SHARES ISSUED FOR CONSIDERATION OTHER THANH
A company may issue shares for consideration other than cash such as against purchase of an asset or purchase of business or services taken, etc. Purchase of an asset or purchase of business and issue of shares are two separate transactions.
Thus, entry is passed for each transaction.
The Journal entries passed are:
- (a) On Purchase of Assets
Sundry Asset A/cs (Individually) Dr. [With the amount of purchase price]
To Vendor’s A/c [With purchase consideration]
(b) On Purchase of Business
Sundry Asset A/cs (Individually) Dr. [Agreed value of assets]
Goodwill A/c* Dr.
To Sundry Liabilities A/c (Individually) [Agreed value of liabilities]
To Vendor’s A/c [With purchase consideration]
To Capital Reserve A/c**
( Purchase consideration is the amount paid by purchasing company in consideration for purchase of assets/ business from other enterprise. It may be given in the question, otherwise it will be equal to net assets, or sundry assets minus sundry liabilities.)*
(c) On Issue of Shares
If shares are issued to vendor at par:
Vendor’s A/c Dr. [With the nominal value of shares allotted]
To Share Capital A/c
If shares are issued to vendor at a premium:
Vendor’s A/c Dr. [With the purchase pr
To Share Capital A/c [With the nominal value of shares allotted]
To Securities Premium Reserve A/c [With the amount of premium]
( Before passing the Journal entry, calculate the number of shares to be issued against purchase consideration as follows:
Number of Shares to be Issued shares
= Purchase Consideration/Issue Price of a Share
Issue of Shares to Promoters
Sometimes companies issue Shares to Promoters for their services rendered to the Company .
The entries passed are:
Incorporation Expenses or Preliminary Expenses A/c Dr.
To Promoters’ A/c
(Amount due to promoters)
Promoters’ A/c Dr.
To Share Capital A/c
(Issue of shares of each as fully paid to the promoters)
Issue of Shares to Underwriters
Underwriting means a contract by which a person, known as underwriter, agrees usually for commission to take the shares not subscribed by public. The company may issue shares to the underwriters, instead of paying the commission in cash.
The Journal entries in this case are:
Underwriting Commission A/c Dr.
To Underwriters’ A/c
(Underwriting commission due)
Underwriters’ A/c Dr.
To Share Capital A/c
(shares issued to the underwriters)
Example-11: ( Comprehensive Example )
Pandit Ltd. purchased machinery of 3 4,30,000 from Manish Ltd. and paid as follows:
(a) Issued 10,000 Equity shares of ₹ 10 each at a premium of ₹ 3;
(b) Issued an acceptance of ₹ 1,00,000 payable after 3 months and
(c) Balance by issuing post-dated cheque of two months of ₹ 2,00,000.
Pass the Journal entries in the books of Prakash Ltd. and Manish Ltd.
Solution-:
|
In the Books of Pandit Ltd. |
||||
|
Date |
Particular |
l.F. |
Dr. Amount ₹ |
Cr. Amount ₹ |
|
|
Machinery A/c Dr. |
|
4,30,000 |
4,30,000 |
|
|
Manish Ltd. Dr |
|
4,30,000 |
1,00,000 |
|
|
Prakash Ltd. Dr. |
|
4,30,000 |
4,30,000 |
|
|
Investment A/c Dr (Shares, acceptance and cheque received from Prakash Ltd.) |
|
1,30,000 |
4,30,000 |
Question-13: Z Limited purchased a machinery costing ₹ 2,00,000 from Sana Traders and issued 20,000 equity shares of ₹ 10 each fully paid. It also issued 40,000 equity shares to public on the condition that full amount of shares will be paid in the lump sum. All the shares were taken up and the requisite amount was duly received. Pass necessary journal entries in the books of the company.
Solution -:
|
In the Books of Z Ltd. |
||||
|
Date |
Particular |
l.F. |
Dr. Amount ₹ |
Cr. Amount ₹ |
|
|
Machinery a/c Dr. To Sana Traders (Machinery purchased) |
|
2,00,000 |
2,00,000 |
|
|
Sana Traders Dr. To Equity Share Capital a/c |
|
2,00,000 |
2,00,000 |
|
|
Bank a/c Dr. To Equity Share application and allotment a/c (Amount received from equity share holders for 40,000 shares of ₹ 10 each fully paid) |
|
4,00,000 |
4,00,000 |
|
|
Equity Share application and allotment a/c Dr. To Equity Share Capital a/c (40,000 equity shares issued at par fully paid) |
|
4,00,000 |
4,00,000 |
Question-14: Zerox Limited purchased a machine from Sarla Traders at ₹ 1,80,000. The payment is to be made by issue of fully paid equity shares of ₹ 50 each. What Journal entries will be made when
(1) Shares are issued at par.
(2) Shares are issued at premium of 20 percent.
Solution-:
|
In the Books of Zerox Ltd. |
||||
|
Date |
Particular |
l.F. |
Dr. Amount ₹ |
Cr. Amount ₹ |
|
|
Machinary A/C Dr. (Machinery purchased from Sarla Traders) |
|
1,80,000 |
1,80,000 |
|
|
Sarla Traders Dr. |
|
1,80,000 |
1,80,000 |
|
|
Machinery a/c Dr. |
|
1,80,000 |
1,80,000 |
|
|
Sarla Traders Dr. 50 each at a premium of 20 %) |
|
1,80,000 |
1,50,000 |
Question-: Arun Ltd. purchased a running business from Barsha Ltd. for a sum of ₹ 75,000 payable by issue of 10,000 equity shares of ₹ 20 each at a premium of ₹ 4 per share and balance in cash. The assets and liabilities taken over were :
Plant – ₹20,000
Building – ₹20,000
Debtors – ₹15,000
Stock – ₹25,000
Furniture – ₹ 10,000
Creditors – ₹10,000
You are required to pass necessary Journal entries for the above transactions
in the books of Arun Ltd.
Solution-:
|
In the Books of Arun Ltd. |
||||
|
Date |
Particular |
l.F. |
Dr. Amount ₹ |
Cr. Amount ₹ |
|
|
Plant Ac Dr. To Creditors A/c |
|
20,000 |
10,000 |
|
|
Barun Ltd. Dr. |
|
75,000 |
62,500 |
Question-16: Dev Ltd. purchased a running business from Gagan Ltd. for a sum of ₹ 36,00,000 payable by issue of equity shares of ₹ 100 each at a premium of ₹ 20 per share. The assets and liabilities consisted of the following:
Plant – ₹ 7,00,000
Land – ₹ 12,00,000
Stock – ₹ 9,00,000 and
Creditors – ₹ 2,00,000.
Pass necessary Journal entries in the books of Dev Ltd. for the above transactions.
Solution-:
|
In the Books of Dev Ltd. |
||||
|
Date |
Particular |
l.F. |
Dr. Amount ₹ |
Cr. Amount ₹ |
|
|
Plant A/c Dr. |
|
7,00,000 |
2,00,000 |
|
|
Gagan Ltd. Dr. (Issue of 30,000 equity shares of ₹ 100 at premium of ₹ 20 ) |
|
36,00,000 |
30,00,000 |
