2. Equity: Share Capital Flashcards
What one class of share do companies often have?
Companies often have just one class of share, ordinary shares, which are referred to in the Companies Act 2006 as ‘equity share capital’ because each share represents an equal interest in the ownership of the company.
What are preference shares?
A company might also issue preference shares, which entitle their holders to a dividend out of profits (preference dividend) before equity shareholders are entitled to any equity dividend.
Once the preference dividend has been paid, the remaining profit ‘belongs’ to the equity shareholders. However, the directors will usually decide to retain some profits (retained earnings) within the company, and the equity dividend will be an amount declared by the directors as being appropriate and affordable.
What is the distinction between issued and called-up share capital?
Give an example.
The issued share capital of a company (also known as its allotted share capital) is the par value of the shares that have actually been issued to shareholders.
If a company issues shares but ‘calls up’ the issue amounts in instalments, instead of raising cash immediately, it then has called-up share capital that is less than its issued share capital.
A company issues 100,000 shares of £1 at par value, but only calls up 75p per share as a first instalment. The issued share capital is £100,000, but the called-up share capital is £75,000. The figure in the statement of financial position will be £75,000.
What figure for share capital appears in a company’s statement of financial position?
In a company’s statement of financial position, the figure for share capital is the called up share capital.
On the face of the company’s statement of financial position, or in a note, called-up equity share capital and irredeemable preference share capital at par value are shown separately.
In what situation might a company’s paid up capital be less than it’s called up capital?
Give an example.
If a company has called-up share capital, but is waiting for payment from some shareholders, it has paid up capital of less than its called-up capital.
A company issues 1 million shares of £1 at par, and asks for payment in full on issue, but is still owed £5,000 by shareholders who have yet to pay what they owe.
The called-up share capital is £1,000,000, but the paid up share capital is only £995,000.
In the statement of financial position, the share capital (a credit balance) is the called-up share capital of £1,000,000, and the unpaid capital of £5,000 is show an an ‘other receivable’ (a debit balance).
What are irredeemable preference shares?
Usually, only preference shares which the company is not entitled to buy back or redeem at some stage in the future, known as irredeemable preference shares, are treated as share capital.
In an exam question, you can assume that irredeemable preference shares are part of share capital unless you are told otherwise.
What are redeemable preference shares?
Preference shares which the company is entitled to buy back from its shareholders or ‘redeem’ at some future time are called redeemable preference shares, treated as non-current liabilities (debt capital).
What is journal entry for the situation when shares are issued at par value and are fully paid?
When shares are issued at their par value and they are fully paid:
Debit - Cash
Credit - Share Capital (par value)
What is the journal entry when shares are issued at their par value but an amount remains uncalled by the company?
When shares are issued at their par value but an amount remains uncalled by the company:
Debit - Cash
Credit - Share Capital (called-up amount of issued shares)
What is the journal entry when shares are issued and called-up at their par value but an amount remains unpaid?
When shares are issued and called-up at their par value but an amount remains unpaid:
Debit - Cash
Debit - Other receivables (unpaid capital)
Credit - Share Capital (par value)
