Algonquin Corporations sold 50,000 common shares on a subscription basis for $40

Question

Algonquin Corporations sold 50,000 common shares on a subscription basis for $40 per share. By December 31, 2014, collections on these subscriptions totalled $1.3 million. None of the subscriptions has been paid in full so far. Algonquin is a private company.

Instructions:

(a) Discuss the meaning of the account Common Shares Subscribed and indicate how it is reported in the financial statements.

(b) Discuss the arguments in favour of reporting Subscriptions Receivable as a current asset.

(c) Discuss the arguments in favour of reporting Subscriptions Receivable as a contra equity account.

(d) Indicate how these 50,000 shares would be presented on Algonquin’s December 31, 2014 balance sheet under the method discussed in (c) above.

(e) Suppose that Algonquin also has a benefit plan that allows employees to purchase shares of the company, and take two years to pay for the shares. When an employee agrees to purchase the shares, the shares are shown as issued and an Employee Share Loan Receivable Account is set up. As payments are made by the employee, this loan receivable account is reduced. Discuss the reporting issues related to this receivable account under IFRS and ASPE.

Explanation / Answer

a. The Common Shares subscribed account includes the money received or due from shareholders on issue or sale of new shares. It is reported as a part of ‘Share Capital’ on the liabilities side of the balance sheet. When the company announces the sale of common shares at a particular subscription price, then the money received would increase the ‘Cash’ while the outstanding amount would be shown as ‘Subscription Receivable’. The journal entry for Algonquin Corporation is as follows:

Cash                                                      1,300,000

Subscription Receivable 700,000

Share Capital/Common Stock                                     2,000,000

b. When common shares are sold on a subscription (or instalment) basis and there is a partial payment then normally the payment outstanding is considered as a “Current Asset”. This because there is a certainty that the shareholder will pay the remaining amount due on a prescribed date. In that case, the journal entry to report the share subscription would be as follows:

Cash                                                      1,300,000

Subscription Receivable 700,000 (Current Asset)

Share Capital/Common Stock                                     2,000,000

c. When common share are sold on a subscription (or instalment) basis and the full amount of the subscription money has not been received then we can also treat is a “Contra Equity” to the share subscribed account in the equity section of the Balance Sheet. In this the company does not account for the full value of the subscription till the full money is received. This method of accounting is preferred by the US Securities and Exchange Commission.

d. If we use the method defined in point (c) then the balance sheet would be as follows:

Liabilities                                                                                            Assets

Share Capital:                                                                                    Current Asset

Issued and Paid-Up Capital Cash 1,300,000

Shares Issued    2,000,000

Less: Subscription

Money Due            700,000

Total Liabilities                                 1,300,000 Total Assets                       1,300,000

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