Question

Generic Pharma Ltd. invited applications for using 3,00,000 equity shares of Rs 10 each at a premium of Rs 6 per share. The amount was payable as follows:

on Application and Allotment - Rs 4 per share (including premium of Rs 2 per share)
on First and Final Call - Balance

Applications for 4,00,000 shares were received. Applications for 40,000 shares were rejected and the application money was refunded. Shares were allotted on pro-rata basis to the remaining applicants. Excess money received on applications was adjusted towards sums due on first and final call. Jain, an applicant for 3,600 shares failed to pay the first and final call. His shares were forfeited.

Pass necessary journal entries in the books of Generic Pharma Ltd. for the above transactions. Open 'calls in arrears account' and 'calls in advance account', wherever necessary.

Hint:

Find the excess application money after the refund and pro-rata allotment. Treat it as calls in advance. Jain unpaid call is calls in arrears, then forfeit his 3,000 shares.

Answer 1

Step 1: Read the terms of issue:
Face value is Rs. 10 and premium is Rs. 6, so the issue price is Rs. 16 per share.
Application and allotment is Rs. 4 per share, made up of Rs. 2 face value and Rs. 2 premium.
The first and final call is the balance of Rs. 12 per share, made up of Rs. 8 face value and Rs. 4 premium.

Step 2: Working Note 1: Pro-rata allotment and refund:
Applications received were for 4,00,000 shares and 40,000 shares were rejected. So 3,60,000 shares were accepted.
Shares allotted are 3,00,000, so the ratio of shares applied to shares allotted is 3,60,000 : 3,00,000 = 6 : 5.
Money received on application = 4,00,000 x Rs. 4 = Rs. 16,00,000.
Refund on rejected applications = 40,000 x Rs. 4 = Rs. 1,60,000.
Application and allotment money due on 3,00,000 shares = Rs. 12,00,000. This splits into share capital Rs. 6,00,000 and securities premium Rs. 6,00,000.
Excess money = 16,00,000 - 1,60,000 - 12,00,000 = Rs. 2,40,000. This is carried to calls in advance.

Step 3: Working Note 2: Jain and the forfeited shares:
Jain applied for 3,600 shares, so he got 3,600 x 5/6 = 3,000 shares.
He paid Rs. 4 on 3,600 shares = Rs. 14,400. The amount due on 3,000 shares was Rs. 12,000, so his excess was Rs. 2,400.
Call due on his 3,000 shares = 3,000 x Rs. 12 = Rs. 36,000. After adjusting the excess of Rs. 2,400, the unpaid call is Rs. 33,600. This is calls in arrears.
Cash received on the call = 36,00,000 - 2,40,000 - 33,600 = Rs. 33,26,400.
On forfeiture, share capital is debited with 3,000 x Rs. 10 = Rs. 30,000. Securities premium is debited with 3,000 x Rs. 4 = Rs. 12,000, because the premium in the call was never received.
Share forfeiture = 30,000 + 12,000 - 33,600 = Rs. 8,400. Check: Jain paid Rs. 14,400 in all, of which Rs. 6,000 (3,000 x Rs. 2) is premium. So 14,400 - 6,000 = Rs. 8,400.

Step 4: Journal entries in the books of Generic Pharma Ltd.:

Particulars	Dr. (Rs.)	Cr. (Rs.)
Bank A/c ... Dr.	16,00,000
To Equity Share Application and Allotment A/c		16,00,000
(Application money received on 4,00,000 shares at Rs. 4 per share, including premium Rs. 2)
Equity Share Application and Allotment A/c ... Dr.	16,00,000
To Equity Share Capital A/c		6,00,000
To Securities Premium A/c		6,00,000
To Calls in Advance A/c		2,40,000
To Bank A/c		1,60,000
(Application money transferred to share capital, securities premium and calls in advance; money on rejected applications refunded)
Equity Share First and Final Call A/c ... Dr.	36,00,000
To Equity Share Capital A/c		24,00,000
To Securities Premium A/c		12,00,000
(First and final call of Rs. 12 per share due on 3,00,000 shares)
Bank A/c ... Dr.	33,26,400
Calls in Arrears A/c ... Dr.	33,600
Calls in Advance A/c ... Dr.	2,40,000
To Equity Share First and Final Call A/c		36,00,000
(First and final call received except on 3,000 shares of Jain; calls in advance adjusted)
Equity Share Capital A/c ... Dr.	30,000
Securities Premium A/c ... Dr.	12,000
To Share Forfeiture A/c		8,400
To Calls in Arrears A/c		33,600
(3,000 shares of Jain forfeited for non-payment of first and final call)

Step 5: Why the entries are made this way:
The excess application money is not refunded. It is kept as calls in advance and set off when the call falls due.
Calls in arrears is opened only when the call money is not paid, here Rs. 33,600 of Jain. It is closed when his shares are forfeited.
Calls in advance of Rs. 2,40,000 is debited in the call entry, so the account is closed.
The forfeited amount is credited to share forfeiture only for money actually received, and the premium is left out.

Final Answer:
Journal entries are passed as above. Calls in advance Rs. 2,40,000, calls in arrears Rs. 33,600 and share forfeiture Rs. 8,400 are the key figures.