Accounting for Company Issuance of Shares & Debentures Principles of Accounting XII
Accounting for Company Issue of Shares & Debentures WHAT THE EXAMINER USUALLY ASK? General Journal entries for issuance of shares: o Issued shares at par. o Issued shares at premium. o Issued shares at discount. o Issued shares for the purchase of assets. General Journal entries for issuance of debentures/bonds: o Issuance of debentures at par and payback at par. o Issuance of debentures at premium and payback at par. o Issuance of debentures at discount and payback at par. o Issuance of debentures at par and payback at premium. o Issuance of debentures at discount and payback at premium. Balance Sheet. Multiple Choice Questions (MCQs). Page 38
ACCOUNTING FOR COMPANY ISSUANCE OF SHARES & DEBENTURES COMPANY A corporate enterprise that has a legal identity separate from that of its members; it operates as one single unit, in the success of which all the members participate. A company may have limited liability (limited company), so that the liability of the members of the company s debt is limited. An unlimited company is one in which the liability of the members is not limited in any way. A company may be registered as a public limited company or a private company. The shares of a private company may not be offered to the public for sale. KINDS OF COMPANY On the Basis of Incorporation: A company incorporated under a special charter granted by the Queen of England is called Chartered Company. The company is regulated Chartered Company: by its charter and companies act does not apply to this kind of company. The charter also prescribes the nature of business and the power of the company. Example: Bank of England. Statutory Company: Registered Company: A statutory company is one which is created by a special act of parliament or a state legislature. The nature and power of such companies are laid down in the special act under which they are created. Memorandum of association is not required for statutory company. The word limited is not required after company s name. Example: State Bank of Pakistan. A registered company is one which is registered in accordance with the provision of Companies Ordinance, 1984 and includes the existing companies formed under any other law. Company comes into existence by receiving the certificate of incorporation and governed by the Companies Ordinance, 1984. Registered company may be public company or private company. Private Company: Private company must be registered under company s law. The legal position (status) of private company is similar to that of public company. A private company cannot invite subscription from the public. Transfer of shares is restricted in a private company. A private company should have at least two (2) members and maximum number cannot exceed fifty (50). A private company is not required to hold a statutory meeting. Public Company: Public company is also registered under company s law. A public company can invite subscription from public. A public company does not have restriction on transfer of shares. Page 39
A public company should have at least seven (7) members. There is no restriction on upper limit of the members. A public company has to seek certificate for commencement of business. A public company is required to file its accounts with the registrar. On the Basis of Liability: A company limited by shares is a company in which the liability of its members is limited by its memorandum to the amount unpaid on the Limited by Shares: shares respectively held by them. It may either public or private company. Limited by Guarantee: Unlimited Company: A company in which the liability of its members is limited by its memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up. Private firm (such as a sole proprietorship or general partnership) whose owner(s), partners, or stockholders accept personal and unlimited liability for its debts and obligations in return for avoiding double taxation of a limited company. Unlimited liability firms are exempt from filing their annual accounts with a public authority (such as Registrar of Companies) unless they are subsidiaries of limited liability holding companies. It is also called unlimited company. SHARE A unit of ownership that represents an equal proportion of a company s capital is called share. It entitles its holders (shareholders) to an equal claim on the company s profit and an equal obligation for the company s debts and losses. KINDS OF SHARE There are different kinds of shares which can be raised by companies are: Ordinary shares. Preference shares. (1) ORDINARY SHARES The equity shares or ordinary shares are those shares on which the dividend is paid after the dividend on fixed rate has been paid on preference shares. CHARACTERISTICS OF ORDINARY SHARES No fixed rate of dividend. Dividend is paid after dividend at a fixed rate is paid on preference shares. At the time of liquidation, capital on equity is paid after preference shares have been paid back in full. Non-redeemable. Equity shareholders have voting rights & thus, control the working of the company. Equity shareholders are the virtual owners of the company. (2) PREFERENCE SHARES Preference shares are those shares which carry with them preferential rights for their holders, i.e. preferential right as to fixed rate of dividend and as to repayment of capital at the time of winding up of the company. Page 40
CHARACTERISTICS OF PREFERENCE SHARES Fixed rate of dividend. Priority as to payment of dividend. Preference as to repayment of capital during liquidation of the company. Generally preference shareholders do not have voting rights. KINDS OF PREFERENCE SHARES On the Basis of Dividend: Cumulative Preference They are those shares on which the dividend at a fixed rate goes on Shares: cumulating till it is all paid. Non Cumulative Preference Shares: These are those shares on which the dividend does not cumulate. On the Basis of Conversion: Convertible Preference The owners of these shares have the option to convert their preference Shares: shares into ordinary shares as per the terms of issue. Non Convertible Preference Shares: The owners of these shares do not have any right of converting their shares into ordinary shares. On the Basis of Redemption: Redeemable Preference These are to be purchased back by the company after a certain period Shares: as per the terms of issue. Irredeemable Preference Shares: These are not to be purchased back by the company during its lifetime. SHARE CAPITAL Share capital is the part of the finance of a company received from its members or shareholders in exchange for shares. TYPES OF SHARE CAPITAL Authorized Share Capital: The maximum amount of shares capital that may be issued by a company, as detailed in the company s memorandum of association is called authorized capital or registered capital. The authorized share capital must be disclosed on the face of the balance sheet or alternatively in the notes to the accounts. Issued Share Capital: Called Up Share Capital: The amount of the authorized share capital of a company for which shareholders have subscribed is called issued share capital. Called up capital is the part of the issued share capital of a company payment for which has either been received (paid up share capital) or requested but not yet received. Some shares are paid for in part at the time of issue, with subsequent requests for the outstanding payment. When all requests have been paid, the called-up share capital will equal the paid-up share capital. Page 41
Paid Up Share Capital: The part of the issued share capital of a company that shareholders have paid into the company for their fully paid or partly paid shares is called paid up share capital. SHARE PREMIUM Share premium is the amount payable for shares in a company and issued by the company itself in excess of their nominal value. Share premium received by a company must be credited to a share premium account, which cannot be used for paying dividends to the shareholders. SHARE DISCOUNT A share issued at a price below its par value. The discount is the difference between the par value and the issue price. PRELIMINARY EXPENSES Expenses incurred for the registration and documentation in the setting up of a company is called preliminary expenses. It is treated as current asset in the balance sheet. ARTICLES OF ASSOCIATION Article of association is the document that governs the running of a company. It sets out voting rights of shareholders, conduct of shareholders and directors meetings, power of management, etc. MEMORANDUM OF ASSOCIATION Memorandum of association is an official document setting out the detail of a company s existence. It must be signed by the first subscribers and must contain the following information: The name of company. The address of the registered office. The objects of the company. A statement that the company is a public company. A statement of limited liability. Amount of the guarantee. The amount of authorized share capital and its division. GENERAL JOURNAL ENTRIES ISSUE OF SHARES AT PAR Bank DR. (with amount received) Ordinary shares application CR. (with amount received) (To record the cash received from general public at par) ----------------------------------------------------------------------------------------------------------------- Ordinary shares application DR. (with the amount of shares issued) Ordinary shares capital CR. (with the amount of shares issued) (To record the shares issued to general public at par) ----------------------------------------------------------------------------------------------------------------- ILLUSTRATION # 1: (Issued at Par) Paramount Co. Ltd. has an authorized capital of Rs.250,000 divided into 25,000 ordinary shares of Rs.10 each. The company invites application for 3,000 ordinary shares at par from public along with money. The last day, the banker of the company has informed that only 3,000 ordinary shares applications were received. The management of the company then decided to issue the same to the public. Page 42
Prepare necessary journal entries. SOLUTION # 1: Paramount Co. Ltd. General Journal Date Particulars P/R Debit Credit 1 Bank (3,000 x 10) 30,000 Ordinary shares applications 30,000 (To record the shares applications received at par) 2 Ordinary shares application 30,000 Ordinary shares capital (3,000 x 10) 30,000 (To record the shares issued to the public at par) ILLUSTRATION # 2: (Issued at Par) Diamond Co. Ltd. is offering 35,000 ordinary shares of Rs.10 each to the public along with money. The banker of the company reported that they have received 55,000 ordinary shares application at par upto the last day. The company has decided to issue 35,000 ordinary shares and instructed to the banker that excess amount refund to whom shares were not allotted. Prepare necessary journal entries. SOLUTION # 2: Diamond Co. Ltd. General Journal Date Particulars P/R Debit Credit 1 Bank (55,000 x 10) 550,000 Ordinary shares applications 550,000 (To record the shares applications received at par) 2 Ordinary shares application 350,000 Ordinary shares capital (35,000 x 10) 350,000 (To record the shares issued to the public at par) 3 Ordinary shares application 200,000 Bank (20,000 x 10) 200,000 (To record the refund of excess money to the public) ISSUE OF SHARES AT PREMIUM Bank DR. (with amount received) Ordinary shares application CR. (with amount received) (To record the cash received from general public at premium) ----------------------------------------------------------------------------------------------------------------- Ordinary shares application DR. (amount of shares issued at par plus premium) Ordinary shares capital CR. (with the amount of shares issued at par) Ordinary shares premium CR. (with the premium amount) (To record the shares issued to the public at premium) ----------------------------------------------------------------------------------------------------------------- Ordinary shares application DR. (with the amount refund to public) Bank CR. (with the amount refund to public) (To record the refund of excess money to public) ----------------------------------------------------------------------------------------------------------------- Page 43
ILLUSTRATION # 3: (Issued at Premium) Regal Ltd. has registered capital of Rs.3,000,000 divided into 150,000 ordinary shares of Rs.20 each. The company invites applications for 28,000 ordinary shares of Rs.20 each at Rs.26 each along with money. The banker has reported that they have received 28,000 ordinary shares applications at premium. The company decided to issue the same number of shares to the public. Prepare necessary journal entries. SOLUTION # 3: Regal Ltd. General Journal Date Particulars P/R Debit Credit 1 Bank (28,000 x 26) 728,000 Ordinary shares applications 728,000 (To record the shares applications received at premium) 2 Ordinary shares application 728,000 Ordinary shares capital (28,000 x 20) 560,000 Ordinary shares premium (28,000 x 6) 168,000 (To record the shares issued to the public at premium) ILLUSTRATION # 4: (Issued at Premium) Unilever Ltd. invites shares applications from 1 April to 10 April for 26,000 ordinary shares of Rs.10 each with the premium of Rs.2 each. On 10 April, the banker of the company informed to the company that they have received total 42,000 shares application along with money. On 18 April the board has decided to issue 26,000 ordinary shares at premium after balloting and instructed to banker that they must refund the amount to whom they have not issued shares. Prepare necessary journal entries. SOLUTION # 4: Unilever Ltd. General Journal Date Particulars P/R Debit Credit 10 Bank (42,000 x 12) 504,000 April Ordinary shares applications 504,000 (To record the shares applications received at premium) 18 Ordinary shares application 312,000 April Ordinary shares capital (26,000 x 10) 260,000 Ordinary shares premium (26,000 x 2) 52,000 (To record the shares issued to the public at premium) 18 Ordinary shares application 192,000 April Bank (16,000 x 12) 192,000 (To record the refund of excess money to the public at premium) Page 44
ISSUE OF SHARES AT DISCOUNT Bank DR. (with amount received) Ordinary shares application CR. (with amount received) (To record the amount received from public at discount) ----------------------------------------------------------------------------------------------------------------- Ordinary shares application DR. (with the amount of shares issued at discount) Ordinary shares discount DR. (with the amount of discount) Ordinary shares capital CR. (with the amount of shares issued at par) (To record the shares issued to public at discount) ----------------------------------------------------------------------------------------------------------------- Bank DR. (with the amount of shares issued at discount) Ordinary shares discount DR. (with the amount of discount) Ordinary shares capital CR. (with the amount of shares issued at par) (To record the shares issued to underwriter as per agreement) ----------------------------------------------------------------------------------------------------------------- ILLUSTRATION # 5: (Issued at Discount) Pepsi Co. Ltd. has an authorized capital of Rs.2,500,000 divided into 100,000 ordinary shares of Rs.25 each. The company invites applications for 35,000 ordinary shares of Rs.25 each at Rs.20 each for the public with the agreement by underwriter. On the last day, the banker has reported that they have received 26,000 ordinary shares applications from public. The management then decided to issue the 26,000 ordinary shares to the public and remaining shares will be taken up by the underwriter as per agreement. Prepare necessary journal entries. SOLUTION # 5: Pepsi Co. Ltd. General Journal Date Particulars P/R Debit Credit 1 Bank (26,000 x 20) 520,000 Ordinary shares applications 520,000 (To record the shares applications received at discount) 2 Ordinary shares application 520,000 Ordinary shares discount (26,000 x 5) 130,000 Ordinary shares capital (26,000 x 25) 650,000 (To record the shares issued to the public at discount) 3 Bank (9,000 x 20) 180,000 Ordinary shares discount (9,000 x 5) 45,000 Ordinary shares capital (9,000 x 25) 225,000 (To record the shares issued to the underwriter at discount as per agreement) DEBENTURES Debentures are the most common form of long-term loan taken by a company. It is usually a loan repayable at a fixed date, although some debentures are irredeemable securities. Most debentures also pay a fixed rate of interest, and this interest must be paid before a dividend is paid to shareholders. Page 45
ISSUE OF DEBENTURES AT PAR AND PAYBACK AT PAR Bank DR. (with the amount received) Debentures payable CR. (with nominal value) (To record the debentures issued at par and payback at par) ----------------------------------------------------------------------------------------------------------------- ILLUSTRATION # 6: (Issued at Par and Payback at Par) The company has issued 15,000 7% debentures of Rs.100 each at par and agreed to pay back after 3 years at par. Prepare necessary journal entries. SOLUTION # 6: General Journal Date Particulars P/R Debit Credit 1 Bank (15,000 x 100) 1,500,000 7% Debentures payable (15,000 x 100) 1,500,000 (To record the issue of 7% debentures at par and payback at par after 3 years) ISSUE OF DEBENTURES AT PREMIUM AND PAYBACK AT PAR Bank DR. (with amount received) Debentures payable CR. (with par value) Premium on debenture CR. (with amount received in premium) (To record the debentures issued at premium and payback at par) ----------------------------------------------------------------------------------------------------------------- ILLUSTRATION # 7: (Issued at Premium and Payback at Par) The company has issued 23,000 10% debentures of Rs.100 each at Rs.105 and agreed to pay back after 5 years at Rs.100 each. Prepare necessary journal entries. SOLUTION # 7: General Journal Date Particulars P/R Debit Credit 1 Bank (23,000 x 105) 2,415,000 10% Debentures payable (23,000 x 100) 2,300,000 Premium on debentures (23,000 x 5) 115,000 (To record the issue of 10% debentures at premium and payback at par after 5 years) ISSUE OF DEBENTURES AT DISCOUNT AND PAYBACK AT PAR Bank DR. (with amount received) Discount on debenture DR. (with discount amount) Debentures payable CR (with par value) (To record the debentures issued at discount and payback at par) ----------------------------------------------------------------------------------------------------------------- Page 46
ILLUSTRATION # 8: (Issued at Discount and Payback at Par) The company has issued 30,000 8% debentures of Rs.100 each at Rs.95 and redeemable after 5 years at Rs.100 each. Prepare necessary journal entries. SOLUTION # 8: General Journal Date Particulars P/R Debit Credit 1 Bank (30,000 x 95) 2,850,000 Discount on debentures (30,000 x 5) 150,000 8% Debentures payable (30,000 x 100) 3,000,000 (To record the issue of 8% debentures at discount and payback at par after 5 years) ISSUE OF DEBENTURES AT PAR AND PAYBACK AT PREMIUM Bank DR. (with amount received) Loss on redemption DR. (with amount of loss at the time of payback) Debentures payable CR. (with par value) Premium on redemption CR. (the amount will be paid as premium) (To record the debentures issued at par and payback at premium) ----------------------------------------------------------------------------------------------------------------- ILLUSTRATION # 9: (Issued at Par and Payback at Premium) The company has issued 26,000 6% debentures of Rs.100 each at par and redeemable after 6 years at Rs.106 each. Prepare necessary journal entries. SOLUTION # 9: General Journal Date Particulars P/R Debit Credit 1 Bank (26,000 x 100) 2,600,000 Loss on redemption (26,000 x 6) 156,000 6% Debentures payable (26,000 x 100) 2,600,000 Premium on redemption (26,000 x 6) 156,000 (To record the issue of 6% debentures at par and payback at premium after 6 years) ISSUE OF DEBENTURES AT DISCOUNT AND PAYBACK AT PREMIUM Bank DR. (with amount received) Loss on redemption DR. (with amount of loss at the time of payback) Discount on debenture DR. (with the discount amount) Debentures payable CR. (with par value) Premium on redemption CR. (the amount will be paid as premium) (To record the debentures issued at discount and payback at premium) ----------------------------------------------------------------------------------------------------------------- Page 47
ILLUSTRATION # 10: (Issued at Discount and Payback at Premium) The company has issued 35,000 9% debentures of Rs.100 each at Rs.93 and redeemable after 8 years at Rs.106 each. Prepare necessary journal entries. SOLUTION # 10: General Journal Date Particulars P/R Debit Credit 1 Bank (35,000 x 93) 3,255,000 Loss on redemption (35,000 x 6) 210,000 Discount on debentures (35,000 x 7) 245,000 9% Debentures payable (35,000 x 100) 3,500,000 Premium on redemption (35,000 x 6) 210,000 (To record the issue of 9% debentures at discount and payback at premium after 8 years) FINANCIAL STATEMENTS Financial statement is a written report which quantitatively describes the financial health of a company. Financial statements are usually compiled on a quarterly and annually basis. Financial statements include: Income Statement. Balance Sheet. Cash Flow Statement. Statement of Changes in Equity. Notes to the Financial Statements. INCOME STATEMENT Income statement shows the financial performance of the business. It shows the result of operations for a period. It consists of revenue and expenses. When total revenues exceed the total expenses, the resulting amount is net profit. When expenses exceed revenues, the resulting amount is net loss. BALANCE SHEET Balance sheet shows the financial position of business. It is listing of firm s assets, liabilities and owner s equity on a given date. It is a quantitative summary of company s financial condition at a specific point in time, including assets, liabilities and net worth. The first part of balance sheet shows all the productive assets a company owns, and the second part shows all the financing methods (such as liabilities and owner s equity). Page 48
Format of Income Statement Name of Company Income Statement For the Period Ended Sales Less: Sales discount Less: Sales returns and allowances () Net sales Less: Cost of Goods Sold: Merchandise inventory (beg) Add: Net Purchases: Purchases Add: Transportation in Delivered purchases Less: Purchase discount () Less: Purchase returns & allowances () Net purchases Merchandise available for sale Less: Merchandise inventory (end) () Cost of goods sold Gross profit Less: Operating Expenses: Office salaries expense Directors fee expenses Advertising expense Office supplies expense Rent expense Insurance expense Auditor s fee expenses Bad debts expense Depreciation expense Total operating expenses Profit/loss from operation Add: Other Income: Commission income Income before income tax Less: Income tax expense Net profit/loss () () /() () /() Page 49
Format of Balance Sheet Name of Company Balance Sheet As on Equities Assets Shareholder s Equity: Fixed Assets: Authorized Capital: Goodwill ordinary shares Plant & equipment @ Rs.xx each Less: All for depreciation () Preliminary expenses Issued & Paid-up Capital: Total fixed assets ordinary shares @ Rs.xx each Current Assets: Add: Shares premium Office supplies Less: Shares discount () Prepaid Merchandise inventory Add: Retained earnings Accounts receivable Add: Reserves Cash/Bank Total shareholder s equity Total current assets Liabilities: Long-Term Liabilities: Debentures payable Premium on redemption Total long-term liabilities Current Liabilities: Accounts payable Cash dividend payable Stock dividend payable Accrued expenses Unearned income Total current liabilities Total equities Total assets Page 50
PRACTICE QUESTIONS Question # 1: 1990 Regular & Private BIEK M/S. Salman Ltd. has the registered capital of Rs.1,000,000 divided into ordinary shares of Rs.50 each. 15,000 shares of Rs.50 each were offered to the public at Rs.55 per share. (a) Give Journal entries in proper form in the book of the company under each of the following assumptions separately: (i) Applications were received for 20,000 shares. The company allotted the shares offered and refunded the amount received in excess. (ii) Applications were received for 14,000 shares. The company finalized the allotment of these shares. (b) Prepare share capital and bank accounts under each of the above assumptions separately. Question # 2: 1998 Regular & Private BIEK Shahid Mujib & Company Ltd. offered to the public 70,000 ordinary shares of Rs.10 each at Rs.15 (Rs.5 being premium per share) on January 1, 1998. The company s bankers received applications for 90,000 ordinary shares up to January 15, 1998. On January 31, 1998 the company finalized the allotment of shares and directed to bank to refund the excess money received on account of over-subscription. (a) Give necessary journal entries in proper form on the books of Shahid Mujib & Company Ltd. of the above transactions (Give narration below each entry). (b) Set up T accounts of cash in bank, ordinary share capital and ordinary share premium. (c) Prepare initial balance sheet of the company. Question # 3: 1994 Regular & Private BIEK Zain Company Ltd. was incorporated with an authorized capital of Rs.1,000,000 divided into 100,000 ordinary shares of Rs.10 each. 50,000 shares were issued to the public at par, payable in full with application. The company s banker reported that applications were received for 45,000 shares. The remaining shares which were not taken up by the public were taken up by the underwriters under the agreement. The directors finalized the allotment of shares. The preliminary expenses amounted to Rs.15,000. The company acquired a delivery truck and in payment issued 5,000 ordinary shares of Rs.10 each. The market price of the shares was Rs.12 per share. (a) Give entries in the General Journal of the company for the above transactions. (b) Prepare initial balance sheet of the company. Question # 4: 2003 Private BIEK The following are transactions, completed by Abdul Sattar and Company: (a) Received applications for 50,000 ordinary shares of Rs.10 each @ Rs.12 per share. (b) Allotted 40,000 ordinary shares of Rs.10 each at a premium of Rs.2 per share. (c) Refunded application money on 10,000 ordinary shares @ Rs.12 per share. (d) Paid preliminary expenses Rs.20,000. (e) Allotted 5,000 ordinary shares of Rs.10 each against land costing Rs.60,000. (f) Allotted 5,000 ordinary shares of Rs.10 each to the promoters of the company for their services. Prepare General Journal entries for the above transactions. Question # 5: 2003 Regular BIEK Mahfooz & Co. Ltd. was registered with capital of Rs.5,000,000 divided into ordinary shares of Rs.10 each. The company offered to the public 15,000 shares payable in full on application. The Page 51
bank informs that 20,000 shares application were received. The Co. allotted the offered shares and refunded the amount received in excess. During the year the Co. completed the following transactions: (a) Issued 5,000 shares at Rs.18 each for cash. (b) Issued 7,000 shares to the promoters as par. (c) Purchased computers for Rs.40,000 and issued 3,000 shares. (d) Purchased a piece of land and issued 50,000 shares at Rs.15. Give entries in General Journal for Mahfooz & Co. Ltd. Question # 6: 2005 Regular & Private BIEK Mehmood Ltd. was registered with the authorized capital of Rs.2,000,000 divided into 200,000 ordinary shares of Rs.10 each. The company offered to the public 170,000 shares for subscription at par. The applications for 150,000 shares were received. The underwriters, under the agreement, subscribed for the remaining 20,000 shares. The company paid 2% underwriting commission. The company also completed the following transactions: (a) Issued 4,200 shares at par to the promoters in consideration for their services for the promotion of the company. (b) Purchased equipment for Rs.80,000 and issued 7,600 shares of Rs.10 each. (c) Purchased office building for Rs.130,000 and issued 12,000 shares of Rs.10 each as purchase consideration. Record the above transactions in the General Journal of the company. Question # 7: 2007 Regular & Private BIEK Yusufzai & Company Limited was registered with the capital of Rs.10,000,000 divided into ordinary shares of Rs.10 each. The company offered to the public 30,000 shares payable in full on application. The bank informs that 40,000 share applications were received. The company allotted the offered shares and refunded the amount received in excess. During the year, the company completed the following transactions: (a) Issued 10,000 shares at Rs.16 each for cash. (b) Issued 14,000 shares to the promoters at par. (c) Purchased computers for Rs.80,000 and issued the suitable number of shares. The market value of shares was Rs.12.50 each. (d) Purchased a piece of land and issued 100,000 shares at Rs.15 each. Give entries in the general journal for Yusufzai & Co. Ltd. Question # 8: 1996 Regular & Private BIEK On January 1, 1996, Jansher Company Ltd. was registered with an authorized capital of Rs.1,200,000 divided into 6,000 10% preference shares of Rs.100 each and 60,000 ordinary shares of Rs.10 each. On January 15, 1996, the company offered 4,000 10% preference shares and 50,000 ordinary shares, payable in full with application. On January 25, 1996, the company s banker reported that Rs.500,000 on 5,000 10% preference shares and Rs.400,000 on 40,000 ordinary shares were received with applications. The remaining ordinary shares which were not taken up by the public were taken up by the underwriters under the agreement. On January 31, 1996, the directors of the company finalized the allotment of 4,000 10% preference shares and 40,000 ordinary shares to the public and 10,000 ordinary shares to the underwriters and directed the banker to refund the excess of application money. Page 52
On February 10, 1996, the company allotted 4,000 ordinary shares of Rs.10 each inconsideration of purchase price of machinery. The shares were issued at market price of Rs.12.50 each. (i) Give dated entries in the General Journal of the Company for the above transactions. (ii) Prepare initial balance sheet of the company on February 29, 1996. Question # 9: 2012 Private BIEK Naveed Company Ltd. Was incorporated with an authorized capital of Rs.5,000,000 divided into 500,000 ordinary shares of Rs.10 each. The company took over the running business of M.M. Brothers, with the following assets and liabilities: Cash Rs.40,000 Accounts receivable Rs.200,000 Merchandise inventory Rs.360,000 Machinery Rs.800,000 Accounts payable Rs.400,000 The company issued to the vendor 104,000 ordinary shares of Rs.10 each fully paid as purchase consideration. i) Give entries in the General Journal of Naveed Co. Ltd. to record the above transactions. ii) Prepare initial balance sheet of the company. Question # 10: 1991 Regular & Private BIEK Eastern Company Ltd. was incorporated with a capital of Rs.2,000,000 divided into 200,000 ordinary shares of Rs.10 each. The company took over the sunning business of Danish Brothers. The balance sheet items of the business of Danish Brothers as of the date of purchase were as under:- Cash Rs. 20,000 Accounts receivable 56,000 Merchandise inventory 80,000 Office supplies 4,000 Machinery 200,000 Allowance for depreciation Machine 120,000 Accounts payable 40,000 The company took over the business assets other than cash and assumed the liabilities. In exchange, the company issued 15,000 ordinary shares of Rs.10 each as fully paid-up. The company also made an additional issue of 30,000 shares of Rs.10 each at Rs.12 per share to the public. (a) Give entries in the General Journal of Eastern Co. Ltd. (b) Prepare initial Balance Sheet of the company. Question # 11: 2004 Regular & Private BIEK Essani Company Ltd. offered 60,000 shares of Rs.20 each payable full with application. The company received 90% application from public. The remaining shares were sold to underwriter at 10% commission. Give necessary journal entries. Question # 12: 2013 Private BIEK Sana & Co. was registered with an authorized capital of Rs.5,000,000 divided into 500,000 ordinary shares of Rs.10 each. The company offered 20,000 shares to the public payable in full on application. The bank of the company informed that applications for 25,000 shares were Page 53
received. The company allotted the offered shares and refunded the amount received in excess. During the year, the company completed the following transactions: i) Issued 6,000 ordinary shares at Rs.15 each for cash. ii) Issued 3,000 shares to the promoters at par in consideration of their services of the Co. iii) Issued 5,000 12% debentures of Rs.100 each at Rs.95 cash. Give entries in the General Journal of Sana & Co. Question # 13: 2001 Regular & Private BIEK Al-Mansoor Co. Limited made the following transactions. The par value of share is Rs.50 and of debenture Rs.100. (a) The company issued 20,000 shares at Rs.60 each for cash. (b) The company issued 10,000 shares at Rs.45 each for cash. (c) The company issued 5,000 shares for purchase of a piece of land with market value of Rs.300,000. (d) The company issued 2,000 shares at par to the promoters of the company. (e) The company issued 2,000, 10% debentures at Rs.100 each repayable after 5 years at Rs.110 each. (f) The company issued 2,000, 10% debentures at Rs.90 each repayable after 10 years at Rs.110 each. Give necessary entries in proper form to record the above transactions. Give explanation below each entry. Question # 14: 2002 Regular BIEK Mehran Company Ltd. made the following transactions. The par value of the share is Rs.10/- and of the debenture is Rs.100/-. (a) The company issued 10,000 shares at Rs.13/- each for cash. (b) The company issued 10,000 shares for purchase of building which had a market value of Rs.150,000/-. (c) The company issued 1,000 shares to the promoters of the company. (d) The company issues 1,000 10% debentures at Rs.100/- each repayable after 5 years at Rs.110/- each. (e) The company issued 1,000 10% debentures of Rs.90/- each repayable after 10 years at Rs.110/- each. Give necessary general journal entries to record the above transactions. Give explanation below each entry. Question # 15: 2013 Regular BIEK Consider the following cases of Iqbal Corporation separately: i) Issued 1,500 shares of Rs.10/- each at Rs.15/- each for the purchase of land. ii) Issued 1,000 shares of Rs.10/- at par for cash. iii) Purchased a machine for Rs.72,000/- and issued sufficient number of shares. (Market price of share is Rs.12/-). iv) Issued 1,000 8% debentures of Rs.100/- at par redeemable at Rs.105/-. v) Issued 2,000 9% debentures of Rs.100/- at Rs.90/- for cash. Record the above the transactions in General Journal. Question # 16: 2004 Regular & Private BIEK Mehran Company Ltd. completed the following transactions: (a) Issued 15,000 shares of Rs.10 at premium of Rs.2 each for cash. Page 54
(b) Purchased building worth Rs.600,000 and issued 61,000 shares of Rs,10 each. (c) Debentures of Rs.80,000 were settled by issue of sufficient number of shares of Rs.10 each. (d) Purchased four computers of Rs.60,000 each by issuing sufficient number of shares of Rs.10 each. The market price of each share is Rs.12. (e) The company issued 2,000 10% debentures of Rs.100 each at Rs.96 each payable at Rs.103 after 5 years. Prepare journal entries in the book of company to record the above transactions. Question # 17: 2008 Regular & Private BIEK Aamna Ltd. was registered with the authorized capital of Rs.8,000,000 divided into the shares of Rs.10 each. The company made the following transactions: (a) Offered 500,000 shares to public at par. The bank informed that Rs.4,500,000 were received. The directors made the final allotment. (b) Issued 10,000 shares for the purchase of equipments at Rs.13 each. (c) Issued 250,000 shares for the purchase of machinery costing Rs.2,250,000. (d) Paid Rs.120,000 for preliminary expenses. (e) Issued 2,000 8% debentures of Rs.100 each at Rs.95 for cash. (f) Issued 1,000 10% debentures of Rs.100 each at Rs.105 each. (a) Record the above transactions in General Journal. (b) What is the amount of company s paid up capital? Question # 18: 2010 Regular & Private BIEK Zulfiqar Ltd. registered with a capital of Rs.1,000,000 which is divided into 100,000 ordinary shares @ Rs.10 each. During the year 2009 following transactions were completed. (1) Issued 6,000 ordinary shares on full settlement of bonds payable of Rs.65,000. (2) Issued 1,500 ordinary shares to the promoters for services rendered by them. (3) Issued 4,000 5% 5 years debentures of Rs.100 at Rs.98 each. (4) Purchased building for Rs.150,000 and issued ordinary shares which have a market value of Rs.12.50 each. Prepare entries in General Journal (Show computation). Question # 19: 2000 Regular & Private BIEK ABC Company Limited completed the following transactions. The par value of shares of Rs.10 and debentures Rs.100. (a) Issued 10,000 shares at Rs.15 each for cash. (b) Acquired land costing Rs.100,000 by issuing 7,000 shares at Rs.10 each. (c) Purchased furniture and in consideration issued 5,000 shares at Rs.12 each. (d) Issued 5,000 shares at par to the promoters of the company. (e) Issued 1,000 10% 10 years debentures at Rs.100 each repayable after 10 years at Rs.105. (f) Issued 2,000 15% debentures at Rs.95 repayable after 8 years at Rs.105. Give necessary journal entries in proper form to record the above transactions. Give explanation below each entry. Question # 20: 2011 Private BIEK The following transactions were completed by Amjad Co. Ltd. (the par value of share is Rs.10/- each). (a) Company offered to public 50,000 ordinary shares at par. The company received application for 70,000 shares at Rs.15/- per share. Company allotted the shares offered and refunded the amount received in excess. Page 55
(b) The company purchased machinery for Rs.130,000/- and in consideration issued to vendor, its own 11,000 ordinary shares of Rs.10/- each. (c) The company issued 8,000 debentures of Rs.100/- each, redeemable after five years at Rs.110/- each. All debentures were subscribed. (d) Paid for preliminary expenses Rs.25,000/-. Prepare Statement of Profit and Loss for the period ended on December 31 st, 2010. Question # 21: 2011 Regular BIEK Umer Company Ltd. issued the following shares and debentures having par value of Rs.10/- and Rs.100/- each. (a) The company received applications for 200,000 ordinary shares of Rs.10/- each. Allotment letters were issued for 150,000 shares and the excess subscription amount was refunded. (b) The promoters paid Rs.20,000 for printing of Memorandum of Association of the company. (c) A computer was acquired by issuing 4,000 ordinary shares of Rs.10/- each fully paid up. The market price per share was Rs.18/-. (d) Issued 3,000 14% 5 years debentures of Rs.100/- each at par redeemable after 5 years at Rs.105. Give entries in the General Journal of the company. Question # 22: 1992 Regular & Private BIEK The following transactions were completed by Al-Murtuza Company Limited:- (a) Issued 50,000 ordinary shares of Rs.10 each at Rs.12.50 per share to the public payable in full on application. The company received applications for 80,000 shares. The company allotted the shares offered and refunded the amount received in excess. (b) The company issued to the public 50,000 ordinary shares of Rs.10 each payable in full on application. The entire issue was guaranteed by the underwriters. The company received applications for 40,000 shares. As per agreement the underwriters subscribed the balance of the issuance. (c) The company purchased machinery at a price of Rs.450,000 and consideration issued to the vendors its own 43,000 ordinary shares of Rs.10 each. (d) The company issued 10,000 debenture bonds of Rs.100 each redeemable at Rs.105 per debenture after five years. All the debentures were subscribed. (e) The company issued 10,000 debenture bonds of Rs.10 each at Rs.95 per debenture. The debentures are redeemable at par after five years. All the debentures were subscribed. Give entries in the General Journal of the company to record the above transactions. Question # 23: 2002 Private BIEK The Pakistan State Oil Ltd. Issued 1,000,000 ordinary shares of Rs.10/- each at Rs.9/- per share to general public on Nov. 1, 2001 to argument its cash reserves. The bankers Habib Bank Ltd. reported on 5 th Nov. 2001 that the public offering was under-subscribed by 200,000 ordinary shares. On Nov. 20, the board of directors finalized the allotment of 800,000 shares to the public and the remaining 200,000 under-subscribed shares were allotted to the under-writers as per agreement. In addition to above, the PSO Ltd. made the following transactions:- Nov. 25: Acquired land and building Rs.1,050,000/- and issued 100,000 ordinary shares of Rs.10/- each at Rs.10.50/- per share to vendors in consideration of the assets taken over. Dec. 28: The company issued 2,500, 8% debentures at Rs.100/- each repayable after 5 years at Rs.108 each. Page 56
Dec. 29: The company issued 3,500, 11% debentures at Rs.90/- each repayable after 10 years at Rs.111/- each. Record general journal entries in standard form. Question # 24: 1997 Regular & Private BIEK The following transactions were completed by Al-Mustafa Company Limited:- (a) Offered 100,000 ordinary shares of Rs.10 each of Rs.12 per share to the public in full on application. The company received applications for 120,000 shares. The company allotted the shares offered and refunded excess amount received. (b) The company offered to the public 40,000 ordinary shares of Rs.10 each payable in full on application. The entire issue was under-written. The company received applications for 30,000 shares. These shares were allotted to the public and as per agreement underwriters subscribed the balance of the issue. (c) The company purchased a piece of land and in consideration issued 45,000 ordinary shares of Rs.10 each to the vendors. The value of land was determined to be Rs.500,000. (d) The company allotted 10,000 ordinary shares to promoters for services rendered. (e) The company issued 20,000 mortgage debentures of Rs.100 each, redeemable @ Rs.105 each after five years. All the debentures were duly subscribed. (f) The company issued 10,000 ordinary debentures of Rs.100 each at Rs.90 per debenture. The debentures are redeemable @ Rs.105 each after 10 years. All the debentures were duly subscribed. Give entries in the General Journal of the company to record the above transactions. Question # 25: 2012 Regular BIEK A company offered to the public 100,000 ordinary shares at par at Rs.10 each. The bank informed that applications of Rs.800,000 were received & the remaining shares were issued to underwriters. The company also declared cash dividend of Rs.30,000 to the shareholders. The cost of publications of prospectus and share certificates Rs.24,000 was paid by the company. Record the above in General Journal. Question # 26: 1999 Regular & Private BIEK Zafar & Company Limited made the following issuance. The par value of the company s share is Rs.10:- (a) Issued 15,000 shares at par for cash. (b) Issued 18,000 shares at Rs.12 each for cash. (c) Issued 9,000 shares at Rs.9 each for cash. (d) Issued 12,000 shares for the purchase of furniture worth Rs.130,000. (e) Issued 11,000 shares for the purchase of equipment worth Rs.100,000. (f) Issued 3,000 shares at par value to the promoters of the company for services rendered by them (g) Issued 7,000 shares at par in payment of stock dividend. Record the above transactions in the General Journal of the company. Question # 27: 1993 Regular & Private BIEK Shuja & Co. Ltd. issued ordinary shares (Rs.10/- par) during 1992, as noted below:- (a) 10,000 shares of Rs.14/- each for cash. (b) 4,000 shares of Rs.9/- each for cash. (c) 5,000 shares for the purchase of machine (market price of share being Rs.13/- each). (d) 4,000 shares at par to the promoters, for services rendered. Page 57
(e) 3,000 shares for purchase of equipment having list price of Rs.32,000. (f) 6,000 shares at par as stock dividend. Give entries in General Journal of the company to record the above transactions (Show computations, where necessary). Question # 28: 2006 Regular & Private BIEK Consider the following cases separately wherein the par value of shares and debentures are Rs.10 and Rs.100 respectively. Cases: (a) Issued 10,000 shares at Rs.12 per share for cash. (b) Issued 7,000 shares to the promoters at par. (c) Issued 5,000 8% debentures at Rs.90 each repayable after 10 years at Rs.110 each. (d) Declares sock dividend Rs.40,000. (e) Purchased equipment and issued 3,500 shares of Rs.10 each. The market value of the shares is Rs.15. (f) Purchases furniture for Rs.45,000 and issued 4,000 shares of Rs.10 each. (g) Issued 3,200 shares against stick dividend. The market price is Rs.12.50 per shares. Give entries in General Journal (standard form) to record the above transactions with brief narrations. Question # 29: 1995 Regular & Private BIEK Mehran & Co. Ltd. completed the following transactions during the accounting year 1994. (The par value of shares is Rs.10/- each). (a) Offered 90,000 shares to the public for cash, but received applications along with cash for 120,000 shares. The company allotted the shares offered and refunded the excess money. (b) Acquired equipment at a fair market value of Rs.200,000 and issued 16,000 shares of Rs.10 each at Rs.12.50 per share to the vendors. (c) Acquired land at a cost of Rs.200,000 & issued 22,000 shares of Rs.10/- each to the vendors. (d) Decided to capitalize Rs.100,000 against retained earnings having a balance of Rs.300,000 and issued 8,000 shares of Rs.10/- each. (a) Give entries in the General Journal of the company to record the above transactions. (b) Prepare partial balance sheet of the company. Question # 30: 2009 Regular & Private BIEK Consider the following cases of Shehzad Shoukat & Co. separately wherein the par values of shares and debentures are Rs.10 and Rs.100 respectively. (a) Offered 20,000 shares to the public at par. Applications were received for 24,000 shares. The directors made the final allotment and instructed the bank to refund the excess money. (b) Issued 2,000, 17% debentures at Rs.95 repayable after 5 years at Rs.105. (c) Purchased an open plot for office building for Rs.1,650,000 and issued a sufficient number of shares at Rs.15 each. (d) Decided to capitalize Rs.400,000 against retained earnings and then issued shares at premium of Rs.16. (e) Issued 13,000 shares at par for the purchase of three computers @ Rs.20,000 each. Give General Journal entries to record the above transactions. Page 58
MULTIPLE CHOICE QUESTIONS (MCQS) 1) Which of the following will be the highest amount? a) Paid up capital b) Authorized capital c) Subscribed capital d) Reserve capital 2) Which of the following is a category of share capital of a company? a) Authorized capital b) Issued capital c) Called up capital d) All of the above 3) An ordinary share dividend is: a) Part of the company profits used to reward the shareholders for their investment b) Interest on money lent to the company by its shareholders c) An expense of running the company d) The directors remuneration 4) In Pakistan, the companies are registered under: a) Company Act, 1931 b) Partnership Act, 1932 c) Companies Ordinance, 1984 d) Cooperative Act, 1928 5) A company is formed by: a) Owners b) Promoters c) Directors d) Government 6) A company is managed by: a) Owners b) Promoters c) Directors d) Public 7) The word limited should be after the name of: a) Chartered company b) Statutory company c) Registered company d) Partnership 8) The face value of share is called: a) Book value b) Par value c) Market value d) None of them 9) Ordinary shares are also called: a) Equity shares b) Founders shares c) Preference shares d) Deferred shares 10) The minimum members in private limited company are: a) 2 b) 7 c) 10 d) 20 11) The minimum members in public limited company are: a) 2 b) 7 c) 20 d) 50 12) The maximum number of members in private limited company are: a) 20 b) 30 c) 50 d) Unlimited 13) The maximum number of members in public limited company are: a) 50 b) 20 c) 10 d) Unlimited 14) The person who takes the risk of issuing shares is known as: a) Director b) Promoter c) Public d) Underwriter Page 59
15) Discount on issue of shares account being a loss of: a) Capital b) Revenue c) Expenditure d) None of above 16) Preliminary expense is: a) Current asset b) Current liability c) Factious asset d) Operating expense 17) Debenture holders are: a) Owners b) Creditors c) Directors d) Suppliers 18) Debenture holders receive: a) Fixed interest b) Dividend c) Profit d) None of them 19) Debenture can be issued at: a) Par b) Premium c) Discount d) All of them 20) Memorandum of association of private limited company is signed by: a) Auditor b) Manager c) Secretary d) Promoters 21) A private invitation to the public to purchase the shares of company is called: a) Prospectus b) Audit report c) Articles of association d) Memorandum of association 22) A document which contains the rules and regulations for the internal management of the company is called: a) Prospectus b) Audit report c) Articles of association d) Memorandum of association 23) The company is managed by the group of persons known as: a) Board of directors b) Group of members c) Team of shareholders d) None of them 24) A share of public company is: a) Non-refundable b) Non-transferable c) Transferable d) Non-allotable 25) Total amount of capital in case of company is divided into small units, these units are called: a) Bonds b) Cheques c) Shares d) Reserves 26) Authorized capital is also known as: a) Issued capital b) Registered capital c) Paid up capital d) Called up capital 27) This is not shown in the shareholder s equity section of balance sheet: a) Ordinary share capital b) Ordinary share premium c) Retained earnings d) Dividend payable 28) The amount mentioned in Memorandum of Association is called: a) Authorized capital b) Subscribed capital c) Issued capital d) Reserve capital Page 60