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the directors of Hull ltd have made a rights issue on the basis of 1 share for every 2 held at an issue price of £1.50 each. The rights issue was fully subscribed.
An extract from the statement of financial position immediately before the issue is shown below:statement of financial position extract at 1 december 2012
Hull ltd
non current liabilities £000
loan 200capital and reserves
issued ordinary shares of £1 each fully paid 100
share premium account 50
profit and loss account 25
=175The directors have used all funds generated by the rights issue to repay part of the loan
a) prepare the capital and reserves section of the statement of financial position of Hull ltd showing the effect of the rights issueHello
Firstly, it is advised to calculate the amount of right issue and value of right issue (portion valued at par and portion of share premium)
amount of right issue = 100 x 1/2 = 50 shares of right issues
Value of right issue (at par) = 50 shares x £1 =£ 50
Share Premium = 50 shares x £0.50 = £25Then, since all right issues are subscribed, so the journal entries would be :
Dr Bank 75
Cr Ordinary share capital(at par) 50
Cr Share Premium 25However, as the proceeds from right issue is used to repay loan, so
Dr Loan 75
Cr Bank 75Therefore, in the balance sheet, the equity (capital and reserves) section would be shown as below (Reserves can include the share premium, general reserve, asset revaluation reserve and retained earning) :
Issued ordinary share at £1 each 150
Share Premium 75
Retained earning/ Profit or loss 25Hope it would be helpful to you
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