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Advanced Financial Accounting

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Advance Financial Accounting (FIN-611)
VU
LESSON # 23
MORE ABOUT COMPANY ACCOUNTS
Rights Issues of Shares
Any subsequent issue of shares against consideration is rights issue. A rights issue of
shares is the simples and most economical way of raising finance. It is an issue of share
in which the existing shareholders have an anticipatory right to subscribe for the new
shares. In a rights issue, a warrant is sent to the existing shareholders, which entails
them to take up a specified number of shares at a specified price. The price of the
shares so offered is higher than the face value but below the market price to make the
offer fascinating.
An existing share holder who does not wish to exercise any or all of the rights is at
liberty to sell them to third parties who can purchase such shares at the same offer
price.
Accounting entries to record the rights issue of share is exactly the same as those we
have already learned to pass when share are issued at premium.
Bank a/c
Share Capital a/c
Share Premium a/c
Comparison between Rights Issue and Initial Public Offer (IPO)
Rights Issue
Initial Public Offer
1. A rights issue is made to
1. Initial Public Offer is made to
existing shareholders
the public at large
2. There is no chance of over
2. There is a chance of over
subscription
subscription;
hence
the
floatation cost is high.
3. Price of the rights issue is kept
3. Initial public offer is generally
lesser than the market price
made on face value
Solved Problem:
Right Co Ltd has 80,000 Rs. 10 ordinary shares in issue. They were originally issued at
a premium of Rs. 4 per share. The current market price of these shares is Rs. 35 each.
Right Co Ltd has announced a 1rights share for every 4 shares held at Rs. 30 per share.
Required:
1. Prepare relevant ledger accounts to record the above transaction
2. Prepare extracts of balance sheet showing share capital and share premium a/c
3. Babar owned 3,200 shares in Right Co Ltd before the rights issue. How many
numbers of shares will he own after the rights issue? What will be his share of
the voting right in the Company before and after the rights issue?
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Advance Financial Accounting (FIN-611)
VU
Solution:
Share Capital a/c
Rupees
Rupees
Opening balance b/f
800,000
Closing balance c/f
1,000,000 Bank a/c (rights issue)
200,000
Share Premium a/c
Rupees
Rupees
Opening balance b/f
320,000
Closing balance c/f
720,000 Bank a/c (rights issue)
400,000
Bank a/c
Rupees
Rupees
Share Capital a/c
200,000
Share Premium a/c
400,000
Working:
Existing shares
80,000
Opening balance of share capital 80,000 x 10 = 800,000
Opening balance of share premium
80,000 x 4 = 320,000
Rights shares
80,000 x ľ = 20,000
Face value
20,000 x 10= 200,000
Premium
20,000 x 20= 400,000
Balance Sheet (extracts)
After
Before
Share Capital
1,000,000
800,000
320,000
Share Premium
720,000
1,720,000
1,120,000
Before the rights issue Babar owned 3,200 shares out of a total of 80,000 shares. This
gave him 4% of the voting rights in the company. The 1 for 4 rights issue gives him
another 800 shares and increases his share holding to 4,000. He now owns 40,000
shares out of 100,000 shares, which is again 4%.
Bonus Issue of Shares
Bonus issue of shares is made when the company has build up substantial reserves.
Issue of bonus share is made to the existing shareholders without receiving any
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Advance Financial Accounting (FIN-611)
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consideration. In bonus issue of share a part of company's reserves are reclassified as
share capital. This is also known as capitalization of reserves or scrip issue.
There are a number of reasons for issue of bonus shares.
1. Increasing the number of shares in issue will make it easier to divide the shares
between a larger numbers of shareholders. This is useful when a company
wants to bring in news shareholder.
2. Increasing the value of the company's share capital will strengthen the balance
sheet. This is useful if a company has grown rapidly, and the share capital is
out of proportion to the net assets of the entity.
3. The market price of each share will fall. This makes the shares more affordable,
and encourages more people to buy shares. This is the most common reason for
publicly quoted company to make a bonus issue.
Solved Problem:
Bonus Co Ltd has 50,000 Ordinary Shares in issue for Rs. 10 each. It decides to issue
bonus shares 2 for every 5 shares held. Share premium will be utilized for the issue.
Balance sheet of Bonus Co Ltd immediately before the bonus issue is as follows:
Rupees
Ordinary Share Capital
500,000
Share Premium
380,000
Retained profits
570,000
1,450,000
Share Capital a/c
Rupees
Rupees
Opening balance b/f
500,000
Closing balance c/f
700,000 Share premium a/c
200,000
Share Premium a/c
Rupees
Rupees
Share Capital a/c
200,000 Opening balance b/f
380,000
Closing balance c/f
180,000
Retained profits a/c
Rupees
Rupees
Opening balance b/v
570,000
Share Premium a/c
570,000
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Advance Financial Accounting (FIN-611)
VU
Balance sheet of Bonus Co Ltd immediately after the bonus issue is as follows:
Rupees
Ordinary Share Capital
700,000
Share Premium
180,000
Retained profits
570,000
1,450,000
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Table of Contents:
  1. ACCOUNTING FOR INCOMPLETE RECORDS
  2. PRACTICING ACCOUNTING FOR INCOMPLETE RECORDS
  3. CONVERSION OF SINGLE ENTRY IN DOUBLE ENTRY ACCOUNTING SYSTEM
  4. SINGLE ENTRY CALCULATION OF MISSING INFORMATION
  5. SINGLE ENTRY CALCULATION OF MARKUP AND MARGIN
  6. ACCOUNTING SYSTEM IN NON-PROFIT ORGANIZATIONS
  7. NON-PROFIT ORGANIZATIONS
  8. PREPARATION OF FINANCIAL STATEMENTS OF NON-PROFIT ORGANIZATIONS FROM INCOMPLETE RECORDS
  9. DEPARTMENTAL ACCOUNTS 1
  10. DEPARTMENTAL ACCOUNTS 2
  11. BRANCH ACCOUNTING SYSTEMS
  12. BRANCH ACCOUNTING
  13. BRANCH ACCOUNTING - STOCK AND DEBTOR SYSTEM
  14. STOCK AND DEBTORS SYSTEM
  15. INDEPENDENT BRANCH
  16. BRANCH ACCOUNTING 1
  17. BRANCH ACCOUNTING 2
  18. ESSENTIALS OF PARTNERSHIP
  19. Partnership Accounts Changes in partnership firm
  20. COMPANY ACCOUNTS 1
  21. COMPANY ACCOUNTS 2
  22. Problems Solving
  23. COMPANY ACCOUNTS
  24. RETURNS ON FINANCIAL SOURCES
  25. IASBíS FRAMEWORK
  26. ELEMENTS OF FINANCIAL STATEMENTS
  27. EVENTS AFTER THE BALANCE SHEET DATE
  28. PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
  29. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 1
  30. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 2
  31. BORROWING COST
  32. EXCESS OF THE CARRYING AMOUNT OF THE QUALIFYING ASSET OVER RECOVERABLE AMOUNT
  33. EARNINGS PER SHARE
  34. Earnings per Share
  35. DILUTED EARNINGS PER SHARE
  36. GROUP ACCOUNTS
  37. Pre-acquisition Reserves
  38. GROUP ACCOUNTS: Minority Interest
  39. GROUP ACCOUNTS: Inter Company Trading (P to S)
  40. GROUP ACCOUNTS: Fair Value Adjustments
  41. GROUP ACCOUNTS: Pre-acquistion Profits, Dividends
  42. GROUP ACCOUNTS: Profit & Loss
  43. GROUP ACCOUNTS: Minority Interest, Inter Co.
  44. GROUP ACCOUNTS: Inter Co. Trading (when there is unrealized profit)
  45. Comprehensive Workings in Group Accounts Consolidated Balance Sheet