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What would be the effect on balance sheet if 200m shares (nominal value $1) are being issued at $2 to a creditor in exchange of a loan of $400m?
Share capital and share premium would both increase by $200m each, and the loan would disappear.
How would the share premium increase If new shares worth $1 are being issued, valued at $2 and we haven’t physically received any cash?
It is effectively as though we have received cash and then immediately paid it out to repay the loan.
What other double entries could there possibly be?
Exactly. If the share premium is being used to pay the loan immediately, then how would it appear on the balance sheet?
I’ll rephrase the question, I realised that I messed up.
The creditor will agree for a reduction in his loan by 140m and would be issued 70m newly issued $1 shares, valued at $2.
How would it change the balance sheet?It is the same entries.
Credit share capital with $70M (the nominal value, as always when new shares are issued).
Credit share premium with $70M (the excess over nominal value, as always when new shares are issued).These are the entries always (from Paper FA) when shares are issued at a premium.
There would be a debit of $140M to cash, if the shares had been issued for cash. Here they did not receive cash and so we would debit the loan with $140M to reduce the amount owing.
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