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Chapter 2: Accounting for Companies

2.1 Accounting for Share Capital

A company is an artificial person created by law, having separate entity with a perpetual succession and a common seal.

Classification of Share Capital

The share capital of a company is classified for accounting purposes as follows:

Authorized Capital Issued Capital Unissued Capital Subscribed Capital Called-up Capital Paid-up Capital

Fig 2.1: Classification of Share Capital

Issue and Forfeiture of Shares

  • Issue at Premium: When shares are issued at a price higher than their face value. The premium is credited to Securities Premium Account.
  • Calls in Arrears: Amount not paid by shareholders on calls.
  • Forfeiture: If a shareholder fails to pay call money, the company can forfeit the shares. \[ \text{Amount Forfeited} = \text{Amount received on shares excluding premium} \]
  • Re-issue: Forfeited shares can be re-issued. The maximum discount allowed on re-issue is the amount forfeited on those shares. \[ \text{Discount on Re-issue} \le \text{Amount Forfeited per Share} \] Any surplus in the Share Forfeiture account after re-issue is transferred to the Capital Reserve.

2.2 Accounting for Debentures

A debenture is a document issued by a company as evidence of a debt, acknowledging a loan.

Issue of Debentures

Debentures can be issued:

  1. At Par: Issue Price = Face Value
  2. At Premium: Issue Price > Face Value
  3. At Discount: Issue Price < Face Value

Debentures as Collateral Security

When a company takes a loan from a bank and issues its own debentures to the bank as an additional or secondary security, it is known as issue of debentures as collateral security.

  • The company will not pay interest on these debentures until it defaults on the principal loan.

Writing off Discount/Loss on Issue of Debentures

Discount or loss on issue of debentures is a capital loss. It must be written off in the year debentures are allotted:

  1. First, from Securities Premium Account (if it exists).
  2. Then, from Statement of Profit and Loss as a Financial Cost.

Competency-Based Questions (CBQs)

Q1. XY Ltd. forfeited 500 equity shares of ₹ 10 each (₹ 8 called up) for non-payment of first call of ₹ 3 per share. Out of these, 300 shares were re-issued for ₹ 7 per share as ₹ 8 paid up. Calculate the amount to be transferred to Capital Reserve. Context: High-level assessment of Forfeiture and Capital Reserve mathematical logic.

Q2. ABC Ltd. was formed with an authorized capital of ₹ 50,00,000 divided into 5,00,000 equity shares of ₹ 10 each. It invited applications for 2,00,000 shares. The amount was payable as ₹ 3 on application, ₹ 4 on allotment, and balance on first and final call. Applications were received for 2,50,000 shares (over-subscription). Pro-rata allotment was made. How much application money will be adjusted towards allotment? Context: Applying calculations for pro-rata over-subscription scenarios.

Q3. PQ Ltd. purchased a machine for ₹ 9,90,000. It paid the purchase consideration by issuing 11% Debentures of ₹ 100 each at a discount of 10%. Calculate the number of debentures issued. Context: Mathematical conversion of consideration into discounted debentures.

Q4. Explain the accounting treatment of “Debentures issued as Collateral Security” without opening a debenture suspense account. Context: Conceptual understanding of collateral security presentation in financial statements.

Q5. A company issued 10,000, 9% Debentures of ₹ 100 each at a discount of 5%, redeemable at a premium of 10% after 5 years. Determine the total Loss on Issue of Debentures and specify how it will be written off. Context: Identifying both discount and premium on redemption as a combined loss and its write-off order.

Answers to CBQs

Ans 1.

  • Called up per share = ₹ 8
  • Unpaid (First Call) = ₹ 3
  • Paid up per share (Amount forfeited) = ₹ 8 - ₹ 3 = ₹ 5
  • Total Forfeited Amount on 500 shares = \( 500 \times 5 = ₹ 2,500 \)
  • Re-issue of 300 shares at ₹ 7 (Paid up ₹ 8): Discount = ₹ 1 per share.
  • Amount forfeited on 300 shares = \( 300 \times 5 = ₹ 1,500 \)
  • Less: Discount on re-issue = \( 300 \times 1 = ₹ 300 \)
  • Transfer to Capital Reserve: \( 1,500 - 300 = ₹ 1,200 \).

Ans 2.

  • Shares Applied = 2,50,000
  • Shares Allotted = 2,00,000
  • Application money received = \( 2,50,000 \times 3 = ₹ 7,50,000 \)
  • Application money required = \( 2,00,000 \times 3 = ₹ 6,00,000 \)
  • Excess application money to be adjusted on allotment = \( 7,50,000 - 6,00,000 = ₹ 1,50,000 \).

Ans 3.

  • Purchase Consideration = ₹ 9,90,000
  • Issue Price per Debenture = ₹ 100 - 10% Discount = ₹ 90
  • Number of Debentures Issued = \( \frac{9,90,000}{90} = 11,000 \text{ debentures} \).

Ans 4. If no journal entry is passed for the issue of debentures as collateral security (Debenture Suspense Account not opened), then in the Balance Sheet of the company, the loan from the bank is shown under “Long-Term Borrowings”. A note is appended below the loan stating that it is secured by the issue of debentures as collateral security.

Ans 5.

  • Total Face Value of Debentures = \( 10,000 \times 100 = ₹ 10,00,000 \)
  • Discount on Issue (5%) = ₹ 50,000
  • Premium on Redemption (10%) = ₹ 1,00,000
  • Total Loss on Issue of Debentures: \( 50,000 + 1,00,000 = ₹ 1,50,000 \). This loss of ₹ 1,50,000 will be written off entirely in the year of allotment. It will first be written off from Securities Premium Account (if any balance exists), and the remaining balance will be written off from the Statement of Profit and Loss (Finance Cost).