TM Account XII

7/31/2019 TM Account XII

1/260

Accountancy, Grade XII ...1

Teaching ManualSubject : Accountancy II Full Marks: 100Grade: XII Teaching Hours: 150

I. IntroductionAccounting is a process designed to identify, measure, and communicate financialinformation about an organisation or other entity. It is both an art and a science ofkeeping record of financial transactions, presenting and analysing financial informationof government and non-governmental enterprises. It is an essential component ofcommerce education.

II. General ObjectivesGeneral Objectives of this course are to:

a. introduce to the students the concepts of accounting for companies, costaccounting, and auditing, and to develop the students' ability to prepare andanalyse financial statements.

b. provide them with fundamental knowledge of book-keeping and accountingrequired while pursuing higher education in commerce and management fields.

III. Specific ObjectivesOn completion of the course, the student shall be able to:

a. develop strong foundation of knowledge and understanding required foradvanced level education in management.

b. be familiar with formation of companies, raising of capital by issuing share anddebentures, and preparation of final accounts for companies.

c. use worksheet for preparing the financial statements in the format prescribed bythe Company Act 2053 BS.

d. utilize and analyse accounting data for meaningful interpretation.e. understand the basic knowledge of cost accounting.

IV. Course Scheme:Units Chapters Teaching Hours 1 Accounting for Companies 35 2 Final Accounts of a Company 30

3 Financial Statement Analysis 35 4 Cost Accounting 50

V. Course Content


2/260


Chapter-1

COMPANY ACCOUNTS

A. Introduction

The size and volume of business are increasing day by day. It has made more difficultfor a sole trader or a partnership firm to run effectively because of lack of resources andtechnical know how. The Joint Stock Company provides ample opportunities forprocuring funds from the public and helps in effective economics of large scaleproduction. This unit is related with accounting procedure of such a company andprovides the knowledge on the features of Joint Stock Company and the stages of

formation of a company, including, the important documents such memorandum ofassociation, Article of association and prospectus. It also includes the procedures to befollowed for raising capital by a Joint Stock Company, from shares and debenturesissues.

B. Objectives

The objectives of this unit is to help the students to acquire knowledge of Joint StockCompany. After studying this unit students would be able to:

(i) Define company and write its features,

(ii) Mention the type of Company,

(iii) Write about memorandum of association, Article of association andprospectus of company,

(iv) Mention the different type of capital of a company,

(v) Bring out clearly the entire range of capital of a company,

(vi) Record transactions relating to the forfeiture and reissue of share,

(vii) Prepare the opening balance sheet of a company.

C. Specification of Content Area of the Unit

This unit includes the following sub-units:

1. Company and its formation.

2. Capital of a company.

3. Method of raising capital.

4. Issue of shares and accounting for share issue.

5. Debentures.

6. Balance sheet of a company.


3/260


D. Description of Content Area of the Unit

1.1. Company and its formation

1.1.1. Meaning and concept

The meaning of Joint Stock Company should include the following points:

- It is an organization consisting of individuals, shareholders by virtue of acompany.

- It is a certain of law and is sometimes called artificial person.

- The capital of the undertaking is contributed by large group of people called theshareholders.

- The legal personality and limited liability are the two fundamental features of acompany.

1.1.2. Characteristics of the company

The important characteristics of a company are as follows:

1. It is an association of different people for earning profit.

2. It is an artificial person created by law and can conduct a lawful business andenter into contracts in its own name. It can sue and be sued by other.

3. The existence of a company can be terminated by only by law. Its life does notdepend on the life of its members. Its existence is not affected by the death,

lunacy and bankruptcy of its shareholders.4. The common seal of the company is the authorized signature of the company

and is accepted by all.

5. The liability of every shareholder is limited by the nominal value of shares heldby them.

6. The shares of a public limited company are freely transferable.

7. Actual owners of the Company are shareholders, but they have very limited rolein the operating activities of business. They elect their representatives calleddirectors, who manage the company's affairs on behalf of the shareholders.Thus the ownership and management of a company are separated.

8. A company can conduct only such business as stated in its memorandum ofassociation.

9. The profits of a company are distributed in accordance with the legal provision.

10. Every company is required under the law to maintain proper books of accountsand it is compulsory to get its account audited.


4/260


1.1.3. Types of Company

Company may be classified from different point of view: They are:1.1.3.1. On the basis of incorporation

1.1.3.2. On the basis of liability

1.1.3.3. On the basis of ownership.

1.1.3.1. On the basis of incorporation

On the basis of incorporation, Companies can be classified into 3 types. They are:

(i) Chartered Company

(ii) Statutory Company

(iii) Registered Company

(i) Charted Company: It refers to a kind of company which is established underthe Royal Charter of order of the head of the state. Such type of companiescame into existence in Great Britain in the early years. Those type of Joint StockCompany are not existed in Nepal.

(ii) Statutory Company: A kind of company which is established under a specialact of parliament is known as statutory company. Nepal Rastra Bank, NepalIndustrial Development Corporation are some examples of statutory companiesin Nepal. The power, objects and activities of these companies are defined in therespective act itself.

(iii) Registered Company: Companies established by registering under theprovision of company act are known as Registered Companies. RegisteredCompanies are also known as Limited Company.

1.1.3.2. On the basis of liability

On the basis of the liability of members companies may further classified into threetypes. They are:

(i) Unlimited company

(ii) Company limited by shares

(iii) Company limited by guarantee

(i) Unlimited company: The liability of the shareholders are unlimited in thistype of company. In the event of company being wond up, shareholders willbe liable to pay the debt of the company from their personal estate. Suchcompanies are rarely formed.


5/260


(ii) Company limited by shares: In this case the liability of the members is

limited only to the extent of the shares held by them. Most of the companiesformed these days are of this type.

(iii) Company limited by guarantee: In this case each member promises to paya fixed sum of money in the event of liquidation of the company. Thisamount is called guarantee.

1.1.3.3. On the basis of ownership

From the point of view of ownership a limited company may further classified as privatecompany and public company.

(i) Private Limited Company

A private limited company is one which by its articles:(a) restricts the right of their member to transfer their shares.

(b) limits the number of its members to fifty, and

(c) prohibits any invitation to the public to subscribe for any of its shares anddebentures.

The word 'Private Ltd.' should be mentioned after the name of the company.

Privileges of Private Ltd. Company

The company act provides large numbers of privileges to Private Ltd. Companies.These are stated below:1. A private limited company need not require to submit its prospectus with the

company register.

2. It can commence its business immediately on incorporation.

3. It is not required to hold statutory meeting or file statutory reports with theregistrar.

4. The managerial remuneration in case of public limited company is restricted tomaximum of 11% of net profit. This restriction is not applicable to a privatelimited company.

5. It can begin allotment of shares even before raising the minimum subscription.

6. A company is free to allot new shares as there is no question of right issue.7. Since there is no provision regarding the minimum number of members, even

one member could form a Private Ltd. Company.


6/260


(ii) Public Limited Company

A Public limited company is an association of persons having the ownership dividedinto different numbers of transferable shares. It is an artificial person can sue and besued by all. It is represented by common seal. Nepal company act, 2053 has definedpublic company as a company which is not a private company. The member of apublic company enjoy the following privileges.

(a) Members can freely transfer their shares

(b) No limitation on the maximum number of its members, however the minimumnumber must be at last seven.

(c) Free to invite the general public to subscribe its shares and debentures.

Features of Public Limited Company

A public limited company has the following features:

1. The minimum number of members required to form a company is seven.

2. There is no limit on maximum number of members.

3. The minimum number of directors are three.

4. There is no restriction on the transfer of shares.

5. It can invite the public to purchase its shares and debentures.

6. It must issue the prospectus.

7. It can start its business only after obtaining certificate of commencement ofbusiness.

8. It must add work 'Limited' in its name.9. It must hold a statutory meeting and file a company of it with the company

registrar.

10. There are number of legal restrictions on allotment of shares.

Advantages of Public Limited Company

The company has the following advantages:

1. Members with limited incomes and savings also may contribute to accumulate thefund by subscribing the shares issued.

2. The liability of each member is limited to the extent of face value of shares held bythem. They have no other obligation toward the company creditors.

3. As a company has a separate legal entity, death or insolvency of its members do notthreaten its existence.


7/260


4. It can employ the qualified and highly efficient personals in the different field of

management and it will help to increase efficiency in management through rationaledecisions.

5. As there is no limit for number of shareholders, it is easier for companies to raiselarge amount of fund through the issue of shares.

6. The company is equally accountable to its owners, government and general public.As such it is compulsory to disclose its financial statement as required by law.

7. Shares of the company is freely transferable. It does not affect the company.

8. It can raise loan by issuing debentures.

9. The management in a public limited company follows a democratic norms byelecting the directors. They are elected by the general body.

10. An intangible benefit of a limit company is that it gives permanence to a business.

(iii) Government Companies

A government company is one in which not less than 51% of the share capital is held bythe government. This type of company also has to comply the provision of the companyact.

1.1.4. Formation of a Company

The formation of a company involves the following stages:

(i) Promotion: It involves the activities by which business enterprise is broughtinto existence. It includes generation of idea, detailed investigation selectionand implementation of idea.

(ii) Incorporation: It involves many legal formalities to bring the company into itsexistence. It includes approval of name, filing of related documents,registration and obtaining of certificate of commencement.

(iii) Floatation: Floatation refers to the actual working of shares, issue ofprospectus, inviting general public to subscribe to the share capital of thecompany.

1.1.4.1. Company Promoters:

A person who plans the formation of a company and brings it into existence isknown as Promoter. He may be an individual, a firm, a company or even thegovernment. Promoters are those who originates a scheme for the formation ofthe company gets the memorandum and article prepared, executed andregistered and finds the first directors, settles the term of the preliminary


8/260


contracts and prospectus (if any) and make arrangements for the advertising

and circulating the prospects and placing the capital.

1.1.4.2. Importance Documents:

Three important documents involve in the formation of a Company. They are:

(i) Memorandum of association

(ii) Article of association

(iii) Prospectus

(i) Memorandum of association

It is very important document. It contains the fundamental rules regarding the

constitution and activities of a company. The objective and business of a companyare guided by the provision contained in the document. It contains the followingparticulars:

(a) Name of the company with 'public' or 'private Ltd.' at the end of name.

(b) Address of the registered office.

(c) Objectives of the company.

(d) Nature of liability of its members.

(e) Share capital and division there of into shares of fixed amount.

(f) The number of shares to be taken up by the promoters.

(g) Other necessary matters.

(ii) Article of association

A document which contains rules regarding the internal management of thecompany is known as article of association. According to sec. 17 of company Act2053 B.S., the following should be disclosed.

(a) Directors and their tenure in the office.

(b) The number of qualifying shares to become a director.

(c) Number of directors and their tenure.

(d) Mode of calling the meeting and matters relating to the notice etc.

(e) Special rights and restriction of the preference shareholders.

(f) Managing director's duties, responsibilities and rights.(g) Matters relating to director's fees, remuneration, allowances etc.

(h) Information as mentioned in the memorandum of association.

(i) Other important matters.


9/260


(iii) Prospectus

A prospectus is an invitation to the general public to participate in the share capitalor debenture of the company. The detail description of the company as well as itsobjectives should be included in prospectus. It should contain:

1. Objectives of the company along with other important information as statedthe memorandum and article of association.

2. Shares to be taken by the directors and director's salary, allowancesremuneration etc.

3. Cash paid or payable to the promoters for their services.

4. Matters relating to bonus shares.

5. Policy of reserving shares for the shareholders, employees or any otherpersons if any, should be disclosed.

6. Introductory profiles of directors.

7. It shares are to be issued at a premium, the reasons and rational of chargingsuch premium.

8. Matters relating to representation of the shareholders in the board ofdirectors.

9. Minimum number of shares to be taken up and money to be paid applicationfor shares.

10. The reason behind raising loan capital by issuing debentures and the modepayment for debentures i.e. in installment of lump sum and their numberalong with information regarding outstanding loans.

11. The details about the properties purchased with the money raised by issuingshares or information regarding any arrangement to issue shares ordebentures as payment for the purchase of property be given if sucharrangement has been agreed upon. The name of the seller is also to bedisclosed.

12. Rate of brokerage on shares and debentures.

13. Estimated expenditure to run the company and its anticipated earnings for atleast three years hence.

14. Estimated financial risk factors of the company.

15. Company's financial policy and its net worth.

16. Auditor's name and address and auditor's report, if any.17. Company's promoter of director's personal contribution, if, any, for the

purchase or decision to purchase any property for the company. Also,


10/260


information regarding promoter's or director's partnership in any other firm or

their association with any other company, if any.18. Date of notifying the allotment of shares.

19. Details of preliminary expenses for a new company and latest balance sheetfor an existing company.

20. Brokerage payable to the trustee of a trust for dealing in company's securities.

21. Company balance sheet, profit or loss statement, agreement covered bysection 15 and subsection 2 of the act, t ime and place of inspecting them.

22. Information about the understanding of shares or debentures and theunderstanding commission.

23. Name and address of the firm dealing in company's securities (shares,debentures, bonds etc.)

24. Name of shareholders holding more than 50% of the issued number ofshares.

25. Special rights and restrictions of the preference shareholders.

26. Other essential matters.

1.2. Capital of Company

Capital may be defined as a minimum amount of fund required to run the business.Capital of a company refers to the amount at which a company has been registered. Thecompany raise the required amount of capital of capital by issuing shares which isknown as share capital. The share capital of a company may be classified into followingtypes:

1.2.1. Authorized or Registered or Nominal Capital

The maximum amount of capital which the company is authorized to raise capital isknown as authorized capital. It represent the amount of share capital mentioned in thememorandum of association at the time of company registration.

1.2.2. Issued Capital

A part of authorized capital offered to public for subscription is called issued capital.

1.2.3. Subscribed Capital

It represents the nominal value of the shares subscribed by the public subsequentlyallotted to them by the directors of the company.


11/260


1.2.4. Called up Capital

It is that portion of subscribed capital which is actually called up by the company to paythe shares subscribed by them.

1.2.5. Paid up Capital

The portion of a called up which actually is paid by the members is known as paidcapital. The unpaid capital out of the called up capital is called calls-in-arrear.

1.2.6. Uncalled Capital

The uncalled portion of subscribed capital is called 'Uncalled Capital' or 'ReserveCapital' and usually called at the time of winding up.

1.3. Methods of Raising Capital

1.3.1. Shares: Meaning and Types

The capital of a company is divided into certain units of small denominations. Such unitis called a 'Share'. The common types of shares are ordinary shares and preferenceshares.

1.3.2. Equity Shares

The shares which carry no preference right regarding the payment of dividend and in therepayment of capital are called equity shares. Equity share is also referred to asordinary or common shares. The holders of these shares are entitled to receive what isleft after the prior claims have been settled. However, if there is enough surplus afterprior claim, they enjoy the high return.

1.3.3. Importance of Equity Shares

(1) It is a permanent type of capital & provides the permanent funds of a company.

(2) It does not impose an obligation to pay a fixed dividend.

(3) It provides a sense of safety shield for the collection of loan capital.

(4) The shareholders of equity capital enjoy full voting power in management.

(5) The company is not required to mortgage or pledge its assets for issuing equityshares.


12/260


1.3.4. Preference Shares

Shares having some shorts of preferential right over an above ordinary shares are calledpreference shares. Preference share capital provides two preferences namely.

(i) Receipt of dividend and

(ii) Return of capital in the case of liquidation of company.

1.3.5. Difference Between Equity Shares and Preferences Shares

(i) Preference dividends are paid prior to equity dividend whereas equity dividendsare paid only after paying the preference share dividend.

(ii) In case of winding up, preference shareholders get their capital back over equityshareholder whereas equity shareholders do not get this priority.

(iii) The rate of preference share dividend is fixed while the rate of equity dividend mayvery over the years.

(iv) Arrears of preference dividend may be accumulated but equity dividend is notaccumulated.

(v) Preference share is convertible while ordinary share is not convertible.

(vi) Preference share is redeemable during the life of the company whereas equityshare is not redeemable during the life of the company. In some country buyingback of own shares in the market to certain extent have been legalized.

(vii) Preference shareholders do not have any voting rights on general meeting butequity shareholders enjoy voting rights on such meeting.

1.3.6. Types of Preference SharesPreference shares may be of following types:

(a) Cumulative Preference Shares: A cumulative preference share is that shareswhich carry the right to cumulate the unpaid dividend during any subsequent yearwhen the available profits are sufficient.

(b) Non-cumulative Preference Shares: Unpaid dividends are not carried forward ornot accumulate on non-cumulative preference shares. In a particular year if thereis no profits available for dividend, the preference shareholders get no dividendduring that year.

(c) Participating Preference Shares: The participating preference shareholders areentitled to receive from surplus profit remained after paying dividend to equityshareholders, in addition to the fixed rate of dividend.

(d) Non-participating Preference Shares: Those preference shares which do not carrythe right of shares in excess profit is known as non-participating preferenceshares.


13/260


(e) Redeemable Preference Shares: Those preference shares which are redeemed

by the company after the expiry of fixed period in accordance to the provision ofarticle known as redeemable preference shares.

(f) Non-redeemable Shares: These type of shares cannot be redeemed during the lifeof the company.

(g) Convertible Preference Shares: Those shares which can be converted into equityshares within a certain period is known as convertible preference shares.

(h) Non-convertible Preference Shares: Such shares have no option to convert theirshares into equity shares.

1.4. Issue of Shares and Accounting for Share Issue

A company can issue its shares in two ways:

1.4.1. For cash

1.4.2. For consideration other than cash.

1.4.1. Shares Issued for Cash

The capital of a company is collected by issuing shares or debentures. The amountshare is gradually collected in different installments. The following steps are to be takeby a public company for the issue of shares:

(a) To issue prospectus

(b) To receive application

(c) To make allotment(d) To make calls

(a) To issue prospectus: Besides the other information a prospectus disclose, thenumber, types and amount of shares issuing by the company for the general publicalso indicate the amount which is payable along with the application, allotment andcalls.

(b) To receive application: The general public interested is buying shares of acompany have a apply with the requested application money and specified in theprospectus. The application money should not be more then 50% of the face valueof the shares. The application money is deposited by the application in a scheduled

bank.(c) To make allotment: After receiving the applications, they are considered in the

meeting of the board of directors. The letters of allotment are issued to thoseapplicants


14/260


(d) To make calls: After the shares have been allotted, the shareholders have to pay

allotment money for their accepted number of shares. After collecting the applicationand allotment money, the balance amount is collected as and when it needs money.This is termed as the call money. The call money can be divided into first call,second call and so on.

Illustration 1

A company issued a prospectus, inviting applications for 10,000 shares of Rs. 100 each,payable as follows:

Rs. 10 on application

Rs. 20 on allotment

Rs. 30 on first call

Rs. 40 on second call

Application for all these shares were received. Give journal entries in the books of thecompany assuming that all sums due have been received.

Solution

Books of A Co. Ltd.

Journal

Date Particulars L.F. Dr. (Rs) Cr. (Rs.)

Bank A/C Dr.

To share application A/C

(For application money received for 10,000shares @ Rs. 10 per share)

1,00,000 1,00,000

Share application A/C Dr.

To share capital

(For application money transferred to sharecapital account)

1,00,000 1,00,000

Share allotment A/C Dr.

To share capital A/C

(For the amount due on 10,000 shares @Rs. 20 per share on allotment)

2,00,000 2,00,000

Bank A/C Dr.

To share allotment

(For allotment money received in full)

2,00,000 2,00,000


15/260


Share first call A/C Dr.

To share capital A/C(For first call money due on 10000 shares @Rs. 30 per share as decided by board ofdirectors dated )

3,00,000

3,00,000

Bank A/C Dr.

To share first call A/C

(For first call money received in full)

3,00,000 3,00,000

Share second & final call A/C Dr.


(For amount due on 100000 shares @ Rs.40 per share on second and final call)

4,00,000 4,00,000

Bank A/C Dr.

To share second & final call A/C

(For share second & final call moneyreceived in full)

4,00,000 4,00,000

1.4.2. Minimum Subscription

The minimum amount to be raised by issue of share is denoted by minimumsubscription. According to Nepal Company Act, 2053 B.S., section 26, the company

should receive subscription for at least 50% of its issued capital as minimumsubscription for making allotment of shares.

The minimum subscription is required for:

a. purchasing necessary assets of the company.

b. paying the preliminary expenses and commission on sale of shares

c. repayment of loan arranged for the above two purposes.

d. working capital arrangement.

e. For other expenses.

1.4.3. Over Subscription of Shares and their Accounting Treatment

To receive applications for more shares than offered is said to be over subscribed. Thecompany cannot allot more shares than offered for subscription. In the case of oversubscription the company may exercise any of the following three possible alternativesor options.


16/260


(i) The applications for excess share are rejected and full amount is made up to the

number of shares offered.(ii) All the applicants are allotted on the basis of pro-rata or proportionately.

(iii) Some applicants are accepted in full, some are rejected and some are allottedproportionately.

Illustration 2

A Ltd. Co. invited application for 1,000 equity shares of Rs. 100 each payable as under:

On application Rs. 20 per share

On allotment Rs. 30 per share

On first call Rs. 30 per share

On second and first call Rs. 20 per share

The calls were not made. Application is received for 400 shares on 1 st Baisakh andallotment was made on 1 st Jestha. The directors decided on allot 1000 shares toselected applicants and the application for the remaining shares were rejected outright.

Required: Journal entries in the looks of the company.

Solution:

In the books of A. Ltd.Journal

Date Particulars L.F. Dr. (Rs) Cr. (Rs.) 1 st Baisakh Bank A/C Dr.

To equity share application A/C(For application money received on 4000shares @ Rs. 20 per share)

80,000 80,000

1 st Jestha Equity share application A/C Dr.To equity share capital A/CTo bank A/C(for application money on 1000 shareswere transferred to share capital andapplication money on 3000 shares towhom no shares were allotted arerefunded)

80,000 20,00060,000

1 st Jestha Equity share allotment A/C Dr.To equity share capital A/C(for allotment due on 1000 shares @ Rs.30 each)

30,000 30,000


17/260


Illustration 3

A limited company invited applications for 1,00,000 equity shares of Rs. 20 payable asunder:

Rs. 5 per share on applicationRs. 10 per share on allotmentRs. 5 per share on first and final call

Applications were received for 3,00,000 equity shares and the directors decides to makea pro-rata allotment of the shares applied for by every applicant; to apply the applicationmonies toward amount due on allotment; and to refund the amount remaining thereafter.Required: Journal entries in the company.

Solution:

In the books of a Ltd. Co.Journal


Bank A/C Dr.To equity share application A/C(For cash received on application for3,00,000 shares @ Rs. 5 each)

15,00,000 15,00,000

Equity share application A/C Dr.To equity share capital A/CTo equity share allotment A/C

(for application money transferred to shareallotment account)

15,00,000 5,00,000

10,00,000

Equity share allotment A/C Dr.To equity share capital A/C(for allotment due on 100000 shares @ Rs.10 per share)

10,00,000 10,00,000

Equity share first call A/C Dr.To equity share capital A/C(for first call due on 100000 share@Rs. 5per share as decided by board of directorsdated)

5,00,000 5,00,000

Bank A/C Dr.To equity share first and find call A/C(for first call money received on 100000shares@ rs. 5 per share)

5,00,000 5,00,000


18/260


Illustration 4

On 1 st Baisakh, the directors of Paragon Co.Ltd. issued for public subscription 50,000equity shares of Rs. 100 each, payable as Rs. 20 per share on application; Rs. 30 pershare on allotment; Rs. 30 per share on first call and balance on final call.

Applications were received for 2,00,000 share sand the directors totally rejectapplication for 1,00,000 shares, accepted in full application for 40,000 shares and makea pro-rata allotment of the remaining 10,000 shares. The balance of application moniesis to be adjusted towards allotment and calls. All money due and received.

Required: Journal entries in the books of the company.

Solution

In the Books of Paragon Co. Ltd.

Journal


Bank A/C Dr.

To equity share application A/C

(for application money received on 2,00,000shares @ Rs. 20 per share)

40,00,000 40,00,000

Equity share application A/C Dr.

To equity share capital A/CTo equity share allotment A/C

To calls-in-advance A/C

To bank A/C

(for application money transferred to sharecapital and excess amount on shareapplication to share allotment and calls inadvance and balance refunded)

40,00,000 10,00,000

3,00,000

5,00,000

22,00,000

Equity share allotment A/C Dr.

To equity share capital A/C

(for amount due on allotment of 50,000share @ Rs. 30 per share)

15,00,000 15,00,000

Bank A/C Dr. 12,00,000


19/260


To equity share allotment A/C

(Allotment money received on 40,000 share@ Rs. 30 per share)

12,00,000

Equity share first call A/C Dr.


(for first call money due on 50,000 share @Rs. 30 per share)

15,00,000 15,00,000

Bank A/C Dr.

Calls-in-advance A/C Dr.

To equity share first call A/C

(for money receiving on first call afteradjusting money received in advance)

12,00,000

3,00,000 15,00,000

Equity share final call A/C Dr.


(for final call made on 50,000 shares @ Rs.20 per share)

10,00,000 10,00,000

Bank A/C Dr.

Calls-in-advance A/C Dr.

To equity share final call A/C

(for money receiving on final call afteradjusting money received in advance)

8,00,000

2,00,000 10,00,000

Alt. Methods of Journal


Bank A/C Dr.

To equity share application A/C

(being application money received on2,00,000 shares @ Rs. 20 per share)

40,00,000 40,00,000

Share application A/C Dr.To equity share capital A/C


40,000 10,00,000

3,00,000


20/260


To first call A/C

To final call A/CTo bank A/C

(for application money transferred to sharecapital and excess amount on application toshare allotment, first call, final call, andbalance refunded)

3,00,000

2,00,00022,00,000

Equity share allotment A/C Dr.


(for allotment due on 50,000 share @ Rs.

30 per share)

15,00,000 15,00,000

Bank A/C Dr.


(Allotment money received on 40,000 share@ Rs. 30 per share)

12,00,000 12,00,000

Equity share first call A/C Dr.


(for first call money due on 50,000 shares@ Rs. 30 per share)

15,00,000 15,00,000

Bank A/C Dr.To equity share first call A/C

(for money receiving on first call after theadjusting money received in advance)

12,00,000 12,00,000

Equity share final call A/C Dr.


(for final call made on 50,000 shares @ Rs.20 per share)

10,00,000 10,00,000

Bank A/C Dr.

To equity share final call A/C(for money receiving on final call afteradjusting money received in advance)

8,00,000

8,00,000


21/260


Analytical Table

No. onShares

Applicationmoney

received

Applied forapplication

Allotment 1st

Call 2nd

Call Refunded

40,00060,000

1,00,000

8,00,00012,00,00020,00,000

8,00,0002,00,000

- 3,00,000

- 3,00,000

- 2,00,000

- 2,00,000

- Total 40,00,000 1,00,000 3,00,000 3,00,000 2,00,000 2,00,000

1.4.4. Issue of shares at per

If the shares are offered for subscription at its nominal value, that is known as 'shares

issued at per'. The accounting treatment for shares issued at per will be the same aswere discussed earlier.

1.4.5. Issue of shares at premium

When shares are issued at the value of shares more than its face value, it is known asthe issue of shares at premium. Premium may be collected by a company along with theapplication, allotment or even calls. However in general practice, company collects thepremium along with allotment money.

(i) Accounting entries when premium is received with allotment:-(a) Share allotment A/C Dr.To share capital A/C

To share premium A/C(for allotment made on . Shares at a premium of Rs. . Per share)

(b) Bank A/C Dr.To share allotment A/C(for cash received on allotment)

(ii) When premium is received with call money(a) Share . Call A/C Dr.

To share capital A/CTo share premium A/C(for share call due on .. shares @ Rs. .. per share and the premium

of Rs. Per share)(b) Bank A/C Dr.To share . A/C(for share call money received)


22/260


1.4.6. Issue of shares at a discount

When a company issue its shares at a price less than its face value, that is called sharesdiscount. Issue of shares at discount is prohibited by sec. 50 of company Act 2053 B.S.Discount on share is loss of capital nature. So it appears on the assets side of thebalance sheet. It is gradually written off against Profit and loss account over a number ofyears. The accounting entries while issuing shares at a discount are:(a) For due on allotment: Share allotment A/C Dr.

Discount on share issued A/V Dr.To share capital A/C

(b) For allotment money receiving:Bank A/C Dr.

To share allotment A/C

Illustration 5

A limited company issued 10000 shares of Rs. 10 each at a premium of Rs. 2 each,payable Rs. 2 on application, Rs. 5 on allotment (including premium) and balance onfirst and final call, as and when required. All shares were taken up and money due werereceived.

Solution:In the books of A Co. Ltd.

JournalDate Particulars L.F. Dr. (Rs) Cr. (Rs.)

Bank A/C Dr.To share application A/C

(for application received for 10,000 shareswith Rs. 2 application money per share)

20,000 20,000

Share application A/C Dr.To share capital A/C(for application money transferred to sharecapital account)

20,000 20,000

Share allotment A/C Dr.To share capital A/CTo share premium A/C(for amount due on allotment @ Rs. 3 pershare, and rS. 2 per share on account ofpremium)

50,000 30,00020,000

Bank A/ C Dr.To share allotment A/C(for receipt of allotment money includingpremium on 10,000 shares)

50,000 50,000


23/260


24/260


1.4.8. Share underwriting and commission

An under-writer is a person or a financial institution who undertakes in consideration ofcommission, to take whole or a portion of the shares offered by a company to the publicfor subscription, if the public do not subscribe such shares. In such case the under writerwill be paid their commission for underwriting of shares. The entry required for suchissue is as follows:

Underwriting commission A/C Dr.


Illustration 7

A Ltd. Company issued 10,000 shares of Rs. 100 each as fully paid. The merchant BankLtd. Underwrites the shares of the company for a commission of 2%.

Pass the necessary entry for the same.

Solution:

In the books of A Ltd.

Journal


Bank A/C Dr.


(for cash received on 10,000 shares @ Rs.100 each as fully paid)

10,00,000 10,00,000

Underwriting commission A/C Dr.

To bank A/C

(for underwriting commission paid @ 2%)

20,000 20,000

Alt. entry for the above two entries:

Bank A/C Dr.

Underwriting commission Dr.


9,80,000

20,000 10,00,000


25/260


1.4.9. Brokerage

Share broker is an agent acting for the company in issuing of shares. Brokerage is thecommission paid to brokers for completing and negotiation for issue of shares anddebentures of a company.

1.4.10. Issue of shares to promoters

For promoting a new company the promoters are sometime paid in shares for servicesrendered by them. In such, as cash is not received, an entry is passed by debiting thegoodwill account in the following way:

Goodwill A/C Dr.


(for shares issued as fully paid to promoters)

1.4.11. Calls in arrears

The calls made by the company on its issued shares but not paid by shareholders istermed as 'Calls in arrears'. There are two methods to dealt with calls in arrears:

(a) Without opening a separate account for calls in arrears.

(b) With opening a separate account for calls in arrears

Under the first method and amount received on calls will be debited and respective callswill be credited by the extent of amount of cash received. The calls in arrears accountwill not be opened. Under second method both bank and calls in arrear account will bedebited and respective calls will be credited. The journal entries for both the alternativewill be:

(a) Without opening a separate account for calls in arrears.

Share allotment / call A/C Dr.


Bank A/C Dr.



26/260


(b) With opening a separate account for calls in arrears

Share allotment / call A/C Dr.To share capital A/C

Bank A/C Dr.Calls in arrears A/C Dr.

To share allotment / call / A/C

Illustration 8

A limited Company issued 10,000 shares of Rs. 10 each payable as Rs. 2 onapplication, Rs. 3 on allotment and Rs. 2 on final call. The public applied for 8,000shares; which were allotment. All the money due on hares were received except the final

call on 500 shares.Required: Journal entries in the books of the company.

Solution:In the book of A Co. Ltd.

Journal

Date Particulars L.F. Dr. (Rs) Cr. (Rs.) Bank A/C Dr.To share capital A/C(for application money received on 8,000shares @ Rs. 2 per share)

16,000 16,000

Share application A/C Dr.To share capital A/C(for application money transferred to sharecapital account)

16,000 16,000

Share allotment A/C Dr.To share capital A/C(for allotment money due on 8,000 shares @Rs.3 per share)

24,000 24,000

Bank A/C Dr.To share allotment A/C(for allotment money received on 8,000shares @ Rs. 8 each)

24,000 24,000

Share final call A/C Dr.To share capital A/C

40,000 24,000


27/260


(for final call due on 8,000 shares @ Rs.5 per

share) Bank A/C Dr.To share final call A/C(for final call money received on 7,500 shares@ Rs. 5 per share)

37,500 37,500

Alternative entry:Ban A/C Dr.Calls-in-arrear Dr.To share final call A/C(for final call money received on 7,500 shares@ Rs. 5 per share and balance transferred tocalls-in-arrear)

37,5002,500

40,000

1.4.12. Calls in advance

The amount which has not been called up by the company but has been paid byshareholders advance is termed as 'calls in advance'.

(a) for money receivedBank A/C Dr.To calls in advance A/C

(b) for adjustment of calls in advance

Calls in advance A/CTo share .. A/C

Illustration 9

A company limited offered 1000 shares of Rs. 100 each to the public payable as under:Rs. 25 on applicationRs. 25 on allotmentRs. 25 on first callRs. 25 on final call

All shares were applied for and allotted. A shareholder to whom 100 shares wereallotted, paid the whole of the sum due to along with allotment. Assume all sums werereceived.Required: Journal entries in the books of the company


28/260


29/260


30/260


31/260


32/260


Problem 11.

A Ltd. Co. Issued 2,000 shares of Rs. 100 each at a premium of Rs. 50 to Mr. X whichhe paid Rs. 30 on application and failed to pay Rs. 80 (including premium on allotment),Rs. 20 on first call; and Rs. 20 on final call.

His shares were forfeited.

Required : Journal entry for the forfeiture of A Ltd. Co.


Share capital A/C Dr.Share Premium A/C Dr.

To share forfeited A/C


To share first call A/C

To share final call A/C

(Being forfeiture of 2000 shares issued atpremium due to unpaid from allotment)

2,00,0001,00,000 60,000

1,60,000

40.000

40,000

Alternative entry:


Share capital A/C Dr.

Share Premium A/C Dr.


To calls in arrears A/C

(Being the forfeiture of 2000 shares of Rs.100 each, for allotment money, first call andthe final call money, including premium of Rs.

50 each as decided by the board of directorsdated.)

2,00,000

1,00,000 60,0001,60,000

40.000

40,000


33/260


34/260


35/260


36/260


Solution:


Share capital A/C Dr.

To share premium A/C



To final call A/C

(Being 100 shares forfeited for non-payment ofallotment, final call and premium)

1000

500 500

700

300

(i) Bank A/C Dr.To share capital A/CTo share premium A/C

(Being re-issued of 100 shares as fully paid ofRs. 10 per share)

1200 1000200

(ii) Bank A/C Dr.Share forfeited A/C Dr.


(being re-issue of 100 shares as fully paid ofRs. 10 per share)

800

200 1000

Share forfeited A/C Dr.To capital reserve A/C

(For balance of gain on re-issued transferredto capital reserve account)

300 300

It should be noted that forfeiture of shares of different categories would not be as simpleas has been discussed so far. The category of the shares and non payment of amountshould be rightly assessed for forfeiture of such shares. However the student must alsobe instructed that where the category has not been identified, the forfeiture would be ofthose shares on which the lowest amount have been received.

Example

A company limited issued 10,000 shares of Rs. 100 each at a par, payable as:

On application Rs. 20


37/260


On allotment Rs. 30

On first call Rs. 20On final call Rs. 30

Application were received for 30,000 shares and the directors followed the followingallotment polices:

(a) Applicants for 2000 shares to receive in full.

(b) Applicants for 12000 shares to receive 4000 shares.

(c) Applicants for 16000 shares to receive 4000 shares.

A holder of 400 shares failed to pay final call and his shares were forfeited.

Analytical Table

No. ofShares

ApplicationReceived

ShareCapital

Allotment First Call SecondCall

Refunded

2000

12000

16000

Rs. 40000

240000

320000

Rs.40000

80000

80000

-

120000

120000

-

40000

80000

-

-

40000

-

-

-

Since in this case the lowest paid share category is 12000 applicants receiving only4000 shares, the forfeiture share account will be credited by the sum as:

Application 4000 shares @ Rs. 20 = Rs. 8000

Allotment 4000 shares @ Rs. 30 = Rs. 12000

First Call 4000 shares @ Rs. 10 = Rs. 4000

Total: = Rs. 24000

Working Notes:

40,000 = Rs. 10

4,000

10x400 = Rs. 4,000

Illustration 17

A company issued 2,000 shares of Rs. 10 each, at a discount of 10%. The final call ofRs. 2 was not paid by A who held 200 shares and his shares were forfeited. Half of theforfeited shares were re-issued at Rs. 8.


38/260


39/260


40/260


41/260


To vendor A/C

(For taken over of assets and liabilities)

Vendor Co. A/CTo share capital A/C(For payment of agreed amount)

(ii) Net worth is greater than purchase considerationAssets A/C Dr.To liabilities A/CTo vendor A/CTo capital Reserve A/C(For taken over of assets and liabilities)Vendor Co. A/C Dr.To share capital A/C(For payment of agreed amount)

(iii) Net worth is less than purchase considerationAssets A/C Dr.Goodwill A/C Dr.To liabilities A/C(For taken over of assets and liabilities)

Vendor Co. A/C Dr.To share capital A/C(For payment of agreed amount)

Illustration 19

A Co. Ltd. registered with Rs. 5,00,000 in shares of Rs. 100 each acquired the followingassets and liabilities of X Co. Ltd.

Land and building Rs. 2,00,000Plant & machinery Rs. 1,00,000

Debtors Rs. 50,000Inventory Rs. 75,000

Cash at Bank Rs. 50,000Bank overdraft Rs. 75,000Accounts payable Rs. 1,25,000


42/260


The purchasing price agreed between A Co. Ltd. and X Co. Ltd. was discharged by

issuing shares:Required: Journal entries in the books of A Co. Ltd. if the price was agreed at:

(i) Rs. 2,75,000

(ii) Rs. 3,75,000

(iii) Rs. 2,25,000

Solution:

Q. (I)

In the books of A Co. Ltd.


Land and building A/C Dr.

Plant & machinery A/C Dr.

Debtors A/C Dr.

Inventory A/C Dr.

Cash at bank A/C Dr.

To bank A/C

To accounts payable A/C

To X Co. Ltd. A/C

(Being assets and liabilities taken over)

2,00,000

1,00,000

50,000

75,000

50,000

75,000

1,25,000

2,75,000

X Co. Ltd. A/C Dr.


(Being 2750 shares issued @ Rs. 100 eachfor the payment of purchase price)

2,75,000 2,75,000

Q. (ii)Journal

Date Particulars L.F. Dr. (Rs) Cr. (Rs.) Land and building A/C Dr.Plant & machinery A/C Dr.

2,00,0001,00,000


43/260


44/260


rate is prefixed and periodic payment of interest is to be paid on debentures. Besides,

the principal amount is also refunded after a specified period. A person holding such adebenture is called debenture holders. They cannot participate in management of thecompany.

Thus, it can be defined as 'a document which refers to an undertaking of the company inwriting for acknowledging a debt and containing a contract for the payment of theprincipal sum at a specified date and for the payment of interest at a fixed rate'.

1.5.2. Features of debentures.

The important features of debentures are:

- A document of certificate which acknowledges the debt of the company.

- Issues under the seal of the company.

- Payment period of principal and interest is prefixed.

- Rate of interest is also prefixed.

- A long term borrowing.

1.5.3. Importance of debentures

Debentures are important to raise long term loan for:

- meeting expenditures on modernization of plant.

- Expansion and diversification of plant.- Meeting long term requirement of working capital

- Setting up new projects.

1.5.4. Types of debentures

Company can issue different types of debentures simultaneously or any one of these toraise loan.

The various kinds of debentures are as follows:

(i) Redeemable debentures: These debentures are repayable after a stipulated

period as per the terms of their issue.

(ii) Irredeemable debentures: These debentures are repayable only at the time ofliquidation. It is also termed as perpetual debentures.


45/260


(iii) Bearer debentures: In this type of debentures, the name and address of the

holder is not registered with the company. It can be transferred to any body andinterest is paid to the person who produces the interest coupon attaches to suchdebentures.

(iv) Registered debentures: The debentures which are recorded and registered in thebook of the company and are payable to the registered holders are calledregistered debentures. These types of debentures can be transferred only byadopting the procedure which laid down in the article of association. The interestis paid to the registered holder only.

(v) Naked or unsecured or simple debentures: These debentures are not secured bya charge on company's assets.

(vi) Secured or mortgage debentures: Debentures which are secured by a charge onthe assets of the company are called mortgage debentures.

(vii) Convertible debentures: If the debentures holders are given an option to convertthe holding of debentures into shares preference or equity after certain.

(viii) Non convertible Debentures: those debentures which can not be converted intoshares known as non-convertible debentures.

(ix) Collateral Debenture: Debenture issued to bank and financial institution, arecalled collateral debentures. If the company fails to pay loan taken against hissecurity ,lending institution can exercise their right as debenture holder.

(x) First Debentures: Debentures, having priority of repayment over other debenturesare termed as first debentures.

(xi) Second Debentures : these types of debenture are to be redeemed only after therepayment of the first debentures.

Students must be told that repayment of debentures of 1st

and 2nd

charges will only beapplicable at the time of liquidation of a company.

1.5.5 Issue of debentures and accounting for debentures

Debentures are issued at par or at premium or at discount. at also can be issued forconsideration other than cash or as collateral security.

1.5.5.1 Issue of debentures for cash

The following entries are passed for issue of debentures:

(1) On receipt of application moneyBank A/C Dr

To debenture Application

(2) On transfer of application of money to debenture Account


46/260


Debenture application A/C Dr

To Debentures A/C(3) On refund of money to totally rejected application

Debenture application A/C Dr

To Bank A/C

(4) On transfer of surplus application money to allotment of partially rejectedapplications.

Debenture application A/C DrTo Debentures allotment A/C

(5) On making allotment money dueDebenture allotment A/C Dr

To Debentures A/C(6) On receipt of allotment moneyBank A/C Dr

To Debenture allotment A/C(7) On making first call money due

Debenture first call A/C DrTo Debenture A/C

(8) On receipt of the first call moneyBank A/C Dr

To Debenture first call A/C

Illustration 20 A limited Co. issued 1,000; 10% debentures of Rs. 100 each payable Rs.40 On

application .Rs.30 On allotment, Rs.15 on first call and balance on final call. All themoney due was dally received. Required: Journal entries in the books of the company

Solution:

Journal in the books of Ltd.

Date Particulars L.F. Dr.(Rs) Cr. (Rs.)

Bank A/C Dr

To Debenture Application

(Being application money received on

1000 debentures @ Rs. 40 each)

40,000 40.000

Debenture application A/C Dr 40,000


47/260


48/260


49/260


the profit) and loss account as early as possible. The following entry is passed fir

debenture issued at a discount:Debenture allotment A/C DrDebenture discount A/C DrTo debenture A/CIllustration 22A company Ltd. issued 2,000, 10% debenture of 100 each at a discount of 10%payable as; Rs.25 on application,Rs.50 on allotment and Rs.15 on final call. Allmoney due was received. Required: journal entries in the books of the company forallotment due & collection

Solution:Journal in the books of A co.Ltd.

Date particulars L.F. Dr.(Rs) cr.(Rs) Debenture allotment A/C DrDis. on debentures A/C DrTo 10 % debentures A/C(Being the allotment due on 2000debentures issued at a discount ofRs. 10 each)

80,00020,000

1,00,000

Bank A/C DrTo debenture allotment A/C

(Being allotment money received)

1,00,000 1,00,000

1.5.8 Issue of debenture for consideration other the cash

Debenture may also be issued for the purchase of assets and issuing is termed as issueof debentures for consideration other than the cash. Debentures may be issued to thevendors at par, at premium and at a discount. The following Journal entries arepassed regarding the issue debenture for the assets.

(i) For the purchase of assets:

Assets A/C Dr

To Vendor A/C

(ii) For issuing debenture at par:

Vendor A/C Dr

To Debenture A/C

(iii) For debenture issued at discount:Vendor A/C Dr

Discount on issue Debenture A/C Dr

To Debenture A/C


50/260


(iv) For debenture issued at premium:

Vendor A/C DrTo debenture A/C

To premium on issue of debenture A/C

Illustration 23

A company limited purchased a plant for Rs. 5,00,000 and issued Rs 100debentures in consideration

Required: Journal entries in the books of the company

If debentures were issued:

(a) at par

(b) at 20% Discount

(c) at 25% premium

Solution:Journal in the books of A Co Ltd.

Date Particulars L.F Dr.(Rs) Cr.(Rs) Plant A/C DrTo Vendor A/C(Being plant purchased from Vendor Co.)

5,00,000 5,00,000

(a) If debentures are issued at par:Vendor Co Ltd A/C DrTo Debenture A/C

(Being 5000debenture issued for thepayment of plant Purchased)

5,00,000 5,00,000

(b) If debentures are issued at discount:Vendor Co Ltd A/C DrDebenture discount A/C DrTo Debenture A/C (Being issue of

6250debenturesof Rs. 100each at adiscount of 20% payment of plantpurchased)

5,00,0001,25,000 6,25,000

(c) If debentures are issued at par:Vendor Co. Ltd.A/C DrTo Debenture premium A/C(Being issue of 4000 debentures ofRs. 100 each at a premium ofRs.25per debenture for the paymentof plant purchased)

5,00,000

4,00,0001,00,000


51/260


Working notes: (b) No of debentures= 500000=6250

80(c) No. of debentures=500000=4000

125

The amount of debenture issued for the purchase of assets of a business may or maynot be equal to the value of assets so purchased. The likely possibilities and their resultsfor different conditions are given below:

Condition Result Product

1. Net worth is equal to Debenture amount No gain, no loss nothing

2. Net worth is greater than the Debentureamount

Gain CapitalReserve

3. Net worth is less than the Debentureamount

Loss Goodwill

Illustration 24

A company tool over assets of Rs.5,00,000 and liabilities worth Rs.2,00,000 of V.Co. Ltd. The purchase price agreed between them discharged by issuing 10%debentures.

Required: Journal entries in the books of A.Co., If the purchase price was agreedat:

(a) Rs.3,00,000

(b) Rs.3,50,000

(c) Rs.2,75,000

Solution:

In the books of A.Co.Journal

Date Particulars L.F. Dr.(Rs.) Cr.(Rs.) (a) If purchase Consideration agreed at Rs.

3,00,000Sundry assets A/C DrTo V.Co. Ltd A/C(Being assets and liabilities taken over)

5,00,00 2,00,0003,00,000

V.Co .Ltd .A/C DrTo 10% debenture A/C

3,00,000 3,00,000


52/260


53/260


54/260


55/260


56/260


Debenture A/C Dr

To Debenture A/CTo Premium o Redemption A/C

P/L A/C Dr

To Loss on issue of Debenture

A/C

Redemption A/C Dr

To Bank A/C

Discount par Bank A/C Dr

Discount on issue of

Debentures A/C Dr

To Debentures A/C

Debentures A/C Dr

To Bank A/C

Discount Premium Bank A/C Dr

Loss on issue of

Debentures A/C Dr

To debentures A/C

To Premium o Redemption A/C

[Loss on issue = discount+Premium on redemption]

Debentures A/C Dr

Premium on

Redemption A/C Dr

To Bank A/C

Discount Discount Bank A/C Dr

Discount on Deb A/C Dr

To Debenture A/C

Debentures A/C Dr

To Bank A/C

To Discount onRedemption A/C

Premium Par Bank A/C DrTo Debenture A/CTo Deb. Premium A/C

Debenture A/C DrTo Bank A/C

Premium Premium Bank A/C DrLoss on issued A/C DrTo Debenture A/CTo Deb. Premium A/C

Debentures A/CDrTo Bank A/CTo Premium onRedemption A/C

Premium Discount Bank A/C DrTo Debentures A/CTo Deb. Premium A/C

Debentures A/C DrTo Bank A/C

To Discount on

Redemption A/C

Note: The discount on redemption should not be considered at the time of redemptionsince it is a future gain.


57/260


58/260


59/260


60/260


61/260


b. For conversion into shared at premium:Debenture Holders A/C Dr

To share Capital A/C

To premium on issue of shares A/C

Illustration 28

A company limited converted 540, 125 debentures of Rs. 100 each issued at 10%discount into 600 shares of Rs. 90 fully Paid up.

Required : Journal entries in the books of the Company.Solution:

In the books of A Co. Ltd.

Journal

Date Particulars L.F. Dr.(Rs.) Cr.(Rs.)

12% Debentures A/C Dr

To Debenture Holder's A/C

(Being the Rs.54,000 Debentures redeemableat par transferred to debenture holder account

for conversion)

54,000

54,000

Debenture Holders A/C Dr

Discount on shares A/C Dr

To share Capital A/C

(Being conversion of Rs. 54,000 debenturesinto 600 shares of Rs.100 at Rs.90,as fully paidup)

54,000

6,000

60,000

1.6 Opening Balance Sheet of a Company

The opening balance sheet of a newly established company does not contains muchitems of assets and liabilities. It includes share capital, debentures, premium, discounton shares or debentures issued and so on. The specimen of an opening balance sheetof a newly established company is illustrated below:


62/260


63/260


64/260


65/260


To equity shate application A/C

(10000 shares @ Rs.25)To pref. shares allotment A/C(5000 shares@ Rs25)To equity share

2,50,000

1,25,0004,00,0002,50,0003,50,000

15,00,000 15,00,000

Balance sheet as on

Liabilities Rs. Assets Rs. Authorised capital:10,000 preference shares ofRs.100 each

Issued, subscribed and called upand paid up capital:50,000 Preference share ofRs. 100 each10000 equity shares ofRs 100 each

10,00,000

15,00,00025,00,000

5,00,000

10,00,000

Cash at bank 15,00,000

15,00,000 15,00,000

Illustration 31

Kantipur Co. ltd. Issued 20,000 shares of RS. 10 each payable as Rs. 5 on application,Rs.6 on allotment and Rs. 2 on call which was duly made. The subscription werereceived from the public fot 30,000 shares and the allotment was made Pro-rata, theexcess application money were retained towards the money due on allotment & call.

Mr. A Who was allotted 4000 shares failed to pay the money due from him on allotmentand call, but other shareholders paid the amount due from them.

Required: Journal entries.

Solution:

Analytical Table

No of shares issued Application money Transferred to capital Share allotment Calls

30,000 Rs.1,50,000 Rs.1,00,000 Rs.50,000


66/260


67/260


Illustration 32

A Company limited issued for public subscription 4,000 equity shares of Rs. 10each at apremium of Rs. 2 per share payable as under:

On application Rs. 2 per shareOn allotment Rs.5 per share (including premium)On first call Rs. 2 per shareOn second call Rs. 3 per share

Application were received for 6,000 shares. Allotment was made Pro-rate to theapplicants of4,800 shares, the remaining applicants were refused. Money overpaid onapplication was applied towards sum due on allotment.

Mr. A, to whom 160 shares were allotted failed to pay the allotment and Mr. X, to whom

200 shares were allotted, failed to pay the two calls. These shares were subsequentlyforfeited after the second call was made.Required: Journal entries

Solution:Journal entries

Date Particulars L.F. Dr. (Rs) Cr.(Rs.) Bank A/C DrTo equity shares application A/C(Being money received onapplication )

12,000 12,000

Equity share application A/C DrTo equity share capital A/CTo Bank A/CTO equity share allotment A/C(Being application money transferredto share capital and excess ofapplication transferred to sharecapital and excess of applicationtransferred to share allotment accountand refunded rejected applications)

12,000 8,0002,4001600

Equity share allotment A/C Dr

To share capital A/CTo share premium A/C(Being allotment money due withpremium)

20,000 12,000

8,000


68/260


69/260


70/260


20. Differentiate between Issue and Subscribed Capital . [2]

21. A holder of 500 equity share of Rs. 10 each Issue at a discount of Rs.2 pre sharefailed to pay final call of Rs. 3 The board of of directors decided to forfeit theseshares and re-issue them at Rs.8 fully paid .Requires (a) Entry forfeiture [1] (B)Entry for re-issue [B]

22. A Company forfeited 100 share of Rs. 100 each fully called up, held by Mr.X fornon were reissued to Mr. B for Rs 80 per share as fully paid up.Require Journal entries for forfeiture & reissue

23 A company issued 5000 shares of Rs. 100 for public subscription at a premium ofRs. 10 each Application were received for 10,000 shares and it was decided tomake prorate allotment to all applicants. Amount payable on application was Rs.50 (including Rs. 10 Premium) [1+2]

24 A company limited issued 10,000 shares of Rs. 50 each to the public at a premiumof Rs.10each, payable as follows:Rs. 20 on applicationRs. 20 on allotmentAll the shares which were applied for were duly allottedRequired journal entries in the books of the Company

25 Lumbini Co Ltd Issued 1000shares of Rs. 100each at a discount of 10%. Theamount was payable as Rs.40on application and balance on allotment. Applicationwere received for all shares and they were duly allotted. All money were dulyreceived.Required Journal entries.

26 Janaki Tr adding Co.Ltd Forfeited 50 equity shares of Rs100 each issued at apremium of Rs.20 per share, for non repayment of allotment of Rs.50 per share(including Rs.20share premium),the firs call of Rs20 per share and final call ofRs30per share. Out of these share 40 equity shares were reissued at Rs.110 pershare.Required: Journal entries for forfeiture and re-issued of share.

27 Mr A applied for 2000 shares of Rs. 100 each at a premium of Rs 25 per share.But he was allotted only for 1000 shares. After having paid Rs. 30 per share onapplication, he did not pay the balanceOn allotment money due of Rs. 45 per share(including premium)On his subsequent failure to pay the first call of Rs 20 per share, his shares wereforfeited. These shares were re-issued at the rate of Rs. 90 per share credited asfully paid.Required: Journal entries to record the forfeiture and reissue of shares

28. Birat Co.Ltd purchased the business of Morang Co. Ltd. for

Rs.1,44,000 payable in fully paid shares of Rs. 10each.Required: Journal entries in the books of Birat Co.Ltd.,if share are issue at;

(a) a Premium of 20%(b) a discount of 10%


71/260


29 Parsa Technico Co. purchased a plant costing Rs.500000 from Bishal

Machinery Co.Ltd. payments were made as to Rs. 200000 by a crossedcheque and remaining amount by equity share of face value of Rs.100eachfully paid at an issue price of Rs150each.Required: journal entries.

30 A Co.Ltd. Issued 4000 shares of Rs100 each at par to purchase the followingassets and liabilities

Land and Building Rs 1,00,000Plant and Machinery Rs 4,00,000Inventory Rs 60,000Account Receivable Rs 40,000Account payable Rs 1,60,000

The Company was also subscribed for 6000 shares of Rs100each at par. Theseshares were fully paid.Required: Journal entries.

31 Kantipur company purchased assets of Rs6,00,000 and also took over theliabilities of Rs.75,000 The purchase price of Rs. 6,00,000 were paid by issuingof debentures of Rs100each.Required: Journal entries.

32 A Company offered 10,000, 10% debentures of Rs. 100 for public subscriptmaking Rs.50payable with the application. Applications were received for 11,000debentures. Application money on 500 debentures were applied for allotmentand the application money on 500 debentures were refunded.

33 A Company issued 1,000,10% debentures of Rs100 at a discount of 10% Themoney payable were:Rs20 on applicationRs20 on allotment (including discount)Rs.50 one year after.2000 application were received, and the directors made the following allotmentdecision:(a) Applicants of 500 debentures were to received in full.(b) Applicants of 1000 debentures were to receive 500 debentures pro-rata(c) Applicants remaining debentures were to be refunded.Required: Journal entries for application and allotment made.

34 Dharan Expo. Ltd. Issued Rs 10,00,000,105 debentures at a discount of 6%repayable at a premium of 5% after 4 years.

Required: (I) Journal entry at the time of issue(II) Journal entry at the time of redemption.

35 The following different transactions are provided:(i) A. Ltd issues 5000, 10% debentures of Rs.100 each at a discount of 5%redeemable at the end of 5years at a premium of 5%


72/260


(ii) B.Ltd. issued 5000, 10% debentures of Rs. 100each at par redeemable at the

end of 5 years at a premium of 5%Required : Journal entries for the above transactions.36. The following cases are given:

(i) Issued Rs.20,000, 10% debentures at par, redeemable at par.(ii) Issued Rs. 20,000, 10% debentures at discount of 10% redeemable; e at par(iii) Issued Rs. 20,000,10% debentures at premium of 10%, redeemable at par.(iv) Issued Rs. 20,000, 10% debentures at par, redeemable at a premium of 10% .(v) Issued Rs. 20,000,10% debentures at discount of 10% redeemable at premium

of 10% .Required: Journal entries for above different cases.

37. A Company Limited with authorized capital of 10000 equity shares ofRs.100each and 10,000,10% preference shares of Rs.100each offered to the

public 10,000 equity shares at a premium of Rs. 10per share and 10,000, 10%preference shares.

Applications were received for 9000 equity shares and 10000,10% preferenceshares. The shares were accordingly allotted and fully called up. One share holder failedto pay final call of Rs. 20per share, holding 500shares.

Required: Opening Balance Sheet.I. Terms introduced in the units

Chartered company, Statutory company , Registered company, unlimited company,Company limited by shares, Company limited by guarantee, private limited company,public Limited company , Government Companies, Company promoters: Memorandum

of association, Article of association, prospectus, Authorized capital, Issued Capital,Subscribed Capital, Called Capital, paid up Capital, Reserve capital, Shares, Equityshares, preference shares, Cumulative preference shares, Non-Cumulative preferenceShares, Participating preference shares, Redeemable preference shares, Non-Redeemable preference shares, Convertible preference shares, Non convertiblepreference shares, Shares Application Share Allotment, Share Calls, Share Capital,Issued Of Shares at par, Issued of shares premium, Issued of Shares Discount, shareUnderwriting and Commission, Brokerage, Calls- in-arrear, calls-in-advance, Forfeitureof shares, Re-issued of shares, Capital Reserve Account, Debentures, RedeemableDebentures, secured Debentures, Convertible Debentures, Non ConvertibleDebentures, collateral Debentures, First Debentures, Second Debentures, RedemptionDebentures.


73/260


74/260


75/260


76/260


MAJOR COMPONENTS OF INCOME STATEMENT

REVENUE

Revenue is the increase in retained earnings because of sale of goods or services. It isalso the amount of cash received or a promise by a customer for sale of goods orservices. In all, it is the inflow of assets whether received in cash or creation of anobligation, the benefit of which is receivable in the future that ultimately increases theowners equity from the operating activities. In effect, revenue is anything of valuegenerated through business operations.

1. Sales Revenue

This is the most common type of revenue reflecting the aggregate of the selling price ofthe goods sold during the year. Sales revenue is the amount earned in exchange ofgoods. For example, IBM sells computers and the sum total of the selling price of all thecomputers sold is sales revenue. The selling price of returned goods and reduction inselling price for damaged or defective merchandise, which is clubbed as sales returnsand allowances, is adjusted from the gross sales revenue to calculate the net revenue.Apart from the adjustment regarding sales return and adjustment, sales revenue needsto be adjusted for the sales discounts depending upon the credit terms of the sale. Thecommon terms of sale are: n/10, EOM; n/30; 2/10,n30 etc.

OTHER BUSINESS INCOMES

2. Service Revenue This is the amount of revenue peculiar to companies providing services. The serviceproviding companies earn fees in return for their services, like an auditing firm earnsaudit fees, computer consultants earn consultancy fees, law firms earn the legal fees,and leasers earn leasing fees. Some companies may even earn both revenues: salesrevenue and service revenue. For example, IBM earns Sales Revenue by sellingcomputers and it earns service revenues by providing consulting services on InformationTechnology.

3. Interest Revenue

Companies engaged in banking and financial institutions would earn interest revenue astheir main business revenue but others also could earn interest revenue on investmentsearned temporary investments of excess cash not forming part of their businessoperations.


77/260


4. Other Revenue

There are many more revenues, probably as many as the possible ways of makingmoney, all having their own nomenclature. A college could call it revenue as tuition fees,a doctor as consultation fees, a cricketer as licensing fees, a chain store asfranchising fees, and an author as royalty. What ever is the nomenclature used,ultimately it reflects the inflow of asset.

COST OF GOODS SOLD

Cost of goods sold is the major component of the income statements prepared by atrading and manufacturing concern.

For the merchandising business, dealing in purchase and sale of goods, cost of goods

sold is the sum of the purchase price and other costs associated for the goods, whichhave been sold during the accounting period. In other words, the amount of direct costsof the goods, which have been sold, is considered cost of goods sold.

The cost of goods sold for a merchandising company is calculated using the followingformulae:

Formula (a) : Cost of Goods Sold =Cost of Goods

available for sale- Ending Inventory

Formula (b) :Cost of Goods available

for sale=

Beginning

Inventory+ Net Purchase

Formula (c) : Net Purchase =Gross Purchases

(Invoice Price)-

Purchase returnand allowances

-PurchaseDiscounts

+FreightInward

For a manufacturing concern, the calculation of cost of goods sold is an elaborate matterrequiring quite a lot of information and it is normally associated with cost accounting andmanagement accounting texts, rather than the financial accounting text like this.

GROSS PROFIT

Gross Profit, often called gross margin, is the first important sub-total on the incomestatement. It is the difference between sales revenue, which represents the selling priceof the goods sold, and the goods cost to the business.


78/260


The gross profit must be sufficient to provide the business with the resources necessary

to pay for operating expenses, financial expenses, and income tax expense, and ofcourse to provide returns for the capital employed (owners and creditors). The amount

of gross profit is a function both of quantity of goods sold and of the selling price

exceeding the cost of goods sold per unit. Therefore, gross profit can be increased

either by selling a larger quantity of goods sold at the same price or by selling the same

quantity of goods for a higher price.

OPERATING EXPENSES

Operating expense are the period expenses incurred in discharging the most important

activities of the business i.e. selling goods or providing service. Since period expensesare related to the period rather than product (like the cost of goods sold which is a

product expense), they are listed separately in the Income Statement. In addition, they

are shown separately from other finance expenses like interest and even depreciation

is shown separately rather than clubbing altogether with the operating expenses (see

Exhibit 8.3). The operating expenses in the same format are classified as:

administrative and selling expenses.

Administrative expenses are the costs associated with managing and administering

the firms entire range of activities. The administrative expenses are to be shown as

Schedule 15 of the Annual Report according to the format mandated by Companies Act

2053. The Schedule 15 (Exhibit 8.4) lists the expenses considered as administrative

expenses by the said Act.

Selling expenses are those, which are incurred to create and stimulate demand and

secure orders. Their aim is to push and promote sales either in the existing markets or

new markets. Distribution expenses are the costs, which begin with the packaging the

goods produced available for despatch and actual distribution expenses. However, in

most enterprises, because of overlapping nature of the two functions, these are grouped

together and known as selling and distribution expenses . The common items fallingunder selling and distribution overheads are as shown in Exhibit 2.2.


79/260


EXHIBIT 2.2 THE ADMINISTRATIVE EXPENSES

Schedule 15 : Administrative ExpensesCurrent Previous

Rs. Rs.

A Salary, Wages and other expenses onEmployees

B Contribution to Provident Fund & Gratuity FundC RentD Repairs and Maintenance

E Electricity, Fuel and WaterF TravelG TransportationH Office operation expensesI Audit FeesJ Legal FeesK Meeting Allowances (Board Meeting)L Tax and RatesM Bank ChargesN Discount Allowed

O Meeting Expenses (Ordinary)P Fees and CommissionQ Insurance PremiumR Communication (Postage, Telephone, Telex)S Miscellaneous & PrintingT AdvertisementU TrainingV Donations & AdW Books and PreiodicalsX Uniform Expenses

Y Entertainment and Promotion ExpensesZ Furniture & Equipments not capitalisedAA Sundry Expenses

Total


80/260


INCOME FROM OPERATIONS

Income from operations is another important sub-total. It is the amount that remainsafter adjusting the administrative, selling and distribution expenses of a business andindicates the level of profit produced by the principal activities of the firm. Income fromoperations can be increased by enhancing the gross profit or by reducing the operatingexpenses. Income from Operations must be enough to pay firms remaining expenses.The common Selling and Distribution expenses are as shown in Exhibit 2.3 below:

EXHIBIT 2.3 THE SELLING AND DISTRIBUTION EXPENSES

Selling and Distribution ExpensesCurrent Previous

Rs. Rs.A AdvertisingB Carriage and transport outwardC. Carriage and transport outwardD. Catalogues, price lists etc.E. Running costs of delivery vans.F. Legal costs in connection with salesmen's

agreements, etc.G. Market research expensesH. Packing materialsI. Rent, rates, and insurance of warehouses.J. Rent, rates, maintenance, and insurance of

showrooms and sales office.K. Salaries, commission, and travelling expenses of

salesmen and technical representatives andsales manager.

L. Selling department salaries and stationeryM. Telephones and postage connected with selling.N. Wages of packers, deliveries van drivers etc.O. Warehouses expensesP. Wastage of finished goods.

DEPRECIATIONAll businesses own some non-trading fixed assets like land, building, machinery, etc thatare generally used for facilitating trading activities. Some of these fixed assets aredirectly productive [machinery] as they produce the trading assets like goods whereas


81/260


82/260


GAINS AND LOSSES

These are amounts of money made or lost on activities outside the normal business of acompany. For example, Pepsi Co sells Pepsi products and makes money, which iscalled revenue. However, when it makes money by selling old delivery van, the amountis called a gain, not revenue, because Pepsis main business is not selling delivery vans.At the same time, losses are money lost; for example, loss incurred on sale of oldfurniture.

LOSS OR GAIN FROM DISCONTINUED OPERATIONS

The term discontinued operations is used to express the operations of a majorbusiness segment that has been sold, abandoned, or disposed off. After such a decisionis made, the results of the discontinued segment are reported separately in the IncomeStatement including the costs of disposing the segment. The disposal of thediscontinued operation could result into a net gain or loss depending upon the costsassociated with the disposal decision.

For the purpose, Segment, is that portion of the business, which constitutes (a)separate major line of business or (b) separate class of customer qualify for treatmentas discontinued operations.

EXTRA-ORDINARY INCOME OR LOSS

Another category of items that must be reported separately from income from operations

is the extra-ordinary income or loss. For accounting purposes, extra-ordinary items aredefined as events or transactions that are: (a) unusual in nature and (b) infrequent inoccurrence.

Unusual in Nature : The event or transaction should posses a high degree of abnormalityand be of a type clearly unrelated to, or only incidentally related to the ordinary andcentral operation of the entity, taking into account the environment in which the entityoperates.

Infrequent in occurrence: The event or transaction should be of a type that would notreasonably be expected to recur in the foreseeable future, taking into account theenvironment in which the entity operates

For example, a company suffering a large uninsured loss from an earthquake wouldreport the loss as an extra-ordinary item.


83/260


INCOME TAX

Income Tax expense is the sum total of all the income tax consequences of alltransactions undertaken by a company during a particular year. The income tax expenseis recognised in the periods in which the taxable income is earned. The Taxable incomeis computed in conformity with income tax regulations and not based on generallyaccepted accounting principles.

NET INCOME OR NET LOSS

The resultant figure calculated by matching the revenue and the expenses can bepositive or negative. The positive figure denotes a net income and negative figuredenotes a net loss.

The Accounting equation discussed earlier can be re-drafted as follows:

Event Balance Sheet Income Statement

Assets = Liability + Equity + Net Income - Revenue - Expenses)

After completing one operating cycle, the equity of a business shall be increased by anyprofit made and shall be decreased with any loss made.

ILLUSTRATION- 1

The following information is provided to you for the year ending 31 st March 2001 forAmrit Company Ltd:

Administrative Expenses 12,000

Beginning Inventory 4,000

Depreciation Expenses 4,500

Ending Inventory 5,000

Extra-ordinary Income 45,000Freight Inward 4,000

Income from Subsidiary 10,000


84/260


85/260


Amrit Company Ltd.

Income Statementfor the year ending 3/31/2001

Description ScheduleNo.

CurrentYr. Rs

PreviousYr. Rs

Sales Revenue (Net of returns and allowances) 78,000Cost of Goods Sold 38,000Gross Profit 40,000Add: Other business Income 4,000Less: Operating Expenses:

Selling & Distributio

Date post:	05-Apr-2018
Category:	Documents
Upload:	padma-ratna-vidya-mandir
View:	254 times
Download:	1 times