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Sir in Doric Co requirement 2 states that estimate the effects on income position after reconstruction.In this question we have to adjust the statement of financial position.
I was confused on the line that said that “The existing unsecured bonds will be cancelled and replaced with 270m shares of $1 ordinary shares. The bond holders will contribute $90m in cash. All the shares will be listed and traded”.
So i made this entry.
Unsecured bonds $120m (debit)
Bank $90m (debit)
Retained earning $60 (debit)
Shares capital $270m (credit)But the examiner answer confused me a bit, I thought that I made the wrong entry.
So can u tell me that whether my entry is correct or wrong and if wrong then what is the right entry and also explain me that right entry.
And sir also explain me the examiner’s technique for this answer.
Don’t think about double entries when doing Paper AFM questions – it is not a financial accounts exam!!
This is a restructuring, and so just follow the instructions in the question.
The bonds are cancelled, so remove them from the SOFP.
They are given new shares, so increase the share capital accordingly.
They pay in more cash, so increase the cash balance.This is a restructuring and so the retained earnings are not relevant – it is like setting up a completely new company with the same assets and liabilities (subject to things like the extra cash being raised) with a new financial structure.
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