Share Capital & Reserves - Test Bank 9e

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Chapter 13 Testbank

1. Ordinary shares are a class of shares that typically ranks last in terms of any distribution of capital. Holders have voting rights, and will receive dividends at the discretion of the directors.

True   False

2. 'Share buybacks' occur when a company buys back some of the ordinary shares held by existing shareholders.

True   False

3. Double-entry accounting requires that:

A. the claims held by external parties equal the claims held by the owners

B. the total assets of an entity equal the total of the claims held by external parties plus those claims held by the owners

C. the liabilities of the entity equal its total assets plus the claims held by the owners

D. the recognition of the claims held by owners will match the entity's total assets

4. A residual interest is:

A. a claim to a fixed percentage return on the amount invested

B. a priority claim over the assets of the entity as the right of an owner

C. a claim or right to the net assets of the reporting entity

D. the minimum entitlement of the holder of the interest

5. Equity's claim against the assets of the entity:

A. takes priority as it belongs to the owners

B. is ranked before employee entitlements

C. is equal to the value of cash reserves held in equity

D. ranks after liabilities in terms of priority

6. Share capital:

A. relates to one class of shares, with the remaining equity recorded as reserves or retained profits

B. represents the amount shareholders are guaranteed to receive if the company is wound up

C. may relate to one or several classes of shares

D. may be calculated by subtracting liabilities from assets

7. A company may elect to issue its shares at any price, which will depend on:

A. the last sales price for the company's shares before the new issue

B. the market demand

C. the minimum price that has been paid for the shares over the last reporting period

D. the amount specified in legislation at which all Australian companies were required to issue shares

8. Under Corporations Law as amended in 1998, companies now issue shares at:

A. any price they determine is appropriate in the market

B. the price determined by the ASX as the appropriate issue price for the shares

C. the ASIC-specified level of price relative to a moving average of sales over the preceding 6 months

D. the average price at which shares have been issued over the last five years

9. In the case of a share issue being oversubscribed, the common approaches include to:

A. issue additional shares to meet the excess demand

B. allocate the shares on a pro rata basis

C. increase the issue price of the shares

D. issue additional shares to meet the excess demand and increase the share issue price

10. In the case of a share issue being oversubscribed, excess application monies:

A. will always be refunded to applicants

B. can either be refunded or may be used to reduce future amounts owing on allotment if the shares are issued on a pro rata basis

C. must be recorded as revenue in the current financial period

D. must be placed in a trust account until a refund is requested by applicants

11. Holders of ordinary shares:

A. are assured of dividends each year

B. may not receive a cash dividend each year but the dividend will accrue and eventually be paid

C. will always receive a dividend if the company has made a profit in that financial year

D. receive dividends at the discretion of the directors

12. A redeemable preference share is one that:

A. may be converted into debt at the option of the shareholder

B. may be converted into cash at the option of either the company or the shareholder

C. has no preferential rights over ordinary shares

D. allows for any dividends to be converted into further preference shares rather than receiving them in cash

13. Preference shares are often considered to be closer to debt as they:

A. may be issued with the condition that they are redeemable by the company in the future

B. may guarantee a regular or cumulative payment, similar to interest

C. may be able to be converted into ordinary shares at a specific date in the future, indicating they are a liability until that time

D. may guarantee a regular or cumulative payment, similar to interest and may be able to be converted into ordinary shares at a specific date in the future, indicating they are a liability until that time

14. If a company has created a forfeited shares reserve, this means that:

A. the company is not a member of the ASX and its constitution does not require it to refund amounts already paid by defaulting investors

B. the company is expecting that the amounts unpaid will be collected in the next period

C. the company is a member of the ASX and is required to refund amounts already paid by defaulting investors

D. the company is holding the amounts already paid by defaulting investors in trust in order to repay them on the request of the investor

15. Cartoon Ltd is listed on the ASX. It has 3 million shares issued at a price of $5.50 per share. The investors were required to pay $2.00 on application and $1.00 on allotment. Both these amounts were paid in full. A first and final call of $2.50 was made and was due on 30 August 2013. At the end of November the directors of the company elect to forfeit 50 000 shares on which the holders have failed to pay the call. Cartoon Ltd reissues the shares fully paid up for a price of $4.75 and incurred costs of $1500. What are the entries required to forfeit the shares, reissue the shares, and make a refund if appropriate?

A.

Forfeit the shares

Reissue the shares

Refund the shares

B.  

Forfeit the shares

Reissue the shares

Refund the shares

No entry required

C.

Forfeit the shares

Reissue the shares

Refund the shares

D. Forfeit the shares

Reissue the shares

Refund the shares

No entry required

16. When a share split occurs:

A. current shareholders receive more shares, thus increasing their stake in the company

B. accounting entries are required to record the increase in the number of shares on hand

C. it must be done so that any uncalled amounts are divided equally when the shares are issued

D. more shares become available to be purchased by the general public, allowing the company to raise more funds

17. Share splits are conducted because it is believed that:

A. excess capital leads to reduced return ratios, which the market does not view favourably

B. increasing the number of shares issued makes the company appear larger and more stable

C. decreasing the price per share makes them more marketable

D. investors view this as a bonus because they now have more shares than they previously held

18. The total market capitalisation of a company after a bonus issue is likely to:

A. be lower than it was before the bonus issue

B. be greater than it was before the bonus issue

C. be less than it was after the bonus issue

D. remain unchanged

19. A forfeited shares account is:

A. an income account

B. an expense account

C. a liability account

D. an asset account

20. A general reserve is a part of _____________ funds.

A. shareholders’

B. the general public’s

C. company

D. excess

21. The revaluation surplus is created through the upward revaluation of ___________.

A. current market value

B. non-current assets

C. current year’s profit

D. total liabilities

22. Some companies establish general reserves as a means of transferring profits out of retained earnings for __________.

A. current expansion plans

B. paying past debts

C. future expansion plans

D. None of the given answers are correct.

23. At the end of the accounting period, the gain on revaluation recognised within other comprehensive income would, in accordance with accounting standards, then be transferred to equity in the form of a transfer to the revaluation ___________________.

A. surplus account

B. reserve

C. liability

D. None of the given answers are correct.

24. Which of the following generally involves providing existing shareholders with the right to acquire additional shares in the entity for a specified and often quite attractive price?

A. rights issue

B. share issue

C. public issue

D. None of the given answers are correct.

25. If the rights are tradeable (often referred to as ‘renounceable’), the recipients of the rights (shareholders):

A. will have the ability to sell the rights to others

B. will not have the ability to sell the rights to others

C. can restrict others to buy any rights from the company

D. None of the given answers are correct.

26. A share option will give the holder the right to acquire shares at a particular price in the ___________.

A. present

B. future

C. past

D. None of the given answers are correct.

27. ___________ are a distribution of profits to shareholders.

A. Assets

B. Expenses

C. Shares

D. Dividends

28. Ultimately, returns to investors from investing in share capital (equity securities) generally come from two sources: through raising share prices and through _____________.

A. dividends

B. assets

C. share buyback

D. None of the given answers are correct.

29. A company might decide to pay cash to shareholders in exchange for those shareholders selling some of their shares back to the company. This is an example of:

A. dividends

B. share buybacks

C. preference shares

D. rights issue

30. AASB 101 Presentation of Financial Statements requires a number of disclosures to be made in relation to _____________.

A. share capital only

B. reserves only

C. share capital and reserves

D. None of the given answers are correct.

31. According to paragraph 79 of AASB 101, an entity shall disclose the following, either in the statement of financial position or the statement of changes in equity, or in the notes for each class of share capital, except for:

A. the number of shares authorised

B. the number of shares issued and fully paid, and issued but not fully paid

C. par value per share, or that the shares have no par value

D. shares in the entity held by the entity or its competitors

32. What is meant by forfeited shares reserve?

______________________________________________________________________________

33. Discuss briefly a rights issue.

______________________________________________________________________________

34. What is meant by dividends?

______________________________________________________________________________

35. Discuss briefly final dividends.

______________________________________________________________________________

36. Discuss briefly the buyback of ordinary shares.

______________________________________________________________________________

37. Discuss briefly the redemption of preference shares.

______________________________________________________________________________

38. Discuss briefly the required disclosures for share capital and reserves.

______________________________________________________________________________

39. What is meant by a share split?

______________________________________________________________________________

Chapter 13 Testbank