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Ok so one of the requirements to allotte (issue) shares was that at least one quarter of the nominal value of the shares and all of the premium have to be paid before the company can issue shares – S586 of Companies Act
1. Now I’m confused, if you have to have all the premium paid as well as at least one quarter of the nominal value paid, then how can you issue a partly-paid share?
So if the company issues 10,000 Ordinary shares of $1 each at issue price of $0.7 (wait isn’t this actually forbidden because the nominal value is $1 and you can’t issue at a price below the nominal value?)
Please help.
Thank you very much sir.
” allotte (issue) ” – allot and issue are not strictly synonymous
As to your confusion, there was quite a stir in the City when the terms of the Telecom issue was announced
50 pence on application, 40 pence one year later and 40 pence another year after that (I got my dates wrong in the previous post)
That’s £1.30 per share and 25% + 30 pence premium is 55 pence yet only 50 pence was payable on application and the lucky applicants were allotted those shares
“Ah” said the Government. But the successful allottees are now bound in contract to pay the remaining amount.
So the double entry for, say, 10,000 shares is:
Dr Cash 10,000 x 50p 5,000
Dr Receivables 10,000 x 40p 4,000
Dr Receivables 10,000 x 40p 4,000
Cr Share Capital 10,000 x £1 10,000
Cr Share Premium 10,000 x 30p 3,000There’s no point in having the power to make the rules if you’re not allowed to bend them every now and again
“and you can’t issue at a price below the nominal value?)” You cannot issue shares credited AS FULLY PAID when the amount to be received is less than nominal value
OK?
“£1.30 per share and 25% + 30 pence premium is 55 pence ”
Sorry could you explain this bit? How did you get 25%
if the £1 shares were issued at £1.3 but over a 3 year period then is it allotted once it has been issued and bought? so since only 50p was issued in the first year, only 50p can be considered as paid-up capital, and one year later another 40p can be considered as allotted and be contributed to the paid-up capital such that, the paid-up capital is 90p of £1 share each?The 25% is strictly “25% of the nominal value” so 25% of the £1 nominal value of each share
Don’t confuse “paid up” and “called up”
Let me sort out these dates for you
50 pence payable on application
40 pence payable on allotment
40 pence payable one year later (I’m not going to change these dates after this post!)When I applied for shares in Telecom, I sent in my application form together with a payment of £100 for my offer to buy 200 shares
The shares were allotted to me and I immediately had to pay a further 40 pence per share – a further amount of 200 * 40 pence = £80
So the double entry for my 200 shares in Telecom’s records is now:
Dr Cash 100
Cr Provisional Share Capital 100Then:
Dr Provisional Share Capital 100
Cr Share Capital 100Dr Cash 80
Cr Share Capital 20
Cr Share Premium 60And a year later:
Dr Cash 80
Cr Share Capital 80If I had failed to pay that first lot of £80, I would have forfeited the shares and would have received none of the £100 already paid on application
By the time the first entries are getting into the Share Capital Account, the net effect will have been:
Dr Cash 180
Cr Share Capital 120
Cr Share Premium 60So, following the allotment of my 200 shares, Telecom has issued 200 £1 Ordinary Shares (60 pence partly paid) at a premium of 30 pence ….
…. and the top two lines in the Capital and Reserves section of the Statement of Financial Position would read:
Share Capital, Ordinary Shares of £1 each, authorised, issued and 60p partly paid 120
Share Premium 60OK?
I’m sorry I’m still confused. Why do you debit the provisional share capital when the company has allotted the shares, when initially from the companies perspective, they credited provisional share capital and debited the cash received?
What I’m get so far is that you have to pay to make an application to buy the issued shares, and WHEN the company alottes the number of shares you bought, you have to pay again.
I lost you after that… please help…I’m sorry
I credited a Provisional Share Capital Account until I was certain that the allottees had paid the amount due (40 pence) when they had been notified that they had been successful in their application to buy
Until that second payment had been received, the shares were only provisionally allotted.
But that means that, after receipt of the second amount, we are now certain of the allotment of shares to those successful applicants so now I can take out of the Provisional Share Capital Account (by debiting to remove the earlier credit) and instead credit the Share Capital Account
Is that any clearer?
The accounting topic of “Issue and Forfeiture of Shares” used to be in the syllabus for ICAEW qualification! But was dropped from the syllabus a good many years ago. In fact, there’s a strong possibility that it was dropped before you were born!
OK?
Sort of. I want to confirm something core with you if that’s okay?
So when companies issues shares as partly-paid, it means that they will accept part-payment to allote the full nominal value share, which is always higher than the part paid amount right? So e.g they issue shares worth $1 at $0.25 meaning that they are willing to allote one share worth $1 for receiving only $0.25, and the remaining $0.75 Is a liability owed to the company which needs to be repaid when it is called by the company, usually under the discretion of the director?
Thank you for taking the time to give me a lot of detail into it though. It has definitely been academically enriching and I’m sure will help me in the future when I hopefully get an ACA training contract after university with one of the big 4 or top 6 companies!
Thank you so much.
Just one more thing.. if you don’t mind..
You cannot credit the partly paid shares that’s been allotted as fully paid shares until the part paid shareholder has paid all of the nominal value of the partly paid shares?
E.g if the company issued partly-paid shares worth $1 at $0.3, you cannot consider the full $1 received until the remaining $0.7 has been called upon and retrieved by the company? – is this where cannot issues shares below nominal value comes from?No, you’re still confused
The law states that a company cannot issue shares credited as fully paid for an amount less that the shares’ nominal value
But the emphasis here is “credited as fully paid”
It can issue shares as partly paid – in your post, it would issue the shares credited as 30 cents paid
Is that any better for you?
Oh… so if a share had a nominal value of $1 each, and the company were to issue it below the nominal value, so issue it partly-paid, such as 100 $1 shares at $0.4 each, then it is against the law to credit that as a fully paid $1 share? It is correct to credit it as $0.4 in share capital but you cannot credit it as $1 as you have issued it below nominal value (part-payment issue)??
“….then it is against the law to credit that as a fully paid $1 share?”
Correct
That’s totally correct
Hello Mike,
I was just confused about par values in finding dividend yield with share capital which brought to mind this conversation.
If you don’t mind,
if there was 50,000 equity shares of 20cents in the trial balance, why would you multiply 50,000 by 5 to get share capital?
share price was $2.4 dividend yield was 4% so since dividend yield = dividend paid per share/ share price
I get that you multiply 2.4 x 4% but I don’t understand why you just don’t x 50,000 to this..
is the par value always 1?
Any help would be greatly appreciated.
best regards,
kingkongThe figures in a trial balance are monetary amounts
You have, in the trial balance extract in your post, “50,000 equity shares of 20 cents each”
That’s $50,000 worth of equity shares where each share has a nominal value of 20 cents
If you held 5 shares in that company, the aggregate nominal value of your holding would be:
5 (shares) * 20 cents (nominal value per share) = $1
So $50,000 worth of equity shares nominal value would represent $50,000 * 5 = 250,000 shares of 20 cents each
OK?
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