Issue of Shares

INTRODUCTION

A company issues its shares to the general public through an invitation called prospectus. The prospectus states, besides others, the number of shares offered to the public and the face value of the shares. Generally, the shares of the company are issued for cash. However, sometimes, shares are also issued for considerations other than cash, such as for the purchase of assets and for the purchase of business. There is mostly three-steps in the collection of the money of shares which are share application; which is taken during accepting the first installment of the company then share allotment which is taken when the share rights are given to the investor and finally calls money which is the remaining amount of share to be paid. So, we will look in detail about the three steps:

1. Share Application

Share application is the money which a company receives during the time of accepting the request of purchase of the share of the company. A company issues a certain amount of shares in the market. In response, investors and shareholders apply for the issuance of the share. When the application money is given for the rights to the share, the share application money is transferred to the share capital money and is termed as the first installment of the share. So, 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.

2. Share Allotment

When a company receives an application for the purchase of shares, it continues to assign the shares on the predefined basis (decided on the prospectus of the company). When the amount of application surpasses the available amount of shares, the allotment is made uniformly. Usually, in most cases, applications for shares are received till the available stated number are received fully. The letter of allotment is given to receive the allotment money and shares. So, the company allots the shares among different applicants after receiving the 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 application intending for subscribing 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 allotment money.

3. Calls on shares

Calls may be defined as the demand by the business made to its investors and shareholders to pay the remaining part or full part of the unpaid balance on each share value at any time in the run of a company. The remaining amount of the shares allotted is called up by writing letters 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 is called up at once, it is known as ‘first and final call’. But, if the balance of the share is called up in two or more different installments, it is known as a first call, second call, third and final call respectively.

Issue of shares for cash

The shares of a company can be issued either at par or at a discount or at a premium. The amount of the shares can be collected either on lump-sum or on an installment basis. If the whole amount of shares is collected at once, it is called issues of shares on a lump-sum basis. In such case, the whole amount of share is received with the amount of share application. Such shares can be issued either at par or at a discount or at a premium.

Issue of share at par

A share issued at a price equal to its face or nominal value is called the issue of share at par. The par or face value of the share is printed on the face of the share certificate. For example, if a share of Rs.100 each is issued at Rs.100, it is known as the issue of share at par.

Example: 1

Let A. company Ltd. Issue 10,000 equity shares of Rs.10 each for public subscription. All the shares were applied for and the allotment was made in full.

Required: Journal Entries

Issue of share at a discount

A share issued at a price lower than its face value or nominal value is called the issue of share at a discount. For example, if a share of Rs.100 each is issued at Rs.90, it is known as an issue of share at a discount. Such discount is a capital loss and hence, it is debited to ‘discount on issue of share account’.

Example: 2

Let Y. Company Ltd. Issued 10,000 equity shares of Rs.10 each at a discount of 10% for public subscription. All the shares were applied for and the allotment was made in full.

Required: Journal Entries

Issue of share at a premium

A share issued at a price greater than its face or nominal value is called issue at a premium. For example, if a share of Rs.100 each is issued at Rs.110, it is known as an issue of share at a premium. Such premium is a capital gain and hence, it is credited to ‘share premium account’.

Example: 3

Let Z Company Ltd. Issued 10,000 equity shares of Rs.10 each at a premium of 10% for public subscription. All the shares were applied for and the allotment was made in full.

Required: Journal Entries

References:

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