Question 1

The 'participating' in participating preference shares means that the shareholders may:

Accepted Answer

The word 'participating' in participating preference shares means that the holders of these shares have the right to receive a share of any further profits that are to be distributed to ordinary shareholders after the payment of the preference dividend. This gives them a greater degree of participation in the company's success, unlike non-participating preference shares which only entitle their holders to a fixed, predetermined dividend. None of the other options listed are consistent with the definition of participating preference shares.

Question 2

The process for issuing shares is that:

Accepted Answer

The process for issuing shares typically involves offering them for sale, receiving applications from potential shareholders, and then making an allotment of shares to successful applicants. Monies received on application must be held in trust until the allotment is made. Therefore, option B is the correct answer.

Question 3

When shares are allotted,or a call made on them,allotment and call accounts are created respectively.What is the nature of these accounts and how are they to be disclosed in the financial statements?

Accepted Answer

Allotment and call accounts are similar to an account receivable and represent amounts due from shareholders. As such, they are typically disclosed in the balance sheet as a reduction against share capital. It is important to note that the specific disclosure requirements may vary based on the accounting standards applied and the applicable regulations.

Question 4

Signal Ltd called for subscriptions for 8 million shares.The issue price per share is $3.50 to be paid in three parts: the first payment of $1.00 is to be made on application,$1.50 is to be paid within 1 month of allotment and the remaining $1.00 is to be paid within 3 months of allotment.At the end of July,when applications close,applications for 10 million shares have been received.The shares are allotted on 1 August on a pro rata basis with the excess application money to be applied against the amount due on allotment.The first and final call on the shares is made on 1October.Assume all amounts on allotment and call are paid by the due date.What are the accounting entries to record these events?

Accepted Answer

1. On receipt of applications:

DR Bank $35,000,000 (10,000,000 shares x $3.50)
CR Share Capital $8,000,000 (8,000,000 shares x $1.00)
CR Share Application $27,000,000 (10,000,000 shares x $2.70)

2. On allotment:

DR Share Application $2,000,000 [(10,000,000 shares - 8,000,000 shares) x $2.70]
DR Share Allotment $22,000,000 (8,000,000 shares x $2.75)
CR Share Capital $28,000,000 (8,000,000 shares x $3.50)
CR Share Premium $18,000,000 [(8,000,000 shares x ($3.50 - $2.70) - $2,000,000]

3. On first call:

DR Share Allotment $8,000,000 (8,000,000 shares x $1.00)
CR Share Capital $8,000,000 (8,000,000 shares x $1.00)

4. On final call:

DR Share Allotment $8,000,000 (8,000,000 shares x $1.00)
CR Share Capital $8,000,000 (8,000,000 shares x $1.00)

Question 5

Accounts that make up owners' equity may include:

Accepted Answer

Accounts that make up owners' equity include preference shares and general reserves.

Question 6

Share capital:

Accepted Answer

Share capital may relate to one or several classes of shares, depending on the structure of the company. It represents the amount of capital raised from shareholders by issuing shares, and is recorded on the company's balance sheet as a component of equity. The remaining equity may be recorded as reserves or retained profits. Share capital does not necessarily represent the amount shareholders are guaranteed to receive if the company is wound up, as this depends on the priority of claims in liquidation and the amount of assets available to distribute amongst creditors and shareholders. Share capital is not calculated by subtracting liabilities from assets.

Question 7

Equity's claim against the assets of the entity:

Accepted Answer

Equity's claim ranks after liabilities in terms of priority. Liabilities must be paid off first before equity holders can claim any remaining assets.

Question 8

A public issue of shares involves:

Accepted Answer

A public issue of shares involves issuing a prospectus that outlines the details of the share issue so those interested can make an informed decision.

Question 9

In the case of a share issue being oversubscribed,excess application monies:

Accepted Answer

Excess application monies may be used to reduce future amounts owing on allotment if the shares are issued on a pro rata basis. This means that if the shares are issued in proportion to the number of shares applied for, those who applied for more shares will be allotted a higher number of shares and the excess application monies will be used towards reducing the amount payable on allotment.

Question 10

Flag Ltd has received applications for 4 million shares during July 2004.The shares are to be issued at a price of $2.75 per share.The 4 million shares are allotted on 15 August 2004.What are the accounting entries required to record these events?

Accepted Answer

The answer of Flag Ltd has received applications for 4...

Question 11

Holders of ordinary shares:

Accepted Answer

Holders of ordinary shares receive dividends at the discretion of the board. While companies generally try to pay dividends regularly, they are not obligated to do so and the decision is ultimately up to the board of directors.

Question 12

Under The Corporations Law as amended in 1998 companies now issue shares at:

Accepted Answer

Under the Corporations Law as amended in 1998, companies can issue shares at any price they determine is appropriate in the market. They are not bound by any specific pricing formula or guidelines.

Question 13

Sundowner Ltd called for subscriptions for 2 million shares.The issue price per share is $6.00 to be paid in three parts: the first payment of $3.00 is to be made on application,$2.00 is to be paid within 1 month of allotment and the remaining $1.00 is to be paid within 6 months of allotment.At the end of July,when applications close,applications for 5 million shares have been received.Two million share applicants were unsuccessful,while the remaining 3 million applicants were allotted shares on 1 August on a pro rata basis with the excess application money to be applied against the amount due on allotment.The first and final call on the shares is made on 1October.Assume all amounts on allotment and call are paid by the due date.What are the accounting entries to record these events?

Accepted Answer

B is the correct answer as it records all the events according to the given scenario. 
A records only the application money received and credited to the share application account but does not account for allotment and calls.
C records the application money and allotment but does not account for the excess application money to be applied against the amount due on allotment.
D records the application money, allotment, and excess application money but does not account for the second call.

Question 14

A residual interest is:

Accepted Answer

A residual interest represents the claim or right to the net assets of the reporting entity after deducting all liabilities. This means that the holder of the residual interest would receive whatever is left over after all other claims and obligations have been met. Therefore, choice C is the correct option.

Question 15

The par value of a share used to be a consideration when issuing shares in Australia.What is a par value? And if Exceed Ltd issues shares with a $1 par value for $5,how would the difference in these amounts be treated?

Accepted Answer

Par value is the nominal value or face value of the share, which is typically a small amount (such as $1). When a company issues shares at a price higher than the par value (such as the $5 in this case), the difference is considered a share premium. Therefore, the $4 difference would be treated as a share premium.

Question 16

A redeemable preference share is one that may be:

Accepted Answer

A redeemable preference share can be converted into cash at the option of either the company or the shareholder. This means that the shareholder has the option to sell their share back to the company, or the company may choose to redeem the share in order to reduce its outstanding share capital. This provides flexibility to both parties involved.

Question 17

The Corporations Act 2001 was amended in 1998 in relation to the par value of shares.That amendment has the effect of:

Accepted Answer

The answer of The Corporations Act 2001 was amended in...

Question 18

In the case of a share issue being oversubscribed,the common approaches include:

Accepted Answer

Allocating the shares on a pro rata basis is the fairest approach as it ensures that all potential investors receive a portion of the shares in proportion to their original order. It also prevents certain investors from receiving more shares than others, which could lead to accusations of favoritism or unfairness. Increasing the issue price or issuing additional shares could also be options, but they may not be as equitable or feasible in every situation.

Question 19

Semaphore Ltd called for subscriptions for 15 million shares.The issue price per share is $2.50 to be paid in two parts: the first payment of $1.00 is to be made on application and the remaining $1.50 is to be paid within 1 month of allotment.At the end of September,when applications close,applications for 19 million shares have been received.The shares are allotted on 1 October on a pro rata basis with the excess application money to be applied against the amount due on allotment.All amounts on allotment are paid by the due date.What are the accounting entries to record these events?

Accepted Answer

The answer of Semaphore Ltd called for subscriptions for 15...

Question 20

Normal features of ordinary shares include:

Accepted Answer

Ordinary shares typically entitle their holders to receive a proportion of any ordinary dividends declared by the company, and also offer voting rights at shareholder meetings. Option A and Option D both include these features, but Option D is the more complete and accurate answer, as it expressly states both features. Option B is incorrect, as ordinary shareholders do not have priority over unsecured creditors in liquidation. Option E is incorrect, as it includes answer B, which is incorrect.

Quiz 14: Share Capital and Reserves