NELSON MANDELA UNIVERSITY – ACCOUNTING 1

TOPIC: Co. Accounting: Share issues; SOFP and Changes in Equity; EXERCISE
8.5
Preference shares issued at greater than redeemable price

(a) Journal entries: Share issue

DR CR
R R
2013
Jan 1 Bank 2 000
Subscribers to memorandum 2 000

Subscribers to memorandum 2 000

Ordinary share capital 2 000

Bank 266 000

Application & allotment - Ordinary shares 160 000
L.A.U. Limited (20 000 x R2) 40 000*
Application & allotment - Preference shares 66 000
Cash received from applicants for shares

Application & allotment - Ordinary shares 160 000

L.A.U. Limited 40 000
Ordinary share capital 200 000
100 000 Ordinary shares allotted

Application & allotment - Preference shares 55 000

Redeemable preference share capital 55 000
50 000 Preference shares allotted

Application & allotment - Preference shares 11 000

Bank (10 000 x R1.10) 11 000
Refunds to unsuccessful applicants

Underwriting commission 12 750

Bank 12 750**
Commission paid to L.A.U. Limited

Redeemable preference share capital (R55 000 x 5%) 2 750

Ordinary share capital (R200 000 x 5%) 10 000
Underwriting commission 12 750

* The effect of the underwriting agreement is that the underwriters must subscribe for any shares not
subscribed for by the general public. This ensures that the share issue will be fully subscribed.

** Underwriting commission is calculated as follows:

Issued price of shares: Ordinary shares 100 000 at R2.00 = R200 000
Preference shares 50 000 at R1.10 = R55 000
Total issue price = R255 000

Commission = 5 x 255 000 = R12 750

100

RV102/RGV102 Page 1 of 3
 NELSON MANDELA UNIVERSITY – ACCOUNTING 1

TOPIC: Co. Accounting: Share issues; SOFP and Changes in Equity; EXERCISE
8.5
Preference shares issued at greater than redeemable price

(b) Statement of Financial Position

BAKER LIMITED
STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 2015
Notes R
EQUITY AND LIABILITIES

CAPITAL AND RESERVES 219 000

Ordinary share capital 1 192 000
Retained earnings 27 000

NON-CURRENT LIABILITIES
Preference share capital 1,2(a) 50 825

CURRENT LIABILITIES
Preference share capital (current portion) 1,2(a) 383

NOTES TO THE FINANCIAL STATEMENTS:

1. SHARE CAPITAL
Authorised
200 000 Ordinary shares

100 000 Redeemable preference shares (dividend of 6 cents per share)

Issued
102 000 Ordinary shares R192 000
50 000 Redeemable preference shares (dividend of 6 cents per share) R 51 208

Reconciliation of number of shares issued Number of shares

Ordinary shares Preference shares
Issued at the beginning of the year 102 000 50 000
Issued during the year - -
Issued at the end of the year 102 000 50 000

Redeemable preference shares

The preference shares are redeemable at R1 per share.

Nominal interest rate : 5.45% p.a. (R3 000/R55 000)

Effective interest rate : 5.1103% p.a.
Redemption date : 1 January 2019

Directors' authority to issue shares

The directors have authority to issue the unissued shares.
This authority is subject to confirmation by shareholders at each annual general meeting.

2. NON-CURRENT LIABILITIES
(a) Preference share capital R

Balance at 1 January 2015 51 573

Less: Repayment during the year 365
51 208
Less: Current portion 383
Balance 31 December 2015 R50 825

RV102/RGV102 Page 2 of 3
 NELSON MANDELA UNIVERSITY – ACCOUNTING 1

TOPIC: Co. Accounting: Share issues; SOFP and Changes in Equity; EXERCISE
8.5
Preference shares issued at greater than redeemable price

NOTE: Preference dividends have been omitted.

This issue will be dealt with later in the RV102/RGV102 courses.

Workings: Preference shares

Calculate effective interest rate:

PV : 52 250 (55 000 – 2 750)
PMT : - 3 000 (50 000 x 6/100)
N : 6
FV : - 50 000
COMP : i (answer 5.1103% p.a.)

Repayment schedule
Payment Interest Capital Balance
01/01/13 52 250
31/12/13 3 000 2 670 330 51 920
31/12/14 3 000 2 653 347 51 573
31/12/15 3 000 2 635 365 51 208
31/12/16 3 000 2 617 383 50 825
31/12/17 3 000 2 597 403 50 422
31/12/18 3 000 2 578 422 50 000
01/01/19 50 000 50 000 NIL
68 000 15 750 52 250

RV102/RGV102 Page 3 of 3