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Difficulty: HardBonus and Rights Issues

Kofar Ltd has an issued share capital of 500,000500,000 ordinary shares of ₦1.00\text{₦}1.00 each and a Share Premium balance of ₦150,000\text{₦}150,000. The company first makes a rights issue of 11 new ordinary share for every 55 existing shares held at an issue price of ���1.50\text{���}1.50 per share, which is fully subscribed. Subsequently, the company makes a bonus issue of 11 new ordinary share for every 44 shares held, utilizing the Share Premium account to fund the issue as far as possible. What is the remaining balance in the Share Premium account after the capitalization for the bonus issue?

  1. ₦50,000\text{₦}50,000Answer
  2. B
    ₦75,000\text{₦}75,000
  3. C
    ₦0\text{₦}0
  4. D
    ₦150,000\text{₦}150,000

Answer

The remaining balance in the Share Premium account is ₦50,000\text{₦}50,000.
The rights issue adds 100,000100,000 shares (500,000/5500,000 / 5) at a premium of ₦0.50\text{₦}0.50 per share, increasing the Share Premium account by ₦50,000\text{₦}50,000 to ₦200,000\text{₦}200,000 and bringing total issued shares to 600,000600,000. The subsequent 11-for-44 bonus issue requires 150,000150,000 shares (600,000/4600,000 / 4) at ₦1.00\text{₦}1.00 nominal value (₦150,000\text{₦}150,000). Capitalizing this ₦150,000\text{₦}150,000 from the updated ₦200,000\text{₦}200,000 Share Premium account leaves a balance of ₦50,000\text{₦}50,000.

Step-by-Step Solution

1
Calculate rights issue volume and share premium contribution
Rights shares issued = 500,000/5=100,000500,000 / 5 = 100,000 shares. Premium per share = ₦1.50−₦1.00=₦0.50\text{₦}1.50 - \text{₦}1.00 = \text{₦}0.50. Total premium added = 100,000×₦0.50=₦50,000100,000 \times \text{₦}0.50 = \text{₦}50,000.
Only the excess of issue price over nominal value is credited to the Share Premium account.
2
Determine post-rights share count and updated Share Premium balance
Total issued shares = 500,000+100,000=600,000500,000 + 100,000 = 600,000 shares. New Share Premium balance = ₦150,000+₦50,000=₦200,000\text{₦}150,000 + \text{₦}50,000 = \text{₦}200,000.
Rights shares increase both total shares outstanding and the available Share Premium balance before the bonus issue.
3
Calculate bonus issue volume and required capitalization
Bonus shares issued = 600,000/4=150,000600,000 / 4 = 150,000 shares. Nominal value capitalized = 150,000×₦1.00=₦150,000150,000 \times \text{₦}1.00 = \text{₦}150,000.
Bonus shares are allocated based on total existing shares after the rights issue and are issued at nominal value.
4
Deduct bonus capitalization from updated Share Premium balance
Remaining Share Premium balance = ₦200,000−₦150,000=₦50,000\text{₦}200,000 - \text{₦}150,000 = \text{₦}50,000.
Share Premium is used to fund the nominal value of bonus shares issued.

Key Concept

Accounting for Sequential Rights and Bonus Issues
Estimated Time:2m 0s
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Topics

Bonus and Rights Issues

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