UNIT-III
Shares and Debentures
CONCEPT OF SHARE CAPITAL
Money required by a company to commence and carry on its operations is raised by issuing shares and debentures. Although there are other sources of raising funds (like acceptance of public deposits, taking bank loans, etc.), issue of shares is the bulk of fund requirement by a company.
The term ‘Share Capital of a company’ can be used in the following concepts :–
1. Authorized Capital: This presents the value of shares with which a company is registered.
2. Issued Capital : This means the portion of authorised capital that is being offered
for public subscription.
3. Subscribed Capital: This presents that portion of issued Capital that is being
taken up by public.
4. Called up Capital: This represents that part of subscribed capital that the directors
have decided to call up from the subscriber to satisfy the monetary needs of the company.
5. Paid up Capital : That portion of called up capital that is being actually paid in cash by the shareholders.
Types of Shares
A company can issue two types of shares :–
1. Preference shares :
be paid in later years when there is adequate profit. This condition does not exists in case of noncumulative preference
shares. Under the Companies (Amendment) Act, 1988 , preference shares issued by a company has to be redeemed within 10 years from the date of issue.
2. Equity shares:
Equity shares are those which are not preference shares. They do not carry any specific rate of dividend; i.e. the rate of dividend can vary over the years depending on the sufficiency of profit. They are allowed to get notice and attend the A.G.M. of the company.
ISSUE OF SHARES
Issue of shares involves the following steps :
1. Issue of prospectus including people to take up shares 2. Receiving applications along with application money. 3. Allotment of shares
4. Making calls on shares as decided by the Board of Directors. 5. Issue and despatch of share certificate.
Journal Entries for issue of Shares
Particulars Dr. (reason) Cr.
1) on receipt of application money :
Bank A/c Dr.
To Share Application A/c [No. of shares applied ‘×’ Rate]
2) on allotment of shares:
Share Application A/c [No. of shares applied ‘×’ Rate] Dr. To Share capital A/c
3) For rejection of some applications:
Share Application A/c Dr.
To Share Capital A/c [No. of shares rejected ‘×’ Rate]
a) When Premium is receivable along with application :
i) Bank A/c [Total receipt including premium] Dr. To Share Application
ii) Share Application A/c [No. of shares issued '×’ Rate] Dr.
To Share Capital [No. of shares issued '×’ Rate towards face value] To Share Premium [premium / share ‘×’ No. of shares issued]
b) When premium is receivable at the time of allotment. i) Share Allotment A/c Dr.
To Share Capital To Share Premium.
ii) Bank A/c Dr. To Share Allotment
5) Making and Receipt of Calls : The Balance due towards face value of shares after receiving application and allotment money can be recovered by making as many calls as the directors decide. The entries should be :
1) For Call Money due:
Share Call A/c [No. of shares Issued '[No. of shares issued ‘×’ Rate]’ Rate.] Dr. To Share Capital.
2) For Call money received
Bank A/c Dr. To Share Call A/c
6) Treatment of calls-in-arrear : The terms denotes failure on part of some shareholders to make
payment of any call due on the shares taken up by him. The following entry should be passed in every case of such default.
Call-in-arrear A/c [No. of defaulted shares ‘×’ Rate] Dr. To (Respective) Call A/c.
In case shares are not forfeited the Total balance of call-in-arrear A/c should be deducted from Share Capital A/c in the Balance Sheet.
When some shareholders make excess payment in respect of any instalment due on his shares the excess amount may be retained by the company and adjusted against subsequent calls. The Journal Entries would be :
Particulars Dr. (reason) Cr.
1) Share Cal l ( 1) [No. of shares Issued '[No. of shares applied ‘×’ Rate]' Amount dueon call/share] Dr.
To Share Capital (original call made).
2) Bank A/c Dr. (Total receipt)
To Share Call (1) A/c [No. of shares '[No. of shares ‘×’ Due on call/per share] To Calls-in-advance [Excess amount received]
3) Share Call (2) A/c Dr.
[No. of shares issued '[No. of shares applied ‘×’ Rate]' Amount due on call /per share] To Share Capital
4) Bank A/c (Balance) Dr.
Calls-in-advance A/c [Excess amount received on prior call] Dr. To share call (2) A/c [No. of shares issued '×' amount due/per Share.]
Unadjusted calls in advance should be shown on Liability side of Balance Sheet.
Issue of shares at a discount
For issuing shares at discount the following conditions are to be satisfied : (u/s 79 of Companies Act)
1) Discount should be given on such classes of shares already issued by the Company.
2) The decision to issue shares at discount will be taken by passing a resolution at the
A.G.M.
3) The company must be at least one year of age.
4) Without approval of CLB the maximum rate of discount must not exceed 10% of
face value.
JOURNAL ENTRY Share Allotment A/c Dr.
Discount on Issue of Share A/c Dr. To Share Capital
Note : The above entry assumes the adjustment of discount at the time of allotment.
Illustration 1 :
Bat and Ball Ltd. issued 50,000 Equity Shares of Rs. 100 each. These were payable as to
Rs. 20 on Application, Rs. 30 on Allotment and the balance will be paid as and when called
for by Directors. Applications were received for 70,000 shares. The Directors made the
allotment as follows :
To applicants of 30,000 shares — Full allotment To applicants of 30,000 shares — 20,000 shares
To applicants of 10,000 shares — Application money refunded
Give journal entries for the above assuming all the money due on allotment has been received and no call has been made.
Solution :
Particulars Dr.(Rs.) Cr.(Rs.)
Bank Account Dr. 14,00,000
To Share Application A/c 14,00,000
(Being Application money received on 70,000 shares @ Rs. 20 per share)
Share Application A/c Dr. 10,00,000 To Share Capital A/c 10,00,000
(Being Application money transferred to Share Capital Account as per Board’s Resolution Dated...)
Share Application A/c Dr. 2,00,000 To Bank Account 2,00,000
as per Board’s Resolution No. Dated...)
Share Allotment Account Dr. 15,00,000 To Share Capital Account 15,00,000
(Being the Capital Account money due on 50,000 shares @ Rs.30 per share as per Board’s Resolution dated...)
Share Application Account Dr. 2,00,000 To Share Allotment A/c 2,00,000
(Being surplus Application money on 10,000 shares transferred to Share Allotment A/c as per Board’s Resolution dated...)
Bank A/c Dr. 13,00,000
To Share Allotment A/c 13,00,000
(Being the receipt of the amount due on allotment Rs. 15,00,000 – 2,00,000)
FORFEITURE AND REISSUE OF SHARES Forfeiture of shares :
The shares allotted to a subscriber who has defaulted in paying any call due on his shares can be forfeited by decision of the Board of Directors if empowered by the articles of the company after giving due notice to the defaulting shareholders. This power of Board of Directors has to be applied bonafide and in the interest of the company.
Journal Entries for Forfeiture Share Capital A/c Dr.
[No. of share forfeited '×' Amount called up per share]
To Calls in Arrear [total amount of dues not collected on forfeited shares] To Share Forfeiture A/c [amount collected on forfeited shares]
If forfeited shares are issued at a premium and such premium is not received then the entry should be :
Share Capital A/c Dr. Share Premium A/c Dr. To Calls-in-arrear A/c To Share Forfeiture A/c
Bank A/c Dr. (Amount actually received) Share Forfeiture A/c Dr. (Discount on Reissue) To Share Capital A/c (Face value of share)
2) If balance of Share Forfeiture A/c exceeds discount on Reissue, the Balance should
be treated as a Capital profit which is computed on follows :–
Amount forfeited × No. of shares reissued - Discount on No. of forfeited shares reissued.× no. of shares.
The Journal Entry will be :
1) Share Forfeited A/c Dr. To Capital Reserve Note:
The forfeited amount on unissued shares will be shown in Balance Sheet as an addition to share capital.
Prorata Allotment
In case of over subscription the company can either reject the excess applications or make proportionate allotment to all applicants. The second case is called prorata allotment. The excess money received on application is adjusted against subsequent calls :
ISSUE OF BONUS SHARES
Companies with substantial reserve may decide to capitalise a part or whole of such reserves by issuing fully paid up, instead of paying dividend to its share holders.
Sources of Bonus Issue
1. For fully paid up Bonus Shares : (a) P/L Account,
(b) General Reserve,
(c) Capital Redemption Reserve, (d) Share Premium A/c,
(e) Other free reserves.
2. For partly paid up bonus shares : (a) P/L A/c,
Note :
(b) General Reserve, (c) Other free Reserves.
2) Share Premium and Capital Redemption Reserves are not available for issuing partly
paid up Bonus shares.
JOURNAL ENTRIES.
For fully paid up Bonus Share issue
1) Reserve A/c Dr.
To Bonus to Shareholders
(Declaration of Bonus as per share holders Resolution No...dated...)
2) Bonus to Shareholders A/c Dr. To Equity Share Capital
(Issue of ...(no.) of Bonus shares as per Share Holder Resolution No...dated...)
For issuing partly paid up Bonus shares a) Share ...CallA/c Dr.
To Share Capital
(Call money due on ...shares @ Rs...)
b) Reserves A/c Dr.
To Bonus to Shareholder A/c
(Declaration of Bonus as per Share holder resolutions no....dated..)
c) Bonus to Shareholders A/c Dr. To Share Call A/c
(Utilisation of Reserves for making partly paid up shares into fully paid up)>
Procedure for Issue of Bonus share:
Students are advised to refer to the SEBI Guidelines issued from time to time in this respect.
Behind bonus issue
1. Reflection of true earning rate to share holders funds.
Redemption of Preference shares:
One should refer to Section 80 of Companies Act in this respect which is reproduced
below:
1. Only fully paid up shares can be redeemed.
2. Such redemption should be affected either out of the funds obtained from fresh
issue of shares or out of the nonspecific reserves of the company.
3. Premium (if any) on redemption shall be paid out of companies past profit or Share
Premium A/c.
4. Where such redemption is affected otherwise than out of the proceeds of the fresh
issue an amount equal to the nominal value of the shares so redeemed will be
transferred termed "Capital Redemption Reserve".
JOURNAL ENTRIES.
1. Preference Share Capital A/c Dr.
[Face value of shares to be redeemed]
Premium on Redemption A/c Dr. To Preference Shareholders A/c
(Amount due on Redemption as well as premium thereon transferred to preference share holders A/c)
2 Bank A/c Dr. To Share Capital
(Fresh issue made on finance Redemption).
Note:
1. This entry should be made only when fresh shares are issued.
2. Premium or discount on such issue shall be adjusted in the manner mentioned earlier while
To Assets A/c
(Sale of Assets to finance redemption)
Note: Any profit or loss on such sale should be adjusted in P/L A/c 4. Reserve A/c Dr.
To Capital Redemption Reserve
[Face value of shares redeemed – Face Value of new issue]
(Provision of Sec. 80 of Companies Act) 5) Preference Shareholders A/c Dr. To Bank
(payment made to preference share holders)
Note : In case some of shareholders could not be found amount due to them should be shown on
liability in the Balance Sheet. 6) Reserve A/c Dr.
To Premium of Redemption A/c
s
DEBENTURE — ISSUE AND REDEMPTION
A debenture may be defined as an acknowledgment (mostly under seal of the company) of a debt or loan raised by the company. Just as the share capital of a company is divided in a large number of a parts, each part being called a share, the loan may be divided into a number of parts called Debentures. They enable a company to raise a loan easily by enabling investors to buy as many debentures as they want.
Debenture is a creditorship security. Company has to pay interest to debenture holders at the agreed rate. It is usual to prefix “Debentures” with annual rate of interest.
Distinction between Debentures and Shares.
Debentures Shares
i) Security It is a creditorship Security It is an ownership security
on his investment and of interest payments.
iii) Order of They are paid first They are finally paid. repayment on winding up. iv) Issue at a discount No legal conditions Legal conditions have to be satisfied. v) Mortgage There can be mortgage Debentures There cannot be mortgage shares.
vi) Convertibility Can be converted into shares at the Cannot be converted option of the debenture holder. into debentures.
CLASSES OF DEBENTURES
Redeemable Debentures
Irredeemable Debentures
Mortgaged Debentures
Naked Debentures
Registered Debentures
Bearer Debentures
First Debentures
Second Debentures
Convertible Debentures
Non-convertible Debentures
Issue of Debentures :
The company issues the prospectus inviting applications along with a sum of money called Application money.After scrutiny, the Board of Directors make allotment.
Entries :
1) When applications are received : Bank A/c Dr.
To Debenture Application A/c
2) Debenture Application A/c Dr. To Debenture A/c
3) Rejection to applications:
4) Surplus allotment money:
Debenture Application A/c Dr. To Debenture Allotment A/c
5) Amount due on allotment of debentures:
Debenture Allotment A/c Dr. To Debentures A/c
Like shares debentures may be issued at par, at a premium or at a discount. But the law does not lay down any maximum limit for discount on issue of debentures. The sanction of the CLB is also not needed. If a company issues debentures on the condition that they would be redeemed at a premium, this additional liability should be recorded in a separate account called “Premium on Redemption of Debentures A/c” and should be shown along with the
liability “Debentures” on the liabilities side of the Balance Sheet.
Entries:
i) When debentures are issued at par and are also redeemed at par:
Bank A/c Dr. To Debenture A/c
ii) When debentures are issued at a discount, but redeemable at par;
Bank A/c Dr.
Discount of Issue of Debentures A/c Dr. To Debenture A/c
iii) When debentures are issued at a premium and redeemable at par:
Bank A/c Dr. To Debenture A/c
To Premium on Issue of Debentures A/c
iv) When debentures are issued at par and redeemable at a premium :
Bank A/c Dr.
Loss of Issue of Debentures A/c Dr. To Debenture A/c
To Premium on Redemption of debentures A/c
v) When debentures are issued at a discount and redeemable at a premium:
Bank A/c Dr.
To Premium on Issue of Debentures A/c
vi) Expenses, Discount, and loss on Issue of debentures are transferred to an account called Cost of Issue of debentures A/c and shown as “Miscellaneous Expenditure” in the Balance Sheet.
vii) Premium on Issue of debentures is transferred to Capital Reserve A/c.
Redemption of Debentures:
1) Redemption of Debentures Out of Capital 2) Redemption of Debentures Out of Profit
Redemption of Debentures Out of Capital
When the redemption of debentures is made out of capital, no amount is transferred from Profit and Loss Account to the debenture Redemption Reserve Account (DRR). Its effect will be that credit balance of Profit and Loss Account will not be reduced. This might result in the payment of dividends sometime in the future. It will also indicate that redemption is being done out of that money which is not earned during the course of business. Therefore, such redemption is out of Capital.
Accounting Treatment
1. When the amount of debentures becomes due
a) If the debentures are redeemable at par
Debenture A/c Dr.
To Debenture-holders Account
b) If the debentures are redeemable at discount
Debenture A/c Dr.
c) If the debentures are redeemable at premium:
Debenture A/c Dr.
Premium on Redemption of Debentures Account To Debenture-holders Account
2. When payment is made to debenture-holders: Debenture-holders Account Dr.
To Bank Account
Redemption of Debentures Out of Profit
When a company wants to redeem its debentures out of profit, it would accumulate its divisible profits so that they may be utilized for the redemption of debentures. For the redemption of debentures out of profit, an amount equal to that utilized for repayment of debenture-holders is transferred from the divisible profits to the Debenture redemption reserve account, so that it may not be utilized for the distribution of dividend.
Accounting Treatment
1. When the amount of debentures becomes due to debenture-holders on redemption:
Debenture A/c Dr.
Premium on Redemption of debentures A/c Dr. To Debenture-holders Account
2. When profits are transferred for redemption
Profit and Loss A/c Dr.
To Debenture redemption reserve account
3. When amount is paid to debenture-holders
4.
After redemption of debentures the balance of Debentures
redemption reserve is transferred to general reserve
.
Debenture redemption reserve account Dr. To General Reserve account
Concept of Cum and Ex-interest
The word "Cum" means "inclusive" and "Ex" means exclusive. When debentures are quoted on "cum-interest" basis it means that the quotation in addition to covering the cost also includes accrued interest up to the date of purchase/sale.
