Study Material & Notes for the Chapter 8
COMPANY - ACCOUNTING FOR SHARE CAPITAL
III. ISSUE OF SHARE FOR CASH AT PAR AND PREMIUM
1. Accounting treatment of Shares Issued for Cash
In general, shares are issued for cash. The company may call the share money either in one instalment or in two or more instalments. But company always collects this money through its bankers.
A. Receipt of Share Money in One Instalment
The company may receive the share money in one instalment along with application. In this case the following journal entries are made in the books of the company
B. Receipt of Share Money in Two or More Instalments
- Instead of receiving payment in one instalment i.e. at the time of application the company collects it in two or more instalments.
- The first, instalment which the applicants have to pay along with the applications for shares is known as Application Money.
- On the allotment of shares the allottees are required to pay the second instalment which is termed as Allotment Money.
- If the company decides to call the share money in more than two instalments the other instalment is/are termed as Call Money (i.e. first-call, second call or final call).
a) Receipt of Share Application Money
b) Allotment Money becoming due:
On the allotment of shares the amount receivable on the next instalment i.e. on allotment becomes due.
c) Call on Shares
- After the receipt of application and allotment money the money that remains unpaid can be called up by the company as and when required
- Thus a call is a demand made by the company asking the shareholders to remit the called up amount on shares allotted to them.
- The company may demand the remaining money in more than two instalments. The amount called after the allotment is known as call money. There may be one or more calls, depending on the fund requirements of the company.
If the company makes more than one call the same accounting treatment is followed for recording the second call or third call money due and their receipt. The last call made is termed as final call.
2. Issue of Shares at Par or Premium
a) Par Value
- Par value means the nominal amount or face value of share
- When issue price of the share is exactly equal to their nominal value or face value shares are said to be issued at par
- For example, share of face value of Rs. 10/- issued at Rs. 10/-
b) Premium
- When the shares of a company are issued at more than its nominal value (face value), the excess amount is called premium
- The premium amount is credited to a separate account called ‘Securities Premium Account’ and is shown under
the title ‘Equity and Liabilities’ of the company’s balance sheet under the head ‘Reserves and Surpluses’ - For example, share of face value of Rs. 10/- issued at Rs. 12/- then it is said to be issued at premium of Rs. 2/-
c) Securities Premium Reserve
As per Section 52(1) of the Companies Act, 2013, where company issues shares at a premium, whether for cash
or otherwise, a sum equal to aggregate amount of premium received in those shares shall be transferred to separate account called Securities Premium Account.
As per Section 52(2) of the Companies Act, 2013 Securities Premium Amount may be applied or utilized for the following purposes
- To write off preliminary expenses of the company
- To write off the commission paid or discount/expenses on issue of shares/debentures.
- To issue fully paid-up bonus shares to the existing shareholders.
- To provide premium on the redemption of preference shares or debentures of the company.
- To buy back of its own shares as per Section 68: The term buy back of shares implies the act of purchasing its own shares from stock market by a company either from free reserves, securities premium reserve or proceeds of any shares or debentures.