Over subscription
Sometimes when company is well-known or earning high profit, shares applicants like to purchase more shares.
In such a condition public applied more than offered shares of the company.
When share applicants applied more than offered share, it is called over subscription.
Normally, the company allots shares in proportion.
But sometimes company uses these three methods.
(1) Full rejection of excess applications
(2) Pro-rata allotment
(3) Mixed methods
Keep in mind
According to the guidelines of SEBI (Securities and Exchange Board of India), a company cannot reject directly any application. |
However, it can do so where the information is incomplete like there is not proper information on the application and money is insufficient. |
In some countries, the company rejects share applications directly on over subscription. |
Full rejection of excess applications
Under this method, company rejects excess applications.
Company returns excess to the applicants with a letter of regret.
Pro rata allotment
Under this method, company allots excess applications in proportion.
For example the company received 5,000 applications and allotted 1,000 shares.
Now 5,000: 1,000 or 5: 1.
Here the applicant of five shares received one share.
Mixed allotment
Under this method,
Company rejects some applications (nil)
Some applications allot in full (100%)
Some excess applications are allotted in proportion (pro-rata).
Calls in Arrears
When shareholder(s) cannot pay due amount on due date, it is called calls in arrears.
It may be on allotment, first call or second and final call.
There is never arrear in application.
According to Company Act, the company should send writing notice or letter to shareholders about calls in arrears.
Calls in arrears are debited with bank entry.
Calls in Advance
When a shareholder pays due amount before calling is calls in advance.
According to Company Act, shareholders can get 6% p.a. interest on calls in advance if it is mentioned on memorandum of association.
Shareholder can get dividend of calls in arrears shares if Articles of Association mentions.
Calls in advance is first time credited then debited with bank entry.
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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 11 [pro rata over subscription with calls in arrears and calls in advance]
BN Company Ltd has authorized capital $/₹/Rs 50,00,000 divided into shares of Rs 100 each. The Company issued 40,000 equity shares at 10% discount. The amount payable as under:
On application Rs 30
On allotment Rs 40
On first and final call Rs 20
The Company received applications for 60,000 shares. The BOD decided to allotment in following basis:
Applications for 25,000 shares Pro-rata
Applications for 25,000 shares full
Applications for 10,000 shares Nil
Excess money can be utilizes toward allotment. The entire amount was duly received except a shareholder who held 495 shares under pro-rata basis failed to pay allotment and calls. Another shareholder who held 1,000 shares paid entire amount with allotment.
Required: Journal entries and balance sheet
[Answer: Arrears on allotment = Rs 13,200; Allotment bank = Rs 13,86,800;
Arrears on final call = Rs 14,850]
SOLUTION:
Given and working note:
Shares |
Issued |
Installation |
Arrears and |
|
Share |
Shares |
|
Issued |
Price |
|
Advance |
|
Applied |
Allotted |
|
40,000 |
100–10D |
Application |
20 |
. |
|
25,000 |
15,000A |
|
|
Allotment |
40 (50C–10D) |
−495 + 1,000 |
|
25,000 |
25,000 |
|
|
F&F call |
30 |
−495 |
|
10,000 |
Nil |
|
60,000 |
40,000 |
Return or refunded money
= Rejected or Nil shares x Always application amount
= 10,000 shares x Rs 20
= Rs 200,000#
Excess money
= Difference in pro-rata shares x Always application money
= (25,000 – 15,000 shares) x Rs 20
= 10,000 x Rs 20
= Rs 200,000*
When there is a call in arrears on allotment, this formula can be applied:
Amount need on allotment (40,000 shares @ Rs 40) |
|
16,00,000 |
Less: Excess amount of pro-rata |
|
(200,000*) |
|
|
14,00,000 |
Arrears seem on allotment (495 Shears @ Rs 40) |
19,800 |
|
Less: Paid = (Rs 200,000* x 495) ÷ 15,000A |
(6,600) |
(13,200) |
Received amount on allotment (bank) |
13,86,800 |
Where: Paid = (Excess amount x Arrears shares) ÷ Pro-rata allotted shares
Calls in advance for final call = 1,000 shares x Rs 30 final call money = Rs 30,000
Calls in arrear for final call = 495 shares x Rs 30 final call money = Rs 14,850
Journal Entries
In the book of BN Company Ltd
Date |
Particulars |
|
LF |
Amount |
Amount |
Received |
Amount received on application |
|
|
|
|
|
Bank account |
Dr |
|
12,00,000 |
|
|
To Equity share application account |
|
|
|
12,00,000 |
|
(Being: amount received on 60,000 shares @ Rs 20) |
|
|
|
|
|
|
|
|
|
|
Transfer |
Amount transfer of application |
|
|
|
|
|
Equity share application account |
Dr |
|
12,00,000 |
|
|
To Equity share capital account |
|
|
|
8,00,000 |
|
To Bank account (return) |
|
|
|
2,00,000* |
|
To Equity shares allotment account (excess) |
|
|
|
2,00,000# |
|
(Being: amount transfer of application to capital, |
|
|
|
|
|
Excess amount returned and adjusted) |
|
|
|
|
|
|
|
|
|
|
Due |
Amount due/receivable on allotment |
|
|
|
|
|
Equity share allotment account |
Dr |
|
16,00,000 |
|
|
Discount on share account |
Dr |
|
4,00,000 |
|
|
To Equity share capital account |
|
|
|
20,00,000 |
|
(Being: amount due on allotment and discount adjusted) |
|
|
|
|
|
|
|
|
|
|
Received |
Amount received on allotment |
|
|
|
|
|
Bank account (b/f} |
Dr |
|
14,16,800 |
|
|
Calls in arrears account |
Dr |
|
13,200 |
|
|
To Equity share allotment account |
|
|
|
14,00,000 |
|
To Calls in advance account |
|
|
|
30,000 |
|
(Being: amount received from working note) |
|
|
|
|
|
|
|
|
|
|
Due |
Amount due/receivable on first and final call |
|
|
|
|
|
Equity share first and final call account |
Dr |
|
12,00,000 |
|
|
To Equity share capital account |
|
|
|
12,00,000 |
|
(Being: amount due/receivable on calls) |
|
|
|
|
|
|
|
|
|
|
Received |
Amount received on first and final call |
|
|
|
|
|
Bank account (b/f) |
Dr |
|
11,55,150 |
|
|
Calls in arrears account |
Dr |
|
14,850 |
|
|
Calls in advance account |
Dr |
|
30,000 |
|
|
To Equity share first and final call account |
|
|
|
12,00,000 |
|
(Being: amount received on 40,000 – 495 = 39,550 |
|
|
|
|
|
shares @ Rs 30, advance and arrears adjusted) |
|
|
|
|
|
|
|
|
|
|
BN Company Ltd
Balance Sheet
Liabilities |
|
Amount |
Assets |
|
Amount |
Authorised capital: |
|
|
Cash at bank |
|
39,71,950 |
50,000 Equity shares @ 100 |
|
50,00,000 |
|
|
|
|
|
|
|
|
|
Issued & paid up capital: |
|
|
|
|
|
40,000 Equity shares @ 100 |
40,00,000 |
|
|
|
|
Less: Calls in arrears |
(28,050) |
39,71,950 |
|
|
|
|
|
|
|
|
|
|
|
39,71,950 |
|
|
39,71,950 |
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#####
Problems and Answers of Pro Rata with Calls in Arrears and Calls in Advance |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 11 [pro rata over subscription with calls in arrears and calls in advance]
BN Company Ltd has authorized capital $/₹/Rs 50,00,000 divided into shares of Rs 100 each. The Company issued 40,000 equity shares at par. The amount payable as under:
On application Rs 30; on allotment Rs 50; on first and final call Rs 20
The Company received applications for 60,000 shares. The BOD decided to allotment in following basis:
Applications for 25,000 shares Pro-rata
Applications for 25,000 shares full
Applications for 10,000 shares Nil
Excess money can be utilizes toward allotment. The entire amount was duly received except a shareholder who held 495 shares under pro-rata basis failed to pay allotment and calls. Another shareholder who held 1,000 shares paid entire amount with allotment.
Required: Journal entries
[Answer: Arrears on allotment = Rs 14,850; Allotment bank = Rs 17,05,150;
Arrear on final call = Rs 9,900;
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