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Extracts from the accounting records of Andratx Co relating to the year ended 31 December 2006 are as follows
Revaluation Surplus $230,000
Ordinary interim divide paid $12000
Profit before tax $178000
Estimated tax liability for year $45000
8% $1Preference share $100,000
Under provision for tax in previous year$5,600
Proceeds of issue of 2000 $1 ordinary shares $5000
Final ordinary dividend proposed $30,000
What was the total equity reported in socie at 31dec 2006?
Sir in this question i understand where to subtract and add but in profit for the year they are subtracting tax liability that i understand but they are also , subtracting under provision..but under provision here should be added not subtracted?
The correct answer is $342,400The amount provided for last year was under provided i.e. was less than they have ended up actually having to pay, and so they will have had to pay this year 5,600 more than they had included as an expense last year.
Therefore reserves this year reduce by the extra 5,600 they have had to pay this year.
Preference shares pay a fixed dividend and are not classed as equity which refers to the ordinary shares.
But If preference shares are irredeemable, shouldn’t it be classed as equity along with ordinary shares? Hence the total equity in the question should add in 8% $1Preference share $100,000?
No. For presentation in the accounts that can be the case, but equity only refers to the ordinary shares and reserves.
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