Companies: Formation and Operations | Test Bank – 11e - Financial Accounting 11e | Test Bank with Answer Key by John Hoggett by John Hoggett, Lew Edwards, John Medlin, Keryn Chalmers, Andreas Hellmann, Claire Beattie, Jodie Maxfield. DOCX document preview.
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Testbank
to accompany
Accounting
11th edition
by
Hoggett et al.
© John Wiley & Sons Australia, Ltd 2020
Chapter 9: Companies: formation and operations
Multiple-choice questions
1. Under the Corporations Act, a Proprietary company is classified as 'small' if it can satisfy two out of three conditions. Which of the following are two of those conditions?
a. Consolidated gross assets less than $12.5 million and consolidated gross revenue less than $25 million.
b. Consolidated gross assets less than $12.5 million and fewer than 200 employees.
c. Consolidated gross revenue less than $25 million and less than 200 employees.
d. Consolidated gross assets less than $5 million and less than 50 employees.
General Feedback:
Learning objective 9.1: describe the different types of companies permitted to exist by law in the Australian business environment and summarise the advantages and disadvantages of the corporate form of organisation.
2. Which of the following statements about a private company in Australia is correct?
a. There is no restriction for the maximum number of shareholders.
b. It is permitted to raise funds from the public.
c. The company's shareholders can only be family members.
d. The company name must include 'Proprietary' or 'Pty'
General Feedback:
Learning objective 9.1: describe the different types of companies permitted to exist by law in the Australian business environment and summarise the advantages and disadvantages of the corporate form of organisation.
3. Buster and Foster each own 30 000 shares in Rebound Company Ltd. If Buster sells his shares directly to Foster:
a. the share capital for Rebound Company remains the same.
b. the bank account for Rebound Company increases.
c. the share capital for Rebound Company increases.
d. the share capital for Rebound Company decreases.
General Feedback:
Learning objective 9.1: describe the different types of companies permitted to exist by law in the Australian business environment and summarise the advantages and disadvantages of the corporate form of organisation.
4. Companies are administered under the:
a. Bankruptcy Act.
b. Company and Partnership Act.
c. Taxation Act.
d. Corporations Act 2001
General Feedback:
Learning objective 9.1: describe the different types of companies permitted to exist by law in the Australian business environment and summarise the advantages and disadvantages of the corporate form of organisation.
5. ASIC stands for:
a. Association of Shares and Investment Companies.
b. Australian Securities and Investments Commission.
c. Association of Shareholder's Investments in Companies.
d. Australian Shares and Interests Committee.
General Feedback:
Learning objective 9.1: describe the different types of companies permitted to exist by law in the Australian business environment and summarise the advantages and disadvantages of the corporate form of organisation.
6. In Australia, the two most common types of companies are:
a. proprietary and no liability companies.
b. public and no liability companies.
c. proprietary and public companies.
d. public companies and companies limited by guarantee.
General Feedback:
Learning objective 9.1: describe the different types of companies permitted to exist by law in the Australian business environment and summarise the advantages and disadvantages of the corporate form of organisation.
7. Which type of company has the right to advertise share issues to the general public?
a. Both a proprietary and a public company
b. Proprietary company
c. A company limited by guarantee
d. Public company
General Feedback:
Learning objective 9.1: describe the different types of companies permitted to exist by law in the Australian business environment and summarise the advantages and disadvantages of the corporate form of organisation.
8. Simone Ltd issued 20 000 shares with an issue price of $2.00 per share. The full price has been paid to the company. What is the maximum additional amount the shareholders can be asked to contribute if Simone Ltd cannot pay its debts?
a. There is no limit on the amount the shareholders can be asked to contribute.
b. $2.00 per share or $40 000.
c. $Nil.
d. $1.00 per share or $10 000.
General Feedback:
Learning objective 9.2: describe the documentation required for forming a company and identify the management structure commonly used for administering a company.
9. Which of the following is not an advantage of companies over sole traders or partnerships?
a. Less government regulation
b. Continuity of existence
c. Simpler transferability of ownership
d. Limited liability
General Feedback:
Learning objective 9.2: describe the documentation required for forming a company and identify the management structure commonly used for administering a company.
10. Which of these is not an advantage of incorporation?
a. The ability to transfer shares easily.
b. Continuity of existence.
c. Government regulation is minimal.
d. Shareholders' liability is limited.
General Feedback:
Learning objective 9.2: describe the documentation required for forming a company and identify the management structure commonly used for administering a company.
11. Which of the following has the ultimate power to control a company?
a. the shareholders.
b. the Chief Financial Officer (CFO).
c. the managers.
d. the board of directors.
General Feedback:
Learning objective 9.2: describe the documentation required for forming a company and identify the management structure commonly used for administering a company.
12. The board of directors has which of the following responsibilities?
Recommendation of dividend payments
I. Collection of bad debts
II. Preparation of the company budget
III. Preparation of the company tax return
a. I, II, III and IV
b. I and II
c. I, II and III
d. I.
General Feedback:
Learning objective 9.2: describe the documentation required for forming a company and identify the management structure commonly used for administering a company.
13. A legal document accompanying an invitation to purchase shares, containing information about the issuing company, is called a(n):
a. prospectus.
b. offering.
c. company report.
d. affidavit.
General Feedback:
Learning objective 9.3: describe the three main categories of equity in a company.
14. When a company is incorporated ASIC issues it with a:
a. certificate of registration.
b. constitution.
c. prospectus.
d. license.
General Feedback:
Learning objective 9.3: describe the three main categories of equity in a company.
15. The information required to be lodged with ASIC when applying to form a company is not required to include:
a. The name and address of each person who consents to become a member.
b. The address of the company's proposed registered office.
c. The date it is proposed to wind up the company.
d. The name and address of each person who consents to become a director.
General Feedback:
Learning objective 9.3: describe the three main categories of equity in a company.
16. If the number of shares subscribed for is greater than the number of shares offered the issue is said to be:
a. over-called.
b. over-subscribed.
c. under-subscribed.
d. uncalled.
General Feedback:
Learning objective 9.4: account for the issue of shares
17. When accounting for share issues, the ultimate debit and credit entries are to which accounts?
a. DR Bank; CR Allotment
b. DR Share Capital; CR Bank
c. DR Application; CR Share capital
d. DR Bank; CR Share capital
General Feedback:
Learning objective 9.4: account for the issue of shares
18. Lotus Company Ltd decided to issue 100 000 ordinary shares for $3.00 each, payable in instalments, 50c on application, $1.50 on allotment and the balance payable at the discretion of the company. Applications were received for 120 000 shares. The shares were allotted by the directors a week after the close of applications and refunds were made for 20 000 shares. The correct journal entry to record the full receipt of the allotment instalment is:
a. DR Share capital $150 000; CR Bank account $150 000
b. DR Bank account $180 000; CR Allotment $180 000
c. DR Bank account $150 000; CR Allotment $150 000
d. DR Allotment $180 000; CR Share capital $180 000
General Feedback:
Learning objective 9.4: account for the issue of shares
19. Under current accounting standards, share issue expenses are treated as a(n):
a. liability.
b. asset.
c. deduction from the proceeds of the share issue.
d. expense.
General Feedback:
Learning objective 9.4: account for the issue of shares
20. Lotus Company Ltd decided to issue 100 000 ordinary shares for $3.00 each, payable in instalments, 50c on application, $1.50 on allotment and the balance payable at the discretion of the company. Applications were received for 120 000 shares. The shares were allotted by the directors a week after the close of applications and refunds were made for 20 000 shares. Twelve months after the allotment monies had been received the directors made a call for the remaining $1 per share. The correct journal entry to record the amount due to the company for the call instalment is:
a. DR Call $100 000; CR Share capital $100 000
b. No accounting entry is required
c. DR Call $120 000; CR Share capital $120 000
d. DR Share capital $100 000; CR Call $100 000
General Feedback:
Learning objective 9.4: account for the issue of shares
21. Which of the following accounts used to record the issue of shares is a permanent account?
a. Call
b. Share capital
c. Allotment
d. Application
General Feedback:
Learning objective 9.4: account for the issue of shares
22. The ____________________________ specified in the prospectus must be reached before an allotment of shares can occur.
a. borrowings forecast
b. minimum share subscription
c. profit forecast
d. maximum share subscription
General Feedback:
Learning objective 9.4: account for the issue of shares
23. Which of the following statements relating to ordinary shareholders are correct?
I. Ordinary shareholders generally have greater risks than preference shareholders.
II. Ordinary shareholders are the last to receive a distribution if the company is wound up.
III. Ordinary shareholders have a greater opportunity for gain if the company is profitable than preference shareholders.
IV. Ordinary shareholders have the right to vote at meetings of the company.
a. I. II, III and IV
b. III and IV
c. I, III and IV
d. II and III
General Feedback:
Learning objective 9.4: account for the issue of shares
24. On 1 January 2024 Maximus Ltd decided to issue 20 000 shares to the public, payable as follows:
$2 on application
$2 within one month of allotment
$1 for calls due 30 September 2024.
Assuming the issue was fully subscribed and all amounts due were received by 30 June 2024. The balance of the Share Capital account on that date was:
a. $80 000.
b. $100 000.
c. $40 000
d. $20 000.
General Feedback:
Learning objective 9.4: account for the issue of shares
Feedback: 20 000 shares × $4 per share.
25. Depending on its constitution and the terms of the prospectus, a company that receives more than the required number of applications for its shares will normally:
a. refund the excess to unsuccessful applicants.
b. issue the additional shares.
c. refund the excess to unsuccessful applicants or retain the excess in satisfaction of future calls.
d. retain the excess in satisfaction of future calls.
General Feedback:
Learning objective 9.4: account for the issue of shares
26. Which of the following statements relating to ordinary shares is incorrect?
a. Ordinary shares have a fixed rate of dividend attached.
b. Holders of ordinary shares have the right to sell their shares.
c. Ordinary shares receive their dividends after the preference shares.
d. The market price of ordinary shares tends to fluctuate with expectations of future profits
General Feedback:
Learning objective 9.4: account for the issue of shares
27. Minstrel Ltd decided to issue 200 000 ordinary shares for $2.50 each, payable in instalments, $1 on application, $1 on allotment and the balance payable at the discretion of the company. Applications were received for 220 000 shares. The shares were allotted by the directors at a meeting held a week after the close of applications. After refunding applications for 20 000 shares, which of the following is the correct journal entry to transfer the application money to the share capital account?
a. DR Application $200 000; CR Share capital $200 000
b. DR Application $220 000; CR Cash trust account $220 000
c. DR Application $220 000; CR Share capital $220 000
d. DR Cash trust account $200 000; CR Share capital account $200 000
General Feedback:
Learning objective 9.4: account for the issue of shares
28. Under current accounting standards preliminary expenses of forming a company must be treated as a(n):
a. deduction from the proceeds of the share issue.
b. asset.
c. liability.
d. expense.
General Feedback:
Learning objective 9.4: account for the issue of shares
29. When accounting for the issue of shares, placing application monies in a separate cash trust account is required:
a. before the share issue is finalised as the money does not belong to the company and some or all of it may need to be refunded.to meet the obligation by the company
b. to remit the funds to ASIC.
c. it is administratively easier for the company if the money is placed in a separate account.
d. because the bank requires it.
General Feedback:
Learning objective 9.4: account for the issue of shares
30. Thompson Ltd was incorporated on 1 January 2023. A private placement of 2000 shares at $1 a share was made and the public was invited to subscribe for 20 000 shares at the same price. The public issue called for payment in the following instalments:
a. $22 000.
b. $14 400.
c. $18 000.
b. 30 cents on allotment
c. payment of the call for the balance outstanding by 30 September 2024.
Applications were received for 18 000 shares. All money due on allotment was received by 30 May 2023.
The balance of the Share Capital of Thompson Ltd at 30 June 2023 was:
d. $16 400.
Feedback:
c) Learning objective 9.4: account for the issue of shares
Feedback: $2000 + (18 000 × 80c)
31. Which of the following statements concerning shares is incorrect?
a. Under changes to the Corporations Act all shares must be paid in full upon application.
b. Shares can sometimes be bought back by the company from its shareholders.
c. Directors may decide to issue ordinary shares, preference shares or both.
d. The directors can issue shares at any price, the limiting factor is what the market will pay.
General Feedback:
Learning objective 9.4: account for the issue of shares
32. When a newly established company issues shares for the first time, the directors will issue the shares at:
a. the highest price that they expect that the shareholders will be prepared to pay.
b. the market price.
c. a price established in consultation with ASIC.
d. the price of $1 per share
General Feedback:
Learning objective 9.4: account for the issue of shares
33. A no cost, pro rata distribution of a company's shares to its shareholders is known as a:
a. dividend in arrears.
b. special dividend.
c. share dividend.
d. preference dividend.
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits.
35. Shetland Ltd declares and pays a share dividend of 8 000 $2 shares. What is the effect on total equity in the company statement of financial position?
a. Share Capital increases by $16 000 and Reserves decrease by $16 000, i.e. no change in total equity.
b. Total Equity increases by $16 000.
c. Total Equity decreases by $16 000.
d. The number of issued shares increases and the book value of each share decreases.
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits.
36. Which of the following is a reason for declaring a share dividend?
a. All of these options are reasons for declaring a share dividend.
b. To stave off a takeover.
c. To conserve the company's cash instead of declaring a cash dividend.
d. To decrease the market price of the shares.
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits.
37. A dividend declared and paid part-way through the financial year is called a/an:
a. dividend in arrears.
b. part-payment dividend.
c. preference dividend.
d. interim dividend.
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits.
38. Which of the following is not a reason for declaring a share dividend?
a. To raise extra capital for the company.
b. To give shareholders extra shares.
c. To conserve the company's cash instead of declaring a cash dividend.
d. To decrease the market price of the shares.
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits.
39. Which of the following is the correct accounting entry to record a share split?
a. DR Allotment account; CR Share capital
b. No entry is required
c. DR Retained earnings; CR Share capital
d. DR Share capital; CR Reserve account
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits.
40. A company's equity can be divided into three main categories. Which of the following is not one of those categories?
a. Dividends
b. Reserves
c. Retained earnings
d. Share capital
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits
41. On 1 July 2023 the balance in Wolston Pty Ltd's retained earnings account was $450 000. The balance on 30 June 2024 was $700 000. On 20 June 2024, the directors declared dividends of $120 000 which were payable on 31 August 2024. Assuming all closing entries have been completed the profit for the year ending 30 June 2024 was:
a. $ 450 000.
b. $ 250 000.
c. $ 580 000.
d. $ 370 000.
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits.
Feedback: $700 000 - $450 000 + $120 000 = $370 000
42. Snowy Ltd was incorporated on 1 January 2022. On that date, Snowy Ltd issued:
During December 2024, Snowy Ltd declared a total dividend of $6000. This was the first dividend declared by Snowy Ltd, that is, no dividends were declared or paid during the first two years of operations. The preference shares are cumulative and non-participating. After payment of the dividend to preference shareholders, the dividend amount available to pay to ordinary shareholders is:
a. $4 800.
b. $6 000.
c. $1 200.
d. $ nil.
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits
Feedback: $6000 - [$8000 × 5% × 3 years]
43. If total liabilities are $135 000, total assets are $420 000 and total paid-up capital is $180 000, the amount of retained earnings is:
a. $ 240 000.
b. $ 285 000.
c. $ 135 000.
d. $ 105 000.
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits.
Feedback: Assets - Liabilities = paid up capital + retained earnings = $420 000 - $135 000 -$180 000= $105 000.
44. Which class of preference shares have the right to receive further dividends above their fixed rate once ordinary shares have received a stated percentage?
a. Cumulative preference shares
b. Bonus preference shares
c. Redeemable preference shares
d. Participating preference shares
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits
45. Which of the following statements concerning preference shares is correct?
a. reference shareholders face a greater risk of loss than ordinary shareholders.
b. Preference shares cannot be listed on the stock exchange
c. Preference shares normally have voting rights attached.
d. Preference shares normally receive a fixed rate of dividend.
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits
46. At the end of the year a company declared a final cash dividend out of its retained earnings. The correct journal entry to record this declaration is:
a. DR Retained earnings; CR Final dividend payable
b. DR Share capital; CR Final dividend payable
c. DR Final dividend payable; CR Cash
d. DR Cash; CR Final dividend payable
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits
47. The following statements are true with regards to share dividends (bonus share issues) except:
a. They involve a transfer of retained earnings or reserves to share capital.
b. Shareholders are provided with additional shares without cost.
c. A bonus issue can only be made if the company has sufficient reserves.
d. They reduce total shareholder's equity.
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits
48. Which of the following statements concerning cash dividends is incorrect?
a. The greater the dividend payment the fewer earnings retained within the company.
b. Shareholders have the right to determine the amount of dividends declared.
c. It is common for companies to pay an interim and a final dividend.
d. The Final Dividend Payable account is classified as a liability.
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits
49. On 28 February 2024, Xavier Ltd declared and distributed an 8% share dividend (bonus issue). At that date the entity's total share capital was $180 000, fully paid to $1. What is the effect of this dividend on Xavier Ltd's total shareholders' equity?
a. Increase of $14 400
b. Decrease of $14 400.
c. No effect..
d. It depends on the current market value of the shares.
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits
Feedback: Reserves and retained earnings go down by the same amount that share capital goes up.
50. Which of the following can be reasons for a company to declare a share dividend (bonus issue)?
I. To reduce the market price of their shares.
II. To capitalise the retained earnings of the company.
III. To conserve cash.
IV. To increase the number of shareholders.
a. I, II, and III only.
b. I and II only.
c. I, III and IV only.
d. I, II, III and IV.
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits
51. Final dividend payable is classified as what type of account?
a. Liability.
b. Retained earnings.
c. Expense.
d. Shareholder's Equity
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits.
52. How much will a shareholder receive in dividends if they own 5000 shares, the dividend is 20c per share, the shares were issued for $6 each, and the current market value of the shares is $6.25 each?
a. $1 200
b. $nil
c. $1 250
d. $1 000
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits.
Feedback: 20c × 5000 shares
53. At 30 June 2023, the board of directors of Stargaze Ltd declared a final dividend of 10c per share on 60 000 ordinary shares. The dividend was paid in August 2023. The correct general journal entry to record the payment of the dividend is:
a. DR Final dividend payable $6000; CR Bank $6000
b. DR Retained earnings $6000; CR Final dividend payable $6000
c. DR Retained earnings $6000; CR Bank $6000
d. DR Bank $6000; CR Final dividend payable $6000
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits.
54. The primary purpose of a share split is to:
a. decrease the total capital of the company.
b. increase the total capital of the company.
c. reduce retained earnings.
d. reduce the market value of the company's shares.
General Feedback:
Learning objective 9.5: account for the declaration and payment of cash dividends on shares, share dividends and share splits.
55. The correct accounting entry to create a reserve is:
a. DR Reserve; CR Retained earnings.
b. DR Profit and loss summary account; CR Reserve.
c. DR Expense; CR Reserve.
d. DR Retained earnings; CR Reserve.
General Feedback:
Learning objective 9.6 ~ account for the creation and reduction of the different types of reserves that are included in equity.
56. What type of account is a reserve?
a. Liability
b. Equity
c. Expense
d. Asset
General Feedback:
Learning objective 9.6: account for the creation and reduction of the different types of reserves that are included in equity.
57. Which statement relating to reserves is incorrect?
a. Retained earnings is a type of reserve account.
b. When a non-current asset is revalued upwards a revaluation reserve is created.
c. They represent items of equity other than share capital.
d. They represent cash set aside to be drawn on in hard times.
General Feedback:
Learning objective 9.6: account for the creation and reduction of the different types of reserves that are included in equity.
58. A company is a legal entity and, as such, has an additional expense it is required to recognise in its statement of financial performance that sole traders and partnerships do not have. This additional expense is for:
a. depreciation
b. cost of sales
c. legal entity expenses
d. income tax
General Feedback:
Learning objective 9.7: prepare basic entries for income tax expense in a company.
59. The basic entry to provide for company income tax at the end of the financial year is:
a. DR Retained earnings; CR Non-Current tax liability
b. DR Income tax expense; CR Current tax liability
c. DR Current tax liability; CR Income tax expense
d. DR Income tax expense; CR Cash at Bank
General Feedback:
Learning objective 9.7: prepare basic entries for income tax expense in a company.
60. At 30 June 2023, Barry Ltd estimates it will be required to pay income tax expenses of $62 000 during the following financial year. The correct journal entry to provide for this income tax estimate at 30 June 2023 is:
a. DR Income tax expense $62 000; CR Current tax liability $62 000
b. DR Current tax liability $62 000; CR Income tax expense $62 000
c. DR Income tax expense $62 000; CR Retained earnings $62 000
d. DR Income tax expense $62 000; CR Bank $62 000
General Feedback:
Learning objective 9.7: prepare basic entries for income tax expense in a company.
61. Two accounting entries are required for income tax: one to provide for the tax; and one to pay the tax. On 28 October 2024, Stevens Ltd pays the tax authorities the $54 000 provided as a liability on 30 June 2024. The correct journal entry to record this payment is:
a. DR Current tax liability $54 000; CR Bank $54 000
b. DR Income tax expense $54 000; CR Bank $54 000
c. DR Income tax expense $54 000; CR Current tax liability $54 000
d. DR Bank $54 000; CR Income tax expense $54 000
General Feedback:
Learning objective 9.7: prepare basic entries for income tax expense in a company.
62. In a statement of financial performance, the expenses may be classified either by:
a. production or administration.
b. current or non-current.
c. temporary or permanent.
d. nature or function.
General Feedback:
Learning objective 9.8: prepare a company's statement of financial performance, statement of changes in equity and statement of financial position for internal use.
63. Which of the following financial statements is required to be completed by a company?
I. Statement of cash flows
II. Statement of profit or loss and other comprehensive income
III. Statement of changes in equity
IV. Statement of financial position
a. I, II, III and IV.
b. II, III and IV only.
c. I and III only
d. II and IV only.
General Feedback:
Learning objective 9.8: prepare a company's statement of financial performance, statement of changes in equity and statement of financial position for internal use.
Document Information
Connected Book
Financial Accounting 11e | Test Bank with Answer Key by John Hoggett
By John Hoggett, Lew Edwards, John Medlin, Keryn Chalmers, Andreas Hellmann, Claire Beattie, Jodie Maxfield