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Difficulty: HardBonus and Rights Issues

Meridian Marine Plc has an issued share capital of 1,600,0001,600,000 ordinary shares of ₦0.50\text{₦}0.50 each. The board of directors resolves to make a rights issue of 11 new ordinary share for every 44 shares held at an issue price of ₦0.80\text{₦}0.80 per share. If all shareholders exercise their rights in full, what is the total amount that will be credited to the Share Premium account from this transaction?

  1. ₦120,000\text{₦}120,000Answer
  2. B
    ₦200,000\text{₦}200,000
  3. C
    ₦320,000\text{₦}320,000
  4. D
    ₦480,000\text{₦}480,000

Answer

The total amount credited to the Share Premium account is ₦120,000\text{₦}120,000.
The number of rights shares issued is 400,000400,000 (1,600,000÷41,600,000 \div 4). The premium per share is ₦0.30\text{₦}0.30 (₦0.80−₦0.50\text{₦}0.80 - \text{₦}0.50). Multiplying 400,000400,000 shares by ₦0.30\text{₦}0.30 gives ₦120,000\text{₦}120,000 credited to Share Premium.

Step-by-Step Solution

1
Calculate the number of new rights shares issued.
Rights Shares=1,600,0004=400,000 shares\text{Rights Shares} = \frac{1,600,000}{4} = 400,000 \text{ shares}.
The rights ratio is 1 new share for every 4 existing shares held.
2
Determine the share premium per share.
Premium per Share=₦0.80−₦0.50=₦0.30\text{Premium per Share} = \text{₦}0.80 - \text{₦}0.50 = \text{₦}0.30.
Share premium is the excess of issue price over nominal value.
3
Compute total amount credited to Share Premium account.
Total Share Premium=400,000×₦0.30=₦120,000\text{Total Share Premium} = 400,000 \times \text{₦}0.30 = \text{₦}120,000.
Multiplying the total rights shares by the premium per share gives the total balance credited to capital reserves.

Key Concept

Rights Issue and Share Premium Accounting
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Topics

Bonus and Rights Issues

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