Topic 1 & 2

Question 1

Application account

Answer 1

is credited for the amount of money received form prospective shareholders when applying for the shares. Before the allotment/issue of shares, the account represents a liability of the company to the applicants.

Question 2

Allotment account

Answer 2

is credited for the amounts receivable and due from shareholders. The allotment account is similar in nature to a receivable account. However, as it represents money receivable from shareholders for amounts unpaid on their shares, it is disclosed as a reduction in share capital in the equity section of the statement of financial position/balance sheet.

Question 3

A call account

Answer 3

is used to record the amount receivable whenever a call is made by the company. As with the Allotment account, the call account is similar in nature to a receiveable, and any unpaid calls ( referred to as calls in arrears) are shown as a reduction of share capital in the company’s financial statements.

Question 4

A right issue

Answer 4

is an issue of new shares with the terms of issue giving all existing shareholders in a particular class of shares the right to an additional number of shares in the same proportion as their shareholdings

Question 5

If right issue is renounceable

Answer 5

existing shareholders have three options:

• They may excercise their rights and acquire more shares in the company
• They may decline to exercise their rights and let them lapse.
• They may sell their rights on a securities exchange and allow other investors to acquire the company’s shares.

Question 6

If right issue is non - renounceable

Answer 6

shareholders are not allowed to selll their rights and must accept or reject the offer to acquire new shares in the company.

Question 7

Ordinary shares

Answer 7

Generally the vast majority of shares issued by a company are so-called ordinary shares. They carry no special rights or privileges (even to a dividend), but they do carry voting rights. Ordinary shares are quite susceptible to market changes, and as a results their price can fluctuate markedly

Question 8

Preference Shares

Answer 8

are not specifically described in the Corporations Law, but their name indicates some preferential treatment, whereby they are granted special rights. Generally, they carry no voting rights and may have preference as to return of capital.

Question 9

Redeemable preference shares

Answer 9

give the option to the shareholder to replace their share capital in the future, or alternatively give the company the right to repay (redeem) the capital after specified time

Question 10

Deferred Shares

Answer 10

ordinary shares that are issued to the founders (or promoters) of a company prior to its formal incorporation. The funds raised by issuing deferred shares enable the founding members of a company to pay for the preliminary expenses and costs associated with the company’s incorporation (registration fees etc.). The funds also enable the founding members of a company to pay for the costs associated with the company’s very first issue of share (prospectus preparation etc.).

Question 11

Application

Answer 11

The company receives applications from the public which represent the first part-payment on the shares. This money is banked in a special bank TRUST account, where it remains until it is claimed by the company or in case it needs to be returned to shareholders if too many applications are received. The company then makes lists of who will receive shares.

Question 12

Allotment

Answer 12

The company then allocates shares according to applications received, and sends out share certificates. This is called the Allotment of shares. Along with the share certificates the company will send out a request for the second instalment on payment of the shares. Share certificates are evidence or title of the shareholding.

Question 13

Call

Answer 13

In the time specified in the prospectus the company will make calls upon the shareholders for the rest of the money due on the shares. This is described as a Call on shares.

Question 14

Transaction costs on share issues include items such as

Answer 14

printing costs, stamp duties and taxes, professional advisers’ fees and brokerage fees

Question 15

Formation costs or start-up costs include

Answer 15

cost of registration and other costs for professional legal and accounting advice before a compnay is registered.