Unit 51115/52115 Company/Corporate Accounting

1. Unit 51115/52115Company/Corporate Accounting • LECTURER Noel Brown • ROOM L418 • E-mail brownn@usq.edu.au • Phone 07 46 311264 • TUTOR Mrs Debra Janke

2. Introduction to Companies • Module 1 • Leo & Hoggett- Chaps 1, 2 & 3 (refer to the study guide as to the required reading)

3. Objectives 1. Complete the entries for the formation of a company, forfeiture & re-issue of shares 2. Differentiate between different types of shares 3. Account for movement in reserve accounts and account for provisions & payment of Dividend 4. Prepare financial statements for managers

4. Corporate Form • The corporate form arose during the industrial revolution where large sums of money were required to purchase machinery • Individuals contributed small amounts which resulted in large totals contributed to companies • Highly successful - today companies are economically & financially successful - examples ??

5. Limited liability • The feature of companies limited liability • shareholders liable for unpaid amount on their shares • Compare with partnerships & sole traders where each partner joint & severally liable • Advantages over partnerships & sole traders • Limited liability • perpetuity ie continued existence • members can sell their shares • raise large amounts of money

6. Corporate legislation • Companies formed, administered and wound up by Corporations Act 1989 which includes the Corporations Law • The law is administered by the Australian Securities & Investments Commission (ASIC)

7. Accounting standard setting • Under corporations law the companies must comply with standards as set by AASB • AASB • Australian Accounting Standards Board - reports to the FRC (Financial Reporting Council) • functions to make accounting standards for Corporations Law • UIG • Urgent issues group reports to AASB its role is to make decisions on existing accounting standards • ASX • Australian Stock Exchange • sets requirements for listed companies

8. Different Companies • 2 types of Companies - • registered as per Corporations Law • Proprietary companies • limited by shares • unlimited with a share capital • Public Companies • limited by shares • limited by guarantee • unlimited • no-liability

9. Proprietary Companies • Classified as either large or Small • test for small (meet 2) • revenue < $10 m • assets < $5 m • < than 50 employees • Small company does not have to prepare accounts unless requested • Large companies must prepare in accordance with accounting standards • lodge with ASIC

10. Public Companies • A company that is NOT a proprietary company • Normally ownership large • additional rules include • appointment of auditor • preparation of financial statement in accordance with accounting standards

11. Administering a company • this is left to the DIRECTORS who manage the company on behalf of the shareholders • the law requires the keeping of registers and records eg 1. Minute Book 2. Financial Records 3. Registers of Members 4. Registers of Debenture Holders 5. Registers of charges

12. Companies have to furnish • Annual Returns • Financial Statements • Director’s Report • Auditor’s Report shareholders (owners) directors (prepare accounts) auditors (check accounts)

13. Funding a company • Shares (equity) • Debentures (borrowings- liability) different types of shares • Ordinary • Preference • Redeemable preference (debt/equity?) • AASB 1034 para 8.2 if exhibit characteristics of liabilities then record as Liabilities • Options

14. Companies • Accounting for share issue • Forfeiture of shares • Reissue of shares • Reserves • Dividends TEXT CHAPS 1& 2

15. Example ALPHA LTD Alpha Ltd was incorporated on 1 July x1. On this day a prospectus was issued calling for applications for 75,000 shares at an issue price of $3. The shares were payable $1 on application and $1 on allotment the balance in two years’ time. Applications closed on 1 August x1 with the receipt by the company of $76,000 for 76 000 shares. The shares were allotted on 15 August, with the $1 000 oversubscription being refunded to the unsuccessful shareholders. All allotment monies received by 31 August. A call of $1 was made on 1 August 19x3. All call money except that payable on 2,000 shares was received by 30 September except that payable on 2,000 shares

16. Receipt Of Cash Dr Cash Trust 76,000 Cr Application 76.000 • Example ALPHA LTD Alpha Ltd was incorporated on 1 July x1. On this day a prospectus was issued calling for applications for 75,000 shares at an issue price of $3. The shares were payable $1 on application and $1 on allotment the balance in two years’ time. Applications closed on 1 August x1 with the receipt by the company of $76,000 for 76 000 shares. The shares were allotted on 15 August, with the $1 000 oversubscription being refunded to the unsuccessful shareholders. All allotment monies received by 31 August. A call of $1 was made on 1 August 19x3. All call money except that payable on 2,000 shares was received by 30 September except that payable on 2,000 shares

17. Receipt Of Cash Dr Cash Trust 76,000 Cr Application 76.000 Return Oversubscription Dr Application 1,000 Cr Cash Trust 1,000 • Example ALPHA LTD Alpha Ltd was incorporated on 1 July x1. On this day a prospectus was issued calling for applications for 75,000 shares at an issue price of $3. The shares were payable $1 on application and $1 on allotment the balance in two years’ time. Applications closed on 1 August x1 with the receipt by the company of $76,000 for 76 000 shares. The shares were allotted on 15 August, with the $1 000 oversubscription being refunded to the unsuccessful shareholders. All allotment monies received by 31 August. A call of $1 was made on 1 August 19x3. All call money except that payable on 2,000 shares was received by 30 September except that payable on 2,000 shares

18. Receipt Of Cash Dr Cash Trust 76,000 Cr Application 76.000 Return Oversubscription Dr Application 1,000 Cr Cash Trust 1,000 • Example ALPHA LTD Alpha Ltd was incorporated on 1 July x1. On this day a prospectus was issued calling for applications for 75,000 shares at an issue price of $3. The shares were payable $1 on application and $1 on allotment the balance in two years’ time. Applications closed on 1 August x1 with the receipt by the company of $76,000 for 76 000 shares. The shares were allotted on 15 August, with the $1 000 oversubscription being refunded to the unsuccessful shareholders. All allotment monies received by 31 August. A call of $1 was made on 1 August 19x3. All call money except that payable on 2,000 shares was received by 30 September except that payable on 2,000 shares Dr Bank 75,000 Cr Cash Trust 75,000 Dr Application 75,000 Cr Share Capital 75,000

19. Receipt Of Allotment Dr Allotment 75,000 Cr Share Capital 75,000 Dr Bank 75,000 Cr Allotment 75,000 • Example ALPHA LTD Alpha Ltd was incorporated on 1 July x1. On this day a prospectus was issued calling for applications for 75,000 shares at an issue price of $3. The shares were payable $1 on application and $1 on allotment the balance in two years’ time. Applications closed on 1 August x1 with the receipt by the company of $76,000 for 76 000 shares. The shares were allotted on 15 August, with the $1 000 oversubscription being refunded to the unsuccessful shareholders. All allotment monies received by 31 August. A call of $1 was made on 1 August 19x3. All call money except that payable on 2,000 shares was received by 30 September except that payable on 2,000 shares

20. Call Dr Call 75,000 Cr Share Capital 75,000 Dr Bank 73,000 Cr Call 73,000 • Example ALPHA LTD Alpha Ltd was incorporated on 1 July x1. On this day a prospectus was issued calling for applications for 75,000 shares at an issue price of $3. The shares were payable $1 on application and $1 on allotment the balance in two years’ time. Applications closed on 1 August x1 with the receipt by the company of $76,000 for 76 000 shares. The shares were allotted on 15 August, with the $1 000 oversubscription being refunded to the unsuccessful shareholders. All allotment monies received by 31 August. A call of $1 was made on 1 August 19x3. All call money except that payable on 2,000 shares was received by 30 September except that payable on 2,000 shares

21. ALPHA LTD BALANCE SHEET AS AT XX/XX/XX SHARE CAPITAL & RESERVES SHARE CAPITAL 75,000 SHARES called to $3 225,000 LESS- CALLS IN ARREARS 2,000 2,000 Shares @ $1 ------------ 223,000

22. Other Issues • Oversubscription - Common for power to be given to the directors to use excess money towards future allotment or call monies Dr Application CR Allotment CR Call Account - Otherwise money refunded to the shareholders- as per previous example DR Application CR Cash Trust

23. Other Issues • Undersubscription • Where applications received for fewer than the number of shares offered to the public 1. Cancel the offer • AND refund money to shareholders 2. Where allowed to offer less than the original number • Allot only the number applied for 3. If issue underwritten • Allotment the balance of the number of shares to the underwriter (Payment may be deducted from fee owing)

24. Companies • Accounting for share issue • Forfeiture of shares • Reissue of shares • Reserves • Dividends TEXT CHAPS 1& 2

25. Entry for forfeiture • DR Share Capital CR Call Account CR Forfeited Shares Reserve

26. Example GAMMA LTD Gamma Ltd’s Capital consists of 10,000 shares issued at $1 paid to 50c. On 1 November the company made a call of 25c per share payable 18 November. At that date all shareholders had paid the call except the holders of 2,000 shares. On 18 December Gamma Ltd decided to forfeit the shares on which the call was unpaid. Dr Share Capital 1,500 (2000*75c) CR Call (2000*25c) 500 CR F.S.R (2000*50c) 1,000

27. Companies • Accounting for share issue • Forfeiture of shares • Reissue of shares • Reserves • Dividends TEXT CHAPS 1& 2

28. REISSUE OF SHARES Dr Cash At Bank (Cash Received) Dr F.S.R. (Amt Lost) Cr Share Capital (Amt Called On Shares) • Assume the 2,000 shares of Gamma Ltd are sold for 40c the shares being credited as paid to 75c expenses $200 (NB: remember previously paid $1,000 ) Dr Cash 800 (2000*40c) Dr F.S.R . 700 Cr Share Capital 1,500 (2000*75c) (reissue of shares) Dr FSR 200 Cr Cash 200 (expense of reissue) Dr F.S.R. 100 Cr Cash 100 (money returned to defaulting shareholder)

29. Companies • Accounting for share issue • Forfeiture of shares • Reissue of shares • Reserves • Dividends TEXT CHAPS 1& 2

30. Reserves Reserves are appropriations of profits examples:- Retained Profits Asset Revaluation Reserve * Foreign Currency Translation Reserve * * covered in a later topic Provisions are NOT reserves - Earmark of future funds against current profits eg Provision for Doubtful Debts Provision for Depreciation Provision for Long Service Leave

31. Reserves RETAINED PROFITS Interim dividend bal fwd Provision for Net profit dividend bal c/fwd bal /fwd

32. Companies • Accounting for share issue • Forfeiture of shares • Reissue of shares • Reserves • Dividends TEXT CHAPS 1& 2

33. Dividends • INTERIM DIVIDEND (Dividend paid) dr Interim dividend declared cr Dividend payable dr Dividend payable cr Cash dr Retained profits cr Interim dividend declared • FINAL DIVIDEND (Dividend provided) dr Final dividend declared cr Dividend payable dr Retained profits cr Final dividend declared

34. Preparation of Financial statements • In this week we are looking at preparing accounts for managers • Refer example in the text Bulldog Ltd • Entry for taxation • Dr Tax Expense • Cr Tax Payable

35. A Ltd Profit & Loss for the year ended 30/6/99 Sales 100 000 Less - Cost of Sales 90 000 Gross Profit 80 000 Less - Expenses 70 000 Net Profit 10 000 Less Tax Expense 3 000 Net profit after tax 7 000 Add Retained profits -from 1/7/98 5 000 12 000 Less:- Dividend Declared 2 000 Dividend Paid 1 000 3 000 Retained Profits - 30/6/99 $ 9 000

36. A Ltd Balance Sheet as at 30/6/99 Current Assets ? Non-Current Assets ? Less Liabilities Tax Payable 3 000 Dividend Payable 2 000 ? $ 100 000 Equity Share Capital Retained Profits 9 000 $100 000

37. Tutorial Questions • Exercise 2.1 • Exercise 2.2 • Exercise 2.5 • Exercise 3.1 • Exercise 3.4 • Problem 3.5