Accounting for Share Capital

A company is an artificial person created by law, having a separate legal entity, perpetual succession and a common seal, and it raises its capital by issuing shares. In this chapter you will study the meaning of a share, the categories of share capital (authorised, issued, subscribed, called-up and paid-up), and the two classes of shares, equity and preference. You will learn to record the issue of shares payable in instalments on application, allotment and calls, and to handle undersubscription, oversubscription with pro-rata allotment, calls in arrears, calls in advance and the issue of shares at par or at a premium under Section 52 of the Companies Act, 2013. The chapter then covers the forfeiture of shares for non-payment of calls and the reissue of forfeited shares, including the transfer of the surplus in the Share Forfeiture Account to Capital Reserve. You will also learn about shares issued for consideration other than cash, private placement, employee stock option plans, and how share capital is shown in the company's Balance Sheet and the Notes to Accounts.

Detailed Worksheet: Accounting for Share Capital Section A - Definitions (10 marks) 1. Define a share. Distinguish between equity shares and preference shares on any two bases. (2 marks) 2. Explain the terms authorised capital, issued capital and subscribed capital. (2 marks) 3. What is meant by calls in arrears and calls in advance? At what rates is interest charged or paid on them under Table F of Schedule I of the Companies Act, 2013? (2 marks) 4. State any four purposes for which the Securities Premium may be used under Section 52 of the Companies Act, 2013. (2 marks) 5. What is meant by forfeiture of shares? Why is the Capital Reserve created on reissue of forfeited shares not available for distribution as dividend? (2 marks) Section B - Calculations and Applications (15 marks) 6. Shine Ltd issued 50,000 equity shares of Rs 10 each at par, payable Rs 3 on application, Rs 4 on allotment and Rs 3 on first and final call. All shares were subscribed and all money was received. Pass the journal entries for application, allotment and call, using prose lines. (3 marks) 7. Bright Ltd invited applications for 20,000 shares of Rs 10 each at a premium of Rs 2 per share, payable Rs 3 on application, Rs 5 on allotment (including premium) and Rs 4 on first and final call. Applications were received for 30,000 shares and allotment was made on a pro-rata basis. Excess application money was adjusted towards allotment. Calculate the amount received on allotment and pass the journal entry for adjustment of excess application money. (3 marks) 8. A company forfeited 100 shares of Rs 10 each issued at a premium of Rs 2 per share for non-payment of allotment money of Rs 5 (including premium) and first and final call of Rs 4. Application money of Rs 3 per share had been received. Pass the journal entry for forfeiture. (3 marks) 9. The 100 shares forfeited in Question 8 were reissued at Rs 8 per share fully paid. Pass the journal entries for reissue and for the transfer of the balance in the Share Forfeiture Account to Capital Reserve. Show the calculation of the capital reserve. (3 marks) 10. A shareholder holding 500 shares of Rs 10 each failed to pay the first call of Rs 2 per share due on 1 July 2025 and paid it with the final call on 31 December 2025. Calculate interest on calls in arrears at 10% per annum. Another shareholder paid the final call of Rs 3 per share on 300 shares on 1 July 2025 along with the first call, although it was due on 31 December 2025. Calculate interest on calls in advance at 12% per annum. (3 marks) Section C - Diagrams (10 marks) 11. Draw a chart showing the classification of share capital into authorised, issued, unissued, subscribed (fully paid-up and not fully paid-up), called-up, uncalled and paid-up capital. (4 marks) 12. Draw a flowchart showing the steps in the issue of shares: issue of prospectus, receipt of applications, allotment, calls, and the possible outcomes of undersubscription, full subscription and oversubscription. (3 marks) 13. Draw a flowchart showing the sequence forfeiture of shares -> balance in Share Forfeiture Account -> reissue at a discount -> transfer of surplus to Capital Reserve, mentioning the maximum discount allowed on reissue. (3 marks) Section D - Analysis and Higher-order Thinking (15 marks) 14. Neel Ltd issued 1,00,000 equity shares of Rs 10 each at a premium of Rs 3 per share, payable Rs 3 on application, Rs 5 on allotment (including premium) and Rs 5 on call. Applications were received for 1,40,000 shares. Applications for 20,000 shares were rejected and their money refunded, and the remaining applicants were allotted shares on a pro-rata basis. Calculate the amount adjusted on allotment, the amount received on allotment and pass the journal entries up to the receipt of allotment money. (5 marks) 15. A company forfeited 300 shares of Rs 10 each, Rs 8 called up, on which Rs 5 per share had been paid. Of these, 200 shares were reissued as fully paid for Rs 7 per share. Calculate the amount transferred to Capital Reserve and the balance remaining in the Share Forfeiture Account. Explain why that balance is shown in the Balance Sheet under Share Capital. (5 marks) 16. A company purchased machinery worth Rs 5,50,000 from a vendor and paid the vendor by issuing equity shares of Rs 100 each at a premium of 10%. Calculate the number of shares issued and pass the journal entries. Explain how such shares are disclosed in the Notes to Accounts, and comment on why companies prefer this method of payment for assets. (5 marks) Instructions: Time allowed 2 hours. Attempt all sections. Write all journal entries as prose lines with narrations. Show working notes for pro-rata allotment and forfeiture calculations.