Topic 10 - Equity, Partnerships and Companies

Question 1

What are the two different classes of shares that carry different ownership rights?

Answer 1

Ordinary shares and Preference shares

Question 2

What are the three major ownership rights of ordinary shareholders?

Answer 2

1. To vote in the election of the board of directors at annual general meetings. To vote on actions that require shareholder approval.
2. To share the company profits through receipt of dividends.
3. To share in assets on liquidation in proportion to their holdings. This is called a residual claim because owners are paid with assets that remain after all claims have been paid.

Question 3

What do preference shareholders have priority to over ordinary shares?

Answer 3

They have priority over ordinary shares with respect to dividends and claims at liquidation.

Question 4

What does private placement involve?

Answer 4

The issue of shares to certain private investors by invitation.

Question 5

What does public issue require?

Answer 5

It requires a prospectus inviting public application for shares.

Question 6

What is a prospectus?

Answer 6

It reports on the company’s financial position, performance and plans.
Contains reports from independent parties.

Question 7

What factors influence the issue price for a new issue of shares?

Answer 7

• The company’s anticipated profits.
• The company’s expected dividend rate per share.
• The company’s current financial position.
• The current state of the economy.
• The current state of the securities market.

Question 8

What would the journal entry be to record the follow - Shares are issued to private shareholders, who pay cash on issue.

Answer 8

DR Cash

CR Share Capital

Question 9

What is the process in accounting for the public issue of shares?

Answer 9

• Prospectus is released to the public with all the information on the share issue.
• Price of shares and payment details are provided in the prospectus.
• Closing date for application for shares is given.
• Public investors who wish to purchase shares must complete and return their application form with their application money for the number of shares requested.
• The company receives the applications and once the closing date has passed, processes the share issue.

Question 10

What is the first step of accounting for the public issue of shares and how is it recorded as a journal entry?

Answer 10

• Prospectus investors return application form with application money for the number of shares they want.
• Company called for applications for shares at 70c each, payable 50c per share on application and the remaining 20c per share on allotment.

DR Cash Trust (for the 50c x share no.)
CR Application

Question 11

What is the second step of accounting for the public issue of shares and how is it recorded as a journal entry?

Answer 11

• Application money is held in trust until the allotment (or issue) of shares.

DR Application (for amount payable 50c)
CR Share Capital

DR Allotment (for amount on allotment 20c)
CR Share Capital

Question 12

What is the third step of accounting for the public issue of shares and how is it recorded as a journal entry?

Answer 12

Company can now transfer money received on application from trust account into its own bank account.

DR Cash at Bank (for amount payable 50c)
CR Cash Trust

Question 13

What is the four step of accounting for the public issue of shares and how is it recorded as a journal entry?

Answer 13

Receipt of allotment money by the company can be recorded into its bank account.

DR Cash at Bank (for amount on allotment 20c)
CR Allotment

Question 14

What is a dividend?

Answer 14

A distribution of profit by a company to its shareholders on a pro rata basis.

Question 15

What are the different forms of dividends?

Answer 15

• Cash
• Shares
• Property

Question 16

When do public companies pay dividends (if they pay dividends)?

Answer 16

• Final dividend determined at end of year.

- Interim dividend paid during the year.

Question 17

What is a cash dividend?

Answer 17

A pro rata distribution of profit paid in cash to shareholders

Question 18

When can a company pay a cash dividend?

Answer 18

• Assets exceed liabilities by more than the amount of dividend proposed.
• It is fair and reasonable to shareholders as a whole.
• It does not materially prejudice the company’s ability to pay its creditors.

Question 19

What are the journal entries for when cash a dividend is declared and paid to shareholders?

Answer 19

DR Retained earnings (or cash dividends declared)
CR Dividends payable

DR Dividends payable
CR Cash

Question 20

What is a share divided and has does it effect equity?

Answer 20

It’s a pro rata distribution of the company’s shares to shareholders.

Total equity does not change because:

• Retained earnings decreases, and
• Share capital increases.

Question 21

What are the journal entries for when a share dividend is declared and paid to shareholders?

Answer 21

DR Retained earnings (or share dividends declared)
CR Share dividends payable

DR Share dividends payable
CR Share capital

Question 22

What are the three rights of partners in a partnership?

Answer 22

• the right to share in profits
• the right to participate in management
• the right to own jointly the assets of the business.

Question 23

What are the advantages of a partnership?

Answer 23

• Pooling of resources
• Low cost
• Subject to little regulation
• Flexibility

Question 24

What are the disadvantages of a partnership?

Answer 24

• Mutual agency
• Unlimited liability
• Limited life
• Co-ownership of property and assets