CU-BCOM-SEM-IV-Corporate Accounting-Second Draft

BACHELOR OF COMMERCE SEMESTER IV CORPORATE ACCOUNTING

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning SLM Development Committee Prof. (Dr.) H.B. Raghvendra Vice- Chancellor, Chandigarh University, Gharuan, Punjab:Chairperson Prof. (Dr.) S.S. Sehgal Registrar Prof. (Dr.) B. Priestly Shan Dean of Academic Affairs Dr. Nitya Prakash Director – IDOL Dr. Gurpreet Singh Associate Director –IDOL Advisors& Members of CIQA –IDOL Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Editorial Committee Prof. (Dr) Nilesh Arora Dr. Ashita Chadha University School of Business University Institute of Liberal Arts Dr. Inderpreet Kaur Prof. Manish University Institute of Teacher Training & University Institute of Tourism & Hotel Management Research Dr. Manisha Malhotra Dr. Nitin Pathak University Institute of Computing University School of Business © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any formor by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS 2 CU IDOL SELF LEARNING MATERIAL (SLM)

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event the Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 3 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENT Unit 1 Introduction................................................................................................................ 5 Unit 2 Accounting Treatment .............................................................................................. 16 Unit 3 Forfeiture And Reissue ............................................................................................. 52 Unit 4 Redemption Of Preferance Shares ............................................................................ 73 Unit 5 Accounting Treatment(Redemption Of Preference Shares) ....................................... 80 Unit 6 Bonus Shares.......................................................................................................... 107 Unit 7 Accounting Treatment ............................................................................................ 115 Unit 8 Issue Of Debentures ............................................................................................... 131 Unit 9 Accounting Treatment For Issue Of Debentures ..................................................... 139 Unit 10 Divisible Profits.................................................................................................... 165 Unit 11 Dividend............................................................................................................... 172 Unit 12 Accounting Treatment(Dividend) ......................................................................... 179 Unit 13 Final Accounts Of Companies I ............................................................................ 202 Unit 14 Final Accounts Of Companies II........................................................................... 222 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 1INTRODUCTION STRUCTURE 1.0 Learning Objectives 1.1 Introduction 1.2 Meaning of shares 1.3 Types of shares 1.4 Share capital 1.5 SEBI Guidelines for public Issue 1.6 Summary 1.7 Keywords 1.8 Learning Activity 1.9 Unit End Questions 1.10 References 1.0LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain the meaning of shares as given by Companies Act 2013  Describe about the types of shares  Discuss what is Share capital and its Classification  Outline SEBI guidelines on Minimum subscription for Issue of Shares 1.1 INTRODUCTION The company form of business organization is formed to overcome the limitations of partnership form of business organization. A company is an association or collection of individual real persons and/or other companies, who provide some form of capital with a common purpose or focus and an aim of gaining profits. Thus, a company can be defined as an “artificial person” created by law, with a distinct legal entity, perpetual succession and a common seal. It is not affected by the death, insanity or insolvency of an individual member. Company accounting is different from sole proprietorship and partnership accounting. Company being a legal entity, has to maintain proper books of accounts to give a true and fair view of the state of affairs of the company. The books are kept on accrual basis and according 5 CU IDOL SELF LEARNING MATERIAL (SLM)

to double entry system of accounting. The company has to prepare its balance sheet and statement of profit & loss and CFS from the books of account maintained by it. 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 2(20) of the Companies Act, 2013 defines a company as “Company formed and registered under this Act or an existing company.” An existing company means a company formed and registered under any of the former Companies Acts. Thus, it is an abstract person, invisible, intangible and existing only in contemplation of law. It can hold, purchase or sell both movable and immovable property, incur and pay debts, open a bank account in its own name and sue and be sued in the same manner as an individual. Law creates it and law only can dissolve it. Its existence is altogether independent of the life of its members. Members may come and go but the company would go on forever. Transferability of shares has given perpetual succession to a company. Death, insanity or insolvency of a member or any member will not affect the existence of the company at all. A company is a legal entity quite distinct and separate from the persons who are its members. A company cannot ordinarily buy its own shares. A shareholder is not the agent of the company. He cannot incur any debt so as to bind the company. They cannot bind the company by their acts. The same person can be a shareholder and a creditor of the company. The ownership is divorced from management because a joint stock company is managed by a Board of Directors elected by the shareholders (i.e., owners). Characteristics of a Company The main characteristics of a company are: (i) It is a distinct legal person existing independent of its members (ii) Liability of the members is limited to the extent of the face value of shares held by them. (iii) It has a perpetual succession, i.e., the members of the company may keep on changing from time to time, but this does not affect the company’s continuity. (iv) The shares of a company are freely transferable except in case of a Private limited Company. (v) A company being a legal person is capable of owing, enjoying and disposing of the property in its own name. (vi) A company, being a separate body can sue and be sued in its own name. (vii) Though a company is an artificial person, yet it acts through human beings who are called directors of the company. There is a divorce between ownership and the management. (viii) It is a voluntary association of persons usually for profit. 6 CU IDOL SELF LEARNING MATERIAL (SLM)

1.2MEANING OF SHARES Share as defined in Section 2(84) of the Companies Act, 2013 means a share in the share capital of a company and it also includes stock. A share is one unit into which the total share capital is divided. It is a fractional part of the share capital and forms the basis of ownership in the company. For example, when a company has a share capital of Rs 5,00,000 divided into 50,000 shares of Rs 10 each and a person who has taken 50 shares of that company is said to have a share in the share capital of the company to the tune of Rs 500. In other words, shares are divisions of the share capital of a company. 1.3 TYPES OF SHARES TYPES OF SHARES Share issued by a company can be divided into following categories : (i) Preference Shares: According to Section 43 of the Companies Act, 2013 persons holding preference shares, called preference shareholders, are assured of a preferential dividend at a - fixed rate during the life of the company. They also carry a preferential right over other shareholders to be paid first in case of winding up of the company. Thus, they enjoy preferential rights in the matter of : (a) Payment of dividend, and (b) Repayment of capital Generally, holders of these shares do not get voting rights. Companies use this mode of financing as it is cheaper than raising debt. Dividend is generally cumulative in nature and need not be paid every year in case of deficiency of profits. The Companies Act, 2013 prohibits the issue of any preference share which is irredeemable. Preference shares are cumulative and non-participating unless expressly stated otherwise. Types of Preference Shares Preference shares can be of various types, which are as follows : (a) Cumulative Preference Shares: A cumulative preference share is one that carries the right to a fixed amount of dividend or dividend at a fixed rate. Such a dividend is payable even out of future profit if current year’s profits are insufficient for the purpose. This means that dividend on these shares accumulates unless it is paid in full and, therefore, the shares are called Cumulative Preference Shares. The arrears of dividend are then shown in the balance sheet as a contingent liability. In India, a preference share is considered cumulative unless otherwise stated. In case, the dividend remains in arrears for a period of not less than two years, holders of such shares will be entitled to take part and vote on every resolution on every matter in the general body meeting of the shareholders. (b) Non-cumulative Preference Shares: A non-cumulative preference share carries with it the right to a fixed amount of dividend. In case no dividend is declared in a year due to any reason, the right to receive such dividend for that year expires. It implies that holder of such a share is not entitled to arrears of dividend in future. 7 CU IDOL SELF LEARNING MATERIAL (SLM)

(c) Participating Preference Shares: Notwithstanding the right to a fixed dividend, this category of preference share confers on the holder the right to participate in the surplus profi- ts, if any, after the equity shareholders have been paid dividend at a stipulated rate. Similarly, in the event of winding up of the company, this type of share carries the right to receive a pre- determined proportion of surplus as well once the equity shareholders have been paid off. (d) Non-participating Preference Shares: A share on which only a fixed rate of dividend is paid every year, without any accompanying additional rights in profits and in the surplus on winding-up, is called ‘Non-participating Preference Shares.’ Unless otherwise specified, the preference shares are generally non-participating. (e) Redeemable Preference Shares: These are shares that a company may issue on the condition that the company will repay after the fixed period or even earlier at company’s discretion. The repayment on these shares is called redemption and is governed by Section 55 of the Companies Act, 2013. (f) Non-redeemable Preference Shares: The preference shares, which do not carry with them the arrangement regarding redemption, are called Non-redeemable Preference Shares. According to Section 55, no company limited by shares shall issue irredeemable preference shares or preference shares redeemable after the expiry of 20 years from the date of issue. However, a Company may issue preference shares redeemable after 20 years for such infrastructure projects as may be specified, under the Companies Act, 2013. (g) Convertible Preference Shares : These shares give the right to the holder to get them converted into equity shares at their option according to the terms and conditions of their issue. (h) Non-convertible Preference Shares : When the holder of a preference share has not been conferred the right to get his holding converted into equity share, it is called Non- convertible Preference Shares. Preference shares are non-convertible unless otherwise stated. Note: Unless mentioned otherwise Preference Shares are Non-Cumulative, Non Participating, Nonconvertible and Redeemable in nature. (ii) Equity Shares : Equity shares are those shares, which are not preference shares. It means that they do not enjoy any preferential rights in the matter of payment of dividend or repayment of capital. The rate of dividend on equity shares is recommended by the Board of Directors and may vary from year to year. Rate of dividend depends upon the dividend policy and the availability of profits after satisfying the rights of preference shareholders. These shares carry voting rights. Companies Act, 2013 permits issue of equity share capital with differential rights as to dividend, voting or otherwise in accordance with prescribed rules. The shares can be issued by a company either (1) for cash or (2) for consideration other than cash. 1.4SHARE CAPITAL Total capital of the company is divided into a number of small indivisible units of a fixed amount and each such unit is called a share. The fixed value of a share, printed on the share 8 CU IDOL SELF LEARNING MATERIAL (SLM)

certificate, is called nominal/ par/face value of a share. However, a company can issue shares at a price different from the face value of a share. The liability of holder of shares (called shareholders) is limited to the issue price of shares acquired by them. Note: The issue price need not be equal to market price of the share. These days the shares are generally priced on the basis of book building process. (Book building is a process through which company determines it's share prices. Under this method company determines a price band of its shares and on the basis of bids received from potential investors at various prices within the price band finally fixes its issue price.) The total capital of the company is divided into shares, the capital of the company is called ‘Share Capital’. At the time of issue of shares, every Company is required to follow SEBI Regulations. Share capital of a company is divided into following categories: (i) Authorised Share Capital or Nominal Capital: A company estimates its maximum capital requirements. This amount of capital is mentioned in ‘Capital Clause’ of the ‘Memorandum of Association’ registered with the Registrar of Companies. It puts a limit on the amount of capital, which a company is authorised to raise during its lifetime and is called ‘Authorised Capital’. It is shown in the balance sheet at face value. (ii) Issued Share Capital: A company need not issue total authorised capital. Whatever portion of the share capital is issued by the company, it is called ‘Issued Capital’. Issued capital means and includes the nominal value of shares issued by the company for: 1. Cash, and 2. Consideration other than cash to: (i) Promoters of a company; and (ii) Others. It is also shown in the balance sheet at nominal value. The remaining portion of the authorised capital which is not issued either in cash or consideration may be termed as ‘Un-issued Capital’. It is not shown in the balance sheet. (iii) Subscribed Share Capital: It is that part of the issued share capital, which is subscribed by the public i.e., applied by the public and allotted by the company. It also includes the face value of shares issued by the company for consideration other than cash. (iv) Called-up Share Capital: Companies generally receive the issue price of shares in installments. The portion of the issue price of shares which a company has demanded or called from shareholders is known as ‘Called-up Capital’ and the balance, which the company has decided to demand in future may be referred to as Uncalled Capital. (v) Paid-up Share Capital: It is the portion of called up capital which is paid by the shareholders. Whenever a particular amount is called by the company and the shareholder(s) fails to pay the amount fully or partially, it is known as ‘unpaid calls’ or ‘installments (or Calls) in Arrears’. Thus, installments in arrears mean the amount not paid although it has been demanded by the company as payment towards the issue price of shares. To calculate paid-up capital, the amount of installments in arrears is deducted from called up capital. Call- 9 CU IDOL SELF LEARNING MATERIAL (SLM)

in-advance is that portion of capital which is yet to be called by the company but has already been paid by shareholder. In balance sheet, called-up and paid-up capital are shown together. (vi) Reserve Share Capital: As per Section 65 of the Companies Act, 2013, a Company may decide by passing a resolution that a certain portion of its subscribed uncalled capital shall not be called up except in the event of winding up of the company. Portion of the uncalled capital which a company has decided to call only in case of liquidation of the company is called Reserve Capital. Reserve Capital is different from Capital reserve, Capital reserves are part of ‘Reserves and Surplus’ and refer to those reserves which are not available for declaration of dividend. Thus, reserve capital which is portion of the uncalled capital to be called up in the event of winding up of the company is entirely different in nature from capital reserve which is created out of capital profits only. 1.5 SEBI GUIDELINES FOR PUBLIC ISSUE When a public company desires to raise capital by issuing its shares to the public, it has to invite the public to subscribe for its shares. The invitation is made through a document called the prospectus. The person who intends to subscribe to those shares should make an application for the desired number of shares to the company. Then, the company will allot shares to the applicant. Allotment means the appropriation of a certain number of shares to an applicant in response to his application. The company cannot allot more than the number of shares offered to the public for subscription through the prospectus. Moreover, the company cannot make allotment unless the amount stated in the prospectus as the minimum subscription has been subscribed and the sum payable on application for the stated amount has been received by the company. If the number of shares applied for is less than the number of shares offered, the allotment can be only for the shares applied for provided minimum subscription is raised. The minimum subscription is 90% of the issued amount. To issue shares, private companies depend upon ‘Private Placement’ of shares. Public companies issue a ‘Prospectus’ and invite general public to subscribe for shares. To discuss accounting treatment, we shall concentrate on public companies who invite general public to subscribe for equity shares. Similar accounting treatment is applicable in other cases. However, for journal entries in case of issue of preference shares, the word ‘Equity’ is replaced with the word ‘Preference’. A public company issues a prospectus inviting general public to subscribe for its shares. On the basis of prospectus, applications are deposited in a scheduled bank by the interested parties along with the amount payable at the time of application, in cash. First installment paid along with application is called ‘Application Money’. As per Section 39 of the Companies Act, 2013. Application money must be at least 5% of the nominal value of shares. After the closing date of the issue (the last date for ling applications), company decides about allotment of shares in consultation with the SEBI and stock exchange concerned. 10 CU IDOL SELF LEARNING MATERIAL (SLM)

According to the Companies Act, 2013, a company cannot proceed to allot shares unless minimum subscription is received by the company. Minimum Subscription: A public limited company cannot make any allotment of shares unless the amount of minimum subscription stated in the prospectus has been subscribed and the sum payable as application money for such shares has been paid to and received by the company. The amount of minimum subscription to be disclosed in prospectus by the Board of Directors taking into account the following: (a) Preliminary expenses of the company, (b) Commission payable on issue of shares, (c) Cost of fixed assets purchased or to be purchased, (d) Working capital requirements of the company, and (e) Any other expenditure for the day to day operation of the business. As per guidelines of the Securities Exchange Board of India (SEBI), the minimum subscription to be received in an issue shall not be less than ninety per cent of the offer through offer document [Provided that in the case of an initial public offer, the minimum subscription to be received shall be subject to allotment of minimum number of specified securities, as prescribed by Securities Contracts (Regulation) Rules, 1957]. If the Company does not receive the minimum subscription of 90% of the issue, all application moneys received shall be refunded to the applicants forthwith, but not later than: (a) fifteen days of the closure of the issue, in case of a non-underwritten issue; and (b) seventy days of the closure of the issue, in the case of an underwritten issue where minimum subscription including devolvement obligations paid by the underwriters is not received within sixty days of the closure of the issue. The company reserves the right to reject or accept an application fully or partially. Successful applicants become shareholders of the company and are required to pay the second instalment which is known as ‘Allotment Money’ and unsuccessful applicants get back their money. However, in case of delay in refunding the money, the Company becomes liable to pay interest on the amount of refund. Subsequent instalments, if any, to be called by the company are known as ‘Calls’. As per Section 39 of the Companies Act, 2013, application money must be at least 5% of the face value of shares. However, as per SEBI Regulations, the minimum application moneys to be paid by an applicant along with the application money shall not be less than 25% of the issue price. According to Section 24 of the Companies Act, 2013 matters related to issue and transfer of securities will be administered by the SEBI and not by the NCLT. 1.6SUMMARY  Share as defined in Section 2(84) of the Companies Act, 2013 means a share in the share capital of a company. A share is one unit into which the total share capital is divided. It is a fractional part of share capital and forms the basis of ownership in the company. 11 CU IDOL SELF LEARNING MATERIAL (SLM)

 Total capital of the company is divided into a number of small indivisible units of a fixed amount and each such unit is called a share. The total capital of the company is divided into shares, the capital of the company is called ‘Share Capital’.  Share capital of a company is divided into following categories: (i) Authorised Share Capital or Nominal Capital; (ii) Issued Share Capital; (iii) Subscribed Share Capital (iv) Called-up Share Capital; (v) Paid-up Share Capital; (vi) Reserve Share Capital  Types of shares are: Preference Shares. Preference shares can be of various types, e.g.:  Cumulative Preference Shares  Non-cumulative Preference Shares  Participating Preference Shares  Non-participating Preference Shares  Redeemable Preference Shares  Non-redeemable Preference Shares  Convertible Preference Shares  Non-convertible Preference Shares. Equity Shares  A company can issue shares either (1) for cash or (2) for consideration other than cash. A public limited company cannot make any allotment of shares unless the amount of minimum subscription stated in the prospectus has been subscribed and the sum payable as application money for such shares has been paid to and received by the company. 1.7 KEYWORDS  Nominal or Authorized Capital: It refers to that amount which is stated in the Memorandum of Association as the share capital of the company. The company is registered with this amount of capital. This is the maximum limit of capital which the company is authorized to issue and beyond which the company cannot issue shares unless the capital clause in the Memorandum is altered, and the authorized capital is increased.  Issued Capital: It refers to that part of the authorized capital of the company which has actually been offered to the public for subscription in cash and the shares allotted to vendors/promoters for consideration other than cash. It sets the limit of the capital 12 CU IDOL SELF LEARNING MATERIAL (SLM)

available for subscription. The prescribed form of the Balance Sheet requires that under the head “Issued Capital”, should be stated (i) the different classes of share capital as also the sub-classes of the preference shares, (ii) the date and terms of redemption or conversion (if any) of any redeemable preference capital, and (iii) any option on un-issued share capital.  Subscribed Capital: It refers to that part of the issued capital which has actually been subscribed by the public and subsequently allotted to them by the directors of the company which are fully paid or partially paid.  Called up Capital: It is that portion of the subscribed capital which the shareholders are called upon to pay on the shares allotted to them. A company does not necessarily require the full amount at once on the shares subscribed and hence calls up only such portion as it needs. The balance then remaining is known as uncalled capital.  Paid-up Capital: It refers to that part of the called-up capital which has actually been paid by the shareholders. This is the actual capital of the company which is included in the total of the Balance Sheet. Paid-up capital is equal to the called-up capital if all the shareholders have paid the amount called up by the company. 1.8LEARNING ACTIVITY 1. Can a company issue Preference shares without issuing Equity shares? ___________________________________________________________________________ _______________________________________________________________________ 2. What are Equity shares with differential voting rights? ___________________________________________________________________________ _______________________________________________________________________ 1.9UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define the term preference shares as per Companies Act, 2013 2. Explain the term share as per Companies Act, 2013 3. Differentiate between Capital reserve and Reserve capital 4. Explain what is Equity share? 5. What do you mean by prospectus? Long Questions 1. Explain the different types of share in detail 2. Explain different categories of Share capital in detail 13 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Discuss in detail about SEBI Guidelines for Issue of share 4. Explain the term Preference share and discuss its types 5. Discuss different types of Share capital B. Multiple Choice Questions 1. The part of authorized capital which can be called up only on the Company being wound up is called: a. Issued Capital b. Unsubscribed Capital c. Reserve Capital d. None of these 2. Who amongst the following are called absolute owners of the company? a. Equity share holders b. Preference share holders c. promoter d. None of these 3. The maximum capital a company can raise during its life time is ___________ a. Issued Capital b. Unsubscribed Capital c. Reserve Capital d. Authorised capital 4. As per Section 39 of the Companies Act, 2013. Application money must be at least ___% of the nominal value of shares. a. 5 b. 10 c. 15 d. 7.5 5. As per SEBI Regulations, the minimum application moneys to be paid by an applicant along with the application money shall not be less than _____% a. 25 14 CU IDOL SELF LEARNING MATERIAL (SLM)

b. 90 c. 75 d. 50 Answers 1-c, 2-a, 3-d. 4-a, 5-a 1.10REFERENCES ReferenceBooks  Corporate Accounting,R.K Mittal,ShagunAhuja, VKPublishers  M. C. Shukla, Advanced Accounts Vol. I, S. Chand & Company Ltd., Ram Nagar, New Delhi-55. T. S. Grewal & S. C. Gupta  R. L. Gupta & Financial Accounting, Sultan Chand & Sons, New Delhi - 2. 15 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 2ACCOUNTING TREATMENT STRUCTURE 2.0 Learning Objectives 2.1 Introduction 2.2 Problems on Issue of Shares at Par, Premium 2.3 Summary 2.4 Keywords 2.5 Learning Activity 2.6 Unit End Questions 2.7 References 2.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain the concepts relating to Issue of shares  Describe the concepts relating to under or oversubscription  Explain the concepts and entries relating to issue of shares at par premium and discount  Describe about concepts relating to calls in arrears and calls in advance  Discuss problems relating to Issue of shares 2.1 INTRODUCTION ISSUE OF SHARES AT PAR,PREMIUM CONCEPTS Issue of shares for consideration of Cash: (1) Issues of Shares at Par: Issue of Shares at its actual price i.e., face value is known as issue of shares at par. At the time of Application: (i) For receipt of application money: Bank A/c Dr. To Share Application A/c (Being application money received on ……. shares @............. per share) (ii) For transferring application money to share capital: 16 CU IDOL SELF LEARNING MATERIAL (SLM)

Share Application A/c Dr. To Share Capital A/c (Being application money transferred to share capital account) At the time of Allotment: (i) For making allotment due: Share Allotment A/c Dr. To Share Capital A/c (Being allotment due on ….shares @ …………. per share) (ii) For receipt of allotment money: Bank A/c Dr. To Share Allotment A/c (Being allotment money received) At the time of First Call: (i) For making first call due: Share First Call A/c Dr. To Share Capital A/c (Being first call money due on …. shares @ ……. per share) (ii) For receipt of first call: Bank A/c Dr. To Share First Call A/c (Being First call money received) At the time of Second Call: (i) For making second call due: Share Second Call A/c Dr. To Share Capital A/c (Being second call money due on …… shares @ …… per share) (ii) For receipt of second call: Bank A/c Dr. To Share Second Call A/c (Being second call money received) At the time of Third and Final Call: (i) For making third and final call due: Share Third and Final Call A/c Dr. To Share Capital A/c (Being third and final call money due on ………. shares @ ……. per share) (ii) For receipt of Third and Final Call Bank A/c Dr. To Share Third and Final Call A/c (Being Third and Final Call money received) 17 CU IDOL SELF LEARNING MATERIAL (SLM)

(2) Issue of Shares at Premium: Issue of shares at a premium implies that shares are issued at a price which is more than their face value. For example, if a share of Rs. 100 is issued at Rs. 120, Rs. 20 will be the premium on share. As per the requirements of the Companies Act, 2013, the amount received on the securities premium shall be credited to Securities Premium Reserve Account. It is a capital receipt for the company. According to Section 52(2) of the Companies Act, 2013, the amount of Securities Premium Reserve can be used only for the following purposes: (i) To issue fully paid-up bonus shares to the shareholders. (ii) To write off preliminary expenses of the companies. (iii) To write off the commission paid or expenses on issue of shares/debentures. (iv) To pay premium on the redemption of preference shares or debentures of the company. (v) Buy-back of Equity Shares and other securities as per Section 68. Journal Entries (1) For making Allotment due with Premium: Share Allotment A/c Dr. To Share Capital A/c To Securities Premium Reserve A/c (2) For receipt of Allotment Money: Bank A/c Dr. To Share Allotment A/c Undersubscription of Shares: When the number of Shares applied for is less than the number of shares offered for issue, it is known as undersubscription. This is subject to the qualification that minimum subscription has at least been received. Oversubscription of Shares: When the number of shares applied for is more than the number of shares offered for issue, it is known as oversubscription. The options available with the company to deal with money received on oversubscription are: (i) Board of Directors can make full allotment to some applicants and totally reject the others. (ii) They can make a pro-rata allotment. It means the proportion is determined by the ratio which the number of shares to be allotted bear to the number of shares applied for. (iii) They can adopt a combination of the above two alternatives. Calls-in-Advance A company can accept advance payment from any shareholder in respect of the shares held by them although calls have not been made on them, if it is authorized by its articles, i.e., a shareholder may pay the whole or a part of the unpaid amount as calls-in-advance although it 18 CU IDOL SELF LEARNING MATERIAL (SLM)

has not been called up. This is called Calls-in-Advance and a separate account having this title is opened. Then the calls are made, i.e., due, then it is adjusted against the respective ‘Calls A/c’. The company may pay interest on such advance from the date of advance received upto the date when it is due, which shall be 12% per annum. In this regard, the following entries are made: (1) For receipt of Calls-in-Advance: Bank A/c Dr. To Calls-in-Advance A/c (2) For adjustment of Calls-in-Advance: Calls-in-Advance A/c Dr. To Share …. Call A/c (3) For interest paid on Calls-in-Advance: Interest on Calls-in-Advance A/c Dr. To Bank A/c Calls-in-Advance will be shown on the liabilities side of Balance sheet under the head \"Current Liabilities\". In this regard, the following entries are made: (1) For receipt of Calls-in-Advance: Bank A/c Dr. To Calls-in-Advance A/c (2) For adjustment of Calls-in-Advance: Calls-in-Advance A/c Dr. To Share …. Call A/c (3) For interest paid on Calls-in-Advance: Interest on Calls-in-Advance A/c Dr. To Bank A/c Calls-in-Advance will be shown on the liabilities side of Balance sheet under the head \"Current Liabilities\". Calls-in-Arrears When a shareholder defaults to pay the amount of call due within a specified period, then the unpaid amount is called Calls-in-Arrears. It is not necessary to pass separate entry for the calls-in-Arrears. But if there is an instruction to open a calls-in-arrears account, then the following entries shall be passed: 19 CU IDOL SELF LEARNING MATERIAL (SLM)

(1) For Amount unpaid on allotment: Calls-in-Arrears A/c Dr. To …. Share Allotment A/c (2) For amount unpaid on calls: Calls-in- Arrears A/c Dr. To …. Share… Calls A/c (3) For receipt of arrears of allotment or calls money: Bank A/c Dr. To Calls-in-Arrears A/c (a) Interest on Calls-in-Arrears: The company may charge interest on Calls-in-Arrears from the due date upto the date of payment at a specified rate. (But not compulsorily) The following entry shall be passed: Bank A/c Dr. To Interest on Calls-in-Arrears A/c Calls-in-Arrears shall be shown at the liabilities side of the Balance Sheet as a deduction from called-up capital. Disclosure of Share Capital in the Company’s Balance Sheet: As per Schedule III of the Companies Act,2013, share capital is required to be disclosed in a Company’s Balance Sheet in the following manner: 20 CU IDOL SELF LEARNING MATERIAL (SLM)

INTEREST ON CALLS-IN-ARREARS AND CALLS-IN-ADVANCE Interest on calls in arrears is recoverable and that in respect of calls in advance is payable, according to provisions in this regard in the articles of the company, at the rates mentioned therein or those to be fixed by the directors, within the limits prescribed by the Articles. Table F prescribes 10% and 12% p.a. as the maximum rates respectively for calls in arrears and those in advance. Differences between Interest on Calls in Arrears and Interest on Calls in Advance 21 CU IDOL SELF LEARNING MATERIAL (SLM)

Issue of shares for consideration other than cash A Company may issue shares for consideration other than cash by acquiring some assets for running business or to the promoters for rendering services to the company. Such issue of shares is termed as issue of shares for consideration other than cash as there is no receipt of cash for the issue of shares. Such issue may be either at par, or at premium. The number of shares to be issued is calculated as follows: They can be issued as fully paid shares for consideration other than cash, in the following circumstances: (A) Issue of Shares to Promoters: A company may issue shares without cash to its promoters for the services rendered by them. The entry in this case will be Incorporation Expenses A/c Dr. To Share Capital A/c (Being fully paid shares issued to the promoters) Incorporation or Formation Expenses Account is debited on the assumption that promoter’s activities have resulted in forming the company into a profitable unit. (B)Issue of Shares to Vendors: When a company purchases certain assets from vendor/supplier on credit, or when it purchases a business instead of making payment to vendor in cash, the company issues fully paid shares to the vendor. Shares may be issued to vendor at par, or at premium. Following entries are passed in this case: (a) For Purchase of Assets from Vendor: Sundry Assets A/c Dr. To Vendor’s A/c (Being assets purchased on Credit) (b) For Purchase of Business: 22 CU IDOL SELF LEARNING MATERIAL (SLM)

Sundry Asset A/c Dr. Goodwill A/c Dr. To Liabilities A/c To Vendor’s A/c To Capital Reserve A/c Prohibition on Issue of Shares at Discount [Section 53] 1. Except as provided in section 54(sweat equity shares), a company shall not issue shares at a discount. 2. Any share issued by a company at a discounted price shall be void. 3. Where a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than one lakh rupees, but which may extend to five lakh rupees and every officer who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than one lakh rupees, but which may extend to five lakh rupees, or with both. NO SHARES CAN BE ISSUED AT A DISCOUNT Issue of shares to promoters A company may allot fully paid shares to promoters or any other party for the services rendered by them by way of furnishing technical information, engineering services, plant layout, drawing and designing, etc. without payment. This type of issue of shares to promoters is called issue of shares for consideration other than cash. As the amount paid to promoters for services rendered by them is supposed to be utilised by the company over a long period of time, such expenditure should be treated as capital expenditure and debited to Goodwill Account. The accounting entry in such a case will be as follows: 2.2PROBLEMS ON ISSUE OF SHARES Illustration No.1 A limited company issued 1 lakh equity shares of Rs. 10 each payable as under : Rs. 3 on application; Rs. 2 on allotment; Rs. 3 on first call; and Rs. 2 on final call. The public applied for 90,000 equity shares. These were allotted. The final call was not yet made. All the money due on the shares was received except the first call on 4,000 equity shares. Give journal entries, ledger accounts and the balance sheet. 23 CU IDOL SELF LEARNING MATERIAL (SLM)

24 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration No.2 X Limited having an authorised share capital of Rs. 30,00,000 in shares of Rs. 10 each issued 2,00,000 equity shares of Rs. 10 each payable as under: On application Rs. 3 On allotment Rs. 2 On first call Rs. 2 On second and final call Rs. 3 Applications received from the public totaled 2,52,000 equity shares. Applications for 2,000 equity shares were 25 CU IDOL SELF LEARNING MATERIAL (SLM)

rejected due to technical faults in them. Allotment was made on the remaining applications on a pro rata basis. The directors did not make the final call. All moneys due on shares were received with the exception of the first call on 4,000 shares. Give journal entries, ledger accounts and the balance sheet. 26 CU IDOL SELF LEARNING MATERIAL (SLM)

27 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration No.3 Goodluck Ltd. issued 1,00,000 equity shares of Rs. 10 each payable as under: Rs. 2.50 on application ; Rs. 2 on allotment ; Rs. 3 on first call; and Rs. 2.50 on final call. The public applied for 2,00,000 shares. On 1st June 2011, the Board of Directors accepted all the 28 CU IDOL SELF LEARNING MATERIAL (SLM)

applications, making allotment on a pro rata basis, i.e., proportionately– The directors made the first call on 1st September 2011, and the second and final call on 1st December 2011. Under the terms of issue, the surplus application money was to be kept by the directors against money due on allotment and against subsequent calls. One shareholder holding 1,000 shares paid the second call in advance while paying the balance of the first call on 1st September 2011. On 1st December 2011, the directors paid interest due on calls in advance at 6 per cent per annum. Give entries in the cash book and the journal of the company assuming that all moneys due have been received. 29 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration No.4 Ashoka Limited issued 2,50,000 equity shares of Rs. 10 each and 2,00,000 8% preference shares of Rs. 10 each. The amounts were payable as follows 30 CU IDOL SELF LEARNING MATERIAL (SLM)

These shares were applied for and allotted. All the amounts due were received. Give entries in the cash book and the journal of the company and also show the balance sheet. 31 CU IDOL SELF LEARNING MATERIAL (SLM)

32 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration No.5 Good Pictures Ltd. invited applications for 1,00,000 equity shares of Rs. 10 each at a premium of Rs. 2 per share. The total amount was to be paid as follows : On application Rs. 3 ; On allotment Rs. 4 including premium ; On first call Rs. 3 ; and On final call Rs. 2. Applications totalled 3,01,000 shares. One application for 1,000 shares was rejected due to a defect. Allotment was made on the remaining applications on pro rata basis. The company was authorised to retain all sums over-paid for adjustment against money due on allotment and on calls. The company exercised this power. The directors made the allotment on 1st July 2011, and 1st call on 1st October 2011. Till 31st March 2012, no further call had been made. All the moneys due on allotment were collected and against first call, the directors had received Rs. 1,98,000. Give journal entries and the balance sheet of the company on 31st March 2012 assuming that the directors had paid interest due to shareholders in cash on the proper date at the rate of 6 per cent per annum. 33 CU IDOL SELF LEARNING MATERIAL (SLM)

34 CU IDOL SELF LEARNING MATERIAL (SLM)

35 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration No.6 On 1st October 2020 Pioneer Equipment Limited received applications for 2,50,000 Equity Shares of Rs. 100 each to be issued at a premium of 25 per cent payable as : On Application Rs. 25 On Allotment Rs.75 (including premium) Balance Amount on Shares As and when required The shares were allotted by the Company on October 20, 2020, and the allotment money was duly received on October 31, 2020. Record journal entries in the books of the company to record the transactions in connection with the issue of shares 36 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration No. 7 ABC Limited is a company with an authorised share capital of Rs.10,00,000 in equity shares of Rs.10 each, of which 6,00,000 shares had been issued and fully paid on 30th June 2020. The company proposed to make a further issue of 1,00,000 of these Rs.10 shares at a price of Rs.14 each, the arrangements for payment being: (a) Rs. 2 per share payable on application, to be received by 1st July 2020; (b) Allotment to be made on 10th July 2020 and a further Rs. 5 per share (including the premium) to be payable. (c) The final call for the balance to be made, and the money received by 30th April 2021. Applications were received for 3,55,000 shares and were dealt with as follows: (i) Applicants for 5,000 shares received allotment in full. (ii) Applicants for 30,000 shares received an allotment of one share for every two applied for; no money was returned to these applicants, the surplus on application being used to reduce the amount due on allotment. (iii) Applicants for 3,20,000 shares received an allotment of one share for every four applied for; the money due on allotment was retained by the company, the excess being returned to the applicants; and (iv) the money due on final call was received on the due date. You are required to record these transactions (including cash items) in the Journal of ABC Limited 37 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration No. 8 P Ltd. was registered with an authorised capital of Rs. 10,00,000 divided into 1,00,000 equity shares of Rs. 10 each out of which 50,000 equity shares were offered to the public for subscription. The shares were payable as under: Rs. 3 per share on application Rs. 2 per share on allotment Rs. 2 per share on 1st call Rs. 3 per share on 2nd and final call The shares were fully subscribed for, and the money was duly received. Show the journal and cash book entries. 38 CU IDOL SELF LEARNING MATERIAL (SLM)

39 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration No. 9 Wonder Ltd. issued 10,000, 12% Preference Shares of Rs. 100 each at a premium of Rs. 10 per share payable as follows: On Application Rs. 30 On Allotment Rs. 30 (including premium) On First Call Rs. 25 On Final Call Rs. 25 Applications were received for 12,000 shares and the directors allotted 10,000 shares and rejected applications for 2,000 shares and the money received thereon was refunded. The allotment money was duly received while the first call money was received on 9,000 shares and the final call money on 8,000 shares. Show the cash book and journal entries 40 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration No. 10 New look Ltd. issued, 1,00,000 Equity Shares of Rs. 10 each payable as follows: On Application (On 1st March 2016) Rs. 4 On Allotment (On 1st April 2016) Rs. 1 On First Call (On 1st August 2016) Rs. 3 On Final Call (On 1st October 2016) Rs. 2 Application were received for 2,60,000 shares. Of these 10,000 shares were in disorder; 40,000 shares in lots of 100 shares; 1,20,000 shares in lots of exceeding 100 but less than 500 shares; 60,000 shares in lots of exceeding 500 but less than 1,000 shares and the balance in lots of exceeding 1,000 shares. Allotment was made as follows: Application for the 10,000 shares in disorder were rejected. Application for 100 shares in full, i.e., 100% 40,000 Application over 100 shares but not exceeding 500 shares - 40% 48,000 Application over 500 shares but not exceeding 1,000 shares - 15% 9,000 Applications over 1,000 shares - 10% 3,000 Money received in excess on shares partially allotted was retained to the extent possible. Show the cash book and journal entries assuming that all the installments were duly received, and interest was paid by the directors on calls-in-advance @ 12% per annum on 1st October 2016. 41 CU IDOL SELF LEARNING MATERIAL (SLM)

42 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration No. 11 Rocket Ltd. purchased the business of Comet Ltd. for Rs. 2,70,000 payable in fully paid shares. Rocket Ltd. allotted equity shares of Rs. 10 each fully paid in satisfaction of the claim by Comet Ltd. Show the necessary journal entries in the books of Rocket Ltd. assuming that: (a) Such shares are issued at par, (b) Such shares are issued at premium of 20% 43 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration No. 12 Bright Ltd. was registered with a share capital of Rs. 10,00,000 in equity shares of Rs. 10 each. The company acquired factory building worth Rs. 1,00,000 and plant and machinery worth Rs. 80,000 from Delite Ltd. and issued 18,000 equity shares of Rs. 10 each to the vendors as fully paid-up. The directors also decided to allot 2,000 equity shares credited as full paid to the promoters for their services. Further capital was issued to the public for cash to the extent of Rs. 3,00,000 payable in full with the application. All the shares were taken up by the public and fully paid for. Show the necessary journal entries. 44 CU IDOL SELF LEARNING MATERIAL (SLM)

2.3SUMMARY  Journal entries for issue of shares For Application money Bank Account Dr. To Share Application A/c (No. of Application X application amount per share) 1.On acceptance of Applications 45 Share Application A/c Dr. To Share Capital A/c To Securities Premium A/c (No. of share allotted X application amount called on cash) (Amount of Securities Premium Received if any) CU IDOL SELF LEARNING MATERIAL (SLM)

2. For allotment money due Share Allotment A/c Dr. To Share Allotment A/c To Securities Premium A/c (No. of Shares Allotted X amount called on allotment for each share (Securities Premium due)On receipt of allotment money Bank Account Dr. To Share Allotment A/c (No. of allotment share x amount received on allotment for each share) or actual amount received) 3. For all money due Share Call A/c Dr. To Share Capital A/c To Securities Premium A/c (No. of shares allotted x amount called on each call share (Securities Premium due)On receipt of cells money Bank A/c Dr. To Share Call A/c (No. of application allotted x amount received on each share)  Issues of Shares At Premium: It is issue of share at more than face value. This premium can be utilized for : (Section 52) 1. Issue of fully paid bonus shares to the shareholders. 2. Write off preliminary expenses of the company. 3. Writing off securities issue expenses commission paid discount on issue of securities. 4. For providing the premium payable on redemption of Redeemable preference shares or debentures of the company. 5. For Buy back of its own shares as per Section 68.  Issue of shares at discount [Section 53] A company cannot issue shares at discount other than sweat equity shares. 46 CU IDOL SELF LEARNING MATERIAL (SLM)

 Shares Issue for Consideration Other than Cash When a company purchases any fixed asset or business and makes the payment to the vendor in form of issue of shares in place of cash it is called the issue of shares for consideration other than cash. Share can be issued at par, at premium.  Under subscription When the number of Share application received is less than the number of shares offered to public it is under subscription.  Over subscription When the number of Share application received is more than the number of shares offered to public it is over subscription 1. Either reject the excess applications 2. Make pro-rata allotment 3. Partially refund amount and on other applications pro-rata allotment is made.  Calls in arrear Any Amount which has been called or demanded by company from shareholders but not paid by the shareholder till the last date mentioned in call letter is called as calls-in arrear, Company can charge interest on this at rate mentioned in Article of Association or 10% p.a. as per Table F.  Calls in advance Any amount paid in excess of what they havebeen asked to pay is called as call in advance. Interest is paid on this at rate mentioned in Article of Association or 12% p.a. as per Table F 2.4 KEYWORDS  Un-issued Capital - The remaining portion of the authorised capital which is not issued either in cash or consideration may be termed as ‘Un-issued Capital’.  Unpaid Calls or Calls in arrears – Whenever a particular amount is called by the company and the shareholder(s) fails to pay the amount fully or partially, it is known as ‘unpaid calls’ or ‘instalments (or Calls) in Arrears’.  Pro-rata allotment – It means allotment in proportion of shares applied for.  Calls-in-advance - Some shareholders may sometimes pay a part, or whole, of the amount not yet called up, such amount is known as Calls-in-advance. 47 CU IDOL SELF LEARNING MATERIAL (SLM)

2.5 LEARNING ACTIVITY 1.These days the shares are generally priced on the basis of book building process. What is book building? ___________________________________________________________________________ ___________________________________________________________________________ 2. What do you mean by private placement of shares? ___________________________________________________________________________ _______________________________________________________________________ 2.6 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What do you mean by prorata allotment of shares? 2. List the purposes for which Securities premium can be utilised for. 3. The director of a public company is of the opinion that the shares of the Company can only be issued for cash. But they wanted to hear from you about whether the shares can be issued for other than cash also. What will be your answer to them? Substantiate your answer with the help of a situation. 4. Can shares be Issued at Discount? Explain 5. What do you mean by calls in Arrears? Long Questions 1. Pant Ltd. invited applications for 50,000 equity shares at Rs.50 each, which are payable as on application Rs.20, on allotment Rs.10 and on first and final call Rs.20. The company received applications for 60,000 shares. The directors accepted application for 50,000 shares and rejected the rest. Show Journal entries if company refunded the application money to rejected applicants and allotment money was received for 45,000 shares. 2. X Ltd. invited applications for 10 lakhs shares of ₹ 100 each payable as follows: On application ₹ 20 On First Call (on 1st Oct. 30 2020) 20 On Final Call (on 1st Feb. 48 CU IDOL SELF LEARNING MATERIAL (SLM)

2021) All the shares were applied for and allotted. A shareholder holding 20,000 shares paid the whole of the amount due along with allotment. Journalize the transactions, assuming all sums due were received. Interest was paid to the shareholder concerned on 1st February 2021. 3. Shreyas Ltd. did not receive the first call on 10,000 equity shares @ Rs. 3 per share which was due on 1.7.2020. This amount was received on 1.4.2021.Open Calls in arrears account and journalise the entries in the books of the company on 1.7.2020 and 1.4.2021. Also show an extract of Balance Sheet on 31.3.2021. 4. Distinguish between Calls-in-arrears and Calls-in-advance. 5. Rashmi Limited issued at par 1,00,000 Equity shares of Rs.10 each payable Rs.2.50 on application; Rs.3 on allotment; Rs. 2 on first call and balance on the final call. All the shares were fully subscribed. Mr. Nair who held 10,000 shares paid full remaining amount on first call itself. The final call which was made after 3 months from first call was fully paid except a shareholder having 1000 shares who paid his due amount after 2 months along with interest on calls in arrears. Company also paid interest on calls in advance to Mr. Nair. Give journal entries to record these transactions. B. Multiple Choice Questions 1. The excess price received over the par value of shares, should be credited to __________. a. Calls-in-advance account b. Share capital account c. Securities premium account d. None of these 2.T Ltd. proposed to issue 6,000 equity shares of Rs.100 each at a premium of 40%. The minimum amount of application money to be collected per share as per the Companies Act, 2013 a. Rs.5.00 b. Rs.6.00 c. Rs.7.00 d. Rs.10 49 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Dividends are usually paid as a percentage of ______. a. Authorized share capital b. Net profit c. Paid-up capital d. None of these 4. As per the SEBI guidelines, on issue of shares, the application money should not be less than a. 2.5% of the nominal value of shares b. 2.5% of the issue price of shares c. 25.0% of the issue price of shares d. None of these 5. G Ltd. acquired assets worth Rs.7,50,000 from H Ltd. by issue of shares of Rs.100 at a premium of 25%. The number of shares to be issued by G Ltd. to settle the purchase consideration = ? a. 6,000 shares b. 7,500 shares c. 9,375 shares d. None of these Answers 1-c, 2-a, 3-c, 4-a, 5-a 2.7REFERENCES Reference books  Advanced Accountancy – M.C. Shukla and T.S. Grewal, Sultan Chand, Publications, New Delhi  Advanced Accounting – R.L. Gupta and Radha swamy, Sultan Chand, Publications, New Delhi 50 CU IDOL SELF LEARNING MATERIAL (SLM)