Page 215 - Microsoft Word - 00 BA3 IW Prelims STUDENT.docx

Accounting for the issue of shares

2.2 Rights issue

A rights issue is an offer by the company to issue shares to current shareholders on
a pro-rata basis in relation to their existing shareholding. A rights issue is normally
made at less than market value in order to encourage shareholders to take up the
share issue.

A rights issue is very similar to an issue at market price. This means that the
accounting entries will be the same, with entries made in the share capital and share
premium accounts.

The accounting entries to record the share issue would therefore be:

Debit Bank account (issue price × no. of shares)

Credit Share capital account (nominal value × no. of shares)

Credit Share premium account (premium charged × no. of shares)

Illustration 2

For example, consider the situation of an entity that had issued share capital of
100,000 shares with a nominal value of 50c each. The issued share capital in
the statement of financial position would be $50,000 (100,000 × 50c). If the
entity now made a rights issue of 1 for 5 at a price of $1.25 per share, we
would need to calculate the number of shares issued and then determine the
cash received by the entity, allocated between share capital and share
premium.

$
Debit Bank account ($1.25 × 20,000) 25,000
Credit Share capital account ($0.50 × 20,000) 10,000
Credit Share premium account (ß) ($0.75 × 20,000) 15,000

209