Deck 14: Share Capital and Reserves

Question 1

As a residual interest,equity ranks after liabilities in terms of a claim against the assets of a reporting entity.

Answer 1

True

Question 2

A share split is usually funded through retained earnings.

Answer 2

False

Question 3

If a company is listed in the Australian Securities Exchange and shareholders fail to pay the amount due on allotment,the shares forfeited must be refunded in full to defaulting investors.

Answer 3

False

Question 4

Double entry accounting requires that:

A) The claims held by external parties equal the claims held by the owners.
B) The total assets of an entity equal the total of the claims held by external parties plus those claims held by the owners.
C) The liabilities of the entity equal its total assets plus the claims held by the owners.
D) The recognition of the claims held by owners will match the entity's total assets.
E) None of the given answers.

Question 5

The AASB Framework defines equity as the remedial interest in the assets of the entity after the deduction of its liabilities:

Question 6

Retained earnings can be used (reduced)for the purpose of a bonus issue of shares:

Question 7

An allotment account,being a receivable account from the subscribers in a share issue,is presented under current assets in the statement of financial position.

Question 8

In a public issue of shares,the procedure to be adopted in the case of an oversubscription is normally specified in the prospectus:

Question 9

Prior period errors and changes in accounting policy create gains and losses that are accounted for in the period that the errors are discovered,or the change in policy made:

Question 10

As a consequence of recent changes to the Corporations Act 2001 (s 254C),shares of a company are no longer considered to be issued at a premium or a discount:

Question 11

It is a requirement of the Corporations Act 2001 that companies hold capital contributed on the issue of shares in trust until the application is made:

Question 12

Ordinary shares receive low dividends because they do not perform very well:

Question 13

The Corporations Act 2001 requires that where a company redeems preference shares it must do so out of profits that would otherwise be available for dividends or out of the proceeds of a fresh issue of shares made for the purpose of the redemption:

Question 14

It used to be normal practice to issue shares at below par value:

Question 15

When shares were issued at amounts greater than par value this was called a share premium:

Question 16

The owners' equity of an organisation is the same as the shareholders' funds of a company:

Question 17

If a partly paid share issue is oversubscribed and the shares are allocated on a pro-rata basis,the excess application monies must be refunded to all subscribers.

Question 18

Companies undertake share splits in order to increase their shareholders' funds:

Question 19

An individual's views on measurement techniques for assets and liabilities will have a direct impact on the amount recorded in shareholders' funds:

Question 20

If an entity performs a share split on a partly paid share,the split must be done in such a way as to divide the uncalled portion equally among the shares issued.

Question 21

The 'participating' in participating preference shares means that the shareholders may:

A) Vote at annual meetings.
B) Vote at annual meetings if preference dividends have not been paid.
C) Participate in a conversion of preference shares into ordinary shares.
D) Receive a share of any further profits that are to be distributed to ordinary shareholders after the payment of the preference dividend.
E) None of the given answers.

Question 22

The process for issuing shares is that:

A) They are offered for sale, allotments are received and an assignment made. Monies received on allotment must be held in trust until the assignment is made.
B) They are offered for sale, applications are received and an allotment made. Monies received on application must be held in trust until the allotment is made.
C) Applications are received for the issue of shares and an offer of shares is made. Applicants contribute capital that is returned to them if their application is unsuccessful when the shares are assigned.
D) A notice of intention to purchase shares is registered with the stock exchange, which the company receives. The company then offers shares. The applicant may then be allotted shares and at that point must make the cash contribution.
E) None of the given answers.

Question 23

When shares are allotted,or a call made on them,allotment and call accounts are created respectively.What is the nature of these accounts and how are they to be disclosed in the financial statements?

A) The accounts are similar in nature to an account receivable and are to be disclosed in the balance sheet as a current asset.
B) The accounts are similar to a future income benefit and are to be separately disclosed as assets in the balance sheet.
C) The accounts are similar to an account receivable and are disclosed in the balance sheet as a reduction against share capital.
D) The accounts are in the nature of a deferred income and are disclosed as a provision for future cash inflows in the balance sheet.
E) None of the given answers.

Question 24

Signal Ltd called for subscriptions for 8 million shares.The issue price per share is $3.50 to be paid in three parts: the first payment of $1.00 is to be made on application,$1.50 is to be paid within 1 month of allotment and the remaining $1.00 is to be paid within 3 months of allotment.At the end of July,when applications close,applications for 10 million shares have been received.The shares are allotted on 1 August on a pro rata basis with the excess application money to be applied against the amount due on allotment.The first and final call on the shares is made on 1October.Assume all amounts on allotment and call are paid by the due date.What are the accounting entries to record these events?

A)
B)
C)
D)
E) None of the given answers.

Question 25

Accounts that make up owners' equity may include:

A) Preference shares.
B) Debentures.
C) General reserves.
D) Preference shares and general reserves.
E) All of the given answers.

Question 26

Share capital:

A) Relates to one class of shares, with the remaining equity recorded as reserves or retained profits.
B) Represents the amount shareholders are guaranteed to receive if the company is wound up.
C) May relate to one or several classes of shares.
D) May be calculated by subtracting liabilities from assets.
E) None of the given answers.

Question 27

Equity's claim against the assets of the entity:

A) Take priority as owners.
B) Is ranked before employee entitlements.
C) Is equal to the value of cash reserves held in equity.
D) Ranks after liabilities in terms of priority.
E) None of the given answers.

Question 28

A public issue of shares involves:

A) Issuing a prospectus that outlines the details of the share issue so those interested can make an informed decision.
B) Making the general public aware that shares are available for sale at a set price.
C) Only issuing a limited number of shares to ensure there is sufficient demand for a full subscription.
D) Issuing ordinary shares to all members of the public who are interested.
E) None of the given answers.

Question 29

In the case of a share issue being oversubscribed,excess application monies:

A) Will always be refunded to applicants.
B) May be used to reduce future amounts owing on allotment if the shares are issued on a pro rata basis.
C) Must be recorded as a revenue in the current financial period.
D) Must be placed in a trust account until a refund is requested by applicants.
E) None of the given answers.

Question 30

Flag Ltd has received applications for 4 million shares during July 2004.The shares are to be issued at a price of $2.75 per share.The 4 million shares are allotted on 15 August 2004.What are the accounting entries required to record these events?

A)
B)
C)
D)
E) None of the given answers.

Question 31

Holders of ordinary shares:

A) Are assured of dividends each year.
B) May not receive a cash dividend each year but the dividend will accrue and eventually be paid.
C) Will always receive a dividend if the company has made a profit in that financial year.
D) Receive dividends at the discretion of the board.
E) None of the given answers.

Question 32

Under The Corporations Law as amended in 1998 companies now issue shares at:

A) Any price they determine is appropriate in the market.
B) The price determined by the Australian Stock Exchange as the appropriate issue price for the shares.
C) The ASIC-specified level of price relative to a moving average of sales over the preceding 6 months.
D) The average price at which shares have been issued over the last 5 years.
E) None of the given answers.

Question 33

Sundowner Ltd called for subscriptions for 2 million shares.The issue price per share is $6.00 to be paid in three parts: the first payment of $3.00 is to be made on application,$2.00 is to be paid within 1 month of allotment and the remaining $1.00 is to be paid within 6 months of allotment.At the end of July,when applications close,applications for 5 million shares have been received.Two million share applicants were unsuccessful,while the remaining 3 million applicants were allotted shares on 1 August on a pro rata basis with the excess application money to be applied against the amount due on allotment.The first and final call on the shares is made on 1October.Assume all amounts on allotment and call are paid by the due date.What are the accounting entries to record these events?

A)
B)
C)
D)
E) None of the given answers.

Question 34

A residual interest is:

A) A claim to a fixed percentage return on the amount invested.
B) A priority claim over the assets of the entity as the right of an owner.
C) A claim or right to the net assets of the reporting entity.
D) The minimum entitlement of the holder of the interest.
E) None of the given answers.

Question 35

The par value of a share used to be a consideration when issuing shares in Australia.What is a par value? And if Exceed Ltd issues shares with a $1 par value for $5,how would the difference in these amounts be treated?

A) The par value is the last sales price for the company's shares before the new issue. The $4 difference would be treated as a general reserve.
B) The par value is the nominal value of the share. The $4 is a share premium.
C) The par value is the minimum price that has been paid for the share over the last reporting period. The $4 difference would be treated as a profit on issuing the share.
D) The par value is the amount specified in legislation at which all Australian companies were required to issue shares. The $4 difference would be treated as an unrealised gain on issuing the shares.
E) None of the given answers.

Question 36

A redeemable preference share is one that may be:

A) Converted into debt at the option of the shareholder.
B) Converted into cash at the option of either the company or the shareholder.
C) Forgiven any future calls where the company has profits in excess of specified levels.
D) Have any dividends converted into further preference shares rather than receiving them in cash.
E) None of the given answers.

Question 37

The Corporations Act 2001 was amended in 1998 in relation to the par value of shares.That amendment has the effect of:

A) Making the use of par values optional for companies.
B) Requiring companies not to issue shares with a par value.
C) Requiring the calculation of share premium or discounts to be based on an average of the market price for the share over the current reporting period.
D) Making the use of par values optional for companies and requiring the calculation of share premium or discounts to be based on an average of the market price for the share over the current reporting period.
E) None of the given answers.

Question 38

In the case of a share issue being oversubscribed,the common approaches include:

A) Issue additional shares to meet the excess demand.
B) Allocate the shares on a pro rata basis.
C) Increase the issue price of the shares.
D) Issue additional shares to meet the excess demand and increase the issue price of the shares.
E) None of the given answers.

Question 39

Semaphore Ltd called for subscriptions for 15 million shares.The issue price per share is $2.50 to be paid in two parts: the first payment of $1.00 is to be made on application and the remaining $1.50 is to be paid within 1 month of allotment.At the end of September,when applications close,applications for 19 million shares have been received.The shares are allotted on 1 October on a pro rata basis with the excess application money to be applied against the amount due on allotment.All amounts on allotment are paid by the due date.What are the accounting entries to record these events?

A)
B)
C)
D)
E) None of the given answers.

Question 40

Normal features of ordinary shares include:

A) They entitle the holder to receive his/her proportion of any ordinary dividends declared.
B) They ensure the holder has priority over unsecured creditors in the case of the company going into liquidation.
C) They confer voting rights.
D) They entitle the holder to receive his/her proportion of any ordinary dividends declared and they confer voting rights.
E) All of the given answers.

Question 41

Reserves recorded in the equity section of the balance sheet:

A) Represent an amount of cash put aside for future projects.
B) Are created from excess profits that are not available for distribution as dividends.
C) May be established by transferring amounts from retained profits.
D) Will not impact on the total equity reported in the equity section of the balance sheet when created.
E) None of the given answers.

Question 42

Cartoon Ltd is listed on the Australian Stock Exchange.It has 3 million shares issued at a price of $5.50 per share.The investors were required to pay $2.00 on application and $1.00 on allotment.Both these amounts were paid in full.A first and final call of $2.50 was made and was due on 30 August 2003.At the end of November the directors of the company elect to forfeit 50 000 shares on which the holders have failed to pay the call.Cartoon Ltd reissues the shares fully paid up for a price of $4.75 and incurred costs of $1500.What are the entries required to forfeit the shares,reissue the shares,and make a refund if appropriate?

A)
B)
C)
D)
E) None of the given answers.

Question 43

When an entity issues shares,until such time as the shares are allotted,the amount received must be held in trust.It remains in trust (refer s722 of the Corporations Act)until:

A) So directed by ASIC.
B) The money is returned to the applicants.
C) Options are issued over the shares.
D) The Board of Directors indicate that the received monies are required by the entity.
E) None of the given answers.

Question 44

If a company has created a forfeited shares reserve,this means that:

A) The company is not a member of the Australian Stock Exchange and its constitution does not require it to refund amounts already paid by defaulting investors.
B) The company is expecting that the amounts unpaid will be collected in the next period.
C) The company is a member of the Australian Stock Exchange and is required to refund amounts already paid by defaulting investors.
D) The company is holding the amounts already paid by defaulting investors in trust in order to repay them on the request of the investor.
E) None of the given answers.

Question 45

Share splits are conducted because it is believed that:

A) Excess capital leads to reduced return ratios, which the market does not view favourably.
B) Increasing the number of shares issued makes the company appear larger and more stable.
C) Decreasing the price per share makes them more marketable.
D) Investors view this as a bonus because they now have more shares than they previously held.
E) None of the given answers.

Question 46

Where there is a redemption of preference shares 'out of profit':

A) The redemption is recorded in the appropriations section of the profit and loss account.
B) The redemption is recorded as an expense.
C) The redemption is recorded as a liability and is amortised over a maximum of five years.
D) The redemption is not recorded in the current period.
E) The redemption is recorded against opening retained profits.

Question 47

In recognising accounting errors that were made in prior periods:

A) Any information presented about prior periods, for a period of ten years, is restated.
B) Any information presented about prior periods, including any historical summaries of financial data, is restated as directed by the auditors examining the financial statements.
C) Any information presented about prior periods, including any historical summaries of financial data, is restated as far back as practicable.
D) No information presented about prior periods needs to be restated.
E) Adjustments are made to the current period's income statement.

Question 48

A forfeited shares account is:

A) A revenue account.
B) An expense account.
C) A liability account.
D) An asset account.
E) An equity account.

Question 49

Goggle Ltd has 1 million shares issued.The directors have elected to make a '1 for 5' bonus issue.The current market price of the shares is $10 each.What is the summary entry to record the bonus issue?

A)
B)
C)
D)
E) None of the given answers.

Question 50

Giggles Ltd has 2 million shares issued.The directors have elected,with the support of a resolution passed at a general meeting,to undertake a 1:2 share split so that there will be 4 million issued shares.The shares were originally issued at a price of $2 each.What is the summary entry to record the share split?

A)
B)
C)
D)
E) None of the given answers.

Question 51

When a share split occurs:

A) Current shareholders receive more shares thus increasing their stake in the company.
B) Accounting entries are required to record the increase in the number of shares on hand.
C) It must be done so that any uncalled amounts are divided equally when the shares are issued.
D) More shares are available to be purchased by the general public, allowing the company to raise more funds.
E) None of the given answers.

Question 52

A statement of recognised income and expense:

A) Is identical to a statement of changes of equity.
B) Is required to include only the components listed in paragraph 96 of AASB 101.
C) Includes the effects of changes in accounting policies recognised in accordance with AASB 108.
D) Is identical to a statement of changes of equity and includes the effects of changes in accounting policies recognised in accordance with AASB 108.
E) Is required to include only the components listed in paragraph 96 of AASB 101 and includes the effects of changes in accounting policies recognised in accordance with AASB 108.

Question 53

The effect of a bonus issue to all shareholders on (a)net asset backing per share,(b)each shareholder's share of net assets and (c)market capitalisation is:

A) (a) The net asset backing per share will decrease; (b) each shareholder's share of net assets will remain the same; (c) evidence suggests that on average the market capitalisation will increase.
B) (a) The net asset backing per share will increase; (b) each shareholder's share of net assets will increase; (c) evidence suggests that on average the market capitalisation will remain the same.
C) (a) The net asset backing per share will decrease; (b) each shareholder's share of net assets will decrease; (c) evidence suggests that on average the market capitalisation will remain the same.
D) (a) The net asset backing per share will remain the same; (b) each shareholder's share of net assets will decrease; (c) evidence suggests that on average the market capitalisation will decrease.
E) None of the given answers.

Question 54

Where there are changes in accounting policies that create initial gains or losses on the first adoption of a new accounting rule:

A) The gains and losses can be included in the period's income statement.
B) The gains or losses are recorded as assets or liabilities, and are amortised over the specified period.
C) The gains or losses can be adjusted against closing retained earnings.
D) The gains or losses can be adjusted against opening retained earnings.
E) The gains or losses can be adjusted against the 'Reserves' recorded in the Equity section of the balance sheet.

Question 55

Which of the following statements correctly describes the above journal entry?

A) The entry is for an entity not listed on the Australian Stock exchange, and shows the buy back of shares as a result of a resolution of the Board.
B) The entry is for an entity listed on the Australian Stock exchange, and shows the buy back of shares as a result of a resolution of the Board.
C) The entry is for an entity not listed on the Australian Stock exchange, and shows the forfeiture of shares as a result of a failure by some shareholders to meet a call on the shares.
D) The entry is for an entity listed on the Australian Stock exchange, and shows the forfeiture of shares as a result of a failure by some shareholders to meet a call on the shares.
E) The entry is for a company unable to fully subscribe an initial public offering.

Question 56

An effect of a bonus issue to all shareholders is to:

A) Increase the total amount of shareholders' funds.
B) Make the amount that was previously recorded as retained earnings no longer available for the payment of cash dividends.
C) Alter the current shareholders' proportionate share of the company's net assets.
D) Increase the total assets of the company.
E) None of the given answers.

Question 57

If a company is listed on the Australian Stock Exchange and a shareholder fails to pay amounts owing on shares,the company will:

A) Transfer the unpaid amount to a forfeited share reserve that remains part of equity after the cost to reissue the shares has been deducted.
B) Transfer the unpaid amount to a forfeited share reserve and refund the amount remaining after the cost of reissuing the shares has been deducted.
C) Take action to collect the unpaid amount through the courts.
D) Transfer the unpaid amount to a forfeited share account and refund the amount remaining after the cost of reissuing the shares has been deducted.
E) None of the given answers.

Question 58

When a company redeems preference shares:

A) It must ensure it has sufficient cash reserves to do so.
B) It must do so out of profits other than those available for the issuing of dividends.
C) It must issue fresh shares to fund the redemption.
D) It must create a capital redemption reserve that needs to be maintained separately to share capital.
E) None of the given answers

Question 59

Preference shares are often considered to be closer to debt as they:

A) May be issued with the condition that they are redeemable by the company in the future.
B) May guarantee a regular or cumulative payment, similar to interest.
C) May be able to be converted into ordinary shares at a specific date in the future, indicating they are a liability until that time.
D) May guarantee a regular or cumulative payment, similar to interest and may be able to be converted into ordinary shares at a specific date in the future, indicating they are a liability until that time.
E) May be issued with the condition that they are redeemable by the company in the future and may guarantee a regular or cumulative payment, similar to interest.

Question 60

The statement of changes in equity:

A) Presents, either on the face of the statement or in the notes, the amounts of transactions with equity holders as equity holders.
B) Is identical to the statement of recognised income and expense.
C) Is the same as that required under the former AASB 1018.
D) Provides a reconciliation between the expenses outstanding at the start of the period and those outstanding at the end of the period.
E) None of the given answers.

Question 61

Which of the following is ?not a required disclosure to be made in relation to each class of share capital?

A) Number of shares authorised;
B) Number of shares issued and fully paid and issued but not fully paid;
C) Par value per share or that the shares have no par value;
D) The rights, preferences and restrictions including restrictions of dividends and repayment of capital;
E) None of the given answers.

Question 62

For each class of share capital,an entity shall disclose either on the face of the balance sheet or in the notes:

A) Shares in the entity held by the entity or its subsidiaries or associates.
B) The number of shares authorised.
C) The number of shares issued but not fully paid.
D) All of the given answers.
E) None of the given answers.

Question 63

What is the effect of a stock split on earnings per share and the number of shares outstanding,respectively?

A) Increase; Decrease
B) Decrease; Increase
C) Increase; Increase
D) No effect; Increase
E) Decrease; No effect

Question 64

Which of the following statements correctly describes the above journal entry?

A) The issue of options; costing $3.50 each.
B) The issue of options; costing $30 each.
C) The exercise of options; with a current market value per share of $3.50.
D) The exercise of options; initially costing $3,500,000 to issue, and with a current market value per share of $30.
E) The exercise of options; initially costing $3,500,000 to issue, and with an exercise price for each option of $30.

Question 65

Fraser Ltd issued 10 million shares at a price of $3 on 1 July 2012.The subscribers are required to pay $1 on application,$1 on allotment and the balance on call to be announced at a later date.The share issue was oversubscribed by 2 million shares.On 1 August 2012 the shares were allotted to all subscribers on a pro-rata basis.What is the balance of the "allotment account" and "share capital" for this share issue on 1 August 2012,respectively?

A) $8 million; $20 million;
B) $8 million; $30 million;
C) $10 million; $20 million;
D) $10 million; $30 million;
E) None of the given answers.

Question 66

Which of the following share issue costs does not qualify as a deduction from share capital?

A) Advertising of share issue
B) Costs of prospectus issue
C) Administration overheads
D) Audit expenses associated with the issue of a prospectus
E) None of the given answers.