Question

These balances were extracted from the books of Tembo Ltd as at 31 January 2018:

	Debit	Credit
Retained earnings (31 January 2018)		12,994,000.00
Interest payable		175,312.50
Long term loan		2,250,000.00
Application and allotment		2,691,000.00
Shareholders for ordinary dividends		30,000.00
Stated share capital (2 000 000 ordinary shares)		4,000,000.00
Preference share capital and shareholders for preference dividends are not known

Additional information:

On 28 February 2018 Tembo Ltd issued 877 000 ordinary shares and applications worth N$60 000.00 were returned due to an oversubscription.Underwriting commission was not accrued in the in the previous final year and the underwriter was paid a commission of 2%.Tembos accounting policy with respect to share issue costs is to minimize distributable reserves.The final dividend was paid on 3 February 2019.Tembo Ltd had issued 15 000,N$3, 6% cumulative preference shares on the 1 February 2016.Preference shares have never been issued at a premium and in case of preference shares declared they are then paid on 1 February.Furthermore ,Tembo Ltd declared and paid an ordinary interim dividend of 7 cents per share on 15 February 2018 and declared a final dividend of N$0.50c per share on 30 January 2019.

The first dividend ever to be paid by Tembo Ltd was the N$30 000.00 ordinary dividend of the prior year.The simple interest payable on the outstanding balance of the long term loan bears at 8.5%.The interest is payable annually on 28 February and the two capital repayments of N$350 000.00 and N$400 000.00 were made on 31 June 2018 and 31 December respectively.The net profit in the statement of profit or loss and comprehensive income is N$3 827 000.00 for the year ended 31 January 2019.This is before any of the information above has been taken into account.

You are required to:

1.Calculate the price at which each ordinary share was issued in the current year

2.Prepare all journal entries relating to the share issue ,to be processed in 2019 financial year.

3.What does the accounting policy say on distributable reserves with relation to the underwriter commission.

4.Calculate the dividends paid to ordinary shareholders during the year ended 31 January 2019 (4 marks )

5.Calculate the dividends paid to preference shareholders during the year ended 31 January 2019

6.Calculate the final net profit

7.Calculate the closing retained earnings

8.How would you determine the total asset value of Tembo Ltd.

Answer 1

The price at which each ordinary share issued in the current year is 2 i.e 4000000/2000000

Following are the journal entries for issue of share

1) Bank a/c DR 1754000 (877000*2)

To share application & allotment

2) Share application & allotment Dr 1754000

To share capital

3) Share capital a/c DR 120000 (60000*2)

To Bank

4) Bank a/c DR 1634000

To share capital (the figure of 1634000 arrived by deducting 120000 from 1754000)

The dividends paid to the ordinary shareholders during the year ended is

2817000*0.07*.50=98595+30000=128595 (2000000 ordinary shares plus shares issued 817000(877000-60000) @7 cent per share plus .50 cent per share plus first dividend of 30000)

The dividends paid to the preference shareholders can't be calculated because of the incomplete information provided in the question.

The Closing retained earnings are 12994000+3635750(net profit for the year ended 31.01.2019 arrived at 3827000-191250 i.e interest @8.5% on long term loan)-128595 the dividend paid equals 16501155 which is closing retained earnings

Final net profit is 3635750 i.e 3827000 net profit for the year ended 31.01.2019 - 191250(interest expense @8.5% on long term loan).