I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

QUESTION 

Rights issue

 

CLARKE FRINGLAND CO 

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X3 (EXTRACT) 

 

 

$      

Share capital (50c) 

 

8,000 

Share premium 

 

7,000 

Retained earnings 

 

10,000 

 

 

25,000 

Clarke Fringland Co decides on a rights issue of 1 for 4 at $1.20. 

Required 

What is the double entry to record the issue of shares and what is the adjusted financial position extract 

after the issue? 

ANSWER 

The double entry is: 

DEBIT  

Bank   

  

$4,800 

 

($8,000  50c 

×

 ¼ 

×

 $1.20) 

CREDIT 

 

Share 

capital 

 

  $2,000  ($8,000 

 50c 

×

 ¼ 

×

 50c) 

CREDIT 

 

Share 

premium  $2,800    

ADJUSTED STATEMENT OF FINANCIAL POSITION  

 

 $   

Share capital (50c) 

 10,000 

Share premium 

 9,800 

Retained earnings 

 10,000 

 

 29,800 

BPP Tutor Toolkit Copy

---

CHAPTER 19  

//

  INTRODUCTION TO COMPANY ACCOUNTING 

 

341 

QUESTION 

Bonus and rights issue

 

X Co has the following capital structure. 

 

 

$      

400,000 ordinary shares of 50c 

 

200,000 

Share premium account 

 

  70,000 

Retained earnings 

 

230,000 

Shareholders' equity 

 

500,000 

Show its capital structure following: 

(a) 

A '1 for 2' bonus issue 

(b) 

A rights issue of '1 for 3' at 75c following the bonus issue, assuming all rights taken up 

ANSWER 

(a) 

$         

600,000 ordinary shares of 50c 

  

 300,000 

Retained earnings 

 

200,000 

Shareholders' equity 

 

500,000 

(b)  

$         

800,000 ordinary shares of 50c 

 

400,000 

Share premium account 

 

  50,000 

Retained earnings 

 

200,000 

Shareholders' equity 

 

650,000 

The bonus issue was financed by the whole of the share premium account and $30,000 retained 

earnings. The share premium account has funds again following the rights issue. Note that the bonus 

issue leaves shareholders' equity unchanged. The rights issue will have brought in cash of $150,000 

(200,000 × 75c) and shareholders' equity is increased by this amount.  

 

 

 

5

   Ledger accounts and limited liability companies 

Limited companies keep ledger accounts. The only difference between the ledger accounts of companies 

and sole traders is the nature of some of the transactions, assets and liabilities for which accounts need 

to be kept. 

For example, there will be an account for each of the following items. 

(a) 

Taxation 

(i) 

Tax charged against profits will be accounted for by: 

DEBIT  

Statement of Profit or Loss 

CREDIT Taxation 

account 

(ii) 

The outstanding balance on the taxation account will be a liability in the statement of 

financial position, until eventually paid, when the accounting entry would be: 

DEBIT  

Taxation account 

CREDIT Cash 

 EXAM FOCUS POINT 

The ACCA examining team has highlighted bonus and rights issues as an area poorly answered in a 

past exam. Some students confused bonus issues with rights issues and failed to understand that rights 

issues are offered at a discount to the market value and not the nominal value. 

BPP Tutor Toolkit Copy

---