Could you please explain this point to me as I’m finding it a bit confusing.
Tadeon’s Trial Balance at 30 september 20X6.
Equity shares of 20 cents each fully paid 150000
Suspense account (note (v)) 48000
Note (v): The suspense account balance can be reconciled from the following transactions:
The payment of a dividend in October 20X5. This was calculated to give a 5% yield on the company’s share price of 80 cents as at 30 September 20X5.
The net receipt in March 20X6 of a fully subscribed rights issue of one new share for every three held at a price of 32 cents each. The expenses of the share issue were $2 million and should be charged to share premium.
a yield of 5% on an 80 cent share is 4 cents per share. Multiply 4c by the number os shares in issue as at October 20×5. So what the company has done is Dr Suspense A/c 750,000 * 4c = $30,000 and Cr cash.
the receipt from the rights issue of 1 for 3 means 250,000 new shares were issued at 32 cents each. 250,000 * 32 cents = 80,000. The company has Dr Cash 80,000 and credited suspense 80,000 and then Cr cash 2,000 and Dr suspense 2,000.
What they should have done is Dr Cash 80,000 Cr Share capital 250,000 * 25c = 62,500 and Credit Share Premium 250,000 * 7 cents = 17,500 and then Dr Share Premium 2,000 and credit cash 2,000.
So, how do you get from one place to the next? Undo ( reverse ) the original bad entries and then put through the correct ones. I think that should do it!
Thank you so very much for your time. I’m obliged.
Blessed you be.
Hi,If the value of each equity share is 20c why did you use 25c and 7c instead of 20c and 12c when calculating the rights issue?I agreed with everything else.Thanks.
Hi, you’re correct – I didn’t have the question in front of me. I thought, from memory, that it was a 25c equity share. But, if it is in fact ( I still don’t have the question with me! ) then the numbers to use are 20c for the share capital, and 12c for the premium.
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