Capital and Reserves

Question 1

Whats the difference between bonus issues and rights issues

Answer 1

Bonus issues are free whereas rights issues are made at a price

Question 2

Give an example of when bonus issues are used

Answer 2

When a company has substantial undistributed profits and by using bonus issues the company is able to credit the shareholders and still keeping the undistributed profits available for use in business

Question 3

Give an example of when rights issues are used

Answer 3

Effectively a way of the company raising additional funds from its current shareholders.

Shareholders are usually offered the additional shares at a lower than the current market value

Question 4

What is a dividend and when is it paid

Answer 4

Allocation of share of profits on each share owned

Can only be paid if there are sufficient profits available

Question 5

What is the payment of moneys to shareholders called

Answer 5

Distribution

Question 6

What are the accounting entries required when a dividend is declared

Answer 6

Debit - Profit and loss account

Credit - Dividends Proposed Account

Question 7

What is an interim dividend and what are the accounting entries

Answer 7

Dividend which may be paid part way through the period
Debit - Dividends paid account
Credit - Bank

Question 8

What is a high geared company

Answer 8

Financial ratio that compares the shareholders funds to the borrowings

The higher the company is geared the bigger the risk

However this does bring greater rewards for shareholders if good profits are made. This is because the shareholders have invested relatively little and the profits are a relatively high percentage of shareholders funds

Question 9

How is debenture interest treated

Answer 9

offset against the profit and loss as interest is a business expense
credit current liabilities

Question 10

What is par value

Answer 10

Actual or stated value/Factual/Face value of a share and not the current market value

Question 11

What are the basic bookkeeping entries for par value

Answer 11

Debit bank and credit share capital

Question 12

How is the share premium shown on the balance sheet

Answer 12

Under reserves under a separate share premium account

Question 13

What are Reserves

Answer 13

Reserves are part of the companys capital and must be shown in the balance sheet

Question 14

What are the two main types of reserves

Answer 14

Statutory Reserves

Non-statutory Reserves i.e named undistributed profits

Question 15

Give examples of statutory reserves

Answer 15

Capital redemption and share premium

Question 16

Give examples of non statutory reserves

Answer 16

plant replacement, stock replacement and general reserves

Question 17

What is a debenture

Answer 17

A Debenture is a form of loan and may be secured on some or all of the assets. Debentures carry a fixed rate of interest. It is a way by which a company raises capital commonly known as Loan Capital

Question 18

Define shareholders equity

Answer 18

Issued ordinary share capital plus the reserves that represent the investment in the company by the ordinary shareholder

Question 19

What are revenue reserves

Answer 19

Retained profits or surpluses over a period of time

Question 20

What are capital reserves

Answer 20

Where certain classes of fixed assets are revalued and there is on revaluation an increase in the NBV of the asset or assets subject to revaluation