Merliah limited makes an offer to issue 10 million shares to the public at an offer price of $1.00 each share. These shares are to be paid up in 3 instalments, with the first payment of $0.5, the second payment of $0.4 and the balance in the third instalment. The first payment is to be made on application, the second payment on allotment while the last payment is to be paid as a first call two months after the close of the applications on 31st august 2011.
Applications have however been received for 14million shares, indicating an oversubscription by 4 million shares. Merliah has decided to deal with this by issuing the shares on prorate basis. This means that each applicant will be allotted a particular percentage of the number of shares applied for, with the sole aim of arriving at the target of 10 million shares issued in total. All monies due on allotment are remitted on time, but during the first and final call, holders of 2 million shares refuse o settle their dues and are thus forced to forfeit their shareholding. An interim dividend of 5% is declared for the remaining shareholders and is payable on 31st march 2010.Below are the journal entries outlining these transactions.
1. On the invitation for subscription of shares by Merliah Limited on 31st August 2011, the entries will be;
Dr: share application account
$10,000,000
Cr: Share capital account
$10,000,000
(Being a record of an initial offer of 10,000,000 shares at $0.5 each by Merliah limited)
2. Money received applications in the first instalment of $0.5 per share on 31st August 2011
Dr: Bank account
$7,000,000
Cr: Share application account
$7,000,000
(Being a record of the moneys received on application for 14 million shares at $0.5 per share, now recognized in the books)
3. Money refunded on application to the over subscribed applicants
Dr: Share Application account
$2,000,000
Cr: Bank account
$2,000,000
(Being record of money refunded for the 4,000,000 shares oversubscribed at $0.5 per share.)
4. Money received on application transferred to the share capital
Dr: Share application account
$5,000,000
Cr: Ordinary Share capital account
$5,000,000
(Being the transfer of money received on application to the share capital account for 10,000,000@0.5 per share)
5. Money received on allotment on 31st August 2011
Dr: Bank account
$5,600,000
Cr: Share Allotments
account
$5,600,000
(To record money received for allotment from the 14,000,000 share applicants @$0.4 per share)
6. Refund of money paid for the oversubscribed shares on allotment at 31st August 2011
Dr: Share allotment account
$1,600,000
Cr: Bank Account
$1,600,000
(To record the refund of money received on allotment of 4,000,000 oversubscribed shares @ $0.4 per share)
Dr: Share allotment account
$4,000,000
CR: Ordinary share capital Account
$4,000,000
7. First and final call
Dr: Call A/C
$1,000,000
Cr: Share capital
$1,000,000
(To recognize the call for the money for the last installment for the 10,000,000@0.1 per share)
8. Receipts on calls at 31st December 2011
Dr: Bank account
$800,000
Dr: Call in arrears account
$200,000
Dr: Bank account
$800,000
Cr: Ordinary Share capital account
$1,000,000
(To record the amount received on the first and final call, where only 8,000,000 honoured their accounts and 2,000,000 defaulted on the call)
9. Forfeiture of shares 15th January 2012
Dr: Ordinary Share capital account
$2,000,000
Cr: Calls in arrears
$200
Cr: Application and allotment
$1,800
(To record the share forfeiture of 2,000,000 shares valued at $1)
10. Declaration of interim dividends
1st March 2012
Dr: Profit and loss appropriation a/c
500,000
Cr: Current liabilities
500,000
(To record the declaration of interim dividends of $ 0.50 per share)
11. Payment of interim dividends
31st March 2012
Dr: Current liabilities
500,000
Cr: Bank
500,000
(To record the payment of interim dividends of $ 0.50 per share as declared by the directors)
B) DIFFERENCE BETWEEN ORDINARY SHARES AND PREFERENCE SHARES
The main difference between preference shares and ordinary shares is that preference shares have preference over ordinary shares in the payment of dividends. This means that the dividends for preference shares are assured, and in case of a company making losses, preference shares will be considered first when profits are made. The dividends payable to preference shares are usually fixed. During liquidation, claims on preference shares are paid before those on ordinary shares.
Unlike ordinary shares, preference shares do not have voting rights. Preference shareholders cannot therefore influence the policy of a company.
Preference shares can be viewed both as debt or equity. They can be viewed as debt because their dividend payment is usually fixed and thus gives the company an obligation to pay at the end of particular period in the same manner a company is obligated to pay interest payments for debt. Some preference shares are redeemable, a quality that is associated with debt.
Preference shares can be viewed as equity because their return is in form of dividends, just like ordinary shares. Preference shares have a claim on the residual interest if the company during liquidation after claims by all the creditors have been met. This characteristic makes it have the qualities of equity.
