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Accounting for Limited Companies- Question 5

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FA – FIA FFA › Accounting for Limited Companies- Question 5

  • This topic has 6 replies, 2 voices, and was last updated 9 years ago by John Moffat.
Viewing 7 posts - 1 through 7 (of 7 total)
  • Author
    Posts
  • June 5, 2016 at 10:40 am #319562
    faze
    Participant
    • Topics: 15
    • Replies: 40
    • ☆☆

    Hi John,

    I have the following solution from you for the above question below:

    There is no need to type out the whole question – I wrote the lecture notes and so I have a copy of the question ?

    There is a bonus issue of 1/2 x 100M = 50M shares. So there are now 150M shares in issue, and share capital increases by 50M and share premium decreases by 50M.

    There there is the rights issue of 2/5 x 150M = 60Mshares. So share capital increases by 60M and share premium increases by 60M x (1.50 – 1.00) = 30M.

    So the end result is that share capital = 100 + 50 + 60 = 210M
    and share premium = 80 – 50 + 30 = 60M

    (as per the answer printed in the free lecture notes)

    I am struggling to understand why share capital decreases by 50m and why share premium decreases by 50m. (bonus issue) and then why they both increase with the rights issue?

    Many thanks,

    Faisal

    June 5, 2016 at 11:39 am #319582
    faze
    Participant
    • Topics: 15
    • Replies: 40
    • ☆☆

    Hi John,

    Further to my question above, I just had another question.

    What would happen to the share premium amount if in the question the ordinary shares had been valued at 50c each?

    Thanks

    June 5, 2016 at 1:21 pm #319609
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    There is no point in using the lecture notes without watching the free lectures. It is in the lectures that I explain and expand on the notes, and work through the examples (including this example).

    Where a rights issue or a bonus issue, there are more shares being issued and therefore the share capital increases.
    With a bonus issue the shareholders are not paying for them, therefore they cannot be owed any more in total, and therefore share premium has to reduce.
    With a rights issue, the shareholders are paying for the shares, and therefore they are owed more than before. Any excess payment over and above the nominal value goes to the share premium reserve.

    The value of ordinary shares is not relevant. I think you are asking what happens if the nominal value is 50c. In which case it is the same rules as above except the increase in share capital is number of shares issued multiplied by 50c.

    For a full explanation you must watch the free lectures – I cannot type them all out here 🙂

    June 5, 2016 at 2:42 pm #319624
    faze
    Participant
    • Topics: 15
    • Replies: 40
    • ☆☆

    Thank you for the explanation. So just to clarify with the rights issue, does the share premium and share capital always increase?

    Also, if the nominal value was 50c, you would do 60M x (1.50-0.5) is that correct?

    June 6, 2016 at 7:42 am #319741
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    Share capital always increases.

    Share premium will increase provided that the issue price is higher than the nominal value (which will normally be the case)/

    Yes – that would be correct.

    June 7, 2016 at 8:19 pm #320587
    faze
    Participant
    • Topics: 15
    • Replies: 40
    • ☆☆

    Thank you for your help John 🙂

    June 8, 2016 at 8:16 am #320707
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    You are welcome 🙂

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    Posts
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