ACCOUNTANCY FORM SIX TOPIC 6:COMPANY ACCOUNTS

TOPIC 6: COMPANY ACCOUNTS

What is a company?

It is a voluntary association of persons formed to carry out some business for profit , with capital divisible into transferable shares, having a corporate legal entity and a common seal.

In law a company can be defined as a fictitious but legal person that can enter into contract sue others and being sued by others, having a banning A/C in its own name owe money or be a creditor and can do any other things which it has been formed.

Characteristics of a Company:-

(a) Voluntary association

(b) Independent legal entity

– A company is distinct and separate from its members.

Usually the liability of a company is limited to the extent of unpaid value of shares held by the members.

(d) Common seal

The company acts through natural persons called directors. The directions are the agents of the company.

All the act of the company are authorized by its common seal. The common seal is the official signature of a company. Any document not bearing the common seal will not binding on company.

(e) Transferability of shares:-

Usually in a limited company shares are freely transferable. But in the case of a private limited company share are transferable subject to conditions laid down by the company’s articles.

(f) Perpetual existence;-

In this case the life of a company is perpetual and so it can never be affected by the life of its members.

TYPES OF COMPANIES

STATUTORY COMPANIES

These are companies formed by a special act passed in parliament. Usually such companies are established in order to carry out some special public undertaking requiring extra – ordinary power and privilege.

Such companies are established not to earn profit but serve people.

GOVERNMENT COMPANIES (PARASTATAL COMPANIES)

These are companies which not less than 51% of its issued paid up capital is held by the central government.

REGISTERED COMPANIES:-

These are companies formed and registered under companies acts. Here in Tanzania it is the 1961 act cap. 212. Such companies may be limited by shares guarantee or unlimited companies.

1) Companies limited by shares:-

In this case the liability of members is limited into the extent of the unpaid value of the shares held by them.

2) Companies limited by guarantee:-

In this case the liability of members is limited to the amount that they undertake to contribute in the event of bankruptcy.

3) Unlimited companies:-

In this case the liability of members is not restricted.

FORMATION / FLOATATION OF A COMPANY

It is the promoter who thinks about the idea of a business to be carried out by a proposed company.

They undertake extensive investigations to its successful operation viability and feasibility.

They then prepare the following documents and send them to the register with a request to register the company.

1) Memorandum of Association

– It is the main document of a company.

– It is a charter or constitution of a company’s power and scope of operation.

This document contains the following things:-

(a) The name of a company with the world Ltd at the end of the name. Name clause

(b) The objective of a company i.e. the purpose of formation. It should state:-

(i) The main of the company’s objective

(ii) Objective incidental to the main objectives.

(iii) Others objectives.

(iv) Objective clause

(d) The domicile of the company i.e. the place of the company’s registered office , situation clause.

(e) Association clause:-

Under this clause it is stated here that people putting their signatures to the memorandum are desirous of forming themselves into company.

The memorandum should be signed by at least two persons in the case of a private company and seven persons in the case of a public company agreeing in both case to take up to at least one share each.

2). ARTICLES OF ASSOCIATION:-

It is a document defining rules and regulations for the conduct of the company’s business.

It establishes a contract between the company on one hand and the shareholders on the other and between the shareholders.

It has the following content:-

a) Share capital and its division into various types and the right attaching there to.
b) Direct their members power duties and qualifications
c) Proceeding of the directors meeting general and extra ordinary investing.
d) Calls on shares.
e) Common seal.
f) Accounts and Audit.
g) Forfeiture of shares.
h) Dividend and reserves.
i) Voting rights of members.
j) Notices

3). A statement of nominal capital:-

It specifies the different classes of shares that comprises the share capital of a Company.

4). A list of persons who have consented to act as directors.

5). A written consent by the directors to act in that capacity.

6). A written undertaking by the directors to take up and pay for their qualification shares.

7) Particulars of directors and secretary.

8) A notice of the address of the company’s registered office.

9) A declaration by a solicitor, attorney, accountant or secretary that all the requirements of the company’s acts have been complied with.

On receipt of such documents the register will then scrutinize them to see to it that they are okay and if he find them to be order he will issue or certificate of incorporation (after payment of the registration fees.)

This certificate signifies that a company has legal existence the register then will put the name of the company into the register.

A private limited company may commence a business on its incorporation but not for the public ltd company.

The caller has to receive a certificate of commencement of business Trading certificate) prior to its commencement of business.

A private company is a company which by its articles:-

(i) Does restrict the rights of its shareholders to transfer shares.

(ii) Limit the number of its shareholders to fifty excluding the post and present employees who are also the members of the company.

(iii) Does not invite the public to the subscription of shares or debentures.

A public Ltd company is a company which is not as private Ltd company i.e. it does not observe any of the above characteristics;-

Before receiving the trading certificate the private Ltd Company has to issue a prospectus and its copy then being kept by the register.

A prospectus

This is a circular, advertisement or any document inviting offers from the public to the subscription of any shares or debenture of anybody corporate.

The prospectus invites public to buy its shares or debentures in order to raise the necessary funds.

Some of the matters contained in this prospectus:-

(i) Contents of the memorandum.

(ii) Names and addresses of the directors.

(iii) Names and addresses of the auditor if any.

(iv) Qualification and remuneration of the directors.

(v) The minimum subscription and the amount payable on application and allotment.

(vi) Brokerage or underwriting commission on placing shares or debentures.

(vii) In case of already established company import by the auditors about the dividend or profit paid in each of 3 proceeding years.

ALLOTMENT OF SHARES:-

After the issue of prospectus, the prospective investors will start applying for the shares, through filling in application forms and paying application money (which should at least be 5% of a face or normal value a shares.)

If the application do not amount to the minimum subscription within 40 days of the issue of the prospective then the whole application money has to be refunded by the directors to the applicants within 8 days, otherwise they will liable to repay it with 5% interest as a penalty.

If the applications amount to the minimum subscription then the directors will start considering each application. They may allot the full number of shares applied for or less than that or none at all without giving any reason.

CLASSES OF SHARES:-

What is a share?

Shares are unit of uniform values into which the share capital of the company is divided.

What is share capital?

Share capital is the sum total of the nominal value of shares of a company.

(a) Ordinary shares or Equity shares;-

Do not give preferential rights in respect of fixed dividends and in regard to the repayment of capital in case of winding up.

(b) Preferred ordinary shares; Have a right to receive dividends after the preference shareholders have received their dividends.

(c) Deferred ordinary shares:-

Have a right to receive dividend after the preferred ordinary shares, have received their dividend.

(d) Preference shares:-

Give preferential rights in respect of a fixed dividend and in regard to the repayment of capital in case of winding up.

(e) Cumulative preference shares:-

In this case any arrears of dividend go on accumulating until paid up.

(f) Participating preference shares:-

Entitle their holders to receive not only a fixed rate of dividend but also share in the surplus profit after the other classes of shareholders have received their specified rate of dividend.

(g) Guaranteed preference shares;

Entitle their holders to receive a fixed rate of dividend quarantined by vendors or any third party. In case of a bad year (i.e no profit declared the guarantees have to pay the guaranteed dividend out of their personal recourses.).

(h) Deferred founder or management shares:-

Have a right to receive dividend after all other classes of shareholders have received their dividend.

Such shares do belong to promoters or founders of the company. When shares are offered to the public, the cost of such shares is usually payable by installments. The installments may be made of application allotment and calls.

A call is the amount of installments payable for each share following the installments payable on allotment.

When the company allots the shares, it signifies acceptance of the offer made by the applicants, when the prospective investment apply for the shares, this does not guarantee that they receive such shares money may be refunded to the unsuccessful applicant with a letter of regret. On allotment a binding contract will exist between the company and their shareholders.

ISSUE OF SHARES

Shares may be issued by a joint stock company for different consideration:-

(i) For consideration other than cash: In this case the company may purchase a running business and pay money / consideration to the vendors in the form of shares.

(ii) For cash: – In this case shares can be issued at (a) part (b) premium Discount.

(a) At par:-

In this case the shareholders are required to pay the nominal value of the shares.

(b)At premium

In this case the shareholders are required to pay more than the nominal value of the shares. That is shares are issued at a profit for example a share of Tsh. 100 being issued at Tshs. 110, Tshs, 10 is the premium.

(c) At discount:-

There are some restrictions on issuing shares at a discount but all the same the shares are issued at less than the nominal value. For example a share of 10 Tshs being issued at Tshs. 9, Tshs. 1 is the amount of discount.

Issue of shares at a premium:-

When the company issues shares above par, the excess termed as premium is held in a separate account called share premium A/c in accordance with the requirements of the company Act. The amount of share premium is called a capital gain and it is usually recorded in the balance sheet on the liabilities side under “Reserve and surplus”.

The share premium can be used in the following ways:-

(i) To pay up the un issued shares for distribution to member as bonus shares.

(ii) To write off preliminary expenses in the formation of a company.

(iii) To write off expenses on issuing shares or debentures..

(iv). To write off commission paid or discount allowed on issuing shares and debentures.

(v). To provide for a premium payable on redemption usually the amount of share premium is payable for in a lump sum on allotment

ENTRIES:-

(a) On amount being due

Application allotment A/c
Share capital A/c
Share premium A/c

(b) When the allotment money is received:-

Dr. Cash / Bank A/c

Cr. Application and allotment A/c

UNDER OR OVER SUBSCRIPTION FOR SHARE

Under – subscription for shares:-

It is a situation where by applications are received for a number shares less than that offered by the company for subscription.

In this case entries for application allotment and call will be made on the applications received.

And if the applications do not amount to minimum subscription the whole application money shall be returned to the applicants.

Over – subscription for shares:-

It is a situation where by applications are received for a number of shares more than that offered by the company for subscription. The excess application money is usually used in making goods the allotment money. And the excess application money can be utilized in the following way:-

(i) Some applications may be returned to the unsuccessful applications i.e. rejected and money being returned to the unsuccessful applications.

(2) Partial allotment may be made:-

This is the allotment of a smaller number of shares than that applied for example of 4000 shares being allotted 2000 shares where as a holder of 8000 being allotted 2600 shares.

3) Prorate allotment may be made:-

This means the allotment of share to an applicant or group of application on proportional basis.

Examples: Given shares applied = 16,000

Shares rejected = 1000

Shares issued = 10,000

PRORATE

Applied Issued / allotments.

16000 10,000

Less: (1000)

Net: 15,000: 10,000

Prorate 3: 2

This means for every 3 shares applied, 2 shares shall be allotted.

NB: A company cannot allot more than the shares issued.

CALLS IN ARREARS

Represents the extent that the shareholders have not paid the amount due on call made to them.

Dr. Calls in arrears A/c

Cr. Call A/c (appropriate)

Money alter allotment is called a call.

CALLS IN ADVANCE

Money may be received before call in due entries.

(j) Dr. Cash / Bank A/c

Cr. Call in advance A/c (Amount received in advance of calls).

(ii) Dr. Call in advance A/c

Cr. Call A/c (Appropriate) (When the call is made)

EXAMPLE:

Baja Company Ltd has an authorized capital of 100,000 Tshs divided into 20,000 ordinary shares of 50 sh. each the whole of the shares were issued at par. Payments being made as follows;-

Payable on applications 5 Tshs.

Payable on allotments 15 Tshs.

1^st call 20 Tshs.

2^nd call 10 Tshs.

Applications were received for 32,600. It was decided to refund application money on 2600 shares and to allot shares the basis of 2 for every 3 applied for. The excess application moneys sent by the successful applicants is not to be returned but it is to be held and so reduced the amount payable on allotment the calls were made and paid in full with the exception of one member holding 100 shares who paid neither the first and the second another who didn’t pay second call on 20 shares. The member of the second call the first each on his 200 shares.

Required:

Prepare the relevant ledger A/c to record the above Ledger Account

DR BANK ACCOUNT CR

Application & allotment(5×32600)	163,000	Application & allotment(5×2500)	13000
Application & allotment	250,000
first call	398000
call in advance	2000	Balance c/d	996,800
second call	196800
	1,009,800		1,009,800

DR APPLICATION & ALLOTMENT CR

Bank (refund)	13,000	bank ( Application money)	163,000
ord.share capital (5+15)20000)	400,000	bank ( Application money)	250,000
	413,000		413,000

DR ORDINARY SHARE CAPITAL CR

Balance c/d	1,000,000	Application & allotment	400,000
		1st call	400,000
		2nd call	200,000
	1,000,000		1,000,000

DR 1^ST CALL ACCOUNT CR

ordinary shares capital (20×20000)	400,000	Bank	398,000
		call in arrear (20 x 100)	2,000
	400,000		400,000

DR 2^ND CALL AND FINAL CALL ACCOUNT CR

Ordinary share capital(10×20000)	200,000	Bank	196,800
		call in advance	2,000
		call in arrear (10x(100 +20)	1,200
	200,000		200,000

DR CALL IN ARREAR ACCOUNT CR

1st call	2000	Balance c/d	3,200
2nd call	1200
	3200		3200

BALANCE SHEET (EXTRACT) AS AT

Authorized share capital		Fixed Assets
Ordinary shares Tshs. 500	xxx		cost	Acc.deprec.	Net
		premises	xxx	xxx	xxx
Issued and paid up capital		machinery	xxx	xxx	xxx
20000 ord. share of Tshs. 50 each	1,000,000		xxx	xxx	xxx

Reserves & surplus		current assets
share premium	xxx	stock			xxx
long-term liabilities		calls in arrear			3200
Debentures	xxx	bank balance			996800
current liabilities
creditors	xx
Dividend payable	xx
corporation tax	xx
	1,000,000				1,000,000

EXERCISE

Ujamaa & Co. Ltd, offered its ordinary shares for sale to the public as follows:-

January 3: Application invited for 10,000/= ordinary shares of Tshs. 100/= each. Applicants were asked to enclose application money of 29/= per share.

January 10: Applications received for 10,000/= ordinary shares.

February 17: Allotment money dully received.

March 5: First call of Tshs. 45/-per share made

March 22: First call duly received.

You are required to show:-

(a) Journal entries to record the above transactions.

(b) All relevant ledger A/c

Solution for exercise 1
JOURNAL ENTRIES

S/N	DETAILS	DR	CR
1	Bank	290,000
	Application		290,000
2	Bank	260,000
	Allotment		260,000
3	Bank	450,000
	1^st call		450,000
4	Application	290,000
	O/share capital		290,000
5	Allotment	260,000
	O/share capital		260,000
6	1^st call	450,000
	O/share capital		450,000

Nyamasama Co. Ltd offered 25,000 ordinary shares of Tshs. 50 each for public subscription as follows:-

Tshs. 10 on application

Tshs. 15 on allotment to include share premium

Tshs. 15 on 1^st call

Tshs. 20 on 2^nd call

Application were received for 38,000/= share. The promoters decided to:-

(i) Reject 8000 applications and to refund the money received against them.

(ii) Allot 5 shares for every 6 applied for by the remaining applicants.

Excess application money received from these applicants was transferred to an allotment money A/c

Allotment money was duly received. The first call was made and money promptly received from all but one shareholder who held 500 shares. The second call was paid by all shareholders except two, one who held 500 shares and who had earlier failed to pay the first call, and another who held 200 shares.

Required:-

(a) Show the relevant ledger A/c of the company.

(b) Show the company’s opening balance sheet after all the above transactions have been made.

JOURNAL ENTRIES

DATE	DETAILS	DEBIT	CREDIT
10-Jan	Bank A/c	250,000
	Allotment & application		250,000

17-Jan	Bank A/c	375,000
	Allotment & application		300,000

15-Mar	First call A/c	450,000
	Ordinary share capital		450,000

22-Mar	Bank	450,000
	First call A/c		450,000

(b)

DR BANK ACCOUNT CR

DATE	DETAILS	AMOUNT	DATE	DETAILS	AMOUNT
10-Jan	Applic& allotment(10,000×25)	250,000
6-Jan	Allotment & applic(30x 10,000)	300,000
5-Mar	ordinary share(1st call)	450,000		Balance c/d	1,000,000
		1,000,000			1,000,000

DR APPLICATION & ALLOTMENT CR

ordinary share	550,000	Bank(applied money)	250,000
		Bank(allot money)	300,000
	550,000		550,000

DR ORDINARY SHARE ACCOUNT CR

Balance c/d	1,000,000	1st call	450,000
		Application & allotment	550,000

	1,000,000		1,000,000

DR 1^ST CALL ACCOUNT CR

5-Mar	ordinary share(45 x10,000)	450,000	Bank	450,000

		450,000		450,000

BALANCE SHEET AS AT 31^ST/ 3/1984

Authorized share capital		Current assets
ordinary shares(10,000 x100)	1,000,000	Bank	1,000,000
	1,000,000		1,000,000

SOLUTION FOR EXERCISE 2

DR APPLICATION & ALLOTMENT CR

Bank(refund)	80,000	Bank(applied money)	380,000
ordinary share capital(10+5)x2500)	375,000	Bank(allot money)	325,000
premium share(10×25,000)	250,000
	705,000		705,000

DR ORDINARY SHARE ACCOUNT CR

Balance c/d	1,250,000	1st call	375,000
		Application &allotment	375,000
		2nd call	500,000
	1,250,000		1,250,000
		Balance b/d	1,250,000

DR 2^ND CALL ACCOUNT CR

ordinary share(20 x 25,000)	500,000	call in arrear(20 x 700)	14,000
		Bank	486000
	500,000		500,000

DR SHARE PREMIUM ACCOUNT CR

Balance c/d	250,000	Application & allotment	250,000

	250,000		250,000
		Balance b/d	250,000

BALANCE SHEET AS AT

Authorized share capital
ordinary share(25,000 x 50)	1,250,000	Current Assets Bank
		Current Assets Bank	1,478,500
Current liabilities		call in arrear(14,000 + 7500)	21,500
share premium	250,000

	1,500,000		1,500,000

ISSUE OF SHARES AT DISCOUNT

A company may issue shares at a discount (i.e. for a consideration less than the nominal value) subject to the following conditions as laid drawn by the company’s act:-

(a) The issue must be authorized by an ordinary resolution.

(b) The resolution should state the maximum rate of discount.

(d) At least one year should have elapsed since the date by which the company was allowed to commerce business.

(e) The issue should be made within two month after the date of the sanction of the company’s law board.

(f) A prospectus relating to the issue of shares at a discount should give particulars about the discount allowed on the issue of shares and also of the amount of discount not yet written as at the date of prospectus.

NB: The entry is usually made on allotment:-

Dr. Application and Allotment A/c

Dr. Discount on issue of shares A/c

Cr. Share capital A/c

The amount of discount is a fictitious asset and so must be written off as an expenses as soon as possible.

Dr. Profit & Loss / Share premium A/c

Cr. Discount on issue A/c

FORFEITURE OF SHARES

When a call remains unpaid, and the time allowed for its payments has expired, then the company may FORFEIT shares together with the amount already received on such shares.

In order for the forfeiture of such shares to be valid, the following conditions must be satisfied:-

(a) The forfeiture must be authorized by the company’s articles.

(b) The procedure of the forfeiture must be followed.

(d) A notice requiring a shareholder to pay a specified amount within a specified period of time must given (usually a fourteen day’s notice).

Entries on forfeiture:-

(i) Calls in arrears on forfeited shares:-

Dr. Forfeited, shares A/c.

Cr. Calls in a arrears A/c.

(ii) Shares for forfeited due to calls in arrears:-

Dr. Share capital A/c with the called value.

Cr. Forfeited shares A/c.

(iii) Forfeited shares now being reissued

Dr . Forfeited shares reissued A/c

Cr. Share capital A/c

(iv) Cash received prior to forfeiture on the reused shares :-

Dr. Forfeited shares

Cr. Forfeited shares reissued

(v) Cash received on the reissued shares:-

Dr. Cash / Bank A/c

Cr. Forfeited share reissued A/c

(vi) Share premium (if any) on the reissued A/c:-

Dr. Forfeited shares issued A/c

Cr. Share premium A/c

Example:-

The authorized and issued share capital of cosy fire’s Ltd was Tshs. 75000 divided into 75000 ordinary shares of Tshs. 1 each, fully paid 2 January 2007. The authorized capital was increased by a further 85,000 ordinary shares of Tshs. 1 each to Tshs. 160,000.

On the same date 40,000 ordinary shares of Tshs. 1 each were offered to the public at Tshs. 1.29 per share payable as to sh. 0.60 on application (including the premium), Tshs. 0.35 on allotment and sh. 0.30 an 6^th April 2007.

The list was closed on 10 January 2007, and by that date applications for 65,000 shares had been received. Applications for 5000 shares received no allotment and cash paid in respect of such shares was returned.

All shares were allocated to the remaining applications on prorate to their original application the balance of the monies received on applications being applied to the amounts due on allotment.

The balances due on allotment were received on 31^st January 2007 with the exception of one allote of 500 share and these were declared forfeited on 4 April 2007. These shares were reissued at fully paid on 2 May 2007 at Tshs. 10 per share. The call due on 6 April 2007 was duly paid by the other shareholder.

Required:-

(a) To record the above mentioned transaction in the appropriate ledger.

(b) To show how the balances on such accounts should appear in the company’s balance sheet as at 31^st May 2007.

Calculate of prorate:-

Applied Offered

65000 40000

Refund (5000) ______

60,000 40,000

Allotment money received

Due on allotment 0.35 x 40000 14,000

Less: excess capt. Money received: 0.6 x 20,000 12,000

2,000

Less: Due on all allotment; 0.35 x 500 = 175

Less: excess apply money 0.6 x 250 = 150 25

Allotment money received 1975

DR BANK ACCOUNT CR

DATE	DETAILS	AMOUNT	DATE	DETAILS	AMOUNT
1/1/2007	Balance b/d	75,000		Appl& allot(refund)	3000
1/10/2007	Application & allotment	39,000
	Application & allotment	1975
	First & final call	11850		Balance c/d	125,375
	forfeited Reissue	550
		128,375			128,375
	Balance b/d	125,375

DR APPLICATION & ALLOTMENT ACCOUNT CR

Bank(refund)	3000	Bank(appl.money)	39,000
ordinary share capital	28,000	call in arrear	25
share premium	10,000	Bank(allot&money)	1975
	41,000		41,000

DR ORDINARY SHARE CAPITAL ACCOUNT CR

forfeited share(0.7×500)	350	1/1/2007	Balance b/d	75,000
			Application &allotment	28,000
			forfeited share reissue	500
Balance c/d	115,000		First & final call	11850
	115,350			115,350

			Balance b/d	115,000

DR FIRST & FINAL CALL CR

ordinary share capital	11850	Bank	11850
	11,850		11,850

DR SHARE PREMIUM ACCOUNT CR

Balance c/d	10375 10375	application & allotment	10,000
		forfeited share	375

DR CALL IN ARREAR ACCOUNT CR

application & allotment	25	forfeited share	25
	25		25

DR FORFEITED SHARE ACCOUNT CR

call in arrear	25	ordinary share capital	350
forfeited	325
	350		350

DR FORFEITED SHARE REISSUED ACCOUNT CR

ordinary share capital	500	forfeited share	325
share premium	375	Bank	550
	875		875

First call (calculation)

40,000 – 500 = 3950

x 0.30

11850

BONUS ISSUE OR SCRIPT ISSUE:

The directors of a limited company may decide to issue. More shares to existing shareholders against the reserves or P&L A/C balance in this case, the shareholders are not supposed to make any payment.

Right issue:- May be defined as the raising of new capital by a company by giving existing shareholders the right to subscribe to new shares of debentures in proportion their current holdings.

EXERCISE

Limited has an authorized share capital of Tshs. 1,500,000 divided into 1,500,000 ordinary share of Tshs. 1 each. The issued share capital at 31st March 2007 was Tshs. 500,000 which was full paid and had been issued at par. On 1st April 2007, the directors, in accordance with the Company’s articles decided to increase the share capital offering by a further 500,000 ordinary shares of Tshs 1 each at a price of Tshs. 1.60 Per share payable as follow:-

On application including the premium Tshs,. 0.85 Per share

On allotment Tshs. 0.25 Per share

On 1st final colon 3rd August 2007 Tshs. 0.50 Per share

On 13th April 2007, applications had been received for 750,000 shares and it was decided to allot the shares on the basis of four shares for every five shares for which applications had been received.

The balance of the money received on application was to applied to the amount due on allotment. The shares were allotted on 1st May 2007, the unsuccessful applications being repaid their cash on this date. The balance of the allotment money was received in fully by 15th May 2007.

With the exception of the member who failed to pay the call on the 5000 shares allotted he the reminder of call was paid in full within two weeks of the call being made.

The directors resolved to the forfeit these shares on 1st September 2007 after giving the required notice. The forfeited shares were reissued on 30th September 2007 to another member at Tshs. 0.90 Per share.

You are required to write up the ledger a/c necessary to record these transactions in the books of M. Ltd.

Premium = 1.60 – 1.0 = 0.6

Application = 0.85 – 0.6 = 0.25

Applied Issue

? 500.000

5 4

= 5 x 500,000 = 625,000 x 7

Net Applied Amount = 625,000

Allotment received:-

Due to allotment (0.25 x 500,000) = 125,000

Less: Expenses on Appl. (0.85 x 625 – 500,000) 106,250

Allotment money received 18750

DR BANK ACCOUNT CR

1- Jan	Balance b/d	500,000	Application& allot(125000×0.85	106250
	Apply & allotment	637,500
	1st call	247,500	Balance c/d	1,302,000
	Apply & allotment	18,750
	forfeited share reissue	4,500
		1,408,250		1,408,250

DR APPLICATION AND ALLOTMENT ACCOUNT CR

Bank(refund)	106,250	Bank(apply money)	637,500
ordinary share(0.5×500,000)	250,000	Bank(allotment money)	18750
share premium(0.6×500,000)	300,000
	656,250		656,250

DR ORDINARY SHARE CAPITAL CR

forfeited share(1×5000)	5000	1-Jan	Balance b/d	500,000
			1st call	250,000
Balance c/d	1,000,000		Appl.and allotment	250,000

	1,005,000			1,005,000
			Balance b/d	1,000,000

DR FORFEITED SHARE ACCOUNT CR

call in arrears	2500	ordinary share	5000
forfeited issued	2500
	5000		5000

DR FORFEITED SHARE REISSUE ACCOUNT CR

ordinary share(1×5000)	5000	forfeited share	2500
share premium	2000	Bank(0.90×5000)	4500
	7000		7000

DR 1^ST CALL ACCOUNT CR

ordinary share(500,000×0.5)	250,000	call in arrears(0.5×5000)	2500
		Bank	247,500
	250,000		250,000

DR SHARE PREMIUM ACCOUNT CR

Balance c/d	302,000	Appl.and allotment	300,000
		forfeited share	2000
	302,000		302,000
		Balance b/d	302,000

DR CALL IN ARREARS ACCOUNT CR

1st call	2500	forfeited share	2500

	2500		2500

Allotment received

Due on allotment (0.25 x 500,000) = 125,000

Less; excess on application (0.85 x(625,000 – 500,000) (106250 )

18750

BALANCE SHEET AS AT 30/9/2007 (Extract)

Authorized share capital
ordinary share	1,500,000

Issued paid up capital	1,000,000	Current assets
		Bank	1,302,000
reserve & surplus
share premium	302,000
	1,302,000		1,302,000

REDEMPTION OF SHARE

Shares can be bought back from their holders direct on a specific data or range of dates.

METHODS OF REDEMPTION

Shares can be redeemed in two ways:-

(i) Out of distributable

e.g.- Credit balance on profit &loss A|c’s

– General reserve

(ii) Out of fresh issue of share made for purpose of redemption

I: Redemption out of distributable profit

According to this method, an amount equal to the nominal value of the shares being redeemed is transferred from a reserve which could otherwise be distributed as cash dividend to a reserve account called capital Redemption Reserve Account.

Entry: Dr. Profit & loss appropriation A/c with the nominal value of the shares redeemed.

Cr. Capital Redemption Reserve A/c

The transfer to the capital Redemption Reserve A/c curtails the amount which could otherwise be distributed as cash dividend and so jeorpodice the company’s liquidity.

II: Redemption out of fresh issue of shares:-

In this case shares can be redeemed out of issuing new share to the members. The issue should be made for the purpose of redemption. Now the amount to be transferred to the capital redemption reserve A/c shall be the difference between the nominal value of the shares now being redeemed and the proceeds from the fresh issue of shares.

Transfer to CR = Nominal value – cash collected out of fresh of shares redeemed issue.

Or = Nominal value of shares redeemed – Nominal value of cash collected out of fresh Issue.

PREMIUM PAYABLE ON REDEMPTION

If the company redeems shares above par (at premium) the premium payable on redemption, shall be appropriated from the distribution profit.

The share premium a/c can be utilized in paying the premium payable on redemption, if the share now being redeemed were originally issued at a premium and a new issue of shares is being made for the purpose.

Now the share premium A/c can be used to meet the premium on redemption only to the extent of the lesser of:-

(i) To credit balance of the share premium A/c after crediting the premium on fresh (new) issue.

(ii) The amount of the share premium received on the original issue pf the shares now being redeemed.

COMPANY ACCOUNT 1.2

CAPITAL REDEMPTION RESERVE

The balance on this A/c can be utilized in paying up the unissued shares of a company as fully paid Bonus shares.

ISSUE OF BONUS SHARES

The receive to provide for the Bonus shares may be used in the following order:-

(i)` Capital Redemption Reserve.

(ii) Share premium.

(iii) Other Reserves (e.g. profit /loss balance, general reserve).

ENTRIES REDEMPTION OF SHARES

A) Declaration of redemption

Dr. Redeemable preference share capital A/c

Cr. Preference share redemption A/c

B) Premium payable on redemption

Dr. Share premium A/c or P & L appropriation A/c

Cr. Preference share Redemption A/c

C) Redemption of shares

Dr. Preference share Redemption A/c

Cr. Cash / Bank/c

D) Transfer of the nominal value of the shares being redeemed

Dr. P&L appropriation. A/c

Cr. Capital Redemption Reserve A/c

Example:

Mpenetecho Co. Ltd had 800,000 % redeemable preference shares of Tshs.1 each in issue originally issue at a premium of act 40 per share. The company new proposes to redeem 200,000 of these shares at Tshs. 1/60 per share financed partially by the issue of 160000 ordinary shares of sh. 1 per share at Tshs. 1/20. Prior to the issue of replacement shares the share premium A/c had a credit balance of Tshs. 242,000.

Show the amount of premium payable on redemption to be approached from;-

(a) Share premium A/c

(b) Distribute profit

Solution

Given: Premium on original issue = 0.40

Premium on fresh issue = 1 – 1.20 = 0.20

Premium on original issue = 0.4 x 200,000

= 80,000

Premium on redemption = 0.6 x 200,000

= 120,000

Premium on fresh issue = 0.2 x 160,000

= 32,000

REDEMPTION OF DEBENTURES

Strictly used, Debenture is a written acknowledgement of a debit, by a limited company providing terms and conditions as for its security, interest and repayment.

It can loosely be defined as an account borrowed by a limited company.

An issue of debenture (i.e obtain of loan from the public) may be documented under seal, (with the added formality of being executed in Deed form).

SECURITY:-

The security may take the form of fixed assets which may be applied for the benefit of the debenture holders on a breach of the debenture deed. (E.g. failure to pay interest, involvement). That is why we have mortgage debentures and simple or married debentures.

Mortgage debentures are the debentures in which assets have been pledged.

Naked debentures are the debentures without security. The security may be described as fixed or floating.

Fixed charge:-

Granted on fixed assets which can be applied for the benefit of the debenture holders on a breach of the debentures deed. While the charge is operative, the security may neither be traded nor exchanged. On the breach of the debenture deed, the assets can then be applied for the benefit of the debentures holders.

Floating charge:-

Granted so as to apply to all assets, and while the charge is operative, the assets can either be traded or exchanged. On the breach of the debenture deed, the charge crystallizes and assets the priority of the debenture holders.

TRUSTEE

The Debenture Deed will appoint a trustee for the debenture holders whose work is to safe guard the interest of the debenture holders. On the breach of the Trust deed, the trustee will appoint a receiver who will seize the security (property) and apply if for the benefit of the debenture holders’ arrangement for the repayment of the debenture issue.

REDEMPTION OF DEBENTURES

Debentures can be bought back (redeemed) using the following methods:-

(a) Sinking fund method / Debenture Redemption fund method.

Under this method a fixed sum calculated from the sinking fund tables is set aside and invested in outside securities which together with interest compounded annually and calculated using a fixed rate, a sufficient sum will them be available to redeem (repay & the debentures on their maturity.

(i) At the end of the first year:-

(a) Dr. P & L appropriation A/c with the annual appro.

Cr. Sinking fund A/c / Debenture redemption sum set aside.

(b) Dr. Sinking fund investment A/c / Debenture Redemption fund

Investment A/c.

Cr. Cash / Bank A/c with the equipment amount invested.

(ii) At the end of the second and subsequent years.

Dr. P. & L appropriation A/c with interest received on investment

Cr. Sinking Fund A/c

(b) Dr. Cash / Bank A/c with interest received on investment.

Cr. Sinking Fund A/c

(c)Dr. Sinking Fund investment A/c with both the fixed sum (+)

Cr. Cash / Bank A/c interest now being re invested.

(iii) At the end of the final year (the year of redemption:-

(a) Dr. P& L appropriation A/c with the fixed sum set a side

Cr. Sinking fund A/c investment

(b) Dr. Cash / Bank A/c with interest received on investment

Cr. Sinking fund A/c

NB: At the end of the final years, no further investment is made instead of security will be sold out.

Entries :-

(i) Dr. Cash / Bank A/c with cash received on sale of the

Cr. Sinking fund investment A/c investment.

(ii)Dr. Sinking Fund Investment A/c with profit on sale of the investment

Cr. Sinking fund A/c

NB: The balancing figure on the sinking fund A/c after the debentures have been redeemed, will be transferred to the general reserve.

Entry:-

Dr. Sinking fund A/c with transfer of the balance

Cr. Reserve A/c

EXERCISE

Debentures of Tshs. 30000 are issued on 1^st Jan. 2003. Redemption is to take place on equal terms four years later. The company decided to set aside an equal amount to be invested at 5% which will provide Tshs. 30000 on maturity. Tables show that Tshs. 0.232012 invested annually will produce sh. 1 in 4 years time.

You’re required to show:-

(a)Debenture redemption reserve A/c (sinking fund / Debentures redemption A/c)

(b)Debenture sinking fund investment A/c

(c)Debentures

(d) Profit and Loss extracts

DR SINKING FUND ACCOUNT CR

			1.1.2004	Balance b/d	6960
31.12.04	balance c/d	14,268	31.12.04	P & L Appr.	6960
			31.12.04	cash(interest)	348
		14268			14268

			1/1/2005	Balance b/d	14,268
			31.12.05	P & L Appr	6960
31.12.05	balance c/d	21941		cash(interest)	713
		21941			21941

			1/1/2006	Balance b/d	21941
31.12.06	Debenture Reserve	30,000	31.12.06	P & L Appr	6960
		8057	31.12.06	cash(interest)	1097
			31.12.06	Deb.sink.fund inv.	8059
		38057			38057

PURCHASE IN THE OPEN MARKET

At times a company can buy its own debentures in the open market. This practice should be allowed by the terms of issue.

This brings a financial sense if the market value is below the present value of the further interest payments plus the sum payable on redemption.

The debentures can be bought back for cancellation. The purchase of debentures in the open market can be ex-int or cum – int.

If it is ex – int, then this means it is without interest, and therefore interest has to be calculated and added to the purchase price.

And if it’s cum – int, then this means it is with interest and therefore for recording purpose, the interest included should be deducted from the total price paid.

Entries:-

Purchases of debentures for cancellation

(i)Purchase of own debentures in the open market.

Dr. Investment in own debentures A/c

Cr. Cash / Bank A/c

(ii)Pre – acquisition interest included in the purchase price.

Dr. Debenture interest A/c

Cr. Investment in own debentures A/c

(iii)Cancellation of the debentures (Nominal value)

Dr. Redeemable debentures

Cr. Investment in own debentures A/c

(iv)Profit on cancellation of the debentures.

Dr. Investment in own debentures A/c

Cr. Sinking fund A/c / Debenture Redemption fund A/c

(v)The balance on the sinking fund A/c after all the debentures has been cancelled.

Dr. sinking fund A/c

Cr. Reserve A/c

Example:-

Super Mnyanyue Company had some years ago issued Tshs. 400,000 12% redeemable debentures. Under the terms of the trust deed the debentures would be redeemed or bought back on the open market at anytime. A sinking fund had been established for this purpose.

On 1^st January 1998 the balance on debenture redemption fund was Tshs. 152400 and on debenture redemption fund investment Tshs. 112800.

The following transactions occurred during 1999:-

Jan. 14: Sinking fund investment bought Tshs. 38100.

May 16: Sinking fund investment income received Tshs. 8700

June 30: Debenture interest paid for half year Tshs. 24000

Sept. 15: Sinking fund investment sold (costing Tshs. 57000), Tshs. 61200

Sept. 30: Tshs. 60000/- debenture bought back on open moment at 97 and cancelled Tshs. 58200.

Oct. 16: Sinking fund income received Tshs. 5100.

Nov. 21: Sinking fund investment sold (cost Tshs. 43200) Tshs. 40,000.

Nov. 30: Tshs. 40000 debentures redeemed at 96 ci on open market and cancelled Tshs.

38400.

Dec.31: Debenture interest paid Tshs. 18000

Dec 31: Annual appropriation Tshs. 32000

Open, post and balance the appropriate accounts to record the above.

Solution:-

DR DEBENTURE REDEMPTION FUND ACCOUNT CR

21-Nov	Deb.Red fund inv.	3200		Balance b/d	152,400
31/12	General reserve	100,000	16-May	cash(income)	8700
				Deb.red.fund.inv
				profit on sale	4200
			16-Oct	cash(income)	5100
			30-Sep	invest.in own deb(profit)
			30-Nov	inv.in own(profit)	3600
			31-Dec	P & L A ppr	32000
		209,600			209600

DR DEBENTURE REDEMPTION FUND INVESTMENT ACCOUNT CR

1-Jan	Balance b/d	112,800	16-Sep	cash	61,200
14-Jan	cash(purchase)	38,100	21-Nov	cash	40,000
16-Sep	Deb.red.fund		21-Nov	Deb.Red.fund	3200
	profit on sale	4200
				Balance c/d	50700
		155,100			155,100

DR 12%DEBENTURE INTEREST ACCOUNT CR

30-Jun	cash	24,000	31dec	P&l	45,800
30-Sep	investment in own	1800
30-Nov	investment in own	2000
31-Dec	cash	18,000
		45,800			45,800

DR INVESTMENT IN OWN DEBENTURE ACCOUNT CR

30-Sep	cash	58200	30-Sep	12% Deb.interest	1800
30-Sep	Deb.Red fund(profit)	3600	30-Sep	Redeem deb	60,000
30-Nov	cash	38400	30-Nov	Deb.interest	2000
	Deb.Red fund(profit)	3600	30-Nov	Redeem deb	40,000
		103,800			103,800

Interest included = 3 month 60,000 x 12 x 3 = 1800

100 12

Interest included = 5 month: 40,000 x 12 x 5 = 2000

100 12

DR 12% REDEEMABLE DEBENTURE ACCOUNT CR

30-Sep	invest in own	60,000	Balance b/d	400,000
30-Nov	invest in own	40,000
31-Dec	Bal.c/d	300,000
		400,000		400,000

EXERCISE

Eight years ago Trafalgar Co. Ltd had issued Tshs. 300,000 12% Debentures. Interest was payable on both June 30^th and Dec. 31^st. Under the terms of the trust deed, the debentures could be redeemed on bought back on the married at any time after 1^st Jan. 1999. A sinking fund had been established for this purpose.

On 1^st Jan. 1994, the balance on debentures redemption fund Tshs 246,250 and on debenture redemption fund investment Tshs. 203,500.

The following transactions took place for the year 1994:-

Jan: Sinking fund investment bought for Tshs. 42,600

May 25: Sinking fund investment income received Tshs. 9230.

June 30: Debenture interest paid 800

Aug. 14: Sinking fund investment sold (cost Tshs. 71,200) for Tshs. 79600.

Aug. 31 Tshs. 100,000 debentures bought back on open market at 97 cum – int and cancelled.

Sept. 30: Tshs. 100,000 debentures bought back on open market at 96 cum-int and cancelled.

Oct. 24: Sinking fund investment income received Tshs. 8920.

Dec. 19: Sinking fund investment sold (cost Tshs. 82500) for Tshs. 81000

Dec. 31: Debenture interest paid

Dec 31: Annual appropriation Tshs. 44,000

Required:

Open post and balance the appropriate ledger accounts to record the above transactions.

DR DEBENTURES REDEMPTION ACCOUNT CR

19-Feb	Deb.red.fund.inve	1500		Balance b/d	246,250
31-Dec	General reserve	200,000	25-May	cash(income)	9230
			14-Aug	Deb.red.fund inve	8400
			24-Oct	cash(income)	8920
			30-Sep	investment in own Deb.	7000
			31-Aug	investment in own Deb.	5000
			31-Dec	P & L Appr	44,000
		328,800			328,800

DR DEBENTURES REDEMPTION FUND INVESTMENT ACCOUNT CR

	Balance b/d	203,500	14-Aug	cash(sale)	79,600
			19-Dec	cash(sale)	81,000
			19-Feb	Deb.red.fund(loss)	1500

			31-Dec	Balance c/d	92,400
		254,500			254,500
1-Jan	Balance b/d	92400

DR 12% DEBENTURE INTEREST ACCOUNT CR

30-Jun	cash	18,000	31-Dec	P & L	29,000
8/31/9/31	invest.in.own.deb	2000
	invest.in.own.deb	3000
	cash	6000
		29,000			29,000

DR INVESTMENT ON DEBENTURE ACCOUNT CR

31-Aug	cash	97,000	31-Aug	Redeemable deb.	100,000
30-Sep	cash	96,000	31-Aug	Debenture interest	2000
31-Aug	Deb,red,fund(profit)	5000	30-Sep	Redeemable debenture	100,000
30-Sep	Deb,red,fund(profit)	7000	Sep-31	Debenture interest	3000
		205,000			205,000

DR REDEEMABLE DEBENTURES ACCOUNT CR

31-Aug	invest.own.Deb	100,000	Balance b/d	300,000
30-Sep	invest.own.Deb	100,000
31-Dec	Balance c/d	100,000
		300,000		300,000

Interest 30/6: 300,000 x 12 x 6 = 18,000

100 12

31/12: 100,000 x 12 x 6 = 6000

100 12

Some years ago Mplc had issued 375,000 of 10% debenture. 2000/2010 at par. The term of the issue allow the company the right to purchase these debentures for collection at or below per with an option to redeem at a premium of 1 percent, on 30 Sept. 2006. The exercise this option the company must give three months notice which it dully did on 30 June 2003 indicating its intention to redeem all the debenture outstanding at 30^th Sept. 2006.

MPLC had established a sinking fund designed o accumulate the sum of Tshs. 378750 by 30 September 2006 and had appropriated profits annually and invested these, together with the interest from such investments and profits made on any realizations from time to time.

A special No. 2 bank account was established specifically to deal with the receipts and payments relating to the debentures and the sinking fund.

By 30 June 2006 annual contributions amounting to Tshs. 1334,485 together with the interest on the sinking fund investment of 39480 had all been invested except for 2475 which remained in the No. 2 account at the date.

The only investment sold, prior to 30^th June 2006 had cost 144,915 and realized 147,243. This was used to re purchase debenture with a par value of 150,000.

Transactions accruing between 1 July and 30^th Sept. 2006 were:

(i) Interest received on the sinking fund investment

7^th July 1,756

13^th Sep. 1,455

(ii) Proceeds from the sale of investments:-

2^nd Aug. 73,215 (Book value was 69322)

25^th Sept. 160,238 (remaining investment)

(iii) Redemption of all debentures on 30^th Sept. with the exception of 15,000 held by B. Limited. The company had received notice of a gamishee order.

(iv) MPLC deposited with the W. Bank P/C the sum of 15,150 on 30^th Sept. 2006. (You are required to ignore debenture interest and income tax).

Required:-

From the information given above to prepare the ledger accounts (Including the No. 2 bank A/c/0 in the books of MPLC for the period 30^th June to 30 Sept. 2006.

Showing the transfer:

Solution

Sinking fund investment
Annual contribution	334485
Add; interest	39480
profit on sale of investment	2328
profit o purchases	2757
	379050
less; Debenture purchased	150,000
	229,050

Sinking fund investment
Annual contribution	334485
Add; interest(39480 -2475)	37005
	37490
less; investment sold	144915
	226575

Debenture
original value	375,000
less; Debenture purchased	150,000
	225,000

DR BANK ACCOUNT CR

Balance b/d	2475	W.Bank	15150
interest	1756	Deb.redeemable	212100
interest	1455
Total inv.sold	233453	Balance c/d	11889
	239,139		239139

DR SINKING FUND ACCOUNT CR

Prem.on redemption	2250	Balance b/d	229,050
	236,889	interest on debenture	1756
		interest	1455
		profit on sale	3893
		profit on sale	2985
	239,139		239,139

DR SINKING FUND INVESTMENT ACCOUNT CR

Balance b/d	226575	sale of investment	73215
profit on sale	3893	sale of investment	160238
profit on sale	2985
	233,453		233,453

DR DEBENTURE ACCOUNT CR

Debenture Redemption	225,000	Balance b/d	225,000

	225,000		225,000

DR DEBENTURE REDEMPTION ACCOUNT CR

Bank	212100	10% Debenture	225,000
Balance c/d	15150	Premium on redemption	2250
	227,250		227,250

(iii) Annual drawings out of profit:-

In this case, an amount equal to the nominal value of the debenture to be redeemed is debited to the P & L appropriation A/c and credited to the Debenture redemption reserve A/c, the balance of which will be transferred to the capital. Reserve A/c once all the debentures have been redeemed.

Accounting entries:-

(a) Annual appropriation of the nominal value of the debentures redeemed:-

Dr. P & L Appropriation a/c

Cr. Debenture redemption reserve A/c

(b) Director’s approval of the redemption of the debenture (Nominal value):-

Dr. Redeemable debenture A/c

Cr. Debenture redemption A/c

Dr. Share premium and or P&L appropriation

Cr. Debenture redemption A/c

(d) Redemption of the debentures:-

Dr. Debenture redemption A/c

Cr. Cash / Bank A/c

(e) Profit on the redemption:-

Dr. Debenture redemption A/c

Cr. P&L A/c

Example:-

Champwili P&L had issue Tshs. 200,000 8% Redeemable Debentures. Under the terms of issue, redemption was to be effected by equal annual drawings over 10 years on 31^st December each year starting 1996.

Eight years offer on 1^st Jan. 2004, balance on 8% redeemable Debenture and on debenture redemption reserve accounts were Tshs. 400,000 and Tshs. 160,000 respectively. A further redemption took place in 2004 at 96 and the final redemption in 2005

Open, post and balance the appropriate accounts for the years 2004 and 2005.

EXERCISE

Kapirimposhi P&L had issued 500,000 12% Redeemable debentures in 1990 on which interest was paid half yearly on 30^th June and 31/12 under the terms of the issue they were to be redeemed by equal annual drawings over 10 years on 31/12 from the year 1996 onwards.

8 years later on 1^st Jan. 2004 the balances on debenture redemption reserve and 12% redeemable debentures were Tshs. 400,000 and Tshs. 100,000 respectively. A further redemption was affected in 2004 at 95 ex- int and the final redemption, 2005 at par ex- int – pen, post and balances the appropriate accounts to record the above transactions for each of the years 2004 and 2005.

DR 12% REDEEMABLE DEBENTURE ACCOUNT CR


31.12.2004	Deb.Red.	50,000	1.1.2004	Balance b/d	100,000
31.12.2004	Balance c/d	50,000
		100,000			100,000

31.12.2005	Deb.redemption	50,000	1.1.2005	Balance b/d	50,000
		50,000			50,000

DR DEBENTURE REDEMPTION RESERVE ACCOUNT CR

31.12.2004	Balance c/d	450,000	1.1.2004	Balance b/d	400,000
				P & L Appr.	50,000
		450,000			450,000
31.12.2005	Capital reserve	500,000	1.1.2005	Balance b/d	450,000
			31.12.2005	P & L Appr.	50,000
		500,000			500,000

DR DEBENTURE REDEMPTION ACCOUNT CR


31.12.2004	cash	47500	31.12.2004	12% Red.debenture	50,000
31.12.2004	P & L	2500
		50,000			50,000

31.12.2004	cash	50,000	1.1.2005	12% Deb.red	50,000

		50,000			50,000

DR DEBENTURE INTEREST ACCOUNT CR

30.06.2004	cash	6000	31.12.2004	P & L	12,000
30.06.2004	cash	6000
		12,000			12,000

1.12.2005	cash	3000	31.12.2005	P & L	6000
31.12.2005	cash	3000
		6000			6000

(iv) Insurance Policy method:-

Instead of investing the sum in securities, the same is paid by way of an Insurance premium to an Insurance company which issues an endorsement policy of the amount equal to the sum payable on redemption and maturing on the date when the debentures become repayable.

The premium paid annually is debited to the debenture redemption fund policy A/c and credited to the cash / Bank A/c, and the premium is paid at the beginning of a period.

The same amount will be set aside out of profit & loss appropriation A/c through debiting profit and loss appropriation A/c and crediting debenture redemption fund A/c.

On the maturity of the policy:-

Dr. Cash / Bank A/c

Cr. Debenture Redemption fund policy A/c ) with sum received on the maturity of the policy and any balance on the Insurance policy A/c shall be taken to the debenture Redemption fund (Deb. Red. Reserve) A/c

If a Cr. Balance – Dr. Deb. Fund policy A/c

Cr. Deb. Red. Fund A/c

If a De. Balance – Dr. Deb. Red. Fund A/c

Cr. Deb. Fund policy A/c

On the redemption of the debentures:-

Dr. Redeemable Debenture A/c / Debenture Redemption

Cr. Cash / Bank A/c

The credit balance on the deb. Redemption Fund A/c shall be transferred to a Reserve A/c.

Entry: Dr. Deb. Redemption Fund A/c

Cr. Reserve A/c

Example:-

A company has a debenture on issue of Tshs. 150,000 on 1^st Jan. 1990. It decided to provide for the redemption of the debentures for Tshs. 1,500,000 for 3 years. The annual premium is Tshs. 47,500. Show the necessary ledger accounts to record the above using the Insurance policy method.

DR REDEEMABLE DEBENTURE CR

31.12.90	Balance c/d	150,000	1.1.90	cash	150,000

		150,000			150,000
31.12.91	Blance c/d	150,000	1.1.91	Balance b/d	150,000

		150,000			150,000
31.12.92	Deb.red.	150,000	1.1.92	Balance b/d	150,000

		150,000			150,000

DR DEBENTURE RED.FUND INSURANCE POLICY ACCOUNT CR

1.1.90	cash(in.prem)	47500	31.12.90	Balance c/d	47500

		47,500			47,500
1.1.91	Balance b/d	47500	31.12.91	Balance c/d	95,000
	cash(in.prem.)	47500
		95,000			95,000
1.1.92	Balance b/d	95000	31.12.92	cash	150,000
1.1.92	cash(in.prem.)	47500
	Deb.Red.fund	7500
		150,000			150,000

DR DEBENTURE REDEMPTION FUND ACCOUNT CR

31.12.90	Balance c/d	47,500	31.12.90	P & L	47500
		47,500			47,500
31.12.91	Balance c/d	95,000	1.1.91	Balance b/d	47500
				P & L Appr.	47500
		95000			95000
			1.1.92	Balance b/d	95000
31.12.92	Deb.redemption	150,000	31.12.92	P & L Appr.	47500
			31.12.92	Deb.red.fund policy	7500
		150,000			150,000

DR DEBENTURE REDEMPTION ACCOUNT CR

cash	150,000	31.12.92	Redeemable Deb.	150,000

	150,000			150,000

EXERCISE

A Ltd company issued Debentures of Tshs. 600,000 on 1^st Jan. 1992 and decided to provide for the redemption by means of an Insurance policy for Tshs. 600,000. The annual premium was Tshs. 190000. Prepare the necessary ledger accounts assuming that the amount of policy was dully released and debentures were paid.
The following balances appeared in the books of a limited company on 31^st Dec. 1997:-

Dr. Cr.

6% Debentures. Tshs. 500,000

Debentures redemption Insurance policy. Tshs. 460’000

Debenture redemption fund Tshs. 460’000

The policy amount was Tshs. 500,000 and the annual premium were received, and the debentures were redeemed.

-You are required to prepare the necessary ledger accounts in the books of the company.

OUT OF CAPITAL METHOD:-

Example:-

A Ltd co. had a debenture on issue of Tshs. 15000 on 1^st Jan. 1990 at a discount of 5%, repayable at par by annual drawings of Tshs. 3000 for five years. Show the necessary ledger accounts for the first year to record the above.

Solution:-

Discount on debenture = 5/100 x 15000 = 750.

DR CASH ACCOUNT CR

Deb.Appl.&Allot	14250	Deb.,redemption	3000

DR DEB.APPLICATION & ALLOTMENT CR

Redeem Deb.	15,000	Bank	14250
		Disc on issue	750
	15,000		15,000

DR REDEEMABLE DEBENTURES ACCOUNT CR

1st year	Deb.Redemption	3000		15,000
31.12.90	Bal.c/d	12,000
		15,000		15,000
			Balance b/d	12,000

DR DISCOUNT ON ISSUE DEBENTURE ACCOUNT CR

Deb.Appl.&Allot	750	31.12.90	P & L	250
			Bal. c/d	500
	750			750

DR DEBENTURE REDEMPTION ACCOUNT CR

311.2.91	cash	3000	Reedemable Deb.	3000

		3000		3000

Discount on deb. Written off = 5/15 x 750 = 250.

COMPANY FINAL ACCOUNTS

They consist of the trading A/c and Profit and Loss A/c. The trading and profit and loss A/c of a company are similar to those of a sole proprietorship, except that in the profit and loss A/c of the company, the following items can be seen to have been debited to it, there are:-

(a) Debenture Interest

(b) Directors salaries or fees or emoluments

And to the credit side there can be shown a part from the gross profit made other gains such as Dividends received.

In this section / A/c the distribution of profit is shown. It is in this A/c that appropriation items such as corporation tax payable, proposed dividend interim dividend, reserve transfer etc are listed.

Corporation tax:-

It is a tax levied on a company’s profit.

Dividend:-

The term dividend originates form a Latin word “Dividend” meaning to dividend. It is that part of the profit of a company which is distributed among its share holders.

TYPES OF DIVIDEND:-

(a) Interim Dividend

(b) Proposed Dividend

(a) INTERIM DIVIDEND

The word “Interim” originates from Latin meaning “in the meantime”

It is a dividend which is declared before the close of the company’s financial period.

(b) PROPOSED DIVIDEND:-

This is only provided for and so not paid before the accounts are closed.It’s shown itself among items on the Balance sheet as “proposed dividend or unpaid dividend”

To the credit side of the appropriation A/c is included such items as the Net profit made during the year and balance of profit it from the previous year.

DR APPROPRIATION ACCOUNT FOR THE YEAR ENDED 31STDEC1999 CR

Dividends, interim	xx	Balance b/d	xxx
proposed	xx	Net profit made during the year	xxx
written off expenses	xx
corporation tax payable	xx
Transfer to reserve e.g CRR	xx
Bal. c/f (retained earnings
unappropriated balance)	xx
	xxxx		xxxx

Sales		xxxx
less; Return inwards		xxx
		xxxx
Deduct; cost of goods sold ; opening stock	xxx
Add; purchases xxx
carriage inwards xx
less; Return outwards xxx	xxx
Net purchases	xxx
less; closing stock	xxx	xxx
Gross profit		xxxx
Add ; other gains e.g. dividend/interest received		xxx
		xxxx
Deduct ; Directors salaries xx
Debenture interest xx
Stationery xx
Audit fees xx		xxx
Net profit made during the year before tax		xxxx

Deduct ; corporation tax		xx
Net profit after tax		xxx
Add ; Net profit b/f (previous year)		xx
		xxx
Deducts ; dividend interim xx
proposed xx
Transfer to general reserve x		xxx
Balance c/f Retained earnings/un appropriated balance		xxx

BALANCE SHEET AS AT 31/12/1999

Fixed Assets	cost	Depreciation	Net
Premises	xxx	–	xxx
Furniture & fittings	xx	x	xx
Machinery	xx	x	xx
Motor vehicle	xx	x	xx
	xxx	xx	xxx
Deduct; Net current Assets
or Working capital
Current Assets
stock	xxx
Debtors xx
less; provision x	xx
cash	x
	xxx
less; current liabilities
sundry creditors xx
proposed dividend xx
corporate tax payable xx	xx		xx
Net assets			xxx

Financed by;
Authorized share capital
ordinary shares of each /=			xxx

Issued & paid up capital
ordinary shares of /= each			xxx

Reserves & surplus
P & L balance (retained earnings)			xxx
share premium			xx
ordinary share holder fund/Equity			xxx
Add; % Debentures			xx
capital employed			xxx

EXERCISE:-

Here is a trial balance of RF Ltd as at 31^st June 2008.

	DEBIT	CREDIT
share capital – authorized & issued		50,000
stock as at 30th June 2007	38,295
Debtors	26890
creditors		12310
10% Debentures		20,000
Fixed replacement reserve		10,000
General reserve		6000
P & L A/c as at 30th June 2007		3964
Debenture interest	1000
equipment at cost	35,000
Motor vehicle at cost	28500
Bank	3643
cash	180
sales		99500
purchases	66,350
Returns Inwards	1150
carriage inwards	240
wages and salaries	10360
Rent, Rates and insurance	5170
Discount allowed	1246
Directors remuneration	2500
provision for depr.at 30th june2007
equipment at cost		8400
Motors		10350
	220,524	220,524

Given the following information as at 30^th June 2008, drawn up a set of financial statements for the year to that date.

(i) Stock 30^th June 2008 Tshs. 4937.

(ii) The share capital consisted of 25000 ordinary shares of sh. Each and 25000 10 per cent preference shares was proposed to be paid as well as a dividend of 20 per cent on the ordinary shares.

(iii) Accrued rent Tshs. 700. Directors remuneration Tshs. 2500.

(iv) Debentures interest ½ years interest owing.

(v) Depreciation cost equipment 10 percent reserve, motors 20%.

(vi) Transfers to Reserve; General reserve Tshs. 2000. Fixed assets replacement reserve Tshs. 1,000.

(vii) Provide 50% as corporation tax payable.

PROFIT &TRADING & LOSS APPROPRIATION ACCOUNT & B/SHEET.

Sales		99500
less; Returns inwards		1150
Net sales		98350
Deduct; cost of goods sold
opening stock	38295
Add; purchases	66350
	104,885
less; closing stock	49,371	55,514

Deduct; wages and salaries 10360
Rent ( 5170 + 700)	5870
Debenture interest	1000
Debenture owing	1000
Discount allowed	1246
Directors remuneration	5000
Depr; Equipment(10/100 x 35000)	3500
Motors(20/100 x 28500)	5700	33676
Net profit made before tax		9160
Deduct;corporation tax(50% x 9160)		4580
Net profit after tax		4580
Add; Net profit b/f(previous yr)		3964
		8544
Deduct; dividend interim	2500
proposed (20/100 x 2500)	5000
Transfer to reserve(1000+2000)	3000	10500
		1956

BALANCE SHEET AS AT30TH JUNE 2008

Fixed Assets	cost	Depreciation.	Net
Equipment	35,000	(8400+3500)	23100
	28500	(10350+5700)	12450
	63,500	27,750	35,550

Deduct; Net current Assets
Current Assets
stock 49371
Debtors 26890
Bank 3643
cash 180
80,084
less; current liabilities
sundry creditors 12310
proposed dividend 2500
Corporate tax payable 4580	19390		60694
			-25144
Financed by;
Authorized share capital
(50,000 – 25,000) ord.share of 1@			25,000

Reserve & surplus
P & L Balance			1956
Add; 10% Debenture			20,000
Capital employed			21,956
READ TOPIC 7

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Wednesday, January 11, 2023

ACCOUNTANCY FORM SIX TOPIC 6:COMPANY ACCOUNTS

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