Question

Answer the following theoretical discussion type questions. Indicate your question number and discuss the question in detail. 1. Occasionally companies build up large reserves from their accumulated profits. To enable shareholders to derive some tangible benefits from these reserves, the company may decide to capitalise these reserves and distribute them among the shareholders in the form of capitalisation shares. The following balances were taken from the books of ZTL Ltd on 31 December 2023, the financial year end of the company: R Issued ordinary share capital (R1 shares)...................550 000 35 000 10% non-cumulative preference shares.......220 000 15 000 12% cumulative preference shares..................90 000 Retained earnings..........................................................650 000 Included in the capital structure above are the following transaction that took place during the current financial year that ended on 31 December 2023: .A Capitalisation issue that the directors made on 1 December 2023 of one ordinary share for every four shares held at R2,00 per share; The directors of the company also approved the following transactions during the year: .The issue of 5 000 12% cumulative preferences shares at R5 per share on1 November 2023. .Dividends on ordinary shares was declared at 10c per share on 31 December 2023. No dividends were declared or paid during the previous financial year. REQUIRED: a) Calculate the rand value of the capitalisation share issue to the shareholders and provide the journal entry to record this transaction. Please motivate your answer. b) Calculate the dividend amount payable for the year ended 31 December 2023. 2.You are the senior audit manager of Long Grow Ltd. Upon completion of the audit of Long Grow Ltd you were offered a weekend getaway to a luxury resort as a gift for your hard work at Long Grow Ltd.

Answer 1

The rand value of the capitalisation share issue was R275,000, and the dividend amount payable for the year was R55,000. Gifts like a luxury weekend getaway offered to an auditor from their client can compromise ethical standards and auditor independence.

Step-by-step explanation:

Calculation of Capitalisation Share Issue and Dividend Amount

In response to the first part of the question, to calculate the rand value of the capitalisation share issue to the shareholders, we note that ZTL Ltd made a capitalisation issue of one ordinary share for every four shares held at R2.00 per share.

If the issued ordinary share capital consists of R1 shares amounting to R550,000, that implies there are 550,000 shares in existence. Since one new share is issued for every four existing shares, this leads to a distribution of 550,000 / 4 = 137,500 new shares at R2.00 each, amounting to R275,000 in total.

The journal entry to record this transaction would be a debit to the Retained Earnings for R275,000 and a credit to the Issued Share Capital for R275,000.

For the second part, the dividend amount payable is calculated by multiplying the number of ordinary shares by the dividend rate. With 550,000 ordinary shares and a dividend of 10c per share, the total dividend amount is 550,000 * R0.10 = R55,000.

Acceptance of Gifts in a Professional Audit Context

In the case of the second question, accepting a luxury weekend getaway as a gift from a client may violate professional ethical standards meant to ensure auditor independence. The gift could be perceived as an attempt to influence the auditor's impartiality and objectivity, thus potentially compromising the integrity of the audit.