Accounting for issue of shares and debentures Dr

Accounting for issue of shares and debentures Dr. N. P Shete n. Define the issue price of shares n. Differentiate between preference shares, ordinary chares and deferred shares n. Distinguish between issued capital, uncalled capital and share capital or paid-up capital n. Describe the concept of partly paid shares and calls on unpaid share capital n. Account for public company share issues n. Define the various costs associated with share issues and account for those costs n. Differentiate between debentures, mortgage debentures and unsecured notes n. Account for the issue and redemption of debentures

Share Capital • Owners of companies are called shareholders • Founding members are also known as subscribers • All shareholders are sometimes referred to as members • Shares in a Public company can be purchased when the company issues a prospectus • Shares in a Public company can also be traded on the stock exchange

Issue price of shares n. Maximization of shareholder wealth n. Effect on the market price of existing shares n. Requirement to sell a desired volume of shares n. Expectation of future profits and dividends to service the new shares n. Whether ASX listing is proposed or already exists n. Usage of an underwriter

Uncalled and paid up share capital n. Shares can be issued to be paid in full or issued partly paid with the balance paid at a future date(s) n. Amounts to be paid at a future date are referred to as calls n. A company’s share capital is also referred to as paid-up capital = number of shares issued by the amount that the directors require as payment of shares n. The amount not required for payment is referred to as the uncalled amount Share Capital Uncalled capital No of shares issued 100, 000 Amt called/uncalled 0. 50 1. 50 Total $50, 000 $150, 000

Classes of Shares n. Ordinary Shares n. Preference Shares n. Deferred or founder Shares

Ordinary Shares n. Basic type n. Full voting rights n. Right to receive dividends

Preference Shares n. Preferential rights to a fixed rate of dividends before dividends to ordinary shareholders are declared n. Repayment of capital when company is wound up n. Participation in surplus assets and profits n. Cumulative and non-cumulative dividends n. Voting rights n. Priority of payment of capital and dividends

Deferred or Founder Shares n. Issued to initial subscribers n. Dividends usually paid after being paid to other shareholders n. Founders are shareholders who start up the company before shares are issued to the public n. Provider establishment costs and issue the prospectus

Share Issue Procedure n. Registration of members n. Disclosure of rights and liabilities of share issue The class of share being issued u. Share price and no of shares issued u. The amount that must be paid for each share with the application (on allotment and future calls) u. The minimum subscription u. The allotment process u. The treatment of over subscription u

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

Share capital issued upon the registration of a company Subscribers Dr Share Cr Capital Issue shares to Subscribers Bank Dr Subscribers Cr Subscriber Receipt upon Payment

Share capital issued by prospectus n. Payment in full on application n. Part payment on application, balance payable on allotment of the shares n. Part payment on application and allotment, with the balance payable in calls

Shares issued fully paid on application n. Fully paid on application n. Number of shares issued by the directors agrees exactly with the no applied for n. All applicants have been received with the full amount

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

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

Shares issued fully paid on application Journal Entry Bank General Journal Dr Trust Cr Account Issuing of Shares to Applicants

Under subscribed and oversubscribed share issue Jnl Entry General Journal Trust Acc Dr Application Applicants deposits Cr

Under subscribed and oversubscribed share issue Jnl Entry Cont. General Journal Application Dr Share Cr Capital Allot shares to Applicants

Under subscribed and oversubscribed share issue Jnl Entry Cont. General Journal Application Dr Trust Acc Cr Refund Applicants deposits

Under subscribed and oversubscribed share issue Jnl Entry Cont. Bank General Journal Dr Trust Acc Cr Issue Shares to Applicants

Shares issued partly paid on application with the balance payable on allotment General Journal Dr Trust Account Application Cr Record receipt of application monies

Shares issued partly paid on application with the balance payable on allotment General Journal Application Dr Share capital Cr Allot shares to applicants

Shares issued partly paid on application with the balance payable on allotment Bank General Journal Dr Trust Acc Cr Transfer trust account money

Shares issued partly paid on application with the balance payable on allotment General Journal Allotment Dr Share capital Cr

Shares issued partly paid on application with the balance payable on allotment Bank General Journal Dr Allotment Cr

Shares issued payable on application and allotment and subject to future calls General Journal Trust Account Dr Application Cr Record receipt of application monies

Shares issued payable on application and allotment and subject to future calls General Journal Application Dr Share capital Cr Allot shares to applicant

Shares issued payable on application and allotment and subject to future calls Bank General Journal Dr Trust Account Cr Transfer trust account monies

Shares issued payable on application and allotment and subject to future calls General Journal Allotment Dr Share capital Cr Record amount owing on allotment

Shares issued payable on application and allotment and subject to future calls Bank General Journal Dr Allotment Cr Record receipt of allotment monies

Shares issued payable on application and allotment and subject to future calls Call General Journal Dr Share capital Cr Record amount owing by shareholders for the call

Shares issued payable on application and allotment and subject to future calls Bank Call General Journal Dr Cr Record amount received in respect of the call

Calls in arrears n. Call on shares is made n. Co may not receive all call monies owed n. Call account remains in a debit balance n. New account – Call in arrears and the above is transferred to this account n. Call in arrears = Shareholder equity account = reduction in share capital n. Co constitution may call for shareholders with calls in arrears to forfeit their shares and the share reissued

Retention of excess application monies n. Prospectus issued calls for monies to be paid on application, allotment and future calls n. Some applicants may forward all monies in the hope that they receive preferential treatment. n. Co may choose to keep this money and allocate it against money owing on allotment and future calls n. Directors can only make this decision if allowed by Co constitution

Retention of excess application monies Amt received from applications allocated to Calls in Advance Shares applied for Paid to $ Amt received $ Shares Allotted Application of $ Allotment of $ Call 1 $ Call 2 $ Application refund $

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

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

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

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

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

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

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

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

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

Accounting for retention of excess application money Bank Calls General Journal Dr Cr Call money owing is received

Costs associated with share issue n n n n Preparation of prospectus Lodgment with ASIC Publication Receipt of money Issue of shares Including stamp duty and taxes, professional advisers’ fees, underwriting costs, commissions and brokerage fees The above “equity issue costs” must be recognized in equity Indirect costs are not included as transaction costs.

Costs associated with share issue General Journal Transaction Dr costs Bank Cr Recording of transaction costs as per AASB 1015

Bookbuilding n Occurs where an investment banker solicits bids from institutional investors prior to pricing an equity issue

Stapled securities n Stapling is an arrangement under which different securities are quoted jointly

Issuing Debentures n n n Issuing of debt Attracts interest Must be repaid in a specified time frame Borrower Lender = principal Interest = Charge (Fixed or Floating) Maturity date Redemption Issued via prospectus to the general public and also privately to elite few Must appoint a trustee Clear disclosure of all matters relating to the debentures

Mortgage Debenture n n Secured by a first mortgage over land and/or buildings Cannot exceed >60% of the value of asset Limits rights to resell/transfer asset Trustee can take possession and sell to repay debenture holders

Unsecured Note n n Debt which is not secured by any charge over assets Higher risk = higher rate of interest

Convertible Note n Allows debenture holder to convert debt to paid up share capital or cash upon maturity

Contrast Funds from equity and debt Shares Debt Ownership entitlement No Ownership entitlement Voting rights No Voting rights Dilute ownership Do not share profits Payment of Dividend is at discretion of Directors Fixed regular income Does not have to be repaid Must be repaid No restriction on amount of share issue Specific debt/equity ratio Dividends = Profit Interest = Expense

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

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

Accounting entries for the issue of debentures Bank General Journal Dr Trust Acc Cr Debentures Transfer of trust monies

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

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

Making annual interest payments on debentures General Journal Accrued Dr expense Interest on Cr debentures Reversal entry

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

Accounting entries for the redemption of debentures General Journal Debentures Dr Bank Cr Payment of debenture holders on redemption

Accounting entries for the redemption prior to maturity at a discount General Journal Debentures Dr Discount on debenture redemption Cr Bank Cr Payment of debenture holders on redemption at discount

Alternate accounts for debt issues Debenture Mortgage Unsecured Debenture Note Applications Debentures Mortgage Debentures Unsecured Notes Interest Premium Discount