Accounting. Financial Accounting: Published Final Accounts and Issues of Shares Pack [ADVANCED HIGHER] Anne Duff. abc

Transcription

1 Accounting Financial Accounting: Published Final Accounts and Issues of Shares Pack [ADVANCED HIGHER] Anne Duff abc

2 The Scottish Qualifications Authority regularly reviews the arrangements for National Qualifications. Users of all NQ support materials, whether published by LT Scotland or others, are reminded that it is their responsibility to check that the support materials correspond to the requirements of the current arrangements. Acknowledgement Learning and Teaching Scotland gratefully acknowledge this contribution to the National Qualifications support programme for Accounting. First published This publication may be reproduced in whole or in part for educational purposes by educational establishments in Scotland provided that no profit accrues at any stage. ISBN-10: ISBN-13:

3 CONTENTS Published Final Accounts Section 1: Theory notes on Published Final Accounts 5 Section 2: Exercises: Published Final Accounts 17 Section 3: Solutions to exercises 33 Issue of Shares Pack Section 1: Theory notes on Issue of Shares 57 Section 2: Exercises: Issue of Shares 73 Section 3: Solutions to exercises 83 FINANCIAL ACCOUNTING (AH) 3

4 4 FINANCIAL ACCOUNTING (AH)

5 SECTION 1 THEORY NOTES ON PUBLISHED FINAL ACCOUNTS Published accounts of limited companies What are the differences between internal and external reporting? All companies draw up Final Accounts. When the accounts are for internal use only the directors and management can use any layout they consider most suitable to their needs. As well as internal accounts, all limited companies in the UK are required, by law, to produce financial statements which are published and are available for anyone to examine. These accounts must conform to the Companies Act 1985 (as amended by the Companies Act of 1989). The published accounts must be sent to the shareholders, debenture holders etc of a company before the annual general meeting and are discussed at that meeting. A copy of the accounts (Statutory Accounts) is sent to the Registrar of Companies. The Companies Act 1985 sets out the information which must be shown and also states how it should be shown. What are the procedures for forming a plc? The Companies Act generally allows one or more persons to form a company; however, a public company must have at least two subscribers. When forming a company, a memorandum of association and articles of association must be drawn up and sent to the Registrar of Companies with a registration fee. Details of these documents have been covered in your Higher accounting course Another two forms (10 and 12) must also be completed. Form 10 gives details of first directors, etc., and Form 12 is a declaration that the company will comply with all legal requirements. A private company must have at least one director and one secretary, not necessarily fully qualified. A public company must have at least 2 directors and one qualified secretary. It must have a minimum authorised share capital of 50,000. Before it can start business it must have allotted shares valuing at least 50,000. One quarter of the nominal value must be paid up. A newly formed plc must also have received a certificate from Companies House. FINANCIAL ACCOUNTING (AH) 5

6 THEORY NOTES ON PUBLISHED FINAL ACCOUNTS What are the Directors responsibilities (Stewardship) Companies are owned by shareholders, but the responsibility of looking after the affairs of a company is held by the directors. The directors are stewards of limited companies. The directors of a limited company must ensure that the provisions of the Companies Act 1985 are followed. The company director is responsible for ensuring that the statutory accounts are produced and filed with the Registrar of Companies. The company s Board of Directors must approve the annual accounts. The directors must prepare a directors report which must be approved by the board. What are the main provisions of the Companies Act? The main provisions of the Companies Act deal with: 1. What the accounting records must show; 2. What the accounting records must contain. 1. The accounting records must: show and explain the company s transactions disclose with reasonable accuracy at any time the financial position of the company enable the directors to ensure that the company s final accounts comply with the Act and give a true and fair view of the company s financial position. 2. The accounting records must contain: day-to-day entries of money received and paid, together with details of the transactions a record of the company s assets and liabilities details of stock held at the end of the year. 6 FINANCIAL ACCOUNTING (AH)

7 THEORY NOTES ON PUBLISHED FINAL ACCOUNTS What are the main requirements under current accounting practices and statement of principle? As well as ensuring that the main provisions of the Companies Act are followed, companies must also take note of the requirements of the relevant Statements of Standard Accounting Practice (SSAPs) and Financial Reporting Standards (FRSs) as set out by the Accounting Standards Board and the Urgent Issues Task Force (UITF) Abstracts. The requirements of International Accounting Standards must also be observed from 2005 onwards. It is expected that, if the above requirements are met, the financial statements produced will give a true and fair view of the company. What are the Statutory Accounts of a company? The Companies Act requires that the following statements are produced: Profit and loss account Balance sheet Cash flow statement Notes to the accounts Directors report Auditors report Statement of total recognised gains and losses Profit and loss account You are familiar with producing Profit and Loss Accounts for internal use and this is the basis for the preparation of the published version, which does not include as much detail. It is a summarised version. The Companies Act gives a choice of two layouts for this account but the example below shows the most commonly used. The requirements of FRS 3 Reporting Financial Performance must be followed. FINANCIAL ACCOUNTING (AH) 7

8 THEORY NOTES ON PUBLISHED FINAL ACCOUNTS Account for external use Profit and Loss Account of ABC plc for year ending 31 December s 000s Turnover 150 Cost of Sales 90 Gross Profit 60 Distribution Costs 15 Administration Costs Other Operating Income Income from Interest/Dividends 5 50 Interest Payable 2 Profit/Loss ordinary activities 48 Tax on ordinary activities 12 Profit/Loss on ordinary activities after taxation 36 Extraordinary income/expenses (net of tax) 4 Profit/loss for year 32 Transfer to reserves 5 Dividends paid and proposed Retained profit for year 15 8 FINANCIAL ACCOUNTING (AH)

9 THEORY NOTES ON PUBLISHED FINAL ACCOUNTS Turnover is the money derived from the sale of goods and services from the company s ordinary activities. This figure is shown after the deduction of trade discount and VAT. Cost of sales, distribution and administration costs. It is unnecessary to show the details of these amounts. The figures shown should include any depreciation charges which may be split amongst the three headings. Administration expenses include the net figures for discount received and allowed, Bad Debts, changes in Provision for Doubtful Debts, Directors Fees and Audit Charges. Other operating income is any income not resulting from normal trading activities, e.g. profit made from selling assets or rent received from a tenant if the space is surplus to requirements. Income from interest/dividends. This heading includes any dividend received from shares that the company holds in other companies and interest from any amounts lent to other organisations, e.g. government. Interest payable includes any amounts paid on overdrafts, loans and debentures. These amounts should be shown separately. Extraordinary income/expenses are items that do not result from the normal trading activities of the company. They are one-off items which are unlikely to recur, e.g. proceeds from the sale of an antique piece of equipment found in an old store room or the result of the sale of a subsidiary company. Attempt Exercises 1 5 FINANCIAL ACCOUNTING (AH) 9

10 THEORY NOTES ON PUBLISHED FINAL ACCOUNTS Balance Sheet The Companies Act gives a choice of two layouts for published Balance Sheets. The vertical layout is used here. It is similar to the internal layout you are familiar with. Balance Sheet of ABC plc as at 31 December 20 1 (for external use). 000s 000s Fixed Assets Intangible Assets 30 Tangible Assets 640 Investments 400 1,070 Current Assets Stock 85 Debtors 105 Investments - Cash/Bank 25 Prepayments and accrued income Creditors: amounts falling due within one year Trade Creditors 87 Accruals Net Current Assets 106 Total Assets less Current Liabilities 1,176 Creditors: amounts falling due after one year 140 Provisions for liabilities and charges Net Assets 1,036 Capital and Reserves Called-up share capital 800 Share Premium 40 Reserves 196 Equity Shareholders funds 1, FINANCIAL ACCOUNTING (AH)

11 THEORY NOTES ON PUBLISHED FINAL ACCOUNTS Fixed Assets are long-term assets owned for use in the business. Intangible Assets are assets which cannot be seen or touched, e.g. patents, trade marks, goodwill. Only intangible assets that have been bought can be shown in the Balance Sheet, i.e. goodwill built up through trading cannot be shown. Tangible Assets are assets like Buildings, Machinery, Vehicles, etc. Investments include shares in and loans to other businesses which are to be held for more than one year. They are shown at either cost or market value whichever is the lower. Current Assets are short-term assets which are expected to be converted into cash within one year. Calls in arrears are shown here. Creditors: amounts falling due within one year are the current liabilities of the company and include trade creditors, overdraft, other short-term loans, calls in advance, tax due dividends proposed, accruals, etc. Creditors: amounts falling due after more than one year include mortgage, debentures with more than one year to run. Provisions for liabilities and charges include items like possible pension obligations and deferred taxation. Reserves include Revaluation Reserves and Capital Redemption Reserves. Cash flow statement All medium and large limited companies must include a Cash Flow Statement as part of their published accounts. This requirement is stated in FRS 1 Cash Flow Statements, a statement to be looked at in detail when studying that topic. Notes to the accounts The published accounts are generally kept short and simple. Any other details and breakdown of figures that are required by the Companies Act are shown in the accompanying notes to the accounts. These notes include: 1. disclosure of accounting policies used, e.g. relating to depreciation and any changes to these policies 2. explanation of any deviation from accounting standards 3. sources of turnover from different geographical markets 4. details of fixed assets, investments, share capital, debentures and reserves 5. directors emoluments pensions, earnings and other benefits 6. auditors remuneration 7. statement of earnings per share. FINANCIAL ACCOUNTING (AH) 11

12 THEORY NOTES ON PUBLISHED FINAL ACCOUNTS 1. Disclosure of Accounting Policies The basis of this requirement is FRS 18 Accounting policies. Firms should ensure that the policies adopted are the most appropriate to their circumstances so that a true and fair view can be presented. Firms should review their accounting policies regularly to ensure they are still appropriate. If a change is required then this should be explained in the note. The areas requiring accounting policies include: depreciation whether straight-line, reducing balance, etc. stock valuation cost, market value, etc. research and development 2. Deviation from Accounting Standards If, for any reason, the firm has not followed the Accounting Standards then an explanation must be included in the notes. 3. Sources of Turnover A breakdown of Turnover can be shown according to type of product or geographical area, e.g. Analysis of turnover by area: Turnover Profit South of England 2,000, ,000 Midlands 1,250,00 75,000 North of England 1,500,000 90,000 Wales 600,000 40,000 Scotland 850,000 46, Details of fixed assets, investments share capital, debentures and reserves Fixed assets This section gives details of: cost or valuation at beginning and end of year depreciation at beginning and end of year changes during the year. 12 FINANCIAL ACCOUNTING (AH)

13 THEORY NOTES ON PUBLISHED FINAL ACCOUNTS Investments This section gives information on listed investments, i.e. those quoted on stock exchange. cost price additions or disposals during the year market value. Share capital and debentures This section gives information on: authorised and issued capital debentures issued, repayment dates, etc. Reserves The section shows information on: retained profit, revaluation reserve and share premium account opening balances, movements and closing balances. 5. Directors emoluments This section shows: total of directors salaries, fees and bonuses allowances which are taxed benefits in kind. 6. Auditors remuneration This section shows the amount of the fees and expenses paid to the auditors. 7. Statement of earnings per share This states the earnings per share. This topic will be dealt with when doing Ratio Analysis. Attempt Exercises 6 12 FINANCIAL ACCOUNTING (AH) 13

14 THEORY NOTES ON PUBLISHED FINAL ACCOUNTS Directors report A directors report must be prepared and sent to shareholders along with the accounts. There is no recommended layout for this report but it must include: names of directors, their interests in any trading contracts, the number of shares and debentures held at the start of the year a statement of the principal activities of the company a review of the development of the company during the year and details of any likely future developments information on changes in fixed assets, i.e. purchase, sale or valuation of assets details of proposed dividends significant differences between the book value and market value of land and buildings details of proposed dividends details of transfer to reserves particulars of any significant events since the end of the financial year details of political and charitable donations a health and safety statement including employee statistics policy on employment of disabled people details of action taken on employee involvement and consultation policy on payment of creditors. The report is audited along with the final accounts and may be reported upon by the auditors. Auditors report After the preparation of the accounts they must be checked (audited) by an independent firm of professional accountants. Their report the auditors report has three main sections: respective responsibilities of directors and auditors, i.e. the directors are responsible for preparing the accounts while the auditors are responsible for forming an opinion on the accounts basis of opinion, i.e. how the audit was planned and carried out opinion the auditors opinion of the accounts. The auditors check that the accounts give a true and fair view of the company s affairs. Any figures that cause concern are discussed with the directors and often changed. If there is a major disagreement between 14 FINANCIAL ACCOUNTING (AH)

15 THEORY NOTES ON PUBLISHED FINAL ACCOUNTS the firm and the auditors which cannot be resolved, the auditors will qualify their report, i.e. they will give an explanation of why they cannot certify that the accounts give a true and fair view. The auditors also certify that the accounts conform to the requirements of the Companies Act. Statement of recognised gains and losses This statement shows total recognised profits and losses from the profit and loss account together with unrealised profits. Unrealised profits are profits resulting from, for example, the revaluation of fixed assets which would not be shown in the profit and loss account. An example of a statement of recognised gains and losses is shown below: Trial plc Statement of Total Recognised Gains and Losses for year ended 31 December s Profit for year 750 Unrealised surplus on revaluation of assets 240 Total recognised gains for year 990 Do all companies have to file full sets of accounts? Small and medium-sized private companies are permitted to file modified accounts with the Registrar of Companies, however they still must prepare full accounts to present to their members. A small company (turnover less than 2.8m) does not need to file a profit and loss account. The directors report can be shortened and details of directors emoluments are not required. The balance sheet need only show the main asset and liability headings. The required notes on the balance sheet are also abbreviated. A medium-sized company (turnover less than 11.2m) is required to file a profit and loss account but it can start with the Gross Profit figure. Other than this a full set of accounts must be filed. FINANCIAL ACCOUNTING (AH) 15

16 THEORY NOTES ON PUBLISHED FINAL ACCOUNTS The above concessions are for private limited companies only. All public limited companies, no matter of size, must file full accounts. Attempt Exercises FINANCIAL ACCOUNTING (AH)

17 SECTION 2 EXERCISES: PUBLISHED FINAL ACCOUNTS Exercise 1 The following ten items have been taken from the books of RTF plc. Place each item under the correct heading in the box for inclusion in the Profit and Loss Account for distribution to shareholders. Repairs to delivery vehicles Depreciation of fork-lift trucks used in warehouse Audit Fees Fuel for company cars Advertising Warehouse heat and light Bank Interest Discount allowed Carriage In Wages of delivery van drivers Cost of Sales Distribution Costs Administration Costs FINANCIAL ACCOUNTING (AH) 17

18 EXERCISES: PUBLISHED FINAL ACCOUNTS Exercise 2 The following Trading Profit and Loss Accounts have been prepared for internal use by Lee plc. Trading and Profit and Loss Accounts for year ended 31 December Sales 270 Less Cost of Sales: Opening Stock 35 Add Purchases Less Closing Stock Gross Profit 180 Distribution Costs: Advertising 13 Depreciation of Vehicles 8 Wages 30 Selling Expenses 5 56 Administration Costs: Salaries 50 Depreciation of Office Equipment 2 Provision for Doubtful Debts 1 Heat and Light 4 Audit Fees Rent Received 5 67 Debenture Interest 4 Net Profit before Tax 63 Corporation Tax 16 Net Profit after Tax 47 Preference Share Dividend 6 Ordinary Share Dividend Retained Profit for year 21 Add Retained Profit brought forward 9 Retained Profit carried forward 30 You are required to prepare the Profit and Loss Account for the year for distribution to shareholders. 18 FINANCIAL ACCOUNTING (AH)

19 EXERCISES: PUBLISHED FINAL ACCOUNTS Exercise 3 The following Trading and Profit and Loss Accounts have been prepared for internal use by Narsapur plc. Trading and Profit and Loss Accounts for year ended 31 December Sales 3,200 Less Cost of Sales: Opening Stock 320 Add Purchases 920 1,240 Less Closing Stock 220 1,020 Gross Profit 2,180 Distribution Costs: Vehicles Expenses 130 Depreciation of Vehicles 100 Wages 500 Selling Expenses Administration Costs: Salaries 470 Depreciation of Office Equipment 40 Discount Allowed 30 Bad Debts 60 Directors Fees 80 Audit Fees , Discount Received 40 Interest Received 50 Decrease in Provision for Doubtful Debts 20 Profit on Sale of Vehicles Debenture Interest 40 Net Profit before tax 680 Corporation Tax 170 Net Profit after Tax 510 General Reserve 50 Ordinary Share Dividend Retained Profit for year 260 Add Retained Profit brought forward 40 Retained Profit carried forward 300 You are required to prepare the Profit and Loss Account for external use. FINANCIAL ACCOUNTING (AH) 19

20 EXERCISES: PUBLISHED FINAL ACCOUNTS Exercise 4 The following balances have been taken from the ledger of Philips plc at 30 June s Sales 7,170 Purchases 3,300 Returns In 250 Returns Out 410 Stock at Carriage In 65 Warehouse Costs 40 Wages and Salaries 1,599 Selling Expenses 58 Audit Fees 10 Directors Emoluments 12 Rent Received 6 Equipment at cost 1,400 Vehicles at cost 700 Provision for Doubtful Debts Provision for Depreciation Equipment 560 Vehicles 250 Loss on sale of equipment 2 Dividends Received 20 Ordinary dividend paid 300 Profit and loss Balance brought forward FINANCIAL ACCOUNTING (AH)

21 EXERCISES: PUBLISHED FINAL ACCOUNTS Notes 1. Stock at end of year is valued at 470, Depreciation for the year is to be charged as follows: Equipment 15% of cost Vehicles 20% on diminishing balance Depreciation of Equipment is to be charged to Cost of Sales, Distribution and Administration in the ratio of 2:1:2 respectively. Vehicles are used solely for the delivery of goods to customers. 3. Wages and Salaries owing 25,000. Wages and Salaries are to be split between Cost of Sales, Distribution and Administration in the ratio of 3:2:2. 4. Selling Expenses paid in advance 7, Provision for Doubtful Debts is to be increased by 3, Corporation Tax for year is estimated at 448, The Directors propose to: pay a final dividend of 450,000 transfer 200,000 to Reserves You are required to prepare the Profit and Loss Account for year ended 30 June 20 1 for publication. Do not produce Notes to the Accounts but show working notes. FINANCIAL ACCOUNTING (AH) 21

22 EXERCISES: PUBLISHED FINAL ACCOUNTS Exercise 5 The following balances were taken from the ledger of Balmay plc on 31 March s Net Sales 15,010 Opening Stock 940 Net Purchases 6,470 Warehousing Expenses 996 Wages 3,206 Insurance 350 Rent 954 Discounts 24 (Cr) Bad Debts 5 Distribution Expenses 34 Administration Expenses 22 Debenture Interest (half year) 6 Delivery Vehicles at cost 860 Equipment at cost 200 Provision for Depreciation at 1 April 20-0: Delivery Vehicles 360 Equipment 75 Provision for Doubtful Debts at 1 April Investment Income 25 Directors Fees 120 Auditors Fees 80 Profit on Sale of Delivery Vehicles 8 Interim Ordinary Dividend 70 Retained profits brought forward FINANCIAL ACCOUNTING (AH)

23 EXERCISES: PUBLISHED FINAL ACCOUNTS Notes 1. Stock at 31 March 20 1 was valued at 980, Provide for depreciation as follows: Delivery Vehicles 25% on the diminishing balance Equipment 10% on cost Equipment depreciation is to be split as follows Cost of sales 40% Distribution 10% Administration 50% 3. On 31 March 20 1 the following amounts were outstanding Rent 12,000 Debenture Interest 6, On 31 March 20 1 Distribution Expenses of 9,000 were prepaid 5. Rent, Insurance and Wages are to be split 2:2:3 amongst Cost of Sales, Distribution and Administration respectively. 6. Provision for Doubtful Debts is to be increased to 10, Provide for Corporation Tax at the rate of 25% 8. The Directors propose to: Pay Preference dividend of 60,000 Pay a final Ordinary dividend of 70,000 You are required to prepare, from the above information: (a) (b) Trading and Profit and Loss Accounts for the year ended 31March 20 1 for internal use. Profit and Loss Account for the year ended 31 March 20 1 for external use. These accounts should conform to the requirements of the Companies Act. FINANCIAL ACCOUNTING (AH) 23

24 EXERCISES: PUBLISHED FINAL ACCOUNTS Exercise 6 Give 2 examples of items which would be included under each of the following headings in a Balance Sheet for distribution to shareholders. (i) (ii) (iii) (iv) (v) (vi) Intangible assets Tangible assets Investments Creditors: amounts falling due within one year Creditors: amounts falling due after one year Reserves Exercise 7 When preparing Final Accounts for distribution to shareholders state the information which is shown in the following notes to the accounts: (i) (ii) (iii) Disclosure of Accounting Policies Fixed Assets Reserves Exercise 8 Name another 3 notes which could be prepared when completing the Notes to the Accounts. 24 FINANCIAL ACCOUNTING (AH)

25 EXERCISES: PUBLISHED FINAL ACCOUNTS Exercise 9 The following Balance Sheet for internal use has been prepared for Anderson Appliances plc. Balance Sheet as at 31 December Fixed Assets 000s 000s 000s Cost Agg Depn NBV Land and Buildings 500 (150) 650 Machinery Fittings ,046 Investments 35 Intangible Assets Trade Marks 78 Goodwill ,174 Current Assets Stock 89 Debtors (104 10) 94 Prepayments Current Liabilities Bank Overdraft 6 Creditors 53 VAT 26 Accruals 12 Debenture Interest owing 3 Corporation Tax 20 Ordinary Dividend owing Working Capital 49 Total Net Assets 1,223 Long-term Liabilities 10% Debentures 60 Total Net Assets 1,163 financed by Capital and Reserves 200,000 5% 2 Preference Shares ,000 1 Ordinary Shares Reserves Share Premium 50 Revaluation Reserve 150 Profit and Loss ,163 You are required to prepare the Balance Sheet as at 31 December 20 1 for external use. Do not prepare any notes to the accounts. FINANCIAL ACCOUNTING (AH) 25

26 EXERCISES: PUBLISHED FINAL ACCOUNTS Exercise 10 Nairn Products plc have just completed their first year of trading. The following balances have been taken from the ledger after the Trading and Profit and Loss Accounts have been prepared. Trial Balance as at 30 September 20 1 m m Fully paid Issued Capital: Ordinary Shares of Stocks Debtors 14 Bank 8 Creditors 12 Prepayments 6 Accruals 3 Buildings cost 60 Vehicles cost 15 Equipment cost 9 Investments cost 23 Provision for Depreciation Vehicles Provision for Depreciation Equipment Provision for Doubtful Debts Goodwill 2 Patents 8 8% Debentures (2020) 10 Share Premium 25 Tax due 10 Dividends due 10 Retained Profit Notes 1. Buildings are to be revalued at their current estimated market value of 68,000, The market value of Investments is 26,000, The authorised share capital is 150,000,000 1 Ordinary Shares 26 FINANCIAL ACCOUNTING (AH)

27 EXERCISES: PUBLISHED FINAL ACCOUNTS You are required to prepare: (a) (b) (c) The Balance Sheet as at 30 September 20 1 for presentation to the directors of Nairn Products plc. The Balance Sheet at 30 September 20 1 for presentation to the shareholders. Notes to the Accounts to explain (i) Movement of Fixed Assets (ii) Investments (iii) Share Capital and Debentures FINANCIAL ACCOUNTING (AH) 27

28 EXERCISES: PUBLISHED FINAL ACCOUNTS Exercise 11 The following figures were taken from the books of Kuper Krafts plc at 31 December s Sales 23,000 Stock at 1 January (at cost) 3,306 Buildings (cost) 6,400 Land (cost) 600 Vehicles (cost) 1,500 Plant and Machinery (cost) 1,800 Investments (market value 300,000) 250 Goodwill 100 Bank Overdraft 502 Debtors 1,740 Trade Creditors 620 Audit Fees 156 Prepayments 100 Accruals 292 Distribution Expenses 160 Dividends Received 24 Bank Interest 14 Purchases 14,000 Wages and Salaries 3,392 Administration Expenses 2,940 Interim Ordinary Share Dividend 200 Provision for Depreciation (1 January): Buildings 2,200 Vehicles 900 Plant and Machinery 1,100 Issued Share Capital (fully paid): 10,000,000 50p Ordinary Shares 5,000 1,000, % Preference Shares 1,000 Share Premium 540 Profit and Loss Account at 1 January 1,480 Notes 1. Stocks at 31 December were 3,020,000 (at cost). 2. Wages and Salaries should be allocated as follows: Cost of Sales 2,160,000 Administration costs 440,000 Distribution costs 792, FINANCIAL ACCOUNTING (AH)

29 EXERCISES: PUBLISHED FINAL ACCOUNTS 3. Provide for Depreciation on Fixed Assets as follows: Buildings 1% per annum using straight line method Vehicles 25% per annum using reducing balance method Plant and machinery 20% per annum using straight line method 4. Depreciation for the year should be allocated as follows: Buildings Cost of sales 50% Distribution costs 25% Administration costs 25% Plant and machinery Cost of sales 60% Distribution costs 20% Administration costs 20% Vehicles are used for delivery of goods to customers only. 5. Corporation tax on profits for the year is estimated to be 240, The directors propose that: (a) the Preference Share dividend be paid in full (b) a dividend of 5p per share be paid to Ordinary Shareholders. 7. The Authorised Share Capital of the company consists of: 15,000,000 Ordinary Shares of 50p each 2,000,000 8% Preference Shares of 1 each. You are required to: (a) Calculate the total of (i) Costs of sales (ii) Distribution costs (iii) Administration costs (b) Prepare the draft Profit and Loss Account for year ended 31 December 20 1 and a Balance Sheet as at that date for presentation to the shareholders. (Show working notes.) The accounts should conform to the requirements of the Companies Act. (c) Prepare Notes to the Accounts to explain (i) Movement of Tangible Fixed Assets (ii) Disclosure of Accounting Policies. FINANCIAL ACCOUNTING (AH) 29

30 EXERCISES: PUBLISHED FINAL ACCOUNTS Exercise 12 The financial year of Easson Electronics plc ends on 30 June and the following balances were taken from the accounts on 30 June Trial Balance as at 30 June s 000s Issued Share Capital (fully paid): 1,000,000 6% 1 Preference Shares 1,000 10,000,000 1 Ordinary Shares 10,000 Share Premium 360 8% Debentures ( ) 100 Profit and Loss Account Balance at 1 July Sales: Highlands 8,000 Central 14,000 Borders 6,000 Stocks at 1 July ,300 Advertising 120 Bank Charges 12 Purchases 10,000 Carriage on Purchases 82 Trade Marks 245 Directors Fees 1,650 Auditors Fees 89 Insurance 310 Carriage on Sales 150 Wages and Salaries 14,400 Land and Buildings cost 7,000 Equipment cost 800 Fixtures and Fittings cost 450 Provision for Depreciation at 1 July 20 0: Equipment 30 Fixtures and Fittings 25 Trade Debtors 4,180 Trade Creditors 2,100 Provision for Doubtful Debts at 1 July 20 0: 120 Sundry Warehouse Expenses 4 Goodwill 38 Sundry Office Expenses 17 Bank 13 Sundry Selling Expenses 31 41,891 41, FINANCIAL ACCOUNTING (AH)

31 EXERCISES: PUBLISHED FINAL ACCOUNTS Notes 1. Stock at 30 June 20 1 at cost 3,200, Depreciation is charged as follows Equipment 15% per annum on cost Fixtures and Fittings 20% per annum on diminishing balance basis 3. Depreciation is to be charged to Cost of Sales, Distribution and Administration respectively as follows: Equipment 1:1:2 Fixtures and Fittings 2:1:2 4. Provision for Doubtful Debts is to be decreased to 105, Land and Buildings is to be revalued at 7,200, An equipment replacement reserve is to be created with an initial transfer from profits of 50, Provide for the following: Insurance prepaid 10,000 Carriage on sales due 20,000 Debenture Interest for year due Corporation tax at 25% 8. Wages and Salaries and Insurance are to be split equally between Cost of Sales, Distribution and Administration. 9. The Authorised Share capital is 2,000,000 6% Preference Shares and 15,000,000 1 Ordinary Shares. 10. The Directors propose to: (i) Pay the preference share dividend for the year (ii) Pay a final dividend of 8% on ordinary shares (iii) Write down goodwill to zero FINANCIAL ACCOUNTING (AH) 31

32 EXERCISES: PUBLISHED FINAL ACCOUNTS From the Trial Balance and Notes, you are required to: (a) Calculate the totals for Cost of Sales, Distribution Costs and Administration Costs (b) Prepare the Profit and Loss Account for the year ended 30 June 20 1 and a Balance Sheet at that date for external use and to conform, as far as possible, to the requirements of the Companies Act. (c) Prepare Notes to the Account to show Sources of Turnover from different geographical markets and Details of Reserves. Exercise 13 For the above exercise, prepare a Statement of Total Recognised Gains and Losses for year ended 30 June Exercise 14 State five items of information which should be included in the Directors Report. Exercise 15 Name the three main sections of an Auditors Report. 32 FINANCIAL ACCOUNTING (AH)

33 SECTION 3 SOLUTIONS TO EXERCISES Solutions Exercise 1 Cost of Sales Distribution Costs Administration Costs Depreciation of fork Repairs to delivery Audit Fees lift trucks vehicles Warehouse heat and Advertising Fuel for company cars light Carriage In Wages of delivery Bank Interest van drivers Discount allowed Exercise 2 Lee plc Profit and Loss Account for year ended 31 December Turnover 270 Cost of Sales 90 Gross Profit 180 Distribution Costs 56 Administration Costs Other Operating Income 5 67 Income from Interest/Dividends 67 Interest payable 4 Profit on Ordinary activities 63 Tax on ordinary activities 16 Profit on ordinary activities after taxation 47 Transfer to Reserves Dividends paid and proposed Retained profit for year 21 FINANCIAL ACCOUNTING (AH) 33

34 SOLUTIONS TO EXERCISES Exercise 3 Narsapur plc Profit and Loss Account for year ended 31 December Turnover 3,200 Cost of Sales 1,020 Gross Profit 2,180 Distribution Costs 850 Administration Costs (730 ( )) 670 1, Other Operating Income Income from Interest/Dividends Interest payable 40 Profit on Ordinary activities 680 Tax on ordinary activities 170 Profit on ordinary activities after taxation 510 Transfer to Reserves 50 Dividends paid and proposed Retained profit for year FINANCIAL ACCOUNTING (AH)

35 SOLUTIONS TO EXERCISES Exercise 4 Philips plc Profit and Loss Account for year ended 30 June s 000s Turnover 6,920 Cost of Sales 3,925 Gross Profit 2,995 Distribution Costs 647 Administration Costs 573 1,220 1,775 Other Operating Income (6 2) 4 1,779 Income from Interest/Dividends 20 1,799 Interest payable Profit on Ordinary activities 1,799 Tax on ordinary activities 448 Profit on ordinary activities after taxation 1,351 Extra ordinary Income 0 1,351 Transfer to Reserves 200 Dividends paid and proposed Retained profit for year 401 FINANCIAL ACCOUNTING (AH) 35

36 SOLUTIONS TO EXERCISES Working Notes Cost of Sales: Opening Stock 620 Net Purchases (3, ) Closing Stock Carriage In 65 Warehouse costs 40 Depreciation Equipment 84 Wages and Salaries (3/7 1624) Cost of sales 3925 Distribution Costs: Selling Expenses (58 7) 51 Wages and Salaries (2/7 1624) 464 Depreciation Equipment (( %) 1/5) 42 Depreciation Vehicles ( ) 20% Administration Costs: Wages and Salaries (2/7 1624) 464 Depreciation Equipment (( %) 2/5) 84 Provision for Doubtful Debts 3 Directors Emoluments 12 Audit Fees Other Operating Income: Rent Received 6 Loss on Sale of Equipment (2) 4 36 FINANCIAL ACCOUNTING (AH)

37 SOLUTIONS TO EXERCISES Exercise 5(a) Balmay plc Trading and Profit and Loss Accounts (for internal use) for year ended 31 March s 000s 000s Sales 15,010 Less Cost of Sales: Opening Stock 940 Purchases 6,470 7,410 Closing Stock 980 6,430 Warehouse Expenses 996 Rent (2/7 ( )) 276 Insurance (2/7 350) 100 Wages (2/7 3,206) 916 Depreciation Equipment (40% 20) 8 2,296 Cost of Sales 8,726 Gross Profit 6,284 Add: Profit on Sale of Delivery Vans 8 Investment Income 25 Discounts (net) ,341 Less Expenses: Distribution Wages (2/7 3,206) 916 Insurance (2/7 350) 100 Rent (2/7 966) 276 Depreciation Delivery Vans (25% ( )) 125 Depreciation Equipment (10% 20) 2 Distribution Expenses (34 9) 25 1,444 Administration Wages (3/7 3,206) 1,374 Insurance (3/7 3500) 150 Rent (3/7 966) 414 Depreciation Equipment (50% 20) 10 Administration Expenses 22 Bad Debts 5 Directors Fees 120 Auditors Fees 80 FINANCIAL ACCOUNTING (AH) 37

38 SOLUTIONS TO EXERCISES Increase in Provision for Doubtful Debts 2 2,177 Debenture Interest 12 3,633 Net profit before Tax 2,708 Corporation Tax 677 2,031 Preference Share Dividend 60 Ordinary Share Dividend ( ) Retained Profit for year 1,831 Retained profit brought forward 185 Retained profit 2, FINANCIAL ACCOUNTING (AH)

39 SOLUTIONS TO EXERCISES Exercise 5(b) 000s 000s Turnover 15,010 Cost of Sales 8,726 Gross Profit 6,284 Distribution Costs* 1,420 Administration Costs 2,177 3,597 2,687 Other Operating Income 8 2,695 Income from Interest/Dividends 25 2,720 Interest payable 12 Profit on ordinary activities 2,708 Tax on ordinary activities 677 Profit on ordinary activities after taxation 2,031 Extra-ordinary Income 0 2,031 Transfer to Reserves 0 Dividends paid and proposed Retained profit for year 1,831 * Working Note Distribution Costs 1,444 Less Net Discounts 24 1,420 FINANCIAL ACCOUNTING (AH) 39

40 SOLUTIONS TO EXERCISES Exercise 6 Items included in (i) (ii) (iii) (iv) (v) (vi) Intangible Assets patents, trade marks, goodwill. Tangible Assets Land, Buildings, Vehicles, Machinery, Plant, Equipment, Fittings, etc. Investments shares in other organisations, loans to other businesses (if they have more than one year to run). Creditors: amounts falling due within one year creditors, bank overdraft, other short term loans, call sin advance, accruals, dividends due, tax due. Creditors: amounts falling due after one year debentures, loans with more than one year to run, mortgages. Reserves revaluation reserves, capital redemption reserves; unappropriated profits. Exercise 7 (i) Disclosure of Accounting Policies This note should give details on the following: depreciation whether straight-line, reducing balance, etc. (no actual figures are required) stock valuation cost, market value, etc. research and development any changes in these policies (ii) Fixed Assets This section gives details of: cost or valuation at beginning and end of year depreciation at beginning and end of year changes during the year (iii) Reserves The section shows information on: retained profit, revaluation reserve and share premium account opening balances, movements and closing balances 40 FINANCIAL ACCOUNTING (AH)

41 SOLUTIONS TO EXERCISES Exercise 8 Other notes include: deviation from accounting standards sources of turnover details of share capital, debentures and investments Directors Emoluments Auditors Remuneration Statement of earnings per share Note Any other relevant notes will be accepted although knowledge of them is not required for this course. FINANCIAL ACCOUNTING (AH) 41

42 SOLUTIONS TO EXERCISES Exercise 9 Anderson Appliances plc 000s 000s Fixed Assets Intangible Assets 93 Tangible Assets 1,046 Investments 35 1,174 Current Assets Stocks 89 Debtors 94 Investments Cash/Bank Prepayments and accrued Income Creditors: amounts falling due within one year Bank Overdraft 6 Creditors 53 VAT 26 Accruals 12 Debenture Interest owing 3 Corporation Tax 20 Ordinary Dividend owing Net Current Assets 49 Total Assets less Current Liabilities 1,223 Creditors: amounts falling due after one year 60 Provisions for liabilities and charges 60 Net Assets 1,163 Capital and Reserves Called-up Share Capital 900 Share Premium 50 Reserves 213 Equity Shareholders Funds 1, FINANCIAL ACCOUNTING (AH)

43 SOLUTIONS TO EXERCISES Exercise 10(a) Nairn Products plc Balance Sheet as at 30 September 20 1 m m m Fixed Assets Cost Agg Depn NBV Buildings 60 (8) 68 Vehicles Equipment (5) 89 Investments 23 Intangible Assets Patents 8 Goodwill Current Assets Stocks 35 Debtors 14 Less Provision for Doubtful Debts 1 13 Bank 8 Prepayments 6 62 Current Liabilities Creditors 12 Accruals 3 Tax due 10 Dividends due Working Capital % Debentures 10 Total Net assets 139 financed by: Capital and Reserves 1 Ordinary Shares 100 Share Premium 25 Building Revaluation Reserve 8 Retained Profits 6 Shareholders interest 139 FINANCIAL ACCOUNTING (AH) 43

44 SOLUTIONS TO EXERCISES Exercise 10(b) Nairn Products plc Balance Sheet (for external use) as at 30 September 20 1 m m Fixed Assets Intangible Assets 10 Tangible Assets 89 Investments Current Assets Stocks 35 Debtors 13 Investments Cash/Bank 8 Prepayments and accrued Income 6 62 Creditors: amounts falling due within one year Creditors 12 Accruals 3 Dividends due 10 Tax due Net Current Assets 27 Total Assets less Current Liabilities 149 Creditors: amounts falling due after one year 10 Provisions for liabilities and charges 10 Net Assets 139 Capital and Reserves Called-up Share Capital 100 Share Premium 25 Reserves 14 Equity Shareholders Funds FINANCIAL ACCOUNTING (AH)

45 SOLUTIONS TO EXERCISES Exercise 10(c) Notes to the Accounts Tangible Assets Buildings Vehicles Equipment Total m m m m Cost at Additions Revaluations 8 8 Disposals At Depreciation at Charge for year At NBV at NBV at Intangible Assets Goodwill Patents Total m m m Cost Value Investments Purchased during year (cost) 23m Market value at 30 September m Share Capital and Debentures Authorised Share Capital 150,000,000 1 Ordinary Shares Debentures 8 % 10,000,000 (Repayable 2020) FINANCIAL ACCOUNTING (AH) 45

46 SOLUTIONS TO EXERCISES Exercise 11(a) Kuper Krafts plc Cost of Sales Administration Costs Opening Stocks 3,306 Audit Fees 156 Purchases 14,000 Bank Interest 14 17,306 Wages and Salaries 440 Closing Stocks 3,020 Admin Expenses 2,940 14,286 Depreciation: Wages and Salaries 2,160 Buildings 16 Depreciation: Plant and Machinery 72 Buildings (50% 64) 32 Admin Costs 3,638 Plant and Machinery (60% 360) 216 Cost of sales 16,694 Distribution Costs Distribution Expenses 160 Depreciation: Buildings (25% 64) 16 Vehicles (25% ( )) 150 Plant and Machinery (20% 360) 72 Wages and Salaries 792 Distribution Costs 1, FINANCIAL ACCOUNTING (AH)

47 SOLUTIONS TO EXERCISES Exercise 11(b) Kuper Krafts plc Profit and Loss Account for year ended 31 December s 000s Turnover 23,000 Cost of Sales 16,694 Gross Profit 6,306 Distribution Costs 1,190 Administration Costs (3,638 14) 3,624 4,814 1,492 Other Operating Income 0 1,492 Income from Interest/Dividends 24 1,516 Interest payable 14 Profit on ordinary activities 1,502 Tax on ordinary activities 240 Profit on ordinary activities after taxation 1,262 Extra-ordinary Income 0 1,262 Transfer to Reserves 0 Dividends paid and proposed ( ) Retained profit for year 482 FINANCIAL ACCOUNTING (AH) 47

48 SOLUTIONS TO EXERCISES Balance Sheet as at 31 December s 000s Fixed Assets Intangible Assets 100 Tangible Assets 5,526 Investments 250 5,876 Current Assets Stocks 3,020 Debtors 1,740 Investments 0 Cash/Bank 0 Prepayments and accrued Income 100 4,860 Creditors: amounts falling due within one year Bank Overdraft 502 Trade Creditors 620 Accruals 292 Tax 240 Preference Share Dividend 80 Final Ordinary Dividend 500 2,234 Net Current Assets 2,626 Total Assets less Current Liabilities 8,502 Creditors: amounts falling due after one year 0 Provisions for liabilities and charges 0 0 Net Assets 8,502 Capital and Reserves Called-up Share Capital 6,000 Share Premium 540 Reserves (1, ) 1,962 Equity Shareholders Funds 8, FINANCIAL ACCOUNTING (AH)

49 SOLUTIONS TO EXERCISES Exercise 11(c) Notes to the accounts (i) Movement of Tangible Fixed Assets Land Buildings Vehicles Plant and Total Machinery 000s 000s 000s 000s 000s Cost at ,400 1,500 1,800 3,900 Additions Revaluations Disposals At ,400 1,500 1,800 10,300 Depreciation at , ,100 4,200 Charge for year At ,264 1,050 1,460 4,774 NBV at , ,100 NBV at , ,526 (ii) Disclosure of the accounting policies Fixed Asset Buildings Plant and Machinery Vehicles Method of Depreciation Straight line Straight line Diminishing Stock is valued at cost. There have been no changes in accounting policies. FINANCIAL ACCOUNTING (AH) 49

50 SOLUTIONS TO EXERCISES Exercise 12(a) Easson Electronics plc Cost of Sales 000s 000s Opening Stock 2,300 Purchases 10,000 Carriage 82 12,382 Closing Stock 3,200 9,182 Depreciation: Equipment 30 Fixtures and Fittings 34 Warehouse Expenses 4 Wages and Salaries 4,800 Insurance 100 4,968 14,150 Distribution Costs 000s Advertising 120 Insurance 100 Carriage on Sales 170 Wages and Salaries 4,800 Depreciation: Equipment 30 Fixtures and Fittings 17 Selling Expenses 31 5,268 Administration Costs 000s Bank Charges 12 Directors Emoluments 1,650 Auditors Fees 89 Insurance 100 Wages and Salaries 4,800 Depreciation: Equipment 60 Fixtures and Fittings 34 Office Expenses 17 Decrease in Provision for Doubtful Debts (15) 6, FINANCIAL ACCOUNTING (AH)

51 SOLUTIONS TO EXERCISES Exercise 12(b) Profit and Loss Account for year ended 30 June s 000s Turnover 28,000 Cost of Sales 14,150 Gross Profit 13,850 Distribution Costs 5,268 Administration Costs 6,747 12,015 1,835 Other Operating Income 0 1,835 Income from Interest/Dividends 0 1,835 Interest payable 8 Profit on ordinary activities 1,827 Tax on ordinary activities 457 Profit on ordinary activities after taxation 1,370 Extra-ordinary Income 0 1,370 Transfer to Reserves 50 Goodwill 38 Dividends paid and proposed ( ) Retained profit for year 422 FINANCIAL ACCOUNTING (AH) 51

52 SOLUTIONS TO EXERCISES Balance Sheet as at 30 June s 000s Fixed Assets Intangible Assets 245 Tangible Assets* 8,190 Investments 0 8,435 Current Assets Stocks 3,200 Debtors 4,075 Investments 0 Cash/Bank 13 Prepayments and accrued Income 10 7,298 Creditors: amounts falling due within one year Trade Creditors 2,100 Accruals 20 Debenture Interest 8 Tax 457 Dividends due 860 3,445 Net Current Assets 3,853 Total Assets less Current Liabilities 12,288 Creditors: amounts falling due after one year 100 Provisions for liabilities and charges Net Assets 12,188 Capital and Reserves Called-up Share Capital 11,000 Share Premium 360 Reserves 828 Equity Shareholders Funds 12,188 * Land and Equipment Fixtures and Total Buildings Fittings Cost 7, ,250 Revaluation 200 Depreciation Depreciation for year Depreciation NBV at , , FINANCIAL ACCOUNTING (AH)

53 SOLUTIONS TO EXERCISES Exercise 12(c) Note to the Accounts Sources of Turnover Area Turnover ( 000s) Highlands 8,000 Central 14,000 Borders 6,000 Total 28,000 Details of Reserves 000s Retained Profits at Retained Profits for year 422 Retained Profits at Revaluation of Land and Buildings at Equipment Replacement Reserve at Total Reserves at Exercise 13 Statement of Total Recognised Gains and Losses For year ended 30 June s Profit for the financial year 1,370 Unrealised surplus on revaluation of buildings 200 Total recognised gains 1,570 Prior year adjustments 0 Total gains and losses for year 1,570 FINANCIAL ACCOUNTING (AH) 53

54 SOLUTIONS TO EXERCISES Exercise 14 Items of information included in Directors Report: names of directors, their interests in any trading contracts, the number of shares and debentures held at the start of the year statement of the principal activities of the company a review of the development of the company during the year and details of any likely future developments information on changes in fixed assets, i.e. purchase, sale or valuation of assets details of proposed dividends significant differences between the book value and market value of land and buildings details of proposed dividends details of transfer to reserves particulars of any significant events since the end of the financial year details of political and charitable donations a health and safety statement including employee statistics policy on employment of disabled people details of action taken on employee involvement and consultation policy on payment of creditors. Exercise 15 The three main sections of the Auditors Report are: respective responsibilities of directors and auditors, i.e. the directors are responsible for preparing the accounts while the auditors are responsible for forming an opinion on the accounts basis of opinion, i.e. how the audit was planned and carried out opinion the auditors opinion of the accounts. 54 FINANCIAL ACCOUNTING (AH)

55 Accounting Financial Accounting: Issues of Shares Pack [ADVANCED HIGHER] Anne Duff abc

56 SECTION 1 THEORY NOTES ON ISSUE OF SHARES Theory notes on issue of shares Introduction Limited companies raise capital by issuing shares. The people buying these shares become shareholders. Shareholders receive part of the company s annual profit in the form of dividends. The liability of a shareholder is limited to the value of the shares owned and private possessions cannot be used to pay the debts of the company. The two main types of shares are Ordinary Shares (Equity) and Preference Shares. Ordinary Shares carry more risk as the dividends can vary and if the company is not performing well then the Ordinary shareholders may receive no dividend. However, when a company is prospering the Ordinary shareholders stand to obtain substantial rewards. Ordinary shareholders have no say in the day-to-day running of the business. They are, however, able to vote at the Annual General Meeting of the company and can influence the election of the board of directors who manage the company. Preference Shares carry less risk because they are issued at a fixed rate of dividend, e.g. 6%, which means that no matter how well the company is doing, the shareholders will receive the same dividend. Preferences shareholders have no voting rights but if a company goes into liquidation their capital will be paid back before that of the Ordinary shareholders. How many shares can a company issue? The Memorandum of Association, one of the statutory documents of a company, must state the Authorised Share Capital of the company. This is the maximum amount of Ordinary and Preference share capital that can be issued. It is not necessary for a company to issue all of its authorised capital at one time. The part that is actually issued is called the Issued Share Capital. The shares are given a face value, i.e. Ordinary shares of 1 each. This is often referred to as the nominal or par value of the shares. FINANCIAL ACCOUNTING (AH) 57

57 THEORY NOTES ON ISSUE OF SHARES How do companies inform the public of share issues? Public Limited Companies can use different ways of informing the public that they are issuing shares. If a large number of shares are being offered to the public a company can produce a prospectus which gives relevant details about the company and includes an application form which interested members of the public can complete requesting some of the shares. Alternatively a company may use the services of an Issuing House which will be responsible for issuing the shares to the public. How are shares issued? A company offering shares to the public can state that the shares have to be paid either in full on application, or by instalments. When applying for shares which have to be paid in full, the applicant will send the full value of the shares with the application form. However, when applying for shares which are to be paid in instalments a prospective shareholder only sends a proportion of the value of the shares he is applying for with his application form and if successful he will send another part when the shares are allotted; the rest of the money will be sent in instalments, when asked for by the company. The instalments are named First Call, Second Call, etc. A company may ask for the shares to be paid by instalments if the full amount of the money to be raised is not required immediately. The following example will indicate the procedure to be followed. Company A is inviting investors to buy 100,000 Ordinary Shares of 1 each at par. The terms of the issue are: On application On allotment First and Final Call Per share 25p 25p 50p 58 FINANCIAL ACCOUNTING (AH)

58 THEORY NOTES ON ISSUE OF SHARES Ms T decides to apply for 4,000 shares. The following procedure would then take place between Company A and Ms T: Ms T Company A Sends application form and cheque for 1,000 (4,000 25p) If application to buy is accepted a letter of allotment is sent to Ms T along with a request for another 25p per share. A legally binding contract has been entered into by both buyer and seller. Ms T sends another cheque for 1,000. One month later Company A makes a first and final call for the outstanding money on the shares. Ms T sends a cheque for 2,000 (the outstanding balance on the value of the shares). FINANCIAL ACCOUNTING (AH) 59

59 THEORY NOTES ON ISSUE OF SHARES How would the issue of shares be recorded in the ledger of Company A? Step 1 When the application was received the cheque would be debited in the Bank Account of Company A and credited in an Application and Allotment Account. Bank Account May 1 Application and Allotment 1,000 1,000 Application and Allotment Account May 1 Bank 1,000 1,000 Step 2 The money received after the shares have been allotted would also be debited to the Bank Account and credited to the Application and Allotment Account. The balance in the Application and Allotment Account is then transferred to the Ordinary Share Capital Account. Bank Account May 1 Application and Allotment 1,000 1,000 May 10 Application and Allotment 1,000 2,000 Application and Allotment Account May 1 Bank 1,000 1,000 May 10 Bank 1,000 2,000 May 10 Ordinary Share Capital 2,000 0 Ordinary Share Capital Account May 10 Application and Allotment 2,000 2, FINANCIAL ACCOUNTING (AH)

60 THEORY NOTES ON ISSUE OF SHARES Step 3 When Company A receives the call money again the Bank Account will be debited but this time the First and Final Call Account will be credited before being transferred to the Ordinary Share Capital Account. Bank Account May 1 Application and Allotment 1,000 1,000 May 10 Application and Allotment 1,000 2,000 June 10 First and Final Call Account 2,000 4,000 First and Final Call Account June 10 Bank 2,000 2,000 June 10 Ordinary Share Capital 2,000 0 Ordinary Share Capital Account May 10 Application and Allotment 2,000 2,000 June 10 First and Final Call Account 2,000 4,000 The Ordinary Share Capital Account now shows the value of the shares issued to Ms T. The same entries would take place for all shares issued. When all shares had been applied for and issued the Ordinary Share Capital Account would show the full value of the issued capital, i.e. Ordinary Share Capital Account Aug 1 Balance 100,000 Attempt Exercises 1 3 FINANCIAL ACCOUNTING (AH) 61

61 THEORY NOTES ON ISSUE OF SHARES What is meant by Shares issued at a premium? When a company has been trading for some time and is successful, it is likely that, when its shares change hands on the stock market, the value of each share will be considerably higher than the nominal or par value, e.g. an Ordinary Share of 1 may be valued at 4 on the stock exchange. This latter value is known as the market value of the share. If this company was to offer more shares to the public it is likely that these shares would be issued at a price somewhere between the nominal value of 1 and the market value of 4, say at a price of 3. The difference between the nominal value and the issue value is known as a share premium. The Share Premium is part of the reserves of a company and is therefore shown in that section of the Balance Sheet. How would the Share Premium be recorded in the Ledger of Company A? The Share Premium which is paid by the applicant is not part of the Share Capital of the company and must, therefore, be shown in a separate account. The following example will explain this. At the beginning of Year 3 Company A is to issue another 50,000 1 Ordinary Shares at a price of 2.50 per share. The offer states that 1.75 per share will be required on application (including the Share Premium of 1.50) 0.50 per share on allotment 0.25 per share on First and Final Call Bank Account Year 3 Feb 1 Application and Allotment 87,500 87,500 Mar 1 Application and Allotment 25, ,500 Apr 1 First and Final Call 12, ,000 Application and Allotment Account Year 3 Feb 1 Bank 87,500 87,500 Mar 1 Bank 25, ,500 May 1 Ordinary Share Capital 37,500 75,000 Share Premium 75, FINANCIAL ACCOUNTING (AH)

62 THEORY NOTES ON ISSUE OF SHARES First and Final Call Account Year 3 Apr 1 Bank 12,500 12,500 May 1 Ordinary Share Capital 12,500 0 Ordinary Share Capital Account Year 3 May 1 Balance 100, ,000 May 1 Application and Allotment 37, ,500 First and Final Call 12, ,000 Share Premium Account Year 3 May 1 Application and Allotment 75,000 75,000 Attempt Exercises 4 6 FINANCIAL ACCOUNTING (AH) 63

63 THEORY NOTES ON ISSUE OF SHARES What is meant by Oversubscription of Shares? Oversubscription of shares arises when more shares are applied for than are available. When a share issue is oversubscribed, the unlucky applicants will have their application money refunded. How does a company decide who is successful when an issue is oversubscribed? There are various ways of allocating the shares. The company may choose the successful applicants randomly, i.e. by drawing lots to accept applications for large numbers of shares because administrative costs are lower to favour the investors who apply for smaller numbers of shares as the amount of voting power held by one person is less to offer a proportion of the shares requested by each applicant, i.e. 3 shares for every 4 applied for. In this case the extra application money is kept by the company thus reducing the amount due on allotment. Example A On 1 July PW plc issued 150,000 1 Ordinary Shares at par. The terms of issue were as follows: On application 0.25 On allotment 0.25 First and Final Call 0.50 Applications were received for 200,000 shares. PW plc decided to refund the application money of 50,000 shares and allot the other applicants in full. The accounting entries for the first stage are shown below: Bank Account July 1 Application and Allotment 50,000 50,000 July 14 Application and Allotment 12,500 37,500 (refunds) 64 FINANCIAL ACCOUNTING (AH)

64 THEORY NOTES ON ISSUE OF SHARES Application and Allotment Account July 1 Bank 50,000 50,000 July 14 Bank 12,500 37,500 The remainder of the entries are as shown on pages Example B On 1 September QX plc issued 150,000 1 Ordinary Shares at par. The terms of issue were as follows: On application 0.25 On allotment 0.25 First and Final Call 0.50 Applications were received for 200,000 shares. QX plc decided to allot the shares on the basis of 3 for every 4 applied for. The surplus application monies were held over by the company thus reducing the amount due on allotment. Bank Account Sept 1 Application and Allotment 50,000 50,000 Oct 7 Application and Allotment 25,000* 75,000 Application and Allotment Account Sept 1 Bank 50,000 50,000 Oct 7 Bank 25,000 75,000 * This represents the amount due on allotment less the surplus application monies, i.e. ( 37,500 12,500) = 25,000 The remainder of the entries are as shown on pages Attempt Exercise 7 9 FINANCIAL ACCOUNTING (AH) 65

65 THEORY NOTES ON ISSUE OF SHARES What are Calls in advance? Calls in advance arise when one or more shareholders pay for their shares completely before the company has called in all the instalments. The amount of the Calls paid in advance would be transferred to a Calls in Advance Account and shown as a liability in the Balance Sheet until the company calls in the rest of the money for the shares. Example CLD plc issued 200,000 6% Preference Shares of 2 each. The shares were issued at par on the following terms: Payable on application 0.50 Payable on allotment 0.50 First Call 0.50 Second Call 0.50 All shares were applied for and allotted and all relevant monies received. All First Call money was received when requested but one shareholder who had bought 10,000 shares paid all outstanding money at this time. The example shows the transactions after the Application and Allotment stages have been completed. 6% Preference Share Capital Account Application and Allotment 100, ,000 First Call Account 50, ,000 Second Call 45, ,000 Calls in Advance 5, ,000 First Call Account Bank 55,000 55,000 Preference Share Capital Account 50,000 5,000 Calls in Advance Account 5, FINANCIAL ACCOUNTING (AH)

66 THEORY NOTES ON ISSUE OF SHARES Calls in Advance First Call Account 5,000 5,000 Preference Share Capital Account 5,000 0 Second Call Account Bank 45,000 45,000 Preference Share Capital Account 45,000 0 Attempt Exercise 10 FINANCIAL ACCOUNTING (AH) 67

67 THEORY NOTES ON ISSUE OF SHARES What are Calls in Arrears? Calls in arrears arise when one or more shareholders fail to pay the money due after the call has been made by the company. It is actually called-up share capital unpaid. The full amount that should have been received is transferred to the Share Capital Account and the amount due is transferred to the Calls in Arrears Account. Calls in Arrears are shown in the Balance Sheet, usually amongst the Current Assets but they can be inserted under a separate heading. Example Sundale plc issued 100, Ordinary Shares at par on the following terms. Payable on application 0.25 Payable on allotment 0.25 First and Final Call 0.50 All shares were applied for and allotted and all relevant monies received. All First and Final Call money was received when requested except from one member holding 400 shares. The example shows the transactions after the Application and Allotment stages have been completed. Ordinary Share Capital Account Application and Allotment 50,000 50,000 First and Final Call Account 50,000 50,000 First and Final Call Account Bank 49,800 49,800 Ordinary Share Capital Account 50, Calls in Arrears Account Calls in Arrears Account First and Final Call Account FINANCIAL ACCOUNTING (AH)

68 THEORY NOTES ON ISSUE OF SHARES What are Forfeited Shares? When a shareholder does not pay the money owed for shares then it is likely that he/she will lose the shares. The Articles of Association of the Company will probably state that these shares should be forfeited. The shares will be cancelled and the shareholder will lose any money previously paid towards the shares. The company can then reissue the shares. When the shares are reissued the price requested on reissue plus the amount received from the original shareholder must, at least, equal the called-up value of the shares if they are not fully called up, or the nominal value if the full amount has been called up. Example Oakridge plc issued 200, Ordinary Shares at par on the following terms. Payable on application 0.25 Payable on allotment 0.25 First Call 0.25 Second Call 0.25 All shares were applied for and allotted and all relevant monies received. All First and Second Call money was received when requested except from one member holding 1,000 shares. The Directors of the company decided that the shares should be forfeited. At a later date, the shares were reissued to A Gibson at 0.60 each. The example shows the transactions after the Application and Allotment stages. First Call Account Bank 49,750 49,750 Ordinary Share Capital Account 50, Forfeited Shares Account FINANCIAL ACCOUNTING (AH) 69

69 THEORY NOTES ON ISSUE OF SHARES Second Call Account Bank 49,750 49,750 Ordinary Share Capital Account 50, Forfeited Shares Account Ordinary Share Capital Account Application and Allotment 100, ,000 First Call 50, ,000 Second Call 50, ,000 Forfeited Shares 1, ,000 A Gibson 1, ,000 Forfeited Shares Account First Call Second Call Ordinary Share Capital 1, Cr A Gibson Bank Account First Call 49,750 49,750 Second Call 49,750 99,500 A Gibson , FINANCIAL ACCOUNTING (AH)

70 THEORY NOTES ON ISSUE OF SHARES A Gibson Bank Forfeited Shares 400 1,000 Ordinary Share Capital 1,000 0 Note When the shares were forfeited the nominal value of 1,000 was transferred from the Ordinary Share Capital Account to the Forfeited Share Capital Account. The 500 received from the original shareholder is now held in the Forfeited Share Account in order to offset the reduced amount paid by A Gibson. Gibson is paying 600 for 1,000 1 shares; therefore, the difference of 400 has to be transferred from the Forfeited Shares Account. Any balance left in the Forfeited Shares Account can be transferred to a Profit on Reissue of Forfeited Shares Account or to the credit side of the Share Premium Account, if there is one. Attempt Exercises FINANCIAL ACCOUNTING (AH) 71

71 72 FINANCIAL ACCOUNTING (AH)

72 SECTION 2 EXERCISES: ISSUE OF SHARES Exercise 1 On 1 March Delightful Drapes plc issued, at par, 120,000 6% Preference Shares of 1 each, on the following terms. Payable on application Payable on allotment 40p 60p On 18 March the ledger accounts below show that some of the application money has been received. Bank Account Mar 1 Application 32,000 32, and Allotment Application and Allotment Account Mar 1 Bank 32,000 32, Copy out the above accounts and update them using the following information. Open any other necessary account/s to complete the issue of shares. By 27 March all shares had been applied for and money received. The shares were allotted on 1 April and all allotment money received by 30 April. FINANCIAL ACCOUNTING (AH) 73

73 EXERCISES: ISSUE OF SHARES Exercise 2 Abercraig plc invited applications for 500,000 2 Ordinary Shares at par. The following terms per share applied Payable on application 1.00 Payable on allotment 0.50 First and Final Call 0.50 Applications were received for the complete issue and all money due on allotment had been received. The call for the remainder was made and all monies received. Open all necessary ledger accounts and record the above transactions. Ignore dates. Exercise 3 Applications were invited by Castletay plc for 200,000 of its 3 Ordinary Shares payable as follows: On application 1 June 1.00 On allotment 1 July 0.50 First Call 1 September 0.75 Second Call 1 December 0.75 All shares were applied for and all monies received when requested by the company. Open all necessary accounts and record the above transactions. 74 FINANCIAL ACCOUNTING (AH)

74 EXERCISES: ISSUE OF SHARES Exercise 4 Aurora plc has an authorised capital of 1,000,000 divided into 500,000 2 Ordinary Shares. 200,000 shares have already been issued. Aurora plc is now issuing another 200,000 shares at 3 per share. The terms of issue are as follows: Per share On application 1.00 On allotment 1.50 (including share premium of 1.00) First and Final Call 0.50 All shares were applied for and all monies received upon request. Copy and complete the accounts below to show the transactions required to record the above share issue. Ignore dates. Bank Account Application and Allotment 200, ,000 Application and Allotment 300, ,000 Application and Allotment Account Bank 200, ,000 Bank 300, ,000 Ordinary Share Capital Account Balance 400, ,000 FINANCIAL ACCOUNTING (AH) 75

75 EXERCISES: ISSUE OF SHARES Share Premium Account First and Final Call Account Exercise 5 Valois plc issued 150,000 1 Ordinary Shares at 2.50 per share on the following terms: Per share On application 0.40 On allotment 1.70 (including the share premium) First and Final Call 0.40 You are required to record the entries in the Application and Allotment Account and the Share Premium Account only. Exercise 6 Applications were invited by Pitcairn plc for 100,000 8% Preference Shares of 5 each. The shares were offered at a price of 6.50 each and at the following terms: Per share On application 2.00 On allotment 2.00 First Call 2.00 (including share premium) Second Call 0.50 You are required to record the above transactions in the ledger of Pitcairn plc. 76 FINANCIAL ACCOUNTING (AH)

76 EXERCISES: ISSUE OF SHARES Exercise 7 Woodbourne plc issued, at par, 400,000 Ordinary Shares of 2 each. Payments were made as follows: Per share On application 1.00 On allotment 0.50 First and Final Call 0.50 Applications were received for 500,000 shares. It was decided that 400,000 would be allotted in full and to refund the application monies for the other 100,000 shares. Open the necessary accounts and record the above transactions in the ledger of Woodbourne plc. Exercise 8 Nesbit plc issued, at par, 500,000 6% Preference Shares of 1 each. Payments were made as follows: Per share On application 0.50 On allotment 0.50 Applications were received for 625,000 shares. It was decided to allot the shares on the basis of four for every five applied for. The surplus received on application was used in part payment of the amount due on allotment. Open the necessary accounts and record the above transactions in the ledger of Nesbit plc. FINANCIAL ACCOUNTING (AH) 77

77 EXERCISES: ISSUE OF SHARES Exercise 9 Parekh plc issued 75,000 Ordinary Shares with a nominal value of 3 at a price of 4 per share. The terms of issue were as follows: Per share On application 1 On allotment 2 (including share premium) First and Final Call 1 Applications were received for 100,000 shares and it was decided to allot three shares for every four applied for. Surplus monies received upon application were kept to reduce the amount due on allotment. In the ledger of Parekh plc, record all necessary transactions relating to the application and allotment stages only. Exercise 10 Savourie plc issued 200,000 1 Ordinary Shares at a price of 1.50 per share. The terms of issue were as follows: Per Share On application 0.25 On allotment 0.25 First Call 0.75 (including share premium) Second Call 0.25 Applications were received for 350,000 shares and it was decided to refund application monies for 50,000 shares, and then allot two shares for ever three applied for. One shareholder who holds 10,000 shares paid off all outstanding money when the First Call was made. The second call has not yet been made. Open all relevant accounts and record the above transactions. 78 FINANCIAL ACCOUNTING (AH)

78 EXERCISES: ISSUE OF SHARES Exercise 11 Kirkdon plc invited applications for 120,000 5 Ordinary Shares at par. The terms of the offer were: Per share On application 2.00 On allotment 2.00 First and Final Call ,000 shares were applied for and it was decided to allot the shares on the basis of one for every two applied for. The excess application money was kept as payment of amounts due on allotment. One shareholder who had been allotted 4,000 shares failed to pay the amount due on first and final call. The following accounts show the position after the application and allotment have taken place. Bank Account Application and Allotment 480, ,000 Application and Allotment Account Bank 480, ,000 Ordinary Share Capital 480,000 0 Ordinary Share Capital Account Application and Allotment 480, ,000 Copy the above accounts into your workbook, open any other necessary accounts and complete the recording of the above transactions. FINANCIAL ACCOUNTING (AH) 79

79 EXERCISES: ISSUE OF SHARES Exercise 12 Trytor plc issued 400,000 2 Ordinary Shares at par. Payments for the shares were made as follows: Per share On application 0.50 On allotment 0.25 First Call 0.75 Second Call 0.50 All the shares were applied for and allotted in full. The calls were made and all the shareholders paid except for one, who failed to pay the first and second calls on the 4,000 shares allotted to her. The shares were forfeited and later issued to N Kirkland at 1.50 each. Open all necessary accounts and record the above transactions in the ledger of Trytor plc. Exercise 13 Crosby plc invited applications for 30,000 7% 3 Preference Shares at a price of 4.50 each. Payments for the shares were to be made as follows: Per share On application 1.00 On allotment 2.50 (including share premium) First and Final Call 1.00 All shares were applied for and allotted. When the first and final call was made all monies were received except from one shareholder who held 500 shares. The shares were declared forfeit. Later they were reissued to T McIntyre at a price of 1.50 each. Any balance on the Forfeited Share Account was transferred to the Share Premium Account. Record the above transactions in the ledger of Crosby plc. 80 FINANCIAL ACCOUNTING (AH)

80 EXERCISES: ISSUE OF SHARES Exercise 14 Parker plc issued 250,000 4 Ordinary Shares at a price of 5 per share. Payments for the shares were made as follows: Per share On application 1.50 (including share premium) On allotment 1.50 First Call 1.00 Second Call ,000 shares were applied for and it was decided to give full allotment to applicants for 50,000 shares allot the remainder on the basis of four shares for every five applied for use the surplus received on application in part payment for amount due on allotment. One shareholder who had been allotted 1,000 shares failed to pay the amounts due on first and second calls and his shares were declared forfeit by the directors. Later the shares were re-issued to A Robertson at a price of 2.00 per share. Record the above transactions in the ledger of Parker plc. FINANCIAL ACCOUNTING (AH) 81

81 EXERCISES: ISSUE OF SHARES Exercise 15 Applications were invited by King plc for 300, % Preference Shares at 6.25 per share. The shares were payable as follows: Per share On application 2.00 On allotment 2.25 First and Final Call 2.00 The share premium was payable on allotment. 400,000 shares were applied for and it was decided to refuse allotment on 20,000 shares give applicants of 60,000 shares full allotment allot the remainder on the basis of three for every four applied for use the surplus received on application as part payment of the amount due on allotment. Shareholders holding 2,500 shares failed to pay the First and Final Call. Their shares were declared forfeit. These shares were later reissued to E Sharp at a price of 2.50 per share. Any balance on the Forfeited Shares Account was transferred to the Share Premium Account. Record the above transactions in the ledger of King plc. 82 FINANCIAL ACCOUNTING (AH)

82 SECTION 3 SOLUTIONS TO EXERCISES Exercise 1 Delightful Drapes plc Bank Account Mar 1 Application and Allotment 32,000 32, Mar 27 Application and Allotment 16,000 48,000 Apr 1 Application and Allotment 72, ,000 Application and Allotment Account Mar 1 Bank 32,000 32, Mar 27 Bank 16,000 48,000 Apr 1 Bank 72, ,000 Apr 1 6% Pref Share Capital 120,000 0 Account 6% Preference Share Capital Account Apr 1 Application and Allotment 120, ,000 FINANCIAL ACCOUNTING (AH) 83

83 SOLUTIONS TO EXERCISES Exercise 2 Abercraig plc Bank Account Application and Allotment 500, ,000 Application and Allotment 250, ,000 First and Final Call Account 250,000 1,000,000 Application and Allotment Account Bank 500, ,000 Bank 250, ,000 Ordinary Share Capital Account 750,000 0 Ordinary Share Capital Account Application and Allotment 750, ,000 First and Final Call Account 250,000 1,000,000 First and Final Call Account Bank 250, ,000 Ordinary Share Capital 250, FINANCIAL ACCOUNTING (AH)

84 SOLUTIONS TO EXERCISES Exercise 3 Castletay plc Bank Account Jun 1 Application and Allotment 200, ,000 Jul 1 Application and Allotment 100, ,000 Sep 1 First Call 150, ,000 Dec 1 Second Call 150, ,000 Application and Allotment Account Jun 1 Bank 200, ,000 Jul 1 Bank 100, ,000 Jul 1 Ordinary Share Capital Account 300,000 0 Ordinary Share Account Jul 1 Application and Allotment 300, ,000 Sep 1 First Call 150, ,000 Dec 1 Second Call 150, ,000 First Call Account Sep 1 Bank 150, ,000 Sep 1 Ordinary Share Capital 150,000 0 Second Call Account Dec 1 Bank 150, ,000 Dec 1 Ordinary Share Capital 150,000 0 FINANCIAL ACCOUNTING (AH) 85

85 SOLUTIONS TO EXERCISES Exercise 4 Aurora plc Bank Account Application and Allotment 200, ,000 Application and Allotment 300, ,000 First and Final Call Account 100, ,000 Application and Allotment Account Bank 200, ,000 Bank 300, ,000 Ordinary Share Capital 300, ,000 Share Premium 200,000 0 Ordinary Share Capital Account Balance 400, ,000 Application and Allotment 300, ,000 First and Final 100, ,000 Share Premium Account Application and Allotment 200, ,000 First and Final Call Account Bank 100, ,000 Ordinary Share Capital 100, FINANCIAL ACCOUNTING (AH)

86 SOLUTIONS TO EXERCISES Exercise 5 Valois plc Application and Allotment Account Bank 60,000 60,000 Bank 255, ,000 Ordinary Share Capital Account 90, ,000 Share Premium Account 225,000 0 Share Premium Account Application and Allotment 225, ,000 FINANCIAL ACCOUNTING (AH) 87

87 SOLUTIONS TO EXERCISES Exercise 6 Pitcairn plc Bank Account Application and Allotment 200, ,000 Application and Allotment 200, ,000 First Call 200, ,000 Second Call 50, ,000 Application and Allotment Account Bank 200, ,000 Bank 200, ,000 8% Preference Share Capital 400, % Preference Share Capital Account Application and Allotment 400, ,000 First Call 50, ,000 Second Call 50, ,000 Share Premium Account First Call Account 150, , FINANCIAL ACCOUNTING (AH)

88 SOLUTIONS TO EXERCISES First Call Account Bank 200,000 8% Preference Share Capital 50, ,000 Share Premium 150,000 0 Second Call Account Bank 50,000 50,000 8% Preference Share Capital 50,000 0 FINANCIAL ACCOUNTING (AH) 89

89 SOLUTIONS TO EXERCISES Exercise 7 Woodbourne plc Bank Account Application and Allotment 500, ,000 Application and Allotment 100, ,000 (refunds) Application and Allotment 200, ,000 First and Final Call 100, ,000 Application and Allotment Account Bank 500, ,000 Bank (refunds) 100, ,000 Bank 200, ,000 Ordinary Share Capital 600,000 0 Ordinary Share Account Application and Allotment 600, ,000 First Call 200, ,000 First Call Account Bank 200, ,000 Ordinary Share Capital 200, FINANCIAL ACCOUNTING (AH)

90 SOLUTIONS TO EXERCISES Exercise 8 Nesbit plc Bank Account Application and Allotment 312, ,500 Application and Allotment 187, ,000 Application and Allotment Account Bank 312, ,500 Bank 187, ,000 6% Preference Shares 500, % Preference Share Account Application and Allotment 500, ,000 FINANCIAL ACCOUNTING (AH) 91

91 SOLUTIONS TO EXERCISES Exercise 9 Parekh plc Bank Account Application and Allotment 100, ,000 Application and Allotment 125, ,000 Application and Allotment Account Bank 100, ,000 Bank 125, ,000 Ordinary Share Capital 150,000 75,000 Share Premium 75,000 0 Ordinary Share Capital Account Application and Allotment 150, ,000 Share Premium Account Application and Allotment 75,000 75, FINANCIAL ACCOUNTING (AH)

92 SOLUTIONS TO EXERCISES Exercise 10 Savourie plc Bank Account Application and Allotment 87,500 87,500 Application and Allotment 12,500 75,000 (refunds) Application and Allotment 25, ,000 First Call 152, ,500 Application and Allotment Account Bank 87,500 87,500 Bank (refunds) 12,500 75,000 Bank 25, ,000 Ordinary Share Capital 100,000 0 Ordinary Share Capital Account Application and Allotment 100, ,000 First Call 50, ,000 Share Premium Account First Call 100, ,000 FINANCIAL ACCOUNTING (AH) 93

93 SOLUTIONS TO EXERCISES First Call Account Bank 152, ,500 Ordinary Share Capital 50, ,500 Share Premium 100,000 2,500 Calls in Advance 2,500 0 Calls in Advance Account First Call 2,500 2, FINANCIAL ACCOUNTING (AH)

94 SOLUTIONS TO EXERCISES Exercise 11 Kirkdon plc Bank Account Application and Allotment 480, ,000 First and Final Call Account 116,000 Application and Allotment Account Bank 480, ,000 Ordinary Share Capital 480,000 0 Ordinary Share Capital Account Application and Allotment 480, ,000 First and Final Call 120, ,000 First and Final Call Account Bank 116, ,000 Ordinary Share Capital 120,000 4,000 dr Calls in Arrears 4,000 0 Calls in Arrears Account First and Final Call 4,000 4,000 FINANCIAL ACCOUNTING (AH) 95

95 SOLUTIONS TO EXERCISES Exercise 12 Trytor plc Bank Account Application and Allotment 200, ,000 Application and Allotment 100, ,000 First Call 297, ,000 Second Call 198, ,000 N Kirkland 6, ,000 Application and Allotment Account Bank 200, ,000 Bank 100, ,000 Ordinary Share Capital 300,000 0 Ordinary Share Capital Account Application and Allotment 300, ,000 First Call 300, ,000 Second Call 200, ,000 Forfeited Shares 8, ,000 N Kirkland 8, ,000 First Call Account Bank 297, ,000 Ordinary Share Capital 300,000 3,000 Dr Forfeited Shares 3, FINANCIAL ACCOUNTING (AH)

96 SOLUTIONS TO EXERCISES Second Call Account Bank 198, ,000 Ordinary Share Capital 200,000 2,000 Dr Forfeited Shares 2,000 0 Forfeited Shares Account First Call 3,000 3,000 Second Call 2,000 5,000 Ordinary Share Capital 8,000 3,000 Cr N Kirkland 2,000 1,000 Profit on Reissue of Forfeited 1,000 0 Shares N Kirkland Bank 6,000 6,000 Forfeited Shares 2,000 8,000 Ordinary Share Capital 8,000 0 Profit on Reissue of Forfeited Shares Account Forfeited Shares 1,000 1,000 FINANCIAL ACCOUNTING (AH) 97

97 SOLUTIONS TO EXERCISES Exercise 13 Crosby plc Bank Account Application and Allotment 30,000 30,000 Application and Allotment 75, ,000 First and Final Call 29, ,500 T McIntyre ,250 Application and Allotment Account Bank 30,000 30,000 Bank 75, ,000 7% Preference Share Capital 60,000 45,000 Share Premium Account 45, % Preference Share Capital Account Application and Allotment 60,000 60,000 First and Final Call 30,000 90,000 Forfeited Shares 1,500 88,500 T McIntyre 1,500 90, FINANCIAL ACCOUNTING (AH)

98 SOLUTIONS TO EXERCISES Share Premium Account Application and Allotment 45,000 45,000 Forfeited Shares First and Final Call Account Bank 29,500 29,500 7% Preference Share Capital 30, Dr Forfeited Shares Forfeited Shares Account First and Final Call % Preference Share Capital 1,500 1,000 T McIntyre Share Premium Account T McIntyre Bank Forfeited Shares 750 1,500 7% Preference Share Capital 1,500 0 FINANCIAL ACCOUNTING (AH) 99

99 SOLUTIONS TO EXERCISES Exercise 14 Parker plc Bank Account Application and Allotment 450, ,000 Application and Allotment 300, ,000 First Call 249, ,000 Second Call 249,000 1,248,000 A Robertson 2,000 1,250,000 Application and Allotment Account Bank 450, ,000 Share Premium 250, ,000 Bank 300, ,000 Ordinary Share Capital 500,000 0 Ordinary Share Capital Account Application and Allotment 500, ,000 First Call 250, ,000 Second Call 250,000 1,000,000 Forfeited Shares 4, ,000 A Robertson 4,000 1,000,000 Share Premium Account Application and Allotment 250, , FINANCIAL ACCOUNTING (AH)

100 SOLUTIONS TO EXERCISES First Call Account Bank 249, ,000 Ordinary Share Capital 250,000 1,000 Dr Forfeited Shares 1,000 0 Forfeited Shares Account First Call 1,000 1,000 Second Call 1,000 2,000 Ordinary Share Capital 4,000 2,000 Cr A Robertson 2,000 0 Second Call Account Bank 249, ,000 Forfeited Shares 1, ,000 Ordinary Share Capital 250,000 0 A Robertson Account Bank 2,000 2,000 Forfeited Shares 2,000 4,000 Ordinary Share Capital 4,000 0 FINANCIAL ACCOUNTING (AH) 101

101 SOLUTIONS TO EXERCISES Exercise 15 King plc Bank Account Application and Allotment 800, ,000 Application and Allotment 40, ,000 (refunds) Application and Allotment 515,000 1,275,000 First and Final Call 595,000 1,870,000 E Sharp 6,250 1,863,750 Application and Allotment Account Bank 800, ,000 Bank (refunds) 40, ,000 Bank 515,000 1,275,000 5% Preference Share Capital 900, ,000 Share Premium Account 375, % Preference Share Capital Account Application and Allotment 900, ,000 First and Final Call 600,000 1,500,000 Forfeited Shares 12,500 1,487,500 E Sharp 12,500 1,500, FINANCIAL ACCOUNTING (AH)

102 SOLUTIONS TO EXERCISES Share Premium Account Application and Allotment 375, ,000 Forfeited Shares 1, ,250 First and Final Call Account Bank 595, ,500 7% Preference Share Capital 600,000 5,000 Dr Forfeited Shares 5,000 0 Forfeited Shares Account First and Final Call 5,000 5,000 5% Preference Share Capital 12,500 7,500 Cr E Sharp 6,250 1,250 Share Premium Account 1,250 0 E Sharp Bank 6,250 6,250 Forfeited Shares 6,250 12,500 5% Preference Share Capital 12,500 0 FINANCIAL ACCOUNTING (AH) 103