Limited Companies

Outcome
• explain the advantages and disadvantages of operating as a limited company

• understand the meaning of the term limited liability

• understand the meaning of the term equity

• understand the capital structure of a limited company comprising preference share capital, ordinary
share capital, general reserve and retained earnings

• understand and distinguish between issued, called-up and paid-up share capital

• understand and distinguish between share capital (preference shares and ordinary shares) and loan
capital (debentures)

• prepare income statements, statements of changes in equity and statements of financial position

• make adjustments to financial statements

The Nature
 Limited Liability Company

• It has a separate legal entity to its owners.

• Shareholders (owners) are only liable (legally responsible) for

the business debts according to the amount invested.
 Characteristics

• Capital is divided into units, called shares.

• Profits generated by the business, can be invested to the

business as part of the capital (equity) as retained earnings, or
divided between shareholders.

• Profits shared in the form of dividends.

• 2 up to unlimited number of owners

• 200 000 shares of $2 each

• Rate of dividend 10%

• The amount payable for dividend

• Total value of capital = 200 000 shares x $2 = $400 000

• Dividend = 10% x $400 000 = $40 000

• Dividend per share = $40 000 / 200 0000 = $0.2/ share

• Total capital = 200 000 shares x $2

• Dividend per share = $40 000 / 200 000 shares

 Advantages

• Limited Liability

• More access to raise finance, e.g. bank loan and capital (share
issuance)

• Easier to recruit employees

• Continuity of existence
 Disadvantages

• More legal procedures in formation

• Must publish financial statements

• Ownership and management are separated

 Equity

• Equity is the total monetary value of a company represented by

the value of:

• shares capital (investment) and

• reserves.
 Equity
• Example:

• A company, with a total capital of $ 500 000, consisting of

shares of $10 each, and decided to pay its shareholders 20% of
dividend.

• Number of shares issued = $ 500,000 shares

=50,000
$ 10
• Total amount payable is = $ 500,000 x 20 %=$ 100,000

• Amount payable per share = 20% x $10 = $2

Capital Structure
Share Capital
 Issued, Called-up, and Paid-up
Capital

• Issued Capital is total amount of share capital sold to raise

finance.

• Called-up Capital is total amount of share capital requested to

shareholders.

• Paid-up Capital is part of called-up capital which the business

has received the payment from its shareholders.
• Mishra Limited

• 1 May 20-8 Issued share capital = 300 000 x $1

• (1st call) Called up capital 1 May 20-8 = (50% x $1 x 300 000

shares ) = $150 000

• Called up price = $0.5

• Paid up capital 1 May 20-8 = $0.5 x 290 000 shares

Issued, Called-up, and Paid-up
Capital

Issued Called-up Paid-up

Capital Capital Capital
 Issued, Called-up, and Paid-up
Capital
• Example:

• At 1 January 2020, a company issues 100 000 shares for $10 each. Shareholders are asked
to pay $2 a share. 75% of the calls has been paid by the shareholders.

• Issued shares capital = 100 000 x $10 = $1 000 000

• $ 1 000 000 comprises of 100 000 shares of $ 10 each

• Called-up capital = 100 000 x $2 = $200 000

• $ 200 000 comprises of $2 called-up on 100 000 shares

• Paid-up capital = 75% x $200 000 = $150 000

• $ 150 000 comprises of $2 called-up on 75 000 shares

 Issued, Called-up, and Paid-up
Capital (p.344)
• Example:

• At 1 January 2020, Astro Ltd issues 100 000 shares for $0.5 each. Shareholders are asked to
pay $0.2 a share. 90% of the calls has been paid by the shareholders.

• Calculate

• Issued shares capital

• 100 000 shares x $0.5 = $50 000

• Called-up capital

• $0.2 x 100 000 shares = $20 000

• Paid-up capital

• 90% x $20 000 = $18 000

 Shares Capital

• Types of Shares:

• Preference Shares

• Ordinary Shares
 Preference Shares
• The shareholders hold certain rights which ordinary
shareholders do not have.

• Fixed rate of dividend

• The dividends are paid before the ordinary shareholders get

paid.

• If a company gets wound up, the shareholders’ capital will

be prioritized for repayment.
Jimmy invested $ 50 000 consists of 50 000 shares with $1 each 5%
preference share capital to Samsing Ltd
Profit for the year ended 31 Dec 2019 $ 250 000
2020 loss for the year $ 50 000
Dividend payable for Jimmy for the year ended 31 December 2019? $ 250
000 - $ 50 000 = $ 150 000 5% x $ 50 000 = $ 2 500
2020? $ 5 000 = (($50 000) - $ 50 000) x 5% = ($ 5 000)
$ 2 500 = 5% x $ 50 000

On 1 Jan 2021 Jimmy invested additional $ 10 000 (10 000 shares with $1
each)
Dividend payable for the year ended 31 December 2021?
 Preference Shares

• The holders are not entitled for voting right at the shareholders’
meeting
 Preference Shares
• Two types:

• Redeemable Preference Shares (Liabilities)

• Might be bought back by the business at an agreed date

and for agreed price

• Non-redeemable Preference Shares (Equity)

• Can not be repurchased

 Ordinary Shares
• The shareholders’ dividend are paid after the preference
shareholders’ are paid.

• If the company closes down, the ordinary shareholders’ capital

will be paid after the debentures holders and preference
shareholders’ are repaid.

• Variable rate of dividend

• Entitled for voting right at the shareholders’ meetings

 Reserves

• Profits ploughed back into the business

• Two types:

• Retained Profits (Earnings)

• General Reserve
 Retained Earnings

• Profit which has not been divided to shareholders or

transferred to General Reserve.
 General Reserve

• Created by transferring the amount from the profit for the

year

• Needed to meet unknown future potential liabilities

Loan Capital
 Debentures

• Long term loans which carry a fixed rate of interest.

• Being holders ≠being owners

• Interest must be paid either when the business earns profit or

suffers loss.

• When the business gets wound up, the debentures holders will
be prioritized on repayment
Financial Statements
 Income Statement

• Interest on Debentures for the period is to be included as part

of the Expenses.

• Dividend of Redeemable Preference Shares (Liabilities)

• Treated like Interest on Loan

Statement of Changes in Equity
• Summarises the changes to:

• Shares Capital

• Ordinary Shares

• Non-redeemable Preference Shares

• Reserves

• Retained Earnings (profit) (Appropriation of profit)

• General Reserve.
 Changes in Shares Capital

• Changes to ordinary shares and non-redeemable preference

shares

• Issuance of new shares

 Changes in Reserves
• Changes in Retained Profits

• Dividend of Ordinary and Non-redeemable Preference Shares

• Proposed Dividend paid during the year

• Interim Dividend (half-yearly or quarterly dividend) paid

within the year

• Transfer to General Reserve

• Balances of Retained Profits

• Proposed dividend:

• Dividend paid
 Changes in Reserves

• Changes in General Reserve

• Transfer from Retained Earnings

• Balances of General Reserve

 Walkthrough 21.3
• Anand Limited was formed on 1 July 2013. By 30 June 2016 a total 200 000 5%
redeemable preference shares of $1 each and 600 000 ordinary shares of $0.50
each had been issued and were fully paid.

• The following information is provided:

• The profit for the year ended 30 June 2016 before the preferences share
dividend was $58 000.

• On 1 July 2015 the retained earnings brought forward amounted to $21 000
and the general reserve amounted to $26 000.

• Half of the preference share dividend was paid on 31 December 2015. On 30

June 2016 the remaining preference share dividend was outstanding.
 • The proposed final ordinary share dividend of $30 000 for the
year ended 30 June 2015 was paid on 30 September 2015.

• An interim dividend of $24 000 was paid on 31 March 2016.

• On 30 June 2016 the directors recommended a transfer of $8 000

to the general reserve and the payment of an ordinary share
dividend of 8%.

• Prepare a statement of changes in equity of Anand Limited for the

year ended 30 June 2016.
Statement of changes in equity

Ordinary Retained
share profit

Balance at
1 July 20-5

Add: Profit
for the year
• Profit for the year $48 000

• Less:
 Anand Limited
Statement of Changes in Equity
for the year ended 30 June 2016
Ordinary Share General Reserve Retained Total
Capital Earnings

$ $ $ $
Balance at 1 July 300000* 45000 41000 386000
2015
Profit for the year 48000** 48000

Dividend paid (30000) (30000)

(Final)
Dividend paid (24000) (24000)
(Interim)
Transfer to 8000 (8000)
General Reserve
Balance at 30 June 300000 53000 27000 380000
2016
 Statement of Financial Position
• Equity:

• Shares Capital

• Ordinary Shares

• Non-redeemable Preference Shares

• Reserves

• Retained Profits

• General Reserve
 Anand Limited
Extract from Statement of Financial Position
at 30 June 2016
$ $ $

Equity and Liabilities

Equity

Ordinary share capital 300000

General Reserve 53000

Retained Earnings 27000

380000
 Income Statement
• Gross profit $105 000

• Add: Other Income $8 500

• $113 500

• Less: Expense (40 000)

• Profit from operations $73 500

• Less: Loan interest $ 500

• Debenture interest $ 800

• Dividend of Redeemable Preference shares $ 1 200

• ($2 500)

• Net Profit $71 000

 Income Statement
• Gross profit $105 000

• Add: Other Income $8 500

• $113 500

• Less: Expense

• … $40 000

• Loan interest $ 500

• Debenture interest $ 800

• Dividend of Redeemable Preference shares $ 1 200

• ($42 500)

• Profit for the year $71 000

• Profit from operations = Gross profit + other income -
Operating expenses
 Income Statement
• Administration Expense

• Stationery

• Rent

• Salaries

• Depreciation of equipment
 Anand Limited
Extract from Statement of Financial Position
at 30 June 2016
$ $ $
Non-current Liabilities

Debentures xxx

5% Redeemable Preference Shares 200000

Current Liabilities

Other Payables:

Accrued Debenture Interest xxx

Accrued Proposed Dividend of Redeemable 10000*)

Preference Shares