Chapter 13

Question 1

Share dividends

Answer 1

distribute shares to shareholders with no payment – transfer from retained earnings to contributed capital

• SHARE DIVIDENDS DECREASE RETAINED EARNINGS.
• • recorded at market value the date of declaration*
• *does not decrease assets or equity

Question 2

reasons companies will declare share dividends

Answer 2

1. to make shares more affordable
2. conserve cash
3. to show management that they are confident in the company

Question 3

calculation for share dividend

Answer 3

amount of shares x % of dividend x market value of shares

Question 4

Journal entry: share dividend- date of declaration, record and distribution

Answer 4

Declaration
Dr. Share dividend
Cr. common share div distributable
record- no entry

distribution
Dr common share div distributable
Cr common shares

*** MUST CLOSE SHARE DIVIDEND ACCOUNT TO RETAINED EARNINGS

Question 5

How does declaring share dividends decrease retained earnings

Answer 5

– you dr. share dividend account which is closed to retained earnings therefore debiting re and reducing it.

Question 6

Share splits

Answer 6

• replace each outstanding share with more
• no journal entry required** but you must disclose it in the notes and on the balance sheet.
• contributed capital and retained earnings are unchanged
• only change is the number of shares
• market value decreases per share after split

Question 7

repurchase of shares

Answer 7

• corporations repurchase shares of its own outstanding capital
  reasons: -avoid hostile takeover, maintain a strong and stable market, and show confidence in the company

Question 8

repurchase of shares entry (buying at same price)

Answer 8

dr common shares

cr cash

Question 9

repurchase of shares entry ( buying at price less than sold for )

Answer 9

dr common shares
cr contributed capital from retired shares
cr cash

Question 10

repurchase of shares entry ( buying at price more than sold for)

Answer 10

dr common shares
dr contributed capital from retired shares(if cr balance in acct)
dr retained earnings (if need be)
cr cash

Question 11

earnings per share

Answer 11

profit- preferred share dividends/ weighted average common shares

• • preferred dividends must be declared that year unless they are cumulative – add all the cumulative ones up
• • number of shares outstanding restated when split or dividend occurs back to the start of the year.

Question 12

how to calculate weighted average common shares

Answer 12

• this is the average number of shares over the year
  create table
  date | outstanding | split/dividend | fraction | weighted av

** remember that a share split/ dividend effects previous time periods to the start of the year

Question 13

dividend payout ratio

Answer 13

-how much of a companies earnings are paid out in dividends

annual dividends per share/ earnings per share

Question 14

Income statement

Answer 14

same as before but continuing operations
discontinued operations
–eps for continuing operations, discontinued operations and a total of the two

Question 15

what are retained earnings

Answer 15

shareholders claim on companies net assets, changes equity

Question 16

restricted retained earnings

Answer 16

statutory: law ex (can’t pay out dividends if retained earnings is in a deficit)

Contractual: Ex: loan requires certain debt to equity ratio only allowing a max amount of dividend payouts

Voluntary: safety net

Question 17

what are the 3 accounting changes

Answer 17

• change in policy
• correction of error in prior financial statements
• change in estimation

Question 18

change in policy

Answer 18

retrospectie: must restate financial statements currently and of previous years. plus disclose in notes.
ex: fifo to moving weighted average

Question 19

correction of error in prior financial statements

Answer 19

reported in current year, charged or credited to retained earnings
-previous periods financial statements also restated

Question 20

change in estimate

Answer 20

• prospectively accounted for in the period of occurrence as well as the future
  ex: allowance for doubtful accounts, ppe life, warranty liability.