Company Accounting 5e Solutions Manual

Company Accounting 5e Solutions Manual Peter Jubb Stephen Haswell Ian Langfield-Smtih

Copyright © 2010 Peter Jubb, Stephen Haswell and Ian Langfield-Smith Version 5.0

Chapter 2 Companies and corporate regulation

2.1 Discuss the characteristics of a company and the aspects that make the company an attractive structure for business enterprises.

These characteristics are discussed on pages 8 and 9 of the textbook:

 legal personality  limited liability  perpetual succession  share based ownership interests  ability to mobilise individual capital  scope for professional management These factors allow for an efficient and effective way for ‘jointly’ engaging in commercial activity.Legal personality and perpetual succession makes the company independent of individual owners, thereby facilitating transfer of ownership interest and not subjecting the business to other risks undertaken by individual owners (as is the case in partnerships). While for smaller enterprises limited liability may be defeated by lenders (and others) insisting on guarantees from owners, for larger companies the risk limitation makes the investment more attractive to potential investors, while the use of share capital as the basis of ownership and interest in profits creates potential for investments with higher marketability than is otherwise available. It allows undertakings that cannot be financed by individuals or small groups of individuals (via a partnership) to be established through mobilising relatively small investments by a large number of investors. Professional management provides the opportunity for more efficient and effective operation, thereby increasing returns to investors. (Of course, the risks arising from the separation of ownership and management must be remembered.)

2.2 Outline the factors that give rise to the different types of company allowable under the Corporations Act. By which permutations may the factors be combined?Three general factors dictate the classes of companies that are available under the Corporations Act:

 Factor 1: maximum size of the ownership pool and scope for fund raising

 proprietary companies  maximum membership 50 (excluding employees and former employees)  cannot raise funds from the general public (in chapter 4 we see that they can only make unregulated offers of securities) Company Accounting Australia New Zealand 5th Edition Jubb Solutions Manual Visit TestBankDeal.com to get complete for all chapters

• Company Accounting 5e Solutions Manual

Copyright © 2010 Peter Jubb, Stephen Haswell and Ian Langfield-Smith Version 5.0

 public companies  no limit on number of members  able to offer securities to general public (as we see in chapter 4 this requires a regulated offer of securities through a prospectus complying with the Corporations Act)

 Factors 2 and 3: limited liability and how it is implemented

 companies without share capital  limited by guarantee (pubic companies only)  companies with share capital  limited by shares  no liability companies (public companies only)  unlimited companies

These factors affect the forms in which a company can be registered. The distinction between small proprietary and large (or not small) proprietary companies does not depend on formal characteristics; rather it depends on the indicators of economic significance. The implications of this distinction are limited to financial reporting requirements.

The possible combinations are depicted in figure 2.1 (page 12).

2.3 What is meant by the following terms: limited liability, no liability and

unlimited liability? Limited liability  owner or member’s (investor’s) liability for the debts of the company is limited to the amount not yet paid on shares owned or the amount agreed by way of guarantee  if there is share capital  the owner must pay amounts not yet paid when called on to do so (if they do not the shares can be forfeited)  on liquidation owner can be called on to pay amounts not yet paid (but no more)  if there is no share capital  usually an obligation to make an annual payment (can be varied from time to time)  on liquidation, maximum amount member can be called on to pay is the amount of the guarantee  No liability  a member or owner has no liability for amounts unpaid on shares owned, both arrears and uncalled amounts (only available if company engages in mining activities) – if a member fails to pay an amount when called on to do so, the company must forfeit the shares and sell them by public auction  there is no liability in event of liquidation  Unlimited liability  the owner must pay amounts not yet paid when called on to do so (if they do not the shares can be forfeited)  on liquidation, the amount that members can be called on to contribute to meet the company’s debts is unlimited

Chapter 2: Companies and corporate regulation 3

Copyright © 2010 Peter Jubb, Stephen Haswell and Ian Langfield-Smith Version 5.0

2.4 How may a share company be distinguished from a guarantee company?

 A share company can:

 have limited liability; or  have unlimited liability; or  be a no liability company.A guarantee company must have limited liability.

 A share company has share capital that is (notionally) divided into individual shares, and the interest of an owner of shares in the capital and profits of the company depends on the number of shares held, and the rights attaching to those shares.For a guarantee company, the members have no interest in the underlying assets of the company and cannot receive dividends or other distributions from the company.

 A share company can be either a public company or a proprietary company.A guarantee company must be a public company.

(For some long-formed guarantee companies members can have an interest in the underlying assets, however, such companies are rare. Before the First Corporate Law Simplification Act 1995 it was possible to create public or proprietary companies with both share capital and liability limited by guarantee. Again, such companies are rare.)

• Company Accounting 5e Solutions Manual

Copyright © 2010 Peter Jubb, Stephen Haswell and Ian Langfield-Smith Version 5.0

2.5 Draw two separate tree diagrams, similar to the diagram in figure 2.1, showing the permutations of corporate structure possibilities. Start the left-hand side of the first diagram with ‘Mode of participation’ and the second diagram with ‘Extent of liability’. Shares Guarantee Mode of Participation Public Public Proprietary Type of company Limited liability Limited liability Unlimited liability Limited liability Unlimited liability Small Large No liability