Tammy Plc has made a rights issue of 2 million new ordinary shares for cash. Each ordinary share of the company has a par value of 50 pence. The current share price is 450 pence and the rights issue price is 320 pence. What is the correct double entry required to record this transaction in the company's books of account?
A) Debit cash £1,000,000
Credit share capital £1,000,000
B) Debit cash £6,400,000
Credit share capital £1,000,000
Credit share premium £5,400,000
C) Debit cash £7,400,000
Credit share capital £1,000,000
Credit share premium £6,400,000
D) Debit cash £9,000,000

Question

Quizplus · Accepted Answer

The correct double entry to record the transaction is to debit cash for the total amount received from the rights issue (£6,400,000, calculated as 2 million shares at £3.20 each) and credit share capital for the par value of the new shares issued (£1,000,000, calculated as 2 million shares at £0.50 each). The difference between the cash received and the par value of the shares (£5,400,000) is credited to share premium.

Tammy Plc Has Made a Rights Issue of 2 Million