Oversubscription of Shares and Prorata AllotmentBy: Lata Rani Kaushik

Assistant Professor-Finance

IEC Group of Institutions

Issue of shares :

• Full subscription

• Under subscription

• Over subscription

1. Rejection and full allotment

2. Proportional (pro-rata allotment

Over-subscription of shares

When application for more shares are received than the number of shares offered to the public is said to be the case of Over-Subscription.

Alternatives to deal with such situation are:

– Full allotment to some applicants while rejecting the others.

– To make pro-rata allotment.

– Combination of the above two.

Oversubscription of shares

• Thus it can be concluded that when more shares are applied for than the number to be issued

• Two approaches to manage oversubscription include:

1. satisfy full demand of a certain number of subscribers and refund the funds advanced by others

2. issue shares to all subscribers on a pro rata basis

• excess monies on application can either be refunded or used to reduce further monies owing on allotment

Continues/ …

Accounting Entries in case of Over- Subscription of Shares

1. For Application Money Received

Bank A/c……………………………………………..…Dr.To Share Application A/c

Application Money For Allotted Shares Share Application a/c ………..…Dr. To Share Capital a/c

Excess Application Money

Continued…….

Excess Application Money

Adjustment Share Application a/c ………Dr.

To Share Allotment a/c To Calls-in-advance a/c

Refund Share Application A/c …..Dr.

To Bank a/c

Combined entryAdjustment Share Application a/c ……Dr. To Share Allotment a/c To Calls-in-advance a/c

Application Money For Allotted Shares Share Application a/c ……..…Dr. To Share Capital a/c

Combined entry

Share Application a/c ……………………………….Dr. To Share Capital a/c To Bank A/c To Share Allotment a/c To Calls-in-advance a/c

Retention of excess application monies

Shares Applied

for

Shares Allotted

to

Application Money

received

App Money Ought to be

reveived SurplusAllotment

Due

Surplus used in

allotmentSurplus to call

Call money

dueSurplus

used Refund

Prorata Table

PROBLEM: Preeti & Co. Ltd. was registered with an authorized capital of Rs. 10,00,000/- divided into 1,00,000 shares of Rs.10 each. The company offered 60,000 shares to the public-which were payable Rs.2 per share on application: Rs.4 on allotment and the balance when required. Applications for 92000 shares were received on which the Directors allotted as follows:

Applications for 40,000 shares-Full Applicants for 50,000 shares-40% Applicants for 2,000 shares –NIL

Rs.1,72,000 was realized on account of allotment money (excluding the amount carried from application money) Show the journal Entries recording the above

Working Notes: 1.Application money received on 50,000 shares @ Rs. 2 per share = Rs.1,00,000 Less: Application money due on shares allotted (40% of 50,000 =20,000 shares) x Rs.2 40,000

60,000 Excess application money adjusted towards allotment 2.Calculation of amount received on allotment later on: Total allotment amount due = 2,40,000 Less: Allotment money received on application stage(note 1) 60,000

1,80,000 Less: Allotment money not received on 2,000 shares @ Rs.4 per share 8,000 Allotment money received 1,72,000

DATE PARTICULARS L.F

Dr.(Rs.) Cr.(Rs)

Bank A/c …Dr.(92,000xRs.2) To Share Application A/c (Being the application money received for 92000 shares at Rs.2 per share) Share Application A/c ..…Dr. To Share Capital a/c (60,000x2)

To share allotment A/cTo Bank A/c(2000x2)

(Being the allotment made as follows: Applicants for rs.40000 shares –Full, Applicants for 50,000 shares 40%, Applicants for 2,000 shares –NIL)

1,84,000 1,84,000

1,84,0001,20,00060,0004,000

Share Allotment A/c ………………….Dr. 2,40,000 To Share Capital a/c 2,40,000

(Being the allotment due on 60,000 shares @ Rs.4 per share)

Share Application A/c ……….........…Dr.(note.1) 60,000To Share Allotment a/c 60,000

(Being the surplus application money adjusted on allotment of 20,000 shares) Bank A/c ……………………….......…Dr. 1,72,000

To Share Allotment A/c(note 2) 1,72,000 (Being the amt recd on allotment except on 2000 shares)

The ABC Ltd has offered to public for subscription 20000 shares of Rs 100 each payable as Rs 30 per share on application, Rs 30 per share on allotment and the balance on call. Applications were received for 30000 shares. Applications for 5000 shares were rejected all together and application money was returned. Remaining applicants were allotted the offered shares. Their excess application money was adjusted towards some due on allotment. Calls were made and duly received. Make journal entries in the books of the company.

Journal Entries in the books of ABC Ltd1. Bank A/c……………………………………. Dr 900000 To Share Application A/c 900000(Application money received for 30000 shares @ Rs 30 per share)2. Share Application A/c……………………… Dr 900000 To Share Capital A/c 600000

To Bank A/c 150000

To Share Allotment A/c 150000(Application money of 20000 shares transferred to share capital A/c on their allotment. That of 5000 shares returned and of 5000 shares adjusted towards sum due on allotment.Share Allotment A/c …………………………..Dr 600000

To Share Capital A/c… 600000(Allotment money due)

Bank A/c………………………......... Dr 450000To Share Allotment A/c. 450000

(Allotment money received)Share First and Final call A/c. ……Dr 800000

To Share Capital A/c 800000(Call money due)Bank A/c ……………………………..Dr 800000

To Share First and Final call A/c. 800000(Call money received)

Continues……………………

JHP Limited is a company with an authorised share capital of Rs. 10,00,000 in equity shares of Rs. 10 each, of which 6,00,000 shares had been issued and fully paid on 30th June, 2005. The company proposed to make a further issue of 1,00,000 of these Rs. 10 shares at a price of Rs. 14 each, the arrangements for payment being : (a) Rs. 2 per share payable on application, to be received by 1st July, 2005; (b) Allotment to be made on 10th July, 2005 and a further Rs. 5 per share (including the premium to be payable; (c) The final call for the balance to be made, and the money received by 30th April, 2006. Application were received for 3,55,000 shares and were dealt with as follows: (i) Applicants for 5,000 shares received allotment in full; (ii) Applicants for 30,000 shares received an allotment of one share for every two applied for; no money was returned to these applicants, the surplus on application being used to reduce the amount due on allotment; (iii) Applicants for 3,20,000 shares received an allotment of one share for every four applied for; the money due on allotment was retained by the company, the excess being returned to the applicants; and (iv) The money due on final call was received on the due date. You are required to record these transactions (including cash items) in the Journal of JHP Limited.

Working Note

Category

No of shares applied

1

No of shares allotted

2

Amt Received on application

3

Amt Required on application

4

Amt Adjusted on allotment

5

Refund (3-4+5)

6

Amt due on allotment

7

Amt received on Allotment

8

1 5,000 5,000 10,000 10,000 - Nil 25,000 25,000

2 30,000 15,000 60,000 30,000 30,000 Nil 75,000 45,000

3 3,20,000 80,000 6,40,000 1,60,000 4,00,000 80,000 4,00,000 ----------

Total

3,55,000 1,00,000 7,10,000 2,00,000 4,30,000 80,000 5,00,000 70,000

Journal Entries in the books of JHP LimitedDate Particulars L/

F.Dr. Cr.

July 1

July 10

Bank A/c (Note 1-Column 3) ..........................Dr. To Equity Share Application A/c

Equity Share Application A/c..........................Dr. To Equity Share Capital A/c To Equity Share Allotment

To Bank A/c (Note 1-Column 6)

Equity Share Allotment A/c ............................Dr. To Equity Share Capital A/c To Securities Premium A/c

Bank A/c (Note 1- Column 8)...........................Dr. To Equity Share Allotment A/c

7,10,000

7,10,000

5,00,000

70,000

7,10,000

2,00,0004,30,00080,000

1,00,0004,00,000

70,000

Date

Particulars L/F.

Dr. Cr.

Equity Share Final Call A/c.........Dr. To Equity Share Capital A/c

Bank A/c.......................................Dr. To Equity Share Final Call A/c

7,00,000

7,00,000

7,00,000

7,00,000

Thank You