C hapter 9: Limited companies and the

issue of shares and debentures

Contents of chapter
This chapter looks at the characteristics of limited companies and how they raise capital by issuing shares and
debentures, whether by immediate payment or by instalments. The issue of shares at par, at a discount and at a
premium are all covered.

Notes for teachers

A lot of examination questions on this topic ask for JOURNAL ENTRIES ONLY. However, except for a very
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simple question, a student will not be able to ascertain the journal entries needed without first actually
doing the double entry accounts.

If the student hands in only the double entry accounts as an answer, they will get no marks. The question
asks for JOURNAL ENTRIES. Students should put a heading of WORKINGS for the double entry accounts
and then put a heading of ANSWER above the journal entries. They should hand in BOTH their answer
AND the workings.

When shares are first issued (sold), the shares are sold directly to the person at the price stated by the
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company. This applies to both public and private companies.

A public company can advertise that it has shares for issue (sale). A private company is not allowed to
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advertise an issue of shares.

Once someone has received the shares issued, he can sell them to someone else. If the shares are issued
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by a private company, this has to be done privately.

Shares of many public companies are bought and sold on the stock exchange as a market for second-hand
shares.

Once the shares have been issued by the company, later dealings in them between individuals are not
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entered in the company’s books.

Students should remember that when the shares for issue are paid in full, the issued share capital is
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always shown in the books at its nominal (i.e. par) value. Adjustments are, therefore, needed for:
(i) Share premium; and
(ii) Discounts on shares.

When shares are issued, payable by instalments, the share capital account is always shown at the
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called-up part of nominal capital.

Entries for debentures are completed in exactly the same way as for shares. The only difference is in the
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title of the account.

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Answers to MCQs and exercises
9.1 B 9.2 B 9.3 A 9.4 D 9.5 C

9.6
20X6 $ $
Jan 15 Bank 100,000
Ordinary share applicants 100,000
Jan 31 Ordinary share applicants 100,000
Ordinary share capital 100,000

9.7X
Bank
20X6 $ 20X6 $
Apr 10 Ordinary share applicants 40,000 Apr 30 Ordinary share applicants (refund) 10,000

Ordinary Share Capital

20X6 $
Apr 30 Ordinary share applicants 30,000

Ordinary Share Applicants

20X6 $ 20X6 $
Apr 30 Ordinary share capital 30,000 Apr 10 Bank 40,000
" 30 Bank (refund) 10,000
40,000 40,000

9.8
Bank
20X5 $ 20X5 $
Jun 10 Ordinary share applicants 90,000 Jun 20 Ordinary share applicants (refund) 15,000

Ordinary Share Capital

20X5 $
Jun 20 Ordinary share applicants 50,000

Ordinary Share Applicants

20X5 $ 20X5 $
Jun 20 Ordinary share capital 50,000 Jun 10 Bank 90,000
Jun 20 Share premium 25,000
Jun 20 Bank (refund) 15,000
90,000 90,000

Share Premium
20X5 $
Jun 20 Ordinary share applicants 25,000

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 9.9
Dr Cr
20X5 $ $
Jan 20 Bank 95,000
Debenture applicants 95,000
Jan 31 Debenture applicants 100,000
10% debentures 100,000
Debenture discounts 5,000
Debenture applicants 5,000

9.10
(a) $20,000
(b) $20,000 × 8% = $1,600
(c) $100 × 100 = $10,000
(d) $10,000 × 10% = $1,000
(e) $ $
Net profit 35,000
Less Debenture interest 1,000
Less Preference dividend 1,600 2,600
Balance available for ordinary shareholders 32,400
Ordinary shares = $150,000
$32,400
Therefore, rate of ordinary dividends = $150,000 = 21.6%

9.11X
Dr Cr
20X5 $ $
Sep 1 Bank 294,000
Ordinary share applicants 240,000
Preference share applicants 54,000
Sep 15 Ordinary share applicants 180,000
Ordinary share capital 150,000
Share premium 30,000
Sep 15 Ordinary share applicants 60,000
Bank (refund) 60,000
Sep 15 Preference share applicants 54,000
Share discount (or share premium) 6,000
Preference share capital 60,000

9.12X
(a) Debenture Applicants
20X5 $ 20X5 $
Mar 31 10% Debentures 150,000 Mar 20 Bank 242,500
Mar 31 Bank (refund) 97,000 " 31 Debenture discounts 4,500
247,000 247,000

Debenture Discounts
20X5 $ 20X5 $
Mar 31 Debenture applicants 4,500 Dec 31 Profit and loss 180
" 31 Balance c/f 4,320
4,500 4,500

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 10% Debentures
20X5 $
Mar 31 Debenture applicants 150,000

Bank
20X5 $ 20X5 $
Mar 20 Debenture applicants 242,500 Mar 31 Debenture applicants (refund) 97,000

(b) Profit and Loss (extracts)

20X5 $
Dec 31 Debenture interest 11,250
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($150,000 × 10% × )
12
20X6
Dec 31 Debenture interest 15,000

9.15

Bank
$
Application (160,000 × $0.125) 20,000
Allotment ($30,000 – $5,000) 25,000
First call (120,000 × $0.25) 30,000
Second call (120,000 × $0.375) 45,000

Application and Allotment

$ $
Ordinary share capital 45,000 Bank 20,000
Bank 25,000
45,000 45,000

Ordinary Share Capital

$ $
Balance c/f 120,000 Application and allotment 45,000
First call 30,000
Second call 45,000
120,000 120,000

First Call
$ $
Ordinary share capital 30,000 Bank 30,000

Second Call
$ $
Ordinary share capital 45,000 Bank 45,000

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 9.16X
Bank
$ $
Application (32,600 × $0.50) 16,300 Application: refunds (2,600 × $0.5) 1,300
Allotment (20,000 × $1.50 less excess
application monies $5,000) 25,000
First call (20,000 × $2) 40,000
Second call (20,000 × $1) 20,000

Application and Allotment

$ $
Ordinary share capital 40,000 Bank 16,300
Bank (refunds) 1,300 Bank 25,000
41,300 41,300

First Call
$ $
Ordinary share capital 40,000 Bank 40,000

Second Call
$ $
Ordinary share capital 20,000 Bank 20,000

Ordinary Share Capital

$ $
Balance c/f 100,000 Application and allotment 40,000
First call 40,000
Second call 20,000
100,000 100,000

9.17
The Journal
Dr Cr
20X4 $ $
Mar 1 Bank (80,000 × $2) 160,000
Application and allotment 160,000
" 1 Application and allotment 20,000
Ordinary share capital 20,000
" 1 Application and allotment 230,000
Share premium 230,000
Apr 5 Bank 87,300
Application and allotment 87,300
May 5 First and final call ($0.6 × 50,000) 30,000
Ordinary share capital 30,000
" 5 Bank 29,100
First and final call 29,100
" 7 Bank (Amy Wong) 2,700
Application and allotment 2,700
" 7 Bank (Amy Wong) 900
First and final call 900

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9.18X
The Journal
Dr Cr
2004 $ $
Jan 1 Bank ($1 × 660,000) 660,000
Application and allotment 660,000

Mar 1 Application and allotment ($0.7 × 400,000) 280,000

Ordinary share capital 280,000

" 1 Application and allotment ($0.8 × 400,000) 320,000

Share premium 320,000

" 1 Bank 20,000

Application and allotment 20,000

" 15 Application and allotment (refund) 80,000

Bank (40 × 2,000 × $1) 80,000

Jun 1 First and final call ($0.3 × 400,000) 120,000

Ordinary share capital 120,000

" 1 Bank 120,000

First and final call 120,000

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