Issue of shares for cash in instalments

Issue of shares for cash in instalments

The share capital may be received through instalments as below:

·        First instalment called application money

·        Second instalment called allotment money

·        Third instalment called first call money

·        The last instalment called final call money

After allotment, whenever the need arises call can be made. Call is a demand by a company to the shareholders holding partly paid up shares to pay further instalments towards the purchase price of shares. There may be more than one call. These calls can be differentiated by serial numbers such as first call, second call, third call and so on. The last instalment will be the final call. The words ‘and final’ will also be added to the last call. Example, if third call is the final call, it will be termed as ‘third and final call’.

Equity shares may be issued for cash at par or at premium. When a company issues shares at a price equal to the face value (nominal value), it is known as issue at par. When a company issues shares at a price more than the face value, the shares are said to be issued at premium. The excess is called as premium.

(i) When shares are issued for cash at par:

Following are the journal entries to be passed:

Illustration 1

Thai Ltd. issued 1,00,000 equity shares of ₹ 10 each, payable ₹ 5 on application, ₹ 2 on allotment, 2 on first call and ₹ 1 on final call. All the shares are subscribed and amount was duly received. Pass journal entries.

Solution

1. Under subscription

All the shares offered to the public may not be subscribed in full. When the number of shares subscribed is less than the number of shares offered, it is known as under subscription. Under such circumstance, all those who have duly applied will obtain allotment provided minimum subscription as mentioned in the prospectus has been subscribed.

Illustration 2

Joy Company issued 10,000 equity shares at ₹ 10 per share payable ₹ 5 on application, ₹ 3 on allotment and ₹ 2 on first and final call. The public subscribed for 9,000 shares. The directors allotted all the 9,000 shares and duly received the money. Pass the necessary journal entries.

Solution

2. Over subscription

When the number of shares applied for is more than the number of shares offered for subscription, it is said to be over subscription. This situation can be dealt with as per any of the following three alternatives:

a.     Some applications are accepted in full and others are totally rejected. Application money is returned to the applicants for rejected applications.

b.     All applications are allotted in proportion of shares applied for. This is called pro rata allotment. Excess application money may be returned or may be retained for adjustment towards allotment money and call money.

c.      A combination of the above two may be applied.

Illustration 3

Bharath Ltd. issued 1,00,000 equity shares of ₹ 10 each to the public at par. The details of the amount payable on the shares are as follows:

On application                       ₹ 5 per share

On allotment                                     ₹ 3 per share

On first and final call                        ₹ 2 per share

Application money was received for 1,20,000 shares. Excess application money was refunded immediately. Pass journal entries to record the above.

Solution

Illustration 4

Khan Ltd. issued 50,000 shares of ₹ 10 each to the public payable ₹ 4 on application, ₹ 4 on allotment and ₹ 2 on first and final call. Applications were received for 65,000 shares. The directors decided to allot 50,000 shares on pro rata basis and surplus application money was utilised for allotment. Pass journal entries assuming that the amounts due were received.

Solution

Illustration 5

Sudha Ltd. offered 1,00,000 shares of ₹ 10 each to the public payable ₹ 3 on application, ₹ 4 on share allotment and the balance when required. Applications for 1,40,000 shares were received on which the directors allotted as:

Applicants for 60,000 shares - Full

Applicants for 75,000 shares - 40,000 shares (excess money will be utilised for allotment)

Applicants for 5,000 shares    - Nil                                                                     

All the money due was received. Pass journal entries upto the receipt of allotment.    

Solution

Working note:

3. Calls in advance

The excess amount paid over the called up value of a share is known as calls in advance. It is the excess money paid on application or allotment or calls. Such excess amount can be returned or adjusted towards future payment. If the company decides to adjust such amount towards future payment, the excess amount may also be transferred to a separate account called calls in advance account.

Calls in advance does not form part of the company’s share capital and no dividend is payable on such amount. In the balance sheet, it should be shown under current liabilities.

As per Section 50 of the Indian Companies Act, 2013, the company can accept calls in advance only if it is authorised by its Articles of Association. As per Table F of the Indian Companies Act, 2013, interest may be paid on calls in advance if Articles of Association so provide not exceeding 12% per annum.

Tutorial note

The excess application money on allotted shares after adjustment for allotment money should be transferred to calls in advance account.

Following are the journal entries to be passed:

Illustration 6

Aruna Mills Ltd. with a registered capital of ₹ 5,00,000 in equity shares of ₹ 10 each, issued 20,000 of such shares payable as follows; ₹ 4 per share on application, ₹ 4 per share on allotment and ₹ 2 per share on first and final call. The issue was duly subscribed.

All the money payable was duly received. But on allotment, one shareholder paid the entire balance on his holding of 300 shares.

Give journal entries to record the above.

Solution

4. Calls in arrear

When a shareholder fails to pay the amount due on allotment or on calls, the amount remaining unpaid is known as calls in arrears. In other words, the amount called up but not paid is calls in arrear.

As per Table F of the Indian Companies Act, 2013, interest may be charged on calls in arrear if Articles of Association so provide not exceeding 10% per annum. There are two methods of accounting of calls in arrear.

(i) By not opening calls in arrear account

Under this method, amount unpaid by the shareholders remains in the respective call account until the amount is collected or the shares are forfeited.

(ii) By opening calls in arrear account

Under this method, amount unpaid by the shareholders is transferred by debiting it to a separate account called calls in arrear account. When calls in arrear is collected or when the share is forfeited, the calls in arrear account is credited.

Illustration 7

Jeyam Tyres issued 15,000 ordinary shares of ₹ 10 each payable as follows: ₹ 3 on application; ₹ 5 on allotment; ₹ 2 on first and final call. All money were duly received except one shareholder holding 100 shares failed to pay the call money. Pass the necessary journal entries for call (using calls in arrear account).

Solution

5. Forfeiture of shares

When a shareholder defaults in making payment of allotment and/or call money, the shares may be forfeited. On forfeiture, the share allotment is cancelled and to that extent, share capital is reduced. The person ceases to be a shareholder of the company after the shares are forfeited.

On forfeiture, the amount so far paid by the shareholder is forfeited which is a gain to the company and is credited to forfeited shares account. Forfeited shares account is shown under share capital as a separate head in the Note to Accounts to the balance sheet.

The following journal entry is to be passed in the books of the company:

Illustration 8

Anitha was holding 500 equity shares of ₹ 10 each of Thanjavur Motors Ltd, issued at par. She paid 3 on application, ₹ 5 on allotment but could not pay the first and final call of ₹ 2. The directors forfeited the shares for nonpayment of call money. Give Journal entry for forfeiture of shares.

Solution

Illustration 9

Muthu was holding 20 equity shares of ₹ 10 each on which he paid ₹ 2 on application but could not pay ₹ 3 on allotment and ₹ 1 on first call. Directors forfeited the shares after the first call. Give journal entry for recording the forfeiture of shares.

Solution

Tutorial note

Equity share capital is debited with the called up amount of ₹ 6.

6. Re-issue of forfeited shares

Shares forfeited can be reissued by the company. The shares can be reissued at any price. But, the reissue price cannot be less than the amount unpaid on forfeited shares.

Example: If a share of ₹ 10 on which ₹ 4 has already been paid as application money is forfeited and reissued as fully paid up, then a minimum of ₹ 6 must be fixed as the new price (10 – 4 = 6). When forfeited shares are reissued at a loss, such loss is to be debited to forfeited shares account. When forfeited shares are reissued at a premium, the amount of such premium will be credited to securities premium account. The following journal entries are passed on reissue:

If the reissue price is more than the amount unpaid on forfeited shares, it results in profit on reissue which is treated as capital profit and is transferred to capital reserve account. The following journal entry is passed:

When only a part of the forfeited shares are reissued, the proportionate amount of profit on the shares reissued should be transferred to capital reserve account. Proportionate amount of profit is computed as follows:

The remaining amount in the forfeited shares account is shown under share capital as a separate head under share capital in the Note to Accounts to the balance sheet.

Illustration 10

Anu Company forfeited 200 equity shares of ₹ 10 each issued at par held by Thiyagu for nonpayment of the final call of ₹ 3 per share. The shares were reissued to Laxman at ₹ 6 per share. Show the journal entries for forfeiture and reissue.

Solution

Illustration 11

Maruthu Ltd. forfeited 150 equity shares of ₹ 10 each for non payment of final call of ₹ 4 per share.

Of these 100 shares were reissued @ ₹ 9 per share. Pass journal entries for forfeiture and reissue.

Solution

Working note:

Forfeited amount for 150 shares = ₹ 900

Forfeited amount for 100 shares = 900/150 x 100 =₹ 600

Gain or loss = Amount forfeited– loss on reissue

= 600 – 100

Net gain = ₹ 500

Illustration 12

Gemini Ltd. forfeited 20 equity shares of ₹ 10 each, ₹ 7 called up, on which Mahesh had paid application and allotment money of ₹ 5 per share. Of these 15 shares were reissued to Naresh by receiving ₹ 6 per share paid up as ₹ 7 per share. Pass journal entries for forfeiture and reissue. 

Solution

Note: Computation of transfer to capital reserve

Forfeited amount for reissued shares of 15 = 100/20 × 15 = 75

Less: Loss on reissue = 15

Transfer to capital reserve = 60

Remaining balance in shares forfeited account ₹ 25 will appear in the balance sheet.

Illustration 13

Jenifer Ltd. issued 10,000 equity shares of ₹ 10 each at par payable on application ₹ 3 per share, on allotment ₹ 3 per share, on first call ₹ 2 per share and on second and final call ₹ 2 per share. The issue was fully subscribed and all the amounts were duly received with the exception of 100 shares held by Subbu, who failed to pay the second and final call. His shares were forfeited and reissued to Hema at ₹ 7 per share. Journalise the above transactions.

Solution

Illustration 14

X company issued 10,000 equity shares of ₹ 10 each payable as under:

On application     ₹ 2

On allotment        ₹ 4

On first call ₹ 2

On final call          ₹ 2

Applications were received for 30,000 shares. Applications for 10,000 shares were rejected and allotment was made proportionately towards remaining applications and the excess application money is adjusted towards allotment money. The directors made both the calls and the all the amount were received except the final call on 600 shares which were subsequently forfeited. Later 400 forfeited shares were reissued as fully paid by receiving ₹ 7 per share. Give journal entries.

Solution

In the books of X company

Journal entries

Working note:

Amount forfeited for 600 shares = ₹ 4,800

7. Shares issued at premium

When a company issues shares at a price more than the face value (nominal value), the shares are said to be issued at premium. The excess is called as premium amount and is transferred to securities premium account. The amount of securities premium may be included in application money or allotment money or in a call. Securities premium account is shown under reserves and surplus as a separate head in the Note to Accounts to the balance sheet. Following are the journal entries for recording securities premium:

Tutorial note While forfeiting shares for which premium had already been received, securities premium account should not be debited.

Illustration 15

Shero Health Care Ltd. invited applications for 3,00,000 equity shares of ₹ 10 each at a premium of ₹ 2 per share payable as follows:

₹ 3 on application

₹ 5 (including premium) on allotment

₹ 4 on first and final call

There was over subscription and applications were received for 4,00,000 shares and the excess applications were rejected by the directors. All the money due were received. Pass the journal entries.

Solution

Note: Number of shares rejected = 4,00,000 - 3,00,000 = 1,00,000

Illustration 16

Keerthiga Company issued shares of ₹ 10 each at 10% premium, payable ₹ 2 on application, ₹ 3 on allotment (including premium), ₹ 3 on first call and ₹ 3 on second and final call. Journalise the transactions relating to forfeiture of shares for the following situations:

(i) Mohan who holds 50 shares failed to pay the second and final call and his shares were forfeited.

(ii) Mohan who holds 50 shares failed to pay the allotment money, first call and second and final call money and his shares were forfeited.

(iii) Mohan who holds 50 shares failed to pay the allotment money and first call and his shares were forfeited after the first call.

Solution

In the books of Keerthiga Company

Journal entries

(i) When final call money is not paid

Note: Since the premium amount is received by the company, premium should not be cancelled.

(ii) When allotment, first call money and second and final call money is not paid

(iii) When allotment and first call money is not paid

Illustration 17

Divya Ltd. allotted 10,000 equity shares of ₹ 10 each at a premium of ₹ 2 per share to applicants of 14,000 shares on a pro rata basis. The excess application money will be adjusted towards allotment money. The amount payable was ₹ 2 on application, ₹ 5 on allotment (including premium of ₹ 2 each) and ₹ 3 on first call and ₹ 2 on final call. Vikas, a shareholder failed to pay the first call and final call on his 300 shares. All the shares were forfeited and out of them 200 shares were reissued @ ₹ 9 per share. Pass the necessary journal entries.

Solution

In the books of Divya Ltd.

Journal entries

Working note:

Amount forfeited for 300 shares = ₹ 1,500

Illustration 18

Thangam Ltd. issued 50,000 shares of ₹ 10 each at a premium of ₹ 2 per share payable as follows:

On application     ₹ 5

On allotment        ₹ 5 (including premium)

On first and final call     ₹ 2

Issue was fully subscribed and the amounts due were received except Priya to whom 500 shares were allotted who failed to pay the allotment money and fist and final call money. Her shares were forfeited. All the forfeited shares were reissued to Devi at ₹ 8 per share. Pass journal entries.

Solution