ACCT10002: Tutorial 8 Exercises

This tutorial provides exercises relating to the following areas of study:

Types of dividend payment to shareholders Recording of the Issue of shares

Recording of cash and share dividends Statement of Changes in Equity
Calculation of dividend payout ratio Changes in equity accounts
Calculation of Return on Equity Ethics

The following exercises are required to be completed before coming to the

tutorial:

1. (E10.3)

On 31 October the equity section of Sanders Ltd's statement of financial position consists of contributed
equity $600 000 and retained earnings $200 000. Sanders Ltd is considering the following two courses
of action: (1) declaring a 5% share dividend on the 60 000 $10 issued ordinary shares or (2) paying a
cash dividend of $0.50 per share. If the company issues shares as dividend, the shares will have a
nominal value of $10 each.

Required:

(a) Prepare a tabular summary of the effects of the alternative actions on the company's equity, the
number of issued shares, and share capital. Use the table below.

(b) Comment on any assumption made and which course of action you would advise Sanders Ltd to
take.

Original Balances After Share Dividend After Cash Dividend

Share Capital
Retained Earnings
Total Equity
Issued Shares (no.)

2. (PSA10.8)

The following section is taken from Silk Ltd’s statement of financial position at 31 December 2016.
Share capital $5 000 000
Reserves 212 000
Retained earnings 42 000
Additional information:
1. Equity was $5 225 000 at 31 December 2015.
2. Silk Ltd’s profit for the year ended 31 December 2016 was $60 000.
3. Cash dividends declared for the year ended 31 December 2016 were $31 000.
4. The directors of the company approved a transfer of $20 000 to reserves. This was recorded in the
ledger and is the only item affecting reserves during the year.
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ACCT 10002: Introductory Financial Accounting
Tutorial 8 – Exercises
Required:

(a) Journalise the dividends declared.

(b) Calculate the dividend payout ratio.

(c) Calculate the return on ordinary shareholders’ equity.

(d) Prepare a statement of changes in equity for the year ended 31 December 2016.

Statement of Changes in Equity

For Share Capital Retained Total
the Year ending 30 Reserves Earnings
June 2016 $
$ $ $
Balance
1 January 2016
Operating Profit

Cash Dividends

Reserves

Balance
31 December 2016

3. ( PSA10.4)

On 1 January 2016, Jake Ltd had these equity accounts:

Share Capital (50 000 shares issued for $20 each) $1 000 000
General Reserve 200 000
Retained Earnings 600 000

During the year, the following transactions occurred:

Feb. 1 Declared an $0.80 cash dividend per share to shareholders, payable on 1 March.
Mar. 1 Paid the dividend declared in February.
July 1 Declared a 5% share dividend to shareholders, distributable on 31 July. On 1 July, the
market price of the shares was $30 per share and this was determined to be the
amount at which the dividend shares would be issued.
July 31 Issued the shares for the share dividend.
Dec. 1 Declared a cash dividend of $0.40 per share, payable on 5 January 2017.

Required:

(a) Journalise the transactions.

(b) Enter the beginning balances and post the entries to the equity and liability T accounts.

(c) Prepare the equity section of Jake Ltd's statement of financial position as at 31
December.

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ACCT 10002: Introductory Financial Accounting
Tutorial 8 – Exercises
4. (Past exam question)

The following section is taken from Clegg Ltd’s Statement of Financial Position at 30 June
2016.

Share Capital $8,000,000

Revaluation reserve 75,000
Currency translation Reserve (22,000)
Retained Earnings 210,000

Additional information:

1. Extract from Clegg Ltd’s Total Comprehensive Income Statement for the year ending 30
June 2017.
EBIT $
Net Profit After Tax $260,000
Comprehensive Income
Currency Translation valuation ($30,000)
Total Income $230,000

2. Eight million shares @ $1 per share were issued to the public on 1 July 2010.

3. Interim cash dividends of $60,000 were declared on October 15, 2016 and paid on 27
December 2016.

4. The directors of the company approved a transfer of $30,000 to Retained Earnings from
the Revaluation Reserve on May 26, 2017.

5. A special cash dividend of 1 cent per share was declared on 15 November 2016 and paid
on 15 December, 2016 from Retained Earnings.

6. The directors declared a final dividend in the form of a share dividend of 1 for 50 at $1.25
per share on June 12, 2017 and the shares are to be issued on June 27, 2017.

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ACCT 10002: Introductory Financial Accounting
Tutorial 8 – Exercises
(a) Prepare the Statement of Changes in Equity for the year ended 30 June 2017.
Clegg Ltd
Statement of Changes in Equity
For the Year ending 30 June 2017
For the Year ending Share Capital Revaluation Currency Retained Total
30 June 2017 Reserve Translation Earnings
$ Reserve
$ $ $ $
Balance
1 July 2016
Operating Profit
Other Comprehensive
Income
Cash Dividends

Share Dividends

Revaluation Reserve
Balance
30 June 2017

The following exercises should be completed prior to the tutorial:

5. (PSA10.1)

Marge Arena Ltd was registered on 31 January 2016. It invited the public to subscribe to the issue of
20 000 ordinary shares for $50 per share: $20 due on application, $20 due on allotment and the balance
due on call.

Jan. 10 Prospectus issued.

Mar. 1 Received applications for 20 000 shares.
Mar. 2 Allotted 20 000 ordinary shares.
Mar. 31 All allotment money received.
Nov. 1 Remaining capital called.
Nov. 30 All money due on call is received.
Required:

(a) Journalise the transactions.

(b) Post to the equity accounts (use T accounts).

(c) What is the share capital of Marge Arena Ltd at 1 December?

6. (BE10.2)

Satina Ltd has 200 000 shares issued (the original share price when issued was $10 per share). It declares
a 10% share dividend on 1 December. The dividend shares are issued as $12 shares on 31 December.

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ACCT 10002: Introductory Financial Accounting
Tutorial 8 – Exercises
Task: Prepare the journal entries for the declaration and payment of the share dividend.

The following exercises may be completed during the tutorial:

7. (E10.8)

The equity of Lloyd's Tabs Pty Ltd was $110 000 at 30 June 2015. During the year ended 30 June 2016,
Lloyd's Tabs made a profit of $50 000 and declared cash dividends of $20 000.
Calculate:

(a) the dividend payout and

(b) the return on ordinary shareholders' equity for the year ended 30 June 2016.

8. (E10.6)

Rich Ltd had the following equity accounts at 1 July 2015:

Share capital (100 000 shares) $200 000

General reserve $15 000
Retained earnings $10 000

During the year ended 30 June 2016, the following occurred:

1. A profit of $20 000 was generated.
2. $7000 was transferred to the general reserve.
3. An interim dividend of 8c per share was declared and paid.
4. A final dividend of 10c per share was declared.

Required: Prepare a statement of the changes in retained earnings.

9. (BBS 10.8) Ethics

Persuasive Ltd has paid 60 consecutive quarterly cash dividends (15 years). However, the last 6 months
have been a real cash drain on the company because profit margins have been greatly narrowed by
increasing competition. With a cash balance sufficient to meet only day-to-day operating needs, the
chief executive officer, Valerie Flamingo, has decided that a share dividend instead of a cash dividend
should be declared. She tells Persuasive Ltd’s financial director, Jonty James, to issue a press release
stating that the company is extending its consecutive dividend record with the issue of a 5% share
dividend. ‘Write the press release convincing the shareholders that the share dividend is just as good as
a cash dividend,’ she orders. ‘Just watch our share price rise when we announce the share dividend; it
must be a good thing if that happens.’

Required

(a) Who are the stakeholders in this situation?

(b) Is there anything unethical about Flamingo’s intentions or actions?

(c) What is the effect of a share dividend on a company’s equity accounts? Might it affect future
dividends? Which would you rather receive as a shareholder — a cash dividend or a share
dividend? Would it make a difference if you did not intend to invest in the long term in Persuasive
Ltd?
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ACCT 10002: Introductory Financial Accounting
Tutorial 8 – Exercises