Called Up Share Capital
Called-up share capital is the share that the investor buys with the condition to be paid later or installment. In order to motivate investors, some companies issue the share by allowing investors to pay the full amount later. The company does not ask for full payment in the first place. However, it will be done with proper terms and conditions.
Share is the proof of ownership over the company. Each share represents a piece of ownership over the company, so the more number of shares we hold, the more ownership we have. In the capital market, shares are traded in the public market which the holder can transfer from one to another. The price of each share is based on the supply and demand in the market which is also impacted by the company performance.
Normally, shares are transferred to investors when full payments are made. However, Called up share capital allows a flexible investment term for the investors who are unable to make payment immediately. The amount of share capital that shareholders owe to the company is called “called up capital”. The company will notify the shareholder if he fails to make the payment on the due date.
The shares do not yet belong to the investor until he makes full payment, and he also has no right to trade the share as well. After the investor makes full payment, called up share capital will become the outstanding share in the market. It will have the same features as the normal commons shares. The investor can trade shares in the capital market or direct transfer to the other parties.
Called Up Share Capital Journal Entry
When company issue share capital, it will increase their equity section. However, the investor has not yet made full payment, so they need to record the receivable balance that needs to collect from shareholder.
The journal entry is debiting receivable and credit share capital.
| Account | Debit | Credit |
|---|---|---|
| Receivable | 000 | |
| Common stock | 000 | |
| Additional paid-in capital | 000 |
Receivable will classify as current assets on balance sheet based on the contract between company and investors. Similar to a normal stock issue, we need to separate between the common stock and additional paid-in capital. Please refer to the example below.
Called Up Capital Example
Company ABC issues 100,000 shares with a par value of $1 at $5 to a group of investors. One institutional investor agrees to purchase all share at $ 5 if the company allow him to pay the installment. The investor will pay $ 200,000 now and the remaining will be paid in the next two months.
The Board of directors agrees with this condition as the company does not really need the cash immediately. And the share price is higher than the market, so they decide to sell the share to this investor and wait two months for the full amount.
Called up Share Capital = (100,000 * $5) – $ 200,000 = $ 300,000
On 01 April, the institutional investors sign the agreement to purchase all 100,000 shares at $ 5 per share. However, they only pay $ 200,000 on the signing date the remaining balance will be paid later.
The journal entry would be debiting Cash $ 200,000, Receivable $ 300,000, and credit common stock of $ 100,000 and credit additional paid-in capital of $ 400,000.
| Account | Debit | Credit |
|---|---|---|
| Receivable | 300,000 | |
| Cash | 200,000 | |
| Common stock | 100,000 | |
| Additional paid-in capital | 400,000 |
Receivable $ 300,000 will be recorded in balance sheet until the investor paid the remaining balance. Cash received will be increased on balance sheet. The credit side is the equity section, common stock is the par value of all stock sales ($ 100,000 = 100,000 share * $1 per share). Additional paid-in capital is the difference between the selling price and par value ($ 500,000 – $ 100,000). Both common stock and additional paid-in capital will be present in the equity section of the balance sheet.
Important of Called Up Share Capital
- To attract investors: The practice of called-up capital will attract investors to invest as they have time to manage the cash flow.
- Reduce investor cost: Time is money, when company offers the delay of payment it will help to reduce the investment cost of the investors.
- To boost new startup: For a new startup, it is very hard to sell the stock so the called up capital will help them to overcome this issue.