Company share issues and reserves

Topic 20: Company Share Issues and Reserves — 50 Hard MCQs

1. A company has 500 000 ordinary shares of $0.50 each. It makes a 1-for-5 rights issue at $0.80 per share. The issue is fully taken up.

What is the ordinary share capital after the rights issue?

A $250 000
B $300 000
C $330 000
D $400 000

2. Using the information in Question 1, what amount is credited to share premium from the rights issue?

A $30 000
B $50 000
C $80 000
D $100 000

3. A company has 400 000 ordinary shares of $0.25 each. It makes a 1-for-4 bonus issue from share premium.

What is the increase in ordinary share capital?

A $25 000
B $50 000
C $100 000
D $125 000

4. Using the information in Question 3, what is the effect on total equity?

A total equity increases by $25 000
B total equity decreases by $25 000
C total equity stays the same
D total equity increases by $100 000

5. A company has 600 000 ordinary shares of $1 each. It makes a 1-for-3 rights issue at $1.40 per share. Only 75% of the rights shares are taken up.

How much cash is raised?

A $150 000
B $210 000
C $280 000
D $420 000

6. Using the information in Question 5, what is credited to share premium?

A $60 000
B $80 000
C $120 000
D $150 000

7. A company has ordinary share capital of $200 000, consisting of $0.50 shares. It makes a 1-for-8 bonus issue.

How many new shares are issued?

A 25 000
B 50 000
C 100 000
D 400 000

8. Using the information in Question 7, what reserve transfer is required?

A debit reserve $25 000, credit ordinary share capital $25 000
B debit ordinary share capital $25 000, credit reserve $25 000
C debit reserve $50 000, credit ordinary share capital $50 000
D debit ordinary share capital $50 000, credit reserve $50 000

9. A company issues 100 000 ordinary shares of $1 each at $1.25. Issue costs of $3000 are paid.

Ignoring legal restrictions, what is the net increase in equity?

A $97 000
B $100 000
C $122 000
D $125 000

10. A company issues 80 000 ordinary shares of $0.50 each at $0.90.

What is the total cash received?

A $32 000
B $40 000
C $72 000
D $112 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Using the information in Question 10, what amount is credited to ordinary share capital?

A $32 000
B $40 000
C $72 000
D $80 000

12. A company has share premium of $70 000. It makes a bonus issue of $45 000 from share premium.

What is the share premium balance after the bonus issue?

A $25 000
B $45 000
C $70 000
D $115 000

13. Which reserve is normally not distributable as ordinary dividend?

A retained earnings
B general reserve created from retained earnings
C revaluation reserve
D profit for the year after tax

14. A company has retained earnings of $96 000 and general reserve of $40 000. It has a revaluation reserve of $55 000.

What is the maximum dividend payable from distributable reserves, assuming the general reserve may be transferred back?

A $96 000
B $136 000
C $151 000
D $191 000

15. A company has retained earnings of $85 000. It transfers $20 000 to general reserve.

What is the maximum dividend immediately after the transfer if the general reserve is not transferred back?

A $20 000
B $65 000
C $85 000
D $105 000

16. A company has opening retained earnings of $120 000. Profit after tax is $48 000. It pays an interim dividend of $10 000 and declares a final dividend of $18 000 before year end. It transfers $12 000 to general reserve.

What are closing retained earnings?

A $128 000
B $140 000
C $152 000
D $168 000

17. A company has opening retained earnings of $72 000. It makes a loss of $15 000, transfers $8000 from general reserve to retained earnings and pays dividends of $6000.

What are closing retained earnings?

A $43 000
B $49 000
C $59 000
D $65 000

18. A company has 300 000 ordinary shares of $0.50 each. It pays an interim dividend of $0.06 per share and declares a final dividend of $0.04 per share.

What total dividend is deducted from retained earnings?

A $15 000
B $18 000
C $30 000
D $150 000

19. A company has 200 000 6% preference shares of $1 each.

What annual preference dividend is payable?

A $6000
B $12 000
C $120 000
D $200 000

20. A company has profit after tax of $70 000. Preference dividend is $9000. Ordinary dividend is $20 000.

What amount is added to retained earnings for the year after dividends?

A $41 000
B $50 000
C $61 000
D $70 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. A company has 500 000 ordinary shares of $0.25 each. It makes a 2-for-5 bonus issue.

How many ordinary shares are in issue after the bonus issue?

A 200 000
B 500 000
C 700 000
D 1 000 000

22. Using the information in Question 21, by how much does ordinary share capital increase?

A $50 000
B $125 000
C $175 000
D $200 000

23. A company has 800 000 ordinary shares of $0.50 each. It makes a 3-for-10 rights issue at $0.75. All rights are taken up.

What is the total cash raised?

A $120 000
B $180 000
C $240 000
D $300 000

24. Using the information in Question 23, what is the increase in share premium?

A $60 000
B $120 000
C $180 000
D $240 000

25. A company has ordinary share capital of $360 000 in $0.20 shares. It makes a 1-for-6 bonus issue.

How many shares are issued as bonus shares?

A 60 000
B 300 000
C 600 000
D 1 800 000

26. Using the information in Question 25, what is the increase in ordinary share capital?

A $12 000
B $60 000
C $72 000
D $300 000

27. A company has ordinary share capital $500 000, share premium $90 000, retained earnings $140 000 and revaluation reserve $60 000. It makes a bonus issue of $50 000 from share premium.

What is total equity after the bonus issue?

A $680 000
B $740 000
C $790 000
D $840 000

28. Using the information in Question 27, what are ordinary share capital and share premium after the bonus issue?

A share capital $450 000, share premium $140 000
B share capital $500 000, share premium $40 000
C share capital $550 000, share premium $40 000
D share capital $550 000, share premium $90 000

29. A company revalues land upwards by $85 000. Later, the land is sold. The revaluation reserve relating to the land is transferred to retained earnings.

What is the effect of this reserve transfer on total equity?

A total equity increases by $85 000
B total equity decreases by $85 000
C total equity stays the same
D total liabilities decrease by $85 000

30. A company has retained earnings of $30 000 and revaluation reserve of $90 000. It wishes to pay an ordinary dividend of $50 000.

Which statement is correct?

A it can pay $50 000 because total reserves are $120 000
B it can pay only $30 000 unless more distributable profit becomes available
C it can pay $90 000 from revaluation reserve
D it cannot pay any dividend because revaluation reserve exists

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. A company has 100 000 ordinary shares of $1 each. It issues 50 000 shares at $1.60. Later, it makes a bonus issue of $30 000 from share premium.

What is the final share premium balance?

A $0
B $30 000
C $50 000
D $80 000

32. Using the information in Question 31, what is the final ordinary share capital?

A $100 000
B $130 000
C $150 000
D $180 000

33. A company has ordinary share capital $250 000 and retained earnings $110 000. It makes a rights issue of $80 000 cash, of which $50 000 is nominal value and $30 000 is share premium. It pays dividends of $20 000.

What is total equity after these transactions, ignoring profit for the year?

A $340 000
B $390 000
C $420 000
D $440 000

34. A company has retained earnings $64 000. Profit after tax for the year is $26 000. A proposed dividend of $12 000 is announced after year end and not declared before year end.

What are closing retained earnings?

A $52 000
B $78 000
C $90 000
D $102 000

35. A company declares a dividend before year end but pays it after year end.

Which double entry records the declaration?

A debit retained earnings, credit dividend payable
B debit dividend payable, credit retained earnings
C debit dividend expense, credit share premium
D debit share capital, credit bank

36. A company pays a dividend that had already been declared before year end.

Which double entry records the payment?

A debit retained earnings, credit bank
B debit bank, credit dividend payable
C debit dividend payable, credit bank
D debit bank, credit retained earnings

37. Which transaction increases both assets and equity?

A bonus issue from share premium
B rights issue fully subscribed
C transfer from retained earnings to general reserve
D declaration of dividend before payment

38. Which transaction decreases equity and increases liabilities?

A bonus issue
B rights issue
C final dividend declared but unpaid
D transfer to general reserve

39. Which transaction changes the composition of equity but not total equity?

A rights issue for cash
B bonus issue from share premium
C debenture issue
D payment of supplier by cheque

40. A company has distributable profits of $75 000. It declares ordinary dividends of $20 000 and transfers $25 000 to general reserve.

What distributable retained earnings remain if the general reserve is not available for dividend?

A $30 000
B $50 000
C $55 000
D $75 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. A company has 1 000 000 ordinary shares of $0.10 each. It makes a 1-for-2 rights issue at $0.18, but 20% of the rights are not taken up.

How much cash is raised?

A $40 000
B $72 000
C $80 000
D $90 000

42. Using the information in Question 41, what is credited to ordinary share capital?

A $40 000
B $50 000
C $72 000
D $80 000

43. Using the information in Question 41, what is credited to share premium?

A $32 000
B $40 000
C $72 000
D $90 000

44. A company has opening equity of $600 000. During the year it makes a rights issue for cash of $90 000, a bonus issue of $40 000 from share premium, profit after tax of $55 000, dividends declared of $18 000 and an upward revaluation of $25 000.

What is closing equity?

A $692 000
B $712 000
C $752 000
D $792 000

45. A company has share capital of $400 000, share premium of $50 000, retained earnings of $95 000 and general reserve of $30 000. It transfers $10 000 from retained earnings to general reserve and then makes a bonus issue of $25 000 from general reserve.

What is total equity after both transactions?

A $525 000
B $550 000
C $575 000
D $600 000

46. Using the information in Question 45, what is the final general reserve balance?

A $15 000
B $25 000
C $35 000
D $40 000

47. A company has retained earnings of $42 000 and general reserve of $18 000. It transfers the full general reserve back to retained earnings and declares a dividend of $50 000.

What retained earnings remain after the dividend?

A $10 000
B $18 000
C $42 000
D $60 000

48. A company has 300 000 ordinary shares of $0.50 each. It declares a dividend of 12% of nominal value.

What is the dividend?

A $18 000
B $36 000
C $150 000
D $300 000

49. A company has 250 000 ordinary shares of $1 each. It declares a dividend of $0.15 per share.

What is the dividend?

A $15 000
B $37 500
C $150 000
D $250 000

50. Which statement about rights issues and bonus issues is correct?

A both rights issues and bonus issues always raise cash
B rights issues raise cash, while bonus issues convert reserves into share capital
C bonus issues increase total equity, while rights issues do not
D rights issues reduce share capital, while bonus issues reduce liabilities

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. B — $300 000

• Existing share capital = 500 000 × $0.50 = $250 000

• Rights shares = 500 000 / 5 = 100 000 shares

• Nominal value added = 100 000 × $0.50 = $50 000

• Ordinary share capital after issue = 250 000 + 50 000

• = $300 000

2. A — $30 000

• Rights issue price = $0.80

• Nominal value = $0.50

• Share premium per share = $0.30

• Rights shares = 100 000

• Share premium = 100 000 × $0.30

• = $30 000

3. A — $25 000

• Existing shares = 400 000

• Bonus issue = 1-for-4

• Bonus shares = 400 000 / 4 = 100 000

• Nominal value = $0.25

• Increase in ordinary share capital = 100 000 × 0.25

• = $25 000

4. C — total equity stays the same

• Bonus issue converts reserves into share capital.

• Share capital increases.

• Share premium/reserve decreases.

• Total equity does not change.

5. B — $210 000

• Rights shares available = 600 000 / 3 = 200 000

• 75% taken up = 150 000 shares

• Issue price = $1.40

• Cash raised = 150 000 × 1.40

• = $210 000

6. A — $60 000

• Rights shares taken = 150 000

• Issue price = $1.40

• Nominal value = $1

• Premium per share = $0.40

• Share premium = 150 000 × 0.40

• = $60 000

7. B — 50 000

• Ordinary share capital = $200 000

• Nominal value per share = $0.50

• Existing shares = 200 000 / 0.50 = 400 000

• Bonus issue = 1-for-8

• New shares = 400 000 / 8

• = 50 000 shares

8. A — debit reserve $25 000, credit ordinary share capital $25 000

• Bonus shares = 50 000

• Nominal value = $0.50

• Bonus issue value = 50 000 × 0.50 = $25 000

• Reserve decreases, share capital increases.

9. C — $122 000

• Cash received from issue = 100 000 × $1.25 = $125 000

• Less issue costs = $3000

• Net increase in equity = 125 000 – 3000

• = $122 000

10. C — $72 000

• Cash received = shares issued × issue price

• = 80 000 × $0.90

• = $72 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. B — $40 000

• Share capital is recorded at nominal value.

• Ordinary share capital = 80 000 × $0.50

• = $40 000

12. A — $25 000

• Opening share premium = $70 000

• Bonus issue from share premium = $45 000

• Closing share premium = 70 000 – 45 000

• = $25 000

13. C — revaluation reserve

• Revaluation reserve is normally non-distributable.

• It comes from unrealised gains on non-current assets.

• Dividends are usually paid from distributable profits such as retained earnings.

14. B — $136 000

• Retained earnings = $96 000

• General reserve = $40 000

• General reserve may be transferred back if allowed.

• Revaluation reserve is not distributable.

• Maximum dividend = 96 000 + 40 000

• = $136 000

15. B — $65 000

• Retained earnings before transfer = $85 000

• Transfer to general reserve = $20 000

• Retained earnings after transfer = 85 000 – 20 000

• = $65 000

• If general reserve is not transferred back, only $65 000 is immediately available.

16. A — $128 000

• Closing retained earnings = opening retained earnings + profit after tax – interim dividend – final dividend – transfer to reserve

• = 120 000 + 48 000 – 10 000 – 18 000 – 12 000

• = $128 000

17. C — $59 000

• Closing retained earnings = opening retained earnings – loss + transfer from general reserve – dividends

• = 72 000 – 15 000 + 8000 – 6000

• = $59 000

18. C — $30 000

• Interim dividend = 300 000 × $0.06 = $18 000

• Final dividend = 300 000 × $0.04 = $12 000

• Total dividend = 18 000 + 12 000

• = $30 000

19. B — $12 000

• Preference share capital = 200 000 × $1 = $200 000

• Preference dividend = 6% × 200 000

• = $12 000

20. A — $41 000

• Profit after tax = $70 000

• Less preference dividend = $9000

• Less ordinary dividend = $20 000

• Amount added to retained earnings = 70 000 – 9000 – 20 000

• = $41 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. C — 700 000

• Existing shares = 500 000

• Bonus issue = 2-for-5

• Bonus shares = 500 000 × 2/5 = 200 000

• Total shares after bonus issue = 500 000 + 200 000

• = 700 000 shares

22. A — $50 000

• Bonus shares = 200 000

• Nominal value = $0.25

• Increase in ordinary share capital = 200 000 × 0.25

• = $50 000

23. B — $180 000

• Rights shares = 800 000 × 3/10 = 240 000

• Issue price = $0.75

• Cash raised = 240 000 × 0.75

• = $180 000

24. A — $60 000

• Issue price = $0.75

• Nominal value = $0.50

• Premium per share = $0.25

• Rights shares = 240 000

• Share premium = 240 000 × 0.25

• = $60 000

25. B — 300 000

• Ordinary share capital = $360 000

• Nominal value = $0.20

• Existing shares = 360 000 / 0.20 = 1 800 000

• Bonus issue = 1-for-6

• Bonus shares = 1 800 000 / 6

• = 300 000 shares

26. B — $60 000

• Bonus shares = 300 000

• Nominal value = $0.20

• Increase in share capital = 300 000 × 0.20

• = $60 000

27. C — $790 000

• Total equity before bonus issue:

• = share capital + share premium + retained earnings + revaluation reserve

• = 500 000 + 90 000 + 140 000 + 60 000

• = $790 000

• Bonus issue changes equity structure, not total equity.

• Total equity remains $790 000

28. C — share capital $550 000, share premium $40 000

• Share capital increases by $50 000:

  • 500 000 + 50 000 = $550 000

• Share premium decreases by $50 000:

  • 90 000 – 50 000 = $40 000

29. C — total equity stays the same

• Revaluation reserve is transferred to retained earnings.

• One equity reserve decreases.

• Another equity reserve increases.

• Total equity is unchanged.

30. B — it can pay only $30 000 unless more distributable profit becomes available

• Retained earnings are distributable.

• Revaluation reserve is normally non-distributable.

• Therefore, only $30 000 is available for ordinary dividend.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. A — $0

• Shares issued = 50 000

• Issue price = $1.60

• Nominal value = $1

• Premium per share = $0.60

• Share premium created = 50 000 × 0.60 = $30 000

• Bonus issue from share premium = $30 000

• Final share premium = 30 000 – 30 000

• = $0

32. D — $180 000

• Original share capital = 100 000 × $1 = $100 000

• New issue share capital = 50 000 × $1 = $50 000

• Bonus issue = $30 000

• Final ordinary share capital = 100 000 + 50 000 + 30 000

• = $180 000

33. C — $420 000

• Opening equity = share capital + retained earnings

• = 250 000 + 110 000 = $360 000

• Rights issue increases equity by $80 000

• Dividend reduces equity by $20 000

• Closing equity = 360 000 + 80 000 – 20 000

• = $420 000

34. C — $90 000

• Proposed dividend announced after year end is ignored if not declared before year end.

• Closing retained earnings = 64 000 + 26 000

• = $90 000

35. A — debit retained earnings, credit dividend payable

• Dividend declared before year end reduces retained earnings.

• If unpaid, it creates a current liability.

36. C — debit dividend payable, credit bank

• Dividend had already been declared.

• Payment clears the liability.

• Bank decreases.

37. B — rights issue fully subscribed

• A rights issue raises cash.

• Assets increase because cash is received.

• Equity increases because share capital/share premium increase.

38. C — final dividend declared but unpaid

• Dividend declaration reduces retained earnings.

• If unpaid, it creates dividend payable.

• Equity decreases and liabilities increase.

39. B — bonus issue from share premium

• Bonus issue transfers reserves into share capital.

• Total equity does not change.

• Only the composition of equity changes.

40. A — $30 000

• Distributable profits = $75 000

• Less ordinary dividends = $20 000

• Less transfer to general reserve = $25 000

• Remaining retained earnings = 75 000 – 20 000 – 25 000

• = $30 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. B — $72 000

• Rights shares available = 1 000 000 / 2 = 500 000

• 20% not taken up, so 80% taken up:

• 500 000 × 80% = 400 000 shares

• Cash raised = 400 000 × $0.18

• = $72 000

42. A — $40 000

• Shares issued = 400 000

• Nominal value = $0.10

• Ordinary share capital credited = 400 000 × 0.10

• = $40 000

43. A — $32 000

• Issue price = $0.18

• Nominal value = $0.10

• Premium per share = $0.08

• Shares issued = 400 000

• Share premium = 400 000 × 0.08

• = $32 000

44. C — $752 000

• Opening equity = $600 000

• Add rights issue cash = $90 000

• Bonus issue = no effect on total equity

• Add profit after tax = $55 000

• Less dividends = $18 000

• Add revaluation surplus = $25 000

• Closing equity = 600 000 + 90 000 + 55 000 – 18 000 + 25 000

• = $752 000

45. C — $575 000

• Total equity before transfers:

• = 400 000 + 50 000 + 95 000 + 30 000

• = $575 000

• Transfer to general reserve does not change total equity.

• Bonus issue from general reserve does not change total equity.

• Total equity remains $575 000

46. A — $15 000

• Opening general reserve = $30 000

• Transfer from retained earnings = +$10 000

• Bonus issue from general reserve = -$25 000

• Final general reserve = 30 000 + 10 000 – 25 000

• = $15 000

47. A — $10 000

• Retained earnings = $42 000

• Transfer from general reserve = $18 000

• Retained earnings available = 42 000 + 18 000 = $60 000

• Dividend = $50 000

• Retained earnings remaining = 60 000 – 50 000

• = $10 000

48. A — $18 000

• Nominal share capital = 300 000 × $0.50 = $150 000

• Dividend = 12% of nominal value

• = 12% × 150 000

• = $18 000

49. B — $37 500

• Dividend = number of shares × dividend per share

• = 250 000 × $0.15

• = $37 500

50. B — rights issues raise cash, while bonus issues convert reserves into share capital

• Rights issue = shareholders pay for new shares.

• Bonus issue = free shares issued by converting reserves into share capital.

• Rights issue increases total equity if taken up.

• Bonus issue does not increase total equity.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.