A company raises money from its owners by issuing shares, and each issue changes the equity section of the statement of financial position in a particular way. Shares can be sold for cash at more than their nominal value, offered to existing shareholders in a rights issue, or given free as a bonus issue. Dividends then pay out part of the profits.
This topic shows the entries for each and how the movements are summarised in the statement of changes in equity.
It builds on the company statement of financial position, which introduced share capital, share premium and retained earnings, and on the company statement of profit or loss, which ends in the profit that is added to retained earnings. Share premium after issue costs and the total of a dividend are common Section A calculations. The next topic covers International Accounting Standard (IAS) 8.
In 30 seconds
Issue price = nominal value + share premium. Debit cash for the whole price, credit share capital for the nominal value and share premium for the excess. Issue costs are set against share premium. A Rights issue offers new shares to existing holders, pro rata and below market price, and is recorded like any issue.
A Bonus issue is free: it moves reserves (share premium first, then retained earnings) into share capital, so total equity does not change. Redeemable preference shares are liabilities and loan notes are non-current liabilities. A proposed dividend is not a liability until declared. The Statement of changes in equity reconciles the opening and closing balance of each equity component.
Ordinary shares, preference shares and loan notes
Ordinary shares give ownership. Holders have voting rights and the right to a dividend if one is declared, with no fixed rate and no maturity date, so they bear the most risk. Preference shares rank ahead for dividends and assets. They usually carry a fixed dividend and no vote. Redeemable preference shares are repayable and are classified as liabilities.
Section 147 of Companies and Allied Matters Act 2020 (CAMA 2020) prohibits non-redeemable preference shares, so all preference shares of Nigerian companies are redeemable. Variants are participating (a share of extra profits), cumulative (unpaid dividends accumulate and are paid first) and convertible (may be exchanged for ordinary shares).
Loan notes are debt: a fixed interest rate and repayment of principal at maturity. The principal is a non-current liability, the interest is a finance cost, and unpaid interest is a current liability. They can be convertible or non-convertible.
Key terms
| Term | Meaning |
|---|---|
| Nominal (par) value | The minimum legal issue price of a share. 1,000,000 shares of ₦1 give nominal share capital of ₦1,000,000. |
| Share premium | The excess received over nominal value. Shares of ₦1 issued at ₦3 have a premium of ₦2 each, so ₦2,000,000 on 1,000,000 shares. |
| Authorised capital | The maximum a company could issue. CAMA 2020 abolished the concept in Nigeria, so no maximum has to be stated. |
| Issued capital | The part offered and allotted to shareholders. |
| Called-up capital | The part for which the company has asked shareholders to pay. |
| Paid-up capital | The part of the called-up capital that has actually been paid. |
Issuing shares for cash
New shares become part of equity and the company receives cash, or other assets. The issue price is usually above nominal value. The difference is credited to the share premium reserve, which is part of equity. Costs of the issue, net of any tax benefit, are set against the share premium. If there is no premium, they are deducted from retained earnings.
Example. A company issues 200,000 shares of ₦25 each at ₦250, with issue costs of ₦3,000,000.
- Cash received is 200,000 × 250 = ₦50,000,000.
- Share capital is 200,000 × 25 = ₦5,000,000 and share premium is 200,000 × 225 = ₦45,000,000.
| Entry | Debit ₦000 | Credit ₦000 |
|---|---|---|
| Cash received | Bank 50,000 | Share capital 5,000; Share premium 45,000 |
| Issue costs | Share premium 3,000 | Bank 3,000 |
The share premium account is left at ₦42,000,000. An exam item uses the same idea: 140,000 shares of ₦20 issued at ₦120 give a premium of 140,000 × 100 = 14,000,000, and after issue costs of ₦2,000,000 the balance is ₦12,000,000 (May Diet 2022, Section A, Question 8).
Over-subscription. When applications exceed the shares offered, the money received is first credited to a share application (liability) account. On allotment, the application account is debited and credited to share capital and share premium for the shares allotted. The money for the shares not allotted is refunded: Dr Share application, Cr Bank.
Uses of share premium. The share premium account is not distributable as a dividend. It may be used to issue fully paid bonus shares, to write off the expenses of issuing shares, to provide for a premium payable on redeeming preference shares, and to buy the company’s own shares.
Rights issues
A rights issue is an offer to existing shareholders to buy more shares in proportion to their holdings, typically below the market price. “1 for 2” means one new share for every two held. It is accounted for like any other issue of shares: the proceeds are recorded in share capital and share premium. The number of shares, issue price and terms are disclosed.
Example. Excel Ltd has 2,000,000 ordinary shares of ₦2, fully paid. It makes a 1-for-4 rights issue at ₦2.50, fully subscribed.
- New shares.
2,000,000 ÷ 4 = 500,000. - Proceeds = 500,000 × 2.50 = ₦1,250,000.
- Share capital increases by 500,000 × 2 = ₦1,000,000 and share premium by 500,000 × 0.50 = ₦250,000.
- The entries are Dr Bank 1,250,000, Cr Application 1,250,000, then Dr Application 1,250,000, Cr Ordinary share capital 1,000,000 and Cr Share premium 250,000.
- Equity afterwards includes share capital of ₦5,000,000 (2,500,000 shares) and share premium of ₦250,000.
Bonus issues
Bonus shares, also called scrip or capitalisation issues, are free shares given to existing shareholders out of reserves. No cash moves, and each shareholder’s proportion of the company is unchanged. Under section 145 of CAMA 2020, the company may use the share premium account to pay up the bonus shares, and takes any balance from retained earnings.
Example. A company has 20,000,000 ordinary shares of ₦10 and declares a 1-for-5 bonus issue. Share premium is ₦24,000,000 and retained earnings ₦42,000,000. Bonus shares = 20,000,000 ÷ 5 = 4,000,000, with a nominal value of ₦40,000,000. Use the whole share premium of ₦24,000,000 and ₦16,000,000 of retained earnings: Dr Share premium 24,000,000, Dr Retained earnings 16,000,000, Cr Share capital 40,000,000. Share capital becomes ₦240,000,000, share premium nil and retained earnings ₦26,000,000. Total equity is ₦266,000,000 before and after.
Dividends
An ordinary dividend is declared at the annual general meeting on the directors’ recommendation, and equals the number of shares multiplied by the dividend per share. A Proposed dividend is not recognised as a liability until it is declared, and is disclosed in the notes. When paid, it reduces retained earnings, appears in the statement of changes in equity, and is a financing cash outflow.
A Preference dividend is the preference share capital multiplied by the rate. It is a finance cost in profit or loss, and a current liability if unpaid. For example, paid-up capital of ₦376,000 in shares of 50 kobo means 752,000 shares, and a dividend of 16 kobo a share is 752,000 × 0.16 = ₦120,320 (May Diet 2021, Section A, Question 18).
The statement of changes in equity
IAS 1 requires a statement of changes in equity in the full set of statements. It reconciles each component of equity from its opening to its closing balance, and shows the transactions with owners (share issues and dividends), profit for the period, other comprehensive income and transfers between components.
The common entries are: profit increases retained earnings, dividends decrease retained earnings, a share issue increases share capital and share premium, and a revaluation increases the revaluation reserve.
| Enofe Ltd (₦000) | Share capital | Share premium | Revaluation reserve | Retained earnings | Total |
|---|---|---|---|---|---|
| Balance at start | 21,000 | 2,000 | 0 | 7,500 | 30,500 |
| Dividend paid | (200) | (200) | |||
| Profit for the year | 4,200 | 4,200 | |||
| Revaluation of land and buildings | 5,000 | 5,000 | |||
| Transfer of excess depreciation | (300) | 300 | 0 | ||
| Balance at end | 21,000 | 2,000 | 4,700 | 11,800 | 39,500 |
The ideas in more depth
Background. Issue costs are set against the share premium account, but only up to its balance. Any excess is taken from retained earnings, as applies where there is no premium. A change in accounting policy or the correction of a prior-period error is adjusted in opening retained earnings, so it shows as an adjustment to the opening balance in the statement of changes in equity.
Rights issues do not change profit. They change cash and equity, and appear in the financing section of the cash flow statement, which a later topic covers.
Worked example: Calabar Oil Ltd
Scenario. At the start of the year Calabar Oil Ltd has 500,000 shares of ₦1 each, a share premium of ₦120,000 and retained earnings of ₦300,000 (all in ₦000 in the table below). During the year it issues 100,000 shares for cash at ₦1.80, with issue costs of ₦5,000 set against share premium. It then makes a 1-for-5 bonus issue out of share premium.
Profit after tax is ₦150,000, and a dividend of 5 kobo a share is paid on the shares in issue at the end. Required: the closing equity.
- Issue.
Cash 100,000 × 1.80 = 180,000.
Dr Bank 180,000, Cr Share capital 100,000, Cr Share premium 80,000.
Dr Share premium 5,000, Cr Bank 5,000. - Shares now in issue: 600,000.
Bonus: 600,000 ÷ 5 = 120,000 shares, nominal 120,000.
Dr Share premium 120,000, Cr Share capital 120,000.
Shares in issue 720,000. - Share premium:
120,000 + 80,000 − 5,000 − 120,000 = 75,000.
Share capital: 500,000 + 100,000 + 120,000 = 720,000. - Dividend:
720,000 × ₦0.05 = 36,000.
Retained earnings: 300,000 + 150,000 − 36,000 = 414,000. - Total equity:
720,000 + 75,000 + 414,000 = ₦1,209,000. - Check. Opening equity 920,000, plus net cash from the issue 175,000, plus profit 150,000, less dividend 36,000 = 1,209,000. The bonus issue added nothing to total equity.
Common mistakes in the exam
- Crediting the whole issue price to share capital instead of splitting nominal value and premium.
- Forgetting to deduct issue costs from share premium.
- Treating a bonus issue as bringing in cash, or as increasing total equity.
- Taking a bonus issue from retained earnings before using the share premium.
- Calculating dividends on the nominal value in naira instead of on the number of shares and the rate per share.
- Showing a proposed dividend as a liability.
- Treating redeemable preference shares as equity.
- Mixing up the number of shares and their value when the nominal value is 50 kobo.
Quick revision
- Issue: Dr Bank, Cr Share capital (nominal), Cr Share premium (excess).
- Issue costs: Dr Share premium.
- Rights issue: new shares = holding ÷ ratio. Recorded like a normal issue.
- Bonus: Dr Share premium then retained earnings, Cr Share capital. Equity total unchanged.
- Dividend = number of shares × rate per share. Preference dividend is a finance cost.
- Changes in equity: opening + profit − dividends + issues ± other = closing, for each column.
Practice questions
These are original questions in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one first.
Section A style: multiple choice
Question 1. Share premium arises when shares are:
- Issued at nominal value
- Issued as bonus shares
- Issued at more than nominal value
- Redeemed at nominal value
Show the answer
C. The premium is the excess of the issue price over the nominal value.
Question 2. 400,000 shares of ₦2 each are issued at ₦5. The share premium is:
- ₦1,200,000
- ₦2,000,000
- ₦800,000
- ₦400,000
Show the answer
A. Premium per share is 3, so 400,000 × 3 = 1,200,000.
Question 3. Issue costs on shares are:
- An expense in profit or loss
- Added to share capital
- Deducted from retained earnings only
- Deducted from share premium
Show the answer
D. They are set against the share premium account.
Question 4. 250,000 shares of ₦10 are issued at ₦60, with issue costs of ₦1,500,000. The share premium balance is:
- ₦12,500,000
- ₦11,000,000
- ₦15,000,000
- ₦13,500,000
Show the answer
B. Premium = 250,000 × 50 = 12,500,000, less 1,500,000 = 11,000,000.
Question 5. A company with 2,000,000 shares makes a 1-for-4 rights issue. The number of new shares is:
- 4,000,000
- 2,000,000
- 500,000
- 1,000,000
Show the answer
C. 2,000,000 ÷ 4 = 500,000.
Question 6. The effect of a bonus issue on total equity is:
- No change
- An increase
- A decrease
- An increase equal to the nominal value
Show the answer
A. It moves reserves into share capital. No cash is received.
Question 7. Issued share capital is ₦600,000 in shares of 50 kobo. A dividend of 8 kobo a share is paid. The dividend is:
- ₦48,000
- ₦8,000
- ₦600,000
- ₦96,000
Show the answer
D. Shares = 600,000 ÷ 0.50 = 1,200,000. Dividend = 1,200,000 × 0.08 = 96,000.
Question 8. A dividend on redeemable preference shares is shown as:
- A deduction from retained earnings
- A finance cost in profit or loss
- An addition to share capital
- Not recorded
Show the answer
B. Redeemable preference shares are liabilities, so the dividend is a finance cost.
Question 9. Which of these is a permitted use of the share premium account?
- Paying up bonus shares
- Paying an ordinary dividend
- Paying directors’ fees
- Writing off the cost of inventory
Show the answer
A. Bonus shares, issue expenses, a redemption premium and buying own shares are permitted. The account is not distributable.
Question 10. Money from unsuccessful applicants in an over-subscribed issue is:
- Kept as share premium
- Added to reserves
- Refunded
- Credited to share capital
Show the answer
C. It is refunded: Dr Share application, Cr Bank.
Section B style: written questions
Question 11 (10 marks). (a) Explain share premium and state four permitted uses of the share premium account. (5 marks) (b) Distinguish a rights issue from a bonus issue. (5 marks)
Question 12 (20 marks). At the start of the year Rivers Plastics Ltd has 800,000 shares of ₦1, a share premium of ₦200,000 and retained earnings of ₦500,000. During the year it makes a fully subscribed 1-for-4 rights issue at ₦1.80. Issue costs of ₦6,000 are set against the share premium. It then makes a 1-for-5 bonus issue, using the share premium.
Profit after tax is ₦250,000, and a dividend of 5 kobo a share is paid on the shares in issue after the bonus.
(a) Give the journal entries for the rights issue, the issue costs and the bonus issue. (10 marks) (b) Calculate the dividend. (3 marks) (c) Prepare the statement of changes in equity showing share capital, share premium, retained earnings and total. (7 marks)
A further written question
Question 13 (10 marks). A company offers 2,000,000 ordinary shares of ₦1 at ₦1.40. Applications are received for 3,500,000 shares, with money, and 2,000,000 shares are allotted. (a) Calculate the money received, the amount credited to share capital and share premium, and the refund. (3 marks) (b) Give the journal entries. (7 marks)
Model answers
Show the model answer to Question 11
(a) Share premium is the excess of the issue price over the nominal value, credited to a separate reserve. It is not distributable as a dividend. It may be used to pay up bonus shares, to write off the expenses of issuing shares, to provide for a premium payable on redeeming preference shares, and to purchase the company’s own shares.
(b) A rights issue offers new shares to existing shareholders in proportion to their holdings, usually below market price, and for cash, so it increases total equity. A bonus issue gives free shares out of reserves, with no cash received, so it increases share capital but not total equity. The shareholder’s proportion of ownership is unchanged by a bonus issue.
Show the model answer to Question 12
(a)
- Rights issue.
800,000 ÷ 4 = 200,000 shares at 1.80 = 360,000. - Dr Bank 360,000, Cr Share capital 200,000, Cr Share premium 160,000.
- Issue costs: Dr Share premium 6,000, Cr Bank 6,000.
- Share premium is now 200,000 + 160,000 − 6,000 = 354,000.
- Shares in issue are 1,000,000.
- Bonus.
1,000,000 ÷ 5 = 200,000 shares, nominal 200,000. - Dr Share premium 200,000, Cr Share capital 200,000, leaving share premium of 154,000.
- Shares in issue are 1,200,000.
(b) Dividend = 1,200,000 × 0.05 = ₦60,000.
(c)
- Share capital.
800,000 + 200,000 + 200,000 = 1,200,000. - Share premium: 154,000.
- Retained earnings.
500,000 + 250,000 − 60,000 = 690,000. - Total equity ₦2,044,000.
- Check.
opening 1,500,000 + net rights proceeds 354,000 + profit 250,000 − dividend 60,000 = 2,044,000.
Show the model answer to Question 13
(a)
- Money received.
3,500,000 × 1.40 = ₦4,900,000. - Allotted shares.
2,000,000 × 1.40 = 2,800,000, of which share capital is 2,000,000 and share premium 800,000. - Refund = 4,900,000 − 2,800,000 = ₦2,100,000.
(b) Dr Bank 4,900,000, Cr Share application 4,900,000. Dr Share application 2,800,000, Cr Share capital 2,000,000 and Cr Share premium 800,000. Dr Share application 2,100,000, Cr Bank 2,100,000.
Pathfinder on Share capital: issue of shares, rights, bonus issues and changes in equity
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
From the previous syllabus. Asks for the number of shares in a company’s memorandum from an authorised share capital of ₦1,000,000 in shares of 50 kobo, where enough shares at par were issued to raise ₦900,000.
Revise first: Key terms
From the previous syllabus. Asks for the total dividends paid from issued and paid-up capital of ₦376,000 in shares of 50 kobo, a share premium of ₦234,000 and a dividend of 16 kobo a share.
Revise first: Dividends
From the previous syllabus. Asks for the share premium balance after an issue of 140,000 shares of ₦20 at ₦120 with issue costs of ₦2,000,000.
Revise first: Issuing shares for cash
Asks what role the statement of changes in equity plays in reporting and decision-making. It summarises equity transactions and shows ownership changes over time.
Revise first: The statement of changes in equity
From the previous syllabus. A company final accounts question where the directors recommend a transfer of ₦15,000,000 to general reserves and a 5% dividend on ordinary share capital.
Revise first: Dividends
From the previous syllabus. The marking guide of this company final accounts question awards marks for entries in a statement of changes in equity, with retained earnings for the year carried to the total column.
Revise first: The statement of changes in equity
Expect an item on share premium after issue costs, on a dividend from shares in issue, on the effect of a bonus or rights issue, or on what equity contains. Check Section A of every diet you practise.
Revise first: Issuing shares for cash
Source: ICAN Pathfinder, Financial Accounting. Diets covered: November Diet, 2015, May Diet, 2018, May Diet, 2021, November Diet, 2021, May Diet, 2022, November Diet, 2022 and May Diet, 2024 (the later ones are not all on the previous syllabus). Rights and bonus issues are new syllabus items and no past diet asks for them directly. Diets before November 2014, and November Diet, 2024 onwards, are not covered here.
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