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right issue

Forums › ACCA Forums › ACCA FA Financial Accounting Forums › right issue

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by lwhlwh.
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  • July 3, 2017 at 2:50 pm #394614
    ludacris1997
    Member
    • Topics: 1
    • Replies: 0
    • ☆

    the directors of Hull ltd have made a rights issue on the basis of 1 share for every 2 held at an issue price of £1.50 each. The rights issue was fully subscribed.
    An extract from the statement of financial position immediately before the issue is shown below:

    statement of financial position extract at 1 december 2012
    Hull ltd
    non current liabilities £000
    loan 200

    capital and reserves
    issued ordinary shares of £1 each fully paid 100
    share premium account 50
    profit and loss account 25
    =175

    The directors have used all funds generated by the rights issue to repay part of the loan
    a) prepare the capital and reserves section of the statement of financial position of Hull ltd showing the effect of the rights issue

    July 16, 2017 at 7:02 pm #396409
    lwhlwh
    Member
    • Topics: 12
    • Replies: 1
    • ☆

    Hello

    Firstly, it is advised to calculate the amount of right issue and value of right issue (portion valued at par and portion of share premium)

    amount of right issue = 100 x 1/2 = 50 shares of right issues
    Value of right issue (at par) = 50 shares x £1 =£ 50
    Share Premium = 50 shares x £0.50 = £25

    Then, since all right issues are subscribed, so the journal entries would be :
    Dr Bank 75
    Cr Ordinary share capital(at par) 50
    Cr Share Premium 25

    However, as the proceeds from right issue is used to repay loan, so
    Dr Loan 75
    Cr Bank 75

    Therefore, in the balance sheet, the equity (capital and reserves) section would be shown as below (Reserves can include the share premium, general reserve, asset revaluation reserve and retained earning) :

    Issued ordinary share at £1 each 150
    Share Premium 75
    Retained earning/ Profit or loss 25

    Hope it would be helpful to you

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