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					                                                      CHAPTER 6
ALTERATION OF SHARE CAPITAL
Contents
                                                                                               Page
Overview                                                                                        86
Conversion of shares                                                                            86
   Example 1 Converting shares into a smaller or larger number                                  86
Reducing share capital                                                                          87
   Question: Theory – need for accounting entries (6.1)                                         87
   Questions: Converting share capital into a smaller or larger number of shares (6.2 – 6.4)    87
   Question: Reducing uncalled capital (6.5)                                                    88
   Self-assessment question 6A                                                                  89
   Example 2 Writing off lost capital                                                           89
   Questions: Reduction of share capital – writing off lost capital (6.6 – 6.7)                 90
   Self-assessment question 6B                                                                  90
Asset impairment                                                                                91
   Example 3 Writing off lost capital and impairment of assets                                  91
   Questions: Reduction of share capital – writing off lost capital (6.8 – 6.15)                92
   Self-assessment question 6C                                                                  96
   Example 4 Returning paid-up capital to shareholders                                          97
   Questions: Returning paid-up capital to shareholders (6.16 – 6.18)                           97
   Self-assessment question 6D                                                                  98
Share buy-backs                                                                                 99
   Example 5 Share buy-back                                                                     99
   Questions: Share buy-backs (6.19 – 6.22)                                                    100
   Self-assessment question 6E                                                                 101
   Share buy-backs – recent trends                                                             101
   Questions: Share buy-backs (6.23 – 6.24)                                                    101
Redeemable preference shares                                                                   102
   Example 6 Redemption out of profits                                                         103
   Example 7 Redemption out of the proceeds of a fresh issue                                   104
   Questions: Redemption of redeemable preference shares (6.25 – 6.27)                         105
   Self-assessment question 6F                                                                 106
   Questions: Issue of bonus shares (6.28 – 6.30)                                              106
   Self-assessment question 6G                                                                 107
Comprehensive questions                                                                        108
   Questions (6.31 – 6.38)                                                                     108
   Self-assessment question 6H                                                                 113
86   Company Accounting




     Overview
     A company may alter its share capital in a number of ways. The alteration may involve a decrease in the
     paid-up capital of the company. This reduction could occur as a result of a capital reduction or share
     buy-back. There are restrictions contained in the Corporations Act 2001 (ss 256B and 256C) in regard to
     these type of alterations.
     The alteration may not affect paid-up capital. Under s 254H a company may, by passing a resolution in
     a general meeting, convert its shares into a larger or smaller number of shares. Under s 254G a company
     may convert an ordinary share into a preference share or a preference share into an ordinary share.
     All material in this chapter assumes that all obligations set down in the Corporations Act 2001 have
     been met.


     Conversion of shares

      EXAMPLE 1 Converting shares into a smaller or larger number
      Flintstone Ltd had the following capital structure:
      Number of shares              Description             Issue price   Amount uncalled   Paid-up share capital
                                                                 $               $                      $
           20 000         Ordinary shares                      5.00             Nil                  100 000
           20 000         ‘A’ preference shares                2.00            0.70                   26 000
           20 000         ‘B’ preference shares                5.00             Nil                  100 000
                                                                                                     226 000


      Approval is gained at a meeting of Flintstone Ltd for the following alterations:
          subdivide the ordinary shares so that their issue price is equivalent to $0.50;
          subdivide ‘A’ preference shares so that their issue price is equivalent to $1.00; and
          consolidate ‘B’ preference shares so that their issue price is equivalent to $10.00.

      Solution
      No journal entries are necessary as paid-up capital remains the same figure. After the reorganisation
      the share capital is:
           Number                                           Issue price      Amount                  Paid-up
          of shares                 Description              equivalent      uncalled              share capital
                                                                $                $                      $
           200 000        Ordinary shares                     0.50              Nil                  100 000
             40 000       ‘A’ preference shares               1.00             0.35                    26 000
             10 000       ‘B’ preference shares              10.00              Nil                  100 000
                                                                                                     226 000
                                                                                     Ch 6: Alteration of Share Capital   87



Reducing share capital
A company may reduce its share capital by reducing uncalled capital: s 256B(1). For example 40 000
shares with an issue price of $1 paid to $0.50 may be reduced to 40 000 shares of $0.50 fully paid. There
is no change in paid-up capital and no accounting entries are required. Accounting entries are required
however if share capital is to be written off because it is lost or if paid-up capital is to be returned to
shareholders.

You should now answer questions 6.1 – 6.5 and self-assessment question 6A.

Questions

Theory – need for accounting entries (6.1)
6.1
Assuming that all necessary authorisations and requirements have been met, indicate whether a journal entry
is required in the following unrelated share capital changes:
                                                                                                        YES/NO
 1.    Alter share capital from 10 000 shares issued fully paid for $2 to 20 000 shares fully paid
       for $1.
 2.    Alter share capital from 16 000 shares issued fully paid for $1 to 8 000 shares fully paid
       for $2.
 3.    The company has approval to reduce the uncalled capital of $0.20 per share on 10 000
       ordinary shares with an original issue price of $1.
 4.    The issued capital consists of 100 000 ordinary shares with an issue price of $10 paid to
       $5 and the members have approved of the subdivision of all of these into 1 000 000
       shares with an issue price of $1 paid to $0.50.
 5.    The reduction in issued and paid-up capital from 200 000 shares fully paid to $2
       to 200 000 shares fully paid to $1.
 6.    The company has approval to convert 10 000 5% preference shares fully paid with an
       issue price of $1 to 10 000 ordinary shares fully paid with an issue price of $1.

Converting share capital into a smaller or larger number of shares (6.2 – 6.4)
6.2
The statement of shareholders’ equity shows:
Issued and paid-up capital                                                                                      $
    30 000 ‘A’ ordinary shares fully paid with an issue price of $10                                         300 000
    100 000 ‘B’ ordinary shares with an issue price of $2 paid to $1                                         100 000
                                                                                                             400 000
At a general meeting the shareholders resolved:
1. to subdivide the ‘A’ ordinary shares into $1 shares fully paid; and
2. to subdivide the ‘B’ ordinary shares into $1 shares paid to $0.50.
Required:
(a) restate the statement of shareholders’ equity to reflect the resolution; and
(b) show the general journal entries (if any) to effect the changes.
88   Company Accounting



     6.3
     Mir Ltd had the following capital structure:
                                                                                                        Paid-up share
         Number of shares               Description                Issue price    Amount uncalled          capital
                                                                           $              $                  $
              15 000         Ordinary shares                              5.00           Nil                75 000
              15 000         ‘A’ preference shares                        4.00           1.60               36 000
              15 000         ‘B’ preference shares                        2.00           Nil                30 000
                                                                                                           141 000


     Mir Ltd gains approval to:
           subdivide the ordinary shares so that their issue price is equivalent to $1;
           subdivide the ‘A’ preference shares so that their issue price is equivalent to $2; and
           consolidate the ‘B’ preference shares so that their issue price is equivalent to $5.
     Required:
     (a) restate the capital structure to reflect the alterations; and
     (b) show the general journal entries (if any) to effect the changes.
     6.4
     Hubble Ltd has the following capital structure:
     Share capital                                                                                                   $
        50 000 ‘A’ ordinary shares with an issue price $2.50 paid to $2                                          100 000
        200 000 ‘B’ ordinary shares issued for $2.50 each fully paid                                             500 000
        200 000 9% preference shares issued for $1 each fully paid                                               200 000

     After complying with all necessary obligations the company resolved to:
           split the ordinary shares on the basis of five shares for every one share;
           convert the ‘B’ ordinary shares on the basis of one share for every four shares held; and
           convert the preference shares into ‘C’ ordinary shares on a one-for-one basis.
     Required:         Restate the share capital to comply with the resolution.

     Reducing uncalled capital (6.5)
     6.5
     The statement of shareholders’ equity shows:
     Issued and paid-up capital                                                                                      $
         50 000 ordinary shares with an issue price of $1 paid to $0.60                                           30 000

     The company is to reduce its capital to 50 000 $0.80 shares paid to $0.60.

     Required:
     (a) restate the statement of shareholders’ equity to reflect the reduction; and
     (b) show the general journal entries (if any) to effect the change.
                                                                                  Ch 6: Alteration of Share Capital   89



Self-assessment Question 6A                                                        (answer in Chapter 15)
Assuming that all necessary authorisations and requirements have been met, indicate whether a journal entry
is required for the following unrelated share capital changes:
                                                                                                 YES/NO
 1.    Alter share capital from 15 000 shares issued fully paid for $1.50 to 30 000 shares fully
       paid for $0.75.
 2.    The company has approval to cancel the uncalled capital on 25 000 shares with an
       issue price of $1 paid to $0.75.
 3.    The company has approval to convert 20 000 6% preference shares fully paid with an
       issue price of $2 to 40 000 ordinary shares with an issue price of $1.
 4.    The company has approval to reduce paid-up capital from 400 000 shares fully paid with
       an issue price of $1.50 to 400 000 shares fully paid to $1.
 5.    The company has approval to consolidate 1 000 000 fully paid ordinary shares of $1
       into 200 000 fully paid ordinary shares of $5.


 EXAMPLE 2 Writing off lost capital
                                            Statement of Shareholders’ Equity
                                                                                                               $
 20 000 ordinary shares with an issue price of $1.50 fully paid                                            30 000
 Retained earnings (Accumulated losses)                                                                   (10 000)
 Shareholders’ equity                                                                                      20 000

 The company decides to reduce its paid-up share capital to 20 000 shares of $1 each fully paid and to
 use the amount made available to write off accumulated losses.
 Required:
 (a) prepare the necessary general journal entries; and
 (b) restate the statement of shareholders’ equity after the reduction.
 Solution
 (a)                                                     General Journal
                                            Details                                      Debit          Credit
                                                                                           $               $
 Share capital                                                                           10 000
    Capital reduction                                                                                   10 000
 Reduction of issue price of 20 000 shares from $1.50 each to $1
 Capital reduction                                                                       10 000
     Retained earnings/accumulated losses                                                               10 000
 Writing off debit balance of retained earnings

 (b)                                          Statement of Shareholders’ Equity
                                                                                                               $
 20 000 ordinary shares with an issue price of $1 fully paid                                               20 000
 Shareholders’ equity                                                                                      20 000


You should now answer questions 6.6, 6.7 and self-assessment question 6B.
90   Company Accounting



     Questions

     Reduction of share capital – writing off lost capital (6.6 – 6.7)
     6.6    Writing off lost share capital
     The statement of shareholders’ equity shows:
     Issued and paid-up capital                                                                            $
         150 000 ordinary shares with an issue price of $5 fully paid                                    750 000
     Retained earnings (Accumulated losses)                                                             (150 000)
     Shareholders’ equity                                                                                600 000
     The company is to reduce its issued and paid-up capital to 150 000 $4 ordinary shares fully paid and use the
     amount made available by the reduction to write off accumulated losses.

     Required:
     (a) prepare the necessary general journal entries; and
     (b) restate the statement of shareholders’ equity to include the reduction.
     6.7
     The statement of shareholders’ equity shows:
     Issued and paid-up capital                                                                             $
         10 000 ordinary shares with an issue price of $1 fully paid                                      10 000
     Retained earnings (Accumulated losses)                                                               (2 500)
     Shareholders’ equity                                                                                  7 500

     The company decides to reduce its paid-up share capital to 7 500 ordinary shares of $1 each and use the
     amount made available by the reduction to write off accumulated losses.

     Required:
     (a) prepare the necessary journal entries; and
     (b) restate the statement of shareholders’ equity after the reduction.

     Self-assessment Question 6B                                                      (answer in Chapter 15)
     The statement of shareholders’ equity shows:
     Issued and paid-up capital                                                                             $
         500 000 ordinary shares with an issue price of $6 fully paid                                   3 000 000
     Retained earnings (accumulated losses)                                                            (1 500 000)
     Shareholders’ equity                                                                               1 500 000

     The company is to reduce its issued and paid-up capital to 250 000 ordinary shares fully paid at $6 each and
     use the amount made available by the reduction to write off accumulated losses.

     Required:
     (a) prepare the necessary general journal entries; and
     (b) restate the statement of shareholders’ equity to include the reduction.
                                                                             Ch 6: Alteration of Share Capital   91



Asset impairment
Where an asset’s recoverable amount is less than the carrying amount then the carrying amount must be
reduced to the recoverable amount. This reduction is known as an impairment loss (AASB 136).
Note that for goodwill on acquisition and other intangible assets with an indefinite useful life the
impairment test must be performed annually. For other assets AASB 136 requires that at each reporting
date the entity assesses whether there are any indications that an asset may be impaired.
The accounting entries are for an item of property, plant and equipment valued at cost with accumulated
depreciation:
         Dr    Impairment loss                                         XXX (then to Profit and loss)
         Cr        Accumulated depreciation and impairment loss                                XXX
For reversal of impairment losses see AASB 136.


 EXAMPLE 3 Writing off lost capital and impairment of assets
 An extract from the balance sheet of Murphy Ltd discloses:

 Non-current assets                                                                                      $
   Machinery                                                                          400 000        300 000
   Less Accumulated depreciation                                                      100 000
     Goodwill on acquisition                                                                         100 000
                                                                                                     400 000
 Shareholders’ equity
    40 000 ordinary shares with an issue price of $8 fully paid                                      320 000
    Retained earnings (accumulated losses)                                                           (40 000)
                                                                                                     280 000

 The company decides to make a pro-rata reduction of the number of shares on issue to:
      write off accumulated losses;
      impair goodwill so that its value is nil; and
      write down machinery to its recoverable amount of $240 000.
 Required:
 (a) general journal entries to effect the reduction; and
 (b) restate the statement of shareholders’ equity.
92   Company Accounting




      Solution
      (a)                                                       General Journal
                                                Details                                     Debit        Credit
                                                                                              $            $
      Impairment loss – goodwill on acquisition                                            100 000
      Impairment loss – machinery                                                           60 000
          Goodwill on acquisition                                                                       100 000
          Accumulated depreciation and impairment loss machinery                                         60 000
      Write-down of assets
      Profit and loss *                                                                    160 000
          Impairment loss – goodwill on acquisition                                                     100 000
          Impairment loss – machinery                                                                    60 000
      Balances transferred
      Retained earnings/accumulated losses                                                 160 000
         Profit and loss                                                                                160 000
      Transfer of loss on asset impairment
      Share capital                                                                        200 000
         Capital reduction                                                                              200 000
      Cancelling lost capital as per capital reduction scheme
      Capital reduction                                                                    200 000
          Retained earnings/accumulated losses                                                          200 000
      Balance transferred
      * Write-downs must go through profit and loss account. See AASB 136 (para 60).

       (b)                                            Statement of Shareholders’ Equity
                                                                                                               $
      15 000 ordinary shares of $8 fully paid                                                             120 000


     You should now answer questions 6.8 – 6.15 and self-assessment question 6C.

     Questions

     Reduction of share capital – writing off lost capital (6.8 – 6.15)
     6.8
     The share capital and reserves of Munster Ltd as at 30 June 20X5:
     Issued and paid-up capital                                                                                $
         119 000 ordinary shares with an issue price of $2 paid to $1.50                                  178 500
     Less Retained earnings (accumulated losses )                                                         (18 800)
     Shareholders’ equity                                                                                 159 700
     The following scheme for reconstruction was proposed and subsequently approved:
     (i) the issued shares to be reduced to shares of $1.50 each paid to $1; and
     (ii) any surplus is to be used to write off accumulated losses and thereafter any balance is to be applied in
          the impairment of goodwill.
     Required:
     (a) journal entries to record the above; and
     (b) a statement of shareholders’ equity after the reconstruction.
                                                                                Ch 6: Alteration of Share Capital   93



6.9
An extract from the balance sheet of Apollo Ltd shows:
Non-current assets                                                                                        $
   Land                                                                                            10 000 000
Shareholders’ equity
   5 000 000 ordinary shares with an issue price of $1 fully paid                                   5 000 000
   Retained earnings (Accumulated losses)                                                            (100 000)
                                                                                                    4 900 000
The company decides to make a pro-rata reduction of paid-up share capital to:
    write off accumulated losses; and
    write down the value of land to its recoverable amount of $9 100 000.
Required:
(a) journal entries to effect the reduction; and
(b) restate the statement of shareholders’ equity after the reduction.
6.10
An extract from the balance sheet of Discovery Ltd shows:
Non-current assets                                                                                        $
   Plant and equipment                                                                  200 000       150 000
   Less Accumulated depreciation                                                         50 000
   Goodwill on acquisition                                                                             50 000
                                                                                                      200 000
Shareholders’ equity
   40 000 ordinary shares with an issue price of $4 fully paid                                        160 000
   Retained earnings (Accumulated losses)                                                             (20 000)
                                                                                                      140 000
The company decides to make a pro-rata reduction of the number of shares on issue to:
    write off accumulated losses;
    impair goodwill so that its values is nil; and
    write down plant and equipment to its recoverable amount of $120 000.
Required:
(a) journal entries to effect the reduction; and
(b) restate the statement of shareholders’ equity.
94   Company Accounting



     6.11
                                                            Qaint Ltd
                                       Statement of Shareholders’ Equity as at 30 June 20X8
     Issued and paid-up capital                                                                               $
         7 500 preference shares with an issue price of $1 paid to $0.75                                     5 625
         20 000 ordinary shares with an issue price of $1 paid to $0.80                                     16 000
                                                                                                            21 625
     Retained earning (Accumulated losses)                                                                  (9 000)
     Shareholders’ equity                                                                                   12 625

     Due to the trading losses it was decided to obtain the appropriate approvals and to reorganise the capital
     structure to give the following result:
                                                           Qaint Ltd
                                      Statement of Shareholders’ Equity after reorganisation
     Issued and paid-up capital                                                                               $
         7 500 preference shares of $0.25 paid to $0.20                                                       1 500
         20 000 ordinary shares of $0.25 paid to $0.25                                                        5 000
     Shareholders’ equity                                                                                     6 500

     The amounts made available by the reconstruction were used to:
     (a) impair goodwill; and
     (b) write off the balance of accumulated losses.
     Required:      General journal entries to give effect to this reorganisation as at 30 June 20X8.
     6.12
     The following information is taken from the books of Brownedoff Ltd:
     Issued capital                                                                                           $
         50 000 10% preference shares of $2 fully paid                                                     100 000
         780 000 ordinary shares of $0.50 fully paid                                                       390 000
     Share capital                                                                                         490 000
     Retained earnings (Accumulated losses)                                                                (58 000)
                                                                                                           432 000
     Non-current assets
        Plant and machinery                                                                      192 000
        Preliminary expenses                                                                       8 000   200 000
     Current assets                                                                                        232 000
                                                                                                           432 000

     The company has experienced a period of unsuccessful trading and the necessary legal formalities are
     completed to carry out the following scheme:
     (a) consolidate the $0.50 ordinary shares into shares of $1 each and reduce the paid portion of each share
         to $0.80;
     (b) divide the $2 preference shares into shares of $1 each, fully paid; and
     (c) use the amount made available by the reduction of capital to write off the accumulated losses, impair
         preliminary expenses so that the balance is nil and reduce the balance on the plant and machinery
         account to its recoverable amount of $180 000.
     Required:    Prepare:
     (a) journal entries that may be necessary to carry out the above matters; and
     (b) a statement of shareholders’ equity after the reconstruction.
                                                                                  Ch 6: Alteration of Share Capital   95



6.13
The balance sheet of Wren Ltd as at 30 June 20X0 disclosed the following:
Issued capital                                                                                              $
    18 000 ordinary ‘A’ shares with an issue price of $1 paid to $0.75                                    13 500
    20 000 ordinary ‘B’ shares with an issue price of $1 paid to $0.75                                    15 000
Paid-up capital                                                                                           28 500
Retained earnings (Accumulated losses)                                                                    (4 000)
Shareholders’ equity                                                                                      24 500

For some time the company has been suffering trade reverses, and it was decided to reorganise its capital
structure as follows:
(a) the amount of $0.25 per share to be written off the paid-up capital on both ordinary ‘A’ and ordinary ‘B’
      shares;
(b) all issued shares to be subdivided into shares of $0.25 each fully paid; and
(c) the amount made available by the capital reduction to be used:
      (i) in writing off the accumulated losses;
      (ii) impairment of plant by $1 200; and
      (iii) impairing goodwill to the extent of the surplus still remaining.
Required:
(a) show journal entries that may be needed to carry out the above; and
(b) prepare a statement of shareholders’ equity at the completion of (a).
6.14
An extract from the records of Sour Ltd shows the following:
                                            Statement of Shareholders’ Equity
Issued capital                                                                                             $
    1 000 000 9% fully paid preference shares with an issue price of $1                               1 000 000
    10 000 000 ‘A’ ordinary shares with an issue price of $1 fully paid                              10 000 000
Paid-up capital                                                                                      11 000 000
Retained earnings (accumulated losses)                                                               (4 250 000)
Total shareholders’ equity                                                                            6 750 000

The shareholders of Sour Ltd have agreed to the following scheme of reorganisation and all legal formalities
have been completed.
The scheme provides for:
1. unissued shares are to be reduced to a nominal value of 50 cents each;
2. issued preference shares are to have a nominal value of 50 cents each paid to 25 cents;
3. issued ordinary shares are to have a nominal value of 50 cents each paid to 25 cents; and
4. the proceeds of the capital reduction are to be applied to extinguishing accumulated losses and impairing
     goodwill.
Required:     Prepare:
(a) entries in general journal form, where required, to reflect the scheme; and
(b) a statement of shareholders’ equity on completion of the above changes.
6.15
The statement of shareholders’ equity shows:
Issued and paid-up capital                                                                                  $
    60 000 preference shares with an issue price of $2 paid to $1.50                                      90 000
    200 000 ordinary shares with an issue price of $1 fully paid                                         200 000
96   Company Accounting



                                                                                                          290 000
     Reserves
        General reserve                                                                                    50 000
     Retained earnings (Accumulated losses)                                                               (75 000)
     Shareholders’ equity                                                                                 265 000

     The company is to reorganise its capital structure as follows:
     (a) An amount of $0.50 per share is to be written off the paid-up preference capital. The uncalled preference
          capital is to be cancelled and the shares reduced to $1 each.
     (b) An amount of $0.20 per share is to be written off the paid-up capital of the ordinary shares. The ordinary
          shares are to be $0.80 per share fully paid.
     (c) The general reserve account is to be cancelled.
     (d) The amount made available by the reorganisation is to be used in:
          (i) writing off accumulated losses;
          (ii) reducing plant and machinery by $5 000 to its recoverable amount; and
          (iii) impairing goodwill to the extent of the surplus still remaining.
     Required:    Prepare:
     (a) general journal entries to effect the reorganisation; and
     (b) a revised statement of shareholders’ equity.

     Self-assessment Question 6C                                                        (answer in Chapter 15)
     The statement of shareholders’ equity shows:
     Issued and paid-up capital                                                                              $
         380 000 preference shares with an issue price of $5 fully paid                                  1 900 000
         600 000 ordinary shares with an issue price of $2 paid to $1.60                                   960 000
                                                                                                         2 860 000
     Reserves
        Asset revaluation reserve                                                                          150 000
     Retained earnings (Accumulated losses)                                                               (590 000)
     Share capital and reserves                                                                          2 420 000

     The company is to reorganise its capital structure as follows:
     (a) an amount of $1 per share is to be written off the paid-up preference capital;
     (b) the preference shares are to be reduced to $4 fully paid;
     (c) an amount of $0.40 per share is to be written off the paid-up ordinary capital;
     (d) the ordinary shares are to be reduced to $1.20 fully paid;
     (e) the asset revaluation reserve account is to be cancelled; and
     (f) the amount made available by the reorganisation is to be used to:
          (i) write off accumulated losses;
          (ii) impair plant and machinery by $140 000 down to its recoverable amount (ignore tax effect); and
          (iii) impair goodwill down to the extent of the surplus still remaining.
     Required:    Prepare:
     (a) general journal entries (where required) to effect the reorganisation; and
     (b) a revised statement of shareholders’ equity.
                                                                                  Ch 6: Alteration of Share Capital   97




 EXAMPLE 4 Returning paid-up capital to shareholders
                                             Statement of Shareholders’ Equity
                                                                                                              $
 800 000 ordinary shares with an issue price of $2 fully paid                                           1 600 000
 The company is to reduce the shares to $1 each fully paid and return the surplus funds to shareholders.
 Solution
 The journal entries necessary to effect the reduction are:
                                           Details                                     Debit           Credit
                                                                                         $                $
 Share capital                                                                        800 000
    Shareholders’ distribution                                                                         800 000
 Reduction of $1 per share on 800 000 shares
 Shareholders’ distribution                                                           800 000
    Bank                                                                                               800 000
 Return of capital to shareholders


You should now answer questions 6.16 – 6.18 and self-assessment question 6D.

Questions

Returning paid-up capital to shareholders (6.16 – 6.18)
6.16    Returning paid-up capital
                                             Statement of Shareholders’ Equity
Issued and paid-up capital                                                                                    $
    500 000 ordinary shares with an issue price of $1 fully paid                                         500 000

The company is to reduce the shares to $0.50 each fully paid and return the surplus funds to shareholders.

Required:
(a) prepare the necessary general journal entries; and
(b) restate the statement of shareholders’ equity.
6.17
Python Ltd discloses:
                                             Statement of Shareholders’ Equity
                                                                                                              $
140 000 ordinary shares with an issue price of $2 fully paid                                             280 000

The company is to reduce the shares to $1.20 each fully paid and return the surplus funds to shareholders.

Required:
(a) prepare the necessary journal entries; and
(b) restate the statement of shareholders’ equity.
98   Company Accounting



     6.18
     The statement of shareholders’ equity shows:
     Issued and paid-up capital                                                                                    $
         140 000 ‘A’ ordinary shares with an issue price of $2 paid to $1.40                                   196 000
         140 000 ‘B’ ordinary shares with an issue price of $2 paid to $1.30                                   182 000
                                                                                                               378 000
     Retained earnings                                                                                         206 000
     Shareholders’ equity                                                                                      584 000

     The company is to reorganise its capital structure and return some funds to shareholders. Details are:
     (i) return $0.40 per share to ‘A’ ordinary shareholders and $0.30 per share to ‘B’ ordinary shareholders;
     (ii) cancel the uncalled capital for both classes of shares (all shares to be $1 fully paid); and
     (iii) transfer $40 000 from retained earnings to general reserve.
     Required:    Prepare:
     (a) general journal entries (where required) to reflect the reorganisation; and
     (b) a revised statement of shareholders’ equity.

     Self-assessment Question 6D                                                         (answer in Chapter 15)
     The statement of shareholders’ equity shows:
     Issued and paid-up capital                                                                                   $
         200 000 preference shares of $1.50 fully paid                                                          300 000
         400 000 ordinary shares of $2 paid to $1.75                                                            700 000
     Paid-up capital                                                                                          1 000 000
     Reserves
         General reserve                                                                                       100 000
     Retained earnings                                                                                         220 000
     Shareholders’ equity                                                                                     1 320 000

     The company is to reorganise its capital structure and return some funds to shareholders. Details are:
     (a) return $0.50 per share to preference shareholders;
     (b) return $0.75 per share to ordinary shareholders;
     (c) return the general reserve to ordinary shareholders;
     (d) all issued shares to be subdivided into $0.50 share fully paid; and
     (e) transfer $120 000 from retained earnings to dividend equalisation reserve.
     Required:    Prepare:
     (a) general journal entries (where required) to reflect the reorganisation; and
     (b) a revised statement of shareholders’ equity.
                                                                                Ch 6: Alteration of Share Capital   99



Share buy-backs
There are a number of circumstances contained in the Corporations Act 2001 where a company can buy
back its own shares from shareholders. The circumstances are described in the various subsections of
s 257. Section 257A(a) stipulates that the company may buy back its own shares as long as the buy-back
does not materially prejudice the company’s ability to pay its creditors. The main problem arises when
the shares are purchased at a price different to issue price. The equity of the company must be reduced
by the purchase price of the shares (and any associated costs) according to a decision made by the
Accounting Urgent Issues Group in Abstract 22 of November 1998. Note that the exact equity accounts
were not stipulated.


 EXAMPLE 5 Share buy-back
                                            Statement of Shareholders’ Equity
                                                                                                            $
 Issued and paid-up capital
     80 000 ordinary shares with an issue price of $1 fully paid                                         80 000
 Reserves
     General reserve                                                                                      5 000
 Retained earnings                                                                                       10 000
 Shareholders’ equity                                                                                    95 000

 Required:       Prepare general journal entries to record a share buy-back of 8 000 shares under the
                 following unrelated conditions (adjust general reserve first for any buy-back premium or
                 discount):
 (a) at a premium of $0.20 per share, that is, $1.20 per share; and
 (b) at a discount of $0.10 per share, that is, $0.90 per share.
 Solution
                                                      General Journal
                                                                                      Debit           Credit
                                                                                        $               $
 (a)    Share capital                                                                   8 000
        General reserve                                                                 1 600
           Bank                                                                                        9 600
        Buy-back of 8 000 shares @$1.20 each
 (b)    Share capital                                                                   8 000
           General reserve                                                                               800
           Bank                                                                                        7 200
        Buy-back of 8 000 shares @ $0.90 each


You should now answer questions 6.19 – 6.22 and self-assessment question 6E.
100 Company Accounting



    Questions

    Share buy-backs (6.19 – 6.22)
    6.19 Introduces share buy-backs
    The statement of shareholders’ equity shows:
    Issued and paid-up capital                                                                                 $
        940 080 ordinary shares with an issue price of $0.50 fully paid                                     470 040

    Required:   Show the general journal entries required for the following unrelated buy-back arrangements:
    (a) the company buys back from shareholders 10% of its issued shares at the issue price of $0.50;
    (b) the company buys back an odd lot total of 80 shares on the stock exchange at the issue price of $0.50.
    6.20
    The statement of shareholders’ equity shows:
    Issued and paid-up capital                                                                                 $
        25 000 ordinary shares with an issue price of $1 fully paid                                          25 000
    Retained earnings                                                                                        18 000
    Shareholders’ equity                                                                                     43 000

    Required:       Prepare the general journal entry to record the buy-back of 2 500 shares at $1.80 per share.
    6.21
    The statement of shareholders’ equity shows:
    Issued and paid-up capital                                                                                 $
        60 000 ordinary shares with an issue price of $1 fully paid                                          60 000
    Reserves
        General reserve                                                                                       3 000
    Retained earnings                                                                                        85 000
    Shareholders’ equity                                                                                    148 000

    6 000 shares are bought back at $2.20 per share. Costs incurred totalled $2 000.

    Required:    Prepare:
    (a) the general journal entry to record the buy-back (any buy-back premium or discount is adjusted first
        against general reserve); and
    (b) a statement of shareholders’ equity after the buy-back.
    6.22
    The statement of shareholders’ equity shows:
    Issued and paid-up capital                                                                                 $
        45 000 ordinary shares with an issue price of $2 fully paid                                           90 000
    Reserves
        General reserve                                                                                       10 000
    Retained earnings                                                                                         80 000
    Shareholders’ equity                                                                                    180 000

    Required:      Prepare the general journal entry to record a share buy-back of 4 000 shares under the following
                   unrelated conditions (adjust general reserve first for any buy-back premium or discount):
    (a)   at a premium of $0.15 per share (that is, $2.15 per share);
    (b)   at a discount of $0.08 per share (that is, $1.92 per share).
                                                                                    Ch 6: Alteration of Share Capital   101



Self-assessment Question 6E                                                          (answer in Chapter 15)
The statement of shareholders’ equity shows:
Issued and paid-up capital                                                                     $               $
    900 000 ordinary shares with an issue price of $1 fully paid                                           900 000
Reserves                                                                                                    50 000
    General reserve                                                                          50 000
Retained earnings                                                                                          140 000
Shareholders’ equity                                                                                      1 090 000

90 000 shares are bought back at $1.80 per share. Costs incurred totalled $4 000.

Required:
(a) the general journal entry to record the buy-back (any buy-back premium or discount is adjusted first
    against general reserve); and
(b) a statement of shareholders’ equity after the buy-back.

Share buy-backs – recent trends
Recently some large companies including Telstra and Westpac have given their shareholders the
opportunity to sell their shares back to the company.
The company stated the total number of shares it was prepared to buy back. Shareholders were sent a
buy-back tender document. This document allowed shareholders to tender (offer) a price at which they
would be prepared to sell their shares back to the company.
The offer document set out a number of prices, within a specified range. The buy-back price was the
lowest price within the specified range at which there were sufficient offers from shareholders for the
company to purchase the number of shares it required. Generally, successful shareholder offers were
those at or below the buy-back price.
This buy-back procedure allowed shareholders to choose whether or not to make an offer. If they did
make a successful offer, the buy-back price included a capital component and a dividend component.
You should now answer questions 6.23 and 6.24.

Questions

Share buy-backs (6.23 – 6.24)
6.23
The statement of shareholders’ equity shows:
Issued and paid-up capital                                                                                     $
    1 500 000 ordinary shares with an issue price of $1 fully paid                                        1 500 000
Retained earnings                                                                                           475 000
Shareholders’ equity                                                                                      1 975 000

150 000 shares are bought back at $1.90 per share. Of the $1.90, $1.00 is classified as a capital component
and $0.90 a dividend component.

Required:
(a) general journal entries to record the buy-back; and
(b) a statement of shareholders’ equity after the buy-back.
102 Company Accounting



    6.24
    The statement of shareholders equity shows:
    Issued and paid-up capital                                                                            $
        3 000 000 ordinary shares with an issue price of $1.50 fully paid                             4 500 000
    Retained earnings                                                                                 1 870 000
    Shareholders’ equity                                                                              6 370 000

    300 000 shares are bought back at $4.15 per share. Of the $4.15, $1.50 is classified as a capital component
    and $2.65 a dividend component.

    Required:
    (a) general journal entries to record the buy-back; and
    (b) a statement of shareholders’ equity after the buy-back.


    Redeemable preference shares
    Redeemable preference shares are a class of shares that can be issued under s 254A of the Corporations
    Act. The issue of the shares is as per the procedures set down in Chapter 2. A redeemable preference
    share is a share that may be bought back by the company. Other characteristics apply.
    In some cases a redeemable preference share will be classified as a liability (and repaid as such) and not
    classified as equity.
    If a company has issued fully paid redeemable preference shares classified as equity they may be
    redeemed:
    (a) out of profits otherwise available for dividend distribution:
        (i) at issue price; or
        (ii) at a premium on issue price;
    (b) out of the proceeds of a fresh issue of shares:
        (i) at issue price; or
        (ii) at a premium on issue price.
    Note that the redemption must be in accordance with the terms of the issue. On redemption the shares
    are cancelled.
                                                                                               Ch 6: Alteration of Share Capital   103




EXAMPLE 6 Redemption out of profits
A company has on issue 200 000 redeemable preference shares fully paid with an issue price of $1.
Show the general journal entries for their redemption out of profits in the following unrelated
circumstances:
(a) at issue price; and
(b) at a premium of $0.10 per share, that is, $1.10 per share.
Solution
                                                      General Journal
                                                                                                      Debit          Credit
                                                                                                          $             $
(a)    Share capital – preference shares                                                            200 000
           Shareholders’ redemption                                                                                 200 000
       Redemption of redeemable preference shares
       Retained earnings*                                                                           200 000
           Share capital – ordinary                                                                                 200 000
       Transfer to protect total capital
       Shareholders’ redemption                                                                     200 000
           Bank                                                                                                     200 000
       Payment of redemption
(b)    At a premium of $0.10 per share:
       Share capital – preference shares                                                            200 000
           Shareholders’ redemption                                                                                 200 000
       Redemption of redeemable preference shares
       Retained earnings                                                                              20 000
          Shareholders’ redemption                                                                                   20 000
       Premium on redemption
       Shareholders’ redemption                                                                     220 000
          Bank                                                                                                      220 000
       Payment to shareholders
       Retained earnings *                                                                          200 000
          Share capital – ordinary                                                                                  200 000
       Transfer to protect total capital
      * Note the transfer out of retained earnings to share capital in order to maintain total capital.
104 Company Accounting




     EXAMPLE 7 Redemption out of the proceeds of a fresh issue
     A company has on issue 300 000 redeemable preference shares fully paid at issue price of $2.
     Show the general journal entries for the redemption out of the proceeds of a fresh issue of ordinary
     shares in the following unrelated circumstances:
     (a) at issue price; and
     (b) at a premium of $0.05 per share.
     Solution
                                                    General Journal
                                                                                      Debit         Credit
                                                                                        $              $
     (a)    Trust bank                                                               600 000
                Application                                                                         600 000
            Receipt of application moneys
            Application                                                              600 000
                Share capital – ordinary                                                            600 000
            Issue of ordinary shares
            General bank                                                             600 000
                Trust bank                                                                          600 000
            Balance transferred
            Share capital – preference shares                                        600 000
                Shareholders’ redemption                                                            600 000
            Redemption of redeemable preference shares
            Shareholders’ redemption                                                 600 000
                General bank                                                                        600 000
            Payment to shareholders
     (b)    At a premium of $0.05 per share:
            Trust bank                                                               600 000
                Application                                                                         600 000
            Receipt of application moneys
            Application                                                              600 000
                Share capital – ordinary                                                            600 000
            Issue of ordinary shares
            General bank                                                             600 000
                Trust bank                                                                          600 000
            Balance transferred
            Share capital – preference shares                                        600 000
               Shareholders’ redemption                                                             600 000
            Redemption of redeemable preference shares
            Retained earnings                                                         15 000
               Shareholders’ redemption                                                              15 000
            Premium on redemption
            Shareholders’ redemption                                                 615 000
               General bank                                                                         615 000
            Payment to preference shareholders
                                                                                     Ch 6: Alteration of Share Capital   105



You should now answer questions 6.25 – 6.27 and self-assessment question 6F, then questions 6.28 –
6.30 and self-assessment question 6G, then questions 6.31 – 6.38 and self-assessment question 6H.

Questions

Redemption of redeemable preference shares (6.25 – 6.27)
6.25 Introduces redemption of redeemable preference shares at par or at a premium
(i) out of profits otherwise available for dividends; and
(ii) out of the proceeds of a fresh issue of shares to existing shareholders.
Required:     Prepare entries, in general journal form, to record:
(a) The redemption of 100 000 fully paid redeemable 9% preference shares with an issue price of $1 out of
    profits otherwise available for dividends.
(b) Wot Ltd issued 50 000 ordinary shares with an issue price of $1 payable fully on application for the
    purpose of redeeming 50 000 fully paid redeemable preference shares with an issue price of $1.
(c) The redemption of 250 000 fully paid redeemable 9% preference shares with an issue price of $0.50 out
    of profits otherwise available for dividends.
(d) Knot Ltd issued 100 000 ordinary shares with an issue price of $1 payable fully on application for the
    purpose of redeeming, at a premium of 20%, 100 000 fully paid redeemable preference shares, issue
    price $1.
(e) The redemption out of profits otherwise available for dividends of 100 000 fully paid preference shares
    with an issue price of $2 at a premium of 5%.
6.26
                                                      Galiant Ltd
                                     Extract from Balance Sheet as at 30 June 20X7
                                           Statement of Shareholders’ Equity
                                                                                                                $
40 000 fully paid 9% redeemable preference shares with an issue price of $1                                   40 000
General reserve                                                                                               20 000
On 1 July 20X7 the directors resolve to redeem the preference shares.
The redemption is to be financed by the issue to existing shareholders of 40 000 ordinary shares at an issue
price of $1. A premium of 10% is payable on redemption and is to be provided for out of general reserve.

Required:      Prepare entries, in general journal form, to record the redemption.
6.27   Introduces restatement of share capital and reserves after redemption of redeemable
       preference shares
The statement of shareholders’ equity shows:
Issued and paid-up capital                                                                                      $
    500 000 ordinary shares fully paid with an issue price of $1                                            500 000
    200 000 redeemable preference shares fully paid with an issue price of $2                               400 000
Reserves
    General reserve                                                                                         120 000
Retained earnings                                                                                         1 230 000
Shareholders’ equity                                                                                      2 250 000

The directors resolve to redeem out of profits the redeemable preference shares at a premium of 5%. The
premium is to be provided for out of general reserve.

Required:    Prepare:
(a) general journal entries to record the redemption; and
106 Company Accounting



    (b)   a statement of shareholders’ equity after the redemption has been completed.

    Self-assessment Question 6F                                                          (answer in Chapter 15)
    The statement of shareholders’ equity shows:
    Issued and paid-up capital                                                                                  $
        3 600 000 ordinary shares fully paid with an issue price of $0.50                                  1 800 000
        300 000 redeemable preference shares fully paid with an issue price of $1                            300 000
    Reserves
        General reserve                                                                                      80 000
    Retained earnings                                                                                       290 000
    Shareholders’ equity                                                                                   2 470 000

    The directors resolve to issue to existing shareholders 600 000 fully paid ordinary shares with an issue price of
    $0.50 and to use the proceeds to redeem the redeemable preference shares at a premium of 10%. The
    premium is to be provided for out of general reserve.

    Required:    Prepare:
    (a) general journal entries to record the share issue and redemption; and
    (b) a statement of shareholders’ equity after the redemption has been completed.

    Questions

    Issue of bonus shares (6.28 – 6.30)
    6.28
    A company has on issue 200 000 ordinary shares fully paid with an issue price of $1. The directors resolve to
    make a bonus issue of one share for every four held using funds held in asset revaluation reserve.

    Required:       Prepare the general journal entry for the bonus issue.
    6.29
    The statement of shareholders’ equity shows:
    Issued and paid-up capital                                                                                    $
        1 000 000 ordinary shares fully paid with an issue price of $0.50                                    500 000
    Reserves
        Asset revaluation reserve                                                                            230 000
    Retained earnings                                                                                        190 000
    Shareholders’ equity                                                                                     920 000

    The directors resolve to make a one-for-five bonus issue using the funds held in asset revaluation reserve.

    Required:
    (a) general journal entry to make the bonus issue; and
    (b) restate the statement of shareholders’ equity at the completion of the bonus issue.
    6.30
    The statement of shareholders’ equity shows:
    Issued and paid-up capital                                                                                  $
        600 000 ordinary shares fully paid with an issue price of $2                                       1 200 000
                                                                                  Ch 6: Alteration of Share Capital   107



Retained earnings                                                                                        540 000
Shareholders’ equity                                                                                    1 740 000

The directors resolve to revalue land and buildings upwards by $500 000 and make a one-for-six bonus issue
using the proceeds of the revaluation (ignore any tax effect).

Required:
(a) general journal entries for the revaluation and the bonus issue; and
(b) restate the statement of shareholders’ equity at the completion of the bonus issue.

Self-assessment Question 6G                                                        (answer in Chapter 15)
The statement of shareholders’ equity shows:
Issued and paid-up capital                                                                                   $
    200 000 ordinary shares fully paid with an issue price of $1                                         200 000
    100 000 redeemable preference shares fully paid with an issue price of $1                            100 000
Reserves
    General reserve                                                                                       80 000
Retained earnings                                                                                        270 000
Shareholders’ equity                                                                                     650 000

The directors resolve to:
1. revalue land and buildings upwards by $80 000 (ignore any tax effect);
2. make a one-for-four bonus issue to ordinary shareholders using the proceeds of the asset revaluation;
     and
3. redeem the redeemable preference shares at par out of profits.
Required:
(a) prepare general journal entries to give effect to the above; and
(b) restate the statement of shareholders’ equity at the completion of the above changes.


Comprehensive questions
Questions

6.31
The statement of shareholders’ equity shows:
Issued and paid-up capital                                                                                   $
    800 000 ordinary shares fully paid with an issue price of $0.50                                       400 000
    150 000 redeemable preference shares fully paid with an issue price of $1                             150 000
Reserves                                                                                                  120 000
    General reserve                                                                       120 000
Retained earnings                                                                                         340 000
Shareholders’ equity                                                                                    1 010 000

The company is to:
1. buy back 60 000 ordinary shares at a price of $1.20 per share (after adjusting general reserve for any
     buy-back premium); and
2. redeem the redeemable preference shares out of profits otherwise available for dividends at a premium
     of 5%.
108 Company Accounting



    Required:
    (a) prepare general journal entries to give effect to the above; and
    (b) restate the statement of shareholders’ equity after completion of the above changes.
    6.32
    An extract from the records of National Ltd shows the following:
                                                Statement of Shareholders’ Equity
    Issued capital                                                                                          $
        1 000 000 12% redeemable preference shares with an issue price of $1                            1 000 000
        3 000 000 ‘A’ ordinary shares fully paid with an issue price of $1                              3 000 000
        2 000 000 ‘B’ ordinary shares with an issue price of $1 called to $0.75 each                    1 500 000
    Paid-up capital                                                                                     5 500 000
    Retained earnings                                                                                   2 400 000
    Total shareholders’ equity                                                                          7 900 000

    Required:
    (a) Prepare entries in general journal form, where required, to reflect the following:
        (i) the redemption of the redeemable preference shares, out of profits, at a premium of 5%;
        (ii) the cancellation of the outstanding liability on all issued ordinary shares;
        (iii) the reduction of all ordinary shares to a nominal value of $0.75 per share and the return of any
              excess capital contribution to the shareholders;
        (iv) the consolidation of the ‘A’ and ‘B’ ordinary shares into one class of ordinary share;
        (v) the revaluation of land and buildings by an increase of $500 000 (ignore tax effect); and
        (vi) a bonus issue, utilising the asset revaluation reserve, of one ordinary share with an issue price of
              $0.75 for each ten ordinary shares held.
    (b) Prepare a statement of shareholders’ equity on completion of the above changes.
    6.33
    An extract from the records of Artline Ltd shows the following:
                                                Statement of Shareholders’ Equity
    Issued capital                                                                                          $
        300 000 9% fully paid redeemable preference shares with an issue price of $2                     600 000
        500 000 9% redeemable preference shares with issue price of $2 called to $1.75 each              875 000
        2 000 000 ‘A’ ordinary shares with an issue price of $1 fully paid                             2 000 000
        2 000 000 ‘B’ ordinary shares with an issue price of $1 called to $0.75 each                   1 500 000
    Paid-up capital                                                                                    4 975 000
    Retained earnings                                                                                  1 050 000
    Total shareholders’ equity                                                                         6 025 000

    Required:
    (a) Prepare entries in general journal form, where required, to reflect the following:
        (i) the redemption of the preference shares capable of redemption, out of profits, at a premium of 5%;
        (ii) cancel the outstanding liability on all issued ordinary shares;
        (iii) reduce all ordinary shares to a nominal value of $0.75 per share and return any excess to
              shareholders;
        (iv) consolidate the ‘A’ and ‘B’ ordinary shares into one class of ordinary share;
        (v) revalue land and buildings by an increase of $750 000 (ignore any tax effect); and
        (vi) make a bonus issue, utilising the asset revaluation reserve, of one ordinary share with an issue
              price of $0.75 for each five ordinary shares held.
    (b) Prepare a statement of shareholders’ equity on completion of the above changes.
                                                                                          Ch 6: Alteration of Share Capital   109



6.34
An extract from the records of Campbell Ltd discloses:
                                           Statement of Shareholders’ Equity
Issued and paid-up capital                                                                                           $
    1 500 000 ordinary shares with an issue price of $1 called to $0.75 each                                   1 125 000
    300 000 redeemable preference shares with an issue price of $1 fully paid                                    300 000
Paid-up capital                                                                                                1 425 000
Retained earnings                                                                                                538 000
Total shareholders’ equity                                                                                     1 963 000

Required:
(a) Prepare entries in general journal form (narrations not necessary), where required, to reflect the
    following:
    (i) the redeemable preference shares to be redeemed out of profits, otherwise available for dividend
          distribution, at a premium of 10%;
    (ii) the issued ordinary shares to be reduced to $0.75 shares fully paid;
    (iii) revalue land and buildings by an increase of $600 000 (ignore any tax effect);
    (iv) make a bonus issue of ONE (1) fully paid share for every FIVE (5) held (1 for 5) using the land and
          buildings revaluation;
    (v) transfer $65 000 representing net profit after tax from profit and loss account to retained earnings;
          and
    (vi) set aside $0.05 per share for a proposed dividend on all issued shares. This dividend is not subject
          to further approval.
    Note Your answer must clearly indicate if a journal entry is not required.
(b) Prepare statement of shareholders’ equity on completion of the above changes.
6.35
An extract from the records of Lineart Ltd shows the following:
                                           Statement of Shareholders’ Equity
Issued and paid-up capital                                                                                           $
    630 000 9% fully paid redeemable preference shares with an issue price of $2                               1 260 000
    1 000 000 9% redeemable preference shares with an issue price of $2 called to $1.75                        1 750 000
    4 000 000 ‘A’ ordinary shares fully paid with an issue price of $1                                         4 000 000
    4 000 000 ‘B’ ordinary shares with an issue price of $1 called to $0.75 each                               3 000 000
Paid-up capital                                                                                               10 010 000
Retained earnings                                                                                              2 100 000
Shareholders’ equity                                                                                          12 110 000

Required:
(a) Prepare entries in general journal form, where required, to reflect the following:
    (i) cancel the outstanding liability on all issued ordinary shares;
    (ii) reduce all ordinary shares to a nominal value of $0.75 per share and return any excess to
          shareholders;
    (iii) revalue land and buildings by an increase of $1 500 000 (ignore any tax effect);
    (iv) consolidate the ‘A’ and ‘B’ ordinary shares into one class of ordinary share;
    (v) make a bonus issue using the asset revaluation reserve of one ordinary share with an issue price of
          $0.75 for each five ordinary shares held; and
    (vi) the redemption of the preference shares capable of redemption at a premium of 5% out of the
          proceeds of a fresh issue of shares; 1 400 000 ordinary shares are issued to existing members at an
          issue price of $0.90 per share.
(b) Prepare a statement of shareholders’ equity on completion of the above changes.
110 Company Accounting



    6.36
    From the following information you are required to:
    (a) submit a revised statement of shareholders’ equity of Ruby Grace Co Ltd; and
    (b) state the balance only of cash on hand, after taking the following transactions into account:
         (i) the redeemable preference shares are to be redeemed out of profits, otherwise available for
               dividend distribution, at a premium of 10%;
         (ii) the 12% debentures are to be redeemed at face value;
         (iii) the issued ordinary shares are to be reduced to $0.75 shares fully paid; and
         (iv) land and buildings are to be revalued to $1 200 000 (ignore any tax effect). A bonus issue of one
               fully paid ordinary share for every five held (1 for 5) is to be made out of the proceeds of revaluation.
         Note You may assume all the necessary legal requirements and obligations have been met.
    The balance sheet of Ruby Grace Co Ltd prior to alteration disclosed:
                                                       Ruby Grace Co Ltd
                                                 Balance Sheet as at 30 June 20X1
                                                                                       $            $             $
     Current assets
        Cash at bank                                                                             700 000
        Accounts receivable                                                                      420 000
        Inventory                                                                                350 000
        Total current assets                                                                                 1 470 000
     Non-current assets
        Land and buildings                                                                       600 000
        Plant and machinery                                                         220 000
        Less Accumulated depreciation                                                44 000      176 000
        Total non-current assets                                                                               776 000
     Total assets                                                                                            2 246 000
     Current liabilities
         Accounts payable                                                                        100 000
         Total current liabilities                                                                             100 000
     Non-current liabilities
         12% Debentures due for redemption 30.6.20X5                                             300 000
         Total non-current liabilities                                                                         300 000
     Total liabilities                                                                                         400 000
     Net assets                                                                                              1 846 000
     Shareholders’ equity
     Issued and paid-up capital
         1 500 000 ordinary shares with issue price of $1 called to $0.75 each                  1 125 000
         200 000 redeemable preference shares with issue price of $1 fully paid                   200 000
     Total paid-up capital                                                                                   1 325 000
     Reserves
         General reserve                                                                         350 000
     Total reserves                                                                                            350 000
         Retained earnings                                                                                     171 000
     Total shareholders’ equity                                                                              1 846 000

    6.37
    The statement of shareholders’ equity shows:
    Issued capital                                                                                                $
        4 000 000 ordinary shares with issue price of $1 called to $0.80                                     3 200 000
                                                                                      Ch 6: Alteration of Share Capital   111



   1 000 000 5% fully paid redeemable preference shares with issue price of $1                             1 000 000
Paid-up capital                                                                                            4 200 000
Retained earnings (accumulated losses)                                                                      (950 000)
Shareholders’ equity                                                                                       3 250 000

(a)   You are required to show all entries in general journal form to show the effect of the following:
      (i) reduce the ordinary shares to $0.50 fully paid;
      (ii) impair (write off) preliminary expenses $140 000 to the capital reduction;
      (iii) write off accumulated losses to the extent available in capital reduction; and
      (iv) redeem the redeemable preference shares at face value out of the proceeds of a fresh issue of
            shares. 2 000 000 ordinary shares with an issue price of $0.50 are issued to existing shareholders
            fully paid on application.
(b)   Prepare a statement of shareholders’ equity on completion of the above changes.
6.38
An extract of the balance sheet of Network Ltd as at 30 June 20X2 disclosed:
Issued capital                                                                                   $               $
    400 000 13% redeemable preference shares with issue price of $1 each fully paid                          400 000
    2 000 000 ‘A’ ordinary shares fully paid with issue price of $1                                        2 000 000
    800 000 ‘B’ ordinary shares with issue price of $1 called to $0.80 each                                  640 000
Paid-up capital                                                                                            3 040 000
Reserves
    Dividend equalisation reserve                                                             700 000
    General reserve                                                                         1 440 000      2 140 000
Retained earnings                                                                                            500 000
Total shareholders’ equity                                                                                 5 680 000
Non-current liabilities
   Creditors and borrowings
   16% debenture stock (due for redemption at face value on 30.6.20X6)                                       600 000

Required:
(a) Prepare entries in general journal form to reflect the following reorganisation and restructuring of the
    company (your answer must clearly show if no entry is required):
    (i) redeem the existing 16% debenture stock which are currently listed on the stock exchange at 95;
    (ii) redeem the 13% redeemable preference shares out of available profits at a premium of 10% (the
          premium on redemption is available from the general reserve account);
    (iii) impair (write off) the balance of preliminary expenses $30 000;
    (iv) cancel the uncalled liability on the ‘B’ ordinary shares;
    (v) return $0.20 per share to the holders of ‘A’ ordinary shares; and
    (vi) consolidate the ‘A’ and ‘B’ ordinary shares into one class of ordinary share.
(b) Prepare a statement of shareholders’ equity on completion of the above changes.

Self-assessment Question 6H                                                            (answer in Chapter 15)
An extract from the records of D Last Ltd discloses:
                                            Statement of Shareholders’ Equity
Issued capital                                                                                                   $
    3 400 000 ordinary shares with an issue price of $1 called to $0.75 each                                2 550 000
    500 000 $1 redeemable preference shares fully paid                                                        500 000
Paid-up capital                                                                                             3 050 000
112 Company Accounting



    Retained earnings                                                                                     900 000
    Shareholders’ equity                                                                                3 950 000

    Required:
    (a) Prepare entries in general journal form (narrations not necessary), where required, to reflect the
        following:
        (i) reduce the ordinary shares to $0.50 each fully paid and return the excess to shareholders;
        (ii) the redeemable preference shares to be redeemed out of profits at a premium of 5%;
        (iii) revalue land and buildings by an increase of $800 000 (ignore any tax effect);
        (iv) make a bonus issue of one fully paid ordinary share with an issue price of $0.50 for every four held
              (1 for 4) using the land and buildings revaluation;
        (v) transfer $150 000 representing net profit after tax from profit and loss account to retained earnings;
              and
        (vi) set aside $0.05 per share for a proposed dividend on all issued shares. This dividend is not subject
              to further approval.
    (b) Prepare a statement of shareholders’ equity on completion of the above changes.

				
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posted:11/26/2011
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