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SUMMARIZE LECTURE 2: FINANCING COMPANY OPERATION

Accounting for the issue of Shares:


Share is issued via IPO for the first time the company public the share. It is accomplished by disclosure document (specify number of application) CA require minimum subscription is 4 month and be allotted within 13 months Payment Method: it is ups to the company requirement, some require full amount to be paid on the application, some may require a portion to be paid on application and the balance at some time in future (allotment, call) Accounts related to facilitate: + Cash Trust (Dr): use to record cash prior to share being issued, held as trust account + Application(Cr): company liability before issuing share +Allotment(Dr): temporary account used when further amounts are owing when share are issued(Account receivable) +Call(Dr): similar with allotment account, use when call is made. Journal Entry: Payable in full on application
Cash Trust Application Application Share capital Cash Cash Trust xxx xxx xxx xxx xxx xxx Xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx

Deposit in Application and balance on allotment


Cash Trust Application Application Allotment Share Capital Application Cash Trust( refund process) or (*) Cash Cash Trust Cash Allotment

Deposit on application, allotment, balance in call


Cash Trust Application Application Allotment Share Capital Cash Cash Trust Cash Allotment Call Share capital Cash Call

Oversubscription:
When number of share applied exceed number of shares available for issue company can treat excess application as following ways: + Refund money for excess application + Retaining excess application money as an advance on future call Journal Entry for call in advance: (*) Application xxx Call in Advance xxx Share capital xxx

Undersubscription
When number of share applied is less than number of share available for issue company need to arrange the underwriting process to avoid refund money underwriter agree to buy all excess share in return for commission reduction against equity and other cost such as legal, stamp duty and formation cost

Forfeiture and re-issue of shares:


If the calls are not made, directors can forfeit the shares. The possible actions that can be taken are: + Balance of paid money will be retained by company equity account: forfeit share reserve. + amount paid may be refunded back liability account: forfeit share account Re-Issue: before refunding, company can reissued share as FULLY PAID share , new shareholders will pay less than the true VL of share ( company can only do that if the constitution states this fact, if no, company is entitled to keep any excess) Journal Entry:
Share Capital Call Forfeit share account(F.S) Cash F.S account Share capital F.S account Cash F.S Account Cash xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx

Balance of Share capital after issue share:


Old Share capital Less Call in arrears Add calls in advance Less underwriting commission( undersubcription) Less share issue cost Total Share capital xxx (xxx) xxx (xxx) (xxx)

Share Issue for Expansion:


Share will be issued via 3 ways + Rights Issue: offer share to existing share holder, depend on the number of share held, it may be renounceable or non-renounceable.

+ Private placement: Offer of shares to one entity only institutional investors + Bonus Issue: granted only to existing shareholders at no cost in lieu of cash dividend based on shareholding at date of declaration and no change in net equity of company

Share Options:
Issued for free bonus to employees in lieu of cash bonuses or to investor as normal shares. If options are not exercise, they will be lapsed. Journal entry:
Cash bonus Wage Option Cash Option Share capital(If exercise) Option Lapsed Opt. Reserve( if no exercise) Issue to investor Cash Option Cash Option Share capital Lapse Opt. Reserve xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx

Redeemable Preference Shares:


Give the holder the right to be repaid his/her capital or give the company the right to repay the capital. They can be classified as equity or liability Equity: - shares can be redeemed from process of a fresh issue or retained earning -Constitution may specify payment of redemption premium - The shares are cancelled and CANT be reissued on redemption Liability: - redeemable in cash or on certain date - Cumulative as to the payment of dividends - Priority capital return rights

Share buy-backs:
Company can buy back share in order to change debt/equity ratio, defend against take over Legal requirement: section 257A of CA Share must be cancelled, buy-back can generate premium or a discount. + As a premium: Capital xxx Retained Earning xxx Cash xxx + As a discount: Capital xxx Reserve xxx

Earning Cash

xxx xxx

Accounting for Debenture:


Debenture may be issued at par/premium or discount and be followed by disclosure document, it is treated as similar to share. Redemption: -Debenture may be redeemed at par/premium (loss to company expense)/ discount (gain to company revenue) -Funds to redeem may come from: process of new share issue, process of asset sale and maybe convertible into share Journal Entry: Redemption at a premium: Debenture xxx Redemption expense xxx Cash xxx Redemption at a discount: Debenture xxx Redemption revenue xxx Cash xxx Conversion to equity: Debenture xxx Share capital xxx