Question 115 Marks

Nimai Ltd makes an offer of shares to the public. In its prospectus it notes that the shares are to be issued at $1.00 per share. The shares are to be paid in three instalments. The first payment, to be made on application, is $0.40. A second amount of $0.40 will be due within one month of allotment, and the third amount of $0.20 will be due within one month of the first and final call, which will be made within six months of the shares being allotted. Nimai Ltd will seek to issue 10 million shares. The closing date for applications is 31 August 20xx.

By the closing date, applications have been received for 14 million shares. To deal with the oversubscription, Nimai Ltd has decided to issue shares to all subscribers on a pro rata basis.All amounts due on allotment are paid by the due date. The first and final call for $0.20 is made on 30 November, with the amounts being due by 31 December. Holders of two million shares fail to pay the amount due on the call by the due date, and on 15 January next year these holders have their shares forfeited. The forfeited shares are auctioned on 15 February next year. An amount of $0.70 per share is received. The cost of holding the auction is $5000. The shares are sold as 'fully paid'.

In March, the company issued one million redeemable preference shares of $2.00 each. The shares offer a rate ofreturn of 7 per cent per annum. The shares can be later redeemed at the option of the shareholders.

Required:

a)Provide the accounting journal entries necessary to account for the above transactions.(12 marks)

b)Would you classify the preference shares as debt or equity? Why?(3 marks)

Note 1: Narrations are not required.