Issue Forfeiture of Shares

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


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




DrDr


CrCr

Being the amount of application Being the amount of application money transferred to Share money transferred to Share Capital A/cCapital A/c




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


Share Share AllotmentAllotment

DrDr


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


Share CallShare Call DrDr


CrCr

No of Shares alloted X Call No of Shares alloted X Call money duemoney due

Journal Entry on Call Money Received


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


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


BankBank DrDr

Calls in Calls in AdvanceAdvance

CrCr

Money received in advance Money received in advance

Calls in advance adjusted


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


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



DrDr

Share capitalShare capital

Share PremiumShare Premium

CrCr

CrCr

Premium is paid with application Premium is paid with application moneymoney

Shares Alloted at premium


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


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


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


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


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


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


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




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


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


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


Bank A/cBank A/c DrDr



CrCr

CrCr

Being Being ___ no of shares ___ no of shares issued at Premiumissued at Premium

Re-issue of shares at Discount


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

Issue Forfeiture of Shares

Documents

Transcript of Issue Forfeiture of Shares