Chapter # 1 Issuance of Shares

ADVANCED FINANCIAL ACCOUNTING
B.COM 2
CHAPTER # 1
JOINT STOCK COMPANY
INTRODUCTION
Rooh-Ullah Khan (M.Com)

0333-87 86 389
THE STANDARD GIRLS COLLEGE

Advanced Financial Accounting Page |1
1. Joint Stock Company (J.S.C)

An artificial person created by law, with a common seal and having perpetual life.
2. Separate Legal entity

It means company is different from owners. It enjoys many of the rights of artificial person. For
example it can purchased property on its own name.
3. Perpetual existence of a company

It means Joint Stock Company has a continuous life. The death or insolvency of shareholders
does not affect the life of the company.
4. Common seal of a company

Company is an artificial person so it cannot make sign. A seal is used for signature purpose
which is called common seal. It is also called official signature of company.
5. Company limited by share

It is a type of company in which liability of shareholders is limited up to unpaid balance of
shares if any.
6. Private limited Company

A company which is formed by at least 2 and maximum 50 members. It can not invite general
public to purchases shares or debentures.
7. Public limited company

A company which is formed by at least 7 members. There is no limit of maximum number of
members. It can invite general public to purchase shares or debentures of company.
8. Company limited by guarantee

A company in which the liability of members is limited up to a guaranteed amount at time of
winding up.
9. Unlimited company
A Company in which liability of members is unlimited. In case of insolvency personal property
of members is also liable to pay debts.
10. Association not for profit

It is an organization which is formed for the promotion of commerce, art, religion etc. It has
same rights like limited company but cannot use word limited with its name.
11. Memorandum of association

It is the basic document of the company. Company can do only those activities which are
mentioned in MOA.
12. Article of Association

It is second important document in the incorporation of a company. It contains the rules and
regulations for the internal management of the company.
Roohullah (M.Com) 0333-87 86 389 Lecturer: The Standard College

13. Prospectus
It is a document which is issued by company to invite general public to purchase share or
debentures of the company.
14. Share
Total amount of capital of a company is divided into smaller units. Each unit is called share.
15. Share Capital

The total par value of shares of a company is called share capital.
16. Authorized capital

The capital with which the company is registered is called authorized capital. It is also called
nominal or registered capital.
17. Issued capital

The total par value of shares offered to general public is called issued capital.
18. Subscribed Capital

The total par value of shares taken up by public is called subscribed capital.
19. Called up Capital

The portion of subscribed capital which is called up by the company from public is called called-
up capital.
20. Paid-up Capital

The total amount received by the company out of called up capital is called paid-up capital.

21. Reserve Capital

The portion of subscribed capital which the company, through a special resolution, reserves to
call in the event of winding up.
22. Primary expenses / Preliminary expenses

All the expenses which are incurred to start the business are called primary expenses. For
example registration fee, cost of printing documents etc.
23. Underwriting commission

Commission paid to underwriters for the sale of shares is called underwriting commission.
24. Par value of share

The value which is assigned to a unit of share is called par value of share. It is also known as
nominal value or face value.
25. Book value of share

The value of share according to books of the company is called book value of share.
26. Market value of share

The price at which buyer is willing to purchase and seller is willing to sell is called market value
of share.
27. Over Subscription

Over subscription means to receive more applications than shares offered to general public.
28. Under Subscription

Under subscription means to receive less applications than shares offered to general public.
29. Issue of share at premium

If the par value of a share is Rs. 100 and it is issued at Rs. 110 it is called shares issued at
premium.
30. Issue of share at Discount

If the par value of a share is Rs. 100 and it is issued at Rs. 90 it is called shares issued at
discount.

Issuance of Shares
Shares can be issued to following parties
1. General public
2. Directors
3. Underwriters
4. Promoters
Journal Entries for issuance of shares
General Public Directors / Underwriters
(i) When applications received Bank A/c

Shares Capital A/c
Bank A/c
Shares applications A/c
(ii) When shares issued Shares issued to promoters against

preliminary expenses
Shares capital A/c Preliminary expenses
Shares Capital A/c
(iii) When excess money refunded

Bank A/c
Shares can be issued at Par, Premium

& Discount Issued at Discount
Issued at Premium General Public
General Public (i) Bank A/c

(i) Bank A/c
Shares Applications A/c (ii) Shares applications A/c
Shares Discount A/c
(ii) Shares Applications A/c Shares capital A/c
Shares capital A/c
Shares premium A/c

Issued at Premium Issued at Discount
Directors / Underwriters Directors / Underwriters
Bank A/c Bank A/c

Shares capital A/c Shares Discount A/c
Shares premium A/c Shares Capital A/c
Issuance of shares other than Cash
Issuance of shares to vendor for the Shares issued to pay off Debt
Purchase of Assets
(i) When Asset Purchased Long term Debt A/c
Shares capital A/c
Assets A/c
Vendor A/c
(ii) When shares issued
Vendor A/c
Shares capital

ILLUSTRATIONS
1. Hammad Ltd. was registered with an authorized capital of Rs. 20,00,000 divided into 200,000
shares of Rs. 10, each. The company issued 80,000 ordinary shares to general public for
subscription at par value on 1st July 2010. Subscription date was fixed as 15th July. Pass the
entries in the books of the company if applications for 80,000 shares were received
Shares were allotted on 31st July 2010.
Also show how the figures would appear in the balance sheet of the company.
Solution
JOURNAL
Date Details L/F Rs. Rs.
2010
July 15 Bank A/c (80000×10) 800,000
Shares applications A/c 800,000
(Applications received with money)
July 31 Shares applications A/c (80000×10) 800,000
Shares capital A/c 800,000
(Shares allotted to applicants)
Hammad Ltd.
Balance sheet
As on 31st July 2010
Share Capital & Liabilities Rs. Assets Rs.

Authorized capital Current Assets
200,000 shares @ Rs. 10 each 20,00,000 Bank 800,000
Issued, subscribed and paid up
capital
80,000 shares @ Rs. 10 each 800,000
800,000 800,000
2. Hammad Ltd. was registered with an authorized capital of Rs. 20,00,000 divided into 200,000

JOURNAL
2010
July 15 Bank A/c (95000×10) 950,000
July 31 Shares applications A/c (80000×10) 800,000
July 31 Shares applications A/c 150,000
Bank A/c (15000×10) 150,000
(Excess money refunded)
Hammad Ltd.
Balance sheet
As on 31st July 2010

200,000 shares @ Rs. 10 each 20,00,000 Bank (950,000 – 150,000) 800,000
capital
80,000 shares @ Rs. 10 each 800,000
800,000 800,000
3. Crescent Ltd. was registered with an authorized capital of Rs. 250,000 divided into 25,000
shares of Rs. 10 each. On June 1, 2003 Decent Ltd. issued 25,000 ordinary shares @ Rs. 10 each.
Out of these 25,000 shares, 5,000 shares were issued to directors and remaining to the general
public. On 15th June (the subscription date) applications were received for 15000 shares.
Consequently 5000 shares were taken up by the underwriters as per agreement. On 30th June,
2003 the company allotted shares.
Pass the journal entries in the books of the company and draft a balance sheet.
JOURNAL
2003
June 1 Bank A/c (5000×10) 50,000
(Shares issued to directors)
June 15 Bank A/c (15000×10) 150,000
June 30 Shares applications A/c (15,000 × 10) 150,000

June 30 Bank A/c (5000×10) 50,000

(Shares issued to underwriters)
Crescent Ltd.
Balance sheet
As on 30 June 2003

25,000 shares @ Rs. 10 each 250,000 Bank 250,000
capital
5000 shares @ Rs. 10 each to
directors 50,000
General public 150,000
underwriters 50,000
250,000 250,000
4. A Limited company was registered with an authorized capital of Rs. 10,00,000 divided into
20,000 shares of Rs. 50 each. On 1st November 2010 Company issued 14000 shares in the
following manner
2000 shares to promoters against preliminary expenses
4000 share to directors for cash
8000 share to general public
On 15th November 2010 company received applications for 10,000 shares. Shares were not
allotted to applicants of 2000 share and their application money was refunded.
Record the above information in company’s books and show the figures in the Balance sheet.
JOURNAL
2010
Nov. 1 Preliminary expenses(2000×50) 100,000
(Shares issued to promoters)
Nov. 1 Cash A/c (4000×50) 200,000
(Shares issued to directors)
Nov. 15 Bank A/c (10000×50) 500,000
Nov. 15 Shares applications A/c (8000×50) 400,000

Nov. 15 Shares applications A/c (2000×50) 100,000

Bank A/c 100,000
Balance sheet
As on 30 June 2010

Authorized capital Deferred Cost
20,000 shares @ Rs. 50 each 10,00,000 Preliminary expenses 100,000
capital Current Assets
2000 shares @ Rs. 50 each to Cash 200,000
promoters 100,000 Bank (500,000 – 100,000) 400,000
Directors 200,000
General Public 400,000
700,000 700,000
5. On 1st Jan. 2010 a company was registered with an authorized capital of 50,000 shares of Rs.
10 each. On 1st Jan. the company issued 10,000 shares of Rs. 10 each to general public at 10%
premium. Applications were received for 15000 shares on 15th Jan. On 30th Jan. shares were
allotted and money was refunded to the applicants of 5000 shares.
Record the above transactions in the books of the company and draft the Balance sheet.
JOURNAL
2010
Jan. 15 Bank A/c (15000×11) 165,000
Jan. 30 Shares applications A/c (10000×11) 110,000
Shares capital A/c (10000×10) 100,000
Shares premium A/c(10000×1) 10,000
Jan. 30 (Shares allotted to applicants)
Shares applications A/c (5000×11) 55,000
Bank A/c 55,000

Advanced Financial Accounting P a g e | 10
Balance sheet
As on 30 Jan. 2010

capital
10,000 shares @ Rs. 10 each 100,000
Reserve
Share premium 10,000
110,000 110,000
6. Bashir Ltd. with an authorized capital of Rs. 5,00,000 divided into 50,000 shares of Rs. 10
each decided to issued 10,000 shares of Rs. 10 each at 10% discount. The issued was permitted
by the authorities. Applications were received for 8000 shares. Shares were allotted.
Make the necessary entries and prepare the Balance sheet.
JOURNAL
2010
Jan. 15 Bank A/c (8000×9) 72,000
Jan. 30 Shares applications A/c (8000×9) 72,000
Shares Discount (8000×1) 8,000
Balance sheet
As on 30 Jan. 2010

capital Deferred Cost
8,000 shares @ Rs. 10 each 80,000 Shares discount 8,000
80,000 80,000

7. A trading Corporation was formed with an authorized capital of 60,000 ordinary shares of Rs.
1000 each. On 1st Jan. 2010, the company issued 40,000 share to the general public and 5000
share were issued to a vendor, Mr. Akmal from whom company had acquired machinery worth
Rs. 5,000,000 on 1st Jan. 2010. Applications were received on 10th Jan. 2010 only for 30000
shares and consequently 10,000 shares were taken up by the underwriters. On 20th Jan. 2010
shares were allotted to the applicants.
Pass the journal entries in the books of the company and show the Balance sheet.
JOURNAL
2010
Jan. 1 Machinery A/c 5,000,000
Mr. Akmal A/c 5,000,000
(Asset purchased from vendor)
Jan. 1 Mr. Akmal A/c (5000×1000) 5,000,000
Shares capital A/c 5,000,000
(Shares issued to vendor)
Jan. 10 Bank A/c (30000×1000) 30,000,000
Shares applications A/c 30,000,000
Jan. 20 Shares applications A/c (30000×1000) 30,000,000
Jan. 20 Bank A/c (10000×1000) 10,000,000
(Shares issued to underwriters)
Balance sheet
As on 20 Jan. 2010

Authorized capital Fixed Assets
60,000 shares @ Rs. 1000 each 60,000,000 Machinery 5,000,000
capital Current Assets
5000 shares @ Rs. 1000 each to Bank 40,000,000
vendor 5,000,000
General public 30,000,000
underwriters 10,000,000
45,000,000 45,000,000

8. Irfan Textiles Ltd. acquired the business of M/s Haroon & Sons. The assets and liabilities of
M/s Haroon & Sons at book value are given below.
Land & Building 25,000 Sundry Creditors 5,000

Machinery 20,000
Furniture 7,000
Debtors 3,000
The purchase consideration is to be paid by the company in fully paid up shares of Rs. 10 each.
Pass the journal entries if the shares are issued:
(a) At par (b) At 100% premium (c) At 50% discount.
Solution
JOURNAL
Land & Building A/c 25000
Machinery A/c 20000
Furniture A/c 7000
Debtors A/c 3000
Sundry Creditors A/c 5000
M/s Haroon A/c 50000
(Business purchased from vendor)
M/s Haroon A/c 50,000
Shares capital A/c(2500×10) 25,000
Share premium (2500×10) 25,000
Share Discount (10000×5) 50,000
No. of Shares issued to vendor

=
(a) At Par (b) At 100% Premium (c) At 50% Discount

= Rs. 50,000 / 10 = Rs. 50,000 / 20 = Rs. 50,000 / 5
= 5000 shares = 2500 Shares = 10,000 Shares

PROBLEMS
1. Sohail Ltd. was registered with an authorized capital of Rs. 40,00,000 divided into 400,000
Ans. Balance sheet Rs. 20,00,000
2. Sohail Ltd. was registered with an authorized capital of Rs. 40,00,000 divided into 400,000
3. Decent Ltd. was registered with an authorized capital of Rs. 500,000 divided into 50,000
shares of Rs. 10 each. On June 1, 2003 Decent Ltd. issued 50,000 ordinary shares @ Rs. 10 each.
Out of these 50,000 shares, 10,000 shares were issued to directors and remaining to the general
public. On 15th June (the subscription date) applications were received for 35000 shares.
Consequently 5000 shares were taken up by the underwriters as per agreement. On 30th June,
2003 the company allotted shares.
Pass the journal entries in the books of the company and draft a balance sheet.
Ans. Balance sheet Rs. 500,000
4. On May 1, 2010 Salman & Co Ltd. offered 40,000 shares @ Rs. 10 each for public
subscription. On May 10 2010 it is made known to the company that applications were received
for 35000 shares. The 5000 shares not taken by the public and as per agreement, taken by the
underwriters. On May 20, 2010 the company allotted the shares. Pass the journal entries and
draft Balance sheet on the company.
5. A Limited company was registered with an authorized capital of Rs. 500,000 divided into
10,000 shares of Rs. 50 each. On 1st November 2010 company issued 7000 shares in the
following manner
1000 shares to promoters against preliminary expenses
2000 share to directors for cash
4000 share to general public

On 15th November 2010 company received applications for 6000 shares. Shares were not allotted
to applicants of 2000 share and their application money was refunded.
Record the above information in company’s books and show the figures in the Balance sheet.
6. A limited company was registered with an authorized capital of Rs. 10,00,000 divided into
100,000 shares of Rs. 10 each. On 1st August 2010 15000 shares were issued to promoters in
connection with their services and preliminary expenses paid by them. 50,000 shares were
offered to the general public for subscription. Applications were received for 60,000 shares on
the 10th August, 2010 the subscription date. On 25th August 2010 shares were allotted to the
applicants of 50,000 shares and the excess applications money was refunded. Pass the journal
entries and show how would they appear in the Balance sheet.
7. Dewan Corporation Limited was formed with an authorized capital of Rs. 20,000 shares of Rs.
50 each. 5000 shares issued to the directors on 10th May, 2010 and 10,000 shares were offered to
the public for subscription. The applications were received for only 8000 shares on 20th May
2010. The shares were allotted to the applicants on 5th June, 2010. The remaining shares were
taken by the underwriters on 6th June, 2010 as per agreement. Pass the necessary journal entries
in the books of the company.
8. On 1st Jan. 2003 a company was registered with an authorized capital of 100,000 shares of Rs.
10 each. On 1st Jan. the company issued 20,000 shares of Rs. 10 each to general public at 10%
premium. Applications were received for 35000 shares on 15th Jan. On 30th Jan. shares were
allotted and money was refunded to the applicants of 15000 shares.
Record the above transactions in the books of the company and draft the Balance sheet.
9. On 1st July 2010 Noor Chemicals Ltd. was formed with an authorized capital of 500,000
shares of Rs. 10 each. The management of the company decided to issued 100,000 shares at a
premium of Rs. 2 per share. Applications were received for 120,000 shares. Share were allotted
and money was refunded for applicants of 20,000 shares.
Pass the necessary journal entries and draft balance sheet of the company.
10. Asif Bashir Ltd. with an authorized capital of Rs. 10,00,000 divided into 100,000 shares of
Rs. 10 each decided to issued 20,000 shares of Rs. 10 each at 10% discount. The issued was
permitted by the authorities. Applications were received for 15000 shares. Shares were allotted.
Make the necessary entries and prepare the Balance sheet.

11. Asif Ltd. with an authorized capital of 100,000 share of Rs. 10 each passed a resolution in a
general meeting to issue 40,000 shares at a discount of 5%. 10,000 shares were issued to
directors and 30,000 shares were offered to general public. Applications were received for 25000
shares and subsequently shares were allotted. Record the transactions in the books of the
company and show the reflection in the Balance sheet.
12. A trading Corporation was formed with an authorized capital of 50,000 ordinary shares of
Rs. 1000 each. On 1st Jan. 2010, the company issued 30,000 share to the general public and
5000 share were issued to a vendor, Mr. Asghar from whom company had acquired machinery
worth Rs. 50,00,000 on 1st Jan. 2010. Applications were received on 10th Jan. 2010 only for
25000 share and consequently 5000 shares were taken up by the underwriters. On 20th Jan. 2010
shares were allotted to the applicants.
Pass the journal entries in the books of the company and show the Balance sheet.
Ans. Balance sheet Rs. 3,50,00,000
13. Imran Textiles Ltd. acquired the business of M/s Noor & Sons. The assets and liabilities of
M/s Noor & Sons at book value are given below.
Land & Building 50,000 Sundry Creditors 10,000

Machinery 40,000
Furniture 14,000
Debtors 5,000
The purchase consideration is to be paid by the company in fully paid up shares of Rs. 10 each.
Pass the journal entries if the shares are issued:
(b) At par (b) At 10% premium (c) At 10% discount.

Chapter # 1 Issuance of Shares

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ADVANCED FINANCIAL ACCOUNTING

Rooh-Ullah Khan (M.Com)

THE STANDARD GIRLS COLLEGE

1. Joint Stock Company (J.S.C)

2. Separate Legal entity

3. Perpetual existence of a company

4. Common seal of a company

5. Company limited by share

6. Private limited Company

7. Public limited company

8. Company limited by guarantee

10. Association not for profit

11. Memorandum of association

12. Article of Association

Roohullah (M.Com) 0333-87 86 389 Lecturer: The Standard College

15. Share Capital

16. Authorized capital

17. Issued capital

18. Subscribed Capital

19. Called up Capital

20. Paid-up Capital

Roohullah (M.Com) 0333-87 86 389 Lecturer: The Standard College

21. Reserve Capital

22. Primary expenses / Preliminary expenses

23. Underwriting commission

24. Par value of share

25. Book value of share

26. Market value of share

27. Over Subscription

28. Under Subscription

29. Issue of share at premium

30. Issue of share at Discount

Roohullah (M.Com) 0333-87 86 389 Lecturer: The Standard College

Journal Entries for issuance of shares

General Public Directors / Underwriters

(i) When applications received Bank A/c

(ii) When shares issued Shares issued to promoters against

Shares applications A/c

Shares can be issued at Par, Premium

Issued at Premium General Public

General Public (i) Bank A/c

Roohullah (M.Com) 0333-87 86 389 Lecturer: The Standard College

Issued at Premium Issued at Discount

Directors / Underwriters Directors / Underwriters

Bank A/c Bank A/c

Issuance of shares other than Cash

(ii) When shares issued

Roohullah (M.Com) 0333-87 86 389 Lecturer: The Standard College

Shares were allotted on 31st July 2010.

Share Capital & Liabilities Rs. Assets Rs.

Shares were allotted on 31st July 2010.

Roohullah (M.Com) 0333-87 86 389 Lecturer: The Standard College

Share Capital & Liabilities Rs. Assets Rs.

Roohullah (M.Com) 0333-87 86 389 Lecturer: The Standard College

June 30 Bank A/c (5000×10) 50,000

Share Capital & Liabilities Rs. Assets Rs.

Roohullah (M.Com) 0333-87 86 389 Lecturer: The Standard College

Nov. 15 Shares applications A/c (2000×50) 100,000

Share Capital & Liabilities Rs. Assets Rs.

Roohullah (M.Com) 0333-87 86 389 Lecturer: The Standard College

Share Capital & Liabilities Rs. Assets Rs.

Share Capital & Liabilities Rs. Assets Rs.

Roohullah (M.Com) 0333-87 86 389 Lecturer: The Standard College