“Sow an act, and you reap a habit; sow a habit, and you reap a character;

sow a character, and you reap a destiny.” ~ George Dana Boardman

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1103 – ACCOUNTING I
SEMESTER 1, 2020/2021

Lesson 13 for week beginning 9 November 2020

Topics:
1 Equity financing
2 Capital structure and firm value
3 Shares split, rights issue, bonus issue
4 Share buybacks (Treasury shares)
5 Cash and shares dividends

Learning objectives:
Refer to the course outline

Textbook:
SNTTLL: Spiceland J.D., Nelson M. W., Thomas W.B., Tan P., Low B., Low K. Y. (2019)
“Intermediate Accounting IFRS Edition”, 2nd Global Edition, McGraw-Hill.

Reading:
1. SNTTLL Chapter 14 (to exclude par value concept)

Seminar Presentation

Team 8 will present Discussion Questions 1 and 2. The submission deadline for the presentation
materials is by 7 November 2020 (Saturday) 12 noon.

Discussion Questions

Question 1 Adapted from AC1102 17S1 Exam Question 4 (Applying online lesson 13 to
account for share split, dividends and shares buyback)

The accountant of Pikachoo Pte Ltd (Pikachoo) was reviewing the draft financial statements for
the financial year ended 30 September 2017 to get them ready for the annual audit. She was
puzzled that there was a balance of $10,000 in dividend payable account when the interim
dividend was fully paid in June 2017 and there was also no final dividend declared for the
previous financial year. Upon further investigation, she uncovered the following information.

1. On 30 November 2016, Pikachoo purchased a piece of equipment for $500,000 by signing

a 1-year note with 3% interest rate. Both the principal and interest are due for repayment
on 30 November 2017. However, due to a misunderstanding, the inexperienced accounts
clerk made an error to record the purchase of the equipment as if the transaction was
financed by an issue of ordinary shares by making the following journal entries on 30

20S1 AC1103 Lesson 13 Discussion Questions 1

 “Sow an act, and you reap a habit; sow a habit, and you reap a character;
sow a character, and you reap a destiny.” ~ George Dana Boardman

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1103 – ACCOUNTING I
SEMESTER 1, 2020/2021

November 2016. He also wrongly updated the number of shares issued without any actual
issuance of shares.

Equipment $500,000
Share Capital $500,000

Though depreciation was correctly recorded for the equipment since it was capitalised, no
record was made with regard to the note signed on 30 November 2016 and any related
accounts.

2. On 1 March 2017, the company affected a 2-for-1 share split for all issued shares including
treasury shares and those shares that were incorrectly recorded in item (1) above. No
journal entry was made.

3. An interim dividend of $0.10 per share declared on 20 April 2017 was fully paid on 6 June
2017. The correct dividend amount was paid to the Central Depository which is the
custodian of the registered shareholders, for the dividend distribution to the shareholders
and the payment entries were recorded correctly. Due to the error made by the accounts
clerk in November 2016, interim dividend was computed and recorded for the “non-
existent” shares but was not paid. This explained the balance in the dividend payable
account.

4. On 1 August 2017, Pikachoo re-issued 2,000 treasury shares for $6 each and the accounting
records had been correctly updated.

5. The draft statement of profit or loss and other comprehensive income for the financial year
ended 30 September 2017 showed net profit of $356,000 and a revaluation gain of $290.

6. The draft statement of financial position showed the following equity items with their
corresponding balances at 30 September 2017.

Share Capital $5,432,000

Treasury Shares ($8,000)
Retained Earnings $1,098,000
Revaluation Reserve $500
Total Shareholders' Equity $6,522,500
Required

(a) Compute the number of shares that the accounts clerk had wrongly recorded to be issued
on 30 November 2016 for the purchase of equipment in item 1 above.

20S1 AC1103 Lesson 13 Discussion Questions 2

 “Sow an act, and you reap a habit; sow a habit, and you reap a character;
sow a character, and you reap a destiny.” ~ George Dana Boardman

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1103 – ACCOUNTING I
SEMESTER 1, 2020/2021

(b) Prepare all necessary entries to correct the errors for financing of the equipment and
dividends made by the accounts clerk for the financial year ended 30 September 2017 upon
discovery by the accountant.

(c) On 1 October 2016, there were 600,000 issued shares and 2,000 treasury shares. All the
2,000 treasury shares were bought at $8 each. There were no share transactions other
than those mentioned in items 2 and 4 above for the financial year ended 30 September
2017. Prepare a schedule, for the note disclosure of Share Capital, to reconcile the
beginning and ending number of shares for the financial year ended 30 September 2017,
with separate columns for issued shares and treasury shares.

(d) If the directors are proposing a final dividend of $0.15 per share for the financial year
ended 30 September 2017, compute the amount of final dividend to be recorded when
the proposal is approved by the shareholders at the annual general meeting.

(e) Assume that there was no recording or presentation error other than those uncovered by
the accountant, prepare a statement of changes in equity in for Pikachoo Pte Ltd for the
financial year ended 30 September 2017 in accordance with SFRS(1)1-1 Presentation of
Financial Statements. Your statement should show treasury shares as a separate column.

Question 2 (Applying online lesson 13 to account for dividends, to present and disclose
equity)

On 4 August 20X2, OCC Ltd announced an interim one-tier tax exempt dividend for the financial
year ending 31 December 20X2 (FY12 Interim Dividend) of 15 cents for every ordinary share held.

The Scrip Dividend Scheme (the “Scheme”) will be applicable to the FY12 Interim Dividend. Under
the Scheme, members will have an option to elect to receive new Shares in lieu of the cash
amount of the FY12 Interim Dividend. For the purposes of the application of the Scheme to the
FY12 Interim Dividend, the price at which each new Share is to be issued will be set at a 10%
discount to the average of the daily volume weighted average prices of the Shares during the
price determination period between 14 August 20X2 and 16 August 20X2 (both dates inclusive).
The issue price will be announced on 17 August 20X2.

Important dates Events

13 August 20X2 Last day on which Shares quoted cum dividend

14 August 20X2 Shares quoted ex-dividend
Between 14 August and 16 August 20X2 Period for determining the issue price
(both dates inclusive)

20S1 AC1103 Lesson 13 Discussion Questions 3

 “Sow an act, and you reap a habit; sow a habit, and you reap a character;
sow a character, and you reap a destiny.” ~ George Dana Boardman

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1103 – ACCOUNTING I
SEMESTER 1, 2020/2021

5.00 p.m. on 16 August 20X2 Books closure date

17 August 20X2 Announcement of issue price
On or about 31 August 20X2 Despatch of Notices of Election and Scrip
Dividend Entitlement Advices
20 September 20X2 Last day for eligible members to submit Notices
of election and Notices of Cancellation
8 October 20X2 Dividend payment date
11 October 20X2 Listing of new shares

Required

(a) Briefly explain “shares quoted cum dividend” and “shares quoted ex-dividend”.

(b) Determine the issue price assuming the daily volume weighted average prices of the Shares
are as follows:
14 August 20X2: $8.90
15 August 20X2: $9.00
16 August 20X2: $8.98

(c) Assume 10,000,000 ordinary shares were outstanding as at 1 January 20X2 and that
shareholders holding a total of 8,000,000 ordinary shares opted for shares in lieu of ordinary
dividends.

(i) Determine the number of new shares issued in lieu of ordinary dividends.

(ii) Prepare the necessary journal entries to record the dividend payment on 8 October
20X2.

(iii) Prepare a statement of changes in Equity for the financial year ended 31 December
20X2, assuming the following information:

Share Capital, 1.1.20X2 $80,000,000

Retained earnings, 1.1.20X2 30,000,000
Revaluation reserves, 1.1.20X2 5,000,000
Total comprehensive income: 20,000,000
Revaluation loss recognised in OCI during the year 20X2: 1,000,000

(iv) Prepare a note on “Share Capital” for disclosure in the Notes to the Accounts for the
financial year ended 31 December 20X2.

20S1 AC1103 Lesson 13 Discussion Questions 4

 “Sow an act, and you reap a habit; sow a habit, and you reap a character;
sow a character, and you reap a destiny.” ~ George Dana Boardman

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1103 – ACCOUNTING I
SEMESTER 1, 2020/2021

Question 3 Adapted from AC1102 15S2 Exam Question 3 (Applying online lesson 13 to
account for rights issue)

Stark Industries Ltd (SI) is in the business of producing and selling fitness products and
equipment. Its financial year end date is 31 of December. SI encountered the following events
during the financial year 2015:

Case E On 1 September 2015, Hydra Ltd (Hydra) announced its intention to pursue a takeover
of SI. Hydra held no shares of SI as at 1 September 2015. If Hydra were to gain control over SI,
it would need to acquire 51% of SI’s outstanding shares. In response to the takeover intention,
SI immediately adopted a “poison pill” i.e., it offered the existing shareholders the right to
purchase its shares at a 50% discount of the market price. Hydra was excluded from this policy
because it was not an existing shareholder. SI’s announcement was made on 2 September 2015.
On 1 October 2015, shares were distributed and 90% of the existing shareholders exercised this
right to acquire SI shares at $10 each, which is 50% of the market price on the distribution date.
Each shareholder who exercised the right purchased shares equal to the number of shares they
owned before this new issuance. The total number of shares outstanding before the distribution
was 1,000,000. The share price declined to $15 per share after the rights were exercised.

Required

(i) Provide journal entries for the poison pill adopted by Stark Industries Ltd, from 1
September 2015 to 1 October 2015 (if any). Show all supporting computations.

(ii) Explain why Stark Industries Ltd’s response to Hydra Ltd’s takeover intention in Case E is
a “poison pill” and explain how it works. Support your argument with computations.

Self-Practice Questions

Question 4 Adapted from AA101 06S2 Exam Question (Applying online lesson 13 to account
for dividends)

Roller Engineering Pte Ltd (Roller) helps build and maintain oil storage terminals and other
infrastructure for firms operating in the petrochemical industry. It reported record earnings of
$20 million for the year ended 31 December 2006, up a staggering 300 per cent compared with
the previous year. Revenue surged 120 per cent to an all-time high of $508.4 million for the year.
The group attributed the higher earnings to greater economies of scale derived from its
execution of large-scale projects.

20S1 AC1103 Lesson 13 Discussion Questions 5

 “Sow an act, and you reap a habit; sow a habit, and you reap a character;
sow a character, and you reap a destiny.” ~ George Dana Boardman

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1103 – ACCOUNTING I
SEMESTER 1, 2020/2021

Earnings per share were 10 cents, up from 2.5 cents previously, while net asset value per share
stood at 30.9 cents as at 31 October 2006, up from 22.8 cents previously. There was no change
in the number of ordinary shares outstanding during the period 1 November 2004 to 30 April
2007.

Roller declared a final tax exempt one-tier dividend of 3 cents a share which was approved by its
shareholders at the Annual General Meeting on 25 March 2007. Dividend payment was made on
17 April 2007. The current corporate tax rate is 20%.

Required

Prepare the necessary journal entries on 25 March 2007 and 17 April 2007 to record the
transactions relating to the accrual and payment of the final dividends.
Key answers:
No. of Outstanding Shares = 200,000,000;
Total Final Dividend = $6,000,000

Question 5 AC1103 19S1 Exam Question 1B (Applying online lesson 13 to account for
dividends, share splits, and share buyback)

On 1 January 2019, Rosy Royce Pte Ltd had 460,000 outstanding shares and 6,000 treasury
shares. Rosy Royce Pte Ltd did the following in 2019:

March Purchased 8,000 of its own shares at $1.50 each, holding 50% of the
repurchased shares as treasury shares and cancelling the rest.
August Declared an interim dividend of $0.05 per share.
October Conducted share split, where each existing share was split into 2 shares.

Required

(a) Determine the number of issued shares and the number of outstanding shares at the end
of: (i) March 2019; (ii) October 2019
Key answers:
(i) Issued shares = 462,000; Outstanding shares = 452,000;
(ii) Issued shares = 924,000; Outstanding shares = 904,000.

(b) Prepare journal entries to record:

(i) the share buyback in March 2019
Key answer: Dr Treasury Shares $6,000
(ii) the declaration of interim dividend in August 2019
Key answer: Cr Dividend Payable $22,600

20S1 AC1103 Lesson 13 Discussion Questions 6