NOTES

CHAPTER 8: Accounting for Share Capital

The word company is derived from Latin words ‘com’ i.e. together and panis means bread.

Salient features of a company

Separate legal entity	A company is created by law and is regarded as a person different from the members who form it. It has separate legal identity. Since a company is a separate legal entity it can enter into contracts in its name, it can sue and be sued.
Incorporated association	A company is an incorporated association. It comes into existence only after registration under companies act.
Audit	A company has to get its account periodically audited by a CA appointed by shareholders of the company.
Right to access information	The shareholder have the right to seek information from the directors by participating in the meetings of the company
Artificial person	A company being an artificial person acts through directors of the company
Transferability of shares	The shares of a company are easily transferable by its members except in case of a private company.

Difference between private company and public company

Difference between private company and public company

Point of difference	Private company	Public company
Issue of prospectus	Prohibited	Not prohibited
Minimum paid up capital	Rs. 1,00,000	Rs. 5,00,000
Maximum numbers of members	200	No restriction
Minimum numbers of members	2	7
Transferability of shares	Complete restrictions on transferability of shares	No restriction on transferability of shares

Share capital:

1. Authorized share capital
2. Issued share capital
3. Subscribed share capital
4. Called up share capital
5. Paid up share capital
6. Reserve share capital

Example 1:

H Ltd. issued 5000 equity shares of Rs. 100 each. The amount payable on these shares was as under:

• Rs.10 per share on application
• Rs. 60 per share on allotment
• Rs. 30 per share on first and final call

All the shares were subscribed and money duly received except the first and final call money on 100 shares.

Pass the journal entries in the books of H Ltd.

Solution:

Date	Particulars	L.F.	Debit	Credit
10-4-14	Bank A/c Dr.  To share application A/c		50,000	50,000
	Share application A/c Dr.  To share capital A/c		50,000	50,000
	Share allotment A/c Dr.  To share capital A/c		3,00,000	3,00,000
	Bank A/c Dr.  To share allotment A/c		3,00,000	3,00,000
	Share first & final call Dr.  To share capital A/c		1,50,000	1,50,000
	Bank A/c Dr.  To share first & final call A/c		1,47,000	1,47,000

Shares issued at premium

Example 2:

X Ltd. was registered with a capital of 23,00,000 in shares of Rs. 10 each. It issued a prospectus inviting applications for 23,000 shares at 40% premium payable as follows:-

 On application Rs. 5 (including Rs. 1 premium)
 On allotment Rs. 4 (including Rs. 1 premium)
 On first call Rs. 3 (including Rs. 1 premium)
 On second call Rs. 2 (including Rs. 1 premium)

Applications were received for 23,000 shares, all money was duly received. Pass the necessary journal entries.

Solution:

Date	Particulars	L.F.	Debit	Credit
1.	Bank A/c Dr.  To share application A/c		1,15,000	1,15,000
	Share application Dr.  To share capital  To security premium		1,15,000	92,000 23,000
	Share allotment A/c Dr.  To share capital  To security premium		92,000	69,000 23,000
	Bank A/c Dr.  To share allotment		92,000	92,000
	Share first & final call Dr.  To share capital  To security premium		69,000	46,000 23,000
	Bank A/c Dr.  To share first call		69,000	69,000
	Share second & final call Dr.  To share capital A/c  To security premium		46,000	23,000 23,000
	Bank A/c Dr.  To share second & final call		46,000	46,000

Shares issued at discount

Example 3:

A Ltd. issued to the public for subscription of 1000 shares of Rs. 10 each at a discount of 10% payable Rs. 4 on application Rs. 3 on allotment and Rs. 2 on first and final call. The issue was fully subscribed and all the money was duly received.

Pass the journal entries for the following.

Solution:

Date	Particulars	L.F.	Debit	Credit
	Bank A/c Dr.  To share application		4,000	4,000
	Share application Dr.  To share capital		4,000	4,000
	Share allotment A/c Dr. Discount on issue of shares Dr.  To share capital		3,000 1,000	4,000
	Bank A/c Dr.  To share allotment		3,000	3,000
	Share first & final call Dr.  To share capital		2,000	2,000
	Bank A/c Dr.  To share first & final call		2,000	2,000

Call in arrears

Example 4:

A company issued to the public subscription 168000 shares of Rs. 10 each at a discount of 10% payable as Rs. 2 on application, allotment and first call and Rs. 3 on final call. Applications were received for 252000 shares and allotment was made prorate to 80% of applicants. R to whom 6720 shares were allotted paid only the application money and S who had applied for 10800 shares paid the entire call money due along with allotment. Pass the necessary journal entries to record the above transactions assuming that calls in arrears account are maintained.

Solution:

Date	Particulars	L.F.	Debit	Credit
	Bank A/c (2,52,000 × 2) Dr.  To share application		5,04,000	5,04,000
	Share application A/c Dr.  To share allotment A/c (33,600 × 2)		67,200	67,200
	Share allotment A/c (168000 × 2) Dr. Discount on issue of shares (168000 × 1) Dr.  To share capital A/c		3,36,000 1,68,000	5,04,000
	Bank A/c Dr. Calls in arrears A/c Dr.  To share allotment A/c  To calls in advance A/c		3,00,048 10,752	2,68,800 42,000
	Share first call A/c (168000 × 2) Dr.  To share capital A/c		3,36,000	3,36,000
	Bank A/c Dr. Calls in arrears Dr. Calls in advance A/c Dr.  To share first call A/c		3,05,760 13,440 16,800	3,36,000
	Share final call A/c Dr.  To share capital		5,04,000	5,04,000
	Bank A/c (bal figure) Dr. Calls in arrears A/c (6720 × 3) Dr. Calls in advance A/c (8400 × 3) Dr.  To share final call A/c		4,58,640 20,160 25,200	5,04,000

Working notes:

1. Calculation of allotment money due but not received from R.  Shares application by R = {201600/168000} × 6720 = 8064 shares  Application money received by R = {8064 × 2}  Less: application money due {6720 × 2}  Excess application money  Allotment money due {6720 × 2}	16,128 13,440 2,688 12,440
2. Allotment money due but not received from S.  Calls in advance received from S  No. of shares allotted to S = $\frac{168000}{201600}\times 10080$ = 8400 shares  Calls in advance = 8400 × 5 = Rs. 42,000
3. Allotment money received later on  Total money due on allotment (1,68,000 × 2)  Less: excess application money adjusted  Less: allotment money not received from R  Add: calls in advance from S	3,36,000 (67,200) (10,752) 42,000 3,00,048

Over subscription

Example 5:

ABC Ltd. issued a prospectus inviting applications for 1,04,000 shares of Rs. 10 each at a premium of Rs. 2 per share payable as follows:

• Application = Rs. 2
• Allotment = Rs. 5 (including premium)
• First call = Rs. 3
• Final call = Rs. 2

Applications were received for 1,56,000 shares and prorate allotment was made on the application for 1,24,800 shares. It was decided to utilize excess application money towards the amount due on allotment. Ramesh to whom 2,080 shares were allotted failed to pay the allotment money.

Calculate the amount due but not received on allotment from Ramesh and also calculate allotment money received later on.

Solution:

1. Total number of shares applied by Ramesh = $\left\{\frac{2080\times 124800}{104000}\right\}=2496$
2. Calculation of the amount due but not received on allotment from Ramesh

   a) Application money received on shares applied (2496 × 2)	4992
   b) Less: Application money due on shares allotted (2080 × 2)	4,160
   c) Excess application money (a − b)	832
   d) Allotment money due on share allotted (2080 × 5)	10,400
   e) Allotment money due but not received (10400 − 832)	9,568

3. Calculation of allotment money received later on:

   a)     Allotment money due (104000 × 5)	5,20,000
   b)    Less: allotment money already received on application stage (20800 × 2)	(41,600)
   c)     Less: allotment money not received	(9,568)
   	4,68,832

Forfeiture of shares

Example 6:

P Ltd. issued a prospectus inviting applications for 25000 shares of Rs. 10 each at a premium of Rs. 2 per share payable as follows:

 Application = Rs. 2
 Allotment = Rs. 5 (including premium)
 First call = Rs. 3
 Final call = Rs. 2

Applications were received for 37500 shares and prorate allotment was made on applications for 30000 shares. It was decided utilize excess application money towards the amount due on allotment. Ramesh who applied for 600 shares failed to pay the allotment money and on his subsequent failure to pay the first call his shares were forfeited M the holder of 750 shares failed to pay the two calls and on such failure his shares were forfeited. Of these shares forfeited 1000 shares were sold to Krishnan credited as fully paid for Rs. 9 per share the whole of R’s shares being included.

Solution:

Date	Particulars	L.F.	Debit	Credit
	Bank A/c (37500 × 2) Dr.  To share application A/c		75,000	75,000
	Share application A/c (37500 × 2)Dr.  To share capital A/c (25000 × 2)  To bank A/c (7500 × 2)  To share allotment A/c (5000 × 2)		75,000	50,000 15000 10,000
	Share allotment (25000 × 5)Dr.  To share capital (25000 × 3)  To security premium (25000 × 2)		1,25,000	75,000 50,000
	Bank A/c (125000 − 10000 − 2300)Dr.  To share allotment		1,12,700	1,12,700
	Share first call (25000 × 3)Dr.  To share capital		75,000	75,000
	Bank A/c (23750 × 3)Dr.  To share first call		71,250	71,250
	Share capital (500 × 8)Dr. Security premium (500 × 2)Dr.  To share allotment (2500 − 200)  To share first call (500 × 3)  To forfeited shares (600 × 2)		4,000 1,000	2,300 1,500 1,200
	Share final call (24500 × 2)Dr.  To share capital		49,000	49,000
	Bank A/c (23750 × 2)Dr.  To share final call		47,500	47,500
	Share capital A/c (750 × 10)Dr.  To share first call (750 × 3)  To share final call (750 × 2)  To forfeited shares A/c (750 × 5)		7,500	2,250 1,500 3,750
	Bank A/c (1000 x 9)Dr. Forfeited shares A/cDr.  To share capital A/c (1000 × 10)		9,000 1,000	10,000
	Forfeited shares A/c (700 + 2000)Dr.  To capital reserve A/c		2,700	2,700

No. of shares allotted to R = 600 × $\frac{25,000}{30,000}$ = 500

Issue of shares for consideration other than cash

Example 7:

PM Ltd. purchase machinery from K ltd. for Rs. 11,88,000 payable 20% in cash and the balance by the issue of fully paid equity shares of Rs. 100 each at par. Journalise the transaction.

Date	Particulars	L.F.	Debit	Credit
	Machinery A/cDr.  To K Ltd.		11,88,000	11,88,000
	K Ltd.Dr.  To cash A/c		2,37,600	2,37,600
	PM Ltd.Dr.  To equity share capital A/c		9,50,400	9,50,400

No. of shares to be issued = $\frac{950400}{100}$ = 9504