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issue of shares for commerce students notes
- 1. Accounting for issueof shares and debentures Dr. N.P Shete Define the issue price of shares Define the issue price of shares Differentiate between preference shares, ordinary chares Differentiate between preference shares, ordinary chares and deferred shares and deferred shares Distinguish between issued capital, uncalled capital and Distinguish between issued capital, uncalled capital and share capital or paid-up capital share capital or paid-up capital Describe the concept of partly paid shares and calls on Describe the concept of partly paid shares and calls on unpaid share capital unpaid share capital Account for public company share issues Account for public company share issues Define the various costs associated with share issues and Define the various costs associated with share issues and account for those costs account for those costs Differentiate between debentures, mortgage debentures and Differentiate between debentures, mortgage debentures and unsecured notes unsecured notes Account for the issue and redemption of debentures Account for the issue and redemption of debentures
- 2. Share Capital •Owners ofcompanies 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
- 3. Issue price ofshares Maximization of shareholder wealth Maximization of shareholder wealth Effect on the market price of existing shares Effect on the market price of existing shares Requirement to sell a desired volume of shares Requirement to sell a desired volume of shares Expectation of future profits and dividends to service the Expectation of future profits and dividends to service the new shares new shares Whether ASX listing is proposed or already exists Whether ASX listing is proposed or already exists Usage of an underwriter Usage of an underwriter
- 4. Uncalled and paidup share capital Shares can be issued to be paid in full or issued partly paid Shares 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 calls 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 A company’s share capital is also referred to as paid-up capital = number of shares issued by the amount that the capital = number of shares issued by the amount that the directors require as payment of shares directors require as payment of shares The amount not required for payment is referred to as the The amount not required for payment is referred to as the uncalled amount uncalled amount Share Capital Share Capital Uncalled capital Uncalled capital No of shares No of shares issued issued 100,000 100,000 100,000 100,000 Amt Amt called/uncalled called/uncalled 0.50 0.50 1.50 1.50 Total Total $50,000 $50,000 $150,000 $150,000
- 5. Classes of Shares OrdinaryShares Ordinary Shares Preference Shares Preference Shares Deferred or founder Shares Deferred or founder Shares
- 6. Ordinary Shares Basic type Basictype Full voting rights Full voting rights Right to receive dividends Right to receive dividends
- 7. Preference Shares Preferential rightsto a fixed rate of dividends before Preferential rights to a fixed rate of dividends before dividends to ordinary shareholders are declared dividends to ordinary shareholders are declared Repayment of capital when company is wound up Repayment of capital when company is wound up Participation in surplus assets and profits Participation in surplus assets and profits Cumulative and non-cumulative dividends Cumulative and non-cumulative dividends Voting rights Voting rights Priority of payment of capital and dividends Priority of payment of capital and dividends
- 8. Deferred or FounderShares Issued to initial subscribers Issued to initial subscribers Dividends usually paid after being paid to other Dividends usually paid after being paid to other shareholders shareholders Founders are shareholders who start up the company Founders are shareholders who start up the company before shares are issued to the public before shares are issued to the public Provider establishment costs and issue the prospectus Provider establishment costs and issue the prospectus
- 9. Share Issue Procedure Registrationof members Registration of members Disclosure of rights and liabilities of share issue Disclosure of rights and liabilities of share issue The class of share being issued The class of share being issued Share price and no of shares issued Share price and no of shares issued The amount that must be paid for each share with the The amount that must be paid for each share with the application (on allotment and future calls) application (on allotment and future calls) The minimum subscription The minimum subscription The allotment process The allotment process The treatment of over subscription The treatment of over subscription
- 10. Procedure for issuingshares under a prospectus The Prospectus together with an application form is made The Prospectus together with an application form is made available to the general public. available to the general public. Application monies are held in trust Application monies are held in trust Minimum subscription must be received before allotment Minimum subscription must be received before allotment Allotment at director’s discretion Allotment at director’s discretion Allotment advice is communicated to the applicant Allotment advice is communicated to the applicant Allotment monies may be required at this stage. Allotment monies may be required at this stage.
- 11. Share capital issuedupon the registration of a company Subscribers Subscribers Dr Dr Share Share Capital Capital Cr Cr Issue shares to Subscribers Issue shares to Subscribers Bank Bank Dr Dr Subscribers Subscribers Cr Cr Subscriber Receipt upon Payment Subscriber Receipt upon Payment
- 12. Share capital issuedby prospectus Payment in full on application Payment in full on application Part payment on application, balance payable on allotment Part payment on application, balance payable on allotment of the shares of the shares Part payment on application and allotment, with the Part payment on application and allotment, with the balance payable in calls balance payable in calls
- 13. Shares issued fullypaid on application Fully paid on application Fully paid on application Number of shares issued by the directors agrees exactly Number of shares issued by the directors agrees exactly with the no applied for with the no applied for All applicants have been received with the full amount All applicants have been received with the full amount
- 14. Shares issued fullypaid on application Journal Entry General Journal General Journal Trust Trust Account Account Dr Dr Application Application Cr Cr Record the receipt of monies Record the receipt of monies from applicants from applicants
- 15. Shares issued fullypaid on application Journal Entry General Journal General Journal Application Application Dr Dr Share Share Capital Capital Cr Cr Allot shares to Applicants Allot shares to Applicants
- 16. Shares issued fullypaid on application Journal Entry General Journal General Journal Bank Bank Dr Dr Trust Trust Account Account Cr Cr Issuing of Shares to Applicants Issuing of Shares to Applicants
- 17. Under subscribed and oversubscribedshare issue Jnl Entry General Journal General Journal Trust Acc Trust Acc Dr Dr Application Application Cr Cr Applicants deposits Applicants deposits
- 18. Under subscribed and oversubscribedshare issue Jnl Entry Cont. General Journal General Journal Application Application Dr Dr Share Share Capital Capital Cr Cr Allot shares to Applicants Allot shares to Applicants
- 19. Under subscribed and oversubscribedshare issue Jnl Entry Cont. General Journal General Journal Application Application Dr Dr Trust Acc Trust Acc Cr Cr Refund Applicants deposits Refund Applicants deposits
- 20. Under subscribed and oversubscribedshare issue Jnl Entry Cont. General Journal General Journal Bank Bank Dr Dr Trust Acc Trust Acc Cr Cr Issue Shares to Applicants Issue Shares to Applicants
- 21. Shares issued partlypaid on application with the balance payable on allotment General Journal General Journal Trust Trust Account Account Dr Dr Application Application Cr Cr Record receipt of application Record receipt of application monies monies
- 22. Shares issued partlypaid on application with the balance payable on allotment General Journal General Journal Application Application Dr Dr Share capital Share capital Cr Cr Allot shares to applicants Allot shares to applicants
- 23. Shares issued partlypaid on application with the balance payable on allotment General Journal General Journal Bank Bank Dr Dr Trust Acc Trust Acc Cr Cr Transfer trust account money Transfer trust account money
- 24. Shares issued partlypaid on application with the balance payable on allotment General Journal General Journal Allotment Allotment Dr Dr Share capital Share capital Cr Cr
- 25. Shares issued partlypaid on application with the balance payable on allotment General Journal General Journal Bank Bank Dr Dr Allotment Allotment Cr Cr
- 26. Shares issued payableon application and allotment and subject to future calls General Journal General Journal Trust Trust Account Account Dr Dr Application Application Cr Cr Record receipt of application Record receipt of application monies monies
- 27. Shares issued payableon application and allotment and subject to future calls General Journal General Journal Application Application Dr Dr Share capital Share capital Cr Cr Allot shares to applicant Allot shares to applicant
- 28. Shares issued payableon application and allotment and subject to future calls General Journal General Journal Bank Bank Dr Dr Trust Trust Account Account Cr Cr Transfer trust account monies Transfer trust account monies
- 29. Shares issued payableon application and allotment and subject to future calls General Journal General Journal Allotment Allotment Dr Dr Share capital Share capital Cr Cr Record amount owing on Record amount owing on allotment allotment
- 30. Shares issued payableon application and allotment and subject to future calls General Journal General Journal Bank Bank Dr Dr Allotment Allotment Cr Cr Record receipt of allotment Record receipt of allotment monies monies
- 31. Shares issued payableon application and allotment and subject to future calls General Journal General Journal Call Call Dr Dr Share capital Share capital Cr Cr Record amount owing by Record amount owing by shareholders for the call shareholders for the call
- 32. Shares issued payableon application and allotment and subject to future calls General Journal General Journal Bank Bank Dr Dr Call Call Cr Cr Record amount received in Record amount received in respect of the call respect of the call
- 33. Calls in arrears Callon shares is made Call on shares is made Co may not receive all call monies owed Co may not receive all call monies owed Call account remains in a debit balance Call account remains in a debit balance New account – Call in arrears and the above is transferred New account – Call in arrears and the above is transferred to this account to this account Call in arrears = Shareholder equity account = reduction in Call in arrears = Shareholder equity account = reduction in share capital share capital Co constitution may call for shareholders with calls in Co constitution may call for shareholders with calls in arrears to forfeit their shares and the share reissued arrears to forfeit their shares and the share reissued
- 34. Retention of excessapplication monies Prospectus issued calls for monies to be paid on Prospectus issued calls for monies to be paid on application, allotment and future calls application, allotment and future calls Some applicants may forward all monies in the hope that Some 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 against Co may choose to keep this money and allocate it against money owing on allotment and future calls money owing on allotment and future calls Directors can only make this decision if allowed by Co Directors can only make this decision if allowed by Co constitution constitution
- 35. Retention of excessapplication monies Amt received from Amt received from applications allocated applications allocated to to Calls in Calls in Advance Advance Shares Shares applied applied for for Paid Paid to $ to $ Amt Amt received received $ $ Shares Shares Allotted Allotted Application Application of $ of $ Allotment Allotment of $ of $ Call 1 Call 1 $ $ Call 2 Call 2 $ $ Application Application refund $ refund $
- 36. Accounting for retentionof excess application money General Journal General Journal Trust Trust Account Account Dr Dr Application Application Cr Cr Record the receipt of application Record the receipt of application money money
- 37. Accounting for retentionof excess application money General Journal General Journal Application Application Dr Dr Share Capital Share Capital Cr Cr Allot shares to applicants Allot shares to applicants
- 38. Accounting for retentionof excess application money General Journal General Journal Allotment Allotment Dr Dr Share Capital Share Capital Cr Cr Issue shares on allotment Issue shares on allotment
- 39. Accounting for retentionof excess application money General Journal General Journal Application Application Dr Dr Trust Trust Account Account Cr Cr Refund application money Refund application money
- 40. Accounting for retentionof excess application money General Journal General Journal Bank Bank Dr Dr Trust Trust Account Account Cr Cr Transfer trust account money Transfer trust account money
- 41. Accounting for retentionof excess application money General Journal General Journal Application Application Dr Dr Allotment Allotment Cr Cr Application money retained Application money retained against allotment against allotment
- 42. Accounting for retentionof excess application money General Journal General Journal Application Application Dr Dr Calls in Calls in Advance Advance Cr Cr Excess application money Excess application money applied to future calls applied to future calls
- 43. Accounting for retentionof excess application money General Journal General Journal Call Call Dr Dr Share Capital Share Capital Cr Cr First Call First Call
- 44. Accounting for retentionof excess application money General Journal General Journal Cash in Cash in advance advance Dr Dr Calls Calls Cr Cr Records calls in advance against Records calls in advance against call call
- 45. Accounting for retentionof excess application money General Journal General Journal Bank Bank Dr Dr Calls Calls Cr Cr Call money owing is received Call money owing is received
- 46. Costs associated withshare issue Preparation of prospectus Preparation of prospectus Lodgment with ASIC Lodgment with ASIC Publication Publication Receipt of money Receipt of money Issue of shares Issue of shares Including stamp duty and taxes, professional advisers’ Including stamp duty and taxes, professional advisers’ fees, underwriting costs, commissions and brokerage fees fees, underwriting costs, commissions and brokerage fees The above “equity issue costs” must be recognized The above “equity issue costs” must be recognized in in equity equity Indirect costs are not included as transaction costs. Indirect costs are not included as transaction costs.
- 47. Costs associated withshare issue General Journal General Journal Transaction Transaction costs costs Dr Dr Bank Bank Cr Cr Recording of transaction costs as Recording of transaction costs as per AASB 1015 per AASB 1015
- 48. Bookbuilding Occurs wherean investment banker solicits Occurs where an investment banker solicits bids from institutional investors prior to bids from institutional investors prior to pricing an equity issue pricing an equity issue
- 49. Stapled securities Staplingis an arrangement under which Stapling is an arrangement under which different securities are quoted jointly different securities are quoted jointly
- 50. Issuing Debentures Issuingof debt Issuing of debt Attracts interest Attracts interest Must be repaid in a specified time frame Must be repaid in a specified time frame Borrower Borrower Lender = principal Lender = principal Interest = Charge (Fixed or Floating) Interest = Charge (Fixed or Floating) Maturity date Maturity date Redemption Redemption Issued via prospectus to the general public and also privately to Issued via prospectus to the general public and also privately to elite few elite few Must appoint a trustee Must appoint a trustee Clear disclosure of all matters relating to the debentures Clear disclosure of all matters relating to the debentures
- 51. Mortgage Debenture Securedby a first mortgage over land and/or buildings Secured by a first mortgage over land and/or buildings Cannot exceed >60% of the value of asset Cannot exceed >60% of the value of asset Limits rights to resell/transfer asset Limits rights to resell/transfer asset Trustee can take possession and sell to repay debenture Trustee can take possession and sell to repay debenture holders holders
- 52. Unsecured Note Debtwhich is not secured by any charge over assets Debt which is not secured by any charge over assets Higher risk = higher rate of interest Higher risk = higher rate of interest
- 53. Convertible Note Allowsdebenture holder to convert debt to paid up Allows debenture holder to convert debt to paid up share capital or cash upon maturity share capital or cash upon maturity
- 54. Contrast Funds fromequity and debt Shares Shares Debt Debt Ownership entitlement Ownership entitlement No Ownership entitlement No Ownership entitlement Voting rights Voting rights No Voting rights No Voting rights Dilute ownership Dilute ownership Do not share profits Do not share profits Payment of Dividend is at discretion of Payment of Dividend is at discretion of Directors Directors Fixed regular income Fixed regular income Does not have to be repaid Does not have to be repaid Must be repaid Must be repaid No restriction on amount of share issue No restriction on amount of share issue Specific debt/equity ratio Specific debt/equity ratio Dividends = Profit Dividends = Profit Interest = Expense Interest = Expense
- 55. Accounting entries forthe issue and redemption of debentures General Journal General Journal Trust Account- Trust Account- Debentures Debentures Dr Dr Application - Application - Debentures Debentures Cr Cr
- 56. Accounting entries forthe issue of debentures General Journal General Journal Application - Application - Debentures Debentures Dr Dr Debentures Debentures Cr Cr Trust Acc - Trust Acc - Debentures Debentures Cr Cr Allot debentures and refund Allot debentures and refund excess application monies excess application monies
- 57. Accounting entries forthe issue of debentures General Journal General Journal Bank Bank Dr Dr Trust Acc - Trust Acc - Debentures Debentures Cr Cr Transfer of trust monies Transfer of trust monies
- 58. Making annual interest paymentson debentures General Journal General Journal Interest Interest Dr Dr Bank Bank Cr Cr Payment of interest Payment of interest
- 59. Making annual interest paymentson debentures General Journal General Journal Interest on Interest on debentures debentures Dr Dr Accrued Accrued expense expense Cr Cr Interest incurred but not due for Interest incurred but not due for payment on annual balance date payment on annual balance date
- 60. Making annual interest paymentson debentures General Journal General Journal Accrued Accrued expense expense Dr Dr Interest on Interest on debentures debentures Cr Cr Reversal entry Reversal entry
- 61. Accounting entries forthe redemption of debentures General Journal General Journal Interest - Interest - Debentures Debentures Dr Dr Bank Bank Cr Cr Final interest payment Final interest payment
- 62. Accounting entries forthe redemption of debentures General Journal General Journal Debentures Debentures Dr Dr Bank Bank Cr Cr Payment of debenture holders on Payment of debenture holders on redemption redemption
- 63. Accounting entries forthe redemption prior to maturity at a discount General Journal General Journal Debentures Debentures Dr Dr Discount on Discount on debenture redemption debenture redemption Cr Cr Bank Bank Cr Cr Payment of debenture holders on Payment of debenture holders on redemption at discount redemption at discount
- 64. Alternate accounts fordebt issues Debenture Debenture Mortgage Mortgage Debenture Debenture Unsecured Unsecured Note Note Applications Applications Applications Applications Applications Applications Debentures Debentures Mortgage Mortgage Debentures Debentures Unsecured Unsecured Notes Notes Interest Interest Interest Interest Interest Interest Premium Premium Premium Premium Premium Premium Discount Discount Discount Discount Discount Discount