Raunak Cotton Ltd. issued a prospectus inviting applications for 6,000 equity shares of Rs. 100 each at a prem

Numerical Questions · Q14

Raunak Cotton Ltd. issued a prospectus inviting applications for 6,000 equity shares of Rs. 100 each at a premium of Rs. 20 per share, payable as follows:

Particulars	Amount (₹)
On Application	20
On Allotment (including premium)	50
On First Call	30
On Final Call	20

Applications were received for 10,000 shares and allotment was made pro-rata to the applicants of 8,000 shares, the remaining applications being refused. Money received in excess on the application was adjusted toward the amount due on allotment. Rohit, to whom 300 shares were allotted, failed to pay allotment and calls money, his shares were forfeited. Itika, who applied for 600 shares, failed to pay the two calls and her shares were also forfeited. All these shares were sold to Kartika as fully paid for Rs. 80 per share. Give journal entries in the books of the company.

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Concept understanding — Share Capital Accounting

Let’s begin with something you already know from everyday life.

Imagine you and two friends decide to start a small business — say, a tiffin service. You each put in some money to buy utensils, a stove, and ingredients. That money you all contributed is the capital of the business. The business doesn’t own that money; it owes it back to you, the owners. In accounting, we call you the shareholders, and the money you put in is share capital.

Now scale that up to a company. A company needs huge amounts of money to build factories, buy machinery, or develop software. It raises this money by selling shares — small units of ownership. When you buy a share, you become a part-owner of that company. The total money collected from all shareholders is the company’s share capital.

Why does share capital matter in accounting?

Because the company is a separate legal person. It does not own the money — the shareholders do. So the company must record exactly how much it has collected from whom, and in what form. This affects the balance sheet (where share capital appears under Equity and Liabilities) and the cash flow (money coming in from shareholders is a financing activity).

The precise meaning (NCERT Class 12)

Share Capital is the money raised by a company by issuing shares to the public or to promoters. It is shown under the head Shareholders’ Funds in the Balance Sheet.

There are two main types of shares:

Equity shares – ordinary shares; owners get dividends only if the company makes profit.
Preference shares – owners get a fixed dividend before equity shareholders, but usually have no voting rights.

Accounting treatment — the journal entries

When a company issues shares, it follows a standard sequence. Let’s say a company issues 10,000 equity shares of ₹10 each at par (i.e., at face value). The money is received in two instalments: ₹4 on application, ₹6 on allotment.

Step 1: Application money received

Date	Particulars	Debit (₹)	Credit (₹)
	Bank A/c Dr.	40,000
	To Share Application A/c		40,000
(Being application money received on 10,000 shares @ ₹4 each)

Step 2: Transfer application money to Share Capital

Date	Particulars	Debit (₹)	Credit (₹)
	Share Application A/c Dr.	40,000
	To Share Capital A/c		40,000
(Being application money transferred to Share Capital)

Step 3: Allotment money due

Date	Particulars	Debit (₹)	Credit (₹)
	Share Allotment A/c Dr.	60,000
	To Share Capital A/c		60,000
(Being allotment money due on 10,000 shares @ ₹6 each)

Step 4: Allotment money received

Date	Particulars	Debit (₹)	Credit (₹)
	Bank A/c Dr.	60,000
	To Share Allotment A/c		60,000
(Being allotment money received)

Note

If shares are issued at a premium (e.g., ₹10 face value, issued at ₹12), the extra ₹2 goes to a separate account called Securities Premium Reserve A/c. It is not part of share capital.

The Balance Sheet format (as per NCERT)

Under Equity and Liabilities, share capital appears like this:

Particulars	Note No.	Amount (₹)
1. Shareholders’ Funds
(a) Share Capital	1	1,00,000
(b) Reserves and Surplus	2	20,000
2. Non-Current Liabilities	...	...
3. Current Liabilities	...	...

And Note 1 (Share Capital) is typically shown as:

Particulars	Amount (₹)
Authorised Capital
1,00,000 Equity Shares of ₹10 each	10,00,000
Issued Capital
80,000 Equity Shares of ₹10 each	8,00,000
Subscribed and Paid-up Capital
80,000 Equity Shares of ₹10 each fully paid	8,00,000

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This is a pro-rata allotment with shares issued at a premium, followed by forfeiture of two members' shares and their reissue at a discount. The rule that decides the answer: only the amount actually received on a forfeited share (excluding any premium not received) sits in the Share Forfeiture Account, and on reissue the discount allowed is charged to that account — the balance left is the Capital Reserve.

Pro-rata and the two defaulters

Applications 10,000; pro-rata allotment to applicants of 8,000 for 6,000 shares → ratio 8,000 : 6,000 = 4 : 3. The other 2,000 applications were rejected and refunded.
Face ₹100; per share: Application ₹20, Allotment ₹50 (incl. ₹20 premium, so ₹30 capital), First call ₹30, Final call ₹20.
Rohit was allotted 300 shares, so he had applied for 300 × 4/3 = 400 shares. He paid only application money and failed the allotment and both calls.
Itika applied for 600 shares, so she was allotted 600 × 3/4 = 450 shares. She paid application and allotment but failed the two calls.

Amount forfeited

Rohit (300 shares): applied for 400 shares, so application received = 400 × ₹20 = ₹8,000. Of this, ₹6,000 is the application due on 300 shares and ₹2,000 was the excess adjusted towards allotment. As he paid nothing more, the whole ₹8,000 is credited to Share Forfeiture, and the unpaid premium (300 × ₹20 = ₹6,000) is debited to Securities Premium on forfeiture.

Itika (450 shares): she applied for 600 shares, so application received = 600 × ₹20 = ₹12,000, of which ₹9,000 is due on the 450 allotted and ₹3,000 excess is adjusted towards allotment. Allotment due 450 × ₹50 = ₹22,500, less the ₹3,000 excess application adjusted = ₹19,500 paid. Of her total money, the premium 450 × ₹20 = ₹9,000 is realised and stays in Securities Premium; the capital portion received = (₹12,000 + ₹19,500) − ₹9,000 premium = ₹22,500 credited to Share Forfeiture. …

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Raunak Cotton Ltd. issued 6,000 shares of ₹100 at a ₹20 premium with pro-rata allotment. Rohit (300 shares) paid only application; Itika (450 shares) paid application and allotment. Both were forfeited and all 750 shares reissued to Kartika at ₹80 fully paid. The Capital Reserve on reissue is ₹15,500.

Concept and Accounting Treatment

When shares are issued at a premium, the premium is credited to Securities Premium Reserve, never to Share Capital. On oversubscription, excess application money is adjusted against allotment. On forfeiture, the amount actually received on the shares (excluding any premium not received) is transferred to the Share Forfeiture Account, and any premium that was called but not received is reversed out of Securities Premium. On reissue below face value, the discount allowed is debited to Share Forfeiture; the surplus left is a capital profit transferred to Capital Reserve.

Working Notes

WN1: Pro-rata ratio

Applications for 8,000 shares were allotted 6,000 shares → 8,000 : 6,000 = 4 : 3 (the other 2,000 applications rejected and refunded).

Rohit: allotted 300 → applied 300 × 4/3 = 400 shares.
Itika: applied 600 → allotted 600 × 3/4 = 450 shares.

WN2: Money stages per share

Application ₹20; Allotment ₹50 (₹30 capital + ₹20 premium); First call ₹30; Final call ₹20.

WN3: Rohit's 300 shares — amount received and forfeited

Application received (on 400 applied) = 400 × ₹20 = ₹8,000.
Application due on 300 allotted = ₹6,000; the excess ₹2,000 was adjusted towards allotment.
Rohit paid nothing further, so allotment (₹15,000 less ₹2,000 adjusted = ₹13,000), first call ₹9,000 and final call ₹6,000 are unpaid; the premium of ₹6,000 in the allotment was not received.
Amount to Share Forfeiture = ₹8,000.

WN4: Itika's 450 shares — amount received and forfeited

Application received (on 600 applied) = 600 × ₹20 = ₹12,000; of this ₹9,000 is due on the 450 allotted and ₹3,000 excess is adjusted towards allotment.
Allotment due = 450 × ₹50 = ₹22,500, less ₹3,000 excess application adjusted = ₹19,500 received (this includes the premium of 450 × ₹20 = ₹9,000, which stays in Securities Premium).
She failed the first call (₹13,500) and final call (₹9,000).
Capital amount received = ₹12,000 + ₹19,500 − ₹9,000 premium = ₹22,500 to Share Forfeiture.

WN5: Reissue and Capital Reserve

750 shares reissued at ₹80 (fully paid ₹100) → discount 750 × ₹20 = ₹15,000.

Capital Reserve = (₹8,000 + ₹22,500) − ₹15,000 = ₹15,500.

Journal Entries in the Books of Raunak Cotton Ltd.

Particulars	Debit (₹)	Credit (₹)
Bank A/c ...Dr.	2,00,000
To Share Application A/c		2,00,000
(Application money on 10,000 shares @ ₹20)
Share Application A/c ...Dr.	2,00,000
To Share Capital A/c		1,20,000
To Share Allotment A/c		40,000
To Bank A/c		40,000
(Application on 6,000 shares to capital, excess on 2,000 adjusted to allotment, 2,000 rejected refunded)
Share Allotment A/c ...Dr.	3,00,000
To Share Capital A/c		1,80,000
To Securities Premium Reserve A/c		1,20,000
(Allotment due on 6,000 shares @ ₹50 incl. ₹20 premium)
Bank A/c ...Dr.	2,47,000
To Share Allotment A/c		2,47,000
(Allotment received: ₹3,00,000 − ₹40,000 adjusted − ₹13,000 unpaid by Rohit)
Share First Call A/c ...Dr.	1,80,000
To Share Capital A/c		1,80,000
(First call due on 6,000 shares @ ₹30)
Bank A/c ...Dr.	1,57,500
To Share First Call A/c		1,57,500
(First call received except Rohit 300 × 30 = 9,000 and Itika 450 × 30 = 13,500)
Share Final Call A/c ...Dr.	1,20,000
To Share Capital A/c		1,20,000
(Final call due on 6,000 shares @ ₹20)
Bank A/c ...Dr.	1,05,000

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Concept and Accounting Treatment

Working Notes

WN1: Pro-rata ratio

WN2: Money stages per share

WN3: Rohit's 300 shares — amount received and forfeited

WN4: Itika's 450 shares — amount received and forfeited

WN5: Reissue and Capital Reserve

Journal Entries in the Books of Raunak Cotton Ltd.

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