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

Name: Lecture Notes for Horngren's Accounting, Volume 2, Eleventh Canadian Edition
Brand: Academic Documents Platform
Price: 9.99 USD
Availability: InStock
Author: Mia Johnson

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

Mia Johnson

Contributor

4.1

about 2 months ago

Preview (31 of 131)

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

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 topic emphasis, etc.)
5) An Assignment Grid for each chapter’s questions, indicating the:
• Subject matter
• Learning Objective(s)
• Suggested completion time
• Level of difficulty
• Availability 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 Quiz.

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 account 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 stated 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 the 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 bonus 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 than 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 show 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 Exercises 12-5 and 12-18, Problems 12-2A and 12-2B.
The Assignment Grid recommends “Pre-Test” problems in MyLab 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.

Loading page 4...

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

Loading page 5...

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 or 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 liability.
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. Accounting 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 partnerships.
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 negligence
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.

Loading page 6...

4
D. The financial statements of a partnership are similar 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 must 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 the 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 unlimited 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 at 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 life, residual value, and method of amortization; therefore,
the accumulated amortization account will report a zero balance immediately after forming the
partnership.

Loading page 7...

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 profits 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 percentage 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 the 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 partner 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 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 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. Partner withdrawals (drawings) are recorded in the withdrawal account of the partner who made
the withdrawal.

Loading page 8...

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 account 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 exchanged 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 balance and the new partner’s account is credited for the same
amount. The amount of cash exchanged is irrelevant.

Loading page 9...

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 new 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-loss-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 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 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

Loading page 10...

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 partners’ 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.

Loading page 11...

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 receive 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 capital 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.

Loading page 12...

10
Assignment Grid (2nd column: * = Excel Template 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 12-12 W Journalize withdrawal of a partner 5 5-10 Medium
Starter 12-13 Withdrawal of a partner; asset
revaluation
5 10-15 Medium
Starter 12-14 Liquidation of a partnership at a loss 6 10 Medium
Starter 12-15 Liquidation of a partnership 6 10 Medium
Starter 12-16 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
E12-12 Using a partnership financial
statement, admitting a new partner
1, 3, 4 10-15 Easy
E12-13 Withdrawal of a partner from a
business
5 5-10 Easy
E12-14 Withdrawal of a partner 5 10-15 Medium
E12-15 Liquidation of a partnership 6 5-10 Medium
E12-16 Liquidation of a partnership 6 15-20 Medium
E12-17 Liquidation of a partnership 6 15-20 Difficult
E12-18 * Using Excel for partnerships 3 15-20 Difficult

Loading page 13...

11
Assignment Topic(s) Learning
Objective(s)
Time in
Minutes
Level of
Difficulty
MyLab
Pre-Test/
(Post-Test)
E12-19 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
P12-6A 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
P12-7A Liquidation of a partnership 6 35-45 Difficult Pre-Test
P12-8A 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
P12-6B 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
P12-7B Liquidation of a partnership 6 35-45 Difficult Post-Test
P12-8B 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

Loading page 14...

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, $90,000
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 partnership 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 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 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

Loading page 15...

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 two 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 capital 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 liquidation?
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.

Loading page 16...

Loading page 17...

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 (common 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 shares 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 with 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 value 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 capital.
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 MyLab 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.

Loading page 18...

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 impact of IFRS on share capital

Loading page 19...

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
wish. 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 shareholders —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. Corporate 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 taxation.
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.
Exhibit 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 elect a chairperson and appoint the president, who is responsible for day-to-day
operations. (Exhibit 13-2 shows the authority structure in a corporation.)

Loading page 20...

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 corporation.
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’ equity 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
shareholders. 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. Corporations 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.

Loading page 21...

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 Corporations 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 provinces,
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 sell 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 of 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

Loading page 22...

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 section 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 this
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 relatively 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

Loading page 23...

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 common 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 arrears 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 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 arrears
preferred share Number of preferred shares outstanding
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.

Loading page 24...

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 and 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.

Loading page 25...

9
Objective 6: Identify the impact of 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 required)
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 13-10 Book value per common share 4 5 Medium
Starter 13-11 Calculating book value 4 5-10 Medium
Starter 13-12 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
E13-10 Balance sheet presentation 2 10-15 Medium
E13-11 Accounting for cash dividends 3 10-15 Easy
E13-12 Dividing cash dividends between
preferred and common shares
3 10-15 Easy

Loading page 26...

10
Assignment Topic(s) Learning
Objective
(s)
Time in
Minutes
Level of
Difficulty
MyLab
Pre-Test/
Post-Test
E13-13 Computing dividends on preferred and
common shares
3 15-20 Medium
E13-14 Book value per share of preferred and
common shares
4 10-15 Easy
E13-15 Book value per share of preferred and
common shares; preferred dividends in
arrears
3, 4 10-15 Medium
E13-16 Evaluating profitability 5 10-15 Easy
E13-17 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
EI13-1 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

Loading page 27...

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
P13-2C 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

Loading page 28...

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 40,000
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.

Loading page 29...

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 agency
D. Unlimited liability of shareholders
The shareholders’ equity of Borland Ltd. appears below.
Table 13-2
20120 2017
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 during 2020.
7. Refer to Table 13-2. The book value of each common share in 2020 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 2020?
A. 11.67%
B. 11.86%
C. 16.67%
D. 6.36%
9. Refer to Table 13-2. Assume in 2020, Borland Ltd. declared and paid total cash dividends of $40,000.
How much dividends did common shareholders receive?
A. $10,000
B. $30,000
C. $40,000
D. Cannot be determined based on the information provided.
10. Holders of preferred 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.

Loading page 30...

Loading page 31...

28 more pages available. Scroll down to load them.

Preview Mode

100%

Study Now!

XY-Copilot AI

Unlimited Access

Secure Payment

Instant Access

24/7 Support

AI Assistant

Document Details

Subject

Accounting

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

Study Now!

Document Details

Related Documents

Horngren's Accounting, 12th Edition Solution Manual

Financial Accounting: A Critical Approach 2013, 4th Edition Test Bank

Introduction To Managerial Accounting With Connect With Smartbook, 4th Edition Test Bank

Modern Advanced Accounting In Canada, 7th Edition Test Bank

Test Bank For Intermediate Accounting: Reporting and Analysis, 3rd Edition

Test Bank for Advanced Accounting, 13th Edition

Financial Accounting: A User Perspective , 6th Canadian Edition Solution Manual

Financial Accounting Theory And Analysis: Text And Cases, 10th Edition Solution Manual

Accounting Theory, 7th Edition Solution Manual

Company Accounting: Australia-New Zealand, 5th Edition Solution Manual