Wednesday, January 11, 2023


  Eli-express       Wednesday, January 11, 2023


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.

(c)    Limited liability

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


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.


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


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.


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

(c)              A declaration that the liability of a members is limited ‘’liability 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.


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:-

  1. a)   Share capital and its division into various types and the right attaching there to.
  2. b)   Direct their members power duties and qualifications
  3. c)  Proceeding of the directors meeting general and extra ordinary investing.
  4. d) Calls on shares.
  5. e) Common seal.
  6. f) Accounts and Audit.
  7. g) Forfeiture of shares.
  8. h) Dividend and reserves.
  9. i) Voting rights of members.
  10. 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.


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.


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.


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


(a)   On amount being due

  1. Application allotment A/c
  2. Share capital A/c
  3. Share premium A/c

(b)  When the allotment money is received:-

Dr.  Cash / Bank A/c

Cr.  Application and allotment A/c


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


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.


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.


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)


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.

1st call                                20 Tshs.

2nd 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.


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                                         1ST 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         2ND 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


  1. 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

(c)        Assuming the company has made no transaction other than the ones listed above, the company on 22nd March, 1984.

Solution for exercise 1

1 Bank 290,000  
       Application   290,000
2 Bank 260,000  
           Allotment   260,000
3 Bank 450,000  
          1st call   450,000
4 Application 290,000  
        O/share capital   290,000
5 Allotment 260,000  
         O/share capital   260,000
6 1st call 450,000  
         O/share capital   450,000
  1. 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 1st call

Tshs. 20 on 2nd 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.


(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.

  1. (a)


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


         DR                                        BANK    ACCOUNT                                      CR

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                                     1ST CALL ACCOUNT                                   CR

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

                                  BALANCE SHEET AS AT 31ST/ 3/1984


Authorized share capital


Current assets


ordinary shares(10,000 x100)



  1,000,000   1,000,000


 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                                         2ND    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


Current liabilities   call in arrear(14,000 + 7500) 21,500
share premium 250,000    
  1,500,000   1,500,000


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.

(c)       The issue must be sanctioned by the company’s law board.

(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


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.

(c)              There should be a default by a shareholder in payment of a valid call.

(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


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 6th 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 31st 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.


(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 31st 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


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

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( 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
  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



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.


  1. 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


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

DR                                 1ST 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 )


                           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


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


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.


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.



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


  1. A)  Declaration of redemption

Dr.  Redeemable preference share capital A/c

Cr.  Preference share redemption A/c

  1. B) Premium payable on redemption

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

Cr.  Preference share Redemption A/c

  1. C) Redemption of shares

Dr.  Preference share Redemption A/c

Cr. Cash / Bank/c

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

Dr.  P&L appropriation.  A/c

Cr.  Capital Redemption Reserve  A/c


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


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


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).


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.


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.


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.


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

Cr. Reserve A/c


Debentures of Tshs. 30000 are issued on 1st 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


(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 inv. 8059
    38057     38057


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.


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


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 1st 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.


Dec.31: Debenture interest paid Tshs. 18000

Dec 31: Annual appropriation Tshs. 32000

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



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


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   21-Nov 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


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


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

On 1st 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


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

DR                         DEBENTURES REDEMPTION ACCOUNT                  CR

19-Feb 1500   Balance b/d 246,250
31-Dec General reserve 200,000 25-May cash(income) 9230
      14-Aug 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


  Balance b/d 203,500 14-Aug cash(sale) 79,600
      19-Dec cash(sale) 81,000
      19-Feb 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 2000 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

  1. 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 30th 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 30th 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 30th Sept. 2006 were:

(i)        Interest received on the sinking fund investment

7th July                  1,756

13th Sep.                1,455

(ii)       Proceeds from the sale of investments:-

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

25th Sept.              160,238 (remaining investment)

(iii)   Redemption of all debentures on 30th 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 30th Sept. 2006.  (You are required to ignore debenture interest and income tax).


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 30th June to 30 Sept. 2006.

Showing the transfer:


Sinking fund investment  
Annual contribution 334485
Add; interest 39480
profit on sale of investment 2328
profit o purchases 2757
less; Debenture purchased 150,000
Sinking fund investment  
Annual contribution 334485
Add; interest(39480 -2475) 37005
less; investment sold 144915
original value 375,000
less; Debenture purchased 150,000

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


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


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

(c)       Premium payable on redemption:-

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


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 31st December each year starting 1996.

Eight years offer on 1st 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.


  1. Kapirimposhi P&L had issued 500,000 12% Redeemable debentures in 1990 on which interest was paid half yearly on 30th 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 1st 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% 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


A company has a debenture on issue of Tshs. 150,000 on 1st 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
31.12.92 150,000 1.1.92 Balance b/d 150,000
    150,000     150,000


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 7500      
    150,000     150,000


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 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


  1. A Ltd company issued Debentures of Tshs. 600,000 on 1st 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.
  2. The following balances appeared in the books of a limited company on 31st 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.



A Ltd co. had a debenture on issue of Tshs. 15000 on 1st 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.


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


  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.


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

(c)       Audit fees or charges

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.


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.


(a)       Interim Dividend

(b)       Proposed 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.


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.


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
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
      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
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    
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


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

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 30th june2007    
equipment at cost   8400
Motors   10350
  220,524 220,524

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

(i)        Stock 30th 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.


Sales   99500
less; Returns inwards   1150
Net sales   98350
Deduct; cost of goods sold    
opening stock 38295  
Add; purchases 66350  
        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
Deduct; dividend interim 2500  
proposed (20/100 x 2500) 5000  
Transfer to reserve(1000+2000) 3000 10500


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      
less; current liabilities      
sundry creditors            12310      
proposed dividend         2500      
Corporate tax payable    4580 19390   60694
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


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