Preparation of Accounts for Issue of Shares II

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In today’s class, we will be talking more about the preparation of accounts for the issue of shares. Enjoy the class!

Preparation of Accounts for the Issue of Shares II

Introduction

As seen in the previous lecture on shares here, there are three classes of shares namely- shares issued at par, shares issued at premium and shares issues at discounts. In this lecture, we shall now discuss the procedures for preparing the accounts for these various classes of shares. Read on below-

Preparation of Account for Issue of Shares at Par

A company may issue shares at their face value or a price other than the face value. When shares are issued at a price equal to their face value it is termed as shares issued at par. When the issue price of a share is more than its face value, it is known as shares issued at a premium. If the issue price of a share is less than its face value, it is called as shares issued at a discount. Below are the accounting entries or procedures for preparing the account for the issue of shares are as follows–

1. On receipt of applications money:

Bank a/c Dr.

To share application a/c

(Being share application money received)

2. On allotment of shares:

(a) Share application a/c Dr.

To share capital a/c

(Being appropriation of application money towards share capital)

(b) Share Allotment a/c Dr.

To share capital a/c

(Being allotment money due on shares @ Rs. per share)

3. When allotment money is received, the following entry is passed:

Bank a/c Dr.

To share allotment a/c (Being allotment money received)

4. (a) If any call is made on the shares, the following entries are passed:

Share call a/c Dr.

To share capital a/c

(b) On receipt of call money:

Bank a/c Dr.

To share call a/c

Preparation of Account for Issue of Share at Premium (Accounting Entries)

The following are the entries for the issuance of shares at a premium-

(a) Bank a/c Dr.

To share application a/c

(Being application money received)

(b) Share application a/c Dr.

To share capital a/c

(Being application appropriated towards capital a/c)

(c) Share Allotment a/c Dr.

To share capital a/c

To securities premium a/c

(Being allotment money and premium money due on share)

Bank a/c Dr.

To share allotment a/c

(Being allotment money received)

Please note that there are no restrictions on the issue of shares at a premium. However, it is only prosperous companies because of their financial strength and high earning capacity which is in a position to offer shares at a premium.

Preparation of Account for Issue of Shares at Discount

Shares can be issued at discount subject to the following conditions:

1. The shares must belong to a class already issued.
2. The discount rate should not be more than 10%.
3. One year must have passed since the date at which the company was allowed to commence business.
4. The issue of such shares must take place within two months after the date of the court’s sanction or within such extended time as the court may allow.
5. The issue must be authorised by a resolution passed by the company in general meeting and sanctioned by the Company Law Board.

Accounting Treatment

• Generally, the ‘Discount on Shares’ is recorded at the Time of Allotment:

Share Allotment A/c … Dr. (With the amt., due) Discount on Issue of Shares A/c … Dr. (With discount)

To Share Capital A/c (Total amount)

(Being the allotment money due)

• To Write off ‘Discount on Shares’

Profit & Loss A/c/Securities Premium Reserve A/c ……..Dr

To Discount on Issue of Shares A/c

Note. Discount on issue of shares is recorded at the time of allotment made due.

Illustration:

(Shares Issued at discount and calls in arrears. Trendy Shoe Company invited applications for 12,000 equity shares of N100 each at a discount N4 per share (allowed at the time of allotment). The amount was payable as follows: On Application N30, on allotment N36, on first and final call N30.

The public applied for 10,000 shares and these were allotted. All money due was except for the first and final call on 400 shares.

Required:

Journalise the above transactions in the books of the Company.

Evaluation

1. What are the conditions for which Shares can be issued at a discount subject?
2. What are the accounting entries or procedures for preparing the account for the issue of shares?

 

In our next class, we will be talking about Loan Capital – Debenture Types.  We hope you enjoyed the class.

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