Issue of shares - Application & Allotment


The share capital in a limited company consists of number of shares. These shares are denominated in units of monetary value - for example, $1 or $2. The value assigned to each share is called the nominal price or par value.

Issued price of a share is the price at which company issues its shares to general public. The shares may be issued at par (nominal price) or at a premium (above par value). For example ordinary shares of $1 are issued at $1.20 (Issued price – Nominal value = Premium of $0.20).

Example 1 – Issue of shares at par

A company issued 100 000 ordinary shares of $ 0.75 at par.

Ordinary share capital

= Number of shares * Nominal price

= 100 000 shares * $ 0.75

= $ 75 000

General Journal


$

$

Bank (DR)

75 000


To Ordinary Share Capital


75 000


Statement of changes in equity for the year ended 31st December 2019


Ordinary Share capital

Retained Earnings

General Reserve

Share Premium

Revaluation Reserve

Total

Balance b/f

***

***

***

***

***

***

Issue of shares at par

75 000





75 000









Example 2- Issue of shares at premium

A company issued 80 000 shares of $ 1 at $ 1.20

Ordinary share capital

= Number of shares * Nominal price

= 80 000 shares * $ 1

= $ 80 000

Share Premium

= Issued price – Nominal price

= $ 1.20 - $ 1

= $ 0.20

General Journal


$

$

Bank (DR) [ 80 000 * $ 1.20 ]

96 000


To Ordinary Share Capital [ 80 000 * $ 1 ]


80 000

To Share Premium [ 80 000 * $ 0.20 ]


16 000


Statement of changes in equity for the year ended 31st December 2019


Ordinary Share capital

Retained Earnings

General Reserve

Share Premium

Revaluation Reserve

Total

Balance b/f

***

***

***

***

***

***

Issue of shares at premium

80 000



16 000


96 000









Example 3 – Issue of shares at a premium

A company issued 150 000 shares of $ 0.80 at a premium of 30%.

Ordinary share capital

= Number of shares * Nominal price

= 150 000 shares * $ 0.80

= $ 120 000

Issued Price

= 0.80 * 130/100

= $ 1.04

Share Premium

= Issued price – Nominal price

= $ 1.04 - $ 0.80

= $ 0.24

General Journal


$

$

Bank (DR) [ 150 000 * $ 1.04 ]

156 000


To Ordinary Share Capital [ 150 000 * $ 0.80 ]


120 000

To Share Premium [ 150 000 * $ 0.24 ]


36 000


Statement of changes in equity for the year ended 31st December 2019


Ordinary Share capital

Retained Earnings

General Reserve

Share Premium

Revaluation Reserve

Total

Balance b/f

***

***

***

***

***

***

Issue of shares at premium

120 000



36 000


156 000









The share capital of a company may be subject to certain changes. The nominal price of a share cannot be changed, but the number of shares can be increased by means of

  1. Prospectus issue
  2. Bonus issue
  3. Rights Issue


Prospectus Issue

An investor buying a company’s shares usually pay in installments. They usually pay a certain amount with an application form as an offer to purchase the shares (on application). The company responds the offer by sending the investor a letter of allotment and requesting further payment (on allotment). A temporary share holding account is used to record money received on application and allotment.

The main double entries are:


 

Ledger Entries

Workings

1

On Application


DR Bank

No of applications * Application Price


CR Share holding account




2

On Allotment


DR Bank

No of shares issued * Allotment Price


CR Share holding account




3

Nominal Value


DR Share holding account

No of shares issued * Nominal Price


CR Ordinary share capital




4

Premium on shares


DR Share holding account

No shares issued * Premium


CR Share premium account




5

Refund unsuccessful applicants


DR Share holding

[No of applications – No of shares issued] * Application price


CR Bank


Worked example

F Limited is a large retail company. On 1 February 2016, the company invited applications for 50 000 ordinary shares of $ 1 each at an issue price of $ 1.20. The following terms applied:


Payable on application           $ 0.50

Payable on allotment              $ 0.70


Applications were received for 65 000 shares.

All monies received in respect of the share issue were posted to the bank account and a share issue holding account until the shares were allotted.

At the time of allotment, transfers were made to the share capital account and the share premium account and monies were returned to the unsuccessful applicants.


Workings


 

Ledger Entries

Workings

1

On Application


DR Bank

No of applications * Application Price

65 000 * $ 0.50 = $ 32 500


CR Share holding account




2

On Allotment


DR Bank

No of shares issued * Allotment Price

50 000 * $ 0.70 = $ 35 000


CR Share holding account




3

Nominal Value


DR Share holding account

No of shares issued * Nominal Price

50 000 * $ 1


CR Ordinary share capital




4

Premium on shares


DR Share holding account

No shares issued * Premium

50 000 * $ 0.20


CR Share premium account




5

Refund unsuccessful applicants


DR Share holding

[Applications – Issued] * Application price

[65 000 – 50 000] * $ 0.50 = $ 7 500


CR Bank



DR                                                                      Bank Account                                                                      CR


$

 

$

Shareholding – Application

32 500

Shareholding

7 500

Shareholding – Allotment

35 000

Balance c/ d

60 000


67 500

 

67 500

Balance b/d

60 000







DR                                                              Share Holding Account                                                               CR


$

 

$

Ordinary share capital

50 000

Bank – Application

32 500

Share premium

10 000

Bank – Allotment

35 000

Bank

7 500




67 500

 

67 500





DR                                                       Ordinary share capital Account                                                         CR


$

 

$

Balance c/d

50 000

Share holding

50 000


50 000


50 000



Balance b/d

50 000





DR                                                              Share premium Account                                                                CR


$

 

$

Balance c/d

10 000

Share holding

10 000


10 000


10 000



Balance b/d

10 000