Deck 9: Companies: Formation and Operations

Question 1

Which of the following has the ultimate power to control a company?

A) the managers.
B) the shareholders.
C) the board of directors.
D) the Chief Financial Officer (CFO).

Answer 1

B

Question 2

Which of the following statements about a private company is correct?

A) It is permitted to raise funds from the public.
B) The company name must include 'Proprietary' or 'Pty'.
C) There is no restriction for the maximum number of shareholders.
D) The company's shareholders can only be family members.

Answer 2

B

Question 3

When a company is incorporated ASIC issues it with a:

A) license.
B) constitution.
C) prospectus.
D) certificate of registration.

Answer 3

D

Question 4

The board of directors has which of the following responsibilities?
I) Recommendation of dividend payments
II) Collection of bad debts
III) Preparation of the company budget
IV) Preparation of the company tax return

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

Question 5

If the number of shares subscribed for is greater than the number of shares offered the issue is said to be:

A) uncalled.
B) over-called.
C) under-subscribed.
D) over-subscribed.

Question 6

Buster and Foster each own 30 000 shares in Rebound Company Ltd. If Buster sells his shares directly to Foster:

A) the share capital for Rebound Company decreases.
B) the share capital for Rebound Company increases.
C) the share capital for Rebound Company remains the same.
D) the bank account for Rebound Company increases.

Question 7

In Australia, the two most common types of companies are:

A) public companies and companies limited by guarantee.
B) proprietary and public companies.
C) proprietary and no liability companies.
D) public and no liability companies.

Question 8

The information required to be lodged with ASIC when applying to form a company is not required to include:

A) The address of the company's proposed registered office.
B) The date it is proposed to wind up the company.
C) The name and address of each person who consents to become a director.
D) The name and address of each person who consents to become a member.

Question 9

Simone Ltd issued 20 000 shares with an issue price of $2.00 per share. The full price has been paid to the company. What is the maximum additional amount the shareholders can be asked to contribute if Simone Ltd cannot pay its debts?

A) $Nil.
B) $2.00 per share or $40 000.
C) $1.00 per share or $10 000.
D) There is no limit on the amount the shareholders can be asked to contribute.

Question 10

Which of the following accounts used to record the issue of shares is a permanent account?

A) Application
B) Call
C) Share capital
D) Allotment

Question 11

Which of these is not an advantage of incorporation?

A) Continuity of existence
B) Government regulation is minimal.
C) Shareholders' liability is limited.
D) The ability to transfer shares easily.

Question 12

Lotus Company Ltd decided to issue 100 000 ordinary shares for $3.00 each, payable in instalments, 50c on application, $1.50 on allotment and the balance payable at the discretion of the company. Applications were received for 120 000 shares. The shares were allotted by the directors a week after the close of applications and refunds were made for 20 000 shares. The correct journal entry to record the full receipt of the allotment instalment is:

A) DR Bank account $150 000; CR Allotment $150 000
B) DR Bank account $180 000; CR Allotment $180 000
C) DR Allotment $180 000; CR Share capital $180 000
D) DR Share capital $150 000; CR Bank account $150 000

Question 13

The rules for governing the internal affairs of a company that have been built into the Corporations Law are known as:

A) replaceable rules.
B) the constitution.
C) the prospectus.
D) the memorandum of association.

Question 14

Which type of company has the right to advertise share issues to the general public?

A) A company limited by guarantee
B) Both a proprietary and a public company
C) Public company
D) Proprietary company

Question 15

Which of the following is not an advantage of companies over sole traders or partnerships?

A) Limited liability
B) Continuity of existence
C) Less government regulation
D) Simpler transferability of ownership

Question 16

A legal document accompanying an invitation to purchase shares, containing information about the issuing company, is called a(n):

A) offering.
B) affidavit.
C) prospectus.
D) company report.

Question 17

Companies are administered under the:

A) Taxation Act.
B) Corporations Act 2001.
C) Company and Partnership Act.
D) Bankruptcy Act.

Question 18

ASIC stands for:

A) Australian Securities and Investments Commission.
B) Australian Shares and Interests Committee.
C) Association of Shareholder's Investments in Companies.
D) Association of Shares and Investment Companies.

Question 19

Under the Corporations Act, a Proprietary company is classified as 'small' if it can satisfy two out of three conditions. Which of the following are two of those conditions?

A) Consolidated gross assets less than $12.5 million and fewer than 200 employees.
B) Consolidated gross revenue less than $25 million and less than 200 employees.
C) Consolidated gross assets less than $5 million and less than 50 employees.
D) Consolidated gross assets less than $12.5 million and consolidated gross revenue less than $25 million.

Question 20

When accounting for share issues, the ultimate debit and credit entries are to which accounts?

A) DR Bank; CR Share capital
B) DR Bank; CR Allotment
C) DR Share Capital; CR Bank
D) DR Application; CR Share capital

Question 21

Shetland Ltd declares and pays a share dividend of 8 000 $2 shares. What is the effect on total equity in the company balance sheet?

A) Total Equity increases by $16 000.
B) Total Equity decreases by $16 000.
C) The number of issued shares increases and the book value of each share decreases.
D) Share Capital increases by $16 000 and Reserves decrease by $16 000, i.e. no change in total equity.

Question 22

How much will a shareholder receive in dividends if they own 5000 shares, the dividend is 20c per share, the shares were issued for $6 each, and the current market value of the shares is $6.25 each?

A) $nil
B) $1 000
C) $1 250
D) $1 200

Question 23

The correct accounting entry to create a reserve is:

A) DR Retained earnings; CR Reserve.
B) DR Reserve; CR Retained earnings.
C) DR Profit and loss summary account; CR Reserve.
D) DR Expense; CR Reserve.

Question 24

Under current accounting standards, share issue expenses are treated as a(n):

A) asset.
B) expense.
C) liability.
D) deduction from the proceeds of the share issue.

Question 25

Which of the following is the correct accounting entry to record a share split?

A) No entry is required
B) DR Share capital; CR Reserve account
C) DR Retained earnings; CR Share capital
D) DR Allotment account; CR Share capital

Question 26

Which of the following is not a reason for declaring a share dividend?

A) To decrease the market price of the shares.
B) To raise extra capital for the company.
C) To give shareholders extra shares.
D) To conserve the company's cash instead of declaring a cash dividend.

Question 27

When accounting for the issue of shares, placing application monies in a separate cash trust account is required:

A) to meet the obligation by the company to remit the funds to ASIC.
B) because the bank requires it.
C) before the share issue is finalised as the money does not belong to the company and some or all of it may need to be refunded.
D) it is administratively easier for the company if the money is placed in a separate account.

Question 28

Under current accounting standards preliminary expenses of forming a company must be treated as a(n):

A) asset.
B) expense.
C) deduction from the proceeds of the share issue.
D) liability.

Question 29

Which of the following statements relating to ordinary shares is incorrect?

A) Ordinary shares receive their dividends after the preference shares.
B) Holders of ordinary shares have the right to sell their shares.
C) The market price of ordinary shares tends to fluctuate with expectations of future profits.
D) Ordinary shares have a fixed rate of dividend attached.

Question 30

Which of the following statements relating to ordinary shareholders are correct?
I) Ordinary shareholders generally have greater risks than preference shareholders.
II) Ordinary shareholders are the last to receive a distribution if the company is wound up.
III) Ordinary shareholders have a greater opportunity for gain if the company is profitable than preference shareholders.
IV) Ordinary shareholders have the right to vote at meetings of the company.

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

Question 31

The ____________________________ specified in the prospectus must be reached before an allotment of shares can occur.

A) minimum share subscription
B) maximum share subscription
C) profit forecast
D) borrowings forecast

Question 32

Final dividend payable is classified as what type of account?

A) Expense
B) Liability
C) Shareholder's Equity
D) Retained earnings.

Question 33

Minstrel Ltd decided to issue 200 000 ordinary shares for $2.50 each, payable in instalments, $1 on application, $1 on allotment and the balance payable at the discretion of the company. Applications were received for 220 000 shares. The shares were allotted by the directors at a meeting held a week after the close of applications. After refunding applications for 20 000 shares, which of the following is the correct journal entry to transfer the application money to the share capital account?

A) DR Application $220 000; CR Cash trust account $220 000
B) DR Cash trust account $200 000; CR Share capital account $200 000
C) DR Application $220 000; CR Share capital $220 000
D) DR Application $200 000; CR Share capital $200 000

Question 34

Lotus Company Ltd decided to issue 100 000 ordinary shares for $3.00 each, payable in instalments, 50c on application, $1.50 on allotment and the balance payable at the discretion of the company. Applications were received for 120 000 shares. The shares were allotted by the directors a week after the close of applications and refunds were made for 20 000 shares. Twelve months after the allotment monies had been received the directors made a call for the remaining $1 per share. The correct journal entry to record the amount due to the company for the call instalment is:

A) DR Share capital $100 000; CR Call $100 000
B) DR Call $120 000; CR Share capital $120 000
C) DR Call $100 000; CR Share capital $100 000
D) No accounting entry is required

Question 35

A dividend declared and paid part-way through the financial year is called a/an:

A) preference dividend.
B) part-payment dividend.
C) interim dividend.
D) dividend in arrears.

Question 36

Depending on its constitution and the terms of the prospectus, a company that receives more than the required number of applications for its shares will normally:

A) issue the additional shares.
B) retain the excess in satisfaction of future calls.
C) refund the excess to unsuccessful applicants.
D) refund the excess to unsuccessful applicants or retain the excess in satisfaction of future calls.

Question 37

Thompson Ltd was incorporated on 1 January 2019. A private placement of 2000 shares at $1 a share was made and the public was invited to subscribe for 20 000 shares at the same price. The public issue called for payment in the following instalments:
(a) 50 cents on application
(b) 30 cents on allotment
(c) payment of the call for the balance outstanding by 30 September 2020.
Applications were received for 18 000 shares. All money due on allotment was received by 30 May 2019.
The balance of the Share Capital of Thompson Ltd at 30 June 2019 was:

A) $14 400.
B) $16 400.
C) $18 000.
D) $22 000.

Question 38

On 1 January 2020 Maximus Ltd decided to issue 20 000 shares to the public, payable as follows:
$2 on application
$2 within one month of allotment
$1 for calls due 30 September 2020.
Assuming the issue was fully subscribed and all amounts due were received by 30 June 2020. The balance of the Share Capital account on that date was:

A) $20 000.
B) $40 000.
C) $80 000.
D) $100 000.

Question 39

When a newly established company issues shares for the first time, the directors will issue the shares at:

A) the price of $1 per share.
B) the market price.
C) a price established in consultation with ASIC.
D) the highest price that they expect that the shareholders will be prepared to pay.

Question 40

At 30 June 2019, the board of directors of Stargaze Ltd declared a final dividend of 10c per share on 60 000 ordinary shares. The dividend was paid in August 2019. The correct general journal entry to record the payment of the dividend is:

A) DR Retained earnings $6000; CR Bank $6000
B) DR Final dividend payable $6000; CR Bank $6000
C) DR Bank $6000; CR Final dividend payable $6000
D) DR Retained earnings $6000; CR Final dividend payable $6000

Question 41

Snowy Ltd was incorporated on 1 January 2018. On that date, Snowy Ltd issued:
$$\begin{array} { | l | l | l | } \hline 5 \% / 1 \text { Preference shares } & 8000 \text { shares } & \$ 1 \text { per share } \\\hline \text { Ordinary shares } & 5000 \text { shares } & \$ 5 \text { per share } \\\hline\end{array}$$
During December 2020, Snowy Ltd declared a total dividend of $6000. This was the first dividend declared by Snowy Ltd, that is, no dividends were declared or paid during the first two years of operations. The preference shares are cumulative and non-participating. After payment of the dividend to preference shareholders, the dividend amount available to pay to ordinary shareholders is:

A) $6 000.
B) $1 200.
C) $ nil.
D) $4 800.

Question 42

On 1 July 2019 the balance in Wolston Pty Ltd's retained earnings account was $450 000. The balance on 30 June 2020 was $700 000. On 20 June 2020, the directors declared dividends of $120 000 which were payable on 31 August 2020. Assuming all closing entries have been completed the profit for the year ending 30 June 2020 was:

A) $ 250 000
B) $ 370 000
C) $ 450 000.
D) $ 580 000.

Question 43

Which of the following statements concerning cash dividends is incorrect?

A) Shareholders have the right to determine the amount of dividends declared.
B) The Final Dividend Payable account is classified as a liability.
C) It is common for companies to pay an interim and a final dividend.
D) The greater the dividend payment the fewer earnings retained within the company.

Question 44

Which of the following statements concerning shares is incorrect?

A) Shares can sometimes be bought back by the company from its shareholders.
B) Directors may decide to issue ordinary shares, preference shares or both.
C) The directors can issue shares at any price, the limiting factor is what the market will pay.
D) Under changes to the Corporations Act all shares must be paid in full upon application.

Question 45

If total liabilities are $135 000, total assets are $420 000 and total paid-up capital is $180 000, the amount of retained earnings is:

A) $ 105 000.
B) $ 135 000.
C) $ 240 000.
D) $ 285 000.

Question 46

A no cost, pro rata distribution of a company's shares to its shareholders is known as a:

A) special dividend.
B) share dividend.
C) preference dividend.
D) dividend in arrears.

Question 47

Which of the following statements relating to the difference between a share split and a share dividend (bonus issue) are true?
A bonus issue, but not a share split:
I) increases the share capital and reduces the retained earnings.
II) reduces the market price of the shares.
III) requires accounting entries to be made in the ledger.

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

Question 48

At the end of the year a company declared a final cash dividend out of its retained earnings. The correct journal entry to record this declaration is:

A) DR Cash; CR Final dividend payable
B) DR Retained earnings; CR Final dividend payable
C) DR Final dividend payable; CR Cash
D) DR Share capital; CR Final dividend payable

Question 49

The primary purpose of a share split is to:

A) reduce retained earnings.
B) increase the total capital of the company.
C) reduce the market value of the company's shares.
D) decrease the total capital of the company.

Question 50

Which statement relating to reserves is incorrect?

A) They represent cash set aside to be drawn on in hard times.
B) They represent items of equity other than share capital.
C) Retained earnings is a type of reserve account.
D) When a non-current asset is revalued upwards a revaluation reserve is created.

Question 51

Two accounting entries are required for income tax: one to provide for the tax; and one to pay the tax. On 28 October 2020, Stevens Ltd pays the tax authorities the $54 000 provided as a liability on 30 June 2020. The correct journal entry to record this payment is:

A) DR Bank $54 000; CR Income tax expense $54 000
B) DR Income tax expense $54 000; CR Bank $54 000
C) DR Current tax liability $54 000; CR Bank $54 000
D) DR Income tax expense $54 000; CR Current tax liability $54 000

Question 52

Which class of preference shares have the right to receive further dividends above their fixed rate once ordinary shares have received a stated percentage?

A) Participating preference shares
B) Cumulative preference shares
C) Bonus preference shares
D) Redeemable preference shares

Question 53

On 28 February 2020, Xavier Ltd declared and distributed an 8% share dividend (bonus issue). At that date the entity's total share capital was $180 000, fully paid to $1. What is the effect of this dividend on Xavier Ltd's total shareholders' equity?

A) No effect.
B) Decrease of $14 400.
C) Increase of $14 400.
D) It depends on the current market value of the shares.

Question 54

What type of account is a reserve?

A) Asset
B) Liability
C) Expense
D) Equity

Question 55

Which of the following statements concerning preference shares is correct?

A) Preference shares normally have voting rights attached.
B) Preference shares cannot be listed on the stock exchange.
C) Preference shares normally receive a fixed rate of dividend.
D) Preference shareholders face a greater risk of loss than ordinary shareholders.

Question 56

Which of the following can be reasons for a company to declare a share dividend (bonus issue)?
I) To reduce the market price of their shares.
II) To capitalise the retained earnings of the company.
III) To conserve cash.
IV) To increase the number of shareholders.

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

Question 57

A company's equity can be divided into three main categories. Which of the following is not one of those categories?

A) Share capital
B) Reserves
C) Dividends
D) Retained earnings

Question 58

The following statements are true with regards to share dividends (bonus share issues) except:

A) Shareholders are provided with additional shares without cost.
B) They reduce total shareholder's equity.
C) They involve a transfer of retained earnings or reserves to share capital.
D) A bonus issue can only be made if the company has sufficient reserves.

Question 59

The basic journal entry to create a general reserve is:

A) DR Income, CR General reserve
B) DR General reserve, CR Retained earnings
C) DR Profit or loss summary, CR General reserve
D) DR Retained earnings, CR General reserve

Question 60

Which of the following is a reason for declaring a share dividend?

A) To stave off a takeover.
B) To conserve the company's cash instead of declaring a cash dividend.
C) To decrease the market price of the shares.
D) All of these options are reasons for declaring a share dividend.

Question 61

In an income statement, the expenses may be classified either by:

A) nature or function.
B) current or non-current.
C) temporary or permanent.
D) production or administration.

Question 62

A company is a legal entity and, as such, has an additional expense it is required to recognise in its income statement that sole traders and partnerships do not have. This additional expense is for:

A) cost of sales
B) income tax
C) depreciation
D) legal entity expenses

Question 63

At 30 June 2019, Barry Ltd estimates it will be required to pay income tax expenses of $62 000 during the following financial year. The correct journal entry to provide for this income tax estimate at 30 June 2019 is:

A) DR Income tax expense $62 000; CR Bank $62 000
B) DR Income tax expense $62 000; CR Retained earnings $62 000
C) DR Income tax expense $62 000; CR Current tax liability $62 000
D) DR Current tax liability $62 000; CR Income tax expense $62 000

Question 64

The basic entry to provide for company income tax at the end of the financial year is :

A) DR Current tax liability; CR Income tax expense
B) DR Retained earnings; CR Non-Current tax liability
C) DR Income tax expense; CR Cash at Bank
D) DR Income tax expense; CR Current tax liability

Question 65

Which of the following financial statements is required to be completed by a company?
I) Statement of cash flows
II) Statement of profit or loss and other comprehensive income
III) Statement of changes in equity
IV) Statement of financial position

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