Topic3_Practice_Questions_Solutions - Solutions for...

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Solutions for Practice Questions Lecture Topic 3 Week 3 2 August (DM) Lecture Topic 3 Shareholders Equity and Principles of Disclosure Identify different forms of corporate entities Account for share issues and reconcile movements in retained earnings Describe the selection of accounting policies, Account for changes in accounting estimates and errors Make judgments in respect of dealing with events after the Reporting Period Practice Questions: Picker et al, Chapter 3 DQ9 DQ10 Exercise 3.1 Picker et al, Chapter 18 DQ1 DQ3 Exercise 18.2 Discussion Questions 9 and 10 9. Discuss whether it is necessary to distinguish between the different components of equity rather than just having a single number for shareholders’ equity. The question is whether an investor would prefer to invest in Company A or Company B assuming the net assets of the company are the same: Company A Company B Share capital $100 000 $20 000 General reserve 30 000 60 000 Retained earnings 40 000 90 000 170 000 170 000 In general the composition of equity is irrelevant. Composition may be relevant where local laws place restrictions on what can be done with particular equity accounts eg if dividends may be paid only out of profits. 10. For what reasons may a company make an appropriation of its retained earnings? Appropriations from retained earnings are made for: - dividends, cash or shares - transfer to other reserves May also like to consider how increases in retained earnings occur: - earning of profit - transfers from reserves - recognition of actuarial gains and losses under IFRS 4 [note here that in all other cases amounts recognised directly in equity are taken to reserve accounts rather than to retained earnings]
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Reserves and dividends (a) Dividend paid Dr 30 000 Cash Cr 30 000 (Payment of dividend) (b) Asset revaluation reserve Dr 52 000 General reserve Cr 52 000 (Transfer between reserves) (c) General reserve Dr 34 000 Transfer from general reserve Cr 34 000 (Transfer between reserves) (d) General reserve Dr 480 000 Share capital Cr 480 000 (Bonus issue: 240 000 shares at $2 each)
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Topic3_Practice_Questions_Solutions - Solutions for...

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