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CS Executive · Corporate Accounting and Financial Management · Accounting for Share Capital

Zenith Polymers Ltd offered 1,00,000 equity shares of Rs 10 each at par and received applications for 1,25,000 shares. The directors rejected applications for 5,000 shares outright and allotted 1,00,000 shares to the remaining applicants. Which treatment of the excess application money on the shares NOT allotted is correct?

Application money on shares that are not allotted is refunded to the applicants, or adjusted against allotment money due from them in the case of pro-rata allotment. It is not income, premium or reserve, because the company has no right to keep money for shares it never issued.

  1. AMoney on rejected and excess applications is refunded or adjusted against allotment dues; it is not treated as company incomeCorrect
  2. BMoney on all excess applications is credited to Securities Premium
  3. CMoney on excess applications is forfeited and credited to Capital Reserve
  4. DMoney on excess applications is credited to Profit and Loss Account as miscellaneous income

Explanation

Application money received on shares that are not allotted belongs to the applicants. It is either returned or, in pro-rata allotment, adjusted against the amounts due on allotment. It is never income, premium or a reserve.

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