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STUDY NOTE - 7
JOINT STOCK COMPANIES
● Introduction
● Shares
◗ Issue of Shares at par, discount & premium, Forfeiture, Reissue of Shares.
◗ Right issue.
◗ Buy Back of Shares.
◗ Redemption of Preference Shares.
● Profit Prior to Incorporation.
● Debentures
◗ Issue and Redemption.
7.1. INTRODUCTION
Meaning of a Company
A company is a voluntary and autonomous association of certain persons with capital divided
into numerous transferable shares formed to carry out a particular purpose in common. It is an
artificial person created by law to achieve the object for which it is formed. Section 3(1) (i) of
the Companies Act, 1956 defines a company as “Company formed and registered under this
Act or an existing company.” An existing company means a company formed and registered
under any of the former Companies Acts. Thus it is an abstract person, invisible, intangible
and existing only in contemplation of law. It can hold, purchase or sell both movable and
immovable property, incur and pay debts, open a bank account in its own name and sue and
be sued in the same manner as an individual. Law creates it and law only can dissolve it. Its
existence is altogether independent of the life of its members. Members may come and go but
the company would go on for ever. Transferability of shares has given perpetual succession to
a company. Death, insanity or insolvency of a member or any member will not affect the exist-
ence of the company at all. A company is a legal entity quite distinct and separate from the
persons who are its members. A company cannot ordinarily buy its own shares. A shareholder
is not the agent of the company. He cannot incur any debt so as to bind the company. They
cannot bind the company by their acts. The same person can be a shareholder and a creditor of
the company. The ownership is divorced from management because a joint stock company is’
managed by a Board of Directors elected by the shareholders (i.e. owners).
Statutory Books
Statutory books are those which a limited company is under statutory obligation to maintain at
its registered office. The main statutory books are :
(i) Register of Investments held and their names
(ii) Register of charges
(iii) Register of Members
(iv) Register of debenture holders
(v) Annual returns
(vi) Minutes books
(vii) Register of contracts
(viii) Register of Directors
(ix) Register of shareholdings of the directors
(x) Register of loans to companies under the same management
(xi) Register of Investment in the shares of other companies.
Books of Account
Every company is required to keep at its registered office books of account.
These books are to be maintained in such a way so as to disclose
(a) The sums of money received and expended by the company and the matter in respect of
which the receipt and expenditure has taken place.
Equity Preference
Share Capital
No trading concern can run without capital. The divisions of share capital are:
(i) Nominal or Registered or Authorized Capital. The amount of capital with which the
company intends to be registered is called registered capital. It is the maximum amount
which the company is authorized to raise by way of public subscription. There is no legal
limit on the extent of the amount of authorized capital.
(ii) Issued Capital. That part of the authorized capital which is offered to the public for sub-
scription is called issued capital.
(iii) Subscribed Capital. That part of the issued capital for which applications are received
from the public is called the subscribed capital.
(iv) Called up Capital. The amount on the shares which is actually demanded by the com-
pany to be paid is known as called up capital.
(v) Paid up Capital. The part of the called up capital which is offered and is actually paid by
the members is known as paid up capital. The sum which is still to be paid is known as
calls in arrears.
(vi) Reserve Capital. A company may determine by a special resolution that any portion of its
share capital which has not been already called up shall not be capable of being called-up
except in the event of winding up of the company. Such type of share capital is known as
reserve capital.
Allotment of Shares
After receiving the applications the directors take steps to allot the shares. Allotment of shares
means acceptance of the offer of the applicant for the purchase of shares. Directors have discre-
tionary power either to reject or to accept partially the applications. There are no restrictions
on the rights of a private company to allot its shares. But the public company cannot allot its
shares unless:
i. The minimum subscription stated in the prospectus has been subscribed by the public.
ii. A prospectus or a statement in lieu of prospectus has been filed with the Registrar before
making the first allotment.
iii. The amount of application, i.e., at least 5% of the face value has been received.
The applicants, to whom shares are allotted, will be sent allotment letters. After allotment,
they become the shareholders of the company. Those to whom shares could not be allotted
will be sent a letter of regret alongwith refund of their application money. The shareholders
will be required to pay the allotment money on allotment of shares which will also be recorded
in the Application and Allotment Book.
Calls on Shares
Out of the face value of the shares, 5% is payable with application, some money will be paid on
allotment and rest money will be paid as and when calls are made by the company. Generally
the prospectus gives the dates of different calls alongwith the amount of the calls by share-
holders. In case it is not given in the prospectus, the directors have the discretion to call it in
one call or more than one call. For this a resolution of the Board of Directors must be passed
and a notice is sent to the shareholders with a request to pay the amount of the call. As soon as
a call notice is sent, its particulars are entered in a separate book known as Share Call Book, a
specimen of which is given on the next page.
Note :
If part of the forfeited shares are reissued, then profit shall have to be calculated proportionately
as follows :
Illustration 1:
PK Ltd. made an issue of 10,00,000 equity shares of Rs. 10 each, payable Rs. 2 on application,
Rs. 4 on allotment and Rs. 4 on call. All the shares are subscribed and amounts duly received.
Pass journal entries to give effect to these. Also show relevant items in the Balance Sheet.
Solution P K Ltd.
JOURNALS
10,000 10,000
When a company issues both preference and equity shares then it is desirable that the entries
for application money, allotment money and calls money should be separately passed for each
type of share capital. The word Equity or Preference must invariably be used in all the circum-
stances.
If the shares have been allotted to any person or firm from whom the company has purchased
any asset, the following entry will be passed:
This fact should also be disclosed in the Balance Sheet while showing the issued, subscribed
and paid up capital.
A company may issue shares at a premium, i.e., at a value greater than its face value. The
power to issue shares at a premium need not be given in the Articles of Association. Premium
so received shall be credited to a separate account called Security Premium Account.
Section 78 of the Companies Act, 1956 gives the purposes for which share premium
account may be applied by the company. These are:
(i) For the issue of fully paid bonus shares to the members of the company;
(ii) For writing off preliminary expenses of the company;
(iii) For writing off the expenses of the commission paid or discount allowed on any issue of
shares or debentures of the company; and
(iv) For providing premium payable on the redemption of any redeemable preference shares
or debentures of the company.
Illustration 2:
AB & Co. Ltd. issued 500,00,000 Equity shares of Rs. 10 each at a premium of Rs 4 per share
payable Re.1 per share on application. Rs. 6 per share on allotment (including premium), Rs. 3
on first call and the balance on final call. The shares were all subscribed and all money due was
received except the first call money on 1,00,000 shares and the Final call money on 1,50,000
shares.
Give the Cash Book and Journal entries to record the above transactions.
Solution
6,991 6,991
JOURNALS
Rs/Lakh Rs/Lakh
Equity Share Application A/c Dr. 500
To Equity Share Capital A/c 500
Illustration 3 : A Company invited the public to subscribe for 10,000,000 Equity Shares of
Rs.100 each at a premium of Rs. 10 per share payable on allotment. Payments were to be made
as follows: On application Rs. 20; on allotment Rs. 40; on first call Rs. 30 and on final call Rs.20.
Applications were received for 13,000,000 shares; applications for 2,000,000 shares were rejected
and allotment was made proportionately to the remaining applicants. Both the calls were made
and all the moneys were received except the final call on 300,000 shares which are forfeited
after due notice. Later 200,000 of the forfeited shares were issued as fully paid at Rs. 85 per
share. Pass Journal entries. JOURNALS
Solution
Particulars Rs.’000 Rs.’000
Bank Account Dr. 260,000
To Equity Share Application Account 260,000
Share application money received on
13,000,000 eq. shares @ Rs.20 each
Equity Share Application Account Dr. 40,000
To Bank 40,000
(Appl. On 2,000,000 rejected)
Equity Share Application Account Dr 220,000
To Equity Share Capital Account 200,000
To Equity Share Allotment account 20,000
(Share application money transferred to
share capital account and excess money
used for share allotment.)
Equity Share Allotment account Dr. 400,000
To Equity Share Capital Account 300,000
To Security Premium Account 100,000
(Share Allotment due on 10,000,000 shares
@ Rs. 40 per share as per the
resolution of the Board of Directors)
Bank Account Dr. 380,000
To Equity Share Allotment Account 380,000
(Allotment money received)
Equity Share first call Account Dr 300,000
To Equity Share Capital Account 300,000
(First call money due)
Bank Account Dr 300,000
To Equity Share First call Account 300,000
First call money received)
Equity Share Final Call A/C Dr. 200,000
To Equity Share Capital Account 200,000
(Share Final Call due)
Bank Account Dr. 194,000
To Equity Sh. Final Call A/C 194,000
(Final Call money received except 300,000
Shares)
Equity Share Capital Account Dr 30,000
480 Financial Accounting
Working:
Rs’000
(200,000/300,000) x 24,000 = 16,000
Less, Discount on Reissue 3,000
Transferred to Capital Reserve 13,000
Balance of Forfeited share account will be shown in balance sheet as ‘Forfeited Share Ac-
count” in liability side.
Illustration 4 :
(5) Equity Share First & Final Call A/c Dr. 1,20,000
To Equity Share Capital A/c 1,20,000
(Being share call money due on 4,800 shares)
@ Rs. 25 per share as per Board’s resolution no. dated)
X Ltd.
Balance Sheet as at ....
Liabilities Rs. Rs. Assets Rs. Rs.
Authorised Capital : Fixed Assets
5,000 Eq. shares of Investments
Rs. 100 each 5,00,000
Issued, Subscribed, Current Assets,
Called up & Loans & Advances
Paid up Capital
4,795 Equity Shares
@ Rs. 100 4,79,500 Cast at Bank 4,32,135
Reserves & Surplus Miscelleaneous
Capital Reserve 460 Expenditure
shares Forfeited A/c 125 (to the extent
Secured & Unsecured not written off)
Loans xxx Discount on Issue
Current Liabilities & of Shares 47,950
Provisions xxx
4,80,085 4,80,085
Illustration 8:A limited Company was registered with a capital of Rs. 5,00,000 is share of
Rs. 100 each and issued 2,000 such shares at a premium of Rs.20 per share, payable as Rs.20
per share on application, Rs. 50 per share on allotment (including premimu) and Rs. 20 per
share on first call made three months later. All the money payable on application, and allot-
ment were duly received but when the first call was made, one shareholder paid the entire
balance on his holding of 30 shares, and another shareholder holding 100 shares failed to
pay the first call money.
Required: Give Journal entries to record the above transactions and show how they will
apperar in the company’s Balance Sheet.
Solution :
Journal
Dr. Cr.
Particulars L.F. Amount Amount
Rs. Rs.
Bank A/c Dr 40,000
To Share Application A/c 40,000
[Being the issue of 2,000 shares and application
mony received @ Rs 20 per share]
Illustration 9: B Ltd purchase the assets of Rs. 10,80,000 from C Ltd. The cosideration
was payable in fully paid equity shares of Rs. 100 each.
Required: Show the necessary journal entries in books of B Ltd. assuming that —
a) Such shares are issued at per
b) Such shares are issued at premium of 20%
c) Such shares are issued at discount of 10%
Solution :
Journal
Dr. Cr.
Particulars L.F. Amount Amount
Rs. Rs.
Entry in all cases
Sundry Assets A/c Dr 10,80,000
To C Ltd. 10,80,000
[Being the purchase of assets from Y Ltd. as
per agreement dated...)
(Contd.)
Case (a) When Shares are issued at per
C Ltd. Dr 10,80,000
To Equity Share Capital A/c 10,80,000
(Being the issue of 10,800 shares at par to C Ltd. as
per agreement dated...)
Case (b) When Shares are issued at a premlum of 20%
C Ltd. Dr 10,80,000
To Equity Share Capital A/c 9,00,000
To Securities Premium A/c 1,80,000
(Being the issue of 9,000 shares at 20% premium to
C Ltd. as per Board’s Resolution dated...)
Case (c) When Shares are issued at a discount of 10%
C Ltd. Dr 10,80,000
Discount on Issue of Shares A/c Dr 1,20,000
To Equity Share Capital A/c 12,00,000
(Being the issue of 12,000 shares at a discount of 10% to
C Ltd., as per Board’s Resolution dated...)
Working Note: Calculation of No. of Shares to be issed in different cases
Journal
Dr. Cr.
Particulars L.F. Amount Amount
Rs. Rs.
Goodwil A/c Dr 2,00,000
To Share Capital A/c 2,00,000
[Being the issue of 2,000 shares of Rs 100 each at par to
promoters as per Board’s Resolution dated...) (Contd.)
(Contd.)
Illustration 11: On 1st May 2008 Superman Ltd. issued 5,000 Equity Shares of Rs 100 each
payable as follows:
Rs Rs
On application 20 On 1st Call 20 (Last date fixed for payment
31st July)
On allotment 30 On Final Call 30 (Last date fixed for payment
30th August)
Applications were received on 15th May 2008 for 6,000 shares and allotment was made
on 1st June 2008. Applicants for 2,500 shares were allotted in full, those for 3,000 shares
were allotted 2,500 shares and applications for 500 shares were rejected.
Balance of amount due on allotment was received on 15th June.
The calls were duly made on 1st July,2008 and 1st August 2008 respectively. One share-
holder did not pay the 1st Call money on 150 shares which he paid with the final call to-
gether with interest at 5% p.a. Another shareholder holding 100 shares did not pay the final
call money till end of the accounting year which ends on 31st October.
Illustration 12: Priyanka Industries Ltd. has an authorised capital Rs 2,00,000 divided into
shares of Rs 100 each. Of these, 600 shares were issued as fully pais in payment of machinery
purchased from Z Ltd. 800 shares were subscribed for by the public and during the first year
Rs 50 per share was called up payable Rs 20 on application, Rs. 10 on allotment, Rs. 10 on
the first call and Rs. 10 on second call. The amounts received in respect of these shares were
as follows:-
On 600 Shares Full amount called up
On 125 Shares Rs 40 Per Share “ “
On 50 Shares Rs 30 Per Share “ “
On 25 Shares Rs 20 Per Share “ “
The directors forfeited the 75 shares, on which less than Rs 40 per share had been paid.
Required: Give Journal Entries recording the above transactions (including cash transac-
tions) and show how Share Capital would appear in the Balance-Sheet of the Compan, in
accordance with Part 1 of Schedule VI to the Companies Act.
Solution:
Journals
Liabilrties Rs Assets Rs
Share Capital: Fixed Assets:
Authorised Capital Machinery 60,000
2,000 Shares of Rs 100 each 2,00,000 Current Assets:
issued Capital: Cash at Bank 37,000
1,400 Shares of Rs 100 each 1,40,000
Subscribed Capital:
600 Shares of Rs 100 each 60,000
725 Shares of Rs 100 each,
Rs 50 per share called up 36,250
(Of the above shares 600
shares are allotted as fully paid
(Contd.)
(Contd.)
up pursuant to a contract
without payments being
received in cash) 96,250
Less: Calls Unpaid 1,250
95,000
Add: Forfeited Shares 2,000
97,000 97,000
Illustration 13: SOS Limited issued a prospectus inviting applications for 6,000 shares of Rs
10 each at a premium of Rs 2 per share, payable as follows;
On application Rs 2 per share; On allotment Rs 5 per share (including premium): On 1st
call Rs 3 per share; On Second and Final Call Rs 2 per share.,
Applications were receive for 9,000 shares and allotment was made prorata to the appli-
cants of 7,500 shares, the remaing applicants were refused allotment. Money overpaid on
applications were applied towards sums due on allotment.
D to whom 100 shares were allotted, failed to pay the allotment money and on his subse-
quent failure to pay the first call, his shares were forfeited. Z,the holder of 200 shares, failed
to pay both the calls, and his shares were forfeited after the second and final call.
Of the shares forfeited 200 shares were sold to C credited as fully paid up for Rs 8.50 per
share, the whole of D’s shares being included.
Required: Show Journal and Cash Book enteries in the books of the company.
Solution:
Dr. Cash Book ( Book Column) Cr.
Particulars Rs Particulars Rs
To Share Capital: 18,000 By Share Application A/c 3,000
(Rs. 2 on 9,000 shares)
To Share Allotment A/c 26,550 By Balance c/d 71,750
(allotment money received)
To Share 1st Call A/c 17,100
(Rs. 3on 5,700 shares)
To Share 2nd & Final Call A/c 11,400
To Share Capital A/c 1,700
74,750 74,750
Journals
Particulars L.F. Dr. (Rs) Cr. (Rs)
Share Application A/c Dr 12,000
To Share Capital 12,000
(Being Share application money transferred to Share Capital
Account)
Share Application A/c Dr 12,000
To Share Allotment A/c 12,000
(Being Share application money at Rs.2 on 1,500 shares
adjusted against allotment.)
Working Notes : (i) Calculation of the amount due but no paid on allotment in Case of D.
No. of applied Shares by Mr. D. (100 x 7500/6,500) 125
(Contd.)
Working Notes : (i) Calculation of the amount due but no paid on allotment in Case of Mohit
Rs.
Total No. of shares applied Shares by Ramesh (40 x 2,400/2,000) 48
Total money sent on application by Ramesh (48 x Rs. 2) 96
Excess application money [ Rs 96 - (40 x Rs. 2)] 16
Total amount due on allotment ( 40x Rs. 5) 200
Amount due but not paid on allotment (Rs. 200 —Rs 16) 184
(ii) Calculation of allotment money received later on
Total allotment money due (2,000 x Rs.5) 10,000
Less: (a) Already received Rs. 800
(b) Not received (as per note 1) Rs. 184 984
9,016
Journals
Dr. Cr.
Particulars L.F. Amount Amount
Rs. Rs.
Bank A/c Dr 90,000
To Share Application A/c 90,000
(Being the application money received on 30,000 shares)
Share Application A/c Dr 90,000
To Share Capital A/c 40,000
To Share Capital A/c 20,000
To Bank A/c 10,800
To Share Allotment A/c 10,200
(Being the application money adjusted and surplus refunded)
(Contd.)
(Contd.)
Working Notes : (i) Calculation of the amount due but no paid on allotment in Case of Arunavo
Rs.
Total No.of shares applied by Arunavo (400x24,000/20,000) 480
Total money sent on application by Arunavo (480x Rs.3) 1440
Excess applicaiton money [Rs. 1440 - (Rs. 400 x Rs.3) 240
Total amount due on allotment (Rs.1600 - Rs.240) 1360
(ii) Calculation of allotment money received latter on
Total allotment money due ( 20,000 x Rs.4) 80,000
Less : (a) Already received (4,000 x 3) 12,000
(b) Not received (as per note I) 1,360 13,360
66,640
(iii) Since the question is silent as to the utilization of Rs.240 (received from Arunavo)
between share capital and Securities premium, it has been assumed that the entire
excess of Rs. 240 is exclusively for share capital and hence credited to Forfeited Shares
Account in full.
Illustration 16: Hero Limited issued 10,000 equity shares of Rs. 100 each at premium of
Rs. 25 per share. Under the erms of the isue, the shares were to be paid for as follows :
Rs.
2008 January 1, on application (including Rs. 25
premium on issue per share) 50
February 1, on allotment 50
April 1, balance of 25
The issue was over subscribed. The applications received are summarised below :
A B C
Number of applicants in categories 40 20 1
Applied for by each applicant in the three categories 200 2000 8000
Issued to each applicant 100 200 2000
One of the conditions of the issue was that amounts over-paid on application were to be
retained by the company and used in redudction of further sums due on shares allotted. All
surplus contributions were refunded on 15th. February, 2008.
Ramesh who had subscribed 100 on an application for 200 shares was unable to meet the
claim due on April 1. On May 5, the directors forfeited his shares. All other shareholders paid
the sums requested on the due dates, on June 10, 2008 the directors re-issued the forfeited
shares as fully paid to Mohan, on receiving a payment of Rs. 10,500.
Rights Issue
Issue of shares by an existing company to the existing equity shareholders is known as rights
issue.
Section 81 of the Companies Act, 1956 provides: Where at any time after the expiry of two
years from the formation of a company or the expiry of one year from the first allotment of
shares in the company, whichever is earlier, if the Board of Directors, decide to increase the
subscribed capital of the company by the allotment of further shares, then:
(a) Such further shares shall be offered to the persons who on that date are the holders of
equity shares of the company proportionately to their equity holdings on that date.
(b) The offer shall be made by a notice specifying the number of shares offered and limiting a
time not being less than 15 days from the date of the offer, within which the offer, if not
accepted, will be 4eemed to have been declined.
(c) Unless the Articles of Association of the company otherwise specify, the offer shall be
deemed to include a right exercisable by the person concerned to renounce the shares
offered to him or any of them in favour of any other person; and the notice referred to in
clause (b) shall contain a statement of this right.
(d) After the expiry of the time specified in the notice referred to above, or on receipt of earlier
intimation from the person to whom such notice is given that he declines to accept the
shares offered, the Board of Directors may proceed to dispose of such shares offered in
such manner as they consider most beneficial to the company.
The new shares issued need not be offered to the existing equity shareholders, if the company
in general meeting has so decided by a special resolution, or, if the company in general meet-
ing has so decided by ordinary resolution and the same has been approved by the Central
Government.
The following can be the advantages which accrue as a result of issuing further shares to the
existing shareholders only:
Valuation of Rights
Usually a company offers rights issue at a price which is lower than the market price of the
shares so that existing (i.e., old) shareholders may get the monetary benefit of being associated
with the company for a long time. Existing shareholders who have been offered right shares
and do not want to purchase these offered shares may renounce their right shares in favour of
some other persons within the specified period as mentioned earlier. In such a case, the exist-
ing shareholders can make a profit by selling his right to such other person. This right can be
valued in terms of money as below:
(a) Calculate the market value of shares which an existing shareholder is requiredto have in
order to get fresh shares.
(b) Add to the above price paid for the fresh shares.
(c) Find out the average price of existing shares and fresh shares.
(d) The average price of the share should be deducted from the market price and the differ-
ence thus ascertained is value of right.
Illustration 17.
A Company is planning to raise funds by making rights issue of equity shares to finance its
expansion. The existing equity share capital of the company is Rs. 50,00,000. The market
value of its share is Rs. 42. The company offers to its shareholders the right to buy 2 shares at
Rs. 11 each for every 5 shares held. You are required to calculate:]
Solution
Rs
Market value of 5 shares already
held by a shareholder @ Rs. 42 210
Add, price to be paid by him for acquiring
2 more shares @ Rs. 11 per share 22
Total price of 7 shares after rights issue 232
(i) Therefore, theoretical market price of one share, (i.e., 232/7) = 33.14
(ii) Value of Rights = Market Price - Theoretical Market Price= Rs. 42 - Rs. 33.14. = Rs. 8.86
(iii) Percentage Increase in Share Capital
Present Capital 50,00,000
Rights Issue Rs. 50,00,000 x 2/5 20,00,000
% Increase In Share Capital (20,00,000/50,00,000) x 100 40% Rs. 33.14