Question 1

Equity's claim against the assets of the entity:

Accepted Answer

Equity's claim on the assets of the entity ranks after liabilities in terms of priority. This means that if the entity is liquidated, any remaining assets would first be used to pay off outstanding liabilities before any payment can be made to equity holders.

Question 2

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

The answer of Signal Ltd called for subscriptions for 8...

Question 3

Holders of ordinary shares:

Accepted Answer

Holders of ordinary shares receive dividends at the discretion of the board. The board considers the company's profits and financial health before deciding whether to distribute dividends or reinvest the profits into the business. Hence, option D is the correct choice.

Question 4

Normal features of ordinary shares include:

Accepted Answer

Ordinary shares entitle the holder to receive his/her proportion of any ordinary dividends declared and confer voting rights. They do not ensure priority over unsecured creditors in the case of the company going into liquidation, which is a feature of preferred shares.

Question 5

A public issue of shares involves:

Accepted Answer

The answer of A public issue of shares involves:
...

Question 6

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

Accepted Answer

If the share issue is oversubscribed and the shares are issued on a pro rata basis, the excess application money can be used to reduce future amounts owing on allotment. This means that applicants will not receive a refund, but will have a reduced outstanding balance to pay when the shares are allocated to them.

Question 7

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 8

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

Accepted Answer

The term 'participating' in participating preference shares means that the shareholders will be entitled to participate in any further profits that are distributed to ordinary shareholders after the payment of the preference dividend. They will receive an additional dividend on top of their fixed preference dividend if there are any profits left for distribution. They may not necessarily have voting rights or the option to convert their shares into ordinary shares.

Question 9

Accounts that make up owners' equity may include:

Accepted Answer

The answer of Accounts that make up owners' equity may...

Question 10

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 11

Share capital:

Accepted Answer

Share capital may relate to one or several classes of shares. It is the amount of money raised by a company through the sale of its shares and represents the portion of a company's equity that has been obtained through the sale of shares to investors. This can include multiple classes of shares with varying rights and preferences. Choices A and B are incorrect as they do not fully encompass the definition of share capital. Choice D is incorrect as it refers to calculating a company's net assets, not specifically share capital.

Question 12

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 in nature to an account receivable, as they represent amounts due from shareholders. These accounts are disclosed in the balance sheet as a reduction against share capital, as they reduce the amount of share capital that is actually paid up. Therefore, choice C is the correct answer.

Question 13

A residual interest is:

Accepted Answer

A residual interest is a claim or right to the net assets of the reporting entity. It represents the portion of the assets that belongs to the owners after all other claims and liabilities have been settled. Options A, B, and D do not accurately describe a residual interest.

Question 14

A redeemable preference share is one that may be:

Accepted Answer

Redeemable preference shares can be redeemed (bought back) by the company at a future date. In case of redeemable preference shares, the shareholders have an option to convert these shares into cash at a future date either at the discretion of the company or at the discretion of the shareholder. Option A is incorrect because this refers to convertible debt, not redeemable preference shares. Option C and D are incorrect as they do not describe the characteristics of redeemable preference shares. Option E is incorrect as there is at least one correct answer.

Question 15

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

On Application: 
Bank (Dr) $3,000,000
Share Application (Cr) $3,000,000

On Allotment: 
Bank (Dr) $6,000,000 
Share Application (Dr) $3,000,000 
Share Allotment (Cr) $6,000,000 
Excess Application (Cr) $3,000,000

($6-$3)x3/5 = $1.80 per share
Allotment:
3,000,000*2 / 5 = 1,200,000 shares 
1,200,000 shares x $1.80 = $2,160,000 excess application money

On call:
Bank (Dr) $3,600,000
Share Allotment (Dr) $2,400,000
Share Call (Cr) $6,000,000

Final Call: 
Bank (Dr) $1,200,000 
Share Call (Dr) $1,200,000 
Share Call (Cr) $2,400,000

Question 16

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 of a share, and in this case, it is $1. The $4 difference between the par value and the issue price of $5 is a share premium, which is commonly treated as part of equity in the company's financial statements.

Question 17

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

Accepted Answer

Allocating the shares on a pro rata basis ensures that everyone who applied for shares receives a proportionate allocation based on the number of shares they applied for. This is fair and transparent, and helps to prevent any accusations of favoritism or bias. Option A may dilute the value of the shares and option C may discourage potential investors. Option D may be seen as unfair to those who initially applied for shares.

Question 18

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 19

The process for issuing shares is that:

Accepted Answer

The process for issuing shares involves offering them for sale and receiving applications. An allotment is then made and monies received on application must be held in trust until the allotment is made. This process is known as the allotment process.

Question 20

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

Accepted Answer

Under the Corporations Law as amended in 1998, companies have the power to issue shares at any price they determine is appropriate in the market. This means that companies have the flexibility to determine the issue price based on market demand and other factors.

Quiz 14: Share Capital and Reserves