Issue of Shares to Promoters

Issue of shares to refers to a company offering shares to the public in exchange for capital. It invites the applications from the public. After obtaining the minimum subscription it allots the shares to the applicants. On allotment, the title on the shares passes to the shareholders. However, in some cases, a company may also issue the shares for consideration other than cash to the promoters as they promote the company.

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Issue of Shares to Promoters

A company can also issue shares to the promoters or the lawyers or other people for rendering services in the formation of the company. Such services could be in way of technical assistance, legal guidance, engineering services, designing of plant layout, etc.

Usually, the company does not receive any cash in respect of these shares.

The company debits this amount to the Goodwill Account as it will derive the benefit of these services for a long period of time. Hence, it treats this expense as a capital expenditure. It thus needs to show the ‘shares issued for consideration other than cash’ separately under the heading ‘Share Capital’.

The company shall produce a written contract regarding the issue of shares for consideration other than cash before the Registrar of the Companies, within the specified time of allotment.

Browse more Topics under Introduction To Company Accounts

• Basic Concepts of Company Accounts
• Issue of Shares for Cash
• Issue of Shares for Consideration
• Under and Over Subscription
• Calls-in-Advance
• Calls-in-Arrears
• Forfeiture of Shares
• Reissue of Shares
• Issue of Debentures
• Issue of Debentures as Security
• Issue of Preference Shares
• Capital Redemption Reserve Account

Journal Entry:

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1. On the issue of shares to the promoters	Preliminary Expenses A/c	Dr.
	Goodwill A/c	Dr.
	To Share Capital A/c
	(Being fully paid up shares issued to promoters for preliminary expenses incurred and services rendered by them)

 

A company generally purchases the assets for cash or on credit. Also, usually the shares are issued for cash. But, in some cases, a promoter may opt for purchasing the assets in exchange of shares.

It thus offers the fully paid equity shares to the vendor for the cost of the assets. If the vendor agrees, the company may issue him the fully paid shares. However, it may issue these shares at par or at a premium.

 

(source – iPleaders)

It calculates the number of shares on the basis of the amount payable to the seller. Thus,

Number of shares = \(\frac{Amount Payable to the Vendor}{Issue Price of the shares})\

Journal Entry in this regard are:

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1. On the issue of shares to the vendor	Assets A/c (amount payable)	Dr.
	To Share Capital A/c (face value)
	To Securities Premium A/c (premium amount)
	(Being shares issued to the vendor for payment of assets purchased)

Solved Example For You:

Ross Ltd. purchases a building for ₹750000 from Sun Enterprises. It pays ₹400000 in cash and issues fully paid equity shares of ₹100 each at par for the balance amount. It also issues 5000 fully paid-up shares to the promoters. Pass necessary journal entries.

Answer –

Journal Entries

In the books of Rudra Ltd.

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1.	Building  A/c	Dr.	650000
	To Share Capital A/c			350000
	To Bank A/c			400000
	(Being money paid and 3500 shares @₹100 each issued to the vendor for payment of assets purchased)
2.	Goodwill A/c	Dr.	500000
	To Share Capital A/c			500000
	(Being 5000 fully paid up shares @₹100 each issued to promoters for services rendered by them)

 

Working Notes:

Number of shares = \(\frac{Amount Payable to the Vendor}{Issue Price of the shares}\)

= \(\frac{350000}{100}\)

= 3500 shares