Question 1

Which of the following is NOT omitted from the consolidated accounts?

Accepted Answer

Intercompany sales, management fees and debt owing to parent company are all eliminated in consolidation to avoid double counting. However, credit sales of the subsidiary are not eliminated as they represent external transactions with customers.

Question 2

A debit balance in the retained profits account indicates that the company has:

Accepted Answer

Retained profits account reflects the accumulated profits of a company that have not been paid out as dividends. If the balance in the retained profits account is negative or debit, it indicates that the company has incurred losses in the past, resulting in a net reduction of its overall profits. Therefore, option B is correct as it states that the company has made a loss in at least one period. Option A could also be correct, but it is a more restrictive statement as it only considers the current period. Option C is incorrect as it is possible for a company to have made a profit in the past, even if the current balance in the retained profits account is negative. Option D is irrelevant to the retained profits account balance.

Question 3

An issue of 50 000 shares at $3 required $2.20 per share to be paid at the time of application.On allotment,another $0.30 was due and a further $0.50 when determined by the board of directors.The application money in respect of the 50 000 shares was received on 8 July.On 26 July,the shares were issued with the amount due on allotment received on 15 August.The remaining $0.50 was called up on 20 September and received on 10 October
- What was the balance of share capital at 11 October?

Accepted Answer

- The issue of 50 000 shares at $3 each brings in a total of 50 000 x $3 = $150 000 in share capital.
- $2.20 per share is paid at the time of application, which amounts to a total of 50 000 x $2.20 = $110 000 received on 8 July.
- On allotment, $0.30 per share is due, which amounts to a total of 50 000 x $0.30 = $15 000. This amount was received on 15 August.
- A further $0.50 per share is due when determined by the board of directors, which amounts to a total of 50 000 x $0.50 = $25 000. This amount was called up on 20 September and received on 10 October.
- Therefore, the total share capital at 11 October is $150 000 (from the issue of shares) + $15 000 (allotment money received) + $25 000 (final call money received) = $190 000.

Question 4

When bonus shares are issued:

Accepted Answer

Bonus shares are issued from retained earnings, so they do not affect total assets or liabilities. They do not increase retained profits, but shareholders may receive more dividends in the future due to increased shareholding.

Question 5

An issue of 50 000 shares at $3 required $2.20 per share to be paid at the time of application.On allotment,another $0.30 was due and a further $0.50 when determined by the board of directors.The application money in respect of the 50 000 shares was received on 8 July.On 26 July,the shares were issued with the amount due on allotment received on 15 August.The remaining $0.50 was called up on 20 September and received on 10 October
- The journal entry to record the cash received on application would include:

Accepted Answer

The journal entry to record the cash received on application would be to credit the application account, as the money is being received as payment towards the application price. Therefore, the correct choice is C - Cr Application, $110 000. A is incorrect, as it would be the entry to record the receipt of the entire share capital amount, not just the application money. B is incorrect, as it would be the entry to record the issuance of shares, not the application money. D is incorrect, as it would be the entry to record the application money being paid to the company, not received from shareholders.

Question 6

LMN Ltd declared an interim dividend on 12 February 2016 of 5 cents per share (500 000 issued shares)and paid it on 3 March 2016.
- The journal entry on 3 March 2016 would include:

Accepted Answer

The journal entry on 3 March 2016 would include a credit to cash for the amount of the dividend paid ($25,000) and no other accounts. The dividend was already declared and therefore no additional account needs to be credited. Option A is incorrect because the interim dividend was already declared on 12 February 2016. Option C is incorrect because the interim dividend payable was already paid on 3 March 2016. Option D is incorrect because no retained profit account is affected by the payment of an interim dividend.

Question 7

A credit balance in retained profits:

Accepted Answer

A credit balance in retained profits represents the profits earned but not paid out in dividends. This means that the company has made a profit in the last financial period but has not distributed all of it to its shareholders as dividends.

Question 8

R Limited has control over another entity,S Limited.R Limited is referred to as:

Accepted Answer

R Limited is referred to as the parent entity since it has control over S Limited. "Control" is defined as having the power to govern the financial and operating policies of an entity.

Option A is incorrect because an associate entity is an entity in which the investor has significant influence but not control.

Option C is incorrect because a consolidated entity refers to a group of entities that are treated as a single entity for financial reporting purposes.

Option D is incorrect because the term "minority shareholder" refers to a shareholder who owns less than 50% of the voting shares in a company, and is not relevant in this scenario where R Limited has control over S Limited.

Question 9

Gargantua Ltd paid $1 000 000 for 75 per cent of the voting shares of Dwarf Ltd,and evaluated Dwarf's assets to be worth $1 500 000 and its liabilities $300 000.What was the goodwill on consolidation at the date of acquisition?

Accepted Answer

The net assets of Dwarf Ltd are $1,200,000 ($1,500,000 assets - $300,000 liabilities). 75% of this is $900,000. Gargantua Ltd paid $1,000,000, so the goodwill is $1,000,000 - $900,000 = $100,000.

Question 10

The entry to create a general reserve is usually:

Accepted Answer

The entry to create a general reserve is to debit Retained profits (which represents surplus profits from previous years) and credit General reserve account. Therefore, option B is correct. Option A is incorrect as it debits General reserve, which is not an account to be debited. Option C is incorrect because Profit and loss account represents the current year's profit or loss and not the accumulated profits of previous years. Option D is incorrect as there is no expense associated with the creation of a general reserve.

Question 11

Which of the following statements about the general reserve account is NOT true?

Accepted Answer

The general reserve account does not provide an indication of where funds are invested. Its purpose is to record a portion of profits that has been retained for unspecified future uses, such as investment in new technology, expansion of operations or paying off debt.

Question 12

LMN Ltd declared an interim dividend on 12 February 2016 of 5 cents per share (500 000 issued shares)and paid it on 3 March 2016.
-The journal entry on 12 February 2016 would include:

Accepted Answer

The journal entry on 12 February 2016 would include a debit to Interim Dividend Declared for $25,000 to record the declaration of the dividend.

Question 13

The directors of Behrens Ltd decided to issue 300 000 ordinary shares at $1 each.25 cents per share was payable on application,25 cents per share on allotment and the balance through two equal calls.Applications were received for 250 000 shares,which were duly issued and allotment money was paid in full.The journal entries to record the allotment would include a:

Accepted Answer

The answer of The directors of Behrens Ltd decided to...

Question 14

Which of the following statements about bonus issues is NOT true?

Accepted Answer

Bonus issues do not reduce shareholders' equity or assets, in fact, they increase the number of shares outstanding without increasing the company's liabilities or assets. Option A is true, as bonus issues can make it more expensive for a potential acquirer to take over the company. Option C is also true, as bonus issues do not involve any cash flow, and option D is partly true, as bonus issues are similar to stock dividends, but not referred to as share dividends.

Question 15

Springtown Ltd issued 10 000 ordinary shares for $2.50 each,payable $1 on application,50 cents on allotment and $1 in calls as required.The journal entries to record the allotment of 10 000 shares would include a:

Accepted Answer

The allotment of shares involves the transfer of ownership from the company to the shareholders. The shareholders have agreed to pay the allotment price of 50 cents per share. Therefore, the journal entry to record the allotment of 10,000 shares would include a credit to share capital for the total value of shares allotted, which is $25,000. Since no cash is received at the time of allotment, there would be no debit to cash or allotment account. Hence, option D, credit to share capital for $25,000, is the correct answer.

Question 16

P Limited has control over another entity called Q Limited.Q Limited is referred to as the:

Accepted Answer

P Limited has control over Q Limited, which means that Q Limited is a subsidiary entity of P Limited.

Question 17

Which of the following are NOT eliminated in the preparation of consolidated financial statements?

Accepted Answer

Assets of the subsidiary are not eliminated in the preparation of consolidated financial statements as they become part of the consolidated totals. Intercompany receivables, intercompany sales and expenses, and the account for the parent company's investment in the subsidiary are eliminated in order to avoid double-counting and to reflect the financial situation of the consolidated group accurately.

Question 18

An issue of 50 000 shares at $3 required $2.20 per share to be paid at the time of application.On allotment,another $0.30 was due and a further $0.50 when determined by the board of directors.The application money in respect of the 50 000 shares was received on 8 July.On 26 July,the shares were issued with the amount due on allotment received on 15 August.The remaining $0.50 was called up on 20 September and received on 10 October
-The journal entry to record the amount due on application would include:

Accepted Answer

The answer of An issue of 50 000 shares at...

Question 19

XYZ Limited paid $2 million for 100 per cent of the voting shares of ABC Limited and determined the assets to be worth $3 million and the liabilities $800 000.What was the goodwill on consolidation at the date of acquisition?

Accepted Answer

Goodwill is calculated as the purchase price minus the fair value of net assets acquired. The net assets are $3 million (assets) - $800,000 (liabilities) = $2.2 million. Goodwill is $2 million (purchase price) - $2.2 million (net assets) = -$200,000, indicating a bargain purchase, but since the options do not account for a negative value, the closest positive value is $200,000.

Question 20

Alby Ltd paid $1 800 000 for 80 per cent of the voting shares of Bunter Ltd and evaluated Bunter's assets to be worth $3 000 000 and its liabilities $800 000.What was the goodwill on consolidation at date of acquisition?

Accepted Answer

The answer of Alby Ltd paid $1 800 000 for...

Quiz 12: Completing the Balance Sheet