A share is issued at either on a lump-sum basis or on installment basis. In lump-sum basis, cash is fully paid at once during the time of application. However, a company might also issue its shares to be paid in various installments. This system of issuance of shares to the shareholders is known as the issue of share on an installment basis. Also, the shares may be issued in par, which is the payment of share at its face value, at a discount, which is the issuance of shares at a price below the face value and at a premium, which is to issue the share above the face value of the share.
A number of shares may be collected in different installments. Generally, such amount of installments is collected in the form of application, allotment, first call and second and final call. A prospective subscriber intending to purchase the share pays the first installment of the amount of share with an application form. The amount of the first installment paid is called share application money. All the applicants deposit their application money in the bank.
The company allots the shares among different applicants after receiving their share application money. The allotment of shares implies that the company has accepted the application of the subscribers and decided to give shares to them. The company sends letters to the applicants intending to subscribe the shares which are called ‘Letter of Allotment’. The letter of allotment provides the information about the number of shares allotted to the subscribers and the amount to be paid by them as the allotment money.
The remaining amount of the shares allotted is called up by writing a letter to the shareholders which are known as calls on the share. Such remaining amount is called up after receiving the allotment money. The balance of share money can be called up either in one or two installments. If the entire balance of share is called up at once, it is called ‘first and final call’. However, if the balance of share is called up in two different installments, it is called first call and second and final call respectively.
Now, we will see the format for the journal entries for application, allotment, and calls.
Generally, shares are issued at par. If the shares are issued at par, the company collects the amount of shares in different installments equal to their face or nominal value. For example: issuing shares of Rs.10 each at Rs.10 per share is called issuing share at par.
Example 1: Saugat company Ltd. Invited application for 1000, 9% preference shares of Rs.50 each at par payable as:
Rs.25 –on first and final call
All the shares were subscribed and allotted. All money was duly received.
Required: Journal Entries
Generally, a company does not issue its shares at a discount. If the shares are issued in different installments after deducting the amount discount from the face or nominal value of the shares. For example, issuing a share of Rs.10 each at Rs.9 per share is called issuing share at a discount.
The discount on the issue of share is a capital loss. It is debited to ‘discount on issue of share account’. The discount is included in the amount of allotment. Mostly, it is debited to discount on issue of share account at the time of making the allotment money due entry. Since, the discount is a capital loss, it is shown on the assets side of the balance sheet. It is required to be written off in subsequent years within the period of debenture amount outstanding as per the decision of the Board of Directors.
Example 2: Anamol Co. Ltd. Issued 20,000 equity shares of Rs.100 each at a discount of Rs.10 per share. The amount was payable Rs.40 on the application, Rs.30 on allotment and Rs.20 on first and final call. All the shares were subscribed, allotted and the money was duly received.
Required: Journal Entries
The issue of share at a price higher than its face value or nominal value is known as an issue of share at a premium. For example, if the face value of a share is Rs.100 and is issued at Rs.110 per share, the excess amount of Rs.10 is a share premium. Such a premium is a capital gain and credited to share premium account.
The amount of share premium can be collected with the application or with an allotment or with calls money. Normally, the amount of premium is collected along with the allotment money. There are two methods for the treatment of the amount of share premium. They are a due method and receipt method.
If the amount of share premium is received along with the application money, it is recorded by preparing the following entries.
Example 3: Active Co. Ltd. Issued 50,000 equity shares of Rs.100 each at 20% premium. The amount payable was as follows:
On application- Rs.30 (including premium Rs.10)
On allotment- Rs.50 (including premium Rs.10)
On first and final call- Rs.40
All the shares were subscribed, allotted and the money was duly received.
Required: Journal Entries
Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu
Shrestha, Dasharatha et.al., Accountancy -XII, M.K. Prakashan, Kathmandu
Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu