Accounting and Finance Unit 4 Topic 1 - Introduction to Company Accounting, share issue and distribution of company profits

Example of a Prospectus.... Dick Smith Prospectus https://www.youtube.com/watch?v=jnfAUxLqtYI More info: https://www.moneysmart.gov.au/investing/shares/how-to-buy-and-sell-shares/prospectuses

AGM An annual general meeting (commonly abbreviated as AGM, also known as the annual meeting) is a meeting that official bodies, and associations involving the general public (including companies with shareholders), are often required by law (or the constitution, charter, by-laws etc. governing the body) to hold.

Issue of shares Example 1   On 1 July 2010 the directors of Runnalong Sports Ltd issued 1,000,000 ordinary shares payable in full on application at a price of $3 per share. By 31 July, the issue had been fully subscribed. Share issue costs were paid amounting to $25,000. At the meeting on 15 August, the directors resolved that the 1,000,000 shares applied for be allotted. Required: A) Record the above transactions in the general journal and general ledger of Runnalong Sports Ltd B) Show the equity section of the Statement of Financial Position immediately after the events stated above.

31 Jul Cash at Bank 3,000,000 Applications, ordinary 3,000,000 Applications for ordinary share issue 31 Jul Share Issue costs 25,000 Cash at Bank 25,000 Payment of costs of share issue

15 Aug Applications, ordinary 3,000,000 Ordinary share capital 3,000,000 Allotment of 1,000,000 ordinary shares at $3.00 each 15 Aug Ordinary share capital 25,000 Share Issue costs 25,000 Transfer of share issue costs

31 Jul Applications - ordinary 3,000,000 3,000,000DR Share issue costs 25,000 2,975,000DR 31 Jul Bank 3,000,000 3,000,000CR 15 Aug Ordinary share 3,000,000 0 capital 15 Aug Applications 3,000,000 3,000,000CR -ordinary Share issue costs 25,000 2,975,000CR 31 Jul Bank 25,000 25,000DR 15 Aug Ordinary share 25,000 0 capital

Statement of Financial Position... 2,975,000

Issue of shares Example 2 Stargazers Ltd invited potential members to invest in 200,000 $5 ordinary shares through its prospectus issued on 1 March 2012. Subscriptions closed, fully paid, on 1 May. The shares were allotted on 31 May. Professional advisor fees for the share issue came to a total of $4,000.   Required: A) Record the above transactions in the general journal and general ledger of Stargazers Ltd B) Show the equity section of the Statement of Financial Position immediately after the events stated above.

1 May Cash at Bank 1,000,000 Applications, ordinary 1,000,000 Applications for ordinary share issue 31 May Share Issue costs 4,000 Cash at Bank 4,000 Payment of costs of share issue

31May Applications, ordinary 1,000,000 Ordinary share capital 1,000,000 Allotment of 200,000 ordinary shares at $5.00 each Ordinary share capital 4,000 Share Issue costs 4,000 Transfer of share issue costs

1 May Applications - ordinary 1,000,000 1,000,000DR 31 Share issue costs 4,000 996,000DR 1 May Bank 1,000,000 1,000,000CR 31 May Ordinary share 1,000,000 0 capital 31 May Applications 1,000,000 1,000,000CR -ordinary Share issue costs 4,000 996,000CR 31 May Bank 4,000 4,000DR Ordinary share 4,000 0 capital

996,000

Question for completion - Rustic Traders

Equity for a company… Made up of : Share Capital – amounts raised by issuing shares Reserves – 2 types General Reserve (profits transferred for specific purposes) Asset Revaluation reserve (created when assets are revalued) Retained earnings – records profits, dividends and transfers to and from reserves

example for the ISSUE OF BONUS SHARES At 30 June 2018, the Equity section for Margaret River Ltd appeared as below:

Issue of bonus shares... Margaret River Ltd decided on 31 July 2018 to make a one-for-two bonus share issue, funded out of the asset revaluation reserve. The nominal share price of the issue will be $1.00 per share. The total value of the bonus share issue is therefore: 800,000/2 = 400,000 x $1.00 = 400,000

Accounting for bonus shares 31 Jul Asset Revaluation Reserve 400,000 2018 Ordinary Share capital 400,000 Issue of 400,000 bonus shares on a 1for 2 basis at $1 per share

31 Jul Ordinary share 400,000 0 2018 Capital 31 Jul Asset Revaluation 400,000 791,000CR 2018 Reserve

The Equity section would now look like this (note total equity value has not changed)...

Questions for completion

7.24… 5,000,000 shares / 5 = 1,000,000 x $1 = 1,000,000

Shakespeare Ltd page 51…

Page 52… Preparation of retained earnings ledger account, Journal and ledger entries for profit transfer, payments of dividends, transfers to and from reserves

Allocation of Profit... Profit = Income less expenses In a sole trader or partnership, profit is transferred to the owner’s capital account The owner/s takes profit from the business in the form of drawings – these drawings are transferred to the capital account also When a company makes a profit, the directors decide how much profit to allocate to shareholders and how much to keep invested in the company.

Equity for a company (repeated) The Equity for a company consists of 3 categories: 1. Share capital – this is the term used to describe the amounts that shareholders have paid to the company for the issue of shares 2. Reserves – funds retained in the organisation for specific purposes 3. Retained profits – amounts of profits earned by the company and not paid out as dividends

Retained earnings Profit (after tax) is transferred to a Retained Earnings account. In the Retained Earnings account, profit can be: Shared out to shareholders in the form of dividends Retained as a balance in the retained earnings account (used to pay future dividends) Transferred to a reserve for some specific purpose Asset revaluation reserve (upward valuation of assets) General reserve

Cash dividends... Dividends are paid to the members of the company in proportion to the number or value of shares that they hold. The Corporations Act 2001 requires a company to pay dividends out of profits. The Replaceable Rules sets out the requirements for the amount, timing and methodology of payment of a dividend

Interim and final dividends An Interim dividend is declared by directors and paid to members during an accounting period A Final dividend is recommended by the directors of the company but is not declared and paid until the AGM of members

Payment of dividends Dividends are paid in two ways: A percentage of paid up capital Cents per share For example dividend paid is .04 cents per share (usually for ordinary shares) Or 8% of the value of shares (usually for preference shares)

Accounting for dividends Final dividends are recognised in the accounts on the date the directors declare them and are then paid on a later date Interim dividends are recognised in the accounts and paid on the date the directors declare them.

Example... At 30 June 2010, Margaret River Limited had the following balances in their Statement of Financial Position:

Example cont... Additional information: Year ended 30 June 2010 The directors recommended a $2,000 final ordinary dividend. These dividends must be approved by the shareholders before they can be paid 1 November 2010 The final dividends were paid 1 March 2011 The directors approved the following interim dividend of .04c per share. These were paid by 31 March 2011 30 June 2011 the company made a profit after tax of $70,000 The directors decided to transfer $10,000 of profits to the general reserve.

Example cont... Required: A) calculate the interim dividend B) show the balance of retained earnings in the general ledger at 1 July 2010 C) Show the general journal and general ledger entries to record: The declaration of final dividend at 30 June 2010 The payment of final dividends on 1 November 2010 The approval of interim dividends on 1 March 2011. The payment of interim dividends on 31 March 2011 The transfer of profit to the retained earnings account on 30 June 2011 The transfer to the general reserve from retained earnings on 30 June 2011

Solution A) Calculation of interim dividend 800,000 ordinary shares x .04c per share = $32,000

General Journal entry for The declaration of final dividend at 30 June 2010 and payment on 1 November 2010 30 June Retained earnings 2,000 2010 Final Dividend payable 2,000 Final ordinary dividend declared 1 Nov Final Dividend payable 2,000 2010 Cash at Bank 2,000 Payment of final dividend

General Journal entry for The approval of the interim dividend on 1 March 2010 and payment on 31 March 2010 1 March Retained earnings 32,000 2011 Interim Dividend payable 32,000 Interim dividend of .04c per share 31 March Interim Dividend payable 32,000 2011 Cash at Bank 32,000 Payment of interim dividend of .04c per share

General Journal entry for The transfer of profit to the Retained earnings account 30 June Profit and Loss summary 70,000 2011 Retained earnings 70,000 Transfer of profit

General Journal entry for The transfer from Retained earnings to General Reserve 30 June Retained earnings 10,000 2011 General reserve 10,000 Transfer to the General reserve

Show Equity section of the Statement of Financial Position at 30 June 2011... 37,400 10,000 438,400

7.14

7.16 cont..