Deck 5: Profits, Reserve and Distributions to Owners

Question 1

Capitalisation of profits results in:

A)no change to retained profits
B)a decrease in assets and an increase in issued capital
C)increasing total liabilities
D)no change to total shareholder's equity

Answer 1

D

Question 2

On 1 April 20X1 the directors of Davo Ltd resolved to pay shareholders an interim cash dividend of $0.35 per share on 1 May 20X1.Davo Ltd's financial year end is 30 June.Davo Ltd prepares monthly accounts.At 31 March 20X1, the equity section of Davo Ltd's balance sheet is as follows:

Under the Framework and AASB 101 'income and expense' equals

A)revenue + gains - expenses - losses
B)revenue - expenses
C)revenue - losses
D)none of the above

Answer 2

A

Question 3

On 1 April 20X1 the directors of Davo Ltd resolved to pay shareholders an interim cash dividend of $0.35 per share on 1 May 20X1.Davo Ltd's financial year end is 30 June.Davo Ltd prepares monthly accounts.At 31 March 20X1, the equity section of Davo Ltd's balance sheet is as follows:
$$\begin{array} { l r } &\$\\\text { Issued share capital (1 } 1000000 \text { shares) } & 2000000 \\\text { Retained profits } & 3800000 \\\text { Asset revaluation reserve } & 955000 \\\text { General reserve } & \underline{445000} \\\text { Total } & 7200000\end{array}$$

-Show the format of the journal entry in the accounts for the month of April 20X1

A) $\begin{array}{llcc} \text { Accounts} & \text { Debit \$} & \text { Credit \$} \\ \text { Interim dividend } &X\\ \text { Interim dividend payable } &&X\\ \text { } &\\ \text { } &\\ \text { } &\\\end{array}$

B) $\begin{array}{lcc}\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Interim dividend } & x & \\\text { Bank } & & x\end{array}$

C) $\begin{array} { l c c } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Interim dividend payable } & \mathrm { x } & \\\text { Interim dividend } & & \mathrm { x }\end{array}$
D) $\begin{array}{lcc}\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Retained profits} & x & \\\text { Bank } & & x\end{array}$

Answer 3

$\begin{array}{llcc} \text { Accounts} & \text { Debit \$} & \text { Credit \$} \\ \text { Interim dividend } &X\\ \text { Interim dividend payable } &&X\\ \text { } &\\ \text { } &\\ \text { } &\\\end{array}$

Question 4

Which of the following statements is untrue

A)dividends already paid must be recognised
B)dividends proposed before reporting date but neither declared nor yet paid must not be recognised in the reporting period just passed
C)dividends proposed before reporting date but neither declared nor yet paid must be included in the reporting period just passed by means of a contingent liability recorded in the notes
D)dividends proposed after reporting date must not be recognised in the reporting period just passed

Question 5

In the comprehensive profit statement the amount 'Total comprehensive profit' is composed of

A)all income and expense amounts incurred by the entity plus direct increases or decreases to equity
B)all income and expense items incurred by the entity
C)the sum of direct debit or direct credit items recognised within the statement
D)the sum of all profit and loss items shown in the profit and loss statement plus the sum of other comprehensive profit.

Question 6

The dividend equalisation reserve

A)is required by AASB 101
B)is required by the Corporations Act, s.2M3
C)is an example of a management discretionary reserve
D)is required of certain companies by order of ASIC

Question 7

Which of the following could be recorded as 'expenses' under AASB 101:
ICost of goods sold
IIWages paid
IIIInterest paid
IVFire damage costs

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

Question 8

A discretionary reserve

A)is one that allows management to transfer amounts to and from the reserve
B)is one that allows management to transfer amounts to the reserve but not out of the reserve except for the purpose indicated by the reserve
C)is one required by the Corporations Act or an accounting standard
D)is one required by a contract with a creditor

Question 9

Langer Ltd is to restructure its owners' equity by making its issued shares paid up to $0.50.It will do this by transferring half the amount from the asset revaluation reserve and the remainder from retained profits.Langer Ltd currently has 1 000 000 shares on issue paid up to $0.25.The asset revaluation reserve balance is $50 000.What is the minimum amount by which Langer Ltd must revalue upwards its non-current assets so that it can effect this transfer?

A)$75 000
B)$125 000
C)$200 000
D)$250 000

Question 10

Which of the following statements is true?

A)For public companies, dividend entitlements are the same for all shares within a class, unless the company's constitution or a special resolution provides otherwise.
B)For proprietary companies, there is a replaceable rule that, subject to the agreement under which the shares were issued, the directors may pay dividends as they see fit.
C)For no liability companies, all ordinary shares have the same dividend entitlement, but there is no right to a dividend if a call has been made that is still outstanding.
D)all of the above

Question 11

Which statements are true?:
IDividends can not be paid out of amounts contributed by owners as share capital.
IIDirectors must ascertain that the company is solvent before they pay a dividend.
IIIAs a general rule dividends must only be paid from profits.For this purpose profits includes reserves.
IVFor purposes of paying dividends profits are not limited to the current period.

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

Question 12

Dividends can be paid from which of the following accounts:

A)retained profits
B)asset revaluation reserve
C)paid-up capital
D)A and B only

Question 13

On 1 April 20X1 the directors of Davo Ltd resolved to pay shareholders an interim cash dividend of $0.35 per share on 1 May 20X1.Davo Ltd's financial year end is 30 June.Davo Ltd prepares monthly accounts.At 31 March 20X1, the equity section of Davo Ltd's balance sheet is as follows:

Under the Framework and AASB 101

A)revenue arises in the course of ordinary activities
B)there is no test to distinguish ordinary activities from non-ordinary
C)gains are other items of income that may or may not arise from ordinary activities
D)all of the above

Question 14

Under AASB 101, in the profit or loss statement (income statement) the amount 'Profit or loss' is

A)the total of all revenue, expense, gain and loss items recognised by the reporting entity
B)the total of revenue, expense, gain and loss items that appear in the profit or loss statement
C)the total of revenue and expense items that appear in the profit or loss statement
D)none of the above

Question 15

On 1 April 20X1 the directors of Davo Ltd resolved to pay shareholders an interim cash dividend of $0.35 per share on 1 May 20X1.Davo Ltd's financial year end is 30 June.Davo Ltd prepares monthly accounts.At 31 March 20X1, the equity section of Davo Ltd's balance sheet is as follows:
$$\begin{array} { l r } &\$\\\text { Issued share capital (1 } 1000000 \text { shares) } & 2000000 \\\text { Retained profits } & 3800000 \\\text { Asset revaluation reserve } & 955000 \\\text { General reserve } & \underline{445000} \\\text { Total } & 7200000\end{array}$$

-How would you calculate the balance of retained profits at 30 June 20X1?

A)$3 800 000 less $350 000
B)$3 800 000 plus profits for April, May and June 20X1 less $350 000
C)$3 800 000 plus profits for April, May and June 20X1 less $700 000
D)$3 800 000 less $700 000

Question 16

A bonus share issue from a reserve:

A)increases assets and increases equity
B)decreases the debt-to-equity ratio
C)increases the number of shares on issue
D)increases the market price per share

Question 17

Regarding the Corporations Act's replaceable rule for dividend payments, which of the following statements is untrue?

A)directors determine the amount, timing and method of payment of a dividend
B)interest is not payable on dividends
C)shareholders have no right that a dividend be paid
D)an interim dividend payable can not be cancelled by the directors

Question 18

On 1 April 20X1 the directors of Davo Ltd resolved to pay shareholders an interim cash dividend of $0.35 per share on 1 May 20X1.Davo Ltd's financial year end is 30 June.Davo Ltd prepares monthly accounts.At 31 March 20X1, the equity section of Davo Ltd's balance sheet is as follows:

Instead of paying a cash dividend this year, more Goanna Ltd shares were issued to the existing shareholders of Goanna Ltd out of Goanna Ltd's asset revaluation reserve which accumulates revaluation increments of property, plant and equipment.This action is called:

A)Establishing a sinking fund
B)Capitalisation of reserves
C)Capitalisation of profits
D)Establishing a reserve fund

Question 19

Instead of paying a cash dividend this year, more Goanna Ltd shares were issued to the existing shareholders of Goanna Ltd out of Goanna Ltd's profit.This action is called:

A)Establishing a sinking fund
B)Capitalisation of reserves
C)Capitalisation of profits
D)Establishing a reserve fund

Question 20

In which of the following ways can a 'reserve' be established in the balance sheet?
IBy a decision of management to transfer an amount from retained profits
IIBy agreement in a debt contract
IIIBy the provision of an accounting standard

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

Question 21

Under AASB 101 fire damage expense must be recorded as a loss and not as an ordinary expense.

Question 22

The Corporations Act does not permit the payment of interest on capital.

Question 23

A company carrying accumulated losses can not pay a dividend.

Question 24

Under AASB 101 the income statement (called profit or loss statement in this text) does not require an amount called 'income' to be recorded anywhere in the statement.

Question 25

Dividends must be paid out of current year's profits.If a loss is made in the current year a dividend can not be paid.