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Chapter 2 – Financing company operations

REVIEW QUESTIONS

1.Describe the purpose of each of the ledger accounts used to record the iue of shares.Cash Trust: used to record money received from applicants subscribing for shares.These amounts remain in the trust account until the shares have been allotted to applicants.The balance will then be transferred to the company’s general bank account.Application: used to record the amount of money received from applicants subscribing for shares.Once the directors decide to allot the shares to the applicants, then this account is cleared out and transferred to the Share Capital Account or to Allotment, Calls in Advance and refunds from Cash Trust if appropriate.Share Capital: used to record the amount called up from succeful applicants who have now been allotted shares in the company.The amount is transferred in from the Application Account or the Allotment and Call accounts.Other accounts that may be used depending on the details of the share iue will be the Allotment Account and the Call Account.These accounts are used if shares are payable by instalments.2.Explain what can happen if a share iue is ‘underwritten’ and the effect that underwriting can have on achieving a minimum subscription.If a share iue is underwritten, this means that the underwriter, if a share iue is not fully subscribed by the public, guarantees to either purchase the remaining unsubscribed shares or arrange for others to subscribe to the iue.Underwriters are usually financial institutions or brokers, and they will charge the company a commiion for their services.If the share iue is fully subscribed, the underwriter will collect the commiion and not have to do anything.