Shares/Dividends

Question 1

what are ordinary shares?

Answer 1

company’s initial capital that is divided in equal size units, and given to shareholders

Question 2

what is equity share capital?

Answer 2

total capital raised

Question 3

what are dividends?

Answer 3

payment of a share of profit that’s given to shareholders

Question 4

what is the relationship b/w shares and nominal value?

Answer 4

shares are required to have nominal value by law, and all shares of the same class must have the same nominal value

Question 5

who can/can’t private (ltd) and public (plc) companies sell shares to

Answer 5

Plc can sell shares to public

Ltd can’t sell to public

Question 6

Properties of ordinary shares

Answer 6

• also known as equity shares
• shareholders own business
• have voting rights
• dividends don’t have to paid (based on director’s decision)

Question 7

Properties of preference shares

Answer 7

• shareholders are not owners
• fixed rate of dividends
• get dividends in priority to ordinary shareholders
• on winding up, get capital in priority
• 2 types: irredeemable and redeemable preference share

Question 8

Properties of Irredeemable preference shares

Answer 8

• company is NOT entitled to buy back
• treated as share capital
• dividends are considered as normal dividends

Question 9

Properties of Redeemable preference shares

Answer 9

• company IS entitled to buy back in future
• treated as on current liability
• dividends are treated as finance costs (interest)

Question 10

double entry: shares issues at nominal value and fully paid

Answer 10

Dr Cash

Cr share capital

Question 11

double entry: shares issued at premium to nominal value and fully paid

Answer 11

Dr cash
Cr share capital (nominal value)
Cr share premium (excess over nominal v.)

Question 12

what are reserves?

Answer 12

profits that have been appropriated for a certain purpose

Question 13

types of reserves

Answer 13

share premium accounts, retained earnings, general/other reserves

Question 14

how is a share premium account used?

Answer 14

• premium is added to the reserve account
• the account has tight legal restrictions on its use
• dividends CANNOT be debited to this account

Question 15

what is a Rights issue?

Answer 15

new shares are offered to existing shareholders at discount to current market price

Question 16

what is a Bonus issue?

Answer 16

free shares given to existing shareholders. It does not generate cash inflow for the company

Question 17

double entry: nominal value of bonus shares

Answer 17

Dr Revenue account

Cr share capital account

Question 18

what are retained earnings?

Answer 18

type of capital; equity reserves is used to accumulate company’s retained earnings

Question 19

when are dividends paid?

Answer 19

either interim (mid year) or final (end year)

Question 20

when do directors declare the final dividend?

Answer 20

after knowing the company’s full-year profit

Question 21

double entry: dividends paid in the year

Answer 21

Dr Retained earnings

Cr Cash

Question 22

double entry: dividends declared but not paid

Answer 22

Dr retained earnings

Cr dividends payable

Question 23

if loans are being paid in instalments, where are they recorded?

Answer 23

if necessary, part of it under current liability and other part under non-current

Question 24

how is interest classified?

Answer 24

as a finance cost

Question 25

how is unpaid interest categorised in SOFP and P&L?

Answer 25

as Other Payables (SOFP) and Expense (P&L)