Issue & Forefiture of Share

Slide 1: 

Accounting for issue and forfeiture of shares

Accounting for issue of shares and debentures : 

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

Capital Structure : 

Capital Structure Equity Share Capital Preference Share Capital Debenture Long Term Borrowings Fixed Deposits

Share Capital : 

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

Classes of Shares : 

Classes of Shares Ordinary Shares Preference Shares Deferred or founder Shares

Ordinary Shares : 

Ordinary Shares Basic type Full voting rights Right to receive dividends

Preference Shares : 

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 : 

Deferred or Founder Shares Issued to initial subscribers/promoters Dividends usually paid after being paid to other shareholders Founders are shareholders who start up the company before shares are issued to the public

Issue price of shares : 

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 listing is proposed or already exists Usage of an underwriter

Types of Share Capital : 

Types of Share Capital Authorised Share Capital Issued Capital Subscribed Capital Called up Capital Paid up Capital

Uncalled and paid up share capital : 

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 company’s 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

Procedure for issuing shares under a prospectus : 

Procedure for issuing shares under a prospectus The Prospectus together with an application form is made available to the general public. Receiving applications alongwith the application money. Minimum subscription must be received before allotment Allotment of shares at director’s discretion Allotment advice is communicated to the applicant. Allotment monies may be required at this stage Making calls for payment of balance money, if any

Share capital issued upon the registration of a company : 

Share capital issued upon the registration of a company

Share capital issued by prospectus : 

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 : 

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 : 

Shares issued fully paid on application

Shares issued fully paid on application : 

Shares issued fully paid on application

Shares issued fully paid on application : 

Shares issued fully paid on application

Allotment of Shares : 

Allotment of Shares

Journal Entries on Call Payments : 

Journal Entries on Call Payments

Journal Entry on Call Money Received : 

Journal Entry on Call Money Received

Calls in arrears : 

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

Calls in Arrear : 

Calls in Arrear

Call Money received in advance : 

Call Money received in advance

Calls in advance adjusted : 

Calls in advance adjusted

Interest payable on Calls in advance : 

Interest payable on Calls in advance

Shares issued at Premium : 

Shares issued at Premium A company is allowed to issue shares at premium The amount of premium is transferred to “Share Premium A/c” The share premium amount can be utilized In writing off preliminary expenses For issue of shares as fully paid bonus shares For premium payable on redemption of preference shares In writing off any discount allowed on issue of shares/debentures In buying back its own securities

Shares issued at Premium : 

Shares issued at Premium

Shares Alloted at premium : 

Shares Alloted at premium

Illustration : 

Illustration Luxuary Cars Ltd. issued 100000 shares of Rs 10 each at a premium of Rs 5 per share, payable as: On application Rs. 4 (including Rs 2 premium) per share On allotment Rs 8 (including Rs 3 premium) per share On call Rs. 3 per share Applications were received for 100000 shares and allotment was made to all. Make journal entries.

Shares issued at discount : 

Shares issued at discount Section 79 of Companies Act 1956 has laid down certain conditions subjectto which a company can issue its shares at a discount. These conditions areas follows : (i) At least one year must have elapsed from the date of commencementof business; (ii) Such shares are of the same class as had already been issued; (iii) The company has sanctioned such issue by passing a resolution in its General meeting and the approval of the court is obtained. (iv) Discount should not be more than 10% of the face value of the share and if the company wants to give discount more than 10%, it will have to obtain the sanction of the Central Government.

Shares issued at Discount : 

Shares issued at Discount

Illustration : 

Illustration Sri Krishna Agro Chemical Ltd. was registered with a capital of Rs 5000000divided into 50000 shares of Rs 100 each. It issued 10000 shares at discount of Rs 10 per share, payable as : Rs 40 per share on application Rs 30 per share on allotment Rs 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. Make journal entries in the books of the company.

Retention of excess application monies : 

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 : 

Retention of excess application monies

Costs associated with share issue : 

Costs associated with share issue Preparation of prospectus Registration with SEBI 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 : 

Costs associated with share issue

Issue of Bonus Shares : 

Issue of Bonus Shares Bonus Shares may be issued at par or at premium Before Bonus shares are issued all the existing shares must be either fully paid or made fully paid Whenever Bonus is declared Share Capital increases and Reserves decrease Declaration of Bonus is known as Capitalization of reserve

Sources of Declaration of Bonus : 

Sources of Declaration of Bonus P & L A/c credit balance General Reserve Capital Reserve Balance in Debenture Redemption or Sinking Fund Capital Redemption Reserve Share Premium A/c Capital Redemption Reserve & Share Premium A/c can be used only for issue of fully paid bonus shares and not for making partly paid shares fully paid

When Bonus is declared : 

When Bonus is declared

Bonus utilised for issue of Bonus Shares at Par : 

Bonus utilised for issue of Bonus Shares at Par

Bonus Utilised for issue of Bonus Shares at Par : 

Bonus Utilised for issue of Bonus Shares at Par

Bonus Utilised for issue of Bonus Shares at Premium : 

Bonus Utilised for issue of Bonus Shares at Premium

Forfeiture and Re-issue of shares : 

Forfeiture and Re-issue of shares By becoming a shareholder a person enters into a contract with the company that he is liable to pay full price of the share to the company from time to time and as and when the calls are made by the company If he fails to comply the company can forfeit his shares Forfeiting means taking back the shares without giving any compensation to the shareholder

Procedure : 

Procedure As per Articles of Association the company has power to forfeit the shares only for non payment of call money Notice to the defaulting shareholder sent warning him about the forfeiture of shares On shareholder’s failure to pay the amount due in time a resolution to forfeit the shares is passed by the directors

Forfeiture of shares issued at par : 

Forfeiture of shares issued at par Amount called up are debited to Share Capital A/c – Forfeiture means cancellation of shares and reduction in share capital Unpaid amount is credited to Share Allotment or Calls-in-Arrears A/c Amount received so far on forfeited shares is transferred to Shares Forfeited A/c

Forfeiture of shares issued at Par : 

Forfeiture of shares issued at Par

Forfeiture of shares issued at Premium : 

Forfeiture of shares issued at Premium

Forfeiture of shares issued at Discount : 

Forfeiture of shares issued at Discount

Reissue of shares at Par : 

Reissue of shares at Par

Re-issue of shares at Premium : 

Re-issue of shares at Premium

Re-issue of shares at Discount : 

Re-issue of shares at Discount

Profit on Re-issue : 

Profit on Re-issue Amt received originally on forfeited shares (Re-issued shares/ Forfeited shares) * 1 Discount on Re-issued shares = Paid up price less Re-issue price Profit on Re-issue = Amt forfeited less Discount

Bookbuilding : 

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

Stapled securities : 

Stapled securities Stapling is an arrangement under which different securities are quoted jointly