## Right Shares — Treatment under AS 13

### What Are Right Shares?

A rights issue gives existing shareholders the option to subscribe for new shares at a fixed price, proportional to their current holding. The shareholder has two choices:

1. Subscribe — pay the issue price and receive new shares

2. Renounce — sell the right entitlement for cash

### Accounting Treatment

Case A — Rights Subscribed:

```

Investment A/c Dr (subscription cost)

To Bank/Cash A/c (same amount)

```

The new shares and their cost are added; WAM is recalculated.

Case B — Rights Renounced (sold):

```

Bank/Cash A/c Dr (sale proceeds)

To P&L A/c (profit — entire proceeds)

```

Rights have zero carrying cost, so the entire proceeds go to P&L.

### Determining Eligible Shares

> Rights are allotted based on shares held on the record date, not on the original holding. If shares were sold before the record date, those sold shares do not earn rights.

Formula: Eligible shares (on record date) ÷ rights ratio = Right shares entitlement

### Installment Payments

Right shares may require payment in installments. Each installment is a separate debit to the Investment Account.

### Renouncement Proceeds — No Cost Allocation

Under AS 13, rights renounced do not require cost allocation from the original investment. The full sale value is income.

Worked example

### Example 1

Example 1 (WN2 — Page 49):

Eligible: 25,000 + 5,000 = 30,000 shares
Rights offered; 15,000 subscribed at ₹10 each:
Investment A/c Dr ₹1,50,000 | To Bank ₹1,50,000
5,000 rights renounced at ₹2 each = ₹10,000:
Bank A/c Dr ₹10,000 | To P&L ₹10,000

### Example 2

Example 2 (WN2 — Page 51-52):

Eligible shares on record date: 1,500 + 1,000 = 2,500 shares → 1,000 right shares issued
600 subscribed at ₹20 = ₹12,000:
Investment Dr ₹12,000 | To Bank ₹12,000
400 renounced at ₹3 each = ₹1,200:
Bank Dr ₹1,200 | To P&L ₹1,200

### Example 3

Example 3 (Q27 — Page 54-55):

Record date shares: 40,000 − 8,000 (sold 15.05) = 32,000 shares
Rights ratio 1:5 → 6,400 rights; 4,000 subscribed + 2,400 renounced
4,000 subscribed at ₹1.50 in two installments:
15 July: Invest Dr ₹3,000 (₹0.75 × 4,000) | To Bank ₹3,000
15 Sept: Invest Dr ₹3,000 (₹0.75 × 4,000) | To Bank ₹3,000
2,400 renounced at ₹0.40 = ₹960:
Bank Dr ₹960 | To P&L ₹960
Note: 'No effect in ledger' for renouncement means only P&L and CIB — no Investment ledger debit

⚠️ Common exam mistakes

Treating renouncement proceeds as recovery of cost (credited to Investment A/c) instead of P&L income
Calculating right share entitlement on original holding instead of shares held on the record date
Missing a second installment entry — each installment is a separate debit to Investment A/c
Netting subscribed and renounced portions instead of accounting for each separately

Bare-Act text Para 13 (Cost of Investments — Rights) · AS 13 – Accounting for Investments (ICAI) · click to expand

When rights shares are renounced by the investor, the sale proceeds should be taken to the profit and loss account. Where rights shares are subscribed, the cost is the amount paid for subscribing to the rights issue.

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AS 13 – Right Shares: Subscribed vs Renounced Treatment

Worked example

⚠️ Common exam mistakes