Shares and Debentures

Accounting for issue of shares
and debentures
Define the issue price of sharesDefine the issue price of shares
Differentiate between preference shares, ordinary charesDifferentiate between preference shares, ordinary chares
and deferred sharesand deferred shares
Distinguish between issued capital, uncalled capital andDistinguish between issued capital, uncalled capital and
share capital or paid-up capitalshare capital or paid-up capital
Describe the concept of partly paid shares and calls onDescribe the concept of partly paid shares and calls on
unpaid share capitalunpaid share capital
Account for public company share issuesAccount for public company share issues
Define the various costs associated with share issues andDefine the various costs associated with share issues and
account for those costsaccount for those costs
Differentiate between debentures, mortgage debentures andDifferentiate between debentures, mortgage debentures and
unsecured notesunsecured notes
Account for the issue and redemption of debenturesAccount for the issue and redemption of debentures

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

Issue price of shares
Maximization of shareholder wealthMaximization of shareholder wealth
Effect on the market price of existing sharesEffect on the market price of existing shares
Requirement to sell a desired volume of sharesRequirement to sell a desired volume of shares
Expectation of future profits and dividends to service theExpectation of future profits and dividends to service the
new sharesnew shares
Whether ASX listing is proposed or already existsWhether ASX listing is proposed or already exists
Usage of an underwriterUsage of an underwriter

Uncalled and paid up share
capital
Shares can be issued to be paid in full or issued partly paidShares 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 calls
A company’s share capital is also referred to as paid-upA company’s share capital is also referred to as paid-up
capital = number of shares issued by the amount that thecapital = number of shares issued by the amount that the
directors require as payment of sharesdirectors require as payment of shares
The amount not required for payment is referred to as theThe amount not required for payment is referred to as the
uncalled amountuncalled amount
Share CapitalShare Capital Uncalled capitalUncalled capital
No of sharesNo of shares
issuedissued
100,000100,000 100,000100,000
AmtAmt
called/uncalledcalled/uncalled
0.500.50 1.501.50
TotalTotal $50,000$50,000 $150,000$150,000

Classes of Shares
Ordinary SharesOrdinary Shares
Preference SharesPreference Shares
Deferred or founder SharesDeferred or founder Shares

Ordinary Shares
Basic typeBasic type
Full voting rightsFull voting rights
Right to receive dividendsRight to receive dividends

Preference Shares
Preferential rights to a fixed rate of dividends beforePreferential rights to a fixed rate of dividends before
dividends to ordinary shareholders are declareddividends to ordinary shareholders are declared
Repayment of capital when company is wound upRepayment of capital when company is wound up
Participation in surplus assets and profitsParticipation in surplus assets and profits
Cumulative and non-cumulative dividendsCumulative and non-cumulative dividends
Voting rightsVoting rights
Priority of payment of capital and dividendsPriority of payment of capital and dividends

Deferred or Founder Shares
Issued to initial subscribersIssued to initial subscribers
Dividends usually paid after being paid to otherDividends usually paid after being paid to other
shareholdersshareholders
Founders are shareholders who start up the companyFounders are shareholders who start up the company
before shares are issued to the publicbefore shares are issued to the public
Provider establishment costs and issue the prospectusProvider establishment costs and issue the prospectus

Share Issue Procedure
Registration of membersRegistration of members
Disclosure of rights and liabilities of share issueDisclosure of rights and liabilities of share issue
The class of share being issuedThe class of share being issued
Share price and no of shares issuedShare price and no of shares issued
The amount that must be paid for each share with theThe amount that must be paid for each share with the
application (on allotment and future calls)application (on allotment and future calls)
The minimum subscriptionThe minimum subscription
The allotment processThe allotment process
The treatment of over subscriptionThe treatment of over subscription

Procedure for issuing shares
under a prospectus
The Prospectus together with an application form is madeThe Prospectus together with an application form is made
available to the general public.available to the general public.
Application monies are held in trustApplication monies are held in trust
Minimum subscription must be received before allotmentMinimum subscription must be received before allotment
Allotment at director’s discretionAllotment at director’s discretion
Allotment advice is communicated to the applicantAllotment advice is communicated to the applicant
Allotment monies may be required at this stage.Allotment monies may be required at this stage.

Share capital issued upon the
registration of a company
SubscribersSubscribers DrDr
ShareShare
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 application
Part payment on application, balance payable on allotmentPart payment on application, balance payable on allotment
of the sharesof the shares
Part payment on application and allotment, with thePart payment on application and allotment, with the
balance payable in callsbalance payable in calls

Shares issued fully paid on
application
Fully paid on applicationFully paid on application
Number of shares issued by the directors agrees exactlyNumber of shares issued by the directors agrees exactly
with the no applied forwith the no applied for
All applicants have been received with the full amountAll applicants have been received with the full amount

application Journal Entry
General JournalGeneral Journal
TrustTrust
AccountAccount
DrDr
ApplicationApplication CrCr
Record the receipt of moniesRecord the receipt of monies
from applicantsfrom applicants

ApplicationApplication DrDr
ShareShare
CapitalCapital
CrCr
Allot shares to ApplicantsAllot shares to Applicants

BankBank DrDr
TrustTrust
AccountAccount
CrCr
Issuing of Shares to ApplicantsIssuing of Shares to Applicants

Under subscribed and
oversubscribed share issue Jnl
Entry
Trust AccTrust Acc DrDr
Applicants depositsApplicants deposits

Entry Cont.
ShareShare
CapitalCapital
CrCr
Allot shares to ApplicantsAllot shares to Applicants

Entry Cont.
Trust AccTrust Acc CrCr
Refund Applicants depositsRefund Applicants deposits

Entry Cont.
BankBank DrDr
Issue Shares to ApplicantsIssue Shares to Applicants

Shares issued partly paid on
application with the balance
payable on allotment
TrustTrust
AccountAccount
DrDr
Record receipt of applicationRecord receipt of application
moniesmonies

Share capitalShare capital CrCr
Allot shares to applicantsAllot shares to applicants

BankBank DrDr
Transfer trust account moneyTransfer trust account money

AllotmentAllotment DrDr

BankBank DrDr
AllotmentAllotment CrCr

Shares issued payable on
application and allotment and
subject to future calls
TrustTrust
AccountAccount
DrDr
Record receipt of applicationRecord receipt of application
moniesmonies

Allot shares to applicantAllot shares to applicant

BankBank DrDr
TrustTrust
AccountAccount
CrCr
Transfer trust account moniesTransfer trust account monies

Record amount owing onRecord amount owing on
allotmentallotment

BankBank DrDr
Record receipt of allotmentRecord receipt of allotment
moniesmonies

CallCall DrDr
Record amount owing byRecord amount owing by
shareholders for the callshareholders for the call

BankBank DrDr
CallCall CrCr
Record amount received inRecord amount received in
respect of the callrespect of the call

Calls in arrears
Call on shares is madeCall on shares is made
Co may not receive all call monies owedCo may not receive all call monies owed
Call account remains in a debit balanceCall account remains in a debit balance
New account – Call in arrears and the above is transferredNew account – Call in arrears and the above is transferred
to this accountto this account
Call in arrears = Shareholder equity account = reduction inCall in arrears = Shareholder equity account = reduction in
share capitalshare capital
Co constitution may call for shareholders with calls inCo constitution may call for shareholders with calls in
arrears to forfeit their shares and the share reissuedarrears to forfeit their shares and the share reissued

Retention of excess application
monies
Prospectus issued calls for monies to be paid onProspectus issued calls for monies to be paid on
application, allotment and future callsapplication, allotment and future calls
Some applicants may forward all monies in the hope thatSome applicants may forward all monies in the hope that
they receive preferential treatment.they receive preferential treatment.
Co may choose to keep this money and allocate it againstCo may choose to keep this money and allocate it against
money owing on allotment and future callsmoney owing on allotment and future calls
Directors can only make this decision if allowed by CoDirectors can only make this decision if allowed by Co
constitutionconstitution

Retention of excess application
monies
Amt received fromAmt received from
applications allocatedapplications allocated
toto
Calls inCalls in
AdvanceAdvance
SharesShares
appliedapplied
forfor
PaidPaid
to $to $
AmtAmt
receivedreceived
$$
SharesShares
AllottedAllotted
ApplicationApplication
of $of $
AllotmentAllotment
of $of $
Call 1Call 1
$$
Call 2Call 2
$$
ApplicationApplication
refund $refund $

Accounting for retention of
excess application money
TrustTrust
AccountAccount
DrDr
Record the receipt of applicationRecord the receipt of application
moneymoney

Share CapitalShare Capital CrCr
Allot shares to applicantsAllot shares to applicants

Issue shares on allotmentIssue shares on allotment

TrustTrust
AccountAccount
CrCr
Refund application moneyRefund application money

BankBank DrDr
TrustTrust
AccountAccount
CrCr
Transfer trust account moneyTransfer trust account money

Application money retainedApplication money retained
against allotmentagainst allotment

Calls inCalls in
AdvanceAdvance
CrCr
Excess application moneyExcess application money
applied to future callsapplied to future calls

CallCall DrDr
First CallFirst Call

Cash inCash in
advanceadvance
DrDr
CallsCalls CrCr
Records calls in advance againstRecords calls in advance against
callcall

BankBank DrDr
CallsCalls CrCr
Call money owing is receivedCall money owing is received

Costs associated with share issue
 Preparation of prospectusPreparation of prospectus
 Lodgment with ASICLodgment with ASIC
 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 brokeragefees, underwriting costs, commissions and brokerage
feesfees
 The above “equity issue costs” must be recognizedThe above “equity issue costs” must be recognized inin
equityequity
 Indirect costs are not included as transaction costs.Indirect costs are not included as transaction costs.

Costs associated with share issue
TransactionTransaction
costscosts
DrDr
BankBank CrCr
Recording of transaction costs asRecording of transaction costs as
per AASB 1015per AASB 1015

Bookbuilding
 Occurs where an investment banker solicitsOccurs where an investment banker solicits
bids from institutional investors prior tobids from institutional investors prior to
pricing an equity issuepricing an equity issue

Stapled securities
 Stapling is an arrangement under whichStapling is an arrangement under which
different securities are quoted jointlydifferent securities are quoted jointly

Issuing Debentures
 Issuing of debtIssuing of debt
 Attracts interestAttracts interest
 Must be repaid in a specified time frameMust be repaid in a specified time frame
 BorrowerBorrower
 Lender = principalLender = principal
 Interest = Charge (Fixed or Floating)Interest = Charge (Fixed or Floating)
 Maturity dateMaturity date
 RedemptionRedemption
 Issued via prospectus to the general public and also privately toIssued via prospectus to the general public and also privately to
elite fewelite few
 Must appoint a trusteeMust appoint a trustee
 Clear disclosure of all matters relating to the debenturesClear disclosure of all matters relating to the debentures

Mortgage Debenture
 Secured by a first mortgage over land and/or buildingsSecured by a first mortgage over land and/or buildings
 Cannot exceed >60% of the value of assetCannot exceed >60% of the value of asset
 Limits rights to resell/transfer assetLimits rights to resell/transfer asset
 Trustee can take possession and sell to repay debentureTrustee can take possession and sell to repay debenture
holdersholders

Unsecured Note
 Debt which is not secured by any charge over assetsDebt which is not secured by any charge over assets
 Higher risk = higher rate of interestHigher risk = higher rate of interest

Convertible Note
 Allows debenture holder to convert debt to paid upAllows debenture holder to convert debt to paid up
share capital or cash upon maturityshare capital or cash upon maturity

Contrast Funds from equity and
debt
SharesShares DebtDebt
Ownership entitlementOwnership entitlement No Ownership entitlementNo Ownership entitlement
Voting rightsVoting rights No Voting rightsNo Voting rights
Dilute ownershipDilute ownership Do not share profitsDo not share profits
Payment of Dividend is at discretion ofPayment of Dividend is at discretion of
DirectorsDirectors
Fixed regular incomeFixed regular income
Does not have to be repaidDoes not have to be repaid Must be repaidMust be repaid
No restriction on amount of share issueNo restriction on amount of share issue Specific debt/equity ratioSpecific debt/equity ratio
Dividends = ProfitDividends = Profit Interest = ExpenseInterest = Expense

Accounting entries for the issue
and redemption of debentures
Trust Account-Trust Account-
DebenturesDebentures
DrDr
Application -Application -
CrCr

of debentures
Application -Application -
DrDr
DebenturesDebentures CrCr
Trust Acc -Trust Acc -
CrCr
Allot debentures and refundAllot debentures and refund
excess application moniesexcess application monies

of debentures
BankBank DrDr
Trust Acc -Trust Acc -
CrCr
Transfer of trust moniesTransfer of trust monies

Making annual interest
payments on debentures
InterestInterest DrDr
BankBank CrCr
Payment of interestPayment of interest

Interest onInterest on
debenturesdebentures
DrDr
AccruedAccrued
expenseexpense
CrCr
Interest incurred but not due forInterest incurred but not due for
payment on annual balance datepayment on annual balance date

AccruedAccrued
expenseexpense
DrDr
Interest onInterest on
debenturesdebentures
CrCr
Reversal entryReversal entry

Accounting entries for the
redemption of debentures
Interest -Interest -
DrDr
BankBank CrCr
Final interest paymentFinal interest payment

redemption of debentures
DebenturesDebentures DrDr
BankBank CrCr
Payment of debenture holders onPayment of debenture holders on
redemptionredemption

redemption prior to maturity
at a discount
DebenturesDebentures DrDr
Discount onDiscount on
debenture redemptiondebenture redemption
CrCr
BankBank CrCr
Payment of debenture holders onPayment of debenture holders on
redemption at discountredemption at discount

Alternate accounts for debt
issues
DebentureDebenture MortgageMortgage
DebentureDebenture
UnsecuredUnsecured
NoteNote
ApplicationsApplications ApplicationsApplications ApplicationsApplications
DebenturesDebentures MortgageMortgage
UnsecuredUnsecured
NotesNotes
InterestInterest InterestInterest InterestInterest
PremiumPremium PremiumPremium PremiumPremium
DiscountDiscount DiscountDiscount DiscountDiscount

Shares and Debentures

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