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Share & Debenture Issue Problems – Full Practice Set

Introduction

This chapter contains full-length solved problems covering the most critical and difficult adjustments in Unit III.

Problem 1: The "Pro-Rata + Forfeiture" Classic (15 Marks)

Question: XYZ Ltd issued 1,00,000 shares of ₹10 each at a premium of ₹2.

  • Payable: App ₹3, Allotment ₹5 (incl premium), Call ₹4.
  • Applied: 1,50,000 shares.
  • Allotment:
    • Cat A: 10,000 applied -> Rejected.
    • Cat B: 1,40,000 applied -> Pro-rata 1,00,000 allotted.
  • Default: Mr. Ram (Applied for 700 shares in Cat B) failed to pay Allotment & Call.
  • Forfeiture: His shares were forfeited.
  • Re-issue: 300 shares re-issued at ₹9 fully paid.

Pass Journal Entries.

Solution

Working Notes:

  1. Ram's Details:
    • Applied: 700.
    • Allotted = (700 x 10/14) = 500 Shares.
    • App Money Paid (700 x 3) = 2,100.
    • App Money Required (500 x 3) = 1,500.
    • Excess Adjusted = 600.
    • Allotment Due (500 x 5) = 2,500.
    • Less: Excess (600).
    • Arrears on Allotment = 1,900.

Journal Entries:

  1. Bank A/c Dr (1,50,000 x 3) ... 4,50,000

    To Share Application A/c       4,50,000

  2. Share Application A/c Dr ... 4,50,000

    To Share Capital A/c (1L x 3)      3,00,000
To Share Allotment A/c (Excess)    1,20,000
To Bank A/c (Refund 10k x 3)         30,000

    (Excess 40k shares x 3 = 1,20,000 adjusted)

  3. Allotment Due:

    Share Allotment Dr (1L x 5)            5,00,000
    To Share Capital (1L x 3)              3,00,000
    To Securities Premium (1L x 2)         2,00,000

  4. Allotment Received:

    • Total Expected: 5,00,000.
    • Less: Already Received (Entry 2): 1,20,000.
    • Less: Ram's Arrears (WN): 1,900.
    • Net Received: 3,78,100.
    Bank A/c ...Dr                         3,78,100
Calls in Arrears A/c ...Dr             1,900
    To Share Allotment A/c                 3,80,000

  5. Forfeiture Entry:

    • Called Up: 10 (Full).
    • Premium Unpaid? Yes (Ram didn't pay Allotment).
    Share Capital A/c Dr (500 x 10)        5,000
Securities Premium A/c Dr (500 x 2)    1,000
    To Share Allotment A/c (WN)            1,900
    To Share Call A/c (500 x 4)            2,000
    To Share Forfeiture A/c (Bal)          2,100

    (Check: Forfeiture 2100 matches App Money Paid exactly).

  6. Re-Issue Entry:

    • 300 shares @ ₹9. (Discount ₹1).
    Bank A/c Dr (300 x 9)                  2,700
Share Forfeiture A/c Dr (300 x 1)        300
    To Share Capital A/c                   3,000

  7. Capital Reserve:

    • Profit per share = (Amount Forf: 2100/500 = ₹4.2) - (Discount: ₹1) = ₹3.2
    • Shares Re-issued = 300.
    • Reserve = 300 x 3.2 = ₹960.
    Share Forfeiture A/c ...Dr             960
    To Capital Reserve A/c                 960

Problem 2: Underwriting Liability

Question: Issue of 10,000 Shares.

  • Underwriters: A (60%), B (40%).
  • Applications: 8,000 total.
  • Marked: A (4,000), B (2,000).
  • Determine Net Liability.

Solution:

ParticularsABTotal
Gross Liability (60:40)6,0004,00010,000
Less: Marked(4,000)(2,000)(6,000)
Balance2,0002,0004,000
Less: Unmarked (2,000)(1,200)(800)(2,000)
Note: Total App 8k - Marked 6k = 2k Unmarked. Dist in GL Ratio.
Net Liability8001,2002,000

Problem 3: Issue of Debentures (Redemption Terms)

Question: Journalise: Issued ₹5,00,000, 9% Debentures at 95%, redeemable at 105%.

Solution:

  • Loss 1: Discount = 5%.
  • Loss 2: Prem on Red = 5%.
  • Total Loss = 10% of 5L = 50,000.

Entry:

Bank A/c ...Dr                         4,75,000
Loss on Issue of Deb ...Dr             50,000
    To 9% Debentures A/c                   5,00,000
    To Prem on Redemption of Deb A/c       25,000

Exam Tips

  1. Forfeiture Calculation: Always calculate "Amount received from defaulter" carefully in pro-rata. It is NOT just (Allotted x App Rate).
  2. Date of Interest: For Interest on Debentures, always divide by months (6/12) if paying half-yearly.
  3. Capital Reserve: Don't transfer the entire forfeiture balance. Only the proportionate amount regarding shares re-sold.

Quiz Time! 🎯

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