Question 1

Only fully paid-up preference shares can be redeemed by a company.

Accepted Answer

Only fully paid-up preference shares can be redeemed by a company. Unpaid preference shares cannot be redeemed until they are fully paid up.

Question 2

Prior to the allotment/issue of shares, the balance in the application account represents a liability of the company to the applicants.

Accepted Answer

The application account holds the money received from applicants for the allotment of shares, which is a liability of the company until the shares are actually issued.

Question 3

Underwriting commission fees are treated as expenses as they are not considered to be an integral part of the equity issue transaction.

Accepted Answer

Underwriting commission fees are considered to be a cost of the equity issue transaction and are deducted from the proceeds of the issue, reducing the amount of equity raised. Therefore, they are not treated as expenses.

Question 4

If a company makes a renounceable rights issue, the shareholders are not allowed to sell their rights, but must either accept or reject the offer to purchase additional shares in the company.

Accepted Answer

In a renounceable rights issue, shareholders are allowed to sell their rights if they choose not to purchase additional shares themselves.

Question 5

Share splits and share consolidations are only allowed if a company's constitution contains specific provisions relating to such transactions.

Accepted Answer

Share splits and share consolidations can generally be undertaken by a company if authorized by its board of directors and shareholders, in accordance with applicable laws and regulations, rather than being strictly dependent on provisions in the company's constitution.

Question 6

If a company uses its surplus cash reserves to buy-back its own shares, the total equity of the company will increase by the equivalent amount of cash spent.

Accepted Answer

When a company buy backs its own shares, the number of shares outstanding decreases, which in turn increases the value of each remaining share. This does not result in an increase in total equity as the cash spent in buying back shares is no longer a part of the company's assets.

Question 7

In accordance with AASB 138/IAS 38 Intangible Assets, company formation costs such as professional legal and accounting advice qualifies for recognition as an asset.

Accepted Answer

According to AASB 138/IAS 38 Intangible Assets, company formation costs do not qualify for recognition as an asset because they do not meet the criteria of an identifiable non-monetary asset without physical substance that is controlled by the entity and from which future economic benefits are expected to flow to the entity. These costs are considered to be expenses that should be recognized in profit or loss when incurred.

Question 8

Many investors may wish to purchase debentures or notes offering the ability to be converted into fully paid shares at the maturity date, in lieu of a cash payment.

Accepted Answer

Some investors may prefer the option of converting debentures or notes into shares at maturity, rather than receiving a cash payment. This allows them to potentially benefit from any future growth in the company's stock price.

Question 9

A rights issue gives all existing shareholders the right to an additional number of shares in proportion to their current shareholding.

Accepted Answer

This statement is true. In a rights issue, existing shareholders have the right to purchase additional shares in proportion to their current shareholding. This is often done to raise additional capital for the company.

Question 10

Where share options are issued and subsequently lapse, the cost of the lapsed options is transferred to a Lapsed Options Reserve account.

Accepted Answer

This statement is true. When share options are issued and subsequently lapse, the cost of the lapsed options is transferred to a Lapsed Options Reserve account in order to keep track of the company's stock compensation expenses.

Question 11

Section 124 of the Corporations Act places a restriction on the private placement of shares, limiting to 15% of existing capital the amount of capital that a company can issue in any one year without prior shareholder approval.

Accepted Answer

Section 124 of the Corporations Act does not specifically place a restriction on the private placement of shares or limit the amount of capital a company can issue in any one year without prior shareholder approval. Section 124 generally outlines the legal capacity and powers of a company, such as the ability to issue shares, but the specific rules regarding share issuance and the requirement for shareholder approval are detailed in other sections and regulations, such as the ASX Listing Rules for listed companies.

Question 12

If a company forfeits shares and the company's constitution is silent in relation to reissue of the shares, the company is entitled to keep any balance in the account after reissue, payment of unpaid calls and interest and administrative costs.

Accepted Answer

This statement is true according to Section 254 of the Companies Act 2006. If a company forfeits shares and has no provision in its constitution regarding the reissue of these shares, then the company is entitled to keep any balance in the account after the reissue, payment of unpaid calls and interest, and administrative costs.

Question 13

Share options issued at no cost to the recipient are accounted for in the same way as a rights issue.

Accepted Answer

Share options issued at no cost to the recipient are considered as a form of equity and are accounted for in the same way as a rights issue. Therefore, the answer is true.

Question 14

According to the Corporations Act, dividends can only be paid out of the profits earned by a company.

Accepted Answer

The Corporations Act allows dividends to be paid out of the company's profits or other sources, as long as the company's assets exceed its liabilities before the dividend is paid and the payment does not materially prejudice the company’s ability to pay its creditors.

Question 15

Share issue costs such as professional adviser's fees and brokerage fees must be reported as an expense in the income statement.

Accepted Answer

Share issue costs are directly deducted from the proceeds of the share issue and are reported in the equity section of the balance sheet, not as an expense in the income statement.

Question 16

Redeemable preference shares are always considered to be compound financial instruments that contain both equity and liability components.

Accepted Answer

Redeemable preference shares are not always considered to be compound financial instruments. They are typically classified as liabilities if they provide for mandatory redemption by the issuer, but they do not inherently contain both equity and liability components unless they have features that meet the criteria for such classification under relevant accounting standards.

Question 17

If a company has not reached a minimum subscription level within 90 days of the date of the disclosure document, the money paid in by applicants must be refunded by the company within 1 month in accordance with the requirements of ss 724(1) and (2) of the Corporations Act.

Accepted Answer

The answer of If a company has not reached a...

Question 18

In the case of a share issue being oversubscribed, any amount kept by the company for future calls is credited to a Calls in Advance account, which is reported in the equity section of the statement of financial position.

Accepted Answer

When a share issue is oversubscribed, the excess amount received is credited to the Calls in Advance account, which is reported in the equity section of the statement of financial position. This account represents the amounts received but not yet called up on shares.

Question 19

Debentures may be issued at a nominal value, a premium or a discount.

Accepted Answer

This statement is true. Debentures can be issued at a nominal value, a premium (higher than face value) or a discount (lower than face value).

Question 20

Any unpaid calls are accounted for as a receivable in a company's financial statements.

Accepted Answer

The answer of Any unpaid calls are accounted for as...

Quiz 2: Financing Company Operations