Issue for Consideration other than Cash

Usually, a company issues shares for cash. It invites the applications from the public and then 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.

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Issue of Shares for Consideration other than Cash

A company generally buys the assets for the business for cash or on credit. Also, it usually issues shares for cash. But, in some cases, it may choose to buy the assets in exchange of shares. It may offer the fully paid equity shares to the vendor for the value of the assets.

If the vendor agrees to it, the company issues him the fully paid shares. Usually, the company receives no cash in respect of these shares. A company may issue these shares at par or at a premium. The company calculates the number of shares on the basis of the amount payable to the vendor. Thus,

$$ \text{Number of shares} = \frac{\text{Amount Payable to the Vendor}}{\text{Issue Price of the shares}} $$

It can also issue shares to the promoters or the lawyers for rendering services in the formation of the company. It 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.

Journal Entries 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.	XXX
	To Share Capital A/c                     (face value)	Cr.		XXX
	To Securities Premium A/c           (premium amount)	Cr.		XXX
	(Being shares issued to the vendor for payment of assets purchased)
2. On the issue of shares to the promoters	Preliminary Expenses A/c	Dr.	XXX
	Goodwill A/c	Dr.	XXX
	To Share Capital A/c	Cr.		XXX
	(Being fully paid up shares issued to promoters for preliminary expenses incurred and services rendered by them)

Solved Example on Consideration other than Cash

Q1. MV Ltd. purchases machinery from Honda Enterprises for ₹500000. It pays the amount due in the form of fully paid shares. Calculate the number of shares when it issues:

1. Shares with face value ₹100 at par.
2. Shares with face value ₹100 at a premium of ₹25.

Ans.

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

= \(\frac{500000}{100}\)

= 5000 shares

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

= \(\frac{500000}{125}\)

= 4000 shares

Q2. Rudra Ltd. purchases a building for ₹650000 from Sun Enterprises. It pays ₹300000 in cash and issues fully paid equity shares of ₹10 each at par for the balance amount. It also issues 50000 fully paid-up shares to the promoters. Pass necessary journal entries.

Ans.

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	Cr.		350000
	To Bank A/c	Cr.		300000
	(Being money paid and shares issued to the vendor for payment of assets purchased)
2.	Goodwill A/c	Dr.	500000
	To Share Capital A/c	Cr.		500000
	(Being fully paid up shares issued to promoters for services rendered by them)