Question

Week 3 and week 4 calculation and explanation required

Week 3

RCK Ltd issues a prospectus inviting the public to subscribe for 90 million ordinary shares of $2.00 each. The terms of the issue are that $1.00 is to be paid on application and the remaining $1.00 within one month of allotment.

Applications are received for 108 million shares during July 2018. The directors allot 90 million shares on 15 August 2018. All applicants receive shares on a pro rata basis. The amounts payable on allotment are due by 20 September 2018. By 20 September 2018 the holders of 18 million shares have failed to pay the amounts due on allotment. The directors forfeit the shares on 30 September 2018.

The shares are resold on 15 October 2018 as fully paid. An amount of $2.00 per share is received. The balance of forfeited shares is refunded on 20 October 2018.

Required:

Provide the journal entries necessary to account for the above transactions and events.

Week 4

Provide some examples of items that would be adjusted directly against equity, rather than being included as part of profit or loss. and explain it

Answer 1

RCK Ltd

Journal Entries:

July 2018:

Debit Stock Application Account with $90,000,000

Credit Common Stock with $90,000,000

To record issue of prospectus for 90 million shares at $1 per share on application.

Debit Cash Account with $108,000,000

Credit Stock Application Account with $90,000,000

Credit Stock Allotment Account with $18,000,000

To record receipt of subscription for 108 million shares.

August 15:

Debit Stock Allotment Account with $90,000,000

Credit Common Stock with $90,000,000

To record 90 million shares at $1 on allotment.

September 20:

Debit Cash Account with $54,000,000

Credit Stock Allotment with $54,000,000

To record receipt of allotment money.

September 30:

Debit Forfeited Stock Account with $18,000,000

Credit Stock Allotment Account with $18,000,000

To record the forfeiture of 18 million shares on allotment.

October 15:

Debit Cash Account with $36,000,000

Credit Forfeited Stock Account with $36,000,000

To record the resale of forfeited shares.

October 20:

Debit Forfeited Stock Account with $18,000,000

Credit Cash Account with $18,000,000

To record the refund of forfeited shares.

Step-by-step explanation:

a) When shares are issued, the application money is debited to the Stock Application Account while the corresponding credit goes to the (Common) Stock Account.

b) When the application money is received, the Cash Account is debited with the amount received and a credit to the Stock Application Account to close the account. If oversubscription is involved the difference is transferred to the allotment account for part settlement of allotment money.

c) The forfeiture of shares means that the potential shareholders failed to pay up the balance due on their allotted shares. The shareholders therefore lose the balance they have already contributed.

d) The reissue of forfeited shares is done in such a way that the difference is received to balance off the forfeited shares account. However, management may decide to receive the shares at par and refund the forfeited shares balance.