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:
- Accept some applications in full and reject the others totally.
- Make Pro-Rata Allotment.
- 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.
Journal Entries in various cases
1. When a company decides to accept some applications in full and reject the other totally
| Date | Particulars | Â | Amount (Dr.) | Amount (Cr.) |
| 1. On receipt of Application money | Bank A/c (total application amount) | Dr. | Â xxx | |
| Â Â Â To Share Application A/c | Â xxx | |||
| (Being application money received for…shares@ ₹…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 | |||
| Â Â Â 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 | |
| Â Â Â 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 | |
| Â Â Â To Share Allotment A/c | xxx | |||
| (Being share allotment money received) | ||||
| 5. On Share call due | Share Call A/c | Dr. | xxx | |
| Â Â Â 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 | |
| Â Â Â 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 | |
| Â Â Â To Share Application A/c | xxx | |||
| (Being application money received for…shares@ ₹…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 | |||
| Â Â Â To Share Allotment A/c (excess) | xxx | |||
| Â Â Â 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 | |
| Â Â Â 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 | |
| Â Â Â To Share Allotment A/c | xxx | |||
| (Being share allotment money received) | ||||
| 5. On Share call due | Share Call A/c | Dr. | xxx | |
| Â Â Â 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 | |
| Â Â Â 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 | |||
| Â Â Â To Bank A/c (refund) | xxx | |||
| Â Â Â To Share Allotment A/c (excess) | xxx | |||
| Â Â Â 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:
- Applicants for 25000 shares receive the full allotment.
- The applicants for 225000 shares receive one share for every three shares applied for on pro-rata basis.
- 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 | |
| Â Â To Share Application A/c | 570000 | |||
| (Being application money received for 285000 shares@ ₹2 each) | ||||
| 1 July | Share Application A/c | Dr. | 570000 | |
| Â Â Â To Share Capital A/c | 200000 | |||
| Â Â Â To Share Allotment A/c | 300000 | |||
| Â Â Â 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 | |
| Â Â Â To Share Capital A/c | 500000 | |||
| Â Â Â 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 | |
| Â Â Â To Share Allotment A/c | 400000 | |||
| (Being share allotment money received) | ||||
| 1 Sept | Share Final Call A/c | Dr. | 300000 | |
| Â Â Â To Share Capital A/c | 300000 | |||
| (Being money on share call due on 100000 shares @ ₹3 each,) | ||||
| 1 Sept | Bank A/c | Dr. | 300000 | |
| Â Â Â 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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