Accounting for issue of shares
and debentures
Define
the issue price of shares
Differentiate between preference shares, ordinary chares
and deferred shares
Distinguish between issued capital, uncalled capital and
share capital or paid-up capital
Describe the concept of partly paid shares and calls on
unpaid share capital
Account for public company share issues
Define the various costs associated with share issues and
account for those costs
Differentiate between debentures, mortgage debentures and
unsecured notes
Account for the issue and redemption of debentures
Share Capital
•Owners of companies are called shareholders
•Founding members are also known as subscribers
•All shareholders are sometimes referred to as
members
•Shares in a Public company can be purchased
when the company issues a prospectus
•Shares in a Public company can also be traded on
the stock exchange
Issue price of shares
Maximization
of shareholder wealth
Effect on the market price of existing shares
Requirement to sell a desired volume of shares
Expectation of future profits and dividends to service the
new shares
Whether ASX listing is proposed or already exists
Usage of an underwriter
Uncalled and paid up share
capital
Shares
can be issued to be paid in full or issued partly paid
with the balance paid at a future date(s)
Amounts to be paid at a future date are referred to as calls
A company’s share capital is also referred to as paid-up
capital = number of shares issued by the amount that the
directors require as payment of shares
The amount not required for payment is referred to as the
uncalled amount
Share Capital Uncalled capital
No of shares
issued
100,000
100,000
Amt
called/uncalled
0.50
1.50
Total
$50,000
$150,000
Classes of Shares
Ordinary
Shares
Preference Shares
Deferred or founder Shares
Ordinary Shares
Basic
type
Full voting rights
Right to receive dividends
Preference Shares
Preferential
rights to a fixed rate of dividends before
dividends to ordinary shareholders are declared
Repayment of capital when company is wound up
Participation in surplus assets and profits
Cumulative and non-cumulative dividends
Voting rights
Priority of payment of capital and dividends
Deferred or Founder Shares
Issued
to initial subscribers
Dividends usually paid after being paid to other
shareholders
Founders are shareholders who start up the company before
shares are issued to the public
Provider establishment costs and issue the prospectus
Share Issue Procedure
Registration
of members
Disclosure of rights and liabilities of share issue
The class of share being issued
Share price and no of shares issued
The amount that must be paid for each share with the
application (on allotment and future calls)
The minimum subscription
The allotment process
The treatment of over subscription
Procedure for issuing shares
under a prospectus
The
Prospectus together with an application form is made
available to the general public.
Application monies are held in trust
Minimum subscription must be received before allotment
Allotment at director’s discretion
Allotment advice is communicated to the applicant
Allotment monies may be required at this stage.
Share capital issued upon the
registration of a company
Subscribers Dr
Share
Cr
Capital
Issue shares to Subscribers
Bank
Dr
Subscribers
Cr
Subscriber Receipt upon Payment
Share capital issued by
prospectus
Payment
in full on application
Part payment on application, balance payable on allotment
of the shares
Part payment on application and allotment, with the
balance payable in calls
Shares issued fully paid on
application
Fully
paid on application
Number of shares issued by the directors agrees exactly
with the no applied for
All applicants have been received with the full amount
Shares issued fully paid on
application Journal Entry
General Journal
Dr
Trust
Account
Application
Cr
Record the receipt of monies
from applicants
Shares issued fully paid on
application Journal Entry
General Journal
Application Dr
Share
Cr
Capital
Allot shares to Applicants
Shares issued fully paid on
application Journal Entry
Bank
General Journal
Dr
Trust
Cr
Account
Issuing of Shares to Applicants
Under subscribed and
oversubscribed share issue Jnl
Entry
General Journal
Trust Acc
Dr
Application
Applicants deposits
Cr
Under subscribed and
oversubscribed share issue Jnl
Entry Cont.
General Journal
Application Dr
Share
Cr
Capital
Allot shares to Applicants
Under subscribed and
oversubscribed share issue Jnl
Entry Cont.
General Journal
Application Dr
Trust Acc
Cr
Refund Applicants deposits
Under subscribed and
oversubscribed share issue Jnl
Entry Cont.
Bank
General Journal
Dr
Trust Acc
Cr
Issue Shares to Applicants
Shares issued partly paid on
application with the balance
payable on allotment
General Journal
Dr
Trust
Account
Application
Cr
Record receipt of application
monies
Shares issued partly paid on
application with the balance
payable on allotment
General Journal
Application Dr
Share capital
Cr
Allot shares to applicants
Shares issued partly paid on
application with the balance
payable on allotment
Bank
General Journal
Dr
Trust Acc
Cr
Transfer trust account money
Shares issued partly paid on
application with the balance
payable on allotment
General Journal
Allotment
Dr
Share capital
Cr
Shares issued partly paid on
application with the balance
payable on allotment
Bank
General Journal
Dr
Allotment
Cr
Shares issued payable on
application and allotment and
subject to future calls
General Journal
Trust Account Dr
Application
Cr
Record receipt of application
monies
Shares issued payable on
application and allotment and
subject to future calls
General Journal
Application
Dr
Share capital
Cr
Allot shares to applicant
Shares issued payable on
application and allotment and
subject to future calls
Bank
General Journal
Dr
Trust Account
Cr
Transfer trust account monies
Shares issued payable on
application and allotment and
subject to future calls
General Journal
Allotment
Dr
Share capital
Cr
Record amount owing on
allotment
Shares issued payable on
application and allotment and
subject to future calls
Bank
General Journal
Dr
Allotment
Cr
Record receipt of allotment
monies
Shares issued payable on
application and allotment and
subject to future calls
Call
General Journal
Dr
Share capital
Cr
Record amount owing by
shareholders for the call
Shares issued payable on
application and allotment and
subject to future calls
Bank
Call
General Journal
Dr
Cr
Record amount received in
respect of the call
Calls in arrears
Call
on shares is made
Co may not receive all call monies owed
Call account remains in a debit balance
New account – Call in arrears and the above is transferred
to this account
Call in arrears = Shareholder equity account = reduction in
share capital
Co constitution may call for shareholders with calls in
arrears to forfeit their shares and the share reissued
Retention of excess application
monies
Prospectus
issued calls for monies to be paid on
application, allotment and future calls
Some applicants may forward all monies in the hope that
they receive preferential treatment.
Co may choose to keep this money and allocate it against
money owing on allotment and future calls
Directors can only make this decision if allowed by Co
constitution
Retention of excess application
monies
Amt received from
applications allocated
to
Calls in
Advance
Shares
applied
for
Paid
to $
Amt
received
$
Shares
Allotted
Application
of $
Allotment
of $
Call 1
$
Call 2
$
Application
refund $
Accounting for retention of
excess application money
General Journal
Trust Account Dr
Application
Cr
Record the receipt of application
money
Accounting for retention of
excess application money
General Journal
Application
Dr
Share Capital
Cr
Allot shares to applicants
Accounting for retention of
excess application money
General Journal
Allotment
Dr
Share Capital
Cr
Issue shares on allotment
Accounting for retention of
excess application money
General Journal
Application
Dr
Trust Account
Cr
Refund application money
Accounting for retention of
excess application money
Bank
General Journal
Dr
Trust Account
Cr
Transfer trust account money
Accounting for retention of
excess application money
General Journal
Application
Dr
Allotment
Cr
Application money retained
against allotment
Accounting for retention of
excess application money
General Journal
Application
Dr
Calls in
Cr
Advance
Excess application money
applied to future calls
Accounting for retention of
excess application money
Call
General Journal
Dr
Share Capital
First Call
Cr
Accounting for retention of
excess application money
General Journal
Cash in
Dr
advance
Calls
Cr
Records calls in advance against
call
Accounting for retention of
excess application money
Bank
Calls
General Journal
Dr
Cr
Call money owing is received
Costs associated with share issue








Preparation of prospectus
Lodgment with ASIC
Publication
Receipt of money
Issue of shares
Including stamp duty and taxes, professional advisers’
fees, underwriting costs, commissions and brokerage
fees
The above “equity issue costs” must be recognized in
equity
Indirect costs are not included as transaction costs.
Costs associated with share issue
General Journal
Transaction
Dr
costs
Bank
Cr
Recording of transaction costs as
per AASB 1015
Bookbuilding

Occurs where an investment banker solicits
bids from institutional investors prior to
pricing an equity issue
Stapled securities

Stapling is an arrangement under which
different securities are quoted jointly
Issuing Debentures











Issuing of debt
Attracts interest
Must be repaid in a specified time frame
Borrower
Lender = principal
Interest = Charge (Fixed or Floating)
Maturity date
Redemption
Issued via prospectus to the general public and also privately to
elite few
Must appoint a trustee
Clear disclosure of all matters relating to the debentures
Mortgage Debenture




Secured by a first mortgage over land and/or buildings
Cannot exceed >60% of the value of asset
Limits rights to resell/transfer asset
Trustee can take possession and sell to repay debenture
holders
Unsecured Note


Debt which is not secured by any charge over assets
Higher risk = higher rate of interest
Convertible Note

Allows debenture holder to convert debt to paid up
share capital or cash upon maturity
Contrast Funds from equity and
debt
Shares
Debt
Ownership entitlement
No Ownership entitlement
Voting rights
No Voting rights
Dilute ownership
Do not share profits
Payment of Dividend is at discretion of
Directors
Fixed regular income
Does not have to be repaid
Must be repaid
No restriction on amount of share issue
Specific debt/equity ratio
Dividends = Profit
Interest = Expense
Accounting entries for the issue
and redemption of debentures
General Journal
Trust Account- Dr
Debentures
Application Debentures
Cr
Accounting entries for the issue
of debentures
General Journal
Application - Dr
Debentures
Debentures
Cr
Trust Acc Cr
Debentures
Allot debentures and refund
excess application monies
Accounting entries for the issue
of debentures
Bank
General Journal
Dr
Trust Acc Cr
Debentures
Transfer of trust monies
Making annual interest
payments on debentures
General Journal
Interest
Dr
Bank
Payment of interest
Cr
Making annual interest
payments on debentures
General Journal
Interest on
Dr
debentures
Accrued
Cr
expense
Interest incurred but not due for
payment on annual balance date
Making annual interest
payments on debentures
General Journal
Accrued
Dr
expense
Interest on
Cr
debentures
Reversal entry
Accounting entries for the
redemption of debentures
General Journal
Interest Dr
Debentures
Bank
Cr
Final interest payment
Accounting entries for the
redemption of debentures
General Journal
Debentures
Dr
Bank
Cr
Payment of debenture holders on
redemption
Accounting entries for the
redemption prior to maturity
at a discount
General Journal
Debentures
Dr
Discount on
debenture redemption
Cr
Bank
Cr
Payment of debenture holders on
redemption at discount
Alternate accounts for debt
issues
Debenture Mortgage Unsecured
Debenture Note
Applications
Applications
Applications
Debentures
Mortgage
Debentures
Unsecured
Notes
Interest
Interest
Interest
Premium
Premium
Premium
Discount
Discount
Discount