Study Note 7.1,Page 470 508

JOINT STOCK COMPANIES

Financial Accounting470

STUDY NOTE - 7


This study note includes

● Introduction

● Shares

◗ Issue of Shares at par, discount & premium, Forfeiture, Reissue of Shares.

◗ Right issue.

◗ Buy Back of Shares.

◗ Redemption of Preference Shares.

● Profit Prior to Incorporation.

● Debentures

◗ Issue and Redemption.

7.1. INTRODUCTION

Meaning of a Company

A company is a voluntary and autonomous association of certain persons with capital dividedinto numerous transferable shares formed to carry out a particular purpose in common. It is anartificial person created by law to achieve the object for which it is formed. Section 3(1) (i) ofthe Companies Act, 1956 defines a company as “Company formed and registered under thisAct or an existing company.” An existing company means a company formed and registeredunder any of the former Companies Acts. Thus it is an abstract person, invisible, intangibleand existing only in contemplation of law. It can hold, purchase or sell both movable andimmovable property, incur and pay debts, open a bank account in its own name and sue andbe sued in the same manner as an individual. Law creates it and law only can dissolve it. Itsexistence is altogether independent of the life of its members. Members may come and go butthe company would go on for ever. Transferability of shares has given perpetual succession toa company. Death, insanity or insolvency of a member or any member will not affect the exist-ence of the company at all. A company is a legal entity quite distinct and separate from thepersons who are its members. A company cannot ordinarily buy its own shares. A shareholderis not the agent of the company. He cannot incur any debt so as to bind the company. Theycannot bind the company by their acts. The same person can be a shareholder and a creditor ofthe company. The ownership is divorced from management because a joint stock company is’managed by a Board of Directors elected by the shareholders (i.e. owners).

471Financial Accounting

Characteristics of a Company

The main characteristics of a company are:

(i) It is a distinct legal person existing independent of its members(ii) Liability of the members is limited to the extent of the face value of shares held by them.(iii) It has a perpetual succession, i.e, the members of the company may keep on changing

from time to time but this does not affect the company’s continuity.(iv) The shares of a company are freely transferable except in case of a Private limited Com-

pany.(v) A company being a legal person is capable of owing, enjoying and disposing of the prop-

erty in its own name.(vi) A company, being a separate body can sue and be sued in its own name.(vii) Though a company is an artificial person yet it acts through human beings who are called

directors of the company. There is a divorce between ownership and the management.(viii) It is a voluntary association of persons usually for profit.

Statutory Books

Statutory books are those which a limited company is under statutory obligation to maintain atits registered office. The main statutory books are :

(i) Register of Investments held and their names

(ii) Register of charges

(iii) Register of Members

(iv) Register of debenture holders

(v) Annual returns

(vi) Minutes books

(vii) Register of contracts

(viii) Register of Directors

(ix) Register of shareholdings of the directors

(x) Register of loans to companies under the same management

(xi) Register of Investment in the shares of other companies.

Books of Account

Every company is required to keep at its registered office books of account.These books are to be maintained in such a way so as to disclose

(a) The sums of money received and expended by the company and the matter in respect ofwhich the receipt and expenditure has taken place.



(b) All sales and purchases of goods of the company.

(c) All assets and liabilities of the company.

Share Capital

No trading concern can run without capital. The divisions of share capital are:

(i) Nominal or Registered or Authorized Capital. The amount of capital with which thecompany intends to be registered is called registered capital. It is the maximum amountwhich the company is authorized to raise by way of public subscription. There is no legallimit on the extent of the amount of authorized capital.

(ii) Issued Capital. That part of the authorized capital which is offered to the public for sub-scription is called issued capital.

(iii) Subscribed Capital. That part of the issued capital for which applications are receivedfrom the public is called the subscribed capital.

(iv) Called up Capital. The amount on the shares which is actually demanded by the com-pany to be paid is known as called up capital.

(v) Paid up Capital. The part of the called up capital which is offered and is actually paid bythe members is known as paid up capital. The sum which is still to be paid is known ascalls in arrears.

(vi) Reserve Capital. A company may determine by a special resolution that any portion of itsshare capital which has not been already called up shall not be capable of being called-upexcept in the event of winding up of the company. Such type of share capital is known asreserve capital.

Long term Sources of Finance

Issue of shares Debenture Loans Ploughing back of profits

Equity Preference

Initial Rights ESOS/ESOPPublic Issue

offering(IPO)


Application for Shares

Whenever shares are to be issued by a company, an advertisement in a leading newspaper isgiven for the information of the general public alongwith some important extracts of the pro-spectus. Those who are interested to purchase the shares on the basis of that information mayhave the prospectus for detailed information and application form. If a person is satisfied withthe profitability and other things he is required to fill up the application form and to depositthis alongwith the requisite amount (known as application money) with the prescribed sched-uled bank. The application money should at least be 5 per cent of the face value of the share.The scheduled bank will send this application money alongwith a list of applicants to thecompany. The company will ultimately record these in the “Application and Allotment Book”

Allotment of Shares

After receiving the applications the directors take steps to allot the shares. Allotment of sharesmeans acceptance of the offer of the applicant for the purchase of shares. Directors have discre-tionary power either to reject or to accept partially the applications. There are no restrictionson the rights of a private company to allot its shares. But the public company cannot allot itsshares unless:

i. The minimum subscription stated in the prospectus has been subscribed by the public.

ii. A prospectus or a statement in lieu of prospectus has been filed with the Registrar beforemaking the first allotment.

iii. The amount of application, i.e., at least 5% of the face value has been received.

The applicants, to whom shares are allotted, will be sent allotment letters. After allotment,they become the shareholders of the company. Those to whom shares could not be allottedwill be sent a letter of regret alongwith refund of their application money. The shareholderswill be required to pay the allotment money on allotment of shares which will also be recordedin the Application and Allotment Book.

Calls on Shares

Out of the face value of the shares, 5% is payable with application, some money will be paid onallotment and rest money will be paid as and when calls are made by the company. Generallythe prospectus gives the dates of different calls alongwith the amount of the calls by share-holders. In case it is not given in the prospectus, the directors have the discretion to call it inone call or more than one call. For this a resolution of the Board of Directors must be passedand a notice is sent to the shareholders with a request to pay the amount of the call. As soon asa call notice is sent, its particulars are entered in a separate book known as Share Call Book, aspecimen of which is given on the next page.



Journal Entries for Issue of Shares

(1) On Receipt of Application MoneyBank A/c Dr

To Share Application A/c(2) For excess share application money refunded :

Share Application A/c DrTo Bank A/c

(3) For Share application money transferred to share capitalShare Application A/c Dr

To Share Capital A/cTo Securities Premium A/c (if application money includes premium)

(4) For Share allotment Money due :Share Allotment A/c Dr.Discount on Issue of shares A/c Dr (if issued at a discount)

To Share Capital A/cTo Securities Premium (if issued at a premium)

(5) For Share allotment money received :Bank A/c DrCalls-in-Arrear A/c Dr. (if allotment money not received)

To Share Allotment A/cTo Calls-in-Advance A/c (if call money received in advance

alongwith allotment)(6) For Share Call money due :

Share Call A/c Dr.To Share Capital A/c

(7) For Call money received :Bank A/c DrCall-in-Arrear A/c Dr. (if call money not received)Calls-in-Advance A/c Dr. (adjustment of share call money received earlier)

To Share Call A/c

Note : For every subsequent calls, entry no. (6) & (7) share have to be recorded.

(8) For forfeiture of shares :Share Capital A/c Dr (No. of shares forfeited × Called up value per share)Securities Premium A/c Dr. (if issued at a premium and premium not received)

To Calls-in-Arrear A/c (amount not received on forfeited shares)To Shares Forfeited A/c (amount received on forfeited shares)To Discount on Issue of Shares A/c (if issued at a discount)


(9) For reissue of forfeited shares

Bank A/c Dr (No. of Shares Reissued × Reissue Price/Share)

Discount on Issue of Shares A/c Dr (No. of shares Reissued × Discount per share,if originally issued at a discount)

Shares Forfeited A/c Dr. (No. of shares × Further discount on reissue)

To Share Capital A/c (No. of shares Reissued × Paid up value per share)

To Securities Premium A/c (if reissued at a premium)

(10) For transferring profit on reissue of forfeited shares

Shares Forfeited A/c Dr. (Profit on Forfeiture— Further discount on reissue of

such forfeited share)

To Capital Reserve

Note :

If part of the forfeited shares are reissued, then profit shall have to be calculated proportionatelyas follows :

Profit on Reissue of Forfeited Shares :

s of forfeitureon Profit Total

forfeited shares of No.= xxx

(–) Further discount on reissue = (x)

Transfer to Capital Reserve = xxx

Illustration 1:

PK Ltd. made an issue of 10,00,000 equity shares of Rs. 10 each, payable Rs. 2 on application,Rs. 4 on allotment and Rs. 4 on call. All the shares are subscribed and amounts duly received.Pass journal entries to give effect to these. Also show relevant items in the Balance Sheet.



BALANCE SHEET OF PK LTD. as at ……. Liabilities Rs’000 Assets Rs’000 Issued, Subscribed and Paid up Capital:

Cash at Bank 10,000

10,00,000 equity shares of Rs. 10 each fully called and paid up

10,000

10,000 10,000

Particulars Rs.’000 Rs.’000 Bank Account,

Dr. 2000

To Equity Share Application Account 2000(Share 'application money on 10,00,000 equity shares @ Rs. 2 each received) Equity Share Application Account Dr. 2,000 To Equity Share Capital Account 2,000(Share application money transferred to share capital account)

Equity Share Allotment account Dr. 4,000 To Equity Share Capital Account 4,000(Share Allotment due on 10,00,000 shares @ Rs. 4 per share as per the resolution of the Board of Directors)

Bank Account Dr. 4,000 To Equity Share Allotment Account 4,000(Allotment money received)

Equity Share First and Final Call A/C Dr. 4,000 To Equity Share Capital Account 4,000(Share 1st and Final Call due on 10,00,000 shares @ Rs.4/ share as per resolution of the Board of Directors)

Bank Account Dr. 4,000 To Equity Sh. First and Final Call A/C 4,000(For shares First and Final Call money received on 10,00,000 shares @ Rs. 4 per share)

Solution P K Ltd.JOURNALS


When Both Preference and Equity Shares are Issued

When a company issues both preference and equity shares then it is desirable that the entriesfor application money, allotment money and calls money should be separately passed for eachtype of share capital. The word Equity or Preference must invariably be used in all the circum-stances.

Issue of Shares for Purchase of Assets

If the shares have been allotted to any person or firm from whom the company has purchasedany asset, the following entry will be passed:

Asset Account Dr.

To Share Capital Account

(Being ... shares allotted……in consideration of purchase of an asset for the company)

This fact should also be disclosed in the Balance Sheet while showing the issued, subscribedand paid up capital.

Issue of Shares at Premium

A company may issue shares at a premium, i.e., at a value greater than its face value. Thepower to issue shares at a premium need not be given in the Articles of Association. Premiumso received shall be credited to a separate account called Security Premium Account.Section 78 of the Companies Act, 1956 gives the purposes for which share premiumaccount may be applied by the company. These are:(i) For the issue of fully paid bonus shares to the members of the company;

(ii) For writing off preliminary expenses of the company;

(iii) For writing off the expenses of the commission paid or discount allowed on any issue ofshares or debentures of the company; and

(iv) For providing premium payable on the redemption of any redeemable preference sharesor debentures of the company.

Illustration 2:

AB & Co. Ltd. issued 500,00,000 Equity shares of Rs. 10 each at a premium of Rs 4 per sharepayable Re.1 per share on application. Rs. 6 per share on allotment (including premium), Rs. 3on first call and the balance on final call. The shares were all subscribed and all money due wasreceived except the first call money on 1,00,000 shares and the Final call money on 1,50,000shares.

Give the Cash Book and Journal entries to record the above transactions.



Solution

CASH BOOK

Issue of Shares at a Discount (Section 79)A company can issue shares at a discount, i.e., value less than the face value subject to thefollowing conditions:(i) The issue of shares at a discount is authorised by a resolution passed by the company in

general meeting and sanctioned by the Central Government.(ii) The resolution must specify the maximum rate of discount which should not exceed 10

per cent of the nominal value of shares or such higher percentage as the Central Governmentmay permit.

JOURNALS Rs/Lakh Rs/Lakh Equity Share Application A/c Dr. 500 To Equity Share Capital A/c 500 Equity Share Allotment A/c

Dr. 3,000

To Equity Share Capital A/c 1,000 To Share Premium A/c 2,000 Equity Share 1st Call A/c

Dr. 1500

To Equity Share Capital A/c 1500 Calls in Arrear A/c

Dr 3

To Equity Share 1st Call A/c 3 Equity Share Final Call A/c

Dr. 2,000

To Equity Share Capital A/c 2,000 Calls in Arrear A/c

Dr. 6

To Equity Share Final Call A/c 6 7,009 7,009

Rs./Lakh Rs/Lakh To Equity Share Application 500 By Balance c/d 6,991 To Equity Share Allotment 3,000 To Equity Share 1st Call 1,497 To Equity Share Final Call 1,994 6,991 6,991

Dr. Cr.


(iii) One year must have been elapsed since the date at which the company was allowed tocommence business.

(iv) Issue must take place within two months after the date of the sanction by the court orwithin such extended time as the court may allow.

(v) Every prospectus relating to the issue of shares and every balance sheet after the issue ofshares contains particulars of the discount allowed and so much of the discount as has notbeen written off.

Adjustment of Excess Money towards the Amount due on the Allotment and CallsSometimes a may not allot all the shares for which applications have been received. Because ofover subscription, allotment is either made of less number of shares or on pro-rata basis. Forexample, if the company offered 100,00,000 shares of Rs.l0 each but applications for 200,00,000shares were received by company. The directors sent letters of regret to applicants of 50,00,000shares and applicants of 150,00,000 shares were allotted the 100,00,000 shares on pro-rata basis.In such a case, application money of 50,00,000 shares will be adjusted either on allotment andon calls, if there is still surplus money after adjusting the allotment and call money due fromshareholders it will be refunded in cash.Forfeiture of SharesWhen a shareholder fails to pay calls, the company, if empowered by its articles, may forfeitthe shares. If a shareholder has not paid any call on the day fixed for payment thereof and failsto pay it even after his attention is drawn to it by the secretary by registered notice, the Boardof Directors pass a resolution to the effect that such shares be forfeited. Shares once forfeitedbecome the property of the company and may be sold on such terms as directors think fit.Upon forfeiture, the original shareholder ceases to be a member and his name must be removedfrom the register of members.Surrender of SharesAfter the allotment of shares, sometimes a shareholder is not able to pay the further calls andreturns his shares to the company for cancellation. Such voluntary return of shares to thecompany by the shareholder himself is called surrender of shares. Surrender of shares has noseparate accounting treatment but it will be like that of forfeiture of shares. The same entries(as are passed in case of forfeiture of shares) will be passed in case of surrender of shares.Reissue of Forfeited SharesForfeited shares may be reissued by the company directors for any amount but if such sharesare issued at a discount then the amount of discount should not exceed the actual amountreceived on forfeited shares. The purchaser of forfeited reissued shares is liable for payment ofall future calls duly made by the Company.When all Forfeited Shares are not IssuedWhen all forfeited shares are not issued, i.e., only a part of such shares is issued, it is desirableto spread the amount of shares forfeited account on all such forfeited shares and of the amountrelating to that part of forfeited shares which has been reissued, discount on reissue of sharesshould be deducted from such amount and the balance is transferred to capital reserve beingcapital profit. The amount relating to that part of shares forfeited account which has not beenreissued should be shown on the liabilities side of Balance Sheet as Shares Forfeited Account.



Illustration 3 : A Company invited the public to subscribe for 10,000,000 Equity Shares ofRs.100 each at a premium of Rs. 10 per share payable on allotment. Payments were to be madeas follows: On application Rs. 20; on allotment Rs. 40; on first call Rs. 30 and on final call Rs.20.Applications were received for 13,000,000 shares; applications for 2,000,000 shares were rejectedand allotment was made proportionately to the remaining applicants. Both the calls were madeand all the moneys were received except the final call on 300,000 shares which are forfeitedafter due notice. Later 200,000 of the forfeited shares were issued as fully paid at Rs. 85 pershare. Pass Journal entries.Solution

Particulars Rs.’000 Rs.’000 Bank Account Dr. 260,000 To Equity Share Application Account 260,000 Share application money received on 13,000,000 eq. shares @ Rs.20 each

Equity Share Application Account Dr. 40,000 To Bank 40,000 (Appl. On 2,000,000 rejected) Equity Share Application Account Dr 220,000 To Equity Share Capital Account 200,000 To Equity Share Allotment account 20,000 (Share application money transferred to share capital account and excess money used for share allotment.)

Equity Share Allotment account Dr. 400,000 To Equity Share Capital Account 300,000 To Security Premium Account 100,000 (Share Allotment due on 10,000,000 shares @ Rs. 40 per share as per the

resolution of the Board of Directors) Bank Account Dr. 380,000 To Equity Share Allotment Account 380,000 (Allotment money received) Equity Share first call Account Dr 300,000 To Equity Share Capital Account 300,000 (First call money due) Bank Account Dr 300,000 To Equity Share First call Account 300,000 First call money received) Equity Share Final Call A/C Dr. 200,000 To Equity Share Capital Account 200,000 (Share Final Call due) Bank Account Dr. 194,000 To Equity Sh. Final Call A/C 194,000 (Final Call money received except 300,000 Shares)

Equity Share Capital Account Dr 30,000

JOURNALS


Working:

1 . On 300,000 forfeited shares, the total amount forfeited is Rs. 24,000.For 200,000 such shares the amount will be

Rs’000(200,000/300,000) x 24,000 = 16,000Less, Discount on Reissue 3,000Transferred to Capital Reserve 13,000

Balance of Forfeited share account will be shown in balance sheet as ‘Forfeited Share Ac-count” in liability side.

Illustration 4 :

Give journal entries for the following:a) PK Ltd. forfeited 10,000 equity shares of Rs 10 each for non payment of first call of Rs 2

and final call of Rs 3 per share. These shares were reissued at a discount of Rs 3.50 pershare.

b) KP Ltd. forfeited 20,000 equity shares of Rs 15 each (including Rs 5 per share as premium),for non payment of final call of Rs 3 per share. Out of these 10,000 shares were reissued ata discount of Rs 4 per share.

c) KP Ltd. forfeited 15,000 equity shares of Rs 15 each (including Rs 5 per share as premium),for non payment of allotment money Rs 8 (including premium money) and first & finalcall of Rs 5 per share. Out of these 10,000 shares were reissued at Rs 14 per share.

d) PK Ltd. forfeited 10,000 equity shares of Rs 10 each issued at a discount of Re 1 per share,for non payment of first call of Rs 2 and final call of Rs 3 per share. Out of these 6,000shares were reissued at Rs 8 per share and the balance shares were re-issued at Rs 7 pershare.

Journal entries

Particulars Rs Rsa) Equity Share Capital Account Dr 100,000

To Equity Sh. First Call A/C 20,000 To Equity Sh. Final Call A/C 30,000 To Forfeited share Account 50,000 (10,000 shares forfeited for non payment offirst and final call money) Bank Account Dr 65,000 Forfeited Share Account Dr 35,000 To Equity Share Capital Account 100,000 (Reissue of 10,000 sh. @Rs6.50 each) Forfeited Share Account Dr 15,000 To Capital Reserve Account 15,000 (Balance of Forfeited share a/c transferred)



b) Equity Share Capital Account Dr 200,000 To Equity Sh. Final Call A/C 60,000 To Forfeited share Account 140,000 (20,000 shares forfeited for non payment offinal call money) Bank Account Dr 60,000 Forfeited Share Account Dr 40,000 To Equity Share Capital Account 100,000 (Reissue of 10,000 sh. @Rs6 each) Forfeited Share Account Dr 30,000 To Capital Reserve Account 30,000 (Balance of Forfeited share a/c relating to 10,000 shares transferred)

c) Equity Share Capital Account Dr 150,000 Security Premium Account Dr 75,000 To Equity Sh. Allotment A/C 120,000 To Equity Sh. First & Final Call A/C 75,000 To Forfeited share Account 30,000 (15,000 shares forfeited for non payment ofallotment and first and final call money) Bank Account Dr 140,000 To Security Premium Account 40,000 To Equity Share Capital Account 100,000 (Reissue of 10,000 sh. @Rs15 each) Forfeited Share Account Dr 20,000 To Capital Reserve Account 20,000 (Balance of Forfeited share a/c on 10,000) shares transferred)

d) Equity Share Capital Account Dr 100,000 To Discount on issue of shares A/C 10,000 To Equity Sh. First Call A/C 20,000 To Equity Sh. Final Call A/C 30,000 To Forfeited share Account 40,000 (10,000 shares forfeited for non payment of firstand final call money) Bank Account Dr 48,000 Discount on issue of shares A/C Dr 6,000 Forfeited Share Account Dr 6,000 To Equity Share Capital Account 60,000 (Reissue of 6,000 sh. @ Rs8 each) Forfeited Share Account Dr 18,000 To Capital Reserve Account 18,000 (Balance of Forfeited share a/c on 6,000 shares transferred) Bank Account Dr 28,000 Discount on issue of shares A/C Dr 4,000 Forfeited Share Account Dr 8,000 To Equity Share Capital Account 40,000 (Reissue of 4,000 sh. @ Rs 7 each) Forfeited Share Account Dr 8,000 To Capital Reserve Account 8,000 (Balance of Forfeited share a/c on 4,000 shares transferred)


Illustration 5 :X Ltd. issued 10,000 Equity shares of Rs. 10 each at a premium of Rs. 2 per share, payable :

Rs. 3 on application (including premium of Re. 1); Rs. 4 on allotment (including the balance ofpremium) and the balance in a call. Public subscribed for 12,000 shares. Excess applicationmoney was refunded. One shareholder Mr. A holding 50 shares paid the call money alongwithallotment. Another Mr. B failed to pay allotment & call on 30 shares.

These shares were forfeited after the call and 25 of those were reissued at Rs. 9 each.Pass Journals and prepare the Balance sheet of the company.

X Ltd.Journal Entries (without narration)Application Money Received Rs. Rs.(1) Bank A/c Dr 36,000(12000×3) To Equity Shares Application A/c 36,000Refund of excess application money(2) Equity Share Application A/c Dr. 6,000(2000×3) To Bank A/c 6,000(excess application money refunded)Transfer of share application to share capital(3) (10,000×3) Equity Shares Application A/c Dr. 30,000(10000×2) To Equity Shares Capital A/c 20,000(10,000×1) To Securities Premium A/c 10,000Allotment Money Due(4) (10000×4) Equity Shares Capital A/c Dr. 40,000(10000×3) To Equity Share Capital A/c 30,000(10000×1) To Securities Premium A/c 10,000Allotment Money Received(5) [9,970×4 + 50×5 Bank A/c Dr. 40,130(30×4) Calls-in-Arear A/c Dr. 120To Equity Share Allotment A/c 40,000(50×5) To Calls-in-Advance A/c 250Share Call Money Due(6) (10,000×5) Equity Share & Final call a/c Dr. 50,000To Equity Share Capital A/c 50,000Call Money Received, Adjustment of Calls-in-Advance(7) (9,920×5) Bank A/c Dr. 49,600(30×5) Calls-in-Arrear A/c Dr. 150Received with Calls-in-Advance A/c Dr. 250Allotment, now adjusted)



To Equity Shares First & Final Call A/c 50,000Forfeiture of Shares(8) (30×10) Equity Share Capital A/c Dr. 300(30×1) Securities Premium A/c Dr. 30To Calls-in-Arrear A/c 270To Shares Forfieted A/c 60Reissue of Forfeited Shares(9) (25×9) Bank A/c Dr. 225(25×1) Shares Forfeited A/c Dr. 25(25×10) To Equity Shares Capital A/c 250(10) Transfer of Profit on Reissue of Forefeited sharesShares Forfeited A/c Dr. 25To Capital Reserve A/c 25Note : Proportionate Profit on reissue :Profit on forfeiture Rs. 60Therefore, Proportionate profit on 25 shares (those are reissued)= 60/30 ×25 = 50Less : Discount on Reissue (25×1) = 25Transfer to Capital Reserve 25

X Ltd.Balance Sheet as at ....

Liabilities Amount Amount Assets Amount AmountRs. Rs. Rs. Rs.

Authorised Capital 10,000×10 1,00,000 Fixed Assets

Issued, Subscribed, Investments

Called up & Paid up Current Assets,

Capital Loans & Advances

9,995 shares

@ Rs. 10 each 99,950 Cash at Bank 1,19,955

Reserves & Surplus

Securities Premium 19,970 Miscellanceous

Shares forfeited A/c 10 Expenditure

Capital Reserve 25 (to the extent not

written off)

1,19,955 1,19,955


llustration 6 :

B Ltd. issued 5,000 Equity shares of Rs. 100 each at a discount of 10%, payable as follows :on Application : Rs. 25; on Allotment : Rs. 40; on Call : the balance.Public subscribed for 4,800 shares and allotment was made in full. One shareholder holding

25 shares failed to pay the allotment and calls. These were forfeited and 20 of those shares werereissued at Rs. 88 each.

Pass journal entries and prepare Balance Sheet.

B Ltd.

Journal Entries(1) Bank A/c Dr. 1,20,000To Equity Share Application A/c 1,20,000(Being equity share application money receivedon 4,800 shares @ Rs. 25 per share)(2) Equity shares Application A/c Dr. 1,20,000To Equity Share Capital A/c 1,20,000(Being share application money transferred toshare capital as per Board’s resolution no... dated)

(3) (4800×40) Equity Share Allotment A/c Dr. 1,92,000(4800×10) Discount on Issue of Shares A/c Dr. 48,000To Equity Share Capital A/c Dr. 2,40,000(Being allotment money due on 4800 shares @ Rs. 40 per share, Rs. 10 as discount,as per Board’s resolution no... dated)

(4) (4775×40) Bank A/c Dr. 1,91,000(25×40) Calls-in-Arrear A/c Dr. 1000To Equity Share Allotment A/c 1,92,000(Being shares allotment money received except on 25 Shares)

(5) Equity Share First & Final Call A/c Dr. 1,20,000To Equity Share Capital A/c 1,20,000(Being share call money due on 4,800 shares)@ Rs. 25 per share as per Board’s resolution no. dated)

(6) (4775×25) Bank A/c Dr. 1,19,375(25×25) Calls-in-Arrear A/c Dr. 625To Equity Share First & Final Call A/c 1,20,000(Being share call money received except on 25 shares)



(7) (25×100) Equity Shares Capital A/c Dr. 2,500(1000+625) To Calls-in-Arrear A/c 1,625(25×10) To Discount on Issue of Shares A/c 250(25×25) To Shares Forfeited A/c 625(Being 25 shares forfeited as per Board’s resolution no. dated)(8) (20×88) Bank A/c Dr. 1760(20×10) Discount on Issue of Shares A/c Dr. 200(20×2) Shares Forfeited A/c Dr. 40(20×100) To Equity Share Capital A/c Dr. 2,000(Being 20 forfeited Shares reissued at Rs. 88 each, as per Board’s resolution no... dated.)(9) Shares Forfeited A/c Dr. 460To Capital Reserve 460(Being profit on reissue of forfeited share transferred to Capital Reserve)

Note : Profit on Reissue of Forfeited Shares :

Amount received on Forfeiture Rs. 625Therefore, Proportionate amount of forfeiture on 20 shares :

= {(625 / 25) x 20} = 500Less : Further discount on reissue (20×2) = 40

= 460

X Ltd.Balance Sheet as at ....

Liabilities Rs. Rs. Assets Rs. Rs.

Authorised Capital : Fixed Assets5,000 Eq. shares of InvestmentsRs. 100 each 5,00,000Issued, Subscribed, Current Assets,Called up & Loans & AdvancesPaid up Capital4,795 Equity Shares@ Rs. 100 4,79,500 Cast at Bank 4,32,135Reserves & Surplus MiscelleaneousCapital Reserve 460 Expenditureshares Forfeited A/c 125 (to the extentSecured & Unsecured not written off)Loans xxx Discount on IssueCurrent Liabilities & of Shares 47,950Provisions xxx

4,80,085 4,80,085


Illustration 7: B Ltd issued 2,000 shares of Rs. 100 each at a premium of 10% payable asfollows :-

On application Rs 20 (1st Jan. 2008). On allotment Rs.40 (including premium) (1st April2008). On First Call Rs. 30 (1st June 2008). On Second & Final call Rs. 20 (1st Aug 2008).

Applications were received for 1,800 shares and the directors made allotment in full. Oneshareholder to whom 40 shares were allotted paid the entire balance on his share holdingswith allotment money and another share holder did not pay allotment and 1st call money onhis 60 shares but which he paid with final call.

Required: Calculated the amount of interest paid and received on calls -in- advance and callsin arrears respectively on 1st Aug. 2008.

Solution :

Calculation of Interest on Calls-in-advance

On Rs. 1200 (i.e. 40 x Rs. 30) for 2 months @ 6% p.a. Rs. 12On Rs. 800 (i.e. 40 x Rs.20) for 4 months @ 6% p.a. Rs. 16

Rs. 28

Calculation of Interest on Calls-in-advance

On Rs. 2400 (i.e. 60 x Rs. 40) for 4 months @ 5% p.a. Rs. 40On Rs. 1800 (i.e. 60 x Rs.30) for 2 months @ 5% p.a. Rs. 15

Rs. 55

Illustration 8:A limited Company was registered with a capital of Rs. 5,00,000 is share ofRs. 100 each and issued 2,000 such shares at a premium of Rs.20 per share, payable as Rs.20per share on application, Rs. 50 per share on allotment (including premimu) and Rs. 20 pershare on first call made three months later. All the money payable on application, and allot-ment were duly received but when the first call was made, one shareholder paid the entirebalance on his holding of 30 shares, and another shareholder holding 100 shares failed topay the first call money.

Required: Give Journal entries to record the above transactions and show how they willapperar in the company’s Balance Sheet.



Journal

Dr. Cr. Particulars L.F. Amount Amount

Rs. Rs.

Bank A/c Dr 40,000 To Share Application A/c 40,000

[Being the issue of 2,000 shares and applicationmony received @ Rs 20 per share]

Share Application A/c Dr 40,000To Share Capital A/c 40,000

[Being the transfer of application money on 2,000shares @ Rs. 20 per share to Share Capital A/c)

Share Allotment A/c Dr 1,00,000 To Share Capital A/c 60,000 To Securities Premium A/c 40,000

[Being the allotment mony on 2,000 shares @ Rs 50including premium made due)

Bank A/c Dr 1,00,000To Share Allotment A/c 1,00,000

[Being the allotment money on 2,000 shares@ Rs. 50 per share received)

Share First Call A/c Dr 40,000 To Share Capital A/c 40,000

[Being the first call mony on 2,000shares @ Rs 20 per share made due)

Bank A/c Dr 38,900To Share First Call A/c 38,000To Call-paid-in-advance A/c 900

(Being the first call money on 1,900 shares @ Rs. 20per share and share Second call money on 30 shares@ Rs. 30 per share received)

Solution :


Balance sheet as at...

Illustration 9: B Ltd purchase the assets of Rs. 10,80,000 from C Ltd. The cosiderationwas payable in fully paid equity shares of Rs. 100 each.

Required: Show the necessary journal entries in books of B Ltd. assuming that —a) Such shares are issued at perb) Such shares are issued at premium of 20%c) Such shares are issued at discount of 10%Solution :

Liabilities Amount Assets Amount Rs. Rs. Rs.

Share Capital Current Assets, Loans &Authorised Capital Advances:5,000 shares of Rs.100 each 5,00,000 Current Assets:

Cash at Bank 1,78,900Issued Capital2,000 shares of Rs. 100 each 2,00,000Subscribed Capital2,000 shares of Rs.100

each Rs. 70 per shareCapital up 1,40,000

Less: Calls unpaid 2,000 1,38,000

Reserves & Surplus:Securities Premium 40,000Current Liabilities:Calls paid-in-advance 900

1,78,900 1,78,900

JournalDr. Cr.

Particulars L.F. Amount AmountRs. Rs.

Entry in all casesSundry Assets A/c Dr 10,80,000

To C Ltd. 10,80,000[Being the purchase of assets from Y Ltd. asper agreement dated...)



Working Note: Calculation of No. of Shares to be issed in different cases

Illustration 10: DLtd. issued 2,000 shares of Rs 100 each credited as fully paid to the pro-moters for their services and issued 1,000 shares of Rs 100 each credited as fully paid to theunderwriters for their underwriting services. Journalise these transactions.Solution:


Rs. Rs.

Goodwil A/c Dr 2,00,000 To Share Capital A/c 2,00,000

[Being the issue of 2,000 shares of Rs 100 each at par topromoters as per Board’s Resolution dated...) (Contd.)

Journal

(Contd.)

At Par At a Premium At a DiscountA. Amount to be paid (Rs) 10,80,000 10,80,000 10,80,000B. Issue Price Per Share (Rs) 100 120 90C. No. of Shares tobe issued (A/B) 10,800 9,000 12,000

(Contd.)

Case (a) When Shares are issued at perC Ltd. Dr 10,80,000

To Equity Share Capital A/c 10,80,000(Being the issue of 10,800 shares at par to C Ltd. asper agreement dated...)

Case (b) When Shares are issued at a premlum of 20%C Ltd. Dr 10,80,000

To Equity Share Capital A/c 9,00,000To Securities Premium A/c 1,80,000

(Being the issue of 9,000 shares at 20% premium toC Ltd. as per Board’s Resolution dated...)

Case (c) When Shares are issued at a discount of 10%C Ltd. Dr 10,80,000Discount on Issue of Shares A/c Dr 1,20,000

To Equity Share Capital A/c 12,00,000(Being the issue of 12,000 shares at a discount of 10% toC Ltd., as per Board’s Resolution dated...)


(Contd.)

Underwriting Commission A/c Dr 1,00,000To Underwriter’s A/c 1,00,000

(Being the Underwriting commission due on shares)

Underwriter’s A/c Dr 1,00,000To Share Capital A/c 1,00,000

(Being the the issue of 1,000 shares of Rs 100 each at par toUnderwriters as per the Board’s Resolution dated...)

Illustration 11: On 1st May 2008 Superman Ltd. issued 5,000 Equity Shares of Rs 100 eachpayable as follows:

Rs RsOn application 20 On 1st Call 20 (Last date fixed for payment

31st July)On allotment 30 On Final Call 30 (Last date fixed for payment

30th August)

Applications were received on 15th May 2008 for 6,000 shares and allotment was madeon 1st June 2008. Applicants for 2,500 shares were allotted in full, those for 3,000 shareswere allotted 2,500 shares and applications for 500 shares were rejected.

Balance of amount due on allotment was received on 15th June.

The calls were duly made on 1st July,2008 and 1st August 2008 respectively. One share-holder did not pay the 1st Call money on 150 shares which he paid with the final call to-gether with interest at 5% p.a. Another shareholder holding 100 shares did not pay the finalcall money till end of the accounting year which ends on 31st October.



Required: Show the Cash Book and Journal Entries.Solution:

Journal Proper

Date Particulars L.F. Dr. (Rs) Cr. (Rs)

1.6.08 Equity Share Application A/c Dr. 1,10,000

To Equity Share Capital 1,00,000

To Share Allotment A/c 10,000

[Being the the transfer of application money @ Rs 20

per share on 5,000 shares transferred to share

Capital A/c and @ Rs 20 on 500 t/f to Share

Allotment A/c)

1.6.08 Equity Share Allotment A/c Dr. 1,50,000

To Equity Share Capital A/c 1,50,000

[Being the amount due on allotment @ Rs 30

per share)

1.7.08 Equity Share Allotment A/c Dr. 1,00,000

To Equity Share Capital A/c 1,00,000

(Being the 1st call amount due @ Rs 20 per share)

1.8.08 Calls-in-Arrear A/c Dr. 3,000

To Equity Share 1st call A/c 3,000

(Being the transfer of 1st Call money on 150

equity shares @ Rs 20 per share)

1.8.08 Equity Share Final Call A/c Dr. 1,50,000

To Equity Share First Call A/c 1,50,000

(Being the final call amount due on @ Rs 30 per

share)

1.9.08 Calls-in-Arrear A/c Dr. 3,000

To Equity Share Final Call A/c 3,000

(Being the transfer of final call money on 100

equity shares @ Rs 30 per shares)

1.9.08 Sundry Shareholders A/c Dr. 25

To Interest on Calls-in-Arrears A/c 25

(Being the interest due on Rs 3,000 @ 5% for

two months)


Statement of shares applied, alloted and amounts adjustedCatetories

A B C(a) Applied (No.of shares) 2,500 3,000 500(b) Alloted (No.of shares) 2,500 2,500 Nil

Rs. Rs. Rs.(c) Application money received 50,000 60,000 10,000[(a) x Rs.20 per share](d) Application money adjusted[(b) x Rs.20 per share] 50,000 50,000(Refunded)

Cash Book (Bank Column)Dr. Cr.

Date Particulars Rs Date Particulars Rs15.5.08 To Equity Share 1.9.08 By Equity Share

Application A/c 1,20,000 Application A/c (Refund 10,000(Application money of application money @@ Rs 20 per share on Rs 20 per share on6,000 shares) 500 shares rejected)

15.6.08 To Equity Share 1,40,000 31.10.08By Balancec/d 4,97,012.50Allotment A/c(Balance of allotmentmoney)

1.8.08 To Equity Share1st Call A/c 97,000(1st Call money on4,850 shares)

1.9.08 To Equity ShareFinal A/c 1,47,000(Final call money on4,900 Shares)

1.9.08 To Calls-in-Arrear 3,000(Arrear of 1st Callmoney @ Rs 2 perShare on 1,500 Shares)

1.9.08 To Interest on Calls-in-Arrear A/c 12.50(Interest on Rs 3,000for one month@ 5% p.a.)

5,07,012.50 5,07,012.50



Illustration 12: Priyanka Industries Ltd. has an authorised capital Rs 2,00,000 divided intoshares of Rs 100 each. Of these, 600 shares were issued as fully pais in payment of machinerypurchased from Z Ltd. 800 shares were subscribed for by the public and during the first yearRs 50 per share was called up payable Rs 20 on application, Rs. 10 on allotment, Rs. 10 onthe first call and Rs. 10 on second call. The amounts received in respect of these shares wereas follows:-

On 600 Shares Full amount called upOn 125 Shares Rs 40 Per Share “ “On 50 Shares Rs 30 Per Share “ “On 25 Shares Rs 20 Per Share “ “

The directors forfeited the 75 shares, on which less than Rs 40 per share had been paid.Required: Give Journal Entries recording the above transactions (including cash transac-tions) and show how Share Capital would appear in the Balance-Sheet of the Compan, inaccordance with Part 1 of Schedule VI to the Companies Act.Solution:

Journals

Particulars L.F. Dr. (Rs) Cr. (Rs)

Machinery A/c Dr 60,000 To Z Ltd. 60,000

(Being the purchase of machinery from Z Ltd. as peragreement dated...)

Z Ltd. Dr 60,000 To Share Capital A/c 60,000

(Being the issue of 600 shares at par)


(Being the application money received)

Share Application A/c Dr 16,000 To Share Capital A/c 16,000

(Being the application money adjusted)

(Contd.)

(e) Excess Application money to be adjustedwith allotment [(c)- (d)] Nil 10,000 ---(f) Allotment money due[(b) x Rs.30 per share] 75,000 75,000 ---(g) Amount received on allotment [(f) -(g) ] 75,000 65,000 ----


(Contd.)Share Allotment A/c Dr 8,000

To Share Capital A/c 8,000(Being the allotment money due)

Bank A/c Dr 7,750 To Share Allotment A/c 7,750

(Being the allotment money received on 775 shares)

Share First Call A/c Dr 8,000To Share Capital A/c 8,000

(Being the first call due)

Bank A/c Dr 7,250 To Share First Call A/c 7,250

(Being the first call received on 725 shares)

Share Second Call A/c Dr 8,000 To Share Capital A/c 8,000

(Being the second call due)

Bank A/c Dr 6,000 To Share Second Call A/c 6,000

(Being the second call received on 600 shares)

Share Capital A/c Dr 3,750To Forteited Share A/c 2,000To Share Allotment A/c 250To Share First Call A/c 750To Share Second Call A/c 750

(Being 75 shares forteited as per Board’s resolution dated...)

Liabilrties Rs Assets RsShare Capital: Fixed Assets:Authorised Capital Machinery 60,0002,000 Shares of Rs 100 each 2,00,000 Current Assets:issued Capital: Cash at Bank 37,0001,400 Shares of Rs 100 each 1,40,000Subscribed Capital:600 Shares of Rs 100 each 60,000725 Shares of Rs 100 each,Rs 50 per share called up 36,250(Of the above shares 600shares are allotted as fully paid

(Contd.)

Balance Sheet as at...



Illustration 13: SOS Limited issued a prospectus inviting applications for 6,000 shares of Rs10 each at a premium of Rs 2 per share, payable as follows;

On application Rs 2 per share; On allotment Rs 5 per share (including premium): On 1stcall Rs 3 per share; On Second and Final Call Rs 2 per share.,

Applications were receive for 9,000 shares and allotment was made prorata to the appli-cants of 7,500 shares, the remaing applicants were refused allotment. Money overpaid onapplications were applied towards sums due on allotment.

D to whom 100 shares were allotted, failed to pay the allotment money and on his subse-quent failure to pay the first call, his shares were forfeited. Z,the holder of 200 shares, failedto pay both the calls, and his shares were forfeited after the second and final call.

Of the shares forfeited 200 shares were sold to C credited as fully paid up for Rs 8.50 pershare, the whole of D’s shares being included.

Required: Show Journal and Cash Book enteries in the books of the company.Solution:

Journals

up pursuant to a contractwithout payments beingreceived in cash) 96,250Less: Calls Unpaid 1,250

95,000Add: Forfeited Shares 2,000

97,000 97,000

(Contd.)

Particulars L.F. Dr. (Rs) Cr. (Rs)

Share Application A/c Dr 12,000 To Share Capital 12,000

(Being Share application money transferred to Share CapitalAccount)

Share Application A/c Dr 12,000 To Share Allotment A/c 12,000

(Being Share application money at Rs.2 on 1,500 sharesadjusted against allotment.)

Cash Book ( Book Column)Dr. Cr.

Particulars Rs Particulars RsTo Share Capital: 18,000 By Share Application A/c 3,000 (Rs. 2 on 9,000 shares)To Share Allotment A/c 26,550 By Balance c/d 71,750 (allotment money received)To Share 1st Call A/c 17,100 (Rs. 3on 5,700 shares)To Share 2nd & Final Call A/c 11,400To Share Capital A/c 1,700

74,750 74,750


Working Notes : (i) Calculation of the amount due but no paid on allotment in Case of D.

No. of applied Shares by Mr. D. (100 x 7500/6,500) 125

(Contd.)

Share Allotment A/c Dr 30,000 To Share Capital A/c 18,000 To Securities Premium A/c 12,000

[Being the allotment money due]


[Being the first call money due]

Share Capital A/c Dr 800Securities Premium A/c Dr 200

To Forefeited Share A/c 250To Share Allotment A/c 450To Share First Call A/c 300

[Being 100 shares of Rs. 10 each, Rs. 8 per Share called up,forfeited for non payment of allotment and first call ]

Share Second and Final Call A/c Dr 11,800To Share Capital A/c 11,800

[Being the second and final call money due on 5,900 Shares]

Share Capital A/c Dr 2,000To Forfeited Share A/c 1,000To Share First Call A/c 600To Share Final Call A/c 400

[Being 200 shares of Rs. 10 each forfeited for non-payment offirst and final call]

Forfeited Share A/c Dr 300To Share Capital A/c 300

[Being 200 shares re-issued]

Forfeited Share A/c Dr 450To Capital Reserve A/c 450

[Being the transfer of profit on re-issue]



Total money sent on application by Mr. D. (125 x 2) Rs. 250

Excess application money [ Rs 250 - (100 x Rs. 2)] Rs. 50

Total amount due on allotment ( 100 x Rs. 5) 500

Amount due but not paid on allotment (Rs. 500 —Rs 50) Rs.450

(ii) Calculation of allotment money received later on

Total allotment money due Rs. 30,000

Less (a) Already received Rs. 3,000

(b) Not received (as per note 1) Rs. 450 3,450

26,550

Illustration 14: Alpha Ltd issued a prospectus inviting applications for 2,000 shares ofRs. 10 each at a premium of Rs. 2 per share, payable as follows :

On Application Rs.2 On Allotment Rs 5 (including premium) On First Call Rs.3 On Second & Final Call Rs. 2 Applications were received for 3,000 shares and pro rata allotment was made on theapplications for 2,400 shares. It was decided to utilise excess application money towards theamount de on allotment.

Mohit, to whom 40 shares allotted, failed to pay the allotment money and on his subse-quent filure to pay the first call, his shares were forfeited.

Jagat, the holder of 60 shares failed to pay the two calls and on his such failure, hisshares were forfeited.

Of the shares forfeited, 80 shares were sold to Rishav credited as fully paid for Rs. 9 pershare, the whole of Mohit’s shares being included.

Required: Give Journal Entries to record the above trasactions (including cash transactions)Solution :


Rs. Rs.


[Being the application money received on 3,000 shares)

Journals


(Contd.)

(Contd.)

Share Application A/c Dr 6,000To Share Capital A/c 4,000To Bank A/c 1,200To Share Allotment A/c 800

[Being the application money received on 3,000 shres ]

Share Allotment A/c Dr 10,000To Share Capital A/c 6,000To Securities Premium A/c 4,000

[Being the allotment money deu]

Bank A/c Dr 9,016To Share Allotment A/c 9,016

[Being the remaining allotement money received on 1,960shares ]


[Being the first call money due]

Bank A/c Dr 5,700To Share First Call A/c 5,700

[Being the first call money received on 1,900 shares @ Rs.3 pershare ]

Share Capital A/c Dr 320 Securities Premium A/c Dr. 80

To Share Allotment A/c 184To Share First Call A/c 120To Forfeited Share A/c 96

[Being 40 shares forfeited for non-payment of full allotmentmoney and the first call money ]

Share Second & Final Call A/c Dr 3,920To Share Capital A/c 3,920

[Being the second and final call due on 1,960 share]



Bank A/c Dr 3,800To Share Second and Final Call A/c 3,800

[Being the second and final call received on 1,900 shares ]

Share Capital A/c Dr 600To Share First Call A/c 180To Share Second and Final Call A/c 120To Forfeited Shares A/c 300

[Being 60 shares forfeited for non-payment on the first calland final call]

Bank A/c Dr 720 Forfeited Shares A/c Dr. 80

To Share Capital A/c 800[Being the reissued of 80 shares @ Rs.9 as fully paidup]

Forfeited Shares A/c Dr. 216To Capital Reserve A/c 216

[Being the reissued of 80 shares @ Rs.9 as fully paidup]

(Contd.)

Working Notes : (i) Calculation of the amount due but no paid on allotment in Case of Mohit

Rs.

Total No. of shares applied Shares by Ramesh (40 x 2,400/2,000) 48

Total money sent on application by Ramesh (48 x Rs. 2) 96

Excess application money [ Rs 96 - (40 x Rs. 2)] 16

Total amount due on allotment ( 40x Rs. 5) 200

Amount due but not paid on allotment (Rs. 200 —Rs 16) 184

(ii) Calculation of allotment money received later on

Total allotment money due (2,000 x Rs.5) 10,000

Less: (a) Already received Rs. 800

(b) Not received (as per note 1) Rs. 184 984

9,016


(iii) Since the question is silent as to the utilization of Rs. 16 (received from Mohit) between share capital and securities premium, it has been assumed that the entire excess

of Rs. 16 is exclusively for share capital and hence credited to Forfeited Shares Account infull.

Illustration 15: Nivedita Fertilisers Ltd. issued a prospectus invitng applications for 20,000shares of Rs.10 each at a premium of Rs. 2 per share, paybale as follows :

Rs.

On Application 3 (including Re.1 premium)

On Allotment 4 (including Re.1 premium)

On First Call 3

On Second & Final Call 2

Applications were received for 30,000 shares and pro rata allotment was made on theapplications for 24,000 shares. It was decided to utilise excess application money towardsthe amlount due on allotment.

Arunavo, to whom 400 shares were allotted, failed to pay the allotment money and onhis subsequent failure to pay the first call, his shares were forfeited.

Victor, who applied for 720 failed to pay the two calls and on his such failure, his sharesof the shsres forfeited, 800 shares were sold to Srijita credited as fully paid for Rs.9 per share,the whole of Arunavo’s shares being included.

Required: Give Journal Entries to record the above trasactions (including cash transactions)Solution :

JournalsDr. Cr.

Particulars L.F. Amount AmountRs. Rs.


(Being the application money received on 30,000 shares)

Share Application A/c Dr 90,000 To Share Capital A/c 40,000 To Share Capital A/c 20,000 To Bank A/c 10,800 To Share Allotment A/c 10,200

(Being the application money adjusted and surplus refunded)



Share Allotment A/c Dr 80,000 To Share Capital A/c 60,000 To Securities Preimum A/c 20,000

(Being the allotment money due)

Bank A/c Dr 66,640 To Share Allotment A/c 66,640

(Being the remaining allotment money received on 19,600 shares)

Share First Call A/c Dr 60,000 To Share Capital A/c 60,000

(Being the first call money due)

Bank A/c Dr 57,000 To Share First Call A/c 57,000

(Being the first call money received on 19,000 shares @ Rs.3 per shares )

Share Capital A/c Dr 3200 Security Premium A/c Dr 400

To Share Allotment A/c 1360 To Share First Call A/c 1200 To Forfeited Shares A/c 1040

(Being 400 shares forfeited for non-payment of fullallotment money and the first call money)

Share Second and Final Call A/c Dr 39,200 To Share Capital A/c 39,200

(Being the second and final call due on 19,600 shares)

Bank A/c Dr 38,000 To Share Second and Final Call A/c 38,000

(Being the second and final call received on 19,000 shares )

Share Capital A/c Dr 6000 To Share Final Call A/c 1800 To Share Second and Final Call A/c 1200 To Forfeited Shares A/c 3000

(Being 600 shares forfeited for non-payment of the first call and final call)

(Contd.)

(Contd.)


Illustration 16: Hero Limited issued 10,000 equity shares of Rs. 100 each at premium ofRs. 25 per share. Under the erms of the isue, the shares were to be paid for as follows :

Rs.

2008 January 1, on application (including Rs. 25premium on issue per share) 50

February 1, on allotment 50April 1, balance of 25

The issue was over subscribed. The applications received are summarised below :

A B CNumber of applicants in categories 40 20 1Applied for by each applicant in the three categories 200 2000 8000Issued to each applicant 100 200 2000One of the conditions of the issue was that amounts over-paid on application were to be

retained by the company and used in redudction of further sums due on shares allotted. Allsurplus contributions were refunded on 15th. February, 2008.

Ramesh who had subscribed 100 on an application for 200 shares was unable to meet theclaim due on April 1. On May 5, the directors forfeited his shares. All other shareholders paidthe sums requested on the due dates, on June 10, 2008 the directors re-issued the forfeitedshares as fully paid to Mohan, on receiving a payment of Rs. 10,500.

Bank A/c Dr 7,200 Forfeited Shares A/c Dr 800

To Share Capital A/c 8,000 [Being the reissue of 800 shares @ Rs.9 as fully paid up)

Forfeited Shares A/c Dr 2240 To Capital Reserve A/c 2240

[Being the transfer of profit on re-issue)

Working Notes : (i) Calculation of the amount due but no paid on allotment in Case of Arunavo

Rs.Total No.of shares applied by Arunavo (400x24,000/20,000) 480Total money sent on application by Arunavo (480x Rs.3) 1440Excess applicaiton money [Rs. 1440 - (Rs. 400 x Rs.3) 240Total amount due on allotment (Rs.1600 - Rs.240) 1360

(ii) Calculation of allotment money received latter onTotal allotment money due ( 20,000 x Rs.4) 80,000Less : (a) Already received (4,000 x 3) 12,000

(b) Not received (as per note I) 1,360 13,360 66,640

(iii) Since the question is silent as to the utilization of Rs.240 (received from Arunavo) between share capital and Securities premium, it has been assumed that the entire excess of Rs. 240 is exclusively for share capital and hence credited to Forfeited Shares Account in full.



(a) To prepare a statement as on February 1, 2008, showing the over-payment, under-payment to in respect of category of applicants : and

(b) To show the above transactions would appear in the journal of the company.

Solution :(a) Hero Ltd.

Statement of Shares Applied, Allotted and Amounts AdjustedCatetories

A B C(a) Applied (Nos.) 8,000 40,000 8,000(b) Allotted (Nos.) 4,000 4,000 2,000

Rs. Rs. Rs.(c) Amount Received 4,00,000 20,00,000 4,00,000

(Applied ×Application per share)(d) Application Money Adjusted 2,00,000 2,00,000 1,00,000

(Alloted × Application per share)(e) Excess Application Money 2,00,000 18,00,000 3,00,000

to be Adjusted with Allotment [c-d](f) Allotment Mone Due 2,00,000 2,00,000 1,00,000

(Alloted × Allotment per share)(g) Balance of Excess Application Money for Nil 16,00,000 2,00,000

Adjustment with calls [e-f](h) Call Money Due 1,00,000 1,00,000 50,000

(Allotment × Call per share)(i) Excess/(Shortage) (1,00,000) 15,00,000 1,50,000In case of shortage, the shareholders will deposit the dues.

(b) Journals

2008 Particulars L.F. Dr. (Rs.) Cr. (Rs.)

Jan. 01 Bank A/c Dr. 28,00,000To Equity Share Application and

Allotment A/c 28,00,000(Application money received on 56,000 shares@ Rs. 50 per share)

Feb. 01 Equity Share Application A/c Dr. 5,00,000To Equity Share Capital A/c 2,50,000To Securities Premium A/c 2,50,000

(Being application money on 10,000 sharestransferred to share Capital and SecuritiesPremium vide Board’s resolution no. dated...)

Equity Share Application A/c Dr. 16,50,000To Bank A/c 16,50,000

(Being excess application money refunded ofvide Board’s resolution no. dated...)

(Contd.)


Equity Share Allotment A/c Dr. 5,00,000To Equity Share Capital A/c 5,00,000

(Being allotment money due on 10,000 shares@ Rs. 50 per share vide Board’s resolutionno. dated...)Equity Share Application A/c Dr. 5,00,000

To Equity Share Allotement A/c Dr. 5,00,000(Being excess of Equity share application moneyadjusted with allotment)Equity Share First & Final Call A/c Dr. 2,50,000

To Equity Share Capital A/c 2,50,000(Being first & final call money due on 10,000shares @ Rs. 25 per share vide Board’s resolutionno. dated...)

Apr. 01 Bank A/c Dr. 90,000Calls in Arrear A/c Dr. 97,500Equity Share Application A/c Dr. 1,50,000

To Equity Share First & Final Call A/c 2,50,0000(Being amount received and adjusted, excepta holder of 100 share who failed to pay the call)

Equity Share Capital A/c Dr. 10,000To Shares Forfeited A/c Dr. 7,500To Calls in Arrear A/c 2,500

(Being 100 shares held by Ramesh forfeited fornon-payment of call @ Rs. 25 per share videBoard’s resolution no. dated...) 7,500

May 05 Bank A/c Dr. 10,500To Equity Share Capital A/c 10,000To Securities Premium A/c 500

(Being 100 forfeited shares resissued atRs. 10,500 )Share Forfeited A/c Dr. 7,500

To Captial Reserve 7,500(Being balance of shares forfeited transferredto captial reserve)

(Contd.)



Rights Issue

Issue of shares by an existing company to the existing equity shareholders is known as rightsissue.

Section 81 of the Companies Act, 1956 provides: Where at any time after the expiry of twoyears from the formation of a company or the expiry of one year from the first allotment ofshares in the company, whichever is earlier, if the Board of Directors, decide to increase thesubscribed capital of the company by the allotment of further shares, then:

(a) Such further shares shall be offered to the persons who on that date are the holders ofequity shares of the company proportionately to their equity holdings on that date.

(b) The offer shall be made by a notice specifying the number of shares offered and limiting atime not being less than 15 days from the date of the offer, within which the offer, if notaccepted, will be 4eemed to have been declined.

(c) Unless the Articles of Association of the company otherwise specify, the offer shall bedeemed to include a right exercisable by the person concerned to renounce the sharesoffered to him or any of them in favour of any other person; and the notice referred to inclause (b) shall contain a statement of this right.

(d) After the expiry of the time specified in the notice referred to above, or on receipt of earlierintimation from the person to whom such notice is given that he declines to accept theshares offered, the Board of Directors may proceed to dispose of such shares offered insuch manner as they consider most beneficial to the company.

The new shares issued need not be offered to the existing equity shareholders, if the companyin general meeting has so decided by a special resolution, or, if the company in general meet-ing has so decided by ordinary resolution and the same has been approved by the CentralGovernment.

“Nothing in section 81 shall apply:

(a) to a private Company; or

(b) to the increase of the subscribed capital of a public company caused by the exercise of anoption attached to debentures issued or loans raised by the company:

(i) to convert such debentures or loans into shares in the company, or

(ii) to subscribe for shares in the company.

Advantages of Rights Issue

The following can be the advantages which accrue as a result of issuing further shares to theexisting shareholders only:


1. Control of the company is retained in the hands of the existing shareholders. Issue ofright shares makes possible equitable distribution of shares without disturbing the estab-lished equilibrium of shareholdings because right shares are offered to the persons whoon the date of rights issue are the holders of equity shares of the company proportion-ately to their equity shares of the company proportionately to their equity shares on thatdate.

2. The existing shareholders do not suffer on account of dilution in the value of their hold-ings if fresh shares are offered to them because value of the shares is likely to fall withfresh issue. This decrease in the value of the shares will be compensated by getting newshares at a price lower than the market price. They are likely to suffer on account of thedilution in the value of their holdings if fresh shares are offered to the general public.

3. The expenses to be incurred, if shares are offered to the general public, are avoided.

4. Image of the company is bettered when rights issues are made from time to time andexisting shareholders remain satisfied.

5. There is more certainty of getting capital when fresh issue of shares is made to the existingshareholders instead of to the general public. .

6. Directors cannot misuse the opportunity of issuing new shares to their friends and rela-tives at lower prices and at the same time retaining more control in their hands when rightshares are issued because in rights issue shares are offered proportionately to the existingshareholders according to their existing holdings.

Valuation of Rights

Usually a company offers rights issue at a price which is lower than the market price of theshares so that existing (i.e., old) shareholders may get the monetary benefit of being associatedwith the company for a long time. Existing shareholders who have been offered right sharesand do not want to purchase these offered shares may renounce their right shares in favour ofsome other persons within the specified period as mentioned earlier. In such a case, the exist-ing shareholders can make a profit by selling his right to such other person. This right can bevalued in terms of money as below:

(a) Calculate the market value of shares which an existing shareholder is requiredto have inorder to get fresh shares.

(b) Add to the above price paid for the fresh shares.

(c) Find out the average price of existing shares and fresh shares.

(d) The average price of the share should be deducted from the market price and the differ-ence thus ascertained is value of right.

Illustration 17.

A Company is planning to raise funds by making rights issue of equity shares to finance its



expansion. The existing equity share capital of the company is Rs. 50,00,000. The marketvalue of its share is Rs. 42. The company offers to its shareholders the right to buy 2 shares atRs. 11 each for every 5 shares held. You are required to calculate:]

(i) Theoretical market price after rights issue;

(ii) The value of rights; and

(iii) Percentage increase in share capital.

SolutionRs

Market value of 5 shares alreadyheld by a shareholder @ Rs. 42 210

Add, price to be paid by him for acquiring

2 more shares @ Rs. 11 per share 22

Total price of 7 shares after rights issue 232

(i) Therefore, theoretical market price of one share, (i.e., 232/7) = 33.14(ii) Value of Rights = Market Price - Theoretical Market Price= Rs. 42 - Rs. 33.14. = Rs. 8.86(iii) Percentage Increase in Share Capital

Present Capital 50,00,000

Rights Issue Rs. 50,00,000 x 2/5 20,00,000

% Increase In Share Capital (20,00,000/50,00,000) x 100 40% Rs. 33.14

Study Note 7.1,Page 470 508

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Transcript of Study Note 7.1,Page 470 508