Deck 4: Forming a Company and Issuing Shares

Question 1

Broadbeach Ltd was registered on 28 December 20X0.Broadbeach Ltd has a financial year end of 31 March.On 29 December 20X0 it lodged a prospectus with ASIC inviting investors to acquire 3 000 000 shares.By the closing date of 28 February 20X1 applications for 9 000 000 shares had been received.During March 20X1 the directors allotted the 3 000 000 shares to the applicants in proportion to the number of shares originally applied for.The terms of the issue are as follows:
issue price of $10.00 per share
$4.00 payable on application
$4.00 payable on allotment
$1.00 payable on 30 June 20X1
$1.00 payable on 31 December 20X1
How much cash would be held by Broadbeach Ltd in relation to this share issue at 28 February 20X1?

A)$36 000 000
B)$12 000 000
C)$90 000 000
D)$4 000 000

Answer 1

A

Question 2

During 20X5, KL Ltd issued new shares for $5 million, and it incurred $100 000 brokerage costs and $100 000 in stamp duty costs for this issue.In the 20X5 year, KL Ltd would most likely debit:

A)$200 000 to retained profits
B)$200 000 to loss
C)$200 000 to expense
D)None of the above

Answer 2

D

Question 3

A non-renounceable rights issue

A)means that shareholders who do not take up the right to purchase shares can not transfer the right to somebody else
B)means that directors can not make any announcement about the price being offered by the company that is attempting the takeover.
C)means that the right to purchase the shares can be sold to somebody else privately
D)means that the right to purchase the shares can be sold to somebody else but only in public via a stock exchange

Answer 3

A

Question 4

Oceana Ltd issued 1 000 000 ordinary shares on 21 November 20X1 under the following terms:
Issue price: $2.50
Initial called up amount: $1.00
Call of $0.75 on 21 May 20X2
Final call of $0.75 on 21 November 20X2
Peter Smith was issued 10 000 shares and his friend Wilma Jones was issued 20 000 shares.
At 31 December 20X1 the:

A)paid-up amount of Oceana Ltd's capital was $1 000 000
B)issued amount of Oceana Ltd's capital was $1 500 000
C)authorised capital of Oceana Ltd was $1 000 000
D)uncalled amount of Oceana Ltd's capital was $750 000

Question 5

A preference share

A)may give the holder a divided based on a fixed percentage, provided there are sufficient profits
B)always gives the holder preference to return of capital in the event of a liquidation
C)always gives the holder the same voting rights as an ordinary share
D)all of the above

Question 6

John wants to set up a proprietary company with only himself as director and himself and his wife as the only shareholders.This is:

A)not allowed under the Corporations Act, because the company must have at least 5 shareholders
B)not allowed under the Corporations Act, because the company must have at least 2 directors
C)allowed under the Corporations Act
D)not allowed under the Corporations Act, because the company must have at least 2 directors and 5 shareholders

Question 7

'When a public company is formed it must have its shares listed on the Australian Securities Exchange (ASX)'.This statement is:

A)Correct, because a public company is limited by shares
B)Incorrect, because a public company that is limited by shares need not list those shares on the ASX
C)Correct, because if the company did not wish to have its shares listed it must be formed as a proprietary company
D)Incorrect, because the company must have its shares listed on any stock exchange, not just the ASX

Question 8

Under common law, a company

A)may forfeit shares due to misconduct of a shareholder
B)may forfeit shares due to misconduct of a shareholder but only if this is stated in the company's constitution
C)may forfeit shares of a shareholder who is in arrears of payment of a call
D)all of the above

Question 9

A bonus issue

A)gives shareholders additional shares without requiring any payment
B)always results in an increase in paid-up capital
C)can not be paid from cancelled forfeited shares
D)all of the above

Question 10

The constitution and replaceable rules of a company act as a contract between

A)the company and each member
B)the company and each director
C)the company and the company secretary
D)all of the above

Question 11

Oceana Ltd issued 1 000 000 ordinary shares on 21 November 20X1 under the following terms:
Issue price: $2.50
Initial called up amount: $1.00
Call of $0.75 on 21 May 20X2
Final call of $0.75 on 21 November 20X2
Peter Smith was issued 10 000 shares and his friend Wilma Jones was issued 20 000 shares.
Registration of a newly-formed company is done with the:

A)ASX
B)AASB
C)ASIC
D)NCSC

Question 12

An issue of shares called a rights issue

A)requires the shares to be first offered to existing members
B)involves the right to purchase shares being offered in the first instance to any purchaser via a stock exchange
C)gives directors the right to purchase shares before other members
D)provides institutional investors with the right to purchase shares in large lots of a fixed size

Question 13

Zebon Ltd has three distinct operations: mining, transport and communications.The company has a class of share in which the holders of those shares are entitled to a distribution from profits only out of the operations of Zebon's mining activities.This type of share is best described as a:

A)Targeted share
B)Founder (Deferred) share
C)Ordinary share
D)Preference share

Question 14

Broadbeach Ltd was registered on 28 December 20X0.Broadbeach Ltd has a financial year end of 31 March.On 29 December 20X0 it lodged a prospectus with ASIC inviting investors to acquire 3 000 000 shares.By the closing date of 28 February 20X1 applications for 9 000 000 shares had been received.During March 20X1 the directors allotted the 3 000 000 shares to the applicants in proportion to the number of shares originally applied for.The terms of the issue are as follows:
????issue price of $10.00 per share
????$4.00 payable on application
????$4.00 payable on allotment
????$1.00 payable on 30 June 20X1
????$1.00 payable on 31 December 20X1

-Assume that all calls were paid on time.What journal entry should Broadbeach Ltd process for the initial applications?

A)
$\begin{array} { l c c } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Bank Trust } & 36000000 & \\\text { Application } & & 36000000\end{array}$
B)
$\begin{array} { l c c } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Application } & 36000000 & \\\text { Paid up capital } & & 36000000\end{array}$
C)
$\begin{array} { l c c } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Application } & 12000000 & \\\text { Paid up capital } & & 12000000\end{array}$
D)
$\begin{array} { l c c } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Bank Trust } & 12000000 & \\\text { Application } & & 12000000\end{array}$

Question 15

Oceana Ltd issued 1 000 000 ordinary shares on 21 November 20X1 under the following terms:
Issue price: $2.50
Initial called up amount: $1.00
Call of $0.75 on 21 May 20X2
Final call of $0.75 on 21 November 20X2
Peter Smith was issued 10 000 shares and his friend Wilma Jones was issued 20 000 shares.
Ignoring transactions costs, the total capital received by Oceana Ltd on 21 November 20X1 would be:

A)$2 500 000
B)$1 500 000
C)$1 000 000
D)$750 000

Question 16

Broadbeach Ltd was registered on 28 December 20X0.Broadbeach Ltd has a financial year end of 31 March.On 29 December 20X0 it lodged a prospectus with ASIC inviting investors to acquire 3 000 000 shares.By the closing date of 28 February 20X1 applications for 9 000 000 shares had been received.During March 20X1 the directors allotted the 3 000 000 shares to the applicants in proportion to the number of shares originally applied for.The terms of the issue are as follows:
issue price of $10.00 per share
$4.00 payable on application
$4.00 payable on allotment
$1.00 payable on 30 June 20X1
$1.00 payable on 31 December 20X1
Show the journal entries for the financial year ended 31 March 20X1 in relation to the refund for the oversubscribed shares, assuming that the company can apply applications to the allotment, but can not apply applications to calls in advance.

A)Accounts Debit $ Credit $ Bank Trust 24 000 000
Application 24 000 000
B)Accounts Debit $ Credit $ Application 12 000 000
Bank Trust 12 000 000
C)Accounts Debit $ Credit $ Bank Trust 12 000 000
Application 12 000 000
D)Accounts Debit $ Credit $ Application 24 000 000
Bank Trust 24 000 000

Question 17

Companies other than no-liability companies:

A)must provide a specially drafted constitution
B)must have a memorandum of association
C)may provide a specially drafted constitution or may use the Corporations Act's replaceable rules
D)must provide articles of association

Question 18

Broadbeach Ltd was registered on 28 December 20X0.Broadbeach Ltd has a financial year end of 31 March.On 29 December 20X0 it lodged a prospectus with ASIC inviting investors to acquire 3 000 000 shares.By the closing date of 28 February 20X1 applications for 9 000 000 shares had been received.During March 20X1 the directors allotted the 3 000 000 shares to the applicants in proportion to the number of shares originally applied for.The terms of the issue are as follows:
issue price of $10.00 per share
$4.00 payable on application
$4.00 payable on allotment
$1.00 payable on 30 June 20X1
$1.00 payable on 31 December 20X1
How much money would the company hold from this subscription on 30 June 20X1, assuming that applications can be credited to calls in advance and that all call money was received?

A)$27 000
B)$36 000
C)$24 000
D)$30 000

Question 19

When a forfeited share parcel is re-issued

A)the parcel must be issued first to existing members
B)the shares must be paid up to at least the amount that existed prior to the forfeiture
C)any profit on sale of the reissued shares must always be returned to the original holder
D)any profit on sale of the reissued shares must always be kept by the company

Question 20

Oceana Ltd issued 1 000 000 ordinary shares on 21 November 20X1 under the following terms:
Issue price: $2.50
Initial called up amount: $1.00
Call of $0.75 on 21 May 20X2
Final call of $0.75 on 21 November 20X2
Peter Smith was issued 10 000 shares and his friend Wilma Jones was issued 20 000 shares.
On 21 May 20X2, Peter did not pay his call but all other shareholders did pay.At 30 June 20X2, Peter still had not paid.At 30 June 20X2, the:

A)paid-up amount of Oceana Ltd's capital is $742 500
B)called-up amount of Oceana Ltd's capital is $750 000
C)paid-up amount of Oceana Ltd's capital is $1 742 500
D)paid-up amount and the called-up amount of Oceana Ltd's capital is $1 750 000

Question 21

Public companies must have at least five directors.

Question 22

A trust account must be used for all applications to purchase shares.

Question 23

An undersubscribed share issue must always be abandoned and the application monies returned.

Question 24

Proprietary companies must have at least two directors.

Question 25

A prospectus will always guarantee a minimum return on investment for the prospective shareholder.

Question 26

Share issue costs are an expense that must be included in determining total comprehensive profit.

Question 27

Irridium Ltd had a share capital of 500 000 $1 ordinary shares fully paid.The company decided to make a new share issue of 100 000 $1 shares, payable in full on application.These shares had to be first offered to existing shareholders.Suppose that the issue was 90% subscribed by the existing shareholders by 31 January 2010, and that the other 10% of shareholders did not apply for any shares.The rights issue is non-renounceable.What would be the correct journal entry for the new issue?

A)
$\begin{array}{llcc} \text { Dr Trust account } &\$100000 \\ \text { Cr Bonus issue } &&\$100000\\\\ \text { Dr Bonus issue } &\$ 10000\\ \text {Cr Forfeited shares reserve } &&\$ 10000\\ \text { } &\\ \text { } &\\\end{array}$

B)
$\begin{array}{lll}\text { Dr Bank } & \$ 90000 & \\\text { Cr Paid up capital—ordinary } & & \$ 90000 \\\end{array}$


C)
$\begin{array}{llcc} \text {Dr Bank } & \$100000 \\ \text { Cr Paid up capital-ordinary} &&\$90000\\ \text {Cr Non renounceable shares account} &&\$10000\\\end{array}$


D)
$\begin{array}{llcc} \text { Dr Bank } &\$ 100000 \\ \text { Cr Allotment } && \$ 100000\\\end{array}$

Question 28

Which of the following statements is incorrect?

A)proprietary companies can only make regulated share offers to employees or to existing shareholders
B)unless exempted it is prohibited to advertise an unregulated offer of shares
C)public companies can make unregulated share offers as long as they do not infringe the stock exchange listing rules
D)unless exempted an unregulated share issue can not be made to more than 30 investors

Question 29

Public listed companies can issue up to 15% of their existing equity as new shares in a twelve month period, without making a regulated share offer.

Question 30

Strontium Ltd had owner's equity of 100 000 shares, issued and called up to $1 each, but there were calls in arrears of 20 cents per share on 5000 shares.These 5000 shares were forfeited.
What is the correct journal entry to reissue the shares at auction, as paid up to $1, supposing that a total of $4140 was obtained as auction proceeds.The company must refund any surplus to the original shareholder.

A) $\begin{array}{llcc} \text { Dr Paid-up capital-forfeited shares} &\$ 5000 \\ \text { Cr Bank } &&\$ 4140\\ \text {Cr Paid up capital } &&\$ 9140\\\end{array}$

B) $\begin{array} { l r r } \text { Dr Paid-up capital-forfeited shares } & \$ 860 & \\\text { Dr Bank } & \$ 4140 & \\\text { Cr Paid up capital } & & \$ 5000 \\& & \\\text { Dr Paid-up capital-forfeited shares } & \$ 3160 & \\\text { Cr Bank } & & \$ 3160\end{array}$
C) $\begin{array}{llcc} \text { Dr Bank } &\$ 4140 \\ \text {Cr Proceeds of sale of forfeited shares } &&\$ 4140 \\ \text { Dr Paid-up capital-forfeited shares} &\$ 4000\\ \text {Dr Proceeds of sale of forfeited shares } &\$ 1000\\ \text { Cr Paid-up capital } &\$ 5000\\ \text {Dr Proceeds of sale of forfeited shares } &\$ 3140\\ \text { Cr Bank} &&\$ 3140\\\end{array}$


D) $\begin{array}{lll}\text { Dr Bank } & \$ 5000 & \\\text { Cr Paid-up capital-forfeited shares } & & \$ 4000 \\\text { Cr Original shareholder } && \$ 1000\end{array}$

Question 31

Strontium Ltd had owner's equity of 100 000 shares, issued and called up to $1 each, but there were calls in arrears of 20 cents per share on 5000 of these shares.
What is the journal entry to forfeit the shares in arrears?

A)
$\begin{array}{llcc} \text { Dr Paid up capital } &\$5000 \\ \text { Cr Call no. 1 } &&\$1000\\ \text { Cr Paid-up capital-forfeited shares } &&\$4000&\\ \end{array}$


B)
$\begin{array}{llcc} \text {Dr Paid up capital } & \$5000 \\ \text { Cr Paid-up capital -forfeited shares } && \$5000\\\end{array}$


C)
$\begin{array}{lrr}\text { Dr Paid up capital } & \$ 4000 & \\\text { Dr Call no. } 1 & \$ 1000 & \\\text { Cr Paid-up capital-forfeited shares } & \$ 5000\end{array}$

D)
$\begin{array}{llcc} \text {Cr Call no. 1 } & \$1000 \\ \text { Cr Paid-up capital-forfeited shares } && \$1000\\\end{array}$

Question 32

In a new regulated share issue (not a rights issue) company directors can issue shares to whichever applicants they like.

Question 33

The rights to new shares shares not taken up by existing shareholders can not be transferred to anybody else by those shareholders.

Question 34

Irridium Ltd had a share capital of 500 000 $1 ordinary shares fully paid.The company decided to make a new share issue of 100 000 $1 shares, payable in full on application.These shares had to be first offered to existing shareholders.Supposing that the issue was fully subscribed by the existing shareholders by 31 January 2010, what would be the correct journal entry?

A)
$\begin{array}{lll}\text { Dr Bank } & \$ 100000 & \\\text { Cr Bonus issue } & & \$ 100000 \\\end{array}$

B)
Dr Bank $\quad \$ 100000$
Cr Paid up capital—ordinary $\quad \$ 100000$
C)
$\begin{array}{llcc} \text { Dr Trust account } & \$ 100000 \\ \text { Cr Application} && \$ 100000\\\end{array}$


D)
$\begin{array}{llcc} \text { Dr Bank } & \$ 100000 \\ \text { Cr Allotment} && \$ 100000\\\end{array}$

Question 35

A regulated issue of shares can not be made by a proprietary company to its own employees.