Limited companies (A Level) flashcards

Topic 2.1: Limited companies

Company statement of profit or loss: the subtotals in order

Gross profit; profit from operations (after distribution costs and administrative expenses); profit before tax (after finance costs); profit for the year from continuing operations (after tax); profit for the year; total comprehensive income.

250,000 ordinary shares of 0.40 are issued at 0.90 for cash. Entries?

Debit bank 225,000; credit share capital 100,000; credit share premium 125,000.

1,400,000 shares of 1.00; a 2 for 7 rights issue at 1.30. New shares, cash and share premium?

400,000 new shares; cash 520,000; share capital 400,000; share premium 120,000.

Bonus issue: entries and the check

Debit the reserves named (often capital reserves first), credit share capital with the nominal value. No bank entry; total equity is unchanged.

Gearing: formula, and the figure for debentures 455,000 and equity 845,000

Fixed cost capital (debt) ÷ total capital employed (debt + equity) × 100. 455,000 ÷ 1,300,000 × 100 = 35.0%.

Provision vs reserve

A provision is a liability of uncertain timing or amount and reduces profit. A reserve is part of equity, an allocation of profit.

A company buys back 80,000 of its ordinary shares of 0.50 at par out of profits. Transfer?

Debit retained earnings, credit capital redemption reserve 40,000 (the nominal value bought back).

Consideration 480,000 for agreed net assets of 437,500. Goodwill? What if net assets were 495,000?

Goodwill 42,500, an intangible non-current asset, not amortised but tested for impairment at least annually. With net assets of 495,000 the consideration is 15,000 below them: a bargain purchase gain of 15,000 in profit or loss.

Vendor: assets transferred at carrying value 410,000; liabilities transferred 60,000; consideration 395,000. Realisation result?

395,000 + 60,000 − 410,000 = 45,000 profit on realisation, credited to sundry shareholders.

A warranty provision is to be 1.5% of revenue of 820,000; last year's provision was 14,000. Entry in profit or loss?

Required 12,300, so the provision falls by 1,700, credited to profit or loss.

How are discontinued operations shown, and why?

As a single amount on the face of the statement, with detail in the notes, so users can forecast from continuing operations only.

Ordinary shares vs debentures

Shares: ownership, dividend at the directors' discretion (statement of changes in equity), votes, not repaid. Debentures: a loan, interest is a legal obligation and a finance cost, no votes, repaid on the redemption date.