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Sir- please help.. I am confused because are preference shares classed as a liability.. why should/ do I need to make an adjustment to equity? super confused.. especially since the solution says I have to make a journal adjustment to equity and share premium. please help. thanks in advance.
GHK issued 10 million $1 cumulative non-redeemable 6% preference shares during the
year. The proceeds of the issue were debited to cash and credited to equity. Issue costs
paid of $50,000 were debited to share premium and the dividend paid shortly before the
year end was debited to retained earnings.Prepare journal entries to record the issue of preference shares correctly in the accounting records of GHK for the current year.
Correcting journal for recording the issue and issue costs:
Equity X
Share premium X
NCL X
and Re-measurement at year end journal is:
Finance Cost x
RE X
Here’s an extract based on IAS 32:
“Illustration – preference shares
If an entity issues preference (preferred) shares that pay a fixed rate of dividend and that have a mandatory redemption feature at a future date, the substance is that they are a contractual obligation to deliver cash and, therefore, should be recognised as a liability. [IAS 32.18(a)]
In contrast, preference shares that DO NOT have a fixed maturity, and where the issuer does not have a contractual obligation to make any payment are equity. In this example even though both instruments are legally termed preference shares they have different contractual terms and one is a financial liability while the other is equity.”
Does that explain it for you?
hhmm.. ok. I will have a read and see if I can answer the ques again.. with this in mind.
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