Capital structure and Finance cost

Capital (generate wealth in a company)

 Debt
 Equity
Share Capital
Reserve

Capital structure?

Financial Capital types

 Ordinary (equity) share capital under the heading of equity,Statement of changes din
equity

 Loan Notes: Debt statement of financial position as a liability, interest payment: Finance cost
statement of profit & Loss, Deduction from profit

 Preference shares: these can be either debt or equity

 If company has an obligation to repay the preference shareholder (redeemable) then this
is a debt. Liabilities, dividend given them as a finance cost.

 Irredeemable preference shares: Equity

1. Ordinary share capital

Nominal /par value

Market value

 ISSUED SHARE CAPITAL

 CALLED UP CAPITAL
 PAID UP CAPITAL

ISSUED SHARE CAPITAL

CALLED UP

PAID UP CAPITAL
ACCOUNTING FOR THE ISSUE OF SHARES

If a company were to issue shares at their nominal value the double entry to
record the raising of finance would be:
Dr Cash (issue price x no of shares)
Cr Share Capital (Nominal value x no of shares)
In reality companies issue shares above their nominal value. Shares issued at
premium.
Dr Cash (issue price x no of shares)
Cr Share Capital (Nominal vale x no of shares)
Cr.Share Premium (difference between the issue price and nominal value x no
of shares)
Equity section
Q.Boubon Co issued 200,000 25cshares at a price $1.75 each.
Ledger transaction

Cash 3,50,000 (200000 x 1.75)

Share Capital 50,000 (200,000 x 0.25)
Share premium 300,000 (3,50,000-50,000)
Ledger:cash,share capital,share premium
Q.Ittehad chemical issues 100 shares with nominal value of Rs 10 at
Rs.25/share. Journalize the entry and prepare ledgers.
Cash 2500
Share Capital 1000
Share premium 1500

Cash

Share capital/ share premium 2500

Share capital

Cash 1000

Share Premium

Cash 1500

Right Issues the offer of new shares to existing shareholders in proportion to their existing
shareholding at a stated price normally below the market value

Same way as a normal issue

BONUS ISSUE:ISSUE OF NEW SHARES TO EXISTING SHAREHOLDERS IN PROPORTION TO

THEIR EXISTING SHAREHOLDING.NO CASH IS RECEIVED IN BONUS ISSUE.

Dr Share premium/other serve

Share capital
Q GKL

CASH 25,000

SHARE CAPITAL 10,000 (fv* no of share)

SHARE PREMIUM 15,000

For every four shares held,a new share is issued.

How many share issued? 20,000/4 =5000 new shares

Share premium 2500(5000 x .50)

Share capital 2500

Statement of financial position

Share capital=10,000 +2500 =12,500

Share premium =15,000-2500 =12,500

RIT CO

RIGHT ISSUE 200,000 /5 X 2=80,000 NEW SAHRES

DIVIDENDS

Distribution of profit to S/H

% OF THE NOMIAL VALUE

RS 10 NV,10 % DIVIDEND EVERY SHAREHOLDER WILL GET RS 1 AS DIVIDEND

ORDINARY DIVIDEND

ANNUAL DIVIDEND

INTERMIN DIVIDEND

DR RETAINED EARNING

CR BANK

LOAN NOTES ( LOAN STOCK)

100,000 5 %

Accounting entries
First company receiving finance

Dr cash 100,000

Non current liability 100,000

Finance charge (interest)

Dr financial charges 5000

Cr cash 5000