Chapter 12 Issue of Shares and Debentures

Name : _________________ Serial No: _____
Chapter 12 Issue of shares and debentures (發行股份及債券)

12.2 Classification of share capital (股份的分類)
12.2.1 Preference shares vs. ordinary shares (優先股與普通股)
Shares are usually called stock. Preference shares (優先股) are known as preferred stock while ordinary shares (普通股) are
known as common stock. Preference shares are seldom issued to the public (甚少會向公眾發行). They are usually sold privately
(私人途徑出售) to financial institutions or other companies. Most of the shares traded on (買賣) the Stock Exchange of Hong
Kong (香港交易所) are ordinary shares (普通股).
Receipt of dividends (收取股息)

A company may distribute some of the profits earned as dividends (股息) to its shareholders. The profits that are not distributed
will be held as reserves (儲備). Preference shareholders (優先股股東) must receive a certain amount (一定金額) of dividends
before (前) ordinary shareholders (普通股股東). Moreover, the dividend amount (股息金額) that preference shareholders are
entitled to (收取) is usually stated as (按) a fixed percentage (固定百分比) of the nominal value (票面值) (par value, face value)
of the preference shares held (所持的優先股). However, the rate of dividend payable to ordinary shareholders may be higher or
lower, depending on the amount of profit made and distributed as dividend during the year.
Example 1
A company has issued 1,000,000 5% preference shares of $1 each and 1,000,000 ordinary shares of $1 each. The dividends paid to
the preference shareholders and ordinary shareholders in the years 2008 to 2010 are shown below:
Year 2008 2009 2010

$ $ $
Profit distributable as dividends 130,000 90,000 50,000
Preference dividends (5%) 50,000 50,000 50,000 ($1,000,000  5%)
Ordinary dividends 80,000 40,000 — (Total dividents  Preference dividens )
The preference shareholders obtain a fixed rate of return and from their investment in the company, while ordinary shareholders
might receive a higher or lower return.
Voting rights (投票權)

Ordinary shares carry voting rights (附有投票權) at shareholders’ general meetings (股東大會) while preference shares do not.
Only ordinary shareholders can exercise controlling power (行使控制權) over the company by voting on important matters (重要
事項) tabled (提交) at shareholders’ general meetings.
Claims to the company’s net assets in liquidation (公司清盤時的淨資產索償權)

When a limited company goes into liquidation (清盤), the preference shareholders have priority (優先權) over the ordinary
shareholders in getting back (取回) the nominal value (面值) of their share capital (股本) after the company has paid off (清還)
all its liabilities (所有債務).
12.2.2 Authorised share capital vs. issued share capital (法定股本與已發行股本)

Limited companies must disclose (註明) both authorized and issued share capital in their annual reports.
Authorised share capital (法定股本)

Authorised share capital (registered share capital) is the maximum amount (上限) of share capital (股份) that a company is
allowed to issue (可發行) and is calculated as follows:
Authorised share capital = Maximum number of shares x nominal value per share (每股面值)
Issued share capital (已發行股本)

Issued share capital is the amount of share capital (股本額) that a company has issued (已發行). The amount cannot exceed (不
能超出) the amount of authorized share capital (法定股本) and is calculated as follows:
The amount of issued share capital = Number of shares issued x Nominal value per share
The number of shares authorized, less (減去) the number issued, is known as unissued shares (未發行股份). When a company
plans to expand (擴充) in future, it can sell the unissued shares. It cannot issue more than (不能發行超出) the unissued number
of shares (未發行股份) unless it applies for an increase (增加) in authorized share capital (法定股本).
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12.3 Issue of shares (發行股份)
Limited companies (有限公司) are allowed to issue shares to raise funds but only the public companies (公眾有限公司) are
allowed to issue shares to the public (可向公眾發行股份).
12.3.1 Procedures for issuing shares (發行股份的程序)

Step 1 The public are invited to subscribe for the shares (邀請公眾認購股份).
Step 2 Applications are received (收集認購申請表格和認購股款).
Step 3 Shares are allotted to applicants (向申請人分配股份).
Step 4 If shares are over-subscribed (超額認購) on application, the excess application monies (多收的款項) will be refunded
(退還) to applicants (申請人).
Shares can be issued in any of the following ways:

1 Issued at par (按面值發行): Shares are issued at (等於) nominal value (面值) (par value).
2 Issued at a premium (溢價發行): Shares are issued at a price higher than (高於) the nominal value.
3 Issued at a discount (折價發行): Shares are issued at a price lower than (低於) the nominal value.
12.3.2 Accounting entries for the issue of shares (發行股份的會計分錄)

1 Shares issued at par (股份按面值發行)
On 1 December 2010, JJ Ltd announced a public offering of 100,000 ordinary shares of $4 each at par. On 10 December 2010,
applications together with application monies were received for exactly 100,000 shares. The shares were allotted to the applicants
two days later.
1 Receipt of application monies:

Dr Bank account $400,000 (100,000 x $4)
Cr Ordinary share applicants account $400,000
2 Allotment of shares to share applicants:

Dr Ordinary share applicants account $400,000
Cr Ordinary share capital account $400,000 (100,000 x $4)
Bank
2010 $ 2011 $
Dec 10 Ordinary share applicants (1) 400,000
Ordinary share Applicants

2010 $ 2010 $
Dec 12 Ordinary share capital (2) 400,000 Dec 10 Bank (1) 400,000
Ordinary share Capital

2010 $
Class work 1
A limited company has an authorized share capital of $100,000, divided into 100,000 ordinary shares of $1 each. On 1 January 2010,
the company announced that all of its share capital would be issued at par, payable in full on application. Applications were
received for exactly 100,000 shares on 15 January 2010. Shares were allotted on 31 January 2010.
Prepare journal entries to record the issue of shares.
Journal
Date Details Dr Cr
2010 $ $
Jan 15 Bank 100,000
Ordinary share applicants 100,000
“ 31 Ordinary share applicants 100,000
Ordinary share capital 100,000
2
2 Over-subscription of shares (股份超額認購)
Suppose on 1 December 2010, applications were received for 150,000 shares. The shares were then said to be over-subscribed (超
額認購). Usually, the shares will be allotted on a pro-rata basis (按比例) in the event of an over-subscription. The excess
application monies were refunded on the date of allotment.

Dr Bank account $600,000 (150,000 x $4)

3 Refund of excess application monies:

Dr Ordinary share applicants account $200,000 (50,000 x $4)
Cr Bank account $200,000
Bank
2010 $ 2011 $
Dec 10 Ordinary share applicants (1) 600,000 Dec 10 Ordinary share applicants – Refund (3) 200,000

2010 $ 2010 $
Dec 12 Ordinary share capital (2) 400,000 Dec 10 Bank (1) 600,000
“ 12 Bank – Refund (3) 200,000
600,000 600,000

2010 $
Class work 2
A limited company had a registered share capital of $120,000 in ordinary shares of $1 each. The company announced on 1 April
2010 that a quarter of its share capital would be issued at par, payable in full on application. Applications were received for 40,000
shares on 10 April 2010. The shares were allotted on 30 April 2010, and the excess application monies were refunded on the same
day. Show the necessary journal and ledger entries to record the issue of shares.
Journal
Date Details Dr Cr
2010 $ $
Apr 10 Bank (40,000 x $1) 40,000
Ordinary share applicants 40,000
Bank – Refund (10,000 x $1) 10,000
Bank
2010 $ 2010 $
Apr 10 Ordinary share applicants 40,000 Apr 30 Ordinary share applicants – Refund 10,000

2010 $ 2010 $
Apr 30 Ordinary share capital 30,000 Apr 10 Bank 40,000
“ 30 Bank – Refund 10,000
40,000 40,000

2010 $ 2010 $
Apr 30 Ordinary share applicants 30,000
3
3 Shares issued at a premium (股份按溢價發行)
On 1 January 2011, KK Ltd announced a public offering of 100,000 ordinary shares of $2 each at a price of $3 per share. On 10
January 2011, applications together with application monies were received for exactly 100,000 shares. The shares were allotted to
the applicants three days later.

Dr Bank account $300,000 (100,000 x 3)

Cr Share premium account $100,000 (100,000 x $1)
Bank
2011 $
Jan 10 Ordinary share applicants (1) 300,000

2011 $ 2011 $
Jan 13 Ordinary share capital (2) 200,000 Jan 10 Bank (1) 300,000
“ 13 Share premium (2) 100,000
300,000 300,000

2011 $
Share Premium
2011 $
1 The Companies Ordinance (公司條例) requires that the share capital account (股本帳戶) be used to record only the nominal
value of share issued (發行股份的面值). The amount of share premium (股份溢價) should be recorded in a separate
account (獨立帳戶).
2 The amount entered in the share premium account (股份溢價帳戶) is the actual number of shares allotted (實際配發股數)
multiplied by the premium per share (每股溢價). The balance of the share premium account (股份溢價帳戶結餘) would be
shown as a reserve (儲備) in the balance sheet at the end of an accounting period.
Class work 3
Cheung King Ltd has an authorized share capital of 200,000 ordinary shares of $1 each, of which 150,000 had been issued and fully
paid. To finance expansion, Cheung King Ltd decided to issue all the remaining authorized ordinary shares at $1.5 each, payable in
full on application. On 10 June 2009, applications for 60,000 ordinary shares were received. The shares were allotted on 20 June
2009, and the excess application monies were refunded on the same day.
Show the necessary ledger accounts to record the issue of shares.
Bank
2009 $ 2009 $
Jun 10 Ordinary share applicants (60,000 x $1.5) 90,000 Jun 20 Ordinary share applicants – Refund 15,000

2009 $ 2009 $
Jun 20 Ordinary share capital (50,000 x $1) 50,000 Jun 10 Bank 90,000
“ 20 Share premium (50,000 x $0.5) 25,000
“ 20 Bank – Refund (10,000 x $1.5) 15,000
90,000 90,000

2009 $ 2009 $
Jun 20 Ordinary share applicants 50,000
Share Premium
2009 $ 2009 $
Jun 20 Ordinary share applicants 25,000
4
4 Under-subscription of shares (股份認購不足)
Suppose on 10 January 2011, applications were received for 80,000 shares. The shares were then said to be under-subscribed (認
購不足).

Dr Bank account $240,000 (80,000 x $3)

Cr Share premium account $80,000 (80,000 x $1)
Bank
2011 $

2011 $ 2011 $
Jan 13 Ordinary share capital (2) 160,000 Jan 10 Bank (1) 240,000
“ 13 Share premium (2) 80,000
240,000 240,000

2011 $
Share Premium
2011 $
5 Share issued at a discount (股份按折價發行)

On 1 February 2011, M&M Ltd announced a public offering of 200,000 ordinary shares of $3 each at a price of $2 per share. On 10
February 2011, applications together with application monies were received for exactly 200,000 shares. The shares were allotted to
the applicants three days later.

Dr Bank account $400,000 (200,000 x 2)

Dr Share discount account $200,000 (200,000 x $1)
Bank
2011 $
Feb 10 Ordinary share applicants (1) 400,000

2011 $ 2011 $
Feb 13 Ordinary share capital (2) 400,000 Feb 10 Bank (1) 400,000
Share Discount
2011 $
Feb 13 Ordinary share capital (2) 200,000

2011 $
Feb 13 Ordinary share applicants (2) 400,000
“ 13 Share Discount (2) 200,000
The issue of shares at a discount rarely occurs (很少發生) because this is prohibited (禁止) in many places. In Hong Kong, a
company is allowed issue shares at a discount only if the issue has already been authorized (已被授權) by a resolution passed (通
過一項決議) at a general meeting (在股東大會上) and sanctioned by the court (法院判決).
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Class work 4
1. Hickson Ltd had an authorized share capital of $1,000,000, divided into 600,000 ordinary shares of $1 each and 400,000 5%
preference shares of $1 each. Half of the ordinary and preferences shares have been issued and fully paid. To finance expansion,
Hickson Ltd decided to issue half of the remaining authorized ordinary shares at $1.2 each and half of the remaining authorized
preference shares at $1.1 each. All monies had to be fully paid on application. On 1 September 2010, applications for 200,000
ordinary shares and 60,000 preference shares were received. Shares were allotted on 15 September 2010, and the excess
application monies were refunded on the same day.
(a) Prepare journal entries to record the above transactions.
(b) Briefly explain the differences between ordinary shares and preference shares from the perspective of the issuing
company.
(a)
Journal
Date Details Dr Cr
2010 $ $
Sept 1 Bank (200,000 x $1.2 + 60,000 x $1.1) 306,000
Ordinary share applicants (200,000 x $1.2) 240,000
Preference share applicants (60,000 x $1.1) 66,000
Ordinary share capital (150,000 x $1) 150,000
Share premium (150,000 x $0.2) 30,000
“ 15 Ordinary share applicants (50,000 x $1.2) 60,000
Bank – Refund 60,000
“ 15 Preference share applicants 66,000
Preference share capital (60,000 x $1) 60,000
Share premium (60,000 x $0.1) 6,000
(b) Payment of dividends

The company has to pay a fixed rate of dividend to preference shareholders. However, the rate of dividend payable
to ordinary shareholders may be higher or lower, depending on the amount of profit mad and distributed as
dividend during the year.
Voting rights
Ordinary shares carry voting rights while preference shares do not. Only ordinary shareholders can exercise
controlling power over the company by voting on important matters tabled at shareholders’ general meetings.
Claims to the company’s net assets on liquidation
When a company goes into liquidation, the preference shareholders have priority over ordinary shareholders in
getting back the nominal value of their share capital after the company has paid off all its liabilities.
HKCEE (2006, 4)
Ball Limited had an issued share capital consisting of 650,000 ordinary shares of $1 each as at 1 January 2005. On 1 July 2005, the
company made an additional issue of 250,000 ordinary shares at $1.50 per share, payable in full on application. Applications were
received for 260,000 shares on 8 July 2005. The shares were allotted to the successful applicants on 15 July 2005. Cash was
returned to the unsuccessful applications on the same day.
You are required to:
Prepare journal entries for Ball Limited to record the share issue in July 2005. (Narrations are not required)
Journal
Date Details Dr Cr
2005 $ $
Jul 8 Bank (260,000 x $1.50) 390,000
Share application – ordinary shares 390,000
“ 15 Share application – ordinary shares 375,000
Ordinary share capital (250,000 x $1) 250,000
Share premium (250,000 x $0.50) 125,000
“ 15 Share application – ordinary shares 15,000
Bank – Refund (10,000 x $1.50) 15,000
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HKCEE (2007, 7)
Bamboo Limited is engaged in the trading business. After preparing the adjusting entries, the bookkeeper extracted an
adjusted trial balance as at 31 March 2007. However, he found that the debit and credit totals did not agree:
Debit Credit
$ $
Ordinary share capital 1 April 2006 180,000
Retained profits, 1 April 2006 20,000
Plant and equipment, at cost 692,460
Bank loan, repayable in 2010 120,000
(i)
SalesRequired entries: Wrong entries: 985,000
Dr
Debtors Bank $800 Dr Bank $800 105,690
Cr interest
Cost of goods sold income $800 Dr prepaid selling expenses $800 538,600
Administrative expenses Suspense entries: 123,700
Cr Suspense $1,600
Selling expenses 187,500
Correct entries
Interest
Dr
on bank loan
Suspense $1,600
5,000
Deposits received from debtors
Cr interest income $800 16,000
Share application money
Cr prepaid received
selling expenses $800 70,000
Cash at bank 47,400
Creditors 96,710
Stock, 31 March 2007 22,100
Prepaid selling expenses, 31(ii)March 2007 entries:
Required Wrong entries: 8,000
Accumulated depreciation – plantDrandBank (cash) 31
equipment, $4,884
March 2007 Dr Bank (cash)
246,540$4,844
Cr Sales $4,884 Cr 1,793,400
Debtors $4,844 1,671,300
(iii)
Required entries: Wrong entries:
Dr administrative expenses
Correct entries $300 Dr Creditors $300
You are required to: Cr Bank $300(cash) $40 Cr Bank $300
Dr Bank
(a) Based on the items listed above, rewrite the adjusted trial balance as at 31 March 2007 for Bamboo Limited.
Dr Debtors $4,844
Correct entries Cr Sales $4,884
Dr
(iv) Required entries:administrative expenses $300 Wrong entries:
Subsequent checking for records
Dr administrativeCr revealed
Creditorsthe $16,000
expenses following errors and
$300 Dr omissions:
Plant and equipment $10,600
(i) Interest incomeCrof $800
Bank had $16,000 Cr Bankand
been debited to the cash at bank account $16,000
the prepaid selling expenses account
Dr administrative expenses ($10,600 x 20%) $2,120
only.
Cr accumulated depreciation $2,120
(ii) Cash sales of(v)$4884 had been
Required recorded as a cash settlementSuspense
entries: of $4844 from
Wrong
entries: debtors.
entries:
Dr Cash expenses
(iii) A payment of administrative $12,000 of $300 was recorded Dras Suspense Dr $5,400
a settlement omitted
of credit purchases.
Cr Deposits received from debtors $12,000 Cr omitted
(iv) EquipmentCorrect
repairsentries
Drof Interim
$16,000, an administrative
dividend $12,000 expense, had been recorded as $10,600 in the plant and
equipmentDraccount. ACrfull Cash
administrative year’s$12,000
depreciation
expenses $16,000had been calculated at 20% on this amount and was included in
Cr Plant
administrative expenses. and equipment $10,600
Cr Suspense $5,400
(v) The closingDrstockaccumulated
had been
Correct undercast
entries by $6000.
depreciation $2,120
Dr Interim dividend
(vi) $12,000 cash was received from a customer$2,120
Cr administrative expenses$12,000
as the deposit for placing a purchase order. The cash had been used
Cr Deposits received from debtors $12,000
to pay an interim dividend to the shareholders. Both transactions were entirely omitted from the books.
(vii) In March 2007, 40,000 ordinary shares of the par value of $1 each were issued to the public at $1.40 each,
payable in full on
(vi) Required application. There was an over-subscription
entries: and the application money received had been
Wrong entries:
Stock (vii)
correctlyDrrecorded. The
$6,000
On correct processes
31 March are thewere
2007, theforshares allotment of and
Drallotted shareatand
omitted thethe refund
same : the excess application
time,
Cr Cost Sharesold
Drof goods application
$6,000– ordinary shares (40,000 x $1) $40,000
Cr omitted
money was refunded to the unsuccessful applications. No entries had been made for the allotment of share and
Cr Ordinary share capital (40,000 x $1) $40,000
the refund.
Correct entries
Dr Stock Dr$6,000 Share application – ordinary shares (40,000 x $0.40) $16,000
Cr Cost ofCrgoodsShare
soldpremium
$6,000 (40,000 x $0.40) $16,000
Dr Share application – ordinary shares (70,000 – 40,000 x $1.4) $14,000
(b) Prepare the necessary journal
Cr Bank entries to correct
– Refund the– errors
(70,000 40,000and omissions in (i) to (vii) $14,000
x $1.4) above. (Narrations are not
required.)
7
(a)
Bamboo Limited
Adjusted trial balance as at 31 March 2007
Debit Credit
$ $
Ordinary share capital 1 April 2006 180,000
Retained profits, 1 April 2006 20,000
Plant and equipment, at cost 692,460
Bank loan, repayable in 2010 120,000
Sales 985,000
Debtors 105,690
Cost of goods sold 538,600
Administrative expenses 123,700
Selling expenses 187,500
Interest on bank loan 5,000
Deposits received from debtors 16,000
Share application money received 70,000
Cash at bank 47,400
Creditors 96,710
Stock, 31 March 2007 22,100
Prepaid selling expenses, 31 March 2007 8,000
Accumulated depreciation – plant and equipment, 31 March 2007 246,540
Suspense 3,800
1,734,250 1,734,250
(b)
Journal
Details Debit Credit
$ $
(i) Suspense 1,600
Interest income 800
Prepaid selling expenses 800
(ii) Bank (Cash) 40
Debtors 4,844
Sales 4,884
(iii) Administrative expenses 300
Creditors 300
(iv) Administrative expenses 16,000
Plant and equipment 10,600
Suspense 5,400
Accumulated depreciation – plant and equipment 2,120
Administrative expenses ($10,600 x 20%) 2,120
(v) Stock 6,000
Cost of goods sold 6,000
(vi) Interim dividend The correct processes: 12,000
Deposits received from debtors Dr interim dividend $12,000 12,000
Cr Debtor $12,000
(vii) Share application money 70,000
Share premium ($0.4 x 40,000) 16,000
Bank ($1.4 x 10,000) 14,000
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12.4 Issue of debentures (發行債券)
Public limited companies are also allowed to issue debentures (bonds) to the public in order to raise funds. The procedures for
issuing debentures are similar to those for the issue of shares.
12.4.1 Differences between debentures and shares (債券與股份不同之處)

1 A debenture represents a loan (貸款) made to a company, while a share represents a part of the ownership (擁有權的一部分)
of a company.
2 Debenture holders are entitled to a fixed rate of return (固定的回報率) (interest, coupon rate) while ordinary shareholders are
not guaranteed (不一定) any dividend. Debenture interest is payable whether or not a company makes profits.
3 Debenture interest (債券利息) must be paid before (先派) share dividends (股息).
4 When a company goes into liquidation (清盤), the debenture holders have priority (優先權) over the shareholders in their
claim (索償) on the company’s residual assets (公司餘下的資產).
5 Debentures are usually redeemable (可贖回) but shares are usually irredeemable (不可贖回).
6 In the balance sheet, the debentures issued are shown as a liability (負債), while the shares issued are shown as share capital
or owners' equity (股本或股東權益).
7 Debenture holders do not have any voting rights (投票權) but ordinary shareholders have such rights.
12.4.2 Accounting entries for the issue of debentures (發行債券的會計分錄)

The balance of the debentures account will be shown as a non-current liability at nominal value in the balance sheet at the end of
an accounting period.
1 Debentures issued at par (債券按面值發行)

On 1 November 2010, NP Ltd announced a public offering of $100,000 5% debentures redeemable on 30 November 2015 at par.
On 20 November 2010, applications together with application monies were received for $150,000 debentures. The debentures
were allotted to the applicants and the excess application monies were refunded on 1 December 2010.

Dr Bank account $150,000
Cr Debenture applicants account $150,000
2 Allotment of debentures to debenture applicants:

Dr Debenture applicants account $100,000
Cr 5% debentures account $100,000
3 Refund of excess application monies:

Cr Bank account $50,000
Bank
2010 $ 2011 $
Nov 20 Debenture applicants (1) 150,000 Dec 1 Debenture applicants – Refund (3) 50,000
Debenture Applicants
2010 $ 2010 $
Dec 1 5% debentures (2) 100,000 Nov 20 Bank (1) 150,000
“ 1 Bank – Refund (3) 50,000
150,000 150,000
5% Debentures
2010 $
Dec 1 Debenture applicants (2) 100,000
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Class work 5
1. BAFS Ltd announced on 1 March 2011 that it would issue $200,000 6% debentures at par. On 20 March 2011, applications were
received for $250,000 debentures. Allotments were made on 1 Apr 2011, and the excess application monies were refunded on
the same day.
(a) Show the necessary journal entries to record the issue of debentures.
(b) If the interest on debenture was to be paid every 6 months, show the necessary journal entries to record the interest
payment after six months.
Journal
Details Dr Cr
2011 $ $
(a) Mar 20 Bank 250,000
Debenture applicants 250,000
Apr 1 Debenture applicants 200,000
6% debentures 200,000
“ 1 Debenture applicants 50,000
Bank – Refund 50,000
(b) Sept 30 Debenture interest ($200,000 x 6% x 6/12) 6,000
Bank 6,000
2. Cyber Ltd announced on 1 March 2011 that it would issue $200,000 5% debentures at par. Applications were received for
$250,000 debentures on 15 March 2011. Allotments were made on 1 April 2011, and the excess application monies were
refunded on the same day.
(a) Show the necessary ledger accounts to record the issue of debentures.
(b) Suppose the financial year ends on 31 December. Calculate the debenture interest for the year ended 31 December 2011.
(c) If the interest on debenture was to be paid every 6 months, show the necessary journal entries to record the interest
payment after preparing the financial statement.
(a)
Bank
2011 $ 2011 $
Mar 15 Debenture applicants 250,000 Apr 1 Debenture applicants – Refund 50,000
2011 $ 2011 $
Apr 1 5% debentures 200,000 Mar 15 Bank 250,000
250,000 250,000
5% Debentures
2011 $ 2011 $
(b) Debenture interest = $200,000 x 5% x 9/12 = $7,500
(c)
Journal
Date Details Dr Cr
2011 $ $
Dec 31 Debenture interest (Profit and loss) 2,500
Accrued debenture interest ($200,000 x 5% x 3/12) 2,500
10
2 Debentures issued at a premium (債券按溢價發行)
Differences between market interest rate (市場利率) and nominal interest rate (名義利率)
Nominal interest rate is the rate of interest (利率) stated on the debenture certificate (債券). Market interest rate (effective
interest rate) is the rate of interest paid in the market (市場上) on debentures of similar risk (同等風險). It fluctuates (波動) all
the time and the debentures issuers (債券發行人) have no control over it (不能控制). Hence, there is often a difference between
the market interest rate and the nominal interest rate on the issue date.
Market interest rate < Nominal interest rate

If the market interest rate is lower than the nominal interest rate, the issue price of the debentures (債券發行價) will be higher
than (高於) the nominal value (面值) and the debentures are said to be issued at a premium (債券按溢價發行). The premium
(溢價) equals (等於) the excess of the issue price over the nominal value (發行價超過面值的價值).
Example 2
On 1 January 2011, QQ Ltd announced a public offering of $100,000 5% debentures redeemable on 31 January 2021 at 105 (The
term ‘105’ represents a premium of 5% over the debenture’s nominal value). Interest is payable half-yearly. On 15 January 2011,
applications together with application monies were received for exactly the same amount of debentures. The debentures were
allotted to the applicants on 1 February 2011.

Dr Bank account $105,000 ($100,000 x 105%)

Cr Debenture premium account $5,000 ($100,000 x 5%)
Bank
2011 $
Jan 15 Debenture applicants (1) 105,000
2011 $ 2011 $
Feb 1 5% debentures (2) 100,000 Jan 15 Bank (1) 105,000
“ 1 Debenture premium (2) 5,000
5% Debentures
2011 $
Feb 1 Debenture applicants (2) 100,000
Debenture Premium
2011 $
Feb 1 Debenture applicants (2) 5,000
Amortization of debenture premium (攤銷債券溢價)

The debenture premium should be amortised (攤銷) over the life of the debentures (債券的期限), 10 years. The debenture
interest expense for each period (每期債券利息支出) would be reduced (減少) by the amount of premium amortised (可攤銷溢
價). The accounting entries on the date of semi-annual payment of debenture interest (1 February and 1 August) would be:
3 Payment of debenture interest on 1 August 2011:

Dr Debenture premium account $250 [($5,000 ÷ 10) x 6/12]
Dr Debenture interest account $2,250 ($100,000 x 5% x 6/12  $250)
Cr Bank account $2,500 ($100,000 x 5% x 6/12)
The nominal value of the debentures, inclusive (包括) of the unamortized debenture premium (未攤銷債券溢價), should be
shown as a non-current liability (非流動負債) in the balance sheet at the end of the accounting period.
QQ Ltd
Balance Sheets as at 31 December 2011 (extract)
$
Non-Current liabilities
5% debentures {$100,000 + [$5,000 – ($5,000 ÷ 10 x 11/12)]} Unamortised debenture premium 104,542
Amortised debenture premium (1 Feb 2011 - 31 Dec 2011)

11
If the company needs to prepare the final account at 31 December 2011, the required entries for the debenture interest accrued
for 1 August 2011 to 31 December 2011 (5 months, to be paid on 1 February 2012) are:
Dr Debenture premium account $208 [($5,000 ÷ 10) x 5/12]

Dr Debenture interest account $1,875 ($100,000 x 5% x 5/12  $208)
Cr Accrued debenture interest account $2,083 ($100,000 x 5% x 5/12)
Class work 6
On 1 January 2010, BAFS Ltd announced a public offering of $100,000 8% debentures redeemable on 31 January 2020 at 110.
Interest is payable half-yearly. On 15 January 2010, applications together with application monies were received for exactly the
same amount of debentures. The debentures were allotted to the applicants on 1 February 2010.
(a) Prepare journal entries to record the issue of debentures.
(b) Show the journal entries for the debenture interest charged after half-year.
(c) Show the journal entries for the debenture interest to prepare the final account at 31 December 2011.
(d) Post all the journal entries to the ledger account.
Journal
Details Dr Cr
2010 $ $
(a) Jan 15 Bank ($100,000 x 110%) 110,000
Feb 1 Debenture applicants 100,000
8% Debentures 100,000
Debenture Premium ($100,000 x 10%) 10,000
(b) Jul 31 Debenture Premium ($10,000 ÷ 10 x 6/12) 500
Debenture interest ($4,000 – $500) 3,500
Bank ($100,000 x 8% x 6/12) 4,000
(c) Dec 31 Debenture Premium ($10,000 ÷ 10 x 5/12) 417
Debenture interest ($3,333 – $417) 2,916
Accrued debenture interest ($100,000 x 8% x 5/12) 3,333
(d)
Bank
2010 $ 2010 $
Jan 15 Debenture applicants 110,000 Jul 31 Debenture premium 500
“ 31 Debenture interest 3,500
2010 $ 2010 $
Feb 1 8% Debentures 100,000 Jan 15 Bank 110,000
“ 1 Debenture premium 10,000
Debenture Premium
2010 $ 2010 $
Jul 31 Bank 500 Feb 1 Debenture applicants 10,000
Dec 31 Accrued debenture interest 417
8% Debentures
2010 $ 2010 $
Feb 1 Debenture applicants 100,000
Debenture interest
2010 $ 2010 $
Jul 31 Bank 3,500
Dec 31 Accrued debenture interest 2,916
Accrued debenture interest

2010 $ 2010 $
Dec 31 Debenture premium 417
“ 31 Debenture interest 2,916
12
3 Debentures issued at a discount (債券按折價發行)
Market interest rate > Nominal interest rate
If the market interest rate (市場利率) is higher than the nominal interest rate (名義利率), the issue price (發行價) of the
debentures will be lower than (低於) the nominal value and the debentures are said to be issued at a discount (債券按折價發行).
The discount (折價) equals the excess of the nominal value over the issue price.
On 1 March 2011, A&T Ltd announced a public offering of $100,000 5% debentures redeemable on 31 January 2021 at 98 (The
term ‘98’ represents a discount of 2% on the debenture’s nominal value). Interest is payable half-yearly. On 25 March 2011,
applications together with application monies were received for exactly the same amount of debentures. The debentures were
allotted to the applicants on 1 April 2011.

Dr Bank account $98,000 ($100,000 x 98%)

Dr Debenture discount account $2,000 ($100,000 x 2%)
Bank
2011 $
Mar 25 Debenture applicants (1) 98,000
2011 $ 2011 $
Apr 1 5% debentures (2) 98,000 Mar 25 Bank (1) 98,000
Debenture Discount
2011 $
Apr 1 5% debentures (2) 2,000
5% Debentures
2011 $
Apr 1 Debenture applicants (2) 98,000
“ 1 Debenture discount (2) 2,000
Amortization of debenture discount (攤銷債券折價)

The debenture discount should be amortised (攤銷) over the life of the debentures (債券的期限), 10 years. The debenture
interest expense for each period (每期債券利息支出) would be increased (增加) by the amount of discount amortised (可攤銷
折價). The accounting entries on the date of semi-annual payment of debenture interest (1 Apr and 1 Oct) would be:
3 Payment of debenture interest on 1 Oct 2011:

Dr Debenture interest account $2,600 ($100,000 x 5% x 6/12  $100)
Cr Bank account $2,500 ($100,000 x 5% x 6/12)
Cr Debenture discount account $100 [($2,000 ÷ 10) x 6/12]
The nominal value of the debentures, less the unamortized debenture discount (未攤銷債券折價), should be shown as a
non-current liability in the balance sheet at the end of the accounting period.
A&T Ltd
Balance Sheets as at 31 Deccember 2011 (extract)
$
Non-Current liabilities
5% debentures {$100,000 – [$2,000 – ($2,000 ÷ 10 x 9/12)]} Unamortised debenture discount 98,150
Amortised debenture discount (1 Apr 2011 - 31 Dec 2011)
If the company needs to prepare the final account at 31 December 2011, the required entries for the debenture interest accrued
for 1 Oct 2011 to 31 December 2011 (3 months, to be paid on 1 Apr 2012) are:
Dr Debenture interest account $1,300 ($100,000 x 5% x 3/12  $50)

Cr Accrued debenture interest account $1,250 ($100,000 x 5% x 3/12)
Cr Debenture discount account $50 [($2,000 ÷ 10) x 3/12]
13
Class work 7
1. On 1 January 2010, Jolly Ltd announced the issue of $100,000 6% debentures at 95, payable in full on application and repayable
10 years later (i.e., on 31 January 2020) at par. Applications were received for exactly $100,000 debentures on 20 January 2010.
Allotments were made on 31 January 2010.
(a) Prepare journal entries to record the issue of debentures.
(b) Explain how the debenture discount should be treated in the accounts of Jolly Ltd.
(a)
Journal
Date Details Dr Cr
2010 $ $
Jan 20 Bank 95,000
Debenture Discount 5,000
6% Debentures 100,000
(b) The debenture discount should be amortised over the life of the debentures, which is 10 years.
The debenture interest expense for each period would be increased by the amount of discount amortised.
The nominal value of the debentures, less the unamortized debenture discount, should be shown as a
non-current liability in the balance sheet at the end of the accounting period.
2. On 1 March 2010, Glory Ltd announced the issue of $150,000 10% debentures at 97 payable in full on application and repayable
25 years later (i.e., on 31 March 2035) at par. Interest on the debentures was payable on the nominal amount as from 1 April
2010. Applications were received for $250,000 debentures on 20 March 2010. Both the allotment of debentures and the refund
of excess application monies were made on 1 April 2010. The discount on debentures is to be written off evenly over the period
of 25 years. The financial year ends on 31 December.
(a) The necessary ledger accounts to record the issue of debentures.
(b) The debenture interest charged to the income statements for the two years ended 31 December 2010 and 2011.
(a)
Bank
2010 $ 2010 $
Mar 20 Debenture applicants ($250,000 x 97%) 242,500 Apr 1 Debenture applicants – Refund 97,000
2010 $ 2010 $
Apr 1 10% debentures ($150,000 x 97%) 145,500 Mar 20 Bank 242,500
242,500 242,500
Debenture Discount
2010 $ 2010 $
Apr 1 Debenture applicants ($150,000 x 3%) 4,500
10% Debentures
2010 $ 2010 $
“ 1 Debenture discount 4,500
(b)
Glory Ltd
Income Statement for the year ended 31 December 2010
$
Less Expenses:
Debenture interest [(150,000 x 10% x 9/12) + ($4,500 ÷ 25 x 9/12)] 11,385
Glory Ltd
Income Statement for the year ended 31 December 2011
$
Less Expenses:
Debenture interest [(150,000 x 10%) + ($4,500 ÷ 25)] 15,180
14
3. China Trading Ltd was expanding and required extra funds of $600,000. It board of directors was considering choosing either
one of the following options:
(i) 600,000 5% preference shares of $1 each to be issued at par.
(ii) $625,000 4% debentures to be issued at 96, the debentures will be repayable four years later.
(a) Which of the above options should be chosen if China Trading Ltd intended to minimize the cost of financing?
(b) Consider one more option of financing: the issue of 600,000 $1 ordinary shares at par. State one advantage and one
disadvantage of this option compared to Option (i).
(a) The cost of issuing preference shares = $600,000 x 5% = $30,000 in dividends each year.
The cost of issuing 4% debenture = $625,000 x 4% + $625,000 x 4% ÷ 4 = $31,250 in interest each year.
Option (i) should be chosen because the annual debenture interest inclusive of the amortised debenture discount
is higher than the annual preference dividend.
(b) Advantage: The company has no obligation to pay a fixed rate of dividend each year.
Disadvantage: The granting of voting rights to ordinary shareholders may hinder the decision-making process of
The company.
4. Bong Ltd had an authorised share capital of $200,000, divided into 150,000 ordinary shares of $1 each and 50,000 8%
preference shares of $1 each. On 1 May 2011, it announced the following issues.
All the authorized ordinary shares were issued at $1.6. Of the preference shares, only 20,000 were issued and each share was
sold for $1.4. In addition, $100,000 6% debentures (redeemable at par on 1 July 2021) were issued at 96. Subscription rates of
200%, 160% and 150% were reported for ordinary shares, preference shares and debentures, respectively. All monies were fully
paid on application dated 20 June 2011. Shares and debentures were allotted on 1 July 2011 and the excess application monies
were refunded on the same day. The financial year ends on 31 December.
(a) How much money was raised from the issue of shares and debentures?
(b) How much discount was given on the debentures issued? How would it be treated in the accounts of Bong Ltd?
(c) Assuming there were sufficient profits, how much would be paid in preference share dividend for the year ended 31
December 2011?
(d) How much would be paid in debenture interest (excluding the amortised debenture discount) for the year ended 31
December 2011? Would your answer differ if the profit were insufficient to meet debenture interest payments?
(e) If net profit before charging debenture interest (including the amortised debenture discount) for the year ended 31
December 2011 was $3,200 and it was to be distributed in full, how much would be paid in preference and ordinary share
dividends?
(f) If net profit before charging debenture interest (including the amortised debenture discount) for the year ended 31
December 2011 was $6,000 and it was to be distributed in full, how much would be paid in preference and ordinary share
dividends?
(a) Ordinary shares : 150,000 x $1.6 = $240,000

Preference shares : 20,000 x $1.4 = $28,000
Debentures : 100,000 x 96% = $96,000
Total = $240,000 + $28,000 + $96,000 = $364,000
(b) Debenture discount = 100,000 x 4% = $4,000
The debenture discount should be amortised over the life of the debentures, which is 10 years. The debenture interest
expense for each period would be increased by the amount of discount amortised. The nominal value of
debentures, less the unamortized debenture discount, should be shown as a non-current liability in the balance
sheet at the end of an accounting period.
(c) Preference dividend = 20,000 x $1 x 8% x 6/12 = $800
(d) Debenture interest for the year = $100,000 x 6% x 6/12 = $3,000
Even if the profit were insufficient, the answer would be the same, as debenture interest must be paid whether
profits are sufficient or not.
(e) Total debenture interest for the year = ($100,000 x 6% x 6/12) + ($4,000 ÷ 10 x 6/12) = $3,200
Net profit after charging debenture interest = $0
No preference dividend nor ordinary dividend would be paid for the year.
(f) Net profit after charging debenture interest = $6,000  $3,200 = $2,800
Preference dividend = $800
Ordinary dividend = $2,000
15
(HKCEE 2006 5)
The trial balance of Ho Limited as at 31 March 2006 failed to agree and the difference was entered in a suspense account. The draft
net profit for the year amounted to $80,260.
Additional information:
(i) The last month’s bank statement balance at 28 February 2006 showed a credit balance of $19,900, which was the same as
that in the cash book on that date. The balance had been wrongly included as the bank balance in the trial balance as at 31
March 2006.
Deposits and cheque payments, totaling $315,000 and $300,700 respectively, had been recorded in the cash book during
March 2006.
(ii) The following items were shown on the March bank statement but not in the cash book:
1 Bank charges of $80;
2 Bank deposit interest of $650;
3 A dishonoured cheque of $10,250 from Star Ray Limited; and
4 A direct deposit of $2,400 logged by Kettler Limited.
(iii) Cheques, issued in March, amounting to $16,500 had not been presented to the bank for payment.
(iv) Lodgements, totaling $6,630 for March, were not recorded by the bank until 2 April 2006.
(a) Show the necessary adjustments to be made in the cash book on 31 March 2006.
(b) Prepare a bank reconciliation statement as at 31 March 2006, commencing with the adjusted cash book balance in (a) above.
Subsequent checking of the records revealed the following:

(v) The salaries account had been undercast by $500.
(vi) A credit purchase of $2,000 had been completely omitted.
(vii) Returns from Jane Limited, amounting to $780, had been recorded in the accounts as $870.
(viii) An electricity bill of $1,240 for March 2006 had been paid twice. Both payments had been posted to the ledger. The excess
amount paid was to be used to settle future bills.
(ix) A trade discount of 10% was granted to a customer, Mr Wu, on a bulk purchase of $10,000. The sale had been properly
recorded in the books. A cash discount of 5% was also allowed to him on his settlement of account in March. However, only
the amount received was debited in the cash book and no other entries were made.
(x) $200,000 6% debentures were issued at par on 1 March 2006 to settle a bank loan. Interest on debenture was to be paid
every 6 months. No entries relating to these had been made.
(c) Prepare the necessary journal entries to correct items (v) to (x) above. (Narrations are not required.)
(d) Prepare a statement to correct the draft net profit for the year ended 31 March 2006.
(a)
Cash Book (bank column only)
$ $
Balance b/d (19,900 + 315,000  300,700) 34,200 Bank charges 80
Bank deposit interest 650 Star Ray Limited  dishonoured cheque 10,250
Kettler Limited 2,400 Balance c/d 26,920
37,250 37,250
(b)
Bank Reconciliation Statement as at March 2006
$
Adjusted balances as per cash book 26,920
Add Uncredited cheque 16,500
43,420
Less Lodgements not yet recorded by bank 6,630
Adjusted balances as per bank statement 36,790
16
(c)
Journal
Details Dr Cr
$ $
(v) Salaries (Profit and loss) 500
Suspense 500
(vi) Purchases (Trading) 2,000
Creditors 2,000
(vii) Jane Limited ($870  $780) 90
Returns inwards (Trading) 90
(viii) Prepaid electricity 1,240
Electricity (Profit and loss) 1,240
(ix) Discount allowed (Profit and loss) 450
Suspense 8,550
Mr Wu 9,000
(x) Bank loan 200,000
6% debentures 200,000
Debenture interest (Profit and loss) 1,000
Interest payable (200,000 x 6% x 1/12) 1,000
(d)
Statement of adjusted profit for the year ended 31 March 2006
$ $
Net profit per draft accounts 80,260
Add Bank deposit interest not recorded 650
Electricity prepaid 1,240
Returns inwards overstated 90 1,980
82,240
Less Bank charges not recorded 80
Salaries undercast 500
Purchases omitted 2,000
Discount allowed not recorded 450
Debenture interest accrued 1,000 4,030
Adjusted net profit 78,210
17

Chapter 12 Issue of Shares and Debentures

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Chapter 12 Issue of Shares and Debentures

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Name : _________________ Serial No: _____

Chapter 12 Issue of shares and debentures (發行股份及債券)

Receipt of dividends (收取股息)

Year 2008 2009 2010

Voting rights (投票權)

Claims to the company’s net assets in liquidation (公司清盤時的淨資產索償權)

12.2.2 Authorised share capital vs. issued share capital (法定股本與已發行股本)

Authorised share capital (法定股本)

Issued share capital (已發行股本)

12.3.1 Procedures for issuing shares (發行股份的程序)

Shares can be issued in any of the following ways:

12.3.2 Accounting entries for the issue of shares (發行股份的會計分錄)

1 Receipt of application monies:

2 Allotment of shares to share applicants:

Ordinary share Applicants

Ordinary share Capital

1 Receipt of application monies:

2 Allotment of shares to share applicants:

3 Refund of excess application monies:

Ordinary share Applicants

Ordinary share Capital

Ordinary share Applicants

Ordinary share Capital

1 Receipt of application monies:

2 Allotment of shares to share applicants:

Ordinary share Applicants

Ordinary share Capital

Ordinary share Applicants

Ordinary share Capital

1 Receipt of application monies:

2 Allotment of shares to share applicants:

Ordinary share Applicants

Ordinary share Capital

5 Share issued at a discount (股份按折價發行)

1 Receipt of application monies:

2 Allotment of shares to share applicants:

Ordinary share Applicants

Ordinary share Capital

(b) Payment of dividends

12.4.1 Differences between debentures and shares (債券與股份不同之處)

12.4.2 Accounting entries for the issue of debentures (發行債券的會計分錄)

1 Debentures issued at par (債券按面值發行)

1 Receipt of application monies:

2 Allotment of debentures to debenture applicants:

3 Refund of excess application monies:

(b) Debenture interest = $200,000 x 5% x 9/12 = $7,500

Market interest rate < Nominal interest rate

1 Receipt of application monies:

2 Allotment of debentures to debenture applicants:

Amortization of debenture premium (攤銷債券溢價)

3 Payment of debenture interest on 1 August 2011:

Amortised debenture premium (1 Feb 2011 - 31 Dec 2011)

Dr Debenture premium account $208 [($5,000 ÷ 10) x 5/12]

Accrued debenture interest

1 Receipt of application monies:

2 Allotment of debentures to debenture applicants:

Amortization of debenture discount (攤銷債券折價)

3 Payment of debenture interest on 1 Oct 2011:

Amortised debenture discount (1 Apr 2011 - 31 Dec 2011)

Dr Debenture interest account $1,300 ($100,000 x 5% x 3/12  $50)

(a) Ordinary shares : 150,000 x $1.6 = $240,000

Subsequent checking of the records revealed the following:

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