Issue of Shares at Discount

Issue of Shares at Discount :

When a company issues its shares at a price less than the face value, it is said to be issued at discount. Discount is the difference
between the face value and the issue price. For example a share of Rs.10 (face value) is issued at Rs 9, it is said that shares are issued at discount of Re.1.

A company can issue shares at a discount only when the following conditions are satisfied (Sec. 79).

a. Issue of shares at discount is authorised by an ordinary resolution passed by the company in its general body meeting and sanctioned by Company Law Board.

b. The shares must belong to a class already issued.

c. The maximum amount of discount can not exceed 10%, however, if the Company Law Board is convinced the shares can be issued at a higher discount rate.

d. The company has to be in existence at least for one year.

Whenever shares are issued at a discount the amount of discount is brought into account with the instalment due on allotment. The accounting entry passed to record the same is:

The shares will appear at the full face value on the liability side of the Balance Sheet. The amount of discount on issue of shares being
loss of capital nature shown on the asset side and written off against the Profit and Loss account over a period of time. The amount of discount not yet written off will appear in the asset side of the Balance Sheet under the heading ‘Miscellaneous Expenditure’.

Illustration :

Senthil Ltd. issued 1,70,000 shares of Rs.10 each at discount of 10%. The shares were payable as under

on application Rs.3

on allotment Rs.4 (with adjustment of discount)

on first and final call Rs.2

Public applied for 1,60,000 shares and the shares have been duly allotted. All money were duly received. Pass journal entries and prepare ledger accounts and also show the balance sheet.

Senthil Ltd.
Journal Entries

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Bank A/c Dr		4,80,000
	To Share Application A/c			4,80,000
	(Application money received on 1,60,000 shares @ Rs.3 per share)
	Share Application A/c Dr		4,80,000
	To Share Capital A/c			4,80,000
	(Application money transferred to share capital)
	Share Allotment A/c Dr		6,40,000
	Discount on issue of shares A/c Dr		1,60,000
	To Share Capital A/c			8,00,000
	(Allotment money due on 1,60,000 shares with adjustment of discount)
	Bank A/c Dr		6,40,000
	To Share Allotment A/c			6,40,000
	(Allotment money received)

Share First & Final Call A/c Dr.	3,20,000
To Share Capital A/c		3,20,000
(Call money due on 1,60,000 shares @ Rs.2 per share)
Bank A/c Dr.	3,20,000
To Share First & Final Call A/c		3,20,000
(Call money received)

Senthil Ltd.
Ledger Accounts
Dr. Bank Account Cr.

Particulars	Rs	Particulars	Rs
To Share Application A/c	4,80,000	By Balance c/d	14,40,000
To Share Allotment A/c	6,40,000
To Share First and Final Call A/c	3,20,000

	14,40,000		14,40,000
To Balance b/d	14,40,000

Dr. Share Application Account Cr.

Particulars	Rs	Particulars	Rs
To Share Capital A/c	4,80,000	By Bank A/c	4,80,000
	4,80,000		4,80,000

Dr. Share Allotment Account Cr.

Particulars	Rs	Particulars	Rs
To Share Capital A/c	6,40,000	By Bank A/c	6,40,000
	6,40,000		6,40,000

Dr. Discount on issue of shares Account Cr.

Particulars	Rs.	Particulars	Rs.
To Share Capital A/c To Balance b/d	1,60,000	By Balance c/d	1,60,000
	1,60,000		1,60,000
	1,60,000

Dr. Share First and Final Call Account Cr.

Particulars	Rs.	Particulars	Rs.
To Share Capital A/c	3,20,000	By Bank A/c	3,20,000
To Share Capital A/c	3,20,000	By Bank A/c	3,20,000

Dr. Share Capital Account Cr.

Particulars	Rs.	Particulars	Rs.
		By Share Application A/c	4,80,000
		By Share Allotment A/c	6,40,000
		By Discount on Shares A/c	1,60,000
To Balance c/d	16,00,000	By Shares First and Final Call A/c	3,20,000
	16,00,000		16,00,000
		By Balance b/d	16,00,000

Extracts from Balance Sheet of Senthil Ltd.

Liabilities	Rs.	Assets	Rs.
Share Capital		Current Assets:
Authorised Capital	—-	Bank	14,40,000
Issued Capital		Miscellaneous
1,70,000 shares @		Expenditure:
Rs.10 each	17,00,000	Discount on issue
Subscribed Capital		of shares	1,60,000
1,60,000 shares @
Rs.10 each	16,00,000
Called-up Capital
1,60,000 shares @ Rs.10 each	16,00,000
Paid up Capital
1,60,000 shares @ Rs.10 each	16,00,000

16,00,000

Illustration :

Cholan Ltd., issued 1000 shares of Rs.100 each. Pass journal entry in the following cases.

a) Shares are issued at par

b) Shares are issued at a premium of Rs. 20.

c) Shares are issued at a discount of Rs.10.

Solution:

Journal Entries

Date	Particulars	L.F	Debit	Credit
	Case a:
	Bank A/c Dr		1,00,000
	To Share capital A/c			1,00,000
	(1000 shares issued @ Rs.100 per share)

	Case b:
	Bank A/c Dr		1,20,000
	To Share capital A/c			1,00,000
	To Securities premium A/c			20,000
	(1000 shares issued @ Rs.100 per share with premium of Rs.20)

	Case c:
	Bank A/c Dr		90,000
	Discount on issue of shares A/c Dr		10,000
	To Share capital A/c			1,00,000
	(1000 shares issued @ Rs.100 per share and discount Rs.10 brought into account)

Leave a Reply