#FocusOnExams : Corporate Accounting GCE ‘A’ Level – 16th May 2020
Double increase of capital
The double increase can be successive or simultaneous.
- 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
- Calculate the AR and the SR
- 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?
- 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.
Task:
- 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 Issue premium 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
- 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
Task:
- Calculate the number of shares to be given to the shareholder who contributed the building.
- Calculate the contribution premium
- 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
- Determination of contribution premium
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 Contribution premium 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 Issue premium
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 |