Share Capital Lecture Examples

CONVERSION OF SHARES
preference shares ordinary shares

Solution 1: Converting ord shares into pref shares

Journals DR CR Ordinary shares (Eq) 600 Preference shares (Eq) 600 Conversion of ordinary shares into pref shares

Example 1: ordinary to pref 1000 ordinary shares (issued at C1,20) in issue. On 1 Jan 2009, 500 of these ordinary shares were converted into 12% preference share equity Journalise this conversion and disclose in SOCIE for year ended 31 Dec 2009.

SOCIE of ABC Ltd for year ended 31/12/09

Ord shares 1200 (600) Pref shares 0 600 REs XXX Total XXX 0

Example 2: RIGHTS ISSUE

A company has 1 000 ord shares in issue (each issued at C2,50). The company wishes to offer its s/hs: 1 share for every 4 shares held at an issue price of C3 each The current mkt price immediately before this issue is C4 All shareholders accept the offer Required: Journalise and disclose in stm of changes in equity.

Opening balance Conversion of ord shares to pref shares Total comprehensive income Closing balance

XXX

XXX

600

600

XXX

XXX

Solution to eg. 2: Rights issue

Solution to eg. 2: Rights issue

Journals DR 750 750 CR

Calculations No. of shares issued Proceeds received

1000/4 x 1 250 x 3 250 750

Bank Ord share capital

Issue of shares to existing shareholders (1:4) at C3 each (market price: C4)

Share Capital Lecture Examples

SOCIE of ABC Ltd for year ended

Ord shares 2 500 750 REs XXX Total XXX 750 XXX XXX

Solution 3: Share Splits

Previously: 200 shares @ C2 ea = C400 Now: 400 shares @ C1* ea = C400 *C400 / 400 No jnl entry (because no change in share capital or cash resources)

Opening bal Issue of shares i.t.o. a RI Total comp income Closing bal

XXX 3 250 XXX

Solution 4: Share Consolidations

Example 5: capitalisation issue

Already in issue: 100 C1 ordinary shares in issue (issued at C3) Capitalisation issue: 300 fully paid-up shares to its existing s/hs in proportion to their existing shareholding at the current mkt price of C2 each Retained earnings of C800 at beginning of year and total comprehensive income of C150 for the year Journalise and disclose in the SOCIE.

Previously: 200 shares @ C2 ea = C400 Now: 100 shares @ C4* ea = C400 *C400 / 100 No jnl entry (because no change in share capital or cash resources)

Solution 5: capitalisation issue

Journals Retained Earnings Ord Share Capital DR 600 600 CR

SOCIE of ABC Ltd for year ended

Ord Shares 300 600 900 REs 800 (600) 150 350 Total 1100 0 150 1250

Cap issue of 300 ord shares to existing s/hs (at current market price of R2 each)

O/ balance Cap issue TCI C/ balance

Share Capital Lecture Examples

REDEEMABLE AND NON-REDEEMABLE PREF SHARES

Redeeming a preference share = returning the capital to the pref shareholder.

Eg 6: issue of non-red pref shares (equity) (GG eg 3)

Issued on 1 Jan 2001: 50 000 10% non-red. non-cm. pref. shares of C2 100 000 ordinary shares at C3.50 each Authorised: Half of authed ord & pref shares have been issued. Other information: All pref divs were declared & pd before y/e with exception of 2006, when the pref div was declared but not yet pd at 31 Dec 2006. Prepare all j/es from date of issue of pref shares to 31 /12/06 Disclose ord & pref shares in FSs for y/e 31/12/06. No comparatives required for SOCIE.

Sol 6: issue of non-red pref shares

1/1/2001 Bank Pref share cap (equity) Issue of 50 000 10% NRPS C2 each DR 100 000 100 000 CR

Sol 6: issue of non-red pref shares

DR CR

31/12/2001 31/12/2006 Pref divs (equity distrib) 10 000 Pref s/hs (L) 10 000 Preference dividends: 50 000 x C2 x 10% * * this jnl would be repeated on 31/12/02, 31/12/03, 31/12/04, 31/12/05 & 31/12/06

Sol 6: issue of non-red pref shares

DR CR 31/12/2001 31/12/2005 Pref s/hs (L) 10 000 Bank 10 000 Pmt of pref div ** ** this jnl would be repeated on 31/12/02, 31/12/03, 31/12/04 & 31/12/05, not 31/12/06 since the divs were not paid in 2006 (presented as a current liability)

SOFP of . as at 31/12/2006 (extracts of)

Note Equity & Liabs Share capital & reserves - Ord share capital - Pref share capital Current liabs - Pref s/hs for divs 2006 2005

2 3

350 000 100 000 0

Share Capital Lecture Examples

SOFP of . as at 31/12/2006 (extracts of)

Note Equity & Liabs Share capital & reserves - Ord share capital - Pref share capital Current liabs - Pref s/hs for divs 2006 2005

SOCIE for year ended 2006 (extracts)

OS PS 350 000 100 000 RE XXX (XXX) Total XXX (XXX)

2 3

350 000 100 000 10 000

350 000 100 000 0

O/bal Ord divs declared Pref divs declared TCI C/bal

(10 000) (10 000) XXX XXX XXX XXX

350 000 100 000

Notes to FSs for yr ended 31/12/06 (extracts)

2. Ord Share Capital Authorised: Ord shares of no par value Issued: Shares in issue: o/bal Issued during yr Shares in issue: c/bal 2006 Number 200 000 100 000 0 100 000 2005 Number 200 000 100 000 0 100 000

Notes to FSs for yr ended 31/12/06 (extracts)

3. Pref Shares Authorised: 10% non-red non-cm pref shares of no par value Issued: Shares in issue: o/bal Issued during yr Shares in issue: c/bal 2006 Number 100 000 2005 Number 100 000

50 000 0 50 000

50 000 0 50 000

Eg 7: issue red pref shares (recog as liab) (GG eg 4)

Eg 7: issue red pref shares (recog as liab) cont.

Issued on 1 Jan 2001: 50 000 10% cumulative, red pref. shares of C2 100 000 ordinary shares at C3.50 each There are a total of 120 000 auth ord shares. Half of the auth pref shares have been issued. The pref shares must be redeemed on 31 Dec 2006 at a premium of C0.20 per share. The effective rate of interest is 11,25563551%

REs on 1 Jan 2005 was C150 000; TCI (after prev info) was C80 000 in 2005; Ord div of C10 000 declared in 2005. Required: a) All j/es for 2001. b)Disclose ord & pref shares in FSs for y/e 31 Dec 2005. No comparatives for SOCIE.

Share Capital Lecture Examples

Solution 7 (a) Preference share liability: Effective interest rate = 11,25563551% (given, or calculated as the internal rate of return using a financial calculator) PV= 100 000 FV = -110 000 PMT = -10 000 n=6 COMP i

Solution 7 (a)
Effective interest rate table: Interest Dr/ (Cr) 1/1/20X1 31/12/20X1 31/12/20X2 31/12/20X3 31/12/20X4 31/12/20X5 31/12/20X6 11 256 11 397 11 554 11 729 11 924 12 140 70 000 Bank Dr/(Cr) 100 000 (10 000) (10 000) (10 000) (10 000) (10 000) (10 000) (110 000) (70 000) Liability bal DR/(CR) (100 000) (101 256) (102 653) (104 307) (105 936) (107 860) (110 000) 110 000 0

Solution 7 (a): Jnl Entries DEBIT 1/1/2001 Bank 100 000 Preference share liability Issue of 50 000 10% red pref shares at C2 each 31/12/2001 Interest expense 11 256 Preference share liability Interest on preference shares Preference share liability Pref s/hs for divs / Bank Preference dividend 10 000 10 000 CREDIT

Solution 7(b): Disclosure Statement of Comprehensive income of ... For year ended 31/12/05 (extracts) Note 2005 XXXX 11924 XXXX XXXX XXXX XXXX 80 000 2004 XXXX 11 729 XXXX XXXX XXXX XXXX XXXX

100 000

Profit before finance charges Finance charges Profit before tax

11 256

Tax Profit for the year Other comp income Total comp income

Solution 7(b): Disclosure Statement of Changes in Equity of ... For year ended 31/12/05 (extracts) OS Opening balance Ordinary dividends declared Total comprehensive income Closing balance 350 000 350 000 RE Total

Solution 7(b): Disclosure Statement of Financial Position of ... As at 31/12/05 (extracts) Note Equity & Liabilities Issued share capital & reserves - Ordinary shares (10 000) (10 000) 80 000 80 000 - Retained earnings Non-current liabilities - Redeemable pref. shares Current liabilities - Redeemable pref. shares 4. 107 860 0 4. 0 105 936 3. 570 000 500 000 350 000 350 000 220 000 150 000 2005 2004

150 000 500 000

220 000 570 000

Share Capital Lecture Examples

Solution 7(b): Disclosure Notes to the FSs of ... For the year ended 31/12/05 (extracts)

Solution 7(b): Disclosure Notes to the FSs of ... For the year ended 31/12/05 (extracts)

3. Ordinary shares Authorised Ord shares of no par value Issued Shares in issue: o/bal Issued during the year Shares in issue: o/bal

Accounting policies 2.8 Preference shares Red. pref. Shares that are redeemable on specific date or at the option of s/h are recognised as liabilities (substance = borrowings). The divs on such pref shares are recognised in the SOCI as finance charges using effective interest rate method.

2005 Number 120 000 100 000 0 100 000

2004 Number 120 000 100 000 0 100 000

Solution 7(b): Disclosure Notes to the FSs of ... For the year ended 31/12/05 (extracts)
4. Red Pref share liability Authorised 10% RPSs of no par value Issued Shares in issue: o/bal Issued during the year Shares in issue: o/bal 50 000 0 50 000 50 000 0 50 000 100 000 100 000 2005 Number 2004 Number

Solution 7(b): Disclosure Notes to the FSs of ... For the year ended 31/12/05 (extracts)
4. Red Pref share liability 2005 Number 2004 Number

Authorised 10% RPSs of no par value Issued Shares in issue: o/bal Issued during the year Shares in issue: o/bal 50 000 0 50 000 50 000 0 50 000 100 000 100 000

RPSs of no par value are compulsorily redeemable on 31/12/06 at a premium of C0.20 per share. The 10% pref divs are cumulative The effective interest is 11,25563551%

Eg 8: Financing of the redemption (GG eg 13) share issue dependent on financing

Co. is to redeem all its pref shares at original issue price of C2 Doesnt want to issue any more ordinary shares unless absolutely necessary (if so, will be issued at C6 each) C80 000 in the bank, but only want to use C30 000 for redemption Any more cash required = issue a maximum of 10 000 debentures at C1 each (redeemable after 3 yrs at C1 each) If more cash still needed = loan of up to C40 000 (repayable after 4 yrs) REs = C150 000

Eg 8: Financing of the redemption cont.

Required: (i) Calculate the no. of ord shares needed to be issued to finance redemption and (ii) all related jnl entries Scenario A: 10 000 pref shares to be redeemed Scenario B: 35 000 pref shares to be redeemed Scenario C: 70 000 pref shares to be redeemed

Share Capital Lecture Examples

Solution 8(i): The financing plan

A: 10 000 B: 35 000 C:70 000 Cash needed Cash available through: - Cash in bank - New deb issue - New bank loan - New share issue Cash shortage/(surplus) Shares to be issued (30 000) (0) (0) (0) (10 000) 0 (30 000) (30 000) (10 000) (10 000) (30 000) (40 000) (0) (60 000) 0 0 0 10 000 20 000 70 000 140 000

Sol 8(ii): Jnl entries

Pref shares (NC liab) Pref shares (C liab)

A 20 000 (20 000) N/A N/A N/A N/A N/A N/A 20 000 (20 000)

70 000 140 000 (70 000) (140 000) 10 000 (10 000) 30 000 (30 000) N/A N/A 10 000 (10 000) 40 000 (40 000) 60 000 (60 000)

Pref shares to be redeemed

Bank Debentures liab

Issue of debentures
Bank Loan liability

Loan raised
Bank Ordinary shares

Issue of ord shares

Pref s/hs (C liab) Bank 70 000 140 000 (70 000) (140 000)

Pref shares redeemed

Eg 9: Redemption at issue price (GG eg 14) share issue not dependent on financing
Company is to redeem all its 20 000 pref shares at the original issue price of C2 In order to finance this redemption, the co. issues 10 000 ordinary shares Any further cash needed for the redemption will be funded by raising a bank loan.

Eg 9: Redemption at issue price (GG eg 14) share issue not dependent on financing
Required: (i) Calculate the cash required to finance the redemption and (ii) all related jnl entries Scenario A: ord shares are to be issued at C4 each Scenario B: ord shares are to be issued at C3 each

Solution 9 (i): The financing plan

Sol 9(ii): Jnl entries Pref shares (NC liab) Pref shares (C liab)

A 40 000 (40 000) 40 000 (40 000) N/A N/A 40 000 (40 000)

B 40 000 (40 000) 30 000 (30 000) 10 000 (10 000) 40 000 (40 000)

Cash needed Cash available through - new share issue - new bank loan needed Cash shortage/ (surplus)

A: Issue price C4 40 000 (40 000) (0) 0

B: Issue price C3 40 000 (30 000) (10 000) 0

Pref shares to be redeemed

Bank Ordinary shares

Issue of ord shares

Bank Loan liability

Loan raised
Pref s/hs (C liab) Bank

Pref shares redeemed

Share Capital Lecture Examples

EG 10: RED AT A PREM PSs RECOGNISED AS EQUITY (GG eg15)

Solution 10 (i): The financing plan

Co. is to redeem all its 20 000 pref shares (issue price of C2) at C3 each (ie at a premium) To finance this redemption, co. issues 10 000 ord shares. Any further cash needed for redemption will be funded by a bank loan. These pref shares were being redeemed at option of co. therefore had been recognised as equity. The co. has chosen to set the premium payable on red. off against REs. Required: (i) Calculate the cash required to finance redemption and (ii) all related jnl entries Scenario A: ord shares are to be issued at C4 each Scenario B: ord shares are to be issued at C3 each

Cash needed Cash available through - new share issue - new bank loan needed Cash shortage/ (surplus)

A: Issue price C4 60 000 (40 000) (20 000) 0

B: Issue price C3 60 000 (30 000) (30 000) 0

Sol 10(ii): Jnl entries Pref shares (equity) Ret earnings Pref shares (Current liab) Pref shares to be redeemed Bank Ordinary shares Issue of ord shares Bank Loan liability Loan raised Pref s/hs (Current liab) Bank Pref shares redeemed

A 40 000 20 000 (60 000) 40 000 (40 000) 20 000 (20 000) 60 000 (60 000)

B 40 000 20 000 (60 000) 30 000 (30 000) 30 000 (30 000) 60 000 (60 000)

EG 11: REDEMPTION AT A PREM PSs RECOGNISED AS LIAB (GG eg 16)

On 1 Jan 2001 a co. issued: 100 000 ord shares at C3,50 ea 50 000 10% cumulative red pref shares @ C2 ea Co. must redeem pref shares on 31 Dec 2006 at a premium of C0,20 per share. The effective rate of interest pd is 11,25563551% Authorised share capital consists of: 120 000 authorised ord shares 100 000 authorised pref shares The co. issues the rest of authed ord shares at C4 to finance pmt. The balance of REs is C200 000 immediately before redemption. Any cash still needed will be paid for via C20 000 in bank account and lastly via the bank overdraft. The premium on redemption is to be set-off against profits. Required: Calculate and show j/es i.r.o. redemption

Solution 11 (i): The financing plan

Sol 11(ii): Jnl entries DR Bank 80 000 Ordinary shares Issue of ord shares Pref shares (NCL) 110 000 Pref shareholders (CL) Pref shares to be redeemed Pref s/hs (C liab) 110 000 Bank Bank overdraft Pref shares redeemed pmt to pref s/hs CR 80 000

Cash needed Cash available through - new share issue - cash in bank - bank overdraft utilised Cash shortage/ (surplus)

110 000

(80 000) (20 000) (10 000) 0

110 000

100 000 10 000