Financial Accounting & Analysis

UNIT III SHARES AND SHARE CAPITAL

Introduction: There are three main types of business organisation: (1) sole proprietorship (2) partnership (3) company. Each form of business organisation is required capital to carry on its business smoothly. On sole proprietorship the the public. !aning o" s#ar! and s#ar! ca$ital: " share is one unit into hich the total share capital is di!ided. #hare capital of the company can be e$plained as a fund or sum ith hich a company is formed to carry on the business and hich is raised by the issue of shares. The amount collected by the company from the public to ards its capital% collecti!ely is &no n as share capital and indi!idually is &no n as share. " share is not a sum of money but is an interest measured by a sum of money and this interest also contains bundle of rights and obligations contained in the contract i.e. "rticle of "ssociation. 'n!estment in the shares of any company is a basis of o nership in the company and the person ho in!est in the shares of any company% is &no n as the shareholder% member and the o ner of that company. D!"inition: "ccording to the section 2(()) of the *ompany+s "ct 1,-)% share means a part in the share capital of the company and it also includes stoc& e$cept share capital is made e$pressed or implied. Ty$!s o" s#ar!s: "s per the pro!ision of section .- of the *ompanies "ct% 1,-)% the share capital of a company consists of t o classes of shares% namely: /reference #hares
By K.Arjun Goud (Assistant Professor)

hole capital is contributed by sole proprietor in

partnership the capital is in!ested by the partners and in case of company capital is in!ested by

here a distinction bet een stoc& and

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Financial Accounting & Analysis

Equity #hares Pr!"!r!nc! S#ar!s: "ccording to #ec .-(1)% of the *ompanies "ct% 1,-)% a preference share is one% hich carries the follo ing t o preferential rights:
(a) (b)

The payment of di!idend at fi$ed rate before paying di!idend to equity shareholders. The return of capital at the time of equity shareholder. inding up of the company% before the payment to the

0oth the rights must e$ist to ma&e any share a preference share and should be clearly mentioned in the "rticles of "ssociation. /reference shareholders do not ha!e any !oting rights% but in the follo ing conditions they can en1oy the !oting rights:
(1) (2)

'n case of cumulati!e preference shares% if di!idend is outstanding for more than t o years. 'n case of non2cumulati!e preference shares% if di!idend is outstanding for more than three years. On any resolution of inding up. On any resolution of capital reduction.

(3) (()

Ty$!s o" $r!"!r!nc! s#ar!s: 'n addition to the aforesaid t o rights% a preference shares may carry some other rights. On the basis of additional rights% preference shares can be classified as follo s:
1)

Cumulative Preference Shares: *umulati!e preference shares are those shares on

hich

the amount of di!ided if not paid in any year% due to loss or inadequate profits% then such unpaid di!ided ill accumulate and ill be paid in the subsequent years before any di!ided is paid to the equity share holders. /reference shares are al ays deemed to be cumulati!e unless any e$press pro!ision is mentioned in the "rticles.

2)

Non-Cumulative Preference Shares: 3on2cumulati!e preference shares are those shares on hich arrear of di!idend do not accumulate. Therefore if di!ided is not paid on these
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By K.Arjun Goud (Assistant Professor)

Financial Accounting & Analysis

shares in any year% the right recei!e the di!idend lapses and as such% the arrear of di!ided is not paid out of the profits of the subsequent years.
3)

Participating Preference Shares: /articipation preference shares are those shares%

hich%

in addition to the basic preferential rights% also carry one or more of the follo ing rights:
(a)

To recei!e di!idend% out of surplus profit left after paying the di!idend to equity shareholders.

(b)

To ha!e share in surplus assets% on inding up of the company.

hich remains after the entire capital has been paid

4)

Non-Participating Preference Shares: 3on2participation preference shares are those shares% hich do not ha!e the follo ing rights:
(a)

To recei!e di!idend% out of surplus profit left after paying the di!idend to equity shareholders.

(b)

To ha!e share in surplus assets% on inding up of the company.

hich remains after the entire capital has been paid

/reference shares are al ays deemed to be non2participating% if the "rticle of the company is silent.
5)

Convertible Preference Shares: *on!ertible preference shares are those shares% in the prospectus.

hich can

be con!erted into equity shares on or after the specified date according to terms mentioned

6)

Non-Convertible Preference Shares: 3on2con!ertible preference shares% the "rticle of the company is silent.

hich cannot be

con!erted into equity shares. /reference shares are al ays being to be non2con!ertible% if

By K.Arjun Goud (Assistant Professor)

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Financial Accounting & Analysis 7)

Redeemable Preference Shares: 4edeemable preference shares are those shares hich can be redeemed by the company on or after the certain date after gi!ing the prescribed notice. These shares are redeemed in accordance 1,-). ith the terms and sec. .5 of the *ompany+s "ct

8)

Irredeemable Preference Shares: 'rredeemable preference shares are those shares% cannot be redeemed by the company during its life time% in other these shares can only be redeemed by the company at the time of issue irredeemable preference shares.

hich

ords it can be said that inding up. 0ut

according to the sec. .5 (-") of the *ompany+s ("mendment) "ct 1,.. no company can

E%uity s#ar!s:
"ccording to section .- (2)% of *ompanies "ct% 1,-)% Equity share can be defined as the share% hich is not preference shares. 'n other the follo ing preferential rights:
(a) (b)

ords equity shares are those shares%

hich do not ha!e

/reference of di!idend o!er others. /reference for repayment of capital o!er others at the time of inding up of the company.

These shares are also &no n as 64is& *apital+% because they get di!idend on the balance of profit if any% left after payment of di!idend on preference shares and also at the time of inding up of the company% they are paid from the balance asset left after payment of other liabilities and preference share capital. "part from this they ha!e to claim di!idend only% if the company in its ". 7. 8. declares the di!idend. The rate of di!idend on such shares is not pre2determined% but it depends on the profit earned by the company. The equity shareholders ha!e the right to !ote on each and e!ery resolution placed before the company and the holders of these shares are the real o ners of the company. Distinction &!t'!!n Pr!"!r!nc! S#ar!s and E%uity S#ar!s: (asis o" di""!r!nc! Pr!"!r!nc! S#ar! E%uity S#ar!
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By K.Arjun Goud (Assistant Professor)

Financial Accounting & Analysis

4ate of di!idend

The rate of di!idend on The rate of di!idend on equity preference share is fi$ed. share is changed from year to year depending upon the

/ayment of di!idend

a!ailability of profits. They ha!e a right to recei!e 9i!idend on equity shares is di!idend before any di!idend paid% after any di!idend is is paid on equity shares. paid on preference shares. /reference shareholders are Equity shareholders are not entitled to participate in entitled to participate in management. management. On the inding up% they ha!e 'n this case% they ha!e been a right to return of capital paid only hen preferences ahead (before) of the capital capital is paid in full.

/articipation in management

:inding up

"rrears of di!idend

returned on equity shares. 'f di!idend is not paid on 'n case of equity shares% these shares in any year% the di!idend cannot accumulate. arrear of di!idend may shareholders en1oy accumulate. /reference shareholders do Equity not ha!e any !oting rights.

;oting rights

!oting rights.

Su&)di*ision o" s#ar! ca$ital: The

1)

ord capital in connection

ith a company may mean any of the follo ing di!isions of hich is stated in the

capital: Authorised capital: "n authorised capital refers to that amount This is the ma$imum limit of the company 6*apital *lause+ of the 8emorandum of "ssociation as the share capital of the company. hich it is authorised to raise and beyond hich company cannot raise unless the capital clause in the 8emorandum is altered in accordance ith the pro!isions of #ec. ,( of the *ompanies "ct% 1,-).
2)

Issued capital: "n issued capital refers to the nominal !alue of that part of authorised capital% hich has been (1) subscribed for by the signatories to the 8emorandum of

By K.Arjun Goud (Assistant Professor)

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Financial Accounting & Analysis

"ssociation% (2) allotted for cash or for consideration other than cash and (3) allotted as 0onus shares.

3)

Subscribed capital: #ubscribed capital refers to the paid2up !alue of the issued capital i.e. the total amount called by the company less calls2in2arrear. 't is only the actual liability for the company hence it ill be only be added hile totaling the liability side.

Di""!r!nc! &!t'!!n Aut#ori+!d Ca$ital and Issu!d Ca$ital: (asis o" di""!r!nc! 8eaning Aut#oris!d Ca$ital 't refers to that amount Issu!d Ca$ital hich 't refers to the

nominal hich has by the the of cash or other

is stated in the 8emorandum (actual) !alue of that part of of "ssociation as the share authorised capital capital of the company. been: (i) #ubscribed signatories 8emorandum "ssociation and (ii) "llotted for consideration *onsideration requirements of for for to

than cash. future 'ts amount is determined after 'ts amount is determined after considering present and future considering the present

requirements. requirements. 9isclosure in 8emorandum of 'ts amount is required to be 'ts amount is not required to "ssociation 's it the based of stamp duty< 's it based of disclosed in 8emorandum of be disclosed in 8emorandum "ssociation. of "ssociation. #tamp duty is payable on the 't is not based for calculating the basis for

based of authorised capital. stamp duty. company *ompany registration fee is 't is not payable authorised capital.

registration fees<

on the based of registration fees.

By K.Arjun Goud (Assistant Professor)

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Financial Accounting & Analysis

9oes the change amount to an "ny change in the amount of "ny change in the amount of alteration of 8emorandum< authorised capital amounts to issued capital does not amount an alteration of 8emorandum to :hether one can e$ceed other of "ssociation. 't can e$ceed issued capital. an alteration of 8emorandum of "ssociation. 't cannot e$ceed authorised capital. Distinction &!t'!!n aut#oris!d ca$ital and su&scri&!d ca$ital: (asis o" di""!r!nc! 8eaning Aut#oris!d Ca$ital 't refers to that amount Su&scri&!d ca$ital hich 't refers to the paid up !alue

is stated in the 8emorandum of the issued capital. of "ssociation as the share *onsideration requirements of capital of the company. future 'ts amount is determined 'ts amount is determined after considering present and after considering the present

future requirements. requirements. 9isclosure in 8emorandum 'ts amount is required to be 'ts amount is not required to of "ssociation 's it the based of stamp duty< disclosed in 8emorandum of be disclosed in 8emorandum "ssociation. of "ssociation. #tamp duty is payable on the 't is not based for calculating basis for

based of authorised capital. stamp duty. 's it based of company *ompany registration fee is 't is not the registration fees< payable on the basis of registration fees.

authorised capital. 9oes the change amount to "ny change in the amount of "ny change in the amount of an alteration of authorised capital amounts to issued an alteration 8emorandum capital does not 8emorandum< of amount to an alteration of of 8emorandum of "ssociation.

"ssociation. :hether one can e$ceed 't can e$ceed subscribed 't cannot e$ceed authorised other capital. capital.

By K.Arjun Goud (Assistant Professor)

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Financial Accounting & Analysis

!aning o" r!s!r*! ca$ital:

=nder Section 99 of the *ompanies "ct 1,-)% sometimes a company by means of special resolution decides that certain portion of its uncalled capital shall not be called up during its e$istence and it ould by a!ailable as an additional security to its creditors in the e!ent of its ithout the lea!e (order) of the court and also it cannot liquidation. #uch a portion of uncalled capital is termed as 64eser!e *apital+. 't cannot be con!erted into ordinary uncalled capital be charged by the company.

!aning o" Ca$ital R!s!r*!:

*apital 4eser!e originates from sources other than the regular acti!ities of the business. 'n other ords% the reser!e% hich is created out of capital profit% is &no n as capital reser!e. 9i!idend cannot e distributed out of this reser!e but it can be used to meet capital losses or to declare a bonus share. 't is sho n in the liability side of the 0alance #heet under the heading of Reserve and Surplus >ollo ing are the principal sources of capital reser!e: (a) (b) (c) (d) (e) /rofit on sale of a fi$ed asset. /rofit on re!aluation of assets and liabilities. /rofit on forfeiture and re2issue of forfeited shares. /rofit on redemption of debentures at a discount. /rofit earned by a company prior to its incorporation.

Di""!r!nc! &!t'!!n R!s!r*! ca$ital and ca$ital r!s!r*!: (as!s o" di""!r!nc! 8eaning R!s!r*! Ca$ital Ca$ital R!s!r*! 't means that certain portion *apital reser!e is that reser!e of uncalled share capital e$cept 4esolution in the case of need to pass any hich is created out of hich shall not be called up capital profits. liquidation. " special resolution is passed 3o creation. 't represents

by the company for its resolution for its creation. "mount the amount 't represents hich has the already amount been

hich has not been recei!ed.

By K.Arjun Goud (Assistant Professor)

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Financial Accounting & Analysis

"ccounting treatment

recei!ed. 3o accounting treatment is "ccounting made in the boo&s.

treatment

is

made in the boo&s and it is sho n in the company+s

=se

0alance #heet. 't can be called up only at the 't can be used to meet capital time of liquidation and used losses or to declare a bonus by the company. share any time during the life of a company.

Pr!li,inary !-$!ns!s: E$penses incurred on the formation of a company are termed as 6/reliminary E$penses+. These include the follo ing: (1). E$penses incurred on the preparation and printing of !arious documents needed for the registration of a company. (2). #tamp duty and registration fees on these documents. (3). 9uty payable on authori?ed capital. ((). E$penses incurred on the preparation% printing% and issue of prospectus. (-). =nder riting commission. ()). *ost of preliminary boo&s and the common seal. (@). 'n case the company has been formed to purchase a running business% the fees charged by accountant or !aluer !aluing the assets and liabilities of that business. (.). This may be ritten off against #ecurity /remium account% or against *apital 4eser!e% other ise% these may be ritten off from /rofit and Aoss "ccount gradually o!er some period. The un ritten off portion of such e$pense is sho n on the assets side of the 0alance #heet under the heading 68iscellaneous E$penditure+. Proc!dur! o" issu! o" s#ar!s: :hen company has been registered% the follo ing procedure is adopted by the company to collect money from the public by issuing of shares:
1.

Issue of prospectus: :hen a /ublic company intends to raise capital by issuing its shares to the public% it in!ites the public to ma&e an offer to buy its shares through a document called 6/rospectus+. "ccording to #ection )5 (1)% a copy of prospectus is required to be

By K.Arjun Goud (Assistant Professor)

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Financial Accounting & Analysis

deli!ered to the 4egistrar for registration on or before the date of publication thereof. 't contains the brief information about the company% its past record and of the pro1ect for hich company is issuing share. 't also includes the opening date and the closing date of the issue% amount payable ith application% at the time of allotment and on calls% name of the ban& in hich the application money ill be deposited% minimum number of shares for hich application ill be accepted% etc.
2.

!o receive application: "fter reading the prospectus if the public is satisfied then they can apply to the company for purchase of its shares on a printed prescribed form. Each application form along ith application money must be deposited by the public in a ithdra this money schedule ban& and get a receipt for the same. The company cannot this amount cannot be

from the ban& till the procedure of allotment has been completed (in case of first allotment% ithdra n until the certificate to commence business is obtained and the amount of minimum subscription has been recei!ed). The amount payable on application for share shall not be less than -B of the nominal amount of share.
3.

Allotments of shares: "llotments of shares means acceptance by the company of the offer made by the applicants to ta&e up the shares applied for. The information of allotment is gi!en to the shareholders by a letter &no n as 6"llotment Aetter+% informing the amount to be called at the time of allotment and the date fi$ed for payment of such money. 't is on allotment that share come into e$istence. Thus% the application money on the share after allotment becomes a part of share capital. 9ecision to allot the share is ta&en by the 0oard of 9irectors in consultation ith the stoc& e$change. "fter the closure of the subscription list% the ban& sends all applications to the company. On receipt of applications% each application is carefully scrutinised to ascertain that the application form is properly filled up and signed and the money is deposited ith the ban&.

4.

!o ma"e calls on shares: The remaining amount left after application and allotment money due from shareholders may be demanded in ne or more parts hich are termed as 6>irst *all+ and 6#econd *all+ and so on. " ord 6>inal+ ord is added to the last call. The amount of call must not e$ceed 2-B of the nominal !alue of the shares and at least 1 month ha!e elapsed since the date hich as fi$ed for the payment of the last preceding call% for hich at least 1( days notice specifying the time and place must be gi!en.

By K.Arjun Goud (Assistant Professor)

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Financial Accounting & Analysis

od!s o" issu! o" s#ar!s: " company can issue shares in t o ays: 1. 2. >or cash. >or consideration other than cash.

Issue of shares for cash: :hen the shares are issued by the company in consideration for cash such issue of shares is &no n as issue of share for cash. 'n such a case shares can be issued at par or at a premium or at a discount. #uch issue price may be payable either in lump sum along ith application or in instalments at different stages (e.g. partly on application% partly on allotment% partly on call). "ccounting procedure for the issue of shares for cash is gi!en belo : St!$s Conditions 1. a) :hen number of shares applied is 2. equal to the number of shares issued. b) :hen number of shares applied are less than the number of shares issued. Tr!at,!nt 4ecord the receipt of application money Transfer the full amount of application money recei!ed to #hare *apital "Cc. 'f the minimum subscription has at least been recei!ed: Transfer the full amount of application money recei!ed to #hare *apital "Cc. 'f the minimum subscription has not been recei!ed: 4efund the total application money to all the applicants. 8a&e due the allotment money on shares allotted. 4ecord the receipt of allotment money. 8a&e due the call money on shares allotted. 4ecord the receipt of call money.

3. (. -. ).

Issu! o" s#ar!s at $ar:

#hares are said to be issued at par hen they are issued at a price equal to the face !alue. >or

e$ample% if a share of 4s. 15 is issued at 4s. 15% it is said that the share has been issued at par.
By K.Arjun Goud (Assistant Professor) Page 11

Financial Accounting & Analysis

Issu! o" s#ar!s at $r!,iu,

:hen shares are issued at an amount more than the face !alue of share% they are said to be issued at premium. >or e$ample% if a share of 4s. 15 is issued at 4s. 1-D such a condition of issue is &no n as issue of shares at premium. The difference bet een the issue price and the face !alue Ei.e. 4s. - (4s.1- F 4s.15)G of the shares is called premium. 't is a capital profit for the company and ill sho credit balanceD hence it Account . #hares of those companies can be issued at premium hich offer attracti!e rate of di!idend on years and hose shares are in ill be sho n in the liability side of the 0alance #heet under the heading Reserves and Surplus in a separate account called Securit# Premium

their e$isting shares% ha!ing a good profit trac& for last fe company.

demand. The amount of premium depends upon the profitability and demand of shares of such Note: The *ompany may collect the amount of security premium in lump sum or in installments. /remium on shares may be collected by the company either allotment money or e!en premium is to be recorded ith allotment. ith application money or ith the ith one of the calls. 'n absence of any information% the amount of the

Utili+ation o" S!curity Pr!,iu, A,ount

"ccording to #ection @. of the *ompanies "ct 1,-)% the amount of security premium may be applied only for the follo ing purposes: (i) (ii) To issue fully paid up bonus shares to the e$isting shareholders. To rite off preliminary e$penses of the company. rite off the e$penses% or commission paid% discount allo ed on issue of the shares or debentures of the company. (i!) To pay premium on the redemption of preference shares or debentures of the company. (!) To buy2bac& its o n shares as per section @@". ishes to use the premium amount for any other purpose% it ill ha!e to first 'f the company

(iii) To

obtain the sanction of the court for the same or it ill be treated as reduction of capital.

Issu! o" s#ar!s at discount

By K.Arjun Goud (Assistant Professor) Page 12

Financial Accounting & Analysis

#hares are said to be issued at a discount

hen they are issued at a price lo er than the face

!alue. >or e$ample if a share of 4s. 15 is issued at 4s. ,% it is said that the share has been issued at discount. The e$cess of the face !alue o!er the issue price Ei.e. 4e.1 (4s. 15 F 4s. ,)G is called as the amount of discount. #hare discount account sho ing a debit balance denotes a loss to the company nature of capital loss. Therefore% it is desirable% but not compulsory% to hich is in the rite it off against any

*apital /rofit a!ailable or /rofit and Aoss "ccount as soon as possible% and the un ritten off part of it is sho n in the asset side of the 0alance #heet under the heading of 6 $iscellaneous %&penditure in a separate account called 'iscount on issue of Shares Account . Conditions "or issu! o" s#ar!s at discount: >or issue of shares a discount the company has to satisfy the follo ing conditions gi!en in section @, of the *ompanies "ct 1,-): (i) "t least one year must ha!e elapsed since the company became entitled to commence business. 't means that a ne beginning. (ii) The company has already issued such types of shares. the 7eneral 8eeting of shareholders and sanction of the *ompany Aa obtained. (i!) The resolution must specify the ma$imum rate of discount at hich the shares are to be issued but the rate of discount must not e$ceed 15B of the face !alue of the shares. >or more than this limit% sanction of the *ompany Aa Tribunal is necessary. (!) The issue must be made *ompany Aa allo . Tribunal or ithin t o months from the date of recei!ing the sanction of the ithin such e$tended time as the *ompany Aa Tribunal may Tribunal has been (iii) "n ordinary resolution to issue the shares at a discount has been passed by the company in company cannot issue shares at a discount at the !ery

Accounting !ntri!s "or issu! o" s#ar!s:

Par (or receipt of application mone# 0an& "Cc 9r Pr!,iu, 0an& "Cc 9r 0an& "Cc To #hare application "Cc #hare application "Cc 9r
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Discount 9r

To #hare application "Cc To #hare application "Cc (or transferring application mone# to Share Capital A)c #hare application "Cc 9r #hare application "Cc 9r
By K.Arjun Goud (Assistant Professor)

Financial Accounting & Analysis

To #hare capital "Cc

To #hare application "Cc

9iscount on issue of shares "Cc To #hare application "Cc #hare allotment "Cc 9r

9r

To #ecurity /remium "Cc (or allotment mone# becoming due #hare allotment "Cc 9r #hare allotment "Cc 9r To #hare capital "Cc (or receipt of allotment mone# 0an& "Cc 9r To #hare allotment "Cc (or call mone# becoming due #hare call "Cc 9r To #hare capital "Cc (or receipt of call mone# 0an& "Cc To #hare call "Cc .oint A$$lication and allot,!nt account: To #hare capital "Cc To #ecurity /remium "Cc 0an& "Cc 9r

9iscount on issue of shares "Cc To #hare application "Cc 0an& "Cc To #hare allotment "Cc #hare call "Cc 9r 9r

9r

To #hare allotment "Cc #hare call "Cc 9r

To #hare application "Cc To #ecurity /remium "Cc 9r 0an& "Cc 9r

9iscount on issue of shares "Cc To #hare application "Cc 0an& "Cc To #hare call "Cc 9r

9r

To #hare call "Cc

These days it is becoming a practice to open only one account in respect of application and allotment and not t o separate accounts. This is based on the reasoning that allotment application is impossible hile application ithout ithout allotment is meaningless so that the stages of

the share capital transactions are closely interrelated% hence% form this point of !ie % #hare "pplication and #hare "llotment "ccount appear more logical. 'f combined account for application and allotment is opened% in such a case instead of passing first ( entries follo ing 3 eateries ill be passed: Par (or receipt of application mone# 0an& "Cc 9r To #hare application H Pr!,iu, 0an& "Cc To #hare 9r application H Discount 0an& "Cc To #hare 9r application H

allotment "Cc allotment "Cc allotment "Cc (or transferring application and allotment mone# to Share Capital A)c #hare application H allotment "Cc #hare application H allotment "Cc #hare application H allotment 9r To #hare capital "Cc 9r To #hare application "Cc To #ecurity /remium "Cc
By K.Arjun Goud (Assistant Professor)

"Cc

9r 9r

9iscount on issue of shares "Cc

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Financial Accounting & Analysis

To #hare application "Cc (or receipt of allotment mone# 0an& "Cc 9r To #hare application H allotment "Cc 0an& "Cc To #hare allotment "Cc 9r application H 0an& "Cc To #hare allotment "Cc 9r application H

Call)in)arr!ar and int!r!st t#!r!on

'f a shareholder ma&es a default in sending the call money due on allotment or on any calls according to the conditions% the money not so sent is called calls2in2arrear. 'n other ords% the portion of called up capital hich is not paid by the shareholder ithin a specified time is &no n as calls2in2arrear. The company is authorised to charge interest at a specified rate on calls2in2 arrear from the due date to the date of actual payment of the allotment money or the calls. 0ut if the "rticles of "ssociation are silent% !able A shall be applicable arrear. Accounting treatment of calls-in-arrear: There are t o methods of dealing ith the accounting of calls2in2arrear:
1.

hich pro!ides for interest at

-B per annum. Io e!er% the directors ha!e the right to ai!e the payment of interest on call2in2

(y o$!ning Calls)in)arr!ar Account: 'n such a case% a separate account for calls2in2arrear is opened. 'f the amount of calls has not been paid by some shareholders% such amount is transferred to ne ly opened Calls-in-arrear Account . Thus allotment and other call accounts ill not sho any balance but the *alls2in2arrear account hich ill sho a debit balance equal to the total unpaid on allotment C calls% ill be sho n as deduction

form the amount of the subscribed capital on the liabilities side of the 0alance #heet. Accounting tr!at,!nt: (or calls-in-arrear: 0an& "Cc *alls2in2arrear "Cc To #hare allotment "Cc To #hare call "Cc 9r 9r (or receipt of arrear amount at subse*uent date: 0an& "Cc To *all2in2arrear "Cc 9r

By K.Arjun Goud (Assistant Professor)

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Financial Accounting & Analysis

+n ma"ing the interest on call-in-arrear due: #hareholder+s "Cc 9r

(or receipt of interest on calls-in-arrear: 0an& "Cs 9r

To 'nterest on call2in2arrear "Cc To #hareholder+s "Cc (or transferring interest on calls-in-arrear A)c to P), A)c at the end of the accounting #ear: 'nterest on calls2in2arrear "Cc To /rofit and Aoss "Cc
2.

9r

/it#out o$!ning calls)in)arr!ar account: 't is not necessary to open a separate account for calls2in2arrear. 'n that case% amount actually recei!ed from the shareholders is credited to the rele!ant allotment C call account and the !arious allotment C call accounts debit balance equal to the total unpaid amount of allotment C calls% #heet. hich ill sho ill be sho n as

deduction form the amount of the subscribed capital on the liabilities side of the 0alance

Accounting tr!at,!nt: (or calls-in-arrear: 0an& "Cc To #hare allotment "Cc To #hare call "Cc Calls)in)ad*anc! and int!r!st t#!r!on: *alls2in2ad!ance is 1ust opposite to calls2in2arrear. :hen a company accepts money paid by some of its shareholders for the call not yet due% such amount is &no n as 6*all2in2"d!ance+. 't may also happen in case of partial or pro2rata allotment of shares hen the company retains e$cess amount recei!ed on application of shares. #ince the amount has not become due% hence% it is a liability of the companyD therefore it is transferred to the credit of a ne ly opened account called Calls-in-advance Account . " company may% if authorised by its articles% accept calls in ad!ance from its shareholders. 'n case of calls2in2ad!ance% the company must pay interest at the rate prescribed in its "rticles of "ssociation. Io e!er% in the absence of interest clause in the "rticles of "ssociation% the pro!isions of !able A of the *ompanies "ct ill apply according to hich the company ill 9r (or receipt of amount at subse*uent date: 0an& "Cc To #hare call "Cc 9r To #hare allotment "Cc

By K.Arjun Goud (Assistant Professor)

Page 16

Financial Accounting & Analysis

ha!e to pay interest J )B p.a. on calls2in2ad!ance% from the date of receipt till the date hen the call becomes due. "ccounting treatment: (or receipt of advance mone#: 0an& "Cc To #hare allotment "Cc To #hare call "Cc To *alls2in2ad!ance "Cc +n ma"ing the interest on call-in-advance due: 'nterest on calls2in2ad!ance "Cc 9r (or pa#ment of interest on calls-in-advance: #hareholder+s "Cc To 0an& "Cc 9r 9r (or ad-ustment of calls-in-advance: *alls2in2ad!ance "Cc To 4especti!e call "Cc 9r

To #hareholder+s "Cc (or transferring interest on calls-in-advance A)c to P), A)c at the end of the accounting #ear: /rofit and Aoss "Cc 9r To interest on calls2in2ad!ance "Cc

Distinction &!t'!!n Calls)in)arr!ar and Calls)in)ad*anc!: Calls)in)arr!ars (asis o" di""!r!nc! 8eaning Calls)in)ad*anc!

*alls2in2arrear is the amount *alls2in2ad!ance is the amount called up by the company% but not called up by the company% not paid by the shareholders. but paid by the shareholders. 'nterest is charged on calls2in2 'nterest is allo ed on calls2in2

'nterest

arrear. ad!ance. 4ate of interest -B 2 as per Table ". )B 2 as per Table ". "uthority under "rticles of "rticles of "ssociation do not " company may accept calls2 "ssociation ha!e any clause to this effect in ad!ance only if "rticles of as non2payment is beyond the "ssociation authorise to do so. 9isclosure company+s control. 'ts amount is sho n by ay of 'ts deduction from in #ubscribed2capital
By K.Arjun Goud (Assistant Professor)

amount

is

sho n

as

the separate item% under the head the current liabilities.

Page 17

Financial Accounting & Analysis

0alance #heet.

For"!itur! o" s#ar!s

:hen any company allots share to the applicants% it is done on the basis of a legal contract bet een the company and the applicant% hich ma&es it binding upon the shareholders to pay the amount of allotment and calls entitled to ta&e its share bac&% hene!er they are due. 3o if any shareholder fails to pay the allotment and or call money due to him% the shareholder !iolates the contract and the company is hich is &no n as forfeiture of shares. The company can forfeit such shares if authorised by the "rticles of "ssociation. >orfeiture of share can be done according to the rules laid so n in the "rticles and if no rules are gi!en in "rticles% the pro!isions of Table "% regarding forfeiture not returnable to him F it is forfeited. Procedure for forfeited shares: The usual procedure is that the defaulting shareholder must be gi!en a minimum 1( days notice requiring him to pay the amount due on his shares along to pay the amount and the interest on it% the shares the shares and information shares. ith interest on it stating that if he fails ill forfeit ill be forfeited. 'nspite of this notice% the ill apply. >orfeiture of shares means cancellation of allotment to defaulting shareholders and to treat the amount already recei!ed on such shares is

shareholder does not pay the unpaid amount. The directors after passing a resolution

ill be gi!en to the defaulting shareholder about the forfeiture his

E""!ct o" "or"!itur! o" s#ar!s:

1.

T!r,ination o" ,!,&!rs#i$: The membership of the defaulting shareholder C o ner of the company and his name 8embers

ill be terminated and

they lose all the rights and interest on those shares i.e. ceases to be the member C ill be remo!ed from the 4egister of

2.

S!i+ur! o" ,on!y $aid: The amount already paid on the forfeited shares by the defaulting shareholders shareholder. ill be sei?ed by the company and in no case ill be refunded bac& to the

By K.Arjun Goud (Assistant Professor)

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Financial Accounting & Analysis 3.

Non $ay,!nt o" di*id!nd: :hen shares are forfeited the shareholder remains no longer the member of the company therefore he looses the right to recei!e future di!idend.

4.

R!duction o" s#ar! ca$ital: >orfeiture of shares result in the reduction of share capital to the e$tent of amount called up on such shares.

Accounting Entri!s: #ince the company issue shares at par% at premium% or at discount. "s such the accounting entries for forfeiture of shares in all the abo!e the cases are different% hich are as follo ing: (orfeiture of shares issued at Par: 'f calls2in2arrear account is opened #hare capital "Cc To *alls2in2arrear "Cc To #hare forfeiture "Cc 9r :ith the called up amount :ith the amount of arrear on shares forfeited :ith the amount paid by the shareholder

'f call2in2arrear account is not opened: #hare capital "Cc To #hare allotment "Cc To #hare call "Cc To #hare forfeiture "Cc (orfeiture of shares issued at Premium: 'f calls2in2arrear account is opened: #hare capital "Cc 9r #ecurity /remium "Cc To *alls2in2arrear "Cc To #hare forfeiture "Cc 9r :ith the called up amount e$cluding premium amount 'f amount of premium is not paid :ith the amount of arrear on shares forfeited :ith the amount paid by the shareholder 9r :ith the called up amount :ith the amount of arrear on allotment :ith the amount arrear on call :ith the amount paid by the shareholder

By K.Arjun Goud (Assistant Professor)

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Financial Accounting & Analysis

'f call2in2arrear account is not opened: #hare capital "Cc 9r #ecurity /remium "Cc To #hare allotment "Cc To #hare call "Cc To #hare forfeiture "Cc (orfeiture of shares issued at 'iscount: 'f calls2in2arrear account is opened: #hare capital "Cc To *alls2in2arrear "Cc To 9iscount of shares "Cc To #hare forfeiture "Cc 'f calls2in2arrear account is not opened: #hare capital "Cc To 9iscount of shares "Cc To #hare allotment "Cc To #hare call "Cc To #hare forfeiture "Cc For"!itur! o" "ully $aid u$ s#ar!s: =sually the shares are forfeited for non2payment of the calls. 0ut at the same time fully paid up shares can be forfeited in such cases as default in fulfilling any agreement bet een the members or on e$pulsion of members here the articles specifically pro!ide for such details. 9r :ith the called up amount :ith discount on shares forfeited :ith the amount of arrear on allotment :ith the amount arrear on call :ith the amount paid by the shareholder 9r :ith the called up amount :ith the amount of arrear on shares forfeited :ith discount on shares forfeited :ith the amount paid by the shareholder 9r :ith the called up amount e$cluding premium amount 'f amount of premium is not paid :ith the amount of arrear on allotment :ith the amount arrear on call :ith the amount paid by the shareholder

By K.Arjun Goud (Assistant Professor)

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Financial Accounting & Analysis

Surr!nd!r o" s#ar!s: :hen a shareholder feels that he cannot pay further callsD he may himself surrender the shares to the company. These shares are then cancelled. #urrender of shares is a !oluntary return of shares for the purposes of cancellation. The directors can accept the surrender of shares only hen the "rticles of "ssociation authorise them to do so. #urrender is la ful only in t o cases !i?. .a/ here it is done as a short cut to forfeiture to a!oid the formalities for a !alid forfeiture and .b/ here shares are surrendered in e$change for ne shares of the same nominal !alue. " surrender ill be !oid if it amounts to purchase of the shares by the company or if it is accepted for the purpose of relie!ing a member from his liabilities. Entries are passed 1ust li&e forfeiture of shares. Thus% surrender of shares is at the instance of shareholder instance of company. R!)issu! o" For"!it!d o" s#ar!s: #hares forfeited becomes the property of the company and the directors of a company ha!e an authority to re2issue the shares once forfeited by them in accordance ith the pro!isions contained in "rticles of "ssociation. Table 6"+ pro!ides that K" forfeited shares may be sold or other ise disposed off on such terms and in such manner as the 0oard thin&s fitL. They can re2 issue the forfeited shares at par% at premium or at discount. Io e!er% if the shares are re2issued at discount% the amount of the discount does not e$ceed the amount paid on such shares by the original shareholder but in case of shares originally issued at a discount% the ma$imum permissible discount ill be amount paid on such shares by the original shareholder plus the amount of original discount. Accounting treatment for re-issue of forfeited shares: >ollo ing are the 1ournal entries for re2 issue of forfeited shares: R!)issu! o" "or"!it!d s#ar!s at $ar: 0an& "Cc To #hare *apital "Cc 9r :ith the amount recei!ed on re2issue :ith the amount credited as paid2up C called up hereas forfeiture of shares at the

By K.Arjun Goud (Assistant Professor)

Page 21

Financial Accounting & Analysis

R!)issu! o" "or"!it!d s#ar!s at $r!,iu,: 0an& "Cc To #hare capital "Cc To #ecurity premium "Cc 9r :ith the amount recei!ed on re2issue :ith the amount credited as paid2up C called up :ith the amount of premium on re2issue

R!)issu! o" "or"!it!d s#ar!s at discount: 0an& "Cc 9iscount on shares "Cc #hare forfeiture "Cc To #hare *apital "Cc 9r 9r 9r :ith the amount recei!ed on re2issue :ith the amount of original discount :ith the e$cess of re2issue discount :ith the amount credited as paid2up C called up

Note: 'f after re2issue of shares there is still a profit% it should be credited to the *apital 4eser!e "ccount. >ollo ing entry ill be passed for this: #hare forfeiture "Cc 9r To *apital reser!e "Cc

0*!r su&scri$tion o" issu!

:hen the application recei!ed from the public are more than the shares issued by the company% this situation is called as o!er subscription of issue. The 0oard of 9irectors cannot allot shares more than that offered to the public% in such a condition the 9irectors of the company ma&e the allotment of shares on the basis of reasonable criteria. "ny allotment to be made by the company in case of o!er subscription should be according to the scheme% consultation of Securit# and %&change 0oard of India (#.E.0.'.) The 1ournal entry for application money issued ill be considered. >ollo ing three alternati!es are a!ailable to deal ith the situation of o!ersubscription: ill be passed for all the shares applied for% but hile transferring the application money to share capital account% only the application money on shares hich is finali?ed ith the

Alt!rnati*! 1

Cours! o" action

.ournal !ntry Page 22

By K.Arjun Goud (Assistant Professor)

Financial Accounting & Analysis To re1ect the Aetter of regret along #hare application aCc ith the refund Aetters of of To 0an& "Cc application regret along of other refund 9r :ith the total amount recei!ed on application :ith the amount refunded on applications re1ected :ith the application money on shares issued

e$cess applications and to allot in full to applicants

ith the application To #hare capital "Cc

money are sent to the applicants allotment of re1ected applications and letters of are sent to applicants of accepted applications.

Alt!rnati*! 2 e$cess applications

Cours! o" action sent to all the applicants

.ournal !ntry #hare application aCc 9r :ith the total amount recei!ed on application :ith the amount retained for allotment :ith the amount retained for calls To 0an& "Cc :ith the amount refunded on applications re1ected

To re1ect the Aetters of allotment are

and e$cess application To #hare allotment "Cc recei!ed to ards due is the To *alls2in2ad!ance "Cc on

and to allot in money full to other ad1usted applicants amount

allotment% calls of shares allotted and the balance application money left after ad1ustment refunded. ill be

Alt!rnati*! 3

Cours!

o"

action "y combination of Aetters the as:

a/ To re1ect some

.ournal !ntry 9r :ith the total amount recei!ed on application :ith the amount retained for allotment To *alls2in2ad!ance "Cc :ith the amount retained for calls :ith the amount refunded on

of #hare application aCc along the To #hare allotment "Cc of are To 0an& "Cc

abo!e

t o regret such ith refund

alternati!es

application money

of

the

By K.Arjun Goud (Assistant Professor)

Page 23

Financial Accounting & Analysis applications sent to the applications re1ected

and ma&e pro2 applicants of rata allotment re1ected to remaining applications and letters of allotment are sent e$cess application money recei!ed ad1usted
c/

applicants.
b/ To allot in full

to some of the applicants and ma&e pro2rata allotment remaining applicants To re1ect some of applications to

to

the

applicants and

is the due

to ards

the amount

on allotment%

allot in full to calls of shares some of the allotted and applications the balance and ma&e pro2 application rata allotment money left to remaining after applicants ad1ustment ill refunded be

Und!r su&scri$tion o" issu!: #hares are said to be under2subscribed hen the number of shares applied for is less than the

number of shares offered% but at least minimum subscription ("ccording to the guidelines issued by #.E.0.'. minimum subscription means 6'f the company does not recei!e a minimum subscription of ,5B of the issued amount ithin )5 days from the date of closure of the issue% the company shall forth ith refund the entire subscription amount+) is recei!ed. >or e$ample% in

By K.Arjun Goud (Assistant Professor)

Page 24

Financial Accounting & Analysis

case has offered -%555 shares to public but the public applied for (%-55 shares only% it is called a case of under2subscription. Mournal entries are passed on the basis of shares applied for. Di""!r!nc! &!t'!!n o*!r)su&scri$tion and und!r)su&scri$tion: (asis #hares applied "cceptance Und!r)su&scri$tion 0*!r)su&scri$tion 3umber of shares applied is less than 3umber of shares applied is more than the the shares offered for subscription. shares offered for subscription. "ll the applicants for shares are "ll the applications are not accepted. accepted% i.e. full allotment is made. 4efund #ome are re1ected. "lternati!ely% shares are allotted on pro2rata basis. "s all the applications are accepted% E$cess application money is to be there is no e$cess money to be refunded or ad1usted to ards allotment. 8inimum refunded. The company may face the problem The company does not face such a problem.

subscription of 68inimum #ubscription+. Pri*at! $lac!,!nt o" s#ar!s:

"ccording to #ection .1 (1") of the *ompanies "ct% 1,-) pri!ate placement of shares implies issue and allotment of shares to a selected group of persons such =.T.'.% A.'.*. etc. in other ordsD an issue hich is not a public issue but offered to a select group of persons is called /ri!ate /lacement of shares. Pr!"!r!ntial allot,!nt: " preferential allotment is one that is made at a pre2determined price to the pre2identified people ho ish to ta&e a strategic sta&e in the company such as promoters% !enture capitalists% ill not sell their securities in the open mar&et for a minimum period of three years financial institutions% buyers of companies products ore its suppliers. 'n other such a case% the allottees from the date of allotment. This period is &no n as the loc&2in2period. The preferential allotment can ta&e place only if three2fourths of the shareholders agree to the issue on preferential basis. #.E.0.'. has prescribed that the minimum price of such an issue has to be an a!erage of highs and lo s of the 2) to ma&e the preferential allotment. ee& preceding the date on hich the board resol!es

By K.Arjun Goud (Assistant Professor)

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Financial Accounting & Analysis

E,$loy!! stoc4 o$tion $lan: 'n order to retain high caliber employees or to gi!e them a sense of belonging% companies may offer their equity shares to be purchased at their 1) 2) 3) E#O/ implies the right% but not an obligation. The employee has a right to e$ercise the option of purchase of shares period% i.e.% the time period during hich the scheme remains in operation. "ny share issued under the scheme of E#O/ shall be loc&ed2in for a minimum period of one year from the date of allotment. (uy)&ac4 o" s#ar!s: The term buy2bac& of share implies the act of purchasing its o n shares by a company either from free reser!es% securities premium or proceeds of any shares or securities. "ccording to #ection @@" of the *ompanies "ct 1,-)% a company can buy its o n shares either from the: a) b) c) d) E$isting equity shareholders on a proportionate basis. Open mar&et Odd lot shareholders Employees of the company pursuant to a scheme of stoc& option or s eat equity. ithin the !esting ill. #uch scheme is called Employee stoc& option plan (E#O/). >ollo ing are the characteristics of this scheme:

Rig#t s#ar!s: =nder #ection .1 of the *ompanies "ct% the e$isting shareholders ha!e a right to subscribe% in their e$isting proportion% to the fresh issue of capital or to re1ect the offer% or sell their rights. The e$isting shareholders can authori?e the company by passing a special resolution to offer such shares to the public.

ISSUE 0F DE(ENTURES
DE(ENTURE AND ITS T5PES
By K.Arjun Goud (Assistant Professor) Page 26

Financial Accounting & Analysis

" 9ebenture is a unit of loan amount. :hen a company intends to raise the loan amount from the public it issues debentures. " person holding debenture or debentures is called a debenture holder. " debenture is a document issued under the seal of the company. 't is an ac&no ledgment of the loan recei!ed by the company equal to the nominal !alue of the debenture. 't bears the date of redemption and rate and mode of payment of interest. " debenture holder is the creditor of the company. "s per section 2(12) of *ompanies "ct 1,-)% K9ebenture includes debenture stoc&% bond and any other securities of the company or notL. Ty$!s o" d!&!ntur!s 9ebenture can be classified as under : 16 Fro, s!curity $oint o" *i!' (i) S!cur!d or ortgag! d!&!ntur!s : These are the debentures that are secured by a charge on the assets of the company. These are also called mortgage debentures. The holders of secured debentures ha!e the right to reco!er their principal amount ith the unpaid amount of interest on such debentures out of the assets mortgaged by the company. 'n 'ndia% debentures must be secured. #ecured debentures can be of t o types : a. >irst mortgage debentures : The holders of such debentures ha!e a first claim on the assets charged. b. #econd mortgage debentures : The holders of such debentures ha!e a second claim on the assets charged. (ii) Uns!cur!d d!&!ntur!s: 9ebentures hich do not carry any security ith regard to the principal amount or unpaid interest are called unsecured debentures. These are called simple debentures. 26 0n t#! &asis o" r!d!,$tion (i) R!d!!,a&l! d!&!ntur!s : These are the debentures hich are issued for a fi$ed period. The principal amount of such debentures is paid off to the debenture hether constituting a charge on the company+s assets

By K.Arjun Goud (Assistant Professor)

Page 27

Financial Accounting & Analysis

holders on the e$piry of such period. These can be redeemed by annual dra ings or by purchasing from the open mar&et. (ii) Non)r!d!!,a&l! d!&!ntur!s : These are the debentures company goes into liquidation 36 0n t#! &asis o" R!cords (i) R!gist!r!d d!&!ntur!s : These are the debentures that are registered appears in the register of the company. (ii) (!ar!r d!&!ntur!s : These are the debentures debentures is entitled to get the interest. 76 0n t#! &asis o" con*!rti&ility (i) Con*!rti&l! d!&!ntur!s : These are the debentures that can be con!erted into shares of the company on the e$piry of predecided period. The term and conditions of con!ersion are generally announced at the time of issue of debentures. (ii) Non)con*!rti&l! d!&!ntur!s : The debenture holders of such debentures cannot con!ert their debentures into shares of the company. 86 0n t#! &asis o" $riority (i) >irst debentures : These debentures are redeemed before other debentures. (ii) #econd debentures : These debentures are redeemed after the redemption of first debentures. hich are not recorded in a register of the company. #uch debentures are transferrable merely by deli!ery. Iolder of these ith the company. hose name The amount of such debentures is payable only to those debenture holders hich are not redeemed hen the in the life time of the company. #uch debentures are paid bac& only

By K.Arjun Goud (Assistant Professor)

Page 28

Financial Accounting & Analysis

ISSUE 0F DE(ENTURES 0y issuing debentures means issue of a certificate by the company under its seal hich is an

ac&no ledgment of debt ta&en by the company. The procedure of issue of debentures by a company is similar to that of the issue of shares. " /rospectus is issued% applications are in!ited% and letters of allotment are issued. On re1ection of applications% application money is refunded. 'n case of partial allotment% e$cess application money may be ad1usted to ards subsequent calls. Issu! o" D!&!ntur! ta4!s *arious "or,s '#ic# ar! as und!r : 1. 9ebentures issued for cash 2. 9ebentures issued for consideration other than cash 3. 9ebentures issued as collateral security. >urther% debentures may be issued (i) (ii) (iii) at par% at premium% and at discount

Accounting treatment of issue of debentures for cash

By K.Arjun Goud (Assistant Professor)

Page 29

Financial Accounting & Analysis

By K.Arjun Goud (Assistant Professor)

Page 30

Financial Accounting & Analysis

By K.Arjun Goud (Assistant Professor)

Page 31

Financial Accounting & Analysis

ll the debentures

ere applied for and allotted. "ll the calls

ere duly recei!ed. 8a&e necessary

1ournal entries in the boo&s of the company. Solution:

0*!r su&scri$tion

By K.Arjun Goud (Assistant Professor)

Page 32

Financial Accounting & Analysis

*ompany if recei!es applications for number of debentures that e$ceed the number of debentures offered for subscription% it is called o!er subscription. There can be follo ing treatment of the e$cess application money recei!ed : (a) The total amount of e$cess number of applications is refunded in case the applications are totally re1ected. (b) The amount of e$cess application money is totally ad1usted to ards amount due on allotment and calls N in case partial allotment is made% N the e$cess amount is ad1usted to ards sums due on allotment and rest of the amount is refunded.

Illustration 2 "0* Atd issued -555 15B 9ebentures of 4s 155 each payable as 4s (5 on application and 4s )5 on allotment. "pplications ere recei!ed for )555 debentures. "pplicants for -55 debentures as returned. "llotment as made proportionately to the as applied to the amount due on allotment. "ll money ere sent letter of regret and money remaining applicants. O!er subscription

as duly recei!ed. 8a&e 1ournal entries for the abo!e transactions in the boo&s of the company

By K.Arjun Goud (Assistant Professor)

Page 33

Financial Accounting & Analysis

By K.Arjun Goud (Assistant Professor)

Page 34

Financial Accounting & Analysis

ISSUE 0F DE(ENTURES AT PRE IU

AND AT DISC0UNT

9ebentures are said to be issued at premium hen these are issued at a !alue hich is more than their nominal !alue. >or e$ample% a debenture of 4s 155 is issued at 4s 115. This e$cess amount of 4s 15 is the amount of premium. The premium on the issue of debentures is credited to the #ecurities /remium "Cc as per section @. of the *ompanies "ct% 1,-).

Illustration 3 " company has issued -555 15B 9ebentures of 4s 155 each at a premium of 25B payable as 4s )5 on application% 4s )5 on allotment (including premium) "ll the debentures for and money as duly recei!ed. 8a&e 1ournal entries. Solution ere subscribed

By K.Arjun Goud (Assistant Professor)

Page 35

Financial Accounting & Analysis

Issu! o" D!&!ntur!s at Discount

:hen debentures are issued at less than their nominal !alue they are said to be issued at discount. >or e$ample% debenture of 4s 155 each is issued at 4s ,5 per debenture. *ompanies "ct% 1,-) has not laid do n any conditions for the issue of debentures at a discount as ha!e been laid do n in case of issue of shares at discount. Io e!er% there should be pro!ision for issue of such debentures in the "rticles of "ssociation of the *ompany.

By K.Arjun Goud (Assistant Professor)

Page 36

Financial Accounting & Analysis

Illustration 7 " company has issued 2555 ,B debentures of 4s 155 each at a discount of 15B payable as 4s (5 on application% 4s -5 on allotment 8a&e necessary 1ournal entries Solution

By K.Arjun Goud (Assistant Professor)

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Financial Accounting & Analysis

Issu! o" D!&!ntur!s "or consid!ration ot#!r t#an cas#

:hen a company purchases some assets and issues debentures as a payment for the purchase% to the !endors it is &no n as issue of debentures for consideration other than cash. 9ebentures can be issued to !endors at par% at premium and at discount

By K.Arjun Goud (Assistant Professor)

Page 38

Financial Accounting & Analysis

Illustration 8

By K.Arjun Goud (Assistant Professor)

Page 39

Financial Accounting & Analysis

8.0. Electronics Atd. purchased machinery for 4s 1,.555 and issued ,B debentures of 4s 155 each to the !endors. 8a&e 1ournal entries if the debentures ere issued (a) at par (b) at a premium of 4s 15 (c) at a discount of 4s 15 Solution :

By K.Arjun Goud (Assistant Professor)

Page 40

Financial Accounting & Analysis

By K.Arjun Goud (Assistant Professor)

Page 41

Financial Accounting & Analysis

Illustration 9 8a&e 1ournal entries if 255 debentures of 4s -55 each ha!e been issued as: (i) 'ssued at 4s -55% redeemable at 4s -55 (ii) 'ssue at 4s (-5D redeemable at 4s -55 (iii) 'ssued at 4s --5D redeemable at 4s -55 (i!) issued at 4s -55D redeemable at 4s --5 (!) 'ssued at 4s (-5D redeemable at 4s --5 Solution : .ournal

By K.Arjun Goud (Assistant Professor)

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Financial Accounting & Analysis

ISSUE 0F DE(ENTURES AS C0LLATERAL SECURIT5

*ollateral security means security gi!en in addition to the principal security. 't is a subsidiary or secondary security. :hene!er a company ta&es loan from ban& or any financial institution it may issue its debentures as secondary security lender ill ha!e a right o!er such debentures only hich is in addition to the principal security. #uch an issue of debentures is &no n as 6issue of debentures as collateral security+. The hen company fails to pay the loan amount and the principal security is e$hausted. 'n case the need to e$ercise this right does not arise debentures ill be returned bac& to the company. 3o interest is paid on the debentures issued as collateral security because company pays interest on loan. 'n the accounting boo&s of the company issue of debentures as collateral security can be credited in t o ays. :i; No <ournal !ntry to &! ,ad! in t#! &oo4s o" accounts o" t#! co,$any: 9ebentures are issued as collateral security. " note of this fact is gi!en on the liability side of the balance sheet under the heading #ecured Aoans and "d!ances.
By K.Arjun Goud (Assistant Professor)

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:ii; Entry to &! ,ad! in t#! &oo4s o" account t#! co,$any " 1ournal entry is made on the issue of debentures as a collateral security% 9ebentures suspense "Cc is debited because no cash is recei!ed for such issue.

Illustration = #&y 4oc&eting *ompany Atd issued )555 15B debentures of 4s 155 each to the ban& as collateral security against a loan of 4s -55555 ta&en from the ban&. 4ecord the issue of

By K.Arjun Goud (Assistant Professor)

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debentures in the boo&s of the company and sho the issued 9ebentures in the 0alance #heet of the *ompany. Solution: 3o 1ournal entry is required

DISC0UNT 0N ISSUE 0F DE(ENTURES AND L0SS 0N ISSUE 0F DE(ENTURES

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'n case company issues debentures on discount the total amount of discount is not charged to profit and Aoss "ccount of the company in the accounting year in hich this discount is allo ed. The amount of such discount is !ery hea!y and to the company gets benefit from the loan by issuing debentures o!er a number of years. Ience some part of the amount of discount is ritten off e!ery year. 7enerally it is ritten off prior to the redemption of these debentures. "s the amount of discount on issue of debentures is treated as a capital loss% it is sho n on the asset side of the balance sheet of the company under the head K8iscellaneous E$penditureL until and by the amount it is not ritten off. T#! a,ount o" d!&!ntur! discount can &! 'ritt!n o"" in t'o 'ays : 16 All d!&!ntur!s ar! to &! r!d!!,!d a"t!r a "i-!d $!riod6 :hen the debentures are to be redeemed after a fi$ed period% the amount of discount distributed equally calculated as "mount of discount to be ritten off annually O Total amount of 9iscount C 3umber of years Illustration > " company issues 1555 debentures of 4s 1555 each at a discount of 15B for a period of - years i.e. to be redeemed after - years. *alculate the amount of discount to be ritten off each year and prepare on issue of debentures discount account. Solution their redemption. The amount of discount on issue of debentures to be ill be ithin the number of years spreaded bet een the issue of debentures and ritten off each year is

Accounting Tr!at,!nt Mournal entry to rite off debenture discount each year
By K.Arjun Goud (Assistant Professor)

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9iscount on 'ssue of 9ebentures "ccount till the amount of discount is under:

ritten off% is sho n as

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26 D!&!ntur!s ar! r!d!!,!d in install,!nts 9ebentures may also be redeemed in installments but o!er a fi$ed period. 'n that case the amount of debenture discount redeemed. Illustration ? " company has issued 2555 ,B debentures of 4s 1555 each at a discount of 15B. 'f the debentures are to be redeemed in fi!e equal annual installments% calculate the amount of 9iscount on 'ssue of 9ebentures to be 9ebentures "Cc. Solution *alculation of "mount of 9iscount on 'ssue of 9ebentures "ccount Total amount of 9iscount on 'ssue of 9ebentures "Cc O (2555 $ 1555 ) C 15 O 255555 ritten off each year and prepare 9iscount on 'ssue of ill be ritten off each year in proportion to the amount of debentures

By K.Arjun Goud (Assistant Professor)

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#imilarly entry

ill be made e!ery year

ith the respecti!e amount of discount. 9iscount on

issue of 9ebentures account till the amount of discount is ritten off ill be sho n as under.

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Loss on Issu! o" D!&!ntur!s

Pou ha!e learnt that a company may issue debentures the debentures on maturity also be ith the stipulation that the repayment of ill ill be made at premium. The amount of the premium payable is riting off 9iscount on 'ssue of

debited to Aoss on 'ssue of 9ebentures "Cc at the time of issue of debentures. This amount ritten off in the same manner as is done in case of 9ebentures. This is illustrated as under:

Calculation o" t#! a,ount to &! 'ritt!n o"" Total A,ount o" Loss on Issu! o" D!&!ntur!s @ No6 o" y!ars6 Illustration 1A

By K.Arjun Goud (Assistant Professor)

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" company issues 1555 15B 9ebentures of 4s 1555 each on 1st Man% 255) payable at a premium of 15B after - years. 8a&e 1ournal entries and open Aoss on 'ssue of 9ebentures "Cc for the year ending 31st 9ecember 255). Solution

"mount to be ritten off each year O 4s155555 C - O 4s 25555

:ii; D!&!ntur!s ar! R!d!!,!d in Install,!nts The amount of Aoss on 'ssue of 9ebentures to be also the same. Illustration 11 4efer 'llustration 3o. 15. " company decides to redeem its debentures in fi!e equal installments beginning from the end of first year. 8a&e 1ournal entry for the 'ssue of 9ebentures "Cc for first year.
By K.Arjun Goud (Assistant Professor)

ritten off each year is calculated in the

manner it is calculated in case of 9iscount on 'ssue of 9ebentures and accounting treatment is

riting off and sho

Aoss on

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Solution

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Int!r!st on D!&!ntur!s
'f you ha!e seen an ad!ertisement in ne spaper regarding issue of debentures by a company% you must ha!e noticed that 69ebenture+ is al ays prefi$ed by a certain percentage say ,B 9ebentures or 12B 9ebentures. Ia!e you e!er thought hat meaning does this prefi$ carry. 't is the rate of interest per annum that ill be paid to the debenture holders. *ompanies generally pay interest on its debentures after e!ery si$ months. Mournal entries that are made in the boo&s of the company are as follo sD

Illustration 12

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Q Atd has issued -555 ,B 9ebentures of 4s 1555 each% on 1st "pril% 255) 'nterest is payable after e!ery si$ months. 8a&e 1ournal entries for the interest paid for the first si$ months after the date of issue.

By K.Arjun Goud (Assistant Professor)

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