1. FINANCIAL ACCOUNTING II PBAC 301BY
RICHARD AMANKWA FOSU

2. Lecture 1
ACCOUNTING FOR SHARES AND DEBENTURES

3. 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.

4. 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

5. 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.

6. 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

7. 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.

8. 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.

9. 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

10. 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.

11. 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,”

12. 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.

13. 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.

14. 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.

15. Accounting Entries – Installment Basis
Transaction
Account to Debit
Account to Credit
Application monies received
Bank
Application
Unsuccessful (excess) Applications rejected
Excess application monies occurred
Allotment
Application completed & allotment made
Stated capital
Allotment Monies received
Allotment completed
State capital
First and Subsequent calls monies received
1st,2nd etc call
Calls end
1st etc calls
Share declared forfeited upon default
No entry
Treasury share re-issued
Share deals

16. 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)

17. 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.

18. 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.

19. 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

20. 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)

21. 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

22. 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

23. 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.

24. 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.

25. 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.

26. 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

27. 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

28. 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

29. Redemption of Debenture
Redeemable debentures are redeemed in accordance with the trust deed.
Redeemed debentures may be cancelled or re-issued.
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.

30. 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.

31. 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 re-invested 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.

32. 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.

33. 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
Discount resulted from redemption
Discount/P&L
Payment effected for the redemption
Bank
Balance on redemption reserve
Capital surplus

34. Redemption of debenture (contd)
Example
Tanye Ltd issued GHS400,000 20% Redeemable Debentures in Under the terms, the debentures were to be redeemed by equal annual drawing over 10 years starting from 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.

35. Journal entries Dr. Cr 31/12/2002 20% redeemable debenture
Debenture redemption
40,000
31/12/ Income surplus
Debenture redemption reserve
31/12/2002 Debenture redemption (40000 * 0.98)
Discount on redemption
Bank
39,200
800
31/12/ % redeemable debenture
31/12/2003 Income surplus
31/12/2003 Debenture redemption
31/12/2003 Debenture redemption reserve
Capital surplus
400,000

36. 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.

37. 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
Sinking Fund
Realization of investment
SF Investment
Profit on realization of investment SF
Loss on realization of investment
Redemption approved by directors
Redeemable Debenture
Debenture redemption
Premium upon redemption
SF/ premium
Discount upon redemption
SF/discount
Redemption effected
Debenture interest paid every year
Deb. Interest
At year end
P&L
Deb. interest

38. 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.

39. 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.

40. Redemption -Sinking fund
Dr.
Cr.
25/1 SF investment
Bank
800
30/6 Debenture interest
500
15/7 Bank
Sinking fund
200
30/7 Bank
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
3,400
1/8 Debenture redemption
Sinking fund (profit + interest)
633

41. Redemption: sinking fundDr Cr
15/9 Bank
SF investment
Sinking fund
900
100
30/9 SF investment
Bank
1,060
31/12 Bank
150
31/12 Income surplus
sinking fund
800
31/12 Debenture interest
300
31/12 Debenture interest
P&L
Sinking Fund
Capital surplus
833
4,000