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Unit 1

Issue of shares
forfeiture and reissue of forfeited shares-
concept & process of book building.
Issue of rights and bonus shares.
Buy back of shares.
Redemption of preference shares.
Issue and Redemption of Debentures.

LEARNING Outcomes
After studying this chapter students will be able to :
Explain the basic nature of a joint stock company as a form of
business organization and the various kinds of companies
based on liability of their members;
describe the types of shares issued by a company;
explain the accounting treatment of shares issued at par, at
premium and at a discount including oversubscription;
outline the accounting for forfeiture of shares and reissue of
forfeited shares under varying situations
workout the amounts to be transferred to capital reserve when
forfeited
shares are reissued
prepare share forfeited account
Give the definition of A Company?
A company is an association of persons who agree to contribute
money to the equity shares for the purpose of employing it in a
business. A company is a creation of law and is called an artificial
person, having a corporate legal entity and a common seal

What is a Share?
The capital of a company is divided into units of small denominations;
each such unit is called a share.
Explain the types of Shares.
Types of Shares : A public company can issue only two types of shares
(1) Preference shares
(2) Equity Shares
Preference Share:
Preference share is one which carries the following two preferential
rights:-
(a) In respect of payment of dividends.
(b) In return of capital if the company being wound up.
Types of Preference Shares:
(i) Cumulative Preference Shares:
These are those shares on which arrears of dividend accumulate
which could not be paid due to insufficient profits in any year.
(ii) Non-Cumulative Preference Shares:
These shares do not have the privilege of accumulation of the
unpaid or arrears of dividends.
(iii) Participating Preference Shares:
Shares, which carry the right left after paying preference and
equity dividends.
(iv) Convertible Preference Shares:
Shares, which can be converted into equity shares after a
particular period.
(v) Non-Convertible Preference Shares:
Shares, which dont carry the right of conversion into equity
shares.
(vi) Redeemable Preference Shares:
Shares, the capital of which is refunded by the company after a
specified duration.
(vii) Irredeemable Preference Shares:
The capital of which can not be refunded before winding up of
the company.
(viii) Non-Participating Preference Shares:
Shares which do not carry the right of sharing in the surplus
left after paying equity dividend.
(ix) Cumulative Convertible Preference Shares:
Which are cumulative as well as convertible having both the
rights.

Equity shares
They are such shares which carry no special rights as regards
receipt of dividends and return of capital at the time of
liquidation. According to sec. 5(2) of companies Act, 1956,
equity shares are those which are not preference shares.

Explain the meaning of Share Capital and Its Categories.
Share Capital: Capital raised by the company from issue of
shares.
Categories of share capital
Authorized Capital:
This is the maximum limit of capital which is authorized to raise.
Issued Capital:
It is that part of authorized capital which the company has issued to
the public.
Subscribed Capital :
It is that part of the issued capital which is actually subscribed by
the public.
Called Up Capital:
It is that amount on the shares subscribed, demanded from the public
by the company.
Paid-Up Capital:
The part of called-up capital which is actually paid by shareholders.
Reserve Capital:
The company may decide by passing a special resolution that a
portion of the uncalled amount shall not be called up by the
company except in case of winding up or liquidation. This is called
reserve capital.
Accounting Treatment in case of Issue of Shares. A company can
issue shares in two ways - (i) for cash and (ii) for consideration other
than cash. These shares may be issued at par or at premium or at
discount.
Accounting Entries for Issue of Shares :
Issue of shares for cash consideration:-
(A) Shares Payable in Lump-Sum :
When shares are issued at nominal value payable full in a single
instatement, the shares so payable are said to have been issued in
lump-sum.
(B) Share Payable in Installments:
Where a company does not require the immediate use of all
proceeds from share issue, the shares are issued as payable in
installments.
Share issued at par-
Shares are said to be at par when they are
issued at a price equal to the face value
(nominal value).
1. On Receipt of Application money
Bank A/c Dr.
To Share Application A/c
2. On acceptance of applications for Allotment:
Share Application A/c Dr.
To Share Capital A/c
With actual money
received on applications
With actual money due
on shares allotted
3. On making allotment money due:
Share Allotment A/c Dr.
To Share Capital A/c
4. On receipt of allotment money
Bank A/c Dr.
To Share Allotment A/c
5. On making the first call
Share First Call A/c Dr.
To Share Capital A/c
6. On receipt of first call
Bank A/c Dr.
To Share First Call A/c
With money due on
allotment
With money received on
allotment.
With first call money due
With money received on
first call
Calls in Arrear:
Some shareholders fail to pay the amount due on allotment
and/or calls on the share hold by them. Such unpaid amount on
account of one or more installments is called calls in arrear
unpaid calls.
Entry:
It is not mandatory to maintain a separate account for calls in
arrear. When a separate account is opened in such a case
following entry will be made:-
Calls in Arrear A/c Dr.
To Share Allotment A/c
To Share I/II/Final Call A/c
Interest at the rate not exceeding 5% per annum shall be
charged for the period from the date fixed for payment to the
date of actual payment.
Calls in Advance :
Any amount received from a share holder in excess of the
amount due is called Calls-in-Advance.
Entry :
Bank A/c Dr.
To Calls in Advance A/c
(with the amount received in advance)
The amount received in respect of future calls shall be adjusted
when the call received in advance is made due.
Calls in Advance A/c Dr.
To Particular Call A/c
Table (A) of Companies Act, 1956, interest at the rate of 6%
per annum may be allowed to the shareholders.
Issue of Shares at Premium:
Share are said to be issued at a premium when they are issued
at a price higher than the face value. The excess of issue price
over the face value is called as the amount of securities
premium. It is shown on liabilities side of B/S under the
heading of Reserve and Surplus.
(i) For transferring money to Capital A/c -
Share Call A/c Dr. (Particular call)
To Share Capital A/c (Amount of Capital)
To Securities Premium A/c (Amount of Premium)
(ii) On receipt of full amount including premium -
Bank A/c Dr. (Amount received)
To Share (Particular) Call A/c
Issue of Shares at Discount:
Shares are said to be issued at discount when they are issued at
a price lower than the face value. It is treated as a loss of
capital nature :-
(i) On allotment money being due -
Share Allotment A/c Dr. (Actual amount due)
Discount on Shares A/c Dr. (Discount on issue)
To Share Capital A/c (Total amount)
(ii) On allotment money received -
Bank A/c Dr.
To Share Allotment A/c
(Allotment money received excluding discount)
(iii) On writing off the amount of discount (every year)
Securities Premium/ P&L A/c Dr.
To Discount on issue of share A/c
Issue of shares for a consideration other than cash
It is not necessary to issue the shares only for cash. Sometimes
a company issue fully paid shares for consideration other than
cash, in the following cases:
(1) Issue of shares to Promoters:
Promoters are the persons who have formed the company and
brought it into existence. For the services rendered by them
they may be issue shares by the company. The entry would be
made:
Goodwill A/c Dr.
To Equity or Preference Share Capital A/c
(For equity or preference shares issued to its promoters)
Issue of shares for Purchases of Assets:
Sometimes a company purchases some assets and makes the payment to
vendor in fully paid shares. Such shares may be issued at par, or at
premium, or at discount.
The Journal entries to be made are as under:
1. When Asset is purchased:
Sundry Asset A/c Dr. (With the Purchases price)
To Vendors A/c (With the Purchases Price)
2. (a) On issue of shares to vendors at par:
Vendors A/c Dr. (With the Purchase Price)
To Share Capital A/c (Nominal value of Shares)
(b) On issue of shares to vendors at premium:
Vendors A/c Dr. (With the Purchase Price)
To Share Capital A/c (With the Nominal Value of Shares)
To Security Premium A/c (With the Amount of premium)
(c) On issue of shares to vendors at discount
Vendors A/c Dr. (With the Purchase Price)
Discount on issue of share Dr. (With the nominal value of shares)
To Share Capital a/c
Sri Krishna Agro Chemical Ltd. was registered with a capital of Rs 5000000
divided into 50000 shares of Rs 100 each. It issued 10000 shares at discount
of Rs 10 per share, payable as :
Rs 40 per share on application
Rs 30 per share on allotment
Rs 20 per share on call.
Company received applications for 15000 shares. Applicants for 12000
shares were allotted 10000 shares and applications for the remaining shares
were sent letters of regret and their application money was returned. Call
was made. Allotment and call money was duly received. Make journal
entries in the books of the company.
Green company Ltd. invited application for 1,00,000 shares of Rs.
10 each payable as follows
On Application Rs. 3
On Allotment Rs. 4
On Call Rs. 3
Application for 1, 50,000 shares were received. Application for
20,000 shares were rejected outright remaining application were
allotted 1,00,000 shares on Pro- rata basis. The excess amount was
adjusted towards the amount due on allotment. Journalized the
transactions.

Forfeiture of Shares
Forfeiture of Shares:
Forfeiture of shares means the cancellation of
allotment to defaulting shareholders (who has
fail to pay one or more installment) and to treat
the amount already received on such shares as
forfeited.
Procedure of forfeiture of shares
The authority to forfeit shares is given to the Board of Directors in
Articles of Association of the company. The Board of Directors has
to give at least fourteen days notice to the defaulting members
calling upon them to pay outstanding amount with or without
interest as the case may be before the specified date. The notice
must also state that if the shareholders fail to remit the amount
mentioned therein within the stipulated period, their shares will be
forfeited. If they still fail to pay the amount within the specified
period of time, the Board of Directors of the company may decide
to forfeit such shares by passing a resolution. The decision
regarding the forfeiture of shares should be communicated to the
concerned allottees and should be asked to return the allotment
letters and share certificates of the forfeited shares to the company.
1. Forfeiture of shares issued at Par
When shares issued at par are forfeited the accounting treatment will
be as follows:
(i) Debit Share Capital Account with amount called up (whether
received or not) per share up to the time of forfeiture.
(ii) Credit Share Forfeited A/c. with the amount received up to the
time of forfeiture.
(iii) Credit Unpaid Calls A/c with the amount due on forfeited
shares. This cancels the effect of debit to such calls which take
place when the amount is made due.
The journal entry is :
Share capital A/c Dr (Amount called up)
To share forfeited A/c
To unpaid calls A/c
Note :
(i) Amount called up = No. of shares called up
per share
(ii) Amount paid = No. of shares Amount paid
per share
(iii) Amount called but not paid = No. of shares
Amount called but not paid per share
Q1.
X, a shareholder, holding 100 shares of Rs 10
each has paid application money of Rs 2 per
share and allotment money of Rs 3 per share,
but has failed to pay the first call of Rs 2 per
share and second call of Rs 3 per share. His
shares were forfeited. Make the journal entry
to record the forfeiture of shares.
Solution
Alpha Ltd. issued 10000 shares of Rs 100 each payable as:
Rs 25 on application.
Rs 25 on allotment
Rs 20 on First call and
Rs 30 on second and final call.
9000 shares were applied for and allotted. All the payments were received
with the exception of allotment money, first call and second and final call
money on 300 shares allotted to Ganesh. The Board of Directors decided
to forfeit these shares. Make journal entry to record transaction relating to
forfeiture of shares.
A company has offered for subscription to the public 10000
shares of Rs 10 each. It has received applications for 15000
shares. Company has decided to allot shares on prorata basis.
Gunakshi holding 200 shares failed to pay allotment money
and first call money. Her shares were forfeited :
Amount payable was as under :
Rs 2 per share on application.
Rs 3 per share on allotment.
Rs 5 per share on call.
Make journal entries and prepare relevant account in the books of
the company.
Forfeiture of shares issued at premium
In case shares are issued at premium and thereafter
forfeited there can be two situations :
Premium on shares has been received prior to the
forfeiture.
Amount of premium on shares has not been received
and it still stands credited to the Securities Premium
A/c.
1. Premium money has been received prior to the
forfeiture
If the amount of premium on shares forfeited has
been received by the company prior to the forfeiture,
securities Premium A/c will not get affected. In this
case the journal entry of forfeiture of shares will be
similar to the entry made as if the shares had been
issued at par.
The journal entry will be :
Share Capital A/c Dr
To Share forfeited A/c
To Unpaid Calls A/c./Calls in arrears A/c
(forfeiture of share issued at premium)
M.B. Software Ltd. issued Rs 500000 capital divided
into equity shares of Rs 10 each. The shares were
issued at a premium of Rs 4 per share and were
payable as : Rs 3 per share on application, Rs 7
(including premium) per share on allotment and the
balance on call. All the shares applied for and were
duly allotted. All the money was duly received except
on 500 shares on which the call money was not
received. Company decided to forfeit these shares.
Make journal entry to record the forfeiture of 500
shares.
2. Premium on shares has not been received and stands
credited to Securities Premium A/c as due but not paid.
When a share is forfeited on which the amount of premium has been made
due but has not been received, either wholly or partially, the Securities
Premium A/c will be cancelled. At the time of making due, Securities
Premium A/c will be credited. The journal entry will be as follows:
Share Capital A/c Dr
Securities Premium A/c Dr
To Share Forfeited A/c
To Unpaid call A/c.
(Forfeiture of shares originally issued at premium due to non
payment of dues).
The Latest Technology Company Ltd. offered to public for
subscription of 50,000 shares of Rs. 20 each at a premium of Rs. 5
per share. The amount was payable as under:
On application Rs. 5 per share
On allotment Rs. 12 per share (Including premium of Rs 5 per share)
On first call Rs. 4 per share
On Second and Final call Rs. 4 per share
Applications were received for all the shares. Allotment was made to
all the applicants in full. Ashima failed to pay allotment and call
money on 200 shares held by her. Rashmi was allotted 300 shares.
She did not pay the call money. Their shares were forfeited. Make
necessary journal entry for the forfeiture only.
Forfeiture of shares issued at discount
Discount on issue of shares is a loss to the company. When
shares issued at a discount are forfeited for non payment of
dues, the discount allowed on such shares is written back. At
the time of issue of shares, Discount on issue of Shares A/c is
debited and when forfeited, this account is credited to cancel
the discount allowed on such shares. In this case the following
journal entry is made :
Share Capital A/c Dr.
To Share Forfeited A/c
To Discount on Issue of Shares A/c
To Unpaid call A/c
(Forfeiture of shares originally issued at discount for non
payment of dues).

The Evergrowing Ltd. invited applications for 20000
shares of Rs. 50 each at a discount of 10% payable as
follows:
On application Rs. 10 per share
On allotment Rs. 20 per share
On call Rs. 15 per share
Whole of the issue was subscribed and paid for
except the calls money on 200 shares which were
forfeited by the company. Make journal entry for
forfeiture of shares.
M/s Herbal Tea Plantations Ltd. was registered with a capital
of Rs 1 crore divided into equity shares of Rs 100 each. The
company offered to public 50000 shares at a premium of Rs 20
per share. The amount on shares was payable as :
Rs 25 on application
Rs 50 (including Rs 20 premium) on allotment
Rs 20 on first call and
Rs 25 on final call.
Applications were received for 75000 shares. Shares were
alloted to the applicants on prorata basis. Kanti Bhai who was
allotted 500 shares did not pay the allotment money. He also
failed to pay the first call. His shares were forfeited. Sheetal
was holding 200 shares did not pay the first call. Final call was
not made. Make journal entries in the books of the company.
There can be four situations of reissue of forfeited
shares. These are:
(i) Reissue of forfeited shares at discount originally
issued at par
(ii) Reissue of shares at par or at premium, originally
issued at par
(iii) Reissue of forfeited shares at par, at discount and at
premium originally issued at premium.
(iv) Reissue of forfeited shares at par, at discount and at
premium, originally issued at discount.
Reissue of forfeited shares at a discount :
When the shares forfeited are reissued at discount, Bank account is debited by
the amount received and Share capital account is credited by the paid up
amount. The amount of discount allowed is debited to Share Forfeited Account.
This is for adjusting the amount of discount so allowed from the amount
forfeited at the time of forfeiture.
The journal entry for the above will be as follows:
Bank A/c (the amount received on reissue) Dr.
Share Forfeited A/c (the amount allowed as discount) Dr.
To Share Capital A/c (paid up amount)
As stated earlier the amount of discount allowed on reissue of shares at the
most can be equal to the forfeited amount on such shares. In that case the
share forfeited account after reissue will show a zero balance. But in case, this
amount of discount is less than the amount forfeited, the remaining forfeited
amount will be profit for the company. This profit is a capital gain to the
company and is transferred to Capital Reserve account. Journal entry of the
same will be as follows :
Share Forfeited A/c Dr
To Capital Reserve A/c
(Transfer of surplus share forfeited amount to capital
reserve A/c)
If all the forfeited shares are reissued, the Share
Forfeited A/c will show a zero balance because whole
of the amount of this account after adjusting the
amount of discount allowed on reissue will be
transferred to capital reserve account. But in case,
only a part of the forfeited shares are reissued and
others remain cancelled, the amount forfeited on
forfeited shares not reissued will remain in the Shares
Forfeited Account.
1. Reissue of forfeited shares issued at discount, originally issued at par
In this case the maximum discount that can be given on reissue of forfeited
shares is the amount that has been received on these shares and is debited to
share forfeited account.
Illustration 1
X company Ltd. forfeited 200 shares of Rs 10 each, fully called up
on which Rs. 7 have been received and final call of Rs. 3 per share
remains unpaid. These shares were later on reissued for Rs. 8 per
share fully paid up. Make journal entry for recording the forfeiture
and reissue of shares.
Share Capital A/c Dr 2000
To Shares Forfeited A/c 1400
To Shares Final call A/c 600
(Forfeiture of 200 shares of Rs. 10 each due to non payment of final
call of Rs 3 per share)
Bank A/c Dr 1600
Shares Forfeited A/c Dr 400
To Share capital A/c 2000
(Reissue of 200 forfeited shares of Rs 10 each for Rs. 8 per share
as fully paid up)

Shares forfeited A/c Dr 1000
To Capital Reserve A/c 1000
(The Balance amount in Share Forfeited A/c transferred to
Capital Reserve A/c)
Reissue of forfeited shares at premium and at par, originally
issued at par
In this case the whole of the amount that has been credited to
Shares Forfeited A/c is transferred to Capital Reserve A/c on
the reissue of such shares.

Y Ltd. forfeited 400 shares of Rs. 20 each, on which Rs 15 per
share have been received and balance remains due but not
paid. These shares were reissued
(a) at the rate of Rs 20 per share i.e. at par
(b) at the rate of Rs. 24 per share i.e. at premium
Make necessary journal entries for reissue of the shares
Journal Entries
Case (a)
(i) Bank A/c Dr 8000
To Share Capital A/c 8000
(Reissue of 400 share at the rate of Rs 20 per share)
(ii) Shares Forfeited A/c Dr 6000
To Capital Reserve A/c 6000
(Balance amount of Share Forfeited A/c is transferred to Capital Reserve A/c)
Case (b)
(b) Bank A/c Dr 9600
To Share Capital A/c 8000
To Securities Premium A/c 1600
(Reissue of forfeited shares at premium)
Share Forfeited A/c Dr 6000
To Capital Reserve A/c 6000
(Balance amount of Shares Forfeited A/c is transferred to Capital Reserve A/c)
Reissue of forfeited shares at par, at discount and at
premium, originally issued at premium :
If the shares were originally issued at premium, it is not
necessary that their reissue after forfeiture is to be at premium.
Such shares can be reissued at par, at discount or at premium.
If such shares are reissued at premium the premium received
should be credited to Securities Premium A/c. Journal entry
will be
Bank A/c Dr
(Number of shares amount received per share)
To Share Capital A/c
(Number of shares amount paid up per share)
To Securities Premium A/c
(Number of shares amount of premium per share)
If such shares are reissued at par the amount that has been
received and has been credited to share forfeited A/c will be
credited to capital reserve A/c
If such shares are reissued at discount, the amount of discount
allowed will be adjusted towards the amount credited to share
forfeited A/c the balance amount of Share Forfeited A/c will be
transferred to Capital Reserve A/c
AZ Ltd. forfeited 200 shares of Rs 10 each originally issued at a premium of
Rs 4 per share, the holder of which paid Rs 3 per share on application but
did not pay the allotment money of Rs 7 per share (including premium) and
call of Rs. 4 per share. Make necessary journal entries for the forfeiture and
for reissue of these shares if :
I. Reissued at Rs 10 per share i.e. at par
II. Reissued at Rs 8 per share i.e. at discount
III. Reissued at Rs 12 per share i.e. at premium
(i) Share Capital A/c (200 Rs 10) Dr 2000
Securities Premium A/c (200 Rs 4) Dr 800
To Share Forfeited A/c (200 Rs 3) 600
To Share Allotment A/c (200 Rs 7) 1400
To Share First & Final Call A/c (200 Rs 4) 800
(Forfeiture of 200 shares for non-payment of dues)

Case I.
(i) Bank A/c Dr 2000
To Share Capital A/c 2000
(Reissue of 200 forfeited shares reissued at par)
(ii) Share Forfeited A/c Dr 600
To Capital Reserve A/c 600
(Share Forfeited A/c balance is transferred to Capital Reserve A/c)
Case II
(i) Bank A/c Dr 1600
Shares Forfeited A/c Dr 400
To Share Capital 2000
(Reissue of 200 forfeited shares reissued at discount)
(ii) Shares Forfeited A/c Dr 200
To Capital Reserve A/c 200
(Balance amount of Shares Forfeited A/c is transferred to Capital
Reserve A/c)
Reissue of forfeited shares at par, premium and
discount, originally issued at discount

Bank A/c Dr
Discount on Issue of Shares A/c Dr
Shares Forfeited A/c Dr
To Share Capital A/c
India infrastructure Ltd. has issued its shares of Rs. 20 each at
a discount of Rs 2 per share. Mahima holding 100 shares did
not pay final call of Rs 5 per share. Her shares were forfeited.
Later on the company reissued 100 shares of these forfeited
shares at (I) Rs. 15 per share (II) Rs. 20 per share, and (III) Rs.
25 per share
Make journal entries for the forfeiture and reissue of the shares
in the books of company.
Journal Entries
Share Capital A/c Dr 2000
To Shares Forfeited A/c 1300
To Discount on Issue of Shares A/c 200
To Shares Final Call A/c 500
(Forfeiture of 200 shares issued at discount for non payment of
final call)
Reissue of shares: Reissued at Rs 15 per share
I. (i) Bank A/c Dr 1500
Discount on Issue of Shares A/c Dr 200
Shares Forfeited A/c Dr 300
To Share Capital A/c 2000
(100 shares reissued at Rs 15 per share)
(ii) Shares Forfeited A/c Dr 1000
To Capital Reserve A/c 1000
(Balance in share Forfeited A/c of 100 shares reissued
transferred to Capital Reserve A/c)
II.
Bank A/c Dr 2000
To Share Capital A/c 2000
(100 shares reissued at Rs 20 per share)

Shares Forfeited A/c Dr 1300
To Capital Reserve A/c 1300
(Balance in shares forfeited A/c transferred to
Capital Reserve A/c)
III. Reissued at Rs. 25 per share
Bank A/c Dr 2500
Discount on issue of share A/c Dr 200
To Share Capital A/c 2000
To Securities Premium A/c 700
(Reissue of discounted shares at Rs 25 per share)
Shares Forfeited A/c Dr 1300
To Capital Reserve 1300
(Balance in shares forfeited A/c transferred to capital
Reserve A/c)
A company forfeited 400 shares of Rs 50 each on
which only application money of Rs 10 per share
and Rs 20 on allotment were received. Final call
of the Rs 20 per share is not received. 300 of
these shares are reissued at Rs 40 per share. Make
journal entries for forfeiture and Reissue of
shares.
Share Capital A/c Dr. 2000
To Share Forfeited A/c 1200
To Share First and Final Call A/c 800
(400 shares forfeited for non payment of call)
Bank A/c Dr. 1200
Share Forfeited A/c Dr. 300
To Share Capital A/c 1500
(300 of the forfeited shares are reissued)

Share forfeited A/c Dr. 600
To Capital Reserve A/c 600
(Balance of forfeited A/c of 300 shares transferred to
capital Reserve A/c)
Reissue of a part of the forfeited shares
A company forfeited 400 shares of Rs 50 each on which only
application money of Rs 10 per share and Rs 20 on allotment
were received. Final call of the Rs 20 per share is not received.
300 of these shares are reissued at Rs 40 per share. Make
journal entries for forfeiture and Reissue of shares.
Share Capital A/c Dr. 2000
To Share Forfeited A/c 1200
To Share First and Final Call A/c 800
(400 shares forfeited for non payment of call)
Bank A/c Dr. 1200
Share Forfeited A/c Dr. 300
To Share Capital A/c 1500
(300 of the forfeited shares are reissued)

Share forfeited A/c Dr. 600
To Capital Reserve A/c 600
(Balance of forfeited A/c of 300 shares
transferred to capital Reserve A/c)
Further issue of capital
At any time after the expiry of two years from the formation
of a company or at any time after the expiry of one year from
the allotment of shares in that company made for the first
time after its formation, whichever is earlier, it is proposed to
increase the subscribe capital of the company by the
allotment of further shares

Issue of Right share
Under Sec.94 of Companies Act, A company can issue additional shares at
any time by passing an ordinary resolution at its General Meeting.
However, under Sec. 81 of that, such additional shares must be 1st offered
to the existing equity shareholders in the proportion of the shares already
held by them. Such additional shares are called Rights Shares. Following
legal provisions are pertinent in this regard.
a) The issue should be within the limits of the authorized capital, if not so, then
the authorized capital must be increased first suitably.
b) The issue is to be made after two years from the formation of the company
or after one year from the first allotment of shares.
c) The shares should be offered to the equity shareholders in proportion to the
capital paid-up on their shares.
d) The offer should be made by a written notice specifying the no. of shares
offered & the time limit for acceptance which should be at least 15 days
from the date of offer.

REDEMPTION OF PREFERENCE SHARES
LEGAL PROVISIONS: A company limited by shares if so
authorized by its articles, may issue Preference Shares.
However, the redemption can be effect only if the following
conditions are fulfilled.
1. Only full paid Preference shares can be redeemed.

Thus partly paid up OR partly called up shares cannot be
redeemed. In case shares which are partly called up; final call
should be made. After receiving final call money the shares are
fully paid up, then Preference Shares can be redeemed. If there
are shares on which calls are in arrears either call should be
received or these shares must be forfeited and then only the
remaining shares can be redeemed.
2. The Preference shares can redeemed either out of
a) Proceeds of fresh issue of shares. AND/OR b) Divisible Profits.

3. The redemption may be
1. Payment by cheque
2. Conversion into Equity or Preference Share
3. Conversion into Debentures.

4. In case redemption out of accumulated Divisible Profit, it is
necessary to transfer amount equal to face value of Preference
Share redeemed to the Capital Redemption Reserve Account.

Capital Redemption Reserve
Section 80 of the Companies Act ensures that
there is no reduction in shareholders' funds due
to redemption and the interest of outsiders is not
impaired. Redemption of Preference Share
requires that either fresh issue of share is made or
distributable profits are retained and transferred
to Capital Redemption Reserve Account. As
Capital Redemption Reserve can be used only for
issue of fully paid up Bonus Shares, profits
retained in the business ultimately get converted
into Share Capital hence effectively there is no
reduction in the capital of the company.



REDEMPTION OUT OF PROCEEDS OF FRESH ISSUE OF
SHAREs.
The proceeds of fresh issue of shares (Equity Share and/or
Preference Share) would basically mean the cash realized by way of
issue of these shares on Capital. The fresh issued of shares may be
at par or at premium or at discount. If fresh issue of shares are at
par or premium, only face value of the fresh issue share is to be
taken as the proceed of fresh issue. If shares are issued at discount,
net amount received is considered as proceeds of fresh issue of
shares.
The time lag between the fresh issue and redemption should not be
more than one month.
REDEMPTION OUT OF DIVISIBLE PROFITS: Divisible Profits mean
and include those profits, which are available for distribution by way of
dividends among the shareholders.
a) The following are normally considered to be Divisible Profits.

i. Accumulated credits balance in Profit and Loss A/c
ii. Revenue Reserve/General Reserve.
iii. Dividend Equalization Reserve.
iv. Voluntary, Debenture Redemption Fund/Sinking Fund.
v. Investment Fluctuation Reserves.
vi. Workmen's Compensation Fund
vii. Development Rebate Reserve or Investment Allowance Reserve (utilized);
Export Profits Reserve, [no longer required to carry forward as per income tax
provisions.]

Capital Redemption Reserve A/c can be created, to the extent redemption out of
divisible profits.
The following are not divisible profits.
i. Securities Premium Account.
ii. Profits Prior to Incorporation.
iii. Share Forfeited Account.
iv. Capital Resolve.
v. Revaluation Reserve.
vi. Capital Redemption Reserve.
vii. Investment Allowance Reserve

OUT OF PROCEEDS OF FRESH ISSUE OF SHARES.
One of the methods of redemption of Preference Shares is to use
the proceeds of a fresh issue of shares. New shares may be issued
at par or at premium or at discount. Sometimes, problem does not
specify the minimum number of shares to be issued for the purpose
of redemption of Preference Share and to ensure compliance of
section 80 of the Companies Act, 1956.
In such case find out premium payable on redemption of
Preference Share whether sufficient balance available in Securities
Premium A/c plus premium received on new issue; otherwise new
issue requires to increase to the extend of balance premium
required.
As certain the maximum amount of reserve and surplus available
for redemption from given balance sheet before redemption and the
additional information provided in the problem.


Minimum proceeds of new issue shares :
Nominal value of Preference Shares to be redeemed **
Less:
Maximum amount of reserve and surplus available for redemption **

Minimum number of shares:
Minimum proceeds to comply with sec. 80 / Proceeds of one share
Proceeds of one share mean the face value of a share issued, if it is
issued at par or premium. In case of issue of share at a discount, it
refers to the discounted value [Face Value Discount on issue].
Minimum number of shares calculated above should not be
tractions. In case fractional shares should be rounded up to the next
higher figure.
The Board of Directors of KM Ltd. decide to issue minimum
number of Equity Shares of Rs.10/- each to redeem
Rs.6,00,000/- Preference Shares at 10% premium. It has a
General Reserve of Rs.1,20,000/- and Securities Premium
Rs.1,00,000/-. Calculate the minimum number of Equity Share
issued in each of the following cases:
Case I: If the new Equity Shares are issued at par
II: If the new Equity Shares are issued Rs.20/- (10
Pre.)
III. If the new Equity Shares are issued at Rs.9.50
Redemption of Preference share capital Rs.6,00,000/-
Premium payable on redemption = Rs.60,000/- can be provided out of
Securities Premium balance available.
Minimum proceeds of new issue of Equity shares
Nominal value of Preference share to be redeemed Rs. 6,00,000
Less: Maximum amount of Reserve available Rs. 1,20,000
Minimum proceeds of new issue of Equity shares 4,80,000

Case I: When new issue Equity shares at par
Minimum no. of shares = 4,80,000
10
Minimum no. of share = 48,000

Case II: When the new issue of Equity share of Rs.10/- @ Rs.20/-
Minimum No. of shares= 4 80 000 / 10 = 48 000 Equity shares of
Rs. @ Rs.20/-
New Issue of Share Capital = 48,000 Equity shares of Rs.10/- @
Rs.10/- premium.

Case III: When the new issue of Equity share of Rs.10/- @ Rs. 9.50
Minimum no. of share = 4 80 000 / 9.50 = 50,526.32
Equity Share to be issued of Rs.10/- each @ Rs.0.50 discounts per
share. , , . . 50,527
Illustration 2:
M.R. Ltd. decided to redeem 2,000 Preference Shares of Rs.100/-
each at 10% premium on date of redemption the company had the
General Reserve stood at Rs.50,000/- the Profit and Loss Account
credit balance of Rs.40,000/- and Securities Premium Rs.10,000/-.
Calculate the minimum number of Equity Share of Rs.50/- each
issued in each of the following cases.
Case I: If the new Equity Shares are issued Rs.48.00
II: If the new Equity Shares are issued at par
III: If the new Equity Shares are issued at Rs.55.00
Nominal value of P.S. to be redeemed 2,00,000
Less: Amount of reserve available (50,000)
Cr. Balance in Profit & Loss A/c (40,000)
1,10,000
premium payable [20,000]
Available Sec. Pre. (10,000)
Required amount of sec. pre. 10,000
Total amount required 1,20,000

Case I:
When new issue of Equity Shares of Rs.50/- each
@ Rs.48/-
Minimum no. of shares issue = 1,20,000 / 48 = 2500

CRR = N. v. of Preference redeemed Minimum
Less: Proceeds of new issue
= 200,000 120000 = 80000
Case II :
Minimum No. Of shares = 1,20, 000 / 50
= 2,400 Equity Shares to be issued at par
Case III :
The new Equity Share of Rs.50/- each issued at
Rs.55/- i.e. Rs.5/- premium.
In case III premium payable on redemption can
be provided out of balance in Securities A/c
Premium A/c plus provision received on new
issued of shares
Nominal value of Preference share 2, 00,000
Less: Divisible profit available - 90,000
1,10,000
Minimum No. of share to be issue = 1,10,000 / 50 = 2,200 equity
share of Rs. 50 each @ Rs. 55
C.R.R. = 2, 00,000 -1,10,000 = 90,000 (out of divisible profit)
Premium payable on redemption = 10% on Rs.2.00,000 =Rs.20,000
Provided out of Securities Premium BAL B/d Rs. 10,000
+ Received on new issue = 2200*5 = 11,000
Total premium available 21,000
Used premium (20,000)
Balance transfer into sec. pre. A/C 1,000
REDEMPTION OUT OF DIVISIBLE PROFIT:
A company may use the distributable profits in place of
issuing new shares. To the extent redemption of Preference
shares out of divisible profit, an amount equal to face value
of shares redeemed is transferred to Capital Redemption
Reserve A/c by debiting the distributable profits.
When Preference shares are redeemed out of divisible profit,
there is no change in the percentage of share holding of the
company and also future earning are not diluted. However
payment to percentage share holders results in reducing
working capital. Divisible profits or distributable profits mean
profits or reserves available to company for distribution to
shareholders as dividends or otherwise as per provisions of
laws applicable. This is possible, if company has bank balance
available to repay capital since repayment of redemption needs
actual bank balance.
For redemption of Preference shares
a. for transferring the claim of Preference
shareholders. [Towards Capital, premium and
dividends unpaid]
Preference Share Capital A/c Dr. X
Premium on Redemption of Pre. Capital A/c Dr. X
Dividend Preference Share A/c (if any) Dr. X
To Preference shareholders A/c
b. For providing premium on redemption
Securities Premium A/c Dr. X
Capital Reserve A/c Dr. X
Profit and loss A/c Dr. X
To premium on redemption of Preference share A/c X
c. For creating capital redemption reserve
Profit and Loss A/c Dr. X
And/or
General Reserve A/c Dr. X
Any other divisible Profit/Reserve A/c Dr. X
To Capital Redemption Reserve A/c X
d. For payment to Preference shareholder Preference
shareholders A/c Dr. X
To Bank A/c X
Illustration 1
Ketan Ltd. had 6000, 9% redeemable Preference Shares
of Rs.50/- each fully paid. The company decides to
redeem the shares at a premium of 10%. The company
makes the following issues for the purpose of redemption.
a) 25,000 Equity Shares of Rs.10/- each at a premium of
10%.
b) 3,000, 9% Debenture of Rs.100/- each at a premium of
Rs.10/- each. The company has a General Reserve of
Rs.3,75,000/- and Securities Premium of Rs.50,000/-.
Pass journal entries to record above transactions.
Bank A/c Dr. 2,75,000
To Equity Share Capital A/c 2,50,000
To Securities Premium A/c 25,000
[Being 25000 Equity share at Rs.10/- each, issued at 10% premium]

Bank A/c Dr. 3,30,000
To 9% Debentures A/c 3,00,000
To Securities Premium A/c 30,000
[Being 3,000, 9% Debentures of Rs.100/-

9% Preference Share Capital A/c Dr. 3,00,000
Premium on Redemption of Preference Share A/c Dr. 30,000
To Preference Shareholders A/c 3,30,000
[Being the claim of transferred Preference shareholders to their
accounts]

Securities Premium A/c Dr. 30,000
To Premium on Redemption of Preference Shares A/c 30,000
[Being premium on redemption of Preference share provided]

General Reserves A/c Dr. 50,000
To Capital Redemption Reserve A/c 50,000
[Being capital redemption reserve created to the extend redemption
of profit]

Preference Shareholders A/c Dr. 3,30,000
To Bank A/c 3,30,000

[Being claim of Preference share holders paid]

[Calculation of issue minimum number of shares]
N. Ltd. decided to redeem their Preference shares 10 premium as on
31st March 2009. On that date their position was as under
Balance sheet as on 31st March 2009
Issued Share Capital 10,000,
9% redeemable Preference
Share of Rs.10/- each fully paid
20,000 Equity Share of Rs.10/-
each fully paid
Profit & Loss A/c
Dividend Equalization Reserve
10% Debentures
Sundry Creditors




1,00,000

2,00,000
50,000
20,000
1,00,000
3,50,000
Fixed Assets
Current Assets
Investment
Bank Bal.

2,10,000
1,45,000
1,00,000
50,000

In order to facilitate the redemption of Preference share it was
decided.
a) Part of Investment to be sold at 10% profit for Rs.55,000/-
b) To finance part of the redemption from company funds, subject to
leaving a balance on Profit and Loss A/c of Rs.40,000/- and
c) To issue sufficient numbers of Equity Share of Rs.10/- each at a
premium of Rs.2.50 per share to raise the balance fund required.

The Preference shares were redeemed on the due date and issue of
Equity shares was fully subscribed. You are requiring (i) the
necessary journal entries to record above transactions (including
cash) and (ii) The Balance Sheet after redemption. Solution:
Solution:
Working Notes: Rs.
(a) Nominal value of Preference Capital to be redeem 1, 00,000
Less: Divisible Profit available
Profit and Loss A/c 50,000
Add: Profit on sale of Investment 5,000 55,000
Less: Bal. requires to P & Loss A/c Balance - 40,000
15,000
Dividend Equalization Fund 20,000 (35,000)
Total fund requirement 65,000
Minimum no. of shares to = 65,000 / 10 = 6,500 Shares of Rs.10/-
each to be issued @ premium of Rs.2.50

Bank A/c Dr. 55,000
To Investment A/c 50,000
To Profit & Loss A/c 5.000
(Being part of Investment sold at 10% profit)
Bank A/c Dr. 81,250
To Equity Share Capital A/c 65,000
To Securities Premium A/c 16,250
[Being 6500 Equity shares of Rs.10 each issued @ 2.50 premium]
9% Preference Share Capital A/c Dr. 1,00,000
Premium on Redemption of P. S. Capital A/c Dr 10,000
To Preference Shareholders A/c 1,10,000
(Being the claim of Preference shareholders transferred to their accounts)



Securities Premium A/c Dr. 10,000
To Premium on Redemption of P. Shares Capital A/c 10,000

Profit & Loss A/c Dr. 15,000
Dividend Equalization Reserve A/c Dr. 20,000
To Capital Redemption Reserve A/c 35,000
[Being Capital Redemption Reserve created to the redemption out of
profit]

Preference Shareholders A/c Dr. 1,10,000
To Bank A/c 1,10,000
[Being claim of Preference share holders paid]

BuyBack of Share
Prior
to the amendment of the Companies Act, 1956, buyback
of shares in India was prohibited.
Section 77
of the Act, imposed a blanket ban on companies from
buying their own shares.
Section 77A,77AA and 77B
have been introduced in 1999 in the Companies Act,
1956 to enable companies to purchase their own shares
or other specified securities.
Meaning of buyback of shares
cancellation
Buyback is a method of cancellation of share
capital.
Reduction
It leads to reduction in share capital of a company
as opposed to issue of shares which results in an
increase in the share capital.
Criteria of Buyback of shares
In order to make buyback beneficial, the company may
undertake buyback after meeting the following criteria:
i. The company has exhausted all avenues of fresh
investments/outlay in the near future
ii. Buyback can be undertaken without jeopardizing the
lenders risk
iii. The company enjoys a return on capital employed which
is significantly higher than the normal cost of borrowing.
iv. The market price of the companys share is far lower
than its intrinsic value.
Reasons for Buyback
hostile bids
To prevent hostile take over bids
Return surplus
To return surplus cash to share holder
underlying
To increase the underlying share value
To support the share price during periods of temporary
weakness
To achieve or to maintain a target capital structure
To shrink equity base, thereby injecting much needed
flexibility
Provisions under Companies Act 1956
Sources of Buyback , Section 77A (1)
Buyback can be done either out of :
i. Its free reserves
ii. Security premium account
iii. Proceeds of any shares or other specified
securities
Note: Buyback of shares of any kind is not allowed
out of fresh issue of shares of the same kind .
Conditions to be fulfilled U/S 77A (2)
No company is allowed to purchase its own shares or other
specified securities unless
a) The buyback is authorized by its articles
b) A special resolution has been passed in general meeting of the
company authorizing the buyback
c) The buyback is less than twenty-five per cent of the total paid
capital and free reserves of the company
d) The ratio of the debt owed by the company is not more than
twice the capital and its free reserves after such buyback
e) All the shares or other specified securities for buyback are fully
paid up
f) The buyback is in accordance with the regulations made by the
SEBI in this behalf
Buyback within 1 year U/S 77A (4)
Every Buyback shall be completed within 12 months from the date
of passing the special regulation.
Methods of Buyback U/S 77A (5)
The Buyback may be made :
a) From the existing share holders on a proportionate basis
b) From the open market
c) From odd lots
d) By purchasing the securities issued to the employees of the
company under ESOP
ESOP : according to section 2(15A) of company Act, 1956, an
option given to employees by the company to purchase or
subscribe for equity share at a future date at a pre-fixed price is
known as Employees Stock Option Plan.
Declaration of solvency U/S 77A(6)
Company has passed a special regulation to Buyback its own
shares or other securities, it shall, before making such Buyback,
a. File a declaration of solvency :
With Registrar
The SEBI in the prescribed form
b. Submit an affidavit (signed by at least 2 directors) to the effect
that the board has made a full enquiry into the affairs of the
company
Note: No declaration of solvency shall be filed with SEBI by a
company whose shares are not listed on any recognized stock
exchange.
Physical destruction of securities U/S 77 A(7)
A company should extinguish and physically destroy the securities
so bought back with in 7 days of the last date of completion of
buyback
No fresh issue with in 24 months U/S 77A(8)
A company cannot make fresh issue of the same kind of securities
within period of 24 months except :-
a) by way of bonus issue
b) conversion of warrants
c) stock option scheme
d) sweat equity
e) conversion of preference shares or debentures into equity shares
TRANSFER TO CRR U/S77B
Where company purchases its own shares out of
free reserves, then a company is required to
transfer a sum equal to the nominal value of the
shares so bought to CAPITAL REDEMPION
RESERVE ACCOUNT from free reserves.
SEBI GUIDELINES
Company is required to make Public announcement in
One NATIONAL English Daily
One Hindi National Daily
One Regional Language Daily
Public announcement should specify
Specified Date i.e. the date of dispatch of the offer letter not later
than 30 days but not later than 42 days
Company should inform SEBI within 7 days
Offer shall remain open at least for 15 days
Company shall complete verification with in 15 days from the
date of closure
Buyback is permitted through six routes, namely the tender route,
open offer route, reverse book building, odd-lot share purchase,
reverse rights and purchase of employee stock option
ADVANTAGES OF BUYBACK OF SHARES
Helps company in reducing its share capital
Results in lower capital base
Company has advantage of servicing reduced capital base with
higher dividend yield
It is a good check on companies having poor liquidity position
Provides capital appreciation to investors
Gives signal to market that shares are undervalued
Helps promoters to formulate an effective defense strategy against
hostile takeover bids
DISADVANTAGES OF BUYBACK OF SHARES
Buyback implies under valuation of companies stock
There exists less or no scope for further expansion
Clever way for managers to invest cheaply in a company
It does not make difference to shareholders, whether
the company returns cash in the form of increased
dividend or by way of repurchase
INDIAN SCENARIO
Hindustan Unilever bought back its equity shares
at a price of Rs 230 per share and upto an
aggregate amount of Rs 630 crores.
Reliance Energy announced move to buyback
shares on 27th Feb, 2008
Navin Fluorine International Ltd
... Navin has announced share buyback at a price
of Rs 400 per share and aims to buy back
338,792 shares
Accounting Entries
1)When investments are sold for buyback of shares
Bank A/c Dr
Profit & Loss A/c Dr (for loss on sale)
To Investment A/c
To Capital Reserve A/c ( for profit on sale)
2) For issue of debentures or other specified
securities
Bank A/c Dr
To Debentures/Other Specified Securities A/c
To Securities Premium A/c (if any)
3) For Cancellation of shares bought back
Equity Share capital Dr( with nominal value)
To Shareholders A/c (with actual cost of BB)
4) For making the payment of buyback shares
Shareholders A/c Dr
To Bank A/c
5) For Transfer of nominal value of shares
bought back out of free reserves
Free Reserves A/c Dr
To Capital Redemption Reserve A/c
6) For expenses incurred in buyback of shares
Buyback Expenses A/c Dr
To Bank A/c
7) For transfer of buyback expenses
Profit & Loss A/c Dr
To Buyback Expenses A
Example
Bharat limited decides to Buyback 10% of Rs 100 crores
paid up equity capital. The face value per equity share is
Rs 10. but the market price per share is Rs 15.
Bharat limited takes the following steps for Buyback of its
shares.
To issue 14% debentures of Rs 100 each at par for face
value of Rs 10 crores.
To utilize general reserve
To sell investments of Rs 7 crores for Rs 8 crores
To Buyback shares at the market price
To immediately cancel the share bought back
Journalize the above transactions.

Bank A/c Dr. 10
To 14% Debentures A/c 10
(Being issue of debentures at par)


Bank A/c Dr. 8
To Investments A/c 7
To Capital Reserve A/c 1
( Being sale of investments and profit on sale
transferred to capital reserve)

Equity share capital A/c Dr. 10
General Reserve A/c Dr. 5
To Shareholders A/c 15

Shareholders A/c Dr. 15
To Bank A/c 15
(amount paid to shareholders on buyback)
ISSUE OF DEBENTURES
Company may need additional amount of money for a long period.
It cannot issue shares every time. It can raise loan from the public.
The amount of loan can be divided into units of small
denominations and the company can sell them to the public. Each
unit is called a debenture and holder of such units is called
Debenture holder.
A Debenture is a unit of loan amount. When a company
intends to raise the loan amount from the public it issues
debentures.
As per section 2(12) of Companies Act 1956, Debenture
includes debenture stock, bond and any other securities of the
company whether constituting a charge on the companys assets or
not.
Types of debentures
Debenture can be classified as under :
1. From security point of view
(i) Secured or Mortgage debentures : These are the debentures that are secured
by a charge on the assets of the company. These are also called mortgage
debentures. The holders of secured debentures have the right to recover their
principal amount with the unpaid amount of interest on such debentures out of
the assets mortgaged by the company. In India, debentures must be secured.
Secured debentures can be of two types :
(a) First mortgage debentures : The holders of such debentures have a first claim on
the assets charged.
(b) Second mortgage debentures : The holders of such debentures have a second
claim on the assets charged.
(ii) Unsecured debentures : Debentures which do not carry any security with
regard to the principal amount or unpaid interest are called unsecured
debentures. These are called simple debentures.
On the basis of redemption

(i) Redeemable debentures : These are the debentures which are
issued for a fixed period. The principal amount of such debentures
is paid off to the debenture holders on the expiry of such period.
These can be redeemed by annual drawings or by purchasing from
the open market.

(ii) Non-redeemable debentures : These are the debentures which
are not redeemed in the life time of the company. Such debentures
are paid back only when the company goes into liquidation.
On the basis of Records

(i) Registered debentures : These are the debentures that are
registered with the company. The amount of such debentures is
payable only to those debenture holders whose name appears in
the register of the company.

(ii) Bearer debentures : These are the debentures which are not
recorded in a register of the company. Such debentures are
transferrable merely by delivery. Holder of these debentures is
entitled to get the interest.
On the basis of convertibility
(i) Convertible debentures : These are the debentures that can be
converted into shares of the company on the expiry of predecided
period. The term and conditions of conversion are generally
announced at the time of issue of debentures.
(ii) Non-convertible debentures : The debenture holders of such
debentures cannot convert their debentures into shares of the
company.
On the basis of priority
(i) First debentures : These debentures are redeemed before other
debentures.
(ii) Second debentures : These debentures are redeemed after the
redemption of first debentures.
ISSUE OF DEBENTURES
By issuing debentures means issue of a certificate by the company
under its seal which is an acknowledgment of debt taken by the
company. The procedure of issue of debentures by a company is
similar to that of the issue of shares. A Prospectus is issued,
applications are invited, and letters of allotment are issued. On
rejection of applications, application money is refunded. In case of
partial allotment, excess application money may be adjusted
towards subsequent calls.
Issue of Debenture takes various forms which are as under :
1. Debentures issued for cash
2. Debentures issued for consideration other than cash
3. Debentures issued as collateral security.
Issue of Debentures with conditions Stipulated to their Redemption
(Journal entry)

(i) Issued at par redeemable at par
Bank A/c Dr
To Debentures Account
(Issue of debentures of Rs .... at par)

(ii) Issued at discount and redeemable at par
Bank A/c Dr
Discount on issue of Debentures A/c Dr
To Debentures A/c
(Issue of debentures of Rs ... at a discount of Rs ....)
(iii) Issued at premium redeemable at par
Bank A/c Dr
To Debentures A/c
To Securities Premium A/c
(Issue of ... debentures of Rs .... at a premium of Rs ....)

(iv) Issue at par, redeemable at premium
Bank A/c Dr
Loss on Issue of Debentures A/c Dr
To Debentures A/c
To Premium on Redemption of Debenture A/c
(Issue of ... debentures of Rs ... a redeemable at a premium of Rs)
(v) Issued at discount and redeemable at premium
Bank A/c Dr
Discount on Issue of Debentures A/c Dr
Loss on Issue of Debentures A/c Dr
To Debentures A/c
To Premium on Redemption of Debenture A/c
(issue of ... debentures of Rs ... at a discount of Rs ... redeemable
at a premium of Rs ....)
ISSUE OF DEBENTURES AS COLLATERAL SECURITY
Collateral security means security given in addition to the
principal security. It is a subsidiary or secondary security.
Whenever a company takes loan from bank or any financial
institution it may issue its debentures as secondary security
which is in addition to the principal security. Such an issue of
debentures is known as issue of debentures as collateral
security. The lender will have a right over such debentures
only when company fails to pay the loan amount and the
principal security is exhausted. In case the need to exercise this
right does not arise debentures will be returned back to the
company. No interest is paid on the debentures issued as
collateral security because company pays interest on loan.
In the accounting books of the company issue of debentures as
collateral security can be credited in two ways.
(i) No journal entry to be made in the books of
accounts of the company :
Debentures are issued as collateral security. A note
of this fact is given on the liability side of the
balance sheet under the heading Secured Loans and
Advances.
(ii) Entry to be made in the books of account the
company
A journal entry is made on the issue of debentures
as a collateral security, Debentures suspense A/c is
debited because no cash is received for such issue.
Following journal entry will be made
Debenture Suspense A/c Dr
To Debentures A/c
(.....Debentures of Rs .... each issued as collateral security to .....)
DISCOUNT ON ISSUE OF DEBENTURES AND LOSS ON
ISSUE OF DEBENTURES
In case company issues debentures on discount the total amount of
discount is not charged to profit and Loss Account of the company
in the accounting year in which this discount is allowed. The
amount of such discount is very heavy and to the company gets
benefit from the loan by issuing debentures over a number of
years. Hence some part of the amount of discount is written off
every year. Generally it is written off prior to the redemption of
these debentures. As the amount of discount on issue of debentures
is treated as a capital loss, it is shown on the asset side of the
balance sheet of the company under the head Miscellaneous
Expenditure until and by the amount it is not written off.
The amount of debenture discount can be written off in two ways :
1. All debentures are to be redeemed after a fixed period.
When the debentures are to be redeemed after a fixed period, the
amount of discount will be distributed equally within the number of
years spreader between the issue of debentures and their redemption.
The amount of discount on issue of debentures to be written off each
year is calculated as Amount of discount to be written off annually
= Total amount of Discount / Number of years
A company issues 1000 debentures of Rs 1000 each at a discount of
10% for a period of 5 years i.e. to be redeemed after 5 years.
Calculate the amount of discount to be written off each year and
prepare on issue of debentures discount account.
Amount of discount =
1000 Rs100010 /100 = 100000 / 5 = 20,000 discount per year
Discount on issue of debenture A/C Dr. 100000
To Debenture A/C 100000

Profit and Loss A/c ... Dr 20000
To Discount on Issue of Debentures A/c 20000
(Amount of Discount on Issue of Debentures written off)

Discount on Issue of Debentures Account till the amount of
discount is written off, is shown as under :
Discount on Issue of Debentures A/c


Date Particulars Amount Date

Particulars Amount
1st
Year

2
nd

Year
To Debenture A/c


To balance b/d
100000 Dec 31


Dec 31
By Profit & Loss A/c
By Balance c / d

By profit & Loss A/c
By Balance c/d
20000
80000

80000

20000
60000

2. Debentures are redeemed in installments
Debentures may also be redeemed in installments but over a
fixed period. In that case the amount of debenture discount
will be written off each year in proportion to the amount of
debentures redeemed.
Illustration 9
A company has issued 3000 9% debentures of Rs 1000 each at a
discount of 10%. If the debentures are to be redeemed in five
equal annual installments, calculate the amount of Discount on
Issue of Debentures to be written off each year and prepare
Discount on Issue of Debentures A/c.
Total amount of Discount on Issue of Debentures A/c
= 3000 100010/ 100 = Rs 300000

Year Outstanding amount Ratio Amount of
end of debenture written off Discount
Rs Rs
1st 3000000 5 300000*5/15 =100000

2nd 2400000 4 300000*4/15 = 800000

3rd 1800000 3 300000*3/15 = 60000

4th 1200000 2 300000*2/15 = 40000

5
th
600000 1 300000*1/15 = 20000
Loss on Issue of Debentures
You have learnt that a company may issue debentures with the
stipulation that the repayment of the debentures on maturity
will be made at premium. The amount of the premium payable
is debited to Loss on Issue of Debentures A/c at the time of
issue of debentures. This amount will also be written off in the
same manner as is done in case of writing off Discount on
Issue of Debentures. This is illustrated as under :
(i) All Debentures are redeemed after fixed period
Amount of Loss on Issue of Debentures written off each year
Profit and Loss A/c Dr
To Loss on Issue of Debentures A/c
(Loss on Issue of Debentures written off)
(ii) Debentures are Redeemed in Instalments
The amount of Loss on Issue of Debentures to be written off
each year is calculated in the manner it is calculated in case of
Discount on Issue of Debentures and accounting treatment is
also the same.
DISTINCTION BETWEEN SHARES & DEBENTURES
1. Share capital is an ownership capital.
2. Debentures capital is creditorship capital i.e. borrowing
3. A shareholder is the owner of the company.
4. debenture holder is the creditor of the company.
5. Share capital is not returnable in the life time of the company. However,
the redeemable preference shares are refunded during the life-time of
the company.
6. Debenture capital returnable during the lifetime of the company. The
exception is the irredeemable debentures which are not redeemable
during the life-time of the company.


7 Shareholders enjoy the voting rights.
8 Debentures holders do not have the voting rights.
9 Dividend is payable on shares & it is an appropriation of
profits
10Interest on debentures is payable at a fixed rate on specified
date irrespective of profits of the company.
11Dividend depends on the profit of the company.
12Interest is paid on debentures & it is a charge on the revenue
of the company.
13Shares are unsecured.
14Debentures are generally secured.
15In the event of winding up of the company shareholders are
the last person in re-fund of their capital.
16Debenture holder being the creditors are paid prior to the
shareholders. If secured they have priority even over the
unsecured creditors.

Terms of Issue of Debentures
When a company issues debentures, it usually
mentions the terms on which they will be
redeemed at their maturity. Redemption of
debentures means discharge of liability on
account of debentures by repayment made to the
debenture holders. Debentures can be redeemed
either at par or at a premium. Depending upon
the terms and conditions of issue and
redemption of debentures, the following six
situations are commonly found in practice.
(i) Issued at par and redeemable at par
(ii) Issued at discount and redeemable at par
(iii) Issued at a premium and redeemable at par
(iv) Issued at par and redeemable at a premium
(v) Issued at a discount and redeemable at a
premium
(vi) Issued at a premium and redeemable at a
premium
1. Issue at par and redeemable at par
(a) Bank A/c Dr.
To Debenture Application & Allotment A/c
(Receipt of application money)
(b) Debenture Application & Allotment A/c Dr.
To Debentures A/c
(Allotment of debentures)
2. Issue at a discount and redeemable at par
(a) Bank A/c Dr.
To Debenture Application & Allotment A/c
(Receipt of application money)
(b) Debenture Application & Allotment A/c Dr.
Discount on Issue of Debentures A/c Dr.
To Debentures A/c
(Allotment of debentures at a discount
3. Issue at premium and redemption at par
(a) Bank A/c Dr.
To Debenture Application & Allotment A/c
(Receipt of application money)
(b) Debenture Application & Allotment A/c Dr.
To Debentures A/c
To Securities Premium A/c
(Allotment of debentures at a premium)
4. Issue at par and redeemable at premium
(a) Bank A/c Dr.
To Debenture Application & Allotment A/c
(Receipt of application money)
(b) Debenture Application & Allotment A/c Dr.
Loss on Issue of Debentures A/c Dr.(with premium on redemption)
To Debentures A/c (with nominal value of debenture)
To Premium on Redemption (with premium on redemption)
of Debenture A/c
(Allotment of debentures at par and redeemed at a
premium)
5. Issue at discount and redemption at premium
Bank A/c Dr.
To Debenture Application & Allotment A/c
(Receipt of application money)
Debenture Application & Allotment A/c Dr.
Loss on Issue of Debentures A/c Dr. (with discount + redemption)
To Debentures A/c (with nominal value of debenture)
To Premium on Redemption (with premium on redemption)
of Debentures A/c
(Allotment of debentures at a discount and redeemable at premium)
6. Issued at a premium and redeemable at premium
Bank A/c Dr.
To Debenture Application & Allotment A/c
(Receipt of application money)

Debenture Application & Allotment A/c Dr.
Loss on Issue of Debentures A/c Dr.(with premium on redemption)
To Debentures A/c (with nominal value of debenture)
To Securities Premium A/c (with premium on issue)
To Premium on Redemption of (with premium on redemption)
Debentures A/c
Give Journal Entries for the following:
1. Issue of Rs.10,000, 9% debentures of Rs. 100 each and
redeemable at par.
Bank A/c Dr. 1,00,000
To 9% Debenture Application & Allotment A/c 1,00,000
(Debentures Application money received)
Debenture Application & Allotment A/c Dr. 1,00,000
To 9% Debentures A/c 1,00,000
(Application money transferred to Debentures Account)
2. Issue of Rs.10,000, 9% debentures of Rs. 100 each at premium of
5% but redeemable at par.
Bank A/c Dr. 1,05,000
To 9% Debenture Application & Allotment A/c 1,05,000
(Debentures application money received)

Debenture Application & Allotment A/c Dr. 1,05,000
To 9% Debentures A/c 1,00,000
To Securities Premium A/c 5,000
(Debentures application money transferred to Debentures &
Securities Premium account)
3. Issue of Rs.10,000, 9% debentures of Rs. 100 each at discount of
5% repayable at par.
Bank A/c Dr. 95,000
To 9% Debenture Application & Allotment A/c 95,000
(Debentures application money received)
9% Debenture Application & Allotment A/c Dr. 95,000
Discount on Issue of Debentures A/c Dr. 5,000
To 9% Debentures A/c 1,00,000
(Debentures application money transferred to Debentures account)

4. Issue of Rs.10,000, 9% debentures of Rs. 100
each at par but repayable at a premium of 5%.
Bank A/c Dr. 1,00,000
To 9% Debenture Application & Allotment A/c 1,00,000
(Debentures Application money received)
Debenture Application & Allotment A/c Dr. 1,00,000
Loss on Issue of Debentures A/c Dr. 5,000
To 9% Debentures A/c 1,00,000
To Premium on Redemption of Debentures A/c 5,000
(Debentures Application money transferred to Debentures account)

5. Issue of Rs.10,000, 9% debentures of Rs. 100
each at discount of 5% but redeemable at
premium of 5%.
Bank A/c Dr. 95,000
To 9% Debenture Application & Allotment A/c 95,000
(Debentures Application money received)
Debenture Application & Allotment A/c Dr. 95,000
Loss on Issue of Debentures A/c Dr. 10,000
To 9% Debentures A/c 1,00,000
To Premium on Redemption of Debentures A/c 5,000
(Debentures application money transferred to debentures
and Premium on debenture account)


6. Issue of Rs.10,000, 9% debentures of Rs. 100
each at premium of 5% and redeemable at
premium of 5%.
Bank A/c Dr. 1,05,000
To 9% Debenture Application & Allotment A/c 1,05,000
(Debentures Application money received)
Debenture Application & Allotment A/c Dr. 1,05,000
Loss on Issue of Debentures A/c Dr. 5,000
To 9% Debenture A/c 1,00,000
To Premium on Redemption of Debentures A/c 5,000
To Securities Premium A/c 5,000
(Debenture application money transferred to debentures account)
You are required to set out the journal entries relating to the issue of
the debentures in the books of X Ltd. and show how they would
appear in its balance sheet under the following cases:
(a) 120, 8% debentures of Rs.1,000 each are issued at 5% discount
and repayable at par.
Bank A/c Dr. 1,14,000
Discount on issue of Debentures A/c Dr. 6,000
To 8% Debentures A/c 1,20,000
(Issue of 120, 8% debentures at a discount of 5% repayable at par)
Balance Sheet of X Ltd.
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Secured Loans: Cash at Bank 1,14,000
8% Debentures 1,20,000 Miscellaneous Expenditure
Discount on debentures 6,000

(b) 150, 7% debentures of Rs.1,000 each are issued
at 5% discount and repayable at premium of
10%.
Bank A/c Dr. 1,42,500
Loss on Issue of Debentures A/c Dr. 22,500*
To 7% Debentures A/c 1,50,000
To Premium on Redemption of 15,000
Debenture A/c
(Issue of 150, 7% debentures at a discount of 5%
repayable at premium of 10%)
(c) 80, 9% debentures of Rs.1,000 each are issued
at 5% premium.
(d) Another 400, 8% debentures of Rs.100 each are
issued as collateral security against a loan of
Rs.40,000
Balance Sheet of X Ltd.
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Secured loans: Cash at bank 1,42,500
7% Debentures 1,50,000 Miscellaneous exp.:
Premium on redemption of 15,000 Loss on issue of debentures
22,500
Interest on Debentures
When a company issues debentures, it is under an obligation to
pay interest thereon at fixed percentage (half yearly) periodically
until debentures are repaid. This percentage is usually as part of
the name of debentures like 8% debentures, 10% debentures, etc.,
and interest payable is calculated at the nominal value of
debentures.
Interest on debenture is a charge against the profit of the company
and must be paid whether the company has earned any profit or
not. According to Income Tax Act 1961, a company must deduct
income tax at a prescribed rate from the interest payable on
debentures if it exceeds the prescribed limit. It is called Tax
Deducted at Source (TDS) and is to be deposited with the tax
authorities.
Accounting Treatment
The following journal entries are recorded in the books of a
company in connection
with the interest on debentures:
1. When interest is due
Debenture Interest A/c Dr.
To Income Tax payable A/c
To Debentureholders A/c
(Amount of interest due on debenture and tax deducted at source )
2. For payment of interest to debentureholders
Debentureholders A/c Dr.
To Bank A/c
(Amount of interest paid to debentureholders)
3. On transfer debenture Interest Account to profit and loss account
Profit and Loss A/c Dr.
To Debenture Interest A/c
(Debenture interest transferred to profit and loss A/c)
On payment of tax deducted at source to
Government
Income Tax Payable A/c Dr.
To Bank A/c
(Payment of tax deducted at source on interest on
debentures)
A Ltd. issued 2000 10% debentures of Rs.100 each on January 01,
2004 at a discount of 10% redeemable at a premium of 10%.
Give journal entries relating to the issue of debentures and
debenture interest for the period ending December 31, 2004
assuming that interest was paid half yearly on June 30 and
December 31 and tax deducted at source is 10%. A.Ltd. follows
calendar year as its accounting year.
2004
Jan.01 Bank A/c Dr. 1,80,000
To 10% Debenture Application & 1,80,000
Allotment A/c
(Application money received on 2,000, 10% debentures)
10% Debentures Application & Allotment A/c Dr. 1,80,000
Loss on Issue of Debenture A/c Dr. 40,000
To 10% Debentures A/c 2,00,000
To Premium on Redemption of 20,000
Debentures A/c
(Allotment of debentures at a discount of 10% and redeemable at a
premium of 10%)
Jun.30
10% Debenture Interest A/c Dr. 10,000
To Debentureholders A/c 9,000
To Income Tax Payable A/c 1,000
(Interest due for 6 months and tax deducted at source)
10% Debenturesholders A/c Dr. 9,000
To Bank A/c 9,000
(Payment of interest)
Dec.31
10% Debenture interest A/c Dr. 10,000
To Debentureholders A/c 9,000
To Income Tax Payable A/c 1,000
(Interest due for 6 months and tax deducted at source)
10% Debenturesholders A/c Dr. 9,000
To Bank A/c 9,000
(Payment of interest)

Dec.31
Income Tax Payable A/c Dr. 2,000
To Bank A/c 2,000
(Paid tax deducted at source to the government)
Profit & Loss A/c Dr. 20,000
To Debenture Interest A/c 20,000
(Debenture interest transferred to profit and loss account)
Redemption of Debentures
Redemption of debentures refers to extinguishing or
discharging the liability on
account of debentures in accordance with the terms of issue.
In other words
redemption of debentures means repayment of the amount
of debentures by
the company. There are four ways by which the debentures
can be redeemed.
These are :
1. Payment in lump sum
2. Payment in instalments
3. Purchase in the open market
4. By conversion into shares or new debentures.
Redemption by Payment in Lump Sum
When the company pays the whole amount in one lump sum,
the following, journal entries are recorded in the books of the
company.
If debentures are to be redeemed at par
Debentures A/c Dr.
To Debenture holders a/c
Debenture holders Dr.
To Bank A/c
If debentures are to be redeemed at premium
Debentures A/c Dr.
Premium on Redemption of Debentures A/c Dr.
To Debenture holders
Debenture holders Dr.
To Bank A/c

Give the necessary journal entries at time of redemption of
debentures in each of the following cases.
X Ltd. issued 500, 9% debentures of Rs.100 each at par and
redeemable at par at the end of 5 years out of capital.
2. X Ltd. issued 1,000, 12% debentures of Rs.100 each at par.
These debentures are redeemable at 10% premium at the end
of 4 years.
3. X Ltd. issued 12% debentures of the total face value of
Rs.1,00,000 at premium of 5% to be redeemed at par at the
end of 4 years.
4. X Ltd. issued Rs.1,00,000, 12% debentures at a discount of
5% but redeemable at a premium of 5% at the end of 5 years.
XYZ Ltd. issued 200, 15% debentures of Rs.100 each on January 01, 2002 at
discount of 10% redeemable at premium of 10% out of profits. Give journal
entries at the time of issue and redemption of debentures if debentures are
to be redeemed in lump sum at the end of 4th year.

Redemption by Payment in Instalments
When, as per terms of the issue, the debentures are to be redeemed in
instalments beginning from a particular year, the actual debentures to be
redeemed are selected usually by draw of lots, and the redemption to be
made either out of profits or out of capital. The entries will be:

Redemption by Purchase in Open Market
When a company purchases its own debentures in the open
market for the purpose of immediate cancellation, the
purchase and cancellation of such debentures are termed as
redemption by purchase in the open market. The advantage
of such an option is that a company can redeem the
debentures at its convenience whenever it has surplus funds.
Secondly, the company can purchase them when they are
available in market at a discount.
When the debentures are purchased from the market at a
discount and cancelled, the journal entries are recorded as
follows :
1. On purchase of our debentures for immediate cancellation
Debentures A/c Dr.
To Bank A/c
To Profit on Redemption of Debentures A/c
2. On transfer of Profit on Redemption
Profit on Redemption of Debenture A/c Dr.
To Capital Reserve
In case, the debentures are purchased from the market at a price
which is above the nominal value of debenture, the excess
will be debited to loss on redemption of debentures. The
journal entry in that case will be
1. Debentures A/c Dr.
Loss on Redemption of Debentures A/c Dr.
To Bank A/c
2. Profit and Loss A/c Dr.
To Loss on Redemption of Debentures A/c
X Ltd. decided to redeem Rs. 25,000, 12% debentures. It
purchased Rs.20,000 debentures in the open market at Rs.98.50
each, the expenses being Rs.100, and redeemed the balance of
Rs.5,000 debentures by draw of lots. Journalise.
12% Debentures A/c Dr. 20,000
To Bank A/c 19,800
To Profit on Redemption of Debentures A/c 200
(Purchase of 200 debentures @ Rs.98.5 plus Rs.100 for expenses )
12% Debentures A/c Dr. 5,000
To Bank A/c 5,000
(Redemption of Rs.5,000 debentures)
Profit on Redemption of Debenture A/c Dr. 200
To Capital Reserve 200
(Transfer of profits on Redemption of debentures to Capital
Reserve A/c)
On January 01, 2004, a company made an issue of 1,000, 6% debentures of
Rs.1,000 each at Rs.960 per debenture. The terms of issue provided for the
redemption of 200 debentures every year starting from the end of 2005
either by purchase or by draw of lot at par at the companys option. Rs.10,000
Was written-off the debenture discount account in 2004 and so also 2005. On
31.12.2005, the company purchased for cancellation debentures of the face
value of Rs.80,000 at Rs.950 per debenture and of the face value of
Rs.1,20,000 at Rs.900 per debenture.
Journalise the above transaction and show the profit on redemption would
be treated.
Redemption by Conversion
As stated earlier the debentures can also be debentures
redeemed by converting them into shares or new debentures. If
Debenture holders find that the offer is beneficial to them, they
will take advantage of this offer. The new shares or debentures
may be issued at par, at a discount or at a premium.
Exp.
Arjun Plastics Limited redeemed 1,000, 15% debentures of
Rs.100 each by converting them into equity shares of Rs.10
each at a premium of Rs.2.50 per share. The company also
redeemed 500 debentures by utilising Rs.50,000 out of profit.
Give the necessary journal entries.
15% Debentures A/c Dr. 1,00,000
To Debenture holders 1,00,000
(Amount due to debenture holders)
Debenture holders A/c Dr. 1,00,000
To Equity Shares Capital A/c 80,000
To Securities Premium A/c 20,000
(Issue of 800 equity shares at a premium of Rs.2.50 per share)
Debentures A/c Dr. 50,000
To Debenture holders A/c 50,000
(Amount due to debenture holders)
Debenture holders Dr. 50,000
To Bank A/c 50,000
(Payment to debenture holders)
Interest on Debentures
Debenture is always prefixed by a certain percentage say 9% Debentures
or 12% Debentures. It is the rate of interest per annum that will be paid to
the debenture holders. Companies generally pay interest on its debentures
after every six months. Journal entries that are made in the books of the
company are as follows;

(i) Payment of Interest on Debentures
Debenture Interest A/c Dr
To Bank A/c
(Interest on ....% Debentures paid for six months ending ...@ ....% pa)

(ii) Transfer of Debenture Interest to Profit and Loss A/c
Profit and Loss A/c Dr
To Debenture Interest A/c
(Debenture Interest transferred to Profit and Loss A/c)
Valuation of goodwill
Methods of Valuation of Goodwill
Since goodwill is an intangible asset it is very difficult to
accurately calculate its value. Various methods have been
advocated for the valuation of goodwill of a partnership firm.
Goodwill calculated by one method may differ from the
goodwill calculated by another method. Hence, the method
by which goodwill is to be calculated, may be specifically
decided between the existing partners and the incoming
partner.
The important methods of valuation of goodwill are as follows:
1. Average Profits Method
2. Supper Profits Method
3. Capitalisation Method
The profit for the last five years of a firm were as follows
year 2002 Rs. 4,00,000; year 2003 Rs. 3,98,000; year 2004 Rs.
4,50,000; year 2005 Rs. 4,45,000 and year 2006 Rs. 5,00,000.
Calculate goodwill of the firm on the basis of 4 years purchase
of 5 years average profits.
Solution
Year Profit
(Rs.)
2002 4,00,000
2003 3,98,000
2004 4,50,000
2005 4,45,000
2006 5,00,000
Total 21,93,000
Average Profit = Total Profit of Last 5 Years
No. of years
= Rs. 21,93,000
5
= Rs. 4,38,600
Goodwill = Average Profits No. of years purchased
= Rs. 4,38,600 4 = Rs. 17,54,400

The Profits of firm for the last five years were as follows:
Year Profit
(Rs.)
200203 20,000
200304 24,000
200405 30,000
200506 25,000
200607 18,000
Calculate the value of goodwill on the basis of three years
purchase of weighted average profits based on weights
1,2,3,4 and 5 respectively to the profits for
2002,2003,2004,2005 and 2006.
Solution
Year Ended 31st March Profit Weight Product
(Rs.)
200203 20,000 1 20,000
200304 24,000 2 48,000
200405 30,000 3 90,000
200506 25,000 4 1,00,000
200607 18,000 5 90,000
15 3,48,000
Weighted Average Profit = Rs. 3,48,000 / 15
= Rs. 23,200
Goodwill = Rs. 23,200 3 = Rs. 69,600
Calculate goodwill of a firm on the basis of three year purchase
of the weighted average profits of the last four years. The
profit of the last four years were: 2003 Rs. 20,200; 2004 Rs.
24,800; 2005 Rs. 20,000 and 2006 Rs. 30,000.
The weights assigned to each year are : 2003 1; 2004 2; 2005
3 and 2006 4.
You are supplied the following information:
1. On September 1, 2005 a major plant repair was undertaken for
Rs. 6,000, which was charged to revenue. The said sum is to
be capitalised for goodwill calculation subject to adjustment of
depreciation of 10% p.a. on reducing balance method.
2. The Closing Stock for the year 2004 was overvalued by Rs.
2,400.
3. To cover management cost an annual charge of Rs. 4,800
should be made for purpose of goodwill valuation.
Calculation of Adjusted Profit 2003 2004 2005 2006
Rs. Rs. Rs. Rs.
Given Profits Less 20,200 24,800 20,000 30,000
Management Cost 4,800 4,800 4,800 4,800
Add: Capital Expenditure 15,400 20,000 15,200 25,200
Charged to Revenue - - 6,000 -
15,400 20,000 21,200 25,200
Less: Unprovided Depreciation - - 200 580
15,400 20,000 21,000 24,620
Less; over valuation of Closing Stock - 2,400 - -
15,400 17,600 21,000 24,620
Add: over value of opening stock - - 2,400 -
Adjusted Profits 15,400 17,600 23,400 24,620
Calculation of weighted average profits:
(Rs.)
Year Profit Weight Product
2003 15,400 1 15,400
2004 17,600 2 35,200
2005 23,400 3 70,200
2006 24,620 4 98,480
Total 10 2,19,280
Weight Average Profit = Rs. 2,19,280/ 10 = Rs. 21,928
Goodwill = Rs. 21,928 3 = Rs. 65,784
Notes to Solution
(i) Depreciation of 2005 = 10% of Rs. 6000 for 4 months
= Rs. 6000 *10/100 * 4/12 = Rs. 200
(ii) Depreciation of 2006 = 10% of Rs. 6000 Rs. 200 for one year
= Rs. 5800 * 10/100 = Rs. 580
(iii) Closing Stock of 2004 will become opening stock for the year 2005
In previous study the term capital employed is defined as
simple equation as:
Total assets out side liabilities
But in practice, in large size of companies the following two
different type of approaches are adopted to compute the
value of capital employed:
1. Assets side approach
2. Liabilities side approach
Assets side approach
Value of capital employed, under this approach, is calculate as follows:
Assets at market value ***
(excluding goodwill, all deferred expenditure)
Less:
Liabilities to outsiders ***
Capital employed ------
Less:
50% of profit during the year ***
Average capital employed ------

Liabilities side approach
Share capital ****
Add:
Profit , reserve, workman compensation reserve,
Gain on revaluation of assets and liabilities ****
Less:
Goodwill, loss on revaluation of assets and liabilities
Losses, preliminary expenses, investment, ****
Capital employed ------
Less:
50% of profit during the year ****
Average capital employed ------
You are required to calculate a) capital employed and b) average
capital employed from the following balance sheet:

Liabilities Amount Assets Amount
12% preference share capital
Equity share capital
Reserve ( including profit of the
current year Rs. 50,000)
Workman compensation fund
Depreciation fund:
Land and building 30,000
Plant 30,000
Debenture
Creditor

1,00,000
3,00,000
90,000

60,000


60,000
90,000
80,000
Goodwill
Land and building
Plant
Current assets
Investment
Investment for replacement of
plant
Preliminary expenses
30,000
90,000
1,50,000
4,00,000
70,000

30,000
10,000

7,80,000 7,80,000
Assets side approach
Total of assets other than goodwill and preliminary expenses
7,80,000 30,000 10,000 = 7,40,000
Less: Debenture 90,000
Creditors 80,000
Depreciation 60,000 2,30,000
5,10,000
Less: 50% of profit 25,000
Average capital employed 4,85,000





Liabilities side approach
Share capital
Equity 1,00,000
Preference share capital 3,00,000 4,00,000
Add: reserve (90,000-50,000) 40,000
Profit 50,000
Workman compensation 60,000 1,50,000
5,50,000
Less: goodwill 30,000
Preliminary exp. 10,000 40,000
Capital employed 5,10,000
Less: 50% profit of c.y. 25,000
Average capital employed 4,85,000





You are required to calculate a) capital employed and b) average
capital employed from the following balance sheet:

Liabilities Amount Assets Amount
Equity share of Rs. 10 each fully
paid up
Reserve
Profit and loss a/c
15% Debenture
Workman compensation fund
Creditor
Workman profit sharing reserve

10,00,000

3,00,000
2,00,000
2,00,000
30,000
60,000
50,000

Goodwill
Land and building 3,00,000
Less: Dep. 30,000
Plant 6,00,000
Less: Dep. 1,00,000
Furniture 70,000
Less: Dep. 20,000
Trade investment
(cost 2,00,000)
Stock
Debtors 4,00,000
Less: provision 50,000
Cash at bank
Preliminary expenses
1,00,000

2,70,000

5,00,000

50,000
1,75,000

2,80,000
3,50,000

90,000
25,000
18,40,000 18,40,00
0
Building are now worth Rs. 5,00,000 and plant and machinery is worth Rs.
4,75,000.
You are required to compute the value of capital employed.
Assets side approach
Total assets 18,40,000
Goodwill (100000)
Less: P. Exp. (25,000)
Less: building book value (2,70,000)
Add: building market value 5,00,000
Less: plant book value (5,00,000)
Add: plant market value 4,75,000
Required new total assets 19,20,000
Less: 15% debenture 2,00,000
Creditors 60,000
Workmen profit sharing reserve 50,000 3,10,000
Capital employed 16,10,000

Liabilities side approach
Share capital 10,00,000
Add: G/R 3,00,000
Profit and loss a/c 2,00,000
Workmen compensation 30,000
Increase in the value of building 2,30,000
17,60,000
Less: Goodwill (1,00,000)
Investment loss (25,000)
Decrease in the value of assets (25,000)
Capital employed 16,10,000

the following balance sheet of Raj Com. Ltd. as on 31
st
march 2010:









You are ask to value the goodwill of Raj Ltd. on the basis of 5 year
purchase for which following information is supplied:
Adequate provision have been made in the accounts for income tax
and depreciation.
The rate of income tax may be taken at 50%.




Liabilities Amount Assets Amount
Equity share of Rs. 10 each fully
paid up
Reserve
Profit and loss a/c
Creditor
Provision for taxation

5,00,000

30,000
50,000
1,00,000
70,000

Goodwill
Land and building
Plant
Stock
Debtors 1,00,000
Less: provision 5,000
Cash at bank
50,000
2,50,000
2,00,000
1,50,000

95,000
5,000

7,50,000 7,50,000
The average rate of dividend by the company for the past 5 year
was 15%.
The return on the company invested is 12%.
Solution :
Assets side approach
Total assets 7,50,000
Less: goodwill (50,000)
Required new total assets 7,00,000
Less: liabilities
Creditors (1,00,000)
Provision for taxation (70,000)
Capital employed 5,30,000
Goodwill = super profit * No. of purchase year
Super profit = average profit or current profit Normal profit



Calculation of current profit
Provision for taxation is Rs. 70,000
That is at 50% of the profit
Total profit 100% will be Rs. 1,40,000
Current Profit after providing tax (1,40,000 70,000) = 70,000
Calculation of Normal profit
Normal profit = capital employed * rate of return
= 5,30,000 * 12/100
= 63,600
Calculation of super profit
Super profit = average profit or current profit Normal profit
= 70,000 63,600
= 6,400
Value of goodwill = super profit * No. of purchase year
= 6,400 * 5 = 32,000

the following balance sheet of sudarshan. Ltd. as on 31
st
march
2010:









the company started business in 2005 with paid up capital Rs. 20,00,000. profit
earned before taxation have been as follows:
2006 = 6,00,000, 2007= 7,00,000, 2008 = 8,00,000, 2009 = 5,00,000, 2010 = 9,00,000
Income tax rate 50%. Dividend have been distributed from the profit of first 3 year @
10% and 15% next 2 year of the paid up capital.



Liabilities Amount Assets Amount
Equity share of Rs. 10 each fully
paid up
Bank overdraft
Profit and loss a/c
Creditor
Provision for taxation

20,00,000

3,00,000
5,00,000
7,00,000
3,75,000

Goodwill
Land and building
Plant
Stock
Debtors
2,00,000
9,00,000
8,00,000
12,00,000
7,75,000
38,75,000 38,75,000
Find the goodwill by capitalization method
Total assets
(38,75,000 2,00,000)= 36,75,000
Less: Total liabilities
3,00,000 + 7,10,000 + 3,75,000 = 13,85,000
Net assets = 22,90,000
Calculation of average profit
6+7+8+5+9=35,00,000 / 5 = 7,00,000
Less: provision for tax @ 50% = 3,50,000
Average profit = 3,50,000
Average dividend = 10%+10%+10%+15%+15% / 5
Fair rate of return = 12%
Capitalized value of business
100 x 3,50,000 / 12 = 29,16,666.6
Goodwill = Capitalized value of business Net Assets
Goodwill = 29,16,666.6 - 22,90,000 =6,26,666.67



Future Maintainable Profits
We all know that goodwill is abstract asset.
It represents the Future Maintainable Profits of a business. As
is clear from the name itself, Future Maintainable Profits are
the profits that are expected to be earned by the business in
the coming future. For calculating the Future Maintainable
Profits of a concern, we should have a look into the profits
earned by that concern in the few previous years say 2,3,4 or
5 years. Its always better to take a short and recent time
period for calculation of Future Maintainable Profits or
Adjusted Average Past Profits.
The following factors should be considered
For the FMP
Interest on debenture and depreciation on fixed assets
should be included.
Provision for liabilities should be made
Preference dividend must be deducted
Result of any development that will arise in future should
be taken into account
The following items should not taken into account
1. Transfer to general reserve
2. Redemption of liabilities
3. Dividend equalization fund
4. Non trading assets
5. Any income derived from Non trading assets

Exp. For the year ended 31
st
march 2010 a
company reported a profit of 14,000 after
paying income tax @ 30%. It was found that
the year income included Rs. 1,000 for a claim
lodged in 2007-08 for which no entry has been
passed then. The plan to launch a new
product and the following are the estimate in
respect of this.
Sales 12,000
Expenditure on raw material 5,000
Wages and fixed expenses 6,500
You are asked to find FMP
Solution
Profit before tax
14,000 * 100 / 70 = 20,000
Less: income of 2007-08 = 1,000
Normal profit 19,000
Add: expected profit of new product
Sales 12,000
Less: expenses (5,000 +6,500) 11,500 500
Expected profit before tax =(19,000+500) = 19,500
Less: income tax @ 30% = 5850
FMP 13650



Valuation of share
Following are the condition in which valuation
of share has become utmost important
Amalgamation of companies
Reconstruction
Conversion
Assessment of tax
To meet shareholders demand
Methods of valuation of shares
Net asset method
Following are the most important steps in this method
Step 1. Total Assets (at market value)
Step 2. less: Total liabilities ( including Debenture and preference share)
Step 3. Result = Net Assets
Step 4. Value of share = Net Assets / Number of equity share
Following are the factors should be considers
Goodwill:
It should be valued at current cost
Inventory:
Raw material, stock and WIP should be valued at cost
Finished goods should be valued at market value
Fictitious Assets:
Should be eliminated
Non trading assets:
at market price
Debtors:
After provision for bad and doubtful debts
Other assets:
If market value of assets are not given, should be value at book value
Share capital:
If both share capital are given, preference share capital should be
deducted
Intrinsic value of share (I.V.S.) : net assets / no. of equity share

Example
Valuation of fully paid share
Valuation of partly paid share


Valuation of fully paid shares
Q1. the following is balance sheet of A ltd. Company as on 31/3/10
Liabilities
3000, 10% P.S. of Rs. 100 each 300000
50000 E.S. of Rs. 10 each 500000
B/P 60000
Creditor 120000 1000000
Assets
Sundry Assets as Book value 1000000
Other information's
The market value of 70% of the assets is estimated to be 20%
more then the book value and that of the remain 30% at 10%
less than the book value. There are unrecorded liabilities of Rs.
10,000.
Find the value of one equity share
Solution
Total assets is Rs. 1000000 out of which 70% is appreciate by 20%
= 840000
And rest of 30% is depreciated by 10% = 270000
Total assets at market value 1110000
Less : current liabilities
B/P 80000
Creditors 120000
Unrecorded liabilities 10000
210000
900000
Less: preference share capital 300000
Net assets available for E.S.H. 600000
I.V.S. = 600000 / 50000 = Rs. 12



Q.2 the following is balance sheet of A ltd. Company as on 31/3/10
Liabilities Assets
5000 E.S. of Rs. 100 each 500000 goodwill 120000
P&L a/c 50000 investment 480000
GR 150000 stock 500000
10% Debenture 450000 Debtors 300000
Workman S.B. a/c 200000 cash at bank 100000
Creditor 150000 -------------- ---------
1500000 1500000
The profit for the past 5 years were:
25000,35000,60000,50000,80000
The market value of investment was Rs. 400000
Goodwill is to be valued as 3 years purchase of average annual profit
for the last 5 years. Find the intrinsic value of share.

Solution
Step 1 calculate goodwill
Goodwill at new value = 150000
Investment at new value = 400000
Other assets 900000
Total assets 1450000
Less liabilities :
Debenture 450000
Creditors 150000
Works S.B. a/c 200000
Total liabilities 800000
Net assets available for E.S.H. 650000
I.V.S. = 650000 / 5000 = 130

Q.3 the following is balance sheet of A ltd. Company as on 31/12/09
Liabilities Assets
150000 E.S. of Rs. 10 each 1500000 Building 500000
P&L a/c 200000 P&M 300000
Div. Eq. fund 150000 stock 1000000
B.O.D.* 50000 Debtors 450000
Provision for tax* 100000 ------------- ---------
Creditor * 250000 -------------- ---------
2250000 2250000
The profit for the past 5 years were:
05-200000,06-225000,07-250000,08-275000,09-300000
On 31
st
Dec 09 the value of building were valued at Rs. 625000 and
P&M at 375000. in view of the business, it is considered that 10% is
reasonable on capital. goodwill is calculate on the basis of 3 year
super profit method.
Solution:
Step 1- (total assets liabilities) = net assets 2050000
Step2 average capital employed = (net assets half of current
year profit)
= (2050000 150000) = 1900000
Step 3 calculate Goodwill
Average profit = 250000
Normal profit = 190000
Super profit = A.P N.P.
Goodwill = S.P. X 3
= 180000
Step 4 Net assets + Goodwill
= 2050000+180000 = 2230000
Step 5 Calculate IVS
= 2230000/ 150000 = 14.86

Q.4 on 31
st
march 2010, the balance sheet of A ltd. was as follows
Liabilities Assets
1000, 10% P.S. 100000 Goodwill 50000
50000 E.S. 500000 land & Building 200000
GR 100000 Machinery 250000
CR 20000 furniture 20000
P&L 80000 investment (F.V. 60000)75000
6% Debenture * 160000 stock 400000
Creditors* 100000 Debtors 80000
Pro. For tax* 40000 cash 25000
1100000 1100000
The assets are revalued as- land & Building 280000, machinery 220000
Furniture 30000. the normal return in capital is 10%, the basic
Valuation of goodwill is 4 year purchase of super profits. 50% of
investment in building is treated as non-trading assets because a sum
of Rs. 12000 is collected as rent from building. You are required to
calculate the value of each equity share assuming that average annual
profit after tax at 50% is Rs. 132500
Solution :
Step 1- calculate capital employed
Total assets total liabilities
Step 2 calculate normal profit
Capital employed * rate/100
Step 3 calculate average trading profit
Average annual profit - non trading income ( rent 50%, interest
on investment at F.V. less tax 50%)
Step 4 calculate super profit
Average profit normal profit
Step 5 calculate Goodwill
Super profit * no. of year purchase
Step 6- calculate Net assets
Total assets total liabilities preference share capital
Step 7- calculate IVS
Net assets/ no. of Equity share
Solution :
Step 1- calculate capital employed
Total assets total liabilities
TA=(280000+220000+30000+400000+80000+25000-50% of 280000)
TL=(160000+100000+40000)
Step 2 calculate normal profit
Capital employed * rate/100
Step 3 calculate average trading profit
Average annual profit - non trading income ( rent 50%, interest on
investment at F.V. less tax 50%)
Step 4 calculate super profit
Average profit normal profit
Step 5 calculate Goodwill
Super profit * no. of year purchase
Step 6- calculate Net assets
Total assets total liabilities preference share capital
Step 7- calculate IVS
Net assets/ no. of Equity share
Valuation of partly paid shares
Following are the extract of balance sheet of A ltd. on 31
st
march 2010
5000, 10% P.S. of Rs. 100 each 500000
10000, E.S. of Rs. 10 each, Rs. 5 paid up 50000
10000, E.S. of Rs. 10 each, Rs. 2.5 paid up 25000
10000, E.S. of Rs. 10 each, Fully paid up 100000
Reserve and Surpluses 200000
P&L a/c 125000
1000000
On revaluation of assets it was found that they had appreciated by Rs.
100000 over the value in the aggregate. The article of association of the
company state that in case of liquidation, the preference share holder
would have a further claim of the surplus assets, if any. You are required
to ascertain the value of share assuming that liquidation of the
company has to take place on 31
st
march 2010.






Solution
Step 1- calculate Net assets
Ps + Eq + R&S + P&L+ appreciation on revaluation
Step 2- preference share capital
Step 3- less surplus to preference share holder (10% of surplus)
Result is surplus assets available to equity share holder
Step 5- calculation of value of Rs. 1 of paid-up capital
= total amount available for EQ.S.H / paid-up capital
Step 6- calculate value of each Rs. 5 paid up share
Rs. 5 * value of Rs. 1 of paid-up capital
Step 7- calculate value of each Rs. 2.5 paid up share
Rs. 2.5 * value of Rs. 1 of paid-up capital
Step 8- calculate value of each Rs. 10 paid up share
Rs. 10 * value of Rs. 1 of paid-up capital




Treatment of preference share
The following is the balance sheet of A ltd. On 31
st
march 2008.
Liabilities Assets
2000, 10% P.S. 200000 sundry Assets 1000000
50000 E.S. 500000 discount on Deb. 5000
GR 25000 Pre. Exp. 15000
Debenture RR 50000 P&L a/c 80000
5% debenture* 100000 --------- ------
Depreciation fund* 25000 --------- -------
Creditors* 200000 --------- -------
1100000 1100000
The debenture interest are for one year is outstanding and dividend
on P.S. is arrear for 2 years. In following cases find the value of EQ.S.
and P.S.
Preference share are preferential as to capital and arrears are payable
Preference share are preferential as to capital but arrears are not payable
Preference share do not priority of capital but arrears are payable
Neither Preference share enjoy priority of capital nor the payment of arrears




Solution
Step 1- calculation of Net Assets
Total Assets Total liabilities including outstanding interest

Case :Preference share are preferential as to capital and arrears are payable
Step 1- calculation of assets available for Eq. share holders
Net assets preference share capital arrears of 2 years
Step 2- IVS = assets available for Eq. share holders / No. of Eq. S.
In this case value of preference share is Rs. 100

Case : Preference share are preferential as to capital but arrears are not payable
Step 1- calculation of assets available for Eq. share holders
Net assets preference share capital
Step 2- IVS = assets available for Eq. share holders / No. of Eq. S.
In this case value of preference share is Rs. 100


case: Preference share do not priority of capital but arrears are
Payable
Step 1- calculation of assets available for Equity and Preference share
holders
Net assets arrears of 2 years
Step 2- IVS = assets available for shareholder / No. of Eq. S. + P.S.
holders

case: Neither Preference share enjoy priority of capital nor the
payment of arrears
Step 1 = Net Assets/ No. of Eq. S. + P.S. holders

Yield/Income valuation method
1. Basis of Rate of Dividend:
This method of valuation of share is based on expected income as
dividend on the share. For this purpose Normal rate of return
and rate of dividend are used
Normal rate of return =
given in the question
Rate of dividend =
Amount of dividend x 100 / Paid up share capital
value of one share
Rate of dividend x paid up amount of one share / Normal rate of
return


q. The paid share capital of A Ltd. 2,000, 8% PS of 100 each and
10,000 Es. Of Rs. 50 each. PS are entitled to participate in the
surplus profit to the extant of 1/10 of profit remaining after
payment of 8% Dividend on PS. And 12% dividend on Es. The
balance of profit is available to Eq. share holders. The average
annual profit Rs. 186000 after providing for depreciation and
taxation. It is necessary to transfer Rs. 20,000 p.a. to reserve fund.
The normal return on PS. Is 10% and on Es. Is 12%. Find out the
value of each ES and Ps.
Step 1 calculate surplus
AP Reserve fund PS Dividend Es. Dividend
Step 2. calculate profit available to ES.
Surplus (1/10) part of PS.
Step 3. calculate rate of dividend to PS and ES.
Rate of dividend = total dividend to PS / ES x 100 / Paid up capital
Step 4. Value of one share for PS / ES
= Rate of dividend x paid up amount of one share / NR

Q. Sharad Ltd . Has issued 10,000 ES. Of Rs. 100 each fully paid and
1500, 10% preference shares of Rs. 100 each fully paid. The
company has practice of transferring 20% of profit to general
reserve every year. The annual average profit of the company are
Rs. 6,00,000 before tax and the rate is 50%. Normal rate of return
on equity share is 15%. Find out the value of one equity share.
Step 1. calculate profit available to equity shareholders
AP Tax = xyz, less Transfer to GR, less Dividend for PS.
Step 2. Calculate Expected rate
ER = (profit available / total paid share capital) x 100
Step 3. Calculate value of one share
V. Of share = (Er / Nr) x paid value of share


When different rates of dividend are given in the question
Q. Three year rate of dividend
10%, 15%, 12.5%

Fair value of share - on the basis of minority holding and majority
holding
Minority holding is based on expected rate of return
F.V. of M.H. = IVS + Yield value (based on expected rate of return)
2
Majority holding is based on Average rate of return
F.V. of M.H. = IVS + Yield value (based on Average rate of return)
2

Q. Determine the value of 200 share held by Mr. Ram of A Ltd. to be
transferred to Mr. Ramesh on the basis of minority and majority
basis. The balance sheet of A Ltd. Is as follows on 31
st
march 2010.
Liabilities Assets
80000 Eq. share 800000 Goodwill 40000
GR 260000 Building 300000
P&L a/c 160000 Machinery 360000
Creditors 80000 Debtors 400000
---------- -------- Stock 160000
---------- -------- Cash at Bank 20000
---------- -------- Pre. Exp. 20000
1300000 1300000
Debtors are estimated to be 10% below book value. Dividend was
paid for the last three years at the rate of 14%,18% and 16%
respectively. Normal Expected rate is 10%. P&L a/c shows the net
profit after tax and transfer in general reserve

Solution
Valuation of share of under net assets method
Step 1 calculate net assets available to Equity share holders
Total assets total liabilities
Step 2 IVS = net assets available to Equity share holders / No. of Eq.S
Step 3- calculate intrinsic value of 200 shares
Valuation of share under yield method
Step 1 calculate expected rate of return
= profit after tax and GR * 100
Share capital
Step 2 calculate yield value of shares
Expected rate of return *paid up value of equity share
Normal rate of return
Step 3- yield value of 200 shares
200 * yield value of shares
Determination of yield value of minority holding and majority holding
Step 1- calculate Average rate of actual dividend
14%+18%+16% / 3 = 16%
Step 2- calculate value of one share
Average rate of actual dividend*paid up value of equity share
Normal rate of return
Step 3- yield value of 200 shares
200*16 =3200
Step 4 fair value of minority holding
F.V. of M.H. = IVS + Yield value (based on expected rate of return)
2
Step 5- fair value of majority holding
F.V. of M.H. = IVS + Yield value (based on Average rate of return)
2

Valuation of share by yield basis or market value
Yield denotes the income that the investors get for their investment
In this method yield may represent
1. The entire earning
2. The dividend paid by company
Following are the steps of share valuation by yield method
1. Future maintainable profit are ascertained
2. The normal rate of return is computed
3. Calculation of capitalization factor is to be ascertained
By (100 / normal rate of return)
4. Calculate the capitalized value of future maintainable profit
By ( step 1 X step 2)
5. Calculate the yield value of share
By ( step 4 / Number of equity share)
Q. From the following information calculate the value of an equity
share
1. The paid capital of the company consist of 2000, 12% preference
share of Rs. 100 each and 50,000 equity share of Rs.10 each .
2. The average annual profit of the company after providing for
depreciation and taxation amounted to Rs. 64,000
3. The normal rate of return is 10%

Solution
Step 1 calculate FMP
Net profit after depreciation 64000
Less preference share dividend 24000
Amount available for equity shareholder (FMP) 40000
Step 2 normal rate of return is giver 10%
Step 3 capitalization factor
100/10=10
Step 4 capitalized value of maintainable profit
40000 x 10 = 400000
Step 5 yield value
400000 / 50000 = 8


Dividend basis of yield value
Step 1 calculate value of Expected rate
profit available X 100
Total paid-up equity share
Step 2 calculate value of share
Expected rate x paid-up value of equity share
Normal rate

Earning per share basis
EPS = earning available to equity share holder / number of equity share
Average EPS = paid up value / normal rate of return
Value of per share = (EPS / Average EPS) X paid up value of equity share
AMALGAMATION OF LIMITED COMPANIES
Amalgamation means coming together of two or more
limited companies for betterment of the business. It
includes dissolution of one or more limited
companies and formation of one new company.
There can be three situations as below:
Amalgamation-
when one or more than one existing limited
companies come together and form a new limited
company to take over their business.
Absorption-
when one existing limited company takes over the
business of another existing limited company
External reconstruction
when one limited company is newly formed to take
over the business of another existing limited
company which is a loss making company.
The I.C.A.I has issued Accounting Standard 14
governing the procedure and accounting of
Amalgamation of companies.
Scope:
Accounting Standard 14 [ Accounting for
Amalgamation], prescribed by the Institute of
Chartered Accounts of India, deals with accounting
for amalgamations. The meaning and types of
amalgamation, according to AS 14 are explained
below.


Amalgamation:
Amalgamation means an amalgamation pursuant to
the provision of the Companies Act, 1956 or any
other statute which may be applicable to the
Companies, Amalgamation involves acquisition of
one company by another. After Amalgamation, the
acquired company is dissolved and ceases to exist.
Transferor Company:
Transferor Company means the Company which a
transferor another Company ( vendor company).
Transferee Company:
Transferee Company means the Company into which
a transferor Company is amalgamated (purchasing
company).
Types of Amalgamations
There are two types of Amalgamations.
(a) Amalgamation in the nature of merger.
(b) Amalgamation in the nature of purchase.



Amalgamation in the nature of merger means
which satisfies all the following conditions:
i. All the assets and liabilities of the transferor company
are taken over by the transferee company.
ii. Shareholders holding not less than 90% of the face
value of equity shares of the transferor company
become equity shareholders of the transferee
company by virtue of the amalgamation.
iii. The consideration for the amalgamation receivable
by those equity shareholders of the transferor
company who agree to become equity shareholders
of the transferee company is discharged by the
transferee company wholly by the issue of equity
shares in the transferee company, except that cash
may be paid in respect of any fractional shares.



iv. The business of the transferor company is intended
to be carried on after the amalgamation, by the
transferee company.
v. No adjustment is intended to be made to the book
values of the assets and liabilities of the transferor
company when they are incorporated in the financial
statements of the transferee company except to
ensure uniformity of accounting policies.
Amalgamation in the nature of purchase
If Amalgamation does not satisfy any one of the
above five conditions then it will be regarded as
Amalgamation in the nature of purchase.


PURCHASE CONSIDERATION :
MEANING
Purchase Consideration is the sale price of the
business agreed mutually between the two parties,
the transferor company (selling company) and the
transferee company (purchasing company). The AS
14 defines the Purchase Consideration as the
aggregate of the shares and other securities issue
and payment made in the form of cash or otherwise
by the transferee company to the SHAREHOLDERS
OF THE TRANSFEROR COMPANY.
METHODS OF PURCHASE CONSIDERATION:
a. Lump-sum method:
The problem may give the amount of purchase consideration directly and
hence there will not be any need to calculate the purchase consideration.
e.g. Alka techno Ltd. agrees to take over business of WLC Ltd for a sum of
Rs.10 lakhs.
b. Net Payment Method:
If the purchase consideration is not given Lum-sum then this method
should be adopted. Here the purchase consideration is arrived at by
adding up cash paid and the agreed values of shares, securities issued by
the transferee company to share holders of transferor company in
discharge of the purchase consideration.
e.g. Engineers Ltd. takes over business of Ramesh Ltd. and agrees to pay the
purchase consideration as follows: issue of 10,000 equity shares of Rs.10
each at Rs. 12 each and cash Rs. 50,000. Hence the purchase consideration
would be Rs 10,000 equity shares of Rs.10 each at Rs. 12 each 1,20,000
Cash 50,000 Purchase consideration 1,70,000

Net Assets Method :
If the purchase consideration can not be calculated
by above two methods then this methods should be
adopted. It is the aggregate of the assets taken over
at agreed values less liabilities taken over at agreed
values.
Assets taken over at agreed values,( excluding fictitious
assets) ******
Less : Liabilities taken over at agreed value ******
Purchase consideration ******


Exchange of shares Method / Intrinsic value
Method :
Under this method the intrinsic value of the
shares of both the companies is calculated
and then the transferor company issue the
shares to the transferee company on the basis
of these values.

ACCOUNTING PROCEDURE IN THE BOOKS OF TRANSFEROR
COMPANY:
Step 1. Open following Ledger Accounts
1. Realization A/c
2. Equity Shareholders A/c
3. Preference Shareholders A/c
4. Cash/ Bank A/c
5. Liabilities not taken over A/c
6. Transferee company's A/c
7. Equity Shares in transferee company A/c
8. Preference Shares in transferee company A/c
Step2. Pass following journal entries
Transfer all assets to realization A/c Whether
taken over or not , at their book values.
Realization A/c Dr.
To Sundry assets A/c
Note:
1.Fictitious assets should not be transferred to realization A/c
2. Cash & bank balance should be transferred to realization A/c
only if it taken over by the transferee company
3. Debtors and R.D.D should be treated as separate A/c. Debtors
should be transferred at their gross value on debit side and
R.D.D should be transferred on the credit side of realization
A/c
4. This entry closes all Assets A/c


Transfer all liabilities which are taken over by the
transferee company to realization A/c, credit side
Sundry liabilities A/c Dr.
To Realization A/c
Transfer Equity Share Capital and Reserves to Equity
share holders A/c
Equity share Capital A/c Dr. x
Securities Premium A/c Dr. x
Capital Reserve A/c Dr. x
C.R.R. A/c Dr. x
General Reserve A/c Dr. x
Profit & Loss A/c Dr. x
To Equity Shareholders A/c x


Transfer Preference Share Capital to Preference
Shareholders A/c
Preference Share Capital A/c Dr. x
To Preference Shareholders A/c x
Record the sale of business
Transferee Company A/c Dr. x
To Realization A/c x
( with the amount of purchase Consideration)
Receive the amount of purchase consideration
Equity shares in transferee company A/c Dr x
Preference shares in transferee company A/c Dr. x
Cash/ Bank A/c Dr. x
To Transferee Company A/c x




Dispose off assets not taken over by the transferee company
Cash / Bank A/c Dr. X
To Realization A/c X
Discharge the liabilities not taken over by the Transferee
company.
Liability A/c Dr. X
Realization A/c ( if loss) Dr. x
To Cash / Bank A/c x
To Realization A/c ( if Profit) x
Payment of realization Expenses
Realization A/c Dr. X
To Cash/ Bank A/c. X


Settle the claim of preference shareholders
Preference shareholders A/c. Dr. X
Realization A/c. (if paid at premium) Dr. X
To preference Shares in transferee Co. A/c X
To Cash/ Bank A/c. X
To Realization A/c. ( if paid at discount) X

Balance the Realization A/c.
a. If Profit
Realization A/c Dr. X
To Equity shareholders A/c. X


b. If loss
Equity shareholders A/c. Dr. X
To Realization A/c. X
Close the Equity shareholders A/c.
Equity shareholders A/c. Dr. X
To Equity shares in transferee Co. A/c X
To Cash/ bank A/c X

ACCOUNTING PROCEDURE IN THE BOOKS OF
TRANSFEREE COMPANY :
Following Journal Entries are passed in the books of
transferee company.
PURCHASE METHOD
1. Recording Purchase of Business
Business Purchase A/c Dr. x
To Liquidator of transferor company X
(The entry should be passed at purchase consideration
amount.)


2. Recording of assets and liabilities taken over
Sundry assets A/c Dr. x ( With Agreed values)
Goodwill A/c (if any) Dr. x
To Sundry Liabilities A/c X
To Business Purchase A/c X
To Capital Reserve A/c X
3. Recording Discharge of purchase consideration
Liquidator of transferor company A/c Dr. X
Discount on issue of shares A/c Dr. X
To Equity Share Capital A/c. X
To Preference Share Capital A/c. X
To Securities Premium A/c. X


4. Discharge of Liabilities of Transferor Company
Debentures of Transferor Company A/c Dr. X
Discount on issue of Debentures A/c Dr. X
To new Debentures A/c. X
To Securities Premium A/c. X
5. Recording of payment of liquidation expenses
Capital Reserve/ Goodwill A/c. Dr. X
To Cash/Bank A/c. X
6. Recording of Expenses incurred by the transferee
company for its own formation.
Preliminary Expenses A/c. Dr. X
To Cash / Bank A/c X



7. Recoding of Statutory Reserve of transferor
company
Amalgamation adjustment A/c Dr. X
To Statutory Reserve A/c. X
8. Adjusting of mutual indebtedness of transferor
& transferee company
Sundry Creditors A/c. Dr. X
To Sundry Debtors A/c. X

MERGER METHOD
1. Recording Purchase of Business
Business Purchase A/c Dr.
To Liquidator of transferor company
(The entry should be passed at purchase consideration amount.)

2. Recording of assets and liabilities taken over
Sundry assets A/c Dr.
General Reserve A/c (if any) Dr.
To All Reserves of transferor co.(except General reserve)
To Sundry Liabilities A/c
To Business Purchase A/c
To General Reserve A/c (Balancing figure)

3. Recording Discharge of purchase consideration
Liquidator of transferor company A/c Dr.
Discount on issue of shares A/c Dr.
To Equity Share Capital A/c.
To Preference Share Capital A/c.
To Securities Premium A/c.

4. Discharge of Liabilities of Transferor Company
Debentures of Transferor Company A/c Dr.
Discount on issue of Debentures A/c Dr.
To new Debentures A/c.
To Securities Premium A/c.

5. Recording of payment of liquidation expenses
General Reserve/ A/c. Dr.
To Cash/Bank A/c.

6. Recording of Expenses incurred by the transferee company for
its own formation.
Preliminary Expenses A/c. Dr.
To Cash / Bank A/c

7. Adjusting of mutual indebtedness of transferor & transferee
company
Sundry Creditors A/c. Dr.
To Sundry Debtors A/c.

Solution: 1.
Offer of Nishith Ltd.
a) Purchase consideration: Rs.18,00,000
b) Statement of net assets taken over All assets taken over at
agreed values:
Goodwill 100000
Land & Building 500000
Furniture 80000
Sundry Debtors 450000
Stock 380000
Bank 90000
total Assets 1600000
Less: liabilities 175000
1425000 Net Assets

Net assets taken over 1425000
Less: Purchase Consideration 1800000
capital reserve 375000
2. Offer of Waridhi Ltd.
a) Purchase consideration
(10,000/2 x25) equity shares of Rs.10 12,50,000
9% Preference shares of Rs. 100 each 2,00,000
total 14,50,000
b) Statement of net assets taken over
total Assets 1600000
Less: liabilities 175000
1425000 Net Assets
Less: consideration 1450000
Capital Reserve 25000


3. Offer of Roohi Ltd.
a) Purchase consideration (Net assets method)
All assets taken over at agreed values:
Goodwill 200000
Land &Building 700000
Furniture 50000
Sundry Debtors 400000
Stock 340000
Bank 90000
Total Assets 1780000
Less: liabilities 166250
Net Assets (P. Consideration) 1433750



Discharge of purchase consideration
10% Preference shares of Rs. 100 each 2,00,000
1,23,375 Equity shares of Rs. 10 each 12,33,750
Total 14,33,750

4. Offer of Ashna ltd.
Total assets 1600000 100000 + 200000= 1700000
Less : Liabilities taken over
Sundry Creditors 175000
Net Assets (P. Consideration) 1525000
Discharge of purchase consideration
2,000 9% Preference shares of Rs. 100 each at par
2,00,000
1,06,000 equity shares of Rs. 10 each at Rs. 12.50
13,25,000



Total Assets
1140000 307900 = 832100
Less: Liabilities taken over at agreed values
10% Debentures 100000
Sundry Creditors 100000
Bank Overdraft 240000 440000
Net Assets taken over 392100
Less: Purchase consideration 315000
Capital Reserve 77100




Holding Companies
A holding company is one which directly or
indirectly acquires either all or more than half
the number of Equity shares in one or more
companies so as to secure a controlling
interest in such companies, which are then
known as subsidiary companies.

MEANING UNDER COMPANIES ACT 1956
Subsidiaries companies
Section 4 of the companies Act, 1956 defines a
subsidiary company.
A company is a subsidiary of another if and only if
a) That other company controls the composition of its
Board of Directors; or
b) Where the first mentioned company is any other
company, holds more than half in nominal value of
its Equity share capitals.
OR
The company is a subsidiary of any company which is
that other companys subsidiary.
ADVANTAGES OF HOLDING COMPANIES
Following are the advantages of Holding Company:
1) Subsidiary company maintained their separate identity.
2) The public may not be aware the existence of combination
among the various company.
3) Holding company need not to be invest entire amount in the
share capital in subsidiary company still enjoy controlling
power in such company.
4) It would be possible to carry forward losses for income tax
purposes.
5) Each subsidiary company prepares its own accounts and
therefore financial position and profitability of each
undertaking is known.
6) Holding company may additional acquired or disposed of and
the shares in subsidiary company in market whenever if
desired.

CONSOLIDATION OF BALANCE SHEET
Consolidated balance sheet is nothing but addicting of up or
combining the balance sheet of holding and its subsidiary
together. However assets and liabilities are straight forward,
i.e. added line to line and combination of share capital,
reserves, and accumulated losses are not directly added in
consolidated balance sheet.

Preparation of consolidated balance sheet
The following points need special attention while preparing
consolidated balance sheet.
1) Share of holding company and share of minority (outside
shareholders).
2) Date of Balance sheet of holding company and that of various
subsidiary companies must be same. If they are not so
necessary adjustment must be made before consolidation.
3) Date of Acquisition of control in subsidiary companies.
4) Inter company owing.
5) Revaluation of fixed assets as on date of acquisition,
depreciation, adjustment on revaluation amount etc. which
are discussed here in after.
COST OF CONTROL / GOODWILL / CAPITAL RESERVE :
If the amount paid by the holding company for the
shares of subsidiary company is more than its
proportionate share in the net asset of the subsidiary
company as on the date of acquisition, the difference
is considered as goodwill.
If there is excess of proportionate share in net assets
of subsidiary company intrinsic of shares acquired
and cost of shares acquired by holding company
there will be capital reserve in favour of holding
company.
Calculation of Goodwill / Capital Reserve

Cost of investment in Subsidiary company ******
Less : 1) Share in share capital
2) Share in Reserves and surpluses
3)Share in capital profit
4)Appreciation in fixed assets ******
If cost of investment is more than, it is Goodwill
If cost of investment is less than, it is Capital Reserve


Balance sheet of S Ltd. as on 31st March 2010 (Liabilities only)
Rs.
Share capital 40,000 Equity shares of Rs. 10/- each 4,00,000
Reserves and surpluses 2,50,000
Secured loan 2,50,000
Other Liabilities 1,00,000
10,00,000
On the above date H Ltd. acquired 30,000 Equity shares in S
Ltd. on the above date for Rs. 7,50,000 fixed assets of S Ltd. were
appreciated by Rs. 1,50,000 find out cost of control / Goodwill.
MINORITY INTEREST
The claim of outside shareholders in the subsidiary company
has to be assessed and shown as liability in the consolidated
balance sheet. Minority interest in the net assets of the company is
nothing but the proportionate share of aggregation of share capital,
reserve surpluses funds etc. proportionate share of all assets
should be deducted from the minority interest.
Thus, minority interest is the share of outsider in the
following.
1) Share in share capital in subsidiary.
2) Share in reserves (Both pre and post acquisition of subsidiary).
3) Share in accumulated losses should be deducted.
4) Proportionate share of profit or loss on revaluation of assets.
5) Preference share capital of subsidiary company held by
outsiders and dividend due on such share capital, if there are
profits.
Minority interest means outsiders interest. It is treated as
liability and shown in consolidated. Balance sheet as current
liability. This amount is basically intrinsic value of shares held by
minority.