ACCA Applied Knowledge · Financial Accounting

Capital structure and finance costs: formula sheet

Full chapter guide

Key formulas

Share capital: Share capital = number of shares × nominal value per share; Only nominal value goes to share capital. Any excess received goes to share premium.
Preference dividend: Dividend = number of shares × nominal value × dividend rate; The rate applies to nominal value, not to issue price.
Classification rule (IAS 32): Obligation to pay cash (redemption or dividend) → liability; no obligation → equity; Judge by substance and contract terms, not by the word 'share'.
Accounting for liability preference shares: Dividend: Dr Finance costs, Cr Cash/Payables. Shares: shown in liabilities; Do not put these dividends in the statement of changes in equity.
Accounting for equity preference shares: Dividend: Dr Retained earnings, Cr Cash. Shares: shown in equity; Recognise the dividend only when it is declared or appropriately authorised.
Share capital credited: Number of shares × nominal value per share; Always uses nominal value, whatever price was paid.
Share premium credited: Number of shares × (issue price − nominal value); Only arises when issue price is above nominal value.
Cash received: Number of shares × issue price; Equals share capital plus share premium.
Journal for issue at a premium: Dr Cash/Bank (total proceeds); Cr Share capital (nominal); Cr Share premium (excess); Total debits must equal total credits.
Issue costs: Dr Share premium; Cr Cash/Bank; Costs of issuing shares are deducted from equity, not expensed in profit or loss.
Number of new shares: New shares = existing shares × (new shares ÷ shares held in the ratio); For a 1 for 4 issue, multiply existing shares by 1/4.
Bonus issue journal: Dr Share premium / Retained earnings / other reserve; Cr Share capital (new shares × nominal value); No cash entry. Total equity is unchanged.
Rights issue journal: Dr Cash (new shares × issue price); Cr Share capital (new shares × nominal value); Cr Share premium (new shares × (issue price − nominal value)); Equity and cash both rise by the cash received.
Issue costs: Dr Share premium; Cr Cash (costs of issuing shares); Costs of issuing equity are deducted from equity, not expensed in profit or loss.
Theoretical ex-rights price (TERP): TERP = total value of shares after the issue ÷ total number of shares after the issue; Value after = (old shares × market price) + cash raised. Used in calculations, but accounting entries use issue price.
Closing equity component: Closing balance = Opening balance + increases − decreases; Apply to each column of the SOCE separately, then check the total column.
Share issue for cash: Share capital increase = shares issued × nominal value; Share premium = shares issued × (issue price − nominal value); Cash received equals the sum of both.
Total comprehensive income: Total comprehensive income = Profit for the year + Other comprehensive income; Profit goes to retained earnings. Revaluation gain goes to revaluation surplus.
Retained earnings roll-forward: Closing retained earnings = Opening + Profit for the year − Dividends paid; Use dividends paid in the year, not dividends proposed after the year end.
Revaluation surplus on revaluation: Surplus = Revalued amount − Carrying amount before revaluation; Credited to the revaluation surplus via OCI. A decrease is first set against any existing surplus on that same asset.
Bonus issue (from reserves): Share capital increases; reserves decrease by the same amount; Total equity does not change. No cash is received.
Ordinary dividend: Dividend = number of shares × dividend per share; Use the number of shares in issue, not the nominal value amount, unless the question gives a rate on nominal value.
Dividend on nominal value: Dividend = nominal value of shares × dividend rate; Used for preference shares, for example 5% on $200,000 of shares = $10,000.
Entry when dividend is paid: Dr Retained earnings (SOCIE) Cr Cash; Applies to interim dividends and final dividends paid in the year.
Entry when dividend is declared but unpaid at year end: Dr Retained earnings (SOCIE) Cr Dividends payable (current liability); Only if declared or approved on or before the reporting date.
Redeemable preference dividend: Dr Finance costs (P&L) Cr Cash or accrued liability; Treated as interest because the shares are a liability under IAS 32.
Closing retained earnings: Opening retained earnings + profit for the year − dividends recognised in the year; Dividends recognised, not dividends proposed after the year end.
Annual interest (coupon): Nominal value × coupon rate; This is the cash interest. Use it when loan notes are issued at par with no issue costs.
Part-year interest: Nominal value × coupon rate × months outstanding ÷ 12; Use for loans issued or redeemed during the year.
Interest accrual: Finance cost for the year − interest paid = interest accrued; Show the accrual as a current liability.
Initial carrying amount: Proceeds − issue costs; The liability starts at the net amount received.
Amortised cost roll-forward: Closing liability = Opening liability + finance cost (opening × effective rate) − cash interest paid; Finance cost is charged at the effective rate, not the coupon rate.
Finance cost entry: Dr Finance costs (profit or loss); Cr Bank or Accrued interest; Accrued interest is credited when not yet paid.

Quick revision

Share capital is recorded at nominal value, not at the issue price.
Share premium = issue price − nominal value, multiplied by the number of shares.
Share premium is a reserve, not part of share capital.
A bonus issue moves reserves into share capital and brings in no cash.
A rights issue offers shares to existing shareholders, usually below market price, and brings in cash.
Ordinary dividends are recognised when declared, not when proposed after the year end.
Dividends are shown in the statement of changes in equity, not in profit or loss.
Redeemable preference shares are normally classed as liabilities, and their dividends are finance costs.
Loan note interest is a finance cost in profit or loss, accrued if unpaid at the year end.
Interest = loan amount × coupon rate, based on the nominal value of the loan.
Equity items in the statement of changes in equity must agree to the statement of financial position.
In multiple response questions, select exactly the stated number of options.

Common mistakes

Treating all preference shares as equity. Fix: Apply the obligation test. Redeemable or mandatory-dividend preference shares are liabilities.
Putting liability preference dividends in the statement of changes in equity. Fix: If the shares are a liability, the dividend is a finance cost in profit or loss.
Crediting the whole proceeds to share capital. Fix: Split the proceeds: nominal value to share capital, the excess to share premium.
Treating share premium as income in profit or loss. Fix: Remember it is a capital receipt from owners. It goes straight to equity.
Recording cash received in a bonus issue. Fix: Ask whether the shares are free. If so, there is no cash entry, only a transfer between equity accounts.
Crediting the whole rights issue proceeds to share capital. Fix: Credit only nominal value to share capital. Credit the excess to share premium.
Putting a revaluation gain into profit or loss. Fix: A revaluation gain on property, plant and equipment goes to other comprehensive income and the revaluation surplus.
Recording share premium as part of share capital. Fix: Split the cash: nominal value to share capital, the rest to share premium.
Accruing a proposed final dividend as a liability at the year end Fix: Apply IAS 10. If it was not declared or approved by the reporting date, there is no obligation. Disclose it in the notes only.
Charging an ordinary dividend in profit or loss Fix: Dividends are distributions of profit. Show them in the SOCIE, never in profit or loss (except redeemable preference dividends, which are finance costs).

Exam tips

Read the terms of the preference shares for the words 'redeemable' and 'mandatory' before anything else.
In multiple response questions, select exactly the stated number of options and check each against the obligation test.
In number entry questions, check whether the answer is before or after the finance cost.
Remember that gearing rises when preference shares are classified as liabilities.
In multiple choice, the wrong options are often built from common errors, such as the full proceeds in share capital. Calculate your own answer before looking at the options.
In number entry questions, check whether the question wants the premium, the share capital or the closing balance. Re-read the last line before you type.
If a question gives total share capital and the nominal value, find the number of shares first.
Issue costs reduce share premium, not profit. Do not subtract them from share capital.