Accounting for share issue and profit appropriation In year 5, a group of business school graduates decide to launch a courier service in an unnamed EU country. They call their company Iris and its logo shows a pair of winged (and nimble) feet.

Listed below are key events in years 6 and 7 which affect Iris’s shareholders’ equity. (All currency amounts are in euros.)

1 The company issues 400,000 shares for 15 a share on 2 January year 6. The shares are fully paid in year 6. The par value of a share is 5.

2 The company has a 31 December year-end. At the end of year 6, it reports a net profit of 1 million.

This is recorded in a ‘Profit for the year’ account in the year 6 balance sheet.

3 Iris’s shareholders approve the following appropriation of profits in June year 7:

– a cash dividend of 1 a share;

– a transfer of 10% of profits to a legal reserve, as required by law;

– the balance of the year 6 profit to be retained.

4 Iris’s shareholders also approve the declaration of a 10% share dividend in June. The company accounts for the dividend by capitalising retained profits at the par value of the shares issued.

Required

(a) Show the effect of the events listed above on the company’s accounts, using journal entries or the balance sheet equation. Specify the shareholders’ equity account(s) affected. If assets or liabilities are affected, assume the entry is to ‘Net assets’.

(b) An investor buys 8,000 Iris shares on 2 January year 6, and is still holding them in June year 7.

What journal entries does he make in his own accounts at the time of the above events? Assume he has a 31 December year-end and accounts for investments at cost. What is the cost per share of his investment in Iris at the end of June year 7?

Check figure:

(a) Share capital, June year 7 2.2 million AppenedixLO1