Hello Sir, i was revising one of the Examiner’s report when i got confused on one of the soutions:
On 1 October 20X6, N Co had 400,000 25c ordinary shares in issue.
On 1 January 20X7, there was a rights issue of 1 share for 5 held at $1.50.
The entry in the share premium account was omitted in error and as a result the trial balance at 30 September 20X7 did not agree.
What balance would have been entered in the suspense account when it was opened?
A) $400,000 Dr
B) $400,000 Cr
C) $100,000 Dr
D) $100,000 Cr
Paper Workings
On 1 January 20X7:
Rights issue : 400,000x 1/5 = 80000
Share capital: 80,000 x $1.50 = 120000
Share Premium: 120000 - 80000 = 40000
On this date the share issue should have been recorded as follows:
Dr Bank: $120,000
Cr Share capital (80,000 x 25c): $20,000
Cr Share premium (40,000 x (1.50 – 0.25)): $100,000
Why is D the correct answer if (40,000 x (1.50 – 0.25)) is equal to 50000 and not 100000 ?
Many thanks in advance
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CAPITAL STRUCTURE AND FINANCE COSTS
7y ago#1It is obviously a misprint - the share premium is 80,000 x (1.50 - 0.25).
What does puzzle me though it that it seems you did not attempt the question yourself before looking at the answer. If you had (assuming that you had watched my lectures first) then you would have realised that D is the correct answer and that the share premium is $100,000.
Do attempt questions yourself before looking at the answer - otherwise you are wasting the questions and not checking that you understand the topics properly :-)
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