Limited Company

Question 1

[LC] Definiton of Limited Company

Answer 1

An organisation owned by its shareholders,
whose liability is limited to its share capital.

Question 2

[LC] Compare Limited Companies and sole trader, partnership.

Answer 2

• all shareholders have limited liability.
• limited companies pay corporation tax on profits.
• shareholders delegate the running of the company to the directors, who are elected by shareholders.

Question 3

[LC] Advantages of Limited Companies

Answer 3

• Separate legal entity/limited liability.
  In the case of a company being wound up, the shareholders are not be held personally liable for the company debts.
• Access to more capital and expertise, allows for future expansion and investment of the business. Issue of shares/debentures.
• Easier to change ownership through shares.
• The death of shareholder does not affect the legal existence of company.

Question 4

[LC] Disadvantages of Limited Companies.

Answer 4

• Highly regulated, in the matters of financial reporting and auditing. Annual accounts must be professionally audited and published.
• More complex and expensive to set up.
  More paperwork and higher accountancy costs.
• Separation of ownership and control.
  Not all shareholders may take part in running the business.

Question 5

[LC] Compare between ‘Ordinary Share Capital’ and ‘Preference Share Capital’.

Answer 5

OSC
- Most common.
- Entitled to attend meeting and vote (more control).
- Share of profit in form of dividends.
- Variable dividend (depnd on level of profit).
- Last to be repaid their share of capital.

PSC [taken out of syllabus]
- Uncommon.
- No voting rights (less control).
- Fixed dividends.
- Entitled to receive repayment of capital after creditors (receive dividend before ordinary share).

Question 6

[LC] Ordinary Share Capital

Answer 6

• Rights to the ownership of the business.
• The share capital of a company being split into small units.
• Issued to increase capital (raise funds) for the company.
• Have a nominal value/ face/ par value.

Question 7

[LC] Issuance of Ordinary Shares (terms)

Answer 7

1. Authorised share capital:
   Maximum number of shares that can be issued under limited company’s constitution.
2. Issued share capital:
   Amount of share capital that the company that have been issued to shareholders, which cannot exceed the authorised amount.
3. Called-up capital:
   Money required to be paid by shareholders immediately.
4. Uncalled capital:
   Any amount of share capital not yet called up by the company.
5. Paid-up capital:
   Money received from shareholders on the called-up capital.
6. Calls in advance:
   Money received from shareholders who have paid calls before they are due.
7. Calls in arrears:
   Money due from shareholders who are late in paying their calls.
8. Forfeited shares:
   Shares that shareholders have forfeited because they have failed to pay their calls. The shares may be reissued to other shareholders.

Question 8

[LC] Issuance of Ordinary Shares (Dr Cr)

Answer 8

1. Issued at par/face value/nominal:
   Dr Bank
   Cr Ordinary Share Capital (at nominal)
2. Share premium:
   - Higher than nominal.
   - Issue price - Nominal = Share premium
   - Share premium = Capital reserve.
   - Dr Bank, Cr Ordinary share capital & Share premium

Question 9

[LC] Dividends

Answer 9

• The amount given to shareholders as their share of the profits of the company.
• No drawings anymore.
• Dividends = $0.02 x No. of issued shares
• Dr Dividends paid, Cr Bank

END OF YEAR, MUST CLOSE DIVIDENDS ACCOUNT.
- Dr Retained earnings, Cr Dividends paid

• Interim & Final Dividends

Question 10

[LC] Proposed Dividends: IAS 10 (Events after the reporting period)

Answer 10

• Only dividends paid DURING THE YEAR are included in the financial statements (shown as deductions in equity).

• The proposed final dividend is subject to APPROVAL OF THE SHAREHOLDERS at the AGM.

• NO LIABILITY is included in the financial statements in respect of the proposed final dividend.

Question 11

[LC] Revenue Reserve

Answer 11

• PROFITS arising from trading activities that have NOT been distributed to shareholders.
• Most flexible form of reserves.

Question 12

[LC] Types of revenue reserve

Answer 12

1. General Reserve
   - Retained earnings kept aside to meet future needs.
   - A bookkeeping adjustments, NOT an actual movement of cash.
   - Dr Retained earnings, Cr General reserve
2. Retained Earnings
   (Opening balance
   + Profit for the year
   - Dividend paid
   - Transfer to other reserves
   Closing )

Question 13

[LC] Capital Reserve

Answer 13

• Gains that arises from non-trading activities.

• NOT available for distribution to the shareholders in the form of dividends.

Question 14

[LC] Types of capital reserve

Answer 14

1. Share premium
   • To pay up unissued shares to existing ordinary shareholders
   as fully paid-up bonus shares.

• To write off any expenses incurred (commission payable) in an issue of shares.

• To provide any premium payable on the redemption of shares or debentures.

• To write off preliminary expenses incurred in the formation of a company.

2. Revaluation Reserve
   • Arises when non-current assets are revalued at an amount GREATER than their current net book value.

• It is an unrealised gain and may not be credited to the
statement of profit or loss.

Question 15

[LC] Revaluation Reserve

Answer 15

• To ensure that the CARRYING AMOUNT does not differ materially from the FAIR VALUE of the asset at the date of the SOFP.

1) Revaluation Gain (Take the difference between fair value & NBV)
- Close the provision account
[Dr Provision for depreciation, NCA, Cr Revaluation reserve]