Deck 2: Company Formation, Share Capital and Debt Securities

Question 1

The buying back of a financial liability or equity instrument is referred to as:

A)call
B)allotment
C)application
D)redemption

Answer 1

D

Question 2

What are convertible notes and explain their accounting treatment?

Answer 2

Convertible notes are a form of debt which can be converted to shares after a set period of time.As discussed in the section on preference shares,some types of securities may have economic characteristics that combine features of debt and equity.AASB 132 requires that in certain circumstances financial instruments be decomposed into liability and equity components.Paragraph 29 illustrates how convertible debt may be decomposed into a financial liability and an equity instrument; the equity component represents a call option to convert the instrument into a fixed number of ordinary shares of the entity.The economic effect is similar to issuing a debt instrument simultaneously with an early settlement provision and rights to purchase ordinary shares,or issuing a debt instrument with detachable share purchase rights.However,once classified,these components remain unchanged for the remainder of the life of the compound instrument.This approach is justified by arguing that the conversion option is a complex combination of tax and other considerations and the likelihood of conversion will also change over time.

Question 3

When a shareholder is permitted to sell his or her right to participate in the purchase of shares in a new issue,it is known as a:

A)private issue
B)renounceable right
C)call option
D)non- renounceable right

Answer 3

B

Question 4

A form of debt which can be converted to shares after a set period of time is referred to as a:

A)unsecured note
B)lease
C)mortgage
D)convertible note

Question 5

Which of the following is not one of the criteria for a large proprietary company under the Corporations Act?

A)consolidated revenue of at least $25 million
B)50 or more full- time employees
C)total liabilities of greater than $5 million
D)end of financial year consolidated gross assets of at least $12.5 million

Question 6

A typical feature of debt financing is:

A)the right to receive payments at agreed dates
B)the absence of an entitlement to return of capital,except on liquidation
C)the right to vote at the annual general meeting
D)the right to receive dividends

Question 7

A request to make a further payment on the outstanding balance of a partly- paid share is referred to as a/an:

A)dividend
B)call
C)allotment
D)application

Question 8

Which of the following are an example of a share issue cost?

A)stamp duty
B)legal fees
C)registration fees
D)all of the above

Question 9

Which of the following is a characteristic of preference shares?

A)they may have restricted voting rights
B)they have an entitlement to assets remaining after all obligations have been satisfied
C)they may be preferential as to return of capital
D)both A and C

Question 10

Which of the following is a major advantage of public companies?

A)being able to invite the public to invest in them through the subscription to share or debt capital
B)being subject to more government regulation than proprietary companies
C)being subject to less government regulation than proprietary companies
D)none of the above

Question 11

When a company sells the right to buy a certain number of shares in the company at a pre- determined price at or up to some fixed time in the future,that right is known as a:

A)bonus issue
B)redeemable preference share
C)call option
D)private issue

Question 12

The journal entry used to record money due on the allotment of shares is

A)Debit Allotment Credit Share Capital
C)Debit Share Capital Credit Allotment

Question 13

When there are applications for more shares than are available for purchase,it is referred as a/an:

A)undersubscription
B)underwritten issue
C)oversubscription
D)forfeiture

Question 14

What is a rights issue?

Question 15

The acronym ACN stands for:

A)Annual Classification Number
B)Australian Classification Number
C)Australian Committee Number
D)Australian Company Number

Question 16

Company prospectuses must be lodged with:

A)ASX
B)FRC
C)AASB
D)ASIC

Question 17

Holly Ltd decide to issue 100 000 ordinary shares at $2 each and require applicants to pay 50 cents for each share applied for on application.Applications are received for 120 000 shares.The journal entry to record the receipt of the application money is:

A)Bank trust 200 000 Application 200 000
B)?Bank trust 60 000 Application 60 000
C)Application 60 000 Bank trust 60 000
D)Bank trust 50 000 Application 50 000

Question 18

Calls in advance are classified in the company's financial statements as:

A)revenue
B)assets
C)equity
D)liabilities

Question 19

Describe the purpose and benefits of companies listing on a stock exchange.

Question 20

Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities is referred to as a/an:

A)debt instrument
B)equity instrument
C)mortgage
D)none of the above

Question 21

Discuss the differences between ordinary and preference shares.

Question 22

What are debentures and explain their accounting treatment?

Question 23

What are options and explain their accounting treatment?

Question 24

What is the difference between a company's constitution and the replaceable rules?

Question 25

Explain the characteristics of a company limited by guarantee.

Question 26

Explain the concepts of oversubscription and undersubscription in relation to share issues.

Question 27

Describe the concepts of par value,premium and discount in relation to share issues.