Accounting for issue of shares and debentures n
Accounting for issue of shares and debentures 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 P. Chinna Sahaya Rani 1
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 P. Chinna Sahaya Rani 2
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 P. Chinna Sahaya Rani 3
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 $50, 000 $150, 000 Total P. Chinna Sahaya Rani 4
Classes of Shares n. Ordinary Shares n. Preference Shares n. Deferred or founder Shares P. Chinna Sahaya Rani 5
Ordinary Shares n. Basic type n. Full voting rights n. Right to receive dividends P. Chinna Sahaya Rani 6
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 P. Chinna Sahaya Rani 7
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 P. Chinna Sahaya Rani 8
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 P. Chinna Sahaya Rani 9
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. P. Chinna Sahaya Rani 10
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 P. Chinna Sahaya Rani 11
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 P. Chinna Sahaya Rani 12
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 P. Chinna Sahaya Rani 13
Shares issued fully paid on application Journal Entry General Journal Dr Trust Account Application Cr Record the receipt of monies from applicants P. Chinna Sahaya Rani 14
Shares issued fully paid on application Journal Entry General Journal Application Dr Share Cr Capital Allot shares to Applicants P. Chinna Sahaya Rani 15
Shares issued fully paid on application Journal Entry Bank General Journal Dr Trust Cr Account Issuing of Shares to Applicants P. Chinna Sahaya Rani 16
Under subscribed and oversubscribed share issue Jnl Entry General Journal Trust Acc Dr Application Cr Applicants deposits P. Chinna Sahaya Rani 17
Under subscribed and oversubscribed share issue Jnl Entry Cont. General Journal Application Dr Share Cr Capital Allot shares to Applicants P. Chinna Sahaya Rani 18
Under subscribed and oversubscribed share issue Jnl Entry Cont. General Journal Application Dr Trust Acc Cr Refund Applicants deposits P. Chinna Sahaya Rani 19
Under subscribed and oversubscribed share issue Jnl Entry Cont. Bank General Journal Dr Trust Acc Cr Issue Shares to Applicants P. Chinna Sahaya Rani 20
Shares issued partly paid on application with the balance payable on allotment General Journal Dr Trust Account Application Cr Record receipt of application monies P. Chinna Sahaya Rani 21
Shares issued partly paid on application with the balance payable on allotment General Journal Application Dr Share capital Cr Allot shares to applicants P. Chinna Sahaya Rani 22
Shares issued partly paid on application with the balance payable on allotment Bank General Journal Dr Trust Acc Cr Transfer trust account money P. Chinna Sahaya Rani 23
Shares issued partly paid on application with the balance payable on allotment General Journal Allotment Dr Share capital P. Chinna Sahaya Rani Cr 24
Shares issued partly paid on application with the balance payable on allotment Bank General Journal Dr Allotment P. Chinna Sahaya Rani Cr 25
Shares issued payable on application and allotment and subject to future calls General Journal Trust Account Dr Application Cr Record receipt of application monies P. Chinna Sahaya Rani 26
Shares issued payable on application and allotment and subject to future calls General Journal Application Dr Share capital Cr Allot shares to applicant P. Chinna Sahaya Rani 27
Shares issued payable on application and allotment and subject to future calls Bank General Journal Dr Trust Account Cr Transfer trust account monies P. Chinna Sahaya Rani 28
Shares issued payable on application and allotment and subject to future calls General Journal Allotment Dr Share capital Cr Record amount owing on allotment P. Chinna Sahaya Rani 29
Shares issued payable on application and allotment and subject to future calls Bank General Journal Dr Allotment Cr Record receipt of allotment monies P. Chinna Sahaya Rani 30
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 P. Chinna Sahaya Rani 31
Shares issued payable on application and allotment and subject to future calls Bank General Journal Dr Call Cr Record amount received in respect of the call P. Chinna Sahaya Rani 32
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 P. Chinna Sahaya Rani 33
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 P. Chinna Sahaya Rani 34
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 $ P. Chinna Sahaya Rani Call 1 $ Call 2 $ Application refund $ 35
Accounting for retention of excess application money General Journal Trust Account Dr Application Cr Record the receipt of application money P. Chinna Sahaya Rani 36
Accounting for retention of excess application money General Journal Application Dr Share Capital Cr Allot shares to applicants P. Chinna Sahaya Rani 37
Accounting for retention of excess application money General Journal Allotment Dr Share Capital Cr Issue shares on allotment P. Chinna Sahaya Rani 38
Accounting for retention of excess application money General Journal Application Dr Trust Account Cr Refund application money P. Chinna Sahaya Rani 39
Accounting for retention of excess application money Bank General Journal Dr Trust Account Cr Transfer trust account money P. Chinna Sahaya Rani 40
Accounting for retention of excess application money General Journal Application Dr Allotment Cr Application money retained against allotment P. Chinna Sahaya Rani 41
Accounting for retention of excess application money General Journal Application Dr Calls in Cr Advance Excess application money applied to future calls P. Chinna Sahaya Rani 42
Accounting for retention of excess application money Call General Journal Dr Share Capital Cr First Call P. Chinna Sahaya Rani 43
Accounting for retention of excess application money General Journal Cash in Dr advance Calls Cr Records calls in advance against call P. Chinna Sahaya Rani 44
Accounting for retention of excess application money Bank General Journal Dr Calls Cr Call money owing is received P. Chinna Sahaya Rani 45
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. P. Chinna Sahaya Rani 46
Costs associated with share issue General Journal Transaction Dr costs Bank Cr Recording of transaction costs as per AASB 1015 P. Chinna Sahaya Rani 47
Bookbuilding n Occurs where an investment banker solicits bids from institutional investors prior to pricing an equity issue P. Chinna Sahaya Rani 48
Stapled securities n Stapling is an arrangement under which different securities are quoted jointly P. Chinna Sahaya Rani 49
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 P. Chinna Sahaya Rani 50
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 P. Chinna Sahaya Rani 51
Unsecured Note n n Debt which is not secured by any charge over assets Higher risk = higher rate of interest P. Chinna Sahaya Rani 52
Convertible Note n Allows debenture holder to convert debt to paid up share capital or cash upon maturity P. Chinna Sahaya Rani 53
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 P. Chinna Sahaya Rani 54
Accounting entries for the issue and redemption of debentures General Journal Trust Account- Dr Debentures Application Debentures P. Chinna Sahaya Rani Cr 55
Accounting entries for the issue of debentures General Journal Application - Dr Debentures Cr Trust Acc Cr Debentures Allot debentures and refund excess application monies P. Chinna Sahaya Rani 56
Accounting entries for the issue of debentures Bank General Journal Dr Trust Acc Cr Debentures Transfer of trust monies P. Chinna Sahaya Rani 57
Making annual interest payments on debentures General Journal Interest Dr Bank Cr Payment of interest P. Chinna Sahaya Rani 58
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 P. Chinna Sahaya Rani 59
Making annual interest payments on debentures General Journal Accrued Dr expense Interest on Cr debentures Reversal entry P. Chinna Sahaya Rani 60
Accounting entries for the redemption of debentures General Journal Interest Dr Debentures Bank Cr Final interest payment P. Chinna Sahaya Rani 61
Accounting entries for the redemption of debentures General Journal Debentures Dr Bank Cr Payment of debenture holders on redemption P. Chinna Sahaya Rani 62
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 P. Chinna Sahaya Rani 63
Alternate accounts for debt issues Debenture Mortgage Unsecured Debenture Note Applications Debentures Mortgage Debentures Unsecured Notes Interest Premium Discount P. Chinna Sahaya Rani 64
- Slides: 64