Estimated decrease ($1.87 x 10%)0.19Estimated net earnings per share next year$1.68The profitability of the rental car operations is notrelevant, as these cars are no longer owned byPacific Airlines.


P12.2B30 Minutes, MediumPROBLEM 12.2BBEACH LIMITEDa.BEACH LIMITEDCondensed Income StatementFor the Year Ended December 31, 2009Sales37,400,000Costs and expenses (including applicable income tax)$21,500,000Income from continuing operations$15,900,000Discontinued operations:Operating income (net of income tax)$205,000Loss on disposal (net of income tax benefit)$(510,000)$(305,000)Profit$15,595,000Earnings per share:Earnings from continuing operations[($15,900,000 - $600,000*) 200,000 shares]$76.500Loss from discontinued operations ($305,000 200,000 shares)(1.525)Net earnings$74.975[($15,595,000 - $600,000 preference share dividends) 200,000 shares]*Preference share dividends: 100,000 shares x $6 = $600,000


P12.2B (p.2)PROBLEM 12.2BBEACH LIMITED (concluded)b.BEACH LIMITEDStatement of Comprehensive IncomeFor the Year Ended December 31, 2009Profit for the year$15,595,000Less: Prior period error (net of income tax)$310,000As restated$15,285,000Subtotal$15,285,000Other comprehensive income:Loss on fair value change of available-for-sale securities$(930,000)Total comprehensive income, December 31, 2009$14,355,000c.Total cash dividends declared during 2009 (data given)$2,000,000Less: Preference stock dividend (100,000 shares x $6 per share)$600,000Cash dividends to ordinary shareholders$1,400,000Number of ordinary shares outstanding through 2009$200,000Cash dividend per ordinary share ($1,400,000 200,000 shares)$7.00d.The single 2010 $75.00 figure for EPS is unfavorable in comparison with 2009 performance. Since 2010 has only one EPS figure, it should be compared to the earnings per share from continuing operations in 2009, which amounted to $76.50 per share. Beach Limiteds earnings per share from continuing operations fell $1.50 per share (2%) from 2009 to 2010.


P12.3B35 Minutes, StrongPROBLEM 12.3BDEXTER LIMITEDa.DEXTER LIMITEDIncome StatementFor the Year Ended December 31, 2009Sales10,200,000Costs and expenses:Cost of goods sold$4,000,000Selling expenses$1,050,000General and administrative expenses$840,000Loss from settlement of litigation$10,000Income tax on continuing operations$612,0006,512,000Profit from continuing operations3,688,000Discontinued operations:Operating loss on discontinued operations (net ofincome tax benefit)$(180,000)Loss on disposal of discontinued operations (net ofincome tax benefit)$(240,000)$(420,000)Profit3,268,000Earnings per share on ordinary share:Earnings from continuing operations ($3,688,000 500,000 shares)7.38Loss from discontinued operations ($420,000 500,000 shares)(0.84)Net earnings ($3,268,000 500,000 shares)$6.54


P12.3B (p.2)PROBLEM 12.3BDEXTER LIMITED (concluded)b.DEXTER LIMITEDStatement of Comprehensive IncomeFor the Year Ended December 31, 2009Profit for the year$3,268,000Add: Prior period error (net of income tax)$80,000As restated$3,348,000Other comprehensive income:Gain on fair value changes of available-for-sale financial assets, net of tax$110,000Total comprehensive income, December 31, 2009$3,458,000c.The gain on sale of treasury share represents the excess of reissue price received over the cost Dexter paid to acquire some of its own shares. Although a corporation may reissue treasury share at prices above or below its cost of acquiring its own share, the difference between amounts received and the cost of treasury shares does not result in gains or losses recognized in the income statement. Rather, the amount described as gain on sale of treasury share is included as part of share premium in the shareholders equity section of the balance sheet.


P12.4B20 Minutes, EasyPROBLEM 12.4BJESSEL LIMITEDTotalNumberBook ValueShareholders'of SharesperEquityOutstandingShare (rounded)Beginning balance$600,000$20,000$30.00Jan. 16Declared and distributed 5% stock div.$1,000Balance$600,000$21,000$28.57Feb. 9Acquired 300 shares of treasury shareat cost of $55.00 per share$(16,500)$(300)Balance$583,500$20,700$28.19Mar. 3Reissued 300 shares of treasury shareat price of $65.00 per share$19,500$300Balance$603,000$21,000$28.71Jul. 5Share capital split 2-for-1$21,000Balance$603,000$42,000$14.36Nov. 22Declared $6.00 per share cash dividend$(252,000)Balance$351,000$42,000$8.36Dec. 31Profit$87,000Balance$438,000$42,000$10.43Note to instructor: Profit actually increases book value throughout the year, not merely on the date upon which profit is closed into retained earnings.


P12.5B20 Minutes, MediumPROBLEM 12.5BDRY WALL LIMITEDDRY WALL LIMITEDStatement of Shareholders' EquityFor the Year Ended December 31, 20__a.Share CapitalTotal($1 parShareRetainedTreasuryShareholders'value)PremiumEarningsShareEquityBalances, January 1, 20__$130,000$1,170,000$1,400,0000.0$2,700,000Prior period adjustment (net of income tax benefit)(47,000)(47,000)Issuance of ordinary share; 20,000 shares @ $1520,000280,000300,000Declaration and distribution of 10% stock dividend(15,000 shares at market price of $17 per share)15,000240,000(255,000)0Purchased 3,000 shares of treasury share @$16(48,000)(48,000)Sale of 1,000 treasury shares @ $182,00016,00018,000Profit1,200,0001,200,000Cash dividends ($1 per share)(163,000)(163,000)Balances, December 31, 20__=SUM(f10.f18)$165,000$1,692,000$2,135,000$(32,000)$3,960,000(part b is on following page)


P12.5B(p.2)PROBLEM 12.5BDRY WALL LIMITED (concluded)b.Declaration/distribution of a 10% stock dividend has no effect on total shareholders equity. Declaration of a cash dividend reduces total shareholders equity by the amount of the dividend.The two types of dividends do not have the same impact upon shareholders equity. A cash dividend is a distribution of a corporations assets (cash) to shareholders and, as such, causes a decrease in shareholders equity. A stock dividend is simply issuing more share certificates to the existing group of shareholders with no accompanying increase or outflow of assets; a corporations own share is not an asset of the corporation. With both small and large stock dividends, shareholders equity is adjusted to reflect the increased number of shares outstanding, but there is no additional equity created and no decrease in equity as occurs when a cash dividend is declared.


P12.6B40 Minutes, StrongPROBLEM 12.6BGREENE LIMITEDa.General Journal2009Jan5Dividends$560,000Dividends Payable$560,000To record declaration of $1 per share cashdividend payable on Feb. 18 to shareholders ofrecord on Jan. 31.Feb$18Dividends Payable$560,000Cash$560,000To record payment of dividend declared Jan. 5Apr$20Treasury Share$10,000Cash$10,000Purchased 1,000 shares of treasury share at $10per share.May$25Cash$6,000Treasury Share$5,000Share Premium: Treasury Share$1,000Sold 500 shares of treasury share, which cost$5,000, at a price of $12 per share.June$15Retained Earnings$307,725Stock Dividend to Be Distributed$27,975Share Premium: Stock Dividends$279,750Declared a 5% stock dividend (27,975 shares) on559,500 outstanding shares. Market price $11, parvalue $1. To be distributed on June 30 toshareholders of record at June 22.$30Stock Dividend to Be Distributed$27,975Share capital$27,975Issued 27,975 shares of share capital as 5% sharedividend declared June 15.Aug$12Cash$2,925Share Premium: Treasury Share$75Treasury Share$3,000Sold 300 shares of treasury share, which cost $3,000,at a price of $9.75 per share.Dec$31Income Summary$1,750,000Retained Earnings$1,750,000To close Income summary account for the year.Dec$31Retained Earnings$560,000Dividends$560,000To close Dividends account.


P12.6B (p.2)PROBLEM 12.6BGREENE LIMITED (concluded)b.GREENE LIMITEDPartial Balance SheetDecember 31, 2009Shareholders equity:Share Capital, $1 par value, 1,000,000 shares authorized,587,975 shares issued, of which 200 are held in the treasury$587,975Share premium:From issuance of share capital$4,480,000From stock dividend$279,750From treasury share$925$4,760,675Total issued and fully paid capital$5,348,650Retained earnings*$3,882,275$9,230,925Less: Treasury share, 200 shares at cost$2,000Total shareholders equity$9,228,925*Computation of retained earnings at Dec. 31, 2009:Retained earnings at beginning of year$3,000,000Add: Profit for year$1,750,000Subtotal$4,750,000Less:Cash dividend declared Jan. 3$560,000Stock dividend declared June 1$307,725$867,725Retained earnings, Dec. 31, 2009$3,882,275c.Computation of maximum legal cash dividendper share at Dec. 31, 2009:Retained earnings at Dec. 31, 2009$3,882,275Less: Restriction of retained earnings fortreasury share owned$2,000Unrestricted retained earnings$3,880,275Number of shares outstanding(587,975 shares issued, minus 200 sharesheld in treasury)$587,775Maximum legal cash dividend per share ($3,880,275divided by 587,775 shares)$6.60


P12.7B30 Minutes, StrongPROBLEM 12.7BHOT WATER LIMITEDa.Net Cash FlowCurrent AssetsShareholders Equity(from AnyEventProfitSource)1NEDNENE2DNENED3DDNED4IINEI5NENENENEI = IncreaseD = DecreaseNE = No effectb.1.Declaration of a cash dividend has no immediate effect upon profit or cashflows. It increases current liabilities (dividends payable), but has no effect oncurrent assets. Also, retained earnings is decreased, resulting in a decrease inshareholders equity.2.Payment of a cash dividend has no effect on revenue or expenses, but it reduces cash. Since it reduces cash, it also reduces current assets. The transaction has no effect on shareholders equity, which has already been decreased when the dividend was declared.3.The purchase of treasury share has no effect on either revenue or expenses and,therefore, does not affect profit. But cash is used to purchase the treasuryshare, and this decreases cash and current assets. Because treasury share isdeducted from shareholders equity in the balance sheet, its purchase decreasesshareholders equity.4.Reissuance of treasury share at a price less than its original cost results in a loss, but these losses are not recorded in the income statement. Instead share premium is decreased for the amount of the loss. Therefore, this transaction does not affect profit. Since the treasury share account is deducted from shareholders equity, reissuance of the share increases the total amount of shareholders equity. Also, both cash and current assets are increased as a result of the cash received from sale of the share.5.Declaration of a stock dividend results in a reclassification of amounts from Retained Earnings to the Share Capital and Share Premium accounts. It has no effect on cash, current assets, shareholders equity, or profit.


P12.8B50 Minutes, StrongPROBLEM 12.8BADAMS CORPORATIONa.ADAMS CORPORATIONPartial Balance SheetDecember 31, 2008Shareholders equity:Share capital:Ordinary share, $1 par, 100,000 shares authorized,20,000 shares issued, 16,000 shares outstanding20,000Stock dividend to be distributed (1)$1,600Share premium:From issuance of ordinary share$480,000From stock dividend (2)$48,000$528,000Total issued and fully paid capital549,600Retained earnings (3)$800,4001,350,000Less: Treasury share, 4,000 shares at cost of $30 per share$120,000Total shareholders equity1,230,000(1)(20,000 shares - 4,000 shares) x 10% = 16,000 shares@$1 par(2)Total stock dividend (1,600 shares x $31)$49,600Par value (1,600 shares x $1)$(1,600)Share premium: stock dividend$48,000(3)Profit for 2008$850,000Less: Stock dividend (1,600 shares x $31)$49,600Retained earnings at end of 2008$800,400b.ADAMS CORPORATIONPartial Balance SheetDecember 31, 2009Shareholders equity:Share capital:Ordinary share, $.50 par, 200,000 shares authorized,43,200 shares issued and outstanding (1)21,600Share premium:From issuance of ordinary share$480,000From stock dividend$48,000From treasury share (2)$20,000$548,000Total issued and fully paid capital569,600Retained earnings (3)$1,567,200Total shareholders equity2,136,800(1)(20,000 shares + 1,600 shares) x 2 = 43,200 shares@ $.50 par(2)4,000 shares x ($35 reissuance price - $30 cost) = $20,000(3)Retained earnings at end of 2008$800,400Profit for 2009$810,000Subtotal$1,610,400Less: Cash dividend (43,200 shares x $1)$43,200Retained earnings at end of 2009$1,567,200


P12.9B25 Minutes, StrongPROBLEM 12.9BBLUE JAY MANUFACTURINGCORP.a.BLUE JAY MANUFACTURING CORPORATIONPartial Income StatementFor the Year Ended December 31, 20__(Dollars inThousands)Loss from continuing operations(28,220)Profit from discontinued operations$12,000Loss$(16,220)b.Loss$(16,220)Less: Preference share dividend requirements$(3,100)Net loss applicable to ordinary shareholders$(19,320)Weighted-average number of ordinary share$10,000Loss per share ($16,220 10,000)$1.622


Case 12.1SOLUTIONS TO CRITICAL THINKING CASES20 Minutes, EasyCASE 12.1WHAT'S THIS?a.Both the operating profit from the Indian mobile telecommunications operations and the disposal gain should be classified in HTILs income statement as discontinued operations and should be shown separately from the results of HTILs ongoing business operations. These gains qualify for this separate treatment because the discontinued activities represented an entire identifiable segment of HTILs business operations.b.Acquisition of a new entity affect only the current year and future years, and are included in revenues and expenses from normal operations.c.The settlement of the court case by Cathay Pacific is classified in normal and recurring business operations.d.Liquidation of Shiseido Beautech Co., Ltd. is classified as discontinued operation because Shiseido Beautech will no longer be able to operate its business.


Case 12.220 Minutes, MediumCASE 12.2IS THERE LIFE WITHOUT BASEBALL?a.If JPL had not sold the baseball team at the end of 2009, it still would have incurred the teams $1,300,000 operating loss for the year. However, the company would not have realized the $4,700,000 gain on the sale. Other items in the income statement would not have been affected. Thus, JPLs income for 2009 would have been $4,700,000 less than was actually reported, or $2,600,000 ($7,300,000 - $4,700,000 = $2,600,000).b.In 2009, JPLs newspaper business earned $3,900,000, as shown by the subtotal, Profit from Continuing Operations. If the profitability of these operations increased by 7% in 2010, they would earn approximately $4,173,000 ($3,900,000 x 1.07 = $4,173,000). If the baseball team were still owned and lost $2,000,000 in 2010, JPL could be expected to earn a profit of about $2,173,000 in that year.c.Given that the baseball team was sold in 2009, JPL should earn a profit of approximately $4,173,000 in 2010, assuming that the profitability of the continuing newspaper operations increases by 7% ($3,900,000 x 1.07 = $4,173,000).d.The operating loss incurred by the baseball team in 2009 indicates that the teams expenses (net of tax effects) exceeded its revenue by $1,300,000. If the expenses were $32,200,000, the revenue must have amounted to $1,300,000 less, or $30,900,000.


Case 12.330 Minutes, StrongCASE 12.3USING EARNINGS PER SHARE STATISTICSa.The company reports earnings per share computed on both a basic and a diluted basis because it has outstanding convertible preference share. The conversion of thesesecurities into ordinary share would increase the number of ordinary shares outstanding and thereby dilute (reduce) earnings per share of ordinary share. The primary purpose of a companys disclosing diluted earnings per share is to warn investors of the dilution in earnings that could occur if the convertible securities actually were converted.It is important to recognize that diluted earnings represent a hypothetical case. The convertible securities have not actually been converted into ordinary shares as of the close of the current year.b.The total dollar amount of the companys loss from discontinued operations can be computed from the earnings per share information as follows:Loss from discontinued operations per share ($6.90 - $3.60) ..$3.30Total loss from discontinued operations ($3.30 per share x 3 million shares) ..$9,900,000c.The approximate market price of the companys ordinary share is $69 per share. When a companys income statement includes an extraordinary item, the price-earnings ratio shown in newspapers is based upon basic earnings before extraordinary items ($6.90 x 10 = $69).d.(1)$7.59 ($6.90 x 110%)Only the continuing operations will be earning revenue and incurring expenses next year, and the extraordinary item is not expected to recur. Therefore, the starting point for projecting future net earnings should be earnings from continuing operations. Since both revenue and expenses are expected to increase by 10%, earnings per share also should increase 10%.(2)$6.05 ($5.50 x 110%)The diluted earnings per share figures show the effect that conversion of all of the convertible preference share into ordinary shares would have had upon this years earnings. Earnings per share from continuing operations would have been only $5.50, rather than $6.90. Thus, $5.50 per share becomes the logical starting point for forecasting next years net earnings. As in part (1), next years earnings are expected to rise by 10% over those of the current year.


Case 12.435 Minutes, StrongCASE 12.4INTERPRETING A STATEMENT OFCHANGES IN EQUITYa.Beginning of year: 77,987,500 shares outstanding (82,550,000 issued - 4,562,500 held in treasury)End of year: 77,353,100 shares outstanding (82,550,000 issued - 5,196,900 treasuryshares)b.$95,700,000 total dividend declared on ordinary share77,804,878 approximate number of shares entitled to $1.23 per stock dividend ($95,700,000 $1.23 per share)This answer appears reasonable, since the number of ordinary shares outstandingranged from 77,987,500 at the beginning of the year to 77,353,100 at year-end. The 77,804,878 approximate figure for the $1.23 annual dividend appears compatible with the beginning and ending actual figures because it falls between these numbers.c.The share issued during the year for the share option plans consisted of treasury shares, not newly issued shares. The Treasury Share account is used to account for repurchases of a corporations share, as well as the reissuance of treasury shares. When share is repurchased and subsequently reissued, the Ordinary Share account is not affected; these transactions do, however, affect the Treasury Share account, a contra- shareholders equity account.d.$29.79 average cost per share of treasury share at the beginning of the year($135,900,000 total cost 4,562,500 treasury shares)e.The aggregate reissue price for the treasury shares must have been lower than the cost to acquire those treasury shares, because the Share Premium account was reduced by the reissuance of the treasury share. The cost of the treasury shares reissued was $16,700,000; the reissue price for the treasury shares must have been $15,300,000 to cause a $1,400,000 reduction in Share Premium.f.$63.61 average cost per share for treasury share acquired during the current year($78,600,000 aggregate cost 1,235,700 shares repurchased)g.Earnings per share: Divide by the weighted-average number of shares outstanding throughout the yearBook value per share: Divide by the actual number of shares outstanding as of the specific date (usually a balance sheet date)


Case 12.560 Minutes, StrongCASE 12.5CLASSIFICATION OF UNUSUAL ITEMSAND THE POTENTIAL FINANCIAL IMPACTa.An asset represents something with future economic benefit. But if the amount at whichthe asset is presented in the balance sheet (i.e., its book value) cannot be recoveredthrough future use or sale, any future economic benefit appears to be less than theassets current book value. In such cases, the asset should be written down to therecoverable amount.b.According to IFRS, no extraordinary item should be disclosed in the financial statements.c.1.Profit will be reduced since there is no extraordinary loss allowed in IFRS.2.Income before extraordinary items will be reduced since the losses are classified as ordinary.3.Income from Continuing Operations will be reduced as the losses are classified as ordinary.4.Given that these losses do not affect income taxes, they have no cash effects. Therefore, net cash flow from operating activities will be unaffected.d.The p/e ratio is based upon income before extraordinary items (stated on a per-share basis). As stated in c(2), above, income before extraordinary items will be affected since the losses are classified as part of the ordinary operations. Therefore, the p/e ratio will be higher.e.Yes. Members of management have a self-interest in seeing share prices increase, which would favorably affect the value of their share options as well as share they already own. In addition, a rising share price makes it easier for the company to raise capital, benefits shareholders, and makes management look good.


Case 12.5 (p.2)CASE 12.5CLASSIFICATION (continued)The classification of these losses may well affect Elliot-Coles share price. Investorsconsider income from continuing operations a predictive subtotal. If the losses areclassified as ordinary, this key subtotal will decline, probably below last years level.(The losses amount to 18% of pre-loss earnings, which exceeds the companys normalearnings growth of 15%. Thus, these losses may be sufficient to cause a decline inearnings relative to the preceding year.) This could have an adverse effect on shareprice.In summary, the adverse effects of these losses on the companys share price are likelyto be greater if the losses are classified as ordinary. Therefore, management has a self-interest in seeing these losses classified as an extraordinary item.f.These write-offs are likely to increase the earnings reported in future periods, especially if the company continues to do business in any of the related countries. With the assets having no book value, future earnings from these operations will not be reduced by charges for depreciation (or, in some cases, for a cost of goods sold).g.No ethical dilemma exists because the classification of these losses as extraordinary is not allowed.Note to instructor: This case is adapted from an incident involving an international pharmaceutical company. The details of the situation have been altered for the purpose of creating an introductory level textbook assignment, and the so-called quotations from corporate officers are entirely fictitious. Nonetheless, we believe that the outcome of the actual event provides insight into the financial reporting process and also to the importance that investors attach to the various computations of earnings per share.


Case 12.5 (p.3)CASE 12.5CLASSIFICATION (concluded)Management originally classified the losses as extraordinary, and the auditors concurred. The SEC, however, did not agree. It insisted that the corporation revise and reissue its financial statementwith the controversial items classified as ordinary operating losses. When the company announced the reclassification of these losses, its share price fell substantiallydespite the fact that the reported amount of profit remained unchanged.Who were the losers? Anyone who bought the share between the release of the original earnings figures and the announcement that substantial losses would be reclassified.


Case 12.630 Minutes, MediumCASE 12.6SHAREHOLDERS' EQUITY AND EPSINTERNETThe following answers are based on information from March 29, 2010 (part a.) and 2009 annual financial statements for the remaining parts.a. On March 29, 2010, Vodafone's share sold for a high of 151.75p and a low of 148.00p. These amounts will vary for other dates.b. The number of ordinary shares outstanding on Mar. 31, 2009 was 57,806,283,716. These shares were originally sold by the company for the total of the par value of the shares plus the share premium:Par value4,153,000,000Share premium 43,008 million43,008,000,00047,161,000,000The average price at which the shares were sold is computed as follows:47,161,000,000 / 57,806,283,716 shares = 0.82 per sharec. There is no direct relationship between the amount the share originally sold for (.82) and the current market price of the share. The original price at which the share was sold is a historical amount that represents the investment of owners in the company while the current market price reflects a number of factors, including the long-term performance of the company and many other factors directly and indirectly related to the company's performance.d. The three-year trend in basic earnings per share (EPS), including discontinued operations, is negative 9.7 (2007), 12.56 (2008), and 5.84 (2009). Discontinued operations did not occur in 2009 and 2008, and had the most significant impact on EPS in 2007 when it accounts for a loss of .76 per share of a net amount of negative 9.7 of earnings per share.e. The average number of shares used to compute basic EPS in 2009 was 52,737,00,000. This is different from the 57,806,283,716 because the number of shares outstanding decreased during the year. The year-end figure is in the balance sheet while a weighted average number is used in computing EPS.


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