Assuming P acq S by issuing 1m shares, at par value $0.5, market value $2.0, should the double entry be:
Debit investment $2m
Credit share capital. $0.5m
Credit reserves. $1.5m
Credit would be share premium i think !!!!!!
I am not sure whether shares can be issued at par value or not. At beginning yes, subsequently may be based on market value only.
If cannot issue at par value, when repurchasing shares, there may be two (or more) steps, reverse subsequent issues first, and then reverse initial issue.
Do not confuse two things.
When a company issues shares (forget for the moment it is for an acquisition) they can issue the shares at any price they want (provided it is not lower than nominal/par value). They do not have to issue them at the market value of their shares on the stock exchange (the market value on the stock exchange is the price at which shareholders are selling existing shares to each other).
(For example, a rights issue of shares will almost certainly be at a price lower than the current market value of shares.)
If they were issuing new shares for cash (whatever the issue price) then the double entry would be to debit cash; credit share capital with the nominal/par value; and credit share premium with any extra.
What is relevant here is the value of what they are buying. If they have put a value of $2M on the company being acquired, then instead of debiting cash they will debit investment with $2M; they will credit share capital with the nominal/par value; and they will credit share premium with the extra.
(I do not understand dazhong’s last comment – they are not repurchasing shares, and you will never reverse subsequent issues.)
My last common is regarding share buyback (eg Jun12 q2 proposal 1). The answer given is to reduce share capital at par value, and extra go to reduction in returned earnings.
Yes If u issuse shares at Par Value and buy them back at premium then u have to set off extra debit from retained earning…!!!
Entry would be Share Capital and R/E debit and Cash/Bank Credit
Now I understand your comment. (It is not subsequent issues, and the extra reduced retained (not returned) earnings)
You must be logged in to reply to this topic.