Shareholder’s Equity Iclicker

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S ￿￿￿￿￿￿￿￿￿￿ ’ ￿ E ￿￿￿￿￿ Rajesh Vijayaraghavan Rajesh Vijayaraghavan COMM 293 1
Exercise Exercise Exercise Pick two firms from either the S&P/TSX Composite Index, or the S&P 500 Index. How has the firms market cap of these two firms changed between Jan 1 2020, and Nov 1, 2020? (include the numbers and the change). Rajesh Vijayaraghavan COMM 293 2
Exercise Exercise Rajesh Vijayaraghavan COMM 293 3
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￿ estion 11.1 ￿ estion 11.1 Purpose: Provide example of common share journal entry Rajesh Vijayaraghavan COMM 293 4
￿ estion 11.1 Problem ￿ estion IKEA issues 12 , 000 shares of common shares at $3 per share. ￿ estion: 1) Record the journal entry for this transaction. Rajesh Vijayaraghavan COMM 293 5
￿ estion 11.1 Answer 1) Record the journal entry for this transaction. Dr. Cash 36,000 Cr. Common Shares 36,000 Rajesh Vijayaraghavan COMM 293 6
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￿ estion 11.2 ￿ estion 11.2 Purpose: Testing the preparation of journal entries to record the issuance of common shares Cash Transactions Equipment in exchange for common shares Rajesh Vijayaraghavan COMM 293 7
￿ estion 11.2 Problem ￿ estion Amazon issued 20,000 shares at $18 per share on June 30, 2020. Cash was paid immediately. ￿ estions: 1) Record the journal entries Amazon would make for the issuance of shares on June 30, 2020. 2) Suppose that instead of a shareholder paying cash for these shares, they exchanged a special piece of equipment with a fair value of $200,000. Prepare Amazon’s journal entry for this transaction. Rajesh Vijayaraghavan COMM 293 8
￿ estion 11.2 Answer 1) Record the journal entries Amazon would make for the issuance of shares on June 30, 2020. June 30, 2020 – Cash transaction: Dr. Cash 360,000 Cr. Common Shares 360,000 2) Suppose that instead of a shareholder paying cash for these shares, they exchanged a special piece of equipment with a fair value of $200,000. Prepare Amazon’s journal entry for this transaction. June 30, 2020 – Asset transfer: Dr. Equipment 200,000 Cr. Common Shares 200,000 Rajesh Vijayaraghavan COMM 293 9
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￿ estion 11.3 ￿ estion 11.3 Purpose: To learn why shares are repurchased To test journal entries for reacquisition of common shares - Calculate the average share price - Remove the retired shares from the equity account - Record a gain or loss to contributed surplus Understand which would result in a gain vs loss Understand the balance of common shares a ￿ er the transaction Understand how contributed surplus cannot be in a debit position Rajesh Vijayaraghavan COMM 293 10
￿ estion 11.3 Problem ￿ estion Telus Inc has 1,000,000 common shares issued and a balance in its common shares account of $6,250,000. On July 13, Telus decided to reacquire and retire 30,000 of its common shares at a price of $5. The Contributed Surplus account currently has a credit balance of 20,000. ￿ estions: 1) Give a reason for why Telus may want to reacquire shares. 2) Record Telus’s journal entries associated with this transaction. 3) Assume that instead of reacquiring at $5 per share, Telus decides to reacquire at $9 per share. Record Telus’ journal entries associated with this transaction. 4) What is the account balance for the common shares account? 5) What is the account balance for contributed surplus if the acquisition price was $5 per share and $9 per share? Rajesh Vijayaraghavan COMM 293 11
￿ estion 11.3 Answer 1) Give a reason for why Telus may want to reacquire shares. Slides: Some companies may buy back their own shares to increase the share price. In our case, Telus may be buying back shares to reduce the number of shares outstanding thereby increasing the earnings by share (reducing the denominator) Textbook: shares may also be repurchased to reissue these shares to o ￿ icers and employees under compensation plans – if they are not cancelled Rajesh Vijayaraghavan COMM 293 12
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￿ estion 11.3 Answer 2) Record Telus’s journal entries associated with this transaction. Average cost per share = $6,250,000/1,000,000 = 6 . 25 > 5, purchase price is less than average issuance price. This results in a gain: Dr. Common Shares 187,500 ( 30 , 000 ⇥ $ 6 . 25 ) Cr. Cash 150,000 ( 30 , 000 ⇥ $ 5 ) Cr. Contributed Surplus 37,500 ( 30 , 000 ⇥ $ 1 . 25 ) Rajesh Vijayaraghavan COMM 293 13
￿ estion 11.3 Answer 3) Assume that instead of reacquiring at $5 per share, Telus decides to reacquire at $9 per share. Record Telus’ journal entries associated with this transaction. Average cost per share = $ 6 , 250 , 000 ÷ 1 , 000 , 000 = $ 6 , 25 < $ 9, purchase price is more than average issuance price. Telus will be paying more for shares worth less. This results in a loss: Dr. Common Shares 187,500 ( 30 , 000 ⇥ $ 6 . 25 ) Dr. Contributed Surplus 20,000 Dr. Retained Earnings 62,500 Cr. Cash 270,000 ( 30 , 000 ⇥ $ 9 ) Rajesh Vijayaraghavan COMM 293 14
￿ estion 11.3 Answer 4) What is the account balance for the common shares account? Balance of Common share account: $ 6 , 250 , 000 - $ 187 , 500 = $ 6 , 062 , 500 5) What is the account balance for contributed surplus if the acquisition price was $5 per share and $9 per share? $5 per share: $20,000 + $37,500 = $57,500 $9 per share: $20,000 – $20,000 = 0 Rajesh Vijayaraghavan COMM 293 15
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Exercise Exercise Rajesh Vijayaraghavan COMM 293 16
￿ estion 11.4 ￿ estion 11.4 Purpose: To test journal entries for reacquisition of common shares Rajesh Vijayaraghavan COMM 293 17
￿ estion 11.4 Problem ￿ estion RBC has following transactions: 1) On July 6, 2021 Royal Bank of Canada issued 100 , 000 common shares for $ 45 per share (first issuance) 2) On March 14, 2022, RBC issued 10 , 000 to WLRK law firm in exchange for legal work. The shares were selling at $ 15 3) On May 1, 2022, RBC reacquired 10 , 000 common shares at $ 40 per share 4) On May 2, 2022, RBC reacquired 10 , 000 common shares at $ 45 per share Rajesh Vijayaraghavan COMM 293 18
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￿ estion 11.4 Problem Provide the Journal Entries for each of the above transactions. Rajesh Vijayaraghavan COMM 293 19
￿ estion 11.4 Answer July 6, 2021 Dr. Cash (+A) 4,500,000 Cr. Common Shares (+SE) 4,500,000 March 14, 2022 Dr. Legal Fees (-SE) 150,000 Cr. Common Shares (+SE) 150,000 This is 10 , 000 ⇥ $ 15 = $ 150 , 000 May 1, 2022 What is the average cost or issuance price? 4 , 500 , 000 + 150 , 000 100 , 000 + 10 , 000 = $ 42 . 27 Rajesh Vijayaraghavan COMM 293 20
￿ estion 11.4 Answer Shares are repurchased less than the average issuance price Di ￿ erence $ 42 . 27 - $ 40 = $ 2 . 27 per share goes into contributed surplus. So 10 , 000 ⇥ $ 2 . 27 = 22 , 700 Also, $ 42 . 27 ⇥ 10 , 000 = $ 422 , 700 Dr. Common Shares (-SE) 422,700 Cr. Cash (-A) 400,000 Cr. Contributed Surplus (+SE) 22,700 Rajesh Vijayaraghavan COMM 293 21
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￿ estion 11.4 Answer May 2, 2022 What is the average issuance price? 4 , 500 , 000 + 150 , 000 - 422 , 700 110 , 000 - 10 , 000 = $ 42 . 27 Shares are repurchase more than the average issuance price The di ￿ erence $ 45 - $ 42 . 27 = $ 2 . 73 per share should be recorded. The amount is $ 2 . 73 ⇥ 10 , 000 = $ 27 , 300 Contributed surplus account has only $ 22 , 700 credit balance. Both the Contributed Surplus and Retained Earnings must be debited. Rajesh Vijayaraghavan COMM 293 22
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￿ estion 11.4 Answer Dr. Common Shares (-SE) 422,700 Dr. Contributed Surplus (-SE) 22,700 Dr. Retained Earnings (-SE) 4,600 Cr. Cash (-A) 450,000 Rajesh Vijayaraghavan COMM 293 23
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￿ estion 11.5 ￿ estion 11.5 Purpose: To test the learnings of the key dates pertaining to dividend payments Rajesh Vijayaraghavan COMM 293 24
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￿ estion 11.5 Problem ￿ estion Date that an organization’s directors approve the dividend. A payable is created on this date. Date when the dividend is paid to shareholders. Payment (cash credit) is recorded. Date that identifies which shareholders will be entitled to receive the dividend. No entry is made. ￿ estions: 1) Match the following question: each description with the key date that pertains to dividend payments Rajesh Vijayaraghavan COMM 293 25
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￿ estion 11.5 Answer 1) Match the following question: each description with the key date that pertains to dividend payments Declaration Date: Date that an organization’s directors approve the dividend. A payable is created on this date Payment Date: Date when the dividend is paid to shareholders. Payment (cash credit) is recorded. Record Date: Date that identifies which shareholders will be entitled to receive the dividend. No entry is made. Rajesh Vijayaraghavan COMM 293 26
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￿ estion 11.6 ￿ estion 11.6 Purpose: To test the understanding of Stock Splits Rajesh Vijayaraghavan COMM 293 27
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￿ estion 11.6 Problem ￿ estion Suppose Wells Fargo has 1,000,000 common shares trading at $50 per share. The total market capitalization of these shares is $50,000,000. The company then announces a 3-for-1 stock split. ￿ estions: 1) How many additional common shares will be issued? 2) What is the value of common shares a ￿ er the split occurs? 3) How much will each share be worth, a ￿ er the stock split? Rajesh Vijayaraghavan COMM 293 28
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￿ estion 11.6 Answer 1) How many additional common shares will be issued? 2,000,000. For a total outstanding amount of 3,000,000. 2) What is the value of common shares a ￿ er the split occurs? Value of shares will remain at $50,000,000. 3) How much will each share be worth, a ￿ er the stock split? Value of each share will be $16.67. Rajesh Vijayaraghavan COMM 293 29
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