Issue of Shares for Consideration other than Cash

A company can issue its shares either For Cash or For Consideration other than Cash. As is clear from the term itself, Shares issued for consideration other than cash means when shares of the company are issued to somebody for something which is not cash. It can be issue of shares to a vendor against the purchase of assets or it can be issue of shares against the purchase of the entire business of an enterprise. It can also be an issue of shares to the brokers, underwriters in lieu of their services to the company.


Accounting Treatment :

Purchase of assets or business and issuing of shares against the purchase are two separate transactions. Hence separate journal entries are passed for each of the two transactions as under:

1. On purchase of asset/ business:

a)Purchase of Assets:

In case if purchase of asset/assets from a vendor, following journal entry is passed:

Sundry Assets A/c ………Dr. (individually with purchase price of each asset)

To Vendor’s A/c (with purchase consideration)

2) Purchase of Business:

When a company purchases the business of an another company, it takes the assets as well as the liabilities of that company at an agreed value. The difference in the agreed value of the assets and liabilities taken over is called Net assets. The journal entry to be passed is:

Sundry Assets A/c……..Dr. (with agreed value)

Goodwill A/c*…………….Dr.

To Sundry Liabilities A/c (with agreed value)

To Vendor’s A/c (withPurchase consideration)

To Capital Reserve A/c**

* If the amount of net assets (sundry assets minus sundary liabilities) is less than purchase consideration, Goodwill account is debited with the difference.

**If the amount of net assets (sundry assets minus sundary liabilities) is more than purchase consideration, Capital Reserve account is credited with the difference.

*** Any one of the two accounts i.e. Goodwill or Capital Reserve will appear as the case may be.

2) On Issue Of Shares:

The next transaction is the issue of shares for settling the account of the vendor. Now again the company can issue shares on any of the three terms i.e.

a) at par, b) at a discount, or c) at a premium.

Journal enrty to be passed is different in each case.

a) Issue of shares at par:

Vendor’s A/c ….. Dr. (with the purchase price)

To Share Capital A/c (with the nominal value of shares allotted)

b) Issue of shares at a Discount:

Vendor’s A/c ….Dr.(with the purchase price)

Discount on Issue of Shares A/c ….Dr. (with the amount of discount)

To Share Capital A/c (with the nominal value of shares allotted)

c) Issue of Shares at a Premium:

Vendor’s A/c ….. Dr. (with the purchase price)

To Share capital A/c (with the nominal value of shares allotted)

To Securities Premium Reserve A/c (with the amount of premium)

Note: In each of the three cases above, It is important to note that number of shares to be issued is calculated as under:

Number of shares to be issued = Purchase consideration/ Issue price of a share

Disclosure in the Balance Sheet:

Shares Issued for Consideration other than Cash are disclosed in the Balance Sheet under Subscibed Share Capital in the Note on Share Capital either as Subscibed and fully paid-up or Subscibed but not fully paid-up as per the case.

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