Question

1. For each of the following events, identify the impact on a company’s assets, liabilities and shareholders’ equity:

• declare a dividend
• pay a dividend
• create a general reserve
• create a revaluation surplus
• make a bonus issue of shares
• make a rights issue of shares
• applied the lower of cost or net realisable value rule to some damaged inventory
• recognised taxation expense for the year (to be paid in the following year)
• a controlling interest in another company was acquired by purchasing shares in that company in exchange for land and cash (the value of the shares received for land was greater than the book value of the land)
• issued 100 000 $10 7% debentures to raise funds for expansion into new markets

2. If you were considering buying shares in a company, and both ordinary and preference shares were available, what factors would you take into account in making the choice? What types of preference shares can companies offer?

3. Calculate the profit of a company for a year given that:
   • assets went up by $33 400 (part of this increase was the result of land being re-valued upwards by $20 000)
   • liabilities went down by $15 700
   • shareholders contributed $5 000 in new capital
   • dividends distributed to shareholders amounted to $7 500 (these dividends were declared and paid in the current year)
   • debt of $12 000 was reduced by an exchange for an equivalent amount of ownership capital.

Answer 1

Impact of below on company assets and liabilities:

Declare a dividend: If a company declares dividend, it the assets and liabilities doesnt change. Its ,ere adecision taken by the shareholders in the general meeting to declare the dividend. Post announcement of the declaration of dividend, company might set aside the fund but the same still remians in shareholders fund and no effect on companys asset and liabilities.

Pay the dividend: In this case, when dividend is paid, the cash or bank balance is decreased by the amount of dividend paid and also the equal amount is reduced from shareholders fund.

Create a general reserve: In this case amount from reained earning is transferred to General reserve created seperately by passing a mere journal entry. The assets and libilities total still remains same. Its just like the shareholders fund kept with another name.

Create a revaluation surplus: Revaluation is a process where assets are evaluated and if required then, its value is revalued and increased. SUch increased amount is called as revaluation surplus. In this csenario, the assets value is increased and simultaneously equal amount is increased in shareholders fund with name revaluation surplus.

Make a bonus issue of shares: Bonus issue of shares is just a journal entry passed to transfer funds from retained earnings to share capital. With this entry the share capital increases but the equal amount of retained earning is reduced. As a result, there is no change in assets and liabilities side of balance sheet.

MAke a right issue of shares: If right issue of shares is announced then, a part of share capital is taken from right holders and the other part is transferred from the reatined earnings. In this case the journal entry is

                         cash a/c dr

                         Retained earnings a/c dr

                                      To share capital a/c

Applied the lower of cost or net realisable value rule to some damaged inventory: In this case the inventory value is reduced and simultaneously such reduction is made from retained earnings through profit and loss accounts . Hence assets and liabilities both are decreased.

Recognised taxation expense for the year: Recognition of tax expense creates a liability but at sam etime it reduces the retained earnings. So, only maount is transferred from retained earnings to a tax liability whereas the asset remains same.

Controlling interest in another company was acquired by purchasing shares in that company in exchange for land and cash:   Such amount of investment will be increased with an intangible asset called goodwill, whereas the land and cash will be decreased. Assets total and liabilities total will remain same.

NOte: in the question it is not mentioned about how many parts to answer, so following the guidelines i have answered more than first four questions.