Practice Questions • 20 Questions
Define the term "share premium account". (2 marks)
State two differences between ordinary shares and debentures as forms of long-term finance for a limited company. (2 marks)
Blackthorn Ltd has 500 000 ordinary shares in issue. Shareholder M holds 75 000 shares. The company makes a rights issue of 100 000 new ordinary shares. Shareholder M does not take up any of the rights shares. (a) Calculate Shareholder M's percentage ownership before the rights issue. (1 mark) (b) Calculate Shareholder M's percentage ownership after the rights issue. (1 mark) (c) State what has happened to Shareholder M's ownership and why. (1 mark)
Explain the difference between an interim paid dividend and a final proposed dividend in the context of a limited company's financial statements. (3 marks)
Explain why a bonus issue of shares does not change the total equity of a limited company. (3 marks)
Explain the significance of a gearing ratio above 50% for the shareholders of a limited company. (3 marks)
The equity section of the statement of financial position of Harlow Ltd at 31 March 2024 is shown below. Equity: £ Ordinary share capital (£1 each) 480 000 Share premium account 90 000 Retained earnings 215 000 Total equity 785 000 On 1 April 2024 Harlow Ltd made a fully subscribed rights issue of 120 000 ordinary shares at £1.45 each. Prepare the equity section of the statement of financial position of Harlow Ltd immediately after the rights issue. (4 marks)
The equity section of the statement of financial position of Pennine plc at 30 June 2024 is shown below. Equity: £ Ordinary share capital (£0.50 each) 600 000 Share premium account 280 000 Revaluation reserve 150 000 Retained earnings 420 000 Total equity 1 450 000 On 1 July 2024 Pennine plc made a bonus issue of 1 new share for every 5 shares held. Prepare the equity section of the statement of financial position of Pennine plc immediately after the bonus issue. (4 marks)
Explain two advantages of issuing ordinary shares rather than debentures to raise long-term finance. (4 marks)
The following information is available for two companies, Redwood plc and Ashford plc, for the year ended 31 March 2024. Redwood plc Ashford plc £000 £000 Ordinary share capital 4 200 3 600 Share premium account 1 800 2 100 Revaluation reserve 600 400 Retained earnings 1 900 1 200 Total equity 8 500 7 300 8% debenture loans 2 500 6 800 (a) Calculate the gearing ratio for each company. (2 marks) (b) Comment on which company has greater financial risk. Justify your answer with reference to the data. (4 marks)
The following information relates to Tiverton Ltd for the year ended 30 September 2024. £ Profit from operations 245 000 7% debenture loan (£200 000) — Additional 7% debenture loan issued on 1 April 2024 100 000 Taxation charge 38 400 Prepare an extract of the income statement of Tiverton Ltd showing profit from operations to profit for the year after tax for the year ended 30 September 2024. (6 marks)
The summarised statement of financial position of Elmwood Ltd at 28 February 2024 is shown below. £ Non-current assets 730 000 Current assets (including bank) 180 000 Total assets 910 000 Equity: Ordinary share capital (£1) 400 000 Share premium account 120 000 Retained earnings 285 000 Total equity 805 000 Current liabilities 105 000 Total equity and liabilities 910 000 On 1 March 2024 Elmwood Ltd: - Made a fully subscribed rights issue of 160 000 ordinary shares at £1.75 per share - Revalued non-current assets upwards by £95 000 Prepare the statement of financial position of Elmwood Ltd immediately after these transactions. (8 marks)
The equity section of the statement of financial position of Lynton plc at 1 April 2023 was: £ Ordinary share capital (£1 each) 600 000 Share premium account 140 000 Revaluation reserve 80 000 Retained earnings 310 000 Total equity 1 130 000 During the year ended 31 March 2024: - Lynton plc made a fully subscribed rights issue of 100 000 ordinary shares at £1.60 per share on 1 April 2023 - Non-current assets were revalued upwards by £45 000 - Profit for the year after tax was £178 000 - Interim dividends of £35 000 were paid during the year Prepare the statement of changes in equity of Lynton plc for the year ended 31 March 2024. (8 marks)
The following balances have been extracted from the accounting records of Crestwood Ltd for the year ended 31 December 2024. £ Revenue 892 500 Cost of sales 534 000 Distribution costs 68 400 Administrative expenses 91 200 Rent receivable 12 000 8% debenture loan (£300 000) — Taxation charge for the year 24 600 The debenture loan has been outstanding for the full year. Prepare the income statement of Crestwood Ltd for the year ended 31 December 2024. (10 marks)
The following data is available for two competing companies in the same industry. Strand plc Hollis plc £000 £000 Ordinary share capital 5 600 4 200 Share premium account 2 100 1 800 Retained earnings 3 200 950 Total equity 10 900 6 950 9% debenture loans 1 800 5 400 Profit from operations 2 640 1 820 Profit after tax 1 890 610 Assess the usefulness of the gearing ratio as a measure of financial risk when comparing Strand plc and Hollis plc. (10 marks)
Ferndale plc has 2 000 000 ordinary shares in issue. The company is considering raising additional capital and has two options: Option A: A fully subscribed rights issue of 400 000 new ordinary shares at £1.20 per share (nominal value £0.50) Option B: A bonus issue of 1 share for every 5 currently held, funded from the share premium account A shareholder currently holds 200 000 shares. Evaluate the impact of each option on the shareholder and on the company's equity. (10 marks)
Evaluate the extent to which the statement of changes in equity (SOCE) is useful to the shareholders of a limited company. (10 marks)