Hi, Else here.
And in the previous set of videos,
we completed the issuing of shares, cashed dividend,
stock dividend, and the statement of changes in equity.
What we're now doing is a question
that we'll have share repurchase, as well
as the calculation for earnings per share.
We're going to continue on with Greene Corporation,
but this time, we're going to be doing 2017.
The question is available for download.
Please check my Dropbox.
Make sure you've downloaded the question before I solve it.
To even have a better learning experience,
attempt the question yourself first and then
watch the video to see if you're correct.
Let's look at the question.
Greene Corporation has been provided for December 31, 2016.
You'll notice that this is the shareholders' equity
section of the statement of financial position,
also called the balance sheet.
All the information has been updated for the current year
end, December 31, 2016.
In 2017, the corporation had a number of transactions.
They include issuing 25,000 common shares
in order to purchase land.
We also declare a semiannual preferred share dividend
and then we repurchase 7,500 common shares.
At the end of the year, we're going
to declare the semiannual preferred dividend again.
And at December 31, we know that the net income or profit
is $192,460.
We have to show the entries for 2017
and calculate the earnings per share for 2017.
Let's get started.
The first thing that's going to happen
is we're going to create all the shareholder equity
T accounts and we're going to input the opening balances.
Remember for all the preferred shares and common shares,
we're going to include the number of shares.
Let's start all the entries.
First, we purchased land in exchange for common shares.
Notice that we have two values--
25,000 shares at $25 each is equal to $650,000.
But we also have the land value.
We know that the fair value is $698,000.
The question is, which value do we use?
Often students do a very strange entry.
I'm going to show it to you.
Please don't write it down, it's the incorrect thing to do.
They debit land for the amount of the value of land
and they credit common shares for the value
of the common shares, and then the credit again
for the difference.
This entry is unbelievably incorrect.
There is no such thing as a gain.
Both IFRS and ASPE require companies
to use the value of the asset received,
unless that amount is not determinable.
If that amount is not determinable,
you can use the value of the shares given up.
The value of the land here is clearly given.
This is the fair value of the land.
It is determinable.
Because it's determinable, we must
do the entry using the fair value of the land.
Therefore, the entry is as follows.
February 1, what did we receive?
We received land.
We know the fair value of the asset
received and therefore we must use it.
What did we give up?
We gave up common shares.
The value of the common shares is
equal to the value of the land.
Keep in mind that we use the value of the land,
because the value of the land was determinable.
If the value of the land had not been determinable,
we would have used the $650,000.
Let's move on to the next entry.
On June 1, we declare a dividend.
You already know how to do this entry due to past videos,
so I'm quickly going to run through it.
On June 1, the day of declaration,
we're going to recognize that there is now a liability.
The amount of the liability, number of shares outstanding,
multiplied times the dividend for the preferred shares,
multiplied by 1/2, because it's the semiannual dividend,
13,200.
You'll notice that I forgot something.
I forgotten to update the T accounts.
That is a very bad thing to do.
Let's just pop up and update the T accounts for all the entries
that I've already made.
Land, of course, I haven't got one,
but I'm going to create one right now.
And the entry for land would be 698,000 and then common shares
are going to go up by 698,000, and the number
of shares that we actually gave up, 25,000.
In addition, the dividend is going
to reduce retained earnings and dividends payable,
which I'm not tracking.
Let's pop back down to our entries.
On June 18 is the date of record.
We know that on the date of record, there's no entry.
And then on July 1, we pay the dividend and we give up cash.
No update of the T accounts that we have is necessary.
Let's move on.
We're now at October 1.
We repurchased 7,500 common shares at $26.25.
There are some steps that we have to go through.
First, we have to calculate the book value per share.
If we're repurchasing shares, we have
to eliminate the value from common shares.
Let's look at our T accounts.
We know that right now we have 351,095 shares outstanding.
The value of those shares is 8,064,147.
We have to calculate how much each share is worth,
so let's do that.
Book value per share is equal to the total value
of the shares, divided by the total number of shares.
That means that each share has a book value of $22.97.
On average, that's what everybody paid for the shares
that we sold.
When we repurchase shares, we need
to use the book value in order to calculate
the reduction in the value of the common share account.
We're repurchasing 7,500 shares.
Multiply times the book value, tells us
how much the common share account
is going to decrease by, but that's
not the amount of cash we pay.
We're going to pay a different amount of cash--
7,500 shares times the amount we paid for the shares
on the open market, in this case, $26.25.
That means we're going to have an outlay of cash of $196,875.
Notice that there's a difference here.
Let's start the entry.
This is on October 1.
Common shares are going to be reduced by the book value.
We debit common shares for 172,264.
The amount of cash that we actually
have to distribute to the shareholders is 196,875.
Under normal circumstances in order to balance this entry,
we would put a debit to retained earnings.
But, we happen to have something else here.
We have contributed surplus, which
is due to repurchase of shares in the past.
When we have a contributed surplus,
we must always use up the contributed surplus
before we take anything out of retained earnings.
Because we have contributed surplus,
we are going to use contributed surplus.
Therefore, the debit will not be to retained earnings.
It will be two contributed surplus.
The amount, the difference between these two,
which is 24,611.
Keep in mind that if we did not have contributed surplus,
this would have been a debit to retained earnings.
Because the book value is less than the cash value,
we have to have that value from somewhere else.
I'm not going to say the word cash, because it's not cash.
We are simply reducing the wealth
that is due to the shareholders by the amount
of additional cash we had to pay for the shares
that we repurchased.
Generally, that would be retained earnings.
But because we have a contributed surplus
from past repurchases, we have to eliminate
the contributed surplus first.
Let's update our T accounts.
We're going to reduce that contributed surplus
by the 24,611, reduce common shares by the amount
of the book value.
In addition, I have to reduce the number of shares
by the amount that we've actually repurchased.
Finally, retained earnings is going to be decreased.
Cash would be decreased.
I don't have a cash T account, so I can't
do that part of the entry.
Let's move on to the next part of the entry.
We declare the semiannual preferred share dividend.
We've already done this in the past,
so I'm just going to rush through it.
December 1-- date of declaration.
December 20-- date of record.
No entry.
December 31-- date of payment.
Update my T accounts.
I have no other T accounts that will be affected.
At this point, I want to create a total for all my T accounts.
Preferred shares, common shares I
need to update, number of common shares,
land which doesn't go on shareholders' equity, what's
left of the contributed surplus.
I have to update retained earnings for the net income.
This happens due to the closing of all the temporary accounts.
Total retained earnings at the end of the year--
this information would then be used
to complete both the statement of changes in equity,
as well as the balance sheet or statement of financial position
shareholder's equity section.
In the next video, I'm going to calculate
the earnings per share.