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Reserves and Capital Structure

6 questions

All types6Multiple choice2Numeric2Matching2
Question 1Question →

Match each company reserve in Column A with its correct definition and statutory characteristic in Column B.

Click a left item, then click its matching right item

Items

Share Premium Account
Revaluation Reserve
General Reserve
Retained Earnings

Matches

Show answer & explanation

Answer

Share Premium Account matches statutory capital reserve arising from issuing shares above par value; Revaluation Reserve matches unrealized capital reserve created from revaluation of non-current assets; General Reserve matches revenue reserve set aside out of distributable profits for general future needs; Retained Earnings matches accumulated revenue reserve comprising profit after tax available for distribution.
Each reserve item is paired according to company accounting rules: Share Premium is a capital reserve restricted by law to specific uses like bonus share issues; Revaluation Reserve represents unrealized gains on non-current assets; General Reserve is a revenue reserve set aside from earned profits for general stability; Retained Earnings represents accumulated undistributed net profits available for dividend declaration.

Step-by-Step Solution

1
Distinguish between Capital Reserves and Revenue Reserves
Capital reserves (Share Premium, Revaluation Reserve) are created from non-trading sources or statutory restrictions and cannot be distributed as cash dividends. Revenue reserves (General Reserve, Retained Earnings) are created from trading profits and are available for dividends.
Understanding the source and legal restrictions of reserves determines their classification.
2
Identify the specific nature of each Capital Reserve
Share Premium comes from issuing shares above par value and has legally restricted uses. Revaluation Reserve records unrealized gains on asset revaluation.
Share Premium is governed by statutory usage provisions, whereas asset appreciation forms revaluation surplus.
3
Identify the specific nature of each Revenue Reserve
General Reserve is an intentional allocation of profit to bolster financial strength, while Retained Earnings is the unappropriated balance of cumulative net income.
General Reserve requires a specific transfer entry, whereas Retained Earnings carries over accumulated residual profit.

Key Concept

Classification and characteristics of Capital Reserves versus Revenue Reserves in company accounts
Estimated Time:1m 30s
Question 2Question →

Under statutory company accounting rules, which of the following is a legally permitted application of the Share Premium account balance?

Show answer & explanation

Answer: Issuing fully paid bonus shares to existing shareholders

Answer

Issuing fully paid bonus shares to existing shareholders
The Share Premium account is a non-distributable capital reserve. Under company law and statutory accounting rules, its balance can legally be applied to issue fully paid bonus shares to existing shareholders, write off preliminary formation expenses, or write off expenses/commissions on share issues.

Step-by-Step Solution

1
Identify the nature and classification of the Share Premium account
Share Premium is classified as a capital reserve because it represents funds paid by subscribers in excess of the nominal value of shares.
Capital reserves arise from capital transactions and are legally restricted from being treated as distributable profits.
2
Evaluate statutory regulations governing the utilization of capital reserves
Company regulations strictly permit capital reserves like Share Premium to be used for capital purposes—such as issuing fully paid bonus shares, writing off preliminary expenses, or writing off share issue commission.
Using capital reserves for cash dividends or operational losses violates statutory principles protecting company capital.

Key Concept

Statutory Utilization of Share Premium
Estimated Time:45s
Question 3Question →

Match each company reserve item in Column A with its correct classification and characteristic in Column B.

Click a left item, then click its matching right item

Items

Share Premium Account
General Reserve
Revaluation Reserve
Retained Earnings

Matches

Show answer & explanation

Answer

Share Premium Account matches with statutory capital reserve from issuing shares above par; General Reserve matches with revenue reserve created out of distributable profits; Revaluation Reserve matches with capital reserve from upward asset revaluation; Retained Earnings matches with revenue reserve of accumulated undistributed net profits.
Share Premium and Revaluation Reserve are capital reserves created from non-trading or statutory sources and asset revaluations. General Reserve and Retained Earnings are revenue reserves created out of operational net profits.

Step-by-Step Solution

1
Distinguish between Capital Reserves and Revenue Reserves.
Capital reserves (Share Premium, Revaluation Reserve) arise from non-trading activities or statutory requirements and cannot be distributed as cash dividends. Revenue reserves (General Reserve, Retained Earnings) are created out of trading profits.
Correct classification requires understanding the source of funds and dividend availability.
2
Identify specific characteristics of each reserve item.
Share Premium represents excess price over par value. Revaluation Reserve records unrealized asset appreciations. General Reserve is allocated for general contingencies. Retained Earnings carries forward undistributed profit.
Each reserve serves a distinct accounting function within equity.
3
Match each item in Column A to its description in Column B.
Share Premium -> Capital reserve from share issue above par. General Reserve -> Revenue reserve from distributable profits. Revaluation Reserve -> Capital reserve from asset revaluation. Retained Earnings -> Revenue reserve of undistributed net profit.
Verifies precise definitions.

Key Concept

Classification of Capital Reserves and Revenue Reserves in Company Equity
Question 4Question →

Apex Nigeria Plc has an authorized share capital of 1,000,000 ordinary shares of ₦1 each. The company had previously issued 600,000 ordinary shares at a premium of ₦0.20 per share, all fully paid. Prior to year-end adjustments, the General Reserve account held a balance of ₦50,000. The directors subsequently wrote off preliminary expenses of ₦10,000 from the Share Premium account and then issued bonus shares to existing shareholders on the basis of one new share for every four shares held, utilizing the Share Premium account to its maximum statutory limit before drawing on revenue reserves. What is the remaining balance in the General Reserve account after the bonus issue?

Show answer & explanation

Answer: ₦10,000

Answer

The remaining balance in the General Reserve account is ₦10,000.
The correct option correctly accounts for the statutory reduction of the Share Premium balance by ₦10,000 for preliminary expenses prior to capitalizing the remaining ₦110,000 for the ₦150,000 bonus issue. This leaves ₦40,000 to be transferred from the General Reserve, leaving ₦10,000 in the General Reserve.

Step-by-Step Solution

1
Calculate the initial Share Premium balance
600,000 shares × ₦0.20 = ₦120,000
Share Premium is calculated as the premium per share multiplied by the number of issued shares.
2
Deduct preliminary expenses written off from Share Premium
₦120,000 - ₦10,000 = ₦110,000 available Share Premium
Writing off preliminary expenses is a statutory permitted use of the Share Premium account.
3
Determine the nominal value of the bonus shares issued
(600,000 shares ÷ 4) × ₦1 = 150,000 shares = ₦150,000
A 1-for-4 bonus issue on 600,000 shares yields 150,000 new ordinary shares at ₦1 nominal value.
4
Apply available Share Premium and compute General Reserve utilization
General Reserve required = ₦150,000 total bonus - ₦110,000 Share Premium = ₦40,000
Share Premium must be utilized to its maximum available balance before absorbing the remaining deficit from revenue reserves.
5
Compute the ending balance of the General Reserve
₦50,000 initial balance - ₦40,000 utilized = ₦10,000 remaining
Subtracting the amount drawn for the bonus issue from the opening General Reserve balance gives the final balance.

Key Concept

Statutory Utilization of Share Premium and Capitalization of Reserves for Bonus Issues
Estimated Time:3m 0s
Question 5Question →

As at 1st January 2025, Crestwood Marine Plc had an issued share capital of 800,000 Ordinary Shares of ₦1.00 each fully paid, and a Share Premium Account balance of ₦220,000. During the year, the directors declared a 1-for-5 bonus issue of ordinary shares using the Share Premium account. Subsequently, the company wrote off preliminary expenses of ₦25,000 and share issue costs of ₦15,000 against the remaining Share Premium balance as legally permitted. Calculate the remaining balance in the Share Premium Account in Naira (₦) at the end of the year.

Show answer & explanation

Answer: 20000

Answer

The remaining balance in the Share Premium Account is ₦20,000.
The Share Premium account initially had ₦220,000. Issuing 160,000 bonus shares (800,000 ÷ 5) at ₦1.00 nominal value absorbs ₦160,000 of the reserve, reducing it to ₦60,000. Statutory regulations allow companies to write off preliminary formation expenses (₦25,000) and share issue costs (₦15,000) against Share Premium, leaving a net final balance of ₦20,000 (₦60,000 - ₦40,000).

Step-by-Step Solution

1
Calculate the total nominal value of the bonus share issue.
₦160,000
A 1-for-5 bonus issue on 800,000 shares yields 160,000 new shares at ₦1.00 nominal value each.
2
Determine the Share Premium balance after funding the bonus issue.
₦60,000
Utilizing ₦160,000 from the initial ₦220,000 Share Premium leaves an intermediate balance of ₦60,000.
3
Deduct statutory write-offs for preliminary expenses and share issue expenses.
₦20,000
Under statutory company laws, writing off preliminary formation expenses (₦25,000) and share issuance costs (₦15,000) directly against the Share Premium account is permitted, leaving ₦60,000 - ₦40,000 = ₦20,000.

Key Concept

Statutory utilization of Share Premium account for bonus issues and expense write-offs
Question 6Question →

Kano Logistics Plc has an authorized capital of 5,000,0005,000,000 ordinary shares of ₦0.50\text{₦}0.50 each. The company issued 3,000,0003,000,000 ordinary shares, with ₦0.40\text{₦}0.40 per share called up by the directors. If the total calls in arrears amount to ₦50,000\text{₦}50,000, what is the value of the paid-up share capital in Naira?

Show answer & explanation

Answer: 1150000

Answer

The paid-up share capital is ₦1,150,000.
To determine paid-up capital, first calculate called-up capital by multiplying the issued shares (3,000,000) by the called-up price per share (₦0.40), giving ₦1,200,000. Then subtract calls in arrears (₦50,000), which represents unpaid amounts requested from shareholders. This gives a final paid-up share capital of ₦1,150,000.

Step-by-Step Solution

1
Calculate the total called-up share capital
₦1,200,000
Called-up capital is determined by multiplying the number of issued shares (3,000,000) by the called-up amount per share (₦0.40).
2
Deduct calls in arrears from called-up capital to find paid-up capital
₦1,150,000
Paid-up capital represents the actual amount received by the company from shareholders, calculated as called-up capital minus calls in arrears (₦1,200,000 - ₦50,000).

Key Concept

Paid-Up Share Capital Calculation
Reserves and Capital Structure Practice Questions — JAMB UTME | Examkin