18 - Issue of shares

Question 1

what are the main four headings in the statement of financial position for limited companies

Answer 1

• share capital
• share premium
• retained earnings
• revaluation surplus

Question 2

what is an authorised share capital

Answer 2

the maximum number of shares a company may issue

Question 3

what is a nominal or face value

Answer 3

the minimum price a share issues for

Question 4

what is an issue price

Answer 4

the price shares are usually issued for

Question 5

what is share capital

Answer 5

capital invested in a company by its owners, divided into a number of identifiable shares

Question 6

what is an ordinary share/shareholders

Answer 6

ORDINARY SHARES generally carry voting rights

ORDINARY SHAREHOLDERS are entitled to the profits of the company after all other claims have been met

BUT they dont have the legal right to a dividend

Question 7

how is an issue of new shares at nominal value accounted for

Answer 7

eg:

100,000 shares issued
nominal value of 50p each for 50p per share

double entry is:
DEBIT - bank £50,000
CREDIT - share capital £50,000

Question 8

what happens if new shares are issued at a premium

Answer 8

when shares are issued for more than their nominal value, the excess must be credited to a share premium account as only the nominal value may be recorded as share capital

Question 9

what is a bonus issue, what is its purpose and which account does it interact with

Answer 9

BONUS ISSUE = the issue of extra shares to existing shareholders at no cost

doesn’t raise any extra finance, a means of reclassifying reserves as share capital to decrease share price by increasing supply

share premium account is used to make the bonus issue

retained earnings unaffected

Question 10

how is a bonus issue recorded

Answer 10

eg

total no of new shares is 25,000

DEBIT - share premium £25000
CREDIT - share capital £25000

to decrease share premium and increase share capital

Question 11

what is a rights issue, who are they offered to and what is their purpose

Answer 11

RIGHTS ISSUE = an issue of shares to existing shareholders at below market value

shares are offered to shareholders in proportion to their existing shareholdings

a cheap way of raising extra share capital

Question 12

how is a rights issue accounted for

Answer 12

eg

£1.10 per share
new shares issued = 10,000

DEBIT - bank £11,000 (10,000 x 1.1)
CREDIT - share capital £10,000
CREDIT - share premium £1,000

Question 13

what are preference shares

Answer 13

shares which carry the right to a fixed rate of dividend

Question 14

how are preference shares different to ordinary shares

Answer 14

1. preference dividend paid out of available profits before any ordinary dividend is paid
2. in event of liquidation, preference shareholders normally have right to return of their capital before any capital returned to ordinary shareholders
3. preference shares don’t carry the right to vote on issues at shareholder meetings

Question 15

how are preference shares classified

Answer 15

1. redeemable
2. irredeemable

Question 16

what are redeemable preference shares

Answer 16

company will redeem (repay) the nominal value of redeemable preference shares at a fixed rate

Question 17

where do redeemable preference shares sit in financial statements

Answer 17

they are treated like loans and are included in the non current liabilities in the statement of financial position

dividends paid on redeemable preference shares are treated like interest paid on loans and are included in finance costs in the statement of profit or loss

Question 18

what are irredeemable preference shares

Answer 18

they are treated like ordinary shares

they form part of equity and their dividends are treated as appropriations of profit