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Hi Mike,
please help me to understand solutions for this type of question
Q:
On 1 August 20X3, Xtol made a fully subscribed rights issue of equity share capital based on two new shares at 60 cents each for every five shares held. The issue has been fully recorded in the trial balance figures.
An equity dividend of 4 cents per share was paid on 30 May 20X3 and, after the rights issue, a further dividend of 2 cents per share was paid on 30 November 20X3.
Solutions:
Dividend paid
Before rights issue (56,000 × $1/25c × 5/7 = 160m × 4c) 6,400
After rights issue (56,000 × $1/25c × 2c) 4,480
Total 10,880
DR Retained earnings 10,880
CR Loan note interest and dividends paid 10,880Why we take into calculation ponder of 5/7 in part before the right issue?
Thank you in advance.
Regards,
Because if the issue was a “2 for 5” then, after the issue you will have 7 shares for each of the 5 shares you held before the rights issue
We know how many shares there are in issue now, after the rights issue. So, to find out how many there were before the rights issue we have to multiply by 5/7
Say you did hold 400 before the rights issue and now, following a 2 for 5 rights you will have 560 (400 / 5 * 2 = 160 and that adds on to your original holding)
If I told you that your holding now was 560, how would you find out how many you had before the rights issue?
560 * 5 / 7 = 400
OK?
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