1.1.1.1.

Calculation of the value of SR

Knowing new shares issued can be subscribed by both the new and the old shareholder, the value
of SR can be calculated from the point of view of an old shareholder and form the point of view
of a new shareholder.
1.1.1.1.1. The value of SR from old shareholder point of view
Because the mathematical value after the increase of capital (Mv2) is lesser than the mathematical
value before the increase of capital (Mv1). The SR from the point of view of the old shareholder
the loss recorded as a result of the reduction in MV caused by the increase of capital. It is calculated
as follows: SR = Mv1 – Mv2
With MV2 obtained with the help of the following table:

Elements Quantities Unit price Amount

Value before the increase N1 Mv1 A1

Value of the increase N’ IP A’

Value after the increase N2 Mv2 A2

With A2 = A1 + A’; N2 = N1+ N’; Mv2 = A2 / N2

Knowing that A’ = N’xIP and A1 = N1 x Mv1, A2 = N1 x Mv1 + N’xIP

N1 xMv1 + N ' xIP

Thus Mv2 =
N1 + N '

We can recall that SR = Mv1 – Mv2; Using the above formula of Mv2, we have:

N1 xMv1 + N ' xIP

SR = Mv1 − by developing this, another formula for SR in point of view of the
N1 + N '
N'
old shareholder can be giving by: SR = (Mv1 − IP)
N1 + N '

1.1.1.1.2. The value of SR from new shareholder point of view

Knowing that the number of new share to subscribe is determined by using the subscription ratio
multiply by the number of old shares, the new shareholder has no old shares. Thus, to him, SR is
what will be spend to buy a right. To know it, the analysis is done as follows:
 ➢ Purchase of the subscription right (SR); if the subscription ration (R) is:
𝑁′
𝑅= ; this means that N subscription rights are needed to subscribe N’ new shares;
𝑁

therefore, the expenditure for the subscription right is: N x SR

➢ Purchase of the new shares: IP x N’
➢ Total expenditure: (N x SR) + (IP x N’)
This expenditure will give the new shareholder right to the net wealth after the increase of capital
where his shareholding will be measured in term of N’ x Mv2.
Hence:
(N x SR) + (IP x N’) = Mv2 x N’
N x SR = (Mv2 x N’) – (IP x N’)
N x SR = N’(Mv2 – IP)
N' N'
Thus: SR = ( Mv2 − IP) with being the subscription ratio (R)
N N
1.1.1.1.3. Maximum and minimum SR
The amount of the SR is highly dependable of that of the issue price. It increases when the IP
moves closer to the NV and decreases when the IP moves closer to the MV. Therefore:
➢ the maximum SR is obtained when the IP is equal to the NV
➢ the minimum is obtained when the IP is equal to the MV thus Min SR = 0
1.1.1.1.4. Application

Camfaith Plc., constituted with a capital of 10 000 000F divided into shares of 10 000F each
decided to issue 200 new shares on the 1/1/2018. At the issue price of 15 000F. The mathematical
value before the increase is 18000F.
Work required
a. Calculate the MV after the increase of capital
b. Calculate the SR in point of view of:
➢ Old shareholder
➢ New shareholder
c. Calculate the maximum SR
Solution

1.1.2. Accounting entry for increase of capital through cash contribution

The recording diagram followed during increase of capital through contribution in cash is as
follows:

a. Recording of the subscription to new shares

Debit: Credit
4732 with the amount of issue price 4615with the amount of issue price
b. Recoding of the acknowledgement of the increase
Debit: Credit:
4615 with the amount of issue price 1013 with the amount of capital added

1051 with the amount of issue premium

c. Recording of transfer of funds in company’s account

Debit: Credit:
5…. With total amount received (IP) 4732 With total amount received (IP)

d. Recording of expenses incurred if any

Debit: Credit:
6…… with the amount of expenses 5….total paid out
4…… with the correspondent amount

Illustration: Maigod Plc with a capital divided into shares of 10000F decided to issue 5000 new
shares at the price of 15 000f. All the new capital was called at the subscription. By the 15/03/2020,
the Notary designated to act on behalf of the company received all the new subscriptions. The
increase is acknowledged on the 17/03 and on the 20/03, all the funds received by the notary were
transfer in company’s bank account opened at bicec.
Required: make the necessary accounting entries.
Solution
 1.2.Increase of capital through contributions in kind
1.2.1. Some particularities of the increase of capital through contributions in kind
• contributions in kind refer to fixed assets, inventories and receivables. these are
undividable like cash contributions;
• contributions in kind are fully paid up at subscription;
• the initial capital should not necessarily be fully paid at the time of the increase of the
capital through contributions in kind;
• no subscription rights exist for old shareholders because the new shares are always issued
at the value of the existing shares. any excess above the nominal value of share obviously
represents the issue premium;
• the contributions are valued by a registered auditor;
• exchange balance might arise from the transaction. an exchange balance is the difference
between the value of the contribution and the subscribed capital issue prime inclusive. this
exchange balance can be paid by the shareholder or been paid to latter by the issuing
company.
1.2.2. Accounting entries of the increase of capital through contributions in kind

a. Recording of the subscription to new shares

Debit: Credit:
4615 with the amount of issue price 1013 with the amount of capital added

1051 with the amount of issue premium

b. Recording of transfer of ownership to the company

Debit: Credit:
2,3,4…. With the respective net amount 4615 With total value (IP)

1.2.3. Illustration
To increase its capital, a Company whit share capital of 40 000 000 CFAF (divided into shares of
10 000 CFAF each) receives from its shareholder Peter a delivery van amounted to 28 000 000
CFAF as a net contribution in kind. This contribution was valued by a registered auditor. The MV
of this company by the date of issue of new shares was 14000CFA
work required
a. Calculate the number of new shares to be given to Peter knowing that the Issue price is
equal to the mathematical value.
b. Calculate the global issue premium
c. Calculate the amount of the increase of the capital
d. Show the accounting entries of the increase of capital.
e. It is assumed that the mathematical value before the increase was 12 000 CFAF. Answer
all the questions a to d.
Solution