QUESTION 19 X Inc issued 1 Million shares of $ 1 face value for $ 40 each. It promises to buy back equity shares from the willing subscribers at the end of one year from the date issue of such equity shares @ $ 50 each. Is it a financial liability?
Yes, it is a financial liability as it represents a contractual obligation to pay cash to the shareholders in the future.
Calculation:
Number of shares issued = 1,000,000
Face value of shares = $ 1
Issue price of shares = $ 40
Total proceeds from issue of shares = Number of shares issued x Issue price
= 1,000,000 x $ 40
= $ 40,000,000
Promise to buy back shares at $ 50 each after one year represents the financial liability. The amount of financial liability will be calculated as:
Financial liability = Number of shares x Buyback price
= 1,000,000 x $ 50
= $ 50,000,000
Since the buyback price exceeds the proceeds from the issue of shares, the financial liability is higher than the equity component. Therefore, the excess amount of $ 10,000,000 will be recognized as a liability on the balance sheet.
Table:
Particulars Amount ($)
Proceeds from issue of shares 40,000,000
Financial liability (1,000,000 x $50) 50,000,000
Excess of financial liability over equity 10,000,000
