1. WEEK 2 – Lecture 2 Chapter two
Further Financing company operations
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2. Subsequent issues of shares
Issued to raise funds to support expansion
1. RIGHTS ISSUE
Offer of shares to existing shareholders
Rights dependent on the number of shares held
Rights may be renounceable or non-renounceable
2. PRIVATE PLACEMENTS
Offer of shares to one entity only
Usually issued to institutional investors
Accounting for these types of issues is similar to public issues but does not use application/cash trust accounts
The entry required is:
Dr Cash xx
Cr Share capital xx
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3. Subsequent issues of shares
3. BONUS ISSUE
Shares granted only to existing shareholders
Issued at no cost in lieu of cash dividend
Number based on shareholding at date of declaration
No change in the net equity of the company.
The entry required is:
Dr Retained earnings/reserve xx
Cr Share capital xx
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4. Subsequent movements in share capital - options
A right (not obligation) to buy a certain number of shares by a set date at a set price.
Options may be issued for free – eg options may be issued to employees in lieu of cash bonuses.
Options may be sold to investors – similar to normal shares.
Where options are not exercised by a specific date they lapse.
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5. Subsequent movements in share capital - options (Example 6)
On 30 June 2011, ABC issued 10,000 options valued at $1 each to the CEO as payment for past services
Each option entitles the CEO to acquire a share in the company for $3
The options must be exercised within 12 months of issue date- after this time they will lapse
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6. Subsequent movements in share capital - options (Example 6)
Required:
Prepare the journal entries to account for the issue and exercising of the options assuming:
a) The options are issued for no consideration. On 1 May 2012, when the share price is $3.10, the CEO exercises the options.
b) The options are issued for no consideration. The options are not exercised by the CEO and lapse on 30 June 2012.
c) The options are issued for $1 each. By 30 June 2012, 9,000 of the options have been exercised.
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7. Subsequent movements in share capital - options (Example 6)
30 June 2012 (same entry for a) and b))
Dr Wages expense 10,000
Cr Options 10,000
Issue of options to CEO for past services
a) 1 May 2012
Dr Cash 30,000
Dr Options 10,000
Cr Share capital 40,000
Exercising of options by CEO
b) 30 June 2012
Cr Reserve 10,000
Transfer of balance to a reserve account on the lapsing of the options
Could also be credited to Retained Earnings or Share Capital
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8. Subsequent movements in share capital - options (Example 6)
c) 30 June 2012
Dr Cash 10,000
Cr Options 10,000
Issuing of options
1 July June 2012
Dr Cash 27,000
Dr Options 10,000
Cr Share capital 36,000
Cr Reserve 1,000
Exercising of 9,000 options to 30 June 2012 and transfer of balance to a reserve account on the lapsing of the options
(10,000 x 1.00)
(9,000 x $3)
(10,000 x 1.00)
(1,000 x $1) -
lapsed options
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9. * Redeemable preference shares
Such shares either:
Give the holder the right to be repaid his/her capital Or
Give the company the right to repay the capital
Main issue is the classification of such shares
Are they equity or liabilities?
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10. Redeemable preference shares - equity
Shares can be redeemed from:
Proceeds of a fresh issue of shares Or
2. Retained earnings
Additionally, the constitution may specify payment of a redemption premium which is paid from profit
On redemption the shares are cancelled and cannot be reissued
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11. Redeemable preference shares - equity
Dr Share Capital - Preference $x Cr Shareholders redemption $x
Transfer of preference capital to redemption account
Dr Shareholders redemption $x
Cr Cash $x
Redemption of preference shares
Dr Cash/ Retained earnings $x Cr Share Capital - Ordinary $x Receipt of cash on issue of new shares
Cash a/c applies to issues of new shares; retained earnings a/c applies to redemption from profits
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12. Redeemable preference shares - liabilities
Redeemable preference shares with the following characteristics are more in the nature of liabilities:
Redeemable in cash on a certain date or at the option of the holder
Cumulative as to the payment of dividends
Non-participating in further dividends distributions
Priority capital return rights
Accounting process required when accounting for redeemable preference shares that are classified as liabilities depends on whether the redemption is:
From a fresh issue of shares (Fig 2.12 of text)
From profits at a premium (Fig 2.13 of text)
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13. Redemption of P/shares liability from a fresh issue of shares:
(The shares are to be redeemed in cash out of a fresh issue of redeemble preference shares issued for $2 each)
Journal entry :
Dr Preference Shares Liability
Cr Shareholders’ Redemption
(Tranfer of P/shares liability to redemption account)
Dr Cash
Cr Preference Shares Liability
(Issue of preference shares for $2 each)
Dr Shareholders’ Redemption
Cr Cash
(Redemption of preference Shares)
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14. Redemption of P/Shares Liability out of profits at a premium:
(The P/ shares are to be redeemed out of profits in cash for a price of $1.10 per share.
Journal entry :
Dr Preference Shares Liability
Cr Shareholders’ Redemption
(Tranfer of P/shares liability to redemption account)
Dr Redemption Premium Expenses 30 00
Cr Shaeholders’ Redemption
(Premium on redemption)
Dr Retained Earnings
Cr Share Capital (equity)
(Transfer R/Earnings to capital to preserve the capital of the company under the law)
Dr Shareholders’ Redemption
Cr Cash
(Redemption of preference Shares at premium)
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15. Conversion of shares A company may change its issued capital by:
Consolidation
Involves grouping issued shares into larger parcels
Eg; 2 x $1.00 consolidated into 1 x $2.00 share
Split
Involves splitting issued shares into smaller parcels
Eg; 1 x $2.00 share split into 2 x $1.00 shares
Conversion
Involves converting an ordinary share to a preference share or vice versa
Governed by constitution
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16. Share buy-backs WHY BUY BACK SHARES? Change debt/equity ratio
Defence against takeover
Clear odd lots or employee share schemes
LEGAL REQUIREMENTS
Covered by Section 257A of Corporations Act
Allowed only if not prejudicial to creditors
Limited types of buy-backs allowed
ACCOUNTING FOR BUY-BACKS
Shares must be cancelled
Buy-back may generate a premium or a discount
These are adjusted against either reserves, retained profits or both (UIG Abstract 22)
Each company must adopt an accounting policy in respect of premiums or discount on buy-backs
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17. Share buy-backs 1. At a premium:
shares initially issued at $1.20 were bought back for $1.50 each
Dr Share Capital ,000
Dr Retained earnings 36,000
Cr Cash ,000
2. At a discount:
shares initially issued at $1.20 were bought back for $1.00 each. Write back firstly against reserves (balance $20,000)
Cr Reserves ,000
Cr Retained earnings ,000
Cr Cash ,000
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18. Accounting for debentures
Issuing debentures
May be issued at par/premium/discount
Issue preceded by disclosure document
Application monies held in trust until allotment
Can be listed on the stock exchange
Redemption of debentures
May be redeemable at company’s option before maturity
Redeemable on a set date or after a set period of time
Debentures may be redeemed at par/premium/discount
Premiums and discounts are treated as expenses and revenues
Funds to redeem debentures may come from:
Proceeds of new share issue or borrowing
Proceeds of asset sale
Assets currently held
May be convertible into shares
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19. Issuing debentures (liability)
Debentures payable in full on application.
Journal Entry:
Cash Trust
Application – Debentures
( for application money received on Debenture)
App- Debentures
Debenture Holders ** only if on instalment
Debentures
(Allotment of Debentures)
Cash
(transfer to general cash on Allotment)
(Transaction costs of issuing debentures)
*Cash
Debenture Holders ** only if instalment money received
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20. Redemption of debentures
REDEMPTION AT A PREMIUM (LOSS)
Dr Debentures $x
Dr Redemption expense $x
Cr Redemption revenue $x
Cr Cash $x
CONVERSION TO EQUITY
Dr Debentures $x
Cr Share Capital $x
Expense = redemption at a premium (loss)
Revenue = redemption at a discount (gain)
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21. Convertible notes Debt convertible to equity on maturity
Initial classification as liability or equity depends on characteristics.
Some may be partly debt, partly equity
Accounting for redemption depends on initial classification
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22. Recap the corporate accounting regulations
End of Lecture 2
Recap the corporate accounting regulations
Recap the company formation process & accounts
Thank you.
Compiled by: Maheshwari Chand; in Tri 2, 2013