FINANCIAL ACCOUNTING II
PBAC 301
BY
RICHARD AMANKWA FOSU
Lecture 1
ACCOUNTING FOR SHARES AND DEBENTURES
SHARES
• Share defined
– share is evidence of ownership of a company.
– It is an ownership right acquired in a company
which may be transferable
– Share is issued by a company at par value or no
par value
– Par value share is a share that has a face value,
that is, its issue price is written on it.
– No par value share has no face value. That is the
issue price is not stated on it.
Shares (contd)
• Classification of Shares
– The law allows for the creation of different
classes of shares with certain rights regarding
dividend, voting, repayment or otherwise.
– Generally, there are two classes of share
• Preference shares
• Ordinary /equity or common shares
– Note that American refers to shares as Stock
Shares (contd)
• Preference shares
– Preference shares are those shares on which fixed
and specified amounts are paid to the holders as
dividend or capital redistribution.
– Dividend payable on preference shares may be
cumulative or non cumulative.
• Cumulative preference shares are entitled to dividend
in arrears in period where no dividends are declared
and paid.
• Non cumulative preference shares are not entitled to
dividend arrears.
• All preference shares are deemed to be cumulative
unless otherwise indicated.
Shares (contd)
• Ordinary shares
– These are also known as equity shares or common
shares.
– These are shares which entitled the holders to the
residue of profit or assets after the dividend or
capital of preference shareholders has been
determined
– They do not carry fixed rates of dividends
Issue of shares: legal considerations
• Shares up to the total number authorized by
the regulations may be issued at any time and
for any consideration determined by the co.
• Shares issued may be paid for at such time as
are agreed between the member & co or as
determined by the regulation
• All shares, except for bonus shares, should be
issued for valuable consideration paid or
payable to the co.
• Shares shall be paid for in cash unless
otherwise agreed.
Issue of shares: legal considerations
(contd)
• Where payment is agreed in forms other than
cash, registrar of companies should be
informed of such agreement in writing within
28 days after allotment.
• A company must deliver a share certificate to
the registered holder within 2 months after
issue.
Issue of shares - Terms
• Stated share capital
– It is the total maximum consideration (cash or kind)
received upon share issue or transfers from surplus.
– Notes that the consideration received on the reissue
of treasury shares is not part of the stated capital.
– Issue share capital is the consideration received for
shares issued to date. This may be lower or equal to
stated share capital
– Stated share capital is also termed the authorized
share capital
Issue of shares – Terms (contd)
• Treasury shares
– these are shares which have been lawfully
redeemed, purchased or acquired or forfeited
while in the custody of the company prior to their
re-issue
• Share deals refers to all dealings in own share
resulting from redemption of shares, or
reissue of treasury shares. This is accounted
for through a share deal account.
Methods of issuing shares
• There are different methods of issuing shares.
– Public issue (prospectus):
• This is where prospectus is advertized in the media inviting the public to
subscribe to the shares of the company.
– Offer for sale
• Here the company sells all the shares to an issuing house, usually a financial
institution which in turn sells them to the public at profit.
– Placing
• A stockbroker is contracted and he finds persons or financial institutions who
which to buy the shares. He reward is called brokerage
– Underwriting
• It involves providing advice on the issue, buying a new issue from issuing
company and reselling it to the public. The underwriter earns a spread on the
transaction. In some case, the underwriter or syndicate enters into fixed
commitment and deals with the issue on “Best effort or all-or-none basis,”
Methods of issue (contd)
– Right Issue
• Existing company may wish to raise additional capital
by offering the existing shareholders an additional
shares to subscribe to on pro-rata basis. The price of
issue is usually lower than the existing market price.
The shareholder has the option to take up the offer, sell
the right or renounce it.
– Bonus issue or capitalization issue.
• Existing shareholders are offered additional shares in
the company without payment of cash. The
consideration involves transfer surplus to stated
capital.
Stages of Issues
• The following stages may the involved
– Application invited and received with the agreed
consideration
– Applications considered and unsuccessful ones
rejected and monies refunded
– Allotment is made to successful applicants and monies
received accordingly
– First call and subsequent calls (per the agreement)
made and monies received
– Shares of defaulting shareholders forfeited and share
retired to treasury.
– Treasury share re-issue and monies sent to share
deals.
Accounting for share Issue
• Note that the price for a share offer may paid
– full upon application or
– In installment at application, allotment through to the
calls.
• Accounting issues are uncomplicated when full
payment is required on application. The issue of
forfeiture will not apply. In this case we debit
bank account and credit stated capital with the
amount.
• Where installment basis is applied then the
stages will be followed through and through.
Accounting Entries – Installment Basis
Transaction
Account to Debit
Account to Credit
Application monies received
Bank
Application
Unsuccessful (excess) Applications rejected Application
Bank
Excess application monies occurred
Application
Allotment
Application completed & allotment made
Application
Stated capital
Allotment Monies received
Bank
Allotment
Allotment completed
Allotment
State capital
First and Subsequent calls monies received
Bank
1st,2nd etc call
Calls end
1st etc calls
Stated capital
Share declared forfeited upon default
No entry
No entry
Treasury share re-issued
Bank
Share deals
Share Redemption
• The Law frowns on indiscriminate redemption
of shares by companies. Why?
• When can a company redeem or repurchase it
own shares:
– Where there is credit balance on the share deal
account
– Where transfer is made from surplus to share deal
for that purpose
– Where fresh issues are made purposely for the
redemption. (should be used within 12 month)
Share deal Accounts
• Purchase of own share or redemption can only be
effected through share deal account
• Share deal account is credited with:
– Transfer from income surplus
– Consideration received on treasury share reissue.
• Where a fresh issue is made is should be credited
to stated capital temporally and used to pay for
the redemption
• Share deal account can only be debited with
– Transfer to stated capital for bonus issue
– Purchase/ redemption of shares.
Reasons for redemption
• To buy out troublesome shareholders
• To reduce the dividend bill of the company
• To take advantage of declining share prices in
the market and buy it at a discount
• Take out the company from public market
• To enjoy the market prospect of the shares
• Employment-based share offering may be
redeemed when employee resigns.
Accounting entries
• Three scenarios exist:
– Redemption is made through Share deal account
– Redemption from fresh issue of shares
– Combination of share deal and fresh issue
Accounting entries- Share deal
• Enough monies on share deal
– Dr. Share deal accounts
– Cr. Bank account
• No enough money on share deal but income surplus exist
–
–
–
–
Dr. income surplus
Cr. Share deals with top required
Dr. share deal account
Cr. Bank with amount of redemption.
*similar entries are required where no money is in share deal
account but here you transfer full amount needed from
income surplus to share deal
*Note that preference share capital will remain on the
balance sheet as treasury share (but no voting /dividend
right)
Accounting entries: Fresh issue
• When fresh issue is made for the redemption
– Dr. bank
– Cr. Stated capital with monies received
– Dr. Stated capital (redeemable preference share)
– Cr. Bank
Accounting entries: Combined
• Share deal account + income surplus top up +
fresh issue
–
–
–
–
–
–
–
–
Dr. income surplus
Cr. Share deal with amount transferred from IS
Cr. Bank
Dr. Share deal with amount redeemed from share
deal account
Dr bank
Cr. Stated capital with the fresh issue
Dr. Stated capital (preference share)
Cr. Bank with amount redeemed from fresh issue
Debenture
• Definition
– Debenture is a written acknowledgement of
indebtedness by the company setting out the
terms and conditions of the loan.
– A company may raise loan by issue a debenture or
debenture stock.
– A debenture holder is a special creditor who is
entitled to fixed interest whether profit is made or
not.
Debenture (contd)
• Types of debenture
– Redeemable or perpetual debenture
– Convertible debenture
– Secured or naked debenture
• debenture may be secured by a floating charge or a
fixed charge or both.
Issue of Debenture
• The mode of issue of debenture is similar to
that of shares and the accounting entries are
the same except the change in account
names.
• Debenture may be payable full on application
or installment basis.
• Debenture may be issued at par, discount or
premium.
Issue of Debenture (contd)
• Issue of debenture at Par
– It means that the debenture is issued at a price
equal to the nominal value
– Accounting entry:
• Dr. bank
• Cr. Debenture (specific) with the amount received
– Example: GHS20,000 20% debenture was issued at
par to the public payable on application.
• Dr bank 20,000
• Cr. 20% Debenture 20,000
Issue of Debenture (contd)
• Issue at Discount
– here the issue price is lower than the nominal value,
hence there is a to the issuer.
– Accounting entry
• Dr. Bank with amount received
• Dr. Discounts on debenture with discount
• Cr. Denture (specific)
– Example: GHs20,000 20% debenture was issued at 98
to the public.
• Dr. bank GHs 19,600
• Dr. Discount 400
• Cr. 20% debenture 20,000
Issue of debenture
• Issue at Premium
– debenture is issued at a price above nominal value,
resulting in capital gain.
– Account entry
• Dr. Bank with all amounts
• Cr. Premium with the gain
• Cr. 20% debenture with value of debenture
– Example: GHs20,000 20% debenture issue at 102.
• Dr bank 20,400
• Cr. Premium 400
• Cr 20% debenture 20,000
Redemption of Debenture
• Redeemable debentures are redeemed in
accordance with the trust deed.
• Redeemed debentures may be cancelled or reissued.
• Debenture may as well be redeemed at par,
discount or premium.
• Modalities for redemption
– One –off redemption on a specific date
– Installment redemptions over agreed period of time.
Redemption of Debenture
• One –off- redemption
– May be funded through
• Fresh issue of debenture under different deed
• Fresh issue of shares
• Internally generated fund
– Creation of capital surplus ( debenture redemption reserve)
through regular annual appropriation from income surplus.
– The redemption reserves created are managed through a
sinking fund.
Redemption of Debenture
The Debenture Redemption Reserve/Surplus operates under one of the
two following principles:
• An amount equal to the nominal value of the Debenture to be redeemed
is debited to the Income Surplus account and credited to Debenture
Redemption Reserve/Surplus . After the redemption of the Debentures,
any balance on the Debenture Redemption Reserve/Surplus is transferred
to the general Capital Surplus.
• Where one-off or one lump sum redemption is to be effected, then the
annual appropriations to the fund is managed on a sinking fund basis. That
is, the company annually appropriates an amount, which together with reinvested interest, will produce an amount which on maturity, will be
sufficient to redeem the debentures.. Annual appropriations are debited
to Income Surplus Account and credited to Sinking Fund specifically
labeled as Debenture Redemption Reserve/Surplus Fund.
Redemption of Debenture
• Installment Basis
– Here, the debenture redemption is credited
annually with the amount due for redemption
from the income surplus.
– The debenture due is transferred to the debenture
redemption account and paid off.
Redemption of debenture (contd)
• Accounting entry for installment redemption
– Under this debenture redemption reserve is
created.
Transaction
Account to debit
Account to credit
Annual installment due
Income surplus
D. Redemption reserve
Redemption approved
Debenture
D. Redemption
Premium resulted from redemption
Premium / P&L
D. Redemption
Discount resulted from redemption
D. Redemption
Discount/P&L
Payment effected for the redemption D. Redemption
Bank
Balance on redemption reserve
Capital surplus
D. Redemption
reserve
Redemption of debenture (contd)
• Example
– Tanye Ltd issued GHS400,000 20% Redeemable
Debentures in 1990. Under the terms, the debentures
were to be redeemed by equal annual drawing over
10 years starting from 1993. Payment was to be made
on 31 Dec each year. As on 1 Jan 2001, GHS80,000 and
GHS320,000 were standing on the debenture account
and reserve accounts respectively. The redemption of
2002 was effected at 98 and the final redemption was
made in 2003 at par. Show the entries in the journal &
ledger accounts.
Journal entries
Dr.
31/12/2002 20% redeemable debenture
Debenture redemption
40,000
31/12/2002 Income surplus
Debenture redemption reserve
40,000
Cr
40,000
40,000
31/12/2002 Debenture redemption (40000 * 0.98) 39,200
Discount on redemption
800
Bank
40,000
31/12/2003 20% redeemable debenture
Debenture redemption
40,000
40,000
31/12/2003 Income surplus
Debenture redemption reserve
40,000
31/12/2003 Debenture redemption
Bank
40,000
31/12/2003 Debenture redemption reserve
Capital surplus
400,000
40,000
40,000
400,000
Redemption of Debenture
• Sinking fund is maintained where one-off
redemption is required.
– Here annual appropriation is made from the
income surplus to a sinking fund which is later
invested in an interest bearing instrument. Upon
reaching the specified date of redemption the
investment is realized and used to redeem the
debenture on a one-off basis.
Redemption of Debenture – Sinking
fund
• Accounting entries
Events
Debit
Credit
Annual appropriation are made to the sinking fund
Income surplus
Sinking fund
Investment made out of sinking fund
SF investment
Bank
SF Investment income received
Bank
Sinking Fund
Realization of investment
Bank
SF Investment
Profit on realization of investment
SF investment
SF
Loss on realization of investment
SF
SF investment
Redemption approved by directors
Redeemable
Debenture
Debenture
redemption
Premium upon redemption
SF/ premium
Debenture
redemption
Discount upon redemption
Debenture
redemption
SF/discount
Redemption effected
Debenture
redemption
Bank
Redemption – Sinking fund
• Example;
– A company issues 10% GHS10,000 redeemable
debenture some years ago. A debenture
redemption fund backed by marketable securities
was established for the redemption. On 31
December 2010 the following balance were
available; 10% Redeemable debenture stock
GHs10,000, Debenture redemption fund GHs
4,900 and Debenture redemption fund investment
GHS 4,100.
Redemption- Sinking fund
• Example (contd)
– The ff took place in 2003:
– 25/1: investment bought at cost GHs800
– 30/6: half year debenture interest paid
– 15/7:Investment income received GHs200
– 30/7: investment (cost 2,400) sold for GHs 3300
– 1/8: debenture stock redeemed ( nominal GHS4,000) 3,400
– 15/9; investment (cost GHS 1,000) sold GHS 900
– 30/9: Investment purchased at cost GHs,1,060
– 31/12: Investment income received GHS 150
– 31/12 Annual appropriation GHS 800
– 31/12 half year interest paid.
*Show entries in journal and ledger.
Redemption -Sinking fund
Dr.
25/1 SF investment
Bank
800
30/6 Debenture interest
Bank
500
15/7
200
Bank
Sinking fund
30/7 Bank
Cr.
800
500
200
3,300
SF investment
3,300
30/7 SF Investment (profit)
Sinking Fund
900
1/8 Debenture stock
Debenture redemption
4,000
1/8 Debenture interest
Debenture redemption
33
1/8 Debenture redemption
Bank
3,400
1/8 Debenture redemption
Sinking fund (profit + interest)
633
900
4,000
33
3,400
633
Redemption: sinking fund
Dr
15/9 Bank
SF investment
Sinking fund
SF investment
900
30/9 SF investment
Bank
1,060
31/12 Bank
SF investment
150
31/12 Income surplus
sinking fund
800
31/12 Debenture interest
Bank
300
31/12 Debenture interest
P&L
Sinking Fund
Capital surplus
833
Cr
900
100
100
1,060
150
800
300
833
4,000
4,000