Semester 2 Week 6 Tutorial 5 Flashcards
Briefly describe, in your own words, what equity is.
Equity or capital represents the ownership of a company. It is, in essence, the ownership of the remaining assets of the company after all liabilities have been paid off.
Lidington Limited currently has ordinary shares with a nominal value of £0.25p each
a. Prepare the journal for the issue of 10,000 shares at nominal value for cash.
b. Prepare the journal for the issue of 10,000 shares at £1.50 cash each.
c. One director wishes to issue 5,000 shares to a key investor at a “special price” of 10p each. Is this possible?
d. Three years ago 4,000 shares were issued to Mr Bruce at £1 each. This year Mr Bruce sold them to Ms MacDonald for £1.35 each. How would Lidinton Limited account for this?
Outline the two main types of shares and the differences between them.
The two main types of shares are ordinary shares and preference shares. Ordinary shareholders are usually entitled to a vote in how the company is run, could receive an unlimited dividend, but rank last in order of payment.
Preference shareholders usually receive a fixed dividend and have to be paid that before any ordinary dividend can be paid but they do not usually have the right to a vote, nor will the dividend usually increase if the company performs well. They do, however, rank above ordinary shareholders in terms of payments – amounts due to preference shareholders must be paid before any payment can be made to ordinary shareholders.
Greenbank Plc. has £5,000,000 of share capital consisting of ordinary shares with a nominal value of 20p each. Greenbank has declared a dividend of 5p per share. Prepare the journal to account for the payment of this dividend.
Crow Plc. has ordinary shares with a nominal value of 50p each. Share capital is currently £600,000 and share premium £450,000. Crow Plc. undertakes a 1-for-4 bonus issue from retained earnings.
a. Prepare the journal to account for the bonus issue.
b. Why might Crow Plc. undertake a bonus issue?
What are pre-emption rights?
Pre-emption rights mean that if new shares are issued they have to be offered first of all to existing shareholders in proportion to their current shareholdings. This ensures that a shareholder’s holding is not diluted.
Fairburn Plc. currently have share capital of 750,000 shares with a nominal value of 25p each. Shares are currently trading on the open market at £3.35 per share. They undertake a 1-for-3 rights issue based on a price of £1.45 per share. 75% of shareholders take on this rights issue.
a. Showing workings, prepare the journal to account for the rights issue.
b. Why might Fairburn Plc. have carried out a rights issue?
Outline the three models of capital maintenance.
The three models of capital maintenance are:
Financial maintenance: Looking at the movement in equity purely in currency terms.
Real financial maintenance: Looking at the movement in equity in currency terms, adjusted for inflation.
Physical capital maintenance: Looking at the company’s production capacity.
At 1 January 20X5 Batavia Ltd. has retained earnings of £1,750,000, issued share capital of 2,000,000 shares with a nominal value of 50p each and share premium of £700,000.
During the year to 31 December 20X5 Batavia made a profit after tax of £650,000, and paid out dividends of £500,000. On 1 June 20X5 an issue of 100,000 shares at £1.25 each was made.
Prepare the statement of changes in equity for the year to 31 December 20X5.
