Accounting for issue of shares and debentures

Define

the issue price of shares Differentiate between preference shares, ordinary chares and deferred shares Distinguish between issued capital, uncalled capital and share capital or paid-up capital Describe the concept of partly paid shares and calls on unpaid share capital Account for public company share issues Define the various costs associated with share issues and account for those costs Differentiate between debentures, mortgage debentures and unsecured notes Account for the issue and redemption of debentures

Share Capital
Owners of companies are called shareholders Founding members are also known as subscribers All shareholders are sometimes referred to as members Shares in a Public company can be purchased when the company issues a prospectus Shares in a Public company can also be traded on the stock exchange

Issue price of shares

Maximization

of shareholder wealth Effect on the market price of existing shares Requirement to sell a desired volume of shares Expectation of future profits and dividends to service the new shares Whether ASX listing is proposed or already exists Usage of an underwriter

Uncalled and paid up share capital

Shares

can be issued to be paid in full or issued partly paid with the balance paid at a future date(s) Amounts to be paid at a future date are referred to as calls A companys share capital is also referred to as paid-up capital = number of shares issued by the amount that the directors require as payment of shares The amount not required for payment is referred to as the uncalled amount Share Capital Uncalled capital No of shares issued Amt called/uncalled

100,000 0.50 $50,000

100,000 1.50 $150,000

Total

Classes of Shares
Ordinary

Shares Preference Shares Deferred or founder Shares

Ordinary Shares
Basic

type Full voting rights Right to receive dividends

Preference Shares
Preferential

rights to a fixed rate of dividends before dividends to ordinary shareholders are declared Repayment of capital when company is wound up Participation in surplus assets and profits Cumulative and non-cumulative dividends Voting rights Priority of payment of capital and dividends

Deferred or Founder Shares

Issued

to initial subscribers Dividends usually paid after being paid to other shareholders Founders are shareholders who start up the company before shares are issued to the public Provider establishment costs and issue the prospectus

Share Issue Procedure

Registration

of members Disclosure of rights and liabilities of share issue The class of share being issued Share price and no of shares issued The amount that must be paid for each share with the application (on allotment and future calls) The minimum subscription The allotment process The treatment of over subscription

Procedure for issuing shares under a prospectus

The

Prospectus together with an application form is made available to the general public. Application monies are held in trust Minimum subscription must be received before allotment Allotment at directors discretion Allotment advice is communicated to the applicant Allotment monies may be required at this stage.

Share capital issued upon the registration of a company

Subscribers Dr Share Cr Capital Issue shares to Subscribers

Bank Dr Subscribers Cr Subscriber Receipt upon Payment

Share capital issued by prospectus

Payment

in full on application Part payment on application, balance payable on allotment of the shares Part payment on application and allotment, with the balance payable in calls

Shares issued fully paid on application

Fully

paid on application Number of shares issued by the directors agrees exactly with the no applied for All applicants have been received with the full amount

Shares issued fully paid on application Journal Entry

Trust Account Application General Journal Dr Cr

Record the receipt of monies from applicants

Shares issued fully paid on application Journal Entry

General Journal Application Dr Share Cr Capital Allot shares to Applicants

Shares issued fully paid on application Journal Entry

Bank General Journal Dr

Trust Cr Account Issuing of Shares to Applicants

Under subscribed and oversubscribed share issue Jnl Entry

General Journal Trust Acc Dr Application Cr

Applicants deposits

Under subscribed and oversubscribed share issue Jnl Entry Cont.

General Journal Application Dr Share Cr Capital Allot shares to Applicants

Under subscribed and oversubscribed share issue Jnl Entry Cont.

General Journal Application Dr Trust Acc Cr

Refund Applicants deposits

Under subscribed and oversubscribed share issue Jnl Entry Cont.

Bank General Journal Dr Cr

Trust Acc

Issue Shares to Applicants

Shares issued partly paid on application with the balance payable on allotment
Trust Account Application General Journal Dr Cr

Record receipt of application monies

Shares issued partly paid on application with the balance payable on allotment
General Journal Application Dr Share capital Cr

Allot shares to applicants

Shares issued partly paid on application with the balance payable on allotment
Bank General Journal Dr Cr

Trust Acc

Transfer trust account money

Shares issued partly paid on application with the balance payable on allotment
General Journal Allotment Dr Share capital Cr

Shares issued partly paid on application with the balance payable on allotment
Bank General Journal Dr Cr

Allotment

Shares issued payable on application and allotment and subject to future calls
General Journal Trust Account Dr Application Cr

Record receipt of application monies

Shares issued payable on application and allotment and subject to future calls
General Journal Application Dr Share capital Cr

Allot shares to applicant

Shares issued payable on application and allotment and subject to future calls
Bank General Journal Dr Cr

Trust Account

Transfer trust account monies

Shares issued payable on application and allotment and subject to future calls
General Journal Allotment Dr Share capital Cr

Record amount owing on allotment

Shares issued payable on application and allotment and subject to future calls
Bank General Journal Dr Cr

Allotment

Record receipt of allotment monies

Shares issued payable on application and allotment and subject to future calls
Call General Journal Dr Cr

Share capital

Record amount owing by shareholders for the call

Shares issued payable on application and allotment and subject to future calls
Bank Call General Journal Dr Cr

Record amount received in respect of the call

Calls in arrears
Call

on shares is made Co may not receive all call monies owed Call account remains in a debit balance New account Call in arrears and the above is transferred to this account Call in arrears = Shareholder equity account = reduction in share capital Co constitution may call for shareholders with calls in arrears to forfeit their shares and the share reissued

Retention of excess application monies

Prospectus

issued calls for monies to be paid on application, allotment and future calls Some applicants may forward all monies in the hope that they receive preferential treatment. Co may choose to keep this money and allocate it against money owing on allotment and future calls Directors can only make this decision if allowed by Co constitution

Retention of excess application monies

Amt received from applications allocated to
Calls in Advance
Shares applied for Paid to $ Amt received $ Shares Allotted Application of $ Allotment of $ Call 1 $ Call 2 $

Application refund $

Accounting for retention of excess application money

General Journal Trust Account Dr Application Cr

Record the receipt of application money

Accounting for retention of excess application money

General Journal Application Dr Share Capital Cr

Allot shares to applicants

Accounting for retention of excess application money

General Journal Allotment Dr Share Capital Cr

Issue shares on allotment

Accounting for retention of excess application money

General Journal Application Dr Trust Account Cr

Refund application money

Accounting for retention of excess application money

Bank General Journal Dr Cr

Trust Account

Transfer trust account money

Accounting for retention of excess application money

General Journal Application Dr Allotment Cr

Application money retained against allotment

Accounting for retention of excess application money

General Journal Application Dr Calls in Cr Advance Excess application money applied to future calls

Accounting for retention of excess application money

Call General Journal Dr Cr

Share Capital

First Call

Accounting for retention of excess application money

General Journal Cash in Dr advance Calls Cr Records calls in advance against call

Accounting for retention of excess application money

Bank Calls General Journal Dr Cr

Call money owing is received

Costs associated with share issue

Preparation of prospectus Lodgment with ASIC Publication Receipt of money Issue of shares Including stamp duty and taxes, professional advisers fees, underwriting costs, commissions and brokerage fees The above equity issue costs must be recognized in equity Indirect costs are not included as transaction costs.

Costs associated with share issue

General Journal Transaction Dr costs Bank Cr Recording of transaction costs as per AASB 1015

Bookbuilding

Occurs where an investment banker solicits bids from institutional investors prior to pricing an equity issue

Stapled securities

Stapling is an arrangement under which different securities are quoted jointly

Issuing Debentures

Issuing of debt Attracts interest Must be repaid in a specified time frame Borrower Lender = principal Interest = Charge (Fixed or Floating) Maturity date Redemption Issued via prospectus to the general public and also privately to elite few Must appoint a trustee Clear disclosure of all matters relating to the debentures

Mortgage Debenture

Secured by a first mortgage over land and/or buildings Cannot exceed >60% of the value of asset Limits rights to resell/transfer asset Trustee can take possession and sell to repay debenture holders

Unsecured Note

Debt which is not secured by any charge over assets Higher risk = higher rate of interest

Convertible Note

Allows debenture holder to convert debt to paid up share capital or cash upon maturity

Contrast Funds from equity and debt

Shares
Ownership entitlement Voting rights Dilute ownership Payment of Dividend is at discretion of Directors Does not have to be repaid No restriction on amount of share issue Dividends = Profit

Debt
No Ownership entitlement No Voting rights Do not share profits Fixed regular income Must be repaid Specific debt/equity ratio Interest = Expense

Accounting entries for the issue and redemption of debentures

General Journal Trust Account- Dr
Debentures

Application Debentures

Cr

Accounting entries for the issue of debentures

General Journal Application - Dr Debentures Debentures Cr Trust Acc Cr Debentures Allot debentures and refund excess application monies

Accounting entries for the issue of debentures

Bank General Journal Dr

Trust Acc Cr Debentures Transfer of trust monies

Making annual interest payments on debentures

General Journal Interest Dr Bank Cr

Payment of interest

Making annual interest payments on debentures

General Journal Interest on Dr debentures Accrued Cr expense Interest incurred but not due for payment on annual balance date

Making annual interest payments on debentures

General Journal Accrued Dr expense Interest on Cr debentures Reversal entry

Accounting entries for the redemption of debentures

General Journal Interest Dr Debentures Bank Cr Final interest payment

Accounting entries for the redemption of debentures

General Journal Debentures Dr Bank Cr

Payment of debenture holders on redemption

Accounting entries for the redemption prior to maturity at a discount

General Journal Debentures Dr
Discount on debenture redemption

Cr

Bank

Cr

Payment of debenture holders on redemption at discount

Alternate accounts for debt issues

Debenture Mortgage Unsecured Debenture Note
Applications Debentures Interest Premium Discount Applications Mortgage Debentures Interest Premium Discount Applications Unsecured Notes Interest Premium Discount