JOINT STOCK COMPANIES

STUDY NOTE - 7 JOINT STOCK COMPANIES
This study note includes
● ●

Introduction Shares
◗ Issue of Shares at par, discount & premium, Forfeiture, Reissue of Shares. ◗ Right issue. ◗ Buy Back of Shares. ◗ Redemption of Preference Shares.

● ●

Profit Prior to Incorporation. Debentures

Issue and Redemption.

7.1. INTRODUCTION
Meaning of a Company A company is a voluntary and autonomous association of certain persons with capital divided into numerous transferable shares formed to carry out a particular purpose in common. It is an artificial person created by law to achieve the object for which it is formed. Section 3(1) (i) of the Companies Act, 1956 defines a company as “Company formed and registered under this Act or an existing company.” An existing company means a company formed and registered under any of the former Companies Acts. Thus it is an abstract person, invisible, intangible and existing only in contemplation of law. It can hold, purchase or sell both movable and immovable property, incur and pay debts, open a bank account in its own name and sue and be sued in the same manner as an individual. Law creates it and law only can dissolve it. Its existence is altogether independent of the life of its members. Members may come and go but the company would go on for ever. Transferability of shares has given perpetual succession to a company. Death, insanity or insolvency of a member or any member will not affect the existence of the company at all. A company is a legal entity quite distinct and separate from the persons who are its members. A company cannot ordinarily buy its own shares. A shareholder is not the agent of the company. He cannot incur any debt so as to bind the company. They cannot bind the company by their acts. The same person can be a shareholder and a creditor of the company. The ownership is divorced from management because a joint stock company is’ managed by a Board of Directors elected by the shareholders (i.e. owners).
Financial Accounting

470

Characteristics of a Company The main characteristics of a company are: (i) It is a distinct legal person existing independent of its members (ii) Liability of the members is limited to the extent of the face value of shares held by them. (iii) It has a perpetual succession, i.e, the members of the company may keep on changing from time to time but this does not affect the company’s continuity. (iv) The shares of a company are freely transferable except in case of a Private limited Company. (v) A company being a legal person is capable of owing, enjoying and disposing of the property in its own name. (vi) A company, being a separate body can sue and be sued in its own name. (vii) Though a company is an artificial person yet it acts through human beings who are called directors of the company. There is a divorce between ownership and the management. (viii) It is a voluntary association of persons usually for profit. Statutory Books Statutory books are those which a limited company is under statutory obligation to maintain at its registered office. The main statutory books are : (i) Register of Investments held and their names

(ii) Register of charges (iii) Register of Members (iv) Register of debenture holders (v) Annual returns (vi) Minutes books (vii) Register of contracts (viii) Register of Directors

(ix) Register of shareholdings of the directors (x) Register of loans to companies under the same management (xi) Register of Investment in the shares of other companies. Books of Account Every company is required to keep at its registered office books of account. These books are to be maintained in such a way so as to disclose (a) The sums of money received and expended by the company and the matter in respect of which the receipt and expenditure has taken place.

Financial Accounting

471

JOINT STOCK COMPANIES (b) (c) All sales and purchases of goods of the company. All assets and liabilities of the company. Long term Sources of Finance

Issue of shares

Debenture

Loans

Ploughing back of profits

Equity

Preference

Initial Public offering (IPO) Share Capital

Rights Issue

ESOS/ESOP

No trading concern can run without capital. The divisions of share capital are: (i) Nominal or Registered or Authorized Capital. The amount of capital with which the company intends to be registered is called registered capital. It is the maximum amount which the company is authorized to raise by way of public subscription. There is no legal limit on the extent of the amount of authorized capital.

(ii) Issued Capital. That part of the authorized capital which is offered to the public for subscription is called issued capital. (iii) Subscribed Capital. That part of the issued capital for which applications are received from the public is called the subscribed capital. (iv) Called up Capital. The amount on the shares which is actually demanded by the company to be paid is known as called up capital. (v) Paid up Capital. The part of the called up capital which is offered and is actually paid by the members is known as paid up capital. The sum which is still to be paid is known as calls in arrears. (vi) Reserve Capital. A company may determine by a special resolution that any portion of its share capital which has not been already called up shall not be capable of being called-up except in the event of winding up of the company. Such type of share capital is known as reserve capital.

472

Financial Accounting

Application for Shares Whenever shares are to be issued by a company, an advertisement in a leading newspaper is given for the information of the general public alongwith some important extracts of the prospectus. Those who are interested to purchase the shares on the basis of that information may have the prospectus for detailed information and application form. If a person is satisfied with the profitability and other things he is required to fill up the application form and to deposit this alongwith the requisite amount (known as application money) with the prescribed scheduled bank. The application money should at least be 5 per cent of the face value of the share. The scheduled bank will send this application money alongwith a list of applicants to the company. The company will ultimately record these in the “Application and Allotment Book” Allotment of Shares After receiving the applications the directors take steps to allot the shares. Allotment of shares means acceptance of the offer of the applicant for the purchase of shares. Directors have discretionary power either to reject or to accept partially the applications. There are no restrictions on the rights of a private company to allot its shares. But the public company cannot allot its shares unless: i. ii. The minimum subscription stated in the prospectus has been subscribed by the public. A prospectus or a statement in lieu of prospectus has been filed with the Registrar before making the first allotment.

iii. The amount of application, i.e., at least 5% of the face value has been received. The applicants, to whom shares are allotted, will be sent allotment letters. After allotment, they become the shareholders of the company. Those to whom shares could not be allotted will be sent a letter of regret alongwith refund of their application money. The shareholders will be required to pay the allotment money on allotment of shares which will also be recorded in the Application and Allotment Book. Calls on Shares Out of the face value of the shares, 5% is payable with application, some money will be paid on allotment and rest money will be paid as and when calls are made by the company. Generally the prospectus gives the dates of different calls alongwith the amount of the calls by shareholders. In case it is not given in the prospectus, the directors have the discretion to call it in one call or more than one call. For this a resolution of the Board of Directors must be passed and a notice is sent to the shareholders with a request to pay the amount of the call. As soon as a call notice is sent, its particulars are entered in a separate book known as Share Call Book, a specimen of which is given on the next page.

Financial Accounting

473

JOINT STOCK COMPANIES Journal Entries for Issue of Shares (1) On Receipt of Application Money Bank A/c Dr To Share Application A/c (2) For excess share application money refunded : Share Application A/c Dr To Bank A/c (3) For Share application money transferred to share capital Share Application A/c Dr To Share Capital A/c To Securities Premium A/c (if application money includes premium) (4) For Share allotment Money due : Share Allotment A/c Dr. Discount on Issue of shares A/c Dr (if issued at a discount) To Share Capital A/c To Securities Premium (if issued at a premium) (5) For Share allotment money received : Bank A/c Dr Calls-in-Arrear A/c Dr. (if allotment money not received) To Share Allotment A/c To Calls-in-Advance A/c (if call money received in advance alongwith allotment) (6) For Share Call money due : Share Call A/c Dr. To Share Capital A/c (7) For Call money received : Bank A/c Dr Call-in-Arrear A/c Dr. (if call money not received) Calls-in-Advance A/c Dr. (adjustment of share call money received earlier) To Share Call A/c Note : For every subsequent calls, entry no. (6) & (7) share have to be recorded. (8) For forfeiture of shares : Share Capital A/c Dr (No. of shares forfeited × Called up value per share) Securities Premium A/c Dr. (if issued at a premium and premium not received) To Calls-in-Arrear A/c (amount not received on forfeited shares) To Shares Forfeited A/c (amount received on forfeited shares) To Discount on Issue of Shares A/c (if issued at a discount)

474

Financial Accounting

(9) For reissue of forfeited shares Bank A/c Dr (No. of Shares Reissued × Reissue Price/Share) Discount on Issue of Shares A/c Dr (No. of shares Reissued × Discount per share, if originally issued at a discount) Shares Forfeited A/c Dr. (No. of shares × Further discount on reissue) To Share Capital A/c (No. of shares Reissued × Paid up value per share) To Securities Premium A/c (if reissued at a premium) (10) For transferring profit on reissue of forfeited shares Shares Forfeited A/c Dr. (Profit on Forfeiture— Further discount on reissue of such forfeited share) To Capital Reserve

Note : If part of the forfeited shares are reissued, then profit shall have to be calculated proportionately as follows : Profit on Reissue of Forfeited Shares :
Total Profit on forfeiture of s

No. of shares forfeited
(–) Further discount on reissue Transfer to Capital Reserve

= xxx = (x) = xxx

Illustration 1: PK Ltd. made an issue of 10,00,000 equity shares of Rs. 10 each, payable Rs. 2 on application, Rs. 4 on allotment and Rs. 4 on call. All the shares are subscribed and amounts duly received. Pass journal entries to give effect to these. Also show relevant items in the Balance Sheet.

Financial Accounting

475

JOINT STOCK COMPANIES

Solution

P K Ltd. JOURNALS
Particulars Rs.’000 Rs.’000 Dr. 2000 2000

Bank Account, To Equity Share Application Account (Share 'application money on 10,00,000 equity shares @ Rs. 2 each received) Equity Share Application Account To Equity Share Capital Account (Share application money transferred to share capital account) Equity Share Allotment account To Equity Share Capital Account (Share Allotment due on 10,00,000 shares @ Rs. 4 per share as per the resolution of the Board of Directors) Bank Account To Equity Share Allotment Account (Allotment money received) Equity Share First and Final Call A/C To Equity Share Capital Account (Share 1st and Final Call due on 10,00,000 shares @ Rs.4/ share as per resolution of the Board of Directors) Bank Account To Equity Sh. First and Final Call A/C (For shares First and Final Call money received on 10,00,000 shares @ Rs. 4 per share)
BALANCE SHEET OF PK LTD. as at ……. Liabilities Issued, Subscribed and Paid up Capital: 10,00,000 equity shares of Rs. 10 each fully called and paid up Rs’000 Assets Cash at Bank 10,000

Dr.

2,000 2,000

Dr.

4,000 4,000

Dr.

4,000 4,000

Dr.

4,000 4,000

Dr.

4,000 4,000

Rs’000 10,000

10,000

10,000
Financial Accounting

476

When Both Preference and Equity Shares are Issued When a company issues both preference and equity shares then it is desirable that the entries for application money, allotment money and calls money should be separately passed for each type of share capital. The word Equity or Preference must invariably be used in all the circumstances. Issue of Shares for Purchase of Assets If the shares have been allotted to any person or firm from whom the company has purchased any asset, the following entry will be passed: Asset Account Dr.

To Share Capital Account (Being ... shares allotted……in consideration of purchase of an asset for the company) This fact should also be disclosed in the Balance Sheet while showing the issued, subscribed and paid up capital. Issue of Shares at Premium A company may issue shares at a premium, i.e., at a value greater than its face value. The power to issue shares at a premium need not be given in the Articles of Association. Premium so received shall be credited to a separate account called Security Premium Account. Section 78 of the Companies Act, 1956 gives the purposes for which share premium account may be applied by the company. These are: (i) For the issue of fully paid bonus shares to the members of the company; (ii) For writing off preliminary expenses of the company; (iii) For writing off the expenses of the commission paid or discount allowed on any issue of shares or debentures of the company; and (iv) For providing premium payable on the redemption of any redeemable preference shares or debentures of the company. Illustration 2: AB & Co. Ltd. issued 500,00,000 Equity shares of Rs. 10 each at a premium of Rs 4 per share payable Re.1 per share on application. Rs. 6 per share on allotment (including premium), Rs. 3 on first call and the balance on final call. The shares were all subscribed and all money due was received except the first call money on 1,00,000 shares and the Final call money on 1,50,000 shares. Give the Cash Book and Journal entries to record the above transactions.
Financial Accounting

477

JOINT STOCK COMPANIES

Solution

Dr.
To Equity Share Application To Equity Share Allotment To Equity Share 1st Call To Equity Share Final Call

CASH BOOK

Cr.
Rs/Lakh 6,991

Rs./Lakh 500 By Balance c/d 3,000 1,497 1,994 6,991
JOURNALS Rs/Lakh 500

6,991

Rs/Lakh 500

Equity Share Application A/c To Equity Share Capital A/c Equity Share Allotment A/c To Equity Share Capital A/c To Share Premium A/c Equity Share 1st Call A/c To Equity Share Capital A/c Calls in Arrear A/c To Equity Share 1st Call A/c Equity Share Final Call A/c To Equity Share Capital A/c Calls in Arrear A/c To Equity Share Final Call A/c

Dr.

Dr.

3,000 1,000 2,000

Dr.

1500 1500

Dr

3 3

Dr.

2,000 2,000

Dr.

6 7,009 6 7,009

Issue of Shares at a Discount (Section 79) A company can issue shares at a discount, i.e., value less than the face value subject to the following conditions: (i) The issue of shares at a discount is authorised by a resolution passed by the company in general meeting and sanctioned by the Central Government. (ii) The resolution must specify the maximum rate of discount which should not exceed 10 per cent of the nominal value of shares or such higher percentage as the Central Government may permit. 478
Financial Accounting

(iii) One year must have been elapsed since the date at which the company was allowed to commence business. (iv) Issue must take place within two months after the date of the sanction by the court or within such extended time as the court may allow. (v) Every prospectus relating to the issue of shares and every balance sheet after the issue of shares contains particulars of the discount allowed and so much of the discount as has not been written off. Adjustment of Excess Money towards the Amount due on the Allotment and Calls Sometimes a may not allot all the shares for which applications have been received. Because of over subscription, allotment is either made of less number of shares or on pro-rata basis. For example, if the company offered 100,00,000 shares of Rs.l0 each but applications for 200,00,000 shares were received by company. The directors sent letters of regret to applicants of 50,00,000 shares and applicants of 150,00,000 shares were allotted the 100,00,000 shares on pro-rata basis. In such a case, application money of 50,00,000 shares will be adjusted either on allotment and on calls, if there is still surplus money after adjusting the allotment and call money due from shareholders it will be refunded in cash. Forfeiture of Shares When a shareholder fails to pay calls, the company, if empowered by its articles, may forfeit the shares. If a shareholder has not paid any call on the day fixed for payment thereof and fails to pay it even after his attention is drawn to it by the secretary by registered notice, the Board of Directors pass a resolution to the effect that such shares be forfeited. Shares once forfeited become the property of the company and may be sold on such terms as directors think fit. Upon forfeiture, the original shareholder ceases to be a member and his name must be removed from the register of members. Surrender of Shares After the allotment of shares, sometimes a shareholder is not able to pay the further calls and returns his shares to the company for cancellation. Such voluntary return of shares to the company by the shareholder himself is called surrender of shares. Surrender of shares has no separate accounting treatment but it will be like that of forfeiture of shares. The same entries (as are passed in case of forfeiture of shares) will be passed in case of surrender of shares. Reissue of Forfeited Shares Forfeited shares may be reissued by the company directors for any amount but if such shares are issued at a discount then the amount of discount should not exceed the actual amount received on forfeited shares. The purchaser of forfeited reissued shares is liable for payment of all future calls duly made by the Company. When all Forfeited Shares are not Issued When all forfeited shares are not issued, i.e., only a part of such shares is issued, it is desirable to spread the amount of shares forfeited account on all such forfeited shares and of the amount relating to that part of forfeited shares which has been reissued, discount on reissue of shares should be deducted from such amount and the balance is transferred to capital reserve being capital profit. The amount relating to that part of shares forfeited account which has not been reissued should be shown on the liabilities side of Balance Sheet as Shares Forfeited Account.

Financial Accounting

479

JOINT STOCK COMPANIES Illustration 3 : A Company invited the public to subscribe for 10,000,000 Equity Shares of Rs.100 each at a premium of Rs. 10 per share payable on allotment. Payments were to be made as follows: On application Rs. 20; on allotment Rs. 40; on first call Rs. 30 and on final call Rs.20. Applications were received for 13,000,000 shares; applications for 2,000,000 shares were rejected and allotment was made proportionately to the remaining applicants. Both the calls were made and all the moneys were received except the final call on 300,000 shares which are forfeited after due notice. Later 200,000 of the forfeited shares were issued as fully paid at Rs. 85 per share. Pass Journal entries. JOURNALS Solution Particulars Rs.’000 Rs.’000 Bank Account Dr. 260,000 To Equity Share Application Account 260,000 Share application money received on 13,000,000 eq. shares @ Rs.20 each Equity Share Application Account Dr. 40,000 To Bank 40,000 (Appl. On 2,000,000 rejected) Equity Share Application Account Dr 220,000 To Equity Share Capital Account 200,000 To Equity Share Allotment account 20,000 (Share application money transferred to share capital account and excess money used for share allotment.) Equity Share Allotment account Dr. 400,000 To Equity Share Capital Account 300,000 To Security Premium Account 100,000 (Share Allotment due on 10,000,000 shares @ Rs. 40 per share as per the resolution of the Board of Directors) Bank Account Dr. 380,000 To Equity Share Allotment Account 380,000 (Allotment money received) Equity Share first call Account Dr 300,000 To Equity Share Capital Account 300,000 (First call money due) Bank Account Dr 300,000 To Equity Share First call Account 300,000 First call money received) Equity Share Final Call A/C Dr. 200,000 To Equity Share Capital Account 200,000 (Share Final Call due) Bank Account Dr. 194,000 To Equity Sh. Final Call A/C 194,000 (Final Call money received except 300,000 Shares) Equity Share Capital Account Dr 30,000 480 Financial Accounting

Working: 1. On 300,000 forfeited shares, the total amount forfeited is Rs. 24,000. For 200,000 such shares the amount will be Rs’000 16,000 3,000 13,000

(200,000/300,000) x 24,000 = Less, Discount on Reissue Transferred to Capital Reserve

Balance of Forfeited share account will be shown in balance sheet as ‘Forfeited Share Account” in liability side. Illustration 4 : Give journal entries for the following: a) PK Ltd. forfeited 10,000 equity shares of Rs 10 each for non payment of first call of Rs 2 and final call of Rs 3 per share. These shares were reissued at a discount of Rs 3.50 per share. b) KP Ltd. forfeited 20,000 equity shares of Rs 15 each (including Rs 5 per share as premium), for non payment of final call of Rs 3 per share. Out of these 10,000 shares were reissued at a discount of Rs 4 per share. c) KP Ltd. forfeited 15,000 equity shares of Rs 15 each (including Rs 5 per share as premium), for non payment of allotment money Rs 8 (including premium money) and first & final call of Rs 5 per share. Out of these 10,000 shares were reissued at Rs 14 per share. d) PK Ltd. forfeited 10,000 equity shares of Rs 10 each issued at a discount of Re 1 per share, for non payment of first call of Rs 2 and final call of Rs 3 per share. Out of these 6,000 shares were reissued at Rs 8 per share and the balance shares were re-issued at Rs 7 per share. Journal entries
a) Particulars Equity Share Capital Account To Equity Sh. First Call A/C To Equity Sh. Final Call A/C To Forfeited share Account (10,000 shares forfeited for non payment of first and final call money) Bank Account Forfeited Share Account To Equity Share Capital Account (Reissue of 10,000 sh. @Rs6.50 each) Forfeited Share Account To Capital Reserve Account (Balance of Forfeited share a/c transferred) Dr Rs 100,000 Rs 20,000 30,000 50,000

Dr Dr

65,000 35,000 100,000

Dr

15,000 15,000

Financial Accounting

481

JOINT STOCK COMPANIES
b) Equity Share Capital Account Dr 200,000 To Equity Sh. Final Call A/C To Forfeited share Account (20,000 shares forfeited for non payment of final call money) Bank Account Dr 60,000 Forfeited Share Account Dr 40,000 To Equity Share Capital Account (Reissue of 10,000 sh. @Rs6 each) Forfeited Share Account Dr 30,000 To Capital Reserve Account (Balance of Forfeited share a/c relating to 10,000 shares transferred) Equity Share Capital Account Dr 150,000 Security Premium Account Dr 75,000 To Equity Sh. Allotment A/C To Equity Sh. First & Final Call A/C To Forfeited share Account (15,000 shares forfeited for non payment of allotment and first and final call money) Bank Account Dr 140,000 To Security Premium Account To Equity Share Capital Account (Reissue of 10,000 sh. @Rs15 each) Forfeited Share Account Dr 20,000 To Capital Reserve Account (Balance of Forfeited share a/c on 10,000) shares transferred) Equity Share Capital Account Dr 100,000 To Discount on issue of shares A/C To Equity Sh. First Call A/C To Equity Sh. Final Call A/C To Forfeited share Account (10,000 shares forfeited for non payment of first and final call money) Bank Account Dr 48,000 Discount on issue of shares A/C Dr 6,000 Forfeited Share Account Dr 6,000 To Equity Share Capital Account (Reissue of 6,000 sh. @ Rs8 each) Forfeited Share Account Dr 18,000 To Capital Reserve Account (Balance of Forfeited share a/c on 6,000 shares transferred) Bank Account Dr 28,000 Discount on issue of shares A/C Dr 4,000 Forfeited Share Account Dr 8,000 To Equity Share Capital Account (Reissue of 4,000 sh. @ Rs 7 each) Forfeited Share Account Dr 8,000 To Capital Reserve Account (Balance of Forfeited share a/c on 4,000 shares transferred)

60,000 140,000

100,000

30,000

c)

120,000 75,000 30,000

40,000 100,000

20,000

d)

10,000 20,000 30,000 40,000

60,000

18,000

40,000

8,000

482

Financial Accounting

Illustration 5 : X Ltd. issued 10,000 Equity shares of Rs. 10 each at a premium of Rs. 2 per share, payable : Rs. 3 on application (including premium of Re. 1); Rs. 4 on allotment (including the balance of premium) and the balance in a call. Public subscribed for 12,000 shares. Excess application money was refunded. One shareholder Mr. A holding 50 shares paid the call money alongwith allotment. Another Mr. B failed to pay allotment & call on 30 shares. These shares were forfeited after the call and 25 of those were reissued at Rs. 9 each. Pass Journals and prepare the Balance sheet of the company. X Ltd. Journal Entries (without narration) Application Money Received Rs. Rs. (1) Bank A/c Dr 36,000 (12000×3) To Equity Shares Application A/c 36,000 Refund of excess application money (2) Equity Share Application A/c Dr. 6,000 (2000×3) To Bank A/c 6,000 (excess application money refunded) Transfer of share application to share capital (3) (10,000×3) Equity Shares Application A/c Dr. 30,000 (10000×2) To Equity Shares Capital A/c 20,000 (10,000×1) To Securities Premium A/c 10,000 Allotment Money Due (4) (10000×4) Equity Shares Capital A/c Dr. 40,000 (10000×3) To Equity Share Capital A/c 30,000 (10000×1) To Securities Premium A/c 10,000 Allotment Money Received (5) [9,970×4 + 50×5 Bank A/c Dr. 40,130 (30×4) Calls-in-Arear A/c Dr. 120 To Equity Share Allotment A/c 40,000 (50×5) To Calls-in-Advance A/c 250 Share Call Money Due (6) (10,000×5) Equity Share & Final call a/c Dr. 50,000 To Equity Share Capital A/c 50,000 Call Money Received, Adjustment of Calls-in-Advance (7) (9,920×5) Bank A/c Dr. 49,600 (30×5) Calls-in-Arrear A/c Dr. 150 Received with Calls-in-Advance A/c Dr. 250 Allotment, now adjusted)

Financial Accounting

483

JOINT STOCK COMPANIES To Equity Shares First & Final Call A/c 50,000 Forfeiture of Shares (8) (30×10) Equity Share Capital A/c Dr. 300 (30×1) Securities Premium A/c Dr. 30 To Calls-in-Arrear A/c 270 To Shares Forfieted A/c 60 Reissue of Forfeited Shares (9) (25×9) Bank A/c Dr. 225 (25×1) Shares Forfeited A/c Dr. 25 (25×10) To Equity Shares Capital A/c 250 (10) Transfer of Profit on Reissue of Forefeited shares Shares Forfeited A/c Dr. 25 To Capital Reserve A/c 25 Note : Proportionate Profit on reissue : Profit on forfeiture Rs. 60 Therefore, Proportionate profit on 25 shares (those are reissued) = 60/30 ×25 = 50 Less : Discount on Reissue (25×1) = 25 Transfer to Capital Reserve 25 X Ltd. Balance Sheet as at .... Liabilities Rs. Authorised Capital Issued, Subscribed, Called up & Paid up Capital 9,995 shares @ Rs. 10 each Reserves & Surplus Securities Premium Shares forfeited A/c Capital Reserve 19,970 10 25 1,19,955 Miscellanceous Expenditure (to the extent not written off) 1,19,955 99,950 Cash at Bank 1,19,955 Amount Rs. 10,000×10 Amount Rs. 1,00,000 Assets Rs. Fixed Assets Investments Current Assets, Loans & Advances Amount Amount

484

Financial Accounting

llustration 6 : B Ltd. issued 5,000 Equity shares of Rs. 100 each at a discount of 10%, payable as follows : on Application : Rs. 25; on Allotment : Rs. 40; on Call : the balance. Public subscribed for 4,800 shares and allotment was made in full. One shareholder holding 25 shares failed to pay the allotment and calls. These were forfeited and 20 of those shares were reissued at Rs. 88 each. Pass journal entries and prepare Balance Sheet. B Ltd. Journal Entries (1) Bank A/c Dr. 1,20,000 To Equity Share Application A/c 1,20,000 (Being equity share application money received on 4,800 shares @ Rs. 25 per share) (2) Equity shares Application A/c Dr. 1,20,000 To Equity Share Capital A/c 1,20,000 (Being share application money transferred to share capital as per Board’s resolution no... dated) (3) (4800×40) Equity Share Allotment A/c Dr. 1,92,000 (4800×10) Discount on Issue of Shares A/c Dr. 48,000 To Equity Share Capital A/c Dr. 2,40,000 (Being allotment money due on 4800 shares @ Rs. 40 per share, Rs. 10 as discount, as per Board’s resolution no... dated) (4) (4775×40) Bank A/c Dr. 1,91,000 (25×40) Calls-in-Arrear A/c Dr. 1000 To Equity Share Allotment A/c 1,92,000 (Being shares allotment money received except on 25 Shares) (5) Equity Share First & Final Call A/c Dr. 1,20,000 To Equity Share Capital A/c 1,20,000 (Being share call money due on 4,800 shares) @ Rs. 25 per share as per Board’s resolution no. dated) (6) (4775×25) Bank A/c Dr. 1,19,375 (25×25) Calls-in-Arrear A/c Dr. 625 To Equity Share First & Final Call A/c 1,20,000 (Being share call money received except on 25 shares)

Financial Accounting

485

JOINT STOCK COMPANIES (7) (25×100) Equity Shares Capital A/c Dr. 2,500 (1000+625) To Calls-in-Arrear A/c 1,625 (25×10) To Discount on Issue of Shares A/c 250 (25×25) To Shares Forfeited A/c 625 (Being 25 shares forfeited as per Board’s resolution no. dated) (8) (20×88) Bank A/c Dr. 1760 (20×10) Discount on Issue of Shares A/c Dr. 200 (20×2) Shares Forfeited A/c Dr. 40 (20×100) To Equity Share Capital A/c Dr. 2,000 (Being 20 forfeited Shares reissued at Rs. 88 each, as per Board’s resolution no... dated.) (9) Shares Forfeited A/c Dr. 460 To Capital Reserve 460 (Being profit on reissue of forfeited share transferred to Capital Reserve) Note : Profit on Reissue of Forfeited Shares : Amount received on Forfeiture Rs. 625 Therefore, Proportionate amount of forfeiture on 20 shares : = {(625 / 25) x 20} Less : Further discount on reissue (20×2)

= 500 = 40 = 460

X Ltd. Balance Sheet as at .... Liabilities Authorised Capital : 5,000 Eq. shares of Rs. 100 each Issued, Subscribed, Called up & Paid up Capital 4,795 Equity Shares @ Rs. 100 Reserves & Surplus Capital Reserve shares Forfeited A/c Secured & Unsecured Loans Current Liabilities & Provisions Rs. Rs. Assets Fixed Assets Investments 5,00,000 Current Assets, Loans & Advances Rs. Rs.

4,79,500 460 125 xxx xxx 4,80,085

Cast at Bank Miscelleaneous Expenditure (to the extent not written off) Discount on Issue of Shares

4,32,135

47,950 4,80,085

486

Financial Accounting

Illustration 7: B Ltd issued 2,000 shares of Rs. 100 each at a premium of 10% payable as follows :On application Rs 20 (1st Jan. 2008). On allotment Rs.40 (including premium) (1st April 2008). On First Call Rs. 30 (1st June 2008). On Second & Final call Rs. 20 (1st Aug 2008). Applications were received for 1,800 shares and the directors made allotment in full. One shareholder to whom 40 shares were allotted paid the entire balance on his share holdings with allotment money and another share holder did not pay allotment and 1st call money on his 60 shares but which he paid with final call. Required: Calculated the amount of interest paid and received on calls -in- advance and calls in arrears respectively on 1st Aug. 2008. Solution : Calculation of Interest on Calls-in-advance On Rs. 1200 (i.e. 40 x Rs. 30) for 2 months @ 6% p.a. On Rs. 800 (i.e. 40 x Rs.20) for 4 months @ 6% p.a. Calculation of Interest on Calls-in-advance On Rs. 2400 (i.e. 60 x Rs. 40) for 4 months @ 5% p.a. On Rs. 1800 (i.e. 60 x Rs.30) for 2 months @ 5% p.a. Rs. 40 Rs. 15 Rs. 55 Rs. 12 Rs. 16 Rs. 28

Illustration 8:A limited Company was registered with a capital of Rs. 5,00,000 is share of Rs. 100 each and issued 2,000 such shares at a premium of Rs.20 per share, payable as Rs.20 per share on application, Rs. 50 per share on allotment (including premimu) and Rs. 20 per share on first call made three months later. All the money payable on application, and allotment were duly received but when the first call was made, one shareholder paid the entire balance on his holding of 30 shares, and another shareholder holding 100 shares failed to pay the first call money. Required: Give Journal entries to record the above transactions and show how they will apperar in the company’s Balance Sheet.

Financial Accounting

487

JOINT STOCK COMPANIES

Solution :

Journal Particulars Bank A/c To Share Application A/c [Being the issue of 2,000 shares and application mony received @ Rs 20 per share] Share Application A/c To Share Capital A/c [Being the transfer of application money on 2,000 shares @ Rs. 20 per share to Share Capital A/c) Share Allotment A/c To Share Capital A/c To Securities Premium A/c [Being the allotment mony on 2,000 shares @ Rs 50 including premium made due) Bank A/c To Share Allotment A/c [Being the allotment money on 2,000 shares @ Rs. 50 per share received) Share First Call A/c To Share Capital A/c [Being the first call mony on 2,000 shares @ Rs 20 per share made due) Bank A/c To Share First Call A/c To Call-paid-in-advance A/c (Being the first call money on 1,900 shares @ Rs. 20 per share and share Second call money on 30 shares @ Rs. 30 per share received) Dr Dr Dr Dr. L.F. Amount Rs. 40,000 40,000 Cr. Amount Rs.

40,000 40,000

Dr

1,00,000 60,000 40,000

1,00,000 1,00,000

Dr

40,000 40,000

Dr

38,900 38,000 900

488

Financial Accounting

Balance sheet as at... Liabilities Share Capital Authorised Capital 5,000 shares of Rs.100 each Issued Capital 2,000 shares of Rs. 100 each Subscribed Capital 2,000 shares of Rs.100 each Rs. 70 per share Capital up 1,40,000 2,000 Less: Calls unpaid Reserves & Surplus: Securities Premium Current Liabilities: Calls paid-in-advance Amount Rs. Assets Rs. Current Assets, Loans & Advances: Current Assets: Cash at Bank Amount Rs.

5,00,000

1,78,900

2,00,000

1,38,000

40,000 900 1,78,900

1,78,900

Illustration 9: B Ltd purchase the assets of Rs. 10,80,000 from C Ltd. The cosideration was payable in fully paid equity shares of Rs. 100 each. Required: Show the necessary journal entries in books of B Ltd. assuming that — a) Such shares are issued at per b) Such shares are issued at premium of 20% c) Such shares are issued at discount of 10% Solution : Journal Particulars Entry in all cases Sundry Assets A/c To C Ltd. [Being the purchase of assets from Y Ltd. as per agreement dated...) Dr. L.F. Amount Rs. Dr 10,80,000 10,80,000 Cr. Amount Rs.

Financial Accounting

489

JOINT STOCK COMPANIES

(Contd.)
Case (a) When Shares are issued at per C Ltd. To Equity Share Capital A/c (Being the issue of 10,800 shares at par to C Ltd. as per agreement dated...) Case (b) When Shares are issued at a premlum of 20% C Ltd. To Equity Share Capital A/c To Securities Premium A/c (Being the issue of 9,000 shares at 20% premium to C Ltd. as per Board’s Resolution dated...) Case (c) When Shares are issued at a discount of 10% C Ltd. Discount on Issue of Shares A/c To Equity Share Capital A/c (Being the issue of 12,000 shares at a discount of 10% to C Ltd., as per Board’s Resolution dated...) Dr 10,80,000 10,80,000

Dr

10,80,000 9,00,000 1,80,000

Dr Dr

10,80,000 1,20,000 12,00,000

Working Note: Calculation of No. of Shares to be issed in different cases At Par A. Amount to be paid (Rs) 10,80,000 B. Issue Price Per Share (Rs) 100 C. No. of Shares tobe issued (A/B) 10,800 At a Premium 10,80,000 120 9,000 At a Discount 10,80,000 90 12,000

Illustration 10: DLtd. issued 2,000 shares of Rs 100 each credited as fully paid to the promoters for their services and issued 1,000 shares of Rs 100 each credited as fully paid to the underwriters for their underwriting services. Journalise these transactions. Solution: Journal Particulars Goodwil A/c To Share Capital A/c [Being the issue of 2,000 shares of Rs 100 each at par to promoters as per Board’s Resolution dated...) Dr Dr. L.F. Amount Rs. 2,00,000 2,00,000 (Contd.) (Contd.) Cr. Amount Rs.

490

Financial Accounting

(Contd.) Underwriting Commission A/c To Underwriter’s A/c (Being the Underwriting commission due on shares) Dr 1,00,000 1,00,000 1,00,000 1,00,000

Underwriter’s A/c Dr To Share Capital A/c (Being the the issue of 1,000 shares of Rs 100 each at par to Underwriters as per the Board’s Resolution dated...)

Illustration 11: On 1st May 2008 Superman Ltd. issued 5,000 Equity Shares of Rs 100 each payable as follows: Rs Rs On application 20 On 1st Call 20 (Last date fixed for payment 31st July) On allotment 30 On Final Call 30 (Last date fixed for payment 30th August) Applications were received on 15th May 2008 for 6,000 shares and allotment was made on 1st June 2008. Applicants for 2,500 shares were allotted in full, those for 3,000 shares were allotted 2,500 shares and applications for 500 shares were rejected. Balance of amount due on allotment was received on 15th June. The calls were duly made on 1st July,2008 and 1st August 2008 respectively. One shareholder did not pay the 1st Call money on 150 shares which he paid with the final call together with interest at 5% p.a. Another shareholder holding 100 shares did not pay the final call money till end of the accounting year which ends on 31st October.

Financial Accounting

491

JOINT STOCK COMPANIES Required: Show the Cash Book and Journal Entries. Solution: Journal Proper Date Particulars Dr. L.F. Dr. (Rs) 1,10,000 1,00,000 10,000 Cr. (Rs)

1.6.08 Equity Share Application A/c To Equity Share Capital To Share Allotment A/c [Being the the transfer of application money @ Rs 20 per share on 5,000 shares transferred to share Capital A/c and @ Rs 20 on 500 t/f to Share Allotment A/c) 1.6.08 Equity Share Allotment A/c To Equity Share Capital A/c [Being the amount due on allotment @ Rs 30 per share)
1.7.08

Dr.

1,50,000 1,50,000

Equity Share Allotment A/c To Equity Share Capital A/c (Being the 1st call amount due @ Rs 20 per share)

Dr.

1,00,000 1,00,000

1.8.08

Calls-in-Arrear A/c To Equity Share 1st call A/c (Being the transfer of 1st Call money on 150 equity shares @ Rs 20 per share)

Dr.

3,000 3,000

1.8.08

Equity Share Final Call A/c To Equity Share First Call A/c (Being the final call amount due on @ Rs 30 per share)

Dr.

1,50,000 1,50,000

1.9.08

Calls-in-Arrear A/c To Equity Share Final Call A/c (Being the transfer of final call money on 100 equity shares @ Rs 30 per shares)

Dr.

3,000 3,000

1.9.08

Sundry Shareholders A/c To Interest on Calls-in-Arrears A/c (Being the interest due on Rs 3,000 @ 5% for two months)

Dr.

25 25

492

Financial Accounting

Dr. Date Particulars

Cash Book (Bank Column) Rs Date
1.9.08 1,20,000

Cr. Rs

Particulars

15.5.08 To Equity Share Application A/c (Application money @ Rs 20 per share on 6,000 shares) 15.6.08 To Equity Share Allotment A/c (Balance of allotment money) 1.8.08 To Equity Share 1st Call A/c (1st Call money on 4,850 shares) 1.9.08 To Equity Share Final A/c (Final call money on 4,900 Shares) 1.9.08 To Calls-in-Arrear (Arrear of 1st Call money @ Rs 2 per Share on 1,500 Shares) 1.9.08 To Interest on Calls-inArrear A/c (Interest on Rs 3,000 for one month @ 5% p.a.)

By Equity Share Application A/c (Refund 10,000 of application money @ Rs 20 per share on 500 shares rejected) 1,40,000 31.10.08By Balancec/d 4,97,012.50

97,000

1,47,000

3,000

12.50

5,07,012.50

5,07,012.50

Statement of shares applied, alloted and amounts adjusted
Catetories A B C

(a) Applied (No.of shares) (b) Alloted (No.of shares)

2,500 2,500 Rs. 50,000

3,000 2,500 Rs. 60,000

500 Nil Rs. 10,000

(c) Application money received [(a) x Rs.20 per share] (d) Application money adjusted [(b) x Rs.20 per share]

50,000

50,000(Refunded)

Financial Accounting

493

JOINT STOCK COMPANIES

(e) Excess Application money to be adjusted with allotment [(c)- (d)] (f) Allotment money due [(b) x Rs.30 per share] (g) Amount received on allotment [(f) -(g) ]

Nil 75,000 75,000

10,000 75,000 65,000

-------

Illustration 12: Priyanka Industries Ltd. has an authorised capital Rs 2,00,000 divided into shares of Rs 100 each. Of these, 600 shares were issued as fully pais in payment of machinery purchased from Z Ltd. 800 shares were subscribed for by the public and during the first year Rs 50 per share was called up payable Rs 20 on application, Rs. 10 on allotment, Rs. 10 on the first call and Rs. 10 on second call. The amounts received in respect of these shares were as follows:On 600 Shares Full amount called up On 125 Shares Rs 40 Per Share “ “ On 50 Shares Rs 30 Per Share “ “ On 25 Shares Rs 20 Per Share “ “ The directors forfeited the 75 shares, on which less than Rs 40 per share had been paid. Required: Give Journal Entries recording the above transactions (including cash transactions) and show how Share Capital would appear in the Balance-Sheet of the Compan, in accordance with Part 1 of Schedule VI to the Companies Act. Solution: Journals Particulars Machinery A/c To Z Ltd. (Being the purchase of machinery from Z Ltd. as per agreement dated...) Z Ltd. To Share Capital A/c (Being the issue of 600 shares at par) Bank A/c To Share Application A/c (Being the application money received) Share Application A/c To Share Capital A/c (Being the application money adjusted) Dr 16,000 16,000 Dr 16,000 16,000 (Contd.) 494
Financial Accounting

L.F. Dr. (Rs) Dr 60,000

Cr. (Rs) 60,000

Dr

60,000 60,000

(Contd.) Share Allotment A/c To Share Capital A/c (Being the allotment money due) Bank A/c To Share Allotment A/c (Being the allotment money received on 775 shares) Share First Call A/c To Share Capital A/c (Being the first call due) Bank A/c To Share First Call A/c (Being the first call received on 725 shares) Share Second Call A/c To Share Capital A/c (Being the second call due) Bank A/c To Share Second Call A/c (Being the second call received on 600 shares)

Dr

8,000 8,000

Dr

7,750 7,750

Dr

8,000 8,000

Dr

7,250 7,250

Dr

8,000 8,000

Dr

6,000 6,000 3,750 2,000 250 750 750

Share Capital A/c Dr To Forteited Share A/c To Share Allotment A/c To Share First Call A/c To Share Second Call A/c (Being 75 shares forteited as per Board’s resolution dated...) Balance Sheet as at... Liabilrties Share Capital: Authorised Capital 2,000 Shares of Rs 100 each issued Capital: 1,400 Shares of Rs 100 each Subscribed Capital: 600 Shares of Rs 100 each 725 Shares of Rs 100 each, Rs 50 per share called up (Of the above shares 600 shares are allotted as fully paid Rs Assets Fixed Assets: Machinery Current Assets: Cash at Bank

Rs 60,000 37,000

2,00,000 1,40,000 60,000 36,250

(Contd.)
Financial Accounting

495

JOINT STOCK COMPANIES (Contd.) up pursuant to a contract without payments being received in cash) Less: Calls Unpaid

96,250 1,250 95,000 Add: Forfeited Shares 2,000 97,000 97,000 Illustration 13: SOS Limited issued a prospectus inviting applications for 6,000 shares of Rs 10 each at a premium of Rs 2 per share, payable as follows; On application Rs 2 per share; On allotment Rs 5 per share (including premium): On 1st call Rs 3 per share; On Second and Final Call Rs 2 per share., Applications were receive for 9,000 shares and allotment was made prorata to the applicants of 7,500 shares, the remaing applicants were refused allotment. Money overpaid on applications were applied towards sums due on allotment. D to whom 100 shares were allotted, failed to pay the allotment money and on his subsequent failure to pay the first call, his shares were forfeited. Z,the holder of 200 shares, failed to pay both the calls, and his shares were forfeited after the second and final call. Of the shares forfeited 200 shares were sold to C credited as fully paid up for Rs 8.50 per share, the whole of D’s shares being included. Required: Show Journal and Cash Book enteries in the books of the company. Solution: Cash Book ( Book Column) Dr. Cr. Particulars To Share Capital: (Rs. 2 on 9,000 shares) To Share Allotment A/c (allotment money received) To Share 1st Call A/c (Rs. 3on 5,700 shares) To Share 2nd & Final Call A/c To Share Capital A/c Rs 18,000 26,550 17,100 11,400 1,700 74,750 Journals Particulars Share Application A/c Dr To Share Capital (Being Share application money transferred to Share Capital Account) Share Application A/c Dr To Share Allotment A/c (Being Share application money at Rs.2 on 1,500 shares adjusted against allotment.) 496 L.F. Dr. (Rs) 12,000 12,000 Cr. (Rs) Particulars By Share Application A/c By Balance c/d Rs 3,000 71,750

74,750

12,000 12,000

Financial Accounting

(Contd.) Share Allotment A/c To Share Capital A/c To Securities Premium A/c [Being the allotment money due] Share First Call A/c To Share Capital A/c [Being the first call money due] Dr 30,000 18,000 12,000

Dr

18,000 18,000

Share Capital A/c Dr Securities Premium A/c Dr To Forefeited Share A/c To Share Allotment A/c To Share First Call A/c [Being 100 shares of Rs. 10 each, Rs. 8 per Share called up, forfeited for non payment of allotment and first call ] Share Second and Final Call A/c Dr To Share Capital A/c [Being the second and final call money due on 5,900 Shares] Share Capital A/c Dr To Forfeited Share A/c To Share First Call A/c To Share Final Call A/c [Being 200 shares of Rs. 10 each forfeited for non-payment of first and final call] Forfeited Share A/c To Share Capital A/c [Being 200 shares re-issued] Forfeited Share A/c To Capital Reserve A/c [Being the transfer of profit on re-issue] Dr Dr

800 200 250 450 300

11,800 11,800

2,000 1,000 600 400

300 300

450 450

Working Notes : (i) Calculation of the amount due but no paid on allotment in Case of D. No. of applied Shares by Mr. D. (100 x 7500/6,500)
Financial Accounting

125 497

JOINT STOCK COMPANIES Total money sent on application by Mr. D. (125 x 2) Excess application money [ Rs 250 - (100 x Rs. 2)] Total amount due on allotment ( 100 x Rs. 5) Amount due but not paid on allotment (Rs. 500 —Rs 50) Rs. 250 Rs. 50 500 Rs.450

(ii) Calculation of allotment money received later on Total allotment money due Less (a) Already received (b) Not received (as per note 1) Rs. 3,000 Rs. 450 3,450 26,550 Illustration 14: Alpha Ltd issued a prospectus inviting applications for 2,000 shares of Rs. 10 each at a premium of Rs. 2 per share, payable as follows : On Application Rs.2 On Allotment Rs 5 (including premium) On First Call Rs.3 On Second & Final Call Rs. 2 Applications were received for 3,000 shares and pro rata allotment was made on the applications for 2,400 shares. It was decided to utilise excess application money towards the amount de on allotment. Mohit, to whom 40 shares allotted, failed to pay the allotment money and on his subsequent filure to pay the first call, his shares were forfeited. Jagat, the holder of 60 shares failed to pay the two calls and on his such failure, his shares were forfeited. Of the shares forfeited, 80 shares were sold to Rishav credited as fully paid for Rs. 9 per share, the whole of Mohit’s shares being included. Required: Give Journal Entries to record the above trasactions (including cash transactions) Solution : Journals Dr. Cr. Particulars L.F. Amount Amount Rs. Rs. Bank A/c Dr To Share Application A/c [Being the application money received on 3,000 shares) 6,000 6,000 Rs. 30,000

498

Financial Accounting

(Contd.) Share Application A/c Dr To Share Capital A/c To Bank A/c To Share Allotment A/c [Being the application money received on 3,000 shres ] Share Allotment A/c To Share Capital A/c To Securities Premium A/c [Being the allotment money deu] Dr 6,000 4,000 1,200 800

10,000 6,000 4,000

Bank A/c Dr To Share Allotment A/c [Being the remaining allotement money received on 1,960 shares ] Share First Call A/c To Share Capital A/c [Being the first call money due] Dr

9,016 9,016

6,000 6,000

Bank A/c Dr To Share First Call A/c [Being the first call money received on 1,900 shares @ Rs.3 per share ] Share Capital A/c Dr Securities Premium A/c Dr. To Share Allotment A/c To Share First Call A/c To Forfeited Share A/c [Being 40 shares forfeited for non-payment of full allotment money and the first call money ] Share Second & Final Call A/c To Share Capital A/c Dr

5,700 5,700

320 80 184 120 96

3,920 3,920

[Being the second and final call due on 1,960 share] (Contd.)

Financial Accounting

499

JOINT STOCK COMPANIES (Contd.) Bank A/c Dr To Share Second and Final Call A/c [Being the second and final call received on 1,900 shares ] Share Capital A/c Dr To Share First Call A/c To Share Second and Final Call A/c To Forfeited Shares A/c [Being 60 shares forfeited for non-payment on the first call and final call] Bank A/c Dr Forfeited Shares A/c Dr. To Share Capital A/c [Being the reissued of 80 shares @ Rs.9 as fully paidup] Forfeited Shares A/c Dr. To Capital Reserve A/c [Being the reissued of 80 shares @ Rs.9 as fully paidup] 3,800 3,800

600 180 120 300

720 80 800

216 216

Working Notes : (i) Calculation of the amount due but no paid on allotment in Case of Mohit Rs. Total No. of shares applied Shares by Ramesh (40 x 2,400/2,000) Total money sent on application by Ramesh (48 x Rs. 2) Excess application money [ Rs 96 - (40 x Rs. 2)] Total amount due on allotment ( 40x Rs. 5) Amount due but not paid on allotment (Rs. 200 —Rs 16) (ii) Calculation of allotment money received later on Total allotment money due (2,000 x Rs.5) Less: (a) Already received (b) Not received (as per note 1) Rs. Rs. 800 184 984 9,016 10,000 48 96 16 200 184

500

Financial Accounting

(iii) Since the question is silent as to the utilization of Rs. 16 (received from Mohit) between share capital and securities premium, it has been assumed that the entire excess of Rs. 16 is exclusively for share capital and hence credited to Forfeited Shares Account in full. Illustration 15: Nivedita Fertilisers Ltd. issued a prospectus invitng applications for 20,000 shares of Rs.10 each at a premium of Rs. 2 per share, paybale as follows : Rs. On Application On Allotment On First Call On Second & Final Call 3 (including Re.1 premium) 4 (including Re.1 premium) 3 2

Applications were received for 30,000 shares and pro rata allotment was made on the applications for 24,000 shares. It was decided to utilise excess application money towards the amlount due on allotment. Arunavo, to whom 400 shares were allotted, failed to pay the allotment money and on his subsequent failure to pay the first call, his shares were forfeited. Victor, who applied for 720 failed to pay the two calls and on his such failure, his shares of the shsres forfeited, 800 shares were sold to Srijita credited as fully paid for Rs.9 per share, the whole of Arunavo’s shares being included. Required: Give Journal Entries to record the above trasactions (including cash transactions) Solution : Journals Particulars Bank A/c Dr To Share Application A/c (Being the application money received on 30,000 shares) Share Application A/c Dr To Share Capital A/c To Share Capital A/c To Bank A/c To Share Allotment A/c (Being the application money adjusted and surplus refunded) Dr. L.F. Amount Rs. 90,000 90,000 90,000 40,000 20,000 10,800 10,200 Cr. Amount Rs.

Financial Accounting

501

JOINT STOCK COMPANIES

(Contd.) Share Allotment A/c To Share Capital A/c To Securities Preimum A/c (Being the allotment money due) Dr 80,000 60,000 20,000 66,640 66,640

Bank A/c Dr To Share Allotment A/c (Being the remaining allotment money received on 19,600 shares) Share First Call A/c To Share Capital A/c (Being the first call money due) Dr

60,000 60,000

Bank A/c Dr To Share First Call A/c (Being the first call money received on 19,000 shares @ Rs.3 per shares ) Share Capital A/c Dr Security Premium A/c Dr To Share Allotment A/c To Share First Call A/c To Forfeited Shares A/c (Being 400 shares forfeited for non-payment of full allotment money and the first call money) Share Second and Final Call A/c Dr To Share Capital A/c (Being the second and final call due on 19,600 shares) Bank A/c Dr To Share Second and Final Call A/c (Being the second and final call received on 19,000 shares ) Share Capital A/c Dr To Share Final Call A/c To Share Second and Final Call A/c To Forfeited Shares A/c (Being 600 shares forfeited for non-payment of the first call and final call)

57,000 57,000

3200 400 1360 1200 1040

39,200 39,200

38,000 38,000 6000 1800 1200 3000

(Contd.)

502

Financial Accounting

Bank A/c Dr Forfeited Shares A/c Dr To Share Capital A/c [Being the reissue of 800 shares @ Rs.9 as fully paid up) Forfeited Shares A/c To Capital Reserve A/c [Being the transfer of profit on re-issue) Dr

7,200 800 8,000 2240 2240

Working Notes : (i) Calculation of the amount due but no paid on allotment in Case of Arunavo Total No.of shares applied by Arunavo (400x24,000/20,000) Total money sent on application by Arunavo (480x Rs.3) Excess applicaiton money [Rs. 1440 - (Rs. 400 x Rs.3) Total amount due on allotment (Rs.1600 - Rs.240) (ii) Calculation of allotment money received latter on Total allotment money due ( 20,000 x Rs.4) Less : (a) Already received (4,000 x 3) 12,000 (b) Not received (as per note I) 1,360 Rs. 480 1440 240 1360 80,000

13,360 66,640 (iii) Since the question is silent as to the utilization of Rs.240 (received from Arunavo) between share capital and Securities premium, it has been assumed that the entire excess of Rs. 240 is exclusively for share capital and hence credited to Forfeited Shares Account in full. Illustration 16: Hero Limited issued 10,000 equity shares of Rs. 100 each at premium of Rs. 25 per share. Under the erms of the isue, the shares were to be paid for as follows : Rs. 2008 January 1, on application (including Rs. 25 premium on issue per share) February 1, on allotment April 1, balance of 50 50 25

The issue was over subscribed. The applications received are summarised below : A B C Number of applicants in categories 40 20 1 Applied for by each applicant in the three categories 200 2000 8000 Issued to each applicant 100 200 2000 One of the conditions of the issue was that amounts over-paid on application were to be retained by the company and used in redudction of further sums due on shares allotted. All surplus contributions were refunded on 15th. February, 2008. Ramesh who had subscribed 100 on an application for 200 shares was unable to meet the claim due on April 1. On May 5, the directors forfeited his shares. All other shareholders paid the sums requested on the due dates, on June 10, 2008 the directors re-issued the forfeited shares as fully paid to Mohan, on receiving a payment of Rs. 10,500.
Financial Accounting

503

JOINT STOCK COMPANIES (a) To prepare a statement as on February 1, 2008, showing the over-payment, underpayment to in respect of category of applicants : and (b) To show the above transactions would appear in the journal of the company. Solution : (a) Hero Ltd. Statement of Shares Applied, Allotted and Amounts Adjusted Catetories A B C (a) Applied (Nos.) 8,000 40,000 8,000 (b) Allotted (Nos.) 4,000 4,000 2,000 Rs. Rs. Rs. (c) Amount Received 4,00,000 20,00,000 4,00,000 (Applied ×Application per share) (d) Application Money Adjusted 2,00,000 2,00,000 1,00,000 (Alloted × Application per share) (e) Excess Application Money 2,00,000 18,00,000 3,00,000 to be Adjusted with Allotment [c-d] (f) Allotment Mone Due 2,00,000 2,00,000 1,00,000 (Alloted × Allotment per share) (g) Balance of Excess Application Money for Nil 16,00,000 2,00,000 Adjustment with calls [e-f] (h) Call Money Due 1,00,000 1,00,000 50,000 (Allotment × Call per share) (i) Excess/(Shortage) (1,00,000) 15,00,000 1,50,000 In case of shortage, the shareholders will deposit the dues. (b) 2008 Jan. 01 Journals Particulars Bank A/c Dr. To Equity Share Application and Allotment A/c (Application money received on 56,000 shares @ Rs. 50 per share) Equity Share Application A/c Dr. To Equity Share Capital A/c To Securities Premium A/c (Being application money on 10,000 shares transferred to share Capital and Securities Premium vide Board’s resolution no. dated...) Equity Share Application A/c Dr. To Bank A/c (Being excess application money refunded of vide Board’s resolution no. dated...) L.F. Dr. (Rs.) 28,00,000 28,00,000 Cr. (Rs.)

Feb. 01

5,00,000 2,50,000 2,50,000

16,50,000 16,50,000

(Contd.) 504
Financial Accounting

(Contd.) Equity Share Allotment A/c Dr. To Equity Share Capital A/c (Being allotment money due on 10,000 shares @ Rs. 50 per share vide Board’s resolution no. dated...) Equity Share Application A/c Dr. To Equity Share Allotement A/c Dr. (Being excess of Equity share application money adjusted with allotment) Equity Share First & Final Call A/c Dr. To Equity Share Capital A/c (Being first & final call money due on 10,000 shares @ Rs. 25 per share vide Board’s resolution no. dated...) Bank A/c Dr. Calls in Arrear A/c Dr. Equity Share Application A/c Dr. To Equity Share First & Final Call A/c (Being amount received and adjusted, except a holder of 100 share who failed to pay the call) Equity Share Capital A/c Dr. To Shares Forfeited A/c Dr. To Calls in Arrear A/c (Being 100 shares held by Ramesh forfeited for non-payment of call @ Rs. 25 per share vide Board’s resolution no. dated...) Bank A/c Dr. To Equity Share Capital A/c To Securities Premium A/c (Being 100 forfeited shares resissued at Rs. 10,500 ) Share Forfeited A/c Dr. To Captial Reserve (Being balance of shares forfeited transferred to captial reserve) 5,00,000 5,00,000

5,00,000 5,00,000

2,50,000 2,50,000

Apr. 01

90,000 97,500 1,50,000 2,50,0000

10,000 7,500 2,500

7,500 10,500 10,000 500

May 05

7,500 7,500

Financial Accounting

505

JOINT STOCK COMPANIES

Rights Issue Issue of shares by an existing company to the existing equity shareholders is known as rights issue. Section 81 of the Companies Act, 1956 provides: Where at any time after the expiry of two years from the formation of a company or the expiry of one year from the first allotment of shares in the company, whichever is earlier, if the Board of Directors, decide to increase the subscribed capital of the company by the allotment of further shares, then: (a) Such further shares shall be offered to the persons who on that date are the holders of equity shares of the company proportionately to their equity holdings on that date. (b) The offer shall be made by a notice specifying the number of shares offered and limiting a time not being less than 15 days from the date of the offer, within which the offer, if not accepted, will be 4eemed to have been declined. (c) Unless the Articles of Association of the company otherwise specify, the offer shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (b) shall contain a statement of this right. (d) After the expiry of the time specified in the notice referred to above, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may proceed to dispose of such shares offered in such manner as they consider most beneficial to the company. The new shares issued need not be offered to the existing equity shareholders, if the company in general meeting has so decided by a special resolution, or, if the company in general meeting has so decided by ordinary resolution and the same has been approved by the Central Government. “Nothing in section 81 shall apply: (a) to a private Company; or (b) to the increase of the subscribed capital of a public company caused by the exercise of an option attached to debentures issued or loans raised by the company: (i) to convert such debentures or loans into shares in the company, or (ii) to subscribe for shares in the company. Advantages of Rights Issue The following can be the advantages which accrue as a result of issuing further shares to the existing shareholders only:

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Financial Accounting

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Control of the company is retained in the hands of the existing shareholders. Issue of right shares makes possible equitable distribution of shares without disturbing the established equilibrium of shareholdings because right shares are offered to the persons who on the date of rights issue are the holders of equity shares of the company proportionately to their equity shares of the company proportionately to their equity shares on that date. The existing shareholders do not suffer on account of dilution in the value of their holdings if fresh shares are offered to them because value of the shares is likely to fall with fresh issue. This decrease in the value of the shares will be compensated by getting new shares at a price lower than the market price. They are likely to suffer on account of the dilution in the value of their holdings if fresh shares are offered to the general public. The expenses to be incurred, if shares are offered to the general public, are avoided. Image of the company is bettered when rights issues are made from time to time and existing shareholders remain satisfied. There is more certainty of getting capital when fresh issue of shares is made to the existing shareholders instead of to the general public. . Directors cannot misuse the opportunity of issuing new shares to their friends and relatives at lower prices and at the same time retaining more control in their hands when right shares are issued because in rights issue shares are offered proportionately to the existing shareholders according to their existing holdings.

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Valuation of Rights Usually a company offers rights issue at a price which is lower than the market price of the shares so that existing (i.e., old) shareholders may get the monetary benefit of being associated with the company for a long time. Existing shareholders who have been offered right shares and do not want to purchase these offered shares may renounce their right shares in favour of some other persons within the specified period as mentioned earlier. In such a case, the existing shareholders can make a profit by selling his right to such other person. This right can be valued in terms of money as below: (a) Calculate the market value of shares which an existing shareholder is requiredto have in order to get fresh shares. (b) Add to the above price paid for the fresh shares. (c) Find out the average price of existing shares and fresh shares. (d) The average price of the share should be deducted from the market price and the difference thus ascertained is value of right. Illustration 17. A Company is planning to raise funds by making rights issue of equity shares to finance its

Financial Accounting

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JOINT STOCK COMPANIES expansion. The existing equity share capital of the company is Rs. 50,00,000. The market value of its share is Rs. 42. The company offers to its shareholders the right to buy 2 shares at Rs. 11 each for every 5 shares held. You are required to calculate:] (i) Theoretical market price after rights issue;

(ii) The value of rights; and (iii) Percentage increase in share capital. Solution Rs Market value of 5 shares already held by a shareholder @ Rs. 42 Add, price to be paid by him for acquiring 2 more shares @ Rs. 11 per share Total price of 7 shares after rights issue 22 232 210

(i) Therefore, theoretical market price of one share, (i.e., 232/7) = 33.14 (ii) Value of Rights = Market Price - Theoretical Market Price= Rs. 42 - Rs. 33.14. = Rs. 8.86 (iii) Percentage Increase in Share Capital Present Capital Rights Issue Rs. 50,00,000 x 2/5 % Increase In Share Capital (20,00,000/50,00,000) x 100 40% 50,00,000 20,00,000 Rs. 33.14

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Financial Accounting

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