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Issue, Forfeiture, Reissue of Shares

Issue of Shares at Discount

No company can assume its existence in the economy without proper finance or funds. Money plays an important part in their establishment as well as their retention. But the problem is that private sources of funds are not sufficient for meeting the overall requirement of the enterprise. Here comes the concept of shares.  Here, we will look at ‘Issue of Shares at Discount’.

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Introduction to Issue of Shares at Discount

In general, share means a portion of a larger thing. Similarly, in real market share is a small proportion of the total amount of capital of the enterprise. Shares form the major source of any company’s finance in this present world.

Shares tempt the investors also because it can give huge profits to them unlike the fixed rate of return on debentures. There are various ways or prices at which a company issues its shares like at par, at a premium and at discount.

Issue of Shares at Discount

The issue of shares at a discount means the issue of the shares at a price less than the face value of the share. For example, if a company issues share of Rs.100 at Rs.90, then Rs.10 (i.e. Rs 100—90) is the amount of discount.

It is nothing but a loss to the company. One must remember that the issue of share below the Market Price (MP) but above the Face Value (FV) is not termed as ‘Issue of Share at Discount’.

The issue of Share at Discount is always below the Nominal Value (NV) of the shares. The company debits it to a separate account called ‘Discount on Issue of Share’ Account.

Learn more about Issue of Shares at Par in detail.

Conditions for Issue of Shares at Discount

  1. In order to issue the shares at a price less than the face value, the company has to get permission from the relevant authority. For seeking permission, they should call and upon a general meeting and discuss and authorize the matter in that meeting.
  2. There is a cap on the rate of discount. A company cannot issue any shares at more than 10% discount.
  3. The company should issue the shares within 60 days of receiving permission from the relevant authority. In certain cases, the company can extend this time frame after getting permission in the permission.
  4. The company cannot issue these shares before passing of 1 year from the date of commencement of business.
  5. The shares must belong to the same class of shares which are already available in the market. For example, if the has previously issued Equity shares then this time also, the company has to issue Equity shares only.
  6. Also, the company has to acquire the sanction by the Central Government after getting approval from the general meeting.

Note: In case of rehabilitation of sick industries, the permission of ‘Tribunal’ is required rather than the ‘Central Government’.

Journal Entries

Generally, the shares are issued at discount at the time of allotment of shares. So, all the entries other than the allotment entries will be unaffected by these shares.

1. Entry for Due of Allotment

Journal

Date Particulars L.F. Amount Dr. Amount Cr.
Share Allotment A/c                                                Dr. With the amount due
Discount on Issue of Shares A/c                           Dr. With the amount of discount
     To Share Capital A/c                                           Cr. Total Amount (Due Amount + Discount)
(Being the allotment money due)

2. Entry for Amount Received

Journal

Date Particulars L.F. Amount Dr. Amount Cr.
Bank A/c                                                                    Dr. With the amount of money received
     To Shares Allotment A/c                                   Cr Amount of money received
(Being the receipt of the amount of allotment)

3. Writing-off the Discount on Issue of Shares

Journal

Date Particulars L.F. Amount Dr. Amount Cr.
Profit and Loss A/c/ Securities Premium A/c  Dr. With the amount of discount
     To Discount on Issue of Shares                       Cr. With the Amount of Discount
(Being the amount of discount on issue of shares written off)

Entry if shares are issued to the underwriters

Journal

Date Particulars L.F. Amount Dr. Amount Cr.
Bank A/c                                                                  Dr. With the amount received
Issue of Shares at Discount A/c                          Dr. Amount of Discount
     Share Capital A/c                                              Cr. Total amount (Amount received and amount of discount)
(Hence, the application money received after adjustment of discount)

Entry if shares are issued to the promoters for their service

Journal

Date Particulars L.F. Amount Dr. Amount Cr.
Preliminary expenses A/c                                   Dr. Amount of Preliminary Expenses
Issue of Shares at Discount A/c                         Dr. With the amount of discount
      Share Capital A/c                                            Cr. With total amount (Preliminary expenses and the amount of discount)
(Being the shares given to the Promoters for their services)

Solved Question on Issue of Shares at Discount

Question 1: What will be the treatment of balance of ‘Discount on issue of shares A/c’ if the company does not write it off? What will be the Journal Entry if shares are issued at a discount and all money is called at the time of application? No. of shares = 100, Face Value= Rs.10, Discount =Rs.1

Answer: The company will show it in the balance sheet on the Assets side under the heading ‘Miscellaneous Expenditure’. This is a fictitious asset and should be gradually written off by transfer to P&L A/c although there is no compulsion to do so.

Journal

Date Particulars L.F. Amount Dr. Amount Cr.
XXX Bank A/c                                                                     Dr. 900
      To Share Application and Allotment A/c       Cr. 900
(Being the amount received after discount)
XXX Share Application and Allotment A/c                  Dr. 900
Discount on Issue of Shares A/c                           Dr. 100
      To Share Capital A/c                                          Cr, 1,000
(Being the allotment done)
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