Unit – 1
ISSUE OF SHARES AND DEBENTURES, FORFEITURE OF SHARES, REDEMPTION OF PREFERENCE SHARES AND DEBENTURES, PREPARATION OF FINAL ACCOUNTS
INTRODUCTION TO ISSUE OF SHARES:
Issue of Shares is the process in which companies allot new shares to the investors. The Investors may be individuals or even corporates. The procedures and process of issuing shares are prescribed under Companies Act, 2013; every company intending to issue shares have to follow those rules. Upon investing in the shares of the company, an investor becomes a Shareholder of the company. Shares are the basis of ownership of the company.
The main reason a company issue shares is to raise additional money for its development and expansion. Companies issues shares to those who tend to invest their money.
There are two types of shares a company can allot according to the Companies Act 2013.
Preference Shares are those which carries two exclusive preferential rights over the other type of shares. These rights are – 1) Preferential right with respect to the dividends declared by a company. This means that the dividend is first paid to preference shareholders before the other type of shareholders and 2) Preferential right when it comes to repayment of capital in case of liquidation of the company. This means that the preference shareholders get paid out earlier than the other type of shareholders.
Another type of Shares is Equity Shares. The shares that do not enjoy any preferential rights are thus equity shares. The dividend given to equity shareholders is not fixed. It is decided by the Board of Directors according to the financial performance of the company.
Procedure for issue of shares:
1) Issue of Prospectus
2) Receiving Applications
3) Allotment of Shares
Difference between Preference Shares and Equity Shares:
Point | Preference Shares | Equity Shares |
1) Right of Dividend
2) Rate of Dividend
3) Management
4) Voting Right
5) Redemption Of Capital | Preference Shares are paid Dividend before Equity Shares.
They are given dividend at a Fixed rate.
Shareholders do not have right to Take part in the management.
Preference Shareholders can Vote only when a decision affect Their rights.
Redeemable Preference Shares Are redeemable and the amount Of capital is refunded at the end Of the tenure of the issued class. | Equity Shares are paid dividend Out of the balance profits and only After payment of dividend to Preference Shares.
Rate of dividend is not fixed, it Varies.
These shareholders have a default Right to participate in the Management of the company.
Equity Shareholders have the Right to vote in all management Decisions.
Equity Share capital is refunded Only at the time of winding up of Company and that too even after Settling the liabilities of Preference shareholders, if any. |
Meanings of some terms used:
1) Nominal/Authorised/Registered Capital: This is the amount of Capital with which a company is registered. It is stated in the Memorandum of Association of the company. The maximum amount of capital that can be raised by any company is the Authorised Capital.
2) Issued Capital: Issued Capital is that part of Nominal Capital which is actually issued to the public for subscription. The balance of Nominal Capital is called as unissued capital.
3) Subscribed Capital: Subscribed Capital is that part of the Issued Capital, which is taken up by the public. The balance of Issued Capital, which is not subscribed for, by the public is called Unsubscribed Capital.
4) Called up Capital: Called up Capital is that part of Subscribed Capital, which is called for payment by the company. The remaining balance of Subscribed Capital is termed as Uncalled Capital.
5) Paid up Capital: The amount actually paid by the shareholders as against the Called up Capital is known as Paid up Capital. The balance of the Called up Capital is known as Unpaid Capital or Calls in Arrears.
INTRODUCTION TO DEBENTURES:
Debenture is one of the forms of long term loans that a company can take. It is normally a loan that should be repaid on a specific date. Debenture holders (investors), like Preference Shareholders, are not allowed to vote in the company's general shareholders meetings, but they have right to vote, for the decisions affecting their rights.
Debentures are of two types: 1) Convertible debentures – Convertible debentures can be converted into equity shares of the issuing company after a predetermined period of time. 2) Non-convertible debentures – The debentures that can't be converted into equity shares of the company are called as Non-convertible debentures. Since they can't be converted, they usually have higher interest rates as compared to convertible debentures.
PROFORMA JOURNAL ENTRIES – ISSUE OF SHARES:
Date Sr. No. | Particulars | L.F. | Debit Amount | Credit Amount |
1
2
3
4
5
6
| RECEIPT OF APPLICATION MONEY Bank A/c Dr. To Equity Shares Application A/c (Being application money received)
TRANSFER OF APPLICATION MONEY Equity Share Application A/c Dr. To Equity Share Capital A/c (Being application money transferred)
ON ALLOTMENT CALL MADE Equity Share Allotment A/c Dr. To Equity Shares Capital A/c (Being call made for allotment)
ON ALLOTMENT MONEY RECEIVED Bank A/c Dr. To Equity Share Allotment A/c (Being allotment money received)
ON AMOUNT DUE ON FIRST CALL Equity Share First Call A/c Dr. To Equity Share Capital A/c (Being first call made)
ON RECEIPT OF FIRST CALL MONEY Bank A/c Dr. To Equity Share First Call A/c (Being Call money received)
NOTE FOR STUDENTS: 1) Entry No. 5 & 6 are repeated for the entries of all subsequent calls.
2) Upon Over-Subscription of Shares, the extra money is refunded to the applicants. In that case, Entry No. 2 is written as follows: Equity Share Application A/c Dr. To Equity Share Capital A/c To Bank A/c (Being application money transferred and excess money refunded)
3) Journal Entries for issue of Preference Shares are same as the one mentioned above. In place of the word ‘EQUITY’, ‘_____% PREFERENCE’ is used.
|
|
Xx
Xx
Xx
Xx
Xx
Xx |
Xx
Xx
Xx
Xx
Xx
Xx |
| TOTAL |
| Xxxx | Xxxx |
ISSUE OF SHARES AT DISCOUNT
If the share is issued at face value it is called as share at par, sometimes share may be issued below its face value, it is called as share issued at discount.
ACCOUNTING TREATMENT:
In case issue of shares at discount a new account is brought in to the book called as “Discount on Issue of Shares Account”. If such a discount is allowed at the time of share allotment the entry is-
Share Allotment A/c Dr. xxx
Discount on Issue of Shares A/c Dr. xxx
To Share Capital A/c xxx
As discount shows debit balance, it is a loss for the company. It is a capital loss. So it is shown on asset side of “Balance Sheet” under the head “Preliminary Expenditure” as “Discount on issue of shares”.
ISSUE OF SHARES AT PREMIUM
When a company issues its shares at a price more than the face value is called issue of shares at premium.
ACCOUNTING TREATMENT:
When shares are issued at premium, one separate account is opened known as “Securities Premium Account”. Being a credit balance this account is shown on liability side of Balance Sheet. Entries are as under:
WHEN PREMIUM IS CALLED WITH APPLICATION MONEY-
Share Application A/c Dr. xxx
To Share Capital A/c xxx
To Securities Premium A/c xxx
IF PREMIUM IS CALLED WITH ALLOTMENT-
Share Allotment A/c Dr. xxx
To Share Capital A/c xxx
To Securities Premium A/c xxx
CALLS IN ARREARS
All the shareholders may not pay the amount due on allotment or calls. Such an amount unpaid instalments is called as ‘Calls-In-Arrears’. It is also known as Unpaid Calls.
ACCOUNTING TREATMENT:
- TO RECORD CALLS-IN-ARREARS FOLLOWING ENTRY IS PASSED:
Calls-In-Arrears A/c Dr. xxx
To Share Allotment A/c xxx
To Share Capital A/c xxx
B. FOR INTEREST RECEIVABLE ON CALLS-IN-ARREARS:
Shareholders A/c Dr. xxx
To Interest on Calls-In-Arrears A/c xxx
C. FOR RECEIPT OF INTEREST:
Bank A/c Dr. xxx
To Shareholders A/c xxx
CALLS-IN-ADVANCE
It refers to that amount paid by shareholders in excess of the amount due from them. Calls-In-Advance can be accepted by a company only when Articles of Association permits to do. According to Table ‘A’, interest at the rate of 6% p.a. Is to be paid on such amount.
ACCOUNTING ENTRIES:
1) ON RECEIPT OF CALLS-IN-ADVANCE
Bank A/c Dr. xxx
To Calls-in-Advance A/c xxx
2) ON ADJUSTMENT OF CALLS-IN-ADVANCE WHEN IT IS PAID
Calls-in-Advance A/c Dr. xxx
To Relevant Call A/c xxx
3) INTEREST DUE ON CALLS-ON-ADVANCE
Interest on Calls-In-Advance A/c Dr. xxx
To Shareholders A/c xxx
4) ON PAYMENT OF INTEREST ON CALLS-IN-ARREARS
Shareholders A/c Dr. xxx
To Bank A/c xxx
5) TRANSFER OF INTEREST ON CALLS-IN-ADVANCE TO PROFIT & LOSS A/C
Profit & Loss A/c Dr. xxx
To Interest on Calls-In-Advance A/c xxx
FORFEITURE OF SHARES:
Forfeiture of shares mean cancellation of shares allotted to a particular shareholder. If a shareholder fails to pay amount on his share allotment or calls, his shares will be forfeited by the company. The company does not return the money already received on the share till the date of forfeiture.
Journal Entries for forfeiture and re-issue of forfeited shares.
1) FOR FORFEITURE OF SHARES ISSUED AT PAR
Share Capital A/c Dr. xxx
To Share Allotment A/c xxx
To First/Second/Third Final Call A/c xxx
To Calls in Arrears A/c xxx
To Share Forfeiture A/c xxx
(Being shares forfeited on non-payment of first/second/final call)
2) FOR FORFEITURE OF SHARES ISSUED AT PREMIUM
Share Capital A/c Dr. xxx
Share Premium A/c Dr. xxx
To Share Allotment/Call A/c xxx
To Calls in Arrears A/c xxx
To Share forfeiture A/c xxx
(Being forfeited shares issued at premium)
3) FOR FORFEITURE OF SHARES ISSUED AT DISCOUNT
Share Capital A/c Dr. xxx
To Share Allotment/First/Second/Final call A/c xxx
To Discount on issue of shares A/c xxx
To Share Forfeiture A/c xxx
(Being forfeited shares issued at discount)
4) FOR RE-ISSUE OF FORFEITED SHARES AT PAR
Bank A/c Dr. xxx
To Share Capital A/c xxx
(Being re-issue of forfeited shares at par)
5) FOR RE-ISSUE OF FORFEITED SHARES AT PREMIUM
Bank A/c Dr. xxx
To Share Capital A/c xxx
To Share Premium A/c xxx
(Being re-issue of forfeited shares at premium)
6) FOR RE-ISSUE OF FORFEITED SHARES AT DISCOUNT
Bank A/c Dr. xxx
Share Forfeited A/c xxx
To Share Capital A/c xxx
(Being forfeited shares issued for cash)
7) FOR TRANSFER OF SHARE FORFEITED A/C
Share forfeited A/c Dr. xxx
To Capital Reserve A/c xxx
(Being transfer of balance of forfeited shares to Capital Reserve A/c)
RE-ISSUE OF FOREITED SHARES
1) Forfeited shares are in the custody and under the ownership of the company. Company has the right to resell it.
2) These shares are reissued at any price.
3) Loss on reissue should not be exceed the forfeited amount.
4) If the loss on re-issue is less than the amount forfeited, the surplus should be transferred to Capital Reserve Account. If the shares are reissued at a loss, such loss is to be debited to ‘Forfeited Shares Account’.
Q1) Goldi & Co. Ltd issued at par 1,00,000 shares of Rs.10 each payable Rs.3 on application, Rs.4 on allotment, and the balance on the final call. All the shares were fully subscribed and paid except a shareholder Mr. Poor having 1,000 shares could not pay the final call. Mr. Poor paid the call-in-arrear amount after four months of due date of final call. Company charged interest on the amount received as per Table ‘A’.
Pass journal entries to record these transactions assuming that Calls-in-arrears and interest money received from Mr. Poor in the books of Goldi & Co. Ltd.
SOLUTION: Journal of Goldi & Co. Ltd.
Date | Particulars | LF | Debit | Credit |
1
2
3
4
5
6
7
8
9 | Bank A/c Dr. To Equity Share Application A/c (Being share application money received)
Equity Share Application A/c Dr. To Equity Share Capital A/c (Being share application money transferred to share capital A/c)
Equity Share Allotment A/c Dr. To Equity Share Capital A/c (Being share allotment money due)
Bank A/c Dr. To Equity Share Allotment A/c (Being share allotment money received)
Equity Share Final Call A/c Dr. To Equity Share Capital A/c (Being final call due)
Bank A/c Dr. To Equity Share Final Call A/c (Being final call received except 1,000 shares) [3,00,000 – (1,000 * 3)]
Equity Share Calls-in-arrears A/c Dr. To Equity Share Final Call A/c (Being arrear on 1,000 shares recorded)
Mr. Poor A/c Dr. To Interest on Calls-in-arrears A/c) (Being interest charged on calls-in-arrears)
Bank A/c Dr. To Mr. Poor A/c (Being calls-in-arrears and interest there on received) |
| 3,00,000
3,00,000
4,00,000
4,00,000
3,00,000
2,97,000
3,000
50
3,050
|
3,00,000
3,00,000
4,00,000
4,00,000
3,00,000
2,97,000
3,000
50
3,050 |
| Total |
| 20,03,100 | 20,03,100 |
Working Note:
1) Calculation of interest on calls-in-arrears
100 – 12 – 5 = 5 * 4 * 3,000 = 50
3,000 – 4 - ? 1 12 100
Q2) Hinduja Co. Ltd with an authorized capital of Rs.4,00,000 divided in to shares of Rs.100 each issued for subscription 2,000 shares payable at Rs.25 per share on application, Rs.30 per share on allotment, 20 per share on first call and the balance as and when required. Application money on 2,000 shares received and allotment was duly made. Allotment money was received in full. When first call was made one shareholder paid the entire amount on his 50 shares.
Show Journal of Hinduja Co. Ltd.
SOLUTION: Journal of Hinduja Co. Ltd
Date | Particulars | LF | Debit | Credit |
1
2
3
4
5
6 | Bank A/c Dr. To Share Application A/c (Being share application money received)
Share Application A/c Dr. To Share Capital A/c (Being share application money transferred to share capital A/c)
Share Allotment A/c Dr. To Share Capital A/c (Being share allotment money due)
Bank A/c Dr. To Share Allotment A/c (Being share allotment money received)
Share First Call A/c Dr. To Share Capital A/c (Being first call money due)
Bank A/c Dr. To Share First Call A/c To Calls-in-Advance A/c (Being first call money received on 2,000 shares and calls-in-advance on fifty shares) (100 – 25- 30 – 20 = 25; 25 * 50 = 1,250) |
| 50,000
50,000
60,000
60,000
40,000
41,250 |
50,000
50,000
60,000
60,000
40,000
40,000 1,250 |
| Total |
| 3,01,250 | 3,01,250 |
Q3) Rajendra Industries issued 20,000 shares of Rs.10 each at 10% discount payable Rs.6 on application and remaining on allotment. Public applied for 32,000 shares, Shares were allocated on pro-rata to the application of 25,000 shares. Money overpaid on applications was used for allotment. All the shareholders paid the amount except Prerna, the allottee of 4,000 shares. Her shares were forfeited. The directors re-issued all the forfeited shares for 35,000. Pass the journal entries to record the above transactions in the books of Rajendra Industries.
SOLUTION: Journal of Rajendra Industries
Sr.No. | Particulars | LF | Debit | Credit |
1
2
3
4
5
6
7 | Bank A/c Dr. To Share Application A/c (Being share application money received)
Share Application A/c Dr. To Share Capital A/c To Bank A/c To Share Allotment A/c (Being the application money adjusted and surplus refunded)
Share Allotment A/c Dr. Discount on Issue of Shares A/c Dr. To Share Capital A/c (Being share allotment money due)
Bank A/c Dr. To Share Allotment A/c (Being share allotment money received) (WN 1)
Share Capital A/c Dr. To Discount on Issue of Shares A/c To Share Allotment A/c To Share Forfeited A/c (24,000+6,000) (Being 4,000 shares forfeited on non payment of full allotment money)
Bank A/c Dr. Discount on Issue of Shares A/c Dr. Forfeited Shares A/c Dr. To Share Capital A/c (Being Rs.4,000 shares re-issued at discount)
Forfeited Shares A/c Dr. To Capital Reserve A/c (Being the balance on Share Forfeited A/c transferred to Capital Reserve A/c) |
| 1,95,000
1,95,000
60,000 20,000
24,000
40,000
35,000 4,000 1,000
29,000 |
1,95,000
1,20,000 45,000 30,000
80,000
24,000
4,000 6,000 30,000
40,000
29,000 |
| Total |
| 6,03,000 | 6,03,000 |
Working Note:
1) Allotment money not received from Prerna
Shares applied by Prerna
When 20,000 shares are allotted application is for 25,000
When 4,000 share are allotted than that is no. Of shares applied for-
25,000 * 4,000 = 5,000 shares
20,000
Excess money received by Prerna on application.
5,000 – 4,000 = 1,000 * 6 = Rs.6,000
Amount due on allotment = 4,000 * 3 = 12,000
Less: Amount received on application (excess) = - 6,000
Amount not received on allotment = 6,000
Actual amount received on allotment (30,000 – 6,000) Rs.24,000
Q4) Rangoonwala Co. Ltd. Forfeited 100 shares of Rs.100 each (allotment time) on which first call of 20 per share was not yet called up.
Give journal entries regarding forfeiture and re-issue of shares in each of the following alternative cases:
1) If 40 of these shares were re-issued as Rs.80 paid up for Rs.90 per share.
2) If 40 of these were re-issued as Rs.80 called up for Rs.80 per share.
3) If 40 of these were re-issued as Rs.80 paid up for Rs.70
SOLUTION: Journal of Rangoonwala Co. Ltd.
Date | Particulars | LF | Debit | Credit |
| Common entry on forfeiture of 100 shares. Share Capital A/c Dr. To Share First Call A/c To Forfeited Shares A/c (Being 100 shares forfeited Entries on Re-Issue of Shares)
Case – 1 Bank A/c Dr. To Share Capital A/c To Securities Premium A/c (Being shares reissued at premium)
Forfeited Shares A/c Dr. To Capital Reserve A/c (Being the balance on Forfeited A/c transferred to Capital Reserve A/c)
Case – 2 Bank A/c Dr. To Share Capital A/c (Being shares issued at par)
Forfeited Shares A/c Dr. To Capital Reserve A/c (Being balance on share forfeited transferred to Capital Reserve A/c)
Case – 3 Bank A/c Dr. Forfeited Shares A/c Dr. To Share Capital A/c (Being shares reissued on discount)
Forfeited Shares A/c Dr. To Capital Reserve A/c (Being balance on forfeited transferred to Capital Reserve A/c) |
|
8,000
3,600
2,000
3,200
2,000
2,800 400
1,600 |
8,000
3,600
2,000
3,200
2,000
3,200
1,600 |
| Total |
| 23,600 | 23,600 |
Debentures:
The word ‘debentures’ has been derived from a Latin word ‘debere’ which means to borrow. Debentures is written instrument acknowledging a debt under a common seal of the company. It contains a contract for repayment of principle after a specified period or at intervals or at the option of the company and for payment of interest at a fixed rate payable either half or yearly on fixed date.
PROFORMA JOURNAL ENTRIES – ISSUE OF DEBENTURES:
Date Sr. No. | Particulars | LF | Debit Amount | Credit Amount |
1
2
3
4
5
6
7
8
9
10
11
12
13
14 | FOR RECEIPT OF APPLICATION MONEY Bank A/c Dr. To Debentures Application A/c (Being the application money received)
FOR TRANSFER OF APPLICATION MONEY Debentures Application A/c Dr. To Debentures A/c (Being application money transferred)
FOR ALLOTMENT MONEY DUE ON DEBENTURES Debentures allotment A/c Dr. To Debentures A/c (Being allotment money due on debentures)
FOR RECEIPT OF ALLOTMENT MONEY Bank A/c Dr. To Debentures allotment A/c (Being allotment money on debentures received)
FOR TRANSFER OF EXCESS APPLICATION MONEY Debentures application A/c Dr. To Debentures allotment A/c (Being excess application money transferred)
FOR DEBENTURES CALLS DUE Debenture 1st/2nd/Final call A/c Dr. To Debenture A/c (Being Debenture 1st/2nd/Final calls due)
ON RECEIPT OF DEBENTURE CALLS Bank A/c Dr. To Debenture 1st/2nd/Final call A/c (Being debentures 1st/2nd/Final calls money received)
FOR ISSUE AT PAR & REDEEMABLE AT PAR Bank A/c Dr. To Debentures A/c (Being the amount of debentures received)
FOR ISSUE AT PAR & REDEEMABLE AT PREMIUM Bank A/c Dr. Loss on issue of debentures A/c Dr. To Debentures A/c To Premium on redemption of debentures (Being debentures are issued at par & redeemable at premium)
FOR ISSUE AT DISCOUNT & REDEEMABLE AT PAR Bank Ac Dr. Discount on issue of debentures A/c Dr. To Debentures A/c (Being debentures issued at discount & redeemable at par)
FOR ISSUE AT DISCOUNT & REDEEMABLE AT PREMIUM Bank A/c Dr. Discount on issue of debentures A/c Dr. Loss on issue of debentures A/c Dr. To Debentures A/c To Premium on redeemable on debentures (Being debentures issued at discount & redeemable at premium)
FOR ISSUE AT PREMIUM & REDEEMABLE AT PAR Bank A/c Dr. To Debentures A/c To Premium on issue of debentures (Being debentures issued at premium & redeemable at par)
FOR CERTAIN EXPENSES ON ISSUE OF DEBENTURES Expenses on issue of debentures A/c Dr. To Bank A/c (Being payment of expenses on issue of debentures)
FOR TRANSFER OF EXPENSES, DISCOUNT & LOSS ON ISSUE OF DEBENTURES A/C Cost of Issue of Debenture A/c Dr. To Expenses on issue of debentures A/c To Discount on issue of debentures A/c To Loss on issue of debentures A/c (Being transfer of expenses, discount & loss on issue of debentures A/c) |
|
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
Face Value
Amt. Received Amt. Premium
Amt. Received Disc. Allowed
Amt. Received Amt. Allotment Amt. Premium
Amt. Received
Xxx
Xxx
|
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
Face Value
Face value Amt. Premium
Face value
Face value Amt. Premium
Face value Xxx
Xxx
Xxx Xxx Xxx |
Q1) Archana Ltd issued 2,000, 8% Debentures of Rs.100, each at a discount of 5% on 1st April, 2008 redeemable after 10 years. Amount was payable as:
On Application on or before 30.4.2008 Rs.20
On Allotment on or before 30.6.2008 Rs.25
On first & final call on or before 31.8.2008 Rs.50
Issue was fully subscribed & paid for, give Journal entries & show treatment of discount for three years ending 31st March 2011.
SOLUTION: Journal entries in the books of Archana Ltd.
Date | Particulars | L F | Debit Amount | Credit Amount |
2008 April 30
April 30
June 30
June 30
June 30
Aug 30
Aug 31 | Bank A/c Dr. To 8% Debentures Application A/c (Being cash received on application)
8% Debentures Application A/c Dr. To 8% Debentures A/c (Being Application money on debentures transferred to Debentures A/c)
Discount on issue of Debentures A/c Dr. To 8% Debentures A/c (Being discount allowed of Rs.5 each)
8% Debentures allotment A/c Dr. To 8% Debentures A/c (Being called Rs.25 each on 2000, 8% debentures on allotment money)
Bank A/c Dr. To 8% Debentures allotment A/c (Being allotment money received)
8% Debentures first & final call A/c Dr. To 8% Debentures A/c (Being first & final call of Rs.50 each on 2,000 8% debentures called)
Bank A/c Dr. To 8% Debentures first & final call A/c (Being cash received on account of first & final call) |
| 40,000
40,000
10,000
50,000
50,000
1,00,000
1,00,000 |
40,000
40,000
10,000
50,000
50,000
1,00,000
1,00,000 |
| Total |
| 3,90,000 | 3,90,000 |
Discount on Issue of Debentures A/c
Date | Particulars | J.F. | Amount | Date | Particulars | J.F. | Amount |
2008 Apr. 1
2009 Apr. 1
2010 Apr. 1
2011 Apr. 1 |
To 8% Debentures
To Balance b/d
To Balance b/d
To Balance b/d |
|
10,000
10,000
9,000
9,000
8,000
8,000
7,000 | 2009 Mar.31 Mar.31
2010 Mar.31 Mar.31
2011 Mar.31 Mar.31 |
By Profit Loss A/c By Balance c/d
By Profit Loss A/c By Balance c/d
By Profit Loss A/c By Balance c/d
|
|
1,000 9,000
10,000
1,000 8,000
9,000
1,000 7,000
8,000
|
Note: Since the period of debentures is 10 years, the amount of discount to be charged each year is Rs.10,000/10=Rs.1,000
Q2) : Anu Ltd issued on 1.4.2010, 1000, 8% debentures of Rs.100 each 5% discount and repayable at the end of 10 years at premium of 4% show necessary Ledger Account for 2010-2011 & 2011-2012 in the books of Anu Ltd.
SOLUTION: In the books of Anu Ltd.
8% Debentures A/c
Date | Particulars | Amount | Date | Particulars | Amount |
1.4.2010 | To Balance c/d | 1,00,000
1,00,000 | 1.4.2010 1.4.2010
1.4.2011 | By Bank By Discount on issue of debentures
By Balance b/d | 95,000
5,000
1,00,000
1,00,000 |
Discount on issue of Debentures A/c
Date | Particulars | Amount | Date | Particulars | Amount |
1.4.2010
1.4.2011
1.4.2012 | To 8% Debentures
To Balance b/d
To Balance b/d |
5,000
5,000
4,500
4,500
4,000 | 31.3.2011 31.3.2011
31.3.2012 31.3.2012 | By Profit & Loss A/c By Balance c/d
By Profit & Loss A/c By Balance c/d | 500 4,500
5,000
500 4,000
4,500 |
Loss on issue of Debentures A/c
Date | Particulars | Amount | Date | Particulars | Amount |
1.4.2010
1.4.2011 | To Premium on Redemption of Debentures
To Balance b/d |
4,000
4,000
3,600
3,600 | 31.3.2011 31.3.2011
31.3.2012 31.3.2012 | By Profit & Loss A/c By Balance c/d
By Profit & Loss A/c By Balance c/d | 400 3,600
4,000
400 3,200
3,600 |
Premium of Redemption of Debentures A/c
Date | Particulars | Amount | Date | Particulars | Amount |
31.3.2011
31.3.2012 | To Balance c/d
To Balance c/d | 4,000
4,000
4,000
4,000 | 1.4.2010
1.4.2011 | By Loss on issue of debentures
By Balance b/d |
4,000
4,000
4,000
4,000 |
Interest on Debentures:
When a company issues debentures, it is under obligation to pay interest there on at a fixed percentage, half yearly or yearly until debentures are repaid. The percentage of interest is given to the name of debentures, e.g. 5% Debentures, 10% Debentures etc. The interest is calculated at the nominal value of debentures.
Interest on debentures is expenses of Company. A company must deduct income tax at a prescribed rate from interest payable on debentures. It is called tax deducted at source (TDS).
The following journal entries are recorded in connection with interest on debentures.
Specimen Journal Entries:
1) For interest is due
Debentures interest A/c Dr. xxx
To Income Tax Payable A/c xxx
To Debenture holder’s A/c xxx
(Being the amount of interest due on debentures & TDS)
2) For payment of interest to debenture holders
Debenture holder’s A/c Dr. xxx
To Bank A/c xxx
(Being the interest paid to debenture holders)
3) For transfer of interest on debentures to profit & loss A/c
Profit & Loss A/c Dr. xxx
To debenture interest A/c xxx
(Being interest on debenture transferred to profit & loss A/c)
4) For payment of tax deducted at source to Govt.
Income Tax Payable A/c Dr. xxx
To Bank A/c xxx
(Being Payment of TDS on interest on debentures)
Q1) (Issue of debentures at discount & repayable at premium & Interest on debentures)
Anand Ltd issued 2,000, 10% debentures of Rs.100 each on 1st April, 2009 at a discount of 10% redeemable at a premium of 10%
Give journal entries relating to issue of debenture and debenture interest for the period ending March 31, 2010 assuming that interest was paid half yearly on September 30 and March 31 and tax deducted at source is 10%
Anand Ltd.’s Journal
Date | Particulars | LF | Amount | Amount |
2009 April 1
April 1
Sep. 30
Sep. 30
2010 Mar. 31
Mar. 31
Mar. 31
Mar. 31
|
Bank A/c Dr. To 10% Debenture Application & Allotment A/c (Being Application money received on 2,000 10% debentures @10% discount)
10% Debentures Application & allotment A/c Dr. Loss on issue of debentures A/c Dr. To 10% Debentures A/c To Premium on redemption of Debentures A/c (Being allotment of debentures ta discount of 10% and redeemable at Premium @10%)
10% Debenture interest A/c Dr. To Debenture holders A/c To Income Tax Payable A/c (Being interest due for 6 months and tax deducted at source)
10% Debenture holders A/c Dr. To Bank A/c (Being Payment of interest)
10% Debenture interest A/c Dr. To Debenture holders A/c To Income Tax Payable A/c (Being interest due for 6 months & TDS)
10% Debenture holders A/c Dr. To Bank A/c. (Being Payment of interest)
Income Tax Payable A/c Dr. To Bank A/c (Being TDS paid)
Profit & Loss A/c Dr. To Debenture Interest A/c (Being Interest transferred to profit & loss A/c) |
|
1,80,000
1,80,000 40,000
10,000
9,000
10,000
9,000
2,000
20,000 |
1,80,000
2,00,000
20,000
9,000 1,000
9,000
9,000 1,000
9,000
2,000
20,000 |
| Total |
| 4,60,000 | 4,60,000 |
REDEMPTION OF PREFERENCE SHARES
Accounting Entries:
No. | Transaction / Entry | Amount |
A.
1 1.1
1.2
1.3
2 2.1
2.2
B
3 3.1
3.2
3.3
4
C
5
6
7
D
8
E
9 9.1
9.2 | BEFORE PROCESSING WITH REDEMTION
Making All Shares Fully Paid Final Call Made on Partly Paid Shares Final Call on Red. Pref. Share Capital A/c Dr. To Red. Pref. Share Capital A/c
Money Received on Final Call Bank A/c Dr. To Final Call on Red. Pref. Share Capital A/c
Money Received on Calls-in-arrears Bank A/c Dr. To Calls-in-arrears A/c
Forfeiture Forfeiture Red. Pref. Share Capital A/c Dr. To Calls in Arrears A/c To Shares Forfeited A/c
Profit on Forfeiture Share Forfeited A/c Dr. To Capital Reserve A/c
FUNDS FOR REDEMPTION
Issue of New Shares Issue at par Bank A/c Dr. To Equity/Pref. Share Capital A/c
Issue at discount Bank A/c Dr. Discount on Issue of Shares A/c Dr. To Equity/Pref. Share Capital A/c
Issue at Premium Bank A/c Dr. To Equity/Pref. Share Capital A/c To Security Premium A/c
Sale of Assets Bank A/c Dr. Profit & Loss A/c Dr. To Asset A/c To Profit & Loss A/c
RECORDING AMOUNT PAYABLE ON REDEMPTION
Amount Payable on Redemption Redeemable Pref. Share Capital A/c Dr.
Premium on Redemption of Pref. Shares A/c Dr. To Pref. Shareholders A/c
Premium on Redemption Adjusted Security Premium A/c Dr.
Profit & Loss A/c Dr. To Prem. On Redemption of Pref. Shares A/c
Create CRR Out of Divisible Profits Profit & Loss A/c Dr. To Capital Redemption Reserve A/c
RECORDING PAYMENT ON REDEMPTION
Payment to Pref. Shareholders Pref. Shareholder A/c Dr. To Bank A/c
AFTER REDEMPTION
Bonus Bonus Declared CRR / Reserve A/c Dr. To Bonus to Shareholders A/c
Issue of Bonus Shares Bonus to Shareholders A/c Dr. To Equity Share Capital A/c |
Call x No. Of Shares
Amount Received
Amount Received
Amount called up Amount unpaid Amount received
Balance Amount tfd.
Total Amount Received For Capital
Net Amount Received Discount For Capital
Total Amount Received For Capital For Premium
Sale Proceeds Loss on sale, if any Book value of that asset Profit on sale, if any
Capital due for Redemption For Premium, if any Total Payable
Existing + Received on new issue Latest Balance Total Premium Payable
Divisible profits used
Actual shares redeem Actual Payment
Amount of Bonus
Bonus Amount Used Issue of bonus shares
|
Q1) The Balance Sheet of Monica Ltd. As on 31st March, 2012 was as follows:
Liabilities | Amount | Assets | Amount |
4,000 12% Redeemable Preference Shares of Rs.10 each fully paid up 6,000 Equity Shares of Rs.10 each fully paid up Security Premium Profit and Loss Account Sundry Creditors |
40,000
60,000 20,000 23,400 52,100 | Goodwill Sundry Assets Bank Share issue Expenses | 7,000 1,21,500 65,000 2,000 |
| 1,95,500 |
| 1,95,500 |
The Company decided to redeem the preference shares at a premium of 5% together with one month’s dividend thereon.
Other information is as under:
1) The company issued for cash Rs.12,000, 14% Debentures at a discount of 2.5%
2) Before redemption, the company decided to write off Goodwill from Profit & Loss Account and Share issue Expenses and discount on issue of debentures out of Security Premium Account.
3) The company issued at par for cash a minimum number of new 15% preference shares of Rs.10 each necessary to provide for redemption of 12% preference shares after utilizing available divisible profits.
4) The Company made a bonus issue to equity shareholders of one fully paid share of Rs.10 each for every five shares held. Pass necessary journal entries.
SOLUTION: Journal of Monica Ltd.
No. | Particulars | Debit | Credit |
1
2
3
4
5
6
7
8
9
10 | Bank A/c Dr. Discount on Issue of Debentures A/c Dr. To 14% Debentures A/c (Being Debentures issued at a discount)
Profit & Loss A/c Dr. To Goodwill A/c (Being Goodwill written off)
Security Premium A/c Dr. To Discount on Issue of Debentures To Share issue Expenses A/c
Bank A/c Dr. To 15% Pref. Share Capital A/c (Being Pref. Shares issued to raise funds for redemption)
Profit & Loss A/c Dr. To Capital Redemption Reserve A/c (Being amount equal to NV of Pref. Shares redeemed out of profits, transferred)
Security Premium A/c Dr. To Premium on Redemption of Pref. Share A/c (Being premium on redemption of Pref. Shares w/o against Security Premium)
12% Redeemable Pref. Share Capital A/c Dr. Premium on Redemption of Pref. Cap A/c Dr. Profit & Loss A/c Dr. To Preference Shareholders (Being amount due to preference shareholders for redemption and dividend) Preference Shareholders A/c Dr. To Bank A/c (Being the amount due to preference shareholders paid)
Capital Redemption Reserve A/c Dr. To Bonus to Shareholders A/c (Being Bonus Shares declared)
Bonus to Shareholders A/c Dr. To Equity Share Capital A/c (Being Equity Shares issued as bonus) | 11,700 300
7,000
2,300
24,000
16,000
2,000
40,000 2,000 400
42,400
12,000
12,000 |
12,000
7,000
300 2.000
24,000
16,000
2,000
42,400
42,400
12,000
12,000 |
Working Note:
1) Divisible Profits
Profit & Loss A/c Balance 23,400
Less: Goodwill w/o 7,000
16,400
Less: Dividend 400
Divisible Profits 16,000
2) Minimum No. Of New Pref. Shares
NV of RP Shares redeemed – Divisible Profits = 40,000 – 16,000 = 24,000
3) Bank Balance = 65,000 + 11,700 + 24,000 – 42,400 = 58,300
Q2) The following is the Balance Sheet of Abhipraya Limited as on 31st March 2012
Liabilities | Amount | Assets | Amount |
Share Capital: 5,000, 12% Redeemable Preference Shares of Rs.100 each Shares of Rs.100 each 10,000 Equity Shares of Rs.100 each Capital Reserve Securities Premium General Reserve Profit and Loss Account Current Liabilities |
5,00,000
10,00,000 1,00,000 1,00,000 2,00,000 1,00,000 10,00,000 | Fixed Assets Stock Debtors Cash
| 24,00,000 5,00,000 50,000 50,000 |
| 30,00,000 |
| 30,00,000 |
The Preference Shares are to be redeemed on 1st April, 2012 at 10 percent premium.
On 1st April, 2012 a fresh issue of Equity Shares was made to the extent it is required under the Companies Act for the purpose of the redemption of preference shares.
The shortfall in cash resources for the purpose of redemption after utilizing the proceeds of fresh issue was met by raising a bank loan, the cash balance of Rs.50,000 being the minimum, the company requires for its trading operation.
Draft journal entries in the books of the company to record these share capital transactions and prepare the Balance Sheet, in the form prescribed by the Companies Act 1956, immediately after redemption.
SOLUTION: Journal of Abhipraya Limited
No. | Particulars | Debit | Credit |
1
2
3
4
5
6
7 | Bank A/c Dr. To Share Application & Allotment A/c (Being fresh issue of equity shares made)
Share Application & Allotment A/c Dr. To Share Capital A/c (Being 2,000 equity shares allotted)
Bank A/c Dr. To Bank Loan A/c (Being bank loan taken to redeem the 5,000 Preference Shares of Rs.100 each at a premium of 10%)
12% Redeemable Pref. Share Capital A/c Dr. Premium on Redemption A/c Dr. To Preference Shareholders A/c (Being 5,000 Preference Shares of Rs.100 each due for redemption at a premium of 10%)
Security Premium A/c Dr. To Premium on Redemption A/c (Being the premium on redemption adjusted)
General Reserve A/c Dr. Profit & Loss A/c Dr. To Capital Redemption Reserve A/c (Being the balance of accumulated profit and reserves transferred to Capital Redemption Reserve A/c for redemption)
Preference Shareholders A/c Dr. To Bank A/c (Being liability of preference shareholders settled) | 2,00,000
2,00,000
3,50,000
5,00,000 50,000
50,000
2,00,000 1,00,000
5,50,000 |
2,00,000
2,00,000
3,50,000
5,50,000
50,000
3,00,000
5,50,000 |
Balance Sheet of Abhipraya limited (After Redemption)
Particulars | Note | Amount | Amount |
I EQUITY AND LIABILITIES 1 Shareholders Funds a Share Capital b Reserves And Surplus 2 Non-Current Liabilities Long-term Borrowings (Bank Loan) 3 Current Liabilities |
1 2 |
12,00,000 4,50,000 |
16,50,000
3,50,000 10,00,000 |
Total |
|
| 30,00,000 |
II ASSETS 1 Non-Current Assets Fixed Assets 2 Current Assets a Inventories b Trade Receivables c Cash and Cash Equivalents |
|
5,00,000 50,000 50,000 |
6,00,000 |
Total |
|
| 30,00,000 |
Notes to Accounts | Amount | Amount |
1 Share Capital Equity Share Capital Issued, subscribed & fully paid Shares (Rs.100) 2 Reserves and Surplus a Capital Reserve b Capital Redemption Reserve Transferred From General Reserve Transferred From P & L Account c Securities Premium Opening Balance Less: Premium on redemption of Preference Shares d General Reserve Balance b/d Less: Transferred To Capital Redemption Reserve e Balance in Statement of Profit & Loss b/d Less: Transferred To Capital Redemption Reserve |
12,000
2,00,000 1,00,000
1,00,000 50,000
2,00,000 2,00,000 1,00,000 1,00,000 |
12,00,000
1,00,000
3,00,000
50,000
Nil
Nil |
Total |
| 4,50,000 |
Q3) The summarized Balance Sheet of Nishith Power Ltd. As on 31st March, 2012 was as under:
Liabilities | Amount | Amount | Assets | Amount | Amount |
Equity Share of Rs.10 each, Rs.8 per share called up Less: Calls unpaid (Rs.2 on 300 Shares) 8% Redeemable Preference Shares of Rs.100 each fully paid Reserves Fund Securities Premium Profit & Loss A/c Sundry Creditors |
1,60,000
600 |
1,59,400
1,50,000 2,50,000 40,000 2,00,000 50,600 | Land & Building Plant Investments Sundry Debtors Stock Bank |
| 2,00,000 2,60,000 75,000 1,15,000 1,20,000 80,000 |
|
| 8,50,000 |
|
| 8,50,000 |
The Directors of a Company resolved to:
a) Realise the Investments at Rs.1,00,000
b) Forfeit the shares on which calls remain unpaid.
c) Reissue the forfeited shares at Rs.7 each credited at Rs.8 per share paid up.
d) Issue 1000-8% Debentures of Rs.100 each at a premium of 10%
e) Utilise the profits to make partly paid equity shares into fully paid by declaring bonus.
f) Redeem Preference shares at a premium of 10%
All the above resolution were implemented on 1st April, 2012.
Show journal entries to record the above transactions in the books of company.
SOLUTION: In the books of Nishith Power Ltd.
No. | Particulars | Debit | Credit |
1
2
3
4
5
6
7
8
9
10
11
12 | Sale of Investments Bank A/c Dr. To Investments A/c To Profit & Loss A/c (Being Investments sold)
Forfeiture and Re-issue Equity Share Capital A/c (300x8) Dr. To Calls in Arrears A/c (300x2 To Shares Forfeited A/c (300x6) (Being 300 shares forfeited for non-payment of Rs.2 per share)
Bank A/c (300x7) Dr. Shares Forfeited A/c (300x1) Dr. To Share Capital (Being forfeited shares re-issued)
Shares Forfeited A/c Dr. To Capital Reserve A/c (Being balance in Shares Forfeited A/c transferred)
Issue of Debentures Bank A/c Dr. To 8% Debentures A/c To Security Premium A/c (Being 8% 1,000 Debentures issued)
Making All Shares Fully Paid/Bonus Equity Shares Final Call (20,000x2) Dr. To Equity Share Capital A/c (being final call made on partly paid equity shares)
Reserve Fund A/c Dr. To Bonus to Equity Shareholders A/c (Being bonus declared for making partly paid shares into fully paid)
Issue of Bonus Shares Bonus to Equity Shareholders A/c Dr. To Equity Shares Final Call A/c (Being bonus issued by making Equity Shares fully paid)
Provide for Premium on Red. Security Premium A/c Dr. To Prem. On Redemption of Pref. Shares (Being premium on redemption provided out of security premium A/c)
CRR from Divisible Profits Reserve Fund A/c Dr. To Capital Redemption Reserve A/c (Being creation of Capital redemption reserve out of divisible profits)
Payable on Redemption 8% Redeemable Pref. Share Capital A/c Dr. Premium on Redemption of Pref. Share A/c To 8% Redeemable Pref. Shareholders (Being amount payable on redemption to Pref. Shareholders)
Actual Redemption 8% Redeemable Pref. Shareholders A/c Dr. To Bank A/c (Being Pref. Shares redeemed) |
1,00,000
2,400
2,100 300
1,500
1,10,000
40,000
40,000
40,000
15,000
1,50,000
1,50,000 15,000
1,65,000 |
75,000 25,000
600 1,800
2,400
1,500
1,00,000 10,000
40,000
40,000
40,000
15,000
1,50,000
1,65,000
1,65,000 |
Working Note:
Bank (80,000 + 1,00,000 + 2,100 + 1,00,000 + 10,000 – 1,65,000) = 1,27,100