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Corporate Accounting (Company Accounts)—Issue of Share Capital

To meet the ever-increasing demand of consumers, different forms of organizations have come into existence. Students might have understood the pros and cons of sole proprietorship and partnership form of business organizations. Those forms were unable to meet the requirements and needs of consumers. This was due to insufficient money, man power and technology. Their resources are limited. As a result, a new form of business organization, known as “company”, has come into existence. This new concept has resulted in the formation of joint stock companies—an important form of business organization to exploit the needed wealth (money), technology so as to satisfy the needs of customers globally. What is a joint stock company? What is “share” and “share capital”? What are the various classes of shares? How is a company managed? How will a new company be floated? What are the important statutory books needed? How shares are issued? What is the accounting treatment for issue of shares under varying conditions? What is meant by sweat equity and employees’ stock option? Why are shares forfeited and how are they reissued? What is bonus share? What is meant by a rights issue? Answering to all such questions and other related matters is the aim of this chapter.

1.1 DEFINITION

According to the Companies Act 1956, “a company is a company formed and registered under this Act or an existing Company formed and registered under any of the defined laws (Act or Acts relating to companies before the Indian Companies Act, 1866, the Companies Act 1882, the Indian Companies Act, 1913 or any law governing companies in the State of Jammu and Kashmir before the Commencement of Central Laws Act, 1968 and Portuguese Commercial Code)”.

But this definition does not expose the real concept and nature of a company. Let us see some other definitions.

Justice Marshall has defined a company as, “A Corporation is an artificial being, invisible, intangible and existing only in the contemplation of law.”

According to Lord Justice Hanay, “A company is artificial person created by law with a perpetual succession and a Common Seal.”

“A company is an association of persons who contribute money or money’s worth to the common stock and employ it for some common purpose”.

All these definitions expose the following characteristics:

1.2 CHARACTERISTICS OF A COMPANY

The characteristics of a company are:

1. Artificial legal person: Company is created by law. Hence, it is treated as artificial legal person. It is not a natural person. Its very existence is through law.
2. Separate legal entity: Its legal existence is different from that of its members. Hence, it is not affected by changes in its membership. This means that change in members does not affect a company.
3. Perpetual entity: A company has a perpetual entity. A company continues to be in existence despite change of members, death or insolvency of its members.
4. Liability is limited: Member’s liability is limited. To explain, the liability of every shareholder of a company (member) is limited to the amount he has fully paid on the shares allotted to him and nothing beyond that amount.
5. Divorce between ownership and management: In companies, management is separated from ownership. Though the shareholders contribute the necessary capital, the Board of Directors are entrusted with the overall responsibility to run the company.
6. Voluntary association of persons: It is a voluntary association of persons for a common purpose to earn profit.
7. Transfer of shares: The shareholders contribute the Capital by way of subscription of shares. These shares can be transferable to any third person in public limited companies.
8. Common seal: As already said, company is an artificial person. It cannot sign the documents directly. For this, a company is provided with a legal arm “Common seal”. So, common seal has to be affixed in all documents in addition to it, the authorized person has to sign on behalf of the company. This process solves the problem of signing the document.
9. Permitted activities: A company can carry on only the permitted activities mentioned at the time of registration of the company.

1.3 KINDS OF COMPANIES (OR) TYPES OF COMPANIES

Companies in India may be classified as depicted in the following:

1.3.1 Statutory Companies

These companies are created by special acts passed by State Legislature or Parliament, e.g., Life Insurance Corporation, Reserve Bank of India. These companies are accountable to the State Legislature or Parliament.

1.3.2 Government Company

As per Section 617 of the Companies Act, 1956, “a Government Company means any company in which not less than 51% of the paid-up capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a Government Company”.

1.3.3 Foreign Company

A foreign company is one that has its incorporation outside India but has business operations in India.

1.3.4 Holding Company

According to Section 4 (4) of the Companies Act, 1956, a company is deemed to be a holding company if the other company is its subsidiary company. A company becomes a subsidiary company when the other company controls 51% or more of its paid-up share capital, has right to appoint directors on its board or is a subsidiary of another subsidiary company.

1.3.5 Subsidiary Company

According to Section 4 (1), a company shall be deemed to be a subsidiary of another if, but only if,

1. That the other controls the composition of its board of directors; or
2. That the first-mentioned company is any other company, holds more than half in nominal value of its equity share capital
3. That the first-mentioned company is a subsidiary of any company which is that other’s subsidiary.

Example:

Company B is a subsidiary of Company A, and Company “C” is a subsidiary of Company “B”. Company C is a subsidiary of company A, by virtue of Clause (c) above. If Company D is a subsidiary of Company C, Company D will be a subsidiary of Company B and consequently also of Company A, by virtual of Clause (c) above, and so on.

(d) In case of a body corporate which is incorporated outside India, a subsidiary or holding company of the body corporate under the law of such country shall be deemed to be a subsidiary or holding company within the meaning and for the purpose of this Act whether the requirements of the section are fulfilled or not.

1.3.6 Registered Company

Companies that are registered under the Companies Act, 1956 are called registered companies.

Public company: Under Section 3 (1) (iv) of the Companies Act, “public company” means a company which

1. Is not a private company
2. Has a minimum paid-up capital of 5 lakh rupees or such higher paid-up capital; as may be prescribed
3. Is a private company which is a subsidiary of a company which is not a private company

After Companies (Amendment) Act, 2000, a public company cannot be registered with a capital of less than 5 lakh. A company’s name ends with “limited”.

A public company may be a listed company or an unlisted company:

1.3.7 Listed Company

A listed company is a public limited company. Its securities are listed in any recognized stock exchange for trading purpose.

Unlisted company: An unlisted company is also a public limited company. But its securities are not listed on any recognized stock exchange for trading purpose.

1.3.8 Private Company

Under Section 3 (1) (iii), “private company” [means a company which has a minimum paid-up capital of 1 lakh rupees or such higher paid-up capital as may be prescribed and by its articles]—

1. Restricts the right to transfer its shares, if any;
2. Limits the number of its members to 50 not including—
   1. Persons who are in the employment of the company; and
   2. Persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and
3. Prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company; and
4. Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.
5. The name of private company ends with “Private Limited”.

1.3.9 Limited Company

In limited companies, liability of shareholders is limited (i) by shares or (ii) by guarantee.

1. Companies limited by shares are the most popular ones. In this, liability of a member is limited to the amount of shares, fully paid-up.
2. In companies limited by guarantee, the liability of the member is limited to the amount he guaranteed voluntarily to meet out the deficiency of assets of the company when it is wound up.

1.3.10 Unlimited Company

In unlimited companies, liability of shareholders is unlimited. In general and in practice such companies do not exist.

1.3.11 Distinction between Private Company and Public Limited Company

At this stage, one should be able to understand the differences between a private company and a public limited company, which is shown in the following tabular column:

Basis of Distinction	Private Company	Public Company
1. Number of members	Minimum: 2 Maximum: 50.	Minimum: 7 Maximum: No limit.
2. Name	Two words: “Private Limited” as part of name (at the end).	One word: “Limited” as part of name (at the end).
3. Prospectus	Prospectus cannot be issued in private company	Prospectus must be issued in public companies.
4. Allotment (Minimum subscription)	Shares are allotted to as per the director’s wish. No minimum subscription arises here.	Shares are allotted only if minimum subscription level is reached.
5. Transfer of shares	Transfer of shares is restricted.	No restriction on transfer of shares in public companies.
6. Bye laws	Special Articles of Association are necessary	Bye laws role is almost NIL. “Table A” in the Act will serve the purpose.
7. Commencement of business	Business can be commenced after Certificate of Incorporation is issued.	In addition, Certificate of Commencement of Business should be obtained to commence business.
8. Statutory Meeting	Statutory Meeting need not be held in private companies.	Statutory Meeting must be held in public companies and Reports have to be sent to its members.
9. Managerial remuneration	In private companies, managerial remuneration is not restricted.	In public companies, management remuneration is strictly in accordance with Companies Act rules.
10. Subscription of shares	Any invitation to the public to subscribe to any shares or debentures of the company is prohibited.	No such prohibition in public companies.
11. Minimum paid-up capital	The minimum paid-up capital is 1,00,000 in private companies.	5,00,000 is the minimum paid-up capital in public companies.
12. Acceptance of deposits	In private companies, deposits from persons other than its members, directors’ relatives are not accepted.	In public companies, no such restrictions prevail to accept deposits.

1.4 PRIVILEGES OF A PRIVATE LIMITED COMPANY

The following are the privileges and exemptions of a private limited company:

1. Even two persons can float a private limited company.
2. Two signatories to the Memorandum will be sufficient.
3. It cannot and need not issue prospectus.
4. As soon as it receives the Certificate of Incorporation, it can commence business.
5. It need not wait till the receipt of Certificate of Commencement of Business to allot shares.
6. Provisions relating to ‘Minimum Subscription’ will not apply to private limited companies.
7. To make a quorum, only two members are sufficient.
8. Only two directors will be enough.
9. Directors need not be insisted to take up qualification shares.
10. The public cannot inspect the profit and loss account.
11. Directors need not retire by rotation.
12. A single resolution will be enough to appoint directors.
13. It can grant loans to its directors without the sanction of the Central Government.
14. Restrictions on managerial remunerations do not apply to private companies.
15. A private company need not hold a statutory meeting. Statutory report need not be filed.
16. A person can be a manager or a managing director for more than two private companies.
17. New shares need not be issued to the existing shareholders of the company in the first instance.
18. Restrictions on investments or loans in the same group of companies do not apply for private companies.

1.5 DOCUMENTS

Now, let us discuss some of the documents that are to be prepared and filed with the Registrar of Companies:

1.5.1 Memorandum of Association

This is the most important document to be filed with the Registrar of Companies, while floating a company. It contains the following six clauses:

1. Name: The name of the Company with “Limited” in case of public limited company or “Private Limited” in case of private limited company.
2. Place: The State in which the registered office of (situation) the company is to be situated.
3. Objects: The objects of the company should be clearly stated. Only those stated in this clause can be pursued by the company.
4. Capital: Authorized capital and its divisions into various classes (shares).
5. Liability: A statement declaring that the liability of the members is limited.
6. Declaration: A declaration of association stating that the company has been formed by the signatories to the Memorandum of Association.

It lays down the limits or framework within which a company has to work.

The Memorandum of Association must be printed, divided into paragraphs, each numbered consecutively. It must be signed by Atleast Seven persons who each agree to take one share at least.

1.5.2 Articles of Association

It contains the rules and regulations to run the company’s business.

• A private company has to prepare its own Articles of Association.
• In case of a public limited company, it need not prepare it. Provisions of Table A of the Companies Act will serve the needed purpose.
• Articles include issue of shares, forfeiture of shares, election of directors, maintenance of books, division of profit, conduct of meetings, etc. In short, the Table A contains model articles which have to be complied with.
• It contains a declaration to the effect that all the requirements of the Act for incorporation have been complied with.
• In case of a private company, there is list of persons who are to act as first directors of the company. In the absence of the list, signatories to the Memorandum will act as directors.
• The written consent of such persons to act and to take qualification shares, if any. (This requirement does not apply to private company). In the absence of the list, signatories to the Memorandum will have to act as directors.
• The situation of Registered Office (Notice of the address) has to be intimated to the Registrar within 30 days after registration (incorporation).

1.5.3 Certificate of Incorporation

• The Registrar, after perusal of the documents—the Memorandum of Association and the Articles of Association—gets satisfied that the requirements the Companies Act have been duly complied with, will issue a certificate. This is called “Certificate of Incorporation”.
• The Registrar will enter the company’s name in the Registrar. The company comes into existence.
• A private company can commence business as soon as it receives this certificate. However, a public limited company will have to get one more certificate—the Certificate of Commencement of Business— to commence its business.

1.5.4 Prospectus

According to Section 2 (36) “Prospectus means [any document described or issued as a prospectus and includes any] notice, circular, advertisement or other document [inviting deposits from the public or] inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate.”

• A public limited company has to issue a prospectus (or prepare a statement in lieu of prospectus) signed by every director before its publication and file a copy with the Registrar in order to get the Certificate of Commencement of Business.
• Its main objective is to invite the public to subscribe for the shares and debentures of the company.
• The prospectus must be dated and it should be issued within 90 days of that date.
• Main clauses in prospectus:
  • Capital—Authorized, issued, subscribed and paid-up capital
  • Share amount of instalments—Time gap between instalments to pay share amount
  • Particulars of issue—At par, At premium, At discount
  • Underwriting commission
  • Commission to brokers on sale of shares
  • Preliminary expenses
• The prospectus serves as a basis of contract between the company and the person who opts to buy shares.
• The Registrar may refuse to register a prospectus, if
  • It does not show the date
  • It does not comply with the requirements of Section 56
  • It does not contain the expert’s consent, when his opinion is permissible and is inserted
  • It does not contain the consent in writing of directors, and copy of documents mentioned in Section 60 (1)
  • It does not comply with the provisions of Section 60 (2)

1.5.5 Certificate of Commencement of Business

The Certificate of Commencement of Business will be issued by the Registrar, if the following conditions are fulfilled:

1. A copy of prospectus or a statement is lieu of prospectus has to be filed by the company with the Registrar.
2. The minimum number of shares which have to be paid in for cash has been subscribed and allotted.
3. Every director has paid on the shares held by him.
4. The secretary or anyone director has to certify and declare that the requirements of the Companies Act have been complied with.

On perusal and satisfaction, the Registrar issues a certificate called the Certificate of Commencement of Business.

A public limited company can commence business only after getting this certificate.

1.6 SHARE CAPITAL

Company raises “Capital” by issue of shares, because it being an artificial person cannot have a capital of its own. Such capital raised by issue of shares is called “share capital”. Share capital is mentioned in the Memorandum of Association of Company. Share capital of a company is divided into small units of a fixed amount. These units are called “shares”.

Types of share capital: The share capital of a company may be divided into the following categories

1.6.1 Authorized Capital (Nominal/Registered Capital)

This is the nominal value of shares which the company is authorized to issue by its Memorandum of Association. This is the maximum amount of capital any company is allowed to have. This amount is stated in the “Capital Clause” of the Memorandum of Association at the time.

On registration, an ad valorem duty is paid on the amount of authorized capital. The company can issue shares only to that much amount. It cannot issue shares beyond the authorized (capital) amount. The share capital (total amount) has to be divided into shares of small denomination such as 10, 50, 100 of various classes. This amount cannot be enhanced without altering the Capital Clause of the Memorandum of Association. The entire amount need not be issued at a single instance.

1.6.2 Issued Capital

The capital (part of authorized) offered to the public for subscription is called “issued capital”. This includes shares offered to vendors for subscription other than cash. Issued capital can never be more than nominal capital. The shares may or may not be fully subscribed by the public. Difference between issued capital and nominal capital is termed as “unissued capital”. This can be offered to the public later at any time.

1.6.3 Subscribed Capital

It is the nominal value of shares subscribed by the public. Shares issued for public may or may not be fully subscribed. If all the shares are fully subscribed by the public, issued capital will be the same as the subscribed capital.

The balance of issued capital not subscribed by the public is known as “unsubscribed capital”.

1.6.4 Called-up Capital

This is the part of the subscribed capital which has been called-up. The Board of Directors may decide to call the entire amount of the face value of the share of part by part in two or more calls. It is not necessary to call for the entire amount on shares subscribed by the shareholders at one and the same time.

1.6.5 Paid-up Capital

The amount of called-up capital that has been actually paid by the shareholders is known as “paid-up capital”. If all the called-up capital has been received, then paid-up capital will equal to the called-up capital. That part of called-up capital which has not received is termed as “calls-in-arrears.”

 

Paid-up Capital = Called-up Capital − Calls-in-Arrear

1.6.6 Uncalled Capital

This is the remaining part of the issued capital which has not yet been called.

1.6.7 Reserve Capital

Sometimes, the company, by a special resolution, may decide to keep a certain portion of the uncalled capital till liquidation. That portion is called reserve capital.

The different types of share capital may be depicted schematically as:

The different types of share capital can best be explained by the following illustration.

Illustration 1.1

A limited company has been incorporated with an authorized capital of 50,00,000 divided into 5,00,000 shares of 10 each. It offered 4,00,000 shares for subscription by the public and out of these, 3,50,000 shares were subscribed for. The directors called for an amount of 8 per share and received the entire amount except a call for 5 per share on 1,000 shares. Determine the amount of different categories of ‘share capital”.

Solution

1.7 DIFFERENCES BETWEEN “CAPITAL RESERVE” AND “RESERVE CAPITAL”

The following table shows the differences between “reserve capital” and “capital reserve”:

Reserve Capital	Capital Reserve
1. It is that portion of uncalled share capital, which shall be capable of being called up except in the event and for the purpose of winding up of the company.	It includes all reserves except revenue reserves. It arises due to revaluation of fixed assets.
2. It is not disclosed in the balance sheet of a company.	It is disclosed on the liability side of the balance sheet under the head “Reserves and Surplus”.
3. It can be used only at the time of winding up of the company.	It can be used at anytime during the life of the company.
4. It is that part of amount which has never been called up.	It is the amount which has already been realized on revaluation of fixed assets of the company.

1.8 SHARES OF A COMPANY

1.8.1 Meaning

Total capital of company is divided into units of small value. Each such unit it called a “share”. A share is a fractional part of the share capital of a company. By purchasing a share, one attains ownership rights in a company. Such persons who part away money through shares are known as shareholders. They, thus, become part owners of the company. “A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place and of interest in the second, but also consisting of mutual covenants entered into by all the shareholders in terms of the Act and the Articles.”

1.8.2 Classes of Shares

According to Section 86 of the Companies Act, 1956, share capital of a company formed after 1 April 1956 shall be of only two kinds: (i) preference shares and (ii) equity shares.

1.8.2.1 Preference Share

U/S 85 of the Companies Act, 1956, a preference share is one which fulfils the following conditions:

1. That it carries a preferential right to dividend to be paid either as a fixed amount or an amount calculated by a fixed rate.
2. That with respect to capital it carries or will carry, on the winding up of the company, the right to repayment of capital before anything is paid to equity shareholders.

In simple words, these preference shareholders have (i) the right to receive dividend and (ii) to return of capital in preference to other shareholders.

A fixed rate of dividend payable is mentioned before the name, i.e., prefixed. For example, 12% reference shares mean that dividend is payable on these shares at the rate of 12% p.a.

The rights are shown in the Articles of Association.

1.8.3 Types or Kinds of Preference Shares

1.8.3.1 On the Basis of Dividend Right

On the basis of dividend right, preference shares are classified into:

1. Cumulative preference shares
2. Non-cumulative preference shares

1. Cumulative preference shares: The holders of these shares have a right to receive the arrears of dividend. They are entitled to receive the arrears of dividend before any dividend is paid on equity shares. For example, if dividend has not been paid for the accounting years 2008-09 and 2009-10 on 15% cumulative preference shares and the company wants to distribute dividend on equity shares for the year 2010-11, divid on preference shares for three years, i.e., 2008-09; 2009-10; 2010-11 at 15% p.a., 45% for three years in all, will have to be first paid on preference shares before any dividend is paid on equity shares for the year 2010-11. Unless specifically mentioned otherwise, preference shares shall be construed to be cumulative.
2. Non-cumulative preference shares: The holders of these shares will not have rights to receive any arrears of dividend. In the above example, if the preference shares are non-cumulative, the company will pay 15% preference dividend only for 2010-11 before paying dividend on equity shares. They are not entitled to receive arrears for the years 2008-09 and 2009-10. Hence, for non-cumulative preference shares, dividends for the previous years do not accumulate. If no dividend is declared in a year, the right to receive such dividend for that year expires automatically.

1.8.3.2 On the Basis of Participation in Surplus Profits

On the basis of participation in surplus profits, preference shares are classified into:

1. Participating preference shares
2. Non-participating preference shares

1. Participating preference shares: In addition to a fixed dividend right, these shareholders have a right to participate in the surplus profits after the equity shareholders have been paid dividend. In the event of winding up of the company, these shareholders have the right to receive a pre-determined portion of surplus after the equity shareholders have been paid off.
2. Non-participating preference shares: These shares are entitled to get only a fixed rate of dividend. They are not entitled to have any right in surplus profit. Unless specified otherwise, the preference shares are generally non-participating.

1.8.3.3 On the Basis of Recovery of Capital

On the basis of recovery of capital, preference shares are classified into:

1. Redeemable preference shares
2. Irredeemable preference shares (Non-redeemable)

1. Redeemable preference shares: A company may issue shares on the condition that the company will repay after a fixed period or even earlier at company’s discretion. The repayment on these shares is called redemption. This is governed by Section 80 of the Companies Act, 1956. Now, only this category of preference shares can be issued by a company.
2. Non-redeemable preference shares: In this category of shares, the amount of capital will never be paid back before winding up of the company. According to Section 80 (5A), no company limited by shares shall issue irredeemable preference shares for preference shares redeemable after the expiry of 20 years from the date of issue.

1.8.3.4 On the Basis of Conversion into Equity Shares

On the basis of convertibility, preference shares may be classified into:

1. Convertible preference shares
2. Non-convertible preference shares

1. Convertible preference shares: These shares give the rights to the holders to get them converted into equity shares at their option as per the stipulated terms and conditions of their issue.
2. Non-convertible preference shares: If a preference share cannot be converted into equity shares, such a share is called non-convertible preference share. Unless otherwise stated, preference shares are non- convertible.

1.8.3.5 Guaranteed Preference Share

In case, even if there is no profit, dividend will have to be distributed to some kind of shares. This is called “guaranteed preference share.” However, such a guarantee is not to be given by the company but by someone else.

1.9 EQUITY SHARES

According to Section 85 of the Companies Act, 1956, “An equity share is a share which is not a preference share”.

Holder of equity shares is entitled to:

1. Dividend
2. Repayment of capital only after the claims of preference shares are paid off.

According to Section 86 (A), equity share capital may be (i) with voting rights or (ii) with differential rights to voting, dividend or otherwise in accordance with such rules and subject to such conditions as may be prescribed.

Generally, equity shareholders control the affairs of the company.

1.9.1 Distinction Between Preference Share and Equity Share

The following table gives the differences between preference share and equity share:

Basis of Distinction	Preference Share	Equity Share
1. Right to dividend (Preference)	Dividend on preference shares is paid first.	Only if there is profit and that too after paying to preference shares, are the dividend is paid.
2. Rate of dividend	Rate of dividend is pre-determined and fixed in Articles of Association.	Rate of dividend is not pre-determined and is also not fixed.
3. Refund of capital	On dissolution of the company, preference share capital is returned (refunded) first.	Only if there is any balance, that the capital may be refunded.
4. Right to vote	In general, they do not have right to vote.	They have full right to vote.
5. Management participation	They have no role in management participation.	They have right to participate in management.

1.10 MANAGEMENT OF COMPANIES

The internal management of companies is governed by the Articles of Association and the Memorandum of Association. The provisions of the law enshrined in the Companies Act, 1956 set the framework within which the activities of the company will have to be carried on. The said Act and the Memorandum and Articles express explicitly the duties and powers of the shareholders, directors, managing director and other persons associated with the affairs of the company. The relevant provisions envisaged in Table A of the First Schedule to the Companies Act are applicable, in case if the Articles are silent on any issue.

1.10.1 Shareholders

By subscribing for shares issued, the shareholders are the real owners of the company, as they contribute to the capital. Since the number of shareholders is sufficiently very large comprising different geographical locations, it will be a difficult task to manage the affairs of the company on a day-to-day basis. This necessity resulted in the separation of management and ownership. Hence, the management is entrusted with the directors (who are not owners). Then, do you think that the real owners are powerless or mere puppets in the affairs of the company? The answer is an emphatic, No. They can show their power in Annual General Body Meeting. In such a meeting, shareholders consider the annual accounts, the balance sheet, directors’ report, audited accounts, etc. By passing a resolution (since they have voting rights), they approve and adopt all such important and crucial matters. Shareholder elect directors, appoint auditors, declare dividends, etc. All such matters are finalized only by the shareholders in general meeting. Even any amendment of articles or memorandum requires a resolution to be passed by the shareholders in such meeting. Any ratification or approval can also be made possible only by the needed resolution passed by them in general meeting. General meeting is the place where the shareholders can show their might.

1.10.2 Board of Directors

There are a number of provisions, in respect of the directors, in the Companies Act. Managerial powers and control are entrusted with the Board of Directors. Generally, directors are elected by the shareholders. Board of Directors constitute more than two directors. Directors have to act in unison, i.e., the directors should act as a board. The Board has enormous powers. A meeting of the Board of Directors must be held once in every three calendar months as per the provisions of the Companies Act. The quorum is two directors or one-third of the total number, whichever is higher. They have to take any decisions at such meeting by way of resolutions. The directors are trustees for the company’s property. They have to act for the benefit of the company alone. The directors should be cautious and diligent in exercising their powers. Generally, they are not responsible for any loss suffered by the company. But, if the directors are guilty of gross negligence or breach of trust, they must compensate the company for its losses.

Subject to Section 289 of the Companies Act, resolutions may also be adopted by circulation. However, according to Section 292, the following must be adopted only by the Board at its meeting:

1. The power to make calls
2. The power to issue debentures
3. The power to borrow moneys otherwise than on debenture
4. The power to invest company’s funds
5. The power to make loans

Only at its meeting are specific powers delegated to individual directors. (But in general, individual directors have no powers.)

1.10.3 Managing Director

A managing director is “a director who, by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board, or, by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called.”

Appointment of a managing director (new or re-appointment) must be approved by the Central Government.

A managing director cannot act as such for more than two companies. In case of a second company, unanimous approval of the Board of Directors of that company is essential.

The powers and allied matters relating to managing director are explained in the provisions of the Companies Act.

1.10.4 Manager

A manager is “an individual … who, subject to the superintendence, control and director of the Board of Directors, has the management of the whole, or substantially the whole of affairs of the company, and includes a director or any other person occupying the position of a manager, by whatever name called, and whether under a contract of service or not”. Generally, a manager is appointed by the Board of Directors. A company may have either the manager or the managing director. However, with the approval of the Central Government, a company may have two managing directors.

1.11 GENERAL MEETINGS OF THE COMPANY

The next item a student of corporate accounting should comprehend is “general meetings of the company”. In general, there are three kinds of meetings of the company:

1. Statutory meeting
2. Annual general meeting
3. Extraordinary general meeting

1.11.1 Statutory Meeting

Every public company limited by shares and limited by guarantee and having share capital must hold a general meeting of its members within a period of not less than one month and more than six months from the date of commencement of business. At least 21 days before the day of the meeting, the Board has to forward to every member a report known as the statutory report along with the notice of the meeting. This meeting is termed statutory meeting.

The statutory report must state:

1. The number of shares allotted; fully or partly paid; cash and other than cash; total amount received in cash
2. An abstract of receipts and payments made up to date within seven days of the report
3. An account or estimate of the preliminary expenses including commission and discount in respect of shares and debentures
4. Names, addresses and occupations of its directors, auditors, managers and secretary
5. Contract for getting approval at the meeting
6. The arrears, if any, due on calls from directors, managers, etc.

In addition to the auditors, at least two directors must certify the statutory report. A copy of statutory report has to be filed with the registrar. A company cannot alter the terms of contract mentioned in the prospectus before the statutory meeting.

A private company is not required to hold a statutory meeting. After the first meeting, it may get adjourned from time to time. Due notice is the prime requirement to pass any resolution.

1.11.2 Annual General Meeting

The first general meeting must be held within 18 months of the incorporation of the company. Thereafter, it must be held every year but the interval between two annual general meetings must not be more than 15 months. The registrar is empowered to extend the time by 3 months. The meeting will be held, generally, at the place where the registered office is situated. It must not be held on public holidays. It must be held during normal business hours.

The following is the usual agenda:

1. Consideration of annual accounts, and the reports of directors
2. Election of directors
3. Appointment of auditors
4. Deciding rate of dividend

All these matters are passed by simple majority resolution. All other matters can be taken up for discussion but they should be given proper prior notice, i.e., at least 21 days in advance.

If any default is made in convening the meeting, the Central Government may intervene on the appeal of any one member. In such a case also, a notice of 21 days is necessary. This is the statutory provision.

1.11.3 Extraordinary General Meeting

Other than the statutory meeting and the annual general meeting, any general meeting of the company is called as an extraordinary general meeting.

This meeting is called by the directors if there is any urgent business that has to be done before the next general meeting.

Only special matters can be transacted in this type of meeting.

Extraordinary general meeting may also be called by the Board at the request of members (written requisition). The meeting must be called within 21 days of the deposit of the requisition to be held on a day not later than 45 days from such date. The notice should contain the matter to be transacted in the meeting.

In case the Board does not convene the meeting within 45 days of the requisition, the concerned members (requisitionists) may hold the meeting within 3 months of the date of requisition. However, all the statutory formalities should be adhered to strictly in the same manner as that of regular meetings.

The National Company Law Tribunal may order a meeting of the company to be held either on its own accord or on the application of a director or a member entitled to note.

1.12 QUORUM

The quorum for the general meetings of the company is FIVE persons personally present for public companies and TWO persons for private companies. However, the articles can fix a higher number than this.

1.13 VOTING

The followig is the procedure of voting:

• Every member present in the meeting has ONE VOTE.
• Voting is by show of hands.
• The chairman or five members present in person or proxy or members representing 10% of the paid-up capital or member(s) holding shares of not less than 50,000 may demand a poll in public companies.
• In a private company, poll may be demanded by one member present in person or proxy if not more than seven such members are personally present. If more than seven members are personally present, two members present in person or proxy may demand a poll.
• In case if there is a poll, proxies can be used.

1.14 RESOLUTIONS

According to the Companies Act, there are three types of resolutions:

1. Ordinary resolution
2. Special resolution
3. Resolution requiring special notice

1. Ordinary resolution: Resolution passed by a simple majority is called an ordinary resolution.
2. Special resolution: A special resolution is one (i) in regard to which the intention to propose the resolution as special resolution is specifically mentioned in the notice of the meeting, and (ii) which is passed if the votes cast for it are not less than three times the votes cast against it.
3. Resolution requiring special notice: This resolution is passed by the members at a general meeting by a simple or three-fourths majority. Besides, a notice of the intention to move the resolution (which requires special notice) should be given to the company not less than 14 days before the meeting at which it is to be moved. The company must immediately give notice to the members of the intention to move such a resolution.

1.15 FLOATING OF A COMPANY (FORMING A NEW COMPANY)

In general, promoters indulge in promoting a company, as they are well versed in the procedure. Irrespective of the involvement of a promoters or somebody else, the procedure to be followed will remain the same. which is explained as follows:

 

Stage I:	Investigation: First, one has to thoroughly analyse and make an intensive survey to ascertain whether the business they are going to venture will be a propositious one.
Stage II:	If such investigation injects a hopeful result, then a document called “Memorandum of Association” has to be prepared. it is an important document and its contents are described earlier in this chapter.
Stage III:	Next, another important document called “The Articles of Association” has to be drafted. Its important clauses are also explained earlier in this chapter. It is nothing but rules and regulations for the conduct of the business of the company.
Stage IV:	Competent persons should be chosen well in advance for the post of Managing Director of the company and an agreement should be entered into with him.
Stage V:	List of persons who have agreed to become the first directors of the company, their written consent, their qualification shares, etc. have to be finalized and reduced to writing in standardized formats.
Stage VI:	A declaration stating that all the provisions and requirements of the Companies Act have been complied with should be prepared. This should be signed by any one of the following persons: An advocate of the Supreme Court or High Court An attorney or a pleader entitled to appear before a High Court A secretary or a chartered accountant, who is engaged in the formation of the company A person named as a director in the Articles of the Company While preparing the above documents, care should be taken to see that no provision of requirements of The Companies Act should be left out. All the above documents should be sent to the Registrar of Companies with required fees.
Stage VII:	The Registrar will peruse all the documents. He has to verify whether all the requirements of The Companies Act have been complied with. Then he will enter the company’s name in the Registrar. The Registrar will issue a certificate at this stage, known as “Certificate of incorporation”. The company comes into EXISTENCE now.
Stage VIII:	In order to get one more certificate—The Certificate of Commencement of business—public limited company has to issue a prospectus (or prepare a statement in lieu of prospectus) signed by all directors and file a copy with the Registrar. (Contents of a prospectus are described earlier in this chapter). The company raises capital by inviting the public to subscribe for the shares and debentures of the company through “prospectus”. The Companies Act, the Central Government, SEBI and the Reserve Bank Of India impose several rules and regulations for the issue of prospectus by the companies. All such rules must be duly complied with.

1.16 MINIMUM SUBSCRIPTION

At this stage, one has to understand the meaning of “minimum subscription”. Let us discuss it.

Minimum subscription means the amount which, in the opinion of the Board of Directors, is the minimum to be raised by the issue of shares so as to provide for the following:

1. The price of any property purchased or agreed to be purchased
2. All preliminary expenses, including underwriting commission and brokerage
3. Repayment of money borrowed, if any, for the above purpose
4. Working capital
5. Any other expenditure

For any new company issuing shares for the first time, this should be strictly adhered to. In case the newly incorporated companies are unable to raise the minimum subscription amount, it will not be able to get Certificate of Commencement of Business. The time limit to raise the minimum subscription is 120 days from the date of first issue of prospectus. If the company fails to do so, it has to refund the entire amount received from application within the next 10 days, i.e., within 130 days from the date of issue of prospectus.

Norms imposed by SEBI: If a company does not receive 90% of the issued amount from public subscription PLUS accepted development from underwriters or from other sources in case of under-subscribed issues, within 60 days from the date of closure of the issue, the company must refund the subscription amount in full. This condition is applicable to all the public and rights issue of shares.

The prospectus not only stipulates the minimum amount (minimum subscription) but also sets the minimum period for which the company will continue to receive application for shares. This minimum period is known as keeping the subscription LIST open. Subscription list must be kept open for at least 3 days. It should not open before the beginning of the fifth day from the date of issue of prospectus. The moneys received from applicant of shares, should be kept in a scheduled bank, until the minimum subscription level is reached. The ulterior motive in imposing so many restrictions is to ensure that only companies with sufficient capital are permitted to commence business.

Only after all such rules, regulations and provisions of The Companies Act are duly complied with, that the Registrar will issue the Certificate of Commencement of Business. After obtaining this certificate, a public limited company can commence its business.

The other import terms such as application money, allotment, calls, call-in-arrears, forfeiture and re-issue of forfeited shares are all explained in the forthcoming pages, while “accounting treatment” is discussed.

1.17 ISSUE OF SHARES

The shares of a company may be issued in two ways:

1. For cash
2. For consideration other than cash

1.17.1 Issue of Shares for Cash

1.17.1.1 Stage I—Application for Shares

This is the first stage for the issue of share capital. The prospectus invites the public to subscribe to its share capital. The prospective investors have to submit their application for shares (in the prescribed format) with the stipulated amount called “application amount”. This should not be less than 25% of the issue price of the share. For example, if the issue price of a share is 10, application amount should not be less than 2.50 per share. Suppose if an investor wants to subscribe for 1,000 shares, then he will send the application form duly filled in and 2,500 has to be remitted in a scheduled bank mentioned in the prospectus.

1.17.1.1.1 Receipt of Applications

On receipt of applications, the company will make the needed entries in its Book.

Accounting Treatment:

[Note and Remember: Whenever cash is received by the company, the (cash A/c) bank A/c should be debited.

Then, note for what purpose it is received. Here, it is received as share application. Hence that account, i.e., share application A/c, should be credited.]

1.17.1.1.2 Stage I—Transfer of Application Money

Situation 1: When all the shares applied for have been allotted:

In this case, i.e., Shares applied = Shares allotted, share application A/c has to be closed by transferring share application money to share capital A/c.

Accounting Treatment:

1.17.1.2 Stage II—Allotment

1.17.1.2.1 Amount Due on Allotment

If the par value of share is called up by the company, letters of allotment are sent to applicants to whom shares have been allotted. They will be requested to pay a part of the remaining value of shares after application amount. This amount is known as allotment money.

Accounting Entry for Amount Due on Allotment:

1.17.1.2.2 Accounting Entry for Receipt of Allotment Amount

When Allotment Amount is Received

[Note: Cash Received — Debit the Bank A/c Purpose — Share Allotment → Credit the Share Allotment A/c]

[These two entries fall under Stage II]

1.17.1.3 Stage III—Call on Shares

The balance amount on the face value of shares after deducting the money received on application and allotment shall be asked by the Board of Directors to pay the allottees in a single payment or in more than one instalment. Each such instalment is known as a “call”. Any number of calls—first call, second call, third call and final call—may be made to get the remaining value of shares. Following two conditions are important:

1. Call amount should not be less than 25% of issue price of shares
2. There should be at least an interval of one month between the makings of two calls or as provided in the Articles of Association.

Accounting Treatment:

1.17.1.3.1 Call Amount Due

1.17.1.3.2 Receipt of Call Amount

These six entries in three stages form the basis of accounting entries

1.18 ACCOUNTING TREATMENT FOR ISSUE OF SHARES FOR CASH

The whole process of issue of shares (i.e., from the receipt of application till the money received on final call) is divided into three stages, for the sake of convenience of passing entries, as follows:

STAGE I: (a): On Receipt of Application Money:

Note: Students should keep in mind that whenever money is received by the company → Bank A/c → to be debited. The source (or purpose for) from which is received → that A/c → to be credited. Here, share application A/c. Though this is not a rule or accounting principle, it is a short cut method to remember.

(b): On Transfer of Application Money to Share Capital:

STAGE II: (a) On Allotment Money Due:

(b) On Receipt of Allotment Money:

STAGE III: (a) On Call Money Due:

(b) On Receipt of Call Money:

Important note:

Generally, call money is received by the company in more than one instalment. Then in such cases, for every call (by prefixing the call number), this entry has to be repeated.

For instance, if call money is made in two instalments, then Call Money Due on First Call (first instalment) is to be recorded as:

 

Share First Call A/c	Dr.	…
To Share Capital A/c			…
When money is received on first call,
Bank A/c	Dr.	…
To Share First Call A/c			…
Then, second instalment, i.e., Call Money Due on Second and Final Call
Share Second and Final Call A/c	Dr.	…
To Share Capital A/c			…
When money is received on second call:
Bank A/c	Dr.	…
To Share Second & Final Call A/c			…
[And so on…, if third call is made]

[These THREE STAGES are the foundation or cornerstone on which all the other transactions are inserted or added, which are described then and there in course of solving problems. Students have to understand and master these steps which will facilitate the task of understanding this chapter with ease.]

Illustration 1.2

On 1 January 2010, Pappu & Co. Ltd. was incorporated with an authorized capital of 20,00,000 divided into shares of 10 each. It offered to the public for subscription of 50,000 shares payable as follows:

 

On Application	4 per Share
On Allotment	3 per Share
On First Call	2 per Share
On Second & Final Call	Re 1 per Share

 

Shares were fully subscribed. Application money was received on 15 January 2010. The directors made the allotment on 15 February 2010.

Journalize the above transactions in the books of Pappu & Co. Ltd.

Solution

 

STAGE 2:    There are three entries:

1. On transfer of application money to share capital A/c (Situation 1: When shares are allotted for all the A/c applicants)
2. On allotment money due
3. On receipt of allotment amount

STAGE 3:    There are mainly two entries (if there is only one call):

1. Share call amount due
2. On receipt of share call money

Important note: Students should be thorough with these BASIC ENTRIES.

Illustration 1.3

Model : Only one call

Good Luck Ltd. Company was incorporated on 1 January 2010 with an authorized capital of 5,00,000 divided into shares of 10 each.

It offered to the public for subscription 40,000 shares payable as follows:

 

On Application	3 per Share
On Allotment	4 per Share
On First and Final Call	3 per Share
(1 month After Allotment)

 

The shares were fully subscribed by the public and the application money was duly received on 15 January 2010. The directors made the allotment on 1 February 2010.

Pass the journal entries in the books of Good luck Ltd. Company, assuming that amount due have been received within 15 days of making the allotment and call.

Solution

Note:

1. In this problem nothing is mentioned regarding the class of shares issued. In such cases, they are always treated as equity shares.
2. Hence, the word “equity” should be prefixed to “share” while recording entries. (In case it is preference shares, then instead of equity, preference shares should be written.)

Now, make journal columns and remember the explained set of entries in three stages and record one by one as follows:

 

Illustration 1.4

Model: More than one calls

Fortune Ltd. on 1 January 2010 was incorporated with an authorized capital of 10,00,000 divided into shares of 100 each.

If offered to the public for subscription 9,000 shares payable as follows:

 

On Application	25 per Share
On Allotment	25 per Share
On First Call	25 per Share
On Second and Final Call	25 per Share

 

Shares were fully subscribed for by the public and all money on allotment, first call and final call were received duly.

Pass necessary entries in the books of the company.

Solution

Note:

1. Students have to enter one more entry, for the second and final call. This should be made in Stage III after entry for first call has been made.
2. In this problem also, it is given as shares only. Automatically, it should be treated as equity shares.

1.18.1 Combined Account

Sometimes a combined account for share application and share allotments is recorded.

There are four entries, if they are recorded separately (as in previous two illustrations, i.e., Stage I (1) and Stage II (a), (b) and (c). Now, in case of combined account it has to be recorded as follows:

STAGE I: On Receipt of Application Amount:

STAGE II: (a) Transfer of Application Money and Allotment Due:

(b) On Receipt of Allotment Amount:

 

Bank A/c	Dr.	…
To Share Application and Allotment A/c			…
(Allotment Money Received)

Illustration 1.5

Model: Combined account for share application and share allotment

Same figures as in Illustration 1.3.

Solution

 

1.19 OVER-SUBSCRIPTION

When the number of shares applied for is more than the number of shares offered for issue, such a situation is called over-subscription. As per SEBI Guidelines, all applications have to be categorized according to the number of shares applied for and then allotment has to be made in marketable lots on a proportionate basis.

Here, only accounting treatment for oversubscription is dealt with. There are three alternatives to deal with oversubscribed shares.

1.19.1 Alternative 1

The directors may decide:

1. to fully accept some applications
2. to reject those in excess of the needed number

   That means, some applicants may not be allotted any shares. Regret letters will be sent to them and the money will be refunded for such rejected applications.

1.19.2 Alternative 2

The Board of Directors can make a proportionate distribution of shares available for allotment among the applicants. This is usually made on the basis of the ratio between the number of shares to be allotted and the number of shares applied for. This method is known as pro-rata allotment.

To illustrate, in case if application for 1,00,000 shares are invited and received shares are 1,50,000. Under pro-rata allotment, two shares will be allotted for every three shares applied for.

 

 

The excess application money of 50,000 shares will be adjusted towards the amount due on the allotment of 1,00,000 shares.

 

 

STAGE I: 1. On Receipt of Application Money:

STAGE I: (c) (a) On Adjustment of Application Money:

STAGE II: (a) On Share Allotment Due:

 

Share Allotment A/c	Dr.	…
To Share Capital A/c		…

 

(b) On Receipt of Allotment Money

1.19.3 Alternative 3

The Board of Directors can opt for this alternative which is a combination of the above-mentioned two alternatives.

1. Some shares are rejected
2. The remaining shares are allotted on a pro-rata basis

To illustrate, for 1,00,000 shares invited, 1,50,000 applications are received. Board of Directors decided

1. To reject 25,000 shares outright
2. Make a pro-rata allotment of remaining excess shares, i.e., 25,000

That means, 1,00,000 applicants are to be allotted 1,25,000 shares—4 shares are allotted for every 5 applicants (1,00,000:1,25,000 = 4:5.)

Hence, money on 25,000 shares will be refunded.

Application money received on another 25,000 shares will be adjusted towards the amount due on the allotment of shares allotted.

 

Illustration 1.6

Model: Over-subscription—Excess applications rejected completely

   X Co. Ltd. invited applications for 50,000 shares of 10 each payable:

   On Application        3

   On Allotment           2

   And the balance when required

60,000 shares were applied for. The directors accepted applications for 50,000 shares and rejected the remaining applications. Allotment money was received on 49,000 shares.

You are required to pass the necessary journal entries, make the ledger accounts and show these items in the balance sheet of the company.

Solution

Note:

1. Excess applications were rejected outright. First alternative (i.e.) application money on rejected ones have to be refunded.
2. 50,000 Shares were allotted. But money for allotment was received only for 49,000 shares. Hence, ‘On allotment due’: 50,000 × 2 = 1,00,000 has to be recorded and on receipt of allotment, 49,000 × 2 = 98,000 has to be recorded.
3. Here, ledger accounts and balance sheet are to be prepared in addition to journal entries.

   First, journal entries have to be passed in the books of the company. Then, from these journal entries, ledger accounts have to be prepared and finally from the available figures, the balance sheet has to be drawn up.

Step 1: Passing of Entries:

 

Step 2: Preparation of Ledger Accounts:

 

Illustration 1.7

Model: Pro-rata allotment of shares

Green Co. Ltd invited applications for 10,000 shares of 20 each payable as follows:

On Application	5
On Allotment	6
And the balance when required

Applications were received for 15,000 shares. The directors decided to allot on pro-rata basis.

Pass necessary journal entries.

Solution

 

Illustration 1.8

Model: Partly rejected and partly pro-rata allotment

A public limited company invited applications for 1,00,000 shares of 10 each payable as:

On Application	3 per share
On Allotment	4 per share
On Call	3 per share

Applications for 1,50,000 shares were received. Applications for 20,000 shares were rejected outright. Remaining applicants were allotted 1,00,000 shares on pro-rata basis. The excess amount on application was adjusted towards the amount due on allotment. All the shareholders paid the amount duly. Journalize the transactions.

Solution

 

Step 1: Excess Money (Application) to Be Adjusted Towards Allotment Money Is Arrived as Shown in the Following:

 

(a) Number of Applications Received: 1,50,000
Application Fee/Share: 3
∴ Amount Received on 1,50,000 Shares
@ 3 per Share (1,50,000 × 3)	=	4,50,000
(b) Less: Amount Transferred to Share Capital
(1,00,000 × 3)	=	3,00,000
(c) Excess Application Money [(a) − (b)]	=	1,50,000
(d) Less: Rejected & Refunded
(20,000 × 3)	=	60,000
(e) Excess Application Money to Be Adjussted towards Allotment Money [(c) − (d)]	=	90,000

 

Step 2: Allotment Money Due:

 

(a) Number of Shares × Allotment Money Due
1,00,000 × 4	=	4,00,000
(b) Less: Excess Application Money Already
Adjusted to Allotment Money: (Ref: Step 1 (e))	=	90,000
(c) Actual Allotment Money to Be Received & Credited to Bank A/c	=	3,10,000
[Step 2: (a) − (b)]
{Allotment Due − Excess Application Money}

 

Step 3:

 

1.20 UNDER-SUBSCRIPTION

All the shares offered by a company, at times, may not be taken by the public. In such a situation, the number of shares applied for is less than the number of shares offered by the company to the public. Such a situation is called “under-subscription” of shares.

This is subject to the condition that minimum subscription should have been received by the company. As per statutory provisions, shares can be issued for subscription only after minimum subscription has been received.

Accounting Treatment:

Journal entities are to be made on the basis of shares APPLIED (NOT ON THE BASIS OF SHARES ISSUED). Hence, no special treatment is required.

If the number of shares applied for is less than 90% of the minimum subscription, the issue devolves if not under-written.

1.20.1 Distinction Between Under-subscription and Over-subscription

The following table gives the differences between under-subscription and over-subscription:

Basis of Distinction	Under-subscription	Over-subscription
1. Number of shares applied	Number of shares applied is less than the shares offered for subscription.	Number of shares applied is more than the shares offered for subscription.
2. Acceptance of application	All the applications are accepted.	All applications are not accepted. Some may be rejected. Some may be on pro-rata basis.
3. Allotment of shares	All the subscribers are allotted shares, i.e., full allotment.	Excess shares are allotted on prorata basis.
4. Refund of application money	As all applications are accepted, question of refund of money does not arise.	Application money for rejected shares, refund of money takes place.
5. Minimum subscription	Sometimes, the company may face the problem of minimum subscription	No such problem arises in this case.

Illustration 1.9

Model: Under-subscription

Vas & Co. Ltd. offered 20,000 shares of 50 each to the public as:

On Application	20
On Allotment	15
On Call	15

The public applied for 18,000 shares only. All money due received.

Pass journal entries.

Solution

 

1.21 CALLS-IN-ARREARS

Sometimes, shareholders may fail to pay the amount due on CALLS. The amount not received on calls (as per terms and conditions) by the company is termed “calls-in-arrears”.

An interest (5% p.a.) is charged on calls-in-arrears till such amount is paid. The directors are empowered to waive the interest charge. This amount is shown as deduction from the called-up-capital to arrive at the paid-up share capital in the balance sheet.

Accounting Treatment:

The following are the two methods for dealing with calls-in-arrears:

1. Without opening calls-in-arrear account
2. By opening calls-in-arrear account

1.21.1 Without Opening Calls-in-Arrear Account

If a separate account for calls-in-arrear is not opened, amount received from the shareholders is credited to the relevant call account. As such, various call accounts will show debit balance equal to the total unpaid amount of each such call.

On a later date, if the calls-in-arrear is received, bank A/c is debited and the respective call account is credited.

1.21.2 By Opening Calls-in-Arrear Account

Accounting Treatment: For calls-in-arrear:

Illustration 1.10

Model: Calls-in-arrear

Raj Ltd. issued 20,000 equity shares of 10 each payable: 3 on Application; 2.50 on Allotment; 2 on I call and the balance on final call. All the shares are fully subscribed and paid except a shareholder having 200 shares could not pay the final call. Journalize these transactions.

Solution

 

1.22 CALLS-IN-ADVANCE

When a company accepts money, paid in advance for calls, for which they are not yet DUE, such amount is called “calls-in-advance”.

For this, the Articles should permit to do so.

This amount is adjusted when the respective call is made.

It may occur at the time of pro-rata allotment also. In such a case, if surplus application money is treated as calls-in-advance, interest will be paid with effect from the date of allotment only.

Usually, 6% interest is allowed on calls-in-advance. Such interest is a charge against profit. Balance of calls-in-advance A/c is shown as a separate item on the liabilities side of the balance sheet, under the head “Current Liabilities”.

Illustration 1.11

Model: Calls-in-advance

Jasemine & Co. Ltd. issued to the public 1,00,000 shares of 10 each payable as:

On Application	3
On Allotment	3
On First & Final Call	4

All the shares were subscribed for and all money due was received. A shareholder who paid for 1,000 shares paid the call money along with allotted money.

Pass the necessary journal entries in the books of Jasemine Ltd.

Solution

Note: Paid call money along with allotted money means that it was paid in advance.

This calls-in-advance was paid along with allotment money. So, when money paid on allotment, this has to be credited.

When the money is paid on call, this has to be adjusted with that.

 

Illustration 1.12

Model: Computation of interest on calls-in-advance and calls-in-arrear

X Ltd. issued 50,000 shares of 10 each payable as:

On Application	2 (1 January 2010)
On Allotment	3 (1 April 2010)
On First Call	3 (1 June 2010)
On Second & First Call	2 (1 August 2010)

Applications were received for 45,000 shares and the directors made allotment in full. X, one shareholder, to whom 50 shares were allotted, paid the entire balance on his shareholdings with allotment money and Y, another shareholder, did not pay allotment and first call money on 100 shares but for which he paid with final call.

You are required to calculate the amount of interest paid and received on calls-in-advance and calls-in-arrear on 1 August 2010.

Solution

1. Calculation of Interest on Calls-in-Advance:

   X—To whom 50 shares were allotted paid in advance. He paid both calls money in advance along with allotment.

   1. Number of Shares: 50 × First Call Money: 3

      50 × 3 = 150 for 2 months (April to June):
      Interest =	=	1.50

   2. For Second Call Money:

      Number of Shares = 50 × Second Call Money
      = 2 = 100
      Period (April to August) = 4 months
      Interest =	=	2.00
      ∴ Interest on Calls-in-Advance	=	3.50

2. Calculation of Interest on Calls-in-Arrear:

   Y—To whom 100 shares were allotted did not pay in due date.

   He paid allotment money and first call only along with final call.

1. 100 Shares−allotment money−after 4 months.
   
2. Interest on First Call Money:
   

Illustration 1.13

Model: Calls-in-arrear and calls-in-advance

On 1 January 2010, X Ltd. makes an issue of 20,000 equity shares of 10 each payable as:

On Application	2
On Allotment	3
On First & Final Call	5 (three months after allotment)

Applications were received for 25,000 shares. The directors made in full to the applicants demanding ten or more shares and rejected and returned money to the applicants for 5,000 shares. One shareholder Mr. A, who was allotted 50 shares, paid first and final call with allotment money. Another shareholder Mr. B did not pay allotment money on his 100 shares but he paid with first and final call. Directors have decided to charge and allow interest, as the case may be.

Journalize the transactions.

Solution

Working:

1. Calculation of Interest on Calls-in-Advance:

   Mr. A Paid for 50 Shares Call Money Along with Allotment

   
2. Calculation of Interest on Calls-in-Arrear:

   Mr. B Paid for 100 Shares Allotment Money Only on Call Date.

   

 

Illustration 1.14

Model: Comprehensive—Allotment of shares

‘A’ Ltd. invited applications for 50,000 shares of 10 as follows:

On Application	3
On Allotment	2
On First and Final Call	5

Applications were received for 1,00,000 shares. It was decided

1. To refuse allotment to the applicants for 10,000 shares
2. To allot 50% to Mr. P. who has applied for 20,000 shares
3. To allot in full to Mr. Q. who has applied for 10,000 shares
4. To allot balance of the available shares pro-rata among the other applicants
5. To utilize excess application money in part payment of allotment and final call

   Pass necessary journal entries in the books of ‘A’ Ltd.

Solution

Working Notes:

1 Mr. P: Shares Applied for: 20,000

 

Shares Allotted: 50%: 10,000
Application Money Received: 20,000 × 3	=	60,000
Out of this, for Application Money: 10,000 × 3	=	30,000
Excess Application Money	=	30,000
To Be Adjusted on Allotment = 10,000 × 2	=	20,000
Calls-in-Advance	=	10,000
(to Be Adjusted on Calls)

 

2. Mr. Q: Shares Applied for and Allotted Were for 10,000 Shares

Hence, No Adjustment on Allotment and Call.

3. Balance: 1,00,000 – (10,000 + 20,000 + 10,000) = 60,000 Shares

For 60,000 Shares Applied for, 30,000 Shares will be Allotted on Pro-rata Basis.

 

Shares Applied (Balance) for	=	60,000 Shares
Shares Allotted 30,000 Shares (50,000 − (10,000 + 10,000))
Application Money Received (60,000 × 3)	=	1,80,000
Application Money Adjusted 30,000 Shares @ 3}	=	90,000
∴ Excess Application Money	=	90,000
Adjustment Money Allotted 30,000 Shares @ 2}	=	60,000
Calls-in-Advance	=	30,000
Total Calls-in-Advance = 10,000 + 30,000 = 40,000
↓
Ref: Working 1

 

1.23 ISSUE OF SHARES FROM THE STANDPOINT OF ISSUE PRICE

Shares of a company may be issued in any of the following ways:

1. Issue of shares at par
2. Issue of shares at premium
3. Issue of shares at discount

The accounting treatment will differ in each approach. Let us discuss one after one as follows:

1.23.1 Issue of Shares at Par

If the issue price of a share is equal to the face value of the share, such issue is said to be an issue at par.

Example: Assume that the issue price is 10 per share and the applicant will have to pay only 10 i.e., the face value of share 10

Shares are said to have been issued at par when an applicant has to pay a total sum equal to the face value of a share, i.e., issue price is 10 and the face value is also equal to 10

The accounting treatment (i.e., journal entries to be passed in case of issue of shares at par) is discussed in the previous illustrations; hence, it is not repeated here.

1.23.2 Issue of Shares at Premium

Sometimes shares may be issued at an amount higher than the face value.

Example: When a share of 10 is issued at 12, it is said to have been issued at a premium of 2. (Issue price – Face value, i.e., 12 - 10 = 2). Premium is the excess of issue price over face value of the share.

According to Section 78 of the Companies Act, when shares are issued at a premium, the premium amount is to be credited to a separate account called “securities premium account”. This is to be done so because it is not treated as a part of share capital. It is a capital gain to the company. Securities premium account has to be used only for the following purposes:

1. To write off preliminary expenses of the company
2. To issue fully paid bonus shares to the members
3. To write off the expenses of, or the commission paid or discount allowed, on any issue of shares or debentures of the company
4. To pay premium on the redemption of preference shares or debentures of the company

In case the company wants to utilize the securities premium account for any other purpose, it will have to obtain permission from the Court to do so.

 

CASE 1: When Premium Amount is Included in Application Money:

(i) On Receipt of Application Money with Premium:

(ii) On Transfer of Application Money:

Illustration 1.15

Model: Issue of shares at premium, premium along with application

X Ltd issued 5,000 shares of 10 each at a premium of 2 per share payable as follows:

4 on Application Along with Premium 2

3 on Allotment

Balance when Required

All the shares were applied for and duly allotted. Pass necessary journal entries in the books of X Ltd.

Solution

Note:

1. Issue is fully subscribed.
2. Shares are issued at premium.
3. Premium is included in application money.

      Bearing the above in mind, the necessary entries are made as:

 

CASE 2: When Premium Amount is Included in Allotment Money:
Generally, the premium amount is received along with allotment money.

Accounting Treatment: Journal entry:

When securities premium is to be collected on allotment, either of the following two approaches may be adopted by a company:

Approach 1: On allotment money becomes due, share capital account will be credited with the total amount becoming due on account of share capital & securities premium A/c will be credited with the total amount of securities premium becoming due and with the total of these two, share allotment A/c will be debited as:

 

	Share Allotment A/c	Dr.
	To Share Capital A/c
	To Securities Premium A/c
	On Receipt of Allotment Money:
	Bank A/c	Dr.
	To Share Allotment A/c

 

Approach 2: This is commonly used by companies.

 

	On allotment money becomes Due:
	Share Allotment A/c	Dr.
	To Share Capital A/c

 

Note: Securities premium is not considered in this approach

 

	On Receipt of Allotment Money:
	Bank A/c	Dr.
	To Share Allotment A/c
	To Securities Premium A/c

 

Illustration 1.16

Model: Premium included in allotment

X Ltd. offered 10,000 shares of 10 each at 12, payable as follows:

On Application          2

On Allotment             5 (Including Premium)

The balance When Required

All the shares were applied for and duly allotted

Pass necessary journal entries.

Solution

 

Illustration 1.17

Model: Premium included in call

‘A’ Ltd. issued 5,000 shares of 10 each at 12 (at a premium of 2 per share) payable as follows:

2 on Application

3 on Allotment

7 on First and Final Call (Including Premium)

All the shares were applied for and duly allotted. All money was duly received.

Pass the necessary journal entries in the books of ‘A’ Ltd.

Solution

 

1.23.3 Issue of Shares at a Discount

When shares of a company are issued at a price less than its face value (nominal value), it is known as “shares issued at a discount”.

Example: When a share of the face value of 10 is issued at 9, it is issued at a discount of Re 1.

The excess of face value over the issue price ( 10 – 9 = Re 1) represents the discount on issue of shares.

Generally, a company issues forfeited shares at a discount.

According to Section 79 of the Companies Act, a Company can issue only if the following conditions are satisfied:

1. The issue of shares at a discount is authorized by an ordinary resolution passed by the company at its general meeting and sanctioned by the Company Law Board.
2. The resolution must specify the maximum rate of discount at which the shares are to be issued. The rate must not exceed 10% of the nominal value of shares unless the Company Law Board is of the opinion that a higher rate of discount may be allowed in special circumstances of the case.
3. The shares are of a class, which has already been issued.
4. At least one year must have elapsed since the company was entitled to commence the business.
5. The shares are issued within two months from the date of receiving sanction from the Company Law Board.

  In a nutshell:

1. No new company can issue shares at a discount
2. A new class of share cannot be issued at a discount

Accounting Treatment:

		Journal Entry
	Share Allotment A/c	Dr.
	Discount on Issue of Shares A/c	Dr.
	To Share Capital A/c

 

(Amount Due on Allotment of … Shares @ … per Share and Discount on Issue Brought into Account)

“Discount on the issue of shares account” is a loss to the company. It is shown on the asset side of the company’s balance sheet under “Miscellaneous Expenditure”.

It is written off by charging to the “Securities Premium Account” (or) it is charged to the P&L A/c over a period of time.

Illustration 1.18

Model: Shares issued at a discount

‘Y’ Ltd. issued 10,000 shares of 10 each at a discount of 10% as payable as follows:

 

On Application	2 per Share
On Allotment	5 per Share (Including Discount)
On First & Final Call	3 per Share

The shares were applied and allotted in full and all moneys were received duly.

Pass the journal entries.

Solution

 

1.24 CASH BOOK

In practice, when shares are issued, all cash transactions are recorded in cash book. In such a case, cash transactions are not recorded in journal. Only transactions, other than cash transactions are recorded in the journal.

If questions are asked with specific instructions such as:

Make entries in the cash book and journal, then all transactions relating to cash/bank are to be recorded in the cash book (with bank columns only), and other non-cash transactions are to be recorded in the journal.

This is explained in the following illustration:

Illustration 1.19

Model: Preparation of cash book

VRS Ltd. offered 10,000 shares of 10 each payable as:

 

On Application	2
On Allotment	3
On First Call	3
On Second & Final Call	2

All the shares were applied for and duly allotted and all money was received duly.
    Make entries in the cash book and the journal.

Solution

First, cash book is to be prepared.

An easy way to prepare cash book:

Remember the three stages explained in journalizing the transactions, discussed so far. Only, “On Amount Received” should be taken into account for respective items and entered on the debit side of “Cash book”. Amount returned by the company has to be entered on the credit side of the cash book. Then it is balanced.

 

Now, other transactions:

 

For easy comprehension, all cash transactions are shown with ^*1, ^*2, ^*3, ^*4 marks. Now, refer the cash book to understand its preparation.

1.25 MORE THAN ONE TYPE OF SHARES

In case more than one type of shares are issued by the company simultaneously, the accounting treatment does not differ from those described so far. But, the various accounts should be prefixed with the type of share issued. To illustrate, if a limited company issues two different classes of shares namely preference shares and equity shares, then each entry should be prefixed as equity share application A/c, equity share allotment A/c, etc in case of equity shares and preference share application A/c, preference share allotment A/c in case of preference shares.

Illustration 1.20

Model: Two classes of shares

Shree Ltd. offered to the public 20,000 equity shares and 25,000 preference shares of 20 each payable as follows:

 

Particulars	Equity Shares	Preference Shares
On Application	6	8
On Allotment	8	6
On First & Final Call	6	6

The public applied for 22,000 equity shares and 10,000 preference shares.

Applications for preference shares were accepted in full.

For equity shares, 1,000 applications were rejected outright. 16,000 shares were accepted in full and the remaining shares were allotted on pro-rata basis.

All money duly received except the amount due on call on 2,500 equity shares and 1,000 preference shares.

Pass necessary entries in the cash book and journal.

Solution

Note:

1. Two classes of shares are given in the question. Hence, entries should be shown separately and each should be prefixed with “equity” or “preference”, as the case may be.
2. In case of equity shares, it is over-subscribed.
3. In case of preference shares, it is under subscribed.
4. Treatment of Over-subscription (Equity Shares):
   1. Number of Over-subscribed Equity Shares

      = Number of Shares Subscribed − Number of Shares Issued

      = 22,000 − 20,000

      = 2,000 Shares

   2. Applications Rejected = 1,000 Shares
   3. Application Money Refunded = 1,000 × 6 = 6,000
   4. Calculation of Surplus Application Money:

   Amount Received on Application: 22,000 × 6	=	1,32,000
   Less: Amount Transferred to Capital: 20,000 × 6	=	1,20,000
   		12,000
   Less: Rejected & Refunded	=	6,000
   ∴ {Excess Application Money to Be Adjusted with Allotment A/c}	=	6,000

5. In this question, both cash book and journal are asked. Care should be taken to enter all cash transactions in cash book and non-cash transactions in journal.
6. In case of preference shares, it is a case of under-subscription. Hence, care should be taken while recording preference share transactions, i.e., each time it is to be multiplied with the number of shares subscribed—10,000—and not with number of shares issued—25,000.
7. This is a typical illustration comprising all features, i.e.,
   1. Two classes of shares are given
   2. Equity shares are over-subscribed
   3. Preference shares are under-subscribed
   4. Calls-in-arrears
   5. Cash book and journal

Illustration 1.21

Model: Shares at premium—All ledger accounts and balance sheet

Renu Ltd. issued 10,000 shares of 10 each at a premium of 2 as follows:

 

On Application	3
On Allotment	5 (Including Premium)
On First & Final Call	4

All shares were duly subscribed and money due was fully paid. Pass journal entries. Prepare necessary ledger accounts. Draw the balance sheet.

Solution

 

Illustration 1.22

Model: Issue of shares at a discount—All ledger accounts and balance sheet

Parul Ltd. issued 1,00,000 shares of 10 each at a discount of 10% payable as:

 

On Application	3
On Allotment	4 (Excluding Discount)
On First & Final Call	2

80,000 shares were applied for and the shares have been duly allotted. All money due were received. Pass necessary journal entries. Prepare ledger accounts and the balance sheet.

Solution

Note:

1. This is a case of under-subscription.
2. Issue of share is at discount.
3. “Discount on issue of shares” should be shown in the balance sheet under the head, “Miscellaneous Expenditure”.

Illustration 1.23

Model: Issue of shares at premium—Over-subscription, calls-in-arrear

Shiva & Co. Ltd. offered 50,000 shares of 10 each at 12 payable as follows:

 

On Application	2
On Allotment	5 (Including Premium)
On First Call	2
On Final Call	3

The public applied for 65,000 shares. Applications for 40,000 shares were accepted in full, 10,000 were allotted to applicants of 20,000 shares and applications for 5,000 shares were rejected. All money was duly received except the first call on 100 shares and final call on 200 shares. Pass journal entries, prepare only necessary ledger accounts and show how these items will appear in the balance sheet of the company?

Solution

 

Calculation of Excess Application Money:
Money Received on 65,000 Applications @ 2	=	1,30,000
Less: Rejected & Refunded 5,000 × 2	=	10,000
	=	1,20,000
Less: Full Allotment 40,000 × 2		80,000
	=	40,000
Less: Partial Allotment 10,000 × 2		20,000
∴ Excess Application Money	=	20,000

 

Illustration 1.24

Model: Issue at a discount and calls-in-arrears and pro-rata allotment

VRV Ltd. issued 50,000 equity shares of 10 each at a discount of 10% payable as follows:

 

On Application	2
On Allotment	3
On First Call	2
On Final Call	2

Applications were received for 75,000 shares and the directors made pro-rata to the applicants for 60,000 shares by rejecting the remaining ones.

Mr. A, a shareholder, failed to pay allotment and first call money on 500 shares allotted to him.

Mr. B, another shareholder, did not pay the final call on 1,000 shares.

Journalize the above transactions, prepare important ledger accounts and draw the balance sheet of the company.

Solution

Working Notes:

1. Application Money Received = 75,000 Shares × 2	=	1,50,000
Amount Refunded on 15,000 Shares @ 2	=	30,000
		1,20,000
Money Transferred to Share Capital A/c (50,000 × 2)	=	1,00,000
∴ Excess Application Money to be Adjusted on Allotment	=	20,000
2. Calls-in-Arrears on Allotment:
3. Calls-in-Arrears on First Call: 500 × 2 = 1,000
4. Calls-in-Arrears on Final Call: 1,000 × 2 = 2,000

 

1.26 SHARES ISSUED FOR CONSIDERATION OTHER THAN CASH

At times, companies may issue shares for consideration other than cash. Example: For purchase of assets such as land, buildings, plant and machinery.

Here, the purchase of an asset against the issue of shares takes place. Two distinct transactions are involved in such instances. They are (1) purchase of an asset and (ii) issue of shares.

Accounting Treatment:

1. On Purchase of Assets:
   
2. On Issue of Shares:

   CASE 1: Shares Issued at Par to the Vendor:

   

   CASE 2: Shares are Issued at Premium:

   

   CASE 3: Shares are Issued at Discount:

   

Illustration 1.25

Model: Issue of shares other than cash

Bhagya Ltd. purchased assets for 7,20,000 from Kaveri & Co. payable in fully paid 100 each. Pass journal entries in the books of Bhagya Ltd. if issue is

1. At par
2. At a premium of 20%
3. At a discount of 10%

Solution

Number of Shares Issued on Each Occasion Has to be Calculated:

1. At Par: Number of Shares to Be Issued
   
2. At Premium:
   
3. At Discount:
   

1.27 FORFEITURE OF SHARES

Shareholders fail to pay any of the instalments due, allotment money or call money, at times. On such occasions, after giving due notice (clear 14 days) and after adhering the provisions in the Articles of Association, the directors can forfeit such shares.

As per SEBI Guidelines, the subscription money must be received within 12 months from the date of allotment. If the shareholders fail to comply with the notice, i.e., if they still do not pay the due with interest within the stipulated period, the directors can forfeit the shares after passing appropriate resolution.

^*On forfeiture, cancellation of allotment of defaulting shares takes place. The shareholder’s name is removed from the Register of Members.

Accounting Treatment:

Since allotment is to be cancelled on account of forfeiture, all entries relating to the shares forfeited (except those relating to premium already recorded) must be REVERSED.

1.27.1 Case 1—When Shares Issued at Par Forfeited

When the shares issued at par are forfeited, the journal entry will be:

Share capital is debited with the amount called up till the stage of forfeiture and NOT the nominal (face) value of shares. Shares forfeited amount is added to the paid-up capital under the heading “Share Capital” and shown on the liabilities side of the balance sheet till the forfeited shares are re-issued.

Illustration 1.26

Model: Forfeiture of shares (Issued at par)

VASU Ltd. issued 10,000 shares of 10 each at par payable as:

 

On Application	2
On Allotment	4
On First Call	2
On Second & Final Call	2
Mr. Z was allotted 100 shares.

Pass the necessary journal entries relating to forfeiture of shares in each of the following alternatives cases:

1. If Mr. Z failed to pay allotment money and his shares are forfeited
2. If Mr. Z failed to pay allotment money and first call money and his shares are forfeited
3. If Mr. Z failed to pay both the calls and his shares are forfeited

Solution

Working Notes:

All transactions with respect to “forfeiture” are shown in Stage IV.

Case (a):

1. For Forfeited Shares A/c:
   
2. For Shares Allotment A/c:
   

1.27.2 Forfeiture of Shares—Issued at Premium

1.27.2.1 Case 1—When Premium is Received

When shares originally issued as a premium, on which premium amount has been received fully, and later forfeited due to non-payment of allotment and or call money, the accounting treatment will be the same as that of shares issued at par. Hence, at the time of forfeiture, securities premium account is not debited.

1.27.2.2 Case 2—When Premium is NOT Received

Where shares originally issued as premium on which premium amount has not been received (wholly or partially) and later forfeited, securities premium account is to be debited with the full amount of premium, along with the share capital A/c at the time of forfeiture.

Important note: When calls-in-arrears A/c is maintained, calls-in-arrears is credited and NOT share allotment A/c or share call(s) A/c.

Illustration 1.27

Model: Forfeiture of shares, shares issued at a premium; Case 1: Premium is received

Khan & Co. Ltd. issued 10,000 shares of 10 each at 12 per share, payable as follows:

 

On Application	2
On Allotment	5 (Including Premium)
On First Call	3
On Second & Final Call	2

Mr. Joseph to whom 100 shares were allotted failed to pay both the calls. His shares were forfeited consequently. Pass journal entries. Prepare necessary ledger accounts and the balance sheet.

Solution

 

Working Notes for Stage IV:

1. For Share Capital A/c:

   Number of Shares Forfeited × Amount Called up per Share

   = 100 × 10 (Premium Should Not be Taken into Account)

   = 1,000

2. For Share First Call A/c:

   Number of Forfeited Shares × On First Call Amount (Not Paid )

   = 100 × 3

   = 300

3. For Share Final Call A/c:

   Number of Forfeited Shares × On Final Call Amount (Not Paid)

   = 100 × 2

   = 200

4. For Share Forfeited A/c:

   Number of Shares Forfeited × Amount Received So Far

   = 100 × ( 2 on application + 3 on allotment ( 5 − 2 premium)

   = 100 × 5

   = 500

Illustration 1.28

Model: Forfeiture of shares issued at premium; premium money—Not received

Ansul Ltd. issued 10,000 shares of 20 each at 23 per share. The amount was payable as:

 

On Application	4
On Allotment	7 (Including Premium)
On First Call	7
On Final Call	5

The company is yet to make final call.

Diraj, a shareholder of 100 shares, failed to pay allotment and first call money and consequently his shares were forfeited.

Pass journal entries with respect to forfeiture of shares.

Solution

Note:

1. Forfeiture occurred due to non-payment of allotment money (and also call money). Hence, premium is not received.
2. So, share premium A/c has to be debited.
3. The entries up to Stage III—No change.
4. Only in Stage IV: For forfeiture of shares, care should be taken and the entry has to be made as follows:

Working Notes:

1. For Share Capital:

   Number of Forfeited Shares × Amount Called up

   100 × 15 = 1,500
2. For Share Premium:

   Number of Forfeited Shares × Premium per share

   100 × 3 = 300
3. For First Call:

   Number of Shares Forfeited × Amount Unpaid

   100 × 7 = 700
4. For Share Allotment:

   Number of Shares Forfeited × Amount Unpaid (Including Premium)

   100 × 7 = 700
5. For Share Forfeited: Number of Shares Forfeited × Amount Received So Far
   100 × 4 = 400

Illustration 1.29

Model: Forfeiture of shares issued at premium comprehensive

Sathyam & Co. Ltd. issued for public subscription 40,000 equity shares of 20 each at a premium of 4 per share payable as:

 

On Application	8
On Allotment	10 (Including Premium)
On Call	6

Applications were received for 60,000 shares. Allotment was made pro-rata to the applicants for 48,000 shares and the balance were rejected. Excess money on application was applied towards sums due to allotment.

Praveen, to whom 1,600 shares were allotted, failed to pay the allotment money and Nitin, to whom 2,000 shares were allotted, failed to pay the call money and consequently they are forfeited.

Journalize the above transactions in the books of Sathyam & Co. Ltd.

Solution

BASIC CALCULATIONS::

 

Step 1:	Amount Due on Allotment:
	Number of Shares × Allotment Amount per Share
	40,000 × 10 =	4,00,000
Step 2:	Allotment Actually Due After Adjusting
	Excess Application Money
	Amount Due on Allotment − Excess Application Money Adjusted with Allotment
	( 4,00,000 − 64,000) =	3,36,000
Step 3:	Allotment Amount Due from Praveen:
	Allotment Money on Praveen’s Share:
	1,600 Shares × 10 (Including Premium)	16,000
	Less: Excess Application Money (Pro-rata Allotment)
	Praveen Would Have Been Applied = 1,920 shares
	Excess: 1,920 Shares − 1,600 Shares = 320 × 8 2,560
	∴ Allotment Amount Due from Praveen:	13,440
Step 4:	Allotment Money Received:
	Amount Actually Due on Allotment (Ref: Step 2)	3,36,000
	Less: Amount Not Paid by Praveen:	13,440
	Amount Received:	3,22,560
Step 5:	Balance on Shares Forfeited Account:
	Amount Paid by Praveen
	(Number of Shares That Would Have Been Applied × 8)	15,360
	(Ref: Step.3) (1,920 × 8)
	Amount Paid by Nitin:
	Add: 2,000 Shares ( 8 + 6) (Prem. Not Included) =	28,000
	Total Balance =	43,360

 

1.27.3. Forfeiture of Shares Issued at a Discount

When shares are issued at a Discount, at that time of issue, the Discount Account is debited.

Hence, now, i.e., at the time of forfeiture of shares which were originally issued at a discount, the Discount Account will be Credited. The account is cancelled thereby. Then the balance on “Discount on Issue of Shares Account” pertains only to the remaining shares forming part of share capital amount.

Journal entry for the shares issued at a discount are forfeited is:

Illustration 1.30

Model: Forfeiture of shares issued at a discount

Riddhima Ltd. issued 10,000 shares of 100 each to the public at 10% discount payable as:

 

On Application:	30
On Allotment:	40
On Call:	20

All money due were received except from one shareholder, to whom 100 shares were allotted, who failed to pay call money. His shares were forfeited.

Pass journal entries for forfeiture of shares:

Solution

 

1.28 RE-ISSUE OF FORFEITED SHARES

1.28.1 All Forfeited Shares are Re-issued

The directors of a company have been empowered to re-issue the shares that were forfeited.

The re-issue price: Forfeited shares may be re-issued at an amount less than that called previously but at the same time, the amount of discount should not be less than the amount previously received. To illustrate, a share of 10, on which 5 has been received till its forfeiture can be re-issued as fully paid up at an amount not less than ( 10 - 5) = 5. In case the share is re-issued as 7 paid up, an amount of not less than ( 7 - 5) = 2 should be received from the persons.

The loss incurred on re-issue (Paid up value - Re-issue Price) of forfeited shares is to be debited to “Shares Forfeited A/c”.

Entry:

Balance, if any, in the forfeited share account is a capital profit. It will be transferred to capital reserve account.

Entry:

Illustration 1.31

Model: Forfeiture of shares—Originally issued at par, re-issued at discount

X Ltd. forfeited 50 shares of 20 each fully called up, held by ‘D’ for non-payment of allotment money 6 per share and the final call of 9 per share. He paid the application money of 5 per share. Those shares were re-issued to ‘A’ for 16 per share.

Pass the entries for the forfeiture and re-issue of shares.

Solution

 

Illustration 1.32

Model: Forfeiture of shares—Originally issued at premium, re-issued at a discount

X Ltd. Forfeited 50 shares of 100 each at a premium of 20% to Gopal who had applied for 60 shares, for non-payment of allotment money of 50 per share (including premium) and the first and final call of 50 per share. These shares were re-issued to Saran credited as fully paid for 90 per share.

Give journal entries to record forfeiture and re-issue of shares assuming that the company follows the policy of adjusting excess application money towards other sums due on shares.

Solution

This is a case of over-subscription, shares issued at premium.

First, the amount due but not paid on allotment has to be calculated as follows:

Illustration 1.33

Model: Forfeiture of shares—Issued at premium, re-issued at discount

X Ltd. issued 10,000 shares of 10 each at 12 payable as follows:

 

On Application	2.50
On Allotment	4.50 (including Premium)
On First Call	2.00
On Final Call	3.00

All the shares were applied for and allotted. All money was received with the exception of first and final call on 100 shares held by Mr. A. These shares were forfeited and re-issued at 9 per share. Give the journal entries relating to forfeiture and re-issue of forfeited shares.

Solution

 

Illustration 1.34

Model: Forfeiture of shares—Originally issued at discount, re-issued at discount

X Ltd. forfeited 100 equity shares of 20 each, issued at a discount of 10%, for non-payment of first call 4 and second call 6 per share.

These shares were re-issued to Ram upon payment of 1,400 credited as fully paid.

The company maintains calls-in-arrears account.

Pass necessary journal entries with respect to forfeiture of 100 shares and their re-issue.

Solution

 

1.28.2 A Part of Forfeited Shares Are Re-Issued

Sometimes, all forfeited shares are not re-issued and only a part of forfeited shares will be re-issued.

Accounting Treatment:

In such case, i.e., when all the forfeited shares are not re-issued at a single instance, the whole balance of share forfeiture account shall not be transferred to capital reserve. The reason is that the capital profit arises only with respect to the shares re-issued and NOT on all the forfeited shares.

Hence, the amount to be transferred to capital reserve is not the same as we have made so far. Care should be taken to see that the amount forfeited on shares that have not been re-issued should not be transferred to the capital reserve. This amount should be kept under a separate head “Share Forfeiture Account”, which has to be utilized for allowing discount whenever such shares will be re-issued.

In this case, the amount to be transferred to capital reserve will have to be ascertained by subtracting the amount of discount utilized on the re-issue of shares from the amount forfeited on shares re-issued.

Illustration 1.35

Model: All forfeited shares are not re-issued

The directors of a company forfeited 1,000 equity shares of 10 each on which the first call of 3 and final call of 3 were not paid.

Of these, 400 shares were re-issued for payment of 3,200. You are required to pass entries for (a) forfeiture of shares and (b) re-issue of shares, and prepare forfeited shares account and show how this will appear in the balance sheet.

Solution

 

Calculation of Profit on Re-issue of Forfeited Shares:

 

(i) Amount Received on Forfeiture: 400 × (10 − 6)	= 1,600
(Only Re-issued Number Should Be Taken into Account)
(ii) Less: Discount Amount to Be Adjusted for 400 × 2	= 800
Re-issue of Forfeited Shares
Original Issue − Re-issue 2
( 10) − ( 8)
(iii) Profit on Re-issue to Be Transferred to Capital Reserve	= 800

 

Illustration 1.36

Model: Over-subscription, pro-rata allotment forfeiture, partial re-issue

X Ltd. forfeited 50 shares of 20 each issued at a premium of 20% to Vivek who had applied for 60 shares for non-payment of allotment money 10 per share (including premium) and first and final call of 10 per share. Of these, 25 shares were re-issued to Rahul credited as fully paid for 18 per share.

Give journal entries to record forfeiture and re-issue of forfeited shares assuming that the company has been adopting the policy of adjusting excess application money towards other sums due on shares.

Solution

First, ascertain the amount due but not paid as allotment as follows:

 

Step 1:	Total Number of Shares Applied for	60 Shares
*1Step 2:	Total Money Paid on Application
	Number of Shares × Application Money (60 × 4)	240
Step 3:	Adjusted Application Money Adjusted
	for 50 Shares × 4	200
Step 4:	Excess Application Money
	(Step 2 − Step 3)	40
Step 5:	Total Amount Due on Allotment
	(50 × 10)	500
	(Including Premium)
*2Step 6:	Amount Due but Not Paid on Allotment	460
	(Step 5 − Step 4)

 

Illustration 1.37

Model: Forfeiture of shares—Originally issued at discount, only a part of forfeited shares re-issued

The directors of a company forfeited 100 shares of Mr. X. who paid on application and allotment 4 (shares of 10 each issued at a discount of 10%), 2 on first call but failed to pay 3 on final call. Out of these, 40 shares were re-issued at 7 per share. Pass journal entries in respect of forfeiture and re-issue of shares only.

Solution

 

1.29 EMPLOYEE STOCK OPTION PLAN

Companies may offer their equity shares to their employees. Such shares are purchased at the will of employees. In order to encourage their employees, to retain the super skilled in the companies, such a scheme is introduced which is known as Employee Stock Option Plan (ESOP). This is a right awarded to an employee to purchase the equity shares of the company at a pre-determined price.

This term “employee”—as per the provisions of the Companies Act 1956—includes permanent employee of the company working in India or out of India; or an employee of a subsidiary or a holding company; or director, etc.

Under this scheme, the employee has the right to exercise the option to purchase shares within the vesting period. Vesting period denotes the time during which the scheme is in operation.

But, employees holding more than 10% of the outstanding equity shares of the company shall not be eligible to exercise their option to purchase shares under ESOP scheme.

Shares issued under this scheme should be locked-in for a minimum period of one year from the date of allotment:

Accounting Treatment:

The value of options under this scheme is an expense to the company. So, it has to be written off over the vesting period.

Accounting value of option = Number of option × (Market price – Exercsie price)

To illustrate, assume that a public limited company grants 500 options to its employees at the rate of 50 per option and on that date the market price of share is 150, then the value of option will be:

 

This is also termed as “option discount”.

There are two alternative circumstances:

1. Where the employees exercise the option
2. Where the employees do not exercise the option

In the first alternative, the accounting value of option (option discount) is treated as:

1. Employee compensation
2. Has to be amortized on a straight-line basis over the vesting period

In the second alternative, the employee compensation equal to the amortized portion of the value of lapsed options has to be debited to employee stock option outstanding A/c and credited to deferred employee compensation expense A/c.

Journal Entries:

1. When Option is Granted:

2. When Employees Exercise the Option:

3. For Amortizing the Expense

4. When the Option Lapses:

The Value of Options is Split into Two Parts:

These entries can be clearly explained through the following illustration:

Alpha Ltd. grants 1,000 options to the employees and directors at 150 per option against the market price of 350, the vesting period is 2 years. Pass the journal entries:

 

Step 1:	Value of Option is Calculated as:
	Value of Option = Number of Options × (Market Price − Exercise Price)
	= 1,000 × ( 350 − 150)
	= 1,000 × 200
	= 2,00,000
Step 2:	Vesting Period = 2 years (Given)
	Hence, This Value of Option, i.e., 2,00,000, Is to Be Amortized in 2 years, Each Year 1,00,000.

Note: This entry will be repeated each year till it is written off. In this illustration, vesting period is only 2 years. Hence, it is written off with next year’s entry.

Illustration 1.38

Model: Employee stock option

Renu & Co. Ltd. granted 1,000 options on 1 April 2007 at 80 (Nominal value of 20) when the market price was 320, the vesting period was two and a half years. The maximum exercise period was one year. On 1 May 2009, 300 invested options lapsed and 600 options were exercised on 30 June 2010, and remaining 100 options lapsed at the end of exercise period. Pass necessary journal entries in the books of Renu & Co. Ltd.

Solution

Note: This is the case when the option granted is exercised by some employees and not exercised by some.

Step 1:    Ascertain of Accounting Value of Options:

• Formula: Accounting Value of Options}: Number of Options × (Market Price − Exercise Price)
• Substituting the Given Figures in the Formula,

  Accounting Value of Options = 1,000 × ( 320 − 80)

          = 1,000 × 240

          = 2,40,000

Step 2:    Calculation of Amortization:

• Here, the term, “Amortization” should be understood.
• It is nothing but that the Accounting Value of Option has to be divided proportionately for each year, depending up on the Vesting Period.
• Here, Accounting Value of Option = 2,40,000
• This value has to be apportioned for 2½ years, which is the Vesting Period given in the question.

  First Year

• Hence, Amortization Value for first year
  

  Second Year

  

  Third Year

• For the third year, i.e. for 6 months till 30 June 2010
  

Step 3:    Reversal of Compensation Accounting on Lapse of 300 Options Has to Be Done:

Step 4:    Deferred Compensation Expenses Have to be Found Out:

Step 5:    Employees Compensation Expense Has to be Calculated:

Step 6:	Deferred Employee Compensation Expense:
	(Amortization of Deferred Compensation)
	= ( 48,000 − 14,400) = 33,600
Step 7:	Calculation of Securities Premium:
	Formula: Number of Options Exercised (Market Price − Face Value)
	= 600 × ( 320 − 20) = 600 × 300
	= 1,80,000
Step 8:	Employee Compensation Expense on 1 October 2010 has to be calculated:
	Formula: Number of Vested Options Lapsed (Market Price − Exercise Price)
	= 100 × ( 320 − 80)
	= 100 × 240 = 24,000
Step 9:	Amortization Portion:
(Step 5)	Number of Options Lapsed × (Market Price − Exercise Price) ×
	= 300 (320 − 80) = 300 × 240 = 72,000 ×
	= 57,600
Step 10:	Unamortized Portion:

Note: Steps 9 and 10 are already shown with a different approach in Step 4 and 5.

Step 10: Passing of Journal Entries:

 

In balance sheet, Employee Stock Options Outstanding will be shown as part of shareholder’s equity.

Deferred employee compensation will also be shown as part of shareholders’ equity but as a negative item.

The expense on exercise of stock option is charged to profit and loss A/c according to GAPP.

1.29.1 Employee Stock Purchase

A public limited company may issue shares under Employee Stock Purchase Scheme, during any accounting period.

Journal entry to be passed for issue of shares under Employee Stock Purchase Scheme will be:

Illustration 1.39

Model: Employee stock purchase

‘ X’ Ltd. issued 1,000 shares on 1 January 2010, under Employee Stock Purchase Scheme at 50 when the market price was 150. Pass the necessary journal entries assuming that the face value of a share is 10.

Solution

BASIC CALCULATIONS:

1. Accounting Value of Shares:
   Formula: Accounting Value of Shares} Number of Options (Market Price – Exercise Price)
        = 1,000 ( 150 – 50)
        = 1,000 × 100 = 1,00,000
2. Value of Security’ Premium:
   Formula: Security Premium: Number of Options Exercise (Market Price - Exercise Price)
           = 1.000 ( 150 - 10)
           = 1.000 × 140 = 1,40,000
3. Journal:

1.30 ISSUE OF BONUS SHARES

The shares which are allotted to existing equity shareholders without any consideration are known as “bonus shares”. These bonus shares are issued in order to capitalize the profits of the company. Only if there is specific provision in the Articles of Association, a company can issue bonus shares.

1.30.1 SEBI Guidelines with Respect to Issue of Bonus Shares

The following are some guidelines that are issued by SEBI regarding the issue of bonus shares:

1. The bonus issue can be made only out of free reserves, generated out of genuine profits or securities premium collected in cash.
2. Reserves created by revaluation of fixed assets cannot be used for issue of bonus shares.
3. The bonus issue cannot be made unless partly paid shares are made fully paid-up.
4. The declaration of bonus issue, in lieu of dividend, is not permitted.
5. If the company announces the issue of bonus shares with the approval of the Board of Directors, it must implement the proposal within six months from the date of approval and, furthermore, it cannot reverse or defer such decision.
6. If there is no provision on capitalization of reserves for the issue of bonus shares in the Articles of Association, first such provision should be enacted in the Articles by passing the needed resolution.
7. Consequent to the issue of bonus shares, if the subscribed and paid-up capital exceed the authorized share capital, then the company has to pass a resolution to increase the authorized capital to the desired level.
8. No company with pending conversion of fully convertible debentures (FCDs)or partially convertible debentures (PCDs) can issue bonus shares.
9. The company must not have defaulted in payment of interest or principal in respect of fixed deposits, interest on existing debentures; principal on redemption.
10. The company must not have defaulted in respect of payment of statutory dues of the employees such as contribution to PF, gratuity, bonus, etc.

Accounting Treatment:

• On Issue of Bonus Shares:
  
• On Distribution of Bonus Shares:
  

In Balance Sheet

The following note should be given in the balance sheet after the issue of bonus shares:

… Of the above shares, … are allotted as fully paid up by way of bonus shares, using credit balances in ……

(Source should be mentioned, here—General Reserve or Securities Premium or P&L A/c).

This is in compliance with the Schedule VI Part I of the Companies Act.

Illustration 1.40

Model: Issue of bonus shares

An extract of the balance sheet of a public limited company is given in the following:

The company issues fully paid bonus equity shares of 10 each for every three equity shareholders held to its equity shareholders. For this purpose, balances in profit & loss account & general reserve are used to the necessary extent.

Pass journal entries regarding the issue of bonus shares.

Solution

Note:

For every three equity shareholders, 1 bonus share is issued

For 30,000 equity shareholders the number of bonus shares issued

Total amount needed: 10 × 10,000 = 1,00,000

This is to be used from P&L A/c & general reserve as per the direction given in the problem.

Amount available in P&L A/c = 60,000

Next, 40,000 is to be taken from general reserve.

 

1.31 RIGHTS ISSUE

According to Section 81 of the Companies Act, the existing shareholders of a company have a right to subscribe to the fresh issue of capital or to reject offer or to sell their rights. It is a legal obligation to offer the fresh issue to the existing shareholders in their existing proportion. The existing shareholders can authorize the company to offer such shares to the public by a special resolution.

The share price of the share will always be higher than the previous issue price. Value of such right may be determined by using the following formula:

Accounting Treatment:

Journalizing the transactions for right issue of shares is similar to that of shares issued at par for application and allotment etc.

Illustration 1.41

Model: Value of right

A limited company offers new shares of 100 each at 20% premium to the existing shareholders in the ratio of every one share for every four shares held. The market price of share is 150. Calculate the value of right.

Solution

Method I:

First Calculate the Average Price of share:

Method II:

Another Formula to Determine Value of Right:

Students may opt either of the method to determine the value of right.

1.32 SWEAT EQUITY

• Shares which are issued by the company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights to use intellectual property are called “sweat equity shares”.
• Sweat Equity shares—a new type of equity shares was introduced by the Companies (Amendment) Act 1999, through Section 79-A.
• Section 79 deals with the power of a company to issue shares at a discount (discussed earlier).
• Notwithstanding anything contained in Section 79, a company may issue sweat equity shares if the following conditions are fulfilled:
  • The issue of sweat equity shares is authorized by a special resolution passed by the company in the general meeting.
  • The resolution specifies the number of shares, current market price, the consideration, if any, and the class or classes of directors or employees to whom such shares are issued.
  • Not less than one year has elapsed since the date of commencement of business.
  • The sweat equity shares of a company, whose equity shares are listed on a recognized stock exchange, are issued in accordance with the regulations issued by the SEBI in this behalf.

Accounting Treatment:

Journal entries for issue sweat equity shares are the same as those for issue of any other equity shares.

1.33* UNDERWRITING

A company issues shares for consideration other than cash. Underwriting commission is one such instance, i.e., shares are allotted to underwriters instead of cash for the services rendered by them.

Underwriting: It is a kind of arrangement between a person (agency or other form of organisation) and a company in order to secure a guarantee from that person or body that the shares and debentures offered to the public will be taken up by the public. In case the shares and debentures are not taken up by public, they will be taken up by the person or body in accordance with the agreement. Such guarantor (person or body) is called the “underwriter”, and the process “Underwriting”, for which the underwriter is entitled to receive commission for the services. The commission is known as underwriting commission. The company allots shares to discharge underwriting commission instead of cash.

Entries:

[*A separate chapter (Chapter 2) for “underwriting on shares” follows this chapter.]

Illustration 1.42

Model: Issue of shares for consideration other than cash: Underwriter and promoter

Vas Bhag Ltd. was registered with an authorized share capital of 20, 00,000 divided into shares of 10 each. It acquired the business of M/s Gopi & Sons, taking over the following assets at the values stated against each one of them:

 

Freehold Premises	5,00,000
Machinery	3,50,000
Furniture	60,000
Stock	1,60,000
Sundry Debtors	30,000

The consideration was discharged by issue of 1,00,000 equity shares at a premium of 10%.

The company allotted 2,000 shares at par to promoters as remuneration for their services.

The company offered to public 25,000 equity shares at a premium of 10% and 20,000 15% preference shares at par, the entire amount being payable on application. The entire issue was underwritten by M/s Dev & Raj Sons for a commission of 2% of the issue price payable in the form of equity shares of Vas Bhag Ltd at par. The issue was fully subscribed to by the public.

You are required to pass journal entries, prepare necessary ledger accounts and construct the balance sheet of the company.

Solution

 

1.34 BUY-BACK OF SHARES

According to Section 77A of the Companies Act, 1956, a company can buy its own shares either from the (a) existing equity shareholders on a proportionate basis or (b) open market or (c) odd lot shareholders; or (d) employees of the company pursuant to a scheme of stock option or sweat equity.

Some important provisions of Section 77A:

1. The buy-back should be authorized by the Articles.
2. Special resolution is to be passed in the general meeting of shareholders.
3. The buy-back of the shares cannot exceed 25% of paid-up capital and free reserves in a financial year.
4. The debt–equity ratio should not be more than 2:1 after such buy-back.
5. All the shares for buy-back should be fully paid up.
6. The buy-back should be completed within 12 months from the date of passing the special resolution.
7. The company must fill a solvency declaration with the Registrar and SEBI in the form of an affidavit.

A company that buys-back its own shares shall extinguish and physically destroy the shares within seven days of the last date of completion of buy-back, as per Section {77A (7)}.

According to Section 77A (8), where a company completes the buy-back of its shares, it shall not make further issue of shares within 24 months.

1.34.1 SEBI Guidelines on Buy-Back of Shares

Following are some of them:

1. Buy-back of shares cannot be from any persons through negotiated deals, whether on or of Stock Exchange or through spot transactions or through private arrangement.
2. Public announcement among other things should specify the following:
   • Specify the date of despatch of the offer letter, which is termed as “specified date”. The date so specified shall not be less than earlier than 30 days but not later than 42 days.
   • The company shall file information to the SEBI within seven working days from the date of public announcement.
   • The offer of buy-back shall remain open to the members for a period of not less than 15 days but not exceeding 30 days. However, the opening date for offer shall not be earlier than 7 days or later than 30 days from the specified date.
   • The company shall complete the verification of offers within 15 days from the date of closure and shares lodged shall be deemed to have been accepted unless communication of rejection is made within 15 days from the date of closure.

1.35 ESCROW ACCOUNT

“Escrow” means a contract or bond deposited with a third person, by whom it is to be delivered to the guarantee on the fulfilment of some condition.

A company has to open an “escrow account” if it wants to initiate the process of buy-back of shares.

An escrow account consists of (1) cash deposited with a commercial bank or (2) bank guarantee in favour of a merchant banker or (3) deposit of acceptable securities with appropriate margin or (4) a combination of (1) (2) & (3) with merchant banker with an amount equal to 25% of the consideration payable if the consideration is not more than 100 crore plus 10% of the consideration exceeding 100 crore. On completion of the process of buy-back of shares, the amount and or securities deposited in escrow account will be released to the company. In case of non-fulfilment of obligations by the company, SEBI can forfeit the escrow account.

Comprehensive Illustrations—Advanced Level

Illustration 1.43

Fantastic Industries Ltd. issued a prospectus, inviting applications for 1,00,000 shares of 20 each at a premium of 10 per share, payable as follows:

 

On Application	5
On Allotment	15 (Including Premium)
On First Call	8
On Final Call	2

Applications were received for 1,50,000 shares and allotment was made pro-rata to the applicants of 1,20,000 shares, the remaining applications being refused. Money received in excess on the applications was adjusted towards the amount due on allotment.

P, to whom 2,000 shares were allotted, failed to pay allotment money and on his failure to pay the first call, his shares were forfeited. Q, the holder of 3,000 shares, failed to pay the two calls, and so his shares were also forfeited. All these sold to R, credited as fully paid for 16 per share.

Journalize the above transactions in the books of the company.

 

[Sri Venkateswara University]

Solution

Basic calculations shown step-wise:

Step 1:

• This is a Case of Over-subscription.
• For 1,20,000 Applicants, 1,00,000 Shares Were Allotted.
• The Remaining 30,000 Applications Were Rejected and Application Money is to be Refunded on this.

Step 2:

 

	Excess Application Money:
	Application Received: 1,50,000 × 5	=	7,50,000
	Less: Rejected & Refunded: 30,000 × 5	=	1,50,000
			6,00,000
	Less: Application Money on 1,00,000 Shares:		5,00,000
	∴ Excess Application Money	=	1,00,000
	This Amount Has to be Adjusted on Allotment Money.

 

Step 3:

Amount Due on Allotment & Actual Money Received on Allotment Due:

	Due for 1,00,000 Shares @ 15 per Share	=	15,00,000
	Less: Excess Application Money Already
	Adjusted with Allotment (Step 2)		1,00,000
			14,00,000
	Less: P Failed to Pay on Allotment
	(2,000 Shares × 15, He Would Have Applied for
	2,400 × Application Money = for Excess 400 Shares × 5 = 2,000)		28,000
	( 30,000 − 2,000)
	Actual Amount Received on Allotment Due	=	13, 72,000

Step 4:

Amount Paid by P:

As Already Calculated in Step 3, the Shares.

Step 5:

[Amount Paid by Q:
For 3,000 Shares, He Would Have Applied for:

As He Paid His Application Money and Allotment Money, the Excess Money on (3,600 - 3,000) = 600 Shares Need Not Be Adjusted Again. To Explain the Difference Between P and Q, This Step is Inserted Here:

Here for Q, Only 3,000 Shares Need be Taken into Account]

Step 6:

 

	Profit Transferred to Capital Reserve:
	Forfeited Shares Amount P (Ref: Step 4)	=	12,000
	Forfeited Shares Amount Q (3,000 × 10)	=	30,000
			42,000
	Exc 1. Prem.
	Less: Discount on Re-issue of (2,000 + 3,000) 5,000 Shares
	( 20 − 16) × 4	=	20,000
	∴ Profit to be Transferred	=	22,000

 

Illustration 1.44

Raghav Ltd. invited applications for 1,00,000 shares of 20 each. The shares were issued at a premium of 10 per share, payable as follows:

On application and allotment 16 per share (including a premium of 6). Balance including premium in the first and final call.

Applications for 1,50,000 share were received. Applications for 10,000 shares were rejected and prorata allotment was made on the remaining applicants on the following basis:

1. Applicants for 80,000 shares were allotted 60,000 shares
2. Applicants for 60,000 shares were allotted 40,000 shares

Mr. A, who belonged to the first category, was allotted 300 shares. He failed to pay the first call money.

Mr. B, who belonged to the second category, was allotted 200 shares and he also failed to pay the first call money. Their shares were forfeited. The forfeited shares were re-issued at 24 per share fully paid up.

Prepare cash book and pass necessary journal entries.

Solution

BASIC CALCULATIONS:

Step 1:    Number of Shares Applied for by A:

• A Belonged to First Category—i.e., 80,000 Applicants were Allotted 60,000 Shares.
  i.e., 80,000:60,000 (or) 8:6 (or) 4:3
• 

Step 2:    Number of Shares Applied for by B:

• B Belonged to Second Category—i.e., 60,000 Applicants Were Allotted 40,000 Shares.
  i.e., 60,000:40,000 (or) 6:4 (or) 3:2
• 

Step 3:    Surplus Application Money from A & B:

	i.e., for 100 Shares, Application Money Received from A = 100 × 16 =	1,600
	B: Excess Application Money Received from B:
	B: (Applied Shares − Allotted Shares)
	= (300 − 200) = 100 Shares
	(Ref: Step 2) (Given)
	∴ Surplus Application Money on 100 Shares by B = 100 × 16 =	1,600
	Total Surplus Application and Allotment Money Paid
	by A & B which is to be Adjusted in Calls =	3,200

Step 4: Money Received from First and Final Call:

	First and Final Call Money Due
	1,00,000 × 14 ( 30 − 16)	=	14, 00,000
	Less: Calls-in-Advance:
	(1,40,00 − 1,00,000) = 40,000 × 16}	=	6, 40,000
			7, 60,000
	Less: Call Money Not Received:
	500 × 14	= 7,000
	Less: Excess Application Money	= 3,200	3,800
	(Ref: Step 3)
	Actual Amount Received on Calls:		7, 56 200

Step 5:

Illustration 1.45

Raj Ltd. invited applications for issuing 20,000 equity shares of 100 each. The amount was payable as follows:

 

On Application	20
On Allotment	50
On First & Final Call	30

Applications for 40,000 shares were received and the allotment was made as follows:

 

Category	Shares Applied for	Shares Allotted
A	5,000	4,000
B	10,000	3,000
C	25,000	13,000

All the shares were allotted on pro-rata basis and excess application money was adjusted towards sum due on allotment.

Mr. X, who belonged to ‘category A’ and to whom 60 shares were allotted, failed to pay the allotment money. His shares were forfeited immediately after allotment money was not received.

Mr. Y, who belonged to ‘category C’ and who had applied for 25 shares, failed to pay the final call money. His shares were forfeited after final call.

The forfeited shares were re-issued at 90 per share fully paid up.

Journalize the above transactions in the books of Raj Ltd.

Solution

Step 1:    Total Number of Shares Applied for by Mr. X =

He Belonged to ‘Category A’ in Which 4,000 Shares were Allotted for 5,000 Shares Applied
for i.e., 50,000:40,000 (or) 5:4

For Every 5 Applications Applied for, 4 Shares Are Allotted

Step 2:    For X: Amount Due but Not Paid on Allotment:

Step 3:    Actual Allotment Amount Received:

Step 4:    As Y’s Shares Were Forfeited After Final Call, It Is Shown Directly in Journal.

Step 5:

 

Illustration 1.46

Model: Issue of bonus shares

Shiva Ltd. presents the following balance sheet:

 

The company purchased new machinery for 1, 50,000 for which it paid 50,000 by cheque and allotted 15% preference shares (1,000) of 100 each as fully paid up to the vendors.

The company then issued one fully paid BONUS equity share of 10 each for every five equity shares held to its equity shareholders. For this purpose, the balances in profit and loss account and general reserve are utilized to the necessary extent.

You are required to pass necessary journal entries to record the above transactions. Redraft the company’s balance sheet.

Solution

 

For every FIVE equity holders ONE BONUS SHARE was allotted; issued & subscribed equity shares were 10,00,000.

20,000 bonus shares of 10 each as fully paid up.

For this purpose, P&L A/c amount 1, 50,000—Refer balance sheet & general reserve ( 2, 00,000 – 50,000) 50,000 were utilized.

 

A company is an artificial person. It is created by law. It has a perpetual entity. Liability of members is limited. It has a common seal. In companies, management is separated from ownership. It is a voluntary allocation of persons with a common purpose.

For kinds or types of companies—refer text.

A Private company is defined in Section 3(1) (iii).

Privileges of a private limited company: (i) Two persons will be enough to float it; (ii) No need to issue prospectus; (iii) Can commence business after receiving Certificate of Incorporation and need not wait to get Certificate of Commencement of Business; (iv) Quorum—two members will be sufficient; (v) Need not hold a statutory meeting; (vi) Minimum subscription clause will not apply; (vii) Directors need not take up qualification shares and (x) The public cannot inspect P&L A/c of private companies.

Memorandum of Association: An important document which lays down the framework within which a company has to work.

Articles of Association: A certificate issued by the Registrar after perusal of required documents submitted to him by the company.

Prospectus: A document issued by the company inviting the public for the subscription of shares or debentures.

Certificate of Commencement of Business: A certificate issued by the registrar after scrutinizing the stipulated documents submitted by a company. A public limited company can commence business only after getting this certificate.

Share capital: Capital raised by issue of shares.

Types of share capital: Refer text for details.

Management of companies: Refer text.

Floating of companies is explained in eight stages in detail in the main part of the text.

Minimum subscription:The minimum amount to be raised by the issue of shares. As per the SEBI norms, a company should receive 90% of the issued amount from public subscription. The prospectus stipulates the minimum subscription amount.

Issue of shares: Shares may be issued (i) for cash or (ii) for consideration other than cash.

1. Issue of shares for cash: Different stages and accounting treatment are discussed in detail in the text.
   

   Over-subscription and under-subscription:Illustrated in detail in the main part of the text.

   Calls-in-arrears: When shareholders fail to pay the amount due on calls, the amount not received so is usually termed due on calls. This may be treated (i) by opening calls-in-arrears account and (ii) without opening calls-in-arrear account.

   Calls-in-advance is explained in detail in Illustrations 1.11 to 1.13.

   Different allotment of shares is explained in Illustration 1.14.

   Issue of shares

   1. Issue of shares at par: When the issue price of a share is equal to the face value of share, such issue is an issue at par.
   2. Issue of shares at premium: If the issue price is higher than the face value, then such issue is at premium to be governed by Section 79 of the Companies Act.
   3. Issue of shares at a discount: When the issue price is less than the nominal value, such issue is an issue at a discount. This is subject to Section 79 of the Companies Act illustrated in detail in the text (For the issue of shares, refer Illustrations 1.15 to 1.18). For preparation of cash book, refer Illustrations 1.19 and 1.20.

   Preparation of ledger accounts and balance sheet: Refer Illustrations 1.21 to 1.24.

2. Issue of shares for consideration other than cash: Under this, purchase of assets against issue of shares occurs. Accounts treatment is illustrated in Illustration 1.25.

Forfeiture of shares: When the shareholders fail to pay any due, their shares can be forfeited by the directors of the company after compliance with statutory provisions. Different cases (types) of forfeiture and re-issue are discussed in depth in Illustrations 1.26 to 1.37.

Employee Stock Option Plan: Companies may offer their equity shares to their employees at a pre-determined price. Accounting treatment is explained in Illustration 1.38. Employee stock purchase is explained in illustration 1.38.

Issue of bonus shares: Companies may issue shares to the existing shareholders without any consideration subject to the provisions of the Articles of Association. For SEBI Guidelines relating to issue of bonus shares and accounting treatment, refer text.

Rights issue: The existing shareholders have a right to subscribe to the fresh issue of capital or to reject or to sell their rights as per Section 81 of the Companies Act. Determination of value of right is explained in Illustration 1.41.

Sweat equity: A new type of equity shares was introduced by the Companies (Amendment) Act, 1999 through Section 79A. Accounting treatment is similar to that of issue of other equity shares.

Buy-back of shares: As per Section 77A of the Companies Act, a company can buy its own shares. For provisions of the Act and SEBI Guidelines refer the text.

Escrow account: An account to be opened by the company to initiate the process of buy-back of shares.

Company: An association of many persons who contribute money or money’s worth to a common stock and employ it in some common trade or business and who share the profit or loss arising therefrom.

Private Company: A company which by its articles: (i) Limits the number of members to 50 (ii) Restricts the right of its members to transfer shares and (iii) Prohibits any invitation to the public to subscribe for any shares or debentures of the company

Promoter: A person who undertakes all the activities in the formation of a company.

Memorandum of Association: A document which defines the objects and powers of a company.

Articles of Association: A document containing rules and regulations for the internal management of affairs of the company.

Certificate of Incorporation: A document by which company comes into existence (by obtaining this from the Registrar of companies).

Prospectus: Company’s invitation to the public for the subscription for its shares of debentures.

Certificate of Commencement of Business: A document that necessitates a public company to (obtain from the Registrar) commence business.

Minimum Subscription: The amount that a company must raise before the allotment of shares.

Share: Fractional part of the capital.

Authorized Capital: The maximum amount which a company can issue during its life.

Issued Capital: A part of authorized capital that is offered to the public.

Subscribed Capital: That part of issued capital which is subscribed by the public.

Called-up Capital: That part of the subscribed capital which the shareholders are called upon by the company to pay.

Paid-up Capital: That part of the called-up capital which the shareholders actually paid.

Reserve Capital: That part of the subscribed capital not already called up.

Preference Share: Share that enjoys preferential rights:

1. The right to receive dividend
2. The right to receive capital

Equity Share: Share that has no preference rights in respect of annual dividend and return of capital (in case of liquidation).

Stock: The shares of a company in a different form.

Application Money: A specified amount that has to be paid along with filled in application forms by the public to subscribe for the shares of a company.

Allotment: The process of confirming the quantum of shares to be awarded to the applicants.

Allotment Money: A specified amount required by the company to be paid after allotment is confirmed.

Calls of Shares: The balance amount (left after money received on application and allotment from the alloitees) that has to be collected by the company through one or more calls (notices).

Calls-in-Advance: Money from the shareholders in advance towards calls not yet made by the company.

Calls-in-Arrears: Dues which the shareholders failed to pay the amount on allotment and or calls on specified dates.

Over-subscription: Receipt of applications for more number of shares than the number offered for subscriptions to the public through prospectus.

Under-subscription: Receipt of applications received are less than the offered for subscription through prospectus.

Pro-rata Allotment: Proportionate allotment of shares to all the applications who have applied for subscription of shares.

Stock Invest: An instrument used by an investor to pay application money for shares applied for through banker with a letter of authority and guarantee.

Shares Issued at Par: Issue price and nominal value of shares are equal.

Issue of Shares at Premium: Issue price > Nominal Value.

Issue of Shares at Discount: Issue Price < Nominal Value.

Forfeiture of Shares: Seizure of shares and termination of membership for default in payment of allotment and or call money.

Bonus Shares: Shares issued by the company to the existing equity shareholders in settlement of the bonus declared.

Rights Issue of Shares: The right to receive first the fresh issue of shares by the existing shareholders with the option to accept or reject or renounce such offer.

Sweat Equity Shares: Shares issued by a company to its employees or directors at a discount for consideration other than cash for providing know- how or making available rights to use intellectual property.

Buy-Back of Shares: Repurchase by a company of its own shares.

Employee Stock Option Scheme: An offer awarded to an employee to purchase shares of the company at a pre-determined price with a right to exercise the option of purchase within the vesting period.

QUESTION BANK

I: State whether the following statements are true or false

1. A company is a natural person.
2. The members of a company have a limited liability.
3. In case of public limited companies, there are no restrictions on the transfer of shares.
4. All those private companies are also to be treated as public limited companies, if 25% or more of paid-up capital is held by public companies.
5. If 50% of the paid-up capital of any company is held by Central or State Government or both, such company is said to be a government company.
6. A public company can commence business as soon as the Certificate of Incorporation is obtained.
7. In a private company, if special Articles of Association are not prepared, Table A of Company’s Act will apply.
8. A public limited company can allot shares only if the minimum subscription is subscribed for by the public.
9. Now, in India, chartered companies may be formed by adhering statutory provisions.
10. The Memorandum of Association has to be signed by at least seven members.
11. Prospectus is nothing but an invitation to the public to subscribe for shares or debentures of a company.
12. Minimum subscription is the amount that should not be less than 50% of the issue.
13. Employee’s Stock Option Scheme permits the employees of a company to subscribe for any number of shares at a privileged price at any time.
14. Authorized capital should be stated in the Memorandum of Association.
15. In general, a company will not issue its entire nominal capital at a time.
16. Capital reserve is mainly utilized for distribution of dividend.
17. Redeemable preference shares cannot be issued by a company.
18. Equity shares without voting rights can be issued by a company.
19. Preference shareholders also have a right to vote under special circumstances.
20. Shares can be issued only for cash.
21. The premium received on shares may be distributed among shareholders like other profits.
22. The companies entering the capital market can retain out of subscription up to 10% of the number of shares offered.
23. When shares are issued at a premium, over the amount of premium has to be credited to share allotment account.
24. Normally, the rate of discount must not exceed 20% of face value when shares are to be issued at discount.
25. The balance of calls-in-advance account is to be added to the amount of subscribed capital.
26. The allotment of shares should be completed within one month of the issue of the prospectus.
27. A new company cannot issue shares at a discount.
28. A public company can issue deferred shares.
29. Until the forfeited shares are re-issued, the balance on the shares forfeited account is shown in the balance sheet under “share capital”.
30. Discount on shares is to be shown on “assets”.

Answers:

1. False
2. True
3. True
4. True
5. False
6. False
7. False
8. True
9. False
10. True
11. True
12. False
13. False
14. True
15. True
16. False
17. False
18. True
19. True
20. False
21. True
22. True
23. False
24. False
25. False
26. False
27. True
28. False
29. True
30. True

II. Fill in the blanks with apt word(s)

1. In India, joint stock companies should be registered under the _____ Act, 1956.
2. A company is an _____ person.
3. In general, the liability of the members of a company is _____.
4. A government company should hold a minimum of the paid-up capital _____.
5. In a public company, shares can be to_____other parties without restriction.
6. Life Insurance Corporation is formed by _____.
7. _____contain the internal rules and regulations of the company.
8. _____ means an invitation to the public for the subscription of its shares or debentures.
9. Minimum subscription is the amount which is so stated in the prospectus and can in no case be less than _____ of the issue.
10. A public company can commence business only on obtaining the Certificate of _____.
11. Raising capital by issue of share is called _____ .
12. The maximum amount of capital which the company shall be allowed to have is termed as _____
13. The capital which is actually offered to the public for subscription is known as _____ .
14. The difference between issued capital and authorized capital is called _____ .
15. That capital represented by the shares that the public actually subscribes for is called _____.
16. If the shares issued for subscription are wholly subscribed for, then issued capital would be _____ as subscribed capital.
17. When the directors ask for only a part of the nominal amount of the shares, the amount asked for its called _____.
18. Paid-up capital = Called-up capital _____ .
19. When a shareholder fails to pay the call amount within the due date, such amount is referred to as _____.
20. That part of the issued capital which has not been called is known as _____ .
21. When a portion of the subscribed capital is not already called up, it becomes the _____.
22. The share capital of a company limited by shares shall be of equity share capital and _____ capital.
23. Shares which are not preference shares are _____ .
24. A joint stock company can issue shares for cash and _____.
25. Application money cannot be less than _____ of the nominal value of the shares.
26. Amount payable on application is called _____.
27. Sum payable on allotment is called _____.
28. Shares may be issued in any of the three ways: (i) At par (ii) At premium and (iii)_____ .
29. When an issue price of the share is equal to its face value, then such shares are said to have been issued at _____.
30. When the number of shares applied for is more than the number of shares offered for issue, shares are said to be _____.
31. When the number of shares applied for is less than the number of shares offered to public for subscription, the shares are said to be _____.
32. When shares are issued at an amount more than the face value, such an issue is said to be made at a _____.
33. When shares are issued at a price less than its face value, shares are said to be made at a _____.
34. When a company accepts money paid by its allotments for the calls not yet due, such amount is called _____.
35. A public company cannot issue _____shares.
36. A non-company cannot issue shares at a _____.
37. Calls-in-advance do not form part of _____ capital.
38. A call money as shares should not exceed _____of the face value of share.
39. In general, a preference share is always deemed to be _____, non-convertible and non-participating.
40. Companies are now permitted to issue equity shares with _____ voting rights.

Answers:

1. companies
2. artificial legal
3. limited
4. 51%
5. transferred
6. Special Act of Parliament
7. Articles of Association
8. Prospectus
9. 90%
10. Commencement of Business
11. share capital
12. authorized capital or
13. issued capital
14. unissued capital
15. subscribed capital
16. same
17. called-up
18. calls-in-arrears
19. calls-in-arrears
20. uncalled
21. reserve capital
22. preference share
23. equity shares
24. for consideration other than cash
25. 5%
26. application money
27. allotment money
28. At discount
29. par
30. over-subscribed
31. under
32. premium
33. discount
34. calls-in-advance
35. deferred
36. discount
37. paid-up
38. 25%
39. cumulative registered capital
40. disproportionate

III: Multiple choice questions—Choose the correct answer

1. A company is created by
   1. adhering statuary provisions in the specified Act
   2. Special Act of Parliament
   3. special status of its members
   4. none of these
2. The capital of a company consists of
   1. equity shares
   2. equity and preference shares
   3. preference shares
   4. none of these
3. A private company which is a subsidiary of public company is a
   1. public company
   2. private company
   3. chartered company
   4. none of these
4. Share application account is a
   1. real A/c
   2. nominal A/c
   3. personal A/c
   4. none of these
5. Share allotment account is a
   1. real A/c
   2. personal A/c
   3. nominal A/c
   4. none of these
6. The difference between subscribed capital and called-up capital is
   1. paid-up capital
   2. calls-in-advance
   3. calls-in-arrears
   4. uncalled capital
7. Holders of preference shares will have a right to vote if the dividend remains in arrears for a period not less than
   1. two years
   2. three years
   3. six years
   4. none of these
8. The minimum share application money will be
   1. 90% of nominal value of shares
   2. 5% of nominal value of shares
   3. 12% of the nominal value of shares
   4. 6% of the nominal value of shares
9. A company wishes to pay dividend on shares; which of the following may be utilized?
   1. profit and loss A/c
   2. premium on shares
   3. general reserve
   4. other surplus
10. Premium received on issue of shares account is shown on
    1. liabilities side of the balance sheet
    2. assets side of the balance sheet
    3. profit and loss appropriation A/c
    4. profit and loss A/c
11. Discount on issue of shares account is shown on
    1. profit and loss A/c
    2. liabilities side of the balance sheet
    3. assets side of the balance sheet
    4. profit and loss A/c
12. The allotment of shares should be completed (from the date of issue) within
    1. one month
    2. 60 days
    3. 90 days
    4. 120 days
13. The rate of discount, while issuing shares at discount, should not exceed
    1. 5%
    2. 10%
    3. 6%
    4. 9%
14. Interest on “calls in advance” and “calls in arrears” should be paid at
    1. 6%
    2. 5%
    3. 9%
    4. none of the above
15. Nominal value of share is 10%; 7.50 has been called up. On forfeiture, the amount to be debited to share capital account will be
    1. 10
    2. 2.50
    3. 7.50
    4. 5
16. If a 1,000 share (nominal value) has been issued at a premium of 20, on which the whole of the amount has been called up, has been forfeited for non-payment of 40, the share capital account will be debited by
    1. 100
    2. 20
    3. 40
    4. 120
17. If a share of 100 issued at a premium of 10, on which 90 (including premium) have been called and 70 (including premium) paid is forfeited, the capital accounted is to be debited by
    1. 90
    2. 80
    3. 70
    4. 110
18. Money received in advance before it is actually due will be
    1. debited to calls paid in advance A/c
    2. debited to calls-in-arrears A/c
    3. credited to calls in arrears A/c
    4. credited to calls paid in advance A/c
19. Forfeited shares account is finally closed by transferring of its balance to
    1. general reserve A/c
    2. profit & loss A/c
    3. capital reserve A/c
    4. balance sheet
20. The “buy-back” of shares may be done
    1. at par
    2. at discount
    3. at premium
    4. all of the above

Answers:

 

1. (a)	6. (d)	11. (c)	16. (a)
2. (b)	7. (a)	12. (d)	17. (b)
3. (d)	8. (b)	13. (b)	18. (d)
4. (c)	9. (b)	14. (d)	19. (c)
5. (b)	10. (a)	15. (c)	20. (d)

1. Define: Company.
2. What is the nature of a private limited company?
3. Mention any four salient features of a public limited company?
4. What is meant by a “share”?
5. Enlist the various major kinds of shares?
6. What is meant by “equity share”?
7. Explain: Preference share.
8. What do you mean by “cumulative preference share”?
9. What is meant by “non-cumulative preference share”?
10. What is meant by “convertible preference share”?
11. What is meant by “redeemable preference share”?
12. What do you mean by “registered capital”?
13. What is an “issued capital”?
14. What is meant by “subscribed capital”?
15. What is meant by “unissued capital”?
16. What is meant by “paid-up capital”?
17. What is meant by “uncalled capital”?
18. What is meant by “reserve capital”?
19. Explain the term “chartered company?”
20. Give four examples of companies that are enacted by Special Act of Parliament.
21. Define: Government Company.
22. Define: Memorandum of Association.
23. What is meant by “Articles of Association”.
24. What is a “prospectus”?
25. Explain the term “application of shares”.
26. Explain the term “application money”?
27. What do you mean by “allotment”?
28. Explain “allotment money”.
29. What do you mean by “minimum subscription”?
30. Explain “call”.
31. What is a call money?
32. What is the maximum amount of a call as per Table A
33. Mention the minimum time interval between two consecutive calls as per Table A.
34. Explain “issue of share at par”.
35. Explain “issue of share at premium”.
36. Explain “issue of share at discount”.
37. Explain “securities premium account”.
38. Can a new company issue shares at a discount?
39. How “securities premium account” can be shown in the balance sheet?
40. How will you treat “discount on issue of shares” in the books of accounts of a company?
41. Explain “issue of shares for consideration other than cash”.
42. What is “over-subscription of shares”?
43. What is “under-subscription of shares”?
44. Explain “pro-rata allotment”?
45. What is “calls-in-advance”?
46. How will you treat “calls-in-advance” in the balance sheet?
47. What is “calls-in-arrears”?
48. How will you show “calls-in-arrears” in the balance sheet?
49. What is the rate of percentage of interest allowed for “calls-in-advance” and “calls-in-arrears”?
50. Explain “forfeiture of shares”.
51. When shares are forfeited, mention the amount the forfeited shares account to be credited.
52. How will “the balance in forfeited shares accounts” appear in the balance sheet?
53. At the time of forfeiture of shares, with what amount the “share capital account” is debited?
54. Can forfeited shares be issued discount?
55. Journalize the transaction, when a company reissues forfeited shares.
56. Can shares be surrendered?
57. What do you mean by “stock invest scheme”?
58. What are the uses of securities premium?
59. What is meant by “sweat equity”?
60. Explain “Employees Stock Option Scheme”.
61. What is meant by “escrow account”.
62. Explain “buy-back of shares”.
63. What is meant by “rights issue”?
64. How will you determine the value of a right?
65. Explain “underwriting”.
66. What is meant by “underwriting commission”?
67. How will you treat “underwriting commission” in the books of accounts of the company?
68. Explain “capital reserve”.
69. How does “reserve capital” differ from “capital reserve”?
70. What do you mean by “private placement of shares”?

1. Define “company”. Discuss the salient features of a company.
2. Enumerate the various kinds of companies with salient features of each kind of company by citing apt examples.
3. What is a “private company”? How does it differ from a public company?
4. What is Memorandum of Association? Explain its contents in detail.
5. What is “Articles of Association”? Explain its contents and its significance?
6. What is a “prospectus”? Explain the important clauses in a prospectus.
7. You are a promoter. How will you float a new company?
8. What is “share capital”? Describe the different kinds of share capital.
9. What are the major kinds of shares? Describe the internet characteristics of different types of preference shares.
10. Tabulate the major differences between preference shares and equity shares.
11. Explain the different stages in issue of shares. Also give journal entries for them.
12. What is “over-subscription of shares”? Explain the SEBI Guidelines to ensure proportional allotment in marketable lots on a fair basis.
13. What do you mean by calls-in-arrear? Explain the different methods of accounting treatment of calls-in-arrears.
14. Explain the provisions of Section 78 with respect to issue of shares at a premium.
15. Explain the provision of Section 79 of the Company’s Act with respect to issue of shares at a discount.
16. Explain the process of forfeiture of shares (a) at par; (b) at a premium and (c) at a discount.
17. What do you mean by “buy-back of shares”? What are the main provisions envisaged in section 77 A of the Companies Act with respect to “buy- back of shares”? What are the SEBI Guidelines relating to this?
18. Explain “Employee Stock Option Plan”. What is the accounting treatment for Employee Stock Option Scheme? Journalize the transactions relating to “ESOP”.
19. Explain the accounting treatment for issue of “bonus shares”.
20. How will you treat underwriting commission in the books of accounts of the company. Use imaginary figures.

 

1. Sri. Ram & Co. Ltd. invited applications for 20,000 shares of the value of 10 each. The amount is payable as 4 on application and 3 on allotment and the balance when required. The whole of the issue was applied for and cash duly received.

Journalize the above transactions.

[Model: Over-subscription of shares—Excess applications rejected]

2. Robert & Co. Ltd. invited applications for 50,000 shares of 10 each payable as:

 

On Application	2
On Allotment	3

Balance When Required

60,000 shares were applied for. The directors accepted applications for 50,000 shares and rejected the remaining applications. Allotment money was received on 49,800 shares.
Give journal entries. Prepare the ledger accounts. Show how these items would appear in the balance sheet.

[Ans: Balance sheet total: 2,49,400]

[Model: Issue of shares at par—Over-subscribed, partial allotment]

3. Rahim & Co. Ltd. invited applications for 25,000 shares of 100 each payable as 25 on application; 35 on allotment and the balance when required.

Applications were received for 30,000 shares. The directors accepted applications for 22,000 shares in fully, allotted 3,000 shares to applications for 5,000 shares and rejected applications for 3,000 shares. Excess application money was refunded. Mr. X, a shareholder holding 250 shares, failed to pay the money due on allotment.

Give journal entries and prepare necessary ledger accounts.

[Model: Shares issued at par—Over-subscribed, full allotment to some applications, partial allotment to others, no allotment to the balance applications]

4. Good Luck & Co. offered 30,000 shares of 10 each to the public which were payable as:

 

On Application	2
On Allotment	5

The Balance When Required

Applications for 55,000 shares were received on which the directors allotted as follows:

Applications for 25,000 shares—Full

Applications for 25,000 shares—20%

Applications for 5,000 shares—NIL

Record the journal entries and prepare the ledger accounts.

[Model: Comprehensive]

5. Prem Ltd. invited applications for 1,00,000 equity shares of 10 each on the following terms:

 

On Application	2
On Allotment	3
On First & Final Call	5

Applications were received for 1,20,000 shares. It was decided

1. To reject applicants for 20,000 shares
2. To allot 50% to Mr. Patel who has applied for 40,000 shares
3. To allot in full to Mr. Dua who has applied for 10,000 shares
4. To allot the balance of the available shares pro-rata among the other applications
5. To utilize excess applications money in part payment of allotment and final call

Give journal entries till the stage of allotment assuming that the entire sum due an allotment is received in full.

[Model: Issue of shares at par—Under- subscribed]

6. Gopal Ltd. offered 1,00,000 shares of 10 each to be payable as:

 

On Application	2
On Allotment	3
On First Call	2
On Final Call	3

The public applied for 90,000 shares which were allotted all money were duly received.

Make journal entries. Prepare the ledger accounts. Show the balance sheet.

[Ans: Total of balance sheet: 9,00,000]

[Model: Entries in cash book and journal]

7. Same figures as in Question 6. Prepare cash book and make entries in cash book and journal.

[Ans: Cash book total: 9, 00,000 (Balance b∕d)]

[Model: Issue of two classes of shares]

8. Leela and Krishna Ltd. issued 1,00,000 equity shares of 10 each and 10,000 preference shares of 100 each payable as follows:

Equity Shares Preference Shares

 

On Application	4	30
On Allotment	2	40
On First and Final Call	4	30

The public applied for 1,20,000 equity shares and 9,000 preference shares. Applications for preference shares were accepted in full. Out of applications, equity shares applications for 10,000 shares were rejected; applications for 85,000 shares were accepted in full and 15,000 shares were allotted to the remaining applicants.

All money was duly received.
Make entries in cash book and journal.

[Ans: Cash book total: 19,40,000; Balance b/d: 19,00,000]

[Model: Issue of shares at premium]

9. A company issued 30,000 shares of 10 each payable at a premium of 3 per share. Instalments were fixed as follows:

 

On Application	4
On Allotment	5
	(Including 3 for Premium)
On Call	4

All amounts were duly received.

You are required to prepare cash account in the books of the company and pass necessary journal entries.

[Ans: Cash book balance: 3,90,000]

[Model: Issue of shares at a premium—Oversubscription, calls-in-arrears]

10. A company offered to the public 2,00,000 equity shares of 10 each at a premium of Re 1 per share. The payment was to be made as follows:

 

On Applicatin	2
On Allotment	4
	(Including Premium)
On First Call	2.50
On Final Call	2.50

Applications totalled for 3,50,000 shares. Applications for 1,00,000 shares were rejected; those totalling 1,50,000 shares were allotted 1,00,000 shares and the remaining applications were accepted in full. The directors made both the calls.

One shareholder, holding 5,000 shares (Full allottee), failed to pay the calls. Expenses amounted to 10,000.

Pass journal entries and relevant extracts from the balance sheet relating to the above transactions. [Ans: Calls-in-arrears: 25,000]

 

11. Radha Rukmani Ltd issued to public 50,000 equity shares of 10 each at a premium of 1 per share payable as follows:

 

On Application	2
On Allotment	4
	(Including Premium)
On Calls	5

Applications were received for 40,000 shares and all were accepted. All moneys due were fully received except first and final call on 3,000 shares.

Pass journal entries and prepared the balance sheet.

[Ans: Total of balance sheet: 4,25,000]

12. Leela & Krishna Ltd. invited applications for 10,000 shares of 100 each at a premium of 20 per share. The shares are payable 30 on application, 50 (including premium) on allotment, and 40 on first and final call.

There was over-subscription and applications were received for 19,000 shares. Allotment was made as follows:

 

	Share Applied	Shares Alloted
To the Applicants of	8,000	8,000
To the Applicants of	1,000	Nil
To the Applicants of	10,000	2,000
	19,000	10,000

Excess money paid on applications was adjusted against sums due on allotment and first and final call. All moneys due were received.

How will you deal with the excess application money? Show your workings and pass journal entries in the books of the company.

[Ans:

1. Amount refunded to applicants: 90,000
2. Transfer from share application A/c to allotment A/c: 1,00,000
3. Transfer from share application to first & final call A/c: 80,000]

[Model: Shares issued at a discount]

13. A company issued 10,000 equity shares of 10 each at a discount of Re 1 per share payable as follows:

 

On Application	3
On Allotment	3
	(Excluding Discount)
On First & Final Call	3

All the amounts were duly received. Pass the necessary journal entries in the books of the company.

[Model: Issue at a discount, calls-in-arrears]

14. A company issued 5,000 shares of 100 each at a discount of 5%. The issue was fully subscribed by paying 20 per share on application. The balance was payable as to 20 on allotment (with adjustment of discount); 25 on first call and 30 on final call.

All the calls were made and recovered except a final call on 500 shares held by Mr. X.

Pass journal entries to record the above transactions and show the balance sheet.

[Ans: The total of balance sheet: 4,85,000;

Cash alone in b/s: 4,60,000]

[Model: Calls-in-arrears and calls-in-advance]

15. A company with a registered capital of 10,00,000 in shares of 100 each issued 4,000 of such shares, payable 10 per share on application, 20 per share on allotment, 30 per share on first call.

All the money payable on allotment was duly received. On the first call being made, one shareholder Mr. X paid the entire balance on his holding of 60 shares and another shareholder Mr. Y holding 200 shares failed to pay the first call on his shares.

Pass the necessary journal entries. Show how this will appear in the balance sheet.

[Ans: Total of balance sheet: 2,36,400;

 

Paid-up capital:	2,40,000;
Calls in-arrears:	6,000;
Calls-in-advance:	2,400]

[Model: Issue at premium—Over-subscription, calls-in-arrears & calls-in-advance; Interest on calls-in-arrear and calls-in-advance].

16. On 1 January 2010, XYZ Ltd. makes an issue of 1,00,000 equity shares of 10 each payable as follows:

 

On Application	2
On Allotment	3
	(Including Premium)
On First & Final Call	6
(3 months After Allotment)

Applications were received for 1,30,000 shares and directors made allotment in full to the applicant demanding five or more shares and returned money to the applicants for 30,000 shares. One shareholder, who was allotted 200 shares paid first and final call with allotment money and another shareholder did not pay allotment money on his 300 shares but which he paid with first and final call. The directors have decided to change and allow interest, as the case may be, on calls-in-advance respectively according to the Provisions of Table ‘A’.

You are required to journalize the above transactions.

[Ans: (i) Calls-in-arrear A/c: 900

(ii) Calls-in-advance A/c: 1,200

(iii) Interest on calls-in-arrear A/c: 11.30

(iv) Interest on calls-in-advance A/c: 18.00]

[Model: Calls-in-advance and calls-in-arrears (Issue at a discount)]

17. XYZ Ltd. issued 50,000 equity shares of 10 each at a discount of 10% payable as follows:

 

On Application	2
On Allotment	2
On First Call	2
On Final Call	2

Applications were received for 60,000 shares and the directors allotted 50,000 shares and refunded the application money for 10,000 shares.

The allotment money was duly received on all shares. One shareholder holding 5,000 shares did not pay the first and final calls. Another shareholder holding 1,000 shares paid the final call money along with the first call itself.

Pass necessary journal entries in the books of XYZ Ltd.

[Ans: Calls-in-arrears: 25,000; Calls-in- advance: 3,000]

[Model: Issue of shares for consideration other than cash]

18. Vas Ltd. purchased the machinery worth 9,00,000 from Subbu & Co. in fully paid shares of 100 each.

Make entries in the books of Vas Ltd. in each of the following alternatives:

1. If the said is at par
2. at a premium of 20%
3. at a discount of 10%

[Model: Forfeiture of shares—Issued at par]

19. A public limited company offered 10,000 shares of 100 each to the public on the following terms:

20 payable on application; 50 on allotment and the balance as and when required.

Applications were received for 14,000 shares and allotments were made as follows:

8,000 Applications Were Given 8,000 Shares

5,000 Applications Were Given 2,000 Shares

1,000 Applications Were Given Nil.

Applications money is to be applied towards allotment and the balance beyond that is to be refunded.

A shareholder who applied for 100 shares and was given 100 shares failed to pay the allotment money. His shares were forfeited.

Pass journal entries to record the above transactions.

[Model: Forfeiture of shares—Issued at premium]

20. ABC Ltd. issued 1,00,000 shares of 10 each at 120 payable as follows:

 

On Application	2.50
On Allotment	4.50
	(Including Premium)
On First Call	2
On Final Call	3

90,000 shares were applied for and allotted. All money was received with the exception of first and final calls on 2,000 shares held by Mr. Y. These shares were forfeited. You are required to journalize the above transactions. Prepare the necessary ledger accounts and the balance sheet.

[Ans: Total of balance sheet: 10, 70,000]

[Model: Forfeiture of shares—Miscellaneous]

21. Parul Ltd. with a share capital of 10, 00,000 divided into 10,000 shares of 100 each offers the shares to the public as follows:

 

On Application	20
On Allotment	20
On First Call	30
On Second and Final Call	30

Shareholder “P” who holds 150 shares has paid only the application money. Shareholder “Q” who holds 100 shares paid application money on 100 shares and allotment money on only 50 shares. He did not pay any other call money.

Shareholder “R” who holds 90 shares has paid only the application and allotment money.

Shareholder “S” who holds 20 shares has paid application, allotment and first call money.

Shareholder “T” who holds 15 shares has paid application, allotment and first call money in full and second call money on only 10 shares.

The company forfeits the shares of the above shareholders who have not paid the due.

Journalize the above transactions in the books of Parul Ltd.

[Model: Forfeiture of shares—Issued at a discount]

22. A company invited applications for 10,000 shares of 100 each at a discount of 10% payable as follows:

 

On Application	20
On Allotment	30
On First Call	20
On final Call	20

Whole of the issue was subscribed and paid for with the exception of one shareholder who holds 200 shares failed to pay both the calls and another shareholder holding 300 shares failed to pay the final call. Those shares were forfeited.

Pass the necessary journal entries in the books of the company.

[Model: Re-issue of forfeited share; Forfeiture— Originally issued at par, re-issued at discount]

23. X Ltd. issued 1,00,000 equity shares of 10 each payable as follows:

 

On Application	2
On Allotment	5
On Call	3

The public applied for 80,000 shares which were allotted. All the money due on shares weas received except for the call on 1,000 shares. These shares were forfeited and re-issued at 8 per share.

Journalize the above transactions in the books of “X” Ltd.

[Model: Forfeiture of shares—Originally issued at premium, re-issued at discount]

24. Renu Ltd. issued 1,00,000 equity shares of 10 each at 20% premium as follows:

 

On Application	2.50
On Allotment	4.50
	(Including Premium)
On First Call	2.00
On Final Call	3.00

90,000 shares were applied for and allotted. All money was received with the exception of First and Final calls on 2,000 shares held by Mr. A. These shares were forfeited consequently. These forfeited shares were re-issued at 9 per share.

You are required to pass necessary journal entries.

Prepare ledger accounts and the balance sheet.

[Ans: Capital reserve A/c: 8,000; Total of balance sheet; 10,88,000]

[Model: Re-issue of forfeited shares—Originally issued at discount]

25. A company issues 1,00,000 equity shares of 10 each at a discount of 10%, payable as follows:

 

On Application	2
On Allotment	3
On First Call	2
On Final Call	2

All money was received duly except on 500 shares held by Mr. Gopi, who did not pay both calls. These shares where forfeited and re-issued at 7 per share.

You are required to journalize the above transactions in the books of the company.

[Model: When all forfeited shares are not reissued]

26. A company makes an issue of 10,000 shares of 100 each, amount is payable as follows:

 

On Application	20
On Allotment	25
On First Call	25
On Final Call	30

A shareholder holding 400 shares did not pay both the calls and all his shares were forfeited. Out of these, 250 shares are re-issued at 90 per share.

Pass journal entries in the books of the company.

[Model: Forfeiture of shares originally issued at premium—A part reissued]

27. A company issues 10,000 shares of 100 each at a premium of 25% and the amount is payable as follows:

 

On Application	30
On Allotment	45
	(Including Premium)
On First Call	20
On Final Call	30

All shares were fully subscribed and duly paid with the exception of 200 shares held by Mr. X, who did not pay allotment (including premium). These shares were forfeited. Of these, 150 shares were re-issued at 110 per share.

You are required to journalize the above transactions.

[Model: Re-issue of forfeited shares originally issued at discount—Portion of forfeited shares re-issued]

28. A company invited applications for 50,000 shares of 100 each at a discount of 4 per share payable as:

 

On Application	20
On Allotment	30
On First & Final Call	46

The applications were received for 45,000 shares and all of these were accepted. All money due was received except the first and final call on 2,000 shares. These shares were forfeited, 1,000 of these shares were re-issued as fully paid for the payment of 80 per share.

Pass entries in the cash book and the journal of the company.

Construct the balance sheet of the company.

[Ans: Cash book total: 43,08,000; Total of balance sheet: 44,84,000]

Model: Pro-rata allotment—Over-subscription, Forfeited and re-issued)

29. A company issued 50,000 shares of 10 each at a premium of 2 per share, payment to be made as follows:

 

On Application	2
On Allotment	5
	(Including Premium)
On First Call	2
On Final Call	3

Applications were received for 1,00,000 shares. Applications for 25,000 shares were rejected and allotment was made proportionately to the remaining applicants. All the money was received except the final call on 500 shares, which were forfeited. 400 of the forfeited shares were reissued as fully paid @ 15 per share.

You are required to journalise the above transaction.

30. A public limited company issued a prospectus inviting applications for 10,000 shares of 10 each at a premium of 2 per share payable as follows:

 

On Application	2
On Allotment	5
	(Including Premium)
On First Call	3
On final Call	2

Applications were received for 15,000 shares and pro-rata allotment was made on applications for 12,000 shares. Money over paid on applications was employed towards the sum due on allotment.

Mr. A, who took 200 shares, failed to pay the allotment money and his shares were forfeited on his failure to pay the first call also.

Mr. B, the holder of 300 shares, failed to pay the two calls and his shares were forfeited after the second call. Of the shares forfeited, 400 shares were sold to “C” credited as fully paid for 9 per share, the whole of Mr. A’s shares being included.

Show the journal entries by separately showing your workings on capital reserve.

[Ans: Amount to be transferred to capital reserve: 1,080]

 

31. On 1 January 2010, the directors of X Ltd. issued 1,20,000 equity shares of 10 each at 12 per share, the amount payable as to 5 on application (including premium) 4 on allotment and the balance on 15 April 2010.

On 10 January 2010, applications were received for 1,60,000 shares. Of the cash received in excess, 80,000 were returned and 1, 20,000 were applied towards the amount due on allotment. The balance of allotment money was received on 30 January 2010. All the shareholders paid the call due on 15 April 2010, with the exception of one shareholder, holding 1,000 shares. These shares were forfeited on 31 May 2010.

You are required to pass journal entries and also prepare the balance sheet of the company on 31 May 2010.

[Ans: Total of the balance sheet: 14,37,000]

[Model: Question No. 31 to Question No. 45— Comprehensive and miscellaneous]

32. XY Co. Ltd. offered to the public 2,00,000 equity shares of 10 each at a premium of Re 1 per share. The payment was to be as follows:

 

On Application	2
On Allotment	4
	(Including Premium)
On First Call	2.50
On Final Call	2.50

Applications were received for 3,50,000 shares. Applications for 1,00,000 shares were rejected. Applicants for 1,50,000 shares were allotted 1,00,000 shares and remaining applications were accepted in full. The directors made both the calls. One shareholder holding 5,000 shares failed to pay the two calls and his shares were consequently forfeited. 2,000 of these shares were re-issued as fully paid at 8 per share. Expenses of the issue came to 10,00,000. You are required to prepare cash book, the journal and the balance sheet.

[Ans: Balance sheet: 21,91,000]

33. Senthil Ltd. offers 10,000 shares of 100 each to the public for subscription. The money is payable as follows:

 

On Application	20
On Allotment	30
On Call	50

The company received applications for 12,000 shares. Applications for 8,400 shares pay the application money in cash. The remaining applicants pay the money through stock invests. The shares are allotted on pro-rata basis. All allottees pay the allotment and final call moneys on due dates.

You are required to pass journal entries in the books of Senthil Ltd. assuming that surplus application money received was refunded.

[Ans: Hint: 1. Number of shares allotted to applicant who applied through stock invest = 3,000 shares

2. Even though unused “stock invest” are physically returned to the applicants, refund is not to be recorded. The reason is that stock invests are encashed by the company only to the extent of shares allotted to them]

34. Following are the extracts from the draft balance sheet of Doss Ltd. as on 31 March 2010:

 

Authorized Capital
8,00,000 Equity Shares of
100 Each	80,00,000
Issued and Subscribed Capital:
20,000 Equity Shares of
100 Each Fully Paid	20,00,000
Reserve Fund	4,00,000
Profit and Loss Account	3,20,000

A resolution was passed declaring the issue of bonus 20% on equity shares to be provided as to 2, 40,000. Out of profit & loss account 1,60,000 out of reserve fund. The bonus is to be satisfied by issuing fully paid equity shares. You are required to set out journal entries to give effect to the resolution and show how they would affect the balance sheet.

[Ans:

1. Issued & subscribed capital:

    

   24,00,000

2. Reserve fund: 2, 40,000
3. Profit and loss A/c: 80,000]

35. NIWAS Ltd. has an authorized capital of 10,00,000 divided into 1,00,000 equity shares of 10 each. Its subscribed capital is 6,40,000 being 80,000 shares of 10 each, 8 paid up per share. Out of the general reserve, it has been decided to:

1. Declare a dividend of 2 per share
2. Utilize such dividend for making partly paid-up shares as fully paid up
3. Issue 20,000 bonus shares fully paid up in the ratio of 1 bonus share to 4 existing shares

Pass the journal entries in the books of the company.

36. Sundar Ltd. presents the following balance sheet to you:

The company purchases new machinery for 62,500 for which it pays 12,500 in cash and allots 500 15% preference shares of 100 each as fully paid up to vendors. The company then issues one fully paid bonus equity share of 100 each for every three equity shares held to its equity shareholders. For this purpose, the balances in profit & loss A/c and general geserve are used to the necessary extent.

You are required to pass journal entries for the above-mentioned transactions and redraft the company’s balance sheet.

[Ans: Total of balance sheet: 11,06,000]

37. “A” Ltd. has a share capital of 5,00,000 equity shares of 10 each. Market value is 25 per share. The company decides to make a rights issue to the existing shareholders in proportion of one rights share of 10 at a premium of 3 per share for every 5 shares held.

Calculate the value of right.

[Ans: Value of right: 2]

38. Popular Ltd. granted 1,000 options on 1 January 2007 at 50 (Nominal value of 10 each) when the market price was 200; the vesting period was two and a half years. The maximum exercise period was one year. On 1 February 2009, 300 unvested options lapsed and 600 options were exercised on31 March 2010 and the remaining 100 options lapsed at the end of exercise period. Pass necessary journal entries in the books of Popular Ltd.

39. Dorga Co. Ltd. issued 50,000 equity shares of 100 each at a premium of 25%; 50 per share being payable along with application and the balance including premium being payable on allotment. Applications totalled 49,000 shares. All the applications are fully accepted. Allotment money on 250 shares is not received. These shares are forfeited. Of these, 200 shares are reissued as fully paid up @ 95 per share.

Pass journal entries for the above transactions crediting securities premium account:

1. Only when the amount of the premium has been received.
2. As soon as the amount of the premium becomes due.

40. Verma Ltd. with an authorized capital of 60,00,000 offered to public 60,000 equity shares of 100 each as a premium of 10%. The payment was to be made as follows:

 

On Application	30
On Allotment	50
	(Including Premium)
On First & Final Call	30

Applications totalled 80,000 shares; shares were allotted on pro-rata basis. Kashyap who had applied for 80 shares and to whom 40 shares had been allotted failed to pay the balance of allotment money due from him. His shares were forfeited and then re-issued to Anju at 80 (including premium of 10) per share paid up @ 60 per share. Vijay, another shareholder, failed to pay the call money on 20 shares held by him. His shares were forfeited and later were re-issued as fully paid up to Ajay @ 120 per share. Expenses of the issue came to 24,000.

Prepare the journal, the cash book, the ledger and the balance sheet.

[Ans: (i) Capital reserve: 3,000

(ii) Total of the balance sheet: 44,03,400]

41. X Ltd. invited applications for 10,000 shares of 100 each at a discount of 6% payable as follows:

 

On Application	25
On Allotment	34
On First & Final Call	35

The applications received were 9,900 and all of those were accepted. All moneys due were received except the first and final call on 10 shares which were forfeited. Five shares were reissued @ 90 as fully paid.

Prepare the cash book, the journal and the balance sheet of the company.

[Ans: Cash book total: 9,30,700; Capital reserve: 275; Balance sheet total: 9,90,070]

42. Arul Ltd. issued 1,00,000 equity shares of 10 each at a discount of 10% payable as to 2.50 per share along with application; 2.50 per share on allotment and the balance on the first and final call to be made six months after allotment. The issue was fully subscribed for.

Call on 60 shares was not received. Consequently, they were forfeited. Half of these shares were reissued as fully paid up @ 8 per share and later the remaining shares were re-issued as fully paid up @ 11 per share.

Pass journal entries in the books of Arul Ltd.

[Ans: Capital reserve: 150]

43. The issued share capital of Nataraj Ltd. consists of 5,00,000 equity shares of 10 each fully paid up. The company offers to its shareholders shares on the rights basis in the ratio of 1:1; the shares of 10 each being offered at a premium of 10 per share. Half of the price was payable with the application and the balance was payable on allotment, distribution being as follows:

 

	With Application	On Allotment
Share Capital	5	5
Securities Premium	5	5
	_____ 10 _____	_____ 10 _____

All the shareholders accepted the offer. One shareholder holding 1,500 shares paid the full offer price with his application. Another shareholder holding 1,000 shares failed to pay the allotment money and his shares were forfeited. Later, the shares were re-issued as fully paid up for 20,000 cash.

Journalize the above transactions.

[Ans: Transfer to capital reserve: 5,000]

44. ABC Ltd. registered with Table ‘A’ as its articles was formed with an authorized capital of 40,000 equity shares of 100 each. On 1 October 2008, 20,000 shares were issued, fully paid, to the vendors and 16,000 were subscribed by the public. On the latter, 25 a share was payable on application, 25 on allotment, 25 on first call due on 1 December 2008, and 25 on the second call due on 1 March 2009.

On the shares subscribed by the public, they had been paid on 30 September 2009 the following:

 

On 12,000 sharesthe full amount called
On 3,600 Shares	75 per Share
On 100 Shares	50 per Share
On 300 Shares	25 per Share

On 30 September 2009, the directors forfeited the shares on which less than 75 has been paid. The calls-in-arrear on the 3,600 shares were collected on 31 October 2009, together with the necessary interest. The forfeited shares were reissued on the same date to Mr. X, at 80 per share.

Submit journal entries for the transaction and set out the capital items as they should appear in the company’s balance sheet as at 31 March 2009 and 31 March 2010.

[Ans: Total of balance sheet as at 31 March 2009: 34,82,500 31 March 2010: 36,07,500]

45. A prospectus issued by a company invited applications for 40,000 equity shares of 100 each, payable 20 on application and 20 on allotment and the balance two equal instalments at intervals of three months each after allotment. The vendor was to receive 4,000 fully paid equity shares as part payment of the purchase consideration of 32,00,000 made up as follows:

Land & building: 12,00,000; plant: 7,00,000; stock in trade: 9,00,000 and the balance as goodwill.

The offer was over-subscribed by 4,000 shares and the amount due on allotment was received in full.

10,50,000 and 10,40,000 were received on first and second call, respectively. Show the accounts concerned after opening the books, recording the above receipts on account of capital, and paying the balance of the purchase consideration to the vendor.

(Journal entries are not required)

[Ans: Cash book balance: 8,90,000]

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