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

Page 1 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 1 preview image

iINSTRUCTOR’S RESOURCEMANUALPrepared byGrant MowbrayLangara CollegeHorngren’s AccountingVolume2Eleventh Canadian EditionTracie L. Miller-NoblesAustin Community CollegeBrenda MattisonTri-County Technical CollegeElla Mae MatsumuraUniversity of Wisconsin–MadisonCarol A MeissnerGeorgian CollegeJo-Ann L. JohnstonBritish Columbia Institute of TechnologyPeter R. NorwoodLangara College

Page 2 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 2 preview image

Page 3 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 3 preview image

iiiIntroduction to theInstructor’s Resource ManualWelcome to the Instructor’s Resource Manual for Volume 1 of Miller-Nobles, Mattison,Matsumura, Meissner, Johnston, and Norwood, Accounting,EleventhCanadian Edition. Foreach chapter, this supplement contains:1)AChapterOverview,with references to the TRY IT! feature, MyLabAccounting, and theAssignment Grid.2)A grid connecting theLearning ObjectivesandKey Questions.3)Suggested priorityof chapter topics, with “must cover,” “recommended,” and “if timepermits” chapter-topic suggestions.4)AChapter Outline,which includes, for each Learning Objective:•Discussion of each topic•Teaching Tips (Examples, discussion questions, suggested topic emphasis, etc.)5)AnAssignment Gridfor each chapter’s questions, indicating the:•Subject matter•Learning Objective(s)•Suggested completion time•Level of difficulty•Availability of an Excel Spreadsheet Template in MyLabAccounting•SuggestedPre-and Post-Testquestionsfor student practice6)A10-Minute Quizthat can be copied and distributed to students.7)AnAnswer Keyto the chapter’s 10-Minute Quiz.

Page 4 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 4 preview image

1CHAPTER 12PartnershipsChapter OverviewThis chapter introduces the student to partnership accounting. The characteristics of the partnership—thepartnership agreement, its limited life, mutual agency, unlimited liability, co-ownership of property,nopartnership income taxes, and partners’ equity accounts are explained. Partnership financial statementsare illustrated. General partnerships, limited partnerships, and limited liability partnerships are defined.The chapter then describes how to account for the organization of a partnership and how to dividepartnership 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 stated fraction,sharing based on capital investments, sharing based on capital investments and service, and sharing basedon “salaries” and interest. Partners’ withdrawals are discussed and illustrated.The next section covers admission of a new partner to the partnership and the withdrawal of a partnerfrom the business. The text illustrates how the new partner can buy an existing partner’s interest or investadditional capital in the partnership. In the latter case, the new partner may either receive a bonus fromthe existing partners or have to pay a bonus to the existing partners. The chapter then discusseswithdrawal of a partner at the book value of the partner’s capital balance, at less than the book value ofthe partner’s capital balance, and at more than the book value of the partner’s capital balance. The effectof 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 show assets sold at a gainand at a loss.Try It!questions appear at the end of each Learning Objective for students to test their understanding ofthe Learning Objective just completed. The answers appear at the end of the chapter and on MyLab.Studentsshould be directed toMyLabfor extra practice. Also included on MyLab are Excel templatesfor Exercises12-5and 12-18, Problems12-2A and 12-2B.TheAssignment Gridrecommends “Pre-Test” problems in MyLab that can be assigned before a test orexam to ensure students understand the topics, as well as “Post-Test” problems that students can completeafter a test or exam to check understanding before moving on.

Page 5 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 5 preview image

2Connecting Learning Objectives & Key QuestionsLearning ObjectiveKey Question1Identify thecharacteristics of a partnershipWhat are the characteristics of a partnership?2Account for partners’ initial investments in apartnershipHow do we account for partners’ investments in apartnership?3Allocate profits and losses to the partners bydifferent methodsHow can we allocate profits and losses to thepartners?4Account for the admission of a new partnerHow do we account for a new partner?5Account for the withdrawal of a partnerHow do we account for the withdrawal of apartner?6Account for the liquidation of a partnershipHow do we account for the ending of apartnership?Suggested Priority of Chapter TopicsMust cover•Characteristics of a partnership•Partnership financial statements•Forming a partnership•Sharingpartnership profits and losses•Partnership withdrawals (drawings)•Admission of a partner•Withdrawal of a partner from the business•Liquidation of a partnershipRecommended•Advantages and disadvantages of partnerships•Types of partnerships

Page 6 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 6 preview image

3ChapterOutlineLearning Objective 1: Identify the characteristics of a partnership(What are the characteristics of a partnership?)A.Apartnershipis an association of two or more partners who co-own a business usually with theintent to earn a profit. Exhibit12-1 lists the ten largest accounting partnerships in Canada.B.The following arecharacteristicsof a partnership:1.Thepartnership agreementmay be written or oral. A written agreement is preferable, because itclarifies issues such as how profitsand losses are to be shared.2.Apartnership’s life is limitedto the time the partners continue to own the business.a.Dissolutionends the partnership, although the business may continue under either the samename or a different one.b.Admissionorwithdrawalof a partner dissolves the old partnership and creates a new one.3.Mutual agencymeans that every partner may bind the partnership to contracts within the scopeof regular business operations.4.All partners haveunlimited personal liabilityfor partnership debts unless the partnership is alimited partnership. Alimited partnershiphas one or more general partners who assume thegeneral liability and the other partners are limited partners who only have limited liability.5.Allpropertycontributed to, or purchased by, the partnership, isco-ownedby all the partners.6.The partnership itselfdoes not pay income tax. Instead, each partner reports his share of theprofit or loss on hispersonal tax return.7.Accountingfor a partnership is similar to accounting for a proprietorship. Each partner has anindividual capital account and withdrawal account.1.Exhibit 12-2 lists the advantages and disadvantages of Partnerships.C.There are two basictypes of partnerships.1.Thegeneral partnership—each partner isa co-owner and has unlimited liability. Each partner’sshare of partnership income is taxed to the individual partner.2.Thelimited partnershiphas at least one general partner who has unlimited liability and limitedpartners who have limited liability. Many partnerships, such as accounting firms, organize aslimited liability partnerships (LLP)where every partner has limited liability for negligencedamages that result from another partner’s actions, but liability for the partner’s own negligenceis still unlimited. The LLP must maintain sufficient liability insurance to protect the public.

Page 7 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 7 preview image

4D.Thefinancial statementsof a partnership are similar to those of a proprietorship. Exhibit 12-3illustrates the financial statements of a partnership and a proprietorship.1.Theincome statementmay report the allocation of net income or net loss to the partners.2.Thestatement of owners’ equitymust report each partner’s investments, withdrawals, and shareof net income or net loss.3.The partners’ capital accounts may be listed separately on thebalance sheet.Teaching TipExplain that the only difference between the financial statements of a partnership and proprietorship isthat the partnership statements include details of each partners’ share of income, and additions andwithdrawals of equity.Teaching TipEmphasize the fact that even though the partners have a written partnership agreement, stating how profitsand losses are to be shared, in a loss situation where Partner A does not have sufficient resources to coverhis or her share, Partner B may,because of unlimited liability, be responsible for both A’s and B’s shareof the loss.Learning Objective 2: Account for partners’ initial investments in a partnership(How do we account for partners’ investments in a partnership?)A.Theinitial investmentsmade bythe partners are recorded in the same way a proprietor’s investmentsto the proprietorship are recorded. Exhibit 12-4 illustrates the partnership balance sheet.B.Partners may invest assetsandliabilities into the partnership.1.Assetsare recorded at current market value.2.Anyliabilitiestransferred to the partnership must be recorded.3.The difference between the market value of the assets and any liabilities contributed to thepartnership equals the credit to the partner’s individualcapitalaccount.Teaching TipStudents sometimes have difficulty understanding why property, plant, and equipment assets are recordedat market values, ignoring accumulated amortization amount. Emphasis should be placed on the fact thatthe partnership will need to determine useful life, residual value, and method of amortization; therefore,the accumulated amortization account will report a zero balance immediately after forming thepartnership.

Page 8 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 8 preview image

5Learning 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 inthe partnership agreement. Each partner’s share of the profits (losses) is added to (deducted from) hisor her capital account.B.Ways ofsharing profits and lossesinclude:1.Share profits and losses based on astated fractionfor each partner.2.Share profits and losses based on each partner’scapital investment.A percentage of total capitalinvested is calculated for each partner, and that percentage is applied to net income (loss) todetermine the partner’s share.3.Share profits and losses based on each partner’scapital investment and serviceto thepartnership.a.Profits are first allocated based on the partner’s capital investments in the business,b.Then profits is allocated based on the amount of service each partner provides thepartnership.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 partnerplus intereston each partner’scapital 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 salaryin the normal 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 arenotexpenses but merely ways to divide partnershipprofits and losses.Teaching TipThe above allocation includes salary, interest on capital investments, and remaining net loss allocationbased on an agreed-upon formula. Walk through the calculations, asthis is one of the more challengingconcepts.Stress the fact that no cash is paid to the partners when profits (losses) are allocated. It is a part of theyear-end closing entries that closes Income Summary to separate partner’s Capital accounts.C.Partnerwithdrawals (drawings)are recorded in the withdrawal account of the partner who madethe withdrawal.

Page 9 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 9 preview image

61.Withdrawals are accumulated until the partners’ individual Withdrawal accounts are closed intotheir individual Capital accounts (at the end ofthe period during the closing process).2.Partners are taxedon their share of net income (determined by one of the methods describedabove), not on the amountwithdrawnfrom the partnership.3.A partner’s withdrawals arenotexpenses.Teaching TipYou should explain that an allocation schedule is necessary when any of the above income-sharingarrangements is present. Also discuss the relationship, or rather lack thereof, between income allocationand the amount reported in the partners’ Withdrawal account for the period. For example, Partner Awithdrew $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 thepartnership?$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.Anew partnermay beadmitted to the partnership in several different ways.1.The new partner maypurchase an old partner’s interestdirectly from the old partner.a.On the partnership books, the old partner’s capital account is closed, and the new partner’scapital account is created.The equity is merely transferred from one partner to the other.Old Partner, CapitalXXNew Partner, CapitalXXb.Cash is exchanged between the old partner and the new partner. The cash doesnotflowthrough the partnership.Teaching TipYou should explain to students that since no cash was received by the partnership, the value of thetransaction for the partnership is simply the balance of the retiring partner’s capital account. The oldpartner’s capital account is debited for its balance and the new partner’s account is credited for the sameamount. The amount of cash exchanged is irrelevant.

Page 10 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 10 preview image

72.The new partner maypurchase a partnership interest by investing directlyin the partnership.a.If theold partners receive a bonus(the new partner contributes cash or other assetsgreaterthan the new partner’s equity), the bonus increases the old partners’ capital accounts based ontheir profit-and-loss-sharing ratio.CashXXNew Partner, CapitalXXOld Partner, CapitalXXOldPartner, CapitalXXb.If thenew partner receives a bonus(the new partner contributes cash or other assets with a fairvaluelessthan the new partner’s equity), the bonus decreases the old partners’ capital accounts based ontheir original profit-and-loss-sharing ratio.CashXXOld Partner, CapitalXXOld Partner, CapitalXXNew Partner, CapitalXXLearning Objective 5: Account for the withdrawal of a partner(How do we account for the withdrawal of a partner?)A.Withdrawalfrom the partnershipcauses the old partnership to dissolve.B.Apartial-yearnet income or loss is allocated to each partner if the withdrawal is between financialstatement dates. Assets arerevalued,and any gain or loss is allocated among the partners.C.Differentmethods of withdrawal are:1.One partner may sellhisinterestto an existing partner or to a new partner.Teaching TipEmphasize that the partnership ceases to exist at this point. Once the transaction to withdraw the partnerhas been recorded and posted, 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 thepurchaser.b.No cash flows through the partnership; the transaction occurssolely between the withdrawingpartner and the purchaser.c.Accounting for the sale of one partner’s interest to an existing partner or to a new partner isthe same as the accounting for a new partner’s admission throughout the purchase of apartner’sinterest.Old Partner, CapitalXXNew Partner, CapitalXX

Page 11 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 11 preview image

82.A partner maywithdrawfrom the partnership and take assets with valueequal to his capitalaccount(equal to book value).a.Assets may have to be revalued in order for the partners toshare 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 maywithdrawfrom the partnership and take assets with avalueless than his capitalbalance (less than book value).a.The remaining partners share the difference(a gain)based on their profit-and-loss sharingratio.Withdrawing Partner, CapitalXXCashXXRemaining Partners, CapitalXXb.Theold partnership is dissolved and a new one is created.4.A partner maywithdrawfrom the partnership and take assetsgreater in value than his capitalbalance (greater than book value).a.The bonus to the withdrawing partner reduces the remaining partners’ capital balances.Withdrawing Partner, CapitalXXRemaining Partners, CapitalXXCashXXb.The decrease in the remaining partners’ accounts is based on their profit-and-loss-sharingratio.c.The old partnership is dissolved and a newpartnership is created.D.Death of a partneralso dissolves a partnership.1.Settlement with the deceased partner’s estate is based on the partnership agreement. The deceasedpartner’s capital account is closed with a debit.2.A remaining partner maybuy 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 partnershipis a three-step process: selling the partnership assets, payingtheliabilities, and distributing the remaining cash (if any) to the partners.

Page 12 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 12 preview image

91.The first step in liquidating a partnership after the books are adjusted and closed is tosell theassets and allocate gains and lossesto 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 topay all the liabilities.All liabilities must bepaid before the partners can receive any cash.3.The final step in liquidation is todistribute the remaining cash.The distribution isnotdonebased on the profit-and-loss ratio but ratherbased on the partners’ capital balances.Teaching TipExplain that business liquidation is theprocess of going out of business by selling the entity assets andpaying its liabilities. The final step in liquidation is the distribution of the remaining cash to the owners.Review the steps of liquidation.B.Adeficiencymay arise in a partner’s capital account if the allocation of a loss creates adebitbalancein a partner’s capital account.1.One way of dealing with capital deficiency is for the partner(s) with the deficiency to contributeadditional cash or assets to erase his capitaldeficiency.2.If the deficient partner(s) cannot contribute assets to erase the deficiency, remaining partners mustabsorb the deficit and share losses based on the partners’ profit-and-loss-sharing ratio.

Page 13 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 13 preview image

10Assignment Grid(2nd column: * = Excel Template available; W = writing required)AssignmentTopic(s)LearningObjective(s)Time inMinutesLevel ofDifficultyMyLabPre-Test/(Post-Test)Starter 12-1Statement of equity15EasyStarter 12-2Statement of equity210EasyStarter 12-3Partnershipbalance sheet25-10EasyStarter 12-4Partnership balance sheet215EasyStarter 12-5Partners’ profits, losses, and capitalbalances35-10MediumStarter 12-6Dividing partnership profits based oncapital contributions and service310EasyStarter 12-7Partnership income statement1,2, 35-10EasyStarter 12-8Admitting a partner who purchases anexisting partner’s interest45-10MediumStarter 12-9Admitting a partner who invests in thebusiness45-10MediumStarter 12-10Admitting a new partner; bonus to theold partners410MediumStarter 12-11Withdrawal of a partner55-10MediumStarter 12-12WJournalize withdrawal of a partner55-10MediumStarter 12-13Withdrawal of a partner; assetrevaluation510-15MediumStarter 12-14Liquidation of a partnership at a loss610MediumStarter 12-15Liquidation of a partnership610MediumStarter 12-16Capital deficit upon liquidation of apartnership65-10MediumE12-1WPartnershipcharacteristics15-10EasyE12-2WOrganizing a business as a partnership110-15EasyE12-3Investments by partners210EasyE12-4Combining proprietorships into apartnership210-15MediumE12-5Recording a partner’s investment210-15MediumE12-6*Computing partners’ shares of netincome and net loss315-20MediumE12-7Share of income or loss310-15EasyE12-8Computing partners’ share of a loss35EasyE12-9Computing partners’ capital balances35-10EasyE12-10Admitting a new partner45-10EasyE12-11Admitting a new partner410-15EasyE12-12Using a partnership financialstatement, admitting a new partner1,3,410-15EasyE12-13Withdrawal of a partner from abusiness55-10EasyE12-14Withdrawal of a partner510-15MediumE12-15Liquidation of a partnership65-10MediumE12-16Liquidation of a partnership615-20MediumE12-17Liquidation of a partnership615-20DifficultE12-18*Using Excel for partnerships315-20Difficult

Page 14 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 14 preview image

11AssignmentTopic(s)LearningObjective(s)Time inMinutesLevel ofDifficultyMyLabPre-Test/(Post-Test)E12-19Account for partners’ initialinvestment, allocate profit and losses,account for the withdrawal of a partner2, 3, 520-25DifficultE12-20Preparing a partnership balance sheet220-30MediumBN12-1WPartnership issues1,520-30MediumEI12-1WP12-1AInvestments by partners215-20MediumP12-2A*Computing partners’ shares of netincome and net loss325-30DifficultPre-TestP12-3ACapital amounts for the balance sheetof a partnership2,325-35MediumP12-4AAdmitting a new partner415-20MediumP12-5ARecording changes in partnershipcapital4,520-25MediumP12-6AAccounting for partners’ investments;allocating profits and losses;accounting for the admission of a newpartner; accounting forthe withdrawalof a partner; preparing a partnershipbalance sheet2,3,4,540-60DifficultP12-7ALiquidation of a partnership635-45DifficultPre-TestP12-8ALiquidation of a partnership (deficits)630-40DifficultP12-1BInvestments bypartners215-20MediumP12-2B*Computing partners’ shares of netincome and net loss2,325-30DifficultPost-TestP12-3BCapital amounts for the balance sheetof a partnership2,325-35MediumP12-4BAdmitting a new partner415-20MediumP12-5BRecording changes in partnershipcapital4,520-25MediumP12-6BAccounting for partners’ investments;allocating profits and losses;accounting for the admission of a newpartner; accounting for the withdrawalof a partner; preparing apartnershipbalance sheet2,3,4,540-60DifficultP12-7BLiquidation of a partnership635-45DifficultPost-TestP12-8BLiquidation of a partnership (deficit)630-40DifficultP12-1CWDeciding on a capital structure1,2MediumP12-2CTheeffects of accounting decisions onprofits3DifficultDP12-1WSettling disagreements among partners310-15DifficultFSC12-110-15Medium

Page 15 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 15 preview image

12Name__________________________________________Date_____________________Section_____________CHAPTER 12TEN-MINUTE QUIZCircle the letter of the best response.1.Which of the following isnota characteristic of a partnership?A.Mutual agencyB.Limited liabilityC.Co-ownership of propertyD.A partnership agreement2.A partner contributed land to apartnership that was originally purchased for $50,000 but has a currentmarket value of $90,000. The entry to record the investment is:A.Debit Land, $50,000; Credit Capital, $50,000B.Debit Land, $50,000 and Gain on Land, $40,000; Credit Capital, $90,000C.Debit Land, $90,000; Credit Capital, $90,000D.Debit Land, $90,000; Credit Capital, $50,000 and Gain on Land, $40,0003.If the partners have not drawn up a partnership agreement, then the profits and losses must be dividedamong the partnersA.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 ontheir 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 tomanage the partnership in return for a $40,000 “salary.” If the partnership earns $100,000 in its firstyear, how much profit will be allocated to Adam?A.$70,000B.$60,000C.$50,000D.$40,0005.Frank Law and Gary Order invest $80,000 and $40,000, respectively, to form the Law and OrderPartnership. The partners share 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 thebalances of Law’s and Order’s capital accounts?LawOrderA.$60,000$20,000B.$65,000$35,000C.$70,000$30,000D.$140,000$60,000

Page 16 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 16 preview image

136.Which one of the following situations will involve an increase in the original partners’ capitalaccounts?A.Admission of a new partner to the partnership at a price less than book value.B.Admissionof 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, thepartnership had two partners with capital balances of $120,000 each. Ham’s capital balance in thepartnership will be:A.$60,000B.$90,000C.$100,000D.$120,0008.Liquidation of a partnership includes all of the followingexcept: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 capital balance and share profits and lossesin a 2:1 ratio, respectively. The cash balance is $40,000, non-cash assets total $210,000, and liabilitiestotal $150,000. If the non-cash assets are sold for $180,000, what amount will Thelma Lou receiveafter liquidation?A.$70,000B.$50,000C.$40,000D.$30,00010.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 incomestatement.B.Apartnership’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.

Page 17 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 17 preview image

14Answer Key to Chapter 12 Quiz1. B2. C3. D4. B5. C6. C7. B8. D9. D10. A

Page 18 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 18 preview image

1CHAPTER 13Corporations: Share Capital and the Balance SheetChapter OverviewThis chapter introduces the student to the corporation, the dominant form of business organization in ourcountry. The characteristics of the corporation are listed, and a brief description of how a corporation isorganized follows. The termshare capitalis defined. The two components of shareholders’ equity—contributed capital and retained earnings—are explained, followed by a discussion of dividends andshareholders’ rights.The next section of the chapter describes the different classes of shares (common and preferred) and theircharacteristics, followed by a brief description of no-par-value shares and stated value of shares. Includedis a discussion of issuing common shares for cash, issuing shares for assets other than cash, and issuingpreferred shares and convertible preferred shares. Ethical considerations related to shareholders’ equityare presented. After a discussion of organization costs, the shareholders’ equity section of a corporation’sbalance sheet is illustrated.The chapter continues with accounting for dividends. Dividend dates, journal entries for cash dividends,and dividends on cumulative and noncumulative preferred shares are discussed. Convertible preferredshares are explained. The different values of shares—market value and book value of preferred andcommon shares—are defined and illustrated. Two profitability measures are presented: rate of return ontotal assets and rate of return on shareholders’ equity. The chapter concludes with a discussion of theimpact of IFRS on share capital.Try It!questions appear at the end of each Learning Objective for students to test their understanding ofthe Learning Objective just completed. The answers appear at the end of the chapter and on MyLabAccounting.Students should be directed toMyLabfor extra practice. Also included on MyLab are Excel templatesfor Exercise 13-8, Problem 13-4A, Problem 13-6A, Problem 13-4B, and Problem 13-6B.TheAssignment Gridrecommends “Pre-Test” problems in MyLab that can be assigned before a test orexamto ensure students understand the topics, as well as “Post-Test” problems that students can completeafter a test or exam to check understanding before moving on.

Page 19 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 19 preview image

2Connecting Learning Objectives and Key QuestionsLearning ObjectiveKey Question1Identify the characteristics of a corporationWhat is a corporation, and why is it an importantform of business?2Record the issuance of shares, and prepare theshareholders’ equity section of a corporation’sbalance sheetHow do we record and presentshare information?3Account for cash dividendsWhat are cash dividends, and how do we accountfor them?4Use different share values in decision makingWhat is the difference between book value andmarket value of shares?5Evaluate a company's ROA andROEWhat are the rate of return on total assets (ROA)and the rate of return on common shareholder’sequity (ROE), and how do we calculate them?6Identify the impact of IFRS on share capitalHow does IFRS apply to share capital?Suggested Priority ofChapter TopicsMust cover•Corporations•Shareholders’ equity•Issuing shares•Accounting for cash dividends•Different values of shares•Evaluating operationsRecommended•Organization costs•The impact of IFRSon share capital

Page 20 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 20 preview image

3Chapter OutlineLearningObjective 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.Thecharacteristicsof a corporation arelisted below:1.Separate legal entity—a corporation is an entity formed under federal or provincial law andexists separately from its owners (shareholders).2.Continuous life and transferability of ownership—shareholders may transfer shares as theywish. Transfers do not affect the continuity of the corporation.3.No mutual agency—shareholders are not agents of the corporation and cannot commit thecorporation to a contract. Partnersareconsidered agents of the partnership.4Limited liability of shareholders—shareholders can lose no more than their investment in thebusiness. A partner has unlimited liability in a partnership.5.Separation of ownership and management—a shareholder’s only control of the operations of acorporation is the right toelect the board of directors. The corporation is managed by corporateofficers elected by the board of directors.6.Corporate taxation—corporations are separate taxable entities and pay several taxes not leviedon partnerships and proprietorships. Corporate earnings are subject to a degree ofdoubletaxationin that corporate earnings are taxed to the corporation as well as to the shareholder whenearnings are distributed as dividends. However, Canadian tax laws have attempted to minimizethis double taxation.7.Government regulation—corporations are subject to more regulation by governmental agenciesthat ensure full disclosure to investors and creditors.8.Unique costs for corporations—the cost for director’s insurance is unique to corporations.Exhibit 13-1 summarizes the advantages and disadvantages of the corporate form of organization.C.Toorganizea corporation, the incorporators obtainarticles of incorporationfrom the federal orprovincial government.1.Thearticles of incorporationinclude 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 theboard of directors,which sets policy and appoints the officers. Thedirectors elect achairpersonand appoint thepresident,who is responsible for day-to-dayoperations. (Exhibit 13-2 shows the authority structure in a corporation.)

Page 21 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 21 preview image

4Teaching TipConsider large corporations located near your school. Discuss possible corporate structures for one ofthese entities. If time permits, assign an exercise whereby students prepare a corporate structure,including names of top executives of an actual corporation.D.A companyissuesshare certificates (Exhibit 13-3) to owners for their investments. Thisinvestment is referred to asshare capital.These shares are issued from the shares authorized inthe articles of incorporation.E.Theshareholders’ equityof a corporation shows the two different sources of capital.1.Contributed capitalrepresents all amounts paid in by owners (shareholders).2.Retained earningsis the capital provided by profits from operations and is not distributed toshareholders. Retained earnings arenota fund of cash.a.A debit balance in retained earnings is called adeficit.b.Distribution of profits to owners is calleddividends.Contributed capitalis the portionof shareholders’ equity that cannot be used fordividends. Exhibit 13-4 focuses on theShareholders’ Equity section of a summarized balance sheet of Canadian TireCorporation, Limited.F.Shareholders’ rightsare:1.Tosellthe shares.2.Tovoteat shareholders’ meetings.3.To receive aproportionate share of dividends(if declared).4.To receive aproportionate share of assetsof the corporation if it is wound up.5.To maintain aproportionate ownershipin any new shares issued; this is called apreemptiveright.However, this right israrely exercised and usually withheld from shareholders.Learning Objective 2: Record the issuance of shares and prepare the shareholders’ equity section of acorporation’s balance sheet(How do we record and present share information?)A.Corporations may issue either preferred or common shares.1.Common sharesare the most basic form of contributed capital. They carry all the rightsdiscussed above unless specifically withheld. Some corporations may issue two classes ofcommon shares—one votingand one nonvoting.

Page 22 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 22 preview image

52.Preferred sharesalso carry shareholder rights, butare usually nonvoting. Preferred shareholdershave priority over common shareholders in the payment of dividends and in the distribution ofassets if the company is wound up. Different classes of preferred shares may also be issued.3.TheCanada Business Corporations Actand most provincial incorporating acts require commonand preferred shares to beno-par-valueshares, which means they do not have a value assignedto them by the articles of incorporation. (Par-value shares were once allowed by some provinces,and are still common in the U.S.)B.A corporationissuesshares when it needs capital. The shares issued are from the sharesauthorizedinthe articles of incorporation. A company need not issue all the shares authorized.1.The corporation may sell the shares to anunderwriterwho 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 areproduction of a share issue announcement by DIRTT Environmental Solutions Ltd.Teaching TipGotohttp://business.financialpost.com/markets, Google Finance, or Yahoo Finance. Selecta companyand show students how to find stock quotes online. You may wish to ask the students to bring a copy ofthe financial information section of a newspaper to class and have them look at a well-known company’sshares.4.When issuing common sharesfor cash, the Common Shares account is credited for the cashreceived.CashXXCommon SharesXX5.When issuing sharesfor assetsother than cash, the asset should be recordedat its current marketvalue. The common shares are then valued at thismarket value.AssetXXCommon SharesXX6.Accounting for the issuance ofpreferred shares for cashis similar to accounting for commonshares issued for cash.CashXXPreferred SharesXX7.Convertible preferred sharesare convertible atthe option of shareholders for other classes ofshares such as common shares. When convertible preferred shares are converted to common shares,the entry is:Preferred SharesXXCommon SharesXX

Page 23 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 23 preview image

6C.Theshareholders’ equity’ sectionof the balance sheet follows this format (Exhibit 13-7):Contributed capital:Preferred shares, $X, A shares authorized, B shares issued$XXXCommon shares, C shares authorized, D shares issuedXXXTotal contributed capitalXXXRetained earningsXXXTotal shareholders’ equityXXX(Many companies combine several accounts.)Teaching TipPoint out the importance of the order and proper description of the accounts and amounts reported withinthe contributed capital section of the balance sheet. Refer students to Exhibit 13-7.D.Issuing shares for assets other than cash can pose anethical challengebecause the company maybe tempted tooverstatethe asset value.E.Organization costs,such as legal fees for preparing documents, fees and taxes paid to theincorporation jurisdiction, and charges for selling company shares, are often incurred when acompany incorporates. These costs are accumulated in an account,Organization Costs, and thisaccount is treated as an intangible asset like patents or trademarks because it will benefit theorganization for as long as it operates. Like other intangible assets, corporations can amortize thiscost. Most corporations amortize the cost over a relatively short time period since it is often animmaterial cost. The Canada Revenue Agency allows corporations to expense a portion oforganization costs against taxable income.Learning Objective 3: Account for cash dividends(What are cash dividends, andhow do we account for them?)A.Corporationsdeclare dividendsfrom retained earnings and pay the dividends with cash.B.The relevantdates for dividends:1.Declaration date—the date the board of directors announces its intention to pay the dividendandthe dividend becomes a liability.Retained EarningsXXDividends PayableXX2.Date of record—the date, also announced by the board of directors, that determines who receivesthe dividend. No journal entry needed.3.Payment date—the date thedividend is paid.Dividends PayableXXCashXX

Page 24 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 24 preview image

7Exhibit 13-8 illustrates a “Notice of Dividends” for Good Company Inc.C.Preferred shareholders have adividend preference; that is, the preferred shareholders receivetheir dividendbeforethe common shareholders. This dividend is usually stated as a specific dollaramount.D.Cumulative preferred sharesaccumulate dividends each year until the dividends are paid.1.Dividends passed or not paid are calleddividends in arrears.Dividends in arrears are not aliability.2.The corporation is not obligated to pay dividends onnoncumulative preferred shares.Teaching TipReview the journal entries associated with the date of declaration and the date of payment. Discuss therules for allocatingdividends to preferred and common shareholders for both cumulative andnoncumulative preferred shares.Exhibit 13-9 demonstrates how Guthrie Industries Inc. divided dividends between its preferred andcommon shareholders.Learning Objective 4: Usedifferent shares values in decision making(What is the difference between book value and market value of shares?)A.Themarket value (market price)of shares is their current selling price.B.Book valueis a measure of the amount of net assets orshareholders’ equity per share.If a company has no preferred shares, then it uses formula 2 below to calculate book value. If acompany has both preferred and common shares, the preferred shareholders’ equity must becalculated before the common shareholders’ 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 arrearspreferred shareNumber of preferred shares outstanding2.Book value per=Total shareholders’ equity–Equity allocated to preferred shareholderscommon shareNumber of common shares outstanding3.Book value may be used to negotiate the purchase of a closely held business or when buying out ashareholder.4.Exhibit 13-10 contrasts the book values and market values of three companies.

Page 25 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 25 preview image

8Teaching TipDiscuss the different values that can be associatedwith shares. Emphasize that book value per share is notthe same as market value.Learning Objective 5: Evaluate a company’s ROA and ROE(What arethe 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 providedbelow:1.Return on assetsNet income + Interest expense=Average total assetsa.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.Returnon equity=Net income–Preferred dividendsAverage common shareholders’ equitya.This ratio shows the relationship between net income and common shareholders’ equity.b.Average common shareholders’ equity is computed by adding beginning and ending commonshareholders’ 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 exceedthe return on assets.Teaching TipHave students choose a company with financial statements available on the Internet. Use the aboveformulas to calculate each of the returns. If more than one year of data are available, have studentscalculate returns for each year, and discusswhethertheresults indicate an improvement or decline in thereturn.

Page 26 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 26 preview image

9Objective 6: Identify the impact ofIFRSon share capital(How does IFRS apply to share capital?)A.Theprinciplesgoverning accounting for share capital are essentially the same under accountingstandards for private enterprises (ASPE) and IFRS. See exhibit 13-11 for some minordifferences.Assignment Grid(2nd column: * = Excel Template available; W = writing required)AssignmentTopic(s)LearningObjective(s)Time inMinutesLevel ofDifficultyMyLabPre-Test/Post-TestStarter 13-1WAuthority structure in a corporation15EasyStarter 13-2WThe balance sheets of a corporation anda proprietorship15EasyStarter 13-3Issuing shares25EasyStarter 13-4WIssuing shares and analyzing retainedearnings25-10EasyStarter 13-5Contributed capital for a corporation25-10EasyStarter 13-6Preparing the shareholders’ equitysection of abalance sheet25MediumStarter 13-7Raising Capital25MediumStarter 13-8Accounting for cash dividends310MediumStarter 13-9Dividing cash dividends betweenpreferred and common shares35-10MediumStarter 13-10Book value per commonshare45MediumStarter 13-11Calculating book value45-10MediumStarter 13-12Computing return on assets55MediumStarter 13-13Computing return on equity55MediumE13-1WCharacteristics of a corporation15-10EasyE13-2WOrganizing a corporation15-10EasyE13-3Closing entries for a corporation15-10EasyE13-4WTypes of shares25-10EasyE13-5Issuing shares210-15EasyE13-6Issuing shares to finance the purchase ofassets210EasyE13-7Calculating shareholders’ equity data35-10MediumE13-8Shareholders’ equity section of abalance sheet210-15MediumE13-9Issuing shares and preparing theshareholders’ equity section of thebalance sheet215-20EasyE13-10Balance sheetpresentation210-15MediumE13-11Accounting for cash dividends310-15EasyE13-12Dividing cash dividends betweenpreferred and common shares310-15Easy

Page 27 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 27 preview image

10AssignmentTopic(s)LearningObjective(s)Time inMinutesLevel ofDifficultyMyLabPre-Test/Post-TestE13-13Computing dividends on preferred andcommon shares315-20MediumE13-14Bookvalue per share of preferred andcommon shares410-15EasyE13-15Book value per share of preferred andcommon shares; preferred dividends inarrears3,410-15MediumE13-16Evaluating profitability510-15EasyE13-17Calculating ROA and ROE510-15MediumPre-TestE13-18Record the issuance of shares andpreparation of shareholders’ equity,account for cash dividends2, 320-25MediumE13-19Accounting for shareholders’ equitytransactions2,315-20MediumBN13-1WCharacteristics ofcorporations’shareholders’ equity2,415-20MediumEI13-1WEthical IssueAlln/aP13-1AWOrganizing a corporation110-20EasyP13-2AJournalizing corporation transactionsand preparing the shareholders’ equitysection of the balance sheet230-45MediumPre-TestP13-3AIssuing shares and preparing theshareholders’ equity section of thebalance sheet215-20MediumPre-TestP13-4A*Shareholders’ equity section of thebalance sheet2,320-30MediumP13-5AAnalyzing the shareholders’ equity of acorporation2,320-35MediumP13-6A*Computing dividends on preferred andcommon shares320-30MediumP13-7AAnalyzing the shareholders’ equity of acorporation3,415-20MediumP13-8ARecording theissuance of shares;allocating cash dividends; calculatingbook value; preparing the liability andshareholders’ equity sections of thebalance sheet2,3,440-50DifficultPre-TestP13-9APreparing a corporation balance sheet;measuring profitability2,540-50MediumP13-1BWOrganizing a corporation110-20EasyP13-2BJournalizing corporation transactionsand preparing the shareholders’ equitysection of the balance sheet230-45MediumPost-TestP13-3BIssuing shares and preparing theshareholders’ equity section of thebalance sheet215-20MediumPost-TestP13-4B*Shareholders’ equity section of the2,320-30Medium

Page 28 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 28 preview image

11AssignmentTopic(s)LearningObjective(s)Time inMinutesLevel ofDifficultyMyLabPre-Test/Post-Testbalance sheetP13-5BAnalyzing the shareholders’ equity of acorporation2,320-35MediumP13-6B*Computingdividends on preferred andcommon shares320-30MediumP13-7BAnalyzing the shareholders’ equity of acorporation3,415-20MediumP13-8BRecording the issuance of shares;allocating cash dividends; calculatingbook value; preparing theshareholders’equity section of the balance sheet2,3,440-50MediumPost-TestP13-9BPreparing a corporation balance sheet;measuring profitability2,540-50MediumP13-1CWThe pros and cons of incorporation115-25MediumP13-2CWDeciding onan investment in shares;evaluating different types of shares4,520-30DifficultDP13-1Evaluating alternative ways of raisingcapital230-45MediumFSC13-1WShareholders’ equity220-30MediumFSC13-2WShareholders’ equity215-20Medium

Page 29 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 29 preview image

12Name__________________________________________Date_____________________Section_____________CHAPTER 13TEN-MINUTE QUIZCircle the letter of the best response.The shareholders’ equity of Allen Corporation appears below:Table 13-1Contributedcapital:Preferred shares, $6, 5,000 shares authorized, 500 shares issued....................$55,000Common shares, 200,000 shares authorized, 30,000 shares issued...................900,000Total contributed capital..................................................................................955,000Retained earnings..................................................................................................256,000Totalshareholders’ equity.....................................................................................$1,211,0001.Refer to Table 13-1. The entry to record the issuance of 1,000 common shares for $35 per sharewould be:A.Cash1,000Common Shares1,000B.Cash35,000Common Shares35,000C.Cash40,000Common Shares40,000D.Cash40,000Preferred Shares40,0002.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 isfalse?A.Assets increase $80,000.B.Retained Earnings isnot 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.$550B.$500C.$110D.$1004.Which of the following statements aboutdividends isfalse?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, declarationdate, and paymentdate.D.Dividends in arrears must be paid before other dividends.

Page 30 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 30 preview image

135.Which of the following statements isnotdescriptive 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 isnota characteristic of a corporation?A.Transferability of ownershipB.Separate legal entityC.No mutual agencyD.Unlimited liability of shareholdersThe shareholders’ equity of Borland Ltd. appears below.Table 13-2201202017Contributed capitalPreferred shares, $6, 5,000 shares issued andoutstanding$ 500,000$500,000Common shares, 10,000 sharesissued and outstanding500,000400,000Total contributed capital1,000,000900,000Retained earnings200,000100,000Total shareholders’ equity$1,200,000$1,000,000Note: The preferred shares are non-cumulative,and no dividend was declared during 2020.7.Refer to Table 13-2. The book value of each commonsharein 2020is:A.$100B.$70C.$69D.$508.Refer to Table 13-2. What is the rate of return on common shareholders’ equity for 2020?A.11.67%B.11.86%C.16.67%D.6.36%9.Refer toTable 13-2. Assume in 2020, Borland Ltd. declared and paid total cash dividends of $40,000.How much dividends did common shareholders receive?A.$10,000B.$30,000C.$40,000D.Cannot be determined based on the information provided.10.Holders of preferred shares do not normally haveA.Preference as to dividends.B.Full voting rights.C.Preference as to assets on liquidation.D.Ownership interest in the corporation.

Page 31 of 31

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 31 preview image

14Answer Key to Chapter 13 Quiz1. B2. D3. C4. C5. A6. D7. B8. A9. A10. B

Preview Mode

This document has 131 pages. Sign in to access the full document!

Report

Learning Tools

Writing Tools

Browse Resources

Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition - Page 1

Study Now!

Document Details

Related Documents

Horngren's Accounting, 12th Edition Solution Manual

Accounting Principles II – Traditional Cost Systems

Accounting Principles II – Statement of Cash Flows

Accounting Principles II – Partnerships

Accounting Principles II – Managerial and Cost Accounting Concepts

Accounting Principles II – Long-Term Liabilities

Accounting Principles II – Investments

Accounting Principles II – Incremental Analysis

Accounting Principles II – Flexible Budgets and Standard Costs

Accounting Principles II – Financial Statement Analysis

Company

Explore

Study Tools