Danford Oil Plc has an issued share capital of 1,200,000 ordinary shares of \text{₦}0.50 e… — JAMB UTME

Danford Oil Plc has an issued share capital of $1,200,000$ ordinary shares of $\text{₦}0.50$ each and a Share Premium balance of $\text{₦}180,000$ . The company executes a rights issue of $1$ new ordinary share for every $4$ shares held at an issue price of $\text{₦}0.80$ per share, which is fully subscribed. Immediately thereafter, the company declares a bonus issue of $1$ new share for every $6$ ordinary shares held, utilizing the Share Premium account. What is the remaining balance in the Share Premium account after both transactions?

Answer: 145000 ₦

Answer

The remaining balance in the Share Premium account after both transactions is ₦145,000.

The rights issue adds 300,000 shares and generates a premium of ₦90,000 (300,000 × ₦0.30), bringing the Share Premium account to ₦270,000. The post-rights total of 1,500,000 shares yields 250,000 bonus shares (1 for 6 ratio). The nominal value of the bonus issue is ₦125,000 (250,000 × ₦0.50). Deducting ₦125,000 from the Share Premium account leaves a balance of ₦145,000.

Step-by-Step Solution

Determine the number of rights shares issued and the resulting share premium generated.

Rights shares = 1,200,000 ÷ 4 = 300,000 shares. Premium per share = ₦0.80 - ₦0.50 = ₦0.30. Premium generated = 300,000 × ₦0.30 = ₦90,000.

A 1 for 4 rights issue on 1,200,000 shares generates 300,000 new shares, with the excess of issue price over nominal value credited to Share Premium.

Calculate the updated Share Premium account balance prior to capitalizing bonus shares.

Updated Share Premium balance = ₦180,000 + ₦90,000 = ₦270,000.

The share premium from the rights issue is added to the initial Share Premium reserve balance.

Calculate the total ordinary shares in issue following the rights issue.

Total post-rights issued shares = 1,200,000 + 300,000 = 1,500,000 shares.

Bonus shares are declared after the rights issue is completed, so they apply to the total post-rights share count.

Calculate the nominal value of bonus shares issued.

Bonus shares = 1,500,000 ÷ 6 = 250,000 shares. Nominal value of bonus issue = 250,000 × ₦0.50 = ₦125,000.

Bonus shares are allocated at nominal value (₦0.50) without receiving cash payment.

Subtract the capitalized bonus share value from the Share Premium account.

Remaining Share Premium = ₦270,000 - ₦125,000 = ₦145,000.

Capitalizing reserves to fund a bonus issue reduces the Share Premium account by the total nominal value of the bonus shares issued.

Key Concept

Accounting Treatment of Rights Issue Premium and Bonus Share Capitalization

Question

Answer

Step-by-Step Solution

Key Concept

Common Mistakes

Topics

More questions from this topic