On reviewing the financial statements, the company’s accountant notices that the rights issue of 1 for 3 ordinary shares made by the company in December Year 2 has not been reflected in the company’s statement of financial position (balance sheet). Ordinary shares of the company are regarded as having a market value of £3 per share and have been issued at 10% below market value. What will be the effect on the statement of financial position (balance sheet) when this omission is rectified?

(a) Increase called up share capital by £125,000 and increase share premium by £250,000, increase in cash by £375,000

(b) Increase called up share capital by £125,000 and increase share premium by £1,225,000, increase in cash by £1,350,000

(c) Increase called up share capital by £500,000 and increase share premium by £1,500,000, increase in cash by £2,000,000

(d) Increase called up share capital by £500,000 and increase share premium by £850,000, increase in cash by £1,350,000

The share capital and reserves section of a company’s statement of financial position (balance sheet) as on 31 December Year 2 was as follows:

Consider each of the following situations independently.

Transcribed Image Text:

Ordinary shares (1.5 million of 25 pence nominal value) Retained earnings 000s 375 250 625