Business Accounts and Debt finance mcps Flashcards
A company takes advice on an employment dispute and incurs legal fees of £5,000 but has not yet been invoiced for that work by the end of its financial year. The company’s business accounts for the said financial year are being drawn up.
Which of the following statements is correct?
The legal fees are a prepayment and if not reflected in the business accounts then the company’s profits will by understated by £5,000.
The legal fees are a prepayment and if not reflected in the business accounts then the company’s assets will be overstated by £5,000 in the balance sheet.
The legal fees are an accrual and if not reflected in the business accounts then the company’s assets will be understated by £5,000 in the balance sheet.
The legal fees are an accrual and if not reflected in the business accounts then the company’s assets will be overstated by £5,000 in the balance sheet.
The balance sheet will not balance owing to the sum of £5,000 having not been paid yet.
The legal fees are an accrual and if not reflected in the business accounts then the company’s assets will be overstated by £5,000 in the balance sheet.
Correct. The company has received the value of the legal advice already but has not yet paid for it. It will therefore be an accrual (as opposed to a prepayment). As the value has been received already and the company has committed to paying this sum then £5,000 has already been incurred. This needs to be reflected as a liability in the balance sheet, otherwise it would be misleading.
A company raises £200,000 through an issue of 100,000 £1 ordinary shares at a price of £2 per share fully paid in cash.
Which of the following statements best describes the effect of the share issue on the company’s balance sheet?
Cash increases by £200,000 and share capital increases by £100,000
Current assets and total equity increase by £450,000
Current assets increase by £200,000; share capital increases by £100,000 and the share premium account increases by £100,000
Net assets and total equity increase by £200,000
Cash increases by £200,000; share capital increases by £100,000 and the share premium account increases by £100,000
Cash increases by £200,000; share capital increases by £100,000 and the share premium account increases by £100,000
Correct. This is correct as it describes the effect on each relevant item in the balance sheet.
A company raises £800,000 by way of a 3-year term loan and uses these funds to purchase some new machinery at a cost of £800,000.
Which of the following statements describes the net impact of these transactions on the company’s Balance Sheet?
Increase in current liabilities by £800,000; no change on cash/cash equivalents; increase in non-current assets by £800,000; no change in Net Asset Value.
Increase in non-current liabilities by £800,000; increase in cash/cash equivalents by £800,000; increase in non-current assets by £800,000; increase in Net Asset Value by £800,000.
Increase in non-current liabilities by £800,000; decrease in cash/cash equivalents by £800,000; increase in non-current assets by £800,000; decrease in Net Asset Value by £800,000.
Increase in current liabilities by £800,000; no change on cash/cash equivalents; increase in current assets by £800,000; no change in Net Asset Value.
Increase in non-current liabilities by £800,000; no change on cash/cash equivalents; increase in non-current assets by £800,000; no change in Net Asset Value.
Increase in non-current liabilities by £800,000; no change on cash/cash equivalents; increase in non-current assets by £800,000; no change in Net Asset Value.
Correct. The first transaction – taking out the loan increases the non-current liabilities by £800,000 and increases the cash and cash equivalents by £800,000. The second transaction – purchase of machinery increases the non-current assets by £800,000 and reduces the cash and cash equivalents by £800,000. The net effect of both transactions is no change to the cash and cash equivalents or to the Net Asset Value.
A private limited company runs a car dealership and is seeking to borrow £1,000,000 by way of a loan from a bank. The bank is considering the security that it should consider taking from the company to secure the loan. The most valuable category of assets owned by the company is the vehicles which it has for sale on its forecourt.
What would be the most appropriate form of security interest for the bank to take over the vehicles?
A fixed charge because the vehicles are a type of permanent asset.
A charge by way of legal mortgage because the vehicles are a type of property.
A pledge, because this is the most secure form of security the bank can take.
A floating charge because the vehicles are a type of fluctuating asset.
A debenture because this is the most comprehensive form of security the bank can take.
A floating charge because the vehicles are a type of fluctuating asset.
Correct. This answer reflects the most appropriate answer. Whilst the other answer options might sound plausible, they are each incorrect. The vehicles represent fluctuating assets in this scenario (as they are the stock of the company) in relation to which a floating charge is the most appropriate security that the bank could take. A pledge, whilst possible as a form of security, is not appropriate as it would involve the as sets being physically transferred to the bank which due to their size and number and the fact that the company would then not be able to sell them would be inappropriate. Whilst vehicles can sometimes be considered a permanent asset, in this case they represent the stock of the company. As the vehicles are therefore a fluctuating assets the company needs to be able to freely dispose of them and so are not appropriate for a fixed charge. Whilst a debenture does contain comprehensive security interests, a debenture in itself is not a form of security interest. A charge by way of legal mortgage is only appropriate as a form of security over land.
A private company incorporated in 2016 with unamended Model Articles wishes to raise money for working capital purposes by borrowing from a bank. The bank will take security for the loan over the company’s assets. No changes have been made to the company’s articles since incorporation.
Which of the following best describes the procedure to be followed to ensure the bank has effective security?
The security document will need to be registered at Companies House within 21 days beginning with the day after the date of creation of the security.
The security document will need to be registered at Companies House within 21 days from the date of creation of the security.
The loan agreement will need to be registered at Companies House within 21 days beginning with the day after the date of signing of the loan agreement.
The company is unable to grant security for this loan as it would breach the financial assistance rules.
The company will need to approve the granting of security in respect of the loan to the bank by shareholder resolution.
The security document will need to be registered at Companies House within 21 days beginning with the day after the date of creation of the security
Correct. This reflects the position under s 859A(4) CA 2006. The loan agreement will contain commercially sensitive information so will not be registered at Companies House. A shareholder resolution to approve the grant of security is only required if the constitution of the company requires it. This company was incorporated in 2016 with model articles (which have not been changed) so no requirement for shareholder approval applies.
Question 1
A private company has the Model Articles of Association with no amendments. The company
proposes to borrow £500,000 from a bank. The loan agreement will be signed as a contract
by the company. The company does not have a company seal or a company secretary.
Which of the following best describes the minimum execution formalities required in
order for the loan agreement to be binding on the company?
A The loan agreement must be signed by two directors, whose signatures must be
witnessed.
B The loan agreement must be signed by the company by a person acting under its
authority express or implied.
C The loan agreement must be signed by two authorised signatories, whose signatures
must be witnessed.
D The loan agreement must be signed by two directors or one director in the presence of
a witness who attests the director’s signature.
E The loan agreement must be signed by the company by two directors acting under its
authority express or implied.
Answer
Option B is correct. This is the minimum required for a contract as set out in s 43 CA
2006. The other options involve two signatories or one signatory and a witness, which is
unnecessary for a contract.
Question 2
A bank has loaned money to a company on two occasions, and both times requested
a charge over the company’s assets. The company has also granted security to another
lender, a building society. Details of the security are set out below:
1 May 2019: The bank lent the company £250,000, secured by way of a fixed charge over
the company’s factory. The charge was not registered.
1 June 2020: The bank extended the company’s overdraft facility. In return, the company
executed a debenture in favour of the bank in which it granted it a floating charge over the
company’s whole undertaking, to secure all monies outstanding to the bank at any time.
The charge was correctly registered at Companies House.
20 January 2022: The building society was granted a fixed charge over the company’s factory
to secure a loan of £50,000. The charge was correctly registered at Companies House.
Will the building society’s charge take priority over the bank’s charges?
A Yes, because it was correctly registered at Companies House and the bank’s charges
were not.
B Yes, because the bank’s fixed charge is void and the building society’s charge,
because it is fixed, takes priority over the bank’s floating charge.
C No, because the bank’s second charge secures all monies outstanding to the bank at
any time and was created before the building society’s charge, so the bank will take
priority.
D No, because the bank’s charges were created first and one of them was registered so
the building society’s charge must take second place to the bank’s charges.
E No, because the bank’s second charge secures all monies outstanding to the bank at
any time and therefore the bank will take priority
Answer
Option B is correct. If a charge is not registered, it is still valid and enforceable between
the chargor and chargee, but void against the liquidator and third parties. Fixed charges
always rank ahead of floating charges, even if the floating charge was registered first.
Fixed charges rank in order of date of creation, as long as they are registered.
Question 3
A company has the Model Articles of Association with no amendments and an issued share
capital of £100,000 ordinary £1 shares. There are two shareholders, a woman and a man.
The woman owns 50,001 shares and the man, with whom the woman sometimes has a
difficult working relationship, owns 49,999 shares. The company is seeking finance – it needs
£200,000 to expand its business (the import and distribution of road bikes). The company will
either borrow the money or issue 50,000 new shares to the man’s wife for £200,000.
Which of the following best describes which is the better option in this case?
A A loan would be better because interest rates are currently low.
B A loan would be better because allotting more shares would make it difficult for the
woman to pass or block ordinary resolutions.
C A loan would be better because allotting more shares would make it more difficult for
the woman to pass special resolutions.
D Allotting more shares would be better because the company will not have to pay
interest.
E Allotting more shares to the man’s wife would be better because the current
shareholders already know her.
Answer
Option B is correct. Currently the woman can block and pass ordinary resolutions alone,
because she has 50.001% of the shares. The allotment of more shares would dilute her
voting power to less than 50% of the shares, so she could neither pass nor block an ordinary
resolution without either the man or his wife voting in the same way. Option C is wrong
because she will not be able to pass special resolutions alone after the allotment but cannot
do so before the allotment either. Options A, D and E sounds plausible but these are weak
arguments compared with option B.
Question 1
The following information is from the accounts of a business:
* Sales 150,000
* Fixed assets 100,000
* Cost of sales 50,000
* Current assets 22,000
* Current liabilities 10,000
* Long- term liabilities 53,000
* Capital employed 59,000
Which of the following best describes the value of the business’s net current assets and
net assets?
A The business’s net current assets are 12,000 and its net assets are 59,000.
B The business’s net current assets are 12,000 and its net assets are 118,000.
C The business’s net current assets are 112,000 and its net assets are 118,000.
D The business’s net current assets are 122,000 and its net assets are 12,000.
E The business’s net current assets are 40,000 and its net assets are 59,000.
Answer
Option A is correct. Net current assets are calculated by subtracting current liabilities from
current assets, so the calculation is 22,000 – 10,000, resulting in a figure of £12,000 for net
current assets. Net assets are calculated by subtracting both current and long- term liabilities
from fixed and current assets. The calculation is (100,000 + 22,000) less (10,000 + 53,000), that
is, 122,000 – 63,000, resulting in a net assets figure of 59,000.
Question 2
A client, which is a partnership, gives you the following information about its business over
the course of the financial year:
(a) It has a trading profit of £200,000; and
(b) The client has received an electricity bill for £500 but has not yet paid it.
Which of the following best describes where the figures listed in (a) and (b) above will
appear on the client’s balance sheet and/ or profit and loss account?
A Item (a) will appear on both the profit and loss account and on the balance sheet, and
item (b) will appear on the balance sheet as an accrual.
B Item (a) will appear on both the profit and loss account and on the balance sheet, and
item (b) will appear on the balance sheet as a prepayment.
C Item (a) will appear on the balance sheet as income, and item (b) will appear on the
profit and loss account as an expense.
D Item (a) will appear on the balance sheet as income, and item (b) will appear on the
balance sheet as an expense.
E Both items will appear on both the profit and loss account and balance sheet.
Answer
Option A is correct. Trading profit is shown at the end of the profit and loss account – this
is what the profit and loss account is designed to calculate. It is also shown on the balance
sheet under ‘capital employed’. The bill will be shown as an accrual on the balance sheet
because it has been received but not yet paid.
Question 2
A company created a floating charge over all its assets in favour of a trade supplier, as security for sums due from time to time.
Five years later, the same company entered into a debenture with a bank, creating a floating charge over all the assets of the company, as security for a loan from the bank.
The trade supplier’s charge was not registered at Companies House. However, before the debenture was signed, the company notified the bank that the trade supplier already held a valid floating charge over the company’s assets. The debenture was duly executed, and was immediately registered at Companies House. The company went into administration ten months after entering into the debenture, with outstanding sums due and unpaid both to the trade supplier and to the bank.
Which creditor of the company has a prior claim to the company’s assets?
A. The bank, because the trade supplier’s failure to register its charge makes the charge void against the company.
B. The trade supplier, because the bank had actual notice of the existence of the trade supplier’s charge.
C. The bank, because the trade supplier’s failure to register its charge makes the charge void against the administrator and the bank.
D. The trade supplier, because the bank’s charge was created less than 12 months before the company went into administration.
E. The trade supplier, because the priority of floating charges is determined solely according to their dates of creation.
C - The bank, because the trade supplier’s failure to register its charge makes the charge void against the administrator and the bank.
Question 26
A company has created a fixed charge in favour of its bank over machinery owned by the company and used in the company’s factory. The company is solvent. The fixed charge has been correctly registered at Companies House. The company now wishes to sell some of the machinery and seeks legal advice on how to proceed.
What advice should the company receive in relation to the sale of the machinery?
A. The company can proceed to sell the machinery freely because the charge has not yet crystallised.
B. The company can only sell the machinery if it does so with the consent of the bank as chargeholder.
C. The company can only sell the machinery if the bank is a party to the sale because the bank has legal title to the machinery.
D. The company can only sell the machinery with the consent of its unsecured creditors.
E. The company can proceed to sell the machinery once it has registered the sale at Companies House.
B - The company can only sell the machinery if it does so with the consent of the bank as chargeholder.
A private company runs a business selling commercial vehicles. It is seeking to borrow £250,000 by way of a loan from a bank for expansion purposes. The bank is considering the security that it should consider taking from the company to secure the loan. The most valuable category of assets owned by the company is the vehicles which it has for sale.
What would be the most appropriate form of security interest for the bank to take over the vehicles?
Select one alternative:
A pledge.
A lien.
A floating charge.
A charge by way of legal mortgage.
A fixed charge.
A floating charge.
This is a BLP question. The vehicles represent fluctuating assets in this scenario (as they are the stock of the company) therefore a floating charge is the most appropriate security that the bank could take.
Your client sets up a restaurant business and introduces capital of £10,000. The business then obtains a long term loan of £6,000 to purchase fixed assets. After these transactions, which of the following is the net asset value figure for the business?
* (£6,000)
* £10,000
* £6,000
* £4,000
* £16,000
- £10,000
Correct
Correct. Each transaction will have a dual effect on the balance sheet. On the top part of the balance sheet, the injection of £10,000 of capital would increase the cash assets of the business by £10,000. Cash is a current asset in the top part. The £10,000 also represents an increase in the capital which is recorded in the bottom part of the balance sheet.
The loan of £6,000 to purchase fixed assets will increase the value of the fixed assets of the business by £6,000 in the top part of the balance sheet. However, there is a corresponding £6,000 liability as the business has an obligation to repay the loan. There is no effect on the bottom part of the balance sheet.
After both transactions, on the top part of the balance sheet, the total assets (£10,000 cash and £6,000 fixed assets) will be £16,000, but as there is also a long term liability of £6,000, the net asset value will be £10,000. On the bottom part of the balance sheet, there will be the initial £10,000 injection of capital. The bottom and top parts of the balance sheet will balance.
The following is an extract of the trial balance of a sole trader
Vehicles, at cost - £50,000
Provision for depreciation, vehicles - £8,000
The sole trader has decided that the vehicles should be depreciated at 20% per annum using the reducing balance method.
What would the depreciation charge for the year be?
* £18,000
* £33,600
* £10,000
* £8,400
* £16,400
- £8,400
Correct
Correct. Since the reducing balance method is used, the provision of £8,000 for depreciation needs to be deducted from the cost figure of £50,000 to give £42,000 as the written down value for the start of the year. The depreciation charge of 20% should then be applied to the £42,000 to give a charge for depreciation for the year of £8,400.
