ANNIKA LIMITED holds 10,000 ordinary shares in B Limited which had been purchased earlier in the year at CU1,50 each. B Limited has a capitalisation issue which is made from retained earnings of one new ordinary share for every 4 ordinary shares currently held by its shareholders. B Limited has 100,000 ordinary shares in issue prior to the capitalisation issue. The fair value of the shares of B Limited just prior to the capitalisation issue is CU1,60 each.
Ignore transactions costs.
REQUIRED
1. Calculate the number of shares B Limited will be required to issue in terms of the capitalisation issue.
2. Prepare the general journal entry that B Limited would be required to make in its accounting records to account for the capitalisation issue.
3. Calculate how many capitalisation shares Annika Limited will receive from B Limited following the capitalisation issue.
4. Prepare the general journal entry that Annika Limited would be required to make in its accounting records to account for the capitalisation issue.
🇿🇦 Annika is an Afrikaans name meaning “grace” and is the Swedish diminutive of Anna. Pronounced AHN-nee-kah.
SOLUTION
1. (100,000/4) shares = 25,000 ordinary shares.
2. B Limited’s general ledger:
|
|
DR CU |
CR CU |
| Retained earnings (Equity) | 40,000 | |
| Ordinary share capital (Equity) | 40,000 | |
| (25,000 ordinary shares issued at the fair value of R1,60 each) |
3. (10,000/4) shares = 2,500 ordinary shares
4. Annika Limited’s general ledger:
|
|
DR CU |
CR CU |
| Investment (SFP) | 4,000 | |
| Gain on shares received in terms of a capitalisation issue (P/L) | 4,000 | |
| (2,500 ordinary shares received as a capitalisation issue – recognised initially at the fair value of CU1,60 each) |
