Ch02 Sm Leo 10e

Topics: Stock market, Stock, Corporate finance Pages: 58 (12998 words) Published: March 29, 2015
Solutions Manual

to accompany

Company Accounting 10e

prepared by

Ken Leo
John Hoggett
John Sweeting
Jeffrey Knapp
Sue McGowan

© John Wiley & Sons Australia, Ltd 2015

Chapter 2 – Financing company operations


1. Explain the nature of a share. Distinguish between an ordinary share and a preference share.

Basically, a share represents ownership of a portion of the share capital of a company. Also note the discussion in Chapter 1 of the text concerning the relationship between limited liability and the amount paid up on a share.

The differences between ordinary and preference shares are determined by the terms of issue. A company has the right to issue preference shares, but may only do so either if there is a statement in its constitution setting out the rights of these share or if these rights have been approved by a special resolution of the company. Not all preference shares are the same. However common differences between ordinary and preference shares are: Ordinary shares represent ordinary ownership interest and therefore have right to participate in profits, voting rights and rights to receive return of capital if the company is wound up and after that of all other claimants (i.e. creditors). Preference shares are distinguished as normally having a set rate of ‘dividend’ (e.g. 5%) that is paid prior to any dividend to ordinary shareholders and have preference (before ordinary shareholders) to return of capital if the company is wound up. Also may be: Cumulative – i.e. if dividends are not paid in one period, they accumulate and are paid in the future when profits and funds are available; Participating- may receive an ‘extra’ dividend and participate in surplus assets or profits; May have voting rights (often only in specific circumstances; e.g. if dividends are not paid) Redeemable – may be able to be bought back either at a fixed time or at the option of either party (shareholder or company) Note: Classification of preference shares as equity or liabilities depends on the rights and features of the shares – judgment is required re which classification is appropriate. For example, redeemable, cumulative 10% preference shares, which are to be redeemed on a set date, are definitely liabilities. Preference shares redeemable at the option of the company may or may not be liabilities. If the preference shares are classified as liabilities, any dividend paid on those shares must be treated as interest expense (not as a dividend).

2.Describe the purpose of each of the ledger accounts used to record the issue of shares.

Cash Trust: used to record money received from applicants subscribing for shares. These amounts remain in the trust account until the shares have been allotted to applicants. The balance will then be transferred to the company’s general bank account. Application: used to record the amount of money received from applicants subscribing for shares. Once the directors decide to allot the shares to the applicants, then this account is cleared out and transferred to the Share Capital Account or to Allotment, Calls in Advance and refunds from Cash Trust if appropriate. Share Capital: used to record the amount called up from successful applicants who have now been allotted shares in the company. The amount is transferred in from the Application Account or the Allotment and Call accounts. Other accounts that may be used depending on the details of the share issue will be the Allotment Account and the Call Account. These accounts are used if shares are payable by instalments.

3.Explain what can happen if a share issue is ‘underwritten’ and the effect that underwriting can have on achieving a minimum subscription.

If a share issue is underwritten, this means that the underwriter, if a share issue is not fully subscribed by the public, guarantees to either purchase the remaining unsubscribed shares or arrange for others...
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