Chapter 13, Problem 17E

1)

To determine

Introduction:

Classes of shares:

• Shares provide partial ownership or a “share” of a corporation. There are two primary classes of shares − Equity Shares and Preference Shares.

• Equity shares are the class of shares which carry voting rights and equity share holders are the true owners of the company as in the event of dissolution, equity shareholders get last preference in clearing the amounts invested and there is no guarantee of profits will be debited by dividend on an annual basis.
• Preference shares are the class of shares which do not carry voting rights and in the event of dissolution, preference shareholders get first preference in clearing the amounts invested and there is usually guarantee of profits will be debited by dividend on an annual basis. Convertible Preference shares are preference shares that carry the option to be converted into equity shares after certain duration.

To Match:

Account titles to Titles as per U.S. G.A.A.P.

Answer to Problem 17E

Solution:

Account Titles	Titles as Per U.S. G.A.A.P.
Share Capital	Common Stock, Par Value
Share Premium	Paid in capital in excess of par value − common stock
Retained Profit	Retained Earnings

Explanation of Solution

• When a company decides to issue shares, it can do so at par, at a premium or at a discount. If the issue price equals the par value, the shares are said to be issued at par.

• If the issue price is less than the par value, the shares are said to be issued at a discount. If the issue price exceeds the par value, the shares are said to be issued at a premium

• The par value of Share Capital is recorded as Common Stock, Par Value in the Financial Statements as per U.S. G.A.A.P.

• The Share Premium is recorded as Paid in capital in excess of par value − common stock in the Financial Statements as per U.S. G.A.A.P.

• The Retained Profit is recorded as Retained Earnings in the Financial Statements as per U.S. G.A.A.P. It represents the excess of income over operations during the reporting period.

Conclusion

Hence the Account titles have been matched to the Titles as per U.S. G.A.A.P.

2)

To determine

Introduction:

Classes of shares:

• Shares provide partial ownership or a “share” of a corporation. There are two primary classes of shares − Equity Shares and Preference Shares.

• Equity shares are the class of shares which carry voting rights and equity share holders are the true owners of the company as in the event of dissolution, equity shareholders get last preference in clearing the amounts invested and there is no guarantee of profits will be debited by dividend on an annual basis.
• Preference shares are the class of shares which do not carry voting rights and in the event of dissolution, preference shareholders get first preference in clearing the amounts invested and there is usually guarantee of profits will be debited by dividend on an annual basis. Convertible Preference shares are preference shares that carry the option to be converted into equity shares after certain duration.
Journal Entries

• Journal entries are the first step in recording financial transactions and preparation of financial statements.

• These represent the impact of the financial transaction and demonstrate the effect on the accounts impacted in the form of debits and credits.

• Assets and expenses have debit balances and Liabilities and Incomes have credit balances and according to the business transaction, the accounts are appropriately debited will be credited by credited to reflect the effect of business transactions and events.

To Prepare:

Journal entries to record issuance of stock

Answer to Problem 17E

Solution:

Date	Particulars	Debit	Credit
31 December 2012	Cash	484 Million Euros
	Paid in Capital - Common Stock		484 Million Euros
	(Being common stock issued)

Explanation of Solution

• Assets and Expenses have debit balances and must be debited in order to increase their balance and credited in order to decrease their balance.

• Liabilities and Incomes have credit balances and must be debited in order to decrease their balance and credited in order to increase their balance.

• When a company decides to issue shares, it can do so at par, at a premium or at a discount. If the issue price equals the par value, the shares are said to be issued at par.

• On December 31 , 2012 Cash will be debited by 484 Million Euros and Paid in Capital - Common Stock will be debited by 484 Million Euros since common stock was issued for cash.

• Cash is an asset and must be debited to indicate increase in balances. Paid in Capital - Common Stock − Common Stock is a liability and must be credited to indicate increase in balances.

Conclusion

Hence the transaction for issuance of stock has been journalized.

3)

To determine

Introduction:

T-Accounts

• T-Accounts are a graphical representation of the postings made to the accounts during a reporting period. The left side records the debit entries and the right side records the credit entries of an account.

• Depending on the nature of the account i.e. Balance Sheet or Profit and Loss Account, Income or Expense account etc. the account balances are reflected.

• In case of Asset and Expenses accounts, the opening balance will be Debit Balance and in case of Liabilities and Incomes accounts, the opening balance is Credit Balance. They help in analysis of the transactions impacting the accounts.

To Compute:

Amount of cash dividends paid for December 31, 2013.

Answer to Problem 17E

Solution:

Amount of cash dividends paid for December 31, 2013 are 5,759 Million Euros

Explanation of Solution

• The Retained earnings account is given below:

Dr.	Retained Earnings	Cr.
	Particulars	Amount	Particulars	Amount
			Opening Balance	20,964
	Cash Dividends	5,759	Net Income	5,263
			Balance	20,468

• In case of Asset and Expenses accounts, the opening balance will be Debit Balance and in case of Liabilities and Incomes accounts, the opening balance is Credit Balance.

• In order to increase balances of Asset and Expenses accounts, they are debited and in order to decrease the balances, they are credited.

• In order to increase balances of Liabilities and Incomes accounts, they are credited and in order to decrease the balances, they are debited.

• Opening and closing balances of the retained earnings as well as the net income for the year are given. The difference between the sum of the opening plus net income for the year and closing balances of the retained earnings account is the amount of cash dividends paid for the year.

• Dividends are profits redistributed to the shareholders on a periodic basis. The cash dividends form part of the financing activities of the business and are accounted for in the cash flows from financing activities.
Cash Dividends are calculated as $20,964+5,263-20,468$
• Million Euros.

Conclusion

Hence the cash dividends for the year are calculated.