BAC 201 @gitagia

ACCOUNTING FOR EQUITIES

The emphasis is on limited liability companies. In a limited liability company the liability of the
members is limited to the amount unpaid on the shares held by the members.
Owners’ Equity
Note 2020 2019
Ordinary Share capital 12 xx xx
Preference share capital xx xx
Share premium xx xx
Capital reserves 13 xx xx
General reserves 14 xx xx
Retained earnings 15 xx xx
XX XX
Issue of shares
Shares are issued at nominal (par) value or at a premium. The payment for the shares may be
made once or in instalments.
Cash xx
Share capital xx

Cash xx
Share capital xx
Share premium xx

Share Premium
If a company issues shares at a premium the company shall establish an account called the share
premium account and transfer to that account an amount equal to the aggregate amount or value
of the premiums on those shares.
The share premium may be used to write off
a) The expenses on the issue of those shares.
b) Any commission paid on the issue of those shares.
c) The company may use its share premium account to pay up new shares that are to be
allotted to members as fully paid bonus shares.
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The provisions of the Companies Act relating to the reduction of a company’s share capital apply
as if the share premium account were part of its paid up share capital.
Rights Issue
A rights issue is an issue of shares where existing shareholders are given the right to acquire new
shares in proportion to their shareholding.
1:1 A shareholder gets the right to buy one share for every one share held
1:2 A shareholder gets the right to buy one share for every two shares held
1:10 A shareholder gets the right to buy one share for every ten shares held
Cash xx
Share capital xx
OR
Cash xx
Share capital xx
Share premium xx
Depending on whether the shares are issued at par or at a premium.

Stock Split
A stock split occurs when the nominal value of the shares is reduced and the number of shares is
increased.
Authorized and issued share capital 100,000 ordinary shares of sh. 10/= each
4:1 split on shares
New par value is sh. 2.50
New number of shares 400,000 shares
There is no change in shareholders’ equity.
We have a memorandum entry to note the change in the number of shares and nominal value.

Reverse Stock Split

This is the opposite of a stock split. The par value is increased and the number of shares reduced.
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PRESENTATION AND DISCLOSURE OF SHARE CAPITAL ACCOUNTS

The Companies Act requires the following to be disclosed:
i) The authorized share capital of the company specifying the type of shares so authorized, that
is, ordinary, preference
ii) The issued and paid up share capital of the company.
iii) Any rights issue and the price of the rights and the dates over which these rights must be
exercised.
iv) The details on any redeemable preference shares and the earliest date that these share can be
redeeemed.
v) Any amounts of dividends on cumulative preference shares not paid ( by way of notes)

Authorized Share Capital

10,000 ordinary shares of sh. 10 each sh. 100,000
10,000 8% (2030) redeemable preference of sh. 10 each 100,000

Issued and fully paid

10,000 ordinary shares of sh. 10 each sh. 100,000
10,000 8% (2030) redeemable preference of sh. 10 each 100,000
Share premium 40,000
Capital reserves 10,000

If not all classes of shares are issued we give only the shares issued.

APPROPRIATION OF PROFITS
Revenues – Expenses = Profit (loss)
Profits are usually appropriated into
-dividends
BAC 201 @gitagia

-reserves
-Retained earnings.
Dividend
This is the amount that is paid to shareholders representing a return on their investment.
A dividend is payable out of profits and should not be paid out of capital.
For a dividend to become payable it must be declared by the directors. An interim dividend is
usually paid before the close of the financial year. A final dividend is paid after the close of the
financial year. A dividend is normally stated as a certain amount of money per share or as a
percentage. When stated as a percentage it is a percentage of the par value of the shares.

Retained earnings xx
Dividends Payable xx
( to record dividends declared)

Dividends payable xx
Cash xx
(to record payment of dividend)

Bonus issue
A bonus issue is an issue of shares to existing shareholders in proportion to their shareholding
without any payment. The account utilized is the retained earnings or other reserve accounts.
Retained earnings xx
Share capital xx

Share premium xx
Share capital xx
BAC 201 @gitagia

RESERVES
Reserves represent amounts from profits set aside by the directors. The transfers are
appropriations of profits. By transferring profits to reserves the directors wish to point out to the
shareholders and other interested parties that the amounts are not available for dividends.
There are usually three types of reserves
i) General reserves
ii) Specific reserves
iii) Statutory reserves.

General reserves are usually created by directors for writing off any contingency losses that may
occur.
Retained earnings xx
General reserves xx
Specific reserves are created for some specific purpose like meeting contractual obligations,
acquiring an asset in future.
Retained earnings xx
Bond redemption reserve xx
Statutory reserves are reserves that must be created to comply with the law. Cooperative
societies must transfer 25% of their profits to a statutory reserve.
Retained earnings xx
Statutory reserve xx
Reserves and Cash
A reserve is not necessarily represented by a cash fund. By itself the appropriation of retained
earnings does nothing more than disclose a restricted amount of retained earnings and an
unrestricted amount from which dividends can be paid. There is no segregation of funds.
The appropriation of retained earnings has no effect upon individual assets and liabilities nor
does it change total capital. The amounts are merely transferred from regular retained earnings to
special retained earnings accounts and assets otherwise available for dividend distribution are
kept within the business. The appropriation balance is no guarantee that cash or any other
specific asset will be available to carry out the purpose of the appropriation.

Funded Appropriation
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The appropriation of retained earnings may be accompanied by the segregation of assets in a

special fund. Such an appropriation is said to be funded. This practice results not only in the
limitation of dividends but also in the accumulation of resources to meet the purpose for which
the appropriation was made. It is the funding aspect and not the appropriation that involves the
segregation and accumulation of assets.
Retained earnings xx
Bond redemption reserve xx

Fixed deposit xx
Cash xx
EARNINGS PER SHARE (EPS)
Earnings per share can only be calculated for limited liability companies. The earnings per share
are based on ordinary shares. It is not based on preference shares because they are not entitled to
sharing residual income.
EPS= Net income available to ordinary shareholders
Number of ordinary shares outstanding
Net income available to ordinary shareholders= Profit after tax minus preference dividends.
When shares are issued during the year we use the weighted average number of shares.
1/1/2020 20,000
1/4/2020 15,000
1/10/2020 8,000
43,000
20,000 *12/12 = 20,000
15,000 * 9/12 = 11,250
8,000 * 3/12 = 2,000
33,250

`SIMPLE CAPITAL STRUCTURE

A company is said to have a simple capital structure when the capital structure consists only of
common stock; or the capital structure may include nonconvertible preferred stock, few or no
potentially dilutive convertible securities, and small amounts of stock options and warrants.
BAC 201 @gitagia

COMPLEX CAPITAL STRUCTURE

A complex capital structure exists when a company has convertible securities, options, warrants
or other rights that upon conversion or exercise could in the aggregate dilute earnings per share.
In such a case we present basic earnings per share based on the number of common shares
outstanding and fully diluted earnings per share which is a pro forma presentation that reflects
the dilution of earnings per share that would have occurred if all contingent issuances of
common shares that would have reduced earnings per share had taken place.

Illustration
The following information was extracted from the books of Tena Company Ltd on 31st
December 2020.
Authorized share capital:
200,000 ordinary shares of sh. 10 each

Issued share capital:

Ordinary share capital sh. 200,000
Share premium 100,000
Retained earnings 300,000

On 1st April 2021 the company offered 40,000 new ordinary shares to the public at sh. 18
per share on a first come first served basis. All the 40,000 shares were sold.
On 1st July 2021 the company the company had a bonus issue of 1:4 utilizing the share
premium account.
On 1st October 2021 the company had a rights issue of 1:2 at sh22 per share. All the
rights were taken up.
Required:
i) Show the journal entries to record the above transactions.
ii) Assuming the company reported net income attributable to shareholders of sh.
2,000,000 for the year ending 31st December 2021 compute the Earnings Per
Share (EPS).
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The number of shares outstanding as at 1st January 2021 is sh. 200,000/sh. 10(par) = 20,000
shares
40,000 shares at sh. 18 40,000*sh.18=sh. 720,000
1/4/2021 Cash 720,000
Share capital 400,000
Share premium 320,000
The new number of shares is 20,000+40,000= 60,000

Bonus of 1:4
New shares issued= 60,000/4
=15,000
Amount of premium utilized 15,000* sh. 10(par) =sh. 150,000
1/7/2021 Share premium 150,000
Share capital 150,000
The number of new shares is 60,000+15,000= 75,000
Rights issue of 1:2
New shares issued 75,000/2
=37,500

1/10/2021 Cash 825,000

Share capital 375,000
Share premium 450,000

Weighted average number of shares

20,000*12/12= 20,000
40,000*9/12= 30,000
15,000*6/12= 7,500
37,500*3/12= 9,375
66,875
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EPS= sh. 2,000,000

66,875
= sh. 29.91