ICAI Notes 9.2: Issue, Forfeiture & Reissue of Shares - 2 Notes | Study Principles and Practice of Accounting - CA Foundation

6. SHARES ISSUED AT DISCOUNT

Shares are said to be issued at a discount, if issue is at an amount less than the nominal or par value of shares. The excess of the nominal value over the issue price represents discount on the issue of shares. For example, when a share of the nominal value of Rs 100 is issued at Rs 98, it is said to have been issued at a discount of 2 per cent.

According to Section 53 of the Companies Act, 2013, a Company cannot issue shares at a discount except in the case of issue of sweat equity shares (issued to employees and directors). Thus any issue of shares at discount shall be void.

7. SHARES ISSUED AT PREMIUM

When a company issues its securities at a price more than the face value, it is said to be an issue at a premium. Premium is the excess of issue price over face value of the security. It is quite common for the financially strong, and well-managed companies to issue their shares at a premium, i.e. at an amount more than the nominal or par value of shares. Thus, where a share of the nominal value of Rs 100 is issued at Rs 105, it is said to have been issued at a premium of 5 per cent.

When the issue is at a premium, the amount of premium may technically be called at any stage of share capital transactions. However, premium is generally called with the amount due on allotment, sometimes with the application of money and rarely with the call money.

7.1 ACCOUNTING TREATMENT

When shares are issued at a premium, the premium amount is credited to a separate account called "Securities Premium Account" because it is not a part of share capital. Rather, it represents a gain of a capital nature to the company.

Being a credit balance, Securities premium Account is shown under the heading, "Reserves and Surplus". However, RsReserves and SurplusRs is shown as RsshareholdersRs funds in the Balance Sheet as per Schedule III. According to Section 52 of the Companies Act, 2013, Securities Premium Account may be used by the company:

1. Towards issue of un-issued shares of the company to be issued to members of the company as fully paid bonus securities.
2. To write off preliminary expenses of the company.
3. To write off the expenses of, or commission paid, or discount allowed on any of the securities or debentures of the company.
4. To provide for premium on the redemption of redeemable preference shares or debentures of the company.
5. For the purchase of own shares or other securities.

Note : If may be noted that certain class of Companies whose financial statements comply with the accounting standards as prescribed under Section 133 of the Companies Act, 2013, canRst apply the securities premium account for the purposes (b) and (d) mentioned above.

When shares are issued at a premium, the journal entries are as follows:

(a) Premium amount called with Application money

(b) Premium Amount called with Allotment

Illustration 5

Pioneer Equipment Limited received on October 1, 2014 applications for 25,000 Equity Shares of Rs 100 each to be issued at a premium of 25 per cent payable at thus:

The shares were allotted by the Company on October 20, 2014 and the allotment money was duly received on October 31, 2014.

Record journal entries in the books of the company to record the transactions in connection with the issue of shares.

Solution

Pioneer Equipment Limited 

Journal

Illustration 6

X Ltd. invited applications for 10,000 shares of Rs 100 each payable as follows :

All the shares were applied for and allotted. A shareholder holding 200 shares paid the whole of the amount due along with allotment. Journalise the transactions, assuming all sums due were received. Interest was paid to the shareholder concerned on 1st February, 2014.

Solution :

Journal of x Ltd.

Thus shares can be issued either at face value or at premium or at discount. The following chart depicts the three categories as follows :

8. OVER SUBSCRIPTION AND PRO-RATA ALLOTMENT

Over subscription is the application money received for more than the number of shares offered to the public by a company. It usually occurs in the case of good issues and depends on many other factors like investors confidence in the company, general economic conditions, pricing of the issue etc. When the shares are oversubscribed, the company cannot satisfy all the applicants. It means that a decision is to be made on how the shares are going to be allotted. Shares can be allotted to the applicants by a company in any manner it thinks proper. The company may reject some applicants in full, i.e., no shares are allotted to some applicants and application money is refunded. Usually, multiple applications by the same persons are not considered. Allotment may be given to the rest of the applicants in full, i.e., for the number of shares they have applied for. A third alternative is that a company may allot shares to the applicants on pro-rata basis. RsPro-rata allotmentRs means allotment in proportion of shares applied for.

For example, a company offers to the public 10,000 shares for subscription. The company receives applications for 12,000 shares. If the shares are to be allotted on pro-rata basis, applicants for 12,000 shares are to be allotted 10,000 shares, i.e., on the 12,000 : 10,000 or 6:5 ratio. Any applicant who has applied for 6 shares will be allotted 5 shares.

Under pro-rata allotment, the excess application money received is adjusted against the amount due on allotment or calls. Surplus money after making adjustment against future calls is returned to the applicants. The applicants are informed about the allotment procedure through an advertisement in leading newspapers.

There is no separate journal entry for forfeiture of shares when there is a pro-rata allotment. But it requires to calculate the net amount due on allotment or any other call, and also the total amount forfeited. When there is a pro-rata allotment, the total application money paid by an applicant is more than the exact amount due on application. The excess amount is treated as an advance against allotment or any other future calls. The net amount due on allotment or any other calls is the difference between the amount due on allotment or any other calls and the excess amount received in application.

Accounting Entries

(Being excess application money adjusted against allotment money as per BoardRss Resolution No....dated....)

Illustration 7

JHP Limited is a company with an authorised share capital of 10,00,000 in equity shares of Rs 10 each, of which 6,00,000 shares had been issued and fully paid on 30th June, 2013. The company proposed to make a further issue of 1,00,000 of these Rs 10 shares at a price of Rs14 each, the arrangements for payment being:

1. Rs 2 per share payable on application, to be received by 1st July, 2013;
2. Allotment to be made on 10th July, 2013 and a further Rs 5 per share (including the premium) to be payable;
3. The final call for the balance to be made, and the money received by 30th April, 2014. Applications were received for 3,55,000 shares and were dealt with as follows:
4. Applicants for 5,000 shares received allotment in full;
5. Applicants for 30,000 shares received an allotment of one share for every two applied for; no money was returned to these applicants, the surplus on application being used to reduce the amount due on allotment;
6. Applicants for 3,20,000 shares received an allotment of one share for every four applied for; the money due on allotment was retained by the company, the excess being returned to the applicants; and
7. the money due on final call was received on the due date.

You are required to record these transactions (including cash items) in the Journal of JHP Limited.

Solution

Journal of Jhp Limited

Working Notes: 

(1)  calculation for adjustment and refund