Ch15 Equity

CHAPTER 15
Equity
SOLUTIONS TO PROBLEMS
PROBLEM 15-8
Transactions:
(a) Assuming Myers Co. declares and pays a €1 per share cash dividend.
(1) Total assets—decrease €4,000 [(€20,000 ÷ €5) X €1]
(2) Share capital—ordinary—no effect
(3) Share premium—ordinary—no effect
(4) Retained earnings—decrease €4,000
(5) Total equity—decrease €4,000
(b) Myers declares and issues a 10% share dividend when the market price
of the stock is €14.
(1) Total assets—no effect
(2) Share capital—ordinary—increase €2,000 (4,000 X 10%) X €5
(3) Share premium—ordinary—no effect.
(4) Retained earnings—decrease €2,000 (€5 X 400)
(5) Total equity—no effect
(c) Myers declares and issues a 100% share dividend when the market
price of the stock is €15 per share.
(2) Share capital—ordinary—increase €20,000 (4,000 X 100%) X €5
(4) Retained earnings—decrease €20,000
(d) Myers declares and distributes a property dividend

(1) Total assets—decrease €14,000 (2,000 X €7)— €6,000 gain less
€20,000 dividend.
(4) Retained earnings—decrease €14,000—€6,000 gain less €20,000
dividend.
(5) Total equity—decrease €14,000
PROBLEM 15-8 (Continued)
Note:
The journal entries made for the above transaction are:
Investments in ABC Shares (€10 – €7) X 2,000........... 6,000
Unrealized Holding Gain or Loss-Income............ 6,000
(To record increase in value of
securities to be issued)
Retained Earnings (€10 X 2,000)................................... 20,000

Investments in ABC Stock..................................... 20,000
(To record distribution of property dividend)
(e) Myers declares a 2-for-1 share split

(4) Retained earnings—no effect
PROBLEM 15-10
To: Ortago S.A. Board of Directors
From: Good Student, Financial Advisor
Date: Today
Subject: Report on the effects of a share dividend and a share split
INTRODUCTION
As financial advisor to the Board of Directors for Ortago S.A., I have been
asked to report on the effects of the following options for creating interest
in Ortago S.A. shares: a 20% share dividend, a 100% share dividend, and a
2-for-1 share split. The board wishes to avoid adjustments to equity
balances, while stimulating interest in the shares. The Board also thinks
that a cash dividend at this point would be unwise.
RECOMMENDATION
In order to meet the needs of Ortago S.A. the board should choose a
2-for-1 share split. The share split is the only option which would not change
the dollar balances in the equity section of the company’s statement of
financial position.
DISCUSSION OF OPTIONS
The three above-mentioned options would all result in an increased

number of ordinary shares outstanding. Because the shares would be
distributed on a pro rata basis to current shareholders, each shareholder of
record would maintain his/her proportion of ownership after the
declaration. All three options would probably generate significant interest
in the shares.
A 20% SHARE DIVIDEND
This option would increase the shares outstanding by 20 percent, which

translates into 800,000 additional shares of €10 par value.
The problem with this type of share dividend is that IFRS requires these
shares to be accounted for at their par value.
The following journal entry must be made to record this dividend.
Retained Earnings (€10 X 800,000)........................... 8,000,000

Ordinary Share Dividend Distributable............ 8,000,000
Although the Ordinary Share Dividend Distributable account increases,

Retained Earnings also decreases. This reduction in Retained Earnings may
hinder Ortago S.A.’s success with the subsequent share offer.
A 100% SHARE DIVIDEND
This option would double the number of €10 par value ordinary shares
currently issued and outstanding. While this type of dividend is considered,
in substance, a share split, Retained Earnings is nonetheless reduced by
the par value of the additional shares, while Ordinary Share Dividend
Distributable and, later, Share Capital—Ordinary are increased for that
same amount. However, when 4,000,000 shares are already issued and
outstanding, the reduction in Retained Earnings reflecting the share
dividend is still great: €40,000,000.
The following journal entry would be made to record the declaration of this
dividend:
Retained Earnings (€10 X 4,000,000)....................... 40,000,000

Ordinary Share Dividend Distributable............ 40,000,000
A 2-FOR-1 SHARE SPLIT
This option doubles the number of shares issued and outstanding; however,
it also cuts the par value per share in half. No accounting treatment beyond
a memorandum entry is required for the split because the effect of splitting
the par value cancels out the effect of doubling the number of shares.
Therefore, Retained Earnings remains unchanged as does the Share
Capital—Ordinary and Share Premium—Ordinary accounts. In addition, the
decreased market value will encourage investors who might otherwise
consider the shares too expensive.
CONCLUSION
To generate the greatest interest in Ortago S.A. shares while maintaining

the present balances in the equity section of the statement of financial
position, you should opt for the 2-for-1 share split.
PROBLEM 15-11
(a)
May 5, 2015
Retained Earnings............................................... 1,800,000
Dividends Payable......................................... 1,800,000
(Declaration of cash dividend of
$0.60 per share on 3,000,000 shares)
June 30, 2015

Dividends Payable.............................................. 1,800,000
Cash................................................................ 1,800,000
(b)
November 30, 2015
Retained Earnings............................................... 1,800,000
Ordinary Share Dividend
Distributable................................................ 1,800,000
(Share dividend of 6%, 180,000
shares, at $10 per share)
December 31, 2015

Ordinary Share Dividend Distributable............... 1,800,000
Share Capital—Ordinary............................... 1,800,000
(c) EARNHART CORPORATION

Partial Statement of Financial Position
December 31, 2015
Equity
Share capital—ordinary $10 par value,
issued 3,180,000 shares............................................... $31,800,000
Share premium—ordinary.............................................. 5,000,000
Retained earnings........................................................... 25,100,000
Total equity................................................................... $61,900,000
Statement of Retained Earnings

For the Year Ended December 31, 2015
Balance, January 1.................................... $24,000,000

Add: Net income...................................... 4,700,000
28,700,000
Less: Dividends on ordinary shares:
Cash................................................ $1,800,000
Share (see note)............................. 1,800,000 3,600,000
Balance December 31............................... $25,100,000
Schedule of Share Premium—Ordinary

For the Year Ended December 31, 2015
Balance January 1..................................... $5,000,000

Balance December 31............................... $5,000,000
Note: The 6% share dividend (180,000 shares) was declared on November 30,
2015. For the purposes of the dividend, the par value of $10 per share
($1,800,000) was credited to Share Capital—Ordinary.

Ch15 Equity

Uploaded by

Copyright:

Available Formats

Ch15 Equity

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ch15 Equity

Uploaded by

Copyright:

Available Formats

CHAPTER 15

(d) Myers declares and distributes a property dividend

Retained Earnings (€10 X 2,000)................................... 20,000

(e) Myers declares a 2-for-1 share split

From: Good Student, Financial Advisor

Subject: Report on the effects of a share dividend and a share split

The three above-mentioned options would all result in an increased

A 20% SHARE DIVIDEND

This option would increase the shares outstanding by 20 percent, which

The following journal entry must be made to record this dividend.

Retained Earnings (€10 X 800,000)........................... 8,000,000

Although the Ordinary Share Dividend Distributable account increases,

A 100% SHARE DIVIDEND

Retained Earnings (€10 X 4,000,000)....................... 40,000,000

A 2-FOR-1 SHARE SPLIT

To generate the greatest interest in Ortago S.A. shares while maintaining

June 30, 2015

December 31, 2015

(c) EARNHART CORPORATION

Statement of Retained Earnings

Balance, January 1.................................... $24,000,000

Schedule of Share Premium—Ordinary

Balance January 1..................................... $5,000,000

You might also like