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Solutions Tovfinancial Accounting

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.

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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 2. Dr Cr 420 000 420 000 3. Dr Cr 65 000 65 000 4. Dr Cr 120 000 120 000 5. 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. 2 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. 0] 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 Dr Cr 126 000 126 000 Dr Cr Cr 24 000 21 000 3 000 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. April 30 Call – Ordinary ‘B’ Share Capital – Ordinary ‘B’ Call of 80c per share on Ordinary B shares) Calls in Advance (20 000 x 80c) Call – Ord ‘B’ (Transfer of calls in advance) May 31 Cash Call – Ord ‘B’ (Cash received on call) [(300 000 – 20 000 – 15 000) x 80c] June 18 Share Capital – Ordinary ‘B’ Call – Ordinary ‘B’ Forfeited Shares Liability (Forfeiture of 15 000 Ordinary B shares) 26 Cash Forfeited Shares Liability Share Capital – Ordinary ‘B’ (Reissue of 15 000 shares paid to $2 for payment of $1. 0) 27 Forfeited Shares Liability Cash (Refund to former shareholders) June 28 Retained Earnings/Dividend Declared Dividend Payable (Dividend declared) [Workings from the entries above: 400 000 + 300 000 + 80 000 + 70 000 – 15 000 + 15 000= 850 000 x 20c] Dr Cr 240 000 240 000 Dr Cr 16 000 16 000 Dr Cr Dr Cr Cr 212 000 212 000 30 000 12 000 18 000 Dr Dr Cr 27 000 3 000 30 000 Dr Cr 15 000 15 000 Dr Cr 170 000 170 000 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. 4

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