1 The directors of Aston plc provided the following financial information at 1 June 2013.

(Nov 2014 P42 Q1)

$000
Ordinary share capital ($1 shares) 25 000
Share premium 5 000
Revaluation reserve 1 000
Retained earnings 2 950

Land 6 000

On 1 July 2013 $1 800 000 8% debentures were issued.

For the year ended 31 May 2014 profit from operations was $3 752 000.
The tax charge for the year was 25% of the profit before taxation.

REQUIRED

(a) Prepare the income statement for the year ended 31 May 2014. [6]

Additional information

On 1 September 2013 a final dividend relating to the previous year of $0.04 per ordinary share
was paid.

On 1 October 2013, 5 000 000 ordinary shares of $1 each were issued at a premium of $0.10 per
share.

On 1 November 2013 a rights issue was made of 1 ordinary share for every 5 ordinary shares
owned at $1 per share. This was fully subscribed.

On 1 February 2014 land was revalued at $7 500 000.

On 1 February 2014 an interim dividend of $0.03 per ordinary share was paid.

On 1 March 2014 a transfer of $500 000 was made from retained earnings to a newly formed
general reserve.

On 1 April 2014 the directors proposed a final dividend for the year 50% higher per share than
the previous year.

[Turn over
REQUIRED

(b) Copy the following table into your answer booklet and prepare a statement of changes in
equity for the year ended 31 May 2014.

Statement of changes in equity

Share Share Revaluation General Retained

capital premium reserve reserves earnings Total
$000 $000 $000 $000 $000 $000
Balance at
1 June
2013

Balance at
31 May
2014
[20]

(c) Explain the treatment of the final dividend proposed on 1 April 2014. [4]

Additional information

The directors are hoping to expand the business. They are planning a bonus issue of 1 new
ordinary share for every 5 ordinary shares held on 31 May 2014.

REQUIRED

(d) Explain what is meant by a bonus issue and also explain whether it would help the expansion
plans for the business. [4]

[Turn over
Solution
: $000
Profit from operations 3 752 (1)
(a) Finance costs (W1) (132) (2)
Profit before tax 3 620 (1) OF
Tax (905) (1) OF
Profit for the year 2 715 (1) OF
W1: Finance costs:
1 800 × 8% (1) × 11/12 (1) = 132
[6]

(b)
$000
Share Share Rev Gen Ret Earnings Total
Capital Premium Reserve Reserve
Balance at 01 June 25 000 5 000 1 000 Zero 2 950 (1) row 33 950 (1)
2013
Final dividend (1 000) (1) (1 000)
01.09.13
Share issue 5 000 (1) 500 (1) 5 500
01.10.13
Rights issue 6 000 (4) 6 000
01.11.13
Revaluation 1 500 (1) 1 500
01.02.14
Interim dividend (1 080) (5) (1 080)
01.02.14
Transfer 500 (1) (500) (1)
01.03.14
Profit 2 715 (1) 2 715
31.05.14
Balance at 31 May 36 000 5 500 2 500 500 3 085 (1) OF row 47 585 (1) OF
2014

Workings

Rights issue (25 000 + 5000) (1) / 5 (1) × $1 (1) = $6 000 000 (1)
Revaluation 7 500 000 – 6 000 000 (1) = $1 500 000 (1)
Interim dividend (25 000 000 + (1) + 5 000 000 (1) + 6 000 000 (1) × 0.03 (1) = $1 080 000 (1)
Final dividend (25 000 000 × 0.04 = $1 000 000 (1) [20]

(c) The final dividend is not a liability (1) at the statement of financial position date. (1)
It is therefore disclosed as a note to the accounts. (1) Non adjusting event (1)
treated in next financial year (1) [max 4]

(d) A bonus issue would result in 1 share for each 5 held being given to the existing
shareholders. (1)
This is a bookkeeping exercise and a reserve is debited (1) and no cash is raised. (1)
Therefore, the expansion plans of Aston plc would not be assisted. (1) [4]

[Turn over
2. The directors of Rebuild Limited are preparing the financial statements for the year ended31
December 2015. The equity section of the statement of financial position at 31 December 2014was
as follows: ( Nov 2016 P22 Q 2)

$
Ordinary shares of $2 each, fully paid 240 000
Share premium 8 000
General reserve 40 000
Retained earnings 75 500
363 500

During the year ended 31 December 2015, the following transactions took place:

March 1 Issued 10 000 ordinary shares at $2.10 each

March 31 Paid final dividend of 3% on all shares in issue at 31 December 2014
December 31 The directors revalued the company premises upwards by $20 000

The profit for the year ended 31 December 2015 was $47 100.

REQUIRED

(a) Prepare the statement of changes in equity for the year ended 31 December 2015.

[5]

[Turn over
Additional information

The directors of Rebuild Limited made a bonus issue of ordinary shares on 30 June 2016. The
basis of the issue was one ordinary share for every twenty-five ordinary shares held. The
company policy is to leave reserves in their most flexible form.

The profit for the 6 months ended 30 June 2016 was $25 000.

REQUIRED

(b) Prepare the statement of changes in equity for the 6 months ended 30 June 2016.

[4]

(c) State two differences between ordinary shares and debentures.

[4]

[Turn over
Additional information

The following item appears on the statement of financial position of Rebuild Limited
at 31 December 2015:

6% debentures (2018–2020) $60 000

REQUIRED

(d) State the significance of (2018–2020).

[1]

(e) State why an issue of debentures does not appear in the statement of changes in equity.

[1]

[Total: 15]

[Turn over
Solution :

(a)
Share Share General Revaluation Retained Total
capital premium reserve reserve earnings

At $ $ $ $ $ $
1 January 2015 240 000 8 000 40 000 – 75 500 363 500
Share issue 20 000 1 000
(1) (1) 21 000
Final dividend (7 200)
(1) (7 200)
Revaluation 20 000
(1) 20 000
Profit for the year 47 100
(1) 47 100
At
31 December 2015 260 000 9 000 40 000 20 000 115 400 444 400
[5]

(b)
Share Share General Revaluation Retained
Total
capital premium reserve reserve earnings
At $ $ $ $ $ $
31 December 2015 260 000 9 000 40 000 20 000 115 400 444 400
Profit 25 000 25 000
(1)
Bonus issue 10 400 (9 000) (1 400)
–
(1) (1OF) (1OF)
At 30 June 2016 270 400 – 38 600 20 000 140 400 469 400
[4]

(c)
Ordinary shares Debentures
Variable returns Fixed returns
Owners Creditors
Receive dividend Receive interest
Paid dividend after debenture holders Paid interest before ordinary
shareholdersVoting rights No voting rights
Not repaid Must be repaid
In case of liquidation paid last In case of liquidation paid first

Any 2 differences 2 marks [4]

(d) The debenture loan is repayable between the years 2018 and 2020 (1) [1]

(e) Because it is a long term liability (1) and is shown as a non-current liability in the statement
offinancial position. (1)

[Turn over
3 The following is an extract from the statement of financial position of Chopin Limited at
30 June 2015: (Nov 2016 P21 Q 3)

$
Non-current assets 750 000
Ordinary shares of $0.25 each 300 000
Share premium 20 000
Retained earnings 635 210

During the year ended 30 June 2016, the following took place:

1 November 2015 Non-current assets were revalued to $1 000 000.

1 January 2016 A bonus issue of shares was made. The terms of the issue were 1 new
share for every 10 shares in existence. Reserves were maintained in the
most flexible form.

1 April 2016 Dividend of $0.02 per share was paid.

Profit for the year ended 30 June 2016 was $230 809.

REQUIRED

(a) Prepare a statement of changes in equity for the year ended 30 June 2016.

[7]

[Turn over
(b) Explain why the company should not use its revaluation reserve to pay dividends to
shareholders.

[4]

(c) State two uses of a share premium account.

[2]

(d) State the difference between a bonus issue of shares and a rights issue of shares.

[2]

[Total: 15]

[Turn over
Solution : Ordinary Share Revaluation Retained
shares premium reserve earnings Total

(a)
$ $ $ $
Opening balance 300 000 20 000 635 210 955 210 (1)(for row)
Revaluation 250 000 (1) 250 000
Issue of shares 30 000 (1) (20 000) (1of) (10 000) (1of) –
Profit for the year 230 809 230 809
Dividends (26 400) (1) (26 400)
Total 330 000 0 240 000 839 619 1 409 619 (1of)

[7]

(b) The revaluation reserve is a capital reserve. (1) Capital reserves are not allowed to be used
for the payment of a cash dividend. (1) The creation of a revaluation reserve is not a cash
transaction as no cash has been generated for the payment of dividends. (1)
The capital reserve will increase the asset value (1) of the company and the shareholders
interest and is in the accounts to reflect a true and fair view of the company accounts.(1)
Cash gain can only be realised if the asset is sold. (1)
Max 4 [4]

(c) Issue bonus shares (1)

Write off formation/preliminary expenses (1) [2]

(d) A bonus issue of shares is a capitalisation of reserves (1)

Free issue of shares/ no cash (1)
A rights issue is to existing shareholders (1)
A rights issue generates cash for the business (1)
Max 1 bonus, max 1 rights [2]

[Total: 15]

[Turn over
4. Part of the equity of a limited company consists of ordinary shares. ( Nov 2018 P 22 Q 3)

REQUIRED

(a) (i) Explain two reasons why a company may make a bonus share issue.

[4]

(ii) State three uses of the share premium account, other than the issue of bonus shares.

[3]

[Turn over
On 1 January 2017 the issued share capital of S Limited consists of ordinary shares of $0.40
each.

The following information is available for the year ended 31 December 2017:

1 On 1 April 2017 the company issued a 6% debenture of $300 000.

2 On 1 May 2017 the company paid a final dividend of $0.04 per ordinary share.

3 On 1 October 2017 the company made a rights issue of 1 ordinary share for every 4 held.
The shares were offered at a 20% discount on the market price of $1.45. The rights issue
was fully subscribed.

4 On 15 October 2017 the company paid an interim dividend of $0.015 per share to the
shareholders who were on the share register at 1 August 2017.

5 The company’s profit from operations for the year was $268 500.

REQUIRED

(b) Prepare the statement of changes in equity for the year ended 31 December 2017.

S Limited
Statement of changes in equity
for the year ended 31 December 2017

Ordinary Share General Retained

Total
share premium reserve earnings
capital
$
$ $ $ $
Brought forward
at 1 January 2017 1 250 000 – 130 000 65 000 1 445 000

Workings:

[6]

[Turn over
(c) State the journal entry required to record a revaluation increase in the value of a non-current
asset.

[2]

[Total: 15]

[Turn over
 Solution :

3(a)(ii) To write off expenses relating to: 3

company formation
the issue of debentures
the issue of shares
redemption of debentures

1 mark per valid point to max of 3

Question Answer Marks

3(b) S Limited 6
Statement of changes in equity
for the year ended 31 December 2017

Ordinary Share General Retained Total

share premium reserve earnings
capital
$ $ $ $ $

Brought forward at 1 January 2017 1 250 000 – 130 000 65 000 1 445 000

Profit for the year 255 000 255 000

(2) / (1)*

Dividend – final 2016 (125 000) (1) (125 000)

– interim 2017 (46 875) (1) (46 875)

Issue of ordinary shares 312 500 (1) 593 750 (1) 906 250

Balance at 31 December 2017 1 562 500 593 750 130 000 148 125 2 434 375

* $268 500 (1) / $255 000 (2)

Working for right issue : 1250000 / 0.40 = 3125000 shares
¼ x 3125000 =781250 shares to be issued, their face value would be 781250 x0.40 = 312500 share capital
Amount received in bank 781250 x 1.45 x80% = $ 906250 so share premium would be 906250 – 312500 = $ 593750
Working for dividend : 3125000 x0.04 = $ 125000(final dividend) ; 3125000 x 0.015= $ 46875 ( interim dividend)

3(c) Debit Non-current asset (1) 2

Credit Revaluation reserve (1)
5. M Limited has provided the following extract from the statement of financial position
at31 August 2016. ( June 2018 P 22 Q 2)
$
Equity
Capital and reserves
Ordinary shares of $0.25 each 200 000
Share premium 80 000
Revaluation reserve 40 000
Retained earnings 37 500
357 500

The following information is available.

a. On 1 January 2017 a rights issue was made on the basis of two ordinary shares for
everyfive ordinary shares held at a price of $0.40 per share. The rights issue was fully
subscribed.

b. On 30 June 2017 an interim dividend of $0.04 per share was paid on all shares in
issue atthat date.

c. At 31 August 2017 non-current assets were re-valued downwards by $48 000.

d. Profit for the year ended 31 August 2017 was $22 500.

REQUIRED

(a) Prepare the statement of changes in equity for the year ended 31 August 2017. A total
column is not required.

[6]

[Turn over
(b) State two reasons why capital reserves may be used before revenue reserves to fund a
bonus issue of shares for a limited company.

[2]

(c) (i) State two benefits to a limited company of making a rights issue.

[2]

(ii) State one limitation to a limited company of making a rights issue.

[1]

[Turn over
Additional information

Directors of M Limited are considering obtaining a long-term bank loan to raise additional capital.

REQUIRED

(d) Explain two advantages to the company of this course of action.

[4]

[Total: 15]

[Turn over
Solution :

2(a) M Limited 6

Statement of changes in equity for the year ended 31 August 2017

Ordinary Share Revaluation Retained

share capital premium reserve earnings

$ $ $ $
Balance at 1 September 2016 200 000 80 000 40 000 37 500
Rights issue 80 000 (1) 48 000 (1)
Interim dividend paid (44 800) (1)OF for row
Revaluation (40 000) (1) (8 000) (1)
Profit for the year 22 500 (1)
Balance at 31 August 2017 280 000 128 000 – 7 200

Working for right issue :

200000 / 0.25 = 800000 shares x2/5 = 320000 shares ; share capital 320000 x 0.25 = $ 80000
Share premium : 320000 x 0.15 = $ 48000
Dividend payment : ( 800000 + 320000) x 0.04 = $ 44800
Question Answer Marks

2(b) Responses could include: 2

To retain reserves in the most distributable or flexible form (1)

Revenue reserves are needed to fund the payment of dividends (1)

2(c)(i) Quicker and cheaper than a new share issue (1) 2

More likely to be fully subscribed than a new share issue (1)
Results in a cash inflow (1)
Does not have to be repaid (1)
Would avoid any dilution of ownership (1)

Max 2
Accept other valid points.

2(c)(ii) Can lead to a fall in the share price (1) 1

Accept other valid points.

2(d) Long-term bank loan 4

Interest on loan is fixed (1) whereas dividends are discretionary (1)
Ownership remains the same therefore (1) No loss of control to existing shareholders (1)
Funds received quicker (1) than a share issue (1)
Repayments are fixed (1) enabling future planning (1)

1 mark for identification + 1 mark for development

Accept other valid responses
6. K Limited prepares annual accounts to 30 September. For the year ended 30 September
2018, the directors have calculated profit from operations of $44 500. On 31 January 2018 they
redeemed a 6% debenture of $100 000 together with accrued interest to that date.
( June 2019 P 21 Q 3)

REQUIRED

(a) Calculate the profit for the year ended 30 September 2018.

[2]

Additional information

The directors have provided the following extract from the statement of financial position at
1 October 2017.

Equity $
Ordinary shares of $0.25 each 500 000
Share premium 175 000
Retained earnings 540 000
1 215 000

The following information is also available:

1 On 31 December 2017, a rights issue of ordinary shares was made at a premium of

$0.15 per share on the basis of 2 ordinary shares for every 5 held on that date. The issue
was fully subscribed.

2 On 31 March 2018, a bonus issue was made on the basis of 3 ordinary shares for every
5 held on that date. Reserves were maintained in the most flexible form.

3 On 30 June 2018, an interim dividend of $0.05 per share was paid on all shares in issue on
that date.

4 On 30 September 2018, buildings were revalued at $1 200 000. The original cost of the
buildings was $1 000 000 and had been depreciated by $150 000.

[Turn over
(b) Prepare the statement of changes in equity for the year ended 30 September 2018.

Ordinary Share Revaluatio Retained

shares premium nreserve earnings
$ $ $ $

At 1 October 2017 500 000 175 000 – 540 000

Workings:

[11]

(c) State one difference between a capital reserve and a revenue reserve.

[2]

[Total: 15]

[Turn over
3(a) $44 500 – $2000 (1) = $42 500 (1) OF 2

3(b) Statement of Changes in Equity for the year ended 30 September 2018 11

Ordinary Share Revaluation Retained

shares premium reserve earnings
$ $ $ $
At 1 October 2017 500 000 175 000 540 000
Profit for the year 42 500 (1) OF
Rights issue W1 200 000 } 120 000 } (3)
Bonus issue W2 420 000 (1) (295 000) (1) (125 000) (1)
Dividends paid W3 (224 000) (2)
Revaluation of buildings 350 000 (1)
At 30 September 2018 1 120 000 0 350 000 233 500 (1) OF
Question Answer Marks

3(b) 2 000 000 (1)

W1 Rights issue: 500 000  4 = = 800 000 (1) OF
5 2
800 000  0.25 = 200 000 } (1) OF both
800 000  0.15 = 120 000 }

W2 Bonus issue: 2 000 000 + 800 000 = 2 800 000

2 800 000
= 1 680 000 (1) OF
53
1 680 000  0.25 = 420 000 (1) OF

W3 Dividends paid: 2 000 000 + 800 000 + 1 680 000 = 4 480 000
4 480 000  0.05 = 224 000 (1) OF

3(c) Capital reserves: 2

Non distributable

Cannot be used to pay dividends

Created via changes in capital structure / non-trading activities

Max 1
Accept other valid points.

Revenue reserves:

Distributable

Can be used to pay dividends

Created via trading activities

Max 1
Accept other valid points.
7. M Limited was formed five years ago.
( Nov 2020 P 21 Q 3)

On 1 January 2019 the company’s statement of financial position included the following details.

$000
Equity
Share capital – ordinary shares of $0.25 each 1200
Share premium 480
Retained earnings 295
1975

On 1 July 2019 shareholders were paid a dividend of $0.05 per share.

REQUIRED

(a) Calculate the total dividend paid.

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

............................................................................................................................................. [2]

Additional information

On 1 September 2019 the directors made a rights issue of two ordinary shares for every three
shares held at a price of $0.40 per share. The issue was fully subscribed.

REQUIRED

(b) Describe one way in which a shareholder can benefit from taking up a rights issue.

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

............................................................................................................................................. [2]

(c) Calculate the amount raised by the rights issue.

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

............................................................................................................................................. [2]
[Turn over
 The company made a profit for the year ended 31 December 2019 of $324 000.

REQUIRED

(d) Prepare the statement of changes in equity for the year ended 31 December 2019.

M Limited
Statement of changes in equity for the year ended 31 December 2019

Share Share Retained Total

capital premium earnings
$000 $000 $000 $000

[5]

(e) Describe two factors directors should take into account when deciding on a dividend to be
paid to the shareholders.

1 ................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

2 ................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................
[4]

[Total: 15]

[Turn over
Solution :

3(a) Dividend paid 2

Number of shares: 1 200 000  4 = 4 800 000 (1)

Dividend: 4 800 000 (OF)  $0.05 = $240 000 (1)

3(b)  Opportunity to purchase additional shares at a favourable price (1) as 2

issue price is usually below market price (1)
 Can maintain same degree of control (1) in the company as shareholder
will own same proportion of issued capital (1)

One benefit 1 mark + 1 mark for development

Accept other valid responses.

3(c) Shares issued 2/3  4 800 000 (OF) = 3 200 000 shares (1)OF 2
Amount raised: 3 200 000  $0.40 = $1 280 000 (1)OF

3(d) 5
M Limited
Statement of changes in equity for the year ended 31 December 2019

Share Share Retained Total

capital Premium earnings $000
$000 $000 $000

Balances, 1 1 200 480 295 1 975

January 2019

Profit for year 324 324

Dividends paid (240) (240)

Rights issue 800 480 1 280

Balances, 31 2 000 960 379 3 339

December
2019

[Turn over
3(e)  The amount of profit available/revenue reserves (1) must be sufficient to 4
finance the dividends (1)
 The amount of liquid funds will be sufficient (1) to cover the dividend
payment/avoid liquidity problems (1)
 That shareholders will expect/feel entitled to a dividend (1) as a reward
for their investment (1)

Max 2 factors x 2 marks (1 mark + 1 mark for development)

Accept other valid responses.

[Turn over
8. P Limited was formed on 1 June 2015. The company’s share capital comprised of
ordinaryshares. ( Nov 2017 P 21 Q 3)

(a) (i) Identify two differences between ordinary shares and cumulative preference shares.

[2]

(ii) State three differences between a rights issue and a bonus issue.

[3]

Additional information

P Limited prepares financial statements to 31 May.

The following transactions, all of which were entered in the appropriate accounts in the ledger,
occurred in relation to the ordinary shares.

2015
1 June 100 000 ordinary shares, with a nominal value of $1 each, were issued at a
price of $1.45 each. Of this, $1.15 was received which included the full par
value.
30 September The balance outstanding was received in full.

2016
1 October P Limited made a 1 for 4 rights issue at a discount of 15% of the most recent
share valuation of $1.40 per ordinary share. All shareholders took up their
rights in full.

[Turn over
REQUIRED

(b) Complete the following table for the two years ended 31 May 2017 to record these
transactions.

Name of account to be Amount Name of account to be Amount

Date debited $ credited $

[6]

[Turn over
Additional information

Shareholders have not received any dividend since the company was formed. However, the
financial statements show the following:

1 Profit for the years ended

31 May 2016 $15 000

31 May 2017 $30 000

2 Cash and cash equivalents at 31 May 2017 $90 000

On 1 June 2017 several major shareholders demanded that the directors pay a dividend of
$0.48 per share.

REQUIRED

(c) Advise the directors how they should respond to the shareholders’ demand. Support your
answer with calculations.

[4]

[Total: 15]

[Turn over
 Solution :

3(a)(ii) Subscribers pay for shares in a rights issue, but not with a bonus issue. (1) 3
The company’s net assets are increased as a result of a rights issue, but unchanged with a bonus issue. (1)
Shareholders may or may not exercise their rights, but will automatically receive their bonus shares. (1)
Question Answer

3(b) Name of account Amount Name of account to Amount

Date to be debited $ be credited $
2015
June 1 Bank 100 000 Ordinary share 100 000 (1)
capital
Bank 15 000 Share premium 15 000 (1)
Sept 30 Bank 30 000 Share premium 30 000 (1)
2016
Oct 1 Bank 25 000 Ordinary share 25 000 (1)
capital
Oct 1 Bank 4 750 Share premium 4 750 (2)

*25 000 ($1.40 85% = $1.19) – 25 000 = 4750

3(c) Shareholders demand would result in a payment of $60 000 (1)

Retained earnings are only $45 000 (1)
Maximum dividend payable equals 45 000 / 125 000 = $0.36 (1)
There is sufficient cash in the bank ($90 000) to pay the dividend, (1) but insufficient retained earnin
Fewer funds for possible future development. (1)
Share premium account could be used to issue bonus. (1)
Max 4
Accept other valid answers.

[Turn over
9. N Limited is a trading business. Sales are made on the credit basis only. ( June 2021 P22 Q1 )

The following information was available at 31 December 2020.

Debit Credit
$000 $000
8% Debentures (2025) 250
Administrative expenses 171
Cash and cash equivalents 14
Cost of sales 466
Debenture interest 8
Distribution costs 63
Dividends paid 80
Inventory at 31 December 2020 33
Issued capital:
Ordinary shares of $0.25 each at 31 December 2020 500
Non-current assets
Cost 1140
Provision for depreciation at 1 January 2020 140
Retained earnings at 1 January 2020 129
Revenue 923
Share premium at 31 December 2020 70
Trade payables 42
Trade receivables 79
2054 2054

The following information is also available at 31 December 2020.

a. Administrative expenses included insurance of $16 000 for four months ended
31 January 2021.

b. Depreciation should be provided on non-current assets at 25% per annum using the reducing
balance method. Depreciation charges should be allocated 20% to distribution costs and
80%to administrative expenses.

c. The account of a credit customer, $3000, should be written off to administrative expenses as
an irrecoverable debt.

d. Debenture interest was outstanding for the second half of the year. The directors had issued
additional debentures of $50 000 on 1 October 2020.

[Turn over
REQUIRED

(a) Prepare the company’s income statement for the year ended 31 December 2020.

N Limited
Income statement for the year ended 31 December 2020

$000

Workings:

Distribution costs

Administrative expenses

Finance costs

[10]

[Turn over
Additional information

On 1 July 2020 the directors had decided to make a rights issue of two ordinary shares for every
three shares held at a price of $0.30 per share. The rights issue was fully subscribed.

REQUIRED

(b) Explain two reasons why a company may make a rights issue of shares rather than an issue
of debentures.

1 ................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

2 ................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................
[4]

(c) Calculate the amount raised by the rights issue.

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

............................................................................................................................................. [4]

[Turn over
 (d) Prepare a statement of changes in equity for the year ended 31 December 2020.

N Limited
Statement of changes in equity
for the year ended 31 December 2020

Ordinary share Share Retained Total

capital premium earnings
$000 $000 $000 $000
Balance at
1 January 2020

[5]

Additional information

The directors are concerned about the company’s credit control and wish to improve the company’s
liquidity position. They are considering a proposal to offer a 5% cash discount to customers for
settlement within 30 days on all invoices of more than $2000.

REQUIRED

(e) Identify two ratios which can be used to assess the liquidity of a business.

1 ................................................................................................................................................

2 ................................................................................................................................................
[2]

[Turn over
(f) Advise the directors whether or not they should go ahead with this proposal. Justify your
answer.

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

...................................................................................................................................................

............................................................................................................................................. [5]

[Total: 30]

[Turn over
Solution :

1(a) N Limited 10
Income statement for the year ended 31 December 2020

$000

Revenue 923

Cost of sales (466)

Gross profit 457 (1)

Administrative expenses W1 (370) (4)OF

Distribution costs W2 (113) (2)OF

Loss from operations (26) (1)OF

Finance costs (17) (1)

Loss for the year (43) (1)OF

Workings

W1 171 + 200 (1) – 4 (1) + 3 (1) = $370 (1)OF

W2 63 + 50 (1) = $113 (1)OF
Prepaid insurance : 16000 x ¼ = $ 4000
Bad debts written off $ 3000
Depreciation on net book value 1140 -140 = $ 1000 x 25% = $ 250
80% allocated to admin expenses = $ 200
20 % allocated to distribution expense = $ 50
Finance cost : 200 x 8% x 9/12 + 250 x 8% x 3/12 = $ 17
Question Answer Marks

1(b) Sample responses 4

1 mark
Rights issue is a permanent source of capital (1)

2 marks
Rights issue is a permanent source of capital (1) whereas debentures are a liability that must be repaid at a future date (1)

3 marks
Rights issue is a permanent source of capital (1) on which dividends are paid (1) whereas debentures are a liability that
must be repaid at a future date (1)

4 marks
Rights issue is a permanent source of capital (1) on which dividends are paid (1) whereas debentures are a liability that
must be repaid at a future date (1) with interest which will reduce profits (1)

Accept other valid responses.

1(c) $240 000 (4) 4

Working

Rights issue 2 000 000 shares (1)  2/5 (1) = 800 000 shares (1OF)  $0.30 = $240 000 (1)OF
Shares at the year-end given in the question : 500/ 0.25 = 2000 shares
2000 ----- 5
X --------- 2
Shares issued during the year : 800 shares , Amount raised through right issue of shares : 800 x 0.30 = $ 240
Question Answer Marks

1(d) N Limited 5
Statement of changes in equity
for the year ended 31 December 2020

Ordinary Share Retained Total

share capital premium earnings

$000 $000 $000 $000

Balance at 300 30 129 459

1 January 2020

(1) for both

Rights issue of 200 40 240

shares

(1)OF for both

Loss for year (43) (43)

(1)OF

Dividend paid (80) (80)

(1)

Balance at 31 500 70 6 576

December 2020 (1) OF
for row &
column

1(e) Current ratio (1) 2

Liquid (acid test) ratio (1)
Question Answer

1(f) For proposal (Max 2)

 May improve cash flows/liquidity/as customer may pay more quickly (1)
 May encourage larger orders (1)
 May make irrecoverable debts less likely (1)

Against proposal (Max 2)

 Will reduce profits by the amount of discounts allowed (1), (and company is already making a loss)
 a loss)
 Will also reduce cash receipts (1)
 Possible loss of customers who do not qualify for cash discount (1)

Advice (1)

Accept other valid responses.

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10. The following information has been extracted from the financial statements of D Limited at
30 June 2020. ( Nov 2021 P 22 Q 3)

$
Share capital (ordinary shares of $0.50 each) 150 000
Share premium 25 000
Retained earnings 28 700

Transactions during the year ended 30 June 2021.

1 August 2020 Made a rights issue of one ordinary share for every five shares held at
$0.70 per share. The issue was fully subscribed.
1 December 2020 Paid a dividend of $0.02 per share on all shares in issue at that date.
1 March 2021 Made a bonus issue of two ordinary shares for every nine shares held.
Reserves were left in the most flexible form.
30 June 2021 Proposed a final dividend of 2%.

The profit for the year ended 30 June 2021 was $76 520.

REQUIRED

(a) Prepare the following ledger accounts.

Ordinary share capital

Date Details $ Date Details $

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 Share premium

Date Details $ Date Details $

Retained earnings

Date Details $ Date Details $

[11]

(b) State two differences between capital reserves and revenue reserves.

1 ................................................................................................................................................

...................................................................................................................................................

2 ................................................................................................................................................

...................................................................................................................................................
[2]

(c) Explain one reason why a company might make a bonus issue of shares.

...................................................................................................................................................

............................................................................................................................................. [2]

[Total: 15]

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Solution :

3(a) Ordinary share capital 11

Date Details $ Date Details $

2021 2020
Jun 30 Balance c/d 220 000 Jul 1 Balance b/d 150 000

1 Aug Bank 30 000 (1)

2021
Mar 1 Share premium 37 000 (1)

Retained earnings 3 000 (1)

220 000 220 000

Jul 1 Balance b/d 220 000 (1)OF

Share premium

Date Details $ Date Details $

2021 2020
Mar 1 Ordinary share capital 37 000 (1)OF Jul 1 Balance b/d 25 000

Aug 1 Bank 12 000 (1)

37 000 37 000
 Retained Earnings

3(a)

Working : Right issue at premium : 150000/ 0.50 = 300000 shares x 1/5 = 60000 shares
Share capital ; 60000 x0.50 = $ 30000
Share premium : 60000 x 0.20 = $ 12000
Bank debit $ 30000 Share capital credit $ 30000
Bank debit $ 12000 Share capital credit $ 12000
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 Total shares : 300000 + 60000 = 360000 shares
Dividend payment : 0.02 x 360000 = $ 7200
Retained earnings debit $ 7200 Bank credit $ 7200
Bonus issue of shares : 2/9 x ( 300000 + 60000) = 80000 shares
Share capital raised through bonus issue : 80000 x 0.50 = $ 40000
Share premium debit $ 37000
Retained earnings debit $ 3000 Share capital credit $ 40000
Net profit of $ 76520 will increase retained earnings
1 mark for all correct dates and labels

3(b) Capital reserves are created from non-trading activities, revenue reserves are created from revenu

Capital reserves are used to meet capital losses only, not for payment of dividends, revenue reserv
dividends (1).

Revenue reserves are distributable, capital reserves are not distributable (1)

Max 2 marks
Accept other valid responses

3(c) To compensate shareholders (1) in the event of shortage of liquid resources to pay a dividend (1)
Increases the issued share capital (1) creating a perception of success (1)
To capitalise revenue reserves (1) to strengthen the statement of financial position (1)

Max 2 marks
Accept other valid responses

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11.

The directors of AB plc have decided to make a rights issue and a bonus issue of ordinary shares.
( Specimen paper 2023 Q 3)
(a) Identify two advantages to the company of:

(i) a rights issue of ordinary shares

1 ........................................................................................................................................

...........................................................................................................................................

2 ........................................................................................................................................

...........................................................................................................................................
[2]

(ii) a bonus issue of ordinary shares.

1 ........................................................................................................................................

...........................................................................................................................................

2 ........................................................................................................................................

...........................................................................................................................................
[2]

Additional information

The following information is available for AB plc at 1 January 2020.

Equity $
Ordinary share capital ($0.50 shares) 120 000
Share premium 25 000
Retained earnings 43 000

AB plc has adopted the revaluation model for measuring the value of its non-current assets.

During the year ended 31 December 2020 the following took place:

1 July The directors made a rights issue of one ordinary share for every 6 held at a
premium of $0.05 per share. The issue was fully subscribed.

1 August The directors made a bonus issue of 1 ordinary share for every 5 held on that
date. They wished to keep the reserves in their most flexible form.

30 September The directors paid an interim dividend of $0.08 per share on all shares in issue at
that date.

31 December Land which had cost $120 000 is now only worth $100 000. This has not been
adjusted in the books of account.
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The company made a profit for the year ended 31 December 2020 of $18 000.

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(b) Prepare the ledger accounts to record these transactions.

Ordinary share capital account

$ $

Share premium account

$ $

Retained earnings account

$ $

[11]

[Total: 15]

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Solution :
11(a)(i Identify two advantages to the company of a rights issue of ordinary shares. 2
)
Max 2

The company will gain additional cash from the rights issue (1)
The issue will be cheaper than an issue by prospectus (1)
The shares will be offered to existing shareholders and these investors will be more in favour of the company than finding new
investors (1)
Does not dilute ownership (1)

Accept other valid responses

11(a)(i Identify two advantages to the company of a bonus issue of ordinary shares.
i)
Max 2

The bonus issue will keep existing shareholders satisfied (1) especially if there is no cash available for dividends (1)
It will make use of capital reserves (1)
Does not dilute ownership (1)

Accept other valid responses

Working for part b :
Right issue : 1/6 x 120000/0.5 = 40000 shares amount credited to share capital ( 40000x0.5) =$20000 Amount credited to
share premium (40000 x0.05) = $ 2000 ;
Bonus issue : 1/5 x (120000+ 20000)/0.50 = 56000 shares ;
Amount credited top share capital 56000 x0.50 =$ 28000
Only $27000 can be debited to share premium as it does have only this much of amount available
Remaining $1000 would be debited to retained earning
Divined paid : 0.08 x ( 120000 +20000+ 28000) /0.50 =$ 26880
Downward revaluation of land would be subtracted from retained earning account as there is no balance in revaluation reserve
account
Question Answer Marks
11(b) Prepare the ledger accounts to record these transactions. 11

1 mark for all correct dates and correctly worded labels

Ordinary share capital account

2020 $ 2020 $
January 1 Balance b/d 120 000
July 1 Bank 20 000 (1)
August 1 Share premium 27 000 (1)
December 31 Balance c/d 168 000 Retained earnings 1 000 (1)
168 000 168 000
2021
January 1 Balance b/d 168 000 (1)OF

Share premium account

2020 $ 2020 $
August 1 Ordinary share capital 27 000 (1) January 1 Balance b/d 25 000
July 1 Bank 2 000 (1)
27 000 27 000
12.

The directors of H Limited provided the following details from the statement of financial position at30
September 2021. ( Nov 2022 Paper 21 Q 3)

$
Equity and reserves
Share capital (ordinary shares of $0.50 each) 200 000
Share premium 50 000
Retained earnings 120 000

During the year ended 30 September 2022, the following transactions took place.

Date Transaction

1 1 November 2021 Paid a final dividend of $0.06 per ordinary share.

2 1 January 2022 Made a rights issue of two ordinary shares for every five shares
held at a price of $0.60. The issue was fully subscribed.

3 1 July 2022 Paid an interim dividend of $0.02 per ordinary share.

4 31 August 2022 Made a bonus issue of one ordinary share for every four shares
held. The directors decided to leave the reserves in the most
flexible form.

REQUIRED

(a) Prepare journal entries to record transactions 1 – 4. Dates and narratives are not required.

Workings:

[Turn over
 Journal

Item Account Debit Credit

$ $

[10]

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 (b) State three reasons why a company may make a bonus issue of shares.

1 ................................................................................................................................................

...................................................................................................................................................

2 ................................................................................................................................................

...................................................................................................................................................

3 ................................................................................................................................................

...................................................................................................................................................
[3]

(c) State two features of preference shares.

1 ................................................................................................................................................

...................................................................................................................................................

2 ................................................................................................................................................

...................................................................................................................................................
[2]

(Total =15 marks)

Solution :
12(a) Journal 10
Debit Credit
1. Dividend paid ( Retained earnings ) 24000
Bank 24000

2. Bank 96000
Share capital 80000
Share premium 16000
3. Dividends paid ( Retained earnings) 11200
Bank 11200
4. Share premium 66000
Retained earnings 4000
Bank 70000
12 b) Enables the company to liquidate capital reserves that cannot be used to pay dividends. (1)
Enables the company to match long-term assets with long-term capital. (1)
Issued in place of cash/dividends when need to preserve cash (1)
It is less expensive than a rights issue or a new share issue. (1)

Max 3 marks
Accept other valid responses.

12 c) Shareholders have no voting rights. (1)

Shareholders receive priority in dividend payment over ordinary shareholders. (1)
Shareholders receive a fixed rate of dividend. (1)

Max 2 marks
Accept other valid responses.

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[Turn over
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