Deck 13: Share Capital and Reserves

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:

A) $50 000 CR.
B) $150 000 CR.
C) $180 000 DR.
D) $300 000 DR.

Answer 1

B

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

A) I, III and IV only.
B) II, III and IV only.
C) II and IV only.
D) I, II, III and IV.

Answer 2

I, III and IV only.

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:

A) $3 200
B) $5 000
C) $6 800
D) $10 000

Answer 3

C

Question 4

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

A) I, II, III and IV.
B) II and III only.
C) I, II and III only.
D) II, III and IV only.

Question 5

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

A) Total equity increases.
B) Total equity decreases.
C) Only the amount of issued share capital changes.
D) One equity account increases and another equity account decreases by an equal amount.

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:

A) $$\begin{array} { l l r l } \text { Share capital } & \mathrm { Dr } & 15000 \\\text { First call - ordinary shares } & \mathrm { Cr } & & 5000 \\\text { Forfeited shares } & \mathrm { Cr } & 10000\end{array}$$
B) $$\begin{array} { l l r l } \text { Share capital } & \mathrm { Dr } & 20000 \\\text { First call - ordinary shares } & \mathrm { Cr } & & 5000 \\\text { Forfeited shares } & \mathrm { Cr } & 15000\end{array}$$
C) $$\begin{array} { l l l } \text { Share capital } & \mathrm { Dr } & 10000 \\\text { Forfeited shares } & \mathrm { Cr } & 10000\end{array}$$
D) $\begin{array} { l } \text { Forfeited shares}&Dr&10000\\ \text {Share capital }&Cr&10000\\\end{array}$

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

A) II and III only.
B) I, II, III and IV.
C) I, II and III only.
D) II, III and IV only.

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:

A) income.
B) equity.
C) expenses.
D) liabilities

Question 9

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

A) An entity is able to use this surplus for the payment of future dividends.
B) An entity is not able to transfer this surplus to any other reserve account.
C) An entity is not able to use this surplus for the payment of future dividends.
D) An entity can transfer the surplus to current period profit or loss when the asset is disposed of.

Question 10

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

A) receive a certain dividend declared by the company by a specified date.
B) receive a bonus issue of shares in a proportion as notified by the company.
C) buy a certain number of shares in the company by a specified date at a stated price.
D) sell a certain number of shares in the company by a specified date at a stated price.

Question 11

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

A) A share represents an ownership right in a company.
B) Each share in a company carries a right to vote for directors of the company.
C) Each share in a company carries a right to share proportionately in all new share issues of a company.
D) Each share in a company carries a right to share in the assets on the liquidation of the company.

Question 12

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

A) Calls in advance account.
B) Share issue costs account.
C) Forfeited shares account.
D) Share capital account.

Question 13

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

A) DR Deferred asset: CR Cash.
B) DR Share capital: CR: Cash.
C) DR Cash: CR Deferred asset.
D) DR Cash: CR Share capital.

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:

A) $$\begin{array} { l l l l } \text { Cash } & \mathrm { Dr } & 10000 & \\\text { Forfeited shares } & \mathrm { Dr } & 5000 & \\\text { Share capital - ordinary } & \mathrm { Cr } & & 15000\end{array}$$
B) $$\begin{array} { l l l l } \text { Cash } & \mathrm { Dr } & 5000 & \\\text { Forfeited shares } & \mathrm { Dr } & 5000 & \\\text { Share capital - ordinary } & \mathrm { Cr } & & 10000\end{array}$$
C) $$\begin{array} { l l l l } \text { Cash } & \text { Dr } & 10000 \\\text { Share capital - ordinary } & \mathrm { Cr } & & 10000\end{array}$$
D) $$\begin{array} { l l l } \text { Share capital } & \mathrm { Dr } & 15000 \\\text { Forfeited shares } & \mathrm { Cr } & &15000\end{array}$$

Question 15

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

A) meet the recognition criteria for a liability.
B) satisfy the recognition criteria for an expense.
C) do not meet the AASB 137 criteria of a present obligation.
D) are recognised in the statement of financial position as they meet the definition of equity.

Question 16

Accounting for share buy-backs is prescribed by:

A) an IFRIC interpretation.
B) an IFRS accounting standard.
C) an IAS accounting standard.
D) generally accepted accounting practices.

Question 17

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

A) To manage the capital structure.
B) As a defence against a hostile takeover.
C) To efficiently manage surplus funds.
D) To increase the value per share of the remaining shares.

Question 18

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

A) the applicant.
B) the company issuing the shares.
C) the broker handling the share issue for the company.
D) the relevant oversight body once it has reviewed the prospectus documentation.

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:

A) $\begin{array}{lr}\text {Share capital — ordinary }&\text {Dr }&60,000\\\text {Cash }&\text {Cr }&&60,000\\\end{array}$

B) $$\begin{array} { l l l l } \text { Bhare options - ordinary } & \mathrm { Dr } & 60000 & \\\text { Share capital - ordinary } & \mathrm { Cr } & & 60000\end{array}$$
C) $\begin{array}{lr}\text {Share options reserve }&\text {Dr }&60,000\\\text {Cash }&\text {Cr }&&60,000\\\end{array}$

D) $\begin{array}{lr}\text {Cash }&\text {Dr }&60,000\\\text {Share capital — ordinary }&\text {Cr }&&60,000\\\end{array}$

Question 20

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

A) Instruments providing options to ordinary shareholders.
B) Investment in preference and ordinary shares.
C) Investment prospectus for an issue of options.
D) Initial public offering of shares.

Question 21

Regulations for share buy-backs are primarily designed to protect the interests of a company's:

A) shareholders.
B) creditors.
C) directors.
D) option holders.

Question 22

Gains or losses resulting from the translating of foreign currency denominated operations into the reporting currency are recognised in income:

A) only if they are material items.
B) only when they are settled in cash.
C) in the reporting period in which they arise.
D) only when the interest in the foreign operation is sold.

Question 23

AASB 101 requires that a reconciliation between the carrying amount of each class of contributed equity capital and each reserve at the beginning and end of each period be disclosed in:

A) the statement of changes in equity only.
B) the notes to the financial statements only.
C) Statement of profit or loss and other comprehensive income.
D) either the statement of changes in equity or the notes to the financial statements.

Question 24

Which of the following is responsible for deciding whether a dividend is paid by a company?

A) Creditors of the company.
B) Auditors of the company.
C) Directors of the company.
D) International Accounting Standards Board.

Question 25

Retained earnings are a component of:

A) reserves.
B) contributed equity.
C) other equity.
D) comprehensive income.

Question 26

The following items appear in the statement of changes in equity except for:

A) Appropriations from retained earnings.
B) The non-controlling interest share of equity.
C) Dividends declared but not yet paid at year end.
D) The payment of a bonus dividend from a reserve.

Question 27

Gains and losses on available-for-sale financial assets are recognised directly in equity until the financial asset is derecognised. Upon derecognition, the cumulative gain or loss previously recognised is:

A) set-off against the relevant financial asset.
B) recognised in profit or loss.
C) transferred to a revaluation reserve account in equity.
D) charged against a provision for gains and losses account.

Question 28

In relation to share capital, AASB 101 does not require disclosure in the financial statements of:

A) the number of shares on issue at the end of the year.
B) the total dollar value of share capital at the end of the year.
C) restrictions on dividends payable to certain classes of shareholders.
D) the amount of any over- or under-subscription of new share issues during the year.

Question 29

AASB 101 requires that information in relation to dividends paid or declared during the year be disclosed in:

A) either the statement of changes in equity or the notes to the financial statements.
B) the statement of changes in equity only.
C) the notes to the financial statements only.
D) the statement of comprehensive income.