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.  

Answer 1

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%