How should a company account for the legal costs of formation Should the

How should a company account for the legal costs of

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5.How should a company account for the legal costs of formation? Should the account-ing treatment be the same as that for underwriting and other share issue costs? 6. What is a rights issue? Distinguish between a renounceable and a non-renounceable rights issue. How would a company account for such issues? A rights issue is an issue of new shares to existing shareholders whereby they are given the right to purchase additional shares in proportion to their current shareholdings. Usually the issue price is set below the current market price of the company’s shares. A renounceable rights issue allows the shareholder to take up the rights issue, let it lapse or sell their rights on the securities market. A non renounceable rights issue only allows the shareholder to either take up the rights by subscribing for more shares, or reject the rights, which mean that they lapse. The shareholders cannot sell the rights. Accounting for a rights issue is discussed in the chapter at section 2.5.1 and practical aspects are shown in illustrative example 2.6.
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7. What is private placement of shares? What are the advantages and disadvantages of a private placement? A private placement is an issue of shares to a large institutional investor. The main advantages are speed, price and direction. The disadvantage is that existing shareholders experience a dilution of their ownership as well as an ability to make a profit if there had been a rights issue instead of a private placement. 8. What is a share option? How does a company account for share options that lapse? A share option is an instrument giving the holder the right to buy or sell a set number of shares in the company by a set date at a set price. Options can be issued for a price or at no cost to the recipient. If issued for a price, an options ledger account is used. On expiry of the exercise date, this account balance is transferred to share capital (for the number of options exercised x the options price) and to lapsed options reserve (for the number of options lapsed x the options price).
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