Lecture Notes: Capital Structure and Finance (Chapter 13 ACC)

Introduction

• Completion of Chapter 13 on Capital Structure and Finance.
• Previous topics covered: shares, ways to raise finance, equity shares, and preference shares.

Journal Entries for Share Capital

• Issued Share Capital: Shares issued to the public to raise capital.
  • Journal Entry:
    • Debit cash (cash inflow)
    • Credit share capital (representing the capital raised)
• Face Value: The nominal value of a share (e.g., $4).
• Issue at Discount: Shares cannot be issued below face value.

Called Up and Paid Up Share Capital

• Called Up Capital: The amount the company asks shareholders to pay now.
• Paid Up Capital: The amount shareholders have actually paid.

Premium on Shares

• Premium: Extra amount charged above face value due to high demand.
• Journal Entry for Premium Shares:
  • Debit cash (total cash received)
  • Credit share capital (face value times number of shares)
  • Credit securities premium (extra amount charged)

Rights Issue

• Rights Issue: New shares offered to existing shareholders at a price below market.
  • Formula: Total new shares = (Total issued / existing shares) x new shares offered.
• Advantages: Cost-effective, potential higher success rate due to existing interest.
• Disadvantages: Can be more expensive, potential failure.

Bonus Issue

• Bonus Issue: Free shares offered to existing shareholders.
  • Journal Entry:
    • Debit share premium (no cash inflow)
    • Credit share capital (at face value)

Dividends

• Dividends: Profit distribution to shareholders.
  • Journal Entry:
    • Debit retained earnings
    • Credit bank account
• Proposed vs. Final Dividends: Only final (approved) dividends are considered liabilities.

Loan Notes

• Loan Notes: Long-term loans or liabilities.
  • Journal Entry for Loans:
    • Debit cash
    • Credit non-current liability
• Interest on Loan Notes: Considered a finance charge (expense).
  • Journal Entry:
    • Debit finance charges
    • Credit cash or accrued liability

Other Reserves

• Retained Earnings: Reinvested profits, available for dividends.
• Revaluation Surplus: Unrealized gains (cannot fund dividends).

Income Tax

• Journal Entry for Income Tax:
  • Debit income tax charges
  • Credit income tax liability
• Under/Over Provision:
  • Under Provision: Debit more expense, credit liability for additional amount.
  • Over Provision: Reverse excess liability.

Practice Problems

• Discussed various examples and problems related to rights issues, bonus shares, dividends, loan notes, and income tax.
• Emphasized understanding journal entries and calculations for different financing scenarios.

Conclusion

• Practice is crucial for understanding concepts.
• Suggested reviewing previous videos and practicing with exam kits for thorough comprehension.