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Concerning the Question Tadeon :
“Tadeon’s Trial Balance at 30 september 20X6.
Equity shares of 20 cents each fully paid 150000
Suspense account (note (v)) 48000Note (v):
The suspense account balance can be reconciled from the following transactions:
The payment of a dividend in October 20X5. This was calculated to give a 5% yield on the company’s share price of 80 cents as at 30 September 20X5.
The net receipt in March 20X6 of a fully subscribed rights issue of one new share for every three held at a price of 32 cents each. The expenses of the share issue were $2 million and should be charged to share premium.”
I tried to find the opening balance for share capital to calculate the total dividend as the question says the dividend is in October 20X5 and the balance of share capital in the tb shows the amount after Rights issue was made in March 20X6.
However, in the answer, the closing balance at 30 sept 20X6 is used to calculate the total dividend instead of the opening balance, why is it so?That 150,000 for the equity shares – is that $150,000 or 150,000 shares?
Equity shares of 20 cents each fully paid $150000
Suspense account (note (v)) $48000 (Credit side of tb)The share issue (rights) has not yet been recorded – the debit has gone to cash but the credit is in suspense
So the 1 for 3 rights is based on the $150,000 worth of shares that are in trial balance …. that’s $50,000 worth of 20 cent shares issued = 250,000 new shares issued by way of rights at 32 cents per share
That brought in 250,000 x 32 cents = $80,000 and the correct entry should have been:
Dr Cash $80,000
Cr Share Capital 250,000 x 20 cents $50,000
Cr Share Premium 250,000 x (32 – 20) $30,000What HAS been entered is
Dr Cash $80,000
Cr Suspense $80,000so, to correct, we need to:
Dr Suspense $80,000
Cr Share Capital 250,000 x 20 cents $50,000
Cr Share Premium 250,000 x (32 – 20) $30,000The expenses of the issue have been netted off in the Suspense account
The entry HAS been:
Dr Suspense $2,000
Cr Cash $2,000The entry SHOULD have been:
Dr Share Premium $2,000
Cr Cash $2,000so, to correct, we need to:
Dr Share Premium $2,000
Cr Suspense $2,000The balance on the Suspense account after these 2 correcting entries is:
48,000 – 80,000 + 2,000 = 30,000 debit balance
The $150,000 Share Capital IS the opening share capital – the entity has not recorded the rights issue
So the dividend is based on 750,000 20 cent shares with a market value of 80 cents and the dividend equates to a yield of 5%
5% of 80 cents = 4 cents so the dividend of 4 cents per share on 750,000 shares = a dividend of $30,000
The entity has recorded this as:
Dr Suspense Account $30,000
Cr Cash $30,000The entry SHOULD have been:
Dr Dividends paid $30,000
Cr Cash $30,000so, to correct, we need to:
Dr Dividends paid $30,000
Cr Suspense Account $30,000And I believe that that gets rid of the Suspense Account!
OK?
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