Question

At a meeting of the board of directors of Barby Limited it was decided :

1. To redeem the redeemable preference shares of the company on 30 September 2006.

2. To achieve this by a fresh issue of the maximum number of ordinary shares of permissible without the necessity of calling a meeting of shareholders.

3. That the issue price for the proposed issue would be R1, 20 per share

4. That the redemption should be made in such a way that would have the minimum effect on distributable reserves.

5. That after the redemption and the issue have been made, a proposal be put to the shareholders in a general meeting that increased the authorized share capital by an amount sufficient to allow capitalisation issue of one ordinary share for every two ordinary shares already held. This is also to be arranged so that there is a minimum effect on distributable reserves.

The following information has been extracted from the accounting records of Barby Limited at 31 August 2006

80 000 ordinary shares of no par value - stated capital R72 500

25 000 12% redeemable preference shares of R2 each 50 000

Share premium account 2 500

Surplus on revaluation of land 50 000

Retained earnings 65 000

Notes

1. The redeemable preference shares are redeemable at a premium of 20c per share at any time at the option of the company.

2. The authorized share capital of the company is: • 100 000 ordinary shares of no par value; and • 25 000 redeemable preference shares of R2 each.

3. The directors have the power to issue unissued shares.

4. The company has sufficient cash, together with the proceeds of the fresh issue, to make any payments which may be required.

5. The company earned a net income after taxation of R5 000 for the month of September 2006.

6. Expenses related to the share issue amount to R1 000.

7. The year end of the company is 31 March.

Required

(a) Record the journal entries required to give effect to the redemption and the fresh issue of shares on 30 September 2006, in accordance with the directors' decisions in point 1 to 4.

(b) Prepare the 'Capital Employed section of the balance sheet, as it would appear immediately after the redemption and fresh issue. Presentation must comply with requirements of the Companies Act. Show all working separately.

(c) Illustrate by means of a pro forma journal entry the effect of the directors' decision (point 5), if it should be confirmed by the shareholders.

(d) Give one good reason for the elaborate provision made by the Companies Act regulating the procedure for the redemption of redeemable preference shares.

Answer 1

Answer-

Date	Account Title and Explanation	Debit ($)	Credit ($)
30th Sep.2006	Redeemable Preference Share Capital	50,000
	Premium on redemption prefence share capital	5,000
	Preference Shareholders		55,000
	Bank (20,000*1.2)	24,000
	Ordinary Share Capital		24,000
	Security Premium	2,500
	Retained Earnings	2,500
	Premium on Redemption		5,000
	Preference Shareholders	55,000
	Bank		55,000
	Retained Earnings	26,000
	Capital Redemption Reserve		26,000

b- Balance Sheet

Particulars	Note	Amount
Equity and Liabilities
(i)-Shareholders' funds
(a)- Share Capital	1	96,500
(b)- Reserve and Surplus	2	112,500
		209,000

Note:1- Share Capital:

Particulars	Amount
80,000 ordinary share of no per value	72,500
20,000 ordinary share of no per value	24,000
	96,500

Note:2-Reserve and Surplus

Particulars	Amount
Surplus on revalution of land	50,000
Retained earnings	36,500
Capital redemption reserve	26,000
	112,500