Chapter 10 Equity Financing Share Capital Flashcards
On 1 January 2000, ABC Ltd issued 1 million ordinary shares @$30 per share.
What are the journal entries and effect on Balance Sheet?
DR Cash 30M
CR Share Capital 30M
Balance Sheet
Equity
Share Capital +30M
What is the concept of rights issue
Issuing rights to a company’s existing shareholders to buy additional proportional shares at a given price (usually at a discount) within a fixed period
- In a rights issue on 1 January 2021, ABC Ltd offered its existing shareholders the right to purchase one ordinary share in the company @$50 per share for every two shares held. The offer ends on 31 March 2021.
- The company’s shares are trading at $60 per share
- Shareholders holding 200,000 shares exercised the right.
What are the journal entries and the effect on the balance sheet?
DR Cash 5,000,000
CR Share Capital 5,000,000
Balance Sheet
Equity
Share Capital +5,000,000
What is the concept of share splits?
Split the shares by increasing the number of ordinary shares when the market price becomes too expensive for investors
A share split DOES NOT CHANGE any account in the balance sheet.
What is the concept of share buyback?
Companies are authorised to buy back their own shares from the open market through secondary market transactions.
This reduces the number of outstanding shares and reduces equity in the company
What are treasury shares?
Treasury shares are owned by the company that has been purchased from the market and not cancelled
What is shares outstanding?
Number of shares held by shareholders
Why would a company perform share buyback?
1) Return cash to shareholder
2) Increase earning per share
3) Reduce cash needed for future dividends
4) Reduce chances of hostile takeover
5) Employee Share Option
6) Signalling that the company expects it will do well in the future
On 1 December 2021, ABC Ltd purchased 200,000 of its own shares from the market when the price was $60 per share. The company cancelled the shares immediately.
On 15 December 2021, ABC Ltd purchased 50,000 of its own shares from the market when the price was $50 per share. The company held the shares as treasury shares.
On 20th December 2021, ABC LTD sold 25,000 treasury shares at $40/share.
On 30 December 2021, ABC Ltd sold 25,000 treasury shares for $70 per share.
What are the journal entries and effect on balance sheet?
1 DEC 2021
DR Share Capital 12,000,000
CR Cash 12,000,000
15 Dec 2021
DR Treasury Shares 2,500,000
CR Cash 2,500,000
20th Dec 2021
DR Cash 1,000,000
DR Share Capital 250,000
CR Treasury Shares 1,250,000
30 Dec 2021
DR Cash 1,750,000
CR Treasury Shares 1,250,000 [Sold at cost price where company bought from market]
CR Share Capital 500,000
Balance Sheet
Equity
Share Capital -12,000,000 - 250,000 + 500,000
Treasury Share 2,500,000 - 1,250,000 - 1,250,000
Explain the concept of dividends
Dividends are distribution of profits to the owners of the company.
- Companies have no obligation to pay dividends, especially if they need funds for growth and expansion.
- Why would anyone invest in a company that does not pay dividends?
- Because they expect share price to appreciate (capital gains).
What are the two kinds of dividends
Who are the approving authority?
1) Interim Dividend
- Authorised by Board of director
2) Final Dividend
- Proposed by Board of director,
- Authorised by shareholders at company’s AGM
On 30 June 20x3, the board of directors of ABC Ltd declared a tax exempt interim dividend of $1/- per share payable in cash on 15 August 20x3.
- The book closure date is 31 July 20x3.
- The company’s year end is 31st December
- The number of outstanding shares is 3,000,000
30 June 20X3
DR Dividend $3,000,000
CR Dividend Payable $3,000,000
15 August 20X3
DR Dividend Payable 3,000,000
CR Cash 3,000,000
Illustration: Final Dividend
- On 28 February 20x4, in its annual report for the financial year end 31 December 20x3, the board of directors of ABC Ltd proposed a tax exempt final dividend of $2 per share payable in cash.
- The dividend was approved at the company’s AGM on 31 March 20x4.
- Book closure date was 30th April 20x4 and payment was made on 14 May 20x4.
- The company has 3,000,000 shares outstanding
28 Feb 20X4
DR Dividend $6,000,000
CR Dividend Payable $6,000,000
14 May 20X4
DR Dividend Payable $6,000,000
CR Cash $6,000,000
Why is there a difference between market value and book value
1) Non recognition of intangible assets
2) Assets & Liabilities measured using diff attributes (PPE - hist cost or revaluation)
