Issue of shares :corporate accounting

ACC 202:FINANCIAL ACCOUNTING II
II. Accounting for the Issue, forfeiture
and re-issue of shares.
DR. SRINIVAS MADISHETTI
PROFESSOR,SCHOL OF BUSINESS
MZUMBE UNIVERSITY

OULINE OF UNIT II
• Meaning and types of shares
• Accounting for the issue of shares.
• Prorata Issue of shares
• Shares issued for other consideration
• Underwriting share issue
• Forfeiture and re-issue of shares.
• Bonus share and Right Issue of shares

Meaning and types of shares:
Share Capital
• A company raises capital by the issue of shares.
• The total capital of the company is divided into
smaller denominations - each part is known as a
“share”.
• These shares are issued for subscription.
• The persons who contribute to the shares are
called the “Shareholders”.
• A share is evidenced by a share certificate which
is issued by the company under its common seal.
Each share has a distinct number.

Information of Share Capital in the Statement of
Financial Position
Share capital is shown in the Statement of Financial Position under the following categories:
• i) Authorized Capital: It is also called as ‘Registered Capital’ or ‘Nominal Capital’. It is the
maximum capital that a company is authorized to raise and it is shown under capital clause
of ‘Memorandum of Association’.
• ii) Issued Capital: This is the capital which is offered to public for subscription. The difference
between authorized capital and the issued capital represents the un-issued capital.
• iii) Subscribed Capital: It refers to that part of the issued capital which has been subscribed
or purchased by the public and also allotted to the directors of the company. Under this
head the information must be given regarding shares allotted for consideration other than
cash and shares allotted as fully paid-up by way of bonus shares. The sources from which
bonus shares are issued must also be stated.
• iv) Called-up Capital: It refers to that part of the subscribed capital which has been called up
by the company for payment.
• v) Paid up Capital: It refers to that part of the called up capital which has been actually paid
up by the shareholders. Some of the shareholders might have defaulted in paying the
allotment or call money. Such defaulted amount is known as calls in arrears from the called
up capital. Calls in arrears are deducted to obtain the paid up capital. Calls in arrears due
from directors have to be stated separately.
• vi) Uncalled Capital: The amount of capital not called by the company is called uncalled
capital. The other way of expressing it is the difference between the subscribed capital and
called
• vii) Reserve Capital: The amount of capital kept aside to call up only in the event of winding
up is called reserve capital. A special resolution has to be passed for this purpos

Share Capital Types
Financial Accounting for
Management by
Ramachandran & Kakani
“Copyright with Tata McGraw-
Hill Publishing Co Ltd, 2005"
Subscribed
Called-Up
Capital
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Issued
Capital
Authorized
Capital
Capital
Paid-Up
Capital
Un-Issued
Capital
Unsubscribed
Capital
Un-Called
Capital
Calls in
Arrears

Share Capital Types - explained
• Authorized or Registered Share Capital
– Maximum amount of capital, which a company is allowed to
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raise during its lifetime
– Based on the amount mentioned in the MoA
• Issued Capital
– The portion of authorized capital, which has been issued to
all the investors including public
– The amount of issued capital is taken in the balance sheet
only if the total amount of issued capital is subscribed,
called up by the company and paid by the share holders
– Otherwise, its presentation is similar to authorized capital

Share Capital Types - explained
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• Subscribed Capital
– The portion of the issued capital, which has been
subscribed by all the investors including the public
• Called up Capital
– The portion of the subscribed capital that has been called
up by the company for payments is the called up capital
• Paid-up Capital
– That part of called up capital, which has been paid up by
the subscribers of share capital
– The amount, which is due but yet to be received, is known
as calls in arrears

Format of Statement of Financial Position (Liabilities)
Figures for the current year Figures for the
previous year
Share capital
• Authorized Capital
... Equity shares of $. ..... each .....
... Preference shares of $. ..... each .....
• Issued Capital
... Equity shares of $ .... each .....
... Preference shares of $. .... each .....
(Of the above shares, ..... shares have been
allotted for consideration other than cash.)
• Subscribed capital
.... Equity shares of $. .... each . .... called up ....
..... Pref shares of $. ...... each------ $...... called up ..... --------------
(Of the above shares, ..... shares have
been allotted for consideration )
• Less: Calls unpaid
(i) By directors ......
(ii) By others ..... .... .....

Illustration 1:
• A Pacha Ltd was newly formed with an authorized capital of
TZS 500m, divided into 50,000 equity shares of TZS 10,000
each. The company issued 25,000 equity shares at a
premium of TZS 1,000 per share payable TZS 2,000 on
application, TZS 4,000 on allotment (including premium);
TZS 3,000 on first call and TZS 2,000 on final call.
Applications for 30,000 shares were received. Directors
allotted the shares and excess money received was
returned. The company made a call of TZS 10,000 per share
(including premium). All shareholders paid the amount
except one who failed to pay 1st call money on 800 shares.
• Required: Show how these transactions will be reflected in
the Statement of Financial Position of the Pacha Ltd.

Solution :A Pacha Ltd
Statement of Financial Position as on .....
• Liabilities Amount in TZS Assets Amount in TZS
• Authorized Capital:
50,000 equity shares of TZS 10,000 each 500,000 ,000
• Issued Capital:
• Subscribed Capital:
• Called up and paid up Capital: Current Assets:
25,000 equity shares of TZS 10,000 each 250,000 ,000 cash at Bank 297,600 ,000
Less: Calls in arrears 2,400,000
• 800 equity shares @ TZS3,000 per share
2,400 247,600 ,000
• Reserves and Surplus:
• Securities premium 25,000 equity share
@ TZS 2,000 50,000 ,000
-------------------------------------------------------------------
297,600 ,000 297,600 ,000

Shares and Share Capital
• In Companies Act, “share” is defined as a unit in the share
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capital of the company
• Now generally companies issue only two types of shares viz.,
Ordinary and Preference Shares
• Ordinary equity shares represent the risk capital of an entity
– No right to fixed dividends; Control through voting rights
• Preference equity shares enjoy preferential rights with respect
to payment of fixed dividend and repayment of capital at the
time of liquidation
• Additional rights can be granted to preference shares by virtue
of provisions contained in the MoA and AoA

Types of Preference Shares
Classified on the basis of rights attached to them
• Cumulative Preference Shares
– Entitled to unpaid dividends in the past
• Non-Cumulative preference shares
– Shareholders do not carry any right to unpaid dividends
• Participating Preference Shares
– Carry a right to share in the profit after a fixed rate is paid
to equity shareholders (over and above the fixed dividend)
• Redeemable Preference shares
• Cumulative Redeemable Non-Participating Preference shares
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are most common

Equity Shares:
• The capital raised through issue of equity shares
is called equity share capital and the persons who
subscribe for the equity shares are called equity
shareholders.
The main features of equity shares are:
• The equity shareholders generally enjoy voting
rights. They have right to elect directors and to
participate in the management.
• The ratio of equity dividend is not fixed and can
vary from year to year.
• Equity capital is generally not redeemable during
the life time of the company unless the company
decides to buy back its shares.

Sweat Equity Shares
The Equity Shares issued by a company to employees or directors at
a discount or for consideration other than cash for providing know-how
or making available right in the nature of intellectual property
rights or value addition are called Sweat Equity Shares. A company
may issue sweat equity shares of a class of shares already issued if
the following conditions are fulfilled.
• a) The issue of sweat equity shares is authorized by a special
resolution passed by the company in the general meeting.
• b) The resolution specifies the number of shares, current market
price, consideration, if any, and the class or classes of directors or
employees to whom such equity shares are to be issued.
• c) Not less than one year has, at the date of the issue elapsed
since the date on which the company was entitled to commence
business.
• d) The sweat equity shares of a company whose equity shares are
listed on a recognised stock exchange are issued in accordance
with the regulations made by the Securities Exchange Board of of
respective country.

Accounting for the issue of shares.

Issue of Shares
• A company can issue shares when wants to raise fund. Shares
are issued when a company invites for subscription for shares.
The terms of issue of shares are mentioned in the prospectus of
the company. Shares can be issued at par or at premium or at
discount. If shares are offered to the public at face value, it is
known as Issue of shares at ‘par’.
• For example, issue of shares of the fair value of TZS.10,000/- at
TZS.10,000/- only. Shares are said to be issued at premium if
they are issued at a price higher than face value. For example, if
the face value of a share is TZS.10,000/- and issued at say
TZS.12,000/-, the shares are said to be issued at a premium of
TZS.2,000/- per share. Shares are said to be issued at discount if
they are issued for a price lower than the face value. For
example if the face value of a share is TZS.10,000/- and issued
at TZS 9/- a share, then the share is issued at a discount of
TZS.1,000/-, in which case the shareholders have to pay only
TZS.9,000/- per share.

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Methods of Payment
• Payment in Full
• Payable by instalments

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Payment in full
The full amount of the issue price of the shares and
debentures should be paid to the company on application
whether or not the applicants will allot the shares and
debentures.

Issue of Securities
20
Issue of
Prospectus
Steps to
Raise
Capital
Making Calls for
payment of balance
money
Receiving Applications
with Application Money
Allotment
of shares

Receiving Applications
• Needs to be in the prescribed form along with the prescribed
application money and delays
• The initial application money shall not be less than 5 percent
• If within the prescribed time a company does not receive
applications equal to the minimum subscription, the whole of the
application money received has to be refunded to the applicants
• For delays, the directors of the company are liable to repay the
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amount with a penal interest
• Share application money has to be kept deposited in a
scheduled bank until the company has received the minimum
subscription

Allotment of Shares
• Implies acceptance of the offer of the applicant for the
purchase of share of the company by the directors
• Done when the company has received applications
amounting to the minimum subscription
• In case of over subscription, the allotment is based on a
pro-rata basis in consultation with a stock exchange
• Once the allotment is made the applicant becomes liable to
pay the full amount of the shares allotted
Management by
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• The company can either collect the whole amount due on such
shares on allotment or a part on allotment and the balance in
one or more installments
• After allotment, installments demanded by the directors against
the sum payable by shareholders on their shares are known as
calls. Calls must be made on a uniform basis on all shares
within the same class
• Example: Using the installment route, Nagarjuna Fertilizers and
Chemicals Limited issued Rs 10 par value share in 1990 (par
value was divided as Rs 2.50 on application; Rs 2.50 on
allotment; Rs 2.50 on first call; and Rs 2.50 on final call)
Management by
Making Calls
23

Over-subscription and Under-subscription
of shares
Sometimes the applications received may exceed the number of shares
issued to the public. This situation is called over-subscription. Though the
applications received may be more than the number of shares issued to the
public, allotment can be made only equal to the number of shares that are
issued. In such a case, Directors will have to refuse allotment to some
applicants. For this purpose, any of the following methods can be used:
• 1) Totally rejecting the applications for excess number of shares, e.g.,
shares issued are 20,000 but applications are received for 22,000 shares.
Therefore, the excess number, 2,000, can be totally rejected and
applicants for 20,000 shares only are allotted the shares.
• 2) Allotment to all on pro rata basis. Here, no application is refused on
allotment, but no applicant is allotted the shares in full as well. Each
applicant receives the shares in the same proportion of “total shares
issued to total shares applied for”. Thus, if shares issued are 20,000, and
shares applied for are 30,000, then the proportion of shares issued to
shares applied for is 20/30 or 2/3. Hence, allotment will be made in the
same proportion that for every 30 shares applied, 20 shares will be
allotted.

contd;:
• 3) (a) Totally rejecting some applications, and
(b) Allotting to the remaining applicants on
pro rata basis. Thus, when shares issued are
50,000 and shares applied for are 57,000, and
if allotment made is: (i) Applications for 2,000
shares rejected totally, and ii) the remaining
applicants allotted, pro rata, 50,000 shares:
then (a) 57,000 - 2,000 = 55,000 shares are
considered for allotting 50,000 shares.
• Thus, every applicant for 11 shares is allotted
10 shares.

Contd:
4) (a) Totally rejecting some applications ; (b) Accepting some
applications in full ; and (c) Allotting the remaining on pro-rata
basis –e.g., Shares issued are 55,000 and shares applied for
are 88,000, and if allotment made is
• a) Applications for 3,000 shares rejected totally,
• b) Applicants for 5,000 shares allotted in full, and
• c) Balance of applicants allotted the remaining shares on
pro rata basis which is as follows:
• a) 88,000 - 3,000 = 85,000 applications are remaining of
which
• b) 85,000 - 5,000 = 80,000 applications considered for pro
rata issue. Of the 55,000 shares, 5,000 are allotted for (b)
category and, hence 50,000 are to be now allotted.
• c) 50,000 shares are allotted to applicants for 80,000
shares.
• Hence,every applicant for 8 shares is allotted 5 shares.

Excess money on Application:
• When the pro rata system of allotment is made, the
application money received will be in excess of the number
allotted. This excess money received on un-allotted shares
can be either, (a) refunded to the respective applicants, or
(b) used for adjusting the amount due on the shares
allotted.
• If the second course is followed, the excess amount not
refunded may be
• a) equal to allotment money due on the shares allotted, in
which case the concerned allottees need not pay anything
on allotment, or
• b) less than allotment money due, when the allottee is to
pay only the deficit on allotment of shares, or
• c) more than allotment money due, in which case the
excess amount of application money is utilized, (i) first in
adjusting the allotment money in full, and (ii) the balance is
credited to Calls-in-advance account for adjustment with
call money that will be due in future.

Under-subscription:
• Sometimes the application for shares is received
for less than the number of shares issued. This is
called under-subscription. In such a case, the
allotment will be equal to the number of shares
subscribed for and not to the shares issued.
• For example, if 2,500,000 equity shares of TZS
1,000 each are issued, but only 2,000,000 equity
shares are subscribed for, then the company will
allot only 2,000,000 equity shares (and not
2,500,000 equity shares issued.)

Issue of Shares- Journal Entries
1. When application money is received:
Dr. Bank A/c xxx
Cr. share Application A/c xxx
(Being application money received)
2. On allotment of shares:
• a) The application money on allotted shares is transferred from share
application account to share capital A/c with the following entry.
Dr. Share Application A/c xxx
Cr. Share Capital A/c xxx
(Being application money transferred to share capital A/c)
• b) If any applications are totally rejected the application money should
be refunded to the applicants. The following entry is passed for the
refund.
Dr. Share Application A/c xxx
Cr. To Bank A/c xxx
(Being Application money refunded)
3. For the allotment money due on the shares:
Dr. Share allotment A/c xxx

Contd:
4. When allotment money is received:
Dr. Bank A/c xxx
Cr. Share Allotment A/c xxx
• (Being the allotment money received)
• It should be noted that the above entry should be passed with the actual
amount received towards allotment money.
5. When the company makes the first call:
Dr. Share First Call A/c xxx
(Being the first call money due) This entry should be passed with the
amount called up on first call.
6. When first call money is received:
Dr. Bank A/c xxx
Cr. Share first call A/c xxx
(Being first call received)
• This entry is passed with the actual amount received on first call.
• Similar entries are made for every call. The last call is called the final call.
If there is only one call, it is known as first and final call.

Illustration 2:
• X Ltd., was registered on 1st January 2001
with an authorized capital of Rs.1,000,000
divided into 10,000 equity shares of Rs.100/-
each. It issued 6,500 shares, payable as under:
• Rs.25/- on Application; Rs.25/- on Allotment;
Rs.30/- on First call and Rs.20/- on Final call.
Public applied for 6,000 shares. All were
allotted shares. All the money due was
collected. Write up the necessary journal
entries and prepare the opening Statement of
Financial Position.

Workings:
• Dr. Bank A/c Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
• To Equity Shares
Applications 150,000
• To Equity Share
Allotment 150,000
• To Equity Share First
call A/c 180,000
• To Equity Share Final
• call A/c 120,000 By Bal. c/d 600,000
600,000 600,000
• Balance b/d 600,000

Solution:
X Limited Journal
Date Particulars LF Debit (Rs.) Credit (Rs.)
• Bank A/c 150,000
Equity share application A/c 150,000
(Being Application money received
@ Rs.25/- per share on 6,000 shares)
• Equity Share Application A/c 150,000
Equity Share Capital A/c 150,000
(Being Application money transferred to Share Capital A/c)
• Equity Share Allotment A/c 150,000
(Being Allotment money due @ Rs.25/- per share on 6,000 shares)
• Bank A/c 150,000
Equity Share Allotment A/c 150,000
• (Being Allotment money received)
• Equity Share First call A/c 180,000
(Being First call money due on 6,000 shares @ Rs.30/- per share)

Contd:
• Bank A/c 180,000
Equity Shares First call A/c 180,000
(Being First call money received)
• Equity Share Final call A/c 120,000
(Being Final call money due @ Rs.20/- on 6,000 shares)
• Bank A/c 120,000
Equity share final call A/c 120,000
(Being final call amount received)

Statement of Financial Position of X Ltd.
As on 31-12-2001
Liabilities Amount Assets Amount
Rs. Rs.
• Authorised Capital
10,000 Equity Shares
of Rs.100/- each 1,000,000
• Issued Capital
6,500 Equity Shares of
Rs.100/- each 650,000
• Subscribed Capital Current Assets
6,000 Equity Shares
of Rs.100/- each 600,000 Cash at Bank 600,000
• Called up and paid up capital
6,000 Equity Shares
of Rs.100/- each
fully paid. 600,000
------------------------------------------------------------------------------------------------------------
600,000 600,000

Calls in advance and calls in arrears
Calls in Advance
• Calls in advance refer to the amount paid by shareholders in
excess of the amount due from them. A company may accept
calls in advance only if authorized by the Articles. Such amount
should be credited to a separate account called “Calls in
Advance” account and not to share capital account.
• The amount is transferred from calls in advance account to the
respective call account as and when the calls are made.
• If the calls are not made before the Statement of Financial
Position date, the amount in calls in advance account is added to
paid up capital in the Statement of Financial Position.
• The directors must pay interest on calls in advance at a rate
specified in the Articles from the date of receipt to the date
when the calls fall due.
• If the Articles are silent about the rate of interest, normally
interest should be paid at a rate not exceeding 6% p.a. The
following entries should be passed for the interest on calls in
advance.

Accounting entries for calls in advance
• Dr. Interest on calls in advance A/c xxx
Cr. Sundry Members A/c xxx
(Being interest payable on calls in advance)
• Dr. Sundry Members A/c xxx
Cr. Bank A/c xxx
(Being interest paid to members)

Calls in Arrears
• Calls in arrears refer to the amount called by the
company which is not paid by the shareholders before
the due date fixed for payment. Such amount is
transferred to an account called calls in arrears account
from the calls account.
• The amount of calls in arrears is shown as deduction
from the paid up capital in the Statement of Financial
Position.
• Interest may be charged on calls in arrears at the rate
specified in the Articles from the due date to the actual
date of payment.
• If Articles is silent about the rate of interest as per
Table - 1, it may be charged at a rate not exceeding 5%
p.a.
• The directors have the authority to waive the interest
on calls in arrears at their discretion.

The following entries are to be passed
for interest on calls in arrears.
For interest due:
Dr. Sundry Members A/c xxx
Cr. interest on calls in arrears A/c xxx
(Being interest due from members)
When interest is received:
Dr. Bank A/c xxx
Cr. Sundry members A/c xxx
(Being interest received)
• Interest on calls in arrears is an income and transferred
to credit side of Profit and Loss A/c.

Issue of Shares at Premium
Companies may issue shares at premium i.e., at a price higher
than its face value. The difference between issue price and
face value is a capital profit and therefore should be credited
to a separate account called “securities premium account”.
Issue and use of share premium are guided by Companies Act
of respective countries. Common provisions are that share
premium can be used for the following purposes.
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 expenses of 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. Unless otherwise stated, premium is included in
allotment installment.

Illustration 4:
Bona Ltd. issued 15,000 equity shares of TZS.1000/-
each at a premium of TZS.200/- per share. The
amounts are payable as under.
• On application TZS.400: on allotment TZS.400/-
On First call TZS. 200: on Final call TZS.200/-
• Public applied for 12,000 shares. All money due
was collected except first call money on 200
shares and final call money on 300 shares.
Pass necessary journal entries in the books of the
company and prepare the opening Statement of
Financial Position.

Solution:
Bona Limited Journal
Date Particulars LF Debit (TZS.) Credit
(TZS.)
• Bank A/c 4,800,000
Equity Share Application A/c 4,800,000
(Being application money received on 12,000 shares @
TZS.400 per share)
• Equity Share Application A/c 4,800,000
Equity share capital A/c 4,800,000
(Being application money transferred to share capital A/c)
• Equity Share Allotment A/c 4,800,000
Securities premium A/c 2,400,000
(Being allotment money due on 12,000 shares @ TZS.400 per
share)

Solution contd:
• Dr.Bank A/c 4,800,000
Cr.Equity Share Allotment A/c 4,800,000
(Being allotment money received)
• Dr.Equity Share First Call A/c 2,400,000
Cr.Equity Share Capital A/c 2,400,000
(Being First call money due @ TZS.200/- per shares)
• Dr.Bank A/c 2,360,000
Cr.Equity Share First call A/c 2,360,000
(Being First call money received on 11,800 shares)

Solution contd:
• Dr.Equity Share Final Call A/c 2,400,000
Cr. Equity Share Capital A/c 2,400,000
(Being Final call due on 12,000 Shares @ TZS.200 per
share)
• Dr.Bank A/c 2,340,000
Cr. Equity Share Final Call A/c 2,340,000
(Being Final call money received on 11,700 shares)
• Dr.Call in arrears A/c 100,000
Cr.Equity Share First call A/c 40,000
Cr. Equity Share Final call A/c 60,000
(Being First call and Final call arrears transferred to calls in
arrears

Statement of Financial Position of
Bona Ltd. as on 31-12-2008
Liabilities Amount TZS. Assets Amount TZS.
• Authorised Capital
• 15000 Equity Shares of TZS.1000/- each ..... 15,000,000
• Issued Capital
• 15,000 equity shares
• TZS.1,000/- each. 15,000,000
• Subscribed capital
• 12,000 equity shares of
• TZS.1,000/- each 12,000,000
• Called up and paid-up Capital: Current Assets
• 12,000 Equity Shares 12,000,000 Cash at Bank 14,300,000
• of TZS.1,000/- each fully paid
• Less: Calls in arrears 100,000 11,900,000
• Reserves and Surplus
• Securities premium 2,400,000
• ------------------------------------------------------------------------------------------------------------
• 14,300,000 14,300,000

Issue of Shares at Discount
• A company can issue shares at a discount also i.e., at a price lower
than face value subject to conditions stipulated in respective
country’s Companies Act. Examples of the requirement section 69
of the Companied Act of India are:
• i) The shares must belong to a class already issued.
• ii) The issue must be authorized by an ordinary resolution of the
company.
• iii) The sanction of Company Law Board must be obtained.
• iv) The resolution must specify the maximum rate of discount at
which the shares are to be issued. No resolution shall be
sanctioned by the Company Law Board if the maximum rate of
discount specified in the resolution exceeds 10% unless it is of the
opinion that a higher percentage of discount may be allowed in
the special circumstances of the case.
• v) At least one year must have elapsed since the date on which
the company was entitled to commence the business.
• vi) The issue must be made within two months from the date of
receiving the sanction of the Company Law Board.

contd
Section 60(1) of the Companies Act 2002 of Tanzania provide that:
• Subject as provided in this section, it shall be lawful for a company to issue at a discount
shares in the company of a class already issued provided that:
• (a) the issue of the shares at a discount must be authorised by resolution passed in general
meeting of the company, and must be sanctioned by the court;
• the resolution must specify the maximum rate of discount at which the shares are to be
issued;
• not less than one year must, at the date of the issue, have elapsed since the date on
which the company was entitled to commence business;
• the shares to be issued at a discount must be issued within one month after the date on
which the issue is sanctioned by the court or within such extended time as the court may
allow.
• (b) Where a company has passed a resolution authorising the issue of shares at a discount,
it may apply to the court for an order sanctioning the issue, and on any such application the
court may make an order sanctioning the issue on such terms and conditions as it thinks fit.
• (c) Every offer document relating to the issue of the shares must contain particulars of the
discount allowed on the issue of the shares or of so much of that discount as has not been
written off at the date of the issue of the offer document.
• (d) If default is made in complying with this subsection, the company and every officer of
the company who is in default shall be liable to a default fine.

contd;:
Accounting Entry
• The following entry is passed for share discount
at the time of allotment.
Dr. Share Allotment A/c xxx
Dr. Discount on Issue of Shares A/c xxx
Cr. To Share Capital Account xxx
• Discount on issue of shares is a capital loss and is
shown as a fictitious asset under the head
miscellaneous expenditure on the assets side of
the Statement of Financial Position. Usually this
loss is written off in four or five years by
transferring to profit and loss A/c.

Illustration 5:
• Mwananchi Limited invited applications for
50,000 equity shares of TZS1,000/- each at a
discount of 5% payable as follows:
• TZS 200 on application; TZS 250 on allotment;
TZS 300 on First call; TZS 200 on Final call.
• The shares were all subscribed for and all
money due was received except call money on
500 shares. Pass necessary journal entries and
prepare the Statement of Financial Position.

Issue of Shares for Purchase of Assets
• Sometimes when the company purchases a fixed asset like building,
land etc., and the vendors may accept shares of the company
instead of payment of cash. When shares are issued on acquisition
of a fixed asset, the following entries are passed.
(i) On acquisition of fixed asset
Dr. Fixed asset A/c xxx
Cr. To vendors A/c xxx
(Being asset acquired and consideration payable)
(ii) On issuing Shares
• Dr. Vendor’s A/c xxx
Cr. To Share Capital A/c xxx
(Being Shares issued to vendors)
• It may be noted that there is no account for “Shares”. Whenever
shares are issued, “Share Capital” Account is credited.
• Whenever shares are issued for consideration other than cash, the
same should be disclosed in the Statement of Financial Position
while showing the issued, subscribed and paid up capital.

Illustration 6:
• Mwikwabe Limited acquired buildings worth
TZS.20,000,000 and allotted to the vendors
20,000 equity shares of TZS.1,000/- each as fully
paid. The company has also issued 80,000 equity
shares for public subscription, payable as follows:
on application TZS.300; on allotment TZS.300; on
first and final call TZS.400.
• The public applied for all the shares and they
were allotted. All money was received except call
money on 500 shares.
• Pass necessary journal entries and show the
opening Statement of Financial Position.

Solution: Mwikwabe Limited Journal
Date Particulars LF Debit (TZS.) Credit (TZS.)
• Building A/c 20,000,000
Vendors A/c 20,000,000
(Being consideration payable for the building acquired).
• Vendors A/c 20,000,000
Equity Share Capital A/c 20,000,000
(Being Shares issued to Vendors for purchase of building)
• Bank A/c 24,000,000
Equity Share Application A/c 24,000,000
(Being application money received on 80,000 applications @ TZS.300/-
per share).
• Equity Share Application A/c 24,000,000
Equity Share Capital 24,000,000
• (Being share application money transferred to share capital A/c)

Contd:
• Dr.Equity Share Allotment A/c 24,000,000
Cr. Equity Share Capital 24,000,000
(Being Allotment money due on 80,000 equity shares @ TZS.300/- per
share)
• Dr.Bank A/c 24,000,000
Cr.Equity Share Allotment A/c 24,000,000
(Being Allotment money received)
• Dr.Equity Share First & Final call A/c 32,000,000
Cr. Equity Share Capital A/c 32,000,000
(Being Call money due on 80,000 Equity Shares @ TZS.400/- per share)
• Dr.Bank A/c 31,800,000
Cr.Equity Share First & Final Call A/c 31,800,000
(Being call money received on 79,500 Shares @ TZS.400/- per share).
• Dr.Calls in Arrears A/c 200,000
Cr.Equity Share First and Final Call A/c 200,000
(Being arrears of calls transferred to calls in arrears A/c)

Mwikwabe Limited
Statement of Financial Position As on 31-12-2008
Liabilities Amount Assets Amount
TZS. TZS.
• Authorized Capital Fixed Assets
• 100000..equity shares of
• TZS.1,000/- each.. 100,000,000 Buildings 20,000,000
• Issued and Subscribed Capital
• 100,000 equity shares TZS.1,000/- 100,000,000
• Called up and paid-up Capital: Current Assets
• 100,000 Equity Shares of TZS.1,000/- Cash at Bank 79,800,000
each fully paid 100,000,000
• Less: Calls in arrears 200,000
• (of the above 20,000 equity shares
• were issued to vendors for
• consideration other than cash).
• _____________________________________________________________________
0 99,800.000 99,800,000

Illustration 7:
• Juhudi Ltd purchased a machinery of TZS. 54,000,000
from Wawekezaji Ltd. The consideration was payable in
fully paid equity shares of TZS.1,000 each. Show the
necessary journal entries in the books of Juhudi Ltd
assuming that -
• Case (a) such shares are issued at par
• Case (b) such shares are issued at a premium of 20%
• Case (c) such shares are issued at a discount of 10%
[ hints:
for premium 54000000/1000+200premium=45000shares;
for discount: 54000000/1000-10% =900 =60,000shares ]

Forfeiture and re-issue of shares.
Forfeiture of Shares
• If any member fails to pay any installments due
(allotment money or call money), the company
may, if the Articles contain a provision, forfeit the
shares of such defaulting member, after giving
due notice.
• When the shares are forfeited the defaulting
member loses all his rights on the shares and he
ceases to be member of the company.
• The amount already paid by him towards
application money and any other installment will
not be refunded to him.
• Such amount already received will be treated as a
capital profit and credited to a separate account
called “Shares Forfeited A/c”.

The following entry is passed at the time of forfeiture:
• Dr. Share Capital A/c (with the amount called up on
shares till the date of forfeiture)
Cr. Shares Forfeited A/c (with the amount already
received on the shares)
Cr. various calls A/c (with amounts unpaid)
(If unpaid calls are already transferred to calls in arrears
account, the calls in arrears account will be credited with
the amount unpaid. As the shares are forfeited, the
arrears account should be cancelled and hence calls in
arrears account is to be credited).
• It may be noted here that Share Capital account is
credited each time an installment is called up (even
before the amount is received). When the shares are
forfeited the share capital account should be debited
with the total amount called up on forfeited shares.

Illustration 1:
The Directors of Sato Limited resolved that 1,000
equity shares of the 1,000/- each on which TZS.750/-
per share is paid-up be forfeited for non-payment of
the final call of TZS.250/- per share.
Give Journal entry for forfeiture
Sato Limited Journal
• Equity Share Capital A/c 1,000,000
Share Forfeited A/c 750,000
Equity Share Final Call A/ 250,000
(Being 1,000 shares forfeited on account of non-payment
of final call of TZS.250/- per share)

Forfeiture of Shares which are issued
at Premium
• If shares are issued at a premium, the amount of
premium must have been credited to securities
premium account (usually at the time of allotment).
• Later if these shares are forfeited, a question arises as
to whether share premium account should be
cancelled to the extent of premium on forfeited shares.
• It may be noted here that securities premium account
should be debited with the amount of premium on
forfeited share if the premium is unpaid.
• If the premium is already received on the forfeited
shares, premium account is not debited.

Contd:
• For instance, if premium TZS.200 per share is included in
allotment installment and 100 shares of TZS.1,000/- each are
forfeited on account of non-payment of final call of TZS.400/-
the following entry should be passed for forfeiture.
• Dr. Share capital A/c 100,000 (100 x 1000 each)
Cr. Shares forfeited A/c 60,000 (100 x 600)
Cr. Shares Final Call A/c 40,000 (100 x 400)
• Here share premium a/c is not cancelled as the share premium
(included in allotment installment) is already received in cash.
• Shares forfeited account is credited only with the amount
received towards capital (excluding premium).
• Total amount due on shares is TZS.1,000 + TZS. 200 =
TZS.1,200; amount of final call TZS.400 is not received. This
means that TZS.800/- per share is received. But of this TZS.600
is towards capital and TZS.200 is towards premium.

In the above example, if only application money of
TZS.200 per share is received and shares are forfeited
for not receiving allotment and call money, the
following entry should be passed.
• Dr. Share Capital A/c 100,000 (100 x 1,000)
Dr. Share Premium A/c 20,000 (100 x 200)
Cr. Shares forfeited 20,000 (100 x 200)
Cr. Calls in arrears 100,000 (100x 1,000)
• Here calls in arrears is TZS.1,200 - TZS.200 =
TZS.1,000
• Amount received on shares in TZS.200 per
share = 200 x 100 = TZS.20,000

Forfeiture of Shares issued at discount
• If the shares issued at discount are forfeited a
similar question arises regarding cancellation
of discount on issue of shares on the shares
forfeited.
• It may be understood that the discount on
forfeited shares should be cancelled as the
discount account should show only the
amount of discount on the remaining shares
forming part of share capital.

Illustration: 2
A company issued 10,000 equity shares of TZS.10,000/- each at a
discount of TZS.1,000/- per share payable as under; TZS.2,000 on
application; TZS.2,000 on allotment; TZS.2,000 on first call and
TZS.3,000 as final call. Mr.Lusajo was allotted 300 shares. Give
necessary journal entry relating to forfeiture in the following cases:
Case 1: Lusajo failed to pay allotment money, his shares were forfeited
Case 2: Lusajo failed to pay allotment money and on his failure to pay
the first call his shares were forfeited.
Case 3: Lusajo failed to pay first and final call on account of which his
shares were forfeited.
Solution:
Case 1:
• Dr. Share Capital A/c 1,500,000 (300 x 5,000)
Cr. discount on issue of shares 300,000 (300 x 1,000)
Cr. Share allotment 600,000 (300 x 2,000)
Cr. shares forfeited 600,000 (300 x 2,000)

Explanation:
• As the shares are forfeited for not paying
allotment money, the amount called up till the
date of forfeiture is TZS.5,000 per share
(TZS.2,000 on application + TZS.2,000 on
allotment + TZS.1,000 discount allowed).
• Hence share capital account should be debited
with TZS.15,000 (300 x 5,000).
• As the discount on forfeited shares should be
cancelled, it is to be credited to discount account
(TZS.1,000 x 300 = TZS. 300,000).
• Allotment money due is TZS.2,000 per share.
• Amount received on shares is TZS.2,000 per share
(application money).

Case 2:
Cr. Discount on issue of share A/c 300,000
(300 x 1,000)
• Cr. Share allotment A/c 600,000
(300 x 2,000)
• Cr. Share First call A/c 600,000
(300 x 2,000)
• Cr. Share Forfeited A/c 600,000
(300 x 2,000)
Explanation: Here Share capital account is debited
with the amount called up till first call (TZS.2,000 on
application + TZS.2,000 on allotment + TZS.1,000
towards discount allowed + TZS.2,000 on first call) =
TZS.7,000 per share.

Case 3:
Cr. Discount on issue of
shares A/c 300,000 (300 x 1,000)
Cr. Share First call A/c 600,000 (300 x 2,000)
Cr. Share Final call A/c 900,000 (300 x 3,000)
Cr. Shares Forfeited A/c 1,200,000 (300 x 4,000)

Surrender of Shares
• Sometimes if a shareholder cannot pay
any installment, he may voluntarily
surrender his shares to the company.
• Even in case of surrender, entries are
passed on the same lines as in case of
forfeiture.

Re-Issue of Forfeited Shares
• A company can re-issue the shares forfeited in accordance with the
provisions contained in the articles of the company.
• Generally the shares are re-issued at a discount. But the discount
on re-issue cannot exceed the gain made at the time of forfeiture on
these shares (which is credited to shares forfeited account).
• If the shares are originally issued at a discount, the discount at the
time of re-issue can be up to a maximum of original discount on
these shares plus ‘gain made at the time of forfeiture.
• Original discount is debited to discount on issue of shares” account
while the remaining amount is debited to shares forfeited account.
• After the shares are re-issued, if still a balance remains in shares
forfeited account representing the profit made at the time of
forfeiture of these shares, it should be transferred to capital reserve
account.
• It may be noted that the balance relating to re-issued shares only is
transferred so; which means that the profit on shares forfeited not
yet re-issued should be in tact in the shares forfeited account.

Illustration 3:
• Magma Plc. forfeited 1,000 shares of 1,000/-
each allotted to Mr. Pimbi after receiving
TZS.300/- on application and TZS.200/- on
allotment, on his failure to pay the first and
final call of TZS.500/- per share. Later these
shares were re-issued to Wilson as fully paid
up for TZS.700/- per share. Pass journal
entries for forfeiture & re-issue.

Solution:
Magma Plc. Journal
• Share Capital A/c 1,000,000
Share First & Final call A/c 500,000
Share forfeited A/c 500,000
(Being 1,000 shares forfeited for non-payment of first & final call
money of TZS.500/- per share)
• Bank A/c 700,000
Shares forfeited A/c 300,000
Share Capital A/c 1,000,000
(Being 1000 shares forfeited re-issued @ TZS.700/- per share)
• Shares forfeited A/c 200,000
Capital reserve A/c 200,000
(Being the balance in shares forfeited account transferred to capital
reserves account on re-issue)

Reissue of shares which are originally issued at premium
• When the shares originally issued at a premium are forfeited and re-issued
at a premium, premium will be credited to securities premium
account.
• Even if they were not originally issued at premium, the premium on re-issue
is credited to securities premium account
Illustration 4:
A company forfeited 500 shares of TZS.1,000/- each issued at 10% premium
(to be paid at the time of allotment) on which first call of TZS.300/- per share
was not received. The final call of TZS.200/- per share was not yet made.
Pass Journal entries for forfeiture and re-issue in the following cases.
(1) 200 of the above shares were re-issued for TZS.900/- per share as
TZS.800/- per share paid up.
(2) 200 shares were re-issued for TZS.800/- per share as TZS.800/- per share
paid up.
(3) 200 shares were re-issued for TZS.800/- per share paid up was TZS.800/-
per share.
(4) 500 shares were re-issued for TZS.800/- per share paid up for TZS.500/-
per share.

Solution:
Journal
• Share Capital A/c 400,000
Share First call A/c 150,000
(Being 500 shares forfeited on account of non- payment of first call of
TZS.300/- per share)
• The above journal entry is common in all cases. The entries differ only on
re-issue.
Entries on Re-issue
Case 1:
• Bank A/c 180,000
Share Capital A/c 160,000
Securities Premium A/c 20,000
(Being 200 shares issued as TZS.800/- paid up for TZS.900/- per share)
• Shares forfeited A/c 100,000
Capital Reserve A/c 100,000
(Being profit on 200 forfeited shares @500 per share re-issued transferred to
capital reserve A/c)

Case 2
• Dr.Bank A/c 160,000
Cr.Share Capital A/c 160,000
(Being 200 forfeited shares re-issued as
TZS.800/- per share paid up)
• Dr.Share forfeited A/c 100,000
Cr. Capital reserve A/c 100,000
(Being the profit on 200 forfeited shares re-issued
transferred to capital reserve A/c)

Case 3
• Dr.Bank A/c 140,000
Dr.Shares forfeited A/c 20,000
(Being 200 forfeited shares re-issued as TZS.800/-
paid up for TZS.700/- per share)
• Dr.Shares forfeited A/c 80,000
Cr.Capital reserve A/c 80,000
(Being balance of profit on 200 forfeited shares re-issued
transferred to capital reserve A/c)

Case 4:
• Dr.Bank A/c 250,000
(Being 500 shares issued for TZS.500/- per share, as TZS.800/-
per share paid up)
Cr.Capital reserve A/c 100,000
(Being balance of profit on forfeited shares re-issued
transferred to capital reserve A/c).
• It may be noted that in the first 3 cases, only 200 shares
were re-issued. Profit made on these shares at that time of
forfeiture is TZS.100,000 (200 x 500). Only this amount,
after adjusting the discount allowed at the time of re-issue
is transferred to capital reserve account.
• While in the 4th case, all 500 shares are re-issued. Hence
the entire balance in share forfeited account left after re-issue
(TZS.250,000 - TZS.150,000) is transferred to capital
reserve A/c.

Reissue of shares which are originally issued at
discount
When shares originally issued at a discount are forfeited and re-issued at a
discount, the original discount is debited to “Discount on issue of shares” a/c
and the remaining discount is debited to “Shares forfeited A/c”.
Illustration 5:
PM Limited forfeited 100 shares of TZS.1,000/- each issued at a discount of
10% to Manoti on which he paid only application money of TZS.200/- per
share as he failed to pay allotment money TZS.300/- per share. Show
necessary journal entries for forfeiture and re-issue in the following cases.
Case 1:
• 80 shares were reissued for TZS.500 per share where as TZS.600/- paid up
Case 2:
• 80 shares were reissued for TZS.400/- per share where as TZS.600/- paid up
Case 3:
• All shares were re-issued as TZS.600/- paid up for TZS.600/- per share.

solution:
Journal
• Share Capital A/c 60,000
Discount on issue of share A/c 10,000
Share Allotment A/c 30,000
(Being 100 shares forfeited for non-payment of allotment
money of TZS.300/- per share).
• The above forfeiture entry is common in all cases.
• Only the entry for reissue differs in different cases.
• It may be noted that share capital account is debited
with TZS.600/- per share (Application money TZS.200 +
Allotment money TZS.300 + discount allowed TZS.100/-)

Entries on Re-issue
Case 1:
Journal
• Bank A/c 40,000
Discount on issue of shares A/c 8,000
Share Capital A/c 48,000
(Being 80 shares issued at TZS.600 per share for TZS.500 per share)
• Share forfeited A/c 16,000
Capital Reserve A/c 16,000
(Being profit on 80 shares re-issued transferred Capital reserve).

Case 2:
• Dr.Bank A/c 32,000
Dr.Discount on issue of shares A/c 8,000
(Being 80 shares re-issued for TZS.400 per share, original
discount debited Discount account and the balance
Shares forfeited A/c.)
• Dr.Shares Forfeited A/c 8,000
• Cr.Capital reserve A/c 8,000
(Being balance of profit on 80 shares re-issued
transferred Capital reserve A/c.

Case 3:
• Dr.Bank A/c 60,000
(Being 100 shares re-issued for TZS.600/- per
share)
Cr.Capital Reserve A/c 20,000
(Being profit on forfeited shares transferred
Capital reserve on re-issued)

Pro-Rata Allotment, Forfeiture
and Re-issue
• Under oversubscription of shares it is not possible for
the company to satisfy the demand of all the
applicants. It rejects some applications altogether,
allots in full some applications and makes a pro rata
allotment on some other applications.
• In solving questions relating to over-subscription,
students face the difficulty only at such places where
some of the shares belonging to pro rata category are
forfeited. In such case the calculation of amount to be
forfeited poses a problem which is to be calculated by
finding the amount the applicant sent on total shares
applied for. Therefore, to reach correct solution the
following procedure is recommended:

Contd:
• a) Calculate total shares applied for.
• b) Multiply the number of shares with the application
money. This gives total money sent with the
applications. This amount is forfeited on default.
• c) Deduct from it the amount due on application with
the help of shares allotted. This gives money sent by
the applicant in advance with the application. This
money is available for adjustment towards allotment.
• d) Calculate amount due on allotment and deduct from
it the amount sent in advance with application as per
(c) above. This gives the amount in arrears on
allotment. It is credited to share allotment account at
the time of forfeiture.

Illustration 6:
DEF Company Limited issued a prospectus inviting applications for 10,000
shares of TZS.1,000 each at premium of TZS.200 per share payable as follows:
• On application TZS.200
• On allotment TZS.500 (including premium)
• On first call TZS.300
• On second and final call TZS.200
Applications were received for 15,000 shares and pro rata allotment made on
the applications for 12,000 shares. Money overpaid on application was
utilized towards allotment money.
• Mr. John, to whom 200 shares were allotted, failed to pay the allotment
money and on his subsequent failure to pay the first call, his shares were
forfeited.
• Mr. Baraka, the holder of 300 shares, failed to pay both the calls, and his
shares were forfeited after the second call.
Of the shares forfeited, 400 shares were sold to Mr. Husein, credited as fully
paid for TZS.900 per share, the whole of Mr. John’s shares being included.
Pass the necessary journal entries to give effect the above and prepare Bank
Account, Forfeited Shares Account and the Statement of Financial Position.

Solution:
DEF Company Limited Journal Entries
Particulars Dr TZS. Cr. TZS.
Bank account 3,000,000
Share application account 3,000,000
(Being application money received on 15,000 shares at TZS.200 per share)
• Share application account 2,000,000
Share capital account 2,000,000
(Being allotment of 10,000 shares to the applicants of 12,000 shares)
• Share allotment account 5,000,000
Share capital account 3,000,000
Security premium account 2,000,000
(Being amount due on account at TZS.500 - TZS.300 for capital and TZS.200
for premium - on 10,000 shares)
• Share application account 1,000,000
Share allotment account 400,000
Bank (Note 1) 600,000
(Being surplus application money (10,000 shares were allotted on applications
for 12,000 shares) used towards allotment money and refund of application
money to applicants for 3,000 shares, to whom no allotment was made)

contd:
• Dr. Bank account 4,508,000
Cr. Share allotment account 4,508,000
(Being receipt of allotment money on 10,000 shares less Mr. John’s shares) (Note 4)
• Dr.Share first call account 3,000,000
Cr. Share capital account 3,000,000
(Being first call of TZS.300 due on 10,000 shares)
• Dr.Bank account 2,850,000
Cr.Share first call account 2,850,000
(Being receipt of first call money on 10,000 shares less 500 shares of Mr. John and
Mr. Baraka)
• Dr.Share capital account 160,000
Dr.Securities premium account 40,000
Cr.Share allotment account (Note 3) 92,000
Cr.Share first call account 60,000
Cr.Share forfeited account (Note 2) 48,000
(Being forfeiture of 200 shares held by Mr. John for non-payment of allotment
money and the first call. Share capital debited at TZS.800 per share called up and
share premium debited at TZS per share)

Contd:
• Dr.Share second and final call account 1,960,000
Cr.Share capital account 1,960,000
[Being amount due on second and final call at TZS.200 per share on 9,800
shares (10,000 shares less 200 shares forfeited) ]
• Dr.Bank account 1,900,000
Cr.Share second and final call account 1,900,000
(Being receipt of second and final call money on 9,500 shares less 500 shares)
• Dr.Share capital account 300,000
Cr.Share first call account 90,000
Cr.Share second and final call account 60,000
Cr.Share forfeited account 150,000
(Being forfeiture of Mr. Baraka’s 300 shares for non-payment of two calls)
• Dr.Bank account 360,000
Dr.Shares forfeited account 40,000
Cr.Share capital account 400,000
(Being re-issue of 400 forfeited shares to Mr. Husein at TZS.900 per share –
TZS. 100 per share discount on re-issue debited to shares forfeited account)

Contd:
• Dr.Share forfeited account 108,000
Cr.Capital reserve 108,000
(Being profit on re-issue of 400 shares transferred to Capital
reserve account leaving a balance of TZS.100,000 in the shares
forfeited account (TZS.1,000 per share on 100 shares of Mr.Baraka
not yet re-issued))
Dr. Bank Account Cr.
Share allotment account 4,508,000 Balance c/d 12,018,000
Share first call account 2,850,000
Share second and final
call A/c 1,900,000
Share capital account 360,000
______________________________________________________
12,618,000 12,618,000
Balance b/d 12,018,000

Contd:
Dr. Forfeited Shares Account Cr.
Particulars Amount Particulars Amount
TZS. TZS.
Share capital A/c 40,000 Share capital A/c 48,000
(Discount on re-issue) Share capital A/c 150,000
Capital reserve 1 08,000
(Profit on re-issue)
Balance c/d 50,000
__________________________________________________________
198,000 198,000
DEF Company Ltd. STATEMENT OF FINANCIAL POSITION as at .....
Liabilities and Capital (TZS) Assets (TZS)
SHARE CAPITAL CURRENT ASSETS
Authorized Cash at Bank 12,018,000
• .Shares of TZS.1000 Each ......
• Issued: 10,000 shares of
TZS.1000 each 10,000,000
• Subscribed 9,900 shares of
• TZS.1000 each fully paid 9,900,000
• Shares forfeited account 50,000
• RESERVES & SURPLUS
• Securities premium 1,960,000
• Capital reserve 108,000
_________________________________________________________________________________
12,018,000 12,018,000

Contd:
Notes:
1. Since total number of shares offered to the public was only 10,000, the allotment in
no case should exceed 10,000 shares. This allotment has been made to those who
applied for 12,000 shares. Others applying for 3,000 shares were not allotted any
shares. Hence the refund of TZS.600,000.
2. Calculation of amount received from Mr. John
Mr. John has paid TZS.48,000 in all as under:
• When shares allotted were 10,000, shares applied for were 12,000
• When shares allotted were 200 shares applied for were 12,000/10,000 x 200 = 240
shares
• Application money on 240 shares @ TZS.200 = TZS.48,000
3. Calculation of money due from Mr. John on allotment
• Money due from Mr. John on account of allotment is not TZS.100,000 (i.e., 200 x 500)
but TZS.184,000. This has been calculated as follows:
• Total allotment due on 200 shares @ TZS.500 per share TZS.100,000
• Less: Advance from Mr. John received on application
• adjusted towards allotment:
• Received on application TZS.48,000
• Adjusted on application (200 x TZS.200) 40,000 8,000
TZS. 92,000
• Amount due on allotment 92,000
(4). Total sum received on allotment is: TZS.5,000,000 - 400,000 – 92,000 = TZS.4508,000

Illustration 7:
Pay Pal Limited issued a prospectus inviting application for 12,000 shares
of TZS.1,000 each at a premium of TZS.200 per share, payable as follows:
• On application TZS.200 per share
• On allotment TZS.500 per share (including premium)
• On 1st call TZS.300 per share
• On second and final call TZS.200 per share
Applications were received for 18,000 shares and allotment was made
pro rata to the applicants of 15,000 shares, the remaining applicants were
refused allotment. Money overpaid on applications was applied towards
sum due on allotment.
• Adam, to whom 200 shares were allotted, failed to pay the allotment
money and on his subsequent failure to pay the first call, his shares
were forfeited. Barikiel, the holder of 400 shares, failed to pay both
the calls, and his shares were forfeited after the second and final call.
• Of the shares forfeited, 400 shares were sold to Chiku credited as fully
paid up for TZS.850 per share, the whole of Adam’s shares being
included.
• Record Journal and Cash Book entries

Underwriting of shares
• an underwriter is a person who undertakes to
take-up the whole or a portion of the shares
or debentures offered by a company to the
public for subscription in the circumstances, if
the public does not subscribe them. The
company pays commission to an underwriter
for the services provided by him. It is known
as underwriting commission. The agreement
between company and underwrite is called
underwriting.

Underwriters may be persons or institutions, who undertake the responsibility of buying
whole or part of shares or debentures offered to public if public does not subscribe them.
Brokers are persons or institutions who help in subscribing shares or debentures offered
to the public for brokerage.
The specific differences between underwriters and brokers are given below.
underwriters
• An underwriter agrees to take
up specified number of
shares or debentures, which
are not subscribed by the
public
• Underwriters have
responsibility and therefore
held liable to take up shares
and debentures in case the
public fails to subscribe
• An underwriter gives
guarantee of underwriting
shares or debentures
• An under writer gets under-
Writing commission
Brokers
• A broker helps in subscripting the
shares and debentures of a
company
• Brokers have no responsibility
hence they are not liable
• A broker provides the service in
subscribing the share
• A broker gets brokerage fee

Types of Underwriting
the main types of underwriting agreements include:
a. Complete underwriting
b. Partial under writing
c. Firm underwriting and sub underwriting
a) Complete underwriting:
• When the complete issue of shares or debentures
of a company is underwritten, it is called complete
under writing.
• The whole issue may be underwritten either by an
individual or institution agreeing to take the entire
risk or by a number of firms or institutions each
agreeing to take the risk to a limited extent.

b) Partial underwriting:
• When a part of the issue of shares or debentures of a
company is underwritten, it is known as partial
underwriting.
• When an underwriter transfers a part of his underwriting
risk by entering into a sub-agreement with other persons it
is called sub-underwriting. Such persons are known as sub-underwriters.
Sub-underwriting helps in spreading the risk.
• Sometimes the whole issue may be underwritten by an
individual institution agreeing to take the entire risk and
shared by a number of firms or institutions each agreeing
to take the risk to a limited extent. In such event the
agreement between the company that has issued shares or
debentures and the underwriter who has taken total risk is
known as complete underwriting.
• The agreement between the underwriter who has taken
total risk of undertaking and other under writers who have
shared the risk of undertaking from them is known as sub
underwriting or partial underwriting.

c) Firm Underwriting:
• When an underwriter agrees to buy a definite
number of shares or debentures in addition to
the shares or debentures undertaken as per the
agreement, it is known as firm underwriting.
• When the shares / debentures are over-subscribed
these under writers get priority over
the general public.
• Even in case of over subscription, then
underwriters are liable to take up the agreed
number of shares or debentures.

Illustration 1:
• A company issued 80,000 shares of TZS.1,500
each. CRDB bank has underwritten the whole
issue for a commission of 4%. Applications
have been received for 75,000 shares, which
were accepted and allotted by the company.
All the amounts due have been received. Pass
journal entries and prepare Statement of
Financial Position

Solution:
Journal Entries
• Bank A/c 112,500,000
Equity share Applications A/c 112,500,000
(Being application money received on 75,000 shares of TZS.1,500 each)
• Equity share Application A/c 112,500,000
(Being allotment of 75,000 shares of TZS.1,500 each)
• CRDB A/c 7,500,000
(Being allotment of 5000 shares of TZS.1,500 each not taken up by the
public)
• Commission on issue of shares A/c 4,800,000
CRDB A/c 4,800,000
(Being commission due to CRDB @ 4% on TZS.120,000,000)
• Bank A/c 2,700,000
CRDB A/c 2,700,000
(Being balance due from CRDB received (7,500,000 - 4,800,000 = 2,700,000)

Statement of Financial Position of ...
as on
Liabilities TZS. Assets TZS.
Share Capital: Current Assets:
80,000 equity shares of Cash at Bank 115,200,000
TZS.1,500 each fully (TZS.112,500,000 +
paid 120,000,000 TZS. 2,700,000)
Misc. Exp.
Commission on
-------- issue of shares 4,800,000
120,000,000 20,000,000

Whole of issue of securities (Shares or debentures) is
underwritten by a number of underwriters in an agreed
ratio:
• In this case the liability of the underwriters can be
determined in any of the following two methods:
• Method 1: The gross liability of each underwriter should be
reduced first by marked applications and unmarked
application should be deducted from the balance left in the
ratio of their gross liability. The liability of each underwriter
can be calculated as follows:
• Gross liability according to the agreed ratio xxx
• Less: Marked applications xxx
• Balance left xxx
• Less: Unmarked applications in the ratio of gross
liability for applications xxx
• Net liability xxx

Illustration 2:
• Sungusungu & Co issued 200,000 equity
shares. The whole of the issue was
underwritten in the proportion of. A - 45%; B -
30% ; C - 25%.
• Applications were received for 180,000 shares
of which 45,000 shares had the stamp of A;
35,000 shares of B and for 20,000 that of C.
• The remaining applications for 80,000 shares
were not stamped. Show the liability of
underwriters.

Solution:
Statement showing the liability of Underwriters
Particulars A B C Total
45% 30% 25% 100%
Shares Shares Shares Shares
Gross liability 90,000 60,000 50,000 200,000
Less: Marked appl. 45,000 35,000 20,000 100,000
Balance left 45,000 25,000 30,000 100,000
Less: Unmarked
Applications * 36,000 24,000 20,000 80,000
• Net liability 9,000 1,000 10,000 20,000
• *In the ratio of gross liability 90,000: 60,000: 50,000
or 45: 30: 25)

Method 2:
• In this method the gross liability of each
underwriter should be reduced first by the
marked application in an agreed ratio. Then the
unmarked applications, which are sent directly to
the company, are to be apportioned in the ratio
of balance left. The liability of each underwriter
• Gross: Liability according to the agree ratio xxx
• Less: Marked applications xxx
• Balance left xxx
• Less: Unmarked applications in the ratio of
balance left xxx
• Net liability xxx

Illustration 3:
Chunche & Co. Ltd had made an issue of 25,000 Equity
shares of TZS.20,000 each. The entire issue has been
underwritten as follows:
• P & Co 8000 shares
• Q & Co 7000 shares
• R & Co 4000 shares
• S & Co 6000 shares
The applications marked by the underwriters are P & Co
6,000 shares, Q & Co 4,500 shares, R & Co 3000 shares S
& Co 4000 shares. Applications for 4500 equity shares are
unmarked.
Calculate the liability of each underwriter. In terms.. of
underwriting agreement, the liability is to be ascertained
in the ratio of gross liability as reduced by marked
applications.

Solution:
Statement showing the liability of underwriters (For shares not
yet applied for)
Particulars P & Co Q & Co R & Co S & Co Total
Gross liability 8,000 7,000 4,000 6,000 25,000
Less: Marked
appl. 6,000 4,500 3,000 4,000 17,500
Balance left 2,000 2,500 1,000 2,000 7,500
Less: Unmarked
or Direct
Applications * 1,200 1,500 600 1,200 4,500
Net liability 800 1,000 400 800 3,000
*In the ratio of balance left or in the ratio of gross liabilities as
reduced 2000:2500:1000:2000 or 4: 5: 2: 4)

Illustration 4:
• NBC Ltd. underwrites the new issue of 4,000
shares of TZS.10,000 each of Kioo Ltd. The
agreed commission was 5% payable as 60% in
cash and the rest in fully paid shares. The
public subscribed for 1600 shares and the rest
had to be taken up by the underwriter. The
shares were subsequently quoted in the
market at 15% discount. Pass necessary
journal entries in the books of the company
and underwriter and prepare shares account
in the books of the underwriter.

Solution:
Journal Entries in the books of Kioo Ltd
Date Particulars LF Debit (TZS) Credit (TZS)
• “ Bank A/c 16,000,000
Share capital A/c 16,000,000
(Being subscription of 1600 shares of TZS10,000 each by the public)
• “ NBC Ltd A/c 24,000,000
Share capital A/c 24,000,000
(Being 2400 shares of TZS10,000 each issued to underwriter)
• “ Commission on issue of shares A/c 2,000,000
(or) underwriting commission A/c
NBC Ltd A/c 2,000,000
(Being commission due to NBC Ltd @ 5% on TZS.40,000,000)
• “ NBC Ltd A/c 800,000
Share capital 800,000
(Being 40% of underwriting commission paid by issuing fully paid shares)
• Bank A/c 22,800,000
NBC Ltd A/c 22,800,000
(Being balance received in cash from NBC Ltd)

Journal entries in the books of NBC Ltd
Date Particulars LF Debit (TZS) Credit (TZS)
• “ Shares in Kioo Ltd A/c 24,000,000
Kioo Ltd 24,000,000
(Being shares received from Kioo Ltd not taken over by the public)
• Kioo Ltd A/c 2,000,000
Underwriting commission 2,000,000
(Being Commission on underwritten shares due from Kioo Ltd)
• Shares in Kioo Ltd A/c 800,000
Kioo Ltd A/c 800,000
(Being 40% of Commission received in shares)
• Kioo Ltd A/c 22,800,000
Bank A/c 22,800,000
(Being balance due to Kioo Ltd paid)
• Underwriting commission A/c 2,000,000
Profit & Loss A/c 1,720,000
Shares in Kioo Ltd 3,720,000
(Being loss on account of fall in the price of shares by 15% of 24,800,000)

Dr. Shares in Kioo Ltd A/c Cr
Date Particulars Amount Date Particulars Amount
TZS TZS
Kioo Ltd 24,000,000 Underwriting
Kioo Ltd 800,000 Commission 2,000,000
Profit & 1,720,000
Loss A/c
(Balancing) Balance c/d 21,080,000
24,800,000 24,800,000

When Part of the Issue of Securities is
underwritten by a Number of Underwriters
• In this case part of the whole issue (say 60% or
70%) is underwritten by a number of
underwriters for the balance (40% or 30%)
concerned the company itself is the underwriter.
• As far as the company is concerned all unmarked
applications are treated as marked applications.
• The method of calculating the liability of the
underwriters is similar to the method followed in
case of part of securities underwritten by one
underwriter.

Illustration 6:
• Wekeza Ltd. issued 15,000 Equity shares of
TZS.1,000 each. The issue was underwritten as
follows:
• X = 30%, Y = 35%, Z = 15%.
• The company received applications for 12,000
shares only. Determine the liability of each
underwriter.

Solution:
• 80% of the shares have been underwritten by underwriters,
for the rest 20% of the shares the company is treated as
underwriter.
Calculation of liability of each underwriter
• Total number of shares issued 15,000
• Less: Applications received 12,000
• Unsubscribed applications 3,000
• X’s liability - 30% of 3,000 = 900
• Y’s liability - 35% of 3,000 = 1,050
• Z’s liability - 15% of 3,000 = 450
• Total liability of X, Y and Z = 900 + 1,050 + 450 = 2,400. This
represents 80% of the total issue underwritten. The
balance 20% (i.e., 3000 - 2400 = 600 shares), which is not
underwritten, remains unissued.

Alternatively the liability of underwriters
Statement showing the liability of underwriters
Particulars Total X Y Z Company
Total liability 100% 30% 35% 15% 20%
Total shares 15,000 4,500 5,250 2,250 3,000
Less: Shares applied
and allotted* 12,000 3,600 4,200 1,800 2,400
Liability of
underwriter 3,000 900 1,050 450 600
• *12000 share to be distributed in the ratio of 30:
35: 15: 20

Firm Underwriting
• When an underwriter agrees to buy a definite number of shares or
debentures in addition to the shares or debentures undertaken as per the
agreement, it is known as firm underwriting. When the shares / debentures
are over-subscribed these under writers get priority over the general public.
Even in the case of over subscription, the underwriters are liable to take up
the agreed number of shares or debentures.
Open and Firm Underwriting:
• An agreement to take-up shares of debentures only when the issue is not
subscribed in full is called open underwriting. For example, if an underwriter
guarantees the issue of 60,000 shares and the public applied for 40,000
shares, then the underwriter has to purchase the balance of 20,000 shares,
which are unsubscribed. When the public apply for all the shares issued, the
underwriter has no liability against the shares.
• But, when an underwriter make an agreement to purchase certain number of
shares or debentures, irrespective of public subscription it is known as firm
underwriting. Here the underwriter agrees to take specified number of
shares or debentures, in addition to the unsubscribed shares or debentures.
In case of over subscription the underwriter will have priority over the public
in allotment of shares or debentures. Firm applications are treated as direct
applications from the public and are included therein. The total liability of the
underwriter is calculated as follows.
• Total liability = Net liability for unsubscribed shares on the basis of
underwriting agreement + liability under firm underwriting.

In case of firm underwriting calculation of unmarked application
a) If marked application include firm underwriting
unmarked application = Total subscription - Marked applications
b) If unmarked application include firm underwriting
unmarked application = (Total subscription - Marked application) +
firm underwriting
Illustration 7:
A company issued 160,000 Equity shares which were underwritten as follows:
• Mr. A - 96,000 Equity shares, M/s B & Co - 40,000 Equity shares, M/s C &
Co - 24,000 Equity shares. These underwriters made the following firm
underwriting Mr. A - 12,800 Equity shares, M/s B & Co - 16,000 Equity
shares, M/s C & Co 4,800 Equity shares. The total applications excluding
firm underwriting but including marked applications were for 80,000
Equity shares.
• The marked applications were as under.
Mr. A - 16,000 Equity shares, M/s B & Co 20,000 Equity shares, M/s C &
Co – 8000
Equity shares.
The underwriting contracts provide that the underwriters be given credit for
firm application and the credit for the marked application be given in
proportion to the shares underwritten. Show the allocation of liability.

Solution: Statement showing the liability of underwriters
Particulars Mr. A M/s B & Co M/s C & Co Total
Gross liability 96,000 40,000 24,000 160,000
Less: Marked appl. 16,000 20,000 8,000 44,000
Balance left 80,000 20,000 16,000 116,000
Less: Unmarked
Appl . * 21,600 9,000 5,400 36,000
58,400 11,000 10,600 80,000
Less: Firm underwr. 12,800 16,000 4,800 33,600
Balance to be taken
under the contract 45,600 -5,000 5,800 46,400
Less: credit for
excess of 4,000 +5,000 1,000 ----------------------------
M/s B & Co
(Ratio 96: 24)
Net liability 41,600 - 4,800 46,400
Add: Firm under
Writing 12,800 16,000 4,800 33,600
Total liability 54,400 16,000 9,600 80,000
* Unmarked application = Total subscription - Marked application (80,000 - 44,000
= 36,000). (Gross liability Ratio = 96: 40: 24)

Illustration 8:
• Mwananchi Ltd invited applications from public for 200,000
equity shares of TZS.1,000 each at a premium of TZS.500 per
share. The entire issue was underwritten by the underwriters P,
Q, R, S to the extent of 30%, 30%, 20% and 20% respectively
with the provision of firm underwriting of 6,000, 4,000, 2,000
and 2,000 shares respectively. The underwriters were entitled to
the maximum commission permitted by law.
• The company received applications for 140,000 shares from
public out of which application for 38,000, 20,000, 42,000 and
16,000 shares were marked in favor of P, Q, R, S respectively.
Calculate the liability of each underwriter assuming:
• a) firm underwriting shares on par with marked applications
• b) firm underwriting shares on par with unmarked applications.
• Also ascertain the commission

Solution:
a) Firm underwriting shares on par with marked applications
Particulars P Q R S Total
Gross liability 60,000 60,000 40,000 40,000 200,000
Less: Unmarked
Applications * 7,200 7,200 4,800 4,800 24,000
Balance left 52,800 52,800 35,200 35,200 176,000
Less: Marked appl. 38,000 20,000 42,000 16,000 116,000
Balance left 14,800 32,800 (6,800) 19,200 60,000
Less: Firm underwr. 6,000 4,000 (2,000) 2,000 14,000
Balance left 8,800 28,800 (8,800) 17,200 46,400
Less: Credit of
Surplus ** 3,300 3,300 8,800 2,200 ?
Net liability 5,500 25,500 - 15,000 46,500
Add: Firm underwrit.6,000 4,000 2,000 2,000 15,000
Total liability 11,500 29,500 2,000 17,000 60,000
• *(140,000 - 116,000 = 24,000) in the ratio of 6: 6: 4: 4 or 3: 3: 2: 2)
• ** R’s surplus to P, Q & S in the gross liability ratio 6: 6: 2 or 3: 3: 2

b) Firm underwriting shares on par with unmarked applications
Particulars P Q R S Total
Gross liability 60,000 60,000 40,000 40,000 200,000
Less: Unmarked app* 11,400 11,400 7,600 7,600 38,000
Balance left 48,600 48,600 32,400 32,400 162,000
Less: Marked appl. 38,000 20,000 42,000 16,000 116,000
10,600 28,600 (9,600) 16,400 46,000
Less: Credit of surp** 3,600 3,600 9,600 2,400 -
Net liability 7,000 25,000 - 14,000 46,000
Add: Firm underwriting6,000 4,000 2,000 2,000 14,000
Total liability 13,000 29,000 2,000 16,000 60,000
• ***Commission payable 1,500 1,500 1,000 1,000 5,000
• *(140,000-116,000) + 14,000 in the gross liability ratio 6: 6: 4: 4)
• ** R’s surplus to P, Q, S in gross liability ratio 6: 6: 4
• ***The rate of commission is not specified. Therefore it is calculated at 2.5% as per the
practice laid down by SEBI for illustrative purposes.
• Unmarked application = (Total subscription - Marked application) + firm underwriting

Illustration 9:
• X Ltd. issued 2,000 shares of TZS.1,000 each and
entered into an underwriting agreement with Y
who agreed to underwrite the whole issue at a
commission of 4% and entered into sub-underwriting
agreement with Z for 5% of the
issue at a commission of 3%. The public applied
only for 75% of issue; hence the balance was
take-up by the underwriters. Y sold the shares
held by him @ TZS.800 per share. Pass journal
entries and show the accounts in the books Y.

Solution: In the book of Y Journal Entries
• Share in X Ltd A/c 500,000
Bank A/c 500,000
(Being 25% of the issue i.e., 500 shares of TZS.1,000 each taken up as per Underwriting agreement)
• Bank A/c 80,000
Commission A/c 80,000
(Being 4% commission received on 2,000 shares of 1,000 each)
• Z A/c 125,000
Shares in X Ltd A/c 125,000
(Being 25% of 500 shares given to Z under the sub-underwriting agreement)
• Commission A/c 15,000
Z A/c 15,000
(Being commission @ 3% payable on 500 shares of TZS.1,000 each under sub- underwriting agreement)
• Bank A/c 110,000
Z A/c 110,000
(Being amount due from Z received) TZS.125,000 - 15,000 = 110,000
• Bank A/c 300,000
Shares in X Ltd. A/c 300,000
(Being sales of 375 shares @ TZS.800 per shares)
• Commission A/c 75,000
Shares in X ltd A/c 75,000
(Being loss on shares transferred to commission A/c)
• Profit and loss A/c 10,000
Commission A/c 10,000
(Being balance in commission A/c transferred to Profit and loss A/c)

Bonus shares
• Normally companies prefer to accumulate reserves out of
profits for strengthening their financial position.
• When a large amount of reserves are accumulated,
companies like to distribute these reserves to the existing
shareholders by way of either (a) Cash bonus or (b) Share
Bonus.
• If accumulated reserves are backed by adequate cash
balance or liquidity position companies may prefer to
distribute Cash Bonus.
• When a company has large accumulated reserves not backed
by sufficient cash balance; it may issue Bonus Shares to its
shareholders.
• This results into increase in the amount of share capital and
distribution of dividend to the shareholders without release
of any assets. Bonus shares are also known as Capital Bonus.
• Bonus Shares may be issued by converting partly paid up
shares as full paid up without receiving cash from the
shareholders or it is given by the issue of free fully paid
shares.

Meaning and Features
Shares issued free of cost to the existing shareholders by way of capitalization of profits and
reserves are known as Bonus Shares. Capitalization of profits and reserves imply acquiring
of any profit or reserve permanently for the use of the company. The following are the
features of Bonus shares.
• 1) Bonus Shares are issued out of accumulated profits and reserves of companies.
• 2) Bonus Shares are issued to the existing shareholders in certain specific proportion to
the existing shares. For example 2: 1, one Bonus Shares for every two shares held .
• 3) Against issue of Bonus Shares accumulated profits and reserves are capitalized.
• 4) As a result of issue of Bonus Shares the total number of shares of each shareholder will
increase and also the total paid up capital of the company increases.
• 5) Bonus Shares issued do not affect the assets of companies and the total assets remain
the same even after issue of Bonus Shares.
• 6) Bonus Share is issued out of the following reserves and profits.
• (i) Capital Redemption Reserve Account.
• (ii) Securities Premium received in cash
• (iii) General Reserves
• (iv) Credit Balance in the Profit and Loss Account
• (v) Capital Profit such as profit prior to incorporation, profit on purchase of business and
profit on sale of fixed assets received in cash.
• (vi) Any other reserves accumulated out of profits Item nos (i) and (ii) account balances
can be utilized only for issuing fully paid Bonus Shares and not for making partly paid
shares into fully paid. Other requirements could be provided for in the Companies Act of a
respective country.

Guidelines for issue of Bonus shares
• 1) The Articles of Association of the company permit the issue of Bonus
Shares.
• 2) Consent of Controller of Capital Issues
• 3) The company should pass a resolution at the General Body Meeting
for issuing Bonus Shares before an application is made to the Controller
of Capital Issues.
• 4) The company should furnish such resolution (item 3) for bonus issue
before an application is mode to Controller of Capital Issues.
• 5) Due to issue of Bonus Shares if the subscribed and paid up capital
exceeds the authorized capital a resolution must be passed at the
general body meeting in respect of increase in the authorized capital
necessary.
• 6) The Bonus issue is permitted from free reserves built out of the
genuine profits or share premium collected in cash only.
• 7) Development Reserve / Investment Allowance Reserve is considered
as free reserve for the purpose of calculation of residual reserve.
• 8) Reserves created by revaluation of fixed assets are not permitted to
capitalize.
• 9) The residual reserves, after the proposed capitalization should be at
least 40% of the increased paid up capital.

Guidelines for issue of bonus shares contd:
• 10) The number of Bonus Shares at one issue cannot be more than the number
of shares already held.
• 11) All contingent liabilities disclosed in the audited account, which have a
bearing on the net profits, shall be taken into account in the calculation of the
minimum residual reserves.
• 12) 30% of the average profits before tax of the company for previous 3 years
should yield a rate of dividend on the expanded capital base of the company at
10%.
• 13) Declaration of Bonus issue in lieu of dividend is not allowed.
• 14) Between two successive announcements of Bonus issues by a company
there should be a time lag of at least 36 months.
• 15) Bonus issues are not permitted unless the partly paid shares if any existing,
are made fully paid up.
• 16) No Bonus issue will be permitted if there are sufficient reasons to believe
that the company has defaulted in respect of the payment of statutory dues of
the employees such as contribution to Provident Fund, Gratuity, Bonus, etc.
• 17) Not more than two bonus issues will be allowed to a company over a period
of five years.
• 18) Applications for issue of Bonus shares should be made within one month of
the Bonus announcements by the Board of Directors of

Accounting Treatment
Bonus issue may be in two forms. (1) Conversion of partly paid up shares
into fully paid shares or (2) Issuing new fully paid up shares. The accounting
treatment under these both the forms are shown below:
(a) When fully paid Bonus Shares are issued
1) When amount transferred from reserves to Bonus Shares to shareholders
Account:
• Dr. Profit and Loss Appropriation A/c
Dr. General Reserve A/c
Dr. Capital Redemption Reserve A/C
Dr. Share premium A/c
Dr. Any other Reserve A/c
Cr. Bonus to shareholders A/c
(Being the amount transferred for issue of Bonus shares depending upon
the available balances in the above accounts)
2) When fully paid Bonus shares are issued:
• Dr. Bonus to shareholders A/c
Cr. share capital A/c
Cr. share premium A/c (if issued at premium)
(Being fully paid Bonus shares issued)

(b) When Bonus shares are issued for making partly
paid up shares into fully paid.
1) When amount transferred for Bonus payable to members:
(shareholders)
• Dr. Profit and Loss Appropriation A/c
Dr. General Reserve A/c
Dr. Capital profit A/c
Cr. Bonus to Shareholders A/c
(Being the amount transferred for Bonus payable to Shareholders)
2) On making final call on the shares:
• Dr. Share final call A/c
Cr. Share Capital A/c
(Being the amount due from the shareholders in respect of final
call)
3) On adjustment of Bonus towards final call
• Dr. Bonus to Shareholders A/c
Cr. Share Final call A/c
(Being the bonus to shareholders applied towards meeting the call)

Illustration 1:
The following are extracts from the Statement of
Financial Position of ABC Ltd as on 31-3-2001.
• Authorized Capital TZS. (10,000 equity shares of TZS.
1,000 each) 10,000,000
• Issued and subscribed capital: (5,000 equity shares of
TZS. 1,000 each fully paid-up) 5,000,000
• Reserve fund 3,500,000
• Profit and Loss Account 1,000,000
A resolution was passed to issue, 1,000 bonus shares of
TZS. 1,000 each by providing TZS. 500,000 out of the P &
L Account and the balance out of the Reserve Fund.
Set out Journal entries to give effect to the resolution and
show how they would affect the Statement of Financial
Position.

Solution:
JOURNAL
Particulars Dr. Cr.
TZS. TZS.
• Profit and Loss A/c 500,000
Reserve Fund 500,000
Bonus to Shareholders A/c 1,000,000
(Being the amount of the Reserve Fund and Profit
and Loss A/c to be capitalized )
• Bonus to Shareholders A/c 1,000,000
Share Capital A/c 1,000,000
(Being issue of 1,000 bonus shares of TZS. 1,000
each)

Bonus in the form of Fully Paid Shares at Par
Illustration 2:
• A Company has a share capital of TZS. 75,000,000
in Equity Shares of TZS. 1,000 each. Out of the
above, 50,000 shares were issued and fully paid
up. The Company's General Reserve amounts to
TZS. 50,000,000. The directors now propose to
utilize the necessary amount from the general
reserve for the purpose of declaring a bonus of
TZS. 25,000,000 as fully paid bonus shares. The
Articles of the Company permit such a course and
necessary sanction has been obtained.
• You are required to Show necessary journal
entries in the books to record the new issue of
bonus shares.

Solution:
Journal
Particulars LF Dr. Cr.
TZS. TZS.
Dr. General Reserve
Account 25,000,000
Cr. Bonus to Shareholders Account 25,000,000
(Being bonus declared)
Dr. Bonus to Shareholders
Account 25,000,000
Cr. Share Capital Account 25,000,000
(Being utilization of bonus towards issue of 25,000 shares
of TZS. 1,000 each, and distribution in the ratio of one
share for every two shares held)

Bonus in the form of fully paid shares at premium
Illustration 3:
• A Company has a share capital of TZS.
70,000,000 in Equity Shares of TZS. 1,000,
each which are quoted, in the market at TZS.
2,000. The company now declares a bonus of
TZS. 60,000,000 out of its reserve and this
bonus is to be paid by issue of fully paid Equity
Shares of TZS. 1,000 each at a premium of TZS.
500 per share. Show necessary journal entries
to record the transactions.

Solution:
Journal Entries
Particulars LF Dr. (TZS.) Cr. (TZS.)
• Reserve Account 60,000,000
Bonus to Shareholders Account 60,000,000
(Being bonus declared)
• Bonus to
Shareholders Account 60,000,000
Share Capital Account 40,000,000
Share Premium Account 20,000,000
(Being 40,000 bonus shares of TZS. 1,000 each
issued at TZS. 1,500 each

Illustration 8:
The Statement of Financial Position of Nyachi Ltd. as on
31st March 2001 is given below.
Liabilities TZS. Assets TZS.
Share Capital:
• Authorized Share Capital Non-current Assets:
30,000 Equity Shares of Freehold Property 10,000,000
TZS.1,000 each 30,000,000 Current Assets:
• Issued and paid up: Stock 12,000,000
20,000 Equity Shares of Sundry Debtors 8,000,000
TZS 1,000 each 20,000,000 Cash and Bank 22,000,000
• Reserves and Surplus:
Profit and Loss 14,000,000
• Secured Loans:
6% Debentures 12,000,000
• Current Liabilities:
Sundry Creditors 6,000,000 ---------------
52,000,000 52,000,000
At the Annual General Meeting it was resolved:
• 1) To pay a dividend of 10%
• 2) To issue one bonus share for every four shares held as on date of last Statement
of Financial Position.

3) To give existing shareholders the option to purchase one share of TZS.1,000 each at TZS
1,400 for every four shares held prior to the issue of bonus shares.
4) To repay the debentures at a premium of 4%.
All the shareholders exercise the option in (3) above. Show necessary journal entries and
prepare the Statement of Financial Position after the resolutions have been given effect to.
Ignore taxes.
Solution: Journal Entries
Particulars Dr. (TZS.) Cr. (TZS.)
1. Profit and Loss Appropriation A/c 2,000,000
Dividend Payable Account 2,000,000
(Being Dividend 10% declared in the Annual General Meeting)
2. Profit and Loss Appropriation A/c 5,000,000
Bonus to Shareholders A/c 5,000,000
(Being amount transferred for issue of bonus shares)
Bonus to Shareholders Account 5,000,000
Equity Share Capital A/c 5,000,000
(Being bonus shares issued to existing Shareholders in the ratio of 4: 1)
3. Bank Account (5,000 x TZS 1,400) 7,000,000
Equity Share Capital Account 5,000,000
Share Premium Account 2,000,000
(Being issue of 5,000 new shares at TZS.1,400 each)

Nyachi Limited
Statement of Financial Position as on 31.3.2001
Liabilities TZS Assets TZS.
Share Capital:
• Authorized: Fixed Assets:
30,000 Equity Shares of Freehold Property 10,000,000
TZS 1,000 each 30,000,000 Current Assets:
• Issued and Paid up: Stock 12,000,000
25,000 Equity shares of Sundry Debtors 8,000,000
TZS 1,000 each 25,000,000 Cash and Bank
• for cash 5,000 Equity (220+70)-124.8m)
• shares of TZS 1,000 5,000,000 16,520,000
• issued as bonus shares Premium on Redp.
Reserves and Surplus: of Debentures A/c 480,000
• Profit and Loss A/c 7,000,000
• Share Premium A/c 2,000,000
• Current Liabilities:
Sundry Creditors 6,000,000
Dividend Payable 2,000,000 --------------
47,000,000 47,000,000

Advantages of Issue of Bonus Shares
From the point of view of the company the
following advantages can be derived from issue of
Bonus Shares.
• 1. Liquidity position of the company remains
understated if bonus share are issued.
• 2. Elimination of disparity between actual capital
and effective capital can be made.
• 3. After Bonus shares issue as the number of
shares increases the rate of dividend will come
down. This avoids resentment either from the
workers for increases of wages or from customers
for reducing prices.
• 4. It is an inexpensive way of raising finance.

Contd:
From the point of view of shareholders the following
advantages can be derived:
• 1. Bonus shares issue is equivalent to cash dividend as
it enables to sell the shares in market and get the cash.
• 2. It is an opportunity to the shareholders to invest in
prosperous company, which is possible in the market
only with higher premium.
• 3. If the bonus is applied in extinguishing liability in
respect of uncalled capital, the share will become fully
paid up without involving the shareholders to pay
further cash.
• 4. The shareholders are not required to pay any income
tax which they would have to pay had the dividends
been paid in cash

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