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Pro-Rata Allotment – Treatment of Excess Applications

Introduction

Over-subscription happens when a company receives applications for MORE shares than it offered.

  • Example: Offered 10,000 shares. Applied 15,000 shares.
  • Rule: Company cannot allot more than offered.
  • Solution:
    1. Reject: Refund money for excess (15k - 10k = 5k rejected).
    2. Pro-Rata: Allot proportionately (e.g., Give 2 shares for every 3 applied).
    3. Combination: Reject some, Pro-rata for others.

1. What is Pro-Rata Allotment?

It means allotting shares in a fixed proportion to total applicants.

  • Applicants: 15,000.
  • Allotted: 10,000.
  • Ratio: 3:2. (Applicant who asked for 3 shares gets 2).

Key Implication: The applicant paid for 3 shares (Application Money). He got only 2. The money paid for the Extra 1 share is Adjusted towards the next installment (Allotment) instead of being refunded.

2. Calculation Table (The Golden Table)

Always make this table in exam for correct values.

CategoryApplied (Shares)Allotted (Shares)Money Recd (App x Rate)Money Req (Allotted x Rate)Excess (Recd - Req)Adj to AllotmentRefund
I10,00010,00030,00030,000NilNilNil
II5,000Nil15,000Nil15,000Nil15,000
Total15,00010,00045,00030,00015,000Nil15k

(Scenario: Full rejection of excess).

Pro-Rata Scenario Table

CategoryAppliedAllottedMoney Recd (x3)Money Req (x3)ExcessAdj to AllotRefund
I15,00010,00045,00030,00015,00015,000Nil

Here, the 15,000 excess is NOT refunded but kept to pay Allotment.

3. Journal Entries (Pro-Rata)

1. Receipt of Application Money:

Bank A/c ...Dr                         (Total Recd)
    To Share Application A/c               (Total Recd)

(15,000 x 3 = 45,000)

2. Transfer & Adjustment (Compound Entry):

Share Application A/c ...Dr            (Total Recd)
    To Share Capital A/c                   (Actual Shares x Rate)
    To Share Allotment A/c                 (Adjusted Amount)
    To Bank A/c                            (Refunded Amount)

(Dr 45k. To Cap 30k. To Allotment 15k)

3. Allotment Due:

Share Allotment A/c ...Dr              (Actual Shares x Allot Rate)
    To Share Capital A/c                   (Due Amount)

(10,000 x 4 = 40,000)

4. Allotment Received: (Total Due - Amount Already Adjusted)

Bank A/c ...Dr                         (Balance Amount)
    To Share Allotment A/c                 (Balance Amount)

(40,000 - 15,000 = 25,000)

4. Calls in Arrears in Pro-Rata (Tricky Point)

If a shareholder (who was allotted pro-rata) fails to pay Allotment money:

  1. Find Applied Shares: Since he paid excess application money, his "Unpaid Allotment" is NOT simply Shares x Rate.
  2. Formula:
    • Amount Due = Allotted Shares x Rate.
    • Less: Excess Application Money Adjusted.
    • Actual Arrears = Balance Unpaid.

Exam Notes: Writing the Answer

Question: "A Company offered 10,000 shares. Applications received for 12,000. Directors allotted on pro-rata basis. Allotment money is ₹5. Calculate amount received on Allotment." (Application was ₹2).

Solution:

  1. Total App Received = 12,000 x 2 = 24,000.
  2. Total App Required = 10,000 x 2 = 20,000.
  3. Excess Adjusted = 4,000.
  4. Total Allotment Due = 10,000 x 5 = 50,000.
  5. Net Amount Received = 50,000 - 4,000 = 46,000.

Summary

  • Excess: Can be Rejected or Adjusted.
  • Adjustment Priority: First toward Allotment, then toward Calls (only if AOA permits), then Refund.
  • Critical Step: In journal entry for receiving Allotment, always DEDUCT the adjusted amount.

Quiz Time! 🎯

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