Question

a) Tom Goodly Ltd guarantees the bank overdraft of Pete Smith Ltd during 2018. Tom Goodly Ltd’s reporting period ends on 30 June each year. At the time of

providing the guarantee, Pete Smith Ltd was in a sound financial position. During late 2019, due to the outbreak of the COVID-19 pandemic, international

trading conditions deteriorated to such an extent that Pete Smith Ltd incurred substantial losses. Finally, on 25 July 2020, Pete Smith Ltd was forced to file for

protection from its creditors.

Required:

Explain how Tom Goodly Ltd would report the guarantee provided to Pete Smith Ltd in its financial statements ending

i) 30 June 2019

ii) 30 June 2020 3

b) As at 30 June 2018, T&P Ltd’s equity accounts are as follow: 400  000 ‘A’ ordinary shares, issued at $2.50 each, fully paid $ 1 000 000

75  000  6% cumulative preference shares, issued at $3 and paid to $2 150  000

Accumulated losses (12 750)

As the company had incurred a loss for the year ended 30 June 2018, no dividends were declared for that year. The following transactions and events occurred during the year ended 30 June 2020.

2019 July 25 The directors made the final call of $1 on the preference shares. Aug 31 All call monies were received except those owing on 5000 preference shares.

Sept 7 The directors resolved to forfeit 5000 preference shares for non-payment of the call. The constitution of the company directs that forfeited amounts are not to be refunded to shareholders. The shares will not be reissued.

Nov 1 The company issued a prospectus offering 40  000 ‘B’ ordinary shares payable in two instalments: $3 on application and $2 on 30 November 2022. The offer closed on 30 November.

Nov 30 Applications for 50  000 ‘B’ ordinary shares were received.

Dec 1 The directors resolved to allot the ‘B’ ordinary shares pro rata with all

applicants receiving 80% of the shares applied for. Excess application

monies were allowed to be held. The shares were duly allotted.

Dec 5 Share issue costs of $8600 were paid.

Required:

Prepare general journal entries to record the above transactions.

Answer 1

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