Issue of Shares

ISSUE OF SHARES:

Face value of a share is the par value of the share. It is also known as the Nominal value or denomination of a share. To issue shares a company follows a definite procedure which is controlled and regulated by the Companies Act and Securities Exchange Board of India (SEBI).

There are different ways of issue of shares which may be:

(A) For consideration other than cash

(B) For cash

(A) Issue of shares for consideration other than cash

Sometimes shares are issued to the promoters of the company in lieu of the services provided by them during the incorporation of the company. The issue price of these shares is normally debited to ‘Goodwill A/c’ and journal entry is made as follows:

Goodwill A/c Dr

To Share Capital A/c

In case a company does not have sufficient funds for the purchase of fixed assets or for payment to creditors it may offer and allot its shares to vendors/ creditors in lieu of cash. Any allotment of shares against which cash is not to be received is called ‘issue of shares for consideration other than cash’.

For example building is purchased and payment is made by issuing shares.

In case of purchase of assets like building, machinery, stock of materials, etc. the following journal entry is made:

1. Assets A/c Dr

To Vendors/Creditors A/c

(Assets purchased)

2. Vendors/Creditors A/c Dr

To Share Capital A/c

(Issue of shares of Rs…….each fully paid up)

(B) Issue of Shares for cash

In general, shares are issued for cash. The company may call the share money either in one installment or in two or more installments. But company always collects this money through its bankers.

(i) Receipt of share money in one installment

The company may receive the share money in one installment along with application. In this case the following journal entries are made in the books of the company

1. On Receipt of Application Money

Bank A/c Dr

To Share Application A/c

(Application money received on …shares of Rs…each)

2. On transferring the Application Money

Share Application A/c Dr

To Share Capital A/c

(Application money transferred to share capital A/c)

 (ii) Share money received in two or more installments

Instead of receiving payment in one installment i.e. at the time of application the company collects it in two or more installments. The first, installment which the applicants have to pay along with the applications for shares is known as application money. On the allotment of shares the allottees are required to pay the second installment which is termed as allotment money. 

If the company decides to call the share money in more than two installments the other installment is/are termed as call money (i.e. first-call, second call or final call).

In the above case the transactions are recorded in journal as given below:

(a) On receipt of application money

(i) Bank A/c Dr

To Share Application A/c

(Receipt of share application money for …. Shares @ Rs. per share)

(b) On allotment of shares

After receiving the application for shares within the prescribed time, the Board of Directors of the company proceeds to allot shares. On allotment of shares the application money is transferred to Share Capital A/c. For this the following journal entry is made:

Share Application A/c Dr

To Share Capital A/c

(Share application for …. Shares @ Rs… per share transferred to share capital A/c)

Allotment Money becoming due and received

On the allotment of shares the amount receivable on the next installment i.e. on allotment becomes due. The following entry is made for recording the amount due:

(i) Allotment money becoming due

Share Allotment A/c Dr

To Share Capital A/c

(Share allotment money due on …. shares @Rs ... per share)

 (ii) Receipt of allotment money

On the receipt of share allotment money the following journal entry is made:

Bank A/c Dr

To Share Allotment A/c

(Receipt of the amount due on allotment of … shares)

Calls on shares

After the receipt of application and allotment money the money that remains unpaid can be called up by the company as and when required. Thus a call is a demand made by the company asking the shareholders to remit the called up amount on shares allotted to them. The company may demand the remaining money in more than two installments. The amount called after the allotment is known as call money. There may be one or more calls, depending on the funds requirements of the company. When only one call is made Call Money is due:

Share First and Final Call A/c Dr

To Share Capital A/c

(Call money due on …. share @ Rs … per share).

Receipt of call money

The following journal entry is made for receipt of call money:

Bank A/c Dr

To Share First & Final call A/c

(Call money due on … shares @ Rs ... per share received)

Note: If the company makes more than one call the same accounting treatment is followed for recording the second call or third call money due and their receipt. The last call made is termed as final call.

FULL, UNDER AND OVER SUBSCRIPTION

A company decides to issue number of shares to raise capital. It invites public to buy these shares. Now there may be three situations:

I. Full Subscription

Company may receive applications equal to the number of shares, the company has offered to people. It is called full subscription. In case of full subscription the journal entries will be made as follows:

(a) On receipt of application money

Bank A/c Dr

To Share Application A/c

(Application money received for ......... shares)

(b) On allotment of shares

Share Application A/c Dr

To Share Capital A/c

(Application money of shares transferred to capital A/c on their allotment)

II. The company does not receive application equal to the number of shares offered for subscription, there may be two situations:

(i) Under subscription

(ii) Over subscription

(i) Under subscription

The issue is said to have been under subscribed when the company receives applications for less number of shares than offered to the public for subscription. In this case company is not to face any problem regarding allotment since every applicant will be allotted all the shares applied for. But the company can proceed with allotment provided the subscription for shares is at least equal to the minimum required number of shares termed as minimum subscription.

(ii) Over Subscription

When company receives applications for more number of shares than the number of shares offered to the public for subscription it is a case of over subscription. A company cannot allot more shares than what it has offered. In case of over subscription, company has the following options:

Option I

(i) Rejection of Excess Applications and Money Returned

The company may reject the applications for shares in excess of the shares offered for issue and a letter of rejection is sent to such applicants. In this case the application money received from these applicants is refunded to them in full. The journal entry made is as follows:

Share Application A/c Dr

To Bank A/c

(Application money on … shares refunded to the applicants)

(ii) Excess application money adjusted towards sums due on allotment.

Journal entry made is :

Shares Application A/c Dr

To Share Allotment A/c

(Excess application money adjusted towards sums due on allotment)

If the application money received on partially accepted applications is more than the amount required for adjustment towards allotment money, the excess money is refunded. However, if the Articles of the company so authorise, the directors may retain the excess money as calls in advance to be adjusted against the call/calls falling due later on and the following entry is made:

Share Application A/c Dr

To Call-in-advance A/c

(The adjustment of excess share application money retained as call-in-advance in respect of ... shares).

Option II: Partial acceptance of Applications.

In some cases the company accepts the applications for subscription partially. It means that the company does not allot the full number of shares applied for. For example if an applicant has applied for 5000 shares and is allotted only 2000 shares, then the applications is said to have been partially accepted. The company may evolve some formula of accepting applications partially or making proportionate allotment/ the Pro-rata allotment which means that the applicants are allotted shares proportionately. In such a case the company adjusts the excess share money received on application towards share allotment money due on partially accepted applications. The journal entry recording the adjustment of application money towards share allotment money is as under:

Share Application A/c Dr

To Share Allotment A/c

(Share application money transferred to Share Allotment Account in respect of ... shares).

A company can issue its shares at their face value. When company issues its shares at their face value, the shares are said to have been issued at par. Company can also issue its shares at more than or less than its face value i.e., at ‘Premium’ or at ‘Discount’ respectively. When shares are issued at premium or at discount an accounting treatment different from shares issued at par is required.

ISSUE OF SHARES AT PREMIUM

If a company issues its shares at a price more than its face value, the shares are said to have been issued at Premium. The difference between the issue price and face value or nominal value is called ‘Premium’. If a share of Rs 10 is issued at Rs 12, it is said to have been issued at a premium of Rs 2 per share. The money received as premium is transferred to Securities Premium A/c. A company issues its shares at premium only when its financial position is very sound. It is a capital gain to the company. The Premium money may be demanded by the company with application, allotment or with calls.

The Companies Act has laid down certain restrictions on the utilization of the amount of premium.

According to Section 78 of this Act, the amount of premium can be utilized for:

(i) Issuing fully-paid bonus shares;

(ii) Writing off preliminary expenses, discount on issue of shares, underwriting commission or expenses on issue;

(iii) Paying premium on redemption of Preference shares or Debentures.

Further, the company may demand the total amount of premium in more than one installment. In case the company doesn’t specify the particular call with which Securities Premium is to be paid it is supposed to be called at the time of Allotment.

Accounting Treatment of premium on Issue of Shares

Following is the accounting treatment of Premium on issue of shares:

(a) Securities premium collected with share Application money:

If the Securities premium is collected on application and the company has taken decision about the allotment of shares, the following journal entry is made:

Share Application A/c. Dr

To Securities Premium A/c

(The amount of Securities premium received on application of the allotted shares is transferred to Securities Premium A/c)

(b) Premium collected with Allotment money or Calls.

If the company decides to demand the premium with share Allotment or/and share call money, the journal entry made is:

Share Allotment A/c Dr

Or/and

Share Call A/c Dr

To Securities Premium A/c

(Adjustment of share premium due on……shares @Rs……per share.)

ISSUE OF SHARES AT DISCOUNT

When the issue price of share is less than the face value, shares are said to have been issued at discount. For example if a company issues its shares of Rs 100 each at Rs. 90 each, the shares are said to be issued at discount.

The amount of discount is Rs 10 per share (i.e. Rs 100 – Rs 90). Discount on shares is a loss to the company.

Section 79 of Companies Act 1956 has laid down certain conditions subject to which a company can issue its shares at a discount. These conditions are as follows:

(i) At least one year must have elapsed from the date of commencement of 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.

Accounting Treatment of Shares Issued at Discount

The amount of discount is generally adjusted towards share allotment money and the following journal entry is made:

Share Allotment A/c Dr

Discount on issue of shares A/c Dr

To Share Capital A/c

(Allotment money due on…shares @Rs ……per share after allowing discount @Rs ………per share)

CALLS IN ADVANCE AND CALLS IN ARREARS

If a shareholder pays any amount to company before it is demanded, it is called Call-in-Advance. This amount is put in a separate account known as Calls-in-Advance A/c. This amount is not shown as capital of the company, till such time the company makes a demand from all the shareholders. Call-in-Advance A/c is shown on the liabilities side of the Balance Sheet. For example if a company issued shares of Rs 10 on which it has already called Rs 5. Against the uncalled portion of Rs 5 per share the company makes a call Rs 3 per share, the entry for call money due will be made only for Rs 3 per share. Now suppose a shareholder pays Rs 5  per share including the uncalled amount of Rs 2 per share along with the call money, it means he has paid Rs 2 per share in advance, which will be credited to calls in Advance A/c. The company is required to pay interest on this amount @ 6% till the date of its appropriation.

Accounting treatment

Following journal entry is made for calls-in-advance.

Bank A/c Dr

To Calls-in-Advance A/c

(Calls in advance received on…….shares @ Rs …….per share)

Appropriation of calls-in-Advance A/c say in the final call, Journal entry will be :

Calls-in-Advance A/c Dr

To Share Final call A/c

(Calls in advance amount adjusted)

For interest given on Calls-in-Advance, Journal entry will be

Interest on calls-in-Advance A/c Dr

To Bank A/c

(Interest paid on the amount of Call-in-Advance)

Calls in arrears

When the company sends notice to the shareholders to pay allotment and /or call money, it has to be paid by them within the specified time period. If it is not paid by any one or more of the shareholders, the unpaid amount becomes arrears due from them. Such arrears are transferred to an account termed as Calls-in-Arrears A/c. The company is authorised to charge interest on calls-in-Arrears @ 5% p.a. for the intervening period. (The period between date of non-receipt of the due amount and the date of actual receipt of the due amount).

Accounting Treatment

The following journal entry is made to record Calls-in-Arrears:

Calls-in-Arrears A/c Dr

To Share Allotment/Call A/c

(Share allotment/ Call money not received on …. shares)

When the unpaid balance is received later on the following journal entry is made:

Bank A/c Dr

To Calls in Arrears A/c

(Amount due on allotment/ call remaining unpaid now received on…… shares.)

The company may charge interest on the amount of calls in arrears at a given rate from the date of amount due till it is paid journal entry will be

Bank A/c Dr

To Interest on calls in arrears A/c

FORFEITURE - MEANING AND PROCEDURE

If a shareholder fails to pay the due amount of allotment or any call on shares issued by the company, the Board of directors may decide to cancel his/her membership of the company. With the cancellation, the defaulting shareholder also loses the amount paid by him/her on such shares. Thus, when a shareholder is deprived of his/her membership due to non payment of calls, it is known as forfeiture of shares. The result of forfeiture of shares is:

Ø  Cancellation of membership of the shareholder.

Ø  Reduction of issued share Capital of the company.

Let us take an example to make it clearer. S.K. Ltd. issued 100000 shares of Rs 10 each payable as Rs 2 on application, Rs 2 on allotment, Rs 3 on first call and Rs 3 on second and final call. Mr. Harish, the allottee of 100 shares, fails to pay the second and final call money made by the company. In this case if the Board of Directors decides to forfeit his shares, his membership will be cancelled and the amount of Rs 700 paid by him (on 100 shares Rs 2 on application, Rs 2 on allotment and Rs 3 on first call per share) will be forfeited. Now Mr. Harish will no longer be the member of the company and the issued capital of the company will be reduced by Rs 1000.

Procedure of forfeiture of shares

The authority to forfeit shares is given to the Board of Directors in Articles of Association of the company. The Board of Directors has to give at least fourteen days notice to the defaulting members calling upon them to pay outstanding amount with or without interest as the case may be before the specified date. The notice must also state that if the shareholders fail to remit the amount mentioned therein within the stipulated period, their shares will be forfeited. If they still fail to pay the amount within the specified period of time, the Board of Directors of the company may decide to forfeit such shares by passing a resolution. The decision regarding the forfeiture of shares should be communicated to the concerned allottees and should be asked to return the allotment letters and share certificates of the forfeited shares to the company.

1. Forfeiture of shares issued at Par

When shares issued at par are forfeited the accounting treatment will be as follows:

(i) Debit Share Capital Account with amount called up (whether received or not) per share up to the time of forfeiture.

(ii) Credit Share Forfeited A/c. with the amount received up to the time of forfeiture.

(iii) Credit ‘Unpaid Calls A/c’ with the amount due on forfeited shares. This cancels the effect of debit to such calls which take place when the amount is made due.

The journal entry is:

Share capital A/c Dr (Amount called up)

  To share forfeited A/c (Amount paid)

  To unpaid calls A/c (Amount called but not paid)

Note: (i) Amount called up = No. of shares × called up per share

(ii) Amount paid = No. of shares × Amount paid per share

(iii) Amount called but not paid = No. of shares × Amount called but not paid per share

Forfeiture of shares allotted on pro-rata basis

In case the shares being over subscribed one of the scheme of allotment of shares  to applicants is to allot in the ratio of shares for which applications are entertained by the company for allotment and the number of shares company has offered for subscription. This is called allotment of shares on pro-rata basis. In case of pro-rata allotment the excess money received on applications is transferred to Share Allotment A/c from Share Application A/c. In case a shareholder fails to make payment on allotment and call money of shares held by him/her, the unpaid amount will be calculated as under:

No. of shares applied for allotment = Total No. of shares applied  X  shares allotted to  Defaulter

Total shares allotted

(ii) Number of shares applied for (as per step) – number of shares allotted = Excess applications received.

Forfeiture of shares issued at premium

In case shares are issued at premium and thereafter forfeited there can be two situations:

_ Premium on shares has been received prior to the forfeiture.

_ Amount of premium on shares has not been received and it still stands credited to the Securities Premium A/c.

1. Premium money has been received prior to the forfeiture

If the amount of premium on shares forfeited has been received by the company prior to the forfeiture, securities Premium A/c will not get affected. In this case the journal entry of forfeiture of shares will be similar to the entry made as if the shares had been issued at par.

The journal entry will be:

Share Capital A/c …Dr

To Share forfeited A/c

To Unpaid Calls A/c./Calls in arrears A/c

(Forfeiture of share issued at premium)

(iii) Excess application money received = Excess number of applied shares × money called per share on application.

(iv) Amount unpaid on allotment = Amount due on allotment – excess application money adjusted towards allotment

Forfeiture of shares issued at discount

Discount on issue of shares is a loss to the company. When shares issued at a discount are forfeited for non payment of dues, the discount allowed on such shares is written back. At the time of issue of shares, Discount on issue of Shares A/c is debited and when forfeited, this account is credited to cancel the discount allowed on such shares. In this case the following journal entry is made:

Share Capital A/c Dr.

To Share Forfeited A/c

To Discount on Issue of Shares A/c

To Unpaid call A/c

(Forfeiture of shares originally issued at discount for non payment of dues).