WHAT IS A ISSUE OF SHARE FOR CASH? Issue of share at premium & Issue of shares at discount

WHAT IS A ISSUE OF SHARE FOR CASH?

WHAT IS A ISSUE OF SHARE FOR CASH?Issue of share at premium & Issue of shares at discount

Introduction
Generally, joint stock companies do large scale of business; therefore, these companies need a huge amount of capital. Such requirement is fulfilled by issuing share and debentures to the public. After receiving the certification of incorporation, a joint stock company can offer t o the public for sshares under different methods.
Methods of issue of shares
Generally, a company issued equity shares to the public. When the capital raised through ordinary shares is not sufficient, the company can also issue preference shares. These shares can be issue either collecting the full per value of shares at the time of issue or collecting the per value in different calls such as application, allotment, first call etc.

ubscribing share by issuing its prospectus. This chapter highlights the according treatment for the issue for ordinary and preference

Shares re issued for cash. However, a company an issue shares for other than cash for the purpose of purchasing assets, purchasing business, motivating promotes and paying underwriting commission.

Issue of equity share on lump sum basis
When the shareholders are called to pay the full amount of shares t the time of application, it is called the issue of equity shares on lump sum basis. Share may be issue at the pr or above the par value or below the par value.
Issue of shares at par
The value stated on a shares certificate is called par value or face value. Each company can state its own par value like Rs. 10, Rs 100 etc. when total per value of a share is collected at the time of application; it is called issue of shares on lump sum basis. For example, if a share of Rs. 10 is issued at Rs. 10 and the whole amount is collected with application, it is called issue of share at par on lump sum basis. The following entries are made itches situation;

Issue of share at premium
When a share is issued at a price which is more than the par value, it is called issue of share at premium. For example, if a share of Rs.10 is issued t Rs. 12, then it is called issue of share at premium. Here Rs. 2 is the premium amount per share. The following entries are made is this situation.

Issue of shares at discount
When shares are issued at an amount which which is less than per value, it is said to be issue of shares at discount, if a share of Rs. 10 is issued at Rs. 9, it is said to have been issued at a discount of Rs. 1. In the case of issued of shares at discount in lump sum, the whole amount of a share after discount i.e., Rs.9 is collected at the time of application. In this situation, the following entries are made:

Issued of equity shares on installments
A joint stock company generally collects required capital for its business from the public by issuing shares to them for cash. The amount of share capital can be collected either gradually in easy installments or in lump sum.
The important steps or the procedures of issue of shares cash are:

1. Issue applications. In order to raise the capital by issuing shares from the public, first of all, public company issue invitation in leading newspapers normally national dailies within 90 days from the date of its registration. This invitation is made through a prospectus.
A prospect describes the profitability and financial soundness of the company to attract the public for investment. It contains all the necessary information regarding the company, its management, and the project for which the money is proposed to be raised by the issue of shares.
2. Receiving applications. After reading the prospectus, all those persons who intend to purchase shares, have to fill up the application from along with the money mentioned in the prospectus such is called 'application money', which is fixed by the board of directors. It cannot be less than 5% of the nominal value of the shares and has to be deposited in a shareholder bank.
3. Allotment of shares. After the last for the receipt of application is over, the company distributes shares among the application. Such distribution of shares is called 'allotment of letter of allotment informs the applications, to which shares are allotted, are issued 'letters of allotment'. The letter of allotment informs the application the number of issued of share

s allotted to them and the amount payable by them on application. The amount payable by the application on the allotment is called 'allotment money'. After receiving the letter of allotment, an applicant becomes the shareholder of the company. It no share is allotted then a 'letter of regret' is sent and the application money paid by them is refunded.
4. Full subscription. When applications are received for the shares offered by the company the issue is called fully subscribed. In this situation, normally all the applicants are allotted shares in full.
5. Under subscription. When the issue is not fully subscription, it is called under subscription. In this case, normally shares are allotted to all the application in full. It is to be noted that allotment can be made only when the minimum subscription amount has been received.
6. Over subscription. When the company receives application for more number of shares than issued by the company, he issue is said to be oversubscribed. However, the company cannot allot shares more than those offered for subscription. In this case, there are three possible ways of allotment.
• The applications for excess shares re rejected and full allotment is made up to the number of shares offered.
• all the applicants are allotted shares but on pro-rate basis.
• Some applications are accepted in full, some are rejected and some are allotted on proportionately basis.
7. Making calls. After allotting the shares and receiving allotment money, the company may demand the balance amount of the share in one or more installments. The installment are with the provision of the articles of association, call letters are sent to the shareholders specifying the amount of the call, name of bank the last date of payment of call money.
Entries for issue of shares bin installments
When the total values of shares are collected by a company is different installment as application, allotment and calls, it is known as the issued no shares in installments. The shares can be issued in installments at per or premium or discount.
Issue of shares at par
Issue of shares at par means t he issue of shares at a price to the face value of the shares. It face value of a share is collected in two or more installment, then it is called issue of share at per in installment. For example, if a share of Rs. 10 and the amount is collected in different installment, it is called issued of share at par in installments. The different entries to be passed for different installments are mentioned below:
1. On receipt of application money. In the case of issue of shares in installment, a company receives application money as first installment along with application forms for shares. When a company received application money, it passes receipt and transfer entries as shown below:
2. On allotment of shares. After receiving application money, the companies allot shares to the application and transfer their application money to shares capital account. After allotting shares to the applicants, a company sends 'letters of allotment' informing the number of shares allotted to the amount payable by them as allotment money i.e. the second installment. After this, company receives the second installment i.e. allotment money.
3. On due and receipt of calls money: the balance amount of a share, which is demander after receiving and allotment money, is called alls money. A company may demand such calls money in one or more installments. the installment are named as first call, 'second call' and so on and last call is called 'final call', one due and on receipts of each call money, two journal entries are made. One entry is made for due of calls money and no her entry is made for receipt of such due call money.

Issue of share at premium
When shares are issue at a price more than its face value or nominal value, it is known s issue of share t premium. If a share of Rs. 10 is issued at Rs 12, it is said to have been issued at a premium of Rs. 2.
In the case of issue of share in installment, the amount of premium may be collected either along with application or allotment or call money. However, the premium is usually collected with allotment. Therefore, in the absence of any information, the amount of premium is assumed to be collected with allotment money.
1. Premium along with application money: the following two entries are made, when amount of premium is received along with application money.
2. Premium along with allotment money. When amount of premium is collected along with allotments money, the following entries are made.
3. Premium along with calls money: when amount of premium is collected along with calls money i.e. first or second or final call money, again the following entries are made.

Treatment of issue of shares in cash book and balance sheet
A cash book is used for recording cash receipts and payment. hence, the amount received on account of different share installments are debited and cash payment for refund for excess application money are credited. Finally, it is balanced to know the cash balance.
A balance sheet is a statement of assets and liabilities. In assets side, the cash balance and discount on issue of share are records. Similarly, the liability side includes the paid-up capital, share premium and calls in advance.
Issue of shares of discount
It is already been said that discount on issue of shares is a capital loss and should be shown on assets side of the balance sheet under the heading 'miscellaneous expenditure'. In the case of issue of shares in installment, the amount of discount may be collected either along with application or allotment or all money. However, the discount is usually collected with allotment. Therefore, in the absence of any information, the amount of discount is assumed to be collected with allotment money.
1. Discount with application money: the following two entries are made, when amount of discount Is received along with application money:
2. Discount with allotment money: when amount of discount is collected along with allotment money, the following entries are made;
3. Discount with calls money: when amount of discount is collected along with calls money i.e. first or second or final call money, again the following entries are made;
Calls in advance
Calls in advance mean uncalled installments received by a company in advance from its shareholders. It is the amount of future installments paid in advance by the shareholders. In other words, the amount received by before calls are made is called calls is advance.

According to section 38 of Nepal company act, 2063, a company if permitted by its articles of association may receive uncalled amount of installment from shareholders on shares held by them.

The money received on calls in advance is not a part of share capital; therefore, a separate account is opened and credited to that account, called 'calls in advance a/c'. When calls become due, it is adjusted accordingly; advance might be received under different installments. The entries are as follows.
1. Advance received with allotment money. If the calls in advance are received with allotment, the following two entries are passed.
2. Advance received before final call: if the calls in advance are received before final call, the following two entries are passed.
Adjustment of calls in advance
When the particular call is made, related amount of calls in advance is deducted toward the payment of calls, in this situation, calls in advance account is debited as shown below.
Calls in arrears
Sometimes a shareholder falls to pay the amount due on allotment or calls either intentionally or unintentionally. Such unpaid amount is known as calls in arrear or unpaid calls. In other words, any installment money (either allotment or calls money or both) due but not paid by a shareholder within a specified time is called calls in arrears. For example, a company issue 10, 0000 shares of Rs. 10 each and payment is to be made in three installments as Rs. 2 on application, Rs. 3 on allotment and balance Rs. 5 on first call. If Mr. a holding 200 shares fails to pay first and final call money within a special time, then such unpaid amount of first and final call money Rs. 1,000 is treated as calls in arrears.
Accounting treatment of calls in arrears
There are two alternative for the accounting treatment of calls in arrears;
Method I: without opening separate account for calls in arrears
Under this method, a call in arrears account is not opened separately for the amount of calls in arrears. When an installment becomes due, that installment account is debited and share capital account is credited similarly, another entry is made on receipt of actual amount of such installment be debiting bank account and credit ding concerned installment account.

In this situation, the debit balance of such installment (i.e. allotment and / or calls) account represents the calls in arrears, which is shown on the liabilities side of the balance sheet by deducting it from the called up capital. For example, a company called up final call money @ Rs. 3 per share on 10, 000 shares and received that called final call money only on 9,000 shares. In this situation, the following entries are made for calls in arrears without opening a separate account for it.

Method II: opening separate account for calls in arrear
Under this method, a separate account is opened for calls in arrears. When the amount of any installment (i.e. allotment or call) money is not received, it is debited to calls in arrears account and created to concerned call account. In this situation, calls in arrear account shows a debit balance equal to the total unpaid allotment or call money, which is shown again as a deduction from called-up shares capital in the balance sheet.

Minimum subscription of shares
The situation, when a company may receive application for at least 50% of its issued capital, is called minimum subscription of shares. In simple word, minimum subscription refers to the amount which must be raised by the company to meet necessary conditions. The minimum fulfilled, the company cannot make the allotment of the shares. In the opinion of directors, minimum subscription must be sufficient for the following purposes:
i. For purposing necessary assets for the company.
ii. For paying the preliminary expenses.
iii. For paying loan if arranges for the above two purpose.
iv. For working capital.
v. For any other purpose for the company.
Under subscription of shares
When the number of shares applied by the public is less than the number of share issued by the company for subscription, it is called under subscription of shares. In simple word, when a company received application for less number of shares than the issued number of shares, it is a situation of under subscription of shares. For example, a company offers 10, 0000 shares to the public for subscription. But public subscription only for 9000 shares and it is called under subscription of shares.

Generally, in the case of under subscription of shares the accounting entries are made on the basis of number of application received by the company but not the basis of minimum of shares issued.

Over subscription of shares
When a company received more application for shares than its issued number of shares, such suction is called 'over subscription of shares'. In other words, when the public apply for more shares in a company than those offered to them, it is called over subscription of shares. For example, a company issues 5,000 shares of rs 10 each to the public for subscription. But if it received application for 7,000 shares, then it is called the suit ion of over subscription of shares.

In the case of over subscription, a company cannot allot shares more than that issued for subscription; it means a company cannot allot its shares to all application in full. In the above example, company cannot issue more than 5,000 shares. Under such condition, the following three alternatives are founds to deal with the suit ion:

Rejection of excess application
Under this alternative, company allots shares up to the issued of shares of shares and rejects the excess applications. The application money of the allotted application is transferred to share capital account and the rejected excess application money Is refunded in full with letter of regret's he following accounting entries are made in this suit ion:
Pro-rate allotment
In the case of over subscription of shares, when a company allots shares proportionally to all application, it is called pro-rate allotment of shares. For example, a company issue 50, 0000 shares to the public, for which it receives 1, 00,000 applications. If 50, 0000 shares are allotted to all the application, it is called pro-rota allotment of shares. The following journal entries are made for pro-rate allotment;
1. When excess application money is adjusted on allotment and subsequent calls.
Generally, the excess application money is adjusted on allotment and subsequent calls and following entries are passed:
2. When excess application money is adjusted on allotment on allotment and rest refunded.
Semitic he excess application money, which is more than the money due on allotment, is not adjusted on subsequent calls. In absence of any information regarding the use of such money, the amount which is over the allotment money is returned. In this situation, the following entries are passed:
Mixed allotment
When a combination of the above two alternatives is adopted in the case of over subscription it is called mixed allotment. Under this method, a company can allot full shares to some, a prorate allotment to other and no allotment. To the rest. In this situation, application money is returned to the unsuccessful applications, but excess application money on pro-rate allotment is retained for utilizing the amount d use on allotment and subsequent calls.

Generally, the following statement is prepared to adjust excess application money toward allotment and subsequent calls as well as refund the rejected application money as shown I the following table:
Interest on calls in advance

The company has to pay interest on the amount of calls in advance from the date of its receipt to the date of adjustment, if it is specified in the articles of association. In this situation, the following entries are made.
Interest on calls in arrear
The articles of association of a company usually empower the directors to charge interest at a special rate on calls in arrears from the date of actual payment and to accept the amount of calls in arrears. Generally, the following entries entries are made in the case of interest on calls in arrears:
Issue of preference share
A joint stock company can issue preference shares like ordinary shares. In other words, preferences shares can be issued either on lump sum basis or on installment basis.

Review of theoretical concept
1. What do you mean by issue of shares at par, premium and discount?
Issue of shares at par: if a share is issued at its face value, it is called issue at par. For example, a share of Rs. 10 is issued for Rs. 10.
Issue of share at premium: if a share is issued at a price more that its face value, it is called issue at premium for example, a share of Rs. 10 is issued for Rs. 12.
Issued of shares at discount: if a share is issued at a price less than its face value, it is called issue at discount. For example, a share of Rs. 10 is issued for Rs. 9.
2. Briefly explain about calls in arrear and calls in advance with example?
If a shareholder fails to pay any due amount, it is called calls in arrears. For example, a shareholder holding 100 shares fails o pay the allotment at Rs. 5 per share Rs. 500 becomes calls in arrear for the company. It is deducted from called up capital so as to find the paid up capital. A call in advance is the amount received by a company before the calls are made. in other words, it is the amount of future installment paid by the shareholders in advance. For example, a shareholder holding 100 shares pays the call money at per shares on allotment Rs. 200 becomes calls in advance. It is shown in liability side of balance sheets.
3. Write about minimum and under subscription?
The situation, when a company may receive application for at least 50% of its capital, is called minimum subscription of shares. In simple word, minimum subscription refers to the amount which must be raised by the company to meet necessary conditions. The condition of under subscription. If the minimum subscription is nt fulfilled, the company cannot of the shares.
When the number of share applied by the public is less than the number of shares issued by the company for subscription, it is called under subscription of shares, in simple word, when a company received applications for less number of shares than the issued number of shares; it is a situation of under subscription of shares.
4. What do you mean by over subscription of shares? Mention the different alternatives to deal with this.When the number of application received exceeds the number of shares issued, it is called over subscription of shares. In this situation, a company cannot allot the shares to all the application as demanded by them. There are three alternative to deal with this:
a. Rejection of excess applications.
b. Pro-rate allotment
c. Mixed allotments
5. What do you mean by 'pro-rata allotment'?
When the shares ae allotment I proportionate basis in case of over subscription, it is called pro-rate allotment of shares. Under this, each rate application gets shares in proportionate to the number of shares applied by them. For example, if company allots 50, 000 shares to the application of 70, 000 shares. It is pro-rate allotment in the proportion of 5:7.