QUESTION TWO

(a) Explain the legal provisions regarding the establishment and subsequent use of the following reserves:

(i) Share premium account. (4marks)

(ii) Capital redemption reserve fund. (4marks)

Molem Company Ltd. is a retail provider with an authorised share capital of

800,000 Sh.20 ordinary shares and 250,000 8% Sh.20 redeemable preference shares.

The following financial information reflects the position of the company as at 31 December 2001 after preparing the Trading, profit and loss account:

	Sh.
	`000'
Provision for depreciation Fittings	1,500,
Motor vehicles	3,740
Goodwill	1,200
Issued share capital: 600,000 Sh.20 Ordinary shares	12,000
250,000 Sh.20 Redeemable preference shares	5,000
Share premium account	400
Trade debtors and prepayments	1,708
Land and buildings at valuation (Cost Sh.4, 400,000)	18,400
Capital redemption reserve fund	3,000
Fittings at cost	3,000
Motor vehicles at cost	7,940
10`% Debentures	1,600
Trade creditors and accruals	960
Short-term investments (Market value Sh.860,000)	7 8 0
Stock at 31 December 2001	2,960
Bank overdraft	540
Revaluation reserve	1,000
Net profit for the year	1,440
Retained profit at 1 January 2001	4,460
General Reserve	1,100
Provision for doubtful debts	48
Interim dividend paid - Ordinary	600
- Preference	200

The following resolutions relating to year ended 31 December 2001 have been passed by the board of directors of the company

1. Transfer Sh.500,000 to General Reserve.

2. Provide for 5% final dividend and final preference dividend on shares issued and

outstanding on 31 December 2001.

3. Make a bonus issue of 100,000 fully paid ordinary shares from the retained profits

account.

Required:

The appropriations account of Molem Company Ltd. for the year ended 31 December 2001. (4 marks)

(ii) The balance sheet of Molem Company Ltd. as at 31 December 2001. (8 marks)