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Home Pages that we will need to bring back Velocity Archive Student e-magazine Velocity Velocity April 2015
C02 financial accounting fundamentals – share issues
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The shares will be given a fixed nominal F2: testing the analysis of financial performance and
position
value, such as USD1 or USD0.50. This Exam notice - April 2015
is an arbitrary value assigned to each
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share which is considered the share’s
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minimum value. Shares would not be issued below this nominal
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value.
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The share capital, shown in the statement of financial position of
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a company, is the number of shares the company has issued to
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its shareholders. There must be at least one share issued up to a year
maximum decided by the company. Benefits for UK and Ireland students
Example:
Company A issues 10,000 USD1 equity shares at their market
value of USD1.80 each. The total amount of cash received is
10,000 x USD1.80 = USD18,000. The total nominal value to be
credited to share capital is 10,000 x USD1 = USD10,000.
Therefore, the amount of share premium created is the balancing
figure USD18,000 - USD10,000 = USD8,000.
The journal to record this is as follows:
Dr Cash USD18,000
3. Bonus issue
A bonus or scrip issue is the issue of new shares to existing
shareholders for no consideration. This may seem like a bad idea
but there are usually sound business decisions behind it.
Examples of the uses of a bonus issue are:
to reduce the share price to promote new investment. This
follows a simple supply and demand theory. The more shares
there are in issue the less people want them and so the price
falls
instead of a dividend payment where there is a cash shortage
within a business.
Example:
Company B has in issue 300,000 USD1 equity shares and a
share premium account balance of USD550,000. It makes a
bonus issue of three for two, utilising its share premium account.
Start by working out how many new shares will be issued.
300,000 shares are currently in issue so the number of bonus
shares issued will be 300,000 X 3/2 = 450,000.
The shares have a nominal value of USD1 so this will create
USD450,000 (450,000 x USD1) of share capital. The journal to
record the bonus issue from share premium is:
Dr Share premium USD450,000
4. Rights issue
The rights issue is again offered to existing shareholders but this
time for monetary consideration. The shares are offered at a
price which is below current market value. This encourages
existing shareholders to buy more shares, generating finance for
the entity.
Another incentive may be that if the option is taken up by all
existing shareholders the balance of control is not affected. For
an investor with significant influence over the entity, who does not
take up their options, this influence could be lost.
A rights issue is offered on the same basis as a bonus issue, for
example two for five, but the shareholders have the choice as to
whether to buy the shares or not. This means that raising finance
is not guaranteed using this approach.
Although the shares are not issued at full market value, the price
offered will be above nominal value so a share premium balance
is created.
Example:
Company C has in issue 500,000 USD1 equity shares with a
current market value of USD2.80 each. It offers a rights issue of 2
for 5 shares at an offer price of USD2.50. The offer is fully taken
up by all shareholders.
Again start by working out how many new shares will be issued.
(500,000 shares in issue dived by 5 shares needed to take part)
multiplied by 2 new shares issued = 200,000 new shares.
The shares have a nominal value of USD1 so this will create
USD200,000 (200,000 x USD1) of share capital but will generate
USD500,000 (200,000 x USD2.50) of cash.
The journal to record the rights issue is:
Dr Cash USD500,000
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