Audio Chapter 12 - Companies PART C

Prospectus
• Prospectus an invitation to the public to

apply for (subscribe) shares in the
company.
• Protect the public - rules in Companies Act
govern information included in prospectus.
• Rules ensure that prospectus is not
misleading and does not contain false
information.
• Private company will never issue a
prospectus - not allowed to offer shares to
the public.
Issue of shares to the public
public apply New Act: Directors
for shares, and can issue over
pay in cash subscribed shares
Closing date for Issue shares to

Shares
share successful applicants,
offered to
applications unsuccessful applicants
public
(if company chooses)
What type of are refunded
account is A&A? What would the
Journal entry Why? journal entry look
DR Bank like if there is a
refund Journal entry
CR Application and Allotment
DR A&A
CR Share Capital
Par value shares
• Par value - arbitrary nominal value
• Par value not price at which shares issued / worth
after issued.
• If issue price more than par value - difference is
share premium. Both the Share Capital account
and the Share Premium account record the capital
of a company.
Par value amount shares issued

CR Share Capital account
Amount in excess of par value

CR Share Premium account.
Par value shares
Company issues a share at R10.
Par value is R1.
Journal entry
DR Bank 10
CR Share Capital 1
CR Share premium 9
No par value shares
NO nominal (par) value allocated to
each share.
Full proceeds are taken to the Share
Capital account.
Company issues a share at R10.
Journal entry
DR Bank 10
CR Share Capital 10
Recording a share issue
• Over-subscription
• Under-subscription and
underwriting
• Other share issue costs
• Closing off share issue costs
• Statement of financial position
and notes
Over subscription
Prepare journal entries to record issue of
490 000 Class A shares (issue price of R22) -
received applications for 600 000 shares.
Gave refund
Dr Bank 13 200 000
Cr Application and allotment 13 200 000
Cash received on receipt of applications for shares
Dr Application and allotment 13 200 000

Cr Bank (110 000 x R22) 2 420 000
Cr Share capital 10 780 000
Shares allotted and refunded unsuccessful investors
Under-subscription
• Minimum subscription: minimum amount
of money required by share issue
• Stated in the prospectus
• If insufficient shares are sold (below the
minimum subscription), no shares can be
issued (any shares) – all cash received is
refunded
• Underwriter: Guarantee that sufficient
equity raised in share issue. Underwriter
purchases sufficient unissued shares to
ensure required equity raised.
Under-subscription
Share issue underwritten. Commission of 5%.
490 000 Class A shares offered at R22 each.
400 000 applied for by the public.
Dr Bank (400 000 x R22) 8 800 000

Public applied and paid for 400 000 shares
Dr Bank (90 000 x R22) 1 980 000

Underwriter purchases 90 000 shares
Under-subscription
Dr Application and allotment 10 780 000
Cr Share capital: Class A 10 780 000
Shares issued to public and underwriter
Dr Underwriter’s commission 539 000
Cr Bank/trade payables 539 000

(10 780 000 x 5%)
Commission for underwriters recorded
Commission charged on entire share issue

regardless of whether issue under subscribed
or not.
Commission compensates for RISK
Closing off share issue costs
Dr Share capital 539 000
Cr Underwriter’s commission 539 000
Transfer commission to share capital
Why is the Share Capital account debited??
Think about the definition of expenses in the

framework - the definition excludes all amounts
relating to transactions with the owners
(shareholders).
The share issue costs are incurred in a transaction
with the owner – closed off directly to equity and
not P + L
Rights issue
• Share offer made to existing
shareholders (in proportion to
existing holdings)
• Accounting for a rights issue is

the same as for a public issue -
only difference is who the shares
are issued to
Capitalisation issue
• Issue shares to current shareholders (No cash
received)
• Issued in same ratio as existing shareholding.
• How: Capitalisation of profits.
• Retained Earnings transferred to share capital
account. Total equity (Share capital + retained
earnings) unchanged
• Retained Earnings reduced DR and share capital
increases CR.
• Directors decide on the price of the shares -
market value or other value
• This is the amount that will be transferred out of
Retained Earnings.

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Audio Chapter 12 - Companies PART C

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Prospectus

• Prospectus an invitation to the public to

Closing date for Issue shares to

Par value amount shares issued

Amount in excess of par value

Company issues a share at R10.

Dr Application and allotment 13 200 000

Dr Bank (400 000 x R22) 8 800 000

Dr Bank (90 000 x R22) 1 980 000

Dr Underwriter’s commission 539 000

Cr Bank/trade payables 539 000

Commission charged on entire share issue

Why is the Share Capital account debited??

Think about the definition of expenses in the

• Accounting for a rights issue is

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