Case Study 2 (Total: 25 Marks) Issues of shares and options Torque Mining Ltd (TML) has been investigating the expansion of the company into new areas of development. In order to fund these new investments the company needs an increase in equity. On 1 April 2020 the company decided to make a public issue to raise $1 200 000 for new capital development. The company issued a prospectus inviting applications for 400 000, $3 shares, payable in full on application. There was an additional incentive offered by Torque Mining Ltd to investors, as those shareholders who acquired more than 20000 shares were allowed to acquire options at 50 cents each. These options allowed the investors to acquire shares in Torque Mining Ltd at $3.20 each, the acquisition having to occur before 30 November 2020. Torque Mining Ltd had received applications for 500 000 shares and 40 000 options by 30 June 2020. On 28 July the shares and options were allotted and money returned to unsuccessful applicants. All applicants who acquired options also received shares. By 30 November 2020 the price of each of Torque Mining's shares was $3.35. Holders of 36 000 options exercised their options in November, with the remaining options lapsing. The accountant of Torque Mining Ltd reported the Application Account as a liability in the statement of financial position prepared at 30 June 2020, arguing that this is consistent with the accounting for liability. He was also confused about accounting for the issue and exercise of options. The accountant seeks your assistance in accounting for ordinary shares and options. Required 1. Explain what application account is. (5 Marks) 2. What is a share option? Explain. (5 Marks) 3. How does a company account for share options that lapse? Explain. (5 Marks) 4. Prepare the journal entries in the records of Torque Mining Ltd in relation to the above events. (10 Marks)