Accounting for Share Capital

Previous Lesson: Share Capital

Accounting for Share Capital starts when a company offers shares to the general public. Persons desirous of becoming shareholders of the company apply to the company for the purchase of a certain number of shares. This application is to be given on the prescribed form.

Practice Share Capital MCQs

These applications are given to banks approved by the company. Each application must be accompanied with the total amount of the value of shares applied for. After the last date of application has expired, the company gets information from all branches of approved banks about the total number of shares applied for and the total amount along with applications. This amount may be called the application money.

If the amount thus collected is equal or more than the amount of minimum subscription stated in the prospectus, the company proceeds to allot shares to the applicants. If share applications have been received in excess of the number of shares offered by the company, the issue is said to be over-subscribed and the oversubscribed amount is returned to the applicants. The decision to allot shares is communicated to applicants by a letter known as the letter of allotment. These letters are signed by applicants and returned to the company on the basis of which the company prepares share certificates and these share certificates are sent to the applicants, who are now shareholders of the company.

>>> Practice Joint Stock Company MCQs

Accounting for Issue of Shares

In the process of raising its minimum subscription, a company invites applications. When the minimum subscription has been raised, the company proceeds to allot the shares. An application for shares is an offer and the allotment is an acceptance. The allotment of shares is an act of the company by which an applicant for shares becomes the holder of the shares.

Over-Subscription

If the issue is over-subscribed, a certain formula is used to allot the shares. For example, applications for 10 shares may be allotted 50%; applicants for 100 shares may be allotted 25 % of the shares applied for, and so forth. Thus the excess amount is returned to the applicants. After finalizing the allotment the company informs the banks of the bases of refund, and the bankers refund the money accordingly.

>>> Read Formation of Company

Example # 1:

First or Initial Issue with Full and Over-Subscription

Alamzeb Industries Ltd. was registered with an authorized capital of Rs. 1000,000 divided into 100,000 ordinary shares of Rs. 10 each. The minimum subscription limited stated in the memorandum was Rs. 600,000. The company offered 60,000 shares of Rs. 10 each at par value on July 1^st, 2019.

Requirement: Record the above transactions in the books of the company and show how it will be shown in the Balance Sheet of company if:

(a) Applications for exactly 60,000 shares were received.

(b) Applications for 75,000 shares were received. .

Solution: (a)

Solution: (b)

>>> Read Current Assets

Example # 2:

(Share taken by the Directors)

Afaq Hussain Corporation limited was formed with an authorized capital of 50,000 shares of Rs. 100 each. 7,000 shares were issued to the directors on 15^th December, 2019 and 20,000 shares were offered to the public for subscription. The applications were received for full offered shares. The shares were allotted to the applications on 25^th of December, 2019.

Solution:

>>> Read Current Assets

Example # 3:

(Shares Issued to Promoters)

Areej Hafeez Limited Company was registered with an authorized capital of Rs. 5,000,000 divided into 500,000 shares of worth Rs. 10 each. On Feb 1^st, 2020, 20,000 shares were issued to promoters in connection with their services and preliminary expenses paid by them. 30,000 shares were also offered to the general public for subscription. Applications were received for 40,000 shares on 15^th Feb 2020. On 25^th Feb 2020 shares were allotted to the applicants of 30,000 shares and excess application money was refunded.

Requirement: Pass the Journal Entries and show how they would appear in the Company’s Balance Sheet at the end of February 2020.

Solution:

>>> Read Current Assets

Example # 4:

(Shares Issued to Underwriters)

On November 1^st, 2019 Waqar Ahmad & Co. Ltd. having authorized share capital of worth Rs. 1,000,000 (100,000 numbers of shares @ 10 each); Offered 20,000 ordinary shares @ 10 each for public subscription. On November 15^th, it is made known to the company that applications were received for 15,000 ordinary shares. The 5,000 share not taken by the general public and as per agreement, taken up by the underwriters, on November 25^th, 2019, the company allotted the shares.

Requirement: Pass Journal Entries and prepare Balance Sheet as on November 2019.