On reviewing the financial statements, the company’s accountant notices that the capitalization issue of 1 for 5 ordinary shares made by the company in December Year 2 has not been reflected in the company’s statement of financial position (balance sheet). Ordinary shares of the company are regarded as having a market value of £3 per share. What will be the effect on the statement of financial position (balance sheet)

when this omission is rectified?

(a) Increase called up share capital by £75,000 and increase cash by £75,000

(b) Increase called up share capital by £150,000 and increase cash by £150,000

(c) Increase called up share capital by £75,000 and reduce retained earnings by £75,000

(d) Increase called up share capital by £150,000, create a share premium account of £300,000 and increase cash by £450,000

The share capital and reserves section of a company’s statement of financial position (balance sheet) as on 31 December Year 2 was as follows:

Consider each of the following situations independently.

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Ordinary shares (1.5 million of 25 pence nominal value) Retained earnings 000s 375 250 625