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Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition

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Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition summarizes important topics for quick revision.

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    i INSTRUCTOR’S RESOURCE MANUAL Prepared by Grant Mowbray Langara College Horngren’s Accounting Volume 2 Eleventh Canadian Edition Tracie L. Miller - Nobles Austin Community College Brenda Mattison Tri - County Technical College Ella Mae Matsumura University of Wisconsin – Madison Carol A Meissner Georgian College Jo - Ann L. Johnston British Columbia Institute of Technology Peter R. Norwood Langara College

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    iii Introduction to the Instructor’s Resource Manual Welcome to the Instructor’s Resource Manual for Volume 1 of Miller - Nobles, Mattison, Matsumura, Meissner, Johnston, and Norwood, Accounting, Eleventh Canadian Edition . For each chapter, this supplement contains: 1) A Chapter Overview, with references to the TRY IT! feature, MyLab Accounting , and the Assignment Grid. 2) A grid connecting the Learning Objectives and Key Questions . 3) Suggested priority of chapter topics, with “must cover,” “recommended,” and “if time permits” chapter - topic suggestions. 4) A Chapter Outline, which includes, for each Learning Objective: • Discussion of each topic • Teaching Tips (Examples, discussion questions, suggested top ic emphasis, etc.) 5) An Assignment Grid for each chapter’s questions, indicating the: • Subject matter • Learning Objective(s) • Suggested completion time • Level of difficulty • A vailability of an Excel Spreadsheet Template in MyLab Accounting • Suggested Pre - and Post - Test questions for student practice 6) A 10 - Minute Quiz that can be copied and distributed to students. 7) An Answer Key to the chapter’s 10 - Minute Qui z.

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    1 CHAPTER 12 Partnerships Chapter Overview This chapter introduces the student to partnership accounting. The characteristics of the partnership — the partnership agreement, its limited life, mutual agency, unlimited liability, co - ownership of property, no partnership income taxes, and partners’ equity accounts are explained. Partnership financial statements are illustrated. General partnerships, limited partnerships, and limited liability partnerships are defined. The chapter then describes how to accoun t for the organization of a partnership and how to divide partnership profits and losses. The partnership agreement should specify the method to be used; however, the text describes four methods that could be used. These methods are: sharing based on a sta ted fraction, sharing based on capital investments, sharing based on capital investments and service, and sharing based on “salaries” and interest. Partners’ withdrawals are discussed and illustrated. The next section covers admission of a new partner to t he partnership and the withdrawal of a partner from the business. The text illustrates how the new partner can buy an existing partner’s interest or invest additional capital in the partnership. In the latter case, the new partner may either receive a bonu s from the existing partners or have to pay a bonus to the existing partners. The chapter then discusses withdrawal of a partner at the book value of the partner’s capital balance, at less than the book value of the partner’s capital balance, and at more t han the book value of the partner’s capital balance. The effect of the death of a partner upon the business is discussed. Liquidation of a partnership is then explained. The text provides a three - step process for liquidating a partnership. Illustrations sh ow assets sold at a gain and at a loss. Try It! questions appear at the end of each Learning Objective for students to test their understanding of the Learning Objective just completed. The answers appear at the end of the chapter and on MyLab. Students should be directed to MyLab for extra practice. Also included on MyLab are Excel templates for Exercise s 12 - 5 and 12 - 18 , Problem s 12 - 2A and 12 - 2B. The Assignment Grid recommends “Pre - Test” problems in MyLab that can be assigned before a test or exam to ens ure students understand the topics, as well as “Post - Test” problems that students can complete after a test or exam to check understanding before moving on.

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    2 Connecting Learning Objectives & Key Questions Learning Objective Key Question 1 Identify the characteristics of a partnership What are the characteristics of a partnership? 2 Account for partners’ initial investments in a partnership How do we account for partners’ investments in a partnership? 3 Allocate profits and losses to the partners by different methods How can we allocate profits and losses to the partners? 4 Account for the admission of a new partner How do we account for a new partner? 5 Account for the withdrawal of a partner How do we account for the withdrawal of a partner? 6 Account for the liquidation of a partnership How do we account for the ending of a partnership? Suggested Priority of Chapter Topics Must cover • Characteristics of a partnership • Partnership financial statements • Forming a partnership • Sharing partnership profits and losses • Partnership withdrawals (drawings) • Admission of a partner • Withdrawal of a partner from the business • Liquidation of a partnership Recommended • Advantages and disadvantages of partnerships • Types of partnerships

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    3 Chapter Outline Learning Objective 1: Identify the characteristics of a partnership (What are the characteristics of a partnership?) A. A partnership is an association of two or more partners who co - own a business usually with the intent to earn a profit. Exhibit 12 - 1 lists the ten largest accounting partnerships in Canada. B. The following are characteristics of a partnership: 1. The partnership agreement may be written or oral. A written agreement is preferable, because it clarifies issues such as how profits and losses are to be shared. 2. A partnership’s life is limited to the time the partners continue to own the business. a. Dissolution ends the partnership, although the business may continue under either the same name or a different one. b. Admission o r withdrawal of a partner dissolves the old partnership and creates a new one. 3. Mutual agency means that every partner may bind the partnership to contracts within the scope of regular business operations. 4. All partners have unlimited personal liability for partnership debts unless the partnership is a limited partnership. A limited partnership has one or more general partners who assume the general liability and the other partners are limited partners who only have limited li ability. 5. All property contributed to, or purchased by, the partnership, is co - owned by all the partners. 6. The partnership itself does not pay income tax . Instead, each partner reports his share of the profit or loss on his personal tax return. 7. A ccounting for a partnership is similar to accounting for a proprietorship. Each partner has an individual capital account and withdrawal account. 1. Exhibit 12 - 2 lists the advantages and disadvantages of Partnerships. C. There are two basic types of partne rships. 1. The general partnership — each partner is a co - owner and has unlimited liability. Each partner’s share of partnership income is taxed to the individual partner. 2. The limited partnership has at least one general partner who has unlimited liability and limited partners who have limited liability. Many partnerships, such as accounting firms, organize as limited liability partnerships (LLP) where every partner has limited liability for negli gence damages that result from another partner’s actions, but liability for the partner’s own negligence is still unlimited. The LLP must maintain sufficient liability insurance to protect the public.

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    4 D. The financial statements of a partnership are simi lar to those of a proprietorship. Exhibit 12 - 3 illustrates the financial statements of a partnership and a proprietorship. 1. The income statement may report the allocation of net income or net loss to the partners. 2. The statement of owners’ equity mu st report each partner’s investments, withdrawals, and share of net income or net loss. 3. The partners’ capital accounts may be listed separately on the balance sheet. Teaching Tip Explain that the only difference between the financial statements of a partnership and proprietorship is that the partnership statements include details of each partners’ share of income, and additions and withdrawals of equity. Teaching Tip Emphasize t he fact that even though the partners have a written partnership agreement, stating how profits and losses are to be shared, in a loss situation where Partner A does not have sufficient resources to cover his or her share, Partner B may, because of unlimit ed liability , be responsible for both A’s and B’s share of the loss. Learning Objective 2: Account for partners’ initial investments in a partnership (How do we account for partners’ investments in a partnership?) A. The initial investments made by the partners are recorded in the same way a proprietor’s investments to the proprietorship are recorded. Exhibit 12 - 4 illustrates the partnership balance sheet. B. Partners may invest assets and liabilities into the partnership. 1. Assets are recorded a t current market value. 2. Any liabilities transferred to the partnership must be recorded. 3. The difference between the market value of the assets and any liabilities contributed to the partnership equals the credit to the partner’s individual capital account . Teaching Tip Students sometimes have difficulty understanding why property, plant, and equipment assets are recorded at market values, ignoring accumulated amortization amount. Emphasis should be placed on the fact that the partnership will need to determine useful lif e, residual value, and method of amortization; therefore, the accumulated amortization account will report a zero balance immediately after forming the partnership.

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    5 Learning Objective 3: Allocate profits and losses to the partners by different methods (How can we allocate profits and losses to the partners?) A. By law, the partners must share profits and losses equally unless there is some statement otherwise in the partnership agreement. Each partner’s share of the profits (losses) is added to (deducted from) his or her capital account. B. Ways of sharing prof its and losses include: 1. Share profits and losses based on a stated fraction for each partner. 2. Share profits and losses based on each partner’s capital investment. A percentage of total capital invested is calculated for each partner, and that perce ntage is applied to net income (loss) to determine the partner’s share. 3. Share profits and losses based on each partner’s capital investment and service to the partnership. a. Profits are first allocated based on the partner’s capital investments in t he business, b. Then profits is allocated based on the amount of service each partner provides the partnership. b. The remainder of the profits (losses) is divided equally or on agreed formula. 4. Share profits and losses based on a “salary” to each pa rtner plus interest on each partner’s capital investment. a. Profits are first allocated based on the amount of service, which is rewarded by paying a “salary” to the partner(s). This “salary” is a predetermined sum to be withdrawn, not a salary in the n ormal sense of the word. b. Next, interest on capital balances is distributed to partners. c. Any remaining net income is divided on agreed formula. Salary and interest allocated to partners are not expenses but merely ways to divide partnership profits and losses. Teaching Tip The above allocation includes salary, interest on capital investments, and remaining net loss allocation based on an agreed - upon formula. Walk through the calculations, as this is one of the more challenging concepts. Stress the fact that no cash is paid to the partners when profits (losses) are allocated. It is a part of the year - end closing entries that closes Income Summary to separate partner’s Capital accounts. C. Par tner withdrawals (drawings) are recorded in the withdrawal account of the partner who made the withdrawal.

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    6 1. Withdrawals are accumulated until the partners’ individual Withdrawal accounts are closed into their individual Capital accounts (at the end of the period during the closing process). 2. Partners are taxed on their share of net income (determined by one of the methods described above), not on the amount withdrawn from the partnership. 3. A partner’s withdrawals are not expenses. Teaching Tip You should explain that an allocation schedule is necessary when any of the above income - sharing arrangements is present. Also discuss the relationship, or rather lack thereof, between income allocation and the amount reported in the partners’ Withdrawal a ccount for the period. For example, Partner A withdrew $25,000 cash from the partnership during the year. According to the allocation schedule, Partner A’s share of net income was $20,000. Which amount will Partner A report as income from the partnership? $20,000. Learning Objective 4: Account for the admission of a new partner (How do we account for a new partner?) A. When one partner leaves or a new partner is admitted to a partnership, the old partnership dissolves. B. A new partner may be admitted to the partnership in several different ways. 1. The new partner may purchase an old partner’s interest directly from the old partner. a. On the partnership books, the old partner’s capital account is closed, and the new partner’s capital account is created. The equity is merely transferred from one partner to the other. Old Partner, Capital XX New Partner, Capital XX b. Cash is exchange d between the old partner and the new partner. The cash does not flow through the partnership. Teaching Tip You should explain to students that since no cash was received by the partnership, the value of the transaction for the partnership is simply the balance of the retiring partner’s capital account. The old partner’s capital account is debited for its balanc e and the new partner’s account is credited for the same amount. The amount of cash exchanged is irrelevant.

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    7 2. The new partner may purchase a partnership interest by investing directly in the partnership. a. If the old partners receive a bonus (the n ew partner contributes cash or other assets greater than the new partner’s equity), the bonus increases the old partners’ capital accounts based on their profit - and - loss - sharing ratio. Cash XX New Partner, Capital XX Old Partner, Capital XX Old Partner, Capital XX b. If the new partner receives a bonus (the new partner contributes cash or other assets with a fair value less than the new partner’s equity), the bonus decreases the old partners’ capital accounts based on their original profit - and - l oss - sharing ratio. Cash XX Old Partner, Capital XX Old Partner, Capital XX New Partner, Capital XX Learning Objective 5: Account for the withdrawal of a partner (How do we account for the withdrawal of a partner?) A. Withdrawal from the partnership causes the old partnership to dissolve. B. A partial - year net income or loss is allocated to each partner if the withdrawal is between financial statement dates. Assets are revalued , and any gain or loss is allocated among the partners. C. Different methods of withdrawal are: 1. One partner may sell his interest to an existing partner or to a new partner. Teaching Tip Emphasize that the partnership ceases to exist at this point. Once the transaction to withdraw the partner has been recorded and post ed, business activity from that point forward is recognized as a separate entity. . a. On the books, an entry is made to transfer equity from the withdrawing partner to the purchaser. b. No cash flows through the partnership; the transaction occurs solely between the withdrawing partner and the purchaser. c. Accounting for the sale of one partner’s interest to an existing partner or to a new partner is the same as the accounting for a new partner’s admission throughout the purchase of a partner’s interest. Old Partner, Capital XX New Partner, Capital XX

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    8 2. A partner may withdraw from the partnership and take assets with value equal to his capital account (equal to book value) . a. Assets may have to be revalued in order for the partners to share changes in market values. b. The withdrawing partner receives the value of the updated (current) capital balances. c. The old partnership is dissolved and a new one is created. 3. A partner may withdraw from the partnership and take assets with a value less than his capital balance (less than book value). a. The remaining partners share the difference (a gain) based on their profit - and - loss sharing ratio. Withdrawing Partner, Capital XX Cash XX Remaining Partners, Capital XX b. The old partnership is dissolved and a new one is created. 4. A partner may withdraw from the partnership and take assets greater in value than his capital balance (greater than book value). a. The bonus to the withdrawing partner reduces the remaining part ners’ capital balances. Withdrawing Partner, Capital XX Remaining Partners, Capital XX Cash XX b. The decrease in the remaining partners’ accounts is based on their profit - and - loss - sharing ratio. c. The old partnership is dissolved and a new partnership is created. D. Death of a partner also dissolves a partnership. 1. Settlement with the deceased partner’s estate is based on the partnership agreement. The deceased partner’s capital account is closed with a debit. 2. A remaining partner may buy the deceased partner’s equity. Learning Objective 6: Account for the liquidation of a partnership (How do we account for the ending of a partnership?) A. Liquidation of a partnership is a three - step process: selling the partnership assets, paying the liabilities, and distributing the remaining cash (if any) to the partners.

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    9 1. The first step in liquidating a partnership after the books are adjusted and closed is to sell the assets and allocate gains and losses to the partners based on their profit - and - loss - sharing ratio. Exhibit 12 - 5 illustrates the liquidation of a partnership when the assets are sold at a gain. 2. The second step in liquidating a partnership is to pay all the liabilities. All liabilities must be paid before the partners can rece ive any cash. 3. The final step in liquidation is to distribute the remaining cash. The distribution is not done based on the profit - and - loss ratio but rather based on the partners’ capital balances . Teaching Tip Explain that business liquidation is the process of going out of business by selling the entity assets and paying its liabilities. The final step in liquidation is the distribution of the remaining cash to the owners. Review the steps of liquidation. B. A deficiency may arise in a partner’s cap ital account if the allocation of a loss creates a debit balance in a partner’s capital account. 1. One way of dealing with capital deficiency is for the partner(s) with the deficiency to contribute additional cash or assets to erase his capital deficiency. 2. If the deficient partner(s) cannot contribute assets to erase the deficiency, remaining partners must absorb the deficit and share losses based on the partners’ profit - and - loss - sharing ratio.

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    10 Assignment Grid (2nd column: * = Excel Temp late available; W = writing required) Assignment Topic(s) Learning Objective(s) Time in Minutes Level of Difficulty MyLab Pre - Test/ (Post - Test) Starter 12 - 1 Statement of equity 1 5 Easy Starter 12 - 2 Statement of equity 2 10 Easy Starter 12 - 3 Partnership balance sheet 2 5 - 10 Easy Starter 12 - 4 Partnership balance sheet 2 15 Easy Starter 12 - 5 Partners’ profits, losses, and capital balances 3 5 - 10 Medium Starter 12 - 6 Dividing partnership profits based on capital contributions and service 3 10 Easy Starter 12 - 7 Partnership income statement 1, 2, 3 5 - 10 Easy Starter 12 - 8 Admitting a partner who purchases an existing partner’s interest 4 5 - 10 Medium Starter 12 - 9 Admitting a partner who invests in the business 4 5 - 10 Medium Starter 12 - 10 Admitting a new partner; bonus to the old partners 4 10 Medium Starter 12 - 11 Withdrawal of a partner 5 5 - 10 Medium Starter 12 - 1 2 W Journalize w ithdrawal of a partner 5 5 - 10 Medium Starter 12 - 1 3 Withdrawal of a partner; asset revaluation 5 10 - 15 Medium Starter 12 - 1 4 Liquidation of a partnership at a loss 6 10 Medium Starter 12 - 1 5 Liquidation of a partnership 6 10 Medium Starter 12 - 1 6 Capital deficit upon liquidation of a partnership 6 5 - 10 Medium E12 - 1 W Partnership characteristics 1 5 - 10 Easy E12 - 2 W Organizing a business as a partnership 1 10 - 15 Easy E12 - 3 Investments by partners 2 10 Easy E12 - 4 Combining proprietorships into a partnership 2 10 - 15 Medium E12 - 5 Recording a partner’s investment 2 10 - 15 Medium E12 - 6 * Computing partners’ shares of net income and net loss 3 15 - 20 Medium E12 - 7 Share of income or loss 3 10 - 15 Easy E12 - 8 Computing partners’ share of a loss 3 5 Easy E12 - 9 Computing partners’ capital balances 3 5 - 10 Easy E12 - 10 Admitting a new partner 4 5 - 10 Easy E12 - 11 Admitting a new partner 4 10 - 15 Easy E12 - 1 2 Using a partnership financial statement, admitting a new partner 1, 3, 4 10 - 15 Easy E12 - 1 3 Withdrawal of a partner from a business 5 5 - 10 Easy E12 - 1 4 Withdrawal of a partner 5 10 - 15 Medium E12 - 1 5 Liquidation of a partnership 6 5 - 10 Medium E12 - 1 6 Liquidation of a partnership 6 15 - 20 Medium E12 - 1 7 Liquidation of a partnership 6 15 - 20 Difficult E12 - 1 8 * Using Excel for partnerships 3 15 - 20 Difficult

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    11 Assignment Topic(s) Learning Objective(s) Time in Minutes Level of Difficulty MyLab Pre - Test/ (Post - Test) E12 - 1 9 Account for partners’ initial investment, allocate profit and losses, account for the withdrawal of a partner 2, 3, 5 20 - 25 Difficult E12 - 20 Preparing a partnership balance sheet 2 20 - 30 Medium BN12 - 1 W Partnership issues 1, 5 20 - 30 Medium EI12 - 1 W P12 - 1A Investments by partners 2 15 - 20 Medium P12 - 2A * Computing partners’ shares of net income and net loss 3 25 - 30 Difficult Pre - Test P12 - 3A Capital amounts for the balance sheet of a partnership 2, 3 25 - 35 Medium P12 - 4A Admitting a new partner 4 15 - 20 Medium P12 - 5A Recording changes in partnership capital 4, 5 20 - 25 Medium P12 - 6 A Accounting for partners’ investments; allocating profits and losses; accounting for the admission of a new partner; accounting for the withdrawal of a partner; preparing a partnership balance sheet 2, 3, 4, 5 40 - 60 Difficult P12 - 7 A Liquidation of a partnership 6 35 - 45 Difficult Pre - Test P12 - 8 A Liquidation of a partnership (deficits) 6 30 - 40 Difficult P12 - 1B Investments by partners 2 15 - 20 Medium P12 - 2B * Computing partners’ shares of net income and net loss 2, 3 25 - 30 Difficult Post - Test P12 - 3B Capital amounts for the balance sheet of a partnership 2, 3 25 - 35 Medium P12 - 4B Admitting a new partner 4 15 - 20 Medium P12 - 5B Recording changes in partnership capital 4, 5 20 - 25 Medium P12 - 6 B Accounting for partners’ investments; allocating profits and losses; accounting for the admission of a new partner; accounting for the withdrawal of a partner; preparing a partnership balance sheet 2, 3, 4, 5 40 - 60 Difficult P12 - 7 B Liquidation of a partnership 6 35 - 45 Difficult Post - Test P12 - 8 B Liquidation of a partnership (deficit) 6 30 - 40 Difficult P12 - 1C W Deciding on a capital structure 1, 2 Medium P12 - 2C The effects of accounting decisions on profits 3 Difficult DP12 - 1 W Settling disagreements among partners 3 10 - 15 Difficult FSC12 - 1 10 - 15 Medium

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    12 Name __________________________________________ Date _____________________ Section _____________ CHAPTER 12 TEN - MINUTE QUIZ Circle the letter of the best response. 1. Which of the following is not a characteristic of a partnership? A. Mutual agency B. Limited liability C. Co - ownership of property D. A partnership agreement 2. A partner contributed land to a partnership that was originally purchased for $50,000 but has a current market value of $90,000. The entry to record the investment is: A. Debit Land, $50,000; Credit Capital, $50,000 B. Debit Land, $50,000 and Gain on Land, $40,000; Credit Capital, $90,0 00 C. Debit Land, $90,000; Credit Capital, $90,000 D. Debit Land, $90,000; Credit Capital, $50,000 and Gain on Land, $40,000 3. If the partners have not drawn up a partnership agreement, then the profits and losses must be divided among the partners A. according to their original capital investments. B. according to the balance in their capital accounts. C. to minimize taxes. D. equally. 4. Adam, Ben, and Carla form a partnership and agree to share their profits based on “salaries” plus 10% interest on their capital investments with any remainder divided equally. At the beginning of the year, their capital investments are $100,000, $50,000, and $150,000, respectively. Adam has agreed to manage the partnership in return for a $40,000 “salary.” If the part nership earns $100,000 in its first year, how much profit will be allocated to Adam? A. $70,000 B. $60,000 C. $50,000 D. $40,000 5. Frank Law and Gary Order invest $80,000 and $40,000, respectively, to form the Law and Order Partnership. The partners shar e profits and losses in a 3:1 ratio. During the year, Law withdraws $70,000 and Order withdraws $30,000. If the partnership earns $80,000 during the year, what are the balances of Law’s and Order’s capital accounts? Law Order A. $60,000 $20,000 B. $65,000 $35,000 C. $70,000 $30,000 D. $140,000 $60,000

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    13 6. Which one of the following situations will involve an increase in the original partners’ capital accounts? A. Admission of a new partner to the partnership at a price less than book value. B. Admission of a partner at book value. C. Sale of assets at a gain during the liquidation process. D. Withdrawal of a partner at more than book value. 7. Chris Ham invests $120,000 in a partnership for a 1/4 interest. Prior to Ham’s admission, the partnership had t wo partners with capital balances of $120,000 each. Ham’s capital balance in the partnership will be: A. $60,000 B. $90,000 C. $100,000 D. $120,000 8. Liquidation of a partnership includes all of the following except : A. Selling the partnership assets. B. Allocating any gain or loss from the sale of assets to each partner. C. Paying all partnership liabilities. D. Distributing the remaining cash in the partners’ profit - and - loss - sharing ratio. 9. Partners Thelma Lou and Aunt Bee each have a $50,000 capita l balance and share profits and losses in a 2:1 ratio, respectively. The cash balance is $40,000, non - cash assets total $210,000, and liabilities total $150,000. If the non - cash assets are sold for $180,000, what amount will Thelma Lou receive after liquid ation? A. $70,000 B. $50,000 C. $40,000 D. $30,000 10. Which of the following statements about partnership financial statements is false? A. The salary that a partner receives for profit sharing is reported on the partnership income statement. B. A partnership’s balance sheet will contain a capital account for each partner. C. The financial statements of a partnership are similar to those of a proprietorship. D. The partnership balance sheet will contain a withdrawal account for each partner.

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    14 Answer Key to Chapter 12 Quiz 1. B 2. C 3. D 4. B 5. C 6. C 7. B 8. D 9. D 10. A

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    1 CHAPTER 13 Corporations: Share Capital and the Balance Sheet Chapter Overview This chapter introduces the student to the corporation, the dominant form of business organization in our country. The characteristics of the corporation are listed, and a brief description of how a corporation is organized follows. The term share capital is defined. The two components of shareholders’ equity — contributed capital and retained earnings — are explained, followed by a discussion of dividends and shareholders’ rights. The next section of the chapter describes the different classes of shares (commo n and preferred) and their characteristics, followed by a brief description of no - par - value shares and stated value of shares. Included is a discussion of issuing common shares for cash, issuing shares for assets other than cash, and issuing preferred shar es and convertible preferred shares. Ethical considerations related to shareholders’ equity are presented. After a discussion of organization costs, the shareholders’ equity section of a corporation’s balance sheet is illustrated. The chapter continues wit h accounting for dividends. Dividend dates, journal entries for cash dividends, and dividends on cumulative and noncumulative preferred shares are discussed. Convertible preferred shares are explained. The different values of shares — market value and book v alue of preferred and common shares — are defined and illustrated. Two profitability measures are presented: rate of return on total assets and rate of return on shareholders’ equity. The chapter concludes with a discussion of the impact of IFRS on share cap ital. Try It! questions appear at the end of each Learning Objective for students to test their understanding of the Learning Objective just completed. The answers appear at the end of the chapter and on MyLab Accounting . Students should be directed to MyLab for extra practice. Also included on MyLab are Excel templates for Exercise 13 - 8 , Problem 13 - 4A, Problem 13 - 6A, Problem 13 - 4B, and Problem 13 - 6B. The Assignment Grid recommends “Pre - Test” problems in M y Lab that can be assigned before a test or exam to ensure students understand the topics, as well as “Post - Test” problems that students can complete after a test or exam to check understanding before moving on.

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    2 Connecting Learning Objectives and Key Questions Learning Objective Key Question 1 Identify the characteristics of a corporation What is a corporation, and why is it an important form of business? 2 Record the issuance of shares, and prepare the shareholders’ equity section of a corporation’s balance sheet How do we record and present share information? 3 Account for cash dividends What are cash dividends, and how do we account for them? 4 Use different share values in decision making What is the difference between book value and market value of shares? 5 Evaluate a company's ROA and ROE What are the rate of return on total assets (ROA) and the rate of return on common shareholder’s equity (ROE), and how do we calculate them? 6 Identify the impact of IFRS on share capital How does IFRS apply to share capital? Suggested Priority of Chapter Topics Must cover • Corporations • Shareholders’ equity • Issuing shares • Accounting for cash dividends • Different values of shares • Evaluating operations Recommended • Organization costs • The i mpact of IFRS on share capital

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    3 Chapter Outline Learning Objective 1: Identify the characteristics of a corporation (What is a corporation, and why is it an important form of business?) A. The corporation is the dominant form of business organization in Canada. B. The characteristics of a corporation are listed below: 1. Separate legal entity — a corporation is an entity formed under federal or provincial law and exists separately from its owners (shareholders). 2. Continuous life and transferability of ownership — shareholders may transfer shares as they wi sh. Transfers do not affect the continuity of the corporation. 3. No mutual agency — shareholders are not agents of the corporation and cannot commit the corporation to a contract. Partners are considered agents of the partnership. 4 Limited liability of s hareholders — shareholders can lose no more than their investment in the business. A partner has unlimited liability in a partnership. 5. Separation of ownership and management — a shareholder’s only control of the operations of a corporation is the right to elect the board of directors. The corporation is managed by corporate officers elected by the board of directors. 6. Corporate taxation — corporations are separate taxable entities and pay several taxes not levied on partnerships and proprietorships. Corp orate earnings are subject to a degree of double taxation in that corporate earnings are taxed to the corporation as well as to the shareholder when earnings are distributed as dividends. However, Canadian tax laws have attempted to minimize this double ta xation. 7. Government regulation — corporations are subject to more regulation by governmental agencies that ensure full disclosure to investors and creditors. 8. Unique costs for corporations — the cost for director’s insurance is unique to corporations. E xhibit 13 - 1 summarizes the advantages and disadvantages of the corporate form of organization. C. To organize a corporation, the incorporators obtain articles of incorporation from the federal or provincial government. 1. The articles of incorporation include the number of shares the corporation is authorized to issue. 2. Bylaws (adopted by the incorporators) govern the acts of the corporation. 3. The shareholders elect the board of directors, which sets policy and appoints the officers. The directors e lect a chairperson and appoint the president, who is responsible for day - to - day operations. (Exhibit 13 - 2 shows the authority structure in a corporation.)

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    4 Teaching Tip Consider large corporations located near your school. Discuss possible corporate structures for one of these entities. If time permits, assign an exercise whereby students prepare a corporate structure, including names of top executives of an actual corpor ation. D. A company issues share certificates (Exhibit 13 - 3) to owners for their investments. This investment is referred to as share capital. These shares are issued from the shares authorized in the articles of incorporation. E. The shareholders’ eq uity of a corporation shows the two different sources of capital. 1. Contributed capital represents all amounts paid in by owners (shareholders). 2. Retained earnings is the capital provided by profits from operations and is not distributed to shareholder s. Retained earnings are not a fund of cash. a. A debit balance in retained earnings is called a deficit. b. Distribution of profits to owners is called dividends. Contributed capital is the portion of shareholders’ equity that cannot be used for dividends. Exhibit 13 - 4 focuses on the Shareholders’ Equity section of a summarized balance sheet of Canadian Tire Corporation, Limited. F. Shareholders’ rights are: 1. To sell the shares. 2. To vote at shareholders’ meetings. 3. To receive a proportionate share of dividends (if declared). 4. To receive a proportionate share of assets of the corporation if it is wound up. 5. To maintain a proportionate ownership in any new shares issued; this is called a preemptive right. However, this right is rarely exercised and usually withheld from shareholders. Learning Objective 2: Record the issuance of shares and prepare the shareholders’ equity section of a corporation’s balance sheet (How do we record and present share information?) A. Corporatio ns may issue either preferred or common shares. 1. Common shares are the most basic form of contributed capital. They carry all the rights discussed above unless specifically withheld. Some corporations may issue two classes of common shares — one voting and one nonvoting.

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    5 2. Preferred shares also carry shareholder rights, but are usually nonvoting. Preferred shareholders have priority over common shareholders in the payment of dividends and in the distribution of assets if the company is wound up. Different classes of preferred shares may also be issued. 3. The Canada Business C orporations Act and most provincial incorporating acts require common and preferred shares to be no - par - value shares, which means they do not have a value assigned to them by the articles of incorporation. (Par - value shares were once allowed by some provin ces, and are still common in the U.S.) B. A corporation issues shares when it needs capital. The shares issued are from the shares authorized in the articles of incorporation. A company need not issue all the shares authorized. 1. The corporation may sel l the shares to an underwriter who agrees to sell the shares to its clients. 2. The issuance of shares increases assets and shareholders’ equity. 3. Shares may be issued for cash or in exchange for assets other than cash. Exhibit 13 - 5 is a reproduction o f a share issue announcement by DIRTT Environmental Solutions Ltd. Teaching Tip Go to http://business.financialpost.com/markets , Google Finance, or Yahoo Finance . Select a company and show students how to find stock quotes online. You may wish to ask the students to bring a copy of the financial information section of a newspaper to class and have them look at a well - known company’s shares. 4. When issuing common shares for cash , the Common Shares account is credited for the cash received. Cash XX Common Shares XX 5. When issuing shares for assets other than cash, the asset should be recorded at its current market value . The common shares are then valued at this market value. Asset XX Common Shares XX 6. Accounting for the issuance of preferred shares for cash is similar to accounting for common shares issued for cash. Cash XX Preferred Shares XX 7. Convertible preferred shares are convertible at the option of shareholders for other classes of shares such as common shares. When convertible preferred shares are converted to common shares, the entry is: Preferred Shares XX Common Shares XX

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    6 C. The shareholders’ equity’ section of the balance sheet follows this format (Exhibit 13 - 7): Contributed capital: Preferred shares, $X, A shares authorized, B shares issued $XXX Common shares, C shares authorized, D shares issued XXX Total contributed capital XXX Retained earnings XXX Total shareholders’ equity XXX (Many companies combine several accounts.) Teaching Tip Point out the importance of the order and proper description of the accounts and amounts reported within the contributed capital secti on of the balance sheet. Refer students to Exhibit 13 - 7. D. Issuing shares for assets other than cash can pose an ethical challenge because the company may be tempted to overstate the asset value. E. Organization costs, such as legal fees for preparing documents, fees and taxes paid to the incorporation jurisdiction, and charges for selling company shares, are often incurred when a company incorporates. These costs are accumulated in an account, Organization Costs , and th is account is treated as an intangible asset like patents or trademarks because it will benefit the organization for as long as it operates. Like other intangible assets, corporations can amortize this cost. Most corporations amortize the cost over a relat ively short time period since it is often an immaterial cost. The Canada Revenue Agency allows corporations to expense a portion of organization costs against taxable income. Learning Objective 3: Account for cash dividends (What are cash dividends, and how do we account for them?) A. Corporations declare dividends from retained earnings and pay the dividends with cash. B. The relevant dates for dividends: 1. Declaration date — the date the board of directors announces its intention to pay the dividend and the dividend becomes a liability. Retained Earnings XX Dividends Payable XX 2. Date of record — the date, also announced by the board of directors, that determines who receives the dividend. No journal entry needed. 3. Payment date — the date the dividend is paid. Dividends Payable XX Cash XX

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    7 Exhibit 13 - 8 illustrates a “Notice of Dividends” for Good Company Inc. C. Preferred shareholders have a dividend preference ; that is, the preferred shareholders receive their dividend before the com mon shareholders. This dividend is usually stated as a specific dollar amount. D. Cumulative preferred shares accumulate dividends each year until the dividends are paid. 1. Dividends passed or not paid are called dividends in arrears. Dividends in arre ars are not a liability. 2. The corporation is not obligated to pay dividends on noncumulative preferred shares . Teaching Tip Review the journal entries associated with the date of declaration and the date of payment. Discuss the rules for allocating dividends to preferred and common shareholders for both cumulative and noncumulative preferred shares. Exhibit 13 - 9 demonstrates how Guthrie Industries Inc. divided dividends between its preferred and common shareholders. Learning Objective 4: Use different shares values in decision making (What is the difference between book value and market value of shares?) A. The market value (market price) of shares is their current selling price. B. Book value is a measure of the amount of net assets or shareholders’ equity per share. If a company has no preferred shares, then it uses formula 2 below to calculate book value. If a company has both preferred and common shares, the preferred shareholders’ equity must be calculated before the common shareho lders’ equity can be calculated. Preferred shareholders’ equity (or equity allocated to preferred shareholders) is the top line in formula 1 below. 1. Book value per = Liquidation value + Dividends in arrears preferred share Number of preferred shares o utstanding 2. Book value per = Total shareholders’ equity – Equity allocated to preferred shareholders common share Number of common shares outstanding 3. Book value may be used to negotiate the purchase of a closely held business or when buying out a shareholder. 4. Exhibit 13 - 10 contrasts the book values and market values of three companies.

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    8 Teaching Tip Discuss the different values that can be associated with shares. Emphasize that book value per share is not the same as market value. Learning Objective 5: Evaluate a company’s ROA and ROE ( What are the rate of return on total assets (ROA) and the rate of return on common shareholder’s equity (ROE), and how do we calculate them? ?) A. Investors and creditors evaluate management’s ability to earn profits. Two key ratios are provided below: 1. Return on assets Net income + Interest expense = Average total assets a. This ratio measures how well a company uses its assets to earn income. b. Average total assets are computed by adding beginning and ending assets and dividing by 2. 2. Return on equity = Net income – Preferred dividends Average common shareholders’ equity a. This ratio shows the relationship between net income and common shareholders’ equity. b. Average common shareholders’ equity is computed by adding beginning a nd ending common shareholders’ equity (shareholders’ equity minus preferred equity) and dividing by 2. B. The higher the rates of return, the more successful the company. Return on equity should exceed the return on assets. Teaching Tip Have students choose a company with financial statements available on the Internet. Use the above formulas to calculate each of the returns. If more than one year of data are available, have students calculate returns for each year, and discuss whether the results indicate an improvement or decline in the return.

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    9 Objective 6: Identify the impact o f IFRS on share capital (How does IFRS apply to share capital?) A. The principles governing accounting for share capital are essentially the same under accounting standards for private enterprises (ASPE) and IFRS . See exhibit 13 - 11 for some minor differences. Assignment Grid (2nd column: * = Excel Template available; W = writing re quired) Assignment Topic(s) Learning Objective (s) Time in Minutes Level of Difficulty MyLab Pre - Test/ Post - Test Starter 13 - 1 W Authority structure in a corporation 1 5 Easy Starter 13 - 2 W The balance sheets of a corporation and a proprietorship 1 5 Easy Starter 13 - 3 Issuing shares 2 5 Easy Starter 13 - 4 W Issuing shares and analyzing retained earnings 2 5 - 10 Easy Starter 13 - 5 Contributed capital for a corporation 2 5 - 10 Easy Starter 13 - 6 Preparing the shareholders’ equity section of a balance sheet 2 5 Medium Starter 13 - 7 Raising Capital 2 5 Medium Starter 13 - 8 Accounting for cash dividends 3 10 Medium Starter 13 - 9 Dividing cash dividends between preferred and common shares 3 5 - 10 Medium Starter 13 - 1 0 Book value per common share 4 5 Medium Starter 13 - 1 1 Calculating book value 4 5 - 10 Medium Starter 13 - 1 2 Computing return on assets 5 5 Medium Starter 13 - 13 Computing return on equity 5 5 Medium E13 - 1 W Characteristics of a corporation 1 5 - 10 Easy E13 - 2 W Organizing a corporation 1 5 - 10 Easy E13 - 3 Closing entries for a corporation 1 5 - 10 Easy E13 - 4 W Types of shares 2 5 - 10 Easy E13 - 5 Issuing shares 2 10 - 15 Easy E13 - 6 Issuing shares to finance the purchase of assets 2 10 Easy E13 - 7 Calculating shareholders’ equity data 3 5 - 10 Medium E13 - 8 Shareholders’ equity section of a balance sheet 2 10 - 15 Medium E13 - 9 Issuing shares and preparing the shareholders’ equity section of the balance sheet 2 15 - 20 Easy E13 - 1 0 Balance sheet presentation 2 10 - 15 Medium E13 - 1 1 Accounting for cash dividends 3 10 - 15 Easy E13 - 1 2 Dividing cash dividends between preferred and common shares 3 10 - 15 Easy

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    10 Assignment Topic(s) Learning Objective (s) Time in Minutes Level of Difficulty MyLab Pre - Test/ Post - Test E13 - 1 3 Computing dividends on preferred and common shares 3 15 - 20 Medium E13 - 1 4 Book value per share of preferred and common shares 4 10 - 15 Easy E13 - 1 5 Book value per share of preferred and common shares; preferred dividends in arrears 3, 4 10 - 15 Medium E13 - 1 6 Evaluating profitability 5 10 - 15 Easy E13 - 1 7 Calculating ROA and ROE 5 10 - 15 Medium Pre - Test E13 - 18 Record the issuance of shares and preparation of shareholders’ equity, account for cash dividends 2, 3 20 - 25 Medium E13 - 19 Accounting for shareholders’ equity transactions 2, 3 15 - 20 Medium BN13 - 1 W Characteristics of corporations’ shareholders’ equity 2, 4 15 - 20 Medium E I 13 - 1 W Ethical Issue All n/a P13 - 1A W Organizing a corporation 1 10 - 20 Easy P13 - 2A Journalizing corporation transactions and preparing the shareholders’ equity section of the balance sheet 2 30 - 45 Medium Pre - Test P13 - 3A Issuing shares and preparing the shareholders’ equity section of the balance sheet 2 15 - 20 Medium Pre - Test P13 - 4A * Shareholders’ equity section of the balance sheet 2, 3 20 - 30 Medium P13 - 5A Analyzing the shareholders’ equity of a corporation 2, 3 20 - 35 Medium P13 - 6A * Computing dividends on preferred and common shares 3 20 - 30 Medium P13 - 7A Analyzing the shareholders’ equity of a corporation 3, 4 15 - 20 Medium P13 - 8A Recording the issuance of shares; allocating cash dividends; calculating book value; preparing the liability and shareholders’ equity sections of the balance sheet 2, 3, 4 40 - 50 Difficult Pre - Test P13 - 9A Preparing a corporation balance sheet; measuring profitability 2, 5 40 - 50 Medium P13 - 1B W Organizing a corporation 1 10 - 20 Easy P13 - 2B Journalizing corporation transactions and preparing the shareholders’ equity section of the balance sheet 2 30 - 45 Medium Post - Test P13 - 3B Issuing shares and preparing the shareholders’ equity section of the balance sheet 2 15 - 20 Medium Post - Test P13 - 4B * Shareholders’ equity section of the 2, 3 20 - 30 Medium

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    11 Assignment Topic(s) Learning Objective (s) Time in Minutes Level of Difficulty MyLab Pre - Test/ Post - Test balance sheet P13 - 5B Analyzing the shareholders’ equity of a corporation 2, 3 20 - 35 Medium P13 - 6B * Computing dividends on preferred and common shares 3 20 - 30 Medium P13 - 7B Analyzing the shareholders’ equity of a corporation 3, 4 15 - 20 Medium P13 - 8B Recording the issuance of shares; allocating cash dividends; calculating book value; preparing the shareholders’ equity section of the balance sheet 2, 3, 4 40 - 50 Medium Post - Test P13 - 9B Preparing a corporation balance sheet; measuring profitability 2, 5 40 - 50 Medium P13 - 1C W The pros and cons of incorporation 1 15 - 25 Medium P13 - 2 C W Deciding on an investment in shares; evaluating different types of shares 4, 5 20 - 30 Difficult DP13 - 1 Evaluating alternative ways of raising capital 2 30 - 45 Medium FSC13 - 1 W Shareholders’ equity 2 20 - 30 Medium FSC13 - 2 W Shareholders’ equity 2 15 - 20 Medium

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    12 Name __________________________________________ Date _____________________ Section _____________ CHAPTER 13 TEN - MINUTE QUIZ Circle the letter of the best response. The shareholders’ equity of Allen Corporation appears below: Table 13 - 1 Contributed capital: Preferred shares, $6, 5,000 shares authorized, 500 shares issued .................... $ 55,000 Common shares, 200,000 shares authorized, 30,000 shares issued ................... 900,000 Total contributed capital ................................ ................................ .................. 955,000 Retained earnings ................................ ................................ ................................ .. 256,000 Total shareholders’ equity ................................ ................................ ..................... $ 1,211,000 1. Refer to Table 13 - 1. The entry to record the issuance of 1,000 common shares for $35 per share would be: A. Cash 1,000 Common Shares 1,000 B. Cash 35,000 Common Shares 35,000 C. Cash 40,000 Common Shares 4 0,000 D. Cash 40,000 Preferred Shares 40,000 2. Refer to Table 13 - 1. Allen Corporation issued 2,000 common shares in exchange for land valued at $80,000. Which of the following statements is false ? A. Assets increase $80,000. B. Retained Earnings is not affected. C. Shareholders’ equity increases $80,000. D. Total contributed capital decreases $80,000. 3. Refer to Table 13 - 1. The average issue price of a preferred share is: A. $550 B. $500 C. $110 D. $100 4. Which of the following statements about dividends is false ? A. Dividends become a liability on the declaration date. B. The payment of dividends reduces retained earnings. C. Chronologically, the relevant dates for dividends occur in this order: date of record, declaration date, and payment date. D. Dividends in arrears must be paid before other dividends.

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    13 5. Which of the following statements is not descriptive of common shares? A. Dividends are listed as an expense on the income statement. B. Issuing shares is less risky than borrowing. C. Shareholders are considered owners, not creditors, of a corporation. D. The payment of dividends is not mandatory. 6. Which of the following is not a characteristic of a corporation? A. Transferability of ownership B. Separate legal entity C. No mutual ag ency D. Unlimited liability of shareholders The shareholders’ equity of Borland Ltd. appears below. Table 13 - 2 201 20 201 7 Contributed capital Preferred shares, $6, 5,000 shares issued and outstanding $ 500,000 $ 500,000 Common shares, 10,000 shares issued and outstanding 500,000 400,000 Total contributed capital 1,000,000 900,000 Retained earnings 200,000 100,000 Total shareholders’ equity $ 1,200,000 $ 1,000,000 Note: The preferred shares are non - cumulative, and no dividend was declared dur ing 20 20 . 7. Refer to Table 13 - 2. The book value of each common share in 20 20 is: A. $100 B. $70 C. $69 D. $50 8. Refer to Table 13 - 2. What is the rate of return on common shareholders’ equity for 20 20 ? A. 11.67% B. 11.86% C. 16.67% D. 6.36% 9. Refer to Table 13 - 2. Assume in 20 20 , Borland Ltd. declared and paid total cash dividends of $40,000. How much dividends did common shareholders receive? A. $10,000 B. $30,000 C. $40,000 D. Cannot be determined based on the information provided. 10. Holders of pre ferred shares do not normally have A. Preference as to dividends. B. Full voting rights. C. Preference as to assets on liquidation. D. Ownership interest in the corporation.

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    14 Answer Key to Chapter 13 Quiz 1. B 2. D 3. C 4. C 5. A 6. D 7. B 8. A 9. A 10. B

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