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Introduction to Company Accounts and Issue of Shares and Debentures

Introduction to Company Accounts and Issue of Shares and Debentures. Companies. Unlimited Companies. Limited Companies. Authorized Capital. Share Capital. Other Funding. Issued Capital. Preference Share. Ordinary Share. Debenture. Reserves. Issue of shares and debenture.

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Introduction to Company Accounts and Issue of Shares and Debentures

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  1. Introduction to Company Accounts and Issue of Shares and Debentures P. Chinna Sahaya Rani

  2. Companies Unlimited Companies Limited Companies Authorized Capital Share Capital Other Funding Issued Capital Preference Share Ordinary Share Debenture Reserves Issue of shares and debenture Called up Capital Revenue Reserve Capital Reserve Paid Up Capital Price: - at par - at premium - at discount Payment: - Payable in full - by instalments P. Chinna Sahaya Rani

  3. Introduction • A limited liability company is a legal entity and the existence of the limited liability companies • The owners of a limited liability company will be named as “members” or “shareholders” of the company • Each company is governed by two documents, known as the Memorandum of Association and the Articles of Association P. Chinna Sahaya Rani

  4. Types of Limited liability companies • Unlimited Company - Companies do not have limited liability. B. Limited Company - The liability of a company can be limited by shares. • A limited company has a separate legal personality. • This means that it can sue or enter into contracts in its • own name. P. Chinna Sahaya Rani

  5. Types of Limited Liability Companies There are two types of limited liability companies as follows: (I) Public Limited Company (II) Private Limited Company Descriptions Public Limited Company Private Limited Company Share Transfer No restriction Restriction Number of Shareholders No restriction Restriction (2 to unlimited) (2 to 50) Raising fund from Public No restriction Restriction Shares can be traded on Yes No Stock Exchange or not P. Chinna Sahaya Rani

  6. Distinction between Partnerships and Limited Liability Companies Description Partnerships Limited Companies Number of Members 2 to 20 (except in certain professional 2 to Unlimited (except private limited business) companies up to 50) Liabilities of Members Unlimited liability of each partner Limited liability of each shareholder (except Limited Partners) to their agreed amounts of contributions on their shares held Amount of Capital Stated in the Partnership Agreement Restricted to the amount of Authorized and subject to each partner’s Capital financial resources Management of the Partners are entitled to take part in Directors are appointed on behalf of Business the operations of the business shareholders to manage the business Distribution of Profits and losses are shared to By way of dividend, profits are shared Profit each partner in their agreed profit to shareholders in respect of their and loss sharing ratio shares held Part of the profits may be unappropriated and retained by the company for future business purposes P. Chinna Sahaya Rani

  7. Classification of Capital Authorized Capital Authorized Capital is the total number of shares and the total amount of Share Capital which a limited liability company is allowed to issue and it is stated in the Memorandum of Association. Authorized Capital may be changed and increased to cope with the growth of the company by the approvals of the shareholder Issued Capital Issued Capital is the part of the Authorized Capital actually issued to the shareholders. Called-Up Capital Called-Up Capital is the amount of the Issued Capital that the limited liability companies request their shareholders to pay. Paid-up Capital Paid-up capital is the actual amount received from the Called-Up Capital. The amounts of the Called-Up Capital which has not yet been received will be named as “Calls in Arrears”. Calls in Advance”refers to the advance payment of the Un-called Capital from the shareholders. P. Chinna Sahaya Rani

  8. Types of Share Capital A. Preference Shares Preference shareholders are entitled to fixed % of dividends before any ordinary dividends are paid. No voting rights. I) Cumulative preference shares Any unpaid dividends on cumulative preference shares can be carried forward to a later year. II) Non-cumulative preference shares the unpaid dividends cannot be carried forward to later years. B. Ordinary Shares - The dividends of ordinary shares are not fixed. They depend on the return of the company. - Ordinary shareholders are paid only after all other claims have been met. - Ordinary shareholders usually have voting rights. P. Chinna Sahaya Rani

  9. Example: Cumulative preference shares Year 1 Year 2 Year 3 $ $ $ Net Profit / (Loss) for the year before appropriations (1,000) (2,000) 50,000 5,000 10% Cumulative Preference Shares of $1 each Dividend Nil Nil 1,500 P. Chinna Sahaya Rani

  10. Example: Non-cumulative preference shares Year 1 Year 2 Year 3 $ $ $ Net Profit / (Loss) for the year before appropriations (1,000) (2,000) 50,000 5,000 10% Cumulative Preference Shares of $1 each Dividend Nil Nil 500 P. Chinna Sahaya Rani

  11. Ordinary Shares • The dividends of ordinary shares are not fixed. They depend on • the return of the company. • Ordinary shareholders are paid only after all other claims (e.g, • loan interest and preference share dividends ) have been met. • - Ordinary shareholders usually have voting rights P. Chinna Sahaya Rani

  12. Other Means of Funding A. Debentures Debentures are long-term loans evidenced by deeds which set out the rate of interest payable and the date of redemption. B. Reserves - Reserves are profits or gains which accrue to ordinary shareholders. - They are undistributed profits which have been retained within the company. - There are two types of reserves, revenue reserves and capital reserves. I) Revenue reserves - They are undistributed trading profits. - They can be used to pay dividends. - Examples are the balance on the profit and loss account and general reserve. II) Capital reserves - They are gains or profits arising from non-trading or non-operating activities. - They are not available for distribution as dividends. P. Chinna Sahaya Rani

  13. - e.g. 1. Share premium a) to write off preliminary expenses b) to write off expenses of issuing shares c) to write off commissions paid and discounts on shares d) to pay up a bonus issue e) to provide premium on redemption of debentures. 2. Revaluation reserve This is the unrealized gain from an increase in the value of an asset after revaluation. 3. Capital redemption reserve and debenture redemption reserve This arises as a result of a company redeeming its shares or debentures by using its retained profits. P. Chinna Sahaya Rani

  14. Distinction between Shares and Debentures Description Ordinary Shares Preference Shares Debentures Relationship between the Members/Shareholders Member/Shareholders Creditors of the holders and the company of the company of the company company Dividends/Interest No fixed percentage A fixed rate of dividends A fixed rate of or amounts of dividends interest will paid The dividends will be whether or not the subjected to the company makes a profitability and profit dividends policy of the company Priority of Distribution After the distribution Before to Ordinary Before any dividend of the dividends to Shareholders distributable to Preference Shareholders Ordinary and Preference Shareholders Treatment in Balance Ordinary Share Capital Preference Share Treated as a long term Sheet Capital liability if the period of repayment is longer than one year Treated as a current liab. If repayment < 1 yr. P. Chinna Sahaya Rani

  15. Raising of Capital-Issue of shares and debentures • Issue Price • Issue at Par • The issue price is same as the “PAR”, “NOMINAL” or “FACE” value of the shares • and debentures. • Issue at a Premium • The issue price may be HIGHER than the par value of the shares and debentures. • The difference between the issue price and the par value of the shares or debentures • is named as “SHARE PREMIUM” • Issue at a Discount • The issue price may be LOWER than the par value of the shares and debentures. • The difference between the issue price and the part value of the shares or debentures • is named as “SHARE DISCOUNT’ P. Chinna Sahaya Rani

  16. Methods of Payment • Payment in Full • Payable by instalments P. Chinna Sahaya Rani

  17. Payment in full The full amount of the issue price of the shares and debentures should be paid to the company on application whether or not the applicants will allot the shares and debentures. P. Chinna Sahaya Rani

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  20. Payable by instalments The full amount of the issue price of the shares and debentures will be paid to the company by instalments in following steps: Step 1 Receipt of application money Step 2 Return of application money to unsuccessful applicants Step 3 Allotment of shares Step 4 Receipt of allotment money Step 5 Call on shares Step 6 Receipt of call money These steps are demonstrated in the following example: P. Chinna Sahaya Rani

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  25. Example 1 P. Chinna Sahaya Rani

  26. Example 1 • Tai Fat Limited made a public offering of its 1,700,000 ordinary shares of $1 • each at $1.4 per share. The shares were issued on the following terms: • Per share • $ • Application 0.3 • Allotment 0.6 • First and final call 0.5 • On 1 February 1997, applications for 3,000,000 shares were received. • Applications for 300,000 shares were unsuccessful and the money involved was • returned on 3 February 1997. • Applications for 700,000 shares were given full allotment. • The remainder of the available shares were allotted among the other applicants on a pro-rata basis. • The balance of the sums received on application was applied to the amounts due on allotment. • The balances due on allotment were received on 1 March 1997. • On 1 April 1997, the first and final call was made and paid in full. $1.4 P. Chinna Sahaya Rani

  27. Bank Application and Allotment 900,000 Application and Allotment 90,000 Application and Allotment 720,000 First and Final Call 850,000 Application and Allotment Bank 90,000 (300,000*$0.3) Bank 900,000 (3,000,000*$0.3) Ordinary Shares 850,000 (1,700,000*$0.5) Bank 720,000 (1,700,000*$0.6-1,000,000*$0.3) Share Premium 680,000 (1,700,000*$0.4) 1,620,000 1,620,000 Ordinary Shares Balance c/f 1,700,000 Application and Allotment 850,000 First and Final Call 850,000 1,700,000 1,700,000 Share Premium Balance c/f 680,000 Application and Allotment 680,000 First and Final Call Ordinary Shares 850,000 Bank 850,000 P. Chinna Sahaya Rani

  28. Journal Dr Cr $ $ 1. Bank (3,000,000 X $0.30) 900,000 Application and Allotment 900,000 Being money received for 3,000,000 shares on application 2. Application and Allotment 90,000 Bank (300,000 X $0.3) 90,000 Being return of application money to unsuccessful applicants for 300,000 shares 3. Application and Allotment ($0.9 X 1,700,000) 1,530,000 Ordinary Shares ($0.5 X 1,700,000) 850,000 Share Premium ($0.4 X 1,700,000) 680,000 Being allotment of 1,700,000 ordinary shares 4. Bank (1,700,000 X $0.60 - 1,000,000 X $0.30) 720,000 Application and Allotment 720,000 Being receipt of the amount due on allotment P. Chinna Sahaya Rani

  29. Journal Dr Cr $ $ 5. First and Final Call 850,000 Ordinary Shares (1,700,000 X $0.5) 850,000 Being call on shares 6. Bank 850,000 First and Final Call 850,000 P. Chinna Sahaya Rani

  30. Forfeiture and Reissue of Shares • If a member fails to pay the calls requested from him, the directors may declare the shares as the ‘ Forfeited Shares’ and reissue the shares to another shareholder P. Chinna Sahaya Rani

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  34. Example 2 P. Chinna Sahaya Rani

  35. Example 2 Tai Cheong Limited made a public offering of its 1,000,000 ordinary shares of $1 each at $1.5 per shares The shares were issued on the following terms: Per share $ Application 0.6 Allotment on 1 April 1997 0.2 First call on 1 June 1997 0.5 Final call on 1 September 1997 0.2 On 1 March 1997, applications for 1,000,000 shares were received. They were given full allotment. All sums due on received on 10 April 1997. All money for the first call was received on 10 June, except for one shareholder who had been allotted 1,000 shares. $1.5 P. Chinna Sahaya Rani

  36. Case 1 All money for the final call was received on 15 September 1997, except for the shareholder who failed to pay the first call. The directors had not declared the shares forfeit by 31 December 1997. Case 2 All money for the final call was received on 15 September 1997. Except for the shareholder who failed to pay the first call. The directors declared the shares forfeit on 1 October 1997. Case 3 The directors declared the shares forfeit on 1 July 1997. On 1 August 1997, 600 shares were reissued for $0.9 each, subject to a final call. On 1 September 1997, the directors made the final call and all sums due were received. P. Chinna Sahaya Rani

  37. Case 1 P. Chinna Sahaya Rani

  38. Case 1 Application and Allotment Mar 1 Bank (1,000,000 X $0.60) 600,000 Apr 1 Ordinary Shares 300,000 (1,000,000*$0.3) Apr 10 Bank (1,000,000 X $0.20) 200,000 Apr 1Shares Premium 500,000 (1,000,000*$0.5) 800,000 800,000 Ordinary Shares Apr 1 Application and Allotment 300,000 Share Premium Dec 31 Balance c/f 500,000 Apr 1 Application and Allotment 500,000 Bank Mar 1 Application 600000 Apr 15 Allotment 200000 P. Chinna Sahaya Rani

  39. First Call June 1 Ordinary Shares 500,000 June 10 Bank (1,000,000 - 1,000) x $0.5 499,500 June 10 Calls in Arrears 500 500,000 500,000 Final Call Sep 1 Ordinary Shares 200,000 Sep 15 Bank (1,000,000 - 1,000) X $0.2 199,800 Sep 15 Calls in Arrears 200 200,000 200,000 Calls in Arrears June 10 First Call 500 Dec 31 700 Sep 15 Final Call 200 700 700 Bank Mar 1 Application 600000 Apr 15 Allotment 200000 June 1 First call 499500 Final call 199800 P. Chinna Sahaya Rani

  40. Ordinary Shares Apr 1 Application and Allotment 300,000 June First call 500000 Sept 1 Final call 200000 Balance Sheet as at 31 December 1997 (Extract) $ Current Assets Called-up Capital not yet paid Share Capital Issued and Fully Paid 1,000,000 Ordinary Shares of $1 each Reserves Share Premium 700 1000000 500000 P. Chinna Sahaya Rani

  41. Case 2 P. Chinna Sahaya Rani

  42. Case 2 Ordinary Shares Apr 1 Application and Allotment 300,000 Oct 1 Forfeited shares (1000*$1) 1000 June First call 500000 Dec 31 Bal c/d 999000 Sept 1 Final call 200000 1000000 1000000 Calls in Arrears June 10 First Call 500 Oct 1 Forfeited shares 700 Sep 15 Final Call 200 700 700 Forfeited shares Oct 1 Call in Arrears 700 Oct 1 Ordinary shares (1000*$1) 1000 Dec 31 Bal c/f 300 1000 1000 P. Chinna Sahaya Rani

  43. Balance Sheet as at 31 December 1997 (Extract) Share Capital Issued and Fully Paid 999,000 Ordinary Shares of $1 each Reserves Share Premium Forfeited Shares 999000 500000 300 P. Chinna Sahaya Rani

  44. Case 3 P. Chinna Sahaya Rani

  45. Case 3 Ordinary Shares July 1 Forfeited Shares 800 (1,000 x $0.80) Apr 1 Application and Allotment 300,000 June 1 First Call 500,000 Dec 31 Balance c/f 999,600 Aug 1 Forfeited Shares (600 x $0.80) 480 Sept 1 Final Call (999,600 X $0.2) 199,920 1,000,400 1,000,400 Reissue Share Premium Apr 1 Application and Allotment 500,000 Dec 31 Balance c/f 500,240 Aug 1 Forfeited Shares 240 500,240 500,240 Calls in Arrears June 10 First Call 500 July 1 Forfeited Shares (1000*$0.5) 500 Forfeited shares July 1 Calls in arrears 500 July 1 Ordinary shares (1000*$0.8) 800 Aug 1 Ordinary shares (600*$0.8) 480 Aug 1 Bank (600*$0.9) 540 Aug 1 Share premium 240 Dec 31 Bal c/d 120 1340 1340 P. Chinna Sahaya Rani

  46. Final call Sept 15 Bank 199920 Sept 1 Ordinary shares 199920 (999600*$0.2) Bank Mar 1 Application 600000 Apr 10 Allotment 200000 June 10First call 499500 Aug 1 Forfeited shares 540 Sept 15 Final call 199920 *Amount transferred to share premium: Receipt from original holder (600*$0.8) 480 Less: Share premium (600*$0.5) 300 180 Add: Receipt from second holder (600*$0.9) 540 720 Less: Called-up nominal value (600*$0.9) 480 240 P. Chinna Sahaya Rani

  47. Balance Sheet as at 31 December 1997 (Extract) Share Capital Issued and Fully Paid 999,000 Ordinary Shares of $1 each Reserves Share Premium Forfeited Shares 999600 500240 120 P. Chinna Sahaya Rani

  48. Right issue • Right issue is an offer to the existing shareholders to subscribe for more shares, in proportion to their existing shareholding, usually at a relatively cheap price. P. Chinna Sahaya Rani

  49. Bonus issue • Bonus shares are issued when there is a build-up of reserves (e.g. undistributed profits) in the company. • Those profit will often not be represented by cash, since the profits have been invested in other assets to expand the business. • It is done by changing the company’s reserves into share capital and allotting shares to existing shareholders por rata, e.g. one share for every two shares held • This decrease the amount of retained earnings and increases the share capital. There is no entry on cash or bank account because mp cash changes hands, the bonus shares are issued free. • Dr. Profit and Loss (retained earnings) account • Cr. Share Capital account (with the nominal value of shares allotted as fully paid bonus shares) P. Chinna Sahaya Rani

  50. Debenture • A debenture is a written acknowledgement of debt. • Debenture are long-term loans which attract a large number of investors. • The terms of debentures such as the rate of interest payable, the date of redemption (if applicable) and security given by the borrowing company are governed by a trust deed P. Chinna Sahaya Rani

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