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ACC601 Corporate Accounting
Tutorial 2 – Due for week 3- (Q2-3 & 2-4 will be due for wk4)
Discussion Questions:
1. What restrictions exist under the Corporations Act 2001 on the conversion of ordinary
shares to preference shares?
2. What is a debenture? Briefly outline the different types of debentures permitted under the
Corporations Act 2001 and outline the procedures which must be followed to issue
debentures.
Case Study 1.
Public floats and private placements
Technology company DDD Ltd announced plans to raise $3 million through a placement of 11.5
million shares in order to proceed with its business plans in the next year. The placement was at
an 8.3% discount to the most recent trading price on the stock exchange. Another company
which owned 8.7 million shares in DDD wanted to sell its shares, and it was agreed that another
major shareholder would acquire 2.3 million of these shares, and that a director would acquire
another 1.8 million of the shares. The remainder would be sold to the public. DDD's chairman
was satisfied with the interest that investors had shown in participating in the placement,
particularly given the recent history of losses made by the company.
(Based on an article by Mark
Beyer, 'DDD plans $3m
raising' , WA Business News,
19 January 2006, p. 5)
Required:
1. Distinguish between a public share float and a private placement.
2. Assuming that the public float of 11.5 million shares was successful, what journal
entries would be required to account for it? What entries or adjustments (if any) would
be necessary in the records of DDD Ltd for the private placement?
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Case Study 2: Forfeiture of shares
The notice shown below appeared in the Financial News on 1 October 2011.
GARAM MASALA NL
Notice of Sale of Forfeited Shares
All shares on which the call of fifty cents per share, due for payment on 1 September 2011,
remains unpaid, will be sold by public auction on 1 November 2011, at 11 a.m. at the Olympics
Auditorium, Suva.
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Assume the following:
•
1 000000 shares were forfeited
•
the forfeited shares were all paid to $1.50 per share
•
all the shares were sold at the auction for $1.80 per share and will be credited to $2.00
•
costs of forfeiture and reissue amounted to $4000
•
the balance of the Forfeited Shares account will be refunded to the former shareholders .
Required
Discuss the benefits to a company from forfeiting and reissuing shares, and prepare journal
entries to record the forfeiture and reissue above.
PRACTICE QUESTIONS:
Question 2.1 Oversubscription on share issue, payable in full on application
Chilli Ltd was registered on 1 March 2011. Directors decided to issue 500000 ordinary shares on
31 March 2011, payable in full on application at an issue price of $2.
The company received applications for 560000 shares, sent letters of regret to applicants for 10
000 shares and the remaining applicants received partial allotments by issue of 10 shares for
every 11 shares applied for, making the total allotment 500000 shares. Legal costs of issuing the
shares, $12000, were paid.
Required
Prepare journal entries and ledger accounts to record the above transactions.
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Question 2.2 Calls on different classes of shares, forfeiture and reissue
Share capital of Parsley Ltd at 31 March 2012 was as follows: 200000 ordinary shares at an issue
price of $5 each paid to $3, and 50000 preference shares at an issue price of $2 each paid to $1.
At that date, a further call of $2 on ordinary shares and $1 on preference shares was made.
During the 3 months to 30 June 2012, all calls were duly received except those on 1000
preference shares which were forfeited as at 30 June 2012.
To bring capital back to the original amount of issued capital, the forfeited shares were offered to
an investment company at a price of $1.80 per share paid to $2 and the transfer was completed
on 30 September 2012.
According to the company's constitution, shareholders' equity in forfeited shares must be
refunded to them. On 31 October, the previous owner of forfeited shares received a refund
cheque for the amount due, less selling costs of $500.
Required
Show journal entries to implement the above transactions.
Question 2.3 Rights issues and private placements
The equity of Marjoram Ltd on 30 June 2012 was:
Share capital (issued at $3, fully paid) $600000
Asset revaluation reserve 300000
Retained earnings 200000
The transactions on the next page occurred during the year ended 30 June 2013.
1. On 1 August 2012, a I-for-2 rights offer was made to existing shareholders. The issue price
was $3 per share payable in full on allotment, and rights were transferable. Shares issued
under the offer were to rank equally with existing shares as from 1 August 2012. The issue
was underwritten for a commission of $6000. The issue closed fully subscribed on 31
August, the holders of 20000 shares having transferred their rights. Directors proceeded to
allotment. The underwriting commission was paid on 7 September.
2. On 1 March 2013, 150000 shares were privately placed with Curry Investments Ltd at $3 per
share.
Required
A. Prepare general journal entries to record the above transactions.
B. Prepare the equity section of the statement of financial position as it would appear at 30
June 2013, assuming a profit for the year of $50000.
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Question 2.4 Share buy-back
Tarragon Ltd decided to reduce its surplus cash by repurchasing 5% of its ordinary shares under
an on-market buy-back scheme for $3.40 per share. At the date of the buy-back, the equity of
Tarragon Ltd consisted of:
Share capital (4000000 shares fully paid) $ 4000000
Other reserves 300000
Retained earnings 420000
The company has adopted a policy that the share buy-back should be written off against retained
earnings, other reserves and share capital in that order.
Required
A. Prepare the journal entries to account for the proposed buy-back.
B. Assuming now that the balance of retained earnings is only $ 100 000, how would your
answer differ?
Question2.5 Oversubscription with pro rata allotment, and forfeiture
On 1st July 2012, Oregano Ltd was registered and offered 1000000 ordinary shares to the public
at an issue price of $6, payable as follows;
$3 on application (due 15th August)
$2 on allotment (due 15th September)
$1 on final call.
The issue was underwritten at a commission of $8000. By 15th August, applications had been
received for 1200000 ordinary shares of which applications for 200000 shares forwarded the full
$6 per shares, the remainder paying only the application money.
At a directors meeting on 16th August, it was decided to allot shares in full to applicants who had
paid the full amount and proportionally to all remaining applicants. According to the company’s
constitution, all surplus money from application can be transferred to allotment and /or call
accounts.
The underwriting commission was paid on 28th August. Other share issue costs of $6000 were
also paid on this date. All outstanding allotment money was received by the due date.
The final call was made on 1st November with money due by 30 November. All money was
received on the due date except for the holder of 30000 shares who failed to meet the final call.
On 7th December as provide for in the constitution, the directors decided to forfeit these shares.
They were reissued on 15th December as paid to $6.00 for $5.60 cash. The balance of forfeited
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shares account was returned to the former shareholder on 16th December.
Required
Prepare the journal entries to record the transactions of Oregano Ltd up to and including
that which took place on 16 December 2012. (Show all workings.)
The End
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