Terms of Issue – TaxDose.com

Terms of Issue:

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

a) Issue of shares at par

b) Issue of shares at premium and

c) Issue of shares at discount

The accounting treatment of issue of shares in case of each of the above is different. We shall now discuss these three situations in detail.

a) Issue of shares at par

If the issue price is equal to the face value, it is said to be issued at par. For example when shares of Rs 10 each (face value) are issued at Rs 10 only.

Illustration :

Bharat Limited had an authorised capital of Rs.4,00,000 divided into shares of Rs.100 each.

It offered to the public 3000 shares payable as follows.

On Application Rs. 30

On Allotment Rs.20

On First Call Rs.25

On Second Call Rs.25

The shares were duly subscribed for by the public and all money was received. Pass journal entries to record the above transactions.

Date	Particulars	L.F	Debit Rs.	Credit Rs.
	Bank A/c Dr		90,000
	To Share Application A/c			90,000
	(Money received on 3000 shares @ Rs,30 per share)

	Share Application A/c Dr		90,000
	To Share Capital A/c			90,000
	(Transfer of Application money on 3000 shares to Share capital)

	Share Allotment A/c Dr.		60,000
	To Share Capital A/c			60,000
	(Amount due on the allotment of 3000 shares @ Rs.20/- per Share)

	Bank A/c Dr.		60,000
	To Share Allotment A/c			60,000
	(Allotment Money received)

	Share First call A/c Dr.		75,000
	To Share Capital A/c			75 ,000
	(First call money due on 3000 Share @ Rs.25/- per Share)

	Bank A/c Dr.		75,000
	To Share First Call A/c			75,000
	(First call money received)

	Share Second & Final call A/c Dr.		75,000
	To Share Capital A/c			75,000
	(Final call money due on 3000 share @ Rs.25/- per share)

	Bank A/c Dr.		75,000
	To Share second & final call A/c			75,000
	(Final call money received)

Under-subscription

Due to poor response, all the shares offered may not be taken by the public. This is under-subscription. However the shares cannot be
allotted if the minimum subscription is not received. Under-subscription does not require any special treatment. Journal entries are made on the basis of shares applied for.

Illustration :

Govindha Ltd., offered 10,000 shares of Rs.100 each to the public on the following terms:

Rs. 30 on application
Rs. 20 on allotment
Rs. 20 on first call and
Rs. 30 on final call

The public applied for 9,000 shares which were allotted. All money due was received. Pass journal entries.

Solution:

Journal in the Books of Govindha Limited

Date	Particulars	L.F	Debit Rs.	Credit Rs.
	Bank A/c Dr.		2,70,000
	To Share Application A/c			2,70,000
	(Money received 9000 shares @ Rs.30 per share)

	Share Application A/c Dr.		2,70,000
	To Share Capital A/c			2,70,000
	(Transfer of Application money on 9000 shares to share capital)

	Share Allotment A/c Dr.		1,80,000
	To Share Capital A/c			1,80,000
	(Amount due on the allotment on 9000 shares @ Rs.20/- per share)

	Bank A/c Dr.		1,80,000
	To Share Allotment A/c			1,80,000
	(Allotment money received)

	Share First call A/c Dr.		1,80,000
	To Share Capital A/c			1,80,000
	(First call money due on 9000 shares @ Rs.20/- per share)

	Bank A/c Dr.		1,80,000
	To Share First Call A/c			1,80,000
	(First call money received)

Share Second & Final call A/c Dr.	2,70,000
To Share Capital A/c		2,70,000
(Final call money due on 9000 shares @ Rs.30/- per share)

Bank A/c Dr.	2,70,000
To Share Second & Final call A/c		2,,70,000

Over-subscription

When the applications received are more than that has been issued to the public, it is called as over-subscription. A company cannot allot more shares than that were offered to public through the prospectus. When there is over subscription the allotment must follow SEBI guidelines to ensure proportional (Pro-rata) allotment.

When there is over – subscription the directors have three alternatives to deal with the situation.

Some applicants may not be allotted any shares –rejection of shares.
Some applicants may be allotted less number of shares than they applied for– prorata allotment.
Some applicants may be allotted full number of shares they applied for– full allotment.

We will be discussing the first two alternatives only in this chapter.

Rejection of shares :

Some applications may be rejected by the Directors due to oversubscription or certain other reasons. The company must refund the application money to those applicants to whom shares were not allotted. The accounting entry passed to record the same is:

Illustration :

Perumal Ltd. issued 1,00,000 shares of Rs.10 each payable:

Rs.3 on application and

Rs.2 on allotment and the balance when required.

1,20,000 shares were applied for.

The directors decided to reject the excess applications. All money due was received. Pass journal entries.

Solution :

Journal in the Books of Perumal Limited

Date	Particulars	L.F	Debit Rs.	Credit Rs.
	Bank A/c Dr.		3,60,000
	To Share Application A/c			3,60,000
	(Money received on 1,20,000 shares @ Rs.3 per share)

	Share Application A/c Dr.		3,00,000
	To Share Capital A/c			3,00,000
	(Transfer of Application money on 1,00,000 shares to share capital)

	Share Application A/c Dr.		60,000
	To Bank A/c			60,000
	(Refund of excess application money on 20,000 @ Rs.3 per share)

	Share Allotment A/c Dr.		2,00,000
	To Share Capital A/c			2,00,000
	(Amount due on the allotment of 1,00,000 shares @ Rs.2/- per share)

	Bank A/c Dr.		2,00,000
	To Share allotment A/c			2,00,000
	(Allotment money received)

Pro-rata allotment:

Some of the applicants may be allotted a certain number of shares lesser than the number they applied for. Instead of returning the excess application money, the same will be adjusted on money due on allotment. The accounting entry passed to record the same is:

Illustration :

Pradhiksha Ltd. issued 50,000 shares of Rs.10 each payable as

Rs.3 on application.

Rs.4 on allotment and The balance on call.

Applications for 70,000 shares had been received.

Application for 8,000 shares were rejected and the remaining applicants were allotted the 50,000 shares on pro-rata basis. The excess
amount on application was adjusted towards the amount due on allotment. All the shareholders paid the amount due. Journalise the
transactions and prepare ledger accounts and show how the entries will appear in the balance sheet.

Solution:

I. Over subscription / Pro-rata Allotment:

Particulars	No.of Shares	Amount Rs.
Number of Applications received	70,000 x 3	2,10,000
Less : Transferred to share capital	50,000 x 3	1,50,000
Excess application money	20,000 x 3	60,000
Less : Refunded	8,000 x 3	24,000
Excess money to be adjusted towards allotment money	12,000 x 3	36,000

II. Calculation of allotment money to be received :

Rs.
50,000 shares of Rs.4 each	2,00,000
Less : Excess Application money adjusted towards allotment money (12,000 x 3)	___ 36,000__
Money to be received	1,64,000

Pradhiksha Ltd.
Journal Entries

Date	Particulars	L.F	Debit Rs.	Credit Rs.
	Bank A/c Dr.		2,10,000
	To Share Application A/c			2,10,000
	(Application money received on 70,000 shares @ Rs.3 per share)

	Share Application A/c Dr.		1,50,000
	To Share Capital A/c 1,50,000			1,50,000
	(Application money received on 50,000 shares @ Rs.3 per share transferred to share capital)

	Share Application A/c Dr.		24,000
	To Bank A/c			24,000
	(Application money on 8,000 shares @ Rs.3 per share refunded)

	Share Application A/c Dr.		36,000
	To Share Allotment A/c			36,000
	(Surplus application money on 12,000 shares @ Rs.3 per share adjusted towards allotment)

Share Allotment A/c Dr.	2,00,000
To Share Capital A/c		2,00,000
(Allotment money due on 50,000 shares @ Rs.4 per share)

Bank A/c Dr.	1,64,000
To Share Allotment A/c		1,64,000
(Allotment money received)

Share First and Final Call A/c Dr.	1,50,000
To Share Capital A/c		1,50,000
(Call money due on 50,000 shares @ Rs.3 per share due)

Bank A/c Dr.	1,50,000
To Share First and Final Call A/c		1,50,000
(Being call money received)

Ledger Accounts in the books of Pradhiksha Ltd.
Dr. Bank Account Cr.

Particulars	Rs.	Particulars	Rs.
To Share Application A/c	2,10,000	By Share Application A/c	24,000
To Share Allotment A/c	1,64,000	By Balance c/d	5,00,000
To Share Call A/c	1,50,000
	5,24,000		5,24,000
To Balance b/d	5,00,000

Dr. Share Application Account Cr.

Particulars

Rs.

Particulars

Rs.

To Share Capital A/c To Bank A/c

To Share Allotment A/c

1,50,000

24,000

36,000

By Bank A/c

2,10,000

2,10,000

Dr. Share Allotment Account Cr.

Particulars

Rs.

Particulars

Rs.

To Share Capital A/c

2,00,000

By Share Application A/c By Bank A/c

36,000

1,64,000

2,00,000

Dr. Share First and Final Call Account Cr.

Particulars	Rs.	Particulars	Rs.
To Share Capital A/c	1,50,000	By Bank A/c	1,50,000
To Share Capital A/c	1,50,000	By Bank A/c	1,50,000

Dr. Share Capital Account Cr.

Particulars	Rs.	Particulars	Rs.
		By Share Application A/c	1,50,000
		By Share Allotment A/c	2,00,000
		By Share First & Final Call A/c	1,50,000
To Balance c/d	5,00,000	By Balance b/d	5,00,000
	5,00,000		5,00,000

Extracts from Balance Sheet of Pradhiksha Ltd.

Liabilities	Rs.	Assets	Rs.
Share Capital:		Current Assets:
Authorised:		…… Cash at Bank	5,00,000
Issued:
50,000 shares of Rs.10 each	5,00,000
Subscribed :
50,000 shares of Rs.10 each	5,00,000
Called-up :
50,000 shares of Rs.10 each	5,00,000
Paid up :
50,000 shares of Rs. 10 each	5,00,000
	5,00,000		5,00,000

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