AFGW 1002: Introduction to Financial Accounting Semester 2 2013

Custom text (Gerrand et al) questions And Additional tutorial problems

Topic 6: Companies Solutions

Reference: Custom text: Gerrand et al (2012): pages 263 310 Work requirements: Pages 294 - 303 questions 6.12, 6.13, 6.20, 6.29, 6.39, 6.41 Pages 309 310 Additional tutorial problems: questions 1 and 2.

Copyright Monash University 2012

Questions

Question 6.12
Under law, individuals or natural persons are liable for their actions. A corporation is a separate legal entity with a continuous life. That is, the life of the corporation continues until it is legally wound up or dissolved. This can last for many years, and employ many different staff and management in its lifetime. Therefore, the activities of the corporation are subject to legal requirements, in a similar manner to a natural person. There is separate legislation for companies, and this can be found in Corporations Law. The corporation is a legal entity, and therefore it is held responsible for the results of its actions. If the corporation is liable for its actions, then any legal impositions or penalties may reduce its financial results, and in the longer term impact its reputation.

Question 6.13
No, this is not correct. According to section 201(1) of the Corporations Law no dividend is to be payable to a shareholder except out of profits.

Question 6.20
The retained earnings extract from a Statement of Changes in Owners Equity for the year ended 31 December 2003: Retained earnings 31 December 2002 ........................................................................................... $ 245 200 Less: Net loss ................................................................................................................................ Less: Dividends paid/payable ....................................................................................................... (23 000) (33 600)

Retained earnings 31 December 2003 ........................................................................................... $ 188 600 Therefore the unknown amount of retained earnings at 31 December 2003 was $188 600.

Question 6.29
Showing journal entries to record the takeover

Smithers Bros Ltd DR 20X3 July 1 Cash at bank Equipment Goodwill Accounts payable $ 5 000 18 000 52 000 7 000 CR $

Liability to vendor (Purchase of business)

68 000

Liability to vendor Cash Paid-up capital (Payment of vendor)

68 000 8 000 60 000

(Note: The takeover could be recorded in one journal entry.)

Question 6.39
(a) Showing the relevant ledger accounts Cosy Co. Pty Ltd General ledger

Date

Account Dividend payable $

DR $

CR $

Balance

20X2 January 1 Balance 18 000 10 000 18 000 CR 10 000 CR

February 12 Cash Retained profits

Tax payable 20X2 January 1 March 31 Balance Cash 17 200 6 200 33 000 11 000 CR 6 200 DR 33 000 CR

December 31 Income summary Tax expense

Interim dividend 20X2 August 12 Cash 9 000 9 000 9 000 DR

December 31 Retained profits

Income summary 20X2 December 31 Net income before tax Tax payable Tax expense Retained profits 6 200 33 000 116 800 156 000 CR 149 800 CR 116 800 CR

Tax expense 20X2 December 31 Tax payable Income summary 33 000 33 000 33 000 DR

Retained profits 20X2 January 1 Balance 116 800 10 000 9 000 2 500 12 000 CR 128 800 CR 118 800 CR 109 800 CR 107 300 CR

December 3 Income summary Dividend payable Interim dividend General reserve

General reserve 20X2 January 1 December 31 Balance Retained profits 2 500 23 000 CR 25 500 CR

(b) Preparing retained profits statement and Statement of financial position

Cosy Co. Pty Ltd Retained profits statement as at 31 December 20X3

Retained profits at 1 January 20X3 add Net profit after tax

12 000 116 800 128 800

less Appropriations Final dividend payable Interim dividend paid Transfer to general reserve 2 500 10 000 9 000 21 500

Retained profits at 31 December 20X3

107 300

Cosy Co. Pty Ltd Statement of Financial Position as at 31 December 20X3 (extract)

Assets

Liabilities Tax payable Dividend payable

$ 33 000 10 000

43 000

Shareholders equity Paid-up capital General reserve Retained profits 60 000 25 500 107 300 150 800 193 800

Question 6.41 (a) Dr. Retained earnings Cr. General reserve $5,000 $5,000

Dr. Retained earnings Cr. Dividend payable Dr. Tax expense Cr. Tax payable

$10,000 $10,000 $52,500 $52,500

(b) Balance of the Retained Earnings as at 30 June 20X1: Opening balance + Net income before tax - Tax expense - Transfer to General reserve - Interim dividend paid - Final dividend declared Closing balance $50,000 $175,000 52,500 5,000 12,500 10,000 122,500 172,500

27,500 $145,000

Additional tutorial problems page 309 - 10 Solution Question 1 - Kapital Ltd

(a) Journal entries 30 Sept 2010 Dr Bank Trust Cr Application 1,375,000 1,375,000

10 Oct 2010

Dr Application 1,375,000 Cr Share Capital - Ordinary Cr Bank Trust

1,250,000 125,000

Dr Bank Cr Bank Trust

1,250,000 1,250,000

15 Feb 2011 Dr Interim Dividend 250,000 Cr Interim Dividend Payable

250,000

28 Feb 2011 Dr Dividend Payable Cr Bank 8 Mar 2011 Dr Land and Buildings Cr Share Capital ordinary Dr Tax Expense Cr Tax payable Dr Profit and Loss Summary Cr Tax expense Dr P+L Summary

250,000 250,000 2,000,000 2,000,000* 285,000 285,000 285,000 285,000 665,000

This assumes an issue price of $1 per share.

30 Jun 2011

$950,000 x 30%

Cr Retained Earnings Transfer of profit after tax (NPAT) to retained earnings Dr Retained Earnings Cr Final Dividend Payable
$0.06 dividend on 7m ordinary shares

665,000

420,000 420,000 250,000 250,000

Dr Retained Earnings Cr Interim Dividend

Dr Retained Profits Cr Reserves

Appropriation of profit could combine these 3 entries.

150,000 150,000 420,000 420,000

22 July 2011 Dr Final Dividend Payable Cr Bank

3 Oct 2011

Dr Tax Payable Cr Bank

285,000 285,000

(b) Kapital Ltd: Statement of Changes in Equity for the year ended 30 June 2011 Shareholders Equity 1 July 2010 Share Capital Balance at 1 July 2010 Issues of share capital Balance at 30 June 2011 Reserves Balance at 1 July 2010 Transfer from retained earnings Balance at 30 June 2011 Retained Earnings Balance at 1 July 2010 Profit after tax Transfer to reserves Dividends paid/payable Balance at 30 June 2011 Shareholders Equity 30 June 2011 1,270,000 665,000 (150,000) (670,000) 1,115,000 $9,115,000 600,000 150,000 750,000 4,000,000 3,250,000 7,250,000 $5,870,000

Solution Question 2 Brown Coal Ltd

(a) Some narrations provided as explanation 2011 10 Jan. Bank Trust Application Ordinary 12 Jan.

7 000 000 7 000 000 7 000 000 5 600 000 1 400 000 5 600 000 5 600 000 240,000 240,000 4 000,000 4 000,000 212,000 212,000

Application Ordinary Share Capital Ordinary Bank Trust

12 Jan. Bank Bank Trust 14 Jan Bank Share Capital Preference Building (PP&E) Share Capital Preference 15 July Interim Dividend 10% Preference shares Interim Dividend Payable - Preference
Interim dividend declared of $1 (10% x $20 * 6/12)per pref share

Interim Dividend Ordinary shares Interim Dividend Payable - Ordinary

Interim dividend declared of 20c on 1 million ordinary shares

200,000 200,000

15 Aug Interim Dividend Payable Preference Interim Dividend Payable - Ordinary Bank 31 Dec Tax Expense Tax Payable
Income tax expense payable on $1m Net Profit (BT) (Tax rate = 30% so NP(BT) $700,000/0.7 = $1m)

212,000 200,000 412,000 300,000 300,000

P/L Summary Retained Earnings Transfer Net Profit after Tax to Retained Earnings. Retained Earnings General Reserve Transfer to General Reserve

700,000 700,000

100,000 100,000

Retained Earnings

874,000

Interim Dividend - preference Interim Dividend - ordinary Final Dividend payable - preference Final Dividend payable- ordinary Appropriate final dividends and close interim dividend accounts 5 Feb Final Dividend payable - preference Final Dividend payable- ordinary Bank
Pay final dividends

212,000 200,000 212,000 250,000

212,000 250,000 462,000 300,000 300,000

15 Feb Tax payable Bank

Pay tax bill

(b) Balance Sheet Extract as at 31 December 2011 EQUITY Share Capital: (Authorised capital: 1 000 000 ordinary shares, 400,000 Preference Shares) Paid up Capital: 212,000 10% preference shares fully paid at $20 1, 000,000 ordinary shares fully paid at $14 Total share capital Other Reserves Asset Revaluation Reserve General Reserve 200,000 350,000 4 240,000 14,000,000 18,240,000

Retained earnings

178,000

Total Equity

$18,968,000

Statement of Changes in Equity as at 31 December 2011 Share Capital Preference shares Balance at beginning Issued 212,000 preference shares at $20 value Balance at end Ordinary shares Balance at beginning (600,000) fully paid at $14 Issued 400,000 ordinary shares at $14 value Balance at end (100,000) fully paid at $14 8,400,000 5,600,000 14,000,000 0 4,240,000 4,240,000

Asset Revaluation Reserve Balance at beginning Nil transfers Balance at end General Reserve Balance at beginning Transfer from retained earnings Balance at end 250,000 100,000 350,000 200,000 ----------200,000

Retained Earnings Balance at the beginning of the year Add: Net Profit (ATax) Less Transfer to General Reserve Interim dividend paid preference shares Interim dividend paid ordinary shares Final dividend payable preference shares Final dividend payable ordinary shares Balance at end (100,000) (212,000) (200,000) (212,000) (250,000) 178,000 452,000 700,000

Total shareholders equities 30.6.2011

18,968,000