Day - 4 : Issue of shares

Chapter Issue of shares

4A

1. Kind of share capital :

The share capital of a company limited by shares shall be of two kinds under the
Companies Act 2013, namely :

Kinds of share
capital

Equity Share Preference Share

Capital Capital

(a) Equity share capital :

Equity share capital with reference to any company limited by shares means all
share capital which is not preference share capital. Equity share capital can be
i) With voting rights; or
ii) With differential rights as to dividend or voting or any other right.

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(b) Preference share capital :

Preference share capital with reference to any company limited by shares means
that part of the issued share capital of the company which carries or would carry
a preferential right with respect to—
h Payment of dividend, either as a fixed amount or an amount calculated at a
fixed rate, which may either be free of or subject to income-tax; and
h Repayment, in the case of a winding up or repayment of capital, of the amount
of the share capital paid-up or deemed to have been paid-up, whether or not,
there is a preferential right to the payment of any fixed premium or premium
on any fixed scale, specified in the memorandum or articles of the company.

2. Classification of share capital :

Basically, share capital of the company should be classified in the balance sheet into
the following three categories :
Authorised
Authorised share capital :
share capital
 It is the maximum amount of share capital
Classification of
share capital

which a company can raise for the time

being. It is mentioned in the company’s Issued share
memorandum and is also termed as capital
“Nominal” or “Registered” capital.
Issued share capital :
Subscribed
 It is that part of the authorised capital which
capital
is represented by the nominal value of :
h The shares allotted for cash
h The shares allotted for consideration other than cash
h The shares subscribed for by the signatories to the company’s Memorandum.
Subscribed capital :
 It represents the paid-up value of the “issued share capital”. In case the shares
are fully paid the “Issued Capital” and the “Subscribed capital” will be the same.

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 Day - 4 : Issue of shares

Some authorities classify the share capital as follows:

Authorised capital : It has the same meaning as given above.
Issued capital : It is that part of authorised capital offered to the public for subscriptio
Subscribed capital : It is that part of the issued capital which has been allotted to the
public.
Such a distinction between “Issued” and “Subscribed” capital would create problems
regarding treatment of capital which might have been allotted to the vendors for consid-
eration other than cash and the capital subscribed by the signatories to the company’s
Memorandum. Moreover, it does not seem to be proper to take that capital as also issued
for which no subscription has been received and consequently which has not been allotted.
Called up capital :
It is that portion of the subscribed capital which has been called up by the company,
e.g. if the nominal value of a share allotted is Rs.10 and the company has called up only
Rs 8 so far, Rs 10 will be included for the purpose of calculating subscribed capital and
only Rs 8 will be included for the amount of called up capital.
Paid up capital :
It is that portion of the called up capital against which payment has been received.

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3. Issue Of Share Capital :

Issue of shares

Issued for Issued for

Cash other than Cash

Issued at
At par

Issued at
At premium

Issue of shares at discount :

h As per section 53 of the companies Act 2013, a company shall not issue shares
at a discount except as provided in section 54 for issue of sweat equity shares.
Any share issued by a company at a discounted price shall be void.
h Where a company contravenes the provisions of this section, the company shall
be punishable with fine which shall not be less than one lakh rupees but which
may extend to five lakh rupees and every officer who is in default shall be
punishable with imprisonment for a term which may extend to six months or
with fine which shall not be less than one lakh rupees but which may extend
to five lakh rupees, or with both.
h Company act 1956 Act permitted issue of shares at a discount to its par value
subject to conditions. But company act, 2013 prohibits issue of shares at a
discount except in case of "sweat equity shares" issued to the employees of the
Company.

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 Day - 4 : Issue of shares

Subscription Of Shares :
 Subscription of shares means application for shares by general public.
 There are three cases of subscription :
i. Full subscription : Number of shares subscribed = Number of shares issued
ii. Under subscription : Number of shares subscribed is lower than number of
shares issued.
iii. Over subscription : Number of shares subscribed is greater than number of
shares issued.

Under subscription :
 A company may not receive applications for all the shares offered by it to the public.
For example, it might have offered 8,000 shares to the public but applications might
have received only for 6,000 shares. Such a situation is called Undersubscription.
In such a case entries for application, allotment, and calls will be made only for
6,000 shares.
 However, if the shares are so undersubscribed that applications are not received
even for minimum subscription, the company cannot proceed with allotment. It will
have to refund to the applicants all application money.

Over subscription :
 When number shares applied for by general public is greater than number of
shares issued by company then it is called as oversubscription.
 But company can allot only that number of shares which are issued.
Example, If 10,000 shares are issued by company & 12,000 applications are
received from the public then company can allot only 10,000 shares.
 So surplus applications can be dealt in following ways :
a. Rejection of surplus applications
b. Allotment of surplus application on pro - rata basis

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a) When surplus application money is refunded, following entry is passed.

Shares application A/c _______________________ Dr (with amount refunded)
To Bank a/c
b) Allotment of surplus applications on pro-rata basis (and calls in advance):
h In this case, shares are allotted on proportionate basis (pro - rata basis).
Example, If 10,000 shares are issued by company & 12,000 applications are
received from the public then company can allot shares in the proportion of
12:10. If any shareholder has applied for 36 shares then he will be allotted 30
shares on pro-rata basis.
h Surplus application money is not refunded. But it is adjusted against allotment
money due.
h When money is adjusted against money due on allotment then entry will be as
follows :
Share application a/c ______________________ Dr
To Share allotment A/c
h If after adjustment with allotment money, still surplus money is remaining then
such surplus should be refunded to shareholders. But sometimes such money
is adjusted against first call & final call. In such case, amount is transferred to
calls – in advance a/c.

Forfeiture Of Shares :
 Forfeiture of shares result in reduction of share capital and therefore the share
capital account should be debited with the amount called up on these shares so
far.
 The various unpaid calls account should now be cancelled and therefore they
should be credited and the balance representing the amount received on the
shares forfeited should be credited to a new account termed as “Forfeited Shares
Account.”

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 Day - 4 : Issue of shares

Particulars Journal Entry Amount

Case I :
When shares are is- Share capital a/c ___________ Dr With money called up
sued at par To share forfeiture a/c With money received
To calls - in - arrear a/c With amount due

Case II :
When shares are is- Share capital a/c ___________ Dr With money called up
sued at discount To share forfeiture a/c With money received
To calls - in - arrear a/c With amount due
To discount on issue With amount of discount
of share a/c

Case III :
When shares are is- Share capital a/c-----Dr With money called up
sued at premium ( To share forfeiture a/c With money received
premium is received)
To calls-in-arrear a/c With amount due
Case IV :
When shares are is- Share capital a/c___________ Dr With money called up
sued at premium ( Share premium a/c_________ Dr With amount of premium
premium is not re-
To share forfeiture a/c With money received
ceived)
To calls-in-arrear a/c With amount due

Remember this
Forfeited shares a/c is shown on
liability side of balance sheet in
addition to paid up share capital
till it is re - issued.

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Re -Issue Of Forfeited Shares :

Important Points :
 If forfeited shares are re-issued the amount in the forfeiture account is transferred
to capital reserve a/c.
 If forfeited shares are issued at discount then discount represents loss on reissue,
it is debited to forfeited shares a/c. then amount remaining is transferred to capital
reserve.
 Amount of discount cannot exceed amount standing in the forfeited shares a/c.

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 Day - 4 : Issue of shares

Accounting entries :
While passing accounting entries regarding reissue of forfeited shares the following
points should be taken into account:
i) The amount at which they are taken as paid up on reissue.
ii) The amount that had already been received on the shares forfeited.
iii) The amount allowed as discount.

The journal entry will be :

Bank A/c ______________ Dr (with the amount received)
Forfeited shares A/c ___________ Dr (with the discount allowed)
To share capital A/c (with the amount taken as paid up)

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Reissue of forfeited shares originally issued at premium :

 It is not necessary that if the shares were originally issued at premium, their
reissue after forfeiture should also be at premium or that the premium should
be at the same rate. However, if any premium is received, the amount should be
credited to the “Securities Premium Account”.

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 Day - 4 : Issue of shares

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Problems
?
of forfeiture

Q uestion 1
500 Shares of Rs.. 20 each issued at 5% discount are forfeited for non-pay-
ment of allotment and final call money @ Rs.. 9 and Rs..5 respectively.
Amount credited to Shares forfeited A/c is
(a) Rs.. 2,000 (b) Rs.. 2,500
(c) Rs.. 3,000 (d) Rs.. 7,000

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 Day - 4 : Issue of shares

Q uestion 2
A Shares of Rs.. 100 each is forfeited for non-payment of allotment money
of Rs.. 50 (including premium Rs.. 20) and First and final call of Rs.. 20.
Amount credited to Shares forfeited account will be
(a) Rs.. 50 (b) Rs.. 30
(c) Rs.. 20 (d) Rs.. 80

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Problems Of Reissue

Q uestion 3
R Ltd. forfeited 300 equity shares of Rs. 10 fully called-up, held by Mr. X
for non-payment of first call of Rs. 2 and final of Rs. 3 each. However, he
paid application money @ Rs. 2 per share and allotment money @ Rs. 3 per
share. These shares were reissued at Rs. 20 each. Amount to be transferred
to Capital Reserve Account = ?
(A) 1,500
(B) 3,000
(C) 600
(D) 900

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 Day - 4 : Issue of shares

Q uestion 4
R Ltd. forfeited 300 equity shares of Rs. 10 fully called-up, held by Mr. X
for non-payment of first call of Rs. 2 and final of Rs. 3 each. However, he
paid application money @ Rs. 2 per share and allotment money @ Rs. 3 per
share. These shares were reissued at Rs. 7 each. Amount to be transferred
to Capital Reserve Account = ?
(A) 1,500
(B) 3,000
(C) 600
(D) 900

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Q uestion 5
X Ltd. forfeited 200 equity shares of Rs. 10 each, Rs. 8 called-up for non-pay-
ment of first call money @ Rs. 2 each. Application money @ Rs. 2 per share
and allotment money @ Rs. 4 per share have already been received by the
company. Out of these 150 share were reissued at 7 per share (face value)
as showing Rs. 8 paid up. On reissue amount to be transferred to capital
reserve account = ?
(A) Rs. 1,200
(B) Rs. 1,600
(C) Rs. 1,050
(D) Rs. 750

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 Day - 4 : Issue of shares

Q uestion 6
X was issued 100 shares of Rs. 10 each at a premium of Rs. 1, he paid ap-
plication money which in total amounted to Rs. 5 (excluding premium) and
failed to balance call money of Rs. 5. Find the maximum discount that can
be given at the time of re-issue of shares.
(A) Rs. 2
(B) Rs. 4
(C) Rs. 6
(D) Rs. 5

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Pr0blems Of Prorata

Q uestion 7
A ltd. had allotted 20,000 Shares to the applicants of 28,000 Shares on
pro-rata basis. The amount payable on application is Rs.. 2. M applied for
420 Shares. The number of Shares allotted and the amount carried forward
for adjustment against allotment money due from Mr. X will be –
(a) 60 Shares, Rs.. 120 (b) 340 Shares, Rs. 160
(c) 320 Shares, Rs.. 200 (d) 300 Shares, Rs.. 240

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 Day - 4 : Issue of shares

Q uestion 8
bittu ltd issued 10,000 Shares of Rs.. 10 each to public. Applications were
received for 12,000 shres by paying Rs.. 2 per Shares. Shares were allotted
on pro-rata basis to the public and excess money was kept to be used in
allotment and further calls. Kittu failed to pay the money of Rs.. 3 per Shares
and her 1,000 Shares were forfeited after due notice. No further calls were
made to her. Her call in arrear Rs. was
(a) Rs.. 3,000 (b) Rs.. 2,800
(c) Rs.. 2,600 (d) Rs.. 2,400

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Concept Of Dividend

Q uestion 9
The following information pertains to X Ltd.
Called-up share capital = Rs. 5,00,000
Calls-in-arrear = Rs. 40,000
Calls-in-advance = Rs. 25,000
Proposed dividend = 15%
The amount of dividend payable is _____
(A) Rs. 75,000
(B) Rs. 72,750
(C) Rs. 71,250
(D) Rs. 69,000

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 Day - 4 : Issue of shares

Problems Of Consideration Other Than Cash

Q uestion 10
A Ltd. acquired assets worth Rs. 75,00,000 from H Ltd. by issue of shares of
Rs. 10 @ discount of 25%. The number of shares issued to settle the purchase
consideration will be —
(A) 5,70,000 shares
(B) 7,12,500 shares
(C) 84,375 shares
(D) none

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