# #FocusonExams: Corporate Accounting GCE Technical – 9th May 2020

SOLUTION TO ASIGNMENT

1. Determination of SR

-Number of new shares: 10 000 000 FRS      = 500shares

• 00frs

– Ĕ=25 000 FRS – 600frs = 24 400FRS

-Sr: 500(32 500 FRS – 24 400 FRS) = 2700 FRS

1000 + 500

1. Journal Entries

-capital increase: 500s × 20 000 FRS = 10 000 000FRS

-total issue premium: 500(25 000 FRS – 20 000 FRS) = 2 500 000 FRS

dr           cr

4615             shareholders transaction on capital      12 500 000

1012    shareholders sub, called up and unp                10000000

1051     issue premium                                                          2 500 000

521              bank                                                   12 500 000

4615     shareholders transaction on capital                      12 500000

1012            shareholders sub.Called up and unpaid10 000000

1013  sub Call up and paid up non redeem                      10000000

1. Determination of amount spent

-number of shares at irreducible title: ½ ×  21=10.5 shares

-number of shares art reducible title: ½ × 9sr = 4.5 shares

-total number of new shares: 10.5 + 4.5 = 15shares

Therefore total number of shares after the capital increase: 21 + 15= 36

Amount spent: [(15s × 25 000frs) + (9sr × 2700frs)] = 399 300frs

INCREASE OF CAPITAL BY INCORPORATION OF RESERVES

The following reserves could be capitalized; statutory reserves, facultative reserves, legal reserves and revaluation reserves.

The increase of capital by the capitalization of reserves is done either by increasing the nominal value of the shares or by distributing new shares to the current shareholders (called bonus shares). Whatever the case, the shares are freely allotted to shareholders in the proportion of old shares owned by everyone. The shareholder who does not want to exercise their right can sell them. The right to free shares is called “Attribution Right.”(AR)

Calculation of the Attribution Right (AR)

It is the right to each old shareholder to receive free shares proportionately to the number of old shares owned by all the shareholders. The AR aims at compensating the loss in value of the old shares caused by this transaction.

 AR=MV1-MV2

Where mv1= maths value before capital increase

Mv2=maths value of a share after the capital increase

MV2= (MV1×N) + 0   where n`=number of free shares

N+n

By the general formula: AR=MV1 n`

N+n`

Illustration: A plc. with a capital of 80 000 000 FRS (8000shares of 10 000 FRS each) decide to increase its capital by capitalizing reserves amounting to 20 000 000 FRS. The increase is followed by the allotment of bonus shares. The shares of this company are quoted in the stock exchange market at 15000 FRS.

• Calculate the AR by the two formulae.
• Show the accounting recordings of the increase knowing that expenses amounted to 2300 000frs before WAT(19.25frs)
• What should be spent by a shareholder who had 300 old shares and ended up with 400 shares after this transaction?

Solution

• Calculation of the AR.

*AR=MV1-MV2.

MV1=15000frs

MV2= (8000S × 15000 FRS) + 0 = 12000 FRS.

8000s + 2000s

Therefore AR=15000 FRS -12000 FRS = 3000 FRS per share.

*AR=MV1 n`                15000frs       2000s                   = 3000frs/shares

N+n`                           8000s + 2000s

• Accounting records
 118     6324 4454 1013       521 Optional reserves Subscribed called up and paid NPC t To record increase of capital Honoraria             do VAT recoverable on external service Bank To record expenses 20 000 000     2300 000 442 750 2742 750

do

*calculation of amount spent

Quota: 12000s = ¼      four old shares gives rise to one free share.

8000 4

• number of free shares obtain = 100
• Irreducible subscription: 300s × ¼ =75 free shares
• Reducible subscription= 25 free shares

Therefore number of AR attached to the 25 free shares: 25s × 4/1 = 100 FRS

Amount spent: 100AR × 3000 FRS = 300 000 FRS.

Double increase of capital

The double increase can be successive or simultaneous.

1. Simultaneous increase of capital

There is a simultaneous increase of capital when a company decides to issue new shares in cash and capitalizing its reserves at the same time. In this case therefore each old share is given an attribution right and a subscription right.

Calculation of the SR and AR.

*by simple proportion: SR + AR= MV1-MV2.

*by formula:  AR= n“× MV2              where MV2= (MV1 × N) + (E × n) + 0

N                                                           N+n+n`

SR=n` (MV2-E)

N

Illustration exercise: MAXICAM PLC on the 12th/02/2018 decides to increase its capital by increasing 1000 new shares at 21000 FRS each and offering500bonus shares. The initial capital of the company was 50 000 000 FRS with a nominal value of 20000 FRS each. The shares were quoted at the Douala stock exchange at 28000 FRS.

Task; calculate the SR and AR.

SOLUTION

*by simple proportion: MV1=28000 FRS

MV2= (28000 FRS × 2500s) + (1000s × 21000 FRS) + 0 = 22750 FRS

2500s + 1000s = 500s

Therefore AR+ SR: 28000 FRS + 22750 = 5250FRS.

*by formula AR= 500 (22750 FRS) = 4550 FRS per shares.

2500

SR= 1000 (22750 frs – 21000frs) = 700 FRS

2500

Assignment:

LIME CO.LTD with a capital of 70 000 000 FRS (shares of 10 000 FRS each) decides to increase its capital by 5000shares of 10 000 FRS NV as follows.

• 3000shares in cash issued at 12000frs
• 2000 bonus shares by incorporating reserves.

Knowing that a share is quoted at 30 000 FRS at the Douala stock exchange, you are required to

1. Calculate the AR and the SR
2. Present the journal entries of the increase given that cash contributed were fully paid up during the subscription.
• Calculate the number of shares in cash and bonus shares that will be received by an owner of the 1400 old shares. If this shareholder came out finally with 3500shares of which 2100 new cash shares and 630 bonus shares, what amount did he spent in this transaction?
1. Successive Increase Of Capital:

In this case the second increase depends on the first. Therefore we will now have math value three.

Illustration: from the assignment exercise, let’s assume that the increase by new cash contributions tool place first then followed by the incorporation of reserves.

• Calculate the SR and AR
• Present the journal entries of the increase assuming that cash contributions were paid up for ¾ during subscription

Solution

• *calculation of the SR

MV1=30 000FRS

MV2= (30 000 FRS × 700s) + (3000s × 12000 FRS) = 246 000 000 FRS=24600 FRS

700s + 300s                                      10 000

*calculation of AR

AR= MV2-MV3.

MV2 =24600frs

MV3 = (24600 FRS × 10 000) + 0 = 20500 FRS

10 000 + 2000

AR=24600-20500FRS= 4100FRS

• Journal entries
4615

109

521

1012

1011

1012

1051

4615

1013

Shareholders transaction on k n

Shareholder sub uncalled

Sub. u.c up capital

Sub called up and unpaid

To record  subscription by cash

do

Bank

s/h transaction on k n

to record realization of cont inc

Statutory reserves

Shareholders sub called up capital

28500 000

7500 000

28500 000

20 000 000

7500 000

22500 000

6000 000

28500 000

20 000 000

Increase of capital by contribution in KIND and convertion of debt

1. Increase by contributions in kind

In this case the number of shares to be given to the new shareholder is in function of the maths value before the increase if capital. This maths value is considered as the issue price.

Illustration: a joint stock company NIN has a capital of 40 000 000frs (4000shares of 10 000frs each). This company has received a building worth 32000 000frs in abit to increase its capital. NINO’S total equity amounts to 65000 000frs and it has a deferred charges of 1000 000frs

• Calculate the number of shares to be given to the shareholder who contributed the building.
• Determine the amount corresponding to the increase of capital
• Record the transaction relating to the increase of the capital.

Solution

Calculate the number of shares:

NA: 65 000 000frs – 1000 000frs = 64000 000frs

MV1=64000 000frs = 16000frs.

4000frs

Number of shares: 32 000 000 frs = 2000shares

10 000frs

2000(16000frs – 10 000frs) = 12000 000frs

• Amount of capital increase

2000shares × 100 000frs = 20 000 000frs.

• Journal entries
4611

231

101

1052

4671

Shareholders contribution in kind

Social capital

According to info on capital

do

Building

s/k contribution in kind

32000 000

32000 000

20 000 000

12 000 000

32 000 000

NB: it may happen that the number of shares attached to the contributions in kind is fractional. In this case the number of shares can either be rounded down or rounded up.

• If rounded down, then the company will refund the balance to the shareholder concerned. in this case the means of payment will be credited
• If rounded up, the shareholder concern will pay in an additional amount and the means of payment will be debited.

* Increase of capital by converting debts

This can be done by :

-converting ordinary debts

-or by converting debentures.

Illustration exercise: LIME  co ltd issued 5000 shares at 16 000frs each, the nominal value of a share is 10 000frs. Supplies subscribed 2/5 of the shares issued and a bank institution subscribed the balance in replacement of a loan taken by the company, the duration of the loan is 10 years.

Work required;

Show the accounting entries of the capital increase

Solution

-capital increase: 5000s × 10 000 FRS = 50 000 000FRS

-suppliers subscription (2/5 × 5000s)10 000frs = 20 000 000frs

-banks subscription (3/5 × 5000s)10 000frs = 30 000 000frs

-total issue premium 5000s (16 000frs – 10 000frs)= 30 000 000frs

4615

4011

162

101

1051

4615

Shareholders transaction on capital

Share capital

supplier

borrowing

shareholders transaction on capital increase

80 000 000

32 000 000

48 000 000

50 000 000

30 000 000

80 000 000

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