Question

Question 15

Glados Ltd recently conducted a bonus issue of shares for their existing shareholders. What would the most likely effect of this have been on their accounts?

		Increased total equity and increased total assets
		Increased total equity only
		Increased total assets only
		No effect on the total equity or total assets

16

If shares are described as 6% cumulative preference shares, what does this mean?

		Holders of these shares are entitled to both a 6% annual dividend and whatever dividend the ordinary shareholders receive
		Holders of these shares are entitled to a 6% annual dividend, but if for whatever reason it is not paid one year, the right to that dividend is forfeited
		Holders of these shares are entitled to a 6% annual dividend, but if for whatever reason it is not paid one year, the right to that dividend carries forward until it is paid
		Holders of these shares are entitled to their choice of the 6% annual dividend or whatever dividend the ordinary shareholders receive

Question 18

Which of the following accounts is NOT an example of a reserve?

		Retained earnings
		Asset revaluation surplus
		Foreign currency translation reserve
		Share capital

Question 20

Which of these transactions would NOT have an effect on the retained earnings account?

		Closing the profit and loss summary account after a profit was made during the year
		Directors declaring a dividend, where shareholder approval is not needed
		Paying a dividend which was declared two months ago, where shareholder approval is not needed
		Closing the profit and loss summary account after a loss was made during the year

Answer 1

Answer to Question 15: Issue of bonus share means capitalisation of reserves. If a Company issues the overall effect on the financial position will be as follows:

1. There will be increase in the additional share capital due to Capitalisation of profits.

2. And due to such capitalisation, reserves will be reduced.

As a result, there will be a movement from Reserves to Share Capital which can be termed as transfer from one head of net worth to another head of net worth. So, to conclude there won't be any affect on total assets or total liabilities. Networth of the Company will be same before and after the issue of bonus shares.

Since during the issue of bonus shares, there will be a inter-movement between the components of net worth and as a result there won't be any increase in net worth.

And by issue of bonus shares there won't be any inflow of assets to the Company and as result there won't be any increase in total assets.

By cumulative reading of above conditions it can be concluded that there won't be any increase in total equity or total assets. So option 1, 2 and 3 are incorrect

So, the answer to Question No. 15 is fourth option i.e., "No effect on the total equity or total assets".

Answer to Question 16:

6% Cumulative Preference shares can be breakdown as follows:

a. 6% represents that preference shareholders are entitled to fixed 6% annual dividend. There won't be any additional dividend paid on the basis of dividend paid to ordinary share holders. They will be given preference in payment of dividend when compared to ordinary share holders. So first option and fourth option are incorrect.

b. Cumulative condition states that in case of non-payment of interest in any year. The dividend will get accumulated and will be paid in the year when the profits are available i.e., right to receive dividend will not get forfeited in case of non-payment in one year. So second option is incorrect

So, the answer to Question 16 is third option i.e., "Holders of these shares are entitled to a 6% annual dividend, but if for whatever reason it is not paid one year, the right to that dividend carries forward until it is paid"

Answer to Question 18:

Reserves/Retained earnings represent the Profits earned by the business from the Capital received from the shareholders and which are retained for future business use or unrealised gains arised due to revaluation of assets. Retained Earning represents the profit earned by the business and retained for its future use. Asset Revaluation surplus and Foreign Currency Translation Reserve (FCTR) represents revaluation and translation of foreign operations as per applicable standards and both represents unrealised gains. So, retained earning, Asset revaluation surplus and FCTR form part of reserves. So Option 1, 2 & 3 are incorrect

On the other hand share capital represents the amount received from share holders excepts in case of capitalisation of profits. Hence a share capital is not a part of reserves.

So, the answer to Question 18 is Option 4 i.e., "Share Capital".

Answer to Question 20:

By transferring the Profit/Loss incurred during the period, there will be increase or decrease in the retained earnings in case of profit or loss respectively. So option 1 and Option 4 are incorrect.

Declaration of dividend means distribution of profits accumulated by the company so there will be a reduction in the  retained earnings for distribution of dividend. So Option 2 is incorrect.

Payment of dividend which was declared already represents a payment of liability and results in outflow of resources and there won't be any effect on retained earning as a result of payment of liability. So Option 4 is correct.