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Difficulty: Very hardReserves and Capital Structure

Apex Nigeria Plc has an authorized share capital of 1,000,000 ordinary shares of ₦1 each. The company had previously issued 600,000 ordinary shares at a premium of ₦0.20 per share, all fully paid. Prior to year-end adjustments, the General Reserve account held a balance of ₦50,000. The directors subsequently wrote off preliminary expenses of ₦10,000 from the Share Premium account and then issued bonus shares to existing shareholders on the basis of one new share for every four shares held, utilizing the Share Premium account to its maximum statutory limit before drawing on revenue reserves. What is the remaining balance in the General Reserve account after the bonus issue?

  1. ₦10,000Answer
  2. B
    ₦20,000
  3. C
    ₦0
  4. D
    ₦40,000

Answer

The remaining balance in the General Reserve account is ₦10,000.
The correct option correctly accounts for the statutory reduction of the Share Premium balance by ₦10,000 for preliminary expenses prior to capitalizing the remaining ₦110,000 for the ₦150,000 bonus issue. This leaves ₦40,000 to be transferred from the General Reserve, leaving ₦10,000 in the General Reserve.

Step-by-Step Solution

1
Calculate the initial Share Premium balance
600,000 shares × ₦0.20 = ₦120,000
Share Premium is calculated as the premium per share multiplied by the number of issued shares.
2
Deduct preliminary expenses written off from Share Premium
₦120,000 - ₦10,000 = ₦110,000 available Share Premium
Writing off preliminary expenses is a statutory permitted use of the Share Premium account.
3
Determine the nominal value of the bonus shares issued
(600,000 shares ÷ 4) × ₦1 = 150,000 shares = ₦150,000
A 1-for-4 bonus issue on 600,000 shares yields 150,000 new ordinary shares at ₦1 nominal value.
4
Apply available Share Premium and compute General Reserve utilization
General Reserve required = ₦150,000 total bonus - ₦110,000 Share Premium = ₦40,000
Share Premium must be utilized to its maximum available balance before absorbing the remaining deficit from revenue reserves.
5
Compute the ending balance of the General Reserve
₦50,000 initial balance - ₦40,000 utilized = ₦10,000 remaining
Subtracting the amount drawn for the bonus issue from the opening General Reserve balance gives the final balance.

Key Concept

Statutory Utilization of Share Premium and Capitalization of Reserves for Bonus Issues
Estimated Time:3m 0s
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Topics

Reserves and Capital Structure

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