NATIONAL QUALIFICATIONS CURRICULUM SUPPORT
Accounting
Financial Accounting:
Published Final
Accounts
and Issues of Shares
Pack
[ADVANCED
HIGHER]
Anne Duff
2
MORALITY IN THE MODERN WORLD – HINDUISM (INT 2/H, RMPS)
© Learning and Teaching Scotland 2005
The Scottish Qualifications Authority regularly reviews
the arrangements for National Qualifications. Users of
all NQ support materials, whether published by LT
Scotland or others, are reminded that it is their
responsibility to check that the support materials
correspond to the requirements of the current
arrangements.
Acknowledgement
Learning and Teaching Scotland gratefully acknowledge this contribution to the National
Qualifications support programme for Accounting.
© Learning and Teaching Scotland 2005
This resource may be reproduced in whole or in part for educational purposes by educational
establishments in Scotland provided that no profit accrues at any stage.
Contents
Published Final Accounts
Section 1:
Theory notes on Published Final Accounts
4
Section 2:
Exercises: Published Final Accounts
16
Section 3:
Solutions to exercises
35
Issue of Shares Pack
Section 1:
Theory notes on Issue of Shares
57
Section 2:
Exercises: Issue of Shares
75
Section 3:
Solutions to exercises
85
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FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
THEORY NOTES ON PUBLISHED FINAL ACCOUNTS
Section 1
Published accounts of limited companies
What are the differences between internal and external reporting?
All companies draw up Final Accounts. When the accounts are for internal
use only the directors and management can use any layout they consider most
suitable to their needs.
As well as internal accounts, all limited companies in the UK are required, by
law, to produce financial statements which are published and are available for
anyone to examine. These accounts must conform to the Companies Act 1985
(as amended by the Companies Act of 1989). The published accounts must
be sent to the shareholders, debenture holders etc. of a company before the
annual general meeting and are discussed at that meeting. A copy of the
accounts (Statutory Accounts) is sent to the Registrar of Companies. The
Companies Act 1985 sets out the information which must be shown and also
states how it should be shown.
What are the procedures for forming a plc?
The Companies Act generally allows one or more persons to form a company;
however, a public company must have at least two subscribers. When forming
a company, a memorandum of association and articles of association must be
drawn up and sent to the Registrar of Companies with a registration fee.
Details of these documents have been covered in your Higher a ccounting
course. Another two forms (10 and 12) must also be completed. Form 10
gives details of first directors etc. and Form 12 is a declaration that the
company will comply with all legal requirements.
A private company must have at least one direct or and one secretary, not
necessarily fully qualified.
A public company must have at least 2 directors and one qualified secretary.
It must have a minimum authorised share capital of £50,000. Before it can
start business it must have allotted shares val uing at least £50,000. One
quarter of the nominal value must be paid up. A newly formed plc must also
have received a certificate from Companies House.
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THEORY NOTES ON PUBLISHED FINAL ACCOUNTS
What are the Directors’ responsibilities (Stewardship)
Companies are owned by shareholders, but the responsibility of looking after
the affairs of a company is held by the directors. The directors are stewards
of limited companies.
The directors of a limited company must ensure that the provisions of the
Companies Act 1985 are followed.
The company director is responsible for ensuring that the statutory accounts
are produced and filed with the Registrar of Companies.
The company’s Board of Directors must approve the annual accounts.
The directors must prepare a directors’ report which must be a pproved by the
board.
What are the main provisions of the Companies Act?
The main provisions of the Companies Act deal with:
1.
2.
What the accounting records must show.
What the accounting records must contain.
1.
The accounting records must:
• show and explain the company’s transactions
• disclose with reasonable accuracy at any time the financial position
of the company
• enable the directors to ensure that the company’s final accounts
comply with the Act and give a true and fair view of the company ’s
financial position.
2.
The accounting records must contain:
• day-to-day entries of money received and paid, together with details
of the transactions
• a record of the company’s assets and liabilities
• details of stock held at the end of the year.
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THEORY NOTES ON PUBLISHED FINAL ACCOUNTS
What are the main requirements under current accounting practices and
statement of principle?
As well as ensuring that the main provisions of the Companies Act are
followed, companies must also take note of the requirements of the relevant
Statements of Standard Accounting Practice (SSAPs) and Financial Reporting
Standards (FRSs) as set out by the Accounting Standards Board and the
Urgent Issues Task Force (UITF) Abstracts. The requirements of
International Accounting Standards must also be observed from 2005
onwards. It is expected that, if the above requirements are met, the financial
statements produced will give a true and fair view of the company.
What are the Statutory Accounts of a company?
The Companies Act requires that the following statement s are produced:
•
•
•
•
•
•
•
Profit and loss account
Balance sheet
Cash flow statement
Notes to the accounts
Directors’ report
Auditors’ report
Statement of total recognised gains and losses
Profit and loss account
You are familiar with producing Profit and Loss Accounts for internal use
and this is the basis for the preparation of the published version, which does
not include as much detail. It is a summarised version. The Companies Act
gives a choice of two layouts for this account but the example b elow shows
the most commonly used. The requirements of FRS 3 – Reporting Financial
Performance must be followed.
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
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THEORY NOTES ON PUBLISHED FINAL ACCOUNTS
Account for external use
Profit and Loss Account of ABC plc for year ending 31 December
20–1.
£000s
Turnover
Cost of Sales
Gross Profit
Distribution Costs
Administration Costs
15
10
Other Operating Income
£000s
150
90
60
25
35
Interest Payable
Profit/Loss ordinary activities
10
45
5
50
2
48
Tax on ordinary activities
Profit/Loss on ordinary activities after taxation
12
36
Extraordinary income/expenses (net of tax)
Profit/loss for year
4
32
Income from Interest/Dividends
Transfer to reserves
Dividends paid and proposed
Retained profit for year
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FINANCIAL ACCOUNTING (AH)
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THEORY NOTES ON PUBLISHED FINAL ACCOUNTS
• Turnover is the money derived from the sale of goods and services from
the company’s ordinary activities. This figure is shown after the deduction
of trade discount and VAT.
• Cost of sales, distribution and administration costs. It is unnecessary to
show the details of these amounts. The figures s hown should include any
depreciation charges which may be split amongst the three headings.
Administration expenses include the net figures for discount received and
allowed, Bad Debts, changes in Provision for Doubtful Debts, Directors’
Fees and Audit Charges.
• Other operating income is any income not resulting from normal trading
activities e.g. profit made from selling assets or rent received from a
tenant if the space is surplus to requirements.
• Income from interest/dividends. This heading includes any dividend
received from shares that the company holds in other companies and
interest from any amounts lent to other organisations, e.g. government.
• Interest payable includes any amounts paid on overdrafts, loans and
debentures. These amounts should be shown separately.
• Extraordinary income/expenses are items that do not result from the
normal trading activities of the company. They are one -off items which
are unlikely to recur e.g. proceeds from the sale of an antique piece of
equipment found in an old store room or the result of the sale of a
subsidiary company.
Attempt Exercises 1–5
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
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THEORY NOTES ON PUBLISHED FINAL ACCOUNTS
Balance Sheet
The Companies Act gives a choice of two layouts for published Balance
Sheets. The vertical layout is used here. It is similar to the intern al layout
you are familiar with.
Balance Sheet of ABC plc as at 31 December 20 –1 (for external use).
£000s
Fixed Assets
Intangible Assets
Tangible Assets
Investments
Current Assets
Stock
Debtors
Investments
Cash/Bank
Prepayments and accrued income
Creditors: amounts falling due within one year
Trade Creditors
Accruals
30
640
400
1,070
85
105
25
4
219
87
26
113
Net Current Assets
Total Assets less Current Liabilities
Creditors: amounts falling due after one year
Provisions for liabilities and charges
106
1,176
140
140
1,036
Net Assets
Capital and Reserves
Called-up share capital
Share Premium
Reserves
Equity Shareholders’ funds
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FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
£000s
800
40
196
1,036
THEORY NOTES ON PUBLISHED FINAL ACCOUNTS
• Fixed Assets are long-term assets owned for use in the business.
• Intangible Assets are assets which cannot be seen or touched e.g. patents,
trade marks, goodwill. Only intangible assets that have been bought can
be shown in the Balance Sheet, i.e. goodwill built up through trading
cannot be shown.
• Tangible Assets are assets like Buildings, Machinery, Vehicles etc.
• Investments include shares in and loans to other businesses which are to
be held for more than one year. They are shown at either cost or market
value whichever is the lower.
• Current Assets are short-term assets which are expected to be converted
into cash within one year. Calls in arrears are shown here.
• Creditors: amounts falling due within one year are the current liabilities
of the company and include trade creditors, overdraft, oth er short-term
loans, calls in advance, tax due dividends proposed, accruals etc.
• Creditors: amounts falling due after more than one year include
mortgage, debentures with more than one year to run.
• Provisions for liabilities and charges include items like possible pension
obligations and deferred taxation.
• Reserves include Revaluation Reserves and Capital Redemption Reserves.
Cash flow statement
All medium and large limited companies must include a Cash Flow Statement
as part of their published accounts. This requirement is stated in FRS 1 ‘Cash
Flow Statements’, a statement to be looked at in detail when studying that
topic.
Notes to the accounts
The published accounts are generally kept short and simple. Any other details
and breakdown of figures that are required by the Companies Act are shown
in the accompanying notes to the accounts. These notes include:
1.
2.
3.
4.
5.
6.
7.
disclosure of accounting policies used e.g. relating to depreciation and
any changes to these policies
explanation of any deviation from accounting standards
sources of turnover from different geographical markets
details of fixed assets, investments, share capital, debentures and
reserves
directors’ emoluments – pensions, earnings and other benefits
auditors’ remuneration
statement of earnings per share.
FINANCIAL ACCOUNTING (AH)
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THEORY NOTES ON PUBLISHED FINAL ACCOUNTS
1.
Disclosure of Accounting Policies
The basis of this requirement is FRS 18 ‘Accounting policies’. Firms
should ensure that the policies adopted are the most appropriate to their
circumstances so that a ‘true and fair’ view can be presented. Firms
should review their accounting policies regularly to ensure they are still
appropriate. If a change is required then this should be explained in the
note.
The areas requiring ‘accounting policies’ include:
• depreciation – whether straight-line, reducing balance etc.
• stock valuation – cost, market value etc.
• research and development
2.
Deviation from Accounting Standards
If, for any reason, the firm has not followed the Accounting Standards
then an explanation must be included in the notes.
3.
Sources of Turnover
A breakdown of Turnover can be shown according to type of product or
geographical area e.g.
Analysis of turnover by area:
South of England
Midlands
North of England
Wales
Scotland
4.
Turnover
£2,000,000
£1,250,00
£1,500,000
£600,000
£850,000
Details of fixed assets, investments share capital, debentures and
reserves
Fixed assets
This section gives details of:
• cost or valuation at beginning and end of year
• depreciation at beginning and end of year
• changes during the year.
12
Profit
£160,000
£75,000
£90,000
£40,000
£46,000
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
THEORY NOTES ON PUBLISHED FINAL ACCOUNTS
Investments
This section gives information on listed investments i.e. those quoted
on stock exchange.
• cost price
• additions or disposals during the year
• market value.
Share capital and debentures
This section gives information on:
• authorised and issued capital
• debentures issued, repayment dates etc.
Reserves
The section shows information on:
• retained profit, revaluation reserve and share premium account
• opening balances, movements and closing balances.
5.
Directors’ emoluments
This section shows:
• total of directors’ salaries, fees and bonuses
• allowances which are taxed
• benefits in kind.
6.
Auditors’ remuneration
This section shows the amount of the fees and expenses paid to the
auditors.
7.
Statement of earnings per share
This states the earnings per share. This topic will be dealt with when
doing Ratio Analysis.
Attempt Exercises 6–12
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
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THEORY NOTES ON PUBLISHED FINAL ACCOUNTS
Directors’ report
A directors’ report must be prepared and sent to shareholders along with the
accounts. There is no recommended layout for this report but it must include:
• names of directors, their interests in any trading contracts, the number of
shares and debentures held at the start of the year
• a statement of the principal activities of the company
• a review of the development of the company during the year and details of
any likely future developments
• information on changes in fixed assets i.e. purc hase, sale or valuation of
assets
• details of proposed dividends
• significant differences between the book value and market value of land
and buildings
• details of proposed dividends
• details of transfer to reserves
• particulars of any significant events since the end of the financial year
• details of political and charitable donations
• a health and safety statement including employee statistics
• policy on employment of disabled people
• details of action taken on employee involvement and consul tation
• policy on payment of creditors.
The report is audited along with the final accounts and may be reported upon
by the auditors.
Auditors’ report
After the preparation of the accounts they must be checked (audited) by an
independent firm of professional accountants.
Their report – the auditors’ report – has three main sections:
• respective responsibilities of directors and auditors i.e. the directors are
responsible for preparing the accounts while the auditors are responsible
for forming an opinion on the accounts
• basis of opinion i.e. how the audit was planned and carried out
• opinion – the auditors’ opinion of the accounts.
The auditors check that the accounts give a ‘true and fair’ view of the
company’s affairs. Any figures that cause concern are discussed with the
directors and often changed. If there is a major disagreement between the
firm and the auditors which cannot be resolved, the auditors will ‘qualify’
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© Learning and Teaching Scotland 2005
THEORY NOTES ON PUBLISHED FINAL ACCOUNTS
their report i.e. they will give an explanation of why they cannot certi fy that
the accounts give a true and fair view.
The auditors also certify that the accounts conform to the requirements of the
Companies Act.
Statement of recognised gains and losses
This statement shows total recognised profits and losses from the prof it and
loss account together with unrealised profits. Unrealised profits are profits
resulting from, for example, the revaluation of fixed assets which would not
be shown in the profit and loss account. An example of a statement of
recognised gains and losses is shown below:
Trial plc
Statement of Total Recognised Gains and Losses
for year ended 31 December 20–1
£000s
750
Profit for year
Unrealised surplus on revaluation of assets
240
Total recognised gains for year
990
Do all companies have to file full sets of accounts?
Small and medium-sized private companies are permitted to file modified
accounts with the Registrar of Companies, however they still must prepare
full accounts to present to their members.
A small company (turnover less than £2.8m) does not need to file a profit and
loss account. The directors’ report can be shortened and details of directors’
emoluments are not required. The balance sheet need only show the main
asset and liability headings. The required notes on the ba lance sheet are also
abbreviated.
A medium-sized company (turnover less than £11.2m) is required to file a
profit and loss account but it can start with the Gross Profit figure. Other
than this a full set of accounts must be filed.
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© Learning and Teaching Scotland 2005
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THEORY NOTES ON PUBLISHED FINAL ACCOUNTS
The above concessions are for private limited companies only. All public
limited companies, no matter of size, must file full accounts.
Attempt Exercises 13–15
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FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
EXERCISES: PUBLISHED FINAL ACCOUNTS
Section 2
Exercise 1
The following ten items have been taken from the books of RTF plc. Place
each item under the correct heading in the box for inclusion in the Profit and
Loss Account for distribution to shareholders.
Repairs to delivery vehicles
Depreciation of fork-lift trucks used in warehouse
Audit Fees
Fuel for company cars
Advertising
Warehouse heat and light
Bank Interest
Discount allowed
Carriage In
Wages of delivery van drivers
Cost of Sales
Distribution Costs
Administration Costs
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
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EXERCISES: PUBLISHED FINAL ACCOUNTS
Exercise 2
The following Trading Profit and Loss Accounts have been prepared for
internal use by Lee plc.
Trading and Profit and Loss Accounts for year ended 31 December
20–1.
£000
£000
Sales
Less Cost of Sales:
Opening Stock
35
Add Purchases
80
115
Less Closing Stock
25
Gross Profit
Distribution Costs:
Advertising
Depreciation of Vehicles
Wages
Selling Expenses
13
8
30
5
56
Administration Costs:
Salaries
Depreciation of Office Equipment
Provision for Doubtful Debts
Heat and Light
Audit Fees
50
2
1
4
5
62
Rent Received
Debenture Interest
Net Profit before Tax
Corporation Tax
Net Profit after Tax
Preference Share Dividend
Ordinary Share Dividend
Retained Profit for year
Add Retained Profit brought forward
Retained Profit carried forward
£000
270
90
180
118
62
5
67
4
63
16
47
6
20
You are required to prepare the Profit and Loss Account for the year for
distribution to shareholders.
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© Learning and Teaching Scotland 2005
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9
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EXERCISES: PUBLISHED FINAL ACCOUNTS
Exercise 3
The following Trading and Profit and Loss Accounts have been prepared for
internal use by Narsapur plc.
Trading and Profit and Loss Accounts for year ended 31 December 20–1.
£000
Sales
Less Cost of Sales:
Opening Stock
Add Purchases
£000
320
920
1,240
220
Less Closing Stock
Gross Profit
Distribution Costs:
Vehicles Expenses
Depreciation of Vehicles
Wages
Selling Expenses
130
100
500
120
850
Administration Costs:
Salaries
Depreciation of Office Equipment
Discount Allowed
Bad Debts
Directors’ Fees
Audit Fees
470
40
30
60
80
50
730
Discount Received
Interest Received
Decrease in Provision for Doubtful Debts
Profit on Sale of Vehicles
Debenture Interest
Net Profit before tax
Corporation Tax
Net Profit after Tax
General Reserve
Ordinary Share Dividend
Retained Profit for year
Add Retained Profit brought forward
Retained Profit carried forward
£000
3,200
1,020
2,180
1,580
600
40
50
20
10
50
200
120
720
40
680
170
510
250
260
40
300
You are required to prepare the Profit and Loss Account for external use.
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
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EXERCISES: PUBLISHED FINAL ACCOUNTS
Exercise 4
The following balances have been taken from the ledger of Philips plc at 30
June 20–1.
Sales
Purchases
Returns In
Returns Out
Stock at 1.7.20-0
Carriage In
Warehouse Costs
Wages and Salaries
Selling Expenses
Audit Fees
Directors’ Emoluments
Rent Received
Equipment at cost
Vehicles at cost
Provision for Doubtful Debts 1.7.20-0
Provision for Depreciation 1.7.20-0
Equipment
Vehicles
Loss on sale of equipment
Dividends Received
Ordinary dividend paid
Profit and loss Balance brought forward
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FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
£000s
7,170
3,300
250
410
620
65
40
1,599
58
10
12
6
1,400
700
8
560
250
2
20
300
205
EXERCISES: PUBLISHED FINAL ACCOUNTS
Notes
1.
Stock at end of year is valued at £470,000.
2.
Depreciation for the year is to be charged as follows:
Equipment – 15% of cost
Vehicles – 20% on diminishing balance.
Depreciation of Equipment is to be charged to Cost of Sales,
Distribution and Administration in the ratio of 2:1:2 respectively.
Vehicles are used solely for the delivery of goods to customers.
3.
Wages and Salaries owing £25,000.
Wages and Salaries are to be split between Cost of Sales, Distribution
and Administration in the ratio of 3:2:2.
4.
Selling Expenses paid in advance – £7,000.
5.
Provision for Doubtful Debts is to be increased by £3,000.
6.
Corporation Tax for year is estimated at £448,000.
7.
The Directors propose to:
• pay a final dividend of £450,000
• transfer £200,000 to Reserves.
You are required to prepare the Profit and Loss Account for year ended 30
June 20–1 for publication. Do not produce Notes to the Accounts but show
working notes.
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© Learning and Teaching Scotland 2005
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EXERCISES: PUBLISHED FINAL ACCOUNTS
Exercise 5
The following balances were taken from the ledger of Balmay plc on 31
March 20–1.
Net Sales
Opening Stock
Net Purchases
Warehousing Expenses
Wages
Insurance
Rent
Discounts
Bad Debts
Distribution Expenses
Administration Expenses
Debenture Interest (half year)
Delivery Vehicles at cost
Equipment at cost
Provision for Depreciation at 1 April 20-0:
Delivery Vehicles
Equipment
Provision for Doubtful Debts at 1 April 20-0
Investment Income
Directors’ Fees
Auditors’ Fees
Profit on Sale of Delivery Vehicles
Interim Ordinary Dividend
Retained profits brought forward
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FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
£000s
15,010
940
6,470
996
3,206
350
954
24 (Cr)
5
34
22
6
860
200
360
75
8
25
120
80
8
70
185
EXERCISES: PUBLISHED FINAL ACCOUNTS
Notes
1.
Stock at 31 March 20–1 was valued at £980,000.
2.
Provide for depreciation as follows:
Delivery Vehicles – 25% on the diminishing balance
Equipment – 10% on cost.
Equipment depreciation is to be split as follows –
Cost of sales –
40%
Distribution –
10%
Administration – 50%.
3.
On 31 March 20–1 the following amounts were outstanding –
Rent – £12,000
Debenture Interest – £6,000.
4.
On 31 March 20–1 Distribution Expenses of £9,000 were prepaid.
5.
Rent, Insurance and Wages are to be split 2:2:3 amongst Cost of Sales,
Distribution and Administration respectively.
6.
Provision for Doubtful Debts is to be increased to £10,000.
7.
Provide for Corporation Tax at the rate of 25%.
8.
The Directors propose to:
• Pay Preference dividend of £60,000
• Pay a final Ordinary dividend of £70,000.
You are required to prepare, from the above information:
(a)
Trading and Profit and Loss Accounts for the year ended 31March 20–1
for internal use.
(b)
Profit and Loss Account for the year ended 31 March 20 –1 for external
use.
These accounts should conform to the requirements of the Companies Act.
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EXERCISES: PUBLISHED FINAL ACCOUNTS
Exercise 6
Give 2 examples of items which would be incl uded under each of the
following headings in a Balance Sheet for distribution to shareholders.
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Intangible assets
Tangible assets
Investments
Creditors: amounts falling due within one year
Creditors: amounts falling due after one ye ar
Reserves.
Exercise 7
When preparing Final Accounts for distribution to shareholders state the
information which is shown in the following notes to the accounts:
(i)
Disclosure of Accounting Policies
(ii) Fixed Assets
(iii) Reserves.
Exercise 8
Name another 3 ‘notes’ which could be prepared when completing the ‘Notes
to the Accounts’.
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EXERCISES: PUBLISHED FINAL ACCOUNTS
Exercise 9
The following Balance Sheet for internal use has been prepared for Anderson
Appliances plc.
Balance Sheet as at 31 December 20–1.
Fixed Assets
Land and Buildings
Machinery
Fittings
£000s
Cost
500
540
80
Investments
Intangible Assets
Trade Marks
Goodwill
78
15
Current Assets
Stock
Debtors (104–10)
Prepayments
Current Liabilities
Bank Overdraft
Creditors
VAT
Accruals
Debenture Interest owing
Corporation Tax
Ordinary Dividend owing
Working Capital
Total Net Assets
Long-term Liabilities
10% Debentures
Total Net Assets
financed by
Capital and Reserves
200,000 5% £2 Preference Shares
500,000 £1 Ordinary Shares
Reserves
Share Premium
Revaluation Reserve
Profit and Loss
£000s
Agg Depn
(150)
192
32
£000s
NBV
650
348
48
1,046
35
93
1,174
89
94
21
204
6
53
26
12
3
20
35
155
49
1,223
60
1,163
400
500
900
50
150
63
263
1,163
You are required to prepare the Balance Sheet as at 31 December 20–1 for
external use. Do not prepare any notes to the accounts.
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© Learning and Teaching Scotland 2005
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EXERCISES: PUBLISHED FINAL ACCOUNTS
Exercise 10
Nairn Products plc have just completed their first year of trading. The
following balances have been taken from the ledger after the Trading and
Profit and Loss Accounts have been prepared.
Trial Balance as at 30 September 20–1
£m
Fully paid Issued Capital:
Ordinary Shares of £1
Stocks 30.09.-1
Debtors
Bank
Creditors
Prepayments
Accruals
Buildings – cost
Vehicles – cost
Equipment – cost
Investments – cost
Provision for Depreciation – Vehicles 30.09.-1
Provision for Depreciation – Equipment 30.09.-1
Provision for Doubtful Debts 30.09.-1
Goodwill
Patents
8% Debentures (2020)
Share Premium
Tax due
Dividends due
Retained Profit
£m
100
35
14
8
12
6
3
60
15
9
23
2
1
1
2
8
180
10
25
10
10
6
180
Notes
1.
2.
3.
Buildings are to be revalued at their cur rent estimated market value of
£68,000,000.
The market value of Investments is £26,000,000.
The authorised share capital is 150,000,000 £1 Ordinary Shares.
26
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
EXERCISES: PUBLISHED FINAL ACCOUNTS
You are required to prepare:
(a)
The Balance Sheet as at 30 September 20–1 for presentation to the
directors of Nairn Products plc
(b)
The Balance Sheet at 30 September 20–1 for presentation to the
shareholders
(c)
Notes to the Accounts to explain
(i)
Movement of Fixed Assets
(ii) Investments
(iii) Share Capital and Debentures.
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
27
EXERCISES: PUBLISHED FINAL ACCOUNTS
Exercise 11
The following figures were taken from the books of Kuper Krafts plc at 31
December 20–1.
Sales
Stock at 1 January (at cost)
Buildings (cost)
Land (cost)
Vehicles (cost)
Plant and Machinery (cost)
Investments (market value £300,000)
Goodwill
Bank Overdraft
Debtors
Trade Creditors
Audit Fees
Prepayments
Accruals
Distribution Expenses
Dividends Received
Bank Interest
Purchases
Wages and Salaries
Administration Expenses
Interim Ordinary Share Dividend
Provision for Depreciation (1 January):
Buildings
Vehicles
Plant and Machinery
Issued Share Capital (fully paid):
10,000,000 50p Ordinary Shares
1,000,000 £1 8% Preference Shares
Share Premium
Profit and Loss Account at 1 January
Notes
1.
Stocks at 31 December were £3,020,000 (at cost).
2.
Wages and Salaries should be allocated as follows:
Cost of Sales
£2,160,000
Administration costs
£440,000
Distribution costs
£792,000
28
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
£000s
23,000
3,306
6,400
600
1,500
1,800
250
100
502
1,740
620
156
100
292
160
24
14
14,000
3,392
2,940
200
2,200
900
1,100
5,000
1,000
540
1,480
EXERCISES: PUBLISHED FINAL ACCOUNTS
3.
Provide for Depreciation on Fixed Assets as follows:
Buildings
1% per annum using straight line method
Vehicles
25% per annum using reducing balance
method
Plant and machinery 20% per annum using straight line method.
4.
Depreciation for the year should be allocated as follows:
Buildings
Cost of sales
50%
Distribution costs
25%
Administration costs
25%
Plant and machinery
Cost of sales
Distribution costs
Administration costs
60%
20%
20%
Vehicles are used for delivery of goods to customers only.
5.
Corporation tax on profits for the year is estimated to be £240,000.
6.
The directors propose that:
(a) the Preference Share dividend be paid in full
(b) a dividend of 5p per share be paid to Ordinary Shareholders.
7.
The Authorised Share Capital of the company consists of:
15,000,000 Ordinary Shares of 50p each
2,000,000 8% Preference Shares of £1 each.
You are required to:
(a)
Calculate the total of
(i)
Costs of sales
(ii) Distribution costs
(iii) Administration costs.
(b)
Prepare the draft Profit and Loss Account for year ended 31 December
20–1 and a Balance Sheet as at that date for presentation to the
shareholders. (Show working notes.).
The accounts should conform to the requirements of the Companies Act.
(c)
Prepare Notes to the Accounts to explain
(i)
Movement of Tangible Fixed Assets
(ii) Disclosure of Accounting Policies.
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
29
EXERCISES: PUBLISHED FINAL ACCOUNTS
Exercise 12
The financial year of Easson Electronics plc ends on 30 June and the
following balances were taken from the accounts on 30 June 20 –1.
Trial Balance as at 30 June 20–1.
£000s
Issued Share Capital (fully paid):
1,000,000 6% £1 Preference Shares
10,000,000 £1 Ordinary Shares
Share Premium
8% Debentures (2018–2020)
Profit and Loss Account Balance at 1 July 20–0
Sales:
Highlands
Central
Borders
Stocks at 1 July 20–0
Advertising
Bank Charges
Purchases
Carriage on Purchases
Trade Marks
Directors’ Fees
Auditors’ Fees
Insurance
Carriage on Sales
Wages and Salaries
Land and Buildings – cost
Equipment – cost
Fixtures and Fittings – cost
Provision for Depreciation at 1 July 20–0:
Equipment
Fixtures and Fittings
Trade Debtors
Trade Creditors
Provision for Doubtful Debts at 1 July 20–0:
Sundry Warehouse Expenses
Goodwill
Sundry Office Expenses
Bank
Sundry Selling Expenses
30
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
£000s
1,000
10,000
360
100
156
8,000
14,000
6,000
2,300
120
12
10,000
82
245
1,650
89
310
150
14,400
7,000
800
450
30
25
4,180
2,100
120
4
38
17
13
31
41,891
41,891
EXERCISES: PUBLISHED FINAL ACCOUNTS
Notes
1.
Stock at 30 June 20–1 at cost – £3,200,000.
2.
Depreciation is charged as follows –
Equipment – 15% per annum on cost
Fixtures and Fittings – 20% per annum on diminishing balance basis.
3.
Depreciation is to be charged to Cost of Sales, Distribution and
Administration respectively as follows:
Equipment – 1:1:2
Fixtures and Fittings – 2:1:2.
4.
Provision for Doubtful Debts is to be decreased to £105,000.
5.
Land and Buildings is to be revalued at £7,200,000.
6.
An equipment replacement reserve is to be created with an initial
transfer from profits of £50,000.
7.
Provide for the following:
Insurance prepaid –
£10,000
Carriage on sales due – £20,000
Debenture Interest for year due
Corporation tax at 25%.
8.
Wages and Salaries and Insurance are to be split equally between Cost
of Sales, Distribution and Administration.
9.
The Authorised Share capital is 2,000,000 6% Preference Shares and
15,000,000 £1 Ordinary Shares.
10.
The
(i)
(ii)
(iii)
Directors propose to:
Pay the preference share dividend for the year
Pay a final dividend of 8% on ordinary shares
Write down goodwill to zero.
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
31
EXERCISES: PUBLISHED FINAL ACCOUNTS
From the Trial Balance and Notes, you are required to:
(a)
Calculate the totals for Cost of Sales, Distribution Costs and
Administration Costs
(b)
Prepare the Profit and Loss Account for the year ended 30 June 20 –1
and a Balance Sheet at that date for external use and to conform, as far
as possible, to the requirements of the Companies Act
(c)
Prepare Notes to the Account to show Sources of Turnover from
different geographical markets and Details of Reserves.
Exercise 13
For the above exercise, prepare a ‘Statement of Total Recognised Gains and
Losses’ for year ended 30 June 20–1.
Exercise 14
State five items of information which should be included in the Directors’
Report.
Exercise 15
Name the three main sections of an Auditors’ Report.
32
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
SOLUTIONS TO EXERCISES
Section 3
Solutions
Exercise 1
Cost of Sales
Depreciation of fork–
lift trucks
Warehouse heat and
light
Carriage In
Distribution Costs
Repairs to delivery
vehicles
Advertising
Administration Costs
Audit Fees
Wages of delivery van
drivers
Bank Interest
Fuel for company cars
Discount allowed
Exercise 2
Lee plc
Profit and Loss Account for year ended 31 December 20 –1
£000
Turnover
Cost of Sales
Gross Profit
Distribution Costs
Administration Costs
£000
270
90
180
56
62
Other Operating Income
Income from Interest/Dividends
Interest payable
Profit on Ordinary activities
Tax on ordinary activities
Profit on ordinary activities after taxation
Transfer to Reserves
Dividends paid and proposed
Retained profit for year
–
26
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
118
62
5
67
–
67
4
63
16
47
26
21
33
SOLUTIONS TO EXERCISES
Exercise 3
Narsapur plc
Profit and Loss Account for year ended 31 December 20–1
£000
Turnover
Cost of Sales
Gross Profit
Distribution Costs
Administration Costs (730 –(40 + 20))
850
670
Other Operating Income
Income from Interest/Dividends
Interest payable
Profit on Ordinary activities
Tax on ordinary activities
Profit on ordinary activities after taxation
Transfer to Reserves
Dividends paid and proposed
Retained profit for year
34
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
50
200
£000
3,200
1,020
2,180
1,520
660
10
670
50
720
40
680
170
510
250
260
SOLUTIONS TO EXERCISES
Exercise 4
Philips plc
Profit and Loss Account for year ended 30 June 20 –1
£000s
Turnover
Cost of Sales
Gross Profit
Distribution Costs
Administration Costs
647
573
Other Operating Income (6 – 2)
Income from Interest/Dividends
Interest payable
Profit on Ordinary activities
Tax on ordinary activities
Profit on ordinary activities after taxation
Extra–ordinary Income
Transfer to Reserves
Dividends paid and proposed
Retained profit for year
£000s
6,920
3,925
2,995
1,220
1,775
4
1,779
20
1,799
–
1,799
448
1,351
0
1,351
200
750
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
950
401
35
SOLUTIONS TO EXERCISES
Working Notes
Cost of Sales:
Opening Stock
Net Purchases (3,300 – 410)
620
2890
3510
470
3040
Closing Stock
Carriage In
Warehouse costs
Depreciation – Equipment
Wages and Salaries (3/7 x 1624)
Cost of sales
Distribution Costs:
Selling Expenses (58 – 7)
Wages and Salaries (2/7 x 1624)
Depreciation – Equipment ((1400 x 15%) x 1/5)
Depreciation – Vehicles (700 – 250) x 20%
Administration Costs:
Wages and Salaries (2/7 x 1624)
Depreciation – Equipment ((1400 x 15%) x 2/5)
Provision for Doubtful Debts
Directors’ Emoluments
Audit Fees
Other Operating Income:
Rent Received
Loss on Sale of Equipment
36
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
65
40
84
696
885
3925
51
464
42
90
647
464
84
3
12
10
573
6
(2)
4
SOLUTIONS TO EXERCISES
Exercise 5(a)
Balmay plc
Trading and Profit and Loss Accounts (for internal use) for year ended 31
March 20–1.
£000s
Sales
Less Cost of Sales:
Opening Stock
Purchases
Less Expenses:
Distribution
Wages (2/7 x 3,206)
Insurance (2/7 x 350)
Rent (2/7 x 966)
Depreciation – Delivery Vans
(25% x (860 – 360))
Depreciation – Equipment (10% x 20)
Distribution Expenses (34 – 9)
Administration
Wages (3/7 x 3,206)
Insurance (3/7 x 3500)
Rent (3/7 x 966)
Depreciation – Equipment (50% x 20)
Administration Expenses
Bad Debts
Directors’ Fees
Auditors’ Fees
£000s
15,010
940
6,470
7,410
980
6,430
Closing Stock
Warehouse Expenses
Rent (2/7 x (954 + 12))
Insurance (2/7 x 350)
Wages (2/7 x 3,206)
Depreciation – Equipment (40% x 20)
Cost of Sales
Gross Profit
Add: Profit on Sale of Delivery Vans
Investment Income
Discounts (net)
£000s
996
276
100
916
8
2,296
8,726
6,284
8
25
24
57
6,341
916
100
276
125
2
25
1,444
1,374
150
414
10
22
5
120
80
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
37
SOLUTIONS TO EXERCISES
Increase in Provision for Doubtful Debts
Debenture Interest
Net profit before Tax
Corporation Tax
Preference Share Dividend
Ordinary Share Dividend (70 + 70)
Retained Profit for year
Retained profit brought forward
Retained profit
38
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
2
2,177
12
60
140
3,633
2,708
677
2,031
200
1,831
185
2,016
SOLUTIONS TO EXERCISES
Exercise 5(b)
£000s
Turnover
Cost of Sales
Gross Profit
Distribution Costs*
Administration Costs
1,420
2,177
Other Operating Income
Income from Interest/Dividends
Interest payable
Profit on ordinary activities
Tax on ordinary activities
Profit on ordinary activities after taxation
Extra-ordinary Income
Transfer to Reserves
Dividends paid and proposed
Retained profit for year
* Working Note
Distribution Costs
Less Net Discounts
0
200
£000s
15,010
8,726
6,284
3,597
2,687
8
2,695
25
2,720
12
2,708
677
2,031
0
2,031
200
1,831
1,444
24
1,420
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
39
SOLUTIONS TO EXERCISES
Exercise 6
Items included in:
Intangible Assets – patents, trade marks, goodwill.
Tangible Assets – Land, Buildings, Vehicles, Machinery, Plant,
Equipment, Fittings etc.
(iii) Investments – shares in other organisations, loans to other businesses
(if they have more than one year to run).
(iv) Creditors: amounts falling due within one year – creditors, bank
overdraft, other short–term loans, call sin advance, accruals, dividends
due, tax due.
(v) Creditors: amounts falling due after one year – debentures, loans with
more than one year to run, mortgages.
(vi) Reserves – revaluation reserves, capital redemption reserves;
unappropriated profits.
(i)
(ii)
Exercise 7
(i)
Disclosure of Accounting Policies
This note should give details on the following:
• depreciation – whether straight-line, reducing balance etc. (no actual
figures are required)
• stock valuation – cost, market value etc.
• research and development
• any changes in these policies.
(ii)
Fixed Assets
This section gives details of:
• cost or valuation at beginning and end of year
• depreciation at beginning and end of year
• changes during the year.
(iii) Reserves
The section shows information on:
• retained profit, revaluation reserve and share premium account
• opening balances, movements and closing balances.
40
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
SOLUTIONS TO EXERCISES
Exercise 8
Other notes include:
•
•
•
•
•
•
deviation from accounting standards
sources of turnover
details of share capital, debentures and investments
Directors’ Emoluments
Auditors’ Remuneration
Statement of earnings per share.
Note
Any other relevant notes will be accepted although knowledge of them is not
required for this course.
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
41
SOLUTIONS TO EXERCISES
Exercise 9
Anderson Appliances plc
£000s
Fixed Assets
Intangible Assets
Tangible Assets
Investments
Current Assets
Stocks
Debtors
Investments
Cash/Bank
Prepayments and accrued Income
Creditors: amounts falling due within one year
Bank Overdraft
Creditors
VAT
Accruals
Debenture Interest owing
Corporation Tax
Ordinary Dividend owing
Net Current Assets
Total Assets less Current Liabilities
Creditors: amounts falling due after one year
Provisions for liabilities and charges
Net Assets
Capital and Reserves
Called-up Share Capital
Share Premium
Reserves
Equity Shareholders’ Funds
42
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
£000s
93
1,046
35
1,174
89
94
–
–
21
204
6
53
26
12
3
20
35
155
49
1,223
60
–
60
1,163
900
50
213
1,163
SOLUTIONS TO EXERCISES
Exercise 10(a)
Nairn Products plc
Balance Sheet as at 30 September 20–1
Fixed Assets
Buildings
Vehicles
Equipment
£m
Cost
60
15
9
84
£m
Agg Depn
(8)
2
1
(5)
£m
NBV
68
13
8
89
Investments
23
Intangible Assets
Patents
Goodwill
8
2
Current Assets
Stocks
Debtors
Less Provision for Doubtful Debts
Bank
Prepayments
14
1
Current Liabilities
Creditors
Accruals
Tax due
Dividends due
Working Capital
12
3
10
10
8% Debentures
Total Net assets
financed by:
Capital and Reserves
£1 Ordinary Shares
Share Premium
Building Revaluation Reserve
Retained Profits
Shareholders’ interest
35
13
8
6
62
35
27
149
10
139
100
25
8
6
139
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
10
122
43
SOLUTIONS TO EXERCISES
Exercise 10(b)
Nairn Products plc
Balance Sheet (for external use) as at 30 September 20 –1
£m
Fixed Assets
Intangible Assets
Tangible Assets
Investments
Current Assets
Stocks
Debtors
Investments
Cash/Bank
Prepayments and accrued Income
Creditors: amounts falling due within one year
Creditors
Accruals
Dividends due
Tax due
Net Current Assets
Total Assets less Current Liabilities
Creditors: amounts falling due after one year
Provisions for liabilities and charges
Net Assets
Capital and Reserves
Called-up Share Capital
Share Premium
Reserves
Equity Shareholders’ Funds
44
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
£m
10
89
23
122
35
13
–
8
6
62
12
3
10
10
35
27
149
10
–
10
139
100
25
14
139
SOLUTIONS TO EXERCISES
Exercise 10(c)
Notes to the Accounts
Tangible Assets
Cost at 1 .10.–0
Additions
Revaluations
Disposals
At 30.9.–1
Buildings
£m
60
–
8
–
68
Vehicles
£m
15
–
–
–
15
Equipment
£m
9
–
–
–
9
Total
£m
84
–
8
–
92
–
–
–
60
68
–
2
2
15
13
–
1
1
9
8
–
3
3
84
89
Depreciation at 1.10.–0
Charge for year
At 30.9.–1
NBV at 1.10.–0
NBV at 30.9.–1
Intangible Assets
Cost 1.10.–0
Value 30.9.–1
Goodwill
£m
2
2
Patents
£m
8
8
Total
£m
10
10
Investments
Purchased during year (cost)
Market value at 30 September 20–1
£23m
£26m
Share Capital and Debentures
Authorised Share Capital
Debentures – 8 %
(Repayable 2020)
150,000,000 £1 Ordinary Shares
£10,000,000
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
45
SOLUTIONS TO EXERCISES
Exercise 11(a)
Kuper Krafts plc
Cost of Sales
Opening Stocks
Purchases
Closing Stocks
Wages and Salaries
Depreciation:
Buildings (50%  64)
Plant and Machinery
(60%  360)
Cost of sales
Distribution Costs
Distribution Expenses
Depreciation:
Buildings (25%  64)
Vehicles
(25%  (1500 – 900))
Plant and Machinery
(20%
360)
Wages and Salaries
Distribution Costs
46
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
3,306
14,000
17,306
3,020
14,286
2,160
32
216
16,694
160
16
150
72
792
1,190
Administration Costs
Audit Fees
Bank Interest
Wages and Salaries
Admin Expenses
Depreciation:
Buildings
Plant and Machinery
Admin Costs
156
14
440
2,940
16
72
3,638
SOLUTIONS TO EXERCISES
Exercise 11(b)
Kuper Krafts plc
Profit and Loss Account for year ended 31 December 20–1.
£000s
Turnover
Cost of Sales
Gross Profit
Distribution Costs
Administration Costs (3,638 – 14)
1,190
3,624
Other Operating Income
Income from Interest/Dividends
Interest payable
Profit on ordinary activities
Tax on ordinary activities
Profit on ordinary activities after taxation
Extra-ordinary Income
Transfer to Reserves
Dividends paid and proposed (200+500+80)
Retained profit for year
£000s
23,000
16,694
6,306
4,814
1,492
0
1,492
24
1,516
14
1,502
240
1,262
0
1,262
0
780
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
780
482
47
SOLUTIONS TO EXERCISES
Balance Sheet as at 31 December 20–1
£000s
Fixed Assets
Intangible Assets
Tangible Assets
Investments
Current Assets
Stocks
Debtors
Investments
Cash/Bank
Prepayments and accrued Income
Creditors: amounts falling due within one year
Bank Overdraft
Trade Creditors
Accruals
Tax
Preference Share Dividend
Final Ordinary Dividend
Net Current Assets
Total Assets less Current Liabilities
Creditors: amounts falling due after one year
Provisions for liabilities and charges
Net Assets
Capital and Reserves
Called-up Share Capital
Share Premium
Reserves (1,480 + 482)
Equity Shareholders’ Funds
48
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
£000s
100
5,526
250
5,876
3,020
1,740
0
0
100
4,860
502
620
292
240
80
500
2,234
2,626
8,502
0
0
0
8,502
6,000
540
1,962
8,502
SOLUTIONS TO EXERCISES
Exercise 11(c)
Notes to the accounts
(i)
Movement of Tangible Fixed Assets
Cost at 1.1.–0
Additions
Revaluations
Disposals
At 31.12.–1
Land
Buildings
Vehicles
£000s
600
–
–
–
600
£000s
6,400
–
–
–
6,400
–
–
–
600
600
Depreciation at 1.1.–1
Charge for year
At 30.9.–1
NBV at 31.12.–1
NBV at 30.9.–1
(ii)
£000s
1,500
–
–
–
1,500
Plant and
Machinery
£000s
1,800
–
–
–
1,800
Total
£000s
3,900
–
–
–
10,300
2,200
64
2,264
900
150
1,050
1,100
360
1,460
4,200
574
4,774
4,200
4,136
600
450
700
340
6,100
5,526
Disclosure of the accounting policies
Fixed Asset
Buildings
Plant and Machinery
Vehicles
Method of Depreciation
Straight line
Straight line
Diminishing
Stock is valued at cost.
There have been no changes in accounting policies.
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
49
SOLUTIONS TO EXERCISES
Exercise 12(a)
Easson Electronics plc
Cost of Sales
Opening Stock
Purchases
Carriage
£000s
Closing Stock
Depreciation:
Equipment
Fixtures and Fittings
30
34
Warehouse Expenses
Wages and Salaries
Insurance
4
4,800
100
£000s
2,300
10,000
82
12,382
3,200
9,182
4,968
14,150
Distribution Costs
Advertising
Insurance
Carriage on Sales
Wages and Salaries
Depreciation:
Equipment
Fixtures and Fittings
Selling Expenses
£000s
120
100
170
4,800
Administration Costs
Bank Charges
Directors’ Emoluments
Auditors’ Fees
Insurance
Wages and Salaries
Depreciation:
Equipment
Fixtures and Fittings
Office Expenses
Decrease in Provision for Doubtful Debts
£000s
12
1,650
89
100
4,800
50
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
30
17
31
5,268
60
34
17
(15)
6,747
SOLUTIONS TO EXERCISES
Exercise 12(b)
Profit and Loss Account for year ended 30 June 20–1
£000s
Turnover
Cost of Sales
Gross Profit
Distribution Costs
Administration Costs
5,268
6,747
Other Operating Income
Income from Interest/Dividends
Interest payable
Profit on ordinary activities
Tax on ordinary activities
Profit on ordinary activities after taxation
Extra-ordinary Income
Transfer to Reserves
Goodwill
Dividends paid and proposed (60 + 800)
Retained profit for year
£000s
28,000
14,150
13,850
12,015
1,835
0
1,835
0
1,835
8
1,827
457
1,370
0
1,370
50
38
860
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
948
422
51
SOLUTIONS TO EXERCISES
Balance Sheet as at 30 June 20–1
£000s
Fixed Assets
Intangible Assets
Tangible Assets*
Investments
£000s
245
8,190
0
8,435
Current Assets
Stocks
Debtors
Investments
Cash/Bank
Prepayments and accrued Income
3,200
4,075
0
13
10
7,298
Creditors: amounts falling due within one year
Trade Creditors
Accruals
Debenture Interest
Tax
Dividends due
Net Current Assets
Total Assets less Current Liabilities
Creditors: amounts falling due after one year
Provisions for liabilities and charges
Net Assets
Capital and Reserves
Called-up Share Capital
Share Premium
Reserves
Equity Shareholders’ Funds
2,100
20
8
457
860
3,445
3,853
12,288
100
0
100
12,188
11,000
360
828
12,188
*
Land and
Buildings
Equipment
7,000
200
–
–
–
7,200
800
–
30
120
150
650
Cost
Revaluation
Depreciation1.7.–0
Depreciation for year
Depreciation 30.6.–1
NBV at 30.6.–0
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Fixtures
and
Fittings
450
–
25
85
110
340
Total
8,250
55
205
260
8,190
SOLUTIONS TO EXERCISES
Exercise 12(c)
Note to the Accounts
Sources of Turnover
Area
Highlands
Central
Borders
Total
Turnover (£000s)
8,000
14,000
6,000
28,000
Details of Reserves
£000s
156
422
578
200
50
828
Retained Profits at 1.7.–0
Retained Profits for year
Retained Profits at 30.6.–1
Revaluation of Land and Buildings at 30.6.–1
Equipment Replacement Reserve at 30.6.–1
Total Reserves at 30.6.–1
Exercise 13
Statement of Total Recognised Gains and Losses
For year ended 30 June 20–1
£000s
1,370
200
1,570
0
1,570
Profit for the financial year
Unrealised surplus on revaluation of buildings
Total recognised gains
Prior year adjustments
Total gains and losses for year
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
53
SOLUTIONS TO EXERCISES
Exercise 14
Items of information included in Directors’ Report:
• names of directors, their interests in any trading contracts , the number of
shares and debentures held at the start of the year
• statement of the principal activities of the company
• a review of the development of the company during the year and details of
any likely future developments
• information on changes in fixed assets i.e. purchase, sale or valuation of
assets
• details of proposed dividends
• significant differences between the book value and market value of land
and buildings
• details of proposed dividends
• details of transfer to reserves
• particulars of any significant events since the end of the financial year
• details of political and charitable donations
• a health and safety statement including employee statistics
• policy on employment of disabled people
• details of action taken on employee involvement and consultation
• policy on payment of creditors.
Exercise 15
The three main sections of the Auditors’ Report are:
• respective responsibilities of directors and auditors i.e. the directors are
responsible for preparing the accounts whi le the auditors are responsible
for forming an opinion on the accounts
• basis of opinion i.e. how the audit was planned and carried out
• opinion – the auditors’ opinion of the accounts.
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NATIONAL QUALIFICATIONS CURRICULUM SUPPORT
Accounting
Financial Accounting:
Issues of Shares Pack
[ADVANCED HIGHER]
Anne Duff
THEORY NOTES ON ISSUE OF SHARES
Section 1
Theory notes on issue of shares
Introduction
Limited companies raise capital by issuing shares. The people buying these
shares become shareholders. Shareholders receive part of the company’s
annual profit in the form of dividends. The liability of a shareholder is
limited to the value of the shares owned and private possessions cannot be
used to pay the debts of the company.
The two main types of shares are Ordinary Shares (Equity) and Preference
Shares. Ordinary Shares carry more risk as the dividends can vary and if the
company is not performing well then the Ordinary shareholders may receive
no dividend. However, when a company is prospering the Ordina ry
shareholders stand to obtain substantial rewards. Ordinary shareholders have
no say in the day-to-day running of the business. They are, however, able to
vote at the Annual General Meeting of the company and can influence the
election of the board of directors who manage the company.
Preference Shares carry less risk because they are issued at a fixed rate of
dividend, e.g. 6%, which means that no matter how well the company is
doing, the shareholders will receive the same dividend. Preferences
shareholders have no voting rights but if a company goes into liquidation
their capital will be paid back before that of the Ordinary shareholders.
How many shares can a company issue?
The Memorandum of Association, one of the statutory documents of a
company, must state the Authorised Share Capital of the company. This is
the maximum amount of Ordinary and Preference share capital that can be
issued. It is not necessary for a company to issue all of its authorised capital
at one time. The part that is actually issued is called the Issued Share
Capital. The shares are given a face value i.e. Ordinary shares of £1 each.
This is often referred to as the nominal or par value of the shares.
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THEORY NOTES ON ISSUE OF SHARES
How do companies inform the public of share issues?
Public Limited Companies can use different ways of informing the public that
they are issuing shares. If a large number of shares are being offered to the
public a company can produce a prospectus which gives relevant details about
the company and includes an application form which interested members of
the public can complete requesting some of the shares. Alternatively a
company may use the services of an Issuing House which will be responsible
for issuing the shares to the public.
How are shares issued?
A company offering shares to the public can state that the shares have to be
paid either
• in full on application, or
• by instalments.
When applying for shares which have to be paid in full, the applicant will
send the full value of the shares with the applicatio n form.
However, when applying for shares which are to be paid in instalments a
prospective shareholder only sends a proportion of the value of the shares he
is applying for with his application form and if successful he will send
another part when the shares are allotted; the rest of the money will be sent in
instalments, when asked for by the company. The instalments are named
‘First Call’, ‘Second Call’ etc. A company may ask for the shares to be paid
by instalments if the full amount of the money to be raised is not required
immediately.
The following example will indicate the procedure to be followed.
Company A is inviting investors to buy 100,000 Ordinary Shares of £1 each
at par. The terms of the issue are:
On application
On allotment
First and Final Call
Per share
25p
25p
50p
THEORY NOTES ON ISSUE OF SHARES
Ms T decides to apply for 4,000 shares. The following procedure would then
take place between Company A and Ms T:
Ms T
Company A
Sends application form and cheque for £1,000 (4,000 x 25p)
If application to buy is accepted a letter of allotment is sent to Ms T
along with a request for another 25p per share.
A legally binding contract has been entered into by both buyer and
seller.
Ms T sends another cheque for £1,000.
One month later Company A makes a first and final call for the
outstanding money on the shares.
Ms T sends a cheque for £2,000 (the outstanding balance on the value
of the shares).
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THEORY NOTES ON ISSUE OF SHARES
How would the issue of shares be recorded in the ledger of Company A?
Step 1
When the application was received the cheque would be debited in the Bank
Account of Company A and credited in an Application and Allotment Account.
Bank Account
May 1
Application and Allotment
Debit
£
1,000
Credit
£
Balance
£
1,000
Debit
£
Credit
£
1,000
Balance
£
1,000
Application and Allotment Account
May 1
Bank
Step 2
The money received after the shares have been allotted would also be debited
to the Bank Account and credited to the Application and Allotment Account.
The balance in the Application and Allotment Account is then transferred to
the Ordinary Share Capital Account.
Bank Account
May 1
Application and Allotment
Debit
£
1,000
May 10
Application and Allotment
1,000
Credit
£
Balance
£
1,000
2,000
Application and Allotment Account
Debit
£
May 1
Bank
Credit
£
1,000
May 10
Bank
1,000
May 10
Ordinary Share Capital
2,000
Balance
£
1,000
2,000
0
Ordinary Share Capital Account
Debit
£
May 10
Application and Allotment
Credit
£
2,000
Balance
£
2,000
THEORY NOTES ON ISSUE OF SHARES
Step 3
When Company A receives the call money again the Bank Account will be
debited but this time the First and Final Call Account will be credited before
being transferred to the Ordinary Share Capital Account.
Bank Account
May 1
Application and Allotment
Debit
£
1,000
Credit
£
Balance
£
1,000
May 10
Application and Allotment
1,000
2,000
June 10
First and Final Call Account
2,000
4,000
First and Final Call Account
Debit
£
June 10
Bank
June 10
Ordinary Share Capital
Credit
£
2,000
Balance
£
2,000
2,000
0
Ordinary Share Capital Account
Debit
£
May 10
Application and Allotment
Jun 10
First and Final Call Account
Credit
£
2,000
Balance
£
2,000
2,000
4,000
The Ordinary Share Capital Account now shows the value of the shares issued
to Ms T.
The same entries would take place for all shares issued. When all shares had
been applied for and issued the Ordinary Share Capital Account would show
the full value of the issued capital i.e.
Ordinary Share Capital Account
Debit
£
Aug 1
Balance
Attempt Exercises 1–3
60
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
Credit
£
Balance
£
100,000
THEORY NOTES ON ISSUE OF SHARES
What is meant by ‘Shares issued at a premium’?
When a company has been trading for some time and is successful, it is likely
that, when its shares change hands on the stock market, the value of each
share will be considerably higher than the nominal or par value, e.g. an
Ordinary Share of £1 may be valued at £4 on the stock exchange. This latter
value is known as the market value of the share.
If this company was to offer more shares to the public it is likely that these
shares would be issued at a price somewhere between the nominal value of £1
and the market value of £4, say at a price of £3. The difference between the
nominal value and the issue value is known as a share premium. The Share
Premium is part of the reserves of a company and is therefore shown in that
section of the Balance Sheet.
How would the Share Premium be recorded in the Ledger of Company A?
The Share Premium which is paid by the applicant is not part of the Share
Capital of the company and must, therefore, be shown in a separate account.
The following example will explain this.
At the beginning of Year 3 Company A is to issue another 50,000 £1
Ordinary Shares at a price of £2.50 per share. The offer states that –
£1.75 per share will be required on application (including the Share Premium
of £1.50)
£0.50 per share on allotment
£0.25 per share on First and Final Call
Bank Account
Year 3
Feb 1
Application and Allotment
Debit
£
87,500
Credit
£
Balance
£
87,500
Mar 1
Application and Allotment
25,000
112,000
Apr 1
First and Final Call
12,500
125,000
THEORY NOTES ON ISSUE OF SHARES
Application and Allotment Account
Debit
£
Year 3
Feb 1
Bank
Credit
£
87,500
Balance
£
87,500
Mar 1
Bank
25,000
112,500
May 1
Ordinary Share Capital
37,500
75,000
Share Premium
75,000
0
First and Final Call Account
Debit
£
Year 3
Apr 1
Bank
May 1
Ordinary Share Capital
Credit
£
Balance
£
12,500
12,500
12,500
0
Ordinary Share Capital Account
Debit
£
Credit
£
Balance
£
100,000
100,000
Year 3
May 1
Balance
May 1
Applications and Allotment
37,500
137,500
First and Final Call
12,500
150,000
Credit
£
Balance
£
75,000
75,000
Share Premium Account
Debit
£
Year 3
May 1
Application and Allotment
Attempt Exercises 4-6
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THEORY NOTES ON ISSUE OF SHARES
What is meant by ‘Oversubscription of Shares’?
Oversubscription of shares arises when more shares are applied for than are
available. When a share issue is oversubscribed, the unlucky applicants will
have their application money refunded.
How does a company decide who is successful when an issue is
oversubscribed?
There are various ways of allocating the shares. The company may choose
• the successful applicants randomly i.e. by drawing lots
• to accept applications for large numbers of shares because administrative
costs are lower
• to favour the investors who apply for smaller numbers of shares as the
amount of voting power held by one person is less
• to offer a proportion of the shares requested by each applicant i.e. 3 shares
for every 4 applied for. In this case the extra application money is kept by
the company thus reducing the amount due on allotment.
Example A
On 1 July PW plc issued 150,000 £1 Ordinary Shares at par. The terms of
issue were as follows:
On application
On allotment
First and Final Call
£0.25
£0.25
£0.50
Applications were received for 200,000 shares. PW plc decided to refund the
application money of 50,000 shares and allot the other applicants in full. The
accounting entries for the first stage are shown b elow:
Bank Account
July 1
Application and Allotment
July 14
Application and Allotment
(refunds)
Debit
£
50,000
Credit
£
Balance
£
50,000
12,500
37,500
THEORY NOTES ON ISSUE OF SHARES
Application and Allotment Account
Debit
£
July 1
Bank
July 14
Bank
Credit
£
50,000
12,500
Balance
£
50,0000
37,500
The remainder of the entries are as shown on pages 60 –1.
Example B
On 1 September QX plc issued 150,000 £1 Ordinary Shares at par. The terms
of issue were as follows:
On application
On allotment
First and Final Call
£0.25
£0.25
£0.50
Applications were received for 200,000 shares. QX plc decided to allot the
shares on the basis of 3 for every 4 applied for. The surplus application
monies were held over by the company thus reducing the amount due on
allotment.
Bank Account
Sept 1
Application and Allotment
Debit
£
50,000
Oct 1
Application and Allotment
25,000*
Credit
£
Balance
£
50,000
75,000
Application and Allotment Account
Debit
£
Sept 1
Bank
Credit
£
50,000
Oct 7
Bank
25,000
Balance
£
50,000
75,000
* This represents the amount due on allotment less the surplus application
monies i.e. (£37,500 – £12,500) = £25,000
The remainder of the entries are as shown on pages 60 –1.
Attempt Exercise 7–9
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THEORY NOTES ON ISSUE OF SHARES
What are Calls in advance?
Calls in advance arise when one or more shareholders pay for their shares
completely before the company has called in all the instalments. The amount
of the Calls paid in advance would be transferred to a ‘Calls in Advance
Account’ and shown as a liability in the Balan ce Sheet until the company
calls in the rest of the money for the shares.
Example
CLD plc issued 200,000 6% Preference Shares of £2 each. The shares were
issued at par on the following terms:
Payable on application
Payable on allotment
First Call
Second Call
£0.50
£0.50
£0.50
£0.50
All shares were applied for and allotted and all relevant monies received. All
First Call money was received when requested but one shareholder who had
bought 10,000 shares paid all outstanding money at this time. The examp le
shows the transactions after the Application and Allotment stages have been
completed.
6% Preference Share Capital Account
Debit
£
Credit
£
100,000
Balance
£
100,000
First Call Account
50,000
150,000
Second Call
45,000
195,000
5,000
200,000
Credit
£
55,000
Balance
£
55,000
Application and Allotment
Calls in Advance
First Call Account
Debit
£
Bank
Preference Share Capital Account
Calls in Advance Account
50,000
5,000
5,000
0
THEORY NOTES ON ISSUE OF SHARES
Calls in Advance
Debit
£
First Call Account
Preference Share Capital Account
Credit
£
5,000
5,000
Balance
£
5,000
0
Second Call Account
Debit
£
Bank
Preference Share Capital Account
Attempt Exercise 10
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FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
45,000
Credit
£
45,000
Balance
£
45,000
0
THEORY NOTES ON ISSUE OF SHARES
What are Calls in Arrears?
Calls in arrears arise when one or more shareholders fail to pay the money
due after the call has been made by the company. It is actually ‘called -up
share capital unpaid’. The full amount that should have been received is
transferred to the Share Capital Account and the amount due is transferred to
the Calls in Arrears Account. Calls in Arrears are shown in the Balance
Sheet, usually amongst the Current Assets but they can be inserted under a
separate heading.
Example
Sundale plc issued 100,000 £1.00 Ordinary Shares at par on the following
terms.
Payable on application
Payable on allotment
First and Final Call
£0.25
£0.25
£0.50
All shares were applied for and allotted and all relevant monies received. All
First and Final Call money was received when requested except from one
member holding 400 shares. The example shows the transactions after the
Application and Allotment stages have been completed.
Ordinary Share Capital Account
Debit
£
Application and Allotment
Credit
£
50,000
Balance
£
50,000
First and Final Call Account
50,000
50,000
Credit
£
49,800
Balance
£
49,800
First and Final Call Account
Debit
£
Bank
Ordinary Share Capital Account
50,000
Calls in Arrears Account
200
200
0
Credit
£
Balance
£
200
Calls in Arrears Account
First and Final Call
Debit
£
200
THEORY NOTES ON ISSUE OF SHARES
What are Forfeited Shares?
When a shareholder does not pay the money owed for shares then it is likely
that he/she will lose the shares. The Articles of Association of the Company
will probably state that these shares should be forfeited. The shares will be
cancelled and the shareholder will lose any money previously paid towards
the shares. The company can then reissue the shares.
When the shares are reissued the price requested on reissue plu s the amount
received from the original shareholder must, at least, equal
• the called-up value of the shares if they are not fully called up, or
• the nominal value if the full amount has been called up.
Example
Oakridge plc issued 200,000 £1.00 Ordinary Shares at par on the following
terms.
Payable on application
Payable on allotment
First Call
Second Call
£0.25
£0.25
£0.25
£0.25
All shares were applied for and allotted and all relevant monies received. All
First and Second Call money was received when requested except from one
member holding 1,000 shares. The Directors of the company decided that the
shares should be forfeited. At a later date, the shares were reissued to A
Gibson at £0.60 each. The example shows the transactions after the
Application and Allotment stages.
First Call Account
Debit
£
Bank
Ordinary Share Capital Account
Forfeited Shares Account
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© Learning and Teaching Scotland 2005
Credit
£
49,750
50,000
Balance
£
49,750
250
250
0
THEORY NOTES ON ISSUE OF SHARES
Second Call Account
Debit
£
Bank
Ordinary Share Capital Account
Credit
£
49,750
50,000
Forfeited Shares Account
Balance
£
49,750
250
250
0
Credit
£
100,000
Balance
£
100,000
First Call
50,000
150,000
Second Call
50,000
200,000
Ordinary Share Capital Account
Debit
£
Application and Allotment
Forfeited Shares
1,000
A Gibson
199,000
1,000
200,000
Forfeited Shares Account
First Call
Second Call
Debit
£
250
250
Ordinary Share Capital
A Gibson
Credit
£
Balance
£
250
500
1,000
400
500 Cr
100
Bank Account
First Call
Debit
£
49,750
Second Call
49,750
99,500
600
100,100
A Gibson
Credit
£
Balance
£
49,750
THEORY NOTES ON ISSUE OF SHARES
A Gibson
Debit
£
Bank
Forfeited Shares
Ordinary Share Capital
Credit
£
600
Balance
£
600
400
1,000
1,000
Note
When the shares were forfeited the nominal value of £1,000 was transferred
from the Ordinary Share Capital Account to the Forfeited Share Capital
Account. The £500 received from the original shareholder is now held in the
Forfeited Share Account in order to offset the reduced amount paid by A
Gibson. Gibson is paying £600 for 1,000 £1 shares; therefore, the difference
of £400 has to be transferred from the Forfeited Shares Account.
Any balance left in the Forfeited Shares Account can be transferred to a
Profit on Reissue of Forfeited Shares Account or to the credit side of the
Share Premium Account, if there is one.
Attempt Exercises 11–15
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0
EXERCISES: ISSUE OF SHARES
Section 2
Exercise 1
On 1 March Delightful Drapes plc issued, at par, 120,000 6% Preference
Shares of £1 each, on the following terms.
Payable on application
Payable on allotment
40p
60p
On 18 March the ledger accounts below show that some of the application
money has been received.
Bank Account
Mar 1 18
Application
and Allotment
Debit
£
32,000
Credit
£
Balance
£
32,000
Debit
£
Credit
£
Balance
£
32,000
32,000
Application and Allotment Account
Mar 1 –
18
Bank
Copy out the above accounts and update them using the following
information. Open any other necessary account/s to complete the issue of
shares.
By 27 March all shares had been applied for and money received.
The shares were allotted on 1 April and all allotment money received by 30
April.
EXERCISES: ISSUE OF SHARES
Exercise 2
Abercraig plc invited applications for 500,000 £2 Ordinary Shares at par.
The following terms per share applied –
Payable on application
Payable on allotment
First and Final Call
£
1.00
0.50
0.50
Applications were received for the complete issue and all money due on
allotment had been received. The call for the remainder was made and all
monies received.
Open all necessary ledger accounts and record the above transactions. Ignore
dates.
Exercise 3
Applications were invited by Castletay plc for 200,000 of its £3 Ordinary
Shares payable as follows:
On application – 1 June
On allotment – 1 July
First Call – 1 September
Second Call – 1 December
£1.00
£0.50
£0.75
£0.75
All shares were applied for and all monies received when requested by the
company.
Open all necessary accounts and record the above transactions.
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EXERCISES: ISSUE OF SHARES
Exercise 4
Aurora plc has an authorised capital of £1,000,000 divided into 500,000 £2
Ordinary Shares. 200,000 shares have already been issued. Aurora plc is
now issuing another 200,000 shares at £3 per share. The terms of issue are as
follows:
On application
On allotment
First and Final Call
Per share
£1.00
£1.50 (including share premium of £1.00)
£0.50
All shares were applied for and all monies received upon request.
Copy and complete the accounts below to show the transactions required to
record the above share issue. Ignore dates.
Bank Account
Application and Allotment
Debit
£
200,000
Application and Allotment
300,000
Credit
£
Balance
£
200,000
500,000
Application and Allotment Account
Debit
£
Bank
Credit
£
200,000
Balance
£
200,000
Bank
300,000
500,000
Credit
£
400,000
Balance
£
400,000
Ordinary Share Capital Account
Debit
£
Balance
EXERCISES: ISSUE OF SHARES
Share Premium Account
Debit
£
Credit
£
Balance
£
Debit
£
Credit
£
Balance
£
First and Final Call Account
Exercise 5
Valois plc issued 150,000 £1 Ordinary Shares at £2.50 per share on the
following terms:
On application
On allotment
First and Final Call
Per share
£0.40
£1.70 (including the share premium)
£0.40
You are required to record the entries in the Application and Allotment
Account and the Share Premium Account only.
Exercise 6
Applications were invited by Pitcairn plc for 100,000 8% Preference Shares
of £5 each. The shares were offered at a price of £6.50 each and at the
following terms:
On application
On allotment
First Call
Second Call
Per share
£2.00
£2.00
£2.00 (including share premium)
£0.50
You are required to record the above transactions in the ledger of Pitcairn
plc.
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EXERCISES: ISSUE OF SHARES
Exercise 7
Woodbourne plc issued, at par, 400,000 Ordinary Shares of £2 each.
Payments were made as follows:
On application
On allotment
First and Final Call
Per share
£1.00
£0.50
£0.50
Applications were received for 500,000 shares. It was decided that 400,000
would be allotted in full and to refund the application monies for the other
100,000 shares.
Open the necessary accounts and record the above transactions in the ledger
of Woodbourne plc.
Exercise 8
Nesbit plc issued, at par, 500,000 6% Preference Shares of £1 each.
Payments were made as follows:
On application
On allotment
Per share
£0.50
£0.50
Applications were received for 625,000 shares. It was decided to allot the
shares on the basis of four for every five applied for. The surplus received on
application was used in part payment of the amount due on allotment.
Open the necessary accounts and record the above transactions in the ledger
of Nesbit plc.
EXERCISES: ISSUE OF SHARES
Exercise 9
Parekh plc issued 75,000 Ordinary Shares with a nominal value of £3 at a
price of £4 per share. The terms of issue were as follows:
On application
On allotment
First and Final Call
Per share
£1
£2 (including share premium)
£1
Applications were received for 100,000 shares and it was decided to allot
three shares for every four applied for. Surplus monies received upon
application were kept to reduce the amount due on allotment.
In the ledger of Parekh plc, record all necessary transactions relating to the
application and allotment stages only.
Exercise 10
Savourie plc issued 200,000 £1 Ordinary Shares at a price of £1.50 per share.
The terms of issue were as follows:
On application
On allotment
First Call
Second Call
Per Share
£0.25
£0.25
£0.75 (including share premium)
£0.25
Applications were received for 350,000 shares and it was decided to
• refund application monies for 50,000 shares, and the n
• allot two shares for ever three applied for.
One shareholder who holds 10,000 shares paid off all outstanding money
when the First Call was made. The second call has not yet been made.
Open all relevant accounts and record the above transactions.
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FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
EXERCISES: ISSUE OF SHARES
Exercise 11
Kirkdon plc invited applications for 120,000 £5 Ordinary Shares at par. The
terms of the offer were:
On application
On allotment
First and Final Call
Per share
£2.00
£2.00
£1.00
240,000 shares were applied for and it was decided to allot the shares on the
basis of one for every two applied for. The excess application money was
kept as payment of amounts due on allotment.
One shareholder who had been allotted 4,000 shares failed to pay the amount
due on first and final call.
The following accounts show the position after the application and allotment
have taken place.
Bank Account
Application and Allotment
Debit
£
480,000
Credit
£
Balance
£
480,000
Debit
£
Credit
£
480,000
Balance
£
480,000
Application and Allotment Account
Bank
Ordinary Share Capital
480,000
0
Ordinary Share Capital Account
Debit
£
Application and Allotment
Credit
£
480,000
Balance
£
480,000
Copy the above accounts into your workbook, open any other necessary
accounts and complete the recording of the above transactions.
EXERCISES: ISSUE OF SHARES
Exercise 12
Trytor plc issued 400,000 £2 Ordinary Shares at par. Payments for the shares
were made as follows:
On application
On allotment
First Call
Second Call
Per share
£0.50
£0.25
£0.75
£0.50
All the shares were applied for and allotted in full. The calls were made and
all the shareholders paid except for one, who failed to pay the first and
second calls on the 4,000 shares allotted to her. The shares were forfeited
and later issued to N Kirkland at £1.50 each.
Open all necessary accounts and record the above transactions in the ledger
of Trytor plc.
Exercise 13
Crosby plc invited applications for 30,000 7% £3 Preference Shares at a price
of £4.50 each. Payments for the shares were to be made as follows:
On application
On allotment
First and Final Call
Per share
£1.00
£2.50 (including share premium)
£1.00
All shares were applied for and allotted. When the first and final call was
made all monies were received except from one shareholder who held 500
shares. The shares were declared forfeit. Later they were reissued to T
McIntyre at a price of £1.50 each. Any balance on the Forfeited Share
Account was transferred to the Share Premium Account.
Record the above transactions in the ledger of Crosby plc.
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FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
EXERCISES: ISSUE OF SHARES
Exercise 14
Parker plc issued 250,000 £4 Ordinary Shares at a price of £5 per share.
Payments for the shares were made as follows:
On application
On allotment
First Call
Second Call
Per share
£1.50 (including share premium)
£1.50
£1.00
£1.00
300,000 shares were applied for and it was decided to
• give full allotment to applicants for 50,000 shares
• allot the remainder on the basis of four shares for every five applied for
• use the surplus received on application in part payment for amount due on
allotment.
One shareholder who had been allotted 1,000 shares failed to pay the amounts
due on first and second calls and his shares were declared forfeit by the
directors. Later the shares were re-issued to A Robertson at a price of £2.00
per share.
Record the above transactions in the ledger of Parker plc.
EXERCISES: ISSUE OF SHARES
Exercise 15
Applications were invited by King plc for 300,000 £5 5% Preference Shares
at £6.25 per share. The shares were payable as follows:
On application
On allotment
First and Final Call
Per share
£2.00
£2.25
£2.00
The share premium was payable on allotment. 400,000 shares were applied
for and it was decided to
•
•
•
•
refuse allotment on 20,000 shares
give applicants of 60,000 shares full allotment
allot the remainder on the basis of three for every four applied for
use the surplus received on application as part payment of the amount due
on allotment.
Shareholders holding 2,500 shares failed to pay the First and Final Call. Their
shares were declared forfeit. These shares were later r eissued to E Sharp at a
price of £2.50 per share. Any balance on the Forfeited Shares Account was
transferred to the Share Premium Account.
Record the above transactions in the ledger of King plc.
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SOLUTIONS TO EXERCISES
Section 3
Exercise 1
Delightful Drapes plc
Bank Account
Mar 1 –
18
Application and Allotment
Debit
£
32,000
Credit
£
Balance
£
32,000
Mar 27
Application and Allotment
16,000
48,000
Apr 1
Application and Allotment
72,000
120,000
Application and Allotment Account
Debit
£
Credit
£
Balance
£
32,000
32,000
Mar 1 –
18
Bank
Mar 27
Bank
16,000
48,000
Apr 1
Bank
72,000
120,000
Apr 1
6% Pref Share Capital Account
120,000
0
6% Preference Share Capital Account
Debit
£
Apr 1
Application and Allotment
Credit
£
120,000
Balance
£
120,000
SOLUTIONS TO EXERCISES
Exercise 2
Abercraig plc
Bank Account
Application and Allotment
Debit
£
500,000
Credit
£
Balance
£
500,000
Application and Allotment
250,000
750,000
First and Final Call Account
250,000
1,000,000
Application and Allotment Account
Debit
£
Bank
Credit
£
500,000
500,000
Bank
250,000
750,000
Ordinary Share Capital Account
750,000
Balance
0
Ordinary Share Capital Account
Debit
£
Application and Allotment
Credit
£
750,000
Balance
£
750,000
First and Final Call Account
250,000
1,000,000
Credit
£
250,000
Balance
£
250,000
First and Final Call Account
Debit
£
Bank
Ordinary Share Capital
82
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
250,000
0
SOLUTIONS TO EXERCISES
Exercise 3
Castletay plc
Bank Account
Jun 1
Application and Allotment
Debit
£
200,000
Credit
£
Balance
£
200,000
Jul 1
Application and Allotment
100,000
300,000
Sep 1
First Call
150,000
450,000
Dec 1
Second Call
150,000
600,000
Application and Allotment Account
Debit
£
Jun 1
Bank
Credit
£
200,000
Jul 1
Bank
100,000
Jul 1
Ordinary Share Capital Account
300,000
Balance
£
200,000
300,000
0
Ordinary Share Account
Debit
£
Jul 1
Application and Allotment
Credit
£
300,000
Balance
£
300,000
Sep 1
First Call
150,000
450,000
Dec 1
Second Call
150,000
600,000
Credit
£
150,000
Balance
£
150,000
First Call Account
Debit
£
Sep 1
Bank
Sep 1
Ordinary Share Capital
150,00
0
Second Call Account
Debit
£
Dec 1
Bank
Dec 1
Ordinary Share Capital
150,000
Credit
£
150,000
Balance
£
150,000
0
SOLUTIONS TO EXERCISES
Exercise 4
Aurora plc
Bank Account
Application and Allotment
Debit
£
200,000
Credit
£
Balance
£
200,000
Application and Allotment
300,000
500,000
First and Final Call Account
100,000
600,000
Application and Allotment Account
Debit
£
Bank
Credit
£
200,000
Balance
£
200,000
Bank
300,000
500,000
Ordinary Share Capital
300,000
200,000
Share Premium
200,000
0
Ordinary Share Capital Account
Debit
£
Balance
Credit
£
400,000
Balance
£
400,000
Application and Allotment
300,000
700,000
First and Final
100,000
800,000
Debit
£
Credit
£
200,000
Balance
£
200,000
Debit
£
Credit
£
100,000
Balance
Share Premium Account
Application and Allotment
First and Final Call Account
Bank
Ordinary Share Capital
84
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
100,000
100,000
0
SOLUTIONS TO EXERCISES
Exercise 5
Valois plc
Application and Allotment Account
Debit
£
Bank
Credit
£
60,000
Balance
£
60,000
Bank
255,000
315,000
Ordinary Share Capital Account
Share Premium Account
90,000
25,000
255,000
0
Share Premium Account
Debit
£
Application and Allotment
Credit
£
225,000
Balance
£
225,000
SOLUTIONS TO EXERCISES
Exercise 6
Pitcairn plc
Bank Account
Application and Allotment
Debit
£
200,000
Application and Allotment
200,000
400,000
First Call
200,000
600,000
50,000
650,000
Second Call
Credit
£
Balance
£
200,000
Application and Allotment Account
Debit
£
Bank
Credit
£
200,000
Balance
£
200,000
Bank
200,000
400,000
8% Preference Share Capital
400,000
0
8% Preference Share Capital Account
Debit
£
Credit
£
400,000
Balance
£
400,000
First Call
50,000
450,000
Second Call
50,000
500,000
Credit
£
150,000
Balance
£
150,000
Application and Allotment
Share Premium Account
Debit
£
First Call Account
86
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
SOLUTIONS TO EXERCISES
First Call Account
Debit
£
Bank
8% Preference Share Capital
Share Premium
Credit
£
200,000
50,000
Balance
£
150,000
150,000
Second Call Account
Debit
£
Bank
8% Preference Share Capital
Credit
50,000
50,000
Balance
£
50,000
0
SOLUTIONS TO EXERCISES
Exercise 7
Woodbourne plc
Bank Account
Application and Allotment
Debit
£
500,000
Application and Allotment
(refunds)
Credit
£
Balance
£
500,000
100,000
400,000
Application and Allotment
200,000
600,000
First and Final Call
100,000
700,000
Application and Allotment Account
Debit
£
Bank
Bank (refunds)
100,000
Bank
Ordinary Share Capital
Credit
£
500,000
Balance
£
500,000
400,000
200,000
600,000
600,000
0
Ordinary Share Account
Debit
£
Application and Allotment
Credit
£
600,000
Balance
£
600,000
First Call
200,000
800,000
Credit
£
200,000
Balance
£
200,000
First Call Account
Debit
£
Bank
Ordinary Share Capital
88
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
200,000
0
SOLUTIONS TO EXERCISES
Exercise 8
Nesbit plc
Bank Account
Application and Allotment
Debit
£
312,500
Application and Allotment
187,500
Credit
£
Balance
£
312,500
500,000
Application and Allotment Account
Debit
£
Bank
Credit
£
312,500
Balance
£
312,500
Bank
187,500
500,00
6% Preference Shares
500,000
0
6% Preference Share Account
Debit
£
Application and Allotment
Credit
£
500,000
Balance
£
500,000
SOLUTIONS TO EXERCISES
Exercise 9
Parekh plc
Bank Account
Application and Allotment
Debit
£
100,000
Application and Allotment
125,000
Credit
£
Balance
£
100,000
225,000
Application and Allotment Account
Debit
£
Bank
100,000
Balance
£
100,000
Bank
125,000
225,000
Ordinary Share Capital
Share Premium
Credit
150,000
75,000
75,000
0
Ordinary Share Capital Account
Debit
£
Credit
£
150,000
Balance
£
150,000
Debit
£
Credit
£
75,000
Balance
£
75,000
Application and Allotment
Share Premium Account
Application and Allotment
90
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
SOLUTIONS TO EXERCISES
Exercise 10
Savourie plc
Bank Account
Application and Allotment
Debit
£
87,500
Application and Allotment
(refunds)
Application and Allotment
First Call
Credit
£
Balance
87,500
12,500
75,000
25,000
100,000
152,500
252,500
Application and Allotment Account
Debit
Bank
Bank (refunds)
12,500
Bank
Ordinary Share Capital
Credit
£
87,500
Balance
£
87,500
75,000
25,000
100,000
100,00
0
Ordinary Share Capital Account
Debit
£
Application and Allotment
First Call
Credit
£
100,000
Balance
100,000
50,000
150,000
Credit
£
100,000
Balance
£
100,000
Share Premium Account
Debit
£
First Call
SOLUTIONS TO EXERCISES
First Call Account
Debit
£
Bank
Ordinary Share Capital
Share Premium
Calls in advance
Credit
£
152,500
Balance
£
152,500
50,000
102,500
100,000
2,500
2,500
0
Calls in Advance Account
Debit
£
First Call
92
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
Credit
£
2,500
Balance
£
2,500
SOLUTIONS TO EXERCISES
Exercise 11
Kirkdon plc
Bank Account
Application and Allotment
Debit
£
480,000
First and Final Call Account
116,000
Credit
£
Balance
£
480,000
Credit
£
480,000
Balance
£
480,000
Application and Allotment Account
Debit
£
Bank
Ordinary Share Capital
480,000
0
Ordinary Share Capital Account
Debit
£
Application and Allotment
Credit
£
480,000
Balance
£
480,000
First and Final Call
120,000
600,000
First and Final Call Account
Debit
£
Bank
Ordinary Share Capital
Credit
£
116,000
120,000
Balance
116,000
4,000 dr
Calls in Arrears
4,000
0
Calls in Arrears Accounts
First and Final Call
Debit
£
4,000
Credit
£
Balance
£
4,000
SOLUTIONS TO EXERCISES
Exercise 12
Trytor plc
Bank Account
Application and Allotment
Debit
£
200,000
Application and Allotment
100,000
300,000
First Call
297,000
597,000
Second Call
198,000
795,000
6,000
801,000
N Kirkland
Credit
£
Balance
£
200,000
Application and Allotment Account
Debit
£
Bank
Credit
£
200,000
Balance
£
200,000
Bank
100,000
300,000
Ordinary Share Capital
300,000
0
Ordinary Share Capital Account
Debit
£
Application and Allotment
Credit
£
300,000
Balance
£
300,000
First Call
300,000
600,000
Second Call
200,000
800,000
Forfeited Shares
N Kirkland
94
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
8,000
792,000
8,000
800,000
SOLUTIONS TO EXERCISES
First Call Account
Debit
£
Bank
Ordinary Share Capital
Credit
£
297,000
300,000
Forfeited Shares
Balance
£
297,000
3,000 Dr
3,000
0
Credit
£
198,000
Balance
£
198,000
Second Call Account
Debit
£
Bank
Ordinary Share Capital
200,000
Forfeited Shares
2,000 Dr
2,000
0
Credit
£
Balance
£
3,000
Forfeited Shares Account
First Call
Debit
£
3,000
Second Call
2,000
Ordinary Share Capital
5,000
8,000
3,000 Cr
N Kirkland
2,000
1,000
Profit on Reissue of Forfeited
Shares
1,000
0
N Kirkland
Debit
£
Bank
Forfeited Shares
Ordinary Share Capital
Credit
£
6,000
Balance
£
6,000
2,000
8,000
8,000
0
Profit on Reissue of Forfeited Shares Account
Debit
£
Forfeited Shares
Credit
£
1,000
Balance
£
1,000
SOLUTIONS TO EXERCISES
Exercise 13
Crosby plc
Bank Account
Application and Allotment
Debit
£
30,000
Application and Allotment
75,000
105,000
First and Final Call
29,500
134,500
750
132,500
T McIntyre
Credit
£
Balance
£
30,000
Application and Allotment Account
Debit
£
Balance
Bank
Credit
£
30,000
Bank
75,000
105,000
30,000
7% Preference Share Capital
60,000
45,000
Share Premium Account
45,000
0
7% Preference Share Capital Account
Debit
£
Application and Allotment
Credit
£
60,000
Balance
£
60,000
First and Final Call
30,000
90,000
Forfeited Shares
1,500
T McIntyre
88,500
1,500
90,000
Credit
£
45,000
Balance
£
45,000
250
250
Share Premium Account
Debit
£
Allocation and Allotment
Forfeited Shares
96
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
SOLUTIONS TO EXERCISES
First Call Account
Debit
£
Bank
7% Preference Share Capital
Credit
£
29,500
30,000
Forfeited Shares
Balance
£
29,500
500 Dr
500
0
Credit
£
Balance
£
500
1,500
1,000
Forfeited Shares Account
First and Final Call
Debit
£
500
7% Preference Share Capital
T McIntyre
750
250
Share Premium Account
250
0
T McIntyre
Debit
£
Bank
Forfeited Shares
7% Forfeited Share Capital
1,500
Credit
£
750
Balance
£
750
750
1,500
0
SOLUTIONS TO EXERCISES
Exercise 14
Parker plc
Bank Account
Application and Allotment
Debit
£
450,000
Credit
£
Balance
£
450,000
Application and Allotment
300,000
750,000
First Call
249,000
999,000
Second Call
249,000
1,248,000
A Robertson
2,000
1,250,000
Application and Allotment Account
Debit
£
Bank
Share Premium
250,000
Bank
Ordinary Share Capital
Credit
£
450,000
Balance
£
450,000
200,000
300,000
500,000
500,000
0
Ordinary Share Capital Account
Debit
£
Application and Allotment
Credit
£
500,000
Balance
£
500,000
First Call
250,000
750,000
Second Call
250,000
1,000,000
Forfeited Shares
A Robertson
98
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
4,000
996,000
4,000
1,000,000
SOLUTIONS TO EXERCISES
Share Premium Account
Debit
£
Credit
£
250,000
Balance
£
250,000
Debit
£
Credit
£
249,000
Balance
£
249,000
Application and Allotment
First Call Account
Bank
Ordinary Share Capital
250,000
Forfeited Shares
1,000 Dr
1,000
0
Credit
£
Balance
£
1,000
Forfeited Shares Account
First Call
Debit
£
1,000
Second Call
1,000
Ordinary Share Capital
A Robertson
2,000
4,000
2,000
2,000 Cr
0
Second Call Account
Debit
£
Bank
Forfeited Shares
Ordinary Share Capital
Credit
£
249,000
Balance
£
249,000
1,000
250,000
250,000
0
A Robertson Account
Debit
Credit
Balance
£
£
£
2,00
2,000
2,000
4,000
Bank
Forfeited Shares
Ordinary Share Capital
4,000
0
SOLUTIONS TO EXERCISES
Exercise 15
King plc
Bank Account
Debit
£
Credit
£
Balance
£
800,000
40,000
760,000
Application and Allotment
800,000
Application and Allotment
(refunds)
Application and Allotment
515,000
1,275,000
First and Final Call
595,000
1,870,000
6,250
1,863,750
E Sharp
Application and Allotment Account
Debit
£
Bank
Bank (refunds)
Credit
£
800,000
40,000
Bank
Balance
£
800,000
760,000
515,000
1,275,000
5% Preference Share Capital
900,000
375,000
Share Premium Account
375,000
0
5% Preference Share Account
Debit
£
Application and Allotment
Credit
£
900,000
Balance
£
900,000
First and Final Call
600,000
1,500,000
Forfeited Shares
E Sharp
100
FINANCIAL ACCOUNTING (AH)
© Learning and Teaching Scotland 2005
12,500
1,487,500
12,500
1,500,000
SOLUTIONS TO EXERCISES
Share Premium Account
Debit
£
Application and Allotment
Forfeited Shares
Credit
£
375,000
Balance
£
375,000
1,250
376,250
Credit
£
595,000
Balance
£
595,000
First and Final Call Account
Debit
£
Bank
7% Preference Share Capital
600,000
Forfeited Shares
5,000 Dr
5,000
0
Credit
£
Balance
Forfeited Shares Account
First and Final Call
Debit
£
5,000
5% Preference Share Capital
5,000
12,500
7,000 Cr
E Sharp
6,250
1,250
Share Premium Account
1,250
0
E Sharp
Debit
£
Bank
Forfeited Shares
5% Preference Share Capital
12,500
Credit
£
6,250
Balance
£
6,250
6,250
12,500
0