Advance Accounting b.com part 2 chapter 1 notes

Chapter # 1 Accounting for Company –

Issuance of Shares & Debentures

Sameer Hussain

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Accounting for Company – Issuance of Shares & Debentures

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Sameer Hussain www.a4accounting.weebly.com

SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI:

Accounting for companies. Issuance of shares and bonds. Appropriation of retained earnings. Declaration and payment of dividends.

WHAT THE EXAMINER USUALLY ASK?

General Journal entries for issuance of shares. General Journal entries for issuance of debentures/bonds. Appropriation of retained earnings.


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www.a4accounting.weebly.com Sameer Hussain

COMPANY A corporate enterprise that has a legal identity separate from that of its members; it operates as one single unit, in the success of which all the members participate. A company may have limited liability (limited company), so that the liability of the members of the company’s debt is limited. An unlimited company is one in which the liability of the members is not limited in any way. A company may be registered as a public limited company or a private company. The shares of a private company may not be offered to the public for sale.

KINDS OF COMPANY On the Basis of Incorporation:

Chartered Company:

A company incorporated under a special charter granted by the Queen of England is called “Chartered Company”. The company is regulated by its charter and companies act does not apply to this kind of company. The charter also prescribes the nature of business and the power of the company. Example: Bank of England.

Statutory Company:

A statutory company is one which is created by a special act of parliament or a state legislature. The nature and power of such companies are laid down in the special act under which they are created. Memorandum of association is not required for statutory company. The word “limited” is not required after company’s name. Example: State Bank of Pakistan.

Registered Company:

A registered company is one which is registered in accordance with the provision of Companies Ordinance, 1984 and includes the existing companies formed under any other law. Company comes into existence by receiving the certificate of incorporation and governed by the Companies Ordinance, 1984. Registered company may be public company or private company.

Private Company:

Private company must be registered under company’s law. The legal position (status) of private company is similar to that of public company. A private company cannot invite subscription from the public. Transfer of shares is restricted in a private company. A private company should have at least two (2) members and maximum number cannot

exceed fifty (50). A private company is not required to hold a statutory meeting.

Public Company:

Public company is also registered under company’s law. A public company can invite subscription from public. A public company does not have restriction on transfer of shares. A public company should have at least seven (7) members. There is no restriction on

upper limit of the members. A public company has to seek certificate for commencement of business. A public company is required to file its accounts with the registrar.


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On the Basis of Liability:

Limited by Shares:

A company limited by shares is a company in which the liability of its members is limited by its memorandum to the amount unpaid on the shares respectively held by them. It may either public or private company.

Limited by Guarantee:

A company in which the liability of its members is limited by its memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.

Unlimited Company:

Private firm (such as a sole proprietorship or general partnership) whose owner(s), partners, or stockholders accept personal and unlimited liability for its debts and obligations in return for avoiding double taxation of a limited company. Unlimited liability firms are exempt from filing their annual accounts with a public authority (such as Registrar of Companies) unless they are subsidiaries of limited liability holding companies. It is also called unlimited company.

SHARE A unit of ownership that represents an equal proportion of a company’s capital is called share. It entitles its holders (shareholders) to an equal claim on the company’s profit and an equal obligation for the company’s debts and losses.

KINDS OF SHARE There are different kinds of shares which can be raised by companies are:

Ordinary shares. Preference shares.

1- ORDINARY SHARES (COMMON STOCKS) The equity shares or ordinary shares are those shares on which the dividend is paid after the dividend on fixed rate has been paid on preference shares.

CHARACTERISTICS OF ORDINARY SHARES No fixed rate of dividend. Dividend is paid after dividend at a fixed rate is paid on preference shares. At the time of liquidation, capital on equity is paid after preference shares have been

paid back in full. Non-redeemable. Equity shareholders have voting rights & thus, control the working of the company. Equity shareholders are the virtual owners of the company.

2- PREFERENCE SHARES (PREFERRED STOCKS) Preference shares are those shares which carry with them preferential rights for their holders, i.e. preferential right as to fixed rate of dividend and as to repayment of capital at the time of winding up of the company.

CHARACTERISTICS OF PREFERENCE SHARES Fixed rate of dividend. Priority as to payment of dividend. Preference as to repayment of capital during liquidation of the company.


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Generally preference shareholders do not have voting rights.

KINDS OF PREFERENCE SHARES On the Basis of Dividend: Cumulative Preference

Shares: They are those shares on which the dividend at a fixed rate goes on cumulating till it is all paid.

Non – Cumulative

Preference Shares: These are those shares on which the dividend does not cumulate.

On the Basis of Conversion: Convertible Preference

Shares: The owners of these shares have the option to convert their preference shares into ordinary shares as per the terms of issue.

Non – Convertible

Preference Shares: The owners of these shares do not have any right of converting their shares into ordinary shares.

On the Basis of Redemption: Redeemable Preference

Shares: These are to be purchased back by the company after a certain period as per the terms of issue.

Irredeemable

Preference Shares: These are not to be purchased back by the company during its lifetime.

SHARE CAPITAL Share capital is the part of the finance of a company received from its members or shareholders in exchange for shares.

TYPES OF SHARE CAPITAL

Authorized Share Capital:

The maximum amount of shares capital that may be issued by a company, as detailed in the company’s memorandum of association is called authorized capital or registered capital. The authorized share capital must be disclosed on the face of the balance sheet or alternatively in the notes to the accounts.

Issued Share Capital: The amount of the authorized share capital of a company for which shareholders have subscribed is called issued share capital.

Called – Up Share Capital:

Called – up capital is the part of the issued share capital of a company payment for which has either been received (paid up share capital) or requested but not yet received. Some shares are paid for in part at the time of issue, with subsequent requests for the outstanding payment. When all requests have been paid, the called-up share capital will equal the paid-up share capital.

Paid – Up Share Capital:

The part of the issued share capital of a company that shareholders have paid into the company for their fully paid or partly paid shares is called paid – up share capital.


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SHARE PREMIUM Share premium is the amount payable for shares in a company and issued by the company itself in excess of their nominal value. Share premium received by a company must be credited to a share premium account, which cannot be used for paying dividends to the shareholders.

SHARE DISCOUNT A share issued at a price below its par value. The discount is the difference between the par value and the issue price.

PRELIMINARY EXPENSES Expenses incurred for the registration and documentation in the setting up of a company is called preliminary expenses. It is treated as current asset in the balance sheet.

ARTICLES OF ASSOCIATION Article of association is the document that governs the running of a company. It sets out voting rights of shareholders, conduct of shareholders’ and directors’ meetings, power of management, etc.

MEMORANDUM OF ASSOCIATION Memorandum of association is an official document setting out the detail of a company’s existence. It must be signed by the first subscribers and must contain the following information:

The name of company. The address of the registered office. The objects of the company. A statement that the company is a public company. A statement of limited liability. Amount of the guarantee. The amount of authorized share capital and its division.

GENERAL JOURNAL ENTRIES

ISSUE OF SHARES AT PAR Bank DR. (with amount received) Ordinary shares application CR. (with amount received) (To record the cash received from general public at par) ----------------------------------------------------------------------------------------------------------------- Ordinary shares application DR. (with the amount of shares issued) Ordinary shares capital CR. (with the amount of shares issued) (To record the shares issued to general public at par) -----------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 1: (ISSUED AT PAR) Paramount Co. Ltd. has an authorized capital of Rs.250,000 divided into 25,000 ordinary shares of Rs.10 each. The company invites application for 3,000 ordinary shares at par from public along with money. The last day, the banker of the company has informed that only 3,000 ordinary shares applications were received. The management of the company then decided to issue the same to the public. REQUIRED Prepare necessary journal entries.


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SOLUTION # 1: Paramount Co. Ltd.

General Journal Date Particulars P/R Debit Credit 1 Bank (3,000 x 10) 30,000 Ordinary shares applications 30,000 (To record the shares applications received at par) 2 Ordinary shares application 30,000 Ordinary shares capital (3,000 x 10) 30,000 (To record the shares issued to the public at par)

ILLUSTRATION # 2: (ISSUED AT PAR) Diamond Co. Ltd. is offering 35,000 ordinary shares of Rs.10 each to the public along with money. The banker of the company reported that they have received 55,000 ordinary shares application at par upto the last day. The company has decided to issue 35,000 ordinary shares and instructed to the banker that excess amount refund to whom shares were not allotted. REQUIRED Prepare necessary journal entries.

SOLUTION # 2: Diamond Co. Ltd. General Journal

Date Particulars P/R Debit Credit 1 Bank (55,000 x 10) 550,000 Ordinary shares applications 550,000 (To record the shares applications received at par) 2 Ordinary shares application 350,000 Ordinary shares capital (35,000 x 10) 350,000 (To record the shares issued to the public at par) 3 Ordinary shares application 200,000 Bank (20,000 x 10) 200,000 (To record the refund of excess money to the public

at par)

ISSUE OF SHARES AT PREMIUM Bank DR. (with amount received) Ordinary shares application CR. (with amount received) (To record the cash received from general public at premium) ----------------------------------------------------------------------------------------------------------------- Ordinary shares application DR. (amount of shares issued at par plus premium) Ordinary shares capital CR. (with the amount of shares issued at par) Ordinary shares premium CR. (with the premium amount) (To record the shares issued to the public at premium) ----------------------------------------------------------------------------------------------------------------- Ordinary shares application DR. (with the amount refund to public) Bank CR. (with the amount refund to public) (To record the refund of excess money to public) -----------------------------------------------------------------------------------------------------------------


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ILLUSTRATION # 3: (ISSUED AT PREMIUM) Regal Ltd. has registered capital of Rs.3,000,000 divided into 150,000 ordinary shares of Rs.20 each. The company invites applications for 28,000 ordinary shares of Rs.20 each at Rs.26 each along with money. The banker has reported that they have received 28,000 ordinary shares applications at premium. The company decided to issue the same number of shares to the public. REQUIRED Prepare necessary journal entries.

SOLUTION # 3: Regal Ltd.

General Journal Date Particulars P/R Debit Credit 1 Bank (28,000 x 26) 728,000 Ordinary shares applications 728,000 (To record the shares applications received at

premium)

2 Ordinary shares application 728,000 Ordinary shares capital (28,000 x 20) 560,000 Ordinary shares premium (28,000 x 6) 168,000 (To record the shares issued to the public at

premium)

ILLUSTRATION # 4: (ISSUED AT PREMIUM) Unilever Ltd. invites shares applications from 1 April to 10 April for 26,000 ordinary shares of Rs.10 each with the premium of Rs.2 each. On 10 April, the banker of the company informed to the company that they have received total 42,000 shares application along with money. On 18 April the board has decided to issue 26,000 ordinary shares at premium after balloting and instructed to banker that they must refund the amount to whom they have not issued shares. REQUIRED Prepare necessary journal entries.

SOLUTION # 4: Unilever Ltd.

General Journal Date Particulars P/R Debit Credit 10 Bank (42,000 x 12) 504,000 April Ordinary shares applications 504,000 (To record the shares applications received at

premium)

18 Ordinary shares application 312,000 April Ordinary shares capital (26,000 x 10) 260,000 Ordinary shares premium (26,000 x 2) 52,000 (To record the shares issued to the public at

premium)

18 Ordinary shares application 192,000 April Bank (16,000 x 12) 192,000 (To record the refund of excess money to the public

at premium)


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ISSUE OF SHARES AT DISCOUNT Bank DR. (with amount received) Ordinary shares application CR. (with amount received) (To record the amount received from public at discount) ----------------------------------------------------------------------------------------------------------------- Ordinary shares application DR. (with the amount of shares issued at discount) Ordinary shares discount DR. (with the amount of discount) Ordinary shares capital CR. (with the amount of shares issued at par) (To record the shares issued to public at discount) ----------------------------------------------------------------------------------------------------------------- Bank DR. (with the amount of shares issued at discount) Ordinary shares discount DR. (with the amount of discount) Ordinary shares capital CR. (with the amount of shares issued at par) (To record the shares issued to underwriter as per agreement) -----------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 5: (ISSUED AT DISCOUNT) Pepsi Co. Ltd. has an authorized capital of Rs.2,500,000 divided into 100,000 ordinary shares of Rs.25 each. The company invites applications for 35,000 ordinary shares of Rs.25 each at Rs.20 each for the public with the agreement by underwriter. On the last day, the banker has reported that they have received 26,000 ordinary shares applications from public. The management then decided to issue the 26,000 ordinary shares to the public and remaining shares will be taken up by the underwriter as per agreement. REQUIRED Prepare necessary journal entries.

SOLUTION # 5: Pepsi Co. Ltd.

General Journal Date Particulars P/R Debit Credit 1 Bank (26,000 x 20) 520,000 Ordinary shares applications 520,000 (To record the shares applications received at

discount)

2 Ordinary shares application 520,000 Ordinary shares discount (26,000 x 5) 130,000 Ordinary shares capital (26,000 x 25) 650,000 (To record the shares issued to the public at

discount)

3 Bank (9,000 x 20) 180,000 Ordinary shares discount (9,000 x 5) 45,000 Ordinary shares capital (9,000 x 25) 225,000 (To record the shares issued to the underwriter at

discount as per agreement)

DEBENTURES Debentures are the most common form of long-term loan taken by a company. It is usually a loan repayable at a fixed date, although some debentures are irredeemable securities. Most debentures also pay a fixed rate of interest, and this interest must be paid before a dividend is paid to shareholders.


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ISSUE OF DEBENTURES AT PAR & PAYBACK AT PAR Bank DR. (with the amount received) Debentures payable CR. (with nominal value) (To record the debentures issued at par and payback at par) -----------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 6: (ISSUED AT PAR & PAYBACK AT PAR) The company has issued 15,000 7% debentures of Rs.100 each at par and agreed to payback after 3 years at par. REQUIRED Prepare necessary journal entries.

SOLUTION # 6: General Journal

Date Particulars P/R Debit Credit 1 Bank (15,000 x 100) 1,500,000 7% Debentures payable (15,000 x 100) 1,500,000 (To record the issue of 7% debentures at par and

payback at par after 3 years)

ISSUE OF DEBENTURES AT PREMIUM & PAYBACK AT PAR Bank DR. (with amount received) Debentures payable CR. (with par value) Premium on debenture CR. (with amount received in premium) (To record the debentures issued at premium and payback at par) -----------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 7: (ISSUED AT PREMIUM & PAYBACK AT PAR) The company has issued 23,000 10% debentures of Rs.100 each at Rs.105 and agreed to payback after 5 years at Rs.100 each. REQUIRED Prepare necessary journal entries.


Date Particulars P/R Debit Credit 1 Bank (23,000 x 105) 2,415,000 10% Debentures payable (23,000 x 100) 2,300,000 Premium on debentures (23,000 x 5) 115,000 (To record the issue of 10% debentures at premium

and payback at par after 5 years)

ISSUE OF DEBENTURES AT DISCOUNT & PAYBACK AT PAR Bank DR. (with amount received) Discount on debenture DR. (with discount amount) Debentures payable CR (with par value) (To record the debentures issued at discount and payback at par) -----------------------------------------------------------------------------------------------------------------


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ILLUSTRATION # 8: (ISSUED AT DISCOUNT & PAYBACK AT PAR) The company has issued 30,000 8% debentures of Rs.100 each at Rs.95 and redeemable after 5 years at Rs.100 each. REQUIRED Prepare necessary journal entries.


Date Particulars P/R Debit Credit 1 Bank (30,000 x 95) 2,850,000 Discount on debentures (30,000 x 5) 150,000 8% Debentures payable (30,000 x 100) 3,000,000 (To record the issue of 8% debentures at discount

and payback at par after 5 years)

ISSUE OF DEBENTURES AT PAR & PAYBACK AT PREMIUM Bank DR. (with amount received) Loss on redemption DR. (with amount of loss at the time of payback) Debentures payable CR. (with par value) Premium on redemption CR. (the amount will be paid as premium) (To record the debentures issued at par and payback at premium) -----------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 9: (ISSUED AT PAR & PAYBACK AT PREMIUM) The company has issued 26,000 6% debentures of Rs.100 each at par and redeemable after 6 years at Rs.106 each. REQUIRED Prepare necessary journal entries.


Date Particulars P/R Debit Credit 1 Bank (26,000 x 100) 2,600,000 Loss on redemption (26,000 x 6) 156,000 6% Debentures payable (26,000 x 100) 2,600,000 Premium on redemption (26,000 x 6) 156,000 (To record the issue of 6% debentures at par and

payback at premium after 6 years)

ISSUE OF DEBENTURES AT DISCOUNT & PAYBACK AT PREMIUM Bank DR. (with amount received) Loss on redemption DR. (with amount of loss at the time of payback) Discount on debenture DR. (with the discount amount) Debentures payable CR. (with par value) Premium on redemption CR. (the amount will be paid as premium) (To record the debentures issued at discount and payback at premium) -----------------------------------------------------------------------------------------------------------------


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ILLUSTRATION # 10: (ISSUED AT DISCOUNT & PAYBACK AT PREMIUM) The company has issued 35,000 9% debentures of Rs.100 each at Rs.93 and redeemable after 8 years at Rs.106 each. REQUIRED Prepare necessary journal entries.


Date Particulars P/R Debit Credit 1 Bank (35,000 x 93) 3,255,000 Loss on redemption (35,000 x 6) 210,000 Discount on debentures (35,000 x 7) 245,000 9% Debentures payable (35,000 x 100) 3,500,000 Premium on redemption (35,000 x 6) 210,000 (To record the issue of 9% debentures at discount

and payback at premium after 8 years)

RETAINED EARNINGS Retained earnings are accumulated earnings that have not been distributed to shareholders but rather reinvested in the business. A company's retained earnings are disclosed at or near the bottom of the shareholders equity section of the balance sheet. Accountants may prepare a separate "statement of retained earnings" that shows the change in retained earnings during the accounting period; however, the statement of retained earnings is often combined with the income statement.

RESERVES AND FUNDS RESERVE FUND

1. It is created out of retained earnings. 1. It is created out of cash. 2. Reserve is a voluntary provision made

out of net income. 2. A provision is a change expense and

revenue. 3. Reserve is part of owner’s equity. 3. Fund is an asset. 4. It is shown on the credit side of the

balance sheet under owner’s equity. 4. It is shown on the debit side of the

balance sheet among assets. 5. It represents a portion of profits or

liability. 5. It represents on assets.

6. Reserve has normally credit balance. 6. Fund has normally debit balance. 7. It is part of retained earnings. 7. It is not part of retained earnings.

CAPITAL RESERVE Capital reserves are the reserves that may not be distributed according to Company Act 1985. They include share capital, share premium, capital redemption reserve, certain unrealized profits, or any other reserves that the company may not distribute according to some other act or its own article of association.

SECRET RESERVE Funds held in the reserve but not disclosed in the balance sheet. They arise when an asset is deliberately either undisclosed or undervalued.

VALUATION RESERVE Allowance, created by a charge against earnings, to provide for changes in the value of a company's assets. Examples include accumulated depreciation and allowance for bad debts.

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SURPLUS RESERVE Amount appropriated out of earned surplus (retained earnings) for future planned or unforeseen expenditure.

LIABILITY RESERVE Liability reserve is used to reflect a known liability.

RESERVES No. Purpose Entry to Create Reporting on

Balance Sheet Entry to Write Off

Nature of Reserve: Contra Assets or Valuation Reserve 1. To decrease

accounts receivable to their realizable value

Bad debts expense (Dr.) Allowance for bad debts (Cr.)

Deduction in accounts receivable

Allowance for bad debts (Dr.) Accounts receivable (Cr.)

2. To accumulate expired cost of fixed assets

Depreciation expense (Dr.) Allowance for depreciation (Cr.)

Deduction in related fixed asset

Allowance for depreciation (Dr.) Fixed asset (Cr.)

Nature of Reserve: Estimated Liability 3. To recognize

estimated liability Income tax expense (Dr.) Reserve for income tax (Cr.)

Shown as a current liability

Reserve for income tax (Dr.) Bank (Cr.)

Nature of Reserve: Appropriation of Retained Earnings 4. To restrict

distributable profit for building extension

Retained earnings (Dr.) Reserve for building extension (Cr.)

Shown as a part of retained earnings

Reserve for building extension (Dr.) Retained earnings (Cr.)

5. To restrict distributable profit for plant expansion

Retained earnings (Dr.) Reserve for plant expansion (Cr.)


Reserve for plant expansion (Dr.) Retained earnings (Cr.)

6 To restrict distributable profit for debenture redemption

Retained earnings (Dr.) Reserve for debenture redemption (Cr.)


Reserve for debenture redemption (Dr.) Retained earnings (Cr.)

7 To restrict distributable profit for contingencies

Retained earnings (Dr.) Reserve for contingencies (Cr.)


Reserve for contingencies (Dr.) Retained earnings (Cr.)

FUNDS No. Purpose Entry to Create Reporting on

Balance Sheet Entry to Write Off

Nature of Reserve: Petty Cash 1. To set aside cash

for petty expenses Petty cash fund (Dr.) Bank (Cr.)

Shown as a part of cash

All expenses (Dr.) Petty cash fund (Cr.)

Nature of Reserve: Sinking 2. To set aside cash

for sinking fund Sinking fund (Dr.) Bank (Cr.)

Shown as a part of cash

Bonds payable (Dr.) Sinking fund (Cr.)

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ILLUSTRATION # 11: (RETAINED EARNINGS) The retained earnings account on ABC Company Ltd. showed a credit balance of Rs.400,000 on December 31, 2010. The expense and revenue summary for the year ending on that date showed a net income of Rs.150,000 which is transferred to retained earnings account. The company decided on December 31, 2010 as under:

(a) To declare a cash dividend of Rs.50,000 and stock dividend of Rs.40,000. (b) To appropriate Rs.40,000 for reserve for plant expansion. (c) To appropriate Rs.27,000 for reserve for contingencies. (d) To establish reserve for building extension for Rs.80,000. (e) Cash dividend paid through bank & 4,000 shares issued in settlement of stock dividend.

REQUIRED Give entries in General Journal to give effect to the above decisions.

SOLUTION # 11: ABC Company Ltd.

General Journal Date Particulars P/R Debit Credit 1 Expense and revenue summary 150,000 Retained earnings 150,000 (To record the transfer of net income to the retained

earnings account)

2 Retained earnings 50,000 Cash dividend payable 50,000 (To record the declaration of cash dividend) 3 Retained earnings 40,000 Stock dividend payable 40,000 (To record the declaration of stock dividend) 4 Retained earnings 40,000 Reserve for plant expansion 40,000 (To record the reserve for plant expansion) 5 Retained earnings 27,000 Reserve for contingencies 27,000 (To record the reserve for contingencies) 6 Retained earnings 80,000 Reserve for building extension 80,000 (To record the reserve for building extension) 7 Cash dividend payable 50,000 Bank 50,000 (To record the payment of cash dividend) 8 Stock dividend payable 40,000 Ordinary shares capital (4,000 x 10) 40,000 (To record the issue of shares against of stock dividend)


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PRACTICE QUESTIONS Question # 1: 1998 – Private (Principles of Accounting – B.Com – I) – UOK Mind Corporation completed the following transaction for the month of January 1998. Jan. 1 Purchased land for Rs.100,000 and in consideration issued shares of Rs.10 each. The

market price of the share was Rs.12.50. Jan. 5 Purchased machinery and issued 12,500 shares of Rs.10 each. The market price of share

was Rs.12.00. Jan. 10 The Corporation allotted 20,000 shares of Rs.10 each to the promoters in consideration

of services rendered. Jan. 20 The Corporation issued 9,000 share of Rs.10 each in full settlement of bonds payable

Rs.100,000. Jan. 25 Issued 1,000 debentures of Rs.100 each redeemable after five years at Rs.105. Jan. 30 Issued 2,000 debentures of Rs.100 each at Rs.95 redeemable after five years. Jan. 31 Paid preliminary expenses Rs.10,000. REQUIRED Give dated entries in the General Journal with narration to record the above transactions. Question # 2: 2004 – Private (Principles of Accounting – B.Com – I) – UOK Nishat Co. Ltd. made the following issuance of shares and debentures:

(a) The company offered 60,000 ordinary shares of Rs.10 each at Rs.12 per share to public; applications were received for 70,000 shares. 60,000 shares were allotted and the excess money was refunded.

(b) Land was acquired by issuing 40,000 ordinary shares of Rs.10 each. The market price per share was Rs.15.

(c) The promoters of the company were allotted 6,000 ordinary shares of Rs.10 each in consideration of their services rendered.

(d) Mortgage payable of Rs.60,000 was settled by the issue of ordinary shares of Rs.10 each. The market value of the share was Rs.15.

(e) Received Rs.95,000 against the issue of 3,000 10% debentures each redeemable at par after 5 years.

REQUIRED Record the above transactions in the General Journal of the company. Question # 3: 2005 – Private (Principles of Accounting – B.Com – I)–UOK Chuhan & Co. Ltd. was registered with a capital of Rs.20,000,000 ordinary shares of Rs.10 each. It was incorporated by acquiring the running business of Yasir, a sole trader. The balance sheet of the business of Yasir as of January 01, 2005 was as under:

ASSETS EQUITIES Cash 40,000 Accounts payable 40,000 Accounts receivable 120,000 Notes payable 40,000 Merchandise inventory 160,000 Allowance for bad debts 8,000 Office supplies 8,000 Accumulated depreciation 240,000 Furniture 400,000 Yasir Capital 400,000 728,000 728,000

Chuhan & Co. Ltd. took over the business assets other than cash and assumed the liabilities. In exchange, the company issued 30,000 shares of Rs.10 each at Rs.15 per share. The company also made an additional issue of 10,000 shares of Rs.10 each at Rs.15 per share to the public, which were subscribed and paid for. REQUIRED

(i) Give the necessary entries in the General Journal of Chuhan & Company. (ii) Prepare initial balance sheet.


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Question # 4: 1989 – Regular & Private (Principles of Accounting – B.Com – I)–UOK Adnan & Co. Ltd. was registered with a capital of Rs.1,000,000 divided into 100,000 ordinary shares of Rs.10 each. It started functioning by acquiring the business of Naeem, a sole trader. The balance sheet of the business of Naeem as of the date of purchase was as under:

ASSETS EQUITIES Cash 10,000 Accounts payable 20,000 Accounts receivable 30,000 Naeem Capital 100,000 Less: All for bad debts (2,000) 28,000 Merchandise inventory 40,000 Office supplies 2,000 Equipment 100,000 Less: All for depreciation (60,000) 40,000 120,000 120,000

Adnan & Co. Ltd. takes over the business assets other than cash and assumed the liabilities. In exchange, the company issued 9,000 shares of Rs.10 each as fully paid. The company also made an additional issue of 15,000 shares of Rs.10 each at Rs.12 per share to the public, which were fully subscribed and paid for. The company also paid for preliminary expenses amounting to Rs.10,000. REQUIRED

(i) Give entries in the General Journal of Adnan & Co. Ltd. (ii) Prepare balance sheet of Adnan & Co. Ltd.

Question # 5: 1999 – Regular & Private (Principles of Accounting – B.Com – I)–UOK Karim Company Ltd. completed the following transactions:

(1) The company offered 70,000 shares of Rs.10 each at Rs.12 but received applications for 80,000 shares. The company finalized the allotment and refunded the excess amount.

(2) The company purchased a running business and acquired the following assets and liabilities: Merchandise inventory Rs.15,000; Office equipment Rs.50,000; Machinery Rs.40,000; Accounts payable Rs.5,000. Purchase consideration of the above business was paid by issue of 9,000 shares of Rs.10 each fully paid-up.

(3) Purchased a machine worth Rs.200,000 and in consideration issued shares of Rs.10 each. Each share had a market value of Rs.12.50.

(4) Purchased office equipment and in consideration issued 10,000 shares of Rs.10 each. The market value of the share was Rs.13.

(5) Issued 2,000 10% debentures of Rs.100 each at Rs.95 redeemable after five years at Rs.105.

(6) The company declared stock dividend Rs.50,000 and issued 4,500 shares of Rs.10 each. REQUIRED Give journal entries in proper form of the above transactions on the books of Karim Co. Ltd. Question # 6: 1995 – Regular (Principles of Accounting – B.Com – I)–UOK Najeeb & Company Ltd. made the following issuance:

1) The company allotted 35,000 ordinary shares of Rs.10 each in consideration of acquiring assets and liabilities of a running business. The agreed value of assets and liabilities acquired is as follows: Accounts receivable Rs.70,000; Furniture Rs.40,000; Building Rs.230,000; Machinery Rs.100,000 and Accounts payable Rs.50,000.

2) The company allotted 8,500 ordinary shares of Rs.10 each in full settlement of debentures payable of Rs.90,000.


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3) The company allotted ordinary shares of Rs.10 each in consideration of stock dividend of Rs.60,000. The share had a market price of Rs.12 per share.

4) The promoters of the company were allotted 15,000 ordinary shares of Rs.10 each in consideration of the services rendered to the company.

5) Purchased equipment by issuing 6,000 ordinary shares of Rs.10 each. The market value of share was Rs.14 per share.

6) Received cash Rs.110,000 by issue of 1,200, 10% debentures of Rs.100 each, redeemable after 5 years at Rs.113 each.

REQUIRED Record the above transactions in the General Journal of the company. Question # 7: 2007 – Regular (Advanced & Cost Accounting)–UOK Following are the some of the transactions completed by Asif Corporation Ltd. The corporation has an authorized capital of Rs.5,000,000 divided into 500,000 shares of Rs.10 each. Acquired office equipment costing Rs.500,000 and in payment issued sufficient number of shares of Rs.10 each fully paid upto the vendor. The market price of the share is Rs.12.50 each. Issued 2,000 6% debentures of Rs.100 each at Rs.103 redeemable at Rs.105 each. The company issued 40,000 shares to capitalize profit of Rs.500,000. Building extension reserve was increased by Rs.300,000. Restriction imposed on retained earnings in the form of ‘contingencies’ was removed Rs.600,000. REQUIRED Give entries in the General Journal to record the above transactions. Question # 8: 2001 – Regular & Private (Principles of Accounting – B.Com – I)–UOK The following transactions relate to Bhutto Limited.

(a) Received applications for 100,000 ordinary shares of Rs.10 each. Issued allotment letters for 80,000 shares and refunded the excess application money.

(b) Issued 6,000 ordinary shares of Rs.10 each at a market price of Rs.12 per share for acquiring land.

(c) Issued ordinary shares of Rs.10 each at a premium of Rs.2 per share, in settlement of bonds payable Rs.60,000.

(d) Declared cash dividend of Rs.30,000 and stock dividend of Rs.50,000. (e) Appropriate Rs.150,000 for contingencies. (f) Issued ordinary shares of Rs.10 each in payment of stock dividend of Rs.50,000. (g) Issued dividend warrants in payment of cash dividend of Rs.30,000. (h) Unclaimed dividend of Rs.5,000 as per bank statement.

REQUIRED Give general journal entries for the above transactions. Question # 9: 2002 – Regular & Private (Principles of Accounting – B.Com – I)–UOK Al-Azam Ltd. entered into the following transactions:

(1) Issued 50,000 ordinary shares of Rs.10 par at Rs.12 each for cash. (2) Issued 10,000 ordinary shares of Rs.10 in acquisition of machinery costing Rs.120,000. (3) Declared cash dividend Rs.150,000 and stock dividend Rs.200,000. Retained earnings

account is having sufficient balance. (4) Bank reported that the cash dividend in the amount of Rs.30,000 was unclaimed. (5) Issued 17,500 ordinary shares of Rs.10 in settlement of stock dividend. (6) Issued to directors 15,000 shares of Rs.10 each in recognition of their services rendered

to the company. (7) Issued 1,000 debentures of Rs.100 each at Rs.110 payable after 5 years at Rs.120.

REQUIRED Give the necessary journal entries to record the above transactions in proper form.


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Question # 10: 2003 – Regular & Private (Principles of Accounting – B.Com – I)–UOK The shares issue transactions of Safeer Co. Ltd. for the year ended on 30th September 2003:

(a) The company issued for cash 400,000 shares of Rs.10 each at Rs.13 each. (b) The promoters were allotted 10,000 shares of Rs.10 each for services. (c) The company bought equipment costing Rs.100,000. Rs.10 shares were issued in

exchange. The market value per share was Rs.12.50. (d) For land purchased worth Rs.750,000, 80,000 shares of Rs.10 each were issued. (e) Declared dividend 25% on the shares issued above. (f) Paid the dividend through bank.

REQUIRED (i) Journalize the above transactions. (ii) Prepare initial balance sheet of the company.

Question # 11: 2004 – Regular (Principles of Accounting – B.Com – I) – UOK The following transactions related to Salman Co. Ltd.:

1. The company offered 50,000 shares of Rs.10 each at Rs.15. The company received application for 65,000 shares. The company finalized the allotment and the excess money was refunded.

2. The company declared stock dividend of Rs.100,000. The company issued 9,000 shares of Rs.10 each in settlement of stock dividend.

3. The company purchased land worth Rs.500,000 and issued 45,000 shares of Rs.10 each to vendor.

4. The company purchased machine and in consideration thereof issued 16,000 shares of Rs.10 each. The market price of the share was Rs.12.50.

5. The company issued 2,000 debentures of Rs.100 each at par, repayable after five years at 5% redemption premium.

6. The company issued 1,000 debentures of Rs.100 each at Rs.95 repayable after five years at Rs.105.

REQUIRED Record the above transactions in the General Journal of the company. Question # 12: 2005 – Regular (Principles of Accounting – B.Com – I) – UOK The following transactions relate to Khan & Co. Ltd.

(a) The company received application for 200,000 ordinary shares of Rs.10 each. Allotment letters were issued for 150,000 shares and the excess subscription amount was refunded.

(b) The promoters paid Rs.20,000 for printing of Memorandum of Association of the company.

(c) A computer was acquired by issuing 4,000 ordinary shares of Rs.10 each fully paid up. The market price per share was Rs.18.

(d) Declared a cash dividend of Rs.200,000 and stock dividend of Rs.300,000. (e) Created reserve for debenture redemption in the amount of Rs.15,000 (f) Issued 5,000 debentures of Rs.100 each at Rs.90 redeemable after 7 years. (g) The bank reported that the amount of dividend paid was Rs.150,000 and the unclaimed

dividend was Rs.50,000. (h) The company issued 3,000 12% 5 years debentures of Rs.100 at par redeemable after 5

years at Rs.105. REQUIRED Give journal entries for the above transactions.


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Question # 13: 1996 – Regular (Principles of Accounting – B.Com – I) – UOK Siddique Company Ltd. is registered with an authorized capital of Rs.1,000,000 divided into 100,000 ordinary shares of Rs.10 each. The company issued its shares as under:

(a) The company offered to the public 50,000 shares at par. Applications for 40,000 shares were received. As per agreement the underwriters subscribed for the balance of their shares. The directors finalized the allotment of 40,000 shares to the public and 10,000 shares to the underwriters. The company paid 2% underwriting commission on shares subscribed to them.

(b) The company purchased a machine costing Rs.72,000 and issued sufficient shares. The shares had a market value of Rs.8/= each.

(c) The company allotted necessary shares in consideration of stock dividend Rs.50,000. The shares had a market value of Rs.12.50.

(d) The company issued 1,000 shares in exchange for services rendered to the company. The stock holders agreed that these services were worth Rs.15,000.

REQUIRED Record the above transactions in the General Journal of the company. Question # 14: 1992 – Private (Principles of Accounting – B.Com – I)–UOK The equities’ section of Ghani Ltd. at December 31, 1991 was as under: Authorized Capital: 200,000 shares of Rs.10 par Rs. 2,000,000 Paid – Up Capital: 100,000 shares of Rs.10 par Rs. 1,000,000 Premium on shares Rs. 150,000 Retained earnings Rs. 450,000 Reserve for asset replacement Rs. 100,000 Stock dividend to be distributed Rs. 120,000 Cash dividend payable Rs. 80,000 Accounts payable Rs. 50,000 Bonds payable Rs. 150,000 In the succeeding year, the Co. performed the following transactions, in addition to routine business:

(1) The dividend payable was paid. (2) 12,000 shares of Rs.10 par were allotted in settlement of the stock dividend. (3) 10,000 shares of Rs.10 were allotted in full settlement of bonds payable of Rs.150,000. (4) The reserve for asset replacement was disposed-off because the asset was replaced. (5) Created a reserve for contingencies in the amount of Rs.40,000. (6) Purchased a machinery for Rs.75,000 by allotting sufficient number of shares of Rs.10

par at a premium of Rs.5 per share. REQUIRED

(a) Record the above transactions in the General Journal giving explanation below each entry.

(b) Reproduce the equities’ section in proper form after incorporating the effects of the above transactions.


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Question # 15: 2000 – Regular & Private (Principles of Accounting – B.Com – I)–UOK The shareholders’ equity section of balance sheet of Wasim Ltd. as on June 30, 2000 was as under:- Authorized capital (2,000,000 shares of Rs.10 par) Rs. 20,000,000 Paid up capital 90,000 shares of Rs.10 par Rs. 900,000 Premium on shares Rs. 180,000 Retained earnings Rs. 520,000 Reserve for building extension Rs. 150,000 During the quarter ended September 30, the company performed the following transactions in addition to normal business:

(a) The company received application along with application money for 80,000 shares in response to the issue of 100,000 shares of Rs.10 par at Rs.15/= to the public. The board of directors finalized the allotment by allotting 80,000 shares to the public and 20,000 shares to the underwriters.

(b) Closed the reserve for building extension account as the purpose is over. (c) A computer costing Rs.90,000 was acquired by allotting 7,000 shares of Rs.10/= par. (d) Purchased a fax machine for Rs.75,000 by allotting shares at the price of Rs.12.50 per

share as quoted at the stock exchange. (e) Issued 5,000 – 10% 5 year bonds of Rs.100 par for cash to be redeemed at Rs.110 at

maturity. (f) Created a reserve for redemption of bonds by Rs.40,000. (g) Declared interim stock dividend of Rs.150,000 and cash dividend of Rs.200,000. (h) Allotted shares of Rs.10 par at a premium of Rs.5 per share in settlement of the stock

dividend. REQUIRED

(i) Record the above transactions in General Journal. (ii) Prepare a partial Balance Sheet reporting the above facts.

Education

Advance Accounting b.com part 2 chapter 1 notes