Question 1

At year-end,the Board of Directors of Mega Motors Ltd declared a final dividend of 4c per share on 80 000 ordinary shares.Early in the next year,the dividend was paid.Which of the following is the general journal entry to record the payment of the dividend?

Accepted Answer

When a dividend is declared, it is recorded as a liability in the Final Dividend Payable account. When the dividend is paid, the liability is reduced, and cash is paid out. Therefore, the correct journal entry to record the payment of the dividend is to debit the Final Dividend Payable account and credit the Bank account. Option C reflects this transaction correctly. Option A is incorrect because retained earnings are not affected by the payment of dividends. Option B is incorrect because it suggests that the payment was made from retained earnings, which is not accurate. Option D is incorrect because it reverses the debit/credit order, making the entry incorrect.

Question 2

Which statement relating to share dividends (bonus share issues)is incorrect?

Accepted Answer

Share dividends (bonus share issues) do not reduce total shareholder's equity. Instead, they involve a transfer of retained earnings or reserves to share capital, and shareholders are provided with additional shares without cost. A bonus issue can only be made if the company has sufficient reserves.

Question 3

A company is a legal entity and as such has an additional expense for ________________ in its income statement that sole traders and partnerships do not have.

Accepted Answer

Companies have to pay income tax on their profits, which is not a cost for sole traders and partnerships. Option A is not a commonly used term in accounting, option B is a general expense for any business, and option D is related to the accounting treatment of fixed assets and not exclusive to companies.

Question 4

The basic entry to provide for company income tax at the end of the financial year is which of the following?

Accepted Answer

The basic entry to provide for company income tax at the end of the financial year is to debit Income tax expense and credit Current tax liability. This is because the company is estimating the amount of tax it will owe for the current financial year and recognizing it as an expense in the income statement. At the same time, the company is setting up a liability in the balance sheet for the same amount, as it will have to pay the tax bill when it becomes due. Therefore, the correct answer is B.

Question 5

The primary purpose of a share split is to:

Accepted Answer

A share split is primarily done to reduce the market value of the company's shares, making them more affordable and potentially more attractive to a broader range of investors. It does not directly affect the company's retained earnings, total capital, or the market value of the company itself.

Question 6

Which of the following is the accounting entry to record a share split?

Accepted Answer

A share split does not involve any financial transaction that impacts the accounting records, hence no entry is required. It simply increases the number of shares outstanding while proportionally adjusting the share price.

Question 7

When a share dividend of 20 000 $1 shares,is declared and paid,the effect on total equity in the company balance sheet is a(n):

Accepted Answer

When a share dividend is declared and paid, it means the company is distributing its earnings to shareholders in the form of additional shares. This has no impact on the total equity of the company as the increase in share capital is offset by a corresponding decrease in reserves. Therefore, there is no change in total equity. Option B is incorrect as there is no increase in total equity. Option C is also incorrect as there is no decrease in total equity. Option D is also incorrect as there is no increase in the number of issued shares, only a distribution of existing shares.

Question 8

King Ltd declared and distributed a 12% share dividend (bonus issue)when share capital was $380 000.What is the effect on total shareholders' equity?

Accepted Answer

A share dividend (bonus issue) redistributes a company's retained earnings to its share capital account but does not affect the total shareholders' equity. It simply transfers amounts within shareholders' equity, not increasing or decreasing the total.

Question 9

Which of these is not a reason for declaring a share dividend?

Accepted Answer

Declaring a share dividend does not raise extra capital for the company. It simply redistributes existing shares or issues new shares to current shareholders, thus diluting the share value but not bringing in new funds.

Question 10

How many of these statements are true? The difference between a share split and a share dividend (bonus issue)is that a bonus issue,but not a share split:
i.increases the share capital and reduces the retained earnings.
ii.reduces the market price of the shares.
iii.requires accounting entries to be made in the ledger.

Accepted Answer

i. is true, as a bonus issue increases the share capital and reduces the retained earnings.
ii. is false, as a bonus issue does not necessarily reduce the market price of the shares, whereas a share split will generally reduce the market price of the shares.
iii. is true, as accounting entries need to be made in the ledger for both share splits and bonus issues.

Question 11

Which of the following statements concerning cash dividends is not true?

Accepted Answer

Shareholders do not typically have the right to determine the amount of dividends declared. The board of directors decides on the amount and timing of dividend payments.

Question 12

The correct accounting entry to create a reserve is:

Accepted Answer

To create a reserve, it is necessary to debit the retained earnings account and credit the reserve account. This reflects that a portion of the company's earnings has been set aside for a specific purpose, such as future expenses or investments. Therefore, option B is the correct accounting entry to create a reserve.

Question 13

At the end of the year a company declared a final cash dividend out of its retained earnings.Which of the following is the journal entry to record the declaration?

Accepted Answer

The correct journal entry for declaring a final cash dividend out of retained earnings is to debit Retained Earnings, which decreases the equity account, and credit Final Dividend Payable, indicating a liability to pay the dividend.

Question 14

Two accounting entries are required for income tax,one to provide for the tax and one to pay the tax.On 28 February 2014,S Ltd pays the tax authorities the $146 000 provided as a liability on 30 June 2013.Which is the correct entry to record this payment?

Accepted Answer

The payment of income tax reduces the liability recorded in the current tax liability account and increases the balance in the bank account. Therefore, the correct entry is to debit the current tax liability account and credit the bank account for the amount paid. Option B correctly matches these accounts. Option A is incorrect because it records the payment as an expense, which was already recorded when the liability was originally recognized. Option C is incorrect because it records the payment as an expense, which would overstate the total expense for the period. Option D is incorrect because it incorrectly matches the payment with the income tax expense account.

Question 15

Two accounting entries are required for income tax,one to provide for the tax and one to pay the tax.If Webmark Ltd wishes to provide for estimated income tax expense on 30 June 2014 of $97 000,the correct entry is which of the following?

Accepted Answer

The entry to provide for estimated income tax expense is to debit income tax expense and credit current tax liability. This ensures that the estimated tax liability is recognized as an expense and a corresponding liability is created on the balance sheet. Option B is incorrect as it reverses the debit and credit accounts. Option C is incorrect as it credits retained earnings which would not be impacted by income tax expense. Option D is incorrect as it credits bank which would not be impacted until the actual tax liability is paid.

Question 16

Final dividend payable is what type of account?

Accepted Answer

Final dividend payable is an amount owing by the company to its shareholders and is classified as a liability.

Question 17

A dividend declared and paid part-way through the year is called a/an:

Accepted Answer

An interim dividend is declared and paid part-way through the year, usually in the middle or towards the end of the financial year. It is paid out of the current year's profits and is based on the company's performance up until that point.

Question 18

How many of the following are reasons for a company to declare a share dividend (bonus issue)?
-To reduce the market price of their shares.
-To capitalise the retained earnings of the company.
-To conserve cash.

Accepted Answer

All three reasons are valid for a company to declare a share dividend: reducing the market price of their shares makes them more affordable, capitalizing retained earnings increases shareholder equity without requiring cash outlay, and conserving cash since dividends are paid in shares instead of cash.

Question 19

If a dividend of 18c per share is declared how much will a shareholder who owns 3000 shares receive if the shares were issued for $6 each and are currently selling on the stock market at $5.40 each?

Accepted Answer

The shareholder will receive $540 because the dividend payment is calculated as the dividend per share multiplied by the number of shares owned, which is 18c * 3000 = $540. The issue price and current market price of the shares are irrelevant to the calculation of dividend payments.

Question 20

Which of these is not a reason for declaring a share dividend?

Accepted Answer

Declaring a share dividend does not raise extra capital for the company. Share dividends are typically distributed to existing shareholders from the company's existing reserves and do not involve raising new capital. They are used for purposes such as conserving cash (C), potentially staving off a takeover by increasing the number of shares outstanding (B), and decreasing the market price of shares by increasing the number of shares (D), making them more affordable and possibly more liquid.

Quiz 9: Companies: Formation and Operations

At year-end,the Board of Directors of Mega Motors Ltd declared a final dividend of 4c per share on 80 000 ordinary shares.Early in the next year,the dividend was paid.Which of the following is the general journal entry to record the payment of the dividend?

Which statement relating to share dividends (bonus share issues) is incorrect?

A company is a legal entity and as such has an additional expense for ________________ in its income statement that sole traders and partnerships do not have.

The basic entry to provide for company income tax at the end of the financial year is which of the following?

The primary purpose of a share split is to:

Which of the following is the accounting entry to record a share split?

When a share dividend of 20 000 $1 shares,is declared and paid,the effect on total equity in the company balance sheet is a(n) :

King Ltd declared and distributed a 12% share dividend (bonus issue) when share capital was $380 000.What is the effect on total shareholders' equity?

Which of these is not a reason for declaring a share dividend?

Which of the following statements concerning cash dividends is not true?

The correct accounting entry to create a reserve is:

At the end of the year a company declared a final cash dividend out of its retained earnings.Which of the following is the journal entry to record the declaration?

Two accounting entries are required for income tax,one to provide for the tax and one to pay the tax.On 28 February 2014,S Ltd pays the tax authorities the $146 000 provided as a liability on 30 June 2013.Which is the correct entry to record this payment?

Two accounting entries are required for income tax,one to provide for the tax and one to pay the tax.If Webmark Ltd wishes to provide for estimated income tax expense on 30 June 2014 of $97 000,the correct entry is which of the following?

Final dividend payable is what type of account?

A dividend declared and paid part-way through the year is called a/an:

How many of the following are reasons for a company to declare a share dividend (bonus issue) ? -To reduce the market price of their shares. -To capitalise the retained earnings of the company. -To conserve cash.

If a dividend of 18c per share is declared how much will a shareholder who owns 3000 shares receive if the shares were issued for $6 each and are currently selling on the stock market at $5.40 each?

Which of these is not a reason for declaring a share dividend?