Page 185 - F3 -FA Integrated Workbook STUDENT 2018-19

Capital structure and finance costs

Example 2

Rights issue

Continuing with the example Campbell Co, several years have passed and
retained earnings now stand at $13 million. Campbell Co has now decided to
raise additional equity capital by making a rights issue. Campbell Co has the
following issued share capital and other components of equity immediately
prior to the rights issue:

Original Updated
$000 $000

Issued share capital @ $0.50 each 2,500 3,000
Share premium 3,000 6,500

Revaluation surplus 3,000 3,000
Retained earnings 13,000 13,000

––––– –––––
Total equity 21,500 25,500
––––– –––––

The terms of the rights issue are that Campbell Co will issue one new equity
share of $0.5 for every five currently held by shareholders. The current
market price of a share is $6 and the issue price is $4 per share.

Required:

State the accounting entries required to account for the rights issue and
prepare an updated summary of Campbell Co’s issued share capital and
other components of equity.

$000
Debit Cash received 4,000 1,000 × $4
Credit Equity share capital @ $0.5 each 500 1,000 × $0.5

Credit Share premium 3,500 1,000 × $3.50

Shares in issue = 2.5m × 2 = 5m Rights issue = 5m/5 = 1m shares issued

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