15-3

Question 1

Issued 4,200 common shares for machinery. The machinery had been appraised at $74,500, and the seller carrying
amount was 58,600. The common shares’ most recent market price is $18 a share.

Answer 1

dr. Machinery ……………………………………………………… 74,500
cr. Common Shares ……………………………………… 74,500
* *(Although the value of the shares is $75,600 (4,200 X $18), the machine cannot be recorded at a cost higher than its fair value.)**

Question 2

Voted a $6 dividend on both the 17,000 shares of outstanding common and the 40,000 shares of outstanding preferred.

Answer 2

(no separate entries for preffered or common)

dr. Retained Earnings………………………………………….. 342,000
cr. Dividends Payable…………………………………… 342,000
Dividend to preferred: $6 X 40,000 shares = $240,000
Dividend to common: $6 X 17,000 shares = $102,000
$342,000

Question 3

Issued 2,500 common shares and 1,200 preferred shares for a lump sum of $125,000. The common shares had been selling at $13 and the preferred at $80.

Answer 3

dr. Cash ……………………………………………………………… 125,000
cr. Preferred Shares……………………………………… 93,385
cr. Common Shares ……………………………………… 31,615
Fair value of common (2,500 X $13) = $ 32,500
Fair value of preferred (1,200 X $80) = 96,000
Aggregate $128,500
Use the relative fair value method (since the fair values of both shares are available) - proportional

Question 4

Issued 2,200 common shares and 135 preferred shares for furniture. The common shares had a fair value of $14 per share and the furniture was appraised at $36,000.

Answer 4

dr. Furniture and Fixtures ……………………………………. 36,000
cr. Preferred Shares……………………………………… 5,200
cr. Common Shares (2,200 X $14)………………….. 30,800

The company must use the residual value method to allocate the lump-sum issue since only the value of the common shares is known. The value of the preferred shares is not directly known and therefore the residual value is assigned

Question 5

Calculating the proportion of dividends received when preferred shares are NON-participating

Answer 5

In this case the preferred sharese receive dividends only for what they are entitle to (arrears if they are cumulative)

Question 6

Fully participating preferred shares:

Answer 6

It is easier to start calculating how much C/S holders receive:

1. Calculate a percentage 0.4/$5 - 8% - where 0.4 is the preferred dividend and $5 is the price of a preferred share
2. Take that % and multiply with the balance in Common Shares => this is how much C/S receive before they start dividing again between preferred and common
3. See how much is left after subtracting
   a) all the preferred dividends (arrears too if they are cumulative)
   b) the percentage the C/S get (see 2)
   c) calculate the rest proportionally with the balance in Preferred Shares vs Common Shares accounts

Question 7

Fully participating preferred shares:

(called somthing like baseline dividend)

Answer 7

The difference between this one and the other one consists in how we divide the leftover proportionally

Instead of using the balances in the account, we use the propotions of dividends already paid in the current year (no arrears for preferred)

Ex: 9,000 preferred

36,000 common

Proportion: 20% + 80%