Explain pro rata allotment of shares

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Slides prepared by Miranda Dyason

Workshop 4:

Accounting for share capital and reserves

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Explain and account for subsequent issues of shares and share buy-backs

Account for the formation of a company through an issue of shares

Explain the nature of reserves, and account for movements in reserves

A

B

C

D

Learning Outcomes

1

E Specify the disclosure requirements for equity

Explain the nature of companies, the key features of the corporate structure, and forms of share capital

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Accounting for share issues in a

company’s accounting records

2

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Things to consider...

3

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▸ Is the share issue payable in full on application or payable in instalments?

▸ Is there an undersubscription? If yes, has the minimum subscription level been reached? Have we employed the services

of an underwriter?

▸ Is there an oversubscription? If yes,

• With share issues payable in full on application, refund money to unsuccessful

applicants.

• With share issues payable in instalments, will we only issue shares to some

applicants, and refund money to unsuccessful applicants? Or will we issue

shares on a pro-rata basis, and keep excess application to go towards the

shareholders next instalment?

Accounting for share issues

4 We will discuss oversubscription more shortly

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▸ With share issues payable in instalments, what will we do if some shareholders don’t pay one of the instalments due?

• Are we able to forfeit/cancel their shares?

• If yes can forfeit/cancel the shares, are we able to reissue the shares to new

shareholders?

• Are the former shareholders going to get any money back?

Accounting for share issues

5

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• Application account:

- a liability account

• Bank trust or cash trust account:

- an asset account

• Allotment account:

- a receivable account

• Call account:

- a receivable account

• Share capital account:

- an equity account

Key accounts

6

Discussion Activity:

Why a bank trust or cash trust

account is used, rather than a

bank or cash account when a

company receives application

money from prospective

shareholders?

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Share issues payable in full on application

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▸ To recognise receipt of application money:

Debit Bank trust

Credit Application

▸ To recognise the issue of shares and to close application account:

Debit Application

Credit Share capital

Accounting for share issues – payable in full

on application

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▸ To refund money received from unsuccessful applicants:

Debit Application

Credit Bank Trust

▸ To transfer cash from trust account to general operating bank account or to the company’s general cash (once shares are allotted):

Debit Cash / Cash at bank

Credit Bank trust

Accounting for share issues – payable in full

on application

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▸ Underwriting costs: – Treated as a reduction against contributed equity

▸ Other share issue costs (eg. Stamp duty, legal fees) – Treated as a reduction against contributed equity

▸ Formation costs: – Treated as an expense

Accounting for share issue costs and

formation costs

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Hot Ltd was registered on 1 January 2016. The directors offered 10,000,000

ordinary shares to the public at $2 per share, payable in full on application.

Applications closed on 31 January 2016, and by that date, the company had

received applications for 11,000,000 shares. On 5 February 2016, the

directors sent letters of regret and refunds to applicants for 1,000,000 shares

and allotted 10,000,000 shares to the remaining applicants. Legal costs re

issuing the shares were $6,000, and were paid.

Required:

Prepare journal entries to record the above transactions.

Example - oversubscription

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