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Accounting for issue of shares and debentures

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Presentation on theme: "Accounting for issue of shares and debentures"— Presentation transcript:

1 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

2 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

3 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

4 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 Amt called/uncalled 0.50 1.50 Total $50,000 $150,000

5 Ordinary Shares Preference Shares Deferred or founder Shares
Classes of Shares Ordinary Shares Preference Shares Deferred or founder Shares

6 Basic type Full voting rights Right to receive dividends
Ordinary Shares Basic type Full voting rights Right to receive dividends

7 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

8 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

9 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

10 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.

11 Share capital issued upon the registration of a company
Subscribers Dr Share Capital Cr Issue shares to Subscribers Bank Subscriber Receipt upon Payment

12 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

13 Shares issued 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

14 Shares issued fully paid on application Journal Entry
General Journal Trust Account Dr Application Cr Record the receipt of monies from applicants

15 Shares issued fully paid on application Journal Entry
General Journal Application Dr Share Capital Cr Allot shares to Applicants

16 Shares issued fully paid on application Journal Entry
General Journal Bank Dr Trust Account Cr Issuing of Shares to Applicants

17 Under subscribed and oversubscribed share issue Jnl Entry
General Journal Trust Acc Dr Application Cr Applicants deposits

18 Under subscribed and oversubscribed share issue Jnl Entry Cont.
General Journal Application Dr Share Capital Cr Allot shares to Applicants

19 Under subscribed and oversubscribed share issue Jnl Entry Cont.
General Journal Application Dr Trust Acc Cr Refund Applicants deposits

20 Under subscribed and oversubscribed share issue Jnl Entry Cont.
General Journal Bank Dr Trust Acc Cr Issue Shares to Applicants

21 Shares issued partly paid on application with the balance payable on allotment
General Journal Trust Account Dr Application Cr Record receipt of application monies

22 Shares issued partly paid on application with the balance payable on allotment
General Journal Application Dr Share capital Cr Allot shares to applicants

23 Shares issued partly paid on application with the balance payable on allotment
General Journal Bank Dr Trust Acc Cr Transfer trust account money

24 Shares issued partly paid on application with the balance payable on allotment
General Journal Allotment Dr Share capital Cr

25 Shares issued partly paid on application with the balance payable on allotment
General Journal Bank Dr Allotment Cr

26 Shares issued payable on application and allotment and subject to future calls
General Journal Trust Account Dr Application Cr Record receipt of application monies

27 Shares issued payable on application and allotment and subject to future calls
General Journal Application Dr Share capital Cr Allot shares to applicant

28 Shares issued payable on application and allotment and subject to future calls
General Journal Bank Dr Trust Account Cr Transfer trust account monies

29 Shares issued payable on application and allotment and subject to future calls
General Journal Allotment Dr Share capital Cr Record amount owing on allotment

30 Shares issued payable on application and allotment and subject to future calls
General Journal Bank Dr Allotment Cr Record receipt of allotment monies

31 Shares issued payable on application and allotment and subject to future calls
General Journal Call Dr Share capital Cr Record amount owing by shareholders for the call

32 Shares issued payable on application and allotment and subject to future calls
General Journal Bank Dr Call Cr Record amount received in respect of the call

33 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

34 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

35 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 $

36 Accounting for retention of excess application money
General Journal Trust Account Dr Application Cr Record the receipt of application money

37 Accounting for retention of excess application money
General Journal Application Dr Share Capital Cr Allot shares to applicants

38 Accounting for retention of excess application money
General Journal Allotment Dr Share Capital Cr Issue shares on allotment

39 Accounting for retention of excess application money
General Journal Application Dr Trust Account Cr Refund application money

40 Accounting for retention of excess application money
General Journal Bank Dr Trust Account Cr Transfer trust account money

41 Accounting for retention of excess application money
General Journal Application Dr Allotment Cr Application money retained against allotment

42 Accounting for retention of excess application money
General Journal Application Dr Calls in Advance Cr Excess application money applied to future calls

43 Accounting for retention of excess application money
General Journal Call Dr Share Capital Cr First Call

44 Accounting for retention of excess application money
General Journal Cash in advance Dr Calls Cr Records calls in advance against call

45 Accounting for retention of excess application money
General Journal Bank Dr Calls Cr Call money owing is received

46 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.

47 Costs associated with share issue
General Journal Transaction costs Dr Bank Cr Recording of transaction costs as per AASB 1015

48 Bookbuilding Occurs where an investment banker solicits bids from institutional investors prior to pricing an equity issue

49 Stapled securities Stapling is an arrangement under which different securities are quoted jointly

50 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

51 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

52 Unsecured Note Debt which is not secured by any charge over assets
Higher risk = higher rate of interest

53 Convertible Note Allows debenture holder to convert debt to paid up share capital or cash upon maturity

54 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

55 Accounting entries for the issue and redemption of debentures
General Journal Trust Account- Debentures Dr Application - Debentures Cr

56 Accounting entries for the issue of debentures
General Journal Application - Debentures Dr Debentures Cr Trust Acc - Debentures Allot debentures and refund excess application monies

57 Accounting entries for the issue of debentures
General Journal Bank Dr Trust Acc - Debentures Cr Transfer of trust monies

58 Making annual interest payments on debentures
General Journal Interest Dr Bank Cr Payment of interest

59 Making annual interest payments on debentures
General Journal Interest on debentures Dr Accrued expense Cr Interest incurred but not due for payment on annual balance date

60 Making annual interest payments on debentures
General Journal Accrued expense Dr Interest on debentures Cr Reversal entry

61 Accounting entries for the redemption of debentures
General Journal Interest - Debentures Dr Bank Cr Final interest payment

62 Accounting entries for the redemption of debentures
General Journal Debentures Dr Bank Cr Payment of debenture holders on redemption

63 Accounting entries for the redemption prior to maturity at a discount
General Journal Debentures Dr Discount on debenture redemption Cr Bank Payment of debenture holders on redemption at discount

64 Alternate accounts for debt issues
Debenture Mortgage Debenture Unsecured Note Applications Debentures Mortgage Debentures Unsecured Notes Interest Premium Discount

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