Accounting Topics 8-11 2014

Study Guide 13-B.
Accounting
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NAME: STUDENT ID:
. .
ACCOUNTING Study Guide 13-B4

UNITS 8-11
(2014 VERSION 1)
You are learning from a Taylors Study Guide.
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Accounting
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CONTENTS:
CONTENTS:
UNITS 8-11 Chapter 1 2 3 4 Unit 8 9 10 11 Title Conceptual Basis Inventory Partnerships Companies Page 3 13 17 29
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Chapter 1 Unit 8: Conceptual Basis

Contents
8.1 8.2 8.3 8.4 8.5 The New Zealand Framework Accounting Assumptions Qualitative Characteristics of Accounting Information Statutory Compliance Financial Reporting Standards
8.1
The New Zealand Framework
The NZ Framework sets out the concepts that underlie the preparation and presentation of financial statements by entities that are required to prepare general purpose financial statements that comply with generally accepted accounting practice in New Zealand. (NZ GAAP) The purpose of the New Zealand Framework is to give accountants principles to follow when preparing financial reports.
THE NEW ZEALAND FRAMEWORK
ELEMENTS: Assets Liabilities Equity Income Expenses
FUNDAMENTAL QUALITATIVE CHARACTERISTICS Relevance Faithful representation
Assumptions Explicit: Going Concern
Recognition
Measurement
Historical Cost
Fair Value
Present Value
Implicit Periodicity
Enhancing QCs Comparability Verifiability Timeliness Understandability
Key Concepts: Accrual Basis: the effects of transactions and other events are recognised when they occur and are reported in the financial statements of the periods to which they relate. Matching Costs with Income Concept: The profit is determined by matching the expenses incurred against the income earned in a reporting period. Monetary Measurement Concept: All transactions, assets, liabilities, income, expenses, and equity are recorded in a common dollar unit such as the $NZ.
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Elements:
THE NEW ZEALAND FRAMEWORK

Assets ELEMENTS are resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. eg premises. are present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. eg Loan. is the residual interest in the assets of the entity after deduction of its liabilities. is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. eg Sales, fees. are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity other than those relating to distributions to equity participants. eg. Wages.
Liabilities Equity
Income
Expenses
Assets
Liabilities
Equity
Income
Expenses
ESSENTIAL CHARACTERISTICS OF ACCOUNTING ELEMENTS Past transaction Present control (can use freely and deny others from its use) Future economic benefit or service potential Past transaction Present obligation to pay Future outflow of resources embodying economic benefit Equity equals total assets less total liabilities Residual interest, ranking after liabilities in claims to the assets of the business. Increase in equity Increase in assets or reduction in liabilities Does not include contributions from the owner Decrease in equity Reductions in assets or increases in liabilities Does not result from drawings
Before an asset can be recognised: it must be probable that any future economic benefit associated with the asset will flow to the entity. the asset must have a cost or other value which can be measured with reliability. Students should be aware that recognition criteria is essential for each element.
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8.2 ACCOUNTING ASSUMPTIONS (a) Explicit: Going Concern: Financial reports are normally prepared on the assumption that the entity will continue in its present operations into the foreseeable future. It is assumed that the entity does not plan to closed down. Assets are therefore valued at their worth to the business as a going concern, not at their liquidation value. They are recorded at their historical cost less accumulated depreciation, not at their market price. If the entity is intending to close or change shape, the going concern assumption is no longer valid. Non-current assets would then be valued at current market value or the agreed value of the purchaser. (b) Implicit: Periodicity: The life of the entity can be divided into equal time periods. 8.3 Key Concept: (a) Accrual Basis: The effects of transactions and other events are recognised when they occur and are reported in the financial statements of the periods to which they relate. (b) Monetary Measurement Concept: All transactions, assets, liabilities, income, expenses, and equity are recorded in a common dollar unit such as the $NZ. 8.4 QUALITATIVE CHARACTERISTICS: Information which is capable of making a difference in the decisions Relevance made by users. To be relevant information must have predictive value and/or confirmatory value. Materiality Information disclosed is governed by relevance. Materiality becomes a guideline helping the accountant to determine if the nature or amount of an item requires separate disclosure. An item should be shown separately if its amount or nature is significant enough to change users decisions. Materiality is an entity-specific aspect of relevance based on nature or magnitude (or both) of the items to which the information relates in the context of an individual entitys financial report. Information which a reader sees as matching the underlying Faithful Representation transaction or event. For example, a source document shows that information is reliable because the information is faithfully represented. The underlying characteristics of completeness, neutrality and freedom from error help financial information to faithfully represent the event that has occurred. Completeness Information in the financial statements must be complete within the bounds of materiality and cost and this information should be able to faithfully represent the business event. Neutrality Information which has not been prepared in such a way as to influence a decision is likely to faithfully represent the business event. Freedom from Accurate information is likely to faithfully represent the event. error
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8.5 Enhancing Qualitative Characteristics: Comparability Information about a reporting entity is more useful if it can be compared with a similar information about other entities and with similar information about the same entity for another period or another date. Comparability enables users to identify and understand similarities in, and differences among items. Consistency is the means of achieving comparability. Verifiability Verifiability means that different knowledgeable and independent observers could reach agreement. Timeliness Timeliness means that information is available to decisionmakers in time to be capable of influencing their decisions. Classifying and presenting information clearly and concisely makes it understandable to a business user.
Understandability
NZCETA Level 2 2006 Practice Exam To help her decide whether Becky should expand her business, Ashleigh searches through the pile of paperwork on her desk and obtains a copy of the Balance Sheet for Beckys existing business. Becky has tried to save some money by preparing the statements herself. QUESTION 1: (a) Ashleigh is disturbed to see that Becky has included her personal motor vehicle in the financial statements for her firm. State the accounting concept that has NOT been followed here.
(b) Define the accounting concept that you identified in question two (a) above.
(c) Ashleigh is also concerned that Becky has recorded her library of law books at their cost price of $5000 Australian Dollars. She believes that this breaches the Monetary Measurement Concept. Define the Monetary Measurement Concept for Becky.
(d) Define the going concern concept.
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QUESTION Two Beckys Financial Reports makes reference to depreciation. Becky is confused and decides she will ask Ashleigh about it. (a) Define depreciation
(b) Explain WHY interest expense is classified as a Finance Cost in the Income Statement.
According to the Summary of Significant Accounting Policies, business equipment is depreciated using the Reducing Balance Method. (c) Explain WHY the Reducing Balance method has been used to depreciate the business equipment.
(d) Write a paragraph to explain to Becky why a loan from a bank to finance business expansion is a liability. (Mid-Course January/April 2007)
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QUESTION THREE Becky sits in the bank managers office hoping to borrow enough money to finance her business expansion. The bank manager seems very interested in the financial statements. (a) Define Income
(b) Using the essential characteristics of an expense, explain WHY insurance is listed in the Income Statement as an expense.
(c) Comprehensively explain how the inclusion of Accumulated Depreciation on Building in the Balance Sheet follows the influence of Materiality.
(d) Write a paragraph in which you explain why bad debts is an expense and provide three strategies a business can use to avoid bad debts. (Mid-Course Exam January/April 2010)
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(e) Explain, using the recognition criteria for a liability, WHY Bank Overdraft is reported in the Balance Sheet as a Liability. The Recognition Criteria for Liability A liability shall be recognised when: (a) It is probable that the outflow of future economic benefits embodied in the asset will eventuate; and (b) the liability possesses a cost or other value that can be measured with reliability.
8.6 Statutory Compliance The Accounting Standards Review Board (ASRB) is responsible for approving financial reporting standards under the Financial Reporting Act 1993. New Zealand entities required to comply with NZ GAAP under the Financial Reporting Act must apply International Financial Reporting Standards. Statutes that accountants must comply with in the preparation of financial statements include: Companies Act 1993 Financial Reporting Act 1993 The Income Tax Act 2004
8.7 Financial Reporting Standards: The New Zealand Institute of Chartered Accountants (NZICA) is New Zealands professional accounting body. A major role of NZICA, is the development of accounting standards. Compliance with the New Zealand Equivalents to International Financial Reporting Standards NZIAS makes the financial statements of various reporting entities more comparable and understandable. Final Accounting Exam January/April Intake 2010 Question: The sales figure in the Income Statement includes only credit sales. Fully explain how credit sales result in an increase in economic benefits.
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SUMMARY ACCOUNTING CONCEPTS AND TERMS TO LEARN Asset Relevance Going Concern Liability Understandability Periodicity Income Neutrality Accrual Basis Expense Comparability Depreciation Equity Goodwill Auditor Historical Cost Reducing Balance Units of Use Verifiability Summary of Significant Accounting Policies Timeliness Monetary Unit
Materiality Faithful Representation Cost vs Benefit Accounting entity Accounting Statutory Straight Line Elements
Choose the appropriate terms from this list above to match the correct meaning given below and write your answer on the table on pages 10. 1 An item should be shown separately if its amount or nature is significant enough to change users decisions. 2 Depreciation is calculated as a fixed percentage of cost each year. 3 Financial reports are prepared on the assumption that as far as the owners are aware, the entity will continue in operation for the foreseeable future. 4 An independent chartered accountant who checks the accounts for accuracy in order to determine whether the reports show a true and fair view of profits and financial position. 5 The excess of the price paid for a business above the fair value of total net assets. 6 The financial affairs of the business are kept separate and distinct from the financial affairs of the owner. 7 Users must be able to compare the financial statements of an entity through time and compare the financial statements of different entities. 8 Method of depreciation used when the economic life of the asset is dependent on the amount of use made of it. 9 Assets are recorded at their price at the time of acquisition, ie their original purchase price. 10 The life of the entity can be divided into equal time periods. 11 The cost of providing additional information should not exceed the benefit to the user. 12 Required by law, eg Companies Act 1993 13 The systematic allocation of the cost of an asset less its residual value over its useful life. 14 The effects of transactions and other events are recognised when they occur and are reported in the financial statements of the periods to which they relate. 15 A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. 16 Are used to group the economic activities of a business entity. 17 Information which is capable of making a difference in the decisions made by users. To be relevant information must have predictive value and/or confirmatory value.
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18 19 20
21 22 23
24 25
26 27
28
29 30
The statement of the principles followed by a business when preparing financial statements. Depreciation is calculated as a percentage of the carrying amount each year. Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. Eg. wages. All transactions, assets, liabilities, incomes and expenses are recorded in a common dollar unit such as the $NZ. The residual interest in the entitys assets after the deduction of its liabilities. The process of identifying, measuring, recording and communicating financial information in order to permit informed decisions to be made by the users of the information. Information of which a user can easily comprehend its meaning. A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Information which a reader sees as matching the underlying transaction or event. Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Eg Sales, Fees Financial information meets this characteristic of accounting if different knowledgeable and independent observers could reach agreement on the value of an item recorded in the financial reports. Information is available to decision-makers in time to be capable of influencing their decisions. Information which has not been prepared in such a way as to influence a decision is likely to faithfully represent the business event.
ANSWERS: 1 2 3 4 5 6 7 8 9 10
11 12 13 14 15 16 17 18 19 20
21 22 23 24 25 26 27 28 29 30
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QUALITATIVE CHARACTERISTICS
Relevance
Materiality
Enhancing Characteristics
Faithful Representation
Underlying Characteristics Completeness Neutrality Freedom from error
Comparability
Verifiability Timeliness
Understandability Constraints on financial reporting are materiality and cost versus benefit.
Question: Final Accounting Exam January/April Intake 2010 The Statement of Significant Accounting policies states there have been no changes in accounting policies. Explain how stating whether or not there have been any changes meets the characteristic of comparability.
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THE CONCEPTUAL BASIS OF ACCOUNTING Explicit Assumption Going Concern Implicit Assumption Periodicity Measurement 1. Historical Cost 2. Fair Value 3. Present Value
THIRD LEVEL
Qualitative Characteristics 1. Fundamental 2. Enhancing
Elements 1. Assets 2. Liabilities 3. Equity 4. Income 5. Expense
SECOND LEVEL
Objective
Provide information about the reporting entity that is decision useful to present and potential capital providers. FIRST LEVEL
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Unit 9: Inventory
9.1 Periodic Inventory System: The periodic inventory system records purchases as an expense and relies on calculating the inventory at the end of the period to calculate cost of goods sold. Exercise: 9.11 On 1 January 20X0 I. Revise started business with the following assets and liabilities Cash at Bank $2,000 Accounts Receivable $3,000 Inventories $4,000 Office Equipment $10,000 Accumulated Depreciation on Office Equipment $1,000 Accounts Payable $1,500 Transactions were: Jan 5 Bought goods on credit $8,000 Invoice 309 Jan 10 A customer who owed $100 paid $90 in full settlement. Receipt No 1 Jan 15 Paid a creditor $55 and received a $5 discount. Cheque No 1 Jan 20 Returned goods to a supplier $100. Credit Note 81. Jan 25 Sold goods on credit for $20,000 Invoice 1-29 Jan 26 Paid wages $1,500 Paid Rent $2,000. Jan 30 A customer returned damaged goods $75 Credit Note 1 REQUIRED: Prepare Journal entries to record the above transactions Post to the Ledger Take out a Trial Balance on 31 January 20X0. A stock take shows that the Closing Inventory is $7,000. Prepare an Income Statement for the month ended 31 January 20X0. Prepare a Balance Sheet as at 31 January 20X0. Exercise: 9.12
2010 May 1 2 3 4 5 6 Start business with inventory $500 Buy goods using an overdraft $400 Sell goods for Cash Cost Price $80, Selling Price $150 Buy goods on credit $2,000 Sell goods on credit Cost Price $200, Selling Price $400 Sell goods for cash Cost Price $1,000, Selling Price $2,000
Required: Periodic Inventory System. a. Record the transactions in Ex 9.12 in the General Ledger and take out a trial balance. b. The inventory balance on 6 May is $1,620. Prepare an Income Statement for the week ended 6 May 2010. c. Prepare a Balance Sheet as at 6 May 2010. 9.2 Perpetual Inventory System: The perpetual inventory inventory system maintains a continuous record of both inventory and cost of goods sold. It provides for better control of inventory because when it is combined with a physical stocktake, shortages caused by lost, stolen or spoiled goods can be detected. Complete Exercise 9.12 using the Perpetual Inventory System.
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Exercise: 9.2.1 Financial Statements using Perpetual Inventory: Ivor Perpetual Adjusted Trial Balance As at 30 June 20X0 $NZ
Sales Revenue Advertising 2 000 Salesperson's salary 24 000 Office salary 17 250 Cost of Goods Sold 119 300 Office rent 4 800 Inventory 28 500 Accounts Receivable 13 500 Allowance for doubtful debts Delivery vehicles 48 000 Accumulated depreciation of delivery vehicles Capital Prepayments 400 Accrued Expenses Depreciation on Delivery Vehicles 6 400 Doubtful Debts 300 Bank 5,000 Drawings 50,000
$NZ
227 210
1 000 22 400 68 590 250
a. b.
Required. Prepare an Income Statement for the year ended 30 June 20XO. Prepare a Balance Sheet as at 30 June 20XO.
9.2.1 Comparison of periodic and perpetual inventory systems: Complete the table below: Periodic Provides a continuous record of inventories? Stocktake necessary? Detects shortages or theft? Easy to calculate regular profitability of the business? The name of the expense account? Provides control over inventories?
Perpetual
NZ IAS 2 Inventories, states that Inventories shall be measured at the lower of cost and net realisable value. If inventories are overstated, profits will be:
If inventories are understated, profits will be: .
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8.8
Examination questions:
a. Final Exam 2009 January/April Conceptual Basis Question:

In the accounts of Educational Toys Ltd which has a balance day of 30 June 20X0 the inventory is valued at its net realisable value of $148,000 instead of its historical cost of $150,000. Explain the conflict between historical cost and relevance in relation to the reporting of inventory at $148,000.
b. Final Exam 2010 January/April Conceptual Basis Question:

Some plants that are in an unhealthy condition on 30 September 2010 are included in the inventory asset at their net realisable value of $3,000 rather than at their cost of $5,000. Explain the conflict between historical cost and faithful representation in relation to the reporting of these plants at $3,000.
(2 marks)
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Mid Course Accounting Exam 2010 July/September Intake: This question deals with the Financial Reporting requirements of Lala, a sole proprietor who operates a book shop trading as Lala Adams Books. You are provided with the following Trial Balance on 30 June 2010. LALA ADAMS BOOKS TRIAL BALANCE AS AT 30 JUNE 2010 Accounts Receivable Advertising Expense Cost of Goods Sold Drawings Electricity Expense Insurance Expense Interest on Overdraft Expense Inventory Delivery Van (cost) Machinery (cost) Office Expenses Postage and Stationery Expense Salaries (office) Expense Telephone Expense Van Expenses Commission received Wages (Sales) Expense Accounts Payable Bank Capital Sales Revenue Allowance for Doubtful Debts Accumulated Depreciation on Machinery Accumulated Depreciation on Van 28,500 5,750 4,500 33,600 220,000 400 1,300 3,400 22,000 3,000 111,000 30,000 1,800 1,000 750 25,000 17,000 15,800 3,600 1,200 15,000 800 2,200 9,700
Additional information:
1. Insurance prepaid on balance day $200. 2. Interest due on overdraft $250. 3. Commission received in advance $450. 4. Allowance for doubtful debts to be 2% of accounts receivable 5. Depreciate the Van and Machinery at 20% p.a. on cost. 6. $200 of stationery has not been used on balance day.
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Required: (a) Adjust the Trial Balance by crossing out the original number and writing the adjusted figure to the left or right as appropriate, to record the adjustments required at reporting date. (b) Complete a classified Income Statement for Lala Adams Books for the year ended 30 June 2010 below after adjusting the Trial Balance.
(c) Complete the Notes to the Balance Sheet for Lala Adams Books as at 30 June 2010.
(d) Complete a Balance Sheet as at 30 June 2010.
Chapter 3 Unit 10: Partnerships

FORMS OF BUSINESS ORGANISATION: 1. SOLE TRADER: Definition: A sole trader is an unincorporated entity with one owner. Advantages: low start up costs owner in direct control all profits to owner
Disadvantages: unlimited liability lack of continuity of business difficulty in raising capital management responsibility and time commitment
Unlimited Liability: If the accounting entity for a partnership or sole trader becomes insolvent and the business assets are insufficient to settle liabilities, the owners will be personally liable for any amounts remaining unpaid.
Can you explain what unlimited liability means?
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2. PARTNERSHIP: Definition: A partnership is a type of business ownership defined in the Partnership Act (1908) as the relationship which exists between persons carrying on a business in common with a view to profit. Three sources of authority which govern partnerships: a. The Partnership Act (1908) is often the guiding principle. It outlines the rights, rules and the arrangement of the business. b. A Partnership Agreement sets out the rights, duties and responsibilities of each partner and how the profits will be shared among them. Partners have the option of drafting their own Partnership Agreement. c. Case Law. A court will examine the facts of a case and make a judgement. If similar situations have arisen in the past, the decision will be based on previous judgements. Some major clauses from the Act and Aagreement PARTNERSHIP ACT 1908 - Equal share of profits - No salaries for partners - Interest is paid only on advances (loans). - New partners can join on approval from all existing partners. - Business ends on death of each partner. PARTNERSHIP AGREEMENT - All the rules and arrangement for the business is discussed and approved by the partners themselves.
ADVANTAGES AND DISADVANTAGES OF PARTNERSHIPS Advantages: - More capital and skills Compared with a sole trader More flexibility
Not expensive to form Compared with a company
no special tax liability
Disadvantages: - profit shared - unlimited liability - limited life Special Accounts for partnerships: Contributed Capital, Current Capital, Drawings, Salary, Interest on Contributed Capital and Current Capital.
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Accounting Formation of a Partnership
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There are 3 main ways to start a partnership: 1. Contribution of cash by partners: General Journal 20X0 Mar 31 Bank Contributed Capital A Contributed Capital B For capital contribution by partners as per Partnership Agreement.
GJ1 100,000 60,000 40,000
Model 1 Dr Hurt and Dr Payne decide to commence business as Painfree on 1 April 20X0. Their partnership agreement states that they will contribute $100,000 each in cash as their initial capitals. They purchase the assets and liabilities (except cash at bank of Dr Surgeon for $180,000 cash. Dr Surgeons Balance Sheet as at the date of purchase reads as follows: $NZ Bank 15,000 Accounts Receivable 70,000 Inventories of Drugs 75,000 Fixtures and Fittings 55,000 Accounts Payable 40,000 Capital 175,000 Required: Prepare General Journal entries to record the formation of the new partnership and settlement of the purchase of the business from Dr Surgeon. Prepare a Balance Sheet as at 1 April 20X0. Exercise 10.1 On 1 May 20X0 Chris Cross and Jo King decided to form a partnership and trade as Fun and Games. They agreed to contribute $150,000 each as capital and signed an agreement with Candy Kane to purchase her business for $275,000. Candy Kanes Balance Sheet read as follows: Bank 10,000 Accounts Receivable 100,000 Inventories 150,000 Equipment 120,000 Accounts Payable 120,000 Capital 260,000 Terms of the Agreement: All assets and liabilities were taken over except the Bank Account. All assets were taken over at their carrying amount. Required: Prepare General Journal entries to record the formation of the new partnership and settlement of the purchase of the business from Candy Kane. Prepare a Balance Sheet as at 1 April 20X0.
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2. Amalgamation of two businesses: The new owners must agree on the revaluation of assets. Current Assets All current assets are revalued at agreed value. Accounts receivable needs to be adjusted for Allowance for Doubtful Debts if the agreed and existing values are different. The original Accounts Receivable amount must be debited in the journal. Bank and Bank overdraft are combined. Non Current Assets All property, plant and equipment is recorded at carrying amount or agreed values. That means the carrying amount or agreed value becomes the new historical cost. Goodwill may have to be calculated and recorded. Goodwill is the excess of the price paid for a business above the fair value of total net assets. Often a potential owner will have to contribute more than the value of the net assets. This is due to a number of benefits that the new partner will get by becoming one of the owners. These benefits could be in the form of - good customer base - location - excellent business results - good employees Liabilities Recorded at agreed value Equity The partners should establish their equity sharing ratio. Additional cash may be required to be contributed by one partner in order to adjust their net assets to equal their required share of equity. For example: The equity sharing ratio is 75% for Partner A and 25% for Partner B. If the Capital of Partner A equals $90,000 Partner Bs Capital must equal $90,000/0.75 x 0.25 = $30,000
e.g. Balance Sheet Extract: Equity Contributed Capital Notes to the Balance Sheet: 4. Equity Partner A Partner B Total
Note 4
$120,000
Contributed Capital 90,000 30,000 $120,000
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Model 2 Art Major and Commerce Major decide to amalgamate their businesses on 1 April 20X0 and form a partnership trading as Academics. At the date of amalgamation their Balance Sheets read as follows. In brackets are the valuations at which it was agreed the assets be taken over: Art Majors Balance Sheet as at 1 April 20X0 Bank Accounts Receivable Inventories Equipment Goodwill Accounts Payable Capital $NZ 40,000 200,000 220,000 250,000 $NZ (40,000) (195,000) (220,000) (300,000) (50,000)
150,000 560,000
Commerce Majors Balance Sheet as at 1 April 20X0 $NZ Accounts Receivable 215,000 Inventories 155,000 Equipment 280,000 Goodwill Bank Overdraft Accounts Payable Capital 8,000 120,000 450,000
$NZ (212,500) (220,000) (300,000) (40,000)
In addition Commerce Major is to contribute sufficient cash to make his capital equal to Art Majors capital. Required: General Journal entries to record the formation of the Partnership. Balance Sheet at the commencement of the Partnership. Explain why Commerce Major and Art Major have formed a Partnership rather than remain as two sole traders.
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Exercise 10.2 Gail Storm and Dusty Rhodes decide to amalgamate their businesses on 1 January 20X0 and form a partnership trading as Weather Patterns. At the date of amalgamation their Balance Sheets read as follows. In brackets are the valuations at which it was agreed the assets be taken over: Gail Storms Balance Sheet as at 1 January 20X0 Accounts Receivable Inventories Equipment Goodwill Bank Overdraft Accounts Payable Capital $NZ 13,500 12,500 12,750 $NZ (12,000) (15,000) (13,000) (6,000)
12,250 11,000 15,500
Dusty Rhodes Balance Sheet as at 1 January 20X0 $NZ Bank 1,150 Accounts Receivable 12,600 Inventories 13,750 Equipment 13,000 Goodwill Accounts Payable Capital 13,000 27,500
$NZ (1,150) 11,500 (15,500) (15,000) (7,200)
Required: General Journal entries to record the formation of the Partnership. Balance Sheet at the commencement of the Partnership. Explain why Goodwill is sometimes recorded when a partnership is formed.
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3. A business operating as a sole trader decides to form a partnership: Model 3 Crisp Bacon decides to form a partnership with his manager and trade as Meat Treats. The Balance Sheet of Crisp Bacon at the date of forming the partnership reads as follows: Crisp Bacons Balance Sheet as at 1 January 20X0 Assets Accounts Receivable Less Allowance for Doubtful Debts Inventories Equipment Less Accumulated Depreciation Goodwill
$NZ 10,000 250 10,000 2,000
$NZ 9,750 3,000 8,000 1,500 $22,250
Liabilities Bank Overdraft Accounts Payable Capital
500 5,000 16,750 $22,250
The Partnership is to take over the assets and liabilities at their carrying amounts with the exception of Equipment which is to be revalued at $18,500. Crisp Bacons manager, A. Hogg, is to introduce sufficient cash to make his capital 50% of Bacons. Exercise 10.3 Hazel Nutt decides to form a partnership on 1 January 20X0 with her manager Kandi Apple and trade as Delicacies. Hazel Nutts assets and liabilities at the date Kandi Apple enters the business as a partner are as follows: Bank $5,000, Accounts Receivable $45,000, Inventories $31,200, Equipment $44,000, Goodwill $8,000, Allowance for Doubtful Debts $800, Accumulated Depreciation $10,000, Accounts Payable $19,000. The Partnership is take over all the assets and liabilities but Accounts Receivable are revalued at $43,000 and Equipment at $35,200. Kandi Apple is to contribute sufficient cash to make her capital 20% of the total capital fo the partnership. Required: General Journal entries to record the formation of the Partnership. Balance Sheet at the commencement of the Partnership.
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10.4 Further Exercises on Partnership Formation: Exercise 10.4.1 B. Allen and Sue Wong both contribute $50,000 to form a partnership on 21 March 20X0 called Express Pizza. Required: a. Prepare General Journal entries to record the formation of the partnership. b. Prepare the Balance Sheet as at 21 March 20X0. Exercise 10.4.2 Zandor and Chip agreed to open a business together. Zandor is to give $20,000 for two thirds of the partnership and Chip to pay $10,000 for the other third. Prepare the general journal entry for these transactions. Exercise 10.4.3 Hine and Sharie wish to work together fixing cables. Hine has a van and equipment at agreed values of $14,000 and $4,000 respectively. Sharie is to pay cash to make her capital up to a third of the total capital. The date to open the Optix partnership is 15 June 20X0. Required: a. Prepare General Journal entries to record the formation of the partnership. b. Prepare the Balance Sheet as at 15 June 20X0. Exercise 10.4.4 Peter has asked Yang to join him in an accounting business. Peter is to provide equipment he purchased at $6,000, furniture valued at $12,000, accounts receivable at an agreed value of $2,000 and his premises valued at $52,000. Yang is to contribute cash to make his contribution up to 40% of the business. Commencement date of the new business is 24 August 20X0. Required: a. Prepare General Journal entries to record the formation of the partnership. b. Prepare the Balance Sheet as at 24 August 20X0.
Exercise 10.4.5 Complete the table: The first one is done as an example
New Partners Investment New Partners Share Total Equity of the new business Existing owners new capital Agreed value of net assets Goodwill
$10,000 $60,000 $160,000 $20,000 $40,000
Third Half Fifth Two Thirds 20%
$30,000
$20,000
$17,000 $42,000 $639,500 $7,300 $132,000
$3,000
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Exercise 10.4.6 January Mid Course 2011

On 1 April 20X1 Arataki and Henare agree to form a partnership to expand Aratakis profitable sole proprietor Maori hangi business to include the sale of Rewena bread. They agree to call their new business Poti Tara. Aratakis hangi business has the following assets, liabilities, and equity on 31 March 20X1. Aratakis Maori Hangi Trial Balance as at 31 March 20X1 $NZ 8,400 850 1,300 35,000 6,300 12,000 2,400 250,000 1,700 3,650 180,000 113,455
$NZ
Bank Accounts Receivable Allowance for Doubtful Debts Cooking Supplies Cooking Equipment (cost) Accumulated Depreciation on Cooking Equipment Shop Fittings (cost) Accumulated Depreciation on Shop Fittings Buildings (cost) Accounts Payable GST Payable Mortgage (6.5% due 20X8) Capital
45
The following are the terms of agreement between Arataki and Henare. Aratakis bank account in her sole proprietors business is not to be taken through to the partnership. Arataki will personally pay the GST owing. All other assets and liabilities are to be taken over at carrying amount except for the following: Accounts Receivable is to be revalued at $800. Cooking Equipment has an agreed value of $30,000. Buildings have an agreed value of $300,000. Aratakis contribution to the partnership has an agreed value of $180,000. Henare will invest a Motor Vehicle valued at $25,000 and sufficient cash to make his capital contribution 25% of the total capital of the partnership.
REQUIRED: 1. General Journal entries for the formation of the partnership between Arataki and Henare. 2. Prepare a Balance Sheet for Poti Tara as at 30 June 20X0. 3. A major disadvantage of forming a partnership is unlimited liability. Explain the meaning of unlimited liability to Arataki and Henare.
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Exercise 10.4.7 a. Hopeful is the owner of a small factory which manufactures toothbrushes. He has asked his manager Tryer to form a partnership with him. The partnership will take over Hopefuls Toothbrush factory for an agreed value of $200,000 and will trade as Toothbrush Partners. The following information relates to the agreement between Hopeful and Tryer. The assets will be revalued as follows: Premises $80,000, Plant and machinery $35,600, Motor Vehicles $24,020, Inventories $70,000. Accounts Receivable are to be decreased by 5%. Hopeful will be personally responsible for paying the overdraft of his business. Tryer is to bring in sufficient cash to make his capital 20% of the total capital of the partnership. Hopefuls Assets and liabilities as at 31 July 20X0 are shown below: $NZ Liabilities Accounts Payable Bank Overdraft Loan from N. Smith Assets Accounts Receivable Inventories Motor Vehicles (cost) Less Accumulated Depreciation Fixtures Less Accumulated Depreciation Plant and Machinery Less Accumulated Depreciation Premises Less Accumulated Depreciation $NZ 30,200 16,000 32,400 $NZ
$78,600
29,200 77,440 38,560 10,000 21,800 4,400 48,400 8,800 90,400 24,000 28,560 17,400 39,600 66,400 $258,600
REQUIRED: 1. General Journal entries for the formation of the partnership between Hopeful and Tryer on 31 July 20X0. 2. Prepare a Balance Sheet for Toothbrush Partners as at 31 July 20X0. b. State two reasons why it is important for Hopeful and Tryer to go to a lawyer and prepare a Partnership Agreement.
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Exercise 10.4.8 Mid Course Accounting Exam January/April 2009 Ignore GST for this question. Forrest Chen and Wright Zhu form a partnership trading as Interior Arts on 1 April 20X0. Their Partnership Agreement states that Forrest who has been trading as a sole trader will contribute his business for an agreed valuation of $150,000. Details of Forrests assets and liabilities and agreed valuations are set out below: Carrying amount in Forrests ledger $NZ 5,600 31,800 90,000 60,000 30,000 Agreed valuation $NZ 5,600 29,400 80,000 55,000 30,000
Bank Accounts Receivable Inventories Plant and Equipment Accounts Payable
Wright agrees to bring in inventories to a value of $70,000 and sufficient cash to make his share 40% of the total capital. (a) Prepare the General Journal entry to record Forrests contribution of the assets and liabilities to the partnership. A narration is not required.
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(b) Prepare the General Journal entry to record Wrights contribution to the partnership. A narration is not required. INTERIOR ARTS GENERAL JOURNAL GJ2
(c) Prepare the bank ledger account for the new partnership after the General Journal has been posted on 1 April 20X0.
Bank
110
(d) Distinguish between the terms Accounting Entity and Legal Entity by defining what each term means. Explain why it is important for Forrest and Wright to understand the significance of these two concepts when they form their partnership.
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Chapter 4 Unit 11: Companies

Contents
11.1 Definition/registration and Certificate of Incorporation 11.2 Issue of shares and Debentures 11.3 Tax Payable 11.4 Profit Distribution for companies 11.5 Statement of Changes in equity 11.6 Fully worked examples 11.7 Terms to learn
11.1 Definition
The Companies Act 1993 states that a company is a type of business organisation that is registered under the Companies Act 1993, which enjoys perpetual succession with one or more owners.
Major factors of this definition include: a. Has to be registered under the Companies Act 1993. This requires applying to the Registrar of Companies for a name reservation, sending in a company application form along with the prescribed fee. b. Enjoying perpetual succession. This means the company continues regardless of the owners dealings. Owners may die or retire or may transfer their ownership in the company, ie. Buying and selling shares in a company. All of these events do not change the financial structure of the company. This helps to make the ownership more appealing to investors. c. One or more owners. This means a company can be as small in size as a sole trader or have an unlimited amount of owners. Where there are many owners they may not all take part in the management of the business. Therefore financial statements become an important part of the accountability of the managers to the owners. The Companies Act 1993 requires certain disclosures to aid accountability.
A Company must have:

A registered name One or more shares One or more shareholders One or more eligible directors A registered office An address for service Can be the same person
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Comparison of Business Ownership:

Feature
Owner Life
Sole Trader
Proprietor Limited
Partnership
Partners Limited
Company
Shareholders Perpetual Succession Limited Separate legal entity
Liability Legal Status
Unlimited Not a separate entity
Unlimited Not a separate entity
Equity
Capital
Contributed Capital Current Capital Advances Partnership agreement Partnership Act 1908
Contributed Equity Retained Earnings

Asset Revaluation Surplus
Operating document Law
None
Constitution
No Specific Document
Companies Act 1993 Financial Reporting Act 1993 Dividends 1+ Board of Directors
Cash distributions Number of Owners Managers
Drawings 1 Owner
Drawings 2+ Partners
Companies essential differences stem from the fact that the own ers are not always the managers of the business. In this regard the owners: Are not personally liable for business debts Do not receive dividends unless proposed by the directors Are able to sell their shares in the company without disruption to the company.
Advantages and Disadvantages of the company structure

Advantages Limited Liability Easier to raise funds through share issue Has perpetual succession Professional managers rather than all owners having to have an input Can sell debentures Disadvantages Expensive set up costs Reporting requirements Double taxation, company profits and dividends paid to shareholders
Shareholders may, on liquidation, have to pay back any unpaid amount on shares purchased.
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Shares
A share is a portion of the ownership of the company. It has no set value other than the fair value of the company divided by the amount of shares held in the business. The smaller the number of shares, the higher the value of each share. The number of shares held by each owner decides the rights that each shareholder has to dividends and voting in the company. A shareholder owning over half the shares of the company will have the majority of voting rights and will therefore control the company. A share in a company confers on the holder: The right to one vote on a poll at a meeting of the company on any resolution, including any resolution to: Appoint or remove a director; Adopt a constitution; Alter a companys constitution; Approve a major transaction; Approve an amalgamation of the company; Put the company into liquidation. The right to an equal share in dividends authorised by the board The right to an equal share in the distribution of the surplus assets of the company. Subject to the constitution of the company, different classes of shares may be issued. Shares can include those which: are redeemable, have no voting rights special voting rights limited voting rights conditional voting rights confer preferential rights to distributions of capital or income. Where a company has more than one type of share the shares must be disclosed separately according to the Companies Act 1993. In this course only ordinary shares fully paid up are covered.
Rights of Shareholders
The types of shares and their rights are outlined in each companys c onstitution. Shareholders have many rights enforced through the disclosure requirements of the Companies Act 1993. As the shareholders do not take part in the management, they have been given the right to closely observe and ensure directors are fulfilling the obligations for which they were appointed. The shareholders rights include: The ability to obtain information and ensure the company and its directors comply with obligations The Annual reports must carry details of the total remuneration packages paid to directors. Knowledge of the number of employees paid over $100,000 in $10,000 brackets must be included in the reports. The ability to take action on behalf of the company where the directors are unwilling. The legal fees resulting from this action is paid by the company, not the shareholder.
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Require the company to buy back their shares if they disagree with certain events. A company is unable to undertake certain activities, such as a big expansion project, without approval from a special resolution of the shareholders. (75% approval required).
One of the major decisions to be authorised by the shareholders includes the distribution of profits to shareholders. These distributions must pass a solvency test before they can be allowed.
Directors duties
The separation of ownership and management in the company structure has placed much power in the directors hands. A director, in the definition of the Companies Act 1993, includes all appointed directors plus those who take on the power or duties normally associated with a director. The directors are able to bind the company into agreements without consent from the shareholders. Directors are accountable to the shareholders and must present information with which the shareholder can make investment decisions for the quality and ethical behaviour of their work. These are referred to in the Companies Act 1993 as their duties. Directors can become personally liable to pay for damages for any breach of duty. These duties include: Duty of Care: They should exercise care, diligence and skill of a reasonable director. They should base their decisions on reports, data and financial statements prepared for them which they accept in good faith and are not known to be inaccurate. Duty to act in good faith and for the benefit of the company. Duty to exercise power for a proper purpose. Duty not to misuse confidential information. Duty not to trade while insolvent: directors must not allow the company to continue trading if this may create substantial risk of serious loss to creditors. Duty to disclose the interests in the Interests Register: This includes any dealing in shares; a civil liability is created for insider trading. (Companies Act 1993)
The major effects on larger companies of these duties have been to: a) Increase the directors fees b) Increase insurance costs, as companies are able to indemnify their directors against such a personal loss.
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Exercises:
11.1 Name the three important aspects to being a company as defined in the Companies Act 1993. 11.2 List the six minimum requirements to be registered as a company. 11.3 Explain a separate advantage of the company structure for: a) A small bookshop b) A large exporting business c) A forestry investment business d) A road making firm e) An investor with $10,000 11.4 Explain the disadvantages of the company structure for: a) Directors b) Accounts Payable c) A small bookshop d) A forestry investment business
Accounting Entity:
All business firms regardless of their ownership form are accounting entities. This means that the financial affairs of the business are kept separate and distinct from the financial affairs of the owners.
Legal Entity:
A legal entity is an individual or organization which is legally permitted to enter into a contract and be sued if it fails to meet its contractual obligations. A Limited Liability company is both a legal entity and an accounting entity whereas a sole trader and a partnership are accounting entities only.
Statutory Requirements:
A company must keep: - the companys Constitution (if it has one) - minutes of all shareholders meetings and resolutions - an interests register - minutes of all directors meetings and resolutions - full names and addresses of current directors - copies of written communications to shareholders - annual reports - financial statements - accounting records
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How to Register:
Step 1.
Name registration
An application is sent to the Companies Registrar to register the company name. It cannot be: Similar to another name Using government or royal words Offensive. Step 2.
Application for incorporation

Within 20 days of the name registration being issued, the directors must file to the registrar of companies an application form with the following information: Company constitution, if any Notice of name reservation Name and consent of director/s stating their eligibility Name and consent of initial shareholder/s Address of the registered offices Address of company Step 3.
Certificate of Incorporation issued

Once the certificate is issued the entity is a company under law and becomes a separate legal entity.
1. Name reservation application
Registrar of Companies
Notice of Name reservation
2. Company constitution Notice of name reservation Name & Consent of Directors Name & consent of shareholders Address of registered office Address of Company Prescribed fee
Certificate of Incorporation
C o m p a n y
3. Separate legal entity. Limited liability status.
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Company Constitution:
A companys constitution is similar to a partnership agreement. It: States the name and objectives of the company sets out the rights, liabilities and duties of the directors and shareholders defines how meetings are run defines types of shares sets out how shares are issued how directors are elected. A company need not have a constitution. A constitution enables the company to take advantage of certain provisions of the Act. This includes share buy backs and indemnifying directors against anything except negligence.
Ownership of a Company
A companys equity is divided into equal amounts called shares. These shares are issued to one or more owners. Shares may be issued at any time to any person during the life of the business within the Act and the constitution of the company. The value of each share is set at a fair value. This is the price someone is willing to pay at the time of purchase. The price will vary during the life of the business. The company has the right to accept or reject any person(s) as a shareholder from the company. The initial share issue is included with the incorporation of the company. The names of the initial shareholders and their consent to be shareholders will be recorded in the share register and filed with the application for incorporation to go to the Companies Registrar. The shareholder is liable to pay the value of the shares to the company either in cash, other assets or a cancellation of a debt from the company. The payment is recorded as the equity of the business and is called Contributed Equity. This is similar to the Contributed Capital account of a partnership. Student Activity: For each of the following situations identify and explain the form of ownership: 1. Adam Jackson decides to open a corner dairy by investing in one share of $100,000. Adam is the only director of the business. 2. Bill and Ted each invest $45,000 to start a mobile phone shop. 3. Jackie Chan decides to give up his job and offer a data entry business from home. He invests $8,000 to buy a new computer. 4. A group of ten teachers decide to form a business offering tuition to students. Each of them invests $2,000 for a one tenth share in the business. The business is called Tutorials Ltd.
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BUSINESS ENTITIES:
Complete the tables from the words in the table at the bottom of this page.
SOLE TRADERS Advantages Disadvantages
PARTNERSHIPS Advantages Disadvantages
Some advantages or disadvantages are used twice. These are indicated by the number 2.
Low start up costs Owner in direct control All profits to the owner Unlimited liability Lack of continuity Difficulty in raising capital Solely responsible for the business
Easy to form 2 Share decision making Additional sources of finance 2 More flexibility 2 Additional skills 2 Limited outside regulation 2 Divided authority
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COMPANIES Advantages Disadvantages
Limited liability Transferability of ownership Easy to raise finance Regulatory requirements Double taxation Slow start-up Higher set up costs Perpetual succession Professional managers Can sell debentures
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11.2 Issue of shares and debentures:

When starting a new company shares can be issued: a) in exchange for cash and/or other assets b) in exchange for the purchase of a business as a going concern c) for repayment of a debt 1. Shares issued to start a company by a small group of investors: Similar to owner invested cash to start the business. Debit Bank Credit Contributed Equity (Cash contribution for the issue of xx number of shares at $x each) XX XX
Example: Jim started a company by investing in 40,000 shares at $5 each. G and J started a business with $20,000 each for $1 shares. G and S invested $25,000 each to form a new company.
2. Share issue in exchange for a business: Rules: - Assets and Liabilities recorded at agreed values. - Accounts Receivable to be adjusted with Allowance for Doubtful Debts. - Non Current Assets recorded at agreed values. Do not record any Accumulated Depreciation. - Goodwill is usually calculated. Generally Debit Bank Accounts Receivable Non Current Assets Goodwill Credit Allowance for Doubtful Debts Liabilities Vendor (Being assets and liabilities taken over as per agreement dated .) XX XX XX XX XX XX XX
Debit Vendor XX Credit Contributed Equity (Issue of shares in consideration of assets and liabilities)
XX
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3. Prospectus issued to the public: Steps: a. Money received from the public who are interested in becoming shareholders. Debit Credit Bank Application XX XX
b. Issue of shares Debit Credit Application Contributed Equity XX XX
c. Payment for the prospectus and legal fees associated with share issue Debit Contributed Equity Credit Bank XX XX
4. Accounting for oversubscription: If applications are received for more shares than the number offered in the prospectus, the directors must decide on how the shares will be allotted. The directors can only issue the number of shares offered in the prospectus. Usually the shares are issued on a pro rata basis. This means that all applicants will receive shares in proportion to the number applied for. For example, if 100,000 shares of $1 were offered and 200,000 shares were applied for, each shareholder will get only 50% of the number of shares for which they applied. After the shares are issued, the excess money must be refunded to the shareholders.
Illustration: Final Exam January/April Intake 2010: Otakau Ltd was registered on 1 July 20X0 with initial shareholders paying $45,000 for 30,000 shares in the company. On 2 July, 100,000 shares were offered to the public at a fair value of $1.50 per share. By 31 July, 105,000 shares had been applied for and on 1 August the directors resolved to issue the shares to the applicants on a pro-rata basis and refund surplus application money. Plant and equipment costing $180,000 was purchased with 75% in cash and the remainder financed by a five year loan from the bank at an interest rate of 7.5% p.a. due 1 August 20X5.
REQUIRED:
Complete General Journal entries without narrations to record the information provided above for Otakau Ltd from 1 July to 1 August 20X0. Your teacher will go over this problem with you. Complete a correct answer on page 47 and use it as a model when you are studying.
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OTAKAU LTD GENERAL JOURNAL GJ1
20X0 Jul 1
Cash contribution for the issue of 30,000 shares of $1.50 each.
31
Being receipt of monies for 105,000 shares at $1.50 each
Aug 1
Being allotment of 100,000 shares of $1.50 each as per Directors resolution No 21 in Minute Book.
Being refund for shares oversubscribed.
Being receipt of money for a five year loan.
For purchase of Plant and Equipment.
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Issue of shares by Sharebroker: Example: ABC LTD gets a sharebroker to issue 100,000 shares at $2.40 fully paid on application. The sharebroker charges a 5% brokerage fee. Prospectus and legal fees associated with the share issue are paid by the company totalling $8,000. Indirect administration costs are paid by the company totalling $1,000. The final entries required relating to this share issue are: Dr Bank Cr Contributed Equity (Money received for the issue of 100,000 shares) Dr Contributed Equity Cr Bank (Payment of prospectus and legal fees associated with share issue) Dr Administration Expenses Cr Bank (Payment of indirect costs associated with share issue) 228,000 228,000
8,000 8,000
1,000 1,000
Repurchase of Shares
The Companies Act 1993 allows a company to repurchase shares from existing shareholders if it is written in its constitution. The benefits for a company are to:
Improve the earnings per share; To buy out a participant; or To buy out a problem shareholder Reduce the chance for a takeover of the company
A solvency test needs to be made before the buy back is allowed.
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Model 1: Example Ltd was formed on 1 April 20X0. A prospectus was issued offering 500,000 shares of $1 to the public. The share issue was fully subscribed and the shares issued on 1 May. Legal costs amounted to $1,000 and property, plant and equipment of $100,000 was purchased for cash on which a mortgage of $50,000 was raised. REQUIRED: Journal entries Post to the ledger and prepare a Trial Balance as at 1 May 20X0. Balance Sheet as at 1 May 20X0. Exercise 11.5 The City Company Ltd was formed on 30 June 20X0. A prospectus was issued offering 2,000,000 shares of $1 to the public. The shares were issued on 15 July. Legal costs amounted to $2,500 and property, plant and equipment was purchased for $1,000,000 cash on which a mortgage of $500,000 was raised. REQUIRED: Journal entries Post to the ledger accounts and prepare a Trial Balance as at 15 July 20X0. Balance Sheet as at 15 July 20X0. Model 2: Z Ltd was formed on 1 April. It offered 50,000 shares of $1 and received all application money by 1 May. It issued shares on 15 May. Legal costs of $1,000 were paid. Property, plant and equipment was purchased on credit for $20,000 with a deposit of 20% being paid. REQUIRED: Journal entries Post to the ledger accounts and prepare a Trial Balance as at 15 May 20X0. Balance Sheet as at 15 May 20X0.
Exercise 11.6 The Patana Company Ltd was formed on 30 June 20X0. Applications were received for 7,500,000 shares of 50 cents each by 31 July. The shares were allotted on 1 August. Legal fees amounted to $5,000. Property, plant and equipment was purchased from Hebe Ltd for $1,000,000. A deposit of 10% was paid. REQUIRED: Journal entries Post to the ledger accounts and prepare a Trial Balance as at 1 August 20X0. Balance Sheet as at 1 August 20X0.
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Exercise 11.7 The following is a summary of the Trial Balance of the Goliath Trading Company Ltd as at 31 March 20X0.
$NZ $NZ
Bank Property, Plant and Equipment Accounts Receivable Contributed Equity Mortgage
80,000 700,000 20,000 400,000 400,000 $800,000
$800,000
The Directors resolve to issue 50,000 additional shares of $2 payable in full on application. All the shareholders applied and paid for their shares by 1 May when the shares were allotted. REQUIRED: Journal entries Post to the ledger accounts and prepare a Trial Balance as at 1 May 20X0. Balance Sheet as at 1 May 20X0. OVERSUBSCRIPTION (When a company receives applications for more shares than it wishes to allot.) Exercise 11.8 Mailata Ltd offers 100,000 shares to the public at $1 and receives 140,000 applications by 1 May 20X0 when the directors decide to allot 100,000 shares on a pro rata basis REQUIRED: Journal entries Post to the ledger accounts and prepare a Trial Balance as at 1 May 20X0. Balance Sheet as at 1 May 20X0. Exercise 11.9 Duong Ltd offers 200,000 $2 shares to existing shareholders pro rata. Applications are received for 310,000 shares by 30 June 20X0. Directors resolve to issue shares on 1 July. REQUIRED: Journal entries Post to the ledger accounts and prepare a Trial Balance as at 1 July 20X0. Balance Sheet as at 1 July 20X0. Exercise 11.10 Westside Couriers is trying to expand. The business needs $100,000. On 3 November 20X0 the company issued a prospectus offering 20,000 shares of $5 each. When applications closed on November, $150,000 had been received. Directors resolved to issue shares on 30 November. Excess application moneys would be refunded on a pro rata basis. REQUIRED: Journal entries Jeffries applied for 6,000 shares. How many shares did he receive? How much did he initially pay and how much is his refund?
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Exercise 11.11 Bucket Plumbers decided to expand their operations and need another $200,000 which they expect to receive through issuing shares of $10 each. By 15 October applications had been received for 30,000 shares and the applications were subsequently closed. After looking through the applications they decided to refund 10,000 shares and issue the remaining on a pro rata basis. REQUIRED: Joan applied for 1000 shares. How many would she receive from the share issue? Prepare the journal entries Prepare the Ledger accounts Exercise 11.12 Tutorials Limited is expanding and needs $10,000. Its plans to sell shares at a fair value of $1 each. Share application starts on 1 January and close on 15 January. In this period $15,000 was received by the company from prospective shareholders. On 31 January the company decided to allocate the shares. Because the shares were oversubscribed the company needed to refund the excess application money. The share issue incurred legal expenses of $250 that were paid. REQUIRED: General Journal entries.
Exercise 11.13 (Final Examination 2008) On 1 January 2008 Avery Ltd was registered as a company with five shareholders, each owning 100 shares issued at $10, fully paid. On 1 June 2010, Avery Ltd approaches Broking Direct Ltd, a local sharebroker, to make a public share issue. Avery Ltd paid Broking Direct Ltd $3,500 for the prospectus on 30 June 2010. (a) Complete the General Journal entry to record the payment for the prospectus charged directly to contributed equity.
General Journal GJ188
Payment for prospectus charged directly to contributed equity.
On 1 July 2010, Broking Direct Ltd issued the prospectus offering 10,000 shares, at a fair value of $20 per share, payable in full on application. By 1 September, the issue was fully subscribed. Broking Direct Ltd charges a brokerage fee of 5% of the value of the shares issued. On 5 September 2010, Broking Direct Ltd paid the net amount owing for the issue to Avery Ltd. (b) Complete the General Journal entry to record the receipt of monies for the issue of 10,000 shares of $20 each on 5 September 2010.
General Journal GJ188
Receipt of monies for issue of 10,000 shares of $20 each net of 5% brokerage fee.
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OVERSUBSCRIPTION AND PURCHASE OF A BUSINESS: Exercise 11.14 A group of investors decide to form a company called Shan Wen Ting Ltd which will operate in the chemicals industry. They pay cash for 50,000 shares of $1 each on 1 July 20X0. On 15 July 20X0 a prospectus is issued offering 375,000 shares to the public at $1 each payable in full on application. Applications closed on 28 August when the issue was oversubscribed by 20%. The directors met on 31 August and agreed to allot 5 shares for every 6 applied for. Excess application money was refunded to the public. During August, the companys Managing Director signs an agreement to take over Chemical Products from its owner Lee Sak Kim. The Resource below shows the Balance Sheet for Chemical Products as well as the agreement which was signed on 31 August.
RESOURCE:
CHEMICAL PRODUCTS BALANCE SHEET (Extract) 31 AUGUST 20X0 Assets Bank Accounts Receivable Inventories Plant and Equipment Less Accumulated Depreciation Less Liabilities Accounts Payable Loan Total Net Assets 1,500 1,200 3,000 20,000 5,000 15,000 20,700
2,000 3,700
5,700 $15,000
AGREEMENT FOR SALE AND PURCHASE 1 The Vendor, Ms Lee Sak Kim, is to be paid $25,000 cash plus the allotment of 10,000 fully paid shares of $1 each on 31 August 20X0. 2 Shan Wen Ting Ltd will take over all assets and liabilities of Chemical Products except for the loan. 3 The Assets and Liabilities will be valued at their carrying amounts except for the following revaluations: Accounts Receivable $1,050 and Plant and Equipment $13,000.
Required: 1. Prepare the General Journal entries to record the above transactions. Date and narrations are required. 2. Prepare a Trial Balance as at 31 August 20X0. 3. Prepare the Balance Sheet for Shan Wen Ting Ltd as at 31 August 20X0.
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BONUS ISSUES
A bonus issue is an issue of shares to existing shareholders for which no payment is required. The issue is made from a reserve account such as Retained Earnings or an Asset Revaluation Surplus. Example: The directors decide to issue 1 bonus share of $1 for every five held out of retained earnings.
Equity Contributed Equity (100,000 fully paid shares) Retained Earnings TOTAL EQUITY Journal entry to record the bonus issue: General Journal Mar 31 Retained Earnings Contributed Equity For bonus issue from retained earnings.
100,000 25,000 125,000
20,000 20,000
Equity Contributed Equity (120,000 fully paid shares) 120,000 Retained Earnings 5,000 TOTAL EQUITY Shareholders can sell the bonus shares if they wish.
125,000
Exercise 11.15 During the year Capital Properties Limited decided to issue two shares for every five held out of Retained Earnings at a share price of $20 each. Their current Equity shows: Contributed Equity (7,500 fully paid shares) Retained Earnings a) b) c)
150,000 90,000
Prepare General Journal entries for the transaction Calculate the number of shares held in the company after distribution of bonus shares. Prepare the new Equity section of the Balance Sheet
Revaluation Surplus The following journal entry is recorded when a non current asset is revalued upwards to record its fair value instead of its historical cost. Debit Asset Credit Asset revaluation surplus The revaluation surplus forms part of the equity of the company.
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Exercise 11.16 Share Issue An extract from the Balance Sheet for Saddleback Ltd as at 31 March 20X0 is shown below. On that date, to help financial expansion, the directors offered 200,000 shares at a fair value of $2.00 each to the public, payable in full on application. On the same date as shares were to be issued, existing shareholders were to be given a bonus issue of one for three, fully paid, from the Land Revaluation Surplus, at a fair value of $1.20 per share. The issue was heavily oversubscribed and by 30 April 20X0 $480,000 was received on application. On 10 May the directors decided to allot 200,000 shares and to refund the application monies in full to the unsuccessful applicants. EXTRACT SADDLEBACK LIMITED BALANCE SHEET AS AT 31 MARCH 20X0 Contributed Equity (300,000 shares) 300,000 Retained Earnings 50,000 Land Revaluation Surplus 160,000 REQUIRED: Record the transactions in the General Journal of Saddleback Limited. Narrations are not required.
Exercise 11.17 Share Issue An extract from the Balance Sheet for Kiwi Ltd as at 31 March 20X0 is shown below. On that date, to help financial expansion, the directors offered 100,000 shares at a fair value of $1.50 to both the public and existing shareholders, payable in full upon application. On the same date as shares were to be issued, existing shareholders were to be given a bonus issue of one for two, fully paid, from the building revaluation surplus, at a fair value of $1.00 per share. Applications were received by 30 April 20X0 for 126,000 shares. Existing shareholders had applied for 80,000 shares, and on 10 May these were allotted in full. The remaining shares were allocated on a pro-rata basis and excess application money refunded. EXTRACT: KIWI LIMITED BALANCE SHEET AS AT 31 MARCH 20X0 Contributed Equity (200,000 shares) Retained Earnings Building Revaluation Surplus
200,000 65,000 150,000
REQUIRED: Record the transactions in the General Journal of Kiwi Limited. Narrations are not required.
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Exercise 11.18 Vitali Company Ltd is a registered company. An extract from its Balance Sheet as at 30 June 20X0 is shown below. VITALI COMPANY LTD BALANCE SHEET AS AT 30 JUNE 20X0 Contributed Equity (300,000 shares)
300,000
Retained Earnings 100,000 Land Revaluation Surplus 200,000 On 1 July 2010 Vitali Company Ltd issued a prospectus inviting the public to apply for 150,000 shares at a fair value of $2.50 per share. The total amount was payable on application. Applications for 200,000 shares had been received by 15 July. On 30 July the directors met and allotted shares on a pro-rata basis. Excess application monies were refunded to applicants. On the same day that the shares were allotted, a bonus issue of one share for every two held was given to existing shareholders from the Land Revaluation Surplus at a fair value of $1 per share. REQUIRED: Prepare General Journal entries to show the transactions which occurred during July. DEBENTURE ISSUE: A debenture is a non current liability. It is a loan of a fixed amount for a fixed term at a fixed interest rate. It may be issued by limited liability company or an incorporated society. Example: On 1 June 20X0, the Company issued 100 debentures of $1,000 interest rate 10% repayable on 1 June 20X5. MANU INDUSTRIES GENERAL JOURNAL 20X0 Jun 1 Bank Debentures (10% p.a. due 1.06.X5) For the issue of 100 debentures of $1,000 each. GJ59 100,000 1,000
Debentures can be repaid by the issue of shares. Example: Manu Industries Ltd has a debenture with a carrying value of $60,000 and a present cash value of $55,000 which is converted to equity on 1 June 20X0. The General Journal entry is: MANU INDUSTRIES GENERAL JOURNAL 20X0 Jun 1 Debentures Contributed Equity Income Conversion of a debenture to equity. GJ59 60,000 55,000 5,000
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CONVERSION OF DEBT TO EQUITY FINANCE - Exercises
Prepare General Journal entries for the following exercises: Ex 11.19 ZAK Ltd issued 40,000 shares at a fair value of $2.50 on 30 July 20X0 to repay debentures with a carrying value of $105,000 and a present cash value of $100,000.
Ex 11.20 DON Ltd converted debentures with a carrying value of $30,000 and a present cash value of $28,000 by the issue of 14,000 fully paid $2 shares on 30 July 20X0.
Ex 11.21 Fuqian Ltd has a debenture with a carrying value of $60,000 and a present cash value of $58,000 which is converted to equity on 30 July 20X0 by the issue of fully paid shares.
11.3 Tax Payable

A profit earned by a company can either be held by the company, for future use, (RETAINED EARNINGS), or paid out to shareholders. All of a companys pro fit after tax is recorded in retained earnings before it is paid out.
Provisional Tax:
o A company pays tax on its profits as it is a separate legal entity. o The current company tax rate is 28%. o Companies are required to pay provisional tax. During the year companies pay provisional tax based on the profit from the previous year. o Provisional tax is payable in three instalments (if the end of the reporting period is 31 March). 28 August 20X1 15 January 20X2 7 May 20X2 o At the end of the year the company will calculate the income tax on profits earned. o The difference between what has been paid in provisional tax and what must be paid is called terminal tax. o Terminal tax is due to be paid on 7 February 20X3 o The date of payment is very important. Overdue payments incur penalty interest. Step 1 first instalment of provisional tax: GENERAL JOURNAL 20X1 Aug 28 Provisional Tax Paid Bank (Provisional tax paid)
30,000 30,000
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Step 2 - second instalment of provisional tax: GENERAL JOURNAL 20X2 Jan 15 Provisional Tax Paid Bank (Provisional tax paid)
30,000 30,000
Step 3 Balance day adjustment for Provisional tax owing: General Journal entry requried to record the third instalment of provisonal tax instalment due on 7 May 20X2.
GENERAL JOURNAL 20X2 Mar 31 Provisional Tax Paid Tax Payable (Provisional tax owing) Step 4 Close Provisional Tax Paid Account GENERAL JOURNAL 20X2 Mar 31 Tax Payable Provisional Tax Paid (for closing journal entry)
30,000 30,000
90,000 90,000
Step 5 Record Income tax expense on Actual Income for the year: 20X2 Mar 31 Income Tax Expense 100,000 Tax Payable 100,000 (to record income tax expense )
Step 6 To close Income tax expense to Income Summary 20X2 Mar 31 Income Summary 100,000 Income Tax Expense (to record income tax expense )
100,000
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GENERAL LEDGER Provisional Tax Paid 20X1 Aug 28 20X2 Jan 15 Mar 31 Bank Tax Payable Tax Payable Tax Payable 20X2 Mar 31 Provisional Tax Paid Provisional Tax Paid Income Tax Expense 90,000 100,000 30,000 30,000 30,000 90,000 306 30,000 Cr 60,000 Dr 40,000 Cr 60,000 Dr 90,000 Dr 0 Bank 30,000 791 30,000 Dr
Explanation: Tax payable $40,000 is a Current Liability which must be paid in the next reporting period. $30,000 provision tax due to be paid 7 May 20X2 $10,000 terminal tax due to be paid 7 Februay 20X3. Exercise 11.22 Crafty Containers Limited estimated their net operating surplus to be $72,000 for the year ending 31 March 20X0. The tax rate is 28%. a) Prepare the cash payment journal entries necessary to meet their tax obligations. b) Craftys actual profit was better than expected at $80,000. i) Prepare the necessary general journal entries at balance day to close off the accounts. ii) Prepare an extract in the Income Statement, from the profit before tax to show the profit after tax. If companies make a profit then that profit can be given to shareholders. That decision will be made by the Board of Directors Profit before tax Less Income tax Profit after tax
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Exercise 11.23 Final Examination January/April Intake 2013

PART A: COMPANIES Ignore GST for this question (10 marks)
Waiata CD Ltd, was formed on 1 July 20X0 with five shareholders each owning 30,000 shares at $3 a share. It has been successfully trading over the past three years and had the following account information on 1 July 20X2. $NZ 450,000 Cr 112,500 Cr 4,500 Dr
Contributed Equity (150,000 shares fully paid) Retained Earnings Tax Payable
The following transactions occurred during the year ended 30 June 20X3: On 31 July 2012, directors proposed a final dividend for 20X2 of 15 cents per share. This was paid to shareholders on 1 September 20X2. An interim dividend of 10 cents per share was paid to shareholders on 1 January 20X3. On 1 February 2013, Waiata CD Ltd re-purchased 30,000 shares for a fair value of $4 each. Three Provisional Tax Payments of $28,000 each were made on 28 August 20X2, 15 January 20X3 and 28 May 20X3. Profit before tax for the year ended 30 June 20X3 was $320,000 and the New Zealand company tax rate is 28% p.a. for the 20X3 tax year. (a) Show the General Ledger account for the interim dividend for 2013, including the closing entry. Dates are required. Waiata CD Ltd GENERAL LEDGER
Interim Dividend (20X3) 540
(b) Explain the two components of the solvency test which the directors of Waiata CD Ltd must sign off before paying any dividends.
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(c) Complete the General Journal entry indicated by the narrations in the General Journal below: Waiata CD Ltd GENERAL JOURNAL GJ911
20X3 Feb 1
(For the re-purchase 30,000 shares for a fair value of $4 each).
(1.5 marks) (d) Complete the Provision Tax Paid account and the Tax Payable account for the year ended 30 June 20X3. Waiata CD Ltd GENERAL LEDGER
Provisional Tax Paid 790
Tax Payable
360
(e) Use all of the relevant information in the question to prepare the Retained Earnings Account for the year ended 30 June 20X3. Waiata CD Ltd GENERAL LEDGER
Retained Earnings 520
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11.4 Profit Distribution for Companies

Dividends are a distribution of profits to shareholders of a company. Before any distribution of dividends can be paid, there are two conditions that must be met: 1. A majority approval from shareholders (75% is required). 2. The registered company must pass the solvency test.
SOLVENCY TEST
There are two parts to the solvency test that need to be met before a distribution of profits can be made to shareholders. 1. Liquidity test: The company must be able to pay its debts in the normal course of business before and after the dividend is paid. (This also applies to a share repurchase). Cash flow forecasts must be used Capital assets are not to be used to meet trading debts.
2. Balance Sheet Test Directors must ensure that the assets are greater than liabilities after the dividends have been paid. (This also applies to a share repurchase). Liabilities are to include contingent liabilities (those that will be owed subject to certain events happening). If found at a later stage that the solvency test was not met after the distributions were made, the shareholders are liable to repay the dividends. In situations where this is not possible, the directors are personally liable for the difference. DIVIDENDS Types of Dividends 1. Interim Dividend paid during the year on projected profits of the current year. 2. Final Dividends are proposed and declared after balance day. This will be disclosed as note in the Financial Statements and is paid in the next accounting period. Recording of Interim Dividend Debit Interim Dividend Credit Bank (Payment of Interim Dividend) XX XX
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Recording of Final Dividend Debit Final Dividend 20X0 Credit Bank (Final Dividend paid) Close off the accounts Debit Retained Earnings Credit Final Dividend Credit Interim Dividend (Close off Dividends accounts) XX XX XX XX XX
Exercise 11.26 1. Act Taxis limited had issued capital of 200,000 shares. A 12 cents final dividend from the previous year was paid on 15 May with an 8 cents interim dividend paid on 30 October. Prepare journal entries to show the payments and also close the dividends accounts to retained earnings 2. Power Limited directors announced a dividend of $5 to its shareholders on 5 April. At the Annual General Meeting on the 15 April it was approved and paid. On 12 November $2 Interim dividends were paid. There are 2000 shares issued. Prepare journal entries to show the payment of dividends and closing to the retained earnings account. 3. Give two reasons why the shareholders may reject the proposal for a final dividend.
Exercise 11.25 Part A XYZ Limited has been in operation for a few years now. The expected profits for the financial year ending 31 March 20X5 were $500,000. Based on this information the company made regular tax payments to the tax department. At the end of the financial year the actual reported profit was $520,000. Calculate a. Provisional Tax payment b. Final Tax Payment c. Record in the journal Part B The Board of Directors then decided to issue dividends. Due to good profits and excellent progress results currently they decided to pay an interim dividend of $2.50 per share. The total number of shares was 20,000 shares at $1. Calculate a. Interim Dividend b. Record in journal
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11.5 Statement of Changes in Equity

This statement shows the changes which have occurred to components of equity over the year. Components of equity include - Contributed equity increases when there is new share issue. - Retained earnings increases with profit after tax and decreases with dividends - land revaluation surplus/buildings revaluation surplus increases if a particular non current asset is revalued upwards
Name of Business Statement of Changes in Equity For the year ended 31 March 20X0 Contributed Asset Retained Equity Revaluation Earnings Surplus $NZ 000 $NZ 000 $NZ 000 Balance at 31 March 20XX Changes in equity for 20X1 Gain on revaluations Net income recognized directly in equity Profit for the year Total recognized income and expenses Proceeds from share issue Distributions Balances at 31 March 20X1
Total
$NZ 000
NZIAS Presentation of Financial Statements Statement of Changes in Equity: The following items must be shown separately: a. Total recognised income and expenses including: The profit or loss for the period Increases/decreases in revaluation reserves Currency translation differences b. Contributions by owners c. Distributions to the owners
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FINAL EXAM JULY/SEPTEMBER INTAKE 2008-2009 COMPANY ACCOUNTING The following information was extracted from the trial balance of Plumbing Ltd as at 01 April 20X8. Contributed Equity (500,000 shares) Retained Earnings Asset Revaluation Surplus $1,000,000 200,000 100,000 Cr Cr Cr
During the year ended 31 March 20X9 the following transactions occurred: 20X8 Jun 20 The directors issued 5,000 shares to the public at $3.00 each. Sep 30 20X9 Mar 31 The Company paid interim dividend $10,000 and final dividends of $12,000.
The business recorded a after tax profit of $168,000. It was further decided to revalue Land by $50,000.
Required: Complete the Statement of Changes in Equity using the information above for this company for the year ended 31 March 20X9.
Plumbing Ltd Statement of Changes in Equity for the year ended 31 March 20X9
Notes
Contributed Equity
Asset Revaluation Surplus
Retained Earnings
Total
Balance at 31 March 20X8 Changes in equity for 20X9
Profit for the year
Balance at 31 March 20X9

(6 marks)
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11.6 Fully Worked Examples

Exercise 11.27
Company Final Accounts
WILSON LTD TRIAL BALANCE as at 31 March 20X1 $NZ Inventories 7,280 Cost of Goods Sold 48,000 Wages Expense 10,740 Advertising Expense 3,440 Office Expenses 6,540 Bank 9,980 Accounts Receivable 5,040 Furniture 8,000 Plant 27,000 Term Deposit 3,760 Interim Dividend 3,000 Sales Revenue Accounts Payable Loan Contributed Equity Retained Earnings
$NZ
85,220 5,120 2,440 30,000 10,000
$132,780
$132,780
REQUIRED: Prepare an Income Statement for the year ended 31 March 20X1. Apply a taxation rate of 28%. Prepare Interim Dividend Account and Retained Earnings Account. Prepare a Balance Sheet as at 31 March 20X1.
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Exercise 11.28
MILLER LTD TRIAL BALANCE as at 31 March 20X1 $NZ Bank 4,700 Office Equipment 9,000 Plant 40,000 Accounts Receivable 11,300 Goodwill 24,000 Inventories 18,680 Cost of Goods sold 130,400 Wages Expense 57,300 Rent Expense 7,600 Office Expenses 3,420 Interim Dividend 20,000 Accounts Payable Sales Revenue Commission Income Contributed Equity Retained Earnings Loan
$NZ
7,460 234,560 1,460 70,000 10,000 2,920
$326,400 $326,400
REQUIRED: Prepare an Income Statement for the year ended 31 March 20X1. Apply a taxation rate of 28%. Prepare Interim Dividend Account and Retained Earnings Account. Prepare a Balance Sheet as at 31 March 20X1.
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Exercise 11.29
SIGNED LTD ADJUSTED TRIAL BALANCE AS AT 31 DECEMBER 20X1 $NZ Cash 32,000 Accounts Receivable 85,000 Inventories 111,000 Prepayments 8,000 Advertising Expense 114,000 General Expenses 123,000 Interest Expense 14,000 Sales Revenue Term Deposit 9,000 Equipment 399,000 Accounts Payable Accrued Expenses Debentures Interim Dividend 10,000 Contributed Equity Retained Earnings Cost of Goods Sold 509,000
$NZ
803,000
78,000 31,000 198,000 186,000 118,000
$1,414,000
$1,414,000
REQUIRED: Prepare an Income Statement for the year ended 31 December 20X1. Apply a taxation rate of 28%. Prepare Interim Dividend Account and Retained Earnings Account. Prepare a Balance Sheet as at 31 December 20X1.
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Exercise 11.30
REPAIR LTD TRIAL BALANCE as at 31 March 20X1 $NZ Inventories 8,960 Purchases Expense 46,320 Wages Expense 10,740 Advertising Expense 3,440 Insurance Expense 3,760 Bank 9,980 Accounts Receivable 5,040 Furniture 8,000 Plant 30,000 Term Deposit 6,540 Sales Revenue Interim Dividend 15,000 Accounts Payable Loan Contributed Equity Retained Earnings
$NZ
85,220 5,120 2,440 45,000 10,000
$147,780 $147,780 Inventories 31.03.X1 $7,280 $500 $450

Balance Day Adjustments
Advertising due but unpaid Insurance paid in advance
1 Prepare General Journal entries for the balance day adjustments. 2 Adjust the trial balance 3 Prepare an Income Statement for the year ended 31 March 20X1. Apply a taxation rate of 28%. 4 Prepare Interim Dividend Account and Retained Earnings Account 5 Prepare a Balance Sheet as at 31 March 20X1
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11.7 Terms to learn:

Unlimited liability Limited liability If a partnership or a sole trader becomes insolvent the owners are personally liable for the debts of the business. If a registered company becomes insolvent the shareholders are not personally liable for the debts of the company because the company is a separate legal entity. However, directors can be held personally liable for business debts. A company constitution sets out the rights, liabilities and duties of the directors and shareholders. The constitution enables the company to take advantage of certain provisions of the Companies Act 1993, eg for the company to buy back shares. A Partnership Agreement sets out the rights, liabilities and duties of each partner. It enables the partners to change the restrictions laid out in the Partnership Act 1908. Minutes record the decisions made at a meeting. A debenture is a non current liability. It is a loan of a fixed amount for a fixed term at a fixed interest rate. It may be issued by limited liability companies and incorporated societies. Dividends are a distribution of profits to shareholders of a company. An interim dividend is paid during the year. A final dividend is declared at the end of the year. A potential obligation exists as a result of a past event. The liability cannot be recorded with certainty as it depends on the outcome of a future event. It should be disclosed in the notes to the Balance Sheet. Eg Amount which may be owed for a lawsuit, also a guarantee agreement for a loan. An invitation to the public to buy shares in a company. An independent chartered accountant who checks the accounts for accuracy in order to determine whether the reports show a true and fair view of profits and financial position. The statement informs the user that the financial statements follow accepted accounting concepts and practices. Legal requirements, eg the Companies Act 1993 gives Statutory requirements for companies. The profits of a business that have not been paid out to the owners.
Constitution
Partnership Agreement Minutes Debentures
Dividends Interim Dividend Final Dividend Contingent Liabilities
Prospectus Auditor
Summary of Significant Accounting Policies Statutory Requirements Retained Earnings
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Bonus issue
An issue of shares to existing shareholders for which no payment is required. The issue is made from a reserve accounts such as Retained Earnings or an Asset Revaluation Surplus. Proportionately. When shares are issued pro rata, it means they are issued in proportion to the number applied for. For example they may be issued 4 for every 5 applied for. The applicant will receive 80% of the shares they requested and be refunded the remaining 20%.
Pro rata
Acknowledgements: Wilson, Mark Accounting Alive

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Study Guide 13-B.

NAME: STUDENT ID:

ACCOUNTING Study Guide 13-B4

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Chapter 1 Unit 8: Conceptual Basis

The New Zealand Framework

THE NEW ZEALAND FRAMEWORK

ELEMENTS: Assets Liabilities Equity Income Expenses

FUNDAMENTAL QUALITATIVE CHARACTERISTICS Relevance Faithful representation

Assumptions Explicit: Going Concern

Enhancing QCs Comparability Verifiability Timeliness Understandability

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THE NEW ZEALAND FRAMEWORK

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(d) Define the going concern concept.

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Underlying Characteristics Completeness Neutrality Freedom from error

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Qualitative Characteristics 1. Fundamental 2. Enhancing

Elements 1. Assets 2. Liabilities 3. Equity 4. Income 5. Expense

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1 000 22 400 68 590 250

If inventories are understated, profits will be: .

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a. Final Exam 2009 January/April Conceptual Basis Question:

b. Final Exam 2010 January/April Conceptual Basis Question:

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Chapter 3 Unit 10: Partnerships

Can you explain what unlimited liability means?

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Not expensive to form Compared with a company

no special tax liability

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Accounting Formation of a Partnership

GJ1 100,000 60,000 40,000

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Contributed Capital 90,000 30,000 $120,000