Centre for Distance and Online

Education

Punjabi University, Patiala

Class : B.COM Part-II Semester:3

Paper : B.C.304(Corporate Accounting- I) Unit: I
Medium : English

Lesson No. (Updated on : 27 June 2023)

1.1 : Company Accounts - Issue of Share Capital

1.2 : Redemption of Preference Shares

1.3 : Issue of Debentures

1.4 : Redemption of Debentures

1.5 : Issue of Bonus and Right Shares

1.6 : Underwriting of Shares and Debentures

Department website : www.pbidde.org

B.COM. PART-II B.C. - 304
SEMESTER-III CORPORATE ACCOUNTING

LESSON NO. 1.1 AUTHOR : PROF. DEVINDER KUMAR

COMPANY ACCOUNTS - ISSUE OF SHARE CAPITAL

Structure of the Lesson :
1.1.0 Objectives
1.1.1 Introduction
1.1.2 Meaning of Company
1.1.3 Characteristics of a Company
1.1.4 Books of Accounts
1.1.5 Share Capital
1.1.6 Types of Shares
1.1.7 Issue of Shares
1.1.7.1 Entries of Issue of Shares
1.1.7.2 Issue of Shares to Venders
1.1.7.3 Issue of Shares at Discount
1.1.7.4 Issues of Shares of Premium
1.1.7.5 Calls in Arrears and Calls in Advance
1.1.7.6 Forfeiture of Shares
1.1.7.7 Reissue of Forfeited Shares
1.1.8 Pro-Rata Allotment
1.1.9 Example - I and II
1.1.10 Surrender of Shares
1.1.11 Private placement of Shares
1.1.12 Self Check Exercises
1.1.13 Summary
1.1.14 Glossary
1.1.15 Short Questions
1.1.16 Long Questions
1.1.17 Suggested Readings
1.1.0 OBJECTIVES
The main objective of this Lesson is to provide detail about :
1. Issue of share capital;
2. Reissue and Forfeiture of share capital;
3. Pro-Rata Allotment of shares; and
4. Surrender of shares.
1.1.1 INTRODUCTION
To overcome the major limitations of sole proprietorship and partnership concerns,
one of the most convenient form of organisation that grew with expansion of business
requiring huge funds is the joint stock company form of Organisation. In India, joint stock
companies are governed by provisions of the companies Act, 2013.
1
B.COM. PART-II (Sem.-III) 2 B.C.-304

A limited company is a body corporate, that is an aggregation of persons and

individual, arising by statute or Royal Charter, having the status of a separate being
or person, the liability of whose members is limited according to circumstances.
1.1.2 MEANING OF COMPANY
Under section 2(20)(i) of the Companies Act, 2013. A company means of a
company formed and registered under this Act or an existing company. Most of the
companies may have a share capital with liability of the share holder limited to the
amount remaining unpaid on the shares for which they have subscribed. A few
companies may not have share capital, the liability being limited to the amount,
members agree in the form of a guarantee. But such companies are very rare, i.e. non-
profitable concerns, Chambers of Commerce, Institutions, or Clubs, etc.
1.1.3 CHARACTERISTICS OF A COMPANY
1. A company is a voluntary association of persons, nobody can compel any
person to form a company.
2. A company has separate legal entity i.e. it can hold, purchase and sell properties,
can open bank accounts in its own name and can enter into contract.
3. A company has common seal, being an artificial person.
4. A company has perpetual succession. Its continuity is not affected by the
change in the membership.
5. Most of the companies are limited companies. In such cases the liabilities of
members are limited to the amount he has agreed to pay to the company.
1.1.4 BOOKS OF ACCOUNTS
The Provisions of maintaining books of accounts are contained in Section
128 of the Companies Act 2013 as follow :
(a) All sums of money received and expanded by the company and the
matters in respect of which the receipt and expenditure take place.
(b) All sales and purchases of goods by the company.
(c) The assests and liabilities of the company.
(d) In the case of company pertaining to any class of companies engaged in
production, processing, manufacturing or mining activities, such particulars
relating to utilisation of material or labour or to other items of cost as may
be prescribed if such class of companies is required by the Central
Government to include such particulars in the books of account.
(e) Books of accounts must give a true and fair view of the state affaris of the
company or its branches
(f) Books of accounts must be kept on accrual basis and according to the
double entry system of accounting.
1.1.5 SHARE CAPITAL
The information relating to the share capital of a company is to be given
in the Balance Sheet under the broad heads like Authorised Capital, Issued
B.COM. PART-II (Sem.-III) 3 B.C.-304

Capital and subscribed Capital, etc. under the provision of Schedule VI of the Companies
Act, 2013. The said terms are described as under :
(i) Authorised Capital : It is maximum amount of share capital which a company
is authorised to raise. This amount is stated in Memorandum of Association and is
also described as Registered capital or Nominal capital.
(ii) Issued Capital : It is defined as the ‘normal’ amount of that part of
authorised capital which is offered to public for subscription by the company
and includes the shares taken up by the subscribers of the Memorandum of
Association.
(iii) Subscribed Capital : Subscribed Capital is that part of the issued capital for
which applications are received from the public.
(iv) Called up Capital : It is that portion of the subscribed capital which has been
called up the company.
(v) Paid up Capital : It is that part of the called up share capital for which payment
has been received by the company.
(vi) Uncalled Capital : It is that part of the Subscribed share capital on which
no calls have yet been made by the company.
(vii) Unissued Capital : It is that part of the Authorised share capital which has
not been offered for subscription to the public or to vendors of property
acquired by the company.
(viii) Reserve Capital : It is that portion of the subscribed share capital not already
called up in respect of which the company has by a special resolution
determined it that it shall not be capable of being called up, except in the
events of for the purpose of the winding up of the company.
STOCK
As per companies Act, 2013 (Section 61), When all the shares of a company
have been fully paid up, they may be converted into stock if so authorised by the
Articles of association, it is another types of unit of capital of company (Section
43).
1.1.6 TYPES OF SHARES
There are two types of shares :
(A) Preference Shares (B) Equity Shares
(A) Preference Shares :
The law defines preference share capital as of the share capital of
company which enjoys preferential right as to :
(i) The payment of dividend at a fixed rate during the life of the company.
(ii) The repayment of capital on winding up of the company.
(B) Equity Shares :
The equity share capital is a share capital other than the preference share
capital i.e. the dividends in respect of the said capital can be paid only after
paying the preference dividend. As regards return of capital, Equity
B.COM. PART-II (Sem.-III) 4 B.C.-304

shareholder is paid only when the preference share capital is paid out fully. However,
the Equity Share capital carries voting rights, whereas preference shares does
not have such a right except in certain circumstances as laid down in the Act.
Classes of Preference Shares
i) Cumulative Preference Shares :
Holders of this class of shares are entitled to dividend of previous years also
if not paid. If in any year dividend on the said shares can not be paid, the
same shall be payable out of the profits to the subsequent years.
ii) Non-Cumulative Preference Shares :
In this case holders of the shares do not have the right to claim unpaid dividends
of the past years. The right to receive dividend for a particular year lapse
immediately if the profit of the years is not sufficient to pay the same.
iii) Redeemable Preference Shares :
They are such shares which would be repaid on or after a certain date
in accordance with the terms of issue and as per the provision laid down in
the companies Act, 2013.
iv) Convertible Preference Shares :
They have a right to be converted into Equity shares.
1.1.7 ISSUE OF SHARES
Shares are units of ownership of a Limited Company. It must raise the necessary
capital before it begins the operations.
These are to be subscribed by the promoters, their friends, relations or by
means of a public offer. The shares may be issued either at par or at a premium
or discount. The amount of subscription may be paid in instalments or the entire
amount at one time.
1.1.7.1 Entries of Issue of Shares
(a) If the shares are issued on one class at par, the entire amount being
payable at once, the entries will be as follows :
(i) Sundry Members A/C ---------- Dr.
To Share Capital A/C
(ii) Cash/Bank A/C ---------- Dr.
To Sundry Member A/C
If the amount is payable in instalment :
(i) For amount received on Application
Cash/Bank A/C ------------- Dr.
To Share Application A/C
(ii) On allotment of share (For the value of application money received in
respect of share allotted).
Share Application A/C ---------- Dr.
B.COM. PART-II (Sem.-III) 5 B.C.-304

To Share Capital A/C

(iii) For amount due on allotment
Share Allotment A/C ---------- Dr.
To Share Capital A/C
(iv) For money received on allotment
Cash/Bank A/C ----------- Dr.
To Share Allotment A/C
(v) For excess money received on application returned to share
holders :
Share Application A/C ---------- Dr.
To Cash/Bank A/C
(vi) For adjusting the excess money on application towards amount due
on allotment.
Share Application A/C ---------- Dr.
To Share Allotment A/C
(v) When Shares are over subscribed some applicants are allotted
lesser number of shares than they applied for
Share Application A/C ---------- Dr.
To Share allotment account
To Calls-in-advance account
To Bank account
(Being excess application money adjusted against allotment and surplus
transferred to calls in-advance account.)
(vi) When allotment money is demanded, the allotment money becomes
due to the company
Share allotment A/C ---------- Dr.
To Share Capital A/c
(vii) When allotment money is received
Bank A/C ------------ Dr.
To share allotment A/C
(viii) When some members fail to make the payment of allotment money
Calls in-arrears A/C --------------- Dr.
To share allotment account
(ix) When call money is demanded
Share first call A/C ------------ Dr.
To share capital A/C
(x) When call money is received
Bank A/C ---------- Dr.
To share first call A/C
(xi) When a part of call money is not received
B.COM. PART-II (Sem.-III) 6 B.C.-304

Calls in arrears A/C ----------- Dr.

To Share first call A/C
(xii) When calls-in-advance money is adjusted
Calls-in advance A/C ------------ Dr.
To Share Calls A/C
1.1.7.2 Issue of Shares to Vendors
Sometimes the company issue fully paid shares to the vendors from whom
it buys it assets. These particulars should be given in the Balance Sheet and such
shares must be distinguished from the one issued for cash.
The entries for that are as under :
(i) For purchase of assets i.e. machine, building etc.
Assets A/C ---------- Dr.
To Vendors A/C
(ii) For issue of shares.
Vendors A/C ----------- Dr.
To Share Capital A/C
1.1.7.3 Issue of Shares at Discount
Under the Companies Act, 2013, a company shall not issue shares at a
discount except as provided in Section 54.
A company may issue shares at a discount in the company of a class
already issued. If the following conditions are fulfilled :
(i) The issue of share at a discount is authorised by a resolution passed by
the company is generally meeting and sanctioned by the Central Government.
(ii) The resolution specifies the maximum rate of the discount at which the
shares are to be issued. The maximum rate of discount allowable is 10%
unless Central government is of the opinion that a higher percentage in
special circumstances is necessary.
(iii) Atleast one year must have elapsed since the Company was entitled to commence
business such shares if sanctioned by the Central government must be issued
within two months or such extended time as the Central government may allow :
e.g. A company issued 10,000 shares of Rs. 100 each at a discount of
10%. Entries :
(a) Cash/Bank A/C----------Dr. 90,000
To Application & Allotment A/C 90,000
(Being Application and allotment moneys issued vide resolution of)
(b) Share Application Allotment A/C----------Dr. 90,000
Discount on Shares A/C----------Dr. 10,000
To Share Capital A/C. 1,00,000
B.COM. PART-II (Sem.-III) 7 B.C.-304

(Being issue of Shares at a discount of

10% vide resolution date)
1.1.7.4 Issue of Shares at Premium
A company due to its attractiveness of its shares may be able to issue
shares at a premium. In other words it will issue the shares at a price which
is above par. The premium received on shares shall be credited to a separate
account called Securities Premium Account.
Securities Premium Account cannot be treated as free reserves, as they are
in the nature of capital reserves. The utilization of Securities Premium Account may
be made as follows :
(a) In paying up unissued share of the company to be issued to the members
of the company as fully paid bonus shares.
(b) In writing off the preliminary expenses of the company.
(c) In writing off the expenses of or the commission paid or discount allowed
on, issue of shares or debentures of the company, or
(d) In providing for the premium payable on the redemption of any
redeemable preference shares or of any debentures of the company.
These provisions are contained in Section 52(2) of the Companies
Act,2013.
(e) For buying back of shares.
The following journal Entries are passed at the time of issue of shares at
premium.
(i) Application/Allotment A/C----------Dr. (full amount)
To Share Capital A/C (with the amount of Face value)
To Securities Premium A/C (Amount of Share Premium)
(ii) Cash A/C ---------- Dr.
To Application/Allotment A/C.
(Being receipt of cash on A/C of Application or allotment of Shares).
When both Preferences and Equity Shares are Issued
When a company issues both preference and equity shares then it is desirable
that the entries for the application money, allotment money and calls money should
be separately passed for each type of share capital. The words ‘Equity’ or
‘Preference’ must invariably be used in all the circumstances.
1.1.7.5 Calls in Arrears and Calls in Advance
If any amount has been called by the company either as allotment or call money
and a shareholder has not paid that money, such amount is known as calls in
arrears. On such calls, if the company's directors want and there is a provision in
the Articles of Association, the company can charge interest @ 10% for the period
for which such amount remained as arrear from the shareholders. Similar, if any call
has been made but while paying that call, some shareholders have paid the amount
of the rest of calls also, than such amount will be called as
B.COM. PART-II (Sem.-III) 8 B.C.-304

calls in advance and will be credited to a separate account known as calls in

Advance account by passing the following entry-
Bank A/C Dr
To Calls in Advance A/C
Calls in Advance Account is shown on the liabilities side of the balance
sheet separately from the paid up capital. Generally interest is paid on such calls
as per the provisions of the Articles of Association but such rate should not exceed
12% p.a. Calls in advance are not entitled to any dividend declared by the company.
Reserves not Available for Issue of Bonus Shares :
Following reserves do not available for issue of bonus shares :-
1. Capital Reserve arising due to revaluation of assets.
2. Securities Premium arising on issue of shares on amalgamation or takeover.
3. Investment allowance reserve and development rebate reserve before
expiry of 4 years of creation.
4. Balance in debenture redemption reserve account before redemption.
5. Surplus arising from a change in the method of charging depriciation.
1.1.7.6 Forfeiture of Shares
When a shareholder of a company fails to pay any call, the company, if
empowered by its articles, may forfeit the shares. If a shareholder does not pay
any call on the day fixed for payment and fails to pay it even in extra time given
to him, then the Board of Directors will pass resolution to the effect that such
share shall be forefeited. When such shares are forfeited the shareholder's
name is removed from the register of members and amount already paid by him
on the shares is forfeited by the company and it becomes the property of the
company. The following journal entry is passed at the time of forefeiture of shares
:
Share Capital A/C----------Dr. (With the called-up amount)
Securities Premium A/C----------Dr. (If not received)
To Unpaid Call A/C (With the Unpaid amount)
To Discount on issue A/C (If shares are issued at discount) To
Shares Forefeited A/C (With the amount already received)
NOTE : If shares are issued at a premium which has been received, the
amount may remain in Securities premium account if it is realised. If not
received the amount of premium should be written back by debiting the
Securities Premium A/C. If the shares were issued at discount, the discount on
shares account is credited, at the time of forefeiture for the amount of discount
allowed.
1.1.7.7 Reissue of Forfeited Shares
Forfeited shares may be reissued by the company as and when the
B.COM. PART-II (Sem.-III) 9 B.C.-304

company finds it suitable and convenient. However, the price charged on the reissue
of shares must not be less than the amount that was in arrear when shares are
forfeited. The discount allowed has to be debited to the shares forfeited account.
The following journal entry is to be passed at the time of reissued of shares
:-
Bank A/C----------Dr. (Actual amount received)
Discount on the issue of (If the shares were issued at discount
with
Shares A/C --------- Dr. the amount of discount of reissue)
Share Forfeited A/C ----- Dr. (Total discount allowed on reissue less
original discount).
To Share Capital A/C (with the face value of shares)
To Securities Premium A/C (If the shares are reissued at premium).
The amount standing to the credit of share forfeited account, in respect
of forfeited shares not yet re-issued, should be shown in the Balance Sheet by
way of addition to paid-up capital under a separate head.
After reissue of all the Forfeited Shares if there is no balance in the shares
Forfeited account, then there will be a capital profit. But where there is profit
on the reissue of all Forfeited shares, i.e. shares Forfeited account is showing credit
balance after reissue of all Forfeited shares, such profit should be treated as
capital profit and the balance transferred to capital reserve account by passing the
following entry :
Share forfeited A/C ----------- Dr.
To Capital Reserve A/C
Capital Reserve will be shown on liabilities side of the Balance Sheet and
can be used for writing off capital losses.
1.1.8 PRO-RATA ALLOTMENT
‘Pro-rata allotment’ means allotment is in proportion of shares applied for -
Adjustment of excess money towards the amount due on the allotment and
calls
Sometimes a company may not allot all the shares for which applications
have been received, because of over-subscription, the allotment is either made of
less number of shares or on pro-rata basis. For example, if the company offered
Rs. 1,50,000 share of Rs. 10 each but applications for 20,000 shares were received
by the company. The Directors sent letters of regret to application of 5,000
shares and applicants for 15,000 shares were allotted 10,000 shares on pro-rata
basis.
In such a case, application money of 5,000 shares will be adjusted either on
allotment and on calls, if there is still surplus money after adjusting the allotment
and call money due from shareholders, if will be paid in cash.
B.COM. PART-II (Sem.-III) 10 B.C.-304

PRO-RATA ALLOTMENT AND FORFEITURE OF SHARE

In case of pro-rata allotment of shares, the students may face difficulty to
find the amount not received on a particular call, if such shares have been forfeited. It
will be better to find the number of shares applied for in such a case on the
following basis :-

It is important here to mention that the question of pro-rata allotment arises

only in case if there is over subscription. In such a situation company can not
satisfy all the applicants, thus the company may either :
(i) Reject the excess applications in full;
(ii) Allot proportionately to all the applications; and
(iii) Reject some applications and allotment may be made proportionately to the
rest applicants.
‘Pro-rata allotment’ means allotment is in proportion of shares applied
for.
Accounting Entries
(a) For rejected application
Share Application A/C ---------- Dr.
To Bank Account
(Being excess application money refunded)
(b) For pro-rata allotment
Share Application account ------- Dr.
To Share Allotment Account
(Being excess application money adjusted with allotment money)
1.1.9 EXAMPLE :
ABC Limited, issued prospectus inviting applications for 20,000 shares of
Rs. 10 each at a premium of Rs. 2 per share on application, Rs. 5 on allotment
(including premium), Rs. 3 on first call, Rs. 2 on second call.
Applications were received for 30,000 shares and allotment made pro- rata
to the applicants of 24000 shares, money overpaid on application was employed
on accounts of sums due on allotment.
Mr. x to whom 400 shares were allotted, failed to pay the allotment
money and on his subsequent failure to pay the first call. His shares were Forfeited.
Mr. Y, the holder of 600 shares failed to pay both calls and his shares were
Forefeited after the second call. 800 shares out of 1100 forfeited shares were
reissued at Rs. 9 per share fully paid up. The whole of Mr. X share being included.
Pass the necessary journal enteries.
B.COM. PART-II (Sem.-III) 11 B.C.-304

Solution
Books of ABC Limited
Journal Entries Rs. Rs.

Bank A/C------- Dr. 60,000 60,000

To Share Application A/C
(Being application money received on
30,000 shares @ Rs. 2 per share)

Share Application A/C ------- Dr. 52,000

To Share Capital A/C 40,000
To Bank A/C 12,000
(Being transfer of application money on 20,000
Shares @ Rs. 2 Share Capital A/C and refunded
application money to applicants of 6,000 shares
@ Rs. per share)

Share Application A/C ------- Dr. 1,00,000

To Share Capital A/C 60,000
To Securities Premium A/C 40,000
(Being allotment money due on 20,000 Shares
@ Rs. 5 per share including premium of Rs. 2
per share)

Bank A/C ------- Dr. 90,160

Share Application A/C ------- Dr. 8,000
To Share Allotment A/C 98,140
(Being receipt of allotment money and surplus money
on application adjusted to Shares Allotment A/C).

Shares First Call -------- Dr. 60,000

To Share Capital A/C 60,000
(Being First call due on 20,000 shares
@ Rs. 3 per share).

Bank A/C -------- Dr. 57,000

To Share Capital A/C 57,000
(Being receipt of first Call money on 19000
shares @ Rs. 3 per share 20,000 - (600 + 400).

Share Capital A/C -------- Dr. 3200

Securities Premium A/C --------- Dr. 800
B.COM. PART-II (Sem.-III) 12 B.C.-304

To Share Allotment A/C To 1840

Share First Call A/C To 1200
Share Forfeited A/C 960
(Being forfeiture of 400 shares held by Mr. X for non- payment
of allotment money and first call money)

Share Second & Final Call A/C ---------- Dr. 38,000

To Share Capital A/C 38,000
(Being Second and Final Call due on 19000
Shares @ Rs. 2 per share)

Bank A/C -------- Dr. 38,000

To Share Second & Final Call A/C 38,000
(Being receipt of Second and Final Call due on
19000 shares @ Rs. 2 per share)

Share Capital A/C --------- Dr. 6,000

To Share First Call A/C 1800
To Share Second & Final Call A/C 1200
To Share Forfeited A/C 3000
(Being forfeiture of 600 shares held by Mr. Y for non-
payment of First Call @ Rs. 3 and Final Call@ Rs.
2 per share)

Bank A/C -------- Dr. 7,200

Share Forfeited A/C ---------- Dr. 2,960
To Share Capital A/C 8,000
To Capital Reserve A/C (2) 2,160
(Being 800 shares out of 1000 forfeited shares
reissued @ Rs. 9 at discount of Rs. 1 per share
and the balance of share forfeited A/C on 800
shares transferred to Capital Reserve A/C)

WORKING NOTE :
1) CALCULATION OF AMOUNT RECEIVED ON ALLOTMENT :
Amount due on allotment on 20,000 shares @ Rs. 5 Rs.
Less : Excess application money : of 4,000 if shares 1,00,000
adjusted on allotment (4000 × 2) 8,000

92,000
 B.COM. PART-II (Sem.-III) 13 B.C.-304

Less : Amount not received on 400 shares :

If allotment 20,000 shares, applied for 24,000 shares
 i.e. 24000  400
and allotted 400 shares applied 480  
 20,000 


Surplus money of application 80 × 2 = Rs. 160

Amount of allotted due on 400 shares
400 × Rs. 5 = Rs. 2,000
Less Rs. 160 1,840
90,160
2) Calculation of Amount Transferred
to Capital Reserve : Rs.
Total money received on 800 re-issued forfeited shares 2,960
Rs. 960 + 2,000
Less : Discount allowed on reissue of 800 forfeited shares 800
2,160
Example :
X. Co. Ltd. invited for 20,000 equity shares of Rs. 10 each at a premium
of Rs. 2 per share, payable Rs. 3 on application, Rs. 7 on allotment including
premium and the balance on first all final call.
Applications for 25,000 shares were received. It was decided :
a) to refuse allotment to applicants for 1,000 shares.
b) to allot in full to applicants for 4,000 shares.
c) to allot the balance of the available shares on pro-rata among the other
applicants, and
d) to utilise excess application money in part payment of allotment money.
Mr. X holding 200 shares to whom shares had been allotted on pro-rata
basis failed to pay the amount due on call only. These shares were forfeited.
160 forfeited shares of Mr. X and 40 forfeited shares of Mr. Y were re-
issued at a discount of Rs. 1 per share to Mr. Z.
Show the necessary journal entries including cash in the books of X Co.
Ltd.
JOURNAL
Solution :

Date Particular L.F. Debit Credit

Amount Amount
Rs. Rs.
Bank Account ---Dr. 75,000
To Share Application Account 75,000
(Being the receipt of application money
on 25,000 share @ Rs. 3 per share)
B.COM. PART-II (Sem.-III) 14 B.C.-304

Share Application Account ---Dr. 60,000

To Share Capital Account 60,000
(Being the transfer of the application
money on 20,000 shares allotted to
share capital account)
Share Allotment Account ---Dr. 1,40,000
To Share Capital Account 1,00,000
To Share Premium Account 40,000
(Being the allotment money due on
20,000 @ Rs. 7 per share including premium)
Share Application Account ---Dr. 3,000
To Bank Account 3,000
(Being the return of the application
money on 1,000 shares rejected)
Share Application Account ---Dr. 12,000
To Share Allotment Account 12,000
(Being the transfer of excess application
money on shares allotment to shares
allotment account)
Bank Account ---Dr. 1,26,750
To Share Allotment Account 1,26,750
(Being the receipt of allotment money
from all shareholders except X holding
200 shares to whom pro-rata allotment
has been made (See note No.3)
Share Final call Account ---Dr. 40,000
To share Capital Account 40,000
(Being the final call money due on
20,000 shares @ Rs. 2 per share)
Bank Account ---Dr. 39,400
To Share Final Call Account 39,400
(Being the receipt of final call money
from all except X holding 200 shares
and Y holding 100 shares)
Share Capital Account ---Dr. 3,000
Share Premium Account ---Dr. 400
To Share Forefeited Account 1,550
To Share Allotment Account 1,250
To Share Final Call Account 600
B.COM. PART-II (Sem.-III) 15 B.C.-304

(Being the forfeited of 200 shares of Mr. X

due to the non-payment of allotment
and call money and 100 shares of
Y due to the non-payment of call money
as per Board's resolution, dated ...................... )
Bank Account ---Dr. 1,800
Bank Forfeited Account ---Dr. 200
To Share Capital Account 2,000
(Being the reissue of 160 share of X and
40 shares of Y at a discount Rs. 1 per share)
Share Forfeited Account ---Dr. 720
To Capital Reserve Account 720
(Being the share premium of Rs. 2 due
on 160 forfeited shares of X and gain
on the reissue on 200 shares
transferred to Shares Premium Account
and Reserve Account)
At a later date and before further calls were made, 500 of these shares
were reissued as fully paid for a consideration of Rs. 8/- per share. Write up
Ledger Accounts.
Note : 1. The company had received application for 25,000 shares.
Since the total number of shares offered to the public were 20,000 the allotment
cannot exceed 20,000 shares. There has been firm allotment to the applicants of 4,000
shares 16,000 shares have been allotted to the applicants of 20,000 shares on pro-
rata basis. Since no allotment has been made to the applicants of 1,000 shares, therefore
the application money to these applicants has been refunded.
2. X had paid Rs. 750 on application, which has been calculated as follows :
Shares allotted 16,000 out of shares applied for 20,000
Shares allotted 200 out of shares applied for
20,000
 200  250
16,000
Application money on 250 shares @ Rs. 3=250×3=Rs. 750
3. Amount due from X on allotment is Rs. 1,250 and not Rs. 1,400 (i.e. 200×7).
It has been calculated as follows :
Total (Gross) amount due on allotment on 200 shares = 1400
Less advance from X received on application adjusted towards allotment.
Received on application 250 × 3 = 750
B.COM. PART-II (Sem.-III) 16 B.C.-304

Adjusted on application (200 ×3) = 600

Advance adjusted towards allotment

150
New amount due on allotment Rs. 1400 - Rs. 150 = Rs. 1,250
Total amount received on account of allotment is
Rs. 1,40,000 - Rs. 12,000 - Rs. 1,250 = Rs. 1,26,750
1.1.10 SURRENDER OF SHARES
After the allotment of shares, sometimes a shareholder is not able to pay further
calls and return his shares to the company for cancellation. Such voluntary return
of shares to the company by the shareholders himself is called surrender of shares.
Surrender of shares has no separate accounting treatment but it will be like that
of Forfeiture of shares. Thus, the same entries (as are passed in case of forfeiture
of shares) will be passed in case of Surrender of Shares.
1.1.11 PRIVATE PLACEMENT OF SHARES [SECTION 42 (1)]
Private placement of shares implies issue and allotment of shares to a
selected group of persons and not to the general public. For such a placement,
a company must pass a special resolution to this effect. Where no special resolution
is passed, but the number of votes cast in favour of such company exceeds the
number of votes cast against the proposal, the board of directors of such company
can make an application to the central government for obtaining consent by stating
that the proposal is most beneficial to the company.
According entries for private placement of securities are to be the same as
are passed at the time of application and allotment as also the accounting entries
passed for the issue of shares for a consideration other than cash.
1.1.12 Self Check Exercises
Ques1: What is Authorized Capital?
Ques2: What is issued capital?
Ques3: What do you understand by the term calls in arrears and calls in advance?
1.1.13 Summary
The capital of the company is divided into units called shares. Company issues the
shares to the public and generate capital for the company. There are different types
of share capital such as authorized capital, issued capital, subscribed capital, called up
capital, paid up capital, uncalled capital, unissued capital. There are two types of
shares namely equity shares and preference shares. As per Companies Act, 2013, a
company shall not issue share at a discount but can issue share at par and premium.
1.1.14 Glossary
1. Authorized Capital: It is maximum amount of share capital stated in
Memorandum of Association, authorize the company to raise during the life time
of the company.
2. Reserve Capital: It is that part of subscribed share capital not already called up
but it would be called for the purpose of winding of the company, as in this
respect, company has passed special resolution.
3. Forfeiture of share: When a shareholder fails to pay any call, the company as per
B.COM. PART-II (Sem.-III) 17 B.C.-304
article of association may forfeit the share.
4. Surrender of share: When a shareholder returns his share voluntarily to the
company for cancellation due to unable to pay further calls called surrender of
shares.
1.1.15 Short Question
Ques1: What is the difference between Reserve Capital and Capital Reserve?
Ques2: Explain the conditions where premium received on shares can be utilized?
Ques3: Explain the difference between equity shares and preference shares?
Ques4: Explain the types of preference shares?
1.1.16 Long Questions
Ques. 1. Write short notes on :
1. Forfeited Shares
2. Surrender of shares
3. Calls in Advance.
Ques. 2. What do you mean by Pro-rata allotment ?
Ques. 3. Explain briefly the provisions of Companies Act regarding
(1) Issue of shares at discount
(2) Issue of shares at premium
Ques.4. What is Forfeiture of Shares? When can shares be forfeited and
how?
Ques.5. Young Farmers Limited issued 2,00,00 Shares of 10 each. Terms
of payment being Rs. 3 on application, Rs. 2 on allotment and Rs.
B.COM. PART-II (Sem.-III) 18 B.C.-304

4 on ‘First and Final Call’. The company received application for 2,80,000
shares, pro-rata allotment was made on the application for 2,50,000
shares. Give journal entries assuming that an applicant who was
allotted 1000 shares did not pay “allotment” and “First and Final
Call” money.
Ques. 6. A Ltd. Whose authorised share capital is Rs. 10,000 in Rs. 10 shares
issued the whole of its capital at a premium of Rs. 1/- per share,
payable as follows : On application and allotment Rs. 6 per share
(including premium), First call of Rs. 1/- per share.
The application and allotment money were received in full, but members holding
1000 shares failed to pay the call of Rs. 1/- per share, in consequences the shares
were forfeited.
1.1.17 SUGGESTED READINGS
1. Corporate Accounting
By : Jain and Narang
2. Corporate Accounting
By : C. Mohan Juneja
B.K. Sachdeva
Inderjit Singh
Rakesh Katyal
B.COM. PART-II B.C. - 304
SEMESTER-III CORPORATE ACCOUNTING

LESSON NO. 1.2 AUTHOR : PROF. DEVINDER KUMAR

REDEMPTION OF PREFERENCE SHARES

Structure of the Lesson :
1.2.0 Objectives
1.2.1 Introduction
1.2.2 Provisions about Redemption of Preference Shares
1.2.3 Capital Redemption Reserve Account
1.2.4 Proceeds of Fresh Issue
1.2.4.1 When fresh issue of shares is made at par
1.2.4.2 When fresh issue of shares is made at a premiu
1.2.5 Accounting Entries
1.2.6 Example I and II
1.2.7 Self Check Exercises
1.2.8 Summary
1.2.9 Glossary
1.2.10 Short Questions
1.2.11 Long Questions
1.2.12 Suggested Readings
1.2.0 OBJECTIVES
The main objective of this lesson is to introduce the students with the lastest
provisions of section 55 of the Companies Act, 2013. These provisions are about
redemption of Preference shares, such as, capital redemption reserve account's
treatment, Process of Fresh issue, and accounting entries to redeem the share
capital.
1.2.1 INTRODUCTION
A company is not allowed to return to its shareholders the share money without
the permission of the court as per of the companies Act. But in case, the refund
is made to the redeemable preference shareholders, then such permission is not
required. However u/s 55 of the Companies Act the company limited by the shares
may if authorised by its articles, issue preference share which are at the option
of the company liable to be redeemed with in a period not exceeding 20 years from the
date of issue. But company may issue preference shares for a period exceeding twenty years
for infrastructure projects.
1.2.2 PROVISIONS ABOUT REDEMPTION OF PREFERENCE SHARES
(a) No such shares shall be redeemed except out of profits of the company
which would otherwise be available for dividend or out of the proceeds of
a fresh issue of shares made for the purposes of the redemption.
(b) No such shares shall be redeemed unless they are fully paid.
(c) The premium, if any payable on redemption shall have been provided for
out of the profits of the company or out of the company's securities
18
B.COM. PART-II (Sem.-III) 19 B.C.-304

premium account before the shares are redeemed.

(d) Where any such shares are redeemed otherwise than out of the proceeds
of a fresh issue, they shall be redeemed out of a profit which would
otherwise have been available for dividend, be transferred to a reserve fund
to be called the “Capital Redemption Reserve Fund”, a sum equal to the
nominal amount of shares redeemed, and the provisions of the act relating
to the reduction of the share capital of a company shall, except as provided in
this section apply as if the Capital redemption reserve account were paid
up share capital of the company.
If those shares are redeemed out of the proceeds of new issue, no stamp
duty shall be payable on the new issue if the preference shares are redeemned
within one month of the new issue.
However, where a company is not in a position to redeem any such shares
within the required period and to pay the dividend due thereon, it may, issue
further redeemable preference shares (make a fresh issue) equal to the amount due
including the dividend thereon in respect of the unredeemed preference shares. By
the issue of such further shares the unredeemed preference shares shall be
deemed to have been redeemed.
Where a company has issued redeemable preference shares the Balance Sheet
must show separately the amount thereof, the term of redemption or conversion and
the earlier date of redemption or conversion.
If a company does not have sufficient accumulated profits and does not
issue any shares for the specific purpuse of redemption of preference shares, the
redemption will be illegal. Further, the issue of debentures need not be considered for
this purpose, if the preference shares are to be redeemed at a premium. The premium
may be debited to the profit & Loss Account or Securities Premium Account.
The premium received on the issue of shares may not be considered for
the redemption of preference shares when only the face value will be utilised. However,
the said premium may be utilised for providing premium payable on the redemption
of preference shares etc.
If the redeemable preference shares are redeemed partly out of the profit
of the company which would otherwise be available for dividend and partly out
of the proceeds of fresh issue for shares, the Capital Redemption Reserve Account
and the new Share Capital (Equity or Preference) taken together will replace
the Redeemable Preference Share Capital redeemed.
1.2.3 CAPITAL REDEMPTION RESERVE ACCOUNT
The companies Act permits the redemption of shares from out of the profits,
which are otherwise available for dividend. In case the redemption is out of
profits, the company is expected to transfer an equal amount to an account called
‘Capital Redemption Reserve Account’ out of divisible profits.
B.COM. PART-II (Sem.-III) 20 B.C.-304

Table-I is showing the profits available for redemption and not available for
redemption.

Profits available for redemption Profits not available for

redemption
1. Reserves 1. Security Premium Account
2. General Reserve 2. Share forfeited Account
3. Reserve Fund 3. Profit prior to incorporation
4. Dividend equalisation fund 4. Capital reserve
5. Insurance fund 5. Development rebate reserve
6. Workmen's compensation fund
7. Workmen's accident fund
8. Voluntary debenture
redemption account
9. Debenture sinking fund
10. Profit and Loss Account (cr.)

There is much scope for confusion as to what should constitute the

“proceeds of fresh issue” in various circumstances like, issue of shares.
(i) at par,
(ii) at a premium

1.2.4 PROCEEDS OF FRESH ISSUE

The word ‘proceeds’ used in the present context implies the amount received
excluding the amount of share premium, if the shares are issued at a premium but the
net amount received if shares are issued either at par or at discount.
This point is particulary important to determine the amount not covered by
fresh issue for transfer to Capital Redemption Reserve Account.
For this, the following principles should be followed :
1.2.4.1 When fresh issue of shares is made at par :- In such a case,
the nominal value of the shares issued will constitute the proceeds and the
same should be considered for determining the amount to be credited to Capital
Redemption Reserve Account.
1.2.4.2 When fresh issue of shares is made at a premium :- In such a
case, the confusion may arise as to whether the nominal value of the shares issued
should constitute the ‘proceeds’ or both the nominal value shares issued and the
premium money received on those shares should constitute the ‘proceeds’.
A critical analysis of the provisions of the Companies Act, clearly state
that where a company issues shares at a premium, a sum equal to the aggregate
B.COM. PART-II (Sem.-III) 21 B.C.-304

amount of the premium received be credited to a separate account called ‘Securities

Premium Account’ and the provisions relating to the reduction of capital shall apply
if the securities premium Amount is utilised otherwise than for the purposes
specified there in. Thus, it is clear that the premium received on issue of share
should be disregarded and only the nominal value of the shares issued should be
considered for determining the amount to be credited to Capital Redemption
Reserve Account.
1.2.5 ACCOUNTING ENTRIES
The following steps for solving problem is suggested :
(1) If there is a fresh issue of share capital then make journal entry for it.
This issue can be made either at par or at premium or at discount. Entries for
the issue will be same as in usual way.
(a) Bank A/C.............Dr. (Where shares issue at par)
To share Capital A/C
(b) Bank A/C.............Dr. (Where shares are issued at premium) To
Share Capital A/C
To Securities Premium A/C
(2) Second step is to make entry for redemption of preference shares. This
redemption can be done either at par or at premium. If redemption takes place
at premium, premium is a loss and loss should be debited. Journal entry :
(a) Redeemable Preference Share Capital A/C........Dr.
(value) Premium on Redemption A/C........Dr.
(Premium) To Preference Shareholder A/C (Total
amount payable)
(b) Preference Shareholders A/C ............ Dr.
To Bank A/C (Payable to preference shareholders)
(c) If the redemption is at par, the journal entry is :
B.COM. PART-II (Sem.-III) 22 B.C.-304

Redeemable Preference Share Capital A/C........Dr. (Value)

To Bank A/C
(3) Third step is to transfer premium on redemption account. Premium on the
redemption of preferences shares can be transferred either to profit and loss
account or any reserve account or Securities premium account. Although there is
no restriction on transferring this account to any particular account it is desirable
to set it off against securities premium account which can be used only for limited
purposes. Journal entry for this :
Securities Premium A/C ............ Dr.
Or
Profit & Loss A/C ............ Dr.
Or
General Reserve A/C ............ Dr.
To Premium on Redemption of Preference Share Capital A/C
(4) Transfer appropriate amount from Profit and Loss Account or general reserve
or any other reserve to meet the deficiency of the amount required for redemption of
preference shares by passing following entry :
Profit & Loss A/C ............ Dr.
Or
General Reserve A/C ............ Dr.
Or
Any other Revenue Profit A/C ............. Dr.
To Capital Redemption Reserve A/C
(5) If liquid assets are not available for making payment to preference shareholders
on redemption then either current assets may be by the company or bank overdraft
may be arranged. The entry will be :
Bank A/C ........... Dr.
Or
Profit & Loss A/C........Dr. (If loss on sale of assets)
To Current Assets A/C
(Note : If profit on sale then reverse entry)
(6) If Bonus shares are issued out of capital redemption reserve account,
the following journal entries are made :
(i) When decision is taken to issue Bonus Shares
capital Redemption Reserve A/C .............. Dr.
To Bonus to Shareholders A/C
(ii) When bonus shares are issued
Bonus to Shareholders A/C ................. Dr.
To Share Capital A/C
(7) If shares are redeemed by converting into some other type of shares,
then the entry will be :
B.COM. PART-II (Sem.-III) 23 B.C.-304

Preference Share Capital A/C ............. Dr.

To New Share Capital A/C
In this case no amount is needed to be transferred to capital redemption
reserve account.
1.2.6 EXAMPLE :
A company has 4,000 6% redeemable preference shares of Rs. 10 each fully paid. The
company decided to redeem the shares on December 31, 2007 at a premium of 5 percent.
The company makes the following issues :
(a) 1,000 equity shares of Rs. 10 each at a premium of 10%
(b) 1,000 9% debentures of Rs. 10 each.
The issue was fully subscribed and whole the amount was received. The redemption
was duly carried out and the company has sufficient profits. Give Journal entries.
SOLUTION :
JOURNAL ENTRIES Dr. Cr.
Rs. Rs.

2007 Bank A/C ................ Dr. 11,000

Dec. 31 To Equity Share Capital A/C 10,000
To Securities premium A/C 1,000
(Being the issue and allotment of 1000
Shares of Rs. 10 each at a premium of Rs. 1)

Dec. 31 Bank A/C ................ Dr. 10,000

To 9% Debentures A/C 10,000
(Being issue of 1000, 9% debentures of
Rs. of 10 each)
Dec. 31 Profit and Loss A/C ................ Dr. 2,000
To Premium on Redemption of Preference 2,000
Share A/C
(Being provision of premium of 5% payable
on redemption of 4,000 redeemable
preference shares of Rs. 10 each
(4000 × Rs. 0.5)

Dec. 31 Profit and Loss A/C ................ Dr. 30,000

To capital Redemption Reserve A/C 30,000
(Being amount transferred to Capital
Redemption Reserves A/C, the amount
uncovered by the face value of the shares
issued)
B.COM. PART-II (Sem.-III) 24 B.C.-304

6% Redeemable Preference Shares Capital

Account ........................ Dr. 40,000
Premium on Redemption of Preference
Shares A/C .................. Dr. 2,000
To Bank A/C 42,000
(Being repayment of the 4,000 redeemable
preference shares of Rs. 10 each at a
premium of Rs. 0.5 per share)

Example : The 3,000 6% Redeemable Preference Share of Rs. 100 each fully
paid of X Ltd. were due for redemption on 30.6.2008 at a premium of 5%. The
company made an issue of 2,000 Equity Shares of Rs. 100 each at a premium
of 20% on the above mentioned date. The issue was immediately subscribed and
paid for expense of issue of the shares came to Rs. 10,000. The General Reserve
and the Profit and Loss Account had balance of Rs. 3,50,000 and Rs. 60,000
respectively on 30.6.2008. The redemption was carried out, holders of 500 shares
not being traceable. A bonus issue of Rs. 30,00,000 in the form of fully paid
equity shares was made.
Show the journal entries for issue of shares and redemption of shares assuming
the revenue Reserve or Surplus is to be used to minimum extent possible.
SOLUTION : BOOK OF X LTD.
Journal Entries Dr. Cr.
Rs. Rs.

2008 Bank A/C ................ Dr. 2,40,000

30 June To Equity Share Capital A/C 2,00,000
To Securities Premium A/C 40,000
(Being 2000 equity shares of Rs. 100 each
Issued at a premium of 20% for purpose
of redemption of preference shares.)

30 June Share Issue Expenses A/C .............Dr. 10,000

To Bank A/C 10,000
(Being expenses of the issue of share paid)
30 June 6% Redeemable Preference Share
Capital A/C ..................Dr. 3,00,000
Premium on Redemption of
Preferences Shares A/C ....................Dr. 15,000
To Redeemable Preference Share A/ 3,15,000
B.COM. PART-II (Sem.-III) 25 B.C.-304

(Being amount due to the redeemable

preference shareholders on redemption in
respect of capital and premium)

30 June Redeemable Preference Shareholder

A/C .................. Dr. 2,62,500
To Bank A/C 2,62,500
(Being amount due on redemption paid excep
500 shares whose holders were not traceable)

30 June Securities remium A/C ............... Dr. 25,000

To Premium on Redemption of Preference
Share A/C 15,000
To Share issue expenses A/C 10,000
(Being providing of premium payable on
redemption @5% on Rs. 30,00,000 and writing
off share issue expenses out of share premium

General Reserve A/C .................... Dr. 1,00,000

To Capital Redemption Reserve A/C 1,00,000
(Being creation of Capital Redemption
Reserve A/C out of general Reserve i.e.
Rs. 1,00,000 (Rs. 3,00,000-Rs. 2,00,000)

Capital Redemption Reserve A/C .............Dr. 1,00,000

Share Premium A/C ............. Dr. 15,000
General Reserve A/C ............... Dr. 1,85,000
To Bonus to Shareholders A/C 3,00,000
(Being amount of Bonus shares to be issued)

Bonus to Shareholders A/C ............... Dr. 3,00,000

To Equity Share Capital A/C 3,00,000
(Being fully paid Bonus share of Rs.
3,00,000 issued)

1.2.7 Self Check Exercises

Ques1: What do you understand by the term Capital Redemption Reserve Account?
Ques2: Write down the profits available for redemption of preference shares?
1.2.8 SUMMARY

As per company act it is not allowed to return shares to its shareholders,

while the company is in existence. But section 55 of the companies Act allows
a company, if authorised by its articles to issue preference shares which at the
option of the company may be redeemed, if the conditions are to be satisfied.
B.COM. PART-II (Sem.-III) 26 B.C.-304

Redemption of redeemable preference shares shall be notified to the registrar

of companies within one month of redemption. Therefore the Companies Act has
laid down manifold conditions for the redemption of preference shares.
1.2.9 Glossary
1. Capital Redemption Reserve Account: The Company Act allows the redemption of
shares out of profits then a company transfers the equal amount to a account
called Capital Redemption Reserve Account.
2. Premium: When shares are issued at a price which is more than its face value.
3. Preference Share: Preference shares are those which are entitled to get preference
over equity in respect of payment of dividend and redemption of capital in the event
of winding of the company.

1.2.10 Short Question

Ques1: Explain the provisions about redemption of preference shares?
Ques2: Explain the profits which are not available for redemption of preference
shares?

1.2.11 Long Questions

Q.1. What are the sources of redemption of preference shares?
Q.2. A company wishes to redeem its preference shares amounting to Rs. 1,00,000
at a premium of 5%. The company has also a balance of Rs. 1,00,000 in
General Reserve. Give Journal entries to record the above.
Q.3. Explain the procedure (along with journal entries) for solving problems on
Redemption of Preference Shares.
Q.4. A company has 8,000 redeemable preference shares of Rs. 10 each fully
paid. The company decides to redeem the shares on 30th September 2006
at a premium of 5%. The company had sufficient profits but in order to
augument liquid funds the following issues are made :
(a) 3,000 6% Debentures of Rs. 10 each at Rs. 10.60.
(b) 2,000 Equity shares of Rs. 10 each at Rs. 11.
The issues were fully subscribed and all the amount were received.
The redemption was duly carried out. Give journal entries.
1.2.12 SUGGESTED READINGS
1. Corporate Accounting,
By : C. Mohan Juneja, B.K. Sachdeva, Inderjit Singh, Rakesh Katyal,
Kalyani Publishers.
2. Corporate Accounting
By : S.P. Jain
K.L. Narang
Kalyani Publishers.
B.COM. PART-II B.C. - 304
SEMESTER-III CORPORATE ACCOUNTING

LESSON NO. 1.3 AUTHOR : PROF. DEVINDER KUMAR

ISSUE OF DEBENTURES
Structure of the Lesson :
1.3.0 Objectives
1.3.1 Introduction
1.3.2 Borrowing Powers of the Company
1.3.3 Kinds of Debentures
1.3.4 Fixed and Floating Charges
1.3.5 Advantages of Issue of Debentures
1.3.6 Difference between Debenture holder and Shareholder
1.3.7 Distinction between Debenture and Debenture stock
13.8 SEBI Guidelines for Issue of Debentures
13.9 Guidelines for the protection of Interest of Debenture holders
1.3.10 Issue of Debentures
1.3.11 Accounting Entries for Issue of Debentures
1.3.12 Illustration
1.3.13 Interest on Debentures
1.3.14 Self Check Exercises
1.3.15 Summary
1.3.16 Glossary
1.3.17 Short Questions
1.3.18 Long Questions
1.3.19 Suggested Readings
1.3.0 OBJECTIVES
The main objectives of this lesson is to introduce the students with the
latest provisions or treatment of issue of debentures, kinds of debentures,
SEBI guidelines for issue of debentures and guidelines for the protection of interest
of debentureholders.
1.3.1 INTRODUCTION
A debenture is a document acknowledging a loan to company and is generally
executed under the seal of the company, usually containing provisions as to
payment of interest and the payment of principal and giving a charge on the
assets of such company and may give security for the payment over some or all
of the assets and undertaking of company.
It has been defined under the Companies Act, 2013 as Debenture includes
debenture stock, bonds and any other securities of a company or not.
1.3.2 BORROWING POWERS OF THE COMPANY
This is usually provided in the memorandum of Association. Although it
has been held that a trading company has an implied power to borrow without
27
B.COM. PART-II (Sem.-III) 28 B.C.-304

restriction, such power is usually exercised by the Board unless the Articles specify
otherwise and includes an implied power to give security for money borrowed. Sec.
180 restricts the power of the Board to borrow money where such borrowings
together with existing borrowings (apart from temporary loans from bankers of the
ordinary course of business) exceed the aggregate paid up Capital of this company
and its free reserves.
1.3.3 KINDS OF DEBENTURES
1. From Security Point of View :
These are of two types :
(i) Naked Debentures :
The naked debentures are the debentures which are not secured.
(ii) Mortgage Debentures :
These debentures are secured either on a particular assets called ‘Fixed
Charge’ or on the general assets of the company called floating charge.
2. From the Priority Point of View :
(A) First Debentures :
First debentures are those debentures which are repaid before the payment
of any other debenture.
(B) Second Debentures :
These debentures are paid after the payment of First debentures.
3. From Permanence Point of View :
(a) Redeemable Debentures : Redeemable debentures are those debentures
which are redeemed or the payment of which is made after a specified
time.
(b) Irredeemable Debentures : Those debentures which are repayable after
a long period of time or on the winding up of the company. In other
words the debenture holders, in this case cannot demand the payment from
the company so long as it is a going concern.
4. From Recording Point of View :
(a) Bearer Debentures : Which can be transferred by mere delivery. The
company does not keep any record of such kind of debenturesholders
name and addresses, payment of interest is made on production of
coupons attached to the debentures.
(b) Registered Debentures: This type of debentures are transferred only
by Transfer deed. The complete particulars in regard to such debentures are
entered in the register and the interest is paid only to those, whose
name appears in the register.
5. From Conversion Point of View :
(a) Convertible Debentures : The holders of such debentures are
B.COM. PART-II (Sem.-III) 29 B.C.-304

given the option to convert the debentures fully of partly into equity
shares after a specified time.
(b) Non-convertible Debentures : The holders of which have no right
convert them into equity shares.
1.3.4 FIXED AND FLOATING CHARGES
A fixed charge is a creation of mortgage on specific assets, which usually allow
the company to certain possession of the asset changed but prevents it from parting
or dealing with such assets without the permission of the debentures holders or
the Trustees for debentures holders.
A floating charge is the general charge on assets or class of assets in favour
of debentures holders, in such a case the company is entitled to deal with the
disposal of assets in the ordinary course of business until the occurrence of events
specified in debenture trust deed (i.e. winding up, non- payment of interest or
principal etc.) when the charge crystalises and become fixed, then the company cann't
deal with the property with the consent of the debenture holders or the trustees.
1.3.5 ADVANTAGES OF ISSUE OF DEBENTURES
1. The bear a lower rate of return by way of interest in view of the security
provides and resulting lower risk factor.
2. Debenture holders may be repaid without recourse to the courts.
3. Debenture holders are not members of the company and have no control
over the business.
4. Interest paid on debentures is an allowable expenses for Income Tax.
Dividend on shares are not so allowable.
5. The statutory restriction on issue of shares at a discount do not apply.
1.3.6 DIFFERENCE BETWEEN DEBENTUREHOLDER AND SHAREHOLDER
DEBENTUREHOLDER SHAREHOLDER

(a) They are loan creditors of the (a) Shareholders are proprietors of
the company. company.
(b) They are entitled to interest on (b) They are entitled to dividend if
any The amount lent by them. declared out of the profits of the
company.
(c) The interest must be paid whether (c) Dividend is paid only when there
or not there are profits (i.e. it is a are profits (i.e. it is anappropriation
charge on the profits. of profit).
(d) Debentures are paid back as per (d) Shares cannot be paid back
without terms of redemption. legal formalities.
(e) In case of winding up the (e) Only out of the balance money left
debentures holders are paid first. after payment of all liabilities they
B.COM. PART-II (Sem.-III) 30 B.C.-304

are paid.
(f) Debentures can be issued on any (f) Shares can be issued at a
discount conditions. but with certain legal formalities.

1.3.7 DISCOUNT BETWEEN DEBENTURE AND DEBENTURE-STOCK

The debenture need not be fully paid whereas the debenture stock must always
be fully paid. The debenture is transferable only in their entirely whereas the
debenture stock is transferable in fraction also. Debentures have identity in terms of
numbers assigned to them. There is no such identity for debenture stock.
1.3.8 SEBI GUIDELINES FOR ISSUE OF DEBENTURES
(i) Issue of fully convertible debentures (FCDs) having a conversion period of more
than 36 months will not be permissible, unless conversion is made optional with
call and out option.
(ii) Compulsory credit rating will be required if conversion is made for FCDs
after 18 months.
(iii) Premium amount on conversion, time of conversion, in stages, if any, shall
be pre-determined and stated in the prospectus.
(iv) Issue of debentures with a maturity period 18 months or less is exempted from
the requirement of appointment of debenture trustees or creating a debenture
redemption reserve. In other cases, the names of the debenture trustees
must be states in the prospectus.
(v) Any conversion, in part of whole of the debentures shall be optional at the
hands of the debentureholder, if the conversion takes place at or after 18 months
from the date of allotment, but before 36 months.
(vi) In case of NCDs/PCDs (Party Convertible Debentures) credit rating is mandatory
where maturity period exceeds 18 months.
(vii) The discount on the non-convertible portions of PCDs in case they are traded
and the procedure for their purchase on spot trading basis must be stated
in the prospectus.
(viii) In case, the non-convertible portions of PCD/NCP (Non Convertible Debentures)
are to be rolled over with or without charges in the interest rate, a
compulsory option should given to those debentureholders who wish to
withdraw and encash from the debenture programme. Roll-over should be
done only in cases where debentureholders have sent their negative reply.
(ix) Letter of information regarding the roll over shall be vetted by SEBI with regard
to the credit rating, debenture holder resolution option for conversion and
such other items as SEBI may prescribe from time to time.
1.3.9 GUIDELINES FOR THE PROTECTION OF INTEREST OF DEBENTURE HOLDERS
1. A debenture redemption reserve (DRR) shall be created by all companies
B.COM. PART-II (Sem.-III) 31 B.C.-304

raising debentures as under :

(i) A Moratorium upto the date of commercial production can be provided
for creation of the DRR in respect of debentures raised for project finance.
(ii) In case of PCDs, DRR should be created in respect of non- convertible
debenture issue similar to that created for fully convertible debenture
issue.
(iii) DRR may be created either in equal instalments for the remaining period
or higher amounts if profits allow.
(iv) Companies may distribute dividends out of general reserves in certain
years if residual profits after transfer to DRR are insufficient.
(v) DRR will be treated as part of general reserve for consideration of bonus
issue proposals and for price fixation related to post-tax return.
(vi) Trustees to the debenture issue shall be vested with the requisite powers
for protecting the interest of debentureholders including a right to
appoint a nominee director on the board of the company in constitution with
institutional debentureholders.
(vii) Lead institution/investment institution will evaluate the progress in respect
of debentures for project finance, expansion or diversification.
(viii) Institutional debenture holders and trustees should obtain a certificate
from the companys' auditors with regard to utilisation of funds during
the implementation period of projects.
1.3.10 ISSUE OF DEBENTURES
This may be studies under the following different angles :
1. From the consideration point of view.
2. From price point of view.
3. From conditions of the redemption point of view.
Regarding the first two entries are the same as in the case of shares and
similar procedure of offer, application, allotment and letters of regret apply. However,
it is not customary to make calls on an issue of debenture which are payable in
instalments at fixed dates.
Debentures may be issued at premium, or at a discount without statutory
restriction as applicable to shares issued at a discount. When debentures are issued
at a premium or at a discount the full nominal amount should be credited to the
debentures account, the premium or discount being credited and debited to a
premium on issue of Debentures account or discount in issue of Debentures
account as applicable. The discount should be written off out of profits and this
write off may spread over the life of a debenture.
When the debentures are repayable by annual drawing the write off should be related
B.COM. PART-II (Sem.-III) 32 B.C.-304

to the amount of debenture outstanding in that years. Thus where an issue is repayable in
ten equal instalments from the year of issue, the amount to be written off in the first year would
10/55 i.e., 10 (10+9+8+7+6+5+4+3+2+1) the next year 9/55 ths. and so on. A student may
work out the general rule applicable to the proportion of discount to be written off each year.
In such cases where debentures are repaid at a premium. The premium should similar be
reserved on redemption and create provisions for the premium on repayment and the written
off discount on issue will not be necessary.
The premium on issue of Debentures may be used to write off the expenses on issue
of fictitious assets, or to form part of the sinking fund for Redemption of debentures. If not so
untilised, it should be treated as a capital reserve although it is not so provided in the Companies
Act, 1956.
It may be stated alternatively that the premium on redemption of debenture account
is personal account and has not been shown as liability until the repayment is made, Since the
company agree to pay more than the face value of debenture at the time of redemption it is a
loss to the company.
Therefore, the sum is debited to “Loss on Issue of Debentures” account. The said
account is to be written off generally every year during the life of the debentures. The balance
remaining not written off generally every year during the life of the debentures. The balance
remaining not written off is to be shown on the asset side of the Balance Sheet under the heading
Miscellaneous Expenditure.
Like issue of debentures at par, premium or discount, the redemption of debentures
can also be redeemed
(a) at par
(b) at premium
(c) at discount only when company is able to buy the debentures in the open
market at a price lower than the face value of debenture.
Thus, following sets of cases can be formed :
(1) Issue at par, redeemable at par
(2) Issue at discount, redeemable at par
(3) Issue at premium, redeemable at par
(4) Issue at par, redeemable at premium
(5) Issue at discount, redeemable at premium
(6) Issue at premium, redeemable at premium.
1.3.11 ACCOUNTING ENTRIES FOR ISSUE OF DEBENTURES
1. When debentures are issued at par and redeemable at par.
(i) Cash/Bank A/C ------------ Dr.
To Debentures A/C
(Being debentures issued)
(ii) Debentures A/C
To Bank A/C --------- Dr.
(Being debentures redeemed at due date)
2. When debentures issued at discount and redeemable at par.
B.COM. PART-II (Sem.-III) 33 B.C.-304

(i) Bank Cash A/C--------Dr. (For the amount received)

Discount on Issue of Debenture A/C --------------- Dr.
(For the discount allowed)
To Debentures A/C
(Being debentures issued at a discount)
(ii) Debentures A/C ---------- Dr.
To Bank A/C
(Being debentures redeemed)
3. When debentures are issued at par and redeemable at premium.
(i) Cash/Bank Account ----------------------------------- - Dr.
Loss on the issue of Debenture A/C ----------- Dr.
To Debentures A/C
To Premium on Redemption of Debentures A/C
(Being debentures issued)
(ii) Debenture Account Dr.
Premium on Redemption of Debentures A/C ---------- Dr.
To Bank A/C
(Being debentures redeemed)
4. When debentures are issued at premium and repayable at par :-
(i) Bank Account....................... Dr.
To Debentures Account
To Premium on the issue of Debentures A/C
(Being debentures issued at premium)
(ii) Debenture A/C ................ Dr.
To Bank A/C
(Bank debentures redeemed)
5. When debentures are issued at discount and redeemable at premium.
(i) Bank Account ................... Dr.
Loss on Issue of Debentures A/C .................... Dr.
(With the amount of discount and premium on redemption)
To Debentures Account
(Being debenture issued)
(ii) Debentures A/C ................. Dr.
Premium on the redemption of Debentures A/C ................ Dr.
To Bank A/C
(Being debentures redeemed)
6. When debentures are issued at premium and redeemable at premium.
(i) On issue of debentures
Bank Account ----------- Dr.
Loss on Issue of Debentures Account ---------- Dr.
(For Premium on redemption less premium on issue)
B.COM. PART-II (Sem.-III) 34 B.C.-304

To Debentures Account
To Premium on Redemption of Debentures Account
To Capital Reserve Account
(If Premium on issue is more than premium on redemption)
(ii) On redemption of debentures
Debentures Account -------------- Dr.
Premium on Redemption of Debentures Account ---------- Dr.
To Bank
Notes: 1. Loss on Issue of debentures and Discount on Issue of
debentures are Capital losses and will be shown on the assets side
of the Balance sheet under the head “Miscellaneous Expenditure” until
these are written off either against Profit and Loss Account or
Securities Premium Account.
2. Premium on debentures Account is raised when debentures are issued
at a premium whereas Premium on Redemption of Debentures Account
is raised only if the debentures are to be redeemed at a premium.
The former represents a Capital profit and is shown on the liabilities side
under the head Reserves and Surplus and the latter represents a provision of
the liability which is to be paid at the time of redemption of debentures and is
shown on the liabilities side of the Balance Sheet so far debentures are not
redeemed.
1.3.12 ILLUSTRATION
Elbo Ltd. issued 10,000, 9% Debentures of Rs. 100 each. Give journal entries
if the Debentures are (i) issued at par, (ii) issued a discount of 10%, and (iii)
issued at a premium of 10%, (iv) Debentures issued at par redeemable at premium,
(v) Debentures issued at discount redeemable at premium.
SOLUTION :
Journal of ELBO Ltd.
Debit Credit
Rs. Rs.

(i) Debentures Issued at par

Bank A/C...........Dr. 10,00,000

To 9% Debentures A/C
(Being issue of 10,000, 9% debentures 1,00,000
@ Rs. 100 each)
(ii) Issued at discount :
Bank Account..........Dr. 9,00,000
B.COM. PART-II (Sem.-III) 35 B.C.-304

Discount on Debentures A/C ............Dr. 1,00,000

To 9% Debentures A/C 10,00,000
(Being issue of 10,000 9% debentures
@ Rs. 90 per debenture)

(iii) Issued at a premium :

Bank A/C .................. Dr. 11,00,000
To 9% Debenture A/C 10,00,000
To Premium on Debentures A/C 1,00,000
(Being issued 10,000 9% per debentures of
Rs. 100 each at Rs. 110 per debenture.)

(iv) Debentures Redeemable at a Premium of

5% and issued at par :
Bank A/C ................ Dr. 10,00,000
Loss on Issue of Debentures A/C ................Dr. 50,000
To 9% Debentures A/C 10,00,000
To Premium on Redemption of 50,000
Debentures A/C
(Being issue of 10,000 9% Debenture of Rs. 100
each (redeemable at Rs. 105) issued at par)

(v) Debentures Redeemable at a premium of 5% and

issued at a discount of 10% :
Bank A/C ............... Dr. 9,90,000
Loss on Issue of Debentures A/C ................. Dr. 60,000
To 9% Debentures A/C 10,00,000
To Premium on Redemption of Debentures A/C 50,000
(Being issue @Rs. 99 of 10,000, 9% Debentures of
Rs. 100 each repayable at Rs. 105 per debenture)

1.3.13 INTEREST ON DEBENTURES

Interest of debentures is charged to the profit and loss account. While
paying the interest on debentures, it is the obligation of the company
concerned to deduct the income tax before making payment of interest of
debentures holders. The following journal entries are passed in this
connection :
(i) When interest on debentures is due :
Interest on debentures Account.........Dr. (with gross amount)
To Income tax Account (with income tax)
To Debentureholders Account (with net amount)
(ii) When net amount due is paid :
B.COM. PART-II (Sem.-III) 36 B.C.-304

Debentures Holders Account Dr.

To Bank Account
Interest on debentures is required to transferred to the debit side of profit
and loss account and the credit balance of income tax account is shown on the
liabilities side of the Balance Sheet. As and when it is paid to the Government
this account is debited and bank account will be credited.
1. Own Debentures
Directors if authorised by the terms of the contract, can purchase own debentures
whenever they find the market price favourable to the company. Such own
purchased debentures can be either cancelled by the company or may be kept
as an investment, called own debentures and may be utilised for reissue when
needed later.
Purchase of own debentures were to be treated in accounts in the same
way as an ordinary investment, the entry will be as given below :
Investment in own debentures A/c ----------- Dr.
OR
Own debentures A/c ------------------------------ Dr.
To Bank A/c
Own debentures account will be shown on the assets side of the Balance sheet.
Debentures will continue to be shown on the liabilities side of the Balance sheet.
Here, it is assumed that the debentures are purchased immediately after the
payment of interest.
As and when the company wants to cancel investment in own debentures,
the following entry is required to pass :
Debentures A/c Dr.
Loss on Redemption of Debentures A/c (for loss) ------------ Dr.
To Debentures a/c
To Profit on Redemption of Debentures a/c (for profit)
2. Interest on own Debentures
The total amount of interest due on debentures (including held by the company
as own investment) is deemed to be outstanding. But payment of interest on
debentures is made only to the outsiders. The portion of interest on own
debentures will be credited to interest on own debentures account the following entry
is made in this case :
Debentures Interest A/c (on whole debentures) ---------- Dr.
To Bank A/c (payable to outsiders)
To Interest on own debentures A/c (due to the company)
When there is no sinking fund, the debit balance of debentures interest
is shown on the debit side of profit and loss accounts and credit balance of
interest on own debentures amount is credited to profit and loss account.
When sinking fund exists, the interest on own debentures is transferred
to sinking fund instead of profit and loss account.
B.COM. PART-II (Sem.-III) 37 B.C.-304

1.3.14 Self Check Exercises

Ques1. What are first debentures and second debentures?
Ques2: What are naked debentures?
Ques3: What are mortgage debentures?
1.3.15 SUMMARY
A Company usually needs a large number of debentureholders to raise funds
without increasing its Share capital. To fulfill its requirement the company
generally invites the public by open declaration to lend money for a fixed period
at a declared rate to be paid on such money. The companies Act, 1956 and SEBI
have issued various guidelines for the issue of debentures and to protect the
interest of debentureholders as discussed in this lesson.
The journal entries to be passed at the time of issue and redemption of
debentures is also given in this lesson.
1.3.16 Glossary
1. Naked Debentures: Those debentures which are not secured.
2. Mortgage Debenture: Those debentures which are secured.
3. Bearer Debenture: When debentures can be transferred by mere
delivery.
1.3.17 Short Questions
Ques1: Write a short note on interest on own debenture?
Ques2: What do you understand by the term debenture stock?
Ques3: What is the difference between debenture holder and shareholder?
Ques4: What is the difference between bearer debenture and registered
debenture?
1.3.18 Long Questions

Q.1. Give the different considerations for which debentures may be issued.
Q.2. Write short notes on :
(a) Debentures as Collateral Security.
(b) Own Debentures.
Q.3. What is the difference between Debentureholder and Shareholder ?
Q.4. Write in detail the various types of Debentures ?
Q.5. What is a Debenture? What entries will you pass at the time of issue of
Debentures in all cases ?
Q.6.(a) On first January, 2007 a limited company issued debentures of the face value
of Rs. 1,00,000 at discount of 6%. The debentures were repayable by
annual drawing of 20,000 made on 31st December each year. The Directors
decided to write off the discount on issue over the period of the debentures in
such a way as to change each year with an amount proportionate to
debentures outstanding in that year.
(b) R. Ltd. issue debentures at 94% for Rs. 1,00,000 on Ist April, 2006, repayable
by five equal annual drawings of Rs. 20,000 each. The company closes its
accounts on calendar basis.
Indicate the amount of discount to be written off every accounting year assuming
that the company decides to write off the debentures account during the life
of debentures.
1.3.19 SUGGESTED READINGS
1. Corporate Accounting By : C. Mohan Juneja, B.K. Sachdeva, Inderjit
B.COM. PART-II (Sem.-III) 38 B.C.-304
Singh, Rakesh Katyal, Kalyani Publishers.
2. Corporate Accounting By : S.P. Jain, K.L. Narang
Kalyani Publishers.
B.COM. PART-II B.C. - 304
SEMESTER-III CORPORATE ACCOUNTING

LESSON NO. 1.4 AUTHOR : PROF. DEVINDER KUMAR

REDEMPTION OF DEBENTURES
Structure of the Lesson :
1.4.0 Objectives
1.4.1 Introduction
1.4.2 Accounting Entries
1.4.3 Alternative Accounting Entries
1.4.4 Example
1.4.5 Repurchase of Debentures in Open Market and Cancellation of the same
1.4.6 Redemption by Annual Drawing out of Profit
1.4.7 Debenture Redemption Fund Policy
1.4.8 Ex-Interest and Cum-Interest Quotations
1.4.9 Conversion of Debentures into Shares
1.4.10 Example
1.4.11 Self Check Exercises
1.4.12 Summary
1.4.13 Glossary
1.4.14 Short Questions
1.4.15 Long Questions
1.4.16 Suggested Readings
1.4.0 OBJECTIVES
The main objective of this lesson is to give the detailed accounting treatment
regarding the redemption of debentures. To achieve this objective the whole
redemption procedure has been discussed in this lesson under various methods
like,
(1) redemption out of profit;
(2) redemption out of capital;
(3) redemption out of provisions made for this purpose; and
(4) by converting them into shares or new debentures.
1.4.1 INTRODUCTION
Redemption of debentures refer to the discharge of liability on account of
debentures. The following three problems require attention when a company wants
to redeem the debentures :
(a) Time of redemption of debentures : Generally debentures are redeemed
at the expiry of their period by making the payment of the amount promise for. But
sometimes company may reserve the right in the articles of association to redeem the
debentures even before the date of redemption either by instalments or by
purchasing them in the open market.
(b) Amount to be paid on redemption : If the debentures are redeemed 38
B.COM. PART-II (Sem.-III) 39 B.C.-304

on the expiry of the period or only during a lot, then the amount to be paid can
be either at premium or at par as promised by the company. If the debentures
are redeemed by purchasing them in the open market, then the amount to be paid
depends on the market price i.e. either at a par or at a discount or at a premium.
Generally the companies purchase their own debentures when the debentures are
quoted below face value.
(c) Sources of finance : The major sources where from the debentures can
be redeemed may be :
(i) Out of profits
(ii) Out of capital
(iii) Out of provisions made for redemption and
(iv) Converting them into shares or new debentures.
The prospectus of every public company inviting application for debentures
always contains terms and conditions of redemption or repayment of the
debentures. There are three ways of redeeming the debentures :
(a) By payment to the debentures holders at specified date or without a
period specified according to the terms of issue.
(b) By purchase of debentures in the open market and cancellation of the
same.
(c) By payment of certain portion in each year.
1.4.2 ACCOUNTING ENTRIES
The basic entry to make, when debentures are redeemed is to debit debentures
account and to credit Bank Account. But actually sometimes the amount paid on
redemption may be more than the face value or less than the face value of
debentures, so at that time the above simple entry will not serve the purpose.
Above entry is only passed at the time when debentures are redeemed at par.
The various entries are as follows :
1. When debentures are issued at par and redeemable at par :
(a) Bank a/c ---Dr.
To Debenture a/c
(b) Debenture a/c ---Dr.
To Bank a/c
2. When debentures are issued at discount and redeemable at par :
(a) Bank a/c ---Dr.
To Debenture application and allotment a/c
(b) Debenture application and allotment a/c ---Dr.
Discount on issue of debentures a/c ---Dr.
To Debentures a/c
3. When debentures are issued at premium and redeemable at par :
(a) Bank a/c ---Dr.
B.COM. PART-II (Sem.-III) 40 B.C.-304

To Debenture application and allotment a/c

(b) Debenture application and allotment a/c ---Dr.
To Debentures account
To premium on issue of debentures a/c
4. When debentures issued at par and redeemable at premium :
(a) Bank a/c ---Dr.
To Debenture application and allotment a/c
(b) Debenture application and allotment a/c ---Dr.
Loss on issue of debentures a/c ---Dr.
To Debentures a/c
To premium on redemption of debentures a/c
5. When debentures issued at discount redeemable at premium :
(a) Bank a/c ---Dr.
To Debenture application and allotment a/c
(b) Debenture application and allotment a/c ---Dr.
Loss on issue of debentures a/c ---Dr.
To Debentures a/c
To premium on redemption of debentures a/c
NOTE :
The profit on redemption of debentures is a capital profit and is utilized
for writing off discount on issue of debentures, by payment to the debenture holder
at a specified date or within a specified period according to the terms of issue.
Sinking Fund Method :
In order to redeem the debentures at a specified date, the company has to
raise sufficient money and the method of raising of funds for redemption is known
as “Sinking Fund Method”.
Under this method an amount is set aside out of the profit each year and
an adequate amount invested in securities so calculated that by the time of
redemption sufficient amount would have accumulated at expected interest rates to
repay the debentures. The appropriations are to ensure that amount in question
is not available for distribution.
I. In the first year
The accounting entries are as under :
(i) For setting aside the amount from profits
Profit & Loss Appropriation A/c........Dr. with the amount
To Sinking Fund A/c of annual instalment
(ii) For investing the amount set aside Sinking
Fund Investment A/C ................................. Dr.
To Cash/Bank A/C
B.COM. PART-II (Sem.-III) 41 B.C.-304

II. In the Second and Subsequent Year :

(i) For the interest received on investment
Cash/Bank A/C .................... Dr.
To interest on Sinking Fund Investment a/c
(ii) For transferring the interest received
Interest in Sinking Fund Investment A/c ................. Dr.
To Sinking Fund A/C
(iii) For setting aside the amount out of the profits
Profit & Loss Appropriation Account ................. Dr.
To Sinking Fund A/C
(iv) For investing the amount set aside including the interest earned.
Sinking Fund Investment A/C.................. Dr.
To Sinking Fund A/c
III. In the year of redemption :
(i) For the amount due on redemption.
Debentures A/C ................ Dr.
To Debentures Holders A/C
(ii) For receiving the interest and setting aside of funds out of profit accounting
entries i, ii, iii in II as given above are to be repeated. However the amount
set aside need not be invested outside. Therefore the entry iv and II, is not
required.
(iii) For realising the sale proceed for investment at profit Cash/Bank
A/C..........Dr. (with amount realised)
To Sinking Fund Investment A/C (with book value of investment
sold)
To Sinking Fund A/C (with amount of profit)
(iv) For loss on sale of investment the reverse entry to the above is passed.
Bank A/c ---Dr.
Sinking Fund A/C ---Dr.
To Sinking Fund Investment A/C
(v) For transferring the balance in sinking fund Account
Sinking Fund A/C .................. Dr.
To General Reserve A/C
(vi) For payment to Debenture holders
Debenture Holder A/C ..................... Dr.
To Cash/Bank A/C.
1.4.3 ALTERNATIVE ACCOUNTING ENTRIES
A. Entries on creation of fund each year :
(i) For the annual amount set aside from profit
B.COM. PART-II (Sem.-III) 42 B.C.-304

Profit & Loss Appropriating A/C ..................Dr.

To Debentures Redemption Fund A/C
(ii) For amount of investment (Made out of annual investment and interest)
Debentures Redemption Fund Investment A/C ........................ Dr.
To Cash A/C
(iii) For the amount of interest received each year
Cash Account....................Dr.
To Debentures Redemption Fund A/C
B. On Redemption of Debentures :
(i) For the Sale Proceeds of Investment A/C
Cash A/C ............. Dr.
To Debentures Redemption Fund Investment A/C
(ii) For the amount of profit on realisation or the amount of loss on realisation
on investment.
(a) In case of Profit :
Bank A/C ------- Dr.
To Sinking fund Investment a/c
To Sinking fund a/c
(b) In case of loss :
Bank A/C ---------------- Dr.
Sinking fund a/c -------- Dr.
To Sinking fund Investment a/c
(iii) For the amount paid for debenture redeemed or purchased.
Debentures Account .................... Dr.
To Cash Account ............. Dr.
(iv) (a) For Profit on Redemption
Debenture A/C................... Dr.
To Debenture Redemption A/C
(b) For Loss on redemption (This arises where debentures are
purchased in the open market or at fixed prices)
Debenture Redemption.............. Dr.
To Debenture A/C
(v) For the balance after redemption on all debentures :
Debenture Redemption A/C.................... Dr.
To General Reserve A/C
(vi) Where discount is written off over a period with the balance amount
discount not yet writing off or where discount is written off at the time of redemption
with the full discount.
General Reserve A/C ................ Dr.
To Discount on Debentures A/C.
The Debenture Redemption Fund after redemption of the Debentures is
B.COM. PART-II (Sem.-III) 43 B.C.-304

no longer represented by earmarked investment but by the general assets of the

business. The purpose of which it was created having been fulfilled, represents
only general appropriations out of profits and the balance is properly transferred
to General Reserve.
1.4.4 EXAMPLE
1. The balance sheet of X Ltd. as on 31st December 2007 was as follows :
Rs.
6% Debentures 10,000
Sinking Fund 4,250
Sinking Fund Investment : Rs. 1,000 own debentures purchased at 98.
Rs. 3,500 4% stock purchased at Rs. 3,270.
On the above date the company redeemed all the debentures. For this purpose
it realised 4% stock at par. It utilised Rs. 1,500 for redemption out of current year's
profits. Journalise the transactions in the books of the company.

Solution :
JOURNAL
Date Particulars L.F. Debit Credit
Amount Amount
2007 Bank a/c ---Dr. 3,500
Dec. To sinking fund Investment (4% stock) a/c 3,500
31 (Being the sale of sinking fund investment
for redemption of debentures)

Sinking fund Investment (4% stock) a/c ---Dr. 230

To sinking fund a/c 230
(Being the profit on the sale of investment
transferred)

6% Debentures a/c ---Dr. 1,000

To own debentures a/c 980
To profit on redemption of debenture a/c 20
(Being the cancellation of own debentures)

Profit on redemption of debentures a/c ---Dr. 20

To sinking fund a/c 20
(Being the profit on redemption of debentures
transferred to sinking fund account)

6% Debentures a/c ---Dr. 9,000

To Bank a/c 9,000
B.COM. PART-II (Sem.-III) 44 B.C.-304

(Being the redemption of outstanding

debentures)

Profit and loss appropriation a/c ---Dr. 1,500

To Debenture redemption reserve a/c 1,500
(Being transfer of Rs. 1,500 from the profit)

Debenture redemption reserve a/c ---Dr. 1,500

To General reserve a/c 1,500
(Being debenture redemption reserve
account transferred)

Sinking fund a/c ---Dr. 4,500

To General reserve a/c 4,250
To capital reserve a/c 250
(Being the transfer of balance in sinking
fund to general and capital reserve)

1.4.5 PURCHASING OF DEBENTURES IN OPEN MARKET AND

CANCELLATION OF THE SAME
The Director of a company, if authorised by the terms of contract can purchase
debentures when they find that the market price is favourable to the company. The
debentures so purchased may be either cancelled or kept as an investment to be
utilized for re-issue in future, if needed. On purchase of debentures, the following
entry is to be passed.
For the purchase value of debentures :
Own Debenture A/C ................. Dr.
To Bank A/C
The Own Debenture Account will appear as an asset under the head “Investment
on the asset side of the balance sheet and debentures are continued to be shown
on the liability side at the figure appearing in the books when the said purchased
debentures are cancelled, the following entries, are to be passed :
Debentures Account ...........Dr. (with the paid up value) To
own Debenture A/c (with the purchase cost)
The difference between the two value represents the profit or loss on cancellation
and is therefore credited/debited as the case may be to Debenture Redemption Reserve
Account or Debenture Sinking Fund Account or General Reserve Account.
The Debentures may be purchased as sinking fund investment. In which case,
it is necessary, to see that the debenture interest on the debenture
B.COM. PART-II (Sem.-III) 45 B.C.-304

purchased is credited to the fund account and reinvested in the same manner
as an outside investment. At the time of realisation of Sinking Fund Investment
the difference between the purchase price and nominal value of the debenture purchased
will be transferred to the debenture redemption reserve account.
1.4.6 REDEMPTION BY ANNUAL DRAWING OUT OF PROFIT
Where the debentures are redeemed by annual drawing at a fixed price as
prescribed in the terms of debenture. In the case of drawing of lots, only the
particular debentures which, are to be redeemed are decided by lots, but the
amount payable already decided by the terms of debentures where these are
redeemed by annual drawings by purchasing in the open market the accounting
entry will be to Debit Debenture Account and Credit Cash/Bank by the yearly
drawings. If there be any profit or loss on redemption of the debentures the same
should be transferred from Profit and Loss Account to General Reserve.
1.4.7 DEBENTURE REDEMPTION FUND POLICY
Instead of purchasing investment, it is possible that the company may purchase
an insurance policy which will enable the company to have the required sum on
the required date. Every year, on payment of the premium, the Insurance Policy Account
will be debited and cash credited. Also a Debenture Redemption Fund Account should
be credited and Profit and Loss Appropriation Account debited with a figure equal to
the premium payable. No interest will be received and hence no entry will be required
for this on the date of redemption. When the policy will be realised cash account is
debited and policy account is credited. The Credit Balance in the policy Account will be
transferred to the Debenture Redemption Fund Account. The Debentures will be paid
off and the balance in the Debenture Redemption Fund Account will be transferred
to the General Reserve.
1.4.8 EX-INTEREST AND CUM-INTEREST QUOTATIONS
When debentures are purchased in the open market on a date other
than the date of declaration of interest, the difference must be made between
the capital expenditure and revenue portion of the price paid for the
debenture. Amount paid towards the cost of debentures constitutes the capital
portion. Amount paid towards interest from the last date of interest payment
to the debenture depends on the quotation. If the quotation is cum-interest,
the price quoted includes the interest for expired period. On the other hand
in the case of ex-interest quotation, the latter does not include the interest and
therefore the buyer has to pay in addition, the interest for the expired period.
At the time of recording the purchase of Own Debentures, only the price
paid for them (Capital Portion) must be debited to the account. Amount paid by
way of interest (revenue portion) must be debited to interest account.
So if same quotation is ex-interest, the buyer has to pay higher amount
B.COM. PART-II (Sem.-III) 46 B.C.-304
than under cum-interest. At the time Own-debentures are cancelled, it naturally
follows that profit on cancellation will be more in the case of cum- interest rather
than ex-interest quotation.
1.4.9 CONVERSION OF DEBENTURES INTO SHARES
One of the issue of the debentures may be that the debentures holders will have the
option to convert the debentures into shares-Equity or Preference at the stipulated rate within
a stipulated period. In such a case the proceeds of the issue of debentures should be
considered while determining the number of shares to be issued. The issue price of the share
and the amount actually received from the debenture holder should be the same.
The new shares or debentures can be issued either at par or at a premium or at a
discount. The following entry will be made :-
Old Debentures Account ---Dr.
Discount on issue of shares Account ---Dr.
To New share capital Account
To premium on the issue of shares Account
To Debenture Account
1.4.10 EXAMPLE-II
For example 8% debentures are issued at a discount of 5% and the debentures
holders have the option of converting the debentures into 9% preference shares at
a premium of 10% and holders of Rs. 22,000 debenture wish to exercise the option
in that case the face value of the preference shares to be issued will be Rs.
19,000 calculated as below :
Rs.
Face Value of Debenture22000 Less discount allowed
on issue @5% 1100 Amount Actually received
20900 Issued price of Preference Shares
100
Assuming Face Value Rs. 100
and issue price is 100+10 as
Premium at the rate 10%
20,900
Number of Shares issued :  209
100
20,900
Face value of the Preference Shares  190  100  19,000
110
Actual proceeds of the issue of debentures must be considered as otherwise
there is danger of violating section 79 of the companies Act- conversion of
debentures issued at a discount into shares considering only the nominal value, would
amount to issuing the shares at discount.
Conversion of debentures into shares at the time of redemption of
B.COM. PART-II (Sem.-III) 47 B.C.-304

debentures is due can be on the basis of terms mutually agreed at the time even
debentures originally issued at discount can be converted into shares on the basis
of par values. Provision of section 79 can not be considered to have been violated
in such case.
1.4.11 Self Check Exercises
Ques1: What do you understand by the term redemption of debentures?
Ques2: Write down the sources of finance for the redemption of debentures?
Ques3: What do you understand by the term sinking fund?
1.4.12 SUMMARY
Redemption of debentures refers to the discharge of liability on account
of debentures. When a company wants to redeem the debentures, the following
three problems, that is, time of redemption of debentures, Amount to be paid
on redemption and sources of finance require, attention as discussed in this lesson.
The major sources wherefrom the debentures can be redeemed may be
(a) out of profits, (b) out of capital, (c) by converting them into shares or new
debentures, and (d) out of provisions made for redemption.
1.4.13 Glossary
1. Redemption of Debenture: Discharge of liabilities on account of debentures.
2. Sinking Fund Method: For the redemption of debentures at a particular date,
company needs to raise sufficient amount of money and the method of raising of
fund for redemption is called Sinking Fund Method.
1.4.14 Short Questions
Ques1: Explain the term Debenture Redemption Fund Policy?
Ques2: Explain the redemption of debenture by annual drawing out of profit?
Ques3: What is the difference between ex-interest and cum interest?
1.4.15 Long Questions
Q.1 Discuss various methods of Redemption of Debentures.
Q.2 Write short notes on :
(a) Ex-interest and Cum-interest
(b) Own Debentures
(c) Sinking Fund
Q.3. Paul Ltd. issued Rs. 5,00,000, 12% debentures of Rs. 1,000 each at par
and repayable at par at the end of fourth years. As per the trust deed, a
sinking fund was to be created for the purpose of accumulating sufficient
fund for the purpose. Investments were made yielding 4% interest received
at the end of each year. Sinking fund table shows that 0.23549 of annually at 4%
amounts to Re. 1 in 4 years. Give Journal entries and ledger accounts for 4
years if company sold investments for Rs. 3,76,000 and closed its accounts
on 31st December every year.
Q.4. The Debenture Redemption Fund Account of a limited company stood at Rs.
1,60,000 represented by Rs. 2,00,000 (nominal) investments. The debentures
stood at Rs. 5,00,000 and the company sold Rs. 24,000 investments at Rs.
85 for the purpose of redeeming Rs. 20,000 debentures at 102. Show-
ledger accounts ignoring interest etc.
1.4.16 SUGGESTED READINGS
(1) Advanced Accounting (Part-2)
By : Ashok Sehgal
B.COM. PART-II (Sem.-III) 48 B.C.-304
Deepak Sehgal
Taxmann's Publication
(2) Corporate Accounting
By : Jain and Narang
B.COM. PART-II B.C. - 304
CORPORATE ACCOUNTING

LESSON NO. 1.5 AUTHOR : PROF. DEVINDER KUMAR

ISSUE OF BONUS AND RIGHT SHARES

Structure of the Lesson :
1.5.0 Objectives
1.5.1 Introduction
1.5.2 Valuation of Right
1.5.3 Advantages of Right Issue
1.5.4 Bonus Shares
1.5.5 SEBI Guidelines for Issue of Bonus Shares
1.5.6 Resources for the Issue of Bonus Shares
1.5.7 Accounting Entries For Bonus Issue
1.5.8 Illustration
1.5.9 Advantages of Issuing Bonus Shares
1.5.10 Disadvantages of Issue of Bonus Shares
1.5.11 Difference between Bonus Shares and Right Shares
1.5.12 Self Check Exercises
1.5.13 Summary
1.5.14 Glossary
1.5.15 Short Questions
1.5.16 Long Questions
1.5.17 Suggested Readings
1.5.0 OBJECTIVES
The main objective of this lesson is to introduce the students with the
valuation methods of right shares and Bonus shares. Further SEBI guidelines for
issue of bonus shares, Resourses, advantages and disadvantages of Bonus shares and
Accounting treatment for bonus and Right shares are also discussed in this
lesson.
1.5.1 INTRODUCTION
Under Section 62 of the Companies Act 2013, every public Limited Company,
Wherever it proposes to increases its subscribed capital after the expiry of two
years from the date of its incorporation or after the expiry of one year from the
date of the allotment of shares in the company, made for the first time after its
formation which is earlier, shall be required to offer those shares to the existing
shareholders of equity shares in the proportion of paid up capital as early as
possible. If the Board of Directors, decide to increase the subscribed capital of the
company by the allotment of further shares, then
(i) The further shares shall be offered to the existing shareholders on that date
in proportion to their equity holding on that date.
(ii) The above offer shall be made through a notice which will specify that
48
B.COM. PART-II (Sem.-III) 49 B.C.-304

number of shares offered and time limit which should be less than 15 days
from the date of offer. If within that time the offer is not accepted by the
shareholders, the offer will be deemed to have been declined.
(iii) Unless the Articles of Association of the Company otherwise specify, the offer
shall be deemed to include a right exercisable by the person concerned to
renounce the shares offered to him in favour of any other person.
(iv) After the expiry of the time specified in the notice referred to above, on receipt
of easier intimation from the person to whom such notice is given that he
declined to accept the shares offered, the Board of Directors may proceed to
dispose to such shared offered, the Board of Directors may proceed to dispose
of such shares offer in such manner as they consider most beneficial to the
company.
As per section 62 (IA) the new shares may be offered to outsiders if;
(i) A special resolution is passed by the company to that effect or,
(ii) An ordinary resolution is passed to that effect and approval of the Central
Government is obtained on the ground that such an offer to the outsiders
is most beneficial to the company. This is specific advantage of this legal
right to the existing shareholders specially when the market price of the
share is more than the issue price.
1.5.2 VALUATION OF RIGHT
Generally, a company offers rights issue at a price which is lower than the market
price of the shares so that existing shareholders may get the monetary benefit of
being in association with the company for a long time, sometime there is need to
calculate the money value of this advantage or otherwise called the value of right,
in order to calculate the value of this right the following procedure may be allotted
:
(a) Calculate the total market value of shares which a shareholder is required
to keep in order to exercise the right of getting shares from the fresh issue
at a concessional price.
(b) Add to the above price the amount required to be paid to the company for the
fresh share.
(c) Find out the average price. This can be done by dividing the total price of shares
by total number of shares.
(d) Compare the average price with the market price and find out the
MS
difference. The difference is called the value of right V 
N 1
Example : A company has decided to increase its existing share Capital by making
rights issue to the existing shareholders in the proportion of one new
B.COM. PART-II (Sem.-III) 50 B.C.-304

share for every two shares held. You are required to calculate the value of the right
if the market value of share at the time of announcement of right issue is Rs.
240. The company has decided to give one share of Rs. 100 each at a premium of
Rs. 20 each.
Solution : Market value of 2 shares already held Rs.
by a shareholder 2 × 240 480
Add : the price required to be paid for
acquiring more share 120

Total price of 3 shares 600

Average price of one share = Rs. 600/3 = Rs. 200

Value of right = Market value – Average price
= Rs. (240-200) = Rs. 40
An alternative formula is : New Share/Total Share × cum right price - new
issue price = 1/3 × (240-120) = Rs.40
Proof : Suppose a person wants to hold three shares in the company. He can
buy two existing shares @Rs. 240 each and then he can get one additional
share from the company for Rs. 120, he will spend Rs. 600 in all for three
shares, i.e. Rs. 200 per share.
Alternatively, the right attached to each existing share enable one to buy 1/
2 new share, for buying one new share, two rights are required and for buying
the shares one needs six rights which will cost Rs. 240 in all, one must pay
Rs. 360 to the company for the three additional shares making a total of Rs. 600
in all or Rs. 200 per share.
1.5.3 ADVANTAGES OF RIGHT ISSUE
The following are the advantages of Rights of Issue :
1. The extra expenses are to be incurred otherwise if shares are offered to
the public.
2. There is more certain of the shares being sold to the existing
shareholders.
3. It improve the image of the company and stimulates enthusiastic
responses from shareholders and the investment market.
1.5.4 BONUS SHARES (SECTION 63) COMPANY ACT, 2013
A company may not be in a position sometimes to pay cash dividends
inspite of adequate profits because of paucity of liquid resources with the company.
Moreover it may not want to part with cash in order to meet some capital
expenditure plans. Further all prudent companies build up reserves for the purpose
of expansion or for building up financial strength. However, to satisfy shareholders
and to portray a realistic relationship between capital and
B.COM. PART-II (Sem.-III) 51 B.C.-304

profit earned, the company may issue shares without payment being required,
to the existing equity shareholders. Such shares are known as bonus shares.
The accumulated profit of company thus ploughed back into the business
for a part of capital employed and a stage may be reached where it becomes necessary
to incorporate such accumulations in share capital.
(a) To recognise its use as such and impossibility of its return as dividends to
shareholders.
(b) To bring share capital in line with its assets employed so that dividends
are expressed in relation to capital instead of its terms of a historical figure.
(c) There are tax advantages which have been considerably reduced in recent
times.
The capitalisation of profit on such occasions may be made by issuing fully
paid bonus shares to the members or for paying out amount for the time being
unpaid on shares already held by members.
1.5.5 SEBI (SECURITIES AND EXCHANGE BOARD OF INDIA) GUIDELINES
FOR ISSUE OF BONUS SHARES
The company shall, while issuing bonus shares, ensure the following :
1. There should be a provision in the Articles of Association of the company
for capitalisation of reserves etc. If not, the company should produce a Resolution
passed at the general meeting making provision in the Articles of Association
for Capitalisation.
2. Consequent to the issue of bonus if the subscribed and paid up capital is
more than the authorised capital a resolution passed at the general body meeting
in respect of increase in the authorised capital is necessary.
3. The company should furnish a resolution passed at the general body meeting
for bonus issue before an application is made to the Controller of Issue. In the
general body resolution the management intention regarding the rate of
dividend to be declared in the year immediatedly after the bonus issue
should be indicated.
4. The bonus issue is permitted to be made out of free reservers build out of the
genuine profits or securities premium collected in cash only.
5. Reserves created by revaluation of fixed assets are not permitted to be
capitalised.
6. Bonus issues are not permitted unless the partly paid shares if existing are
made fully paid up.
7. No bonus issues are permitted if there is sufficient reasons to believe that
the company has defaulted in respect of the payment of statutory dues of
the employees such as contribution of provident funds, gratuity and bonus
etc.
B.COM. PART-II (Sem.-III) 52 B.C.-304

8. Declaration on bonus issue in lieu of dividend is not allowed.

Bonus shares are generally issued in the following circumstances :
(i) When the company's case resources are not adequate for the cash
dividend.
(ii) When in company wants to increase cash resources for expansion or other
purposes like repayment of liability.
(iii) When the company, having built up large reserves, wishes to show to the
outsiders (and also the shareholders) the correct earning capacity.
1.5.6 RESOURCES FOR ISSUE OF THE BONUS SHARES
(a) Balance of profits and loss account.
(b) General reserves or any other accumulated balance out of profits.
(c) Balance in the sinking fund for Redemption of Debentures after the debentures
have been redeemed.
(d) Realised capital profits and reserves.
(e) Capital Redemption Reserves Account (created out of profit for the redemption
of redeemed preference shares).
(f) Premium received on issue of shares.
Bonus shares can be issued in the form of fully paid shares at par, or
at a premium. But the bonus can also be distributed by way of making partly
paid shares, fully paid that is to say, the bonus can be applied towards the call
that may be due on the share.
Sometimes, when bonus shares are distributed the shareholders may not
gain at all. This is because of the fact that the market value of the shares depends
upon the dividend received. If the company issues bonus shares, the profits (which
do not increase) will have to be distributed over a large number of share, thus
reducing the dividend per share. This will result in fall in the value of the shares
in the market. Thus the shareholders will have a large number of shares but the
total value of this holding will not increase because each share now is of a
smaller value. Hence the shareholder makes no entry in his books on receipt of
bonus shares. However, the shareholders will benefit in the form of capital
appreciation if there is no increase in the amount of dividend received by him.
1.5.7 ACCOUNTING ENTRIES FOR BONUS ISSUE
There are two ways of capitalisation of profits :
(i) by utilising the amount in paying up any amount for the time being unpaid
on any shares held by members.
(ii) for paying up in full unissued shares of the company to be allotted and
distributed, created as fully paid up, to the members. The accounting enteries
in both cases are different.
(iii) Journal Entries will be as follows :
B.COM. PART-II (Sem.-III) 53 B.C.-304

(a) Profit and Loss Appropriation Account

or
Any other Reserve A/C ..................Dr.
To Bonus to Shareholders A/C
(b) Share call Account ................. Dr.
To Share Capital Account.
(c) Bonus to Shareholders A/C .................. Dr.
To Share Call A/C
(iv) Journal entries for issuing fully paid-up bonus shares.
(a) Profit and Loss Appropriation.
or
Reserve Account ................. Dr.
To Bonus to Shareholders Account.
(b) Bonus to Shareholders Account ................... Dr.
To Share Capital A/C
1.5.8 ILLUSTRATION-I
The Balance Sheet of X Ltd. on December 31, 2007 was as follows :
Share Capital : Rs. Rs.
1,000 Shares of Rs. 100 each 1,00,000 Sundry Assets 2,37,500
Security Premium 25,000
Reserve Fund 50,000
P & L Account 40,000
Sundry Creditors 22,500
------------ - ------------
2,37,500 2,37,500
The Company decided to issue bonus share at the rate of three shares for
every four shares held and decided, for this purpose, to utilise the securities
premium account, Rs. 30,000 out of reserve fund and the Balance out of Profit
and Loss Account, Give Journal entries to give effect to the above and give the
amended Balance Sheet.
Solution :
JOURNAL
Date Particulars Dr. Cr.
Amount Amount
(Rs.) (Rs.)
2007 Securities Premium A/C .............. Dr. 25,000
31 Dec. Reserve Fund A/C ....................... Dr. 30,000
Profit and Loss A/C ..................... Dr. 20,000
B.COM. PART-II (Sem.-III) 54 B.C.-304

To Bonus to Shareholders A/C 75,000

(Being the amount of bonus shares
numbering 750, i.e. = 1000×3/4 = to be
distributed among the shareholders
as per resolution no ........................... )

Bonus to shareholders A/C .............. Dr. 75,000

To Share Capital A/C 75,000
(Being the allotment to bonus shares
as per resolution no ............................)

BALANCE SHEET OF X LTD. AS ON 31 DECEMBER, 2006

Share Capital : Rs. Rs.
1750 Shares of Rs. 100 each 1,75,000 Sundry Assets 2,37,500
fully paid :
(of the above, 750 shares
were issued as bonus
shares out of securities
premium A/C 25,000,
Reserve Fund Rs. 30,000
and P&L A/C Rs. 20,000)
Reserve Fund 20,000
Profit and Loss Account 20,000
Sundry Creditors 22,500
------------- ------------
2,37,500 2,37,500

1.5.9 ADVANTAGES OF ISSUING BONUS SHARES

1. It enables a company to make use of its profits on a permanent basis and
increase credit worthiness of the company.
2. Abnormally high rate of dividend can be reduced by issuing bonus shares which
enables company to restrict entry of new entrepreneurs into the business and
there by reduces competition.
3. It is the cheapest method of raising additional capital for expansion of the
business.
1.5.10 DISADVANTAGES OF ISSUE OF BONUS SHARES
1. The fall in the future rate of dividend results in the fall of the market price
of share considerably. This may cause unhappiness among the shareholder.
2. The reserves of the company after the bonus issue decline and leave less
B.COM. PART-II (Sem.-III) 55 B.C.-304

security to investors.
1.5.11 DIFFERENCE BETWEEN BONUS SHARES AND RIGHT SHARES
1. Bonus shares are issued to the existing shareholders free of cost whereas existing
shareholder have to pay for taking right shares.
2. An existing shareholder may renounce the right shares partly or totally in favour of
some other person whereas no such facility is available is case of bonus shares.
3. Bonus shares are always fully paid because as per companies Act only fully paid
bonus shares can be issued. Right shares can be fully paid or partly paid.
4. Issue of right shares is regulated by section 81 of the companies act whereas
issue of bonus shares is according to the provisions of the Articles of
Association and SEBI guidelines.
5. Issue of right shares increases working capital of the company and they are
issued for cash. Issue of bonus shares does not increase cash as they are
issued free of cost.
6. Issue of right shares is subject to minimum subscription whereas there is
no requirement of minimum subscription in case of bonus shares.
1.5.12 Self Check Exercises
Ques1: What are bonus shares?
Ques2: What are right shares?
Ques3: Write down the resources for the issue of bonus shares?
1.5.13 SUMMARY
The issue of shares by an existing company to the existing shareholders
is known as rights issue. Usually a company offers rights issue at a price which
is lower than the market price of the shares to give monetary benefit to shareholders
being associated with the company for a long time. In the same way Bonus is
paid to the shareholders which may be cash bonus or capital bonus. The various
Companies Act provisions as well as SEBI guidelines are issued by the authorities
to regulate the procedure of Bonus and Rights issues.
1.5.14 Glossary
1. Bonus Shares: When a company issue shares without receiving the payment from
the existing equity shareholders.
2. Right Shares: When a company provides the right to existing equity shareholders
to get a share at a price which is lower than market price of the share.
1.5.15 Short Questions
Ques1: Explain the advantages of right issue?
Ques2: Explain the advantages and disadvantages for the issue of bonus shares?
Ques3: What is the difference between right share and bonus share?
1.5.16 Long Questions
Q.1. What is the meaning of Bonus Share ? Give various sources out of which
these shares are issued ?
Q.2. Explain the provision of the companies Act regarding Rights issue in case
of a public company. How the Value of Rights is computed ?
Q.3. The nominal value of Equity Share of a company is Rs. 10 and the current market
price is Rs. 40. The Company issues Right Shares @ 1 Equity Share for
every 2 existing shares hold, the right shares being issued at a premium of 10%.
From the above, calculate the value of the right.
B.COM. PART-II (Sem.-III) 56 B.C.-304
1.5.17 SUGGESTED READINGS
Advanced Accounting
By : Ashok Sehgal
Deepak Sehgal
Taxmann's Publications
B.COM. PART-II B.C. - 304
CORPORATE ACCOUNTING

LESSON NO. 1.6 AUTHOR : PROF. DEVINDER KUMAR

UNDERWRITING OF SHARES AND DEBENTURES

Structure of the Lesson :
1.6.0 Objectives
1.6.1 Introduction
1.6.2 Disclosure of Underwriting Agreement Under the Law
1.6.3 Underwriting Commission
1.6.4 Sub-Underwriters
1.6.5 Apportionment of Liability
1.6.5.1 Two or more Underwritings
1.6.5.2 Firm Underwriting
1.6.6 Brokerage
1.6.7 Fees of the Managers to the Issues
1.6.8 Marked and Unmarked Applications
1.6.9 Accounting Entries for Underwriting
1.6.10 Calculation of Liability of Underwriter
1.6.10.1 Complete Underwriting : Calculation of Liability
1.6.10.2 Partial Underwriting : Calculation of Liability
1.6.10.3 Firm Underwriting : Calculation of Liability
1.6.10.4 Illustration-I
1.6.11 Accounts of Underwriters
1.6.12 Illustrations II, III and IV
1.6.13 Self Check Exercises
1.6.14 Summary
1.6.15 Glossary
1.6.16 Short Questions
1.6.17 Long Questions
1.6.18 Suggested Readings
1.6.0 OBJECTIVES
The focus of this lesson is to give the information to the readers about :
1. Underwriting agreement under the law;
2. Accounting treatment for underwriting;
3. Calculation of liability of underwriting; and
4. Underwriting commission.
1.6.1 INTRODUCTION
Underwriting means undertaking a responsibility or giving a guarantee that
the shares or debentures offered to the public will be subscribed for or underwriting
of shares is an insurance against under-subscription. An underwriter is a
guarantor. He guarantees the sale of shares or debentures,
56
B.COM. PART-II (Sem.-III) 57 B.C.-304

within a certain period. There are firms which undertake this sort of work and
are very useful to companies which want to raise funds by issue of shares or debentures.
If the shares or debentures are not taken up by the public wholly, the underwriters
will have to take and pay for them. His liability is limited to the short subscription.
Thus underwriting is an insurance against short subscription. For this service, they
charge commission which is generally calculated at a specified rate on the issue price
of the shares or debentures underwritten. Even if the public takes up all the shares
or debentures offered and the underwriters are not called upon to take up any
share, commission will be payable on the whole of the shares or debentures
underwritten. A company cannot pay any commission on issue of shares unless it
is permitted by its Articles.
1.6.2 DISCLOSURE OF UNDERWRITING AGREEMENT UNDER THE LAW
The provisions of the Companies Act, 2013 in this respect are as follows :
(1) Disclosure in the Prospectus : Clause 11 of schedule II part I dealing
with the matters to be specified in prospectus requires that where any issue of
shares or debentures is underwritten, the names of the underwriters and the
opinion of the Directors that the resources of the underwriters are sufficient to
discharge their obligations should be specified in prospectus.
According to section 40(6) of the companies Act 2013, the number of shares
or debentures which underwriters have agreed to subscribe and also the amount
or rate of commission payable to them should be disclosed in the prospectus or
statement in lieu of the prospectus, as the case may be.
(2) Disclosure in the Statutory Report : Section 165 (3) (f) of the companies
Act requires that the statutory report shall set out to the extent, if any, to which
each underwriting contracts, if any, has not been carried out and the reasons
therefore.
(3) Commission and brokerage : All sum payable by way of commission,
brokerage etc. must be disclosed in the Balance Sheet vide Schedule VI Under
the leading “Miscellaneous Expenditures”.
1.6.3 UNDERWRITING COMMISSION
Provisions relating to underwriting Commission have been laid down in section
40(6) of the Companies Act, 2013. It authorises the payment of Commission on
fulfilment of the following conditions :
(i) The payment of commission is possible only when it is authorised by the articles.
(ii) The commission paid or agreed to be paid does not exceed,
(a) In case of shares, five percent of the price at which the shares are issued
or the amount or rate authorised by the articles, whichever is less;
and
B.COM. PART-II (Sem.-III) 58 B.C.-304

(b) In the case of debentures, two and a half percent of the price at
which the debentures are issued or the amount or rate authorised by
the articles, whichever is less.
(iii) The Commission paid or agreed to be paid is disclosed in the prospectus or
statement in lieu of prospectus, as the case may be.
(iv) Commission can not be paid to any person on share or debentures which
are not offered to the public subscription.
1.6.4 SUB-UNDERWRITERS
In addition to the underwriters, there may be several underwriters working
under him. These will be called sub-underwriters. They are responsible only to
the underwriters and generally have no direct contract with the company. For
subscriptions procured by the sub-underwriters, the underwriter receives a small
commission, called overall commission.
1.6.5 APPORTIONMENT OF LIABILITY
When the whole issue is underwritten by the underwriter (s) it is called full
underwriting. When a part of the whole issue is underwritten by the underwriters
then for the balance of shares, the company itself becomes the underwriter.
1.6.5.1 Two or more Underwriting :
When a number of underwriters jointly underwrite the shares of a company
the exact number of shares to be taken by each in case of short subscription is a
matter of importance to the company as well as to each underwriter. The Gross
liability of each underwriter is found out by applying the ratio in which the
shares have been underwritten to the total number of shares issued and
underwritten.
1.6.5.2 Firm Underwriting :
When an underwriter agrees to buy or subscribe a certain number of shares
or debentures irrespective of the result of the issue prospectus, it is the case of
firm underwriting. Under ‘firm’ Underwriters stipulate that they be allotted a given
number of shares. Such agreement gets priority over the general public in relation
to allotment of shares in the event of over subscription.
1.6.6 BROKERAGE
Brokerage is different from undertaking. Brokerage, as against underwriting
is merely the act of procuring subscriptions for shares or debentures without
any responsibility. A broker receives commission on the shares subscribed through
him but is under no obligation to take up any shares that may remain unsold.
Brokerage at the normal rates can be paid in addition to the underwriting
commission if any. Brokerage can be paid to the brokers and who deal in shares
or debentures and whose business includes
B.COM. PART-II (Sem.-III) 59 B.C.-304

the procuring of subscribers for shares or debentures.

(a) Brokerage is fixed at 1.5 percent in respect of all types of public issue of
industrial securities whether the issue is underwritten or not.
(b) The mailing cost and other out of pocket expenses for canvasing the
public etc. will be borne by the brokers. A clause to this effect must be given
in the agreement.
(c) The listed companies are allowed to pay brokerage in case of private placement
of capital at the maximum rate of 0 . 5 percent.
(d) No brokerage will be paid in respect of promoters quota.
(e) No brokerage will be paid when the applications are made by the institutions/banks
against their underwriting commitments.
1.6.7 FEES OF THE MANAGERS TO THE ISSUES
Though the companies have the liberty to appoint one or more agencies as
managers to the issue but the aggregate amount as fees to such persons shall
not exceed the following limits :
(i) For issue upto Rs. 5 crores 0.5 percent
(ii) For issue over Rs. 5 crores 0.2 percent
Such fees shall not be paid in respect of the following :
(a) Amounts agreed to be taken by the financial institutions as investors/
underwriters;
(b) Promoters quota of capital; and
(c) Amounts subscribed on right basis.
1.6.8 MARKED AND UNMARKED APPLICATIONS
Underwriters or brokers issue application forms for shares or debentures to
public, Such application forms are stamped with the name of the underwriters or
brokers. Such applications are known as Marked Applications. Those applications
which do not bear the stamp of the underwriter or the broker are known as unmarked
applications.
1.6.9 ACCOUNTING ENTRIES FOR UNDERWRITING
Journal entries in the books of the Insured Company will be as follows :
(1) Commission or brokerage due to Underwriters/Brokers :
Underwriting Commission/Brokerage A/C --Dr.
To underwriters/brokers A/C
(2) Payment made for commission/brokerage :
Underwriters/Brokers A/C --Dr.
To Bank A/C
(3) Liability for shortfall in public subscription.
Underwriter A/C --Dr.
Share Capital/Debentures A/C
(4) Receipt of money for shares/debentures taken up by underwriters :
B.COM. PART-II (Sem.-III) 60 B.C.-304

Bank A/C --Dr.

To Underwriters A/C
1.6.10 CALCULATION OF LIABILITY OF UNDERWRITER
If an underwriter underwriters the whole issue, the shares or debentures
left unsubscribed by the public will have to be taken up by the underwriter.
Where the issue is underwritten by two or more underwriters in an agreed
ratio the procedure to calculate their liabilities will be as follows :
1. First, of all calculate the gross liability of each underwriter in the agreed
ratio.
2. Second, deduct the marked applications from the grossliability.
3. Third, give credit to unmarked application in the ratio of gross liability. This
is done by way of deduction from the balance after step 2.
4. Fourth, if some figure is in minus then transfer that figure to other underwriter's
accounts in the ratio of gross liability. This gives the liability of underwriters
in account of shortfall in the public subscription.
Determining the liability of the underwriters under different types of
underwriting agreements :
The liability of the underwriter or underwriters would be determined in the
following ways :
1.6.10.1 Complete Underwriting : Calculation of Liability :
(a) If the whole of the issue of shares or debentures is underwritten only
by one underwriter : In such a case, the underwriter will be liable to
take up all the share or debentures that have not been subscribed for by the
public.
Liability = Shares or debentures offered - Total applications received
(b) If the whole of the issue of shares or debentures in underwritten by
a number of underwriters in an agreed ratio : In such a case, the liability
of the respective underwriters can be determined in either of the following two
ways :
(i) The gross liability of each underwriter according to the agreed ratio should
be reduced first by the marked applications and then credit may be given
into the company by way of deduction from the balance left in the ratio of
their gross liability. Thus, the liability of each underwriter in such case will
be as follows :
Gross Liability according to the agreed ratio xxx
Less : Marked applications xx
Balanced left xxxx
Less : Unmarked application in the ratio
of gross liability xxx
Net Liability xxxx
(ii) The gross liability of each underwriter according to the agreed ratio
B.COM. PART-II (Sem.-III) 61 B.C.-304

should be reduced first by the marked applications and then credit may be
given in respect of unmarked applications sent directly to company by way
of deduction from the balance left in the ratio of gross liability as reduced by
marked applications.
Thus, the liability of each underwriter in such a case will be as follows :
Gross Liability according to the agreed ratio xxxx
Less : Marked applications
xxx
Balance left xxx
Less : Unmarked application in the ratio of
balance left (i.e. gross liability as reduced
by marked applications) xxx
Net Liability xxxx
1.6.10.2 Partial Underwriting : Calculation of Liability :
Partial underwriting means that only a part of the issue is underwritten. In
such a case for the balance not underwritten, the company itself becomes the
underwriter. Again as in the case of complete undertaking, partial underwriting may
be done by one underwriter, or more than one underwriter.
(i) When the partial underwriting is done by one person only :
The net liability of the underwriter will be equal to his gross liability minus
the marked application received to his credit. All the unmarked applications are
treated as marked in favour of the company and the underwriter does not get
any credit for them.
(ii) When the partial underwriting is done by more than one person :
The calculation of liability of underwriter is just same as in the (i) above.
In this case also the company is deemed to be the underwriter for the balance
not underwritten and get the credit for unmarked applications.
Example I :
X Ltd. issued 10,000 equity shares A and B, two underwriters, underwrite
4000 and 6000 shares. Applications for 8,000 shares were received in all, out of
which applications for 3,500 shares had the stamp of A and those for 4,000 shares
that of B. Show the liability of the underwriters.
Solution :
Liabilities of A and B for the 2000 unsubscribed shares (10000-8000) will
be determied as follows :
A B
Gross Liability 4,000 6,000
Less : Marked Applications in 3,500 4,000
the ratio of 4 : 6
Less : Unmarked applications 500 (i.e. 8000-3500+4000) 500 2,000
is the ratio of 4 : 6 200 300
B.COM. PART-II (Sem.-III) 62 B.C.-304

Net Liability 300 1,700

If the marked application of the underwriter exceeds his liability, the surplus
should be distributed amount other underwriters in the ratio of their gross liability
or the ratio of the number of shares underwritten.
1.6.10.3 Calculation of liability for firm underwriting :
When the underwriter agrees to firm underwriting it becomes an additional liability
and therefore must be added to the net liability arising under the agreement. In the
calculations of net liability the shares underwritten firm are ignored.
1.6.10.4 Illustration-I
A underwrites 6,000 shares and also 500 shares as a firm underwriting, the total
issue being 10,000 shares. The marked applications are 5400. He will have to take 1100
shares in all 500 underwritten firm will be calculated after taking the firm underwriting into
account.
The issue of 10,00,000 shares is underwritten by two underwriters - A and B equally
the commission being 5% of the issue price. Each of the underwriters 20,000 shares firm.
Subscriptions total 9,60,000 shares, the distributions of forms being :
A-5, 20,000, B-3, 60,000 and unmarked form 80,000
One of the allottees (using forms marked with the name of A) for 2,000 shares fails
to pay the amount due to allotment all other money due being received in full including
any due from the share developing upon the underwriters. The Commission due is paid
separately.
The Shares of the failed allottee are finally Forfeited by 30.6.07 and are reallotted for
payment in cash of Rs. 4 per share.
Pass the necessary journal entries.
Solution : Young Farmers Forests Limited Journal Entries
DATE PARTICULARS DEBIT CREDIT
(Rs.) (Rs.)
2007 Bank A/C.................. Dr. 24,00,000
Jan 31 To Share Application A/C 24,00,000
(Being application received)
March Share Application A/C ................... Dr. 24,00,000
31 To Share Capital A/C 24,00,000
(Being the transfer of application money
to Share capital on 9,60,000 shares
March Share Allotment A/C................. Dr. 28,80,000
31 B's A/C................... Dr. 2,20,000
To Share Capital A/C 26,00,000
To Share Premium A/C 5,00,000
(Being amounts due on allotment on
B.COM. PART-II (Sem.-III) 63 B.C.-304

9,60,000 Shares allotted generally and

40,000 shares developed upon B vide
Board's resolution .........................)
March Bank A/C.................. Dr. 30,94,000
31 To Share Allotment A/C 28,74,000
To B's A/C 2,20,00
(Being the receipt of money due on
allotment except from the allottee for
2,000 shares including premium on
9,60,000 shares)
March Underwritting Commission A/C ........... Dr. 5,25,000
31 To Bank A/C 5,25,000
(Being payment of Commission @5% on
issue price of Rs. 10.50 for 10 lakh shares )
June Share Capital A/C .............. Dr. 10,000
30 Share Premium A/C ............ Dr. 1,000
To Share Allotment A/C 6,000
To Share forfeited A/C 5,000
(Being 2000 shares forfeited
vide Board's resolution ........... )
June Bank A/C............... Dr. 8,000
30 Shares Forfeited A/C ............ Dr. 2,000
To Share Capital A/C 10,000
(Being re-issued 200 shares)
Shares Forfeited A/C ............ Dr. 3,000
To Capital Reserve A/C 3,000
(Being transfer of profit on
forfeiture to Capital Reserve)
Working Notes :
1. It has been presumed that shares subscribed 9,60,000 include firm
underwriting.
2. Calculation of Liability of Underwriters :
Particulars A (Rs.) B (Rs.)
Gross Liability 5,00,000 5,00,000
Less : Firm underwriting 20,000 20,000

4,80,000 4,80,000
Less : Unmarked Forms 40,000 40,000
B.COM. PART-II (Sem.-III) 64 B.C.-304

Less : Marked Forms (Excluding 4,40,000 4,40,000

Firm Underwriting) 5,00,000 3,40,000

Benefit of A's surplus to B 60,000 1,00,000

60,000 60,000

Add : Firm Underwriting — 40,000

20,000 20,000

Number of share to be taken as 20,000 60,000

per guarantee

1.6.11 ACCOUNTS OF UNDERWRITERS

It has already been stated that underwriters ensure the company that in
case the shares and debentures offered to the public to the extent, the balance
of shares and debentures will be taken up (on the same term as the public)
by the underwriters. For this responsibility, they are paid a commission (on all
shares and debentures underwritten which cannot exceed 5% of the issue price
of shares and 2½% of the issue price of debentures.
An underwriter may reduce his liability by entering into a contract with sub
underwriter who will assume a part of the responsibility for a commission. The
sub underwriter has nothing to do with the company. He will charge his commission
from the main underwriter. He will have to take the shares or debentures as may
fall in his share from him.
The underwriter will maintain an account known as underwriter account.
The amount paid for taking up the shares or debentures will be debited to his account.
The commission received from the company will be credited to this account. In
case the underwriting has a sub-underwriter, the commission due to him will
be debited and the amount of shares or debentures transferred to him will be
credited. The underwriter will try to sell the shares or debentures sold will be
valued at cost or market price whichever is lower and carried forward to the next
period. The balancing figure will be profit or loss and will be transferred to profit
and loss account.
1.6.12 ILLUSTRATIONS II
A enters into a contract with B Ltd., to underwrite its 5,000 shares of Rs.
10 each in consideration of 5% commission. He also enters into an agreement with
C to sub-underwrite 1,000 shares of B Ltd. at a commission of 3%. The public
subscribes for 2,000 shares only and subsequently the shares were taken up
by A who sold his shares @ Rs. 9 per share. The shares taken by
B.COM. PART-II (Sem.-III) 65 B.C.-304

C were sold Rs. 10 per share. Expenses of underwriting amounts to Rs. 600.
Prepare Underwriting account in the books of A.

Books of A
Underwriting Account
Dr. Cr.
Particulars No. of Amount Particulars No. of Amount
Shares Shares
To Bank (Expenses) – 600 By Bank (Commi-
To Bank (Shares ssion @ 5% on
taken up) 3,000 30,000 5,000 shares of 2,500
Rs. 10 each
To Bank (Commission – 300 By Bank Trans-
3% on 1,000 fer to 600 shares
shares) of Rs, 10 each to
C as per sub-
under writing
agreement i.e., 600 6,000
20% of 3,000)
By Bank (Sale of
2,400 shares @ 2,400 21,600
Rs. 9 per share)
By Profit & Loss
Account – 800
(Loss on under-

3,000 30,900 writing 3,000 30,900

III : X Ltd. issued 2,00,000 equity shares of Rs. 10 each, The issue was
underwritten by A for a commission of 5%. A arranges with B for sub- underwriting
to the extent of 30% of shares for a commission of 4%. The shares were to be paid
for as :
Rs. 3 on application Rs.
4 on allotment and
Rs. 3 on first and final call
The public applied for 1,60,000 shares. Both A and B fulfilled their obligations.
After the call, A sold 18,000 shares at Rs. 9. At the close of the period, the market
value of the shares was Rs. 9.50. Expenses were Rs. 12,000. Prepare the underwriting
account in the books of A.
B.COM. PART-II (Sem.-III) 66 B.C.-304
In the Books of A
Underwriting Account
Dr. Cr.
Particulars No. of Amount Particulars No. of Amount
Share s Rs. Shares Rs.
To Bank (Expenses) – 12,000 By Bank (Commission
To Bank (Application @ 5% on 20,00,000 — 1,00,000
Money) 40,000 1,20,000 By Bank (Rs. 7 per
To Bank (allotment share on shares tran-
money) 1,60,000 sferred to B) 12,000 84,000
To Bank (Commission By Bank (Sale) 18,000 1,62,000
to B) 4% on Rs.
6,00,000 (i.e. 30% of By Balance c/d 10,000 77,142
Rs. 20,00,000 24,000 (Rs. 77,142 cost price)
To Bank (call on 84,000
28,000 shares)
To profit & loss A/c 23,142
(Profit)
40,000 4,23,142 40,000 4,23,142

Working note : Rs. Rs.

Total Amount paid (including Commission to B) 4,00,000
Less : Commission received 1,00,000
Amount receivable from B 84,000
1,84,000
Cost of 28,000 shares 2,16,000
2,16,000
Cost per share  7.7,142
28,000

IV : X Ltd. which carries on the business of underwriting shares, underwrite

15,000 shares of Rs. 10 each in a new issue made by A Co. Ltd. The agreed
commission was 5% payable as to 70% in fully paid shares and the balance in cash.
In addition to underwriting these shares X Co. Ltd. made ‘Firm Application’ in the
ordinary course for an other 2,500 shares.
The issue was not fully subscribed by the public and the underwriter
was obliged to take up 30% of the shares underwritten. The shares in A Co.
Ltd., were subsequently quoted at a discount of 12%.
Prepare the underwriting of shares in A Co. Ltd., Account in the books
of X Co.
B.COM. PART-II (Sem.-III) 67 B.C.-304

Books of X co. Ltd.

(UNDERWRITING OF SHARES IN A CO, LTD. ACCOUNT)
Dr. Cr.
Particulars No. of Amount Particulars No. of Amount
Shares Rs. Shares Rs.
To Cash 2,500 25,000 By Cash A/c — 2,250
To Cash (I) 2,000 20,000 By Balancing 5,025 42,750
To shares A/c 525 — c/d
(Received as
Commission (2)
5,025 45,000 5,025 45,000
Working Notes :
1. Total share to be acquired under the contract = 30% of 15,000 i.e.
4,500
Less : Shares already taken up under firm underwriting 2,500
More shares to be subscribed 2,000
Rs.
2. Total commission is 5% of Rs. 1,50,000 7,500
Less : 30% received in cash 2,250
Balance to be received in fully paid up 225 shares for which
No payment is to be made, so 525 shares have to receive 5,250
as a commission
3. As the book value of Rs. 8.50 per share (i.e. Rs. 42,750/5,025) is less
than the market value of Rs. 8.80 (i.e. Rs. 10 Less 12%), so shares have been carried
down at the book value.
1.6.13 Self Check Exercises
Ques1: What do you mean by underwriting commission?
Ques2: What do you mean by firm underwriting?
Ques3: What do you mean by the term two or more underwriting?
1.6.14 SUMMARY
The minimum subscription is the least amount which, in the opinion of directors
(promoters) must be raised by issue of shares. To cover this minimum amount,
companies usually get the issue underwritten by a person or group of persons
to ensure that issue is fully subscribed. If whole issue is underwritten by the
underwriter(s) it is called full underwriting, but if a part of the whole issue is
underwritten by the underwriter(s), it is called partial underwriting. To record this
whole system underwriter's Accounts are required to maintained as discussed in
this lesson.
1.6.15 Glossary
1. Underwriting: Underwriting means undertaking a responsibility that debentures or shares
offered to public will be subscribed.
2. Brokerage: Brokerage is procurement of subscriptions for shares or debentures without
taking any responsibility.
3. Sub underwriters: When several underwriters work under a underwriter, then these
several underwriters are called sub underwriters.
B.COM. PART-II (Sem.-III) 68 B.C.-304

1.6.16 Short Questions

Q.1. What is maximum rate of commission on underwritting of shares or

debentures to be paid by the company ?
Q.2. What is Underwriting Account ?
B.COM. PART-II (Sem.-III) 69 B.C.-304

Q.3. Give a specimen of Underwriting account with various entries on the debit
and credit of the account ?
Q.4. Who is sub underwriter ?
Q.5. What do you mean by Accounts of Underwriter ?
1.6.17 Long Questions :
Q.1. X Co. Ltd. which carries on the business of underwriting shares, underwrote
15,000 shares of Rs. 10 each in a new issue made by A Co. Ltd. The agreed
commission was 5% payable as to 70% in fully paid shares and the balance
in cash. In addition to underwriting these shares
X Co. Ltd. Made “Firm Application” in the ordinary course for another 2,500
shares.
Q.2. A company issued 4,000 shares of Rs. 10 each and entered into an underwriting
agreement with B who agreed to underwrite the whole issue at a commission
of 4% and entered into sub-underwriting agreement with C For 5% of the
issue at a commission of 3%. The public applied only for 75% of issue.
Hence the balance was taken up by the underwriters. B sold the shares
held by him @Rs. 8 per share. Pass journal entries and prepare accounts in
the books of B.
Q.3. It has been arranged that X Ltd. would issue 80,00,000 shares of Rs. 10
each; Re. 1 payable on application. Rs. 4 an allotment and Rs. 5 as a final
call. Arrangements made for A Ltd. to underwrite the whole issue at a
commission of 2½% and to apply firm for 20,00,000 shares. A Ltd. arranged
with B Ltd. to sub-underwrite 10,00,000 of these shares being offered to the
public for a commission of 2%.
Q.4. Write Short Notes On :
(a) Firm Underwriting
(b) Underwriting of Shares and Debentures.
(c) Marked and Unmarked Application.
1.6.18 SUGGESTED READINGS
a. Advanced Accounting
By : Jain and Narang
2. Advanced Accounting Part-II
By : Ashok Sehgal
Deepak Sehgal
Taxmann's Publication.
 Mandatory Student Feedback Form
https://forms.gle/KS5CLhvpwrpgjwN98

Note: Students, kindly click this google form link, and fill this feedback form once.