accounting for issue of shares and debentures define the issue price of shares define the issue...

Accounting for issue of shares and debentures

Define the issue price of sharesDefine the issue price of sharesDifferentiate between preference shares, ordinary chares Differentiate between preference shares, ordinary chares and deferred shares and deferred shares Distinguish between issued capital, uncalled capital and Distinguish between issued capital, uncalled capital and share capital or paid-up capital share capital or paid-up capital Describe the concept of partly paid shares and calls on Describe the concept of partly paid shares and calls on unpaid share capitalunpaid share capitalAccount for public company share issuesAccount for public company share issuesDefine the various costs associated with share issues and Define the various costs associated with share issues and account for those costsaccount for those costsDifferentiate between debentures, mortgage debentures and Differentiate between debentures, mortgage debentures and unsecured notesunsecured notesAccount for the issue and redemption of debenturesAccount for the issue and redemption of debentures

Share Capital

•Owners of companies are called shareholders•Founding members are also known as subscribers•All shareholders are sometimes referred to as members•Shares in a Public company can be purchased when the company issues a prospectus•Shares in a Public company can also be traded on the stock exchange

Issue price of shares

Maximization of shareholder wealthMaximization of shareholder wealthEffect on the market price of existing sharesEffect on the market price of existing sharesRequirement to sell a desired volume of sharesRequirement to sell a desired volume of sharesExpectation of future profits and dividends to service the Expectation of future profits and dividends to service the new sharesnew sharesWhether ASX listing is proposed or already existsWhether ASX listing is proposed or already existsUsage of an underwriter Usage of an underwriter

Uncalled and paid up share capital

Shares can be issued to be paid in full or issued partly paid Shares can be issued to be paid in full or issued partly paid with the balance paid at a future date(s)with the balance paid at a future date(s)Amounts to be paid at a future date are referred to as callsAmounts to be paid at a future date are referred to as callsA company’s share capital is also referred to as paid-up A company’s share capital is also referred to as paid-up capital = number of shares issued by the amount that the capital = number of shares issued by the amount that the directors require as payment of sharesdirectors require as payment of sharesThe amount not required for payment is referred to as the The amount not required for payment is referred to as the uncalled amount uncalled amount

Share CapitalShare Capital Uncalled capitalUncalled capital

No of shares No of shares issuedissued

100,000100,000 100,000100,000

Amt Amt called/uncalledcalled/uncalled

0.500.50 1.501.50

TotalTotal $50,000$50,000 $150,000$150,000

Classes of Shares

Ordinary SharesOrdinary SharesPreference SharesPreference SharesDeferred or founder SharesDeferred or founder Shares

Ordinary Shares

Basic typeBasic typeFull voting rightsFull voting rightsRight to receive dividendsRight to receive dividends

Preference Shares

Preferential rights to a fixed rate of dividends before Preferential rights to a fixed rate of dividends before dividends to ordinary shareholders are declareddividends to ordinary shareholders are declaredRepayment of capital when company is wound upRepayment of capital when company is wound upParticipation in surplus assets and profitsParticipation in surplus assets and profitsCumulative and non-cumulative dividendsCumulative and non-cumulative dividendsVoting rightsVoting rightsPriority of payment of capital and dividendsPriority of payment of capital and dividends

Deferred or Founder Shares

Issued to initial subscribersIssued to initial subscribersDividends usually paid after being paid to other Dividends usually paid after being paid to other shareholdersshareholdersFounders are shareholders who start up the company Founders are shareholders who start up the company before shares are issued to the publicbefore shares are issued to the publicProvider establishment costs and issue the prospectusProvider establishment costs and issue the prospectus

Share Issue Procedure

Registration of membersRegistration of membersDisclosure of rights and liabilities of share issueDisclosure of rights and liabilities of share issue

The class of share being issuedThe class of share being issuedShare price and no of shares issuedShare price and no of shares issuedThe amount that must be paid for each share with the The amount that must be paid for each share with the application (on allotment and future calls)application (on allotment and future calls)The minimum subscriptionThe minimum subscriptionThe allotment processThe allotment processThe treatment of over subscriptionThe treatment of over subscription

Procedure for issuing shares under a prospectus

The Prospectus together with an application form is made The Prospectus together with an application form is made available to the general public.available to the general public.Application monies are held in trustApplication monies are held in trustMinimum subscription must be received before allotmentMinimum subscription must be received before allotmentAllotment at director’s discretionAllotment at director’s discretionAllotment advice is communicated to the applicantAllotment advice is communicated to the applicantAllotment monies may be required at this stage.Allotment monies may be required at this stage.

Share capital issued upon the registration of a company

SubscribersSubscribers DrDr

Share Share CapitalCapital

CrCr

Issue shares to SubscribersIssue shares to Subscribers

BankBank DrDr

SubscribersSubscribers CrCr

Subscriber Receipt upon PaymentSubscriber Receipt upon Payment

Share capital issued by prospectus

Payment in full on applicationPayment in full on applicationPart payment on application, balance payable on allotment Part payment on application, balance payable on allotment of the sharesof the sharesPart payment on application and allotment, with the Part payment on application and allotment, with the balance payable in callsbalance payable in calls

Shares issued fully paid on application

Fully paid on applicationFully paid on applicationNumber of shares issued by the directors agrees exactly Number of shares issued by the directors agrees exactly with the no applied forwith the no applied forAll applicants have been received with the full amountAll applicants have been received with the full amount

Shares issued fully paid on application Journal Entry

General JournalGeneral Journal

Trust Trust AccountAccount

DrDr

ApplicationApplication CrCr

Record the receipt of monies Record the receipt of monies from applicantsfrom applicants



ApplicationApplication DrDr


CrCr

Allot shares to ApplicantsAllot shares to Applicants



BankBank DrDr


CrCr

Issuing of Shares to ApplicantsIssuing of Shares to Applicants

Under subscribed and oversubscribed share issue Jnl

Entry


Trust AccTrust Acc DrDr


Applicants depositsApplicants deposits


Entry Cont.




CrCr

Allot shares to ApplicantsAllot shares to Applicants


Entry Cont.



Trust AccTrust Acc CrCr

Refund Applicants depositsRefund Applicants deposits


Entry Cont.


BankBank DrDr


Issue Shares to Applicants Issue Shares to Applicants

Shares issued partly paid on application with the balance

payable on allotment



DrDr


Record receipt of application Record receipt of application monies monies





Share capitalShare capital CrCr

Allot shares to applicants Allot shares to applicants




BankBank DrDr


Transfer trust account money Transfer trust account money




AllotmentAllotment DrDr





BankBank DrDr

AllotmentAllotment CrCr

Shares issued payable on application and allotment and

subject to future calls



DrDr


Record receipt of application Record receipt of application monies monies






Allot shares to applicantAllot shares to applicant




BankBank DrDr


CrCr

Transfer trust account moniesTransfer trust account monies




AllotmentAllotment DrDr


Record amount owing on Record amount owing on allotmentallotment




BankBank DrDr

Allotment Allotment CrCr

Record receipt of allotment Record receipt of allotment moniesmonies




CallCall DrDr

Share capital Share capital CrCr

Record amount owing by Record amount owing by shareholders for the callshareholders for the call




BankBank DrDr

CallCall CrCr

Record amount received in Record amount received in respect of the callrespect of the call

Calls in arrears

Call on shares is madeCall on shares is madeCo may not receive all call monies owedCo may not receive all call monies owedCall account remains in a debit balanceCall account remains in a debit balanceNew account – Call in arrears and the above is transferred New account – Call in arrears and the above is transferred to this accountto this accountCall in arrears = Shareholder equity account = reduction in Call in arrears = Shareholder equity account = reduction in share capitalshare capitalCo constitution may call for shareholders with calls in Co constitution may call for shareholders with calls in arrears to forfeit their shares and the share reissuedarrears to forfeit their shares and the share reissued

Retention of excess application monies

Prospectus issued calls for monies to be paid on Prospectus issued calls for monies to be paid on application, allotment and future callsapplication, allotment and future callsSome applicants may forward all monies in the hope that Some applicants may forward all monies in the hope that they receive preferential treatment.they receive preferential treatment.Co may choose to keep this money and allocate it against Co may choose to keep this money and allocate it against money owing on allotment and future callsmoney owing on allotment and future callsDirectors can only make this decision if allowed by Co Directors can only make this decision if allowed by Co constitutionconstitution

Retention of excess application monies

Amt received from Amt received from applications allocated applications allocated toto

Calls in Calls in AdvanceAdvance

Shares Shares applied applied forfor

Paid Paid to $to $

Amt Amt received received $$

SharesShares

AllottedAllotted

Application Application of $of $

Allotment Allotment of $of $

Call 1 Call 1 $$

Call 2Call 2

$$Application Application refund $refund $

Accounting for retention of excess application money



DrDr


Record the receipt of application Record the receipt of application moneymoney




Share CapitalShare Capital CrCr

Allot shares to applicantsAllot shares to applicants



Allotment Allotment DrDr


Issue shares on allotmentIssue shares on allotment





CrCr

Refund application moneyRefund application money



BankBank DrDr


CrCr

Transfer trust account moneyTransfer trust account money




AllotmentAllotment CrCr

Application money retained Application money retained against allotmentagainst allotment




Calls in Calls in AdvanceAdvance

CrCr

Excess application money Excess application money applied to future callsapplied to future calls



CallCall DrDr


First CallFirst Call



Cash in Cash in advanceadvance

DrDr

CallsCalls CrCr

Records calls in advance against Records calls in advance against callcall



BankBank DrDr

CallsCalls CrCr

Call money owing is receivedCall money owing is received

Costs associated with share issue

Preparation of prospectusPreparation of prospectus Lodgment with ASICLodgment with ASIC PublicationPublication Receipt of moneyReceipt of money Issue of sharesIssue of shares Including stamp duty and taxes, professional advisers’ Including stamp duty and taxes, professional advisers’

fees, underwriting costs, commissions and brokerage fees, underwriting costs, commissions and brokerage feesfees

The above “equity issue costs” must be recognizedThe above “equity issue costs” must be recognized in in equityequity

Indirect costs are not included as transaction costs.Indirect costs are not included as transaction costs.

Costs associated with share issue


Transaction Transaction costscosts

DrDr

BankBank CrCr

Recording of transaction costs as Recording of transaction costs as per AASB 1015per AASB 1015

Bookbuilding

Occurs where an investment banker solicits Occurs where an investment banker solicits bids from institutional investors prior to bids from institutional investors prior to pricing an equity issuepricing an equity issue

Stapled securities

Stapling is an arrangement under which Stapling is an arrangement under which different securities are quoted jointlydifferent securities are quoted jointly

Issuing Debentures Issuing of debtIssuing of debt Attracts interestAttracts interest Must be repaid in a specified time frameMust be repaid in a specified time frame BorrowerBorrower Lender = principalLender = principal Interest = Charge (Fixed or Floating)Interest = Charge (Fixed or Floating) Maturity dateMaturity date RedemptionRedemption Issued via prospectus to the general public and also privately to Issued via prospectus to the general public and also privately to

elite fewelite few Must appoint a trusteeMust appoint a trustee Clear disclosure of all matters relating to the debenturesClear disclosure of all matters relating to the debentures

Mortgage Debenture

Secured by a first mortgage over land and/or buildingsSecured by a first mortgage over land and/or buildings Cannot exceed >60% of the value of assetCannot exceed >60% of the value of asset Limits rights to resell/transfer assetLimits rights to resell/transfer asset Trustee can take possession and sell to repay debenture Trustee can take possession and sell to repay debenture

holdersholders

Unsecured Note

Debt which is not secured by any charge over assetsDebt which is not secured by any charge over assets Higher risk = higher rate of interestHigher risk = higher rate of interest

Convertible Note

Allows debenture holder to convert debt to paid up Allows debenture holder to convert debt to paid up share capital or cash upon maturityshare capital or cash upon maturity

Contrast Funds from equity and debt

SharesShares DebtDebtOwnership entitlementOwnership entitlement No Ownership entitlementNo Ownership entitlement

Voting rightsVoting rights No Voting rights No Voting rights

Dilute ownershipDilute ownership Do not share profitsDo not share profits

Payment of Dividend is at discretion of Payment of Dividend is at discretion of DirectorsDirectors

Fixed regular incomeFixed regular income

Does not have to be repaidDoes not have to be repaid Must be repaidMust be repaid

No restriction on amount of share issueNo restriction on amount of share issue Specific debt/equity ratioSpecific debt/equity ratio

Dividends = ProfitDividends = Profit Interest = ExpenseInterest = Expense

Accounting entries for the issue and redemption of debentures

General JournalGeneral JournalTrust Account- Trust Account- DebenturesDebentures

DrDr

Application - Application - DebenturesDebentures

CrCr

Accounting entries for the issue of debentures


Application - Application - DebenturesDebentures

DrDr

DebenturesDebentures CrCr

Trust Acc - Trust Acc - DebenturesDebentures

CrCr

Allot debentures and refund Allot debentures and refund excess application moniesexcess application monies

Accounting entries for the issue of debentures


BankBank DrDr

Trust Acc - Trust Acc - DebenturesDebentures

CrCr

Transfer of trust moniesTransfer of trust monies

Making annual interest payments on debentures


InterestInterest DrDr

BankBank CrCr

Payment of interestPayment of interest



Interest on Interest on debenturesdebentures

DrDr

Accrued Accrued expenseexpense

CrCr

Interest incurred but not due for Interest incurred but not due for payment on annual balance datepayment on annual balance date



Accrued Accrued expenseexpense

DrDr

Interest on Interest on debenturesdebentures

CrCr

Reversal entryReversal entry

Accounting entries for the redemption of debentures


Interest - Interest - DebenturesDebentures

DrDr

BankBank CrCr

Final interest paymentFinal interest payment

Accounting entries for the redemption of debentures


DebenturesDebentures DrDr

BankBank CrCr

Payment of debenture holders on Payment of debenture holders on redemptionredemption

Accounting entries for the redemption prior to maturity

at a discount


DebenturesDebentures DrDr

Discount on Discount on debenture redemptiondebenture redemption

CrCr

BankBank CrCr

Payment of debenture holders on Payment of debenture holders on redemption at discountredemption at discount

Alternate accounts for debt issues

DebentureDebenture Mortgage Mortgage DebentureDebenture

Unsecured Unsecured NoteNote

ApplicationsApplications ApplicationsApplications ApplicationsApplications

DebenturesDebentures Mortgage Mortgage DebenturesDebentures

Unsecured Unsecured NotesNotes

InterestInterest InterestInterest InterestInterest

PremiumPremium PremiumPremium PremiumPremium

DiscountDiscount DiscountDiscount DiscountDiscount

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