2. IFM - 2- Issue of Shares.pptx

Prof. Dr. Uma
Shankar
Department of Finance
School of Business
Dr. Vishwanath Karad
MIT World Peace
University, Pune, INDIA
Course Title: International Financial Management
Term – II – Sem IV
Course code: MGU 3104B
Unit 2 – Issue of Shares

1. Authorized share capital
2. Issued share capital
3. Subscribed share capital
4. Called up share capital
5. Paid up share capital
6. Reserve share capital
Share capital

Introduction
2.1 Equity Share:
• A unit of capital or an equal portion of the share capital of an
organization divided, whose ownership is evidenced by a share
certificate is known as a Share. Simply put, shares are the
denominations of the share capital of an organisation.
• For example, if the total capital of ABC Ltd. is ₹10,00,000 and is
divided into 10,000 units of ₹100 each. Each unit of ₹100 will be
called a share. The share of a company is moveable in nature and
can be moved through the process stated by the Articles of
Association of the Company.

Issue of Shares at Par
• Issue of Shares at Par means to issue the shares for an amount equal
to the face value of shares.
• For example, if the face value of shares is ₹20 each and they are
issued at ₹20 each, then it will be Issue of Shares at Par. One should
also notice that the shares issued by the company may be fully
subscribed by the public. Suppose, if a company issues 1,00,000
shares and gets applications for 1,00,000 shares then it will be a full
subscription.

Accounting Entries
on Issue of Shares at Par:
1. Entries on Receiving Application Money:
The applicants who want to invest in a company deposit the application money directly in the bank. The
bank then sends the application forms to the company’s office.
A. For entry is made by the company on receiving the application money:
B. For Application money is transferred to Share Capital A/c (When a share application is accepted, it
is an allotment of shares):

Accounting Entries
2. Entries on Allotment: The applicants who are allotted shares are sent a letter of allotment. The letter
consists of information regarding the number of shares allotted and the amount due to allotment. Once
the allotment letter is sent to the applicants, the allotment money becomes due on the allotment and
becomes a part of the share capital.
A. For making allotment for money due:
B. For receipt of allotment money:

Accounting Entries
3. Entries on First Call:
A. For entry is passed for call money due:
B. For receipt of first call money:

Accounting Entries
4. Entries of Second and Final Call:
A. For the second call money due as follows:
B. For receipt of Second Call Money:

Accounting Entries
Illustration 1:
• Akanksha Ltd. was formed with an Authorised Share Capital of ₹1,00,000 divided into
10,000 shares of ₹10 each, payable ₹2 on Application, ₹3 on Allotment, ₹4 on First
Call, and ₹1 on Second & Final Call. Expenses on the issue of shares amounted to
₹7,000. Pass the Journal Entries in the books of Akanksha Ltd.
Solution:
The amount payable will be as follows:

Illustration 2:
Nupur Ltd. was formed with an Authorised Share Capital of ₹7,00,000 divided into 70,000
shares of ₹10 each. The company issued a prospectus inviting application for 60,000 shares
@ ₹10 each payable as ₹4 on Application, ₹1.5 on Allotment, ₹2 on First Call, and ₹2.5 on
Second & Final Call. Applications were received for 50,000 shares. Allotments were made to
all applicants and all dues were duly received. Pass Journal Entries in the books of Nupur
Ltd.
Solution:

2.2. Issue of Shares at Premium:
• Issue of Shares at Premium means to issue the shares for a value more
than its face value per share. For example, if the face value of shares is
₹20 each and they are issued at ₹25 each, then it will be the Issue of
Shares at a Premium of ₹5.
• There is no legal restriction on a company for the issue of shares at a
premium. There is a separate account called Securities Premium
Reserve Account, in which the amount of the premium is credited. It is
so because the amount of premium received on the shares issued is
not a revenue profit but a capital profit.
• This amount is shown separately in the Equity and Liabilities side of the
Balance Sheet under the Reserves and Surplus head.

Accounting Entries
• Utilisation of Securities Premium Account under Section 52 of the Indian
Companies Act, 2013:
• Even though there is no legal restriction on the issue of shares at a premium;
however, Section 52 of the Indian Companies Act, 2013 has laid down some
specific purposes for which the amount of securities premium can be used.
These are as follows:
1.Writing off the preliminary expenses of the company.
2.Writing off the expenses, commission or discount allowed on the issue of
shares or debentures of the company.
3.For issuing fully paid bonus shares to the shareholders of the company.
4.For paying the premium on redemption of redeemable preference shares or
debentures of the company.
5.For buying back its own shares (as per Section 68).

Conti…
Presentation of Security Premium in Company’s Balance Sheet:

Accounting Entries
for the Amount of Premium:
The company may charge the premium either on the application or on allotment or call. Therefore, it is
essential to record the premium at the time it is payable. The entries for the same will be as follows:
1. When the Premium amount is received on Application Money:
A. For receiving Application Money:
A. For transferring Application Money to Share Capital A/c and Securities Premium A/c:

2. When the Premium amount is received or receivable along with Allotment Money:
A. When the allotment money is due including premium:
A. When the allotment money is received along with premium:

3. If the Premium is received or receivable with Call Money:
A. When the call money is due along with the premium:
A. When the call money is received along with premium:

ILLUSTRATION 1
(When Premium is received on Application):
ILLUSTRATION 3
Sukant Ltd. issued 20,000 shares of ₹10 each with 10% premium, payable ₹5 on
Application (including premium), ₹3 on Allotment, and balance on Final Call. All
money was received. Pass the Journal entries in the books of Sukant Ltd.
Solution: The amount payable will be as follows:

Illustration 4 (When Premium is received on Allotment and Call):
Sayeba Ltd. issued 50,000 shares @ ₹10 each at a premium of ₹4 per share payable as follows:
₹3 per share on the Application
₹5 per share on Allotment (including ₹2 as premium)
₹3 per share on First Call (including ₹2 as premium)
₹3 per share on the Second & Final Call
The issue was fully subscribed and money was duly received. Pass Journal Entries.
Solution:

Illustration 5-
Issue of Two Classes of Shares at
Par
A company was registered with an authorized capital share of $25,00,000
divided into 10,000 preference shares of $100 each and 15,000 equity shares
of $100 each. Out of these, 4,000 preference shares and 8,500 equity shares
were issued. These shares were payable as under:
Preference Shares Equity Shares
On Application 20 20
On Allotment 30 40
On First Call 50 40
All shares were paid in full. You are required to prepare the cash/ Bank book,
and balance sheet.

Illustration 6. Issue of Two Classes of
Shares at Par
A company was registered with an authorized capital share of $2,00,000
divided into 100,000 preference shares of $10 each and 50,000 equity shares
of $20 each. Out of these, 60,000 preference shares and 40,000 equity shares
were issued. These shares were payable as under:
Preference Shares Equity Shares
On Application 5 8
On Allotment 3 8
On First Call 2 4
All shares were paid in full. You are required to prepare the cash/ Bank book,
and balance sheet.

Forfeiture of Shares
Forfeiture of shares means cancellation of shares and seizure of the amount
already received from defaulting shareholders.
(i) Forfeiture of Shares Originally Issued at Par
Share Capital A/c Dr (Called-up money)
To Share Unpaid Calls A/c (Unpaid money or calls-in-arrears)
To Forfeited Shares A/c (Paid-up money)
(Being forfeiture of…… shares for non-payment of call of…….. per share)

Forfeiture of Shares at Par
Practical Problem 7
• A company forfeits 100 shares of $10 each fully called upon. The shareholder has failed to pay the
first call money of $3 per share and the second and final Call Money of $3 per share. Pass
the journal entry.
Solution

Forfeiture of Shares at Par
Work out :
A company forfeits 1000 shares of $100 each fully called upon.
The shareholder has failed to pay the first call money of $30 per
share and the second and final Call Money of $30 per share. Pass
the journal entry.

(ii)Forfeiture of Shares Originally Issued at Premium and Premium was Received
To Share Allotment A/c (Unpaid money excluding premium)
To Share Unpaid Call A/c (Unpaid money or calls-in-arrears)
(Being forfeiture of …… shares for non-payment of allotment and call of…… per share)

(iii)Forfeiture of Shares Originally Issued at Premium and Premium was not Received
Securities Premium Reserve A/c Dr (Unpaid premium)
To Share Allotment A/c (Unpaid money including premium)
To Share Unpaid Call A/c (Unpaid money or calls-in-arrears)
(Being forfeiture of …… shares for non-payment of allotment and call of ……per share)

Forfeiture of Shares at a Premium
Practical Problem 8
• A company forfeits 100 shares of $10 each issued at $11 per share. The premium was payable on
an allotment. The shareholder failed to pay the allotment money of $3 per share and the second
and final call of $5 per share. Pass the journal entry.
Solution

Forfeiture of Shares at a Premium
Practical Problem 9
A company forfeits 100 shares of $100 each issued at $110
per share. The premium was payable on an allotment. The
shareholder failed to pay the allotment money of $30 per
share and the second and final call of $50 per share. Pass the
journal entry.

Forfeiture of Shares at a Discount
Practical Problem 10
A company forfeits 100 shares of $10 each issued at $9 per share on account of non-
payment of $4 per share by the shareholder. Pass the journal entry.
Solution

Forfeiture of Shares at a Discount
A company forfeits 200 shares of $10 each issued at
$9 per share on account of non-payment of $5 per
share by the shareholder. Pass the journal entry.

X Ltd. issued 20,000 equity shares of $10 each at a discount of 10%. The
amounts payable are:
$2 on the application
$3 on the allotment
$5 on the final call
Mr. Seth, the holder of 1,000 shares, did not pay the amount due on call and
his shares were forfeited by the company. Journalize the entries for forfeiture.

Re-issue of Shares
The directors can either cancel or re-issue the forfeited shares.
Shares forfeited can be re-issued at par, at premium or at a
discount
1. In case, they are re-issued at par, accounting entry will be
Bank A/c Dr
To Share Capital A/c

Re-issue of Shares
3. If the forfeited shares are re-issued at a price higher than that paid-up, the excess is credited to the
securities premium reserve account. The journal entry will be
A. If the forfeited shares are re-issued at a premium
Bank A/c Dr
To Share Capital A/c
To Securities Premium Reserve A/c
(being the forfeited shares are re-issued at a premium)
B. Transfer of Balance in Forfeited Share Account
Forfeited Shares A/c Dr
To Capital Reserve A/c
(Being balance of share forfeiture account transferred to capital reserve account)

Re-issue of Shares
2. In case, shares are re-issued at a discount, the amount of discount allowed on the re-issue of
forfeited shares must not exceed the amount forfeited on re-issued shares. The discount allowed
on the re-issue of forfeited shares should be debited to the ‘share forfeiture account’. The journal
entry will be
Bank A/c Dr [With the amount received on re-issue]
Share Forfeiture A/c Dr [With the discount allowed on re-issue]
To Share Capital A/c [With the amount credited as paid-up]
It is calculated as
Number of Shares Re-issued x (Paid-up Value – Re-issue Price Per Share)

Reissue of Forfeited Shares
Mr. John holds 200 shares for $10 each. He had paid on these
shares application money of $2 each, allotment money of $2 each,
and first call money of $3 each. He failed to pay the final call
amount of $3 per share. His shares were forfeited and reissued at
$8 per share as fully paid up. Give the necessary entries to record
the forfeiture and reissue.

Reissue of a Part of Forfeited Shares
A holds 10 shares of $10 each, on which he has paid $1 per
share as application money. B holds 20 shares of $10 each,
on which he has paid $1 on the application, $2 on an
allotment, and $3 on the first call. C holds 30 shares of $10
each and has paid $1 on the application, $2 on an allotment,
and $2 on the first call. They all fail to pay their arrears and
the second call of $2 per share.
Therefore, the directors forfeited their shares. The shares of
C were then reissued at $7 per share as fully paid up. Pass
necessary journal entries of forfeiture and reissue of shares.

ESSY – QUESTIONS
1. Shares issued at premium
X Ltd. was registered with a capital of 23,00,000 in shares of Rs.
10 each. It issued a prospectus inviting applications for 23,000
shares at a 40% premium payable as follows:-
On application Rs. 5 (including Rs. 1 premium)
On allotment Rs. 4 (including Rs. 1 premium)
On the first call Rs. 3 (including Rs. 1 premium)
On the second call Rs. 2 (including Rs. 1 premium)
Applications were received for 23,000 shares, all money was duly
received. Pass the necessary journal entries.

Solution:
Date Particulars L.F. Debit Credit
1. Bank A/c Dr.
To share application A/c
1,15,000
1,15,000
Share application Dr.
To share capital
To security premium
1,15,000
92,000
23,000
Share allotment A/c Dr.
To share capital
To security premium
92,000
69,000
23,000
Bank A/c Dr.
To share allotment
92,000
92,000
Share first & final call Dr.
To share capital
To security premium
69,000
46,000
23,000
Bank A/c Dr.
To share first call
69,000
69,000
Share second & final call Dr.
To share capital A/c
To security premium
46,000
23,000
23,000
Bank A/c Dr.
To share second & final call
46,000
46,000

Shares issued at discount
A Ltd. issued to the public for the subscription of 1000 shares of Rs. 10 each at a
discount of 10% payable Rs. 4 on application Rs. 3 on allotment and Rs. 2 on the
first and final call. The issue was fully subscribed and all the money was duly
received.
Pass the journal entries for the following.

Solution:
Bank A/c Dr.
To share application
4,000
4,000
Share application Dr.
To share capital
4,000
4,000
Share allotment A/c Dr.
Discount on issue of shares Dr.
To share capital
3,000
1,000
4,000
Bank A/c Dr.
To share allotment
3,000
3,000
Share first & final call Dr.
To share capital
2,000
2,000
Bank A/c Dr.
To share first & final call
2,000
2,000

Call in arrears
Definition
If any amount that is called in respect of a share is not paid before or on the
date fixed for payment, such an amount is known as call in arrears. The
amount may be called by a company either as allotment money or call money.
Thus, any default arising due to the failure to send the call money is known as a
call in arrears.
A separate account is opened for calls in arrears. Companies can charge interest
on all such calls in arrears for the period that the amount remains unpaid. The
rate used is 5% p.a. The total of calls in arrears is shown in the balance sheet as
a deduction from the called-up capital.

Calls in
Advance
Definition
The money received by a company in excess of what has been
called up is known as calls in advance.
A company, if authorized by its articles, may accept calls in advance from
shareholders. If such an amount, which has not been called, is
received, the amount should be credited to a separate account
known as the calls in the advance account.
However, the amount that is not called should not be credited to the
capital account. A company may pay interest on such amounts received
in advance at the rate of 6% p.a. The amount that is received will be
adjusted toward the payment of calls as and when they become due.

Calls in Arrears and Calls in
Advance
United Limited was registered with a nominal capital of $500,000 in shares of $100
each. 3,000 shares were issued for subscription and payable as to
$12.50 on application,
$12.50 on the allotment, and
The first call is $25 three months after allotment,
with the balance to be called up as and when required.
All money up to allotment was duly received, but regarding the call of $25, a shareholder
holding 100 shares did not pay the amount due.
Another shareholder who was allotted 150 shares paid the entire amount of the shares
in the first call. Show the journal entries needed to record the above transactions,
including cash, and show how these appear in the balance sheet.
Solution : Calls in arrears = 25x100= 2500 and calls in advance = 50x150 =7500

X Limited issued 20,000 equity shares worth $10 each at $11 on 1 March, payable as follows:
$3 on the allotment
$6 on the first and final call (three months after allotment)
Applications were received for 26,000 shares. The directors made the allotment in full to
applications demanding 10 or more shares, and they returned the money to applications for 6,000
shares.
One shareholder who was allotted 40 shares paid the first and final call money along with the
allotment money, while another shareholder who was allotted 60 shares did not pay the allotment
money but paid along with the first and final call money.
The directors decided to charge and allow interest, as the case may be, on calls in advance and calls
in arrears. Give journal entries in the company's books.

X Limited issued 50,000 equity shares worth $100 each at $110 on 1 March, payable as follows:
$40 on the allotment
$50 on the first and final call (three months after allotment)
Applications were received for 55,000 shares. The directors made the allotment in full to
applications demanding 100 or more shares, and they returned the money to applications for 5,000
shares.
One shareholder who was allotted 100 shares paid the first and final call money along with the
allotment money, while another shareholder who was allotted 200 shares did not pay the allotment
money but paid along with the first and final call money.
The directors decided to charge and allow interest, as the case may be, on calls in advance and calls
in arrears. Give journal entries in the company's books.

Oversubscription - Prorate Allotment
ABC Ltd. issued a prospectus inviting applications for 1,04,000 shares of Rs. 10 each at a
premium of Rs. 2 per share payable as follows:
Application = Rs. 2
Allotment = Rs. 5 (including premium)
First call = Rs. 3
Final call = Rs. 2
Applications were received for 1,56,000 shares and prorate allotment was made on the
application for 1,24,800 shares. It was decided to utilize excess application money towards
the amount due on allotment. Ramesh to whom 2,080 shares were allotted failed to pay
the allotment money.
Calculate the amount due but not received on allotment from Ramesh and also calculate
allotment money received later on.

Solution
Points to be noted:
1. Shares issued = 1,04,000 @10 each + 2 (premium).
2. Applications received =1,56,000 (oversubscription).
3. Prorate allotment = 124800 shares.
4. Ramesh failed allotment money on 2080 shares.
5. Due money not received on an allotment from Ramesh.
6. Allotment money received later on

a) Application money received on shares applied (2496 × 2) 4992
b) Less: shares allotted & Application money due on shares allotted (2080 × 2) 4,160
c) Excess application money (a − b) 832
d) Allotment money due on share allotted (2080 × 5) 10,400
e) Allotment money due but not received (10400 − 832) 9,568
1.Total number of shares applied by Ramesh = {2080×124800 / 104000} = 2496
2. Calculation of the amount due but not received on allotment from Ramesh

a) Allotment money due (104000 × 5) 5,20,000
b) Less: allotment money already received in the application stage
(1,24,800 - 1,04,000 = 20800 × 2)
(41,600)
c) Less: allotment money not received (10400 − 832) (9,568)
4,68,832
3. Calculation of allotment money received later on:

Oversubscription - Prorate Allotment
ABC Ltd. issued a prospectus inviting applications for 200,000 shares of Rs. 100 each at a
Application = Rs. 20
First call = Rs. 30
Final call = Rs. 30
Applications were received for 320,000 shares and prorate allotment was made on the
application for 2,80,000 shares. It was decided to utilize excess application money towards
the amount due on allotment. Mohan to whom 4800 shares were allotted failed to pay the
allotment money.
Calculate the amount due but not received on allotment from Ramesh and also calculate
allotment money received later on.

Forfeiture of shares
P Ltd. issued a prospectus inviting applications for 25000 shares of Rs. 10 each at a
Application = Rs. 2
First call = Rs. 3
Final call = Rs. 2
Applications were received for 37500 shares and prorate allotment was made on
applications for 30000 shares. It was decided to utilize excess application money towards
the amount due on allotment. Ramesh who applied for 600 shares failed to pay the
allotment money and on his subsequent failure to pay the first call his shares were
forfeited Mahesh the holder of 750 shares failed to pay the two calls and on such failure,
his shares were forfeited. Reissued to Krishnan credited as fully paid for Rs. 9 per share
the whole of Ramesh’s shares being included.

Solution
1. No. of shares allotted to R = 600 × 25,000 / 30,000 = 500
2. Excess application money of Ramesh transferred to allotment
= (600 x 2 = 1200) – (500 x 2 =1000) = 200
3. Allotment money not received from R = 500 x5 = 2500 – 200 = 2300

Solution
Bank A/c (37500 × 2) Dr.
To share application A/c
75,000
75,000
Share application A/c (37500 × 2) Dr.
To share capital A/c (25000 × 2)
To bank A/c (7500 × 2)
To share allotment A/c (5000 × 2)
75,000
50,000
15000
10,000
Share allotment (25000 × 5)Dr.
To share capital (25000 × 3)
To security premium (25000 × 2)
1,25,000
75,000
50,000
Bank A/c (125000 − 10000 − 2300)Dr.
To share allotment
1,12,700
1,12,700
Share first call (25000 × 3)Dr.
To share capital
75,000
75,000
Bank A/c (23750 × 3)Dr.
To share first call
71,250
71,250

Solution
Share capital (500 × 8)Dr.
Security premium (500 × 2)Dr.
To share allotment (2500 − 200)
To share first call (500 × 3)
To forfeited shares (600 × 2)
4,000
1,000
2,300
1,500
1,200
Share final call (24500 × 2)Dr.
To share capital
49,000
49,000
Bank A/c (23750 × 2)Dr.
To share final call
47,500
47,500
Share capital A/c (750 × 10)Dr.
To share first call (750 × 3)
To share final call (750 × 2)
To forfeited shares A/c (750 × 5)
7,500
2,250
1,500
3,750
Bank A/c (1250 x 9)Dr.
Forfeited shares A/c Dr.
To share capital A/c (1250 × 10)
11,250
1250
12500
Forfeited shares A/c (1200+3750 – 1250 )Dr.
To capital reserve A/c
3700
3700

Forfeiture of shares
P Ltd. issued a prospectus inviting applications for 400000 shares of Rs. 100 each at a
ss
Application = Rs. 30
First call = Rs. 30
Final call = Rs. 30
Applications were received for 600000 shares and prorate allotment was made on
applications for 500000 shares. It was decided to utilize excess application money towards
the amount due on allotment. kamesh who applied for 1500 shares failed to pay the
allotment money and on his subsequent failure to pay the first call his shares were
forfeited Rakesh the holder of 500 shares failed to pay the two calls and on such failure,
his shares were forfeited and reissued to veeresh credited as fully paid for Rs. 90 per
share the whole of kamesh’s shares being included.

2. IFM - 2- Issue of Shares.pptx

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