Answer to Question #122527 in Accounting for Theophilus Agyei

Question

At 31 December 2005 the capital structure of Dompo, a limited liability company, was as follows:
1,000,000 ordinary shares of GHS 1 each Share premium account
Revaluation reserve
Retained earnings
GHS 1,000,000
200,000 100,000 50,000
The authorized share capital of the company was GHS 1,000,000.
The directors of the company are considering the following proposals. None of them is a qualified accountant:
a. Making a bonus issue of one ordinary share for every two held, in order to raise GHS500,000 for the company.
b. Paying a dividend of 10p per share
c. Increasing the revaluation reserve to GHS 300,000 by revaluing goodwill from GHS
800,000 to GHS 1,000,000.
d. Combining all reserves into a single figure.
Comment on the validity of these proposals.

Answer 1

a.Debit authorized capital credit settlements with founders - 500 000

b.Debit retained earnings credit settlements with founders - 100 000

c.Debit goodwill credit additional capital - 300 000

d.Revaluation reserve :200 000+300 000=500 000

Retained earnings: 100 000-100 000=0

Athorized share capital of the company: 1 000 000+500 000=1 500 000

Other: 50 000

Total:=500 000+0+1 500 000+50 000=2 050 000

The increase in equity means that the company's financial stability will increase