Calls in Arrears and Calls in Advance
Calls in Arrears
If any amount that is called in respect of a share is not paid before or on the date fixed for payment, such an amount is known as calls in arrears.
The amount may be called by a company either as allotment money or call money. Thus, any default arising due to the failure to send the call money is known as calls in arrears. A separate account is opened for calls in arrears.
Companies can charge interest on all such calls in arrears for the period that the amount remains unpaid. The rate used is 5% p.a. The total of calls in arrears is shown in the balance sheet as a deduction from the called-up capital.
Calls in Advance
The money received by a company in excess of what has been called up is known as calls in advance.
A company, if authorized by its articles, may accept calls in advance from shareholders. If such an amount, which has not been called, is received, the amount should be credited to a separate account known as the calls advance account.
However, the amount that is not called should not be credited to the capital account. A company may pay interest on such amounts received in advance at the rate of 6% p.a. No dividend is payable on this amount.
The amount that is received will be adjusted toward the payment of calls as and when they become due.
Example: Calls in Arrears and Calls in Advance
United Limited was registered with a nominal capital of $500,000 in shares of $100 each.
3,000 shares were issued for subscription and payable as to $12.50 on application, $12.50 on allotment, and $25 three months after allotment, with the balance to be called up as and when required.
All money up to allotment was duly received, but regarding the call of $25, a shareholder holding 100 shares did not pay the amount due. Another shareholder who was allotted 150 shares paid the entire amount of the shares.
Show the journal entries needed to record the above transactions, including cash, and show how these appear in the balance sheet.
X Limited issued 20,000 equity shares worth $10 each at $11 on 1 March, payable as follows:
- $2 on application
- $3 on allotment
- $6 on first and final call (three months after allotment)
Applications were received for 26,000 shares. The directors made the allotment in full to applications demanding 10 or more shares, and they returned the money to applications for 6,000 shares.
One shareholder who was allotted 40 shares paid the first and final call money along with the allotment money, while another shareholder who was allotted 60 shares did not pay the allotment money but paid along with the first and final call money.
The directors decided to charge and allow interest, as the case may be, on calls in advance and calls in arrears.
Give journal entries in the company’s books.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.