Chapter 15

Question 1

What are ordinary shares?

Answer 1

Ordinary shareholders own the share capital and reserves of the company. Voting rights are attached to the shares. They may receive a dividend out of profits. They are expressed in terms of pence per share. No dividend may be paid on ordinary shares until preference share dividend has been paid in full.

Question 2

What are preference shares?

Answer 2

Preference shareholders own the preference share capital. They do not carry voting rights. They receive a fixed dividend calculated as a % of nominal value which is paid in priority to ordinary dividends.

Question 3

What are redeemable preference shares?

Answer 3

They are repayable by the company. They are classified as debt rather than equity in the SFP. Dividends are classified as finance costs in the P&L

Question 4

What are irredeemable preference shares?

Answer 4

The company is not entitled to buy back/redeem the shares. They are classified as equity.

Question 5

What is a nominal value?

Answer 5

An arbitrary, fixed amount assigned to each share. Normally £1, 50p or 25p

Question 6

What is an issue price?

Answer 6

How much shares are sold for buy the company at first issue. This is at least equal to the nominal value, but often exceeds it.

Question 7

What is the market value of share capital?

Answer 7

The value of shares determined by market forces.

Question 8

What is the double entry to record a share issue?

Answer 8

Dr Cash - Issue price x No. Shares
Cr Share Capital - Nominal Value x No. Shares
Cr Share Premium - Excess over nominal x No. Shares

Question 9

What is a rights issue?

Answer 9

The offer of new shares to existing shareholders in proportion to their existing shareholding at a stated price. (Normally below market value but always above nominal value) it is accounted for the same way as a normal share issue

Question 10

What is a bonus issue?

Answer 10

The issue of new shares to existing shareholders in proportion to their existing shareholding. No cash is received from a bonus issue

Question 11

How are bonus issues funded?

Answer 11

As no cash is received from a bonus issue, it must be funded from the reserves. Non-distributable reserves such as the share premium account would be preferred to reserves which can be distributed.

Question 12

What is the double entry for a bonus issue?

Answer 12

Dr Share premium (or other reserve) - Nominal Value
Cr Share Capital - Nominal Value

Question 13

What does authorised mean?

Answer 13

Authorised share capital is the nominal value of the maximum number of shares that a company can have in issue at any particular point in time.

Question 14

What is issued share capital?

Answer 14

The nominal value of the shares that have actually been issued to shareholders. The number of issued shares is used in the calculation of dividends.

Question 15

What is called up share capital?

Answer 15

The amount of the nominal value of the issued share capital which has been requested from shareholders by the company. This is what will be shown on the SFP for the company.

Question 16

What is paid up share capital?

Answer 16

The amount of the nominal value of the called up share capital that has been paid by the shareholders.

Question 17

How are differences in called up and paid up capital show on the SFP?

Answer 17

A recievable

Question 18

What are retained earnings?

Answer 18

A reserve that included all the retained profits of the company up to the SFP date.

Question 19

How is retained earnings calculated?

Answer 19

+ B/f
+ Net Profit for the year
- Dividends

Question 20

How are dividends on redeemable preference shares shown on the FS?

Answer 20

As a finance cost on the P&L

Question 21

What is the General reserve?

Answer 21

An extension of retained earnings. A company may chose to transfer some of their retained earnings into a separate reserve.

Question 22

What does a statement of changes in equity show?

Answer 22

How the balances making up equity in the SFP have changed over the course of the year. Including, profit, dividends paid, transfers between reserves, share issues.

Question 23

What is a provision?

Answer 23

A liability to a third party where either the amount or the timing of the payment is not yet certain, eg. Warranty claims, refunds for returned goods, litigation. Judgement is used as the business cannot be certain if provisions will be paid out.

Question 24

How do you recognise a provision?

Answer 24

The liability must represent a present obligation to incur the expenditure and be probable (more than 50%) that the expense will be incurred

Question 25

What is the double entry to record provisions?

Answer 25

Dr Relevant expense account
Cr Provision

Question 26

What is the double entry for when the expenditure for which the provision was created is incurred?

Answer 26

Dr Provision
Cr Cash

Question 27

What is the double entry to record a tax liability?

Answer 27

Dr Tax Expense
Cr Tax Payable

Question 28

Why is accounting for tax based on estimates?

Answer 28

Because the company’s tax bill isn’t finalised and paid until 9 months after it’s year end. This means they will usually over/under provide for tax in any given year.

Question 29

What is the double entry for when tax has been under provided?

Answer 29

Dr tax expense
Cr Tax Payable

Question 30

What is the double entry for when tax is over provided?

Answer 30

Dr Tax Payable
Cr Tax Expense

Question 31

How are dividends for redeemable preference shares classified in the FS?

Answer 31

Finance costs.

Question 32

How are dividends allocated in the FS?

Answer 32

Ordinary shares and irredeemable preference shares have dividends deducted from Retained earnings. Redeemable preference shares have dividends deducted from the P&L as Finance Costs.