ISSUE OF SHARES A company may raise its capital by inviting investors to subscribe to business capital by purchasing shares for

cash or other assets. Parties interested in subscribing for shares in a company, accept the offer made by the directors, by sending their application to the company on prescribed forms along with an application fee. Once the directors receive the applications, they recruit the successful applicants. Allotment of shares is the next step whereby a binding contract between the company and the applicants is made. Where there is an over ubscription, applicants are allocated only a portion of the shares. Accounting entries made on application and allotment Two approaches can be used to account for application and allotment of shares. In the first approach, two accounts application and allotment are treated as separate accounts. The second approach which is widely used treats both accounts as one. The accounting entries used under this approach are as below; 1. When application money is received; Dr bank a/c Cr application and allotment a/c 2. When application money is refunded to unsuccessful candidates; Dr Application and allotment a/c Cr bank a/c 3. Allotment of shares made; Dr Application and allotment a/c Cr share capital a/c 4. Allotment money is received; Dr bank a/c Cr application and allotment a/c Example Misplay Ltd issued 1,000 ordinary shares of sh 100 each at par payable as follows; Sh 40 on application Sh 60 on allotment Applications are received for 1,200 shares. Upon allotment, applications of 200 shares were rejected and their application money refunded. Required Show the journal entries and ledger accounts assuming all the sums due on allotment have been received. Calls A call is a demand served to a shareholder to pay money for shares issued. Calls are usually made in installments as first call, second call and final call. Calls in arrears are calls which have not been paid for and are treated as debtors while calls in advance are those paid before they fall due and are treated as liabilities. 1

Accounting entries on calls made are as follows; 1. When a call is made on shares (total value of money payable on a call) Dr calls a/c Cr share capital a/c 2. When call money is received Dr bank a/c Cr calls a/c 3. When a calls is in arrears Dr calls in arrears a/c Cr calls a/c 4. When calls are in advance Dr bank a/c Cr calls in advance a/c Issue of shares at par When shares are issued at their nominal value they are said to be issued at par Example Top Inc offered 30,000 ordinary shares of sh 10 each at par payable by installment as below; Sh 2 on application Sh 5 on allotment Sh 3 on first and final call Applications were received for 33,000 shares. The company however allotted only 30,000 shares, rejecting applicants for 3,000 shares. The rejected applicants were refunded their application money in full. All money due was received except for 1,000 shares that had fallen in arrears on the first and final call. Required Show the relevant journal entries and ledger accounts. Issue of shares at a premium Shares are said to be issued at a premium when they are issued at a price higher than the nominal value. Accounting entries to record a premium are as follows; 1. When the allotment is made Dr Application and allotment a/c Cr share capital a/c With nominal value payable on application and allotment 2. Dr application and allotment a/c Cr share premium a/c With the premium value 3. When the allotment money is received 2

Dr bank a/c Cr application and allotment a/c With the amount received for allotment including the premium Example Using the above example, consider that the 30,000 shares were issued at sh 12 instead of sh 10. The full value of the shares was payable as follows; Sh 2 on application Sh 7 on allotment including premium Sh 3 on first and final call Required Show the relevant journal entries and ledger accounts. Issue of shares at a discount Shares are issued at a discount when they re issued at a price lower than the nominal value. Accounting entries to record a discount are as follows; 1. When allotment is made Dr Application and allotment a/c Cr share capital a/c With the nominal value payable on application and allotment 2. Dr share discount a/c Cr application and allotment a/c With the discount value 3. When the allotment money is received Dr bank a/c Cr application ad allotment a/c With the amount received on allotment including the discount given Example Sri Krishna Agro Chemical Ltd. was registered with a capital of Sh 5,000,000 divided into 50000 shares of Sh 100 each. It issued 10000 shares at discount of Sh 10 per share, payable as: Sh 40 per share on application Sh 30 per share on allotment Sh 20 per share on call. Company received applications for 15000 shares. Applicants for 12000 shares were allotted 10000 shares and applications for the remaining shares were sent letters of regret and their application money was returned. Call was made. Allotment and call money was duly received. Required Make the relevant journal entries in the books of the company.

UNDER SUBSCRIPTION 3

The issue is said to have been under subscribed when the company receives applications for less number of shares than offered to the public for subscription. In this case company is not to face any problem regarding allotment since every applicant will be allotted all the shares applied for. But the company can proceed with allotment provided the subscription for shares is at least equal to the minimum required number of shares termed as minimum subscription. If not, the company can reject all applications and invite for another fresh offer. OVER SUBSCRIPTION When company receives applications for more number of shares than the number of shares offered to the public for subscription it is a case of over subscription. A company cannot allot more shares than what it has offered. In case of over subscription, the journal entries will be as below; Dr Share Application A/c Cr Bank A/c With application money on shares refunded to the applicants Example Joy land ltd offered 100,000 ordinary shares of sh 10 each at a premium of sh 2, payable by installments as shown below; On application sh 3 On allotment including premium sh 7 On first and final call sh 2 Applications were received for 130,000 shares and were allotted shares as follows Application for 80,000 shares full shares allotted Application for 40,000 shares 20,000 allotted Application for 10,000 shares rejected Excess application money for partially accepted applicants is to be used to reduce the amount due on allotment. All money due on allotment and first and final call was received except 6,000 shares allotted to Mr. Ranju, who failed to pay for the first and final call. Required Record the above transactions in the books of joy land ltd FORFEITURE OF SHARES Shares are said to be forfeited when they are fully withdrawn from a shareholder. A person whose shares have been forfeited ceases to be a member in respect of the forfeited shares, but remains liable to pay the company all money which at the time of the forfeiture was due. The accounting entries are as below; 1. To record forfeiture of shares Dr Share capital a/c Cr forfeited shares a/c 4

With the total nominal value of shares forfeited 2. To record amount unpaid on shares Dr Shares in arrears a/c Cr forfeited shares a/c 3. To record amount unpaid on premium on forfeited shares Dr Share premium a/c Cr forfeited shares a/c Example Shell craft ltd has an unauthorized capital of sh 1 million divided into 20,000 ordinary shares of sh 50 each issued as fully paid except 200 shares held by peter on which only sh 5,000 has been paid. The directors passed a resolution to forfeit the shares held by peter. Required Show the entries in the companys journal and ledger accounts recording the forfeiture of shares. BONUS ISSUE AND DIVIDENDS The directors of a limited company may decide to issue more shares to exsisting shareholders against the capital reserves. Bonus issue doesnt require the shareholders to make any cash payments for the shares allotted to them. The relevant accounting entries are as below; 1. to record bonus issue Dr reserves or profit and loss a/c Cr bonus a/c 2. To close the bonus account Dr bonus a/c Cr share capital a/c Example Murphy ltdhas an authoriesd capital of 20,000 shares of sh 100 each. On 31st December 2011, the directors of the company decided to make a bonus issue of one ordinary share for every four held. The bonus issue is to be financed by the appropiriation account which on 31st December had a balance of sh 1.5 million. Required Show the relevant journal and ledger entries