Question I (Based on ICAI, P3 Summer 2006, Question 6) Question 1 (Based on ICAI, P3 Summer

Question I (Based on ICAI, P3 Summer 2006, Question 6) 

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Question 1 (Based on ICAI, P3 Summer 2006, Question 6) ZIPCO Limited (ZIPCO), a company which was incorporated on 23 January 1986, is involved in the production and distribution of electronic games. Prior to 1 January 2005, ZIPCO had issued 100,000 ordinary shares as follows: 90,000 1 ordinary shares were issued for 2 per share cash on 23 January 1986; 5,000 1 ordinary shares were exchanged on 3 September 1990 for a patent that had a fair value at the date of exchange of 50,000; and 5,000 1 ordinary shares were issued on 14 July 2004 for 20 per share cash. At 1 January 2005, ZIPCO had a balance in its retained earnings of 500,000, while the general reserve and the revaluation reserve had credit balances of 200,000 and 300.000 respectively. The purpose of the general reserve is to reflect ZIPCO's need to regularly replace certain computer equipment because of technological advances. During the year ended 31 December 2005, the following transactions occurred: 23 January ZIPCO paid a 20,000 dividend that had been declared and approved by shareholders in November 2004;