CH-9 Companies: Formation and Operations – Accounting : Book Guide

Chapter 9: Companies: Formation and Operations Please note: GST versions of the end-of chapter questions are not appropriate for this chapter. Discussion questions 1. Two partners in a business are discussing the possibility of incorporating their business as a proprietary company. Discuss the advantages and disadvantages that this move would potentially bring to them. Briefly discuss the impact that the Corporations Act would have on their decision. Advantages of forming a proprietary company are discussed at the beginning of this chapter. Specific benefits for a proprietary company of the Corporations Act will depend on whether the proprietary company is classified as large or small. If large, the company will have more onerous reporting requirements, (as provided in accounting standards), and the requirements for audit (assurance services) of the company’s accounts are also more onerous. The main advantages of incorporating a business as a proprietary company are: • limited liability of shareholders • the continuity of legal existence • the easy transferability of shares • potential tax benefits if personal income tax rates exceed company tax rates. Disadvantages are: • companies (including proprietary companies) are generally subject to greater governmental regulation. 2. What is the difference between a small proprietary company, a large proprietary company and a public company? Public companies are those whose shares are widely held and traded through a securities exchange. Proprietary companies are those whose shares are held by a few shareholders, often members of the same family. A public company has a major advantage in that it is allowed to invite the public to subscribe for any shares, debentures, notes or loans, and to have these shares, debentures, etc. listed on the nation’s securities exchanges. A public company must have ‘Limited’ or ‘Ltd’ at the end of its name; a proprietary company must have ‘Proprietary Limited’ or ‘Pty Ltd’. A proprietary company must have a share capital whereas a public company can also be limited by guarantee. A small proprietary company is distinguished in the law from a large proprietary company if it satisfies at least two of the following tests: • the consolidated operating revenue for the company and the entities it controls is less than $25 million for the financial year • the value of consolidated gross assets at the end of the financial year is less than $12.5 million • the company and the entities it controls have fewer than 50 full-time equivalent employees at the end of the financial year. 3. ‘It is better for a company to have a constitution rather than rely on the replaceable rules in the Act.’ Discuss. Discuss the basic contents of the replaceable rules under the law. For a guide to contents, see Section 141 of the Corporations Act. Maybe these are satisfactory, as is expected with most small companies, but in larger companies, more complex rules are desired, and so a constitution becomes necessary. 4. Explain the purpose of each of the following accounts used in a public share issue: Share Capital, Application, Cash Trust, Allotment, Call, Calls in Advance. The Share Capital account is used to record the net amount called up on a company’s shares at a point in time, less any share issue costs. An Application account is used in public share floats where the public are asked to apply for an allotment of shares in a company during a share issue. The Application account records any monies paid in by applicants. The Cash Trust account is used in public share floats to record money which must be held in trust. This is the money received from applicants for shares prior to the shares being issued. Any refunds to unsuccessful applicants is taken out of the Cash Trust account once shares are allotted, and any remaining money can then be transferred to general cash to be used by the company. An Allotment account and a Call account are used in situations where a company issues shares payable in instalments. The Allotment account records any amount receivable from shareholders when shares are allotted to them. A Call account records any further amounts receivable on shares from those shareholders who received an initial allotment. The Calls in Advance account is used in those rare circumstances where a public issue of shares by instalments has led to some applicants paying into the company not only the application fees but also the allotment money and one or more future calls. The Calls in Advance account is credited for these future calls received on application. The debit entry is to the Application account. Calls in advance, which has many of the characteristics of a liability, is nevertheless regarded as part of share capital in an entity’s balance sheet/statement of financial position. 5. Distinguish between a private placement, a public share issue and a rights issue. Distinguish also between a renounceable rights issue and a non-renounceable rights issue. A private placement is an issue of shares to a large institutional investor. The main advantages are speed, price and direction. The disadvantage is that existing shareholders experience a dilution of their ownership as well as an ability to make a profit if there had been a rights issue instead of a private placement. A public share issue requires the issue of a disclosure document inviting the public to apply for shares. Application money is held in trust until the directors allot shares to applicants. Money paid in by unsuccessful applicants is refunded to them. An underwriter may be appointed to ensure that the public share float is successful. A rights issue is an issue of new shares to existing shareholders whereby they are given the right to purchase additional shares in proportion to their current shareholdings. Usually the issue price is set below the current market price of the company’s shares. A renounceable rights issue allows the shareholder to take up the rights issue, let it lapse or sell their rights on the securities exchange. A non-renounceable rights issue only allows the shareholder to either take up the rights by subscribing for more shares, or reject the rights, which mean that they lapse. The shareholders cannot sell the rights. 6. How should a company account for its start-up costs, and its share issue costs? How should a company account for the fees paid to an underwriter? Formation or start-up costs, which represent the legal and other costs of forming a company, were traditionally treated as an asset and then systematically amortised over an arbitrary period. However there are no future economic benefits to be gained from these costs and they should be written off to expense (as per the requirements of AASB 138 Intangible Assets). Share issue costs, including underwriter’s fees, are discussed in AASB 132 Financial Instruments: Presentation, (paras. 35 and 37). The appropriate treatment is to regard these costs as a reduction of the share capital being raised. The rationale for this treatment is that the incurrence of share issue costs and the raising of capital are viewed as a single transaction and as such, the increase in equity is the net amount the company receives from the issue of shares. 7. ‘Preference shares can offer security of dividends and other advantages over ordinary shares, and are therefore the best equity to have in a company.’ Do you agree? Explain. What is the motive for holding shares? If the motive is to take a greater risk with the potential of achieving significant capital gains in share prices, and potentially higher dividends than the fixed amount payable to preference shares, then ordinary shares are the better equity to hold. Are the preference shares participating or not? Discuss the potential benefits of preference shares being cumulative and participating, and the fact that certain preference shares may be more akin to long-term debt, in which case they should be treated as liabilities rather than equity. 8. A well-established company, which wanted to raise finance for expansion, decided to issue some preference shares. The terms of the issue were that the shareholders did not have the right to vote at meetings, but were entitled to dividends of 12 cents per share each year, on a cumulative basis. Discuss the merits of issuing such shares. Where should they appear in the company’s balance sheet? Explain your reasoning. Such shares will place burdens on the ordinary shareholders, particularly if the expansion program is unprofitable for a few years, as cumulative dividends must be paid on these shares before any ordinary dividends are paid. Since the new preference shareholders do not have the right to vote, perhaps they are more appropriately treated as a liability of the company, based on the Framework’s liability definition (see previous chapters).This would be so particularly if the preference shares are redeemable on a fixed future date. Treating the preference shares as liabilities means that the dividends on these shares are to be regarded as an expense and disclosed as part of the entity’s finance costs expense. 9. ‘A company must have made sufficient profits before it can pay dividends to its shareholders.’ Discuss. As a result of changes in the Corporations Act in 2010, a company is no longer required to have any profits in order to pay dividends. The requirements of the Act are that a company must not pay a dividend unless: (a) the company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and (b) the payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and (c) the payment of the dividend does not materially prejudice the company’s ability to pay its creditors. The payment of a dividend is considered to materially prejudice the company’s ability to pay its creditors if the company becomes insolvent as a result of the payment. Assets and liabilities in (a) above are to be calculated in accordance with accounting standards in force at the relevant time. In essence, the Act now uses a solvency test for the payment of dividends as opposed to a ‘profits’ test in the past, which specified that dividends could only be paid out of ‘profits’. Under the approach adopted in June 2010, it appears that dividends can be paid out of capital as well as out of retained earnings or other reserves, so long as (a), (b) and (c) above are satisfied. Exercises Exercise 9.1 Issue of shares payable in full The directors of Dunedoo Ltd decided to issue 100 000 ordinary shares. Required (a) Prepare journal entries (in general journal form) to record the issue of shares as a private placement to Good Times Ltd for $15 per share payable in full. (b) Prepare journal entries (in general journal form) to record the issue of shares to the public at $18 per share payable in full. (LO4) (a) Cash at Bank 1 500 000 Share Capital 1 500 000 Private placement of shares. (b) Cash Trust 1 800 000 Application 1 800 000 Cash received on application. Application 1 800 000 Share Capital 1 800 000 Issue of shares at $18. Cash at Bank 1 800 000 Cash Trust 1 800 000 Transfer of cash. Exercise 9.2 Determining equity in the balance sheet Warren Ltd was organised on 2 January 2019, and proceeded to issue 100 000 9% cumulative preference shares and 200 000 ordinary shares. The preference shares were issued privately at a value of $2 each and the ordinary shares were issued to the public at $5 each, payable in two instalments of $2.50 per share. The first instalment was payable on application and the remaining instalment was payable by 30 June 2020. Required (a) Prepare the equity section of the balance sheet as at 30 June 2020. (LO3 and LO8) (a) WARREN LTD Balance Sheet (Equity Section) as at 30 June 2020 EQUITY: Share Capital 9% Preference shares (100 000 shares @ $2) $200 000 Ordinary shares (200 000 @ $2.50) 500 000 TOTAL EQUITY $700 000 Note : This solution assumes that the second call had not yet been made. Exercise 9.3 Issue of shares by instalments and undersubscription On 30 April, Tamworth Ltd issued 40 000 shares for $6 each, payable $2 on application, $2 on allotment and the remainder due by two equal calls on 30 June and 31 August. Share issue costs of $3500 were paid on 31 May. Required (a) Prepare journal entries (in general journal format) to record the share issue up to collection of allotment money assuming: i. the shares were fully subscribed ii. the shares were undersubscribed by 6000 shares. (LO4) (a)(i) Cash Trust 80 000 Application 80 000 Cash received ($2) on application Application ($2) 80 000 Allotment ($2) 80 000 Share Capital 160 000 Amounts receivable on application and allotment on issue of shares. Cash at Bank 80 000 Cash Trust 80 000 Transfer of cash. Cash at Bank 80 000 Allotment 80 000 Amount received on allotment. Share Capital 3 500 Cash at Bank 3 500 Share issue costs paid. (a)(ii) Cash Trust 68 000 Application 68 000 (34 000  $2) Cash received on application. Application ($2) 68 000 Allotment ($2) 68 000 Share Capital 136 000 Amounts receivable on application and allotment on issue of shares. Cash at Bank 68 000 Cash Trust 68 000 Transfer of cash. Cash at Bank 68 000 Allotment 68 000 Amount received on allotment. Share Capital 3 500 Cash at Bank 3 500 Share issue costs paid. Exercise 9.4 Share issue with oversubscription On 1 July 2019, Denman Ltd issued a prospectus offering 160 000 of its ordinary shares, payable $1 on application, $1 on allotment and $2 to be called as and when required. When applications closed on 23 July, applications had been received for 240 000 shares, including one applicant for 20 000 shares who had paid in full. The directors allotted the shares on 24 July as follows. 1. The applicant for 20 000 shares, who paid in full, was allotted 20 000 shares. 2. Applications for 20 000 shares were rejected and the application money was refunded. 3. The remaining applicants were allotted 7 shares for every 10 applied for. The excess application money on these shares was to be applied in part payment of allotment money. All allotment money was received by 7 August. Required (a) Prepare journal entries in general journal format to record the share issue. (LO4) (a) Workings: Allocation of Money Received on Application No. of shares applied for No. of shares allotted Money received Application ($1) Allotment ($1) Call in advance ($2) Refund 20 000 20 000 $80 000 $20 000 $20 000 $40 000 — 20 000 — 20 000 — — — $20 000 200 000 140 000 200 000 140 000 60 000 — — 240 000 160 000 $300 000 $160 000 $80 000 $40 000 $20 000 2019 July 23 Cash Trust 300 000 Application 300 000 Cash received on application (20 000  $4) + (220 000  $1) 24 Application (160 000  $1) 160 000 Allotment (160 000  $1) 160 000 Share Capital 320 000 Amounts receivable on application and allotment. 24 Application 140 000 Calls in Advance (20 000  $2) 40 000 Allotment (20 000  $1 + excess) 80 000 Cash Trust (20 000  $1) 20 000 Calls in advance on 20 000 shares, refunds on 20 000 shares, excess application money applied to allotment (see workings above). 24 Cash at Bank 280 000 Cash Trust 280 000 Transfer of cash. Aug. 7 Cash at Bank 80 000 Allotment 80 000 Cash received on allotment. Exercise 9.5 Private placement and public issue of shares Scone Ltd was registered on 1 February 2019. The following events occurred in that year. Required (a) Prepare entries in general journal form to record the transactions. (b) Show the equity section of the balance sheet as at 18 March 2019. (LO4 and LO8) (a) 2019 Feb. 1 Cash at Bank 50 000 Share Capital – Ordinary 50 000 Shares issued to original members. Mar. 15 Cash Trust 420 000 Application – Ordinary 220 000 Application – Preference 200 000 Cash received on application from 100 000 preference shares and 220 000 ordinary shares. Mar. 18 Application – Ordinary 150 000 Application – Preference 200 000 Share Capital – Ordinary 150 000 Share Capital – Preference 200 000 Allotment of shares. Mar. 18 Application – Ordinary 70 000 Cash Trust 70 000 Refund of excess money. Mar. 18 Cash at Bank 350 000 Cash Trust 350 000 Transfer of cash. (b) SCONE LTD Balance Sheet (Equity Section) as at 18 March 2019 EQUITY Share Capital: 100 000 10% preference shares fully paid at $2 200 000 200 000 ordinary shares fully paid at $1 200 000 Total Equity $400 000 Exercise 9.6 Ledger accounts for public issue and rights issue The following events occurred in the newly formed company, Armidale Ltd, which was registered on 31 January 2019. Required (a) Prepare ledger (T accounts) to record the events in the records of Armidale Ltd for 2019. (LO4) (a) Application 1/3/19 Share Capital 1 200 000 1/3/19 Cash Trust 3 000 000 1/3/19 Allotment & Cash Trust 1 800 000 3 000 000 3 000 000 Cash Trust 1/3/19 Application 3 000 000 1/3/19 Application 1 500 000 1/3/19 Cash at Bank 1 500 000 3 000 000 3 000 000 Share Capital 1/3/19 Application and Allotment 1 500 000 20/9/19 Call 300 000 15/12/19 Cash at Bank 313 600 31/12/19 Balance c/d 2 113 600 [112 000 shares @ $2.80] 2 113 600 2 113 600 31/12/16 Balance b/d Balance b/d 2 113 600 Allotment 1/3/19 Share Capital 300 000 1/3/19 Application 300 000 Cash at Bank 1/3/19 Cash Trust 1 500 000 20/10/19 Call 300 000 15/12/19 Share Capital 313 600 31/12/19 Balance b/d 2 113 600 2 113 600 2 113 600 31/12/19 Balance b/d 2 113 600 Call 20/9/19 Share Capital 300 000 20/10/19 Cash at Bank 300 000 Exercise 9.7 Issue of ordinary shares Required (a) As the above share issue was a private placement with several well-known investors, prepare the journal entry, in general journal form, made by the company to record the share issue. (b) How would your answer to A. differ if the share issue had been a public share float? (LO4) (a) 2019 Cash at Bank 504 000 000 Share Capital – Ordinary 504 000 000 Private placement of 14 000 000 ordinary shares at $36 per share (b) Cash Trust 504 000 000 Application – Ordinary 504 000 000 Cash received on application from 14 000 000. ordinary shares. Application – Ordinary 504 000 000 Share Capital – Ordinary 504 000 000 Allotment of shares. Cash at Bank 504 000 000 Cash Trust 504 000 000 Transfer of cash. If the share issue was a public share float, the above entries would have been made, assuming no oversubscription, no refunds, no underwriter, and all shares were payable in full on application. Exercise 9.8 Participating preference shares Maitland Ltd has issued 2 000 000 ordinary shares for $4 and 200 000 8% preference shares for $4, all shares being fully paid. On 30 September 2019 at the annual general meeting of the company, a dividend was declared for a total cash payout of $320 000. Preference shares are entitled to participate in further dividends once ordinary shares have received 8 cents per share. Assume that the dividends are taken out of retained earnings. Required (a) Show how the total dividend would be apportioned between ordinary and preference shares. (b) Prepare journal entries in general journal form to record the dividend payments. (LO5) (a) Ordinary Preference Current rate of preference dividend (8% on $800000) $64 000 Ordinary dividend (8c on 2 000 000 shares) $160 000 Participation apportionment Total distribution $320 000 Dividends so far 224 000 Balance for payment $ 96 000 No of share issued 2 200 000 Cents per share participation (4.36c – rounded) To preference shares (4.36c on 200 000 shares) 8 727 To ordinary shares (4.36c on 2 000 000 shares) 87 273 . Total dividends $247 273 $72 727 (b) 2019 Sept. 30 Retained Earnings 320 000 Preference Dividend Payable 72 727 Ordinary Dividend Payable 247 273 Dividends declared on 2 000 000 ordinary shares and 200 000 participating preference shares Preference Dividend Payable 72 727 Ordinary Dividend Payable 247 273 Cash at Bank 320 000 Payment of dividends. Exercise 9.9 Journals and ledgers for issue of shares Bega Ltd was registered as a new company on 2 January 2020. On that day a prospectus was issued inviting applications for 300 000 ordinary shares at $10, payable $2.50 on application, $2.50 on allotment and the balance due in one call on 15 June 2020. The issue was underwritten for a fee of $7000. On 31 January, applications closed with the issue undersubscribed by 15 000 shares. Directors proceeded to allot the shares. Amounts due on allotment were received on 9 February, including the amount due from the underwriter less the underwriter’s commission. On 15 June, the amounts due on the call were received with the exception of the amount due on 12 000 shares. Required (a) Prepare journal entries (in general journal form) and ledger accounts (in T-account format) to record the above transactions. (LO4) (a) General Journal 2020 Jan. 31 Cash Trust 712 500 Application 712 500 Cash received on application ($2.50 per share from 285 000 ordinary shares). Jan. 31 Application 750 000 Allotment 750 000 Share Capital 1 500 000 Allotment of 300 000 shares (including to the underwriter: 15 000 shares). Jan. 31 Cash at Bank 712 500 Cash Trust 712 500 Transfer of cash. Feb. 9 Cash at Bank 68 000 Share Issue Costs (or Share Capital) 7 000 Allotment 37 500 Application 37 500 Cash received from underwriter on 15 000 shares ($2.50 on each of application and allotment). Feb. 9 Cash at Bank 712 500 Allotment 712 500 Cash received on allotment from 285 000 shares June 15 Call 1 500 000 Share Capital 1 500 000 Call of $5 per share on 300 000 shares. June 15 Cash at Bank 1 440 000 Call 1 440 000 Call received on 288 000 shares. General Ledger Application 31/1/20 Share Capital 750 000 31/1/20 Cash Trust 712 500 9/2/20 Cash, Allotment (from underwriter) 37 500 750 000 750 000 Cash Trust 31/1/20 Application 712 500 9/2/20 Cash at Bank 712 500 Share Capital 31/1/20 Application and Allotment 1 500 000 15/6/20 Call 1 500 000 30/6/20 Balance c/d 3 000 000 3 000 000 3 000 000 30/6/20 Balance b/d Balance b/d 3 000 000 Allotment 31/1/20 Share Capital 750 000 9/2/20 Cash at Bank 37 500 9/2/20 Cash at Bank 712 500 750 000 750 000 Cash at Bank 31/1/20 Cash Trust 712 500 9/2/20 Application, Allotment 68 000 9/2/20 Allotment 712 500 15/6/20 Call 1 440 000 30/6/20 Balance b/d 2 933 000 2 933 000 2 933 000 30/6/20 Balance b/d 2 933 000 Share Issue Costs 9/2/20 Allotment, Application, Cash at Bank 7 000 Call 15/6/20 Share Capital 1 500 000 15/6/20 Cash at Bank 1 440 000 30/6/20 Balance c/d 60 000 1 500 000 1 500 000 30/6/20 Balance b/d 60 000 Exercise 9.10 Dividends, tax and reserve transfers During the year ended 30 June 2019, the directors of Cooma Ltd paid a final dividend out of retained earnings of $60 000, which had been recommended at the end of the previous financial year. They also declared and paid an interim dividend of $150 000 on 1 February 2020. The balance of the Retained Earnings account at 1 July 2019 was $200 000. At 30 June 2020, the ledger accounts showed that the company had made a total profit of $1 000 000 for the year. However, the directors determined that the following adjustments were still necessary to finalise the accounts. 1. Provide for an income tax liability of $300 000. 2. Recommend the payment of a final dividend of $100 000 out of retained earnings. 3. Transfer $175 000 to a general reserve and $100 000 to a plant replacement reserve. Required (a) Prepare journal entries to record all transactions above for the year ended 30 June 2020. (b) Prepare the Retained Earnings account for the year ended 30 June 2020. (LO5, LO6 and LO7) (a) 2019 Before Retained Earnings 60 000 June (last Final Dividend Payable 60 000 Fin. Yr) Final dividend declared on shares Final Dividend Payable 60 000 Cash at Bank 60 000 Payment of dividends. Note: This dividend would have been deducted from Retained Earnings in the year ended 30 June 2019. 2020 Feb. 1 Retained Earnings 150 000 Interim Dividend Payable 150 000 Interim dividend declared on shares Feb. 1 Interim Dividend Payable 150 000 Cash at Bank 150 000 Payment of interim dividend. June 30 Income Tax Expense 300 000 Current Tax Liability 300 000 Current income tax for the year. Retained Earnings 275 000 General Reserve 175 000 Plant Replacement Reserve 100 000 Transfer retained earnings to reserves No entry for recommended dividend 2020 Closing entries June 30 Income and Expenses (incl tax expense) 700 000 Profit or Loss Summary 700 000 Profit for the year (after tax) Profit or Loss Summary 700 000 Retained Earnings 700 000 Transfer profit to retained earnings. (b) Retained Earnings 1/7/29 Balance b/d 200 000 1/2/20 Interim dividend payable 150 000 30/6/20 Profit or Loss Summary 700 000 30/6/20 General and plant replacement reserves 275 000 30/6/20 Balance c/d 475 000 900 000 900 000 30/6/20 Balance b/d Balance b/d 475 000 Exercise 9.11 Share dividends Penshurst Ltd’s balance sheet, before a share dividend, is as follows. The company immediately declared a share dividend from the general reserve on the basis of 1 bonus share for every 5 shares held. All shares were issued at $1. Required (a) Prepare any journal entries necessary to record the payment of this share dividend. (LO5) (a) 2019 June 30 General Reserve 20 000 Share Capital 20 000 Payment of share dividend of 1 share for every 5 shares held, valued at $1. Exercise 9.12 Preparation of income statement The following information relates to Nevertire Ltd. Profit before income tax for the year ended 30 June 2019 was $220 000. The following items were used in determining that profit: Assume the company’s taxation rate is 30c in the dollar. Required (a) Prepare the income statement for the year ended 30 June 2019. (LO7 and LO8) (a) NEVERTIRE LTD Income Statement for the year ended 30 June 2019 INCOME Sales $580 000 Cost of sales 234 000 GROSS PROFIT 346 000 Other income: Interest revenue 18 000 364 000 EXPENSES Selling, administrative and finance expenses $72 000 Loss from flood 14 000 Bad debts 36 000 Development costs written off 22 000 TOTAL EXPENSES 144 000 Profit before income tax 220 000 Income tax expense (30%) 66 000 PROFIT $154 000 Exercise 9.13 Dividends, reserves, retained earnings During the year ended 30 June 2019, the directors of Jindabyne Ltd declared and paid an interim dividend of $18 000 out of retained earnings. At the end of the year the financial statements showed a profit (before tax) of $460 000 out of which the directors made the following reserve transfers and tax liability. The beginning balance of retained earnings was $15 000. Required (a) Prepare journal entries relating to the above transactions. (b) Prepare the Retained Earnings account for Jindabyne Ltd for the year ended 30 June 2019. (LO5, LO6 and LO7) (a) 2019 Retained Earnings 18 000 Interim Dividend Payable 18 000 Declaring an interim dividend. Interim Dividend Payable 18 000 Cash at Bank 18 000 Payment of interim dividend. June 30 Income Tax Expense 140 000 Current Tax Liability 140 000 Recording income tax liability. June 30 Retained Earnings 142 000 Plant Replacement Reserve 40 000 General Reserve 102 000 Transfer to various reserves. Closing Entries June 30 Income and Expenses (incl Tax) 320 000 Profit or Loss Summary 320 000 Profit for the year (after tax). June 30 Profit or Loss Summary 320 000 Retained Earnings 320 000 Transfer profit to retained earnings. (b) Retained Earnings Interim dividend declared $18 000 1/7/28 Balance b/d $15 000 30/6/19 Profit or Loss Summary 320 000 30/6/19 Transfers to reserves 142 000 30/6/19 Balance c/d 175 000 $335 000 $335 000 1/7/19 Balance b/d 175 000 Exercise 9.14 Dividends, reserves, statement of changes in equity 1. Profit for the year was $1 750 000. Ignore income tax. 2. Directors resolved to transfer the amounts specified below from retained earnings to: • contingencies reserve, $1 000 000 • general reserve, $400 000. 3. Some years ago, the company had established an exchange fluctuation reserve, $4 500 000, but now that it had withdrawn from international trade, this reserve was no longer required. 4. Start-up costs $250 000 were to be written off. This has not been reflected in the profit in (1) above. 5. An interim dividend of $200 000 had been paid and directors recommended a final dividend of $300 000 to be paid in 3 months’ time, after ratification by shareholders at the annual general meeting. Both dividends were paid out of retained earnings. Note: The beginning balance of the Retained Earnings account was $1 800 000. Required (a) Show the journal entries to record 1 to 5 above. (b) Prepare the statement of changes in equity for Murrurundi Ltd. (LO5, LO6 and LO8) (a) 1. Income x Expenses x Profit or Loss Summary 1 750 000 2. Retained Earnings 1 400 000 Contingencies Reserve 1 000 000 General Reserve 400 000 3. Exchange Fluctuation Reserve 4 500 000 Retained Earnings 4 500 000 4. Assuming that start-up costs were originally treated as an asset: Start-up Costs Written Off (Expense) 250 000 Start-up Costs 250 000 5. Retained Earnings 200 000 Cash at Bank 200 000 No entry necessary for final dividend. The following closing entries are necessary: Profit or Loss Summary 250 000 Start-up Costs Written Off (Expense) 250 000 Profit or Loss Summary 1 500 000 Retained Earnings 1 500 000 Transfer of final profit. Retained Earnings Interim dividend (cash) $200 000 Balance b/d $1 800 000 Profit or Loss Summary 1 500 000 Transfer to reserves 1 400 000 Exchange fluctuation reserve 4 500 000 Balance c/d 6 200 000 $7 800 000 $ 7 800 000 Balance b/d $6 200 000 (b) MURRURUNDI LTD Statement of Changes in Equity for the year ended … Retained Earnings Retained earnings at the beginning of the year $1 800 000 Add: Profit 1 500 000 Transfer from exchange fluctuation reserve 4 500 000 7 800 000 Transfer to reserves: Contingencies reserve 1 000 000 General reserve 400 000 Interim dividend paid 200 000 1 600 000 Retained earnings at the end of the year $6 200 000 Reserves Exchange fluctuation reserve at the beginning of the year $4 500 000 Transfer to retained earnings (4 500 000) Exchange fluctuation reserve at the end of the year — Contingencies reserve at beginning of the year (assumed) — Transfer from retained earnings $1 000 000 Contingencies reserve at the end of the year 1 000 000 General reserve at the beginning of the year (assumed) — Transfer from retained earnings 400 000 General reserve at the end of the year 400 000 Share capital; no details available Exercise 9.15 Issue of shares, and equity in the balance sheet On 1 July 2019, Grafton Ltd was incorporated, and on 4 July a prospectus was issued inviting applications for 80 000 shares payable $4.50 on application, $2.50 on allotment and $2.50 on each of two calls to be made at intervals of 3 months after the date of allotment. By 31 July, applications were received for 96 000 shares. On 3 August, the directors allotted 80 000 shares to the applicants in proportion to the number of shares for which application had been made. The surplus application money was offset against the amount payable on allotment. The balance of allotment money was received by 12 August. The two calls were made on the dates stated in the prospectus, but the holders of 4800 shares did not pay either call. In addition, a holder of another 2400 shares did not pay the second call. Required (a) Prepare journal entries to record the above transactions (in general journal format). (b) Prepare the equity section of the balance sheet of Grafton Ltd on completion of the transactions. (LO4 and LO8) (a) 2019 July 31 Cash Trust 432 000 Application 432 000 Cash received on application from 96 000 shares at $4.50 per share. Aug. 3 Application ($4.50) 360 000 Allotment ($2.50) 200 000 Share Capital 560 000 Allotment of shares. Aug. 3 Application 72 000 Allotment 72 000 Transfer excess application money. Aug. 3 Cash at Bank 432 000 Cash Trust 432 000 Transfer of cash. Aug. 12 Cash at Bank 128 000 Allotment 128 000 Cash received on allotment. Nov. 3 First Call 200 000 Share Capital 200 000 For call receivable on 80 000 shares at $2.50. Cash at Bank 188 000 First Call 188 000 Cash received on first call from 75 200 shares. 2020 Feb. 3 Second Call 200 000 Share Capital 200 000 For second call receivable Cash at Bank 182 000 Second Call 182 000 Cash received on second call from 72 800 shares. (b) MURRURUNDI LTD Balance Sheet (Equity Section) As at 3 February 2020 EQUITY Share Capital: 80 000 ordinary shares called to $12 $960 000 Less unpaid calls (4800 shares @ $5 + 2400 shares @ $2.50) 30 000 TOTAL EQUITY $990 000 Problems Problem 9.16 Ledger accounts on issue of ordinary shares Newcastle Ltd was incorporated on 1 July 2019. On 1 August, it was decided to issue 300 000 ordinary shares on the following terms. To the end of August, applications for 350 000 shares had been received together with the application money due on each share. One applicant for 5000 shares had forwarded $20 000 in full payment of the shares. On 15 September, the directors proceeded to allot 300 000 shares on the following basis. Applicants for 30 000 shares were refunded their application money in full, 5000 shares were allotted to the applicant who paid for the shares in full, and the other successful applicants were allotted the remaining shares, excess application money being transferred to allotment. On 7 October, all allotment money had been received. A first and final call was made on 1 November, and all call money was received by 30 November with the exception of the amount due on 6000 shares. Required (a) Prepare all ledger accounts (T account format) necessary to record the transactions. (LO4) (a) Cash Trust 2019 2019 31/8 Application $710 000 15/9 Application $60 000 15/9 Cash at Bank 650 000 $710 000 $710 000 Cash at Bank 2019 2019 15/9 Cash Trust $650 000 7/10 Allotment 255 000 30/11 Call 289 000 30/11 Balance c/d $1 194 000 $1 194 000 $1 194 000 30/11 Balance b/d $1 194 000 Share Capital 2019 2019 15/9 Application & Allotment $900 000 30/11 Balance c/d $1 200 000 1/11 Call 300 000 $1 200 000 $1 200 000 Balance b/d $1 200 000 Application 2019 2019 15/9 Share Capital $600 000 31/8 Cash Trust $710 000 15/9 Cash Trust 60 000 15/9 Call in Advance 5 000 15/9 Allotment 45 000 $710 000 $710 000 Allotment 2019 2019 1/11 Share Capital $300 000 15/9 Application $45 000 7/10 Cash at Bank 255 000 $300 000 $300 000 Call in Advance 2019 2019 1/11 Call $5 000 15/9 Application $5 000 Call 2019 2019 1/11 Share Capital $300 000 1/11 Call in Advance $5 000 30/11 Cash 289 000 30/11 Balance c/d 6 000 $300 000 $300 000 30/11 Balance b/d $6 000 Workings: Allocation of Money Received on Application No. of shares applied for No. of shares allotted Money received Application $2 Allotment $1 Call $1 Refund 5 000 5 000 $20 000 $10 000 $5 000 $5 000 — 30 000 — 60 000 — — — $60 000 315 000 295 000 630 000 590 000 40 000 350 000 300 000 $710 000 $600 000 $45 000 $5 000 $60 000 Problem 9.17 Ledger accounts for issue of shares, preparation of balance sheet On 1 January 2019, Shoalhaven Ltd was registered and, on the same day, the company purchased the net assets (excluding cash) of a partnership for a consideration of 240 000 ordinary shares (fully paid) at a price of $2.40 per share. 1 000 000 ordinary shares were offered to the public at $2.40 per share on the following terms: • $1 on application (due 15 January) • 70c on allotment (due 15 February) • balance on final call (due 15 May). By 15 January, applications had been received for 1 200 000 ordinary shares of which applicants for 200 000 shares forwarded the full $2.40 per share. At a directors’ meeting on 16 January, it was decided: 1. to allot ordinary shares in full to applicants who had paid in full on application 2. to allot the remaining ordinary shares from this issue in proportion of 4 for every 5 applied for. According to the prospectus, all surplus money from applications was to be transferred to allotment and/or call accounts. The share issue costs were $5600 and were paid on 15 February. By 31 May, all money was received except for the holder of 2000 shares who did not pay the final call. Required (a) Prepare ledger accounts (running balance format) to record all the transactions. (b) Prepare a balance sheet of Shoalhaven Ltd as at 31 May 2019. (LO4 and LO8) (a) ACCOUNT: Cash Trust Account No. Date Explanation Post Ref Debit Credit Balance 2019 15 1 Application 1 480 000 1 480 000 16 1 Cash at Bank 1 480 000 — ACCOUNT: Share Capital Account No. Date Explanation Post Ref Debit Credit Balance 2019 1 1 Net Assets 576 000 576 000 16 1 Application and Allotment 1 700 000 2 276 000 15 2 Cash at Bank (share issue costs) 5 600 2 270 400 15 5 Final Call 700 000 2 970 400 ACCOUNT: Cash at Bank Account No. Date Explanation Post Ref Debit Credit Balance 2019 16 1 Cash Trust 1 480 000 1 480 000 15 2 Share Capital 5 600 1 474 400 15 2 Allotment 360 000 1 834 400 31 5 Final Call 558 600 2 393 000 ACCOUNT: Net Assets (excl. cash) Account No. Date Explanation Post Ref Debit Credit Balance 2019 1 1 Share Capital 576 000 576 000 ACCOUNT: Application Account No. Date Explanation Post Ref Debit Credit Balance 2019 15 1 Cash Trust 1 480 000 1 480 000 16 1 Share Capital 1 000 000 480 000 16 1 Allotment 340 000 140 000 16 1 Calles in Advance 140 000 — ACCOUNT: Allotment Account No. Date Explanation Post Ref Debit Credit Balance 2019 16 1 Share Capital 700 000 700 000 16 1 Application 340 000 360 000 15 2 Cash at Bank 360 000 — ACCOUNT: Calls in Advance Account No. Date Explanation Post Ref Debit Credit Balance 2019 16 1 Application 140 000 140 000 15 5 Final Call 140 000 — ACCOUNT: Final Call Account No. Date Explanation Post Ref Debit Credit Balance 2019 15 5 Share Capital 700 000 700 000 15 5 Calls in Advance 140 000 560 000 31 5 Cash at Bank 558 600 1 400 Allocation of Money Received on Application Shares applied for Cash Received Shares Allotted Application ($1) Allotment (70c) Calls in Advance (70c) 200 000 $480 000 200 000 $200 000 $140 000 $140 000 1 000 000 1 000 000 800 000 800 000 200 000 — 1 200 000 $1 480 000 1 000 000 $1 000 000 $340 000 $140 000 $1 480 000 (b) SHOALHAVEN LTD Balance Sheet as at 31 May 2019 ASSETS Cash at Bank $2 393 000 Other Net Assets 576 000 $2 969 000 EQUITY Share Capital 1 240 000 ordinary shares issued at $2.40 2 976 000 Less: Share Issue Costs 5 600 Calls in Arrears (2 000 shares @ 70c) 1 400 TOTAL EQUITY $2 969 000 Problem 9.18 Issue of ordinary and preference shares Picton Ltd was registered on 1 July 2019. On 4 August a prospectus was issued inviting public subscriptions for an issue of 200 000 12% preference shares payable $2 in full on application, and 600 000 ordinary shares at a price of $1.60 per share, payable $1 on application, 20c on allotment and the balance as and when required. Applications were to be made in multiples of 100 shares with a minimum of 200 preference shares or 500 ordinary shares. The directors reserved the right to allot the shares applied for in full or such lesser number as resolved and to apply excess money towards amounts due on allotment. All other money was to be refunded to applicants. Applications were received for 240 000 preference shares and 800 000 ordinary shares by 16 August when the directors closed the issue. On 19 August, the directors allotted the shares as follows. 1. Preference: Three applications for a total of 40 000 shares were rejected, and the balance allotted in full. 2. Ordinary: Applications for 120 000 shares were rejected in full and the balance was allotted on a pro rata basis. On 24 August, refunds were made to the respective applicants in accordance with the directors’ resolutions. Share issue costs of $1500 were also paid on this date. Outstanding allotment money was received by 30 September. On 8 November the directors resolved that a call of 30c per share was to be made on the 600 000 partly paid ordinary shares. The call is due and payable by 1 December. Call money was received as follows. • December on 520 000 shares • 15 December on 40 000 shares. Required (a) Prepare entries in general journal form to record the events in the accounts of Picton Ltd. (LO4) (a) 2019 Aug. 16 Cash Trust 1 280 000 Application – Preference 480 000 Application – Ordinary 800 000 (240 000  $2 + 800 000  $1) Cash received on application. Aug. 19 Application – Preference 400 000 Application – Ordinary 600 000 Allotment – Ordinary 0 Share Capital – Preference 400 000 Share Capital – Ordinary 600 000 For allotment of shares. Aug. 24 Application – Preference 80 000 Application – Ordinary 200 000 Cash Trust ($80 000 + $120 000) 200 000 Allotment – Ordinary 80 000 Distribution of application money. Aug. 24 Cash at Bank 1 080 000 Cash Trust 1 080 000 Transfer cash held in trust. Aug. 24 Share Capital 1 500 Cash at Bank 1 500 Share issue costs. Sept. 30 Cash at Bank 40 000 Allotment – Ordinary 40 000 Balance received on allotment. Nov. 8 First Call – Ordinary 180 000 Share Capital – Ordinary 180 000 First call receivable. Dec. 1 Cash at Bank 156 000 First Call – Ordinary 156 000 For cash received on first call (520 000  30c). Dec. 15 Cash at Bank 12 000 First Call – Ordinary 12 000 For additional cash received on call (40 000  30c). Problem 9.19 Rights issues, private placement, dividends and changes in equity The following is the equity of Bowral Ltd at 30 June 2019. The transactions below occurred during the year ended 30 June 2020. Required (a) Prepare entries in general journal format to record the above transactions. (b) Prepare a statement of changes in equity for the period 1 July to 30 September 2019. (LO4, LO5 and LO8) (a) 2019 1/7 Cash at Bank 400 000 Share Capital 400 000 Private placement of shares with QLM Insurance. 31/7 Cash at Bank 400 000 Application 400 000 Cash received from existing shareholders for rights issue. 31/7 Application 400 000 Share Capital 400 000 200 000 shares allotted under rights issue. 1/8 Share Capital 5 000 Cash at Bank 5 000 Share issue costs. 1/9 General Reserve 60 000 Final Dividends Payable 60 000 Dividend of 15c per share on 400 000 shares 1/9 Final Dividends Payable 60 000 Cash at Bank 60 000 Payment of final dividend. (b) BOWRAL LTD Statement of Changes in Equity From 1 July to 30 September 2019 Share capital Share capital at 30 June 2019 $400 000 Rights issue to existing shareholders 400 000 Private placement 400 000 Share issue costs (5 000) Share capital at 30 September 2019 $1 195 000 (1 200 000 shares fully paid at $1) Retained Earnings Retained earnings at 30 June 2019 $10 000 Profit for the period ? Retained earnings at 30 September 2019 ? Other Reserves General reserve at 30 June 2019 $200 000 Final dividend (60 000) General reserve at 30 September 2019 $140 000 Problem 9.20 Ledgers, statement of changes in equity The following information relating to the year ending 30 June 2019 for Penrith Ltd has been obtained from the company’s records. On 30 June 2019, the directors decided to: 1. recommend a final cash dividend of $7000, to be ratified by shareholders at the annual general meeting 2. write off development costs 3. increase the general reserve by $1000 4. provide for an estimated tax expense and current tax liability of $7500 on 2018–16 profits. Required (a) Record the adjustments in ledger accounts and prepare a statement of changes in equity for Penrith Ltd for the year ended 30 June 2019. (LO4, LO5 and LO8) (a) Income Tax Expense 30/6 Current tax liability $7 500 30/6 Profit or Loss Summary $7 500 Profit or Loss Summary 30/6 Write-off Development Costs 3500 30/6 Profit before Adjustments $ 33000 30/6 Income Tax Expense 7 500 30/6 Retained Earnings 22000 $33 000 $ 33000 Retained Earnings 30/6 General Reserve $1 000 1/7 Balance b/d $ 5500 30/6 Interim Dividend/Cash 7 000 Profit or Loss Summary 22000 Balance c/d 19500 $ 27500 $ 27500 Balance b/d $ 19500 Development Costs Balance $ 3500 30/6 Profit or Loss Summary 3500 Current Tax Liability 30/6 Income Tax Expense $7 500 Revaluation Surplus Balance $2 500 General Reserve Balance b/d $ 3000 30/6 Balance c/d $4 000 30/6 Retained Earnings 1 000 $4 000 $4 000 30/6 Balance b/d $4 000 PENRITH LTD Statement of Changes in Equity for the year ended 30 June 2019 Retained Earnings Retained earnings at 1 July 2018 $ 5500 Profit for the period 22000 27500 Interim dividend paid 7 000 Transfer to general reserve 1 000 8 000 Retained earnings at 30 June 2019 $19500 Other Reserves Revaluation surplus at 1 July 2018 $ 2500 Revaluation surplus at 30 June 2019 2500 General reserve at 1 July 2018 $ 3000 Transfer from retained earnings 1 000 General reserve at 30 June 2019 $ 4000 Share capital; no details available Problem 9.21 Dividends, reserves Equity of Toronto Ltd at 14 February 2019 consisted of the following. The following events occurred during 2019. Required (a) Prepare journal entries in general journal format to give effect to the above transactions. (b) Show the Retained Earnings account up to 17 August 2019. (c) Show the statement of changes in equity from 14 February 2019 to 17 August 2019. (LO5, LO6 and LO7) (a) 2019 Feb. 15 Retained Earnings $55 000 Interim Dividend Payable $55 000 Declare interim dividend of 5c on 800 000 shares + 600 000 /2  5c. 15 Interim Dividend Payable 55 000 Cash at Bank 55 000 Pay interim dividend. April 2 Final Call 300 000 Share Capital 300 000 Final call on shares. May 30 Cash at Bank 300 000 Final Call 300 000 Receipt of final call. June 30 Income and Expenses 700 000 Profit or Loss Summary 700 000 Closing entry. 30 Income Tax Expense 250 000 Current Tax Liability 250 000 Income tax for year. 30 Profit or Loss Summary 250 000 Income Tax Expense 250 000 Closing entry. 30 Profit or Loss Summary 450 000 Retained Earnings 450 000 Transfer profit. 30 Retained Earnings 270 000 General Reserve 240 000 Plant Replacement Reserve 30 000 Transfers to reserves. Aug. 15 Retained Earnings 70 000 Final Dividend Payable 70 000 Final dividend of 5c on 1 400 000 shares. Aug. 16 Final Dividend Payable 70 000 Cash at Bank 70 000 Pay final dividend. 16 General Reserve 280 000 Share Capital 280 000 Allotment of bonus shares (1 400 000/5  $1) (b) Retained Earnings 15/2/16 Interim dividend $55 000 14/2/16 Balance b/d $125 000 30/6/16 Reserves 270 000 30/6/16 Profit or Loss Summary 450 000 15/8/16 Final dividend 70 000 17/8/16 Balance c/d 180 000 $575 000 $575 000 17/8/16 Balance b/d $180 000 (c) TORONTO LTD Statement of Changes in Equity from 14 February 2019 to 17 August 2019 Share capital Share capital at 14 February 2019 $1 100 000 Final call on 600 000 shares 300 000 Issue of bonus shares 280 000 Share capital at 17 August 2019 $1 680 000 (1 680 000 shares fully paid at $1) Retained Earnings Retained earnings at 14 February 2019 $125 000 Profit for the period 450 000 Interim dividend paid (55 000) Transfer to reserves (270 000) Final dividend declared (70 000) Retained earnings at 17 August 2019 $180 000 Other Reserves Plant replacement reserve at 14 February 2019 $50 000 Transfer from retained earnings 30 000 Plant replacement reserve at 17 August 2019 80 000 General reserve at 14 February 2019 $100 000 Transfer from retained earnings 240 000 Issue of bonus shares (280 000) General reserve at 17 August 2019 $60 000 Problem 9.22 Issue of shares, dividends and statement of changes in equity Broken Hill Ltd’s equity at 30 June 2019 was as follows. The following events occurred during the year ended 30 June 2020. Required A. Prepare journal entries (in general journal form) to record the transactions. B. Prepare a statement of changes in equity for the year ended 30 June 2020, assuming profit for the year was $36 000. (LO4, LO5, LO6 and LO7) (a) 2019 July 15 Call – Ordinary (500 000  $1) 500 000 Share Capital – Ordinary 500 000 Final call of $1 on 500 000 ordinary shares. Calls in Advance 10 000 Call – Ordinary 10 000 Transfer calls already received in advance. Aug. 31 Cash at Bank ([500 000 – 10 000]  $1) 490 000 Call – Ordinary 490 000 Cash received on final call. Sept. 20 Dividend Payable – Ordinary 110 588 Dividend Payable – Preference 16 200 Cash at Bank 126 788 Dividend of 20c per fully-paid equivalent ordinary share = 200 000  20c + 500 000  $2.40 ÷ $3.40  20c, and 9% on $180 000 preference share Dec. 10 Retained Earnings 42 000 Cash at Bank 42 000 Interim dividend of 6c on 700 000 fully paid ordinary shares 2020 Jan. 31 Cash Trust 400 000 Application – Ordinary 400 000 Cash received on 160 000 ordinary shares Feb. 5 Application – Ordinary 400 000 Share Capital – Ordinary 400 000 Allotment of 100 000 ordinary shares Cash at Bank 400 000 Cash Trust 400 000 Transfer of cash on allotment of shares June 30 Retained Earnings 103 200 Dividend Payable – Ordinary 103 200 Declare final cash dividend of 12c per share on 860 000 ordinary shares Retained Earnings 100 000 General Reserve 100 000 Transfer to general reserve. (b) BROKEN HILL LTD Statement of Changes in Equity for year ended 30 June 2020 Share capital Ordinary share capital at 1 July 2019 * $1 840 300 Final call on 500 000 shares 500 000 Issue of 160 000 shares 400 000 Ordinary share capital at 30 June 2020 $2 740 300 Preference share capital at 1 July 2019 $180 000 Preference share capital at 30 June 2020 $180 000 Retained Earnings Retained earnings at 1 July 2019 $300 000 Profit for the period 360 00 Interim dividend paid (42 000) Transfer to reserves (100 000) Final dividend declared (103 200) Retained earnings at 30 June 2020 $ 90800 Other Reserves General reserve at 1 July 2019 $60 000 Transfer from retained earnings 100 000 General reserve at 30 June 2020 $160 000 * includes calls in advance and share issue costs (assumed to be on ordinary shares) from previous periods. Problem 9.23 Share issues and statement of changes in equity Gundagai Ltd was incorporated on 30 June 2019. On 1 July 2019, the company issued a prospectus offering 300 000 ordinary shares at an issue price of $10, payable on the following terms. • $3 on application • $3 on allotment • $2 on first call • $2 on second call A summary of the applications and allotments register follows. Shares were allotted to all applicants on 1 September 2019. All money received in excess of amounts due on application was applied to amounts due on allotment and calls. Where appropriate, refunds of application money were made. All allotment money was received by 30 September 2019. On 1 November 2019, Gundagai Ltd’s directors made a call of 42c per share, payable by 30 November 2019. By 31 December, call money had not been received from holders of 25 000 shares. Required (a) Prepare journal entries to record the above events. (b) Prepare the ledger accounts (running balance format) for the period 1 July to 31 December 2019. (c) Prepare the statement of changes in equity for the period ending 31 December 2019. (LO4 and LO8) Workings: Allocation of money received on application No. applied for No. allotted $ received Appl’n ($3) Allotment ($3) 1st call ($2) 2nd call ($2) Refund 200 000 150 000 $600 000 $450 000 $150 000 — — — 100 000 100 000 600 000 300 000 300 000 — — — 50 000 50 000 500 000 150 000 150 000 $100 000 $100 000 — 350 000 300 000 1 700 000 $900 000 $600 000 $100 000 $100 000 — (a) GENERAL JOURNAL ENTRIES 2019 Aug. 31 Cash Trust 1 700 000 Application 1 700 000 Application money received Sept. 1 Application (300 000  $3) 900 000 Allotment (300 000  $3) 900 000 Share Capital (300 000  $6) 1 800 000 Issue of shares Cash at Bank 1 700 000 Cash Trust 1 700 000 Transfer on allotment Application 800 000 Allotment 600 000 Calls in Advance 200 000 Transfer to allotment and calls in advance of excess application money Sept. 30 Cash at Bank ($900 000 – $600 000) 300 000 Allotment 300 000 Receipt of allotment money Nov. 1 First Call (300 000  $2) 600 000 Share Capital 600 000 First call of $2 per share Calls in Advance 100 000 First Call 100 000 Transfer of calls in advance money Dec. 31 Cash at Bank (225 000  $2) 450 000 First Call 450 000 Receipt of call money (b) GENERAL LEDGER RUNNING BALANCE ACCOUNTS ACCOUNT: Cash Trust Account No. Date Explanation Post Ref Debit Credit Balance 2019 31 8 Application 1 700 000 1 700 000 1 9 Cash at Bank 1 700 000 — ACCOUNT: Share Capital Account No. Date Explanation Post Ref Debit Credit Balance 2019 1 9 Application & Allotment 1 800 000 1 800 000 1 11 First Call 600 000 2 400 000 ACCOUNT: Cash at Bank Account No. Date Explanation Post Ref Debit Credit Balance 2019 1 9 Cash Trust 1 700 000 1 700 000 30 9 Allotment 300 000 2 000 000 31 12 First Call 450 000 2 450 000 ACCOUNT: Application Account No. Date Explanation Post Ref Debit Credit Balance 2019 31 8 Cash Trust 1 700 000 1 700 000 1 9 Share Capital 900 000 800 000 1 9 Allotment 600 000 200 000 1 9 Calls in Advance 200 000 — ACCOUNT: Allotment Account No. Date Explanation Post Ref Debit Credit Balance 2019 1 9 Share Capital 900 000 900 000 1 9 Application 600 000 300 000 30 9 Cash at Bank 300 000 — ACCOUNT: Calls in Advance Account No. Date Explanation Post Ref Debit Credit Balance 2019 30 9 Application 200 000 200 000 1 11 First Call 100 000 100 000 ACCOUNT: First Call Account No. Date Explanation Post Ref Debit Credit Balance 2019 1 11 Share Capital 600 000 600 000 1 11 Calls in Advance 100 000 500 000 31 12 Cash at Bank 450 000 50 000 (c) GUNDAGAI LTD Statement of Changes in Equity for six months ended 31 December 2019 Share capital Ordinary share capital at 1 July 2019 $0 Issue of 300 000 shares for $10 paid to $8 2 400 000 Call on 25 000 shares (50 000) Calls in advance on 50 000 shares 100 000 Ordinary share capital at 31 December 2019 $2 450 000 Problem 9.24 Share issues and dividends At 30 June 2019, Box Hill Ltd’s equity was as follows. The preference shares were non-participating. The following events occurred after 30 June 2019: Required (a) Prepare the journal entries (in general journal form) necessary to record the above events in Box Hill Ltd’s accounting records. (LO4, LO5 and LO8) (a) 2019 Sept 1 Retained Earnings 45 600 Ordinary Dividend Payable 40 000 Preference Dividend Payable 5 600 Dividend declared on 400 000 ordinary shares at 10c per share and 7% on 80 000 preference shares. Ordinary Dividend Payable 40 000 Preference Dividend Payable 5 600 Cash at Bank 45 600 Dividends paid. Nov. 18 Cash Trust 84 800 Application – Ordinary 84 800 Cash received on 100 000 ordinary shares incl. 8000 shares which paid in full Nov. 20 Application – Ordinary 80 000 Allotment – Ordinary 60 000 Share Capital – Ordinary 140 000 Allotment of 100 000 ordinary shares Cash at Bank 84 800 Cash Trust 84 800 Transfer of cash on allotment of shares Application – Ordinary 4 800 Allotment – Ordinary 4 800 Transfer of excess application money Dec. 11 Cash at Bank 55 200 Allotment – Ordinary 55 200 Receipt of outstanding allotment money 31 General Reserve 60 000 Share Capital – Ordinary 60 000 Bonus issue on 500 000 ordinary shares (500 000/10  $1.20) 2020 June 20 Retained Earnings 5 600 Preference Dividend Payable 5 600 7% preference dividend. Preference Dividend Payable 5 600 Cash at Bank 5 600 Dividend paid. No entry for the ordinary dividend recommended on 30 June. Problem 9.25 Share issues and statement of changes in equity A trial balance taken from Galston Ltd’s accounting records at 30 September 2019 showed the following account balances. At a meeting of directors on 1 October, it was decided to issue additional shares to fund future operations. Accordingly a prospectus was issued on 10 October offering 400 000 ordinary shares at $1 each to the public, payable 50c per share on application, 25c per share on allotment and the remainder in one call when required. By 30 November, applications were received from the public for 24 000 shares in excess of the number available, and the application money paid in on 24 000 shares was refunded to unsuccessful applicants. The rest of the shares were allotted to the successful applicants, including one who had paid in full on application for 4000 shares. The share issue had been underwritten for a fee of $8000. By 15 December, all cash due on allotment had been received, and the underwriting fee was paid on this date. On 31 January 2020, an interim dividend of 6c per share was paid out of retained earnings on all fully paid equivalent shares. On 28 February, the remaining call on the shares was made, and all cash was received on the call by 31 March, except for the holder of 7000 shares. Required (a) Prepare journal entries in general journal form to record the above transactions. (b) Prepare the following accounts in T-account format to show the effect of the above transactions: Share Capital, Application, Allotment, and Call. (c) Prepare a statement of changes in equity for the six months ended 31 March 2020, assuming that the profit made by the company during that period amounted to $120 000. (LO4, LO5 and LO8) (a) 2019 Nov. 30 Cash Trust 214 000 Application 214 000 Cash received on 420 000 ordinary shares @50c and on 4000 shares which paid in full ($1) 30 Application 200 000 Allotment 100 000 Share Capital 300 000 Allotment of 400 000 ordinary shares 30 Application 12 000 Cash Trust 12 000 Refund to applicants for 24 000 shares Cash at Bank 202 000 Cash Trust 202 000 Transfer of cash on allotment of shares Application 2 000 Allotment 1 000 Calls in Advance 1 000 Transfer of excess application money Dec. 15 Cash at Bank 99 000 Allotment 99 000 Receipt of outstanding allotment money on 396 000 shares @25c Share Capital/Share Issue Costs 8 000 Cash at Bank 8 000 Underwriting fee paid 2020 Jan. 31 Retained Earnings 60 000 Interim Dividend Payable 60 000 Dividend declared on 700 000 ordinary shares at 6c per share and on 400 000 shares at 6c  ¾. 31 Interim Dividend Payable 60 000 Cash at Bank 60 000 Dividends paid. Feb. 28 Call 100 000 Share Capital 100 000 Call of 25c on 400 000 ordinary shares 28 Calls in Advance 1 000 Call 1 000 Transfer of calls previously paid Mar. 31 Cash at Bank 97 250 Call 97 250 Call money received except on 7 000 shares. (b) Application 2019 2019 Nov 30 Share Capital 200 000 Nov Cash Trust 214 000 30 Cash Trust 12 000 30 Allotment/Calls in Adv 2 000 214 000 214 000 Allotment 2019 2019 Nov 30 Share Capital 100 000 Nov 30 Application 1 000 30 Cash at Bank 99 000 100 000 100 000 Share Capital 2019 2019 Dec 15 Cash at Bank 8 000 Nov 30 Application and Allotment 300 000 2020 2020 Mar 31 Balance c/d 392 000 Feb 28 Call 100 000 400 000 400 000 Mar 31 Balance b/d 392 000 Call 2020 2020 Feb 28 Share Capital 100 000 Feb 28 Calls in Advance 1 000 Mar. 31 Cash at Bank 97 250 31 Balance c/d 1 750 100 000 100 000 Mar 31 Balance b/d 1 750 (c) GALSTON LTD Statement of Changes in Equity for 6 months ended 31 March 2020 Share capital Share capital at 1 October 2019 $700 000 Issue of 400 000 shares @ $1 400 000 Share issue costs (8 000) Calls in arrears on 7 000 shares @ 25c (1 750) Ordinary share capital at 31 March 2020 $1 090 250 Retained Earnings Retained earnings at 1 October 2019 $117 800 Profit for the period 120 000 Interim dividend paid (60 000) Retained earnings at 31 March 2020 $177 800 Other Reserves General reserve at 1 October 2019 $240 000 General reserve at 31 March 2020 $240 000 Problem 9.26 Share issues and statement of changes in equity In January 2018, the management of Branxton Ltd decided on a program of expansion for the business. On 1 July 2018, the company had $900 000 in retained earnings, and another reserve totalling $600 000 had been set aside out of retained earnings for the acquisition of equipment. Share capital consisted of 2 800 000 shares issued for $1 each. The following events occurred in relation to the equity accounts of Branxton Ltd over the next few years. Required (a) Prepare journal entries to record all transactions and events across the three year period. (b) Show the equity section of the balance sheet of Branxton Ltd at 31 December 2021. (LO4, LO5, LO6 and LO8) (a) 2019 June 30 Income and Expenses 270 000 Profit or Loss Summary 270 000 Closing entry. Profit or Loss Summary 270 000 Retained Earnings 270 000 Transfer profit. Retained Earnings 120 000 Reserve for Acquiring Equipment 120 000 Transfer to reserve. NOTE: It is assumed that the interim dividend which amounted to $20 000 has already been debited to Retained Earnings when it was paid. No entry for the final dividend recommended on 30 June. Sept. 21 Retained Earnings 70 000 Final Dividend Payable 70 000 Final dividend of 2.5c on 2 800 000 shares. Final Dividend Payable 70 000 Cash at Bank 70 000 Pay final dividend. 2019 Nov. 30 Ordinary Shares in Aberdeen Ltd 960 000 Share Capital 960 000 Acquisition of 1 000 000 shares in Aberdeen Ltd by issuing 800 000 shares, fair value at $1.20 each. 2020 June 30 Income and Expenses 500 000 Profit or Loss Summary 500 000 Closing entry. Profit or Loss Summary 500 000 Retained Earnings 500 000 Transfer profit. Retained Earnings 150 000 Reserve for Acquiring Equipment 150 000 Transfers to reserve. NOTE: No entry for the final dividend recommended on 30 June. Sept. 22 Retained Earnings 108 000 Final Dividend Payable 108 000 Final dividend of 3c on 3 600 000 shares. Final Dividend Payable 108 000 Cash at Bank 108 000 Pay final dividend. 2021 June 30 Income and Expenses 480 000 Profit or Loss Summary 480 000 Closing entry. Profit or Loss Summary 480 000 Retained Earnings 480 000 Transfer profit. 30 Retained Earnings 130 000 Reserve for Acquiring Equipment 130 000 Transfer to reserve. NOTE: No entry for the final dividend recommended on 30 June. Sept. 23 Retained Earnings 144 000 Final Dividend Payable 144 000 Final dividend of 4c on 3 600 000 shares. Final Dividend Payable 144 000 Cash at Bank 144 000 Pay final dividend. Dec. 31 Retained Earnings 72 000 Interim Dividend Payable 72 000 Declare interim dividend of 2c on 3 600 000 shares. Interim Dividend Payable 72 000 Cash at Bank 72 000 Pay interim dividend. Equipment 1 020 000 Cash at Bank 1 020 000 Payment for new equipment. Reserve for Acquiring Equipment 1 000 000 Retained Earnings 1 000 000 Transfer from reserve. Income and Expenses 300 000 Profit or Loss Summary 300 000 Closing entry for half-yearly profit. Profit or Loss Summary 300 000 Retained Earnings 300 000 Transfer profit. (b) Rough workings, ignoring annual balances Retained Earnings –/–/19 Interim dividend 20 000 1/7/18 Balance b/d $900 000 30/6/19 Equipment reserve 120 000 21/9/19 Final dividend 70 000 30/6/19 Profit 270 000 30/6/20 Equipment reserve 150 000 30/6/20 Profit 500 000 22/9/20 Final dividend 108 000 30/6/21 Profit 480 000 31/12/21 Equipment reserve 1 000 000 30/6/21 Equipment reserve 130 000 31/12/21 Profit 300 000 23/9/21 Final dividend 144 000 31/12/21 Interim dividend 72 000 31/12/21 Balance c/d 2 636 000 $3 450 000 $3 450 000 31/12/21 Balance b/d $2 636 000 BRANXTON LTD Statement of Changes in Equity from 1 July 2018 to 31 December 2021 Share capital Share capital at 1 July 2018 (2 800 000 shares) $2 800 000 Issue of 800 000 shares to Aberdeen Ltd 960 000 Share capital at 31 December 2021 (3 600 000 shares) $3 760 000 Retained Earnings Retained earnings at 1 July 2018 $900 000 Profit for the whole period (270 + 500 + 480 + 300) 1 550 000 Transfer to equipment reserve (400 000) Transfer from equipment reserve 1 000 000 Interim dividends declared in whole period (92 000) Final dividends declared for the whole period (322 000) Retained earnings at 31 December 2021 $2 636 000 Other Reserves Equipment reserve at 1 July 2018 $600 000 Transfer from retained earnings 400 000 Transfer to retained earnings (1 000 000) Equipment reserve at 31 December 2021 — BRANXTON LTD Balance Sheet (extract) as at 31 December 2021 EQUITY Share Capital: 2 800 000 shares issued at $1 $2 800 000 800 000 shares issued at $1.20 96 000 Total share capital 3 760 000 Reserves: Retained earnings 2 636 000 TOTAL EQUITY $6 396 000 Problem 9.27 Dividends, reserves, bonus issue and statement of changes in equity The equity of Lochinvar Ltd at 30 June 2019 was as follows. During the year ended 30 June 2020, the following transactions occurred. Required (a) Prepare general journal entries to record all transactions for the year. (b) Prepare a statement of changes in equity for Lochinvar Ltd for the year ended 30 June 2020. (LO4, LO5, LO6 and LO8) (a) 2019 Sept. 1 Damages Expense 18 000 Cash at Bank 18 000 Damages from lawsuit paid 1 Contingencies Reserve 20 000 Retained Earnings 20 000 Reserve discontinued. 2020 March 1 Retained Earnings 15 000 Preference Dividend Payable 15 000 Preference dividend for 3 years on cumulative preference shares ($50 000  10%  3 years) 1 Retained Earnings 10 000 Interim Ordinary Dividend Payable 10 000 Interim dividend declared: 10c  100 000 ord. shares 12 Preference Dividend Payable 15 000 Interim Ordinary Dividend Payable 10 000 Cash at Bank 25 000 Payment of dividends April 30 Revaluation Surplus 52 000 Share Capital – Ordinary 52 000 Bonus share issue of 1 for 5 @ $2.60, to ordinary shareholders June 30 Income Tax Expense 111 000 Current Tax Liability 111 000 Tax expense of 30% of $370 000 profit 30 Income and Expenses (Incl Tax Exp) 259 000 Profit or Loss Summary 259 000 Profit for the year 30 Profit or Loss Summary 259 000 Retained Earnings 259 000 Profit transferred No entry for recommended final dividends. (b) LOCHINVAR LTD Statement of Changes in Equity for year ended 30 June 2020 Share capital Ordinary share capital at 1 July 2019 * $200 000 Bonus issue of 20 000 shares 52 000 Ordinary share capital at 30 June 2020 $252 000 Preference share capital at 1 July 2019 $50 000 Preference share capital at 30 June 2020 $50 000 Retained Earnings Retained earnings at 1 July 2019 $(40 000) Profit for the period 259 000 Interim ordinary dividend paid (10 000) Transfer from contingencies reserve 20 000 Preference dividend paid (15 000) Retained earnings at 30 June 2020 $214 000 Other Reserves Contingencies reserve at 1 July 2019 $20 000 Transfer to retained earnings (20 000) Contingencies reserve at 30 June 2020 — Revaluation surplus at 1 July 2019 $60 000 Bonus share issue (52 000) Revaluation surplus at 30 June 2020 $8 000 Problem 9.28 Comprehensive problem Swansea Ltd prepared the unadjusted trial balance as at 30 June 2019 shown on page 711. The following information and events are yet to be recorded by the company on 30 June 2019. 1. Inventory on hand after a physical stocktake at 30 June 2019 amounted to $265 000. 2. Prepaid insurance at the end of the year amounted to $3000. 3. Wages accrued and unpaid were $1700. 4. Interest owing and unrecorded on debentures and bank overdraft was $15 000. 5. Depreciation to be recorded on delivery vehicles at the rate of 20% p.a., on buildings at the rate of 5% p.a., and on furniture at the rate of 10% p.a. All these assets have been on hand throughout the year. 6. Interest due on investments amounted to $6000. 7. Sales made on the last day of the financial year but not recorded were for $8000. 8. The directors have decided to transfer $20 000 to the general reserve from retained earnings. 9. Dividends of 5c per share were recommended. An interim dividend of $35 000 had been paid during the year, and this dividend had been debited to the Retained Earnings account. 10. The company issued 30 000 bonus shares valued at $1 each out of the revaluation surplus. Required (a) Prepare the adjusting entries necessary. (b) Prepare a detailed income statement for Swansea Ltd for the year ended 30 June 2019. (c) Prepare the statement of changes in equity for Swansea Ltd for the year ended 30 June 2019. (d) Prepare the balance sheet for Swansea Ltd as at 30 June 2019. (LO4, LO5, LO6, LO7 and LO8) (a) Adjusting entries Note: No adjusting entry is made for beginning and ending inventory. Under the periodic inventory system, these items would be amended as part of closing entries. 2019 June 30 Insurance Expense 7 000 Prepaid Insurance 7 000 Insurance expense recognised Wages Expense 1 700 Wages Payable 1 700 Wages accrued Interest Expense 15 000 Interest Payable 15 000 Interest owing on bank overdraft and debentures Depreciation Expense – Delivery Vehicles 12 080 Accum. Depreciation – Delivery Vehicles 12 080 Depreciation on delivery vehicles @ 20%. Depreciation Expense – Buildings 31 000 Accum. Depreciation – Buildings 31 000 Depreciation on buildings @ 5%. Depreciation Expense – Furniture and Equipment 16 000 Accum. Dep’n – Furniture and Equipment 16 000 Depreciation @ 10%. Interest Receivable 6 000 Interest Revenue 6 000 Interest due on investments Accounts Receivable 8 000 Sales 8 000 Sales made but not recorded (assume credit sales) Retained Earnings 20 000 General Reserve 20 000 Transfer to general reserve No entry for recommended dividends Interim dividends have already been recorded Revaluation Surplus 30 000 Share Capital 30 000 Bonus share issue of 30 000 shares @ $1 Workings: The trial balance after the above adjusting entries are posted shows the following account balances. SWANSEA LTD Trial Balance as at 30 June 2019 _________________________________________________________________ Account Debit Credit ______________________________________________________________________ Share capital (730 000 shares fully paid) $730 000 General reserve 220 000 Retained earnings 60 000 Revaluation surplus 400 Current tax liability 20 800 Accounts payable 50 300 Debentures 400 000 Bank overdraft (current) 30 700 Interest payable 15 000 Wages payable 1 700 Other liabilities (current) 30 300 Land $400 000 Buildings 620 000 Accumulated depreciation – buildings 131 000 Furniture and equipment 160 000 Accumulated depreciation – furniture 96 000 Delivery vehicles 60 400 Accumulated depreciation – vehicles 32 080 Accounts receivable 68 600 Inventory (1 July 2018) 240 000 Investments 200 000 Interest receivable 6 000 Prepaid insurance 3 000 Sales 538 600 Interest revenue 6 000 Purchases 240 000 Sales returns and allowances 2 080 Purchases returns and allowances 2 000 Freight inwards 10 080 Freight outwards 9 060 Wages expense 102 200 Discount allowed 3 050 Discount received 3 020 Insurance expense 7 000 Interest expense 25 140 Advertising expense 30 700 Depreciation expense – delivery vehicles 12 080 Depreciation expense – buildings 31 000 Depreciation expense – furniture and equip 16 000 Income tax expense 20 800 Administrative expenses 100 710 . $2 367 900 $2 367 900 The financial statements can be prepared from the trial balance as well as from the closing entry for inventory. (b) SWANSEA LTD Income Statement for the year ended 30 June 2019 INCOME Sales $538 600 Less: Sales returns and allowances (2 080) Discount allowed (3 050) Net sales 533 470 Cost of sales: Beginning inventory $240 000 Purchases 240 000 Less: Purchases returns & allowances (2 000) Discount received (3 020) Freight inwards 10 080 485 060 Ending inventory (265 000) Cost of sales 220 060 GROSS PROFIT 313 410 Other income: Interest on investments 6 000 319 410 EXPENSES Selling and distribution expenses Freight outwards 9 060 Depreciation expense – delivery vehicles 12 080 Advertising expense 30 700 Wages expense 102 200 Total selling and distribution expenses 154 040 Administrative expenses: Administrative expenses 100 710 Depreciation – furniture and equip’t 16 000 Depreciation – buildings 31 000 Insurance expense 7 000 Total administrative expenses 154 710 Finance expenses Interest on debentures and overdraft 25 140 Total finance expenses 25 140 TOTAL EXPENSES 333 890 Profit before income tax (14 480) Income tax expense (20 800) LOSS $(35 280) (c) * Calculation of retained earnings: Retained Earnings Transfer to general reserve 20 000 Begin Balance b/d ($80 000 + $35 000 int. dividend) 115 000 Interim dividend 35 000 Loss for the year 35 280 Balance c/d 24 720 115 000 115 000 Balance b/d 115 000 SWANSEA LTD Statement of Changes in Equity for year ended 30 June 2019 Retained earnings at 1 July 2018 $115 000 Loss for the year (35 280) 79 720 Interim dividends paid (35 000) Transfer to general reserve (20 000) Retained earnings at 30 June 2019 $24 720 General reserve at 1 July 2018 200 000 Transfer from retained earnings 20 000 General reserve at 30 June 2019 $220 000 Revaluation surplus at 1 July 2018 30 400 Bonus share issue (30 000) Revaluation surplus at 30 June 2019 $400 Share capital at 1 July 2018 700 000 Bonus share issue from revaluation surplus 30 000 Share capital at 30 June 2019 $730 000 (d) SWANSEA LTD Balance Sheet as at 30 June 2019 CURRENT ASSETS Accounts Receivable $68 600 Inventory 265 000 Interest Receivable 6 000 Prepaid Insurance 3 000 TOTAL CURRENT ASSETS $342 600 NON-CURRENT ASSETS Investments $200 000 Land 400 000 Buildings $620 000 Accumulated Depreciation (131 000) 489 000 Delivery Vehicles 60 400 Accumulated Depreciation (32 080) 28 320 Furniture and Equipment 160 000 Accumulated Depreciation (96 000) 64 000 TOTAL NON-CURRENT ASSETS 1 181 320 TOTAL ASSETS $1 523 920 CURRENT LIABILITIES Accounts Payable 50 300 Bank Overdraft 30 700 Current Tax Liability 20 800 Interest Payable 15 000 Wages Payable 1 700 Other 30 300 TOTAL CURRENT LIABILITIES 148 800 NON-CURRENT LIABILITIES Debentures 400 000 TOTAL NON-CURRENT LIABILITIES 400 000 TOTAL LIABILITIES $548 800 NET ASSETS $975 120 EQUITY: Share Capital 730 000 shares issued at $1 $730 000 General Reserve 220 000 Revaluation Surplus 400 Retained Earnings 24 720 TOTAL EQUITY $975 120 Problem 9.29 Comprehensive problem The accounts in the ledger of Zetland Ltd as at 30 June 2020 had balances as shown on page 712. The Share Capital account represents 30 000 000 shares fully paid at $1 and 50 000 000 shares issued at $1 but called to 75c per share. A call of 25c per share had been made on these 50 000 000 shares during the year, but 2 000 000 had failed to pay the call by 30 June 2020. An interim dividend of $1 500 000 has been paid during the year out of retained earnings. Inventory on hand at 30 June 2020 was $16 000 000. The following adjustments have to be made. 1. Provide for 10% p.a. depreciation on cost of fixtures and fittings and 5% p.a. on buildings for the whole year. 2. Unrecorded and unpaid expenses: travellers’ salaries $100 000. 3. General expenses prepaid, $15 000. 4. Record income tax expense and current tax liability of $900 000. 5. Declare a final dividend, $1 500 000. No ratification of this dividend is needed. 6. Share issue costs to be written off against share capital. 7. An amount of $1 000 000 is to be transferred to a general reserve from retained earnings. Required (a) Prepare an income statement for the year ended 30 June 2020 and a balance sheet) as at 30 June 2020. (LO4, LO5, LO6, LO7 and LO8) (a) ZETLAND LTD Income Statement for the year ended 30 June 2020 $’000 $’000 $’000 INCOME Sales $24 000 Cost of sales: Beginning inventory $15 000 Purchases 11 850 Freight inwards 150 27 000 Ending inventory 16 000 Cost of sales 11 000 GROSS PROFIT 13 000 Other income: Interest on investments 1 750 14 750 EXPENSES Selling and distribution expenses Selling commission 100 Delivery expenses 200 Travellers’ salaries 1 290 Total selling and distribution expenses 1 590 Administrative expenses: Administrative salaries 3 500 Directors’ fees 200 Depreciation – fixtures & fittings 250 Depreciation – buildings 2 000 General expenses 2 950 Total administrative expenses 8 900 Finance expenses Interest on mortgage 1 000 Total finance expenses 1 000 TOTAL EXPENSES 11 490 Profit before income tax 3 260 Income tax expense 900 PROFIT $2 360 ZETLAND LTD Balance Sheet as at 30 June 2020 $’000 $’000 $’000 CURRENT ASSETS Accounts receivable 5 495 Inventory 16 000 Prepaid expenses 15 TOTAL CURRENT ASSETS 21 510 NON-CURRENT ASSETS Investments 40 000 Land 10 200 Buildings 40 000 Accumulated depreciation (6 000) 34 000 Fixtures and fittings 2 500 Accumulated depreciation (750) 1 750 TOTAL NON-CURRENT ASSETS 85 950 TOTAL ASSETS 107 460 CURRENT LIABILITIES Accounts payable 2 000 Bank overdraft 11 000 Current tax liability 900 Final dividend payable 1 500 Salaries payable 100 TOTAL CURRENT LIABILITIES 15 500 NON-CURRENT LIABILITIES Mortgage on land and buildings 20 000 TOTAL NON-CURRENT LIABILITIES 20 000 TOTAL LIABILITIES 35 500 NET ASSETS 71 960 EQUITY Share capital 30 000 000 shares fully paid at $1 30 000 48 000 000 shares fully paid to 75c 36 000 2 000 shares paid to 50c 1 000 67 000 Less: Share issue costs 500 66 500 General reserve 1 000 Retained earnings* 4 460 TOTAL EQUITY 71 960 * Calculation of retained earnings: Retained Earnings Transfer to general reserve $1 000 Balance b/d (4 600 + 1 500) $6 100 Interim dividend 1 500 Profit or Loss Summary 2 360 Final dividend 1 500 Balance c/d 4 460 $8 460 $8 460 Balance b/d 4 460 Problem 9.30 Comprehensive problem The trial balance of Victoria Ltd at 30 June 2019 is shown on page 713. There was no movement in share capital for the year. The following adjustments are required. 1. Record income tax expense of $7500. 2. Transfer $1000 to general reserve. 3. Accrued expenses: sales staff’s salary $650; office salaries $270; interest on bank loan $20. 4. Write off preliminary expenses $3000. 5. Rent prepaid $300. 6. Record depreciation: motor vehicles 10% on cost; office furniture 20% on cost; buildings 5%. 7. Recommend a dividend of 20c per share. Required (a) Prepare an income statement, a statement of changes in equity for the year ended 30 June 2019 and a balance sheet for Victoria Ltd as at 30 June 2019. (LO4, LO5, LO6, LO7 and LO8) (a) VICTORIA LTD Income Statement for the year ended 30 June 2019 INCOME Sales $150 000 Less: Sales returns (500) Discount allowed (1 270) Net sales revenue 148 230 Cost of sales (including freight inwards) 93 880 GROSS PROFIT 54 350 Selling expenses: Freight outwards 700 Advertising expense 1 000 Selling expense 1 000 Sales staff salary 10 650 Sales staff car expenses 1 500 Entertainment expenses 1 200 Depreciation of motor vehicles 1 000 Total selling expenses 17 050 Administrative expenses: General expenses 1 250 Insurance expense 2 000 Rates expense 1 000 Office salaries expense 5 570 Preliminary expenses 3 000 Depreciation – office furniture 600 Depreciation – buildings 2 200 Total administrative expenses 15 620 Finance and other expenses: Rent expense 1 150 Interest on bank loan 70 Total finance and other expenses 1 220 Total expenses 33 890 Profit before income tax 20 460 Income tax expense 7 500 PROFIT $12 960 VICTORIA LTD Statement of Changes in Equity for year ended 30 June 2019 Retained earnings at 1 July 2018 $5 000 Profit for the period 12 960 17 960 Transfer to general reserve 1 000 Retained earnings at 30 June 2019 $16 960 General reserve at 1 July 2018 4 700 Transfer from retained earnings 1 000 General reserve at 30 June 2019 $5 700 Asset replacement reserve at 1 July 2018 10 000 Asset replacement reserve at 30 June 2019 10 000 Share capital at 1 July 2018 40 000 Share capital at 30 June 2019 $40 000 VICTORIA LTD Balance Sheet as at 30 June 2019 CURRENT ASSETS Cash at Bank $6 100 Accounts Receivable 16 500 Inventory 16 000 Prepaid Rent 300 TOTAL CURRENT ASSETS $38 900 NON-CURRENT ASSETS Buildings $44 000 Accumulated Depreciation (3 200) 40 800 Motor Vehicles 10 000 Accumulated Depreciation (3 000) 7 000 Office Furniture 3 000 Accumulated Depreciation (1 600) 1 400 TOTAL NON-CURRENT ASSETS 49 200 TOTAL ASSETS 88 100 CURRENT LIABILITIES Accounts Payable 6 000 Bank Loan 1 000 Current Tax Liability 7 500 Accrued Expenses 940 TOTAL CURRENT LIABILITIES 15 440 TOTAL LIABILITIES 15 440 NET ASSETS $72 660 EQUITY: Share Capital 50 000 shares issued at $1 paid to 80c $40 000 General Reserve 5 700 Asset Replacement Reserve 10 000 Retained Earnings 16 960 TOTAL EQUITY $72 660 Case studies Decision analysis From partnership to company Fifteen years ago, John Kerr worked as a production manager for a small manufacturing firm involved in the production of metal furniture. Owing to his keen interest in woodworking, he decided at that time to begin his own business, Woodworkers Anonymous, with the aim of manufacturing dolls’ houses and other wooden toys to retail. After moderate success in this venture over a period of 5 years, he decided to form a partnership with two good friends, Alexis Thompson and James Bentley, and to branch out into the manufacture of wooden garden furniture. This partnership traded under the name of The Garden Furniture Store, even though the construction of dolls’ houses and other toys was to continue. John had a 60% interest in the partnership, and both Alexis and James had 20% interests. John took on the role of general manager in the partnership, with Alexis and James being responsible for production and sales respectively. After further success in this venture, because of John’s previous experience in the metal industry, the partners decided to expand the business into metal garden furniture and metal fencing. As part of these arrangements, they were thinking of applying to ASIC to be registered as a proprietary company. The proposed name for the new company was Relaxaquipment Pty Ltd, and each partner was to continue operating in a similar role. Before registering the company, a trial balance of the partnership was as follows. It was agreed that the fair values of all assets and liabilities were equal to their carrying amounts, and that each partner would be issued with shares in the new company, valued at $1 each, in accordance with the values of their total equity in the partnership. In order to finance expansion into metal gates and fencing, the three partners decided that the new company would need to apply for a $60 000 loan, interest payable annually at 8%, from the Western Bank, with the principal repayable over a 10-year period. They also agreed that they could ask another friend, Simone Carey, to become a member of the company by taking up shares and contributing further cash requirements of $50 000, if necessary. Before incorporation, however, they seek your advice on the following questions: • What are the advantages and disadvantages of incorporation, compared with remaining a partnership? • What is the legal relationship between the shareholders, directors and officers in a company? • What portion of the total equity belongs to each partner in the new company? Will the partners be happy with this if they expect the same profit-sharing ratio as in the partnership? • Given that it will cost $300 in legal fees to form the company, how should these legal fees be recorded in the company’s accounts? • How would the balance sheet of the company appear immediately after registering and taking up the loan from Western Bank? • How much profit before income tax and interest would the company have to earn in the first year in order to achieve a rate of return on total assets (net of depreciation) of 15%? • Assuming an income tax rate of 30% on profit, how much profit would this represent for the shareholders after interest and after tax? Ignore GST in this situation. Required (a) Answer all the questions for the three partners. (b) Should they proceed with incorporation? Are there other factors which they should consider? (a) 1. Advantages and disadvantages of incorporation: • See text. Since Kerr, Thompson and Bentley are considering forming a proprietary company, the main advantage will be that of limited liability. There may also be tax advantages depending on the profitability of the partnership and individual tax rates compared with the company tax rate. There will be no separation of owners and management in this case. They will have to comply with the Corporations Act 2001 as it applies to small proprietary companies. 2. Legal relationship between shareholders, directors and officers. See the text re administering a company. Since this is a proprietary company, the relationships are less complex. Relationships are specified in the replaceable rules of a company, which students should consult. See Section 141 of the Corporations Act as well as company law texts. Replaceable rules deal with things such as the appointment and removal of directors, their powers and remuneration, directors’ meetings, share transfers, inspection of company books. If the three partners do not like any of these rules then they can agree to set up a constitution for the company to specify rules of conduct to which they can agree. This constitution must be lodged with the ASIC as part of registering the company. It would appear from previous duties in the partnership that Kerr would be the likely choice for the dual roles of ‘chief executive officer’ and managing director. 3. Portion of total equity for each partner. Since each partner receives shares equivalent to their equity in the partnership as at 30 June 2019: Total equity = $219 844 (Kerr) + $101 463 (Thompson) + $101 468 (Bentley) = $422 775. Kerr’s share = $219 844/$422 775 = 52% Thompson’s share = $101 463/$422 775 = 24% Bentley’s share = $101 468/$422 775 = 24% Hence, Kerr would not receive the same proportion of profits as in the past (60%), and Thompson and Bentley would receive a greater proportion than previously (20% each). Kerr may desire, therefore, a greater salary entitlement in the company as its chief executive officer to compensate for this. If Carey also takes up shares in the new company and contributes $50 000 in cash, the total equity on formation of the company will rise to $472 775, and their respective interests in the company will become: Kerr 46.5% Thompson 21.5% Bentley 21.5% Carey 10.5% Kerr’s interest is further diluted by the introduction of Carey. Have Kerr, Thompson and Bentley considered a valuation for goodwill before the establishment of the company? 4. Treatment of legal fees. See text for a discussion of the treatment of formation costs. 5. Balance sheet. The balance sheet of the company is prepared after taking up the loan from Western Bank but excluding the potential shareholder, Carey. THE GARDEN FURNITURE STORE Balance Sheet as at 30 June 2019 CURRENT ASSETS Cash at bank $80 250 Accounts receivable 43 650 Inventory 71 250 Prepaid insurance 1 500 TOTAL CURRENT ASSETS 196 650 NON-CURRENT ASSETS Land 45 000 Building 187 500 Equipment 120 000 TOTAL NON-CURRENT ASSETS 352 500 TOTAL ASSETS $549 150 CURRENT LIABILITIES Accounts payable 63 750 Accrued expenses 2 625 TOTAL CURRENT LIABILITIES 66 375 NON-CURRENT LIABILITIES Bank loan from Western Bank 60 000 TOTAL NON-CURRENT LIABILITIES 60 000 TOTAL LIABILITIES $126 375 NET ASSETS $422 775 EQUITY Share capital 219 844 ordinary shares fully paid to Kerr 219 844 101 463 ordinary shares fully paid to Thompson 101 463 101 468 ordinary shares fully paid to Bentley 101 468 TOTAL EQUITY $422 775 6. Required profit to earn a rate of return on assets of 15%. Excluding Carey Including Carey Profit after tax and interest = 15% of $549 150 $82 373 = 15% of $599 150 $89 873 Profit before tax = Profit/0.70 117 676 128 390 Interest = 8% of $60 000 4 800 4 800 Profit before tax and interest = Profit + $4 800 $122 476 $133 190 7. Profit for shareholders after interest and tax. See the above calculation for the amounts of $82 373 (excluding Carey) and $89 873 (including Carey). (b) There are other factors to be considered before making a decision to incorporate. For example, study future economic prospects for this business and for the economy as a whole; study the likelihood of stable supply of raw materials especially for metal gates and fencing; examine activities such as pricing policies of competitors if this company enters the market; examine the working relationships between the future managers of the business; determine whether goodwill exists between old partners prior to admitting Carey as a shareholder into the proprietary company. Get students to consider other aspects. Critical thinking Accounting for a donation Recyclers Ltd was formed for the purpose of collecting and recycling household garbage in Australia’s capital cities. The company has been in operation for 5 years and has managed to be profitable enough to survive. Nevertheless, it has come across a number of problems, especially related to the need for new technology to increase the amount of recyclable waste. Another problem has been in separating recyclable and non-recyclable material, which householders have been placing in their recycle bins. The company has been seeking financial support from the local and international community in order to carry out its research program to improve the technology of the industry. Hearing of the company’s need, the well-known environmentally conscious philanthropist, Richard Rich, decided to donate $1 000 000 to the company for the purpose of continuing its research activities. All that he asked was that the money was spent wisely, and that the company provided him with financial statements after each 6 months, showing how the money was spent and how the research was progressing. The company accepted the money gratefully and was happy to comply with Rich’s wishes; the managing director believed that Rich may be prepared to donate more money in future if technological progress could be shown to occur. When Rich’s cheque for $1 000 000 arrived, there was considerable disagreement among the accounting staff as to how this transaction should be recorded. One accountant believed that the money should be treated as revenue; another argued that it should be regarded as a type of capital account, and called ‘donated capital’. Required (a) Advise the managing director of Recyclers Ltd of the best accounting treatment. Present reasons for your answer. (a) This question deals with material which is covered in more detail in the next chapter. Nevertheless, it is useful to ‘stretch the mind a little’ and think about these issues, given limited knowledge of the conceptual framework. Refer students back to the definitions of income and assets in early chapters of the text. The question is whether donations are to be recorded as income or in a special type of equity account called ‘donated capital’. Use the conceptual framework document as a guide to the definition of income, and accounting standard AASB 1004 Contributions. Consider the definition of contributions under the standard, and refer as well to the definition of a ‘non-reciprocal transfer’. The donation received represents an increase in assets without a corresponding increase in liabilities; hence there is an increase in equity and the definition of income is satisfied. Communication and leadership Companies — online resources Assign one of the following websites to each group of 3 or more people. • www.comlaw.gov.au: Investigate the procedures that are required under the Corporations Act 2001 to establish a small proprietary company. • www.asx.com.au: Investigate information about the role of the Australian Securities Exchange in society. • www.asx.com.au: Investigate the Asx Listing Rules and what is required for a company to have its shares listed on the Australian Securities Exchange. • www.asic.gov.au: Investigate the role played by the Australian Securities and Investments Commission in regulating company behaviour. Solutions will depend on the website chosen. Financial analysis Refer to the consolidated financial statements in the latest financial report of JB Hi-Fi Limited on its website, www.jbhifi.com.au, especially the statement of changes in equity, and answer the following questions. 1. How many ordinary shares have been issued by the company at the end of the financial year? 2. Are any of the company’s issued shares not fully paid at the end of the financial year? If so, provide details. 3. Has the company issued any shares over the last two financial years? If so, provide details of those shares. 4. What is the amount of cash which has flowed to the company from share issues over the last 2 financial years (see the statement of cash flows)? 5. List the different types of reserves, and their amounts, recognised by JB Hi-Fi Limited in its consolidated statements at the end of the financial year. 6. Provide details of any movements in these reserves over the last financial year. 7. How much has been paid in dividends on all shares in the current financial year? Determine the amount of dividends recommended to shareholders at the end of the year. Based on Annual Report 2016. 1. See note 16. There are 98 947 309 fully paid ordinary shares, issued for a total price of $49 264 000. 2. See note 16. At 30 June 2016, there were no ordinary shares partly paid. 3. For the year ended 30 June 2015, 333 956 ordinary shares were issued. For the year ended 30 June 2016,a further 671 849 ordinary shares were issued. The company also bought back 291 364 shares in 2015 and 714 441 shares in 2016. 4. See the statement of cash flows. The cash from the issue of shares and options in 2016 is $5 955 000, and in 2015 were $3 125 000. 5. See note 17. The reserves in existence at the end of the reporting period on 30 June 2016 are: • equity-settled benefits • common control reserves • hedging reserves • foreign currency translation reserve. 6. Details of the nature, purpose, and movements in these reserves are found in note 17. 7. See note 4 and the statement of cash flows. In the statement, the company has paid out $93 205 000 in dividends in the current year. The details of the dividends paid during the year are all provided in note 4. Details are provided for fully franked (what does this mean?) interim dividends and final dividends paid on ordinary and preference shares during the year. The amount recommended for payment of dividends on all shares at the end of the reporting period is $36 610 000. This amount is not recognised as a liability in the company’s balance sheet [statement of financial position] as it will not become payable until 26 August 2016. Solution Manual for Accounting John Hoggett, John Medlin, Claire Beattie, Keryn Chalmers, Andreas Hellmann, Jodie Maxfield 9780730344568