Deck 3: Shareholders Equity: Share Capital and Reserves

Question 1

Which of the following journal entries demonstrates the appropriate accounting treatment for share issue costs?

A) Dr Deferred asset: Cr Cash;
B) Dr Cash: Cr Deferred asset;
C) Dr Share capital: Cr: Cash;
D) Dr Cash: Cr Share capital.

Answer 1

C

Question 2

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

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

Answer 2

D

Question 3

Which of the following statements is incorrect?

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

Answer 3

B

Question 4

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

A) as a defence against a hostile takeover
B) to manage the capital structure
C) to increase the worth per share of the remaining shares
D) as a way to efficiently manage surplus funds

Question 5

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

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

Question 6

Use the following information to answer questions
A company's capital consists of 50 000 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 $22 500. 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 $2 000. 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) $5000
B) $500
C) $2500
D)$3000

Question 7

AASB 101 Presentation of Financial Statements requires the following items to appear on the face of the Statement of Changes in Equity
I The net amount of cash from the issue of any securities during the period
II The cumulative effect of changes in accounting policy and the correction of errors
III Each item of income or expenses that are required to be recognised directly in equity
IV Profit or loss for the period.

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

Question 8

The bonus issue of shares has the following impact on the equity of a company;

A) total equity increases;
B) total equity decreases;
C) one equity account increases and another equity account decreases by an equal amount;
D) only the amount of issued share capital changes.

Question 9

Valdez Limited issued 10 000 share options to subscribe for ordinary shares. The exercise price on the options was $3 per share. If all options were exercised on due date the following journal entry would be recorded:

A) $\begin{array} { l l l l } \text { Share capital - Ordinary } & \text { Dr } & 30000 & \\\text { Cash } & \mathrm { Cr } & & 30000\end{array}$
B)
$\begin{array} { c c c c } \text { Share options - Ordinary } & \mathrm { Dr } & 30000 & \\\text { Share capital - Ordinary } & \mathrm { Cr } & & 30000\end{array}$
C) $\begin{array}{lll}\text { Share options reserve } & \text { Dr } & 30,000\\\text { Cash }& \text { Cr } & 30,000\end{array}$
D) $\begin{array} { l l l l } \text { Cash } & \mathrm { Dr } & 30,000 & \\\text { Share capital - Ordinary } & \mathrm { Cr } & 30,000\end{array}$

Question 10

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

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

Question 11

Use the following information to answer questions
A company's capital consists of 50 000 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 $22 500. 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 $2 000. 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)
$\begin{array}{llll}\text { Share capital } & \mathrm{Dr} & 7500 & \\\text { First Call-Ordinary shares } & \mathrm{Cr} & & 2500 \\\text { Forfeited shares } & \mathrm{Cr} & & 5000\end{array}$
B)
$\begin{array} { l l l l } \text { Share capital } & \mathrm { Dr } & 7500 & \\\text { First call - Ordinary shares } & \mathrm { Cr } & & 5000 \\\text { Forfeited shares } & \mathrm { Cr } & & 2500\end{array}$
C)
$\begin{array} { l l l l } \text { Share capital } & \mathrm { Dr } & 5000 & \\\text { Forfeited shares } & \mathrm { Cr } & & 5000\end{array}$
D)
$\begin{array} { c c r } \text { Forfeited shares } & \text { Dr } & 2500 \\\text { Share capital } & \mathrm { Cr } & 2500\end{array}$

Question 12

Use the following information to answer questions
A company's capital consists of 50 000 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 $22 500. 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 $2 000. 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) $\begin{array} { l l l l } \text { Cash } & \mathrm { Dr } & 5000 & \\\text { Forfeited shares } & \mathrm { Dr } & 2500 & \\\quad \text { Share capital - Ordinary } & \mathrm { Cr } & & 7500\end{array}$
B) $\begin{array} { l l l l } \text { Cash } & \mathrm { Dr } & 2500 & \\\text { Forfeited shares } & \mathrm { Dr } & 2500 & \\\quad \text { Share capital-Ordinary } & \mathrm { Cr } & & 5000\end{array}$
C) $\begin{array} { l l l l } \text { Cash } & \mathrm { Dr } & 5000 & \\\quad \text { Share capital - Ordinary } & \mathrm { Cr } & & 5000\end{array}$
D) $\begin{array} { l l l l } \text { Share capital } & \mathrm { Dr } & 7500 & \\\text { Forfeited shares } & \mathrm { Cr } & & 7500\end{array}$

Question 13

Laws in relation to share buy-backs are primarily designed to protect the interests of the company's:

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

Question 14

The appropriate account to record any excess proceeds received and retained (not refunded) by a company from an oversubscription to a share offer application, is the:

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

Question 15

ABC Ltd was registered as a corporation on 1 July 2014. On 4 July 2014, ABC Ltd issued a prospectus offering 100 000 ordinary shares at an issue price of $2.50 each, payable $1.50 on application and $1.00 on allotment.
Application closed on 1 August 2014 with the company having received applications for 110 000 shares. The shares were allotted on 15 August 2014, with the over-subscription amount being refunded to unsuccessful applicants. All allotment monies were received by 31 August 2014. Following the allotment the balance in the Share Capital account would be:

A) $100 000 Credit;
B) $250 000 Credit;
C) $100 000 Debit;
D) $250 000 Debit.

Question 16

In respect to the issue of shares by a company, what is an IPO?

A) Investment in Preference and Ordinary shares;
B) Initial Public Offering of shares;
C) Investment Prospectus for an issue of Options;
D) Instruments Providing Options to ordinary shareholders.

Question 17

In relation to an asset revaluation surplus, an entity

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

Question 18

If the balance in a forfeited shares account is refundable to the owners of those shares, then the forfeited shares account is classified as a component of:

A) income;
B) liabilities;
C) equity;
D) expense.

Question 19

The balance in the retained earnings account is affected by the transfer to that account of:
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 and III only
C) II, III and IV only
D) I, II, III and IV

Question 20

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

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

Question 21

Retained earnings are a component of

A) Contributed equity
B) Reserves
C) Other equity
D) Comprehensive income

Question 22

Accounting for share buy-backs is prescribed by

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

Question 23

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

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

Question 24

Gains or losses that arise as a result of translating foreign currency denominated operations into the reporting currency are recognised in income:

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

Question 25

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

A) the Statement of Changes in Equity only;
B) the notes only;
C) either the Statement of Changes in Equity or the notes;
D) the Statement of Comprehensive Income.

Question 26

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 only;
C) either the Statement of Changes in Equity or the notes;
D) Statement of Profit or Loss and Other Comprehensive Income.

Question 27

Which of the following does not appear in the Statement of Changes in Equity?

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

Question 28

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

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

Question 29

Whether a dividend is paid by a company depends on the decisions made by the:

A) creditors of the company;
B) International Accounting Standards Board;
C) auditors of the company;
D) directors of the company.