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Sir i need some help please with rights issue. how do we deal with an instance like
Qn 7 Llama Dec 207.
suspense a/c credit balance of $24000
Suspense account credit entry relates to proceeds of a rights issue of shares made on 1 July 07. the terms of the issue were 1 for every 4 held at 80 c per share. Llama’s share price immediately before issue was $1. the issue was fully subscribed.
Equity shares @ 50c fully paid in trial balance is $60,000
how do we work out the value of the rights issue.
my understanding is as follows.
1. total number of shares = 60,000 / 0.50 = 120,000 shares.
2. rights issue = 120,000 x 1/4 = 30,000 shares
3. therefore original shares = (120,000 – 30,000) = 90,000
then i can work out the value of the premium and increase in share capital.
the problem am facing is that when i try to work out 1 for 4 rights issue on the original shares of 90,000. i dont get 120,000
which makes me think that other than rights issue being 120,000 x 1/4 it should be 120,000 x 1/5. which of these two is the correct working. it always confuses me when i get to it in my calcs and i end up guessing.please help
many thanksI seem to remember that the question says “Suspense account credit entry relates to proceeds of a rights issue of shares made on 1 July 07.” as you have posted above. That means the debit Cash has been recorded correctly but the CFO had no idea what to do with th credits.
You rightly calculate that there are 120,000 shares in issue and THIS FIGURE HAS NOT BEEN INCREASED BY THE RIGHTS ISSUE. So 120,000 shares is the basis for a 1 for 4 issue = 30,000 shares of 50 cents each face value and a premium of 30 cents each
30,000 x 50c = 15,000 and 30,000 x 30c = 9,000
The correct double entry should have been Dr Cash 24,000 Cr Share Caoital 15,000 and Cr Share Premium 9,000
So, to correct and eliminate the Suspense Account we now need Dr Suspense Account 24,000 Cr Share Capital 15,000 and Cr Share Premium Account 9,000
OK?
thanks Mike you are a Star…i always thought the 120,000 share included the rights issue, i guess thats where the confusion came from.
If i could reward you for your continuous support on this forum, i would but sure you’re helping change my life
thnx
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