MCQs CAPITAL STRUCTURE AND FINANCE COSTS

3-1 A company has issued 50,000 ordinary shares of 25c each at a premium of 50c per share. The cash
received was correctly recorded but the full amount was credited to the ordinary share capital
account.

Which of the following journal entries is needed to correct this error?

Debit Credit
$ $
A Share premium account 25,000
Share capital account 25,000

B Share capital account 25,000

Share premium account 25,000

C Share capital account 12,500

Share premium 25,000
Cash 37,500

D Share capital account 37,500

Share premium account 37,500
3-2 Which of the following journal entries could correctly record a bonus (capitalisation) issue of
shares?
Debit Credit
$ $
A Cash 100,000
Ordinary share capital 100,000

B Ordinary share capital 100,000

Share premium 100,000

C Share premium 100,000

Ordinary share capital 100,000

D Retained earnings 100,000

Ordinary share capital 60,000
Share premium 40,000
3-3 Which of these statements about limited liability companies is/are correct?

(1) A company might make a bonus (capitalisation) issue to raise funds for expansion

(2) Both realised and unrealised gains and losses are included in the statement of
comprehensive income required by IAS 1 Presentation of Financial Statements

A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2
3-4 Which of the following statements about financial accounting for a limited liability company is
true?

A A revaluation surplus arises when a non-current asset is sold at a profit

B The authorised share capital of a company is the maximum nominal value of shares
the company may issue
C The notes to the financial statements must contain details of all adjusting events as
defined in IAS 10 Events after the Reporting Period
D The dividend paid in the year cannot exceed the profits of that year
3-5 Evon issued 1,000,000 ordinary shares of 25c each at a price of $1·10 per share, all received in cash.

What should be the accounting entries to record this issue?

A Debit: Cash $1,100,000

Credit: Share capital $250,000
Share premium $850,000

B Debit: Share capital $250,000

Share premium $850,000
Credit: Cash $1,100,000

C Debit: Cash $1,100,000

Credit: Share capital $1,100,000

D Debit: Cash $1,100,000

Credit: Share capital $250,000
Retained earnings $850,000
3-6 At 1 July 2016 a limited liability company’s capital structure was as follows:

$
Ordinary share capital (1,000,000 shares of 50c each) 500,000
Share premium account 400,000

In the year ended 30 June 2017 the company made the following share issues:

1 January 2017: A bonus issue of one share for every four in issue at that date, using the share
premium account.

1 April 2017: A rights issue of one share for every ten in issue at that date, at $1·50 per share.

What will be the balances on the company’s share capital and share premium accounts at
30 June 2017 as a result of these issues?

Share capital Share premium

$ $
A 687,500 650,000
B 675,000 375,000
C 687,500 400,000
D 687,500 150,000
3-7 Which of the following statements are correct?

(1) A company might make a rights issue if it wished to raise more equity capital
(2) A rights issue might increase the share premium account whereas a bonus issue is
likely to reduce it
(3) A rights issue will always increase the number of shareholders in a company whereas
a bonus issue will not
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D All three statements

3-8 Where should dividends paid to ordinary shareholders be shown in a company’s published
financial statements?

A In other comprehensive income

B In the statement of financial position
C In the statement of changes in equity
D In the statement of profit or loss
3-9 At 30 June 2016 a company had $1m 8% loan notes in issue. Interest is paid half-yearly on 30 June
and 31 December.
On 30 September 2016 the company redeemed $250,000 of these loan notes at par, and paid the
interest due to that date.
On 1 April 2017 the company issued $500,000 7% loan notes at par. Interest is payable
halfyearly on 31 March and 30 September.
What figure should appear in the company’s statement of profit or loss for finance costs
for the year ended 30 June 2017?

A $88,750
B $82,500
C $73,750
D $65,000

3-10 Diamond issues 250,000 ordinary shares with a nominal value of $2 each at a price of $3.55 each
for cash.

Which of the following sets of entries would be made to record this transaction?

A Cr Bank $887,500, Dr Share capital $500,000, Dr Share premium $387,500

B Dr Bank $887,500, Cr Share capital $250,000, Cr Share premium $637,500
C Dr Bank $887,500, Cr Share capital $500,000, Cr Share premium $387,500
D Cr Bank $887,500, Dr Share capital $250,000, Dr Share premium $637,500
3-11 The following balances have been extracted from Saracen’s trial balance at 31 December 2016:
Debit Credit
$ $
Retained earnings at 1 January 2016 4,695,600
10% Loan notes issued in 2013 1,300,000
Loan note interest paid 65,000
Profit for the year ended 31 December 2016 is $520,000. Income tax for the year has been
estimated at $156,000.

What is the figure for retained earnings in Saracen’s statement of financial position as at
31 December 2016?

A $4,929,600
B $4,994,600
C $5,059,600
D $5,215,600
3-12 Floyd made a rights issue of 150,000 $1 ordinary shares at price of $1.20 per share.

What is the correct journal to record this?

Dr Cr
$ $
A Bank 180,000
Share capital 150,000
Share premium 30,000
B Bank 180,000
Share premium 180,000
C Bank 180,000
Share capital 180,000
D Bank 150,000
Share premium 30,000
Share capital 120,000
3-13 The following information is available about a company’s dividends:
$
2016
September Paid final dividend for the year ended
30 June 2016 (declared August 2016) 600,000
2017
March Paid interim dividend for the year ended30 June 2017 250,000
September Paid final dividend for the year ended
30 June 2017 (declared August 2017) 750,000

How should these dividends be recognised in the company’s profit or loss for the year
ended 30 June 2017 and its statement of financial position as at that date?

Profit or loss Statement of

for the period financial position
A $1,000,000 deduction $750,000 liability
B $850,000 deduction $nil
C $nil $750,000 liability
D $nil $nil
3-14 Which TWO items in the statement of financial position would change immediately following
an issue of redeemable preference shares?

(1) Cash
(2) Retained earnings
(3) Finance cost
(4) Equity
(5) Long-term debt

A 1 and 5
B 1 and 4
C 2 and 4
D 3 and 5
3-15 Which of the following statements is/are correct in relation to a rights issue made by a

company?

(1) A rights issue capitalises the company’s reserves, which can be a disadvantage, as this
can reduce the amount of reserves available for future dividends
(2) A rights issue is offered to the company’s existing shareholders and is usually at a
discounted price compared to the nominal value of a share

Statement 1 Statement 2
A Correct Correct
B Correct Incorrect
C Incorrect Correct
D Incorrect Incorrect
3-16 During the year to 30 September 2016 K Co made the following payments:

(1) $40,000 interest on $800,000 10% loan notes issued on 1 January 2016. Interest is
payable on 30 June and 31 December

(2) $12,000 dividend on 200,000 $1 6% irredeemable preference shares

(3) $5,000 dividend on 100,000 $1 5% redeemable preference shares

What should be the finance cost in the statement of profit or loss for the year ended 30
September 2016?

A $45,000
B $60,000
C $65,000
D $77,000
3-17 Shane Co has the following share capital in issue at 31 March 2017:

30,000 2% $1 irredeemable preference shares

20,000 4% $1 redeemable preference shares
100,000 50c ordinary shares

What amount will be included as equity capital in the statement of financial position at 31
March 2017?

A $130,000
B $70,000
C $80,000
D $100,000

3-18 Problem Co makes a 1 for 5 bonus issue using the share premium account to the extent that it is
possible. Immediately before the bonus issue, the company had the following equity balances:
$
Share capital ($1 shares) 100,000
Share premium account 15,000
Retained earnings 460,000

What is the balance on the retained earnings account after the bonus issue has been
recorded?

A $460,000
B $465,000
C $440,000
D $455,000