Question 9.
3 24 marks/36 minutes
Overview
Fester Ltd ('Fester') is a company that is listed on the JSE Ltd. Fester manufactures enzymes that are
used by fast-food chains to bake hamburger rolls. Fester has a 30 November year end.
Growth
Over the last few years Fester has been growing very quickly. In order to finance new projects, it has
needed extra cash. In the past it has generally acquired cash by taking out loans from banks.
New 'gino-sized' enzyme
On 1 December 2009 Fester's development team decided to launch a new 'gino-sized' enzyme that would
be used to bake a new, 'gino-sized' roll for a new fast-food outlet called Ginosaur. In order to fund the
new enzyme, Fester required more than R44 000 000. Fester's CEO, Famil Adams, was reluctant to
borrow more cash from the bank. He suggested that the cash be sourced in the following ways:
Issuing new ordinary shares to the market;
Settling some of the dividends declared in the prior year by issuing new ordinary shares, i.e. a
capitalisation issue; and
Issuing preference shares to the bank.
Issue of shares to the market
On 30 November 2009 Fester had 20 000 000 ordinary shares in issue. Fester wished to issue a maximum
of 9 500 000 ordinary shares at R2.80 per share. Fester approached a bank, which undertook to
underwrite the share issue in return for a commission of 3%.
The share application process was completed on 31 December 2009, by which stage Fester had received
R29 000 000 in cash from applicants. Fester issued 9 500 000 ordinary shares to 4 000 shareholders on
2 January 2010 and incurred share issue costs of R20 per shareholder. Surplus cash received was
returned to applicants. Fester's accounting policy in respect of share issue costs is to maximise its
distributable reserves.
Capitalisation issue
On 30 November 2009 the directors declared, but did not pay, a dividend of R19 650 000. Because extra
cash was required for the 'gino-sized' enzyme project, they decided to settle 60% of this dividend by
issuing 3 930 000 ordinary shares to the shareholders who were eligible for dividends. The remaining 40%
of the dividend would be settled in cash. Fester settled the entire dividend on 15 December 2009.
Preference share issue
Fester issued 291 500, 6% non-cumulative preference shares to the bank on 31 January 2010 at R20 per
share. If declared, preference dividends would be paid to the bank annually in arrears on 31 January.
Fester had no preference shares in issue in prior years.
Purchase of new enzyme-producing machine
Using the all the proceeds received, Fester purchased the new enzyme-producing machine on
28 February 2010 for R42 000 000. The machine had an estimated useful life of 5 years and a residual
value of R6 000 000. The machine was available for use on 31 March 2010 and began producing 'gino-
sized' enzymes on 30 April 2010.
Other information
All Fester's shares are no par value shares.
On 16 November 2010 Famil Adam s sold 3 000 000 of the shares that he held personally in Fester to
the market for R6 per share.
On 31 January 2011 Fester declared a preference dividend.
Fester did not declare an ordinary dividend.
On 30 November 2010 Fester's ordinary shares were trading on the JSE Ltd for R2,10 per share.
On the same date a year earlier, Fester's shares were trading for R3,05 per share.
Fester made an after-tax profit of R12 444 300 for the year ended 30 November 2010. This does not
include the depreciation expense on the new enzyme-producing machine. You may assume that
SARS’s wear and tear allowance is equal to the accounting calculation for depreciation. Assume a tax
rate of 28% and dividend withholding tax is 20%.
All shareholders are natural persons.
Required
MARKS
1 Is Fester a private or a public company? Justify your answer. 2
2 Calculate the total cash that Fester made available to fund the 'gino-sized' enzyme
project. You need not reduce any of the amounts by costs incurred. 3
3 Prepare, on 15 December 2009, the journal entry to account for the settlement of the
ordinary dividend declared on 30 November 2009. 3
4 Calculate the depreciation expense related to the new enzyme-producing machine. 3
5 Discuss how Fester should account for Famil Adams selling his 3 000 000 shares on
16 November 2010 and the effect that this will have on Fester. 3
6 Provide the journal entries for the underwriter’s commission and the share issue costs of 4
the ordinary share issue on 31 December 2009.
7 Prepare Fester's statement of changes in equity for the year ended 30 November 2010.
You need not include opening balances, closing balances and a total column. 6
