Chapter 9: Companies: formation and operations

Discussion questions

4. 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.

8. 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.

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

Exercises
Exercise 9.4

Share issue with oversubscription

On 1 July 2019, 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
(a) Prepare journal entries in general journal format to record the share issue.
(LO4)

1
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 2019 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.
(LO5)

Exercise 9.9

Journals and ledgers for issue of shares

Bega Ltd was registered as a new company on 2 January 2020. 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 2020. 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
(a) Prepare journal entries (in general journal form) and ledger accounts (in T-account format) to
record the above transactions.
(LO4)

2
Problem 9.18

Issue of ordinary and preference shares

Picton Ltd was registered on 1 July 2019. 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.

 December on 520 000 shares

 15 December on 40 000 shares.

Required
(a) Prepare entries in general journal form to record the events in the accounts of Picton
Ltd.
(LO4)

3
Problem 9.21

Dividends, reserves

Equity of Toronto Ltd at 14 February 2019 consisted of the following.

The following events occurred during 2019.

Required
(a) Prepare journal entries in general journal format to give effect to the above transactions.
(b) Show the Retained Earnings account up to 17 August 2019.
(c) Show the statement of changes in equity from 14 February 2019 to 17 August 2019.
(LO5, LO6 and LO7)