Issue and Forfeiture of Shares: Summary Video Lecture | Accountancy Class 12 - Commerce

Oh
accounting treatment issue of shares
forfeiture of shares we have already
seen that share capital denotes the
amount of capital raised by the issue of
shares it is collected through the issue
of shares and remains with the company
till its liquidation share capital is
owned capital of the company it is the
money of the shareholders and the
shareholders are the owners of the
company this total share capital is
divided into small parts and each part
is called a share
thus a share is the smallest part of the
total capital of a company
call on a share a demand made by the
company on its shareholders to pay whole
or part of the balance remaining unpaid
amount on each share at any time during
the lifetime of a company is termed as
call on a share when a public company
intends to raise capital by issuing its
shares to the public it invites the
public to make an offer to buy its
shares through a document called
prospectus after reading the prospectus
if the public is satisfied then they can
apply to the company for the purchase of
its shares each application form along
with the application money must be
deposited by the public in a scheduled
Bank the company cannot withdraw this
money from the bank till the procedure
of allotment has been completed in the
case of first allotment this amount
cannot be withdrawn until the
certificate to commence business is
obtained and the amount of minimum
subscription has been received
a point to be noted the amount payable
on application of a share shall not be
less than 5% of the nominal value
allotment of shares means the company
has accepted the offer made by the
applicants to take up the shares applied
for it is on allotment that a share
comes into existence thus the
application money on the shares after
allotment becomes a part of the share
capital the company made among the
balance amount which is due after
application and allotment from the
shareholders in one or many parts they
are termed as first call second call and
so on a word final is added to the last
call the amount of call must not exceed
25 percent of the nominal value of the
shares at least one month must have
elapsed since the date which was fixed
for the payment of the last preceding
call also a minimum of 14 days notice is
given to the shareholders to pay the
amount when the shares I sued by the
company in consideration for cash such
issue of shares is known as issue of
share for cash in such a case shares can
be shoed at par or at a premium or at a
discount such issue price may be payable
either in lump sum along with the
application or in installments at
different stages for example partly on
application partly an allotment and
partly on call
the accounting procedure for the issue
of shares for cash is given below
issue of share at bar shares are said to
be shoed at par when the issue price is
equal to the face value for example a
share of ten rupees when it is issued
for ten rupees is said to be issued at
par the issue of shares at premium when
shares I shoot for an amount more than
the face value of share they are said to
be shewed at a premium for example if a
share of ten rupees is issued at fifteen
rupees such a condition of issue is
known as issue of shares at premium the
difference between the issue price and
the face value that is five rupees share
premium it is a capital profit for the
company it shows a credit balance it is
shown on the liability side of the
balance sheet it is written under the
heading reserves and surplus in a
separate account called security premium
account the Companies Act has laid down
certain restrictions on the utilization
of the amount of premium according to
section 78 of this act the amount of
premium can be utilized for one issuing
fully paid bonus shells to writing off
preliminary expenses discount on issue
of shares underwriting commission or
expenses on issue three paying premium
on redemption of preference shares or
debentures
issue of shares at discount shares are
said to be issued at a discount when
they are issued at a price lower than
the face value for example if a share of
10 rupees is issued at 9 rupees it is
said that the share has been issued at a
discount the difference between the face
value and issue price is called the
discount share discount account shows a
debit balance it denotes a loss to the
company capital loss it is in the nature
of capital loss it is desirable to write
it off against any capital profit points
to be noted 1 at least one year must
have elapsed since the company became
entitled to commence business it means
that a new company cannot issue shares
at a discount at the very beginning -
the company has already issued such
types of shares 3 shares to be shoed at
a discount must be of a class already
issued for the resolution must specify
the maximum rate of discount at which
the shares are to be issued but the rate
of discount must not exceed 10% of the
face value of the shares for more than
this limit the sanction of the Company
Law Tribunal is necessary 5 the issue of
such shares must be made within two
months from the date of receiving the
sanction of the company law tribunal or
within such extended time as the company
Lord
I may allow
a quick glance at journal entries to be
passed when chairs are issued at par a
quick glance at journal entries to be
passed
when chairs are issued at premium a
quick glance at journal entries to be
passed
when chairs are issued at discount
the journal entries would appear as
shown
let us take an example of shares issued
at par in Denis on fabrics limited
issued one lakh shares of 10 rupees each
on the 1st of April 2007 the amount
payable on these shares was as under 3
rupees per share on application 3 rupees
per share on allotment for rupees per
share on call pass the journal entries
and prepare relevant accounts in the
books of company the journal entries
would appear as shown
journal entries when allotment money
becomes due when a company issues shares
to raise capital one it receives
applications equal to the number of
shares the company has offered to people
in such a case journal entries would be
a on receipt of application money bank
account debit to share application
account application money received for
shares
be on allotment of shares share
application account debit to share
capital account application money of
shares transfer to capital account on
the allotment
- receives applications for less number
of shares than offer to the public for
subscription a case of under
subscription the company can proceed
with allotment provided the subscription
of shares is at least equal to the
minimum required number of shares termed
as minimum subscription three receives
applications for more number of shares
than the number of shares offered to the
public for subscription this is a case
of over subscription option one one
rejection of excess applications and
money returned the company may reject
the applications of shares in excess of
the shares offered for issue in this
case the application money received from
these applicants is refunded to them in
full the journal entry made is as
follows share application account debit
to bank account application money on
shares refunded to the applicants
to excess application money adjusted
towards sums duan allotment shares
application account debit to share
allotment account excess application
money adjusted towards sums duan
allotment if the application money
received on partially accepted
applications is more than the amount
required for adjustment towards
allotment money the excess money is
refunded however if the articles of the
company authorized the directors may
retain the excess money and adjust
against calls in advance the following
journal entry is made share application
account debit to call in advance account
the adjustments of excess share
application money retained as all in
advance in respect of shares
option two partial acceptance of
applications in some cases the company
accepts the applications for
subscription partially let us take an
example the mungeri healthcare limited
has offered to public four subscription
twenty thousand shares of hundred rupees
each payable as 30 rupees per share on
application 30 rupees per share on
allotment and the balance on call
applications were received for forty
thousand shares
applications for ten thousand shares
were rejected altogether and the
application money was returned the
remaining applicants were allotted the
offered shares their excess application
money was adjusted towards some to you
on allotment also made and duly received
make journal entries in the books of the
company
working total shares offered 20,000
shares total applications received
40,000 shares applications rejected
10,000 shares that is from an
application amount of 30,000 shares an
additional amount received on 10,000
shares was to be adjusted for allotment
money total amount received 30 rupees
into 40,000 shares equal to 12 lakh
rupees amount to be refunded 30 rupees
into 10,000 shares equal to 3 lakh
rupees balance amount equal to 9 lakh
rupees amount due on share application
is equal to 6 lakh rupees balance amount
adjusted towards allotment is equal to 3
lakh rupees
the actual amount to be received on
allotment 30 rupees into 20,000 shares
is equal to 6 lakh rupees already
adjusted from application is equal to 3
lakh rupees received on application is
equal to 3 lakh rupees
journal entries for the same would
appear as shown
let us take one more example Bolivia
cars limited issued one lakh shares of
10 rupees each at a premium of 4 rupees
per share payable as on application for
rupees including one rupee premium per
share on allotment 5 rupees including to
repeat premium per share on call fire
rupees per share applications were
received for 1 lakh shells and
allotments were made to all
the journal entries would appear as
shown
Shri Krishna agrochemical limited was
registered with a capital of 50 lakh
rupees divided into 50 thousand shares
of a hundred rupees each it issued
10,000 shares at a discount of 10 rupees
per share payable as 40 rupees per share
on application 30 rupees per share on
allotment and 20 rupees per share on
call the company received applications
for 15,000 shares applicants for 12,000
shares were allotted 10,000 shares and
applications for the remaining shares
were sent letters of regret and their
application money was returned all was
made allotment and all money was duly
received make the journal entries in the
books of the company the journal entries
will be as shown
India software limited offered 50,000
shares of 10 rupees each to the public
payable as 2 rupees on application 3
rupees on allotment 2 rupees on first
call and the balance as and when
required all the shares were applied for
and duly allotted but mukesh a
shareholder holding 200 shares paid the
entire balance on allotment make the
necessary journal entries the journal
entries would be as shown
X limited made its first call of 20
rupees per share on the 1st of July 2006
Zaheer holding 200 shares failed to pay
the call money he could pay the call
money only on the 31st of December 2006
the company charged interest at 12
percent per annum make the necessary
journal entry for the interests charged
by the company solution the amount of
interest due is equal to 240 rupees bank
account debit 240 rupees - interest on
call in areas account 240 rupees receipt
of interest on calls in areas
let us take an example ABC Limited
issued 20,000 shares of 10 rupees each
payable as 2 rupees per share on
application five rupees including
premium of 2 rupees per share on
allotment 3 rupees per share on first
call and the balance on final call all
the money was received except the first
call money on 400 shares which was
received later on with final call make
the necessary journal entries
joint application and allotment account
these days it is becoming a practice to
open only one account in respect of
application and allotment and not to
separate accounts this is based on the
reasoning that allotment without
application is impossible while
application without allotment is
meaningless so that the stages of the
share capital transactions are closely
interrelated hence from this point of
view share application and share
allotment account appear more logical if
combined account for application and
allotment is opened in such a case the
following three entries will be passed a
quick glance at journal entries to be
passed when chairs are issued at par a
quick glance at journal entries to be
passed when chairs I shoot at premium a
quick glance at journal entries to be
passed
when chairs are issued at discount
calls in areas and interest on it if a
shareholder makes a default in sending
the call money on allotment or on any
calls according to the conditions the
money not so sent is called call an area
the company is authorized to charge
interest at a specified rate on calls an
area from the due date to the date of
actual payment of the allotment money or
the calls but if the articles of
association are silent table a shall be
applicable which provides for interest
at 5% per annum
however the directors have the right to
waive the payment of interest on call in
area accounting treatment of calls in
area there are two methods of dealing
with call in area one by opening calls
an area account in this case a separate
account for calls an area is opened if
the amount of calls has not been paid by
some shareholders such amount is
transferred to newly opened calls an
area account thus allotment and other
call accounts will not show any balance
but the calls in area account will show
a debit balance equal to the total
unpaid on allotment calls which will be
shown as deduction from the amount of
subscribed capital on the liability side
of the balance sheet the journal entries
for the same shall be as shown
without opening calls an area account it
is not necessary to open a new account
for calls an area in that case the
amount actually received from the
shareholders is credited to the relevant
allotment or call account and the
various allotment or call accounts will
show debit balance equal to the total
unpaid amount of allotment or calls
which will be shown as deduction from
the amount of subscribed capital on the
liability side of the balance sheet the
journal entries for the same shall be as
shown when a company accepts money paid
by some of its shareholders for the call
not yet due such amount is known as
calls in advance it may also happen in
case of partial or pro rata allotment of
shares when the company retains excess
amount received on application of shares
since the amount has not become due
hence it is a liability of the company
therefore it is transferred to the
credit of a newly opened account called
calls in advance account in case of
calls in advance the company must be
interest at the rate prescribed in its
articles of association however in the
absence of interest laws in the articles
of association the provisions of table a
of the Companies Act will apply
according to which the company will have
to pay interest at six percent per annum
on its calls in advance from the date of
receipt till the date when the call
becomes due
journal entries for the same shall be as
shown when any company alerts shares to
the applicants it is done on the basis
of a legal contract between the company
and the applicant which makes it binding
upon the shareholders to pay the amount
of allotment and calls whenever they are
due now if any shareholder fails to pay
the allotment and owe all money due from
him the shareholder violates the
contract and the company is entitled to
take his share back which is known as
forfeiture of shares forfeiture of
shares means cancellation of allotment
to default in shareholders and to treat
the amount already received on such
shares as not returnable
procedure for forfeiture of shares the
usual procedure is that the defaulting
shareholder must be given a minimum 14
days notice requiring him to pay the
amount due on his shares along with
interest on it stating that if he fails
to pay the amount and the interest on it
the shares will be forfeited in spite of
this notice if the shareholder does not
pay the unpaid amount the directors
after passing a resolution will forfeit
the shares and information will be given
to the defaulting shareholder above the
forfeiture of his shares effect of a
feature of shares termination of
membership the shareholder who shares
have been forfeited lose all the rights
and interest on those shares that is
this is to be a member
shareholder or owner of the company and
the name will be removed from the
register of members to seizure of money
paid the amount already paid on the
forfeited shares by the defaulting
shareholders will be seized by the
company and in no case will be refunded
to the shareholder 3 non-payment of
dividend when shares are forfeited the
shareholder remains no longer a member
of the company
therefore he loses the right to receive
future dividend for reduction of share
capital for feature of shares results in
the reduction of share capital to the
extent of amount called up on such
shares
journal entries for the same shall be as
shown
for feature of fully paid shares usually
the shares are forfeited for non-payment
of the calls but at the same time fully
paid up shares can be forfeited in such
cases as default in fulfilling any
agreement between the members or on
expulsion of members where the Articles
specifically provide for such details
accounting treatment for reissue of
forfeited shares issue of shares for
consideration other than cash there are
instances where a company enters into an
agreement with the vendors from whom it
has purchased assets whereby the latter
agrees to accept the payment in the form
of fully paid shares of the company
issued to them normally no cash is
received for such issue of shares these
shares can also be shoed either at par
at premium or at discount and the number
of shares to be shoed will depend upon
the price at which the shares are issued
and the amount payable to the vendor
thus to find out the number of shares to
be shooto the vendor will be calculated
as follows number of chairs to be issued
is equal to amount payable divided by
issue price
the latest technology Company Limited
offered to public subscription of 50,000
shares of 20 rupees aged at a premium of
fire rupees per share the amount was
payable as under on application fine
rupees per share on allotment 12 rupees
per share including premium of 5 rupees
per share on first call for rupees per
share on second and final call for
rupees per share applications were
received for all the shares allotment
was made to all the applicants in full
Ashima failed to pay allotment and call
money on 200 shares held by her Reshma
was allotted 300 shares
she did not pay the call money their
shares were forfeited make the necessary
journal entry for the 4 feature only
example of a feature of share and
reissue X company limited for fee to 200
shares of 10 rupees each from the corner
on which seven rupees have been received
and final call of three rupees per share
remains unpaid these shares were later
reshoot for 8 rupees per share fully
paid-up make the journal entry for
recording the 4 feature and every issue
of shares
thus to issue shares a company follows a
definite procedure which is controlled
and regulated by the Companies Act and
the Securities and Exchange Board of
India CB