Corporation accounting assignment

CORPORATE ACCOUNTING5

Corporate Accounting

Raising finance for Johnsons P/L Company

There are two ways of raising finances that’s debt and equity forms of financing. In order to choose an appropriate method of financing the company must consider the reasons behind the need to finance, the market’s reaction to the type of financing and the amount of time available to raise the funds.

Equity financing: They are ways of raising finances internally and includes the following methods

Issuance of new shares: this is the offering of shares to the public either for the first time if the company is going public or subsequently if the company is already listed. The shares can either be ordinary shares or preference shares. The ordinary shares are those that are offered to the original shareholders of the company while preference shares are offered to the rest of the public; the owners of such are prioritized over the ordinary shareholders in case of bankruptcy but only after the creditors have been paid. The shares are advertised to the public, and they are sold either by an offer for sale or offer for subscription. Offer for sale, all the shares are sold to one single investor who acts as the broker and sells the shares to the public on behalf of the company. Offer for subscription, here all the shares are sold to the directly to the public by the issuing company. There are no intermediaries as in the offer for sale, and the price is determined in advance or by tender where the price is the highest bid. Issuing of ordinary share as a source of financing to the company is more advantageous since share are readily available for issue and there is no requirement to be complied such as credit rating to issue them. However, issuing of ordinary shares dissolve the shareholding capacity.

Rights issue: This involves the issuance of fully paid additional shares to already existing shareholders at prices that are relatively lower than the market price. The main objective in this issue is to raise additional capital inform of shares.

Bonus issue/script issue: This is the issuance of bonus shares to already existing shareholders, and the new share amounts are credited to their share accounts, this is done to raise additional finance and to improve liquidity of the company[ CITATION Coo06 l 1033 ].

Retained earnings: This is a situation where the company instead of issuing cash dividends to the shareholders retains them in the company in order to maintain liquidity.

Advantages of equity financing

  1. There no extra charges involved such as interests from bank loans.

  2. Investors are usually interested to give additional funding to follow us business activities.

  3. The entire funding is usually committed to the intended projects

  4. The investors have personal interests in the use of the fund just like the company owners.

Disadvantages of equity finance

  1. May be expensive to raise in terms of money and time.

  2. There will come with it dilution of power due to issue of new shares

  3. Involves tough regulatory measures when raising such finances

  4. There will be revealing of company information to potential investors which maybe risky to the business.

Debt financing

It’s the raising of finance through borrowing from a lender with a promise to payback in future. The methods include:

Bank loans: The Company obtains financing through loans from a bank and other financing institutions, with the intention of paying back later plus interest. A loan can either be short term payable within one year or long-term payable after ten years.

Debt securities: Are financial instruments where the issuer pays the buyers of the security at a later date the initial amount plus interest on a specified future date[ CITATION Dav11 l 1033 ]. Examples of debt securities include bonds which are payable after a year, medium-term notes which are payable after 30 years and commercial papers which are bonds that are payable in a year.

Advantages of debt financing

  1. The company power is not diluted because the lender doesn’t have a claim in the equity.

  2. Raising of debt finance is less complicated as there aren’t so many compliance requirements.

Disadvantages of equity financing

  1. The company will always be required to pledge its assets hence risky

  2. It increases the debt-equity ratio of the company hence the company is more risky in the opinion of other lenders

  3. It involves other expenses such as interests on loans.

ADVANCED SURGICAL DESIGN AND MANUFACTURE LIMITED (ASDM LTD)

Nature of business

Advanced Surgical Design and Manufacture limited (ASDM LTD) is Australian based company which trades under Australian stock exchange. The company’s corporate headquarters is located in St Leonards, Sidney where the operations and manufacturing facility is also located[ CITATION Nel09 l 1033 ]. Due to its strong commitment to research, development and engineering the company has won very many awards and an extensive product portfolio. The scope of its duties range from the manufacture, design and engineering of medical instruments which includes prosthetic implant tools. The main vision of ASDM is to provide the best possible healthcare solutions all around the world and at the same time make use of the innovative and creative Australian clinicians.

Since its listing in 2007, the ordinary shares of the company have been listed under the symbol AMT. The major products of the company include orthopedic, spinal products, medical services and consulting services. The orthopedic products include active total knee replacement, Arthur surface, small bone innovations, Inc (Sbi), supplementary surgical products, carpal plate, clavicle plate (CFS), clavicle pin, hip and knee system instrument sets and polishing technology. The company offer medical services such as; manufacturing of medical instruments where clients are encouraged to reach the company in order to arrange for the planning of projects[ CITATION Nel09 l 1033 ]. The other medical service offered is precision manufacturing where clients are also encouraged to order.

Located in New South Wales, the company’s wide coverage area allows it to hold a lot of facilities which includes computer numerical controlled machines which allows the company to produce many types and varieties of plastic and metal equipment’s.

With the help of computer aided design software, the company is able to produce complex 3-dimensional models. In adhering of safety measures, the company involves the use of finite analysis software which is used to measure stress in design of materials.

In addition, the company uses a hydroxyapatite plasma spraying unit making it the only Australian company which applies a bioactive hydroxyapatite coating onto medical implants[ CITATION Nel09 l 1033 ]. The company offers the above consulting services and in addition cleans and packages medical implants in a room that exceeds the standard size of a clean room required.

Due to a major success and increase in revenue from the services offered as explained above, the company has a better opportunity to expand its business to further areas such as the USA, UK and other major European markets[ CITATION Ben071 l 1033 ]. These opportunities arise due to the good reputation the company has, for instance, the active knee product is one of the best in the Australian market so far, and its good performance history in medical services has been there for more than fifteen years.

ASDM has made use of its expertise in enhancing commercialization and development of medical devices to create new products at various stages of the development process including production of a wider range of medical products to reach out to a wider audience, therefore, addressing their different needs.

ASDM has collaborated with various institutions in terms of development in order to enhance its competitiveness over other companies in a similar market[ CITATION Bel10 l 1033 ]. The collaboration with all vascular Pty Limited has led them into landing on a project of managing the development and clinical trial of the Peripheral Access Device after being appointed to manufacture it by the company. The collaborations are not only restricted to other companies but also with university research groups and other innovators. This has led to consequential development of new orthopedic and medical devices and services with time.

Amountto raise $60 million, Price per share= $2.00

Number of shares subscribed= 30.4 million

Excess monies= $2.00*(30400000-3000000) = $800000

18th April 2013: received 30.4 million applications that paid $0.80 per share.

The amount received is: $0.80*30400000 = $24320000

Journal entries: cash account- debit; Share capital account: credit

12th may 2013: received a further $0.50 per share

The amount received is: $0.50*30400000 = $15200000

Journal entries: cash account-debit; Share capital account- credit

30th June 2013: received the remaining $0.70 per share

Total amount received: $0.70*30400000 = $21280000

Entries: cash account- debit, share capital account- credit

1st July 2013: since the number of applicants exceeded the expected number, the excess will be returned to the unlucky applicants on first-come first-service basis. The entries will be: credit cash account by the excess amount and debit the share capital account by the same amount.

The journal entries will be as follows:

Date particulars debit $ credit $

18th April 2013 cash 24320000 share capital 24320000

Being cash received on application

12th May 2013 cash 15200000

Share capital 15200000

Being amount received on second payment

30th June 2013 cash 21280000

Share capital 21280000

Being the amount received on final payment

1st July 2013 share capital 800000

Cash 800000

Being the excess amount returned to applicants

Total 61600000 61600000

Cash account

Date Particulars debit $ credit $

18th April 2013 Shares account 24320000

12th May shares account 15200000

30th June shares account 21280000

1st July shares account 800000

2nd July balance C/D 6000000

Total 60800000 60800000

Capital account

Date particulars debit credit

18th April 2013 cash account 24320000

12th May cash account 15200000

30th June cash account 21280000

1st July cash account 800000

2nd July balance C/D 6000000

Total 6800000 6800000

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