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With reference to a limited company, briefly explain the term Limited

In a limited company the shareholders liability for the debts of the company is limited. As the
company is a separate legal entity, the company is responsible for its own debts. Limited
means that the owners maximum losses are limited to the amount they invested in the
company. This is restricted to the value of the shares the owners have paid for or agreed to
pay for.


Distinguish between authorized, issued and paid up capital?

The authorized share capital is stated in the companys memorandum of association and
states the maximum amount of capital that the company is allowed to raise / issue.
Issued share capital is the total of the shares which have been issued to the shareholders.
It is usually less than, but may never be more than, the authorized capital.
Paid up capital represents the amount actually received from shareholders on the called
up capital. Some shareholders may be late in paying their calls, or may fail to pay them at all.


State two features each of the Ordinary shares and Preference shares?
Ordinary shares:

They form the backbone of the financial structure of a company.

There is no fixed rate of dividend, and ordinary shareholders will receive a dividend only
if profits available for distribution still remain after other investors.

If the business is closed down, the ordinary shareholders will receive any proceeds from
asset disposals only after lenders and preference shareholders have received their

Ordinary shareholders have voting rights, which give them the power to elect the
directors and to remove the directors from office.

From the businesss perspective, ordinary shares can be a valuable form of financing as
at times it is useful to be able to avoid paying a dividend.

There are no types of ordinary shares.


Preference shares:

They offer investors a lower level of risk than ordinary shares but no voting rights.

Provided that there are sufficient profits available, preference shares will normally be
given a fixed rate of dividend each year, and preference dividends will be paid before
ordinary ones.

Where a business is closed down, preference shareholders may be given priority over the
claims of ordinary shareholders.

Preference shares can be cumulative, non cumulative or redeemable.

Accept any two relevant points


Briefly explain the term Debentures?

Debentures are formal certificates issued by companies raising long-term finance from
lenders and investors. Debenture certificates issued by large public limited companies are
often traded on the Stock Exchange. Debentures are commonly secured against assets such
as property so that, in the event of the company ceasing to trade, the assets could be sold
and used to repay the debenture holders. Loans and debentures usually carry fixed rate of
interest that must be paid whether or not a company earns profit.


State and explain the purpose of reserves?

Reserves are funds, normally belonging to the owners of the business, which represents
value retained in the business for some purpose or another. A limited company rarely
distributes all its profits to its shareholders. Instead, it will often keep part of the profits
earned each year in the form of reserves. Retained profits and general reserve are
common form of revenue reserves which can be used to fund dividend payments; can be
used for a specific purpose, for example for the replacement of machinery; can be used to
provide funds for shares issued as bonus issue; or can be used to provide funds for
redemption of shares and debentures.

[Total marks 15]


For each of the questions (1) to (10) below there are four possible answers A, B, C and D.
Choose the one you consider correct and circle it.

What would not appear in the income statement of a limited company?


Debenture interest
Ordinary dividends paid
Transfer to reserves

A 1 and 2


B 1 and 4

C 2 and 3

D 3 and 4

A company has been wound up and the only assets that remain have realised $45 000.
A summary of the companys capital structure shows the following.
20 000
40 000
30 000

Ordinary shares
Preference shares
How will the $45 000 be distributed?


Ordinary shares
10 000
20 000

Preference shares
20 000
15 000
25 000
40 00

15 000
30 000

A company shows the following balance sheet extract at 31 December 2013:

Ordinary shares of $1 each
60 000
Retained earnings
5 400
9 % Debentures
15 000
Trade payables
4 500
Other payables
3 600
Other receivables
3 000
Bank overdraft
19 500
How much are the current liabilities at 31 December 2013?
A $7 500

B $22 500

C $27 600

D $39 000


Which of the following are characteristics of a public limited company:

(1) Maximising the excess of income over expenditure is not a primary objective
(2) Shareholders can vote according to the number of shares owned
(3) Shares can be bought and sold through personal transactions of the members
(4) All shareholders are invited to attend the annual general meeting and participate in
decisions at the meeting.
Which of the above are the characteristics of public limited companies?


2, 3 and 4
2 and 3 only
1, 2 and 4 only
1, 3 and 4 only

A company has total assets of $60 000 and total liabilities of $40 000. During the year
the business recorded $100 000 in revenues, $55 000 in expenses, and paid dividends
of $10 000. The operating profit reported by the company for the year was:
A $35 000


D $55 000

B $20 000

C $6 000

D $24 000

Samra Limited has issued $120 000 of 5% debentures which are repayable in 2016.
The debenture interest is payable quarterly. State the amount of interest payable by the
company each quarter.
A $6 000


C $20 000

Pringle Limited has an issued share capital of $40 000 divided into ordinary shares of
$0.50 each. The company declared a dividend of $0.30 per share. What was the total
amount of the dividend paid to shareholders?
A $12 000


B $45 000

B $12 000

C $1 500

D $3 000

Which of the following statements are true of limited liability companies?

(1) The companys exposure to debts and liability is limited
(2) Financial statements must be produced
(3) A company continues to exist regardless of the identity of its owners
A 1 and 2 only

B 1 and 3 only

C 2 and 3 only

D 1, 2 and 3


Dio owns 5000 shares of $2 each in Diomedes Limited. The company declares a
dividend of $0.25 per share. State how much Dio will receive as a dividend.
A $2 500


B $10 000

C $4 000

D $1 250

Which of the following will appear in the appropriation account of a company?


Transfer to reserves
Debenture interest
Ordinary shares
[Total marks 10]


The capital and reserves section of the balance sheet of Carins Ltd at 1 January 2013
is shown below.
Capital and reserves:

Ordinary shares of $0.50 each

700 000

5% Preference shares of $0.25 each

150 000

General reserve

35 000

Retained Profit

23 750
908 750

On 1 July 2013, the directors made a further issue of 200000 ordinary shares and
100000 5% preference shares. All the shares were fully subscribed.
(a) Calculate the total amount of ordinary and preference shares capital after the new
Ordinary shares [700000 + (200000 x 0.5)] = $800 000

Preference shares [150000 + (100000 x 0.25)] = $175000

The net profit of Carins Ltd for the year ended 31 December 2013 was $200 000.
No interim dividend was paid on 5% Preference shares but the final dividend was paid
at 31 December 2013.

(b) Calculate the dividend paid on preference shares.

150000 x .05 = $7500
25000 x .05 x 6/12 = $ 625
Total preference dividend = $8125
The directors paid an interim dividend of $0.02 per Ordinary share on 30 June 2013,
based on the shares in issue at that date. They also paid final dividend of $0.03 per
share based on the shares in issue at 31 December 2013.
(c) Calculate the total dividend paid on ordinary shares.
700 000 / 0.5 = 1400 000 x .02 = $28000
(1400 000 + 200 000) = 1600 000 x .03 = $48000

Total ordinary dividend = $76000

The directors also decided to transfer $25000 to general reserve.
(d) Calculate the retained profit for the year ended 31 December 2013.
Profit for the year

$ 200000

(-) Preference dividend


Ordinary dividend


Transfer to general reserve


Retained profit for the year



(e) Prepare a balance sheet extract only showing share capital and reserves.
Ordinary shares of $0.50 each
5% Preference shares of $0.25 each

$1600 000
175 000

General reserve

60 000

Retained Profit

114 625
1949 625

(f) State who owns a Public limited company.
(g) State who is responsible for the day-to-day management of a Public limited company.
Managing Directors
[Total Marks 25]