Issue of Shares
Issue of Shares
Issue of Shares
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Sameer Hussain
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COMPANY
A corporate enterprise that has a legal identity separate from that of its members; it operates as
one single unit, in the success of which all the members participate. A company may have
limited liability (limited company), so that the liability of the members of the companys debt is
limited. An unlimited company is one in which the liability of the members is not limited in any
way. A company may be registered as a public limited company or a private company. The
shares of a private company may not be offered to the public for sale.
KINDS OF COMPANY
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Sameer Hussain
SHARE
A unit of ownership that represents an equal proportion of a companys capital is called share. It
entitles its holders (shareholders) to an equal claim on the companys profit and an equal
obligation for the companys debts and losses.
KINDS OF SHARE
There are different kinds of shares which can be raised by companies are:
Ordinary shares.
Preference shares.
1-
The equity shares or ordinary shares are those shares on which the dividend is paid after the
dividend on fixed rate has been paid on preference shares.
2-
Preference shares are those shares which carry with them preferential rights for their holders,
i.e. preferential right as to fixed rate of dividend and as to repayment of capital at the time of
winding up of the company.
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SHARE CAPITAL
Share capital is the part of the finance of a company received from its members or shareholders
in exchange for shares.
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SHARE PREMIUM
Share premium is the amount payable for shares in a company and issued by the company itself
in excess of their nominal value. Share premium received by a company must be credited to a
share premium account, which cannot be used for paying dividends to the shareholders.
SHARE DISCOUNT
A share issued at a price below its par value. The discount is the difference between the par
value and the issue price.
PRELIMINARY EXPENSES
Expenses incurred for the registration and documentation in the setting up of a company is
called preliminary expenses. It is treated as current asset in the balance sheet.
ARTICLES OF ASSOCIATION
Article of association is the document that governs the running of a company. It sets out voting
rights of shareholders, conduct of shareholders and directors meetings, power of management,
etc.
MEMORANDUM OF ASSOCIATION
ILLUSTRATION # 1:
(ISSUED AT PAR)
Paramount Co. Ltd. has an authorized capital of Rs.250,000 divided into 25,000 ordinary shares
of Rs.10 each. The company invites application for 3,000 ordinary shares at par from public
along with money. The last day, the banker of the company has informed that only 3,000
ordinary shares applications were received. The management of the company then decided to
issue the same to the public.
REQUIRED
Prepare necessary journal entries.
Sameer Hussain
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SOLUTION # 1:
Date
1
2
P/R
ILLUSTRATION # 2:
Debit
30,000
Credit
30,000
30,000
30,000
(ISSUED AT PAR)
Diamond Co. Ltd. is offering 35,000 ordinary shares of Rs.10 each to the public along with
money. The banker of the company reported that they have received 55,000 ordinary shares
application at par upto the last day. The company has decided to issue 35,000 ordinary shares
and instructed to the banker that excess amount refund to whom shares were not allotted.
REQUIRED
Prepare necessary journal entries.
SOLUTION # 2:
Date
1
2
3
P/R
Debit
550,000
Credit
550,000
350,000
350,000
200,000
200,000
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ILLUSTRATION # 3:
(ISSUED AT PREMIUM)
Regal Ltd. has registered capital of Rs.3,000,000 divided into 150,000 ordinary shares of Rs.20
each. The company invites applications for 28,000 ordinary shares of Rs.20 each at Rs.26 each
along with money. The banker has reported that they have received 28,000 ordinary shares
applications at premium. The company decided to issue the same number of shares to the
public.
REQUIRED
Prepare necessary journal entries.
SOLUTION # 3:
Date
1
Regal Ltd.
General Journal
Particulars
Bank (28,000 x 26)
Ordinary shares applications
(To record the shares applications received at
premium)
Ordinary shares application
Ordinary shares capital (28,000 x 20)
Ordinary shares premium (28,000 x 6)
(To record the shares issued to the public at
premium)
ILLUSTRATION # 4:
P/R
Debit
728,000
728,000
Credit
728,000
560,000
168,000
(ISSUED AT PREMIUM)
Unilever Ltd. invites shares applications from 1 April to 10 April for 26,000 ordinary shares of
Rs.10 each with the premium of Rs.2 each. On 10 April, the banker of the company informed to
the company that they have received total 42,000 shares application along with money. On 18
April the board has decided to issue 26,000 ordinary shares at premium after balloting and
instructed to banker that they must refund the amount to whom they have not issued shares.
REQUIRED
Prepare necessary journal entries.
SOLUTION # 4:
Date
10
April
18
April
18
April
Unilever Ltd.
General Journal
Particulars
Bank (42,000 x 12)
Ordinary shares applications
(To record the shares applications received at
premium)
Ordinary shares application
Ordinary shares capital (26,000 x 10)
Ordinary shares premium (26,000 x 2)
(To record the shares issued to the public at
premium)
Ordinary shares application
Bank (16,000 x 12)
(To record the refund of excess money to the public
at premium)
Sameer Hussain
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P/R
Debit
504,000
Credit
504,000
312,000
260,000
52,000
192,000
192,000
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ILLUSTRATION # 5:
(ISSUED AT DISCOUNT)
Pepsi Co. Ltd. has an authorized capital of Rs.2,500,000 divided into 100,000 ordinary shares of
Rs.25 each. The company invites applications for 35,000 ordinary shares of Rs.25 each at Rs.20
each for the public with the agreement by underwriter. On the last day, the banker has reported
that they have received 26,000 ordinary shares applications from public. The management then
decided to issue the 26,000 ordinary shares to the public and remaining shares will be taken up
by the underwriter as per agreement.
REQUIRED
Prepare necessary journal entries.
SOLUTION # 5:
Date
1
Particulars
Bank (26,000 x 20)
Ordinary shares applications
(To record the shares applications received at
discount)
Ordinary shares application
Ordinary shares discount (26,000 x 5)
Ordinary shares capital (26,000 x 25)
(To record the shares issued to the public at
discount)
Bank (9,000 x 20)
Ordinary shares discount (9,000 x 5)
Ordinary shares capital (9,000 x 25)
(To record the shares issued to the underwriter at
discount as per agreement)
P/R
Debit
520,000
Credit
520,000
520,000
130,000
650,000
180,000
45,000
225,000
DEBENTURES
Debentures are the most common form of long-term loan taken by a company. It is usually a
loan repayable at a fixed date, although some debentures are irredeemable securities. Most
debentures also pay a fixed rate of interest, and this interest must be paid before a dividend is
paid to shareholders.
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ILLUSTRATION # 6:
The company has issued 15,000 7% debentures of Rs.100 each at par and agreed to payback
after 3 years at par.
REQUIRED
Prepare necessary journal entries.
SOLUTION # 6:
Date
1
General Journal
Particulars
P/R
Debit
1,500,000
Credit
1,500,000
ILLUSTRATION # 7:
The company has issued 23,000 10% debentures of Rs.100 each at Rs.105 and agreed to
payback after 5 years at Rs.100 each.
REQUIRED
Prepare necessary journal entries.
SOLUTION # 7:
Date
1
General Journal
Particulars
P/R
Debit
2,415,000
Credit
2,300,000
115,000
Bank
DR. (with amount received)
Discount on debenture
DR. (with discount amount)
Debentures payable
CR (with par value)
(To record the debentures issued at discount and payback at par)
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Sameer Hussain
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ILLUSTRATION # 8:
The company has issued 30,000 8% debentures of Rs.100 each at Rs.95 and redeemable after 5
years at Rs.100 each.
REQUIRED
Prepare necessary journal entries.
SOLUTION # 8:
Date
1
General Journal
Particulars
Bank (30,000 x 95)
Discount on debentures (30,000 x 5)
8% Debentures payable (30,000 x 100)
(To record the issue of 8% debentures at discount
and payback at par after 5 years)
P/R
Debit
2,850,000
150,000
Credit
3,000,000
Bank
DR. (with amount received)
Loss on redemption
DR. (with amount of loss at the time of payback)
Debentures payable
CR. (with par value)
Premium on redemption
CR. (the amount will be paid as premium)
(To record the debentures issued at par and payback at premium)
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ILLUSTRATION # 9:
The company has issued 26,000 6% debentures of Rs.100 each at par and redeemable after 6
years at Rs.106 each.
REQUIRED
Prepare necessary journal entries.
SOLUTION # 9:
Date
1
General Journal
Particulars
Bank (26,000 x 100)
Loss on redemption (26,000 x 6)
6% Debentures payable (26,000 x 100)
Premium on redemption (26,000 x 6)
(To record the issue of 6% debentures at par and
payback at premium after 6 years)
P/R
Debit
2,600,000
156,000
Credit
2,600,000
156,000
Bank
DR. (with amount received)
Loss on redemption
DR. (with amount of loss at the time of payback)
Discount on debenture
DR. (with the discount amount)
Debentures payable
CR. (with par value)
Premium on redemption
CR. (the amount will be paid as premium)
(To record the debentures issued at discount and payback at premium)
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Sameer Hussain
ILLUSTRATION # 10:
The company has issued 35,000 9% debentures of Rs.100 each at Rs.93 and redeemable after 8
years at Rs.106 each.
REQUIRED
Prepare necessary journal entries.
SOLUTION # 10:
Date
1
General Journal
Particulars
Bank (35,000 x 93)
Loss on redemption (35,000 x 6)
Discount on debentures (35,000 x 7)
9% Debentures payable (35,000 x 100)
Premium on redemption (35,000 x 6)
(To record the issue of 9% debentures at discount
and payback at premium after 8 years)
P/R
Debit
3,255,000
210,000
245,000
Credit
3,500,000
210,000
RETAINED EARNINGS
Retained earnings are accumulated earnings that have not been distributed to shareholders but
rather reinvested in the business. A company's retained earnings are disclosed at or near the
bottom of the shareholders equity section of the balance sheet. Accountants may prepare a
separate "statement of retained earnings" that shows the change in retained earnings during the
accounting period; however, the statement of retained earnings is often combined with the
income statement.
FUND
1. It is created out of cash.
2. A provision is a change expense and
revenue.
3. Fund is an asset.
4. It is shown on the debit side of the
balance sheet among assets.
5. It represents on assets.
6. Fund has normally debit balance.
7. It is not part of retained earnings.
CAPITAL RESERVE
Capital reserves are the reserves that may not be distributed according to Company Act 1985.
They include share capital, share premium, capital redemption reserve, certain unrealized
profits, or any other reserves that the company may not distribute according to some other act
or its own article of association.
SECRET RESERVE
Funds held in the reserve but not disclosed in the balance sheet. They arise when an asset is
deliberately either undisclosed or undervalued.
VALUATION RESERVE
Allowance, created by a charge against earnings, to provide for changes in the value of a
company's assets. Examples include accumulated depreciation and allowance for bad debts.
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SURPLUS RESERVE
Amount appropriated out of earned surplus (retained earnings) for future planned or
unforeseen expenditure.
LIABILITY RESERVE
RESERVES
No.
Purpose
Entry to Create
Reporting on
Balance Sheet
Nature of Reserve: Contra Assets or Valuation Reserve
1. To decrease
Bad debts expense
Deduction in
accounts receivable (Dr.)
accounts
to their realizable
Allowance for bad
receivable
value
debts (Cr.)
2. To accumulate
Depreciation expense Deduction in
expired cost of
(Dr.)
related fixed
fixed assets
Allowance for
asset
depreciation (Cr.)
Nature of Reserve: Estimated Liability
3. To recognize
Income tax expense
Shown as a
estimated liability
(Dr.)
current liability
Reserve for income
tax (Cr.)
Nature of Reserve: Appropriation of Retained Earnings
4. To restrict
Retained earnings
Shown as a part
distributable profit (Dr.)
of retained
for building
Reserve for building
earnings
extension
extension (Cr.)
5. To restrict
Retained earnings
Shown as a part
distributable profit (Dr.)
of retained
for plant expansion Reserve for plant
earnings
expansion (Cr.)
6 To restrict
Retained earnings
Shown as a part
distributable profit (Dr.)
of retained
for debenture
Reserve for debenture earnings
redemption
redemption (Cr.)
7 To restrict
Retained earnings
Shown as a part
distributable profit (Dr.)
of retained
for contingencies
Reserve for
earnings
contingencies (Cr.)
FUNDS
No.
Purpose
Entry to Create
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Reporting on
Balance Sheet
Shown as a part
of cash
Shown as a part
of cash
Sameer Hussain
ILLUSTRATION # 11:
(RETAINED EARNINGS)
The retained earnings account on ABC Company Ltd. showed a credit balance of Rs.400,000 on
December 31, 2010. The expense and revenue summary for the year ending on that date
showed a net income of Rs.150,000 which is transferred to retained earnings account. The
company decided on December 31, 2010 as under:
(a) To declare a cash dividend of Rs.50,000 and stock dividend of Rs.40,000.
(b) To appropriate Rs.40,000 for reserve for plant expansion.
(c) To appropriate Rs.27,000 for reserve for contingencies.
(d) To establish reserve for building extension for Rs.80,000.
(e) Cash dividend paid through bank & 4,000 shares issued in settlement of stock dividend.
REQUIRED
Give entries in General Journal to give effect to the above decisions.
SOLUTION # 11:
Date
1
2
3
4
5
6
7
8
Sameer Hussain
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P/R
Debit
150,000
Credit
150,000
50,000
50,000
40,000
40,000
40,000
40,000
27,000
27,000
80,000
80,000
50,000
50,000
40,000
40,000
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PRACTICE QUESTIONS
Question # 1:
1998 Private (Principles of Accounting B.Com I) UOK
Mind Corporation completed the following transaction for the month of January 1998.
Jan. 1 Purchased land for Rs.100,000 and in consideration issued shares of Rs.10 each. The
market price of the share was Rs.12.50.
Jan. 5 Purchased machinery and issued 12,500 shares of Rs.10 each. The market price of share
was Rs.12.00.
Jan. 10 The Corporation allotted 20,000 shares of Rs.10 each to the promoters in consideration
of services rendered.
Jan. 20 The Corporation issued 9,000 share of Rs.10 each in full settlement of bonds payable
Rs.100,000.
Jan. 25 Issued 1,000 debentures of Rs.100 each redeemable after five years at Rs.105.
Jan. 30 Issued 2,000 debentures of Rs.100 each at Rs.95 redeemable after five years.
Jan. 31 Paid preliminary expenses Rs.10,000.
REQUIRED
Give dated entries in the General Journal with narration to record the above transactions.
Question # 2:
2004 Private (Principles of Accounting B.Com I) UOK
Nishat Co. Ltd. made the following issuance of shares and debentures:
(a) The company offered 60,000 ordinary shares of Rs.10 each at Rs.12 per share to public;
applications were received for 70,000 shares. 60,000 shares were allotted and the
excess money was refunded.
(b) Land was acquired by issuing 40,000 ordinary shares of Rs.10 each. The market price
per share was Rs.15.
(c) The promoters of the company were allotted 6,000 ordinary shares of Rs.10 each in
consideration of their services rendered.
(d) Mortgage payable of Rs.60,000 was settled by the issue of ordinary shares of Rs.10 each.
The market value of the share was Rs.15.
(e) Received Rs.95,000 against the issue of 3,000 10% debentures each redeemable at par
after 5 years.
REQUIRED
Record the above transactions in the General Journal of the company.
Question # 3:
2005 Private (Principles of Accounting B.Com I)UOK
Chuhan & Co. Ltd. was registered with a capital of Rs.20,000,000 ordinary shares of Rs.10 each.
It was incorporated by acquiring the running business of Yasir, a sole trader. The balance sheet
of the business of Yasir as of January 01, 2005 was as under:
ASSETS
EQUITIES
Cash
40,000 Accounts payable
40,000
Accounts receivable
120,000 Notes payable
40,000
Merchandise inventory
160,000 Allowance for bad debts
8,000
Office supplies
8,000 Accumulated depreciation
240,000
Furniture
400,000 Yasir Capital
400,000
728,000
728,000
Chuhan & Co. Ltd. took over the business assets other than cash and assumed the liabilities. In
exchange, the company issued 30,000 shares of Rs.10 each at Rs.15 per share. The company also
made an additional issue of 10,000 shares of Rs.10 each at Rs.15 per share to the public, which
were subscribed and paid for.
REQUIRED
(i) Give the necessary entries in the General Journal of Chuhan & Company.
(ii) Prepare initial balance sheet.
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