Post on 18-Nov-2014
Accounting for issue and Accounting for issue and forfeiture of shares forfeiture of shares
Accounting for issue of shares and debentures
Define the issue price of sharesDefine the issue price of sharesDifferentiate between preference shares, ordinary chares Differentiate between preference shares, ordinary chares and deferred shares and deferred shares Distinguish between issued capital, uncalled capital and Distinguish between issued capital, uncalled capital and share capital or paid-up capital share capital or paid-up capital Describe the concept of partly paid shares and calls on Describe the concept of partly paid shares and calls on unpaid share capitalunpaid share capitalAccount for public company share issuesAccount for public company share issuesDefine the various costs associated with share issues and Define the various costs associated with share issues and account for those costsaccount for those costsDifferentiate between debentures, mortgage debentures and Differentiate between debentures, mortgage debentures and unsecured notesunsecured notesAccount for the issue and redemption of debenturesAccount for the issue and redemption of debentures
Capital Structure
Equity Share CapitalEquity Share Capital Preference Share CapitalPreference Share Capital DebentureDebenture Long Term BorrowingsLong Term Borrowings Fixed DepositsFixed Deposits
Share Capital
•Owners of companies are called shareholders•Founding members are also known as subscribers•All shareholders are sometimes referred to as members•Shares in a Public company can be purchased when the company issues a prospectus•Shares in a Public company can also be traded on the stock exchange
Classes of Shares
Ordinary SharesOrdinary SharesPreference SharesPreference SharesDeferred or founder SharesDeferred or founder Shares
Ordinary Shares
Basic typeBasic typeFull voting rightsFull voting rightsRight to receive dividendsRight to receive dividends
Preference Shares
Preferential rights to a fixed rate of dividends Preferential rights to a fixed rate of dividends before dividends to ordinary shareholders are before dividends to ordinary shareholders are declareddeclaredRepayment of capital when company is wound Repayment of capital when company is wound upupParticipation in surplus assets and profitsParticipation in surplus assets and profitsCumulative and non-cumulative dividendsCumulative and non-cumulative dividendsVoting rightsVoting rightsPriority of payment of capital and dividendsPriority of payment of capital and dividends
Deferred or Founder Shares
Issued to initial subscribers/promotersIssued to initial subscribers/promotersDividends usually paid after being paid to other Dividends usually paid after being paid to other shareholdersshareholdersFounders are shareholders who start up the Founders are shareholders who start up the company before shares are issued to the publiccompany before shares are issued to the public
Issue price of shares
Maximization of shareholder wealthMaximization of shareholder wealthEffect on the market price of existing sharesEffect on the market price of existing sharesRequirement to sell a desired volume of sharesRequirement to sell a desired volume of sharesExpectation of future profits and dividends to Expectation of future profits and dividends to service the new sharesservice the new sharesWhether listing is proposed or already existsWhether listing is proposed or already existsUsage of an underwriter Usage of an underwriter
Types of Share Capital
Authorised Share CapitalAuthorised Share Capital Issued CapitalIssued Capital Subscribed CapitalSubscribed Capital Called up CapitalCalled up Capital Paid up CapitalPaid up Capital
Uncalled and paid up share capital
Shares can be issued to be paid in full or issued partly paid Shares can be issued to be paid in full or issued partly paid with the balance paid at a future date(s)with the balance paid at a future date(s)Amounts to be paid at a future date are referred to as callsAmounts to be paid at a future date are referred to as callsA company’s share capital is also referred to as paid-up A company’s share capital is also referred to as paid-up capital = number of shares issued by the amount that the capital = number of shares issued by the amount that the directors require as payment of sharesdirectors require as payment of sharesThe amount not required for payment is referred to as the The amount not required for payment is referred to as the uncalled amount uncalled amount
Share CapitalShare Capital Uncalled capitalUncalled capital
No of shares No of shares issuedissued
100,000100,000 100,000100,000
Amt Amt called/uncalledcalled/uncalled
0.500.50 1.501.50
TotalTotal 50,00050,000 150,000150,000
Procedure for issuing shares under a prospectus
The Prospectus together with an application form The Prospectus together with an application form is made available to the general public.is made available to the general public.Receiving applications alongwith the application Receiving applications alongwith the application money. Minimum subscription must be received money. Minimum subscription must be received before allotmentbefore allotmentAllotment of shares at director’s discretionAllotment of shares at director’s discretionAllotment advice is communicated to the Allotment advice is communicated to the applicant. Allotment monies may be required at applicant. Allotment monies may be required at this stagethis stageMaking calls for payment of balance money, if Making calls for payment of balance money, if anyany
Share capital issued upon the registration of a company
SubscribersSubscribers DrDr
Share Share CapitalCapital
CrCr
Issue shares to SubscribersIssue shares to Subscribers
BankBank DrDr
SubscribersSubscribers CrCr
Subscriber Receipt upon PaymentSubscriber Receipt upon Payment
Share capital issued by prospectus
Payment in full on applicationPayment in full on applicationPart payment on application, balance payable on Part payment on application, balance payable on allotment of the sharesallotment of the sharesPart payment on application and allotment, with Part payment on application and allotment, with the balance payable in callsthe balance payable in calls
Shares issued fully paid on application
Fully paid on applicationFully paid on applicationNumber of shares issued by the directors agrees Number of shares issued by the directors agrees exactly with the no applied forexactly with the no applied forAll applicants have been received with the full All applicants have been received with the full amountamount
Shares issued fully paid on application
Journal EntryJournal Entry
Bank Bank AccountAccount
DrDr
Share Share ApplicationApplication
CrCr
Being the amount of application Being the amount of application money received money received
Shares issued fully paid on application
Journal EntryJournal Entry
Share Share ApplicationApplication
DrDr
Share Share CapitalCapital
CrCr
Being the amount of application Being the amount of application money transferred to Share money transferred to Share Capital A/cCapital A/c
Shares issued fully paid on application
Journal EntryJournal Entry
Share Share ApplicationApplication
DrDr
BankBank CrCr
Being the excess of application Being the excess of application money returned to the applicantsmoney returned to the applicants
Allotment of Shares
Journal EntryJournal Entry
Share Share AllotmentAllotment
DrDr
Share Share CapitalCapital
CrCr
Being the no of shares allotted X Being the no of shares allotted X Allotment money dueAllotment money due
Journal Entries on Call Payments
Journal EntryJournal Entry
Share CallShare Call DrDr
Share Share CapitalCapital
CrCr
No of Shares alloted X Call No of Shares alloted X Call money duemoney due
Journal Entry on Call Money Received
Journal EntryJournal Entry
BankBank DrDr
Share 1Share 1stst/2/2ndnd / Final Call/ Final Call
CrCr
Being the amount received on Being the amount received on the 1the 1stst/2/2ndnd/Final Call /Final Call
Calls in arrears
Call on shares is madeCall on shares is madeCo may not receive all call monies owedCo may not receive all call monies owedCall account remains in a debit balanceCall account remains in a debit balanceNew account – Call in arrears and the above is New account – Call in arrears and the above is transferred to this accounttransferred to this accountCall in arrears = Shareholder equity account = Call in arrears = Shareholder equity account = reduction in share capitalreduction in share capitalCo constitution may call for shareholders with Co constitution may call for shareholders with calls in arrears to forfeit their shares and the share calls in arrears to forfeit their shares and the share reissuedreissued
Calls in Arrear
Journal EntryJournal Entry
Calls in arrearsCalls in arrears DrDr
Share Share Allotment Allotment
Share 1Share 1stst/2/2ndnd//
Final CallFinal Call
CrCr
CrCr
Issue Shares to Applicants Issue Shares to Applicants
Call Money received in advance
Journal EntryJournal Entry
BankBank DrDr
Calls in Calls in AdvanceAdvance
CrCr
Money received in advance Money received in advance
Calls in advance adjusted
Journal EntryJournal Entry
Calls in Calls in advanceadvance
DrDr
Share Share 11stst/2/2ndnd/Final /Final CallCall
CrCr
Money received in advance Money received in advance adjusted adjusted
Interest payable on Calls in advance
Journal EntryJournal Entry
Interest on Interest on Calls in Calls in advanceadvance
DrDr
Sundry Sundry ShareholdersShareholders
CrCr
Interest payable on calls in Interest payable on calls in advanceadvance
Shares issued at Premium A company is allowed to issue shares at premiumA company is allowed to issue shares at premium The amount of premium is transferred to “Share Premium The amount of premium is transferred to “Share Premium
A/c”A/c” The share premium amount can be utilized The share premium amount can be utilized
In writing off preliminary expensesIn writing off preliminary expenses For issue of shares as fully paid bonus sharesFor issue of shares as fully paid bonus shares For premium payable on redemption of preference For premium payable on redemption of preference
sharesshares In writing off any discount allowed on issue of In writing off any discount allowed on issue of
shares/debenturesshares/debentures In buying back its own securitiesIn buying back its own securities
Shares issued at Premium
Journal EntryJournal Entry
Share Share ApplicationApplication
DrDr
Share capitalShare capital
Share PremiumShare Premium
CrCr
CrCr
Premium is paid with application Premium is paid with application moneymoney
Shares Alloted at premium
Journal EntryJournal Entry
Share AllotmentShare Allotment
Share CallShare Call
DrDr
DrDr
Share premiumShare premium CrCr
Being Being Adjustment of share premium due on……shares @Rs…….per share
Illustration
Luxuary Cars Ltd. issued 100000 shares of Rs 10 each at a premium of Rs 5 per share, payable as:
On application Rs. 4 (including Rs 2 premium) per share
On allotment Rs 8 (including Rs 3 premium) per share
On call Rs. 3 per shareApplications were received for 100000 shares and allotment was made to all.Make journal entries.
Shares issued at discount Section 79 of Companies Act 1956 has laid down certain
conditions subjectto which a company can issue its shares at a discount. These conditions areas follows :
(i) At least one year must have elapsed from the date of commencementof business;
(ii) Such shares are of the same class as had already been issued; (iii) The company has sanctioned such issue by passing a
resolution in its General meeting and the approval of the court is obtained.
(iv) Discount should not be more than 10% of the face value of the share and if the company wants to give discount more than 10%,
it will have to obtain the sanction of the Central Government.
Shares issued at Discount
Journal EntryJournal Entry
Share AllotmentShare Allotment
Discount on Discount on issue of sharesissue of shares
DrDr
DrDr
Share capitalShare capital CrCr
Being shares issued at discountBeing shares issued at discount
Illustration Sri Krishna Agro Chemical Ltd. was registered with a
capital of Rs 5000000divided into 50000 shares of Rs 100 each. It issued 10000 shares at discount of Rs 10 per share, payable as :
Rs 40 per share on application Rs 30 per share on allotment Rs 20 per share on call. Company received applications for 15000 shares.
Applicants for 12000 shares were allotted 10000 shares and applications for the remaining shares were sent letters of regret and their application money was returned. Call was made. Allotment and call money was duly received. Make journal entries in the books of the company.
Retention of excess application monies
Prospectus issued calls for monies to be paid on Prospectus issued calls for monies to be paid on application, allotment and future callsapplication, allotment and future callsSome applicants may forward all monies in the Some applicants may forward all monies in the hope that they receive preferential treatment.hope that they receive preferential treatment.Co may choose to keep this money and allocate Co may choose to keep this money and allocate it against money owing on allotment and future it against money owing on allotment and future callscallsDirectors can only make this decision if allowed Directors can only make this decision if allowed by Co constitutionby Co constitution
Retention of excess application monies
Amt received from Amt received from applications allocated applications allocated toto
Calls in Calls in AdvanceAdvance
Shares Shares applied applied forfor
Paid Paid to $to $
Amt Amt received received
SharesShares
AllottedAllotted
Application Application of of
Allotment Allotment of of
Call 1 Call 1 Call 2Call 2 Application Application refund refund
Costs associated with share issue
Preparation of prospectusPreparation of prospectus Registration with SEBIRegistration with SEBI PublicationPublication Receipt of moneyReceipt of money Issue of sharesIssue of shares Including stamp duty and taxes, professional advisers’ Including stamp duty and taxes, professional advisers’
fees, underwriting costs, commissions and brokerage fees, underwriting costs, commissions and brokerage feesfees
The above “equity issue costs” must be recognizedThe above “equity issue costs” must be recognized in in equityequity
Indirect costs are not included as transaction costs.Indirect costs are not included as transaction costs.
Costs associated with share issue
Journal entryJournal entry
Transaction Transaction costscosts
DrDr
BankBank CrCr
Recording of transaction costsRecording of transaction costs
Issue of Bonus Shares
Bonus Shares may be issued at par or at premiumBonus Shares may be issued at par or at premium Before Bonus shares are issued all the existing Before Bonus shares are issued all the existing
shares must be either fully paid or made fully paidshares must be either fully paid or made fully paid Whenever Bonus is declared Share Capital Whenever Bonus is declared Share Capital
increases and Reserves decreaseincreases and Reserves decrease Declaration of Bonus is known as Capitalization Declaration of Bonus is known as Capitalization
of reserveof reserve
Sources of Declaration of Bonus
P & L A/c credit balanceP & L A/c credit balance General ReserveGeneral Reserve Capital ReserveCapital Reserve Balance in Debenture Redemption or Sinking FundBalance in Debenture Redemption or Sinking Fund Capital Redemption ReserveCapital Redemption Reserve Share Premium A/cShare Premium A/c Capital Redemption Reserve & Share Premium A/c can be Capital Redemption Reserve & Share Premium A/c can be
used only for issue of fully paid bonus shares and not for used only for issue of fully paid bonus shares and not for making partly paid shares fully paidmaking partly paid shares fully paid
When Bonus is declared
Journal entryJournal entry
General General Reserve Reserve
DrDr
Bonus to Bonus to ShareholdersShareholders
CrCr
Being Bonus declared Being Bonus declared
Bonus utilised for issue of Bonus Shares at Par
Journal entryJournal entry
Bonus to Bonus to ShareholdersShareholders
DrDr
Share CapitalShare Capital CrCr
Being Bonus amount used for Being Bonus amount used for issue of Sharesissue of Shares
Bonus Utilised for issue of Bonus Shares at Par
Journal entryJournal entry
Bonus to Bonus to Shareholder’s A/cShareholder’s A/c
DrDr
Share Capital A/cShare Capital A/c CrCr
Being Bonus amount used for Being Bonus amount used for issue of Bonus Sharesissue of Bonus Shares
Bonus Utilised for issue of Bonus Shares at Premium
Journal entryJournal entry
Bonus to Bonus to Shareholder’s A/cShareholder’s A/c
DrDr
Share Capital A/cShare Capital A/c
Share Premium A/cShare Premium A/c
CrCr
CrCr
Being Being Bonus utilised forBonus utilised forissue of Bonus Shares at Premiumissue of Bonus Shares at Premium
Forfeiture and Re-issue of shares
By becoming a shareholder a person enters into a By becoming a shareholder a person enters into a contract with the company that he is liable to pay contract with the company that he is liable to pay full price of the share to the company from time to full price of the share to the company from time to time and as and when the calls are made by the time and as and when the calls are made by the companycompany
If he fails to comply the company can forfeit his If he fails to comply the company can forfeit his sharesshares
Forfeiting means taking back the shares without Forfeiting means taking back the shares without giving any compensation to the shareholdergiving any compensation to the shareholder
Procedure
As per Articles of Association the company As per Articles of Association the company has power to forfeit the shares only for non has power to forfeit the shares only for non payment of call moneypayment of call money
Notice to the defaulting shareholder sent Notice to the defaulting shareholder sent warning him about the forfeiture of shareswarning him about the forfeiture of shares
On shareholder’s failure to pay the amount On shareholder’s failure to pay the amount due in time a resolution to forfeit the shares due in time a resolution to forfeit the shares is passed by the directorsis passed by the directors
Forfeiture of shares issued at par
Amount called up are debited to Share Amount called up are debited to Share Capital A/c – Forfeiture means cancellation Capital A/c – Forfeiture means cancellation of shares and reduction in share capitalof shares and reduction in share capital
Unpaid amount is credited to Share Unpaid amount is credited to Share Allotment or Calls-in-Arrears A/cAllotment or Calls-in-Arrears A/c
Amount received so far on forfeited shares Amount received so far on forfeited shares is transferred to Shares Forfeited A/cis transferred to Shares Forfeited A/c
Forfeiture of shares issued at Par
Journal entryJournal entry
Share Capital A/cShare Capital A/c DrDr
Share Allotment/ Share Allotment/ Call A/cCall A/c
Shares forfeited A/cShares forfeited A/c
CrCr
CrCr
Being Being Forfeiture of shares issued Forfeiture of shares issued at parat par
Forfeiture of shares issued at Premium
Journal entryJournal entry
Share Capital A/cShare Capital A/c
Share Premium A/cShare Premium A/c
DrDr
DrDr
Share Allotment A/cShare Allotment A/c
Shares forfeited A/cShares forfeited A/c
CrCr
CrCr
Being Being Forfeiture of Shares at Forfeiture of Shares at PremiumPremium
Forfeiture of shares issued at Discount
Journal entryJournal entry
Share Capital A/cShare Capital A/c DrDr
Dis on Issue of Dis on Issue of Shares Shares
Share Allotment A/cShare Allotment A/c
Shares Forfeited A/cShares Forfeited A/c
CrCr
CrCr
CrCr
Being Being Forfeiture of shares Forfeiture of shares issued at Discountissued at Discount
Reissue of shares at Par
Journal entryJournal entry
Bank A/cBank A/c DrDr
Shares Capital A/cShares Capital A/c CrCr
Being Being __ no of shares re-issued at __ no of shares re-issued at par par
Re-issue of shares at Premium
Journal entryJournal entry
Bank A/cBank A/c DrDr
Share Capital A/cShare Capital A/c
Share Premium A/cShare Premium A/c
CrCr
CrCr
Being Being ___ no of shares ___ no of shares issued at Premiumissued at Premium
Re-issue of shares at Discount
Journal entryJournal entry
Bank A/cBank A/c
Shares Forfeited A/cShares Forfeited A/c
DrDr
DrDr
Shares Capital A/cShares Capital A/c CrCr
Being ____ no of shares Being ____ no of shares issued at issued at DiscountDiscount
Profit on Re-issue
1.1. Amt received originally on forfeited Amt received originally on forfeited sharesshares
2.2. (Re-issued shares/ Forfeited shares) * 1(Re-issued shares/ Forfeited shares) * 1
3.3. Discount on Re-issued shares = Paid up Discount on Re-issued shares = Paid up price less Re-issue priceprice less Re-issue price
4.4. Profit on Re-issue = Amt forfeited less Profit on Re-issue = Amt forfeited less DiscountDiscount
Bookbuilding
Occurs where an investment banker solicits Occurs where an investment banker solicits bids from institutional investors prior to bids from institutional investors prior to pricing an equity issuepricing an equity issue
Stapled securities
Stapling is an arrangement under which Stapling is an arrangement under which different securities are quoted jointlydifferent securities are quoted jointly