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Difficulty: MediumBonus and Rights Issues

Crestline Ventures Plc has an issued share capital of 800,000800,000 ordinary shares of ₦0.50\text{₦}0.50 nominal value each. The company's reserves stand at: Share Premium ₦85,000\text{₦}85,000, General Reserve ₦120,000\text{₦}120,000, and Retained Earnings ₦95,000\text{₦}95,000. The board of directors resolves to make a bonus issue of 11 new ordinary share for every 44 ordinary shares held, fully capitalizing the Share Premium account first and using the General Reserve for any remaining balance. What is the remaining balance in the General Reserve account after the capitalization for the bonus issue?

Answer: 105000 Naira

Answer

The remaining balance in the General Reserve account after the capitalization for the bonus issue is ₦105,000\text{₦}105,000.
The bonus issue requires 200,000200,000 new shares (14×800,000\frac{1}{4} \times 800,000), which amounts to a total nominal value of ₦100,000\text{₦}100,000 (200,000×₦0.50200,000 \times \text{₦}0.50). Utilizing the entire Share Premium balance of ₦85,000\text{₦}85,000 leaves ₦15,000\text{₦}15,000 to be funded from the General Reserve. Subtracting ₦15,000\text{₦}15,000 from the original General Reserve of ₦120,000\text{₦}120,000 leaves a remaining balance of ₦105,000\text{₦}105,000.

Step-by-Step Solution

1
Calculate the total number of bonus shares issued
200,000 ordinary shares
The bonus issue ratio is 11 new share for every 44 existing shares: 800,0004=200,000\frac{800,000}{4} = 200,000 shares.
2
Calculate the total nominal value of the bonus shares
₦100,000
Each share has a nominal value of ��0.50\text{��}0.50, so 200,000×₦0.50=₦100,000200,000 \times \text{₦}0.50 = \text{₦}100,000.
3
Determine the amount required from the General Reserve after utilizing Share Premium
₦15,000
The Share Premium account of ₦85,000\text{₦}85,000 is fully utilized first, leaving ₦100,000−₦85,000=₦15,000\text{₦}100,000 - \text{₦}85,000 = \text{₦}15,000 to be taken from the General Reserve.
4
Calculate the final remaining balance in the General Reserve
₦105,000
Subtracting the ₦15,000\text{₦}15,000 capitalized from the initial ₦120,000\text{₦}120,000 General Reserve yields ₦120,000−₦15,000=₦105,000\text{₦}120,000 - \text{₦}15,000 = \text{₦}105,000.

Key Concept

Capitalization of Reserves for Bonus Issue
Estimated Time:1m 30s
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Topics

Bonus and Rights Issues

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