- Company Financial Statements Notes:
- Forfeiture of Shares – Accounting Treatment
- i. Forfeiture of shares issued at par
- ii. Forfeiture of shares issued at premium
- a. where premium was collected
- Meaning of debentures
- Distinction between Shares and Debentures
- 1.On the Basis of Repayment
Company Financial Statements Notes:
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COMPANY FINANCIAL STATEMENTS NOTES
Company Financial Statements Notes Relating to Shares:
Share and Share Capital Meaning, Nature and Types:
The most striking feature of a joint stock company is its ownership structure. The capital of a joint stock company is divided into small shares of fixed value. This facilitates easy investment and easy transfer. Shareholders do not directly mange the company. They elect directors who carry out management. The shareholders have the safety of limited liability. In the event of extreme loss or liquidation with excessive outside liability, the non invested wealth of a shareholder is not affected. The face value of the shares held by a person is the maximum amount that he can lose in a joint stock company. If the shares are fully paid up he need not pay anything further even if the company is liquidated with heavy unsettled claims. If the shares held are partly paid up, a shareholder might be asked to pay the unpaid portion of the shares.
- Authorised Capital or Registered Capital
- Issued Capital
- Subscribed Capital
- Called up Capital
- Paid up Capital
- Reserve Capital
Over-Subscription and Under-Subscription
It is unlikely that the public apply for the exact number of applications invited by the company. When applications received exceed the number invited, the share is said to be over-subscribed. It also means that the company received more application money than what was originally invited. Now the company cannot conveniently increase the number of shares and keep the money as capital. Instead, it must refund the excess amount received or make a part allotment on applications adjust the excess money against future calls from shareholders.
When there is over subscription share application account will not be closed by the transfer to capital alone (second entry above). This is because the company has received more money. One of the following entries will be passed to close the share application account depending on the treatment of money.
Under-subscription is a situation just the opposite of over-subscription. Here the company has received less number of applications than what was invited. In case of under subscription the company will proceed to allotment with whatever number of shares applied by the public.
Issue and Allotment of Preference Shares
Preference shares as also part of capital. But these shares as the name suggest are having some special privileges or preferences. Following are the important features of preference shares.
Preference shares are issued with a prescribed rate of dividend. Thus such shareholders have an assured income from their shares. When the company does not make huge profits there is an advantage to the Preference shareholder. But when the profit is high, a preference shareholder must satisfy with his prescribed rate of dividend.
In the event of liquidation of the company the preference shareholders get a priority over the equity shareholder in the repayment of capital.
Preference shareholders have less say in the management of the company. Equity shareholders who are the real risk bearing investors mainly control management.
Form the accounting point of view there is no much difference between the issue of equity shares or preference shares. The only difference is that the preference capital account will be clearly stated as “preference share capital” in the journal entry. But there is no need to specify “equity capital” when it is issued. The term capital is understood as equity capital
Issue of shares at Premium
Shares of reputed companies are usually issued at a higher issue price that than the face value. This extra amount is known as share premium. This is a gain to be credited separately into a securities premium account. Share premium is usually collected along with the allotment money.
Security premium is not an ordinary income of the company; therefore it is not credited into the profit and loss account. It is comes under the category of capital recipt. Security premium can be utilized in the following ways;
to write off preliminary expenses if any
to write off discount on issue of shares
to issue bonus shares
to provide for the premium payable on any redeemable preference shares of the company.
Issue at Discount
When shares are issued at a discount, the company is incurring a loss, which will be debited to ‘discount on issue of shares’ account. This will remain as a fictitious asset in the books of the company and will be written off in due course. Usually discount will be adjusted at the time of allotment of shares.
Calls in Advance
Sometimes shareholders chose to pay the call money in advance which should be credited to calls in advance account. Oversubscription of issue is another reason for opening Calls in Advance Account. Suppose a person applied for 100 shares and the company allotted him only 50 shares, the excess application money paid by him may be refunded or treated as calls in advance. This amount is adjusted against the amounts due from him in future. (Calls in advance can be directly credited against next call account, which is an easier treatment.
Calls in Arrears
Sometimes shareholders fail to pay the amount due on calls. In that case we have two options in passing the journal entry. First option is just recording the actual amount collected to the respective call account. Normally the call account will vanish from books with the collection of money. But in this case the unpaid amount will remain in the books in the call account as debit balance. The second option is to debit the Bank account for the amount received and debit the Calls in Arrears Account for the unpaid amount and credit the respective call account for the total.
Forfeiture of Shares in Company Financial Statements:
Forfeiture of Shares – Accounting Treatment
Normally a company is not allowed to cancel or take back its shares. But when a person fails to pay the allotment money or call money due on a share, the company is allowed to withdraw those shares and reissue them to another party. Forfeiture is withdrawal of shares due to non-payment of dues by the shareholder.
Capital representing the forfeited shares removed from share capital account
Unsettled balances in temporary accounts such as Share Allotment, Share Call etc. (or calls in arrears account) reduced to zero.
The paid up portion the forfeited shares is transferred from the capital account to a separate account called ‘Share Forfeiture Account”.
Accounting entries for forfeiture of shares vary according to the conditions of issue. Following are the common conditions of forfeiture and their journal entries.
i. Forfeiture of shares issued at par
Share Capital Account Dr. (called up value of shares forfeited)
To Share Forfeiture Account (paid up portion of forfeited shares)
To Calls in arrears (the unpaid amount of the respective calls)
ii. Forfeiture of shares issued at premium
a. where premium was collected
Share Capital Account Dr. (the capital value)
Securities Premium Account Dr. (the premium on forfeited shares)
To Share Forfeiture Account (the amount collected on shares)
To Various Calls Account (the unpaid amount on shares)
iii. Forfeiture of shares issued at discount
When shares issued at discount are forfeited, the discount account must be reversed irrespective of the point at which default occurs. This is because the capital account itself includes discount in it.
Share Capital Account Dr. (the value of shares)
To Discount (amount of discount allowed on shares)
To Various Calls (amount unpaid on calls)
Company Financial Statements Notes Relating to Debentures:
Meaning of debentures
Debentures are debt instruments issued by a joint stock company. Amounts collected by way of debentures form part of the loan capital of a company. They are repayable after a fixed period. Debentures are issued in units of small value for convenient buying and selling. Debenture holders get interest on their debentures. They are creditors of the company. They do not get dividend. Only shareholders get dividend.
|Shares represent the ownership of the companyShare holders are paid dividend only if the company makes profitDividend is usually paid once a yearThere is no fixed rate of dividend on shares.
Directors are elected by shareholders and thus the shareholders participate in the management through representatives
Shares are permanent (except redeemable preference shares)
Shares are not issued on the security of any asset of the company
In the event of winding up of the company, share holders get their payment at the end, only after all other claims are settled.
|Debentures represent the loan of the companyDebenture holders are paid interest at the fixed rate irrespective of profitInterest on debenture is usually paid in six monthsInterest on debenture is paid at a fixed rate
Debenture holders are allowed to have their representatives in the Board only under special circumstances
Debentures are repayable at the end of a fixed period and failure to repay the debentures on due date can cause disqualification of directors.
Debentures can be issued on the security of any specific asset or with a general charge on all the assets of the company.
Secured debentures get priority over all the normal creditors. Unsecured debentures are listed with other creditors and settled prior to any payment to shareholders.
Different Types of Debentures in Company Financial Statements:
Types of Debentures
1.On the Basis of Repayment
a) Redeemable Debentures
b) Irredeemable or Perpetual Debentures
2. On the Basis of Transferability
a) Registered Debentures
b) Bearer Debentures
3. On the Basis of Security
a) Simple or Naked Debentures
b) Mortgage Debentures
4. On the basis of Conversion
a) Convertible Debentures
b) Non Convertible Debentures
5. On the Basis of Pre-Mature Redemption Rights
a) Debenture with “Call” option
b) Debenture with “Put” option
6. On the Basis of Coupon Rate (interest rate)
a) Fixed Rate Debentures
b) Floating rate Debentures
c) Zero Coupon Bonds
Issue of Debentures
Like shares debentures can also be issued at par, premium or discount. Collection of money also can be made in instalments. Debentures can be issued for cash or consideration other than cash.
Journal Entries for the issue of Debentures
Journal entries for the issue of debentures will vary according to the conditions of issue and the conditions of redemption. Debentures can be issued at par, premium or discount. Similarly the debentures can be redeemed at par, premium or discount. Thus there can be nine different combinations for the issue of debentures.
- Debentures issued at par, to be redeemed at par
- Debentures issued at par, to be redeemed at premium
- Debentures issued at par, to be redeemed at discount
- Debentures issued at premium, to be redeemed at par
- Debentures issued at premium, to be redeemed at premium
- Debentures issued at premium, to be redeemed at discount
- Debentures issued at discount, to be redeemed at par
- Debentures issued at discount, to be redeemed at premium
- Debentures issued at discount, to be redeemed at discount