Question

Red Mama Company 100, 000 shares of P 10 par ordinary shares outstanding. In declaring and distributing a 50% bonus issue, Red Mama initially issued only 45,000 new shares; the other shares were not issued because some investors did not own Red Mama shares in even multiples of 2. To these shareholders, Red Mama issued a fractional share warrants. Subsequently, 80% of the fractional share warrants were turned in for full shares.

REQUIRED:

Explain and Journalize entries to record the foregoing.

Answer 1

Explanation

For bonus issue 50000 shares to be issued but some people don't even hold 2 shares to give them 1 share as bonus, so company issued 45000 shares and warrants for the rest. After some time, 80% of warrants converted into shares i.e. 4000 shares.(assumed 10 as face value).

Journal:

Undistributed Profit Reserves / Share Premium Reserve / or Other reserves Dr. 50000

To Share Warrants Alc 50000 (5000*10)

( Being share warrants issued)

Share Warrants Alc 40000

To Share Capital A/c 40000

(Being warrants converted in capital)