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Hi sir could you please help me with this question?
At 30 September 20X2 the trial balance of Cavern Co includes the following balances:
$’000
Equity shares of 20c each 50,000
Share premium 15,000Cavern Co has accounted for a fully subscribed rights issue of equity shares made on
1 April 20X2 of one new share for every four in issue at 42 cents each. This was the only
share issue made during the year.
show the balances on the share capital and share premium accounts at 30 September 20X1?Answer:
Share capital Share premium
$’000 $’000
Balance 30 September X2 (250m shares) 50,000 15,000
Rights issue:
Share capital (50m * 20c) (10,000)
Share premium (50m * 22c) – (11,000)
Balance 30 September X1 (200m shares) 40,000 4,000I do not get how they got the answer .The shares at year end was 250m (I get that) but how can we calculate what the shares were on year beginning(according to answer provided 200m)? Can you explain the logic ,specifically how they found out 50m shares was issued as the newly issued rights? I understand the share value comes at par and premium has whatever comes on the balance but how 50m new shares? I tried to do it trigonometrically and it was a big mistake. please help
Hi,
This is a favourite of the examiner. We know that there are 250,000 in issue at the end of the year and this is following a 1-for-4 share issue. If that was the case then if we owned 4 shares then we would now have 5 shares, scaling that up for now having 250,000 shares we can work out that we would have to have had 200,000 shares (250,000 x 4/5).
You can also look at it as such:
Before 4 shares
Issued 1 shares
After 5 shares = 250,000Hope that clears it up.
Thanks
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