ACCA FA · Chapter 9
Capital structure and finance costs MCQs with Answers
10 multiple-choice questions on Capital structure and finance costs for ACCA FA Financial Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A company issued 200,000 ordinary shares with a nominal value of $0.50 each at a price of $1.80 per share. What amount should be credited to the share premium account?
- A) $260,000
- B) $360,000
- C) $100,000
- D) $160,000
Show answer & explanation
Answer: A) $260,000
Share capital is credited with the nominal value: 200,000 x $0.50 = $100,000. The premium is the excess of the issue price over nominal value: 200,000 x ($1.80 - $0.50) = $260,000. Total cash received is $360,000. Assuming a $1 nominal value gives $160,000.
Question 2
A company had 400,000 ordinary shares of $1 each and a share premium account of $150,000. It made a 1 for 4 bonus issue, using the share premium account. It then made a 1 for 5 rights issue at $1.50 per share, which was fully taken up. What are the balances on the share capital and share premium accounts after these issues?
- A) Share capital $580,000; Share premium $90,000
- B) Share capital $600,000; Share premium $200,000
- C) Share capital $600,000; Share premium $100,000
- D) Share capital $500,000; Share premium $200,000
Show answer & explanation
Answer: C) Share capital $600,000; Share premium $100,000
Bonus issue: 400,000 / 4 = 100,000 shares, so share capital becomes $500,000 and share premium falls to $150,000 - $100,000 = $50,000. Rights issue: 500,000 / 5 = 100,000 shares at $1.50, adding $100,000 to share capital and $50,000 to share premium. Final balances: share capital $600,000; share premium $50,000 + $50,000 = $100,000. Basing the rights issue on the original 400,000 shares gives $580,000 and $90,000.
Question 3
Which of the following statements about a bonus issue of shares is correct?
- A) It increases the total equity of the company
- B) It is issued at a price below market value to existing shareholders
- C) It is recorded by debiting cash and crediting share capital
- D) It does not raise any cash for the company
Show answer & explanation
Answer: D) It does not raise any cash for the company
A bonus (capitalisation) issue converts reserves, such as share premium or retained earnings, into share capital. No cash is received, and total equity is unchanged because one component of equity increases while another decreases. Issuing shares for cash to existing shareholders at a discount describes a rights issue.
Question 4
On 1 April 20X5, a company issued $250,000 of 8% loan notes. Interest is paid every six months on 30 September and 31 March. What is the interest accrual required in the statement of financial position at 31 December 20X5?
- A) $10,000
- B) $15,000
- C) $20,000
- D) $5,000
Show answer & explanation
Answer: D) $5,000
Finance cost for April to December = $250,000 x 8% x 9/12 = $15,000. Interest paid on 30 September for April to September = $250,000 x 8% x 6/12 = $10,000. Accrual = $15,000 - $10,000 = $5,000, covering October to December. $15,000 is the total charge to profit or loss, not the accrual.
Question 5
Where are dividends paid to ordinary shareholders presented in a company's financial statements?
- A) In other comprehensive income
- B) As an expense in the statement of profit or loss
- C) In the statement of changes in equity
- D) As finance costs in the statement of profit or loss
Show answer & explanation
Answer: C) In the statement of changes in equity
Ordinary dividends are a distribution to owners, not an expense, so they are deducted from retained earnings in the statement of changes in equity. They are not included in profit or loss or other comprehensive income. Cash paid would also appear in the statement of cash flows.
Question 6
A company has issued redeemable preference shares that must be redeemed for cash on a fixed date. How should these be classified, and how should the dividends on them be treated?
- A) As a liability, with dividends treated as a finance cost
- B) As equity, with dividends deducted in the statement of changes in equity
- C) As equity, with dividends treated as a finance cost
- D) As a liability, with dividends deducted in the statement of changes in equity
Show answer & explanation
Answer: A) As a liability, with dividends treated as a finance cost
Under IAS 32, redeemable preference shares that must be redeemed for cash on a fixed date create a contractual obligation to pay cash to the holder, so they are classified as a financial liability (usually non-current), not equity. Consistent with this, the dividends on them are presented as a finance cost in profit or loss rather than as a distribution in the statement of changes in equity. Irredeemable preference shares with discretionary dividends would instead be equity, with dividends shown in the statement of changes in equity.
Question 7
A company has 1,200,000 ordinary shares of $0.25 each in issue. It pays a dividend of 5 cents per share. What is the total dividend payment?
- A) $240,000
- B) $15,000
- C) $60,000
- D) $6,000
Show answer & explanation
Answer: C) $60,000
The dividend is stated per share, regardless of nominal value: 1,200,000 x $0.05 = $60,000. Applying 5% to the total nominal value (1,200,000 x $0.25 = $300,000) gives $15,000, which is the error of treating the dividend as a percentage of nominal value.
Question 8
Which of the following transactions increases the total equity of a company?
- A) Repayment of a bank loan
- B) An issue of ordinary shares for cash
- C) A bonus issue of ordinary shares
- D) Payment of an ordinary dividend
Show answer & explanation
Answer: B) An issue of ordinary shares for cash
An issue of shares for cash increases assets and share capital (and share premium), so total equity increases. A dividend reduces equity, a bonus issue reallocates amounts within equity without changing the total, and repaying a loan reduces assets and liabilities without affecting equity.
Question 9
A company issued shares at $2.00 each several years ago. Its shares are now quoted on a stock exchange at $3.40 each. How does the increase in the market price affect the company's share capital in its statement of financial position?
- A) Share premium increases by the rise in market price
- B) Share capital increases by the rise in market price
- C) A revaluation surplus is recognised for the rise in market price
- D) There is no effect; share capital remains at its nominal value
Show answer & explanation
Answer: D) There is no effect; share capital remains at its nominal value
Changes in the market price of a company's own shares occur between investors and are not transactions of the company. Share capital and share premium reflect the amounts received when shares were issued, so they are unaffected by subsequent movements in market value.
Question 10
For which of the following purposes may the share premium account be used?
- A) To write off irrecoverable debts
- B) To fund the purchase of non-current assets
- C) To pay up bonus shares issued to existing shareholders
- D) To pay cash dividends to shareholders
Show answer & explanation
Answer: C) To pay up bonus shares issued to existing shareholders
The share premium account is a non-distributable statutory reserve with restricted uses, a common one being to fund a bonus issue of fully paid shares. It cannot be used to pay dividends. Writing off debts is an expense in profit or loss, and buying assets uses cash, not a reserve.