Question

Madhav Ltd. invited applications for issuing 4,00,000 equity shares of Rs 10 each at a premium of Rs 4 per share. The amount was payable as follows:

On Application and Allotment - Rs 6 per share (including premium Rs 2)

On First and Final Call - Balance

Applications for 6,00,000 shares were received. Applications for 1,00,000 shares were rejected and the application money was refunded. Shares were allotted on pro-rata basis to the remaining applicants. Excess money received on application and allotment was adjusted towards sums due on first and final call. A shareholder, who had applied for 500 shares, failed to pay the first and final call. His shares were forfeited. Pass necessary journal entries in the books of Madhav Ltd. for the above transactions.

Hint:

Use the 5 : 4 pro-rata ratio. The excess money is calls in advance. The 500-share applicant gets 400 shares and his unpaid call is calls in arrears.

Answer 1

Step 1: Read the terms of issue:
Face value Rs. 10 and premium Rs. 4 make an issue price of Rs. 14.
Application and allotment is Rs. 6, made up of Rs. 4 face value and Rs. 2 premium.
First and final call is Rs. 8, made up of Rs. 6 face value and Rs. 2 premium.

Step 2: Working Note 1: Pro-rata allotment and refund:
Applications received for 6,00,000 shares and 1,00,000 were rejected. So 5,00,000 shares were accepted.
Allotment is 4,00,000 shares, so the ratio is 5,00,000 : 4,00,000 = 5 : 4.
Money received = 6,00,000 x 6 = Rs. 36,00,000. Refund on rejected applications = 1,00,000 x 6 = Rs. 6,00,000.
Money needed for 4,00,000 shares = 4,00,000 x 6 = Rs. 24,00,000. Capital = 4,00,000 x 4 = Rs. 16,00,000 and premium = 4,00,000 x 2 = Rs. 8,00,000.
Excess = 36,00,000 - 6,00,000 - 24,00,000 = Rs. 6,00,000, shown as calls in advance.

Step 3: Working Note 2: The shareholder who applied for 500 shares:
He gets 500 x 4/5 = 400 shares.
He paid 500 x 6 = Rs. 3,000. Allotment due on 400 shares = 400 x 6 = Rs. 2,400. So his excess is Rs. 600.
First and final call on 400 shares = 400 x 8 = Rs. 3,200. After the excess of Rs. 600, he owes Rs. 2,600, which is calls in arrears.
Cash on the call = 32,00,000 - 6,00,000 - 2,600 = Rs. 25,97,400.

Step 4: Working Note 3: Forfeiture of 400 shares:
Share capital debit = 400 x 10 = Rs. 4,000.
Premium of Rs. 2 per share in the call was not received, so securities premium debit = 400 x 2 = Rs. 800.
Calls in arrears credit = Rs. 2,600. Share forfeiture = 4,000 + 800 - 2,600 = Rs. 2,200.
Check: he paid Rs. 3,000 in all and Rs. 800 of it (400 x 2) is premium. So 3,000 - 800 = Rs. 2,200.

Step 5: Journal entries in the books of Madhav Ltd.:

Particulars	Dr. (Rs.)	Cr. (Rs.)
Bank A/c ... Dr.	36,00,000
To Equity Share Application and Allotment A/c		36,00,000
(Application money received on 6,00,000 shares at Rs. 6 per share)
Equity Share Application and Allotment A/c ... Dr.	36,00,000
To Equity Share Capital A/c		16,00,000
To Securities Premium A/c		8,00,000
To Calls in Advance A/c		6,00,000
To Bank A/c		6,00,000
(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.	32,00,000
To Equity Share Capital A/c		24,00,000
To Securities Premium A/c		8,00,000
(First and final call due on 4,00,000 shares at Rs. 8 per share)
Bank A/c ... Dr.	25,97,400
Calls in Arrears A/c ... Dr.	2,600
Calls in Advance A/c ... Dr.	6,00,000
To Equity Share First and Final Call A/c		32,00,000
(First and final call received except on 400 shares; calls in advance adjusted)
Equity Share Capital A/c ... Dr.	4,000
Securities Premium A/c ... Dr.	800
To Share Forfeiture A/c		2,200
To Calls in Arrears A/c		2,600
(400 shares forfeited for non-payment of first and final call)

Step 6: Alternative entry for the call:
The call entry can also be passed as Bank Rs. 25,97,400 and Calls in Advance Rs. 6,00,000 debited, with the first and final call account credited by Rs. 31,97,400.
Then the forfeiture entry credits the first and final call account with Rs. 2,600 in place of calls in arrears. The figures stay the same.

Final Answer:
Calls in advance is Rs. 6,00,000, calls in arrears is Rs. 2,600 and share forfeiture is Rs. 2,200 on 400 shares.