Financial accounting 9th edition hoggett solutions manual

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Solutions Manual to accompany

Financial Accounting 9e by

John Hoggett Lew Edwards John Medlin Keryn Chalmers Andreas Hellmann Claire Beattie Jodie Maxfield

© John Wiley & Sons Australia, Ltd 2015

Chapter 9: Companies: formation and operations

Note:

Please help Wiley to retain the security of our solutions for this text by not distributing the Solutions Manual in its entirety or selected chapters thereof. We would be grateful if you would restrict distribution to the individual solutions for questions that you set as homework or ask students to attempt in workshops or other lecturer/tutor mediated forums.

CHAPTER 9 COMPANIES: FORMATION AND OPERATIONS

DISCUSSION QUESTIONS SOLUTIONS

1.

Two partners in a business are discussing the possibility of incorporating their business as a proprietary company. Discuss the advantages and disadvantages that this move would potentially bring to them. Briefly discuss the impact that the Corporations Act would have on their decision.

• Advantages of forming a proprietary company are discussed at the beginning of this chapter. Specific benefits for a proprietary company of the Corporations Act will depend on whether the proprietary company is classified as large or small. If large, the company will have more onerous reporting requirements, (as provided in accounting standards), and the requirements for audit (assurance services) of the company’s accounts are also more onerous.

The main advantages of incorporating a business as a proprietary company are: a) limited liability of shareholders b) the continuity of legal existence; c) the easy transferability of shares; d) potential tax benefits if personal income tax rates exceed company tax rates.

Disadvantages are: a) companies (including proprietary companies) are generally subject to greater governmental regulation;

2.

What is the difference between a small proprietary company, a large proprietary company and a public company?

Public companies are those whose shares are widely held and traded through a securities exchange. Proprietary companies are those whose shares are held by a few shareholders, often members of the same family. A public company has a major advantage in that it is allowed to invite the public to subscribe for any shares, debentures, notes or loans, and to have these shares, debentures, etc. listed on the nation’s securities exchanges. A public company must have ‘Limited’ or ‘Ltd’ at the end of its name; a proprietary company must have ‘Proprietary Limited’ or ‘Pty Ltd’. A proprietary company must have a share capital whereas a public company can also be limited by guarantee.

A small proprietary company is distinguished in the law from a large proprietary company if it satisfies at least two of the following tests: a) the consolidated operating revenue for the company and the entities it controls is less than $25 million for the financial year b) the value of consolidated gross assets at the end of the financial year is less than $12.5 million

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Solutions manual to accompany Financial Accounting 9e by Hoggett et al

c) 3.

the company and the entities it controls have fewer than 50 full-time equivalent employees at the end of the financial year.

What are the contents of an application form to register a company?

The contents of the application form are specified as follows: • the type of company that is proposed to be registered under the Corporations Act • the company’s proposed name (unless the ACN is to be used in its name) • the name and address of each person who consents to become a member • the given and family names, and the date and place of birth of each person who consents in writing to become a director • the given and family names, and the date and place of birth of each person who consents in writing to become a company secretary • the address of each person who consents in writing to become a director or company secretary • the address of the company’s proposed registered office • for a public company — the proposed opening hours of its registered office • the address of the company’s proposed principal place of business (if it is not the address of the proposed registered office) • for a company limited by shares or an unlimited company — the following: (i) the number and class of shares each founding member agrees, in writing, to take up (ii) the amount each founding member agrees, in writing, to pay for each share (iii) if that amount is not paid in full on registration, the amount each founding member agrees in writing to be unpaid on each share.

• for a public company that is limited by shares or is an unlimited company, if shares will be issued for a non-cash consideration — the prescribed particulars about the issue of the shares, unless the shares are issued under a written contract and a copy of the contract is lodged with the application • for a company limited by guarantee — the proposed amount of the guarantee that each member agrees to in writing.

If the company is to be a public company and is to have a constitution on registration, a copy of the constitution must be lodged with the application. To register a company in accordance with these requirements, all of the details above are to be provided on a single prescribed application form.

4.

‘It is better for a company to have a constitution rather than rely on the replaceable rules in the Act.’ Discuss.

▪

5.

Discuss the basic contents of the replaceable rules under the law. For a guide to contents, see Section 141 of the Corporations Act. Maybe these are satisfactory, as is expected with most small companies, but in larger companies, more complex rules are desired, and so a constitution becomes necessary.

Explain the purpose of each of the following accounts used in a public share issue: Share Capital, Application, Cash Trust, Allotment, Call, Calls in Advance.

The Share Capital account is used to record the net amount called up on a company’s shares at a point in time, less any share issue costs.

An Application account is used in public share floats where the public are asked to apply for an allotment of shares in a company during a share issue. The Application account records any monies paid in by applicants.

© John Wiley & Sons Australia, Ltd 2015

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Chapter 9: Companies: formation and operations

The Cash Trust account is used in public share floats to record money which must be held in trust. This is the money received from applicants for shares prior to the shares being issued.

Any refunds to unsuccessful applicants is taken out of the Cash Trust account once shares are allotted, and any remaining money can then be transferred to general cash to be used by the company.

An Allotment account and a Call account are used in situations where a company issues shares payable in instalments. The Allotment account records any amount receivable from shareholders when shares are allotted to them. A Call account records any further amounts receivable on shares from those shareholders who received an initial allotment.

The Calls in Advance account is used in those rare circumstances where a public issue of shares by instalments has led to some applicants paying into the company not only the application fees but also the allotment money and one or more future calls. The Calls in Advance account is credited for these future calls received on application. The debit entry is to the Application account. Calls in advance, which has many of the characteristics of a liability, is nevertheless regarded as part of share capital in an entity’s balance sheet/statement of financial position.

6.

Distinguish between a private placement, a public share issue and a rights issue. Distinguish also between a renounceable rights issue and a non-renounceable rights issue.

A private placement is an issue of shares to a large institutional investor. The main advantages are speed, price and direction. The disadvantage is that existing shareholders experience a dilution of their ownership as well as an ability to make a profit if there had been a rights issue instead of a private placement.

A public share issue requires the issue of a disclosure document inviting the public to apply for shares. Application money is held in trust until the directors allot shares to applicants.

Money paid in by unsuccessful applicants is refunded to them. An underwriter may be appointed to ensure that the public share float is successful.

A rights issue is an issue of new shares to existing shareholders whereby they are given the right to purchase additional shares in proportion to their current shareholdings. Usually the issue price is set below the current market price of the company’s shares.

A renounceable rights issue allows the shareholder to take up the rights issue, let it lapse or sell their rights on the securities exchange. A non-renounceable rights issue only allows the shareholder to either take up the rights by subscribing for more shares, or reject the rights, which mean that they lapse. The shareholders cannot sell the rights.

7.

How should a company account for its start-up costs, and its share issue costs? How should a company account for the fees paid to an underwriter?

Formation or start-up costs, which represent the legal and other costs of forming a company, were traditionally treated as an asset and then systematically amortised over an arbitrary period. However there are no future economic benefits to be gained from these costs and they should be written off to expense (as per the requirements of AASB 138 Intangible Assets).

Share issue costs, including underwriter’s fees, are discussed in AASB 132 Financial Instruments: Presentation, (paras. 35 and 37). The appropriate treatment is to regard these costs as a reduction of the share capital being raised. The rationale for this treatment is that the incurrence of share issue costs and the raising of capital are viewed as a single transaction and as such, the increase in equity is the net amount the company receives from the issue of shares.

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Solutions manual to accompany Financial Accounting 9e by Hoggett et al

8.

‘Preference shares can offer security of dividends and other advantages over ordinary shares, and are therefore the best equity to have in a company.’ Do you agree? Explain.

What is the motive for holding shares? If the motive is to take a greater risk with the potential of achieving significant capital gains in share prices, and potentially higher dividends than the fixed amount payable to preference shares, then ordinary shares are the better equity to hold.

Are the preference shares participating or not? Discuss the potential benefits of preference shares being cumulative and participating, and the fact that certain preference shares may be more akin to long-term debt, in which case they should be treated as liabilities rather than equity.

9.

A well-established company, which wanted to raise finance for expansion, decided to issue some preference shares. The terms of the issue were that the shareholders did not have the right to vote at meetings, but were entitled to dividends of 12 cents per share each year, on a cumulative basis. Discuss the merits of issuing such shares. Where should they appear in the company’s balance sheet? Explain your reasoning.

Such shares will place burdens on the ordinary shareholders, particularly if the expansion program is unprofitable for a few years, as cumulative dividends must be paid on these shares before any ordinary dividends are paid. Since the new preference shareholders do not have the right to vote, perhaps they are more appropriately treated as a liability of the company, based on the Framework’s liability definition (see previous chapters).This would be so particularly if the preference shares are redeemable on a fixed future date. Treating the preference shares as liabilities means that the dividends on these shares are to be regarded as an expense and disclosed as part of the entity’s finance costs expense.

10.

‘A company must have made sufficient profits before it can pay dividends to its shareholders.’

Discuss.

As a result of changes in the Corporations Act in 2010, a company is no longer required to have any profits in order to pay dividends. The requirements of the Act are that a company must not pay a dividend unless: (a) the company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and (b) the payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and (c) the payment of the dividend does not materially prejudice the company’s ability to pay its creditors. The payment of a dividend is considered to materially prejudice the company’s ability to pay its creditors if the company becomes insolvent as a result of the payment.

Assets and liabilities in (a) above are to be calculated in accordance with accounting standards in force at the relevant time.

In essence, the Act now uses a solvency test for the payment of dividends as opposed to a ‘profits’ test in the past, which specified that dividends could only be paid out of ‘profits’.

Under the approach adopted in June 2010, it appears that dividends can be paid out of capital as well as out of retained earnings or other reserves, so long as (a), (b) and (c) above are satisfied.

© John Wiley & Sons Australia, Ltd 2015

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Chapter 9: Companies: formation and operations

EXERCISE SOLUTIONS Exercise 9.1

Issue of shares payable in full

The directors of Dunedoo Ltd decided to issue 100 000 ordinary shares.

Required A. Prepare journal entries (in general journal form) to record the issue of shares as a private placement to Good Times Ltd for $15 per share payable in full.

B. Prepare journal entries (in general journal form) to record the issue of shares to the public at $18 per share payable in full.

A. Cash at Bank Share Capital Private placement of shares.

1 500 000

Cash Trust Application Cash received on application.

1 800 000

Application Share Capital Issue of shares at $18.

1 800 000

Cash at Bank Cash Trust Transfer of cash.

1 800 000

1 500 000

B. 1 800 000

1 800 000

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1 800 000

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Solutions manual to accompany Financial Accounting 9e by Hoggett et al

Exercise 9.2

Determining equity in the balance sheet

Warren Ltd was organised on 2 January 2016, and proceeded to issue 100 000 9% cumulative preference shares and 200 000 ordinary shares. The preference shares were issued privately at a value of $2 each and the ordinary shares were issued to the public at $5 each, payable in two instalments of $2.50 per share. The first instalment was payable on application and the remaining instalment was payable by 30 June 2017.

Required Prepare the equity section of the balance sheet as at 30 June 2017.

WARREN LTD Balance Sheet (Equity Section) as at 30 June 2017 EQUITY: Share Capital 9% Preference shares (100 000 shares @ $2) Ordinary shares (200 000 @ $2.50) TOTAL EQUITY

$200 000 500 000 $700 000

Note : This solution assumes that the second call had not yet been made.

© John Wiley & Sons Australia, Ltd 2015

9.6

Chapter 9: Companies: formation and operations

Exercise 9.3

Issue of shares by instalments and undersubscription

On 30 April, Tamworth Ltd issued 40 000 shares for $6 each, payable $2 on application, $2 on allotment and the remainder due by two equal calls on 30 June and 31 August. Share issue costs of $3500 were paid on 31 May. Required Prepare journal entries (in general journal format) to record the share issue up to collection of allotment money assuming: 1. the shares were fully subscribed 2. the shares were undersubscribed by 6000 shares.

1.

Cash Trust

80 000

Application

80 000

Cash received ($2) on application Application ($2)

80 000

Allotment ($2)

80 000

Share Capital Amounts receivable on application and allotment on issue of shares.

Cash at Bank

160 000

80 000

Cash Trust

80 000

Transfer of cash.

Cash at Bank

80 000

Allotment

80 000

Amount received on allotment.

Share Capital

3 500

Cash at Bank

3 500

Share issue costs paid.

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Solutions manual to accompany Financial Accounting 9e by Hoggett et al

2.

Cash Trust

68 000

Application

68 000

(34 000  $2) Cash received on application.

Application ($2)

68 000

Allotment ($2)

68 000

Share Capital

136 000

Amounts receivable on application and allotment on issue of shares.

Cash at Bank

68 000

Cash Trust

68 000

Transfer of cash.

Cash at Bank

68 000

Allotment Amount received on allotment.

Share Capital

68 000

3 500

Cash at Bank Share issue costs paid.

3 500

© John Wiley & Sons Australia, Ltd 2015

9.8

Chapter 9: Companies: formation and operations

Exercise 9.4

Share issue with oversubscription

On 1 July 2016, Denman Ltd issued a prospectus offering 160 000 of its ordinary shares, payable $1 on application, $1 on allotment and $2 to be called as and when required. When applications closed on 23 July, applications had been received for 240 000 shares, including one applicant for 20 000 shares who had paid in full. The directors allotted the shares on 24 July as follows: 1. The applicant for 20 000 shares, who paid in full, was allotted 20 000 shares.

2. Applications for 20 000 shares were rejected and the application money was refunded.

3. The remaining applicants were allotted 7 shares for every 10 applied for. The excess application money on these shares was to be applied in part payment of allotment money.

All allotment money was received by 7 August.

Required Prepare journal entries in general journal format to record the share issue.

Workings: Allocation of Money Received on Application No. of Money Application Allotment shares received ($1) ($1) allotted

No. of shares applied for 20 000 20 000 200 000 240 000

20 000 — 140 000 160 000

$80 000 20 000 200 000 $300 000

$20 000 — 140 000 $160 000

$20 000 — 60 000 $80 000

Call in advance ($2) $40 000 — — $40 000

Refund

— $20 000 — $20 000

2016 July 23 Cash Trust

300 000

Application Cash received on application (20 000  $4) + (220 000  $1)

300 000

24 Application (160 000  $1)

160 000

Allotment (160 000  $1)

160 000

Share Capital

320 000

Amounts receivable on application and allotment.

24 Application

140 000

Calls in Advance (20 000  $2)

40 000

Allotment (20 000  $1 + excess)

80 000

Cash Trust (20 000  $1) Calls in advance on 20 000 shares, refunds on 20 000 shares, excess application money applied to allotment (see workings above).

© John Wiley & Sons Australia, Ltd 2015

20 000

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Solutions manual to accompany Financial Accounting 9e by Hoggett et al

24

Cash at Bank

280 000

Cash Trust

280 000

Transfer of cash.

Aug. 7

Cash at Bank Allotment

80 000 80 000

Cash received on allotment.

© John Wiley & Sons Australia, Ltd 2015

9.10

Chapter 9: Companies: formation and operations

Exercise 9.5

Private placement and public issue of shares

Scone Ltd was registered on 1 February 2016. The following events occurred in that year: Feb. 1

Mar. 15 Mar. 18

25 000 ordinary shares were allotted to the original members. The shares were paid for in full at a price of $1 each.

A prospectus was issued for 100 000 10% preference shares and 150 000 ordinary shares, payable in full on application. The issue prices of the preference shares and ordinary shares respectively were $2 and $1.

Applications were received for 100 000 preference shares and 220 000 ordinary shares.

The directors allotted the shares in terms of the prospectus, excess monies being returned to unsuccessful applicants.

Required A. Prepare entries in general journal form to record the transactions.

B. Show the equity section of the balance sheet as at 18 March 2016.

A. 2016 Feb. 1

Cash at Bank

50 000

Share Capital – Ordinary Shares issued to original members.

Mar. 15

Cash Trust

50 000

420 000

Application – Ordinary

220 000

Application – Preference Cash received on application from 100 000 preference shares and 220 000 ordinary shares.

Mar. 18

200 000

Application – Ordinary

150 000

Application – Preference

200 000

Share Capital – Ordinary

150 000

Share Capital – Preference

200 000

Allotment of shares.

Mar. 18

Application – Ordinary

70 000

Cash Trust

70 000

Refund of excess money.

Mar. 18

Cash at Bank Cash Trust

350 000 350 000

Transfer of cash.

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Solutions manual to accompany Financial Accounting 9e by Hoggett et al

B. SCONE LTD Balance Sheet (Equity Section) as at 18 March 2016 EQUITY Share Capital: 100 000 10% preference shares fully paid at $2 200 000 ordinary shares fully paid at $1 Total Equity

© John Wiley & Sons Australia, Ltd 2015

200 000 200 000 $400 000

9.12

Chapter 9: Companies: formation and operations

Exercise 9.6

Ledger accounts for public issue and rights issue

The following events occurred in the newly formed company, Armidale Ltd, which was registered on 31 January 2016: 2016 Feb. 1

Mar. 1

Sept. 20 Oct. 20 Nov. 1 Dec. 15

Armidale Ltd issued a prospectus calling for applications for 600 000 ordinary shares to be issued at a price of $3, payable $2 on application, 50c on allotment and the balance as and when required.

Applications closed with the issue oversubscribed by $1 800 000. The directors allotted shares on the basis of 1 share for every 3 applied for. Excess application money was applied against amounts owing on allotment and the balance was refunded.

A final call on shares was made.

Call money was received.

Shareholders were offered a 1-for-5 rights issue at a price of $2.80, with rights to be exercised by 15 December. If rights are not exercised, they will lapse.

Holders of 560 000 shares exercised their rights to take up new shares in accordance with the rights issue by paying in the appropriate money to the company.

Required Prepare ledger (T accounts) to record the events in the records of Armidale Ltd for 2016.

Application 1/3/16 Share Capital 1/3/16 Allotment & Cash Trust

1 200 000 1/3/16 Cash Trust 1 800 000

3 000 000

3 000 000

3 000 000

Cash Trust 1/3/16 Application

3 000 000 1/3/16 Application

1 500 000

1/3/16 Cash at Bank

1 500 000

3 000 000

3 000 000

Share Capital 1/3/16 Application and

31/12/16

Balance c/d

2 113 600

1 500 000

Allotment 20/9/16 Call

300 000

15/12/16 Cash at Bank

313 600

[112 000 shares @ $2.80]

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Solutions manual to accompany Financial Accounting 9e by Hoggett et al

2 113 600

2 113 600 31/12/16 Balance b/d

Balance 2 113 600 b/d

Allotment 1/3/16 Share Capital

300 000 1/3/16 Application

300 000

Cash at Bank 1/3/16 Cash Trust

1 500 000

20/10/16 Call

300 000

15/12/16 Share Capital

313 600 31/12/16 Balance b/d 2 113 600

31/12/16 Balance b/d

2 113 600 2 113 600

2 113 600 Call

20/9/16 Share Capital

300 000 20/10/16 Cash at Bank

© John Wiley & Sons Australia, Ltd 2015

300 000

9.14

Chapter 9: Companies: formation and operations

Exercise 9.7

Issue of ordinary shares

The following is an actual case:

Fortescue raises $504m Iron ore hopeful Fortescue Metals Group has raised $504 million to fund expansions to its emerging project in the Pilbara region of Western Australia. Fortescue said it had set a minimum raising target of US$300 million (A$344 million) for the much-anticipated capital raising, but decided to increase the target amount after strong demand. The company issued 14 million shares at $36 each to raise $504 million.

The project was initially slated to produce 45 million tonnes of iron ore on an annual basis . . .

Source: Excerpts from Ben Sharples, ‘Fortescue raises $504m’, The Courier-Mail.

Required A. As the above share issue was a private placement with several well-known investors, prepare the journal entry, in general journal form, made by the company to record the share issue.

B. How would your answer to A. differ if the share issue had been a public share float?

A. 2007 Cash at Bank

504 000 000

Share Capital – Ordinary Private placement of 14 000 000 ordinary shares at $36 per share

504 000 000

B. Cash Trust

504 000 000

Application – Ordinary Cash received on application from 14 000 000. ordinary shares.

Application – Ordinary

504 000 000

504 000 000

Share Capital – Ordinary

504 000 000

Allotment of shares.

Cash at Bank

504 000 000

Cash Trust

504 000 000

Transfer of cash.

If the share issue was a public share float, the above entries would have been made, assuming no oversubscription, no refunds, no underwriter, and all shares were payable in full on application.

© John Wiley & Sons Australia, Ltd 2015

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Solutions manual to accompany Financial Accounting 9e by Hoggett et al

Exercise 9.8

Participating preference shares

Maitland Ltd has issued 2 000 000 ordinary shares for $4 and 200 000 8% preference shares for $4, all shares being fully paid. On 30 September 2016 at the annual general meeting of the company, a dividend was declared for a total cash payout of $320 000. Preference shares are entitled to participate in further dividends once ordinary shares have received 8 cents per share. Assume that the dividends are taken out of retained earnings.

Required A. Show how the total dividend would be apportioned between ordinary and preference shares.

B. Prepare journal entries in general journal form to record the dividend payments.

A. Ordinary Current rate of preference dividend (8% on $800000)$64 000 Ordinary dividend (8c on 2 000 000 shares) $160 000 Participation apportionment

Preference

Total distribution $320 000 Dividends so far 224 000 Balance for payment $ 96 000 No of share issued 2 200 000 Cents per share participation 4.36c (rounded) To preference shares (4.36c on 200 000 shares) To ordinary shares (4.36c on 2 000 000 shares) 87 273 Total dividends $247 273 B. 2016 Sept. 30

Retained Earnings

8 727 . $72 727

320 000

Preference Dividend Payable

72 727

Ordinary Dividend Payable

247 273

Dividends declared on 2 000 000 ordinary shares and 200 000 participating preference shares Preference Dividend Payable

72 727

Ordinary Dividend Payable Cash at Bank

247 273 320 000

Payment of dividends.

© John Wiley & Sons Australia, Ltd 2015

9.16

Chapter 9: Companies: formation and operations

Exercise 9.9

Journals and ledgers for issue of shares

Bega Ltd was registered as a new company on 2 January 2017. On that day a prospectus was issued inviting applications for 300 000 ordinary shares at $10, payable $2.50 on application, $2.50 on allotment and the balance due in one call on 15 June 2017. The issue was underwritten for a fee of $7000.

On 31 January, applications closed with the issue undersubscribed by 15 000 shares. Directors proceeded to allot the shares. Amounts due on allotment were received on 9 February, including the amount due from the underwriter less the underwriter’s commission.

On 15 June, the amounts due on the call were received with the exception of the amount due on 12 000 shares.

Required Prepare journal entries (in general journal form) and ledger accounts (in T-account format) to record the above transactions.

General Journal 2017 Jan. 31

Jan. 31

Cash Trust Application Cash received on application ($2.50 per share from 285 000 ordinary shares).

712 500

Application

750 000

Allotment

750 000

712 500

Share Capital Allotment of 300 000 shares (including to the underwriter: 15 000 shares).

Jan. 31

Cash at Bank

1 500 000

712 500

Cash Trust

712 500

Transfer of cash.

Feb. 9

Cash at Bank

68 000

Share Issue Costs (or Share Capital)

7 000

Allotment

37 500

Application

37 500

Cash received from underwriter on 15 000 shares ($2.50 on each of application and allotment).

Feb. 9

Cash at Bank Allotment

712 500 712 500

Cash received on allotment from 285 000 shares

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Solutions manual to accompany Financial Accounting 9e by Hoggett et al

June 15

Call

1 500 000 Share Capital

1 500 000

Call of $5 per share on 300 000 shares.

June 15

Cash at Bank

1 440 000

Call

1 440 000

Call received on 288 000 shares.

General Ledger Application 31/1/17 Share Capital

750 000 31/1/17 Cash Trust 9/2/17 Cash, Allotment (from underwriter)

712 500

750 000

750 000

37 500

Cash Trust 31/1/17 Application

712 500 9/2/17 Cash at Bank

712 500

Share Capital

30/6/17 Balance c/d

31/1/17 Application and Allotment

1 500 000

15/6/17 Call

1 500 000

3 000 000 3 000 000

3 000 000 30/6/17 Balance b/d

Balance 3 000 000 b/d

Allotment 31/1/17 Share Capital

750 000 9/2/17 Cash at Bank 9/2/17 Cash at Bank

37 500 712 500

750 000

750 000

© John Wiley & Sons Australia, Ltd 2015

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Chapter 9: Companies: formation and operations

Cash at Bank 31/1/17 Cash Trust

712 500

9/2/17 Application, Allotment

68 000

9/2/17 Allotment

712 500

15/6/17 Call 30/6/17 Balance b/d

1 440 000 30/6/17 Balance b/d

2 933 000

2 933 000

2 933 000

2 933 000 Share Issue Costs

9/2/17 Allotment, Application,

7 000

Cash at Bank

Call 15/6/17 Share Capital

1 500 000 15/6/17 Cash at Bank 30/6/17 Balance c/d 1 500 000

30/6/17 Balance b/d

1 440 000 60 000 1 500 000

60 000

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Solutions manual to accompany Financial Accounting 9e by Hoggett et al

Exercise 9.10

Dividends, tax and reserve transfers

During the year ended 30 June 2016, the directors of Cooma Ltd paid a final dividend out of retained earnings of $60 000, which had been recommended at the end of the previous financial year. They also declared and paid an interim dividend of $150 000 on 1 February 2017. The balance of the Retained Earnings account at 1 July 2016 was $200 000.

At 30 June 2017, the ledger accounts showed that the company had made a total profit of $1 000 000 for the year. However, the directors determined that the following adjustments were still necessary to finalise the accounts.

1. Provide for an income tax liability of $300 000.

2. Recommend the payment of a final dividend of $100 000 out of retained earnings.

3. Transfer $175 000 to a general reserve and $100 000 to a plant replacement reserve.

Required A. Prepare journal entries to record all transactions above for the year ended 30 June 2017.

B. Prepare the Retained Earnings account for the year ended 30 June 2017.

A. 2016 Before June (last

Retained Earnings Final Dividend Payable

Fin. Yr)

Final dividend declared on shares Final Dividend Payable Cash at Bank

60 000 60 000

60 000 60 000

Payment of dividends.

Note: This dividend would have been deducted from Retained Earnings in the year ended 30 June 2016.

2017 Feb. 1

Retained Earnings

150 000

Interim Dividend Payable

150 000

Interim dividend declared on shares Feb. 1

Interim Dividend Payable

150 000

Cash at Bank Payment of interim dividend.

June 30

Income Tax Expense

150 000

300 000

Current Tax Liability Current income tax for the year.

Retained Earnings General Reserve Plant Replacement Reserve

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300 000

275 000 175 000 100 000

9.20

Chapter 9: Companies: formation and operations

Transfer retained earnings to reserves No entry for recommended dividend 2017 Closing entries June 30

Income and Expenses (incl tax expense)

700 000

Profit or Loss Summary

700 000

Profit for the year (after tax) Profit or Loss Summary

700 000

Retained Earnings

700 000

Transfer profit to retained earnings.

B. Retained Earnings 1/2/17 Interim dividend payable

1/7/16 Balance b/d 150 000 30/6/17 Profit or Loss Summary

30/6/17 General and plant

275 000

200 000 700 000

replacement reserves 30/6/17 Balance c/d

475 000 900 000

900 000 30/6/17 Balance b/d

© John Wiley & Sons Australia, Ltd 2015

Balance 475 000 b/d

9.21

Solutions manual to accompany Financial Accounting 9e by Hoggett et al

Exercise 9.11

Share dividends

Penshurst Ltd’s balance sheet, before a share dividend, is as follows:

ASSETS Cash at bank

PERU LTD Balance Sheet as at 30 June 2016 EQUITY $ 20 000 Share capital 150 000 General reserve Retained earnings

$100 000 40 000 30 000

$170 000

$170 000

Non-current assets

The company immediately declared a share dividend from the general reserve on the basis of 1 bonus share for every 5 shares held. All shares were issued at $1.

Required Prepare any journal entries necessary to record the payment of this share dividend.

2016 June 30 General Reserve Share Capital Payment of share dividend of 1 share for every 5 shares held, valued at $1.

© John Wiley & Sons Australia, Ltd 2015

20 000 20 000

9.22

Chapter 9: Companies: formation and operations

Exercise 9.12

Preparation of income statement

The following information relates to Nevertire Ltd. Profit before income tax for the year ended 30 June 2016 was $220 000. The following items were used in determining that profit: Sales Cost of sales Selling, administrative and finance expenses Loss from flood Interest revenue Bad debts Development costs written off

$540 000 234 000 72 000 14 000 18 000 36 000 22 000

Assume the company’s taxation rate is 30c in the dollar.

Required Prepare the income statement for the year ended 30 June 2016.

NEVERTIRE LTD Income Statement for the year ended 30 June 2016 INCOME Sales Cost of sales GROSS PROFIT Other income: Interest revenue EXPENSES Selling, administrative and finance expenses Loss from flood Bad debts Development costs written off TOTAL EXPENSES Profit before income tax Income tax expense (30%) PROFIT

© John Wiley & Sons Australia, Ltd 2015

$580 000 234 000 346 000 18 000 364 000 $72 000 14 000 36 000 22 000 144 000 220 000 66 000 $154 000

9.23

Solutions manual to accompany Financial Accounting 9e by Hoggett et al

Exercise 9.13

Dividends, reserves, retained earnings

During the year ended 30 June 2016, the directors of Jindabyne Ltd declared and paid an interim dividend of $18 000 out of retained earnings. At the end of the year the financial statements showed a profit (before tax) of $460 000 out of which the directors made the following reserve transfers and tax liability.

Income tax expense Reserves: Plant replacement General

$ 140 000 40 000 102 000

The beginning balance of retained earnings was $15 000.

Required A. Prepare journal entries relating to the above transactions.

B. Prepare the Retained Earnings account for Jindabyne Ltd for the year ended 30 June 2016.

A. 2016 Retained Earnings

18 000

Interim Dividend Payable Declaring an interim dividend.

Interim Dividend Payable

18 000

18 000

Cash at Bank

18 000

Payment of interim dividend.

June 30 Income Tax Expense

140 000

Current Tax Liability

140 000

Recording income tax liability.

June 30

Retained Earnings

142 000

Plant Replacement Reserve General Reserve

40 000 102 000

Transfer to various reserves.

Closing Entries June 30 Income and Expenses (incl Tax) Profit or Loss Summary

320 000 320 000

Profit for the year (after tax).

June 30 Profit or Loss Summary Retained Earnings

© John Wiley & Sons Australia, Ltd 2015

320 000 320 000

9.24

Chapter 9: Companies: formation and operations

Transfer profit to retained earnings.

B. Retained Earnings Interim dividend declared

$18 000 1/7/15 Balance b/d 30/6/16 Profit or Loss Summary

30/6/16 Transfers to reserves

142 000

30/6/16 Balance c/d

175 000 $335 000

$15 000 320 000

$335 000 1/7/16 Balance b/d

© John Wiley & Sons Australia, Ltd 2015

175 000

9.25

Solutions manual to accompany Financial Accounting 9e by Hoggett et al

Exercise 9.14

Dividends, reserves, statement of changes in equity

A. Show the journal entries to record the following transactions for Murrurundi Ltd. 1. Profit for the year was $1 750 000. Ignore income tax.

2. Directors resolved to transfer the amounts specified below from retained earnings to: (a) contingencies reserve, $1 000 000 (b) general reserve, $400 000.

3. Some years ago, the company had established an exchange fluctuation reserve, $4 500 000, but now that it had withdrawn from international trade, this reserve was no longer required.

4. Start-up costs $250 000 were to be written off. This has not been reflected in the profit in (1) above.

5. An interim dividend of $200 000 had been paid and directors recommended a final dividend of $300 000 to be paid in 3 months’ time, after ratification by shareholders at the annual general meeting. Both dividends were paid out of retained earnings.

Note: The beginning balance of the Retained Earnings account was $1 800 000.

B. Prepare the statement of changes in equity for Murrurundi Ltd.

1.

Income

x

Expenses Profit or Loss Summary

x 1 750 000

2.

Retained Earnings

1 400 000

Contingencies Reserve

1 000 000

General Reserve

400 000

3.

Exchange Fluctuation Reserve

4 500 000

Retained Earnings

4.

4 500 000

Assuming that start-up costs were originally treated as an asset: Start-up Costs Written Off (Expense)

250 000

Start-up Costs

250 000

5.

Retained Earnings Cash at Bank

200 000 200 000

No entry necessary for Final Dividend

© John Wiley & Sons Australia, Ltd 2015

9.26

Chapter 9: Companies: formation and operations

The following closing entries are necessary: Profit or Loss Summary

250 000

Start-up Costs Written Off (Expense)

250 000

Profit or Loss Summary

1 500 000

Retained Earnings

1 500 000

Transfer of final profit.

B. Retained Earnings Interim dividend (cash)

$200 000 Balance b/d Profit or Loss Summary

Transfer to reserves

1 400 000 Exchange fluctuation reserve

Balance c/d

6 200 000 $7 800 000

$1 800 000 1 500 000 4 500 000 $ 7 800 000

Balance b/d

© John Wiley & Sons Australia, Ltd 2015

$6 200 000

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Solutions manual to accompany Financial Accounting 9e by Hoggett et al

C. MURRURUNDI LTD Statement of Changes in Equity for the year ended …

Retained Earnings Retained earnings at the beginning of the year Add: Profit Transfer from exchange fluctuation reserve Transfer to reserves: Contingencies reserve General reserve Interim dividend paid

$1 800 000 1 500 000 4 500 000 7 800 000

Retained earnings at the end of the year

1 000 000 400 000 200 000 1 600 000 $6 200 000

Reserves Exchange fluctuation reserve at the beginning of the year Transfer to retained earnings Exchange fluctuation reserve at the end of the year

$4 500 000 (4 500 000) —

Contingencies reserve at beginning of the year (assumed) Transfer from retained earnings Contingencies reserve at the end of the year

— $1 000 000 1 000 000

General reserve at the beginning of the year (assumed) Transfer from retained earnings General reserve at the end of the year

— 400 000 400 000

Share capital; no details available

© John Wiley & Sons Australia, Ltd 2015

9.28

Chapter 9: Companies: formation and operations

Exercise 9.15

Issue of shares, and equity in the balance sheet

On 1 July 2016, Grafton Ltd was incorporated, and on 4 July a prospectus was issued inviting applications for 80 000 shares payable $4.50 on application, $2.50 on allotment and $2.50 on each of two calls to be made at intervals of 3 months after the date of allotment.

By 31 July, applications were received for 96 000 shares. On 3 August, the directors allotted 80 000 shares to the applicants in proportion to the number of shares for which application had been made. The surplus application money was offset against the amount payable on allotment.

The balance of allotment money was received by 12 August.

The two calls were made on the dates stated in the prospectus, but the holders of 4800 shares did not pay either call. In addition, a holder of another 2400 shares did not pay the second call.

Required A. Prepare journal entries to record the above transactions (in general journal format).

B. Prepare the equity section of the balance sheet of Grafton Ltd on completion of the transactions.

A. 2016 July 31

Cash Trust

432 000

Application

432 000

Cash received on application from 96 000 shares at $4.50 per share.

Aug. 3

Application ($4.50)

360 000

Allotment ($2.50)

200 000

Share Capital

560 000

Allotment of shares.

Aug. 3

Application

72 000

Allotment

72 000

Transfer excess application money.

Aug. 3

Cash at Bank

432 000

Cash Trust

432 000

Transfer of cash.

Aug. 12

Cash at Bank Allotment

128 000 128 000

Cash received on allotment.

© John Wiley & Sons Australia, Ltd 2015

9.29

Solutions manual to accompany Financial Accounting 9e by Hoggett et al

Nov. 3

First Call

200 000

Share Capital For call receivable on 80 000 shares at $2.50.

Cash at Bank

200 000

188 000

First Call

188 000

Cash received on first call from 75 200 shares.

2017 Feb. 3

Second Call

200 000

Share Capital

200 000

For second call receivable Cash at Bank

182 000

Second Call

182 000

Cash received on second call from 72 800 shares.

B. MURRURUNDI LTD Balance Sheet (Equity Section) As at 3 February 2017 EQUITY Share Capital: 80 000 ordinary shares called to $12 Less unpaid calls (4800 shares @ $5 + 2400 shares @ $2.50) TOTAL EQUITY

© John Wiley & Sons Australia, Ltd 2015

$960 000 30 000 $990 000

9.30

Chapter 9: Companies: formation and operations

PROBLEM SOLUTIONS Problem 9.1

Ledger accounts on issue of ordinary shares

Newcastle Ltd was incorporated on 1 July 2016. On 1 August, it was decided to issue 300 000 ordinary shares on the following terms: Application Allotment Call as required

$2 per share $1 per share $1 per share

To the end of August, applications for 350 000 shares had been received together with the application money due on each share. One applicant for 5000 shares had forwarded $20 000 in full payment of the shares.

On 15 September, the directors proceeded to allot 300 000 shares on the following basis. Applicants for 30 000 shares were refunded their application money in full, 5000 shares were allotted to the applicant who paid for the shares in full, and the other successful applicants were allotted the remaining shares, excess application money being transferred to allotment.

On 7 October, all allotment money had been received.

A first and final call was made on 1 November, and all call money was received by 30 November with the exception of the amount due on 6000 shares.

Required Prepare all ledger accounts (T account format) necessary to record the transactions.

Cash Trust 2016 31/8

2016 Application

$710 000 15/9

Application

$60 000

15/9

Cash at Bank

650 000

$710 000

$710 000

Cash at Bank 2016

2016

15/9

Cash Trust

$650 000

7/10 30/11

Allotment Call

255 000 289 000 30/11

Balance c/d

$1 194 000 30/11

Balance b/d

$1 194 000 $1 194 000

$1 194 000

Share Capital

© John Wiley & Sons Australia, Ltd 2015

9.31

Solutions manual to accompany Financial Accounting 9e by Hoggett et al

2016

2016 15/9

30/11

Balance c/d

$1 200 000 1/11

Application & Allotment

$900 000

Call

300 000

$1 200 000

$1 200 000 Balance b/d

$1 200 000

Cash Trust

$710 000

Application 2016

2016

15/9

Share Capital

$600 000 31/8

15/9

Cash Trust

60 000

15/9 15/9

Call in Advance Allotment

5 000 45 000 $710 000

$710 000

Allotment 2016 1/11

Share Capital

2016 $300 000 15/9

Application

$45 000

7/10

Cash at Bank

255 000

$300 000

$300 000

Call in Advance 2016

2016

1/11

Call

$5 000 15/9

Application

$5 000

Call in Advance

$5 000

Cash Balance c/d

289 000 6 000

Call 2016

2016

1/11

Share Capital

$300 000 1/11 30/11 30/11 $300 000

30/11

Balance b/d

$300 000

$6 000

Workings: Allocation of Money Received on Application

© John Wiley & Sons Australia, Ltd 2015

9.32

Chapter 9: Companies: formation and operations

No. of shares applied for 5 000 30 000 315 000 350 000

No. of shares allotted 5 000 — 295 000 300 000

Money received

Application $2

Allotment $1

Call $1

$20 000 60 000 630 000 $710 000

$10 000 — 590 000 $600 000

$5 000 — 40 000 $45 000

$5 000 —

— $60 000

$5 000

$60 000

© John Wiley & Sons Australia, Ltd 2015

Refund

9.33

Solutions manual to accompany Financial Accounting 9e by Hoggett et al

Problem 9.2

Ledger accounts for issue of shares, preparation of balance sheet

On 1 January 2016, Shoalhaven Ltd was registered and, on the same day, the company purchased the net assets (excluding cash) of a partnership for a consideration of 240 000 ordinary shares (fully paid) at a price of $2.40 per share. 1 000 000 ordinary shares were offered to the public at $2.40 per share on the following terms: $1 on application (due 15 January) 70c on allotment (due 15 February) balance on final call (due 15 May).

By 15 January, applications had been received for 1 200 000 ordinary shares of which applicants for 200 000 shares forwarded the full $2.40 per share.

At a directors’ meeting on 16 January, it was decided: 1. to allot ordinary shares in full to applicants who had paid in full on application 2. to allot the remaining ordinary shares from this issue in proportion of 4 for every 5 applied for.

According to the prospectus, all surplus money from applications was to be transferred to allotment and/or call accounts.

The share issue costs were $5600 and were paid on 15 February.

By 31 May, all money was received except for the holder of 2000 shares who did not pay the final call.

Required A. Prepare ledger accounts (running balance format) to record all the transactions.

B. Prepare a balance sheet of Shoalhaven Ltd as at 31 May 2016.

A. ACCOUNT: Cash Trust Date Explanation 2016 15 1 16 1

Application Cash at Bank

15

5

Debit

1 480 000 1 480 000

ACCOUNT: Share Capital Date Explanation 2016 1 1 16 1 15 2

Post Ref

Account No. Credit Balance

Net Assets Application and Allotment Cash at Bank (share issue costs) Final Call

Post Ref

Debit

Account No. Credit Balance

576 000 1 700 000

576 000 2 276 000 2 270 400

700 000

2 970 400

5 600

ACCOUNT: Cash at Bank

© John Wiley & Sons Australia, Ltd 2015

1 480 000 —

Account No.

9.34

Chapter 9: Companies: formation and operations

Date

Explanation

Post Ref

2016 16 1 15 2 15 2 31 5

Cash Trust Share Capital Allotment Final Call

ACCOUNT: Net Assets (excl. cash) Date Explanation 2016 1 1

2016 15 1 16 1 16 1 16 1

2016 16 1 16 1 15 2

360 000 558 600

Post Ref

Post Ref

Debit

Account No. Credit Balance

1 000 000 340 000 140 000

Debit

340 000 360 000

Application Final Call

Debit

Post

Debit

© John Wiley & Sons Australia, Ltd 2015

700 000 360 000 —

Account No. Credit Balance

140 000 140 000

1 480 000 480 000 140 000 —

Account No. Credit Balance

700 000

Post Ref

1 480 000 1 474 400 1 834 400 2 393 000

576 000

1 480 000

Share Capital Application Cash at Bank

ACCOUNT: Final Call Date Explanation

Debit

Balance

Account No. Credit Balance

576 000

Post Ref

ACCOUNT: Calls in Advance Date Explanation 2016 16 1 15 5

5 600

Cash Trust Share Capital Allotment Calles in Advance

ACCOUNT: Allotment Date Explanation

Credit

1 480 000

Share Capital

ACCOUNT: Application Date Explanation

Debit

140 000 —

Account No. Credit Balance

9.35

Solutions manual to accompany Financial Accounting 9e by Hoggett et al

Ref 2016 15 5 15 5 31 5

Shares applied for 200 000 1 000 000 1 200 000

Share Capital Calls in Advance Cash at Bank

700 000 140 000 558 600

Allocation of Money Received on Application Cash Shares Application Allotment Received Allotted ($1) (70c) $480 000 1 000 000 $1 480 000

200 000 800 000 1 000 000

$200 000 800 000 $1 000 000

$140 000 200 000 $340 000

700 000 560 000 1 400

Calls in Advance (70c) $140 000 — $140 000

$1 480 000 B. SHOALHAVEN LTD Balance Sheet as at 31 May 2016 ASSETS Cash at Bank Other Net Assets

$2 393 000 576 000 $2 969 000

EQUITY Share Capital 1 240 000 ordinary shares issued at $2.40 Less: Share Issue Costs Calls in Arrears (2 000 shares @ 70c) TOTAL EQUITY

© John Wiley & Sons Australia, Ltd 2015

2 976 000 5 600 1 400 $2 969 000

9.36

Chapter 9: Companies: formation and operations

Problem 9.3

Issue of ordinary and preference shares

Picton Ltd was registered on 1 July 2016. On 4 August a prospectus was issued inviting public subscriptions for an issue of 200 000 12% preference shares payable $2 in full on application, and 600 000 ordinary shares at a price of $1.60 per share, payable $1 on application, 20c on allotment and the balance as and when required.

Applications were to be made in multiples of 100 shares with a minimum of 200 preference shares or 500 ordinary shares. The directors reserved the right to allot the shares applied for in full or such lesser number as resolved and to apply excess money towards amounts due on allotment.

All other money was to be refunded to applicants.

Applications were received for 240 000 preference shares and 800 000 ordinary shares by 16 August when the directors closed the issue. On 19 August, the directors allotted the shares as follows.

1. Preference: Three applications for a total of 40 000 shares were rejected, and the balance allotted in full.

2. Ordinary: Applications for 120 000 shares were rejected in full and the balance was allotted on a pro rata basis.

On 24 August, refunds were made to the respective applicants in accordance with the directors’ resolutions. Share issue costs of $1500 were also paid on this date. Outstanding allotment money was received by 30 September.

On 8 November the directors resolved that a call of 30c per share was to be made on the 600 000 partly paid ordinary shares. The call is due and payable by 1 December.

Call money was received as follows: 1 December on 520 000 shares 15 December on 40 000 shares.

Required Prepare entries in general journal form to record the events in the accounts of Picton Ltd. 2016 Aug. 16

Cash Trust

1 280 000

Application – Preference Application – Ordinary

480 000 800 000

(240 000  $2 + 800 000  $1) Cash received on application.

Aug. 19

Application – Preference

400 000

Application – Ordinary

600 000

Allotment – Ordinary

0

Share Capital – Preference

400 000

Share Capital – Ordinary

600 000

For allotment of shares.

Aug. 24

Application – Preference

80 000

Application – Ordinary

200 000

Cash Trust ($80 000 + $120 000)

200 000

Allotment – Ordinary

80 000

© John Wiley & Sons Australia, Ltd 2015

9.37

Solutions manual to accompany Financial Accounting 9e by Hoggett et al

Distribution of application money.

Aug. 24

Cash at Bank

1 080 000

Cash Trust

1 080 000

Transfer cash held in trust.

Aug. 24

Share Capital

1 500

Cash at Bank

1 500

Share issue costs.

Sept. 30

Cash at Bank

40 000

Allotment – Ordinary

40 000

Balance received on allotment.

Nov. 8

First Call – Ordinary

180 000

Share Capital – Ordinary

180 000

First call receivable.

Dec. 1

Cash at Bank

156 000

First Call – Ordinary

156 000

For cash received on first call (520 000  30c).

Dec. 15

Cash at Bank First Call – Ordinary

12 000 12 000

For additional cash received on call (40 000  30c).

© John Wiley & Sons Australia, Ltd 2015

9.38

Chapter 9: Companies: formation and operations

Problem 9.4

Rights issues, private placement, dividends and changes in equity

The following is the equity of Bowral Ltd at 30 June 2016: Share capital (200 000 fully paid ordinary shares) General reserve Retained earnings

$400 000 200 000 10 000

The transactions below occurred during the year ended 30 June 2017: 2016

July

1

July

31

Aug. 1 Sept. 22

Prospectus issued inviting offers for 200 000 shares to be issued for $3 per share. These shares were offered to existing shareholders on the basis of 1 share for every 2 shares at present held. Shares were payable in full on application and rights to the issue were transferable. The prospectus provided that these shares were to rank equally with existing shares from 1 July 2016. The issue was underwritten for a commission of $5000.

In addition, 200 000 shares were privately placed with QLM Insurance Ltd at $2.80 per share, and these shares were to rank for dividend purposes from 1 October 2016.

The issue closed fully subscribed, the holders of 40 000 shares having transferred their rights. Directors proceeded to allotment.

Underwriting commission paid.

At the annual general meeting, shareholders approved a final dividend of 15c per share for the year ended 30 June 2016. The dividend had not been recorded in the accounts for the year ended 30 June 2016. Dividends were paid by direct debit to shareholders after the close of the meeting. Dividends were paid from General Reserve.

Required A. Prepare entries in general journal format to record the above transactions.

B. Prepare a statement of changes in equity for the period 1 July to 30 September 2016.

A. 2016 1/7

Cash at Bank

400 000

Share Capital

400 000

Private placement of shares with QLM Insurance.

31/7

Cash at Bank

400 000

Application

400 000

Cash received from existing shareholders for rights issue.

31/7

Application Share Capital

400 000 400 000

200 000 shares allotted under rights issue.

1/8

Share Capital

© John Wiley & Sons Australia, Ltd 2015

5 000

9.39

Solutions manual to accompany Financial Accounting 9e by Hoggett et al

Cash at Bank

5 000

Share issue costs.

1/9

General Reserve

60 000

Final Dividends Payable

60 000

Dividend of 15c per share on 400 000 shares 1/9

Final Dividends Payable Cash at Bank

60 000 60 000

Payment of final dividend.

B. BOWRAL LTD Statement of Changes in Equity From 1 July to 30 September 2016 Share capital Share capital at 30 June 2016 Rights issue to existing shareholders Private placement Share issue costs Share capital at 30 September 2016 (1 200 000 shares fully paid at $1) Retained Earnings Retained earnings at 30 June 2016 Profit for the period Retained earnings at 30 September 2016 Other Reserves General reserve at 30 June 2016 Final dividend General reserve at 30 September 2016

© John Wiley & Sons Australia, Ltd 2015

$400 000 400 000 400 000 (5 000) $1 195 000

$10 000 ? ? $200 000 (60 000) $140 000

9.40

Chapter 9: Companies: formation and operations

Problem 9.5

Ledgers, statement of changes in equity

The following information relating to the year ending 30 June 2016 for Penrith Ltd has been obtained from the company’s records.

Profit for year before further adjustments and tax Retained earnings (1 July 2015) General reserve Revaluation surplus Interim dividend paid Development costs

$33 000 5 500 3 000 2 500 5 000 3 500

On 30 June 2016, the directors decided to: 1. recommend a final cash dividend of $7000, to be ratified by shareholders at the annual general meeting 2. write off development costs 3. increase the general reserve by $1000 4. provide for an estimated tax expense and current tax liability of $7500 on 2015–16 profits.

Required Record the adjustments in ledger accounts and prepare a statement of changes in equity for Penrith Ltd for the year ended 30 June 2016.

Income Tax Expense 30/6

Current tax liability

$7 500 30/6

Profit or Loss Summary

$7 500

Profit or Loss Summary 30/6

Write-off Development Costs

3500 30/6

30/6

Income Tax Expense

7 500

30/6

Retained Earnings

22000

Profit before Adjustments

$33 000

$ 33000

$ 33000

Retained Earnings 30/6

General Reserve

$1 000 1/7

Balance b/d

$ 5500

30/6

Interim Dividend/Cash

7 000

Profit or Loss Summary

22000

Balance c/d

19500 $ 27500

$ 27500 Balance b/d

$ 19500

Development Costs Balance

$ 3500 30/6

Profit or Loss Summary

© John Wiley & Sons Australia, Ltd 2015

3500

9.41

Solutions manual to accompany Financial Accounting 9e by Hoggett et al

Current Tax Liability 30/6

Income Tax Expense

$7 500

Balance

$2 500

Balance b/d

$ 3000

Revaluation Surplus

General Reserve 30/6

Balance c/d

$4 000 30/6

Retained Earnings

$4 000

1 000 $4 000

30/6

Balance b/d

$4 000

PENRITH LTD Statement of Changes in Equity for the year ended 30 June 2016 Retained Earnings Retained earnings at 1 July 2015 Profit for the period Interim dividend paid Transfer to general reserve Retained earnings at 30 June 2016

$ 5500 22000 27500 7 000 1 000 8 000 $ 19500

Other Reserves Revaluation surplus at 1 July 2015 Revaluation surplus at 30 June 2016

$ 2500 2500

General reserve at 1 July 2015 Transfer from retained earnings General reserve at 30 June 2016

$ 3000 1 000 $ 4000

Share capital; no details available

© John Wiley & Sons Australia, Ltd 2015

9.42