chapter 12 issue of shares and debentures (發行股份及債券proxy.flss.edu.hk/~flssmcwong/s5...

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Chapter 12 Issue of shares and debentures (發行股份及債券) 12.2 Classification of share capital (股份的分類) 12.2.1 Preference shares vs. ordinary shares (優先股與普通股) Shares are usually called stock. Preference shares (優先股) are known as preferred stock while ordinary shares (普通股) are

known as common stock. Preference shares are seldom issued to the public (甚少會向公眾發行). They are usually sold privately

(私人途徑出售) to financial institutions or other companies. Most of the shares traded on (買賣) the Stock Exchange of Hong

Kong (香港交易所) are ordinary shares (普通股).

Receipt of dividends (收取股息) A company may distribute some of the profits earned as dividends (股息) to its shareholders. The profits that are not distributed

will be held as reserves (儲備). Preference shareholders (優先股股東) must receive a certain amount (一定金額) of dividends

before (前) ordinary shareholders (普通股股東). Moreover, the dividend amount (股息金額) that preference shareholders are

entitled to (收取) is usually stated as (按) a fixed percentage (固定百分比) of the nominal value (票面值) (par value, face value)

of the preference shares held (所持的優先股). However, the rate of dividend payable to ordinary shareholders may be higher or

lower, depending on the amount of profit made and distributed as dividend during the year. Example 1 A company has issued 1,000,000 5% preference shares of $1 each and 1,000,000 ordinary shares of $1 each. The dividends paid to the preference shareholders and ordinary shareholders in the years 2008 to 2010 are shown below: Year 2008 2009 2010 $ $ $ Profit distributable as dividends 130,000 90,000 50,000

Preference dividends (5%) 50,000 50,000 50,000 Ordinary dividends 80,000 40,000 — The preference shareholders obtain a fixed rate of return and from their investment in the company, while ordinary shareholders might receive a higher or lower return.

Voting rights (投票權) Ordinary shares carry voting rights (附有投票權) at shareholders’ general meetings (股東大會) while preference shares do not.

Only ordinary shareholders can exercise controlling power (行使控制權) over the company by voting on important matters (重要

事項) tabled (提交) at shareholders’ general meetings.

Claims to the company’s net assets in liquidation (公司清盤時的淨資產索償權) When a limited company goes into liquidation (清盤), the preference shareholders have priority (優先權) over the ordinary

shareholders in getting back (取回) the nominal value (面值) of their share capital (股本) after the company has paid off (清還)

all its liabilities (所有債務).

12.2.2 Authorised share capital vs. issued share capital (法定股本與已發行股本) Limited companies must disclose (註明) both authorized and issued share capital in their annual reports.

Authorised share capital (法定股本) Authorised share capital (registered share capital) is the maximum amount (上限) of share capital (股份) that a company is

allowed to issue (可發行) and is calculated as follows:

Authorised share capital = Maximum number of shares x nominal value per share (每股面值)

Issued share capital (已發行股本) Issued share capital is the amount of share capital (股本額) that a company has issued (已發行). The amount cannot exceed (不

能超出) the amount of authorized share capital (法定股本) and is calculated as follows:

The amount of issued share capital = Number of shares issued x Nominal value per share The number of shares authorized, less (減去) the number issued, is known as unissued shares (未發行股份). When a company

plans to expand (擴充) in future, it can sell the unissued shares. It cannot issue more than (不能發行超出) the unissued number

of shares (未發行股份) unless it applies for an increase (增加) in authorized share capital (法定股本).

Name : _________________ Serial No: _____

)dividens Preferencedividents (Total

%)5000,000,1($

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12.3 Issue of shares (發行股份) Limited companies (有限公司) are allowed to issue shares to raise funds but only the public companies (公眾有限公司) are

allowed to issue shares to the public (可向公眾發行股份).

12.3.1 Procedures for issuing shares (發行股份的程序) Step 1 The public are invited to subscribe for the shares (邀請公眾認購股份).

Step 2 Applications are received (收集認購申請表格和認購股款).

Step 3 Shares are allotted to applicants (向申請人分配股份).

Step 4 If shares are over-subscribed (超額認購) on application, the excess application monies (多收的款項) will be refunded

(退還) to applicants (申請人).

Shares can be issued in any of the following ways: 1 Issued at par (按面值發行): Shares are issued at (等於) nominal value (面值) (par value).

2 Issued at a premium (溢價發行): Shares are issued at a price higher than (高於) the nominal value.

3 Issued at a discount (折價發行): Shares are issued at a price lower than (低於) the nominal value.

12.3.2 Accounting entries for the issue of shares (發行股份的會計分錄) 1 Shares issued at par (股份按面值發行) On 1 December 2010, JJ Ltd announced a public offering of 100,000 ordinary shares of $4 each at par. On 10 December 2010, applications together with application monies were received for exactly 100,000 shares. The shares were allotted to the applicants two days later. 1 Receipt of application monies: Dr Bank account $400,000 (100,000 x $4) Cr Ordinary share applicants account $400,000 2 Allotment of shares to share applicants: Dr Ordinary share applicants account $400,000 Cr Ordinary share capital account $400,000 (100,000 x $4)

Bank 2010 $ 2011 $

Dec 10 Ordinary share applicants (1) 400,000

Ordinary share Applicants 2010 $ 2010 $

Dec 12 Ordinary share capital (2) 400,000 Dec 10 Bank (1) 400,000

Ordinary share Capital 2010 $


Class work 1

A limited company has an authorized share capital of $100,000, divided into 100,000 ordinary shares of $1 each. On 1 January 2010, the company announced that all of its share capital would be issued at par, payable in full on application. Applications were received for exactly 100,000 shares on 15 January 2010. Shares were allotted on 31 January 2010. Prepare journal entries to record the issue of shares.

Journal

Date Details Dr Cr

2010 $ $

Jan 15 Bank 100,000

Ordinary share applicants 100,000

“ 31 Ordinary share applicants 100,000

Ordinary share capital 100,000

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2 Over-subscription of shares (股份超額認購) Suppose on 1 December 2010, applications were received for 150,000 shares. The shares were then said to be over-subscribed (超

額認購). Usually, the shares will be allotted on a pro-rata basis (按比例) in the event of an over-subscription. The excess

application monies were refunded on the date of allotment. 1 Receipt of application monies: Dr Bank account $600,000 (150,000 x $4) Cr Ordinary share applicants account $600,000 2 Allotment of shares to share applicants: Dr Ordinary share applicants account $400,000 Cr Ordinary share capital account $400,000 (100,000 x $4) 3 Refund of excess application monies: Dr Ordinary share applicants account $200,000 (50,000 x $4) Cr Bank account $200,000

Bank 2010 $ 2011 $

Dec 10 Ordinary share applicants (1) 600,000 Dec 10 Ordinary share applicants – Refund (3) 200,000

Ordinary share Applicants 2010 $ 2010 $

Dec 12 Ordinary share capital (2) 400,000 Dec 10 Bank (1) 600,000

“ 12 Bank – Refund (3) 200,000

600,000 600,000

Ordinary share Capital 2010 $


Class work 2

A limited company had a registered share capital of $120,000 in ordinary shares of $1 each. The company announced on 1 April 2010 that a quarter of its share capital would be issued at par, payable in full on application. Applications were received for 40,000 shares on 10 April 2010. The shares were allotted on 30 April 2010, and the excess application monies were refunded on the same day. Show the necessary journal and ledger entries to record the issue of shares.

Journal

Date Details Dr Cr 2010 $ $

Apr 10 Bank (40,000 x $1) 40,000

Ordinary share applicants 40,000




Bank – Refund (10,000 x $1) 10,000

Bank

2010 $ 2010 $

Apr 10 Ordinary share applicants 40,000 Apr 30 Ordinary share applicants – Refund 10,000

Ordinary share Applicants

2010 $ 2010 $

Apr 30 Ordinary share capital 30,000 Apr 10 Bank 40,000

“ 30 Bank – Refund 10,000

40,000 40,000

Ordinary share Capital

2010 $ 2010 $

Apr 30 Ordinary share applicants 30,000

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3 Shares issued at a premium (股份按溢價發行) On 1 January 2011, KK Ltd announced a public offering of 100,000 ordinary shares of $2 each at a price of $3 per share. On 10 January 2011, applications together with application monies were received for exactly 100,000 shares. The shares were allotted to the applicants three days later. 1 Receipt of application monies: Dr Bank account $300,000 (100,000 x 3) Cr Ordinary share applicants account $300,000 2 Allotment of shares to share applicants: Dr Ordinary share applicants account $300,000 Cr Ordinary share capital account $200,000 (100,000 x $2) Cr Share premium account $100,000 (100,000 x $1)

Bank 2011 $ Jan 10 Ordinary share applicants (1) 300,000

Ordinary share Applicants 2011 $ 2011 $ Jan 13 Ordinary share capital (2) 200,000 Jan 10 Bank (1) 300,000 “ 13 Share premium (2) 100,000 300,000 300,000

Ordinary share Capital 2011 $ Jan 13 Ordinary share applicants (2) 200,000

Share Premium 2011 $ Jan 13 Ordinary share applicants (2) 100,000

1 The Companies Ordinance (公司條例) requires that the share capital account (股本帳戶) be used to record only the nominal

value of share issued (發行股份的面值). The amount of share premium (股份溢價) should be recorded in a separate

account (獨立帳戶). 2 The amount entered in the share premium account (股份溢價帳戶) is the actual number of shares allotted (實際配發股數)

multiplied by the premium per share (每股溢價). The balance of the share premium account (股份溢價帳戶結餘) would be

shown as a reserve (儲備) in the balance sheet at the end of an accounting period.

Class work 3

Cheung King Ltd has an authorized share capital of 200,000 ordinary shares of $1 each, of which 150,000 had been issued and fully paid. To finance expansion, Cheung King Ltd decided to issue all the remaining authorized ordinary shares at $1.5 each, payable in full on application. On 10 June 2009, applications for 60,000 ordinary shares were received. The shares were allotted on 20 June 2009, and the excess application monies were refunded on the same day. Show the necessary ledger accounts to record the issue of shares.

Bank 2009 $ 2009 $

Jun 10 Ordinary share applicants (60,000 x $1.5) 90,000 Jun 20 Ordinary share applicants – Refund 15,000


2009 $ 2009 $

Jun 20 Ordinary share capital (50,000 x $1) 50,000 Jun 10 Bank 90,000

“ 20 Share premium (50,000 x $0.5) 25,000

“ 20 Bank – Refund (10,000 x $1.5) 15,000

90,000 90,000


2009 $ 2009 $

Jun 20 Ordinary share applicants 50,000

Share Premium

2009 $ 2009 $

Jun 20 Ordinary share applicants 25,000

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4 Under-subscription of shares (股份認購不足) Suppose on 10 January 2011, applications were received for 80,000 shares. The shares were then said to be under-subscribed (認

購不足). 1 Receipt of application monies: Dr Bank account $240,000 (80,000 x $3) Cr Ordinary share applicants account $240,000 2 Allotment of shares to share applicants: Dr Ordinary share applicants account $240,000 Cr Ordinary share capital account $160,000 (80,000 x $2) Cr Share premium account $80,000 (80,000 x $1)

Bank 2011 $

Jan 10 Ordinary share applicants (1) 240,000


2011 $ 2011 $ Jan 13 Ordinary share capital (2) 160,000 Jan 10 Bank (1) 240,000 “ 13 Share premium (2) 80,000

240,000 240,000


2011 $ Jan 13 Ordinary share applicants (2) 160,000

Share Premium

2011 $ Jan 13 Ordinary share applicants (2) 80,000

5 Share issued at a discount (股份按折價發行) On 1 February 2011, M&M Ltd announced a public offering of 200,000 ordinary shares of $3 each at a price of $2 per share. On 10 February 2011, applications together with application monies were received for exactly 200,000 shares. The shares were allotted to the applicants three days later. 1 Receipt of application monies: Dr Bank account $400,000 (200,000 x 2) Cr Ordinary share applicants account $400,000 2 Allotment of shares to share applicants: Dr Ordinary share applicants account $400,000 Dr Share discount account $200,000 (200,000 x $1) Cr Ordinary share capital account $600,000 (200,000 x $3)

Bank 2011 $

Feb 10 Ordinary share applicants (1) 400,000


2011 $ 2011 $

Feb 13 Ordinary share capital (2) 400,000 Feb 10 Bank (1) 400,000

Share Discount

2011 $

Feb 13 Ordinary share capital (2) 200,000


2011 $

Feb 13 Ordinary share applicants (2) 400,000

“ 13 Share Discount (2) 200,000

The issue of shares at a discount rarely occurs (很少發生) because this is prohibited (禁止) in many places. In Hong Kong, a

company is allowed issue shares at a discount only if the issue has already been authorized (已被授權) by a resolution passed (通

過一項決議) at a general meeting (在股東大會上) and sanctioned by the court (法院判決).

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Class work 4

1. Hickson Ltd had an authorized share capital of $1,000,000, divided into 600,000 ordinary shares of $1 each and 400,000 5% preference shares of $1 each. Half of the ordinary and preferences shares have been issued and fully paid. To finance expansion, Hickson Ltd decided to issue half of the remaining authorized ordinary shares at $1.2 each and half of the remaining authorized preference shares at $1.1 each. All monies had to be fully paid on application. On 1 September 2010, applications for 200,000 ordinary shares and 60,000 preference shares were received. Shares were allotted on 15 September 2010, and the excess application monies were refunded on the same day. (a) Prepare journal entries to record the above transactions. (b) Briefly explain the differences between ordinary shares and preference shares from the perspective of the issuing

company. (a)

Journal

Date Details Dr Cr

2010 $ $

Sept 1 Bank (200,000 x $1.2 + 60,000 x $1.1) 306,000

Ordinary share applicants (200,000 x $1.2) 240,000

Preference share applicants (60,000 x $1.1) 66,000


Ordinary share capital (150,000 x $1) 150,000

Share premium (150,000 x $0.2) 30,000

“ 15 Ordinary share applicants (50,000 x $1.2) 60,000

Bank – Refund 60,000

“ 15 Preference share applicants 66,000

Preference share capital (60,000 x $1) 60,000

Share premium (60,000 x $0.1) 6,000 (b) Payment of dividends

The company has to pay a fixed rate of dividend to preference shareholders. However, the rate of dividend payable

to ordinary shareholders may be higher or lower, depending on the amount of profit mad and distributed as

dividend during the year.

Voting rights

Ordinary shares carry voting rights while preference shares do not. Only ordinary shareholders can exercise

controlling power over the company by voting on important matters tabled at shareholders’ general meetings.

Claims to the company’s net assets on liquidation

When a company goes into liquidation, the preference shareholders have priority over ordinary shareholders in

getting back the nominal value of their share capital after the company has paid off all its liabilities.

HKCEE (2006, 4) Ball Limited had an issued share capital consisting of 650,000 ordinary shares of $1 each as at 1 January 2005. On 1 July 2005, the company made an additional issue of 250,000 ordinary shares at $1.50 per share, payable in full on application. Applications were received for 260,000 shares on 8 July 2005. The shares were allotted to the successful applicants on 15 July 2005. Cash was returned to the unsuccessful applications on the same day. You are required to: Prepare journal entries for Ball Limited to record the share issue in July 2005. (Narrations are not required)

Journal

Date Details Dr Cr

2005 $ $

Jul 8 Bank (260,000 x $1.50) 390,000

Share application – ordinary shares 390,000

“ 15 Share application – ordinary shares 375,000

Ordinary share capital (250,000 x $1) 250,000

Share premium (250,000 x $0.50) 125,000

“ 15 Share application – ordinary shares 15,000

Bank – Refund (10,000 x $1.50) 15,000

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HKCEE (2007, 7)

Bamboo Limited is engaged in the trading business. After preparing the adjusting entries, the bookkeeper extracted an

adjusted trial balance as at 31 March 2007. However, he found that the debit and credit totals did not agree:

Debit Credit $ $

Ordinary share capital 1 April 2006 180,000 Retained profits, 1 April 2006 20,000 Plant and equipment, at cost 692,460 Bank loan, repayable in 2010 120,000 Sales 985,000 Debtors 105,690 Cost of goods sold 538,600 Administrative expenses 123,700 Selling expenses 187,500 Interest on bank loan 5,000 Deposits received from debtors 16,000 Share application money received 70,000 Cash at bank 47,400 Creditors 96,710 Stock, 31 March 2007 22,100 Prepaid selling expenses, 31 March 2007 8,000 Accumulated depreciation – plant and equipment, 31 March 2007 246,540

1,793,400 1,671,300

You are required to: (a) Based on the items listed above, rewrite the adjusted trial balance as at 31 March 2007 for Bamboo Limited. Subsequent checking for records revealed the following errors and omissions:

(i) Interest income of $800 had been debited to the cash at bank account and the prepaid selling expenses account

only.

(ii) Cash sales of $4884 had been recorded as a cash settlement of $4844 from debtors.

(iii) A payment of administrative expenses of $300 was recorded as a settlement of credit purchases.

(iv) Equipment repairs of $16,000, an administrative expense, had been recorded as $10,600 in the plant and

equipment account. A full year’s depreciation had been calculated at 20% on this amount and was included in

administrative expenses.

(v) The closing stock had been undercast by $6000.

(vi) $12,000 cash was received from a customer as the deposit for placing a purchase order. The cash had been used

to pay an interim dividend to the shareholders. Both transactions were entirely omitted from the books.

(vii) In March 2007, 40,000 ordinary shares of the par value of $1 each were issued to the public at $1.40 each,

payable in full on application. There was an over-subscription and the application money received had been

correctly recorded. On 31 March 2007, the shares were allotted and at the same time, the excess application

money was refunded to the unsuccessful applications. No entries had been made for the allotment of share and

the refund.

You are required to:

(b) Prepare the necessary journal entries to correct the errors and omissions in (i) to (vii) above. (Narrations are not

required.)

(vii) The correct processes for are the allotment of share and the refund:

Dr Share application – ordinary shares (40,000 x $1) $40,000 Cr Ordinary share capital (40,000 x $1) $40,000 Dr Share application – ordinary shares (40,000 x $0.40) $16,000

Cr Share premium (40,000 x $0.40) $16,000 Dr Share application – ordinary shares (70,000 – 40,000 x $1.4) $14,000

Cr Bank – Refund (70,000 – 40,000 x $1.4) $14,000

(i) Required entries: Wrong entries: Dr Bank $800 Dr Bank $800

Cr interest income $800 Dr prepaid selling expenses $800 Suspense entries:

Cr Suspense $1,600 Correct entries Dr Suspense $1,600 Cr interest income $800 Cr prepaid selling expenses $800

(ii) Required entries: Wrong entries: Dr Bank (cash) $4,884 Dr Bank (cash) $4,844

Cr Sales $4,884 Cr Debtors $4,844 Correct entries Dr Bank (cash) $40 Dr Debtors $4,844 Cr Sales $4,884

(iv) Required entries: Wrong entries: Dr administrative expenses $16,000 Dr Plant and equipment $10,600

Cr Bank $16,000 Cr Bank $16,000 Dr administrative expenses ($10,600 x 20%) $2,120 Cr accumulated depreciation $2,120 Suspense entries: Dr Suspense $5,400 Correct entries Dr administrative expenses $16,000 Cr Plant and equipment $10,600

Cr Suspense $5,400 Dr accumulated depreciation $2,120

Cr administrative expenses $2,120

(iii) Required entries: Wrong entries: Dr administrative expenses $300 Dr Creditors $300

Cr Bank $300 Cr Bank $300 Correct entries Dr administrative expenses $300 Cr Creditors $300

(vi) Required entries: Wrong entries: Dr Stock $6,000 Dr omitted

Cr Cost of goods sold $6,000 Cr omitted Correct entries Dr Stock $6,000 Cr Cost of goods sold $6,000

(v) Required entries: Wrong entries: Dr Cash $12,000 Dr omitted

Cr Deposits received from debtors $12,000 Cr omitted Dr Interim dividend $12,000 Cr Cash $12,000 Correct entries Dr Interim dividend $12,000 Cr Deposits received from debtors $12,000

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(a) Bamboo Limited

Adjusted trial balance as at 31 March 2007 Debit Credit

$ $

Ordinary share capital 1 April 2006 180,000

Retained profits, 1 April 2006 20,000

Plant and equipment, at cost 692,460

Bank loan, repayable in 2010 120,000

Sales 985,000

Debtors 105,690

Cost of goods sold 538,600

Administrative expenses 123,700

Selling expenses 187,500

Interest on bank loan 5,000

Deposits received from debtors 16,000

Share application money received 70,000

Cash at bank 47,400

Creditors 96,710

Stock, 31 March 2007 22,100

Prepaid selling expenses, 31 March 2007 8,000

Accumulated depreciation – plant and equipment, 31 March 2007 246,540

Suspense 3,800

1,734,250 1,734,250

(b)

Journal

Details Debit Credit

$ $

(i) Suspense 1,600

Interest income 800

Prepaid selling expenses 800

(ii) Bank (Cash) 40

Debtors 4,844

Sales 4,884

(iii) Administrative expenses 300

Creditors 300

(iv) Administrative expenses 16,000

Plant and equipment 10,600

Suspense 5,400

Accumulated depreciation – plant and equipment 2,120

Administrative expenses ($10,600 x 20%) 2,120

(v) Stock 6,000

Cost of goods sold 6,000

(vi) Interim dividend 12,000

Deposits received from debtors 12,000

(vii) Share application money 70,000


Share premium ($0.4 x 40,000) 16,000

Bank ($1.4 x 10,000) 14,000

The correct processes:

Dr interim dividend $12,000 Cr Debtor $12,000

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12.4 Issue of debentures (發行債券) Public limited companies are also allowed to issue debentures (bonds) to the public in order to raise funds. The procedures for issuing debentures are similar to those for the issue of shares.

12.4.1 Differences between debentures and shares (債券與股份不同之處) 1 A debenture represents a loan (貸款) made to a company, while a share represents a part of the ownership (擁有權的一部分)

of a company. 2 Debenture holders are entitled to a fixed rate of return (固定的回報率) (interest, coupon rate) while ordinary shareholders are

not guaranteed (不一定) any dividend. Debenture interest is payable whether or not a company makes profits.

3 Debenture interest (債券利息) must be paid before (先派) share dividends (股息).

4 When a company goes into liquidation (清盤), the debenture holders have priority (優先權) over the shareholders in their

claim (索償) on the company’s residual assets (公司餘下的資產).

5 Debentures are usually redeemable (可贖回) but shares are usually irredeemable (不可贖回).

6 In the balance sheet, the debentures issued are shown as a liability (負債), while the shares issued are shown as share capital

or owners' equity (股本或股東權益).

7 Debenture holders do not have any voting rights (投票權) but ordinary shareholders have such rights.

12.4.2 Accounting entries for the issue of debentures (發行債券的會計分錄) The balance of the debentures account will be shown as a non-current liability at nominal value in the balance sheet at the end of an accounting period.

1 Debentures issued at par (債券按面值發行) On 1 November 2010, NP Ltd announced a public offering of $100,000 5% debentures redeemable on 30 November 2015 at par. On 20 November 2010, applications together with application monies were received for $150,000 debentures. The debentures were allotted to the applicants and the excess application monies were refunded on 1 December 2010. 1 Receipt of application monies: Dr Bank account $150,000 Cr Debenture applicants account $150,000 2 Allotment of debentures to debenture applicants: Dr Debenture applicants account $100,000 Cr 5% debentures account $100,000 3 Refund of excess application monies: Dr Debenture applicants account $50,000 Cr Bank account $50,000

Bank 2010 $ 2011 $

Nov 20 Debenture applicants (1) 150,000 Dec 1 Debenture applicants – Refund (3) 50,000

Debenture Applicants 2010 $ 2010 $

Dec 1 5% debentures (2) 100,000 Nov 20 Bank (1) 150,000

“ 1 Bank – Refund (3) 50,000

150,000 150,000

5% Debentures 2010 $

Dec 1 Debenture applicants (2) 100,000

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Class work 5

1. BAFS Ltd announced on 1 March 2011 that it would issue $200,000 6% debentures at par. On 20 March 2011, applications were received for $250,000 debentures. Allotments were made on 1 Apr 2011, and the excess application monies were refunded on the same day. (a) Show the necessary journal entries to record the issue of debentures. (b) If the interest on debenture was to be paid every 6 months, show the necessary journal entries to record the interest

payment after six months.

Journal

Details Dr Cr

2011 $ $

(a) Mar 20 Bank 250,000

Debenture applicants 250,000

Apr 1 Debenture applicants 200,000

6% debentures 200,000

“ 1 Debenture applicants 50,000

Bank – Refund 50,000

(b) Sept 30 Debenture interest ($200,000 x 6% x 6/12) 6,000

Bank 6,000

2. Cyber Ltd announced on 1 March 2011 that it would issue $200,000 5% debentures at par. Applications were received for

$250,000 debentures on 15 March 2011. Allotments were made on 1 April 2011, and the excess application monies were refunded on the same day. (a) Show the necessary ledger accounts to record the issue of debentures. (b) Suppose the financial year ends on 31 December. Calculate the debenture interest for the year ended 31 December 2011. (c) If the interest on debenture was to be paid every 6 months, show the necessary journal entries to record the interest

payment after preparing the financial statement.

(a)

Bank 2011 $ 2011 $

Mar 15 Debenture applicants 250,000 Apr 1 Debenture applicants – Refund 50,000

Debenture Applicants

2011 $ 2011 $

Apr 1 5% debentures 200,000 Mar 15 Bank 250,000


250,000 250,000

5% Debentures

2011 $ 2011 $


(b) Debenture interest = $200,000 x 5% x 9/12 = $7,500

(c)

Journal

Date Details Dr Cr

2011 $ $

Dec 31 Debenture interest (Profit and loss) 2,500

Accrued debenture interest ($200,000 x 5% x 3/12) 2,500

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2 Debentures issued at a premium (債券按溢價發行) Differences between market interest rate (市場利率) and nominal interest rate (名義利率) Nominal interest rate is the rate of interest (利率) stated on the debenture certificate (債券). Market interest rate (effective

interest rate) is the rate of interest paid in the market (市場上) on debentures of similar risk (同等風險). It fluctuates (波動) all

the time and the debentures issuers (債券發行人) have no control over it (不能控制). Hence, there is often a difference between

the market interest rate and the nominal interest rate on the issue date.

Market interest rate < Nominal interest rate If the market interest rate is lower than the nominal interest rate, the issue price of the debentures (債券發行價) will be higher

than (高於) the nominal value (面值) and the debentures are said to be issued at a premium (債券按溢價發行). The premium

(溢價) equals (等於) the excess of the issue price over the nominal value (發行價超過面值的價值).

Example 2 On 1 January 2011, QQ Ltd announced a public offering of $100,000 5% debentures redeemable on 31 January 2021 at 105 (The term ‘105’ represents a premium of 5% over the debenture’s nominal value). Interest is payable half-yearly. On 15 January 2011, applications together with application monies were received for exactly the same amount of debentures. The debentures were allotted to the applicants on 1 February 2011. 1 Receipt of application monies: Dr Bank account $105,000 ($100,000 x 105%) Cr Debenture applicants account $105,000 2 Allotment of debentures to debenture applicants: Dr Debenture applicants account $105,000 Cr 5% debentures account $100,000 Cr Debenture premium account $5,000 ($100,000 x 5%)

Bank 2011 $ Jan 15 Debenture applicants (1) 105,000


2011 $ 2011 $ Feb 1 5% debentures (2) 100,000 Jan 15 Bank (1) 105,000 “ 1 Debenture premium (2) 5,000

5% Debentures

2011 $ Feb 1 Debenture applicants (2) 100,000

Debenture Premium

2011 $ Feb 1 Debenture applicants (2) 5,000

Amortization of debenture premium (攤銷債券溢價) The debenture premium should be amortised (攤銷) over the life of the debentures (債券的期限), 10 years. The debenture

interest expense for each period (每期債券利息支出) would be reduced (減少) by the amount of premium amortised (可攤銷溢

價). The accounting entries on the date of semi-annual payment of debenture interest (1 February and 1 August) would be: 3 Payment of debenture interest on 1 August 2011:

Dr Debenture premium account $250 [($5,000 ÷ 10) x 6/12]

Dr Debenture interest account $2,250 ($100,000 x 5% x 6/12 $250) Cr Bank account $2,500 ($100,000 x 5% x 6/12) The nominal value of the debentures, inclusive (包括) of the unamortized debenture premium (未攤銷債券溢價), should be

shown as a non-current liability (非流動負債) in the balance sheet at the end of the accounting period.

QQ Ltd Balance Sheets as at 31 December 2011 (extract)

$ Non-Current liabilities

5% debentures {$100,000 + [$5,000 – ($5,000 ÷ 10 x 11/12)]} 104,542

2011) Dec 31 2011 Feb (1 premium debenture Amortised -

premium debenture dUnamortise

12

If the company needs to prepare the final account at 31 December 2011, the required entries for the debenture interest accrued for 1 August 2011 to 31 December 2011 (5 months, to be paid on 1 February 2012) are: Dr Debenture premium account $208 [($5,000 ÷ 10) x 5/12]

Dr Debenture interest account $1,875 ($100,000 x 5% x 5/12 $208) Cr Accrued debenture interest account $2,083 ($100,000 x 5% x 5/12)

Class work 6

On 1 January 2010, BAFS Ltd announced a public offering of $100,000 8% debentures redeemable on 31 January 2020 at 110. Interest is payable half-yearly. On 15 January 2010, applications together with application monies were received for exactly the same amount of debentures. The debentures were allotted to the applicants on 1 February 2010. (a) Prepare journal entries to record the issue of debentures. (b) Show the journal entries for the debenture interest charged after half-year. (c) Show the journal entries for the debenture interest to prepare the final account at 31 December 2011. (d) Post all the journal entries to the ledger account.

Journal

Details Dr Cr

2010 $ $ (a) Jan 15 Bank ($100,000 x 110%) 110,000


Feb 1 Debenture applicants 100,000

8% Debentures 100,000


Debenture Premium ($100,000 x 10%) 10,000

(b) Jul 31 Debenture Premium ($10,000 ÷ 10 x 6/12) 500

Debenture interest ($4,000 – $500) 3,500

Bank ($100,000 x 8% x 6/12) 4,000

(c) Dec 31 Debenture Premium ($10,000 ÷ 10 x 5/12) 417

Debenture interest ($3,333 – $417) 2,916

Accrued debenture interest ($100,000 x 8% x 5/12) 3,333

(d)

Bank 2010 $ 2010 $

Jan 15 Debenture applicants 110,000 Jul 31 Debenture premium 500

“ 31 Debenture interest 3,500


2010 $ 2010 $

Feb 1 8% Debentures 100,000 Jan 15 Bank 110,000

“ 1 Debenture premium 10,000

Debenture Premium

2010 $ 2010 $

Jul 31 Bank 500 Feb 1 Debenture applicants 10,000

Dec 31 Accrued debenture interest 417

8% Debentures

2010 $ 2010 $

Feb 1 Debenture applicants 100,000

Debenture interest

2010 $ 2010 $

Jul 31 Bank 3,500

Dec 31 Accrued debenture interest 2,916

Accrued debenture interest

2010 $ 2010 $

Dec 31 Debenture premium 417

“ 31 Debenture interest 2,916

13

3 Debentures issued at a discount (債券按折價發行) Market interest rate > Nominal interest rate If the market interest rate (市場利率) is higher than the nominal interest rate (名義利率), the issue price (發行價) of the

debentures will be lower than (低於) the nominal value and the debentures are said to be issued at a discount (債券按折價發行).

The discount (折價) equals the excess of the nominal value over the issue price. On 1 March 2011, A&T Ltd announced a public offering of $100,000 5% debentures redeemable on 31 January 2021 at 98 (The term ‘98’ represents a discount of 2% on the debenture’s nominal value). Interest is payable half-yearly. On 25 March 2011, applications together with application monies were received for exactly the same amount of debentures. The debentures were allotted to the applicants on 1 April 2011. 1 Receipt of application monies: Dr Bank account $98,000 ($100,000 x 98%) Cr Debenture applicants account $98,000 2 Allotment of debentures to debenture applicants: Dr Debenture applicants account $98,000 Dr Debenture discount account $2,000 ($100,000 x 2%) Cr 5% debentures account $100,000

Bank

2011 $

Mar 25 Debenture applicants (1) 98,000


2011 $ 2011 $

Apr 1 5% debentures (2) 98,000 Mar 25 Bank (1) 98,000

Debenture Discount

2011 $

Apr 1 5% debentures (2) 2,000

5% Debentures

2011 $

Apr 1 Debenture applicants (2) 98,000

“ 1 Debenture discount (2) 2,000

Amortization of debenture discount (攤銷債券折價) The debenture discount should be amortised (攤銷) over the life of the debentures (債券的期限), 10 years. The debenture

interest expense for each period (每期債券利息支出) would be increased (增加) by the amount of discount amortised (可攤銷

折價). The accounting entries on the date of semi-annual payment of debenture interest (1 Apr and 1 Oct) would be: 3 Payment of debenture interest on 1 Oct 2011:

Dr Debenture interest account $2,600 ($100,000 x 5% x 6/12 $100) Cr Bank account $2,500 ($100,000 x 5% x 6/12)

Cr Debenture discount account $100 [($2,000 ÷ 10) x 6/12] The nominal value of the debentures, less the unamortized debenture discount (未攤銷債券折價), should be shown as a

non-current liability in the balance sheet at the end of the accounting period.

A&T Ltd Balance Sheets as at 31 Deccember 2011 (extract)

$ Non-Current liabilities

5% debentures {$100,000 – [$2,000 – ($2,000 ÷ 10 x 9/12)]} 98,150

If the company needs to prepare the final account at 31 December 2011, the required entries for the debenture interest accrued for 1 Oct 2011 to 31 December 2011 (3 months, to be paid on 1 Apr 2012) are: Dr Debenture interest account $1,300 ($100,000 x 5% x 3/12 $50) Cr Accrued debenture interest account $1,250 ($100,000 x 5% x 3/12)

Cr Debenture discount account $50 [($2,000 ÷ 10) x 3/12]

2011) Dec 31 2011Apr (1discount debenture Amortised -

discount debenture dUnamortise

14

Class work 7

1. On 1 January 2010, Jolly Ltd announced the issue of $100,000 6% debentures at 95, payable in full on application and repayable 10 years later (i.e., on 31 January 2020) at par. Applications were received for exactly $100,000 debentures on 20 January 2010. Allotments were made on 31 January 2010. (a) Prepare journal entries to record the issue of debentures. (b) Explain how the debenture discount should be treated in the accounts of Jolly Ltd.

(a)

Journal

Date Details Dr Cr

2010 $ $

Jan 20 Bank 95,000



Debenture Discount 5,000

6% Debentures 100,000

(b) The debenture discount should be amortised over the life of the debentures, which is 10 years. The debenture interest expense for each period would be increased by the amount of discount amortised. The nominal value of the debentures, less the unamortized debenture discount, should be shown as a non-current liability in the balance sheet at the end of the accounting period.

2. On 1 March 2010, Glory Ltd announced the issue of $150,000 10% debentures at 97 payable in full on application and repayable

25 years later (i.e., on 31 March 2035) at par. Interest on the debentures was payable on the nominal amount as from 1 April 2010. Applications were received for $250,000 debentures on 20 March 2010. Both the allotment of debentures and the refund of excess application monies were made on 1 April 2010. The discount on debentures is to be written off evenly over the period of 25 years. The financial year ends on 31 December. (a) The necessary ledger accounts to record the issue of debentures. (b) The debenture interest charged to the income statements for the two years ended 31 December 2010 and 2011.

(a)

Bank 2010 $ 2010 $

Mar 20 Debenture applicants ($250,000 x 97%) 242,500 Apr 1 Debenture applicants – Refund 97,000


2010 $ 2010 $

Apr 1 10% debentures ($150,000 x 97%) 145,500 Mar 20 Bank 242,500


242,500 242,500

Debenture Discount

2010 $ 2010 $

Apr 1 Debenture applicants ($150,000 x 3%) 4,500

10% Debentures

2010 $ 2010 $


“ 1 Debenture discount 4,500 (b)

Glory Ltd Income Statement for the year ended 31 December 2010

$

Less Expenses:

Debenture interest [(150,000 x 10% x 9/12) + ($4,500 ÷ 25 x 9/12)] 11,385

Glory Ltd Income Statement for the year ended 31 December 2011

$

Less Expenses:

Debenture interest [(150,000 x 10%) + ($4,500 ÷ 25)] 15,180

15

3. China Trading Ltd was expanding and required extra funds of $600,000. It board of directors was considering choosing either one of the following options:

(i) 600,000 5% preference shares of $1 each to be issued at par. (ii) $625,000 4% debentures to be issued at 96, the debentures will be repayable four years later.

(a) Which of the above options should be chosen if China Trading Ltd intended to minimize the cost of financing? (b) Consider one more option of financing: the issue of 600,000 $1 ordinary shares at par. State one advantage and one

disadvantage of this option compared to Option (i). (a) The cost of issuing preference shares = $600,000 x 5% = $30,000 in dividends each year.

The cost of issuing 4% debenture = $625,000 x 4% + $625,000 x 4% ÷ 4 = $31,250 in interest each year.

Option (i) should be chosen because the annual debenture interest inclusive of the amortised debenture discount

is higher than the annual preference dividend.

(b) Advantage: The company has no obligation to pay a fixed rate of dividend each year.

Disadvantage: The granting of voting rights to ordinary shareholders may hinder the decision-making process of

The company.

4. Bong Ltd had an authorised share capital of $200,000, divided into 150,000 ordinary shares of $1 each and 50,000 8%

preference shares of $1 each. On 1 May 2011, it announced the following issues. All the authorized ordinary shares were issued at $1.6. Of the preference shares, only 20,000 were issued and each share was

sold for $1.4. In addition, $100,000 6% debentures (redeemable at par on 1 July 2021) were issued at 96. Subscription rates of 200%, 160% and 150% were reported for ordinary shares, preference shares and debentures, respectively. All monies were fully paid on application dated 20 June 2011. Shares and debentures were allotted on 1 July 2011 and the excess application monies were refunded on the same day. The financial year ends on 31 December. (a) How much money was raised from the issue of shares and debentures? (b) How much discount was given on the debentures issued? How would it be treated in the accounts of Bong Ltd? (c) Assuming there were sufficient profits, how much would be paid in preference share dividend for the year ended 31

December 2011? (d) How much would be paid in debenture interest (excluding the amortised debenture discount) for the year ended 31

December 2011? Would your answer differ if the profit were insufficient to meet debenture interest payments? (e) If net profit before charging debenture interest (including the amortised debenture discount) for the year ended 31

December 2011 was $3,200 and it was to be distributed in full, how much would be paid in preference and ordinary share dividends?

(f) If net profit before charging debenture interest (including the amortised debenture discount) for the year ended 31 December 2011 was $6,000 and it was to be distributed in full, how much would be paid in preference and ordinary share dividends?

(a) Ordinary shares : 150,000 x $1.6 = $240,000

Preference shares : 20,000 x $1.4 = $28,000

Debentures : 100,000 x 96% = $96,000

Total = $240,000 + $28,000 + $96,000 = $364,000

(b) Debenture discount = 100,000 x 4% = $4,000

The debenture discount should be amortised over the life of the debentures, which is 10 years. The debenture interest

expense for each period would be increased by the amount of discount amortised. The nominal value of

debentures, less the unamortized debenture discount, should be shown as a non-current liability in the balance

sheet at the end of an accounting period.

(c) Preference dividend = 20,000 x $1 x 8% x 6/12 = $800

(d) Debenture interest for the year = $100,000 x 6% x 6/12 = $3,000

Even if the profit were insufficient, the answer would be the same, as debenture interest must be paid whether

profits are sufficient or not.

(e) Total debenture interest for the year = ($100,000 x 6% x 6/12) + ($4,000 ÷ 10 x 6/12) = $3,200

Net profit after charging debenture interest = $0

No preference dividend nor ordinary dividend would be paid for the year.

(f) Net profit after charging debenture interest = $6,000 $3,200 = $2,800

Preference dividend = $800

Ordinary dividend = $2,000

16

(HKCEE 2006 5)

The trial balance of Ho Limited as at 31 March 2006 failed to agree and the difference was entered in a suspense account. The draft

net profit for the year amounted to $80,260.

Additional information:

(i) The last month’s bank statement balance at 28 February 2006 showed a credit balance of $19,900, which was the same as

that in the cash book on that date. The balance had been wrongly included as the bank balance in the trial balance as at 31

March 2006.

Deposits and cheque payments, totaling $315,000 and $300,700 respectively, had been recorded in the cash book during

March 2006.

(ii) The following items were shown on the March bank statement but not in the cash book:

1 Bank charges of $80;

2 Bank deposit interest of $650;

3 A dishonoured cheque of $10,250 from Star Ray Limited; and

4 A direct deposit of $2,400 logged by Kettler Limited.

(iii) Cheques, issued in March, amounting to $16,500 had not been presented to the bank for payment.

(iv) Lodgements, totaling $6,630 for March, were not recorded by the bank until 2 April 2006.


(a) Show the necessary adjustments to be made in the cash book on 31 March 2006.

(b) Prepare a bank reconciliation statement as at 31 March 2006, commencing with the adjusted cash book balance in (a) above.

Subsequent checking of the records revealed the following:

(v) The salaries account had been undercast by $500.

(vi) A credit purchase of $2,000 had been completely omitted.

(vii) Returns from Jane Limited, amounting to $780, had been recorded in the accounts as $870.

(viii) An electricity bill of $1,240 for March 2006 had been paid twice. Both payments had been posted to the ledger. The excess

amount paid was to be used to settle future bills.

(ix) A trade discount of 10% was granted to a customer, Mr Wu, on a bulk purchase of $10,000. The sale had been properly

recorded in the books. A cash discount of 5% was also allowed to him on his settlement of account in March. However, only

the amount received was debited in the cash book and no other entries were made.

(x) $200,000 6% debentures were issued at par on 1 March 2006 to settle a bank loan. Interest on debenture was to be paid

every 6 months. No entries relating to these had been made.


(c) Prepare the necessary journal entries to correct items (v) to (x) above. (Narrations are not required.)

(d) Prepare a statement to correct the draft net profit for the year ended 31 March 2006.

(a)

Cash Book (bank column only)

$ $

Balance b/d (19,900 + 315,000 300,700) 34,200 Bank charges 80

Bank deposit interest 650 Star Ray Limited dishonoured cheque 10,250

Kettler Limited 2,400 Balance c/d 26,920

37,250 37,250

(b)

Bank Reconciliation Statement as at March 2006

$

Adjusted balances as per cash book 26,920

Add Uncredited cheque 16,500

43,420

Less Lodgements not yet recorded by bank 6,630

Adjusted balances as per bank statement 36,790

17

(c)

Journal

Details Dr Cr

$ $

(v) Salaries (Profit and loss) 500

Suspense 500

(vi) Purchases (Trading) 2,000

Creditors 2,000

(vii) Jane Limited ($870 $780) 90

Returns inwards (Trading) 90

(viii) Prepaid electricity 1,240

Electricity (Profit and loss) 1,240

(ix) Discount allowed (Profit and loss) 450

Suspense 8,550

Mr Wu 9,000

(x) Bank loan 200,000

6% debentures 200,000

Debenture interest (Profit and loss) 1,000

Interest payable (200,000 x 6% x 1/12) 1,000

(d)

Statement of adjusted profit for the year ended 31 March 2006

$ $

Net profit per draft accounts 80,260

Add Bank deposit interest not recorded 650

Electricity prepaid 1,240

Returns inwards overstated 90 1,980

82,240

Less Bank charges not recorded 80

Salaries undercast 500

Purchases omitted 2,000

Discount allowed not recorded 450

Debenture interest accrued 1,000 4,030

Adjusted net profit 78,210

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