TOPIC 3 pt.2

Question 1

Entries for Profit Distribution

Answer 1

Remember! Profit distribution is done with the profits from the year before.

D
Net Income

C
Legal Reserve
(Spanish Law: 10% of net profit until they occupy 20% of share capital)

Interim Dividend
Dividend Payable
Voluntary Reserves
Losses from…

Question 2

What is Interim Dividend?

Answer 2

An interim dividend is a dividend paid to shareholders before the company’s annual profits are fully known and approved at the General Meeting.

Question 3

Interim Dividend Entries

Answer 3

1. Agreement on Distribution

D
Interim Dividend

C
Dividend Payable

2. At Payment

D
Dividend Payable

C
Cash in Banks
Witholding Tax Payable

3. At profit distribution

D
Net Income for the Period

C
Dividends Payable (Total dividends - Interim dividends)

Interim Dividends

Question 4

When do we have to make a Capital Reduction?

Answer 4

When Equity < 2/3 of Share Capital, companies need a capital reduction to avoid bankruptcy (Prudence principle).

Bankruptcy: Equity < 50% Share Capital

Question 5

Equity Formula

Answer 5

Share Capital + Legal Reserves - Losses

Question 6

Capital Reduction Steps

Answer 6

1. Calculate Equity + Check its Ratio
2. If Equity < 2/3 of Share Capital

I will reduce my Share Capital to make the ratio Balance. (I can chose any value I want)

3. Reduce Share Capital

D
Share Capital (Amount Chosen to Reduce)

C
Losses from previous periods

4. Return contributions to Shareholders

D
Share Capital

C
Cash in Banks

Question 7

Net Book Value Formulas

Answer 7

= Share Capital - Dividends + Legal Reserves + Voluntary Reserves

= Net Equity / Number of Shares

Question 8

Capital Increase Steps

Answer 8

1. Net Book Value

= Share Capital - Dividends + Legal Reserves + Voluntary Reserves

2. NBV per Share

NBV / Number of Shares

3. New Shares to be Issued

Share Premium / NBV per Share

4. Share Capital at Par Value

New Shares to be issues x Par Value = New Share Capital

5. Share Premium

OG Share Premium - New Share Capital

Question 9

Difference between Market Value and Book Value

Answer 9

Market value may include other items that are not
included in the books such as intangibles that have been created internally within the company
(e.g., brand value, customer data, etc.). Those are typically not accounted for in the balance sheet
and may originate differences between market vs book values.