IFRS Chap 2
IFRS Chap 2
IFRS Chap 2
Solutions Manual
to accompany
Discussion Questions
1. Discuss the nature of a reserve. How do reserves differ from the other main
components of equity?
Reserves arise as a result of increases in equity other than from contributions from
equity participants. They may arise from various actions:
- earnings of profits [retained earnings]
- increases in the fair value of assets [asset revaluation surplus]
Unlike share capital, reserves are not created via cash flows into the entity.
2. A company announces a final dividend at the end of the financial year. Discuss
whether a dividend payable should be recognised.
If a liability is declared after end of reporting period, a liability is recognised only if the
dividends are appropriately authorised and no longer at the discretion of the entity. For
example, if the payment of dividends requires the approval of shareholders at a
The reason for this treatment is that no present obligation exists while an entity still has
discretion in relation to payment.
3. The telecommunications industry in a particular country has been a part of the
public sector. As a part of its privatisation agenda, the government decided to
establish a limited liability company called Telecom Plus, with the issue of 10
million $3 shares. These shares were to be offered to the citizens of the country.
The terms of issue were such that investors had to pay $2 on application and the
other $1 per share would be called at a later time. Discuss:
(a) The nature of the limited liability company, and in particular the
financial obligations of acquirers of shares in the company.
(b) The journal entries that would be required if applications were received
for 11 million shares.
In general:
The nature of a limited liability company is such that shareholders’ liability is limited to
the issue price of a share. If the shares are issued at par value, the liability is limited to
payment of that par value per share. If shares are issued at a given price, the limitation
is to that price.
The journal entries are – assuming that applications were received for 10 million
4. Why would a company wish to buy back its own shares? Discuss.
At date of buyback, the company has issued 150 000 shares and has a total share capital
of $350 000. Having issued the shares, the issue price is irrelevant.
(a) If the company buys back 20 000 shares at $4 per share, the company will record a cash
receipt of $80 000. Which equity accounts it adjusts is the decision of management.
There is no requirement that share capital be reduced.
(b) The answer is the same if the shares are bought back at $2.50 per share.
6. A company has a share capital consisting of 100 000 shares having a par value of
$1 per share and issued at a premium of $1 per share, and 50 000 shares issued at
$2 par and $1 premium. Discuss the effects on the accounts if:
(a) The company buys back 20 000 shares at $4 per share
(b) The company buys back 20 000 shares at $2.50 share
(a) The company would have to specify which shares it was buying back.
If the $1 par shares were bought back, the relevant entry is:
Cash Dr 80 000
Share Capital Cr 20 000
Share Premium Cr 20 000
Reserves Cr 40 000
Cash Dr 80 000
Share Capital Cr 40 000
Share Premium Cr 20 000
Reserves Cr 20 000
(b) The company would have to specify which shares it was buying back.
If the $1 par shares were bought back, the relevant entry is:
Cash Dr 50 000
Share Capital Cr 20 000
Share Premium Cr 20 000
Reserves Cr 10 000
Cash Dr 50 000
Reserve [Share Buy-Back Discount] Dr 10 000
Share Capital Cr 40 000
Share Premium Cr 20 000
A rights issue is an issue of shares with the terms of issue giving existing shareholders
the right to an additional number of shares in proportion to their current shareholding,
i.e. the shares are offered on a pro rata basis.
For example, each shareholder may be entitled to one share for every two currently
held.
A private placement is where a company places the shares with specific investors rather
than invite applications for the new issue of shares.
Disadvantages;
- dilution of current shareholders’ interests.
- where shares are placed at a discount.
9. Discuss whether it is necessary to distinguish between the different components of
equity rather than just having a single number for shareholders’ equity.
Company A Company B
Composition may be relevant where local laws place restrictions on what can be done
with particular equity accounts e.g. if dividends may be paid only out of profits.
10. For what reasons may a company make an appropriation of its retained earnings?
INDIA LTD
LAOS LTD
(a)
15/2 to
15/3 Cash Dr 800 000
Application – rights issue Cr 800 000
(Money received on applications for
rights issue: 160 000 x $5)
Sometime later:
(b)
15/2 to
15/3 Cash Dr 800 000
Application – rights issue Cr 800 000
(Money received on applications for
rights issue)
JORDAN LTD
Options Dr 1 000
Options lapsed reserve Cr 1 000
(Transfer of lapsed options)
Note: the $1 000 amount for lapsed options could have been included in
share capital.
JAPAN LTD
General Journal
(a)
2015
June
25 Dividend paid Dr 80 000
Cash Cr 80 000
(Interim dividend of 10c per share on
600 000 fully paid shares and 5c per
share on 400 000 partly paid shares)
July
10 Call Dr 200 000
Share capital Cr 200 000
(Final call on 400 000 shares at 50c)
31
Cash Dr 200 000
Call Cr 200 000
(Cash received on call)
September
15 General reserve Dr 100 000
Share capital Cr 100 000
(1-10 bonus issue on 1 000 000
shares from general reserve)
December
31 Plant maintenance reserve Dr 50 000
General reserve Cr 50 000
(Transfer between reserves)
KUWAIT LTD
2015
01/4 NO ENTRY
Receivable - Underwriter
15/04/15 Share capital - pref 30 000 20/04/15 Cash/Share issue costs 30 000
Cash
15/04/15 Cash trust 320 000
20/04/15 Receivable – U’writer 25 500
Exercise 2.7 RIGHTS ISSUE, PLACEMENT OF SHARES
IRAQ LTD
BRUNEI LTD
DATE DETAILS
Application Dr 30 000
Calls in advance Cr 30 000
(5 000 applications x $3.00)
(b) The accountant should consider whether there are tax or dividend distribution issues associated
with particular equity accounts before determining which accounts are to be affected by the buy-
back. If there are no such issues the buy-back can be written off against any equity account or
across all equity accounts.
Exercise 2.9 ISSUE OF OPTION AND SHARES, FORFEITURE OF
SHARES
Prepare ledger accounts to record the following transactions for Nepal Ltd:
NEPAL LTD
Cash Trust
Date Item $ Date Item $
21/7/15 Application – ord 240 000 31/7/15 Application – ord 40 000
21/7/15 Application – pref 70 000 31/7/15 Cash 270 000
310 000 310 000
Application – Ordinary
Date Item $ Date Item $
31/7/15 Cash trust (refund) 40 000 21/7/15 Cash trust 240 000
31/7/15 Share capital – ord 200 000
240 000 240 000
Application – Preference
Date Item $ DateItem $
31/7/15 Share capital – pref 100 000 21/7/15 70 000
Cash Trust Receivable from underwriter
31/7/15 30 000
100 000
100 000
Cash (extract)
Date Item $ Date Item $
31/7/15 Cash trust 270 000 25/6/15 Forfeited shares a/c 550
14/8/15 Receivable – 23 500 25/6/15 Forfeited shares a/c 8 450
underwriter
1/6/16 Share capital – ord 108 000
10/6/16 Call – ord 95 000
25/6/16 Share capital – ord 14 000
Exercise 2.10 BUY-BACK OF SHARES
(a) Prepare the journal entries to account for the buy-back. Explain the reasons for the
entries made.
(b) Assume that the buy-back price per share was equal to 70c per share.
Prepare journal entries to record the buy-back, and explain your answer.
(c) Assume that, instead of the share capital shown above, Vietnam Ltd had issued 1
million shares at a par value of $1 and a share premium of $3 per share. Rework
your answers to (a) and (b) under this new scenario.
VIETNAM LTD
General Journal
(a). Any combination of equity accounts is correct. The following entry is purely illustrative.
Unless there are taxation or legislative reasons, any equity account can be used.
Note: where a share buy-back premium arises, both the share capital and share
premium accounts must be reduced in amounts relating to the par value and premium
on each share. Any balance of premium is debited to equity consistent with the terms of
the buy-back.
Prepare journal entries to record the above transactions in the records of Syria Ltd.
SYRIA LTD
General Journal
2014
Nov 30 Cash Dr 18 000
Share capital - B Ordinary Cr 18 000
(Allotment of 8 000 B ordinary
shares at a price of $2.25 under a 1
for 5 rights issue)
2015
Jan 16 Call -A Ordinary Dr 90 000
Share capital - A Ordinary Cr 90 000
(Call of 75c per share on 120 000
A Ordinary shares)
(a) Prepare general journal entries, including any closing entries required, to
record the above transactions. (Narrations are not required, but show all
workings.)
(b) Prepare a statement of changes in equity for the year ended 30 June 2014.
(c) Taiwan Ltd has recognised a ‘Forfeited shares reserve’ as part of equity. Explain
how and why such areserve would be created.
TAIWAN LTD
DATE
DETAILS
Application Dr 20 000
Calls in advance Cr 20 000
(10 000 x $2)
Cash Dr 100 000
Cash trust Cr 100 000
Movements of changes in equity during the period ending 30 June 2014 were:
Share capital
Balance at 1 July 2013 $300 000
Issue of 40 000 ordinary shares, paid to $2.00 80 000
Share issue costs (2 500)
Issue of 80 000 ordinary shares @ $2.90 232 000
Issue of 65 000 ordinary shares @ $3.00 on exercise
of options worth 50c 227 500
Calls in advance 20 000
Balance at 30 June 2014 $857 000
Options
Balance at 1 July 2013 $40 000
Transfer to share capital on exercise (32 500)
Transfer to reserve on lapse (7 500)
Balance at 30 June 2014 $ 0
General reserve
Balance at 1 July 2013 $30 000
Transfer from retained earnings 30 000
Balance at 30 June 2014 $60 000
Retained earnings
Balance at 1 July 2013 $75 000
Dividends declared and paid (12 000)
Transfer to general reserve (30 000)
Profit for the period 69 420
Balance at 30 June 2014 $102 420
(c)
Taiwan Ltd has recognised a “Forfeited Shares Reserve” as part of equity. Explain
how and why such a reserve would be created.
The forfeited shares reserve can only have arisen if shareholders failed to pay a call made on
their shares by the company. Corporate legislation or the company’s own rules must then
allow the directors to forfeit those shares for non-payment of the call and to retain any monies
already paid. Forfeiture will result in the cancellation of the shares, the elimination of the
calls in arrears balance and the transfer of any monies by the shareholders to the reserve
account titled ‘forfeited shares reserve’.
Exercise 2.13 SHARES, OPTIONS, DIVIDENDS AND RESERVE
TRANSFERS
MALDIVES LTD
(a)
2014
15/9 Preference dividend payable Dr 4 500
Cash Cr 4 500
(Payment of preference dividend)
2015
Share capital:
Ordinary A shares: 480 000 shares fully paid $949 000
Ordinary B shares: 300 000 fully paid 600 000
Ordinary C shares: 70 000 fully paid 147 000
Preference shares: 50 000 fully paid 75 000
1 771 000
General reserve 35 000
Options reserve 3 000
Retained earnings 113 000
Total shareholders’ equity $1 922 000
Exercise 2.14 DIVIDENDS, SHARE ISSUES, SHARE BUY-BACK, OPTIONS
AND MOVEMENTS IN RESERVES
(a) Prepare the general journal entries to record the above transactions.
(b) Prepare the statement of changes in equity for Singapore Ltd for the year ended
31 December 2015.
SINGAPORE LTD
2015
15/2 Dividend payable Dr 25 000
Cash Cr 25 000
(Payment of dividend)
Share capital:
Balance at 1 January 2015 – 110 000 shares $3 590 000
Share issues: 25 000 shares 1 237 500
Repurchase of shares: 5 000 shares (140 000)
Bonus issue: 13 000 shares 216 000
Balance at 31 December 2015 – 143 000 shares $4 903 500
Retained earnings:
Balance at 1 January 2015 $750 000
Profit for the period 150 000
Transfer from asset revaluation surplus 30 000
Dividends paid and provided (50 000)
Early adoption of IAS 9X (55 000)
Repurchase of shares (140 000)
Transfer to general reserve (40 000)
Balance at 31 December 2015 $645 000
General reserve:
Balance at 1 January 2015 $240 000
Bonus issue of shares (240 000
Transfer from retained earnings 40 000
Balance at 31 December 2015 $40 000
Options:
Balance at 1 January 2015 $0
Options issued 20 000
Balance at 31 December 20015 $20 000
(a) Prepare general journal entries to record the transactions relating to share
issues and options for the year ending 30 June 2014.
(b) Prepare general journal entries, including any closing entries required, to
record the transactions relating to dividends and reserve transfers for the year
ended 30 June 2014.
(c) If the company’s constitution required all dividends to be approved by the
shareholders at the annual general meeting before they could be paid, explain how
and why your recording of the dividend payment on 29 September 2013 would
change. Assume shareholder approval was granted on 20 September 2013.
YEMEN LTD
DATE DETAILS
(c) IAS 10 mandates that no liability can be raised for dividend declared prior to end of
reporting period if shareholder approval is required. As a consequence, no
recognition of the dividend would have occurred in the prior period. When the
approval is obtained the dividends can be paid. The entry to record the payment
would change to:
This is necessary to remove the profits being distributed from retained earnings and to
record the cash payment to shareholders. No liability is recognised as the reduction in
equity takes place simultaneously with the cash payment.
Exercise 2.16 OPTIONS, SHARES, DIVIDENDS, RESERVES
PHILIPPINES LTD
DATE DETAILS Dr Cr
(i) Cash Dr 150 000
Share capital Cr 150 000
(50 000 x $3.00)
Options Dr 24 000
Share capital (50 000 x 0.40) Cr 20 000
Options reserve (10 000 x 0.40) Cr 4 000
Application Dr 20 000
Calls in advance Cr 20 000
(a) Prepare general journal entries and closing entries to record the above transactions
and events.
(b) Prepare the following general ledger accounts (T format) for the period 30 June
2012 to 30 June 2015:
• Share capital (Ordinary A)
• Share capital (Ordinary B)
• Share capital (Preference).
MONGOLIA LTD
1. JOURNAL ENTRIES
2012
30/09 Final dividend payable Dr 28 750
Cash Cr 28 750
([Ord A: 120 000 x 10c = 12 000] +
[Ord B: 150 000 x 10c x 105/180 = 8 750] +
[Pref: 100 000 x 8% = 8 000])
31/10 NO ENTRY
Cash Dr 40 000
Cash Trust Cr 40 000
(Transfer on issue of options)
2013
15/01 Call (Ordinary B) Dr 75 000
Share cap (Ordinary B) Cr 75 000
(Ord B call: 150 000 x 50c)
2014
31/1 NO ENTRY
(a) Prepare general journal entries and closing entries to record the above transactions.
(b) Prepare the Options and Retained Earnings ledger accounts for the period 30 June
2012 to 30 June 2013.
MALAYSIA LTD
1. JOURNAL ENTRIES
01/10/11 NO ENTRY
Application Dr 5 250
Allotment Cr 5 250
(Surplus application money transferred to allotment)
Cash Dr 26250
Cash trust Cr 26250
Options Dr 7 500
Share capital – Ordinary Cr 6 000
Options reserve Cr 1 500
(Options: 15 000 x 50c
Capital: 12 000 x 50c
Options reserve: 3 000 x 50c)
2. Ledger Accounts
OPTIONS
31/03/12 Share cap/OR GJ 7 500 30/06/11 Bal b/d 7 500
RETAINED EARNINGS
30/06/11 Bal b/d 136 340
30/06/12 Bal c/d 148 050 30/06/12 P&L GJ ..11 710
148 050 148050
30/06/12 Bal b/d 148050