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Issue, Forfeiture, Reissue of Shares

Pro Rata Allotment

A company may receive applications for shares more than the number of shares it has offered to the public. This is known as over-subscription of shares. Usually, the companies that are financially strong, have a good reputation in the market or have profitable future prospects, receive over-subscription of shares. Thus, Pro Rata Allotment becomes necessary.

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Pro Rata Allotment

In the case of over-subscription, it is not possible for the company to allot shares to every applicant in the number that he desires.  The company needs to allot the shares in a proper manner. The company has the following three alternatives:

  1. Accept some applications in full and reject the others totally.
  2. Make Pro-Rata Allotment.
  3. Adopt a combination of the above two.

Usually, the company does not consider the multiple applications from the same person. Also, generally a company takes the third course of action. The problem of accounting of over-subscription is usually resolved at the time of allotment of shares.

Pro-rata allotment refers to the allotment of shares in proportion of the shares applied for. When a company makes pro-rata allotment, it adjusts the excess money received at the time of application firstly, towards the allotment and then towards calls.

It refunds any surplus left after adjusting the amount towards allotment and calls to the applicants. The company advertises the allotment procedure in the leading newspapers.

For example, AB Ltd. offers 10000 shares to the public. The issue was heavily oversubscribed. It receives applications for 20000 shares.

When the company decides to allot the shares at pro-rata basis, then it has to allot 10000 shares to the applicants of 20000 shares. Thus, the ratio will be 20000:10000 i.e. 2:1. Hence, an applicant for 2 shares will receive 1 share. This is Pro-rata allotment.

Pro Rata Allotment

Journal Entries in various cases

1. When a company decides to accept some applications in full and reject the other totally

Date Particulars   Amount (Dr.) Amount (Cr.)
1. On receipt of Application money Bank A/c (total application amount) Dr.  xxx
     To Share Application A/c  xxx
(Being application money received for…[email protected] ₹…each)
2. Transfer of application money to Share Capital A/c and refund of excess Share Application A/c Dr. xxx
     To Share Capital A/c                           (application amount) xxx
     To Bank A/c (refund) xxx
(Being share application money on …..shares @ ₹…each, transferred to share capital and money on …..shares @ ₹…each, refunded)
3. On Share Allotment due Share Allotment A/c (amount due on allotment) Dr. xxx
     To Share Capital A/c xxx
(Being share allotment due on …..shares @ ₹…each,)
4. Share Allotment money received Bank A/c (actual amount received) Dr. xxx
     To Share Allotment A/c xxx
(Being share allotment money received)
5. On Share call due Share Call A/c Dr. xxx
     To Share Capital A/c xxx
(Being money on share call due on …..shares @ ₹…each,)
6. Share call amount received Bank A/c Dr. xxx
     To Share Call A/c xxx
(Being share call amount received)

2. When a company makes pro-rata allotment

Date Particulars Amount (Dr.) Amount (Cr.)
1. On receipt of Application money Bank A/c (total application amount) Dr. xxx
     To Share Application A/c xxx
(Being application money received for…[email protected] ₹…each)
2. Transfer of application money to Share Capital A/c Share Application A/c Dr. xxx
      To Share Capital A/c                            (application amount) xxx
      To Share Allotment A/c (excess) xxx
      To Share Call A/c (balance, if any) xxx
(Being share application money on …..shares @ ₹…each, transferred to share capital and money on …..shares @ ₹…each, utilizes towards allotment and call)
3. On Share Allotment due Share Allotment A/c (amount due on allotment) Dr. xxx
     To Share Capital A/c xxx
(Being share allotment due on …..shares @ ₹…each,)
4. Share Allotment money received Bank A/c (actual amount received) Dr. xxx
     To Share Allotment A/c xxx
(Being share allotment money received)
5. On Share call due Share Call A/c Dr. xxx
     To Share Capital A/c xxx
(Being money on share call due on …..shares @ ₹…each,)
6. Share call amount received Bank A/c Dr. xxx
     To Share Call A/c xxx
(Being share call amount received)

 3. When the company adopts a combination of the above two.

In this case, all entries except at the time of transferring the application amount being due are same. The entry at the time of allotment will be:

Date Particulars Amount (Dr.) Amount (Cr.)
At the time of transfer of the application money Share Application A/c Dr. xxx
     To Share Capital A/c                           (application amount) xxx
     To Bank A/c (refund) xxx
     To Share Allotment A/c (excess) xxx
     To Share Call A/c (balance, if any)
(Being share application money on …..shares @ ₹…each, transferred to share capital, money on …..shares @ ₹…each, refunded and money on …..shares @ ₹…each, utilizes towards allotment and call)

Solved Example on Pro Rata Allotment

Arihant Ltd. Co. issues 100000 equity shares of face value of ₹10 on 1st June 2018 at 20% premium. The arrangements for payment are:

June 1, 2018: On Application ₹2

July 1, 2018: On Allotment including Premium ₹7

September 1, 2018: On First and final call ₹3

The company receives applications for 285000 shares. It deals with them in the following manner:

  1. Applicants for 25000 shares receive the full allotment.
  2. The applicants for 225000 shares receive one share for every three shares applied for on pro-rata basis.
  3. It rejects the applications for 35000 shares.

The company duly receives the entire amount. Pass necessary journal entries.

Ans.

Journal Entries

In the books of Arihant Ltd.

Date Particulars Amount (Dr.) Amount (Cr.)
1 June Bank A/c Dr. 570000
    To Share Application A/c 570000
(Being application money received for 285000 [email protected] ₹2 each)
1 July Share Application A/c Dr. 570000
     To Share Capital A/c 200000
     To Share Allotment A/c 300000
     To Bank A/c 70000
(Being share application money on 100000 shares @ ₹ 2 each, transferred to share capital, on 225000 shares adjusted towards allotment and on 35000 shares refunded)
1 July Share Allotment A/c Dr. 700000
     To Share Capital A/c 500000
     To Securities Premium A/c 200000
(Being share allotment due on 100000 shares @ ₹ 7 each including a premium of ₹2)
1 July Bank A/c Dr. 400000
     To Share Allotment A/c 400000
(Being share allotment money received)
1 Sept Share Final Call A/c Dr. 300000
     To Share Capital A/c 300000
(Being money on share call due on 100000 shares @ ₹3 each,)
1 Sept Bank A/c Dr. 300000
     To Share Final Call A/c 300000
(Being share call amount received)

 

Working Notes:

Calculation of adjustment of application money

Category No. of shares applied No. of shares allotted Amount received on the application Application money required Adjusted towards allotment Amount due on allotment Amount received on the allotment Refund
a. 25000 25000 50000 50000 Nil 175000 175000 Nil
b. 225000 75000 450000 150000 300000 525000 225000 Nil
c. 35000 Nil 70000 Nil Nil Nil Nil 70000
Total 285000 100000 570000 200000 300000 700000 400000 70000

 

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