Financial Statement Analysis

Question 1

Jackknife Trucking Ltd has announced a renounceable rights issue of 1-for-5 based on shares held at 2 July 2024. The shareholders have to exercise their rights by 31 August 2024, and pay $1 per share on application. At the end of the companys reporting period, 30 June 2024, 70% of the companys shareholders have applied for the new shares, and the company has received $2.8 million. The monies received have been recorded in an application account. The accountant of Jackknife Trucking Ltd plans to report the application account as a liability in the statement of financial position prepared at 30 June 2024, arguing that this is consistent with the accounting used for new issues of shares by the company.

REQUIRED:

Write a report to the accountant of Jackknife Trucking Ltd, critiquing the accountants decision.

Question 2

Cradock Ltd has had a windfall gain of $4 million on a major foreign currency transaction. A director, representing a 40% share ownership in Cradock suggests the $4 million is used to repurchase the companys shares. The chief financial officer, who is also a director, argues that Cradock Ltd retains the $4 million and reinvests it within the building. The two independent directors on Cradock Ltds board seek an independent opinion before they make their decision.

REQUIRED:

Write a report to the directors of Cradock Limited. Analyse the main arguments, for and against a share buyback. In your report provide sufficient discussion for the directors to make a decision.

Question 3

The directors of Pebbles Ltd are preparing the annual report for the company at 30 June 2024. The directors anticipate that the company will pay a dividend of $2.75 per share subsequent to the annual general meeting scheduled for 13 August 2024. This information will be included in the directors report as well as in a release to the public concerning the annual performance of the company.

The group accountant of Pebbles Ltd is unsure as to whether or not the dividend should be shown as a liability in the statement of financial position at 30 June 2024.

REQUIRED:

Provide a recommendation to the group accountant on what action should be undertaken in relation to accounting for the dividend.

Question 4

West Ltd needs to raise funds for mining projects in the Northern Territory. When it was first established it issued 2 million shares at $1 each. In the current year, the directors have decided to make a non-renounceable rights issue to existing shareholders of 200?000 new shares at an issue price of $7.50 per share.

Ed Dunder Ltd, a firm of finance brokers, has agreed to fully underwrite the rights issue. West Ltd issued a prospectus on 1 April 2024 and applications closed on 3 May 2024. Costs associated with the rights issue and the eventual issue of the shares were $15?000.

REQUIRED:

1. Prepare the journal entries for the rights issue and the subsequent share issue made by West Ltd, assuming that 80% of the rights were exercised by the due date.


2. Prepare the journal entries assuming that the rights issue was not underwritten and that any unexercised rights lapsed.

Question 5

The group accountant of Tomthumb Ltd has been given the task of accounting for a repurchase of shares by the company. The company is repurchasing 5 million shares at a cost of $2 each, paying for this in cash. However, the accountant is unsure which accounts should be reduced by the share buyback. The current equity position of the company is as follows.

REQUIRED:

Write a report to the group accountant advising how to account for the buyback of shares. Provide justification for your advice.

Question 6

Bantam Ltd decided to repurchase 15% of its ordinary shares under a buyback scheme for $3.20 per share. At the date of the buyback, the equity of Bantam Ltd consisted of the following.

The costs of the buyback scheme amounted to $5000.

REQUIRED:

1. Prepare the journal entries to account for the buyback. Explain the reasons for the entries and any assumptions made.


2. Assume that the buyback price was $1.50 per share. Prepare journal entries to record the buyback. Explain your answer.