Capital Structure

Question 1

How capital is raised ?

Answer 1

Debt - repayment is due

Equity - equity holder is entitled to residual assets

Question 2

What are type of shares ?

Answer 2

Ordinary shares - no obligation to pay dividends, recognized in s. Of ch of equity

Loan notes - repaid at fixed point, annual interest paid(fin charge in P/L, it is debt in BS

Preference - redeemable (it is debt to pay, dividend is fin charge) irredeemable(no need to repay, treated as equity, dividends as normal , no title to assets

Question 3

What is DE for capital ?

Answer 3

Dr cash (issue price x no of shares
Cr share cap.(nominal value x no of shares)

Question 4

What is DE if shares are issued at premium (above nominal value)

Answer 4

Dr cash (issue price x no of shares)

Cr share cap.(nominal value x no of shares)
Cr share cap.(difference x no of shares)

Question 5

How else new shares can be issued ?

Answer 5

Rights issue - offers new shares to existing shareholders (usually at lower price) cheapest way to raise capital through shares

Bonus issue - new shares offered to shareholders for free (drives down price,evens assets with capital)
Must be funded from reserve
Ex:
Dr share premium or other reserve
Cr share capital

Question 6

What are DE for loan notes ?

Answer 6

Dr cash
Cr NCLoan

Yearly interest:
Dr fin charges
Cr cash/current liability

Question 7

What are other reserves ?

Answer 7

Retained earnings
Rev reserve

Question 8

How to record DE for income tax over 2 year period?

Answer 8

1 record estimate
Dr corp tax (P/L)
Cr corp tax (liabilities)

2 actual liability is calculated and paid after YE
Dr Tax liability
Cr cash

3 adjustment
If estimate was greater:
Dr tax liability
Cr tax P/L
If underestimate:
Dr tax P/L
Cr tax liability