Accounting for issue of shares

and debentures
Define the issue price of shares
Differentiate between preference shares, ordinary chares
and deferred shares
Distinguish between issued capital, uncalled capital and
share capital or paid-up capital
Describe the concept of partly paid shares and calls on
unpaid share capital
Account for public company share issues
Define the various costs associated with share issues and
account for those costs
Differentiate between debentures, mortgage debentures and
unsecured notes
Account for the issue and redemption of debentures
 Share Capital
•Owners of companies are called shareholders
•Founding members are also known as subscribers
•All shareholders are sometimes referred to as
members
•Shares in a Public company can be purchased
when the company issues a prospectus
•Shares in a Public company can also be traded on
the stock exchange
 Issue price of shares
Maximization of shareholder wealth
Effect on the market price of existing shares
Requirement to sell a desired volume of shares
Expectation of future profits and dividends to service the
new shares
Whether ASX listing is proposed or already exists
Usage of an underwriter
Uncalled and paid up share
capital
Shares can be issued to be paid in full or issued partly paid
with the balance paid at a future date(s)
Amounts to be paid at a future date are referred to as calls
A company’s share capital is also referred to as paid-up
capital = number of shares issued by the amount that the
directors require as payment of shares
The amount not required for payment is referred to as the
uncalled amount
Share Capital Uncalled capital

No of shares 100,000 100,000

issued
Amt 0.50 1.50
called/uncalled
Total $50,000 $150,000
 Classes of Shares
Ordinary Shares
Preference Shares
Deferred or founder Shares
 Ordinary Shares
Basic type
Full voting rights
Right to receive dividends
 Preference Shares
Preferential rights to a fixed rate of dividends before
dividends to ordinary shareholders are declared
Repayment of capital when company is wound up
Participation in surplus assets and profits
Cumulative and non-cumulative dividends
Voting rights
Priority of payment of capital and dividends
Deferred or Founder Shares
Issued to initial subscribers
Dividends usually paid after being paid to other
shareholders
Founders are shareholders who start up the company
before shares are issued to the public
Provider establishment costs and issue the prospectus
 Share Issue Procedure
Registration of members
Disclosure of rights and liabilities of share issue
The class of share being issued
Share price and no of shares issued

The amount that must be paid for each share with the

application (on allotment and future calls)

The minimum subscription

The allotment process

The treatment of over subscription

Procedure for issuing shares
under a prospectus
The Prospectus together with an application form is made
available to the general public.
Application monies are held in trust
Minimum subscription must be received before allotment
Allotment at director’s discretion
Allotment advice is communicated to the applicant
Allotment monies may be required at this stage.
Share capital issued upon the
registration of a company

Subscribers Dr
Share Cr
Capital
Issue shares to Subscribers

Bank Dr
Subscribers Cr
Subscriber Receipt upon Payment
 Share capital issued by
prospectus
Payment in full on application
Part payment on application, balance payable on allotment
of the shares
Part payment on application and allotment, with the
balance payable in calls
Shares issued fully paid on
application
Fully paid on application
Number of shares issued by the directors agrees exactly
with the no applied for
All applicants have been received with the full amount
Shares issued fully paid on
application Journal Entry

General Journal
Trust Dr
Account
Application Cr
Record the receipt of monies
from applicants
Shares issued fully paid on
application Journal Entry

General Journal
Application Dr
Share Cr
Capital
Allot shares to Applicants
Shares issued fully paid on
application Journal Entry

General Journal
Bank Dr
Trust Cr
Account
Issuing of Shares to Applicants
 Under subscribed and
oversubscribed share issue Jnl
Entry
General Journal
Trust Acc Dr
Application Cr
Applicants deposits
 Under subscribed and
oversubscribed share issue Jnl
Entry Cont.
General Journal
Application Dr
Share Cr
Capital
Allot shares to Applicants
 Under subscribed and
oversubscribed share issue Jnl
Entry Cont.
General Journal
Application Dr
Trust Acc Cr
Refund Applicants deposits
 Under subscribed and
oversubscribed share issue Jnl
Entry Cont.
General Journal
Bank Dr
Trust Acc Cr
Issue Shares to Applicants
Shares issued partly paid on
application with the balance
payable on allotment
General Journal
Trust Dr
Account
Application Cr
Record receipt of application
monies
Shares issued partly paid on
application with the balance
payable on allotment
General Journal
Application Dr
Share capital Cr
Allot shares to applicants
Shares issued partly paid on
application with the balance
payable on allotment
General Journal
Bank Dr
Trust Acc Cr
Transfer trust account money
Shares issued partly paid on
application with the balance
payable on allotment
General Journal
Allotment Dr
Share capital Cr
Shares issued partly paid on
application with the balance
payable on allotment
General Journal
Bank Dr
Allotment Cr
 Shares issued payable on
application and allotment and
subject to future calls
General Journal
Trust Dr
Account
Application Cr
Record receipt of application
monies
 Shares issued payable on
application and allotment and
subject to future calls
General Journal
Application Dr
Share capital Cr
Allot shares to applicant
 Shares issued payable on
application and allotment and
subject to future calls
General Journal
Bank Dr
Trust Cr
Account
Transfer trust account monies
 Shares issued payable on
application and allotment and
subject to future calls
General Journal
Allotment Dr
Share capital Cr
Record amount owing on
allotment
 Shares issued payable on
application and allotment and
subject to future calls
General Journal
Bank Dr
Allotment Cr
Record receipt of allotment
monies
 Shares issued payable on
application and allotment and
subject to future calls
General Journal
Call Dr
Share capital Cr
Record amount owing by
shareholders for the call
 Shares issued payable on
application and allotment and
subject to future calls
General Journal
Bank Dr
Call Cr
Record amount received in
respect of the call
 Calls in arrears
Call on shares is made
Co may not receive all call monies owed
Call account remains in a debit balance
New account – Call in arrears and the above is transferred
to this account
Call in arrears = Shareholder equity account = reduction in
share capital
Co constitution may call for shareholders with calls in
arrears to forfeit their shares and the share reissued
Retention of excess application
monies
Prospectus issued calls for monies to be paid on
application, allotment and future calls
Some applicants may forward all monies in the hope that
they receive preferential treatment.
Co may choose to keep this money and allocate it against
money owing on allotment and future calls
Directors can only make this decision if allowed by Co
constitution
Retention of excess application
monies
Amt received from
applications allocated
to
Calls in
Advance
Shares Paid Amt Shares Application Allotment Call 1 Call 2 Application
applied to $ received Allotted of $ of $ $ $ refund $
for $
Accounting for retention of
excess application money

General Journal
Trust Dr
Account
Application Cr
Record the receipt of application
money
Accounting for retention of
excess application money

General Journal
Application Dr
Share Capital Cr
Allot shares to applicants
Accounting for retention of
excess application money

General Journal
Allotment Dr
Share Capital Cr
Issue shares on allotment
Accounting for retention of
excess application money

General Journal
Application Dr
Trust Cr
Account
Refund application money
Accounting for retention of
excess application money

General Journal
Bank Dr
Trust Cr
Account
Transfer trust account money
Accounting for retention of
excess application money

General Journal
Application Dr
Allotment Cr
Application money retained
against allotment
Accounting for retention of
excess application money

General Journal
Application Dr
Calls in Cr
Advance
Excess application money
applied to future calls
Accounting for retention of
excess application money

General Journal
Call Dr
Share Capital Cr
First Call
Accounting for retention of
excess application money

General Journal
Cash in Dr
advance
Calls Cr
Records calls in advance against
call
Accounting for retention of
excess application money

General Journal
Bank Dr
Calls Cr
Call money owing is received
Costs associated with share issue
 Preparation of prospectus
 Lodgment with ASIC
 Publication
 Receipt of money
 Issue of shares
 Including stamp duty and taxes, professional advisers’
fees, underwriting costs, commissions and brokerage fees
 The above “equity issue costs” must be recognized in
equity
 Indirect costs are not included as transaction costs.
Costs associated with share issue

General Journal
Transaction Dr
costs
Bank Cr
Recording of transaction costs as
per AASB 1015
 Bookbuilding
 Occurs where an investment banker solicits
bids from institutional investors prior to
pricing an equity issue
 Stapled securities
 Stapling is an arrangement under which
different securities are quoted jointly
 Issuing Debentures
 Issuing of debt
 Attracts interest
 Must be repaid in a specified time frame
 Borrower
 Lender = principal
 Interest = Charge (Fixed or Floating)
 Maturity date
 Redemption
 Issued via prospectus to the general public and also privately to
elite few
 Must appoint a trustee
 Clear disclosure of all matters relating to the debentures
 Mortgage Debenture
 Secured by a first mortgage over land and/or buildings
 Cannot exceed >60% of the value of asset
 Limits rights to resell/transfer asset
 Trustee can take possession and sell to repay debenture
holders
 Unsecured Note
 Debt which is not secured by any charge over assets
 Higher risk = higher rate of interest
 Convertible Note
 Allows debenture holder to convert debt to paid up
share capital or cash upon maturity
Contrast Funds from equity and
debt
Shares Debt
Ownership entitlement No Ownership entitlement
Voting rights No Voting rights
Dilute ownership Do not share profits
Payment of Dividend is at discretion of Fixed regular income
Directors
Does not have to be repaid Must be repaid
No restriction on amount of share issue Specific debt/equity ratio
Dividends = Profit Interest = Expense
Accounting entries for the issue
and redemption of debentures

General Journal
Trust Account- Dr
Debentures
Application - Cr
Debentures
Accounting entries for the issue
of debentures

General Journal
Application - Dr
Debentures
Debentures Cr
Trust Acc - Cr
Debentures
Allot debentures and refund
excess application monies
Accounting entries for the issue
of debentures

General Journal
Bank Dr
Trust Acc - Cr
Debentures
Transfer of trust monies
Making annual interest
payments on debentures

General Journal
Interest Dr
Bank Cr
Payment of interest
Making annual interest
payments on debentures

General Journal
Interest on Dr
debentures
Accrued Cr
expense
Interest incurred but not due for
payment on annual balance date
Making annual interest
payments on debentures

General Journal
Accrued Dr
expense
Interest on Cr
debentures
Reversal entry
Accounting entries for the
redemption of debentures

General Journal
Interest - Dr
Debentures
Bank Cr
Final interest payment
Accounting entries for the
redemption of debentures

General Journal
Debentures Dr
Bank Cr
Payment of debenture holders on
redemption
 Accounting entries for the
redemption prior to maturity
at a discount
General Journal
Debentures Dr
Discount on Cr
debenture redemption
Bank Cr
Payment of debenture holders on
redemption at discount
Alternate accounts for debt
issues
Debenture Mortgage Unsecured
Debenture Note
Applications Applications Applications
Debentures Mortgage Unsecured
Debentures Notes
Interest Interest Interest
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