Accounting for the Issue of Shares

Entries to record share issue DR Company invites applications (prospectus) Application money is received Shares are allotted to successful applicants Preliminary expenses Share issue costs Share issue costs closed Prospectus This is a public invitation to potential investors to purchase shares. In this syllabus, it is assumed that shares are fully subscribed (what is offered is applied for in full) and that investors pay the amount in full on application. Application money received No book entries Cash at bank Application Preliminary Expenses Share issue costs Share capital Application Share Capital Cash at bank Cash at Bank* Share issue costs* CR

* These entries may be combined to one entry

The money received will be posted to an application account in the ledger. The application account represents the holding of money in trust by the company. The money received from the investors cannot be used by the company until the shares are issued. Allotment of shares When the shares are issued the application account is closed and the money is transferred to the ordinary share capital account:

Preliminary expenses are the costs of forming the company and include, for example, the fee charged by the Australian Securities and Investments Commission to register

the company, legal consultation fees and other administrative expenses associated with the formation of the company These are treated as expenses in the Income Statement because it is difficult to define future benefits arising from them. (They may be treated initially as intangible assets but subsequently written off as an expense.) Share issue costs These include items like stamp duties, taxes, underwriting costs and brokerage fees and the cost of printing the prospectus. Accounting standards state that these are neither assets nor expenses but rather a deduction from equity.

Example 1 February 2009 Kalbarri Limited offered to the public 500,000 ordinary shares of $1.00 each payable in full on application. 28 February 2009

The share issue closed fully subscribed. This means that the company received application money for all the shares that it intended to issue. 17 March 2009

On this date the ordinary shares were allotted (that is issued) to the shareholders. 31 March 2009

The company recorded the payment of $2,000 in preliminary expenses. Share issue costs were $1000. Show general journal and ledger entries to record the above.

Solution

Step 1

The money received from the investors is recorded in the general journal. The money received will be posted to an application account in the ledger. The application account represents the holding of money in trust by the company. The money received from the investors cannot be used by the company until the shares are issued.

Date 2009 Feb 28

Details

Folio No

Debit

Credit

Cash at Bank Application

500,000 500,000

To record the receipt of application money on 500,000 ordinary shares at a price of $1.00 each.

Step 2

When the shares are issued the application account is closed and the money is transferred to the ordinary share capital account:

General Journal Date 2009 Mar 17 Details

Folio No

Debit

Credit

Application Ordinary Share Capital

500,000 500,000

To record the allotment of 500,000 ordinary shares at a price of $1.00 each.

Step 3 The payment of the preliminary expenses and share issue cost (a negative equity item) recorded in the general journal. Date 2009 Mar 31 Preliminary Expenses Share Issue Costs Cash at bank To record the payment of preliminary expenses and share issue costs 2,000 1,000 3,000 Details
Folio No

Debit

Credit

To close share issue costs

Date 2009 Mar 31

Details

Folio No

Debit

Credit

Ordinary Share Capital Share Issue Costs

1,000 1,000

To transfer share issue costs

Step 4 Ledger Entries

Cash at Bank Account

Application

Ordinary Share capital

Preliminary Expenses

Share Issue Costs

Question 1 Couriers 2 Go Limited

1 General Journal Date 2019 Mar 31 Cash at Bank Application Details Debit 90,000 90,000 Credit

Cash received from share issue. Apr 28 Application Share Capital 90,000 90,000

Issue of 90,000 $1.00 ordinary shares.

Apr 30

Share Issue Costs Cash at Bank

1,500 1,500

Payment of share issue costs.

Share Capital Share Issue Costs Transfer of share issue costs.

1,500 1,500

Question 1 continued Couriers 2 Go Limited

General Ledger Cash at Bank 2019 90,000 Apr 30 90,000 May 1 Balance b/d 88,500

2019 Mar 31

Application

Share Issue Costs

Balance c/d

1,500 88,500 90,000

2019 Apr 28

Share Capital

Application 2019 90,000 Mar 31

Bank

90,000

2019 Apr 30

Share Issue Costs Balance c/d

Share Capital 2019 1,500 Apr 28 88,500 90,000 May 1

Application

90,000 90,000

Balance b/d

88,500

2019 Apr 30

Bank

Share Issue Costs 2019 1,500 Apr 30 Share Capital

1,500

Couriers 2 Go Limited Balance Sheet (extract) as at 30 April 2019

Equity Share Capital Total Equity

88,500 $88,500