ACC613: Suggested Solutions for Mid-semester exam (sem.

1, 2017)

Q1. ACCOUNTING FOR COMPANIES – Accounting for issues of shares

COMPANIES - ISSUES OF SHARES

a.
General Journal
Date Details Dr Cr

31-Jul Cash trust - ordinary 41,000

Application - ordinary 41,000

1-Aug Application - ord 25,000

Paid-up capital - ord 25,000

Application 3,000
Cash Trust 3,000

Cash at Bank 38,000

Cash Trust 38,000

Allotment - ordinary 25,000

Paid-up capital - ord 25,000

Application 13,000
Allotment 9,000
Call in advance 4,000

31-
Aug Cash at Bank - ordinary 16,000
Allotment - ordinary 16,000

1-Sep 1st Call 25,000

Paid-up capital 25,000

1
 Call in advance 2,000
1st Call 2,000

30-
Sep Cash at bank 22,850
Call 22,850

b.
Cash Trust
App-
Ord 41,000 Application 3,000
Cash at bank 38,000
41,000 41,000

Application
Paid-up Capital- ord 25,000 Cash Trust - ord 41,000
Cash trust 3,000
Allotment inadvance 9,000
Call in advance 4,000
41,000 41,000

Pad-up Capital
Application -ord 25,000
Apllotment - ord 25,000
Call 25,000
75,000

Cash at Bank
Cash trust 38,000
Allotment -ord 16,000
Call 22,850
76,850

2
 Allotment
Paid-up capital - ord 25,000 Application 9,000
Cash at bank - ord 16,000
25,000 25,000

Call in advance
Call 2,000 Application 4,000
Bal c/d 2,000
4,000 4,000
Balance b/d 2,000

1st Call
Paid up capital 25,000 Call in advance 2,000
Cash at bank 22,850

C.
Statement of Position
Shareholders Equity
Share Capital
Authorised 500,000 $1 ordinary shares 500,000
500,000

Issued
capital 500,000 $1 ordinary shares 500,000
500,000

Paid-up 400,000 $1 ordinary share paid to

capital $1 400,000
99 400 $1 ord shares paid to
$0.75c 74,550
600 $1 pref shares paid to 50c 300 474,850
Calls in advance 2,000
Total shareholders' equity $ 476,850

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D.

The Share Capital account is used to record the net amount called up on a company’s shares at
a point in time, less any share issue costs.

An Application account is used in public share floats where the public are asked to apply for an
allotment of shares in a company during a share issue. The Application account records any
monies paid in by applicants.

The Cash Trust account is used in public share floats to record money which must be held in
trust. This is the money received from applicants for shares prior to the shares being issued.
Any refunds to unsuccessful applicants is taken out of the Cash Trust account once shares are
allotted, and any remaining money can then be transferred to general cash to be used by the
company.

An Allotment account and a Call account are used in situations where a company issues shares
payable in installments. The Allotment account records any amount receivable from
shareholders when shares are allotted to them. A Call account records any further amounts
receivable on shares from those shareholders who received an initial allotment.

The Calls in Advance account is used in those rare circumstances where a public issue of shares
by installments has led to some applicants paying into the company not only the application fees
but also the allotment money and one or more future calls. The Calls in Advance account is
credited for these future calls received on application. The debit entry is to the Application
account. Calls in advance, which has many of the characteristics of a liability, is nevertheless
regarded as part of share capital in an entity’s balance sheet/statement of financial position.

4
Q2: ACCOUNTING FOR PARTNERSHIP – Profit Allocation

MATTHEW AND MARK

A.

Profit Distribution
2014 2014
30/6 Salary – Mark $80 000 30/6 Partnership Profits $460 000
30/6 Interest on Capital:
Matthew 64 800
Rogers 55 200
30/6 Residual Profit:
Matthew (60%) $156 000
Mark (40%) $104 000 260 000
$460 000 $460 000

B.
Matthew, Retained Earnings
2014 2013
1/7 Balance $160 000

30/6 Drawings $24 000 30/6 Interest on Capital 64 800

30/6 Balance 356 800 30/6 Share of Profits 156 000
$380 800 $380 800
30/6 Balance 356 800

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 Mark, Retained Earnings
2014 2013
1/7 Balance $130 000
2007
30/6 Drawings $12 000 30/6 Interest on Capital 55 200
30/6 Salary 80 000
30/6 Balance 357 200 30/6 Share of Profits 104 000
$369 200 $369 200
30/6 Balance 357 200

C.

 The distinction lies in the extent of the partner providing the resources to the firm. Capital
contributions represent an investment and a commitment to finance the firm for the long
term. A loan or advance, on the other hand, represents the provision of funds for use in
the partnership on a normal commercial basis in return for interest.
 A partner who provides loan funds via an advance, will expect the partnership to treat
such an advance as a normal commercial loan and account for it as such.
 Interest on an advance will be treated as an operating expense, while interest on capital
constitutes an adjustment among the partners for differing amounts of capital invested by
the partners. Differences in accounting treatment appear to be justified.
[6 marks]

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Q3: ACCOUNTING FOR STATEMENT OF CASH FLOW

A.
DIRECT
METHOD
Stubbs Ltd
Statement of cash flow
for the year ended 30 June 2015
($000)
Cash flow from operating activities
Receipts from customers 1,908
Payments to suppliers, inclusive of labour, leases, electricity & rates (1,356)
Interest paid (26)
Income taxes paid (182)
Net cash provided from operating activities 344

Cash flow from investing activities

Payment for plant & equipment (288)
Proceed from sale of plant 72
Net cash used in investing activities (216)

Cash flow from financing activities

Proceeds from borrowing 24,000
Net cash from financing activities 24,000

Net increase in cash held 152

Cash at the beginning of the financial year 422
Cash at the end of the financial year 574

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INDIRECT METHOD

Stubbs Ltd
Statement of cash flow
for the year ended 30 June 2015
($000)
Net profit 264
Depreciation 216
Increase in provision for doubtful debts 24
Increase in income taxes payable 36
(Increase)/decrease in accounts receivable (144)
(Increase)/decrease in inventories (24)
(Increase)/decrease in trade creditors (24)
Increase in accrued expenses 6
(Increase)/decrease in future income tax benefit (10)
Net cash provided from operating activities 344

Cash flow from investing activities

Payment for plant & equipment (288)
Proceed from sale of plant 72
Net cash used in investing activities (216)

Cash flow from financing activities

Proceeds from borrowing 24,000
Net cash from financing activities 24,000

Net increase in cash held 152

Cash at the beginning of the financial year 422
Cash at the end of the financial year 574

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B.

1. Evaluate the changes in net assets of the entity

2. Evaluate the entity’s financial structure, including its liquidity and solvency
3. Evaluate the entity’s ability to adapt to changing circumstances and opportunities
4. Assess the entity’s ability to generate cash in the future and enable predictions of future
cash flows to be made
5. Compare the performance of this entity with other entities because it eliminates the
effects of using different accounting treatments (for example depreciation methods) for
the same transactions and events
6. Check the accuracy of past assessments of future cash flows, and
7. Examine the relationship between profitability and net cash flow

End End