Accounting for Preference Shares
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Questions and Answers

What is the total number of ordinary shares issued at the end of 20X3?

  • 3 400 000
  • 2 400 000
  • 2 000 000
  • 3 000 000 (correct)

    • What is the total number of preference shares issued at the end of 20X3?

  • 150 000
  • 250 000
  • 300 000
  • 200 000 (correct)

    • What is the amount of preference share liability accrued as at 31 December 20X5?

  • 120 000
  • 10 000
  • 110 000 (correct)
  • 12 140

    • What is the premium per preference share when redeemed?

    <p>R0.20</p> Signup and view all the answers

    What is the amount of 10% debentures issued?

    <p>96 000</p> Signup and view all the answers

    What is the amount paid to preference shareholders?

    <p>120 000</p> Signup and view all the answers

    How many ordinary shares were issued to finance the redemption of preference shares?

    <p>24 000</p> Signup and view all the answers

    What is the amount of dividend accrued for the year?

    <p>10 000</p> Signup and view all the answers

    How are preference shares presented in the financial statements?

    <p>As long-term liabilities</p> Signup and view all the answers

    What is the nature of 12% preference dividends?

    <p>Cumulative and non-discretionary</p> Signup and view all the answers

    At what rate are preference dividends recognised?

    <p>Effective interest rate</p> Signup and view all the answers

    What is the number of ordinary shares in issue at the end of the year?

    <p>1,265,000</p> Signup and view all the answers

    What is the authorised quantity of ordinary shares?

    <p>2,500,000</p> Signup and view all the answers

    What is the quantity of 12% redeemable preference shares redeemed during the year?

    <p>187,500</p> Signup and view all the answers

    At what premium were the preference shares redeemed?

    <p>C0.10 per share</p> Signup and view all the answers

    What is the effective interest rate on the preference shares?

    <p>12.7750262%</p> Signup and view all the answers

    What is the preference share liability at 31/12/20X3?

    <p>308 811</p> Signup and view all the answers

    What is the present value of the future cash flows at 31/12/20X4?

    <p>318 762</p> Signup and view all the answers

    What is the interest accrued at 31/12/20X4?

    <p>39 951</p> Signup and view all the answers

    What is the bank's liability at 31/12/20X5 after the payment?

    <p>0</p> Signup and view all the answers

    How should liabilities be recognised?

    <p>At the present value of the future cash flows</p> Signup and view all the answers

    What is the effective interest rate?

    <p>12.937%</p> Signup and view all the answers

    What is the cash flow schedule for the preference shares?

    <p>375 000, (45 000), (45 000), (45 000), (45 000), (438 750)</p> Signup and view all the answers

    What is the internal rate of return (IRR) for the preference shares?

    <p>12.775%</p> Signup and view all the answers

    What is the purpose of calculating the internal rate of return (IRR)?

    <p>To evaluate the investment's viability</p> Signup and view all the answers

    What is the profit before tax?

    <p>195 300</p> Signup and view all the answers

    What is the tax liability?

    <p>71 050</p> Signup and view all the answers

    What is the capital and reserves for Klaus Limited as at 30 June 20X5?

    <p>425 600</p> Signup and view all the answers

    What is the retained earnings for Klaus Limited as at 30 June 20X5?

    <p>137 000</p> Signup and view all the answers

    What is the debit entry for the recognition of preference shares as a liability on 1 January 20X3?

    <p>Preference share capital (OE) 300 000</p> Signup and view all the answers

    What is the total comprehensive income for Klaus Limited for the year ended 30 June 20X5?

    <p>80 000</p> Signup and view all the answers

    What is the amount of shares issued during the year?

    <p>73 600</p> Signup and view all the answers

    What is the credit entry for the preference dividend recognised as interest expense/premium accrued and payment of dividend on 31 December 20X3?

    <p>Preference share liability (L) 38 811</p> Signup and view all the answers

    What is the balance of retained earnings as at 30 June X4?

    <p>60 000</p> Signup and view all the answers

    What is the debit entry for the reclassification of preference shares as a current liability on 31 December 20X4?

    <p>Preference shares (current liability) 318 762</p> Signup and view all the answers

    What is the credit entry for the repayment of capital and premium on 31 December 20X5?

    <p>Bank 330 000</p> Signup and view all the answers

    What is the credit entry for the recognition of preference shares as a liability on 1 January 20X3?

    <p>Preference share liability (L) 300 000</p> Signup and view all the answers

    What is the debit entry for the preference dividend recognised as interest expense/premium accrued and payment of dividend on 31 December 20X3?

    <p>Interest expense (E) 30 000</p> Signup and view all the answers

    What is the credit entry for the reclassification of preference shares as a current liability on 31 December 20X4?

    <p>Preference shares (current liability) 318 762</p> Signup and view all the answers

    What is the debit entry for the repayment of capital and premium on 31 December 20X5?

    <p>Preference share liability (L) 330 000</p> Signup and view all the answers

    Study Notes

    Journal Entries

    • Preference share capital recognized as a liability: 300,000 (debit) and preference share liability (credit) on January 1, 20X3
    • Interest expense recognized: 38,811 (debit) and preference share liability (credit) on December 31, 20X3
    • Preference dividend recognized as interest expense: 30,000 (debit) and bank (credit) on December 31, 20X3
    • Reclassifying preference shares as a current liability: 318,762 (debit) and preference shares (credit) on December 31, 20X4

    Effective Interest Table

    • Effective interest rate: 12.937%
    • Interest accrued: 38,811 on December 31, 20X3; 39,951 on December 31, 20X4; 41,238 on December 31, 20X5
    • Premium accrued: 8,811 on December 31, 20X3; 9,951 on December 31, 20X4; 11,238 on December 31, 20X5

    Share Capital

    • Ordinary shares: 3,000,000 issued, no par value
    • Preference shares: 200,000 issued, 12% non-cumulative, no par value

    Reconciliation of Number of Shares

    • Balance outstanding at April 1, 20X1: 2,000,000 ordinary shares, 200,000 preference shares
    • Share issue on July 1, 20X1: 400,000 ordinary shares
    • Capitalization issue on December 31, 20X2: 600,000 ordinary shares
    • Balance outstanding at March 31, 20X3: 3,000,000 ordinary shares, 200,000 preference shares

    Notes

    • Liabilities should be recognized at the present value of the future cash flows
    • The future cash flows at December 31, 20X4 equal 360,000 (30,000 + 330,000)
    • The PV of 360,000 at 12.937% in one year's time = 318,762

    Accounting Policies

    • Preference shares are presented as long-term liabilities, as they are in substance borrowings
    • Dividends on preference shares are recognized in the statement of comprehensive income as interest expense on the effective interest rate basis

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    Description

    Journal entries for preference share capital, interest expense, and reclassification as a current liability. Understand the accounting treatment of preference shares in a company's financial statements.

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