PRINCIPLES OF ACCOUNTING II

ISSUE OF SHARES

Definition of terms
Ordinary share A unit in which ordinary share capital is divided Authorized share capital Maximum capital a company can raise for the time being Issued share capital Part of issued share capital that is offered for subscription Par value Registered value of a share.Also called face value/nominal value Issue price Price at which shares are subscribed Share premium The excess of share subscription price over issue price Share discount Amount by which share subscription price falls short of issue price

Terms of payment
Shares can be issued being payable for: a) Immediately on application b) By installments

Terms of share issue

Issue of shares take place on the following terms: (Connected with the price of shares) a) Shares issued at par value
In this case shares are issued at a price equal to the nominal value
b)

Shares issued at a premium

Shares are issued at a price higher than the nominal value

c)

Shares issued at a discount

Shares are issued at a price lower than the nominal value In Kenya it is illegal for a company to issue shares at a discount

Accounting entries
issue at par DR- share application account at par value CR- share capital at par value Being the nominal value expected on application On receipt of amount DR- bank account CR- share application Being the amount received on application Issue at a premium DR- share application CR- share capital CR- share premium Being the amount expected on issue On receipt DR- bank CR-share application Being the amount received on application

Issue at discount DR- share application CR- share capital Being the amount expected on application DR- bank DR- discount on share issue CR- share application Being the amount received on application and discount

Over and under subscription

Often, when a company invites investors to apply or subscribe for its shares, the number of applications will not equal the number of shares issued. When more shares are applied for are more than actually available for issue, then the issue is said to be over subscribed. When fewer shares are applied for than are available for issue, then the issue is said to be undersubscribed.

When the issue is under subscribed, there is no problem since accounting entries will only be in respect of the applied shares as the unapplied portion does not represent a transaction (there is no transaction for the unapplied portion) If however the shares are over subscribed, the company must come up with a policy on how the shares are to be allocated. Any excess application money will be refunded by the company

Issue of shares payable by installments

a) b) c) d) e) f) g) h) i) j)

Steps issue of shares receipt of application together with application money refund of rejected applications allotment (allocation) of the remaining application transfer of excess application money on allotment receive the balance of the allotment money request of first call receive money for the first call request for second call receive money on second call

Journal entries
On issue of shares DR share application CR share capital (Being the amount expected on application) On receipt DR bank CR share application (Being the amount received on application) On refund DR share application CR bank (Being the refund of money to the rejected application)

Contd
On allotment DR share allotment CR share capital (Being the amount expected on allotment) On transfer of excess application money DR share application CR share allotment Instead of refunding the excess money then receiving it again On receipt of the balance DR bank CR share allotment

Contd
On request of 1st call DR 1st call CR share capital (Being the amount expected on 1st call) On the receipt of 1st call DR bank CR 1st call (Being the amount received on 1st call) On request of 2nd call DR 2nd call CR share capital (Being the amount expected for 2nd call) On receipt of 2nd call DR bank CR 2nd call (Being the amount received on 2nd call)

Illustration
A company issued 2000 6% preference shares of shs.10 each payable 10% on application, 20% on allotment, 40% on 1st call and 30% on 2nd call. Applications were received for 3300 shares. A refund of money was made in respect of 300 shares while for the remaining 3000 shares applied for, an allotment was made on the basis of 2 for every 3 applied for. The excess application money was set off against the money expected on allotment. The remaining requested installments were all paid in full. Required i. Journal entries to record the transactions ii. Ledger accounts

Calls in advance and calls in arrears

Calls in advance - When shareholder pays for calls money before calls are made. - At year end they are treated as current liability Calls in arrears -When shareholder fails to pay for calls when they are made. -At year end they are treated as a current asset

Forfeiture of Shares
Sometimes a shareholder may fail to pay the calls requested from him/her. The Articles of Association of the company will probably provide that the shareholder will have his shares forfeited provided that certain safeguards for his protection are fully observed. The shares will be cancelled and the installments already paid by the shareholder lost to him. After forfeiture the company may reissue the shares unless there is a provision in the articles that prevents it. There are conditions as to the price at which the shares can be reissued: The amount received on reissue plus the amount received from the original shareholder should at least equal; the called up value where the shares are not fully called up the nominal value, where the full amount has been called up Any premium previously paid is disregarded in determining the minimum reissue price.

Accounting entries
On forfeiture of shares DR share capital CR share forfeiture With nominal value of shares forfeited Calls in arrears DR share forfeiture CR calls in arrears On reissue DR forfeiture CR share capital With the nominal value of shares re-issued On receipt DR bank CR share forfeiture Premium on reissue DR share forfeiture CR share premium

Example
Informatics ltd issued 1,000,000 ordinary shares of sh20 each payable as follows: Application 8 Allotment 9 (including premium) Call 5 Applications were received for 1,200,000 shares. Allotment was made on pro rata basis. All monies were received except: i. A shareholder with 20,000 shares paid for call money together with allotment ii. A shareholder with 30,000 shares failed to pay the calls. Shares with arrears were forfeited but re-issued to Juma at a discount of 20% Required; Pass the necessary journal entries.

Bonus/script shares
Shares issued to existing shareholders free of charge in proportion to their holdings Its one way of paying dividends Its cheap way of raising permanent capital It leads to reduction in reserves and increase in share capital Can be made from share premium or general reserve

Rights issue
This is offering additional shares to existing shareholders in proportion to their holdings. They are issued at a lower price Shareholders are not obliged to take them up Shareholders can exercise the right, sell or ignore the rights

Assignment and class activities

Read chapter 16 of main text Attempt Examination question number 9 part (b)