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Pro Rata Over Subscription with Calls in Arrears and Calls in Advance

Arjun EP

Published on: July 10, 2020

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	15,000^A
		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) ÷ 15,000^A*	(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

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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