Company Account - Issue of Shares

When a company decides to raise (additional) capital through the capital market or stock exchange, it issues out shares. It does this by advertising in a prospectus. The prospectus will detail out the available number of shares to be subscribed for, and the issuing price of the shares.

Prospective buyers who wish to be shareholders of the company can now subscribe to the offer made by buying the shares. Buyers are expected to pay for the number of shares they indicate interest in. once they pay through participating banks, they are thereafter issued share certificates which confirm to them that they are now shareholders in the company.

BOOKKEEPING ENTRIES

When shares are offered and are subscribed for, two basic bookkeeping actions are taken. These are explained below

1.    When prospective buyers pay and cash is received. A bank account will have to be opened to receive the cash and application account will need to be opened to record the applications received.

     The accounting bookkeeping (accounting) entries are

     Debit Bank Account and Credit Application Account

2.    The next action is to close the application/allotment account and move the records to share capital account.

     The bookkeeping (accounting) entries required to do this are

     Debit Application/Allotment Account and Credit Share Capital Account.

     This will close the application/allotment account and the fund will now be shown        in the share capital account to signify the amount of additional capital raised through this exercise.

     If the issuing price (selling price of the shares) is greater than the nominal value        of the shares, it means that share premium account will have to be opened as         well.

Assuming shares are oversubscribed for, forfeited or paid for instalmentally, it means that additional bookkeeping entries will be needed.

The following examples buttress the two steps explained above.

Question1

5,000 ordinary shares of N1 each are issued and paid for at N2.50k each. The accounting entries will be 

 

To close the application/allotment account as the exercise has closed, we have step2 as follows  

We now demonstrate these entries by the following examples

Question2

myFATutorials Inv. Ltd issues out 100,000 ordinary shares of N1 each for N1 per share and the shares were fully subscribed and paid for.

You are required to:

                      i.        Show Journal Entries necessary to record the above transactions

                     ii.        Transfer the entries into their respective Ledgers

                    iii.        Prepare a balance sheet extract for the issue of the shares

Suggested solution 

 

 

 

 

Question3 - Practice Question

Igbira Camp Ltd issues out 100,000 ordinary shares of N1 each for N1.80k per share and the shares were fully subscribed and paid for.

You are required to:

                      i.        Show Journal Entries necessary to record the above transactions

                     ii.        Transfer the entries into their respective Ledgers

                    iii.        Prepare a balance sheet extract for the issue of the shares

Contact the Admin of this blog for the suggested solution to this question by filling the Contact Us Form.

Sometimes, depending on the company issuing the shares, the payment for shares applied for by the buyers may be done on instalmental basis. The company may require that a certain amount be paid on application, another on allotment, and so on until the shares are fully paid for. Where this is the case, the bookkeeping (accounting) entries will take a slightly different style. The following example illustrates this position.

Question4 - Practice Question

Ekhei-Girls Ltd issued out 1,000,000 ordinary shares of N1 each at N1.85k per share. The shares were payable as listed below

a.    N0.45k on application

b.    N1.05k on allotment (including premium)

c.    N0.35k on first & final call

Cash was paid by buyers and received by Ekhei-Girls as at when due excepting for 20,000 shares that were not paid for when the first & final call was made. The applicants for the 20,000 shares could not pay up their money within the time allowed as stated in the prospectus. The shares were later re-issued at 35k and were fully paid for.

You are required to:

              i.        Show Journal Entries necessary to record the above transactions

             ii.        Transfer the entries into their respective Ledgers

            iii.        Prepare a balance sheet extract for the issue of the shares
Contact the Admin of this blog for the suggested solution to this question by filling the Contact Us Form.