A limited company’s total equity in its statement of financial position was as follows:

£ £

Equity Share capital 100,000 Share premium 75,000 Asset revaluation reserve 140,000 Retained earnings 330,000 545,000 Total equity 645,000 Note: share capital comprises ordinary shares of £1 nominal value each.

(a) To what extent is it true to say that reserves equal cash?

(b) Explain the difference between a distributable reserve and a non-distributable reserve and give one example of each from the above statement of financial position.

(c) What is a share premium? If the company had only ever made one issue of shares, what price was each share sold for?

(d) Explain why an asset revaluation reserve is created. What other item in the statement of financial position, not listed above, would have been affected when this reserve was created?

(e) Explain a way in which the company could return reserves to shareholders without paying cash to them.

(f) If the company, immediately after extracting the above statement of financial position, made a rights issue on a ‘3 for 2’ basis at £2.40 per share, what effect would that have on the statement of financial position, assuming that all shareholders took up their rights?