A rights issue is form of share which offers existing shareholders the
right to purchase new shares in the company in proportion to their existing
shareholdings. It is different from a bonus issue as it results in a receipt of
cash from shareholders in respect of the new shares issued. The price of the
new shares is often set at a figure below the current market value.
right to purchase new shares in the company in proportion to their existing
shareholdings. It is different from a bonus issue as it results in a receipt of
cash from shareholders in respect of the new shares issued. The price of the
new shares is often set at a figure below the current market value.
Existing shareholders who do not wish to take advantage of the rights
offer may decide to sell their rights to other investors wishing to take
advantage of the discounted price of the new shares. No costs of advertising
are incurred and administrative costs are relatively low. As rights are issued
in opportunity to retain control of the business
offer may decide to sell their rights to other investors wishing to take
advantage of the discounted price of the new shares. No costs of advertising
are incurred and administrative costs are relatively low. As rights are issued
in opportunity to retain control of the business
Example
The balance sheet of
Good name PLC is as follows
Good name PLC is as follows
Assets
Sunday net
assets
assets
Share Capital
N1 ordinary shares fully paid 400,000
Reserves
General reserve 500,000
Profit and Loss Account (unappropriated profit) 300,000
1,200,000
The directors decide to make 1 for 5 bonus issue. This will be followed
by a 1 for 3 rights issue. Rights shares will be offered at a price of N1.60
per share.
by a 1 for 3 rights issue. Rights shares will be offered at a price of N1.60
per share.
Required:
Show the revised balance sheet of Good Name PLC after both share issues
have taken place.
have taken place.
Solution:
Good Name PLC Revised Balance Sheet
Assets: N
Sundry net assets 1,456,000
Share Capital
Reserves
Share premium 96,000
General Reserve 420,000
Profit and Loss Account 300,000
1,456,000
The bonus issue of ordinary shares has been carried out by a transfer
from the General Reserve. However, a transfer from the profit and Loss Account
would also have been appropriate.
from the General Reserve. However, a transfer from the profit and Loss Account
would also have been appropriate.
By the issue of shares to the public, the capital of a company is
usually raised. As previously highlighted, advertisement for shares may be
through prospectus. When the prospectus is issued, interested members of the
public will apply by filling in the application form and remitting the amount
required on application to the company through its banker.
usually raised. As previously highlighted, advertisement for shares may be
through prospectus. When the prospectus is issued, interested members of the
public will apply by filling in the application form and remitting the amount
required on application to the company through its banker.
Shares will be allotted after the application has been submitted.
Successful applicants will get letters of allotment showing the number of
shares allotted to them and asking for allotment money to be remitted within a
specified period.
Successful applicants will get letters of allotment showing the number of
shares allotted to them and asking for allotment money to be remitted within a
specified period.
The unsuccessful ones will get letters of regret, and a refund of the
money paid on application. After allotment come calls. The directors often call
in whatever balance of the share is left allotment. This balance could be demanded
in one or more installments as illustrated here-under.
money paid on application. After allotment come calls. The directors often call
in whatever balance of the share is left allotment. This balance could be demanded
in one or more installments as illustrated here-under.
Example
Charnco Ltd incorporated with a share capital of N30,000 divided into 30,000
ordinary shares ofN each issued a prospectus
on July 1 offering 20,000 shares for subscription as follows:
ordinary shares of
on July 1 offering 20,000 shares for subscription as follows:
20k per share on
application
application
40k per share on
allotment
allotment
40k per share on directors’ description
All the shares offered were applied for and the necessary deposits paid
on July 10,199%. The shares were allotted on July 12 and all allotment money received
on July 18. A call of 40k was made on August 12 and this was all paid on August
19.
on July 10,199%. The shares were allotted on July 12 and all allotment money received
on July 18. A call of 40k was made on August 12 and this was all paid on August
19.
Required:
Make the necessary entries in the book of account and show the structure
of capital only in the balance sheet as at August 31, 1996.
of capital only in the balance sheet as at August 31, 1996.
Journal
|
1996
July 12
|
* Application and allotment.
Ordinary Share Capital being 20k per share on application and 40k per shares made this date |
Dr
12,000
|
Cr
12,000
|
|
August 12
|
First and final call
Ordinary Share capital being of 40k per share on 20,000 shares made this date |
8,000
|
8,000
|
Cash Book
|
1996
July 10
July 18
August 19
|
Application and Allotment
Application and Allotment
(allotment money)
First and final call
|
4,000
8,000
8.000
20,000
|
1996
August 19
|
Bal.
c/d
|
20,000
20.000
|
* Application and Allotment
Account
Account
|
1996
July 12
|
Ordinary share
|
12,000
———12,000
|
1996
July 10
July 18
|
Cash
Cash
|
4,000
8,000
——-
12,00
|
|
First and Final Call
Account
Account
|
1996
August
31 |
Ordinary Share
Capital
|
8,000
——–
8,000
|
1996
August 19
|
Cash
|
8,000
——–
8,000
|
Balance Sheet as at August
31, 1996
31, 1996
(Capital Structure only)
|
1996
August 31
|
Bal. c/d
|
20,000
———–
20,000
|
1996
July 12
Aug. 12
Sep. 1
|
Application and allotment
First and final call
Bal. b/d/
|
12,000
8,000
———
20,000
20,000
|
Balance Sheet as at August
31, 1996
31, 1996
(Capital Structure only)
Authorized share capital
30,000
ordinary share of #1 each 30,000
ordinary share of #1 each 30,000
Issued Share Capital
20,000 ordinary shares of N1 each
fully paid 20,000
* The application and
allotment account could be separated into two accounts – application account
and allotment account. They are generally treated together since allotment
usually follows application almost immediately but can be treated separately.
allotment account could be separated into two accounts – application account
and allotment account. They are generally treated together since allotment
usually follows application almost immediately but can be treated separately.
Calls in arrears
Sometimes when a call is made some shareholder may fail to pay the
amount due on their shares. There will therefore be a debit balance in the
particular calls account because the call money collected will fail short of what
was expected. Such a debit balance is a debit owned to the firm and should be
transferred to another account called calls in arrears account. Assume in the
last example, a shareholder failed to pay the first and final call of 40k per
share on 400 shares taken up originally, then the first and Final Call Account
would appear of follows:
amount due on their shares. There will therefore be a debit balance in the
particular calls account because the call money collected will fail short of what
was expected. Such a debit balance is a debit owned to the firm and should be
transferred to another account called calls in arrears account. Assume in the
last example, a shareholder failed to pay the first and final call of 40k per
share on 400 shares taken up originally, then the first and Final Call Account
would appear of follows:
First and Final call
Account
Account
|
1996
Aug. 12
|
Ordinary Share Capital
|
8,000
——-
8,000
160
|
1996
Aug. 19
Aug. 31
|
Cash
Bal. c/d
|
7,840
160
——
8,000
|
The debit balance of N160 represents a call in
arrears and should be transferred to calls in arrears account, in that case, a
Journal entry would be made crediting the above account (to close it) and
debiting calls in arrears account.
arrears and should be transferred to calls in arrears account, in that case, a
Journal entry would be made crediting the above account (to close it) and
debiting calls in arrears account.
After this transaction, the capital structure in the balance sheet would
appear as follows:
appear as follows:
Charmco Ltd.
Balance Sheet (Capital
Structure only) as at August 31, 1996
Structure only) as at August 31, 1996
|
Authorized Share capital
30,000 ordinary shares of
Issued Share Capital:
20,000 ordinary shares of
Less Calls in arrears
|
20,000
160
——–
|
30,000
19,840
|
Calls in advance
Some shareholders who have the means can pay in advance for calls not
yet made. Let us assume again that in the first example, a shareholder who was
allotted 200 shares paid in the balance on allotment.
yet made. Let us assume again that in the first example, a shareholder who was
allotted 200 shares paid in the balance on allotment.
The necessary ledger accounts to reflect this transaction are shown
below:
below:
Application and allotment
account
account
|
1996
July 12
July 31
|
Ordinary
Capital
Calls in Advance
|
12,000
80
——–
12,080
|
1996
July 10
July 18
|
Cash
Cash
|
4,000
8,080
——–
12,080
|
Calls in advance account
|
1996
Aug. 12
|
First and
Final Call
|
80
——–
80
|
1996
July 31
|
Application
and Allotment
|
80
——–
80
|
First and final call
account
account
|
1996
Aug. 12
|
Ordinary
Share capital
|
8,000
——–
8,000
|
1996
Aug. 12
Aug. 19
|
Call in advance
Cash
|
80
7,920
——–
8,000
|
Note that #80, the amount
paid in advance on 200 shares is transferred to calls in Advance Account. When
the call is eventually made, this is transferred again to the particular calls
account as shown in the example.
paid in advance on 200 shares is transferred to calls in Advance Account. When
the call is eventually made, this is transferred again to the particular calls
account as shown in the example.
If the balance sheet is
drawn up before the final call is made, the capital structure would appear as
shown below:
drawn up before the final call is made, the capital structure would appear as
shown below:
Charnco Ltd Balance Sheet
as at July 31, 1996
as at July 31, 1996
|
Authorized Share Capital:
30,000
ordinary shares of
Issued Share Capital:
20,000 ordinary shares of 60k called up Calls in advance |
12,000
80
|
30,000
12,000
|
Forfeiture of Shares
According to section 140; (1) Of CAMD 1990, if a number fails to pay
call or installment of a call on the day appointed for payment, the director
may, at any time thereafter during such time as any part of the call or
installment remains unpaid, serve a notice on him requiring payment of so much
of the call or installment as is unpaid, together with interest which may have
accrued.
call or installment of a call on the day appointed for payment, the director
may, at any time thereafter during such time as any part of the call or
installment remains unpaid, serve a notice on him requiring payment of so much
of the call or installment as is unpaid, together with interest which may have
accrued.
(2) The notice name a further
day (not earlier than the expiration of 14 days from date of service of the
notice) on or before which the payment required by the notice at or before the
time appointed, the shares in respect of which the call was made shall be
liable to be forfeited.
day (not earlier than the expiration of 14 days from date of service of the
notice) on or before which the payment required by the notice at or before the
time appointed, the shares in respect of which the call was made shall be
liable to be forfeited.
(3) If the requirements of
any such notice as is mentioned in sub-section (1) and (2) of this section are
not complied with, any share in respect of which notice has been may, be
forfeited by a resolution of the directors to that effect.
any such notice as is mentioned in sub-section (1) and (2) of this section are
not complied with, any share in respect of which notice has been may, be
forfeited by a resolution of the directors to that effect.
(4) A forfeited share may be
sold or otherwise disposed of on such terms and in such manner, as the
directors think fit, and any time before a sale or disposition, the forfeiture
may be cancelled on such terms as the directors think fit.
sold or otherwise disposed of on such terms and in such manner, as the
directors think fit, and any time before a sale or disposition, the forfeiture
may be cancelled on such terms as the directors think fit.
(5) A person whose shares
have been forfeited shall cease to be member in respect of the forfeited
shares, but shall, notwithstanding, remain liable to pay to the company all
moneys which at the date of forfeiture, were payable by him to the company
receives payment in full of all moneys in respect of the shares.
have been forfeited shall cease to be member in respect of the forfeited
shares, but shall, notwithstanding, remain liable to pay to the company all
moneys which at the date of forfeiture, were payable by him to the company
receives payment in full of all moneys in respect of the shares.
The value of shares forfeited would be debited to the Share Capital
Account and credited to forfeited shares Account. Whatever remains in the
Forfeited Shares Account would represent the amount that has actually been paid
up by the defaulting shareholders.
Account and credited to forfeited shares Account. Whatever remains in the
Forfeited Shares Account would represent the amount that has actually been paid
up by the defaulting shareholders.
Let us return to our illustration on calls in arrears. When a
shareholder, Austino failed to pay the First and Final call of 40k per share on
400 shares originally allotted to him, we make the following ledger entries:
shareholder, Austino failed to pay the First and Final call of 40k per share on
400 shares originally allotted to him, we make the following ledger entries:
Ordinary share capital
account
account
|
1996
Aug. 31
|
Bal. c/d
|
20,000
——–
20,000
|
1996
July 12
Aug. 12
Sept. 1
|
Application And
Allotment
First And Final Call
Bal. b/d
|
12,000
8,000
——-
20,000
20,000
|
Calls in arrears account
|
1996
Sept. 30
|
First and
Final Call
|
160
|
1996
Oct. 12
|
Forfeited
Share
|
160
|
Forfeited share account
|
1996
Oct. 12
Oct. 31
|
Calls in Arrears
Bal. c/d
|
160
240
——
400
|
1996
Oct. 12
|
Ordinary
Share Capital
|
400
——-
400
|
The balance sheet (capital structure only) of
Chance Ltd would appears as follows:
Chance Ltd would appears as follows:
|
1996
Nov. 30
|
Balance c/d
|
140
|
1996
Nov. 18
|
Forfeited shares
|
140
|
Issue of shares at a premium
According to Section 120(1) of CAMD 1990, shares
of company may be issued at a premium. Sub-section (2) – where a company issues
share at a premium, whether for each or otherwise, a sum equal to the aggregate
amount or value of the premium on these shares be transferred to an account to be called “the share
premium account” and the provisions of this Decree relating to the reduction of
the share capital of a company shall, except as provided in this section, apply
as if the share premium account were paid up share capital of the company.
of company may be issued at a premium. Sub-section (2) – where a company issues
share at a premium, whether for each or otherwise, a sum equal to the aggregate
amount or value of the premium on these shares be transferred to an account to be called “the share
premium account” and the provisions of this Decree relating to the reduction of
the share capital of a company shall, except as provided in this section, apply
as if the share premium account were paid up share capital of the company.
With this statutory backing, an old established and prosperous company
may decide to raise additional capital by issuing more shares for public
subscription. Such shares are often quoted above par. Thus shares ofN1 nominal value could each quoted for
sayN
1.25K, that above par value. The shares are said to be quoted at a premium of
25k per share.
may decide to raise additional capital by issuing more shares for public
subscription. Such shares are often quoted above par. Thus shares of
say
1.25K, that above par value. The shares are said to be quoted at a premium of
25k per share.
It is obvious that this 25k above the nominal value of each share is profit
to the company like the re-issue of forfeited shares already illustrated. It is
however, a capital profit and therefore not available for distribution to
shareholders in the way of dividends as ordinary profits are. However, it is
paid at the same time allotment money is paid.
to the company like the re-issue of forfeited shares already illustrated. It is
however, a capital profit and therefore not available for distribution to
shareholders in the way of dividends as ordinary profits are. However, it is
paid at the same time allotment money is paid.
The only way- premium (a capital) could be used is spelt at in section
120 (3) a and b of CAMD 1990. According to Section 120 (3) of CAMD 1990,
notwithstanding, anything to the contrary in subsection (2) of this section,
the share premium account may be applied by the company up unissued shares of
the company to be issued to members of the company as fully paid bonus shares,
in writing off –
120 (3) a and b of CAMD 1990. According to Section 120 (3) of CAMD 1990,
notwithstanding, anything to the contrary in subsection (2) of this section,
the share premium account may be applied by the company up unissued shares of
the company to be issued to members of the company as fully paid bonus shares,
in writing off –
(a) The preliminary expenses
of the company; or
of the company; or
(b) The expenses of, or the commission
paid or discount allowed on, any issue of shares of the company; or in
providing for the premium payable on redemption share of any redeemable share
of the company.
paid or discount allowed on, any issue of shares of the company; or in
providing for the premium payable on redemption share of any redeemable share
of the company.
Example
On January 1, 1997, Charlemco Ltd with registered share capital of
50,000 ordinary shares ofN1 each which
30,000 shares had already been issued and fully paid, decided to offer, for
public subscription, the remaining 20,000 shares at a premium of 20k per share.
This was to be paid as follows:
50,000 ordinary shares of
30,000 shares had already been issued and fully paid, decided to offer, for
public subscription, the remaining 20,000 shares at a premium of 20k per share.
This was to be paid as follows:
30k per share on
application
application
40k per on allotment
(including premium)
(including premium)
30k per share – 10th
March
March
20k per share – 10th May.
Applications were received for 20,400 shares (over subscription). By
January 25, 1996, the directors went to allotment and on that date application
money for 400 shares was returned to unsuccessful applicants. All the allotment
money was received on February 20, 1996.
January 25, 1996, the directors went to allotment and on that date application
money for 400 shares was returned to unsuccessful applicants. All the allotment
money was received on February 20, 1996.
Required: Show the necessary entries
in the books of account.
in the books of account.
Solution:
Journal
|
1997
Jan. 25
March 10
May 10
|
Application and allotment
Ordinary Share capital Premium on shares
being
30k share on application, 40k
per share on allotment (including a
premium of 20k per share) of 20,000 shares of
___________________________
First call
Ordinary share capital
being first call of 30k per share on 20,000
shares made this date.
Second and Final call
Ordinary Share Capital
being
final call of j20k per share on 20,000 shares this date. |
14,000
6,000
4,000
|
10,000
4,000
6,000
4,000
|
Cash Bank
|
1996
Jan. 25
Feb. 20
March 20
May 10
May 11
|
Application and Allotment
(Application money)
Application and
Allotment
(Allotment money)
First call
Second and Final
call
bal. b/d
|
6,120
8,000
6,000
4,000
——-
24,120
24,000
|
1997
Jan 25
May 10
|
Application
and
allotment
(money refunded)
Bal. c/d
|
120
24,000
——–
24,120
|
Ordinary Share Capital
Account
Account
|
1997
May, 31
|
Bal. c/d
|
50,000
——-
50,000
|
1997
Jan. 1
Jan. 25
March 10
May 10
June 1
|
Bal. b/d
Application
and
Allotment
First call
Second cal
Bal. b/d
|
30,000
10,000
6,000
4,000
——–
50,000
50,000
|
Premium Share on Share
Account
Account
|
1997
Jan. 31
|
Bal. c/d
|
4,000
———
4,000
|
1997
Feb. 1
|
Application
and Allotment
Bal. b/d
|
4,000
——–
4,000
4,000
|
Application and Allotment
Account
Account
|
1997
Jan. 31
Jan. 25
|
Cash
Ordinary Share
capital
premium on
shares |
120
10,000
4,000
——-
14,120
|
1997
Jan. 25
Feb. 10
|
Cash
Cash
|
6,120
8,000
——-
14,120
|
First Call Account
|
1997
March 10
|
Ordinary
Share
Capital
|
6,000
——-
6,000
|
1997
March 10
|
Cash
|
6,000
——-
6,000
|
Second and Final Call
Account
Account
|
1997
May 10
|
Ordinary
Share Capital
|
4,000
——-
4,000
|
1997
May 10
|
Cash
|
4,000
——-
4,000
|
Charlmco Ltd Balance sheet (Capital Structure only)
|
As at May 31, 1997
|
|
|
|
|
|
Authorized and issued capital
|
|
|
50,000 ordinary shares of
|
50,000
|
|
Capital Reserve
|
|
|
Premium on shares
|
4,000
|
|
|
54,000
|
Issued of shares on
discount
discount
According to section 121 (1) of CAMD 1990, subject to the provisions of
this section, it shall be lawful for a company to issue at a discount shares in
the company of a class of shares already issued, provided that: –
this section, it shall be lawful for a company to issue at a discount shares in
the company of a class of shares already issued, provided that: –
(a) The issue of the shares at
a discount is authorized by relation passed in general meeting of the company,
and thereafter is sanctioned by the court.
a discount is authorized by relation passed in general meeting of the company,
and thereafter is sanctioned by the court.
(b) The discount at which the
shares are to be issued; and
shares are to be issued; and
(c) The shares to be issue at
a discount are issued within the month after the date on which the issue is
sanctioned by the court or within such extended time as the court allow.
a discount are issued within the month after the date on which the issue is
sanctioned by the court or within such extended time as the court allow.
A share issued at a discount has a price less than the nominal value of
the shares. For example, shares ofN 1
nominal value each could be issued at 90k, that is at a discount of 10k per
share or 10k. like shares issued at a premium, these shares are usually issued
by an already established company which must have been trading for at least one
year. The shares issued must be of class already issued.
the shares. For example, shares of
nominal value each could be issued at 90k, that is at a discount of 10k per
share or 10k. like shares issued at a premium, these shares are usually issued
by an already established company which must have been trading for at least one
year. The shares issued must be of class already issued.
A company might with to issue shares at a discount if it is not doing
well and wishes to attract investors. Whatever happens, the share capital must
be entered at face value, and shares to issued rank for divided at the face
value as well.
well and wishes to attract investors. Whatever happens, the share capital must
be entered at face value, and shares to issued rank for divided at the face
value as well.
Example
Ahidjo Bentex Company Limited with a registered capital of 30,000
ordinary shares ofN 1 each, 20,000 of
which had already been issued and fully paid, decide on Jan. 1, 1996 to issue
the balance at a discount of 10%, payable as to 20k per share on application,
40k per share on allotment and the balance on first call.
ordinary shares of
which had already been issued and fully paid, decide on Jan. 1, 1996 to issue
the balance at a discount of 10%, payable as to 20k per share on application,
40k per share on allotment and the balance on first call.
Required: – Show the entries in the books of account.
|
Journal
|
Dr.
|
Cr.
|
|
|
1996
|
|
|
|
|
Jan. 1
|
Application and Allotment
Ordinary share capital
Being 20k per share on application, 40k per
share on allotment of 10,000 shares made this dater. |
6,000
|
6,000
|
|
|
First and final call
|
3,000
|
|
|
|
Discount on ordinary shares |
1,000
|
|
|
|
Ordinary share capital
being call of 30k per share on 10,000 shares
with 10% discount made this date. |
|
4,000
|
Ordinary Share Capital
Account
Account
|
1996
|
|
|
I1996
|
|
|
|
Jan. 31
|
Bal. C/d
|
30,000
|
Jan. 1
|
Bal.b/d
|
20,000
|
|
|
|
|
|
Application and Allotment
|
6,000
|
|
|
|
|
|
First and Final call
|
3,000
|
|
|
|
|
|
Discount on ordinary shares
|
1,000
|
|
|
|
30,000
|
|
|
30,000
|
|
|
|
|
Feb.1
|
Bal. b/d
|
30,000
|
Application and Final Call
Account
Account
|
1996
|
|
|
1996
|
|
|
|
Jan. 1
|
Ordinary share
|
|
Jan. 1
|
Cash
|
2,000
|
|
|
capital
|
6,000
|
|
|
|
|
|
|
|
|
Cash
|
4,000
|
|
|
|
6,000
|
|
|
6,000
|
First and Final Call
Account
Account
|
1996
|
|
|
|
|
|
|
Jan. 1
|
Ordinary share
Capital
|
3,000
|
Jan.1
|
Cash
|
3,000
|
|
|
|
3,000
|
|
|
3,000
|
Discount on Ordinary Shares
|
1996
|
|
|
1996
|
|
|
|
Jan. 1
|
Ordinary share
|
|
Jan. 1
|
Bal. C/d
|
1,000
|
|
|
capital
|
1,000
|
|
|
|
|
|
|
1,000
|
|
|
1,000
|
|
Feb. 1
|
Bal. b/d
|
1,000
|
|
|
|
The discount on shares is decided a loss to the company; a loss
sustained in raising capital and therefore a capital loss.
sustained in raising capital and therefore a capital loss.
This loss is often shown as a debit balance on the right hand side of
the balance sheet under fictitious Assets until written off, and is often
written off to the Profit and Loss Appropriate Account over a number of years
or set against a share Premium Account if any.
the balance sheet under fictitious Assets until written off, and is often
written off to the Profit and Loss Appropriate Account over a number of years
or set against a share Premium Account if any.