Business Accounts

Question 1

Payment of Final Dividend

Answer 1

FINAL DIVIDEND

• proposed by directors; must be declared by O.R. - then paid
• only becomes a debt enforceable by the shareolders once it is declared - so a proposed dividend will NOT appear on accounts (Note only)
• Declared dividend:
  > In the Analysis of the Profit and Loss
  Account Reserve, will be a deduction
  (thereby reducing Retained Earnings)> if declared but not yet paid, will appear
  in top half as Creditors falling due
  within 1 year (as an enforceable debt)> if paid during the year - will be shown
  by deducion from Analysis of Profit and
  Loss Account Reserve (thereby reducing
  Retained Earnings), and in the top half,
  cash at bank will be reduced (current
  assets, as these were used to pay the
  dividend).

Note, once declared, will then need board resolution to be paid.

Question 2

Payment of Interim Dividend

Answer 2

Interim Dividends can be paid by board resolution, without the need for an O.R.
(MA 30)

As board resolution can be rescinded, its NOT a debt enforceable by the shareholders.

Thus, only reflected in accounts if actually paid!

Treated the same as final dividends that have been paid:

• Cash at bank (current assets) down
• Retained earnings down

Question 3

Share issue

Answer 3

• Called up share capital - UP (nominal value)
• Share Premium Account - UP (if applicable)
• Cash - UP

Question 4

Revaulation of property

Answer 4

Revaluation reserve created when company directors wish to show more up to date values for fixed assets.

• Fixed assets net book value - UP
• Revaluation Reserve - create and add amount of increase

Question 5

Bonus issue

Answer 5

Bonus issue (AKA scrip issue or capitalsiation issue) = when company decides to convert some of its P+L reserves into share capital, by issuing fully paid shares to existing shareholders, pro rata, for no consideration

Can fund from reserves, including Share Premium Account.
NOTE: COMPANY WILL USUALLY PREFER TO DO OUT OF SHARE PREMIUM ACCOUNT IF IT HAS SUFFICEINT FUNDS - BECAUSE THIS IS ONE OF THE FEW SITUATIONS IN WHICH A COMPANY IS ACTUALLY PERMITTED TO USE ITS SHARE PREMIUM ACCOUNT - s.610 (3) CA

Top half of Balance Sheet unchanged - as no new money coming in!

Bottom half:

• Called up share capital (nominal value) will increase (as new shares now in issue)
• Will be balanced by decreased in the reserve from which it is funded (either Retained Earnings of Share Premium Account)

Thus, the net assets figure will actually remain the same.
Have not changed Total Capital - only changes its composition.