QUESTION 4 (35 Marks) Overview Expander Ltd (Expander) is undergoing a period of significant growth and has needed to ra
Posted: Sun Apr 17, 2022 7:04 pm
QUESTION 4 (35 Marks) Overview Expander Ltd (Expander) is
undergoing a period of significant growth and has needed to raise
capital. It has done this by issuing ordinary shares, preferences
share and debentures to the public. Expander has a 31 January year
end. Share Issue On 1 February 2019 Expander had 10,000,000
authorized and 8,000,000 issued ordinary shares. Ordinary shares
have a par value of N$2,95 each. On this date the share premium and
retained earnings had a balance of nil and 1,200,000 respectively.
On 28 February 2019 Expander decided to issue all the remaining
authorized shares. UWU underwrote the share issue in return for a
3% underwriting commission. Expander notified shareholders that it
would issue ordinary shares for N$3 each. By 31 March 2019, the
closing date of the application, Expander had received N$4,500,000
from applicants. The maximum number of shares was duly issued on 31
March 2019 and UWU was paid. Expander’s accounting policy for
underwriter commission is to maximize distributable reserves
whenever possible. Preference share Issue Expander issued 300,000,
N$2,14% preference shares on 30 April 2019 at a 5% premium. This
was the first time that Expander had ever issued preference shares.
Preference dividends are payable annually on 31 January, if
declared. Debenture issue Expander issued 20, N$100,000 Debentures
that bear interest at 9% per annum on 31 May 2019, Interest on
debentures is payable annually on 31 January. Dividend and interest
payments On 15 January 2020 Expander’s board of directors were
deciding how to distribute profits. It was proposed that a
distribution of N$2,400,000 be made to ordinary shareholders and no
distribution to its debenture holder and preference shareholders.
Other Information Expander made a profit of N$30,000,000 for the
year ended 31 January 2020 before taking into account any of
information provided above. You may ignore all tax. REQUIRED: 1.
Prepare the journal entries to account for all the transactions
involved in issuing the ordinary shares. (10 marks) 2. At 31
January 2020 Expander decided to convert its par value shares into
no par value shares. Prepare the journal entries that Expander
should process in order to effect this change. (2 marks) 3. Discuss
whether Expander is able to make a distribution to its ordinary
shareholders without paying its debenture holders and preference
shareholders. (4 marks) 7 4. a. Calculate how much Expander should
pay its debenture holders on 31 January 2020. (2 marks) b. If a
preference dividend is declared, calculate how much Expander should
pay its preference shareholder on 31 January 2020. (2 marks) c.
Prepare the journal entries to process the payment of the
preference share dividend and the interest on the debentures. You
may assume that both are fully paid up by the end of the year. (3
marks) d. Assuming Expander declares ordinary dividend of
N$2,400,000 ON 31 January 2020 and pays the dividend on 28 February
2020, prepare the journal entries to account for this in the 2020
financial statements. (2 marks) 5. Prepare Expander’s statement of
changes in equity for the year ended 31 January 2020 assuming that
both an ordinary and a preference dividend were declared. You need
not include a total column. (10 marks)
undergoing a period of significant growth and has needed to raise
capital. It has done this by issuing ordinary shares, preferences
share and debentures to the public. Expander has a 31 January year
end. Share Issue On 1 February 2019 Expander had 10,000,000
authorized and 8,000,000 issued ordinary shares. Ordinary shares
have a par value of N$2,95 each. On this date the share premium and
retained earnings had a balance of nil and 1,200,000 respectively.
On 28 February 2019 Expander decided to issue all the remaining
authorized shares. UWU underwrote the share issue in return for a
3% underwriting commission. Expander notified shareholders that it
would issue ordinary shares for N$3 each. By 31 March 2019, the
closing date of the application, Expander had received N$4,500,000
from applicants. The maximum number of shares was duly issued on 31
March 2019 and UWU was paid. Expander’s accounting policy for
underwriter commission is to maximize distributable reserves
whenever possible. Preference share Issue Expander issued 300,000,
N$2,14% preference shares on 30 April 2019 at a 5% premium. This
was the first time that Expander had ever issued preference shares.
Preference dividends are payable annually on 31 January, if
declared. Debenture issue Expander issued 20, N$100,000 Debentures
that bear interest at 9% per annum on 31 May 2019, Interest on
debentures is payable annually on 31 January. Dividend and interest
payments On 15 January 2020 Expander’s board of directors were
deciding how to distribute profits. It was proposed that a
distribution of N$2,400,000 be made to ordinary shareholders and no
distribution to its debenture holder and preference shareholders.
Other Information Expander made a profit of N$30,000,000 for the
year ended 31 January 2020 before taking into account any of
information provided above. You may ignore all tax. REQUIRED: 1.
Prepare the journal entries to account for all the transactions
involved in issuing the ordinary shares. (10 marks) 2. At 31
January 2020 Expander decided to convert its par value shares into
no par value shares. Prepare the journal entries that Expander
should process in order to effect this change. (2 marks) 3. Discuss
whether Expander is able to make a distribution to its ordinary
shareholders without paying its debenture holders and preference
shareholders. (4 marks) 7 4. a. Calculate how much Expander should
pay its debenture holders on 31 January 2020. (2 marks) b. If a
preference dividend is declared, calculate how much Expander should
pay its preference shareholder on 31 January 2020. (2 marks) c.
Prepare the journal entries to process the payment of the
preference share dividend and the interest on the debentures. You
may assume that both are fully paid up by the end of the year. (3
marks) d. Assuming Expander declares ordinary dividend of
N$2,400,000 ON 31 January 2020 and pays the dividend on 28 February
2020, prepare the journal entries to account for this in the 2020
financial statements. (2 marks) 5. Prepare Expander’s statement of
changes in equity for the year ended 31 January 2020 assuming that
both an ordinary and a preference dividend were declared. You need
not include a total column. (10 marks)