Ch02 Sm Leo 10e
Solutions Manual
to accompany
Company Accounting 10e
prepared by
Ken Leo
John Hoggett
John Sweeting
Jeffrey Knapp
Sue McGowan
© John Wiley & Sons Australia, Ltd 2015
Chapter 2 – Financing company operations
REVIEW QUESTIONS
1. Explain the nature of a share. Distinguish between an ordinary share and a preference share.
Basically, a share represents ownership of a portion of the share capital of a company. Also note the discussion in Chapter 1 of the text concerning the relationship between limited liability and the amount paid up on a share.
The differences between ordinary and preference shares are determined by the terms of issue. A company has the right to issue preference shares, but may only do so either if there is a statement in its constitution setting out the rights of these share or if these rights have been approved by a special resolution of the company. Not all preference shares are the same.
However common differences between ordinary and preference shares are:
Ordinary shares represent ordinary ownership interest and therefore have right to participate in profits, voting rights and rights to receive return of capital if the company is wound up and after that of all other claimants (i.e. creditors).
Preference shares are distinguished as normally having a set rate of ‘dividend’ (e.g. 5%) that is paid prior to any dividend to ordinary shareholders and have preference (before ordinary shareholders) to return of capital if the company is wound up. Also may be:
Cumulative – i.e. if dividends are not paid in one period, they accumulate and are paid in the future when profits and funds are available;
Participating- may receive an ‘extra’ dividend and participate in surplus assets or profits;
May have voting rights (often only in specific circumstances; e.g. if dividends are not paid)
Redeemable – may be able to be bought back either at a fixed time or at the option of either party (shareholder or company)
Note: Classification of
to accompany
Company Accounting 10e
prepared by
Ken Leo
John Hoggett
John Sweeting
Jeffrey Knapp
Sue McGowan
© John Wiley & Sons Australia, Ltd 2015
Chapter 2 – Financing company operations
REVIEW QUESTIONS
1. Explain the nature of a share. Distinguish between an ordinary share and a preference share.
Basically, a share represents ownership of a portion of the share capital of a company. Also note the discussion in Chapter 1 of the text concerning the relationship between limited liability and the amount paid up on a share.
The differences between ordinary and preference shares are determined by the terms of issue. A company has the right to issue preference shares, but may only do so either if there is a statement in its constitution setting out the rights of these share or if these rights have been approved by a special resolution of the company. Not all preference shares are the same.
However common differences between ordinary and preference shares are:
Ordinary shares represent ordinary ownership interest and therefore have right to participate in profits, voting rights and rights to receive return of capital if the company is wound up and after that of all other claimants (i.e. creditors).
Preference shares are distinguished as normally having a set rate of ‘dividend’ (e.g. 5%) that is paid prior to any dividend to ordinary shareholders and have preference (before ordinary shareholders) to return of capital if the company is wound up. Also may be:
Cumulative – i.e. if dividends are not paid in one period, they accumulate and are paid in the future when profits and funds are available;
Participating- may receive an ‘extra’ dividend and participate in surplus assets or profits;
May have voting rights (often only in specific circumstances; e.g. if dividends are not paid)
Redeemable – may be able to be bought back either at a fixed time or at the option of either party (shareholder or company)
Note: Classification of