The share capital and reserves

The share capital and reserves section of Bantam plc’s statement of financial position as at 31 December 2013 was as follows:

In view of the large balance of retained earnings, and in response to shareholder pressure, the company’s chairman wants to make changes to the share capital and reserves, and has made the following alternative suggestions:

1 Pay a dividend of £200,000 by using the balance within the share premium account

2 Repay all the share capital to the shareholders

3 Use the retained profits balance to issue bonus shares on a 2 for 1 basis

4 Use the retained profits balance to pay a dividend of £200,000.

(a) Explain the extent to which each of the four alternatives is legally acceptable.

(b) What are the relative advantages from the shareholders’ viewpoint of alternatives 3 and 4?

(c) What are the relative advantages from the company’s viewpoint of alternatives 3 and 4?

(d) Assume that the company has decided to implement alternative 3 on 5 January 2014 and then, on 12 January 2014, it implements alternative 4. Redraft the statement of financial position extract as it would appear on each of these two dates. Assume that there were no other changes to share capital or reserves in the period.

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