Study Material & Notes for the Chapter 8
Partnership - ACCOUNTING FOR SHARE CAPITAL
IX FORFEITURE OF SHARES UNDER PRO-RATA CATEGORY
1) Over Subscription of Shares
Meaning
Over-subscription is a situation where number of shares applied for is more than the number for which applications have been invited for subscription.
Example
A company offered 1,00,000 shares for subscription to the public but the applications were received for 2,00,000 shares
Accounting Treatment
In such a condition, three alternatives are available to the directors to deal with the situation:
- they can accept some applications in full and totally reject the others;
- they can make a pro-rata allotment to all;
- they can adopt a combination of the above two alternatives which happens to be the most common course adopted in practice.
2) Pro-rata Allotment
Case-1 When the directors opt to make a proportionate allotment to all applicants
- In this case, the excess application money received is normally adjusted towards the amount due on allotment.
- If the excess application money received is more than the amount due on allotment of shares, such excess amount may either be refunded or credited to subsequent installments i.e. Calls money.
- For example, in the event of applications for 20,000 shares being invited and those received are for 25,000 shares, it is decided to allot shares in the ratio of 4:5 to all applicants (four shares are allotted for every five shares applied).
- It is a case of pro-rata allotment and the excess application money received on 5,000 shares would be adjusted towards the amount due on the allotment of 20,000 shares.
Case-2 When the application for some shares are rejected outrightly and pro-rata allotment is made to the remaining applicants
- In this case, the money on rejected applications is refunded and the excess application money received from applicants to whom pro-rata allotment has been made is adjusted towards the amount due on the allotment of shares allotted.
- If the excess application money received is more than the amount due on allotment of shares, such excess amount may either be refunded or credited to subsequent installments i.e. Calls money.
- For example, a company invited applications for 10,000 shares and received applications for 15,000 shares. The directors decided to reject the applications for 2,500 shares outright and to make a pro-rata allotment of 10,000 shares to the applicants for the remaining 12,500 shares so that four shares are allotted for every five shares applied.
- In this case, the money on applications for 2,500 shares rejected would be refunded fully and that on the remaining 2,500 shares (12,500 shares – 10,000 shares) would be adjusted against the allotment amount due on 10,000 shares allotted and credited to Share Allotment account
3) Applied vs Allotted
- Remember Shares Applied > Shares Allotted