When shareholders subscribe to a rights issue and pay cash, which journal entry records the transaction?

When shareholders subscribe to a rights issue and pay cash, which journal entry records the transaction?

• A. Dr Bank; Cr Share Capital and Share Premium
• B. Dr Bank; Cr Share Capital only
• C. Dr Share Premium; Cr Bank
• D. Dr Retained Earnings; Cr Bank

Answer: (A)

When cash is received for a rights issue, the company receives an asset (cash) and increases equity to reflect the new shares issued. The cash is debited to Bank, and the equity is increased by crediting the nominal value to Share Capital and any amount above nominal to Share Premium. This entry shows the full breakdown of the funds received: the portion that represents the share’s par value goes to Share Capital, and any extra paid over par goes to Share Premium. For example, if 100 shares with a nominal value of 1 each are issued at 1.50, the entry is Dr Bank 150; Cr Share Capital 100; Cr Share Premium 50. If there is no premium, only the Share Capital would be credited. The other options misstate the flow of funds (for instance, recording a debit to Retained Earnings or crediting Bank against Share Premium) and don’t reflect the correct increase in equity from the new shares.

When cash is received for a rights issue, the company receives an asset (cash) and increases equity to reflect the new shares issued. The cash is debited to Bank, and the equity is increased by crediting the nominal value to Share Capital and any amount above nominal to Share Premium. This entry shows the full breakdown of the funds received: the portion that represents the share’s par value goes to Share Capital, and any extra paid over par goes to Share Premium. For example, if 100 shares with a nominal value of 1 each are issued at 1.50, the entry is Dr Bank 150; Cr Share Capital 100; Cr Share Premium 50. If there is no premium, only the Share Capital would be credited. The other options misstate the flow of funds (for instance, recording a debit to Retained Earnings or crediting Bank against Share Premium) and don’t reflect the correct increase in equity from the new shares.