Chapter # 3: Accounting For Company - Issuance of Shares & Debentures

Chapter # 3
Accounting for Company –

Issuance of Shares & Debentures
Principles of Accounting – XII
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Accounting for Company – Issue of Shares & Debentures
Chapter # 3
WHAT THE EXAMINER USUALLY ASK?
 General Journal entries for issuance of shares:

o Issued shares at par.
o Issued shares at premium.
o Issued shares at discount.
o Issued shares for the purchase of assets.
 General Journal entries for issuance of debentures/bonds:
o Issuance of debentures at par and payback at par.
o Issuance of debentures at premium and payback at par.
o Issuance of debentures at discount and payback at par.
o Issuance of debentures at par and payback at premium.
o Issuance of debentures at discount and payback at premium.
 Balance Sheet.
 Multiple Choice Questions (MCQs).
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Accounting for Company – Issuance of Shares & Debentures
Chapter # 3
Chapter # 3
ACCOUNTING FOR COMPANY –
ISSUANCE OF SHARES &
DEBENTURES
COMPANY
A corporate enterprise that has a legal identity separate from that of its members; it operates as
one single unit, in the success of which all the members participate. A company may have
limited liability (limited company), so that the liability of the members of the company’s debt is
limited. An unlimited company is one in which the liability of the members is not limited in any
way. A company may be registered as a public limited company or a private company. The
shares of a private company may not be offered to the public for sale.
KINDS OF COMPANY
On the Basis of Incorporation:

A company incorporated under a special charter granted by the Queen
of England is called “Chartered Company”. The company is regulated
Chartered Company: by its charter and companies act does not apply to this kind of
company. The charter also prescribes the nature of business and the
power of the company. Example: Bank of England.
A statutory company is one which is created by a special act of

parliament or a state legislature. The nature and power of such
companies are laid down in the special act under which they are
Statutory Company:
created. Memorandum of association is not required for statutory
company. The word “limited” is not required after company’s name.
Example: State Bank of Pakistan.
A registered company is one which is registered in accordance with

the provision of Companies Ordinance, 1984 and includes the existing
companies formed under any other law. Company comes into
Registered Company:
existence by receiving the certificate of incorporation and governed by
the Companies Ordinance, 1984. Registered company may be public
company or private company.
Private Company:
 Private company must be registered under company’s law.
 The legal position (status) of private company is similar to that of public company.
 A private company cannot invite subscription from the public.
 Transfer of shares is restricted in a private company.
 A private company should have at least two (2) members and maximum number cannot
exceed fifty (50).
 A private company is not required to hold a statutory meeting.
Public Company:
 Public company is also registered under company’s law.
 A public company can invite subscription from public.
 A public company does not have restriction on transfer of shares.
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Chapter # 3
 A public company should have at least seven (7) members. There is no restriction on
upper limit of the members.
 A public company has to seek certificate for commencement of business.
 A public company is required to file its accounts with the registrar.
On the Basis of Liability:

A company limited by shares is a company in which the liability of its
members is limited by its memorandum to the amount unpaid on the
Limited by Shares:
shares respectively held by them. It may either public or private
company.
A company in which the liability of its members is limited by its

memorandum to such amount as the members may respectively
Limited by Guarantee:
undertake to contribute to the assets of the company in the event of its
being wound up.
Private firm (such as a sole proprietorship or general partnership)

whose owner(s), partners, or stockholders accept personal and
unlimited liability for its debts and obligations in return for avoiding
Unlimited Company: double taxation of a limited company. Unlimited liability firms are
exempt from filing their annual accounts with a public authority (such
as Registrar of Companies) unless they are subsidiaries of limited
liability holding companies. It is also called unlimited company.
SHARE
A unit of ownership that represents an equal proportion of a company’s capital is called share. It
entitles its holders (shareholders) to an equal claim on the company’s profit and an equal
obligation for the company’s debts and losses.
KINDS OF SHARE
There are different kinds of shares which can be raised by companies are:
 Ordinary shares.
 Preference shares.
(1) ORDINARY SHARES

The equity shares or ordinary shares are those shares on which the dividend is paid after the
dividend on fixed rate has been paid on preference shares.
CHARACTERISTICS OF ORDINARY SHARES

 No fixed rate of dividend.
 Dividend is paid after dividend at a fixed rate is paid on preference shares.
 At the time of liquidation, capital on equity is paid after preference shares have been
paid back in full.
 Non-redeemable.
 Equity shareholders have voting rights & thus, control the working of the company.
 Equity shareholders are the virtual owners of the company.
(2) PREFERENCE SHARES

Preference shares are those shares which carry with them preferential rights for their holders,
i.e. preferential right as to fixed rate of dividend and as to repayment of capital at the time of
winding up of the company.

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Chapter # 3
CHARACTERISTICS OF PREFERENCE SHARES

 Fixed rate of dividend.
 Priority as to payment of dividend.
 Preference as to repayment of capital during liquidation of the company.
 Generally preference shareholders do not have voting rights.
KINDS OF PREFERENCE SHARES
On the Basis of Dividend:

Cumulative Preference They are those shares on which the dividend at a fixed rate goes on
Shares: cumulating till it is all paid.
Non – Cumulative These are those shares on which the dividend does not cumulate.
Preference Shares:
On the Basis of Conversion:

Convertible Preference The owners of these shares have the option to convert their preference
Shares: shares into ordinary shares as per the terms of issue.
Non – Convertible The owners of these shares do not have any right of converting their
Preference Shares: shares into ordinary shares.
On the Basis of Redemption:

Redeemable Preference These are to be purchased back by the company after a certain period
Shares: as per the terms of issue.
Irredeemable These are not to be purchased back by the company during its lifetime.
Preference Shares:
SHARE CAPITAL
Share capital is the part of the finance of a company received from its members or
shareholders in exchange for shares.
TYPES OF SHARE CAPITAL

The maximum amount of shares capital that may be issued by a
company, as detailed in the company’s memorandum of association is
Authorized Share
called authorized capital or registered capital. The authorized share
Capital:
capital must be disclosed on the face of the balance sheet or
alternatively in the notes to the accounts.
The amount of the authorized share capital of a company for which

Issued Share Capital:
shareholders have subscribed is called issued share capital.
Called – up capital is the part of the issued share capital of a company

payment for which has either been received (paid up share capital) or
Called – Up Share requested but not yet received. Some shares are paid for in part at the
Capital: time of issue, with subsequent requests for the outstanding payment.
When all requests have been paid, the called-up share capital will
equal the paid-up share capital.

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Chapter # 3
The part of the issued share capital of a company that shareholders
Paid – Up Share
have paid into the company for their fully paid or partly paid shares is
Capital:
called paid – up share capital.
SHARE PREMIUM
Share premium is the amount payable for shares in a company and issued by the company itself
in excess of their nominal value. Share premium received by a company must be credited to a
share premium account, which cannot be used for paying dividends to the shareholders.
SHARE DISCOUNT
A share issued at a price below its par value. The discount is the difference between the par
value and the issue price.
PRELIMINARY EXPENSES
Expenses incurred for the registration and documentation in the setting up of a company is
called preliminary expenses. It is treated as current asset in the balance sheet.
ARTICLES OF ASSOCIATION
Article of association is the document that governs the running of a company. It sets out voting
rights of shareholders, conduct of shareholders’ and directors’ meetings, power of management,
etc.
MEMORANDUM OF ASSOCIATION
Memorandum of association is an official document setting out the detail of a company’s
existence. It must be signed by the first subscribers and must contain the following information:
 The name of company.
 The address of the registered office.
 The objects of the company.
 A statement that the company is a public company.
 A statement of limited liability.
 Amount of the guarantee.
 The amount of authorized share capital and its division.
GENERAL JOURNAL ENTRIES
ISSUE OF SHARES AT PAR

Bank DR. (with amount received)
Ordinary shares application CR. (with amount received)
(To record the cash received from general public at par)
-----------------------------------------------------------------------------------------------------------------
Ordinary shares application DR. (with the amount of shares issued)
Ordinary shares capital CR. (with the amount of shares issued)
(To record the shares issued to general public at par)
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ILLUSTRATION # 1: (Issued at Par)

Paramount Co. Ltd. has an authorized capital of Rs.250,000 divided into 25,000 ordinary shares
of Rs.10 each. The company invites application for 3,000 ordinary shares at par from public
along with money. The last day, the banker of the company has informed that only 3,000
ordinary shares applications were received. The management of the company then decided to
issue the same to the public.

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Chapter # 3
REQUIRED
Prepare necessary journal entries.
SOLUTION # 1:
Paramount Co. Ltd.
General Journal
Date Particulars P/R Debit Credit
1 Bank (3,000 x 10) 30,000
Ordinary shares applications 30,000
(To record the shares applications received at par)
2 Ordinary shares application 30,000
Ordinary shares capital (3,000 x 10) 30,000
(To record the shares issued to the public at par)
ILLUSTRATION # 2: (Issued at Par)

Diamond Co. Ltd. is offering 35,000 ordinary shares of Rs.10 each to the public along with
money. The banker of the company reported that they have received 55,000 ordinary shares
application at par upto the last day. The company has decided to issue 35,000 ordinary shares
and instructed to the banker that excess amount refund to whom shares were not allotted.
REQUIRED
SOLUTION # 2:
Diamond Co. Ltd.
General Journal
1 Bank (55,000 x 10) 550,000
(To record the shares applications received at par)
(To record the shares issued to the public at par)
Bank (20,000 x 10) 200,000
(To record the refund of excess money to the public)
ISSUE OF SHARES AT PREMIUM

(To record the cash received from general public at premium)
-----------------------------------------------------------------------------------------------------------------
Ordinary shares application DR. (amount of shares issued at par plus premium)
Ordinary shares capital CR. (with the amount of shares issued at par)
Ordinary shares premium CR. (with the premium amount)
(To record the shares issued to the public at premium)
-----------------------------------------------------------------------------------------------------------------
Ordinary shares application DR. (with the amount refund to public)
Bank CR. (with the amount refund to public)
(To record the refund of excess money to public)
-----------------------------------------------------------------------------------------------------------------

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Chapter # 3
ILLUSTRATION # 3: (Issued at Premium)

Regal Ltd. has registered capital of Rs.3,000,000 divided into 150,000 ordinary shares of Rs.20
each. The company invites applications for 28,000 ordinary shares of Rs.20 each at Rs.26 each
along with money. The banker has reported that they have received 28,000 ordinary shares
applications at premium. The company decided to issue the same number of shares to the
public.
REQUIRED
SOLUTION # 3:
Regal Ltd.
General Journal
1 Bank (28,000 x 26) 728,000
(To record the shares applications received at
premium)
Ordinary shares premium (28,000 x 6) 168,000
(To record the shares issued to the public at
premium)
ILLUSTRATION # 4: (Issued at Premium)

Unilever Ltd. invites shares applications from 1 April to 10 April for 26,000 ordinary shares of
Rs.10 each with the premium of Rs.2 each. On 10 April, the banker of the company informed to
the company that they have received total 42,000 shares application along with money. On 18
April the board has decided to issue 26,000 ordinary shares at premium after balloting and
instructed to banker that they must refund the amount to whom they have not issued shares.
REQUIRED
SOLUTION # 4:
Unilever Ltd.
General Journal
10 Bank (42,000 x 12) 504,000
April Ordinary shares applications 504,000
premium)
April Ordinary shares capital (26,000 x 10) 260,000
Ordinary shares premium (26,000 x 2) 52,000
premium)
April Bank (16,000 x 12) 192,000
(To record the refund of excess money to the public
at premium)

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Chapter # 3
ISSUE OF SHARES AT DISCOUNT

(To record the amount received from public at discount)
-----------------------------------------------------------------------------------------------------------------
Ordinary shares application DR. (with the amount of shares issued at discount)
Ordinary shares discount DR. (with the amount of discount)
(To record the shares issued to public at discount)
-----------------------------------------------------------------------------------------------------------------
Bank DR. (with the amount of shares issued at discount)
Ordinary shares discount DR. (with the amount of discount)
(To record the shares issued to underwriter as per agreement)
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ILLUSTRATION # 5: (Issued at Discount)

Pepsi Co. Ltd. has an authorized capital of Rs.2,500,000 divided into 100,000 ordinary shares of
Rs.25 each. The company invites applications for 35,000 ordinary shares of Rs.25 each at Rs.20
each for the public with the agreement by underwriter. On the last day, the banker has reported
that they have received 26,000 ordinary shares applications from public. The management then
decided to issue the 26,000 ordinary shares to the public and remaining shares will be taken up
by the underwriter as per agreement.
REQUIRED
SOLUTION # 5:
Pepsi Co. Ltd.
General Journal
1 Bank (26,000 x 20) 520,000
discount)
Ordinary shares discount (26,000 x 5) 130,000
discount)
3 Bank (9,000 x 20) 180,000
Ordinary shares discount (9,000 x 5) 45,000
(To record the shares issued to the underwriter at
discount as per agreement)
DEBENTURES
Debentures are the most common form of long-term loan taken by a company. It is usually a
loan repayable at a fixed date, although some debentures are irredeemable securities. Most
debentures also pay a fixed rate of interest, and this interest must be paid before a dividend is
paid to shareholders.

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Chapter # 3
ISSUE OF DEBENTURES AT PAR AND PAYBACK AT PAR

Bank DR. (with the amount received)
Debentures payable CR. (with nominal value)
(To record the debentures issued at par and payback at par)
-----------------------------------------------------------------------------------------------------------------
ILLUSTRATION # 6: (Issued at Par and Payback at Par)

The company has issued 15,000 7% debentures of Rs.100 each at par and agreed to pay back
after 3 years at par.
REQUIRED
SOLUTION # 6:
General Journal
1 Bank (15,000 x 100) 1,500,000
7% Debentures payable (15,000 x 100) 1,500,000
(To record the issue of 7% debentures at par and
payback at par after 3 years)
ISSUE OF DEBENTURES AT PREMIUM AND PAYBACK AT PAR

Debentures payable CR. (with par value)
Premium on debenture CR. (with amount received in premium)
(To record the debentures issued at premium and payback at par)
-----------------------------------------------------------------------------------------------------------------
ILLUSTRATION # 7: (Issued at Premium and Payback at Par)

The company has issued 23,000 10% debentures of Rs.100 each at Rs.105 and agreed to pay
back after 5 years at Rs.100 each.
REQUIRED
SOLUTION # 7:
General Journal
1 Bank (23,000 x 105) 2,415,000
Premium on debentures (23,000 x 5) 115,000
(To record the issue of 10% debentures at premium
and payback at par after 5 years)
ISSUE OF DEBENTURES AT DISCOUNT AND PAYBACK AT PAR

Discount on debenture DR. (with discount amount)
Debentures payable CR (with par value)
(To record the debentures issued at discount and payback at par)
-----------------------------------------------------------------------------------------------------------------

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Chapter # 3
ILLUSTRATION # 8: (Issued at Discount and Payback at Par)

The company has issued 30,000 8% debentures of Rs.100 each at Rs.95 and redeemable after 5
years at Rs.100 each.
REQUIRED
SOLUTION # 8:
General Journal
1 Bank (30,000 x 95) 2,850,000
Discount on debentures (30,000 x 5) 150,000
(To record the issue of 8% debentures at discount
and payback at par after 5 years)
ISSUE OF DEBENTURES AT PAR AND PAYBACK AT PREMIUM

Loss on redemption DR. (with amount of loss at the time of payback)
Premium on redemption CR. (the amount will be paid as premium)
(To record the debentures issued at par and payback at premium)
-----------------------------------------------------------------------------------------------------------------
ILLUSTRATION # 9: (Issued at Par and Payback at Premium)

The company has issued 26,000 6% debentures of Rs.100 each at par and redeemable after 6
REQUIRED
SOLUTION # 9:
General Journal
1 Bank (26,000 x 100) 2,600,000
Loss on redemption (26,000 x 6) 156,000
Premium on redemption (26,000 x 6) 156,000
(To record the issue of 6% debentures at par and
payback at premium after 6 years)
ISSUE OF DEBENTURES AT DISCOUNT AND PAYBACK AT

PREMIUM
Loss on redemption DR. (with amount of loss at the time of payback)
Discount on debenture DR. (with the discount amount)
Premium on redemption CR. (the amount will be paid as premium)
(To record the debentures issued at discount and payback at premium)
-----------------------------------------------------------------------------------------------------------------

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Chapter # 3
ILLUSTRATION # 10: (Issued at Discount and Payback at Premium)

The company has issued 35,000 9% debentures of Rs.100 each at Rs.93 and redeemable after 8
REQUIRED
SOLUTION # 10:
General Journal
1 Bank (35,000 x 93) 3,255,000
Loss on redemption (35,000 x 6) 210,000
Discount on debentures (35,000 x 7) 245,000
Premium on redemption (35,000 x 6) 210,000
(To record the issue of 9% debentures at discount
and payback at premium after 8 years)
FINANCIAL STATEMENTS
Financial statement is a written report which quantitatively describes the financial health of a
company. Financial statements are usually compiled on a quarterly and annually basis. Financial
statements include:
 Income Statement.
 Balance Sheet.
 Cash Flow Statement.
 Statement of Changes in Equity.
 Notes to the Financial Statements.
INCOME STATEMENT
Income statement shows the financial performance of the business. It shows the result of
operations for a period. It consists of revenue and expenses. When total revenues exceed the
total expenses, the resulting amount is net profit. When expenses exceed revenues, the resulting
amount is net loss.
BALANCE SHEET
Balance sheet shows the financial position of business. It is listing of firm’s assets, liabilities
and owner’s equity on a given date. It is a quantitative summary of company’s financial
condition at a specific point in time, including assets, liabilities and net worth. The first part
of balance sheet shows all the productive assets a company owns, and the second part
shows all the financing methods (such as liabilities and owner’s equity).

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Chapter # 3
Format of Income Statement
Name of Company
Income Statement
For the Period Ended______
Sales XXX
Less: Sales discount XXX
Less: Sales returns and allowances XXX (XXX)
Net sales XXX
Less: Cost of Goods Sold:
Merchandise inventory (beg) XXX
Add: Net Purchases:
Purchases XXX
Add: Transportation in XXX
Delivered purchases XXX
Less: Purchase discount (XXX)
Less: Purchase returns & allowances (XXX)
Net purchases XXX
Merchandise available for sale XXX
Less: Merchandise inventory (end) (XXX)
Cost of goods sold (XXX)
Gross profit XXX
Less: Operating Expenses:
Office salaries expense XXX
Directors’ fee expenses XXX
Advertising expense XXX
Office supplies expense XXX
Rent expense XXX
Insurance expense XXX
Auditor’s fee expenses XXX
Bad debts expense XXX
Depreciation expense XXX
Total operating expenses (XXX)
Profit/loss from operation XXX/(XXX)
Add: Other Income:
Commission income XXX
Income before income tax XXX
Less: Income tax expense (XXX)
Net profit/Loss XXX/(XXX)

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Chapter # 3
Format of Balance Sheet
Name of Company
Balance Sheet
As on _________
Equities Assets
Shareholder’s Equity: Fixed Assets:
Authorized Capital: Goodwill XXX
XXX ordinary shares Plant & equipment XXX
@ Rs.xx each XXX Less: All for depreciation (XXX) XXX
Preliminary expenses XXX
Issued & Paid-up Capital: Total fixed assets XXX
XXX ordinary shares
@ Rs.xx each XXX Current Assets:
Add: Shares premium XXX Office supplies XXX
Less: Shares discount (XXX) Prepaid XXX
XXX Merchandise inventory XXX
Add: Retained earnings XXX Accounts receivable XXX
Add: Reserves XXX Cash/Bank XXX
Total shareholder’s equity XXX Total current assets XXX
Liabilities:
Long-Term Liabilities:
Debentures payable XXX
Premium on redemption XXX
Total long-term liabilities XXX
Current Liabilities:
Accounts payable XXX
Cash dividend payable XXX
Stock dividend payable XXX
Accrued expenses XXX
Unearned income XXX
Total current liabilities XXX
Total equities XXX Total assets XXX

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Chapter # 3
PRACTICE QUESTIONS
Question # 1: 1990 Regular & Private – BIEK
M/S. Salman Ltd. has the registered capital of Rs.1,000,000 divided into ordinary shares of Rs.50
each. 15,000 shares of Rs.50 each were offered to the public at Rs.55 per share.
REQUIRED
(a) Give Journal entries in proper form in the book of the company under each of the following
assumptions separately:
(i) Applications were received for 20,000 shares. The company allotted the shares
offered and refunded the amount received in excess.
(ii) Applications were received for 14,000 shares. The company finalized the allotment
of these shares.
(b) Prepare share capital and bank accounts under each of the above assumptions separately.

Shahid Mujib & Company Ltd. offered to the public 70,000 ordinary shares of Rs.10 each at
Rs.15 (Rs.5 being premium per share) on January 1, 1998. The company’s bankers received
applications for 90,000 ordinary shares up to January 15, 1998.
On January 31, 1998 the company finalized the allotment of shares and directed to bank to
refund the excess money received on account of over-subscription.
REQUIRED
(a) Give necessary journal entries in proper form on the books of Shahid Mujib & Company
Ltd. of the above transactions (Give narration below each entry).
(b) Set up “T” accounts of cash in bank, ordinary share capital and ordinary share premium.
(c) Prepare initial balance sheet of the company.

Zain Company Ltd. was incorporated with an authorized capital of Rs.1,000,000 divided into
100,000 ordinary shares of Rs.10 each. 50,000 shares were issued to the public at par, payable
in full with application. The company’s banker reported that applications were received for
45,000 shares. The remaining shares which were not taken up by the public were taken up by
the underwriters under the agreement. The directors finalized the allotment of shares.
The preliminary expenses amounted to Rs.15,000. The company acquired a delivery truck and
in payment issued 5,000 ordinary shares of Rs.10 each. The market price of the shares was
Rs.12 per share.
REQUIRED
(a) Give entries in the General Journal of the company for the above transactions.
(b) Prepare initial balance sheet of the company.
Question # 4: 2003 Private – BIEK

The following are transactions, completed by Abdul Sattar and Company:
(a) Received applications for 50,000 ordinary shares of Rs.10 each @ Rs.12 per share.
(b) Allotted 40,000 ordinary shares of Rs.10 each at a premium of Rs.2 per share.
(c) Refunded application money on 10,000 ordinary shares @ Rs.12 per share.
(d) Paid preliminary expenses Rs.20,000.
(e) Allotted 5,000 ordinary shares of Rs.10 each against land costing Rs.60,000.
(f) Allotted 5,000 ordinary shares of Rs.10 each to the promoters of the company for their
services.
REQUIRED
Prepare General Journal entries for the above transactions.
Question # 5: 2003 Regular – BIEK

Mahfooz & Co. Ltd. was registered with capital of Rs.5,000,000 divided into ordinary shares of
Rs.10 each. The company offered to the public 15,000 shares payable in full on application. The

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Chapter # 3
bank informs that 20,000 shares application were received. The Co. allotted the offered shares
and refunded the amount received in excess. During the year the Co. completed the following
transactions:
(a) Issued 5,000 shares at Rs.18 each for cash.
(b) Issued 7,000 shares to the promoters as par.
(c) Purchased computers for Rs.40,000 and issued 3,000 shares.
(d) Purchased a piece of land and issued 50,000 shares at Rs.15.
REQUIRED
Give entries in General Journal for Mahfooz & Co. Ltd.

Mehmood Ltd. was registered with the authorized capital of Rs.2,000,000 divided into 200,000
ordinary shares of Rs.10 each. The company offered to the public 170,000 shares for
subscription at par. The applications for 150,000 shares were received. The underwriters,
under the agreement, subscribed for the remaining 20,000 shares. The company paid 2%
underwriting commission. The company also completed the following transactions:
(a) Issued 4,200 shares at par to the promoters in consideration for their services for the
promotion of the company.
(b) Purchased equipment for Rs.80,000 and issued 7,600 shares of Rs.10 each.
(c) Purchased office building for Rs.130,000 and issued 12,000 shares of Rs.10 each as
purchase consideration.
REQUIRED
Record the above transactions in the General Journal of the company.

Yusufzai & Company Limited was registered with the capital of Rs.10,000,000 divided into
ordinary shares of Rs.10 each. The company offered to the public 30,000 shares payable in full
on application. The bank informs that 40,000 share applications were received. The company
allotted the offered shares and refunded the amount received in excess.
During the year, the company completed the following transactions:
(b) Issued 14,000 shares to the promoters at par.
(c) Purchased computers for Rs.80,000 and issued the suitable number of shares. The
market value of shares was Rs.12.50 each.
(d) Purchased a piece of land and issued 100,000 shares at Rs.15 each.
REQUIRED
Give entries in the general journal for Yusufzai & Co. Ltd.

On January 1, 1996, Jansher Company Ltd. was registered with an authorized capital of
Rs.1,200,000 divided into 6,000 10% preference shares of Rs.100 each and 60,000 ordinary
shares of Rs.10 each.
On January 15, 1996, the company offered 4,000 10% preference shares and 50,000 ordinary
shares, payable in full with application.
On January 25, 1996, the company’s banker reported that Rs.500,000 on 5,000 10% preference
shares and Rs.400,000 on 40,000 ordinary shares were received with applications. The
remaining ordinary shares which were not taken up by the public were taken up by the
underwriters under the agreement.
On January 31, 1996, the directors of the company finalized the allotment of 4,000 10%
preference shares and 40,000 ordinary shares to the public and 10,000 ordinary shares to the
underwriters and directed the banker to refund the excess of application money.

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Chapter # 3
On February 10, 1996, the company allotted 4,000 ordinary shares of Rs.10 each
inconsideration of purchase price of machinery. The shares were issued at market price of
Rs.12.50 each.
REQUIRED
(i) Give dated entries in the General Journal of the Company for the above transactions.
(ii) Prepare initial balance sheet of the company on February 29, 1996.

Naveed Company Ltd. Was incorporated with an authorized capital of Rs.5,000,000 divided into
500,000 ordinary shares of Rs.10 each. The company took over the running business of M.M.
Brothers, with the following assets and liabilities:
Cash Rs.40,000
Accounts receivable Rs.200,000
Merchandise inventory Rs.360,000
Machinery Rs.800,000
Accounts payable Rs.400,000
The company issued to the vendor 104,000 ordinary shares of Rs.10 each fully paid as purchase
consideration.
REQUIRED
i) Give entries in the General Journal of Naveed Co. Ltd. to record the above transactions.
ii) Prepare initial balance sheet of the company.

Eastern Company Ltd. was incorporated with a capital of Rs.2,000,000 divided into 200,000
ordinary shares of Rs.10 each. The company took over the sunning business of Danish Brothers.
The balance sheet items of the business of Danish Brothers as of the date of purchase were as
under:-
Cash Rs. 20,000
Accounts receivable 56,000
Merchandise inventory 80,000
Office supplies 4,000
Machinery 200,000
Allowance for depreciation – Machine 120,000
Accounts payable 40,000
The company took over the business assets other than cash and assumed the liabilities. In
exchange, the company issued 15,000 ordinary shares of Rs.10 each as fully paid-up. The
company also made an additional issue of 30,000 shares of Rs.10 each at Rs.12 per share to the
public.
REQUIRED
(a) Give entries in the General Journal of Eastern Co. Ltd.
(b) Prepare initial Balance Sheet of the company.

Essani Company Ltd. offered 60,000 shares of Rs.20 each payable full with application. The
company received 90% application from public. The remaining shares were sold to underwriter
at 10% commission.
REQUIRED
Give necessary journal entries.

Sana & Co. was registered with an authorized capital of Rs.5,000,000 divided into 500,000
ordinary shares of Rs.10 each. The company offered 20,000 shares to the public payable in full
on application. The bank of the company informed that applications for 25,000 shares were

Page 53
Chapter # 3
received. The company allotted the offered shares and refunded the amount received in excess.
During the year, the company completed the following transactions:
i) Issued 6,000 ordinary shares at Rs.15 each for cash.
ii) Issued 3,000 shares to the promoters at par in consideration of their services of the Co.
iii) Issued 5,000 12% debentures of Rs.100 each at Rs.95 cash.
REQUIRED
Give entries in the General Journal of Sana & Co.

Al-Mansoor Co. Limited made the following transactions.
The par value of share is Rs.50 and of debenture Rs.100.
(a) The company issued 20,000 shares at Rs.60 each for cash.
(b) The company issued 10,000 shares at Rs.45 each for cash.
(c) The company issued 5,000 shares for purchase of a piece of land with market value of
Rs.300,000.
(d) The company issued 2,000 shares at par to the promoters of the company.
(e) The company issued 2,000, 10% debentures at Rs.100 each repayable after 5 years at
Rs.110 each.
(f) The company issued 2,000, 10% debentures at Rs.90 each repayable after 10 years at
Rs.110 each.
REQUIRED
Give necessary entries in proper form to record the above transactions. Give explanation below
each entry.

Mehran Company Ltd. made the following transactions. The par value of the share is Rs.10/- and
of the debenture is Rs.100/-.
(a) The company issued 10,000 shares at Rs.13/- each for cash.
(b) The company issued 10,000 shares for purchase of building which had a market value of
Rs.150,000/-.
(c) The company issued 1,000 shares to the promoters of the company.
(d) The company issues 1,000 10% debentures at Rs.100/- each repayable after 5 years at
Rs.110/- each.
(e) The company issued 1,000 10% debentures of Rs.90/- each repayable after 10 years at
Rs.110/- each.
REQUIRED
Give necessary general journal entries to record the above transactions. Give explanation below
each entry.

Consider the following cases of Iqbal Corporation separately:
i) Issued 1,500 shares of Rs.10/- each at Rs.15/- each for the purchase of land.
ii) Issued 1,000 shares of Rs.10/- at par for cash.
iii) Purchased a machine for Rs.72,000/- and issued sufficient number of shares.
(Market price of share is Rs.12/-).
iv) Issued 1,000 8% debentures of Rs.100/- at par redeemable at Rs.105/-.
v) Issued 2,000 9% debentures of Rs.100/- at Rs.90/- for cash.
REQUIRED
Record the above the transactions in General Journal.

Mehran Company Ltd. completed the following transactions:
(a) Issued 15,000 shares of Rs.10 at premium of Rs.2 each for cash.

Page 54
Chapter # 3
(b) Purchased building worth Rs.600,000 and issued 61,000 shares of Rs,10 each.
(c) Debentures of Rs.80,000 were settled by issue of sufficient number of shares of Rs.10 each.
(d) Purchased four computers of Rs.60,000 each by issuing sufficient number of shares of Rs.10
each. The market price of each share is Rs.12.
(e) The company issued 2,000 10% debentures of Rs.100 each at Rs.96 each payable at Rs.103
after 5 years.
REQUIRED
Prepare journal entries in the book of company to record the above transactions.

Aamna Ltd. was registered with the authorized capital of Rs.8,000,000 divided into the shares of
Rs.10 each. The company made the following transactions:
(a) Offered 500,000 shares to public at par. The bank informed that Rs.4,500,000 were
received. The directors made the final allotment.
(b) Issued 10,000 shares for the purchase of equipments at Rs.13 each.
(c) Issued 250,000 shares for the purchase of machinery costing Rs.2,250,000.
(d) Paid Rs.120,000 for preliminary expenses.
(e) Issued 2,000 8% debentures of Rs.100 each at Rs.95 for cash.
(f) Issued 1,000 10% debentures of Rs.100 each at Rs.105 each.
REQUIRED
(a) Record the above transactions in General Journal.
(b) What is the amount of company’s paid up capital?

Zulfiqar Ltd. registered with a capital of Rs.1,000,000 which is divided into 100,000 ordinary
shares @ Rs.10 each. During the year 2009 following transactions were completed.
(1) Issued 6,000 ordinary shares on full settlement of bonds payable of Rs.65,000.
(2) Issued 1,500 ordinary shares to the promoters for services rendered by them.
(3) Issued 4,000 5% 5 years debentures of Rs.100 at Rs.98 each.
(4) Purchased building for Rs.150,000 and issued ordinary shares which have a market
value of Rs.12.50 each.
REQUIRED
Prepare entries in General Journal (Show computation).

ABC Company Limited completed the following transactions. The par value of shares of Rs.10
and debentures Rs.100.
(b) Acquired land costing Rs.100,000 by issuing 7,000 shares at Rs.10 each.
(c) Purchased furniture and in consideration issued 5,000 shares at Rs.12 each.
(d) Issued 5,000 shares at par to the promoters of the company.
(e) Issued 1,000 10% 10 years debentures at Rs.100 each repayable after 10 years at Rs.105.
(f) Issued 2,000 15% debentures at Rs.95 repayable after 8 years at Rs.105.
REQUIRED
Give necessary journal entries in proper form to record the above transactions. Give explanation
below each entry.

The following transactions were completed by Amjad Co. Ltd. (the par value of share is Rs.10/-
each).
(a) Company offered to public 50,000 ordinary shares at par. The company received
application for 70,000 shares at Rs.15/- per share. Company allotted the shares offered
and refunded the amount received in excess.

Page 55
Chapter # 3
(b) The company purchased machinery for Rs.130,000/- and in consideration issued to
vendor, its own 11,000 ordinary shares of Rs.10/- each.
(c) The company issued 8,000 debentures of Rs.100/- each, redeemable after five years at
Rs.110/- each. All debentures were subscribed.
(d) Paid for preliminary expenses Rs.25,000/-.
REQUIRED
Prepare Statement of Profit and Loss for the period ended on December 31st, 2010.

Umer Company Ltd. issued the following shares and debentures having par value of Rs.10/- and
Rs.100/- each.
(a) The company received applications for 200,000 ordinary shares of Rs.10/- each. Allotment
letters were issued for 150,000 shares and the excess subscription amount was refunded.
(b) The promoters paid Rs.20,000 for printing of Memorandum of Association of the company.
(c) A computer was acquired by issuing 4,000 ordinary shares of Rs.10/- each fully paid up. The
market price per share was Rs.18/-.
(d) Issued 3,000 14% 5 years debentures of Rs.100/- each at par redeemable after 5 years at
Rs.105.
REQUIRED
Give entries in the General Journal of the company.

The following transactions were completed by Al-Murtuza Company Limited:-
(a) Issued 50,000 ordinary shares of Rs.10 each at Rs.12.50 per share to the public payable
in full on application. The company received applications for 80,000 shares. The
company allotted the shares offered and refunded the amount received in excess.
(b) The company issued to the public 50,000 ordinary shares of Rs.10 each payable in full
on application. The entire issue was guaranteed by the underwriters. The company
received applications for 40,000 shares. As per agreement the underwriters subscribed
the balance of the issuance.
(c) The company purchased machinery at a price of Rs.450,000 and consideration issued to
the vendors its own 43,000 ordinary shares of Rs.10 each.
(d) The company issued 10,000 debenture bonds of Rs.100 each redeemable at Rs.105 per
debenture after five years. All the debentures were subscribed.
(e) The company issued 10,000 debenture bonds of Rs.10 each at Rs.95 per debenture. The
debentures are redeemable at par after five years. All the debentures were subscribed.
REQUIRED
Give entries in the General Journal of the company to record the above transactions.

The Pakistan State Oil Ltd. Issued 1,000,000 ordinary shares of Rs.10/- each at Rs.9/- per share
to general public on Nov. 1, 2001 to argument its cash reserves. The bankers Habib Bank Ltd.
reported on 5th Nov. 2001 that the public offering was under-subscribed by 200,000 ordinary
shares. On Nov. 20, the board of directors finalized the allotment of 800,000 shares to the public
and the remaining 200,000 under-subscribed shares were allotted to the under-writers as per
agreement.
In addition to above, the PSO Ltd. made the following transactions:-
Nov. 25: Acquired land and building Rs.1,050,000/- and issued 100,000 ordinary shares
of Rs.10/- each at Rs.10.50/- per share to vendors in consideration of the assets
taken over.
Dec. 28: The company issued 2,500, 8% debentures at Rs.100/- each repayable after 5

Page 56
Chapter # 3
Dec. 29: The company issued 3,500, 11% debentures at Rs.90/- each repayable after 10
years at Rs.111/- each.
REQUIRED
Record general journal entries in standard form.

The following transactions were completed by Al-Mustafa Company Limited:-
(a) Offered 100,000 ordinary shares of Rs.10 each of Rs.12 per share to the public in full on
application. The company received applications for 120,000 shares. The company
allotted the shares offered and refunded excess amount received.
(b) The company offered to the public 40,000 ordinary shares of Rs.10 each payable in full
on application. The entire issue was under-written. The company received applications
for 30,000 shares. These shares were allotted to the public and as per agreement under-
writers subscribed the balance of the issue.
(c) The company purchased a piece of land and in consideration issued 45,000 ordinary
shares of Rs.10 each to the vendors. The value of land was determined to be Rs.500,000.
(d) The company allotted 10,000 ordinary shares to promoters for services rendered.
(e) The company issued 20,000 mortgage debentures of Rs.100 each, redeemable @ Rs.105
each after five years. All the debentures were duly subscribed.
(f) The company issued 10,000 ordinary debentures of Rs.100 each at Rs.90 per debenture.
The debentures are redeemable @ Rs.105 each after 10 years. All the debentures were
duly subscribed.
REQUIRED
Give entries in the General Journal of the company to record the above transactions.

A company offered to the public 100,000 ordinary shares at par at Rs.10 each. The bank
informed that applications of Rs.800,000 were received & the remaining shares were issued to
underwriters. The company also declared cash dividend of Rs.30,000 to the shareholders. The
cost of publications of prospectus and share certificates Rs.24,000 was paid by the company.
REQUIRED
Record the above in General Journal.

Zafar & Company Limited made the following issuance. The par value of the company’s share is
Rs.10:-
(a) Issued 15,000 shares at par for cash.
(b) Issued 18,000 shares at Rs.12 each for cash.
(c) Issued 9,000 shares at Rs.9 each for cash.
(d) Issued 12,000 shares for the purchase of furniture worth Rs.130,000.
(e) Issued 11,000 shares for the purchase of equipment worth Rs.100,000.
(f) Issued 3,000 shares at par value to the promoters of the company for services rendered
by them
(g) Issued 7,000 shares at par in payment of stock dividend.
REQUIRED
Record the above transactions in the General Journal of the company.

Shuja & Co. Ltd. issued ordinary shares (Rs.10/- par) during 1992, as noted below:-
(a) 10,000 shares of Rs.14/- each for cash.
(b) 4,000 shares of Rs.9/- each for cash.
(c) 5,000 shares for the purchase of machine (market price of share being Rs.13/- each).
(d) 4,000 shares at par to the promoters, for services rendered.

Page 57
Chapter # 3
(e) 3,000 shares for purchase of equipment having list price of Rs.32,000.
(f) 6,000 shares at par as stock dividend.
REQUIRED
Give entries in General Journal of the company to record the above transactions (Show
computations, where necessary).

Consider the following cases separately wherein the par value of shares and debentures are
Rs.10 and Rs.100 respectively.
Cases:
(a) Issued 10,000 shares at Rs.12 per share for cash.
(b) Issued 7,000 shares to the promoters at par.
(c) Issued 5,000 8% debentures at Rs.90 each repayable after 10 years at Rs.110 each.
(d) Declares sock dividend Rs.40,000.
(e) Purchased equipment and issued 3,500 shares of Rs.10 each. The market value of the
shares is Rs.15.
(f) Purchases furniture for Rs.45,000 and issued 4,000 shares of Rs.10 each.
(g) Issued 3,200 shares against stick dividend. The market price is Rs.12.50 per shares.
REQUIRED
Give entries in General Journal (standard form) to record the above transactions with brief
narrations.

Mehran & Co. Ltd. completed the following transactions during the accounting year 1994. (The
par value of shares is Rs.10/- each).
(a) Offered 90,000 shares to the public for cash, but received applications along with cash for
120,000 shares. The company allotted the shares offered and refunded the excess money.
(b) Acquired equipment at a fair market value of Rs.200,000 and issued 16,000 shares of Rs.10
each at Rs.12.50 per share to the vendors.
(c) Acquired land at a cost of Rs.200,000 & issued 22,000 shares of Rs.10/- each to the vendors.
(d) Decided to capitalize Rs.100,000 against retained earnings having a balance of Rs.300,000
and issued 8,000 shares of Rs.10/- each.
REQUIRED
(a) Give entries in the General Journal of the company to record the above transactions.
(b) Prepare partial balance sheet of the company.

Consider the following cases of Shehzad Shoukat & Co. separately wherein the par values of
shares and debentures are Rs.10 and Rs.100 respectively.
(a) Offered 20,000 shares to the public at par. Applications were received for 24,000 shares.
The directors made the final allotment and instructed the bank to refund the excess money.
(b) Issued 2,000, 17% debentures at Rs.95 repayable after 5 years at Rs.105.
(c) Purchased an open plot for office building for Rs.1,650,000 and issued a sufficient number of
shares at Rs.15 each.
(d) Decided to capitalize Rs.400,000 against retained earnings and then issued shares at
premium of Rs.16.
(e) Issued 13,000 shares at par for the purchase of three computers @ Rs.20,000 each.
REQUIRED
Give General Journal entries to record the above transactions.

Page 58
Chapter # 3
MULTIPLE CHOICE QUESTIONS (MCQS)

1) Which of the following will be the highest amount?
a) Paid – up capital b) Authorized capital
c) Subscribed capital d) Reserve capital
2) Which of the following is a category of share capital of a company?

a) Authorized capital b) Issued capital
c) Called – up capital d) All of the above
3) An ordinary share dividend is:

a) Part of the company profits used to reward the shareholders for their investment
b) Interest on money lent to the company by its shareholders
c) An expense of running the company
d) The directors’ remuneration
4) In Pakistan, the companies are registered under:

a) Company Act, 1931 b) Partnership Act, 1932
c) Companies Ordinance, 1984 d) Cooperative Act, 1928
5) A company is formed by:

a) Owners b) Promoters c) Directors d) Government
6) A company is managed by:

a) Owners b) Promoters c) Directors d) Public
7) The word “limited” should be after the name of:

a) Chartered company b) Statutory company
c) Registered company d) Partnership
8) The face value of share is called:

a) Book value b) Par value c) Market value d) None of them
9) Ordinary shares are also called:

a) Equity shares b) Founders shares
c) Preference shares d) Deferred shares
10) The minimum members in private limited company are:

a) 2 b) 7 c) 10 d) 20
11) The minimum members in public limited company are:

a) 2 b) 7 c) 20 d) 50
12) The maximum number of members in private limited company are:

a) 20 b) 30 c) 50 d) Unlimited
13) The maximum number of members in public limited company are:

a) 50 b) 20 c) 10 d) Unlimited
14) The person who takes the risk of issuing shares is known as:
a) Director b) Promoter c) Public d) Underwriter

Page 59
Chapter # 3
15) Discount on issue of shares account being a loss of:
a) Capital b) Revenue c) Expenditure d) None of above
16) Preliminary expense is:

a) Current asset b) Current liability
c) Factious asset d) Operating expense
17) Debenture holders are:

a) Owners b) Creditors c) Directors d) Suppliers
18) Debenture holders receive:

a) Fixed interest b) Dividend c) Profit d) None of them
19) Debenture can be issued at:

a) Par b) Premium c) Discount d) All of them
20) Memorandum of association of private limited company is signed by:

a) Auditor b) Manager c) Secretary d) Promoters
21) A private invitation to the public to purchase the shares of company is called:
a) Prospectus b) Audit report
c) Articles of association d) Memorandum of association
22) A document which contains the rules and regulations for the internal management
of the company is called:
a) Prospectus b) Audit report
c) Articles of association d) Memorandum of association
23) The company is managed by the group of persons known as:

a) Board of directors b) Group of members
c) Team of shareholders d) None of them
24) A share of public company is:

a) Non-refundable b) Non-transferable c) Transferable d) Non-allotable
25) Total amount of capital in case of company is divided into small units, these units
are called:
a) Bonds b) Cheques c) Shares d) Reserves
26) Authorized capital is also known as:

a) Issued capital b) Registered capital
c) Paid – up capital d) Called – up capital
27) This is not shown in the shareholder’s equity section of balance sheet:
a) Ordinary share capital b) Ordinary share premium
c) Retained earnings d) Dividend payable
28) The amount mentioned in Memorandum of Association is called:

a) Authorized capital b) Subscribed capital
c) Issued capital d) Reserve capital

Page 60
Chapter # 3
29) Debentures are the certificate of:
a) Ownership b) Medical for company’s employees
c) Receipt of loan acknowledgement d) None of these
30) The periodic distribution of profit, by a company in the form of cash, is called:
a) Stock dividend b) Liquidating dividend
c) Cash dividend d) Property dividend
31) Owners of a limited company are known as:

a) Auditors b) Directors c) Shareholders d) Bond holders
32) The excess amount on issue of share price, over the par value is called:
a) Discount b) Retained earning c) Liability d) Share premium
33) The term debentures means:

a) Short term loan b) Capital c) Long term loan d) None of these
34) A person who buys shares of a company is known as:

a) A shareholder b) A director c) A partner d) None of above
35) A joint stock company (private or public) raises its capital by issuing:
a) Audit reports b) Shares
c) Certificate of incorporation d) Certificate of commencement
36) The joint stock company is formed under companies’ ordinance:

a) 1984 b) 1978 c) 1884 d) 2004
37) Debenture represents:

a) The investment of equity shareholders b) Director shares in business
c) Long-term liabilities of a business d) Short-term liabilities of a business
38) Discount on issue of share is shown in the balance sheet as an:

a) Asset b) Liability
c) Deduction from paid up capital d) Deduction from asset side
39) What is the meaning of a company’s authorized capital?

a) The total number of share capital is allowed to issue
b) The maximum amount of loan capital prescribed by its articles of association
c) The amount of share capital it has issued
d) The amount of share capital for which payment has been received from subscribers
40) This is shown in the shareholders equity section of balance sheet:

a) Unclaimed dividend b) Cash dividend payable
c) Share premium d) Preliminary expenses
41) Choose the odd one:

a) Machine cost b) Organization cost
c) Foundation cost d) Preliminary expenses
42) Issued capital is known as:

a) Paid up capital b) Subscribed capital
c) Shares allotted d) All of these

Page 61
Chapter # 3
43) The word “limited” means:
a) Limited by assets b) Limited by revenues
c) Limited by liabilities d) Limited by expenses
44) Initially expenses or cost to use establishment of the corporation is known as in

terms of accounting as:
a) Establishment cost b) Preliminary expenses
c) Cost d) Initial cost

Page 62

Chapter # 3: Accounting For Company - Issuance of Shares & Debentures

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Chapter # 3

Accounting for Company –

Principles of Accounting – XII

WHAT THE EXAMINER USUALLY ASK?

 General Journal entries for issuance of shares:

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On the Basis of Incorporation:

A statutory company is one which is created by a special act of

A registered company is one which is registered in accordance with

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On the Basis of Liability:

A company in which the liability of its members is limited by its

Private firm (such as a sole proprietorship or general partnership)

(1) ORDINARY SHARES

CHARACTERISTICS OF ORDINARY SHARES

(2) PREFERENCE SHARES

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CHARACTERISTICS OF PREFERENCE SHARES

KINDS OF PREFERENCE SHARES

On the Basis of Dividend:

On the Basis of Conversion:

On the Basis of Redemption:

TYPES OF SHARE CAPITAL

The amount of the authorized share capital of a company for which

Called – up capital is the part of the issued share capital of a company

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GENERAL JOURNAL ENTRIES

ISSUE OF SHARES AT PAR

ILLUSTRATION # 1: (Issued at Par)

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ILLUSTRATION # 2: (Issued at Par)

ISSUE OF SHARES AT PREMIUM

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ILLUSTRATION # 3: (Issued at Premium)

ILLUSTRATION # 4: (Issued at Premium)

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ISSUE OF SHARES AT DISCOUNT

ILLUSTRATION # 5: (Issued at Discount)

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ISSUE OF DEBENTURES AT PAR AND PAYBACK AT PAR

ILLUSTRATION # 6: (Issued at Par and Payback at Par)

ISSUE OF DEBENTURES AT PREMIUM AND PAYBACK AT PAR

ILLUSTRATION # 7: (Issued at Premium and Payback at Par)

ISSUE OF DEBENTURES AT DISCOUNT AND PAYBACK AT PAR

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ILLUSTRATION # 8: (Issued at Discount and Payback at Par)

ISSUE OF DEBENTURES AT PAR AND PAYBACK AT PREMIUM

ILLUSTRATION # 9: (Issued at Par and Payback at Premium)

ISSUE OF DEBENTURES AT DISCOUNT AND PAYBACK AT

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ILLUSTRATION # 10: (Issued at Discount and Payback at Premium)

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Question # 2: 1998 Regular & Private – BIEK

Question # 3: 1994 Regular & Private – BIEK

Question # 4: 2003 Private – BIEK

Question # 5: 2003 Regular – BIEK

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Question # 6: 2005 Regular & Private – BIEK

Question # 7: 2007 Regular & Private – BIEK

Question # 8: 1996 Regular & Private – BIEK

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