interest and tax and dividends

Question 1

when do you recognise an interest expense

Answer 1

during the period that the entity has the loan

Question 2

how to work out interest expense

Answer 2

interest rate x outstanding loan balance

Question 3

what do you debit and what do you credit

Answer 3

debit interest expense
credit cash

Question 4

eg bank loan 100k outstanding. fixed rate interest at 6%. interest totalling 4k paid during the year

Answer 4

6% x 100k = £6k = interest expense
6k - 4k = 2k therefore need accrual to bridge gap
debit interest expense 2k and credit interest payable 2k
therefore 6k goes into statement of profit or loss
2k goes as current liability in statement of financial position

Question 5

what is the dividends process

Answer 5

directors propose dividend
shareholders vote
if approved the company pays dividend. this point is recognised in financial statements

Question 6

formula for dividend

Answer 6

pence per share x number of shares in issue

Question 7

explain timing of dividends

Answer 7

propose final dividends close to end of year
shareholders approve in annual general meeting after the year
dividend then payed in the new financial year

Question 8

are dividends on ordinary shares an expense

Answer 8

not an expense they are the distributions of profits therefore not recognised in the statement of profit or loss instead deduced directly from retained earnings

Question 9

what are retained earnings

Answer 9

accumulation of all profits made by the company less any dividends payed as a distribution of them profits

Question 10

how to work out the closing balance for retained earnings

Answer 10

figure in trial balance +
profit of the year -
interim dividend-
final dividend

Question 11

how do you work out what to put in the financial statements in terms of accounting for dividends

Answer 11

interim dividend - retained earnings account

Question 12

how to find total equity in statement of of financial position

Answer 12

share capital + retained earnings