Chapter 15

Worksheet 2
Q1. Treasury share transactions.
The original sale of the €50 par value ordinary shares of Gray Company was recorded as follows:
Cash 290,000
Share Capital—Ordinary 250,000
Share Premium—Ordinary 40,000
Instructions
Record the treasury share transactions (given below) under the cost method:
Transactions:
(a) Bought 300 ordinary shares as treasury shares at €62.
(b) Sold 80 shares of treasury shares at €60.
(c) Sold 40 treasury shares at €68.

Solution :
(a) Treasury
(a) Treasury Shares 18,600 18,60
Shares Cash 18,600 0 18,60
Cash 0
(b) Cash Cash
(b) 4,800 4,80
Retained Retained Earnings 160 0
Earnings Treasury Shares 4,960 160 4,96
(c) Treasury
Cash 2,720 0
(c) Cash Share Premium—Treasury 240 2,72
Share Premium—
Treasury Shares 2,480 0 240
Treasury 2,48
0
Q2. Equity transactions.
Foley Corporation has the following capital structure at the beginning of the year:
Share capital—preference 6%, $50 par value, 20,000 shares authorized,
6,000 shares issued and outstanding 300,000
Share capital—ordinary, $10 par value, 60,000 shares authorized,
40,000 shares issued and outstanding 400,000
Share premium—ordinary 110,000
Retained earnings 440,000
Total equity $1,250,000
Instructions
(a) Record the following transactions which occurred consecutively (show all calculations).
1. A total cash dividend of £90,000 was declared and payable to shareholders of record. Record dividends payable
on ordinary and preference shares in separate accounts.
Solution:
Solution: (a) 1. Retained Earnings 90,000
(a) 1. Retained Earnings 90,000
Dividends Payable—Preference (£300,000
Dividends Payable—Preference× .06) 18,000
(£300,000 × .06) 18,000
Dividends Payable—Ordinary
Dividends Payable—Ordinary 72,000 72,000
2. A 10% ordinary share dividend was declared. The average fair value of the ordinary shares is £18 a share.
Solution:
40,000 shares
X 10%
(a) 2. Retained Earnings
4,000 shares as share dividend 40,000
Ordinary Share Dividend Distributable 40,000
X £10
£40,000 total dividend

3. Assume that net income for the year was £150,000 (record the closing entry) and the board of directors appropriated £70,000 of
retained earnings for plant expansion
Solution:

3. Income Summary 150,000

Retained Earnings 150,000

Retained Earnings 70,000

Retained Earnings Appropriated for Plant Expansion 70,000
(b) Construct the equity section incorporating all the above information.

Solution:
Equity
6% Preference shares, £50 par value, 20,000 shares authorized,
(b) Equity
6,000 shares issued and outstanding £ 300,000
6% Preference shares, £50 par value, 20,000 shares authorized,
Share capital—ordinary, £10shares
6,000 par value, 60,000
issued andshares authorized,
outstanding £ 300,000
Share
40,000 shares capital—ordinary,
issued and outstanding £10 par value, 60,000 shares authorized, 400,000
40,000 shares issued and outstanding
Ordinary share dividend distributable
400,000 40,000
Ordinary share dividend distributable 40,000
Share premium—ordinaryShare premium—ordinary 110,000 110,000
Retained earnings—unappropriated*
Retained earnings—unappropriated* £390,000 £390,000
Appropriated for plantAppropriated
expansion for plant expansion 70,000 70,000
Total retained earnings
Total retained earnings
460,000 460,000
Total equity £1,310,000
Total equity – £90,000 – £40,000 + £150,000 – £70,000 = £390,000
*£440,000 £1,310,000
*£440,000 – £90,000 – £40,000 + £150,000 – £70,000 = £390,000
Q3. On January 1, 2022, Belloc Limited, a toy manufacturer, had outstanding share capital of 100,000 common shares with apar value of $2 each.
During 2022, the following dividend transactions occurred:
May 5: A 10% share dividend was declared and distributed.
May 15: A cash dividend of $0.80 per share was declared for shareholders of record
on May 20, to be distributed on May 25.
May 25: The cash dividend was distributed.
May 27: In order to reduce some excess inventory levels, the company declared a property dividend. Each share was to receive eight units of
the Atomic Accountant action figure. Due to declining sales levels, the inventory carrying amount had previously been written down to its
estimated realizable value of $0.75 per unit. The record date for this dividend was May 30, and the distribution date was May 31.
May 31: The property dividend was distributed.
Required: Prepare all the journal entries necessary to record the above dividend
Retained
transactions. earnings.................................................20,000
Solution:
May 5 Ordinary share dividend distributable.............20,000
Ordinary share dividend distributable..................................20,000
Share capital ordinary....................................... 20,000
(100,000 × 10% × $2)
May 15 Retained earnings.................................................88,000
Retained earnings.......................................88,000
Dividend
Dividendpayable.............................................88,000
payable....................................88,000
(100,000
(100,000 × 110%
× 110% × $0.80)
× $0.80)

May 20 no journal entry required no journal entry required

May 25 Dividend payable........................................88,000
Dividend payable...................................................88,000
Cash.........................................................88,000
Cash....................................................................88,000
May 27 Retained earnings......................................660,000
Retained earnings.................................................660,000
Dividend payable....................................660,000
Dividend payable.............................................660,000
(100,000 × 110% × 8 × $0.75)
(100,000 × 110% × 8 × $0.75)
May 30 no journal
no journal entryentry
requiredrequired

May 31 Dividend payable...................................................660,000

Dividend payable........................................660,000
Inventory............................................................660,000
Inventory..................................................660,000
(100,000 × 110%
(100,000 × 8 × $0.75)
× 110% × 8 × $0.75)
Q4. Ayme Inc. had the following share capital outstanding on January 1, 2022:
Class A common shares, unlimited authorized, 250,000 issued $8,000,000
Class B preferred shares, $100 par value, $3 dividend,
100,000 authorized, 50,000 issued 5,000,000
At the end of 2022, the company declared total dividends of $1,200,000. No dividends
had been paid in either 2020 or 2021.
Required:
Determine the amount of dividends paid to each class of share under each of the following
independent conditions:
a. The Class B preferred shares are non-cumulative and non-participating.

Solution
Calculation Preferred Common Total
a.
Current year: (50,000 shares × $3) $ 150,000 $ 150,000
Calculation
Balance of dividends Preferred – Common
$1,050,000 Total
1,050,000
Current year: (50,000 shares × $3) $ 150,000 $ 150,000
$ 150,000 $1,050,000 $1,200,000
Balance of dividends – $1,050,000 1,050,000
$ 150,000 $1,050,000 $1,200,000
 b. The Class B preferred shares are cumulative and non-
participating. Solution:

b
. Calculation Preferred Common Total
Arrears: (50,000 shares Calculation
× $3 × 2 years) $Preferred
300,000 Common $Total
300,000
Arrears: (50,000 shares × $3 × 2 years)
Current year: (50,000 shares × $3)
$ 300,000
150,000
$150,000
300,000
Current year: (50,000 shares × $3) 150,000 150,000
Balance
Balance of dividends
of dividends – – $$ 750,000
750,000 750,000
750,000
$$ 450,000
450,000 $$ 750,000
750,000 $1,200,00
$1,200,000
0

c. The Class B preferred shares are cumulative and fully participating.

Solution:
Calculation Preferred Common Total
c.
Arrears, as before $ 300,000 $ 300,000
Calculation Preferred Common Total
Current year as
Arrears, basic dividend
before $ 300,000150,000 $ 240,000 $390,000
300,000
Current
Current yearyear basicdividend
participating dividend 150,000196,146 $ 240,000313,854 390,000
510,000
Current year participating 196,146 313,854 510,000
dividend $ 646,146 $ 553,854 $1,200,000
$ 646,146 $ 553,854 $1,200,000
Note: The basic preferred dividend is calculated as before. Then, a like amount is allocated to the common shares. The preferred
dividend can be expressed as a percentage: $150,000 ÷ $5,000,000 = 3% (or $3 ÷ $100). Therefore, the common shares are also
allocated a basic dividend of (3% × $8,000,000) = $240,000. This leaves a remaining dividend of $510,000, which is available for
participation. The participation is allocated on a pro-rata basis as follows:

Carrying amounts of each class:

Preferred $ 5,000,000 38.46%
Common 8,000,000 61.54%
Total $13,000,000 100%
The participating dividend is therefore:
Preferred: $510,000 × 38.46% = $196,146
Common: $510,000 × 61.54% = $313,854