Emerge Corp. reported the following amounts in the shareholders’ equity section
ID: 2532678 • Letter: E
Question
Emerge Corp. reported the following amounts in the shareholders’ equity section of its December 31, 2016 statement of financial position:
Preferred shares, $8 dividend (10,000 shares authorized, 2,000 shares issued)
$ 200,000
Common shares (unlimited authorized, 25,000 issued)
600,000
Contributed surplus
55,000
Retained earnings
250,000
Accumulated other comprehensive income
75,000
Total
$1,180,000
During 2017, the company had the following transactions that affect shareholders’ equity.
1. Paid the annual 2016 $8 per share dividend on preferred shares and a $3 per share dividend on common shares. These dividends had been declared on December 31, 2016.
2. Purchased 3,700 shares of its own outstanding common shares for $35 per share and cancelled them.
3. Issued 1,000 shares of preferred shares at $105 per share (at the beginning of the year).
4. Declared a 10% stock dividend on the outstanding common shares when the shares were selling for $45 per share.
5. Issued the stock dividend.
6. Declared the annual 2017 $8 per share dividend on preferred shares and a $2 per share dividend on common shares. These dividends are payable in 2018.
The contributed surplus arose from net excess of proceeds over cost on a previous cancellation of common shares. Total assets at December 31, 2016 were $2,140,000, and total assets at December 31, 2017 were $2,616,000. The company follows IFRS.
Required**********:
1. Prepare journal entries to record the transactions above.
2. Prepare the December 31, 2017 shareholders’ equity section. Assume 2017 net income was $450,000 and comprehensive income was $455,000.
3. Calculate the rate of return on common shareholders’ equity and the rate of return on total assets for 2017. Is Emerge trading on the equity? Evaluate the results from the perspective of a common shareholder.
Preferred shares, $8 dividend (10,000 shares authorized, 2,000 shares issued)
$ 200,000
Common shares (unlimited authorized, 25,000 issued)
600,000
Contributed surplus
55,000
Retained earnings
250,000
Accumulated other comprehensive income
75,000
Total
$1,180,000
Explanation / Answer
SOLUTION:
Part-1)
Journal entries:
1
Dividends Payable (Preferred: 2,000 *$8)
16,000
Dividends Payable (Common: 25,000* $3)
75,000
Cash
91,00
2
Common Shares ($600,000 / 25,000 * 3,700)
88,800
Contributed Surplus
40,700
Cash
129,500
3
Cash
105,000
Preferred Stock
105,000
4
Dividends [(25,000 - 3,700) * 10% = 2,130 * $45]
95,850
Common Stock Dividends Distributable
95,850
5
Common Stock Dividends Distributable
Common Shares
6
Dividends
70,860
Dividends Payable Preferred (3000 * 8)
24,000
Dividends Payable Common (25,000 - 3,700 + 2,130) * $2
46,860
Part-2)
Preferred shares
Common Shares
Other
No. of shares
Paid-in capital
No. of shares
Paid-in capital
Contributed Surplus
Retained Earnings
Comprehensive Income
Balance as on 1st Jan
2,000
$200,000
25,000
$600,000
$55,000
$250,000
$75,000
Net income
450,000
Other comprehensive income
5,000
Comprehensive income
Common shares repurchase
(3,700)
$(88,800)
$(40,700)
Preferred shares issuance
1,000
$105,000
Common shares issuance
through stock dividend
2,130
$95,850
$(95,850)
Cash dividend:
Preferred shares
$(24,000)
Common shares
$(46,860)
Balance as on 31st Dec
3,000
$305,000
23,430
$607,050
$14,300
$533,290
$80,000
Share capital
Preferred shares, $8, (authorized 10,000 shares, Issued 3,000 shares)
$305,000
Common shares, (Authorized -unlimited , Issued 23,430 shares)
$607,050
Total capital of shares
$912,050
Contributed surplus
$14,300
Total paid-in capital
$926,350
Retained earnings
$533,290
Other comprehensive income- Accumulated
$80,000
Shareholders’ equity- Total
$1,539,640
Working:
Preferred shares= 200,000 + 105,000 = 305,000
Common shares = 600,000 + 95,850 - 88,800 = 607,050
Contributed surplus: 55,000 - 40,700 = $14,300
Retained earnings: $250,000 + 450,000 - 70,860 - 95,850 = 533,290
Other comprehensive income- Accumulated : ($455,000 – $450,000) + 75,000 = 80,000
PART-3)
Average common shareholders’ equity = {(1,180,000 - 200,000) + (1,539,640 -305,000)}= 1,107,320
ROR on common shareholders’ equity = (450,000 - 24,000) / 1,107,320 = 38.47%
ROR on total assets = (450,000 - 24,000) / [($2,140,000 + $2,616,000) / 2] = 17.91%
1
Dividends Payable (Preferred: 2,000 *$8)
16,000
Dividends Payable (Common: 25,000* $3)
75,000
Cash
91,00
2
Common Shares ($600,000 / 25,000 * 3,700)
88,800
Contributed Surplus
40,700
Cash
129,500
3
Cash
105,000
Preferred Stock
105,000
4
Dividends [(25,000 - 3,700) * 10% = 2,130 * $45]
95,850
Common Stock Dividends Distributable
95,850
5
Common Stock Dividends Distributable
Common Shares
6
Dividends
70,860
Dividends Payable Preferred (3000 * 8)
24,000
Dividends Payable Common (25,000 - 3,700 + 2,130) * $2
46,860
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