Torque Mining Ltd issued a prospectus on 25 January 2013 inviting applications f

Question

Torque Mining Ltd issued a prospectus on 25 January 2013 inviting applications for up to 20 000 000 ordinary shares at an issue price of 20c each, payable in full on application. A minimum subscription of $3 000 000 was specified, with share issue costs of $376 350 expected to be incurred. The expected closing date for the offer was 15 March 2013. On 27 March 2013, the company advised that the Initial Public Offering had been withdrawn as the minimum subscription had not been reached.

(Based on information from Torque Mining Ltd, www.torquemining.com.au/news.)

Required

A. What is the rationale behind specifying a minimum subscription to be reached before a share issue can be made?

B. Assume that the minimum subscription was reached, the offer closed on 15 March 2013, and that 3,000,000 shares were issued on 27 March 2013 with share issue costs paid on that day. Prepare the journal entries required to be processed from the 25 January to the 27 March inclusive.

C. Given that the share issue was not completed, explain how any costs associated with the offer would be accounted for?

Explanation / Answer

A. A company is required to specify in the disclosure document what it intends to do with the funds expected to be raised. If the minimum subscription specified in the document is not met, no shares can be issued and all application money must be refunded. This is to protect investors as, if the minimum subscription is not reached, the company would not have adequate funds to achieve the objectives as stated in the disclosure document. This would place any investment at risk.

B. The entries required given these assumptions are:

To 15 Mar.

            Cash Trust                                                       Dr                3 000 000

                Application                                                 Cr                                        3 000 000

            (Money received on application)

27 Mar.

            Application                                                     Dr                3 000 000

                   Share Capital                                            Cr                                        3 000 000

            (Issue of 15m shares fully                               paid to 20c)

            Cash                                                                Dr                3 000 000

                Cash Trust                                                   Cr                                        3 000 000

            (Transfer on allotment of shares)

            Share Issue Costs/Share Capital                     Dr                   376 350

               Cash                                                             Cr                                           376 350

            (Costs of issuing the shares)

C. If the share issue was not completed the costs associated with the offer would be expensed to the profit/loss (AASB 132, para 37).

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