Question 1

Contact Ltd was registered as a corporation on 1 July 2021. On 3 July 2021, Contact Ltd issued a prospectus offering 50 000 ordinary shares at an issue price of $5.00 each, payable $3.00 on application and $2.00 on allotment. Application closed on 1 August 2021 with the company having received applications for 60 000 shares. The shares were allotted on 15 August 2021, with the over-subscription amount being refunded to unsuccessful applicants. All allotment monies were received by 31 August 2021. Following the allotment, the balance in the Share Capital account would be:

Accepted Answer

The number of shares applied for (60,000) is greater than the number of shares offered (50,000), resulting in an oversubscription of 10,000 shares. The excess application money of $30,000 (10,000 shares x $3.00) should be refunded to applicants. The amount received from successful applicants would be $120,000 (40,000 shares x $3.00 on application + 50,000 shares x $2.00 on allotment). Therefore, the total amount of share capital would be $150,000 CR.

Question 2

AASB 101 Presentation of Financial Statements requires which of the following items to appear on the face of the statement of changes in equity?
I. Profit or loss for the period
II. The net amount of cash from the issue of any securities during the period
III. The cumulative effect of changes in accounting policy and the correction of errors
IV. Each item of income or expenses that are required to be recognised directly in equity

Accepted Answer

AASB 101 requires that profit or loss for the period, the cumulative effect of changes in accounting policy and the correction of errors, and each item of income or expenses that are required to be recognised directly in equity must be presented on the face of the statement of changes in equity. The net amount of cash from the issue of any securities during the period is not required to be presented on the face of the statement of changes in equity.

Question 3

A company's capital consists of 100 000 ordinary shares issued at $2 and paid to $1 per share. On 1 September, a first call of 50c was made on the ordinary shares. By 30 September, the call money received amounted to $45 000. No further payments were received, and on 31 October, the shares on which calls were outstanding were forfeited. On 15 November, the forfeited shares were reissued as paid to $1.50 for a payment of $1 per share. The appropriate cash amount from the reissue was received on 19 November. Costs of reissue amounted to $1 800. The company's constitution provided for any surplus on resale, after satisfaction of unpaid calls, accrued interest and costs, to be returned to the shareholders whose shares were forfeited.
The amount of the surplus payable to the shareholders whose shares were forfeited is:

Accepted Answer

- The total amount of call money due on the 100 000 ordinary shares is 100 000 x 50c = $50 000.
- By 30 September, the company received only $45 000, leaving a balance of $5 000.
- On 31 October, the shares on which calls were outstanding were forfeited. The shareholders whose shares were forfeited still owe the company the balance of the call money, which is $5 000.
- On 15 November, the forfeited shares were reissued as paid to $1.50 for a payment of $1 per share. This means that the company received $1.50 per forfeited share, and the shareholders whose shares were forfeited are entitled to receive the difference between the reissue price and the balance of call money owed, which is $1.50 - $0.50 = $1 per forfeited share.
- The number of forfeited shares is not given in the question, but we can calculate it using the balance of call money owed: $5 000 / 50c = 10 000 shares.
- Therefore, the proceeds from the reissue of the forfeited shares is 10 000 x $1.50 = $15 000.
- The costs of reissue are $1 800, so the net proceeds from the reissue are $13 200 ($15 000 - $1 800).
- The surplus payable to the shareholders whose shares were forfeited is the net proceeds from the reissue, minus the balance of call money owed: $13 200 - $5 000 = $8 200.
- However, the question specifies that the surplus is to be returned only to the shareholders whose shares were forfeited. We previously calculated that there were 10 000 forfeited shares. Each forfeited share is entitled to receive $1 of surplus, so the total amount of surplus payable to the shareholders whose shares were forfeited is $10 000.
- Therefore, the correct answer is C) $6 800.

Question 4

For-profit companies may be: I Listed
II No-liability
III Unlimited
IV Limited by guarantee

Accepted Answer

For-profit companies can be listed (publicly traded), no-liability (specific to certain jurisdictions and industries, such as mining in Australia), unlimited (where owners have unlimited liability), or limited by guarantee (often used by non-profits, but can be for profit in some jurisdictions).

Question 5

How does a bonus issue of shares impact the equity of a company?

Accepted Answer

A bonus issue of shares involves transferring amounts from one equity account (e.g., retained earnings or share premium) to another equity account (issued share capital), without changing the total equity of the company.

Question 6

A company's capital consists of 100 000 ordinary shares issued at $2 and paid to $1 per share. On 1 September, a first call of 50c was made on the ordinary shares. By 30 September, the call money received amounted to $45 000. No further payments were received, and on 31 October, the shares on which calls were outstanding were forfeited. On 15 November, the forfeited shares were reissued as paid to $1.50 for a payment of $1 per share. The appropriate cash amount from the reissue was received on 19 November. Costs of reissue amounted to $2 500. The company's constitution provided for any surplus on resale, after satisfaction of unpaid calls, accrued interest and costs, to be returned to the shareholders whose shares were forfeited.
The entry to record the forfeiture of shares is:

Accepted Answer

The entry to record the forfeiture of shares is to debit Share capital for the amount of the unpaid calls, credit First call - ordinary shares for the amount of the call received, and credit Forfeited shares for the nominal value of the forfeited shares. In this case, the unpaid calls amount to $50 000, the call received amounts to $45 000, and the nominal value of the forfeited shares is $10 000. Therefore, the entry is:Share capital Dr $15 000First call - ordinary shares Cr $5 000Forfeited shares Cr $10 000

Question 7

The balance in the retained earnings account is affected by:
I. Issued share capital
II. Dividends paid or provided for
III. Transfers to or from other reserve accounts
IV. Changes in accounting policies and errors

Accepted Answer

Dividends paid or provided for, transfers to or from other reserve accounts, and changes in accounting policies and errors all affect retained earnings. Issued share capital does not directly affect retained earnings.

Question 8

If the balance in a forfeited shares account is refundable to the owners of those shares, then the forfeited shares account is classified in the financial statements as:

Accepted Answer

When the balance in a forfeited shares account is refundable to the owners of those shares, it represents an obligation of the company to pay the shareholders in the future. Therefore, it is classified as a liability in the financial statements.

Question 9

Which of the following statements relating to an asset revaluation surplus account is correct?

Accepted Answer

The answer of Which of the following statements relating to...

Question 10

A company issued share option is an instrument that gives the holder the right, but not the obligation, to:

Accepted Answer

A company issued share option gives the holder the right to buy a certain number of shares in the company by a specified date at a stated price. This is known as a call option. Option A is incorrect because share options do not necessarily involve dividends. Option B is incorrect because bonus issues of shares are distributed to existing shareholders and not to option holders. Option D is incorrect because selling shares is not a right granted by a share option.

Question 11

Which of the following statements relating to shares is not correct?

Accepted Answer

While shareholders generally have the right to subscribe to new share issues, this is not always a legally binding right and can vary depending on the company's articles of association and the specific terms of any new share issue. Therefore, not all new share issues will necessarily be available for purchase by all shareholders.

Question 12

Which account represents excess proceeds received and retained by a company from an oversubscription to a share offer application?

Accepted Answer

Calls in advance account represents the excess funds received by a company over the share capital amount when there is an oversubscription to a share offer. These funds are held until they can be either returned to the subscribers or appropriated in a manner decided by the company.

Question 13

The appropriate journal entry to recognise the accounting treatment for share issue costs is:

Accepted Answer

The answer of The appropriate journal entry to recognise the...

Question 14

A company's capital consists of 100 000 ordinary shares issued at $2 and paid to $1 per share. On 1 September, a first call of 50c was made on the ordinary shares. By 30 September, the call money received amounted to $45 000. No further payments were received, and on 31 October, the shares on which calls were outstanding were forfeited. On 15 November, the forfeited shares were reissued as paid to $1.50 for a payment of $1 per share. The appropriate cash amount from the reissue was received on 19 November. Costs of reissue amounted to $1 800. The company's constitution provided for any surplus on resale, after satisfaction of unpaid calls, accrued interest and costs, to be returned to the shareholders whose shares were forfeited.
The entry to record the reissue of forfeited shares is:

Accepted Answer

The correct entry involves debiting Cash for the amount received from the reissue ($10,000), debiting Forfeited shares for the amount that covers the unpaid call and costs ($5,000), and crediting Share capital - ordinary for the total amount credited to share capital upon reissue ($15,000). This reflects the cash inflow from the reissue, the utilization of forfeited shares to cover unpaid amounts and costs, and the increase in share capital due to the reissue.

Question 15

Dividends declared after the balance date but before the financial statements are authorised for issue:

Accepted Answer

Dividends declared after the balance date but before the financial statements are authorised for issue do not meet the AASB 137 criteria of a present obligation because they do not represent an outflow of resources embodying economic benefits that the entity is presently obliged to make as of the balance sheet date.

Question 16

Accounting for share buy-backs is prescribed by:

Accepted Answer

The answer of Accounting for share buy-backs is prescribed by:
...

Question 17

Which of the following is not a reason that companies may undertake a share buy-back?

Accepted Answer

A share buy-back can be used as a defense against a hostile takeover, but this is not typically cited as a reason not to undertake a share buy-back. The other options (managing the capital structure, efficiently managing surplus funds, and increasing the value per share of the remaining shares) are common reasons for a company to buy back its shares.

Question 18

When a public share issue is made, the offer comes from:

Accepted Answer

The answer of When a public share issue is made,...

Question 19

Sunshine Company issued 20 000 share options to subscribe for ordinary shares. The exercise price on the options was $2 per share. If all options were exercised on the due date, the journal entry that would be recorded is:

Accepted Answer

The correct journal entry for exercising share options involves debiting Cash for the total amount received from the option holders (20,000 shares at $2 each equals $40,000, not $60,000 as mistakenly mentioned in all options) and crediting Share Capital for the same amount, reflecting the increase in equity from issuing new shares. However, given the choices provided, option D correctly represents the structure of the transaction, despite the numerical error.

Question 20

In respect to a company's issue of shares, an IPO is an:

Accepted Answer

An IPO (Initial Public Offering) refers to the first time a company offers shares of its stock to the public, allowing individuals to buy and own a small portion of the company. Therefore, D is the correct choice as it specifically refers to the initial public offering of shares. A, B, and C are incorrect as they do not accurately describe an IPO.

Quiz 13: Share Capital and Reserves

For-profit companies may be: I Listed II No-liability III Unlimited IV Limited by guarantee