Joint Stock Companies Part 1

Joint Stock Companies

Meaning of a Company

A company is a voluntary and autonomous association of certain persons with capital divided into

numerous transferable shares formed to carry out a particular purpose in common. It is an artificial

person created by law to achieve the object for which it is formed. Section 3(1) (i) of the Companies Act,

1956 defines a company as Company formed and registered under this Act or an existing company.

Share Capital

No trading concern can run without capital. The divisions of share capital are:

a) Nominal or Registered or Authorized Capital. The amount of capital with which the company

intends to be registered is called registered capital. It is the maximum amount which the

company is authorized to raise by way of public subscription. There is no legal limit on the

extent of the amount of authorized capital.

b) Issued Capital: That part of the authorized capital which is offered to the public for subscription

is called issued capital.

c) Subscribed Capital: That part of the issued capital for which applications are received from the

public is called the subscribed capital.

d) Called up Capital: The amount on the shares which is actually demanded by the company to be

paid is known as called up capital.

e) Paid up Capital: The part of the called up capital which is offered and is actually paid by the

members is known as paid up capital. The sum which is still to be paid is known as calls in

arrears.

f) Reserve Capital. A company may determine by a special resolution that any portion of its share

capital which has not been already called up shall not be capable of being called-up except in

the event of winding up of the company. Such type of share capital is known as reserve capital.

Application for Shares

Whenever shares are to be issued by a company, an advertisement in a leading newspaper is given for

the information of the general public alongwith some important extracts of the prospectus. Those who

are interested to purchase the shares on the basis of that information may have the prospectus for

detailed information and application form. If a person is satis- fied with the profitability and other things

he is required to fill up the application form and to deposit this alongwith the requisite amount (known

as application money) with the pre- scribed scheduled bank. The application money should at least be 5

per cent of the face value of the share. The scheduled bank will send this application money alongwith a

list of applicants to the company. The company will ultimately record these in the Application and

Allotment Book

Allotment of Shares

After receiving the applications the directors take steps to allot the shares. Allotment of shares means

acceptance of the offer of the applicant for the purchase of shares. Directors have discretionary power

either to reject or to accept partially the applications. There are no re- strictions on the rights of a

private company to allot its shares. But the public company cannot allot its shares unless:

a) i. The minimum subscription stated in the prospectus has been subscribed by the public. ii.

A prospectus or a statement in lieu of prospectus has been filed with the Registrar before

making the first allotment.

b) iii. The amount of application, i.e., at least 5% of the face value has been received.

The applicants, to whom shares are allotted, will be sent allotment letters. After allotment, they

become the shareholders of the company. Those to whom shares could not be allotted will be sent a

letter of regret along with refund of their application money. The shareholders will be required to pay

the allotment money on allotment of shares which will also be re- corded in the Application and

Allotment Book.

Calls on Shares

Out of the face value of the shares, 5% is payable with application, some money will be paid on

allotment and rest money will be paid as and when calls are made by the company. Generally the

prospectus gives the dates of different calls along with the amount of the calls by shareholders. In case

it is not given in the prospectus, the directors have the discretion to call it in one call or more than one

call. For this a resolution of the Board of Directors must be passed and a notice is sent to the

shareholders with a request to pay the amount of the call.

Journal Entries

Sl no Particulars Amount Amount

1 On Receipt of Application Money

Bank A/c

To Share Application A/c

2 For excess share application money refunded

Share Application A/c

To Bank A/c

3 For Share application money transferred to share capital

Share Application A/c

To Share Capital A/c

To Securities Premium A/c (if application money includes premium)

4 For Share allotment Money due

Share Allotment A/c

Discount on Issue of shares A/c Dr (if issued at a discount)


To Securities Premium (if issued at a premium)

5 For Share allotment money received

Bank A/c Dr

Calls-in-Arrear A/c Dr

To Share Allotment A/c

To Calls-in-Advance A/c (if call money received in advance alongwith allotment)

6 For Share Call money due

Share Call A/c Dr.


7 For Call money received

Bank A/c Dr

Call-in-Arrear A/c Dr. (if call money not received)

Calls-in-Advance A/c Dr. (adjustment of share call money received earlier)

To Share Call A/c

8 For forfeiture of shares

Share Capital A/c Dr (No. of shares forfeited Called up value per share)

Securities Premium A/c Dr. (if issued at a premium and premium not received)

To Calls-in-Arrear A/c (amount not received on forfeited shares)

To Shares Forfeited A/c (amount received on forfeited shares)

To Discount on Issue of Shares A/c (if issued at a discount)

9 For reissue of forfeited shares

Bank A/c Dr (No. of Shares Reissued Reissue Price/Share)

Discount on Issue of Shares A/c Dr (No. of shares Reissued Discount per share, if originally issued at a discount)

Shares Forfeited A/c Dr. (No. of shares Further discount on reissue)

To Share Capital A/c (No. of shares Reissued Paid up value per share)

To Securities Premium A/c (if reissued at a premium)

10 For transferring profit on reissue of forfeited shares

Shares Forfeited A/c Dr. (Profit on Forfeiture Further discount on reissue of such forfeited share)

To Capital Reserve

Example 1

PK Ltd. made an issue of 10,00,000 equity shares of Rs. 10 each, payable Rs. 2 on application, Rs. 4 on

allotment and Rs. 4 on call. All the shares are subscribed and amounts duly received. Pass journal

entries to give effect to these. Also show relevant items in the Balance Sheet.

P K Ltd.

Journals

Particulars Amount Amount

Bank Account 2000

To Equity Share Application Account 2000

(Share application money on 10,00,000 equity shares @ Rs. 2 each received)

Equity Share Application Account 2,000

To Equity Share Capital Account 2,000

(Share application money transferred to share capital account)

Equity Share Allotment account 4,000


(Share Allotment due on 10,00,000 shares @ Rs. 4 per share)

Bank Account 4,000

To Equity Share Allotment Account 4,000

(Allotment money received)

Equity Share First and Final Call A/C 4,000


(Share 1st and Final Call due on 10,00,000 shares @ Rs.4/)

Bank Account 4,000

To Equity Sh. First and Final Call A/C 4,000

(For shares First and Final Call money received on 10,00,000 shares @ Rs. 4 per share)

Balance Sheet of PK Ltd

Liabilities Amount Assets Amount

Issued, Subscribed and Paid up

Cash at Bank 10,000

Capital: 10,00,000 equity shares of Rs. 10 each fully called and paid up

10,000

10,000 10,000

When Both Preference and Equity Shares are Issued

When a company issues both preference and equity shares then it is desirable that the entries for

application money, allotment money and calls money should be separately passed for each type of

share capital. The word Equity or Preference must invariably be used in all the circumstances.

Issue of Shares for Purchase of Assets

If the shares have been allotted to any person or firm from whom the company has pur- chased any

asset, the following entry will be passed:

Asset Account

To Share Capital Account

(Being shares allotted in consideration of purchase of an asset for the company)

This fact should also be disclosed in the Balance Sheet while showing the issued, subscribed and paid up

capital.

Issue of Shares at Premium

A company may issue shares at a premium, i.e., at a value greater than its face value. The power to

issue shares at a premium need not be given in the Articles of Association. Premium so received shall be

credited to a separate account called Securities Premium Account. Section 78 of the Companies Act,

1956 gives the purposes for which share premium account may be applied by the company. These are:

1) For the issue of fully paid bonus shares to the members of the company;

2) For writing off preliminary expenses of the company;

3) For writing off the expenses of the commission paid or discount allowed on any issue of shares

or debentures of the company; and

4) For providing premium payable on the redemption of any redeemable preference shares or

debentures of the company.

Example 2

AB & Co. Ltd. issued 500, 00,000 Equity shares of Rs. 10 each at a premium of Rs 4 per share payable

Re.1 per share on application. Rs. 6 per share on allotment (including premium), Rs.3 on first call and

the balance on final call. The shares were all subscribed and all money due was received except the first

call money on 1, 00,000 shares and the Final call money on 1, 50,000 shares. Give the Cash Book and

Journal entries to record the above transactions.

Solution 2

Cash Book

Particulars Amount Particulars Amount

To Equity Share Application 500 By Balance c/d 6991

To Equity Share Allotment 3000 To Equity Share 1st Call 1497

To Equity Share Final Call 1994

6991 6991

Journals


1 Equity Share Application A/c 500

To Equity Share Capital A/c 500

2 Equity Share Allotment A/c 3000


To Securities Premium A/c 2000

3 Equity Share 1st Call A/c 1500


4 Calls in Arrear A/c 3

To Equity Share 1st Call A/c 3

5 Equity Share Final Call A/c 2000


6 Calls in Arrear A/c 6

To Equity Share Final Call A/c 6

7009 7009

Issue of Shares at a Discount (Section 79)

A company can issue shares at a discount, i.e., value less than the face value subject to thefollowing

conditions:

1) The issue of shares at a discount is authorised by a resolution passed by the company in

general meeting and sanctioned by the Central Government.

2) The resolution must specify the maximum rate of discount which should not exceed 10 per

cent of the nominal value of shares or such higher percentage as the Central Government

may permit.

3) One year must have been elapsed since the date at which the company was allowed to

commence business.

4) Issue must take place within two months after the date of the sanction by the court or

within such extended time as the court may allow.

5) Every prospectus relating to the issue of shares and every balance sheet after the issue of

shares contains particulars of the discount allowed and so much of the discount as has not

been written off.

Adjustment of Excess Money towards the Amount due on the Allotment and Calls

Sometimes a Company may not allot all the shares for which applications have been received. Because

of over subscription, allotment is either made of less number of shares or on pro-rata basis. For

example, if the company offered 100,00,000 shares of Rs.l0 each but applications for 200,00,000 shares

were received by company. The directors sent letters of regret to applicants of 50,00,000 shares and

applicants of 150,00,000 shares were allotted the 100,00,000 shares on pro-rata basis. In such a case,

application money of 50,00,000 shares will be adjusted either on allotment and on calls, if there is still

surplus money after adjusting the allotment and call money due from shareholders it will be refunded in

cash.

Forfeiture of Shares

When a shareholder fails to pay calls, the company, if empowered by its articles, may forfeit the shares.

If a shareholder has not paid any call on the day fixed for payment thereof and fails to pay it even after

his attention is drawn to it by the secretary by registered notice, the Board of Directors pass a

resolution to the effect that such shares be forfeited. Shares once forfeited become the property of the

company and may be sold on such terms as directors think fit. Upon forfeiture, the original shareholder

ceases to be a member and his name must be removed from the register of members.

Surrender of Shares

After the allotment of shares, sometimes a shareholder is not able to pay the further calls and returns

his shares to the company for cancellation. Such voluntary return of shares to the company by the

shareholder himself is called surrender of shares. Surrender of shares has no separate accounting

treatment but it will be like that of forfeiture of shares. The same entries (as are passed in case of

forfeiture of shares) will be passed in case of surrender of shares.

Reissue of Forfeited Shares

Forfeited shares may be reissued by the company directors for any amount but if such shares are issued

at a discount then the amount of discount should not exceed the actual amount received on forfeited

shares. The purchaser of forfeited reissued shares is liable for payment of all future calls duly made by

the Company.

When all Forfeited Shares are not issued

When all forfeited shares are not issued, i.e., only a part of such shares is issued, it is desirable to spread

the amount of shares forfeited account on all such forfeited shares and of the amount relating to that

part of forfeited shares which has been reissued, discount on reissue of shares should be deducted from

such amount and the balance is transferred to capital reserve being capital profit. The amount relating

to that part of shares forfeited account which has not been reissued should be shown on the liabilities

side of Balance Sheet as Shares Forfeited Account.

Example 3

A Company invited the public to subscribe for 10,000,000 Equity Shares of Rs.100 each at a premium of

Rs. 10 per share payable on allotment. Payments were to be made as follows: On application Rs. 20; on

allotment Rs. 40; on first call Rs. 30 and on final call Rs.20. Applications were received for 13,000,000

shares; applications for 2,000,000 shares were rejected and allotment was made proportionately to the

remaining applicants. Both the calls were made and all the moneys were received except the final call

on 300,000 shares which are forfeited after due notice. Later 200,000 of the forfeited shares were re-

issued as fully paid at Rs. 85 per share. Pass Journal entries.

Solution 3


1 Bank Account 260000

To Equity Share Application Account 260000

(Share application money received on 13,000,000 equity shares @ Rs.20 each)

2 Equity Share Application Account 40000

To Bank Account 40000

(Application for 2,000,000 rejected)

3 Equity Share Application Account 220000

To Equity Share Capital Account 200000

To Equity Share Allotment account 20000

(Share application money transferred to share capital account and excess money used for share allotment.)

4 Equity Share Allotment account 400000


To Security Premium Account 100000

(Share Allotment due on 10,000,000 shares @ Rs. 40 per share as per the resolution of the Board of Directors)


To Equity Share Allotment Account 380000

(Allotment money received)

6 Equity Share first call Account 300000


(First call money due)

Bank Account 300000

To Equity Share First call Account 300000

(First call money received)

7 Equity Share Final Call Account 3,00,000

To Equity Share Capital Account 3,00,000

(Share Final Call due)

8 Equity Share Final Call Account 200000

To Equity Sh. Final Call Account 200000

(Share Final Call due)



(Final Call money received except 300,000 Shares)

10 Equity Share Capital Account 30000


To Forfeited share Account 24000

(300,000 shares forfeited for non payment of final call money)

Working Note:

On 300,000 forfeited shares, the total amount forfeited is Rs. 24,000.

For 200,000 such shares the amount will be (200,000/300,000) x 24,000

16,000

Less, Discount on Reissue

3,000

Transferred to Capital Reserve

13,000

Balance of Forfeited share account will be shown in balance sheet as Forfeited Share Ac- count in

liability side

Example 4

X Ltd. issued 10,000 Equity shares of Rs. 10 each at a premium of Rs. 2 per share, payable : Rs. 3 on

application (including premium of Re. 1); Rs. 4 on allotment (including the balance of premium) and the

balance in a call. Public subscribed for 12,000 shares. Excess application money was refunded. One

shareholder Mr. A holding 50 shares paid the call money along with allotment. Another Mr. B failed to

pay allotment & call on 30 shares.

These shares were forfeited after the call and 25 of those were reissued at Rs. 9 each. Pass Journals and

prepare the Balance sheet of the company.

Solution 4


1 Application Money Received

Bank A/c 36000

To Equity Shares Application A/c 36000

2 Refund of excess application money

Equity Share Application A/c 6000

To Bank A/c 6000

3 Transfer of share application to share capital

Equity Shares Application A/c 30000

To Equity Shares Capital A/c 20000


4 Allotment Money Due

Equity Shares Capital A/c 40000



5 Allotment Money Received

Bank A/c [9,9704 + 505] 40130

Calls-in-Arear A/c (304) 120

To Equity Share Allotment A/c 40000

To Calls-in-Advance A/c 250

6 Share Call Money Due

Equity Share Final call A/c 50000


7

Call Money Received, Adjustment of Calls-in-Advance

Bank A/c (9,9205) 49600

Calls-in-Arrear A/c 150

Calls-in-Advance A/c 250

(Received with Allotment, now adjusted)

To Equity Shares First & Final Call A/c 50000

8 Forfeiture of Shares

Equity Share Capital A/c (3010) 300

Securities Premium A/c (301) 30

To Calls-in-Arrear A/c 270

To Shares Forfieted A/c 60

9 Reissue of Forfeited Shares

Bank A/c (259) 225

Shares Forfeited A/c (251) 25

To Equity Shares Capital A/c 250

10 Transfer of Profit on Reissue of Forefeited shares

Shares Forfeited A/c 25

To Capital Reserve A/c 25

Profit on forfeiture Rs. 60

Therefore, Proportionate profit on 25 shares (those are reissued) = 60/30 25 = 50

Less : Discount on Reissue (251) = 25

Transfer to Capital Reserve 25

Liabilities Amount Amount Assets Amount Amount

Authorised Capital 10,00010 1,00,000 Fixed Assets

Called up & Paid up Capital 9,995 shares @ Rs. 10 each 99,950

Investments Current Assets, Loans & Advances

Securities Premium 19970 Cash at Bank 119955

Shares forfeited A/c 10

Miscellaneous Expenditure (to the extent not written off)

Capital Reserve 25

119955 119955

Example 5

B Ltd issued 2,000 shares of Rs. 100 each at a premium of 10% payable as follows :-

On application Rs 20 (1st Jan. 2008). On allotment Rs.40 (including premium) (1st April 2008). On First

Call Rs. 30 (1st June 2008). On Second & Final call Rs. 20 (1st Aug 2008). Applications were received for

1,800 shares and the directors made allotment in full. One shareholder to whom 40 shares were

allotted paid the entire balance on his share holdings with allotment money and another share holder

did not pay allotment and 1st call money on his 60 shares but which he paid with final call.

Required: Calculated the amount of interest paid and received on calls -in- advance and calls in arrears

respectively on 1st Aug. 2008.

Solution 5

Calculation of Interest on Calls-in-advance

On Rs. 1200 (i.e. 40 x Rs. 30) for 2 months @ 6% p.a. Rs. 12

On Rs. 800 (i.e. 40 x Rs.20) for 4 months @ 6% p.a. Rs. 16

28

Calculation of Interest on Calls-in-arrears

On Rs. 2400 (i.e. 60 x Rs. 40) for 4 months @ 5% p.a Rs. 40

On Rs. 1800 (i.e. 60 x Rs.30) for 2 months @ 5% p.a. Rs. 15

55

Example 6

A limited Company was registered with a capital of Rs. 5,00,000 in share of Rs. 100 each and issued

2,000 such shares at a premium of Rs.20 per share, payable as Rs.20 per share on application, Rs. 50 per

share on allotment (including premimu) and Rs. 20 per share on first call made three months later. All

the money payable on application, and allotment were duly received but when the first call was made,

one shareholder paid the entire balance on his holding of 30 shares, and another shareholder holding

100 shares failed to pay the first call money.

Required: Give Journal entries to record the above transactions and show how they will apperar in the

companys Balance Sheet.

Second Call @ Rs. 30 per share.

Solution 6


Bank A/c 40000

To Share Application A/c 40000

[Being the issue of 2,000 shares and application money received @ Rs 20 per share]

Share Application A/c 40000

To Share Capital A/c 40000

[Being the transfer of application money on 2,000 shares @ Rs. 20 per share to Share Capital A/c)

Share Allotment A/c 100000



[Being the allotment mony on 2,000 shares @ Rs 50 including premium made due)

Bank A/c 100000

To Share Allotment A/c 100000

[Being the allotment money on 2,000 shares @ Rs. 50 per share received)

Share First Call A/c 40000


[Being the first call mony on 2,000 shares @ Rs 20 per share made due)

Bank A/c 38900

To Share First Call A/c 38000

To Call-paid-in-advance A/c 900

(Being the first call money on 1,900 shares @ Rs. 20 per share and share Second call money on 30 shares @ Rs. 30 per share received)

Liabilities Amount Amount Assets Amount Amount

Authorised Capital 5,000 shares of Rs.100 each 500000

Current Assets, Loans & Advances 1,78,900

Issued Capital 2,000 shares of Rs. 100 each 200000 Cash at Bank

Subscribed Capital 2,000 shares of Rs.100 each Rs. 70 per share Capital paid up 140000

Less: Calls Unpaid 2000 138000

Reserves & Surplus:

Securities Premium 40000

Current Liabilities

Calls paid-in-advance 9000

178900 178900

Example 7

B Ltd purchase the assets of Rs. 10, 80,000 from C Ltd. The consideration was payable in fully paid

equity shares of Rs. 100 each. Required: Show the necessary journal entries in books of B Ltd. assuming

that

a) Such shares are issued at par

b) Such shares are issued at premium of 20%

c) Such shares are issued at discount of 10%

Solution 7


Sundry Assets A/c 10,80,000

To C Ltd. 10,80,000

[Being the purchase of assets from Y Ltd. as per agreement dated...)

Case (a) When Shares are issued at par

C Ltd. 10,80,000

To Equity Share Capital A/c 10,80,000

(Being the issue of 10,800 shares at par to C Ltd. as per agreement dated...)

Case (b) When Shares are issued at a premium of 20%

C Ltd. 10,80,000



(Being the issue of 9,000 shares at 20% premium to C Ltd. as per Boards Resolution dated...)

Case (c) When Shares are issued at a discount of 10%

C Ltd. 10,80,000

Discount on Issue of Shares A/c 120000

To Equity Share Capital A/c 1200000 (Being the issue of 12,000 shares at a discount of 10% to

C Ltd., as per Boards Resolution dated...)

At Par At a Premium At a Discount

A. Amount to be paid (Rs) 10,80,000 10,80,000 10,80,000 B. Issue Price Per Share (Rs) 1 0 0 1 2 0 9 0 C. No. of Shares to be issued (A/B) 10,800 9,000 12,000

Example 8

SOS Limited issued a prospectus inviting applications for 6,000 shares of Rs. 10 each at a premium of Rs

2 per share, payable as follows; On application Rs 2 per share; On allotment Rs 5 per share (including

premium): On 1st call Rs 3 per share; On Second and Final Call Rs 2 per share., Applications were receive

for 9,000 shares and allotment was made prorata to the applicants of 7,500 shares, the remaining

applicants were refused allotment. Money overpaid on applications was applied towards sums due on

allotment. D to whom 100 shares were allotted, failed to pay the allotment money and on his

subsequent failure to pay the first call, his shares were forfeited. Z, the holder of 200 shares, failed to

pay both the calls, and his shares were forfeited after the second and final call.

Of the shares forfeited 200 shares were sold to C credited as fully paid up for Rs 8.50 per share, the

whole of Ds shares being included. Required: Show Journal and Cash Book entries in the books of the

company.

Solution 8

Cash Book

Particulars Rs Particulars Rs To Share Capital:

(Rs. 2 on 9,000 shares) To Share Allotment a/c

(allotment money received) To Share 1st Call a/c

(Rs. 3on 5,700 shares) To Share 2nd & Final Call a/c To Share Capital a/c (Rs. 8.50 on 200 shares)

18,000

26,550

17,100

11,400 1,700

By Share Application a/c

By Balance c/d

3,000

71,750

74,750 74,750



To Share Capital 12000

(Being Share application money transferred to Share Capital Account)



(Being Share application money at Rs.2 on 1,500 shares adjusted against allotment.)

Share Allotment A/c 30000



[Being the allotment money due]

Share First Call A/c 18000


[Being the first call money due]

Share Capital A/c 800

Securities Premium A/c 200

To Forefeited Share A/c 250



[Being 100 shares of Rs. 10 each, Rs. 8 per Share called up, forfeited for non payment of allotment and first call ]

Share Second and Final Call A/c 11800


Share Capital A/c 2000

To Forfeited Share A/c 1000


To Share Final Call A/c 400

[Being 200 shares of Rs. 10 each forfeited for non-payment of first and final call]

Forfeited Share A/c 300


[Being 200 shares re-issued]

Forfeited Share A/c 450

To Capital Reserve A/c 450

[Being the transfer of profit on re-issue]

Calculation of the amount due but no paid on allotment in Case of D.

No. of applied Shares by Mr. D. (100 x 7500/6,000) 1 2 5

Professor Vipin 2014

www.VipinMKS.com Page 20

Total money sent on application by Mr. D. (125 x 2) Rs. 250

Excess application money [ Rs 250 - (100 x Rs. 2)] Rs. 50

Total amount due on allotment ( 100 x Rs. 5) 500

Amount due but not paid on allotment (Rs. 500 Rs 50) Rs.450

(ii) Calculation of allotment money received later on

Total allotment money due Rs. 30,000

Less (a) Already received Rs. 3,000

(b) Not received (as per note 1) Rs. 450 3,450

26,550

Joint Stock Companies Part 1

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Transcript of Joint Stock Companies Part 1