Ch 15

Question 1

What is the corporate form of business organization?

Answer 1

Legal entity: Separate from owners, greater legal protection, access to capital markets

Question 2

What are the rights of common shareholders?

Answer 2

Voting rights, right to dividends, and right to assets upon liquidation

Question 3

What are the rights of preferred shareholders?

Answer 3

Priority claim on dividends and assets, but typically no voting rights.

Question 4

What is the difference between common shares and preferred shares?

Answer 4

Common shares have voting rights and variable dividends; preferred shares have fixed dividends and priority on assets.

Question 5

What are in-substance common shares?

Answer 5

Investment with characteristics similar to common shares, but not legally called common shares.

Question 6

What is the significance of treasury shares?

Answer 6

Shares repurchased by the company, which can be either held for re-issue or retired.

Question 7

What rights do shareholders of treasury shares have?

Answer 7

They do not receive dividends.

Question 8

What is the role of shareholders in electing directors?

Answer 8

Common shareholders have the right to vote and elect the board of directors.

Question 9

What happens when shares are issued?

Answer 9

The company receives money, which is credited to share capital.

Question 10

How is reacquisition of shares treated in accounting?

Answer 10

It’s a capital transaction, and any gain or loss is booked through equity.

Question 11

How are reacquisition costs allocated if the price paid is higher than the original amount?

Answer 11

Allocated to share capital, then to contributed surplus, and lastly to retained earnings.

Question 12

How are reacquisition costs allocated if the price paid is lower than the original amount?

Answer 12

Allocated to share capital and contributed surplus.

Question 13

What is the treatment of shares with no par value?

Answer 13

The assigned value is based on the average per-share amount of the class of shares on the transaction date.

Question 14

What is the difference between stock dividends and stock splits?

Answer 14

Stock dividends increase the number of shares and reduce retained earnings, while stock splits increase shares without changing total equity.

Question 15

How are stock dividends treated in terms of shareholder equity?

Answer 15

They result in an increase in the number of shares and share capital, with a reduction in retained earnings.

Question 16

What is a liquidating dividend?

Answer 16

Dividends paid from contributed surplus, returning shareholders’ investment (return of capital).

Question 17

What is a stock split?

Answer 17

A process to reduce share price by increasing the number of shares without changing share capital or retained earnings.

Question 18

When are stock dividends treated as stock splits?

Answer 18

If the dividend is larger than 20%-25%, it’s treated like a stock split (SEC rule).

Question 19

What are the two types of dividends?

Answer 19

Return on capital (share of earnings) and return of capital (liquidating dividends).

Question 20

What is the effect of dividends on shareholders’ equity?

Answer 20

Dividends reduce shareholders’ equity.

Question 21

When does a dividend become a liability for the company?

Answer 21

When it is declared by the board of directors.

Question 22

What are the three key dates related to dividends?

Answer 22

Date of declaration, date of record, and date of paymen

Question 23

What is a dividend in kind?

Answer 23

A non-cash dividend paid in assets like merchandise, real estate, or investments.

Question 24

How is a dividend in kind measured?

Answer 24

It’s measured at the fair value of the asset given up.

Question 25

What is a stock dividend?

Answer 25

A dividend paid in additional shares of stock instead of cash.

Question 26

What happens to the book value per share during a stock dividend?

Answer 26

It decreases because there are more shares outstanding.

Question 27

What does shareholders' equity represent?

Answer 27

The owners' claim on the company after all liabilities are subtracted from assets.

Question 28

What is accumulated other comprehensive income?

Answer 28

Changes in equity due to non-shareholder transactions, such as unrealized gains/losses, not included in net income.

Question 29

How is shareholders’ equity presented under IFRS?

Answer 29

In the Statement of Changes in Shareholders' Equity, including accumulated other comprehensive income.

Question 30

What is required in capital disclosures under IFRS?

Answer 30

Objectives, policies, processes for managing capital, and quantitative data on capital management.

Question 31

What are normal capital disclosures under ASPE?

Answer 31

Amount of authorized, issued, and fully paid shares, and details on rights, preferences, and restrictions

Question 32

What is the return on equity (ROE)?

Answer 32

It shows how much net income was earned for each dollar invested by the owners.

Question 33

What is the payout ratio?

Answer 33

The proportion of net income paid out as dividends to shareholders.

Question 34

How does ASPE differ from IFRS?

Answer 34

ASPE provides more specific guidance, while IFRS is more flexible with broad principles.

Question 35

When no explicit guidance is given, how do IFRS and ASPE compare?

Answer 35

The accounting treatment may end up being the same using basic principles.

Question 36

How does the treatment of accumulated other comprehensive income differ between IFRS and ASPE?

Answer 36

IFRS includes it in the Statement of Changes in Shareholders' Equity, while ASPE doesn’t require it.

Question 37

How does IFRS handle capital management disclosures?

Answer 37

IFRS requires detailed disclosures on capital management objectives, policies, and changes.

Question 38

Under IFRS, what is required for earnings not realized yet?

Answer 38

They are included in other comprehensive income, affecting equity.

Question 39

What is contributed surplus?

Answer 39

Surplus created from transactions like the reacquisition of shares at a price different from the original value.

Question 40

What happens when shares are issued at a price higher than par value?

Answer 40

The excess is credited to contributed surplus.

Question 41

What is the difference between authorized shares and issued shares?

Answer 41

Authorized shares are the maximum allowed, while issued shares are those that have been sold.

Question 42

What is the role of a shareholder agreement

Answer 42

It sets rules for the management and transfer of shares in private companies.

Question 43

How are share issuance costs treated in accounting?

Answer 43

They are deducted from the proceeds of the share sale and recorded as a capital transaction.

Question 44

What is a common method of allocating proceeds in a lump-sum sale?

Answer 44

Proceeds are allocated based on the relative fair value of each class of shares.

Question 45

What happens if a shareholder defaults on a subscription?

Answer 45

The amount paid is refunded, or forfeited and transferred to contributed surplus.

Question 46

What is the effect of buying back shares?

Answer 46

It reduces the number of shares outstanding and may increase earnings per share (EPS).

Question 47

What are the consequences of issuing shares to employees?

Answer 47

This often involves lending money to employees or providing stock compensation.

Question 48

What is the accounting for dividends declared?

Answer 48

It becomes a liability when declared by the board, reducing retained earnings.

Question 50

j/e for defaulted subscription accounts explanation

Answer 50

1. return amt paid by subscriber (minus expenses) 2. treat amount paid as forfeited and therefor transfer to Cont. surplus account 3. Issue fewer shares to subscriber so # of shares equal to what subscription payments already received would have paid for fully

Question 51

Default sub j/e

Answer 51

dr common share sub cr share subs receivable cr a/p

Question 52

j/e for ant paid by subs forfeited

Answer 52

dr common shares subscribe cr share sub receivable cr contributed surplus