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Hi My Dear Tutor, I just solved this question by my own without looking at the answer but coming to debt to equity calculation using equity finance method made me confused so let us start main procedures.
it says 2000 equity finance or debt finance raised.
I usually give debits and credits because of the balance sheet’s equity part which figures where will go
debit cash-2000
credit sc-500
credit sp-1500right issue shares
2500*1/5=500*4$ (5%*0.8)=2000
nominal value of shares 1$ and right issue share value 3$ (4$-1$)
500*1$=500
500*3=1500PBIT——–1916(1597*1.2)
finance cost-(315)———————-Finance cost stays the same cos of using equity
tax———–(352)
profit after tax and interest-1249Equity
OS-2500+500
SP—1500
RE-5488-1000+1249=6737
loan note 7%–4500My problem arises from RE part.Before 2$ mln cash growth, the balance sheet shows its RE 5488 and how should I add new profit tax and interest over 5488 do I deduct prior profit after tax and interest of 1000$ from 5488 then add 1249
coming to debt to equity
debt is 4500/10237 equity (OS 3000+SP1500+RE 5488-1000+1249) but in the answer shows 9988 so I confused in this part.
Currently, the total equity on the SOFP is 2,500 + 5,488 = 7,988.
(The current years profit of 1,000 is already included in the retained earnings of 5,488 at the end of the year – this is always the case as per financial accounts).They are raising 2,000 from the rights issue, and therefore the total equity immediately after the rights issue will increase to 7,988 + 2,000 = 9,988.
(The double entry for the rights issue is of no relevance – all that matters is that the total equity will increase.)Next year the retained earnings will increase by however much of next years profits are retained, but we have no idea how much will be retained next year (we don’t know what dividend will be paid) and therefore we cannot calculate what will happen to the gearing in a years time.
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