3.2.

Increase of capital through contributions in kind

3.2.1. Some particularities of the increase of capital through contributions in kind
 contributions in kind refer to fixed assets, inventories and receivables. these are
undividable like cash contributions;
 contributions in kind are fully paid up at subscription;
 the initial capital should not necessarily be fully paid at the time of the increase of the
capital through contributions in kind;
 no subscription rights exist for old shareholders because the new shares are always issued
at the value of the existing shares. any excess above the nominal value of share obviously
represents the issue premium;
 the contributions are valued by a registered auditor;
 exchange balance might arise from the transaction. an exchange balance is the difference
between the value of the contribution and the subscribed capital issue prime inclusive. this
exchange balance can be paid by the shareholder or been paid to latter by the issuing
company.
3.2.2. Accounting entries of the increase of capital through contributions in kind

a. Recording of the subscription to new shares

Debit: Credit:
4615 with the amount of issue price 1013 with the amount of capital added

1051 with the amount of issue premium

b. Recording of transfer of ownership to the company

Debit: Credit:
2,3,4…. With the respective net amount 4615 With total value (IP)

3.2.3. Illustration
To increase its capital, a Company whit share capital of 40 000 000 CFAF (divided into shares of
10 000 CFAF each) receives from its shareholder Peter a delivery van amounted to 28 000 000
CFAF as a net contribution in kind. This contribution was valued by a registered auditor. The MV
of this company by the date of issue of new shares was 14000CFA
work required
a. Calculate the number of new shares to be given to Peter knowing that the Issue price is
equal to the mathematical value.
b. Calculate the global issue premium
c. Calculate the amount of the increase of the capital
d. Show the accounting entries of the increase of capital.
e. It is assumed that the mathematical value before the increase was 12 000 CFAF. Answer
all the questions a to d.
Solution
4. Increase of the capital by the incorporation of reserves
Reserves represent part of the profit kept in the company during the repartition of profit for
unknown circumstances. It is an internal resource which belongs to the owner. they here refer to
real reserves, profits, issue premiums and contribution premiums and can be used to increase
capital. However, unlike the case of cash and kind, the incorporation of reserves into the capital
does not mean that new resources have been brought in. Some modalities exist.
4.1.The modalities of the incorporation of reserves into the capital
The modalities of the incorporation are as follows:
- the increase of the nominal value of shares should be done at the same proportion as
the increase of the capital. The new shares, replacing the old shares, have a new
nominal value, should be distributed to the old shareholders who have exclusive rights
over the reserves to be incorporated; That is they deserve fully legal reserves and issue
premium and partially other reserves.
- The conservation of the nominal value of the old shares; in this case, the number of
shares should increase but the nominal value of the share should be maintained. A free
distribution of the new shares to the old shareholders will take place and the distribution
will be at the proportion of the number of old shares held by each of them.
- The attribution right (AR): each old share gives an attribution right to its owner,
materialised by a coupon.
4.2.Calculation of the value of the attribution right
At times, during incorporation of reserve, some shareholders forego to receive free shares
which will bring the problem of selling price or purchase price of a right. The value of an
 attribution right is theoretical equal to the loss of value of the old share due to the incorporation
of reserves. It can be calculated from the point of view of old share holder as from the point of
view of new shareholder.
4.2.1. The calculation of the attribution right from the point of view of the old shareholder
Just like in case of cash or king, the increase of capital through incorporation of reserves increases
the number of share by reducing the mathematical value per share. Due to this, the old shareholder,
losses the difference with the mathematical value before the increase (Mv1). This difference is
called the attribution right and it is denoted AR; thus:
AR= Mv1 – Mv2
MV2 can be obtained using the same table like in the case of SR.
By denoting:
N = number of old shares.
N’’ = number of free shares
AR = Attribution Right
Another formula of AR in function of Mv1, N and N’’can be developed as follows:
AR = Mv1 – Mv2
= Mv1 – Mv1 x N
N + N’’
= (N + N11) Mv1 – Mv1 x N
N + N’’
= N.Mv1 + N’’. Mv1 – Mv1.N
N + N’’
N ''
AR  Mv1
N  N ''

4.2.2. The calculation of the attribution right from the point of view of the old shareholder
For a new shareholder, AR is what is to be paid to acquire a right for a free share. The calculation
from this point of view requires the use of the attribution ratio.
4.2.2.1.Notion of attribution ratio
The attribution ratio R’ is the ratio that shows how many old share is required to get a certain
number of new free share during incorporation of reserve into capital. It is calculated as
follows:
 𝑁′′
𝑅′ =
𝑁
With : N’’ = Number of free shares and N = Number of old shares
e.g. An attribution ratio of 3/5 means that to expect 3 free shares, the shareholder should previously
hold 5 old shares or 5 attribution rights. That is, for a new shareholder to get 3 new shares, he/she
must buy 5 rights.
4.2.2.2. Formula of the AR
Given that the shares are freely given; the new shareholder obligatorily needs to buy attribution
rights. If R’ = N’’/N, then the new shareholder needs N attribution rights (N x AR) to be entitled
to N’’ free shares of value (N’’ x Mv2). This statement provides us with two equal equations where
AR emanates, as follows:
NxAR = N’’ x Mv2 by dividing by N, we have in function of Mv2:
N ''
AR  Mv 2
N
4.2.3. Accounting entries for increase of capital through incorporation of reserve

11… Reserves X
1013 Sub, called up, paid up, N.R.C X
Increase of capital by the
incorporation of reserve IP

4.2.4. Application
SOPARL Plc has a share capital made up of 8 000 shares of 10 000 CFAF each with a mathematical
value of 15 750 CFAF. On the 1st January 2019, the company carries its capital to 100 000 000
CFAF (corresponding to an increase of 2 000 new shares) by incorporating optional reserves of
20 000 000 CFAF into the capital.
Work required:
a. Calculate the value of a share after the incorporation.
b. Calculate the attribution right from the point of view of the old share holder
c. Calculate the attribution right from the point of view of the new share holder
d. Make the accounting entry in the book of SOPARL