DR APPLICATION & ALLOTMENT CR
| Bank (refund) | 80,000 | Bank (applied money) | 380,000 |
| Ordinary share capital (10+5) x 25,000 | 375,000 | Bank (allot money) | 325,000 |
| Premium share (10 x 25,000) | 250,000 | ||
| 705,000 | 705,000 |
DR ORDINARY SHARE ACCOUNT CR
| Balance c/d | 1,250,000 | 1st call | 375,000 |
| Application & allotment | 375,000 | ||
| 2nd call | 500,000 | ||
| 1,250,000 | 1,250,000 |
DR 2ND CALL ACCOUNT CR
| Ordinary share (20 x 25,000) | 500,000 | Call in arrear (20 x 700) | 14,000 |
| Bank | 486,000 | ||
| 500,000 | 500,000 |
DR SHARE PREMIUM ACCOUNT CR
| Balance c/d | 250,000 | Application & allotment | 250,000 |
| 250,000 | 250,000 |
BALANCE SHEET AS AT
| Authorized share capital | Current Assets Bank | ||
| Ordinary share (25,000 x 50) | 1,250,000 | 1,478,500 | |
| Current liabilities | Call in arrear (14,000 + 7,500) | 21,500 | |
| Share premium | 250,000 | ||
| 1,500,000 | 1,500,000 |
ISSUE OF SHARES AT DISCOUNT
A company may issue shares at a discount (i.e., for a consideration less than the nominal value) subject to the following conditions as laid down by the company’s act:
- The issue must be authorized by an ordinary resolution.
- The resolution should state the maximum rate of discount.
- The issue must be sanctioned by the company’s law board.
- At least one year should have elapsed since the date by which the company was allowed to commence business.
- The issue should be made within two months after the date of the sanction of the company’s law board.
- A prospectus relating to the issue of shares at a discount should give particulars about the discount allowed on the issue of shares and also of the amount of discount not yet written off as at the date of the prospectus.
NB: The entry is usually made on allotment:
Dr. Application and Allotment A/c
Dr. Discount on Issue of Shares A/c
Cr. Share Capital A/c
The amount of discount is a fictitious asset and so must be written off as an expense as soon as possible.
Dr. Profit & Loss / Share Premium A/c
Cr. Discount on Issue A/c
FORFEITURE OF SHARES
When a call remains unpaid, and the time allowed for its payment has expired, the company may FORFEIT shares together with the amount already received on such shares.
For the forfeiture of such shares to be valid, the following conditions must be satisfied:
- The forfeiture must be authorized by the company’s articles.
- The procedure of the forfeiture must be followed.
- There should be a default by a shareholder in payment of a valid call.
- A notice requiring a shareholder to pay a specified amount within a specified period of time must be given (usually a fourteen-day notice).
Entries on forfeiture:
(i) Calls in arrears on forfeited shares:
Dr. Forfeited Shares A/c
Cr. Calls in Arrears A/c
(ii) Shares forfeited due to calls in arrears:
Dr. Share Capital A/c with the called value.
Cr. Forfeited Shares A/c.
(iii) Forfeited shares now being reissued:
Dr. Forfeited Shares Reissued A/c
Cr. Share Capital A/c
(iv) Cash received prior to forfeiture on the reissued shares:
Dr. Forfeited Shares
Cr. Forfeited Shares Reissued
(v) Cash received on the reissued shares:
Dr. Cash / Bank A/c
Cr. Forfeited Shares Reissued A/c
(vi) Share premium (if any) on the reissued A/c:
Dr. Forfeited Shares Reissued A/c
Cr. Share Premium A/c
Example:
The authorized and issued share capital of Cosy Fire’s Ltd was Tshs. 75,000 divided into 75,000 ordinary shares of Tshs. 1 each, fully paid on 2 January 2007. The authorized capital was increased by a further 85,000 ordinary shares of Tshs. 1 each to Tshs. 160,000.
On the same date, 40,000 ordinary shares of Tshs. 1 each were offered to the public at Tshs. 1.29 per share payable as to Tshs. 0.60 on application (including the premium), Tshs. 0.35 on allotment, and Tshs. 0.30 on 6th April 2007.
The list was closed on 10 January 2007, and by that date applications for 65,000 shares had been received. Applications for 5,000 shares received no allotment and cash paid in respect of such shares was returned.
All shares were allocated to the remaining applications on a prorate basis to their original application; the balance of the monies received on applications being applied to the amounts due on allotment.
The balances due on allotment were received on 31st January 2007 with the exception of one allottee of 500 shares, and these were declared forfeited on 4 April 2007. These shares were reissued as fully paid on 2 May 2007 at Tshs. 10 per share. The call due on 6 April 2007 was duly paid by the other shareholders.
Required:
- To record the above-mentioned transactions in the appropriate ledger.
- To show how the balances on such accounts should appear in the company’s balance sheet as at 31st May 2007.
Calculation of Prorate:
Applied: 65,000
Offered: 40,000
Refund (5,000) = 60,000 applied for 40,000 offered
Allotment money received
Due on allotment: 0.35 x 40,000 = 14,000
Less: Excess capital money received: 0.6 x 20,000 = 12,000
Net: 2,000
Less: Due on allotment for 500 shares: 0.35 x 500 = 175
Less: Excess application money 0.6 x 250 = 150
Allotment money received: 1,975
DR BANK ACCOUNT CR
| DATE | DETAILS | AMOUNT | DATE | DETAILS | AMOUNT |
|---|---|---|---|---|---|
| 1/1/2007 | Balance b/d | 75,000 | Appl & allot (refund) | 3,000 | |
| 1/10/2007 | Application & allotment | 39,000 | |||
| Application & allotment | 1,975 | ||||
| First & final call | 11,850 | Balance c/d | 125,375 | ||
| Forfeited Reissue | 550 | ||||
| 128,375 | 128,375 | ||||
| Balance b/d | 125,375 |
DR APPLICATION & ALLOTMENT ACCOUNT CR
| Bank (refund) | 3,000 | Bank (appl. money) | 39,000 |
| Ordinary share capital | 28,000 | Call in arrear | 25 |
| Share premium | 10,000 | Bank (allot & money) | 1,975 |
| 41,000 | 41,000 |
DR ORDINARY SHARE CAPITAL ACCOUNT CR
| Forfeited share (0.7 x 500) | 350 | 1/1/2007 | Balance b/d | 75,000 |
| Application & allotment | 28,000 | |||
| Forfeited share reissue | 500 | Balance c/d | 115,000 | |
| First & final call | 11,850 | |||
| 115,350 | 115,350 |
DR FIRST & FINAL CALL CR
| Ordinary share capital | 11,850 | Bank | 11,850 |
| 11,850 | 11,850 |
BONUS ISSUE OR SCRIPT ISSUE
The directors of a limited company may decide to issue more shares to existing shareholders against the reserves or Profit & Loss Account balance. In this case, the shareholders are not required to make any payment. This method is often used to reward shareholders by capitalizing reserves.
Right Issue
A right issue may be defined as the raising of new capital by a company by giving existing shareholders the right to subscribe to new shares or debentures in proportion to their current holdings. This allows shareholders to maintain their proportionate ownership in the company.
EXERCISE
M. Limited has an authorized share capital of Tshs. 1,500,000 divided into 1,500,000 ordinary shares of Tshs. 1 each. The issued share capital at 31st March 2007 was Tshs. 500,000 which was fully paid and had been issued at par. On 1st April 2007, the directors, in accordance with the Company’s articles, decided to increase the share capital by a further 500,000 ordinary shares of Tshs. 1 each at a price of Tshs. 1.60 per share payable as follows:
- On application including the premium: Tshs. 0.85 per share
- On allotment: Tshs. 0.25 per share
- On 1st final call 3rd August 2007: Tshs. 0.50 per share
On 13th April 2007, applications had been received for 750,000 shares and it was decided to allot the shares on the basis of four shares for every five shares for which applications had been received.
The balance of the money received on application was to be applied to the amount due on allotment. The shares were allotted on 1st May 2007, the unsuccessful applications being repaid their cash on this date. The balance of the allotment money was received in full by 15th May 2007.
With the exception of the member who failed to pay the call on the 5,000 shares allotted, the remainder of the call was paid in full within two weeks of the call being made.
The directors resolved to forfeit these shares on 1st September 2007 after giving the required notice. The forfeited shares were reissued on 30th September 2007 to another member at Tshs. 0.90 per share.
You are required to write up the ledger accounts necessary to record these transactions in the books of M. Ltd.
Premium = 1.60 – 1.00 = 0.60
Application = 0.85 – 0.60 = 0.25
Applied Issue = ? 500,000 x 5/4 = 625,000 x 4/5 = 500,000
Net Applied Amount = 625,000
Allotment received:
Due to allotment (0.25 x 500,000) = 125,000
Less: expenses on application (0.85 x (625,000 – 500,000)) = 106,250
Allotment money received = 18,750
DR BANK ACCOUNT CR
| 1-Jan | Balance b/d | 500,000 | Application & allot (125,000 x 0.85) | 106,250 | |
| Apply & allotment | 637,500 | ||||
| 1st call | 247,500 | Balance c/d | 1,302,000 | ||
| Apply & allotment | 18,750 | ||||
| Forfeited share reissue | 4,500 | ||||
| 1,408,250 | 1,408,250 |
DR APPLICATION AND ALLOTMENT ACCOUNT CR
| Bank (refund) | 106,250 | Bank (apply money) | 637,500 |
| Ordinary share (0.5 x 500,000) | 250,000 | Bank (allotment money) | 18,750 |
| Share premium (0.6 x 500,000) | 300,000 | ||
| 656,250 | 656,250 |
DR ORDINARY SHARE CAPITAL CR
| Forfeited share (1 x 5,000) | 5,000 | 1-Jan | Balance b/d | 500,000 |
| 1st call | 250,000 | |||
| Balance c/d | 1,000,000 | Application and allotment | 250,000 |
DR FORFEITED SHARE ACCOUNT CR
| Call in arrears | 2,500 | Ordinary share capital | 5,000 |
| Forfeited | 3,250 |
DR FORFEITED SHARE REISSUED ACCOUNT CR
| Ordinary share (1 x 5,000) | 5,000 | Forfeited share | 3,250 |
| Share premium | 2,000 | Bank (0.90 x 5,000) | 4,500 |
| 7,000 | 7,000 |
DR CALL IN ARREARS ACCOUNT CR
| 1st call | 2,500 | Forfeited share | 2,500 |
REDEMPTION OF SHARES
Shares can be bought back from their holders directly on a specific date or range of dates. This process is known as redemption of shares and is subject to legal and regulatory requirements to protect the interests of shareholders and creditors.
METHODS OF REDEMPTION
Shares can be redeemed in two ways:
- Out of distributable profits, e.g., credit balance on profit & loss account, general reserve.
- Out of fresh issue of shares made for the purpose of redemption.
I: Redemption out of distributable profit
According to this method, an amount equal to the nominal value of the shares being redeemed is transferred from a reserve which could otherwise be distributed as cash dividend to a reserve account called Capital Redemption Reserve Account.
Entry:
Dr. Profit & Loss Appropriation A/c with the nominal value of the shares redeemed.
Cr. Capital Redemption Reserve A/c
The transfer to the Capital Redemption Reserve A/c curtails the amount which could otherwise be distributed as cash dividend and so affects the company’s liquidity.
II: Redemption out of fresh issue of shares
In this case, shares can be redeemed by issuing new shares to the members. The issue should be made for the purpose of redemption. The amount to be transferred to the Capital Redemption Reserve A/c shall be the difference between the nominal value of the shares now being redeemed and the proceeds from the fresh issue of shares.
Transfer to CR = Nominal value – cash collected out of fresh issue of shares redeemed.
Or = Nominal value of shares redeemed – nominal value of cash collected out of fresh issue.
PREMIUM PAYABLE ON REDEMPTION
If the company redeems shares above par (at premium), the premium payable on redemption shall be appropriated from the distributable profit.
The share premium account can be utilized in paying the premium payable on redemption if the shares now being redeemed were originally issued at a premium and a new issue of shares is being made for the purpose.
The share premium account can be used to meet the premium on redemption only to the extent of the lesser of:
- The credit balance of the share premium account after crediting the premium on fresh (new) issue.
- The amount of the share premium received on the original issue of the shares now being redeemed.
COMPANY ACCOUNT 1.2
CAPITAL REDEMPTION RESERVE
The balance on this account can be utilized in paying up the unissued shares of a company as fully paid bonus shares. This reserve ensures that the capital structure of the company remains intact after redemption.
ISSUE OF BONUS SHARES
The reserve to provide for the bonus shares may be used in the following order:
- Capital Redemption Reserve.
- Share premium.
- Other reserves (e.g., profit/loss balance, general reserve).
ENTRIES FOR REDEMPTION OF SHARES
A) Declaration of redemption
Dr. Redeemable Preference Share Capital A/c
Cr. Preference Share Redemption A/c
B) Premium payable on redemption
Dr. Share Premium A/c or Profit & Loss Appropriation A/c
Cr. Preference Share Redemption A/c
C) Redemption of shares
Dr. Preference Share Redemption A/c
Cr. Cash / Bank
D) Transfer of the nominal value of the shares being redeemed
Dr. Profit & Loss Appropriation A/c
Cr. Capital Redemption Reserve A/c
Example:
Mpenetecho Co. Ltd had 800,000 % redeemable preference shares of Tshs. 1 each in issue originally issued at a premium of Tshs. 0.40 per share. The company now proposes to redeem 200,000 of these shares at Tshs. 1.60 per share financed partially by the issue of 160,000 ordinary shares of Tshs. 1 per share at Tshs. 1.20. Prior to the issue of replacement shares, the share premium account had a credit balance of Tshs. 242,000.
Show the amount of premium payable on redemption to be appropriated from:
- Share premium account
- Distributable profit
Solution
Given:
Premium on original issue = 0.40
Premium on fresh issue = 1.20 – 1.00 = 0.20
Premium on original issue = 0.40 x 200,000 = 80,000
Premium on redemption = 0.60 x 200,000 = 120,000
Premium on fresh issue = 0.20 x 160,000 = 32,000
REDEMPTION OF DEBENTURES
Strictly used, a debenture is a written acknowledgement of a debt by a limited company providing terms and conditions for its security, interest, and repayment.
Or
It can loosely be defined as an amount borrowed by a limited company.
An issue of debenture (i.e., obtaining a loan from the public) may be documented under seal, with the added formality of being executed in deed form.
SECURITY
The security may take the form of fixed assets which may be applied for the benefit of the debenture holders on a breach of the debenture deed (e.g., failure to pay interest, insolvency). That is why we have mortgage debentures and simple or naked debentures.
Mortgage debentures are debentures in which assets have been pledged.
Naked debentures are debentures without security. The security may be described as fixed or floating.
Fixed charge
Granted on fixed assets which can be applied for the benefit of the debenture holders on a breach of the debenture deed. While the charge is operative, the security may neither be traded nor exchanged. On breach of the debenture deed, the assets can then be applied for the benefit of the debenture holders.
Floating charge
Granted so as to apply to all assets, and while the charge is operative, the assets can either be traded or exchanged. On breach of the debenture deed, the charge crystallizes and assets take priority for the debenture holders.
