ACCOUNTANCY FORM 6 – COMPANY ACCOUNT 1.1

BONUS ISSUE OR SCRIPT ISSUE:

 The directors of a limited company may decide to issue. More shares to existing shareholders against the reserves or P&L A/C balance in this case, the shareholders are not supposed to make any payment.

Right issue:- May be defined as the raising of new capital by a company by giving existing shareholders the right to subscribe to new shares of debentures in proportion their current holdings.

EXERCISE

M. Limited has an authorized share capital of Tshs. 1,500,000 divided into 1,500,000 ordinary share of Tshs. 1 each.  The issued share capital at 31st March 2007 was Tshs. 500,000 which was full paid and had been issued at par. On 1st April 2007, the directors, in accordance with the Company’s articles decided to increase the share capital offering by a further 500,000 ordinary shares of Tshs 1 each at a price of Tshs. 1.60 Per share payable as follow:-

On application including the premium        Tshs,.     0.85 Per share

On allotment                                             Tshs.      0.25 Per share

On 1st final colon 3rd August 2007            Tshs.      0.50 Per share

On 13th April 2007, applications had been received for 750,000 shares and it was decided to allot the shares on the basis of four shares for every five shares for which applications had been received.

The balance of the money received on application was to applied to the amount due on allotment. The shares were allotted on 1st May 2007, the unsuccessful applications being repaid their cash on this date.  The balance of the allotment money was received in fully by 15th May 2007.

With the exception of the member who failed to pay the call on the 5000 shares allotted he the reminder of call was paid in full within two weeks of the call being made.

The directors resolved to the forfeit these shares on 1st September 2007 after giving the required notice.  The forfeited shares were reissued on 30th September 2007 to another member at Tshs. 0.90 Per share.

You are required to write up the ledger a/c necessary to record these transactions in the books of M. Ltd.

Premium = 1.60 – 1.0 = 0.6

Application = 0.85 – 0.6 = 0.25

Applied                                    Issue

?                                            500.000

5                                               4

= 5 x 500,000  = 625,000 x 7

        4                            

Net Applied Amount = 625,000

Allotment received:-

Due to allotment (0.25 x 500,000)  =                    125,000

Less: Expenses on Appl. (0.85 x 625 – 500,000)   106,250

          Allotment money received                          18750

   DR                                  BANK     ACCOUNT                                               CR

DR                APPLICATION AND ALLOTMENT ACCOUNT                        CR      

 DR                        ORDINARY SHARE CAPITAL                            CR

     DR                     FORFEITED        SHARE   ACCOUNT         CR

    DR              FORFEITED   SHARE    REISSUE ACCOUNT     CR

      DR                                 1^ST CALL ACCOUNT                                          CR

     DR                           SHARE PREMIUM ACCOUNT              CR

      DR                     CALL    IN     ARREARS ACCOUNT               CR

Allotment received

Due on allotment (0.25 x 500,000)  =                                  125,000

Less; excess on application (0.85 x(625,000 – 500,000)       (106250 )

                                                                                           18750

                           BALANCE SHEET AS AT 30/9/2007 (Extract)

REDEMPTION OF SHARE

 Shares can be bought back from their holders direct on a specific data  or range of dates.

METHODS OF REDEMPTION

  Shares can be redeemed in two ways:-

(i)  Out of distributable

   e.g.- Credit  balance on profit &loss  A|c’s

       – General reserve

(ii)  Out of fresh issue of share made for purpose of redemption

 I:       Redemption out of distributable profit

According to this method, an amount equal to the nominal value of the shares being redeemed is transferred from a reserve which could otherwise be distributed as cash dividend to a reserve account called capital Redemption Reserve Account.

  Entry: Dr.  Profit & loss appropriation A/c with the nominal value of the shares redeemed.

             Cr.   Capital Redemption Reserve A/c

 The transfer to the capital Redemption Reserve A/c curtails the amount which could otherwise be distributed as cash dividend and so jeorpodice the company’s liquidity.

II:        Redemption out of fresh issue of shares:-

  In this case shares can be redeemed out of issuing new share to the members.  The issue should be made for the purpose of redemption.  Now the amount to be transferred to the capital redemption reserve A/c shall be the difference between the nominal value of the shares now being redeemed and the proceeds from the fresh issue of shares. 

Transfer to  CR  = Nominal value – cash collected out of fresh of shares redeemed issue.

Or     = Nominal value of shares redeemed – Nominal value of cash collected out of fresh Issue.

PREMIUM PAYABLE ON REDEMPTION

If the company redeems shares above par (at premium) the premium payable on redemption, shall be appropriated from the nglish-swahili/distribution” target=”_blank”>distribution profit.

The share premium a/c can be utilized in paying the premium payable on redemption, if the share now being redeemed were originally issued at a premium and a new issue of shares is being made for the purpose.

Now the share premium A/c can be used to meet the premium on redemption only to the extent of the lesser of:-

(i)   To credit balance of the share premium A/c after crediting the premium on fresh   (new) issue.

(ii)  The amount of the share premium received on the original issue pf the shares now being redeemed.