IIPM Cor AC Lecture 2

8/7/2019 IIPM Cor AC Lecture 2

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` Meaning and Categories of Share Capital

` Meaning, Nature and Classes of Shares

` Distinction between and an Equity Share and Preference

Share` Accounting treatment for Issue of Shares at par,

premium, and discount

` Accounting treatment for forfeiture of shares and reissueof shares

` Accounting treatment for redemption of redeemablepreference shares

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Share capital means the capital raised by the issue of shares.The amounts invested by shareholders towards theface valueof shares are collectively known as share capital.

The share capital is divided under the following three heads:

Authorized Capital This refers to that amount which isstated in the capital clauseof the Memorandum ofAssociation as the share capital of the company.

This is the maximum limit of the company which it isauthorized to raise and beyond which the company cannotraise unless the capital clause in the Memorandum is alteredin accordance with statutory provisions.

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Issued Capital That part of the authorized capital which isoffered to the public for subscription.

Subscribed Capital That part of the issued capital for whichapplications are received from the public. (Paid-up value ofthe issued capital)

Called-up Capital That portion of the subscribed capital

which has been called-up by the company.

Paid-up Capital The part of the called-up capital which isoffered and is actually paid by the members is known aspaid-up capital.

Reserve Capital Portion of uncalled share capital whichshall not be capable of being called up except in the event andfor the purposes of the company being wound up. (sec. 99)

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Authorized capital

10,00,000 Equity shares of Rs. 10 each 10,000,000

Issued capital


Subscribed Capital

6,00,000 Equity Shares of Rs. 10 each 6,000,000

Called-up Capital

6,00,000 Equity Shares of Rs. 10 each Rs. 8 called up 4,800,000

Paid-up Capital

6,00,000 Equity shares Rs. 10 each, Rs. 8 called up 4,800,000

Less: Calles in arrears on 50,000 Equity shares of @ Rs. 5 each 250,000

4,550,000

Authorized capital


Issued capital


Subscribed Capital

6,00,000 Equity Shares of Rs. 10 each 6,000,000

Called-up Capital

6,00,000 Equity Shares of Rs. 10 each Rs. 8 called up 4,800,000

Paid-up Capital

6,00,000 Equity shares Rs. 10 each, Rs. 8 called up 4,800,000

Less: Calles in arrears on 50,000 Equity shares of @ Rs. 5 each 250,000

4,550,000


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A share is one unit into which the total share capital isdivided.

According to the section 2(46) of the Companys Act 1956,share means a part in the share capital of the company and it

also includes stock except where a distinction between stockand share capital is made expressed or implied.

As per the provision of section 85 of the Companies Act, 1956,the share capital of a company consists of two classes of

shares, namely: Preference Shares

Equity Shares

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` A right to receive dividend at a stipulated rate or of a fixedamount before any dividend is paid on equity shares.

` A right to receive repayment of capital on winding up of a thecompany, before the capital of equity shareholders isreturned.

Preference shareholders do not have any voting rights, but inthe following conditions they can enjoy the voting rights:

` In case of cumulative preference shares, if dividend isoutstanding for more than two years.

` In case of non-cumulative preference shares, if dividend isoutstanding for more than three years.

` On any resolution of winding up.

` On any resolution of capital reduction.

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` Cumulative Preference Shares: Cumulative preference

shares are those shares on which arrears of dividendaccumulate and will be paid in the subsequent years.Preference shares are always deemed to be cumulativeunless any express provision is mentioned in the

Articles.

` Non-Cumulative Preference Shares: Non-cumulativepreference shares are those shares on which arrear ofdividend do not accumulate. Therefore if divided is notpaid on these shares in any year, the right receive thedividend lapses and as such, the arrear of divided is notpaid out of the profits of the subsequent years.

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` ParticipatingPreference Shares: Participation preferenceshares are those shares, which, in addition to the basicpreferential rights, also carry one or more of the following

rights: To receive dividend, out of surplus profit left after paying the

dividend to equity shareholders. To have share in surplus assets, which remains after the entire

capital has been paid on winding up of the company.

` Non-ParticipatingPreference Shares: Non-participationpreference shares are those shares, which do not have thefollowing rights:

To receive dividend, out of surplus profit left after paying thedividend to equity shareholders.

To have share in surplus assets, which remains after the entirecapital has been paid on winding up of the company.

Preference shares are always deemed to be non-participating,if the Article of the company is silent.

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` Convertible Preference Shares: Convertible preference shares arethose shares, which can be converted into equity shares on or afterthe specified date according to terms mentioned in the prospectus.

` Non-Convertible Preference Shares: Non-convertible preferenceshares, which cannot be converted into equity shares. Preferenceshares are always being to be non-convertible, if the Article of thecompany is silent.

` Redeemable Preference Shares: Redeemable preference shares are

those shares which can be redeemed by the company on or after thecertain date after giving the prescribed notice. These shares areredeemed in accordance with the terms and sec. 80 of theCompanys Act 1956.

` Irredeemable Preference Shares: Irredeemable preference shares

are those shares, which cannot be redeemed by the company duringits life time, in other words it can be said that these shares can onlybe redeemed by the company at the time of winding up. Butaccording to the sec. 80 (5A) of the Companys (Amendment) Act1988 no company can issue irredeemable preference shares.

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According to section 85 (2), of Companies Act, 1956,Equity share can be defined as the share, which is notpreference shares. In other words equity shares are thoseshares, which do not have the following preferential

rights:

` Preference of dividend over others.

` Preference for repayment of capital over others at the

time of winding up of the company.

These shares are also known as Risk Capital

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Basis of difference Preference Share Equity Share

Rateof dividend The rate of dividend on preference

share is fixed.

The rate of dividend on equity

share is changed from year to year

depending upon the availability of

profits.

Payment of dividend They have a right to receivedividend before any dividend is

paid on equity shares.

Dividend on equity shares is paid,after any dividend is paid on

preference shares.

Participationin management Preference shareholders are not

ent it led to part ic ipate in

management.

Equity shareholders are entitled to

participate in management.

Winding up On the winding up, they have a

right to return of capital ahead

(before) of the capital returned on

equity shares.

In this case, they have been paid

only when preferences capital is

paidin full.

Arrears of dividend If dividend is not paid on these

shares in any year, the arrear of

dividend may accumulate.

In case of equity shares, dividend

cannot accumulate.

Voting rights Preference shareholders do not

have any voting rights.

Equity shareholders enjoy voting

rights.

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Basis ofdifference Preference Share Equity Share

Rate of dividend The rate of dividend on preference share

is fixed.

The rate of dividend on equity

share is changed from year to

year depending upon the

availability of profits.

Payment of dividend They have a right to receive dividend

before any dividend is paid on equity

shares.

Dividend on equity shares is

paid, after any dividend is paid

on preference shares.

Participation

In management

Preference shareholders are not entitled

to participate in management.

Equity shareholders are entitled

to participate in management.

Winding up n the inding up, they have a right to

return of capital ahead (before) of the

capital returned on equity shares.

In this case, they have been paid

only hen preferences capital is

paid in full.

Arrears of dividend If dividend is not paid on these shares in

any year, the arrear of dividend may

accumulate.

In case of equity shares,

dividend cannot accumulate.

Voting rights Preference shareholders do not have any

voting rights.

Equity shareholders enjoy

voting rights.


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Conditions Treatment

1

.

Record the receipt of application money

2

.

a) hen number of shares applied

is equal to the number of shares

issued.

Transfer the full amount of application money received to

Share Capital A/c.

a) hen number of shares applied

are less than the number of

shares issued.

If the minimum subscription has at least been received:Transfer the full amount of application money received to

Share Capital A/c.

If the minimum subscription has not been received:

Refund the total application money to all the applicants.

3.

Make due the allotment money on shares allotted.

4

.

Record the receipt of allotment money.

5

.

Make due the call money on shares allotted.

6.

Record the receipt of call money.13


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Issue of shares at par: Shares are said to be issued atpar when they are issued at a price equal to the facevalue. For example, if a share of Rs. 10 is issued at Rs. 10

Issue of shares at premium: When shares are issued atan amount more than the face value of share, they are

said to be issued at premium. For example, if a share ofRs. 10 is issued at Rs. 15

Issue of shares at discount: Shares are said to be

issued at a discount when they are issued at a pricelower than the face value. For example if a share of Rs.10 is issued at Rs. 9


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Par Premium Discount

For receipt of application money

Bank A/c DrTo Share application A/c



For transferring application money to Share Capital A/c

Share application A/c Dr

To Share capital A/c


To Share application A/c

To Security Premium A/c


Discount on issue of shares A/c Dr


For allotment money becoming due

Share allotment A/c Dr








For receipt of allotment money

Bank A/c Dr

To Share allotment A/c

Bank A/c Dr


Bank A/c Dr


For call money becoming dueShare call A/c Dr


Share call A/c Dr



Share call A/c Dr



For receipt of call money

Bank A/c Dr

To Share call A/c

Bank A/c Dr

To Share call A/c

Bank A/c Dr

To Share call A/c

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Calls-in-arrear is the amount called up by the company, but notpaid by the shareholders. The directors can charge interest oncalls-in-arrears at a rate not exceeding 5% p.a.

For calls-in-arrear:

Bank A/c Dr


To Share call A/c

For receipt of amount at subsequent date:Bank A/c Dr


To Share call A/c

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Calls-in-advance is the amount not called up by the company, but

paid by the shareholders. Interest is allowed on calls-in-advance. 6%- as per Table A.

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For receipt of advance money:

Bank A/c Dr


To Share call A/c

To Calls-in-advance A/c

For adjustment of calls-in-advance:

Calls-in-advance A/c Dr

To Respective call A/c

On making the interest on call-in-advance due:

Interest on calls-in-advance A/c Dr

To Shareholders A/c

For payment of interest on calls-in-advance:

Shareholders A/c

Dr

To Bank A/c

For transferring interest on calls-in-advance A/c to P/L A/c at the end of the accounting year:

Profit and Loss A/c Dr

To interest on calls-in-advance A/c


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ABC Corporation Ltd was registered on 1stJanuary, 2010 with acapital of Rs 10,00,000 divided into 1,00,000 shares of Rs. 10 each.

The company offered 44,000 shares of which 40,000 shares were

taken up by the public and Re 1 per share was received with

application. On 1st February, these shares were allotted and Rs. 2 per

share was duly received on 28th February as allotment money. A first

call of Rs. 3 per share was made on 1st March and the call money on

all shares with the exception of 100 shares was received. The final

call of Rs 4 per share was made on 1stJune and the amount, due,

with the exception of 400 shares, was received by 30thJune.Pass the necessary Journal entries and prepare balance sheet as at

30the June. 2010.

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IIPM Cor AC Lecture 2