Accounting For Share Issues And Options
Accounting for share issues and options
Sunny Ltd is looking to expand its operations, and in order to do this, the company needs to increase equity.
On 1 January 2016, Sunny Ltd offered 6,000,000 ordinary shares to the public at an issue price of $4.00 per share, with $3.00 payable on application, and $1.00 due within one month of allotment. The closing date for applications was 31 January 2016. Sunny Ltd offered an additional incentive to investors: shareholders who acquired more than 25,000 shares were allowed to purchase options at 50 cents each. These options allowed investors to acquire shares in Sunny Ltd at $4.20 each on or before 30 June 2016.
By 31 January 2016, applications had been received for 6,300,000 shares and 60,000 options. On 12 February 2016, 6,000,000 shares were allotted on a pro-rata basis, and all 60,000 options applied for were allotted. Excess application money received was retained and used to go towards the allotment instalment due.
All allotment money is received by 12 March 2016, except for holders of 20,000 shares who fail to meet the instalment.
On 20 March 2016, the 20,000 shares were forfeited, and on 5 April 2016 they were auctioned as fully paid. An amount of $3.70 was received for each share sold. Share re-issue costs amounted to $3,600, and were paid. The constitution provided for any surplus on resale, after satisfaction of unpaid instalments and any costs, to be returned to shareholders whose shares were forfeited.
By 30 June 2016, the price of each of Sunny Ltd’s shares was $4.80. Holders of 50,000 options exercised their options in June 2016, with the remaining options lapsing.
Required:
Prepare the journal entries to account for the above entries. Show all relevant dates, narrations and workings.
1:
|
Date of the transaction |
Particulars |
Debit |
Credit |
|
|
31-01-2016 |
Bank |
189,30,000.00 |
||
|
To share application A/c |
189,00,000.00 |
|||
|
To share options A/C |
30,000.00 |
|||
|
(being money received on share application) |
||||
|
12-02-2016 |
Share application A/c |
189,00,000.00 |
||
|
To share capital |
180,00,000.00 |
|||
|
To bank |
9,00,000.00 |
|||
|
(being refund of the excess money received) |
||||
|
Share options A/c |
30,000.00 |
|||
|
To share options |
30,000.00 |
|||
|
(conversion of share options money received into share options capital) |
||||
|
12-03-2016 |
Bank |
59,80,000.00 |
||
|
To share allotment A/c |
59,80,000.00 |
|||
|
(being allotment money received) |
||||
|
Share capital |
80,000.00 |
|||
|
To shares forfeited |
60,000.00 |
|||
|
To unpaid calls |
20,000.00 |
|||
|
(being shares forfeited) |
||||
|
05-04-2016 |
Bank |
74,000.00 |
||
|
Shares forfeited |
60,000.00 |
|||
|
To share capital |
1,34,000.00 |
|||
|
Share capital |
56,400.00 |
|||
|
To bank |
56,400.00 |
|||
|
(being the excess amount transferred to the investor) |
(Accounting simplified, 2016).
3:
|
Computation of Taxable Income |
|||
|
|
|
|
Remarks |
|
Revenue |
7,50,000.00 |
||
|
Government Grant |
– |
Not Taxable |
|
|
Cost of Sales |
3,25,000.00 |
||
|
Annual Leave |
2,000.00 |
Allowed on Payment Basis |
|
|
Depreciation on equipment |
60,000.00 |
As per Income Tax Rules |
|
|
Depreciation on motor vehicle |
12,000.00 |
As per Income Tax Rules |
|
|
Doubtful Debt Expenses |
2,000.00 |
Allowed on actual written off basis |
|
|
Entertainment expenses |
– |
Not allowable |
|
|
Insurance |
13,000.00 |
Allowed on Payment basis |
|
|
Rent |
20,000.00 |
Allowed on Payment basis |
|
|
Salaries |
1,25,000.00 |
||
|
Warranty Expenses |
600.00 |
Allowed on Payment basis |
|
|
Other Expenses |
17,250.00 |
-5,76,850.00 |
|
|
Taxable Profit |
1,73,150.00 |
||
|
Tax Rate |
30% |
||
|
Current tax |
51,945.00 |
|
Deferred Tax Work Sheet |
||||||
|
Book Value |
Tax Value |
Difference |
Deferred Tax |
|||
|
Assets |
Asset/(Liability) |
Asset/(Liability) |
||||
|
Cash |
20,000.00 |
20,000.00 |
– |
– |
||
|
Inventory |
85,900.00 |
85,900.00 |
– |
– |
||
|
Accounts Receivable |
80,000.00 |
80,000.00 |
– |
– |
||
|
Less: Allowance for Doubtful Debts |
-4,000.00 |
76,000.00 |
– |
80,000.00 |
4,000.00 |
1,200.00 |
|
Prepaid Insurance |
3,000.00 |
– |
-3,000.00 |
-900.00 |
||
|
Equipment |
4,00,000.00 |
4,00,000.00 |
– |
– |
||
|
Less: Accumulated Depreciation |
-40,000.00 |
3,60,000.00 |
-60,000.00 |
3,40,000.00 |
-20,000.00 |
-6,000.00 |
|
Motor Vehicle |
60,000.00 |
60,000.00 |
– |
– |
||
|
Less: Accumulated Depreciation |
-15,000.00 |
45,000.00 |
-12,000.00 |
48,000.00 |
3,000.00 |
900.00 |
|
5,89,900.00 |
5,73,900.00 |
-16,000.00 |
-4,800.00 |
|||
|
Liabilities |
||||||
|
Accounts Payable |
50,250.00 |
50,250.00 |
– |
– |
||
|
Loans |
25,000.00 |
25,000.00 |
– |
– |
||
|
Provision for Annual leave |
11,000.00 |
– |
11,000.00 |
3,300.00 |
||
|
Provision for Warranties |
6,900.00 |
– |
6,900.00 |
2,070.00 |
||
|
Rent Payable |
6,000.00 |
– |
6,000.00 |
1,800.00 |
||
|
99,150.00 |
75,250.00 |
23,900.00 |
7,170.00 |
|||
|
Net Assets |
4,90,750.00 |
4,98,650.00 |
7,900.00 |
2,370.00 |
|
Statement of Profit & Loss |
|||
|
Revenue |
7,50,000.00 |
||
|
Government Grant |
30,000.00 |
||
|
Cost of Sales |
3,25,000.00 |
||
|
Annual Leave |
13,000.00 |
||
|
Depreciation on equipment |
40,000.00 |
||
|
Depreciation on motor vehicle |
15,000.00 |
||
|
Doubtful Debt Expenses |
6,000.00 |
||
|
Entertainment expenses |
4,500.00 |
||
|
Insurance |
10,000.00 |
||
|
Rent |
26,000.00 |
||
|
Salaries |
1,25,000.00 |
||
|
Warranty Expenses |
7,500.00 |
||
|
Other Expenses |
17,250.00 |
-5,89,250.00 |
|
|
Accounting Profit |
1,90,750.00 |
||
|
Journal Entries |
|||
|
Provision for Current Tax A/c |
Credit |
51,945.00 |
|
|
Deferred Tax Asset A/c (Net) |
Debit |
2,370.00 |
|
|
Tax Expense |
Debit |
49,575.00 |
(CA club India, 2016).
4:
|
Date |
Particulars |
Debit |
Credit |
||||
|
01-07-2013 |
Equipment |
8,00,000.00 |
|||||
|
To bank |
8,00,000.00 |
Value of the equipment |
8,00,000.00 |
||||
|
(being purchase of equipment) |
|||||||
|
30-06-2014 |
Depreciation |
1,52,000.00 |
|||||
|
To accumulated depreciation-equipment |
1,52,000.00 |
Value of the equipment |
6,48,000.00 |
||||
|
(being the depreciation on equipment) |
|||||||
|
01-07-2014 |
Equipment |
82,000.00 |
|||||
|
To revaluation profit |
82,000.00 |
Value of the equipment |
7,30,000.00 |
||||
|
(being revaluation profit on equipment) |
|||||||
|
30-06-2015 |
Depreciation |
1,15,000.00 |
|||||
|
To accumulated depreciation-equipment |
1,15,000.00 |
Value of the equipment |
6,15,000.00 |
||||
|
(being the depreciation on equipment) |
|||||||
|
30-06-2016 |
Depreciation |
1,15,000.00 |
|||||
|
To accumulated depreciation-equipment |
1,15,000.00 |
Value of the equipment |
5,00,000.00 |
||||
|
(being the depreciation on equipment) |
|||||||
|
01-07-2016 |
Revaluation loss |
1,00,000.00 |
|||||
|
To equipment |
1,00,000.00 |
Value of the equipment |
4,00,000.00 |
||||
|
(being revaluation loss on equipment) |
|||||||
|
30-09-2016 |
Depreciation |
18,000.00 |
|||||
|
To accumulated depreciation-equipment |
18,000.00 |
Value of the equipment |
3,82,000.00 |
||||
|
(being the depreciation on equipment) |
|||||||
|
30-09-2016 |
Bank |
3,90,000.00 |
|||||
|
To equipment |
3,82,000.00 |
||||||
|
To profit on sales of equipment |
8,000.00 |
||||||
|
(being sale of equipment) |
(IAS plus, 2016).
5:
|
|
Carrying values |
|
Recoverable value |
||
|
Assets |
Cinema |
DVD sales |
Cinema |
DVD sales |
|
|
Cash |
5,000.00 |
12,000.00 |
|||
|
Inventory |
4,000.00 |
85,000.00 |
|||
|
Furniture and fixtures, net of depreciation |
2,05,000.00 |
25,000.00 |
|||
|
Electrical equipment, net of depreciation |
1,10,000.00 |
10,000.00 |
|||
|
Land and buildings, net of depreciation |
6,25,000.00 |
1,79,000.00 |
|||
|
License |
25,000.00 |
– |
|||
|
Goodwill |
45,000.00 |
15,000.00 |
|||
|
Total |
10,19,000.00 |
3,26,000.00 |
9,00,000.00 |
3,18,000.00 |
|
|
Value in use |
9,00,000.00 |
2,90,000.00 |
|||
|
Recoverable amount is higher of fair value less selling costs and value in use |
|||||
|
So, higher of 900000,290000 and 780000,318000 |
|
Assets |
Cinema |
Impairment |
Recoverable value |
|
|
Cash |
5,000.00 |
– |
5,000.00 |
No change |
|
Inventory |
4,000.00 |
– |
4,000.00 |
No change |
|
Furniture and fixtures, net of depreciation |
2,05,000.00 |
1,301.59 |
2,06,301.59 |
Impairment profit |
|
Electrical equipment, net of depreciation |
1,10,000.00 |
698.41 |
1,10,698.41 |
Impairment profit |
|
Land and buildings, net of depreciation |
6,25,000.00 |
75,000.00 |
5,50,000.00 |
Impairment loss |
|
License |
25,000.00 |
1,000.00 |
24,000.00 |
Impairment loss |
|
Goodwill |
45,000.00 |
45,000.00 |
– |
Impairment loss |
|
Total |
10,19,000.00 |
1,19,000.00 |
9,00,000.00 |
|
|
Value to be reduced |
3,17,000.00 |
|||
|
0.65 |
2,05,000.00 |
2,06,301.59 |
||
|
0.35 |
1,10,000.00 |
1,10,698.41 |
||
|
3,15,000.00 |
3,17,000.00 |
|
Assets |
DVD Sales |
Impairment |
Recoverable value |
|
|
Cash |
12,000.00 |
– |
12,000.00 |
No change |
|
Inventory |
85,000.00 |
– |
85,000.00 |
No change |
|
Furniture and fixtures, net of depreciation |
25,000.00 |
– |
25,000.00 |
No change |
|
Electrical equipment, net of depreciation |
10,000.00 |
– |
10,000.00 |
No change |
|
Land and buildings, net of depreciation |
1,79,000.00 |
4,000.00 |
1,75,000.00 |
Impairment loss |
|
License |
– |
– |
– |
No change |
|
Goodwill |
15,000.00 |
4,000.00 |
11,000.00 |
Impairment loss |
|
Total |
3,26,000.00 |
8,000.00 |
3,18,000.00 |
|
Journal entry: |
||
|
Impairment loss |
1,29,000.00 |
|
|
Land and buildings |
79,000.00 |
|
|
License |
1,000.00 |
|
|
Goodwill |
49,000.00 |
|
|
Furniture and fixtures |
1,301.59 |
|
|
Electrical equipment |
698.41 |
|
|
Impairment loss |
2,000.00 |
(IAS plus, 2016).
References:
Accounting-simplified.com. (2016). Accounting for Issue of Ordinary Shares. [online] Available at: https://accounting-simplified.com/financial/share-capital/ordinary-issue.html [Accessed 18 Sep. 2016].
Iasplus.com. (2016). IAS 16 — Property, Plant and Equipment. [online] Available at: https://www.iasplus.com/en/standards/ias/ias16 [Accessed 18 Sep. 2016].
Iasplus.com. (2016). IAS 36 — Impairment of Assets. [online] Available at: https://www.iasplus.com/en/standards/ias/ias36 [Accessed 18 Sep. 2016].
Profile, (2010). Calculation of Deferred Tax Asset – Others – Accounts. [online] CAclubindia. Available at: https://www.caclubindia.com/forum/calculation-of-deferred-tax-asset-99743.asp [Accessed 18 Sep. 2016].