ICAEW AF · Chapter 13 · Question 11 of 12
At the start of the year, a company's equity comprised: ordinary share capital (£1 shares) £100,000; share premium £20,000; retained earnings £150,000. During the year: 1. It issued 40,000 ordinary £1 shares for cash at £1.75 each. 2. After the share issue, it paid an ordinary dividend of 10p per share on all shares then in issue. 3. Profit for the year was £56,000. There were no other movements in equity. What is the company's total equity at the end of the year?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) £382,000
Explanation
Share capital = £100,000 + (40,000 x £1) = £140,000. Share premium = £20,000 + 40,000 x (£1.75 - £1.00) = £20,000 + £30,000 = £50,000. Dividend = 140,000 shares x £0.10 = £14,000. Retained earnings = £150,000 + £56,000 - £14,000 = £192,000. Total equity = £140,000 + £50,000 + £192,000 = £382,000. Recording the share issue at nominal value only gives £352,000, paying the dividend on 100,000 shares gives £386,000, and ignoring the dividend gives £396,000.
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