HI5020 Corporate Accounting

Session 3c
Share Capital & Reserves
 Session Objectives

•Forfeited shares (journals)

•Journals for rights issues and options
•Share split and issue of bonus shares
•Reserves, Asset Revaluation and General
•Provide the journal entries to account for distributions
•Journal entries for preference shares to be redeemed
 Forfeited Shares (cont.)
We will concentrate on the refund method as it is much
more common and more complex.
Tarago Ltd, a listed company allocates 5 million shares for
a price of $2.20. The amount was to be partly paid to $1.50
per share on application, and the balance on call on 1/5/15.
Shareholders holding 4.95 million shares pay the balance.
The remaining 50,000 unpaid on call, the directors decide
to reissue on 31/5/15 and are sold on 25/6/15 for $1.85 per
share.
Surplus is returned to the original shareholders after
expenses.
Cost of reissue is $750.
Bank trust 7,500,000
Application 7,500,000
Cash in bank 7,500,000
Bank trust 7,500,000
Application 7,500,000
Share capital 7,500,000

4
 Example – Forfeited Shares Journals
1/5/2015
Call on shares 3,500,000
Share capital 3,500,000
To record the final call of $0.70 per share on 5 million shares

31/5/2015
Bank 3,465,000
Call on shares 3,465,000
To record the aggregated receipt of monies received on call

Share capital 110,000

Call on shares 35,000
Forfeited Shares 75,000
To record the forfeiture of 50,000 shares paid to $1.50

Note: The directors will now proceed to reissue the shares.

 Example – Forfeited Shares Journals (cont.)
25/6/15
Bank 92,500
Forfeited Shares 17,500
Share Capital 110,000
To record receipt of payment on reissued shares previously forfeited

Forfeited Shares 750

Bank 750
To record payment on reissue costs

Forfeited Shares 56,750

Bank 56,750
To record return of remaining monies to original shareholders
Note: Calculation of remaining monies shown on next slide.
 Example – Forfeited Shares
Calculation of remaining monies:
Total number of shares defaulted = 50,000
Total value of defaulted shares $2.20 x 50,000 =
$110,000
Total collected $1.85 x 50,000 = $ 92,500
Difference $ 17,500
Reissue costs $ 750
Return of remaining monies
= $75,000 - $17,500 - $750
=$56,750
 Distributions
•Distributions are generally applied as dividends
(cash) but can be distributed as other. E.g. a well
known Victorian winery has in the past issued
bottles of wine as a dividend option instead of
cash. Issued at actual value, not retail.
•Dividends, when distributed can be interim (half-
year) and final (end of year).
•Directors decide on dividends to be issued.
 Distributions - Interim

Where directors pay an interim dividend, journal entries are:

Interim dividend XX
Bank XX
To record interim dividend paid
At the end of the financial year:
Retained earnings XX
Interim dividends XX
To record recognition of interim dividend paid from retained
earnings
 Distributions - Final
•Final dividends are decided by the directors once
they know the final profit outcomes.
•NOTE: Australian Accounting Standards do not
permit the recognition of a dividend at the end of a
reporting period UNLESS the dividend has been
declared prior to year-end and the payment of said
dividend does not require further ratification by
other parties, e.g. shareholders at the Annual
General Meeting (AGM) (held after the year end).
 Dividends - Final
•The reason for this ruling (refer: AASB 132 and
137) is that it stops the entity from using
discretion rather than an unavoidable commitment
at the end of the reporting period to pay the
dividends
•When declared at or before the end of the
reporting period, this binding payment (to be) is
recorded as a liability.
 Dividends – Final (cont.)
Journal entries:
Final Dividend declared XX
Dividend payable XX
To record final dividend declared for year
Retained earnings XX
Final dividend declared XX
To record payment of dividend from retained
earnings
 Redemption of Preference Shares
•Preference shares, where an entity wants to
redeem them, the Corporations Act 2001 (s.254J)
requires that redemption of shares be made from
profits (retained earnings) that would otherwise be
used for dividend distribution or from the
proceeds of a fresh issue of shares which has
been issued for the purpose of the redemption.
•Only fully-paid preference shares can be
redeemed (s.254K)
 Redemption of Preference Shares (cont.)
Where an entity redeems the preference shares from a fresh
issue of shares, the journal entries would be:
Bank XX
Share capital XX
To record the issue of shares

Share capital – redeemable preference shares XX

Bank XX
To record the redemption of preference shares
 Redemption of Preference Shares (cont.)
Where an entity redeems the preference shares from
retained earnings, the journal entries would be:

Retained earnings XX
Share capital XX
To transfer retained earnings to share capital

Share capital – redeemable pref. shares XX

Bank XX
To record the redemption of preference shares
 Preference Shares as a Liability
Where preference shares are classified as a
liability, all interest payments made to preference
shareholders is recognised as an expense to the
entity, recognised in the year that the interest
payment(s) were made.
 In-class Worked Example
Jubbly Bubbly Ltd issues 5 million preference
shares at $2.50 per share on 1st Jan. 2015. They
are redeemable on 31st Dec. 2017.
Prepare journal entries for 1st Jan and for
redemption date (from retained earnings).
Do not worry about bank trust and applications
for the recognition date.
 Solution
1/01/2015
Bank 12,500,000
Share capital-preference 12,500,000
To record the recognition of 5 million redeemable preference shares
at $2.50 per share
31/12/2017
Retained earnings 12,500,000
Share capital 12,500,000
To record transfer from retained earnings to Bank for purpose of
share redemption

Share capital-preference 12,500,000

Bank 12,500,000
To record payment and redemption of 5 million preference shares
 Redemption of Preference Shares
Finally, it should be noted that the Corporations
Act 2001 requires that a redemption of
preference shares should not reduce total share
capital.
 Rights Issue & Share Options
•A rights issue is where a release of shares is
made only to existing shareholders, often at
prices more attractive than offered on the open
market.
•A common method is to offer these shares
based on existing holdings, e.g. one additional
share for every two held, or four held, etc.
•They are usually offered for a very limited time
and these rights are not transferable.
 Rights Issue & Share Options (cont.)
•A rights issue must be underwritten, basically a
guarantee that all shares on offer against existing
shares will be taken up.
•Where there is an under-subscription, the
underwriter will be required to acquire the balance
(will be a receivable), meaning that the share
capital increases by the “required” amount
 Rights Issues & Share Options-Journals
Bank trust XX
Share application XX
To recognise the application/payments under a rights issue

Underwriter (receivable) XX
Share application XX
To record the balance underwritten due to under-subscription

Bank XX
Bank trust XX
Underwriter (rec.) XX
To record transfer of funds to general bank account

Share application XX
Share capital XX
To record allotment of shares
 Share Split
•A share split is simply, where a public company
decides to split is existing shares into shares of
smaller value, thereby (theoretically) making the
company’s shares more attractive in the market
place. E.g. a company with 20 million shares may
split them down to 40 million shares.
•There is NO change to equity and as such, no
journals required. They just need to amend their
share register.
 Share Split (cont.)
Share splitting MAY add value to shareholders.
e.g. Shares at $4.00 may be stagnant, but
through share splitting, shares technically would
now have a value of $2.00. The market may feel
that this is too low so through buy/sell, they may
increase to $2.50. Effectively, shareholders have
profited by $1.00 on the original shares.
There is little evidence to suggest this will
generally be the case.
 Bonus Shares
Where a company makes additional shares available to
existing shareholders, those shares from Retained
Earnings.
This has no impact on Equity as just a shift but needs to be
journalised.

Retained earnings XX
Share capital XX
To record issue of bonus shares (ordinary)
 Reserves
•As mentioned at the commencement of this
session, a company can have many reserves,
recognising changes to equity. Often they are
“recognition” only.
•E.g. Asset Revaluation. Where land is revalued
and as such, an increase in the value needs to be
recognised, given that an entity is required to
present their statements in a “true and fair” way.
 Asset Revaluation
Lets assume that land was revalued from $570,000 to
$700,000. Journal entry is:

Land 130,000
Asset revaluation 130,000
To recognise a revaluation of assets (land)
This means that the Balance sheet will show the increase in
value and obviously, an increase in equity
 General Reserves
A reserve which is used for a number of reasons
such as setting aside monies from profits for a
future project.

Retained profits XX
General reserve XX

This effectively takes monies away from

potential dividend issues (not available to
shareholders)
END