Question

a) Prior to 1 June 2020, the share capital of Jenkins’ Era Ltd consisted of 1,000,000 ordinary shares, issued at $2 each and fully paid. On 1 June, the directors of Jenkin’ Ear Ltd decided to issue a share dividend, Existing shareholders are to receive one new share for every five shares held. The share issue is to be funded entirely from retained earnings. Each new share is valued at 43, How much cash will the company pay to fund the share dividend?

a.nothing b.$1,000,000   c.$2,000,000    d.$3,000,000

b) Whiterun Ltd owned a boat that has an economic useful life of 6 years as at 1 July 2020. On 1 July 2020 the company leased the boat to Riverwood Ltd for three years. Whiterun Ltd recognised this lease as a finance lease and recorded a lease receivable valued at $58,784. The annual lease payment is $20,000. Lease payments are to be made annually and in arrears. The interest rate implicit in the lease for Riverwood Ltd is 5%. What is the amount of Riverwood Ltd’s first year’s interest expense?

A.$2,939   b.$1,939   c.There has not been enough information provided to accurately determine this   d.$1,000

c) Whiterun Ltd owned a boat that has an economic useful life of 6 years as at 1 July 2020. On 1 July 2020 the company leased the boat to Riverwood Ltd for three years. Whiterun Ltd recognised this lease as a finance lease and recorded a lease receivable valued at $58,784. In the lease agreement, Riverwood Ltd agreed to guarantee the full estimated $5,000 residual value. Lease payments are to be made annually and in arrears. The interest rate implicit in the lease for Riverwood Ltd is 5%. What is the amount of Riverwood Ltd’s annual depreciation expense?

a.$17,928   b.$19,595   c. There has not been enough information provided to accurately determine this   d.$12,928

d) On 23 October 2027, Preston Garvey Ltd had a balance of $111,000 in their options account. This reflected the full premiums paid by the holders of 100,000 options which were on issue. Each option entitled the holder to acquire one ordinary share in Preston Garvey Ltd for $4. Each option expires on 1 December 2027. By 1 December 2027, 40% of the options had been exercised. The remaining options duly lapsed. Which of the following is NOT a journal entry which would be part of recording the exercising of the options and issuing of the shares?

1. DR options $44,400 CR share capital $44,400
2. DR cash $100,000    CR share capital $100,000
3. DR options $66,600   CR lapsed options reserve $66,600
4. DR cash $66,600 CR options $66,600

e) Prior to 1 July 2020, the share capital account of MAGA Ltd had a balance of $10 million reflecting their issued capital of 1 million ordinary shares issued at $10 and paid in full. On 1 July 2020, MAGA Ltd announce a 1-for-4 rights issue, with each new share issued under the rights scheme being sold for $20, payable in full upon accepting the offer. Costs associated with the issue amount to $1 million. Assuming that all shareholders exercise their rights in full, what will the balance of the share capital account be once the rights issue is complete? (note: to be clear, we are looking for the dollar balance. NOT the number of outstanding shares)

A.$10,250,000    b.$14,000,0000   c.$16,000,000    d.$1,650,000

Answer 1

Answer for Question a) Answer will be a. nothing since dividend is given in form of shares issued out of retained earnings hence there is no cash outflow

Answer to Question b) Answer will be a. $2939 i.e. 5% interest on lease receivable $58784

Answer to Question c) Answer will be a. $17928 i.e. ($58784 lease receivable-$5000 residual value)/3

Answer to Question d) Answer will be b) DR cash $100,000 CR share capital $100,000. Reason for other three entries being correct are as follows:

• a) DR options $44,400 CR share capital $44,400. This is entry for transferring amount of options exercised from options account to share capital account
• c) DR options $66,600 CR lapsed options reserve $66,600. This is entry for trasferring amount of options lapsed to lapsed options reserve as liability for payment to be made to shareholders assuming that it is not immediately paid
• d) DR cash $66,600 CR options $66,600. This is entry for transferring cash for lapsed options to shareholders assuming that cash is immediately paid out and amount is not taken to lapsed options reserve account

Answer to Question e) Answer will be b. $14,000,000 i.e. (Existing share capital of $10 million plus rights issue of $5 million less issue cost of $ 1 million using offset cost method for share issue. Note that one zero seems to have got added erroneously in the question