Issue of Shares and Debentures

Back to: FINANCIAL ACCOUNTING SS3

 

Welcome to class! 

In today’s class, we will be talking about the issue of shares and debentures. Enjoy the class!

Issue of Shares and Debentures

CONTENT

• Definition of shares
• Classes of shares
• Issue of shares
• Explanation of the issue of shares
• Shares payable in full on application at par
• Shares issued at a premium
• Shares issued at a discount

Shares

Shares can be defined as units of the capital of ownership of a limited company. It is an ownership right in a company. A company cannot commence business until it raises capital by selling shares to the public for subscription.

Classes of shares

There are three classes of shares in a limited liability company, they are:

1. Ordinary shares
2. Preference shares
3. Founder’s shares

• Ordinary shares: The shareholders of these are entitled to dividend after preference shareholders have settled. They are the owners of the company because they bear company risk and their dividend is not fixed. No wonder during the period of prosperity, they receive more dividends. They are often known as equities.
• Preference shares: The shareholders of these shares are entitled to fixed dividend and they are treated preferentially. They received a dividend before any other class of shares. A company can issue redeemable or irredeemable, participating or non-participating, cumulative or non- cumulative preference shares.
• Founder’s shares: These are also called deferred shares. These are shares issued to promoters of the company to compensate them for a job well done. And they are entitled to a dividend.

Issue of shares

Shares can be issued in the following terms:

1. Shares issued at a discount
2. Shares issued at a premium
3. Shares issued at par

• Shares issued at a discount: Shares of limited liability companies are said to be issued at a discount when the company share is issued at a price value less than the nominal value of the company share. For example, if XYZ plc’s share nominal value is ₦1 but the company share is issued for subscription at 50k per share, the share is said to be issued at discount. The discount is 50k
• Shares issued at a premium: shares of limited liability companies are said to be issued at a premium when the company share is issued at a price value above the nominal value of the company’s share. For example, if XYZ plc’s share nominal share value is ₦1 but the company share is issued for subscription at ₦2 per share, the share is said to be issued at a premium. The premium is ₦00
• Shares issued at par: Shares of limited liability companies are said to be issued at par when the company’s share is issued for subscription at the shares nominal value i.e issued at a price value equal to the nominal value. For example, XYZ plc shares nominal value is ₦1, and the company issuing the share for subscription at ₦1 per share, the share is said to be issued at par.

Note: Shares issued at par, payable in full on application.

Evaluation

1. Define the term shares.
2. Explain the following: Cumulative and non-cumulative preference share.

Accounting entries

On receipt of the application of money

Debit: Bank Account

Credit: Application Account

On allotment:

Debit Application Account

Credit Ordinary Share Capital Account

Example: On the 1^st January 1980 XYZ plc made an issue of 13,000 ordinary shares of ₦2 each at par Application together with the total amount received for exactly 13,000 shares and the shares were allotted to the applicants. Show the journal entries and ledger accounts

Solution:

Journal

Bank Account Application Account   Being money collected on the application	Dr 26,000         26,000	Cr   26,000         26,000
Application Account   Share capital account   Allotment 13,000 ordinary shares at ₦2

 Ledger accounts:

₦ Application                    26,000

Application Account

₦ Share capital                     26,000

₦ Bank                      26,000

 

₦ Application                  26,000

Ordinary Share Capital Account

Shares issued at a premium payable in full on application: Share can be issued at a premium and paid in a full application. This will necessitate the opening of a share premium account. The value of the share premium is credited to the share premium account.

Accounting entries:

On receipt of application money:

Debit Bank Account

Credit Application Account

On allotment:

Debit Application Account

Credit Share Premium Account

Credit Ordinary Share Capital Account

Example 2: On 1^st January 1980 XYZ plc made an issue of 13,000 ordinary shares of the nominal value of ₦2 at ₦3. Application money was received for exactly 13,000 ordinary shares. Show the journal entries and the ledger account.

Solution:

Journal

	Dr	Cr
Bank account Application account Being ₦3 collected on 13,000 shares   Application account Share premium account Ordinary share capital account Allotment of 13,000 ordinary shares at a premium	₦ 39,000       39,000	₦   39,000       13,000 26,000

Ledger Accounts:

₦ application                                 39,000

Bank  Account

₦ Share premium                         13,000 Ordinary share capital                26,000 39,000

₦ Bank                  39,000   39,000

Application Account

SharePremium Account

₦ Application and allotment a/c      13,000

Ordinary Share Capital Account

₦ Application                            26,000

 

• Share issued at a discount payable in full on application: Here, the share is issued at a discount. The difference is debited to the discount account opened.

Accounting entries:

On receipt of application money:

Debit Bank Account

Credit Application Account

On allotment:

Debit Application Account

Credit Ordinary Share Capital Account

Example 3: On 1^st January 1980 XYZ plc made an issue of 13,000 ordinary shares of the nominal value of ₦2 at ₦1 each.  Application money was received in full, show the journal and ledger account entries.

 Solution:

Journal

	Dr	Cr
Bank Account Application Account Being money collected on 13,000 shares   Application Account Share discount account Ordinary share capital account Allotment of 13,000 shares at a discount	₦ 13,000       13,000 13,000	₦   13,000         26,000

Ledger accounts:

                                       Bank Account

₦ Application                                13,000

Application Account

Ordinary Share Capital        26,000   26,000

Bank             13,000 Share discount  13,000 26,000

Ordinary Share Capital Account

₦ Application         13,000

• Under subscription: this is where fewer shares are applied for than available for sale e.g A company issued out 300 shares but only 250 shares were applied for.
• Oversubscription: This is when the number of shares applied for is more than that number actually offered for subscription.

Evaluation

1. What is meant by over-subscription
2. Explain the term under subscription

General evaluation

1. What is the effect of understatement of closing stock on (a) cost of sales (b) gross profit (c) net profit
2. State five causes of a decline in the net profit of a business
3. Differentiate between ‘‘Discount Allowed” and ‘’Discount Received”
4. State five characteristics of the imprest system of keeping petty cash records
5. List four characteristics of each of the following (a) fixed assets (b) current assets (c) intangible assets

Weekend assignment

1. When a company received an application for shares fewer than available for sale, the share is said to be a) oversubscribed b) under-subscribed  c)subscription at par (d) forfeited
2. When a company received an application for more than available shares for sales, the share is said to be (a) ever-subscribed (b) under- subscribed (c) oversubscribed (d) cancelled
3. On shares issued at par on the application and fully-paid, the accounting entries on receipts of money are (a) debit bank and credit application  (b)debit application and credit bank (c) debit premium and credit bank (d) debit ordinary shares credit bank
4. Based on question 3 above, the accounting entries on an allotment of shares are (a) debit ordinary share capital account and credit application account  (b)debit application account and credit ordinary shares capital account (c) debit premium  and credit application account(d) debit ordinary shares credit bank
5. A share issued below the nominal value is said to be issued at (a) discount (b) premium (c) at par (d) loss

Theory

On 1^st February 1989, ABC plc makes an issue of 15,000 ordinary shares of the nominal value of ₦2 at ₦3. Application money was received for exactly 15,000 shares.

Show:

1. Journal entries
2. Ledger accounts

 

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