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Difficulty: Very hardBonus and Rights Issues

Premier Logistics Plc had an issued share capital of 2,000,0002,000,000 ordinary shares of ₦1.00\text{₦}1.00 each, a Share Premium account balance of ₦350,000\text{₦}350,000, and a General Reserve balance of ₦450,000\text{₦}450,000. The company first made a bonus issue of 1 new share for every 4 ordinary shares held, utilizing the Share Premium account to the maximum extent permissible before drawing from the General Reserve. Immediately following the bonus issue, the company declared a rights issue of 1 share for every 5 shares held at an issue price of ₦1.40\text{₦}1.40 per share. If all rights shares were fully subscribed and paid for, what is the final balance in the Share Premium account (in ₦\text{₦})?

Answer: 200000 ₦

Answer

The final balance in the Share Premium account after completing both the bonus issue and rights issue is ₦200,000.
The bonus issue requires ₦500,000 of reserves (500,000 shares at ₦1.00 nominal value). Capitalizing the full ₦350,000 Share Premium balance leaves ₦0 in Share Premium. The subsequent rights issue of 1 for 5 on the post-bonus base of 2,500,000 shares yields 500,000 rights shares. Each rights share generates a premium of ₦0.40 (₦1.40 - ₦1.00), giving a total premium of ₦200,000. Adding this to the zero balance results in a final Share Premium balance of ₦200,000.

Step-by-Step Solution

1
Calculate the number and total nominal value of bonus shares issued.
500,000 bonus shares with a total nominal value of ₦500,000.
Bonus shares are issued based on existing share capital of 2,000,000 shares at a 1 for 4 ratio.
2
Account for the capitalization of reserves to fund the bonus issue.
The Share Premium account is reduced from ₦350,000 to ₦0, and General Reserve is reduced by ₦150,000.
Non-distributable reserves like Share Premium must be utilized first before distributable reserves.
3
Determine total ordinary shares outstanding before the rights issue.
2,500,000 ordinary shares.
Original 2,000,000 shares plus the newly issued 500,000 bonus shares.
4
Calculate the number of rights shares and the premium generated per share.
500,000 rights shares generating a total premium of ₦200,000.
The 1 for 5 rights issue is based on post-bonus shares (2,500,000) at a premium of ₦0.40 per share (₦1.40 - ₦1.00).
5
Compute the final balance of the Share Premium account.
₦200,000.
Adding the ₦200,000 premium from the rights issue to the ₦0 post-bonus Share Premium balance.

Key Concept

Accounting for Bonus and Rights Issues and Reserve Capitalization Order
Estimated Time:3m 0s
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Topics

Bonus and Rights Issues

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