AF210

Financial Accounting
Semester 1, 2018

Week 3 Lecture A
Company formation and share capital
 Learning Outcomes
1. Brief outline of company formation

2. Ways of Raising finance

– Debt and Equity

3. Raising finance through equity

– Public offering
– Private Placement

4. Accounting for share issue

– Ordinary shares
– Over subscriptions
– Forfeited shares
 Learning Outcomes

5. Explain What are share splits

6. Explain What are Bonus Shares

7. Explain What are Preference Shares

 Company Formation
• A company is a “corporation”- an artificial person
created by law

• A company is a legal person

• A human being is a natural person

• A company thus has legal rights and obligations in

the same way that a natural person does
 Raising Finance
Journal Entries/Ledger Posting
• DEBT (Basic and ultimate entry)

Dr Cash XXX
Cr Loan XXX

• EQUITY (Basic and ultimate entry)

Dr Cash XXX
Cr Share Capital XXX
Raising finance through equity
 Raising Finance: Public Offering
• To recognise receipt of application monies
Debit Bank trust
Credit Application

• To recognise the issue of shares and to close application

account
Debit Application
Credit Share capital

• To transfer cash from trust account to general operating

bank account
Debit Cash at bank
Credit Bank trust
 Partly paid shares
• A company might issue shares on an instalment basis
• Where shares are partly paid, the paid portion of the shares
is accounted for in the same manner as fully paid shares,
while the balance, the deferred consideration, is of the
nature of a receivable
• Where no future date has been specified for calling up the
unpaid portion, an asset is not recognised until the
company has specified a future date or dates for calling up
the unpaid portion and informs shareholders of these dates
• However, where shares have been issued on an instalment
basis, with an amount to be paid on issue and with further
amounts payable at specified future dates, a receivable
must be recognised
 Partly paid shares (Worked Example)
Yeates Ltd commenced operations on 1 July 2019
by issuing 15 million ordinary shares by way of a
direct private placement and at an issue price of
$1.50 per share.

Shareholders were required to pay:

• $1.00 on application
• with a further $0.35 payable on 1
September 2019
• and a further $0.15 payable on 1 December
2019.
 Worked Example—Issue of partly paid shares
1 July 2019
Dr Cash 15 000 000
Cr Share capital 15 000 000 (15,000,000x$1.00)

1 July 2019
Dr First call 5250 000 (15,000,000 x $0.35)
Dr Second call 2 250 000 (15,000,000 x $0.15)
Cr Share capital 7 500 000
1 September 2019
Dr Cash 5 250 000
Cr First call 5 250 000
1 December 2019
Dr Cash 2 250 000
Cr Second call 2 250 000
 Oversubscription of shares
• When more shares are applied for than the number to be
issued—quite common

• Two approaches to manage oversubscription:

1. Satisfy full demand of a certain number of subscribers
and refund the funds advanced by others
2. Issue shares to all subscribers on a pro rata basis
– Excess monies on application can either be refunded
or used to reduce further monies owing on allotment

• Refer to Worked Example Oversubscription for shares issued

as partly paid
 Worked Example—Oversubscription for shares issued
as partly paid
In July 2019, Fortec Ltd calls for public subscriptions for
10 million shares.

The issue price per share is $1.20, to be paid in three

parts, these being
• $0.50 on application,
• $0.40 within one month of the shares being allotted
and
• $0.30 within two months of the first and final call,
with the call for final payment being payable on 1
September 2019.
 Worked Example—Oversubscription for
shares issued as partly paid

• By the end of July, when applications close,

applications have been received for 12 million
shares; that is, two million in excess of the
amount to be allotted.
 Worked Example—Oversubscription for shares
issued as partly paid
We will assume that the excess funds are used to
offset the amount due on allotment ($0.40 per
share), and that all subscribers will receive an
allotment of shares on a pro rata basis.
1–31 July 2019

Dr Bank trust 6 000 000

Cr Application 6 000 000
(12,000,000 x $0.50)
Worked Example—Oversubscription for shares issued as partly paid
(cont.)

1 August 2019
Dr Application 5 000 000
Cr Share capital 5 000 000
(10,000,000 x $0.50)

Dr Allotment 4 000 000 (10,000,000 x $0.40)

Dr Call 3 000 000 (10,000,000 x $0.30)
Cr Share capital 7 000 000

Dr Application 1 000 000 (6,000,000 – 5,000,000)

Cr Allotment 1 000 000

Dr Cash at bank 6 000 000

Cr Bank trust 6 000 000
Worked Example Oversubscription for shares issued as partly paid
(cont.)

30 August 2019
Dr Cash at bank 3 000 000
Cr Allotment 3 000 000
(4,000,000 – 1,000,000)
(to recognise the receipt of amounts due on allotment)

It is assumed that all amounts due on allotment are paid.

1 September 2019
Dr Cash at bank 3 000 000
Cr Call 3 000 000
 Forfeited shares
• Shares can be forfeited if:
– shares are issued as partly paid and shareholders
do not subsequently pay the amounts due on
allotment or on calls
– a shareholder ceases to be a member of the
company at that time
• Shareholders who have forfeited shares might be
entitled to a full or partial refund of monies paid
before forfeiture
 Forfeited shares (cont.)

• Various outcomes
– If company is listed on the ASX or if company’s
operating rules allow it, a refund is paid to the
investor less costs incurred in reissuing shares

• Amounts paid are recorded in a forfeited

shares account (liability) until refunded
 Forfeited shares (cont.)
 To record the call
Debit Call
Credit Share capital

 To record receipt of call monies

Debit Cash at bank
Credit Call
 Forfeited shares (cont.)
 To record forfeiture of shares
Debit Share capital
Credit Call
Credit Forfeited shares account

 To recognise amount received on sale of forfeited

shares
Debit Cash at bank
Debit Forfeited shares account
Credit Share capital
 Forfeited shares (cont.)
 To recognise payment of costs relating to sale of
shares
Debit Forfeited shares account
Credit Cash at bank

 To recognise return of remaining monies to

original shareholders
Debit Forfeited shares account
Credit Cash at bank
 Forfeited shares- Basic
• You are to:
– Reverse the share-capital recorded
– Reverse the call not collected
– Recognize a liability account to record amount of
owed as forfeited shares
– Reduce the liability account by cost of reissuing
shares
– Reduce the liability account with the discount on
reissued shares
– Refund forfeited shares
 Example: Forfeited Shares
• X Ltd issued 100 shares @ $10
– $5 at application/allotment,
– $5 at a date determined later
• 1st July
– Received application in full and also allotted in full
– Called remaining $5 to be paid by 30 July
• 30 July
– Only 80 shares paid
• 15 August
– Board decided to forfeit the unpaid called shares and to reissue the
shares at $9
– Reissuing cost was $5
• 30 August
– All money for reissued shares was received
– Refunded forfeited shares
 Solution
Date Dr Cr
July
1 Bank Trust (100 x $5) $500
Application $500

Application (100 x $5)

$500
Share Capital $500

Bank $500
Bank Trust $500

Call (100 x $5) $500

Share Capital $500
 Solution cont’d
30 Bank $400
Call (80 x $5) $400

August
15 Share Capital (20 x 10) $ 200.00
Call (20 x $5) $ 100.00
Forfeited share liability (20 x $5) $ 100.00

Forfeited share liability $5

Cash (Reissue cost) $5

30 Cash (20 x $9) $180

Forfeited Share liability (20 x $1) $20
Share Capital $ 200.00

Forfeited Share liability $ 75.00

Cash (100-5-20) $ 75.00
 Share splits and bonus issues
• Share splits
– Subdivision of the company’s shares into shares of
smaller value
– Result in no change to owners’ equity
– Companies may undertake share splits because
they feel that lower priced shares will be more
marketable
– No journal entries required
– Company must amend share register
 Share splits and bonus issues (cont.)
• Bonus shares
– Existing shareholders receive additional shares, at no cost, in
proportion to their shareholding at the date of the bonus issue
– Journal entry
Debit Retained earnings
Credit Share capital—ordinary shares

– Bonus shares from retained earnings often referred to as a

bonus share dividend
 Preference Shares
– Subject to preferential treatment, often with receipt
of dividends or order of ranking for asset
distributions
– Some have voting rights
– Some have voting rights if dividends unpaid
– Others have no voting rights
– Convertible, have the right of conversion to ordinary
shares
– Redeemable, have a right of conversion