Solutions Tovfinancial Accounting
2 Company Operations
Tutorial Solutions Chapter 3 Company operations
Review Questions
11. When do dividends become a legal debt of the company? When are they to be recognised as liabilities? Where a company has a constitution that provides for directors to declare a dividend, then a dividend becomes a debt of the company once the dividend is declared. Where no such statement exists in a company’s constitution, then the debt will only arise when the time for payment of the dividend arrives. However, a dividend determined or publicly recommended by the time of completion of the financial report but not on or before the reporting date must not be recognised as a liability as at the reporting date. Instead such a dividend must be disclosed in notes as an event after reporting date. See sections 3.4.1 and 3.4.2 of the chapter.
14. Discuss the nature of a reserve. What reasons may there be for no definitions being given for a reserve in the legislation, accounting standards and the Conceptual Framework 2010? The term reserve is not defined in any accounting standard or the Corporations Act. AASB 101 describes the equity of a company as consisting of issued capital and reserves (para.54(r)). In addition to retained earnings, the most common type of reserves are general, revaluation and foreign currency translation reserves, all of which can be considered as ‘direct adjustments to equity’. There appears to be no clear reason as to why the term ‘reserve’ is not defined in the legislation, standards, or the Conceptual Framework. ‘Retained earnings’ is one category of reserves, according to AASB 101.
Selected solution from Leo, K., Hoggett, J., and Sweeting, J., (2012) Solutions manual to accompany Company Accounting 9e, John Wiley and Sons, Australia.
Practice Questions QUESTION 3.1
1. Retained Earnings/Interim Dividend Cash (Payment of interim dividend) Retained Earnings/ Dividend Declared Dividend Payable (Declaration of a final dividend) Revaluation Surplus
Tutorial Solutions Chapter 3 Company operations
Review Questions
11. When do dividends become a legal debt of the company? When are they to be recognised as liabilities? Where a company has a constitution that provides for directors to declare a dividend, then a dividend becomes a debt of the company once the dividend is declared. Where no such statement exists in a company’s constitution, then the debt will only arise when the time for payment of the dividend arrives. However, a dividend determined or publicly recommended by the time of completion of the financial report but not on or before the reporting date must not be recognised as a liability as at the reporting date. Instead such a dividend must be disclosed in notes as an event after reporting date. See sections 3.4.1 and 3.4.2 of the chapter.
14. Discuss the nature of a reserve. What reasons may there be for no definitions being given for a reserve in the legislation, accounting standards and the Conceptual Framework 2010? The term reserve is not defined in any accounting standard or the Corporations Act. AASB 101 describes the equity of a company as consisting of issued capital and reserves (para.54(r)). In addition to retained earnings, the most common type of reserves are general, revaluation and foreign currency translation reserves, all of which can be considered as ‘direct adjustments to equity’. There appears to be no clear reason as to why the term ‘reserve’ is not defined in the legislation, standards, or the Conceptual Framework. ‘Retained earnings’ is one category of reserves, according to AASB 101.
Selected solution from Leo, K., Hoggett, J., and Sweeting, J., (2012) Solutions manual to accompany Company Accounting 9e, John Wiley and Sons, Australia.
Practice Questions QUESTION 3.1
1. Retained Earnings/Interim Dividend Cash (Payment of interim dividend) Retained Earnings/ Dividend Declared Dividend Payable (Declaration of a final dividend) Revaluation Surplus