COMPANY ACCOUNTS - ISSUE OF SHARES (PAR, PREMIUM & DISCOUNT)

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COMPANY ACCOUNTS – ISSUE OF SHARES (PAR, PREMIUM & DISCOUNT)

MEANING AND CHARACTERSTIC OF A COMPANY

Meaning A company or a joint stock company is an enterprise established through a

process of law for undertaking (usually) a business venture. A is an artificial

person existing in the eyes of law and distinct from its members. It has a share

capital divided into shares, the owners of which are known as members or

shareholders. Insolvency of death of a member has no effect on the life of the

company.

Section 3(1) (i) of the companies Act, 1956 defines “A company formed and

registered under this Act or an existing Company.” An existing company means

“A company formed and registered under any of the previous Company Laws.”

The term ‘Company’ has not been much clarified by the Companies Act. Let us

look at some definitions of the term for better understanding.

“A corporation is an artificial being, invisible, intangible, existing only in

contemplation of the law.” -Chief Justice Marshal

“A company is an artificial person created by law, having separate entity with a

perpetual succession and common seal.” -Prof. Haney

Characteristics (Features) of a Company i. Incorporation: A company is an artificial person created through a process

law, i.e., the Companies Act, 1956 having existence distinct from its

members.

ii. Separate Legal Entity: A company is a separate legal entity from its

shareholders. It can own property, enter to contract, conduct business, sue or

sued. The activities and the working are regulated by its Memorandum,

Association, Articles of Association and provision of the Companies Act.

Anyone taking legal action proceeds against the company and not the

individual shareholder.

iii. Perpetual Existence: A company is not affected by the death, lunacy or

bankruptcy of its members of shareholders.

iv. Limited Liability: Liability of the members of the company is limited

(though not in all cases) to the value of the shares Subscribed by each of

them.

v. Transferability of shares: The shares of company are normally freely

transferable in the case of public companies whereas they are not so in case

of private companies.

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vi. Management and Ownership Separate: A company is not managed

by all the members but by their elected representative called ‘Directors’. In

other words, management and ownership are separate.

vii. Common Seal: Every company has its own common seal which is affixed

on all the important documents of the company.

Kinds of Joint Stock Company A company may be incorporated as a private company or a public company.

Private Company: A private company is one which as a minimum paid-up

share capital of Rs. 1, 00,000 or such higher paid-up share capital as may be

prescribed & by its Articles of Association: a) Restricts the right to transfer its shares, if any;

b) Limits the number of its members to 50 not including its present or past

employee members;

c) Prevents the public from subscribing for any shares or debentures of the

company; and

d) Prohibits any invitation or acceptance of deposits from persons other than its

members & directors or their relatives.

The name of a private company ends with the word, ‘Private Limited’.

Public Company: A public company means a company which

a) is not a private company;

b) has a minimum paid-up capital of Rs. 5,00,000 or such higher paid-up capital

as may be prescribed;

c) is a private company, being a subsidiary of a company which is not a private

company.

The name of a public company ends with the word ‘Limited’.

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SHARE CAPITAL OF A COMPANY

Share capital refers to the amount that a company can raise or has raised by issue

of shares. From accounting point of view, share capital can be classified as

follows:

1. Authorized Share Capital The Authorized Share Capital is started in the Memorandum of Association and is

the maximum share capital that a company can issue. The authorized may or may

not be the same as issued share capital.

The capital of the company is divided into units of small denomination and is

called a ‘share’. As per the provision of Section 85 of the Companies Act, 1956,

share capital of a company consists of two classes of share: (1) Preference shares;

(2) Equity shares. Each share has nominal value or face, whichever may be Re. 1

or Rs 2 or Rs. 5 or Rs. 10 or indeed amount. Thus, company with an authorized

share capital as follows:

Rs. 75000 Equity shares of Rs. 10 each 750000

2500 Preference shares of Rs. 100 each 250000

Or say

150000 Equity shares of Rs. 5 each 750000

5000 Preference shares of Rs. 50 each 250000

2. Issued Share capital Issued share capital is a part of authorized share capital that is issued for

subscription by the company. Issued share capital cannot exceed the company’s

authorized capital.

3. Subscribed Share Capital Subscribed share capital is a part of issued share capital which is applied for

subscription. For example, Nokia Ltd. Issued 20000 equity shares of Rs. 10 each

and 17500 equity shares are applied; the subscribed share capital is Rs. 175000.

4. Called-up Share capital Called-up share capital is nominal value of share that has been called-up by the

company for payment by the subscriber towards the share. For example, the

company has subscribed capital of 200000 equity shares of Rs. 10 each, out of

this value of Rs. 10 each, the company has called-up capital will be 1000000

(i.e., 2000000 equity shares x 5).

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5. Paid-up capital Paid up capital is a part of called up capital that the members of the company

have paid. Continuing the above example if the members fail to pay Rs. 10000

out of the called up capital of Rs. 1000000, paid up capital shall be 990000 and

calls arrears shall be Rs. 10000. It should be remembered that paid-up capital is

equal called up capital less call-in- arrears.

6. Reserve capital Reserve capital is a part of subscribed capital remaining uncalled that company

resolves, by special resolution, not to call except in the approved circumstances,

say in the event of the winding up of the company.

Illustration 1. (Different types of shares capital). The particulars of the shares

capital of X Ltd. are as follows:

i. The authorized capital is Rs. 1000000 divided into equity shares of Rs. 10

each.

ii. 20000 equity shares were allotted in payment of a plant purchased by the

company.

iii. 60000 equity shares were allotted in payment of cash, on which Rs. 8 per

was called-up. The amount on 40000 equity shares was received at Rs. 8 per

share and Rs. 6 per shares on 20000 equity shares.

State the amount of different classes of share capital.

Call-in-arrears

Call-in-arrears is the part of the called-up Capital that remains unpaid by the

subscribers. In the balance sheet it is shown under the sub-head ‘Paid-up share

capital’ is follows:

Paid-up share capital

….Equity shares of Rs…each

Rs….Called-up ….

Less: Calls-in-arrears (Unpaid Calls) …. …..

Call-in-Advance

A company, if its Articles of Association permit, may receive unpaid amount

from the shareholders even when that amount has not seen called. The amount

so received is known as Call-in-advance. In the balance sheet it is shown

separately as Calls-in-Advance as current liability.

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Solution:

SHARE CAPITAL Authorized capital Rs.

100000 Equity shares of Rs. 10each 1000000

Issued capital

80000 equity shares of Rs. 10 each 800000

Subscribed capital

20000 equity shares issued as fully paid for consideration other than cash 200000

60000 equity shares issued for cash 600000

800000

Called-up Capital

20000 equity shares fully paid-up 200000

60000 equity shares of Rs. 10 each-Rs. 8 called-up 480000

680000

Paid-up Capital

20000 equity shares of Rs. 10 each fully paid-up—issued for

consideration other the cash 200000

60000 equity shares of Rs. 10 each—Rs. 8 called-up; paid-up in cash 480000

680000

Less: Call-in-arrears on 20000 shares at Rs. 2 per shares. 40000

640000

DISCLOUSER OF SHARE CAPITAL IN COMPANY’S BALANCE SHEET

Following information is disclosed under the head ‘Share Capital’ on the

liabilities of the company’s Balance sheet.

AN EXTRACT OF BALANCE SHEET OF ...LTD.

Rs. Rs.

Capital

Authorized capital:

Equity shares of Rs. …each Preference share of Rs. …each

Issued capital:

Equity shares of Rs. …each Preference share of Rs. …each

Subscribed. Called-up and paid-up capital:

Equity shares of Rs. … each, Rs. …called-up

Preference shares of Rs. … each, Rs. …called-up (of the above shares ….shares are allotted as fully paid up pursuant

a contract without payment being received in cash)

Calls unpaid (a) By directors Rs…

(b) By others Rs…

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Note: The information on subscribed, called-up and paid-up share paid-up share

capital is to be then for each class of shares.

Illustration 2. Suman Ltd., registered with a nominal capital of Rs. 1000000

divided 100000 equity shares of Rs. 10 each. Out of these 20000 equity shares

were issued the vendor as fully paid as purchase consideration for a building

acquired. 65000 equity shares were offered to the public and of these 60000

equity shares were applied for and allotted. The directors called Rs. 6 per share

and received the entire amount expect a call of Rs. 2 per share on 5000 equity

shares.

How would you show the relevant items in the Balance sheet of Suman Ltd.?

Solution: Suman Ltd.

BALANCE SHEET as on...

Liabilities Rs. Assets Rs.

Share Capital

Authorized capital:

100000 Equity shares of Rs.

10 each

Issued Capital:

85000 shares of Rs. 10 each

Subscribed, Called-up &

Paid-up Capital:

20,000 shares of Rs. 10 each

(Issued as fully paid for

consideration other than

cash)

60,000 shares of Rs. 10 each

Rs. 6 called up 3,60,000

Less: Calls unpaid

@ Rs.2 on 5,000

shares 10,000

10,00,000

Fixed Assets

Building

Current Assets

Cash at bank

2,00,000

3,50,000

5,50,000

8,50,000

2,00,000

3,50,000

5,50,000

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CLASSES OR KINDS OF SHARES

Capital of a company is divided into units of small denomination called a share.

Preference share and equity shares are defined by the companies Act, 1956 as

follows:

1. Preference Shares [section 85(1)] Preference shares are the shares that carry the following two rights:

i. Preferential right of dividend to be paid as fixed amount calculated at a fixed

rate; and

ii. On winding up or repayment of capital, a preferential right to be repaid the

amt. of capital before any amt. is paid to the equity shareholders.

Classes of Preference Shares We may broadly classify the Preference Shares as follows:

i. With Reference to Dividend;

ii. With Reference to Participation in Profits;

iii. With Reference to Convertibility; &

iv. With Reference to Redemption.

2. Equity Shares [Section 85(2)] Equity shares mean those shares which are not preference shares, i.e., these shares

do not enjoy any preferential rights. Thus, for the purpose of divided &

repayment of capital, the equity shares rank after the preference shares. Their rate

of dividend is not fixed. It may vary from year to year depending upon the profits

of the company. Equity shareholders may get higher dividend if the profits are

large & may get nothing if there are no profits. Directors have the sole right of

recommending dividends to such they may not get any dividends if directors so

choose, in spite of large profits. That is why in financial terminology the share

capital raised through such capital is called as ‘Risk Capital’.

ISSUE OF SHARES

A Company collects its capital by issue of shares. A public company can issue

shares only after it has met the legal compliances that is obtaining certificate for

commencement of business, filing of prospectus with the Registrar of Companies,

etc. Private companies, on the other, do not have to meet any such legal

compliance.

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Accounting Treatment

A company can issue its shares in two ways:

I. For cash, &

II. For consideration other than cash.

I. ISSUE OF SHARES FOR CASH

Shares are said to be issued for cash when a company receives cash against the

shares issued. These shares may be issued at par (at face value) or at premium

(above the face value) or at discount (below the face value). Issue price may be

payable either in lump sum along with the application, or in installments at

different stages; it means, partly on application, partly on allotment & balance in

one or more calls.

i. Shares Payable in Lump Sum: When shares are issued at par

payable in one installment, the shares so payable are said to have been issued

in lump sum. Shares now-a-days, are issued against payment in lump-sum.

Accounting Entries for Issue of Shares

For Receiving Share Application Money:

Bank A/c …Dr.

To Shares Application A/c

For Allotment of Shares:

Share Application A/c …Dr.

To Share Capital A/c

Illustration 3. A Ltd. Proposed for application to public on 1st April, 2009,

10,000 equity shares of Rs. 10 each at par. The whole of the amount was payable

on application. The public applied for all the shares by 30th

April, 2009 & the

shares were allotted on 15th

May, 2009. Pass the necessary Journal entries in the

books of the company.

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Solution: JOURNAL

Date Particulars L.F Dr.(Rs.) Cr.(Rs.)

2009

April 30

May 15

Bank A/c …Dr.

To Equity Share Application A/c

(Being the application money received on

10,000 equity shares @ Rs. 10 each.)

Equity share application A/c …Dr.

To Equity Share Capital

(Being the share allotted and application

money transferred to share capital account)

1,00,000

1,00,000

1,00,000

1,00,000

ii. Shares Payable in Installments: The amount against the share can

be taken in installments also. First installment on a share is paid along with

the applications. Hence, the amount to be paid by intending shareholders

(who apply for shares) is called ‘Application Money’ [Application money on

the shares after allotment (allotment mean acceptance of share application)

becomes a part of share capital.]. Second installment is called by the

company at the time of allotment; it is called ‘Allotment Money’. After

allotment of share remaining part of share money, when called up is called

‘Call money’. Call money may be collected in one or more installments. If

only one call is made then it is called ‘First and Final call’ in place of First

call, otherwise the word final will be added to the last installments. Entries

passed are follows: Transaction Journal Entry Amount

On Receipt of Application

Money

Bank A/c …Dr.

To Shares Application A/c Amount received with

application. On Allotment of Shares

Shares Application Money is

transferred to Share Capital A/c

Share Application A/c …Dr.

To Share Capital A/c Application money on shares

allotted.

Amount due on Allotment Share Allotment A/c …Dr. To Share Capital A/c

Money due on shares allotted.

On Receipt of Allotment

Money

Bank A/c …Dr. To Share Allotment A/c

Amount received on share

allotted.

On First Call Being Due Share First Call A/c …Dr.

To Share Capital A/c Amount payable on First Call.

On Receipt of First Call Bank A/c …Dr.

To Share First Call A/c Amount received on First

Call.

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Terms of Issue of Shares

Shares of a company may not be issued in any of the following three ways:

1. Issue of Share at Par,

2. Issue of Share at Premium (Section 78), and

3. Issue of Shares at a Discount (Section 79).

The accounting treatment of issue of shares in case of each of the above is

different.

1. Issue of Share at Par Shares are said to have been issued at par when an application has to pay sum

equal to the face value of share, i.e. issue price Rs. 10 and face value is also Rs.

10.

The journal entries passed in case issue of shares at par are explained here with

the help of the following illustration.

Illustration 4. (Issue of Shares at Par; Fully Subscribed). X Co. Ltd. Invited

applications for 10,000 shares of the value of Rs. 10 each. The amount is payable

as Rs. 3 on application & Rs. 4 on allotment & balance Rs. 3 on First & Final

Call. The whole of the above issue was applied for & cash duly received. Give the

Journal entries for the above transactions.

Solution:

JOURNAL ENTRIES IN THE BOOKS OF X CO. LTD.

Date Particulars L.F. Dr. Cr.

Date of

Receipt

Date of

Allotment

Date of

Allotment

Bank A/c Dr.

To Share Application A/c


10,000 shares at Rs. 3 per share)

Share Application A/c Dr.


(Being the transfer of application money on

10,000 shares on allotment to Share Capital

Account)

Share Allotment A/c Dr.


(Being Amount Due on 10,000 shares at

Rs. 4 per share)

30,000

30,000

40,000

30,000

30,000

40,000

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Date of

Receipt

Date of

Call

Date of

Receipt

Bank A/c Dr.

To Share Allotment A/c

(Being the receipt of Rs. 4 per share on

10,000 shares)

Share First & Final A/c Dr.


(Being the amount due on 10,000 shares at

Rs. 3 per share)

Bank A/c Dr.

To Share First & Final Call A/c

(Being the receipt of Rs. 3 per share on

10,000 shares)

40,000

30,000

30,000

40,000

30,000

30,000

2. Issue of Shares at a Premium (Section 78) Shares may be issued at an amount more than the face value, e.g. a Rs. 10 share

may be issued, say, at Rs. 20. It is a case of issue of shares at a premium- the

premium being Rs. 10 per share.

According to the Companies Act, the amount of the premium should be credited

to Securities Premium Account. Securities Premium is treated as a capital receipt.

Presentation: Securities Premium Account is shown on liabilities side of balance

sheet under the head Reserves & Surplus.

Utilization of Securities Premium Section 77A &78 of the Companies Act restricts the use of the amount collected as

premium on securities for the following purpose:

i. Issuing fully paid bonus shares to the members;

ii. Writing off preliminary expenses of the company;

iii. Writing off the expenses of, or the commission paid or discount allowed on

any issue of securities or debentures of the company; or

iv. Providing for the premium payable on the redemption of any redeemable

preference shares or of any debentures of the company;

v. In purchasing its own shares (buy back) [Section 77A].

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Accounting Treatment: a company may collect the amount of securities

premium in lump sum or in installments. Premium on shares may be collected by

a company either with application money or with the allotment money or even

with one of the calls money depending on the terns of issue. If the question is

silent, it is assumed that the amount of the securities premium becomes due along

with the allotment money. The accounting treatment in different cases is as given

below:

i. When amount of premium is payable with the application money, Journal

entry passed on receipt of application money is:

Bank A/c Dr. [With the total application money

To Share Application A/c including premium money]

It may be observed from the above entry that securities premium account is not

credited although it is received. The reason being that application money is in the

nature of deposit & it is not certain whether the shares will be allotted to the

applicant or the amount shall be refunded to the applicant. If securities premium

account is credited & the shares are not allotted to the applicant the amount shall

have to be refunded. The amount once credited to Securities Premium A/c cannot

be debited except when utilized for the purpose specified in Section 77A & 78 of

the Companies Act, 1956.

When the shares are allotted, the entry is:

Share Application A/c Dr. [With the total application money

payable including premium]

To Share capital A/c [With the application money payable

towards share capital]

To Securities Premium A/c [With the amount of premium paid

with application money]

ii. When amount of money is payable with allotment money:

Suppose the amount due on allotment is Rs. 60,000 including a premium of Rs.

10,000, the Journal entry is:

Share Allotment A/c Dr. Rs. 60,000

To Share Capital A/c Rs. 50,000

To Securities Premium A/c Rs. 10,000

When the amount due on allotment is received, it should be credited for the

amount of premium due, i.e. on the allotted shares. It means amount of premium

collected shall not be refunded &, therefore, the provisions of Section 77A & 78

shall not be violated.

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Illustration 5. (Issue of Shares at Premium, Fully Subscribed) Y Ltd. Issued

10,000 shares of Rs. 10 each at a premium of Rs. 2 per share payable as follows:

Rs. 3 on application; Rs. 6 on allotment; & Rs. 3 on first & final calls.

All the shares were applied for & duly allotted. Pass necessary Journal entries.

Solution:

In the Books of Y Ltd.

JOURNAL

Date

?

?

?

?

?

?

Particulars

Bank A/c Dr.


(Being the application money on 10,000 shares

at Rs. 3 per share)

L.F.

Dr.

30,000

30,000

60,000

60,000

30,000

30,000

Cr.

30,000

30,000

40,000

20,000

60,000

30,000

30,000



(Being the transfer of application money to

Share Capital A/c on allotment)



To Securities Premium A/c

(Being the amount due on 10,000 shares at Rs.6

per share, Rs. 4 towards Share Capital A/c &

Rs. 2 towards Securities Premium Account)

Bank A/c Dr.


(Being the receipt of Rs. 6 per share on 10,000

Share)

Share First & Final Call A/c Dr.


(Being the amount due on 10,000 shares at Rs.3

Per share)

Bank A/c Dr.

To Share First & Finals Call A/c

(Being the receipt of Rs. 3 per share on 10,000

Share)

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3. Issue of Shares at a Discount (Section 79) When shares are issued at a price less than its face value, (nominal value or par

value), it is said that shares are issued at a discount. For example, if a Rs. 10 share

is issued for Rs. 9, then it is issued at a 10% discount. When shares are issued at a

discount, the company suffers a loss. The discount allowed to shareholders is

debited to an account titled Discount on Issue of Shares Account. The entry is:

Share Allotment A/c Dr. [With the Amount due]

Discount on Issue of Shares A/c Dr. [With the amount of Discount]


Conditions for Issue of Shares at a Discount Issue of shares at a discount is governed by Section 79 of the Companies Act, 1956.

It prescribed the following conditions:

1. The shares are of a class already issued.

2. The issue of shares at a discount is authorized by a resolution passed by the

company in its general meeting & sanctioned by the Central Government.

3. The resolution specifies the maximum rate of discount at which the shares are to

be issued.

4. Not less than one year has, at the date of issue, elapsed since the date on which

the company was entitled to commence business.

5. The shares are issued within two months of the date on which the issue is

sanctioned by the Central Government or within such extended time as the

Central Government may allow.

It can be concluded from the above conditions that shares cannot be issued at a

discount if:

a) It is a new company; or

b) Shares issued are of a new class even though issued by an old company.

When shares are issued at a discount, the Share Capital A/c is credited with the

face value of the share in full & Discount on Issue of Shares is shown on the

assets side of the balance sheet under the head ‘Miscellaneous Expenditure’. It

preferably, should be written off as early as possible through the Profit and Loss

A/c or Securities Premium A/c. The balance amount not written off will appear in

the Balance Sheet as fictitious asset.

Illustration 6. XYZ Ltd. Issued 10,000 equity shares of Rs. 10 each at a discount

of 10%. The amount is payable as follows: On application Rs. 2; on allotment Rs.

4; on the final call Rs. 3. All the shares offered were subscribed for & the money

was duly received. You are required to pass the necessary Journal entries

(including cash) in the books of the company and also show the Balance Sheet of

the company.

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Solution:

In The Books of XYZ Ltd.

JOURNAL Date Particulars L.F. Debit(Rs.) Credit(Rs.)

Bank A/c Dr.

To Equity Share Application A/c


10,000 equity shares @ Rs. 2 per share.)

20,000

20,000

40,000

10,000

40,000

30,000

30,000

20,000

20,000

50,000

40,000

30,000

30,000

Equity Share Application A/c Dr.

To Equity Share Capital A/c

(Being the application money on 10,000 equity

shares @ Rs. 2 per share transferred to Equity

Share Capital A/c)

Equity Share Allotment A/c Dr.

Discount in Issue of Shares A/c Dr.


(Being the allotment money due on 10,000

shares @ Rs. 4 per share)

Bank A/c Dr.

To Equity Share Allotment A/c

(Being the allotment money received on 10,000

equity shares @ Rs. 4 each)

Equity Share Final Call A/c Dr.


(Being the first call money due on 10,000


Bank A/c Dr.

To Equity Share Final Call A/c

(Being the final call money received on 10,000


BALANCE SHEET

Liabilities Rs. Assets Rs.

Share Capital

Authorized Capital:

…Equity Shares of Rs….

Issued & Subscribed,

Called-up & Paid-up

Capital:

10,000 Equity Shares of

Rs. 10 each

…

1,00,000

1,00,000

Current Assets

Cash at Bank

Miscellaneous Expenditure

Discount on Issue of Shares

90,000

10,000

1,00,000

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OVER-SUBSCRIPTION OF SHARES Shares are said to be over-subscribed when the number of shares applied for is

more than the number of shares offered for subscription. However, the company

cannot allot shares more than those offered for subscription.

In the case of over-subscription, the company cannot allot shares to all the

applicants in full. To deal with the situation, three alternatives are available to it:

i. First Alternative: Some applications are accepted in full and excess

application is rejected outright and their application money is refunded. This

is known as Rejection of Applications. For example, applications are invited

for 50,000 shares and applications received are for 70,000 shares.

Applications for shares in excess of 50,000 shares, i.e. 20,000 shares are not

accepted and application money is refunded.

ii. Second Alternative: applicants may be allotted shares in fixed proportion.

This is called Partial or Pro-rata Allotment. For example, considering the

above example, shares are allotted to all the applicants in the ratio of 5 shares

for 7 applied.

iii. Third Alternative: A combination of the above two alternatives may be

adopted. Some applications may be accepted in full, some applications may

be out rightly rejected and hence proportional allotment may be made to the

remaining. For example, applications for allotted shares as follows:

Applications for 20,000 shares are accepted in full, applications for 10,000

shares are rejected and the balance applications are allotted on pro rata basis,

i.e. in ratio of 3 shares for every 4 shares applied.

STATEMENT SHOWING DETAILS OF APPLICATION MONEY

Accounting Entries in Case of Over- Subscription

Categories Shares

Applied

Shares

Allotted

Application

Money

Received Share Shares Calls-in- Refund

Capital Allotment Advance or Bank

Disposition of Application Money

Received

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Combined Entry

Illustration 7. A company invited applications for 50,000 equity shares of Rs. 10

each on the following terms:

Rs.

On Application 3

On Allotment 3

On First & Final Call 4

Applications were received for 1, 10,000 shares. It was decided (i) to refuse

allotment to the applications for 10,000 shares, (ii) to allot 50% to Mr. X who has

applied for 20,000 shares, (iii) to allot in full to Mr. Y who has applied for 10,000

shares, (iv) to allot balance of the available shares pro-rata among the other

Application Money for Allotted Shares



Excess Application Money

Refund Share Application A/c Dr.

To Bank A/c

Adjustment Share Application A/c Dr.


To Calls-in- Advance A/c

For Application Money Received

Bank A/c Dr.




To Bank A/c


To Calls-in-Advance A/c

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applicants and (v) to utilize excess application money in part payment of

allotment and final call.

Give Journal entries till the stage of allotment assuming that assuming that the

entire sum due on allotment is received in full.

Solution:

JOURNAL

Date

Particulars

Bank A/c Dr.


(Being receipt of application money @ Rs. 3 per

on 1,10,000 shares)



(Being allotment money due on 50,000 shares

@ Rs. per shares to Share Capital Account)



(Being allotment money due on 50,000 shares

@ Rs. 3 per share)


To Bank A/c

(Being the refund of Application money on

10,000 shares @ Rs. 3 per share)



To Calls-in-Advance A/c

(Being the excess application money

transferred to Share Allotment Account and

Calls-in-Advance Account)

Bank A/c Dr.


(Being the receipt of allotment money @ Rs. 3

per share on 10,000 shares of Mr. Y who was

allotted in full)

L.F.

Dr.

3,30,000

1,50,000

1,50,000

30,000

1,50,000

30,000

Cr.

3,30,000

1,50,000

1,50,000

30,000

1,20,000

30,000

30,000

P a g e | 19


II. SHARES ISSUED FOR CONSIDERATION OTHER

THAN CASH

If shares are issued to vendors of assets in payment of consideration or to

promoters of company for their services or to underwriters against commission,

the issue is called issue of shares for a consideration other than cash. According to

the Companies Act, shares issued for consideration other than cash are disclosed

separately under the head “paid up capital”. The following entries will be passed

for the issue of shares under the above conditions:-

Illustration 8. (Various cases for shares issued for consideration other than

cash). X Ltd. Purchased the business of Ram Bros. for Rs. 1, 80,000 payable in

fully paid equity shares of Rs. 100 each. What will be made in the books of X

Ltd. If such issue is: (i) at par, (ii) at a premium of 20% & (iii) at a discount 10%.

Solution:

Transactions Journal Entries

When assets are

bought from

vendor

Issue of share to

vendors at par

Issue of shares

to vendors at

premium

Issue of shares

to vendors at

discount

Issue of share to

promoters

towards

remuneration

Issue of shares

for underwriting

commission

Respective Assets A/c Dr. (with purchase price)

To Vendor’s A/c

(Assets purchased)

Vendor’s Dr. (with face value of shares

To Share Capital A/c Allotted)

(Share issued to vendor)

Vendor’s A/c Dr. (with purchase price)

To share Capital A/c (face value of shares allotted)

To Securities Premium A/c (amount of premium)

(Shares issued at discount to Vendors)

Vendor’s A/c Dr. (with purchase price)

Discount on issue of Shares A/c Dr. (with amount of discount)

To Share Capital A/c (with face value of share allotted)

(Share issued to promoters)

Preliminary Expenses/Goodwill A/c Dr.

To Share Capital A/c (with face value of shares)

(Share issued to promoters)

Underwriting Commission A/c Dr.

To Share Capital A/c (with face value of shares)

(Shares issued to underwriters for commission)

P a g e | 20


In the Books of X Ltd.

JOURNAL

Date Particulars L.F. Dr.(Rs.) Cr.(Rs.)

Sundry Assets A/c Dr.

To Ram Bros.

(Being the purchase of business from Ram

Bros. as per agreement dated…)

1,80,000

1,80,000

1,80,000

1,80,000

20,000

1,80,000

1,80,000

1,50,000

30,000

2,00,000

(i)When shares are issued at par:

Ram Bros. Dr.

To Equity Shares Capital A/c

(Being issue of fully paid shares of Rs. 100

each to the Vendors)

(ii)When shares are issued at premium:

Ram Bros. Dr.


To Securities Premium A/c

(Being issue of 1,500 fully paid shares of Rs.

100 each at a premium of 20%)

(iii)When shares are issued at discount:

Ram Bros. Dr.

Discount on Issue of Shares Capital A/c Dr.


(Being issue of 2,000 fully paid shares of Rs.

100 each at a discount of 10%)

Working Notes:

1. When Equity Shares are issued at a premium of 20%:

Number of Shares to be issued= Purchase Price = Rs. 1,80,000= 1,500 shares

Issue Price 120

2. When Equity Shares are issued at a discount of 10%:

Number of Equity Shares to be issued= Purchase Price

Issue Price

= Rs. 1, 80,000

90

= 2,000 Shares

Documents

COMPANY ACCOUNTS - ISSUE OF SHARES (PAR, PREMIUM & DISCOUNT)