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Accounting for issue and

forfeiture of shares
Accounting for issue of shares
and debentures
Define the issue price of shares
Differentiate between preference shares, ordinary chares
and deferred shares
Distinguish between issued capital, uncalled capital and
share capital or paid-up capital
Describe the concept of partly paid shares and calls on
unpaid share capital
Account for public company share issues
Define the various costs associated with share issues and
account for those costs
Differentiate between debentures, mortgage debentures and
unsecured notes
Account for the issue and redemption of debentures
Capital Structure
 Equity Share Capital
 Preference Share Capital
 Debenture
 Long Term Borrowings
 Fixed 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 Shares
Preference Shares
Deferred or founder Shares
Ordinary Shares
Basic type
Full voting rights
Right to receive dividends
Preference Shares
Preferential rights to a fixed rate of dividends
before dividends to ordinary shareholders are
declared
Repayment of capital when company is wound
up
Participation in surplus assets and profits
Cumulative and non-cumulative dividends
Voting rights
Priority of payment of capital and dividends
Deferred or Founder Shares
Issued to initial subscribers/promoters
Dividends usually paid after being paid to other
shareholders
Founders are shareholders who start up the
company before shares are issued to the public
Issue price of shares
Maximization of shareholder wealth
Effect on the market price of existing shares
Requirement to sell a desired volume of shares
Expectation of future profits and dividends to
service the new shares
Whether listing is proposed or already exists
Usage of an underwriter
Types of Share Capital
 Authorised Share Capital
 Issued Capital
 Subscribed Capital
 Called up Capital
 Paid up Capital
Uncalled and paid up share
capital
Shares can be issued to be paid in full or issued partly paid
with the balance paid at a future date(s)
Amounts to be paid at a future date are referred to as calls
A company’s share capital is also referred to as paid-up
capital = number of shares issued by the amount that the
directors require as payment of shares
The amount not required for payment is referred to as the
uncalled amount
Share Capital Uncalled capital

No of shares issued 100,000 100,000


Amt 0.50 1.50
called/uncalled

Total 50,000 150,000


Procedure for issuing shares
under a prospectus
The Prospectus together with an application form
is made available to the general public.
Receiving applications alongwith the application
money. Minimum subscription must be received
before allotment
Allotment of shares at director’s discretion
Allotment advice is communicated to the
applicant. Allotment monies may be required at
this stage
Making calls for payment of balance money, if
any
Share capital issued upon the
registration of a company

Subscribers Dr
Share Cr
Capital
Issue shares to Subscribers

Bank Dr
Subscribers Cr
Subscriber Receipt upon Payment
Share capital issued by
prospectus
Payment in full on application
Part payment on application, balance payable on
allotment of the shares
Part payment on application and allotment, with
the balance payable in calls
Shares issued fully paid on
application
Fully paid on application
Number of shares issued by the directors agrees
exactly with the no applied for
All applicants have been received with the full
amount
Shares issued fully
paid on application

Journal Entry
Bank Dr
Account
Share Cr
Application
Being the amount of application
money received
Shares issued fully
paid on application

Journal Entry
Share Dr
Application
Share Capital Cr

Being the amount of application


money transferred to Share
Capital A/c
Shares issued fully
paid on application

Journal Entry
Share Dr
Application
Bank Cr
Being the excess of application
money returned to the applicants
Allotment of Shares

Journal Entry
Share Dr
Allotment
Share Capital Cr

Being the no of shares allotted X


Allotment money due
Journal Entries on Call Payments

Journal Entry
Share Call Dr
Share Capital Cr

No of Shares alloted X Call


money due
Journal Entry on Call Money
Received

Journal Entry
Bank Dr
Share 1st /2nd / Cr
Final Call
Being the amount received on the
1st /2nd /Final Call
Calls in arrears
Call on shares is made
Co may not receive all call monies owed
Call account remains in a debit balance
New account – Call in arrears and the above is
transferred to this account
Call in arrears = Shareholder equity account =
reduction in share capital
Co constitution may call for shareholders with
calls in arrears to forfeit their shares and the share
reissued
Calls in Arrear

Journal Entry
Calls in arrears Dr
Share Allotment Cr
Share 1st /2nd /
Final Call Cr

Issue Shares to Applicants


Call Money received in advance

Journal Entry
Bank Dr
Calls in Cr
Advance
Money received in advance
Calls in advance adjusted

Journal Entry
Calls in Dr
advance
Share Cr
1st /2nd /Final
Call
Money received in advance
adjusted
Interest payable on Calls in advance

Journal Entry
Interest on Dr
Calls in
advance
Sundry Cr
Shareholders
Interest payable on calls in
advance
Shares issued at Premium
 A company is allowed to issue shares at premium
 The amount of premium is transferred to “Share Premium
A/c”
 The share premium amount can be utilized
 In writing off preliminary expenses

 For issue of shares as fully paid bonus shares

 For premium payable on redemption of preference


shares
 In writing off any discount allowed on issue of
shares/debentures
 In buying back its own securities
Shares issued at Premium

Journal Entry
Share Application Dr

Share capital Cr
Share Premium Cr
Premium is paid with application
money
Shares Alloted at premium

Journal Entry
Share Allotment Dr
Share Call Dr
Share premium Cr
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 share
Applications 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 Entry
Share Allotment Dr
Discount on issue Dr
of shares
Share capital Cr
Being 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
application, allotment and future calls
Some applicants may forward all monies in the
hope that they receive preferential treatment.
Co may choose to keep this money and allocate
it against money owing on allotment and future
calls
Directors can only make this decision if allowed
by Co constitution
Retention of excess application
monies
Amt received from
applications allocated
to
Calls in
Advance
Shares Paid to Amt Shares Application of Allotment Call 1 Call 2 Application
applied $ received Allotted of refund
for
Costs associated with share issue
 Preparation of prospectus
 Registration with SEBI
 Publication
 Receipt of money
 Issue of shares
 Including stamp duty and taxes, professional advisers’
fees, underwriting costs, commissions and brokerage fees
 The above “equity issue costs” must be recognized in
equity
 Indirect costs are not included as transaction costs.
Costs associated with share issue

Journal entry
Transaction Dr
costs
Bank Cr
Recording of transaction costs
Issue of Bonus Shares
 Bonus Shares may be issued at par or at premium
 Before Bonus shares are issued all the existing
shares must be either fully paid or made fully paid
 Whenever Bonus is declared Share Capital
increases and Reserves decrease
 Declaration of Bonus is known as Capitalization
of reserve
Sources of Declaration of Bonus
 P & L A/c credit balance
 General Reserve
 Capital Reserve
 Balance in Debenture Redemption or Sinking Fund
 Capital Redemption Reserve
 Share Premium A/c
 Capital Redemption Reserve & Share Premium A/c can be
used only for issue of fully paid bonus shares and not for
making partly paid shares fully paid
When Bonus is declared

Journal entry
General Dr
Reserve
Bonus to Cr
Shareholders
Being Bonus declared
Bonus utilised for
issue of Bonus Shares at Par

Journal entry
Bonus to Dr
Shareholders
Share Capital Cr
Being Bonus amount used for
issue of Shares
Bonus Utilised for
issue of Bonus Shares at Par

Journal entry
Bonus to Dr
Shareholder’s A/c
Share Capital A/c Cr
Being Bonus amount used for
issue of Bonus Shares
Bonus Utilised for
issue of Bonus Shares at Premium

Journal entry
Bonus to Dr
Shareholder’s A/c
Share Capital A/c Cr
Share Premium A/c Cr
Being Bonus utilised for
issue of Bonus Shares at Premium
Forfeiture and Re-issue of shares
 By becoming a shareholder a person enters into a
contract with the company that he is liable to pay
full price of the share to the company from time to
time and as and when the calls are made by the
company
 If he fails to comply the company can forfeit his
shares
 Forfeiting means taking back the shares without
giving any compensation to the shareholder
Procedure
 As per Articles of Association the company
has power to forfeit the shares only for non
payment of call money
 Notice to the defaulting shareholder sent
warning him about the forfeiture of shares
 On shareholder’s failure to pay the amount
due in time a resolution to forfeit the shares
is passed by the directors
Forfeiture of shares issued at par
 Amount called up are debited to Share
Capital A/c – Forfeiture means cancellation
of shares and reduction in share capital
 Unpaid amount is credited to Share
Allotment or Calls-in-Arrears A/c
 Amount received so far on forfeited shares
is transferred to Shares Forfeited A/c
Forfeiture of shares
issued at Par

Journal entry
Share Capital A/c Dr
Share Allotment/ Call Cr
A/c
Shares forfeited A/c Cr
Being Forfeiture of shares issued at
par
Forfeiture of shares
issued at Premium

Journal entry
Share Capital A/c Dr
Share Premium A/c Dr
Share Allotment A/c Cr
Shares forfeited A/c Cr
Being Forfeiture of Shares at
Premium
Forfeiture of shares
issued at Discount
Journal entry
Share Capital A/c Dr
Dis on Issue of Shares Cr
Share Allotment A/c
Shares Forfeited A/c Cr
Cr
Being Forfeiture of shares
issued at Discount
Reissue of shares at Par

Journal entry
Bank A/c Dr
Shares Capital A/c Cr
Being __ no of shares re-issued at
par
Re-issue of shares at Premium

Journal entry
Bank A/c Dr
Share Capital A/c Cr
Share Premium A/c Cr
Being ___ no of shares
issued at Premium
Re-issue of shares at Discount

Journal entry
Bank A/c Dr
Shares Forfeited A/c Dr
Shares Capital A/c Cr

Being ____ no of shares issued at


Discount
Profit on Re-issue
1. Amt received originally on forfeited
shares
2. (Re-issued shares/ Forfeited shares) * 1
3. Discount on Re-issued shares = Paid up
price less Re-issue price
4. Profit on Re-issue = Amt forfeited less
Discount
Bookbuilding
 Occurs where an investment banker solicits
bids from institutional investors prior to
pricing an equity issue
Stapled securities
 Stapling is an arrangement under which
different securities are quoted jointly