Arranging for the issue to be underwritten will avoid

Arranging for the issue to be underwritten will avoid having to refund
monies due to under-subscription
–
Underwriter agrees to purchase all excess shares in return for an upfront
payment of an underwriting commission
–
Treated as a reduction against contributed equity
•
Other share issue costs:
–
Includes costs such as stamp duty, legal fees etc
–
Treated as a reduction against contributed equity
•
Formation costs:
–
Treated as an expense

Share capital - summary
•
The share capital equity total shown on the Balance Sheet is the net of:
$
Share Capital x
Less Calls in Arrears (x)
Add Calls in Advance x
Less Underwriting commission (x)
Less Share issue costs (x)
Total share capital x

Subsequent issues of shares
•
Companies can issue more shares to fund expansion plans
1. Rights issue
–
offer of shares to existing shareholders
–
rights dependent on the number of shares held
–
rights may be renounceable or non-renounceable
2. Private placements
–
offer of shares to one entity only
–
usually issued to institutional investors
Accounting for these types of share issues does not involve the use of
application/cash trust accounts
The entry required is: Dr Cash xx
Cr Share capital xx

Subsequent issues of shares
3. Bonus issue
–
Shares granted only to existing shareholders
–
Issued at no cost in lieu of cash dividend
–
Number based on shareholding at date of declaration
–
No change in the net equity of the company
The entry required is:
Dr Retained earnings or reserve xx
Cr Share capital xx

Share options
• An option is a right (not obligation) to buy a certain number of shares by a set
date at a set price
• Options may be issued for free – e.g. options may be issued to employees in
lieu of cash bonuses
• Options may be sold to investors – similar to normal shares
• Where options are not exercised by a specific date they lapse
(Accounting for share options not covered in AYN417)

Redeemable preference shares
•
Such shares either:
–
give the holder the right to be repaid his/her capital; or
–
give the company the right to repay the capital
•
Main issue is the classification of such shares
–
are they equity, liabilities or a combination of both?

Redeemable preference shares - equity
Dr Share Capital – Preference $x
Cr Shareholders redemption $x
Transfer of preference capital to redemption account
Dr Shareholders redemption $x
Cr Cash $x
Redemption of preference shares
Dr Cash/ Retained earnings $x
Cr Share Capital - Ordinary $x
Receipt of cash on issue of new shares
Cash a/c applies to issues of new shares; retained earnings a/c applies
to redemption from profits
The shareholders redemption account is a clearing account

Redeemable preference shares - liabilities
•