Chapter 4 The Writing Process
3. WHAT IS A THESIS STATEMENT?
1. Open a redeemable preference share account and credit it with the preference shares to be redeemed .i.e: -
Dr Cr
Preference shares account XX
Redeemable preference shares account XX
This entry will not be required where the preference shares is stated as redeemable preference shares. Here the amount standing to the credit of redeemable preference shares is brought forward e.g.
N100 8% redeemable preference shares to be redeemed by A ltd; from the amount of N2000 standing to the credit of 8% redeemable preference shares. The ledger entries for this are shown below: -
8% Redeemable pref shares
Pref share N b/f 2000
Redemption Account 100
2. Open a premium on redemption of preference shares account (if the preference shares are to be redeemed at a premium) and credit it with the premium. Debit share premium account.
Dr Cr
Share premium Account XX
Premium on redemption of pref shares XX
(With provision for premium on redemption out of share premium account)
3. Open a preference shares redemption account and close the entries in the redeemable preference shares account, and the premium on redemption of preference shares account by Debiting them and crediting the preference shares redemption account:
Dr Cr
Redeemable pref shares XX Premium on redemption of pref shares XX
Pre shares redemption account XX
4. Open an application and allotment account if shares are to be issued for the purpose of redeeming the preference shares. Debit App &All otment account and credit share capital account (with nominal value) share premium account (with the premium on the shares issued)
Dr Cr
Application and Allotment Account XX
Share capital account XX
Share premium account (if any) XX
Example: To assist in financing the redemption of a redeemable preference shares.
A limited issue 100 ordinary shares of N1,00 each, at a premium of 10k (The entries are:
Dr Cr
Application and Allotment Account 110
Share capital Account 100
Share premium Account 10
5. Debit can with the proceeds from the issue of shares and credit the Application and Allotment account.
Dr Cr
Cash/Bank XX
Application & Allotment XX
6. Debit the preference shares redemption account with cash sufficient to close the account (Mominal value of pref shares and premium). Credit cash/Bank Account.
7. Open a capital redemption reserve fund and transfer from accumulated profit an equivalent amount relating to the nominal value of the shares redeemed to the account. This is applicable where shares are redeemed out of profit.
Dr Cr
Profit and loss XX
Capital redemption reserve fund XX
Example 2
Part of the share capital of P Ltd. consisted of 600,000 8% Redeemable preference shares of N1,00 per share fully paid. The company decided to exercise its rights and redeemed 200,000 of these shares at a premium of 40k per share. To assist in financing the redemption, P Ltd issued a further 120,000 ordinary shares of N1,00 per share at a premium of 20k per share.
Prior to the above events, the balance standing to the credit of the company’s ordinary share capital, share premium and unappriopriated profits accounts were N900,000, N26,000 and N400,000 respectively. You are required to post the relevant accounts (excluding Bank) in P limited’s ledger to record these transactions.
Solution to Example 2
Dr % Redeemable Preference shares Cr
N N
Preference share Bal b/d 600,000
Redemption account 200,000
Balance C/D 400,000 ______
600,000 600,000
Balance b/f 400,000
Dr Premium on Redemption of Pref Shares Cr
N N
Pref share redemption Share premium 50,000
Account 80,000 P & Account 30,000
80,000 80,000
Dr Pref shares redemption Account Cr
N N
8% Red pref shares 200,000
Bank 280,000 Premium on redemption
______ Of pref shares 80,000
280,000 280,000
Dr Ordinary share capital Cr
N N
b/f 900,000
Balance c/d ________ App & All 120,000
1,020,000 1,020,000
Balance b/d 1,020,000
Dr Profit & Loss A/c Cr
N N
Premium on redemption Balance b/d 400,000
of pref shares 30,000 Capital Red Reserve
Fund 80,000
Balance c/f 290,000 ______
400,000 400,000
Balance b/f 290,000
Dr Share premium Cr
N N
Premium on red b/f 26,000
Emption of pref shares 50,000 App & All 24,000
50,000 50,000
Dr APPLICATION AND ALLOTMENT ACCOUNT Cr
N N
Share capital 120,000 Bank 144,000
Share premium 24,000 _______
144,000 Bank 114,000
Capital Redemption Reserve fund N
Profit and Loss 80,000
The balance sheet extract is shown below: - Balance sheet Extract
Share capital N
Ordinary shares of N1.00 each 1,020,000
8% Red pref shares of N1,00 each 400,000
1,420,000 Reserves:
Capital Redemption Reserve Found 80,000
Profit and loss Account 290,000 370,000
1,790,000 4.0 CONCLUSION
The unit discusses the forfeiture of shares, redemption of ordinary share and redemption of redeemable preference shares.
5.0 SUMMARY
Adequate knowledge of the treatment of forfeiture share and redemption are pertinent to the principle of accounting.
6.0 TUTOR MARKED ASSIGNMENT Question 1
The Statement of Financial Position of B Limited at December 31st 2007 was as follows:
B Limited
Statement of Financial Position as at 31st Dec 2007 Authorized & Issued capital: N N
45,000 6% Pref shares of Sundry Assets 60,000
N1,000 each fully paid 45,000 20,000 ordinary shares
Of N1.00 each fully Bank 40,000
Paid 20,000
Profit and loss 20,000
Liabilities 15,000 _______
100,000 100,000
By the terms of their issue the preference shares were redeemable at a premium of 4% on the following Jan 1st 1988 and it was decided to arrange this as far as possible out of the company’s resources subject to leaving a balance of N8000 to the credit of the profit and loss
account. It was also decided to raise the balance of money required by the issue of a sufficient number of ordinary shares at a premium of 30k per share.
Show the necessary journal entries and ledger accounts giving effect to the transactions and the statement of financial position thereafter.
2. The Goodness Company Ltd advertised an issue of 750,000 12% preference shares of N1 each to be issued at N1.50 per share. Applications for 1,370,000 shares were received with the correct application money for 30k per share, 70k per share (including premium) was due on allotment while 25k per share was due on each of the remaining two calls. All amounts due were received. Application money for 120,000 shares was refunded to unsuccessful applicants and the remaining applications were allotted shares on a pro-rata basis.
You are required to:
(a) Open all necessary ledger accounts and post the above transactions.
(b) Calculate the number of shares issued to Musa, Obi and Alakija who applied for 275,000; 180,000 and 50,000 shares respectively and were among the successful applicants.
3. Iwarere Ltd has a nominal capital of N40,000 divided into 40,000 ordinary shares of N1 each. The whole of the capital has been issued at par on the following terms.
Payable on Application 12½k per share Payable on Allotment 12½k per share
First Call 50k per share
Second Call 25k per share
The calls have been made and paid in full by the members with the exception of S. Ajao who has failed to pay the first and second calls on 400 shares allotted to him. On January 1st, the directors resolved to forfeit the shares.
Required
Show the journal and ledger entries recording the forfeiture, the Ordinary Share Capital Account, the Call Accounts and Forfeited Share Account, and show how the above items will appear in a Statement of Financial Position prepared immediately after the forfeiture.
7.0 REFERENCES/FURTHER READING
Akeju, J. B. (2011) “Financial Accounting for Beginners, JBA Associate Ltd, Shomolu Lagos.
Anao, A.R. (2009) “An Introduction to Financial Accounting” Longman Nigeria Plc, Ikeja, Lagos. 2nd Edition.
Igben, R.O. (2009) “Financial Accounting Made Simple, Vol. 2, ROI Publishers, Isolo, Lagos. 3rd Edition
Institute of Chartered Accountant of Nigeria, Financial Accounting, Study Pack Lagos.
The Institute of Cost Accountants of India (2013), Financial Accounting, Intermediate Study note, CMA Bhawan, 12, Sudder Street, Kolkata - 700 016
Ishola, K. A. (2012) “Foundation in Accounting for Tertiary Institutions (In compliance with the Requirements of International Financial Reporting Standards)”, Lavgark (Nigeria Publishers) Limited, Ilorin.
Jennings, A. R., (2001), Financial Accounting, London, Letts Educational
Wood, F. and Horner D. (2010), Business Accounting Basics, Pearson Education Limited, Edinburgh Gate Harlow, England
Salawu, R.O. (2017) “Financial Accounting for the Professionals”, OAU Press Limited, Ile- Ife.
Siyanbola, T.T. (2015) “Advanced Financial Accounting (IFRS Compliant)”, Gastos Consults Educational Publisher, Lagos.
UNIT 4: AMALGAMATION AND ABSORPTIONS