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Transcript of LIMITED COMPANIES LIMITED LIABILITY Owners (Shareholders) liability is limited to the amount of...
LIMITED COMPANIES
LIMITED LIABILITY Owners (Shareholders) liability is
limited to the amount of money they invest in the company
Public Limited Company (plc): 2 or more owners Minimal share capital of £50,000. Sells shares on the stock market to
the general public Private Limited Company (ltd): Company name must be followed by
letters Ltd Can sell shares to family and friends Authorised Share Capital cannot
exceed £50,000
DOCUMENTS
Memorandum of Association
Contents: Company Name Company Address Address of the
Company Authorised Share
Capital Statement of
Limited liability
Articles of Association
Contents: Rights and duties
of the director The procedure for
election of directors
Procedure for calling a General Meeting
Declaration and payments of dividends
Keeping of Accounts and Audits
Appointment of Secretary
LIMITED COMPANIES
Ownership
• Owned by the SHAREHOLDERS
Dividend
• A reward given to each shareholder for investing in the company.
• An interim dividend is one that is paid during the financial year
Control
• Run by a BOARD of DIRECTORS who have been elected by SHAREHOLDERS at the AGM
• Directors are get paid for their work, which is deducted in the Profit and Loss Account
Annual General Meeting (AGM)
• Must be held by law
• Informs shareholders how the business is doing
• Allows shareholders to express their views
FINANCEIssuing Shares
Authorised Share Capital
• The amount of shares a company is allowed to sell.
Issued Share Capital
• The amount of shares a company actually sold
TYPES OF SHARES
Preference shares
• Entitled to a certain percentage of the Net Profits
• Rank for payment before ordinary shares
• Don’t carry voting rights
Ordinary Shares
• Most risky type of investment
• Dividend will depend on Net profit of the year
• Get paid after preference shares
• Carry voting rights
FINANCE
DEBENTURES
• A debenture is a bond or loan These are normally issued in attempt to raise capital by plcs
Characteristics:
• Certificates representing a long term loan to the firm
• Fixed rate of interest charged over the term of the loan
• Debenture interest must be paid regardless of profit or loss
• Secured debentures guaranteed repayment upon liquidation
• Debenture owners are creditors and not shareholders to a limited company
FINANCE
Reserves
• A build up of profits in the following categories:
• Unappropriated Profit
• General Reserve
• Can be reduced by losses, issue of bonus shares, pay off or write off goodwill
General Reserve
• Contains profit that are transferred from the P&L appropriation account
• The General Reserve is not identified for a particular purpose
• Annual Transfer is identified by Directors
• General Reserve is the property of the shareholder
Trading P& L Acc of xxxx for y/e xxxxxx£ £ £
Sales x
LESS COST OF GOODS SOLD
Opening Stock x
ADD Purchases x
LESS Purchases Returns x x
ADD Carriage In x
ADD Warehouse Expenses x
x
LESS Closing Stock x
Cost of Goods sold -x
GROSS PROFIT x
Add any GAINS
(rent comm, disc, Investment received) x
Add any DECREASED Prov for BD +xx
LESS EXPENSES
Debenture Interest x
Wages x
Rates x
Insurance x
Advertising x
Depreciation x
Inc in Prov for BD x x
Net Profit Before Corporation Tax x
Trading P& L Acc of xxxx for y/e xxxxxx
£ £ £
Net Profit Before Corporation Tax x
Less Corporation Tax x
Net Profit After Corporation Tax x
Add unappropriated profit (trial balance)+x
x
Less Appropriations:
All interim Dividends (in trial balance) x
Preference Dividends (in notes) x
Ordinary Dividends (in notes) x
General Reserve (notes) x
Goodwill written off x x
Unappropriated Profit x
Balance Sheet of xxxx as at xxxxxx£ £ £
FIXED ASSETS Cost Dep NBV
Properties x x x
Fittings x x x
Investments x
Goodwill (intangible asset) x
x
CURRENT ASSETS
Stock x
Debtors x
(LESS prov for bad debt) x x
Prepayments x
Bank x
Cash x
Investment Dividends Received x
x
CURRENT LIABILITIES
Creditors x
Bank overdraft x
Accrued Expenses x
Debenture Interest Due x
Corporation Tax x
Proposed Dividends x
VAT x -x
Working Capital x
NET ASSETS x
Balance Sheet of xxxx plc as at xxxxxx£ £ £
FINANCED BY
Authorised Share Capital
xxxxxxxx Ordinary shares x
xxxxxxxx ? Preference shares x
x
Issued Share Capital
xxxxxxx Ordinary Shares x
xxxxxxxx ?% Preference Shares x
x
Reserves and Provisions
Profit and Loss Account x
General Reserve x
Share Premium Reserve x
Revaluation Reserve x x
ADD Long Term Liabilities
Debentures +x
NET WORTH x
Exercise 1 – Taylor plc
Notes
Prepayment
Marketing Expenses
Original figure 5,800
Less Prepayment 340
5,460
P& L Acc of Taylor plc for y/e 31/12/10£ £ £
GROSS PROFIT 63,500
LESS EXPENSES
Electricity 8,090
Marketing Expenses 5,460
Telephone 3,650
Rates 2,700
Advertising 2,200
Depreciation F&F 1,200 23,300
Net profit 40,200
+unappropriated profit at 31/12/09 0
40,200
Transfer to General Reserve 15,000
Ordinary Share Dividend 8,000
Preference Share Dividend14,00037,000
Unappropriated Profit 31/12/10 3,200
Ex 2 JINKY PLCJinky plc Appropriation Acc for Y/e 30/4/11
£ £ £
Net profit 46,000
+unappropriated profit at 30/04/10 4,000
50,000
Transfer to General Reserve 3,000
Ordinary Share Dividend 4,000
Preference Share Dividend1,000 8,000
Unappropriated Profit 31/12/11 42,000
Balance Sheet of Jinky plc as at 30/4/11£ £ £
FINANCED BY
Issued Share Capital
100,000 £1 Ordinary Shares 100,000
20,000 5% £1 Pref Shares 20,000
120,000
Reserves and Provisions
Profit and Loss Account 42,000
General Reserve 35,000 77,000
ADD Long Term Liabilities
Debentures 50,000
NET WORTH 247,000
£ £ £
(000) (000) (000)
Net Profit 35
Add Unappropriated Profit +26
61
Transfer to General Reserve 5
Interim Dividends
Ordinary 4
Preference 3 7
Proposed Dividend
Ordinary (full % plusInterim) 8
Preference 4 12 -24
(3000 already paid deducted)
Unappropriated Profit 31/1/11 37
Ex 3 – App Acc of Kippininn plc for y/e 31/1/11
Balance Sheet of Kipininn plc as at 31/1/11£ £ £
FIXED ASSETS Cost Dep NBV
Premises 160
Office Equipment 65 18 47
207
CURRENT ASSETS
Stock 62
Debtors 13
VAT 6
Bank 21
102
CURRENT LIABILITIES
Creditors 18
Proposed Ordinary Dividend 8
Proposed Preference Div 4
Wages Accrued 7 37
Working Capital 65
NET ASSETS 272
Balance Sheet of Kipininn as at 31/1/11£ £ £
Issued Share Capital
80,000 £1 Ordinary Shares 80
100,000 7% £1 Preference Shares 100
180
Reserves and Provisions
Profit and Loss Account 37
General Reserve 55 92
ADD Long Term Liabilities
Debentures 0
NET WORTH 272
HIGHER THEORYPROPERTY REVALUATION RESERVE
• Property usually appreciates in value (goes up) over the assets lifetime
• Revaluation occurs when there is a difference in value between the revaluation figure and the net book value.
• It should be recorded as follows: Dr Asset in Balance Sheet, Cr Revaluation Reserve
• The reserve cannot be distributed to shareholders
• The reserve cannot be used to write off goodwill
• The reserve can be used to finance a bonus share issue
• If the asset depreciates then it should be written off against the profits
HIGHER THEORY
SHARE PREMIUM
• Shares and debentures may be issued at PAR ie. At a price equal to their nominal value e.g. £1 share issued at £1.
• Shares may be issued at a PREMIUM (at a price ABOVE their nominal or face value i.e. £1 share issued at £1.25.
• A premium on the issue of shares must be treated as CAPITAL RESERVE that can only be used for the following purposes:
• Issuing fully paid bonus shares
• Writing off preliminary expenses
• Writing off commission paid or discounts allowed on shares or debentures
HIGHER THEORY
EXAMPLE
• 100,000 ordinary shares were £1 each and are now being sold as a premium price of£1.50
• The financed by section should be updated as follows:
Issued Share Capital
Ordinary Shares (100,000 at £1) £100,000
Reserves
General Reserve 10,000
Revaluation Reserve 15,000
Share Premium Reserve
(100,000@50p) 50,000 75,000
175,000
HIGHER THEORY
BONUS ISSUE
• If reserves increase beyond the level thought to be needed then shares can be issued to existing shareholders free of charge.
• Unlike a Rights Issue, no additional money is received. Share Certificates however are issued.
HIGHER THEORY
EXAMPLE
• It is proposed to give Ordinary shareholders a bonus issue of 1 share for every 6 held.
• This issue is to be financed from the share premium account.
• The value of issued ordinary shares is £36,000 (36,000 at £1 each) and the amount in the share premium account is £10,000.
• If 36,000 ordinary shares were sold and 1 in every six is to be issued as a bonus then that would be 36,000/6 = 6,000 shares
• 6000 shares at £1 each = £6,000.
HIGHER THEORY
Issued Share Capital
Ordinary Shares (36,000+6,000) 42,000
Reserves
Share Premium Reserve (10-6) 4,000
HIGHER THEORY
Preliminary/ Issue Expenses
• These include legal and other expenses incurred when a company is formed
• When they are large they are often Capitalised with a proportion being written off each year
• Since the Companies Act 1981 they MAY NOT be shown as assets
• They can be written off against any balance on the Share Premium Account
OR
• They should e written off in the Profit and Loss account
• They can also include expenses incurred in the issue of Debentures
HIGHER THEORY
Factoring
• Where a company transfers responsibility for collecting its book debts to a factor
• The factor will:
• Settle the debts due to the firm
• Receive a fee in return (based on the amount of debts paid – plus a service charge)
• Manage the sales ledger and arrange for the collection of overdue debts
• Advantages of factoring
• Reduces debt collection period
• Better credit control
• Decrease in risk of bad debts
HIGHER THEORY
Operating profit
• This is the Net Profit of a company BEFORE Corporation Tax is Deducted
Exercise 10 – Kelburn Plc
Notes
Prepayment £’000
Selling Expenses
Original figure 26
Less Prepayment 5 BS/A
21 P&L
Accrual
Office Expenses
Original figure 20
ADD Accrual 8 BS/L
28 P&L
Debenture interest
Original figure (1/2 year) 4
ADD Amount owing 4 BS/L
8 P&L
Exercise 10 – Kelburn Plc
Notes
Depreciation £’000
Fittings (Reduced Bal)
Cost 60 BS/FA
Dep to date 2040
Dep for current year 25% 10 P&L
NBV 30 BSC/FA
+BS/FA
Vehicles
Cost 70 BS/FA
Dep for Current year 20% 14 P&L
56
Existing Dep 9
NBV 47 BS/FA
+BS/FA
Exercise 10 – Kelburn Plc
Notes
Provision for Bad Debts £’000
Debtors 40 BS/CA
Provision 5% 2
New Debtors figure 38 BS/CA
Existing Figure 3
Decrease in provision 1 P&L
Property Revaluation
Present Value 180 BS/FA
Cost 147
Increase in Valuation 33 Cap Res
Exercise 10 – Kelburn Plc
Notes
Share premium Reserve £’000
Original amount 25
Less Preliminary Exp 20 BS/CL
5 BS/ FB
General Reserve
Original Value 27
This year’s transfer 13 APP
40 BS/FB
Dividends
50,000 10% £1 preference 50 BS/FB
Proposed dividend 5 BS/CL/ APP
60,000 £1 ordinary shares 60 BS/FB
Interim Dividend paid 6 APP
Final proposed dividend 5% 3 BS/CL/ APP
TPL & App of Kelburn plc for y/e 31/3/11£000 £000 £000
Sales 300
LESS COST OF GOODS SOLD
Opening Stock 15
ADD Purchases 180
ADD Warehouse Expenses 10 190
205
LESS Closing Stock 20
Cost of Goods sold -185
GROSS PROFIT 115
Add any GAINS
DECREASED Prov for BD 1
Discount Received 2118
LESS EXPENSES
Selling Expenses 21
Office Expenses 28
Bad Debts 5
Debenture Interest 8
Depreciation fittings 10
Depreciation Vehicles 14 86
Net Profit Before Corporation Tax 32
TPL & App of Kelburn plc for y/e 31/3/11
£000 £000 £000
Net Profit Before Corporation Tax 32
Less Corporation Tax 25% 8
Net Profit After Corporation Tax 24
Add unappropriated profit from prev yr 5
29
Less Appropriations:
Interim Ordinary dividend 6
Proposed Dividends
Final Ord dividend 5% 3
50,000 10% £1 preference 5
Reserves
General Reserve 13 27
Unnappropriated Profit 2
Bal sheet of Kelburn plc as at 31/12/11£000 £000 £000
FIXED ASSETS Cost Dep NBV
Properties 180 180
Fittings 60 30 30
Vehicles 70 23 47
257
CURRENT ASSETS
Stock 20
Debtors (less provision (40-2) 38
Selling Expenses Prepaid] 5
Bank 4
67
CURRENT LIABILITIES
Creditors 20
Office Expenses Accrued 8
Debenture Interest due 4
Proposed Ordinary dividend 3
Proposed Pref dividend 5
Corporation Tax due 8
VAT 6 -54
Working Capital 13
NET ASSETS 270
Bal sheet of Kelburn plc as at 31/3/11£ £ £
FINANCED BY
Issued Share Capital
60,000 £1 Ordinary shares 60
50,000 10% Preference shares 50
110
Reserves and Provisions
Unappropriated profit P&L 2
General Reserve 40
Share Premium Reserve (25-5) 5
Capital Reserve 33 80
ADD Long Term Liabilities
10% Debentures +80
NET WORTH 270
Exercise 11 – Gibshill Enterprise plc
Notes
Accrual £’000
Selling Expenses
Original figure 16
Add Accrual 4 BS/L
20 P&L
Prepayment
Office Expenses
Original figure 18
LESS Prepayment 5 BS/A
13 P&L
Depreciation
Fittings - Cost 55 BS
Depreciation 20% 11 P&L
44
Existing Dep 12
NBV 32 BS
Total Dep (12 + 11) 23 BS
Exercise 11 – Gibshill plc
Notes
Depreciation £’000
Vehicles (Reduced Bal)
Cost 85 BS
Existing Depreciation 1570
Dep for current year 10% 7 P&L
NBV 63 BS
Depreciation to date (15+7) 22 BS
Provision for Doubtful Debts
Debtors 60 BS/CA
5% Provision for DD 3 BS/CA
Existing Provision for DD 1
Adjustment for this year 2 P&L
Exercise 11 – Gibshill plc
Notes
Bank overdraft £’000
Interest due Bank overdraft 1 BS/CL & P&L
Debenture Interest
½ Year (Paid) 2
½ Year (due) 2 BS/ CL
Full year interest 4 P&L
Bonus Share
£1 Ordinary Shares issued 40,000
£1 Bonus shares (1 in 4) 10,000
50,000 FB
Share Premium reserve 15,000
Less Bonus shares 10,000
5,000 FB
Exercise 11 – Gibshill Plc
Notes
General Reserve £’000
Existing amount 20
Less Amount to transfer 9 P&L
11 BS/ FB
Goodwill
Value 22 P&L (App)
Dividends
10,000 10% £1 preference 20 BS/FB
Dividend 2
Less Interim dividend) 1 P&L/app
Proposed dividend due 1 P&L/app
BS/CL
50,000 £1 ordinary shares 50 BS/FB
Final proposed dividend 8% 4 BS/CL/ APP
TPL & App of Gibshill plc for y/e 30/4/11£000 £000 £000
Sales 250
LESS COST OF GOODS SOLD
Opening Stock 15
ADD Purchases 170
185
LESS Closing Stock 18
Cost of Goods sold 167
GROSS PROFIT 83
LESS EXPENSES
Selling Expenses (16+4) 20
Office Expenses (18-5) 13
Provision for doubtful debts 2
Bad Debts 4
Discounts 1
Debenture interest 4
Depreciation Fittings 11
Depreciation Vehicles 7
Overdraft interest due 1 63
Net Profit Before Corporation Tax 20
TPL & App of Gibshill plc for y/e 30/4/11
£000 £000 £000
Net Profit Before Corporation Tax 20
Less Corporation Tax 25% 5
Net Profit After Corporation Tax 15
Add unappropriated profit from prev yr 6
21
Less Appropriations:
Interim preference share div 1
Proposed Dividends
Final Preference share div 1
Ordinary Share dividend 4 6
Goodwill written off 22 28
-7
Reserves
Transfer FROM General Reserve 9
Unnappropriated Profit 2
Bal sheet of Gibshill plc as at 30/4/11£000 £000 £000
FIXED ASSETS Cost Dep NBV
Fittings 55 23 32
Vehicles 85 22 63
95
CURRENT ASSETS
Stock 18
Debtors (less provision (60-3) 57
Office Expenses Prepaid 5
80
CURRENT LIABILITIES
Creditors 10
Selling Expenses Accrued 4
Debenture Interest due 2
Overdraft interest due 1
Proposed Preference div 1
Proposed Ordinary div 4
Corporation Tax 5
VAT 4
Bank Overdraft 6 37
Working capital 43
NET ASSETS 138
Bal sheet of Gibshill plc as at 30/4/11£ £ £
FINANCED BY
Issued Share Capital
50,000 £1 Ordinary shares (40+10) 50
20,000 10% Preference shares 20
70
Reserves and Provisions
Unappropriated profit P&L 2
General Reserve (20-9) 11
Share Premium Reserve (15-10)5 18
ADD Long Term Liabilities
8% Debentures +50
NET WORTH 138