UNIT 1 CORPORATE ACCOUNTING
1Q) NATURE & SCOPE OF CORPORATE ACCOUNTING
Corporate accounting, also known as financial accounting, is the process of recording, classifying, reporting, and analyzing financial transactions of a company.
2Q) ACCOUNTING STANDARDS
Accounting standards are formal guidelines that govern how financial transactions and reporting should be conducted. These standards ensure consistency, reliability, and comparability of financial statements across different organizations and jurisdictions.
Types of Accounting Standards:
1. Generally Accepted Accounting Principles (GAAP)
2. International Financial Reporting Standards (IFRS)
3. Financial Accounting Standards Board (FASB)
4. International Accounting Standards Board (IASB)
5. Accounting Standards Codification (ASC)
- Enhances Transparency: Provides a clear view of financial health to stakeholders.
- Facilitates Comparability: Helps investors and analysts compare financial statements across companies and industries.
- Improves Accountability: Ensures organizations adhere to ethical reporting practices.
- Reduces Fraud Risk: Standardized practices help deter and detect financial misreporting.
Overall, accounting standards play a vital role in the financial reporting landscape, promoting trust and integrity in financial markets.
3Q) STATE THE CONDITIONS MUST BE FULFILLED FOR REDEMPTION OF PREFERENCE SHARES & DEBENTURES
To redeem preference shares and debentures, certain conditions typically need to be fulfilled. Here’s a summary:
For Preference Shares:
1. Authorized by Articles: The company’s articles of association must permit the redemption of preference shares.
2. Solvency Test: The company must be solvent, meaning it can pay its debts as they become due.
3. Payment from Profits: Redemption should generally be made from accumulated profits or out of the proceeds of a fresh issue of shares.
4. Special Resolution: A special resolution may be required if the redemption involves capital.
5. Notice to Shareholders: Shareholders should be informed about the redemption process.
6. Compliance with Legal Requirements: Adherence to applicable laws and regulations governing the redemption of shares.
For Debentures:
1. Terms of Issue: The terms of the debenture must allow for redemption. This includes specific conditions like redemption dates and methods.
2. Sufficient Funds: The company must have adequate funds to pay off the debenture holders.
3. Notification: Debenture holders must be given notice as per the terms of the debenture for any redemption.
4. Legal Compliance: The redemption must comply with any relevant laws, including company and securities laws.
5. Meeting Conditions Precedent: Any conditions stipulated in the debenture agreement (e.g., payment of dividends or interest) must be satisfied before redemption.
6. Board Approval: The redemption usually requires board approval.
General Considerations:
- Ensure that all documentation and records are maintained properly.
- The redemption process should be transparent to avoid disputes.
Always check the specific legal framework governing the company and the jurisdiction, as these conditions can vary.
4Q) ISSUE OF SHARES
The issue of
shares is the procedure by which enterprises allocate new shares to the
shareholders. Shareholders can be either corporations or individuals. The
enterprise follows the rules stipulated by the Companies Act 2013 while
circulating the shares. The Issue of Prospectus, Receiving Applications, and
Allocation of Shares are 3 key fundamental steps of the process of issuing the
shares.
A noticeable
feature of the company’s capital is that the amount on
its shares can be progressively collected in simple installments that are
spread over a time frame relying upon its enhancing financial obligation. The
1st installment is collected with the application and is hence, called
application money, the 2nd is on allocation (termed as allocation or allotment
of money), and the 3rd installment is known as a 1st call, 2nd call, and so on.
The word-final is suffixed to the final installment. This procedure, in no way,
prevents an enterprise from calling the entire amount on shares during the
period of application.
STEPS INVOLVED IN ISSUE OF
SHARES
When the
Company has been registered, the following procedure is adopted by the company
to collect money from the public by issuing shares:
Step-1
·
Issue of prospectus: When a Public company intends to raise capital by issuing
its shares to the public, it invites the public to make an offer to buy its
shares through a document called ‘Prospectus’.
·
According to Section
60 (1), a copy of the prospectus is required to be delivered to the Registrar
for registration on or before the date of publication thereof.
·
It contains brief
information about the company, its past record, and of the project for which
the company is issuing shares.
·
It also includes the
opening date and the closing date of the issue, the amount payable with the
application, at the time of allotment and on calls, the name of the bank in
which the application money will be deposited, the minimum number of shares for
which the application will be accepted, etc.
Step-2
·
To receive
application: After reading the prospectus if the public is satisfied then they
can apply to the company for the purchase of its shares on a printed prescribed
form.
·
Each application form
along with application money must be deposited by the public in a scheduled
bank and get a receipt for the same.
·
The company cannot
withdraw this money from the bank till the procedure of allotment has been
completed (in the case of the first allotment, this amount cannot be withdrawn
until the certificate to commence business is obtained and the amount of
minimum subscription has been received).
·
The amount payable on
application for a share shall not be less than 5% of the nominal amount of the
share.
Step-3
·
Allotments of shares:
Allotments of shares mean acceptance by the company of the offer made by the
applicants to take up the shares applied for.
·
The information of
allotment is given to the shareholders by a letter known as an ‘Allotment
Letter’, informing the amount to be called at the time of allotment and the
date fixed for payment of such money.
·
It is on allotment
that shares come into existence. Thus, the application money on the share after
allotment becomes a part of the share capital.
·
The decision to allow
the share is taken by the I Board of Directors in consultation with the Stock
Exchange. After the closure of the subscription list, the bank sends all
applications to the company.
·
On receipt of
applications, each application is carefully scrutinized to ascertain that the
application form is properly filled up and signed and that the money is
deposited with the bank.
Step-4
·
To make calls on
shares: The remaining amount left after application and allotment money due
from shareholders may be demanded in one or more parts which are termed as
‘First Call’ and ‘Second Call’ and so on.
·
A word ‘Final’ word is
added to the last call. The amount of call must not exceed 25% of the nominal
value of the shares and at least 1 month has elapsed since the date which was
fixed for the payment of the last preceding call, for which at least 14 days
notice specifying the time and place must be given.
ACCOUNTING TREATMENT FOR ISSUE OF SHARES:
A company
can issue shares in two ways:
·
For cash.
·
For consideration
other than cash.
A) ISSUE OF SHARES FOR CASH: When the shares are issued by the company in consideration
for cash such issue of shares is known as issue of share for cash.
In such a
case shares can be issued at par or at a premium or at a discount. Such issue
price may be payable either in lump sum along with the application or in
installments at different stages (e.g. partly on application, partly on
allotment, partly on call).
ISSUE OF SHARES
AT PAR: Shares are said to be issued at
par when they are issued at a price equal to the face value. For example, if a
share of Rs. 10 is issued at Rs. 10, it is said that the share has been issued
at par.
ISSUE OF SHARES
AT A PREMIUM: When shares are issued at an
amount more than the face value of the share, they are said to be issued at a
premium.
For example, if a share of Rs. 10 is issued at Rs. 15; such
a condition of the issue is known as the issue of shares at a premium. The difference
between the issue price and the face value [i.e. Rs. 5 (Rs.15 – Rs.10)] of the
shares is called premium.
It is a capital profit for the company and will show a
credit balance; hence it will be shown on the liability side of the Balance
Sheet under the heading ‘Reserves and Surplus’ in a separate account called
‘Security Premium Account’.
Shares of those companies can be issued at a premium which
offers an attractive rate of dividends on their existing shares, having a good
profit track for the last few years, and whose shares are in demand.
The amount of premium depends upon the profitability and
demand of shares of such a company.
Note: The Company may collect the amount of security premium in
a lump sum or in installments. Premium on shares may be collected by the
company either with application money or with the allotment money or even with
one of the calls. In the absence of any information, the amount of the premium
is to be recorded with allotment.
ISSUE OF SHARES
AT DISCOUNT: Shares are said to be issued
at a discount when they are issued at a price lower than the face value.
For example, if a share of Rs. 10 is issued at Rs. 9, it is said that
the share has been issued at a discount. The excess of the face value over the
issue price [i.e. Re.1 (Rs. 10 – Rs. 9)] is called the amount of discount.
Share discount account showing a debit balance denotes a
loss to the company which is like capital loss. Therefore, it is desirable, but
not compulsory, to write it off against any Capital Profit available or Profit
and Loss Account as soon as possible, and the unwritten off part of it is shown
in the asset side of the Balance Sheet under the heading of ‘Miscellaneous
Expenditure’ in a separate account called ‘Discount on issue of Shares
Account’.
Conditions for
issue of shares at discount: For the issue
of shares at a discount, the company has to satisfy the following conditions
given in section 79 of the Companies Act 1956:
(i) At least one year must have elapsed since the company
became entitled to commence business. It means that a new company cannot issue
shares at a discount at the very beginning.
(ii) The company has already issued such types of shares.
(iii) An ordinary resolution to issue the shares at a
discount has been passed by the company in the General Meeting of shareholders
and sanction of the Company Law Tribunal has been obtained.
(iv) The resolution must specify the maximum rate of
discount at which the shares are to be issued but the rate of discount must not
exceed 10% of the face value of the shares. For more than this limit, sanction
of the Company Law Tribunal is necessary.
(v) The issue must be made within two months from the date
of receiving the sanction of the Company Law Tribunal or within such extended
time as the Company Law Tribunal may allow.
JOURNAL ENTRIES:
(i) Receipt of Share Money in One Installment
:
The company may receive the share money in one installment along with application. In this case the following journal entries are made in the books of the company
1.On Receipt of Application Money
Bank A/c Dr.
To Share Application A/c
(Application money received on ….shares of `…each)
2. On transferring the Application Money
Share Application A/c Dr.
To Share Capital A/c
(Application money transferred to share capital A/c)
(ii) Share Money Received in Two or More Installments: Instead of receiving payment in one installment i.e. at the time of application the company collects it in two or more installments. The first, installment which the applicants have to pay along with the applications for shares is known as application money. On the allotment of shares the allottees are required to pay the second installment which is termed as allotment money. If the company decides to call the share money in more than two installments the other installment is/are termed as call money (i.e. first-call, second call or final call).
In the above case the transactions are recorded in journal as given below:
(a) On Receipt of Application Money
Bank A/c Dr.
To Share Application A/c
(Receipt of share application money for …. Shares @ `.. per share)
(b) On Allotment of Shares: After receiving the application for shares within the prescribed time, the Board of Directors of the company proceed to allot shares. On allotment of shares the application money is transferred to Share Capital A/c. For this the following journal entry is made :
Share Application A/c Dr.
To Share Capital A/c
(Share application for …. Shares @ `… per share transferred to share capital A/c)
Allotment Money Becoming Due and Received On the allotment of shares the amount receivable on the next installment i.e. on allotment becomes due. The following entry is made for recording the amount due:
(i) Allotment money becoming due
Share Allotment A/c Dr.
To Share Capital A/c
(Share allotment money due on …. shares @` ...
per share)
(ii) Receipt of allotment money
On the receipt of share allotment money the following journal entry is made:
Bank A/c Dr.
To Share Allotment A/c
(Receipt of the amount due on allotment of … shares)
Calls on Shares After the receipt of application and allotment money the money that remains unpaid can be called up by the company as and when required. Thus a call is a demand made by the company asking the shareholders to remit the called up amount on shares allotted to them.
The company may demand the remaining money in more than two installments. The amount called after the allotment is known as call money. There may be one or more calls, depending on the fund requirements of the company. When only one call is made and Call Money is Due:
Share First and Final Call A/c Dr.
To Share Capital A/c.
(Call money due on …. share @ ` … per share).
Receipt of Call Money
The following journal entry is made for receipt of call money:
Bank A/c Dr.
To Share First & Final call A/c
(call money due on … shares @ ` ... per share received)
Note: If the company makes more than one call the same accounting treatment is followed for recording the second call or third call money due and their receipt. The last call made is termed as final call.
B) ISSUE OF SHARES FOR CONSIDERATION OTHER
THAN CASH
Sometimes shares are issued to the promoters of the company in lieu of the services provided by them during the incorporation of the company. The issue price of these shares is normally debited to ‘Goodwill A/c’ and journal entry is made as follows:
Goodwill A/c Dr.
To Share Capital A/c
In case a company does not have sufficient funds for the purchase of fixed assets or for payment to creditors it may offer and allot its shares to vendors/ creditors in place of cash. Any allotment of shares against which cash is not to be received is called an ‘issue of shares for consideration other than cash’. For example building is purchased and payment is made by issuing shares. In case of the purchase of assets like building, machinery, stock of materials, etc. the following journal entry is made:
1. Assets A/c Dr.
To Vendors/Creditors A/c
(Assets purchased)
2. Vendors/Creditors A/c Dr.
To Share Capital A/c
(Issue of shares of
`…….each fullly paid up)
SUBSCRIPTION OF SHARES
Accounting for the issue of shares depends upon the type of
subscription. Whenever a company decides to issue shares to the public, it invites
applications for subscription by issuing a prospectus. Company doesn't need to receive applications
for the number of shares to be issued by it.
Full
subscription of shares: The company may receive applications equal to the number of shares the company has offered to
people. It is called a full subscription. In case of a full subscription the
journal entries will be made as follows:
(a) On receipt of application money
Bank A/c
Dr
To Share Application A/c
(Application money
received for ......... shares)
(b) On allotment of
shares
Share Application A/c Dr
To Share Capital A/c
(Application money of
shares transferred to capital A/c on their allotment)
Under-subscription
of shares: The issue
is said to have been under-subscribed when the company receives applications
for less number of shares than offered to the public for subscription. In this
case, company is not to face any problem regarding allotment since every
applicant will be allotted all the shares applied for. But the company can
proceed with allotment provided the subscription for shares is at least equal
to the minimum required number of shares termed as minimum subscription.
Over-subscription of shares: When the company receives applications for more shares than the
number of shares offered to the public for a subscription it is a case of over-subscription. A company cannot allot more shares than what it has offered.
SEBI GUIDELINES ON THE ISSUE OF SHARES:
SEBI, the Securities and Exchange Board of India, has established
comprehensive guidelines governing the issuance of shares by companies. These
guidelines ensure transparency, fairness, and investor protection in the Indian
capital markets. Here are some key aspects covered by SEBI guidelines on the
issue of shares:
1. SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2018: These regulations provide a framework for various types of
capital issuances by companies, including initial public offerings (IPOs),
follow-on public offerings (FPOs), rights issues, preferential allotments, and
qualified institutional placements (QIPs). They specify the eligibility
criteria, disclosure requirements, pricing guidelines, allotment procedures,
and other aspects of share issuance.
2. Disclosure Requirements: SEBI mandates extensive
disclosure requirements to ensure that investors have access to all material
information about the company and the proposed issue. Companies are required to
disclose information regarding their business operations, financial performance,
risk factors, use of proceeds, management, and other relevant details in the
offer document or prospectus.
3. Eligibility Criteria: SEBI sets eligibility criteria
for companies intending to make public offerings or other share issuances.
These criteria may include minimum net worth, track record of profitability,
minimum promoter contribution, and other financial and operational requirements
to ensure the credibility and viability of the issuing company.
4. Pricing Guidelines: SEBI prescribes pricing guidelines
for different types of share issuances to prevent underpricing or overpricing
of shares and protect the interests of investors. Pricing methodologies may
vary depending on the type of issuance, such as book-building process for IPOs
and FPOs, floor price for rights issues, and pricing norms for preferential
allotments and QIPs.
5. Allotment and Listing: SEBI regulations govern the
allotment process and listing of shares on stock exchanges. Companies are
required to adhere to prescribed timelines for allotment and listing
post-closure of the issue. SEBI also monitors compliance with post-listing
requirements, including continuous disclosures and corporate governance
standards.
6. Prohibition of Insider Trading and Market Manipulation:
SEBI guidelines prohibit insider trading and market manipulation in connection
with share issuances. Companies, promoters, directors, key managerial
personnel, and other insiders are required to comply with insider trading
regulations and disclose any material information that could impact the share
price.
7. Investor Protection Measures: SEBI emphasizes investor
protection through measures such as ensuring fair disclosure, transparency, and
accountability in share issuances. Investors are provided with mechanisms to
seek redressal in case of any grievances or non-compliance with regulatory
requirements.
These are some of the key aspects covered by SEBI
guidelines on the issue of shares, which aim to promote integrity, efficiency,
and stability in the Indian capital markets. Companies and market participants
are required to comply with these regulations to maintain market integrity and
investor confidence.
ACCOUNTING TREATMENT ON OVER SUBSCRIPTION OF SHARES:
In case of over-subscription, the company has the following options:
Option I
(i) Rejection of Excess Applications and Money Returned: The company may
reject the applications for shares above the shares offered for issue
and a letter of rejection is sent to such applicants. In this case, the
application money received from these applicants is refunded to them in full.
The journal entry made is as follows:
Share Application
A/c
Dr.
To Bank A/c
(Application money on
… shares refunded to the applicants)
(ii) Excess application money adjusted towards sums
due on allotment. Journal entry made is :
Shares Application A/c Dr.
To Share Allotment A/c
(Excess application
money adjusted towards sums due on allotment)
If the application
money received on partially accepted applications is more than the amount
required for adjustment towards allotment money, the excess money is refunded.
However, if the Articles of the company so authorize, the directors may retain
the excess money as calls in advance to be adjusted against the call/ calls
falling due later on, and the following entry is made :
Share Application
A/c
Dr.
To Call-in-advance
A/c
(The adjustment of
excess share application money retained as call-in-advance in respect of ...
shares)
Option II
Partial Acceptance of Applications
In some cases, the company accepts the
applications for subscription partially. It means that the company does not
allow the full number of shares applied for. For example, if an applicant has
applied for 5000 shares and is allotted only 2000 shares, then the application
is said to have been partially accepted. The company may evolve some formula of
accepting applications partially or making proportionate allotment/ the Prorata
allotment which means that the applicants are allotted shares proportionately.
In such a case the company adjusts the excess share money received on
application towards share allotment money due on partially accepted
applications. The journal entry recording the adjustment of application money
towards share allotment money is as under :
Share Application A/c Dr.
To Share Allotment A/c
(Share application money transferred to Share
Allotment Account in respect of ... shares)
ILLUSTRATION: Full Health Care Ltd has offered to the public
for subscription of 20000 shares of Rs. 100
each payable as Rs. 30 per share on
application, Rs. 30 per share on an allotment, and the balance on a call.
Applications were received for 30000 shares. Applications for 5000 shares were
rejected altogether and application money was returned. The remaining applicants
were allotted the offered shares. Their excess application money was adjusted
towards some due on allotment. Calls were made and duly received. Make journal
entries in the books of the company.
Solution :
Full
Health Care Ltd.
Journal
Entries
|
Date |
Particulars |
L.F |
Debit |
Credit |
|
1
2
3
4
5
6 |
Bank A/c
Dr. To
Share Application A/c (Application
money received for 30000 shares @ 30
per share) Share
Application A/c Dr. To Share Capital A/c To Bank A/c To Share Allotment A/c (Application money of 20000 shares
transferred to share capital A/c on their allotment. That of 5000 shares
returned and of 5000 shares adjusted towards sum due on allotment) Share
Allotment A/c Dr. To Share Capital A/c. (Allotment
money due) Bank
A/c
Dr. To Share Allotment A/c. (Allotment money received)
Share First and Final call A/c. Dr. To Share Capital A/c (Call money due) Bank A/c
Dr. To Share First and Final call A/c. (Call money received)
|
|
9,00,000
9,00,000
600000
4,50,000
8,00,000
8,00,000 |
9,00,000
6,00,000 1,50,000
1,50,000
600000
4,50,000
8,00,000
8,00,000 |
CALLS
IN ADVANCE AND CALLS IN ARREARS
If a shareholder pays any amount to the company
before it is demanded, it is called Calls-in-Advance. This amount is put in a
separate account known as Calls-in-Advance A/c. This amount is not shown as
capital of the company, till such time the company makes a demand from all the
shareholders. Call-in-Advance A/c is shown on the liabilities side of the
Balance Sheet. For example, if a company issued shares of Rs. 10 on which it has
already called Rs.5. Against the uncalled portion of Rs. 5 per share the
company makes a call Rs.3 per share, the entry for call money due will be made
only for Rs. 3 per share. Now suppose a shareholder pays Rs.5 per share
including the uncalled amount of Rs.2 per share along with the call money, it
means he has paid Rs.2 per share in advance, which will be credited to calls in
Advance A/c. The company is required to pay interest on this amount @ 6% till
the date of its appropriation.
Accounting Treatment
Following
journal entry is made for calls-in-advance.
Bank
A/c Dr
To
Calls-in-Advance A/c
(Calls
in advance received on…….shares @ ` …….per share)
Appropriation
of calls-in-Advance A/c say in the final call Journal entry will be :
Calls-in-Advance
A/c
Dr
To
Share Final call A/c
(Calls
in advance amount adjusted)
For
interest given on Calls-in-Advance journal entry will be:
Interest
on calls-in-Advance A/c
Dr
To Bank A/c
(Interest
paid on the amount of Call-in-Advance)
CALLS IN ARREARS
When
the company sends notice to the shareholders to pay allotment and /or call
money, it has to be paid by them within the specified time period. If it is not
paid by any one or more of the shareholders, the unpaid amount becomes arrears
due from them. Such arrears are transferred to an account termed as
Calls-in-Arrears A/c. The company is authorised to charge interest on
calls-in-Arrears @ 5% p.a. for the intervening peroid. (The period between date of non-receipt of the
due amount and the date of actual receipt of the due amount)
Accounting Treatment
The
following journal entry is made to record Calls-in-Arrears:
Calls-in-Arrears
A/c
Dr
To Share Allotment/Call A/c
(Share
allotment/ Call money not received on …. shares)
When
the unpaid balance is received later on the following journal entry is made:
Bank
A/c
Dr.
To Calls in Arrears A/c
(Amount
due on allotment/ call remaining unpaid now received on…… shares.)
The
company may charge interest on the amount of calls in arrears at a given rate
from the date of amount due till it is paid journal entry will be
Bank
A/c Dr.
To Interest on calls in arrears A/c
5Q) ISSUE OF DEBENTURES:
The issue of debentures involves several key steps and considerations. Here’s an overview:
1. Definition
Debentures are long-term securities that represent a loan made by investors to a borrower (typically a company). They are issued to raise capital and usually pay a fixed rate of interest.
2. Types of Debentures
Convertible Debentures: Can be converted into equity shares after a specified period.
Non-Convertible Debentures: Cannot be converted into equity; only repayable in cash.
Secured Debentures: Backed by specific assets of the company.
Unsecured Debentures: Not backed by any collateral.
3. Steps for Issuing Debentures
1. Board Approval: The company’s board of directors must approve the issue, often through a resolution.
2. Drafting the Debenture Trust Deed: This document outlines the terms of the debentures, including interest rate, maturity date, repayment terms, and covenants.
3. Compliance with Legal Requirements:
- Ensure compliance with company laws and securities regulations.
- Obtain any necessary approvals from regulatory authorities.
4. Valuation (if required): If the debentures are to be convertible, a valuation might be needed to determine the conversion price.
5. Offering Document: Prepare a prospectus or offering document that provides details about the debentures, including risks, terms, and the use of proceeds.
6. Marketing the Issue: Promote the debenture issue to potential investors, which may include institutional investors, banks, or the public.
7. Subscription Process: Investors subscribe to the debentures during the issue period.
8. Allotment of Debentures: Allot debentures to subscribers and issue certificates.
9. Interest Payments: Ensure timely payment of interest to debenture holders, as specified in the terms.
10. Redemption: Prepare for the eventual redemption of the debentures at maturity, ensuring funds are available for repayment.
4. Considerations
Interest Rates: Set competitive interest rates to attract investors.
Credit Rating: A credit rating can enhance the attractiveness of the debenture issue.
Market Conditions: Be aware of market conditions that may affect investor appetite.
5. Documentation
- Debenture certificates
- Trust deed
- Prospectus
- Board resolutions
6. Regulatory Framework
Ensure adherence to local regulations regarding disclosure, reporting, and the rights of debenture holders.
Issuing debentures can be an effective way for companies to raise funds while managing their capital structure. Always consult with legal and financial advisors to navigate the complexities of the process.
6Q) ISSUE OF PREFERENCE SHARES:
Issuing preference shares is a way for companies to raise capital while providing specific rights to shareholders. Here’s an overview of the process and considerations involved:
1. Definition
Preference shares are a class of shares that typically offer fixed dividends and have a higher claim on assets than ordinary shares in the event of liquidation. They may have preferential rights regarding dividends and redemption.
2. Types of Preference Shares
- Cumulative Preference Shares: Unpaid dividends accumulate and must be paid before any dividends are paid to ordinary shareholders.
- Non-Cumulative Preference Shares: Dividends do not accumulate if not declared.
- Convertible Preference Shares: Can be converted into ordinary shares after a specified period.
- Redeemable Preference Shares: Can be redeemed by the company at a later date.
3. Steps for Issuing Preference Shares
1. Board Approval: The board of directors must pass a resolution to issue preference shares.
2. Amendment of Articles (if necessary): If the company’s articles of association do not allow for the issuance of preference shares, they may need to be amended.
3. Drafting the Terms: Clearly outline the terms of the preference shares, including:
- Dividend rate
- Redemption terms (if applicable)
- Voting rights (if any)
- Liquidation preference
4. Regulatory Compliance: Ensure compliance with company laws and securities regulations, which may include obtaining approval from regulatory authorities.
5. Offering Document: Prepare a prospectus or offering document that details the offering, including the purpose, risks, and terms of the shares.
6. Marketing the Issue: Promote the preference share offering to potential investors, which may include institutional investors or the public.
7. Subscription Process: Allow investors to subscribe during the offering period.
8. Allotment of Shares: Once subscriptions are received, allot preference shares to investors and issue share certificates.
9. Dividend Payments: Ensure timely payment of dividends as specified in the terms.
10. Redemption (if applicable): Prepare for the redemption of preference shares at the end of the specified period, ensuring sufficient funds are available.
4. Considerations:
- Dividend Rates: Set competitive rates to attract investors.
- Market Conditions: Assess market conditions to determine the best timing for the issue.
- Creditworthiness: The company’s financial health will impact investor interest and the terms of the issue.
5. Documentation:
- Share certificates
- Offering prospectus
- Board resolutions
- Any necessary amendments to articles of association
6. Regulatory Framework: Comply with local laws regarding disclosures, shareholder rights, and reporting obligations.
Issuing preference shares can provide a flexible funding option for companies, balancing the interests of investors with the company’s capital structure. Always consult with legal and financial advisors to navigate the complexities of the issuance process.
7Q FORFEITURE OF SHARES
The term ‘forfeit’ actually means taking away property in
breach of a condition. Commonly, one or more shareholders fail to pay their
allotment and/or calls on the due dates. Failure to pay call money results in
forfeiture of shares.
MEANING:
Forfeiture of shares is a process where the company
forfeits the shares of a member or shareholder who fails to pay the call on
shares or installments of the issue price of his shares within a certain period
after they fall due.
When a shareholder fails to pay any call money that
is due from him, the Company has two options:
(1) To file a suit against the defaulting
shareholder, or
(2) To forfeit his shares Generally, a Company
adopts the second remedy. The Articles of Association of almost every Company
reserve the right of forfeiture of the shares for non-payment of call money
within a stated period.
The following conditions
must be satisfied for the valid forfeiture of shares:
1. The power to forfeit shares must be expressly given in
the Articles of Association of the Company.
2. A notice must be sent to the shareholder, giving him
at least 14 days to pay the amount due. It must also state that in case of
failure, the shares will be forfeited.
3. If the Company does not receive the amount even after
notice, the Board of Directors, by passing a Resolution, forfeit the shares.
Forfeiture means taking away the right as a penalty for making a default. Thus, if a shareholder fails to pay any call money, his shares may be canceled.
EFFECT OF FORFEITURE:
1. A person whose shares have been forfeited ceases to be
a member in respect of the forfeited shares.
2. The name of such defaulted person will be struck off
from the Register of Members.
3. A person loses whatever amount he had paid to the
Company. The Company does not refund such an amount to defaulting shareholders.
Forfeiture means cancellation of the shares and to that
extent, the share capital stands reduced. Therefore, the Share Capital Account
should be debited at the rate at which it was credited. Therefore, after the
forfeiture of shares, the calls-in-arrears are not recoverable. The amount
already received on such shares is forfeited.
ACCOUNTING TREATMENT ON FORFEITURE OF SHARES:
Forfeiture of shares issued at par: When shares issued at par are forfeited the accounting
treatment will be as follows:
(i) Debit Share Capital
Account with amount called up (whether received or not) per share up to the
time of forfeiture.
(ii) Credit Share Forfeited
A/c. with the amount received up to the time of forfeiture.
(iii) Credit ‘Unpaid Calls
A/c’ with the amount due on forfeited shares. This cancels the effect of debit
to such calls which take place when the amount is made due.
The journal entry is:
Share capital A/c
Dr.
(Amount called
up)
To share forfeited A/c
(Amount paid)
To unpaid calls A/c
(Amount called but not paid)
Note:
(i) Amount called up =
No. of shares × called up per share
(ii) Amount paid = No.
of shares × Amount paid per share
(iii) Amount called but
not paid = No. of shares × Amount called but not paid per share
Illustration 1
X, a shareholder, holding 100
shares of Rs.10 each has paid application money of Rs 2 per share and allotment
money of Rs 3 per share but has failed to pay the first call of Rs 2 per share
and second call of Rs 3 per share. His
shares were forfeited. Make the journal entry to record the forfeiture of
shares.
Solution:
Journal Entry
|
Date |
Particulars |
L.F |
Debit Rs |
Credit Rs |
|
|
Share Capital A/c (100 × Rs 10) Dr. To Share forfeited A/c (100 × Rs 5) To Share First Call A/c (100 × Rs 2) To Share Second and Final Call A/c (100 × Rs
3) (forfeiture of 100 shares) |
|
1,000 |
500 200 300 |
ILLUSTRATION 2
Alpha
Ltd. issued 10000 shares of 100 each payable as:
Rs. 25
on application.
Rs 25 on allotment
Rs .20 on First call and
Rs 30 on second and final call
9000 shares were applied for and allotted. All
the payments were received with the exception of allotment money, first call
and second and final call money on 300 shares allotted to Ganesh. The Board of
Directors decided to forfeit these shares. Make journal entry to record
transaction relating to forfeiture of shares.
Solution:
Journal Entry
|
Date |
Particulars |
L.F |
Debit
Rs |
Credit Rs |
|
|
Share Capital A/c (300 × Rs 100) Dr. To Share forfeited A/c (300 × Rs 25) To Share allotment A/c (300 × Rs 25) To
Share first call A/c (300 × Rs 20)
To Share second call A/c (300 × Rs 30) (300 shares of ` 100 each forfeited due to
non payment of allotment money and calls money) |
|
30,000 |
7,500 7,500 6,000
9,000
|
Forfeiture of shares issued at a premium: In case shares are issued at a premium
and thereafter forfeited there can be two situations:
1. Premium on shares has been
received before the forfeiture.
2. The amount of premium on
shares has not been received and it still stands credited to the Securities
Premium A/c.
1. Premium Money has
been Received Before the Forfeiture:
If the amount of premium on shares
forfeited has been received by the company before the forfeiture, securities
Premium A/c will not get affected. In this case, the journal entry of
forfeiture of shares will be similar to the entry made as if the shares had
been issued at par. The
journal entry will be:
Share Capital
A/c
Dr.
To Share forfeited A/c
To Unpaid Calls /Calls in
arrears A/c
(forfeiture of share issued at a
premium)
ILLUSTRATION
3
M.B.
Software Ltd. issued ` 500000 capital divided into equity shares of ` 10 each.
The shares were issued at a premium of ` 4 per share and were payable as: ` 3
per share on application, ` 7 (including premium) per share on the allotment,
and the balance on call. All the shares applied for and were duly allotted. All
the money was duly received except for 500 shares on which the call money was
not received. The company decided to forfeit these shares. Make a journal entry
to record the forfeiture of 500 shares.
SOLUTION:
Journal Entry
|
Date |
Particulars |
L.F |
Debit
Rs |
Credit Rs |
|
|
Share Capital A/c Dr.
To Share Forfeited A/c
To Share First & Final Call A/c (Forfeiture
of 500 shares of ` 10 each due to non
payment of call money of ` 4 per share) |
|
5,000 |
3,000 2,000 |
2. Premium on shares has not been
received and stands credited to Securities Premium A/c as due but not paid:
When a share is forfeited on which the amount of premium has been made due but
has not been received, either wholly or partially, the Securities Premium A/c
will be cancelled. At the time of making due, Securities Premium A/c will be
credited. The journal entry will be
as follows:
Share Capital A/c Dr
Securities Premium A/c Dr
To Share
Forfeited A/c
To Unpaid
call A/c.
(Forfeiture of
shares originally issued at a premium due to non payment of dues)
Illustration 4
The Latest Technology
Company Ltd. offered to the public for subscription of 50,000 shares of ` 20
each at a premium of ` 5 per share. The amount was payable as under: On
application ` 5 per share On allotment ` 12 per share (Including premium of ` 5
per share) On first call ` 4 per share On Second and Final call ` 4 per share
Applications were received for all the shares. The allotment was made to all
the applicants in full. Ashima failed to pay allotment and call money on 200
shares held by her. Reshma was allotted 300 shares. She did not pay the call
money. Their shares were forfeited. Make necessary journal entries for the
forfeiture only.
SOLUTION:
Journal Entries
|
Date |
Particulars |
L.F |
Debit
Rs |
Credit Rs |
|
1
2 |
Share Capital A/c (`200 × 20) Dr. Securities Premium A/c (`200 × 5) Dr. To
Share Forfeited A/c (`200 × 5) To Share Allotment A/c (`200 × 12) To
Share First Call A/c (`200 × 4) To Share Second and Final call A/c (`200 ×
4) (Forfeiture
of 200 shares held by Ashima who did not pay allotment and call money) Share Capital A/c
(`300 × 20) Dr. To
Shares forfeited A/c `(300 × 12) To
Share First Call A/c (`300 × 4) To
Share Second Call A/c (`300 × 4) (Forfeiture of 300 shares held by Reshma) |
|
4,000 1,000
6,000 |
1,000 2,400 800 800
3,600 1,200 1,200 |
Combined entry of the above will be as:
|
Date |
Particulars |
L.F |
Debit
Rs |
Credit Rs |
|
|
Share Capital A/c Dr. Securities premium A/c Dr. To
Share forfeited A/c To
Share Allotment A/c To
Share First Call A/c To
Share Second and Final Call A/c (Forfeiture of 200 shares held by Ashima, who
did not pay allotment and call and 300 shares of Reshma who did not pay call
money) |
|
10,000 1,000 |
4,600 2,400 2,000 2,000
|
Forfeiture
of shares issued at a discount:
Discount
on the issue of shares is a loss to the company. When shares issued at a
discount are forfeited for non-payment of dues, the discount allowed on such
shares is written back. At the time of issue of shares, the Discount on the
issue of Shares A/c is debited and when forfeited, this account is credited to
cancel the discount allowed on such shares. In this case, the following journal
entry is made:
Share
Capital A/c
Dr.
To Share Forfeited A/c
To Discount on Issue of Shares A/c
To Unpaid call A/c
(Forfeiture
of shares originally issued at a discount for non-payment of dues).
Illustration
5
The
Evergrowing Ltd. invited applications for 20000 shares of Rs. 50 each at a
discount of 10% payable as follows: On application Rs. 10 per share On
allotment Rs. 20 per share On call Rs. 15 per share. The whole of the
issue was subscribed and paid for except the calls money on 200 shares which
were forfeited by the company. Make a journal entry for the forfeiture of
shares.
Solution:
|
Date |
Particulars |
L.F |
Debit
Rs |
Credit Rs |
|
|
Share Capital A/c (`200 × 50) Dr.
To Share forfeited A/c (200 × 30)
To Discount on Issue of Shares A/c (200 × 5)
To Share First and Final call A/c (`200 × 15) (Forfeiture of 200
shares of ` 50 each issued at a discount of 10% on non payment of call money) |
|
10,000 |
6,000 1,000 3,000 |
Illustration
6
M/s
Herbal Tea Plantations Ltd. was registered with a capital of ` 1 crore divided
into equity shares of ` 100 each. The company offered to public 50000 shares at
a premium of ` 20 per share. The amount on shares was payable as: ` 25 on the
application ` 50 (including ` 20 premium) on allotment ` 20 on the first call
and ` 25 on the final call. Applications were received for 75000 shares. Shares
were allotted to the applicants on a pro-rata basis. Kanti Bhai who was
allotted 500 shares did not pay the allotment money. He also failed to pay the
first call. His shares were forfeited. Sheetal was holding 200 shares and did
not pay the first call. The final call was not made. Make journal entries in
the books of the company
Solution:
M/s
Herbal Tea Plantations Ltd
Journal
Entries
|
Date |
Particulars |
L.F |
Debit
Rs |
Credit Rs |
|
1
2
3
4
5
6
7 |
Bank A/c
Dr To
Share Application A/c (Application
money received) Share Application A/c Dr To
Equity Share Capital A/c
To Share Allotment A/c (Application
money of 50000 share transferred to share Capital A/c on their allotment and
remaining adjusted towards shares allotment) Share Allotment A/c Dr
To Equity Share Capital A/c
To Securities Premium A/c (Allotment money
due including premium) Bank A/c
Dr.
To Share Allotment A/c (Allotment money
received) Share First Call A/c Dr.
To Equity Share Capital A/c (First call money
due) Bank A/c Dr. Call-in-arrears A/c Dr
To Share First Call A/c (First call money
received of 49300 shares of 200 share debited to calls-in-arrears A/c) Share Capital A/c Dr. Securities Premium A/c Dr. To Share Forfeited A/c To Share Allotment A/c To share First Call A/c (Forfeiture of 500 shares on non- payment
of allotment and call money) |
|
18,75,000
18,75,000
25,00,000
18,56,250
10,00,000
9,86,000
4000
37,500
10,000
|
18,75,000
12,50,000 6,25,000
15,00,000 10,00,000
18,56,250
10,00,000
9,90,000
18,750 18,750 10,000 |
Working Notes:
Shares applied for 75,000
Share Allotted 50000 Ratio = 3 : 2
Number of shares holded by Kanti Bhai = 500
Number
of shares applied 500 3 2 × = 750
Excess application money received = 250 × 25
= ` 6250
Share allotment money due = 500 × `s 50 = `
25000
Net Amount due after adjustment of excess
applicaiton money = ` 25000 – ` 6250 = ` 18750
Total allotment money due = ` 2500000
Less excess application money adjusted `
625000
Less Kanti Bhai’s amount due on allotment
18750
Net Amount Received ` 1856250
Re-issue of forfeited shares
Forfeited shares may either be canceled or
reissued. Such shares once forfeited can be reissued to any person within a
reasonable time and at a reasonable price. They can be reissued at par, at a
premium, or at a discount. However, the reissue price together with the amount
already received on such shares should not be less than the called-up amount on
each share. In other words, if the forfeited shares are reissued at a discount,
the amount of discount should not exceed the amount already paid by the
defaulter. Thus, the maximum amount of discount on reissue should not be more
than the original discount (if so) plus the amount paid by the defaulter.
If a Company makes any loss on the reissue of
shares, such loss is made good by making adjustments by debiting the Forfeited
Shares Account. The balance remaining in the forfeited Share Account is a
capital profit and it must be transferred to the Capital Reserve Account.
However, it is to be noted that the amount forfeited in respect of shares, not
yet reissued, must be kept intact in the Forfeited Shares Account.
ACCOUNTING TREATMENT ON
REISSUE OF SHARES
1. Forfeited shares reissued at a discount when originally issued at
par
When shares are reissued at a discount, the bank account will be debited
by the amount received, and the share capital account is credited by the
paid-up amount. The discount allowed will be debited to the share forfeited
account.
Journal entries
Bank A/c (the amount received on reissue)
Dr.
Share Forfeited A/c (the amount allowed as a discount)
Dr.
To Share Capital A/c (paid up amount)
If the amount of discount allowed is less than the forfeited amount then
the remaining forfeited amount will be considered as a profit to the company
and accordingly transferred to the capital reserve account
Share Forfeited A/c
Dr.
To Capital Reserve A/c
(Transfer of surplus share forfeited amount to capital reserve A/c)
2. Shares reissued at par or at a premium when originally
issued at par
In this case, the whole amount that has been credited to Shares
Forfeited A/c is transferred to capital reserve A/c
Journal entries
For shares reissued at par
Bank A/c
Dr.
To Share Capital A/c
(Reissue of shares at ₹ per share)
Shares Forfeited A/c
Dr.
To Capital Reserve A/c
(Balance amount of Shares Forfeited Account transferred to Capital
reserve account)
For shares reissued at a premium
Bank A/c
Dr.
To Share Capital A/c
To Securities Premium Reserve A/c
(Reissue of forfeited shares at premium)
Share Forfeited A/c
Dr.
To Capital Reserve A/c
(Balance amount of Shares Forfeited A/c is transferred to Capital
Reserve A/c)
3. Forfeited shares reissued at par, at a discount, and
at a premium when originally issued at a premium.
Shares that are originally issued at a premium need not be reissued at a
premium, it can be reissued at par, discount, or at a premium On reissuing at a
premium, the premium received should be credited to the Securities Premium A/c.
Journal entries
Bank A/c
Dr.
(Number of shares × amount received per share)
To Share Capital A/c
(Number of shares × amount paid up per share)
To Securities Premium Reserve A/c
(Number of shares × amount of premium per share)
4. Forfeited shares reissued at par, at a discount, and
at a premium when originally issued at a discount.
When forfeited shares are originally issued at a discount are reissued
then the discount allowed at the time of original issue is again applicable. On
the reissue of shares, the discount on the issue of shares account is debited
by the original discount amount.
Share Capital A/c
Dr.
To Share Forfeited A/c
To Discount on Issue of Shares A/c
To Share Final Call A/c
(Forfeiture of shares issued at discount)
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