The Multiple Choice Questions Blog

A company wishes to pay the maximum possible ordinary dividend in respect of a year during which it earned a net profit after tax of £26,600.

The company has issued 20.000 £1 8% preference shares and 50,000 £1 ordinary shares.

If £5,000 is to be transferred to the general reserve, what ordinary dividends are to be paid, in percentage terms?

Select ONE answer:

1. 10%
2. 20%
3. 40%
4. 60%

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 3

1. Not correct
2. Not correct
3. Correct
4. Not correct

    

Answer 3

Profit after tax                                                        £26,600
Preference dividend (£20000 * 8%)                   – £1,600
                                                                                  £25,000
Transfer to general reserve                                – £5,000
Profit available to pay ordinary dividend       £20,000

As £20,000 is available for the payment of the dividend on the ordinary shares and the company wishes to pay the maximum possible dividend, £20,000 will be paid.

£20.000 dividend / £50,000 issued ordinary share capital = 40% ordinary dividend.

 

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If a company makes a transfer from its profit and loss account to a capital reserve . . .?

Select ONE answer:

1. shareholders’ funds will be increased.
2. the relevant amount of money will be transferred to a special bank account.
3. shareholders’ funds will be decreased.
4. shareholders’ funds will remain unchanged.

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 4

1. Not correct
2. Not correct
3. Not correct
4. Correct – The balance on the profit and loss account (part of shareholders’ funds) will be reduced and the balance on the capital reserve account (also part of shareholders’ funds) will be increased by the same amount.

 

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Shareholders’ funds in a company equals . . .?

Select ONE answer:

1. the total of share capital, reserves and long-term debts of the company.
2. the total of share capital and revenue reserves of the company.
3. the total of issued share capital and reserves of the company.
4. the total of share capital and capital reserves of the company.

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 3

1. Not correct
2. Not correct
3. Correct – The term ‘shareholders‘ funds’ means all of the money ‘owed’ by the company to its shareholders. This is the total of all money invested in the company by the shareholders (share capital) and all profits earned by the company (these profits are ‘owned‘ by the company, which in turn is owned by its shareholders) which is the total of the balance on the profit and loss account (profits retained) and the balance on all other reserve accounts (amounts debited in the profit and loss appropriation account and transferred into the balance sheet).
4. Not correct

 

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A company issued 20,000 25p ordinary shares at a premium of 20%.  The market value of these shares is currently 40p per share.

As a result of this issue, share capital. as shown in the balance sheet, will be increased by?

Select ONE answer:

1. £4,000
2. £5,000
3. £6,000
4. £8,000

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 2

1. Not correct
2. Correct – The share capital account is credited with the nominal (par) value of the shares issued = 20,000 shares Ca) 25p each = £5,000. The premium on the issue will be credited to the share premium account (shown separately from share capital in the capital and reserves section of the balance sheet). The market value of share capital is not shown in the balance sheet.
3. Not correct
4. Not correct

 

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The declaration of a dividend by a company . . . ?

Select ONE answer:

1. reduces the company‘s bank balance.
2. increases the company‘s liabilities.
3. increases the shareholders’ funds in the company.
4. does not affect the shareholders’ funds in the company.

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 2

1. Not correct – The company’s bank balance will not be reduced until the dividend is actually paid.
2. Correct – The declaration of a dividend means the announcement by the company of its intention to pay the dividend at some future date. Therefore, dividends are not paid for some time after they are declared. Consequently, at the time a dividend is declared it becomes an obligation to pay an amount of money at some future date ie. a liability. It is also shown as an appropriation of profit.
3. Not correct – One of the effects of a company declaring a dividend is to reduce its retained profit (the second is the creation of a current liability). As the balance on the profit and loss account is part of the company’s shareholders’ funds, a reduction in this balance will reduce the company’s shareholders’ funds.
4. Not correct – As for answer C above.

 

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