Financial Accounting 5 questions
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Topic4Slides-Accountingforsharecapitalandreserves.pdf
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Slides prepared by Miranda Dyason
Workshop 4:
Accounting for share capital and reserves
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Explain and account for subsequent issues of shares and share buy-backs
Account for the formation of a company through an issue of shares
Explain the nature of reserves, and account for movements in reserves
A
B
C
D
Learning Outcomes
1
E Specify the disclosure requirements for equity
Explain the nature of companies, the key features of the corporate structure, and forms of share capital
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Accounting for share issues in a
company’s accounting records
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Things to consider...
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▸ Is the share issue payable in full on application or payable in instalments?
▸ Is there an undersubscription? If yes, has the minimum subscription level been reached? Have we employed the services
of an underwriter?
▸ Is there an oversubscription? If yes,
• With share issues payable in full on application, refund money to unsuccessful
applicants.
• With share issues payable in instalments, will we only issue shares to some
applicants, and refund money to unsuccessful applicants? Or will we issue
shares on a pro-rata basis, and keep excess application to go towards the
shareholders next instalment?
Accounting for share issues
4 We will discuss oversubscription more shortly
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▸ With share issues payable in instalments, what will we do if some shareholders don’t pay one of the instalments due?
• Are we able to forfeit/cancel their shares?
• If yes can forfeit/cancel the shares, are we able to reissue the shares to new
shareholders?
• Are the former shareholders going to get any money back?
Accounting for share issues
5
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• Application account:
- a liability account
• Bank trust or cash trust account:
- an asset account
• Allotment account:
- a receivable account
• Call account:
- a receivable account
• Share capital account:
- an equity account
Key accounts
6
Discussion Activity:
Why a bank trust or cash trust
account is used, rather than a
bank or cash account when a
company receives application
money from prospective
shareholders?
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Share issues payable in full on application
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▸ To recognise receipt of application money:
Debit Bank trust
Credit Application
▸ To recognise the issue of shares and to close application account:
Debit Application
Credit Share capital
Accounting for share issues – payable in full
on application
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▸ To refund money received from unsuccessful applicants:
Debit Application
Credit Bank Trust
▸ To transfer cash from trust account to general operating bank account or to the company’s general cash (once shares are allotted):
Debit Cash / Cash at bank
Credit Bank trust
Accounting for share issues – payable in full
on application
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▸ Underwriting costs: – Treated as a reduction against contributed equity
▸ Other share issue costs (eg. Stamp duty, legal fees) – Treated as a reduction against contributed equity
▸ Formation costs: – Treated as an expense
Accounting for share issue costs and
formation costs
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Hot Ltd was registered on 1 January 2016. The directors offered 10,000,000
ordinary shares to the public at $2 per share, payable in full on application.
Applications closed on 31 January 2016, and by that date, the company had
received applications for 11,000,000 shares. On 5 February 2016, the
directors sent letters of regret and refunds to applicants for 1,000,000 shares
and allotted 10,000,000 shares to the remaining applicants. Legal costs re
issuing the shares were $6,000, and were paid.
Required:
Prepare journal entries to record the above transactions.
Example - oversubscription
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Answer:
1-31 January 2016: Application money received
DR Bank Trust $22 000 000
CR Application $22 000 000 (Money received on application: 11,000,000 x $2)
5 February 2016: Refund to unsuccessful applicants, and allotment of shares
DR Application $2 000 000
CR Bank Trust $2 000 000 (Refund to unsuccessful applicants – 1,000,000 x $2)
DR Application $20 000 000
CR Share capital $20 000 000 (Issue of 10,000,000 shares at $2 each)
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Answer:
Transfer of money from Cash Trust to Cash/Bank account:
DR Cash $20 000 000
CR Bank Trust $20 000 000 (Once shares have been allotted, the company can then transfer the cash into its usual
operating account)
Payment of share issue costs:
DR Share issue costs/share capital $6 000
CR Cash $6 000 (Costs of issuing the shares)
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Hot Ltd was registered on 1 January 2016. The directors offered 10,000,000
ordinary shares to the public at $2 per share, payable in full on application.
The share issue was underwritten at a commission of $3,000.
Applications closed on 31 January 2016, and by that date, the company had
received applications for 8,000,000 shares. On 5 February 2016, the
10,000,000 shares and allotted, and the underwriter pays the amount money
due for the 2,000,000 shares, less their commission.
Required:
Prepare journal entries to record the above transactions.
Example – undersubscription with underwriter
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Answer: 1-31 January 2016: Application money received
DR Bank Trust $16 000 000
CR Application $16 000 000 (Money received on application: 8,000,000 x $2)
5 February 2016: Allotment of shares, and receipt of money from underwriter
DR Application $20 000 000
CR Share capital $20 000 000 (Issue of 10,000,000 shares at $2 each)
DR Cash $3 997 000
DR Share capital / share issue costs $3 000
CR Application $4 000 000 (Receipt of money from underwriter for 2,000,000 shares, less commission)
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Answer:
Transfer of money from Cash Trust to Cash/Bank account:
DR Cash $16 000 000
CR Bank Trust $16 000 000 (Once shares have been allotted, the company can then transfer the cash into its usual
operating account)
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Review questions:
17
Loftus et al (Chapter 13):
• Application and analysis exercise 13.11.
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Share issues payable in instalments
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• To recognise aggregate applications for shares:
Debit Bank Trust
Credit Application
• To allot shares as partly paid:
Debit Application
Credit Share Capital
• To recognise amount due on allotment
Debit Allotment
Credit Share capital
Accounting for share issues payable in
instalments
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These two journals
can be combined
as:
DR Application
DR Allotment
CR Share Capital
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• To transfer funds to operating bank account:
Debit Cash at bank
Credit Cash/Bank trust
• To recognise receipt of amounts due on allotment
Debit Cash at bank
Credit Allotment
• To record call
Debit Call
Credit Share capital
• To record receipt of amounts due on call
Debit Cash at bank
Credit Call
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▸ The treatment of excess application money depends on the terms of a company’s constitution. Options include:
• Refunding excess application money to applicants:
DR Application
CR Cash Trust
• Issuing shares to applicants on a pro-rata basis, and retaining
the excess application money to go towards future instalments.
The journal entry re the money being retained will be:
DR Application
CR Allotment (or ‘Calls in Advance’ if re a call)
Oversubscription
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Example
Share Issue Payable by instalments
• ABC issued a prospectus for the issue of 100,000 $5 shares on 1 January 2016. The prospectus
specified that $2.50 was payable on application, a further $1.25 was payable on allotment and the
final $1.25 was payable at call.
• The company received applications for a total of 120,000 shares throughout the month of January.
On 1 February 2016, ABC issued 100,000 shares and the directors refunded the money in relation
to unsuccessful applications. Allotment money was payable by 28 February 2016, and by this date,
all allotment money was received.
• On 31 May 2016, the company made the call for the outstanding balance of $1.25 per share. The
call was payable by 30 June 2016.
• By 30 June 2016, the call on 10,000 shares remained unpaid.
Required:
Prepare the journal entries up until 30 June 2016 to account for the issue of shares for ABC. 22
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Answer:
1-31 January 2016
To record receipt of application money prior to issuing the shares:
Dr Cash trust 300,000
Cr Application 300,000
1 February 2016
Issue of shares applied for and recognise allotment money due:
Dr Application 250,000
Dr Allotment 125,000
Cr Share capital 375,000
Refund of application money to unsuccessful applicants:
Dr Application 50,000
Cr Cash trust 50,000 23
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1 February 2016
Transfer from cash trust on issue of shares:
Dr Cash 250,000
Cr Cash trust 250,000
28 February 2016
Cash received on allotment:
Dr Cash 125,000
Cr Allotment 125,000
31 May 2016
Call of $1.25 per share on 100,000 shares issued:
Dr Call 125,000
Cr Share capital 125,000 24 24
Answer:
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30 June 2016
Cash received on call:
Dr Cash 112,500
Cr Call 112,500
• The balance in the call account is $12,500, being $1.25 x 10,000 shares.
• Unpaid calls are referred to as calls in arrears and are shown as a
reduction of share capital in the company’s financial statements.
• The balance in the share capital account at 30 June is as follows:
Share capital (100,000 ordinary shares @ $5) 500,000
Less: Calls in arrears (10,000 shares @ $1.25) (12,500)
TOTAL SHARE CAPITAL 487,500
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Answer:
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▸ Shares may be forfeited where amounts due and payable by shareholders have not been paid.
▸ Possible actions that can be taken in such circumstances are:
• The balance of paid monies may be retained by the company
(retained in an equity account (Forfeited Shares Reserve)).
• The amount paid may be refunded back to the forfeiting shareholder.
▸ Where the constitution is silent, the company is entitled to keep any excess.
Forfeiture of shares
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▸ Prior to refunding the balance the company could reissue the shares as
fully paid shares to new shareholders with the new shareholders paying
less than the fully paid value of the share.
▸ The difference, as well as any costs of reissue are deducted from the
amount to be refunded back to the forfeiting shareholders (if amounts
are going to be refunded to them).
Reissue of forfeited shares
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• To record forfeiture of shares
Dr Share capital (number of shares x amount called up)
Cr Call (number of shares x unpaid call)
Cr Forfeited shares a/c (number of shares x amount paid up)
This entry cancels the remainder of the call and the forfeited shares.
• To recognise amount received on reissue of forfeited shares
Dr Cash at bank (cash received on sale)
Dr Forfeited shares a/c (discount allowed on reissued shares)
Cr Share capital (number of shares x amount called up)
Forfeiture and reissue of shares
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• To recognise payment of costs relating to reissue of shares
Dr Forfeited shares account
Cr Cash at bank
• To recognise return of remaining money to original shareholders (if it is
to be refunded to them)
Dr Forfeited shares account
Cr Cash at bank
Forfeiture and reissue of shares
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Take note: the accounting treatment for
costs associated with forfeiture and
reissue is different to costs associated
with the original share issue made.
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On 1 January 2016, Salami Ltd was incorporated and offered 200,000 shares to the public at
an issue price $4.00 per share. The terms of the issue are that $2.00 is to be paid on
application and the remaining $2.00 within one month of allotment. Applications for shares
close on 31 January 2016.
Applications are received for 300,000 shares during January 2016. On 5 February 2016 the
directors decide that all subscribers will receive shares on a pro-rata basis, with any excess
paid on application to be offset against the amount due on allotment. The amounts payable on
allotment are due by 5 March 2016.
By 5 March 2016, the holders of 30,000 shares have failed to pay the amounts due on
allotment. On 10 March 2016, as provided by the company’s constitution, the directors forfeit
these 30,000 shares. On 20 March 2016, the forfeited shares are reissued as fully paid for a
consideration of $3.50 per share. The balance of the Forfeited Shares Account was returned to
the former shareholders on 20 March 2016.
Required:
Provide the journal entries necessary to account for the above.
Activity
30
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1-31 January 2016:
DR Bank Trust $600 000
CR Application $600 000
(To recognise the aggregate receipt of application monies: 300,000 x $2)
5 February 2016:
DR Application $400 000
CR Share capital $400 000
(To allot 200,000 shares as paid to $2 per share)
DR Allotment $400 000
CR Share capital $400 000
(To recognise the amount of $2 per share which is due following the allotment of shares)
Answer:
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5 February 2016:
DR Application $200 000
CR Allotment $200 000
(Excess application monies used to offset some of the amount that is due on allotment. $200,000
is now due on allotment, or $1.00 per share)
DR Cash at bank $600 000
CR Bank trust $600 000
(Once shares have been allotted, the company can then transfer the cash into its usual operating
account)
5 March 2016:
DR Cash at bank $170 000
CR Allotment $170 000
(To recognise cash received from holders of 170,000 shares at the rate of $1.00 per share)
Answer:
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10 March 2016:
DR Share capital $120 000
CR Allotment $30 000
CR Forfeited share account $90 000
(To record forfeiture of 30,000 shares. Each forfeited share had been paid to $3.00 per share)
20 March 2016:
DR Cash at bank $105 000
DR Forfeited share account $15 000
CR Share capital $120 000
(To recognise the amount received on the sale of the forfeited shares)
DR Forfeited share account $75 000
CR Cash at bank $75 000
(Return the balance of the FSA to the defaulting shareholders)
Answer:
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Review questions:
34
Loftus et al (Chapter 13):
• Application and analysis exercise 13.14 and 13.15.
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▸ Understand what you are required to do – for example: prepare journal entries, or prepare ledger accounts.
▸ Understand what’s involved in the scenario presented: eg. Share issue with oversubscription? Undersubscription? Forfeiture and Reissue?
▸ Work through the events and transactions systematically.
▸ If you are required to prepare journal entries, you may find it helpful to also prepare ledger / T-Accounts so that you understand how the ledger accounts
are affected with each journal entry and can check the balances in these
ledger accounts once all journal entries are completed.
How to approach activities re
accounting for share capital?
35
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Subsequent movements in share capital
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• Placements
• Rights issues
• Share purchase plans
• Dividend reinvestment plans
• Options
• Bonus share issues
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Review questions:
37
Loftus et al (Chapter 13):
• Application and analysis exercise 13.8 and 13.12.
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Movements in reserves and retained
earnings
38
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Review questions:
39
Loftus et al (Chapter 13):
• Application and analysis exercise 13.9.
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Accounting for share buybacks
40
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Review questions:
41
Loftus et al (Chapter 13):
• Application and analysis exercise 13.16.
