Question

Define the following terms:
a) Retained earnings.
b) Redeemable cumulative preference shares.
c) Memorandum of Incorporation (MoI)
d) Limited liability.
e) Authorised share capital.
Part 2
Diraster Ltd (‘Diraster’) is a hedge fund that is listed on the JSE Ltd with a 31 January year end. Diraster researches various investment options on behalf of clients and invests their money according to their preferences. Massief Diraster, the CEO and founder of Diraster, has never been very good at the administration and accounting side of the business and often loses documents. He has approached you for help, but ca only offer you certain information.
Trial balance extract at 31 January 2009
Note
Debit
Credit
Long – term loan
4
4 500 000
Interest payable
4
350 625
Application and allotment
1
5 382 000
Shareholders for ordinary dividend
2
60 000
Shareholder for preference dividend
3
?
Stated capital (2 000 000 ordinary shares)
1
8 000 000
Preference share capital
3
?
Retained earnings – closing balance
25 988 000
Page 17 of 21
Notes
1) 754 000 ordinary shares were issued on 28 February 2009. R120 000 was returned to application due to an oversubscription.
2) The underwriter was paid commission of 2%.
3) Diraster accounting policy with respect to share issue costs is to minimise distributable reserves.
4) Underwriting commission was not accrued in the previous final year.
5) The dividend payable from the previous financial year was settled on 3 February 2009.
6) Diraster declared and paid an ordinary interim dividend of 7 cents per share on 15 February 2009 and declared a final dividend of 5 cents per share on 30 January 2010.
7) The final dividend was paid on 3 February 2010.
8) Diraster had issued 30 000, R3, 6% cumulative preference shares on 1 February2007.
9) Preference shares have never been issued at a premium.
10) If declared, preference dividends are paid on 1 February.
11) The R60 000 ordinary dividend of the prior financial year was the first dividend ever to be declared by Diraster.
12) The long- term bears simple interest at 8, 5% on the outstanding balance.
13) Two capital repayments of R700 000 and R800 000 were made on 31 June 2009 and 31 December 2009 respectively.
14) Interest is payable annually on 28 February.
15) The net profit in the income statement is started at R7 654 000 for the year ended 31 January 2010.
16) This is before any of the above information has been taken into account.
Required
1) Calculate the price at which each ordinary share was issued in the current year.
2) Prepare all the journal entries that should be processed in the 2010 financial year that relate to the share issue.
3) Calculate the dividends paid to ordinary and preference shareholders during the year ended 31 January 2010. If in your opinion any of the dividend in the question should not be included in the calculation, briefly justify your reasoning.
4) Calculate the dividend amount that will be shown in Diraster statement of changes in equity for the year ended 31 January 2010. If in your opinion any of the dividends in the question should not be included in the calculation, briefly justify your reasoning.
5) Calculate the net profit of Diraster for the year ended 31 January 2010.
6) Prepare the equity and liabilities section of Diraster statement of financial position as at 31 January 2010.
7) Calculate the total asset value of Diraster as at 31 January 2010.

Answer 1

Note: All parts of given questions are separate & independent. So as per rule I am answering first part (including all sub-parts of part 1).

Part -1;

a) Retained earnings;

Retained earnings refer to that part of net income which is kept in business for future use. In other words we can say that, part of net income which is not distributed to the shareholders as dividend is known as retained earnings.

b) Redeemable cumulative preference shares;

Redeemable cumulative preference shares are those shares which have predetermined maturity period and dividend on these shares are cummulative in nature. In other words we can say that in case of inadequate profits, arrears dividend on these shares will be accumulated in future years.

c) Memorandum of Incorporation (MoI);

Memorandum of Incorporation (MoI) is a legal document which helps in incorporating a company in the eyes of law of the country. Memorandum of Incorporation (MoI) is known as a document which includes rights, duties & responsibilities of shareholders, directors and other official within a company. And this document laid down a base for incorporation of a company under a specified Act.

d) Limited liability;

Whenever shareholders of a company have their liability limited to the face value of the shares then it is known as limited liability. In other words we can say that in case of company, shareholders are liable for fixed liability normally upto face value of shares, it is known as limited liability of shareholders.

e) Authorised share capital;

Authorised share capital is the maximum limit of share capital which can be issued by a company during its’ life period. At the time of incorporation of company, officials of the company need to set maximum limit of the capital which will be issued by the company in future time, is known as authorised capital.

Hence authorised capital is also known as registered capital of the company.