Accounting For Share Issues And Options

December 21, 2023/

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Accounting for share issues and options

Sunny Ltd is looking to expand its operations, and in order to do this, the company needs to increase equity.

On 1 January 2016, Sunny Ltd offered 6,000,000 ordinary shares to the public at an issue price of $4.00 per share, with $3.00 payable on application, and $1.00 due within one month of allotment. The closing date for applications was 31 January 2016. Sunny Ltd offered an additional incentive to investors: shareholders who acquired more than 25,000 shares were allowed to purchase options at 50 cents each. These options allowed investors to acquire shares in Sunny Ltd at $4.20 each on or before 30 June 2016.

By 31 January 2016, applications had been received for 6,300,000 shares and 60,000 options. On 12 February 2016, 6,000,000 shares were allotted on a pro-rata basis, and all 60,000 options applied for were allotted. Excess application money received was retained and used to go towards the allotment instalment due.

All allotment money is received by 12 March 2016, except for holders of 20,000 shares who fail to meet the instalment.

On 20 March 2016, the 20,000 shares were forfeited, and on 5 April 2016 they were auctioned as fully paid. An amount of $3.70 was received for each share sold. Share re-issue costs amounted to $3,600, and were paid. The constitution provided for any surplus on resale, after satisfaction of unpaid instalments and any costs, to be returned to shareholders whose shares were forfeited.

By 30 June 2016, the price of each of Sunny Ltd’s shares was $4.80. Holders of 50,000 options exercised their options in June 2016, with the remaining options lapsing.

Required:

Prepare the journal entries to account for the above entries. Show all relevant dates, narrations and workings.

Date of the transaction	Particulars	Debit	Credit
31-01-2016	Bank	189,30,000.00
	To share application A/c		189,00,000.00
	To share options A/C		30,000.00
	(being money received on share application)
12-02-2016	Share application A/c	189,00,000.00
	To share capital		180,00,000.00
	To bank		9,00,000.00
	(being refund of the excess money received)
	Share options A/c	30,000.00
	To share options		30,000.00
	(conversion of share options money received into share options capital)
12-03-2016	Bank	59,80,000.00
	To share allotment A/c		59,80,000.00
	(being allotment money received)
	Share capital	80,000.00
	To shares forfeited		60,000.00
	To unpaid calls		20,000.00
	(being shares forfeited)
05-04-2016	Bank	74,000.00
	Shares forfeited	60,000.00
	To share capital		1,34,000.00
	Share capital	56,400.00
	To bank		56,400.00
	(being the excess amount transferred to the investor)

(Accounting simplified, 2016).

Computation of Taxable Income
			Remarks
Revenue		7,50,000.00
Government Grant		–	Not Taxable
Cost of Sales	3,25,000.00
Annual Leave	2,000.00		Allowed on Payment Basis
Depreciation on equipment	60,000.00		As per Income Tax Rules
Depreciation on motor vehicle	12,000.00		As per Income Tax Rules
Doubtful Debt Expenses	2,000.00		Allowed on actual written off basis
Entertainment expenses	–		Not allowable
Insurance	13,000.00		Allowed on Payment basis
Rent	20,000.00		Allowed on Payment basis
Salaries	1,25,000.00
Warranty Expenses	600.00		Allowed on Payment basis
Other Expenses	17,250.00	-5,76,850.00
Taxable Profit		1,73,150.00
Tax Rate	30%
Current tax		51,945.00

Deferred Tax Work Sheet
	Book Value	Tax Value	Difference	Deferred Tax
Assets					Asset/(Liability)	Asset/(Liability)
Cash		20,000.00		20,000.00	–	–
Inventory		85,900.00		85,900.00	–	–
Accounts Receivable	80,000.00		80,000.00		–	–
Less: Allowance for Doubtful Debts	-4,000.00	76,000.00	–	80,000.00	4,000.00	1,200.00
Prepaid Insurance		3,000.00		–	-3,000.00	-900.00
Equipment	4,00,000.00		4,00,000.00		–	–
Less: Accumulated Depreciation	-40,000.00	3,60,000.00	-60,000.00	3,40,000.00	-20,000.00	-6,000.00
Motor Vehicle	60,000.00		60,000.00		–	–
Less: Accumulated Depreciation	-15,000.00	45,000.00	-12,000.00	48,000.00	3,000.00	900.00
		5,89,900.00		5,73,900.00	-16,000.00	-4,800.00
Liabilities
Accounts Payable		50,250.00		50,250.00	–	–
Loans		25,000.00		25,000.00	–	–
Provision for Annual leave		11,000.00		–	11,000.00	3,300.00
Provision for Warranties		6,900.00		–	6,900.00	2,070.00
Rent Payable		6,000.00		–	6,000.00	1,800.00
		99,150.00		75,250.00	23,900.00	7,170.00

Net Assets		4,90,750.00		4,98,650.00	7,900.00	2,370.00

Statement of Profit & Loss
Revenue		7,50,000.00
Government Grant		30,000.00
Cost of Sales	3,25,000.00
Annual Leave	13,000.00
Depreciation on equipment	40,000.00
Depreciation on motor vehicle	15,000.00
Doubtful Debt Expenses	6,000.00
Entertainment expenses	4,500.00
Insurance	10,000.00
Rent	26,000.00
Salaries	1,25,000.00
Warranty Expenses	7,500.00
Other Expenses	17,250.00	-5,89,250.00
Accounting Profit		1,90,750.00
Journal Entries
Provision for Current Tax A/c	Credit		51,945.00
Deferred Tax Asset A/c (Net)	Debit	2,370.00
Tax Expense	Debit	49,575.00

(CA club India, 2016).

Date	Particulars	Debit	Credit
01-07-2013	Equipment	8,00,000.00
	To bank		8,00,000.00	Value of the equipment	8,00,000.00
	(being purchase of equipment)
30-06-2014	Depreciation	1,52,000.00
	To accumulated depreciation-equipment		1,52,000.00	Value of the equipment	6,48,000.00
	(being the depreciation on equipment)
01-07-2014	Equipment	82,000.00
	To revaluation profit		82,000.00	Value of the equipment	7,30,000.00
	(being revaluation profit on equipment)
30-06-2015	Depreciation	1,15,000.00
	To accumulated depreciation-equipment		1,15,000.00	Value of the equipment	6,15,000.00
	(being the depreciation on equipment)
30-06-2016	Depreciation	1,15,000.00
	To accumulated depreciation-equipment		1,15,000.00	Value of the equipment	5,00,000.00
	(being the depreciation on equipment)
01-07-2016	Revaluation loss	1,00,000.00
	To equipment		1,00,000.00	Value of the equipment	4,00,000.00
	(being revaluation loss on equipment)
30-09-2016	Depreciation	18,000.00
	To accumulated depreciation-equipment		18,000.00	Value of the equipment	3,82,000.00
	(being the depreciation on equipment)
30-09-2016	Bank	3,90,000.00
	To equipment		3,82,000.00
	To profit on sales of equipment		8,000.00
	(being sale of equipment)

(IAS plus, 2016).

	Carrying values		Recoverable value
Assets	Cinema	DVD sales	Cinema	DVD sales
Cash	5,000.00	12,000.00
Inventory	4,000.00	85,000.00
Furniture and fixtures, net of depreciation	2,05,000.00	25,000.00
Electrical equipment, net of depreciation	1,10,000.00	10,000.00
Land and buildings, net of depreciation	6,25,000.00	1,79,000.00
License	25,000.00	–
Goodwill	45,000.00	15,000.00
Total	10,19,000.00	3,26,000.00	9,00,000.00	3,18,000.00
Value in use			9,00,000.00	2,90,000.00
	Recoverable amount is higher of fair value less selling costs and value in use
	So, higher of 900000,290000 and 780000,318000

Assets	Cinema	Impairment	Recoverable value
Cash	5,000.00	–	5,000.00	No change
Inventory	4,000.00	–	4,000.00	No change
Furniture and fixtures, net of depreciation	2,05,000.00	1,301.59	2,06,301.59	Impairment profit
Electrical equipment, net of depreciation	1,10,000.00	698.41	1,10,698.41	Impairment profit
Land and buildings, net of depreciation	6,25,000.00	75,000.00	5,50,000.00	Impairment loss
License	25,000.00	1,000.00	24,000.00	Impairment loss
Goodwill	45,000.00	45,000.00	–	Impairment loss
Total	10,19,000.00	1,19,000.00	9,00,000.00
Value to be reduced			3,17,000.00
0.65	2,05,000.00	2,06,301.59
0.35	1,10,000.00	1,10,698.41
	3,15,000.00	3,17,000.00

Assets	DVD Sales	Impairment	Recoverable value
Cash	12,000.00	–	12,000.00	No change
Inventory	85,000.00	–	85,000.00	No change
Furniture and fixtures, net of depreciation	25,000.00	–	25,000.00	No change
Electrical equipment, net of depreciation	10,000.00	–	10,000.00	No change
Land and buildings, net of depreciation	1,79,000.00	4,000.00	1,75,000.00	Impairment loss
License	–	–	–	No change
Goodwill	15,000.00	4,000.00	11,000.00	Impairment loss
Total	3,26,000.00	8,000.00	3,18,000.00

Journal entry:
Impairment loss	1,29,000.00
Land and buildings		79,000.00
License		1,000.00
Goodwill		49,000.00
Furniture and fixtures	1,301.59
Electrical equipment	698.41
Impairment loss		2,000.00

(IAS plus, 2016).

References:

Accounting-simplified.com. (2016). Accounting for Issue of Ordinary Shares. [online] Available at: https://accounting-simplified.com/financial/share-capital/ordinary-issue.html [Accessed 18 Sep. 2016].

Iasplus.com. (2016). IAS 16 — Property, Plant and Equipment. [online] Available at: https://www.iasplus.com/en/standards/ias/ias16 [Accessed 18 Sep. 2016].

Iasplus.com. (2016). IAS 36 — Impairment of Assets. [online] Available at: https://www.iasplus.com/en/standards/ias/ias36 [Accessed 18 Sep. 2016].

Profile, (2010). Calculation of Deferred Tax Asset – Others – Accounts. [online] CAclubindia. Available at: https://www.caclubindia.com/forum/calculation-of-deferred-tax-asset-99743.asp [Accessed 18 Sep. 2016].

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