Question 4 Flashcards
Record receipt of application monies
Trust Bank account
- Application account
(to record receipt of all money received during share application)
Record the allotment process
Application account
Allotment account
- Share capital
(application and allotment amounts applied to share capital)
Application account
- Allotment account
(money in application account transferred to cover allotment amount due on shares)
Trust bank account
- Allotment account
(money received for allotment amount due on shares)
Refund monies received relating to unallocated shares
Application account
- Trust bank account
(refund application monies received on unallocated shares)
Transfer remaining funds from trust bank account to operational bank account
Cash at bank
- Trust bank account
(transfer funds for issued capital from trust account to bank account)
If there are any calls in advance money received at time of application
Application Account
- Calls in advance
(being the amount received for calls in advance)
When a call is made
Calls account
- Share capital
(being the share capital for call, which has now been called)
Applying calls in advance
Calls in advance
- Call account
(being the amount received in advance for call)
Receipt of call monies
Cash at bank
- Call account
(being the monies received for call)
Recording of any calls in arrears
Calls in arrears
- Call account
(being the amount unpaid on call)
Record receipt of any calls in arrears moneys
Cash at bank
Calls in arrears
(being monies received for calls in arrears)
Cancellation of shares
Share capital
Calls in arrears
Cash - bank (cancellation cost)
Cash - bank (refund to ex- shareholder)
(being the cancellation of share capital, payment of costs and refund to ex shareholder on shares cancelled)
Forfeiture of shares and reissue at discount
Share capital
- Calls in arrears
- Forfeited shares account (liability)
(forfeit of shares and elimination of arrears owing)
Cash-bank
Forfeited shares account
Share capital
Cash bank (costs of reissue)
Cash bank (refunds)
(being the reissue of shares less discount, with costs deducted, and refund to former shareholder of the remaining balance)
Solvency Test
Made up of two parts
1. Liquidity test (short term focus of current assets exceed current liabilities)
2. Balance Sheet Test (long term focus of total assets exceed total liabilities).
Able to pay its debts as they become due in the normal course of business.
Interim dividend declared and paid (ignoring RWT)
Dividend Paid
Dividend Payable
Dividend Payable
Cash-Bank
Dividend paid with RWT
Dividends Payable
* Cash-Bank - shareholders
* Cash-Bank - paid to IRD for RWT
Recommendation to directors - proceed with proposed dividend
Does/ does not meet both parts of solvency test and therefor succeeded/failed test overall. On that basis, the directors should/not proceed with the proposed dividend.
Specifically not passing the liquidity portion of the test.
Strike price
The share price specified in a dividend election plan to establish equivalence between alternatives of dividends in cash or dividends in shares.
Meaning the strike price is the set price at which shareholders can exchange dividends for shares
Calculate Strike price
= (3.84 + 3.93 + 3.90) / 3 = $3.89
= $3.89 x 97% = $3.7733 strike price
Calculate the number of shares that you will receive under the dividend election plan
a. Net dividends that will be taken as dividends
Total dividends = 2,000,000 x $0.05 = $100,000
Share election dividends = $100,000 x 85% = $85,000
Net dividends = $85,000 – ($85,000 x 0.28) = $61,200
b. Calculate the number of shares received = dollar value of net dividends ÷ strike price
= $61,200 / 3.7733
= 16,219 shares
Shareholders VS Stakeholders
Shareholders own shares in a company.
Stakeholders is a far more general term, which covers anyone who has an interest in the company’s activities (including shareholders).
Ordinary shares VS Preference shares.
Ordinary shares are normal shares with normal voting rights and normal rights on distribution of assets when a company is wound up.
Preference shares confer some degree of benefit over ordinary shares. For example, they may have preferential dividends, meaning the preferential shareholders are paid their dividends in full before ordinary shareholders are paid any dividends.
Application for shares VS Allotment of shares
Application for shares means the process of a potential investor sending in money, requesting a company to issue the investor with new shares.
Allotment of shares means the process of a company then issuing new shares to the investors.
Calls in advance VS Calls in arrears
Calls in advance are monetary amounts sent in to pay on partly paid shares before the company has requested for payment. These amounts are held by the company on the shareholders’ behalf; a liability of the company.
Calls in arrears are unpaid monetary amounts on partly paid shares issued which the company has requested (called) for payment; an asset of the company.
Dividends vs Dividend election plan
Dividends are distributions by a company to its shareholders, normally in cash.
A dividend election plan gives the shareholders an option to receive their dividends as either cash or as new shares issued in the company. The shareholder elects (chooses) which option he/she prefers.
Benefits of a share split
Lower-priced shares can attract a wider range of investors due to affordability, potentially increasing their tradability and boosting their market price.
Additionally, if a share split is perceived positively by the market as a sign of company growth, it can further elevate the share price and long-term market capitalisation
Share repurchase
- Agreement between shareholder and company is required.
- The solvency test must always be applied
- Only applies to ordinary shares
Share redemption
A separate class of shares needs to be created
Once the transaction is complete shares must be cancelled
In some cases, the shareholder can force this transaction
Share Bonus issue pros
- Directors do not need to apply the solvency test in order to make bonus issue to shareholders.
- Depending on how the bonus issue is funded it can be a tax-free distribution.
- It is a non-cash distribution to shareholders, so it doesn’t diminish Tobruk’s current cashflow.
Share Bonus issue cons
- The shareholder may not perceive the bonus issue positively as they aren’t receiving a cash distribution.
- Administration costs related to the bonus issue.
- Uncertainty around how the market will perceive the bonus issue – so the share price could be negatively affected (or positively).
Strike price VS Share price
Strike price is the price specified in a dividend election plan to ensure dividends received in shares equate to dividends received in cash.
Share price is the price of shares in the open market; for example, on the NZX.
Call option VS Put option
A call option is an option to buy a set number of shares at a set (future) date at a set price, whereas a put option is an option to sell a set number of shares at a set (future) date at a set price.
Share Split Pros
- done because the share price is too high, and this discourages trading in shares
- Lower the share price = shares more tradeable
- Suggests that a company is doing well
- No cash is transferred, so no solvency test is necessary
- No journal entries are necessary
Share Split cons
Administrative costs (communicated/approved by shareholders)
Share consolidation Pro
1.increase the share price per share.
2.A more meaningful value per share will also tend to make some shares more tradeable,
3.No cash is transferred, so no solvency test is necessary
4.No journal entries are necessary
Share Consolidation Cons
- Administrative costs, will need to be communicated to and approved by shareholders.
- A share consolidation suggests that a company is not doing well; remember it is a consequence of a very low share price; it may signal to share traders to avoid the shares
Bonus Share Issue J
Cash at bank
- Land
-ARR
ARR
- Share capital
record sale and realise capital gain / record bonus 1: 3 of 10,000 s
Repurchase of shares RE approach
JE:
Share capital
Retained earnings
* Cash at bank
Equity section:
Share capital
ARR
RE
Total equity
Repurchase of shares RRA
JE:
Share capital
Repurchase reserve
* Cash at bank
Equity section
Share capital
ARR
(Repurchase reserve)
RE
