Adjusting Excess Application Money

When does Excess Money go to Future Calls?

In a pro-rata allotment, you already know we first use the excess application money to settle the amount due on allotment. If there's still a surplus after that, the company has two options, which will be specified in the question:

1. Refund the surplus: The amount remaining after the allotment adjustment is returned to the shareholder.
2. Adjust against future calls: The surplus is held by the company and used to pay for the first call, second call, etc., on behalf of the shareholder. This amount is credited to a temporary liability account called Calls-in-Advance.

The Golden Rule: Always read the question carefully! The problem will state whether the excess money beyond allotment should be refunded or adjusted against calls. If nothing is mentioned, the standard practice is to refund it.

The Accounting Treatment for Calls-in-Advance

When you determine that excess money will be adjusted against future calls, it impacts two key stages of your journal entries.

1. At the Time of Allotment:
The second journal entry (for transferring application money) is expanded. You debit Share Application with the total money received and credit the respective accounts. The new addition is To Calls-in-Advance A/c.

The entry will look like this:
Share Application A/c Dr.
    To Share Capital A/c
    To Share Allotment A/c (Excess money adjusted against allotment)
    To Calls-in-Advance A/c (Surplus after allotment, held for future calls)
    To Bank A/c (Any money being refunded)

2. At the Time a Call is Made:
When you make a call (e.g., First Call), you first pass the usual 'due' entry. However, in the 'receipt' entry, you won't receive the full amount in cash because some shareholders have already paid. You will debit the Calls-in-Advance account to cancel the liability for those shareholders.

The entry will look like this:
Bank A/c Dr. (Cash received from other shareholders)
Calls-in-Advance A/c Dr. (Amount being used from the advance)
    To Share [First/Final] Call A/c

Let's see this in action with a detailed example.

Walkthrough: Adjusting Excess Towards Calls

The following resource provides a perfect example of how this works. The problem statement explicitly says, "The excess of application money is to be adjusted towards allotment and calls to be made."

Let's break down the journal entries from that example together.

Analysis of the Journal Entries:

1. Bank to Share Application (Jan 1): Simple enough. Total applications (400,000) × Application money (₹5) = ₹20,00,000.

2. Share Application Transfer (Feb 1): This is the most important entry for today's lesson.

   • Share Application A/c is debited with the full ₹20,00,000.
   • To Share Capital A/c: For the shares actually issued (100,000 shares × ₹5) = ₹5,00,000.
   • To Bank A/c: For the 200,000 rejected applications (200,000 × ₹5), plus an additional refund calculated in the working note. The total refund is ₹11,00,000. (Wait, let's re-examine the resource. It looks like the working note has a slight typo and the numbers in the journal entry are what we should follow).
     *Let's re-calculate based on the problem description:
     • Total Received: 400,000 apps * ₹5 = ₹20,00,000
     • Rejected: 200,000 apps * ₹5 = ₹10,00,000 refunded.
     • Full Allotment: 80,000 apps allotted 80,000 shares. Money is fine.
     • Pro-rata: Remaining apps (400k - 200k - 80k) = 120,000 apps were allotted the remaining shares (100k - 80k) = 20,000 shares.
     • Money from Pro-rata group: 120,000 apps * ₹5 = ₹6,00,000.
     • Money needed for Application: 20,000 shares * ₹5 = ₹1,00,000.
     • Excess money from Pro-rata group: ₹6,00,000 - ₹1,00,000 = ₹5,00,000.
   • To Share Allotment A/c: Amount due on allotment for this group is 20,000 shares × ₹7.50 = ₹1,50,000. We can use the excess money for this.
   • To Calls in Advance A/c: After allotment, we still have a surplus (₹5,00,000 - ₹1,50,000 = ₹3,50,000). The amount due on calls for this group is 20,000 shares × (₹6 + ₹6.50) = ₹2,50,000. We can adjust this amount. The entry shows ₹2,50,000.
   • To Bank A/c: This is for the rejected applications (200,000 * ₹5 = ₹10,00,000). And what about the remaining surplus from the pro-rata group? (₹3,50,000 - ₹2,50,000 = ₹1,00,000). This is also refunded. So total refund = ₹10,00,000 + ₹1,00,000 = ₹11,00,000. Now the journal entry makes sense!

3. Share Allotment Due (Feb 1): Normal entry for all 100,000 shares. (100,000 × ₹7.50 = ₹7,50,000).

4. Bank to Share Allotment (Feb 1): Total due was ₹7,50,000. The pro-rata group had ₹1,50,000 adjusted from their excess application money. So, the cash received is ₹7,50,000 - ₹1,50,000 = ₹6,00,000.

5. Share First Call Due (Apr 1): Normal entry (100,000 × ₹6 = ₹6,00,000).

6. Bank & Calls-in-Advance to First Call (Apr 1): This is the second key entry. The total due is ₹6,00,000. The working note shows that the pro-rata group (20,000 shares) has advance payment for this. Their portion is 20,000 × ₹6 = ₹1,20,000. This amount is debited from Calls in Advance A/c. The remaining cash received is ₹6,00,000 - ₹1,20,000 = ₹4,80,000. Note: The resource seems to have a typo in this entry, showing Bank Dr with 600,000 and Calls in Advance Dr with 120,000. Based on the logic, the Bank Dr should be 480,000.

This step-by-step logic is crucial for solving these problems correctly.

Reinforcing the Concept

Let's look at another resource that clearly illustrates the journal entries for this process.

The image below, from the GeeksForGeeks article, provides a concise visual summary of the journal entries for Sayeba Ltd. Notice the To Calls in Advance A/c in the second entry.

This example also mentions interest on Calls-in-Advance. As per the Companies Act, 2013, if the Articles of Association of a company provide for it, interest (up to 12% p.a.) can be paid on the amount of calls paid in advance. For your exam problems, you only need to calculate this if the question specifically asks you to.

Conclusion

You have now added a powerful tool to your accounting skill set for company accounts. You can confidently handle situations where a company is so popular that shareholders pay for their shares far in advance!

Key Takeaways:

• When excess application money from a pro-rata allotment exceeds the amount due on allotment, it may be adjusted against future calls if the question specifies.
• The amount held for future calls is credited to a liability account: Calls-in-Advance A/c.
• The key journal entry is the transfer of application money, which will now include a credit to Calls-in-Advance A/c.
• When the actual call is made, Calls-in-Advance A/c is debited in the receipt entry to show that the cash was already received.

In our next lesson, we will shift gears and look at the opposite scenario: undersubscription. We will learn what it means and how it affects the accounting process for issuing shares.