Question

Bridgeport Corp. reported the following amounts in the shareholders’ equity section of its December 31, 2019 SFP:

Preferred shares, $7 dividend (9,000 shares authorized, 2,000 shares issued)		$206,000
Common shares (unlimited authorized, 29,000 issued)		696,000
Contributed surplus		81,700
Retained earnings		300,000
Accumulated other comprehensive income		67,000
Total		$1,350,700

During 2020, the company had the following transactions that affect shareholders’ equity.

1.		Paid the annual 2019 $7 per share dividend on preferred shares and a $3 per share dividend on common shares. These dividends had been declared on December 31, 2019.
2.		Purchased 4,000 shares of its own outstanding common shares for $40 per share and cancelled them.
3.		Issued 800 shares of preferred shares at $106 per share (at the beginning of the year).
4.		Declared a 20% stock dividend on the outstanding common shares at their fair value when the shares were selling for $41 per share.
5.		Issued the stock dividend.
6.		Declared the annual 2020 $7 per share dividend on preferred shares and a $2 per share dividend on common shares. These dividends are payable in 2021.

The contributed surplus arose from net excess of proceeds over cost on a previous cancellation of common shares. Total assets at December 31, 2019, were $2,140,000, and total assets at December 31, 2020 were $2,616,000. The company follows IFRS.

Prepare journal entries to record the transactions above.

Prepare the statement of changes in shareholders’ equity for the year ended December 31, 2020. Assume 2020 net income was $420,000 and comprehensive income was $429,000.

Prepare the December 31, 2020 shareholders’ equity section.

Calculate the rate of return on common shareholders’ equity and the rate of return on total assets for 2020.

Answer 1

Part A

No.	General journal	Debit	Credit
1	Dividends Payable – Preferred (2000*7)	14000
	Dividends Payable – Common (29000*3)	87000
	Cash		91000
2.	Common shares (696000/29000*4000)	96000
	Contributed surplus	64000
	Cash (4000*40)		160000
3.	Cash (800*106)	84800
	Preferred shares		84800
4.	Dividends (29000-4000)*20%*41	205000
	Common Stock Dividends Distributable		205000
5.	Common Stock Dividends Distributable	205000
	Common shares		205000
6.	Dividends	79600
	Dividends Payable – Preferred (2800*7)		19600
	Dividends Payable – Common (29000-4000+5000)*2		60000

Part B

Bridgeport Corp. Statement of Changes in Shareholders' Equity For the year ended December 31, 2020
	Preferred shares		Common Shares
	Number of sh.	Paid-in	Number of sh.	Paid-in	Contrib.Surplus	Retained Earnings	Acc. Other Compr.Income	Total
Balance, January 1	2000	206000	29000	696000	81700	300000	67000	1350700
Net income						420000		420000
Other comprehensive income							9000	9000
Comprehensive income								429000
Repurchase of common shares			(4000)	(96000)	(64000)			(160000)
Issuance of preferred shares	800	84800						84800
Issuance of common sharesthrough stock dividend			2500	205000		(205000)
Cash dividend:
– preferred						(19600)		(19600)
– common						(60000)		(60000)
Balance, December 31	2800	290800	27500	805000	17700	435400	76000	1624900

Part C

Bridgeport Corp. Shareholders’ Equity—December 31, 2020
Share capital
Preferred shares	290800
Common shares	805000
Total share capital	1095800
Contributed surplus	17700
Total paid-in capital	1113500
Retained earnings	435400
Accumulated other comprehensive income	76000
Total shareholders’ equity	$1624900

                                   

Part D

Rate of return on common shareholders’ equity for 2020: (Net income – preferred dividends)/Average common shareholders’ equity

(420000-19600)/1239400 = 32.31%

Average common shareholders’ equity = ((1350700-206000)+(1624900-290800))/2 = 1239400

Rate of return on total assets for 2020: (Net income – preferred dividends)/Average total assets

(420000-19600)/2378000 = 16.84%

Average total assets = (2140000+2616000)/2