13: Company financial statements and associated matters

Question 1

What are the three main differences between the financial statments of a company and those of a sole trader? (3)

Answer 1

• How profit is dealt with in the profit and loss account
• The composition of ‘Capital’ in the balance sheet
• Statutory requirements

Question 2

When is corporation tax payable?

Answer 2

Either:

• 9 months after the year end; or
• instalments for large companies

Question 3

What is the double entry for the corporation tax charge?

and

What is the double entry in the next year, when the tax is actually paid?

Answer 3

Dr Corporation tax charge (PnL)
Cr Corporation tax creditor (B/S liability)

Dr Corporation tax creditor
Cr Bank

Question 4

Where are Revaluations accounted for? Think more specifically/ which income statement…

Answer 4

In the statement of other comprehensive income

Question 5

What are the titles of the financial statements if a two statement approach is used and if a one statment approach is used?

Answer 5

Two statement approach:

• income statement
• statement of other comprehensive income

One statement approach:
- statment of comprehensive income

Question 6

What is the double entry for a shareholder withdrawing dividends

Answer 6

Dr Drawings

Cr Bank

Question 7

What is the double entry for an interim dividend?

Answer 7

Dr Profit and loss reserves (balance sheet)

Cr Bank

Question 8

Why would there generally be two dividend amounts in the profit and loss reserves on the B/S?

Answer 8

One for the final dividend from the previous year and one for the interim dividend from the current year.

Question 9

A company may have a third financial statment relating to equity - what might this be called?

Answer 9

Statement of Changes in Equity

This reconciles the opening and closing shareholders’ funds and would show the movement on the profit and loss reserve due to both dividends paid and profits retained.

Question 10

Advantages of trading as a company over a sole trader (4)

Answer 10

1. Shareholders have limited liability to the share that they own. They will only be liable to pay debts to the proportion of shares they own. Whereas sole trader will be personally liable to repay all debts of the business
2. Shareholders receive dividends without having to do day to day work
3. More likely to achieve business loans
4. A company can continue if a shareholder dies

Question 11

Disadvantages of trading as a company over a sole trader (3)

Answer 11

1. Companies will require an audit over their financial statements and will therefore be required to pay auditor’s fees unless it is ‘small’ and exempt
2. A company will have to prepare financial accounts to the format by regulations.
3. Greater administrative burden for a company than that of a sole trader. For example, have to prepare financial statements for Registrar of companies and hold AGMs

Question 12

What is the main difference between ordinary shares and preference shares?

Answer 12

The main difference is that the reward of the ordinary shareholders will be geared toward the performance of the company, whereas those holding preference shares will have a fixed entitlement

Question 13

What are ordinary shares also called?

Answer 13

Equity shares

Question 14

What are preference shares?

Answer 14

Preference shares essentially mean that they will have priority to ordinary shares in receiving a dividend.

Question 15

Enterprise Ltd makes an issue of 10,000 £1 ordinary shraes for £1.60 each. What is the double entry for this transaction? (Hint: remember share capital vs share premium account)

Answer 15

Dr Bank £16,000

Cr Share capital a/c £10,000
Cr Share premium a/c £6,000

(Share sold at premium, 0.60 per share premium)

Question 16

What is the double entry to transfer the profits for the year into the reserves? (Hint: PnL to BS)

Answer 16

Dr Profit and loss a/c

Cr Profit and loss reserves a/c

Question 17

What is the definition of shareholders’ funds?

Answer 17

Share capital + reserves

Question 18

Write two ways a company can raise capital

Answer 18

1. Issuing of new ordinary shares

2. Repayable bank loan

Question 19

What is the double entry for a bonus issue of shares?

Answer 19

Dr Profit and loss reserve a/c

Cr Ordinary share capital a/c

Question 20

What are the double entries for receiveing a debenture and paying regular interest

Answer 20

Dr Bank
Cr Long term creditor

then

Dr Loan interest expense
Cr Bank

Question 21

What are the three options available to a shareholder who is offered a rights issue?

Answer 21

• Take up the rights and pay the required amount to the company, increase their shareholding
• Sell their rights to a third party who may then subscribe for the shares from the company
• Do nothing and let their rights lapse

Question 22

Which one of the following is NOT true?

• A company’s issued share capital must be included in its statement of financial position
• If a company makes a bonus issue of ordinary shares, total shareholders’ funds will not increase
• A company’s statement of changes of equity must include the proceeds of any shares issued during the period
• All companies must make the same disclosures in notes to the financial statements

Answer 22

All companies must make the same disclosures in notes to the financial statements

Companies are different, so are likely to make different disclosures. Micro entities in particular are entitles to make reduced disclosures.

Question 23

What is the double entry for receiving patent royalties?

Answer 23

Dr Bank (Net)
Dr Income tax control a/c (Income tax amt)
Cr Patent royalties income (Gross)

Question 24

What is the double entry for paying debenture interest?

Answer 24

Dr Debenture interest expense (Gross)
Cr Bank (Net)
Cr Income tax control a/c (Income tax amount)