Question 1

Which of the following has the ultimate power to control a company?

Accepted Answer

The shareholders are the ultimate owners of a company and have the power to control it by electing the board of directors and voting on major corporate decisions.

Question 2

Which of the following statements about a private company is correct?

Accepted Answer

According to most countries, a private company must include 'Proprietary' or 'Pty' in their name.

Option A is incorrect as a private company cannot raise funds from the public.
Option C is incorrect as most countries impose a restriction on the maximum number of shareholders. 
Option D is incorrect as a private company can have any person as a shareholder, not just family members.

Question 3

When a company is incorporated ASIC issues it with a:

Accepted Answer

When a company is incorporated, ASIC issues it with a certificate of registration as proof of its legal status as a company. A license may be required for specific activities or industries, a constitution is a company's internal rules, and a prospectus is a document used to invite investment in the company.

Question 4

The board of directors has which of the following responsibilities?
I. Recommendation of dividend payments
II. Collection of bad debts
III. Preparation of the company budget
IV. Preparation of the company tax return

Accepted Answer

The board of directors is responsible for recommending dividend payments to shareholders. Collections of bad debts and preparation of the company budget are responsibilities of management, while preparation of the company tax return is typically handled by the finance or accounting department.

Question 5

If the number of shares subscribed for is greater than the number of shares offered the issue is said to be:

Accepted Answer

If the number of shares subscribed for is greater than the number of shares offered, it means that there is excess demand for the shares being offered. This situation is called over-subscribed.

Question 6

Buster and Foster each own 30 000 shares in Rebound Company Ltd. If Buster sells his shares directly to Foster:

Accepted Answer

The share capital for Rebound Company will remain the same because the shares are simply transferred from one shareholder to another. There is no change in the total number of shares outstanding or the amount of money invested in the company through the sale of shares. The bank account for Rebound Company is also not affected by this transaction.

Question 7

In Australia, the two most common types of companies are:

Accepted Answer

The two most common types of companies in Australia are proprietary companies and public companies. Proprietary companies are usually small to medium-sized businesses and have restrictions on the transfer of shares. Public companies have no such restrictions and can offer shares to the public to raise funds. No liability companies are not as common in Australia compared to proprietary and public companies, and companies limited by guarantee are typically used for non-profit organizations.

Question 8

The information required to be lodged with ASIC when applying to form a company is not required to include:

Accepted Answer

The information required when applying to form a company includes the address of the company's proposed registered office, the name and address of each person who consents to become a director and a member, and other details. However, the proposed winding up date is not relevant at this stage and is not required to be lodged with ASIC.

Question 9

Simone Ltd issued 20 000 shares with an issue price of $2.00 per share. The full price has been paid to the company. What is the maximum additional amount the shareholders can be asked to contribute if Simone Ltd cannot pay its debts?

Accepted Answer

Since the full price of the shares has been paid, shareholders have no further obligation to contribute to the company's debts.

Question 10

Which of the following accounts used to record the issue of shares is a permanent account?

Accepted Answer

Share capital is a permanent account as it represents the capital invested by shareholders in the company and is not affected by any temporary transactions such as the issue of shares or payment of dividends. The other options, Application, Allotment, and Call, are all temporary accounts used to record the various stages of share issuance and are closed once the process is completed.

Question 11

Which of these is not an advantage of incorporation?

Accepted Answer

Government regulation is not necessarily minimal when it comes to incorporation. In fact, corporations are subject to a variety of regulations, such as those regarding accounting and taxation.

Question 12

Lotus Company Ltd decided to issue 100 000 ordinary shares for $3.00 each, payable in instalments, 50c on application, $1.50 on allotment and the balance payable at the discretion of the company. Applications were received for 120 000 shares. The shares were allotted by the directors a week after the close of applications and refunds were made for 20 000 shares. The correct journal entry to record the full receipt of the allotment instalment is:

Accepted Answer

The total amount received from allotment instalments is $150 000 (100 000 shares x $1.50 allotment per share). Therefore, the correct journal entry to record this transaction is to debit Bank account for $150 000 and credit Allotment for $150 000. Option B is incorrect as it includes the excess amount received from the application, which is refunded. Option C is incorrect as it records the allotment as a capital account, which is not correct. Option D is incorrect as it records the receipt as share capital, whereas it is only an allotment installment.

Question 13

The rules for governing the internal affairs of a company that have been built into the Corporations Law are known as:

Accepted Answer

The term "replaceable rules" refers to the predetermined set of rules that cover the internal affairs of a company and are included in the Corporations Law. Companies are not required to adopt these rules, as they can create their own constitution. However, if they do not have their own constitution, these replaceable rules will take effect automatically. Therefore, choice A is the correct answer.

B) The constitution pertains to the specific legal document that outlines the guidelines on how a company must be governed. While the Corporations Law includes some predetermined rules, companies can opt to create their own constitution.

C) The prospectus is a document that provides information about the company's financial status, objectives, and management. It is issued to potential investors to help them make an informed decision about whether to invest in the company.

D) The memorandum of association refers to a historical document that outlines the purpose and objectives of a company when it is first established. The Corporations Law has replaced this requirement with a requirement for a company's constitution.

Question 14

Which type of company has the right to advertise share issues to the general public?

Accepted Answer

Only public companies have the right to advertise share issues to the general public. Proprietary companies are restricted to offering shares to a maximum of 50 non-employee shareholders and cannot advertise or offer shares to the general public. A company limited by guarantee does not issue shares.

Question 15

Which of the following is not an advantage of companies over sole traders or partnerships?

Accepted Answer

Less government regulation is not an advantage of companies over sole traders or partnerships. In fact, companies are typically subject to more government regulation than sole traders or partnerships due to their larger size, greater public visibility, and increased potential for societal impact. Limited liability, continuity of existence, and simpler transferability of ownership are all advantages of companies over sole traders or partnerships.

Question 16

A legal document accompanying an invitation to purchase shares, containing information about the issuing company, is called a(n):

Accepted Answer

A prospectus is a legal document that provides detailed information about the issuing company and the securities being offered. It is required by law to be provided to potential investors before they purchase shares. An offering refers to the sale of securities, but it does not necessarily include the accompanying legal document. An affidavit is a written statement made under oath, and a company report is a broader term that can refer to various documents produced by a company for informational or regulatory purposes.

Question 17

Companies are administered under the:

Accepted Answer

The Corporations Act 2001 is the primary legislation governing companies in Australia. It sets out rules for the formation, administration, and dissolution of companies, as well as outlining the rights and duties of company directors and shareholders. The other options listed are related to specific areas of law, but do not provide a comprehensive framework for the operation of companies.

Question 18

ASIC stands for:

Accepted Answer

ASIC stands for the Australian Securities and Investments Commission.

Question 19

Under the Corporations Act, a Proprietary company is classified as 'small' if it can satisfy two out of three conditions. Which of the following are two of those conditions?

Accepted Answer

According to the Corporations Act, a company is classified as 'small' if it satisfies two of the following three conditions: consolidated gross assets less than $12.5 million, consolidated gross revenue less than $25 million, and fewer than 50 employees. Therefore, option D is the correct answer as it meets two of the conditions - consolidated gross assets less than $12.5 million and consolidated gross revenue less than $25 million.

Question 20

When accounting for share issues, the ultimate debit and credit entries are to which accounts?

Accepted Answer

The correct accounting entry for a share issue is to debit the Bank account, as the company receives cash (or its equivalent) from the investors, and credit the Share Capital account, reflecting the increase in the company's equity from the issued shares.

Quiz 9: Companies: Formation and Operations