Solutions Tovfinancial Accounting

Topics: Stock market, Dividend, John Wiley & Sons Pages: 5 (911 words) Published: April 15, 2013
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 General Reserve (Transfer from revaluation surplus to general reserve) Retained Earnings/ T’fer to Reserve General Reserve (Transfer to general reserve) General Reserve Share Capital (Being bonus dividend out of general reserve) Dr Cr 200 000 200 000


Dr Cr

420 000 420 000


Dr Cr

65 000 65 000


Dr Cr

120 000 120 000


Dr Cr

300 000 300 000

QUESTION 3.10 GERALDTON WAX LTD General journal 2013 Sept 15 Dividend Payable– Ordinary Dividend Payable– Preference Cash (Payment of ordinary dividend [400 000 x 16c +300 000 x 16c x 3/5 = $92 800] and preference dividend [$75 000 x 6%]) Dr Dr Cr 92 800 4 500 97 300

Selected solution from Leo, K., Hoggett, J., Sweeting, J., and Radford, J., (2009) Solutions manual to accompany Company Accounting 8e, John Wiley and Sons, Australia.


Oct 20 Share Capital – Preference Retained Earnings/Redemption Premium (75 000 x 5%) Shareholders’ Redemption (Redemption of preference shares out of profits) Note: dividends do not accrue on the preference shares Retained Earnings/Transfer to Share Capital Share Capital – Ordinary (Retained earnings transferred to capital. NOTE: no dividends will be paid on this share capital) Oct 25 Shareholders’ Redemption Cash (Payment of cash to redeem preference shares) Nov 30 Cash Share Capital – Ordinary ‘A’ (Renounceable rights issue) [400 000/5 = 80 000 x 1.90] Dec 20 Share Issue Costs (Share Capital) Cash (Payment of share issue costs) 2014 Jan 10 Retained Earnings/Transfer to reserve General Reserve (Transfer to general reserve) Feb 28 Cash Share Capital – Ordinary ‘C’ (Issue of shares to options holders) [70 000 x $1.80] Share Options Share Capital – Ord ‘C’ Lapsed Options Reserve (Transfer of options account, 35 000 exercised and 5 000 lapsed) [70 000/2 = 35 000 x 60c = 21 000]

Dr Dr Cr

75 000 3 750 78 750

Dr Cr

75 000 75 000

Dr Cr

78 750 78,750

Dr Cr

152 000 152 000

Dr Cr

3 000 3 000

Dr Cr

35 000 35 000

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