Gao
Limited, a publicly traded company, uses IFRS and had the following events and
transactions occur in its fis cal year ending October 31, 2011. Although no
dates are given, the events described are in chronological order.
1.
Gao Limited repurchased common shares on the open market to allow stock options
to its key employees to be exer cised without a dilution effect resulting to
the remaining shareholders. The weighted average issue price of the outstanding
shares on the date of reacquisition was $34.20, and 4,000 shares were
repurchased at a price of $44.40. On the date of declaration, Gao had
contributed surplus for preferred share repurchases of $84,600 and contributed
sur plus for common share repurchases of $22,700.
2.
Common shares were issued in partial settlement of a purchase of land. Gao paid
$33,000 and 5,000 common shares for the land. On the date of the transaction,
the common shares were trading at $41.50.
3.
Gao has 8,000 preferred shares outstanding. These shares are limited in number
and are not traded on the public stock exchange. Gao declared a property
dividend to be paid to the preferred shareholders. Shareholders will receive
for each preferred share held one share of Trivex Corp. Gao holds 8,000 shares
of Trivex (2% of the outstanding shares), and had purchased them in 2009 for
$68,400 (or $8.55 per share). The shares were held as an investment since 2009
and accounted for using the fair value through other comprehensive income
(FV-OCI) model with recy cling (transference). At the beginning of the fiscal
year, the accumulated other comprehensive income had a debit bal ance in the
amount of $2,350 relating only to the Trivex shares. The fair value of Trivex
shares was $7.80 per share on the date of declaration of the property dividend.
On the date of the dividend distribution, the fair value of the Trivex shares
was $7.95. There being no longer any investments accounted for at FV-OCI, the
reclassification entry needed to be recorded, in accordance with Gao's
practice.
4.
Gao declared a 5% stock dividend to the common shareholders. There were 43,200
common shares outstanding on the date of declaration and the market price of
the common shares on that date was $39.70. The stock dividend was later
distributed.
5.
A shareholder, in an effort to persuade Gao to expand into her city, donated to
the company a plot of land with an appraised value of $42,000.
6.
Gao sold by subscription to an investment institution 10,000 common shares for
$38.50 per share. The terms require 10% of the balance to be paid in cash
immediately. The remainder is expected to be paid in fiscal year 2012.
7.
Gao has term preferred shares on its statement of financial position. These
shares are classified as debt. Gao declared a cash dividend of $3,800 on these
shares. The dividend will be paid in the first week of the fiscal year 2012.
Instructions
(a)
Prepare the underlying journal entries that were made by Gao Limited during
2011 to record all information related to the changes in each equity account
and associated accounts over the year.
(b)
Prepare the captions that would appear on Gao's statement of cash flows for the
year ended October 31, 2011, using the indirect format. Include all necessary
additional disclosures required under IFRS.
(c)
How would your answer to parts (a) and (b) above change if the investments in
Trivex were accounted for using the fair value through net income model? (d)
How would your answer to parts (a) and (b) above change if Gao were using ASPE?
(a)
Common Shares (4,000 X $34.20)....... 136,800
Contributed Surplus—Common Share
Repurchase....................... 22,700
Retained
Earnings................ 18,100
Cash (4,000
X $44.40)............ 177,600
Land................................. 240,500
Cash......................... 33,000
Common
Shares (5,000 X $41.50)... 207,500
Holding Loss in Trivex shares (OCI).. 3,650
Investment
in Trivex (FV-OCI).... 3,650
Original
cost of shares... $68,400
Fair value
adj. to beg. of year (2,350)
Carrying
amount beg. of year 66,050
Fair value
date of declaration 62,400
Fair value
adjust. required $3,650
Loss on Sale of Trivex Shares........ 6,000
Holding
Gains/Losses on Trivex (OCI) 6,000
(Reclassification
$2,350 + $3,650)
Retained Earnings.................... 62,400
Property
Dividend Payable........ 62,400
Property Dividend Payable............ 62,400
Investment
in Trivex (FV-OCI).... 62,400
Retained Earnings.................... 85,752
Stock
Dividend Distributable..... 85,752
(43,200 X 5%
X $39.70)
Stock Dividend Distributable......... 85,752
Common
Shares.................... 85,752
Land................................. 42,000
Contributed
Surplus, Donated Land 42,000
Share Subscription Receivable........ 346,500
Cash ($385,000 X 10%)................ 38,500
Common
Shares Subscribed......... 385,000
(10,000 X
$38.50)
Dividend Expense..................... 3,800
Dividends
Payable................ 3,800
(b)
Cash provided by (used in) operations
Add back:
non-cash expenses:
Loss on sale
of Trivex shares (FV-OCI) $6,000
Changes in
non-cash working capital:
Dividends
payable, term preferred shares 3,800
Cash provided by (used in) investing activities
Purchase of
land (Note x)........ (33,000)
Cash provided by (used in) financing activities
Collection
of subscription for shares 38,500
Common shares
repurchased........ (177,600)
Note X: During the year Gao Limited purchased land
with a fair value of $240,500 in exchange for cash of $33,000 and 5,000 common
shares.
Additional disclosures:
A property
dividend in the amount of $62,400, charged to retained earnings, were declared
and distributed to preferred shareholders.
A 10% stock
dividend for $85,752 was declared and distributed to the common shareholders.
During the
year, a shareholder donated land at an appraised value of $42,000.
(c) If Gao’s investment in Trivex were accounted
using the fair value through income model, the changes in fair value would have
been included in net income, instead of being reported in other comprehensive
income. There would be no Accumulated other comprehensive income on the
statement of financial position at October 31, 2011, the end of the previous
fiscal, and therefore no reclassification entry would be needed following the
declaration of the property dividend. As for the cash flow statement, would
not change in amounts reported, but the captions and descriptions would change
to FV-NI, instead of FV-OCI.
(d) If Gao were using ASPE, it would be not be
allowed to follow the FV-OCI model.
